Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and walk into the into a four quarterly analysts call.
But this time all participants are in a listen only mode. After the speakers presentation there'll be a question and answer session to ask a question during the session no need depressed star one on your telephone.
Please be advised that today's conference because being recorded.
If you require any further systems. Please press stars zero I would now like to him the conference over to your speaker today <unk>. Thank you. Please go ahead Sir.
Thank you operator, welcome to our Q1 20 investor analyst call.
Firstly on behalf of inner for I'd like to.
I hope you're a shape in your family safe and healthy and doing well during this pandemic with me today, you have Bart Bender or senior Vice President of sales and marketing law with Rick pause Barnard Vice President the corporate controller.
<unk> agenda day, we'll start off with myself, providing a recap of our strategic priorities in key themes. Although then passed the call to Rick cool cover on financial matters, and they know Pensacola Art go a cover off the market.
Turning to our strategic focus it sure has been one heck of a 2020 large but as I talked about on our last I call, our or over arching priorities have not changed.
Quarter or a company is maintaining our capital allocation discipline, and ensuring our balance sheet integrity and strong liquidity.
You'll hear this for me both in good times in in challenging times like we're in now.
This approach is in our D.N.A. here at dinner for an it served as well over the years.
Allows us to control our destiny weathering that tough times, but also taking advantage of both internal and external growth opportunities when conditions improve.
Our efforts were again balanced across the company as we've made progress in all regions.
In British Columbia, we secured additional long term timber right for Adam's Lake operation completing the acquisition of 349000 cubic meters.
All of our B.C. interior males are well positioned have been capitalized and have secure fiber volumes in profiles.
The Pacific North West where near completion on one of our phase two strategic projects at one of our started mills, which will improve recovery productivity and costs.
And it should be advanced on her face to strategic capital plans and or eat out or even in Georgia operation and South Carolina at our Georgetown operation.
Or balance sheet, we improved our liquidity by completing the U.S. 100 million long-term debt financing with Prudential.
Just want to notice there's is proactive on our part put in motion well before the Kobe business conditions.
Are available liquidity increased the 431 million at the end of Q1.
Want to turn to Kobe Dame Paxton forward plant.
Production in sales were slightly down for the quarter, reflecting R.C. 19 related curtailments that were implemented in the last two weeks of March.
In regards to the market 2020 started off well weekly order volumes were strong from late December through early February.
Once the full impact of C. 19, yet we saw order volumes rapidly decline and decided to proactively shift their operating plans to match both demand and price.
We continue to monitor the situation and she no need to take on any working capital risk by trying to guess, how and when things will improve.
We believe that lumber pricing has somewhat stabilized.
And are similar to those seen queue for 18 and 19. However, the situation is still unfolding.
We were planning very conservatively to ensure we maintain our financial flexibility regardless of the economic outlook.
In closing, we're focused on maintaining the health safety and well being over employees protecting our balance sheet by running our most competitive operations, reducing costs, reducing cap expanding repatriating working capital.
However, all of these initiatives and tactics or keep generally being evaluated and if required will be implemented will be in many even more aggressive plans if necessary.
That concludes my opening remarks on now hand, the call over to Rick pause upon.
Thank you in and good morning, everyone before getting started I'll refer you to Costner language regarding forward looking information I'm. The first page or do you want to M.D.N.A.
I'll start with an update on her balance sheet is even just mentioned maintaining a strong financial position his cord to our company.
Fortunately weren't very good shape, whether the cobin 19 related uncertainty yet.
But not done in $322 million, not that's invested capital at 27% and available liquidity a $431 million at the end of Q1.
We practically bolstered order liquidity in the quarter by adding $100 million you asked of long term debt as attractive rates.
Long term that now has a weighted average interest rate of just over 4% with maturity is principally in the years 2024 2030.
Or 350 million dollar evolving term line further strengthens aren't liquidity it was on drawn a quarter and hasn't maturity in 2024, it's.
It's also worth noting that we had $102 million U.S., a soft lumber duties on deposit <unk> government, a quarter and substantially all of which are not recorded on her balance sheet.
In terms of Q1 2020 earnings adjust either dollars $37 million improved from each million dollars in Q. for 2019.
Improving reflects stronger average lumber prices combined with relatively find unit costs quarter of a quarter.
Average realize prices were $592 per thousand worked eating the first quarter versus $566 in the preceding quarter.
<unk> results benefited from the recent reconfiguration or D.C. coastal business.
In a strong coastal log market.
Terms of lumber volumes production in all regions was practically reduced to balance with demand.
Which was impacted by cope with 19 in the second half of Q1.
627 million worth you were produced in Q1 versus 668 million Porky didn't queue for 2019, Oh, it's almost shipments worry about 6% lower quarter over a quarter.
From a cash flow perspective, we continued with our enhance focus on working capital.
Cash flow from operations after working capital in the first quarter was a positive $19 million.
The seasonal working capital building Q1, I'll be smaller than in prior years, it's higher log sales him to be sea coast balance the seasonal build it'd be see interior log decks.
Repatriation of approximately $40 million working capital from the haven't saw mill.
Actually complete by the end of Q1.
On the investment side, because it's on the acquisition of <unk> cutting rates from can for in the quarter for $57 million.
Acquisition solidifies the long term lock supply and operating platform ever items like saw M.L. in British Columbia.
In terms of capital expenditures $20 million spent in Q1, approximately $21 million about related to work days to another strategic projects.
In response to the prevailing environment, we will remain disciplines in our approach to Capitalise appointment.
We've made plans to reduce the capital program through 2021, and currently expect expenditures to be approximately $100 million and twentytwenty and substantially less than $100 million in 2021.
We continue to have significant flexibility to adjust our capital program.
Pending on how market conditions of malls.
In summary enterprises balance sheet isn't very good shape, and we will continue to be proactive in making decisions that position that company well for the longer term.
I can cruise my remarks, and the color and apart.
Thanks, right good morning, everyone.
Q1, 2020 started off much much promise it sounds like 2020 would be a year wasn't more traditional spring season lumber Mark.
Early March it was clear that Kobe 19 was going to get annoying.
Access to markets in North America have generally been open however, a certain areas like Washington State Northern California in the northeast have placed restrictions that impacted our ability to shell or shipped in those areas.
We are seeing signs that some of these restrictions are using over market access remains at risk.
Looking at the lumber markets.
There's been a wide range of impacts on demand differences across and use sectors geography and customers.
Looking at the end use sectors, new home construction has seen significant adjustments through two so far.
Extent and magnitude of the decline and the recovery are debatable. However, there are some positive signs that some home builders.
That pays sharp declines in business in March and April May Beach, those maybe short left.
Right approximately 30% of lumber demand the U.S. declined thus far have been significant.
[noise] turning to repair a model activity the sectors essentially stayed steady overall, however, some reasons showing much more activity than others.
One point is the southeast weren't Bach start business is strong.
Similarly, the industrial market segments.
It's also been relatively steady thus far, but it's likely to fluctuate with overall economic activity going for.
Looking outside of North America.
<unk> business overseas is being consistent shipment volumes into Asia or essentially the same as cute for 2019.
Looking at this regionally there are significant differences between the markets for lumber produced in the southeast relative to the west.
West saw it decreased demand for lumber well before the southeast, which we attribute to longer transit time, so higher real car shipments higher percentage of products sold through traditional distribution and and uses for the products.
In the southeast the products have a much shorter supply chain predominately truckload shipments, which carry less market risk. Additionally, sudden yellow pine lumber as greater access to end users such a stress manufacturers some traders, but generally remain busy throughout the Kobe 19 situation.
Notable a supply chain inventories in the back half of March there was significant focus on reducing lumber inventories at the distribution at manufacturing levels.
For a period a good portion of customer short completely off the spot market for a number and driving down their own working capital through debt reduction mentors.
Quite frankly, we were doing the same thing I can tell you already mentors today are less it's 50% of what they work towards the end of Q1.
A big number.
In order accomplish session align our operations to lower demands entered four reduced production by 40 million feet in March which essentially translates to an 80 per cent run right.
And 160 million feet in April, which essentially translates to at 25% right right That's company wine.
We will continue to match or production to our customers demand, we expect prices for lumber products will continue to be thought huh.
True to quarter as we all figure out very dynamic situation or lumber markets.
<unk> turn it back in.
Okay. Thanks, part so operator, we're ready to take a analysts calls or questions. Yeah at this point.
Certainly as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound or <unk>.
Standby, while we compiled think you in a roster.
Mm mm.
Your first question comes from the line, Sean Stewart with T.D. Securities Your lines open.
Thanks, Good morning, everyone.
<unk> just a couple of questions to start with.
You you touched on Bart the the downtime you took in March and April can you give us the sense of what curtailments lookalikes heading into me at this point.
Shy now this is you know I'll just jump in Bard Sharon can fill in anything on this also but yeah. We're we're operating you know a may and I'll just sort of clarify that this is.
Week to week review that we do but yeah. We're in that you know.
<unk>.
Per cent range for a company wide and why region is so to is a little bit better than than the west is a little bit behind on that.
<unk> roughing dirty at at this point, that's where things are but.
Again, we're we're meeting at the senior team.
On a regular basis and as Bard alluded to.
We have confidence in market demand and pricing levels, we do have the flexibility too.
Nibble, and and moved out up or down on a week tweet basis, but that that's where we're at today.
Thanks, C.N.N. can you give us a sense of and she takes it down time.
Costs, you're carrying and just trying to gauge the unit costs impact is you take that downtime any math you can give us there.
You know.
Sean the the way that we're you know we're allocating our our business right now is.
To take that market demand and applying that to the the most competitive males.
In our system, so where we are taking downtime they're at the meals that.
Don't have the demand don't help yeah cos structure in place given the the environment that we're in today.
And so the meals that are running our our our best competitive meals on on that basis.
You know for 0.1 0.2 would be there is a bit of a mixed in demand and in some cases, some mills have a unique product mix or species mix that you always off random links or off you know print pricing. So we do have some some mills ah running on those those programs but.
I'll just leave it at that yeah, what we are running we're running well in in the mills that you know or or our best performers at this point.
Thanks for that.
And.
The second question I guess is for Rick wondering if you can.
Help us understand some of the other leaders you can pull for a balance sheet.
Preservation over the the near term and <unk> you touch on inventory declines.
Through through the second quarter, but other factors stumpage to for all the tax refunds deferrals those types of things any.
Qualification you can provide on on that front.
Yeah, Shaun all kick it off again, E.N. and then I'll hand, it over to refer to fill in a couple of the other points, yes, but.
<unk> yeah. The leave the main writ beavers or as you well, though working capital made a tremendous progress on that over the last you know several weeks.
Reducing our cutbacks, which we talked about and then you know the the idea of you know what do you run in what Oh, you run when demand isn't there. So just minimizing any kind of operating losses.
Is is really you know the other main lever so that decision point of.
You know if you're going out eight hours into a week or 10 hours or a second shift making sure that goes into the right plants so that.
You know when we're looking at you know any kind of operating losses minimizing not just you know has a double whammy as far as a positive impact on on balance sheet in financial flexibility. So you know <unk> the capital.
And just making sure that we're minimizing any losses. It you know there.
We might see it's been our approach and those are the the big ones, but.
Maybe Rick if there's anything else that you can help Sean with their yeah for Shurn. Thanks, Yeah in terms of <unk> got lots of flexibility on this looking through 2021.
Terms of working capital as part of <unk> really good progress on this <unk>.
We had $170 million in logs in lumber a cord random as part mentioned <unk>.
On top I remember a house.
<unk>, the Vancouver cost log market continues to be quite strong suit and participate in that.
And then turn log levels will come down to raise dependent on their operating schedules.
In terms of.
Deferrals on cost we've been participating in those where it makes sense and the religious costa pearls, they're not going to change your overall cost profile for for the rest of this year.
Mm.
Okay. That's that's useful detail thanks, very much guys.
<unk>.
Mm mm.
Your next question comes on the line of Mark Wild with E.M.L. capital markets you lines open.
Hi, This is Jesse Brown on for Mark Good morning goes.
Alright first question King is give us any more sense of what you're seeing in the distribution channel now on the inventory side.
Mm.
Sure I I'll I'll take that one <unk> so.
Inventories are always an interesting question I mean, they're difficult to be precise is really there's no no reliable data that excess.
I can say, though through March and April supply chain was actively piece talking whether from the manufacturer level or the dish distribution level.
Our customers essentially stopped buying on they open cash market instead focused on managing their commitments and driving down there on inventories.
In general when I have conversations with customers they talk about.
Keeping 30 to 45 days a consumption in inventory and sort of strategic levels. However, you know that how that translates an actual volume really depends on what your view of consumption is so obviously those to go hand in hand.
For Us we're 19 different we quickly responded on the operating rates and started to reduce our own working capital, but as I mentioned R.M. and tourists are down less less than 50% of what they were.
And our focus is really quite height on managing these levels and making sure that were aligning the production rates to our ability to sell.
To sell at a pace that supports that operation and also at a price that supports that operation.
Overall, though I think that the key the key point. There is is what's your view of consumption is and I think that will tell you whether or not be inventories in the market are adequate or not that's sad I mean this week, we're seeing signs in some regions that that that inventories are very tight.
And there would it it looks like there could have been.
You know I think a bigger adjustment on the supply side in an underestimate on what the demand side look like so we've got little short term disconnects I think that are going to take place over the next while as a supply chain figures out what the new door mess.
I think I'll leave it at that.
Mm.
It's helpful. And then as you kind of think about bringing production back online what kind of indicators are you going to look for is it just simply talking to your customers and what your view a supply demand is whereas or other indicators you guys are watching.
Yeah Jesse in here.
So no one.
One component is the demand security spring back you know an operation or to add to it you know how confident do we feel around that demand and how long does outlook. So that's one thing the other one is ordered alluded to.
<unk>.
The pricing level.
But the one the other one is making sure that given the.
You know a situation we're in with the market that we're not building risking inventories so.
Yeah, well Barry.
Carefully considering you know what you know lumber working capital might look like if we start up or out hours.
You know in some cases in some of our regions what the logging.
Oh profile or operating might look like and so we are very very conservative on making sure that.
We do you risk from working capitals and point.
So that would be yeah other than that the demand in price I would be the other main driver that that we talk about internally.
Mm.
Okay. That's helpful. And then just Leslie anything else you can kind of give us on the state of the export market into Asia.
Yeah, maybe board you can take that one.
Sure. So on the exports side, Japan has been fairly steady for us corner over a quarter.
Does look like we're getting some improvement.
And that market.
We enter into Q2, so we're pretty positive that not for US is it's again, Ben and J. grade plate.
China and I, you know I guess, I'll kind of group, China, and and other Asian countries.
You know the inventory Scott fairly low in the market place.
You know coming in Texas, he hit the I.B.C.D.C. issues, Oh, a little earlier that we did in North America, So [noise] over that China, new year period, the inventory Scott got quite low.
And there was a number of countries that pulled back they're important volume or sorry export volumes into those markets.
And you know once they were coming out of that the business for the main commodity type species really wrap it up and I think there's a significant volumes that were put together, which we would've played.
Role, but I'll I'll talk a little bit more about that second but.
Those volumes are now in transit or coal still arriving and I think the inventory levels are now starting to come back up. So we're we're I guess, our our view of the export markets a little bit cautious you know I think that.
I think that the M. and Tories are starting to climb back on.
My earlier comment about the main commodity products, you know, our which is which is essentially S.P.F.. There's that's that's the big volume over there and that represents 80% of what we produce from a value per per second so it's just not a huge item for.
<unk>.
We <unk>.
We have more business on on other species I suppose into those markets. Then are those sort of neat neat lines and and not subject to that I think that volatility that we sometimes see it volumes and go over there so.
Hopefully that helps you.
<unk>.
Jesse I'll just added T. in here just you one thing that.
I think is the strength of ours is the ellen's portfolio that we have really do have five different.
You know operating <unk> worms with the so.
Obviously that region.
Ah, Washington, and Oregon in the Pacific Northwest.
We have to be sea coast, which is largely you know export market is you're referring to.
We have to be she interior and that's really decide whether an interior.
And then we have to be she coastal log a market. So.
Times like these there's pluses and minuses, but having that balanced portfolio is something that you know, we're we're appreciating definitely in some of her regions right now.
That's super helpful. Thank you guys, so I'll turn it over.
<unk>.
Again, if he would like to ask a question Crestar one on your telephone.
Your next question comes from the line up Hammer Patel, what T.I.D.C. capital markets you lines open.
I like morning, Yeah, Nah I'm, just wondering out what's your sense today as to how much north North American lumber capacity is is down I know there's been a couple of melzer in there that have been in ramping up.
Yeah, Yeah EMIR. That's great question, we're trying to figure that out all the time also.
There was.
You know published few weeks ago is somewhere around you know 25 in.
We kind of took an estimate that it could be as high as 35, maybe even 40 at some point, but.
We definitely think that you know given you know some other recent.
Pricing levels that starting to change you know I I would I would think it's probably in that.
You know, 20% range somewhere around there plus or minus.
But yeah quite a shift from where it was a number of weeks ago.
Great. Thanks again, that's a that's helpful. At nights question for Bart's you know, we've seen a kind of just pre Kobe that there was it looked like the export market for 70 Alpine was was going to come back with the the terrorists going away. So <unk>. What do you think you know over the medium to long term is that.
Potential.
For for southern yellow pine exports to China and would would you you know what <unk> what portion of your your volumes.
Do you see that growing too.
Yeah.
Okay. Good questions. Yeah, I think you know, it's a way that tariffs were working out over there and it was a it was a tail wind for us I mean, I think certain distributors set up I can get exemption. So that kind of opened up the market a little bit further than what it was.
For us and and so you know, we anticipated being able to sell more volumes over there in and then I think our volumes have been fairly steady.
You know when you get into the market to chat today that that that in China, It's very price sensitive and so obviously the pricing in the last call. It three weeks in the southeast is is is generally a pretty big headwind for for doing anything significant so.
You know, we'll continue to maintain the distribution lines that we have set up with customers and feed that market, but will be pretty conservative.
Given where where pricing is gone lately.
Overall, I'd say you know our target.
In the South would be you know in that 10% to 15% range of our production to be going overseas not necessarily just to China, you know, but just generally outside of North America.
Or outside of the U.S. quite frankly.
We're not we're not there yet we're at at times were there, but we're not we're not there yet probably maybe in around 90% Mark [noise] today.
Alright. Thanks, Thanks for it that's that's all I had all alternative.
Mmm.
Mm.
Hmm next question comes from the line, Paul Quinn with RBC capital markets Your lines open.
Yeah.
Mm.
[noise] can't hear you call.
Morning.
Pardon Paul <unk> I got on call laid to look <unk> popular on the line up to get on most long, but I heard about on when you're talking about me operating levels and maybe you could just I'll be <unk>.
Yeah for sure all the T.N. you know may operating levels, right now company wide or anything around that.
50 per cent rate, but we have.
You know a bit higher in the in the south.
Yeah, and a bit lower in in the wise, but generally it's bad and and we are I.
I mean, our strategy is you ought to be conservative in.
And that'd be operating where we have confidence in the the market.
Order file and the pricing so we're reviewing that.
Almost on a daily basis, but we're making decisions on a weekly basis around.
Either out, adding or subtracting to that but right. Now you know things are looking fairly positive you know I expect there'll be some changes to that level, but today, that's where we're at.
Okay.
<unk>, what's your a working capital building T., one and you know how much.
You know how quickly to kill come out of that.
No overall is a fairly minor working capital built around $19 million in the corridor.
<unk>.
On on on the log side, we had a seasonal build I was expecting to be see interior, but that was.
Offset by a strong log sales on the coastal side.
And you know Paul just add to that it's in no big focus of bars over the last number of weeks as you can imagine was just really drawing down or working capital both on logs in in lumber.
Made you know decent progress on on that for sure.
Okay, and then just last week was fun <unk> girls as Rooney, she's associated with that or you know how.
When you the per projects you know it goes up increase the overall costs is that what you found in the past.
Yeah, <unk>, Oh jumping again so the.
With the exception of one project, which is a turn key which you know commit to to a a contract.
Yeah, and it's a fairly small project all of the rasta or manage internally by our our cat backs group.
And.
<unk>, where when you're in times like this being able to.
Throttle forward or throttle back I'm spending you always paying dividends so.
You know there are no commitments that you're able to make rehouse to me to benders, you know to build equipment in and do those sort of things, but we have a very low exposure on that and in some cases.
Where there's like equipment, we have the ability to shift you know a piece of equipment to.
You know a pro jacked up might already be under way. So you know, we're very low exposure to future commitments on on that side of it.
You know we are continuing to engineer all of our strategic projects, which is the basis for.
You know completing those you need you need to get that work done in and we're continuing to do that we're committed to our project and we don't see any material costs changes.
Coming our way.
Maybe I.
And well like I did and thinking about it or you get surprise at the the discount Western S.B.F. is God pet selling alpine right now or you know, it's just funny you anticipate it yeah.
You know when when she when she saw you know what was happening in the marketplace.
<unk> yeah.
Well those those markets you know, we obviously you track the the complex sets or whatever benchmark you want to pick and.
They don't generally state disconnected for chewed long, but you know generally you see the western species are more volatiles bad.
Then southern yellow pine has been and you know I I always look at that in terms of <unk>.
Supply chain rest again, and you know with the western species. The fact that a majority of it gets put in our L. car.
Shipped off to customers they don't receive it for.
For you know a couple of weeks, there's probably a couple of weeks lead time, just even before the shipment there's a fair bit at time involved in that and and whereas the self is.
Predominantly truck load order files are you know generally a week to two weeks a shipment takes a couple of days so just represent different different.
Risking the and the.
In the in a network.
And also you know, it's it's only a truck truckload versus having to buy a real actually there's a different amount of dollars involved. So I think that when you get uncertain at volatile markets. Like this you can you can see certain.
Regents getting more attention than others, just just based on that.
Yeah, Paul in here I would just.
Just you know as you know our western Mills in particular in British Columbia.
You know a multiple species that in in different product lines off of you know print pricing. So you know in certain times in in given the log in to rebuild that.
We had for break up it does give us flexibility too.
You know.
Bring in alternate <unk> plans and species were where there is demand so.
You know that that again, you know pays dividends in times like this when you have that type of flexibility in your species profile and then flexibility built into the males.
Yeah.
Right.
<unk>.
<unk>.
Thank you thanks Paul.
Mm.
There are no further questions at this time I will turn the call back over to the presenters.
Okay. Thanks, operator on behalf of the three of US we'd like to thank you for dialing in in participating in or update coldest warning and your interest in our company and you have any further questions are all feel free to reach out to a bar to Rick or or myself at any time and.
Be safe and healthy and all the best to you and your family's thank you.
Yeah.
Latency and gentlemen, this concludes today's conference call. Thank you for participating me now disconnect.
Oh.
[music].