Q4 2019 Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to the West Space. Your Q4 20 that came with its conference call at this time, all lines and listen only mode.
Following the presentation, we will conduct a question and answer session.
Anytime during this call you require assistance please press star zero for the operator.
<unk> looking statements. During this conference call, what's patients representatives will be making sense statements about potential future developments.
These forward looking statements are intended to provide a reasonable guidance to investors, but the accuracy of these statements depends on a number of assumptions and is subject to various risks and uncertainties.
Actual outcomes will depend on a number of factors that could affect the ability of the company to execute its business plans, including those matters described onto risks uncertainties and the company its annual Mdna, which can be accessed on west piceance websites like <unk> or two seater as a supplemented by the company's quarterly MTN ace. According.
When you listen I should exercise caution and relying upon forward looking statements.
This call is being recorded on Wednesday February 12, 2020, and now now let's turn the conference over to my Ferrous President and Chief Executive Officer. Please go ahead.
Thank you operator.
Hi, good morning, everyone and thank you for joining us today.
With me is our Chief Financial Officer, Chris for Astec, as well as Chris Mckeever, Vice President of sales and marketing and their number other a number of our other senior management team.
I will make a few opening comments and then Chris for US take will review our fourth quarter results.
When you 19 was a transition year for west Fraser on several fronts.
Firstly, we adjusted our Vichy capacity to more closely aligned with the animal tumor supply.
Which included permanent capacity elimination of over 600 million board feet of lumber production, including the closure of our CASM song.
Additionally, late in the third quarter, we implemented variable operating schedules at several of our BC operations to further adjust to the economic available log supply.
Although a minute most of British Columbia operations have she has returned to normal schedules. In early 2020, we will continue to be disappointed to reduce our costs and to manage to the available log supply.
As log supply and demand normalizes in British Columbia, we expect to see BC returned to being a profitable region.
It is important to recognize that BCEI.
Is home to some of that most highly skilled workforce.
And achieves the safest most productive utilizing some of the best technology available in any force manufacturing region in the world.
Secondly outside of British Columbia, Our Alberta operations in 2019 were impacted by a severe early fire season, which was closely followed by wet weather throughout the summer and fall.
When coupled with contractors shortages in northern Alberta, This led to unprecedented low log inventories, which impacted our productivity and led to several curtailments.
Additional logging and hauling contractors have been added in 2020 in Alberta to ensure inventories returned to normal levels and we expect to return I have normalized normalized operations in 2020 and in fact, we already have.
Our panels group.
Despite curtailments in British Columbia, and in the fourth quarter continued strong operational performance for the group.
With respect to Paul.
Our RBC T M. P operations continue to operate very well in the quarter.
Our M.B.S.K. operations slowed somewhat in Q4 over it improved third quarter.
And our pulp group remains focused on reliability and cost reduction initiatives.
Although we have much work to do we expect to see gradual improvement in performance going forward.
It is important to note.
We have 27 U.S., so in Alberta saw mills and when combined now represent over 70% of our west Fraser lumber production.
And then finally in the U.S.. So we continued our aggressive modernization and growth plan.
With several key capital project completions occurring in the last half of 29 team.
Early progress on the startup curves for these projects has not been easy, but it has been encouraging.
Our U.S. group is excited to have a significant disruption period behind them and they are focused on achieving their expectations I'll discuss later two of the major initiatives currently underway in U.S.. So after Chris reviews, our fourth quarter financials a Chris.
Thanks Ray.
During the fourth quarter, the macroeconomic data indicators for lumber demand improved favorably.
Housing starts and permits numbers strengthened in the fourth quarter.
Yeah annualized pace of housing starts reported in December was the highest level since 2006.
Well repair and remodeling growth may be slowing absolute spending is still on the increase.
Lumber benchmark prices increased modestly in the fourth quarter a trend we are continuing to see early and twentytwenty.
World annual pulp shipments have been in line with the previous two years.
The Corona virus outbreak in China appears to be slowing paper production in recent weeks.
Excess hardwoods supply also currently exists in South America. These factors appears stage to keep a lid on pulp pricing through the first half of Twentytwenty.
North American lumber production declined in the year by 5%. It was down approximately 3 billion board feet as a result of permanent temporary curtailments announced in the year.
British Columbia lumber production decreased by 21% in the year Curtailments announced in the interior British Columbia permanently reduce lumber supplied by an estimated 2 billion board feet per year or the equivalent of approximately 200000 housing starts.
Milled curtailments and closures take a period of time to be reflected in reduced supply.
As mill working capital is reduced.
We believe during the quarter, our inventory was rationalize to align with current production run rates out our lumber mills.
Although there was an increase in lumber imports in the fourth quarter for the year offshore imports remained at reasonably consistent levels.
U.S. South production was up just 2% or 325 million board feet through November there has been significant capital spent in the region in recent years, but growth and output has been slow to materialize.
In early 2018 weather caused delays in shipments, which disrupted the supply chain caused SPF shipments to be well below production.
Demand and supply became unbalanced prices started to increase.
This backlog of inventory was shipped into the market in the second half of 28 team.
Correct with a softening and new home construction.
Cases began to decline, which led to both permanent and temporary curtailments announced in British Columbia.
Shipments exceeded production in 2019 as working capital from Curtailments and closures was liquidated.
It appears this working capital liquidation was still in the process of being completed during the third quarter. The latest information we have available.
Lumber pricing showed modest increases in the fourth quarter of 29 team.
Trend that has continued into twentytwenty.
Turning to our financial results. The lumber segment performed better in the quarter as EBITDA improved by $30 million to $69 million on improved lumber pricing and lower fiber costs.
Final results were in line with the previous quarter as lower sales returns were offset by improved conversion costs.
Open paper results declined $4 million to a loss of $1 million as higher shipments and improve conversion costs were offset by weaker prices in the quarter.
Comparing to the third quarter of 2019 pricing positively contributed to our results with our Canadian lumber business experiencing improved SPF benchmark pricing in the quarter.
That's why be in pulp prices were relatively unchanged quarter over quarter, well plywood prices had a small decline.
Fiber costs improved overall as we work through higher cost fiber procured earlier in 2019 and late in 28.
Variable operating schedules were implemented a number of our mills in an effort to consume only cost effective fiber.
He was a negative contributor in the quarter as we finish shipping the backlog of inventory associated with our permanent curtailments in the previous quarter.
Turning specifically to lumber price positively contributed to our results.
As the SPF to buy for benchmark price increased.
Fiber costs were also a benefit and variable operating schedules.
That were implemented at a number of Ms Mills.
Lumber production decline from the third quarter as variable operating schedules were deployed in the number these mills and that's why production was flat.
Lumber shipments were lower in the quarter due to lower production due to less inventory being drawn down as compared to third quarter.
Pulp and paper shipments improved with better be cgmp production.
Cash flow from operations declined 76 million to $40 million for the quarter, which was impacted by the seasonal log inventory accumulation in our Canadian operations.
Adjusted EBITDA improved in the quarter by 25 million to 80 million as a result of lower costs and improve pricing.
Capex declined by 46 million sequentially as we ramped up projects earlier on a year.
Net debt increased slightly and liquidity remains strong.
Debt levels remain very manageable and ample financial flexibility of approximately $500 million remains available with no near term maturities.
With that I'd like to turn it back over to Ray for an outlook on 2020, and an update on some key projects.
Okay. Thanks, Chris just a couple a general comments on the outlook for 2020.
As we look forward Oh, we do anticipate our Canadian SPF lumber production and cost to improve over 29 team.
Primarily as a result, recapturing production loss due to temporary curtailments and a return to normal operations held in Alberta.
As well as an expected general overall productivity improvements, resulting from just less disruption.
These comments are the same to our panels business as they are closely aligned with our Canadian lumber operating strategy.
With respect to Paul MBS K production as it is expected to increase on improved reliability and benefit from somewhat smaller planned shutdown impacts.
We expect continued strong operational results in our BC 10, P. business, albeit what we expect will be tough markets.
With respect to log cost in British Columbia, We do expect to continue to decrease in 2020 as we have seen in late 2019, as our operational footprint as better aligned to the available fiber supply.
The U.S., so and Alberta log costs are expected to generally be within a range relatively flat year over year.
In the U.S. out.
Our southern yellow pine production is expected to increase by roughly 10%.
As we continue to execute on her modernization and growth plans.
Despite headwinds in the U.S.. So we remain confident and motivated about the opportunities still ahead of us.
So with that typically with 47 operations.
Oh, I'm reluctant to often talk about individual projects.
But it is important to describe our U.S. set of strategy.
Orange Sawmilling Opel like Alabama is a great example of the opportunity that we see in the so.
We've been ramping up the sawmill facility in 2019, and we'll complete the final Planer mill phase in the first half of 2020.
With respect to technology, we're making a multi generational upgrade.
Essentially from a 1980 technology to the currently best available as expected we are seeing a significant uplift in all of our key metrics safety productivity and cost reduction.
With significant further upside as we reach our our operating expectations, perhaps most importantly is our people strategy improving the work environment, while creating fewer but higher value jobs is key in reducing turnover and key in our ability recruit and retain the people needed to be able to execute on this technology.
Energy.
Turnover has reduced substantially which we believe is key to achieving our expectations.
We have also began construction of our new manufacturing complex and deadly Georgia.
The area benefits from a good fiber supply and the strategically located close to key lumber consuming markets in the U.S. So.
The current deadly mill will continue to operate through this period, but no impact on day to day operations will be working through the construction of the mail through 2020 and anticipate a startup in early 2021.
Similar to overlay gap, we expect as with other projects, we expect growth in production.
Cost reduction and further execution of our overall people strategy.
Our focus is on achieving our operational expectations.
Reducing cost, while improving value or the areas that we control and we see see significant opportunity to improve in both.
We are encouraged by the projects, we've been able to bring to completion in the U.S., So and look forward to continuing to operationalize than in 2020.
We remain committed to deploying our capital prudently.
To support our low cost operating platform.
While there are many factors that can can temporarily influence markets that may be outside of our control.
Market fundamentals appear favorable.
And the environmental benefits of building with would have never been more Claire and more accepted.
Both of these conditions bode well for their continued growth in lumber consumption.
Further to that the recent news on duties was encouraging.
Notwithstanding an unforeseen change we expect to see meaningful reduction in cash deposit rates later in 2020.
Finally, it is our employees at West Fraser that have taken on the burden of transition in the past year and in doing so have improved our overall ability to tackle whatever challenge comes next.
Dedication and perseverance of our people across the company is what I am most thankful for I'm proud of.
Thank you and with that operator, I'll turn it back to you for questions.
Thank you.
Ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by the one on your Touchtone phone.
You will hear three top prompt acknowledging request and questions I pulled in the auto safe.
If you wish a decline from the planning process. Please press star followed by too.
If you are using speakerphone, please let the headset before pricing any Keith.
Your first question is from Paul Quinn from RBC capital markets. Please.
Please go ahead.
Yeah, Thanks, very much morning, guys.
Okay.
Hey, just a question on a you singled out imports of Lumberton, North America being flat over the year and but up in Q4, we're seeing other companies reported a lot more activity from a especially the Europeans is is that trade any China gets plugged and ER and they're looking for home for the Islam or do you expect that in 2020 in India.
Going to be a material increase.
The ball, it's a it's Chris Mckeever I'll I'll give your question.
Shot you know week, it's I find this quite interesting weve.
We haven't really bumped into a lot of European lumber, we hear about it all the time, but it really hasn't affected our business in North America and U.S. in particular, a if you look at the stats there roughly.
Maybe a little bit more than a third of the peak in a in the early two thousands so it's a factor, but I don't think we've seen it in any way coming in the way that some people are talking about yet now will that change it. Good. It certainly could we do see a bit more of a factor we think in China.
Good on logs and and we see a bit more lumber going into Japan as well from here.
Okay, and then I guess moving over to the.
Capex side, you mentioned that dead lease or a good chunk of your Capex budget in 2020 can you sort of an approximate cost what what greenfield costs now and is that move materially over the last number of years.
Paul a history here so on.
I you know starting to answer that two ways that yeah yeah.
Not going to have kinda give the you know what what the cost of deadliest, but it I don't think has changed a lot in the last let's say 18 months, but I wouldn't say you know there wasn't material change I would say for a couple or three years, there on capital cost I'd say they've kind of.
Flattened out something like last 12, or 18 months little bit.
So and then.
And then with the with the drop in the southern yellow pine prices of late.
What's the level of overall M&A activity down there is or mill owners are they looking to get older. They.
Happy to hold on what.
Can you compare the activity you know versus the six months a year ago.
And a good question I would say you know for at least from my perspective, I I'd say, it's a it's the same I'd say, there's there's there's always something that's available doesn't mean that that's something that fits west Fraser, but I'd say.
It's probably slower than it was a couple of years ago, but it's been pretty consistent over the last say 12 months something like that said, it's it's quieter but.
I think.
My guess is people have high expectations much the same as we do.
Okay, and then just lastly on the pulled side you mentioned shutdowns, who will be a positive with respect to 29 team. What is what do you think that delta will be in.
Money.
I can give you did what that delta would be up Paul you know I think are we just have smaller scope shutdowns and I don't think it's a material change I just think it'll be a you know.
You know a little bit better than it was last year. So.
All right. That's all I had best of luck S and X.
Thank you Paul.
Thank you. The next question is from Mark wealthy families BMO capital markets. Please go ahead.
Turning right morning, Chris Hi, Good morning are.
Right just to kind of starting out I or maybe for Chris.
You flagged the lower fiber costs in the fourth quarter 24 million on lumber I'm curious how much of that is just lower costs in British Columbia, how much of that is just a kind of a shift in your regional mix toward Alberta, and the U.S. So.
You know there a piece of it would be that that shift, but that's probably not the biggest piece of it the biggest pieces really the management of the fiber supply to you know only bring in what is what economically makes sense for us to operate on that that would be the biggest.
Portion of that have that improvement.
Right and then another one on on fiber I guess, just more broadly you know its striking to me that we do have loves fiber available in western Canada, but it hasn't really had much of an effect pulp and paper capacity in Western Canada.
Should we anticipate.
Now ripple from us over the next couple of years do you think.
You know I think it's a it's it's public knowledge and Theres been information out there in the public demand and you know when you reduce.
The amount of residuals that are being produced in British Columbia.
Ah Theres certainly a strain on a on residual throat British Columbia, I can't forecast, what that will mean, but you know when I look at our operations. We've been you know planning or how to make sure that we had the fiber to run our mills for a long time, but without a doubt marketers gonna be stress.
In British Columbia, and it and we'll have to see how that plays out.
Okay, and then Chris can you help us with the.
Change and duties I mean, it looks like if these duties are be for prior periods are being kind of reduce.
Well I'm, not a mean that you'll get or a refund of sort of the.
Difference between what you've been paying in the newly assessed rate.
I think you know our assessment of the situation is that it's highly unlikely that we'd get any cash refund did in the near term in the absence of some sort of settlement of the of the process. The change in the rates themselves as a result to the administrative review.
That does not trigger a refund of what you paid in excess of what those rates that they determined.
So it's growing but [laughter].
Okay and then.
Can you guys also give me a little sense of kind of what you're seeing in the pulp market.
Right now just visa be kind of activity in China.
Mentioned lower activity you know I've also heard maybe some back up.
The ports are there were some reports is last weekend that maybe people renege in China reneging on some earlier purchase agreements. So just any color that you can give us there would be helpful.
Mark It's Chris [noise], Yeah were.
You know it's early days first of all we're coming out of Chinese new year, which always is a bit of a slow period for us, but what we're hearing from our customers is generally they're busy.
Paper, guys, a little bit less so tissue and towel producers are very busy.
We do know that you know they struggle a little bit with workers, we have some concern around logistics with shipments getting delayed and then vessels getting out of sync, but we haven't seen that yet and we've also had no problems with err on the financial side at this time.
But it is early days.
Okay.
Then just kind of toggling over to this a project that it suddenly it just kind of raised the question for me of where you're at overall with Oh.
Productivity improvements that you talked about being able to get out of Gilman back. When you made that acquisition. So maybe just an update on that I think you talked about potentially.
Fiber productivity improvements of all the way up and the kind of 20 and 30%.
Oh, Yeah markets. It's ray here. So first of all that I want to say that we expect to get our our duties returned to us at some point so okay. So I.
I agree with your comments the second part.
Someone asked me, where we were in our capital program quarter, too and I think I said, a bottom of the path or something like Don Oh, you know <unk> and I still would say we may have moved from the bottom of the fast at the top of this extra or something so you know we still have what I would say is that we.
Uh huh.
The in our U.S. platform is going to be far less disruptive than it was up for the last say 12 or 18 months, so most and so.
The impact of the capital at won't have a you know just won't keep us off our game.
And I would say with respect to the Gilman assets.
Yeah, we still have a quite a bit of opportunity that we see ahead of us we like our current position very much a we're gonna be we're going to be a thoughtful and ER and prudent on how we move forward with that but yes. So it's not something that we're trying to close the books on in the next.
Here and a half we see this is a you know a bit of a path for the next few years, so, but there's quite a bit runway left that we see.
Okay, and then an open like is that Sterno, Ben you know a longer curve than you expected.
I have not I'd, probably had to start ups in my career that were shorter than I expected.
And the other 98% the other way so <unk> a good question I would say our stereotypical Blake I has has parallel many of or other startups, what I'd like it to be faster and better absolutely.
But we're quite pleased with where we're currently at and whenever trending to.
Okay and the reason that I asked the question is that I I have heard that there are some other new projects that have had.
Really significant.
The longer startup curve than they were expected.
And what I'm hearing about its just issues with the contractors and things.
So mark I'll just.
Calling that quick look we're I'm, we're not immune to those things either you know we I think we've got broad experience you know, both north and south on these things whether good and bad.
And I would just say that.
It's a big challenge.
And it's it's always a little bit harder than what you expect the with a shortage of labor shortage of contractors.
Sometimes shortage of skills.
It just adds that challenge to actually came in in those regions and so you know it is a little bit more difficult I don't think the challenges is waning a with the current economy in U.S., but good economy has pluses and minuses will take the pluses.
Okay sounds good well listen good luck in the coming here. Thank you Mark.
Thank you. The next question is from shots to it from TD Securities. Please go ahead.
Thanks, Good morning, guys.
A couple of questions or Chris Mckeever I'll start with you.
Your perspective, I guess on the lack of momentum were seeing for prices lumber prices in the U.S. says to this point.
How much of that is just ongoing capacity ramp both greenfield and brownfield sounds like you arent seeing European imports affecting things too much is that the wet weather any context, you can give us on the lack of momentum in that region that good morning, Sean [noise]. It is you know it is quite interesting what we're seeing right.
Now in the South I. There's no question, we got a bit of a seasonal effect the weather hasn't been great. It hasn't been nearly as bad as it was a year ago. I think we're also seeing customers keeping their inventories pretty tight.
Are treating customers, which is a big segment for us certainly have.
And holding back a little bit more than usual a there is starting to buy a bit more but.
There does appear to be ample supply on our order book is really good in the south right now are inventories are an exceptional shape.
But we are price has been a bit of a struggle. So a you know it appears that there's certainly ample supply around right now.
Just different than in Canada.
So that detail.
And it's really a question on the pulp production schedule. This year it sounds like you're expecting overall better productivity out of the craft Mills can you give us some detailed on the how the downtime schedule stacks up this year just to help us style and the the quarterly variation a little bit.
So sean or.
Yeah.
Yes, we split it up like last year, we kind of went back to back with our with our pulp we're going to split up do one shot in the in the first half and the second shot later in the third quarter. So there would be a bit of a gap and we've done not.
For that reason, so that we can be better organized and spread it out and make sure that were we have the full attention of our contractors and vendors in order to tackle both shutdowns. So that's that's a.
That's the detail I can give it.
That's helpful or the rest of my questions have been answered thanks, guys.
Thank you shop.
Thank you ladies and gentlemen, that's I mean my does she didn't have any questions. Please press star followed by when.
The next question, it's fun Hamir Patel said sad to see capital markets. Please go ahead.
Hi, good morning.
I want to get that you know in your outlook you referenced a arent are indicators decelerating and reduce signs of reduced in industrial demand. So any color you can give there on what you're seeing in terms of your own volumes with the big box stores for iron ore and how are you know what how are you can measure.
In the demand trends in industrial well good good morning here and I'm, you know I'm going to let Mr., Chris Mckeever that tackle all morning Im here [noise]. So.
Both industrial and are in our pretty hard for us to measure accurately.
But.
No. We do think that are in our slowing down that doesn't mean, it's still not increasing year over year. It's just that the increase is less than it has been so that's still huge segment for us call it 35% to 40% of our market.
We see that being consistent but not a huge growth. This year, that's kind of what we're seeing with regards to the box stores.
Our self business with the box stores.
Was up year over year, and it started up pretty strong this year.
And in Canada, our our program tends to be a lot heavier to plywood, but we are you know, we're seeing Canada little slower generally I think most people would say that whereas the U.S. has been okay, so and the industrial side.
A you know we kind of flex that production because a lot of its low grades we flex up between the U.S. and China, depending on where we think to better return is.
Great. Thanks, Teresa that's helpful Atlanta. Thanks.
Thank you there.
Thank you. The next question as a follow up from Mike loyalty from BMO capital markets. Please go ahead.
Yeah, you called out the reduction in BC fiber cross and 2020 I just wondered if it's possible Oh.
Help us quantify that at all.
<unk>.
Well the years still in front of US Mark you know what I would say is that you know.
In British Columbia, you you know we tend to secure our fiber you know a pretty significantly in van and advance. Yeah. You know we have to remember we started making any industry, we're making a pretty significant changes in British Columbia to change our our our behavior. A you know really early last year. So.
No.
You know I, you know I would say or you know we expect some cost reduction NBC, but you know we you know to.
Significant cost reduction probably doesn't happen you know until really 2021, but but I you know our expectations is ER visit is a continuing trend of you know slightly reduced fiber costs.
It really would you expect what's kind of fiber costs coming down.
In the duties coming down.
Much capacity that might be idled right now winds up coming back.
Well I can't speak for others, Mark I can only speak to.
Oh, I, regardless of markets and regardless of duties I see a you know we can only operate on what the available timber supply is that we'll continue to decline. So, albeit you may see less temporary reductions like we experienced last year, we took a week or.
Or went to a four day week or you may see less of that temporary or the ultimate pieces I don't see you know really any.
Thing that was announced permanent coming back at least for my West Fraser perspective, and quite frankly over the next two or three years I've I'd expect to see the industry and to some extent west Fraser or you know.
I have some reduction based solely on the timber supply of animal almost year regardless of market.
Okay. All right. That's helpful last one for me it's just.
Lumber volume going into China, I'm, just curious about the influence of two factors. One is the kind of the competition from that's Bruce beetle.
In Central Europe, but the other is just will your volume tend to come down over time, just as you have left beautiful killed low grade beetle kill lumber to sell.
Can you kind of help us with both of those factors.
Yeah, I would say on the first part.
What I think we're seeing a little bit of is that you're seeing substitution log for log on to timber side. So you know the European spruce, maybe substituting New Zealand fine or something.
I think you see in some of that and.
Maybe it'll take a little bit of the lumber demand, but I don't really see that.
With regards to.
Yeah, as our well as we get into more and more green timber in our low grade.
He is reduced unless we increase the amount of.
Doing better that we are putting into China. Our volumes will go down some and I and I think there's opportunity to do both but but certainly I would think that you would see less certainly lots low grade Big question is are we able to develop and find markets in China for our upper grades and that's still to be found out so.
I think I'd, just add to that I mean, our expectations or is that you know will make less low great going forward over the next few years.
Okay. That's helpful. Thanks, guys.
Thank you Mark.
Thank you found no further questions at this time you May proceed.
Oh, well with that I'd no further questions I'd like to thank everyone for joining us and I look forward to talking to next quarter. Thank you.
Ladies and gentlemen, this concludes the conference call for today.
Thank you for participating and ask that you. Please disconnect your lines.