Q1 2020 Earnings Call
Good morning, ladies and gentlemen, welcome to Western Forest products first quarter 2020 results conference call.
This conference call Western's Representatives may make forward looking statements within the meaning of applicable securities laws. These statements can be identified by words like anticipate plan estimate will and other reference it references to future periods.
These forward looking statements reflect management's reasonable to really beliefs expectations and assumptions they are subject to inherent uncertainties and actual results may differ materially.
There are many factors that could cause actual outcomes to be different including those factors described under risks and uncertainties in the companys annual mdna, which can be accessed on CDR and supplemented by the company's quarterly M.B. any forward looking statements are based only on information currently available to western and speak.
Only as of the date on which they are me, except as required by law Western undertakes no obligation to update forward looking statements. Accordingly, you should exercise caution in relying upon forward looking statements.
Knocked the trend I mean over to Mr., John demands, President and Chief Executive Officer of Western Forest products. She didn't answer. Please go ahead.
Thank you Donna good morning, everyone.
But to welcome you to western forced trucks, 2021st quarter Conference call.
Joining me on the call today as Steve Williams, our executive Vice President and Chief Financial Officer.
We issued our 2021st quarter results yesterday.
I'll provide you with some introductory comments and then ask Steve to take you through a summary of our financial results.
Well then share with you our outlook and discuss recent developments are industry.
Well then open the call up for your questions.
Like to start off the call by discussing the impact of Covidien 18 pandemic on or be on her business.
At the onset of covert 19, we created a senior executive Task Force.
That together with our operations team helped to speed the implementation of strict health and safety protocols across our business.
The protocols are based on guidance from experts.
Health officials and in compliance with regulatory orders and standards.
Protocols included travel restrictions.
Physical distancing measures.
Limiting site access to essential personnel only.
An increase in cleaning and sanitation and work places.
We also moved to work from home model for those able to do so.
We took some operational downtime in the quarter to confirm appropriate health and safety protocols were placed for employees and to assess market conditions.
The strict health and safety protocols implemented have kept our employees contractors and community safe.
Being designated and essential industry.
Something we and our team at Western take seriously and we understand the responsibility that comes with it.
Health and safety of our employees remains our highest priority.
One of Recognizer employees health officials and unions for their commitment to health and safety during this challenging period.
So in addition to our covert 19 health and safety response, we took prudent measures to protect our balance sheet and liquidity.
As well as provide financial flexibility to our business given the uncertain impacts of covert 19.
These measures of included the suspension of our quarterly dividend.
Board will continue to review the dividend at a quarterly basis.
In addition to the suspension of our dividend, both strategic and discretionary capital projects remain on hold until there's greater operational certainty.
Continued with any safety environmental or previously committed capital.
We will continue to explore all other opportunities to strengthen our liquidity, including managing expenses me working capital levels.
Accelerating the receipt of income tax receivables.
Completing our Tfl 44 limited partnership sale.
And evaluating various government relief programs.
As we work through these uncertain times, we will continue to align our production volumes to match market demand.
Well first and foremost ensuring the health and safety of our employees.
Moving on to our first quarter results.
For first quarter results were significantly impacted by the U.S.W. strike, which continued through February.
The gradual restarted strike impacted operations.
And the negative impacts of the covert 19 pandemic a markets in production.
As a result of these challenges we generated negative EBITDA of $17.4 million in the first quarter 2020.
Despite the more challenging quarter. Some highlights include.
February members of the SW ratified a new five year collective agreement ending an easement strike.
We're pleased to have reached a fair and equitable agreement and to ever employees and contractors back to work.
The new agreement recognizes the contributions of our employees provides for improved improvements the health and safety benefits Health authority shelves health and welfare benefits as well as mid teens operational flexibility for western.
In March we safely restarted operations and our timberlands and saw mills that were impacted by the strike.
Through the month, so no production continued to ramp up and we worked to replenish our timberland supply chain.
The restart was interrupted by one week of downtime as we addressed business challenges related to covert 18.
Also in March we advanced our strategic partnership with the wafers Nations.
We have agreed to sell additional ownership interest in two limited partnerships for $36.2 million.
The transaction is subject to various closing conditions as expected to close a third quarter 2020.
The transaction further highlights our commitment to building mutually beneficial relationships in the first nations.
I'll now turn it over to Steve Your key financial results.
Thanks, John My comments will focus primarily on our financial results for the first quarter 2020 by comparison to the first quarter of last year.
We reported first quarter adjusted EBITDA of negative $17.4 million as compared to $18.1 million in the same period of 2018 as a strike gradual restarted our operations and Covidien 18 impacted results.
We continue to operate our U.S. assets process, largely testing test facilities and execute on our wholesale lumber strategy to service, our customers and mitigate the impact during the strike.
We increased wholesale lumber shipments in the first quarter as compared to the same period last year.
Our average realized lumber pricing benefited from an improved specialty product mix and a weaker Canadian to U.S. dollar.
Specialty lumber represented 73% of first quarter shipments compared to 52% in the same period last year.
Although the average Canadian to U.S. dollar foreign exchange rate declined just over 1% over the same period of 2018 significant foreign exchange volatility in March 2020 resulted in a 5% reduction in the closing exchange rate compared to the same period last year.
To support our selected customers during the strike we are forced to operate suboptimally, which resulted in higher transportation and operating costs.
The incremental $13.8 million and straight related operating expenses was recognized in the first quarter, including curtailment to us during the strike production inefficiencies on started up due to lower log quality and additional safety and maintenance procedures required to resume operations.
Operating expense was also negatively impacted by $2.9 million of incremental timberlands provisions for degraded log inventory until the culture.
The majority of the incremental silviculture provision was due to the decline in the discount rate applied to the liability.
We also incurred $1.1 million of Tobin 19 related operating expenses in March 2020.
First quarter, selling and administration expense was $6.4 million as compared to $8.8 million in the same period last year.
Due to lower share base in performance compensation expense and as a result of minimizing expenses during the strike.
Gross profit and loss perspective, net loss was $21 million as compared to net income of $1.9 million in the first quarter 2018.
Looking at first quarter cash flow and capital management.
Cash used in operating activities was $12.5 million as compared to $9.2 million in same period of 2018.
We reduced our noncash working capital by $6.2 million in the quarter to partly offset significantly reduce cash from operations, resulting from the strike.
Cash used in investing activities was point $5 million during the first quarter 2020, as compared to $47.7 million during the same period last year.
We reduced our capital spending in order to manage cash flow during the straight into address uncertainty caused by coven 19.
In the first quarter, we returned $8.4 million of capital to shareholders via dividends.
Our liquidity at the end of the first quarter was $113.5 billion and our net debt to capitalization ratio was approximately 23%.
Liquidity remains a key priority and near term focus we continue to explore all opportunities to strengthen our liquidity, including managing expenses Capex and working capital levels accelerometer receipt of our income tax receivables in completing our Tfl 44 limited partnership sale as well as evaluating.
Various government relief programs.
We expect sufficient liquidity will be available to meet our ongoing obligations.
Don that concludes my comments it thanks, Steve.
So let's start off our outlook section by discussing the impacts of Covidien 18 in their business.
The onset of the of the covert 19 pandemic brought to a virtual stand still what was a promising start to the 2020 North American building season.
Government actions to limit the spread of the virus, including stay at home orders and restrictions on construction.
The caused significant demand disruptions in North America.
And in some of our key offshore markets.
Disruptions have caused some customers to divert shipments and other customers to limit purchases.
As government restrictions are being lifted we're beginning to see some improved activity.
But I should caution it's early days.
In the United States, the strong market sentiment for Cedar products at the beginning of the year faded and demand slowed as we close the first quarter.
The last couple of weeks however.
We've seen some encouraging signs from the home Center segment.
How this improved picture will impact the overall demand for cedar products in the U.S. remains to be seen.
Demand and pricing for industrial niche products have been fairly resilient.
We expect pricing and demand to remain stable through the second quarter provided there no additional covert 19 related disruptions.
In contrast that to covert 19 challenges faced in North America.
Europe.
Australia New Zealand.
Lumber and large demand has improved in China as the country emerge from its cobot 19 lockdown.
As a result, we've been successful building work order files in that market.
In Japan demand for Douglas from BC coastal hemlock products through the second quarter is expected to be stable and lesser unforeseen developments in Japan with respect to covert 19th.
With respect to our operations typically in the second quarter, our large harvest volumes increase as snow receives an expanded operations across the complete timber harvesting land base.
As harvest volumes increase our log inventories tend to peak.
That said, we expect to see a build in log inventories by the ended the second quarter.
We're going to be diligence.
Aligning our working capital inventories to match market conditions.
As we look forward. The Covance 19 outbreak has led to near term market volatility and reduced business visibility.
We will take all the necessary steps to mass production to market demand and.
And manage our business through these uncertain times.
I'd now like to provide an update on a couple of developments in the industry.
On January 20, Onest of this year, the BC government announced changes to the manufacturing forest products regulation.
The changes are to be effective July onest of this year.
The amendments to the regulation requires question red Cedar and yellow cedar lumber to be fully manufactured to be eligible for export.
Fully manufacturers is defined as lumber that will not be killed dried slain to resource at a facility outside of British Columbia and is subject to certain exemptions.
Provinces, working with industry stakeholders to develop the right exemptions to meet its stated objective and helped define a workable process.
We continue to collaboratively engage with the province to ensure that the desired outcome has met with an unintended consequences to our global customers or employment in British Columbia.
The details of the policy have yet to be released but the regulation as proposed today could have negative implications for global customers of BC Cedar products.
Who through their purchases support thousands of jobs in communities and the Kosta BC.
It could also have negative implications for the coach lumber business.
That is already being disproportionately impacted by the application of duties on our high price cedar shipments to the United States.
Moving onto the softwood lumber dispute on February Threerd 2020, the U.S. Department of Commerce issued preliminary revised countervailing and antidumping duty rates in the first administrative review of shipments for the years of 2017 in 2018.
The preliminary revised all others combined rates for countervailing and antidumping.
Duties were set at 8.37% for 2017 and 8.21% for 2018.
These rates are well below our current combined rate of 20.23%.
In April of 2020, the department of Commerce announced a Kobin 19 administrative review extension.
It could delay the final rate the terminated.
Determinations until late September 2020.
Cash deposits will continue to accrue at our combined rate of 20.23%.
Until the final determinations are published.
At which time the final 2018 combined rate will apply to deposits on lumber shipments to the U.S.
Despite the lower revised preliminary rates for 27 in 2018, no duties paid in excess of the revised final rate will be refunded.
Until the entire appeals process of the softwood lumber dispute concludes.
Currently western as over 72 million us dollars on deposit with the U.S Treasury, which at current exchange rates is more than 100 million Canadian.
Looking to whats next our top priority remains the health and safety or employees contractors and communities will continue to adapt our procedures and protocols as necessary to we to ensure we keep our people safe.
We also remain focused on maintaining financial flexibility and a strong balance sheet as the covert 19 pandemic evolves, we will continue to align our production volumes to match market demand.
Despite the near term uncertainty, we remain focused on implementing our strategic initiatives to strengthen our foundation grower base and grow our business over the long term.
With that operator, we can open up the call for questions.
Thank you we will now take questions from the telephone lines. If you have a question and using a speaker phone. Please ask your handset before making your selection. If you have a question. Please press star one on your telephone keypad.
To cancel the question. Please press the pound sign please press star one at this time, if you have a question.
I'll be brief pause for participants register thank you for your patience.
And the first question is from Sean Stewart from TD Securities. Please go ahead.
Thanks, Good morning, everyone.
Great questions.
Our with.
Don your comments on SEDAR markets, I guess I'm trying to reconcile those comments with what we're seeing in pricing because it doesn't look like there has been relative strength and resilience for number western Red senior.
Lumber grades that we track even through the whole covance onset.
I'm trying to gauge how much of that is just the coast not operating.
Until very recently and just very tight supply versus resilient demand from the.
To repair and remodeling end market channels.
Okay show good morning, so.
As it relates to pricing, maybe just talk with demand first.
I think the the earn our channel really drives.
The consumption of SEDAR.
As you pointed out.
And I think we've seen some encouraging signs of the home Center segment.
For the our market another key component the earn our market. However is.
Is through the distribution channel through the pro dealers in on the contractors.
So specifically when we see SEDAR, we've kind of a too.
Two two things happening in the market one.
Demands in the home center has been really strong for US I think it's probably 20% ahead of the same piece last year.
However, the business in in the distribution side of the business and through through the contractor and pro dealer market is been slow.
So what we're encouraged on the home center side, we're pricing is from China, and probably going up.
The demand on the other side of the of the market has been weak and there's probably if anything a little bit of price weakness. So I think what you're seeing it to conclude what you're seeing prices showing some resilience is you've got this divergence in the market.
And we're hopeful that is.
This stage start to reopen we'll see a re energized distribution.
Business and as contractors get back to work and we'll see some more demand there.
That's that's good detail, thanks, Don and question for Steve.
Regarding balance sheet durability, and another lever as you can pull to bolster liquidity.
Yes, it is it safe to assume that beyond the Q3.
Asset sale, they've already lined up.
Have other non core asset sale processes.
Essentially come to a standstill and the current contacts are you able to advance any of those initiatives.
Yes, maybe just for everybody's benefit just as we communicated at Pasadena large larger noncore assets include the northern private timberlands.
On maker Island, a royalty received from a quarter near Fort Mcneil in Vancouver Island, and other fee simple.
Private lands and.
And properties I think right now we don't have any further updates at this time, but we continue to look for opportunities that will allow us to capitalize on the differential between how the market values those assets versus though they value specialty.
Lumber producers so I.
I think great now that's probably all I can add.
Sure.
And Steve.
The tax receivable on the balance sheet.
You mentioned expediting the collection there.
Can we assume that all Commons.
Over the next couple of quarters, how should we think about that.
Yes, I would think so we're working on that now I think.
There's been some locally government delays in terms of what's going out with.
Colvin soon.
I would expect that yes.
Okay. Thanks, guys I'll get back in Q.
They shot.
Thank you.
Your next question is from Hamir Patel from Sea RBC capital markets. Please go ahead.
Hi, good morning.
On the.
Yes release reference.
I guess.
New agreements.
You guys had out.
The home centers and pro dealers in the quarter can you speak more more to that and.
Hi.
How should we expect that ramp up and then in coming quarters.
Sure. So so we've been able to do over the last few months is to solidify our relationships with key.
Specialty distributors and the homes and home centers.
Both sides of the border.
What we're doing is we're trying to work collaboratively with our customers investing in marketing to drive demand going forward that is in our focus for our cedar products, establishing specialty branding and and supporting the.
Supporting that branding with with marketing initiatives. So that's what we're currently doing and as I said in the previous answer you know we've been pretty darn encouraged by the results thus far out of the home Center business.
I think.
But to put in perspective home center business and the Cedar side was probably about 15% of our business and but we're seeing substantial growth there right now.
And we're looking to grow that our estimate is about 40% as cedars now consumed in the home Center Center segment, and we would like to see our position increase there.
So the Genesis of the.
Of the work with our customers is in establishing product lines or sorry, marketing initiatives that can drive more demand for products from western forest products through the segments.
Great and Don do you have exposure to both of the big box stores or have these changes resulted in maybe exclusivity with one of them.
No we've got exposure to both both big boxes in the us actually and there's another one as well so it's actually all three.
Okay.
And then.
This question for Steve can you give us a sense as to a likely capex budgets for the year and just remind us on what you're sort of bare bones maintenance.
It could be.
Sure So and I think we mentioned this in the last all our typical maintenance in roads Capex historically been between about 30 to 40 million on average with about another 30 to 40 million in strategic investments so due to.
Covidien its impact and global markets and operating conditions, we plan to only incurs safety environmental maintenance and committed.
Capital So.
For 2020, we estimated or maintenance and road capex will be in the neighborhood of $25 million to $30 million, depending on how cold it evolves rate, so and as John indicated strategic in discretionary capital projects will remain on hold until there's greater operational certainty.
Great and Steve is there any risks that the transaction with that first nations group.
Doesnt close I'm, just thinking I mean it.
Came together sort of pre coated.
What's the.
What's what's your thoughts on that right now.
Listen we this is the third transaction that we've been working on with the.
The way we have a.
Great relationship and things are moving ahead.
Obviously covitz play to.
Rule.
Right now in terms of people getting together in advancing things, but things are moving ahead.
Great. That's that's all I had thanks.
Operator.
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Thank you sorry, Mr. demands, we had a little bit of a technical issue.
So the next.
From the next question is from Paul Quinn. Please go ahead.
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Mr Quinn.
Yes.
Your line is open for your question.
Hey, thanks.
Hey, guys I just had a couple of follow up questions.
So on the senior side, Don you said, 15% home centers, 85%, I guess thats distributors pro dealers, but the vision is to get that 40, 60 overtime and how long do you expect that could take to get there.
Yep Yep public probably a couple of years, but I think.
Just to highlight that's that's sort of the distribution, we expected the growing our cedar business coming out of the out of the strike and if I could add to what I've already said, we're pretty encouraged by the results thus far and we've been.
Straight for eight months and not able to necessarily provide the full suite of products that we normally would so we're pretty encouraged by the results coming out of the eight months straight with our home center business and and look forward to seeing a growing further and also seeing that just distributors and distribution business through the pro dealers get back up and going out as the.
Covert related shutdowns and.
Okay, and then just overall on on the quarter I mean, I expect a lot better results given that you had one month is there anything in the started up above operation that.
Yes that you didnt anticipate or that was large that that kept the results almost unchanged quarter over quarter.
So maybe at a high level. This I'll just talk about the start restart and then I'll put it over to Steve and he can you can give you some.
Financial details before yet I mean, we we're really pleased with the restart the employees came back.
Very supportive we had done a lot of training with our supervisors.
And we got off to a very good start that said whenever you're down for that long, there's a significant amount of maintenance on the in both the timberlands and manufacturing you have to go through to ensure that you can have a safe restart on the timberland side it would be a ensuring that we've got roads.
And.
Accessible and in good condition and safe condition.
It would be one of the larger developments. It also takes quite a while to get your supply chain back up and running getting the flow of logs through to the driveline sorts and then into.
A trends.
Transportation of all I guess for.
In the mill side, we had to invest in some specific small.
Investments to ensure that we can come back in a safe manner been Steve's got the actual numbers that what interrupted is of course is a week of downtime in the middle of a restart after eight months of downtime.
Due to cobot beds, which added additional costs, but now Steve you want to color comment, yes, well that I highlighted I think as I was just going through the overview in terms of.
Basically two but two months of the shutdown. We also had other provisions in timberlands that I touched on there the.
You know as well that had a day and Nicole good weak down in March it had the impact negative impacts on on results.
Thank you and the next question will be Hamir Patel. Please go ahead.
My questions were asked my questions.
Thank you.
Please press star one at this time, if you have a question.
And the next question is from Paul Quinn. Please go ahead.
Good to get bug in the QVC coming off.
Maybe a question around that.
Quite quite continues on its manufacturing force price regulation eight yeah. I mean this this is a real game changer. It doesn't sound like you've got any.
Information on what the regulation looks like and.
It's kind of.
Three months before implementation really last actually.
Is there.
In your discussions is there a willingness on that part of the government to push this off given the current situation with Goldman.
So we would share your your analysis and concern Paul that were three months away from what it would be a major change to customers that have supported the BDC industry for.
Many of them many 50 60 years.
And we're just three months to go in this lack of clarity, yes, it's a bit perplexing.
We are aware there has been a request made to defer that hasn't been answered yet by government.
And I can't I can't respond.
Or provide any more insights than that we haven't heard anything else.
Other than.
But what we provided.
Okay and then.
A question what are the operations that are what you're running footprint right now would you expect through the balance of the year.
Yes, sure so on the on the Timberland side, we're running at a reduced rate just.
But we are running at all our operations.
The reduced rate is just reflective of limited limited markets and in some of the cost challenges that we currently have.
On the coast from a harvesting perspective.
And the mills, we've got six mills running.
Ed.
Alberta is running on a 40 hour.
The configuration right now so one shift we've got Dewpoint salt there.
Sure Manus and Calvey, all running on two shifts and we've got our mill down in Vancouver, Washington at Columbia Vista running on 60 every week.
All told us about 75% fall I would say at least Mclean operations, where we were when when the strength again if that helps.
We do and I guess to add we will continue to operate.
Based upon order file so if we see that we aren't able to meet.
And that production with order files, we'll we'll have to take downtime.
Okay, and then maybe a question, but we wait agreement.
I'm I'm pleased to see that partnership is it continues to grow in it. Good I just said a couple of questions. We've said this a podium that agreement I guess the initial press releases as you may sell an additional 26%.
Just looking at this from a liquidity standpoint to be able to monetize not limited to 26.
Why couldn't you saw the majority of your position.
Yes, Paul this is the term of the.
The agreement right now and again as part of the reconciliation.
Processes.
You know to encourage greater first nations involvement.
Okay, and then the valuation on the 7% of Eightd from lean.
Come out with Alan.
Yes, well I don't want to get into that.
The details on.
You know that right now like I said, I think it's an opportunity that expanding.
Relationship and for the who went to dissipate in the manufacturing side of the business, Yes, I think if I can add evolving the ideas they get a have that way get exposure on the manufacturing side and.
And as part of it fits with their strategy of trying to come up with.
Vibrance.
Forest products business, not just not just harvesting, but also manufacturing in the region. So we're certainly anxious to happen have them become partners in the operation and and go forward with them.
To try to achieve their objectives.
So the million dollars isn't really reflective of the value of the $12 million to $13 million for themselves.
Yes.
No.
Okay, and just lastly, working capital building Q2, how much you expect that to me.
Well, yes, so I can take it on Steve might want to jump in but I think the biggest working capital build.
You know that you know this very well will occur on course, all operators in the second quarter, because we're going to build up log inventory to be able to operate through a typical third quarters, where we have fire closures and the like so if you look at the first.
As we close the first quarter.
Yeah, we're going to need to rebuild the log inventory given the impacts of the strike.
We're going to be diligent and prudent about that but you can assume that.
As we look at the first quarter would we were about 30% lower.
Than historic levels.
You could expect us to build about $30 million I guess in log inventory through the second quarter, but that said the build and working capital is going to be offset by a corresponding growth in like accounts payable and other other expected things like maybe the income tax refund. So I think to conclude we're gonna it will try it will keep to.
Stories about where we are we will build working capital and large add but obviously.
There will be there will be offset by some recoveries elsewhere.
And all that set of course I gather I've got to caution you that the current market conditions are much different than they were.
In prior year, so we're going to be prudent and if we have to take curtailments to manage working capital and our production with with markets. We will do so.
All right. Let's go ahead, thanks, guys.
Thank you Paul.
Thank you.
There are no further questions registered at this time I'd like to turn the call back over to Mr. demand.
Great well, thanks, Donna and thanks, everyone for your continued support appreciate your interest in our company in your time on the call. This morning.
Steven are both available if you have any follow up questions and we look forward to sharing with you our second quarter results in August with that have a great day. Thanks.
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