Q2 2022 Western Forest Products Inc Earnings Call

This conference has being recorded. F? ical FA? ologist Tory.

Good morning, Ladies and gentlemen. Welcome to the Western Forest product. Second quarter 2022 results- conference call.

During this conference call, Western's representives may 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 mdna, which can be accessed on SEDAR and is supplemented by the company's quarterly mdna.

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 and relying upon forward-looking statements.

I would now like to turn mineting over to MR Don demand's President. CEO of Western Forest products. Mr demands, Please go ahead.

Well Thank you Chris, and good morning everyone. I'd like to welcome you to Western forstbrockxs. 2022 second quarter conference call.

Joining me on the call today: Steve Williams, our Executive Vice President, Chief Financial Officer.

In Glen tell, a Vice President of corporate development.

We issued our 2022 second quarter results yesterday.

I'll provide you with semicroductory comments and then ask steed to take you through a summary of our financial results.

I will follow Steve's review with our outlook section before we open the call to your questions.

Through generated adjusted EBITDA $66.2 million in second quarter, which was consistent with our first quarter results, despite an increase of $16 million in stumpage expense.

We benefited from our specialty product mix and strong log pricing.

However we remain challenged by the logistics constraints, particularly rail and truck capacity.

Which impacted shipments in the first two -thirds of the quarter, when lumber pricing was strongest.

During the quarter we successfully rebuilt log inventories to more normal levels.

Despite late spring, snow conditions and harvest permitting challenges.

We did experienced mill downtime in the early part of the quarter due to a lack of logs.

Our strong results continue to leave our balance sheet well positioned.

We ended the quarter with $84 million of cash in our balance sheet.

And our duty deposits with the U's treasury have now grown $182 million.

Our strong balance sheet and approximately $32 million in liquidity provides us with significant flexibility to continue with our balanced approach to capital allocation.

Allowing us to continue to invest in our business while also returning funds to shareholders.

During the quarter we confirmed $29 million in strategic capital investments in our BC coastal Mills.

These investments will support and grow our value-added Wood products business.

As well as improve our long-term competitiveness.

Just after the close of the quarter, we were pleased to announce the acquisition of Calvert aggloua, manufactured in Washington state.

Our movement into the glouam space has been a project we've been working on for some time.

caliver is well known for the production of high-quality glw lams for residential, commercial and industrial applications around the world.

We believe there's an opportunity to grow the production of Calvert by leveraging our lumber supply base.

Our ability to vertically integrate the production of blam makes us somewhat unique in the space.

And will provide customers the confidence of product delivery and pricing stability that nonintegrated businesses have been challenged with.

In addition to growing Calvert's existing business, we believe the acquisition will position Western to capitalize on the growing North American mass timber building market.

As glwlams are an integral component for mass timber.

As part of our balanceced abortce to capital allocation, we've announced the renewal of our 10% NCIB, in addition to paying a regular dividend.

I proud of the accomplishments of our team at Western and look forward to ensuring a smooth transition as we welcomed stephenhoofer as Western's next President and CEO .

I'll now turn it over Steve to review our key financial results.

Thanks Don. My comments will focus primarily on our financial results for the second quarter of 2022, with comparisons to the second quarter of last year.

We reported second quarter adjusted EBITDA of $66.2 million as compared to $120.4 million in the same quarter last year.

Results in 2021. benefited from record high commodity lender prices.

Results in the second quarter of 2022 benefited from higher specialty lumber prices.

Higher log prices and shipments and a stronger U's dollar.

Results were offset by lower lumbershipments due to logistics challenges and weaker demand in certain lumber segments.

Lower commodity lumber prices.

$28.1 million in higher freight stumage in export tax expenses.

And $13.5 million in incremental inventory and civil culture provisions.

Lumber revenue was generally flat compared to the second quarter of last year.

Higher lumber prices in certain segments were offset by lower shipment volumes.

Our second quarter average realized lumber price was 1007 or $86 per thousand Board feet, an increase of 12% compared to the same period last year.

Log revenue increased 53% compared to the same period last year due to higher log prices and shipment volumes. All export grade loss were redirected to our saw Mills to support lumber production.

mproduct revenue was generally flat compared to the same period last year.

Increased chip price realizations were offset by lower chip shipments.

Rate expense increased 16% compared to the same quarter last year.

Lower lumber shipments were more than offset by higher freight rates, fuel costs and greater usage of breakbulk vessel shipments.

dumpage expense more than doubles compared to the same quarter last year, increasing to $34.9 million in the second quarter as compared to $15 million last year.

Second quarter results included $14.7 million of export duty expense as compared to $10.8 million in the same quarter last year.

At the end of the quarter, we had approximately $182 million of duties on deposit.

Lumber production was 16% lower compared to the same quarter last year due to operating curtailments related to log supply and production mix.

Log production was 11% lower compared to the same quarter last year. As late brings, snow conditions and permitting delays impacted production.

We ended the quarter with approximately 968 thousand cubic meters of Los.

Looking at second quarter cash flow and capital management: cash provided by operating activities before changes in noncash working capital to $31 million.

The second quarter of 2022 included income tax payments of $29.6 million.

gash used in investing activities, with $6.7 million in the second quarter.

We ended the quarter with $84 million in net cash and $319 million in available liquidity.

Though that concludes my garments.

chac ne. Thank you. Let me start off our outlook section by touching on third quarter seasonality.

Typical third quarters can be challenging operationally, as hot dry weather restrict logging activity rooing, harvest volumes and impacting costs.

While we have yet to experience any significant forestfires in our arears of operation, hotter and drier conditions combined with potential harvest permit delays may impact harvest levels through the summer.

As we look to our markets.

Strong North American housing market fundamentals should support lumber demand and pricing above trend levels in the mid to long term.

An aging housing stock, housing deficit from years of underbuilding.

The influence of work from home arrangements.

And the growth of mass timber construction are expected to drive demand for lumber well into the future.

That said, in the near term, rising interest rates and slowing economic growth may cause demand and price volatility.

It's our view that supply reductions in the BC interior and the lean inventory in the logistics constrained supply chain are expected to limit significant downside pricing risks.

Rising inflation has has begun to impact our business and we anticipate the cost pressures and market volatility may continue until inflation returns to more normalized range.

To manage the challenges facing the business. We will continue to leverage our flexible operating platform to match production to market demand and logistics capacity.

Turning to capital allocation, we remain committed to a balanced approach to capital allocation.

Our strong balance sheet and net cash position allow us to continue to pursue targeted product line growth opportunities to create long-term value while at the same time return cash to shareholders.

I'm pleased to confirm that we have renewed our 10% in B.

And at the current share price we find to be aggressive under the nsib, given our shares are currently trading approximately 30% below bulk.

For 2022, we continue to estimate total capital expenditures around 60 to $65 million.

To this we will need to add our acquisition of calort.

Turning to what's next, we look forward to welcoming Stephen hofor's wesner's next prespresent and CEO .

Our priority is to ensure a seamless transition as he steps into the role in September .

steph brings a wealth of industry knowledge and leadership experience that allow him to guide the execution of our strategic plan and continue to deliver long-term shareholder value.

So with without Chris, let me open up the call to questions.

Thank you, So we'll now take questions from the telephone. Les if you have a question using a speaker phone, please with your handset before making your selection.

If you have a question, Please P orar 1: any devices keep ad.

You may answer your question at any time. A pressing Star too.

Please press start one at this time. If you have a question, there will be a poswellall participants charges for questions. Thank you for your patience.

First question is from pule quin. Your line is open, glad.

Yeah Thanks very much morning guys.

mybl.

They just questioned on Calvert gluelam. Production at that facility was quite a bit lower than capacity last year. We'll the constraint on production and's you're planant to grow the capacity.

Great yes, and so absolutely correct, I mean, and production was lower than capacity. The challenges most non integrated gluem manufacturer face is having the purchase lumber you on the open market, which is pretty volatile, and so you- I think that probably contributed to a challenge for the operation- to be able to access enough fiber and enough Lam sock fiber- high quality fiber call that would fit the GL application. I think this is where we one of the advantages of us acquiring calibert is because we're going to want to retain existing supply base and supply sources for calit But but also add at our own product lines in our own own supply from our from our Mills, and we think we would can grow the production at Caliber to in the kind of the first step up, up to their capacity, and then we're looking for growth from there for sure.

In fact gluelam product is an all G is there is some some adlock as wellright now calit the species the converted over to gluelam would be Douglas for your right also of the yellow Pine and yellow Cedar, and so I think I think the fact they're bring some yellowopineion underscores the comment that I made around supply challenges. I mean,n't make a bunch of sense to bring So yellow Pine in from far away. Your question about hemlock's a very important one well, hemlock is approved to be used in the application of gloulam. We're not aware of any gloulam manufacturers have been approved to use it. So you can have the general approval for hemlock but you need to have the individual operations approved to use it with certain product quality recipes.

And of course we've, for quite a while a working with, actually working with Calvert and others to ensure they can use hemlock in the gluer, glam or salty manufacturing.

Okay then just onto pecially lumber prices. They have sort of a peak level in the quarters. Swing with how you think are the sustainability at that pricing level.

Yes So. So especially a lumber product pricing was driven by strong, strong sales in Japan, for sure, and strong appearance grade product sales in Cedar. I think in each one of the businesses were' probably a little more challenges. As we look forward in Japan, the end is we can substantially and there's more inventory, So we could expect to see some erosion, while historically the pricing is still still going to be remain above any historic levels and trend levels. In Cedar we're seeing continued strong demand for clear lumber as well as timbers, but certainly more muted demand in the TRIM and decking markets. So it's a bit of amixed bag Paul, but I think you could. The second quarter was kind of the peak, especially product pricing.

Okay and then just just on LO sales. I mean that those volumes can to be pretty high. I don't know TE relative to my, my forecast, but they didn't really see a change in pricing. Why might be so addressing losales? And why not increase inventotoryries? So you have enough.

For the back half of the year. Okay, So maybe two questions there. So how, your log inventories, they kind they're kind of close to like 90, about 90% of historicical levels of the current rates. So we're feeling pretty good at to me in with the inventories we have currently. We have just simply been matching our consumption needs with our available supply and so you would also see we have increased our purchases and so we're targeting certain logs for certain Mills. Where we see we have a surplus, we will sell them. Announce that we did in the second quarter.

Okay and then just lastgh again you took some curtailent reallyly in Q2 just wondering what's what's not operating at book about the currently.

Well we're running our running Mills today at capacity, still late on the custom cut, the log quality of the log volume available for the programs we have there, it just have been available. And if we go back to Q2 where we saw that the biggest impacts was that at albernie which didn't have enough logcks to operate, and in custom cuts. So still still seeing some challenges on the custom cut side. The rest of the Miller are running as we have been.

Al right, that's the lab. That's what great faceaseball.

Thank you once again. Please press star one on devices. Keep ad if you have a question.

The next question is from Sean Stewart. Your lines open, go ahead.

Thanks good morning guys ch.

Couple of questions. Calvert seems like a a logical fit.

Can you give us perspective on?

What else might be there not specific assets but.

I guess scope of potential E whether it's glulamb or other.

Value-added products accessing mass timber.

What are the MA opportunities that look like?

How how much opportunity is there to build on this acquisition, not just organically increasing production at Calvert, but trmany as well?

Sure So.

A couple things and then I'll even talk further about MMA. But what we're really excited about calvert- and we've been working for quite a while, including taking trips to Europe , to make sure we understand the business most of most of the.

gluelam operations are quite undercapitalized. It's, I think, this lack of integration, vertical integration and and security of supply has challenged the manufacturers. So we see tremendous growth opportunitieswithin the glulam business and within the base business. We've got at calibert by adding some capital and automating some of the processes.

Where we're going next. I think we have to be looking and we are looking at how we participate in fabrication as well as as factory building. So if you can think, Paul of this business, more and more of the glue lams and more and more of the say mass timber construction is going to be done in factories, and so we are going to be focusing our efforts and seeing where we can participate in fabrication and growth opportunities in factory building. And the reason why that's very important is because the alternative, if you're just going to make the raw material, is to lean out someone's supply chain to be a low cost producer. We think there's more margin in partnering with people moving up up the value chain. And that's really the basis for our O of our acquisition of calivert: to move up the value chain and make have our products, our base lber products, more valuable.

When we think of MA looking forward, it might be a combination of partnerships and the like to expand our engineered Wood products offerings and we look to ama just have just growing our business and our focus has been in the? O Pacific Northwest'. Pleased we're starting to see is the market moderating. Here a few more opportunities show up. I can't- I can't- guarantee timelines as to when things will happen, but certainly our focus on the? U's Pacific Northwest than developing two way relationships in Japan continue and I think I can say that the environment is a little more positive as we look forward.

Thanks for that on that's encouraging. Second question, just on the specific capital projects you have identified here.

The overall CapEx for this year, I think, is unchanged.

Were any of these investments already envisioned in that previous CapEx guidance and, if not, should we assume most of the sgets loaded into the 2023 CapEx budget?

' ve hit on a early challenging. You know it's been really challenging for a manufacturers to be able to stick to their capital budgets when the supply chain of equipment and services have been so challenged. So you ve kind of hit hit on something quite important. Many we had a number of the projects previously announce. We were trying to bring them together to explain what we were trying to do. The biggest new announcement in that $29 million was a continuous kill at sal there. But the other announcements include a auto wrapper at our D point, planer and and MO, some modifications to our orders which allow the operation to run faster, be more efficient, drive down across, very important when we're talking about about a little more dimension type material coming out of our Mills. And the third one there was in as our machine which are be going in at the end of year, the beginning of next year, which will allow us to separate the products by strength and service. The gooland business so, and the trust business, So the $29, $29 million were envisioned. The $6 million has stayed the same and some of those expenses, you are right, will flow into next year, particularly kill.

Got it okay thanks, D. that's all I happen now, guys.

Great Thank sho.

Thank you.

Then no further questions are registered at this time. I'd like now to end the meeting over to MR demense.

Great thanks, Chris. Well, and thanks everyone for your continued support. We appreciate your interest in our company and your time on the call today. Steve Glenn and I are available if you have any follow-up questions and without have a great day ree. Rest of the summer, Thank you.

Thank you. The conference now ended. Please disconnect your lines at this time and thank you for your participation.

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