Q4 2021 Western Forest Products Inc Earnings Call
This conference is being recorded so it goes to the homes that don't have as you see.
Good morning, ladies and gentlemen, and welcome to the Western Forest Products' fourth quarter 2021 results conference call.
During the conference call Western's Representatives will make forward looking statements within the meaning of 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 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 different including those factors described under risks and uncertainties in the company's annual MD&A.
Which can be accessed on SEDAR and are 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 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. Don <unk>, President and CEO of Western Forest products. Mr de Mendez. Please go ahead.
Thank you, Chris and good morning, everyone.
I'd like to welcome you to Western Forest Products' 2021 fourth quarter conference call joining.
Joining me on the call today is Steve Williams, our executive Vice President and Chief Financial Officer.
And Glenn <unk>, our vice President of corporate development.
So we issued our 2020 one's fourth 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 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.
2021 was an exceptional year for western.
Our flexible operating platform allowed us to capitalize on strong lumber markets to generate a record adjusted EBIT of $302 million.
The combination of strong financial results and $52 million of noncore asset sales supported the successful repositioning of our balance sheet.
Our net cash position at the end of 2021 of $130 million.
Combined with the extension of our credit facilities to 2025.
That position the company for future growth.
Through the year, we continued our balanced approach to capital allocation as we returned $111 million to shareholders via dividends and share repurchases.
And finally, we shared our financial success with our employees and communities.
Recognizing nonexecutive employees with Covid related safety bonuses and a performance bonus.
Simultaneously increasing community donations during the year.
In addition to our strong financial results. We were also successful in advancing and executing on many of our strategic priorities.
I was particularly pleased with the progress we've made in advancing partnerships with indigenous nations.
The highlight was the completion of the next phase of our salary and limited partnership with the Huawei at first nations.
With our recent purchase now only 35% of Celgene.
In addition to the ownership transaction. We also achieved a series of milestone agreements focused on joint and collaborative planning forestry activities with indigenous nations in your traditional territories we operate.
Through 2020 , one our team continued to demonstrate our vision and leadership in advancing indigenous relationships in support of reconciliation.
We also continued to show our commitment to sustainability and ESG being.
Being the first forest products company in North America to a transition to a sustainability linked credit facility and with the release of our latest sustainability report.
As part of that report Western confirmed the net positive role, our sustainable Forest management practices and wood products out and fighting against climate change.
I'm proud of our team at Western and what we've been able to accomplish together.
And I look forward to Western has continued success and growth in the future.
I'll now turn it over to Steve to review our key financial results. Thanks, John My comments will focus primarily on our financial results for the fourth quarter of 2021.
With comparisons to the fourth quarter of last year.
We reported fourth quarter, adjusted EBITDA of $52 $5 million as compared to $71 $1 million in the same quarter last year.
Results in the fourth quarter of 2020 included a noncash export tax recovery of $31 $6 million as compared to $3 $3 million in the same period in 2021.
Results in the fourth quarter of 2021 benefited from higher lumber and log prices higher byproduct revenue from improved chip price realizations and lower export tax expense.
Results were partially offset by lower lumber and log shipments higher per unit timberland harvesting costs due to weather related curtailments higher stumpage expense and higher performance based compensation expense related to our strong financial results and an appreciation of our share price.
<unk> revenue increased 4% compared to the fourth quarter of 2020.
Higher lumber prices were offset by lower shipment volumes due to logistics related disruptions.
Our fourth quarter average realized lumber prices $1634 per thousand board feet, an increase of 30% compared to the same period last year.
Log revenue was lower in the fourth quarter of 2021 due to weather related operating curtailments, we continue to direct export grade log supply to our saw mills to support lumber production.
Byproduct revenue increased by $2 $1 million benefiting from improved chip realizations due to a higher N V S K pulp price.
Freight expense was 13% lower compared to the same quarter last year, lower lumber shipments more than offset higher freight rates and an increased use of higher cost break bulk vessels in response to global supply chain constraints for container vessels.
In absence of export log shipments also reduced freight expense.
Fourth quarter results included $4 $6 million of export duty expense as compared to $12 $1 million in the same quarter last year.
At the end of the quarter, we had approximately $120 million of duties on deposit.
Lumber production was flat compared to the same quarter last year.
Operating curtailments related to lot supply and severe winter weather impacted lumber production as well as differences in the net nominal production count due to product mix year over year.
Well on production in the fourth quarter of 2021 was 22% lower than the same quarter last year log production was impacted by weather related curtailments caused by significant rainfall in November followed by heavy snowfall in December .
We ended the quarter with approximately 556000 cubic meters of log inventory, which is lower than historical levels for the end of the fourth quarter.
From a profit and loss perspective fourth quarter net income was $28 $5 million as compared to $34 $4 million in the same quarter last year.
Looking at fourth quarter cash flow and capital management.
Cash provided by operating activities before changes in noncash working capital was $47 $8 million in the fourth quarter as.
As compared to $37 $9 million in the same quarter last year.
Cash used in investing activities was $13 million in the fourth quarter as compared to $5 $5 million in the same quarter last year.
We returned $37 $8 million to shareholders during the quarter via dividends and share repurchases in.
In 2021, and we returned over $111 million to shareholders and we completed our 10% in CIB in January 2022.
We ended the quarter with $130 million of net cash and $371 million in available liquidity and had an income tax payable balance of $64.1 million at the end of 2021.
Don that concludes my comments.
Right, Steve So let me start off our outlook section by touching on first quarter seasonality.
Typical first quarters, our timber harvesting activity can be periodically interrupted by winter weather.
Harvest volumes are typically skew to the end of the quarter when the weather and light conditions support greater activity.
From a market perspective sales usually accelerates for the quarter.
As you look to our markets strong demand across our core markets have created margin opportunities for western.
In North America, we expect continued strong demand combined with excellent strained supply.
To deliver above trend level pricing over the near term.
But we anticipate any supply demand imbalances could lead to increased pricing volatility in the months ahead.
And our Cedar segment demand in pricing is expected to improve as we head towards the usually stronger spring season.
In the coming months, we anticipate improved demand and pricing for all product categories and our niche segment.
And finally in Japan, We believe continued strong demand from the new home construction segment.
Combined with logistics constraint imported lumber supply.
Should support pricing through the first part of the year.
And our log business weather related events limited harvesting activity in the first half of last half of 2021 .
Resulting in lower than usual log inventories at the end of the year.
So we'll look to rebuild our log inventories over the first half of 2022, but we may experience some large related downtime at certain sawmills in the coming months.
We expect domestic saw log prices to remain strong supported by limited supply and higher demand.
Higher N B S K prices should benefit residual chip pricing in the coming quarters.
All that said the ongoing challenges related to COVID-19, and the global logistics issues continue to create uncertainty in our business and.
And could lead to pricing volatility and ongoing shipping challenges in the near term.
We will continue to leverage our flexible operating platform to match production to market demand and logistics capacity.
We remain optimistic about the long term growth opportunities for wood as a sustainable building products as.
As the world looks to reduce its carbon footprint.
Turning to recent industry developments in November the BC government announced its intention to work in partnership with first nations to temporarily defer harvest in $2 6 million hectares of BCS most at risk over a forest.
The proposed deferrals, our province wide.
And if implemented had been identified as temporary.
The BC government continues to state that final decisions on deferral areas, we based on discussions between themselves and first nations.
Since the government's announcement, some first nations on whose traditional territories we operate.
Have provided updates regarding their decisions on the provincial government's technical advisory panels proposed temporary deferral areas.
In December the way of first nations groups.
Whose traditional territory includes a portion of Tfl 44 operated by Silicon Forestry Limited partnership.
Announced their interim decision to uphold their right to harvest in the 4% of the proposed temporary deferral area that would have impacted harvest in the next two years.
We have not yet or have yet to release their final decision and we are not certain when that final decision will be made.
However, the nation has initiated a science based integrated resource management planning process.
Public communications state that this indigenous led process will inform their decisions relate.
Related to forest management, including the governments all growth report going forward.
Last month, Western and four members member Nations of the novel Clause Council.
Announced an agreement to work on a joint approach to managing forests, and Tfl 39 block to that.
That included a joint agreement for short term deferral of 2500 hectares. While these plans are completed.
The dialogue with the nations has allowed us to forward plan and as such we do not expect a material impact on our business as a result of these interim or final decisions.
We continue to proactively work on fostering positive and mutually beneficial relationships with first nations and support a sustainable Forest management M. D C.
Moving on to the softwood lumber dispute effective December 1st of last year, the combined countervailing and antidumping duty deposit rates for western increased from about 9% to approximately 18%.
In January of this year the U S Department of Commerce announced preliminary combined duty rates from the third administrative review.
The duty rates applicable to western from the third administered your view are approximately 11, 5%.
Which is lower than the current rate.
We expect the final rates for the third administrative review to be implemented in August of this year.
Currently western has over 120 million U S dollars of duty deposits on deposit with the U S Treasury.
Which at today's exchange rate is approximately 150 million Canadian dollars.
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.
Since 2013, we have invested approximately a half a billion dollars of capital in our business. While at the same time, returning approximately half a billion dollars to shareholders via dividends and share repurchases.
We plan to remain balanced and disciplined in our approach to capital allocation.
Turning to what's next our top priority remains the health and safety of our employees contractors and communities and working collaboratively with first nations.
Our long term focus remains the same to.
To successfully and sustainably implement our strategic initiatives.
To strengthen our foundation.
Grow our base.
Grow our business and deliver long term shareholder value.
And with that operator, we can open the call up to your questions.
Yeah.
Okay.
Yeah.
Thank you we will now take questions from the telephone lines. If you have a question you're 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.
Prompted by the system. Please clearly state your name to register your question.
Can they 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 all participants register for questions. Thank you for your patience.
Yeah.
Once again, please press star one on your devices keypad, if you have a question.
We will take the first question. Please go ahead Europe itself.
Good morning.
Don.
What's on.
What you're seeing from your channel partners in terms of demand just particularly with the.
The home Center channel.
Yeah, and you're right I mean.
We're we're pretty encouraged by the demand we're seeing throughout the.
The markets we service.
Yeah, I think we were pretty clear kind of governor M. D. N. A N kind of my opening comments, it's a pretty positive operating environment. Currently in market environment. Yeah that said I think on the logistics side, you know container rail and truck capacity is constrained.
And I think that's kind of the biggest challenges we see at least in the near term.
Thanks, Tom and believe me it was about a year ago. You know you kind of outlined the bigger focus on partnering with some of the big box stores can you give us update you know in terms of your Cedar business, how much is going.
Directly to our you know.
The two big home improvement retailers and how do you see that evolving.
Yeah. So I mean last year, we are kind of in a in a similar position very strong U S market and as everyone knows R&R took a took a step back through the middle part of the year a significant portion of the cedar still consumed in or are sold through the box stores.
We continue to work with box to to stock our lumber either directly or through a.
The two step distribution, so yeah, I think whenever whenever the businesses is getting strong.
Youre going to see more volume flow through the box stores in and we are we've got our foot in the door there and why you know we expect to see a little more growth there this year.
Great. Thanks, I just wanted to touch on this.
Stumpage I believe on the coast would have been maybe a December revision.
You know, what what kind of increase or are you seeing there and.
Just given the current.
<unk> environment, what sort of inflation would you expect going forward on the coast.
Sure. So I mean for everybody on the call I mean, I know you know well, but that you know there there are two different equations for stumpage and N B C. One on the coast and one in the interior.
Coastal stumpage equation considers variables are there specific to the coast market variables and there are different than those in the interior so but declare that you know well the formula is going to drive stumpage calculations, you know I think our mix of harvest will drive any company specific stumpage rates right. So in the near term based.
On the updated the equation, we expect stumpage the moderate because our markets weakened late and in there I guess the midpoint to 2021, and that's going to have an influence on the stumpage rate, but I kind of say, but given the current lumber market strength I think we would expect that kind of respite in stumpage costs to be pretty short lived.
And all of that said you know we look at every one of our permits and ensure it contributes margin. So well stumpage costs may be rising we're going to remain focused on margin.
Yeah and to be clear, yeah, I mean, I think stumpage rates are similar to the interior because of the markets are going to be kind of lower in the next quarter or so and then based on market. So I think theyre going to go higher.
Great. Thanks, Todd and just just one for Steve.
I'm not sure if you're able to provide a preliminary capex budget for 2022.
Yeah, maybe I'll throw that over to Atlanta, and get him to give you an update I'm here, yeah, not a problem. So.
Historically, we've averaged about $30 million to $40 million annually and maintenance and road Capex some weather related impact in the second half of 2021 delayed.
Maintenance and real Capex in 2022 about $10 million. We also have about $10 million of strategic capital projects underway are focused on cost reduction and other.
Efficiency initiatives, so rough math for 2022 total capex of around 60 million is probably a reasonable number to use them here.
And maybe.
Maybe if I can just add I mean, <unk> done a good job of outlining what are what we're looking at this year I think longer term you know we're looking at increased.
Increased investments in our operating platform likely around killing capacity as well as you know over the next few years, we'll be looking at a line upgrades you know for checkout generational improvements from a technology point of view and a couple of our mills. So you could probably expect to see some time going forward.
Some announcements on an additional capital required maintenance.
Maintenance business, and an increasing killing capacity.
Great. Thanks, that's all I had I'll turn it over.
Thank you Sir.
Thank you.
Take the next question from.
Paul Quinn.
Hey, Marty Hey, guys good morning.
Good morning.
It sounds like an interesting system, you've got here maybe.
Maybe just a follow up on this capex at $60 million sounds like 10, as a holdover from last year, but of the 50, you mentioned kilns dawn.
Whereas the kill them going in are you putting into calendar is refurbishing and how many years.
Yeah. So Paul I think we've tried to explain there are they.
The additional strategic Capex that the Glen highlight is is the continuation of our productivity improvements focused on processing, mostly the viewpoint planer, you know with an auto wrapper.
Pushed off shorter different stacking them.
And that should be done by the third quarter of this year, the kilns and and maybe line replacement would be done in subsequent years and we're still doing the preliminary engineering on that so I just wanted to foreshadow that we're thinking about it and and give you some insights into what their thoughts are.
I would expect and we come to a conclusion here pretty shortly in the next the next few months and then come back to you.
Okay, and just remind me how short of killing or what what percentage of your wood is stride right now.
Yes, so so.
We've got the largest investment in killing capacity on the coast as you know how.
How short we are it depends on our product mix. So so currently and in at our Big mill, where kind of 50% to 60% covered but we've got product lines that are still green that we support them and we'd like to see that obviously the opportunity.
To grow overall.
Overall, you know $50 to 60% is probably a good number and.
We liked the opportunity on the killed side, because they own about lumber selling typically through the cycle a little at higher prices than the green lumber so.
It provides greater flexibility for us so installing the kilns will allow us to pursue margin opportunities you know through the cycle.
Okay. That's helpful. And then just back to this old growth deferral.
You know the government's experiment here.
It had no material impact across your across your areas.
Just wondering when you think about for the I mean do you guys do a lot of log trading on the coast. So.
The rest of the Coke inside of Europe .
Do you think that is going to be.
Is it going to affect your ability to access log.
Yeah. So good question so just.
Just to be clear like you know in Tfl 44, and 39 block two where the announcements have been made by the first nations. We don't foresee material impacts you know right now based on what's been announced so far.
Other first nations are still going through the process to try to respond to the government. So that's sort of a wait and see.
I think how is going to impact the.
Other suppliers on the coast again, I can't foretell, how how are there going to be impacted but what I can tell you is that we have spent years in developing relationships with first nations on the coast I'm really pleased that the progress. We made just this past year and working with first name.
<unk> is identifying a integrated resource management planning and we've been invited to participate in some of those and I'm I'm hopeful that that.
Our our work over the last number of years will will.
Support.
Our business with greater certainty and working with first nations I think we have an opportunity to provide greater benefits to the nations. So hard to say, Paul how it's going to impact log supply from others I do like our positioning.
What about the what about the deferrals and with respect to the force profile is it.
I suspect it's heavy too.
Consider that is it would that be a fair statement.
Well if you go back to the deferrals that you know the $2 6 million hectares, a portion of and these are all public public numbers I'll tell I'll quote you you know half of it is probably outside the timber harvesting land base, so areas that werent going to be harvested anyway.
About 80, and and you know from the studies, we've seen 88% of the temporary or deferrals are actually in the interior 12% on the coast.
How it's going to impact the profile I mean, obviously depends site by site.
And I'd be.
I'd be reluctant to jump to conclusions, which I think other people have you know about how this is all going to play out I think you know I'd remind you that they're temporary.
There are and and they're going to require first nations' approval and support and so really hard to tell exactly how it's going to play out here, but again I reiterate I kind of like our position in our in our efforts to work proactively with first nations.
Okay, and then maybe just back of the business.
That you've got.
That could be impacted by that over the last number of years by the downturn.
And oil specifically I thought there was a number of products that you made for that for that sector. Just wondering if thats seen a big big come back in.
What are the what are the key products that we should follow or what are the key businesses that would really drive that niche.
Segment going forward.
Sure. So so great point, so and you're absolutely right. So in our niche segment that products you want to think about would be appearance products for the molding and millwork sector.
<unk> timbers.
And those are quite often price for your heart center for timbers, particularly you can see those in random lengths and then of course, the industrial segment, which are oil and gas large infrastructure projects like pipelines and yeah, you're absolutely right the the appetite for for through the.
I just you know the the oil patch and for these large infrastructure projects.
For lumber has increased pretty dramatically and I think that's what I referred to in my opening comments. So we see across the product lines, whether its appearance whether its timbers or whether its products for the for the infrastructure business Theyre all in high demand with very strong pricing.
Okay and last question, just a Japan seemed particularly strong here you guys have operated in that.
That area for forever.
Do you see the strength is sustainable going forward.
Well you know.
The strength in Japan is pretty much correlated to the strength in housing.
What we saw an opportunity last year to kind of reestablish ourselves when our customers were short of wood from other supply regions.
And and you know I think it really it's really important for us to explain as well our flexible operating platform allowed us to transition products out of the U S and some extent China back into Japan.
We leveraged our relationships with break bulk carriers because there still was containers were extremely short and we positioned ourselves last may to our extended order files through the balance of the year at very attractive pricing record pricing and and significantly increased volumes. So all of.
Our components of our business had to come together and.
And so we certainly benefited I think looking forward housing market still remains strong our work with our customer base I think I would I would hope would be rewarded because we were there to deliver products when they needed them and others weren't so.
I'm pretty encouraged at least for the first part of the year here and we're going to continue to try to extend order files in Japan.
I mean, we're trying to do it right today through second quarter. So.
Pretty encouraged.
Alright, that's all I had best of luck.
Hello.
Thank you.
Once again, please press star one on your devices keypad, if you have a question.
We will take the next question from.
Sean Stewart.
Yeah.
Thanks, Good morning, guys.
I just wanted to follow up on your last point on on Japan, and more with respect to your lumber shipment mix into.
And to the first quarter, so Q4 skewed more heavily to Japan.
Away from commodity grades, which makes sense given how you just laid it out we've seen commodity prices skyrocket since late last year.
Should we think about your mix.
Into Q1 for lumber shipments.
Sure so so.
I think we need we need to think about our mix.
Some of the ways. They can go here, but but let me just start off by discussing the mix of the segments. As you have asked so in 2021, our production and shipments of commodity lumber increased by about 20% relative to 2020, which of course was strike impacted.
And it kind of normalized at about 50% of our business being commodity.
50% specialty products.
Within the specialty mix of course as you saw right at the very end of the year, our volumes to Japan increased pretty substantially.
So a couple of things are going on you know I think within our commodity mix, 60% of our volume ended up going to North America and that's the toggle we can move between export and North America.
When markets allow us to.
I think looking forward what you want it what do you want to think about it on a volume basis, I think Japan is going to stay about where it is although working hard with.
With home companies.
And suppliers are home companies, who are concerned about their supply chain now after last year and whether or not we can grow volume there is going to be our focus but I think you can consider for the near term that volumes to stay about the same.
And youll see commodity lumber volumes pick up a little bit for two reasons. One of course, we get account gain when we start producing lumber into the into North America. The other reason is we've had a few production challenges due to lower log inventories and so a couple of the larger log mills.
Have taken some downtime here in the first quarter, we're working hard at expediting harvest, where we can rebuild log inventories and keep them going.
But I think you can anticipate that just is a mix component a little more commodity and the Japan volumes stay about the same okay.
That's great thanks for that detail.
Second question is on <unk>.
Larger scale capital.
Allocation initiatives beyond the Capex program, which Glenn laid out nicely.
I guess I'm wondering with respect to potential acquisitions or larger capital deployment initiatives.
And maybe this is not something you can answer, but it's the board's perspective.
They'll wait until your your official retirement in your successors in place before they would consider something along those lines or are you guys still looking at opportunities through this through this interim period.
Well, yes, let me comment on the retirement piece and then I'll throw it over to Glenn on capital.
You know I think we have made an announcement earlier in February that I'd be retiring and provide the board pretty darn long lead time through March of 2023. So.
Business as usual here at western will be and we will be reviewing capital allocation opportunities with our board.
And and whether that includes investing in our business or acquisitions, our returning money back to shareholders on a regular basis.
Over to you Glen if you want it and that's for sure. So I mean.
Ill touch more broadly on capital allocation, so I mean as you're aware.
<unk> remain committed to a balanced approach to capital allocation, which includes the payment of our regular quarterly dividend.
We're successful returning about $111 million to shareholders via dividends and share repurchases in 2021.
Accelerating those repurchases in Q4, as we saw an attractive opportunity to return additional capital to shareholders.
We completed the maximum under our normal course issuer bid in January of this year.
You are probably aware TFS rules only allow a maximum of 10% of the float and CIB over 12 months.
Meaning that we won't be able to renew or.
In CIB until August of this year.
That said, we retain the flexibility for other return of capital alternatives and we'll consider all options which may include.
Considering increasing our dividend considering a substantial issuer bid or considering a special dividend.
We continue to evaluate and discuss return capital with our board every quarter and at the same time, we do remain focused on our strategic growth initiatives.
Including our strategic capital investment projects as well as growth opportunities.
And as you're aware on the growth side.
We continue to explore growth opportunities that will increase our share of it.
Definitely product products and create long term shareholder value.
On the M&A side, Thats, probably be focused in the U S Pacific northwest as well as you know.
It's actually developing strong two way relationships in Japan.
But as you're aware you know from an M&A perspective, while we continue to be active you know, we're gonna be disciplined in our approach and any acquisitions will need to make sense.
Over the long term would be accretive and create long term shareholder value.
That's a that's great detail, thanks, very much Glenn I appreciate it guys.
Thanks, Jeff.
Thank you.
There are no further questions registered at this time I would like now to turn the meeting back over to.
Mr demands right.
Thanks, Chris and thanks, everyone for your continued support I appreciate your interest in our company and your time on the call. This morning, Steve.
Steve and I are available if you have any follow up questions and otherwise we look forward to sharing our first quarter results with you in may with that have a great day. Thank you.
Thank you. The conference has now ended please disconnect your lines at this time and thank you for your participation.
Okay.
Yeah.
It's Christmas at it.
I've got that image.
Changes the way they do.