Western Forest Products reported Q3 2014 revenue increased to $262.1 million

Nov 14, 2014. /Lesprom Network/. Western Forest Products Inc. reported adjusted EBITDA of $20.0 million in the third quarter of 2014, its second best third quarter in company history. Adjusted EBITDA decreased $7.6 million in comparison to the same period in 2013 due to challenging markets in Japan and China and operational curtailments due to an extended fire season.

Revenue grew to $262.1 million in the third quarter of 2014, an improvement of $22.7 million over the same period last year. Increased log shipments, an improved lumber sales mix and pricing, and the benefit of a weaker Canadian dollar ("CAD") contributed to these results.

Third quarter lumber revenue increased 5%, compared to the same period in 2013, as continued strong demand from the North American repair and renovation sector led to increased volumes and pricing for Western Red Cedar ("WRC") and our specialty moulding and millwork ("Niche") lumber products. These results were achieved through a log purchase strategy that increased sawlog purchases to drive higher production of WRC lumber in the quarter, and offset the impact of an extended fire season on the supply of fibre to our mills. In addition, our flexible operating platform made it possible to shift production volumes from Japan lumber to Niche products.

In the third quarter of 2014, log revenue increased 22% on the strength of a 15% increase in log sales volumes as compared to the same period in 2013. We achieved a 4% increase in average realized log prices period over period as we continued to internalize pulp logs, which offset the decrease in export log prices.

Lumber production increased 4% in the third quarter of 2014 compared to the same quarter of last year, due to a log purchase strategy that improved fibre supply to our mills and contributed to increased operating shifts period over period.

Dry weather conditions forced the extended fire season and resulted in a 10% decline in log harvest volumes and an incremental $3.5 million in shut-down costs in the third quarter of 2014, as compared to the same period in 2013. Log costs increased period over period due to an increase in heli-logging, relative to total log production, and higher stumpage rates.

Net income for the third quarter of 2014 was $2.7 million, or $0.01 per share as compared to net income of $17.2 million, or $0.04 per share, for the same period in 2013. Reflected in net income for the third quarter of 2014 is a restructuring charge of $8.1 million, or $0.02 per share, taken for the consolidation of our Nanaimo-area sawmill operations. The closure of the Nanaimo sawmill in the fourth quarter of 2014 is expected to improve our margins without affecting our production capacity, and was made possible through the capital investments at our Duke Point and Saltair sawmills.

Our total liquidity position at September 30, 2014, has improved to $159.2 million, compared to $125.9 million at the end of 2013. The increased liquidity in 2014 has primarily resulted from cash generated by operations.

In the third quarter of 2014, we continued to provide returns to our shareholders through our dividend program, paying $7.8 million or $0.02 per share to shareholders on September 19, 2014. Total dividend payments in the nine months ended September 30, 2014 amounted to $23.5 million, or $0.06 per share.

Third quarter 2014

In the third quarter of 2014, we generated $262.1 million of revenue and $20.0 million of adjusted EBITDA compared to $239.4 million and $27.6 million, respectively, in the same quarter last year. Third quarter net income was $2.7 million in 2014, as compared to $17.2 million in the same period in 2013. Increased revenue was the result of higher log sales volumes and improved lumber prices driven by adjusting our sales mix, and the impact of a weaker CAD dollar. The decline in adjusted EBITDA and net income were primarily due to challenging markets in Japan and China and operational curtailments due to an extended fire season. Net income in the third quarter of 2014 also reflects a restructuring charge of $8.1 million taken for the consolidation of our Nanaimo-area sawmill operations.

Lumber revenue in the third quarter of 2014 grew to $180.4 million, a 5% increase over the third quarter of 2013. Third quarter average realized lumber prices increased $68 per thousand board feet as compared to the third quarter of 2013. Higher pricing was due to a combination of a 21% increase in Niche product shipments and an 8% increase in WRC product shipments period over period, and price improvements for those products which offset a 4% decrease in total lumber shipment volume.

Third quarter log revenue was $66.0 million, an increase of 22% over the same period in 2013. The increased log revenue was due to 15% higher log sales volumes and a 4% increase in average realized log price. The strength of the domestic log market and higher export log sales volumes offset the impact of a 10% decline in export log prices. Log sales mix and average realized log prices were further enhanced by a focus on improving log utilization while maintaining lumber quality standards. Third quarter pulp log sales volumes were reduced by 14% while export log sales volumes increased 10%, relative to total log sales volumes.

By-products revenue was $15.7 million in the third quarter of 2014, an increase of $1.9 million from the same period in 2013. The increase in by-products revenue is due to a 5% rise in chip sales volumes driven by increased lumber production, and as a result of a 10% increase in average realized chip prices primarily due to the positive impact of the weaker CAD.

Third quarter lumber production was 231 million board feet, an increase of 4% compared to the third quarter of 2013, as we operated with increased shifts. These results were achieved through flexible production programs, realizing the benefits of capital improvements, and our log purchase strategy.

Dry weather conditions in the third quarter of 2014 limited log production to 1.1 million cubic metres, a 10% reduction as compared to the third quarter of 2013. The impact of dry weather conditions on lumber production was mitigated by increased sawlog purchases in the third quarter of 2014. In addition, operational curtailments resulted in $3.5 million of incremental shut-down expenses in the third quarter of 2014 as compared to the same period in 2013. Also negatively impacting log costs in the third quarter of 2014 were higher contractor costs, increased stumpage rates, and increased transportation costs.

Freight costs were $23.6 million in the third quarter of 2014, an increase of $3.1 million compared to the same period of 2013. This increase was the result of a 15% increase in log shipment volumes in the current quarter as compared to the third quarter of 2013, and the impact of the weaker CAD in the current quarter, as freight costs are primarily USD denominated.

Selling and administration expenses in the third quarter of 2014 were $8.3 million, compared to $8.2 million in the same quarter in 2013. As a percentage of revenue, our selling and administration costs were 3.2% for the third quarter of 2014, a slight reduction from 3.4% in the third quarter of 2013.

Year to date, September 30, 2014

Adjusted EBITDA for the first nine months of 2014 was $93.7 million, compared to $104.4 million in the same period in 2013, as a result of rising lumber and log prices which were offset by an increase in log costs. Adjusted EBITDA margin decreased from 14.2% to 11.6% year over year.

Revenue for the first nine months of 2014 grew to $804.3 million, an increase of 9% over the same period of 2013. The factors that provided increased year-to-date revenue results are consistent with those discussed in the third quarter summary above, and reflect continued efforts by Western to channel product sales into higher value markets. The CAD was, on average, 8% weaker relative to the USD during the first nine months of 2014 compared to the same period in 2013, which has also contributed to the improved pricing for our products.

Lumber production for the first nine months of 2014 increased 5% from the first nine months of 2013, and overall mill productivity increased 4% over those same periods. These production efficiencies primarily reflect the beneficial impacts of the capital investments implemented at the Saltair sawmill during 2013, combined with operating improvements at our other mills.

Log harvest volumes for the first nine months of 2014 were 3.9 million cubic metres, a decrease in volume of 6% in the same period last year. Harvest costs increased in the first nine months of 2014 as a result of increased harvest operating costs, the construction of more spur roads, and rising stumpage rates. Our plan to increase the amount of accessible timber for harvest has led to an increase in spur road construction which resulted in an additional $2.0 million expense in the first nine months of 2014 compared to the first nine months of 2013.

Selling and administration costs through the first nine months of 2014 were $26.2 million, an increase of $2.0 million compared to the same period of last year. The nine months' selling and administration costs as a percentage of revenue was 3.3% and has remained relatively consistent year over year.

Market Outlook

The pace of U.S. new home construction continues its gradual improvement. Company expects that a pace of just under 1 million seasonally adjusted starts will remain relatively unchanged for the balance of 2014. In the medium-term, company anticipates an acceleration of US new home construction and continued strength in the repair and renovation sectors, which should drive lumber demand higher. Over the longer-term, reduced 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.

Company's sales performance continues to be spurred by robust demand for our cedar products, which have increased in volume and price over 2013, and represented 38% of lumber revenue in the first nine months of 2014. Company anticipates this trend to continue as limited log and lumber inventories are expected to support stable pricing for WRC through the traditionally slower fourth quarter and into 2015.

Demand for lumber in Japan remains flat and company has adjusted its production levels to offset the impact of seasonal weakness in this market. Company expects nominal growth in the Japan lumber market through to the first half of 2015 as high inventory levels are slowly depleted.

The North American home repair and renovation sector is expected to continue its moderate growth path and company expects this will continue to drive growth in volume and improved pricing in its Niche lumber products.

Weakening demand in China led to a decline in company's commodity lumber prices and it anticipates that market conditions for its commodity lumber will remain challenging through the remainder of 2014.

Export log markets are being negatively impacted by high log inventories in China. Domestic log demand remains strong due to lower supply. Company expects that export log inventory will normalize in the near-term, and anticipates a continuation of a strong domestic log market due to supply constraints.

Western is an integrated Canadian forest products company and the largest coastal British Columbia woodland operator and lumber producer with an annual available harvest of approximately 6.4 million cubic metres of timber of which approximately 6.2 million cubic metres is from Crown lands and lumber capacity in excess of 1.1 billion board feet from eight sawmills and three remanufacturing plants. Principal activities conducted by the Company include timber harvesting, reforestation, sawmilling logs into lumber and wood chips and value-added remanufacturing. Substantially all of Western's operations, employees and corporate facilities are located in the coastal region of British Columbia while its products are sold in over 25 countries worldwide.