Q2 2020 Western Forest Products Inc Earnings Call
Good morning, ladies and gentlemen, welcome to the Western Forest products second quota 2020 results Conference calls during this conference call Westerns Representatives may make forward looking statements within the meaning of applicable securities laws. These statements can be identified by words like anticipate Glen estimate will.
And other references to future periods.
Although these forward looking statements reflect managements reasonable beliefs expectations and assumptions, they're subject to inherent uncertainties, an actual results made it for materially.
There are many factors that could cause actual outcomes to be different including those factors described under risks and uncertainties in the company's annual MBNA, which can be accessed on Cedar and then supplemented by the company's quarterly M. D N E.
Four weird looking statements are based only on the information currently available to western.
Speak only as of the date on which they are made except as required by law Western undertakes no obligation to update for weird looking statements. Accordingly listeners should exercise caution and are relying upon forward looking statements Oh now I'd like to turn the meeting over to Mister darn demands.
Didn't N C O of Western Forest products. Mr. Demands. Please go ahead.
Oh, Thank you J give me the morning, everyone.
So I'd like to walk in me do Western Forest, <unk>, 2022nd quarter Conference call.
Joining me on the call today is Steven Williams, or executive Vice President and Chief Financial Officer.
We issued or 2022nd quarter results yesterday.
I'll provide you with some introductory comments and then Steve to take you through a summary of our financial results.
Well then sure with your outlook and discuss recent developments in our industry.
Well then take your questions.
Let me start the call by acknowledging our employees and contractors for their commitment to health and safety during this challenging in in certain time.
They're adoption of district health and safety protocols that our company implemented at the onset of the Cove at night have Coke with 19 have not only kept our employees contractors and community safe.
But their efforts have been instrumental in enabling us to reestablish our business after the a link Lee USW strike.
Our strategic investments in information technology over the past several years.
Loudest or work remotely while ensuring we remain connected.
Both internally and with our customers around the world.
As we navigate through the challenges presented back over at 19.
Will continue to provide all the support necessary to keep our employees contractors and communities healthy N safe.
[music] moving onto our second quarter results. Despite the in certain operating environment cars Breakover 19.
And operational challenges, resulting from the restart of operations after the lengthy usw's strike.
We generated 29 and a half million dollars a adjusted EBITDA.
This year's results were much improve in the $15 million generated in the same quarter last year.
Please we were able to to successfully deliver solid financial results in the second order of 2020, well overcoming the impacts cosmic over at 19 and despite the operational challenges associated with the restart a R. B C operations.
The consumption of strike impacted large.
And having been unable to participate in the spring by due to the strike.
As we continue to navigate through these on certain times.
I mean focused on a lining our production volumes to match market demand.
Well first and foremost insuring, the health and safety of our employees.
Well now turn it over to Steve to review of key financial results.
My comments will focus primarily on our financial results for the second quarter of 2020 by comparison to the second order of last year.
We reported second quarter, adjusted EBITDA $29.5 million as compared to $15.1 million in the same period of 2019.
Results in the corner benefited from improved lumber and log markets towards the end of the quarter favorable coastal harvesting conditions.
Strategically accessing logs restage prior to the straight to reduce per unit harvesting to us and accessing that can make it an emergency wage programmed to support employment and communities.
These benefits were partially offset by a week or log sales mix.
Lower byproduct revenues and higher per unit manufacturing toss do the restart of operations in production inefficiencies from consuming log inventory.
D graded during the strike [noise].
Lumber revenue decreased by 19% compared to the same period last year do the lower shipment volumes.
This was partially offset by a higher specialty product mix in the benefits from a week or Canadian G. U S dollar.
Specialty lumber shipments represented 64% of second quarter shipments compared to 57 per cent and the second quarter of 2019.
Log revenue decreased 4% compared to the same period last year.
We capitalized in an improved logged market late in the second order to deliver increased shipments as compared to the same period last year, However average log.
Price realization declined you to a week or sales mix and degraded log quality as a result of the strike.
Byproduct revenue decreased 48% due to lower chip sales volumes and lower realized pricing.
<unk> expense decreased by $6.3 million from the same period last year due to lower shipment volumes.
Judy expense decreased by $2.1 million from the same period last year due to reduce U S desk in lumber shipment volumes.
At the end of the quality, we had approximately $105 million of duties on deposit.
Lumber production decreased 31% compared to the same period last year.
<unk> fewer shifts and production efficiency was impacted by logging inventory that a degraded during the strike.
It's also resulted in higher for unit manufacturing costs compared to the same period last year.
Lord production in the second quarter of 2020 was two per cent lower than the same period last year.
Oh I'd production gradually increased do the second quarter of 2020, overcoming modified operating procedures to mitigate cove at 19 risks and capitalizing on favorable coastal operating conditions.
R. A V C coastal per unit harvest costs decrease from the same period last year as suey strategically access lost it had been states prior to the strike. We also reduced higher cost helicopter logging volumes and limited road expenditures.
From a profit and loss perspective.
Net income was $8.5 million as compared to a net loss of point $7 million in the second order of 2019.
Looking at second quarter cash flow and capital management cash provided by operating activities before changes in non-cash working capital during the second order of 2020 was $38.5 million as compared to $4.5 million in the same period last year.
Second order of 2020 benefited from the receipt of income tax refunds of $11.4 million.
And the second order of 2020 non-cash working capital increased by 46 $23 million non-cash working capital increase as we rebuild inventories as we resumed strike your T V. C operations and is shipments accelerated through the end of June with improving market demand.
Cash used in investing activities with 3.9 million during the second order of 2020 is compared to 14.9 million during the same period last year.
We reduce their capital spending in order to address uncertainty caused by Cove at 19.
Last quarter, we announced the suspension of our quarterly dividend to address and is there any cause I go with 19 and as a result, we did not make it did it and distribution and the second order of 2020.
Our liquidity at the end of the second quarter was $95.1 million in our net debt to capitalization ratio was approximately 25 per cent.
Liquidity remains a key priority in or near term focus.
Working capital typically reaches a seasonal high at the end of the second quarter.
We expect to receive a total of $18 million in the third order of 2020 from income tax refunds and they can meet Canadian emergency wage program.
We will continue to explore opportunities to strengthen our liquidity.
We expect sufficient liquidity to be available to meet our ongoing obligations.
Dawn that concludes my call them is great. Thank Steve.
I'd like to start off or what section bread touching on third quarter seasonality.
[noise] typical third quarters can be challenging operationally.
It's hot dry weather can restrict logging activity, reducing harvest volumes and in fact and costs.
Is there coastal forest dry out we shift or less productive early morning operating hours to reduce fire risk.
So far we've had a productive first month of harvesting.
But conditions can change quickly as we head into the late summer.
Turning to our markets at the onset with a coke with 19 pandemic government actions to limit the spread of the virus created significant demand disruptions.
In response, many lumber producers curtailed operations.
As governments began to ease restrictions lumber consumption quickly improved particularly in North America.
Rising demand has outpaced supply.
The resulting supply demand imbalances led to significant price increases, especially for a commodity lumber.
Number demanded are key export markets is not experienced the same sharp rebound as in North America.
As a result were directing a component of our lumber production to North American product lines to take advantage of the improved pricing environment.
Demand in pricing for our western Red Cedar products in North America improve through the quarter led by the home center segments.
We expect demand in North America to remain strong and a third quarter.
Which is traditionally a slower period for western Red Cedar lumber sales.
Demand for niche lumber products targeted treating segment in North America remain strong.
Well the man for timbers consumed in the industrial segment has slowed.
In Japan lumber demand as we can do climbing housing starts.
Cove at 19 related challenges.
As demand has fallen market pricing has become more competitive.
In response to the week or demand for our products, we made a wreck certain Japan destined volume to the North American market.
And the export Lord Margaret during the second quarter Kobe 19 shutdowns in New Zealand in Europe impacted large supply to China.
We expect European in New Zealand large supply to return Dupri shut down levels, leading to a more competitive price environment as we go forward.
The recent strengthening of the Canadian dollar versus the U S. Dollar may impact certain log in lumber realization and a third quarter.
We expect domestic log prices to improve slightly and the third quarter.
Supported by increased demand from local manufacturers.
In contrast, we expect pricing for pulp large to remain under pressure.
Until demand for pulp and paper improves.
And the pulp and paper Mills returned a full production.
And the second quarter of 2020, we launched new product branding to increase our presence in the home center and pro dealer sales channels.
The new branding will support the strategic marketing and Bender purchase agreements, we reached with customers in the first quarter.
We expect to see more wholesome benefits of these marketing initiatives as we move forward.
Supporting us and growing sales volumes in order to capitalize on the growth and the root beer and remodeling segment.
As we look forward the potential resurgence of Coke with 19 cases around the globe may lead to the reintroduction a restrictions that could impact lumber demand.
We finally utilize or flexible operating platform to adjust the market conditions and will continue to align our production volumes to match our customers needs.
I'd like to provide you an update on a couple of developments now in the industry.
In January of this year, the BC government announced changes to the manufacturing forest product regulation.
The amendments to the regulation require western red Cedar and yellow cedar lumber to be fully manufactured to be eligible for export.
And you're in the province announced.
The deferral of the regulations implementation to September 30th of this year.
The province also updated the regulation to only apply to the BZ coached.
We continue to <unk> to work and engage with the government to insure the desired outcome is met without unintended consequences to our global customers or employment in B C.
The final policy has yet to be released but the regulation could have negative implications for global customers, a b C cedar products.
Through their purchases support thousands of jobs and communities on the coast a V C.
You could also a name negative implications on the coastal lumber business that is already being disproportionately impacted by the application of duties on our high price Cedar shipments the United States.
Moving onto the software lumber dispute in July the U S Department of Commerce announced an extension for the first administrative duty review.
As a result, the determination to final calorie reeling and antidumping duty rates for 2017, and 2018 or not expected until November 2020.
Currently western has over 78 million U S dollars on deposit with the U S Treasury.
Which is the current exchange rates approximately 105 million Canadian.
Looking to what's next.
Priority remains the health and safety of our employees contractors in communities.
We will continue to adapt or procedures and protocols as necessary to insure we keep our people safe.
We also remain focused on maintaining financial flexibility and a strong balance sheet.
We will continue to review capital allocation on a quarterly basis for their board, but our near term focus remains on reducing that.
Despite the near term uncertainty, we remain focused on growing or lumber production.
In implementing our strategic initiatives.
[noise] to strengthen our foundation graw base and grow our business over the long term.
Without Jacob I can open up the call for questions.
Thank you.
I'll take questions on the telephone lines.
Debit question and you're using your speaker phone, please lifter handsets before making your selection.
Question Crestar, one on your telephone keypad.
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Please press star one at this time for a question and there'll be a brief possible participant register thank you for your patience.
And our first question is from <unk> from Guidi Securities. Please go ahead and you're lying is open.
Thank you good morning, guys.
I'm Gonna shut.
Couple of questions.
You guys reference plans to reallocate some of the off shore volume.
T U S markets can you give us an order of magnitude and and what we can expect for for that from a volume perspective, and Q3 and maybe even into Q4, and then context on specific grades and and and market. So you're gonna push that product into.
Sure.
Sean So yeah, I think first off you know we already do a significant amount of business in North America, you know from her parents products using molding of nowhere to Cedar targeted the home centers no door living.
You know we do for her parents timbers yellow cedar in the <unk> in glue Lam in Lamb stock.
And we have a pretty strong position and in North America or at least in our region and the treating an industrial segments.
Yeah. We also do some products for the construction segment, both dimension and timbers. So it's along with like the you know the products directed to the treating segment and the construction segment is where we expect to grow volume in the next couple of quarters.
And redirect volume <unk>.
Most of the volume is going to be redirected Ah you know from Japan and from China.
I think we'd estimate maybe about 10% to 15% additional volume being directed this quarter.
To North America.
Can I guess tomorrow perspective, you know the disability to redirect volume.
Underscores the benefits of the flexible operating platform, we've got and should allow us to participate.
And the improved pricing environment, we're seeing in North America as opposed to some of the export markets.
Makes sense.
The the T F L 19 decision to lower.
Volumes for <unk> for you guys are the expectation that that'd be the case.
I I guess <unk> do you expect it easy would have to replace that 130000 cubic meters on the open market.
Do you expect it to solve any.
Bearing on on your Sanmao operations at all.
Yeah. So so that'd be direction I know, we we don't think it will have any bearing on the sawmill operations are we purchased swollen vermillion meters tip in a typically a year and having you know the volume being reduced in 19 T. A L 19, it shouldn't have an impact on sawmills I mean, maybe just to provide you a little what context in for.
G. A L 19th located on the West side of Vancouver Island, but like every one of our 10 years every 10 years, the cheap forest or the provinces required to review the 10 years and determine.
Sustainable annual elbow cat that allows us to harvest in perpetuity.
To do this you know they do have detailed analysis of growth rates and and harvest and then take into account any reductions or deductions from the timber harvesting lambastes do the government land use decisions and set asides.
That's basically what's occurred here and and what they've determined is most of the reduction is due to natural decline, which means there's less volume per hectare then see from old forced to new forest.
It's just so happens a reduction we had just paid off some would be in line with the harvest we've had over the past period of time. It is a very high cost area in the West Coast to Vancouver Island. So yeah. We you know again I don't think we see any impact on on our business going forward or it'll be minimal.
I would like to highlight the use of lighter technology. The investment made a few years ago.
It it is certainly reduced the expected declines we would have expected to see due to natural Brookline E. A V C over time, because the investments identifying that you know for sure growing faster and N as improved and enhanced our understanding of the standing timber inventory so.
Is it sounds like a bad news story is actually not it should not impact are are mill operating platform going forward and it's actually a good news story from a light or perspective at our investments because we're actually have a much better understanding of of our inventories and our growth rates and that improves.
<unk> abilities sustainably manage our 10 years.
Thanks, Don that's all I have for now thank you betcha.
Thank you. The next question is from me or Potala from CIBC capital markets. Please go ahead your line or something.
Like the money gone and we've seen some really good volume growth numbers from quite a few of C would pressure treaters I'm I'm composite decking producers <unk> do you think Cedar has lost market share this year.
Well, yeah, I I don't I don't think silly not enough for us Hmm here I mean, but you have to put everything in perspective, when you're thinking of our business you know in our business. We we got off to what I would call a standing start which is difficult in the lumber business coming into second quarter.
We.
Due to the long strike.
And so you know we're pretty pleased with the progress we've made and particularly in in the product lines you've identified in particular in the home centers.
You know we've made investments in our our products and branding that it's been really well received there and you know we're expecting to see a a benefit from that going forward. So I don't think seaters, losing any traction.
I think we're also very encouraged and that's Cedar front, there that you know as as the.
Investments people are making in their homes have increased especially in the current cove environment, we're expecting to see cedar demand increase through the traditionally slower third quarter.
So maybe to conclude you know I always liked thank the the best products unnatural product and those products you know it you know for for Us.
And the parents Cedar and the application of those I think are treating segment is going very well. An example for us might be that you know are are treating volumes.
This year I'd expect to approach what we're doing it 2018.
And you have to put that in context are volumes are lower so.
I don't think we're losing traction and I think actually the work we're doing a marketing is going to benefit is is increased demand procedure going forward.
Thanks, Thanks on that that that's helpful. And then with respect to how your products are priced through that home Center channel.
Is that Ah shall we think of it as a lag with some of those random lengths benchmarks and and how long would that lousy.
Well, yeah. So so <unk> on the actual pricing the the home centers, we're putting to the final consumer there maybe some lag a you know we've seen pretty strong pricing in cedar over the last a year or two and you know I think if you're comparing it to the immediate run up in.
Two by four Yeah, you would say it would lag but.
I think we're pretty pleased with the pricing momentum we've seen in cedar over the last couple of months here.
Sure enough and I just want to ask you about the various B C. Coastal policy changes. This year. It you know with all of them are implemented as conceived what would be the annual ebay impact for for western.
Yeah, I Gotta say that that's that's that's gonna be tough tough to estimate.
The fact that we don't know what they're going to implement.
Maybe maybe try to help answer that question like I think I, probably along with most most.
Operators in British Columbia worry about the cumulative the effects of these multiple multiple policy changes that are in advance by the government and the impact it's having on not just western not just the coast, but the industry's ability.
[noise] to support for sector jobs in our province.
<unk>, especially I think during cove it.
I think material that <unk>, probably him here would be you know with respect the manufacturing lumber Reg.
[noise], maybe just give you a little overview me the proposed amendments or to require cedar red Cedar and yellow cedar to be fully manufactured it'd be exported.
That means that it would be fully manufactured it can't be killing drive planed resign and a facility outside it'd be C.
Again, just like many of the regulations the policies still haven't been released M won't become effective till September 30th So we're operating at a bit of you know.
A a vacuum here.
But I can tell you the <unk> you know the regulations proposed today.
Could have unintended consequences I said, you know to our to our customers, but also and through their purchases. Those are the guys that support the thousands of jobs and the communities in the V. C code. So.
I think we're all surprised by the potentially punitive nature of the privilege regulation on the coastal businesses.
We continue to work with others in the industry to engage government to ensure they can achieve their goal without negatively impacting customers an appointment.
And I guess, one would have to ask the question if the government's gonna implement something like this and when's the right time and is it in a coke with 19 environment, but I think they're better position to answer that then I N.
I think I'll review is restricting the volume of products to customers, there's not a way to grow business N B C and impacting B C companies is not a way to support investment in D. C.
I think again for for.
For you you know I think a question as well how would this impact maybe our investment in in Arlington and I can say that you know as we've always said Arlington is gonna be a key hop.
For distribution.
To our to our customers United States and very critical as we invest in marketing and efforts to increase our volume into the home Center business. I think also maybe a brief update you know we are currently trialling, our first trials of Japanese Cedar at Arlington.
And we're pretty excited about that opportunity and again it fits with our with our marketing efforts and you know with a targeted segment being home centers. So you know we're looking forward to how that goes. We're also just started trialling U S produce cedar there.
So you know for US I, you know I think we worry about the impacts the policies might have B C production B C of.
<unk> B C jobs.
But we're not standing still we're doing things in our business to supply our customers utilizing the assets we've got.
Okay, great. Thanks, Thanks on it <unk>, maybe a question for you or Steve, but it keeps any update on how maybe the lemonade pipeline, maybe looking we've seen some deals you know and the distribution side curious you know and some of those categories you're interested in if if you're seeing any.
Activity pick up <unk>.
Yeah. So I guess, what I'd say is our near term focus kinda you know for us when we're thinking about <unk> prayer prioritizing R capital allocation would be on.
Making sure we've got the liquidity and financial flexibility in our business and so we're really focused is that right now, but but but that said we can Chimbley review review our capital allocation and we continue to review opportunities of of acquisitions. Our focus continues to be you know the Pacific northwest.
Especially manufacturing and despite the challenges we've had with the strike in and coming out of the strike and that was Cove at 19, we continue to C N a investigate opportunities.
We'll see where that goes but again I'd like to reiterate our first priority here from from Illiquidity and capital allocation perspective is is to reduce our debt and create flexibility given the uncertain environment, we're operating it.
Okay, great. Thanks on that so that's all I had thanks I'm here.
Thank you.
Minder, Please press Taiwanese have any questions or comments.
And the next question is from Paul Quintain from RBC capital markets. Please go ahead.
Yeah, Thanks, very much marine got.
My fault.
Just pull it up on capital allocation that debt reduction priority.
I I can understand that what.
What level of of that that do you feel comfortable with to be able to.
The back the dividend in place.
Yeah, I mean, I think she just with respect to that again. So I think you know or focuses on liquidity and financial flexibility you know given yeah uncertain impacts of Cove. It right now and again I think just the coke would really clouds. The the visibility you know in the outlet.
And so again I think we're just going to focus on debt reduction rearview. The capital allocation quarterly you know with our board will continue to do so but I think instead of it is done at this point focus it'll be on debt reduction.
Okay, and then you guys referenced lower harvesting costs, because he's states logged in in the Bush Ah I'm material was that.
See.
C a corresponding reversal N T three.
Yeah. So so as I I think a great question. So we we will see <unk>. So it's kind of some recovery in Q3 and as I indicated seasonality wise, we tend to have supply disruptions in lower harvest levels [noise].
And ZIP O Q3, then we tend to increase our helicopter harvest thing so.
You're absolutely going to expect to see increasing harvest cost just because of that.
We did get a benefit of reducing what we call timber developed which is you know we'd made we we had our company we expense roads when they occur and then harvest a lot of the harvest later, so you know I I think like a 10%.
A benefit to log harvest costs.
This is what we experienced we're going to continue to right size of the business. So Paul I think that's really important will continue to operate.
On the on the basis of producing logs in line with a lumber production and and that may mitigate the the impacts on costs going forward.
Okay and then let me just maybe you can give us for color on Arlington. When you when you say I understand the distribution aspect, but I guess you are you, bringing in Japanese log sick Japanese seem to like to cut as well as as well, let's see that's like.
And then no I've were so what we've been doing alright. So maybe just the back of Arlington is is primarily a.
You know a distribution center, it's got a rail siding, it's gotten the ability to load a containers. It's got it in the ability to load a lot of trucks.
And we centralize all of our Cedar production there because.
Most cedar customers are looking for mixed highly mixed.
<unk> various products for their inventory. So it's really important that we have a facility that can do that in addition, it's gotta be able to repackage for certain customers and and I think I'll along those lines, the home center business and smallpox barcoding and alike.
So that's that's you know part of the business or we also have a plainer kilns and the like and so what we're doing is we're bringing in lumber from arlin from from Japan and elsewhere in Japanese Cedar there is no ability to manufacturer logs at Arlington, It's <unk>.
Only lumber lumber processing and it's only tied to expanding the product lines that we have four our to our selected customer base.
I I guess, one thing I can add Paul as well just on the Japanese you hear me. This is the early stages it'll be our first shipment shipments coming in a certain product lines and and the processing is going to start there at Arlington I can also tell you that we have processing capacity.
Fruit Valley, which is which is tied to Columbia Vista, Yeah, Vancouver, Washington, There will be utilizing that facility as well to further process. Some of the Japanese cedar we haven't seen the results of it yet, but we're pretty pretty excited about the opportunity and the customer base seems quite excited.
Okay and in Turtle that pass you know you guys flagged increase Japanese cedar imports and in North America is is <unk>.
Confused in the marketplace How're, you going to differentiate those products between western Red Cedar and and U S or or Japanese theater.
I think the the marketplaces, becoming much more sophisticated and understands the differences are the products and the characteristics.
You know, there's definitely a price point here, where the Japanese cedar is in some cases more competitive then then D C Cedar and and those you know that those are the wage real differentiated we will be calling a Japanese cedar and we will mark it under a different branch.
Okay, and just laffey on the on the P C government changes and regulations.
They they postpone that until September 30th is there have been redo dialogue or conversations between the industry and the government on the implementation.
Yeah. So so <unk> what what's transpired is is the government did differ their implementation. They they had a consultant go out and deliver a report he engaged components of the industry in.
In that report in creating that report those recommendations were made public we have commented on that but that is the only actual communications we've had directly with the government other than expressing our concerns about.
[noise] potential impacts and the timing of this giving cove it.
Alright, that's all I had that's like a.
Great. Thanks, Paul.
Thank you there are no further questions registered at this time I'd like to turn your medium back over to Mister beans.
Great well, thanks, Jacob and thanks, everybody for your continued support I appreciate your interest in our company in your time on the call. This morning.
Steven are both available if you have follow up questions and we look forward to sharing with your third quarter results in November without have a great day. Thank you.
Thank you what kind of French fries.
Please disconnect your lines at this time, thank you for your participation.
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