Western Forest Products Inc.

Good morning, ladies and gentlemen. Welcome to the Western Forest Products fourth quarter 2022 results conference call. During this conference call, Western 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 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 CDAR 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. Stephen Hoffer, President and CEO of Western Forest Products. Mr. Hoffer, please go ahead.

Thank you, Chris, and good morning, everyone. I'd like to welcome you to Western Forest Products' 2022 fourth quarter conference call. Joining me on the call today is Stephen Williams, our Executive Vice President and Chief Financial Officer, and Glenn Montel, our Vice President of Corporate Development. We issued our 2022 fourth quarter results yesterday. I will provide you with some introductory comments and then ask Steve to take you through a summary of our financial results. I will follow Steve's review with a discussion of our strategic priorities and outlook before we open the call to your questions. 2022 was a year of two halves. In the first half of 2022, lumber demand and pricing remained strong. However, in the second half of 2022, as the impacts from interest rate increases, and slowing growth started to be felt through the economy, lumber demand and prices significantly weakened. In response, temporary and permanent lumber curtailments were taken by companies across North America. Despite the more challenging operating environment in the second half of 2022, we made progress advancing our strategic priorities, including delivering improved health and safety metrics compared to 2021, acquiring Calvert in the U.S. to capitalize on the growing mass timber building sector, advancing collaborative forest planning activities and partnership opportunities with First Nations, advancing strategic investments in our business to support value-added manufacturing in British Columbia, further enhancing our board with the recent addition of two new board members, including members with prior forest sector experience, releasing our latest sustainability report, which included further refinement of admissions data and third-party limited assurance engagement of our carbon accounting. And finally, continuing with our balanced approach to capital allocation, which included increasing our dividend per share 25% and returning over $35 million to shareholders. I will now turn it over to Steve to review our key financial results.

Thanks, Stephen. Fourth quarter adjusted EBITDA was negative $11.9 million. Results in the quarter included $11.8 million of inventory provisions. Compared to the same period last year, results in the fourth quarter of 2022 were also impacted by lower lumber demand, lower prices, and a weaker mix. Higher costs, including stumpage and sawmill operating curtailments as we balanced production to market conditions. These were partially offset by an increase in log, by-product, and other revenue. In our engineered products division, we were very pleased with the first full quarter of results post our Calvert acquisition. Since closing the acquisition, the business has generated EBITDA margins in excess of 20% and performed to our expectations. The ability of our sawmills to stratify the lumber products we produced enabled incremental lamb stock production and supported our ability to move further up the value chain. While the relative size of the business is currently small, we are excited about the potential growth opportunities for the business over the long term. Moving on to our BC strategic investments, we continue to make progress on our previously announced strategic investments at our BC manufacturing operations. We remain committed to these investments as we believe they will position the company for future success in value-added manufacturing and moving our products further up the value chain. For 2023, We currently expect total CapEx to be between $60 and $70 million, which includes a mix of maintenance of business, roads, and strategic CapEx. Should market and financial conditions materially deteriorate during 2023, we would look to reduce our CapEx spend to match those conditions. Turning to first quarter seasonality, in typical first quarters, our timber harvesting activity can be periodically interrupted by winter weather. Harvest volumes are typically skewed to the end of the quarter when the weather and light conditions support greater activity. From a market perspective, sales typically accelerate through the quarter. Our log inventories remain well positioned as we head into the first quarter. We ended the fourth quarter with approximately 895,000 cubic meters of log inventory. We will continue to match production to market demand, and our available liquidity remains strong to manage through any near-term market volatility. Stephen, that concludes my comments.

Thanks, Steve. I'd like to start by touching on our long-term strategic priorities. The foundation of our strategic priorities is built around business excellence. This includes an unwavering commitment to health, safety, and environmental compliance, along with focused operational execution and a mindset of continual improvement. Next, we will remain committed to building mutually beneficial relationships with First Nations. We plan to continue to evaluate and advance First Nations partnerships and investment opportunities in British Columbia, supporting greater long-term clarity for the stewardship and management of the land base. Our next strategic priority focuses on business and asset optimization. This includes... how we could strategically implement best-in-class technology in our operations to position our business for success through all market cycles. We believe companies need to continually evaluate their assets with a long-term focus on improving financial performance, asset utilizations, return metrics, and reducing costs. This strategic priority is consistent with our recently announced Albany Pacific Division Working Group Review. Next, we will continue to evaluate opportunities to grow in specialty wood products, where we can create long-term shareholder value and be market leaders. This includes both organic and inorganic opportunities. We take a very disciplined approach to acquisitions and near-term, we will continue to be focused on tuck-in opportunities in engineered wood, mass timber, and specialty wood products. Lastly is our commitment to stewardship and exploring new revenue opportunities. Over the longer term, we plan to explore opportunities related to carbon and carbon credits as the market evolves and develops. We also plan to evaluate opportunities and alternatives for our wood residuals and waste with the objective of increasing fiber utilization. Turning to our market outlook, We are seeing some positive signs that certain lumber prices are moving above recent levels. However, in the near term, we expect lumber markets to remain challenging until supply and demand come back into balance. Long term, we remain excited about the growth opportunity for engineered wood, mass timber building in North America, and the role our wood products have to play in a low-carbon world. I remain excited and optimistic about the future opportunities Western has to deliver long-term shareholder value as we continue to execute on our strategic priorities. We will continue to focus on profit margin across our businesses, all while driving to provide best-in-class service to our customers. With that, operator, we can open the call up to questions.

Thank you. So we'll now take questions from the telephone lines. If you have a question using the speakerphone, please lift your handset before making your selection. If you have a question, please press star one on your device's keypad. 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 pause while participants register for questions. Thank you for your patience. First question is from Hamir Patel. Your line is open. Go ahead.

Hi, good morning. Steve, the BC government put out an announcement this week with respect to old growth. I just want to get your thoughts on some of the figures that they cited there and what potential impact you might see for the Western.

Thanks, Amir. Well, we're certainly still looking to understand the scope and impact of the announcement. That being said, on the old growth and planning components, Western's approach to operational planning has put mutually beneficial collaborative relationships with indigenous peoples on whose territory we operate at the center. Our view is that stability for the sector in British Columbia is going to be built from the ground up in these collaborative planning processes and not centrally from Victoria or Vancouver. To this extent, this announcement supports that work and we will facilitate implementation of the plans that are built and be supportive. We are very proud of our track record in sustainable forest management and the work that we are doing with First Nations to develop plans in a stable, profitable sector here on the coast.

Fair enough. Thanks for that, Steve. And I wanted to also ask about on the stumpage front, BC Coastal Stumpage, I believe the increase there was December. What kind of scale increase do or change did you see this most recent December, and what kind of change would you expect at the next annual revision?

Yeah. Hey, Amir. It's Glenn. You know, we believe stumpage rates have peaked, but they still remain elevated relative to 2021. We should start to see lower per cubic meter stumpage rates as we head into 2023. As you're aware, a mix of harvesting operations can impact overall per cubic meter rates. but we are starting to see some relief given the declines in lumber prices. You know, through the first half of 2023, you know, we expected a decline in per cubic meter of, you know, between 20 to 25% relative to the fourth quarter, all dependent on mix.

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

Thank you. Once again, please press star 1 on your device's keypad if you have a question. Next question is from Paul Quinn. Your line's open. Go ahead.

Yeah, thanks very much. Good morning, guys. Hey, Glenn, maybe to follow up on that stumpage question, that first half down 25% from Q4. I'm just trying to understand sort of the overall rate is, you know, another reference point that you guys put out was stumpage was up $54 million in 2022. So just Just wondering what we're at in terms of levels per dollars per cubic meter.

Yeah, rough and awful. I mean, if you look in the fourth quarter, I mean, you know, our stumpage is probably somewhere in the high 30s, low 40s on a per cubic meter basis.

Okay. That's helpful. And then maybe this is a question for Stephen, but the BC government introduced these eight forest landscape planning tables. How many will there be on the coast, and who's going to represent you guys on those?

Paul, I'll start and then I'll have Stephen jump in. I mean, you know, we're still trying to get clarity on the specific tables. I mean, we have a number of existing tables underway with between, you know, six to eight tables underway through these various planning initiatives that we continue to advance. You know, we believe we've been very successful in advancing a number of these initiatives with First Nations, and these tables that we're currently working on with those First Nations initiatives will be completed over the next, you know, 12 to 18 months. You know, these things do take time to develop. So, once we get greater clarity from the government on the specific tables and which ones may or may not be on the coast, I think we'll be in a better position to comment.

Okay. Do you anticipate any issues on cutting permit applications and approvals in 2023?

I mean, I think, Paul, at this point, it's too early to comment until, you know, the process has worked its way through. And once we get some additional clarity, we'll be in a better position to be able to comment on that.

Okay. And then the Albany Pacific review, just wondering what the timeline is on that, when do you expect to have this decision?

Yeah, Paul, we put a 90-day window around it. We felt that was an appropriate time to – establish the working group, launch the working group, and give them adequate time to assess, you know, all the different opportunities that are coming into play. You know, at the end of the 90-day process, if there's something there that's meaningful, we'll continue to extend it. But, you know, we put a 90-day window around it.

Okay, and then just lastly, just on the overall market conditions overseas as well as what you expect for this year in the first half of the year.

Yeah, I would say on the Japan front, it's a challenging market. We shouldn't sugarcoat that. There's a fair amount of domestic supply that continues to kind of hold prices flat, heavily subsidized by the Japanese government, I would share as well. And then there continues to be quite an influx of competitively priced engineered wood products from Europe in the Japanese market. So, you know, we're going to see, you know, I think the demand is going to be okay. You know, the housing start numbers are kind of in line with what we would normally see. But, you know, it'll be a pretty competitive market to maintain market share.

Okay, and then cedar in Northmark?

Well, I would say that, you know, the cedar profile, the really high-end component of our product mix continues to have, you know, very solid pricing and pretty good takeaway. It's kind of the meat in the middle of the sandwich, as we would describe it, that has a few more challenges to it. You know, kind of some of the knotty decking products that – have been impacted by what we're seeing on overall R&R, decline in R&R across North America. So we're optimistic that we're going to see a little bit more volume as we go into March, April, May. But some of the highs that we've seen on pricing through COVID, those are probably behind us. And we'll be reverting back to kind of a normalized pattern pricing for some of the mid-tier products.

All right. That's all I have. Thanks, guys. Thanks, Paul.

Thank you. There are no further questions registered at this time. I'd like now to turn it over to Steve.

Okay. Well, thanks, everyone, for joining our call today. We appreciate your interest in our company, and we look forward to our call in May. Thanks, everyone, and have a great day.

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