Western Forest Products Inc

TSX:WEF

Good afternoon, ladies and gentlemen. Welcome to Western Forest Products' Q1 2025 Results 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 that 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. Mr. Hofer, please go ahead.

Thank you, Patrick, and good afternoon, everyone. I'd like to welcome you to Western Forest Products' 2025 First Quarter Conference Call. 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. I will provide you with some introductory comments and then ask Glen to take you through our financial results. I will then follow Glen's review with our outlook section before we open the call to your questions.

We delivered significantly improved results in the first quarter of 2025 compared to the same period last year. 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. During the quarter, this included: ratifying a new 6-year collective agreement with the USW; completing significant noncore asset sales for gross proceeds of $76.5 million; and extending the maturity of our $250 million credit facility for 3 years to July 2028.

We were also successful on executing our strategic CapEx plans, which included: advancing site preparation for two continuous dry kilns at our value-added division. These kilns are planned to be completed and commissioned in early 2026. We also entered into an agreement with the BC government through the BC Manufacturing Jobs Fund to reimburse up to $7.5 million of eligible expenses related to our kiln investments.

From an operational perspective, we continue to focus on improving our efficiency and recovery to drive increased profitability. In our manufacturing group, this includes a continued focus on operational uptime and reliability. Despite some mechanical downtime at the Duke Point sawmill, we are very impressed with the slabber head capital project. We are now experiencing 90% operational uptime with improved lumber and grade recovery.

We continue to be very impressed with our first continuous kiln at our Saltair sawmill. It has been achieving above target uptime of 99%, and we look forward to the commissioning of the 2 new CDKs in early 2026. In our timberlands group, we continue to focus on improving our specialty log stratification and reducing our harvesting costs. However, harvest permitting delays in some tenures are leading to lean log inventories for certain BC sawmills. 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.

In our sales and marketing group, we continue to focus on growing key strategic customer accounts and diversifying our customer base. Supporting these initiatives was year-over-year wholesale lumber shipment growth of 28%. I am proud of the significant contributions across our entire organization. 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.

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

Thanks, Steven. First quarter adjusted EBITDA was $3.5 million as compared to negative $4.2 million in the same period last year. As compared to the prior year, results in the first quarter benefited from higher lumber shipments and prices, a stronger U.S. dollar exchange rates and improved log prices and sales mix. This was partially offset by increased softwood lumber duties, lower external log sales volume and a weaker lumber sales mix.

We closed the first quarter with approximately 66 million board feet of lumber inventory and 753,000 cubic meters of log inventory. We've been taking proactive steps to improve our inventory turnover with log and lumber turnover ratio is improving 6% and 12%, respectively, compared to the same period last year.

Turning to CapEx. Our 2025 total CapEx spending is expected to be between $60 million to $65 million which includes approximately $30 million related to two continuous kilns. We may reduce our 2025 planned CapEx spending, depending on how market and financial conditions evolve through 2025 with a near-term priority of maintaining a strong balance sheet.

From a balance sheet perspective, we ended the first quarter with a significantly delevered balance sheet compared to the end of the last quarter ending the quarter with a net debt-to-cap ratio of 4%. We were also successful in extending our $250 million credit facility for 3 years to 2028.

With respect to softwood lumber duties, preliminary rates for the sixth administrative review have been released. The preliminary combined rate applicable to Western of approximately 34% will be finalized in the second half of 2025. Should the final rates be unchanged from the preliminary rates, Western will record an incremental noncash duty expense of approximately USD 43 million plus accrued interest of approximately USD 7 million in the second half of 2025. These amounts will reduce the current long-term duty receivable of USD 58.2 million on our balance sheet.

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 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 spring season. We plan to continue to match production to market demand.

Steven, that concludes my remarks.

Thanks, Glen. Turning to our market outlook. 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.

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. Demand for our industrial lumber products in North America are expected to strengthen as supply remains tight across all species.

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. Overall, we currently have a second quarter order file of approximately 116 million board feet.

Touching on U.S. tariffs. In addition to existing softwood lumber duties currently in place, U.S. President Donald Trump has proposed various potential tariff and trade measures on countries and products. We are working with all levels of governments across Canada to advocate for programs and policies that will best enable the force sector to serve global markets and manage through these uncertain times. We continue to monitor the situation but cannot determine the impact on our business until there is greater clarity provided on any potential incremental U.S. tariffs.

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

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

[Operator Instructions] The first question is from Sean Steuart from TD Cowen.

A couple of questions. You touched on all the measures you've taken to augment the balance sheet and bolster liquidity. Steven, just wondering if I can get a little more perspective on the Section 232 investigation -- and your comfort with liquidity if incremental tariffs are applied, updated thoughts on your ability to pass that on to customers across your grade profile?

Thanks, Sean. I appreciate the question. I appreciate you joining our call this morning. So Section 232, the U.S. Trade Expansion Act allows the President to impose trade restrictions as part of national security decisions. And the Trump administration has launched a review of lumber imports under the Section 232, which is in process and expected to be completed later in the year. The Canadian industry and many of our U.S. customers of Canadian lumber have made submissions as part of that review process, making the case that Canadian lumber serves to alleviate a U.S. deficit in lumber capacity versus consumption. And certainly from our perspective, in no way represents a security risk to the United States.

And 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 into this position 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. And Bruce is on the call here today with us as well. And we're already socializing and have been socializing since January 6 in the event of new tariffs that we plan to pass as much as that onto the U.S. consumer as possible. And we're really mitigating this by tapping into the fact that Western has a long history of serving global markets. I think today, we sell into over 30 different countries. We do have a little bit of exposure overexposure in the U.S. on a couple of product lines, but 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.

Yes. We -- excuse me, we've taken a kind of close look at it. It really depends on which 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 U.S., depending on the product category 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 shopping 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 market.

But as Steven 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.

Just one follow-up, guys. Maybe for Glen can you speak to line of sight on additional discretionary CapEx projects beyond the two kiln projects. 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.

Well, we certainly have plans in place that align with our acceleration into additional value-added manufacturing and value-added product lines -- but all of that is going to be executed in the constraints of the balance sheet. So if we need to slow walk a couple of additional strategic priorities that we have outlined in 2026, we'll absolutely do that.

Clearly, the capital required to execute our timberland strategy is important. And so we'll probably have a fairly similar year in 2026 related to overall roads and bridges to support [ dawn ] in the timberlands group. So I would say that will probably be normalized, but we'll 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 maintain that liquidity as we face these uncertain times.

Thanks for that detail, Steven. That's all I have for now.

The next question is from Ben Isaacson from Scotiabank.

Just one question for me. You mentioned that you're a little bit overweight in the U.S. in terms of exposure. And you talked about how the North American markets are volatile. My question is, how nimble is the portfolio? Or how much has it been kind of designed for the regional mix that you have right now? Can you -- is there an appetite? Is it possible to exit the U.S.? Is that something you talk about? Could you switch more to a heavier weight in China, Japan and other offshore markets -- just trying to understand kind of how much flex there is if things don't go the way we want them to.

Well, Ben, that's an interesting question. Just to clarify, I don't think I said that we were overweighted into the U.S. 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.

Understood.

Yes. With respect to our ability to be nimble and quickly reposition, we're in the business of extracting margin. And I think all of us can appreciate that for certain product lines that are -- that we manufacture in finished product form that the United States is the most important market for some of those product lines. And there -- 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 have that market take on additional price. We think there are certain market segments that can do that.

And if we think back on the period during COVID, there certainly was -- the many, many product lines that took on significant price increases and we maintained market share, but a little different scenario today where we have to be mindful of the U.S. consumer and just how much incremental price they can -- they're prepared to pay for certain products.

Certainly, our Japan business is very strong, very well positioned, and we're very pleased with where the order file is for Q2 and where we see initial demand for Q3. Overall, our position in China is less than it has been historically over the last couple of years, but that's by design as well.

And then our focus on Europe will continue. We have a very strong customer base in Europe for a wide range of product line. And then our focus on Australia and New Zealand for certain product lines in the cedar category. That market continues to be very solid. So 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 that product line and again, focus on where the highest margin opportunities are.

So I'm pretty pleased with the effort that we've had in the last 6 months to work on mitigating the potential threat of additional tariffs and the incremental duties.

That makes a lot of sense. I appreciate it.

The next question is from Matthew McKellar from RBC Capital Markets.

Just one from me. Just looking at your log harvest volumes in the quarter, down pretty substantially. You talked about a cutting permit issue. Should we be thinking about, I mean, the sale of private timberlands or other recent changes to the portfolio is having an impact there? Or is this really truly mostly a cutting permit issue? And if so, is there any sense that things get better kind of into Q2 or as the year progresses? Or how should we think about harvest through the balance of '25?

Thanks, Matt. I might just add a comment into -- I guess, to begin with, one is that we're getting a bit more accustomed to having a little bit less inventory, both in log form and in lumber form. And you can see that in the numbers that were disclosed earlier. And it just speaks to our focus on working capital. So overall, 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 uncomfortable feeling when it comes to inventory because that tells me that we're continuing to get as lean as possible throughout the whole supply chain. So when I think of actual harvesting levels in Q1 they were very much in line with our business plan to support the requirements of the mills. And we're going to continue to be very disciplined on that. And -- so we don't see a need to have 1 million cubic meters of logs in the system anymore. We've learned to live with less, and we're going to continue to be focused on being very lean and manage our working capital.

With respect to the private land, that was a relatively insignificant volume overall of our log harvesting and our log volume for the next number of years. And so it really doesn't have any impact on our harvesting and/or our log needs. I think it's less than 2% of our consumption. So -- any other questions related to that, Matt?

Just in terms of -- I mean, is this a pretty good run rate to think about for harvest levels through the balance of '25? Or should we be expecting changes from kind of that Q1 level?

Yes. I think it's pretty much in line with our business plan. We're -- 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. On 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 on where we're at and don't anticipate any material change as we look to the balance of the year.

There are no further questions registered. At this time, I would like to turn the meeting back over to Mr. Hofer.

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. Please disconnect your lines at this time, and we thank you for your participation.