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WFP log costs, revenue up

July 30, 2014, Vancouver - Western Forest Products Inc. earned 15% higher lumber revenue over last year in the second quarter of 2014. With adjusted EBITDA of $40.9 million the second quarter showed an improvement of $8.1 million over the first quarter 2014 result but $4.0 lower than the second quarter 2013 result.

The company reported revenue of $296.2 million for the second quarter of 2014 compared to $246.0 million for the first quarter of 2014 and $262.3 million for the second quarter of 2013.

"Despite the challenges that we faced in its second quarter, we delivered another strong performance. Increased shipments and an improved sales mix drove our revenue to its highest level in seven years," said Don Demens, President and Chief Executive Officer. "We believe that gradually improving market conditions and the efficiencies from our strategic capital investments, have positioned our Company for continued growth."

Net income for the second quarter of 2014 was $29.2 million ($0.07 per diluted share) compared to a net income reported for the first quarter of 2014 of $23.6 million ($0.06 per diluted share) and a net income reported in the second quarter of 2013 of $35.5 million ($0.07 per diluted share).

Overview

July 31, 2014 - Western reported adjusted EBITDA of $40.9 million for the second quarter of 2014, an $8.1 million improvement over the prior quarter and a $4.0 million decline from the second quarter of 2013. Its adjusted EBITDA margin of 13.8% in the second quarter of 2014 was consistent with the prior quarter. Its revenue in the second quarter of 2014 is the highest quarterly revenue reported in seven years, and reflects improved product pricing, increased lumber and log shipments, an improved product mix, and the benefit of a weaker Canadian dollar ("CAD").

Increases in its log harvesting and freight costs contributed to a 3.3% decline in its adjusted EBITDA margin in the second quarter 2014, compared to the same quarter of 2013. Its costs and production levels were also impacted by its decision to close operations at all its manufacturing facilities for at least three business days following the tragic shooting on April 30, 2014, at its Nanaimo sawmill, when two employees were fatally wounded, and two others injured.

Average prices realized in the second quarter of 2014 for its lumber products were 4% better than the second quarter a year ago, supported by a favourable exchange rate in the current quarter, and improved pricing in North American specialty products. Average prices realized for logs sold improved 7% in the second quarter of 2014 compared to the second quarter of 2013. This increase was principally a result of improving the mix of its sales and, to a lesser degree, price increases, most notably for shingle and peeler logs. As in the first quarter of 2014, the company continued to reduce the percentage of pulp log sales, from 32% of its total log sales in the second quarter of 2013 to 22% in the second quarter of 2014, while at the same time increasing its domestic and export log sales.

Total lumber production was 3% higher in the second quarter of 2014 compared to the same quarter a year ago, with increased productivity more than offsetting the impact of running fewer operating days. Log costs in the second quarter of 2014 increased as a result of higher stumpage rates and increased harvesting costs. Other cost increases were incurred in the current quarter in the pursuit of higher value log mix, including a 76% increase in the volume from helicopter logging compared to the second quarter of 2013. In addition, we invested $2.0 million more in road construction during the second quarter of 2014 compared to the same quarter last year.

Net income for the second quarter of 2014 was $29.2 million, or $0.07 per share as compared to net income of $35.5 million, or $0.08 per share, for the same period of 2013, and to $23.6 million, or $0.06 per share, for the previous quarter.

Its liquidity position remains strong. At June 30, 2014, the company had total liquidity of $165.6 million, compared to $125.9 million at the end of 2013. The increased liquidity in the first half of 2014 primarily resulted from cash generated by operations.

Its strategic capital plan continues to progress in accordance with expectations and will build on previous investments at the Saltair, Cowichan Bay and Alberni Pacific sawmills. Its Board of Directors recently approved an additional $6.6 million investment at the Duke Point sawmill, giving a committed capital investment of $8.0 million at the facility. In addition, it commenced work on a $2.3 million investment to its barge loading facility, which will reduce the costs of accessing key North American and export markets.

During the second quarter of 2014, its margin improvement plan program contributed a further $5.8 million in annualized margin enhancements. These benefits mainly relate to improvements in timberlands operations, changes in product mix to create higher margins at its sawmills, and other logistics and procurement initiatives.

On July 14, 2014, Western signed a memorandum of agreement with the United Steel Workers on a five- year collective agreement, largely based on a previously negotiated agreement with BC interior forest companies. Ratification of this agreement is expected in the next few weeks.

In the second quarter of 2014, the company continued to provide returns to its shareholders through its dividend program, paying $7.9 million or $0.02 per share to shareholders on June 20, 2014. Total dividend payments in the first half of 2014 amounted to $15.7 million, or $0.04 per share.

Operating Results

Second quarter 2014

Lumber revenue in the second quarter of 2014 grew to $207.9 million, 15% higher than in the second quarter of 2013. This increase was driven by an 11% increase in shipment volume combined with higher realized prices. Its average realized price for lumber during the second quarter of 2014 was 4%, or $33 per thousand board feet, higher than in the second quarter of 2013. This reflects both the benefit of a weaker CAD, and actual price increases for its Western Red Cedar ("WRC"). Partially offsetting these benefits was a lower value mix of its sales, as it sold a greater volume of commodity lumber, and proportionately less lumber into the Japanese market, in the second quarter this year compared to 2013.

Log revenue in the second quarter of 2014 was $71.8 million, an increase of $4.8 million, or 7%, over the second quarter of 2013. Its shipment volume in the current quarter was 1% higher than in the same quarter last year. The main driver of the increased log revenues in the current quarter was product mix related. The company sold 20% more of higher value export logs and shingle logs, and 31% less of lower value pulp logs. With the exception of higher prices for shingle and peeler logs, prices were generally similar compared to the same period last year.

By-products revenue in the second quarter of 2014 was $16.5 million, $1.6 million higher than the $14.9 million reported for in the same period in 2013. This increase was the result of 11% higher average realized chip prices this quarter, combined with a 2% increase in the volume of chips sold compared to the second quarter of 2013. The increase in chip prices over the two quarters reflects an increase in the market price of pulp, to which prices received are tied by formula.

Adjusted EBITDA of $40.9 million for the second quarter of 2014 compares to $44.9 million reported in the same quarter last year and to $32.8 million in the first quarter of 2014. Results for the second quarter 2014 benefitted from improved sales volumes and prices for its products, and the favourable impact on its revenues of the weakening of the CAD against the US dollar ("USD"). The CAD was, on average, 7% weaker relative to the USD during the second quarter of 2014 compared to the second quarter of last year. The decline in adjusted EBITDA compared to the same quarter a year ago primarily reflects cost increases in its timberlands operations.

Its log harvest volume for the current quarter was 1.5 million cubic metres, which was 3% higher than the volume harvested in the second quarter of 2013. Its overall harvest costs were higher in the second quarter of 2014 compared to the second quarter last year. This increase resulted from a variety of factors including increased stumpage rates, and higher logging costs. Costs were also impacted in the second quarter of 2014 relative the second quarter last year as the company increased the level of heli-logging by 76% to achieve a higher value log mix. It also invested more on construction of new logging roads, which were expensed in the current quarter.

Total lumber production for the second quarter of 2014 was 237 million board feet, 3% higher than during the second quarter of 2013. The increased volume occurred despite downtime taken at its mills following the tragedy at its Nanaimo sawmill in April. An increase of 4% in mill productivity, as measured on a production per shift basis, compensated for the lower number of shifts operated over the respective quarters. The improved productivity was largely driven by its Saltair sawmill, following its capital program undertaken in 2013.

Freight costs in the second quarter of 2014 were $25.1 million, which was $3.4 million more than those incurred in the second quarter of 2013. This increase is the result of an 11% increase in shipment volumes of lumber in the current quarter as compared to the second quarter of 2013, and the impact of the weaker Canadian dollar in the current quarter. Partially offsetting these increases were lower log freight costs.

Selling and administration expenses in the second quarter of 2014 were $8.1 million, compared to $8.0 million in the same quarter in 2013. As a percentage of revenue, its selling and administration costs were 2.8% for the second quarter of 2014, a reduction from the 3.0% reported in second quarter of 2013.

Year to date, June 30, 2014

Total revenue for the first half of 2014 grew to $542.2 million, which was 9% higher than the first half of 2013. Lumber and by-product revenues were up by 13% and 17%, respectively, while log revenue was down by 3%. Its lumber shipment volumes and average prices realized were both higher by 6%, and by-product prices were 14% higher, driven primarily by higher chip prices in the first half of 2014. Despite realized average log prices being 7% higher during the first half of 2014, overall revenue declined as shipment volumes were lower than for the first half 2013. The reasons for these changes over the respective six month periods are similar to those discussed in the second quarter summary above, and reflect improved markets for its products and the continued efforts by Western to maximize adjusted EBITDA by channeling its products into higher margin markets. The CAD was, on average, 8% weaker relative to the USD during the first six months of 2014 compared to the same period in 2013, which also contributed to the improved prices realized for its products.

Adjusted EBITDA for the first six months of 2014 was $73.7 million, compared to $76.8 million in the first six months of 2013. While total revenues for the first half of 2014 were 9% higher than the same period in 2013, log harvest cost increases led to a reduction in adjusted EBITDA margins from 15.5% in the first half of 2013 to 13.6% in the same period of 2014.

Lumber production for the first half of 2014 was 6% higher than in the first half of 2013. The majority of this increase was in the first quarter of 2014 and was achieved mainly at its Saltair and Cowichan Bay mills. Overall mill productivity for the first half of 2014 was 4% ahead of the same period in 2013, which primarily reflects the beneficial impacts of the capital improvements implemented at the Saltair sawmill during 2013, combined with operating improvements at its mills.

Its total log harvest for the first half of 2014 was 2.8 million cubic metres, marginally lower than the volume in the same period last year. Harvest costs were higher in the first half of 2014 as a result of increased stumpage, increased harvest operating costs, increased use of heli-logging, and the construction of more spur roads. We approximately doubled the level of heli-logging in the first six months of 2014 and invested $4.0 million more in the construction of spur roads compared to the first half of 2013.

Selling and administration costs in the first half of 2014 were $17.9 million, which was $1.9 million more than in the same period last year. Most of the increase relates to performance related compensation. The cost for the six months as a percentage of revenue at 3.3% remains relatively consistent year over year.

Restructuring Costs

In the second quarter of 2014, an expense of $1.2 million was recognized following the arbitrated settlement of a union grievance relating to the 2011 curtailment of the Duke Point and Nanaimo sawmills.

Strategy and Outlook

Western's strategy, which is designed to maximize product margins while prudently increasing its sales volume, continued to progress during the first half of 2014. Key operational priorities for the strategy in 2014 include:

-- Increasing log availability through improved utilization and accessing
more volume on the open market
-- Improving productivity through increased machine utilization
efficiencies
-- Rationalizing its lumber marketing programs by mill to drive higher
margins

Market Outlook

During the second quarter of 2014 the rate of new home construction in the US leveled off at a pace of just under 1 million seasonally adjusted starts, an increase of 8% over the second quarter 2013. For the balance of 2014, its outlook for US housing growth is relatively flat. In the medium-term we expect gradual improvement in the US new home construction and the repair and renovation segment, which should drive lumber demand higher. Over the longer-term, constrained supply of Canadian softwood lumber due to BC's mountain pine beetle infestation and reduced allowable cut levels from eastern provinces, along with an increase in worldwide demand for lumber, are expected to lead to improved pricing for logs and lumber.

We benefited from strong demand for our cedar products in the second quarter of 2014, which increased over 2013 levels. Continued robust demand and limited log and lumber inventories are expected to support stable pricing for WRC as we move through the traditionally slower back half of the year.

Demand for lumber in Japan is currently being negatively impacted by a combination of seasonal weakness and reduced housing starts due to the increase in consumption tax introduced in April 2014. In the event that this trend worsens, we will re-evaluate its market options and adjust operating levels accordingly.

Niche lumber markets continue to improve heading into the second half of 2014, driven by the improved US repair and renovation segments.

Realized prices for commodity lumber in the first half of 2014 increased year-over-year, but softness in SPF commodity lumber demand will limit the company's ability to improve prices in the second half of 2014.

High log inventories in China have resulted in reduced export log prices. We expect export prices to stabilize over the third quarter and demand to return as inventories come into balance. The domestic log market is expected to remain strong through the third quarter. We anticipate pulp log pricing will improve through the third quarter due to increased competition from pulp companies for open market supply.

Strategic Capital Plan Update

Its strategic capital plan continues to make steady progress:

-- The Cowichan Bay log auto-rotation project was successfully installed
and fully operational on July 28, 2014.
-- The first phase of the Duke Point sawmill modernization was completed on
July 29, 2014, and its Board recently approved an additional $6.6
million phase two investment at the mill to increase productivity and
consolidate production.
-- The final phase of the Saltair sawmill project, which involves the
installation of a new log in-feed, will commence during the third
quarter of 2014 and is expected to be complete by the end of this year.
-- In July, 2014, work commenced on a $2.3 million project to enhance
the efficiency at the Duke Point barge loading facility, which will
reduce the costs of accessing key North American and export markets.
-- The recently installed Alberni Pacific sawmill autograder continues to
exceed operating expectations, and we continue the evaluation of its
other mills for similar autograder installations.

July 31, 2014  By Marketwired



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