Q3 2023 Western Forest Products Inc Earnings Call

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This conference is being recorded.

To close the homes that don't have as you see.

Good morning, ladies and gentlemen, welcome to the Western Forest products third quarter 2023 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 should exercise caution in relying upon forward looking statements I would now like to turn the meeting over to Mr. Stephen <unk>, President and CEO of Western Forest products. Please go ahead.

Thank you, Chris and good morning, everyone I'd like to welcome you to Western Forest Products' 2023 third quarter conference call.

Joining me on the call today is Steven Williams, our executive Vice President and Chief Financial Officer.

I'm, Glenn <unk>, our vice President of corporate development.

We issued our 2023 third quarter results yesterday.

I will provide you with some introductory 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 third quarter of 2023, we continue to face challenging market conditions.

While our results in the quarter reflect a continued challenging operating environment and cost structure in our B C. Operations. We are encouraged by the progress we have made in repositioning our business for the future.

The partnership announced and Tfl 39 block two with four first nations is a significant step forward.

This partnership will provide a collaborative forest stewardship and business model that is key to the operational stability on the BC coast, which we need to support reinvestment.

We are excited to move it forward with her partners.

We were also successful in advancing RBC strategic capital investments to support value added manufacturer.

Installation and commissioning of our machine stress rating grading technology at our Duke point facility is now complete with orders being shipped into targeted accounts.

We also resolved a permitting delay related to a continuous kiln project at our salt Salter sawmill.

Construction is continuing on the project with Killen commissioning anticipated in the first quarter of 2024.

These investments will support moving our products further up the value chain to drive increased profitability over the long term.

As we head into the typically slower fall and winter seasons, we remain focused on maintaining financial flexibility.

<unk> balance sheet.

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

Thanks, Steven third quarter, adjusted EBITDA was a negative $11 $6 million, which included $4 $3 million in export tax recovery.

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

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

During the quarter the department of Commerce finalized the duty rates as part of the fourth administrative review.

The revised combined duty rate for Western is now currently 8.05%.

As part of the Finalization Western recognized a $4 3 million dollar export tax recovery during the third quarter.

As at the end of September we had $229 million in duties on deposit relative to our current market capitalization of approximately $225 million.

In our engineered products Division we.

We celebrated the one year anniversary of acquired Calvert in August we continue to be pleased with the results of the business based on the earnings since the acquisition. The EBIT a payback of our investment is trending towards under two and a half years.

Okay.

Turning to capital allocation.

In response to weaker lumber market conditions, and corresponding financial results, we suspended our quarterly dividend.

Our board plans to continue to review the dividend on a quarterly basis.

For 2023, we expect total capex of approximately $40 million to $50 million, although some capex spend may get pushed into 2024.

Turning to fourth quarter seasonality.

Typically enforced corridors 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 remain well positioned as we head into the fourth quarter. We ended the third quarter with approximately 939000 cubic meters of log inventory.

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

Steven that concludes my comments thank.

Thanks, Steve turning to our market outlook.

We remain excited about the long term growth opportunity for wood products and the positive impacts they have in a low carbon world.

However, near term, we expect lumber markets to remain challenging as consumers adjust to macroeconomic conditions and lumber supply and demand rebalancing.

Demand and prices for Cedar timber and premium appearance products are expected to remain stable.

While cedar decking trim and fencing products are expected to remain weaker.

In Japan, we expect to see near term opportunities to increase volumes due to a fire at a large Japanese sawmill.

Demand for our industrial lumber products will be product line specific but are expected to remain stable over the near term.

North American demand and prices for our commodity products are expected to remain volatile.

China demand and pricing are expected to remain weak.

Looking ahead.

We are focused on returning our business to profitability, while executing on our strategic priorities and completing our current strategic investment projects here in D C.

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

Perfect. Thank you.

We will now take questions from the telephone lines. If you have a question that 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 all participants register for questions. Thank you for your patience.

Yeah.

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

First question is from Sean Stewart. Your line is open go ahead.

Thanks, Good morning, everyone a couple of questions.

Let's start with the dividend suspension can you speak to the intent to eventually reestablish a regular dividend and I guess, what would you need to see with respect to balance sheet strength or market visibility to take that step and any thoughts around what payout ratio long term might makes sense.

Good morning, John It's Steve here, So I'll take that one so no again I think we made the difficult decision to suspend the dividend so.

And from our perspective dividends and return of capital to shareholders are meant to be paid from positive earnings and free cash flow from the business, which has not been the case for the last five quarters. So.

Note that we continue to pay the dividend for the last five quarters. Despite the negative earnings and free cash. So I think we need to see our business returned to positive earnings and free cash flow before considering.

Returning incremental capital to the shareholders. So to say our board continues to review the company's dividend on a quarterly basis.

Okay. Thanks, Steve for that.

And with regards to the the new L. P. At Tfl thirty-nine congrats on moving that forward.

Just trying to assess how we should think about the valuation implications beyond the the dollar per cubic meter multiple.

Can you give us a sense of how this affects mid to long term cash flows for the company and the other metrics. We can we can wrap our heads around there.

Sure Sean.

Take that one so obviously you saw the valuation you know.

The way, we think about at least 10 years is.

They're great partnerships with the first nations.

From a valuation perspective.

And.

In addition to that great partnership Youre, probably monetizing them at multiples above where western is currently trading and especially at the current depressed share price.

I can't speak specifically to.

EBITDA multiples around them, but I can say that they are probably down about where we would historically trade at.

Okay, one last one for me.

The a P D negotiations any sense of the timeline to complete the due diligence around.

Proposals and in determining the best proposal moving forward to too.

To advance that that initiative.

Thanks, Sean.

We certainly continue to work diligently diligently to move the process forward as quickly as possible.

We have no additional updates at this time, but are planned to be in a position to provide further updates in the first quarter of 2024.

Okay.

That's all I have for now thanks, very much guys. Thanks, Sean.

Thank you next question is from Paul Quinn. Your line is open go ahead.

Yes. Good morning. Good morning, guys, just trying to understand I mean, you're you're business is definitely gone the wrong way here and it's been five quarters of losses.

These losses are almost as much as it was when when you guys were on strike. So just wondering what fundamentally has it changed has it made the markets is there any flexibility that you've got that you can shut down.

Some of it so some of your operations that are losing the most amount of money in and up and running.

All right a little bit better than what we saw.

Yeah.

Thanks, Paul.

So it's a complex.

Complex answer.

So fundamentally there's two sides of the equation, we have the cost structure of.

Older manufacturing assets.

And then we have the revenue side of the business and if you look at some of the key product line prices for Western we're now back to kind of pre COVID-19 levels.

So.

We fundamentally we're out we're all focused on developing.

Key targeted accounts into key distribution are areas of the business that align with our focus around specialty products. So.

Those things take time, there's a lot of great work, that's been done here in 2023 and repositioning our key product lines into key targeted accounts.

We continue to be very diligent and very focused on you know the key levers of profitability inside of our sawmill facilities, including a recovery uptime.

Product realizations.

I was hoping at this point in time that we would've had.

You know the new kiln up and running at Salt here.

Being able to take 80 million feet of product today that is sold as rough green at relatively low values and putting that into.

Higher value kiln dried products, whether they be for Doug fir squares into Japan, hem fir squares in the Japan.

Kiln dried lam stock into Calvert kiln dried machine stress rated lumber into you know targeted engineered wood facilities across North America.

We didn't get that done this year and we had some permitting delays and we're back on track and we expect to see those type of initiatives really start to move the dial in 2024.

So you know we're a ware.

When I look back at our 2023 here the first three quarters.

You know I'm pretty impressed with what we've accomplished on the timberland side that business continues to run quite well.

Very much focused on cost containment are executing cutting permits engagement with the first nations on his traditional territory, we operate on and really pleased on our on what we've achieved on the on the timberland side.

And repositioning the manufacturing assets.

We've been very disciplined on on a matching demand.

Our production and we are looking at all those options is as you've laid out in terms of what that manufacturing footprint looks like for 2024 and beyond so.

I think I'll leave it at there.

Okay. Thanks for that I know, it's a difficult a difficult issue and a hard one to get around maybe just switching over to I mean westerns more impacted than everybody else out there on softwood lumber or what is the state of that file in Missouri.

A way out of that one.

Yeah, I was hoping you would be able to point just to the path forward.

In all seriousness.

We're now into our <unk>.

Election year in the U S a.

You know I think I shared on the previous call there's certainly no.

Appetite either on the Republican side or are there on the Democratic side to have this as a as an initiative that gets talked about in 2024.

You know, we're heading into probably an election in the federal government side here in Canada.

Little bit more momentum.

On the federal government side.

The opposition party you know it was kind of trying to move this file you know kind of to the forefront of a.

Federal government foreign policy.

So but in reality it takes a it's going to take the U S side are you able to come to the table and I think in the background I think there's some good work happening across Canada, where you know, there's there's some dialogue occurring to developer.

Yeah, you know some consensus to have a pan Canadian.

<unk> approach to.

What would work and so theres some work being done there by industry and by associations, but that's.

That's kind of where it's at today I don't see anything imminent.

Okay and then in the past you know one of the things that's it.

I guess motivated the U S side too.

To think about our solution as a court.

Cases, whether it's you know WTO earn out or was it part of a state of those those cases right now.

Yeah.

Well there's.

Without getting too technical I think there's.

The the Acousma panels are struggling to get enough.

Participants properly vetted.

And assigned to the panels and so the Canadian side has proposed some alternative suggestions on how to get more people properly vetted and that both both sides would agree too and that's that's been a bit of a hang up here where.

Worked it should've been done in the past couple of years continues to be delayed because of our inability to to formalize the panels. So.

Some momentum there, but again, that's that's a key a key component is to actually have the panels properly.

Resource.

Okay, and then last one for me just a I mean, you mentioned Q4 weakness you know are critical.

Is that you.

And we've just gone through a pretty weak Q3 is that still the direction that you think youre going to turn out with at the end of the year for Q4.

While we are.

We're optimistic on a couple of areas for Q4.

We're one month into it I'm again I like the momentum that we have on the timberland side of the business.

We'll have a very strong shipments into Japan.

In Q4 and.

You know again optimistic about what we can take.

Take advantage of with this large facility in Japan, now being off the market for probably up to three years.

The majority of that is 100% of that is Douglas fir and so we have some good collaboration going on.

With some external partners to ensure that we have sufficient Doug for fiber available for the mills to capitalize on the opportunity.

You know weather dependent you know if we can have a reasonably mild November and December I think we will see some of our key markets start to take positions are in late November 1st part of December where we can.

Probably increase some of our shipments on cedar and have that position for gen fab into key markets. So.

You know I'm I'm optimist, I am pleasantly optimistic about what we could.

Could deliver but lots of work left to do.

Alright.

Graduations on the partnership and best of luck off work.

Great. Thanks, Paul Thanks, Bob.

Thank you.

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

Yes, no further questions registered at this time I'd like to pass it back over to Mr. Hoefer.

Thanks, Chris and thanks, everyone for joining our call today, we certainly appreciate your continued interest in our company and we look forward to our next call in February thanks, everyone.

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