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Western Announces Third Quarter 2019 Results

Press Release

November 6, 2019 – Vancouver, British Columbia – Western Forest Products Inc. (TSX: WEF) (“Western” or the “Company”) reported negative adjusted EBITDA of $16.6 million in the third quarter of 2019. Results were impacted by ongoing strike action by the United Steelworkers Local 1-1937 (“USW”) and weaker markets. The Company continued to service customers and partly mitigated losses arising from labour disruptions at all of its timberlands and the majority of its British Columbia (“BC”) based manufacturing operations by selling available inventory, deferring certain expenditures, and from profitable United States (“US”) based operations.

Third Quarter Summary

  • Reduced net debt by $7.2 million, which improved liquidity to $141.3 million
  • Shipped 90 million feet of lumber to our customers despite the USW strike
  • Achieved 80% of third quarter 2018 log sales volumes despite not harvesting in Company timberlands
  • Returned $8.4 million to shareholders via regular, quarterly dividend
  • Completed $1.9 million of share repurchases, cancelling 1.2 million common shares

Western’s negative adjusted EBITDA of $16.6 million in the third quarter of 2019 compared to adjusted EBITDA of $32.3 million in the third quarter of 2018, and $15.1 million reported in the second quarter of 2019. Operating loss prior to restructuring and other income was $24.2 million in the third quarter of 2019, compared to operating income prior to restructuring and other income of $23.4 million in third quarter of 2018, and $1.4 million reported in the second quarter of 2019.

Net loss of $18.7 million ($0.05 net loss per diluted share) was reported for the third quarter of 2019, as compared to net income of $15.1 million ($0.04 net income per diluted share) for the third quarter of 2018 and net loss of $0.7 million ($nil per diluted share) in the second quarter of 2019.

Q3 Q3 Q2 YTD YTD
(millions of dollars except per share amounts and where otherwise noted) 2019 2018 2019 2019 2018
Total revenue $ 141.6 $ 292.5 $ 310.3 $ 727.6 $ 911.9
Export tax 5.5 11.5 9.7 24.4 32.9
Stumpage 10.9 14.2 26.4 38.9
Adjusted EBITDA (16.6) 32.3 15.1 16.6 125.5
Adjusted EBITDA margin -11.7% 11.0% 4.9% 2.3% 13.8%
Operating income prior to restructuring items and other income (expense) $ (24.2) $ 23.4 $ 1.4 $ (17.1) $ 95.7
Net income (loss) (18.7) 15.1 (0.7) (17.5) 63.9
Basic and diluted earnings per share (in dollars) (0.05) 0.04 (0.05) 0.16
Net debt (cash) – end of period 107.0 (42.8) 114.1
Total liquidity – end of period 141.3 291.8 133.9

“In the third quarter, we focused on delivering targeted products to our selected customers and limiting the impacts of the USW strike on our financial position,” said Don Demens, President and Chief Executive Officer. “Looking ahead, we are committed to resolving the current labour dispute in a manner that supports our customers and employees, while ensuring that Western remains globally competitive.”

The Company generated revenue of $141.6 million in the third quarter of 2019, as compared to $292.5 million in the third quarter of 2018, and $310.3 million in the second quarter of 2019. The Company partially mitigated the impacts of the strike by selling unencumbered lumber and log inventories during the third quarter of 2019.

Summary of Third Quarter 2019 Results

Third quarter results were significantly impacted by ongoing strike action (the “Strike”) by the USW and weak markets. All of our timberlands and most of our BC based manufacturing divisions did not operate in the third quarter of 2019 due to the Strike. We took steps to mitigate the Strike’s impact on our customers, business and cash flows by actively selling unencumbered inventories, drawing down working capital, and deferring certain expenditures.

Adjusted EBITDA for the third quarter of 2019 was negative $16.6 million, as compared to positive EBITDA of $32.3 million from the same period last year. Operating loss prior to restructuring and other items was $24.2 million, as compared to operating income of $23.4 million in the same period last year.

Our near-term focus remains on managing our balance sheet, cash flow and working capital, and reaching a reasonable collective agreement that creates certainty for our employees while maintaining Western’s globally competitive position.

Sales

Lumber revenue of $109.7 million was 53.9% lower than the same period last year. Lumber shipment volumes of 90 million board feet were 57.5% lower than the same period last year due to the Strike, as most of our manufacturing operations were shutdown in the third quarter of 2019. We sold the majority of our unencumbered inventory, processed certain unencumbered logs at custom cut facilities, and grew our wholesale lumber program to service our customers and help mitigate the impact of the Strike. Our U.S.-based Columbia Vista division continues to perform in line with our expectations and has been a positive addition to our business and product mix.

Despite difficult market conditions, our average realized lumber pricing increased 8.5% due to an improved specialty product mix and a weaker Canadian dollar (“CAD”) to United States dollar (“USD”). Specialty lumber represented 64.4% of third quarter shipments compared to 50.0% in the same period last year, as we increased wholesale lumber and custom cut volumes to meet customer needs.

Log revenue was $27.4 million in 2019, a decrease of 18.5% from the same period last year. To mitigate the impact of the Strike on our business, we accelerated unencumbered log inventory sales in the quarter to help manage cash flow and reduce working capital levels.

By-product revenue was $4.5 million, including $1.2 million from our Columbia Vista operation. By-product revenue decreased by 78.3% as compared to the same period last year as most of our BC coastal operations were shut down due to the Strike.

Operations

To support our selected customers during the Strike, we redirected available inventory to active divisions and operated on a sub-optimal basis resulting in higher transportation and operating costs.

Leading up to the Strike, we drew down inventory at USW-certified operations to avoid restricted access to inventory and to supply our remanufacturing and custom cut operations; however, as certain inventory was encumbered by the Strike and degraded over the third quarter of 2019, we expensed an additional $1.7 million provision against this restricted inventory.

We incurred $19.2 million of expenses arising from curtailed operations and related operating inefficiencies as a result the Strike, including $1.2 million of third quarter benefit costs paid on behalf of the USW for its striking members. After the USW’s refusal to commit to reimbursing these expenses, we made the difficult decision to discontinue paying benefit premiums on the USW’s behalf in the third month of the Strike.

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