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Operator
All participants, please continue to stand by. The conference will begin momentarily. Once again, please continue to stand by. We thank you for your patience. This conference is being recorded. All participants, thank you for standing by.
Steve
The conference is ready to begin. Good morning, ladies and gentlemen. Welcome to Western Forest Products' first quarter 2022 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 MDNA, which can be accessed on CDAR and is supplemented by the company's quarterly MDNA. 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. Don Demings, President and CEO of Western Forest Products. Mr. Demings, please go ahead.
Demings
Thank you, Patrick, and good morning, everyone. I'd like to welcome you to Western Forest Products 2022 first quarter conference call. Joining me in the call today is Stephen Williams, our Executive Vice President, Chief Financial Officer, and Glenn Dontell, our Vice President, Corporate Development. We issued our 2022 first quarter results yesterday. I'll provide you with some introductory comments and then ask Steve to take you through a summary of our financial results. I'll then follow Steve's review with our outlook section before we open the call to your questions. Before we begin, I'd like to recognize our team at Western for their continued dedication to health and safety. Their efforts delivered another quarter with no COVID workplace transmissions or downtime. This results a testament to our strong safety culture and commitment of our people. Financially, I'm pleased to report that our results were a first quarter record for the company. We capitalized on strong markets to overcome ongoing logistics challenges that impacted shipment volumes to generate record first quarter adjusted EBITDA of $65 million. Operationally, we successfully began to rebuild log inventories that were depleted due to difficult harvesting weather in the second half of 2021. We achieved this through a combination of accelerated log harvest and increased open market purchases. Of note, we purchased almost 50% more logs in the first quarter of 2022 as compared to the same period last year. Our continuous drawing results have allowed us to reposition our balance sheet despite our increased investment in logs. We ended the first quarter with $75 million of cash in our balance sheet, and we also have approximately $128 million in duty deposits with the U.S. Treasury. Combined, these provide a significant flexibility to continue with our balanced approach to capital allocation. In support of returning capital to shareholders, we completed our 10% NCIB in January. Through the NCIB, we returned a total of $61 million to shareholders. And we just announced a 25% increase to our quarterly dividend. In addition to our strong financial results, I'm pleased with the progress we have made in advancing relationships with Indigenous nations. In the last quarter, we continued to advance our milestone agreements focused on joint and collaborative planning of forestry activities with Indigenous nations in whose traditional territories we operate. We believe our demonstrated leadership in advancing reconciliation with Indigenous nations is consistent with what the BC government is hoping to accomplish through its policy modernization. I'll now turn it over to Steve to review our key financial results.
Steve
Thanks, Don. My comments will focus primarily on our financial results for the first quarter of 2022 with comparisons to the first quarter of last year. We reported first quarter adjusted EBITDA of $65.4 million as compared to $62.9 million in the same quarter last year. Results in the first quarter of 2022 benefited from higher lumber and log prices and a higher specialty lumber sales mix. Results were offset by lower lumber shipments due to logistics challenges, lower log shipments, higher export tax and stumpage expense, and higher per unit timberland harvesting costs due to accelerated road building and a mix of operations. Lumber revenue increased 13% compared to the first quarter of 2021. Higher lumber prices were partially offset by lower shipment volumes due to logistic-related disruptions. Our first quarter average realized lumber price was $1,688 per thousand board feet, an increase of 24% compared to the same period last year. Log revenue was generally flat compared to the same period last year, with higher log prices being offset by lower shipment volumes. All export grade logs were redirected to our sawmills to support lumber production. Byproduct revenue was generally flat compared to the same period last year, Increased chip price realizations were offset by lower chip shipments. Freight expense increased 14% compared to the same quarter last year. Lower lumber shipments and no export log shipments were more than offset by increased freight rates, higher fuel costs, and greater usage of brake bulk vessel shipments. First quarter results included $11.5 million of export duty expense as compared to $8.2 million in the same quarter last year. At the end of the quarter, we had approximately $128 million of duties on deposit. Lumber production was 12% lower compared to the same quarter last year due to operating curtailments related to log supply and differences in the net nominal production count due to product mix. Log production was 9% higher, and we increased saw log purchases by almost 50% compared to the same quarter last year. We were successful in partially rebuilding our log inventory and ended the quarter with approximately 764,000 cubic meters of logs. From a profit and loss perspective, first quarter net income was $38 million as compared to $53.8 million in the same quarter last year. Looking at first quarter cash flow and capital management, cash provided by operating activities before changes in non-cash working capital was $8.1 million as compared to $66.3 million in the same quarter last year. The first quarter of 2022 included income tax payments of $58.4 million related to 2021 income taxes and a 2022 income tax installment. Cash use and investing activities was $6.3 million in the first quarter as compared to cash provided by investing activities of $33.4 million in the same quarter last year. The first quarter of 2021 included proceeds of $37.7 million on asset dispositions. We returned $10.6 million to shareholders during the quarter via dividends and share repurchases, and we completed our 10% NCIB in January. We ended the quarter with $75 million in net cash and $316 million in available liquidity.
Demings
Don, that concludes my comments. Great. Thanks, Steve. So let me start off our outlook section by touching on second quarter seasonality. Typically in the second quarter, our harvest volumes increase as snow recedes and we expand operations across the entire timber harvesting land base. As our harvest activity moves further up the hillsides, our costs tend to rise as steeper, more difficult terrain increases harvesting complexity. From a market perspective, North American lumber consumption typically increases as we move into the more active spring season. As we look to our markets, in North America, we expect to experience continued strong demand from all segments. We believe strong demand for lumber products combined with constrained supply will deliver above-trend pricing over the near term. We note that any supply-demand imbalances are likely to lead to increased pricing volatility in the months ahead. We expect pricing to remain strong for our Cedar, Japan, and niche specialty product segments. That said, logistics constraints remain a challenge, with inadequate rail and truck capacity in western North America limiting market access. On the export side, We've recently experienced some improvements in container availability, but conditions remain uncertain, and the current COVID challenges in China could cause disruptions in the months ahead. We'll continue to leverage our flexible operating platform to match production to market demand and logistics capacity. With respect to logs, we expect the solid log markets to remain strong due to a combination of reduced supply and strong demand. while pulp log prices are likely to remain relatively flat. We'll look to further build our log inventories in the second quarter. However, as we do so, supply imbalances may lead to downtime at certain sawmills. Turning to industry developments, we remain optimistic about the long-term growth opportunities for wood as a sustainable building material. In North America, mass timber building presents an opportunity for increased wood use as a sustainable building product. For context, Woodworks estimates that there are currently over 1,300 mass timber projects built under construction or in the design phase in the United States. And third-party research estimates mass timber building has the potential to add over 4 billion board feet of lumber demand in North America by 2035. We believe many of our existing products are well-suited for use in the mass timber segment and should benefit from future sector growth. Over the last several years, we have been exploring how we can best participate in this growth opportunity. Our work is included completing various tests and trials for our hemlock products in both CLT and glulaminated beam end uses. We continue to explore additional strategic capital investment opportunities to support product lines, which are utilized in mass timber buildings. Overall, we believe mass timber building in North America will continue to gain momentum as the world looks to reduce its carbon footprint. And we will continue to advance how we can best capitalize on this growth. Turning to capital allocation, We remain committed to a balanced approach to capital allocation, maintaining the flexibility to support growth initiatives while returning cash to shareholders. Over the past decade, we've returned about a half a billion dollars to shareholders through dividends and share repurchases, while at the same time, we've invested another half a billion dollars into our business. As I noted in my opening remarks, we completed our 10% NCIB during the quarter, and we also announced a 25% increase to our quarterly dividend. At the same time, we continue to evaluate both internal and external strategic capital opportunities. Internally, we are focused on reducing our costs as we pivot commodity production from Asia to North America. And we are focused on investments that support product line growth. This quarter, we've approved two small quick payback capital projects. One will increase our kill and drive production by about 10% through the introduction of new kiln control systems, and the other is the installation of an MSR machine at our Duke Point planer. Both projects should be operational within a year and were included within our yearly strategic capital envelope. In addition to these projects, we are continuing to look at other internal investments which will increase our kiln capacity, reduce operating costs, increased recovery, or support our move up the product value chain. While we're focused on investing in our existing operations, we're also looking to grow through acquisitions. Acquisitions may include both capacity expansion and capital invested to support targeted product line growth. Overall, we expect to remain balanced and disciplined in our approach to capital allocation For 2022, we continue to estimate total capital expenditures are around $60 to $65 million. This includes approximately $15 million in strategic capital investments and $10 million in 2021 maintenance capex that was delayed due to supply chain issues. Turning to what's next, our top priority continues to be the health and safety of our employees, contractors, and communities. And in working collaboratively, with indigenous nations. Our long-term focus remains the same, to successfully and sustainably implement our strategic initiatives to strengthen our foundation, grow our base, grow our business, and deliver long-term shareholder value. So with that, operator, we can open up to call to questions.
Steve
Thank you. We'll now take questions from the telephone lines. If you have a question and you're using a speakerphone, please lift your handset before making your selection. If you have a question, please press star 1 on your device's keypad. You may cancel your question at any time by pressing star 2. Please press star 1 at this time if you have a question. There will be a brief pause while the participants register for questions. Thank you for your patience. We have a question from Sean Stewart from TD Securities. Please go ahead.
Sean Stewart
Thank you. Good afternoon, guys. Good afternoon, Sean. A couple of questions. Don, I appreciate your comments on transportation bottlenecks persisting. And it sounds like offshore, you mentioned that things were getting a little bit better. Any sense at this point on when You might expect to see things improve at a faster pace and an ability to move product a bit easier. At what point during the course of the year do you expect that should be more prominent?
Demings
Sure. Let me take a run at that. So we'll kind of differentiate between export and domestic. I think domestically we're seeing some real challenges with rail car capacity in the west. including out of our shipping hubs out of Vancouver and truck, actually. We had a unique opportunity last week to talk to a number of the rail companies as they were in town for the COFI convention. They did not provide a great outlook as to how quickly this situation here would improve. I think we're looking, Sean, kind of more towards the end of the year, where they might be able to get caught back up and provide more regular service to, I think, all of their forest products customers in the West. Export-wise, we've implemented the use of more break-bulk vessels, especially to get our products to Japan. I think you saw we had a big increase compared to last year, the same quarter, in our shipments to Japan. It's a little higher cost for sure, but I think that's how we're trying to deal with some of the challenges we've got coming out on the container side of export. So it's not been a very fun time here, and the logistics challenges, I think, are going to be with us at least through the next quarter.
Sean Stewart
Thanks for that detail, Don. And the second question I have, just digging in a little deeper on the capital allocation part of this. So you've finished the NCIB, you've raised the dividend. It sounds like near to midterm CapEx needs are manageable and M&A, I suppose, is a potential. But it's fair to say that the bias would be to look at another NCIB relatively soon and further buybacks would potentially be on the table.
Demings
Yeah, well, I think the kind of way we're looking at it, so maybe a backup. You're right. I mean, over the last 12 months, we've returned something like almost $120 million to shareholders via dividends and share repurchases. You're right. We increased the dividend backup or increased it by 25%. I think you want to think about that as we've returned it to at least the total dollar amount it was prior to us repurchasing shares. Yeah, I think as we look forward, we're going to maintain flexibility in our return of capital alternatives. We'll continue to discuss with our board, you know, could an NCIB be in the works, you know, for later or mid-quarter of the year? You know, absolutely, Sean. But we're going to continue to look at ways to, you know, support growth in our business, remain balanced in our capital allocation, and we'll look at it each quarter.
Sean Stewart
Okay, thanks, Don. I appreciate it. That's all I have for right now. I'll get back in the queue. Thanks, guys.
Steve
Thank you. Once again, you may press star 1 if you have a question. The next question is from Paul Quinn from RBC Capital Markets. Please go ahead.
Paul Quinn
Yeah, thanks very much. Just a question just on the lumber side. You shipped 186 in the quarter. Just wondering how much inventory was built on the lumber side and What's our expectation for Q2?
Demings
Sure. Good afternoon, Paul. So inventory build wasn't a whole bunch. It's kind of pretty flat from quarter to quarter, but I would like to tell you it's too high. So we are continuing to manage the inventory. It's all around logistics challenges, I think, as the previous question. We're going to continue to manage our production inventory. to our ability to obviously get orders, but I think we're able to do that. It's just to be able to move the lumber. We have, Paul, taken a couple weeks out at a couple of the small log mills this last quarter to try to get the inventory down. So we're trying to manage the situation on logistics. We'd like to see the inventory lower, kind of close around 100 million feet. I think we'd like to see it in the 70 million foot range. uh going forward and we're going to work towards that uh you know we did hit 185 186 million feet of shipments in in q1 that was up from q4 we'd expect to be there or better in q2 okay that's uh great just just on the markets it looks like uh
Paul Quinn
through Q1, Western red cedar prices have moved up. Japan looks pretty flat. Maybe you can just comment on what you're expecting going forward for those two markets.
Demings
Sure. And I think I'll throw the niche in there as well. So any of the specialty product lines, we're looking at both specialty and cedar, and then, of course, as well as Japan, staying strong and relatively strong historically. I'll try to break them down. Cedar, we've seen... Lots of tailwinds in the R&R sector over the last period of time. That's where a lot of the cedar ends up. We're expecting to continue to see good demand from that segment. I can tell you the weather, as you know, living out here in the West, it's been pretty tough. And so the R&R demand side of the business has been a little spotty, but we're expecting as the weather breaks for things to get better. So we're still holding on our view that pricing is going to stay firm. Volumes may be a little different, but pricing will stay firm. Japan, the only headwind there, tends to be the yen has weakened tremendously. However, I think supply is constrained as well with some recent developments, and we're looking forward to continued good demand out of Japan and strong pricing, and the niche market's been very, very good. So all in all, our specialty segments should be strong to firm pricing for the quarter coming up, and there may be a little bit of – of on the demand side only related to some weather. And I think that's just a delay. That's not a lost volume.
Paul Quinn
Okay. And then last year, you know, in QT, you had a record quarter, you know, prices are up since that point. What are the impediments of trying to get back to that $120 million in EBITDA levels?
Demings
Yeah, I think number one is going to be shipment volume, right? So that's going to be a challenge. Also, from the cost perspective, as prices have gone up through the year, especially in a number of our segments, and you're well aware of the differences between the coastal and interior stumpage system, we're going to see higher stumpage rates compared to last year for sure. And I think we're all facing in the industry cost pressures, whether it's on steel, freight, fuel. So I think those are the big impediments. Number one will be volume, and then number two will be stumpage, and then three would be just general cost inflation that is going to cause us some problems. All that said, Paul, I think, as you know, I haven't been in the business a long time. This is one of the best environments from a pricing and product demand and supply position. So we're hopeful that the market can absorb some of these additional costs.
Paul Quinn
All right. And then, uh, not to suggest you're not doing a great job, Don, but, uh, just wanted to update on the, uh, the CEO hunt.
Demings
Uh, sure. Thank you. Uh, so, you know, I think the board's taking, taking, uh, um, their, uh, their time to go through their process. The, uh, I have provided a long, uh, a long time, uh, timeline in, uh, And to reiterate, I'm not going anywhere in the foreseeable future. It is business as usual here at Western, and we are here to drive the best results we can safely and provide the best return to shareholders.
Paul Quinn
All right. That's all I had. Thanks, guys.
Steve
Thanks, Paul. Thank you. This concludes today's question and answer session. I would like to turn the meeting back over to Mr. Demenz.
Demings
Great. Thank you, Patrick, and thanks, everyone, for your continued support. We appreciate your interest in the company and your time on the call today. Steve Glenn and I are available if there's other follow-up questions. And if not, we certainly look forward to sharing with you our second quarter results in August. With that, have a great day. Thank you very much.
Steve
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.
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