Earnings call transcript: Western Forest Products Q3 2025 sees financial strain

Western Forest Products Inc. (WEF) reported its third-quarter 2025 financial results, revealing a challenging period marked by significant losses. The company posted an adjusted EBITDA of negative $65.9 million, a steep decline from the previous year's negative $10.7 million. Despite efforts to manage debt and liquidity, the stock price fell 0.6% following the announcement, closing at $11.59.

Key Takeaways

• Western Forest Products reported a substantial loss in Q3 2025, with adjusted EBITDA at negative $65.9 million.
• The company reduced its debt by $15.7 million and maintains a strong liquidity position with $234 million available.
• The stock price dropped by 0.6% after the earnings release, reflecting investor concerns.

Company Performance

Western Forest Products faced a tough third quarter in 2025, exacerbated by a non-cash export duty expense of $59.5 million. The company's lumber and log inventories remained robust, with 53 million board feet and 602,000 cubic meters, respectively. However, the North American markets continued to show weakness, impacting overall performance.

Financial Highlights

• Revenue: Not disclosed
• Adjusted EBITDA: -$65.9 million (vs. -$10.7 million in Q3 2024)
• Net debt reduction: $15.7 million
• Available liquidity: $234 million
• Lumber inventory: 53 million board feet

Market Reaction

Following the earnings announcement, Western Forest Products' stock price experienced a decline of 0.6%, closing at $11.59. This movement reflects investor apprehension regarding the company's financial health amid challenging market conditions. The stock remains closer to its 52-week low of $10.8, indicating ongoing market pressures.

Outlook & Guidance

Looking ahead, Western Forest Products anticipates potential market improvements by late Q4 2025 or early 2026. The company is focusing on maintaining a strong balance sheet and aligning operations with market demand. Strategic investments, such as the construction of two continuous kilns, are expected to enhance value-added production capabilities.

Executive Commentary

CEO Stephen Hofer emphasized the company's focus on operational controllables and balance sheet strength: "We continue to focus on our operational controllables, and maintaining a strong balance sheet." CFO Glen Nontell highlighted efforts to reposition the balance sheet amid uncertainty: "We have done a lot this year to reposition our balance sheet to navigate through the near-term uncertainty."

Risks and Challenges

• Market Weakness: North American markets remain weak, with elevated U.S. channel inventory levels.
• Export Duties: Increased softwood lumber duty rates and additional tariffs pose financial challenges.
• Global Demand: Declining housing demand in Japan and China could impact international sales.
• Operational Adjustments: Planned lumber production reductions may affect revenue.
• Economic Conditions: Potential central bank interest rate cuts could influence future housing demand.

Q&A

During the earnings call, analysts inquired about the ongoing strike at La Quesamuc Limited Partnership and explored opportunities for reducing working capital. The competitive landscape of the cedar decking market was also discussed, highlighting the challenges and opportunities ahead for Western Forest Products.

Full transcript - Western Forest Products Inc (WEF) Q3 2025:

Gary, Conference Call Moderator: Good morning, ladies and gentlemen. Welcome to Western Forest Products' third quarter 2025 results conference call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. Following prepared remarks, there will be an opportunity for analysts to ask questions. To join the question queue, press star one on your telephone keypad. Should anyone need assistance during the conference call, they may reach an operator by pressing star 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 may be—excuse me—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 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.

Stephen Hofer, President and CEO, Western Forest Products: Thank you, Gary, and good morning, everyone. I'd like to welcome you to Western Forest Products' 2025 third quarter conference call. Joining me on the call today is Glen Nontell, our Chief Financial Officer. We issued our 2025 third quarter results yesterday. I will provide you with some introductory comments and then ask Glen to take you through our financial results. I will follow Glen's review with our Outlook section before we open the call to your questions. Despite challenging markets and increases in lumber duties, we continue to focus on our operational controllables, and maintaining a strong balance sheet. In the third quarter, this included reducing working capital and reducing our debt by $15.7 million compared to the second quarter. In our timberlands group, we continue to focus on cost and inventory management, with log inventory turnover improving 11% since 2023.

However, ongoing permitting challenges in British Columbia and a strike at our La Quesamuc Limited Partnership continue to challenge harvest levels. In our manufacturing group, our mills achieved above target uptime levels of 87% in the third quarter, an 11% improvement in lumber inventory turnover year over year. We were also proactive in staging lumber inventory into the U.S. ahead of duty increases, leading to approximately $3.3 million in duty savings. In our sales and marketing group, we continue to grow strategic customers and advance opportunities to grow our domestic and international customer base as we actively navigate the effect of tariffs and increased duties. In the first nine months, U.S. lumber shipments accounted for 21% of total shipments from our Canadian operations, compared to 25% in the year-ago period. We achieved ahead-of-target on-time shipping performance of 92% in the quarter.

We continue to advance progress on two continuous kilns at our value-added division, with construction commencing and commissioning of the first kiln expected in early 2026. These investments will increase the production of value-added kiln-dried lumber products, lower our drying costs, and help support the diversification of our global customer base. With significant increases in softwood lumber duties and softness in the North American lumber demand, we expect challenging market conditions to persist in the near term. However, through the successful repositioning of our balance sheet in 2025, we are prepared to navigate near-term uncertainty. I'll now turn it over to Glen to review our key financial results.

Glen Nontell, Chief Financial Officer, Western Forest Products: Thanks, Stephen. Third quarter adjusted EBITDA was negative $65.9 million, as compared to negative $10.7 million in the same period last year. Our results for the quarter included a non-cash export duty expense of $59.5 million, related to the finalization of duty rates from the sixth administrative review. As compared to the prior year, results in the third quarter were negatively impacted by softer macroeconomic conditions, U.S. trade tensions, and an ongoing strike at our La Quesamuc Limited Partnership. This resulted in lower lumber shipments, a weaker specialty lumber sales mix, and reduced log harvesting and lower external log shipments. This was partially offset by higher average realized lumber prices in most markets and improvements in realized log prices due to a stronger sales mix. We closed the third quarter with approximately 53 million board feet of lumber inventory and 602,000 cubic meters of log inventory.

Turning to CapEx, we have reduced our planned 2025 capital expenditure spending to between $30-$35 million. We will continue to rigorously evaluate our planned CapEx spending and adjust proactively. From a balance sheet perspective, we ended the third quarter with an improved balance sheet, reducing debt by $15.7 million compared to the second quarter and ending with a net debt-to-capitalization ratio of 2%. Our available liquidity also improved to $234 million, supported through working capital reductions and a new $30 million US letter of credit facility. With respect to softwood lumber duties and US trade, the US Department of Commerce announced its final determination for countervailing and anti-dumping duty rates related to the sixth administrative review. The combined effective rate increased to 35.16% compared to the prior combined rate of 14.4%.

In addition, on September 29th, U.S. President Donald Trump imposed a 10% tariff on imported lumber products through Section 232 of the Trade Expansion Act. The incremental 10% tariff became effective on October 14th. We continue to prioritize diversifying our shipments into other jurisdictions to minimize our U.S. exposure. 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. Stephen, that concludes my remarks.

Stephen Hofer, President and CEO, Western Forest Products: Thanks, Glen. Turning to our market outlook. North American markets are expected to remain weaker in the near term. U.S. channel inventory levels remain elevated, and the incremental U.S. tariff of 10% has further complicated an already weak demand environment. However, with the anticipation of further central bank interest rate cuts and the 30-year mortgage rate approaching three-year lows, this may support improved housing affordability and modestly stimulate U.S. housing demand in 2026. Markets may start to improve towards the end of the fourth quarter of 2025 or into early 2026 as supply decreases and as distributors start to build inventories ahead of the spring building season. However, in the near term, distributors, pro-dealers, and home centers continue to buy on an as-needed basis. In Japan and China, housing demand continues to trend downwards, but market lumber inventories remain low, resulting in near-term stable pricing.

Overall, we have a fourth quarter order file of approximately 87 million board feet and on track to meet our Q4 operating plans. From an operational perspective, given seasonal market conditions combined with high U.S. duties and tariffs, we plan to reduce lumber production by approximately 35 million board feet in the fourth quarter. We will continue to align our operating schedules to market demand and available log supply. Looking ahead, we remain focused on maintaining a strong balance sheet while also executing on our strategic priorities. With that, Gary, we can open up the call to questions.

Gary, Conference Call Moderator: Thank you. We'll 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. We will pause for a moment as callers join the queue. The first question is from Kasia Kosatek with Teal. Please go ahead.

Kasia Kosatek, Analyst, Teal: Hi, good morning. It's Kasia on the line. First question is around the strike at the La Quesamuc Limited Partnership. Can you provide an update on that? Also, your outlook for log availability, not necessarily on the back of the strike action, but also just more broadly across your platform?

Stephen Hofer, President and CEO, Western Forest Products: Good morning, and thanks for the question. I'll share a couple of comments. On the strike. Obviously, as everyone knows, that continues to play out. We completed a six-year agreement with the USW, which was ratified in January of this year. While Western encouraged contractors, including La Quesamuc, to do a me-too to our agreement, not all did. La Quesamuc has a right under labor laws to negotiate their own agreement, and they decided to exercise that right. While Western is a majority shareholder, the governance structure is constructed to ensure that the views of the other partners are not unilaterally overruled by Western. We can't comment on the specific issues in detail, but can say they are related to the unionization process when new First Nation-owned contractors are engaged. We're hoping for a resolution of this.

In the near future and look forward to having that business unit come back online. With respect to your question on overall log inventories, at this point in time, we ended the quarter end of Q2 at 602,000 cubic meters. Our inventories are lower than they would be historically. We do continue to have some permitting delays on certain tenures and continue to work very closely with government and the respective First Nations to help alleviate those. Overall, as we look at our operating plan in Q4 and into Q1, we do see adequate inventories to execute on our operating plan.

Kasia Kosatek, Analyst, Teal: Okay, thank you for that context. Appreciate it. You touched on working capital reductions already. I just wanted to ask, is there any additional opportunities to reduce working capital further?

Glen Nontell, Chief Financial Officer, Western Forest Products: Yeah, hi Kasia. It's Glen. Maybe making a more broad comment. I think we've done a lot this year to reposition our balance sheet to navigate through the near-term uncertainty, including monetizing some significant non-core assets earlier this year. In the third quarter, we also closed an incremental $30 million letter of credit facility, which helped further bolster our liquidity to approximately $234 million at the end of the quarter. I'd say we've taken steps to manage and reduce our working capital, improving turnover metrics related to our working capital. I'd say we probably have come, are approaching what we can achieve on further reducing working capital levers, just given Stephen's comments where we are around log inventory.

All that said, we continue to access other available liquidity alternatives to some of the government programs that have been announced federally, as well as advancing other strategic priorities, including limited partnership opportunities that we've demonstrated success on previously in TFL 44 and 64 as potential sources of additional liquidity. Overall, I'd say we remain focused on maintaining a strong balance sheet and adequate liquidity as we navigate through the uncertain environment here in the near term.

Kasia Kosatek, Analyst, Teal: Thanks for that, Glen. Final question for you or Stephen. Stepping back and looking at the competitive landscape for your decking product into the U.S., what is the profile of that right now, just given the higher value nature of your product versus your competitors?

Stephen Hofer, President and CEO, Western Forest Products: As you can expect, the naughty cedar decking profile has come under significant price pressure. We have tried to push as much of the incremental tariffs through to the end user. While we have been able to see some modest gains, we have not been able to achieve the entire amount. I guess the piece that I would say is that no product line is immune from the current downturn in both the R&R market as well as in new home construction. That includes cedar decking and all the substitutes that are on the shelf alongside cedar. The good news is that there is an element of consumers who are very discerning and continue to want to have the highest quality decking available, and that is where cedar fits in. We have seen some replenishment take place in the last 10-14 days as.

Distributors start to reposition for the spring. That does provide some comfort that there is an opportunity for cedar to continue to have a place in the U.S. decking market. We should not kid ourselves that there are some ceilings on where a consumer is prepared to pay for decking, whether it be cedar or any alternative. Our teams are working very aggressively alongside all of our key distributors in the U.S. We have a group in the U.S. this week actively discussing strategic partnerships for next year and what that demand curve looks like. Yeah, you are correct on saying that there were some price pressures on cedar.

Kasia Kosatek, Analyst, Teal: I appreciate that extra context, Stephen. Those are all the questions I had. I'll turn it over.

Stephen Hofer, President and CEO, Western Forest Products: Great. Thank you.

Gary, Conference Call Moderator: This concludes the question and answer session. I would like to turn the conference back over to Mr. Hofer for any closing remarks.

Stephen Hofer, President and CEO, Western Forest Products: Thanks everyone for joining our call today. We certainly appreciate your continued interest in our company and look forward to our next call in February. Have a great day.

Gary, Conference Call Moderator: Thank you. The conference is now ended. Please disconnect your lines at this time, and we thank you for your participation.

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