Western Forest Products Q3 2024 Earnings Report

Western Forest Products EPS Results

• Actual EPS: -C$1.80
• Consensus EPS: -C$0.90
• Beat/Miss: Missed by -C$0.90
• One Year Ago EPS: N/A

Western Forest Products Revenue Results

• Actual Revenue: $241.70 million
• Expected Revenue: $242.00 million
• Beat/Miss: Missed by -$300.00 thousand
• YoY Revenue Growth: N/A

Western Forest Products Announcement Details

• Quarter: Q3 2024
• Date: 11/6/2024
• Time: N/A
• Conference Call Date: Thursday, November 7, 2024
• Conference Call Time: 12:00PM ET

Western Forest Products (TSE:WEF) Inc is a Canada-based softwood forest products company. The company's principal business activities include timber harvesting, reforestation, forest management, sawmilling logs into lumber and wood chips, and value-added lumber remanufacturing. Its operating business segment comprised of Timber harvesting, Log sales, and Lumber manufacturing and sales. The firm purchases and harvests logs which are then manufactured into lumber products at its sawmills, or sold. Canada and the United States, represent the company's largest markets and contribute the vast majority of its total revenue.

Western Forest Products Q3 2024 Earnings Call Transcript

Key Takeaways

• Q3 adjusted EBITDA loss narrowed to –$10.7M from –$11.6M a year ago, aided by higher log and lumber shipments despite weaker sales mix and rising stumpage costs.
• Combined softwood lumber duties rose from roughly 8% to 14.4% following the U.S. Commerce Department’s 5th administrative review, remaining in place until H2 2025.
• Balance sheet remains robust with $137M in liquidity, a net debt-to-capital ratio of 13%, and $240M of duties on deposit (≈$0.55/share).
• Anticipating typical winter seasonality, the company will curtail ~30M board feet of lumber production in Q4 to align manufacturing with softer demand and weather constraints.
• Operational uptime climbed to 84.6% in Q3—up from mid-70s levels two years ago—with a new target of 88% despite aging mill infrastructure.

Presentation

[Operator]

Thank you all for waiting. Mr. CEO, you may go ahead.

[Steven Hofer, CEO at Western Forest Products]

Go ahead, Glen.

[Glen Nontell, CFO at Western Forest Products]

Thanks, Steven. Third quarter Adjusted EBITDA was $-10.7 million as compared to $-11.6 million in the same period last year. Results in the third quarter included $1 million in export tax recovery as compared to $4.3 million in the same period last year. Results in the third quarter benefited from higher log and lumber shipments, which were partially offset by a weaker log and lumber sales mix, higher stumpage expense, and increased softwood lumber duty rates. During the third quarter, the U.S. Department of Commerce released its final determination for countervailing and anti-dumping rates resulting from its fifth administrative review. As a result of this review, combined softwood lumber duty rates were increased from approximately 8% to 14.4%. This new rate will remain in effect until the finalization of the sixth administrative review, which is anticipated in the second half of 2025.

[Glen Nontell, CFO at Western Forest Products]

We closed the third quarter with approximately 71 million board feet of lumber inventory and 793,000 cubic meters of log inventory.

[Glen Nontell, CFO at Western Forest Products]

Turning to CapEx and cash flow, our 2024 total CapEx spending is expected to be approximately CAD 35 million. From a balance sheet perspective, we ended the third quarter with liquidity of approximately CAD 137 million and a net debt-to-cap ratio of 13%. As at the end of September, we had approximately CAD 240 million in duties on deposit, which equates to approximately CAD 0.55 per share after tax. 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 costs.

[Glen Nontell, CFO at Western Forest Products]

That said, we remain comfortable with our log inventories as we enter the fourth quarter. As previously announced, we expect to take approximately 30 million board feet of lumber production curtailments in the fourth quarter. We will continue to manage our manufacturing operating schedules to match production to market demand and log supply. Steven, that concludes my remarks.

[Steven Hofer, CEO at Western Forest Products]

Thanks, Glen. I apologize for the interruption there. We lost connectivity. Turning to our market outlook, cedar demand and prices for timber and products are expected to remain stable as buyers begin to build inventories for the spring season, while demand for decking products has started to seasonally slow. Repair and renovation spending is expected to improve gradually in 2025, but to remain below peak levels experienced over the last few years. In Japan, continued weakness in wooden home starts, well-stocked inventories, and a weaker Japan yen to U.S. dollar exchange rates are anticipated to impact lumber demand and prices in Japan into the first half of 2025. For industrial lumber products, current improved demand and pricing is expected to continue through the first quarter of 2025. For commodity lumber, North American demand and prices are expected to remain flat with some fluctuations depending on product line.

[Steven Hofer, CEO at Western Forest Products]

In China, despite the weaker housing market, lumber prices have slightly improved on lower channel inventory levels, and we expect some modest pricing increases through the end of the year. Overall, we currently have a fourth quarter order file of approximately 120 million board feet. Turning to the recent BC election. In October, we had a BC provincial election, which yielded a very close result. The BC NDP returned to power, but with a very slim majority. We were encouraged to see strong forestry commitments in the BC NDP's election campaign, as well as that of the BC Conservatives. We will be working hard to ensure that forestry is top of mind for both the incoming government and the official opposition. We will engage with all elected representatives to enact policies and programs that return BC's forest sector to an internationally respected economic powerhouse.

[Steven Hofer, CEO at Western Forest Products]

Looking ahead, we remain focused on executing our strategic priorities and maintaining a strong balance sheet. With that, Operator, we can open the call up to questions.

[Operator]

Thank you. We will 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. Please press star one at this time if you have a question. There will be a brief pause while the participants register for questions. Thank you for your patience. The first question is from Matthew McKellar from RBC Capital Markets. Please go ahead.

[Matthew McKellar, VP at RBC Capital Markets]

Thanks. Good morning. First, for me, in your manufacturing operations, you talked about wanting to drive stronger reliability and uptime at your mills. Could you help us understand how your metrics have trended here on the capacity you've been running, and then understand what you view as the most important levers for further improvement, please?

[Steven Hofer, CEO at Western Forest Products]

Thanks, Matt. We measure overall reliability and uptime on an hourly shift-by-shift, day-by-day, and report out on it as an executive team on a weekly basis. In Q3, we were rated around 84.6% uptime across all of our facilities, slightly about 0.3% down from where we were the previous quarter, functionality of a couple of significant events at our Saltair facility. But overall, our reliability and uptime has increased significantly in the last two years. When I first joined, I think we had a number of mills in the mid-70s. So a really significant gain in overall reliability as a result of some change in management structure and just overall focus. I'll say that to move the dial now to 88 is our next target for all of our facilities, but we are dealing with older facilities that have a bit of older technology and nearing end of life.

[Steven Hofer, CEO at Western Forest Products]

So our focus now is to really focus on those events that are catastrophic in nature and ensure that we're positioning those mills for success every day. In terms of levers in our business, each mill is a bit unique based on the log profile, small diameter timber, medium size, and large diameter. So a facility like Ladysmith, it's a small log facility there. So uptime, productivity per hour is very important. At a place like Duke Point, where larger diameter timber focused on grade extraction, product value, and recovery are the main levers there. So each mill is a little bit unique, Matt, in terms of the key levers of profitability, but our team understands what those levers are on a mill-by-mill basis and are very much focused on them.

[Matthew McKellar, VP at RBC Capital Markets]

Great. Thank you for the color there. Next from me, I think you provided some commentary around this topic a couple of quarters ago, but with recent developments in the marketplace, can you just provide any updated thoughts around opportunities that may exist to monetize a portion of your duties on deposits and how you would evaluate those?

[Steven Hofer, CEO at Western Forest Products]

Yeah, I'll let Glen provide some comment on that, Matt.

[Glen Nontell, CFO at Western Forest Products]

Yeah. I mean, the duties is something we continue to remain open to monetizing or looking at alternatives for that. Obviously, there's an interesting transaction that occurred with a peer during the quarter. I think all I can say is that it's something we continue to evaluate. The proposals we've seen are in discussion with us. The cost of capital remains much higher than other alternatives we have available to us, but it's something that we continue to monitor and remain active evaluating.

[Matthew McKellar, VP at RBC Capital Markets]

Great. Thanks very much. And if I could just speak one more and just touching on your comments around the BC election, you mentioned wanting to engage with representatives to enact positive policy for the sector. What would be your kind of short list of most important kind of recommendations on that front?

[Steven Hofer, CEO at Western Forest Products]

Certainly, we have that list well defined and have reached out to both parties to ensure that our interests are well represented as government restarts. Our interests on the BC coast are a little bit different than on perhaps in the BC interior. But it's really around this clarity and certainty of access to fiber. We're fortunate that we've spent a lot of time developing strong relations across all the First Nations on whose traditional territory we operate on, but we still have delays on the permitting side that are impacting our ability to become a bit more efficient in our timberland operations. So removing some of the, I guess, some of the roadblocks that are in place for permitting is a key piece, and policy can dramatically change that. So I would say that the permitting side is front and center.

[Steven Hofer, CEO at Western Forest Products]

The BCTS system, we fundamentally believe it needs to be dramatically changed and reworked to make it efficient both on the coast and on the province. And so it's really ensuring that there's an alignment inside of government and the civil service to recognize the importance of this industry and roll up their sleeves and work with every organization, whether they're on the BC coast or in the BC interior, because we're at a bit of a crisis here, and there's another duty that is coming at us in October of next year, and time is limited for action to take place.

[Matthew McKellar, VP at RBC Capital Markets]

Thanks for the perspective. I'll turn it back.

[Glen Nontell, CFO at Western Forest Products]

Thank you, Matt.

[Operator]

Thank you. Once again, please press star one if you have any questions. There will be a brief pause while participants register. Thank you. There are no further questions registered at this time. I would now like to turn the meeting over to Mr. CEO.

[Steven Hofer, CEO at Western Forest Products]

Thanks everyone for joining our call today. We appreciate your interest in our company and look forward to our next call in February and enjoy the long weekend. Thank you.

[Operator]

Thank you. The conference has now ended. Please disconnect your lines at this time. Thank you for your participation.

Participants

Executives

• Steven Hofer, CEO
• Glen Nontell, CFO

Analysts

• Matthew McKellar, VP at RBC Capital Markets