Q4 2022 Western Forest Products Inc Earnings Call

This conference is being recorded so it goes to homes that don't have as you see.

Good morning, ladies and gentlemen, welcome to the Western Forest Products' fourth quarter 2022 results conference call.

During this conference call Western's Representatives 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 belief expectations and assumptions they are subject to inherent uncertainties and actual results may differ materially.

There are many factors that could cause actual outcomes to be different including those factors described under risks and uncertainties 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 on which they are made.

Except as required by law Western undertakes no obligation to update forward looking statements.

Accordingly listeners.

Good exercise caution in relying upon forward looking statements I would now like to turn the meeting over to Mr. Steven Huffer, President and CEO of Western Forest products. Mr. Hubbard. Please go ahead.

Thank you, Chris and good morning, everyone.

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

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

We issued our 2020 to fourth 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 fall of Steve's review with a discussion of our strategic priorities and outlook before we open the call to your questions.

2022 is a year of two halves.

In the first half of 2022 lumber demand and pricing remains strong.

However, in the second half of 2022 as the impacts from interest rate increases and slowing growth started to be felt through the economy lumber demand and prices significantly weakened.

In response temporary and permanent lumber curtailments were taken by companies across North America.

Despite the more challenging operating environment in the second half of 2022.

We made progress advancing our strategic priorities, including.

Delivering improved health and safety metrics compared to 2021.

Acquiring calvert in the U S to capitalize on the growing mass timber building sector.

Advancing collaborative forest planning activities and partnership opportunities with first nations.

Advancing strategic investments in our business to support value added manufacturing in British Columbia.

Further enhancing our board with the recent addition of two new board members, including members with prior four sector experience.

Releasing our latest sustainability report, which included further refinement of admissions data.

Third party limited assurance engagement of our carbon accounting.

And finally continued.

With our balanced approach to capital allocation, which included increasing our dividend per share, 25% and returning over $35 million to shareholders.

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

First quarter adjusted EBITDA was negative $11 9 million.

Results in the quarter included $11 $8 million of inventory provisions.

Compared to the same period last year results in the fourth quarter of 2022 were also impacted by lower lumber demand lower prices and a weaker mix.

Higher costs, including stumpage and sawmill operating curtailments as we balanced production to market conditions.

These were partially offset by an increase in log byproduct and other revenue.

In our engineered products Division, we were very pleased with the first full quarter of results post our Calvert acquisition since closing the acquisition. The business has generated EBITDA margins in excess of 20% and performed to our expectations.

The ability of our sawmills to stratify the lumbar products, we produce enabled incremental Lam stock production and supported our ability to move further up the value chain.

While the relative size of the business is currently small we are excited about the potential growth opportunities for the business over the long term.

Moving onto Rbc's strategic investments, we continue to make progress on our previously announced strategic investments that RBC manufacturing operations we.

We remain committed to these investments as we believe they will position the company for future success and value added manufacturing and moving our products further up the value chain for.

For 2023, we currently expect total capex to be between 60 and $70 million.

Which includes a mix of maintenance of business roads in strategic Capex.

Should market and financial conditions materially deteriorate. During 2023, we would look to reduce our capex spend to match those conditions.

Turning to 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 typically accelerate through the quarter.

Log inventories remain well positioned as we head into the first quarter. We ended the fourth quarter was approximately 895000 cubic meters of log inventory.

We will continue to match production to market demand and our available liquidity remains strong to manage through any near term market volatility.

Even that concludes my comments thank.

Thanks, Steve.

I'd like to start by touching on our long term strategic priorities.

With the foundation of our strategic priorities is built around the business excellence.

This includes an unwavering commitment to health.

Safety and environmental compliance along with focused operational execution and a mindset of continuous improvement.

Next we will remain committed to building mutually beneficial relationships with first nations.

Plan to continue to evaluate and advance first nations partnerships and investment opportunities in British Columbia.

Supporting Lunk supporting greater long term clarity for the stewardship and management of the land base.

Our next strategic priority focus on focuses on business and asset optimization.

This includes how we could strategically implement best in class technology and our operations.

To position our business for success through all market cycles.

We believe companies need to continually evaluate their assets with a long term focus on improving financial performance asset utilizations return metrics and reducing costs.

This strategic priority is consistent with our recently announced Alberta Pacific Division working group review.

Next we will continue to evaluate opportunities to grow our specialty wood products, where we can create long term shareholder value and be market leaders.

This includes both organic and inorganic opportunities.

We take a very disciplined approach to acquisitions and near term, we will continue to be focused on tuck in opportunities and engineered wood mass timber specialty wood products.

Lastly is our commitment to stewardship and exploring new revenue opportunities.

Over the longer term, we plan to explore opportunities related to carbon and carbon credits as the market evolves and develops.

We also plan to evaluate opportunities and alternatives.

For wood residuals and waste with the objective of increasing fiber utilization.

Turning to our market outlook.

We are seeing some positive signs that certain lumber prices are moving above recent levels.

However, in the near term, we expect lumber markets to remain challenging until supply and demand come back into balance.

Long term, we remain excited about the growth opportunity for engineered wood mass timber building in North America, and the role our wood products have to play in a low carbon world.

I remain excited and optimistic about the future opportunities western has to deliver long term shareholder value as we continue to execute on our strategic priorities.

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

With that operator, we can open the call up to questions.

Thank you. So 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 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 will be a pause of all participants register for <unk>.

<unk>. Thank you for your patience.

First question is from Hanmi Europe Italia. Your line is open go ahead.

Yeah good morning.

But yeah, the BC government.

Put out an announcement this week with respect to what's the old growth just wanted to get your thoughts on there's somebody at the finger figures that that they are that they cited bear and what potential impact you might see for the western.

Thanks Amir.

Well, we're certainly still.

Still looking to understand the scope and impact of the announcement.

That being said on the old growth planning components westerns approach to operational planning has put mutually beneficial.

Collaborate collaborative relationships with indigenous peoples on whose territory we operate at the center.

Our view is that stability for the sector in British Columbia is going to be built from the ground up.

These collaborative planning processes, and essentially from Victoria or Vancouver.

Yeah. So this extended its announcement supports that works and we will facilitate implementation of the plans that are built that'd be supportive. We are very proud of our track record of sustainable Forest management and the work that we're doing with first nations to develop plans and a stable profitable sector here on the coast.

Okay Fair.

Fair enough, thanks for that Steve and.

I wanted to also ask about on the on the Stumpage front.

C coastal stumpage I believe the increase there was a it was December .

What what kind of scale increase side.

Or change do you see this most recent December and what.

What kind of change would you expect that the next annual revision.

Yeah, Hey Marathon Glenn.

Yeah, we believe stumpage rates have peaked but they still remain elevated relative to 2021.

It should start to see lower per cubic meter stumpage rates as we head into 2023.

As you are aware mix of harvesting operations can impact overall for cubic meter rate, but we are starting to see some relief given the declines in lumber prices you know through the first half of 2023 we expect a decline in per cubic meter stumpage of between 20% to 25% relative to the fourth quarter all dependent on mix.

Great. Thanks, Glenn that's all I had I'll turn it over.

Thank you.

Once again, please press star one on your devices keypad, if you have a question.

Next question is from Paul Quinn Your line's open go ahead.

Yeah, Thanks, very much morning, guys, Hey, Glenn.

Then maybe to follow up on that somebody's question.

But that sort of stopped down 25%.

Crum from Q4, I'm, just trying to understand sort of the overall rate is another reference point that you guys put out was.

Stumpage, it was up $54 million.

In 2022, so I just wonder what were at in terms of levels or dollars per cubic meter.

Yeah rough basketball I mean, if you look in the fourth quarter I mean, there are some places probably somewhere in the high thirty's low forty's on a per cubic meter basis.

Okay. That's.

That's helpful and then.

It's a question for Stephen but the BC government introduced eight.

Work landscape planning tables, how many how many will there be on the coasts and who's going to represent.

Okay.

Hey, Paul I'll start and then I'll, let Stephen jump in I mean, you know we will so trying to get clarity on the specific tables I mean, we have a number of existing tables underway with between six to eight tables underway to these.

Various planning initiatives that we continue to advance.

You know we believe we've been very successful in vaccine ever these initiatives with first nations and these tables that were currently working on with those first nations will be completed over the next 12 to 18 months.

You know these things do take time to develop so once we get greater clarity from the government on the specific tables, and which ones may or may not be on the coast I mean, I think what we know about.

Our position to comment.

Okay do you anticipate any any.

Issues on cutting permitted.

Vacation season and approval.

In 'twenty three.

I mean, I think Paul this at this point, it's too early to comment until the process has worked its way through and once we get some additional clarity will be in a better position to be able to comment on that.

Okay, and then the Alberta Pacific.

You just wondering what the timeline is on that but when do you expect that business.

Yeah, Paul we are we put a.

Our 90 day window around it we felt that was an appropriate time to.

Established a working group launched the working group and give them adequate time to assess Yale.

All the different opportunities that are coming into play.

You know at the end of the 90 day process if.

If there's something there that's meaningful Wilkins will continue to extend it but.

But we you know we put a 90 day window around it.

Okay and then just lastly, just on the overall market conditions overseas as well is that what you expect for for Cedar and the first outbreak.

Yeah, I'd say on the the Japan front is.

It's a challenging market, we shouldn't sugarcoat that there's a fair amount of domestic supply that continues to.

Kind of hold prices flat heavily subsidized by the Japanese government I would share as well.

And then there continues to be a quite an influx of of.

Competitively priced engineered wood products from Europe are in the Japanese market. So.

You know, where we're going to see.

You know I think the demand is going to be okay. You know the housing start numbers are we're kind of in line with what we would normally see but are you.

It'll be a pretty competitive market to to maintain market share.

Okay, and then Cedar in North America.

Well I would say that.

The Cedar profile, the really high end a component of our product mix continues to have very very solid pricing and pretty good takeaway is kind of the the meet in the middle of the Sandwich says we would describe it that has a few more challenges to it you know kind of some of the naughty decade prop.

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It had been impacted by what we're seeing on overall R&R decline in R&R across North America. So.

We're optimistic that we're going to see a little bit more volume as we go into March April may.

But some of the highest that we've seen on pricing through Covid those are probably behind us and will be reverting back to kind of a normalized.

Pricing for some of the you know the.

The mid tier products.

All right that's all I had thanks yeah.

Paul.

Thank you.

And no further questions registered at this time I'd like now to turn it over to Steve.

Okay, well, thanks to everyone for joining our call today, we appreciate.

Thanks, everyone and have a great day.

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

Yeah.