West Fraser’s Q1 2019 results impacted by lower SPF, SYP production
By West Fraser
By West Fraser
West Fraser‘s lumber segment generated operating earnings of $2 million (Q4-18 – $22 million loss) and Adjusted EBITDA of $84 million (Q4-18 – $68 million). The current quarter’s results were negatively impacted by lower SPF and SYP production and a decline in SPF market demand compared to the previous quarter. SPF production for the quarter was affected by the previously announced temporary curtailments at West Fraser’s Williams Lake, Chasm, 100 Mile and Chetwynd sawmills and the permanent curtailment of the third-shift at the company’s Quesnel and Fraser Lake sawmills resulting in 125 MMfbm of lower production (Q4-18 – 25 MMfbm lower from temporary curtailments). Despite this, operating earnings were higher in the current quarter due in part to improved SPF pricing and higher SYP shipments. Lastly, the impact on earnings of log and lumber inventory write-downs to market value was nil in the current quarter compared to $17 million in the fourth quarter of 2018.
The company’s panels segment generated operating earnings in the quarter of $11 million (Q4-18 – $4 million) and Adjusted EBITDA of $15 million (Q4-18 – $9 million). Improved plywood pricing was the major contributor to the improved results.
West Fraser’s pulp and paper segment generated operating earnings of $1 million (Q4-18 – $36 million) and Adjusted EBITDA of $11 million (Q4-18 – $47 million). This quarter, the company’s Hinton pulp mill experienced planned and unplanned shutdowns which resulted in 22,000 tonnes of lost production compared to the previous quarter. This gave rise to higher manufacturing costs which when accompanied with lower pulp pricing resulted in lower operating earnings compared to the previous quarter. This was partially offset by lower fibre costs, higher BCTMP shipment volumes and lower manufacturing costs at West Fraser’s Quesnel River pulp mill following their planned shutdowns in the fourth quarter of 2018.
The company ended the quarter with $208 million of available liquidity and remains well within its leverage parameters. Subsequent to quarter end, it secured a new $100 million of demand operating credit facility as well as an additional $20 million on its letter of credit facility.
Several of the fundamental factors for U.S. housing demand, including mortgage rates and applications, housing permits, as well as employment and job gains, have been showing positive signs early in 2019. As of yet, this has not translated into an increase in demand for lumber which West Fraser believes has been negatively impacted by persistently wet weather across major construction markets in the U.S. In the second quarter, normal spring logging curtailments will significantly reduce log inventories at the company’s Canadian lumber and panel mills, which will be an additional source of liquidity.
West Fraser has an upcoming maintenance shut down in May at its jointly owned NBSK mill in Quesnel, B.C.
Fibre costs in B.C. remain challenging due to a tight market for purchase wood which will impact quota wood in the second half of 2019. The company is expecting a moderation of fibre costs in the U.S. South provided weather conditions normalize more in line with past trends.
The B.C. government has launched a number of policy measures that will affect the B.C. forest sector. The government has: (1) commenced a consultation process on a draft agreement called the Caribou Protection Plan which the province estimates may remove at least 300,000 m3 from the timber supply in the northeast of B.C.; (2) introduced Bill 22, Forest Amendment Act, 2019, which, if passed into law, will make it harder to dispose of or transfer a tenure agreement to a third party; and (3) initiated the Interior Revitalization process which is meant to encourage collaborative forest planning activities and update land-use planning and usage. West Fraser is still assessing the impact these changes may have on our operations.