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Western reports adjusted EBITDA of $29.5M in Q2 2020 despite financial impacts of COVID-19

Western Forest Products Inc. (Western or the Company) reported adjusted EBITDA of $29.5 million in the second quarter of 2020. Despite the negative financial impacts and significant uncertainty arising from the novel Coronavirus pandemic (COVID-19), Western maintained employment and operating levels, and continued to service customers.

Net income of $8.5 million ($0.02 net income per diluted share) was reported for the second quarter of 2020, as compared to net loss of $0.7 million ($nil per diluted share) for the second quarter of 2019 and net loss of $21.0 million ($0.06 net loss per diluted share) in the first quarter of 2020.

Western’s second quarter adjusted EBITDA was $29.5 million, including export tax expense of $7.6 million, as compared to adjusted EBITDA of $15.1 million in the second quarter of 2019, and negative adjusted EBITDA of $17.4 million reported in the first quarter of 2020. Operating income prior to restructuring and other items was $14.6 million, compared to $1.4 million in second quarter of 2019, and $28.4 million loss reported in the first quarter of 2020. Second quarter adjusted EBITDA in 2020 included $10.7 million of federal government grants accessed through the Canadian Emergency Wage program.

Summary of Second Quarter 2020 Results

Adjusted EBITDA for the second quarter of 2020 was $29.5 million, as compared to $15.1 million from the same period last year. Despite the negative financial impacts and significant uncertainty arising from COVID-19, we maintained employment and operating levels supported by the Canadian Emergency Wage Subsidy (“CEWS”) program. We capitalized on improved lumber and log markets in June 2020 to overcome operating losses realized early in the second quarter. Operating income prior to restructuring and other items was $14.6 million, as compared to $1.4 million in the same period last year.

In the second quarter, we focused on re-establishing our business after the lengthy United Steelworkers Local 1-1937 (“USW”) strike (the “Strike”) that ended in the first quarter of 2020. We re-engaged with employees, contractors and customers, overcoming the residual impacts of the Strike to deliver improved operating performance and financial results through the second quarter of 2020.

We continue to strictly enforce enhanced health and safety protocols and regularly re-evaluate market conditions arising from COVID-19. Our near-term focus remains on ensuring the health and safety of our employees, managing our balance sheet, and servicing our customers.

Sales

Lumber and log sales were impacted by market uncertainty and delayed shipments arising from COVID-19. Lumber revenue in the second quarter was $188.8 million, a decrease of 19 per cent from the same period last year. Lumber shipment volumes of 152 million board feet were 28 per cent lower than the same period last year. Lumber demand dropped significantly late in the first quarter and into the second quarter of 2020 as a result of global market uncertainty arising from COVID-19 and related government emergency measures. Demand gradually recovered through the quarter with shipments accelerating in June 2020. We grew wholesale lumber shipments as compared to the same period last year, and our United States (U.S.) based Columbia Vista division continued to perform in line with our expectations.

Our average realized lumber price increased 12 per cent from the same period last year, despite significant uncertainty in key export markets from COVID-19. An improved price realization was the result of a higher specialty product mix and a weaker Canadian dollar (CAD) to U.S. dollar (USD). Specialty lumber represented 64 per cent of shipments compared to 57 per cent in the second quarter of last year. The average CAD-USD foreign exchange rate in the second quarter of 2020 was three per cent lower than in the same period last year.

Log revenue was $60.5 million in the second quarter of 2020, a decrease of four per cent from the same period last year. We capitalized on an improved log market late in the second quarter to deliver increased shipments as compared to the same period last year, however average price realizations declined due to a weaker sales mix. Log sales mix was negatively impacted by inventory degradation that occurred during the Strike in certain British Columbia (B.C.) operations.

Operations

Despite significant uncertainty arising from COVID-19, we continued production through the second quarter. We maintained operating levels in order to support and maintain employment levels, rebuild inventories, and service our customers. By late May 2020, we had rebuilt log decks and lumber inventory that were depleted from the Strike.

Lumber production of 143 million board feet was 31 per cent lower than the same period last year. We operated fewer shifts, and production efficiency was impacted by consuming certain aged log inventory that had degraded during the Strike. On May 4, 2020, we restarted production at our Cowichan Bay sawmill, which had remained curtailed after the end of the Strike due to limited log supply.

We produced 1,224,000 cubic meters of logs from our B.C. coastal operations in the second quarter of 2020, a decrease of two per cent from same quarter of last year. Our log production increased through the second quarter of 2020, overcoming modified operating procedures implemented to mitigate COVID-19 risks and capitalizing on favourable coastal operating conditions. Logging costs were lower as compared to the same period last year as our production included logs that had been staged prior to the Strike. We also reduced helicopter logging volumes and limited road expenditures.

B.C. coastal saw log purchases were 236,000 cubic metres, consistent with the same period last year. Saw log purchases were limited due to reduced B.C. coastal harvest activity.

Freight expense decreased by $6.3 million from the same period last year due to lower shipment volumes.

Second quarter adjusted EBITDA and operating income included $7.6 million of countervailing duty (CVD) and anti-dumping duty (AD), as compared to $9.7 million in the same period last year. Duty expense decreased as a result of lower U.S.-destined lumber shipment volumes.

Due to the negative financial impacts COVID-19 had on our business, we applied for the Canadian government’s CEWS program. CEWS prevented temporary operating curtailments, employee layoffs, and offset the cost of enhanced health and safety protocols. We continued to operate despite uncertainty arising from COVID-19 to maintain employment levels, support contractors and communities, rebuild inventory and continue to service our customers. In the second quarter of 2020, we recognized CEWS of $9.3 million as an offset to cost of goods sold, and $1.4 million as an offset to selling and administration expense.

COVID-19

Western is committed to the health and safety of our employees, contractors and the communities where we operate. To help mitigate the spread of COVID-19, we have implemented strict health and safety protocols across our business that are based on guidance from health officials and experts, and in compliance with regulatory orders and standards.

Health and safety protocols currently being enforced include travel restrictions; self-isolation instructions for those who have travelled, are ill, exhibiting symptoms of COVID-19 or have come in direct contact with someone with COVID-19; implementing physical distancing measures; restricting site access to essential personnel and activities; increasing cleaning and sanitization in workplaces; and where possible, providing those who can work from home the ability to exercise that option. We continue to monitor and review the latest guidance from health officials and experts to ensure our protocols meet the current required standards.

In response to the impacts of the COVID-19 pandemic, the Company also curtailed its BC manufacturing facilities for up to a one-week period effective March 23, 2020. After implementing enhanced health and safety protocols and re-evaluating operating conditions, we resumed all operations, except at our Ladysmith, Cowichan Bay and Somass sawmills. By continuing to operate timberlands operations through the uncertainty arising from COVID-19 in the second quarter of 2020, we rebuilt sufficient log inventory to resume manufacturing operations at our Cowichan Bay sawmill on May 4, 2020 and at our Ladysmith sawmill on August 4, 2020.

State of Emergency declarations and other restrictions relating to travel, business operations and isolation have been made by governing bodies in the regions that Western operates and sells its products. Western’s business activities have been designated an essential service in Canada and the US, and we will continue to monitor and adjust our operations as required to ensure the health and safety of our employees, contractors and the communities where we operate and to address changes in customer demand. In addition, governments in Canada and the US have announced various financial relief programs for businesses. In the second quarter of 2020, we recognized $10.7 million in CEWS as a reduction to cost of goods sold and selling and administrative expense. We continue to evaluate Western’s eligibility for relief programs as they are announced, to help mitigate the financial impacts of COVID-19.

With the potential negative impacts to the global economy from COVID-19 and with dynamic global economic conditions, in the near-term we remain focused on maintaining financial flexibility, protecting the health and safety of our employees and contractors, and servicing our customers.

Timber Tenure Reduction

Approximately 89 per cent of Western’s 5,956,000 cubic metre sustainable allowable annual cut (AAC) is in the form of Tree Farm Licenses (TFL). TFLs are granted for 25-year terms and are replaced by the Province every five to ten years with a new TFL with a 25-year term.

In the second half of 2020, we expect that the Province’s Chief Forester to issue a final determination on the AAC in TFL 19, which is approximately 729,000 cubic metres. We expect that determination may reduce the AAC of TFL 19 by up to 18 per cent or approximately 130,000 cubic meters. Provincial legislation requires the Chief Forester to routinely review sustainable harvesting levels of individual tenures at least every 10-years and to issue a determination which may result in an increase or decrease to AAC. The AAC determination reflects tree growth, ecology, regional and local economic and social interests, water and other environmental considerations that define how forests can be managed.

More information on our tenure rights and sustainable harvest practices can be found in the Company’s Annual Information Form, which can be found SEDAR at www.sedar.com, and Western’s 2019 Sustainability Report, which can be found at www.westernforest.com.