Q3 2019 Earnings Call
My name is Simon and I will be your conference operator today.
At this time I would like to welcome everyone to the inter for Corporation quarterly Analyst Conference call.
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Thanks, operator, good morning, everyone and thank you for joining us I'm here as usual with Marty dressed PRC, a bull and Bert vendor or senior Vice President sales and marketing go reports third quarter results from to comment on our outlook for the balance of the year.
Joining us as well this morning, ASEAN cylinder or Chief operating officer, who has been appointed by our board to take over is it affords president and CEO on January 1st next years I, just I'm sorry.
Ill provide an update on our capital projects that his priorities for the company later on in the discussion.
We're going to keep our remarks brief.
Session or would you for questions as soon as Kim.
EBITDA was $16.8 million on sales of $486 million <unk> third quarter, which compares with EBITDA of 12.6 million on sales of $481 billion a second quarter.
Overall, our average sales realizations dropped by $20 a third quarter.
The negative effects of lower sales returns <unk> third quarter were more than offset by the impact car production shipment volumes during the quarter, which in turn had a positive impact on operating costs.
In addition, or normal operating results her financial results for the quarter included a 31.8 million dollar pre tax restructuring provisions associated with the permanent closure of our Hamlin saw no other reconfigured number coastal Ford feel woodlands operations.
Taken all together can afford pulls the net loss in the third quarter of $35.6 million after tax compared with a loss of 11.2 million in the second quarter.
Increase of 6%.
Production in the southern region increased to 348 million board feet from 320 million board feet and the second quarter as the modest so and meldrum projects ramped up following the completion of the phase one couple of projects are those mills.
[noise] correction or Western region, which includes our mills in British Columbia Pacific Northwest increased from 327 million board feet on the second quarter 336 million board feet as higher operating rates in the interior more than offset a drop of production in the northwest.
[noise] capacity utilization third quarter was 85% compared to 83% in the second quarter made up of 45% on the BC coast, 90% on the beach interior, 82% in the Pacific northwest of 92% themselves.
During the quarter, we made the decision to reconfigure a b C coastal business, including the permanent closure of the haven't saw mill and reorganization of our coastal porphyria woodlands operations.
A few minutes ago, I spoke with restructuring provisions taken in the quarter to reflect this change which includes $14 million and convalescent breakdowns of $17.8 million severance other costs relating primarily to the coastal decision.
For many years now our coastal business has been negatively impacted by log supply issues and other challenges.
In addition to releasing signaling amounts of working capital tied up in log and lumber inventories of freedom that have a property for sale.
We believe the reconfiguration of our coastal business weren't able to significantly better financial results from that business unit in the years ahead.
[noise] funding from my standpoint, there's as much but I can report today hotter transaction with Canford regarding the cutting rates associated with their plan will be them be saw mill.
The transaction I think as you know is subject to various consents, including that of the Vichy government.
I can tell you that we're making good progress on our discussions with various stakeholders remain optimistic that will receive the required approval and close the transaction prior to year end up.
At that point I'm going to turn it over to Burke, who can give you some comments about what's happening in the lumber market and then under mature over after birth to young who can comment on capital projects other priorities suburb, where do you.
Okay. Thanks, Saket provide brief out what kind of lumber market new home construction is gradually increasing particularly single family as purchasers to take advantage of lower interest rates and approved affordability.
Repair remodel and use sector, a steady you expect favorable home prices and interest rates to continue the help here.
In North America in North end market inventories as difficult as they are the accurately read appeared normal for this time of year order files across our network of mills are solid.
We expect attention to soon turned to next year, what should bring in a level of investment in inventories in preparation for seasonal spring demand.
As always whether it will be a weather between now and the spring of next year will be a factor.
Oversees our business has improved quarter over quarter from a volume standpoint, however, inventories remain elevated in most markets and competition from other countries is heightened.
On the supply side of the equation there continues to be some significant shifts and as our opinion at the full impact in the 2 billion feet of well over 2 billion freedom Curtailments MPC has not been fully realized in the markets.
Canadian shipments to the U.S., you're trending downwards from I expect us to continue in terms of other regions, we see stable supply year over year from imports southeast BMW and the inland Empire, no significant acre increases or declines.
Turning to our specialty business leader in particular, a we're in a transition but the closure of our haven't mill, we had been busy transitioning our customers over to BC anterior western rats here.
Our interior western rents heater business has grown to be comparable in size to what we previously produced on a cost.
Overall long term market fundamentals remain favorable and we expect lumber demand to continue to grow.
I'll stop there Duncan turn it back over to you great. Thanks, Bert you see that could make some comments on this does have a couple of projects in your priorities for the company going forward.
Sure I'm sure phase one capital projects or just to remind everyone. We're monticello in Arkansas, and or Meldrum, Millen, Georgia and both of those projects are complete spendings done and we're in ramp up period and very very close.
To the Cardinals projects.
Complete from a pro forma achievement standpoint.
Phase two is a our Georgetown South Carolina, a mill, even 10 in Georgia and both of those projects are underway with a certain phases happening Georgetown.
Completing some projects in the saw known planar and even 10 with some civil and building work underway at this point in time, and then phase three is really a handful of discretionary projects that are.
Hi return and those are big.
Plan and executed on as we speak also.
As far as.
The priorities as Duncan.
Alluded to for us for us.
There is completing the the first prior to completing the execution of the capital projects.
And achieving the post project ramp up a party built on a two hour completing the cap for.
Maybe a purchase is a top priority for us.
Maintaining our financial flexibility in managing our working capital is carefully.
Scrutinizing, our spending and improving operational efficiencies everywhere, we can like we do everyday and then monitoring market conditions and adjusting as required and I think Doug that probably as good summary, our key priorities.
Great. Thanks.
So in August it was announced that I was going to be stepping down as enter pourciau. The end of this year. The deal is going to be taking over on the first of January .
I've been in this role now for more than 20 years.
Actually it's time for a change.
And then within or four for more than 15 years and he's done an outstanding job for us in my opinion will do a great job for the company going forward.
I think this is the first time on this call and I feel really good to have been provide you an update on our capital projects at his priorities.
But that really brings our discussion here to an end operator, and I'm going to turn this session over too.
Our guest for questions so over to you.
Ladies and gentlemen at this time I'd like to remind everyone that in order to ask a question.
Please press Star then the number one on your telephone keypad, well pause for just a moment to consult the Cuban a roster.
[noise] and your first question comes the line of Catan Ventura with BMO capital markets. Your line is open.
Thank you.
Morning, everyone on I've done congratulations on all the best for the future.
Thank you know.
Maybe to start off.
Can you just refresh our memory on what kind of ridden do you are expecting from these phase one phase two projects.
Ralph timeline.
Sorry, It was a production for returns both for returns.
Yeah, the returns or internally, our target turned to achieve a 20% are less than five year payback on the big strategic projects.
Phase one and fees to phase one the ramp up is really a kitten essentially done there is little bit more work to achieve a couple of the K P ice that the Monticello and meldrum team or are focused on at Georgetown and even 10.
Our completing.
George town.
Somewhere in Q1 2020 near the end of that time period, even 10 as far as the construction and commissioning goes is mid 2021.
Got it and then just.
The <unk>.
And that's both stacks a pretax.
Pre tax.
It's a cash on cash pretax return.
Okay, Perfect and then just switching gears here.
This European pine beetle.
So on died.
Lumber imports into the U.S. from Europe would go up meaningfully I know that.
We haven't seen much of an impact yet.
But as you look ahead.
This has the potential risk.
Okay, Let me comment on that maybe Bard can follow up on it.
It's something we're monitoring or in the in the case of Europe . As this is Bruce Bruce beetle as opposed to a pine beetle but.
It's it's it's created are driven by the same set of factors as we've seen here in North America with the pine beetle in British Columbia and in other jurisdictions. So it's it's we're seeing starting to see ramped up harvest levels and production levels.
In Europe , and we're starting to see product, both logs and lumber in the different markets of the world and we had one of our senior people over in Europe last week talking to the people over there trying to get an understanding of just exactly what's happening with the shelf life. It looks like with the harvesting plans are and where we're likely to see that.
Product in the various markets world. So it's something we're thing attention to for sure.
Yeah, the only thing I would add to that is.
Within the markets lots of discussion taking place with their customers I think it's an uncertainty on on the magnitude side of the equation, but I think it's worth pointing out that the constraints that they have over there you know in some respects the same constraints that we have here when it comes to.
People and equipment and mills and so I think that there is an ability to flex on volumes, but but but it's not in Canada.
So there are some constraints on just how much can be produced out of those log.
That's helpful and just one last from me one from me when I think.
Capex.
Good.
Number four now.
Yes, Hey, Ken it's Marty.
We haven't formalized.
Our budget for next year capital budget, but we look at this year will probably be spending a little less than $200 million in 2020 will be substantially less than that probably the 140 150 zone will refine that over the next little bit but for planning purposes, you can use that as a frame of reference.
Got it that's what I've done a.
Good luck guys you get into Wendy.
Thank you thanks Peter.
Your next question comes from the line of Hamir Patel with CBC capital markets. Your line is open.
Good morning.
I just wanted to follow up on the on the capital projects can you give us a sense given the sort of.
Staging up if everything how much lumber output growth what would you be expecting in 2020, <unk> and then you know looking beyond that as well.
So the phase one projects monotone meldrum, well add in the neighborhood of 150 to 155 million feet.
As to our so platform and then the phase two which is Georgetown Eden pin and Thomas then, we'll add 275 million board feet.
I think thats over several years to the impact for 2020 is probably about 100 million feet increment over 2019 right.
Great. Thanks, Thanks, Marty and Bart just wanted to ask you get a sense as to where inventories are in the channel and and also any indication yet from the big box stores about what sort of volume growth they might be planning for next year.
Okay, well, that's a difficult question the inventories are always.
Difficult to gauge really.
Aside from the occasional reports that you see it's all a matter just discussions one by one with your customers and I and I would say that I would I would characterize inventories today as normal for this time of year, maybe even just a tad below that and the reason I say that as you can see that in their purchasing behavior.
Sure.
When they're buying things and and for question that you can tell that there are some holes in some areas, but overall.
I don't think the distributor level has a lot of pressure at this time.
In terms of their inventory levels.
Looking at the Big box stores that that is a.
You know your information is probably as good as mine our business with the box stores as a.
It's not as overly significant we have just a couple of a very small programs with them.
And those programs are continuing.
The volumes that we've been selling them historically have been very.
Very steady so thats, all I can really save about.
Great.
Thanks, Bart sets, but had a.
All the best and not in retirement.
[laughter] Thanks Amir.
Your next question comes from the line of Paul Quinn with RBC capital markets. Your line is open.
Yeah. Thanks, very much a morning, guys maybe start with the congratulating you Duncan on the retirement I actually thought you'd never return, but congratulations.
And maybe from your perspective 20 years in the in the chair and a lot of.
A lot of leadership on the softwood lumber file.
How do you see the felt progressing going forward here.
Well I think we've said consistency consistently pull that not much is going to happen on the trade front until the legal process purged to work its way through the system and that's that's happening now.
I don't think theres going to be much more is going to happen until we get some clarity on that side of things going forward. So nothing nothing quickly.
The fact that the federal election is now what are the way I think is is helpful from.
Canadian standpoint, I've said on this call before how much regard I've got poor Chris Your Freeland, yeah, how she's handle things from a from a Canadian standpoint, I think you've been great, but I think we also need to recognize that we're about to move into another political cycle in the U.S.
And.
Nothing else the who softwood files of is a political file. So I think you are going to be bucking some some headwinds.
From a U.S. political standpoint, if we think we're going to a fight and they were resolution of this so my guidance to everybody that I talked to is this thing historically takes time.
The arguments on our behalf are good we just need to have the patients in the wherewithal to be able to to work, though work our way through the system and find those windows of opportunity when economic and political realities of legal realities allow opportunities for solutions to be device. So.
I think the net messages.
I don't expect much to happen here in the near term.
Okay. So it is it safe to say the legal will be wrapped up in 2020, and maybe you get a political decision or compromise negotiation in 2021.
No.
Well I don't know, whether we'll get a decision in 2021 or not the legal process usually takes a surge in three to five years do work its way through the system to the point, where you're getting some some clarity on on the on the case itself. So I think we're still in the the early innings, where if you want to use a football in l.
As you were somewhere between probably the first quarter the second quarter.
Of the whole process.
Okay. Thanks, very much and then maybe over to bird on markets. Bert you are commenting that overseas volumes were up but lots of competition, what would've said done for price on what's your outlook going forward.
Well it depends on on the market I suppose.
And being very different market than China, but I am feeling you're right, you're asking a mainly about China.
We've been dealing with excessive inventories in that and that market as well.
So whenever you get that kind of a situation is tends to put a blanket on your ability to.
To flex on price.
So the added variable there it's the.
It's a European volumes that are that are moving away and then and competing against SPF type products said at various levels. So at the low grade level and the lead grade level and so I think.
The Chinese bit we don't we don't anticipate a lot of price appreciation.
Obviously, the north American market pricing isn't isn't isn't really encouraging us.
Significantly to do anything there so.
We think it's going to be a matter of of companies deciding to what degree they want to participated the going market prices.
China.
Okay, and then just said doesn't mean you reference account for transaction, but we've seen the current effects have been approved by the government is yours next in line to be submitted your question.
We have submitted a request we are I would like to believe were next in line.
I think our situation is quite a bit different for variety of reasons than them.
That have some conifex transaction needed to two well position will finance companies and accounted for and enter for we're just we're working our way through this process and I'm very systematic way.
Very good cooperation.
Between ourselves and accounted for.
Very good progress dealing with the various stakeholders in the area and we just wanted to be very carefully as we worked our way through that whole piece to make sure that.
We got the arrangement.
Set up properly and now we're moving into the formal part of the discussion with the provincial government, which is which is happening as we speak.
All right. That's all I had that's like us.
Yes, Thanks Paul.
Again, if you would like to ask the question. Please press Star then the number one on your telephone keypad.
Your next question comes from the line of Sean Stewart with TD Securities. Your line is open.
Thanks, Good morning, everyone.
I'm just I'm just one question for me Marty.
The messaging around the the lack of activity in the buyback is been you're going through an extended really deep.
Cash flow trough.
You've got a lot of money to deploy towards Capex, and and hopefully that the tenure acquisition as well.
I guess the question I have is this is all dependent on share price I, suppose and valuation, but what sort of.
Visibility would you need on cash flows improving.
And what sort of liquidity cushion would you be comfortable with proceeding with with buyback activity, what sort of backdrop, you need or confidence they need in that market recovering to get busy again.
Yes, it's a great question, Sean and Oh, well given non answer answer.
It has that because there is no one variable we're constantly looking at all those things that you talk about some of which are quantitative and some which are frankly quite qualitative in terms of our judgments of how much drypowder do we think is appropriate given.
It is frankly, a fairly unpredictable market from time to time and also fairly unpredictable in terms of the opportunities that present themselves in those periods of market volatility. So we're constantly recalibrating those things we like the flexibility that we have right now we like the dry powder that we have right now.
So we've been in active under our share buyback program as you leave and as you pointed out for the last little bit, but it's really all about part of trying to balance off the various opportunities that are in front of us and.
There is no there's no formula that we have per se. We're just constantly looking at all those variables and right. Now we just think is appropriate given the market conditions and the opportunities that are in front of us both internal and external to keep that dry powder as we as we have right now.
Well said, thanks very much that's all I had congratulations Duncan and Andy in as well.
Thank you Sean.
There are no further questions at this time I turn the call back over to our presenters.
Yes. Thanks, Thanks, operator, I know I normally on these calls.
Thank you people for their interest in our company and seeing that we'll see you again at the end of the next quarter, but.
That's not could be the case for me.
This is my last call, therefore seal and I'd like to think personally I'd like to thank everybody. Who's attended this call in the other calls that we've had over the last couple of decades.
You folks have been very fair with us and very for with me.
I've enjoyed working with you and hope you folks feel the same.
So thanks everybody.
The group around the table during his leadership with Meridian Bert will be here at the end of the next quarter to review.
And if were fourth quarter, and 20, Nike and results of the talk about.
The future the company. So thanks, everybody have a good day, both Marty and myself and legacy on or around.
Later on today, if you got any follow up questions, but thanks very much bigger.
Ladies and gentlemen. This concludes today's conference call you may now disconnect.