Earnings call transcript: Western Forest Products Q4 2024 beats forecasts

Western Forest Products Inc. (WEF.TO) reported its fourth-quarter 2024 earnings, showcasing a significant turnaround with an adjusted EBITDA of $14.4 million, compared to a loss of $1.2 million in the same period last year. The company exceeded earnings per share (EPS) expectations, reporting a breakeven EPS against a forecasted loss of $0.0467. Revenue also surpassed projections, reaching $273.2 million versus the anticipated $246.5 million. Following these results, the company's stock rose by 1.18% in after-hours trading. According to InvestingPro analysis, the stock appears undervalued based on its Fair Value calculations, with the company trading at a notably low Price/Book multiple of 0.24.

Key Takeaways

• Western Forest Products reported a breakeven EPS, beating the forecasted loss.
• Revenue for Q4 2024 was $273.2 million, exceeding expectations by $26.7 million.
• Stock price increased by 1.18% in after-hours trading following the earnings announcement.
• Improved financial performance was driven by higher lumber shipments and prices.
• The company continues to innovate with new technology installations and strategic investments.

Company Performance

Western Forest Products demonstrated a robust performance in Q4 2024, with a notable improvement in adjusted EBITDA from a negative position last year. The company's focus on increasing lumber shipments and enhancing product pricing contributed to its financial success, though InvestingPro data shows gross profit margins remain weak at 8.48%. The firm also maintained strong liquidity, with a healthy current ratio of 2.63, ending the quarter with approximately $145 million, and reduced its net debt to capital ratio to 12%. For deeper insights into Western Forest Products' financial health and valuation metrics, investors can access the comprehensive Pro Research Report, available exclusively on InvestingPro.

Financial Highlights

• Revenue: $273.2 million, up from $246.5 million forecasted.
• Adjusted EBITDA: $14.4 million, compared to a loss of $1.2 million last year.
• Lumber shipments increased by 58% year-over-year.
• Liquidity: $145 million at the end of Q4 2024.

Earnings vs. Forecast

Western Forest Products reported a breakeven EPS, surpassing the forecasted loss of $0.0467. The revenue of $273.2 million exceeded expectations by approximately $26.7 million, marking a significant positive surprise for investors. This performance reflects the company's successful strategies in enhancing shipment volumes and product pricing.

Market Reaction

Following the earnings announcement, Western Forest Products' stock rose by 1.18% in after-hours trading, reflecting investor confidence in the company's improved financial health. The stock has shown strong momentum with an 11.84% return over the past week, though at $0.30, it trades between its 52-week range of $0.26 to $0.49. InvestingPro subscribers have access to 8 additional key insights about Western Forest Products, including detailed analysis of its growth prospects and financial health metrics.

Outlook & Guidance

Looking ahead, Western Forest Products plans to invest $60-65 million in capital expenditures for 2025, focusing on strategic priorities and maintaining a strong balance sheet. The company is also exploring new technologies, such as thermally modified Hemlock, and preparing for potential U.S. tariffs on Canadian lumber imports, which they intend to pass on to customers.

Executive Commentary

Stephen Hoefer, President and CEO, expressed optimism about the company's progress, stating, "We delivered significantly improved results in the fourth quarter and the full year of 2024." He also highlighted the company's innovative efforts, saying, "We're pretty excited about our ability to add significant value to our second and third growth Hemlock timber stands."

Risks and Challenges

• Potential U.S. tariffs on Canadian lumber imports could impact profitability.
• Market volatility in Japan due to a weak yen poses pricing challenges.
• Cedar market shortages in North America could affect supply dynamics.
• Economic policies in British Columbia and Canada could influence operational costs.
• Global economic conditions may impact demand for lumber products.

Q&A

During the earnings call, analysts inquired about the company's strategies for managing potential U.S. tariffs and the demand outlook for cedar products. Executives also discussed advancements in thermally modified Hemlock technology and engagement with government bodies to address economic policies affecting the industry.

Full transcript - Western Forest Products Inc (WEF) Q4 2024:

Patrick, Conference Call Moderator, Western Forest Products: Good morning, ladies and gentlemen. Welcome to Western Forest Products Fourth Quarter twenty twenty four 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 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 and A, which and speak only as of the date on which they are made. 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 Hoefer, President and CEO of Western Forest Products. Mr. Hoefer, please go ahead.

Stephen Hoefer, President and CEO, Western Forest Products: Thank you, Patrick, and good morning, everyone. I'd like to welcome you to Western Forest Products twenty twenty four fourth quarter conference call. Joining me on the call today is Glenn Nontel, our Chief Financial Officer and Bruce Alexander, our Senior Vice President of Sales, Marketing and Manufacturing. We issued our twenty twenty four 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 and 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 $6,000,000 In manufacturing, we improved our operational uptime to 85% in 2024 compared to 83% 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%. 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 BC Coast at our Saltair sawmill in March 2024.

Since commissioning, we have operated at 99.2% of full capacity utilization and we expect an EBITDA payback of less than two years on our $13,000,000 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 $4,600,000 investment. We commissioned a new slabber head at Duke Point to support increased production and improvements in ship recovery. We expect an EBITDA payback of approximately three years on our $5,700,000 investment.

And we continue to advance pre engineering and permitting related to two additional dry kilns on the BC 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 USW, which is one of the longest term agreements in the history of the BC Coastal Force sector completing the sale of a 34% interest in a new limited partnership with four Vancouver Island First Nations for $35,900,000 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 $69,200,000 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 5% year over year as well as reducing controllable corporate overhead by $2,400,000 I'm very proud of the significant contributions across our entire organization.

These efforts have provided for a strong foundation to continue to build on 2025. I will now turn it over to Glenn to review our key financial results. Thanks, Stephen. Fourth quarter adjusted EBITDA was 14,400,000 as compared to negative $1,200,000 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 63,000,000 board feet 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 $60,000,000 to $65,000,000 which includes approximately $30,000,000 related to two previously announced continuous kilns. From a balance sheet perspective, we ended the fourth quarter with liquidity of approximately 145,000,000 and a net debt to cap ratio of 12%. These metrics do not include the $76,000,000 in gross proceeds from the sale of our Northern Private Timberlands and pending Alberta Pacific Division sale.

We expect to report an accounting gain of approximately $23,000,000 in the first quarter of twenty twenty five related to the sale of the Private Timberlands. At the December, we had approximately $264,000,000 in duties on deposit, which equates to approximately $0.61 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 twenty twenty five, 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 twenty twenty five, 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 U. S.

Dollar exchange rate. 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 twenty twenty five is anticipated to benefit from industry wide curtailments 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 U. S. Tariff threats may impact exports to The U. S.

And result in lower demand for lumber. Overall, we currently have our first quarter order file of approximately 120,000,000 board feet. Touching on lumber duties and tariffs. On February 1, U. 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 4, but on February 3, the implementation date was delayed thirty days. The incremental U. S. Tariff is in addition to the current U. S.

Softwood lumber duties of 14.4% for Western. We have informed customers of our intention to pass on the incremental U. S. 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 U. S. 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.

Patrick, Conference Call Moderator, Western Forest Products: Thank you. We'll now take questions from the telephone lines. First question is from Matthew McKeon from RBC Capital Markets. Please go ahead.

Matthew McKeon, Analyst, RBC Capital Markets: Hi, good morning. Thanks for taking my questions. It sounds like you're seeing really good momentum in feeder right now. I was wondering if you could just speak to how meaningful the shift in demand in VIN versus maybe what's transpired on the supply side. And any thoughts around just how tight that market would 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?

Stephen Hoefer, President and CEO, Western Forest Products: Bruce Alexander here. Yes, 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 holdback as distributors wait to see and hear the outcome on March 4 with respect to The U. S.

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, Matt.

Matthew McKeon, Analyst, RBC Capital Markets: Thanks very much. If I could ask one more. You talked about exploring an opportunity in thermally modified Hemlock. Can you just expand on what you're kind of considering here? And is it something that 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 North America too? Thanks.

Stephen Hoefer, President and CEO, Western Forest Products: Yes. 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 U.

S. 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 it 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

Patrick, Conference Call Moderator, Western Forest Products: the

Stephen Hoefer, President and CEO, Western Forest Products: 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 over 60% of our standing timber is hemlock, and we're pretty passionate about finding a way to add incremental value to that timber stand.

Patrick, Conference Call Moderator, Western Forest Products: Thank you. The next question is from Sean Steuart from TD Cowen. Please go ahead. Thanks. Good morning, everyone.

A couple

Sean Steuart, Analyst, TD Cowen: of questions. Stephen, you mentioned you've informed customers your intent to pass prospective tariffs straight through in pricing. And I'm wondering if you can just give a bit more perspective on demand elasticity in Western Red Cedar markets in particular. It's my perception, I guess, through the soft and lumber dispute longer term, it hasn't always been easy to pass through duties tariffs on to customers. It does feel like there's some tension in the market right now though.

Just broader perspective on your ability to pass that through and potential supply cuts that might be needed to get there?

Stephen Hoefer, President and CEO, Western Forest Products: Thanks, Sean. It's a great question. We don't have the crystal ball on this one dialed in, but 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 U. S. 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 in 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 U. S. Marketplace that this will be achieved. But overall, our focus is 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 how do we move forward with an economic union between Canada and The U. S. That doesn't penalize and impact the consumer in The U. S. And benefits the entire Canadian and U.

S. Economy.

Sean Steuart, Analyst, TD Cowen: 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 I think there was 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?

Stephen Hoefer, President and CEO, Western Forest Products: Well, from our perspective, 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. 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 as a fundamental first step that requires the end of disruptive restrictive policy initiatives 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.

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.

Sean Steuart, Analyst, TD Cowen: Thanks for that detail. That's all I have for now. Thanks.

Stephen Hoefer, President and CEO, Western Forest Products: Thanks, Sean.

Patrick, Conference Call Moderator, Western Forest Products: Thank you. There are no further questions at this time. I would like to turn the meeting back over to Mr. Hoefer.

Stephen Hoefer, President and CEO, Western Forest Products: 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.

Patrick, Conference Call Moderator, Western Forest Products: Thank you. The conference has now ended. Please disconnect your lines at this time. And thank you for your participation.

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