Q3 2019 Earnings Call
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Good morning, ladies and gentlemen, welcome to the Western Forest products third quarter 2019 results conference call.
During this conference call Western's rate because then the then we'll be making certain statements about potential future.
These forward looking statements are intended to provide reasonable guidance to investors.
But the accuracy of these statements depend on the number of assumptions and are subject to various risks and uncertainties.
Actual outcomes will depend on the number of factors that could affect the ability of the company to execute its did this land.
Yeah meeting those matters described under risk and uncertainties in the company's annual M.D. any.
Which can be accessed on seed aren't in our supplemented by the company's clearly m. DNA.
Accordingly listeners should exercise caution.
Hang up on forward looking statements.
I would now like turn the meeting over to Mr., Don demand prison in field Western Forest products. Mr. Demand. Please go ahead.
Thank you very good morning, everyone.
I'd like to walk me to Western <unk> 2018, third quarter Carper scope joining me on the call that is Steve Williams, our executive Vice President and Chief Financial Officer.
We issued or 2019 third quarter results yesterday.
I'll provide you with some introductory comments.
Steve take you through a summary of our financial results.
Well then provide an update on the status of the labor disruption.
Sure work.
And provide an update on developments in our industry.
Well then open the call to your questions.
And weaker product markets.
All of our timberlands and most of RBC base manufacturing divisions were unable to operate in a third quarter of 2019 due to the strike.
As a result in the quarter or adjusted EBITDA was a negative $16.6 million.
During the quarter, we focused on taking steps to mitigate the impact of the strike on our business in customers.
We manage the impact to the strike in our balance sheet by selling unencumbered log and lumber inventories and magic expenditures.
We tended to mitigate the impact on our customers by growing our wholesale lumber program.
Processing unencumbered large custom kept facilities.
Some highlights in the quarter include the performance of our U.S. based Columbia Vista Division, which continues to perform in line with our expectations.
It's been a positive addition to our business and product mix.
We continued to ramp up production at our Arlington facility.
Facilities currently operating on a reduced basis due to old block of lumber supply caused by the strike.
Despite this we expect Arlington operation to assist us in repositioning or product lines closer to the final customer over the longer term.
And by acting as a critical component to our logistics and distribution platform.
And finally, despite the strike we were successful in reducing our debt levels.
Well at the same time, continuing with our balanced approach to capital allocation <unk>.
Turning $10.3 million to shareholders via dividends and share repurchases in the quarter.
Since 2018, we returned approximately $100 million the shareholders via dividends or share repurchases.
So with that I'll turn it over to Steve to review our key financial results. Thanks, Don My comments will focus primarily on our financial results for the third quarter of 29 team by comparison to the third quarter of last year.
Don mentioned, we delivered third quarter, adjusted EBITDA negative $16.6 million as compared to $32 million in the same period of 2019.
As a strike impacted the entire third quarter of 2019.
In the quarter, we sold the majority of our unencumbered inventory process certain encumbered logs it custom debt facilities and grew our wholesale lumber program to service our customers and helped mitigate the impact to the strike.
Despite product fracing declines across all our segments, our average realized pricing lumber pricing increased 8.5% you do it improves specialty product mix.
And weaker Canadian to U.S. dollar.
Specialty lumber represented 64% of third quarter shipments compared to 50% in the same period last year.
In order to support our selected customers during the strike, we redirected available inventory to active divisions, it and operated on a sub optimal basis, resulting in higher transportation in operating costs.
We incurred 19.2 million of expenses arising from curtailed operations and related operating inefficiencies as a result of the strike, including 1.2 million of third quarter benefit cost Pete on behalf of the US W for its striking members.
Leading up to the strike, we drew down inventory you SW certified operations to supply or Remanufacturing and custom set operations. Despite these efforts certain inventory volumes remain encumbered by the strike indeed read it over the third quarter of 2019.
As a result, we expensed, an additional 1.7 million provision against the restricted inventory.
We are monitoring any potential log and lumber degradation as the straight continues.
The remaining lumber inventories represent a weaker mix of products than what was realized in the third quarter of 2019.
From a profit and loss perspective.
Net loss was $18.7 million as compared to net income of 15.1 million in the third quarter of 2018.
Looking at our third quarter cash flow in capital management.
Strike impacting the majority of our operations in the third quarter 2019, our primary focus was on managing our balance sheet cash flow and working capital.
Cash provided by operating activities was $22.3 million as compared to cash provided a $40.1 million and the same period of 2018.
Reduced are noncash working capital by 38.2 million in the quarter to partly offset.
Significantly reduced cash flow from operations, resulting from the US W strike.
Cash used in investing activities was $1.4 million during the third quarter of 2019 as compared to $19.9 million invested during the same period last year.
We reduced our capital spending in order to manage cash flow and incurred only safety environmental.
And committed capital expenditures.
Despite the challenges faced in the quarter, we returned $10.3 million capital shareholders via dividends and share repurchases and were successful in reducing our net debt by $7 million compared to the ended the second quarter 2019.
Our liquidity at the end of the third quarter of 2019 increase to $141 million and our net debt to capitalization ratio was 17%.
We expect sufficient liquidity will be available to meet our ongoing obligations.
Don that concludes my comments.
Receive thank you.
So first I'd like to start off by providing an update on the current use w. labor disruption. According our BC operations.
On July 1st 2019, the United Steelworkers Union, representing approximately 1500 at the company's hourly employees and 1500 employees working for timberland contractors NBC.
Since the strike.
Strike is ongoing for all are you SWS certified manufacturing and timberlands operations.
We understand the impact the strike is having in our employees customers.
Communities shareholders.
And we remain committed to reaching a reasonable collective agreement decreed certainty for for our employees, while maintaining his western globally competitive position.
To achieve this outcome western offered to go to binding arbitration with mediator Vince ready to resolve the dispute.
The U.S.W. refused to bring except this proposal that would see employees returned to work.
Earlier this week, we agreed to return to the table with the mediator. However, the union is yet to confirm their attendance.
We continue to seek ways to get to use w. back to the table.
I'd now like to churn to a discussion of our markets.
Our longer term view of market fundamentals remains unchanged.
In North America, rising lumber consumption will be driven by increased new home construction.
Robust repair and renovation sector.
And growth in the use of mass timber building technologies.
Growing demand and reduce supply due to north American sawmill curtailments is expected to benefit the industry long term.
At the same time, we expect lumber demand in China to continue to grow.
Despite these positive long term growth drivers lumber markets of it remain challenging 2019, as north American weather events and skilled labor constraints sold U.S., new home construction and muted growth and repair innovation spending.
We expect recently commodity lumber market volatility to continue through the rest of 2019.
But we're cross usually optimistic heading into 2020, the combination of improved lumber consumption.
And reduce supplied you to permit production curtailments will lead to better pricing.
Moving on to specific lumber product segments recent BC coastal cedar permanent manufacturing closures should benefit our western receded product pricing going forward.
In Japan, we expect demand to remain flat for our Douglas for products.
However increased competition from European engineered Wood me pressure pricing.
We expect market share erosion and weaker pricing for BC coastal hemlock lumber in Japan as a result of DSW strike.
And increased competition from Japanese government subsidized domestic species.
We anticipate demand for appearance niche products to remain muted in China due to the trade friction between the U.S. in China.
In contrast, we expect demand in North America remained steady for timbers and industrial products.
Going forward, we'll continue to align our production volumes to match market demand.
So I'd also like to provide you an update in a couple of developments in the industry.
As discussed last quarter, the BC government announced its coastal revitalization plan earlier this year.
The plan includes various policy initiatives that will impact the BC for sector.
As part of their revitalization initiatives, the BC government announced accretion of fiber recovery zones, which are intended to increase the supply of residual fiber from primary harvesting for secondary users, mostly pulp mill pull bills.
What's your estimates at approximately 70% of our timberland operations will be impacted with the creation of fiber recovery zones.
The impacts to our business include the potential for higher costs and lower blog harvest volumes.
We expect the impacts will start to be realized in late 2019.
The BC government has stated they don't want to see unintended consequences from the policy implementation.
We continued to collaboratively engage with the BC government and other stakeholders.
To ensure the desired outcome of the policy avoid these unintended consequences.
Overall, we remain committed to working with government to support our industry in creating business hosting conditions and an operating environment that will keep business on the BC coast globally competitive.
While avoiding policies that add costs are restrict supply to our global lumber customers.
Moving on to suffer lumber dispute during the quarter.
We notified we were notified that our cedar separate like product NAFTA challenge would not be remanded back to the U.S. ITC.
The lack of remained effectively ends or our ability to challenge the U.S. itcs, finding that western red Cedar and yellow Cedar products are not a distinct product group, but rather interchangeable and their use with commodity lumber.
Well, obviously disappointed with enough the panel decision.
Separately as a broader softwood lumber dispute drags on we're not anticipating resolution in the near term.
We'll continue to leverage our flexible operating platform to partially mitigate any challenges that arise from this trade dispute as well as continue to evaluate opportunities to diversify our business.
Looking to what snack what's next.
With the U.S.W. strikes still ongoing our near term focus remains on reaching a reasonable collective agreement to create certainty for our employees, while maintaining western's globally competitive position.
Until a settlement as reach we will continue to take all necessary steps to protect our balance sheet manage our cash flow.
This will include increasing our marketing efforts with respect to our noncore assets.
Our long term focus remains the same.
Implementing our strategic initiatives to strengthen our foundation grower base and grow our business.
We remain committed to a balanced approach to capital allocation, including returning capital to shareholders, well also considering internal and external growth opportunities to go long term shareholder value.
With that operator, I can or open up the goal of the questions.
Thank you Mr. demands will now take questions on the telephone lines. If you have a question and you are using his speakerphone. Please look you had said before taking your section.
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Now I will be responsible for participants or is it for questions. Thank you for your patience.
Our first question is from your potential.
Capital markets.
Hello.
Hi, good morning.
Don just trying to understand the motivations on on both sides of the strike here.
If you were to give the union everything they wanted what does that represent.
The annual EBITDA, because it seems like the strikes tracking at sort of an 18 80 million a year.
Loss.
EBITDA.
Yes.
Reasonable question.
Can I can actually.
Identify.
The motivation is with the SWS, that's oh ill, what let them decide that I think.
Oh, I can say emerge we understand the impact of disputes having in our employees our customers shareholders and the communities.
We're committed to reaching a reasonable agreement.
We understand the cost implications of the strike and we can compare that to the demands from the union.
Yeah, I think it said, we're committed to reaching a reasonable reasonable settlement and we've demonstrated our commitment.
I offer new at a binding arbitration with the union, which in effect puts people back to work now.
So we you know weve informed the mediators that were available to meet on dates that Dave suggested over the next week.
Assumption and bargaining and as of yet DSW as an agreed to come to the table.
I'd say like with over 6000, the rest of the members having already reached an agreement.
We believe everyone knows where a reasonable settlements on lies.
So to conclude we recognize the impact the strikes having in reference to your question the cost of the straight as well as the demands of the Union.
We're ready to negotiate or enter binding arbitration that would see people go back to work and see a resumption of the business. So we're waiting for the union to respond to the media's request to meet.
Fair enough, thanks, Don and.
If the strike word it persists the.
Thinking about things you could do to help support the contractor base that is.
It's going to be kind of critical when things get going again.
Well I think we're all in this together there are many of the contractors or is that represented by another bargaining agent there and they should be out actively bargaining I think.
Our business is.
It's a challenge the of course with the strike as theirs is we should be all working together I think we've put a reasonable proposal together.
That would see people go back to work and have us stay at the table to reach an agreement I think thats, probably the area everybody should focus on.
And on with the a you know reduce cedar shipments.
Hey, what's your sense as to those customers of the switch to composites.
Is it just been I'm, an inventory worked out in the channel.
Any idea how that's played out.
So I guess, there's a couple of points there with SEDAR.
Certainly cedar is not a great. It was not a great markets for Cedar through 2019, mostly because of the delays in a in getting started and consumption through the year.
Driven by weather events throughout the U.S.
That said, there's been a couple of positive developments here, we've seen a permanent production.
Closure or announcements.
We've also been on strike and I can tell you the tone.
We're positive tone in Cedar markets.
Over the last month or so as a result of probably both working down inventories as well as the permanent production curtailments announced.
We haven't seen a significant improvement in pricing currently because I think it's just that time of year people are not putting more cedar into their inventories.
In the distribution channels, but we've certainly been encouraged by the outreach we've seen from our selected cedar customers as they have been visiting a lot more anxious to discuss their needs for the spring So I.
I guess to conclude that the tone in the markets better prices haven't moved yet, but we're expecting a better year next year in cedar.
Great. Thanks on that so go ahead I'll turn over thanks Amir.
Thank you. Our next question is from Sean start with TD Securities. Please go ahead.
Thanks, Good morning, guys.
Two questions just housekeeping first.
Is there any unencumbered inventory left at quarter end to sell into Q4.
Yes, so I mean, not not as much as there was obviously the start but we still have a significant volume a logs and a lot less lumber.
Sub 10 million feet of lumber.
Well the over 400000 meters of logs I'd caution you that to extrapolate anything on the large front simply because you know western has been really the only company over the last number of years to invest in saw milling capacity on the coast and we're the only one is really suited to manufacture a significant portion of those logs. So.
Having those turned into cash and deliver products to customers will be a challenge having all of them, but it's certainly some of them.
Inventory levels in general Sean are certainly lower than they were at this time last year.
But I think the market is not as active either.
So I think were maybe a little more imbalanced overall and inventories if you take encumbered and unencumbered but.
We'll do everything possible to move our unencumbered inventories over the over the near term.
Got it.
And there was mention made is potentially expediting noncore asset sales to.
I guess shore up the balance sheet through this.
Time any idea.
What you're prioritizing there any context, you can provide on what you're prioritizing and.
I suppose scale on time frame of what you're thinking on that front.
Sure so.
Yes, sure Sean I mean, I think probably over the last five years, we've highlighted three key areas being our.
Private timberlands, the the quarry and other fee simple.
Properties that we editor noncore.
I think.
As Don mentioned, we we've stepped up our.
Marketing efforts and don't necessarily want to speculate on.
You know timing here, but.
In totality I mean, I think you you said those assets are somewhere in the.
80 plus million dollar range.
And as it is Steve.
There's been a long time coming in you haven't needed the cash so I guess, there's no urgency to it but.
Should we be thinking is this process unfolding over the next year two years.
Any context, you can give us there.
Just I think it would say.
We're active in in marketing so we can't control. The you know the timing, but fair to say that we've stepped up our efforts.
Okay.
And then last question just on in terms of capital allocation.
Dividend was sustained.
Any context, you can provide on what the board's thinking on.
The.
The commitment to this level.
Presumably you don't want to cut just related to a labor stoppage, but.
How does the board thinking about the dividend in terms of the overall pecking order for capital allocation here.
Sure. So that's a good point Sean.
I don't I don't have the board's going to look at things.
And adjust adjust our approach to capital allocation based on transient events here, but I think we've consistently noted in our public disclosure of the directors will and our board will review the amount of the dividend and a quarterly basis as they take into consideration Companys financial operating performance liquidity and our needs ongoing needs for capital.
So dividend been along.
Long been part of our balanced approach to capital allocation. So despite the current strike situation. We expect the board to continue to go through that rigorous process. We go through each quarter.
And reviewing our financial performance and ensuring that theres proper coverage for that for the dividends.
Thanks for the detail I appreciate it guys.
Thanks, John .
Thank you.
Once again, please press star one at this time you can have a question.
Next question is from Paul Quinn with RBC capital markets.
Ahead.
Yeah, Thanks, very much morning, guys.
Morning, Baltimore.
So obviously difficult quarter given the strike.
You're looking for reasonable settlement is a reasonable settlement to you is that the agreement the BBC interior.
Concluded with the work or is it something less than that.
So.
I would say theres been.
A history.
History over the 40 years of pattern bargaining in British Columbia.
And as I noted and as you're fully aware 6000, you SW members and interior already settled an agreement.
Interestingly you may not be aware that.
The pulp mill in the nine will harm at Pacific just concluded an eight year agreement starting with a 2% wage increases in the first two years and then industry pattern. After that so I think there's a lot of precedent out there as to what a reasonable agreement is.
Refer back to the comments previously we are mindful of the impact is having on employees and communities and our customers and of course shareholders. So we're we have been willing.
To go to the table and talk about things.
We've demonstrated that willingness by even putting our hands in the mediator through binding arbitration and have yet.
Able to get the union to come to the table. So.
To conclude.
I think there's there's been a reasonable we kind of nowhere reasonable settlement zone wise, there's been lots of precedent.
Agreements and we just like the back to the table.
Get people back to work and cert, providing products for our customers.
Good.
I don't know if it's right, but in the press it seems like binding arbitration as rejected by the Union because of bad track record.
Do you feel that's fair or do you feel it.
Its a.
Maybe that that's the best way to get a negotiated settlement.
Well I think what it does it provide indicates that western is opened to anything.
So we want to get back to work at the end if the Union is a is refusing to go back because of poor results in the past I recall the last time. They went to binding arbitration that was at the request of the Union.
So I.
I think everyone's got to kind of.
You know.
Get focused on what's important I think you have to focus on employees here.
Customers communities, and our shareholders and get back to work.
Don't want to.
Lecture anybody, but western has been the only company for the last 25 years invested this amount of money in the coast to try to build a business that can generate reasonable returns and support support employment. So I think it's time, we all got back to the table got a resolution to move done.
Okay, and just lastly on labor.
Consequently surprised at how long Mrs. Last it is there anything specific in what you're asking for it.
And I would say something.
Coming from the Union side, you know that that would say that you're looking to cancel seniority rights is there something specific that there.
There.
Obviously.
I want to agree to is there something from the BC interior that's.
The concluded agreement that would be different from what you're proposing on the coast.
Yes, so so I'm not familiar with any seen you already rates were canceling we've been pretty transparent, but what we've offered we sent letters directly to our employees to explain our bargaining position.
There was an issue around pension I believe fall, where we had offered as suggested it was time from or from a retention and recruitment perspective to offer.
Choice in pensions, no I think a younger workers, who were trying to attracted the industry are looking to have a more portable pension option that is what we heard from the from the people. We put that forward that would certainly rejected from the union. They want to they don't want to change the pension.
And we've taken that off the table, so I don't I'm not sure, but whats annuity rates were trying to cancel.
Thats rhetoric, but and then I.
I think we've been.
Public in what we have offered and again I think the focus should be on getting back to the table getting people back to work.
Okay, and then I.
I guess moving off that and see we you guys collectively solve this labor issue and get back to work it sounds like with the BC Coso revitalization plan, you're getting back to a.
Situation that that is not as favorable how material is that the fiber recovery zones to you and what's your confidence that the BC government actually will mitigate any kind of.
Deleterious effects of it.
Sure. So as we noted 70% of our harvesting a 10 years are in the fiber recovery zones.
Robert fiber recovery zones.
Require us to pull out more fiber.
Waste is measured on a.
It's a challenging.
I don't know set of criteria.
And there is punitive.
Punitive.
Penalties, if there is excess waste in the blocks that gives you a perspective, what we're facing with we've been engaged with government identifying some of the issues. Some of which include safety concerns we have.
And the way waste as measured I think it's important to note its a.
Yeah.
We'll see over the next period of time, where they go with this.
I don't think anyone expects or wanted to see a new policy come in that actually reduced supply the pulp mills, but thats whats at riskier and we're hopeful that the government will review the proposals we sent a fourth and adjust the policy.
Where where they need to.
All right. That's all I had good luck at the negotiating to.
Great. Thanks.
Thank you.
There are no further questions registered at this time I would like to during the meeting back over to Mr. demands great. Thanks, Valerie and thanks, everyone for other attention today in support of Western and we look forward to better news a at our next quarterly call. Thank you have a great day.
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