Q4 2020 Western Forest Products Inc Earnings Call
All participants please stand by your meeting is ready to begin.
Good morning, ladies and gentlemen, welcome to the Western Forest products fourth quarter 2020 results conference call.
During this conference.
Call Western's Representatives may make forward looking statements within the meaning of the applicable securities laws. These statements can be identified by words like anticipate anticipate plan estimate will and other references to future periods.
Although these forward looking statements reflect management's reasonable beliefs expect.
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 and the company's annual MD&A, which can be accessed on SEDAR and its.
Supplemented by the company's quarterly M D N a.
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.
Size caution in relying upon forward looking statements I would now like to turn the meeting over and of Mr. Don Demmons, President and CEO of Western Forest products. Mr. Demmons. Please go ahead.
Thank you Laura and good morning, everyone.
I'd like to welcome you to Western Forest products, 2024th quarter Conference call.
Joining me on the call today is Steve Williams, our executive Vice President and Chief Financial Officer.
We issued our 2024th quarter and full year results yesterday.
I'll provide you with some introductory comments.
And then ask Steve to take you through a summary of our financial results.
I'll then share with you our outlook.
Look and discuss recent developments and our industry.
We'll then take your questions.
So let me begin.
'twenty and 'twenty was an extraordinary year for western.
Through the year, we successfully managed the safe restart of our operations after the the lengthy USW strike.
Actively re engaging our workforce.
We overcame the challenges of the COVID-19, pandemic and our operations and our markets.
We responded to the divergent pricing and our markets by leveraging past capital investments and our mills.
Redirecting production from relatively weak export markets into higher margin product lines for North America.
And we did.
All of this while delivering improved safety performance and our operations and continuing to advance our sales and marketing strategy.
The successful management of the significant challenges supported us and delivering $117 million and EBIT for the year.
Despite our BC operations being largely curtailed and the first quarter due to the strike.
We successfully leveraged our reposition product lines and capitalizing on strong North American markets.
To deliver EBIT of $71 million and the fourth quarter, including of duty recovery.
And what is traditionally a slower quarter seasonally for us.
So I'd like to recognize our operations team for successfully executing.
The safe restart of our operations Inc.
<unk> of positive re engagement with our employees after the long USW strike.
As well as the strict adherence to our new safety protocols to manage the impacts of COVID-19, and our operations.
I'm pleased to say there were no COVID-19 related transmissions and any of our operations and 2020.
During the year, we also benefited from our investments and our core operating systems to support a seamless transition to work from home during the pandemic.
We advanced our strategic partnerships with first nations as we continued to reposition of our coastal tenure assets.
With the announced sale of and additional interest and our Tfl 44 limited partnership.
<unk> to the whole way of first nations.
We expanded our ESG disclosure with the release of our latest sustainability report.
We provide one of the most sustainable building products and the world and are committed to defining of higher standard and our sustainability practices and ESG reporting.
And we successfully concluded long.
Long term collective agreements with key labor unions, and providing labor certainty for the next several years.
And our Columbia Vista Division, which we acquired in 2019 continued to exceed expectations in 2020.
<unk> adjusted EBITDA above its long term trend levels, despite the weaker Japanese market.
Our results confirmed that we have successfully reestablished the earnings capacity of the company.
And together with our new view on markets and strong balance sheet has.
<unk> has provided us the confidence to reinstate our dividend.
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I'll now turn it over to Steve to review our key financial results. Thanks, Don My comments will focus primarily on our financials.
The results for the fourth quarter of 2020 with comparisons to the third quarter of this year. Our results from the fourth quarter of 2019 are less comparable due to the impacts of the USW strength.
And we reported fourth quarter, adjusted EBITDA of $71 1 million as compared to $33 7 million and the third quarter of this year.
Results in the quarter benefited from improved lumber pricing and shipment volumes lower.
Lower harvesting costs and non cash recovery of $31 6 million and export tax related to the finalization of the 2017 and 2018 softwood lumber duty rates.
And continuing to leverage our flexible operating.
Operating platform redirecting volume to capitalize on strong North American markets and capture incremental margin.
Results were slightly offset by higher manufacturing costs due to lower production volumes.
The incremental secondary processing costs associated with certain products destined for the North American market and.
And higher.
Selling and administrative expenses due to health safety and it related costs associated with COVID-19, as well as higher incentive compensation expense.
And to our improved financial performance and appreciation of our share price.
On the revenue increased 23% compared to the third quarter of 2020 due to higher shipments.
Shipment volumes and improved pricing.
We took advantage of strong north American lumber markets by maintaining western Red Cedar volumes.
During the traditionally slower period and by redirecting production and sales from weaker export markets.
Specialty lumber shipments represented 48% of fourth quarter shipments compared to 59% and the third.
Quarter of 2020.
The greater commodity waiting of our lumber sales mix and a stronger Canadian dollar to the U S. Dollar reduced our average realized lumber price compared to the third quarter. However, benchmark pricing for the majority of our products continued to rise.
Log revenue was lower and the fourth quarter of 2020.
Compared to the third quarter consistent with seasonal trends.
We directed the majority of our export log inventory to our saw mills to capitalize on strong North American lumber markets.
Byproduct revenue increased <unk> 6 million as compared to the third quarter of 2020 due to higher byproduct volumes and moderately improved chip pricing.
The rate increased by $2 5 million as compared to the third quarter of 2020 due to higher shipment volumes and an increase in container shipping rates.
Fourth quarter results included $12 $1 million of export duty expense compared to $11 million and the third quarter of 2020.
We recognize the $31 six.
And export duty recovery and the fourth quarter of 2020 related to the Finalization of the 17 and 18 softwood lumber duty rates.
At the end of the quarter, we had approximately $95 million of duty on deposits.
Lumber production decreased 6% compared to the third quarter of 2020 as we balanced.
Lumber production with re manufacturing capacity.
We have continued to lever our flexible operating platform by redirecting production from relatively weak export markets and the strong North American market.
And early February we added a second shift and our Lady Smith sawmill as lumber markets and China began to improve.
<unk> as well as to increase production of products destined for the North American market.
Log production and the fourth quarter of 2020 was 21% lower than the third quarter of this year.
Consistent with typical seasonal operating conditions.
And from a profit and loss perspective fourth quarter net income was $34 four.
<unk> and <unk> as compared to $11 5 million and the third quarter of 2020.
Looking at fourth quarter cash flow and capital management.
Cash provided by operating activities after changes in noncash working capital of $64 million and the fourth quarter as compared to $40 3 million and.
And the third quarter of this year.
Cash used in investing activities was $5 5 million during the fourth quarter of 2020 as compared to $4 6 million during the third quarter of this year.
Capital expenditures and the fourth quarter of 2020 per part.
Partly offset by $2 5 million and cash proceeds from the sale of noncore as.
For the.
We successfully reduced our net debt by $52 million and the fourth quarter on the strength of our operating results are.
And our liquidity at the end of the third and fourth quarter was the $178 3 million and our net debt to capitalization ratio was approximately 12% we.
We expect sufficiently.
Asset liquidity will be available to meet our ongoing.
Obligations Don that concludes my comments.
Well thanks, Steve.
So let me start off of our outlook section by touching on first quarter seasonality.
And typical first quarters of timber harvesting activity can be periodically interrupted by winter weather.
Volumes are typically skewed to the.
Efficiently order when the weather and light conditions support greater activity.
From a market perspective sales typically accelerate through the quarter.
As we look to our markets I'm very encouraged by the positive North American market fundamentals and the improvement we've seen and our export markets of late.
And North America.
The end of the quarter price rally that began in the middle of the fourth quarter has continued through the first six weeks of 2021.
Unseasonably strong demand from both the new home construction and repair and renovation segments combined with constrained supply have led the higher pricing.
As we look to the near term, while some volatility may linger, we expect demand.
And the strong for commodity lumber as we enter the spring building season.
It should further support pricing.
Demand and pricing for our Cedar and niche lumber product lines are expected to continue to improve as we benefit from the strength of the north American repair and renovation segment.
And the fundamentals and our export markets have improved.
And to remain as inventory levels of rebalanced, and we expect pricing the increase in both Japan, and China and the coming quarters.
That said, we may be faced with some logistics challenges getting our products of our customers due to container shipping constraints.
And our log business, we expect domestic log prices to continue to rise.
True sorted by the strong lumber markets and greater competition from export log markets.
Improving pulp markets should support higher chip prices, and a slight improvement and pulp log prices.
So moving on to the softwood lumber dispute effective December 1st of the past year.
The combined countervailing.
So the dumping duty rates for western were reduced by 56%.
From 22, 3% to $8, 99%.
The new combined duty rate will continue to apply until a final determination is complete as part of the department of Commerce's second administrative review.
We expect the new.
And answering the second administrative review to come into effect later this year.
Given the strong demand for and our leading position in key product lines and markets.
We have thus far been able to capture the benefit of the reduced duties and our sawmill realizations.
Currently western has over.
New rates of $5 million on deposit with the us Treasury.
Which of the current exchange rate is approximately $123 million Canadian.
Turning to our capital allocation priorities.
We remain committed to a balanced approach to capital allocation.
Returning cash to shareholders, while maintaining a conservative balance sheet.
90, <unk> ability to support growth initiatives.
Our first priority is to return a portion of our operating cash flows to shareholders of the payment of our regular quarterly dividend.
We announced the reinstatement of a quarterly dividend as part of our fourth quarter results.
Our second priority is to invest strategic and discretionary capital.
And the fight and jurisdictions that will grow long term shareholder value and meet our desired return thresholds.
Near term opportunities may be focused on reducing manufacturing costs are addressing secondary process and capacity constraints and the BC coast.
To support growth of our targeted product lines.
In addition, we.
And May also look at acquisition growth opportunities that complement our current specialty products focus.
To the extent there are limited near term internal and external investment opportunities with appropriate returns and.
And we of excess capital available to deploy the <unk>.
Third priority is to return additional cash to shareholders.
Through share repurchases under our normal course issuer bid.
We plan to remain disciplined and our capital allocation approach and ensure we maintain financial flexibility.
Looking to what's next.
Our top priority remains the health and safety of our employees contractors and communities.
And we'll continue.
We own the app their procedures and protocols as necessary to ensure we keep our people safe.
With the successful repositioning of our balance sheet.
And re establishment of our earnings capacity.
Now look forward to resuming our growth strategy.
While we continue to capitalize on the investments, we've made and our new product line brands.
Longer term, we're excited about the potential growth opportunities for wood products and mass timber building technologies.
In addition to the increasing the demand for wood products mass timber will further help solidify wood is one of the world's most sustainable building materials.
We continue to evaluate how we may best participate and this potential growth opportunities.
<unk>.
So we remain committed to strong ESG policies and practices and we will publish our third annual sustainability report in 2021.
We will continue to engage with our employees first nations government and stakeholders.
Working together to develop mutually beneficial relationships to support jobs and communities and.
And which we operate.
While also ensuring we are creating long term value for our shareholders.
Our long term focus remains the same.
To successfully and sustainably implement our strategic initiatives to strengthen our foundation growth.
<unk> of our base grow our business and deliver long term shareholder value.
With that operator, we can open up the call the questions.
Thank you we will now take questions from the telephone lines and if you have a question and 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 is that anytime you wish to answer your question. Please press.
And Sam Please press star one at this time, if you have a question and there will be a brief pause of all participants register for questions. Thank you for your patience.
And the first question is from <unk> Patel. Please go ahead. Your line is now open.
Hi, good morning.
Don.
We've been hearing more about.
The Pan Alaska, yellow cedar being being milled into decking.
How do you see that competing with.
Western Red Cedar going forward and is there maybe an opportunity there for you to participate in some fashion there as well.
Yeah, and the merit so.
You may have noticed that some of our commentary has kind of changed recently.
And we were talking more about Cedar I think when we look at Cedar.
<unk> as everyone knows cedars the.
Premium softwood products for outdoor applications that goes not just for red cedar, but yellow cedar.
And so I think you're probably hearing more of them.
Alaska and yellow cedar because we're promoting it.
Recently, we will be one of the largest suppliers, probably the largest supplier of of yellow and we have.
Instituted a program recently, where we have launched the decking and trim line into the market late last year and I think we're seeing really great uptake and interest.
As as Red Cedar is kind of limited and supply so.
The long and short we are continuing to promote and provide the market with products that suit. The end uses and that includes.
The red Cedar yellow Cedar and I'd also add Japanese Cedar, which we had also launched again and naturally durable <unk> and <unk>.
Directed mostly at the defense business so.
So I think we're real excited about the opportunity the yellow and I'll ask and yellow.
<unk>.
Towards the company.
And then kind of related to that can you speak to how just given the stronger balance sheet. How do you think about M&A at this point and the cycle and.
Given some of the changes.
Thank you.
What.
<unk> are you considering.
Sure so.
And focused on our growth strategy and as you point out and I think we've talked about.
And our desire first and foremost of reposition our balance sheet and we've done that we achieved that by.
By getting down to $69 million and debt at the end of Q4 of our target was between 80 and 100.
And and I'm really pleased we were able to take the opportunity to reinstate the dividend that we have.
The suspended.
It is now time to look for growth.
And we're excited about the potential opportunities we continue.
Continue to think about the long term opportunities that are going to complement and grow our business I think from an M&A perspective, our focus is going to remain in the U S Pacific Northwest.
Or and other opportunities that add value to the product lines that we want to be in and.
Our focus has been to differentiate our products.
And to create differentiated differ.
<unk> and and undifferentiated market and so anywhere we can whether that's adding capacity and product lines or adding new product lines that support our core businesses, where we're going to focus our efforts.
Great. Thanks, Don that's the plan.
Sure.
Thank you.
The next question is from Sean Stewart. Please go ahead. Your line is now open.
Thank you and good morning, guys.
Couple of questions I guess first on the production profile expectations. This year it sounds like Youre getting back closer to full speed other than the.
The point I suppose of the.
Stage.
Any context or guidance you can give us on your expectation for overall 2021 lumber volumes.
Yes, so I think.
And Sean good morning.
Yeah. Good question. So you are right we are starting to.
Ramp back up to <unk>.
Previous levels going forward I think you can expect us to look to add some hours of production.
Probably targeting sold here at the start and potentially getting Duke point back up we're going to have to do this and balanced with our processing constraints and capacities.
I think you can think of us overall.
Somewhere around that 800 million foot level.
We will do what we can to lever additional shifting opportunities and were doing that currently and we will try to leverage our position and the customer care business to add more production and I think eight hundreds probably a pretty good number to think of for the year.
Okay. Thanks for that.
And you.
You referenced and your comments, Don and and in the MD&A and the mass timber opportunity set and it feels like the industry has been talking about this for a long time now and.
Clearly some ESG tailwind, but can you give us broader thoughts on what that market could ultimately look like and.
And what.
The piece of your business that could that could take up over the long run.
Yes, so I think theres been lots of as you point out there's been lots of publications and lots of analysis and really good quality of analysis done on trying to to articulate how big the market might be.
I think.
We will see how.
Of that unfolds going forward to some people say four of 5 billion feet.
Is the potential for western I think the opportunity is to try to figure out where our products best fit in and the production of mass timber building technologies, we have.
And I think Thats got to focus mostly on hemlock and.
<unk>.
You know I think we would recognize that or talk to talk to people but of being under.
Utilized from the from an appearance perspective and strength perspective, so our focus will be on leveraging the strength characteristics potentially and laminated lumber, which is a key component of the mass timber building technologies, and where we can lever the inherent.
Is the strength qualities and the appearance and visual qualities of the product.
To create the most value.
And I think the near term I think there may be some challenges in this sector, just because and COVID-19 has probably taken.
A little bit of delay.
The late a lot of projects and they are.
So there could be some growing pains here, but is the is the.
Does that.
Rectifies itself and the building gets back up and going I think more and more people are going to want to build with woods. So it's a really bright future and our participation will likely be in the and the <unk> side of the business.
Thank you for that detail that's all I have for now thanks guys.
Thanks, Sean.
Thank you once again, please press star one on your devices keypad. If you have a question or comment. The next question is from Paul Quinn. Please go ahead. Your line is now open.
And thanks, very much learning, Steve and done.
<unk>.
I guess, maybe start with your mix, yes, you mixed it dropping in Q4.
What do we expect seasonally going through 'twenty, one here on mix.
So youre right I mean the.
The mix did drop as we increase the production of commodity lumber.
And.
And in the commodity segment is of course.
Our volumes to the treating segment.
And I think that $50 50 somewhere between <unk> and <unk>.
It may oscillate between $45, 55% of specialty lumber is the is the mix you can consider.
And that we're going to probably.
The operate through the year.
As Youre well aware, Paul we obviously get a benefit when we start cutting lumber into the North American markets from a nominal net perspective, so we're picking up volume there.
And I think just maybe one other point I'd like to make is when we talk about commodity lumber for western.
Not typically construction.
Lumber, we're focused on the treating segment and.
It's because treating and cedar kind of go hand in hand and outdoor applications.
And we saw some really great growth and are treated segment, we did over 35 million feet I think and treated lumber.
In Q4, and it probably represents about 50% to 60%.
<unk> of our commodity lumber now so for North America. So I think we're pretty excited about it.
And maybe I'll leave the last point with you is we're going to continue the toggle back and forth specialty commodity depending on where the margin is and that's sort of one of the opportunities, we have which may differentiate us from our lumber peers.
And.
Okay. Thanks for the wholesome answer maybe just on naphtha Murray you expected to be of supplier of mass Camaro of producer.
I think initially.
And the last answer I think our focus is going to be and trying to lever hemlock and our product and it doesn't mean, we're not going to be doing for yellow cedar, but but I think.
Mostly hemlock, we'd like to be of supplier of the products.
Rather than a supplier of.
Supplier into the product mix.
Okay and then just.
Try and understand the flexibility of got here. If you could describe your log inventories at the end of the year on what you've seen and the first six weeks of the 'twenty one here.
Yes, so good.
Good question I mean, as you know log inventories can be pretty pretty variable and the coast were in pretty good shape coming out of the out of the fourth quarter.
And over 900000 meters and I think was the number.
And well positioned on the small log side of the business large logs or a bit of a challenge.
And so we're trying to work through that right.
Now.
As you are well familiar large luxury are always a challenge at this time of the year going into the first quarter and early second quarter. So nothing unusual.
We think there is some more log volume available and the market and we'll be active participants in the open market to ensure we've got log supply and in front of our mills.
Okay, and then in terms of some of the Capex projects that.
And that you are contemplating here I mean, you see governments.
And some of the regulation around that and Youre, having to pay the taxes.
Is that facilitating some of these capex savings.
Well.
And just to go back I mean typically.
<unk>, we target about $30 to $40 million, a year and maintenance of business capex through of timberlands and our and our.
Our net.
Sales.
And we'll be looking at adding.
And incremental amount to that maybe upwards of $10 million.
And more strategic capital quick payback volumes I think we will target that.
And into.
And the probably are reducing our costs and our operations and and I think improving our processing capacity does it have a direct impact and one of the BC government is doing is driving us to this not really market driven and I think.
One of the challenges we've got.
And we share of the government's desire to increase value added production and Nick going up the value chain and so we're continually working at ways to do that and we're working with the government to figure out ways. We can do that it just so happens of these investments targeted for specific product lines.
And is perfect and a good.
Good example of how well aligned where with the government.
Okay and then just.
On the M&A potentials. It sounded like you guys were saying you are pretty focused on the Pacific northwest and the U S as opposed to.
Is that true.
Well I think so I think I think the.
And the Pacific Northwest.
Western and the U S provides some of the same opportunities that we have.
In the NBC and the coast rate, which of you can differentiate product lines you can differentiate qualities within the products and you can make more specialty products and become more valuable to the final customer. So yes, I think long and short answer yes, we're probably more focused on.
The U S Pacific Northwest that said, if we can if there's opportunities for investments.
And specific product lines NBC, we would not shy away from that.
Okay, and then just lastly, just trying to understand Thats total seat of market.
And what the size of potential as you mentioned that Red Cedar is limited I guess that's the.
Ability of harvest.
We've got this new opportunity and yellow Cedar, how big is that yellow cedar opportunity relative to red Cedar and relative to the stuff youre, bringing the outcome for that.
Certainly the largest component of any kind of cedar business will be red Cedar.
And Thats a combination of FIS of.
And BC coastal BC interior and then.
And the.
Northwest of of the U S, which are the three supply and regions for western Red.
Yellow for us is about 7% of our standing inventory and logs.
And creates a growth opportunity for us.
As as yellow is not being used as much and Japan, we have an opportunity to redirect it into <unk>.
North America.
So I think we're going to work really hard at trying to expand.
And the use of yellow Cedar as I said, we're pretty excited about the opportunity and we've already got product lines going into the home centers as well as is.
Some distribution and we'll see what the uptick is over and over this.
Quarter and that will kind of determine how big we can get and yellow I think we're the only company investing and the marketing branding and increased production of yellow Cedar and.
We expect to have it to.
The become a bigger part of our Cedar business.
Great. That's all I had best of luck of thanks.
Great. Thanks, Paul.
Thank you once again, please press star one on your devices keypad, if you have a question or comment.
There are no further questions registered at this time I will turn the meeting back over to Mr. Diamond.
Great. Thanks, Laurie and thanks, everyone for your continued.
<unk> support we appreciate your interest and our company and your time on the call. This morning.
Steve and I are going to be available. If you have follow up questions. We look forward to sharing our first quarter results with you and me.
With that have a great day. Thank you.
Thank you. The conference has now ended please disconnect your lines at this time and we thank you for your participation.
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