Western Forest Products Q3 2023 Earnings Call Transcript

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November 8, 2023

There are 6 speakers on the call.

Operator

Morning, ladies and gentlemen. Welcome to the Western Forest Products Third Quarter 2023 Results Conference Call. These statements can be identified by words like anticipate, plan, we 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 in the company's annual MD and A, which can be accessed on SEDAR and is supplemented by the company's quarterly MD and A.

Operator

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 Hoefer, President and CEO of Western Forest Products.

Operator

Please go ahead.

Speaker 1

Thank you, Chris, and good morning, everyone. I'd like to welcome you to Western Forest Products 2023 West Third Quarter Conference Call. Joining me on the call today is Stephen Williams, our Executive Vice President and Chief Financial Officer and Glenn Nontel, our Vice President of Corporate Development. We issued our 2023 Q3 results yesterday. I will provide you with some introductory comments and then ask Steve to take you through our financial results.

Speaker 1

I will follow Steve's review with our outlook section before we open the call to your questions. In the Q3 of 2023, we continue to face challenging market conditions. While our results in the quarter reflect the continued challenging operating environment and cost we are encouraged by the progress we have made in repositioning our business for the future. The partnership announced in TFL-thirty 9 Block 2 with 4 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.

Speaker 1

We are excited to move it forward with our partners. We were also successful in advancing our BC strategic capital investments to support value added manufacturing. Westlake and Company's Construction and Commissioning of our machine stress rated grading technology at our Duke Point facility is now complete with orders being shipped into targeted accounts. We also resolved the permitting delay related to our continuous kiln project at our Saltaire Sawmill. Construction is continuing on the project with kiln commissioning anticipated in the Q1 of 2024.

Speaker 1

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 and a strong balance sheet. I will now turn it over to Steve to review our key financial results. Thanks, Stephen. 3rd quarter adjusted EBITDA was a negative

Speaker 2

$11,600,000 which included $4,300,000 in export tax recovery. Compared to the same period last year, results in the Q3 of 2023 were impacted by lower lumber prices and shipments, lower log and 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.

Speaker 2

During the quarter, the Department of Commerce finalized the duty rates as part of the 4th administrative review. The revised combined duty rate for Western is now currently 8 0.05%. As part of the finalization, Western recognized a $4,300,000 export tax recovery during the Q3. We have capitalization of approximately $225,000,000 In our Engineered Products division, we celebrated the 1 year anniversary of acquiring Calvert in August. We continue to be pleased with the results of the business.

Speaker 2

Based on the earnings since the acquisition, the EBITDA payback of our investment is trending towards under 2.5 years. 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 $40,000,000 to $50,000,000 although some CapEx spend may get pushed into 2024.

Speaker 2

During the Q4 seasonality, typically in 4th quarters, lumber consumption declines in North America as construction slows with the onset of winter. Westin and our timberlands harvest volumes decline 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 4th quarter.

Speaker 2

We ended the 3rd quarter with approximately 939,000 cubic meters of log inventory. We will continue to manage our manufacturing operating schedules to match production to market demand. Stephen, that concludes my comments.

Speaker 1

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 West Coast and lumber supply and demand rebalances. 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.

Speaker 1

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. Westin's Q1 2019 guidance was $1,000,000,000 in the quarter. North American demand and prices for our commodity products are expected to remain volatile. China demand and pricing are expected to remain weak.

Speaker 1

We're pleased to report that we are focused on returning our business to profitability, while executing on our strategic priorities and completing our current strategic investment West Projects here in BC. With that, Chris, we can open up the call to questions.

Operator

Perfect. Thank you. We we will now take questions from the telephone lines. You may answer your question at any time or pressing star 2. Please press star 1.

Operator

At this time, if you have a question, there will be a pause while participants register for questions. Thank you for your patience. First question is from Sean Steuart. Your line is open. Go ahead.

Speaker 3

Thanks. Good morning, everyone. A couple of questions. We'll start with the dividend suspension. Can you speak to the intent to eventually reestablish a regular dividend?

Speaker 3

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 WES payout ratio long term might make sense?

Speaker 2

Good morning, Sean. It's Steve here. So I'll take that one. So Wes Again, I think we made the difficult decision to suspend the dividend. So from our perspective, dividends and return of capital to shareholders are meant to be paid from positive earnings and we'll take cash flow from the business, which has not been the case for the last five quarters.

Speaker 2

So I would note that we continue to pay the dividend for the last five we expect the negative earnings and free cash. So I think we need to see our business return to positive earnings and free cash flow before considering we're returning incremental capital to the shareholders. So to say our Board continues to review the company's dividend on a quarterly basis.

Speaker 3

Wes. Okay. Thanks, Steve, for that. And with regards to the new LP at TFL-thirty nine, congrats on moving that forward. Just trying to assess how we should think about the valuation implications beyond the dollar per cubic meter multiple.

Speaker 3

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

Speaker 4

Sure, Sean. It's Glenn. Maybe I'll take that one. So, obviously, you saw the valuation. The way we think about these tenures is there are great partnerships with the First Nations.

Speaker 4

And from a valuation perspective, Westin addition to that great partnership, you're probably monetizing them at multiples above where Western is currently trading at, especially at the current depressed share price. We can't speak specifically to EBITDA multiples around them, but can say that they're probably done above where we would we'll start with the trade add.

Speaker 3

Okay. One last one for me. The APD West Coast and Company negotiations, any sense of the timeline to complete the due diligence around proposals and determining the best proposal moving forward Wes will now begin to advance that initiative.

Speaker 1

Thanks, Sean. We certainly continue to work diligently to move the process we will take a look forward as quickly as possible. We have no additional updates at this time, but plan to be in a position to provide further updates In the Q1 of 2024.

Operator

Weston. Thank you. The next question is from Paul Quinn. Your line is open. Go ahead.

Speaker 5

Yes. Good morning, guys. Just Trying to understand, I mean, your business is definitely going the wrong way here and it's been 5 quarters of losses and these losses are we're almost as much as it was when you guys were on strike. So just wondering what fundamentally has to change? Is it markets?

Speaker 5

Is there any flexibility that you've got that you can shut Some of your operations that are losing the most amount of money and run a little bit better than what we see.

Speaker 1

Wes? Thanks, Paul. It's a complex answer. Wes. Fundamentally, there's 2 sides of the equation.

Speaker 1

We have the cost structure of older manufacturing assets, Western, 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 levels. So we fundamentally we're out focused on we're developing key targeted accounts into key distribution 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 Key product lines into key targeted accounts.

Speaker 1

We continue to be very diligent and very focused Westin's

Speaker 5

Q1 of 2019. The key levers of profitability

Speaker 1

inside of our sawmill facilities including recovery, West Coast and Company's Q1 2019 guidance was $1,000,000,000 up time product realizations. I was hoping at this point in time that we would have had Westlake, the new kiln up and running at Saltair, being able to take 80,000,000 feet of West's product today that is sold as roughgreen at relatively low values and putting that into higher value kiln dried products, whether they be for Doug First Squares into Japan, Hem First Squares into Japan, kiln dried lamb stock into Calvert, we didn't get that done this year. We had some permitting delays and we are back on track and expect to see those type of initiatives we'll start to move the dial in 2024. So, when I look back at 2020 we're here the 1st 3 quarters. I'm pretty impressed with what we've accomplished on the Timberland side.

Speaker 1

That business continues to run West White well, very much focused on cost containment, executing cutting permits engagement with the First Nations on whose traditional territory we operate on and really pleased on what we've we achieved on the Timberland side. And repositioning the manufacturing assets, we've been very 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.

Speaker 2

Westin. Okay. Thanks for that. I know

Speaker 5

it's a difficult issue and a hard one to go around. Maybe just switching over to, I mean, Western is more impacted than everybody else out there on softwood lumber. What is the state of that file? And is there a way out of that one?

Speaker 1

Yes. I was hoping you would be able to point us to a path forward. In all seriousness, we're now we have a very strong appetite either on the Republican side or on the Democratic side to have this West Coast has an initiative that gets talked about in 2024. We're heading into probably an election on the federal government side here in Canada, a little bit more momentum on the federal government side. I think the opposition party Westheimer was kind of trying to move this file kind of to the forefront of federal government foreign policy.

Speaker 1

But in reality, it takes it's going to take the U. S. Side to come to the table and I think in the background, I think there's some good work happening across Canada where there there's some dialogue occurring to develop some consensus to have a pan Canadian approach to what would work. And so there's some work being done there by industry and by associations, but that's kind of where it's at today. I don't see anything imminent.

Speaker 5

Okay. And then in the past, one of the things that's, Westchester has been a very strong contributor to the U. S. Side to think about a solution is the court cases, whether it's WTI over and after, what are the state of those cases right now?

Speaker 1

Well, there is Without getting too technical, I think there is the CUSMA 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 sides would agree to and that's been a bit of a hang up here where work that should have been done in the past couple of years continues to be delayed because of inability to formalize the panel. So we have some momentum there, but again, that's a key component is to actually have the panels properly resourced.

Speaker 5

Okay. And then last one for me. Just, I mean, you mentioned Q4 weakness, traditional, is that And we've just gone through a pretty weak Q3. Is that still the direction that you think you're going to turn out with at the end of the year for Q4?

Speaker 1

Well, we are optimistic on a couple of areas for Q4. We're 1 month into it. Again, I like the momentum that we have on the Timberland side of the business. We'll have very strong shipments into Japan in Q4 and we are again optimistic about what we can take advantage of with this large facility in Japan now being we're off the market for probably up to 3 years. The majority of that is well, 100% of that is Douglas fir.

Speaker 1

We have some good collaboration going on with some external partners to ensure that we have sufficient Doug we expect fiber available for the mills to capitalize on the opportunity. Weather dependent, Westin. If we can have a reasonably mild November December, I think we'll see some of our key markets start to take I am pleasantly optimistic about what we could deliver, but lots of work left to do.

Speaker 5

All right. Congratulations on the partnership. Best of luck to all of you.

Speaker 1

Great. Thanks, Paul. Thanks, Paul.

Operator

Thank There are no further questions registered at this time. I'd like now to pass it back over to Mr. Hofer.

Speaker 1

Wes. 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. Wes? Thanks, everyone.

Operator

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

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Earnings Conference Call
Western Forest Products Q3 2023
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