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Operator
Welcome to the Western Forest Products Conference call hosted by Mr. Stephen Hofer, which was held on November 8, 2023 at 9 a.m. Pacific. You may press 2 at any time during the conference for a detailed help menu.
Stephen Hofer
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Operator
Good morning, ladies and gentlemen. Welcome to the Western Forest Products Third Quarter 2023 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 words like anticipate, plan, estimate, will, and other references for 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 Hofer, President and CEO of Western Forest Products. Please go ahead.
Stephen Hofer
Thank
Operator
you,
Stephen Hofer
Chris, and good morning, everyone. I'd like to welcome you to Western Forest Products' 2023 Third Quarter Conference Call. Joining me on the call today is Stephen Williams, our Executive Vice President and Chief Financial Officer, and Glenn Nantel, our Vice President of Corporate Development. We issued our 2023 Third 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. In the third quarter of 2023, we continued to face challenging market conditions. While our results in the quarter reflect a continued challenging operating environment and cost structure in our BC operations, we are encouraged by the progress we have made in repositioning our business for the future. The partnership announced in TFL 39 Block 2 with four First Nations is a significant step forward. This partnership will provide a collaborative forest stewardship and business model that is key to the operational stability on the BC coast, which we need to support reinvestment. We are excited to move it forward with our partners. We were also successful in advancing our BC strategic capital investments to support value added manufacturing. Installation and commissioning of our machine stress-grading technology at our Duke Point facility is now complete, with orders being shipped into targeted accounts. We also resolved the permitting delay related to our continuous kiln project at our Saltair sawmill. Construction is continuing on the project with kiln commissioning anticipated in the first quarter of 2024. These investments will support moving our products further up the value chain to drive increased profitability over the long term. As we head into the typically slower fall and winter seasons, we remain focused on maintaining financial flexibility and a strong balance sheet. I will now turn it over to Steve to review our key financial results.
Steve
Thanks, Stephen. Third quarter adjusted EBITDA was a negative $11.6 million, which included $4.3 million in export tax recovery. Compared to the same period last year, results in the third quarter of 2023 were impacted by lower lumber prices and shipments, lower log and byproduct revenues, and sawmill curtailments as we continue to match production to market demand. These were partially offset by lower stumpage and freight expense, a stronger US dollar, and a stronger specialty sales mix. During the quarter, the Department of Commerce finalized the duty rates as part of the fourth administrative review. The revised combined duty rate for Western is now currently 8.05%. As part of the finalization, Western recognized a $4.3 million export tax recovery during the third quarter. As at the end of September, we had $220.9 million in duties on deposit relative to a current market capitalization of approximately $225 million. In our engineered products division, we celebrated the one-year anniversary of acquiring Calvert in August. We continue to be pleased with the results of the business. Based on the earnings since the acquisition, the EBITDA payback of our investment is trending towards under two and a half years. Turning to capital allocation. In response to weaker lumber market conditions and corresponding financial results, we suspended our quarterly dividend. Our board plans to continue to review the dividend on a quarterly basis. For 2023, we expect total capex of approximately $40-50 million, although some capex spend may get pushed into 2024. 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. Our log inventories remain well positioned as we head into the fourth quarter. We ended the third quarter with approximately 939,000 cubic meters of log inventory. We will continue to manage our manufacturing operating schedules to match production to market demand. Steve, and that concludes my comments. Thanks, Steve.
Stephen Hofer
Turning to our market outlook. We remain excited about the long-term growth opportunity for wood products and the positive impacts they have in a low-carbon world. However, near term, we expect lumber markets to remain challenging as consumers adjust to macroeconomic conditions and lumber supply and demand rebalances. Demand and prices for cedar timber and premium appearance products are expected to remain stable, while cedar decking, trim, and fencing products are expected to remain weaker. In Japan, we expect to see near-term opportunities to increase volumes due to a fire at a large Japanese sawmill. 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 remain volatile. China demand and pricing are expected to remain weak. Looking ahead, we are focused on returning our business to profitability while executing on our strategic priorities and completing our current strategic investment projects here in BC. With that, Chris, we can open up the call to questions.
Operator
Perfect. Thank you. We will now take questions from the telephone lines. If you have a question using a speakerphone, please lift your handset before making your selection. If you have a question, please press star 1 on your device's keypad. You may cancel your question at any time by pressing star 2. Please press star 1 at this time if you have a question. There will be a pause while participants register for questions. Thank you for your patience. Once again, please press star 1 on your device's keypad if you have a question. First question is from Sean Stewart. Your line is open. Go ahead.
Sean Stewart
Thanks. Good morning, everyone. A couple of questions. Start with the dividend suspension. Can you speak to the intent to eventually reestablish a regular dividend? I guess what would you need to see with respect to balance sheet strength or market visibility to take that step? Any thoughts around what payout ratio long term might make sense?
Steve
Good morning, Sean. It's Steve here. I'll take that one. Again, I think we made the difficult decision to suspend the dividend. From our perspective, dividends in return of capital shareholders are meant to be paid from positive earnings and free cash flow from the business, which has not been the case for the last five quarters. I would note that we continue to pay the dividend for the last five quarters despite the negative earnings and free cash. I think we need to see our business return to positive earnings and free cash flow before considering returning incremental capital to the shareholders. To say our board continues to review the company's dividend on a quarterly basis.
Sean Stewart
Thanks, Steve, for that. With regards to the new LP at TFL39, congrats on moving that forward. Just trying to assess how we should think about the valuation implications beyond the dollar per cubic meter multiple. Can you give us a sense of how this affects mid to long term cash flows for the company? Any other metrics we can wrap our heads around there?
Steve
Sure, Sean. Maybe I'll take that one. So obviously you saw the valuation. The way we think about these 10 years is there are great partnerships with the First Nations. From a valuation perspective, in addition to that great partnership, you're probably monetizing them at multiples above where Western is currently trading at, especially at the current depressed share price. You can't speak specifically to EBITDA multiples around them, but you can say that they're probably down above where we would historically trade at.
Sean Stewart
Okay. One last one for me. The APD negotiations, any sense of the timeline to complete the due diligence around proposals and determining the best proposal moving forward to advance that initiative?
Stephen Hofer
Thanks, Sean. We certainly continue to work diligently to move the process forward as quickly as possible. We have no additional updates at this time, but plan to be in a position to provide further updates in the first quarter of 2024. Okay.
Sean Stewart
That's all I have for now. Thanks very much,
Operator
guys. Thanks,
Sean Stewart
Sean.
Operator
Thank you. Next question is from Paul Quinn. Your line's open. Go ahead.
Paul Quinn
Yeah, morning, guys. Just trying to understand, I mean, your business is definitely going the wrong way here, and it's been five quarters of losses. These losses are almost as much as it was when you guys were on strike. So just wondering what fundamentally has to change. Is it markets? Is there any flexibility that you've got that you can shut down some of your operations that are losing the most amount of money and run a little bit better than what we see?
Stephen Hofer
Thanks, Paul. It's a complex answer. You know, fundamentally, there's two sides of the equation. We have the cost structure of older manufacturing assets, and then we have the revenue side of the business. And if you look at some of the key product line prices for Western, you know, we're now back to kind of pre-COVID levels. So, you know, we fundamentally, you know, we're out focused on developing key targeted accounts into key distribution areas of the business that align with our focus around specialty products. So those things take time. There's a lot of great work that's been done here in 2023 and repositioning key product lines into key targeted accounts. We continue to be very diligent and very focused on, you know, the key levers of profitability inside of our sawmill facilities, including recovery, uptime, product realizations. I was hoping at this point in time that we would have had, you know, the new kiln up and running at Salterre, you know, being able to take 80 million feet of product today that is sold as rough green at relatively low values and putting that into higher value kiln dried products, whether they be for Doug first squares into Japan, M first squares into Japan, kiln dried lamb stock into Calvert, kiln dried machine stress rated lumber into, you know, targeted engineered wood facilities across North America. We didn't get that done this year and we had some permitting delays and we're back on track and expect to see, you know, those type of initiatives start to move the dial in 2024. So, you know, we're, when I look back at 2023 here, the first three quarters, you know, I'm pretty impressed with what we've accomplished on the timberland side. That business continues to run quite well. Very much focused on cost containment, executing cutting permits, engagement with the First Nations on whose traditional territory we operate on, and really pleased on what we've achieved on the timberland side. And, you know, repositioning the manufacturing assets. We've been very disciplined on matching, you know, demand to our production and we are looking at all those options as you've laid out in terms of, you know, what that manufacturing footprint looks like for 2024 and beyond. So, I think I'll leave it at there.
Paul Quinn
Okay, thanks for that. I know it's a difficult issue and a hard one to come around. Maybe just switching over to, I mean, Western's more impacted than everybody else out there on Southwood Lumber. What is the state of that file and is there a way out of that one?
Stephen Hofer
Yeah, I was hoping you would be able to point us to a path forward. In all seriousness, you know, we're now into, you know, election year in the US. You know, I think I shared on the previous call, there's certainly no appetite, either on the Republican side or on the Democratic side to have this as an initiative that gets talked about in 2024. You know, we're heading into probably an election on the federal government side here in Canada. A little bit more momentum on the federal government side. I think the opposition party, you know, is kind of trying to move this file, you know, kind of to the forefront of federal government foreign policy. So, but in reality, it takes, it's going to take the US side, you know, to come to the table. And I think in the background, I think there's some good work happening across Canada where, you know, there's some dialogue occurring to develop some consensus to have a pan-Canadian approach to, you know, what would work. And so there's some work being done there by industry and by associations. But that's kind of where it's at today. I don't see anything imminent.
Paul Quinn
Okay. And then in the past, you know, one of the things that's, I guess, motivated the US side to think about a solution is the court cases, whether it's, you know, WTO or Renaf. What are the state of those cases right now?
Stephen Hofer
Well, there's, without getting too technical, I think there's the KUSMA panels are struggling to get enough participants properly vetted and assigned to the panels. And so the Canadian side has proposed some alternative suggestions on how to get more people properly vetted and that both sides would agree to. And that's been a bit of a hang up here where, you know, work that should have been done in the past couple of years continues to be delayed because of inability to formalize the panels. So some momentum there. But, you know, again, that's a key component is to actually have the panels properly resourced.
Paul Quinn
Okay. And then last one for me, just, I mean, you mentioned Q4 weakness, you know, traditional. Is that, you know, and we've just gone through a pretty weak Q3. Is that still the direction that you think you're going to turn out with at the end of the year for Q4?
Stephen Hofer
Well, we are, we're optimistic on a couple of areas for Q4. You know, we're one month into it. I'm again, I like the momentum that we have on the Timberland side of the business. We'll have very strong shipments into Japan in Q4. And, you know, again, optimistic about what we can take advantage of with this large facility in Japan now being off the market for probably up to three years. The majority that is well, 100% of that is Douglas Fir. And so we have some good collaboration going on with some external partners to ensure that we have sufficient Doug Fir fiber available for the mills to capitalize on the opportunity. You know, weather dependent, you know, if we can have a reasonably mild November and December, I think we'll see some of our key markets start to take positions. In late November, first part of December, where we can probably increase some of our shipments on Cedar and have that position for Jan Feb into key markets. So, you know, I'm, I'm optimist, you know, pleasantly optimistic about what we could deliver, but lots of work left to do.
Paul Quinn
All right. Congratulations on the partnership. Best of luck off work.
Operator
Great. Thanks, Paul. Thanks, Paul. Thank you. Once again, please press star one on your device's keypad if you have a question. There are no further questions registered at this time. I'd like to pass it back over to Mr. Hofer.
Stephen Hofer
Thanks, Chris. And 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 February. Thanks, everyone.
Operator
Thank you. The conference is now ended. Please disconnect your lines at this time, and thank you for your participation.
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