Q3 2020 Western Forest Products Inc Earnings Call
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Good morning, ladies and gentlemen, welcome to the Western Forest products third quarter 2020 results Conference call. During this conference call Westerns Representatives may make forward looking statements within the meaning of applicable securities law.
These statements can be identified by words like anticipate plan estimate will and other references to future periods. Although these forward looking statements reflect managements reasonable 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 dear friends, including those factors described under risks and uncertainties in the company's annual Mdna, which can be accessed on SEDAR and supplemented by the company's quarterly M. DNA.
Forward looking statements are based only on information currently available to western and speak only as of the date on which they are made except as required by law Western undertakes no obligation to update forward looking statements accordingly listeners should exercise caution in relying upon forward looking statements I would now like to turn the meeting over to.
Mr Dawn damning, president and CEO of Western Forest products. Mr. Denham. Please go ahead.
Thank you Laurie good morning, everyone.
I'd like to welcome you to Western Forest products, 2023rd quarter Conference call.
Joining me on the call today is Steve Williams.
<unk>, Vice President and Chief Financial Officer.
We issued our 2023rd 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.
Oh, then share with you our outlook and discuss recent developments in our industry.
Well then open the call up to your questions.
So let me start the call by recognizing our employees and contractors for their commitment to health and safety during these uncertain times.
The adoption of district health and safety protocols that our company implemented at the onset of Cold at night gene.
And not only kept our employees contractors and community safe.
But their efforts have been instrumental in enabling us to reestablish our business after a lengthy U.S.W. strike.
Moving on to our third quarter results.
To capitalize on strong North American lumber markets to generate $33.7 million of adjusted EBIT.
Which is a 14% improvement over our second quarter results.
In what has historically been a seasonally slower quarter for our business.
So I'm pleased with our continued efforts to successfully re establish our business post the U.S.W. strike.
Oh, well facing the uncertainty of coated and in this quarter severe forest fires in Washington, and Oregon, which impacted our operations due to poor air quality.
Through the quarter, we capitalized on improved North American markets by increasing our Cedar sales and.
By leveraging our flexible operating platform to redirect approximately 30% of our lumber production from.
From weaker export markets to the North American market.
The redirection and since it's such a substantial amount of volume and a two month period was a pretty remarkable achievement.
And in my view it highlights how our sales and operation teams did a great job to recognize adapting capitalize on changing market conditions.
The strength of our results allowed us to reduce our debt by $33 million during the quarter.
So I'm pleased with our results in what has historically been a seasonally weaker quarter.
And I'm proud of how our employees have worked together during these unprecedented times.
I think these efforts demonstrate the resiliency of our company when faced with unforeseen challenges.
As we continue to navigate through these uncertain times.
We remain focused on aligning our production volumes to match market demand.
Well first and foremost ensuring the health and safety of our employees.
So let me now turn it over to Steve to review our financial results.
Thanks, John My comments will focus primarily on our financial results for the third quarter of 2020 with comparisons to the second quarter of this year our results from the third quarter of 2019 or less comparable due to the impact of the U.S.W. strike.
We reported third quarter, adjusted EBITDA of $33.7 million as compared to $29.5 million in the second quarter of this year.
Results in the quarter benefited from [noise].
Improved lumber pricing.
Lower saw mill conversion costs as we shifted some production to north American markets and restarted or leases Smith saw mill favour.
Favorable coastal harvesting conditions and a reduction in our inventory LCM provision driven by higher lumber prices and a mix of our lumber production.
Lumber revenue increased 10% compared to the second quarter of this year due to higher shipment volumes and improved pricing.
This was partially offset by a stronger Canadian to U.S. dollar.
Specialty lumber shipments represented 59% of third quarter shipments compared to 64% in the second quarter of 2020, as we redirected lumber production to benefit from stronger North American lumber prices.
Log revenue increased 22% compared to the second quarter of this year.
Revenue growth resulted from increased shipments and was achieved despite a weaker sales mix and lower export log market pricing.
Redirected certain export log inventory to our sawmills as a result of the strong north American lumber market.
Byproduct revenue increased by $1.3 million due to higher volumes as compared to the second quarter of 2020.
Freight increased by $2.3 million as compared to the second quarter of 2020 due to higher shipment volumes.
Judy expense increased by $3.4 million compared to the second quarter of 2020 duty increased U.S. destined to lumber shipment volumes.
At the end of the quarter, we had approximately 85 million U.S. dollars of duties on deposit.
Lumber production increased 34% compared to the second quarter of 2020, we restarted our latest Miss saw mill and benefited from a full quarter of operations that are college and be saw mill.
Reported production volumes also benefited from the nominal board foot measure used in north American commodity lumber products as compared to the net board foot measure used in export lumber products.
We also restarted our couch and being over any Pacific planar operations during the quarter as well as increased operating hours that are dewpoint planar.
Lost production in the third quarter 2020 was 7% lower than the second quarter of this year.
Log production typically declines from the second quarter to third quarter due to the fire season. However, we did benefit from seasonally favorable harvesting conditions during the third quarter.
From a profit and loss perspective, net income was $11.5 million as compared to $8.5 million in the second quarter of 2020.
Looking at third quarter cash flow and capital management.
Cash provided by operating activities after changes in noncash working capital was $40.3 million in the third quarter as compared to cash use of $7.8 million in the second quarter of this year.
Lumber inventory grew by 33 million board feet in the third quarter due in large part to secondary processing constraints due to the transition to North American markets.
Cash used in investing activities was $4.6 million during the third quarter of 2020 as compared to $3.9 million during the second quarter. This year.
We continue to manage capital spending in order to address uncertainty caused by Cove in 19.
We reduced our net debt by $32.7 million in the third quarter on the strength of our operating results.
Our liquidity at the end of the third quarter was $127.9 million and our net debt to capitalization ratio was approximately 20%.
Liquidity remains a key priority and a near term focus given the uncertainties associated with over 19, and we expect sufficient liquidity will be available to meet our ongoing obligations.
Don that concludes my comments.
Thanks, Steve.
So I'd like to start off or outlook section by touching on fourth quarter seasonality.
In typical fourth quarters lumber consumption declines in North America as construction slows with the onset of winter.
And our timberlands harvest volumes decline as we lose daylight operating hours.
Winter weather can negatively impact operations and further limit production.
The combination of weather related curtailments and reduced operating hours can impact production volumes and can put upward pressure on log costs.
So let me provide you an update now on our markets.
So lumber pricing in North America reached all time highs in the third quarter of 2020.
This was driven by a combination of rising demand from new home construction.
A very strong repair and renovation segment.
And supply constraints due to permanent mill closures and BC.
And labor challenges, which has limited the supply response from other North American regions.
As a result of the improved markets, we redirected lumber production from relatively weak export markets to the improving north American market.
We targeted our north American sales to selected customers in the treating sector, where our product mix to provide the most value.
Despite the recent market correction, we expect commodity pricing in North America to remain above trend levels in the near term.
Demand and pricing for western Red Cedar products in North America are expected to remain strong as our customers' customers position their businesses for the first quarter of 2021.
When looking at our export markets, we anticipate pricing in Japan will improve as inventories of North American lumber have normalized.
Well in China, we expect demand in pricing to trend slightly higher as we enter the seasonally more active fall and winter.
And our and our new segment, we believe demand for lumber targeted to the treating segment in North America will remain strong.
And while demand for our parents' products is expected to improve.
In contrast, we anticipate demand for timbers consumed in the industrial segment will remain weak.
There are large business, we anticipate the domestic saw log market will continue to be under supplied.
Pricing is expected to remain strong through the end of the year.
In contrast, we believe pricing in the export log market will continue to be competitive at the current relatively low levels.
And finally, we believe pricing for pulp logs will be flat for the rest of the year.
As we look forward the potential resurgence of Covidien 18 cases around the globe is leading to the reintroduction of government actions that could impact lumber demand and pricing.
We plan to utilize our flexible operating platform to adjust to market conditions and will continue to align our production volumes to match our customer needs.
So now let me provide you an update on a couple of developments in the industry.
In September the BC government provided additional information with respect to the manufactured forest products regulation.
The regulation applies to certain exported BC western red Cedar and yellow cedar lumber products to any location outside of Canada and within 3000 miles.
The regulation requires a provincial export permit.
And were the fully manufactured requirements are not met.
The payment of tax to be eligible for export.
The amount of the tax is dependent on the extent of the processing completed prior to export and is linked to the all other softwood lumber duty rates.
We will continue to engage with government to reduce unintended consequences of the regulation.
Well, we take all steps necessary to mitigate any potential financial impact to our business.
Moving on to the softwood lumber dispute in July the US Department of Commerce announced an extension of the first administrative duty review.
As a result, the determination of the final countervailing and anti dumping duty rates for 2017 and 2018.
Were not expected until late November of this year.
The final duty rate for 2018 will form the new duty deposit rate going forward.
Currently western has over $85 million on deposit with us Treasury.
Which at the current exchange rate is approximately 114 million Canadian.
Looking to what's next.
Our top priority remains the health and safety of our employees contractors and communities.
We'll continue to adapt our procedures and protocols as necessary to ensure we keep our people safe.
From a capital allocation perspective, our near term focus remains on reducing our debt, while we navigate through the uncertainty caused by the COVID-19 pandemic.
We will continue to review capital allocation on a quarterly basis with our board.
Despite the near term uncertainty remain cautiously optimistic heading into 2021, given encouraging market demand indicators.
We also remain focused on growing our lumber production and implementing our strategic initiatives to strengthen our foundation grower base and grow our business over the long term.
So with that operator, we can open the call to questions.
Thank you we will now take questions from the telephone lines. If you have a question that you are using a speaker phone. Please lift your handset before making your selection. If you have a question. Please press star one on your devices keypad. If at any time you wish to cancel your question. Please press the pound sign. Please press star one at this time, if you have a question.
There will be a brief pause while the participants register for questions. Thank you for your patience.
And the first question is from Sean Stewart. Please go ahead. Your line is now open.
Thanks, Good morning, guys.
Hi, John.
Questions, I guess for Don or Steve to start with.
Don Your your comments at the end on capital allocation. So.
I get that the near.
The near time for near term priority is deleveraging and preserving flexibility.
Hi, how are you guys thinking about capex headed into 2021 is there room to ramp it at all versus.
Bottom levels.
You've got the NCD in place.
Given relative underperformance for your shares versus some of your peers. How are you thinking about that.
That is an option at the margin to.
Return capital to shareholders.
Sure. Okay show, maybe I'll give it a try.
To answer that one so I think as you are aware in the last few years, we've kinda averaged about 30 to 40 $40 million a year.
And maintenance and road Capex.
And about the same and strategic.
I think as market conditions evolve or change I think we have the flexibility of toggling that capex up or down.
To provide you some direction for 2021, I think we should focus on that $40 million.
And as our debt levels come down.
And we look at other capital allocation options.
There is more visibility.
Related to covert we could start targeting a little bit more capital or capex to.
Smaller strategic capital focused on cost reductions, but I think in general to provide you guidance today I'd stick with that $40 million as your as you're modeling out what our business is going to look like in the future.
With respect to our focus on you know on other capital allocation options here.
For sure our near term focus remains on liquidity and financial flexibility given the uncertainty of cobot.
And as we reestablish our business post the strike.
Our near term target has done to reduce our debt to somewhere between 80 to 100 million and as you know we closed Q3 at about 119 hundred $20 million.
So we have a ways to go there.
To be clear, we continually review the capital allocation with the board.
And I think you know once we get a few more quarters of results behind us postal strike in the situation at Cove. It evolves, maybe becomes a little more clear, we'll certainly allow us.
To determine the capital allocation priorities going forward, you're correct, we did renew or inside the during the quarter and I think that just provides us lots of options and flexibility going forward, but the first first and foremost we get we are focused on getting our debt down in these uncertain times.
That's that's useful detail. Thank you.
Don one other question you mentioned.
Your expectation that Japan is.
Set to start to increase or your prices for the grades you sell their set to increase.
Are you seeing that floor set in yet.
What's giving you that that confidence that things are poised to get better.
Yes, John So we have seen improvements in pricing going into the fourth quarter in Japan.
I think thats related again to a reset in inventory levels and I realised nation that the market needs to be competitive on a worldwide basis, we're pretty comfortable that the pricing is going to hold going forward and probably improve could improve further.
Just recently export log prices out of the U.S., which forms a significant component of the competitive landscape in Japan.
We're increasing substantially by large exporter. So I think we're comfortable we've seen some price increases in the fourth quarter in Japan.
And the environment seems to be getting better for improved pricing there going forward I would caution, though the volumes are going to still be constrained until you see an improvement in housing starts so pricing is going up in Japan volumes are going to be a little more muted.
Thanks for that detail I will get back in the queue. Thanks.
Great. Thanks, Jeff.
Thank you. The next question is from Paul Quinn. Please go ahead. Your line is now open.
Yes, thanks, guys.
Good morning, Bob.
Hey, just maybe as line sort of the financial impact of the.
In factoring regulation on your business.
Well sure so as you know.
The government has implemented a new policy.
And I think.
Which requires us either either to process the lumber further.
Or pay duties. So a couple of there's a lot of moving parts here a couple of things to consider we're anticipating the duty rate to come down and of course that will mitigate any type of payments we have to pay in the future.
I'd also like to kind of point out that.
Western we do have the largest sawmill as you know we've got the largest saw milling and processing capacity on the coast.
So I think what we understand the government is trying to increase the amount of further processing on the coast.
You know I think the reality is if we.
Redirect, our cedar and yellow cedar into our processing business. It just means that theres going to be less hemlock process and that kind of runs counter to what I think their objective is which is to support more domestic manufacturer.
And as you know.
The species that needs the most value added and most focused on improving margin is hemlock. So I think the way we look at it fall because our positioning.
We believe we're gonna be able to manage through the new regulation with non material impacts.
On our financial results, but I think were really anxious to work with government to demonstrate that we can accomplish their objective.
In a way that supports the sustainable harvest and consumption of the entire coast log profile not just SEDAR and that's the message that we're going to work on so long and short of it I think we can manage through it we have the capacity to do it.
I think there's a better way to achieve the government's results and we'd like to work with them on that.
So it sounds like you're capacity constrained on the manufacturing side.
Which.
Which would suggest that you would look for additional manufacturing in the province BC. What are the what are the I guess investment criteria that you look to to make that up.
Yes, so maybe to be clear I assume I see constrain the manufacturing be processing and and so the process and kiln drying and planning.
We've made some pretty pretty significant investments already in the planning side I wouldn't say, it's just western that's constraining the entire coast is constrained on processing and that's also why it makes it a bit of a challenge to try to to have or forced the processing further processed seems cedar. It means something is going to drop out.
From a criteria perspective, I mean, it's got to hit our targeted hurdle rates and a and I think what we would be doing given given our location mostly in Vancouver Island. I think you know you might be seeing us invest or we can look at investing in additional killen dry and additional planning processing capacity.
I know.
You being local here in lower Manhattan, I think you understand.
Better than most people the challenges to see more investment.
In the lower mainland given the cost of land and it's very difficult for us to see an investment in the lower mainland, but I think you could see us, adding a bit of capacity on the processing side.
Next to our mills on the on the backdrop.
Okay, and then if you could.
30% export that you directed redirected to the North American market, if you could.
Quantify the financial benefit you received from that in the quarter.
Yes, so maybe a couple of things so that 30% it equated on a production basis to like 50 million feet or so.
And so that 50 million feet is I think thats going to flow through our sales volumes over the next.
Couple or over the last quarter and this quarter. Both 50 50. So you haven't really seen it come through the whole full way I mean, if we were to try to put a dollar amount on it for for Q3 G.'s are probably somewhere in the three to 4 million dollar range would be a good number to put on it.
Of course that is all dependent on pricing.
And how much more margin we're making.
You know maybe to close I think.
It's the ability to move back and forth between the markets.
Demonstrates that flexible operating platform, we've talked about and is makes us a little different than than other people.
Going forward so.
We'll see where the market goes or whether that's a permanent change or whether or not we're going to move back more to the export side.
Okay, and then just lastly capital allocation.
Use of a dividend is a dividend look like it it gets reinstated once you get that down 35 to 40 million Bucks.
Well I think what I mean, I think I'll stick to the comments I made earlier, we review capital allocation with our board and we look to ensure that we are putting our money.
Into the business, where it generates the highest return if that was dividend, we'd certainly I think the board certainly consider that its share buybacks as we talked earlier with our instead be we'd look at that or where capital allocation or capital into our business. So I think it's a wait and see until we get there Paul and we review it every quarter with the board.
Great Thats all I had.
Thanks, Paul.
Thank you once again, please press star one on your devices keypad. If you have a question or comment. The next question is from Samir Patel. Please go ahead. Your line is now open.
Hi, good morning.
Don Wood.
Would you expect the lower duties at the end of this month to add to lead to as sort of step change.
Cedar prices.
So a good question I mean, you know you're going to go back to when the duties were put in place and I think they we led the charge and making sure that that.
The pricing and the pricing represented the duties.
And we increased our prices as such.
Looking forward the market is what it is right now is strong demand for cedar products really strong demand for cedar products and make our volumes were up 20% quarter over quarter.
We have a substantial amount of our quarterly sales done and I think we're going to focus on what the customer and consumers willing to pay so our objective is to continue to sell at market whatever the duty rate is and to continue to fill our customers needs as.
I'd say looking forward customers are as I said are looking to try to position themselves are 2021, and do not want to be caught short.
And.
I think thats, where their focus is probably not on not on duty adjusted adjusted pricing.
Thanks, Thanks that thought and.
In the past you've talked about wanting to.
Strengthen our direct relationships with some of the big U.S.
Big box stores.
Any sense as to how that's going to evolve in 2021 imagine some of those discussions for programs for next year ongoing.
Yeah for sure and you're plugged into this you know that's exactly what's going on currently.
Say that I'm pretty pleased with our progress in directing more volume to the home Center channel.
We grew our North American Cedar Home Center business volumes was 17% compared to the second quarter.
And currently about 15% of our Cedar sales go to home centers, which is up from about 9%.
A couple of years ago.
As you point out we're we're looking to grow our volumes in this important segment further and I think the question is how are we going to do that.
First off we're investing in product branding and that has been really well received by the home centers. We work with they are really pleased with our investments there.
Because they see it as an opportunity to drive more sales and more demand through their business and and with our support I think they're they're extremely pleased that we're making those investments.
Secondly, we're looking to expand our product lines, we supply to the home centers and I think thats something I talked about in the last call during the quarter. Our first shipments a Japanese cedar arrived and were well received by our home Center partners. So.
So I think to conclude we are making progress in expanding sales there in the home center segment, and we'd expect that our marketing efforts and expanded product lines are going to support further increases in the future.
Thanks, that's helpful and anything you can share in terms of maybe how that geographic.
So with that with the home centers.
Matt.
One of the states like Texas would be disproportionately larger, but where's it going yes.
Yes. So so in actual fact, we've always had a position in the in the mountain States.
In the home center business and that continues to grow.
And.
Cedars in high demand there we've got a good position in home centers in the Canadian market.
And as you point out we are expanding our business.
In sort of Texas, as well and I wouldn't want to forget our positioning in the Pacific Northwest, where clearly Cedar is the preferred SPC and we do some work with the home centers air So it's pretty broad based across across the continent, but even if I was to say focus on Canada and the west is in the Western us.
Be a at a high level, where we're focused.
Great that's it thanks.
Thanks.
Great great. Thanks Amir.
Thank you.
No more questions registered at this time I will turn the meeting back over to Mr. diamonds.
Great well, thanks, Laurie and thanks, everybody for your continued support we appreciate your interest in our company and your time on the call. This morning, Stephen are both available if you have follow up questions.
And we look forward to sharing with you our fourth quarter results in February.
Have a great day.
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