Western Forest Products Inc.

Good morning ladies and gentlemen. Welcome to Western Forest Products fourth quarter 2024 Resolved 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 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 MDNA, which can be accessed on CDAR and is supplemented by the company's hourly MDNA. 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 will now like to turn the meeting over to Mr. Stephen Hofer, President and CEO of Western Forest Products. Mr. Hofer, please go ahead.

Thank you, Patrick, and good morning everyone. I'd like to welcome you to Western Forest Products 2024 fourth quarter conference call. Joining me on the call today is Glenn Nantel, our Chief Financial Officer, and Bruce Alexander, our Senior Vice President of Sales, Marketing, and Manufacturing. We issued our 2024 fourth quarter and full year results yesterday. I will provide you with some introductory comments and then ask Glenn to take you through our financial results. And then I will follow Glenn's review with our outlook section before we open the call to your questions. We delivered significantly improved results in the fourth quarter in the full year of 2024 compared to the same period of 2023. Supporting these improved results was success in executing our strategic priorities, allowing us to reposition our business and balance sheet. Over the last year, this has included continuing to focus on safety with several of our operations achieving zero recordable incidents in 2024. Rolling out new company vision and values to enhance our culture and support a shift in mindset. In Timberlands, we continue to focus on improving the stratification of our specialty log sorts, such as pole and peeler logs. In 2024, these efforts delivered incremental gross margin in excess of six million dollars. In manufacturing, we improved our operational uptime to 85 percent in 2024 compared to 83 percent in 2023 and continue to focus on log and lumber recovery. In sales and marketing, we grew strategic customer accounts and focused on the customer experience. Supporting these initiatives was year over year wholesale lumber shipment growth of 58 percent. From a capital investment perspective, we were successful on executing on our CapEx plans. This included completing and commissioning the first continuous dry kiln on the B.C. coast at our Salter sawmill in March 2024. Since commissioning, we have operated at 99.2 percent of full capacity utilization, and we expect an EBITDA payback of less than two years on our 13 million dollar investment. We also commissioned new automated grading equipment, which is assisted by artificial intelligence at Duke Point in September 2024. We expect an EBITDA payback of less than two years on our 4.6 million dollar investment. We commissioned a new slabberhead at Duke Point to support increased production and improvements in ship recovery. We expect an EBITDA payback of approximately three years on our 5.7 million dollar investment. We continue to advance pre-engineering and permitting related to two additional dry kilns on the B.C. coast, and in 2025 we plan to explore opportunities in thermally modified hemlock. We were also successful in setting the business up for long-term success, which included ratifying a new six-year collective agreement with the .S.W., which is one of the longest-term agreements in the history of the B.C. Coastal Force Sector, completing the sale of a 34 percent interest in a new limited partnership with four Vancouver Island First Nations for 35.9 million dollars in March, and repositioning our balance sheet through significant non-core asset sales. Earlier this week, we completed the sale of our Northern Private Timberlands for gross proceeds of 69.2 million dollars. We plan on using the proceeds to repay debt and support our previously announced kiln investments. We remain focused on working capital reductions throughout the business, which included increasing our overall inventory turnover by five percent -over-year, as well as reducing controllable corporate overhead by 2.4 million dollars. I am very proud of the significant contributions across our entire organization. These efforts have provided for a strong foundation to continue to build on in 2025. I will now turn it over to Glenn to review our key financial results. Thanks,

Stephen. Fourth quarter adjusted EBITDA was 14.4 million dollars, as compared to negative 1.2 million dollars in the same period last year. As compared to the prior year, results in the fourth quarter benefited from higher lumber shipments and prices, higher log prices, and a stronger log sales mix. This was partially offset by a weaker lumber sales mix, lower external log sales due to lower harvest levels, and increased softwood lumber duties. We closed the fourth quarter with approximately 63 million boardfeet of lumber inventory and 838,000 cubic meters of log inventory. Turning to capex and cash flow, our 2025 total capex spending is expected to be between 60 to 65 million dollars, which includes approximately 30 million dollars related to two previously announced continuous kilns. From a balance sheet perspective, we ended the fourth quarter with liquidity of approximately 145 million dollars and a net debt to cap ratio of 12%. These metrics do not include the 76 million dollars in gross proceeds from the sale of our northern private timberlands and pending Albany Pacific Division sale. We expect to record an accounting gain of approximately 23 million dollars in the first quarter of 2025 related to the sale of the private timberlands. At the end of December, we had approximately 264 million dollars in duties on deposit, which equates to approximately 61 cents per share after tax. 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. We plan to continue to manage our manufacturing operating schedules to match production to market demand and available log supply. Stephen, that concludes my remarks.

Thanks, Glenn. So turning to our market outlook, demand and pricing for our North American Cedar product lines are expected to improve in the first quarter of 2025, with most of our business already booked with major distributors. The overall North American Cedar market is expected to experience shortages in most products in the second quarter of 2025, which is expected to lead to further price increases. In Japan, consumption is expected to remain moderate as housing starts and overall construction activities are low. Pricing remains more challenged due to a weaker Japanese yen to US dollar exchanger. However, inventories at Japanese ports continue to decrease, which we expect may marginally improve pricing in late first quarter and into the second quarter. Demand for our industrial lumber products have been quite strong and is expected to continue to gain momentum in the first quarter with decreased supply across all species. For commodity lumber, North American demand and pricing in the first quarter of 2025 is anticipated to benefit from industry-wide controlments experienced late in 2024. In China, despite a continued slowdown in housing and real estate, softwood lumber markets are performing above expectations. Inventories are low and prices have risen as a result. Going forward, volatility is expected as US tariff threats may impact exports to the US and result in lower demand for lumber. Overall, we currently have our first quarter order file of approximately 120 million boardfeet. Touching on lumber duties and tariffs. On February 1st, US President Donald Trump signed an executive order imposing a tariff of 25% on imported goods from Canada to the US. The original planned implementation date was February 4th, but on February 3rd, the implementation date was delayed 30 days. The incremental US tariff is in addition to the current US softwood lumber duties of .4% for Western. We have informed customers of our intention to pass on the incremental US tariff in our lumber prices if implemented. We are working with all levels of governments across Canada to advocate for programs and policies that will best enable the forestry sector to serve global markets and manage through these uncertain times. Over the last several years, our lumber shipments from Canada to the US represented approximately 27% of our total shipments. Looking ahead, we will remain focused on executing our strategic priorities and CAPEX plans while also ensuring we maintain a strong balance sheet. With that, Patrick, we can open the call up to questions.

Thank you. We'll now take questions from the telephone lines. If you have a question, you may press star one on the 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 brief pause while the participants register for questions. Thank you for your patience. First question is from Matthew McKellar from RBC Capital Markets. Please go ahead.

Hi, good morning. Thanks for taking my questions. It sounds like you're seeing really good momentum in Cedar right now. I was wondering if you could speak to how meaningful the shift in demand has been versus maybe what's transpired on the supply side. Any thoughts around just how tight that market could be in Q2 and what your abilities like to flex volume to succeed or higher over the next couple of quarters to potentially respond here? Thanks.

Excuse me. Bruce Alexander here. Yeah, we saw an increase in demand starting in the fourth quarter and we've pretty much booked out our first quarter. All of our major distributors have strong inventories in place. At the time being, we're seeing a little bit of a hold back as distributors wait to see and hear the outcome on March 4th with respect to the US tariffs. We're looking at roughly similar volumes in Q1 in Cedar that we had in Q4 of last year. In terms of log supply, we're well positioned at both our small log mill and large log mills to maintain those production levels to meet the market demand.

Thanks. Thanks very much. If I could ask one more, you talked about exploring an opportunity of thermally modified hemlocks. Can you just expand on what you're kind of considering here and is it something you can build towards a potential investment in some kind in your own capacity? And where do you expect there to be the market opportunity? Is it North America or international markets in most of us? Thanks.

I'll just share a few comments on this. Thermally modified wood technology has been in place in Europe for a number of years, quite successful at developing the appropriate technology to produce this type of product as well as develop overall very strong market demand in Europe. So we certainly see this technology being very suitable here in North America. There is some product being imported from Europe today and being sold into home centers and distributors across primarily the US market. And we're pretty excited about it in terms of our ability to add significant value to our second and third growth hemlock timber stands. We see the species being very suitable for this type of technology. We see these type of products being very suitable in wild urban interface areas where we've seen the impact of catastrophic fires in California and other areas. And so our initial focus is a relatively modest capex investment that we're considering to really understand the technology, understand the species properties and walk before we run in terms of product development and putting this into the marketplace. But it's a strategic initiative for us. It's very much aligned with, you know, over 60% of our standing timber is hemlocked and we're pretty passionate about finding a way to add incremental value to that timber stand.

That's great. Thanks very much for the color. I'll turn it back.

Thanks, Matt. Thank you. The next question is from Sean Stewart from TD Cowan. Please go ahead.

Thanks. Good morning, everyone. A couple of questions. Stephen, you mentioned you've informed customers your intent to pass prospective tariffs straight through in pricing. And I wonder if you can just give a bit more perspective on demand elasticity in Western Roads Cedar markets in particular. It's my perception, I guess, through the soft lumber dispute, longer term, it hasn't always been easy to pass through duties, tariffs onto customers. It does feel like there's some tension in the market right now, though. And just broader perspective on your ability to pass that through and potential supply cuts that might be needed to get there.

Thanks, Sean. It's a great question. We don't have the crystal ball on this one dialed in, but, you know, there is some precedent over the last couple of years of the market being able to accept higher prices on some of our cedar product lines. And I just reflect back upon COVID and some of the supply constraints that occurred there and what occurred on product pricing in Cedar. Obviously, there was a very strong demand at that point as well, but there was an acceptance by the consumer and by the customer base to pay a higher price. Whether it's going to be 75% or 100% remains to be seen, but we're being very proactive in our communication across all distribution channels in the US to ensure that there are no surprises. And I think the industry as a whole is very much aligned on this approach and it's not just reflective of Cedar and Western, but I'm pleased to see that all the majors across Canada are approaching this in a very similar and a very disciplined way. So that will be important for us to be aligned on this and to ensure that we're being consistent in our approach. So, again, optimistic that with a little bit of incremental demand that we're seeing in the US marketplace that this will be achieved. But overall, our focus is, you know, how do we figure out a settlement and agreement between the two economies? And that's really the challenge that the provincial governments and the federal governments are tasked with today is, you know, how do we move forward with an economic union between Canada and the US that doesn't penalize and impact the consumer in the US and benefits the entire Canadian and US economy?

Thanks for that detail. And just following on that, you mentioned you're engaging with provincial and federal governments to talk about options to support the industry and there's mention of broadening international outreach. Can you give a little more perspective on what sorts of things you're talking about there and how you might expect that to unfold?

Well, from our perspective, you know, now is the time for BC and Canadian governments to take real bold action to provide economically focused policy and positive hosting conditions to foster investment, competitiveness and profitability here in Canada. You know, we need a relentless focus on unlocking the key economic sectors that drive prosperity. And here in British Columbia, forestry is at the top of this list. And, you know, as a fundamental first step, you know, that requires the end of disruptive restrictive policy initiatives, you know, combined with vastly improving clarity and timeliness on permits to secure the operating land base for all of us here in British Columbia. So there's a lot that we can do right here. You know, we don't want to see anyone hide behind this threat of tariffs. We need to fundamentally address some of the issues that I've spoken of here in terms of providing a more competitive landscape for us to operate here in British Columbia.

Thanks for that detail. That's all I have for now. Thanks.

Thanks, Sean.

Thank you, Your Honour, for the questions. At this time, I would like to turn the meeting back over to Mr. Hofer.

Okay. Well, thanks, everyone, for joining our call today. We certainly appreciate your continued interest in our company and look forward to our next call in May. And enjoy the long weekend,

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