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August 3, 2022 – Vancouver, British Columbia – Western Forest Products Inc. (TSX: WEF) (“Western” or the “Company”) reported net income of $38.6 million and adjusted EBITDA of $66.2 million in the second quarter of 2022. Strong Japan lumber demand and record specialty product pricing drove revenue growth, but earnings were reduced by increased stumpage expense, logistics constrained shipments, higher export tax, freight rates and operating costs. In addition, a significant decline in commodity lumber pricing through the quarter and weaker cedar markets led to increased inventory provisions.
Net income in the second quarter of 2022 was $38.6 million ($0.12 per diluted share) as compared to net income of $38.0 million ($0.11 per diluted share) for the first quarter of 2022, and net income of $78.3 million ($0.21 per diluted share) in the second quarter of 2021.
Western’s second quarter adjusted EBITDA was $66.2 million, as compared to adjusted EBITDA of $65.4 million in the first quarter of 2022, and adjusted EBITDA of $120.4 million in the second quarter of 2021. Operating income prior to restructuring and other items was $53.4 million, compared to income of $52.2 million in the first quarter of 2022, and $105.7 million of income reported in the second quarter of 2021.
|(millions of Canadian dollars except per share amounts||Q2||Q2||Q1||YTD||YTD|
|and where otherwise noted)||2022||2021||2022||2022||2021|
|Export tax expense||14.7||10.8||11.5||26.2||19.0|
|Adjusted EBITDA margin(1)||15%||29%||18%||17%||25%|
|Operating income prior to restructuring and other items||$||53.4||$||105.7||$||52.2||$||105.6||$||154.5|
|Earnings per share, diluted||0.12||0.21||0.11||0.23||0.35|
|Net cash (debt)(2), end of period||84.3||97.7||74.9|
|Liquidity (1), end of period||319.1||341.1||310.1|
“We continue to deliver strong results overcoming significant cost pressures and logistics challenges,” said Don Demens, President and Chief Executive Officer. “Recent capital announcements for our coastal manufacturing business and the addition of glulam to our specialty lumber portfolio are important steps forward in Western’s strategy to move up the product value chain and to improve shareholder returns.”
Summary of Second Quarter 2022 Results
Adjusted EBITDA for the second quarter of 2022 was $66.2 million, as compared to $120.4 million in the same period last year. Results in the comparative period were driven by record North American lumber pricing and margins. Net income in the second quarter of 2022 was $38.6 million as compared to net income of $78.3 million in the same quarter of 2021.
We grew revenues in the second quarter of 2022 by leveraging record specialty product pricing. Adjusted EBITDA in the second quarter of 2022 was impacted by incremental costs including $19.9 million in additional stumpage expenses, $13.5 million in inventory and silviculture provisions, rising log purchase pricing, and higher operating costs. In addition, we incurred an incremental $4.3 million in freight expense and an incremental $3.9 million in export taxes despite lower lumber shipments. Second quarter operating income prior to restructuring and other items was $53.4 million in 2022, as compared to $105.7 million in the same period last year.
Revenue grew by 6% in the second quarter of 2022 as compared to the same period last year, as we increased log shipments to capitalize on record log pricing and maintained lumber revenue despite lower sales volumes.
We delivered a stronger specialty lumber mix, which more than offset logistics-constrained lumber shipments and declining commodity lumber pricing through the quarter.
Lumber shipments decreased by 11% as compared to the same period last year, despite increased shipments to Japan. Logistics constraints and weaker demand limited lumber shipments. Lower activity in the repair and renovation market reduced demand for certain Cedar and Niche products. Shipments of Japan specialty products increased by 17% as compared to the second quarter last year, as we took advantage of strong demand and pricing.
Our average realized lumber price was a record $1,786 per thousand board feet, an increase of 12% from the second quarter of 2021. Strong pricing across our specialty lumber products was offset by weaker pricing for commodity lumber, which had peaked in the comparative quarter of 2021. Lumber revenue also benefited from the 4% appreciation of the US to Canadian dollar exchange rate from the comparative period.
Log revenue was $70.8 million in the second quarter of 2022, a 53% increase from the comparative period last year. Recent strong lumber market conditions and limited British Columbia (“BC”) coastal log production combined to drive coastal log prices to record highs. We capitalized on market conditions by selling certain domestic log inventories which were in excess to our sawmill requirements, achieving a 31% average realized log price improvement and an 11% increase in sales volumes as compared to the second quarter last year.
By-product revenue was $14.8 million, comparable to the second quarter last year. Increased chip price realizations resulting from a higher Northern Bleached Softwood Kraft (“NBSK”) pulp price to China, were offset by reduced by-product shipments due to lower lumber production.
Lumber market weakness and significant declines in commodity lumber pricing in the second quarter of 2022 led to incremental inventory provisions of $10.5 million as compared to the same period last year. We recognized $11.5 million in inventory provisions in the second quarter of 2022, as compared to $1.0 million expense in the same period last year.
Lumber production was 16% lower in the second quarter of 2022 as compared the same period last year, due to log supply related operating curtailments at certain large-log sawmills and the mix of production. We modified certain production plans to reduce the impacts of logistics constraints which limited access to North American markets.
We harvested 904,000 cubic metres of logs from our coastal operations in BC, as compared to 1,012,000 cubic metres in the second quarter last year. Harvest results were impacted by late spring snow conditions that extended into the second quarter of 2022, and harvest permitting delays. The comparative period included an incremental 96,000 cubic metres of accelerated private timberlands log harvest associated with the sale of our former Orca Quarry assets.
Stumpage expense increased by $19.9 million as compared to the same period last year, despite reduced harvest volume. Recent record product pricing led to record coastal stumpage rates in the second quarter of 2022 on applicable BC crown land harvest.
Excluding stumpage, timberlands operating costs increased over the comparative period due to weather-related impacts early in the quarter, incremental road building, higher fuel costs and increased heli-logging. We increased road expenditures to address timber development deferred in past quarters due to weather. In addition, we recognized an incremental $3.0 million in silviculture expense from same period last year, which was primarily the result of inflation on our reforestation provision.
To support sawmill production, we increased our BC coastal saw log purchases by 45% as compared to the second quarter of last year. Average purchased log price increased 23%, consistent with the increase in our log sales pricing over the same period.
Second quarter freight expense increased by $4.3 million over the same period last year, despite a 11% decline in lumber shipments and the absence of log exports. Higher freight expenses were led by a 42% increase in container freight rates, increased use of breakbulk vessel shipments, and higher fuel costs. We continued to partly mitigate ongoing export logistics issues and limited container availability by converting a component of our lumber shipments to higher-cost breakbulk. Vessel and rail capacity improved towards the end of the quarter.
Adjusted EBITDA and operating income included $14.7 million of countervailing duty (“CV”) and anti-dumping duty (“AD”) expense in the second quarter of 2022, as compared to $10.8 million in the same period of 2021. The applicable export tax cash deposit rates increased from 8.99% to 17.91% over those periods. Higher export taxes were also influenced by the US to Canadian dollar exchange rate, offset by a 32% reduction in US-destined lumber shipments and lower lumber prices.
At June 30, 2022, we had $182.0 million of cash on deposit with the US Department of Treasury in respect of softwood lumber duties, of which $38.4 million was recognized as a long-term duty receivable.
Selling and Administration Expense
Second quarter selling and administration expense was $9.7 million in 2022 as compared to $ 16.7 million in the second quarter last year, attributable to lower incentive compensation expense resulting from reduced share price and earnings.
We recognized other income of $0.2 million as compared to income of $1.4 million in the second quarter last year, resulting primarily from sales of equipment and other assets.
Finance costs were $0.3 million as compared to $0.4 million in the second quarter last year. Interest expense was offset by slightly higher interest earned on our cash balances.
Western recognized current income tax expense of $14.9 million partially offset by a deferred income tax recovery of $0.4 million in net income in the second quarter of 2022, a decrease of $13.4 million over the second quarter of 2021. Lower tax expense was the result of reduced operating income.
Net income for the second quarter of 2022 was $38.6 million, as compared to net income of $78.3 million for the same period last year. Compressed margins on lower shipment volumes, higher stumpage expense, freight rates, export taxes, and the impact of inventory provisions reduced second quarter net income as compared to the same period of 2021.
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