Q1 2020 Earnings Call

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At this time, a life and listen only mode.

Only presentation, we will conduct a question answer session.

So anytime during this call. Your question. Please press Star I guess, what the operator.

Forward looking statements. During this conference call, let's face it represented there will be making certain statements about potential features.

These forward looking statements are intended to provide at least guidance twin faster.

Patrick if 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's executes that's it.

Including those matters described.

If you compete anyone MTV, which can be accessed on white spaces websites or <unk> or some seed and supplemented by the company's Carlos and Ginny.

Accordingly, you must know should exercise caution and reliance on forward looking statements.

This call is being recorded on Tuesday April 20, 2020, I'll now turn the conference over to Mike Harris. Please go ahead.

Thank you operator.

Good morning, everyone and thank you for joining us today with me as Chris Ferrara stick, our Chief financial Officer, as well as Chris Mckeever, Our Vice President sales and marketing and several other members of our executive team.

I will make a few opening comments and then Chris rock sticking to review, our first quarter results and some additional remarks.

As we manage through this crisis I think it's important to clearly communicate what our priorities here are at West Fraser.

Our first priority is to health and safety of our employees and the communities that we operate at.

Without delay we aggressively eliminated travel impose physical discussing measures improved cleaning and hygiene regimes and in collaboration with our industry competitors and regulatory bodies developed and implemented industry, leading exposure control protocols.

That would protect our fellow employees.

Sure it and when exposure and events take place it all sort of shared the shelf 14 expectations were effect isn't being followed.

We adjusted our production schedules, where necessary to accommodate both protocols and employee needs and successfully execute didn't have an almost our entire corporate personnel working from home.

These measures coupled with strictly following the health authorities direction have kept our employees in community safe.

Being designated essential industry is not something that we take for granted.

And we take our three any responsibilities very seriously.

Or an expertise to ensure that we are operating our business is responsibly and the middle of March or April in response to rapidly changing market demand, we significantly reduced lumber and plywood production in Canada, and we continue to adjust our operating schedules in both the U.S. in Canada weekly as necessary.

We're able to accomplish this.

Well attaining our best safety performance in the history of the company both for the year 2019, as well as for the first quarter of Twentytwenty.

I will provide further comments after Chris his overview of our Q1 operating results [noise].

Thanks, Ray we reported $127 million of adjusted EBITDA in the first quarter as compared to $80 million into fourth quarter of last year.

Results improved in both the lumber in pulp segments, while demand challenges associated with Covance 19, dampened panel of results, especially plywood.

Operating earnings increased by $44 million from a loss of $31 million in the fourth quarter to income of $13 million and the current quarter.

Turning to the drivers of the results, we saw improved lumber in pulp pricing compared to the previous quarter, which lifted results by approximately $52 million volume had a negligible impact overall as changes across the various segments largely offset one another.

Costs inclusive of fiber manufacturing and administrative costs were up.

Up slightly on the quarter.

On the key metrics for the quarter lumber production was up 78 million board feet to 1.5 million board feet.

Late in the quarter, we slowed syp and SPF production as a result of the coven 19 situation.

Shipment slag production by 75 million board feet with a key issues being in Sps as rail blockades earlier in the quarter challenge railcar availability for a period of time.

Alright, swipe your shipments exceeded our syp production.

As we lowered inventories while on the reduce schedules at the end to the quarter.

With price in operational improvements adjusted EBITDA increased by $47 million from $80 million to $127 million.

Cash flow from operations was a use of $162 million as we used $195 million to build log in other inventories as is the seasonal trend.

Receivables were also use in the quarter as shipment levels at the end of the fourth quarter, we're very low during the holiday period.

Before the impact of changes in working capital cash flow from operations improved by $53 million to $114 million when compared to the previous quarter.

As compared to the same period in the prior year, which is more comparable from a seasonal standpoint cash flow from operations was $106 million improved.

Capex decline from $87 million in the fourth quarter 20, $19 million to $59 million in the most recent quarter.

We have delayed or deferred most discretionary capital that has not been started.

Our focus on maintenance capital and the orderly completion of strategic projects currently underway, which remain on track and which we believe will provide significant benefits over the long term.

Net debt increased by 274 million and represents 33% of total capital a slight increase from year end, but well within parameters.

At the end of the quarter, we had U S $407 million of cumulative duties on deposit.

Last Friday, the do you will see announced that it is totally all administrative review processes for at least 50 days, which will likely extend the finalization of administrative review one rates and any potential change in duty rates from August until September.

Finally, I'd like to touch on our liquidity situation at the ended the quarter, we had $294 million available liquidity at a point in time, when we have largely wrapped up our winter twentytwenty logging activities in Western Canada.

April night, we secured an additional 150 million revolving credit facility bolstering our available liquidity to a pro forma 444 million as of the end of the second quarter.

The new credit facility matures in 2022 and provides additional flexibility in the current uncertain times.

We have no other significant debt maturities until 2024.

We remain well on side with our financial covenants in the credit facilities.

Additionally, we're do approximately $125 million of tax refunds on account of prior years.

We have shifted now as well into the seasonal period, where logging activities are limited it will be consuming the log decks, we have accumulated in western Canada.

Over the past several weeks various levels of government have also implemented a number of temporary payment deferral mechanisms that will provide a boost to liquidity during the second and third quarter.

Through the first four weeks of the second quarter, we've seen reasonable levels of demand for lumber and Paul and while on reduce schedules have made significant progress in reducing inventories across our operations. If the trend continues we would expect available liquidity to improve as the quarter progresses with that.

I'll turn it over to re for some closing remarks, thanks, Chris.

So on there are number of economic forecasts seven sounds like around that describe anywhere from a sharp be take recovery to one shape Lincoln now.

The colder 19 is an unprecedented events and it is uncertain invest what the recovery may look like and from our perspective, it's premature if not impossible for us to provide any credible views at this time.

Saying that in the mid term we do expect.

Markets for forest products to be difficult choppy and lumpy.

During these times as in past recessions, both our product and geographic diversity of lumber plywood pulp MDF and LDL is a strength, which allows us greater flexibility to adapt to the available market.

Our final priority must be to ensure that our balance sheet remains strong as we manage through this downturn and eventually prepare for an economic.

A return to economic growth and growth of the company.

As we look forward into the coming quarters and the impacts of Coca Cola 19 become more clear, we will adjust as necessary all available capital allocation labors, and Oregon maintained a strong balance sheet ample liquidity.

Finally, I want to recognize our employees that delivered strong health safety and operational performance across our entire platform at West Fraser.

We're very proud of our health safety and productivity accomplishments.

I'm pleased to see the results of our capital on margin improvement projects coming online.

Our employees continue to demonstrate they're up to taking on any and every challenge directed to them, including co. In 19. It is our employees are they must thanks for being so resilient and dedicated and making the business stronger well adapting to rapidly and constantly changing environment.

With that thank you and I will turn it back to the operator for questions.

Thank you.

Ladies and gentlemen, we will now begin the question answer session.

You have a question. Please press the star followed by the window on your Touchtone phone you will hear with me Thompson arching Everquest.

If you are used to get speakerphone, please lift the handset before passing any key.

One moment. Please state your first question.

Your first question comes from Michael healthy from Bank of Montreal. Please go ahead.

Good morning, Ray Good morning, Chris Reimer Alright.

Right I wondered just to start out if you could just kind of walk us through the distribution channel in terms of what you see for kinda demand at the middle level, what you're seeing at the other end in terms of kind of customer builder takeaways and then you know what what you think is happening that just supply in the inventory channel.

Inventories in the distribution channel.

Well good morning Merck.

No I'm going to ask Mr. mckeever to take that one if that's okay.

Good morning, Mark.

Turning Christie.

Morning.

It's actually quite interesting what's happening right now what we're seeing its pretty product specific.

As far as takeaway.

But I would say generally.

We've seen major destocking on the distribution side on the customer end, including.

Some of the Big Pro dealers moving product from site to site just reduce their total inventories.

Anecdotally were hearing from them that business.

Depending on the product is as good as it's been all year right now.

But they're not buying a lot.

So so they're waiting to see what's going to happen.

We have good order files pretty much in all our products right now.

Most recently, we've seen plywood beginning to come back as eastern Canada talks about reopening.

By far the best product and we have on the wood product side right now is there southern yellow pine.

[music].

Tremendous demand from treaters.

And had retailers at this time, so we're reasonably well so [noise].

On all our products and of course pulses stuff has been very good.

Okay and then.

Chris Rustic I Wonder you mentioned these oh potential deferral programs.

In both the U.S. and Canada, I know a lot of this stuff has not been finalized yet.

But could you just walk us through the three or four that you're watching most closely that would have the biggest impact for you in terms of of helping your cash flow this year.

Yeah, and I think you know on these they are they are just deferrals right. So they are temporary in nature rate and and you.

No I think to your point like these things vary from three mines to six months to a year to two years.

You know that probably evolves on on the duration of those potentially.

How long. This this goes on so you know in its everything I'll save from <unk>.

Every level of government property taxes.

Sales and use taxes corporate income taxes payroll taxes.

Theres really been actually pretty good support from all levels of government to to try to find ways that they can help at the end. It is just the deferral and we will have to pay it.

You know in the future, whether that's the third or fourth quarter or into 2021.

And you know as for sort of quantification of sort of each individual one I think you know when we look across the landscape of all those of all those opportunities you know through the second quarter, it's maybe $20 million to $30 million and then it starts to unwind in the third and into the.

Fourth.

Okay, and just like I know that that Theres, a deferral that spend proposed for I think kind of stumpage costs in Alberta, and maybe some talk about this MBC, how big would those be free up for you got like a six month deferral.

It would be a big chunk of the number that I. Just this is quoted maybe half.

Okay Alright.

I guess the a the last one for me as if you could maybe just talk a little bit about what's going on in terms of the the export market to what to Asia for lumber coming out of out of Western Canada.

Mark maybe I'll try that one again, it's Chris.

So we've we've.

As you know we've been in the export market on lumber.

You know, primarily Japan, and China for some time.

But what most recently what we've done is we're increasing our volumes.

To help diversify.

Our transportation options and.

Just to make sure that we've got worse in front of our mills so.

Japan.

Clear to state of emergency.

Certainly they slowed down some but they are they continue to buying we are seeing some builders.

With the shovels down for a little while.

China has come back very very strong.

And we're selling pretty much all degree as we make over there right now.

And using various types transportation together, so we've been quite please [noise].

Okay and just the it's the kind of follow on that China question. You know, we we hear about this.

Spruce beetle wood coming into the Asian markets from a.

From Europe, how much of that competitive issue has that been for your Chris.

I am certainly I think 2019, it was quite a large competitive issue.

But what we what we understand is most recently you know I mean, Europe's been through a pretty tough time. So we don't know how much manufacturing has been going on but on top of that their freight rates have increased dramatically and availability. So we're not seeing a lot of that product in.

Asia right now I suspect overtime, it will come back but at this time.

There's not that much there.

Okay. That's helpful I'll turn it over guys.

Thank you. The next question comes from Hamir Patel Sad to see please go ahead.

Hi, good morning.

Chris Chris Mckeever could you give us a sense as to how Ah demands been chairing the our in our and mile industrials channels.

Well again iron ore is very difficult to get us.

Strong feeling from but I would say.

Again, it's it is somewhat better in the U.S. and particularly in the U.S. So.

On our and our.

We're seeing tremendous demand down there for that.

Canada.

We are less exposed our and our as a company, but we are seeing.

Actually surprisingly strong demand for the products, we put in there.

Industrial.

We are a little concerned about industrial as manufacturing slows down a little concerned we are seeing we're certainly seeing the takeaway of our lower grades which end up in industrial fair bit, but we do have some concern there.

[noise], Okay, great. Thanks, and then Murray I wanted to ask about you know the pulp maintenance downtime in the back half the year.

Given a you know the ongoing proportions that you'd you'd have to take <unk> is that stretch out the duration.

I expect the downtime and the likely production impact well, it's a that's a good question here and.

And so.

Here's what I would say is that we're reviewing our maintenance downtime at a at both RMBS came at all side of course, we moved up.

Moved them both in the fall, but so we're really kind of going through that right. Now I think our intention would be not a to increase scope or time, so that probably leads us to you know potentially I really focusing on the critical projects that we need to do and to defer or things that we don't.

To do so at this time.

I would say.

We don't think Theres, a big change from our of our overall kind of pulp shut down for the fall, but and if we need to will reduce the scope a little that in order to accommodate.

Great. Thanks, Thanks, Ray that's that's helpful and Chris for US that got just last one from me you. I mean, you know if this were to be a more prolonged downturn, what's the lowest you could take a capex to on a full year basis, just thinking for 2021, I know you've got certain commitments.

For 2020.

[noise] Yeah, you know I think probably you know looking back at at where it's been before is a reasonable proxy for that I'm. You know there's more mills now than there was in the last downturn I think you know we've got out there in our public documents that you know maintenance capital would run you know as we would.

Think about it is somewhere around $100 million.

I think we've been fairly consistent in how we've described that.

Now you know look if it's a draconian situation and we got to do more and there's more downtime. Then you know obviously that gets adjusted but.

Okay, Great our view would be it's pretty consistent with what's out there in our in our documents as to what we spent on maintenance at an annual basis.

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

Thank you. The next question comes from sponsors that from TD Securities. Please go ahead.

Thanks, Good morning.

Question on your your lumber production.

Our term out like you guys have pulled 2020 production guidance, which makes sense.

Is it fair to say, though that that made downtime will continue at a similar pace to what you took in April where.

Second that 35% of your your capacity was curtailed.

Yeah, Yeah, Shyness Ray here Ed good morning.

Sean.

Yeah, I don't think I gave me a answer for me, but but here's what I would say is that I think.

Yeah, you heard Chris talked that you know today.

Markets are pretty you know we.

We're selling a pretty much the you know a month ago that wasn't the case and so I think our view is that the market is going to be you know very very choppy and it's going to be in and out as a.

As demand fluctuates and potentially even unwinds more or so so I think you know what I would say is that <unk>. Our intention is to make sure that a that were first funding to that Ted available market as needed. So and every week as another week right now so what's going on this week may not be what.

Happens next week so.

What I would say is that.

You know I think we're well positioned to kind of.

Respond to that as needed.

And.

Thanks Irene.

It's a drastic maybe you can give us a little context on.

The nature of the costs as you take this this temporary downtime.

And I'm trying to gauge unit cost inflation. Notable the next couple of months I suppose as you take the downtime.

What percentage of your costs will be fix that you're carrying over about duration.

Oh, I guess I'm, just trying to benchmark that's against that.

The cost benefit analysis, and taking permanent or indefinite shots versus these temporary.

Rolling shifts reductions.

[noise] well I think you know as Weve.

Nonetheless, probably.

Feels like 12 or 18 months now right as we've looked at this is.

You know when when we do something that permanent its permanent and that's you know based on the long term assessment of if the fiber supply in the region and you know the economic ability to operate that mill and that's why we made shift reductions in in 2019 and and.

And announced the mill closure.

For us doing something permanent.

It's got to be grounded in pretty you know so long term economic view about kind of what's going on.

The temporary stuff.

I think.

Over the course of the last year, you know on Fort. Unfortunately, we've had to learn a lot about about this and and you know probably get better at it then we really want to be in the long term in terms of taking down in starting starting back up.

But I would say you know our calculus involves a number of things looking at where our order file is looking at our investment in inventory looking at the contribution on a variable basis. The age of the log decks you know those sorts of things all around started preserving a you know grade and the I'll turn the call.

Comes from the mill, because if you idle indefinitely and leave the logs on the DAC, you're going to have you know a degradation of a value there too. So there's a lot that would go into it I would say you know the fixed element of the idling costs are actually quite manageable in in our view Bill.

Has the the logs.

You don't make up the biggest portion of the cost in Western Canada. So.

I'm not sure if that answers your question, but that's a little bit of kind of how we think about you know the approach to this.

Well Hans.

That's all I have for now thanks.

Thank you as a reminder, ladies and gentlemen, please press star one if you have any questions.

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

Yeah. Thanks, very much line goes.

When Paul.

Just a question on that sustainability.

Oh, yes lumber prices year midweek was down two bucks down at 330. This just wondering how sustainable you think this place in levels given that we still at the high duty.

Oh, Paul a [noise].

Honestly, we don't know.

You know a the demand seems to come and go and.

Till we get a little more stable I think it's really difficult to say.

[noise], but still at at this time, we've seen enough demand.

To build pretty good or [noise].

[noise] trees are you seeing any capitulation some of the higher cost a western Canadian producers say you know would be maybe you know closing up to some of the bigger companies a in terms of you know the gets eliminated.

Well I'll tell you the run it that's all I, you know were six or seven weeks into a crisis.

I think you know I think people are trying to figure out how to operate i. I can't speak for others, but I think at.

That's probably not the top priority for most people, it's kinda figuring out what's happened in the last six or seven weeks and and responding it and trying to you know run your business plan. So.

You know.

Perhaps down the road, but it's Mike.

I don't think Thats front and center for most today.

Okay, and then just on the pulled so we've taken some shots at a a caribou it seems that on the on the fiber availability side AIDS you know what were the BC interior another place taking some shots in the lumber I suspect fiber will get even more acute do you see caribou.

And Donald all the way through the year as a result.

I guess, we'll have to wait and see a Paul I would say that.

Our focus would be it is to take as little less downtime as possible.

At this time, we're certainly not planning any additional downtime at care, but it's hard to predict exactly what will happen on the fiber.

Have a side. So you know there's potential but I think our plans are too.

You know tariff <unk> run and with.

The idea that any downtime that we take now helps us Ryan later in the air in through next winter. So we're taking a we tend to on that side take a bit of the longer term view on how we want to run those of those facilities.

Okay, and then just lastly on capital allocation.

Thinking about share buybacks now that you know what are your current share prices.

And let Chris feel that one [laughter] well I think you know given the uncertainty that's that's out there right now you know it it. It's it's tough when you don't have an idea of what the next three six months or 12 months looks like you know two to two.

Take a view on that relative to how you want to manage your liquidity and continue to keep keep your mills in operating conditions. So.

You know I think I think until there is greater clarity.

It's pretty tough to see a case for doing something there.

All right that's all I hope that's what business. Thank you Paul.

Thank you next question is a follow up some Mike Willoughby from Bank of Montreal. Please go ahead.

Yeah, I just a couple of follow ons, one just following on Paul there.

In the Mdna, you pretty specific about kind of maintaining flexibility that kinda pursue kind of growth opportunities that might arise I'm. Just curious if you're going to grow and in lumber is it fairly safe assumption that the focus will continue to be the southern U.S.

So mark.

Hi.

You know I I mean, I certainly as you know if you look if you know kind of what we've done in the last number of years I think that's probably a pretty good indication of the kind of a you know you know what kind of the if you look at a fast, but saying that they know Mark I think we're always focused on what whatever will make our business better.

And so you know I wouldn't just give it one geographic location, but certainly a whatever will make our business stronger we're willing to look at and their scouring all the time and but tell you know, we're certainly going to move to the areas, where we think we can have the best opportunity in that it all is pretty good opportunity in the in the south for sure but.

Ted those aren't the only opportunity so.

Okay, that's fair or the other one I had it just to kind of a question on the pulp market. There have been some reports recently, suggesting that theres some pressure on the paper producers in China and that the Chinese pull buyers are starting to push back, particularly on N.B.S.K., a pricing I'd like to just get your perspective.

On what you see in the market right now.

Yeah, Mark we I mean printing and writing for sure has taken a hit worldwide and China is no exception on that we are somewhat fortunate that we are much bigger in tissue and packaging.

In all are for all our mills.

We are still seeing good demand not tremendous push back on any products, we have seen some price increases as well.

Do you know, we could see a slowing going into the summer which seasonal.

Unusual and sooner or later, we do believe the printing and writing I will have some effective manner.

Okay. That's helpful. Thanks, Good luck the rest of the year. Thanks Mark.

Thank you there no further questions at this time you May proceed.

Well I just want to thank everyone for joining the call and listening to us today and look forward to talk to you again in a next quarter. Thank you.

Ladies and gentlemen, this concludes your conference call for today, we thank you for participating in the assay. Please disconnect your lines.