Western Forest Products : Q4 2020 & Fiscal 2020 REsults Release

FOR IMMEDIATE RELEASE

TSX: WEF

Western Announces Fourth Quarter 2020 Results

February 18, 2021 - Vancouver, British Columbia - Western Forest Products Inc. (TSX: WEF) ("Western" or the "Company") reported adjusted EBITDA of $71.1 million in the fourth quarter of 2020. Western capitalized on strong North American lumber markets by growing Western Red Cedar ("WRC") shipments, and by redirecting commodity production from weaker export markets into the speciality treated lumber segment.

Net income in the fourth quarter of 2020 was $34.4 million ($0.09 net income per diluted share), as compared to a net loss of $29.2 million ($0.09 net loss per diluted share) for the fourth quarter of 2019 and net income of $11.5 million ($0.03 net income per diluted share) in the third quarter of 2020.

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 $71.1 million, as compared to negative adjusted EBITDA of $18.1 million in the fourth quarter of 2019, and adjusted EBITDA of $33.7 million reported in the third quarter of 2020. Operating income prior to restructuring and other items was $56.0 million, compared to a loss of $29.6 million in the fourth quarter of 2019, and $19.0 million of income reported in the third quarter of 2020. Fourth quarter financial results benefited from a non-cash export tax recovery of $31.6 million arising from the finalization of 2017 and 2018 export tax rates.

(millions of dollars except per share amounts and where otherwise noted)

Revenue

Export tax expense Export tax recovery

Adjusted EBITDA Adjusted EBITDA margin

Operating income prior to restructuring items and other income (expense) Net income (loss)

Basic and diluted earnings (loss) per share (in dollars)

Net debt, end of period

Liquidity, end of period

"We capitalized on strong North American lumber markets in the fourth quarter to deliver significantly improved financial results," said Don Demens, President and Chief Executive Officer. "I look forward to capitalizing on the successful repositioning of our balance sheet and the rising demand for sustainable, specialty lumber products."

For the year ended December 31, 2020, Western delivered adjusted EBITDA of $116.8 million compared to negative adjusted EBITDA of $1.5 million in 2019. Western reported net income of $61.2 million in 2020, as compared to a net loss of $46.7 million in the prior year.

Summary of Fourth Quarter 2020 Results

Adjusted EBITDA for the fourth quarter of 2020 was $71.1 million, as compared to negative adjusted EBITDA of $18.1 million during the same period last year. The recovery of export tax attributable to the final determination of 2017 and 2018 United States ("US") imposed export tax rates accounted for $31.6 million of adjusted EBITDA. We grew fourth quarter adjusted EBITDA, despite volatility in North American commodity markets, by increasing lumber shipments, redirecting certain commodity volumes to a strong North American treating segment, and by recognizing a non-cash recovery of export tax.

Operating income prior to restructuring and other items was $56.0 million, as compared to operating loss prior to restructuring and other items of $29.6 million in the same period last year. Comparative results were significantly impacted by the Strike, which curtailed all of our timberlands and most of our British Columbia ("BC") based manufacturing operations from July 2019 through February 2020.

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 China improved marginally.

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 $256.6 million, as compared to $66.1 million in the Strike affected fourth quarter of 2019, and $208.6 million in the third quarter of 2020. We grew lumber shipments by 24% from the third quarter of 2020, led by a 60% increase in commodity lumber shipments which were mostly directed to the specialty treated lumber sector.

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 United States dollar ("USD") reduced our average realized lumber price from the comparative periods, while benchmark pricing for the majority of our products continued to rise.

Log revenue was $53.4 million, as compared to $12.1 million in the Strike affected fourth quarter of 2019, and $73.7 million in the third quarter of 2020. We achieved a higher average realized log price than the comparative periods despite a weaker sales mix and lower export market pricing. We directed the majority of our export log inventory to our sawmills to capitalize on the strong North American lumber market. Limited export log shipments originated primarily from commitments under First Nation partnership and joint venture arrangements.

By-product revenue was $8.9 million, as compared to $1.9 million in the Strike affected fourth quarter of 2019, and $8.3 million in the third quarter of 2020. By-product revenue increased from the third quarter of 2020 as a result of moderately improved chip pricing and higher by-product shipments.

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 Duke Point sawmill by 10% and temporarily curtailed our Cowichan Bay sawmill operations for two weeks to balance production to secondary processing capacity. Our Port Alberni sawmill was curtailed for two weeks due to unplanned maintenance. We have resumed operations at Cowichan Bay and Port Alberni, while Duke Point continues to run on an adjusted two-shift basis. In early February 2021, we added a second shift at our Ladysmith sawmill as lumber markets in China began to improve.

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 $24.9 million, as compared to $5.1 million in the Strike affected fourth quarter of 2019 and $22.4 million in the third quarter of 2020. An increase in container shipping rates and greater lumber shipment volumes drove an increase in freight expense over the comparative periods.

Fourth quarter adjusted EBITDA and operating income included $12.1 million of US-imposed countervailing duty ("CVD") and anti-dumping duty ("AD") expense, as compared to $3.4 million in the same period last year and $11.0 million in the third quarter of 2020. Duty expense rose as a result of increased US-destined lumber shipment volumes, which offset the benefit of the December 1, 2020 reduction in applicable combined duty rate from 20.23% to 8.99%. In addition, we recognized a $31.6 million export duty tax recovery against export tax expense in relation to the US Department of Commerce's ("DoC") final determination on assessed rates applicable to 2017 and 2018.

Selling and Administration Expense

Fourth quarter selling and administration expense was $11.9 million in 2020 as compared to $8.0 million in the Strike affected fourth quarter of 2019. Improved financial performance drove an incremental $1.5 million of incentive compensation expense, while appreciation of the Company's share price led to a $0.9 million increase in long-term compensation liabilities.

In addition to increased health and safety and IT costs associated with COVID-19 operating requirements, we expensed an incremental $0.5 million of non-recurring strategic and governance consulting fees.

Finance Costs

Lower average outstanding debt balance and the recognition of interest income on duty receivable resulted in income from financing activities of $0.5 million, as compared to finance costs of $2.2 million in the same period last year. As at December 31, 2020, the Company had drawn $70.2 million on its credit facility, significantly reduced from $114.1 million drawn at December 31, 2019.

Other Expense

We recognized other expenses of $6.4 million in the fourth quarter of 2020, including impairments of $3.6 million on non-core lands and a $2.0 million loss on asset dispositions partially offset by other income. In the same period of 2019, we recognized other expense of $5.3 million, including $2.8 million fair value reduction in private timberlands and multiple lesser non-recurring expenses related to asset acquisitions, dispositions and environmental remediation.

Net Income (Loss)

Net income for the fourth quarter was $34.4 million, as compared to net loss of $29.2 million for the same period of 2019. Net income improved as we increased shipments to strong North American markets by redirecting volumes from relatively weaker export markets, and recognized export tax recovery.

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 February 15, 2020, USW members voted in support of a 5-year agreement to replace the collective agreement that expired on June 14, 2019, resulting in the end of the Strike. Following the Strike, we performed the necessary safety and maintenance procedures before commencing a gradual restart of certain Strike-curtailed BC operations. Upon restart, our manufacturing productivity was impacted by the consumption of lower quality log inventory that had degraded during the Strike.

In late March 2020, as a result of COVID-19, we curtailed certain of our BC operations for one week to implement enhanced health and safety protocols and to re-evaluate market conditions. We then resumed operations except at our Ladysmith and Cowichan Bay sawmills which remained curtailed due to a lack of log supply. Operations resumed at our Cowichan Bay and Ladysmith sawmills on May 4 and August 4, 2020, respectively. Our US-based Columbia Vista division operations were unaffected by the Strike and took no COVID-19 related downtime.

Adjusted EBITDA for 2020 was $116.8 million, as compared to negative adjusted EBITDA of $1.5 million from the prior year. Operating income prior to restructuring items and other items was $61.2 million, as compared to an operating loss prior to restructuring items and other items of $46.7 million in the prior year. We capitalized on improvements in North American lumber and log markets, beginning in June 2020, to overcome operating losses incurred earlier in the year. COVID-19 initially reduced demand for our products and caused some customers to defer order shipments. Demand for our products slowly recovered after governments started to lift their shutdowns and other restrictions. Demand slowly began to return in China early in the second quarter, followed by Europe and North America in the third quarter. Throughout the year we levered our flexible operating platform to transition production and shipments to higher margin North American markets.

Sales

Lumber revenue grew to $737.2 million in 2020 from $628.3 million the prior year. Lumber revenue was impacted by COVID-19 and the Strike, which limited our BC based sawmill production from the third quarter of 2019 through the first quarter of 2020. Government emergency measures instituted to combat COVID-19 significantly impacted demand for our products as many customers suspended order activity in late March 2020 through mid-May 2020. We took this time to rebuild inventory depleted by the Strike, which allowed us to increase shipments as lumber markets gradually recovered through the period.

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 $200.5 million in 2020, an increase of 39% from the prior year when log production and sales were limited by the Strike. Log shipment volumes increased by 46%, led by a significant one-time increase in pulp log sales arising from degradation of logs encumbered from the Strike. A weaker log sales mix and the temporary impact of COVID-19 on log markets early in the year resulted in a 4% decline in average realized log prices.

By-products revenue decreased to $27.2 million in 2020, from $35.4 million in the prior year due to reduced chip purchase-and-resale volume, lower average annualized pricing, and temporary coastal pulp operating curtailments.

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 May 2020, we had rebuilt log decks that were depleted from the Strike. Stable operating plans have driven improved productivity and enabled us to sustain shipments into strong lumber and log markets.

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 Cowichan Bay and Ladysmith sawmills in May and August 2020, respectively. To address increased remanufacturing capacity requirements for North American commodity production,