Western Forest Products Inc.

Good morning, ladies and gentlemen. Welcome to Western Forest Products Third Quarter 2024 Results Conference Call. During this conference call, Western's representatives may make forward-looking statements within the meaning of applicable security laws. These statements can be identified by words like anticipate, plan, estimate, will, and other references to future periods. Although these forward-looking statements will 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 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 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, LaTanya, and good morning, everyone. I'd like to welcome you to Western Forest Products' 2024 Third Quarter Conference Call. Joining me on the call today is Glenn Nontel, our Chief Financial Officer, and Bruce Alexander, our Senior Vice President of Sales, Marketing, and Manufacturing. We issued our 2024 Third Quarter results yesterday. I will provide you with some introductory comments and then ask Glenn to take you through our financial results. I'll then follow Glenn's review with our outlook section before we open the call to your questions. Earlier this year, all members of the Western team were invited to share their thoughts on the company's values. With this feedback, Western has recently introduced three evolved values statements which are, one, build a better world. We invest in safety, people, stewardship, and community. Number two, be entrepreneurial. We generate human, ecological, and customer value. And three, lead by example. We grow and adapt, operate with integrity, and are accountable for our actions. We are very excited to have these new value statements guide our future success. Turning to our third quarter, We continued to face softer market conditions in the third quarter of 2024. Despite this, we remained focused on executing on our strategic priorities to position the business for success. In the quarter, this included our sales and marketing team continued to focus on our customers and growth across key strategic accounts. This included over 20 customer groups visiting our facilities this quarter.

I apologize for the interruption. We appear to be having a technical difficulty. Please stand by. We appreciate your patience. Thank you. Thank you.

All participants, please continue to stand by. The conference will begin momentarily. Once again, please continue to stand by. We thank you for your patience.

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

Go ahead, Glenn. Thanks, Stephen. Third quarter adjusted EBITDA was negative $10.7 million as compared to negative $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. We close the third quarter with approximately 71 million board feet of lumber inventory and 793,000 cubic meters of log inventory. Turning to CapEx and cash flow, our 2024 total CapEx spending is expected to be approximately $35 million. From a balance sheet perspective, we ended the third quarter with liquidity of approximately $137 million and a net debt-to-cap ratio of 13%. As at the end of September, we had approximately $240 million in duties on deposit, which equates to approximately 55 cents 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. 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 bore 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. Stephen, that concludes my remarks.

Thanks, Glenn, and 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 production, 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. 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. 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.

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.

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 there, please?

Thanks, Matt. We measure overall reliability and uptime on a 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 right 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 SALT Air 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, you know, 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. 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. 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. 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.

Great. Thank you for the color there. Next for 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 and deposits and how you would evaluate those?

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

Hi, Matt. Yeah, I mean, the duties is something we continue to remain open to monetizing or looking at alternatives for that. Obviously, there's an insurance transaction that occurred with the peer during the quarter. I think all I can say is that, you know, it's something we continue to evaluate. You know, the proposals we've seen or been in discussions with, again, 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.

Great. Thanks very much. And if I could just speak one more. And just touching on your comments around the B.C. 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?

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 perhaps in the BC interior. But it's really around this clarity and certainty of access to fibre. 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 roadblocks that are in place for permitting is a key piece, and you know, policy can dramatically change that. So I would say the permitting side is front and center. You know, the BCTS system, you know, 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 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 in 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.

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

Thank you, Matt.

Thank you. Once again, please press star 1 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. Seale.

Well, 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.

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