Western Forest Products Inc. announced results for the fourth quarter and year ended December 31, 2014. The Company reported an adjusted EBITDA of $14.8 million for the fourth quarter of 2014, compared to an adjusted EBITDA of $24.4 million in the same period of 2013, due primarily to weaker lumber and log markets in China and Japan. The Company reported revenue of $232.6 million in the fourth quarter of 2014, as compared to $242.0 million for the fourth quarter of 2013.
Q4 2014 HIGHLIGHTS
• Increased Western Red Cedar and Niche lumber volumes by 17% from the prior year
• Continued our balanced approach to capital allocation, returning $7.8 million in dividends to our shareholders for a total $31.4 million in quarterly dividends in 2014
• Increased liquidity 6% from prior year to $134.4 million
For the year ended December 31, 2014, Western generated adjusted EBITDA of $108.5 million on record annual revenue of $1,036.9 million. This compares to adjusted EBITDA of $128.8 million on revenue of $977.5 million in the prior year.
“We continued to grow our company in 2014 as we increased sales revenue 6% and surpassed $1 billion in sales for the first time in our history. We achieved these results by utilizing our flexible operating platform to increase sales of Western Red Cedar and Niche products, offsetting the weakness in export markets,” said Don Demens, President and Chief Executive Officer. “We also invested an additional $18 million of strategic capital, primarily in our sawmills, to improve our competitiveness.”
Net income of $12.9 million ($0.03 per diluted share) was reported for the fourth quarter of 2014, as compared to $49.9 million ($0.13 per diluted share) for the fourth quarter of 2013. Net income of $68.4 million ($0.17 per diluted share) was reported for the year ending December 31, 2014, as compared to $125.4 million ($0.28 per diluted share) for the prior year.
Subsequent to year-end, on February 6, 2015, the Company announced the completion of the sale of its former pulp mill site and related assets in Squamish, B.C. for gross proceeds of $21.8 million. Western will use the proceeds of the sale to pay down outstanding debt and intends to use the added liquidity to further its strategic capital plans.
Fourth Quarter 2014
We reported adjusted EBITDA of $14.8 million in the fourth quarter of 2014, a decrease from the $24.4 million earned in the same quarter last year, but an improvement over the $14.3 million recognized in the fourth quarter of 2012. The decrease in adjusted EBITDA was due to lower commodity lumber and export log pricing in China and reduced sales volumes to Japan. Our results benefitted from continued strength in the North American repair and renovation market which has increased the demand for our Western Red Cedar (“WRC”) and Niche products.
Fourth quarter revenue in 2014 was $232.6 million, a decrease of $9.4 million from the same quarter of 2013, due to lower log sales volumes and weaker log export pricing. Our revenue benefitted from a weaker Canadian dollar (“CAD”) against the U.S. dollar (“USD”), which had decreased 8% on average in the fourth quarter of 2014 as compared to the same period of 2013. Gradual improvement in U.S. new home construction starts and the continued strength of the U.S. repair and renovation markets contributed to strong demand for our WRC and Niche products, for which sales volumes increased by 14% and 19% respectively. These factors were more than offset by a weak market in China for logs and commodity lumber, and reduced lumber demand from Japan.
Fourth quarter lumber revenue in 2014 was $166.8 million, compared to $168.1 million in the fourth quarter of 2013. A weakening CAD and sales volumes growth in high value WRC and Niche lumber drove an $11 per thousand board feet increase in average realized lumber pricing in the fourth quarter of 2014 as compared to the same period of 2013. These positive factors were offset by a decrease in Japan lumber volumes and much lower pricing for commodity lumber sold in China.
Log revenue was $51.2 million, a decrease of $8.5 million from the same period in 2013, due to reduced log sales volumes in the fourth quarter of 2014. Dry-weather conditions curtailed harvest operations in the third quarter of 2014, and reduced the volume of logs available for sale in the fourth quarter of 2014. Additionally, export log pricing was 17% lower in the fourth quarter of 2014 as compared to the same quarter of 2013, due to lower demand from the China market.
Fourth quarter lumber production was 202 million board feet, a decrease of 5% from the same period of 2013. Lumber production was affected by a reduced opening log inventory; the permanent closure of our Nanaimo sawmill and continued ramp-up of operations at our Duke Point sawmill; and the temporary curtailment of our Ladysmith sawmill late in December 2014. Additionally, production at our Saltair sawmill was curtailed for the last two weeks of 2014 to allow us to complete our log in-feed capital project. Fourth quarter production results achieved in 2014 were supported by 30,000 cubic metres of incremental sawlog purchases, as compared to the fourth quarter of 2013, that partly offset log availability issues at our mills.
Our timberlands harvest volume for the fourth quarter of 2014 was 1.3 million cubic metres, a decrease of 3% from the same quarter of 2013, and was fully offset by our ability to purchase logs and standing timber in the open market. Primary drivers for increased fourth quarter 2014 log costs, in comparison to 2013 fourth quarter costs, were a 24,000 cubic metres increase in the use of heli-logging, an increase in stumpage costs due in part to harvest profile, and increased labour costs.
Following the secondary offerings, on November 30, 2014, the remaining Brookfield representatives on our Board of Directors (“Board”), Peter Gordon and Pierre McNeil, resigned their positions. Similarly, on December 30, 2014, long-serving director John Newman resigned from the Board. In their place, we have welcomed Mike Waites and Barrie Shineton to the Board.
Annual Operating Results
Adjusted EBITDA for 2014 was $108.5 million on record annual revenue of $1,036.9 million, compared to $128.8 million adjusted EBITDA on revenue of $977.5 million in 2013. The decrease in adjusted EBITDA relates primarily to challenges faced in the second half of 2014, including weakening markets in China and Japan, reduced log availability, and increased log costs. Partially offsetting these factors and leading to record revenue in 2014, were the continued strong demand for our WRC products and our flexible manufacturing platform, which allowed us to shift production from Japan lumber programs to Niche programs. Additionally, revenue was positively impacted by a weaker CAD, which was, on average, 7% lower during 2014.
Lumber revenue in 2014 was $729.0 million, 8% higher than in 2013, primarily due to an improved mix of lumber products sold in 2014 and the impact of foreign exchange, as mentioned above. Our average realized price for lumber during 2014 increased by $46 per thousand board feet, or 6%, over 2013 prices. Increased pricing was driven by demand for WRC and Niche lumber, for which 2014 average realized prices increased 15% and 13% from 2013 prices, respectively.
Also contributing to an increase in lumber revenue in 2014 was a 2% increase in lumber sales volume, which rose to 909 million board feet. Our 2014 shipments rose 9% for WRC lumber, 7% for Niche, and 4% for commodity lumber, as compared to volumes sold in 2013. Increased WRC and Niche shipments were the result of continued growth in demand from a strong North American repair and renovation market. Increased commodity shipments in 2014 as compared to 2013 helped to offset a decrease in commodity pricing over that same period resulting from a slower than anticipated recovery of the U.S. new home construction market and a weak China lumber market in the second half of 2014.
Log revenue increased marginally from $243.8 million in 2013 to $244.2 million in 2014. As compared to 2013, average realized log prices increased in 2014 by 7% and peaked in the second quarter of 2014. Strong export log pricing in the first half of 2014 was offset by a decline in the log sales volume and pricing in the latter half of 2014 resulting from a weakening export log market.
Sales of by-products in 2014 were $63.7 million, or $7.2 million higher than in 2013, due to an increase in average chip prices and an increase in volume of chips sold in 2014. Realized average chip prices were 12% higher, compared to 2013, which reflected a weaker CAD and an increase of approximately 4% in 2014 for northern bleached softwood kraft prices, to which chip prices are tied. Our volume of chips sold increased by 3% in line with increased production of lumber of 3% in 2014.
Lumber production increased to 908 million board feet in 2014 from 884 million board feet in 2013. We grew our 2014 lumber production by running slightly more shifts as compared to 2013. Increased shipments were achieved despite downtime at our sawmills due to our decision to close all our mills for three business days following the tragic shooting at our Nanaimo sawmill in April 2014; capital installations at our Cowichan Bay and Saltair sawmills; the permanent closure of our Nanaimo sawmill; and the temporary curtailment of our Ladysmith sawmill due to weak China market conditions. We continued to run a broad species and quality mix in our mills in 2014 to reduce supply driven mill curtailments, while increasing primary mill productivity by 2% and maintaining recovery results achieved in 2013.
The total log harvest for 2014 was 5.1 million cubic metres, a decrease of 5% from our 2013 harvest level of 5.4 million cubic metres, but this was offset by increased sawlog purchase volume of 0.3 million cubic metres over the same period. The primary driver for our reduced harvest volume in 2014 was the impact of dry weather conditions on our third quarter log production that offset strong second quarter harvest volumes. We were not able to fully recapture the lost third quarter volume in the fourth quarter of 2014.