Western Forest Products Inc.

Good day, ladies and gentlemen. Welcome to the Western Forest Products First Quarter 2026 Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. Following the prepared remarks, there will be an opportunity for analysts to ask questions. To join the question queue, press star then 1 on your telephone keypad. Should anyone need assistance during the conference call, they may reach an operator by pressing star then zero. 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 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. Mr. Hofer, please go ahead.

Thank you, Colleen, and good afternoon, everyone. I'd like to welcome you to Western Forest Products' 2026 first quarter conference call. Joining me on the call today is Glenn Montell, our Chief Financial Officer, and Bruce Alexander, our Senior Vice President of Sales, Marketing, and Manufacturing. We issued our 2026 first quarter results yesterday. I will provide you with some introductory comments and then ask Glenn to take you through our financial results. And then I'll follow up with an interview with our outlook section before we open the call to your questions. We saw improvements in lumber pricing in the first quarter despite some softness in demand for certain product lines. We continue to execute our strategic priorities and have taken steps to solidify our balance sheet to manage through near-term uncertainty. Since the beginning of the year, this has included announcing the sale of our Stillwater force operation, including TFL 39 Block 1 for $80 million to the Tlaman First Nation. Western will enter into a long-term fiber supply agreement with the purchaser to ensure log supply supports our VC manufacturing facilities. This landmark transaction is anticipated to close in the second half of 2026. At our Columbia Vista sawmill site, we finalized our property insurance claim for U.S. $28.8 million. In addition, we continue to work towards the finalization of the sale of the sawmill property, and have also submitted our business interruption insurance claim to our adjuster. We commissioned the first of our two continuous dry kilns at our value added division, achieving startup uptime above our target. Site construction continues on the second continuous kiln, which is expected to be commissioned in mid-2026 on schedule and on budget, as well as a new thermal kiln, which is expected to be commissioned in the third quarter of this year. These investments will allow for more kiln-dried lumber production, generating higher margins than grain lumber, and enabling the expansion of our global customer base. From a labor perspective, we completed a six-year collective agreement that covers USW employees at the Laplacian Forestry Limited Partnership, ending the strike that began in the second quarter of 2025. In our timberlands group, we continue to focus on managing costs and log margin opportunities, as well as the safe restart of operations at Laplacian Forestry Limited Partnership. In our manufacturing group, we improved our operational uptime to 87% in the first quarter of 2026, compared to 82% in the first quarter of last year, with improvements noted at every one of our sawmills. In our sales and marketing group, we continue to focus on market diversification efforts to grow our global customer base. We have seen some modest improvements in lumber demand as we start the second quarter, but anticipate continued near-term volatility given combined duties and tariffs of 45%. I will now turn it over to Glenn to review our key financial results. Thanks, Stephen.

First quarter adjusted EBITDA was negative $13.6 million, as compared to $3.5 million in the same period last year. First quarter adjusted EBITDA included a one-time $2.8 million expense related to changes in inventory accounting estimates and $1.9 million of share-based compensation expense due to a 34% increase in share price in the first quarter. Other items that impacted first quarter results compared to the same period last year included a 28% reduction in lumber shipments, a 29% reduction in log shipment due to lower harvest volume, and higher softwood lumber duties with a combined duty and tariff rate of 45% compared to 14% last year. This was partially offset by higher log prices and a stronger mix of log sales and higher average lumber prices and stronger specialty sales mix. We closed the first quarter with approximately 63 million board fees of lumber inventory and 500,000 cubic meters of log inventory. Our log inventory is very lean, and the lowest it's been in over the last decade, which may result in some sawmill operating curtailments in the second quarter. Turning to CapEx, our 2026 total CapEx spending is expected to be between $45 to $50 million, which includes approximately $16 million related to previously announced continuous kilns and one thermal kiln at our value-added division. From a balance sheet perspective, we ended the first quarter with a liquidity of approximately $229 million and a net debt to capitalization ratio of 9%. During the quarter, we entered into a new $30 million term loan, which was utilized to repay drawings under our syndicated credit facility. Assuming the successful completion of the sale of our Columbia Vista sawmill property and Stillwater Forest operations, combined with anticipated Columbia Vista property and business insurance interruption insurance proceeds, we expect to receive net proceeds after tax of approximately $110 to $120 million in 2026, based on the current U.S. dollar to Canadian dollar foreign exchange rate. Touching on fuel and oil costs, at current oil prices, increases in direct operational costs plus current fuel surcharges from Timberland contractors and logistics providers represents approximately 3% of our overall cost structure. We continue to monitor the situation and will seek to manage and mitigate increases in fuel and oil-related costs in our business where possible. 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 the hillsides, our costs tend to rise as steeper and more difficult terrain increases harvesting complexity. While no forest fires are currently impacting our operations, early hot and dry weather on the BC coast may impact rural operations in the second quarter. From a market perspective, North American lumber consumption typically increases as we move into the spring season. We plan to continue to match lumber production with market demand. Stephen, that concludes my comments.

Thanks, Brian. So, turning to our market outlook, demand and pricing in North American lumber markets improved towards the end of the first quarter. As the spring season approaches and building activity picks up pace, pricing is expected to increase before stabilizing by the end of the second quarter. That said, persistently high interest rates, along with recent increases in oil prices, may curb demand in the short term. Some Western Red Cedar inventories remain high in certain markets, and customers remain disciplined in managing their inventory levels to avoid slower-moving products. Lumber demand in Japan is showing signs of recovery in the second quarter of 2026, supported by an anticipated increase in housing starts during April and May. This improvement is expected to be partially offset by higher fuel surcharges and a weak yen to US dollar foreign exchange rate. Lumber markets in parts of China began to show signs of renewed demand following the Lunar New Year slowdown. The Chinese market remains competitive for price with offers readily available from all global suppliers, and modest price increases are anticipated in the second quarter. Overall, we currently have a second quarter order file of approximately 103 million board feet. Looking ahead, we remain focused on executing our strategic priorities and CapEx plans, including realizing significant cash flow from asset sales to ensure We maintain 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 then 1. You may cancel your question at any time by pressing star then 2. Please press star then 1 at any time if you have a question. Our first question is from Ben Ivexson with Scotiabank. Please go ahead.

Thank you very much, and good afternoon, everyone. I have three quick ones. The first one is, can you just talk about this new measurement that you announced in your disclosure, and what was the purpose of making the change, and how does it improve disclosure?

Sure, Ben. Maybe I'll take that one. As you know, obviously, us being slightly different than the commodity lumber players, we have a mixed specialty in commodity lumber products. Historically, those products were measured on different measurements than, you know, the commodity lumber peers that measure, you know, commodity lumber typically all on a nominal measure basis. So, what, you know, historically as you look through our results, you'd have a mix of both net lumber measurement and nominal lumber measurement, which would sort of, you know, cloud some of the volumes and, you know, per board foot or per thousand board foot measures. And so, this step was really just to take that noise out of the data of the two years of historical we stated and the numbers going forward to, you know, take that more, take that complexity out of the numbers we disclosed going forward and help the comparability when you look quarter over quarter.

Okay. That's helpful. That makes sense. So, maybe on that point then, that's a good segue. I noticed that your specialty mix was about, I think you said 57% versus close to the 50 or 51% previously. Is that just a function of the market and kind of where demand is right now? or is that moving towards a longer-term target of more specialty product and potentially reduced volatility on your free cash flow or on your earnings?

Yeah, I'll take that one, Ben. Maybe it's the mix of both. I think historically what we've set our target is, you know, a specialty mix of somewhere between 55% to 60%. I think You know, that is our long-term target, and as we continue on with advancing and finalizing our fill investments to, you know, move our product up that value chain, you know, that is what we would look to target from a specialty mix. And, you know, as you're well aware, it provides a little bit more stability, a little more margin, and sort of takes out the commodity volatility of our business.

And then this last question is on this 3%. I think you talked about higher cost. I'm just trying to understand how much of it is structural versus, you know, transitory as a result of what's happening in the Middle East? And, you know, assuming that winds down, do we get some of that cost pressure back?

Yeah, and so when we talk about the 3% and just for simple numbers, on an annualized basis, it's about $30 to $35 million impact. You know, that is all just pure fuel. None of it's structural. So, you know, our expectation is, you know, we're seeing fuel surcharges come from whether it's contractors or logistics providers. And obviously, they're very fast at putting these surcharges in. You know, if we did see a resolution to the complicated metal lease and oil prices do decline, our expectation is that those surcharges would come off just as quickly. So, we view it as more a temporary aspect. Obviously, no one has a crystal ball to say how long they may be in place. But, yeah, our expectation is that any of these fuel surcharges will come off as oil if oil wants to move back to more typical levels ahead prior to the conflict in the Middle East.

That's perfect. Thanks so much, Chris. Thanks, Ben.

The next question is from Sean Stewart with TD Collins. Please go ahead.

Thanks. Hi, everyone. A couple questions. So after the Stillwater sale, the insurance claims, and I guess Columbia Vista site sale, eventually, you guys all get cash on the balance sheet. And I'm wondering how you're thinking about capital deployment options. You've got these kiln projects rolling through. What's the intent going forward with capital structure that makes sense given where we are in the cycle and inherent volatility? And is there any incremental capital allocation target, be it incremental CapEx or M&A that might make sense for the company?

Yeah, John, as long as I'll take that one. Yeah, if we're successful in, you know, these asset sales, you know, we do expect to be in a net cash position by the end of the year. I think our first priority, obviously, some of that cash will be used to complete our kiln projects that are currently underway. I'd say, you know, in the near term, you know, we might be a little more conservative on the balance sheet and maybe put on some excess dry powder here until we potentially see you know, signs of a broader recovery. So, you might see us sit on some, you know, cash in the near term. I think longer term, you know, we still remain quite interested in obviously growing the business. You know, and here what is still an area that, you know, we like and would like to grow in. You know, I think there would be opportunities for us to consider on, you know, the strategic CapEx side, whether, you know, in our existing business or externally via M&A. But if I had to look over, say, the next, you know, 12 to 18 months, you know, our focus is getting these assets sold, getting the kilns in place, and then maybe we're going to sit on some, you know, a little bit of excess drive out of here just until we see maybe some clarity around the duties and tariffs and some clarity around some recovery, further recovery in lumber markets.

Okay. Got it.

And Glen, just with respect to the cadence of the lumber volumes here going forward, log in stories are tight. This is a busier harvest quarter. Any context on, over the next couple quarters, incremental volume uplift on the lumber side, relative to what we saw in Q1? Just trying to get a sense of how this plays out through the year.

Yeah, so seasonally, we would expect, you know, lumber volumes to increase here in the second quarter off Q1, which is typically a lower quarter. You know, I think it'll be a gradual increase. I mean, you know, last year, we, you know, restated or readjusted. We were about 173 million board feet. Obviously, that included our Columbia Vista, which was about 15. I say if you take that off, you know, we're probably slightly below that, but you should sequentially here versus Q1, you know, see an increase in volume. You know, I'd probably say somewhere into the, you know, the 130 to 145 range in the second quarter.

Okay. Okay. That's all I have for now. Thanks very much, guys.

Thanks, Sean.

The next question is from Matthew McKellar with RBC Capital Markets. Go ahead.

Hi. Thanks for taking my question. Personally, duties are likely to step lower for you later this year. I know the U.S. is a smaller market for you than maybe some of your Canadian peers, but what does that step lower in duties mean for how you manage your business and market your lumber? And maybe as a related question, and I'll keep it pretty open-ended, Are there any product categories we expect to be better positioned competitively as substitute products maybe see some cost push, price inflation downstream of the petrochemical industry disruptions we're seeing? Thank you.

Thanks, Matt. You know, as we look at this step change down, obviously, it is meaningful to us. That'll expected to take place sometime probably October. It might even get pushed a little bit later than that depending on how the U.S. decides to implement it. But, you know, despite, you know, our volumes being I think we're only about 18% in the quarter, you know, the U.S. market is an incredibly important market to us from a value perspective. And so, you know, it does drive, you know, the core sales for a lot of our high-grade cedar and even some of our knotty cedar product lines. So, you know, critically important that you find a, you know, a solution to the ongoing trade dispute. In terms of what it could potentially mean for, you know, capturing some additional market share, you know, clearly, you know, there's not a lot – aside from – the impact on our conversion costs with the increase in fuel and some potential logistics costs, you know, our products don't have any, you know, fuel or petrol chemicals as an input like some other substitutes. So, you know, I think there might be some opportunity with respect to some of the other, you know, exterior cladding, exterior decking products that are, you know, non-wood. I think the key pieces, you know, one, get the trade settlement solved, and then, you know, find a path forward to having greater affordability take place across the U.S. housing market. Those are the, you know, two key drivers that we see as really important for continued growth in our sales into that key market.

Great. That's helpful. Thanks. Just last for me. I think you said in your preparative remarks that your new kiln capacity opens opportunities related to your global customer base. Can you just maybe elaborate a bit there? Will your exposure to non-Canadian, non-U.S. markets grow as these kilns come online? And how meaningful are oil and ocean transportation costs as it relates to how this business develops? Thanks.

Yeah, I would say that when we look at Japan, obviously that market is now essentially 100% stone-dried solid wood products, and we want to continue to capture market share in Japan. We looked at some of the evolving market trends in China. Historically, because of a lack of stone-dried capacity, we were a supplier of rough green lumber, and now we're able to kind of move up the the value chain, so to speak, and go into that market with significantly more kiln-dried product. And, you know, that market continues to get more sophisticated and demand more kiln-dried products. And we're seeing that as a real opportunity for us. So, you know, directionally, as you think about the balance, the second half of this year and into – Next year, our percentage of kiln-dried product going into China will be growing. With respect to logistics and the impact of the current fuel surcharges, I think the first round of cost increase came in at around $200 a container they were trying to put forward, and I think the number settled at about $50. You know, everyone's pretty quick to try and ratchet up the price, and we're pushing back significantly on that. But, you know, in the short term, we will have, you know, $50 to probably $75 a container. So not a, you know, a real significant impact at this point into that particular market.

Okay. Thanks for all the color. I'll send it back.

Thanks, Matt.

This concludes the question and answer session. I'd like to turn the conference back over to Mr. Hofer for any closing remarks.

Well, thanks, everyone, for joining our call today. We certainly appreciate your continued interest in our company, and we look forward to our call in August. Have a great day.

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