Q2 2021 Western Forest Products Inc Earnings Call
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Good morning, ladies and gentlemen, and welcome to Western Forest products second quarter 'twenty to 'twenty, 1 results conference call.
During this conference call Western Representatives may make forward looking statements within the meaning of the applicable securities laws.
These statements can be identified by words like anticipate plan estimate will and other references to future periods.
Although these forward looking statements reflect management's reasonable belief 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 is supplemented by the company's quarterly MD&A.
Forward looking statements are based only on information currently available to western.
And speak only as of the day on which they are made.
Except as required by law Western undertakes no obligation to update forward looking statements.
Accordingly, listeners should exercise caution and real.
Lying upon forward looking statements.
I would now like turn on meeting over to Mr. Don <unk>, President and CEO of Western Forest products. This was a bad and please go ahead.
And thank you Paul and good morning, everyone I'd like to welcome you to Western Forest products, 2021, and second quarter Conference call.
Joining me on the call today is Steve Williams, our executive Vice President and Chief Financial Officer.
We issued our 2021 second quarter results yesterday.
And I'll provide you with some introductory comments.
And then ask Steve to take you through a summary of our financial results.
I'll start with Steve's review with our outlook section.
Before we open the call to your questions.
Before I begin I'd like to recognize our team at western for their strict adherence to our robust COVID-19 safety protocols.
Their dedication to safety and has delivered another quarter with no COVID-19 workplace transmissions or downtime.
These results are testament to our strong safety culture, and the commitment of our people.
Our second quarter results were record for western.
Our safety performance solid operating execution and allowed us to capitalize on our stronger markets to generate record second quarter adjusted EBITDA by $124 million.
This results almost double the EBITDA, we delivered and the first quarter of this year.
During the quarter, we continued to leverage our flexible operating platform by redirecting production from export markets to higher margin product lines for North America.
Our strong operating results.
And with the proceeds from asset sales has allowed us to reposition our balance sheet.
We ended the second quarter of 2021, with almost $100 million and cash while at the same time, returning more than 33, and a half million dollars to shareholders through dividends and share buybacks.
Over the last 12 months, we've generated more than $325 million and cash from operations and asset sales and.
And so far this year, we've returned about $50 million to our shareholders through dividends and share repurchases.
In conjunction with these excellent results. We've also continued to demonstrate our leadership and advancing our ESG commitments.
During the second quarter, we released our 2020 sustainability report, which confirms western is net positive carbon impact.
And we became the first North American public and traded force company to transition to a sustainability linked credit facility.
Linking the interest rate, we pay to the achievement of certain sustainability goals.
We advanced mutually beneficial first nations relationships by completing the next phase of the Tfl 44 limited partnership transaction with a weighted first nations for $22.4 million.
And we establish sustainable Forest management planning processes with a number of first nations work.
She will support their increased participation and the full spectrum of forest replanting within their territories.
We recognized non executive employees with the Covid related safety bonus to show our appreciation for their commitment and dedication during the pandemic.
And we support our communities, which have been devastated by recent forest fires with a donation to the Canadian Red Cross specie by our P O campaign.
And in addition, we've increased our other community donations and conjunction with our strong results.
So I'm proud of what our team at Western has been able to accomplish and look forward to continued success and growth together as we move forward.
I'll now turn it over to Steve to review our key financial results. Thanks, Don My comments will focus primarily on our financial results for the second quarter of 2021 with comparisons to the second quarter of last year.
We reported second quarter, adjusted EBITDA of $124 million as compared to $29.5 million and the same quarter last year.
Results in the quarter benefited from record lumber prices and growth and lumber shipments.
During our flexible operating platform to redirect volume to capture incremental margin from strong North American markets and.
And higher byproduct revenue from increased lumber production and improve chip price realizations.
Results were partially offset by increased secondary processing costs as we shifted production to north American commodity markets.
Lower external on shipment volumes as we redirected logs to our saw mills to GAAP capitalized on strong North American markets and.
And higher performance based compensation expense related to our record financial results and a 17% share price appreciation and the second quarter of 2020.1.
Lumber revenue increased 87% compared to the second quarter of 2020 on increasing shipment volumes and higher prices for our products.
North American commodity lumber shipment volumes represented 72% of total commodity lumber shipment volumes during the second quarter of 2020.1.
As compared to 16% and the same period last year.
Our second quarter average realized lumber price was a record 1005 hundred 98 per thousand board feet.
Log revenue was lower and the second quarter of 2020 compared to the same quarter last year due to reduced sales volumes and we.
Directed log inventory to our sawmills to support lumber production and capitalize on the strong North American lumber market.
By product revenue increased by $8 million as compared to the same quarter last year benefiting from higher production volumes and improved chip realizations from our higher N B S K pulp price.
Freight increased by $6.7 million as compared to the same quarter last year increased lumber shipment volumes and container costs were partially offset by reduced export log shipments.
Second quarter results included $10.8 million of export duty expense as compared to $7.6 million and the same quarter last year.
Increased U S destin and lumber shipments were only partially offset by a reduction and cash deposit rates.
At the end of the quarter, we had approximately 109 million U S dollars of duties on deposit.
Lumber production increased 45% compared to the same quarter last year, the redirection of production to the North American markets contributed to improved recovery, while also increasing secondary processing requirements and costs.
Log production and the second quarter of 2021 was 17% lower than the same quarter last year.
Harvest activity was impacted by a heavy snowpack early and the second quarter.
By extreme heat curtailments at the end of the quarter as well as harvest permit delays.
We ended the quarter with approximately 860000 cubic meters of log inventory, which is slightly lower than historical levels for the end of the second quarter.
Our BC coastal per unit, Harvard and harvest costs increased by 17% from the same period last year.
Driven by higher stumpage costs, lower volume and a mix of operations.
From a profit and loss perspective.
Second quarter, net income was $78.3 million as compared to $8.5 million and the same quarter last year.
Looking at second quarter cash flow and capital management.
Cash provided by operating activities after changes in noncash working capital was $113.3 million and the second quarter as compared to cash used in operating activities of $6.8 million and the same quarter last year.
Cash provided by investing activities was $19.4 million during the second quarter of 2021 as compared to cash utilized a $3.9 million and the same quarter last year.
Capital expenditures and the second quarter of 2021 were more than offset by proceeds from asset sales of $26.7 million.
We returned $33.5 million to shareholders during the quarter by dividends and share repurchases year to date, we have returned over $50 million to shareholders.
We ended the quarter with $98 million, and net cash and $341 million and available liquidity.
And July we completed the amendments to our $250 million credit facility, which included transitioning just sustainability linked credit facility and extending the maturity to July 2025.
The amended credit facility will continue to include an accordion feature which allows western and to increase the aggregate available amount up to $350 million subject to lender approval.
Don that concludes my comments.
Great. Thanks, Steve.
So let me start off our outlook section by touching on third quarter seasonality.
Typical third quarters can be challenging operationally as hot dry weather can restrict logging activity, reducing harvest volumes and impacting costs.
And at the end of the second quarter of this year, both our timberlands and mills took downtime due to excessive heat.
While our mills returned to regular operations in early July our harvesting activities continue to be impacted by earlier than normal hot and dry conditions.
Well, we've not experienced any significant forest fires and our areas of operation.
The combination of hotter and drier conditions.
Combined with potential harvest permit delays.
May impact near term log availability.
And could result, and operational downtime.
We'll continue to monitor the situation as we move forward and adapt operations as necessary.
As we look to our markets.
Despite strong demand from the new home construction segment in North America.
Commodity lumber prices a decline from the record levels reached in May.
As COVID-19 restrictions are relaxed and people would be and the travel there was less demand for lumber from the do it yourself segment.
The decline in activity has caused the supply and demand for lumber to rebalance.
And the past couple of weeks, our customers have indicated that demand from the DIY segment appears to be improving.
Which along with the recent supply curtailments due to extreme fire conditions could support the market and the near term.
But as we wait for the North American commodity market to stabilize we'd been redirecting lumber back into the export markets, where inventory levels are low and pricing has improved.
We began this process late in the second quarter, increasing shipments into Japan, and we expect to continue to do this through the third and fourth quarters.
We've attempted to mitigate Asian market logistics challenges by reintroducing the use of break bulk carriers to deliver some of our products to market.
As we look forward, we will continue to leverage our flexible operating platform to match production to market demand and logistics capacity.
And our log business, we expect domestic saw log prices to remain elevated.
Due to limited supply and pulpwood prices to remain stable.
Longer term, we believe the combination of low mortgage rates and aging U S housing stock and years of under building.
Work from home and gross and the use of mass timber construction will support increased demand for our products.
All of this while supply remains relatively constrained due to the effects of the mountain pine beetle and British Columbia.
Going forward, the new demand and supply dynamic should support elevated product pricing over recent trend levels.
Turning to capital allocation, we remain committed to a balanced approach to capital allocation.
Returning cash to shareholders, while maintaining the flexibility to support growth initiatives.
Our balance capital allocation approach, including includes paying a regular quarterly dividend.
Investing strategic and discretionary capital on our mills or through acquisitions that will grow long term shareholder value.
And returning any excess capital to shareholders.
We continue to make progress on the $10 million and strategic capital projects currently underway.
These projects are focused on reducing costs and improving efficiency.
We're also looking at some larger projects and our existing facilities that will further improve competitiveness by reducing costs, improving recovery and enhancing value extraction.
Overall, we plan to remain balanced and disciplined on our approach to capital allocation and as you've seen we've announced the renewal of our NCI be that provides us the opportunity to purchase up to 10% of our public float for cancellation over the next year.
Turning to what's next our top priority remains the health and safety of our employees contractors and communities.
Our strong balance sheet is giving us financial flexibility to continue with our balanced approach to capital allocation.
Also supporting the execution of our strategic growth priorities.
Our long term focus remains the same to.
To successfully and sustainably implement our strategic initiatives.
To strengthen our foundation.
Gore base grow our business and deliver long term shareholder value.
And with that operator, we can open up the call to questions.
Thank you.
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The first question is from I know that data from CIBC capital markets.
Please go ahead.
Your line is now open.
Sorry about that.
Thanks, Don I want to start on the on the R&R side.
You know I was just wondering if you could share any data points you guys might have about what you're seeing on demand.
And in the Big box channel and you know if you're noticing any differences between maybe the DIY buyer and and contractors for a procedure and Matt.
Sure Yeah. So I mean, I think if you go back you know at the start of the quarter, we saw really strong demand and the R&R channel.
I would say probably the combination of you know the media coverage every day about record high lumber prices.
And the reduction on the Covid restrictions led to a reduced rouge demand for lumber, especially as you've identified and the home centers. You know is our view longer term or the next few months, we're going to expect us to see that trend reverse just because of the age of the housing stock and and that this work from.
Home dynamic.
<unk>.
You're answering your question directly you know and and the last couple of weeks on.
Our customers are indicating things are getting better and those are customers that supply product into the home centers.
Our recent calls directly with the home centers indicate the same that theyre, taking some aggressive.
Action 2 to spur demand and and I think I think that's a that's all a positive. So I think this is a short term blip R&R is a real important segment as you know in AR and the consumption of lumber and lumber products and we see kind of what's happened is a short term kind of issue that that should work and.
Self out and we're hoping things you're going to get better through Q3, and then Q4.
Yeah. Thanks, Thanks for that on it and I just wanted to turn on the on the cost side.
And how you've seen and stumpage and the B C interior and move up by July 1st and couple of the entire company's appointing 10 additional increase and and October what what is your expectation for the coast I believe its a December revision and what scale lets say increase you're expecting.
Well, yeah, and yeah, and I think you started off with the question well you know there are 2 different equations for stumpage and D. C and 1 that applies obviously to the interior 1 that's the price of the coast.
Coastal stumpage is is.
And there's other and variables in the equation that are different and then the interior and there there are variables that pertain specifically to coastal activity.
Yeah, I think first and foremost and what's gonna happen right in front of US you know, we're expecting to see a stumpage increase from Q2 to Q3 based on the strong lumber markets and the lag and stumpage.
And in our as we look as we look forward I would expect to see kind of AR and when we when we do that full update in the beginning of December the stumpage is likely to be higher.
And then the base established last year.
As you know.
Your every every quarter and Theres, an update on stumpage and based on market. So I think you know a lot of that change we're going to see and December maybe may be adjusted as the market's come down and and we get to a more stable environment here. So you know.
So just to summarize I think stumpage is going up Q2 to Q3.
We'd expect the reset and December to bring things to a higher level and that reset will likely be offset somewhat by our by the changing market and changing prices.
Okay. Thanks on that that's helpful. That's all I had I'll I'll get back in queue.
Thanks Oliver.
Thank you.
The next question is from Paul Quinn from RBC Capital markets. Please go ahead. Your line is open.
Yeah. Thanks, guys good morning.
From a ballroom and vote.
Yeah lumber price has been pretty volatile by you guys operate.
Much of our specialty niche just wondering what you're seeing so far to date and in Q3 in terms of a price drop from the <unk> average.
So as as you've indicated that you operate and different different markets. So you know I think we were pretty heavily skewed just going back to Q2, you know into north American into commodities.
Going forward I think youre going to see is a return to more historic norms on on our mix you know and between specialty and commodity you know on that.
The commodity side were and North America, we're not seeing anything different than anyone else is seeing with that a significant repositioning of the price levels are.
And you know what lots of challenges getting getting sales right now as buyers wait to see once a bottoms established or once that some stability returns to the market and when we looked at the export markets and they didn't rise as much as the North American market did but we've seen really good strength in Japan.
And we have worked hard to with our customers who have been really looking at for a lot of lumber and.
And we've adjusted our production schedules to try and meet customer demand into a stronger and higher price environment in Japan and.
And China has been pretty stable, so we've been moving volume there as well.
So.
You know summarize Paul we're not seeing and the different in.
In the commodity space and North America, some of the specialty items and still maintain pricing.
And when we look to export markets, Japan, and China had been relatively strong and and we're redirecting volume that way.
And right now.
Okay, and then on the log inventory side, you mentioned 60000 cubic meters at the end of Q2.
With this early sort of firing season here and dry conditions on the coasts I suspect.
Like it's been suspended.
<unk> just wondering what is it sits currently and and you know you said slightly lower than that average is it sets itself.
So on this thing.
Well, yeah. So so you're right. We're at 860 at the end of the quarter our.
Logging operations on the coast had been interrupted.
To a.
Less harvesting and and just load and haul to get logs out to market.
So we really haven't seen a significant impact.
And on inventories as of yet however, I would say that we are.
Entered the market or ended the quarter.
On the third quarter cash.
150000 meters lower than we would traditionally think I would think of and and theres been a significant amount of downtime.
Couple that with some permit challenges right through the right through the piece.
And across the coast for all operators and I think it's largely going to be pretty tight going forward here.
Okay, and given your balance sheet and you've got a you know our.
The ability to do some M&A.
And that is.
Is there anything that that looks promising.
Well, yes. So we continue to remain focused on growth. We are cognizant of of valuations currently and you know I think some of the some of the valuations are pretty darn high or have been recently.
And on acquisitions.
And we're going to continue to value all the growth opportunities. Our focus as you recall is is that most of the Pacific northwest and.
And in specialty manufacturing along with we're really working hard at developing a strong 2 way relationship in Japan.
And we start to expand our product lines, and and expand our cedar product lines, including Japanese Cedar So.
You know these things take time.
Current valuations are.
I would suggest elevated and and you know we're gonna be really prudent about about where we invest from an M&A activity focus remains U S Pacific northwest and specialty specialty manufacturing and and working really hard on our Japan business.
Okay, and lastly, you know almost every day goes by it and it's always on article and then and the newspaper about old growth logging.
Sure any of your areas that you're currently on your operations that are subject to blockades and and what percentage of the old growth logging on your debt.
Yeah. So so I think I'm on the on the old gross front, and maybe and you'll expand it to the BC government policy front Youre right day care. So it feels like every day every second day, there's something going on current.
Current deferrals as related to old growth have not impacted our business although.
The issues and southern bank around or close to our operations and close to our joint venture and limited partnership with a web first nation and T about 44.
You know I think we maintain real consistent and regular dialogue with all levels of government and.
And I think you know I think we're pretty well positioned to support their their initiatives and to work around.
On the old growth issues based upon our long history of area based tenures and sustainable Forest management, So and we've got a great success story, there and and we've got a great suggests already working with with first nations and and the ownership template we've developed and Tfl 44, So yes there.
Theres a story a day, but you know I like our positioning relative to debt certainly relative to others and and I think we can be successful even and this kind of a challenging environment.
Okay. That's all I had best of luck guys great.
Great. Thanks, Paul.
Thank you.
Once again for questions. Please press star 1 on devices keypad. The next question is from Sean Stewart from TD Securities. Please go ahead, Sir your line is open.
Thanks, Good morning, guys.
Hey, Sean.
Good morning, I wanted to follow up on 1 of the previous questions and you touched on <unk>.
Positioning and sales mix.
A little bit more away from the commodity grades.
And I think the suggestion Dawn was you can do that over the back half of the year.
And I'm trying to gauge and should we be thinking about commodity as a percentage of shipments going from mid 50% range down to.
I think a year ago. It was towards the 36% range do you have that much flexibility and the sales makes it you can move that quickly.
This quarter or is that a gradual progression over.
234 quarters.
Yeah, well I think Sean and I think when you talk about going back.
35, 36% I think that was coming out of the strike and and our focus on custom cutting and high value production. So I think and what we were restricted to do I think you should consider it more on the 50.50 range right and so will probably will drop back to 50, 50, 50, and AR and the mix will be.
We're going to try to increase our shipments into Japan, where.
There are as you know, there's a premium for high quality products.
And so I think that's that's the plan going forward, we're really focused on building order file through Japan and.
And really encouraged by our work with our customers we're looking.
Looking for supply supports and I think we've delivered that for them. So you'll see us getting back into Japan for sure.
Thanks for that and.
And I wanted to dial and a bit more on on western Red Cedar and all the grades we track would suggest that prices are hanging in.
Well on and I know when markets are volatile, sometimes it's price is hanging, but youre not able to move and you specifically, but the industry is not able to move as much volume.
And to the strong prices can you comment on the resilience of that market in North America and.
And your ability to sustain strong shipments into.
Into that price strength right now yeah.
Yeah, there's a few things happening and in Cedar and you're exactly right.
For the most part pricing has been resilient, we're entering into the third quarter here, where the market does typically take a break in cedar.
Historically, it's a slower quarter, where we see a demand decline and then pick up right at the end of the quarter as the hot weather, especially in the ER.
Middle part of the United States.
It gets a little cooler and people can get back at back to projects. So.
Nothing nothing different than normal you know pricing has hung in there so far demand is probably weaker but it's a seasonal thing overall.
Overall, we expect our expect the volumes to be the our volumes to be there.
Maybe just expand on that for you Sean you know I think we're we're seeing a less harvest of Cedar on the coast are this year year to date and past years and our focus has been mitigating the impact of <unk>.
Less cedar for our customers by increasing production of yellow cedar and bringing in more Japanese cedar and and developing new products lines of Japanese Cedar. So you know I think I think we're well positioned longer term and Cedar and as you you know, there's there's no no real non natural substitute for for Cedar and Cedar.
And high quality outdoor applications. So no short term yet we are seeing a little less demand that's seasonal pricing has hung in there and longer term I think we've got a we're positioned well and the outdoor living.
Segment.
That's great detail. Thanks, a lot that's all I have.
Great. Thanks, Sean.
Thank you there are no further questions registered at this time I would now like to turn the meeting back over to Mr. Dinos.
Great. Thanks, Paul and thanks, everyone for your continued support.
And I appreciate your interest and our company and your time on the call today are.
Steve and are both available if you have any follow up questions and we look forward to sharing our third quarter results with you in November.
Have a great day, thanks a lot.
Thank you. The conference has now ended please disconnect your lines at this time and we thank you for your participation.
Yeah.
Yes.
Okay.
Okay.
Operator.
Yes, and this is Damon and do you want me to transfer you to the.
Pre conference back to the pre conference don't know what were good and I. Just thank you very much for your time and I have a great afternoon.
Oh, Thank you very much yourself as well with all of your team have a great day. Thanks again.
Bye bye.
Goodbye.
By this and Williams.