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WFP reports $29.2M net loss in Q4 2019

Western Forest Products Inc. reported negative adjusted EBITDA of $18.1 million in the fourth quarter of 2019. Results were impacted by strike action by the United Steelworkers Local 1-1937 and weak markets. The company continued to service customers and partly mitigated losses arising from labour disruptions at all of its timberlands and the majority of its British Columbia based manufacturing operations by selling available inventory, increasing its wholesale lumber program and deferring certain expenditures.

Net loss of $29.2 million ($0.09 net loss per diluted share) was reported for the fourth quarter of 2019, as compared to net income of $5.3 million ($0.02 net income per diluted share) for the fourth quarter of 2018 and net loss of $18.7 million ($0.05 net loss per diluted share) in the third quarter of 2019.

Western’s negative adjusted EBITDA of $18.1 million in the fourth quarter of 2019 compared to adjusted EBITDA of $18.0 million in the fourth quarter of 2018, and negative $16.6 million reported in the third quarter of 2019. Operating loss prior to restructuring and other items was $29.6 million in the fourth quarter of 2019, compared to operating income prior to restructuring and other items of $7.7 million in fourth quarter of 2018, and $24.2 million loss reported in the third quarter of 2019. Western’s liquidity at the end of the fourth quarter of 2019 was $136.9 million and net debt to capitalization ratio was approximately 18.8 per cent.

“In the fourth quarter, we continued to focus on limiting the impact of the USW strike on our customers and our financial position by managing our debt levels,” said Don Demens, president and CEO. “With terms of a tentative collective agreement reached with the USW, we look forward to bringing people back to work following the completion of the ratification process.”

The company generated revenue of $80.1 million in the fourth quarter of 2019, as compared to $284.8 million in the fourth quarter of 2018, and $141.6 million in the third quarter of 2019. The company partially mitigated the impacts of the strike by selling unencumbered lumber and log inventories during the fourth quarter of 2019.

For the year ended Dec. 31, 2019, Western generated annual revenue of $807.7 million, as compared to annual revenue of $1,196.7 million in 2018. Western reported negative adjusted EBITDA of $1.5 million as compared to $143.5 million in 2018.

Summary of fourth quarter 2019 results

Fourth quarter results were significantly impacted by the strike, as all of the company’s timberlands and most of its B.C.-based manufacturing operations were curtailed. The company took steps to mitigate the strike’s impact on its customers, business and cash flows by selling the majority of its remaining unencumbered lumber inventory, processing certain unencumbered logs at custom cut facilities, drawing down working capital, and deferring certain expenditures.

Adjusted EBITDA for the fourth quarter of 2019 was negative $18.1 million, as compared to positive EBITDA of $18.0 million from the same period last year. Operating loss prior to restructuring and other items was $29.6 million, as compared to operating income of $7.7 million in the same period last year.

Sales

Lumber and log sales volume and revenue were impacted by the strike. Lumber revenue in the fourth quarter was $66.1 million, a decrease of 71.4 per cent from the same period last year. Lumber shipment volumes were 80.3 per cent lower than the same period last year due to the strike, as most of WFP’s manufacturing operations were shutdown in the fourth quarter of 2019. WFP sold the majority of its remaining unencumbered lumber inventory, processed certain unencumbered logs at custom cut facilities, and continued to execute on its wholesale lumber program to service its customers and help mitigate the impact of the strike. The company’s United States-based Columbia Vista division continued to perform in line with WFP’s expectations and has been a positive addition to the company’s business and product mix.

WFP’s average realized lumber pricing increased 45.1 per cent as the result of an improved specialty product mix, which was partially offset by a stronger Canadian dollar to United States dollar. Specialty lumber represented 79.1 per cent of fourth quarter shipments compared to 49.5 per cent in the same period last year, as the company leveraged its wholesale lumber business and custom cut production to supply customers.

Log revenue was $12.1 million in the fourth quarter of 2019, a decrease of 66.6 per cent from the same period last year. To mitigate the impact of the strike on WFP’s business, the company sold certain unencumbered log inventory to help manage cash flow and reduce working capital levels.

By-product revenue was $1.9 million, a decrease of 89.3 per cent as compared to the same period last year as most of the company’s B.C. coastal operations were shut down due to the strike.

Operations

To support WFP’s selected customers during the strike, the company continued to redirect available inventory to active divisions. WFP operated on a sub-optimal basis, resulting in higher transportation and operating costs. Operating expenses included $16.7 million arising from curtailed operations and related operating inefficiencies as a result of the strike.

Leading up to the strike, WFP drew down inventory at USW-certified operations to supply its remanufacturing and custom cut operations. However, as certain inventory was encumbered by the strike and degraded over the fourth quarter of 2019, WFP expensed an additional $2.4 million provision against this restricted inventory.

Lumber production of 34 million board feet was 83.0 per cent lower than the same period last year. Incremental production from WFP’s U.S.-based Columbia Vista division, acquired in 2019, and volumes from its custom cut program was more than offset by the curtailment of WFP’s B.C. operations due to the strike.

WFP produced 21,000 cubic meters of logs from its B.C. coastal operations in the fourth quarter of 2019 compared to production of 1,135,000 cubic metres in the same quarter of last year. Fourth quarter log production in 2019 was sourced from joint ventures and limited partnerships, as all WFP’s USW-certified timberlands operations were curtailed due to the strike.

B.C. coastal saw log purchases were 34,000 cubic metres, an 84.0 per cent decrease from the same period last year. Weaker markets and government policy decisions led to a significant decline in coastal log harvest that reduced market log availability. WFP sourced its saw log purchases from pre-existing purchase commitments and joint venture arrangements. Freight expense decreased by $19.3 million from the same period last year due to lower shipment volumes.

Summary of 2019 annual results

Adjusted EBITDA for the year was negative $1.5 million, as compared to positive $143.5 million from the same period last year. Operating loss prior to restructuring and other items was $46.7 million, compared to operating income of $103.4 million during the same period last year.

Sales

Lumber revenue was $628.3 million, a decrease of 34.1 per cent from the same period last year, primarily due to the strike and more challenging market conditions. Despite the decline in market pricing, WFP’s average lumber price realizations increased, benefitting from a higher specialty product mix and a weaker CAD to USD. Specialty lumber represented 58.3 per cent of 2019 annual shipments, compared to 49.9 per cent last year. Despite a more challenging year, WFP was successful in more than doubling its wholesale lumber volume to service customers and help mitigate the impact of the strike.

Log revenue was $144.0 million, a decrease of 10.0 per cent compared to the same period last year. Log revenue benefited from the resumption of the company’s export log sales program in the second quarter of 2019 but was offset by the impact of the strike in the third and fourth quarters of 2019.

By-products revenue decreased to $35.4 million, from $83.8 million last year, primarily due to lower production and shipments as a result of the strike. Other factors included declining B.C. coastal chip prices and lower chip purchase-and-resale volume.

Operations

Lumber production of 491 million board feet was 43.2 per cent lower than the same period last year. Market-related sawmill curtailments and the strike led to lower production, which more than offset the inclusion of results from WFP’s U.S.-based Columbia Vista division. Log production was 2,214,000 cubic metres, 48.8 per cent lower than the same period last year, primarily due to the strike in the second half of 2019. B.C. coastal saw log purchases were 564,000 cubic metres, a 42.4 per cent decrease from the same period last year, as WFP managed log purchases to available capacity to support customer needs. Freight expense decreased by $26.5 million as compared to last year, primarily due to lower shipment volumes as a result of the strike. Adjusted EBITDA and operating income included $27.8 million of CVD and AD expense, as compared to $43.0 million in 2018. Duty expense declined as a result of reduced U.S.-destined lumber shipment volumes due to the strike.

Net income (loss)

Net loss for 2019 was $46.7 million, as compared to net income of $69.2 million last year. Net income for the year was lower due to the strike, which largely curtailed operations in the second half of 2019.

Market outlook

WFP’s long-term view of market fundamentals remains unchanged. In North America, rising lumber consumption will be driven by increased new home construction, a robust repair and renovation sector and growth of mass timber building technologies. Growing demand and reduced supply due to North American sawmill curtailments is expected to improve market fundamentals and benefit the industry long-term.

Despite positive long-term growth drivers, lumber markets were challenged in 2019 as North American weather events, skilled labour constraints and higher mortgage rates stalled U.S. new home construction and muted growth in repair and renovation spending. In response to weak demand, temporary and permanent production curtailments were announced in the forestry sector. The supply impacts of these announcements are expected to support lumber pricing in 2020.

WFP is encouraged by the positive market sentiment regarding WRC products heading into the spring building season. Low in-market inventories and recent B.C. coastal cedar manufacturing closures should benefit WRC product pricing going forward.

In Japan, WFP expects steady demand for its Douglas fir products; however, increased competition from European engineered wood products may pressure pricing. The company expects market share erosion and weaker pricing for B.C. coastal Hemlock lumber in Japan due to the supply shortages as a result of the strike and increased competition from Japanese Government subsidized domestic species. The strike has resulted in certain Japanese Hemlock lumber customers switching to competing products. WFP plans to leverage Columbia Vista’s strong and loyal Douglas fir customer base, as well as develop marketing strategies, to help regain its Japanese Hemlock lumber market share.

The company anticipates demand for appearance niche products to improve, resulting in modest price gains. In addition, WFP expects steady demand in North America for timbers and industrial products due to large scale industrial oil and gas projects currently underway in Canada.

Commodity lumber markets in North America are likely to benefit from previously announced temporary and permanent production curtailments, but WFP expects any pricing gains to be modest. The Chinese log market continues to be influenced by an increased supply of lower priced, beetle impacted logs from Europe. WFP expects the log market in China to remain competitive over the near term. In the short term, the coronavirus could result in a temporary slow down of log and lumber imports to China. However, a government commitment to housing and continued positive economic growth should support long-term demand for logs and lumber in China.

WFP expects domestic saw log prices to increase in response to reduced log availability and improving lumber markets. Log supply on the B.C. coast is expected to remain constrained, as recent government initiates that have increased harvest costs are expected to challenge harvest economics. WFP expects modest improvements in pulp log and chip pricing in 2020 due to limited supply.