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WFP reports record net income of $53.8M in Q1 2021

Western Forest Products Inc. reported adjusted EBITDA of $62.9 million in the first quarter of 2021. Western capitalized on strong North American markets and overcame logistics constraints to deliver record realized lumber pricing.

Net income in the first quarter of 2021 was $53.8 million ($0.14 net income per diluted share), as compared to a net loss of $21.0 million ($0.06 net loss per diluted share) for the first quarter of 2020 and net income of $34.4 million ($0.09 net income per diluted share) in the fourth quarter of 2020.

First quarter highlights:

• Record first quarter adjusted EBITDA of $62.9 million and net income of $53.8 million
• Leveraged flexible operating platform to accelerate commodity shipments into North America
• Achieved company record quarterly average realized lumber price of $1,356 per thousand board feet
• Signed an eight-year collective bargaining agreement with our unionized Ladysmith sawmill employees

Western’s first quarter adjusted EBITDA was $62.9 million, as compared to negative adjusted EBITDA of $17.4 million in the first quarter of 2020 and adjusted EBITDA of $71.1 million reported in the fourth quarter of 2020. Fourth quarter financial results in 2020 benefited from a non-cash export tax recovery of $31.6 million arising from the finalization of 2017 and 2018 export tax rates. Operating income prior to restructuring and other items was $48.8 million, compared to a loss of $28.4 million in the first quarter of 2020, and $56.0 million of income reported in the fourth quarter of 2020.

“We made significant strides in repositioning our business and increasing the production of value-added lumber products targeted to strong North American markets,” said Don Demens, president and chief executive officer. “We expect robust market conditions will continue in the near and mid-term, supporting momentum in the execution of our business strategy and growing our business.”

Summary of first quarter 2021 results

Adjusted EBITDA for the first quarter of 2021 was $62.9 million, as compared to negative adjusted EBITDA of $17.4 million in the same period last year. WFP delivered record first quarter adjusted EBITDA by redirecting production to a strong North American lumber market.

Operating income prior to restructuring and other items was $48.8 million, as compared to an operating loss of $28.4 million in the same period last year. Comparative results were significantly impacted by the United Steelworkers Local 1-1937 (USW) strike, which curtailed the majority of WFP’s B.C.-based operations through February 2020. In addition, WFP curtailed its B.C. manufacturing facilities for up to one-week in March 2020 in response to the impacts of the novel Coronavirus pandemic.

WFP continues to strictly enforce enhanced health and safety protocols and regularly re-evaluate market conditions arising from COVID-19. The company’s near-term focus remains on ensuring the health and safety of its employees, maintaining financial flexibility, and servicing its customers.

Sales

Rising North American lumber demand, driven by increased levels of new home construction and a strong repair and renovation segment, combined with limited supply to deliver record lumber pricing in the first quarter of 2021. Lumber producers have struggled to respond to the strong market due to permanent production curtailments in the B.C. Interior as a result of the Mountain Pine Beetle and COVID-19 related labour constraints in other producing regions. To capitalize on market conditions and overcome container shipping constraints that reduced export market access, WFP further levered its flexible operating platform and increased production for the North American market.

Lumber revenue rose eight per cent from the fourth quarter last year, on the strength of higher prices for WFP’s products and increased North American shipments. The company grew its total commodity volumes by four per cent during the quarter as compared to the fourth quarter of 2020. WFP’s North American commodity shipment volumes represented 64 per cent of total commodity shipment volumes during the first quarter of 2021, well above the company’s historical average. WFP successfully grew sales to selected customers in the specialty treating sector, increasing volumes by 12 per cent from the fourth quarter of last year.

The company’s first quarter average realized lumber price was $1,356 per thousand board feet, an increase of eight per cent from the fourth quarter of 2020, despite a weaker sales mix and a stronger Canadian to U.S. dollar exchange rate. Wholesale shipments were flat due to limited market availability and supply chain challenges.

Log revenue was $33.1 million in the first quarter of 2021, an increase of 157 per cent from the same period last year and a 38 per cent decline from the fourth quarter last year due to seasonality. WFP achieved a higher average realized log price as compared to the fourth quarter last year despite lower export market shipments. The company directed export log inventory to its sawmills in support of increased commodity lumber production, to capitalize on the strong North American lumber market. Limited export log shipments originated primarily from commitments under First Nation partnership and joint venture arrangements.

By-product revenue was $12.8 million, an increase of $9.8 million as compared to the same period last year, and an increase of $3.9 million from the fourth quarter of 2020. Chip price realizations benefitted from a sharp increase in NBSK pulp price in the period, and increased production led to higher by-product shipments.

Higher first quarter log and lumber pricing reduced inventory provisions by $9.3 million as compared to the same period last year.

Operations

WFP has continued to lever its flexible operating platform by redirecting production from export markets into the strong North American market.

First quarter lumber production of 199 million board feet was 226 per cent higher than the strike-impacted first quarter last year and was 11 per cent higher than the fourth quarter of 2020. The company achieved higher production through increased operating hours, improved production efficiency, and a shift to more domestic lumber production. Increased production of North American commodity lumber contributed to improved sawmill recovery but also increased the company’s secondary processing requirements, consistent with the fourth quarter last year. Insufficient B.C. coastal kiln capacity limited incremental kiln-dried lumber production volumes.

WFP produced 688,000 cubic metres of logs from its coastal operations in British Columbia in the first quarter of 2021, as compared to 167,000 cubic metres in the strike-curtailed first quarter last year and 901,000 cubic metres in the fourth quarter of 2020. Harvest volumes and costs declined due to typical seasonal operating conditions. WFP lowered harvest production costs in the first quarter of 2021 through improved alignment of road expenditures and harvest volumes. The company increased private timber production by logging the Orca Quarry land prior to its disposition, which did not incur stumpage expense and reduced requirements for higher cost purchased logs.

B.C. coastal sawlog purchases were 195,000 cubic metres, an increase of 38 per cent from the same period last year and a decrease of 12 per cent from the fourth quarter of 2020. B.C. coastal harvest activity has improved market log supply while strong North American product pricing has increased log market competition.

Freight expense increased by $16.5 million from the same period last year. Freight expense grew as a result of higher shipment volumes and increased container costs. Global container supply disruptions caused a diversion of shipments to other markets and led to slightly higher ending inventory. We partly mitigated the impact of limited container availability and rising container costs by directing more shipments to North American markets and by using other modes of transportation.

Sale of ownership interests in TFL 44 Limited Partnership

On March 29, 2019, Western completed the sale of a seven per cent ownership interest in its newly formed TFL44 Limited Partnership (TFL 44 LP) to Huumiis Ventures Limited Partnership (HVLP), a limited partnership beneficially owned by the Huu-ay-aht First Nations. Western received $7.3 million in exchange for the seven per cent ownership interest in TFL 44 LP.

On March 16, 2020, Western announced it had reached an agreement whereby HVLP will acquire an incremental 44 per cent equity interest in TFL 44 LP (the TFL 44 Transaction) and a seven per cent equity interest in a newly formed limited partnership that will own the Alberni Pacific Division Sawmill (the APD Transaction) for total consideration of $36.2 million. COVID-19 restrictions and other impacts affected the ability for the parties to satisfy all closing conditions, necessitating the closing of the TFL 44 Transaction in two stages and delaying the closing of the APD Transaction.

On May 3, 2021, Western completed the sale of an incremental 28 per cent equity interest in TFL 44 LP to HVLP for total consideration of $22.4 million. The completion of this stage of the TFL 44 Transaction results in HVLP holding a combined equity interest of 35 per cent in TFL44 LP.

The next stage of the TFL 44 Transaction, for the acquisition by HVLP of a further 16 per cent equity interest in TFL 44 LP for total consideration of $12.8 million, is anticipated to close in the first quarter of 2023, and is subject to satisfaction of customary closing conditions, financing and certain third-party consents, including approval by the B.C. provincial government and the Huu-ay-aht First Nations People’s Assembly.

Western may sell to other area First Nations, including HVLP, a further incremental ownership interest of up to 26 per cent in TFL 44 LP, under certain conditions. The company and TFL 44 LP will also enter into a long-term fibre agreement to continue to supply the company’s B.C. coastal manufacturing operations, which have undergone significant capital investment over the past several years.

The APD Transaction is anticipated to close in the first quarter of 2023.

Strategy and outlook

Western’s long-term business objective is to create superior value for shareholders by building a sustainable, margin-focused log and lumber business of scale to compete successfully in global softwood markets. The company believes this will be achieved by maximizing the sustainable utilization of its forest tenures, operating safe, efficient, low-cost manufacturing facilities and augmenting our sales of targeted high-value specialty products for selected global customers with a lumber wholesale program. WFP seeks to manage its business with a focus on operating cash flow and maximizing value through the production and sales cycle.

Sales and marketing strategy update

To capitalize on a strong North American market, WFP has redirected lumber production from relatively weak export markets. The company has targeted sales to selected customers in the North American treating sector where our product mix could provide the most value. In the near-term WFP anticipates North American pricing to remain above trend levels and will look to solidify their presence in the specialty treated lumber sector.

WFP continues to progress with the execution of its sales and marketing strategy, which focuses on the production and sale of targeted, high-margin products of scale to selected customers. WFP supplements its key product offerings with purchased lumber to deliver the suite of products our customers require.

WFP continues to develop and evaluate growth opportunities for its wholesale lumber business, including the Japanese Cedar products program and ongoing Yellow Cedar product development. In the company’s U.S. operations, the Columbia Vista division has been a positive addition to the business and product mix.

Market outlook

Demand for forest products globally continues to outpace supply driving higher pricing for all of our product segments. Lumber markets in North America are being supported by strong fundamentals including low mortgage rates, a housing deficit stemming from years of under-building, and the influence of work-from-home arrangements on the repair and renovation segment. At the same time supply has been reduced due to the impact of permanent production curtailments resulting from Mountain Pine Beetle in the B.C. Interior, and COVID-19 related manufacturing labour constraints. Markets are likely to be further impacted near-term by higher seasonal demand associated with the spring building season, while lumber imports into North American may continue to be limited by global container shipping challenges. Long-term we expect growth in mass timber building technologies, the need for carbon neutral products and improved recognition of lumber as the most sustainable building product on the planet will grow demand and benefit the forest sector.

Demand and pricing for WFP’s Western Red Cedar (WRC) and niche products has improved across all product categories on the strength of a robust residential repair and renovation market. WRC trim, decking and fencing are in high demand, while Douglas Fir and Hemlock timbers and appearance grade products have led pricing improvements in the niche segment. WFP expects seasonally strong demand and constrained supply to drive incremental price improvements in the near term.

In Japan, difficult winter operating conditions and the impacts of COVID-19 have challenged domestic production while container shipping constraints have reduced the supply of imported lumber. Reduced supply has left Japan lumber inventory levels at record lows. As a result of the lack of supply, pricing has started to rise, and WFP anticipates pricing to improve further as we move into the third quarter. WFP is closely monitoring rising COVID-19 cases in Japan which could temporarily impact demand.

WFP expects domestic sawlog prices to increase in response to improved lumber markets, and greater competition from improved export markets. The Northern Bleached Softwood Kraft pulp price benchmark has increased in the last few months and, if sustained, WFP would expect to achieve improved prices for pulp logs and sawmill residual chips.

WFP expects the impacts of COVID-19 to continue to challenge lumber supply in the near term which should lead to increased pricing volatility. While at the same time WFP is hopeful that ongoing safety protocols and vaccine roll-outs may positively influence lumber demand and pricing, the company plans to utilize its flexible operating platform to adjust to market conditions and will continue to align its production volumes to match market demand.