Western announces Q3 2015 results
November 3, 2015 - Western Forest Products Inc. announced results for the third quarter of 2015. The Company reported a record third quarter adjusted EBITDA of $28.7 million in 2015, a 44 per cent increase from $20.0 million reported in the third quarter of 2014, and a two per cent decrease from $29.2 million of adjusted EBITDA reported in the second quarter of 2015. Improved lumber demand from Japan, resilient Western Red Cedar lumber markets, strong opening log and lumber inventories and the weaker CAD contributed to a third quarter adjusted EBITDA increase of $8.7 million over the same quarter last year. The Company reported revenue of $278.5 million in the third quarter of 2015, a six per cent increase compared to the third quarter of 2014 and a four per cent decrease from revenue in the second quarter of 2015.
Q3 2015 Highlights
- Set a record third quarter adjusted EBITDA for the Company of $28.7 million
- Achieved the highest third quarter lumber revenue since 2006 at $203.8 million
- Set a record quarterly average lumber price for the Company of $899 per thousand board feet
- Returned $7.9 million to shareholders via the Company's quarterly dividend program
- Completed and successfully commissioned the $40 million capital investment in the Saltair sawmill
Net income of $17.1 million ($0.04 per diluted share) was reported for the third quarter of 2015, compared to $2.7 million ($0.01 per diluted share) for the third quarter of 2014 and $19.1 million ($0.05 per diluted share) for the second quarter of 2015.
Following the third quarter, on October 29, 2015, the Company successfully reached a five-year labour agreement with the Pulp and Paper Workers of Canada Union, the union representing hourly employees at the Company's Ladysmith sawmill.
On November 2, 2015, the Company amended certain terms and conditions of its revolving credit and long-term debt facilities. In addition, the maturity date of the revolving credit facility was extended by one year to December 14, 2016.
Western reported record third quarter adjusted EBITDA of $28.7 million, a 44 per cent increase from the same quarter last year. Well-positioned log and lumber inventories allowed us to capitalize on improved specialty markets in the third quarter of 2015. We used our flexible operating platform to focus production and sales towards improved lumber demand in Japan and sustained demand from the Western Red Cedar ("WRC") lumber market, while reducing our exposure to the continued downturn in the commodity lumber market. These achievements were partly offset by reduced export log sales volumes, due in part to internalizing log volumes, and the continued imposition of Softwood Lumber Agreement export duties.
Third quarter lumber revenue of $203.8 million increased 13 per cent from the same period last year as we improved our sales mix, delivering a 10 per cent increase in average realized lumber prices, and benefitted from a weaker CAD. Lumber pricing improvements were driven by using our flexible operating platform to direct production towards high-value specialty products. Lumber shipment volumes grew three per cent in the third quarter of 2015 as compared to the same period last year, on the strength of a 21 per cent increase in volumes to Japan and stronger demand for our WRC lumber products.
Log revenue of $57.3 million in the third quarter of 2015 was down 13 per cent as compared to the same period last year due to a 14 per cent decline in overall log shipment volumes period over period. Our strategy of redirecting a greater proportion of logs internally to our mills away from weak export markets, in part, led to a 35 per cent reduction in export log sales volume. This more than offset an improved domestic sawlog sales mix and higher realized export log pricing in the quarter. Domestic log sales remained seasonally strong due to continued demand for our specialty log offerings.
We limited our exposure to the weak commodity lumber market by leveraging our log inventory and the flexibility of our operating platform to focus on Japan and WRC production in the third quarter of 2015. While specialty lumber production increased, third quarter lumber production was eight per cent lower in 2015 than in the same quarter last year. Lower production in the period was also partly due to three weeks of planned shutdown at the Saltair sawmill occurring in the third quarter.
Our Timberlands operations delivered a 17 per cent harvest volume increase in the third quarter of 2015 as compared to the same quarter last year, primarily due to greater heli-logging activity and improved period- over-period harvesting conditions. Third quarter log production costs increased five per cent over the same period last year due to the change in the mix of harvest locations and higher heli-logging volumes.
Net income for the third quarter of 2015 was $17.1 million, or $0.04 per common share. Net income included a $2.9 million restructuring charge primarily due to the consolidation of our Central Island forest operations, which is expected to reduce harvest costs once fully implemented. This net income compares to $2.7 million, or $0.01 per common share, recognized in the third quarter of 2014, which was net of an $8.3 million restructuring charge primarily as a result of the consolidation of our Nanaimo-area sawmill operations.
Total liquidity as of September 30, 2015 was $173.4 million compared to $134.4 million at the end of 2014. Our increased liquidity year-to-date was the result of cash generated by operations and the sale of non-core assets. In the third quarter of 2015, we continued to provide returns to our shareholders through our quarterly dividend program, returning $7.9 million, or $0.02 per common share, on September 18, 2015.
Third quarter 2015
We generated $278.5 million of revenue in the third quarter of 2015, a six per cent increase over revenue of $262.1 million in the same quarter last year and our highest third quarter revenues since 2006. Third quarter adjusted EBITDA was $28.7 million in 2015, compared to $20.0 million of adjusted EBITDA in the same quarter last year. We achieved these results by using our flexible operating platform to direct our well-positioned log inventories into the production of high-margin, high-value specialty products. This strategy limited the impact of the continued decline in commodity lumber market conditions and the impact of reduced demand for export logs from China and the United States ("U.S.").
Lumber revenue in the third quarter of 2015 was $203.8 million, an increase of 13 per cent from the same period in 2014 due to realized lumber pricing gains and a three per cent improvement in lumber sales volume. Third quarter average realized lumber pricing of $899 per thousand board feet ("mfbm") was a record for the Company, $20 per mfbm better than the record set in the previous quarter, and an increase of $79 per mfbm over the same period last year. Improved pricing was driven by a better sales mix and a weaker CAD as compared to the third quarter of 2014. Sales mix improved as a result of a 21 per cent increase in sales volumes into Japan and a seven per cent increase in WRC sales volumes as compared to the same period in 2014.
Our third quarter 2015 log revenue of $57.3 million was down 13 per cent from the same period in 2014 as we redirected a greater proportion of logs internally to our mills away from weak export markets. This led to a 35 per cent reduction in export log sales volume in the third quarter of 2015 as compared to the same quarter last year. Domestic saw log shipments remained stable year-over-year while domestic log pricing increased eight per cent due to a higher mix of specialty log sorts sold. Realized pulp log pricing and shipment volumes were both down marginally over the third quarter of 2014.
By-products revenue was $17.4 million in the third quarter of 2015, as compared to the $15.7 million in same period in 2014. The increase was largely due to a weaker CAD, as our realized chip prices are tied to the U.S. Dollar ("USD") denominated market price of pulp.
Improved production from the Duke Point sawmill, as a result of our ongoing modernization project, largely offset the impact of the November 2014 permanent closure of our Nanaimo sawmill on third quarter lumber production, which was eight per cent lower than in the same quarter of 2014. The lumber production decrease to 212 million board feet was partly due to three weeks of downtime at the Saltair sawmill in the third quarter of 2015. This planned downtime was taken to complete the $40 million strategic capital investment in that mill. We also continue to internalize our custom cut production volumes to match production volumes to market demand.
Our focus on specialty lumber production resulted in our highest third quarter lumber revenue since 2006. By utilizing our flexible operating platform we replaced higher production commodity volumes with higher value Japan and WRC production in our mills. The additional Japan and WRC volumes led to an increase in production costs and a two per cent decrease in lumber recovery as compared to the same period last year.
Log harvest volume was 1.2 million cubic metres in the third quarter of 2015, an increase of approximately 0.2 million cubic metres from the same quarter of 2014. The increase was primarily due to improved coastal harvesting conditions over the comparative period. Offsetting the increased harvest was equal reduction in log purchases due to a constrained coastal log supply and selective log purchasing that was focused on specialty lumber production. While we realized a 17 per cent increase in harvest in the third quarter of 2015, as compared to the same quarter last year, while coastal British Columbia ("B.C.") harvest volumes decreased 22 per cent, according to the Province of B.C.'s Harvest Billing system.
In the third quarter of 2015, average value of logs harvested increased 11%, exceeding the log production cost increase of five per cent, as compared to the same quarter last year. These increases were primarily due to a change in mix of harvest locations and an increase in helicopter logging.
In the third quarter of 2015 we incurred $1.7 million in export tax expense. With the steep decline in the commodity benchmark lumber pricing index, export taxes under the Softwood Lumber Agreement became payable in the second quarter of 2015 and continued into the third quarter. Export tax rates applied to shipments of lumber to the U.S. were 15 per cent for July and five per cent for August and September.
Freight costs were $22.9 million in the third quarter of 2015, a decrease of $0.7 million compared to the same period of 2014. This decrease was due largely to the geographic mix of lumber shipments and a reduction in export log sales volumes partly offset by the impact of a weaker CAD on USD-denominated freight.
Selling and administration expense decreased 25 per cent from the third quarter of 2014 to $6.2 million in the third quarter of 2015. Contributing to lower administration expense were reduced performance-based compensation costs, option forfeitures, and lower share-based compensation expense.
Third quarter net income was $17.1 million in 2015, as compared to $2.7 million in the same period in 2014. Results from the third quarter of 2015 include $2.9 million in restructuring charges as compared to $8.3 million in restructuring charge in the same quarter of 2014. Restructuring charges in the third quarter of 2015 relate primarily to severance expenses resulting from the consolidation of our Central Island forest operations, while these expenses in the same quarter of 2014 resulted largely from the consolidation of our Nanaimo-area sawmill operations.
Year to date, September 30, 2015
Adjusted EBITDA for the first nine months of 2015 was $87.5 million. Our flexible operating platform enabled us to meet increased demand for specialty lumber and reduce our exposure to a significant downturn in commodity markets and reduced export log demand. An improved Japan lumber market, resilient WRC market, the impact of a weaker CAD and stable year-to-date log shipments has partially offset the impact of poor commodity lumber markets in the first nine months of 2015. An increase in production costs and the imposition of export tax reduced adjusted EBITDA by $6.2 million as compared to the first three quarters of 2014, and resulted in an adjusted EBITDA margin of 10.7 per cent as compared to 11.6 per cent over the same period last year.
Lumber revenue in the first three quarters of 2015 increased by two per cent as compared to the first three quarters of 2014. While lumber shipments have decreased five per cent from the first nine months of 2014, an improved lumber sales mix and a weaker CAD have led to a $65 per mfbm increase in average realized lumber pricing in 2015. The primary driver for increased average realized lumber pricing was WRC lumber for which shipments and average realized pricing grew by nine per cent and 15 per cent, respectively, as compared to the first nine months of last year. On the strength of log purchases year-to-date, WRC lumber sales volumes increased to 30 per cent of total lumber sold in the first nine months of 2015 as compared to 26 per cent in the same period last year.
Log revenue of $189.5 million for the first nine months of 2015 has decreased two per cent compared to the same period of 2014. An increase of nine per cent in domestic sales volume has largely offset the 10% decrease in export sales volumes and five per cent decline in pulp log pricing period-over-period. Challenging log market conditions in China and weaker pulp log pricing due to the impact of pulp operation curtailments on the B.C. coast has offset the impact of rising domestic log pricing and the weaker CAD on average realized log pricing.
Improved production from our Duke Point sawmill partially offset the impact of the three weeks of downtime at our Saltair sawmill late in the third quarter for the installation of the new log merchandiser and debarker and the November 2014 closure of our Nanaimo sawmill. These factors contributed to 7% lower lumber production for the first three quarters of 2015 as compared to the same period of 2014.
Total log production increased to 4.1 million cubic metres in the first nine months of 2015 from 3.8 million cubic metres produced in the same period last year. As a result of year-to-date harvest production, we have been able to leverage our well-positioned log inventory to focus on the production of specialty lumber products and reduce our exposure to poor commodity market pricing.
Log production costs were higher in the first three quarters of 2015 primarily due to mix in harvest operations, increased helicopter logging volumes and increased labour costs. Labour costs have increased following the five-year labour agreement ratified by the United Steelworkers Union ("USW") in July 2014. Additionally, we expensed $1.1 million more spur road construction in the first three quarters of 2015, as compared to the same period last year, as we increased our access to standing timber in preparation for future harvesting.
Selling and administration expense in the first three quarters of 2015 was $20.3 million, a decrease of $5.9 million from the same period last year. The reduction in selling and administration expense was due largely to a decrease in performance-based employee compensation costs, lower share-based compensation expense, and reduced payroll costs arising from the consolidation of certain operations and sales offices. As a percentage of revenue, selling and administration expense has decreased from 3.3 per cent in the first nine months of last year to 2.5 per cent in the same period of 2015.
Finance costs in the third quarter of 2015 were $1.3 million, a decrease of $0.1 million compared to the same quarter of 2014. This decrease was commensurate with lower average outstanding debt on our revolving term loan facility and a reduction in interest rate from the comparative period. The average debt balance outstanding in the third quarter of 2015 was $72.8 million as compared to $83.9 million in the same quarter of 2014.
The sale of Western's former Squamish pulp mill site was completed February 6, 2015 for cash proceeds of $21.8 million. Consequently, the Company recognized $9.1 million in net income from discontinued operations in the first quarter of 2015 resulting from gains on disposal of property, plant and equipment; revenue from the sale of hydro-electric power generated at the site partly offset by site operating costs incurred up to the sale completion date; and a gain on reversal of an associated liability.
As part of our corporate strategy, we will continue to pursue opportunities to sell non-core assets in order to optimize our business.
Strategy and outlook
In the third quarter we continued to implement our strategy of maximizing product margins while increasing our sales volume.
Key operational priorities in support of our strategy include:
1. Increasing log availability through the accessing of additional log volume on the open market to increase lumber production;
2. Implementing strategic capital and utilizing our flexible operating platform to produce products that maximize margin; and,
3. Improving productivity through increased equipment utilization.
We believe that in the mid to long-term, increased demand from a continued gradual recovery in the U.S. new home segment and continued demand from China, combined with a reduction in supply from traditional Canadian sources, will lead to a stronger pricing environment. Until U.S. new home construction returns to more normalized levels we expect commodity lumber pricing will continue to be volatile.
Demand and pricing for WRC normally declines in the fourth quarter as distributors reduce inventories ahead of the winter season. As with past fourth quarters, we expect a seasonal reduction in demand for WRC compared to the third quarter; but in contrast to past years, we anticipate WRC lumber pricing to remain firm, supported by continued strength in the repair and renovation segment. Demand for certain Niche lumber product lines was challenged in the third quarter due to higher inventory levels in the distribution channel. We are adjusting the mix of our Niche lumber production and expect that to increase sales volumes and maintain pricing.
As expected, demand for lumber in Japan improved in the third quarter. This was supported by increased Japan housing starts. We anticipate that demand will continue to improve over the next two quarters. Lumber pricing in Japan will remain competitive in the near term due to increased competition from other supply regions, however we expect to achieve marginal price improvements in selected product lines. Lumber pricing and demand for Canadian lumber in China in 2015 has been weak. We are somewhat optimistic that declining inventories will improve both demand and pricing in the fourth quarter.
Export log market fundamentals appear to be improving. Log inventories in China have declined and demand in Korea has improved. Our price realizations have benefited from a weaker CAD and lower freight rates due in part to reduced export volumes from North America. While the export log markets remain fragile, we anticipate the fourth quarter will be slightly better in both volume and price. The market for domestic logs is expected to remain strong through the fourth quarter due to limited supply, and pulp log prices appear to have stabilized at current low levels.
The Canada-U.S. Softwood Lumber Agreement expired on October 12, 2015, eliminating export tax measures applicable under this agreement, and limiting litigation in respect of the importation of softwood lumber from Canada to the U.S. for twelve months following its expiration.
Strategic Capital Plan Update
In the third quarter of 2015, we continued to make steady progress with our ongoing strategic capital projects.
In mid-September 2015, we completed the installation of the log merchandiser and debarker at our Saltair sawmill. The completion of these projects has allowed us to capitalize on the previous investments we made in the mill and initial results have been positive. The upgraded Saltair sawmill will operate at higher production levels, improved recovery, lower cost and with greater product flexibility.
Additionally, in the third quarter of 2015, we continued with the Duke Point sawmill and planer modernization projects. The sawmill upgrade has allowed us to increase our large log utilization which supports our strategy of harvesting the profile of the coastal forest. The planer upgrade will allow us to centralize our specialty planing at a new high speed facility which will process lumber at lower costs.
In the fourth quarter of 2015, we plan to continue the next phase of the modernization of the Duke Point operation by installing new headrig optimization equipment in the sawmill, and by installing new equipment to support the processing of kiln dried lumber. Also in the quarter we will upgrade the canter line at our Ladysmith sawmill and finalize the upgrade to the timber deck at our Chemainus sawmill. The benefits of these capital projects will be evident through their ramp-up in 2016.
The upcoming capital investments in our operations are expected to increase productivity, reduce production costs, increase margins, and support the continued sustainable harvesting of our complete forest profile. Upon completing the strategic capital program, we expect to have improved our competitiveness and gained access to new markets.
Forward-looking statements and information
This press release contains statements which constitute forward-looking statements and forward-looking information within the meaning of applicable securities laws. Those statements and information appear in a number of places in this document and include statements and information regarding our current intent, belief or expectations primarily with respect to market and general economic conditions, future costs, expenditures, available harvest levels and our future operating performance, objectives and strategies. Such statements and information may be indicated by words such as "estimate", "expect", "anticipate", "plan", "intend", "believe", "should", "may" and similar words and phrases. Readers are cautioned that it would be unreasonable to rely on any such forward- looking statements and information as creating any legal rights, and that the statements and information are not guarantees and may involve known and unknown risks and uncertainties, and that actual results and objectives and strategies may differ or change from those expressed or implied in the forward-looking statements or information as a result of various factors. Such risks and uncertainties include, among others: general economic conditions, competition and selling prices, changes in foreign currency exchange rates, labour disruptions, natural disasters, relations with First Nations groups, changes in laws, regulations or public policy, misjudgements in the course of preparing forward-looking statements or information, changes in opportunities and other factors referenced under the "Risks and Uncertainties" section of our MD&A in our 2014 Annual Report dated February 17, 2015. All written and oral forward-looking statements or information attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements. Except as required by law, Western does not expect to update forward-looking statements or information as conditions change.
Reference is made in this report to adjusted EBITDA which is defined as operating income prior to operating restructuring items and other income, plus amortization of property, plant, equipment, and intangible assets, impairment adjustments, and changes in fair value of biological assets. Adjusted EBITDA margin is EBITDA presented as a proportion of revenue. Western uses adjusted EBITDA and adjusted EBITDA margin as benchmark measurements of our own operating results and as benchmarks relative to our competitors. We consider adjusted EBITDA to be a meaningful supplement to operating income as a performance measure primarily because amortization expense, impairment adjustments and changes in the fair value of biological assets are non-cash costs, and vary widely from company to company in a manner that we consider largely independent of the underlying cost efficiency of their operating facilities. Further, the inclusion of operating restructuring items which are unpredictable in nature and timing may make comparisons of our operating results between periods more difficult. We also believe adjusted EBITDA and adjusted EBITDA margin are commonly used by securities analysts, investors and other interested parties to evaluate our financial performance.
Adjusted EBITDA does not represent cash generated from operations as defined by IFRS and it is not necessarily indicative of cash available to fund cash needs. Furthermore, adjusted EBITDA does not reflect the impact of a number of items that affect our net income. Adjusted EBITDA and adjusted EBITDA margin are not measures of financial performance under IFRS, and should not be considered as alternatives to measure performance under IFRS. Moreover, because all companies do not calculate adjusted EBITDA and adjusted EBITDA margin in the same manner, these measures as calculated by Western may differ from similar measures as calculated by other companies. A reconciliation between the Company's net income as reported in accordance with IFRS and adjusted EBITDA is included in the Company's Management's Discussion & Analysis for the quarter ended September 30, 2015, which is available under the Company's profile on SEDAR at www.sedar.com.
Also in this report management uses key performance indicators such as net debt, net debt to capitalization and current assets to current liabilities. Net debt is defined as long-term debt less cash and cash equivalents. Net debt to capitalization is a ratio defined as net debt divided by capitalization, with capitalization being the sum of net debt and shareholder's equity. Current assets to current liabilities is defined as total current assets divided by total current liabilities. These key performance indicators are non-GAAP financial measures that do not have a standardized meaning and may not be comparable to similar measures used by other issuers. They are not recognized by IFRS, however, they are meaningful in that they indicate the Company's ability to meet their obligations on an ongoing basis, and indicate whether the Company is more or less leveraged than the prior year.
Western is an integrated Canadian forest products company, and is the largest coastal British Columbia woodland operator and lumber producer. The Company has an annual available harvest of approximately 6.4 million cubic metres of timber, of which approximately 6.2 million cubic metres is from Crown lands. Western has a lumber capacity in excess of 1.1 billion board feet from seven sawmills and two remanufacturing plants. Principal activities conducted by the Company include timber harvesting, reforestation, sawmilling logs into lumber and wood chips, and value-added remanufacturing. Substantially all of Western's operations, employees and corporate facilities are located in the coastal region of British Columbia, while its products are sold in more than 25 countries worldwide.