Western Forest Products Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 8, 2024

There are 8 speakers on the call.

Operator

Good morning, ladies and gentlemen. Welcome to the Western Forest Products First Quarter 2024 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 the 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 inherent uncertainties and actual results may differ materially.

Operator

There are many factors that could cause actual outcomes to differ, 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. Forward looking statements are based only on information currently available to Western and speaks only of the date of 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 name over to Mr.

Operator

Steven Ofer, President and CEO of Western Forest Products. Mr. Ofer, please go ahead.

Speaker 1

Thank you, Carl, and good afternoon, everyone. I'd like to welcome you to Western Forest Products' 2024 First Quarter Conference Call. Joining me on the call today is Stephen Williams, our Executive Vice President and Chief Financial Officer Bruce Alexander, our Senior Vice President of Sales, Marketing and Manufacturing and Glenn Nontel, our Vice President of Corporate Development. We issued our 2024 Q1 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. We continue to face softer market conditions in Q1 2024. Despite this, we remain optimistic in our ability to manage through the current markets and advance our strategic priorities. During the quarter, we continued to demonstrate our commitment to First Nation relationships and partnerships. This included completing the sale of a 34% interest in our Mid Island Forest operation to 4 local First Nations for $35,900,000 and releasing a draft for public comment of the first forest landscape plan in British Columbia for TFL 37.

Speaker 1

The plan was developed in collaboration with the Nunggeese First Nation and provides the opportunity for greater certainty for a stable long term fiber supply within TFL-thirty seven. We were also successful in accelerating our transition to higher value products. This included commissioning the 1st continuous kiln on the BC coast at our Saltair Sawmill. The project was completed on budget and will support increased production of higher valued products. In the 1st month since commissioning the kiln, it has operated at 97% efficiency and exceeded our target EBITDA returns on an annualized basis.

Speaker 1

We also advanced pre engineering and permitting related to 2 previously announced continuous kilns on Vancouver Island. These two kilns are expected to be completed in 2025 at a total cost of approximately $35,000,000 We remain very focused on health and safety and internal initiatives to support driving improved profitability in our business. In our Timberlands group, this has included improving the stratification of our specialty log sorts, such as pull and peeler logs to support incremental margin. In our manufacturing group, we are continuing to focus on operational uptime and reliability, and we achieved uptime rates ahead of target in the Q1. In our sales and marketing group, we are focused on a customer strategy that delivers mutual benefit for Western and our partner customers.

Speaker 1

This has included growing key strategic accounts while developing value added products and programs targeted with the end user in mind. We continue to grow the demand for our key product categories, which include cedar finished value added products, Hemlock and Douglas fir products targeted at the Japan traditional home and non residential sectors, Hemlock and Douglas fir timber and industrial programs, Hemlock treating programs and products and lambstock and glulam for the stock beam and custom markets. In our commodity lumber segment, we continue to target square edge and pro sales in treating, retail and MSR products that typically sell at a premium above regular dimension channels. That premium spread has been widening recently given reduced availability in other regions, resulting in customers willing to pay more for access to our supply. While near term lumber market performance is expected to be product line dependent, we remain optimistic in our ability to manage through the current markets.

Speaker 1

We remain very focused on maintaining a strong balance sheet in the near term. I will now turn it over to Steve to review our key financial results. Thanks, Stephen.

Speaker 2

1st quarter adjusted EBITDA was negative $4,200,000 as compared to negative $5,000,000 in the same period last year. Results in the Q1 of 2024 benefited from a stronger sales mix, higher domestic log shipments and lower stumpage and freight expense. This was offset by lower lumber prices in certain segments, lower lumber shipments and higher secondary processing costs due to a stronger mix of specialty volumes. Our shipping volumes to Japan continue to remain strong and were almost doubled compared to the same period last year. Our Engineered Wood Products business continues to perform well, generating another strong quarter of results.

Speaker 2

Since acquiring Calvert in August of 2022, we have generated EBIT of approximately $10,000,000 implying a payback on our investment of under 3 years. We closed the Q1 with 84,000,000 board feet of lumber inventory and 749,000 cubic meters of log inventory. Turning to CapEx and cash flow. We have reduced our 2024 total CapEx plan by approximately $15,000,000 and now expect 2024 CapEx to be approximately $50,000,000 This includes approximately $13,000,000 related to our 2 previously announced continuous dry kilns. We are currently refining our CapEx timeline related to the new kilns and some of this CapEx spending in 2024 may be delayed to 2025.

Speaker 2

We received $35,900,000 in the Q1 from the sale of 34 percent ownership interest in our Mid Island Forest operation, and we expect to receive an income tax refund of approximately $23,000,000 in the second or third quarter of 2024. From a balance sheet perspective, we ended the Q1 with liquidity of approximately $142,000,000 and a net debt to cap ratio of 13%. At the end of March, we had $228,500,000 in duties on deposit, which equates to approximately $0.53 per share after tax. Our book value is $1.83 per share at the end of March relative to the current share price of approximately $0.53 per share. Turning to 2nd quarter seasonality.

Speaker 2

Typically in the Q2, our harvest volumes increase as snow receives and we expand operations across the entire timber harvesting land base. As our harvest activity moves further uphill sides, our costs tend to rise as steeper and more difficult terrain increases harvesting complexity. From a market perspective, North American lumber consumption typically increases as we move into more active spring season. We plan to continue to match production to market demand. Stephen, that concludes my comments.

Speaker 2

Thanks, Steve.

Speaker 1

So turning to our market outlook. We are seeing some near term positive signs of improving demand and prices in certain lumber products. However, in the second half of twenty twenty four, it will vary based on product lines and be dependent on global macroeconomic conditions. Cedar demand and prices for timber and premium appearance products are expected to remain stable and demand and price for decking products are firming up as we head into the spring. Cedar demand for trim and fencing products are expected to remain soft until market inventory rebalances.

Speaker 1

In Japan, we anticipate quarterly lumber volumes to remain similar to those achieved in the Q1 of 2024. Lumber prices are expected to remain stable, but may be impacted by weakness in the Japanese yen to U. S. Dollar exchange rate. Demand for our industrial lumber products will be product line specific, but are expected to remain stable over the near term.

Speaker 1

North American demand and prices for our commodity products are expected to marginally improve over the remainder of the second quarter, but are expected to remain volatile through the second half of twenty twenty four. In China, lumber demand and prices may slightly weaken as we progress through 2024. Overall, we currently have a second quarter order file of approximately 137,000,000 board feet. Looking ahead, we remain focused on returning our business to profitability while executing on our strategic priorities and maintaining a strong balance sheet. With that operator, we can open the call up to questions.

Operator

Thank you. We will now take questions from the telephone The first question is from

Speaker 3

Hamir Patel.

Speaker 4

Please go ahead.

Speaker 3

Hi, good afternoon. Steve and Stephen, I'm just thinking through the outlook you've given, it's been a couple of quarters now of negative EBITDA. Based on what you're seeing in April, do

Speaker 5

you think

Speaker 3

you're set up to get back to positive EBITDA from Q2?

Speaker 2

Hi, Amir. It's Steve here. I think as we indicated, the markets have been a little bit firmer in our outlook and highlighted some progress, I think, on order files type of things. So we don't give guidance specifically around EBITDA. But I think, again, things are trending positively.

Speaker 3

Thanks, Steve. That's helpful. And we've seen one of your peers on the West Coast undergoing some restructuring. What do you think the potential impact could be for your end markets?

Speaker 1

Well, we've known Dick and Tom a long time and we have a high degree of respect for their entrepreneurial spirit and how they run their business. Obviously, the news is unfortunate and we hope the best for all those impacted. From our standpoint, we really believe that having a robust primary sawmilling industry is important to the long term success of the BC coast. We do have some product overlap in Western Red Cedar and we do buy and sell logs with T. L.

Speaker 1

Jones. Currently, we don't have any material financial exposure to their process. But, yes, we're certainly aware of their situation and hoping for the best as they go through their process. And once they're back up and running, we'll reengage and be a strong business partner with them as we have in the past.

Operator

The next question is from

Speaker 4

Sean Steuart. Please go ahead. Hi, guys. Good afternoon.

Speaker 1

With Alberni Pacific curtailed now, I think the wording is still exploring options for the property, which I guess selling a property could be one of those options. Can you give us a bit more insight on your thinking there and thoughts on valuation parameters if that is the approach you're taking? Yes, Sean, thanks for the question. Clearly, we've been very focused at trying to find a partner that either could take the facility and do something with it as an ongoing manufacturing facility or someone who might be a bit more creative on a higher better use outcome for that property. Unfortunately, we have not been able to conclude a transaction up to this point, but we are actively engaged in a couple of new opportunities for that property and we expect to be able to have some positive news to share here in the next quarter.

Speaker 1

Okay. Thanks for that. A couple of questions on the Killam projects. I'm just trying to wrap my head around how you guys think about incremental EBITDA and returns from Saltair and the projects you're going to move ahead with. Can you give us a sense of the price uplift you get on the dried products, how that factors in your return calculations,

Speaker 5

a bit more

Speaker 1

granularity on that topic?

Speaker 5

Yes, Sean, it's Glenn. Just on specifically on the Saltair kiln, that's probably where the majority of the outlook comes is that incremental margin you can realize on a KD product versus a green product. There are some cost savings of drying internally versus externally, but the larger margin comes from that uplift in the product values.

Speaker 1

And remind you, Glenn, on how you think about returns or payback periods for those investments?

Speaker 5

Yes. So we have a threshold of 20% return on capital for any strategic investments. I mean, I can speak on that, Kiln, at a cost net basis around $12,000,000 Our target EBITDA return related to that kiln would be $9,000,000 in incremental EBITDA annually. So very, very, very high return on capital employed.

Speaker 1

Okay. Thanks very much guys. That's all I have for now.

Speaker 4

Thanks, John.

Operator

The next question is from Matthew Kelleher. Please go ahead.

Speaker 6

Hi, good afternoon. Thanks for taking my questions. Maybe first, just wanted to drill a little bit on the reductions in your CapEx budget this year, which I think was a $15,000,000 reduction. I think you called up maybe a couple of million specifics to the CDK spending. But is there anything else you can tell us about what's been removed from the budget?

Speaker 5

No, Matt, it's Glenn. It's a mix of everything across the board, some other maintenance, other strategic projects. I think we thought it was just prudent, just given the Q1 penciled out and our outlook as much as it's positive for the rest of the year, we thought it was a prudent move just to reduce or defer some of that spending.

Speaker 6

Thanks. That's helpful. Then maybe one of just a couple of different end markets. I think your commentary on China was that things could weaken there as you progress through 24 inches is a little bit weaker than I think you were talking about previously. Can you expand on that at all?

Speaker 6

And then I think Coppers and Stella Jones talked about a bit of a slowdown in utility poles. I was wondering if you've seen any impact to your utility cost savings business?

Speaker 7

Yes. Hi, it's Bruce here. Maybe I'll speak to China and then leave the cross arm utility poll question for Stephen. Yes, we've seen actually through the Q1 an increase in demand and price in China, but we're starting to see some weakness in pricing there. The Russians have recently reduced their pricing and really the inventory built through the quarter, but in April here we've actually seen those come off a little bit, but the fundamental driver there is in residential housing and they're seeing a 10% decline year over year.

Speaker 7

So we're expecting some weakness, particularly as we head into the summer period, which is their seasonal seasonally more weaker market period.

Speaker 1

And maybe I'll just share a couple of comments around the pool and the Peeler question. Certainly within our Timberland group, our ability to manufacture cedar and Doug fir poles is a real key competitive advantage. We have a couple of TFLs that have a number of high quality stands where we're able to extrapolate a fairly high volume of of poles from those areas. And then we've had a long time focus on both Doug fir and Hem fir peeler grade logs as well. With respect to the pull side of it, we have a couple of different customers and we continue to ensure that we have the right diversification, right volume being allocated out to that customer base and would really view this as a bit of a short term slowdown, mostly around some capacity issues and having the poles treated both in Canada and in the U.

Speaker 1

S. But if you look at the overall long term trends around electrification, demand on infrastructure, we see this as a long term high value opportunity for us to be focused on. So a little bit of a slowdown for Stella, but we don't see it as being something that's going to be a step change down beyond kind of a short timeframe.

Speaker 6

Thanks. That's helpful. Appreciate the color. And then last one for me. We've seen a couple of transactions related to claims to software remedy refunds lately.

Speaker 6

Is that an option that you would consider at the right price?

Speaker 5

Hey, Matt, it's Glenn. More generally, we look and consider all opportunities to monetize non core assets, which we believe will be value accretive to our shareholders. This has included our softwood lumber duties. I'd say it's based on some preliminary discussions we've had around the softwood lumber duties. The implied cost of financing and monetizing a portion of them is well beyond the financing rates which are available to us.

Speaker 5

Depending on the expectation around when duties might be returned and people's expectation around timeline of that, based on our math, the implied cost of financing is pushing somewhere around 20%.

Speaker 6

Great. Appreciate the color. That's all for me. I'll turn it back. Thanks.

Speaker 2

Great. Thank you.

Operator

The next question is from

Speaker 4

Ed Isaacson at Scotiabank.

Operator

Please go ahead.

Speaker 4

Hi, thank you very much. Actually most of my questions have been answered, only a couple left. The first one is on Japan. Can you just give a quick update in terms of how you see that market evolving over the balance of the year, similar to what you just talked about on China?

Speaker 7

Yes, Bruce here again. Yes, inventories really in Japan at the moment ports are relatively stable and are actually at reasonable levels. Supply has been limited into that market out of Europe due to a number of challenges there including transportation and so on. So our volumes and actually pricing into Japan has been quite stable. The one downside really is the yen exchange rate, which is obviously impacting the affordability of North American lumber to Japanese end user.

Speaker 7

And that could have an impact on prices as we head into the 3rd quarter. But in general, we see that market as positive and stable through Q2, strong order file and into Q3.

Speaker 4

That's helpful. And then just last one for me is, I think you mentioned at the start of the call that book value is about $1.80 or $1.83 per share and the stock is $0.53 Can you just talk about what do you think that means from an investor perspective? Is the market do you think the market is pricing in or thinking about a write down or some kind of impairment? And kind of where do you stand on that? Is there anything that would be kind of next up that would need to be assessed?

Speaker 4

Thank you.

Speaker 5

Glenn, it's Glenn here. I think I'll make a couple of comments. There's no question that the book value relative to our share price, we view the shares as being very undervalued. I think that said, we need to demonstrate to the market we have gone 7 quarters of not having positive EBITDA. We need to demonstrate to the market a return to positive EBITDA to gain back the confidence of investors to really help close that gap.

Speaker 4

That makes sense.

Operator

There are no further questions registered at this time.

Speaker 6

I would now like to

Operator

turn the meeting over to Mr. Ofer.

Speaker 1

Okay. Thanks everyone for joining our call today. We appreciate your interest in our company and look forward to our next call in August. Have a great afternoon.

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Earnings Conference Call
Western Forest Products Q1 2024
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