VANCOUVER, British Columbia, May 06, 2020 (GLOBE NEWSWIRE) — Western Forest Products Inc. (TSX: WEF) (“Western” or the “Company”) reported negative adjusted EBITDA of $17.4 million in the first quarter of 2020. Results were impacted by strike action that concluded in mid-February at the majority of its BC-based operations, a graduated return to work through the second half of the quarter, weak North American markets, and the novel Coronavirus pandemic (“COVID-19”). The Company mitigated losses arising from labour disruptions by selling available inventory and minimizing certain expenditures.
Western curtailed production at its manufacturing operations for one-week in March to implement enhanced health and safety protocols and re-evaluate market conditions arising from COVID-19. In accordance with directions from provincial and federal authorities, the Company resumed operations to continue to service customers and provide support for thousands of industry jobs.As a result of business uncertainty caused by COVID-19, Western has suspended its quarterly dividend. The Company’s Board of Directors will continue to review the dividend quarterly.First Quarter SummaryReached a 5-year collective bargaining agreement with United Steelworkers Local 1-1937 (“USW”)Announced the sale of partial interests in certain Alberni Valley operations for $36.2 millionClosed with $113.5 million of available liquidity, exceeding ongoing operating capital requirementsNet loss of $21.0 million ($0.06 net loss per diluted share) was reported for the first quarter of 2020, as compared to net income of $1.9 million ($nil per diluted share) for the first quarter of 2019 and net loss of $29.2 million ($0.09 net loss per diluted share) in the fourth quarter of 2019.Western’s negative adjusted EBITDA of $17.4 million compared to adjusted EBITDA of $18.1 million in the first quarter of 2019, and negative $18.1 million reported in the fourth quarter of 2019. Operating loss prior to restructuring and other items was $28.4 million, compared to $5.7 million in first quarter of 2019, and $29.6 million loss reported in the fourth quarter of 2019. 

“I’m proud of our employees and business partners for safely returning to work and for their rapid implementation of enhanced safety protocols to address the health risk associated with COVID-19,” said Don Demens, President and Chief Executive Officer. “Through their dedication and collaboration, we continue to safely operate, service customers and sustain jobs.”Summary of First Quarter 2020 ResultsFirst quarter results were significantly impacted by strike action (the “Strike”) by the United Steelworkers Local 1-1937 (“USW”), the gradual restart of certain Strike-curtailed British Columbia (“BC”) operations, and the negative impacts of the novel Coronavirus pandemic (“COVID-19”) on markets and production. As a result, our BC operations operated on a limited basis in the quarter.We took steps during the Strike to mitigate the impact on our customers, business and cash flows by actively selling unencumbered inventories and drawing down working capital. On February 15, 2020, USW members voted in support of a tentative 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 degraded due to the duration of the Strike. Operating efficiency improved through March as we improved the mix of our log and lumber inventories.We curtailed certain operations for one-week in late March to implement enhanced health and safety protocols and to re-evaluate market conditions arising from COVID-19. For more details on these health and safety measures, refer to the “COVID-19” section.Adjusted EBITDA for the first quarter of 2020 was negative $17.4 million, as compared to positive EBITDA of $18.1 million from the same period last year. Operating loss prior to restructuring and other items was $28.4 million, as compared to operating income of $5.7 million in the same period last year.Our near-term focus remains on ensuring the health and safety of our employees, managing our balance sheet, and servicing our customers.SalesLumber and log sales volume and revenue were impacted by the Strike and COVID-19. Lumber revenue in the first quarter was $83.2 million, a decrease of 62.0% from the same period last year. Lumber shipment volumes of 64 million board feet were 68.5% lower than the same period last year due to the Strike and COVID-19. We continued to process logs at custom cut facilities and execute on our wholesale lumber strategy, to service our customers and to mitigate Strike impacts. We increased wholesale lumber shipments as compared to the same period last year. Our United States (“US”) based Columbia Vista division continued to perform in line with our expectations and has been a positive addition to our business and product mix.Our average realized lumber pricing increased 20.6% from the same period last year, as the result of an improved specialty product mix and a weaker Canadian dollar (“CAD”) to US dollar (“USD”). Specialty lumber represented 73% of first quarter shipments compared to 52% in the same period last year. Although the average CAD-USD foreign exchange rate declined just 1% over the comparative period, significant foreign exchange volatility in March 2020 resulted in a 5% reduction in the closing exchange rate period over period.Log revenue was $12.9 million in the first quarter of 2020, a decrease of 68.7% from the same period last year, due to limited log production during the Strike and retaining inventory to restock our supply chain through March 2020.By-product revenue was $3.0 million, a decrease of 80.8% as compared to the same period last year as most of our BC coastal operations were curtailed for a majority of the first quarter due to the Strike.OperationsTo support our selected customers during the Strike, we continued to redirect available inventory to active divisions. We operated on a sub-optimal basis during the Strike resulting in higher transportation and operating costs.An incremental $13.8 million in Strike-related operating expense was recognized in the first quarter, including curtailment costs during the Strike, production inefficiencies on start-up and additional safety and maintenance procedures required to resume operations. Operating expense was also negatively impacted by $2.9 million of incremental timberlands provisions, including for aged log inventory and silviculture expense. We also incurred $1.1 million of COVID-19 related operating expenses in March 2020.Lumber production of 61 million board feet was 69.8% lower than the same period last year. Incremental production from our US-based Columbia Vista division, acquired in February 2019, and volumes from our custom cut program were more than offset by the curtailment of our BC operations due to the Strike.We produced 167,000 cubic meters of logs from our BC coastal operations in the first quarter of 2020 compared to production of 922,000 cubic metres in the same quarter of last year. First quarter log production in 2020 was impacted as all our USW-certified timberlands operations were curtailed during the Strike.BC coastal saw log purchases were 141,000 cubic metres, a 32.2% decrease from the same period last year. Reduced saw log purchases resulted from extremely low BC coastal harvest activity and volumes generated from our joint venture arrangements.Freight expense decreased by $16.8 million from the same period last year due to lower shipment volumes.First quarter adjusted EBITDA and operating income included $4.0 million of countervailing duty (“CVD”) and anti-dumping duty (“AD”), as compared to $9.2 million in the same period last year. Duty expense declined as a result of reduced US-destined lumber shipment volumes.Selling and Administration ExpenseFirst quarter selling and administration expense was $6.4 million in 2020 as compared to $8.8 million in the first quarter of 2019, due to lower share-based and performance compensation expense and as a result of minimizing expenses during the Strike.Finance CostsFinance costs were $2.2 million, compared to $1.5 million in the same period last year, primarily due to a comparatively higher average outstanding debt and a higher average interest rate applicable in 2020.Income TaxesLower operating earnings led to an income tax recovery of $8.4 million being recognized in the first quarter of 2020, as compared to income tax expense of $0.8 million in the same quarter of last year. The Company is exploring all opportunities to accelerate receipt of its $16.7 million income tax receivable.Net Income (Loss)Net loss for the first quarter of 2020 was $21.0 million, as compared to net income of $1.9 million for the same period last year. Results were significantly impacted by the Strike, the restart of Strike-curtailed BC operations and COVID-19.Sale of Ownership Interests in Limited PartnershipsOn March 16, 2020, Western announced it had reached an agreement whereby Huumiis Ventures Limited Partnership (“HVLP”), a limited partnership beneficially owned by Huu-ay-aht First Nations, will acquire a majority ownership interest in TFL 44 Limited Partnership (“TFL 44 LP”) and an ownership interest in a newly formed limited partnership that will own the Alberni Pacific Division Sawmill (“APD Sawmill”) for total consideration of $36.2 million (the “Transaction”).TFL 44 LP holds certain assets in Port Alberni, British Columbia, including Tree Farm Licence 44 and other associated assets and liabilities. HVLP will acquire an incremental 44% ownership interest in TFL 44 LP from Western for $35.2 million. On completion of the Transaction, HVLP will own 51% of TFL 44 LP and Western will own 49% of TFL 44 LP. Western may sell other area First Nations, including HVLP, a further incremental ownership interest of up to 26% in TFL 44 LP, under certain conditions. Western and TFL 44 LP will enter into a long-term fibre agreement to continue to supply Western’s British Columbia coastal manufacturing operations, which have undergone significant capital investment over the past several years.Western will transfer its APD Sawmill into a limited partnership (“APD LP”) along with certain other assets and liabilities. HVLP will acquire a 7% ownership interest in APD LP from Western for $1.0 million, and subject to further negotiations, HVLP will have an option to purchase an incremental ownership interest in APD LP, which may include a majority interest.The completion of the Transaction is subject to satisfaction of customary closing conditions, financing, and certain third-party consents, including approval by the BC Provincial Government and the Huu-ay-aht First Nations People’s Assembly. The Transaction is anticipated to close in the third quarter of 2020 as COVID-19 restrictions have delayed the administration of certain closing conditions.Dividend & Capital Allocation UpdateQuarterly DividendIn response to the global economic impacts of COVID-19 on our business and sector, Western is suspending its quarterly dividend until further notice. We believe that this is a prudent decision in order to maintain financial flexibility and liquidity due to the global uncertainty resulting from COVID-19.The Board of Directors will continue to review the Company’s dividend on a quarterly basis. Any decision to declare and pay dividends in the future will be made at the discretion of our Board of Directors, after considering our operating results, financial condition, cash requirements, financing agreement restrictions and other factors our Board may deem relevant.Capital ExpendituresDue to COVID-19 and its impact on global markets and operating conditions, we plan to incur only safety, environmental, maintenance and committed capital expenditures in the near-term. Strategic and discretionary capital projects will remain on hold until there is greater operational certainty. We will continue to evaluate opportunities to invest strategic capital in jurisdictions that create the opportunity to grow long-term shareholder value, but in the near-term will be prioritizing liquidity and financial flexibility.Normal Course Issuer BidOn August 2, 2019, we renewed our Normal Course Issuer Bid (“NCIB”) permitting the purchase and cancellation of up to 18,763,888 of the Company’s common shares or approximately 5% of the common shares issued and outstanding as of August 1, 2019. 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.In the three months ended March 31, 2020, the Company did not repurchase any common shares. As at May 6, 2020, 18,763,888 common shares remain available to be purchased under the current NCIB. The NCIB expires on August 7, 2020.COVID-19Western 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.Health and safety protocols currently being enforced include travel restrictions; self-isolation instructions for those who have travelled, are ill, exhibiting symptoms of COVID-19 or have come in direct contact with someone with COVID-19; implementing physical distancing measures; restricting site access to essential personnel and activities; increasing cleaning and sanitization in workplaces; and where possible, providing those who can work from home the ability to exercise that option. We continue to monitor and review the latest guidance from health officials and experts to ensure our protocols meet the current required standards.In response to the impacts of the COVID-19 pandemic, the Company also curtailed its BC manufacturing facilities for up to a one-week period effective March 23, 2020.State of Emergency declarations and other restrictions relating to travel, business operations and isolation have been made by governing bodies in the regions that Western operates and sells its products. Western’s business activities have been designated an essential service in Canada and the US, and 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. In addition, governments in Canada and the US have announced various financial relief programs for businesses. We continue to analyze whether Western can apply for any of the programs to help mitigate the financial impacts of COVID-19.With the potential negative impacts to the global economy from COVID-19 and with dynamic global economic conditions, our near-term focus remains on maintaining financial flexibility to manage our business during this uncertain time while protecting the health and safety of our employees and contractors and servicing our customers.Operations CurtailmentsOn March 22, 2020, the Company announced it was temporarily curtailing its manufacturing facilities operating in BC for up to a one-week period effective March 23, 2020. After implementing enhanced health and safety protocols and re-evaluating operating conditions, the Company resumed all operations in late March, except at our Ladysmith, Cowichan Bay and Somass sawmills.On May 4, 2020, we restarted production at our Cowichan Bay sawmill, which had remained curtailed after the end of the Strike due to limited log supply. The continued operation of our Cowichan Bay sawmill is dependent on log supply and market conditions.Our Ladysmith sawmill, which remained curtailed after the end of the Strike, is expected to continue to remain curtailed due to insufficient log supply.Our Somass sawmill remains indefinitely curtailed as a result of a fibre supply deficit arising from years of tenure takebacks and government land use decisions, and rising costs associated with the US Softwood Lumber dispute.As of May 6, 2020, our other manufacturing and timberlands are actively operating based on market demand.Labour Relations UpdateOn February 6, 2020, the BC Minster of Labour appointed Special Mediators to work with the Company and the USW for a period of 10 days to determine if a negotiated settlement could be reached.On February 10, 2020, the Company announced that terms of a tentative collective agreement had been reached, subject to a ratification vote by USW membership.On February 15, 2020, Western announced that USW members voted in support of the tentative agreement to replace the collective agreement that expired on June 14, 2019. The new 5-year collective agreement is effective from June 15, 2019 and expires on June 14, 2024.The new agreement provides for general wage increases of 3%, 2%, 2%, 3% and 2.5%, respectively, in each of the five years of the agreement. The new agreement also provides for improvements to health and welfare benefits and clarifies the application of Western’s Alcohol and Drug Policy to USW members. Western has maintained its management rights to operate alternate shifts while agreeing to an enhanced shift review process. The agreement also provides the Company with additional operational flexibility in its Timberlands operations through the ability to introduce additional USW contractors to ensure it is meeting its Annual Allowable Cut requirements.BC Government Forest Policies UpdateDuring 2019, the BC Provincial Government (the “Province”) introduced various policy initiatives that will impact the BC forest sector regulatory framework as part of their Coastal Revitalization Initiative.On January 21, 2020, the Province announced changes to the Manufactured Forest Products Regulation (“Regulation”) effective July 1, 2020. The amendments to the Regulation require lumber that is made from Western Red Cedar (“WRC”) or cypress (yellow cedar) to be fully manufactured to be eligible for export. Fully manufactured is defined as lumber that will not be kiln-dried, planed or re-sawn at a facility outside of BC and is subject to certain exemptions. The Province is working with industry stakeholders to develop exemptions to meet its stated objective and has formed a working group with key industry representatives to help develop the exemption process. We continue to collaboratively engage with the Province to ensure that the desired outcome is met without unintended consequences to our global customers. The impact that the amendments to this Regulation may have on our operations cannot be determined at this time.Strategy and OutlookWestern’s long-term business objective is to create superior value for shareholders by building a margin-focused specialty 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, 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.Sales & Marketing Strategy UpdateWe continue to progress with the execution of our sales and marketing strategy that 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.During the first quarter of 2020, we reached marketing and vendor purchase agreements with certain customers that will increase our access to the North American Home Centre and Pro-Dealer sales channels. We expect this strategy to provide Western with greater access to the growing repair and remodel lumber segment.Our Columbia Vista division continues to perform in line with our expectations and has been a positive addition to our business and product mix. We continued to develop and evaluate growth opportunities for our wholesale lumber business.Market OutlookThe onset of the COVID-19 pandemic brought to a standstill what was a promising start to the 2020 North American building season. Government actions to limit the spread of the virus, including the complete shutdown of construction in some jurisdictions, caused significant demand disruptions. In addition, country-wide shutdowns have significantly restricted access to many of our high-value offshore markets. In contrast to the challenges faced in North America and Europe, lumber and log demand has improved in China as the country emerged from its COVID-19 lockdown.Strong market sentiment for WRC products at the beginning of the year has faded and demand has slowed due to COVID-19 containment measures. WRC lumber consumption from the Home Centre channel has been impacted less than other distribution channels.In Japan, demand for Douglas fir and BC coastal Hemlock products has remained steady due in part to reduced lumber supply from Europe. Price realizations have been supported by a weaker CAD relative to the USD.Demand for industrial Niche products and products targeted to the treating segment have remained strong. We expect pricing and demand to remain steady, provided there are no additional COVID-19 related disruptions.Export logistics have been challenged due to the limited number of in-bound shipping containers arriving in North America. To mitigate export logistics risks we are utilizing both container and break-bulk shipping modes to ensure continued supply to our customers.We expect domestic log and by-product prices to remain steady due to limited supply. Log supply on the BC coast is expected to remain constrained due to a combination of high harvest costs and uncertain markets relating to COVID-19.As we look forward, the COVID-19 outbreak has led to near term market volatility and reduced long-term business visibility. We plan to mitigate the increased volatility by leveraging our diversified market and product offerings and flexible operating platform. Our price realizations should be supported by the relatively weak CAD-USD exchange rate. We will continue to align our production volumes to match market demand.Softwood Lumber Dispute and US Market UpdateThe US application of duties on Canadian lumber imports continues a long-standing pattern of US protectionist action against Canadian lumber producers. We disagree with the inclusion of specialty lumber products, particularly WRC and Yellow 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 are predominantly high-value, appearance grade lumber, we are disproportionately impacted by these duties.Western expensed $4.0 million of export duties in the first quarter of 2020, comprised of CVD and AD at a combined rate of 20.23% on all lumber it sold into the US. On February 3, 2020, the US Department of Commerce (“DoC”) issued preliminary revised rates in the CVD and AD first administrative review of shipments for the years ended December 31, 2017 and 2018. The combined preliminary revised rates were 8.37% for 2017 and 8.21% for 2018. The DoC may revise these rates between preliminary and final determination. On April 24, 2020, the DoC announced a COVID-19 administrative review extension that is expected to delay the final rate determination until late September 2020. Cash deposits continue at the current rate of 20.23% until the final determinations are published, at which time the 2018 rate will apply to US-destined lumber sales.The Canadian government’s appeal of the US International Trade Commission determination that softwood lumber products from Canada materially injured US producers has been delayed due to COVID-19.At March 31, 2020, Western had US$72.6 million of cash on deposit with the US Department of Treasury in respect of these softwood lumber duties.Including wholesale lumber shipments, our sales to the US market represented approximately 27% of our total revenue in 2019. Our distribution and processing centre in Arlington, Washington and our Columbia Vista division in Vancouver, Washington are expected to partially mitigate the damaging effects of duties on our products destined for the US market. We intend to leverage our flexible operating platform to continue to partially mitigate any challenges that arise from this trade dispute.Forward Looking Statements and Information
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