Western Forest Products posts record sales
Western Forest Products reported the highest sales in its history last year, $925.4 million, amid improved market conditions.
In the fourth quarter ended Dec. 31, Western Forest had $231.2 million in revenue and $14.6 million in net income or three cents per share.
That was an improvement from $3.3 million of net income, or one cent per share, with $220.7 million of revenue in the fourth quarter of 2011.
For the full year, revenue was up 8.4 per cent from $853.7 million in 2011.
Western Forest Product’s annual profit was $29.1 million or six cents per share, up from $23.8 million or five cents per share in 2011.
Net debt was also down dramatically, to $15 million from $52.1 million at the end of 2011.
“A strong operating performance and improved lumber markets allowed Western to deliver the highest sales in company history. Log and lumber sales increased as we continued to profitably grow our business to meet market demand. We delivered $50.6 million of EBITDA and continued to make significant improvements to our balance sheet. Our net debt is now at an all-time low of $15.0 million and our liquidity improved to $185.1 million by year end, ensuring we are well positioned to continue to reinvest in our business and consider other capital allocation alternatives to enhance long term value for shareholders,” said Dominic Gammiero, Chairman of the Board.
Lumber revenue in 2012 was $63.3 million, or 11%, higher than in 2011. Western shipped 894 million board feet of lumber (“mmfbm”) in 2012, which was up 10% from the 811 mmfbm shipped last year. Markets began the year with relatively weak demand, but United States (“US”) housing starts began accelerating through the year. As US demand improved we experienced better pricing for both our western red cedar (“WRC”) and commodity segments. We believe that the Japanese and Chinese markets had accumulated excess inventories in the first half of 2012 which they needed to reduce and, as a result, demand in those markets did not begin improving until the fourth quarter of 2012.
Overall average prices per board foot of lumber sold in 2012 were marginally higher than 2011. This result masks the upward trend in pricing which did not gain momentum until the latter part of the year. Increased lumber demand in the US helped move pricing up in WRC and commodity lumber starting late in the third quarter of 2012. Prices in Japan started moving up in the fourth quarter of 2012, but prices in our niche segment remained flat. We expect these trends to continue through to the second quarter of 2013.
In 2012, our overall 10% increase in shipments reflected higher volumes to Canada, the US and Japan, which was partially offset by lower volumes to China, Europe and Australasia. Rising North American lumber demand and pricing is providing higher margin opportunities in the commodity segment of our business.
Our lumber sales volume into Canada increased by 31% over 2011 levels to 370 mmfbm, with the majority of the increase being driven by higher hemlock sales. Our hemlock sales increased, particularly in the commodity sector, as higher levels of housing activity drove more business for pressure treated lumber. We also continue to develop new markets in the industrial and civil construction sectors to take further advantage of our ability to make larger sizes with the strength properties inherent in our coastal species.
Our lumber shipments to the US were 16% higher in 2012, driven by stronger demand for WRC. New home construction starts in the US, while still below historic trend levels, accelerated in 2012. New home construction in the US grew by 28% in 2012 over 2011 levels, with the multifamily construction sector growing by 40%.
Lumber shipments to Japan for 2012 increased by 4% over 2011 levels to 185 mmfbm, primarily due to increased yellow cedar shipments. Average prices realized on these shipments were 5% higher in 2012. Rebuilding required as a result of the tsunami, which devastated Japan early in March 2011, has not yet had a significant impact on demand. Japanese demand was flat through the first three quarters of 2012, and began to trend up in the last quarter. Two factors increased the demand for Western’s lumber in Japan in the latter part of the year; housing demand has increased due to Japanese government stimulus programs and the start of the tsunami rebuild; and secondly, improved US markets has meant less lumber has been available for the export markets
Our direct lumber shipments to China decreased by 10% in 2012 to 182 mmfbm. However, this reduction is not indicative of reduced shipments to China in general since we are now selling more volume locally to take advantage of wholesale markets, which in turn is selling much of this on to China. However, the market growth in China did slow down, and much of this was attributable to the fact that the market had high log and lumber inventories at a time when the Chinese government was taking steps to slow down housing growth. Inventory levels were reduced by mid-year and market demand began to strengthen in the latter part of 2012, yielding higher price levels.
Log sales in 2012 increased by $14.7 million over 2011. The overall average price of logs sold in 2012 was marginally higher than in 2011. Domestic log prices were higher in 2012 compared to 2011 by 5%, on average, and overall log sales volumes were 8% higher in 2012 compared to 2011. However, market prices for pulplogs and export logs declined by 12% and 8%, respectively, from 2011 levels. Tempering the negative impact of these price declines has been a favourable change in sales mix, with relatively fewer pulplogs and more export logs sold this year.
Sales of by-products in 2012 were $54.7 million, or $6.3 million lower than in 2011. The majority of our by-products sales are comprised of chip sales, and in 2012 we sold 9% more volume compared to 2011. Despite increased sales volumes of by-products, revenue declined by 10% as a result of an 18% reduction in overall average prices in 2012 compared to 2011. In general, chip prices are tied by a formula to the market price of pulp, and for 2012 these prices were lower than 2011 (NBSK prices delivered to China were 23.5% higher in 2011 than in 2012). Western has various obligations under long-term chip supply contracts which require us to either purchase quantities of chips on the open market or use whole log chipping programs at certain of our sawmills or third party chipping facilities, if insufficient chips are produced from our own mills.
Total freight costs incurred in 2012 were $88.2 million which is $2.6 million less than those incurred for 2011. Log shipment freight costs were $3.6 million lower in 2012 compared to 2011 while lumber freight costs were $1.0 million higher. The log freight costs were reduced primarily because more log shipments were sold on a FOB basis in 2012. In the case of lumber, while shipment volumes for 2012 increased by 10% over 2011, freight costs increased by just $1.0 million, or 1%. The primary reason for this is that market conditions in 2012 led Western to pursue higher margin opportunities in local markets, which meant proportionately more of its lumber sales were shipped locally and less in overseas markets (China in particular), which have significantly higher freight rates. In 2012, 55% of our shipments were in North American markets compared to 47% in 2011. In addition, transportation management initiatives have helped to reduce costs in key markets by approximately $1.5 million in 2012.
EBITDA for 2012 was $50.6 million, which is a decline of $11.0 million from the $61.6 million achieved in 2011. Lumber production for 2012 was 8% higher than during 2011. Our sawmills operated at 84% of total capacity in 2012 compared to 83% of capacity in 2011. The increased production level was achieved with almost the same number of shifts being operated over the two years which reflects increased operating efficiencies at our mills as indicated by an 8% improvement in total board feet of lumber produced per shift.
With the increased growth in production, unavoidable fixed costs associated with curtailed activities for our logging and sawmill facilities that were directly expensed to the income statement in 2012 declined from $8.6 million in 2011 to $4.2 million in 2012.
Even though we continued to increase production and sales levels of both lumber and logs in 2012, our EBITDA declined mainly as a result of lower market prices for our pulplogs and export logs, lower by-product pricing, and higher log costs. Partially offsetting these negative variances was a favourable change in the sales mix of our logs as described above, higher domestic log sales prices, increased sawmill productivity, higher realized lumber prices, freight cost reductions, and lower fixed costs associated with less down time.
The total log harvest for 2012 was 6.1 million cubic meters, which was 5% higher than the 2011 harvest level of 5.8 million cubic meters. As we increased the harvest from all of our tenures, we increased our heli-logging harvest and incurred additional transportation costs. However, offsetting the higher logging costs was a higher value species mix of logs resulting from the increased heli-logging. The higher log costs also included more purchased logs and proportionately more of these purchases were higher cost cedar and hemlock sawlogs to supplement our sawmill demand. Finally, we incurred higher maintenance costs in our timberlands operations in 2012.