Western Forest Products : Announces First Quarter 2016 Results

Microsoft Word - NR - Results - 2016 Q1 - FINAL.doc

WESTERN FOREST PRODUCTS INC.

510 - 700 West Georgia Street Vancouver, British Columbia Canada V7Y 1A1

Telephone: 604-648-4500

FOR IMMEDIATE RELEASE TSX: WEF

Western Announces First Quarter 2016 Results

lllay 5,2016 - Vancouver, British Columbla,Western Forest Products Inc. (TSX: WEF) ('Western·or the •Company") reported adjusted EBITDA of $35.7 million in the first quarter of 2016, compared to adjusted EBITDA of $29.6 million reported in both the same period last year and the previous quarter. Improved log and lumber pricing,higher lumber production and increased lumber sales volumes delivered a 21% increase in adjusted EBITDA.

The Company successfully grew revenue to $269.8 million in the first quarter of 2016, as compared to

$248.6 million in the same period last year, and $265.6 million in the fourth quarter of 2015. Soong demand for our specialty lumber products and improving commodity markets delivered higher lumber pricing. The positive pricing environment combined with higher sales volumes enabled Western to achieve its highest quarterly lumber revenue result since 2007.

Q12016 HIGHLIGHTS

• Increased lumber production by 6% while accelerating the implementation of strategic capital

• Grew lumber shipments by 11% from the same quarter last yearto 225 million boardfeet

• Achieved a Company recordquarterly average realized lumber price of $916 perthousand board feet

• Maintained an industry leading safety per1ormance with a medicalincident rate of O.78

• Returned $7.9 million to shareholders via the Company's quarterly dividend program

• Reduced net debt by $5.9 millionto $49.7 million and increased liquidity to $183.9 million

"In the first quarter, we capitalized on improved markets for our products by increasing both lumber production and sales volumes. I am encouraged by our continued ability to deliver robust financial performance while accelerating the implementation of our strategic capital program,• said Don Demens President and Chief Executive Officer. •Looking ahead,we will focus on carrying this momentum forward, executing on our strategy andcontinuing to deliver strong returns to our shareholders."

First quarter operating income prior to restructuring items and other income increased 31% to $26.3 million in 2016, compared to $20.1 million in the same period of 2015. Net income of $17.3 million ($0.04 per diluted share) was reported for the first quarter of 2016, compared to $27.6 million ($0.07 per diluted share) for the first quarter of 2015. Improved operating income was offset by current and deferred income

tax expense of $6.9 million,as compared to a deferred expense of $0.1 million in the same period of 2015.

In addition, net income for the first quarter of 2015 included income from discontinued operations of $9.1 million arising from the sale of the former Squamish pulp mill site.

(millions of dollars except ""1ers noted)

FINANCIAL SUMMARY

Three months ended March 31,

2016 2015

Rewnue

Adjusted EBrTDA Adjusted EBrTDA margin

Operating income prior to restructuring items and other income Net income from continuing operations

Net income for the period

Basic and diluted earnings per share (in dollars)

Basic and diluted earnings per share (in dollars) - discontinued operations Net Debt at March 31,

Liquidity at March 31,

First Quarter 2016

$ 269.8 $ 248.6

35.7 29.6

13.2% 11.9%

26.3 20.1

17.3 18.5

17.3 27.6

$ 0.04 $ 0.07

$ $ 0.02

47.9 53.8

183.9 177.9

In the first quarter of 2016 we generated adjusted EBITDA of $35.7 million, an increase of 21% from adjusted EBITDA of $29.6 million in the same quarter last year. We achieved these results by increasing lumber shipments and maintaining a favourable product mix. A continued focus on high-margin, high­ value specialty products drove total revenue growth of 9% as compared to the first quarter of 2015.

Lumber revenue was $206.2 million in the first quarter of 2016, a 20% increase from the same quarter of 2015. We successfully increased lumber sales volumes by 11% to 225 million board feet, and achieved a record quarterly average realized lumber price of $916 per thousand board feet. Increased price realizations were the result of a strong sales mix, including a 15% increase in WRC volumes, an improving commodity market and a weaker CAD relative to the USD. The average CAD-USD exchange rate in the period declined by 11%, as compared to the same period of 2015, but the CAD strengthened significantly late in the first quarter of 2016 to close 6% higher than at December 31, 2015.

First quarter log revenue was $46.3 million, a decrease of $14.9 million from the same period in 2015. Average log pricing increased by 20% due to an improved sales mix and the influence of a constrained coastal log supply on domestic log prices. Log sales volumes declined by 37% due to a lower first quarter harvest and our strategy to increase log consumption in our sawmills.

By-products revenue was $17.3 million in the first quarter of 2016, as compared to $15.6 million in the same period in 2015. By-product revenue growth was driven by increased lumber production and additional chips purchased for resale.

First quarter lumber production was 221 million board feet, an increase of 6% from the same period of 2015. Increased production was achieved despite three weeks of downtime at our Duke Point sawmill and one week of downtime at our Ladysmith sawmill for strategic capital installations. Our Duke Point and Saltair sawmills realized significant productivity improvements as we began to see the benefits of recently completed capital installations. Lumber production costs rose as compared to the first quarter of 2015 due to higher WRC lumber production volumes and increased secondary processing volume.

Timberlands harvest volume for the first quarter was 1.0 million cubic metres, down 30% from the record first quarter harvest in 2015. Harvest was delayed in part due to more typical winter weather in the first quarter of 2016 compared to the mild conditions experienced in the same period last year. In addition, harvest volumes were impacted by an ongoing contractor dispute and permitting consultation. Average log harvest costs increased by 8% in comparison to the first quarter of 2015, driven primarily by lower harvest volume and a proportionate increase in heli-logging and associated costs.

Well positioned opening mill log inventories supported an overall increase in lumber production. Total sawlog purchases declined slightly compared to the first quarter of 2015, as winter conditions constrained coastal sawlog supply, but greater specialty log volume purchases facilitated an increase in the production of certain specialty lumber products.

First quarter freight costs were $22.0 million in 2016, an increase of 6% compared to the same period of 2015. Increased freight costs were the result of a weaker CAD on USO-denominated freight, and an 11% increase in lumber shipments as compared to the same period of last year. Rising freight costs were offset by a 40% reduction in export log shipments due to a lower log harvest and the redirecting of log volume to our mills to take advantage of improved North American lumber markets.

Selling and administration expenses in the first quarter of 2016 increased to $7.8 million from $5.8 million in the same period of 2015. Reflected in this increase were higher legal expenses in the first quarter of 2016 arising from contractor disputes and compensation discussions with the Government of British Columbia ("BC"), regarding the 2011 tenure take-back in TFL 44 as a result of the Maa'nulth First Nations Final Agreement Act. In addition, a year-over-year 17% increase in the Company's common share price resulted in a net increase of $0.8 million over that period to the mark-to-market share based compensation expense.

Net income for the first quarter of 2016 was $17.3 million, a decrease from $27.6 million for the same period of 2015. An increase in operating income of 27% was offset by increased tax expense. Current and deferred income tax expense of $6.9 million was incurred in the first quarter of 2016 as compared to an expense of $0.1 million in the same period of 2015. In past quarters, the recognition of deferred income tax assets offset the deferred income tax expense resulting in unusually low deferred tax expense. In addition, net income for the first quarter of 2015 also included income from discontinued operations of

$9.1 million arising from the sale of the former Squamish pulp mill site.

Finance Costs

First quarter finance costs were $1.1 million in 2016, $0.2 million lower than the same quarter of 2015. This decrease was primarily the result of lower interest expense as average first quarter outstanding debt was reduced from $74.0 million in 2015 to $60.5 million in 2016.

Income Taxes

During the first quarter of 2016, the Company recognized income tax expense of $6.9 million through net income arising from continuing operations, and $0.4 million through other comprehensive income related to actuarial gains on its defined benefit plans.

Strategy and Outlook

In the first quarter we continued to implement our strategy of optimizing our operations and investing in our mills to improve margins and grow our business through increased production.

Key operational priorities in support of our strategy include:

1. Implementing strategic capital to position our mills as the most competitive in the region;

2. Improving productivity and further improving margins through increased capital utilization; and,

3. Utilizing our competitive advantage to access additional log volume on the open market to increase lumber production.

Market Outlook

The combination of improved lumber consumption from an active United States ("US") new home construction market and greater demand from China supported increased pricing for commodity lumber in the first quarter of 2016. Benchmark KD SPF 2X4 prices closed the quarter 7% higher than in the same period last year and 11% higher than at December 31, 2015. Commodity lumber pricing should see further improvements in the near-term as seasonal demand in North America drives increased lumber consumption. Improving price realizations may be mitigated by recent CAD-USD exchange rate volatility. We expect to increase production of commodity lumber in the near term as we increase operating hours at our commodity mills.

Continued growth in North American repair and renovation market spending should benefit our North American specialty business. Recent market consolidation in the WRC segment is anticipated to support increases in our share of the WRC market. We expect pricing to improve for both our WRC and Niche product lines as distributors build inventory ahead of the peak building season. While we expect pricing to improve, price realizations could be negatively impacted by the recent strength in the CAD relative to the USD.

Japan lumber market demand is expected to accelerate ahead of the proposed 2017 consumption tax increase. Improved demand is expected to drive USD price improvements while growth in realized pricing may be limited by the recent CAD appreciation.

We expect sawlog markets to continue to perform well in the second quarter of 2016. In the domestic market, the favourable combination of limited supply and strong demand will support pricing. More balanced inventories in China are expected to keep export log market prices firm. Pulp log prices are expected to remain weak due to increased inventories and lower consumption levels from coastal BC pulp mills.

The twelve-month standstill period of the Softwood Lumber Agreement, which precludes trade action by the US, continues through October 11, 2016. Discussions between Canada and the US regarding a replacement of the Softwood Lumber Agreement are underway. Uncertainty remains regarding a resolution.

On March 1, 2016, the Government of BC updated coastal stumpage rates. We expect the update to lead to an increase in stumpage costs for specialty log grades and species reflecting the current market price for those logs.

Strategic Capital Program Update

We continue to accelerate the implementation of our strategic capital program, which is designed to position Western as the only company on the coast of BC capable of sustainably consuming the complete profile of the coastal forest and competitively manufacturing a diverse product mix.

Our strategic capital program is focused on the installation of proven technology that will deliver top quartile performance and improve our ability to manufacture the products that yield the best margin. In addition to investments in our manufacturing assets, we will also invest capital into strategic, high-return projects involving our information systems, timberlands assets, and forest inventories.

We have announced plans for $97.7 million of our $125.0 million strategic capital program. Through the end of the first quarter of 2016, we have implemented and capitalized $82.4 million under that program. In the first quarter of 2016, we had multiple projects in ramp-up including the modernization of our Duke Point sawmill and planer; our new timber deck at our Chemainus sawmill; and the single-line conversion at our Ladysmith sawmill. In total, our first quarter strategic capital investment was $7.5 million.

The Duke Point sawmill and planer modernization project are the primary focus for the second quarter of 2016, as we commence the installation of a new timber deck at the sawmill and commence planer production of kiln-dried lumber. We will also begin to map our timberlands utilizing LiDAR technology and expect to complete the data gathering phase of this project in 2016.