Q4 2019 Earnings Call
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Good morning, ladies and gentlemen, well comes in the Western Forest products fourth quarter 2019 results conference call.
During this conference call Westerns Representatives may make forward looking statements within the meaning of applicable securities laws.
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Except as required by the law Western undertakes no obligation to update forward looking statements.
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Forward looking statements.
I wonder like they tend to meaning over two dozen demands president and CEO of Western Forest products. Please go ahead Sir.
Well. Thank you very good morning, everyone.
Like the walking me to Western Forest products 2019 fourth quarter conference call.
Joining me on the call today's Stephen Williams, our executive Vice President and Chief Financial Officer.
We issued our 2019 fourth quarter and full year results yesterday.
I'll provide you with some introductory comments and then asked you to take you through a summary of our financial results.
Oh, then share with you our outlook and discuss recent developments in our industry.
Well then open the call up for your questions.
Like to start off the call by providing an update to our labor disruption.
On Monday, we announced that the company and United Steelworkers had agreed to terms of a tentative collective agreement with our employees.
The tentative agreement is subject to ratification vote by U. S. W. Membership.
It's ratification vote is scheduled for later this week.
The U.S.W. bargaining committee is advise they will be recommending that its members except disagreement.
We're pleased to have reached a fair and equitable tentative agreement with U. S. W.
As a tentative agreement is subject to ratification go by U. S. W. Membership, we're not releasing details of the agreement at this time.
We'd like to thank Vince ready and Amanda Rogers for their work is special mediators to help achieve a negotiated settlement.
As well I like to recognize the western and U S. W. Bargaining committees you bargain through the weekend to reach this tentative agreement.
Recognize the impact the prolong strike us out of our customers employees contractors their families.
And the communities in which we operate in addition to our shareholders.
We're pleased that we're heading back to work for the benefit of all those impacted by the for long strike.
We're currently working to finalize our operating plans based on market demand and log availability.
Operations will commence as quickly as possible following ratification of the agreement.
Moving onto our fourth quarter and full year results.
Our 2019 results were significantly impacted by the U. S. W strike, which commenced on July 1st.
All of our timberlands and most of our BCBS manufacturing divisions did not operate in the second half of 2019 due to the strike.
The straightforward a period of weak markets for forest products, and a more challenging operating environment in British Columbia.
As a result, we generated negative EBITDA of $1.5 million in 2019.
During the fourth quarter, we continue to take steps to mitigate the strikes impact on our customers by selling unencumbered inventories.
Producing lumber it custom kept facilities.
Growing or wholesale lumber program.
Our U.S. based businesses continued to operate during the quarter delivering targeted products to our selected customers.
Our success in operations wrote the strike allowed us to end 2019 with less net debt.
Then when the strike began.
Throughout the year made significant progress implementing or strategic initiatives.
Some highlights from 2019 include the growing of our specialty products business with the asset acquisition to Vancouver, Washington, based Columbia Vista Corporation.
We advanced our strategic partnerships and first nations and continued to reposition or coastal tenure assets with the sale of a 7% interest and a newly formed CFO 44 limited partnership to the away at first nations.
We substantially completed equipment building upgrades at our Arlington facility.
Which will enable us to more effectively service are selected U.S. customers.
More than double doubled our wholesale lumber shipments to 34 million feet in 2019.
Our wholesale lumber business will allow us to offer an expanded product line, making us more meaningful to our selected customers and further enhancing the viability and success of our existing businesses.
We continue to execute our sales and marketing strategy building strong relationships with selected specialty wood products distributors and home centers in North America, which we expect will benefit our business for years to go.
We further demonstrated our commitment top tier governance practices, where their board leadership transition a.
Good morning might wages independent chair the board.
As well as adding additional independent directors Lauricella Cherry paper.
We published our inaugural sustainability report, which provided expanded environmental social and governance disclosure.
While highlighting our commitment to defining a higher standard and sustainable management and environmental stewardship.
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We also implemented important foundational systems and adjusted our structure and staffing in support of our growth strategy.
And finally, we continued with our balanced approach to capital allocation by returning approximately $50 million to shareholders through regular quarterly dividends and share repurchases.
I'll now turn it over to Steve to review, our key financial results. Thanks, Don.
Thomas will focus primarily on our financial results for the fourth quarter of 2019 by comparison in the fourth quarter of last year.
We reported fourth quarter, adjusted EBITDA of negative $18.1 million as compared to $18 million in the same period of 2019 as a strike impacted the entire fourth quarter 2019.
In the quarter, we sold the majority of our remaining unencumbered lumber inventory process certain unencumbered logs to test and got facilities and continue to execute on or excuse me wholesale under program to service our customers and helped mitigate the impact of the strike.
Our average realized lumber pricing benefited from improved specialty product mix, which was partially offset by a stronger Canadian to U.S. dollar.
Specialty lumber represented 79% of fourth quarter shipments compared to 50% the same period last year.
Just Florida selected customers during the strike we are forced to obdurate operate suboptimally, which resulted in higher transportation and operating costs.
Operating expenses included $16.7 million arising from curtailed operations and related operating inefficiencies as a result of distress.
Despite our efforts to drawdown inventory at U. S. W certified operations, leading up to the strike.
Inventory volumes remained encumbered by the strike in degraded over the fourth quarter of 2019 as a result, we expensed, an additional $2.4 million against the restricted inventory.
We continue to monitor for any further potential log and lumber degradation.
From a profit and loss perspective, net loss was $29.2 million as compared to net income of 5.3 million in the fourth quarter of.
The prior year.
Looking at fourth quarter cash flow in capital management.
With the strike ongoing our primary focus remains on managing our balance sheet cash flow and working capital cash provided by operating activities was $6.8 million as compared to $5.6 million in the same period of last year.
We reduced our nonworking cat noncash working capital by 24.9 million in the quarter to partly offset significantly reduce cash flow from operations, resulting from the strike.
Cash provided by investing activities was point $8 million during the fourth quarter of 29 gene as compared to the cash use of $29 million 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 our capital expenditures in the fourth quarter of 2019 were more than offset by proceeds from noncore land sales.
In the fourth quarter, we returned $8.5 million of capital to shareholders via dividends and despite the challenges of the strike in the second half of 2019, we have been successful and reducing our net debt at the end of year by approximately $3 million.
Compared to before the start of the strike.
Our liquidity at the end of the fourth quarter of 2019 was $137 million and our net debt to capitalization ratio was approximately 19%.
We expect it sufficient liquidity will be available to meet our ongoing obligations.
Don that concludes my comments greasy. Thank you.
I'll now I would now like to provide an update in our markets.
Our long term view of market phenom fundamentals remain unchanged.
In North America, rising lumber consumption will be driven by increased new home construction.
Robust repair and renovation sector and the growth of mass timber building technologies.
Growing demand and reduced supply due to north American sawmill curtailments is expected to improve market fundamentals and benefit the industry long term.
The supply impacts of these curtailments are expected to support lumber pricing in 2020.
Moving on to specific lumber product segments.
We're encouraged by the positive market sentiment in our western Red Cedar and appearance niche segments, and we anticipate improved pricing as we move through the spring.
We expect our niche timber and industrial markets to continue to benefit from large scale industrial oil and gas projects.
In Japan, we expect steady demand for our Douglas for products.
However increased competition from European engineered wood may pressure pricing.
We anticipate market share erosion and weaker pricing for BC coastal hemlock lumber in Japan during the strike.
And increased competition from Japanese government subsidized domestic species.
Well look to regain our Japanese hemlock lumber market now that the strength as a result.
And in the short term the Corona buyers could result in a temporary slowdown in log and lumber consumption in China.
However over the longer term government commitment to housing and continued positive economic growth should support demand for log and lumber in China.
I'd now like to provide an update in a couple developments in the industry.
As discussed last quarter, the BC government announced its coastal revitalization plan in 2019.
The plan includes various policy initiatives that will impact the BC coastal for sector.
These new policies include the accretion of fiber recovery zones.
Well for tenure transfers and targeted fee in lieu of manufacturing for certain export logs.
The government is now also undertaking an old growth review.
In addition on January 21st 2020 to BC government announced changes to the manufactured forest products regulation.
We should come into effect July 1st of 2020.
The regulation reduces the size of timbers any species that can be exported.
And requires westar at cedar or yellow cedar lumber to be fully manufactured to be eligible for export.
Fully manufactured is defined as lumber that will not be killing dried planed or respond to the facility outside of BC.
So in our view the reduction in the size of timbers able to be exported will have no impact on the business.
The details of the policy with respect to the lumber restrictions have yet to be released but the regulation as proposed today could have negative implications for global customers BC coastal lumber products.
We through their purchases support thousands of jobs in communities and the hosted BC.
We're surprised by the potentially punitive nature of the proposed regulation on coastal businesses, which are already being disproportionately impacted by the application of U.S. softwood duties.
We continue to evaluate the impacts of the various government policies may have on our operations.
Overall, we remain committed to working with the government to support our industry and creating business hosting conditions.
And an operating environment.
We will keep business on the BC coast globally competitive.
While avoiding policies that add costs are restrict supply to our global lumber customers.
Moving onto the softwood lumber dispute on February Threerd 2020, U.S. Department of Commerce issued preliminary revised countervailing and antidumping duty rates in the first administrative review.
For shipments for the years of 2017 and 2018.
The preliminary revised all others combined rates for countervailing and antidumping, we're set up 8.37% for 2017.
I'd point to 1% for 2018.
These rates are well below our current combined rate of 20.23%.
The final rates for 2017 in 2018 will be determined in August of this year.
Cash deposits will continue to accrue at our combined rate of 20.23% until the final determinations are published in August.
At which time the 2018 combined rate of 8.21% will apply to deposits on lumber shipments to the United States.
Despite the lower revised preliminary rates for 27 in 2018, no duties paid in excess of the revised final rates.
We'll be refunded until the entire appeals process of the softwood lumber dispute concludes.
So looking to whats next we're anxious to resume operations for the benefit of our customers employees contractors and in the communities, which we operate.
Our long term focus remains the same implementing our strategic initiatives to strengthen our foundation grower base and grow our business.
And with that operator, we can open up the call for questions.
Thank you we will now take question from a telephone lines.
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Okay.
The first question is from the Hamir Patel from.
Seed capital markets. Please go ahead. Your line is now open.
Hi, good morning.
Don I was I was wondering if you could give us your sense as to for the last eight months your cedar customers.
There were did they go for their product that they switch to weather would spcs composites and as you look to ramp back up.
Do you think you may have to.
It'll be more aggressive with pricing initially to regain the market share.
Sure. So maybe maybe a couple of quick things here one.
Well, our cedar customers of our Cedar volumes were down substantially they were down less than any of other product line. So were the guys were successful in our team was successful are continuing to put product into the market.
I think as you recall if I go back.
Recall 2019 got off to a very difficult start with poor weather across much of North America impacting lumber consumption and that weak demand led to more competitive pricing.
Especially a narrow with and and decking products for Cedar.
Over the strike period, the inventories at our distributed through distribution were wound down and I think the market itself.
Became a lot more balanced position.
So while there was some erosion and some market share loss in the narrows and decking.
A combination of the strike I think a combination of the fact that duties are applied to SEDAR cedars very high value, making the pricing of the products.
Hi, Therefore, we lost some market share.
We're expecting a better a better a 2020 and.
The interest we've seen from the customers have been really encouraging.
But.
Time will tell as to how much market share. This strike is cost our business and the Kosta BC.
Okay. Thanks, Don that's that's helpful and I'm just wanted to turn to the at the changes you referenced after the manufactured forest products regulation.
So post July 1st how do you know how did those changes affect how you would look to to run the Arlington facility.
Okay. So just maybe I can begin with Amir.
I've got to say I really worry about the cumulative impacts in the effects of the multiple policy changes that advanced by government.
Given the fact of the coast through the whole industry hasn't run very much I think it's really a known as to how significant the impacts of these policy changes will have on the coast.
When it comes to the manufacturing lumber Reg.
The proposed amendments are going to require western red cedar or yellow ceded to be fully manufactured.
Fully manufacturers defined as lumber that's going to be killen, dried planed or resign add a facility outside the BC.
Yes, I think the as the regulations is proposed today could have some significant unintended consequences for the entire coastal forced industry and of course, our global customers you through their purchases are supporting all of the jobs here.
As I said, we're pretty surprised at the peak potential punitive nature of the proposed regulation and we're working with the industry partners to deal with that with respect to Arlington as we've always said it is a distribution.
Hub that is going to be a to be able to improve the service to our existing customers and our targeted selected customers in the us.
And we're growing other businesses there now and.
We'll see where this goes it's.
I think I think the government is going to take a look at it and and determine when the right time implement something like this is our view is restricting volume.
And products to customers is not a way to grow the business.
Okay, great. Thanks, Don just a final on for for me.
You also in the release referenced some of the policy changes under consideration with respect to first nations and.
How that may.
Result in reduced forest tenure for it for yourselves do you have a sense yet as to the potential impact of that and would you expect to get a compensation if there's changes on that front.
Yes I.
Yes.
I think I understand your question here in the the maybe I'll rephrase it the.
Maybe the application of an drip and.
And the desire of government to have more first nations participation in the four sector lead to a risk for our business and.
Our view is been for a long time has been that we see that is positive first nations participation in the industry is positive I think that's why last year. We we reached an agreement with the wafers nations to transact and 7% of CFO 44.
We're.
As we said at that time were open in willing to too.
Discuss.
Businesses business.
Relationships.
With other first nations along those lines, we think it's a template that.
It will work and worked well and we're anxious to grow that so well can be viewed as a risk I think for us getting first nations participation is a way that business can participate in reconciliation and and can make the business stronger.
In the event there was a take back or something in that nature, which is what you think you inferred absolutely we'd expect to be compensated.
Great. Thanks, Don that's a full at all I will turn or.
Great.
Thank you. Our next question is from Jon Stewart with TD Securities. Please go ahead.
Thanks, Good morning, guys.
A couple of questions I jumped on the call it a bit late so I apologize if you went over this but.
Can you give us a sense of how fast do you think you'll be able to ramp things back up.
Sure.
Sean.
Just start with the over maybe I'll just give you the full overview. The next step so the tentative agreement is going to be subject to ratification by the you SW membership.
It's our understanding that that ratification will take place this week.
Once the contract is ratified.
We'll begin calling employees back to work for safety reviews, and the safety start and then per bearing the operations itself for startup.
Yeah, I would estimate that process is going to take about a week or so.
I think at the Mills, we expect operations will begin in early March.
At those mills that have the logs available and the market demand to support production.
In the timberlands, we'll be getting back to operations based on location and snow impacts. So yes, timberlands ramp up as it would be in this time is you're at any any year.
Got to be dependent on snow, but we'd like to get to the teams back out and picking up some of the.
Filled and bucked inventory, we have right now.
So to conclude kind of we expect a ramp and I guess to conclude we expect to ramp up of production through March and be operating more fully in April.
Okay that helps.
A question on the trade file developments when the duties were imposed we saw pretty immediate passthrough of the duties for translate over to western or at Cedar prices.
When the duties get but can you give us a sense of what you're expecting for the price response.
Think of it is.
Easy pass through in the way when they're imposed and maybe a slower give back on the other end how are you thinking about it.
We like the way you're looking at it I would say, but a couple of key points the.
The final determination is not going to occur till August so up until August will keep accruing at that 20%.
So we would see no no immediate changes to pricing.
I would also seen a prices have improved recently across all cedar product lines.
I think I discussed earlier.
Some of the product lines, especially narrows and decking have been a we haven't we haven't been able to maintain the prices. We initially.
Received or achieved in a in 2019, when we implemented or actually before then when we implemented a higher pricing do the duties. So I think it's going to be going forward.
Selling prices is not an exact science, but I'd expect for certain product lines. We've established track record and where there is few possible substitutes I'd like to think those prices are going to remain and for the narrower Whitson decking I think we've got to be in that we've got to be competitive.
And we do have market share pressures there. So we're going to have those prices may be more at risk.
That's great. Thanks for the context.
Great. Thanks.
Thank you once again, please press star one on your telephone keypad. If you have the question.
We have your question from Paul Quinn from RBC Capital markets. Please go ahead, Sir your line is now thanks.
Yes, thanks, very much morning, guys.
Hi, Bob.
Just.
Maybe start with.
Capital programs going forward here it sounds like a.
Reenter the release that you want to scale back given the uncertainty, which I think is which is very prudent but just trying to understand how you get around this manufacturing.
Regulation now that that would suggest that you should be building kilns on the coast to be able to fully utilize that.
It's either in cyber so how do you added.
How do you.
Combined those two.
Yes, So maybe let me start were capital and then I'll get to the killing concept and few other things.
And your annual maintenance and cap and roads Capex historically been around $30 million to $40 million, we're going to start operations here basically three months into you know for modeling you can adjust staff.
I think clearly a we do 30 to 40 on maintenance and road Capex. We typically we're doing 30 to 40.
On strategic investments, but have to say given the challenging operating environment in the coast and due impart to BC government policies, we have to scale back our strategic capital plans until there is an improved operating environment fad or greater clarity.
That said, we're going to continue to evaluate opportunities to invest strategic capital and jurisdictions that create opportunity to grow long term value. So I think that should answer your question on my capital with respect to adding.
More killing drying capacity and others we are.
Fortunate we have significant.
Capacity in kilns already.
And I would I would just make a point that when it comes at a manufacturing regulations. Most of the products. We're talking about our finished and are not kill and ride.
Bye and so that's not the issue that's not the restriction we have customers around the world.
That what the products as as we provide them typically.
Seasoned typically in.
In sizes and shapes that allow them to them further processed for selected individual projects and that's where they change that's where they generate the value and thats what generates the maximum value back.
To the province, and and do allow us to run our business. So it's not a matter of going out and investing in more capacity we have capacity here.
As a matter of I my view, providing products to customers around the world in the form that they want them.
Huh.
It doesn't sound like BC governments can allow you to do that but.
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Well this like on that one.
Maybe just moving onto.
The old growth strategy that you mentioned in the report back when is that do.
Our understanding is sometime in the spring.
I don't actually have the final date.
We've made some significant.
Contributions to that effort.
I would like to point out that in our view something like 70% of yield growth on the coast already protected in manners and parks that are in different management zones and.
So I think BC should stand up and be proud of the efforts we have.
Accomplished already in preservation and be even more proud of how we sustainably harvest on the land base and work on the land base. So we'll see what transpires from this there are a lot of people through at least bank of Reiland, whose livelihoods rely on x.
I think that timber harvesting land base that has made available to the industry and and they do it really well, so but we'll see what happens.
Okay, and then just Las Vegas on Stumpage, what happened with the dinner first.
The change is error rates coming down and then how material is your feldman Buck inventory in the wood.
Yes, so so on.
The impacts on the update to the equation and with the data.
We estimate over time, it's going to the two things it probably did drop or will reduce.
Stumpage rates.
Somewhere in the neighborhood of 20% I guess, which would be in line does actually pro to more than that inline with what happened in the lumber market I think equally important is the fact that the equation on the coast now is tied to lumber markets more which is which is beneficial in the past it was tied to the log log.
Pricing in the venture log market, which as you know can be highly variable.
So that is I think we look forward to the gradual implementation of of the new stumpage formula on our tenures harvest.
Our FNB inventory and our total arguments are I think is probably better way to look at it it's probably both down about 30% or so from where it would have been last year.
There is we have a lot of work to do too.
Fill up our supply chain going forward and that's we will be focused on don't underestimate the challenges there given government policies.
The industry wound down through the third and fourth quarter last year and I think.
All the participants including government on the coast need to get together to figure out ways. We can.
Jumpstart, the business and get more and more harvesting going.
Alright best of luck I think you'll need it.
Thanks, Paul.
Thank you there are no further questions registered at this time I would like to turn back the meeting over it comes to Don demands.
Thanks, Mary and thanks, everyone for your continued support we appreciate your interest in our company in your time and the call. This morning.
Steven are both available if you have follow up questions. We certainly look forward to sharing with you. Our first quarter results in May and we look forward to getting our employees back to safely starting up and producing our products for our selective price for our customers. So with that have a great day. Thank you.
Thank you the conference has now in Dundee. Please disconnect your lines at this time and we thank you for your participation.
This call.