TSX: WEF
Net income in the fourth quarter of 2020 was
Fourth Quarter Highlights:
- Strong fourth quarter EBITDA
- Leveraged flexible operating platform to grow lumber production and shipments into
North America
- Further advanced our sales and marketing growth initiatives
- Reduced debt by
$50.2 million , bringing net debt down to$69.2 million at the end of 2020
- Available liquidity of
$178.3 million to support growth and our balanced approach to capital allocation
Western's fourth quarter adjusted EBITDA was
Q4 2020 | Q4 2019 | Q3 2020 | Annual 2020 | Annual 2019 | |||||||||||||||
(millions of dollars except per share amounts | |||||||||||||||||||
Revenue | $ | 318.9 | $ | 80.1 | $ | 290.6 | $ | 964.9 | $ | 807.7 | |||||||||
Export tax expense | 12.1 | 3.4 | 11.0 | 34.6 | 27.8 | ||||||||||||||
Export tax recovery | (31.6) | - | - | (31.6) | - | ||||||||||||||
Adjusted EBITDA | 71.1 | (18.1) | 33.7 | 116.8 | (1.5) | ||||||||||||||
Adjusted EBITDA margin | 22% | -23% | 12% | 12% | 0% | ||||||||||||||
Operating income (loss) prior to restructuring items and other items | $ | 56.0 | $ | (29.6) | $ | 19.0 | $ | 61.2 | $ | (46.7) | |||||||||
Net income (loss) | 34.4 | (29.2) | 11.5 | 33.4 | (46.7) | ||||||||||||||
Basic and diluted earnings (loss) per share (in dollars) | 0.09 | (0.09) | 0.03 | 0.09 | (0.12) | ||||||||||||||
Net debt, end of period | 69.2 | 111.3 | 119.4 | ||||||||||||||||
Liquidity, end of period | 178.3 | 136.9 | 127.9 |
"We capitalized on strong North American lumber markets in the fourth quarter to deliver significantly improved financial results," said
For the year ended
Summary of Fourth Quarter 2020 Results
Adjusted EBITDA for the fourth quarter of 2020 was
Operating income prior to restructuring and other items was
Sales
In the fourth quarter unseasonably strong demand and constrained supply supported pricing for our North American product lines, while prices in our export markets remained relatively weak. North American lumber pricing was volatile through the quarter as inventory in the distribution channel could not supply demand that was stronger than anticipated. Domestic log markets continued to improve in the fourth quarter supported by the strength of lumber markets and constrained supply. Pulp log markets remained muted while prices for export logs into
We took advantage of strong North American lumber markets by maintaining Western Red Cedar volumes during a traditionally slower period and by redirecting production and sales from weaker export markets. We grew lumber revenue by 23% from the third quarter of 2020, on the strength of higher prices for our Western Red Cedar products, and increased sales volumes and prices in our commodity lumber segment. Lumber revenue was
Specialty lumber represented 48% of fourth quarter shipments in 2020 compared to 80% in the same period last year and 59% in the third quarter of 2020. A greater commodity weighting to our lumber sales mix and stronger Canadian dollar ("CAD") to
Log revenue was
By-product revenue was
Operations
Lumber production was 180 million board feet, as compared to 34 million board feet in the Strike affected fourth quarter of 2019, and 192 million board feet in the third quarter of 2020. Production decreased by 6% from the third quarter of 2020 as we balanced lumber production with remanufacturing capacity. We have continued to lever our flexible operating platform by redirecting production from relatively weak export markets into the strong North American market.
We reduced operating hours at our
We produced 901,000 cubic metres of logs from our BC coastal operations in the fourth quarter of 2020, as compared to 21,000 cubic metres in the same quarter of last year and 1,138,000 cubic metres in the third quarter of 2020. Harvest volumes were reduced due to typical seasonal operating conditions.
BC coastal saw log purchases were 222,000 cubic metres, as compared to 34,000 cubic metres in the same period last year. Although market log supply has been limited, we have been successful in growing log purchase volumes to support our mills.
Freight expense was
Fourth quarter adjusted EBITDA and operating income included
Selling and Administration Expense
Fourth quarter selling and administration expense was
In addition to increased health and safety and IT costs associated with COVID-19 operating requirements, we expensed an incremental
Finance Costs
Lower average outstanding debt balance and the recognition of interest income on duty receivable resulted in income from financing activities of
Other Expense
We recognized other expenses of
Net Income (Loss)
Net income for the fourth quarter was
Summary of 2020 Annual Results
Financial and operating results were significantly impacted by COVID-19, the Strike, and the gradual restart of Strike-curtailed BC operations in the first half of 2020. Despite financial impacts and significant uncertainty arising from COVID-19, we maintained employment and operating levels with support from the Canadian Emergency Wage Subsidy ("CEWS") program.
On
In late
Adjusted EBITDA for 2020 was
Sales
Lumber revenue grew to
Despite challenges at the beginning of the year, we successfully increased Western Red Cedar shipments and capitalized on strong North American lumber markets by redirecting volume from weaker export markets to achieve record average lumber price realizations.
Log revenue was
By-products revenue decreased to
Operations
Despite significant uncertainty arising from COVID-19 through 2020, we maintained operating levels in order to support and maintain employment, rebuild inventories, and service our customers. By late
Lumber production in 2020 was 576 million board feet, 17% higher than last year. Lumber production was negatively impacted in the first half of 2020 by the Strike and COVID-19. We partly mitigated the impact of the Strike on our customers by continuing to process logs at custom cut facilities and through our wholesale lumber activity. Upon returning from the Strike, mid-year production volume and grade recovery were impacted due to processing log inventory that had degraded during the Strike. In the second half of 2020, we leveraged our flexible operating platform to increase the production of North American commodity lumber targeted to the treating segment.
After the resolution of the Strike in the first quarter of 2020, we resumed and maintained our timberlands operations through the remainder of 2020 despite significant uncertainty arising from COVID-19. By maintaining active timberlands operations, we rebuilt log inventories to support our sawmill operations. We resumed operations at our
Log production for 2020 was 3,430,000 cubic metres, an increase of 55% from 2019. We delivered higher production by capitalizing on favourable operating conditions. Lower production costs resulted from a favourable mix of operations and by aligning our road expenditures to harvest volumes. No significant fire-related downtime was taken in either year.
BC coastal saw log purchases were 835,000 cubic metres in 2020, a 48% increase from the prior year despite lower overall non-Western coastal harvest activity.
Freight expense was
Adjusted EBITDA and operating income included
Due to the negative financial impact and risk to employment that COVID-19 had on our business we applied for CEWS to support continued operations despite uncertainty; maintain employment; offset costs of enhanced health and safety protocols; support contractors and communities; rebuild inventory and continue to service our customers. In the first half of 2020, before our operating income began to recover, we recognized CEWS of
Selling and Administration Expense
Selling and administration expense for 2020 was
Improved financial performance drove an incremental
Despite uncertainty arising from COVID-19, we maintained staffing levels to support our business and communities, and to continue to service our customers.
Finance Costs
Finance costs were
Other Expense
We recognized net other expenses of
Other expense was
Net Income (Loss)
Net income was
Operating Restructuring Items
We incurred
Operating restructuring costs were
Income Taxes
Improved operating earnings led to the recognition of
At
COVID-19
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 travelled, 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.
In response to the impacts of the COVID-19 pandemic, the Company curtailed its BC manufacturing facilities for up to a one-week period effective
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
With the potential negative impacts to the global economy from COVID-19 and with dynamic global economic conditions, in the near-term we remain focused on maintaining financial flexibility, protecting the health and safety of our employees and contractors, and servicing our customers.
Sale of Ownership Interests in Limited Partnerships
On
On
The completion of each stage of the TFL 44 Transaction 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
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
On
Dividend and Capital Allocation
We remain committed to a balanced approach to capital allocation. To return capital to shareholders, we have reinstated a regular quarterly dividend and may complement it with common share repurchases under our renewed Normal Course Issuer Bid ("NCIB").
We will continue to evaluate opportunities to invest strategic and discretionary capital in jurisdictions that create the opportunity to grow long-term shareholder value. We expect to focus near-term strategic capital investments on projects that reduce manufacturing costs or address kiln drying and planer capacity constraints on the
Quarterly Dividend
With the global economic uncertainty arising from COVID-19 and added financial requirements of resetting the business post-Strike, on
The Company's Board of Directors have reinstated a quarterly dividend of
Normal Course Issuer Bid
On
The Company's previous NCIB to purchase for cancellation up to 18,763,888 common shares expired on
During 2020, the Company did not repurchase common shares such that 18,759,858 common shares remain available to be purchased under the renewed NCIB. The NCIB expires on
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. We believe 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. We seek to manage our business with a focus on operating cash flow and maximizing value through the production and sales cycle. We routinely evaluate our performance using the measure of Return on Capital Employed.
Continuing to guide our actions are the strategic initiatives presented below, with selected accomplishments noted:
Strengthen the Foundation
- Through our focused capital investments, we have positioned Western as the only company on the coast of BC capable of consuming the complete profile of the coastal forest and competitively manufacturing a diverse product mix.
- Our strategic capital investments have allowed us to increase the production of targeted products and supported the optimization of our coastal operations.
- We have invested in our people and systems to create a platform for pursuing margin-focused growth opportunities.
- We continue to pursue long-term relationships with coastal First Nations to create mutually beneficial opportunities. In 2020, we announced an agreement to sell an incremental ownership interest in TFL 44 LP to HVLP, aligning our interests and introducing an opportunity to potentially involve other First Nations in a shared vision for forestry.
Grow the Base
- We optimized our operations and invested in our sawmills and timberlands to improve margins and position ourselves for growth. We continue to look for opportunities to further optimize our operations to enhance profit margins.
- We implemented multiple non-capital margin improvement programs to improve our cost structure and optimize our supply chain.
- The success of our business relationships with First Nations has and continues to drive incremental log volume and enabled Western to grow specialty lumber production in recent years.
- We are executing on our sales and marketing strategy, driving the production and sale of targeted, high-margin products of scale to selected customers that value our product offerings. In 2020, we reached marketing and vendor purchase agreements with certain customers, increasing our lumber sales into
North American Home Centre and Pro-Dealer sales channels.
- We created a new product branding strategy that differentiates our high-quality products in the
North American Home Centre sales channel and is supporting increased demand for our products.
Explore Opportunities
- In 2018, we acquired our
Arlington distribution and processing facility. The facility allows the Company to increase the production of targeted, finished products while also providing a centralized warehousing and distribution centre to more effectively service our selected US customers.
- In 2019, we acquired the assets of
Columbia Vista inVancouver, Washington , enabling us to offer a broader array ofDouglas fir specialty products to our selected customers in both the US andJapan .
- We launched a new wholesale business which will provide complementary products to our industry leading specialty product offerings and enhance our return on capital employed. In 2020, this initiative led to the launch of our Japanese Cedar fencing lumber to complement our WRC product portfolio.
- We continue to evaluate opportunities to grow our business and long-term shareholder value.
Sales & Marketing Strategy Update
In 2020, we redirected lumber production from relatively weak export markets to the improving North American market. We purposely targeted sales to selected customers in the treating sector where our product mix could provide the most value. In the near term we anticipate North American pricing to remain above trend levels and will look to grow our presence in the specialty treated lumber sector.
We continue to progress with the execution of our sales and marketing strategy, which focuses on the production and sale of targeted, high-margin products of scale to selected customers. We supplement our key product offerings with purchased lumber to deliver the suite of products our customers require.
We continue to develop and evaluate growth opportunities for our wholesale lumber business, including the inception of a Japanese Cedar products program and ongoing
Market Outlook
Robust North American lumber markets have continued into 2021, with the combination of strong demand and constrained supply delivering an unseasonably strong pricing environment. Export market demand has improved, which we believe will support higher pricing for our products in
Demand and pricing for our WRC and Niche products are expected to continue to improve as we benefit from the strength of the North American repair and renovation segment.
In
We expect domestic saw log prices to increase in response to improving lumber markets, and greater competition from improved export markets.
The global Northern Bleached Softwood Kraft benchmark pulp price has improved early in the first quarter of 2021 and, if sustained, this could lead to modest improvements in pulp log and chip pricing.
Despite ongoing uncertainty arising from COVID-19 and the identification of new variants of the virus, we are hopeful that progress with vaccine roll-outs may positively influence lumber demand and pricing. We plan to utilize our flexible operating platform to adjust to market conditions and will continue to align our production volumes to match market demand.
Softwood Lumber Dispute
The US application of duties continues a long-standing pattern of US protectionist action against Canadian lumber producers. We disagree with the inclusion of specialty lumber products, particularly WRC and
Western expensed
At
Including wholesale lumber shipments, our sales to the US market represent approximately 32% of our total revenue in 2020. Our distribution and processing centre in
Non-GAAP Measures
Reference is made in this press release to the following non-GAAP measures: Adjusted EBITDA, Adjusted EBITDA margin, and Net debt to capitalization are used as benchmark measurements of our operating results and as benchmarks relative to our competitors. These non-GAAP measures are commonly used by securities analysts, investors and other interested parties to evaluate our financial performance. These non-GAAP measures do not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other issuers. The following table provides a reconciliation of these non-GAAP measures to figures as reported in our audited annual consolidated financial statements:
Q4 2020 | Q4 2019 | Q3 2020 | Annual 2020 | Annual | ||||||||||||
(millions of Canadian dollars except where otherwise noted) | 2019 | |||||||||||||||
Adjusted EBITDA | ||||||||||||||||
Net income (loss) | $ | 34.4 | $ | (29.2) | $ | 11.5 | $ | 33.4 | $ | (46.7) | ||||||
Add: | ||||||||||||||||
Amortization | 14.3 | 12.4 | 14.0 | 53.5 | 45.4 | |||||||||||
Changes in fair value of biological assets, net | 1.2 | 1.4 | 0.6 | 2.4 | 2.3 | |||||||||||
Operating restructuring items | 0.6 | 2.1 | 0.5 | 2.1 | 3.5 | |||||||||||
Other expense(1) | 6.2 | 2.8 | 0.6 | 5.0 | 2.9 | |||||||||||
Finance costs (income) | (0.5) | 2.2 | 2.0 | 5.9 | 7.8 | |||||||||||
Current income tax recovery | - | (3.4) | - | (0.1) | (13.0) | |||||||||||
Deferred income tax expense (recovery) | 15.1 | (6.6) | 4.4 | 14.7 | (3.7) | |||||||||||
Adjusted EBITDA | $ | 71.1 | $ | (18.1) | $ | 33.7 | $ | 116.8 | $ | (1.5) | ||||||
Adjusted EBITDA margin | ||||||||||||||||
Total revenue | $ | 318.9 | $ | 80.1 | $ | 290.6 | $ | 964.9 | $ | 807.7 | ||||||
Adjusted EBITDA | 71.1 | (18.1) | 33.7 | 116.8 | (1.5) | |||||||||||
Adjusted EBITDA margin | 22.% | -23% | 12% | 12% | -0% | |||||||||||
Net debt to capitalization | ||||||||||||||||
Net debt | ||||||||||||||||
Total debt, net of deferred financing costs | $ | 71.9 | $ | 113.4 | $ | 121.3 | ||||||||||
Bank indebtedness | 0.2 | - | - | |||||||||||||
Cash and cash equivalents | (2.9) | (2.1) | (1.9) | |||||||||||||
Net debt | $ | 69.2 | $ | 111.3 | $ | 119.4 | ||||||||||
Capitalization | ||||||||||||||||
Net debt | $ | 69.2 | $ | 111.3 | $ | 119.4 | ||||||||||
Add: Equity | 504.5 | 481.8 | 471.1 | |||||||||||||
Capitalization | $ | 573.7 | $ | 593.1 | $ | 590.5 | ||||||||||
Net debt to capitalization | 12% | 19% | 20% |
Figures in the table above may not equal or sum to figures presented elsewhere due to rounding. |
(1) Other expense, net of changes in fair market value less cost to sell of biological assets and loss (gain) on disposal of assets. |
Forward Looking Statements and Information
This press release contains statements that may constitute forward-looking statements under the applicable securities laws. Readers are cautioned against placing undue reliance on forward-looking statements. All statements herein, other than statements of historical fact, may be forward-looking statements and can be identified by the use of words such as "will", "estimate", "expect", "anticipate", "plan", "intend", "believe", "seek", "should", "may", "likely", "continue" and similar references to future periods. Forward-looking statements in this press release include, but are not limited to, statements relating to our current intent, belief or expectations with respect to: market and general economic conditions, the
Reference is made in this press release to adjusted EBITDA which is defined as operating income prior to operating restructuring items and other income (exp, plus amortization of property, plant, and equipment, and intangible assets, impairment adjustments, and changes in fair value of biological assets. Adjusted EBITDA margin is adjusted EBITDA presented as a proportion of revenue. Western uses adjusted EBITDA and adjusted EBITDA margin as benchmark measurements of our own operating results and as benchmarks relative to our competitors. We consider adjusted EBITDA to be a meaningful supplement to operating income as a performance measure primarily because amortization expense, impairment adjustments and changes in the fair value of biological assets are non-cash costs, and vary widely from company to company in a manner that we consider largely independent of the underlying cost efficiency of their operating facilities. Further, the inclusion of operating restructuring items which are unpredictable in nature and timing may make comparisons of our operating results between periods more difficult. We also believe adjusted EBITDA and adjusted EBITDA margin are commonly used by securities analysts, investors and other interested parties to evaluate our financial performance.
Adjusted EBITDA does not represent cash generated from operations as defined by IFRS and it is not necessarily indicative of cash available to fund cash needs. Furthermore, adjusted EBITDA does not reflect the impact of certain items that affect our net income. Adjusted EBITDA and adjusted EBITDA margin are not measures of financial performance under IFRS, and should not be considered as alternatives to measures of performance under IFRS. Moreover, because all companies do not calculate adjusted EBITDA and adjusted EBITDA margin in the same manner, these measures as calculated by Western may differ from similar measures calculated by other companies. A reconciliation between the Company's net income as reported in accordance with IFRS and adjusted EBITDA is included in this press release.
Also in this press release management may use key performance indicators such as net debt, net debt to capitalization and current assets to current liabilities. Net debt is defined as long-term debt less cash and cash equivalents. Net debt to capitalization is a ratio defined as net debt divided by capitalization, with capitalization being the sum of net debt and equity. Current assets to current liabilities is defined as total current assets divided by total current liabilities. These key performance indicators are non-GAAP financial measures that do not have a standardized meaning and may not be comparable to similar measures used by other issuers. They are not recognized by IFRS, however, they are meaningful in that they indicate the Company's ability to meet their obligations on an ongoing basis, and indicate whether the Company is more or less leveraged than the prior year.
Western is an integrated forest products company building a margin-focused log and lumber business to compete successfully in global softwood markets. With operations and employees located primarily on the coast of
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