Western Forest Products Inc. (OTCPK:WFSTF) Q3 2022 Earnings Conference Call November 4, 2022 12:00 PM ET
Company Participants
Steven Hofer – President and CEO
Stephen Williams – EVP and CFO
Glen Nontell – VP, Corporate Development
Conference Call Participants
Sean Steuart – TD Securities
Paul Quinn – RBC Capital Markets
Hamir Patel – CIBC World Markets
Operator
Good morning, ladies and gentlemen, and 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 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 sir.
Steven Hofer
Thank you, Valarie, 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 Glenn Nontell, our Vice President of Corporate Development.
We issued our 2022 third 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 will follow Steve’s review with our outlook section before we open the call to your questions.
I am excited and honored to have this opportunity to build on the strong foundation established through the many years of leadership at Western. This includes Westerns 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 its diverse and talented workforce.
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 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
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 EBITDA 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 balance production to market conditions. Offsetting these impacts with an increase in external logs shipments and revenue.
During the quarter, the Department of Commerce finalize 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 then 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.
During the 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 reduce operating hours can put upward pressure and 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.
Steven Hofer
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 tighten 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.
Question-and-Answer Session
Operator
Thank you. We will now take questions from the telephone lines. [Operator Instructions]
Our first question is from Sean Steuart. Please go ahead.
Sean Steuart
Thank you. Good morning. Steven, question for you. You’re a couple of months into the seat — in the job and I’m wondering if you can give some thoughts on 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 a strategic shift for this this company and how long you intend to take to implement it?
Steven Hofer
Well, thank you and great to have you on the call. Clearly, for me the first 60 days has really just been around onboarding and immersion. So, I’ve spent the last 60 days 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 creative 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 all around costs and margin and continuing our balanced approach to capital allocation.
Sean Steuart
Okay, thanks for that. And question on the Calvert deal and glulam is as — has been an entryway 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, on that as a jumping off point mass timber shot?
Glen Nontell
Sean, its Glen here, maybe I’ll provide some introductory comments on Calvert and let others jump in. We’re excited about our Calvert acquisition. At Western, an opportunity to grow our special 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 five to 10 years. It’s also a sustainable product, which sort of meets our product criteria.
Calvert, obviously, is a small acquisition, but we use 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 did — for the last few years, it’s done between 13 million and 15 million board feet. It’d be nice to go that 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 whereabouts, we’re looking into all those, but we remain open to any opportunity that’s going to create shareholder value over the long-term.
Sean Steuart
Okay, thanks for that Glen. Appreciate it. That’s all I have for now.
Steven Hofer
Thanks Sean.
Operator
Thank you. Our next question is from Paul Quinn. Go ahead.
Paul Quinn
Yes, thanks for much. Morning, guys.
Paul Quinn
Morning Paul.
Paul Quinn
Let’s start with — Steven you been around for a while and different operations and equipment, suppliers, you’ve characterized Western’s strengths well. Where are they weak and where the big opportunities you see for Western over the next five to 10 years?
Steven Hofer
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 cost 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
Okay. And then in your press release, you mentioned that HVLT is not following through with the additional TFL 44 purchase and the — in their investment in APD. What what’s going on there? Why the change?
Glen Nontell
Yes, Paul, maybe I’ll take that one, its 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 Nations Groups provide with three comment, but the feedback we got from them was changing circumstances since the original transaction. What I say that is that doesn’t necessarily change our focus or us winding 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 Nations or First Nations in the tenure on acquiring incremental ownership in that [Indiscernible] and Forestry Limited partnership.
Paul Quinn
All right. That’s all I had. Thank guys.
Steven Hofer
Thanks, Paul.
Operator
Thank you. [Operator Instructions]
Our next question is from Hamir Patel. Please go ahead.
Hamir Patel
Hi. Good morning. Steven, could you speak to what you hearing from some of your key R&R partners in terms of expected seater demand in 2023?
Glen Nontell
Hey Hamir I’ll kick it off and we’ll see if Steve or Steven will jump in. I mean if I talk more about seater more broadly, I think, it’s typically a seasonally slower time of the year for seater. It’s sort of been a tale of two markets, where a wide timbers and clears have been fairly steady, where the narrows decking and trim have been a bit weaker.
I don’t think we’re expecting any changes to that until we entered 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 risks given the potential talk of a recession that in 2023, that may impact demand.
So, I think what we’re seeing, on the seater side is customers sort of ordering only what’s needed in the near-term. And channel inventories are fairly low until they see potentially a shift in the demand.
Hamir Patel
Great, thanks. Thanks Glen. That’s helpful. And just lastly what should we expect for CapEx in Q4? Any sense yet on 2023?
Glen Nontell
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 this 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 projects 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.
Today, we spent around $7 million, that’s sort of in the back half of this year and into 2023 there’s about $22 million of strategic capital to come as well.
Hamir Patel
Okay. Thanks. Thanks Glen. That’s all I had.
Glen Nontell
Great. Thanks Hamir.
Operator
Thank you. There are no further questions registered. At this time, I would like to turn the meeting back over to Mr. Hofer.
Steven Hofer
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.
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