Q4 2023 Western Forest Products Inc Earnings Call
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Good morning, ladies and gentlemen, and welcome to Western Forest Products' fourth 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 and the company's animal MD&A, which can be accessed on SEDAR.
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. Steven Haufer, President and CEO of Western Forest products. Mr. Haufer. Please go ahead.
Thank you Paul and good morning, everyone.
I'd like to welcome you to Western Forest Products' 2023 fourth quarter conference call.
Joining me on the call today is Steven Williams, our executive Vice President and Chief Financial Officer.
Bruce Alexander our senior Vice President of sales marketing and manufacturing and Glenda until our vice president of corporate development.
We issued our 2023 fourth quarter results yesterday.
I will provide you with some introductory comments and then ask Steve to take you through our financial results.
All fall of Steve's review with our outlook section before we open the call to your questions.
I'd first like to acknowledge Steve Williams, who has announced he will step down from his current role by the end of 'twenty 'twenty four.
Since joining western in 2014, Steve has made significant contributions to our company and has played a critical role in our strategic transition to become a leading specialty wood products' supplier.
I want to personally thank Steve for his leadership over a tremendous 10 year career at western.
We have commenced an executive search for a new Chief financial Officer.
Steve will remain in his role until his replacement is found and will ensure a smooth and seamless transition to his successor.
Turning to our business.
In 2023, western faced a more challenging macroeconomic environment.
Resulting in weaker lumber markets and financial results.
We continue to take steps to improve the financial results of our business and during 2023. This included.
Reducing our overall, our overall head count by 6% year over year.
Streamlining certain corporate and operational salary functions, which we expect will drive approximately $3 5 million in annual savings.
Proactively taking operating curtailments to match production.
To market demand.
And ensuring a safe and healthy working environment to drive the best operational results possible.
Despite a more challenging 2023, I am excited about the future and the steps we are taking to accelerate our transition to higher value products.
As part of that journey yesterday, we announced that we are moving forward with two new continuous dry kilns.
One at our Duke point sawmill and one of our value added division and she made us.
These investments will support the increased production of approximately 140 million board feet of kiln dried lumber products.
In addition during 2023, we completed the installation of the machine stress rated lumber greater at our Duke point facility and we are currently in the process of commissioning our new continuous dry kilns at the salt here lumber operation.
These investments are part of a broader strategy to identify opportunities to modernize our primary manufacturing facilities.
Increase our kiln, drawing and painting capacity.
Reduce our cost structure and expand our engineered wood products and Remanufacturing capacity.
We will continue to evaluate any potential future investment opportunities with a long term view of supporting our value added specialty and engineered wood products business.
In addition to our capital investments.
I'm also proud of our progress in advancing first nations partnerships and relationships.
During 2023, we announced an agreement with for Vancouver Island first nations to sell at 34% interest in her mid Island force operations for $35 $9 million.
We also continued with joint and collaborative planning a forestry activities with first nations building upon westerns, well established forestry practices.
And in support of greater long term clarity for the stewardship and management of the land base.
While lumber markets are expected to remain variable.
In the near term, we are cautiously optimistic heading into 2024.
I will now turn it over to Steve to review, our key financial results.
Thanks, Steven fourth quarter, adjusted EBITDA was negative $1 $2 million as compared to negative $11 $9 million in the same period last year.
Results in the fourth quarter of 2023 benefitted from lower stumpage freight and export tax expense, but was partially offset by lower lumber prices and shipments lower log revenues and lower production volumes as we continued to match production to market demand.
Our shipment volumes to Japan more than doubled compared to the same time last year benefiting from fire related curtailments at one of Japan's largest saw mills.
Our engineered wood products business continues to perform to our expectations generating EBIT of approximately $7 million in 2023, and EBITDA margins in excess of 20%.
We ended the year with 64 million board feet of lumber inventory of 964000 cubic meters of log inventory.
Our log inventory at the end of the year at a higher mix of Cedar in Douglas fir logs, leading to lower inventory provisions relative to the third quarter of 2023.
In February the U S Department of Commerce, released preliminary duty rates related to the fifth administrative review.
The Department of Congress May revise these rates between now and the final determination, which is expected to be released in the third quarter of 2024.
Western will continue to pay a combined duty rate of approximately 8% until the final determinations are published.
At the end of 2023, we had approximately $219 million in duties on deposit relative to our current market capitalization of approximately $200 million.
Now turning to Capex and cash flow.
For 'twenty 'twenty four we expect total capex of approximately $65 million, which includes approximately $35 million of maintenance of business and road Capex.
And approximately $30 million in strategic Capex.
The strategic Capex through 2024 includes approximately $15 million related to new kilns at our Duke point in value added divisions.
We estimate the total capital cost of these projects to be approximately $35 million and will be completed over 2024 and 2025.
In the first quarter of 2024, and we expect to receive proceeds of $35 $9 million from our previously announced sale of the 34% ownership interest in our mid island Forest operations.
We also expect to receive an income tax refund of approximately $23 million in the second half of 2024.
We ended 2023 with liquidity of approximately $148 million and a net debt to cap ratio of 13%.
Turning to first quarter seasonality and typical first quarters, our timber harvesting activity can be periodically interrupted by winter weather harvest volumes are typically skewed to the end of the quarter when weather and light conditions support greater activity.
From a market perspective sales typically accelerate through the quarter. We plan to continue to manage our manufacturing operating schedules to match production to market demand Steve.
Stephen that concludes my comments thanks, Steve.
Turning to our market outlook.
Near term lumber markets are expected to remain variable, but we remain cautiously optimistic as we head into the typically more active spring building season.
Cedar demand and prices for timber in premium appearance products are expected to remain stable and demand and price for decking products should firm as we head into the spring.
Cedar demand for trim and fencing products as it is expected to remain soft until market inventory rebalancing.
In Japan, we anticipate quarterly lumber volumes remained similar to those achieved in the fourth quarter of 2023.
Domestic production remains impacted by a prolonged fire related operating curtailment at a large Japanese sawmill.
Anticipating lumber prices in Japan to modestly improve during 'twenty 'twenty four.
Demand for our industrial lumber products sold the 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 through 2024.
And China lumber demand and prices are expected to marginally improve.
Looking ahead, we are focused on returning our business to profitability, while accelerating our transition to higher value products through our targeted capital investments.
With that Paul we can open up the call to your questions.
Thank you.
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The first question is from Ben Isaacson from Scotiabank. Please go ahead. Your line is open.
Thank you very much and good morning, everyone, but to be on the call. A couple of questions for you first one is on the two new dry kilns can you talk about the payback or the return or give some kind of magnitude in terms of how much of a reduction in cost structure, you expect to see and when.
Well first of all been a welcome to the call and we appreciate your your coverage of the company.
You know a lot of at a granular level.
You know continuous dry kilns you know it is.
Not a new technology, there are kind of the standard standard now across North America for any investment in and drying capacity.
You know typically the you know the returns are quite attractive and certainly in our case the investment is kind of twofold one.
As we want to transition into higher value kiln dried finished product.
We have a we have a gap in our current drawing capacity. So the the investment is is twofold, one to start to bridge that gap in drawing capacity and then secondly, our some of our existing killen drawing capacity is quite.
Old outdated conventional batch kiln technology.
During end of life.
This this technology allows us to immediately move up the value chain in terms of additional kiln dried finished product primarily around the industrial grades are especially at Duke point.
And then for the facility for the killing that's going to end up the value added facility and Shininess. The a majority of that capacity will be utilized to transition rough green products from the caliber email the our Lady Smith small log facility and then the salt.
Air facility into as I said higher valued kiln dried products. So we're we're really pleased that the at the ROI on these investments and we expect a fairly short payback on this capacity.
That's helpful. Thank you. My next question as you talked about a return to profitability. Hopefully soon can you just run us through what kind of scenario would need to see for you to at least get to a breakeven level on a free cash flow basis is it just simply you know.
5% higher E. S. P is is it a better mix what are we looking for exactly.
Yeah.
Well, it's a it's a very good question.
I would say just looking at our business. You know you can look you can look externally band and you can say hey, it's a it's a pretty challenging business environment.
Oh on the Timberland side, you can you can kind of point to some of the challenges around cutting permits.
On the operating side you could you could look at and say well we have older outdated technology, we could look to the market and say the market's pretty challenging but really our focus in terms of returning to profitability is managing the controllable inside our business. So when we think about.
Cutting permits yeah, they are challenging but our our group is taking it head on and taking a very different approach to direct engagement with her.
Strategic partners on the first nation side to say, let's look at a different model and so.
That's that's how we're alleviating some of the challenges on cutting permits internally around our our manufacturing operations. You know, we're not the only ones with older outdated technology. There's a lot of a lot of companies private and public that have you'll saw lines that are 2025 years old that run really really well.
And so you know Bruce's challenge with overseeing the operations side of the business and his leadership team as we have to have assets that are more reliable and a need to have higher levels of uptime and I'm really pleased to see the progress on that in in Q4.
We in Q1 or sorry in Q3, we were at 81, 6% uptime across our manufacturing fleet and in Q4 that transitioned to 84.9.
And that's still not good enough, but that's a significant improvement in operating execution in and that allows us to drive our costs lower higher levels of recovery et cetera, and then the market side. You know yeah can we can we would we like to see a five or 10% increase.
And are in the market absolutely, but there are some things that we can control as well, including where our products are sold are the type of customers that we want to sell to and again. This is on on Bruce's area of responsibility. We've made tremendous progress in repositioning a number of our high value product lines into.
The account base that pays.
12% to 15% premium over other distribution channels. So lots of controllable that are that you know we have accountability for and I'll tell you that it's all about execution execution execution.
That's helpful. Just one more for me if I may have.
Have you disclosed or maybe you can talk about it from a high level the southern actually the six mills that you have in B C. Can you talk about.
What the shape of your internal cash cost curve looks like what is the difference between the highest cost and lowest cost.
The highest cost $1, 20% higher than the lowest cost can you just talk about that shake.
Yeah, we're gonna be a little careful on that one but you.
You know obviously you know we're trying to match our.
Our operating rhythm to market demand as well so there's some variability in our cost cost curves relative to downtime that we've been we've been having to take but I'll.
Well I'll say this Ben we know where our cost structures too high.
And so when we think about a future capex and.
You know, how we want to run our business.
The existing assets, we have to have higher levels of reliability and uptime.
We have to do a little bit better job of matching the right log into the right mills for the right product clients and we know with what we have we can we can drive you know a lower cash conversion costs, but ultimately we also understand that we were gonna have to have a little bit of a strategic investment to some of our primary.
All lines simply because of end of life and our just our inability to do much more with some of the physical assets.
Maybe I could just throw in one more quick one you talked about your cost structure being too high and you know you're holding yourself.
Accountable as a company is that something you're willing to put metrics out there in terms of what your cost.
Reduction targets could be in 2024 that the street could could follow along with.
I'll, let Glenn maybe Steve kind of.
Participate on that that response.
Glenn I mean, we have a bunch of internal metrics I mean, I don't think we're at a point to provide those externally you know we do have margin improvement programs across our business both in timberland in manufacturing.
They're measured quarterly and annualized at board level.
But just to Echo Stevens.
We're definitely focused on costs and reducing costly you know ive been told are more complex and diverse than the commodity lumber business that is focused purely on volume pricing cost model. So it's a little more challenging for us to put out.
For metrics out there I'd say.
And then maybe I'll just.
And maybe I'll, just give you a little bit of context.
If you have a if we have mills that have cash conversion costs to start with a three.
We know they need to start with the two and.
And if we have the assets that have cash conversion cost to start with the two we know they need to be starting with the one and so.
There's a there's a there's a gap there and we need to you know all of the initiatives that were taken internally and what we're looking to do.
Into the future here address address those those cost curves.
It makes a lot of sense. Thanks, so much appreciate it.
You bet. Thank you.
Thank you.
The next question is from Sean Stewart from TD Securities. Please go ahead. Your line is open.
Thanks, Good morning, guys.
Couple of questions. Steven wondering if you can address the D. C. Land Act amendments are it seems like the government wants to push these through pretty quickly.
Any broad thoughts on potential impacts for your your coastal business.
Yeah, Sean you, obviously, it's become now.
A topic that is being.
You know disclosed across a broader a broader.
Audience here in British Columbia.
I think the opportunity.
Really as is for the government to.
To really engage a broader audience through the consultation process.
We are.
A lot of the things that are addressed inside the proposed land Act legislation.
Western is already doing you know so when you think about the drip legislation.
Here in British Columbia.
We're well advanced in ensuring that all the appropriate level of discussion a free prior informed consent that are we're required to do on the land base, we're already down that path, but I do I do think it's a you know.
The process the implementation.
How it was communicated.
Obviously, it could have been done much better and we have privately are assured that with government, we publicly shared it with government.
We're obviously part of coffee and coffee has shared that our two government and I really do believe that a minister Ralston administer collyn has have heard the message loud and clear.
And I believe Premier E. B has heard the message loud and clear and.
We're we're optimistic that they will.
Take a step back and really allow a broader and more collaborative process to ensure that everyone across British Columbia really knows what it is and how they'll be impacted and what it means for their respective business going forward, but you know inside our organization.
<unk> that level of detailed collaboration it's part of what we do every day with the with our first nations.
Got it thanks for that detail.
Question on the shipment mix are you you touched on.
The skewing away from commodity towards more heavily Japan this quarter in Q4, and it sounds like that continues into Q1 and.
And any broader visibility on shipment mix that you're expecting.
Through the remainder of 2024 and percentage of commodity versus.
Specialty or higher value great.
Great.
Yeah, we've we've asked Bruce to start joining.
These quarterly conference calls I think it's you know.
Certainly I'm I'm pretty close to what's going on in the market just because of my background, but I think having Bruce being part of these calls is going to really benefit are all of the participants since certainly all the analysts so Bruce I'd like to turn it over to you and provide some you could provide some color on that question for Sean.
Yes.
I guess as we move forward in the year here, we're expecting volumes into Japan to be at similar levels as.
As we saw in the fourth quarter, and we expect that to continue into the second quarter as Susan mentioned theirs.
Ben are domestic.
Japanese manufacturer that had a large fire near the end of Q3, that's impacted supply into that market and currently the supply out of Europe is also challenged with some of the shipping issues that they're facing and some late production. There. So we see a continued strength in Japan throughout the year may be some small price appreciation in Japan.
In the second quarter, our Cedar business, we're expecting that to recover over the course of the year the mood in the market is much more optimistic depending on the segment, we're dealing with in that market you look at timbers and Clearers and the demand has remained stable and prices are at good levels there.
Decking were seeing some signs of picking up trimming Kate trim fencing and Steven mentioned is expected to remain soft until the inventories rebalance but.
But inventories are being managed very very tightly.
And distribution hasn't stepped in yet in a large way, but any small uptick in demand we're expecting to have a positive impact on that side in our industrial business will remain stable throughout the year and as Stephen mentioned on the commodity side, we're focused there on value added.
Type programs.
It will be volatile through the through the year, but the mix should remain relatively.
Similar to the first quarter here for.
For the rest of the year.
That's that's great detail thanks Bruce.
Just one last one and I apologize if I missed it.
Maybe Steve or Glenn I'll get you to answer this but it was 35 million for the the two kiln projects did you give an overall 'twenty 'twenty four capex.
Guidance figure for the year in total.
Sean It's Glenn.
Total capex, we expected approximately $65 million for the full year.
That's 35 million of maintenance of business Capex maintenance events and no capex at $30 million of strategic within that $30 million of strategic for 2024 15 million relates to the new two continuous dry kilns.
And we expect the total spending on the two new counts to be approximately $35 million over 2024 and 2025.
Got it.
Okay. That's all I have thanks very much guys.
Thank you Sean.
Thank you.
The next question is from Matthew Mckellar from RBC capital markets. Please go ahead. Your line is open.
Hi, good morning, Thanks for taking my questions. Firstly on the two kilns, you announced with the quarter could you provide a bit of color around how those investments maybe particularly the wanted humana's.
Might support your engineered wood product strategy, and whether you are contemplating any kind of downstream capital projects, maybe on the <unk> side or otherwise in connection with that increased capacity.
Thanks, Matt loved.
I Love that question certainly.
The two kilns are all around accelerating this transition and maybe I'll just provide a little bit of color at starting with Duke point.
Duke point as a facility today that has the the sawmill and then the planer mill that's been upgraded over the last few years, what it does not have as any kiln drying capacity on site.
And at Duke point, we manufacture a wide range of of Kemper.
Cam for industrial products some of those products will continue to be sold green around.
The squares and timbers and some of the two inch dimension that goes into it.
The rig mat business and Crane mat business, but a large portion of our product line. There are industrial that's no shop in better type product set today, we sell rough green.
And you know we're interested in capturing a more more revenue and higher margins as we transition the rough green industrial product line into kiln dried finished products. So we're pretty excited about you know that revenue uplift.
Again, the technology is not new so it's proven and it's tested we're not buying thrilled number 001.
At the value added a facility.
We had 10th 10 conventional batch kilns are today.
And some of them are nearing end of life. So this new continuous dry kilns gain.
Again as a two fold investment one is to address the cost structure of the existing <unk>.
Filmed bank capacity and then adding.
Some additional capacity to really.
Help transition both some of this theater.
Products that we currently do rough green coming from Palo Bay into kiln dried finished.
And then.
For the Lady Smith facility in the salt their facility.
Allowing us to increase the volume of kiln dried Lam stock.
And both yellow Cedar hem fir and Doug fir.
And as we increase that volume of <unk>.
I'll drive finished lamb stocked the vast majority of that will be vertically integrated into the Calvert facility.
And ideally men in our.
<unk> plan is.
To increase the overall.
Glue the lamp stock.
Capacity at Calvert through some additional additional operating hours, we have some labor constraints there that we're trying to find some innovative solutions around but we're trying to increase the overall internal demand as well for our for our lab stuff.
And then it will also facilitate allowing us to kill them drive more of the appearance grade dimension that we can now run through the MSR machine Hot at Duke point So.
As we look at the quality of our fiber here on the B C coast, Yeah, we certainly see a path forward, where we can be a very significant supplier.
Kiln dried lam stock across those three species and ultimately.
You know, we're gonna have to find a way to utilize more of that and currently because Calvert will we could quickly overwhelmed calvert with the with the forecasted volume so.
Yeah, we want to grow that we want to grow that our internal demand for land Stockton, whether it's through some additional tuck in acquisition opportunities are evaluating.
You know larger scale investments in Glu Lam are those things are all under consideration.
Great. Thanks, very much for all that color.
The second I think in your commentary, you said that Cedar chairman and fencing products.
You're expecting those to remain a bit soft until inventories rebalance could you give us a sense of how large that inventory overhang is and how do you think about the timeline for that to resolve.
Bruce here. Thanks, Thanks for that question.
Not a great degree of clarity around that although we don't believe that those inventories are exceptionally high. So I think it's more related to as the spring demand kicks in those should come in line fairly quickly. So we're not in anticipating a long hangover there.
I think Matt one of the one of the things on that on the demand side is we're really.
Some of those products are highly dependent upon R&R spending in and you know when you seem to have consumers to have a little bit more confidence in some of their disposable income.
Income that can be allocated to those type of backyard projects. So.
You know I think there's you know a little bit of a window here as we go into a bit more certainty in 2020 for that.
Consumers will start to open their wallets again last year was one of those I think you know frankly, a bit of a transition year for <unk>.
Consumers as they adjusted to.
Higher levels of inflation and uncertainty around.
What their disposable income actually was going to look like.
Thanks that makes sense.
Last one for me.
Can you give us any sense of when do you expect an announcement on the process you've been undertaking its portal Bernie.
Well I'll tell you. This mad it's it's dragged on a little longer than we've wanted.
You know we were working very hard to.
Find a a resolution on that particular asset.
We expect to have a bit more color available here in Q2 around the finality of of that process. So stay tuned.
It's front and center on my desk and.
Our team is working very diligently at bringing that to a closure.
Thanks, very much I'll turn it back.
Thanks, Matt.
Yeah.
Thank you.
There are no further questions registered at this time I will turn the call back to Mr. Haufer.
Yeah.
Okay, well, thanks, everyone for joining our call today, we certainly appreciate your continued interest in our company and look forward to our next call in May.
Thank you the conference has now ended.
Please disconnect your lines at this time and.
And we thank you for your participation.
Yeah.
Okay.
Okay.