WFP announces adjusted EBITDA of $33.7M in Q3 2020
November 9, 2020 By Western Forest Products
Western Forest Products Inc. reported adjusted EBITDA of $33.7 million in the third quarter of 2020. The company capitalized on improved markets in North America by increasing sales of Western Red Cedar (WRC) lumber and by redirecting products destined for relatively weaker export markets. Western took advantage of favourable timberlands operating conditions and restarted certain idled mill operations to grow production and drive cost efficiencies.
Net income of $11.5 million ($0.03 net income per diluted share) was reported for the third quarter of 2020, as compared to net loss of $18.7 million ($0.05 net loss per diluted share) for the third quarter of 2019 and net income of $8.5 million ($0.02 net income per diluted share) in the second quarter of 2020.
Third quarter highlights:
- Achieved an average lumber price of $1,264 per thousand board feet
- Increased lumber shipments 10 per cent over Q2 2020
- Levered flexible operating platform to grow lumber production and shipments within North America
- Restarted the Ladysmith Sawmill, Cowichan Bay Planer and Alberni Pacific Planer operations
- Repaid $32.8 million of debt, closing the period with $127.9 million of available liquidity
Western’s third quarter adjusted EBITDA was $33.7 million, including export tax expense of $11.0 million, as compared to negative adjusted EBITDA of $16.6 million in the third quarter of 2019, and adjusted EBITDA of $29.5 million reported in the second quarter of 2020. Operating income prior to restructuring and other items was $19.0 million, compared to a loss of $24.2 million in the third quarter of 2019, and $14.6 million of income reported in the first quarter of 2020.
“We leveraged our flexible operating platform, increasing sales in the strong North American lumber market, to deliver improved EBITDA,” said Don Demens, president and chief executive officer. “Looking ahead, we are well-positioned to build on these results as we remain focused on safeguarding our people and our business from the impacts of COVID-19.”
Summary of third quarter 2020 results
Adjusted EBITDA for the third quarter of 2020 was $33.7 million, as compared to negative adjusted EBITDA of $16.6 million in the same period last year. Western capitalized on an improved market in North America by increasing its Western Red Cedar shipments and by redirecting production from weaker export markets to North America. Increased log and lumber production drove cost efficiencies while higher prices reduced inventory provisions. Operating income prior to restructuring and other items was $19.0 million, as compared to an operating loss of $24.2 million in the same period last year. Prior year third quarter results include the impact of the United Steelworkers Local 1-1937 (USW) strike that ended in the first quarter of 2020.
Western continue to strictly enforce enhanced health and safety protocols and regularly re-evaluate market conditions arising from the novel Coronavirus pandemic (COVID-19). Our near-term focus remains on ensuring the health and safety of our employees, managing our balance sheet, and servicing our customers.
Lumber and log sales benefitted from significantly improved North American lumber markets. Robust demand from the repair and renovation and new home building sectors combined with constrained supply to drive record pricing in North American commodity lumber markets in the quarter. Strong demand for Western’s WRC products supported increased shipments and better pricing. As the quarter progressed, the company levered its flexible operating platform by redirecting volumes from the relatively weak export markets to North America.
Lumber revenue in the third quarter was $208.6 million, an increase of 90 per cent from the same period last year, and an increase of 10 per cent from the second quarter of 2020. Lumber shipment volumes of 165 million board feet were 83 per cent higher than the same period last year and increased nine per cent from the second quarter of 2020. In comparison to the second quarter of 2020, Western grew WRC lumber shipments by 19 per cent and its North American lumber diversion strategy led to a 21 per cent increase in commodity lumber shipments.
Western’s average realized lumber price of $1,264 per thousand board feet increased two per cent from the same period last year as price improvements were partly offset by a weaker sales mix. Despite increasing the WRC volumes, the percentage of specialty product shipments decreased to 59 per cent from 64 per cent in the third quarter last year as Western grew its production of North American commodity lumber. Lower wholesale lumber shipments and a relatively weaker Canadian dollar partly offset improved third quarter lumber revenue in 2020.
Log revenue was $73.7 million in the third quarter of 2020, an increase of 169 per cent from the same period last year and a 22 per cent increase from the second quarter of 2020. Log revenue growth resulted from increased shipments and was achieved despite a weaker sales mix and lower export log market pricing. Western recently redirected export log inventory to its sawmills as a result of the strong North American lumber market.
By-product revenue was $8.3 million, an increase of 84 per cent as compared to the same period last year, and a 19 per cent increase from the second quarter of 2020. Increased production led to higher by-product shipments, while pricing was negatively impacted by the weak NBSK pulp market.
Third quarter lumber production of 192 million board feet was 300 per cent higher than the same period last year, and an increase of 34 per cent from the second quarter of 2020. Western achieved significantly higher production through increased operating hours and by an improved recovery that was influenced by higher domestic market production. The company restarted production at its Cowichan Bay sawmill on May 4, 2020 and at its Ladysmith sawmill on Aug. 4, 2020, with both operations having remained curtailed following the strike. Western’s Columbia Vista sawmill was curtailed for seven days due to power issues and poor air quality caused by forest fires.
Increased production of North American commodity lumber contributed to improved sawmill productivity but also increased our secondary processing requirements. Western restarted planer operations at its Cowichan Bay and Alberni Pacific sawmills in the third quarter to supplement processing capacity.
The company produced 1,138,000 cubic meters of logs from our coastal operations in British Columbia in the third quarter of 2020, as compared to 21,000 cubic meters in the Strike-curtailed third quarter last year. Western capitalized on favourable operating conditions to increase log harvest volumes, which drove lower production costs despite an increase in helicopter operations. Western continues to maintain modified operating procedures in our timberlands to mitigate COVID-19 risks.
B.C. Coastal saw log purchases were 235,000 cubic metres, a significant increase over the same period last year and consistent with the second quarter of 2020. Market log availability remains constrained due to reduced BC coastal harvest activity.
Freight expense increased by $12.9 million from the same period last year. Freight expense grew as the result of higher shipment volumes and the relative geographic mix of log and lumber sales, partly offset by lower fuel surcharges and ocean freight rates.
Third quarter adjusted EBITDA and operating income included $11.0 million of countervailing duty (CVD) and anti-dumping duty (AD), as compared to $5.5 million in the same period last year. Duty expense increased as a result of growth in U.S.-destined lumber shipment volumes.
B.C. government forest policies update
During 2019, the B.C. provincial government introduced various policy initiatives that will impact the B.C. forest sector regulatory framework as part of their Coastal Revitalization Initiative.
On Jan. 21, 2020, the province announced changes to the Manufactured Forest Products Regulation, which was intended to come into effect July 1, 2020. The amendments to the Regulation require lumber that is made from WRC or Cypress (CYP) to be fully manufactured in B.C. to be eligible for export from Canada. Fully manufactured is defined as lumber that will not be kiln-dried, planed or re-sawn at a facility outside of B.C.
On June 11, 2020, the province announced the deferral of the implementation of the changes to the Regulation to Sept. 30, 2020. The province also updated the requirement to fully manufacture WRC and CYP to only apply to the B.C. coastal region.
On Sept. 16, 2020, the province provided additional information with respect to the implementation of amendments to the Regulation, including the application of a tax on WRC and CYP exported from B.C. to any location outside of Canada and within 3,000 miles. Requirements under the Regulation require provincial export permit applications and, where fully manufactured requirements are not met, payment of a tax in lieu of manufacture to be eligible for export. The amount of the tax factors in the extent of processing completed prior to export application, with the rate calculated as a proportion of the combined CVD and AD U.S. export tax all others duty rate. For products shipped within the 3,000-mile export zone, the applicable B.C. export duty rate decreases by one third for each process performed prior to the export, with no fee applicable upon completing three processes. Certain other exemptions apply including rough appearance products ready for retail sale prior to export. These changes were effective Sept. 30, 2020.
While the application of provincial export tax was not effective until Nov. 1, 2020, Western was compliant with permitting requirements that became effective Oct. 1, 2020 and continues to take steps to limit any potential financial impact and mitigate any potential unintended consequences of the amended Regulation. Mitigating actions include the use of exemptions, maximizing our planer capacity utilization, pursuing additional market processing capacity, reducing mill operating hours and increasing export log volumes where necessary to manage inventory risk.
Western will continue to sustainably harvest and manufacture lumber from the full B.C. Coastal forest profile.
Strategy and outlook
Western’s long-term business objective is to create superior value for shareholders by building a margin-focused specialty log and lumber business of scale to compete successfully in global softwood markets. Western believes this will be achieved by maximizing the sustainable utilization of its forest tenures, operating safe, efficient, low-cost manufacturing facilities and augmenting sales of targeted high-value specialty products for selected global customers with a lumber wholesale program. The company seeks to manage its business with a focus on operating cash flow and maximizing value through the production and sales cycle.
Lumber pricing in North America reached all-time highs in the third quarter of 2020, driven by a combination of rising demand from new home construction and a very strong repair and renovation segment. Supply was constrained due to permanent mill closures in B.C. and temporary production disruptions resulting from COVID-19. Despite a recent correction Western expects pricing to remain above trend levels in North America in the near term, as supply lags increased demand. Western is anticipating lumber pricing to improve marginally in China as we enter the seasonally more active fall and early winter.
Demand and pricing for Western’s WRC products in North America are expected to remain strong as buyers position their inventories for the first half of 2021. The company is closely monitoring the resurgence of COIVD-19 in Europe, which could temporarily impact the demand for high-priced appearance WRC products.
In Japan, declining housing starts reduced demand for Western’s products. Despite weaker demand and increased competition from lower priced, subsidized Japanese domestic species, inventories of North American sourced lumber in Japan have normalized and Western expects pricing to improve.
Demand for niche lumber products targeted to the treating segment in North America has been strong, while demand for timbers consumed in the industrial segment has remained weak. Western expects continued strength in the treated segment, stable demand for its niche appearance products and continued weakness in the industrial sector.
The domestic log market remains undersupplied and pricing is expected to remain strong through the end of the year. In contrast, Western expects the export log market to remain competitive and pricing to remain relatively weak. Due to the weak export markets Western has re-directed some log volume to the domestic market.
As we look forward, the potential resurgence in COVID-19 cases around the globe may lead to the reintroduction of government actions that could impact lumber demand and pricing. Western plans to utilize its flexible operating platform to adjust to market conditions and will continue to align our production volumes to match market demand.
Softwood lumber dispute and U.S. market update
The U.S. application of duties on Canadian lumber imports continues a long-standing pattern of U.S. protectionist action against Canadian lumber producers. Western disagrees with the inclusion of specialty lumber products, particularly WRC and Yellow Cedar products, in this commodity lumber focused dispute. As duties paid are determined on the value of lumber exported, and as Western’s shipments to the U.S. market are predominantly high-value, appearance grade lumber, Western is disproportionately impacted by these duties.
Western expensed $11.0 million of export duties in the third quarter of 2020, comprised of CVD and AD at a combined rate of 20.23 per cent on all lumber it sold into the U.S. On Feb, 3, 2020, the U.S. Department of Commerce (DoC) issued preliminary revised rates in the CVD and AD first administrative review of shipments for the years ended Dec. 31, 2017 and 2018. The combined preliminary revised rates were 8.37 per cent for 2017 and 8.21 per cent for 2018. The DoC may revise these rates between preliminary and final determination. On July 22, 2020, the DoC again announced an administrative review extension that is expected to delay the final rate determination until late November 2020. Cash deposits continue at the current rate of 20.23 per cent until the final determinations are published, at which time the 2018 rate will apply to U.S.-destined lumber sales.
The tolling of all administrative reviews on July 22, 2020 also extended the DoC’s second administrative review for fiscal year 2019. Western was not selected as a mandatory respondent in the second administrative review and will therefore be subject to the “all others” rate once preliminary review findings are finalized.
At Sept. 30, 2020, Western had USD $85.5 million (CAD $113.9 million) of cash on deposit with the U.S. Department of Treasury in respect of these softwood lumber duties.
Including wholesale lumber shipments, Western’s sales to the U.S. market represented approximately 29 per cent of the company’s total revenue in 2020. Western’s distribution and processing centre in Arlington, Washington and its Columbia Vista division in Vancouver, Wash., are expected to partially mitigate the damaging effects of duties on its products destined for the U.S. market. Western intend to leverage its flexible operating platform to continue to partially mitigate any challenges that arise from this trade dispute.
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