By: The Working Forest Staff
VANCOUVER, BC, CNW – Western Forest Products Inc. has 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 8-year collective bargaining agreement with our unionized Ladysmith sawmill employees
- Sold non-core assets for cash proceeds of $37.7 million
- Repaid $69.7 million in debt, closing the period in a net cash position
- Returned $6.1 million to shareholders via dividends and share repurchases
- Available liquidity of $244.0 million to support growth and our balanced approach to capital allocation
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 $56.0 million of income reported in the fourth quarter of 2020.
|(millions of dollars except per share amounts and where otherwise noted)||Q1||Q1||Q4|
|Export tax expense||8.2||4.0||12.1|
|Export tax recovery||–||–||31.6|
|Adjusted EBITDA margin||20%||(18%)||22%|
|Operating income (loss) prior to restructuring and other items||$||48.8||$||(28.4)||$||56.0|
|Net income (loss)||53.8||(21.0)||34.4|
|Basic and diluted earnings (loss) per share (in dollars)||0.14||(0.06)||0.09|
|Net debt (cash), end of period||(0.6)||137.0||69.2|
|Liquidity, end of period||244.0||113.5||178.3|
“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. We 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 (the “Strike”), which curtailed the majority of our BC-based operations through February 2020. In addition, we curtailed our BC manufacturing facilities for up to one week in March 2020 in response to the impacts of the novel Coronavirus pandemic (“COVID-19”).
We continue to strictly enforce enhanced health and safety protocols and regularly re-evaluate market conditions arising from COVID-19. Our near-term focus remains on ensuring the health and safety of our employees, maintaining financial flexibility, and servicing our customers.
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 BC 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, we further levered our flexible operating platform and increased production for the North American market.
Lumber revenue rose 8% from the fourth quarter last year, on the strength of higher prices for our products and increased North American shipments. We grew our total commodity volumes by 4% during the quarter as compared to the fourth quarter of 2020. Our North American commodity shipment volumes represented 64% of total commodity shipment volumes during the first quarter of 2021, well above our historical average. We successfully grew sales to selected customers in the specialty treating sector, increasing volumes by 12% from the fourth quarter of last year.
Our first quarter average realized lumber price was $1,356 per thousand board feet, an increase of 8% from the fourth quarter of 2020, despite a weaker sales mix and a stronger Canadian to US 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% from the same period last year and a 38% decline from the fourth quarter last year due to seasonality. We achieved a higher average realized log price as compared to the fourth quarter last year despite lower export market shipments. We directed export log inventory to our 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.
We have continued to lever our 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% higher than the Strike-impacted first quarter last year and was 11% higher than the fourth quarter of 2020. We 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 our secondary processing requirements, consistent with the fourth quarter last year. Insufficient BC coastal kiln capacity limited incremental kiln-dried lumber production volumes.
We produced 688,000 cubic metres of logs from our coastal operations in British Columbia (“BC”) 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. We lowered harvest production costs in the first quarter of 2021 through improved alignment of road expenditures and harvest volumes. We 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.
BC coastal saw log purchases were 195,000 cubic metres, an increase of 38% from the same period last year and a decrease of 12% from the fourth quarter of 2020. BC 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.
Selling and Administration Expense
First-quarter selling and administration expenses were $14.3 million in 2021 as compared to $6.4 million in the Strike-curtailed first quarter last year. Record financial results and rapid share price appreciation had a net incremental expense impact of $7.0 million. We continue to incur higher health and safety and IT costs associated with COVID-19 protocols and remote work requirements.
Record financial performance and a stronger market outlook drove an incremental $3.9 million in performance-based incentive compensation expense. An incentive compensation expense recovery in the first quarter of 2020 contributed to that period over the period result.
The Company’s shares appreciated by 41% in the first quarter of 2021, resulting in an incremental $3.1 million of mark-to-market expense on long-term compensation liabilities. First-quarter mark-to-market expense was $1.9 million in 2021, as compared to an expense recovery of $1.2 million in 2020.
We recognized other income of $16.7 million attributable primarily to gains from the sale of non-core assets. In the same period last year, we realized $1.6 million of other income largely resulting from gains on the sale of obsolete operating equipment.
Finance costs were $0.9 million as compared to $2.2 million in the first quarter last year, due to a lower average outstanding debt balance. As at March 31, 2021, we had returned to a net cash position.
Record first-quarter operating earnings led to income tax expense of $10.3 million for the first quarter of 2021, as compared to an income tax recovery of $8.4 million in the same period last year.
Net Income (Loss)
Net income for the first quarter of 2021 was $53.8 million, as compared to a net loss of $21.0 million for the same period last year. Significantly improved net income resulted from strong operating performance, record pricing in North American markets, and net proceeds from non-core asset sales. Results in the same period last year were negatively impacted by the Strike in the majority of our BC operations and the onset of COVID-19 late in the period.
Western is committed to the health and safety of our employees, contractors, and the communities where we operate. To help mitigate the spread of COVID-19, we have implemented strict health and safety protocols across our business that are based on guidance from health officials and experts, and in compliance with regulatory orders and standards.
Health and safety protocols currently being enforced include travel restrictions; self-isolation instructions for those who have traveled, are ill, exhibiting symptoms of COVID-19 or have come in direct contact with someone with COVID-19; implementing physical distancing measures; restricting site access to essential personnel and activities; increasing cleaning and sanitization in workplaces; and where possible, providing those who can work from home the ability to exercise that option. We continue to monitor and review the latest guidance from health officials and experts to ensure our protocols meet the current required standards.
State of Emergency declarations and other restrictions relating to travel, business operations and isolation have been made by governing bodies in the regions that Western operates and sells its products. Western’s business activities have been designated an essential service in Canada and the US, and we will continue to monitor and adjust our operations as required to ensure the health and safety of our employees, contractors, and the communities where we operate and to address changes in customer demand.
Sale of Orca Quarry Non-Core Assets
On March 14, 2021, Western completed the sale of certain non-core assets for $36.0 million. The sale includes certain properties, and their underlying rights, related to the Orca Quarry located near Port McNeill, British Columbia. The Company used the proceeds from the sale to repay debt.
Sale of Ownership Interests in TFL 44 Limited Partnership
On March 29, 2019, Western completed the sale of a 7% 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 7% ownership interest in TFL 44 LP.
On March 16, 2020, Western announced it had reached an agreement whereby HVLP will acquire an incremental 44% equity interest in TFL 44 LP (the “TFL 44 Transaction”) and a 7% 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% 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% in TFL44 LP.
The next stage of the TFL 44 Transaction, for the acquisition by HVLP of a further 16% 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 BC 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% 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 BC 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.
Labour Relations Update
On February 3, 2021, members of the Public and Private Workers of Canada (“PPWC”) Local 8 representing unionized employees at our Ladysmith Sawmill ratified a new eight-year collective agreement effective from January 1, 2021, and expiring on December 31, 2028.
We previously announced on February 15, 2020, that USW members had voted in support of a new five-year collective agreement effective from June 15, 2019 and expiring on June 14, 2024.
Timber Tenure Reduction
Approximately 89% of Western’s 5,956,000 cubic metre sustainable allowable annual cut (“AAC”) is in the form of Tree Farm Licenses (“TFL”). TFLs are granted for 25-year terms and are replaced by the BC Provincial Government (the “Province”) every five to ten years with a new TFL with a 25-year term.
In the first half of 2021, we expect the Province’s Chief Forester to issue a final determination on the AAC in TFL 19, which is approximately 729,000 cubic metres. We expect that determination may reduce the AAC of TFL 19 by up to 18% or approximately 130,000 cubic metres. Provincial legislation requires the Chief Forester to routinely review sustainable harvesting levels of individual tenures at least every 10 years and to issue a determination that may result in an increase or decrease to AAC. The AAC determination reflects tree growth, ecology, regional and local economic and social interests, water, and other environmental considerations that define how forests can be managed.
More information on our tenure rights and sustainable harvest practices can be found in the Company’s Annual Information Form, which is available on SEDAR at www.sedar.com, and Western’s Sustainability Report, which is available at www.westernforest.com.
During 2019 and 2020, the Province introduced various policy initiatives and regulatory changes that impact the BC forest sector regulatory framework as part of a Coastal Revitalization Initiative, including fibre recovery, lumber remanufacturing, old-growth forest management, and the exportation of logs. For additional details on these policy initiatives and regulatory changes please see the “BC Government Forest Policies Update” heading and “Regulatory Risks” under the heading “Risks and Uncertainties”, in our Management’s Discussion and Analysis for the year ended December 31, 2020.
Current provincial policy requires that forest management and operating plans take into account and not unreasonably infringe on Aboriginal rights and title, proven or unproven, and provide for First Nations consultation. First Nation opposition to a forest tenure or other operating authorization may delay the Province from granting the permit application. For additional details on these policy requirements and regulatory aspects in relation to First Nations see “First Nations Land Claims” and “Regulatory Risks” under the heading “Risks and Uncertainties”, in our Management’s Discussion and Analysis for the year ended December 31, 2020. The Company may manage risks associated with delays in the Province granting operating authorizations through fostering positive working relationships with the First Nations, with asserted traditional territories within which Western operates, through information sharing, timber harvesting, silviculture, planning, and other mutually beneficial arrangements. The Company may partly mitigate the operating impacts of permit delays by increasing permitted harvest in other areas; by purchasing more logs on the open market or through BC Timber Sales; and by increasing harvest production from private timberlands.