STEVEN HOFER
BRITISH COLUMBIA – Western Forest Products Inc. (TSX: WEF) reported net income of $6.6 million and adjusted EBITDA of $17.3 million in the third quarter of 2022. Results reflect compressed margins on lower lumber production and shipments and $23.1 million of inventory provisions, partly offset by an $18.0 million export tax recovery.
Net income in the third quarter of 2022 was $6.6 million ($0.02 per diluted share) as compared to net income of $38.6 million ($0.12 per diluted share) for the second quarter of 2022, and net income of $42.2 million ($0.12 per diluted share) in the third quarter of 2021.
Western’s third quarter adjusted EBITDA was $17.3 million, as compared to adjusted EBITDA of $66.2 million in the second quarter of 2022, and adjusted EBITDA of $66.3 million in the third quarter of 2021. Operating income prior to restructuring and other items was $4.7 million, compared to income of $53.4 million in the second quarter of 2022, and $53.5 million of income reported in the third quarter of 2021.
“Our results on the quarter reflect challenging global market conditions, reduced lumber sales volumes and continued pressure on log costs and logistics,” said Steven Hofer, Western’s President and Chief Executive Officer. “While key markets are stabilizing, the current headwinds emphasize the need for improved operational execution on costs, recovery, and product values, including moving forward on our strategy to move up the product value chain. To that end, we made progress in the quarter in advancing strategic, value- focused capital projects and closing on the acquisition of the Calvert business, adding glulam to our portfolio of specialty products.”
Steven Hofer was appointed President and Chief Executive Officer effective September 7, 2022. Cheri Phyfer, who was appointed to the Board of Directors effective March 2019, tendered her resignation effective November 1, 2022, for personal reasons. Fiona Macfarlane has been appointed to the Environmental, Health and Safety Committee to replace Ms. Phyfer.
Summary of Third Quarter 2022 Results
Adjusted EBITDA was $17.3 million, as compared to $66.3 million in the third quarter of 2021. Results in the third quarter of 2022 reflect compressed margins on lower lumber shipment volumes and $23.1 million of inventory provisions, partly offset by an $18 million export tax recovery. Net income in the third quarter of 2022 was $6.6 million as compared to net income of $42.2 million in the same period last year.
Adjusted EBITDA in the third quarter of 2022 was impacted by incremental costs including $22.5 million in additional stumpage expenses, higher log purchase prices, and elevated operating costs. In addition, we incurred an incremental $3.0 million in freight expense and an incremental $1.8 million in export taxes despite lower lumber shipments. Product price declines resulted in $23.1 million of additional inventory provisions in the third quarter of 2022, as compared to $3.7 million recognized in the same period of 2021. Third quarter operating income prior to restructuring and other items was $4.7 million in 2022, as compared to $53.5 million in the same period last year.
Sales
Revenue in the third quarter of 2022 was consistent with the same period last year despite weaker markets. We increased sawlog sales to match supply to our sawmill requirements, and offset lower lumber shipments.
Lumber revenue declined by 11% as compared to the third quarter of last year on reduced shipments and a lower average realized lumber price. Lumber sales volumes decreased by 8%, with weaker demand across most segments driving a 27% decline in our specialty product shipments. Among factors influencing reduced lumber demand were rising borrowing costs and inflation, high customer inventories, and the impact of the Yen devaluation on North American market lumber price competitiveness in Japan.
Our average realized lumber price was $1,495 per thousand board feet, a decrease of 4% from the third quarter of 2021. Price realization was impacted by a reduction in the percentage of specialty shipments to 39% from 49% in the third quarter of last year, partly offset by the benefit of a weaker average Canadian to
US Dollar exchange rate. The average CAD to USD exchange rate fell by 4% as compared to the same period last year.
Log revenue of $72.5 million in the third quarter of 2022 rose by 77% from the comparative period last year. We increased sawlog shipments as compared to the same period last year, capitalizing on stronger log markets. A higher mix of domestic to pulp log sales contributed to the 43% increase in average realized log price over the same period last year. Declining lumber markets through the third quarter of 2022 resulted in significant declines in log prices at the end of the quarter.
By-products and other revenue was $16.4 million, an increase of $4.3 million over the same quarter last year, primarily attributable to improved by-product species mix and other revenue.
Operations
Lumber production declined by 4% in the third quarter of 2022 as compared the same period last year, due to maintenance, capital upgrades and market-related curtailments at certain large-log sawmills. We reduced production to more closely match supply to demand and manage inventory levels. We completed components of the Duke Point planer upgrades and are ramping up processing at this facility in the fourth quarter of 2022.
We harvested 800,000 cubic metres of logs from our coastal operations in BC, as compared to 690,000 cubic metres in the third quarter last year, which was impacted by prolonged fire season operating curtailments. Log harvest was reduced late in the third quarter of 2022 to more closely match mill requirements.
Stumpage expense increased by $22.5 million as compared to the same period last year. Record coastal stumpage rates as a result of record product pricing in the first half of 2022, coupled with an increase in logs harvested, drove a significant increase in stumpage expense quarter-over-quarter. Stumpage rates in the third quarter of 2022 increased 73% over the same period of 2021.
Excluding stumpage, timberlands operating costs increased over the comparative period due to higher fuel costs, incremental road building and increased heli-logging. Comparative third quarter results in 2021 include the impact of partial deferral of road building due to weather related operating curtailments.
We increased our BC coastal saw log purchases by 33% as compared to the third quarter of last year. Market log availability was constrained in the prior period due to an extended fire season.
Third quarter freight expense increased by $3.0 million over the same period last year, despite an 8% decline in lumber shipments and the absence of log exports. Higher container rates, increased use of breakbulk container shipments and fuel increases contributed to the rise in freight expense. Freight rates declined slightly through the third quarter of 2022 as global logistics constraints and fuel surcharges eased but remain significantly above rates in the comparative period.
Adjusted EBITDA and operating income included $8.0 million of countervailing duty (“CV”) and anti-dumping duty (“AD”) expense in the third quarter of 2022, as compared to duty expense of $6.2 million in the same period of 2021. During the third quarter of 2022, we recognized a recovery of $18.0 million on the finalization of duty rates for shipments made in 2020.
Excluding the export tax recovery, higher average cash deposit rates in the third quarter of 2022 as compared to the same period of 2021, and a weaker average CAD to USD exchange rate, offset the impact of reduced US-destined lumber sales volumes. Cash deposit rates in the third quarter of 2022 declined from 17.91% to 8.59% on August 4, 2022, compared to cash deposit rates of 8.99% throughout the same period of 2021.
Lumber market weakness and related declines in inventory values held at period-end led to inventory provisions of $23.1 million in the third quarter of 2022, as compared to $3.7 million in the same period last year.
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. The Company’s Board will continue to review our dividend on a quarterly basis.
On May 4, 2022, we increased our quarterly dividend from $0.01 per common share to $0.0125 per common share. Dividends of $4.1 million and $11.4 million were paid in the three- and nine-months ended September 30, 2022, respectively.
Full report can be found here.
