Q3 2022 Western Forest Products Inc Earnings Call

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Good morning, ladies and gentlemen, welcome to the Western Forest products third quarter 2022 results conference call.

During this conference call Western's Representatives make make forward looking statements within the meaning of the applicable securities laws. These statements can be identified by words like anticipate.

Lan 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 certain shouldn't DS and the actual results to differ result.

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 as 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 of 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. Stephen Harper.

President and CEO of Western Forest products. Please go ahead Sir.

Thank you Valerie and good morning, everyone.

I'd like to welcome you to Western Forest Products', 2022 third quarter conference call.

Joining me on the call today is Steven Williams, Executive Vice President and Chief Financial Officer, and Glen until Vice President corporate development.

We issued our 2022 third quarter results yesterday.

I will provide you with some introductory comments and then ask Steve 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.

I am excited and honored to have this opportunity to build on the strong foundation established through the many years of leadership at Western.

This includes western his commitment to finding a sustainable and profitable path forward.

That benefits employees, our communities first nations shareholders and other partners.

I've spent the first 60 days listening and engaging with our employees throughout our company.

As well as customers first nations and other stakeholders and partners.

It is clear to me that Western has a solid foundation with many strengths, including its focus on safety and its diverse and talented workforce.

Looking ahead, we remain very focused on growing long term shareholder value.

In allocating capital to the highest return opportunity.

We will continue to focus on profit margin across our business all while driving to provide the best in class service.

To our customers.

I will now turn it over to Steve to review, our key financial results.

Steven we reported third quarter, adjusted EBITDA of $17 $3 million as compared to $66 $3 million in the same quarter last year.

Adjusted EBIT in the third quarter of 2022 included $23 $1 million of inventory provisions due to weaker lumber markets and $18 million of export tax recovery related to the finalization of the most recent softwood lumber administrative review.

Compared to the same period last year our results in the third quarter of 2022 were also impacted by lower lumber demand lower prices and a weaker mix higher costs, including an incremental $27 $3 million in stumpage freight and export tax expenses and sawmill operating curtailments as we balanced.

Reductions in market conditions.

Offsetting these impacts was an increase in external log shipments and revenue.

During the quarter the department of Commerce finalized its most recent administrative review, resulting in a decrease in the softwood lumber export tax rate to 859%.

Looking at third quarter cash flow and capital management.

We completed the acquisition of Calvert during the third quarter of 2022.

The acquisition will help position western to capitalize on the growing North American mass timber building market.

We also continued with our balanced approach to capital allocation, returning $14 $1 million to shareholders via dividends and share repurchases.

We continue to make progress on our $29 million of previously announced strategic capital projects.

These investments will support and grow western as value added wood products business, and we are and will be completed over the rest of 2022 and in 2023.

For 2022, excluding the acquisition of Calvert, We anticipate total capital expenditures between $45 million to $55 million.

Our balance sheet remains well positioned heading into the fourth quarter.

We ended the quarter with $269 million in available liquidity.

Which will continue to support our balanced approach to capital allocation.

Turning to fourth quarter seasonality typically in fourth quarter as lumber consumption declines in North America as construction slows with the onset of winter.

In our timberlands harvest volumes declined 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.

Our log inventories remained well positioned as we head into the fourth quarter.

We ended the third quarter with approximately 986000 cubic meters of log inventory.

We will continue to match production to market demand.

Even that concludes my comments.

Thanks, Steve.

Our results in the quarter reflect challenging global market conditions reduced lumber sales volumes and continued pressure on log costs and logistics.

In the near term with central banks, continuing to increase interest rates and tightened financial conditions around the world. We expect lumber markets to remain volatile until a rebalancing of supply and demand occurs.

The current headwinds emphasized the need for improved operational execution on cost recovery and product values, including moving at pace on our strategy to move up the product value chain.

To that end I am pleased with our progress in the quarter in advancing strategic value focused capital projects and completing the acquisition of Calvert company, adding.

Adding glue lam to our portfolio of specialty products.

Longer term, we continue to believe that wood products have an important role to play in a low carbon world.

We expect long term housing market fundamentals and growth in mass timber construction will continue to drive demand for lumber.

With that Valerie we can open up the call to questions.

Thank you we will now take questions from the telephone lines. If you have a question on Youre using a speaker phone. Please lift your handset before making your selection.

Cancel your question on anytime by pressing star two.

Press Star one at this time, if you have a question.

There'll be a brief pause while the participants register for questions. Thank you for your patience.

Our first question is from Sean Stewart.

Please go ahead.

Thank you good morning.

Steven.

For you you're a couple of months into the seat in the in the job.

And I'm wondering if you can give some thoughts on the pace and direction of Western States.

This strategic shift.

The history has been a gradual approach.

To try and groups them for some time with any thoughts on.

Your your approach to.

Our strategic shift for this this company and how long you intend to take to implement it.

Well, thank you and great to have you on the call.

Clearly for me. The first 60 days has really just been around.

Onboarding and immersion. So I've spent the last 60 days is primarily visiting all the different business units, both in the United States and here in British Columbia.

Engaging with a wide range of.

[noise], both internal and external stakeholders, so certainly no immediate changes to our strategy.

Our strategic priorities remain the same whether it is advancing first nation partnerships exploring accretive growth opportunities or moving our products up the value chain to earn incremental margin.

As I shared certainly here in the near term.

Our focus are internally here all around costs and margin.

And continuing our balanced approach to capital allocation.

Okay, Thanks for that and.

Question on on the Calvert deal on and and glue Lam is as an entry way into mass timber.

What about that product.

Some of the others that have exposure to mass timber or are you guys excited about and potential.

Potential to build on on that as a jumping off point and mass timber.

Yes, Sean it's quite here, maybe I'll provide some introductory comments on Calvert and let others jump in you know we're excited about our Calvert acquisition at Western you know an opportunity to grow our specialty offering are moving higher up the value chain as.

As well as provide the potential vertical integration opportunities with our sawmill.

Yeah to your point, you know, we definitely see as an opportunity to capitalize on mass timber building in North America, which we believe is going to grow substantially over the next five.

Five to 10 years.

It's also a sustainable product, which sort of meets our product criteria we.

Thank you Catherine asked you did a small acquisition, but we use it as a stepping stone into mass timber and potential other you know mass timber products longer term.

You can also provide some geographical diversification for us I think in the near term here. Our focus is on growing volumes at Calvert last year did you know over the last few years is that between 30 to 50 million board feet.

You know it would be nice to go back to 20 over the next 12 to 18 months.

And then from there you know I think we remain interested in opportunities throughout the mass timber value chain what products that maybe are whereabouts were looking into all of those but we remain open to any opportunity that's going to create.

Shareholder value over the long term.

Okay. Thanks for that Glenn I appreciate it that's all I have for now.

Thanks Todd.

Thank you.

Our next question is from Paul Quinn. Please go ahead.

Yeah, Thanks for by supporting good.

Well.

Let's start with the given you've been around for a while different operations and equipment suppliers are.

Huge characterized.

Characterize western strengths, well, where are the week and where the big opportunities you see after watching over the next five to 10 years.

Well, it's a great question Paul.

You know I've been fortunate to spend the last number of years.

With the bid group and I think everyone on this call knows what a bid has done in the U S. South East in terms of building you know top of top quartile manufacturing complexes for.

A wide range of of customers, yes, certainly.

Certainly when we when I look at the AR in the western manufacturing footprint.

There is a need for some additional capital.

Capital too.

Help us on a number of fronts. Both on you know driving lower cash conversion costs and achieving higher levels of operational uptime.

Getting getting technology.

Current with respect to our automation and optimization inside the facilities. So.

We have some work to do but I can tell you what's what's really stood out to me in the first 60 days is really the strength of our people.

So capital is one side of the equation.

The people is the other side of the equation and I'm very confident that our we have a very strong committed passionate group of leaders in our company both on timberlands and in the operations side that are able to execute it.

High level with with the capital that we plan to deploy.

Okay and then.

You know in your press release, you you'd mentioned that a H b L. P. As not following through with the with the additional Tfl 44 purchase in the.

And their investment in a P D. What what's going on there why the change.

Yeah, well, maybe I'll take that one it's one you know.

When we structured the original transaction. It was always an option for you know the first nations to purchase an incremental ownership interest in both the tenure and then potentially a P. D. You know the first nations groups are probably going to comment, but you know the feedback we got from them was you know changing circumstances.

The original transaction.

What I'd say is that doesn't necessarily change our focus are winding to do more of these partnerships.

A key strategic priority for us and you know while the time period for the auction has expired on that particular.

Limited partnerships. We continue to have described discussions with interested first area first nations or first nations in the tenure on acquiring incremental ownership in.

In that.

Walk in Forestry limited partnership.

Alright, that's all I had thanks guys.

Thanks, Paul.

Thank you once again, please press star one at this time, if you have a question.

Our next question is from whom you Patel. Please go ahead.

Hey, good morning.

Steven could you speak to what you're hearing from some of your key R&R partners.

In terms of what I expected cedar demand in 'twenty three.

Maybe I'll kick it off and I'll see if Steve or you don't really extrapolate I mean, you know if I talk more about <unk>.

More broadly I think you know, it's typically a seasonally slower time of the year for Cedar.

It's sort of been a tale of two markets.

Wide timbers and cleaners, its been fairly steady, whereas the narrow as Daphne and seven have been a bit weaker.

I don't think you know we are expecting any changes to that until we entered the first quarter of next year as customers look to put orders ahead of the spring building season, you know from a channel perspective, you know Mark speaking more broadly you know I think most customers are operating on lower inventory levels. I think most of them are looking to manage that.

The risks given the other potential talk of you know a recession.

'twenty three that may impact demand. So I think what we're seeing on the theater side as you know customers sort of ordering only what's needed in the near term and that channel inventories are fairly low until they see potentially a shift in demand.

Okay, great. Thanks, that's helpful and just lastly.

What should we expect for Capex in Q4, and any sense yet on a 23.

Yeah, maybe I'll take that one too so I think for the full year. Our Capex is between 45 to 55 million plus the acquisition of Calvert you know the range is there because you know there might be some slight delays in terms of the timing of this specific capex.

But you know that that range is probably a reasonable range for full year.

Okay.

And then what are you.

And then 2023 I'm still working through our plan for next year maybe.

Maybe just talking about the strategic capital projects, we have underway. So we had it previously houses here about $29 million and strategic capital projects.

No around growing.

Growing our value added manufacturing position on the coast you know to date, we spent around 7 million. That's a you know in the back half of this year and into 2023, there's about $22 million of strategic capital to come.

As well.

Okay. Thanks, our next call and that's that's all I had.

Great. Thank you Barry.

Yeah.

Thank you.

There are no further questions registered at this time I would like to turn the meeting back over to you Mr. Ofer.

Thanks, Valerie well, thanks to everyone for joining our call today, we certainly appreciate your interest in our company and we look forward to our next call in February have a great day everyone.

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