Q2 2023 Western Forest Products Inc Earnings Call

No one else seemed to be honest, we lapped a silty duckenfield they'd be tough super nimble pre owned at the end of who I had the honor of again it gives us a new voice.

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Good morning, ladies and gentlemen, welcome to the Western Forest products second quarter 'twenty twenty-three results conference call. During this conference call Western's Representatives.

Make forward looking statements within the meaning of the 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.

And the company's annual MD&A, 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 undertakes no obligation to update forward looking statements.

Accordingly listeners should exercise caution in relying upon upon foreign Ricky statements.

I'll now like to turn the meeting over to Mr. Steven the hole for President and CEO of Western Forest products. Mr. Hoefer. Please go ahead.

Thank you Patrick and good morning, everyone I'd like to welcome you to Western Forest Products' 2023 second quarter Conference call.

Joining me on the call today is Steven Williams, our executive Vice President and Chief Financial Officer, and Glenn <unk>, Our Vice President of corporate development.

We issued our 'twenty two 'twenty three second quarter results yesterday.

I will provide you with some introductory comments and then ask Steve to take you through our financial results.

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

In the second quarter of 'twenty to 'twenty, three we continued to face a more challenging demand environment.

Headwinds from rapid interest rate increases over the last year continue to work through the economy.

This has resulted in weaker lumber demand and prices compared to the same time last year.

Our second quarter results also reflect an organizational structure, which was not aligned to the current operating environment.

As a result, we took steps during the quarter to realign and reorganize certain aspects of our timberlands manufacturing and sales and marketing groups.

This included the optimization of certain operations and the streamlining of operational structures to drive a more lean and nimble organization moving forward.

As part of our operational excellence strategic priority, we remain focused on driving improved profit margins going forward.

We will continue to evaluate all opportunities to do so.

Despite the more challenging environment, we continue to advance opportunities to position our business for long term success.

This including advancing multiple sales marketing and quality issue quality assurance initiatives to.

To support our customer excellence promise.

We also advanced RBC strategic capital investments to support value added manufacturing.

We completed installation of our.

MSR or greater at our Duke point facility and are in the process of testing and calibrating prior to commissioning.

We also continued to progress our continuous kiln project at our salt or sawmill.

These investments will support the production of more kiln dried lumber products and move our products further up the value chain to drive increased profitability over the long term.

In addition.

We remain focused on other strategic priorities, including advancing collaborative forest planning activities.

And partnership opportunities with first nations and growing our engineered wood products Division.

Our balance sheet remains strong and we remain focused on maintaining financial flexibility to support our strategic priorities and balanced approach to capital allocation.

I will now turn it over to Steve to review our key financial results. Thanks, Steven second quarter, adjusted EBITDA was negative $12 million, which included an increase of $8 $5 million and inventory provisions.

<unk> improvement and some lumber prices from the first quarter of 2023 weaker pricing in certain number of segments impacted log and lumber values.

Compared to the same period last year results in the second quarter of 2023 were impacted by lower lumber prices and shipments lower logging byproduct revenues and saw mill curtailments as we continue to match production to market demand.

These were partially offset by lower stumpage and freight expense lower export taxes, a stronger U S dollar and specialty mix.

In our engineered products Division, we continue to be pleased with the performance of our Calvert acquisition, delivering another quarter of EBITDA margins in excess of 20%.

Since completing the acquisition in August of last year, we have generated EBITDA of $6 $3 million on an annualized basis.

Turning to the second quarter cash flow and capital management, we continue with our balanced approach to capital allocation, returning $3 $9 million to shareholders via dividends. We also received our income tax refund of $15 2 million.

For 2020 three we expect total capex to be approximately $60 million, which includes a mix of maintenance of business roads in strategic Capex.

Our balance sheet remains strong ending the quarter with $196 million and available liquidity and a net debt to capitalization ratio of 5%.

We will continue to prioritize financial flexibility of our balance sheet to support our strategic initiatives and manage through current market conditions.

Subsequent to the end of the second quarter. The Department of Commerce released the final duty rates related to the fourth administrative review.

The combined all others Judy rate applicable to western was 799% as compared to the current rate of 859.

Per cent softwood lumber duties will now accrue at 799% until the completion of the next administrative review, which is scheduled to be completed in 2024.

We will record an export duty recovery of approximately $4 $5 million in the third quarter of 2023 related to the Finalization of the fourth administrative review.

Turning to third quarter seasonality typical third quarters can be challenging operationally as hot dry weather can restrict logging activity, reducing harvest volumes and impacting costs.

During the end of the second quarter and into the third quarter, we have taken some operational downtime in our timberland operations due to dry conditions.

We will continue to manage our manufacturing operating schedules to match production to market demand Steve.

Stephen that concludes my comments thank.

Thanks, Steve turning to our market outlook.

Near term, we expect lumber markets to remain challenging as lumber supply and demand rebalance is in certain markets.

We have seen some positive signs in Japan as channel inventories have rebalanced, but we expect some downward pressure on prices in the near term.

Long term, we expect to see growth opportunities for engineered wood products and lumber business supported by our strategic capital investments and increased demand for mass timber building in North America.

We are highly focused on profit margin and our cost structure across our business.

We will continue to deliver best in class service to our customers and ensure we create long term shareholder value as we execute on our strategic priorities.

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

Thank you, we'll now take questions from the telephone lines. If you have a question and using a speaker phone. Please state your handset before making a selection.

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You May counseling question at any time by pressing star two.

Please press star one at this time, if you have a question.

It will be a brief pause while the participants register for questions. Thank you for your patience.

The first question is from Sean Stewart from TD Securities. Please go ahead.

Yeah.

Thanks, Good morning, everyone. Thanks for taking my questions.

Steven I'm wondering if you can give us a little bit more detail on some of these realignment initiatives you've undertaken.

This most recent quarter and I guess, what could follow from that end.

Just trying to gauge absent.

A recovery for.

What are the like for.

Pricing for the grades you produce what you guys can do to.

Improved margins on your ends and if you're able to put any numbers on that and I'm thinking of it.

Initiatives, you can take that or capital light to.

Start to turn the margins around.

Yeah.

Thanks, Sean I appreciate the question.

Normally we wouldn't publicly comment on our restructuring activity that happens internally.

No our focus really was around ensuring you know very strong alignment and integration.

Between our timberland units, our manufacturing business center sales and marketing organization.

And we certainly saw some opportunities too.

Within their respective area of business as well as and between the between the business units.

And so I would I would say, it's just about our understanding of the current business environment that we have looking forward for the next 12 to 24 months and ensuring that organizationally that were restructured in the in the manner, that's going to give us. The you know the highest probability for success and execution.

Okay.

Yes.

And a.

Follow on question on on markets, and I guess, just excluding Japan and in your commodity grade.

We've seen sort of consistent pressure for various specialty niche grades you guys produce.

And I guess in your sense of how close are we to rebalancing for some of those grades.

Perception of.

Inventory through the channel that you guys have taken some downtime as some others are as well.

Is it your sense of close to.

Getting towards a rebalance point for for some of those niche and specialty grades.

Well, maybe I can just share a few comments with respect to that you know that a few of the categories certainly.

When you look at Cedar Hill overall market demand continues to be slow.

We have some categories inside the cedar profile in timbers and clears that are certainly.

Stronger than the one in two inch merchant products.

You know there is some some good news coming from our customers in North America that.

Sales in the last few months have improved compared to where we started us off out in Q1.

The home center business is probably the bright spot of our.

Of our Cedar business with very strong demand and takeaway.

For this for this time of year, and we're seeing that extend into.

August and September .

Having said that customers are managing inventories pretty carefully in and buying within a kind of a one to two month window.

On the.

And then maybe just one last comment on the on the Cedar Home Center business. That's an area of of a very strong focus for US we continue to build out additional programs with the big retailers, we will see most of that opportunity occur in in Q4 and into 'twenty two.

For on.

On the industrial side.

You're under Doug fir timber business that happens at chaminade as well as that are accustomed Cook group.

Group you know overall demand is stable and pricing is stable.

One product category, that's had a pretty significant impact on our business in industrials as the match stock business and that is primarily rough screen to buy eight match stock out of Salt Air in Ladysmith and then the 12 by 12 Crane mat material out of Duke point.

And all of that product goes out as rough Green and we saw a very significant pullback in quarter. Two as a result of a few of the big major pipeline projects coming to completion.

So that's a challenging.

Component for us because all of that rough Green now has to get put into a kiln dried product and.

And we are faced with limited kiln drying capacity and its relatively high cost until we get the new continuous dry kilns built at salt here.

You know, Japan inventories are at or there at a healthier level that.

That rebalancing that we talked about in the previous call.

That's largely occurred in the quarter.

But the yen to the U S. Dollar is going to present, a challenge for us to increase any of our pricing.

On the commodity side just to finish off.

You know some recent improvements in North America for them.

June through July .

One bright spot is the trading sector and that's just that's shown to be much stronger than expected.

And that's allowed us to continue to run some of our cut program, specifically targeting you know our four square premium.

Two inch dimension into.

That market segment.

Lastly, I'd just wrap up by saying you know China's China's weak in both demand and pricing as a struggled through some I would call it structural changes and transformation the overall real estate.

Portfolio there.

That is what's great detail I appreciate it that's all I had guys. Thanks.

Thanks, Sean.

Thank you.

Next question is from Paul Quinn from RBC capital markets. Please go ahead.

Yeah. Thanks, guys. Good morning, just a what's the update on portal Bernie process right now.

Yeah.

Good morning, Paul So as we are as we announced on April 27th we concluded the 90 day working group process and that we would not restrict restart the facility we've commenced negotiations and the.

Related to the proposals that we've received due diligence is underway.

And we're working diligently to move forward as quickly as possible and as soon as we have our additional updates that we can share we will absolutely do that Paul.

Any expected timeline with that as at the end of the year.

Ah, we're certainly we'd like to have.

I'd like to have a conclusion.

I'm going to say you know October .

And and have it have something announced in that time frame.

Okay and then.

Last year, you you you bought Calvert I suspect that.

That facility is doing quite well given the strength in mass timber right now or if you could confirm that and and.

Is there opportunity for you to acquire like assets to Calvert.

Yeah, we we really like our what we've seen so far with Calvert, We just had our our board of directors visiting the Columbia Vista and the Calvert assets. This week.

You know we spent a lot of time on the vertical integration piece really understanding where the value creation could be recognized between Calvert and R. A D. C saw mills and right back to our you know our timberlands operations. So you'll demand continues to be quite strong with the industrial product line that we.

Make there.

And we continue to build out our lamb stock in both Doug fir and in yellow Cedar from our coastal D. C saw mills.

We're very optimistic that we can continue to.

That is a core piece of the overall supply that Calvert requires and as far as additional opportunities you know, it's it's certainly an area of our focus as we look at our additional tuck in.

You know Calvert size.

The opportunities in that market segment. So again, it's it's been a bright spot for us we've learned a lot about the the value of the vertical integration opportunity.

And I'm very optimistic that we can grow that business I think we are.

Compared to where they were in 2022 in terms of production volume.

Or sorry production capacity, we will have increased that are around 29% in 2023.

So we'll see if we can take you know take.

Take that even further as we go into 2024.

Oh, yes.

Oh, okay.

Any update at all on what you're seeing I mean, you are there.

Liberty companies, you know that are impacted by the soft wood lumber.

Rates right now or any you know you guys are the way I look at it on a.

Fairly penalize them, just given the higher sales price of the product, but any any movement on that file at all or do you see any way forward for you guys.

Well there is certainly conversations occurring monks amongst the industry.

But you know it is going to take.

The counter party.

You know want to want to have a settlement.

I think.

And there's probably a gap there still Paul in terms of you know certain.

Certain members of the coalition actually.

Raising their hand, and say lets have a dialogue, let's let's see what we can.

See what we can accomplish here.

So you know I would say, there's not a lot there's very little momentum today, you know I think I shared on the last call.

When president Biden visited our Prime Minister Trudeau, we worked every phone every email every relationship that we add as an industry a pan Canadian approach from British Columbia to New Brunswick in Quebec to get softwood lumber on the discussion paper between.

It's two executives and couldn't make it happen so.

That was a real disappointment and it really a lost opportunity.

Yeah, Okay, and just lastly, I mean, and therefore trying to monetize or B C coastal assets any interest on for.

From my standpoint to pick up additional capacity in D C.

Well I think if I look at our you know what Ian has as left here on the BC Coast. You know, there's there might be some opportunities around you'll log log dumps and more infrastructure related.

The and in areas, where there you know where they're going to to leave and so.

You know in due course, we'll have some conversations with.

I'm sorry D moderate your line is disconnected.

Please tell the line.

All participants please continue to standby.

Okay.

Okay.

Okay.

Please go ahead, Mr. Ofer I'm sorry, your line disconnected there your back end the call now.

Sorry about that Paul.

And we'd have to challenge.

Yeah.

Telecom carriers here.

Where did I, where did I leave out leave off at Pall, where do you guys yet.

At the beginning.

Sorry.

Okay.

And we were talking.

Yeah.

And of course about this was the inner for question right Yeah.

Yes, so what I would say is we're sharing there was yeah. We will certainly have a conversation with Ian and his team.

I think any opportunities between the two companies would be mostly around <unk>.

Would call infrastructure related.

So log sorting facilities log dumps.

Things like that that it will no longer need and maybe we we could benefit from so we will have a conversation.

With Ian and the team as <unk>.

As that opportunity unfolds.

Alright, that's all I had best of luck.

Thanks, Paul and sorry for the disconnect.

Yes.

Thank you Don no further questions at this time I would like to turn the meeting back over to Mr. Hoefer.

Okay, well, if there's no further questions. Thanks, everyone for joining our call today. We certainly appreciate your continued interest in our company and.

And we look forward to our call in November have a great long weekend everyone.

Thank you the conference has now ended.

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