Record Adjusted EBITDA of
Net income in the second quarter of 2021 was
Second Quarter Highlights:
- Record quarterly adjusted EBITDA of
$120.4 million and net income of$78.3 million - Released 2020 Sustainability Report confirming Western's net positive climate impact
Achieved Company record quarterly average realized lumber price of$1,598 per thousand board feet- Completed the sale of an incremental 28% ownership of TFL 44 LP for proceeds of
$22.4 million - Returned
$33.5 million to shareholders via dividends and share repurchases - Grew available liquidity to
$341.1 million to support of growth strategy and balanced capital allocation
Western's second quarter adjusted EBITDA was
(millions of Canadian dollars except per share amounts and where otherwise noted) | Q2 2021 | Q2 2020 | Q1 2021 | YTD 2021 | YTD 2020 | ||||||||||
Revenue | $ | 414.4 | $ | 256.3 | $ | 322.5 | $ | 736.9 | $ | 355.4 | |||||
Export tax expense | 10.8 | 7.6 | 8.2 | 19.0 | 11.6 | ||||||||||
Adjusted EBITDA | 120.4 | 29.5 | 62.9 | 183.4 | 12.0 | ||||||||||
Adjusted EBITDA margin | 29% | 12% | 20% | 25% | 3% | ||||||||||
Operating income (loss) prior to restructuring and other items | $ | 105.7 | $ | 14.6 | $ | 48.8 | $ | 154.5 | $ | (13.8) | |||||
Net income (loss) | 78.3 | 8.5 | 53.8 | 132.1 | (12.5) | ||||||||||
Earnings (loss) per share, basic and diluted | 0.21 | 0.02 | 0.14 | 0.35 | (0.03) | ||||||||||
Net cash (debt), end of period | 97.7 | (152.1) | 0.6 | ||||||||||||
Liquidity, end of period | 341.1 | 95.1 | 244.0 |
"We successfully increased North American lumber production and shipments in the first half of the year to benefit from record commodity pricing," said
Following the quarter, on
Summary of Second Quarter 2021 Results
Adjusted EBITDA for the second quarter of 2021 was
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 COVID-19. Our business has not been significantly impacted by COVID-19 year-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
The North American lumber market was exceptionally strong in the second quarter as demand from the new home construction and the repair and renovation segments outpaced supply, driving pricing to record levels. We took advantage of these market conditions by increasing our shipments into
Lumber revenue rose 87% compared to the second quarter of last year, on increased North American shipments and higher prices for our products. Sales volumes increased by 45% driven by a 125% increase in commodity lumber shipments as compared to the second quarter last year, while shipments of Cedar,
Our average realized lumber price was
Log revenue was
By-product revenue was
Operations
We continued to leverage our flexible operating platform by redirecting production from export markets into the North American market in the second quarter of 2021.
Lumber production of 207 million board feet was 45% higher than the second quarter last year and was 4% higher than the first quarter of 2021. Lumber production in the second quarter of 2020 was impacted by the re-start of our BC operations following the end of the Strike and the initial slowdowns caused by COVID-19.
We achieved higher lumber production through increased operating hours, improved production efficiency, and improved sawmill recovery. The shift to increased North American commodity lumber production contributed to improved recovery, while increasing secondary processing requirements and related costs. As a safety precaution, we temporarily curtailed certain operations by up to eight shifts in late
We harvested 1,012,000 cubic metres of logs from our coastal operations in BC in the second quarter of 2021, as compared to 1,224,000 cubic metres in the second quarter last year and 688,000 cubic metres in the first quarter of 2021. Harvest was impacted by a heavy snowpack early in the second quarter of 2021, followed by extreme heat curtailments at the end of the quarter, as well as harvest permit delays. Harvest production costs increased as a result of a doubling of stumpage rates as compared to the second quarter of last year.
BC coastal saw log purchases were 227,000 cubic metres, a decrease of 4% from the same period last year. Log markets remain competitive with demand outpacing current supply.
Second quarter freight expense increased by
Adjusted EBITDA and operating income included
Comparative results for the second quarter of 2020 included CEWS proceeds of
Selling and Administration Expense
Second quarter selling and administration expense was
Record financial results and a 17% share price appreciation in the second quarter of 2021 had a net incremental expense impact of
Comparatives were affected by 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
Net income for the second quarter of 2021 was
Summary of Year to Date 2021 Results
Adjusted EBITDA for the first six months of 2021 was
Operating income prior to restructuring and other items was
Sales
Lumber revenue for the first half of 2021 was
Improved lumber pricing led to an 18% increase in average lumber price realization as compared to the first half of last year, despite a lower specialty product mix. Significantly improved pricing, resulting from the North American finished lumber focus, was offset by the 9% appreciation in average Canadian to US dollar exchange rate period-over-period.
Log revenue was
A return to normal operating rates led to higher by-product shipments from the same period last year, while average chip pricing improved 55% period-over-period. These factors grew revenue to
Operations
Lumber production in the first half of 2021 was 406 million board feet, 99% higher than the same period last year. Comparative period lumber production was negatively impacted by curtailed BC operations during the Strike, processing log inventory that had degraded during the Strike, and by the initial impacts of COVID-19.
We achieved higher lumber production through increased operating hours, improved production efficiency, and improved sawmill recovery. The shift to increased North American commodity lumber production contributed to improved recovery, while increasing secondary processing requirements and related costs. As a safety precaution, we temporarily curtailed certain operations by up to eight shifts in late
Log production for the first half of 2021 was 1,700,000 cubic metres, an increase of 22% over the same period last year. 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. In 2021, we increased private timber production which reduced requirements for higher cost purchased logs. We increased BC coastal saw log purchases by 12% from the same period last year to support sawmill production.
Harvesting in the first half of 2021 was impacted by a heavy snowpack early in the season, followed by extreme heat curtailments at the end of the period. Higher harvest production costs in the first half of 2021 resulted from an almost doubling of stumpage rates as compared to the same period in 2020.
Freight expense for the first half of 2021 was
Adjusted EBITDA and operating income in the first six months of 2021 included
Comparative results also included CEWS proceeds of
Selling and Administration Expense
Selling and administration expense for the first half of 2021 was
Year-to-date mark-to-market expense on long-term compensation liabilities was
Comparatives were affected by the recognition 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 prices resulted in a net income for the first half of 2021 of
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.
Sustainability and Environmental, Social and Governance Advancements
Net Positive Climate Impact
Our 2020 Sustainability Report was released in the second quarter of 2021, detailing our progress and commitment to key sustainability initiatives. This report includes the results our first full lifecycle carbon accounting, which confirmed the positive role Western's sustainable forest management practices and wood products have in fighting against climate change.
During 2018 and 2019, Western's activities, including the sustainable management of forests in our care, resulted in 14.2 million tonnes of CO2 equivalent being removed from the atmosphere.
Our latest Sustainability Report is available on our website at www.westernforest.com/responsibility/.
Sustainability-Linked Credit Facility
On
The Amended Credit Facility maturity date was extended to
First Nations, Employees and Community
As part of further developing First Nations relationships, Western completed the next phase of the
In addition, in
During 2021, Western has also continued to demonstrate our commitment to our employees and communities in which we operate. This has included providing non-executive employees a second COVID-19 related safety performance bonus, to show appreciation for their safety commitment and dedication during the pandemic. We have also committed or spent
Further details of these community and First Nations initiatives are available on our website at www.westernforest.com/responsibility/community/.
Sale of Ownership Interests in TFL 44 Limited Partnership
On
On
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
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 second quarter of 2023.
Sale of Other Non-Core Assets
Through the first six months of 2021, Western has completed
Pending Sale of Somass Division Assets
On
On
The Somass sawmill was indefinitely curtailed in
Timber Tenure Reduction
Approximately 89% of Western's 5,946,000 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 25-year term.
In the latter half of 2021, 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.
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.
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, 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
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
Old-Growth Logging Deferral
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 2,000-hectare old growth logging deferral area and TFL 44 LP's forestry activity continues as planned.
The Province has indicated that additional deferrals may be forthcoming and 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.
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
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.
During the first half of 2021, we repurchased 15,723,116 common shares for
As at
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; 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.
For more detail on our strategic initiatives and actions, refer to "Strategy and Outlook" in our Management's Discussion and Analysis for the year ended
Sales & Marketing Strategy Update
To capitalize on a strong North American market in the first half of 2021, we redirected lumber production from relatively weak export markets. We targeted sales to selected customers in the North American treating sector where our product mix could provide the most value. With the recent return to more normalized North American lumber pricing, and relative strength in export markets, we anticipate redirecting some of our production back into export markets in the second half of 2021.
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 Japanese Cedar products program and ongoing
Market Outlook
After reaching a record high in May, North American commodity lumber markets have returned to more normalized pricing. An easing of COVID-19 related restrictions reintroduced alternatives to time at home, ultimately slowing repair and renovation activity. The resulting reduction in demand, and seasonally higher production, has led to a market rebalancing. We expect near-term commodity lumber market volatility to continue as North American demand and supply find equilibrium.
Demand and pricing for our Cedar and Niche products has improved across all product categories over the last few quarters on the strength of a robust residential repair and renovation market. Continued strength in this market and constrained supply should continue to support pricing through the remainder of the year.
In
Domestic saw log prices increased in the first half of the year in response to improved lumber markets. We expect pricing to remain higher in the near-term due to limited supply. The price for Northern Bleached Softwood Kraft pulp has stabilized after retreating from a recent high, and that should support current pricing for our pulp logs and sawmill residual chips.
The ongoing challenges related to COVID-19 continue to create uncertainty in our business and could lead to additional pricing volatility. 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 into the future. 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 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. For a comprehensive history of the softwood lumber trade dispute and related North American Free Trade Agreement ("NAFTA") challenge proceedings, please see "Risks and Uncertainties" in our Management's Discussion and Analysis for the year ended
Western expensed
In the fourth quarter of 2020, Western recognized an export tax recovery of
On
At
Including wholesale lumber shipments, our sales to the US market represent approximately 41% of our total revenue in the first half of 2021, as compared to 29% in the same period last year and 32% 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 | Q2 | Q2 | Q1 | YTD | YTD | ||||||
Net income (loss) | $ | 78.3 | $ | 8.5 | $ | 53.8 | $ | 132.1 | $ | (12.5) | |
Add: | |||||||||||
Amortization | 13.3 | 14.2 | 12.9 | 26.2 | 25.2 | ||||||
Changes in fair value of biological assets | 1.5 | 0.6 | 1.2 | 2.7 | 0.6 | ||||||
Operating restructuring items | 0.5 | 0.6 | 0.5 | 1.0 | 1.0 | ||||||
Other income (1) | (1.4) | (0.2) | (16.7) | (18.1) | (1.8) | ||||||
Finance costs | 0.4 | 2.2 | 0.9 | 1.3 | 4.4 | ||||||
Current income tax (recovery) | 31.2 | - | 8.8 | 40.0 | (0.1) | ||||||
Deferred income tax (recovery) | (3.3) | 3.5 | 1.5 | (1.8) | (4.8) | ||||||
Adjusted EBITDA | $ | 120.4 | $ | 29.5 | $ | 62.9 | $ | 183.4 | $ | 12.0 | |
Adjusted EBITDA margin | |||||||||||
Total revenue | $ | 414.4 | $ | 256.3 | $ | 322.5 | $ | 736.9 | $ | 355.4 | |
Adjusted EBITDA | 120.4 | 29.5 | 62.9 | 183.4 | 12.0 | ||||||
Adjusted EBITDA margin | 29% | 12% | 20% | 25% | 3% | ||||||
Net debt to capitalization | |||||||||||
Net debt | |||||||||||
Total debt | $ | 1.9 | $ | 154.2 | $ | 2.5 | |||||
Cash and cash equivalents | (99.6) | (2.1) | (3.1) | ||||||||
Net debt (cash) | $ | (97.7) | $ | 152.1 | $ | (0.6) | |||||
Capitalization | |||||||||||
Net debt (cash) | $ | (97.7) | $ | 152.1 | $ | (0.6) | |||||
Add: equity | 611.5 | 461.4 | 552.6 | ||||||||
Capitalization | $ | 513.8 | $ | 613.5 | $ | 552.0 | |||||
Net debt to capitalization | - | 25% | - |
Figures in the table above may not equal or sum to figures presented elsewhere due to rounding. |
(1) Other income, 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, 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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