Q4 2019 Earnings Call

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I would now like to hand, the conference over to your speaker today until the <unk> President and CEO.

Please go ahead Sir.

Thank you operator, welcome to our Q4 19 Investor Analyst call a with me today, Yeah, Marty draw skier.

Senior Vice President CFO.

Also barb Bender, our senior Vice President sales and marketing.

Our agenda today, we'll start off with myself, providing a recap of our strategic priorities in Q4 theme.

Well then pass the call to Marty who will cover our financial matters and then I'll pass.

The call to board, who will cover off the market.

[music] first turning to our strategic focus.

With the recent change in leadership I thought I would it would be good to reconfirm our overarching priorities.

Corridor, a company, we will continue to maintain our capital allocation disciplined.

Our focus isn't changing we'll continue to manage our working capital very closely and achieving in executing on our phase one in phase two strategic capital programs.

We'll also maintain our balance sheet integrity and our strong liquidity.

In Q4, our efforts.

Were balanced across the company in each region.

We did a lot of work resetting our business for the future, particularly in British Columbia, We completed the closure of our Cedar mill on the coast.

We dealt with impacted employees and other stakeholders in a thoughtful way.

We right sized our coastal would.

And division to reflect the lean marketing logging business.

And we reduced a significant amount of associated working capital.

For a b C interior, we continue to focus with the BC government.

On the timber purchase agreement for cutting rights in the Bhavan be area.

Which is as a reminder, near or Adams like Division.

In the U.S., South we moved onto our phase two capital with heightened building work and preparation underway at or even didn't division in Georgia.

No I'm going to turn the call over to Marty who will cover off the financial matters.

Great.

Thanks, and good morning, everyone.

Let me begin by just referring to the cautionary language regarding forward looking information that's on the first page of our Mdna.

So the focus for the quarter was improving upon the controllable parts of the business as we navigate our way through a challenging market environment, we think that a significant progress.

This was accomplished and there is more on the come so a few highlights from our Q4 results from an earnings standpoint.

Adjusted EBITDA was slightly higher at $17.6 million versus $16.8 million in Q3 2019.

And this was achieved despite.

Bridge price realizations being down about Canadian $17 per thousand board feet in Q versus Q3.

Factors that contributed to the average price realization decline include lower volumes of high value theater as a result of the Hammond mill shutdown that Ian referred to before also.

As you're aware our portfolio is weighted toward southern yellow pine species in southern yellow pine prices were down in the quarter Where's things like SPF were slightly higher.

Production and shipment volumes were slightly lower in Q4 versus Q3 again, the Hammond mill shutdown factored in as all of.

The regions had fairly comparable about volumes in Q4 versus Q3.

Net realizable value adjustments on log and lumber inventories were a negative $5 million in Q4, whereas it was a positive contributor to EBITDA in Q3.

So despite those previously.

Lee mentioned items adjusted EBITDA wasn't as I said earlier a bit better in Q4 over Q3 as we started to see some early stage progress from a b C coast business reconfiguration initiatives.

Another notable PML item in Q4 was the $30.4 million pre tax.

Asian for capital asset write down in restructuring charges. The vast majority of those charges, but 29 million are noncash 13 million related to the write down of legacy goodwill in 16 million related to equipment write downs. These adjustments are based on normal course yearned analysis.

After incorporating our views on operating plans and other macro assumptions.

From a cash flow standpoint.

As the in said earlier, a big focus for US has been on working capital discipline over the last number of quarters more specifically working capital declined in Q4 for the third consecutive quarter.

In Q4 came down by about $8 million. Despite some seasonal log building NBC in the coast in particular as well as the payment of $8 million and severance for Hammond employees.

You are in lumber inventories were near their lowest levels over the past three quarters accounts receivable was also.

The down a fair amount and a large component of the working capital decline over the last couple of quarters is it related to the closure of Hammond is working capital repatriation was a fairly large factor in the shutdown decision.

So I want to talk a little bit more but ham and shut down for a second as it relates to the working cap.

Component.

Often working capital repatriation to mill shutdown scenarios involves a lot of risk and often results in compromises on value realization.

In the Havent situation, our team did an exceptional job on executing the plan and as a result were able to maximize our working capital values.

Very effectively more specifically, we expect approximately $40 million of working capital back from Hammond. Most of that was achieved in Q3 in Q4 with a very small balance to go in Q1.

Further on cash flow for the quarter Capex was $37 million in Q4 hundred.

$1 million for full year 2019 in 2019, we completed the phase one projects at Monticello Meldrum and started the phase two projects spending.

The result of this double cohort year on projects was a relatively high level of Capex. Therefore, as we cast forward into 2020.

Expect our capex spending to come down in 2020, it should be closer to $140 million to $150 million range of which approximately 100 million will be for discretionary strategic capital projects.

From a balance sheet perspective, uterine net debt was $225 million, which equates to about 21% net debt to.

The capital very strong liquidity at around $363 million again, as Ian said earlier balance sheet is important having a rock solid financial position will continue to be a core principle for us.

Lastly, I'd like to quickly mention the recent announcement by the department of Commerce from earlier this week.

Regarding to reduce preliminary countervailing and anti dumping duty rates that would apply to 2017 in 2018.

We recognize that these are not final and are subject to change, but reducing the combined rate from approximately 20% to approximately 8% is very.

Sizable and very notable to put in order of magnitude around it we paid duties of approximately us $94 million through to the ended 2019.

A portion of the past duty paid that related to the 2017 and 2018 years is around.

$60 million us virtually all of these amounts were previously expensed and are therefore off balance sheet items for us with that being said why don't I now turn it over to art to provide some market context.

Thanks Marty.

I'll talk about three general areas here.

This.

This quarter.

Firstly, the demand secondly, I will get into appeared on the supply side.

Lastly on top of inventory and pricing.

First demand some positive signs obviously, we've seen some some good headline news on housing starts throughout the quarter.

Frankly.

Which has been very encouraging.

The aging housing stocks in the U.S. and increased equity and existing homes.

Continue to support growth in lumber usage for home improvements.

Macroeconomic sorry macroeconomic factors, such as employment interest rates wage growth.

All all seen as positive.

How that translates into order files for enter for we've got a solid order follow across the network, but the vast majority of inventories that are sold and in the queue to be shipped.

On the supply side low single digit net growth in lumber production in the southeast has been more than offset.

By the significant permanent curtailments in Canada.

The export markets are challenged by trade negotiations.

We're still very meaningful volumes for the industry.

In the overseas markets for us our export business has been steady quarter over quarter.

Imports from Europe, essentially the same year over year.

Looking at North American lumber production at declined to 2019 versus 2018 again, primarily as a rural result in the massive permanent curtailments in DC.

On the inventory side.

Always difficult to gauge.

We continuously.

Pull the market to try and find out.

What the inventory situation as our customers are telling us.

End market inventories are in the range of 30 to 45 days.

Assumption I would say that thats a bit below average as we hadn't head into the spring.

Building season.

For enter forward again.

Stories, essentially committed tied to how fast we can ship them quite frankly.

In terms of buying patterns.

I would say they've changed in 2019.

That's what I've turned as just in time buying.

And that's encouraged by ample availability and stable logistics, which we've seen.

Pretty much taro.

29 team.

On the customer side.

They have been able to find what they need what theyve needed.

And for fairly quick shipment.

So far seasonal dynamics haven't played much of a role I think thats beneficial from logistics standpoint, both in terms of.

Thanks to the market, but also in the construction activity in the market.

So we're having a decent winter when it comes to.

Producing and shipping lumber, but also consuming lumber.

We're encouraged by the fundamentals that we're seeing so far in the marketplace. We look forward to these translating into higher lumber.

Yes.

In 2020.

With that I'll turn it back to you.

Okay. Thanks Bart.

Carol operator, we're ready to take questions.

Thank you.

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Press the pound rehash Keith.

Our first question comes from Hamir Patel from CBC capital markets. Please go ahead.

Hi, good morning.

Yes, it seems like there's been some discussions in the BDC industry that the province may look to modify the lag.

In the Stumpage equation later this year to make it more.

Market base.

How meaningful could that be and any sense as to yet as as to when the likely timing of that could be.

Thanks Amir.

Yes, I guess where the.

Way that I would answer that is there's ongoing discussions with.

The BC government, both on the coast and the interior with different dynamics in different.

Drivers on.

Cost inefficiencies and what have you but.

Yes.

There hasn't been anything.

Significant or concrete.

Changed relative to the stumpage calculation.

But you know industry is working closely with with the government to look at all those variables on how.

We can get.

Cost.

Back in line with.

With where we think it needs to be I mean.

Just as a reference I believe the coast is operating at 30%.

Of capacity right now so.

Very.

Very challenging with 70%.

Yes.

Down so.

Just ongoing Amir.

I don't have any other information.

In that.

Fair enough yet so that's helpful and just just one for us the bar.

Any sense, yet as to how the Corona viruses is affecting.

Hi, takeaway of both the lumber and logs.

And in China.

Yeah.

Obviously, a subject pets.

That is front and center.

For us.

It's a little hard to say I'd say that that that file as kind of emerging.

We haven't got.

Really the industry back and then.

And working yet thats due to be next week. The biggest concern I think from my standpoint.

Is the backing up of the supply chain.

We've got that adding an extra week before people come back you've got a bunch of ships.

That are cued up.

To go into port.

And I and obviously the efficiencies in the port today are.

Our are very low so that's that's my biggest concern and I think that that could cause some delays and some shipments.

We're not only in lumber, but you know and all the products.

That are imported into China, and so I think thats.

The focus item today to make sure that we're managing that and minimizing any risks our product on the water.

And then.

The next couple of weeks couple or three weeks I think we'll have to gauge.

What what the market impact is at this point, we're we're on churn.

Sure enough.

Thanks, That's all I had I'll I'll turn it over.

Our next question comes from Mark Wilde from BMO capital markets. Please go ahead.

Good morning in Marty Burke.

Hey, Mark.

I wonder just to start off.

Ian.

Do you think that this change in the duties.

Will alter kind of plans in terms of any potential further.

Capacity rationalization or whether it might actually bring some capacity back into the market.

You know Mark we've talked about.

A lot with with this recent announcement.

I think that the fundamentals.

You know investment in running your operations or you're just going to come down to.

What the what the price outlook is so.

This point.

I don't I don't know of any.

Anything that would change I haven't heard of anything that's going to change.

And I think it's just too early to tell where this is going to go but the end of the day.

Where the lumber prices in the fundamentals are really I think in and drive those those decisions on the outlook Marty do you have.

Anything Mark remember also like when we look at the rationalization that happened in BC last year. There are a lot of drivers. The single biggest driver was log availability and long costs and so the fundamentals haven't changed in terms of the contraction of log availability. So.

But I can't speak for all of this.

Situations, but a good chunk of the mills that have rationalized just didn't have adequate log supply and frankly some of them have been dismantled so I can't see a scenario, where those permits curtailments aren't anything other than permanent.

Okay, just on that Marty I thought in some places in the interior.

There were a number of mills in the fourth quarter that were down kind of running a single shelf.

Are you aware of any kind of changes that any of those single shifts mills.

It seems like they would be the things that are on the bubble.

Yeah and recognize also some some folks will take a path to permanent.

Elevation in steps and taking down a shift taking down the line. It's not meant to be a temporary it's meant to be a step towards something more permanent so yeah, I don't see I don't see any shift back in those that we have visibility on.

Okay, and just a again on the kind of supply side.

Can you.

Give us a little more information on where we're at with the tenure transfer I see that you're still kind of pointing to.

First quarter resolution, but it just seems like these things off in wind up getting.

Tied up and stretched out.

From a timing perspective.

I think your last comment.

Is pretty accurate characterization stretched out.

We announced that deal with can for back.

In the summer of 2019, and we've gone very collaboratively collaborative we with them communities first nations various folks the government.

And so it would be.

The application is in the government's hands there working it through and there's continuing feedback that we haven't had a decision yet back. So we're still awaiting that they've indicated to us that should be shortly.

Shortly is.

Is all in the either sold or I guess.

Okay.

And then Bart I wondered is it possible for you to talk about sort of the ways in which you think this central European spruce Beatle.

Will affect the industry and effect inter for.

Okay Big topic.

So there's a number of.

Yes, I mean, there is obviously the impacts on the lumber market.

There's also the impacts on the log market.

I think that Theres.

We're hearing that Theres, a fairly short lifespan.

Of these.

These logs once they are impacted by the spruce speeds and so.

I think that Thats tempering.

The industry from spending too much money on.

On.

Combat lumber capacity in lumber production capacity. So I think there is a there is a limit on how much of that can be done.

Bottom line is is that.

That's going.

To drive a higher level of low grade.

And so we're going to end competing with that low grade.

In our overseas markets.

It will also.

I think encouraged and producers to.

Target to us market.

As I mentioned.

I think they've been doing that.

So we're seeing the impacts of that today already.

And I'd say, so far those volumes have been.

While the been steady year over year, essentially the same and the growth, but that certainly is being forecasted for next year's fairly moderate.

It's the log side I think thats.

Probably the bigger impact.

As they try to get some economic value out of that out of that timber.

And so I think that.

The primary market.

For that is China.

And that's where we'll see the the most important.

For us at enter for that's fairly small.

And thats not a huge part of our business.

For other countries.

It's it's a it's a lot more significant.

I guess like a new Zealand.

Correct.

Yeah, I'm just curious does the beetle damaged would does that compete directly with a lot of the stuff that you guys had been exporting into.

The China.

So to your own lower grade stuff some of it maybe still beetle damaged from BC.

Oh, well I mean.

The low grades a lot of that Houston, and whether its packaging or concrete forming our things like that.

I would say.

That the low grades that you'd see edinger would be similar.

Forms of.

How they being used.

So thats yet we expect some we expect some impact their ability to ship into certain parts of China, a little bit different than ours and so.

I think the markets will sort all that out.

On where where.

Were you able to compete animal and where we're not.

Just just as a reminder market. It's yet I mean are as you know our southern interior mills are really greenfiber with no no beetle kill aspects to our great offering to.

China is.

Different than northern BC caribou area.

We just have.

Higher quality fiber in the southern interior.

Okay, and finally, and just how it's I guess, what you're in your your second month in the chair there can you just.

Talk.

With us about what we might see shift even if it's a kind of a subtle shift.

And therefore under your leadership.

Mark.

I mean, obviously you've thought about this lot and.

You know internally.

Communicated.

What.

What I believe in my team believes is our outlook and frankly.

It's not a lot I think we've got a good strategic plan that has been refined over all of the years.

I think it's always.

An opportunity to take a fresh look at the portfolio and what what needs to.

We invested in.

What opportunities might be out in the field so.

The the great thing a boat I think our company is.

Well, particularly over the last decade, or so we've we've got a playbook, we feel comfortable with it and there's theres not a lot of changes and as I you My opening remarks.

I mean capital allocation is something that we think about a lot and.

Maintaining that.

Focuses.

Finally, the big the biggest thing that we're always talking boat is are we were doing right when it comes to.

Use of capital and so I think.

No if that.

Sounds boring, but I don't see a lot changing.

Okay fair enough.

I'll turn it over.

Thanks Mark.

Our next question comes from Sean Stewart from TD Securities. Please go ahead.

Thanks, Good morning, guys.

Follow up question on the the the timber tenure acquisition.

Well I suppose but if the deal isn't approved how long do you envision.

Adams late being able to sustain two shifts.

How's that thinking evolving.

Yes so.

The Adams Lake Mill.

It was.

Bill.

It's a super competitive.

No. It was built to compete on the open market.

For fiber and with the rationalization in that area of tell them the C.

What's the number Marty in that area, one button billing.

Oh 1 billion board feet of.

Capacity has been permanently taken out around that area. So yes, the timber transfers very important for us.

For the long term view about them play but.

It also is the most competitive mill in the region and.

Yeah.

You know over the last year. So we've we've.

Obviously had the benefit of a few tough decisions that other companies have made in that area with with rationalization. So.

I feel very very good about Adams Lake running on.

Full shifting.

Got it.

Question.

Part.

Just wanted to.

Touch on the southern pine market and a little bit more detail, it's been a relatively sluggish.

Start to the year and you mentioned European imports being a factor at the margin can you talk a little bit about capacity growth in the.

And your sense of all the Greenfield mills that were built how those are ramping brownfield expansions, including some of the work you've done how's that affecting the operating rate environment in the region.

Okay.

If you look at a if.

You look at the information that's published by the Southern Forest Products Association.

They talk about year to date shipments out of the so being 2% above the same period.

2018.

So really it's it's the expansion of volumes has not been that significant.

And I.

I think that I think there's there's a couple of things one is that when when you're when you're allocating capital and putting in equipment down in itself.

Sales are not as productive.

Through that process and then also when you ramp up they take a little bit longer than I think people people anticipated. So.

We just really havent seen the.

I suppose that that production.

Come on line.

You know compared to all the announcement so were made and I think we'll see some of that continue in 2020.

It's a little uncertain to say.

In terms of in terms of.

The self.

You know, it's I talked earlier in my comments. This whole just in time buying I think it's probably most.

But then.

In the south.

You know predominantly truckload.

Shipments.

So you know the order files are generally.

Really.

Hello.

And the shipments very quick so I think that that the buyers down there have gotten used to being able to get what they want.

And you know I think the weather so far this year it has been a little bit went down.

There, but you're seeing some of the bigger markets really really pick up.

And so we're we're quite frankly, we're a little bit surprised at the self hasn't.

Come Hadnt seen a little bit more attention.

Especially when you compare that to the west I mean in particular.

How the stud market in the.

West as.

Is very strong and so if you look at the historical trends.

I won't make any any sort of forecast, but if you look at the historical trends the south.

Has really.

Has really shown an ability to respond to that.

Nice increases in the west there there have been disconnects every once in a while we have one right now, but historically they don't last very long.

So hopefully that answers some of your questions I mean, it's a big topic.

Especially in item.

That's great part I appreciate it that's all I have guys. Thanks.

Thanks, Sean.

As a reminder, star one on your telephone in order to ask your question.

Our next question comes from Paul Quinn from RBC capital markets. Please go ahead.

Yes, thanks, very much morning, Ian Meridian Bert.

People Werent.

Just following up on this.

Finally, ruddock potential reduction in August.

What's what's your view on on an implication if we get the 20 that down to eight the affected that on lumber prices.

Yes.

Paul.

Okay over to borrow [laughter], yeah. So I you know.

That's been asked that question a lot national wallet and you know really it's a it's a cost item just the same as logs or a cost item.

And when you look on the on the revenue side. The prices is obviously an impact as well and.

The magnitude of that reduction although.

So a meaningful.

It doesn't it doesn't really change how we would approach the market I mean are our efforts in the marketplace or at a price our lumber at at the highest possible price at the customers willing to pay.

And so we've tried to keep that duty influence out of it I think.

It does it does bring a little bit uncertainty from a from the buy side.

But really if you consider all the inputs in variables that are that are involved.

You know on on the call on the cost side of lumber. This is just one of many that quite frankly have been very volatile.

Over the last while.

Okay. So so net net do you think it'll go down.

Well.

Let me comment on that one.

You're asking about what the market is going to look like in the month of August.

There's all kinds of variable so in some ways you almost have to strip.

Up away this off the softwood lumber duty and just say given the cost curves that exist does the current price environment makes sense current cost and price environment doesn't make sense given the cost environment. So you sit back and say, okay something's going to change something will change at some point, we just don't know exactly what the path.

So trying to predict what things look like in August is probably a bit of a mugs game Paul.

Yes, Okay, just add to that you know the only thing right about a forecast is that it's wrong.

That's my job, maybe maybe there.

Flip over and you mentioned the coast.

Operating 70% whatever inner force coastal operations early running right now.

Yeah, Yeah, they are pauls or.

Of course, the woodlands is is operating and our Acorn mill is operating on its normal operating cadence.

Okay, and then just I know you guys are.

We are focused on executing on phase one phase to.

Capital projects, but just one everybody M&A side, whether you know this year has got off to a sluggish start, especially in the U.S. So just wondering if.

You see more opportunities to acquire mills.

In or or mill.

Yes.

Actively marketing their their facilities.

Yes.

Hard to answer Paul.

Yeah, I don't know I think it's the environment.

It is going to dictate that on one off but.

Where we.

We monitor that Theres always inbound calls but.

Yeah, I don't know.

I mean, the reality is we've looked at lots of situations. All the time. So just the current environment doesn't really change. The fact that theres always stuff that is out there there's a pretty strict set of criteria that.

We have so sometimes you get buyer and seller, who have a lime and sometimes we see situations that don't meet our criteria and we don't spend an awful lot of time on those situations. So it's pretty hard to handicap other than to say, we look all the time and have been looking all the time, but we're going to stick to our criteria.

Alright vessel like us.

Yes, Paul.

And I have no further questions in queue at this time I'll turn the call back for closing remarks.

Okay.

Well I'd like to thank everybody for dialing in and participating in our update call the sporting and your interest in our company.

If you have any further questions.

Please feel free to reach out to myself for Marty anytime.

And.

Thanks, again and have a great day.

Ladies and gentlemen. This concludes today's conference call. Thank you want smart for participating you may now disconnect.

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