Earnings call: Western Forest Products Q1 2024 amidst market headwinds

Western Forest Products Inc. (WEF) has announced its first-quarter results for 2024, navigating through challenging market conditions. The company has completed significant transactions, including the sale of a stake in its Mid-Island Forest operation and the commissioning of a new kiln that has shown high efficiency and strong returns.

While facing softer market conditions, Western Forest Products remains focused on profitability and demand growth for its lumber products, expecting an uptick in demand and prices shortly.

Despite ongoing efforts to sell a manufacturing facility, the company has not yet finalized a deal but is exploring new opportunities. They also anticipate variability in the market outlook for the latter half of 2024 based on product lines and global economic factors.

Key Takeaways

• Western Forest Products completed the sale of a 34% interest in its Mid-Island Forest operation for $35.9 million.
• The company launched the first continuous kiln on the BC Coast, achieving 97% efficiency and exceeding EBITDA targets.
• Plans are underway to add two more continuous kilns on Vancouver Island by 2025, with an estimated cost of $35 million.
• Liquidity stood at approximately $142 million with a net debt-to-cap ratio of 13% at the end of Q1.
• Active discussions to sell a manufacturing facility are ongoing, with no transaction concluded yet.
• CapEx budget reductions and potential market weaknesses in China were noted.
• The company is exploring the monetization of non-core assets, including softwood lumber duty refunds.
• The Japanese market is considered positive and stable despite supply and currency challenges.

Company Outlook

• Western Forest Products expects improving demand and prices for certain lumber products in the near term.
• The market outlook for the second half of 2024 is uncertain and will depend on product lines and global economic conditions.

Bearish Highlights

• The company acknowledged the softer market conditions it currently faces.
• There is a potential weakness in the Chinese market that could impact future performance.

Bullish Highlights

• The newly commissioned kiln at the Saltair sawmill is performing well, with high efficiency and EBITDA returns.
• Positive signs for demand and prices in lumber products are expected in the near term.

Misses

• Despite efforts, the company has not concluded the sale of a manufacturing facility.
• The cost of financing and monetizing softwood lumber duty refunds is higher than expected, at around 20%.

Q&A Highlights

• The company is actively engaged in opportunities to sell a manufacturing facility.
• Western Forest Products is considering the reduction of their CapEx budget.
• Supply challenges and the yen exchange rate may affect the Japanese market in Q3.
• The company believes its shares are undervalued and is working to demonstrate a return to positive EBITDA to regain investor confidence.

Western Forest Products remains committed to improving its profitability and maintaining a strong financial position despite the current market headwinds.

The company’s strategic initiatives, including the expansion of its kiln operations and the monetization of non-core assets, are expected to contribute to future growth and stability.

However, the overall outlook remains cautious, with a clear emphasis on adapting to the diverse challenges presented by the global economic landscape and specific market conditions.

InvestingPro Insights

Western Forest Products Inc. (WFSTF) is navigating a complex financial landscape, as reflected in the latest data and analysis from InvestingPro. With a market capitalization of $118.13 million, the company is trading at a low Price / Book multiple of 0.28, suggesting that its assets may be undervalued in the market. This could attract investors looking for potential bargains.

InvestingPro Tips highlight that the company operates with a significant debt burden, which is an important consideration for investors. Additionally, Western Forest Products is quickly burning through cash, a situation that might concern investors given the company’s need for liquidity to fund operations and investments, such as the commissioning of new kilns mentioned in the article.

Despite these challenges, the company pays a significant dividend to shareholders, with a high dividend yield of 9.86%, which could appeal to income-focused investors. This is particularly notable when considering the company’s stock is trading near its 52-week low, potentially offering a lucrative entry point for dividend investors.

For readers looking to delve deeper into Western Forest Products’ financials and future prospects, InvestingPro offers additional insights and metrics. There are currently 10 more InvestingPro Tips available for Western Forest Products at Use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, offering a more comprehensive understanding of the company’s financial health and market position.

Full transcript – Western Fst Prods (WFSTF) Q1 2024:

Operator: Good morning, ladies and gentlemen. Welcome to the Western Forest Products First Quarter 2024 Results 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 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 be different, including those factors described under risks and uncertainties in the company’s annual MD&A, which can be accessed on SEDAR and is supplemented by the company’s quarterly MD&A. Forward-looking statements are based 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. Steven Hofer, President and CEO of Western Forest Products. Mr. Hofer, please go ahead.

Steven Hofer: Thank you, Karl, 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 Glen Nontell, 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 continued 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 continued 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 Namgis 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 Saltair 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 peeler 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 nonresidential sectors. Hemlock and Douglas Fir timber and industrial programs, Hemlock treating programs and products and lamstock 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.

Stephen Williams: Thanks, Steven. 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 and 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 EBITDA 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 $0.53 per share after tax. Our book value was $1.83 per share at the end of March relative to the current share price of approximately $0.53 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 the 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 a more active spring season. We plan to continue to match production to market demand. Steven that concludes my comments.

Steven Hofer: Thanks Steve. 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 trend 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 our 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 and 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 feet. 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. [Operator Instructions] The first question is from Hamir Patel.

Hamir Patel: Hi. Good afternoon. Steve and Steven, 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?

Stephen Williams: Hi. Hamir, it’s Steve here. I think as we indicated, the markets have been a little bit firmer in our outlook and highlighted some progress, I think, on order file type of things. So we don’t give guidance specifically around EBITDA. But I think, again, things are trending positively.

Hamir Patel: Thanks, Steve. That’s helpful. And 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?

Steven Hofer: 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 BC Coast. We do have some product overlap in Western Red Cedar and we do buy and sell logs with TL Jones. Currently, we don’t have any material financial exposure to their process. But yes, we’re certainly aware of the situation and hoping for the best as they go through their process and once they’re back up and running, we’ll reengage and be a strong business partner with them as we have in the past.

Hamir Patel: Great. Thanks. Steven, that’s I had all. I will turn it over.

Steven Hofer: Thank you.

Operator: The next question is from Sean Steuart. Please go ahead.

Sean Steuart: 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 the thoughts on valuation parameters if that is the approach you’re taking?

Steven Hofer: Yes, Sean, thanks for the question. Clearly, we’ve been very focused at trying to find 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 Steuart: Okay. Thanks for that. A couple of questions on the kiln projects. Just trying to wrap my head around, how you guys think about incremental EBITDA and returns from Saltair 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 into your return calculation, just a bit more granularity on that topic?

Glen Nontell: Yes. So, it’s Glen. Just on – specifically on the Saltair kiln, that’s probably where the majority of the uplift comes is, that incremental margin you can realize on a KD product versus the green product. There are some cost savings of drying internally versus externally, but the larger margin comes from that uplift in the product value.

Sean Steuart: And reminder, Glen, on how you think about returns or payback periods for those investments?

Glen Nontell: Yes. So we have a threshold of 20% for sure on capital for any strategic investments. I mean, I can speak on that kiln today that [indiscernible] a net basis around $12 million. Our target EBITDA return related to that Kiln would be $9 million in incremental EBITDA annually. So very, very high return on capital employed.

Sean Steuart: Okay. Thanks very much guys. That’s all I have for now.

Steven Hofer: Thanks, Sean.

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 a little bit on the reduction in your CapEx budget this year, which I think was a $15 million reduction. I think you called out maybe a couple of million specifically through the CDK spending. But is there anything you can tell us about what’s going to move from the budget?

Glen Nontell: Matt, it’s Glenn. A mix of everything across the board, other maintenance, other strategic projects, I think we thought it was just prudent just given the first quarter penciled out in our outlook as much as it’s positive for the rest of the year, we thought it was a prudent move just to reduce or defer some of that spending.

Matthew McKellar: That’s helpful. Then maybe one of – just a couple of different end markets. I think your commentary on China was that things could weaken there as you progress through 2024, which is a little bit weaker than I think you were talking about previously. Can you expand on that at all? And then I think [indiscernible] and Stella Jones talked about a bit of a slowdown in utility poles. I was wondering if you see any impact to the utility cross arms business?

Bruce Alexander: Hi. It’s Bruce here. Maybe I’ll speak to China and then leave the cross arms or utility pole question for Steven. Yes, we’ve seen obviously 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 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 they’re 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.

Steven Hofer: Then maybe I’ll just share a couple of comments around the pole and the peeler question. Certainly, with in 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 extract a fairly high volume of poles from those areas. And then we’ve had a long time focus on both Doug Fir and Hem Fir peeler grade logs as well. With respect to the pull side of it, we have a couple of different customers and we continue to ensure that we have the right diversification, 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 poles 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 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 timeframe.

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 consider at the right price?

Glen Nontell: Matt, it’s Glenn. More generally, we’re looking to consider all opportunities to monetize non-core assets, which we believe will be value accretive to our shareholders. This has included our softwood lumber duties. I’d say based on some preliminary discussions we’ve had around the softwood lumber duties, the implied cost of financing and monetizing a portion of them is well beyond the financing rates, which are available to us. Depending on the expectation around when duties might be returned and people’s expectations around timeline of that – based on our math implied cost of financing, it’s pushing somewhere around 20%.

Matthew McKellar: Great. Appreciate the color. That’s all for me. I will turn it back. Thanks.

Steven Hofer: Great. Thank you.

Operator: Your next question is from Ben Isaacson at Scotiabank. Please go ahead.

Ben Isaacson: 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?

Bruce Alexander: Yes, Bruce here again. Yes, inventories really in Japan, at the moment ports are relatively stable and are actually at reasonable level. 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, strong order file and into Q3.

Ben 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 at 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? Is the market – do you think the market is pricing in or thinking about a write-down or some kind of impairment? And kind of where do you stand on that? Is there anything that would be kind of next stuff that would need to be assessed? Thank you.

Glen Nontell: Ben, it’s Glen here. I think I made a couple of comments. There’s no question that the book value relative to our share price, we view the shares are 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.

Ben Isaacson: That makes sense. Thanks so much. Appreciate it.

Steven Hofer: Thanks, Ben.

Operator: There are no further questions registered at this time. I would now like to turn the meeting over to Mr. Hofer.

Steven Hofer: 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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