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Operator
Good morning, ladies and gentlemen. Welcome to the Western Forest Products First Quarter 2024 Results Conference Call. During this conference call, Western's representative mimics 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 the different, including those factors described under risk 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 speaks only of the date of 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 Offer, President and CEO of Western Forest Products. Mr. Offer, please go ahead.
Offer
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 Glenn Nontel, 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 continue 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 continue to demonstrate our commitment to First Nation relationships and partnerships. This included completing the sale of a 34% interest in our mid-island forest operation to four local First Nations for $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 Nungi 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 salt air 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. 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 $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 pilar 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. 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 programs and products, and lamb 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. I will now turn it over to Steve to review our key financial results.
Steve
Thanks, Stephen. First quarter adjusted EBITDA was negative $4.2 million as compared to negative $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, than higher secondary processing costs due to a stronger mix of specialty volumes. Our shipment volumes to Japan continue 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 $10 million, implying a payback on our investment of under three years. We closed the first quarter with 84 million board feet of lumber inventory and 749,000 cubic meters of log inventory. Turning to CapEx and cash flow, we have reduced our 2024 total CapEx plan by approximately $15 million and now expect 2024 CapEx to be approximately $50 million. This includes approximately $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 $35.9 million in the first quarter from the sale of 34% ownership interest in our Mid Island forest operation and we expect to receive an income tax refund of approximately $23 million in the second or third quarter of 2024. From a balance sheet perspective, We ended the first quarter with liquidity of approximately $142 million and a net debt-to-cap ratio of 13%. At the end of March, we had $228.5 million in duties on deposit, which equates to approximately 53 cents per share after tax. Our book value is $1.83 per share at the end of March relative to the current share price of approximately 53 cents 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 complexity. 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. Stephen, that concludes my comments. Thanks, Steve.
Offer
So 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 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. Demand for 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 currently have a second quarter order file of approximately 137 million board fees. 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 lines. If you have a question, please press star 1 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 2. Please press star 1 at this time if you have a question. The first question is from... Amir Patel. Please go ahead.
Amir Patel
Hi. Good afternoon. Steve and Stephen, 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?
Steve
Hi, Amir. It's Steve here. I think as we indicated, the markets have been a little bit firmer in our outlook and highlighted you know, some progress, I think, on order files type of thing. So, you know, give guidance specifically, you know, around EBITDA. But I think, you know, again, things are trending positively.
Amir Patel
Thanks. Thanks, Steve. That's helpful. And, you know, we've seen one of your peers on the West Coast undergoing some restructuring. What do you think the potential impact could be for your end markets?
Offer
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 run their business. Obviously, the news is unfortunate, and we hope the best for all those impacted. From our standpoint, we really believe that having a robust primary sawmilling industry is important to the long-term success of the B.C. coast. Uh, we do have some product overlap in Western Red Cedar and, and we do buy and sell logs with, uh, TL Jones. Currently, we don't have any material financial exposure, uh, to their process. But, um, yeah, we're, we're certainly, uh, aware of their situation and, and, uh, hoping for the best as they, uh, go through their, their process and, and, uh, once they're back up and running, we'll, we'll re-engage and, and be, uh, a strong business partner with them as we have in the past.
Amir Patel
Great. Thanks, Stephen. That's all I had. I'll turn it over.
Offer
Thank you.
Operator
The next question is from Sean Stewart. Please go ahead.
Sean Stewart
Hi, guys. Good afternoon. A few questions. With Alberni Pacific curtailed now, I think the wording is still exploring options for the property, which I guess selling a property could be one of those options. Can you give us a bit more insight on your thinking there and thoughts on valuation parameters, uh, if that is the approach you're taking?
Offer
Yeah, Sean, thanks for the question. Um, you know, clarity, we've been very focused at trying to find, uh, 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 have 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 We expect to be able to have some positive news to share here in the next quarter.
Sean Stewart
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 salt air and the projects you're going to move ahead with. Can you give us a sense of the price uplift you get on the dried products how that factors in your return calculations, just a bit more granularity on that topic.
spk00
Yeah, Sean, it's Glenn. Just specifically on the salt hair kiln, that's probably where the majority of the uplift comes is that incremental margin you can realize on a KD product versus a green product. There are some cost savings of drying internally versus externally, but the larger margin comes from that uplift in the product values.
Sean Stewart
And a reminder, Glenn, on how you think about returns or payback periods for those investments?
spk00
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 a net basis around $12 million. You know, our target EBITDA return related to that kiln would be, you know, $9 million in incremental EBITDA annually. So very, very, very high return on capital employed. Yeah.
Sean Stewart
Okay, thanks very much, guys. That's all I have for now.
Offer
Thanks, John.
Operator
The next question is from Matthew McKellar. Please go ahead.
Matthew McKellar
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 $15 million reduction. I think he called up maybe a couple million specific to the CDK spending. But is there anything else you can tell us about what's been removed from the budget?
spk00
No, Matt, Glenn. You know, it was a mix of everything across the board, weather 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. um, just to reduce or defer some of that spending.
Matthew McKellar
Thanks. That's helpful. Um, then maybe, maybe one on just a couple of different end markets. I think your, uh, your commentary on China was that, uh, things could weaken there as you progress through 24 inches, a little bit weaker than I think you were talking about previously to expand on that at all. And then, um, I think Coppers and Stella Jones talked about a bit of a slowdown in utility polls. I was wondering if you'd seen any impact to your utility cross arms business.
spk05
Yeah, hi, it's Bruce here. Maybe I'll speak to China and then leave the cross arms utility poll question for Stephen. 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 their 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.
Offer
Then maybe I'll just share a couple of comments around the pole and the peeler question. You know, certainly within our timberland group, Our ability to manufacture cedar and Doug fir poles is a real key competitive advantage. We have a couple of TFLs that have a number of high-quality stands where we're able to extrapolate a fairly high volume of poles from those areas. And then we've had a long time focus on both Doug fir and hemp fir peeler grade logs as well. With respect to the poll side of it, we have a couple of different customers and we continue to ensure that we have the right diversification, the right volume being allocated out to that customer base and would really view this as a bit of a short-term slowdown, mostly around some capacity issues and having the polls treated both in Canada and in the U.S. But if you look at the overall long-term trends around electrification demand on infrastructure, we see this as a long-term, high-value opportunity for us to continue to be focused on. So a little bit of a slowdown for Stella, but we don't see it as being something that's going to be a step change down beyond kind of a short time frame.
Matthew McKellar
Thanks. That's helpful. Appreciate the color. And then last one for me. We've seen a couple of transactions related to claims to softwood lumber duty refunds lately. Is that an option that you'd consider at the right price?
spk00
Hey, Matt. It's Glenn. You know, more generally, we look and consider all opportunities to monetize non-core assets, which we believe will be value-appreciated to our shareholders. You know, this has included our softwood lumber duties. You know, I'd say it's 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 expectation around timeline or that, you know, based on our math, the implied cost of financing is, you know, pushing somewhere around 20%. Great.
Matthew McKellar
Appreciate the call. That's all from me. I'll turn it back. Thanks.
N. Isaacson
Great. Thank you.
Operator
The next question is from... N. Isaacson at Scotiabank.
N. Isaacson
Please go ahead. 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?
spk05
Yeah, Bruce here again. Yeah, inventories really in Japan at the moment, 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. We have a strong order file into Q3.
N. Isaacson
That's helpful. And then just last one for me is I think you mentioned at the start of the call that book value with about $1.80 or $1.83 per share and the stock is $0.53. Can you just talk about what do you think that means from an investor perspective? Do you think the market is pricing in or thinking about a write-down or some kind of impairment? And where do you stand on that? Is there anything that would be next up that would need to be assessed? Thank you.
spk00
Ben, it's Glenn here. I think I'll make a couple of comments. There's no question that the book value relative to our share price, we view the shares as being very undervalued. I think that said, we need to demonstrate to the market we've gone seven quarters of not having positive EBITDA. We need to demonstrate to the market a return to positive EBITDA to gain back the confidence of investors to really help close that gap. That makes sense.
N. Isaacson
Thanks so much. Appreciate it. Thanks, Ben.
Operator
There are no further questions registered at this time. I would now like to turn the meeting over to Mr. Offer.
Offer
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.
Operator
Thank you. The conference has now ended. Please disconnect your lines at this time. Thank you for your participation.
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