Adjusted EBITDA of
TSX: WEF
Net income in the third quarter of 2021 was
Third Quarter Highlights:
- Delivered record third quarter adjusted EBITDA of
$66.3 million and net income of$42.2 million - Realized average lumber price of
$1,553 per thousand board feet, despite a significant decline in commodity lumber prices - Successfully transitioned to a sustainability-linked credit facility and extended the maturity to 2025
- Completed the sale of the Somass sawmill assets for
$5.3 million - Returned
$33.8 million to shareholders via dividends and share repurchases - Grew liquidity to
$384.4 million to support growth strategy and balanced capital allocation
Western's third quarter adjusted EBITDA was
(millions of Canadian dollars except per share amounts and where otherwise noted) | Q3 | Q3 | Q2 | YTD | YTD | ||||||||||
Revenue | $ | 352.9 | $ | 290.6 | $ | 414.4 | $ | 1,089.8 | $ | 646.0 | |||||
Export tax expense | 6.2 | 11.0 | 10.8 | 25.2 | 22.6 | ||||||||||
Adjusted EBITDA | 66.3 | 33.7 | 120.4 | 249.7 | 45.7 | ||||||||||
Adjusted EBITDA margin | 19% | 12% | 29% | 23% | 7% | ||||||||||
Operating income prior to restructuring and other items | $ | 53.5 | $ | 19.0 | $ | 105.7 | $ | 208.0 | $ | 5.2 | |||||
Net income (loss) | 42.2 | 11.5 | 78.3 | 174.3 | (1.0) | ||||||||||
Earnings (loss) per share, basic and diluted | 0.12 | 0.03 | 0.21 | 0.47 | - | ||||||||||
Net cash (debt), end of period | 143.1 | (119.4) | 97.7 | ||||||||||||
Liquidity, end of period | 384.4 | 127.9 | 341.1 |
"In the third quarter we successfully pivoted lumber shipments to export markets, mitigating the impacts of North American commodity pricing volatility on our business", said
Summary of Third Quarter 2021 Results
Adjusted EBITDA for the third quarter of 2021 was
Third quarter operating income prior to restructuring and other items was
We continue to strictly enforce enhanced health and safety protocols and follow public health guidance to protect our employees, contractors, and communities from the novel Coronavirus pandemic ("COVID-19"). Our operations have not been significantly impacted by COVID-19 to-date, but we continue to monitor its influence on market conditions. Our near-term focus remains on ensuring the health and safety of our employees, maintaining financial flexibility, and servicing our customers.
Sales
After reaching record levels in
Lumber revenue rose 44% compared to the third quarter of last year, due to increased lumber shipments and significantly improved prices across all product segments. Sales volumes increased by 17%, led by increases of 49% and 47% in
Our average realized lumber price was
Log revenue was
By-product revenue was
Operations
Lumber production of 175 million board feet was 9% lower than the third quarter last year, due to log supply related operating curtailments.
We harvested 690,000 cubic metres of logs from our coastal operations in
BC coastal saw log purchases were 227,000 cubic metres, a decrease of 3% from the same period last year. Saw log supply remains tight as an extended fire season negatively impacted harvest volumes as compared to the same period last year.
Third quarter freight expense remained flat as compared to the same period last year despite an increase in lumber shipments. The reduction in freight expense associated with not shipping logs to export markets offset incremental costs arising from increased lumber shipments and higher freight rates.
Adjusted EBITDA and operating income included
Selling and Administration Expense
Third quarter selling and administration expense was
Strong financial results and share price appreciation in the third quarter of 2021 had an incremental compensation expense impact of
Other Income
We recognized other income of
Finance Costs
Finance costs were reduced to
Income Taxes
We used our remaining non-capital Canadian tax loss carryforwards during the first quarter of 2021, which will result in cash taxes payable for the tax year ending
Net Income
Net income for the third quarter of 2021 was
Summary of Year to Date 2021 Results
Adjusted EBITDA for the first nine months of 2021 was
Operating income prior to restructuring and other items was
Comparative results were significantly impacted by the restart of operations after the lengthy
Sales
Lumber revenue for the first nine months of 2021 was
Improved lumber pricing led to a 19% increase in average lumber price realization as compared to the first nine months of 2020. Our flexible operating platform allowed us to capitalize on changing market conditions, transitioning production and shipments from North American markets to improved export lumber markets. Price realizations were negatively impacted by an 8% appreciation in the average Canadian to US dollar exchange rate year-over-year.
Log revenue was
By-product revenue grew to
Operations
Lumber production in the first nine months of 2021 was 581 million board feet, 47% higher than the same period last year. The comparative period production was negatively impacted by the Strike.
We achieved higher lumber production in 2021 through increased operating hours and improved production efficiency. The shift to increased North American commodity lumber production in the first half of 2021 contributed to higher production volumes and improved recovery. Production and recovery benefits associated with higher North American commodity production were partially offset by increased levels of processing required to manufacture North American commodity products. Third quarter lumber production in 2021 was impacted by lower recovery associated with export lumber production, and temporary operating curtailments due to constrained log supply.
Log production for the first nine months of 2021 was 2,390,000 cubic metres, a decrease of 5% over the same period last year. Unfavourable weather conditions and permit delays impacted log production, and deferred road expense to future periods. Logging expenses have increased over the same period of 2020, primarily due to a 70% increase in stumpage expense. In 2020, logging operations were curtailed for most of the first quarter of 2020 due to the Strike and actions taken to mitigate COVID-19 health and safety risks.
Freight expense for the first nine months of 2021 was
Adjusted EBITDA and operating income in the first nine months of 2021 included
Comparative results also included CEWS proceeds of
Selling and Administration Expense
Selling and administration expense for the first nine months of 2021 was
Year-to-date mark-to-market expense on long-term compensation liabilities was
Comparatives include the recognition of
Other Income
We recognized other income of
Finance Costs
Finance costs were
Income Taxes
We used our remaining non-capital Canadian tax loss carryforwards during the first quarter of 2021, which will result in cash taxes payable for the tax year ending
Net Income
Strong operating performance and record product pricing resulted in a net income of
Sale of Other Non-Core Assets
Western has completed
On
On
Sustainability-Linked Credit Facility
On
The Amended Credit Facility maturity date was extended to
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, and as presented below, we have achieved a series of milestone agreements in 2021 that advance our mutually beneficial relationships and exemplify Western's ongoing actions to support reconciliation.
Integrated Resource Management Plan with Nanwakolas Council
On
Nanwakolas Council represents Tlowitsis, K'ómoks,
Sale of Forest and Timber Licence Interests to Lil'wat Nation and Tsleil-Waututh Nation
On
These licence interests had been held by Western, under the management of 3rd parties, as the result of Western-predecessor company transactions to acquire and reassign operating rights.
Forest Landscape Plan Pilot with 'Namgis First Nation
On
The three forest areas covered by the plan include the area-based tenure managed by Western, a replaceable forest licence managed by a 'Namgis-owned corporation, and the operating area of the Danyas Limited Partnership, a successful forest partnership established by 'Namgis and Western in 2015.
This Landscape Level Plan is supported by the BC Government ("Province") as a formal pilot project to inform the implementation of the Province's Forest and Range Practices Act amendments identified under the Regulatory Environment header below.
Integrated Resource Management Plan with Tla'amin Nation
On
The Renewal Agreement advances joint efforts that have been underway since the signing of a 2019 Memorandum of Understanding, supports continued exploration of innovative ideas to advance common interests related our respective forestry assets and interests in Tla'amin territory.
Quatsino First Nation Land Agreement
On
The land purchase and sale transaction is another positive milestone in a long-standing relationship of joint efforts. Most recently, involving the Province, we co-developed the
TFL 44 Partnership and Integrated Resource Management Plan with Huu-ay-aht First Nations
On
We have previously agreed to an option to sell a further 16% equity interest in TFL 44 LP to HVLP with an anticipated close in the second quarter of 2023, subject to closing conditions. We also have an agreement to sell up to an incremental 26% in TFL 44 LP to area First Nations and, alongside the HFN, we are now engaging those Nations.
Our growing relationship with HFN has resulted in a suite of other mutually beneficial agreements since 2017, including the sale of our former
On
Regulatory Environment
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 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 application. 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 production from private timberlands.
Old-Growth Logging Deferral
On
Western requires more specific information on the Province's proposed measures to meaningfully assess any potential impacts on the Company's business. Determination of potential impacts will be subject to further dialogue with the First Nations on whose territories the Company operates and 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.
On
TFL 44 LP, which is owned and managed by Western and the Huu-ay-aht First Nations, has no active or planned cutting permits in the portion of the 2,000-hectare old growth logging deferral area in TFL 44, and TFL 44 LP's forestry activity continues as planned.
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 first 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.
PPWC Labour Agreement
As announced in
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. We continue to monitor and review the latest guidance from health officials and experts to ensure our protocols meet the current required standards. 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.
Dividend and Capital Allocation
We remain committed to a balanced approach to capital allocation. To return capital to shareholders, we reinstated a regular quarterly dividend in 2021 and continue to repurchase common shares under our 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 internal strategic capital investments on projects that reduce manufacturing costs or address kiln drying and planer capacity constraints on the
Quarterly Dividend
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. In the first quarter of 2021, the Company's Board of Directors reinstated a quarterly dividend of
The Company's Board of Directors will continue to review our dividend on a quarterly basis. Dividends of
Normal Course Issuer Bid ("NCIB")
On
The Company also entered into an automatic share purchase plan with its designated broker to facilitate purchases of its common shares under the NCIB at times when the Company would ordinarily not be permitted to purchase its common shares due to regulatory restrictions or self-imposed blackout periods.
The Company's previous NCIB to purchase for cancellation up to 23,112,988 common shares expired on
During the first nine months of 2021, we repurchased and cancelled 30,346,240 common shares for
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
After reaching record levels in
Strong demand and record pricing in export cedar lumber markets is expected to be partially offset by typical North American seasonal demand weakness and a duty rate increase in late
Niche product demand and pricing remains strong. We anticipate that seasonal weakness in the North American timber segment will transition to improved demand and pricing leading into Spring.
In
An extended third quarter fire season limited domestic log harvest. Domestic saw log prices are expected to increase due to the resulting supply impacts, as well as rising stumpage costs and improving lumber markets.
The price for Northern Bleached Softwood Kraft pulp has been impacted by logistics constraints and energy conservation efforts in
The ongoing challenges related to COVID-19 and global logistics issues continue to create uncertainty in our business and could lead to pricing volatility and ongoing shipping challenges. 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.
Long-term, we believe that strong North American housing market fundamentals will support lumber demand and pricing, above trend levels. Low mortgage interest rates, an aging housing stock, a housing deficit stemming from years of underbuilding, and the influence of work-from-home arrangements on the repair and renovation segment 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.
In addition, we expect growth in the use of mass timber building technologies, the need for carbon neutral products and improved recognition of lumber as the most sustainable building product on the planet will grow demand and benefit the forest sector long-term.
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 the fourth quarter of 2020, Western recognized an export tax recovery of
On
On
At
Including wholesale lumber shipments, our lumber shipments to the US market represent approximately 44% of our total lumber revenue in the first three quarters of 2021, as compared to 39% in the same period last year and 41% in fiscal 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 unaudited condensed consolidated financial statements:
(millions of Canadian dollars except where otherwise noted) | |||||||||||
Adjusted EBITDA | Q3 2021 | Q3 2020 | Q2 2021 | YTD 2021 | YTD 2020 | ||||||
Net income (loss) | $ | 42.2 | $ | 11.5 | $ | 78.3 | $ | 174.3 | $ | (1.0) | |
Add: | |||||||||||
Amortization | 12.0 | 14.0 | 13.3 | 38.2 | 39.2 | ||||||
Changes in fair value of biological assets | 0.8 | 0.6 | 1.5 | 3.5 | 1.2 | ||||||
Operating restructuring items | 0.9 | 0.5 | 0.5 | 1.9 | 1.5 | ||||||
Other income (expense) (1) | (4.0) | 0.6 | (1.4) | (22.1) | (1.2) | ||||||
Finance costs | 0.4 | 2.0 | 0.4 | 1.7 | 6.4 | ||||||
Current income tax (recovery) | 13.6 | - | 31.2 | 53.6 | (0.1) | ||||||
Deferred income tax (recovery) | 0.4 | 4.4 | (3.3) | (1.4) | (0.4) | ||||||
Adjusted EBITDA | $ | 66.3 | $ | 33.7 | $ | 120.4 | $ | 249.7 | $ | 45.7 | |
Adjusted EBITDA margin | |||||||||||
Total revenue | $ | 352.9 | $ | 290.6 | $ | 414.4 | $ | 1,089.8 | $ | 646.0 | |
Adjusted EBITDA | 66.3 | 33.7 | 120.4 | 249.7 | 45.7 | ||||||
Adjusted EBITDA margin | 19% | 12% | 29% | 23% | 7% | ||||||
Net debt to capitalization | |||||||||||
Net debt | |||||||||||
Total debt | $ | 0.0 | $ | 121.3 | $ | 1.9 | |||||
Cash and cash equivalents | (143.1) | (1.9) | (99.6) | ||||||||
Net debt (cash) | $ | (143.1) | $ | 119.4 | $ | (97.7) | |||||
Capitalization | |||||||||||
Net debt (cash) | $ | (143.1) | $ | 119.4 | $ | (97.7) | |||||
Add: equity | 620.6 | 471.1 | 611.5 | ||||||||
Capitalization | $ | 477.5 | $ | 590.5 | $ | 513.8 | |||||
Net debt to capitalization | - | 20% | - |
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 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", "forecast", "intend", "believe", "seek", "could", "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: 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 interest in TFL 44 LP and in other potential LP structures in the future. Although such statements reflect management's current reasonable beliefs, expectations and assumptions as to, amongst other things, the future supply and demand of forest products, global and regional economic activity and the consistency of the regulatory framework within which the Company currently operates, there can be no assurance that forward-looking statements are accurate, and actual results and performance may materially vary. Many factors could cause our actual results or performance to be materially different, including: economic and financial conditions, international demand for forest products, competition and selling prices, international trade disputes, changes in foreign currency exchange rates, labour disputes and disruptions, natural disasters, the impact of climate change, relations with First Nations groups , 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, future developments in the COVID-19 pandemic and other factors referenced under the "Risks and Uncertainties" section of our MD&A in our 2020 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 items 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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