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West Fraser reports ‘significant reduction in earnings’ in 2019

West Fraser today reported results for the fourth quarter and full year of 2019. Ray Ferris, CEO of West Fraser stated, “This past year has been challenging for West Fraser on multiple fronts. A softer demand environment coupled with high fibre input costs in British Columbia resulted in a significant reduction in earnings. We took several difficult decisions to right size our manufacturing footprint in Western Canada by permanently reducing shifts and closing one facility. Despite the difficult conditions, we remained resolute in our commitment to modernize our U.S. South business to achieve its full potential. Several key projects have been completed in 2019 and we are encouraged by the opportunity to fully operationalize them in 2020. The final stage of our Opelika, Ala., modernization will be completed in 2020 with the start up of a new planer mill. We are also underway on the construction of a replacement manufacturing complex in Dudley, Georg., and we anticipate commencing operations at the new mill mid 2021. The new facility will be well positioned to benefit from a strong fibre supply basket and well suited to servicing the local markets.”

Q4 2019 highlights:

Sales of $1.129 billion
Lower fibre costs improve lumber earnings compared to third quarter
Adjusted EBITDA of $80 million or 7.1 per cent of sales
Quarterly cash dividend of $0.20 declared

2019 highlights:

Sales of $4.877 billion
Adjusted EBITDA of $301 million
Cash provided by operating activities of $115 million
Invested $410 million in capital projects
Year-end liquidity strong with $505 million of available bank lines, net debt to capital ratio at 30 per cent

Operational results

West Fraser’s lumber segment generated an operating loss of $23 million (Q3-19 – $53 million loss) and Adjusted EBITDA of $69 million (Q3-19 – $39 million). This quarter’s results were favourably impacted by an increase in lumber prices, cost controls around log procurement, variable operating schedules and the impact of the closure of the company’s Chasm, B.C., lumber facility in the prior quarter. Realized lumber prices improved slightly from the third quarter which impacted Adjusted EBITDA for the segment by $13 million. Lumber shipments declined approximately 10 per cent from the third quarter due to variable operating schedules, shift reductions, mill closures and holidays in the fourth quarter. The decline in shipment volumes negatively impacted Adjusted EBITDA by $8 million compared to the third quarter of 2019. A higher proportion of West Fraser’s lumber shipments came from Alberta and the U.S. South in the fourth quarter compared to the third quarter.

West Fraser’s panels segment generated operating earnings in the quarter of $8 million (Q3-19 – $9 million) and Adjusted EBITDA of $13 million (Q3-19 – $13 million). Increased plywood volumes and lower costs were not able to fully offset lower plywood pricing and reduced MDF and LVL volumes.

Outlook

The fourth quarter was a slight improvement over the prior two quarters in what has been a very difficult year.

West Fraser expects lumber production for 2020 to increase by approximately 350 MMFBM over 2019 production and reach approximately 6,250 MMFBM. Pulp production is expected to be slightly improved in 2020. Capital expenditure is planned to be in the range of $275 to $325 million with a large portion of that dedicated to the Dudley complex. The company’s focus in 2020 is on realizing the benefits of the capital that it has deployed to its operations in the last two years. Log costs have shown signs of starting to moderate in B.C. but remain well above historical levels and it will likely take until 2021 for stumpage to change materially in B.C.

Recent U.S. new housing data has been encouraging and with the significant reduction of capacity in B.C. over the past year, supply and demand may be in better balance going forward. West Fraser remains convinced of potential for further improvement in all its operations. The company’s consistent business approach, diversified operating footprint, continued reinvestment in its business and development of high-performance teams puts it in a strong position to compete in our sector and product markets.