Western Forest Products' (WFSTF) CEO Don Demens on Q4 2015 Results - Earnings Call Transcript

| About: Western Forest (WFSTF)

Western Forest Products Incorporated (OTCPK:WFSTF) Q4 2015 Earnings Conference Call February 18, 2016 12:00 PM ET

Executives

Don Demens - President and CEO

Steve Williams - SVP, CFO and Corporate Secretary

Analysts

Sean Steuart - TD Securities

Paul Quinn - RBC Capital Markets

Operator

Good morning, ladies and gentlemen. Welcome to the Western Forest Products Q4 Financial Results Conference Call. During this conference call, Western's representatives will be making certain statements about potential future developments. These forward-looking statements are intended to provide reasonable guidance to investors, but the accuracy of these statements depend on a number of assumptions and are subject to various risks and uncertainties.

Actual outcomes will depend on a number of factors that could affect the ability of the Company to execute its business plans, including those matters described under risks and uncertainties in the Company's annual MD&A, which can be accessed on SEDAR and are supplemented by the Company's quarterly MD&A. Accordingly, listeners should exercise caution in relying upon forward-looking statements.

I would now like to turn the meeting over to Mr. Don Demens, President and CEO. Please go ahead, Mr. Demens.

Don Demens

Well thank you, Valerie, and good morning, everyone. I'd like to welcome you to our fourth quarter conference call. Joining me on the call today is Steve Williams, our Senior Vice President and Chief Financial Officer. We issued our fourth 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 share our outlook for the next few quarters and provide a review of our capital projects. Then we can open up for you to ask any questions.

So I normally begin our fourth quarter calls by discussing seasonality that can have a significant impact on our results. Typical fourth quarters are characterized by reduced demand and lower prices for lumber products and higher cost due to more challenging weather conditions and limited day light hours which impact and restrict our logging. From an operating point of view this past fourth quarter was no exception as weather did have an impact on our production.

On the market side, we did not experience the usual decline in demand particularly in our Specialty business where shipments to Japan increased 19% year-over-year and demand for our cedar products remained strong. Where we continue to see weaknesses in our commodity business, but however as others have commented by the end of the quarter we did begin to experience improved demand and pricing. So despite the weak commodity markets I am pleased to report that we achieved fourth quarter adjusted EBITDA of 29.6 million which is double the adjusted EBITDA we reported in the fourth quarter of 2014. Our unique ability to adjust production and focus on specialty lumber production allowed us to capitalize on demand driven market segments and deliver our improved results.

Some additional highlights from our fourth quarter, include; in safety we achieved a record low quarterly company medical incident rate of 0.78; we increased lumber production by 16% year-over-year as we began to realize the benefits of recently completed strategic capital projects; we grew revenue by 14% as compared to the same period last year, as we rolled in on an improved sales mix and increased lumber shipments; and finally, we were successful in forming a limited partnership with the Namgis First Nation that has resulted in early 2016 harvesting in an area of TFL 37 that was previously unavailable due to treaty negotiations.

In reviewing 2015, we delivered record revenue exceeding $1 billion in sales despite very challenging commodity log and lumber markets. We achieved 8% growth in adjusted EBITDA on the strength of our improved sales mix. We advanced our relationships with First Nations through joint interest in sustainably harvesting timber. We accelerated the implementation of our strategic capital plan, while maintaining year-over-year lumber production volume. And finally, we continued our balanced approach to capital allocation by returning $31.6 million to our shareholders through our quarterly dividend program, while reducing our net debt by $24 million over the course of the year.

So with that let me turn it over to Steve to review our numbers.

Steve Williams

Thanks Don. And let me start by discussing our Q4 EBITDA results. As previously mentioned, adjusted EBITDA for the quarter was 29.6 million, 100% increase over the same period last year and consistent with adjusted EBITDA for the first three quarters of 2015. The increase in adjusted EBITDA was the result of growth in specialty lumber shipments and an increase in export log sales realization, both of which were supported by a weaker Canadian dollar.

Lumber revenue increased 17% reflecting the benefits of an improved sales mix, the weaker Canadian dollar and a 5% increase in quarter-on-quarter volumes. Log revenue increased 5% primarily due to improved price realizations on export and domestic logs. Byproduct revenue improved 21% as compared to the fourth quarter of 2014 as increased lumber production and third-party purchases drove increased shipments.

From a profit and loss perspective, fourth quarter net income was 9.9 million or $0.02 per diluted share on the strength of our operating results partly offset by a deferred income tax expense of 7.9 million. This compares to 12.9 million or $0.03 per diluted share and a deferred income tax recovery of 3.2 million in the same period last year. Annual diluted earnings were $0.18 per share in 2015 as compared to $0.17 per share in 2014.

Now moving on to cash flow for the fourth quarter, cash provided by operating activities grew to 31.9 million compared to 14.5 million in the fourth quarter 2014. This increase was largely due to improved profitability. Our capital expenditures totaled 19.2 million in the quarter made up of discretionary maintenance capital of 5.9 million discretionary investments in roads of 3.3 million and strategic capital spending of 10 million.

Our fourth quarter strategic capital investments included the conversions of Ladysmith Sawmill to a single line, the installation of a new timber deck at our Chemanius Sawmill and continued modernization projects at our Duke Point Sawmill in Planer. Also during the fourth quarter we distributed dividend to shareholders of $0.02 per common share totaling 7.9 million. With improved cash flow from operations and a strong balance sheet we are well positioned to execute on our strategy.

For the year, we generated 99 million of cash from operations compared to 87 million in 2014 driven by improved EBITDA. Capital expenditures increased to 62 million compared to 50 million in 2014. Year-to-date we have returned a total of 31.6 million in dividends to shareholders and at December 31, 2015, we had total liquidity of 178 million compared to 134 million at the end of 2014. Increased liquidity was driven by surplus cash generated from operations and the sale of the former Squamish pulp mill site in February.

Don, that concludes my comments.

Don Demens

Great, thanks Steve. So let me start off our outlook section by touching on first quarter seasonality, in typical first quarters our harvest is impacted by winter weather which can restrict our access to higher elevations. Unlike last year when we experienced basically no winter on the Coast of BC this year has been more typical. Also I’d like to make you aware of the production challenges we have experienced in our TFL 44, where our harvesting has been impacted by a contracted rate dispute. Due to the dispute we anticipate Q1 company harvest volumes to be impacted by between 5% and 10%. We’re working to resolve the issue and we focused on recovering the harvest volumes in subsequent quarters. And in the meantime, we anticipate mitigating any impact by increasing our log purchases.

Looking to our markets, our mid to long-term global market outlook remains positive. The gradual recovery in the United States New Home Construction segment is continuing. In a longer term we believe the increased demand from the U.S. recoveries and continued demand from China will combine with the reduction in supply from the BC interior to deliver a stronger pricing environment. In the short-term until U.S. housing returns to more normal levels, we anticipate commodity markets will remain volatile.

When we look at our cedar and niche businesses in the near-term we expect the continued strength in the North American repair and renovation segment to support both demand and pricing. I would note our niche production will be moderately impacted in the first quarter by three weeks of downtime at our Duke Point Sawmill for a capital project. In Japan, we expect recent improvements in housing starts will continue to support lumber demand through the first quarter. It’s our view pricing will remain competitive. And in China, we anticipate improving demand in the first quarter supported by lowered entry levels and what appears to be an improving housing market. We also anticipate pricing to improve.

Let me turn to our log markets. Sawlog markets are expected to remain firm in the first half of Q16. Tight inventories due to reduced harvest levels on the BC Coast in 2015 will support domestic pricing, while the weaker Canadian dollar will support export price realizations in the competitive Asian log markets. Further, we expect log shipments to be lower in the first quarter as we continue to internalize more fiber into our mills. The pulp log market is expected to remain depressed as reduced consumption levels from Coastal BC pulp mills will keep the market oversupplied.

Now let me update you on our capital plan. We continue to implement our planned strategic capital program. Our goal is to position Western as the only company in the Coast of BC capable of consuming the complete profile of a coastal forest and competitively manufacturing a diverse product mix. Our capital plan will further support our abilities to sustainably harvest our tenures, which is a key to long-term profitability. We’ve announced approximately $97 million of approved capital projects as part of our original $125 million program and those projects are now in various stages of implementation or have been completed.

In fact in the first weeks of January we had four projects in production ramp-up including Saltair, Chemanius timber deck, Ladysmith single line conversion and the Duke Point plant. We continue to work on additional plans that will position Western as a top cortile producer in our targeted product lines. We will take three weeks of down time in the first quarter at the Duke Point Sawmill as we continue the $16 million Phase 3 capital project at the mill. During this shutdown we will install a new stacking and packaging line, as well as optimization incremental on both head rates.

In our Timberlands will begin a newly approved $3 million capital project that will deliver an improved forest inventory and ground mapping of our forest tenures. We will be using proven technology called LIDAR which is three dimensional laser scanning from a helicopter that creates a more robust and detailed forest inventory. Once collected and implemented the database will allow us to streamline our engineering and planning processes ultimately reducing delivered log cost.

As I reflect on our fourth quarter results, I believe there are good indications of what we are hoping to deliver in 2016, including increased lumber production as we realize the benefits from our recent capital investments and we anticipate improved results as we capture the benefits from our optimization initiatives. We expect to accomplish this while we continue our balanced approach to capital allocation, returning a meaningful dividend to our shareholders, managing our debt and continuing to invest in our business.

So with that operator you can open it up to any questions.

Question-and-Answer Session

Operator

Thank you, sir. We will now take questions from the telephone line. [Operator Instructions] Our first question is from Sean Steuart with TD Securities. Please go ahead.

Sean Steuart

A couple of questions, Don you went through the various projects under the strategic capital program that you have planned for 2016. Maybe I missed it in the MD&A but have you put all that together in terms of an overall 2016 CapEx budget at this point?

Don Demens

We actually expressly provided the information but I think I can help you with the numbers as we’ve indicated in the past from a maintenance and discretionary maintenance perspective, we continue to invest $35 million to $40 million a year and on the strategic capital programs we anticipate with the announced projects we have underway another $20 million to $25 million of strategic currently. And as I said we continue to work on additional plans that are going to position us as the top cortile producer in the targeted product lines.

Sean Steuart

So could that mean an extra $15 million to $20 million on top of that as you figure some other discretionary projects through the year?

Don Demens

Yes I think that’s a fair number Sean and I believe that that is -- but we continue to work on these projects and we do have as we’ve said a number in the Q that we’ve been working on with compelling returns. And given our recent performance we feel comfortable although more than that but I think that’s a good number to go with right now.

Sean Steuart

And then given the balance sheet flexibility and liquidity position you have, wondering if you could speak to M&A ambitions for the Company and maybe speak to the opportunity set that exists on the Coast and then is there any ambition to potentially expand off the Coast over the long run?

Don Demens

Okay, so that’s a pretty large question, but let me start by providing a little background and I’ll try to get to your answers here. We’ve been diligent in working at what we call fixing the foundation of our business implementing capital to upgrade our facilities, because the returns there are been so compelling. We feel we’re moving through that and growing our base, which will include increased production which you’ve seen in Q4 and that would be our strategy going forward. And now we’re beginning to look elsewhere to grow the business and I think we’ll see where those opportunities present themselves. Again, we’re pretty focused on our business strategy which is the margin focused strategy and so any businesses that we want to add on to our current base program will likely be in that segment. But certainly as we move through 2016 we’re going to be looking at ways we can enhance shareholder returns.

Sean Steuart

And any context you can give on opportunities on the Coast versus other regions that you might be interested in?

Don Demens

I am not really willing to talk about individual specific opportunities Sean, I think a couple of things we’re doing that is going to provide us if there are opportunities in the Coast to execute on them better than others that would be our ability to consume the entire profile of the Coastal for us being the only Company with the manufacturing capability to do so. And we are working extremely hard on our relationships with First Nations and we are really pleased with the progress we have made announcing another limited partnership and ensuring that we work with First Nation so that they benefit from sustainably harvest timber harvesting on the Coast of BC.

Operator

Thank you. Our next question is from Paul Quinn with RBC Capital Markets. Please go ahead.

Paul Quinn

A couple of question one is Don you referred to this, you want to have manufacturing capability to harvest a complete Coastal profile, where are the gaps right now with Western’s manufacturing platform?

Don Demens

Good morning Paul and good question there I think I’d refer to you to Slide 7 of our investor presentation which kind of outlines our strategy which is the segment’s quick uniformity out of our diverse Coastal for us by segmenting diameters and right now we don’t have any gaps on certainly in our mills. I think the biggest challenge we just have to go through the process of increasing our production in our facilities and that’s what the capital that we’re putting into the facilities is intended to do. So in each one of the segments we’ve got a mill that can consume that part of the profile.

Paul Quinn

So in terms of I guess your consumption of your -- you want to increasingly internalize your harvest profile. But are you also reducing your third-party manufacturing component?

Don Demens

And so great question and you’re very familiar with our business, so you recognize that a significant portion of the 100 million shady years is manufactured at third-party facilities and as we continue to invest in our mills driving down our unit costs, we will internalize those programs that make sense. And I would anticipate that over 2016 you will see a little less volume than externally more volume than internally.

Paul Quinn

Then over to Sean’s question on the M&A what parts of your business do you think are exceptional especially for the long-term? And what parts would you want to minimize?

Don Demens

So exceptional parts I think a specialty lumber component of our business is obviously a strong suit. We believe that we have and are developing competitive advantage in understanding how to sustainably harvest in difficult terrain. And so we’re pleased with the progress we’ve made and we believe the investments in LIDAR are going to be enhance our ability there. And I think that again our view the good thing about our platform is that when markets improve and as commodity improves we have the opportunity to expand commodity business and expand commodity production by the purchase of logs. And so I don’t see a big weakness in our business we’re just be able to move back and forth between segments as the opportunity presents itself. And I think it's demonstrated by the EBITDA returns that we presented this year in what was a really difficult commodity business.

Paul Quinn

And then you mentioned that LIDAR product my understanding is you’re operating the majority of your operations around on the Crown assets DotForce inventory was their responsibility. So I am just trying to understand the returns on our project, is that back stumpage is that where you get the return?

Don Demens

The way we’ve calculated the return which we anticipate to be over 30% is in reducing our road construction planning and actually engineering costs. So the technology will provide a much more detailed view of the actual ground so it will allow you to identify where the best roads or narrow down where the road should go. And also it will reduce the amount of planning time necessary because the detail that provides on the tree by tree basis will allow us to do less field work. So I think it's a proven technology the costs have come down dramatically over the last couple of years. The resolution has gone up dramatically and we believe it's the right time to invest in the technology.

Paul Quinn

Okay, last question just capital allocation you’ve got this strong dividend in place, you’ve repaid debt. I look at your balance sheet and perhaps a pretty robust. So just wondering if we’ll see sort of more focus on share buybacks going forward?

Don Demens

So good question and we don’t mind being considered boring, we continue to say the same thing and deliver I think on what we’ve said which is we’ll continue to proceed with a balanced approach to capital allocation. We will and I kind of referred to this back to Sean’s question, if the opportunity presents itself when we believe we have more capital projects that are going to return better than an alternative like a share buyback that’s where we put our surplus if you would like to call it capital. We’ll continue to look for the best place to put capital and do that so.

Operator

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

Don Demens

Thank you, operator. And to close, I’d just like to thank all of you for your attention and support at Western over 2015. We continue to be encouraged by our most recent results and look forward to sharing our first quarter results with you in May. Have a great day. Thank you.

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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