Western Forest Products post Q2 net income of C$12.1M on sales of C$218.7M, compared with profits of C$9.8M a year earlier; lumber, log products saw healthy seasonal demand from strong domestic market
August 3, 2011
Western Forest Products Inc. (TSX: WEF.TO - News) ("Western" or "the Company") today announced results for the second quarter of 2011. The Company reported EBITDA of $21.9 million for the second quarter of 2011 compared to EBITDA of $8.2 million for the first quarter of 2011 and $21.9 million for the second quarter of 2010.
Q2 2011 HIGHLIGHTS
The Company enjoyed strong seasonal demand for its lumber and log products. Log sales revenues reached the highest levels since the second quarter of 2007, driven by a strong Canadian domestic market. In addition, by-product volumes and prices increased, largely driven by a robust pulp market. However, our EBITDA margin for the quarter was adversely impacted relative to the second quarter of 2010 by the negative impacts of the stronger Canadian dollar, increased freight charges and higher log harvesting costs.
Our liquidity position at June 30, 2011 increased to $111.7 million from $95.2 million at the end of the first quarter of 2011, and from $64.1 million a year ago.
Net income for the second quarter of 2011 was $12.1 million ($0.03 per share), on sales of $218.7 million, which compared to a net income reported in the second quarter of 2010 of $9.8 million ($0.02 per share) and a net loss reported for the first quarter of 2011 of $1.0 million (nil per share).
Second quarter 2011
Lumber sales revenues increased by 9% when compared to the second quarter of 2010 primarily due to higher shipment volumes. Despite the uncertain global economic conditions, market demand for the majority of our lumber products has shown a gradual improvement. Lumber shipments increased by 11% to 210 million board feet in the second quarter of 2011. The geographic destination of the lumber was generally consistent with the prior year, with 34% of lumber volume being shipped within Canada, 24% going to Japan, 23% to China, and 14% to the United States. Lumber sales values in the second quarter of 2011 have seen modest price increases in most major product categories, particularly commodity products, when compared to the same period last year. However, in the second quarter of 2011, the overall average lumber price realized was marginally lower at $683 per thousand board feet, compared to $694 in the same quarter of 2010. The decrease is largely attributable to the mix of lumber products sold, particularly lower volumes of high value cypress, rather than lower prices being realized, and also by the impact of the stronger Canadian dollar.
Log sales revenues in the second quarter of 2011 increased by 58% compared to the same period last year. The increase is due to an 18% increase in the volume of logs sold and average log prices realized in the second quarter of 2011 being 26%, or $15 per cubic metre, higher than a year ago. Overall log demand for the quarter was strong, relative to prior quarters, in both our domestic and export markets. Increases in volumes sold were achieved in our pulp log, peeler and shingle log sales in North American markets as well as export sales to Korea and China. Log prices have increased since the second quarter of 2010 largely because of a strong domestic pulplog market and supply shortages for most log species. Supply shortages have resulted from severe winter weather conditions through the first half of the year, with snow pack restricting harvest levels.
By-product revenues increased by $3.6 million, or 26%, in the current quarter compared to the second quarter of 2010, mainly because of increased chip production and higher chip prices. Chip production in the second quarter of 2011 increased by 25% over 2010 largely due to increased lumber production at our sawmills. Chip prices were approximately 10% higher, which is a result of higher pulp mill net realizations which drive the chip pricing formula used in our fibre agreements with certain of our customers.
EBITDA of $21.9 million reported for the second quarter of 2011 was consistent with the EBITDA reported in the same quarter last year, and a $13.7 million improvement over the $8.2 million reported in the first quarter of 2011. The EBITDA result for the second quarter of 2011 reflects increased operating levels, higher sales volumes and prices for most products and a more favorable mix of sales compared to the second quarter of 2010. However, these positive variances were offset by a negative impact of foreign exchange, increased cost of sales, higher freight costs and higher selling and administrative expenses in the current quarter.
The operating results for the second quarter of 2011 incorporated temporary shutdown costs that were $1.2 million less than those incurred in 2010, as production was increased to meet demand. Lumber production was 11% higher in the second quarter of 2011 compared to the second quarter of 2010 and our sawmills operated at 86% of capacity in the second quarter of 2011 compared to 63% of capacity in the same quarter of 2010. The majority of this increase in operating capacity relates to the Nanaimo and Ladysmith mills which ran for the second quarter of 2011, but were idle in the same quarter in 2010. Mill productivity, measured on a volume produced per shift basis, improved 4% by the end of the second quarter of 2011 compared to the same period in 2010. The heavy snowfall at the end of the first quarter of 2011 hampered log harvesting into the early part of the second quarter. Log harvesting costs were higher in the second quarter of 2011 compared to the same quarter last year because of increased spending on spur roads this year and also because a greater percentage of our logging activities were in higher cost locations.
As previously mentioned, our operating results were negatively impacted by an approximate 6% strengthening in the value of the Canadian dollar relative to the United States dollar from the first quarter of 2010, which reduced our Canadian dollar proceeds received on United States dollar denominated sales (the major share of our lumber sales are denominated in United States dollars, including those to China).
Total freight costs were $24.1 million in the second quarter of 2011, which compared to the second quarter of 2010 cost of $17.9 million. Shipment volumes of lumber were higher in the current quarter which accounts for the majority of the $6.2 million increase. The balance of the increase results from an increased proportion of our shipments being made to China in 2011, which incur relatively more costly ocean freight, and also the impact of rising oil prices on general freight rates.
Selling and administration costs increased by $0.9 million to $6.7 million in the current quarter compared to $5.8 million in the same quarter of 2010, primarily because of increased salary costs.
Year to date, June 30, 2011
Total sales revenues for the first six months of 2011 were $399.5 million, an increase of 25% over the sales revenues for same period in 2010. Lumber, log and by-product sales were higher in the current six months period by 17%, 54% and 30% respectively. Higher shipment volumes for all primary product categories, logs in particular, contributed most of the increase. This increase was a function of stronger market demand for logs and lumber. Our lumber production was 13% higher in the first six months of 2011 compared to 2010, which led to greater chip production levels thus increasing by-product revenues. Increased sales prices of logs and by- products were the other key contributors to the revenue increase. Partially offsetting these was the negative impact on revenues of the stronger Canadian dollar in the current six month period compared to 2010. The Canadian dollar was, on average, 6% stronger relative to the US dollar over the respective periods.
EBITDA for the six months to June 30, 2011 was $30.1 million which is marginally less than the EBITDA for the same period of 2010 of $31.2 million. Despite the benefits of the revenue increases achieved for the six months to June 30, 2011 compared to the six months to June 30, 2010, offsetting this were increases to our cost of sales including log costs, increases in freight costs and selling and administration costs over the respective periods.
Non-operating income and costs
Finance costs decreased from $3.4 million in the second quarter of 2010 to $1.8 million in the current quarter. This decrease is primarily attributable to a reduction in the outstanding debt amount over the respective periods resulting from the proceeds of non-core asset sales being used to pay down debt subsequent to March 31, 2010. Also contributing to this reduction is the benefit of lower interest rates negotiated in the amendments to the loan agreements effected in late December 2010.
Other expenses of $0.1 million for the second quarter of 2011 and other income of $0.3 million in the second quarter of 2010 relate primarily to net losses and gains respectively on various non-core asset sales. In the first quarter of 2011 other expenses of $0.5 million related to a gain on the sale of an equity interest in certain real estate properties of $2.4 million, an expense incurred of $2.5 million to amend the terms of certain contractual arrangements, and other items totaling expenses of $0.4 million. In comparison, the first quarter of 2010 included other income of $10.4 million, which primarily related to a receipt in January 2010 of $8.9 million being the balance of the proceeds related to the establishment of a jointly-owned entity in 2009.
Markets and Outlook
The worldwide economic outlook remains uncertain with ongoing concerns about the potential impact of the European sovereign debt crisis, and continuing weakness in the United States economy, in particular. While some signs point to the fact that global economic conditions have improved, significant concern remains.
With the market weakness in the United States, our commodity lumber program continues to focus on China. China is expected to be our highest volume export lumber market for 2011, with strong demand for both lumber and logs. However, the Chinese government has recently undertaken a number of measures to slow their economy by restricting credit. These restrictions may impact the pace of residential development in China and ultimately lumber demand. We do anticipate some slow-down of sales growth in this market for the balance of 2011, as a result of such restrictions and seasonal demand slow-down.
We expect that the severe infrastructure damage caused by the earthquake and resulting tsunami will continue to slow lumber demand in Japan in the third quarter. As a result, we anticipate taking some market related down-time at certain mills in our system during the third quarter. However, we expect that most of Japan's infrastructure constraints will be resolved during the third quarter and that demand for lumber will start to improve in the fourth quarter. Western has participated in certain co-sponsored government and industry relief projects that will aid in the rebuilding of Japan.
Despite recent increases in new housing starts in the United States, the housing market there continues to have deep structural issues which preclude any significant housing market recovery. Current reports indicate that job growth is slowing in most regions (especially areas with high concentrations of government employees). Existing home sales continue to languish with increasing numbers being distress sales. There are also indications of an increasing trend to rent rather than buy, which means more emphasis on multi-unit home construction rather than new single unit dwellings.
North American demand for specialized commodities such as treated products and timbers is expected to decline for the balance of the year in line with seasonal expectations. We expect to increase our specialized commodity sales to China in the third and fourth quarters to partially offset this trend.
The seasonal upswing in cedar demand peaked in the second quarter. Cedar sales volumes are expected to fall for the balance of the year due to a weak United States housing market and seasonal slowdown in renovations.
Our sales into the niche lumber markets in North America and Europe are expected to be stronger over the second half of the year as we expect to have additional high grade log supply in the third quarter which will help increase our niche product sales. We continue to diversify our customer and product base in this market segment.
As previously announced, we plan on investing $125 million of strategic capital into Western's operations over the next several years. We continue to work through our strategic plan and evaluate the best opportunities to inject capital into the business. We plan to commence strategic, high return projects totaling over $3 million in the latter half of 2011. We will also focus on improving our product margins through a number of non-capital initiatives, while at the same time ensuring that we balance our working capital requirements with market demand in the coming months.
Western will continue to pursue opportunities to sell non-core assets. However, our net debt and liquidity situation has significantly improved over the past year. Any proceeds will first be used to reduce the revolving term loan and then any surplus will be used to provide additional liquidity.
The Company's Q2 2011 news release, management's discussion and analysis, unaudited condensed consolidated interim financial statements and notes to the financial statements have been filed on SEDAR and are also available on the Company's website at www.westernforest.com.