Western Forest Products Inc

TSX:WEF

Earnings Call Transcript 2023-Q3

[Operator]

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 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&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 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 Hofer, President and CEO of Western Forest Products. Please go ahead.

[J. Hofer, executive]

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 Stephen Williams, our Executive Vice President and Chief Financial Officer; and Glen Nontell, our Vice President of Corporate Development.

We issued our 2023 third quarter results yesterday. I will provide you 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 continued to face challenging market conditions. While our results in the quarter reflect a continued challenging operating environment and cost structure in our BC operations, we are encouraged by the progress we have made in repositioning our business for the future. The partnership announced in TFL 39 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. 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. Installation 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 Saltair sawmill. Construction is continuing on the project with kiln 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 and a strong balance sheet. I will now turn it over to Steve to review our key financial results.

[Stephen Williams, executive]

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 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.

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 export tax recovery during the third quarter. As at the end of September, we had $220.9 million in duties on deposit relative to a current market capitalization of approximately $225 million.

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. 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 to 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 in fourth quarters, lumber consumption declines in North America as construction slows with the onset of winter. In 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 could 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 939,000 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.

[J. Hofer, executive]

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 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.

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

[Operator]

[Operator Instructions] First question is from Sean Steuart.

[Sean Steuart, analyst]

A couple of questions. 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 make sense?

[Stephen Williams, executive]

Sean, it's Steve here so I'll take that one. So 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 free cash flow from the business, which has not been the case for the last 5 quarters. So I would note that we continue to pay the dividend for the last 5 quarters despite 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 returning incremental capital to the shareholders, so to say our Board continues to review the company's dividend on a quarterly basis.

[Sean Steuart, analyst]

Okay. And with regards to the new LP at TFL 39, congrats on moving that forward. Just trying to assess how we should think about the valuation implications beyond 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? Any other metrics we can wrap our heads around there?

[Glen Nontell, executive]

Sure, Sean. It's Glen. Maybe I'll take that one. So obviously, you saw the valuation. The way we think about these tenures is they're great partnerships with the First Nations. And from a valuation perspective, in 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. Can't speak specifically to EBITDA multiples around them, but I can say that they're probably done above where we would historically trade at.

[Sean Steuart, analyst]

Okay. One last one for me. The APD negotiations, any sense of the time line to complete the due diligence around proposals and determining the best proposal moving forward to advance that initiative?

[J. Hofer, executive]

Thanks, Sean. We certainly continue to work diligently to move the process 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 first quarter of 2024.

[Operator]

Next question is from Paul Quinn.

[Paul Quinn, analyst]

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 almost as much as it was when you guys were on strike. So just wondering what fundamentally has to change. Is it markets? Is there any flexibility that you've got that you can shut down some of your operations that are losing the most amount of money and run a little bit better than what we've seen?

[J. Hofer, executive]

Thanks, Paul. It's a complex answer. Fundamentally, there's 2 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 levels. So we fundamentally -- we're out focused on developing key targeted accounts to 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 in repositioning key product lines into key targeted accounts. We continue to be very diligent and very focused on the key levers of profitability inside of our sawmill facilities, including recovery, uptime, product realizations.

I was hoping at this point in time that we would have had the new kiln up and running at Saltair, 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 into Japan, kiln dried lamstock into Calvert, kiln dried machine stress-rated lumber into 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 expect to see those type of initiatives start to move the dial in 2024. So we're -- when I look back at 2023 here, the first 3 quarters, I'm pretty impressed with what we've accomplished on the timberlands side. That business continues to run quite 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 achieved on the timberlands side.

And repositioning the manufacturing assets. We've been very disciplined on matching demand to our production. And we are looking at all those options, 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.

[Paul Quinn, analyst]

Okay. I know it's a difficult issue and a hard one to come 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?

[J. Hofer, executive]

Yes. I was hoping you would be able to point us to a path forward. In all seriousness, we're now into election year in the U.S. I think I shared on the previous call, there's certainly no appetite either on the Republican side or on the Democrat side to have this as 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 is kind of trying to move this file kind of to the forefront of federal government foreign policy. 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'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.

[Paul Quinn, analyst]

Okay. And then in the past, one of the things that's, I guess, motivated the U.S. side to think about a solution is court cases, whether it's WTO or NAFTA. What are the state of those cases right now?

[J. Hofer, executive]

Well, there's -- without getting too technical, I think there's -- 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 some momentum there, but again, that's a -- key component is to actually have the panels properly resourced.

[Paul Quinn, analyst]

Okay. And 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?

[J. Hofer, executive]

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

The majority of that is -- well, 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 fir fiber available for the mills to capitalize on the opportunity. Weather-dependent. If we can have a reasonably mild November and December, I think we'll see some of our key markets start to take positions in late November, first part of December where we can probably increase some of our shipments on cedar and have that positioned for Jan, Feb into key markets. So I'm optimistic -- pleasantly optimistic about what we could deliver, but lots of work left to do.

[Paul Quinn, analyst]

All right. Congratulations on the partnership. Best of luck going forward.

[J. Hofer, executive]

Great. Thanks, Paul.

[Stephen Williams, executive]

Thanks, Paul.

[Operator]

[Operator Instructions] There are no further questions registered at this time. I'd like to pass it back over to Mr. Hofer.

[J. Hofer, executive]

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.

[Operator]

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