TSX: WEF
Net income in the first quarter of 2022 was
Highlights:
- Record first quarter adjusted EBITDA of
$65.4 million - Realized record average lumber price of
$1,688 per thousand board feet - Announced a 25% increase to our quarterly dividend
- Completed our 10% normal course issuer bid, returning a total of
$60.7 million to shareholders - Liquidity(1) of
$316.3 million to support growth strategy and balanced approach to capital allocation
Western's first quarter adjusted EBITDA was
(millions of Canadian dollars except per share amounts and where otherwise noted) | Q1 2022 | Q4 2021 | Q1 2021 | ||||||
Revenue | $ 359.6 | $ 327.9 | $ 322.5 | ||||||
Export tax expense | 11.5 | 4.6 | 8.2 | ||||||
Export tax recovery | - | (3.3) | - | ||||||
Adjusted EBITDA | 65.4 | 52.5 | 62.9 | ||||||
Adjusted EBITDA margin(1) | 18% | 16% | 20% | ||||||
Operating income prior to restructuring and other items | $ 52.2 | $ 39.4 | $ 48.8 | ||||||
Net income | 38.0 | 28.5 | 53.8 | ||||||
Earnings per share, diluted | 0.11 | 0.08 | 0.14 | ||||||
Net cash (debt)(2), end of period | 74.9 | 130.0 | 0.6 | ||||||
Liquidity, end of period | 316.3 | 371.4 | 244.0 |
"We achieved record first quarter results and growth in lumber shipment volumes as compared to the fourth quarter despite global logistics challenges," said
(1) | Refer to Adjusted EBITDA, Liquidity, Adjusted EBITDA margin in the Non-GAAP Financial Measures section. |
(2) | Net debt (cash), a supplemental measure, is defined as long-term debt and bank indebtedness less cash and cash equivalents. |
Summary of First Quarter 2022 Results
Adjusted EBITDA for the first quarter of 2022 was
First quarter operating income prior to restructuring and other items was
Sales
Lumber revenue rose 13% as compared to the first quarter of last year, as a stronger lumber sales mix and higher price realizations more than offset logistics-constrained sales volumes.
Lumber pricing improved across all our specialty lumber segments as compared to the first quarter of last year, while realized commodity pricing was relatively flat due to the geographic mix of sales. We increased our specialty product lumber shipments to 51% from 46% in the first quarter of 2021. Improved pricing and mix delivered a record quarterly average realized lumber price of
We grew lumber revenue despite a 9% reduction in shipment volumes from the same quarter of 2021. Ongoing logistics constraints affected lumber shipments. Limited cedar log availability constrained cedar lumber production, as compared to the same period last year. In contrast to these challenges, shipment volumes to
Log revenue was
Permitting delays and weather-related curtailments in the latter half of 2021 limited log harvest and sales volumes and reduced our log inventory going into 2022. As a result, all export-grade logs were redirected to our sawmills to provide fibre in support of lumber production.
By-product revenue was
Operations
Lumber production of 175 million board feet was 12% lower than the first quarter last year, due to log supply related, temporary operating curtailments at certain sawmills and the relative increase of net count export lumber production.
We harvested 748,000 cubic metres of logs from our coastal operations in BC, as compared to 688,000 cubic metres in the first quarter last year. Timberlands operations benefitted from improved harvesting conditions to partly rebuild a depleted log inventory.
Excluding stumpage, timberlands per unit operating costs increased over the comparative period with accelerated road building and higher helicopter logging harvest volume. Record pricing for logs and lumber drove a 75% increase in stumpage rates as compared to the same period last year. Increased harvest production and higher coastal stumpage rates resulted in the increase in stumpage expense compared to the same period last year.
We increased our BC Coastal saw log purchases by almost 50% to 290,000 cubic metres, as compared to the same period last year, to support sawmill operations and the rebuilding of a depleted sawlog inventory. The mix of purchases and rising log prices resulted in a 25% increase in purchase log price as compared to the same period last year.
First quarter freight expense increased by
Adjusted EBITDA and operating income included
Selling and Administration Expense
First quarter selling and administration expense was
Mark-to-market recovery of
Other Income (Expense)
We recognized other expense of
Finance Costs
Finance costs were
Income Taxes
Western recognized current income tax expense of
Net Income
Net income for the first quarter of 2022 was
Indigenous Relationships
We respect the treaty and Aboriginal rights of Indigenous groups, and we are committed to open dialogue and meaningful actions in support of reconciliation.
We are actively investing time and resources in capacity building and fostering positive working relationships with Indigenous groups, with traditional territories within which Western operates, through information sharing, joint sustainable forest management planning, timber harvesting, reforestation practices, restoration initiatives and other mutually beneficial interests. These arrangements may include business-to-business service and supply contracts, combining tenure for joint forest management, job creation and training, and limited partnerships with shared governance and financial interests.
In collaboration with Indigenous groups, we have achieved a series of milestone agreements that advance our mutually beneficial relationships and exemplify Western's ongoing actions to support reconciliation. A summary of those agreements and related announcements occurring in 2022 is presented below.
Integrated Resource Management Plan with
On
In recent years, we have engaged in several innovative projects together with the Nanwakolas Council, including joint development and the ongoing implementation of the Nanwakolas Large Cultural
Service Contract Agreement with Tla'amin Nation in Tree Farm Licence 39 Block 1
On
The contract supports the ongoing relationship between Western and Tla'amin and builds on the Renewal Agreement signed in
Integrated Resource Management Plans in Tree Farm Licence 44
On
On
Regulatory Environment
In recent years, the Province has introduced various policy initiatives and regulatory changes that impact the BC forest sector regulatory framework as part of a Coastal Revitalization Initiative and Interior Renewal Process, including: fibre recovery, lumber remanufacturing, old growth forest management and the exportation of logs.
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 necessary for road development and harvesting. The Company may manage risks associated with delays in the Province granting operating authorizations by fostering positive working relationships with the First Nations, as discussed above. 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; and by increasing harvest from private timberlands.
Old-Growth Logging Deferral
On
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On
On
Western continues to work collaboratively with First Nations, on whose territories the Company operates, through information sharing and capacity funding to assess any potential impacts on the Company's business. Determination of potential impacts is subject to further dialogue with the First Nations and the outcomes of their government-to-government discussions. Should the proposed measures impact Western's business, the Company will seek support from the Province for its workers and full compensation for investments.
Western will work with First Nations and government as these decisions are made, respecting the rights and title of First Nations, including their right to economically benefit from the lands within their traditional territories.
Forest and Range Practices Act Amendments
On
Timber Tenure Reduction
Approximately 89% of Western's 5,914,000 cubic metre sustainable allowable annual cut ("AAC") is in the form of Tree Farm Licences ("TFL"). TFLs are granted for 25-year terms and are replaced by the Province every five to ten years with a new 25-year term.
In the second half of 2022, we anticipate the Province's
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 which 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.
COVID-19
Western is committed to the health and safety of our employees, contractors and the communities where we operate. From the onset of the pandemic, Western has been committed to following the public health guidance in shaping our response to help mitigate the risk of COVID-19 transmission. To help mitigate the spread of COVID-19, strict health and safety protocols were implemented across our business based on guidance from health officials and experts, and in compliance with regulatory orders and standards.
Public health guidance evolved in all of our operating environments in 2022. Effective
We continue to monitor and review the latest guidance from health officials and experts to ensure our protocols meet the current required standards should circumstances change.
Dividend and Capital Allocation
We remain committed to a balanced approach to capital allocation. To return capital to shareholders, we pay a regular quarterly dividend and complement our dividend program with opportunistic repurchases of common shares.
We will continue to evaluate opportunities to invest strategic and discretionary capital in jurisdictions and product lines that create the opportunity to grow long-term shareholder value. We expect to focus near-term internal strategic capital investments on projects that reduce manufacturing costs or address kiln drying and planer capacity constraints on the
Dividend Increase
On
The quarterly dividend program is intended to return a portion of the Company's cash to shareholders, after taking into consideration liquidity and ongoing capital needs. The Company's Board of Directors will continue to review our dividend on a quarterly basis.
Normal Course Issuer Bid
During the first three months ended
As at
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; partnering with First Nations in sustainable forest management; 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.
Market Outlook
As we look ahead, we expect the strong North American lumber market fundamentals, which have driven lumber pricing over the last few years, to continue. The combination of low existing home for sale inventories, improved housing starts, and historically attractive mortgage rates should support higher lumber consumption. We believe the strong demand fundamentals combined with lower lumber supply from
Pricing for our Cedar and Niche specialty product segments improved from the fourth quarter, while
Logistics remain a considerable challenge for our business as we pivot production from relatively weaker export markets in
We expect sawlog markets to remain strong due to a combination of reduced supply and strong demand while we expect pulp log pricing to trade in a narrow band due to limited market competition. Sawmill residual chip pricing is expected to remain strong supported by higher Northern Softwood Bleach Kraft pulp pricing in
Long-term, we believe that strong North American housing market fundamentals will support lumber demand and pricing, above trend levels. An aging housing stock, a housing deficit stemming from years of underbuilding, the influence of work-from-home arrangements on the repair and renovation segment, and the growth of mass timber construction are expected to continue to drive growing demand for lumber. At the same time supply has been reduced due to the impact of permanent production curtailments resulting from Mountain Pine Beetle in the BC Interior.
Softwood Lumber Dispute
The US application of duties on shipments of Canadian lumber continues a long-standing pattern of US protectionist action. We disagree with the inclusion of specialty lumber products, particularly Cedar products in this commodity lumber focused dispute. As duties paid are determined on the value of lumber exported, and as our shipments to the US market consists of significant volumes of high-value, appearance grade lumber, we are disproportionately impacted by these duties.
Western expensed
In 2020, Western recognized an export tax recovery of
On
On
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At
Including wholesale lumber shipments, our lumber shipments from
Non-GAAP Financial Measures
Reference is made in this press release to the following non-GAAP measures: Adjusted EBITDA, Adjusted EBITDA margin, Net debt to capitalization, and total Liquidity 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. Refer also to Forward Looking Statements and Information for further descriptions of use of these non-GAAP measures. The following table provides a reconciliation of these non-GAAP measures to figures as reported in our unaudited condensed consolidated financial statements:
(millions of Canadian dollars except where otherwise noted)
Adjusted EBITDA | Q1 2022 | Q4 2021 | Q1 2021 | ||||||
Net income | $ | 38.0 | $ | 28.5 | $ | 53.8 | |||
Add: | |||||||||
Amortization | 12.7 | 12.7 | 12.9 | ||||||
Changes in fair value of biological assets | 0.5 | 0.2 | 1.2 | ||||||
Operating restructuring items | 0.6 | 0.8 | 0.5 | ||||||
Other expense (income) (1) | 0.1 | (0.3) | (16.7) | ||||||
Finance costs | 0.4 | 0.2 | 0.9 | ||||||
Current income tax | 15.4 | 10.5 | 8.8 | ||||||
Deferred income tax (recovery) | (2.3) | (0.3) | 1.5 | ||||||
Adjusted EBITDA | $ | 65.4 | $ | 52.5 | $ | 62.9 | |||
Adjusted EBITDA margin | |||||||||
Total revenue | $ | 359.6 | $ | 327.9 | $ | 322.5 | |||
Adjusted EBITDA | 65.4 | 52.5 | 62.9 | ||||||
Adjusted EBITDA margin | 18% | 16% | 20% | ||||||
Net debt to capitalization | 2022 | 2021 | 2021 | ||||||
Net debt | |||||||||
Total debt | $ | - | $ | - | $ | 2.5 | |||
Cash and cash equivalents | (74.9) | (130.0) | (3.1) | ||||||
Net debt (cash) | $ | (74.9) | $ | (130.0) | $ | (0.6) | |||
Capitalization | |||||||||
Net debt (cash) | $ | (74.9) | $ | (130.0) | $ | (0.6) | |||
Add: equity attributable to equity shareholders of the Company | 640.9 | 612.1 | 552.6 | ||||||
Capitalization | $ | 566.0 | $ | 482.1 | $ | 552.0 | |||
Net debt to capitalization | - | - | - | ||||||
Total liquidity | 2022 | 2021 | 2021 | ||||||
Cash and cash equivalents | $ | 74.9 | $ | 130.0 | $ | 3.1 | |||
Available credit facility | 250.0 | 250.0 | 250.0 | ||||||
Less outstanding letters of credit | (8.6) | (8.6) | (9.1) | ||||||
Total liquidity | $ | 316.3 | $ | 371.4 | $ | 244.0 |
Figures in the table above may not equal or sum to figures presented elsewhere due to rounding. | |
(1) | Other income (expense), net of changes in fair market value less cost to sell of biological assets and gain on disposal of |
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", "commit", "project", "estimate", "expect", "anticipate", "plan", "forecast", "intend", "believe", "seek", "could", "should", "may", "likely", "continue", "pursue" 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: domestic and international market conditions, demands and growth; economic conditions; our growth, marketing, product, wholesale, operational and capital allocation plans and strategies, including but not limited to payment of a dividend; fibre availability and regulatory developments; the impact of COVID-19; and the selling of additional incremental ownership interests in
Many factors could cause our actual results or performance to be materially different including: economic and financial conditions including inflation, international demand for forest products, the Company's ability to export its products, cost and availability of shipping carrier capacity, competition and selling prices, international trade disputes and sanctions, changes in foreign currency exchange rates, labour disputes and disruptions, natural disasters, the impact of climate change, relations with First Nations groups, First Nations' claims and settlements, the availability of fibre and allowable annual cut, the ability to obtain operational permits, development and changes in laws and regulations affecting the forest industry including as related to old growth timber management and the Manufactured Forest Products Regulation, changes in the price of key materials for our products, changes in opportunities, information systems security, future developments in COVID-19 and other factors referenced under the "Risks and Uncertainties" section of our MD&A in our 2021 Annual Report dated
Reference is made in this press release to adjusted EBITDA which is defined as operating income prior to operating restructuring items and other income (expense) plus amortization of plant, equipment and intangible assets, impairment adjustments, and changes in fair value of biological assets. Adjusted EBITDA margin is adjusted EBITDA 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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