Q1 2025 Western Forest Products Inc Earnings Call

Speaker Change: During this conference call, Western's representatives may make forward-looking statements within the meaning of applicable securities laws.

Speaker Change: These statements can be identified by words like anticipate, plan, estimate, will, and other references to future periods.

Speaker Change: Although these four-looking statements reflect management's reasonable beliefs, expectations and assumptions, they are subject to inherent uncertainties and actual results made

Speaker Change: 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 CIDAR and is supplemented by the company's quarterly MDNA.

Speaker Change: Ford-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 Ford-looking statements.

Accordingly, listeners should exercise caution in relying upon four-looking statements.

Speaker Change: I would not like to turn a meeting over to Mr. Stephen Hofer, President and CEO of Western Forest Products. Mr. Hofer, please go ahead.

Thank you, Patrick, and good afternoon, everyone.

Speaker Change: I'd like to welcome you to Western Forest Products 2025 First Quarter Conference Call.

Speaker Change: Joining me on the call today is Glen Nontell, our Chief Financial Officer and Bruce Alexander, our Senior Vice President of Sales, Marketing, and Manufacturing.

We issued our 2025 first-quarter results yesterday.

Speaker Change: I will provide you with some introductory comments and then ask Glen to take you through our financial results.

Speaker Change: I will then follow Glen's review of our Outlook section before we open the call to your questions.

Speaker Change: We delivered significantly improved results in the first quarter of 2025 compared to the same period last year.

Speaker Change: Supporting these improved results was success in executing on our strategic priorities, allowing us to significantly reduce our debt and position Western for future growth.

Speaker Change: During the quarter, this included, ratifying a new six-year collective agreement with the USW.

Speaker Change: Completing significant non-core asset sales for gross proceeds of $76.5 million.

Speaker Change: and extending the maturity of our $250 million credit facility for three years to July 20,

Speaker Change: We were also successful on executing our strategic CAP-X plans, which included advancing site preparation for two continuous dry kilns that are a value added division. These kilns are planned to be completed and commissioned in early 2026.

Speaker Change: We also entered into an agreement with the BC government through the BC manufacturing jobs fund to reimburse up to $7.5 million dollars of eligible expenses related to our Kill and Investments.

Speaker Change: From an operational perspective, we continue to focus on improving our efficiency and recovery to drive increased profitability.

Speaker Change: In our manufacturing group, this includes a continued focus on operational uptime and reliability.

Speaker Change: Despite some mechanical downtime at the Duke Point sawmill, we are very impressed with the Slumberhead Capital Project.

Speaker Change: We are now experiencing 90% operational uptime with improved lumber and grade recovery.

Speaker Change: We continue to be very impressed with our first continuous kill that are Salter or Somnell. It has been achieving above target uptime at 99% and we look forward to the commission of the two news TDKs in early 2026.

Speaker Change: In our Timberlands group, we continue to focus on improving our specialty log sort stratification and reducing our harvesting costs.

Speaker Change: However, harvest permitting delays in some 10 years are leading to lean logonmentaries for certain BC sawmills.

Speaker Change: We continue to work with all parties involved in the permitting process to ensure economic viable logs are available to support our value-added manufacturing facilities.

Speaker Change: In our sales and marketing group, we continue to focus on growing key strategic customer accounts and diversifying our customer base.

Speaker Change: Deporting needs initiatives was year-over-year wholesale membership rate growth of 28 percent.

Speaker Change: I am proud of the significant contributions across our entire organization.

Speaker Change: While the direction of U.S. trade policy remains uncertain, our significant efforts have provided for a strong balance sheet to navigate through near-term volatility and uncertainty.

Speaker Change: I will now turn it over to Glen to review our key financial results.

Glen Nontell: Thanks, Stephen. First quarter adjusted EBITDA was $3.5 million as compared to negative $4.2 million in the same period last year.

Glen Nontell: As compared to the prior year, the results in the first quarter benefited from higher lumber shipments and prices, a stronger US dollar exchange rate, and improved a lot of prices in SHELT-NICS.

Glen Nontell: This was partially offset by increased softwood number duties, lower external law-tailed volume and a weaker lumber sales mix.

Glen Nontell: We closed the first quarter with approximately 66 million boardfeet of lumber inventory and 753,000 cubic meters of logging inventory.

Glen Nontell: We've been taking proactive steps to improve our inventory turnover, with log-in lumber turnover ratio is improving 6% and 12% respectively compared to the same tier in last year.

Glen Nontell: Turning to CapEx, our 2025 total CapEx spending is expected to be between $60 to $65 million, which includes approximately $30 million related to two continuous killings.

Glen Nontell: We may reduce our 2025 plan-capic spending depending on how market and financial conditions evolve through 2025 with a near-term priority of maintaining a strong balance sheet.

Glen Nontell: From a balance sheet perspective, we ended the first quarter with a significantly de-levered balance sheet compared to the end of the last quarter, ending the quarter with a net debt-to-cap ratio of 4%.

Glen Nontell: We were also successful in extending our $250 million prep facility for three years to 2028.

Glen Nontell: With respect to software number duties, preliminary rates for the 6th Administrator

Glen Nontell: The preliminary combined rate apical to Western of approximately 34% will be finalized in the second half of 2025.

Glen Nontell: Should the final rates be unchanged from the preliminary rates, Western will record an incremental non-cash duty expense of approximately $43 million US dollars plus the crude interest of approximately $7 million US dollars in the second half of 2025.

Glen Nontell: These amounts will reduce the current long-term video receivable at $58.2 million US dollars on our balance sheet.

Glen Nontell: Turning to second quarter seasonality. Typically in second quarters, our harvest volumes increase as snow recedes and we expand our operations across the entire timber harvesting land base. As our harvest activity moves further up the hillside, our costs tenderize as deeper, more difficult terrain increases harvest and complexity.

Glen Nontell: From a market perspective, North American lumber consumption typically increases as we move into the spring season. We plan to continue to match production to market demand. Stephen, that concludes my remarks.

Thanks, Glen. Turning to our market outlook.

Glen Nontell: North American markets are expected to be volatile due to concerns around the potential economic impact of tariffs. This may result in a more muted spring building season.

Glen Nontell: In Japan, channel inventories have declined and lumber prices have improved. We anticipate our lumber shipment volumes to Japan will improve in the second quarter compared to the first quarter of this year.

Glen Nontell: Demand for our industrial-number products in North America are expected to strengthen as supply remains tight across all species.

Glen Nontell: In China, significant U.S. tariffs on Chinese exports has caused some concerns within the economy. However, China's ban on imported U.S. logs may lead to an increase in demand for Canadian lumber.

Glen Nontell: Overall, we currently have a second quarter order file of approximately 116 million board

Touching on U.S. tariffs.

Glen Nontell: In addition to existing softwood lumber duties currently in place, US President Donald Trump has proposed various potential tariffs and trade measures on countries and products.

Glen Nontell: We are working with all levels of governments across Canada to advocate for programs and policies that will best enable the forest sector to serve global markets and manage through these uncertain times.

Glen Nontell: We continue to monitor the situation, but cannot determine the impact on our business until there's greater clarity provided on any potential incremental US tariffs.

Glen Nontell: Looking ahead, we will remain focused on maintaining a strong balance sheet while also executing on our strategic priorities.

Glen Nontell: With that, Patrick, we can open the call up to questions.

Glen Nontell: Thank you. We'll now take questions from the telephone lines. If you have a question, please press star one. You may cancel your question at any time by pressing star two.

Glen Nontell: Please press star one at this time. If you have a question, there will be a brief pause while the participants register for their questions. Thank you for your patience.

Speaker Change: First question is from Sean Steuart, from TD Cowan. Please go ahead.

Sean Stewart: Thanks, good afternoon, guys. A couple of questions. You touched on all the measures you've taken to augment the balance sheet and both sort of liquidity.

Sean Stewart: And your comfort with liquidity if incremental tariffs are applied, updated thoughts on your ability to pass that on to customers across your great profile.

Thanks, John.

Sean Stewart: I appreciate the question. I appreciate you joining our call this morning. The Section 232, the U.S. Trade Expansion Act, allows the President to oppose trade restrictions as part of national security decisions.

Sean Stewart: And the Trump administration has launched a review of lumber imports under this section 232.

Sean Stewart: which is in process and expected to be completed later in the year.

Sean Stewart: And certainly from our perspective, in no way represents a security risk to the United States.

Sean Stewart: At this point, with everything that we know, we certainly feel that our balance sheet is in a very strong position. We've worked very hard for the past.

16 months to put ourselves in this position.

Glen Nontell: And we'll continue to be very much focused on managing the balance sheet as it sits today. And as Glen shared, if we need to scale back on some longer-term strategic capital, we will do that.

Glen Nontell: Bruce is on the call here today with us as well, and we're already socializing and have been socializing since January 6th.

Glen Nontell: in the event of new tariffs that we plan to pass as much as that onto the US consumer as possible.

Glen Nontell: And we're really mitigating this by, you know, tapping into the fact that, you know, Western has a long history of serving global markets. I think today we sell into over 30 different countries.

Glen Nontell: We do have a little bit of exposure over exposure in the U.S. on a couple of product lines, but...

Glen Nontell: We're really focused today on market diversification and some product diversification as well. Bruce, maybe you can just share a comment or two on your view of our ability to pass.

incremental tariffs on to the U.S. side. Yeah, excuse me, we've taken a...

Glen Nontell: The segment of our business that you're speaking about, and when we look inside the Cedar business, which is a large portion of what we're shipping into the US, depending on that...

Glen Nontell: Product Categories that we're talking about, we feel that we'll be able to pass on roughly from 25% of the incremental duties up to in some cases in the shop and veteran clear type products where supply is really constrained, we expect to get close to all of the incremental duties back.

So, it really depends on which which market but is-

Glen Nontell: As Stephen mentioned, we have some levers in terms of mitigating our risk, both from a product diversification and market diversification perspective as well as utilizing price where we can, depending on the segment product that we're talking about.

Thanks, Sean.

Thanks for that. Just one follow-up, guys.

Glen Nontell: Can you speak to line of sight on additional discretionary CAPEX projects beyond the two kiln projects?

Glen Nontell: Do you have anything sort of in the hopper for 2026 if markets work out maybe better than anticipated? Or should we consider this as sort of the bigger capex year and more of a normal spend into 26. .

Glen Nontell: Well, we certainly have plans in place that align with our acceleration into additional value added.

Manufacturing and Value Outer Product Lines.

Glen Nontell: But all of that is going to be executed in the constraints of the balance sheet.

Glen Nontell: We'll probably have a fairly similar year in 2026 related to overall roads and bridges.

to support Dawn and the Timberlands Group.

Glen Nontell: I would say that will probably be normalized but will be, again, very, very disciplined on any incremental strategic capital in light of all the great work that we've done to put ourselves in this position from a balance sheet perspective.

and maintaining that liquidity as we face these uncertain times.

Speaker Change: Thanks for that detail, Stephen. That's all I have for now.

Thanks, Sean.

Thank you.

Speaker Change: The next question is from Ben Isaacson from Skillshare Bank. Please go ahead.

Ben Isaacson: Thank you very much for taking my question. Just one question from me.

Ben Isaacson: You mentioned that you're a little bit overweight in the U.S.

Ben Isaacson: In terms of exposure, and you talked about how the North American market for volatile.

My question is...

How nimble is the portfolio or how?

How much has it been designed?

Ben Isaacson: for the regional mix that you have right now. Can you? Is there an appetite? Is it possible to exit the US? Is that something you talk about? Is? [inaudible]

Ben Isaacson: A heavier weight in China, Japan, and other offshore markets. Just to understand kind of how much flexor is if things don't go the way we want them to. [inaudible]

Speaker Change: Well, Ben, that's an interesting question. Just to clarify, I don't think I—

Speaker Change: I said that we were overweighted into the U.S. and I think we have a couple of product categories that I would define as more of, it's certainly a key market and a key area of demand that we've serviced for many, many years.

Speaker Change: Yeah, with respect to, you know, our ability to be nimble and, you know, quickly repositioned.

Speaker Change: We were in the business of extracting margin and I think all of us can appreciate that for certain product lines that will be manufactured in finished product form that.

Speaker Change: You know, it's an important market because that's the market in the world that pays the highest price.

And so, when Bruce talked about our ability to...

Speaker Change: You know, have that market take on additional price. We think there are certain market segments that can do that, and if we take back on...

Speaker Change: On the period during COVID, there were many, many product lines that took on significant price increases and maintained market share.

You know, certainly our Japan businesses.

You know, a very strong, very well positioned.

Speaker Change: We're very pleased with where the order file is for Q2.

and where we see initial demand for Q3.

Speaker Change: Overall, our position in China is certainly less than it has been historically over the last couple of years. That's by design as well.

Speaker Change: And then our focus on Europe will continue. We have a very strong customer base in Europe for a wide range of product line.

Speaker Change: And then, you know, our focus on Australian Museum for certain.

Speaker Change: The product lines in the cedar category, you know, that market continues to be very solid, so...

Speaker Change: We are nimble. We're doing some work on the product development side around thermally modified wood. That will continue to give us additional flexibility on where we're able to sell.

Speaker Change: That product lined in, and again, focus on where the highest margin opportunities are. So I'm pretty pleased with...

Speaker Change: The effort that we've had in the last six months to work on mitigating, you know, the potential threat of additional tariffs and the incremental deuce.

Speaker Change: That makes a lot of sense. Thanks so much. I appreciate it.

Thanks Ben.

Thank you.

Speaker Change: The next question is from Matthew McKellar, from RBC Capital and Markets. Please go ahead.

Matthew Mckellar: Hi, thanks for taking my question, just one to me. Just to get your log out of his volumes in the corner, you know, down pretty substantially, talk about a kind of permanent issue.

Matthew Mckellar: Should we be thinking about, I mean, the sale of kinds of timberlooms, or other recent changes, the parts we're going to have to get them back there, is this really, really mostly a precutting, permanent issue. And if so, in any sense, the things get better, kind of as a Q2, as the possesses, and how should we think about that.

And on how this tune about the 25th, thanks.

Thanks, Matt.

Matthew Mckellar: I might just add a comment into, just to begin with, what is that...

Matthew Mckellar: You know, we're getting a bit more accustomed to having a little bit less inventory, both in.

Matthew Mckellar: in log form and in lumber form, and you can see that in the numbers that were disclosed earlier. And, you know, it just speaks to our focus on working capital. So, overall, um...

Matthew Mckellar: I don't think anyone ever – I certainly don't want any of our management team ever to feel comfortable when it comes to inventory levels. There should always be a little bit of –

Matthew Mckellar: of uncomfortable feeling when it comes to inventory, because that that tells me that we're we're continuing to get as lean as possible throughout the whole supply chain, so.

Matthew Mckellar: Well, I think of, you know, actual harvesting levels in Q1. They were very much in line with our business plan to support the

Requirements of the Mills.

Matthew Mckellar: And we're going to continue. We're very disciplined on that. And so we don't see a need to have...

You know, a million cubic meters of logs in the system anymore. We've learned to live with less and we're going to continue to be.

Matthew Mckellar: You know, focus on being very lean and manager working capital. With respect to the private land, that was a relatively insignificant volume.

Any other questions related to that? Yeah.

Matthew Mckellar: Just think there is, I mean, is this a pretty good one, right? You think about, for her, the levels, could the balance is 25, or should we be expecting changes from kind of IQ level?

Matthew Mckellar: Yeah, I think it's pretty much in line, you know, with our business plan, we're [inaudible]

Matthew Mckellar: We actually had a very good start to the year, the weather cooperated, and we were able to get into some old growth a little bit earlier than expected.

Matthew Mckellar: You know, in the log market overall, you can see that in some of the results that we were sharing. The log market is pretty good, so we're pleased that we're rad and don't anticipate.

Matthew Mckellar: Any material changes we look to the balance of the earth?

Great. Thank you very much. I'll turn it back.

Experts.

Speaker Change: Thank you, the honor for the questions registered. At this time, I would like to turn the meaning back over to Mr. Hofer.

Speaker Change: Well, 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 August . Thank you very much.

Thank you. The conference has now ended.

Speaker Change: Please disconnect your lines at this time and thank you for your participation.

This conference is no longer being recorded. This conference is no longer registered.