Good morning, ladies and gentlemen, and welcome to Western Forest Products' Q4 2023 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&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. Steven Hofer, President and CEO of Western Forest Products. Mr. Hofer, please go ahead.
Thank you, Paul, and good morning, everyone. I'd like to welcome you to Western Forest Products' 2023 Q4 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 2023 Q4 results yesterday. I will provide you with some introductory comments and then ask Steve to take you through our financial results. I'll follow Steve's review with our Outlook section before we open the call to your questions. I'd first like to acknowledge Steve Williams, who has announced he will step down from his current role by the end of 2024.
Since joining Western in 2014, Steve has made significant contributions to our company and has played a critical role in our strategic transition to become a leading specialty wood products supplier. I want to personally thank Steve for his leadership over a tremendous 10-year career at Western. We have commenced an executive search for a new Chief Financial Officer. Steve will remain in his role until his replacement is found and will ensure a smooth and seamless transition to his successor. Turning to our business. In 2023, Western faced a more challenging macroeconomic environment, resulting in weaker lumber markets and financial results.
We continue to take steps to improve the financial results of our business, and during 2023, this included: reducing our overall headcount by 6% year-over-year; streamlining certain corporate and operational salary functions, which we expect will drive approximately CAD 3.5 million in annual savings; proactively taking operating curtailments to match production to market demand; and ensuring a safe and healthy work environment to drive the best operational results possible. Despite a more challenging 2023, I am excited about the future and the steps we are taking to accelerate our transition to higher-value products. As part of that journey, yesterday we announced that we are moving forward with two new continuous dry kilns, one at our Duke Point Sawmill and one at our Value-Added Division in Chemainus. These investments will support the increased production of approximately 140 million board feet of kiln-dried lumber products.
In addition, during 2023, we completed the installation of a machine-stress-rated lumber grader at our Duke Point facility, and we are currently in the process of commissioning our new continuous dry kiln at the Saltair lumber operation . These investments are part of a broader strategy to identify opportunities to modernize our primary manufacturing facilities, increase our kiln-drying and planing capacity, reduce our cost structure, and expand our engineered wood products and remanufacturing capacity. We will continue to evaluate any potential future investment opportunities with a long-term view of supporting our value-added specialty and engineered wood products business. In addition to our capital investments, I'm also proud of our progress in advancing First Nations partnerships and relationships. During 2023, we announced an agreement with four Vancouver Island First Nations to sell a 34% interest in our Mid-Island Forest Operations for CAD 35.9 million.
We also continued with joint and collaborative planning of forestry activities with First Nations, building upon Western's well-established forestry practices and in support of greater long-term clarity for the stewardship and management of the land base. While lumber markets are expected to remain variable in the near term, we are cautiously optimistic heading into 2024. I will now turn it over to Steve to review our key financial results.
Thanks, Steven. Q4 Adjusted EBITDA was negative CAD 1.2 million as compared to negative CAD 11.9 million in the same period last year. Results in the Q4 of 2023 benefited from lower stumpage, freight, and export tax expense but was partially offset by lower lumber prices and shipments, lower log revenues, and lower production volumes as we continued to match production to market demand. Our shipment volumes to Japan more than doubled compared to the same time last year, benefiting from fire-related curtailment at one of Japan's largest sawmills. Our engineered wood products business continues to perform to our expectations, generating EBITDA of approximately CAD 7 million in 2023 and EBITDA margins in excess of 20%. We ended the year with 64 million board feet of lumber inventory and 964,000 cubic meters of log inventory.
Our log inventory at the end of the year had a higher mix of cedar and Douglas fir logs, leading to lower inventory provisions relative to the Q3 of 2023. In February, the U.S. Department of Commerce released preliminary duty rates related to the fifth administrative review. The Department of Commerce may revise these rates between now and the final determination, which is expected to be released in the Q3 of 2024. Western will continue to pay a combined duty rate of approximately 8% until the final determinations are published. At the end of 2023, we had approximately $219 million in duties on deposit relative to a current market capitalization of approximately $200 million. Now turning to CapEx and cash flow.
For 2024, we expect total CapEx of approximately CAD 65 million, which includes approximately CAD 35 million of maintenance of business and road CapEx and approximately CAD 30 million in strategic CapEx. The strategic CapEx for 2024 includes approximately CAD 15 million related to new kilns at our Duke Point and Value-Added divisions . We estimate the total capital cost of these projects to be approximately CAD 35 million and will be completed over 2024 and 2025. In the Q1 of 2024, we expect to receive proceeds of CAD 35.9 million from our previously announced sale of the 34% ownership interest in our Mid-Island Forest Operations . We also expect to receive an income tax refund of approximately CAD 23 million in the second half of 2024. We ended 2023 with liquidity of approximately CAD 148 million and a net debt-to-cap ratio of 13%. Turning to Q1 seasonality.
In typical Q1 , our timber harvesting activity can be periodically interrupted by winter weather. Harvest volumes are typically skewed to the end of the quarter when 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. Steven, that concludes my comments. Thanks, Steve. Turning to our market outlook. Near-term lumber markets are expected to remain variable, but we remain cautiously optimistic as we head into the typically more active spring building season. Cedar demand and prices for timber and premium appearance products are expected to remain stable, and demand and price for decking products should firm as we head into the spring. Cedar demand for trim and fencing products is expected to remain soft until market inventory rebalances.
In Japan, we anticipate quarterly lumber volumes to remain similar to those achieved in the Q4 of 2023. Domestic production remains impacted by a prolonged fire-related operating curtailment at a large Japanese sawmill. We anticipate lumber prices in Japan to modestly improve during 2024. 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 remain volatile through 2024. In China, lumber demand and prices are expected to marginally improve. Looking ahead, we are focused on returning our business to profitability while accelerating our transition to higher-value products through our targeted capital investments. With that, Paul, we can open up the call to questions.
Thank you. We will now take questions from the telephone lines. If you have a question and you are using a speakerphone, please lift your handset before making your selection. If you have a question, please press star one on the device's keypad. You can also cancel your question at any time by pressing star two. So please press star 1 at this time if you have a question. There will be a brief pause while the participants register. We thank you for your patience. The first question is from Ben Isaacson from Scotiabank. Please go ahead. Your line is open.
Thank you very much, and good morning, everyone. Good to be on the call. A couple of questions for you. First one is on the two new dry kilns. Can you talk about the payback or the return or give some kind of magnitude in terms of how much of a reduction in cost structure you expect to see and when?
Well, first of all, Ben, welcome to the call, and we appreciate your coverage of the company. At a granular level, continuous dry kilns. It's not a new technology. They're kind of the standard now across North America for any investment in drying capacity. Typically, the returns are quite attractive. And certainly, in our case, the investment is kind of twofold. One, as we want to transition into higher-value kiln-dried finished product, we have a gap in our current drying capacity. So the investment is twofold. One, to start to bridge that gap in drying capacity. And then secondly, some of our existing kiln-drying capacity is quite old, outdated conventional batch kiln technology, nearing end of life. So this technology allows us to immediately move up the value chain in terms of additional kiln-dried finished product, primarily around the industrial grades, especially at Duke Point.
And then for the kiln that's going in at the value-added facility in Chemainus, the majority of that capacity will be utilized to transition rough green products from the Cow Bay Mill, the Ladysmith Small Log Facility, and then the Saltair Facility into, as I said, higher-value kiln-dried products. So we're really pleased at the ROI on these investments, and we expect a fairly short payback on this capacity.
That's helpful. Thank you. My next question is, you talked about a return to profitability, hopefully soon. Can you just run us through what kind of scenario we need to see for you to at least get to a breakeven level on a free cash flow basis? Is it just simply a 5% higher ASP? Is it a better mix? What are we looking for exactly?
Well, it's a very good question. I would say just looking at our business, you can look externally, Ben, and you can say, "Hey, it's a pretty challenging business environment." On the timberland side, you can kind of point to some of the challenges around cutting permits. On the operating side, you could look at and say, "Well, we have older, outdated technology." We could look to the market and say, "The market's pretty challenging." But really, our focus in terms of returning to profitability is managing the controllables inside our business. So when we think about cutting permits, yeah, they are challenging. But our group has taken it head-on and taken a very different approach to direct engagement with our strategic partners on the First Nations side to say, "Let's look at a different model." And so that's how we're alleviating some of the challenges on cutting permits.
Internally, around our manufacturing operations, we're not the only ones with older, outdated technology. There's a lot of companies, private and public, that have saw lines that are 20, 25 years old that run really, really well. So Bruce's challenge with overseeing the operation side of the business and his leadership team is we have to have assets that are more reliable and need to have higher levels of uptime. And I'm really pleased to see the progress on that. In Q3, we were at 81.6% uptime across our manufacturing fleet. And in Q4, that transitioned to 84.9%. And that's still not good enough. But that's a significant improvement in operating execution, and that allows us to drive our costs lower, higher levels of recovery, etc.
And then the market side, yeah, can we would we like to see a 5% or 10% increase in the market? Absolutely. But there's some things that we can control as well, including where our products are sold, the type of customers that we want to sell to. And again, this is on Bruce's area of responsibility. We've made tremendous progress in repositioning a number of our high-value product lines into the account base that pays 12%-15% premium over other distribution channels. So lots of controllables that we have accountability for, and I'll tell you that it's all about execution, execution, execution.
That's helpful. Just one more for me, if I may. Have you disclosed or maybe you can talk about it from a high level? Actually, the six mills that you have in BC, can you talk about what the shape of your internal cash cost curve looks like? What is the difference between the highest cost and the lowest cost? Is the highest cost one 20% higher than the lowest cost? Can you just kind of talk about that shape?
Yeah. We got to be a little careful on that one. Obviously, we're trying to match our operating rhythm to market demand as well. So there's some variability in our cost curves relative to downtime that we've been having to take. But I'll say this, Ben, we know our cost structure is too high. And so when we think about future CapEx and how we want to run our business, the existing assets, we have to have higher levels of reliability and uptime. We have to do a little bit better job of matching the right log into the right mill for the right product lines. And we know with what we have, we can drive a lower cash conversion cost.
But ultimately, we also understand that we're going to have to have a little bit of strategic investment to some of our primary saw lines simply because of end of life and just our inability to do much more with some of the physical assets.
Maybe I can just throw in one more quick one. You talked about your cost structure being too high and you're holding yourself accountable as a company. Is that something you're willing to put metrics out there in terms of what your cost reduction targets could be in 2024 that the street could follow along with?
I'll let Glen maybe or Steve kind of participate in that response.
Yeah, Ben, it's Glen speaking. I mean, we have a bunch of internal metrics. I mean, I don't think we're at a point to provide those externally. We do have margin improvement programs across our business, both in timberlands and manufacturing, which are measured quarterly and annually at the board level. But just to echo Steven's, I think, comments, we're definitely focused on cost and reducing costs. But our business is a little bit more complex and diverse than the commodity lumber business that is focused purely on a volume, price, and cost model. So it's a little more challenging for us to put forth metrics out there, I'd say.
Ben, maybe I'll just give you a little bit of context. If we have mills that have cash conversion costs that start with a 3, we know they need to start with a 2. And if we have assets that have cash conversion costs that start with a 2, we know they need to be starting with a 1. And so there's a gap there, and we need to all the initiatives that we're taking internally and what we're looking to do into the future here address those cost curves.
Makes a lot of sense. Thanks so much. Appreciate it.
You bet. Thank you.
Thank you. The next question is from Sean Steuart from TD Securities. Please go ahead. Your line is open.
Thanks. Good morning, guys. A couple of questions. Steven, wondering if you can address the B.C. Land Act amendments. It seems like the government wants to push these through pretty quickly. Any broad thoughts on potential impacts for your coastal business?
Yeah, Sean, obviously, it's become now a topic that is being disclosed across a broader audience here in British Columbia. I think the opportunity really is for the government to really engage a broader audience through the consultation process. A lot of the things that are addressed inside the proposed Land Act legislation, Western's already doing. So when you think about the DRIPA legislation here in British Columbia, we're well advanced in ensuring that all the appropriate level of discussion, free prior, and informed consent that we're required to do on the land base, we're already down that path. But I do think it's the process, the implementation, how it was communicated, obviously, could have been done much better. And we have privately shared that with government. We've publicly shared it with government. We're obviously part of COFI, and COFI has shared that to government.
I really do believe that Minister Ralston and Minister Cullen have heard the message loud and clear. I believe Premier Eby has heard the message loud and clear. We're optimistic that they will take a step back and really allow a broader, more collaborative process to ensure that everyone across British Columbia really knows what it is and how they'll be impacted and what it means for their respective business going forward. Inside our organization, that level of detailed collaboration, it's part of what we do every day with our First Nations.
Got it. Thanks for that detail. Question on the shipment mix. You touched on the skewing away from commodity towards more heavily Japan this quarter in Q4, and it sounds like that continues into Q1. Any broader visibility on shipment mix that you're expecting through the remainder of 2024 and percentage of commodity versus specialty or higher value grades?
Yeah. We've asked Bruce to start joining these quarterly conference calls. I think it's certainly. I'm pretty close to what's going on in the market just because of my background. But I think having Bruce being part of these calls is going to really benefit all of the participants and certainly all the analysts. So Bruce, I'd like to turn it over to you and you could provide some color on that question for Sean.
Yeah. I guess as we move forward in the year here, we're expecting volumes into Japan to be at similar levels as we saw in the Q4 . And we expect that to continue into the Q2 . As I've mentioned, there's been a domestic Japanese manufacturer that had a large fire near the end of Q3 that's impacted supply into that market. And currently, the supply out of Europe is also challenged with some of the shipping issues that they're facing and some late production there. So we see a continued strength in Japan throughout the year, maybe some small price appreciation in Japan in the Q2 . Our cedar business, we're expecting that to recover over the course of the year. The mood in the market is much more optimistic.
Depending on the segment we're dealing with in that market, you look at timbers and clears, and the demand has remained stable, and prices are at good levels there. Decking, we're seeing some signs of picking up. Trim and fencing, as Steven mentioned, is expected to remain soft until the inventories rebalance. Inventories are being managed very, very tightly, and distribution hasn't stepped in yet in a large way. Any small uptick in demand, we're expecting to have a positive impact on that side. Our industrial business will remain stable throughout the year. As Steven mentioned, on the commodity side, we're focused there on value-added type programs but will be volatile through the year. The mix should remain relatively similar to the Q1 here for the rest of the year.
That's great detail. Thanks, Bruce. Just one last one, and I apologize if I missed it. Maybe Steve or Glen, I'll get you to answer this. But it was CAD 35 million for the two kiln projects. Did you give an overall 2024 CapEx guidance figure for the year in total?
Yeah. No problem, Sean. It's Glen. So total CapEx, we expected approximately CAD 65 million for the full year. That's CAD 35 million of maintenance of business CapEx maintenance of business and road CapEx and CAD 30 million of strategic. Within that CAD 30 million of strategic for 2024, CAD 15 million relates to the new two continuous dry kilns. And we expect the total spending on the two new kilns to be approximately CAD 35 million over 2024 and 2025.
Got it. Okay. That's all I have. Thanks very much, guys.
Thank you, Sean.
Thank you. The next question is from Matthew McKellar from RBC Capital Markets. Please go ahead. Your line is open.
Hi. Good morning. Thanks for taking my questions. Firstly, on the two kilns you announced with the quarter, could you provide a bit of color around how those investments, and maybe particularly the one at Chemainus, might support your engineered wood product strategy and whether you're contemplating any kind of downstream capital projects, maybe on the glulam side or otherwise, in connection with that increased capacity?
Thanks, Matt. Love that question. Certainly, the two kilns are all around accelerating this transition. Maybe I'll just provide a little bit of color starting with Duke Point. Duke Point is a facility today that has the sawmill and then the planer mill that's been upgraded over the last few years. What it does not have is any kiln-drying capacity on site. And at Duke Point, we manufacture a wide range of Hem-Fir industrial products. Some of those products will continue to be sold green around the squares and timbers and some of the two-inch dimension that goes into the rig mat business and crane mat business. But a large portion of our product line there are industrial. It's shop and better type products that today we sell rough green.
We're interested in capturing more revenue and higher margins as we transition the rough green industrial product line into kiln-dried finished products. We're pretty excited about that revenue uplift. Again, the technology is not new, so it's proven. It's tested. We're not buying serial number 001. At the value-added facility, we have 10 conventional batch kilns there today, and some of them are nearing end of life. This new continuous dry kiln, again, is a twofold investment. 1 is to address the cost structure of the existing kiln-drying capacity and then adding some additional capacity to really help transition both some of the cedar products that we currently do rough green coming from Cow Bay into kiln-dried finished.
Then for the Ladysmith facility and the Saltair facility, allowing us to increase the volume of kiln-dried lam stock in both Yellow Cedar, Hem-Fir, and Douglas fir. As we increase that volume of kiln-dried finished lam stock, the vast majority of that will be vertically integrated into the Chemainus facility. Ideally, and in our strategic plan, is to increase the overall lam stock capacity at Chemainus through some additional operating hours. We have some labor constraints there that we're trying to find some innovative solutions around, but we're trying to increase the overall internal demand as well for our lam stock. Then it'll also facilitate allowing us to kiln-dry more of the appearance-grade dimension that we can now run through the MSR machine at Duke Point.
So as we look at the quality of our fiber here on the BC coast, we certainly see a path forward where we can be a very significant supplier of kiln-dried lam stock across those three species. And ultimately, we're going to have to find a way to utilize more of that internally because Calvert, we could quickly overwhelm Calvert with the forecasted volume. So yeah, we want to grow that; we want to grow that internal demand for lam stock. And whether it's through some additional tuck-in acquisition opportunities or evaluating larger-scale investments in glulam, those things are all under consideration.
Great. Thanks very much for all that color. A few seconds. I think in your commentary, you said that cedar trim and fencing products, you're expecting those to remain a bit soft until inventories rebalance. Could you give us a sense of how large that inventory overhang is, and how do you think about a timeline for that to resolve?
Bruce here. Thanks for that question. Not a great degree of clarity around that, although we don't believe those inventories are exceptionally high. So I think it's more related to as the spring demand kicks in, those should come in line fairly quickly. So we're not anticipating a long hangover there.
I think, Matt, one of the things on the demand side is we're really some of those products are highly dependent upon our spending. We just need to have consumers to have a little bit more confidence in some of their disposable income that can be allocated to those type of backyard projects. I think there's a little bit of a window here as we go into a bit more certainty in 2024 that consumers will start to open their wallets again. Last year was one of those, I think, frankly, a bit of a transition year for consumers as they adjusted to higher levels of inflation and uncertainty around what their disposable income actually was going to look like.
Thanks. That makes sense. Last one for me. Can you give us any sense of when to expect an announcement on the process you've been undertaking at Port Alberni?
Well, I'll tell you this, Matt. It's dragged on a little longer than we've wanted. We're working very hard to find a resolution on that particular asset. We expect to have a bit more color available here in Q2 around the finality of that process. So stay tuned. It's front and center on my desk, and our team is working very diligently at bringing that to a closure.
Thanks very much. I'll turn it back.
Thanks, Matt.
Thank you. There are no further questions registered at this time. I will turn the call back to Mr. Hofer.
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.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.