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WFP’s Q1 2019 results ‘impacted by challenging markets’

Western Forest Products Inc. reported adjusted EBITDA of $18.1 million in the first quarter of 2019. Results were impacted by challenging markets and difficult operating conditions which led to higher operating costs. Prolonged winter weather delayed typical spring lumber demand and led to operational downtime in both our mills and timberlands. In response, the company leveraged its flexible operating platform, scaling back commodity production to match market demand and delivered an improved specialty sales mix to partly mitigate a weaker pricing environment.

Western’s adjusted EBITDA result of $18.1 million in the first quarter of 2019 compared to adjusted EBITDA of $43.0 million in the first quarter of 2018, and $18.0 million reported in the fourth quarter of 2018. Operating income prior to restructuring and other income was $5.7 million in the first quarter of 2019, compared to $32.6 million in first quarter of 2018, and $7.7 million reported in the fourth quarter of 2018.

Net income of $1.9 million was reported for the first quarter of 2019, as compared to $21.7 million for the first quarter of 2018 and $5.3 million in the fourth quarter of 2018.

“Despite current lumber market challenges, we took significant steps in advancing our specialty-focused strategy, including the acquisition of Columbia Vista, accelerated wholesale activity and advanced our mutually beneficial partnership with the Huu-ay-aht First Nations,” said Don Demens, President and Chief Executive Officer. “We are pleased with the progress we’ve made integrating our Columbia Vista division and look forward to the contribution this operation will make to our business going forward.”

The company generated revenue of $275.7 million in the first quarter of 2019, as compared to $291.6 million in the first quarter of 2018, and $284.8 million in the fourth quarter of 2018. The company mitigated the impacts of a slow start to the spring building season by reducing the production and sales of lower value commodity products. The improved mix resulted in a slightly higher average lumber price.

On Feb. 1, 2019, the company completed its acquisition of certain assets of Columbia Vista Corporation and related entities located in Vancouver, Wash. for U.S. $28.4 million, and on March 29, 2019, completed the sale of a 7 per cent interest in the newly formed TFL 44 Limited Partnership to the Huu-ay-aht First Nations. Western also published its first sustainability report, highlighting the company’s governance, environmental and social practices and performance during 2018.

Sales

Lumber revenue was $218.9 million, which was 4 per cent lower than the same period last year. Shipment volumes decreased 6 per cent due to slowing U.S. housing starts and as extended winter in North America delayed seasonal demand. Average lumber pricing benefited from the successful execution of our sales and marketing strategy and a weaker Canadian dollar.

Specialty lumber revenue was supported by higher production from our Duke Point sawmill which drove a 30 per cent increase in Niche product sales quarter-over-quarter. Sales volumes of Western Red Cedar (WRC) declined 15 per cent compared to last year as poor weather impacted market demand. First quarter Japan lumber shipments declined 14 per cent. The addition of Columbia Vista led to an increase in Douglas fir product sales to Japan which was more than offset by weakness in sales of Hemlock and Yellow Cedar. Hemlock market share has been challenged by subsidized Japanese domestic species. The company successfully mitigated commodity lumber price declines by increasing its direct sales to China by 56 per cent compared to last year. Specialty lumber represented 52 per cent of first quarter shipments, unchanged from the same period last year but an increase from the 49 per cent we achieved in the fourth quarter of 2018.

First quarter log revenue was $41.2 million, consistent with the first quarter of 2018. A stronger domestic saw log sales mix offset declining log pricing. Log shipments were flat compared to the first quarter of 2018, as increased pulp log sales volumes offset lower export and domestic shipments. Our export log volume in the period originated from a First Nation timber purchase agreement managed by Western.

British Columbia coastal chip pricing declined 17 per cent compared to the same period last year. Declining prices and lower production due to mill curtailments led to a 30 per cent decrease in by-products revenue. By-products revenue in the first quarter of 2018 included $2.6 million related to third-party custom production at our Ladysmith sawmill.

Operations

Lumber production of 202 million board feet was 3 per cent lower than the first quarter of 2018. The company grew production at its Duke Point sawmill through increased hours and improved operating performance. Challenging commodity lumber markets led to reduced operations at WFP’s commodity-focused sawmills. The company’s newly-acquired Columbia Vista division contributed incremental production of 10 million board feet in the quarter.

First quarter B.C. coastal manufacturing costs were 20 per cent higher than the same period last year due to challenging operating conditions. Included in higher operating costs was $1.7 million associated with temporary mill curtailments, and higher natural gas costs due to a temporary supply disruption.

Log production from our B.C. coastal operations was 922,000 cubic metres, 10 per cent lower than the same period last year. Decreased log production was primarily due to curtailed Englewood operations. The company’s B.C. coastal log inventory was 5 per cent lower at March 31, 2019, as compared to the same time last year.

WFP’s B.C. coastal harvest costs increased by 12 per cent from the first quarter of 2018, primarily driven by a 31 per cent increase in per unit stumpage costs and a mix of higher cost operations. Coastal stumpage inflation has resulted from B.C. Provincial Government stumpage equation updates, the ongoing influence of coastal log exports, and log markets that have been unresponsive to weaker lumber pricing. As a result of the misalignment between the coastal stumpage system and lumber market pricing, we resumed export log sales in the second quarter of 2019.

B.C. coastal sawlog purchases were 208,000 cubic metres, a 22 per cent decrease from the same quarter last year due to lower market log availability. Strong demand from export markets and pulp manufacturers and lower harvest levels, due in part to rising stumpage rates, have limited market log supply to domestic sawmills.

Consistent with WFP’s strategy, the company increased direct lumber sales to China to mitigate weak North American lumber pricing. Increased direct sales volumes to China combined with the impact of a weaker Canadian dollar on United States dollar denominated freight and fuel costs led to a $1.8 million increase in freight expense compared to the first quarter of 2018.

First quarter adjusted EBITDA and operating income included $9.2 million of countervailing duty (CVD) and anti-dumping duty (AD), as compared to $9.7 million in the same quarter last year. Duty expense declined as a result of reduced shipment volume, offset by higher values for U.S.-destined lumber shipments.

Strategy and outlook

Western’s long-term business objective is to create superior value for shareholders by building a 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 our 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. The company routinely evaluates its performance using the measure of Return on Capital Employed.

Market outlook

Despite recent lumber pricing volatility and slow seasonal demand due to weather events, the company’s long-term view of market fundamentals remains unchanged. In North America, rising lumber consumption will continue to be driven by increased new home construction, a robust repair and renovation sector and growth in the use of mass timber building technologies. WFP expects lumber demand in China to continue to grow due to a government commitment to housing and economic stimulus, while in Japan, lumber consumption is expected to remain relatively stable over the next few years.

In North America, prolonged winter weather has delayed the onset of the spring building season, resulting in a supply-demand imbalance and commodity lumber pricing volatility. As weather improves in North America, the company expects to see recovery in demand and pricing for commodity lumber. WFP anticipates any pricing response will be moderated by higher than normal inventories and additional supply, as idled commodity lumber capacity returns. The company will continue to monitor prices and make adjustments in our operating plans accordingly.

Improved weather conditions will also create opportunities for the company’s Western Red Cedar products. WFP anticipates prices to remain stable for WRC timbers and wide-width products. The narrow-width WRC lumber market is expected to remain weak due to competition from low-price, imported lumber and an abundant supply of narrow-width US domestic cedar lumber. The company will continue to focus on managing its product mix to mitigate the pricing impacts.

In Japan, WFP anticipates demand will be relatively stable ahead of the proposed increase in the Japanese consumption tax. The company expects Hemlock pricing to remain under pressure from subsidized Japanese domestic product substitution, while pricing for its Douglas fir products may be slightly weaker.

WFP expects to grow both volumes and price realizations for its niche products, as it continues to refine the product offerings from its Duke Point sawmill. The company intends to leverage the planer rebuild and auto-grader installation to improve recovery and lower costs.

The company expects domestic sawlog prices to decline in response to weaker lumber markets. Price declines may be mitigated by low saw log supply as coastal log production may decline due to stumpage rates that have become disconnected from the lumber market.