Western Forest Products Inc

TSX:WEF

Q3-2025 Earnings Call

[Operator]

Good morning, ladies and gentlemen. Welcome to Western Forest Products Third Quarter 2025 Results Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] 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 may be -- excuse me, 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 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.

[J. Hofer, executive]

Thank you, Gary, and good morning, everyone. I'd like to welcome you to Western Forest Products 2025 Third Quarter Conference Call. Joining me on the call today is Glen Nontell, our Chief Financial Officer.

We issued our 2025 3rd quarter results yesterday. I will provide you with some introductory comments and then ask Glen to take you through our financial results. I will follow Glen's review with our outlook section before we open the call to your questions. Despite challenging markets and increases in lumber duties, we continue to focus on our operational controllables and maintaining a strong balance sheet.

In the third quarter, this included reducing working capital and reducing our debt by $15.7 million compared to the second quarter. In our Timberlands group, we continue to focus on cost and inventory management with log inventory turnover improving 11% since 2023. However, ongoing permitting challenges in BC and a strike at our La-kwa sa muqw Limited Partnership continue to challenge harvest levels.

In our Manufacturing group, our mills achieved above target uptime levels of 87% in the third quarter, an 11% improvement in lumber inventory turnover year-over-year. We were also proactive in staging lumber inventory into the U.S. ahead of duty increases, leading to approximately $3.3 million in duty savings.

In our sales and marketing group, we continue to grow strategic customers and advance opportunities to grow our domestic and international customer base as we actively navigate the effect of tariffs and increased duties. In the first 9 months, U.S. lumber shipments accounted for 21% of total shipments from our Canadian operations, compared to 25% in the year ago period. We achieved ahead of target on-time shipping performance of 92% in the quarter.

We continue to advance progress on 2 continuous kilns at our value-added division with construction commencing and commissioning of the first kiln expected in early 2026. These investments will increase the production of value-added kiln-dried lumber products, lower our drying costs and help support the diversification of our global customer base. With significant increases in softwood lumber duties and softness in the North American lumber demand, we expect challenging market conditions to persist in the near term. However, through the successful repositioning of our balance sheet in 2025, we are prepared to navigate near-term uncertainty.

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

[Glen Nontell, executive]

Thanks, Steven. Third quarter adjusted EBITDA was negative $65.9 million as compared to negative $10.7 million in the same period last year. Our results for the quarter included a noncash export duty expense of $59.5 million related to the finalization of duty rates from the sixth administrative review.

As compared to the prior year, results in the third quarter were negatively impacted by softer macroeconomic conditions, U.S. trade tensions and an ongoing strike at our La-kwa sa muqw Limited Partnership. This resulted in lower lumber shipments, a weaker specialty lumber sales mix and reduced log harvesting and lower external log shipments. This was partially offset by higher average realized lumber prices in most markets and improvements in realized log prices due to a stronger sales mix. We closed the third quarter with approximately 53 million board feet of lumber inventory and 602,000 cubic meters of log inventory.

Turning to CapEx. We have reduced our planned 2025 capital expenditure spending to between $30 million to $35 million. We will continue to rigorously evaluate our planned CapEx spending and adjust proactively.

From a balance sheet perspective, we ended the third quarter with an improved balance sheet, reducing debt by $15.7 million compared to the second quarter and ending with a net debt to capitalization ratio of 2%. Our available liquidity also improved to $234 million, supported through working capital reductions and a new $30 million letter of credit facility.

With respect to softwood lumber duties and U.S. trade, the U.S. Department of Commerce announced its final determination for countervailing and antidumping duty rates related to the sixth administrative review. The combined effective rate increased to 35.16% and compared to the prior combined rate of 14.4%. In addition, on September 29, U.S. President, Donald Trump, imposed a 10% tariff on imported lumber products through Section 232 of the Trade Expansion Act. The incremental 10% tariff became effective on October 14. We continue to prioritize diversifying our shipments into other jurisdictions to minimize our U.S. exposure.

Turning to 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 decline 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 reduced operating hours can put upward pressure on harvest cost.

Steven, that concludes my remarks.

[J. Hofer, executive]

Thanks, Glen. Turning to our market outlook. North American markets are expected to remain weaker in the near term. U.S. channel inventory levels remain elevated and the incremental U.S. tariff of 10% has further complicated an already weak demand environment. However, with the anticipation of further Central Bank interest rate cuts and the 30-year mortgage rate approaching 3-year lows, this may support improved housing affordability and modestly stimulate U.S. housing demand in 2026.

Markets may start to improve towards the end of the fourth quarter of 2025 or into early 2026, as supply decreases and as distributors start to build inventories ahead of the spring building season. However, in the near term, distributors, pro dealers and home centers continue to buy on an as-needed basis. In Japan and China, housing demand continues to trend downwards, but market lumber inventories remain low, resulting in near-term stable pricing. Overall, we have a fourth quarter order file of approximately 87 million board feet and on track to meet our Q4 operating plans.

From an operational perspective, given seasonal market conditions combined with U.S. -- with high U.S. duties and tariffs, we plan to reduce lumber production by approximately 35 million board feet in the fourth quarter. We will continue to align our operating schedules to market demand and available log supply.

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

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

[Operator]

We'll now take questions from the telephone lines. [Operator Instructions] The first question is from Kasia Kopytek with TD Cowen.

[Kasia Trzaski Kopytek, analyst]

Kasia on the line. First question is around the strike of the La-kwa LP. Can you provide an update on that? And also your outlook for log availability, not necessarily on the back of the strike action, but also just more broadly across the platform?

[J. Hofer, executive]

Good morning, and thanks for the question. I'll share a couple of comments on the strike. So obviously, as everyone knows, that continues to play out. We completed a 6-year agreement with the USW, which was ratified in January of this year. And while Western encouraged contractors, including La-kwa sa muqw to do a me-too to our agreement, not all did. La-kwa sa muqw has a right under labor laws to negotiate their own agreement, and they decided to exercise that right. And while Western is a majority shareholder, the governance structure is constructed to ensure that the views of the other partners are not unilaterally overruled by Western.

So we can't comment on the specific issues in detail, but can say they are related to the unionization process when new First Nation-owned contractors are engaged. And so we're hoping for a resolution of this in the near future and look forward to having that business unit come back online.

And with respect to your question on overall log inventories, at this point in time, we ended the quarter -- end of Q2 at 602,000 cubic meters. They are -- our inventories are lower than they would be historically. We do continue to have some permitting delays on certain tenures and continue to work very closely with government and the respective First Nations to help alleviate those.

But overall, as we look at our operating plan in Q4 and into Q1, we do see adequate inventories to execute on our operating plan.

[Kasia Trzaski Kopytek, analyst]

I appreciate it. You touched on working capital reductions already. I just wanted to ask, is there any additional opportunities to reduce working capital further?

[Glen Nontell, executive]

Yes. Kasia, it's Glen. Maybe making a more broad comment. I think we've done a lot this year to reposition our balance sheet to navigate through the near-term uncertainty, including monetizing some significant noncore assets earlier this year. In the third quarter, we also closed an incremental USD 30 million letter of credit facility, which helped to further bolster our liquidity to approximately $234 million at the end of the quarter.

I'd say we've taken steps to manage and reduce our working capital, improving turnover metrics related to our working capital. I'd say we probably have come -- are approaching what we can achieve on further reducing working capital levels just given Steven's comments where we are around log inventory. So all that said, we continue to access other available liquidity alternatives to some of the government programs that have been announced federally as well as advancing other strategic priorities, including limited partnership opportunities that we've demonstrated success on previously in TFL 44 and 64 as potential sources of additional liquidity.

So overall, I'd say we remain focused on maintaining a strong balance sheet and adequate liquidity as we navigate through the uncertain environment here in the near term.

[Kasia Trzaski Kopytek, analyst]

Final question for you or Steven. Stepping back and looking at the competitive landscape for your decking product into the U.S., what is what is the profile of that right now, just given the higher value nature of your product versus your competitors?

[J. Hofer, executive]

Well, that's -- as you can expect, the knotty cedar decking profile has come under significant price pressure. So we've tried to push as much of the incremental tariffs through to the end user. While we have been able to see some modest gains, we have not been able to achieve the entire amount. And I guess the piece that I would say is that, no product line is immune from the current downturn in both the R&R market as well as in new home construction. And that includes cedar decking and all the substitutes that are on the shelf alongside cedar.

The good news is that there is an element of consumers who are very discerning and continue to want to have the highest quality decking available, and that is where cedar fits in. So we have seen some replenishment take place in the last 10 to 14 days as distributors start to reposition for the spring and that does provide some comfort that there is an opportunity for cedar to continue to have a place in the U.S. decking market. But we shouldn't kid ourselves that there are some -- there are ceilings on where a consumer is prepared to pay for decking, whether it be cedar or any alternative.

So our teams are working very aggressively alongside all of our key distributors in the U.S. We have a group in the U.S. this week actively discussing strategic partnerships for next year and what that demand curve looks like. But yes, you're correct on saying that there is some price pressures on cedar.

[Operator]

This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Hofer for any closing remarks.

[J. Hofer, executive]

Well, thanks, everyone, for joining our call today. We certainly appreciate your continued interest in our company and look forward to our next call in February. Have a great day.

[Operator]

The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.