Q3 2021 Western Forest Products Inc Earnings Call
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Good morning, ladies and gentlemen, welcome to the Western Forest products third quarter 2021 results conference call. During this conference call Western's 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 management's reasonable belief expectations and assumptions they are subject to inherent uncertainties and actual results may differ materially.
Ali.
There are many factors that could cause actual outcomes to be different including those factors described under risks and uncertainties in the Companys manual M G and H, 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 date on which they are made.
Except as required by law Western under takes no obligation to update forward looking statements.
Listeners should exercise caution in relying upon forward looking statements.
I'd like to turn the meeting over to Mr. Don Demmons, President and CEO of Western Forest products. Mr. Dennis. Please go ahead.
Well, thank you, Jason and good morning, everyone.
Like to welcome you to Western Forest products 2021 third quarter conference call.
Joining me on the call today is Steve Williams, our executive Vice President and Chief Financial Officer and.
And Glen <unk>, our VP of corporate development.
We issued our 2021 third quarter results yesterday.
I intend to provide you with some introductory comments.
And then ask Steve to take you through a summary of our financial results.
I'll follow 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 continued strict adherence to our robust COVID-19 safety protocols.
Their dedication to safety has delivered another quarter with no COVID-19 workplace transmissions or downtime.
This result is a testament to our strong safety culture and the commitment of our people.
Yeah.
Financially I'm pleased to report that our results were a third quarter record for the company.
Our specialty products focus and ability to pivot production from volatile North American commodity markets to more stable export markets.
Allowed us to generate record third quarter, adjusted EBITDA of $66 $3 million.
This result is almost double the EBITDA, we delivered in the third quarter of last year.
Our strong operating results have allowed us to reposition our balance sheet.
And continue with our balanced approach to capital allocation.
Year to date, we've returned over $80 million towards shareholders through dividends and share repurchases.
And we ended the third quarter with $143 million of cash in our balance sheet.
And more than 140 million Canadian dollars on deposit with the U S Treasury.
In conjunction with these excellent results. We have also continued to demonstrate our leadership in advancing our ESG commitments.
During the third quarter, we achieved a series of milestone agreements focused on joint and collaborative planning a forestry activities within.
With indigenous nations in whose traditional territories we operate.
These partnerships build upon western is well established sustainable forestry practices by incorporating indigenous values within planning and forestry activities.
We're committed to fostering positive working relationships with indigenous nations in support of reconciliation.
And know that by doing so we will also create more certainty for our business.
During the quarter. We also became the first north American publicly traded <unk> companies to transition to a sustainability linked credit facility.
Linking the interest rate, we pay to the achievement of certain sustainability goals.
And finally, we announced a new eight year labor agreement with the hourly employees of our value added division.
I'm proud of what our team at Western has been able to accomplish.
And I 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 third quarter of 2021 with comparisons to the third quarter of last year.
We reported third quarter, adjusted EBITDA of $66 $3 million as compared to $33 $7 million in the same quarter last year.
Results in the quarter benefited from higher lumber and log prices and.
The increase in lumber shipments.
Byproduct revenue from improved chip price realizations and lower export tax expense.
Results were partially offset by lower log shipments higher stumpage expense and higher performance based compensation expense related to our strong financial results and the appreciation of our share price.
<unk> revenue increased 44% compared to the third quarter of 2020 on increasing shipment volumes and higher prices for our products.
Our third quarter average realized lumber price was $1553 per thousand board feet, an increase of 23% compared to the same period last year.
<unk> revenue was lower in the third quarter of 2021 compared to the same quarter last year as a prolonged fire season led to timberlands operating your chairman's, which limited log harvest and sales volumes.
We directed export grade log supply to our saw mills to support lumber production.
Byproduct revenue increased by $3 8 million as compared to the same quarter last year.
Benefiting from improved price realizations due to a higher MBS K pulp price.
Freight expense was flat as compared to the same quarter last year increased lumber shipment volumes and higher freight rates were offset by a reduction in export log shipments.
Third quarter results included $6 $2 million of export duty expense.
As compared to $11 million in the same quarter last year.
Lower duty rates more than offset the increase in U S destined lumber shipments and higher lumber prices.
At the end of the quarter, we had approximately $116 million of duties on deposit.
Lumber production decreased 9% compared to the same quarter last year due to log supply relating related operating curtailments.
Log production in the third quarter of 2021, it was 39% lower than the same quarter last year.
Harvest activity was impacted by prolonged operating curtailments as fire conditions persisted for longer than usual in the summer.
We ended the quarter with approximately 753000 cubic meters of log inventory, which is lower than historical levels for the end of the third quarter.
Our BC coastal per unit harvest costs increased by 17% from the same period last year, driven by higher stumpage costs and lower harvest volume.
From a profit and loss perspective.
Third quarter net income was $42 $2 million as compared to $11 $5 million in the same quarter last year.
Looking at third quarter cash flow and capital management.
Cash provided by operating activities after changes in noncash working capital was $82 $5 billion in the third quarter.
As compared to $44 million in the same quarter last year.
Cash used in investing activities was $1 $1 million in the third quarter as compared to $4 $6 million in the same quarter last year Kathy.
Capital expenditures in the third quarter of 2021 were offset by proceeds from asset sales of $5 $5 million.
We returned $33 $8 million to shareholders during the quarter via dividends and share repurchases year to date, we have returned over $80 million to shareholders.
We ended the quarter with $143 million in net cash and $384 million in available liquidity.
Don that concludes my comments.
Steve.
Our outlook section by touching on fourth quarter seasonality typical fourth quarters lumber consumption declines in North America as construction slows at the onset of winter.
In our timberlands harvest volumes decline as we lose daylight operating hours.
In addition winter weather can negatively impact operations and further limit production.
The combination of weather related curtailments and reduced operating hours can put upward pressure on harvest costs.
As we look to our markets. Despite recent north American market volatility.
We expect near term lumber pricing to remain above historic trend levels.
We believe the market will be supported by strong housing market fundamentals.
The ongoing logistics constraints, which are challenged supply.
For Cedar products like the next quarter is going to be a bit choppy due to normal seasonal weakness and the imposition of higher duty rates at the end of the fourth quarter.
As we look into next year, we expect a strong repair and renovation segment and reduced supply to better support cedar lumber prices and volumes.
Yeah.
For a niche segment, we expect continued strength in our appearance grade products or our timber market has slowed.
Looking forward, we anticipate the North American timber segment will improve as we head into the spring.
And in Japan, the combination of limited supply and strong demand driven.
Driven by an improved housing sector should support pricing into the first part of 2022.
We're working hard at increasing shipment volumes to support our customers.
We expanded our shipping options by contracted break bulk shipping capacity as we manage export logistics challenges.
And our log business, we expect domestic saw log prices to remain strong supported by limited supply and stable demand.
In contrast, the price of our sawmill residual chips may be challenged given the weaker MBS ski market in China.
All that said the ongoing challenges related to COVID-19, and global logistics issues.
You need to create uncertainty in our business.
And could lead to pricing volatility and ongoing shipping challenges in the near term.
We intend to continue to leverage our flexible operating platform to match production to market demand and logistics capacity, helping.
Helping deliver to deliver earnings stability.
We remain optimistic about the long term growth opportunities for wood as a sustainable building products.
As the world looks to reduce its carbon footprint.
So now turning to some recent industry developments.
Earlier this week, the BC government announced its intention to work in partnership with first nations to potentially defer harvest and $2 6 million hectares of Mpc's, most at risk old growth forests.
The potential deferrals or provincewide.
The proposed deferrals if implemented had been identified as temporary and are subject to first nations engagement.
The BC government continues to state that final decisions on deferral areas will be based on discussions between themselves and first nations.
Yeah.
We believe it's very important not to speculate.
We do not have enough specific information to make a determination as to the potential impacts on our business at this time.
We take government at their word that they will partner with first nations to define deferral areas and as such no decisions had been made currently in relation to harvest deferrals.
To be clear, we do not support the maps or the process the province has undertaken to produce them.
But we do respect the need for first nations to have meaningful input into decisions that may affect them.
We're evaluating the maps the provinces released and are pleased to have been invited by many first nations partners.
To put this fate in joint planning processes, which we hope will inform their decisions.
The province has specifically stated they will set up meetings with company G. Foresters to review the maps and recommendations.
We await the government's call.
I want to conclude by saying Western is modern sustainable forest management practices in place.
Including the protection of victories in rare ecosystems.
We utilize variable retention versus clearcut harvesting in many of our settings.
And we expect the province, and first nations to take these leading practices into consideration when making decisions on harvest deferrals.
We've also been proactively working with first nations for many years.
To foster positive and mutually beneficial relationships.
This has included the creation of our sour King first Forestry limited partnership with a way of first nations.
As well as a number of other joint and collaborative forest planning activities with other first nations.
All of these have been highlighted in our third quarter M. D N a.
And finally, we look forward to continue to work with first nations and government and support a sustainable Forest management British Columbia.
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 balanced capital allocation approach includes paying a regular quarterly dividend.
Investing strategic and discretionary capital in our mills or through acquisitions that are accretive and real long term shareholder value.
And returning any excess capital to shareholders.
We continue to make progress on the $10 million in strategic capital projects currently underway.
These projects are focused on reducing costs and improving efficiency.
We also continue to evaluate how we may participate in the growing use of mass timber building technologies.
Overall, we plan to remain balanced and disciplined in our approach to capital allocation.
Okay.
Turning to what's next our top priority remains the health and safety of our employees contractors and communities.
And I'm working collaboratively with first nations.
Our strong balance sheet has given us financial flexibility to continue with our balanced approach to capital allocation, while also supporting the execution of our strategic growth priorities.
Our long term focus remains the same to successfully and sustainably implement our strategic initiatives.
To strengthen our foundation grow our base grow our business and delivers long term shareholder value.
And with that Kate I can now open up the call to questions.
Okay.
Operator over to you.
Thank you we will now take questions from the telephone lines. If you have a question and Youre 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 you may cancel your question at any time by pressing star two.
Please press star one at this time, if you have a question there'll be a brief pause while participants register for questions. Thank you for your patience.
Our first question Paul Quinn Your line is open. Please go ahead.
Yeah. Thanks, guys good morning.
Good morning, Paul.
Maybe it gets an easy questions out of the way first but.
You mentioned, a 753000 cubic meters of log inventory.
More than normal, but what kind of percent lower than normal in and how do you see the flexibility moving forward into Q4.
Yeah. So it's a great Paul I mean, yeah, we ended the quarter with about 700000 meters as you've said and yeah. That's basically driven by the impacts of the weather related curtailments in the third quarter I think if you look back at previous third quarters, we'd probably want to be in that 900000 cubic meter range.
You know what what will that to answer your question, specifically will it impact production going forward I think were pretty good I think through the fourth quarter. Paul We may have some.
Challenges into the first quarter and that would be the mills that are typically impacted by by log challenges.
So I think it's manageable, it's lower than we like.
But manageable.
Okay, and then it sounds like.
I'm talking about your markets that are pretty stable, but do you think the pricing effect is gonna be on certain product with our with the export tax doubling at the end of the year.
Yeah. So so again good question I think.
Historically, what we've seen after western as we've been focused on high value products into the U S M win win.
When the export taxes had been applied we've been able to get a majority of that increase in cost to us.
In a higher price to the customer it may be a little more difficult. This time, but that is certainly our intent on the specialty products that to try to capture the the.
The increase in duty rates in our pricing and we will.
See how successful we are on the commodity side I think historically as long as there is strong demand in the market I think I think you're going to see prices go up and Thats our view.
And I think you've been doing this for a long time and I guess, that's probably what you have seen as well.
Okay and then just on this.
Return of cash to shareholders. If you could just remind us it's been a busy morning, so I didnt check it out but your share repurchase authorization, where that where is that standing is that something that you'd.
Likely increase going forward.
Yeah. So I think we're at the current pace, we're in pretty good shape for the next for the foreseeable future as long as we're able to continue to generate the type of cash were generating which we anticipate we will.
If we're if we're in need of increasing the in CIB, we'll look to do that.
I go back to what is our approach on capital allocation and when we have excess capital we intend to return it to shareholders. So I think in.
In conclusion near term I think we're in pretty good shape.
On the NCI view right now and we'll continue to anticipate to be continue to be active in the market.
Okay, and then just lastly over to this nightmare old growth decision just.
Do you have any harvesting permits currently in the deferral areas that that are going to affect you guys in the short term.
Yes, so I guess when you think of that I mean, we're gonna take government for their word that they're going to partner with first nations to define deferral areas. So really right now there's been no decisions have been made in relation to the harvest deferrals and the impact on permits.
I think we're really looking forward to I appreciate the opportunity to persist spacing in these deferral discussions that many of our first nations partners have offered us.
And look in the in the interim we continue we're going to continue to exercise the rights granted through the provincially approved getting permits.
Okay, and then just I know, it's going to take you guys. A couple of weeks to try to understand what the what the deferrals are going to how they're going to impact your operations and your partnerships, but at a high level, we've seen some pretty crazy ideas out there that you know this is only affecting the BC coast D. C coast harvest is going to come down by <unk>.
40% from a high level can you you know what we figure is it's probably a 13% reduction on harvest in both the interior and the coast is that consistent with what Youre seeing out there.
So you've hit on a number of points.
Again, I would I would go back to my point, it's really too early to speculate and we're not in a position to speculate because we don't have enough specific information as provided by the province to make a determination of the impact in the business.
You made a couple of really key points. So this is province wide.
And the speculation that has been out there that it's all centered in the coast I think is incorrect.
And and worry that it will drive people to make decisions that are ill informed so boy, it's going to take some time the you've seen some of the maps are not at a level yet that we can make a determination and we have a number you know we've been going over 100.
Professional foresters and our company, we've got a G. I S team and analyst analytic team that are pouring over the maps trying to trying to ascertain what the impact is in our business. So to have anybody come out and anyone speculate that it's all on the coast are all impacting western would be is dangerous and it is just speculation so.
We intend to work hard at this we intend to as quickly as we can we're going to ask the government to clarify a number of points that we don't understand and we've already identified those and and in the end we believe.
Yeah, you know.
In working with first nations and who our partners are to identify the best approach forward here.
Okay.
Alright, thanks, guys. Thank you.
Thank you. Our next question Sean Stewart. Your line is open. Please go ahead.
Thanks, Good morning, everyone.
Following up on Paul's question with respect to the deferrals.
Don in your press release, a couple of days ago. There was there was talk about.
Pursuing potential compensation, if it comes to it and it reference investments.
The company has made.
And I guess, what I'm wondering is.
Is that potentially a retroactive assessment on investments you've made is it for prospective investments going forward. How do you think about that and if it comes to it the process towards compensation from the government.
Yeah, So I think again.
Reasonable question for sure I, just I think our view is it's pretty early to speculate on this.
And on the outcome. However, you quoted me correctly encoded us correctly so.
First and foremost.
We certainly respect.
The rights of first nations and their role in this decision making in BC.
And again I want to highlight we certainly appreciate the opportunity to participate in the deferral discussions is offered by many of our first nations partners.
We're going to work with the first nations and government to mitigate any impact.
But for sure we're going to seek full compensation for any impacts on our business.
I really worry about our about the.
The risks and challenges that are some of the other stakeholders in this but we're gonna advocate.
The province be transparent.
On the AR on the implications to workers contractors and communities, but again reiterating what we said in our.
In our press release, we will seek full compensation if we are impacted.
Thanks for that detailed on.
Second question I have is.
This is another example of.
Policy headwinds on NBC for for you guys and.
That's part of the motivation of why you've taken a gradual approach to growth in the Pacific Northwest.
This <unk>.
Extra day, those ambitions going forwards you have taken a really steady slow approach to this point.
Hum.
Is there a potential that you you look to accelerate that trend as we go forward.
Sure so.
Look we remain focused on our growth strategy.
To continue to evaluate and explore any growth opportunities as we have been oh.
All through this piece.
As we look to increase the share.
Our specialty product markets, and and creating with a focused and create long term shareholder value. So you know our main focus still remains the U S Pacific Northwest just because we think it offers.
A better opportunity the best opportunity for specialty product manufacturing, we are working at it every day I can tell you Sean we're also working hard at developing a stronger two way relationships in Japan.
And and maybe working working with some of our customers and potential suppliers on on more specialty products that could come this way as we produce high quality products for that market. So a rest assured our growth strategy remains in place we're focused on growing our specialty business.
And and are we going to work really hard at at that over the next period of time.
Okay. That's all I have for now thanks Todd.
Sure.
Thank you.
Once again, please press star one on your devices.
Our next question Samir Patel. Your line is open. Please go ahead.
Good morning.
Don I appreciate the uncertainty in trying to predict how this oh growth plays out but.
With respect to you know it.
If if any of the deferrals or made permanent and four years down the line.
Seeking compensation what are the sort of a recent precedent transaction values that that you would point to on the coast for for tenure.
We're trying to assess what the what the value might that you might.
Reap from that down the line might be.
Yes, So I would just go back and say yeah reiterate three early on to assert the speculation.
I do appreciate everyone's interest in trying to figure out what are maybe what compensation will look like we're a long way from having that discussion in my opinion, you know our view would be we don't have enough specific information to even determine what impact.
There could be in our business at this time.
That said when you talk about precedent transactions Ah.
We have worked really hard working with first nations and precedent transactions.
You know our sidewalk in.
Forestry limited partnership is a pretty good proxy for valuations in that area.
That is all public information.
As the only.
Company I'm aware of it's.
<unk> been able to execute a limited partnership in this fashion and.
But I would also highlight every tenure has different valuations based on the mix of species the access the access ability and cost structure.
So.
It's early on and I'd reiterate too early to speculate we're still working through that potential impact and we're anxious and really pleased with the opportunity.
That's our first nations partners have offered for us to work with them on this on this process.
All right. Thanks, Thanks, Bill I appreciate the color and then I was just wondering you know with respect to areas, where you might have overlapping.
First nations claims and a different first nations might have.
Different desires about how to move forward any sense as to how the province will navigate those situations.
Oh actual fact no.
Again, it's the provinces come out with their statement.
In the report from their technical Advisory panel.
The industry was not are not engaged in that discussion and and we'll have to work through what.
What potential impacts.
And first nations decisions are.
As we go so I really can't comment on that.
Okay fair enough alright, and just.
Just with respect to final point with respect to like Capex.
As you know I appreciate the uncertainty, but just.
In terms of as you're working through your business plan. What's US you know how it's how you're thinking about capex for 2022.
Well I think we as we said in the past our Capex, we've kind of averaged about $30 million to $40 million annually and maintenance and road.
We've we're not going to stop on our $10 million that we have currently in strategic capital projects. Most of those projects are designed at our.
Cost reduction out of our small log mills. So I think that's appropriate we'll take a pretty measured approach going forward.
But for guidance for you I think 2021 35 to 40 million is a good number and for 2022, just because of the timing of getting equipment and the like potentially $45 million to $55 million, but you know announcements like this.
Great great great uncertainty.
And for businesses.
[noise] uncertainty you are if you stop investing in.
And I think that's that's we're going to slow down here for the next period of time.
And and assessed where this is all going before we make any more commitments to B C.
Fair enough okay. Thank sat behind that so that's all I had I'll turn it over.
Thanks Mark.
Thank you there are no further questions registered at this time I would like to turn the meeting back over to Mr. Dan Donlan great.
Great. Thank you Kate and thanks, everyone for your continued support we certainly appreciate the interest in our company and your time on the call. This morning, Steve and I are available and Glen are available. If you have any follow up questions and we look forward to sharing our fourth quarter results with you in February with that have a great day. Thank you.
Thank you. The conference has now ended please disconnect your lines at this time. Thank you for your participation.
Thank you.
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