Western Forest Products Q1 2024 Earnings Report

Western Forest Products EPS Results

• Actual EPS: -C$0.60
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

Western Forest Products Revenue Results

• Actual Revenue: $239.50 million
• Expected Revenue: $231.00 million
• Beat/Miss: Beat by +$8.50 million
• YoY Revenue Growth: N/A

Western Forest Products Announcement Details

• Quarter: Q1 2024
• Date: 5/7/2024
• Time: N/A
• Conference Call Date: Wednesday, May 8, 2024
• Conference Call Time: 3:00PM 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 Q1 2024 Earnings Call Transcript

Key Takeaways

• Western reported Q1 adjusted EBITDA of negative $4.2 million, an improvement from negative $5 million last year but still below break-even due to lower lumber prices and shipments.
• The company completed the sale of a 34% interest in its Mid Island Forest operation to four local First Nations for $35.9 million and released the first public draft of the TFL 37 forest landscape plan in collaboration with the Nunggeese First Nation.
• Western commissioned its first continuous dry kiln at the Saltair Sawmill, achieving 97% efficiency in the first month and exceeding target EBITDA returns, with two more kilns on Vancouver Island planned for completion in 2025 at a total cost of ~$35 million.
• The company reduced its 2024 CapEx plan by approximately $15 million to $50 million, with some kiln-related spending potentially deferred into 2025 to preserve liquidity.
• Western closed Q1 with $142 million in liquidity, a net debt-to-capital ratio of 13%, and anticipates a $23 million income tax refund in Q2/Q3.

Presentation

[Operator]

Good morning, ladies and gentlemen. Welcome to the Western Forest Products first quarter 2024 results conference 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 the 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 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 speaks only of the date of which they are made.

[Operator]

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.

[Steven Hofer, President and CEO at Western Forest Products]

Thank you, Carl, and good afternoon, everyone. I'd like to welcome you to Western Forest Products' 2024 first quarter conference call. Joining me on the call today is Stephen Williams, our Executive Vice President and Chief Financial Officer, Bruce Alexander, our Senior Vice President of Sales, Marketing, and Manufacturing, and Glen Nontell, our Vice President of Corporate Development. We issued our 2024 first quarter results yesterday. I will provide you with some introductory comments and then ask Steve to take you through our financial results. I will follow Steve's review with our outlook section before we open the call to your questions. We continued to face softer market conditions in first quarter 2024. Despite this, we remain optimistic in our ability to manage through the current markets and advance our strategic priorities. During the quarter, we continued to demonstrate our commitment to First Nation relationships and partnerships.

[Steven Hofer, President and CEO at Western Forest Products]

This included completing the sale of a 34% interest in our Mid-Island Forest Operation to four local First Nations for CAD 35.9 million, and releasing a draft for public comment of the first Forest Landscape Plan in British Columbia for TFL 37. The plan was developed in collaboration with the 'Namgis First Nation and provides the opportunity for greater certainty for a stable, long-term fiber supply within TFL 37. We were also successful in accelerating our transition to higher-value products. This included commissioning the first continuous kiln on the BC coast at our Saltair Sawmill. The project was completed on budget and will support increased production of higher-valued products. In the first month since commissioning the kiln, it has operated at 97% efficiency and exceeded our target EBITDA returns on an annualized basis.

[Steven Hofer, President and CEO at Western Forest Products]

We also advanced pre-engineering and permitting related to two previously announced continuous kilns on Vancouver Island. These two kilns are expected to be completed in 2025, at a total cost of approximately CAD 35 million. We remain very focused on health and safety and internal initiatives to support driving improved profitability in our business. In our Timberlands group, this has included improving the stratification of our specialty log sorts, such as pole and peeler logs, to support incremental margin. In our manufacturing group, we are continuing to focus on operational uptime and reliability, and we achieved uptime rates ahead of target in the first quarter. In our sales and marketing group, we are focused on a customer strategy that delivers mutual benefit for Western and our partner customers. This has included growing key strategic accounts while developing value-added products and programs targeted with the end user in mind.

[Steven Hofer, President and CEO at Western Forest Products]

We continue to grow the demand for our key product categories, which include Cedar finished value-added products, Hemlock and Douglas fir products targeted at the Japan traditional home and non-residential sectors, Hemlock and Douglas fir timber and industrial programs, Hemlock treating program, programs and products, and lam stock and glulam for the stock beam and custom markets. In our commodity lumber segment, we continue to target square edge and pro sales in treating, retail, and MSR products that typically sell at a premium above regular dimension channels. That premium spread has been widening recently, given reduced availability in other regions, resulting in customers willing to pay more for access to our supply. While near-term lumber market performance is expected to be product line dependent, we remain optimistic in our ability to manage through the current markets. We remain very focused on maintaining a strong balance sheet in the near term.

[Steven Hofer, President and CEO at Western Forest Products]

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

[Stephen Williams, EVP and CFO at Western Forest Products]

Thanks, Steven. First quarter adjusted EBITDA was negative CAD 4.2 million, as compared to negative CAD 5 million in the same period last year. Results in the first quarter of 2024 benefited from a stronger sales mix, higher domestic log shipments, and lower stumpage and freight expense. This was offset by lower lumber prices in certain segments, lower lumber shipments and higher secondary processing costs due to a stronger mix of specialty volumes. Our shipment volumes to Japan continued to remain strong and were almost doubled compared to the same period last year. Our engineered wood products business continues to perform well, generating another strong quarter of results. Since acquiring Calvert in August of 2022, we have generated EBIT of approximately CAD 10 million, implying a payback on our investment of under three years.

[Stephen Williams, EVP and CFO at Western Forest Products]

We closed the first quarter with 84 million board feet of lumber inventory and 749,000 m³ of log inventory. Turning to CapEx and cash flow, we have reduced our 2024 total CapEx plan by approximately CAD 15 million and now expect 2024 CapEx to be approximately CAD 50 million. This includes approximately CAD 13 million related to our two previously announced continuous dry kilns. We are currently refining our CapEx timeline related to the new kilns, and some of this CapEx spending in 2024 may be delayed to 2025. We received CAD 35.9 million in the first quarter from the sale of a 34% ownership interest in our Mid-Island Forest Operation, and we expect to receive an income tax refund of approximately CAD 23 million in the second or third quarter of 2024.

[Stephen Williams, EVP and CFO at Western Forest Products]

From a balance sheet perspective, we ended the first quarter with liquidity of approximately CAD 142 million and a net debt-to-cap ratio of 13%. At the end of March, we had CAD 228.5 million in duties on deposit, which equates to approximately CAD 0.53 per share after tax. Our book value is CAD 1.83 per share at the end of March, relative to the current share price of approximately CAD 0.53 per share. Turning to second quarter seasonality. Typically, in the second quarter, our harvest volumes increase as snow recedes, and we expand operations across the entire timber harvesting land base. As our harvest activity moves further up hillsides, our costs tend to rise as steeper and more difficult terrain increases harvesting complexities.

[Stephen Williams, EVP and CFO at Western Forest Products]

From a market perspective, North American lumber consumption typically increases as we move into more active spring season. We plan to continue to match production to market demand. Steven, that concludes my comments.

[Steven Hofer, President and CEO at Western Forest Products]

Thanks, Steve. Turning to our market outlook, we are seeing some near-term positive signs of improving demand and prices in certain lumber products. However, in the second half of 2024, it will vary based on product lines and be dependent on global macro, macroeconomic conditions. Cedar demand and prices for timber and premium appearance products are expected to remain stable, and demand and price for decking products are firming up as we head into the spring. Cedar demand for trim and fencing products are expected to remain soft until market inventory rebalances. In Japan, we anticipate quarterly lumber volumes to remain similar to those achieved in the first quarter of 2024. Lumber prices are expected to remain stable, but may be impacted by weakness in the Japanese yen to U.S. dollar exchange rate.

[Steven Hofer, President and CEO at Western Forest Products]

Demand for our industrial lumber products will be product line specific, but are expected to remain stable over the near term. North American demand and prices for our commodity products are expected to marginally improve over the remainder of the second quarter, but are expected to remain volatile through the second half of 2024. In China, lumber demand and prices may slightly weaken as we progress through 2024. Overall, we're currently have a second quarter order file of approximately 137 million board feet. Looking ahead, we remain focused on returning our business to profitability while executing on 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 line. If you have a question, please press star one on your device's keypad. When prompted by the system, please clearly state your name to register your question. You may cancel your question at any time by pressing star two. Please press star one at this time if you have a question. The first question is from?

[Analyst]

Amir Patel.

[Operator]

Please go ahead.

[Analyst]

Hi, good afternoon. Steve and Steven, I'm just, you know, thinking through the outlook you've given. It's been a couple of quarters now of negative EBITDA. Based on what you're seeing in April, do you think you're set up to get back to positive EBITDA from Q2?

[Stephen Williams, EVP and CFO at Western Forest Products]

Hi, Amir, it's Steve here. I think as we indicated, that, you know, the markets have been a little bit firmer in our outlook and highlighted, you know, some progress, I think, on order file type of things. So we don't give guidance specifically, you know, around EBITDA, but I think, you know, again, things are trending positively so.

[Analyst]

Thanks, thanks, Steve. That's, that's helpful. You know, we've seen one of your, your, your peers on the West Coast undergoing some restructuring. What, what do you think the potential impact could be for your, your end markets?

[Steven Hofer, President and CEO at Western Forest Products]

Well, we've known Dick and Tom a long time, and we have a high degree of respect for their entrepreneurial spirit and how they've run their business. Obviously, the news is unfortunate, and we hope the best for all those impacted. You know, from our standpoint, we really believe that having robust primary sawmilling industry is important to the long-term success of the BC coast. We do have some product overlap in Western Red Cedar, and we do buy and sell logs with Teal Jones. Currently, we don't have any material financial exposure to their process. But yeah, we're certainly aware of their situation and hoping for the best as they go through their process.

[Steven Hofer, President and CEO at Western Forest Products]

Once they're back up and running, we'll reengage and be, you know, a strong business partner with them as we have in the past.

[Analyst]

Great. Thanks, Steven. That's, that's all I had. I'll, I'll turn it over.

[Steven Hofer, President and CEO at Western Forest Products]

Thank you.

[Operator]

The next question is from-

[Sean Steuart, Managing Director at TD Cowen]

Sean Stewart.

[Operator]

Please go ahead.

[Sean Steuart, Managing Director at TD Cowen]

Hi, guys. Good afternoon. Two questions: With Alberni Pacific curtailed now, I think the wording is still exploring options for the property, which I guess selling the property could be one of those options. Can you give us a bit more insight on your thinking there, and thoughts on the valuation parameters, if that is the, the approach you're taking?

[Steven Hofer, President and CEO at Western Forest Products]

Yeah, Sean, thanks for the question. You know, clearly, we've been very focused at trying to find you know, a partner that either could take the facility and do something with it as an ongoing manufacturing facility, or someone who might be a bit more creative on a higher, better use outcome for that property. Unfortunately, we've not been able to conclude a transaction up to this point, but we are actively engaged in a couple of new opportunities for that property. And, you know, we expect to be able to you know, have some positive news to share here in the next quarter.

[Sean Steuart, Managing Director at TD Cowen]

Okay. Thanks for that. A couple of questions on the kiln projects. I'm just trying to wrap my head around how you guys think about incremental EBITDA and returns from Saltair and the projects you're gonna move ahead with. Can you give us a sense of, you know, the price uplift you get on the dried product, how that factors into your return calculations? Just a bit more granularity on that topic.

[Glen Nontell, VP of Corporate Development at Western Forest Products]

Yeah, Sean, it's Glen. Just on specifically on the Saltair kiln, you know, that's probably where the majority of the uplift comes is, you know, the incremental margin you can realize on a KD product versus a green product. You know, there are some cost savings of drying internally versus externally, but, you know, the larger margin comes from that uplift in the product value.

[Sean Steuart, Managing Director at TD Cowen]

Reminder, Glen, on how you think about returns or payback periods for those investments?

[Glen Nontell, VP of Corporate Development at Western Forest Products]

Yeah, so we have a threshold of a 20% return on capital for any strategic investments. I mean, I can speak on that kiln. It ended up costing us, on a net basis, around CAD 12 million. You know, our target EBITDA return related to that kiln would be, you know, CAD 9 million in incremental EBITDA annually. So very, very, very high return on capital employed.

[Sean Steuart, Managing Director at TD Cowen]

Yeah. Okay, thanks very much, guys. That's all I have for now.

[Steven Hofer, President and CEO at Western Forest Products]

Thanks, Sean.

[Operator]

The next question is from-

[Matthew McKellar, VP at RBC Capital Markets]

Matthew McKellar.

[Operator]

Please go ahead.

[Matthew McKellar, VP at RBC Capital Markets]

Hi, good afternoon. Thanks for taking my questions. Maybe first, just wanted to drill in a little bit on the reductions in your CapEx budget this year, which I think was a CAD 15 million reduction. I think you called out maybe CAD 2 million specific to the CDK spending, but is there anything else you can tell us about what's been removed from the budget?

[Glen Nontell, VP of Corporate Development at Western Forest Products]

No, Matt, Glen. You know, it was a mix of everything across the board, other maintenance, other strategic projects. I think we thought it was just prudent, just given, you know, the first quarter penciled out and, you know, our outlook as much as it's positive for the rest of the year, we thought it was a prudent move, just to reduce or defer some of that spending.

[Matthew McKellar, VP at RBC Capital Markets]

Thanks. That's helpful. Then maybe, maybe one on just a couple of different end markets. I think your commentary on China was that things could weaken there as we progress through 2024, which is a little bit weaker than I think you were talking about previously. Can you expand on that at all? And then, I think Koppers and Stella-Jones talked about a bit of a slowdown in utility poles. I was wondering if you'd seen any impact to your utility crossarms business.

[Bruce Alexander, SVP of Sales, Marketing, and Manufacturing at Western Forest Products]

Yeah. Hi, it's Bruce here. Maybe I'll speak to China and then leave the crossarm or utility pole question for Steven. Yeah, we've seen actually through the first quarter, an increase in demand and price in China, but we're starting to see some weakness in pricing there. The Russians have recently reduced their pricing and really, the inventory built through the quarter. But in April here, we've actually seen those come off a little bit, but the fundamental driver there is in residential housing, and they're seeing a 10% decline year-over-year. So we're expecting some weakness, particularly as we head into the summer period, which is their seasonally more weaker market period.

[Steven Hofer, President and CEO at Western Forest Products]

Then maybe I'll just share a couple comments around the pole and the peeler question. You know, certainly within our, in our Timberland Group, our ability to, to manufacture, you know, cedar and Doug fir poles is a, a real key competitive advantage. We have a couple of TFLs that, have, you know, a, a number of, high-quality stands, where we're able to extrapolate a, a fairly high volume of, of poles, from those areas.... And then we've had a long time focus on both, Doug-fir and Hem-fir, peeler grade logs as well. You know, with respect to the, the pole side of it, we have, you know, a couple of different customers and, and, you know, we, we continue to, you know, ensure that we have the right diversification, the right volume being allocated out to, to that customer base.

[Steven Hofer, President and CEO at Western Forest Products]

And would really view this as a bit of a short-term slowdown, mostly around some capacity issues and having the poles treated, both in Canada and in the U.S. But if you look at the overall long-term trends around electrification, you know, demand on infrastructure, we see this as you know, a long-term high value opportunity for us to continue to be focused on. So a little bit of a slowdown for Stella-Jones, but we don't see it as being something that's going to you know, be a step change down beyond kind of a short time frame.

[Matthew McKellar, VP at RBC Capital Markets]

Thanks. That's helpful. Appreciate the color. And then last one from me. We've seen a couple transactions related to claims to softwood lumber duty refunds lately. Is that an option that you would consider at the right price?

[Glen Nontell, VP of Corporate Development at Western Forest Products]

Hey, Matt, it's Glen. You know, more generally, we look and consider all opportunities to monetize non-core assets, which we believe will be value accretive to our shareholders. You know, this has included our softwood lumber duties. You know, what I'd say is, based on some preliminary discussions we've had around the softwood lumber duties, you know, the implied cost of financing and monetizing a portion of them, you know, is well beyond the financing rates, which are available to us. You know, depending on the expectation around when duties might be returned and, you know, people's expectations around timeline of that, you know, based on our math, the implied cost of financing is, you know, pushing somewhere around 20%.

[Matthew McKellar, VP at RBC Capital Markets]

Great. Appreciate the color. That's all for me. I'll turn it back. Thanks.

[Glen Nontell, VP of Corporate Development at Western Forest Products]

Great. Thank you.

[Operator]

The next question is from-

[Ben Isaacson, Managing Director of Equity Research at Scotiabank]

Ben Isaacson at Scotiabank.

[Operator]

Please go ahead.

[Ben Isaacson, Managing Director of Equity Research at Scotiabank]

Hi, thank you very much. Actually, most of my questions have been answered, only a couple left. The first one is on Japan. Can you just give a quick update in terms of how you see that market evolving over the balance of the year, similar to what you just talked about on China?

[Bruce Alexander, SVP of Sales, Marketing, and Manufacturing at Western Forest Products]

Yeah, Bruce here again. Yeah, inventories really in Japan at the moment at the ports are relatively stable and are actually at reasonable levels. Supply has been limited into that market out of Europe due to a number of challenges there, including transportation and so on. So our volumes and actually pricing into Japan has been quite stable. The one downside really is the yen exchange rate, which is obviously impacting the affordability of North American lumber to the Japanese end user. And that could have an impact on prices as we head into the third quarter. But in general, we see that market as positive and stable through Q2, you know, strong order file and into Q3.

[Ben Isaacson, Managing Director of Equity Research at Scotiabank]

That's helpful. Just last one from me is, I think you mentioned, at the start of the call that, book value is about CAD 1.80 or CAD 1.83 per share, and the stock is, you know, CAD 0.53. Can you just talk about what do you think that means from, an investor perspective? Is the market. Do you think the market is pricing in or thinking about a write-down or some kind of impairment? And, and kind of where do you stand on that? Is there anything that would be kind of next up that would need to be assessed? Thank you.

[Glen Nontell, VP of Corporate Development at Western Forest Products]

Ben, it's Glen here. You know, I think I'll make a couple comments. You know, there's no question that, you know, the, the book value relative to our share price, we view the shares as being very undervalued. I think, you know, that said, you know, we need to demonstrate to the market, we've gone, you know, seven quarters of not having positive EBITDA. We need to demonstrate to the market, you know, a return to, you know, positive EBITDA to gain back the confidence of investors to really, you know, help close that gap.

[Ben Isaacson, Managing Director of Equity Research at Scotiabank]

That makes sense. Thanks so much. Appreciate it.

[Steven Hofer, President and CEO at Western Forest Products]

Thanks, Ben.

[Operator]

There are no further questions registered at this time. I would now like to turn the meeting over to Mr. Hofer.

[Steven Hofer, President and CEO at Western Forest Products]

Okay, thanks everyone for joining our call today. We appreciate your interest in our company and look forward to our next call in August. Have a great afternoon.

Participants

Executives

• Bruce Alexander, SVP of Sales, Marketing, and Manufacturing
• Glen Nontell, VP of Corporate Development
• Stephen Williams, EVP and CFO
• Steven Hofer, President and CEO

Analysts

• Ben Isaacson, Managing Director of Equity Research at Scotiabank
• Matthew McKellar, VP at RBC Capital Markets
• Sean Steuart, Managing Director at TD Cowen
• Analyst