Western Forest Products Inc

TSX:WEF

Earnings Call Transcript 2022-Q3

[Operator]

Good morning, ladies and gentlemen. Welcome to the Western Forest Products Third Quarter 2022 Results Conference Call. During this conference call, Western's representatives may 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 or 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 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 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 will now I'd like to turn the meeting over to Mr. Steven Hofer, President and CEO of Western Forest Products. Please go ahead, sir.

[J. Hofer, executive]

Thank you, Valerie, and good morning, everyone. I'd like to welcome you to Western Forest Products' 2022 Third Quarter Conference Call. Joining me on the call today is Stephen Williams, Executive Vice President and Chief Financial Officer; and Glen Nontell, Vice President of Corporate Development. We issued our 2022 third quarter results yesterday. I will provide you with some introductory comments and then ask Steve to take you through a summary of our financial results. I will follow Steve's review with our outlook section before we open the call to your questions.

I'm excited and honored to have this opportunity to build on the strong foundation established in the many years of leadership at Western. This includes Western's commitment to finding a sustainable and profitable path forward that benefits employees, our communities, First Nations, shareholders and other partners. I've spent the first 60 days listening and engaging with our employees throughout our company as well as customers, First Nations and other stakeholders and partners. It is clear to me that Western has a solid foundation with many strengths, including its focus on safety and is diverse and talented force.

Looking ahead, we remain very focused on growing long-term shareholder value and allocating capital to the highest return opportunity. We will continue to focus on profit margin across our business, all the while driving to provide the best-in-class service to our customers. I will now turn it over to Steve to review our key financial results.

[Stephen Williams, executive]

Thanks, Steven. We reported third quarter adjusted EBITDA of $17.3 million as compared to $66.3 million in the same quarter last year. Adjusted EBIT in the third quarter of 2022 included $23.1 million of inventory provisions, due to weaker lumber markets and $18 million of export tax recovery related to the finalization of the most recent softwood lumber administrative review. Compared to the same period last year, results in the third quarter of 2022 were also impacted by lower lumber demand, lower prices and a weaker mix. Higher costs, including an incremental $27.3 million in stumpage, freight and export tax expenses and sawmill operating curtailments as we balanced production to market conditions.

Offsetting these impacts was an increase in external log shipments and revenue. During the quarter, the Department of Commerce finalized its most recent administrative review, resulting in a decrease in the softwood lumber export tax rate to 8.59%. Looking at third quarter cash flow and capital management, we completed the acquisition of Calvert during the third quarter of 2022. The acquisition will help position Western to capitalize on the growing North American mass timber building market. We also continued with our balanced approach to capital allocation returning $14.1 million to shareholders via dividends and share repurchases. We continue to make progress on our $29 million of previously announced strategic capital projects.

These investments will support and grow Western's value-added wood products business and will be completed over the rest of 2022 and in 2023. For 2022, excluding the acquisition of Calvert, we anticipate total capital expenditures between $45 million and $55 million. Our balance sheet remains well positioned heading into the fourth quarter. We ended the quarter with $269 million in available liquidity, which will continue to support our balanced approach to capital allocation.

Turning to fourth quarter seasonality. Typically, in fourth quarters, 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 986,000 cubic meters of log inventory. We will continue to match production to market demand. Steven, that concludes my comments.

[J. Hofer, executive]

Thanks, Steve. Our results in the quarter reflect challenging global market conditions reduced lumber sales volumes and continued pressure on log costs and logistics. In the near term, with central banks continuing to increase interest rates and tightened financial conditions around the world, we expect lumber markets to remain volatile until a rebalancing of supply and demand occurs. The current headwinds emphasize the need for improved operational execution on costs, recovery and product values, including moving at pace on our strategy to move up the product value chain. To that end, I am pleased with our progress in the quarter in advancing strategic, value-focused capital projects and completing the acquisition of Calvert Company, adding glulam to our portfolio of specialty products.

Longer term, we continue to believe that wood products have an important role to play in a low-carbon world. We expect long-term housing market fundamentals and growth in mass timber construction will continue to drive demand for lumber. With that, Valerie, we can open up the call to questions.

[Operator]

[Operator Instructions]. Our first question is from Sean Steuart.

[Sean Steuart, analyst]

Steven, a question for you. You're a couple of months into the seat in the job. And I'm wondering the pace and direction of Western's strategic shift. The history has been a gradual approach to transition for some time. Do you have any thoughts on your approach to strategic shift for this company and how long you intend to take to implement it?

[J. Hofer, executive]

Well, thank you. Clearly, for me, the first 60 days has really just been around onboarding and immersion. So I've spent the last 60 -- primarily visiting all the different business units, both in the United States and here in British Columbia, engaging with a wide range of both internal and external stakeholders. So certainly no immediate changes to our strategy. Our strategic priorities remain the same, whether it is advancing First Nation partnerships, exploring accretive growth opportunities or moving our products up the value chain to earn incremental margin. As I shared, certainly here in the near term, our focus internally here are all around costs and margin and continuing our balanced approach to capital allocation.

[Sean Steuart, analyst]

Okay. And a question on the Calvert deal and glulam as an entry way into mass timber. What about that product versus some of the others that have exposure to mass timber? Are you guys excited about and potential to build on that as jumping off point in mass timber?

[Glen Nontell, executive]

Yes, Sean. It's Glen here. Maybe I'll provide some interesting comments on Calvert and let others jump in. We're excited about our acquisition at Western, an opportunity to grow our exception offering, moving up the value chain as well as providing some potential vertical integration opportunities with our sawmills. To your point, we definitely see as an opportunity to capitalize on mass timber building in North America, which we believe is going to grow substantially over the next 5 to 10 years. It's also a sustainable product, which sort of meets our product criteria.

We view Calvert -- obviously it's a small acquisition, but we view it as a stepping stone into mass timber and potential other mass timber products longer term. Also provide some geographical diversification for us. I think in the near term here, our focus is on growing volumes at Calvert. Last year we did -- over the last few years, we it said between 13 million and 15 million board feet. It would be nice to go back to 20 million over the next 12 to 18 months. And then from there, I think we remain interested in opportunities throughout the mass timber value chain, what products that may be or where about. We're looking into all those, but we remain open to any opportunity that's going to create shareholder value over the long term.

[Operator]

Our next question is from Paul Quinn.

[Paul Quinn, analyst]

Let's start with -- Steven, you've been around for a while at different operations and equipment suppliers. I think you characterize Western strengths well, where are they weak? And what are the big opportunities you see for Western over the next 5 to 10 years?

[J. Hofer, executive]

That's a great question, Paul. I've been fortunate to spend the last number of years with the BID Group, and I think everyone on this call knows what BID has done in the U.S. Southeast in terms of building top of top quartile, manufacturing complexes for a wide range of customers. Certainly, when we -- when I look at the -- in the Western manufacturing footprint, there is a need for some additional capital to help on a number of fronts, both on driving lower cash conversion costs, achieving higher levels of operational uptime, getting technology current with respect to automation and optimization inside the facility. So we have some work to do.

But I can tell you what's really stood out to me in the first 60 days is really the strength of our people. So capital is one side of the equation, people is the other side of the equation. And I'm very confident that we have a very strong, committed, passionate group of leaders in our company, both on timberlands and in the operations side that are able to execute at a very high level with the capital that we plan to deploy.

[Paul Quinn, analyst]

Okay. And then in your press release, you mentioned that HVLP is not following through with the additional TFL 44 purchase and the -- and they're investing in APD. What's going on there? Why the change?

[Glen Nontell, executive]

Yes. Paul, maybe I'll take that one. It's Glen. When we structured the original transaction, it was always an option for the First Nations to purchase an incremental ownership interest in both the tenure and then potentially APD. The First Nation [indiscernible] to comment, but feedback we got from them was changing circumstances since the original transaction. What I'd say is that doesn't necessarily change our focus or us whining to do more of these partnerships. I think that's a key strategic priority for us. And while the time period for the option has expired on that particular limited partnership, we continue to have discussions with interested first area -- First Nations -- or First Nations in the tenure on acquiring incremental ownership in that Tsawak-qin Forestry Limited partnership.

[Operator]

Our next question is from Hamir Patel.

[Hamir Patel, analyst]

Steven, could you speak to what you're hearing from some pure key R&R partners in terms of expected cedar demand in '23?

[Glen Nontell, executive]

Hamir, I'll kick it off and we'll see if Steve or Stephen will chime in. I mean if I talk more about cedar more broadly, I think it's typically a seasonally slower time of the year for cedar. It's sort of been a tale of 2 markets, where white, timbers and [indiscernible] have been fairly steady, where the narrow [indiscernible] trim have been a bit weaker. I don't think we are expecting any changes to that until we enter the first quarter of next year as customers look to put orders ahead of the spring building season.

From a channel perspective, speaking more broadly, I think most customers are operating on lower inventory levels. I think most of them are looking to manage their risk given the potential talk of a recession in 2023 that may impact demand. So I think what we're seeing on the cedar side is customers sort of ordering only what's needed in the near term. And as channel inventories are fairly low until they see potentially a shift in demand.

[Hamir Patel, analyst]

Great. That's helpful. And just lastly, what should we expect for CapEx in Q4? And any sense yet on '23?

[Glen Nontell, executive]

Yes, Hamir, I'll take that one, too. So I think for the full year, our CapEx is between $45 million to $55 million plus the acquisition of Calvert. The range is there because there might be some slight delays in terms of the timing of specific CapEx. But that range is probably a reasonable range for full year. And then 2023, still working through our plans for next year, maybe just talking about the strategic capital products we have underway.

So we had it previously announced this year about $29 million in strategic capital projects around growing our value-added manufacturing position on the coast. To date, we spent around $7 million of that. So that's in the back half of this year and into 2023, there's about $22 million of strategic capital to come as well.

[Operator]

Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to Mr. Hofer.

[J. Hofer, executive]

Thanks, Valerie. Well, thanks, everyone, for joining our call today. We certainly appreciate your interest in our company, and we look forward to our next call in February. Have a great day, everyone.

[Operator]

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