Western Forest Products Inc.

All participants, thank you for standing by. The conference is ready to begin. Good afternoon, ladies and gentlemen. Welcome to Western Forest Products 2021-2025 Results 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 four 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 complemented by the company's quarterly 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 forelooking statements. I'm going 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 afternoon, everyone. I'd like to welcome you to Western Forest Products' 2025 First Quarter Conference Call. Joining me on the call today is Gwen Montel, our Chief Financial Officer, and Bruce Alexander, our Senior Vice President of Sales, Marketing, and Manufacturing. We issued our 2025 first quarter results yesterday. I will provide you with some introductory comments and then ask Gwen to take you through our financial results. I will then follow Gwen's review of our outlook section before we open the call to your questions. We delivered significantly improved results in the first quarter of 2025 compared to the same period last year. Supporting these improved results was success in executing on our strategic priorities, allowing us to significantly reduce our debt and position Western for future growth. During the quarter, this included gratifying a new six-year collective agreement with the USW, completing significant non-core asset sales for gross proceeds of $76.5 million, and extending the maturity of our $250 million credit facility for three years to July 2028. We were also successful on executing our strategic CapEx clients, which included advancing site preparation for two continuous ride signals that are valued at a division, These kilns are planned to be completed and commissioned in early 2026. We also entered into an agreement with the BC government through the BC Manufacturing Jobs Fund to reimburse up to $7.5 million of eligible expenses related to our kiln investments. From an operational perspective, we continue to focus on improving our efficiency and recovery to drive increased profitability. In our manufacturing group, this includes a continued focus on operational uptime and reliability. Despite the mechanical downtime at the dew point sawmill, we are very impressed with the Slabberhead Capital Project. We are now experiencing 90% operational uptime with improved lumber and grade recovery. We continue to be very impressed with our first continuous film at our saltwater sawmill. It has been achieving above target uptime of 99%, and we look forward to the commissioning of the two new CDKs in early 2026. In our timber landscape, we continue to focus on improving our specialty log source stratification and reducing our harvesting costs. However, harvest permitting delays in some tenures are leading to lean log inventories for certain BC psalms. We continue to work with all parties involved in the permitting process to ensure economic viable laws are available to support our value-added manufacturing facilities. In our sales and marketing group, we continue to focus on growing key strategic customer accounts and diversifying our customer base. Supporting these initiatives was year-over-year wholesale lumber shipment growth of 28%. I am proud of the significant contributions across our entire organization. While the direction of U.S. trade policy remains uncertain, our significant efforts have provided for a strong balance sheet to navigate through near-term volatility and uncertainty. I will now turn it over to Glenn to review our key financial results.

Thanks, Stephen. First quarter adjusted EBITDA was $3.5 million. as compared to negative $4.2 million in the same period last year. As compared to the prior year, results in the first quarter benefited from higher lumber shipments and prices, a stronger U.S. dollar exchange rate, and improved log prices and sales mix. This was partially offset by increased cost for lumber duty, lower external log sales volume, and a weaker lumber sales mix. We closed the first quarter with approximately 66 million board feet of lumber inventory and 753,000 cubic meters of log inventory. We've been taking proactive steps to improve our inventory turnover, with log and lumber turnover ratios improving 6% and 12% respectively compared to the same period last year. Turning to CapEx, our 2025 total CapEx spending is expected to be between $60 to $65 million dollars, approximately $30 million related to two continuous kilns. We may reduce our 2025 planned traffic spending depending on how market and financial conditions evolve through 2025, with the near-term priority of maintaining a strong balance sheet. From a balance sheet perspective, we ended the first quarter with a significantly delevered balance sheet compared to the end of the last quarter, ending the quarter with a net debt-to-cap ratio of 4%. We were also successful in extending our $250 million credit facility for three years to 2028. With respect to soft and lumber duties, preliminary rates for the sixth administrative review have been released. The preliminary combined rates applicable to Western of approximately 34% will be finalized in the second half of 2025. Should the final rates be unchanged from the preliminary rate, Western will record an incremental non-cash duty expense of approximately $43 million U.S. dollars plus accrued interest of approximately $7 million U.S. dollars in the second half of 2025. These amounts will reduce the current long-term duty receivable of $58.2 million U.S. dollars on our balance sheet. Turn to second quarter seasonality. Typically in second quarter, our harvest volumes increase as snow recedes and we stand our As our harvest activities move further up the hillside, our costs tend to rise as deeper, more difficult terrain increases harvesting complexity. From a market perspective, North American lumber consumption typically increases as we move into the spring season. We plan to continue to match production to market demand. Even that concludes my remarks.

Thanks, Glenn. Turning to our market outlook. North American markets are expected to be volatile due to concerns around the potential economic impact of tariffs. This may result in a more muted spring building season. In Japan, channel inventories have declined and lumber prices have improved. We anticipate our lumber shipment volumes to Japan will improve in the second quarter compared to the first quarter this year. Demand for our industrial lumber products in North America are expected to strengthen as supply remains tight across all species. In China, significant U.S. tariffs on Chinese exports have caused some concerns within the economy. However, China's ban on imported U.S. logs may lead to an increase in demand for Canadian lumber. Overall, we currently have a second-quarter order file of approximately $116 million. Touching on U.S. tariffs, in addition to existing software lumber duties currently in place, U.S. President Donald Trump has proposed various potential tariffs and trade measures on countries and products. We are working with all levels of governments across Canada to advocate for programs and policies that will best enable the forced sector to serve global markets and manage through these uncertain times. We continue to monitor the situation but cannot determine the impact on our business until there is greater priority provided on any potential incremental U.S. tariffs. Looking ahead, we will remain focused on maintaining a strong balance sheet while also executing on our strategic priorities. With that, Patrick, you can open the call up to questions.

Thank you. We'll now take questions from the telephone lines. If you have a question, please press star 1. You may answer 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 brief pause while the participants register for their questions. Thanks for your patience. The first question is from Sean Stewart from TD Taiwan. Please go ahead.

Thanks. Good afternoon, guys.

A couple questions. You touched on all the measures you've taken to augment the balance sheet and bolster liquidity. Steven, just wondering if I can get a little more perspective on the Section 232 investigation and your comfort with liquidity if incremental tariffs are applied. Updated thoughts on your ability to pass that on to customers across your grade profile. Thanks, John. Appreciate the question. I appreciate you joining the call this morning. So Section 232 of the U.S. Trade Expansion Act allows the President to impose trade restrictions as part of national security decisions. And the Trump administration has launched a review of lumber imports under this Section 232, which is in process and expected to be completed later in the year. The Canadian industry and many of our U.S. customers of Canadian lumber have made submissions as part of that review process, taking the case that Canadian lumber serves to alleviate a U.S. deficit in lumber capacity versus consumption, and certainly from our perspective, in no way represents a security risk to the United States. And at this point, with everything that we know, we certainly feel that our balance sheet is is in a very strong position. We've worked very hard for the past 16 months to put ourselves in this position. And we'll continue to be very much focused on managing the balance sheet as it sits today. And as Glenn shared, if we need to slow back on some longer-term strategic capital, we will do that. And Bruce is on the call here today with us as well, and we're already socializing and have been socializing since January 6th in the event of new tariffs that we plan to pass as much as that on to the U.S. consumer as possible. And we're really mitigating this by tapping into the fact that Western has a long history of serving global markets. I think today we sell into over 30 different countries. We do have a little bit of overexposure in the U.S. on a couple of product lines, but we're really focused today on market diversification and some product diversification as well. Bruce, maybe you can just share a comment or two on your view of our ability to pass internal tariffs onto the U.S. side. Yeah, we should maybe take a kind of close look at it. It really depends on which segment of our business that you're speaking about. And when we look inside the feeder business, which is a large portion of what we're shipping into the U.S., depending on the product category that we're talking about, we feel that we'll be able to pass on roughly from 25% of the incremental duties up in some cases in the shop and veteran clear pipe products where supply is really constrained. We expect to get close to all of the incremental duties back. So it really depends on which market. But as Stephen mentioned, you know, we have some levers in terms of mitigating our risk, both from a product diversification and market diversification perspective, as well as utilizing pipes where we can, depending on the pigment product that we're talking about. Thanks, Rob. Thanks for that. Just one follow-up, guys. Maybe for Glenn, do you see the line of sight on additional discretionary CapEx projects beyond the two-chome projects? Do you have anything sort of in the hopper for 2026 if markets work out maybe better than anticipated? Or should we consider this as sort of the bigger CapEx year and more of a normal trend into 2026? Well, we certainly have... plans in place that align with our acceleration into additional value-added manufacturing and value-added product lines. But, you know, all of that is going to be executed in the constraints of the balance sheet. So if we need to slow walk a couple of additional strategic priorities that we have outlined in 2026, we'll actually do that. clearly the capital required to execute our timberland strategy is important. And, you know, so we'll probably have a fairly similar year in 2026 related to overall roads and bridges to support Don and the timberlands group. So I would say that will probably be normalized, but we'll be – Again, very, very disciplined on any incremental strategic capital in light of all the great work that we've done to put ourselves in this position from a balance sheet perspective and maintain that liquidity as we face these uncertain times. Thanks for that detail, Stephen. That's all I have for now. Thanks, John.

Thank you. Thank you very much for taking my question.

Just one question for me. You mentioned that you're a little bit overweight in the U.S. in terms of exposure, and you talked about how the North American markets are volatile. My question is, how nimble is the portfolio or how much has it been kind of designed for the regional mix that you have right now? Is there an appetite? Is it possible to exit the U.S.? Is that something you talk about? Could you switch more to a heavier weight in China, Japan, and other offshore markets? Just to understand kind of how much flex there is if things don't go the way we want them to.

That's an interesting question. Just to clarify, I don't think I said that we were overweighted into the U.S. I think you have a couple of product categories that I would define as more of a key market and a key area of demand that we've serviced for many, many years. With respect to our ability to be nimble and quickly reposition, we're in the business of of extracting margin. And I think all of us can appreciate that, uh, for certain product lines that are, uh, they'll be manufactured in, in finished product format. You know, the United States is the most, uh, uh, important market for some of those product lines. And, you know, there, it's, it's an important market because that's, uh, that's the market in the world that pays the highest price. And so, um, when Bruce talked about our ability to, you know, have that market take on additional price, we think there are certain market segments that can do that. And if we think back on the period during COVID, you know, there certainly was many, many product lines that took on significant price increases and maintained market share. But a little different scenario today where we have to be mindful of the U.S. consumer and just how much incremental price they're prepared to pay for certain products. You know, certainly our Japan business is, you know, very strong, very well positioned, and we're very pleased with where the order file is for Q2 and where we see initial demand for Q3. Overall, our position in China is less than it has been historically over the last couple of years, but that's by design as well. And then our focus on Europe will continue. We have a very strong customer base in Europe for a wide range of product lines. And then our focus on Australia and New Zealand for certain areas, product lines in the speeder category, that market continues to be very solid. We are nimble. We're doing some work on the product development side around thermally modified wood. That will continue to give us additional flexibility on where we're able to sell that product line and again focus on where the highest margin opportunities are. I'm pretty pleased with the effort that we've had in the last six months to work on mitigating, you know, the potential threat of additional tariffs and the incremental use.

That makes a lot of sense. Thanks so much. I appreciate it.

Thanks, Ben. Thank you. The next question is from Matthew McKenna from RBC Capital Markets. Please go ahead.

Hi. Thanks for taking my question. This one's for me. Just looking at your log harvest values in the quarter, you know, that pretty substantially talks about a cutting permit issue. Should we be thinking about, I mean, the sale of private timberlands or other recent changes to the parts of the land, is that going to impact there, or is this really ensuring mostly a cutting permit issue? And if so, in what sense do things get better kind of in the future as it progresses, or how should you think about harvest through the balance of pay class? Thanks.

Thanks, Matt. I might just add a comment just to begin with. One is that, you know, we're getting a bit more accustomed to having a little bit less inventory both in log form and in lumber form. You can see that in the numbers that were disclosed earlier. it speaks to our focus on working capital. So overall, I don't think anyone ever, I certainly don't want any of our management team ever to feel comfortable when it comes to inventory levels. There should always be a little bit of uncomfortable feeling when it comes to inventory because that tells me that we're continuing to get as lean as possible throughout the whole supply chain. So When I think of actual harvesting levels in Q1, they were very much in line with our business plan to support the requirements of the mills. And we're going to continue to be very disciplined on that. And so we don't see a need to have a million cubic meters of continue to be focused on being very lean and manage our working capital. With respect to the private land, that was a relatively insignificant volume overall of our log harvesting and our log volume for the next number of years. And so it really doesn't have any impact on on our harvesting and or our log needs. I think it's less than 2% of our consumption. Any other questions related to that, Ben?

I mean, this is a pretty good runway to pick about for harvest. I don't really see the balance of 25, as you'd be expecting in terms of some kind of IQR model.

Yeah, I think it's pretty much in line with our business plan. We actually had a very good start to the year. The weather cooperated. We were able to get into some old growth a little bit earlier than expected. You know, in the log market overall, you can see that in some of the results that we're sharing. The log market's pretty good. So we're pleased on where we're at and don't anticipate that. you know, any material change as we look for the balance of the year.

Great. Thanks very much. I'll take it back.

Thanks, Matt. Thank you, Delano, for the questions registered at this time. I would like to turn the meeting back over to Mr. Hofer.

Well, 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 August. Thank you very much.

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

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