Good morning, ladies and gentlemen. Welcome to Western Forest Products' second quarter 2024 results conference call. During this conference call, Western's representative 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, Patrick, and good morning, everyone. I would like to welcome you to Western Forest Products' 2024 second quarter conference call. Joining me on the call today, Glenn Nontell, our new Chief Financial Officer, Steve Williams, our Executive Vice President, and Bruce Alexander, our Senior Vice President, Sales, Marketing, and Manufacturing. We issued our 2024 second quarter results yesterday, which included the announcement that Glenn Nontell will be our next CFO. In deciding who should fill the role of CFO, we looked both internally and externally. We wanted someone with the right mix of leadership, industry experience, and technical skills to help navigate through near-term macroeconomic conditions and advance our strategic priorities. Glenn's financial acumen, forward-thinking, and laser focus on execution made him a clear choice from a number of strong candidates and speaks to the strength of the internal talent at Western.
Steve Williams will remain in the role of Executive Vice President until his previously communicated retirement date of December 31, 2024. We look forward to benefiting from Steve's advice and judgment as he moves to an advisory role thereafter. Turning to our second quarter financial results. We successfully navigated through more challenging market conditions to return our business to positive EBITDA in the second quarter, generating CAD 9.4 million. This was the result of a huge effort across all of our operating divisions and driven by a focused effort on execution and safety. In timberlands, despite facing ongoing harvesting permitting delays, we continue to improve the stratification of our specialty log sorts, such as pole and peer logs, to support incremental margin. In manufacturing, our continued focus on operational uptime and reliability supported improved results despite tight log supply at certain facilities.
In sales and marketing, we continue to make progress growing key strategic accounts while developing value-added products and programs targeted with the end user in mind. In engineered wood products, we delivered another quarter of positive EBITDA, despite labor and Lamstock availability challenges. In addition, we remain focused on accelerating our transition to higher-value products. Our new Salt Air Kiln dried 14.5 million board feet of lumber in the second quarter and is achieving our uptime, production, and value performance targets. We also continue to advance pre-engineering and permitting related to our two previously announced continuous kilns. Each kiln will have a capacity of approximately 70 million board feet and are expected to be completed in 2025. A continued focus on safety and maintaining a strong balance sheet while advancing our key strategic priorities remains our key focus in the near term.
I will now turn it over to Glenn to review our key financial results.
Thanks, Steven. Second quarter adjusted EBITDA was CAD 9.4 million, as compared to CAD -12 million in the same period last year. As compared to the prior year, results in the second quarter benefited from higher lumber shipments, higher domestic log prices and a stronger log sales mix, and lower stumpage and freight expenses. This was partially offset by a slightly weaker lumber specialty sales mix and higher timberlands and secondary processing costs. We closed the second quarter with approximately 75 million board feet of lumber inventory and 777,000 cubic meters of log inventory. Turning to CapEx and cash flow, our revised 2024 total CapEx spending is now expected to be approximately CAD 40 million.
This reflects the expectation that the majority of the CAD 35 million related to two new continuous kilns will be incurred in 2025. After the end of the second quarter, we received our income tax refund of approximately CAD 23 million, which was utilized to reduce debt. From a balance sheet perspective, we ended the second quarter with liquidity of approximately CAD 142 million and a net debt to cap ratio of 13%. Last week, we amended and extended our credit facility to July 2026. At the end of June, we had approximately CAD 236 million in duties on deposit, which equates to approximately CAD 0.54 per share after tax. Turning to third quarter seasonality, typical third quarters can be challenging operationally, as hot, dry weather can restrict logging activity, reduce harvest volumes, and impact cost.
While we have yet to experience any significant forest fires in our area of operation, hotter and drier conditions, combined with harvest permit delays, may impact harvest volumes through the summer. We will continue to manage our manufacturing operating schedules to match production, to market demand and available log supply. Steven, that concludes my remarks.
Thanks, Glenn. Turning to our market outlook. Cedar demand and prices for timber and premium appearance products are expected to remain stable. Demand and price for cedar decking have firmed up, while cedar trim products are expected to remain soft for the balance of the year. In Japan, weakness in wooden home starts, well-stocked inventories, and the weaker Japanese yen to the US dollar exchange rates are anticipated to impact lumber demand and prices in the near term. Demand for our industrial products is generally expected to remain stable. For commodity lumber, North American demand and prices are expected to remain volatile, while in China, near-term lumber demand and prices are expected to be seasonally weaker. Overall, we currently have a third quarter order file of approximately 108 million board feet.
Looking ahead, we remain focused on building our profitable quarter while executing on our strategic priorities and maintaining a strong balance sheet. With that, operator, we can open the call up to questions.
Thank you. We'll now take questions from the telephone lines. If you have a question, please press star one on your device's keypad. You may cancel your question at any time by pressing star two. Please press star one at this time if you have a question. There will be a brief pause while the participants register for questions. Thank you for your patience. First question is from Ben Isaacson from Scotiabank. Please go ahead.
Good morning, everyone, and thank you for taking my call. First, congrats to see or very good to see the positive EBITDA this quarter. My first question is for Glenn. Congrats on the appointment to CFO. Can you talk a little bit about your vision for the role and any kind of wholesale time any wholesale changes that you wanna make? Thank you.
Thanks, Ben. Appreciate the comment. You know, I think what I'd say is, you know, from a strategy perspective, we have a very well-defined strategy, and none of that is changing for the company. Very high focus around, you know, operational execution, focus on our First Nation partnerships, continually growing the business, you know, when the balance sheet warrants. So we're, there's definitely no change from a strategy perspective. You know, I think what I hope to bring to the role, and, you know, I know that I'm only one person in this broad organization that is important to the success of the business. But, you know, in my current or my prior roles, and my prior roles that I've been at before Western, there's been a very high degree on execution and expediting execution.
You know, what I hope to bring to this is, you know, continue to executing on our strategic priorities, but bringing sort of a faster cadence of getting on with some of the priorities that we set.
That's great. And then just as a follow-up question, can you guys just talk a little bit about where you are in terms of the overall, capacity utilization rate? And how should we think about that rate, through the back half of 2024 and into 2025? Thank you.
Yeah, I can maybe comment on that, Ben. You know, currently, what we're doing is, is being very disciplined in matching our operating rates relative to demand, you know, across all of our global markets, and that's overlaid against overall log supply. As you know, we have kind of three categories of fiber, you know, small diameter chip and saw, kind of the medium-size gang log, and then the large diameter head rig log. And so each of those sorts have different challenges when it comes to cutting permits and cut blocks. But we'll be pretty disciplined, just like we've shown over the last year and a half around making sure that, you know, our inventory levels are in balance overall, a match of capacity relative to lumber demand.
So don't expect much material change here, for the balance of the year relative to what we've been, focused on for the first half.
That makes sense. Thank you very much.
Thanks, Ben.
Thank you. The next question is from Sean Stewart. Please go ahead.
Thanks. Good morning, everyone. One follow-on question from Ben. It seems like a big part of the success story in the second quarter was you guys were able to draw down your finished good inventories by quite a bit, and that's been the trend for most of the past couple of years. I guess, in terms of gauging sustainability of this momentum, can you comment on further room to lower finished good inventories at this point, or are you, you've tapped out on that front?
Well, Sean, thanks for the question. You know, our focus is really around ensuring that we have an order file that matches production. So, you know, I come from a bit of a background of, you know, everything that you make every day, you wanna sell every day. And, you know, kind of have 30- 45 days worth of inventory at the max. And so, you know, we've had some challenges historically overall because of the lack of kiln-dried capacity, having to take a lot of our volume outside that needs to be kiln-dried, and by definition, that provides a bit more complexity as well as having to hold a bit higher levels of inventory.
But, you know, our focus is really to continue to draw that down, and, you know, we have some pretty aggressive targets here in Q3 that we continue to be focused on. So, we're not done yet.
Okay. That's good to hear. Steven, any comments you can give with respect to negotiations with the union towards a new contract?
Sure. I'll make a few general comments. We commenced negotiations in April, and those continue today. The current agreement expired in mid-June, so the prior collective agreement continues to apply as negotiations continue. We're, you know, committed to delivering a fair and balanced agreement that recognizes our employees' contributions, while also ensuring our long-term competitiveness as a company. USW members represent about 1,000 of our team members, as well as additional members within our timberland contractors. So there's, you know, ongoing discussions today, both on the manufacturing side and on the timberland side, and, you know, I continue to be optimistic.
We've committed to these discussions and they're being led by Jennifer, and you know, so far I think we're making good progress, and we'll keep everyone posted on those discussions.
Okay. Thanks for that detail. One last one, Steven. Bigger picture question. You guys have underperformed comps both from a share price and valuation perspective the last couple of years. You know, aside from the discretionary CapEx plan and restructuring initiatives, have you or the board considered bigger picture strategic initiatives to narrow the valuation gap? How much does that occupy of your head space really, I guess, is the question.
Yeah, it's a significant component of what I focus on every day and the discussions that I have with our board. You know, our view is that we have a very clear, concise, strategic plan. It has five key strategic priorities, and I think we've communicated those publicly in previous calls, and we can certainly do that directly with you, Sean, as well on a subsequent call. But, you know, we remain optimistic around our ability to execute the strategic plan, and that involves you know, getting our business that we currently have running better, you know, from a overall reliability and uptime.
It involves, you know, monetization of some of the tenures, and we've shown that we can execute on those, and we're gonna continue to focus on those areas. You know, we talked a bit about growth in the engineered wood business, and we're making some progress organically with the Calvert acquisition. You know, we're very careful on what we're prepared to bite off, though, for tuck-in acquisitions, just relative to the balance sheet. You know, we have the new credit agreement that Steve and Glenn were successful in putting in place, and we just wanna be mindful that that's an important piece of our business is the overall integrity of that balance sheet. So I'm, you know, I'm...
I continue to be focused on those strategic priorities, and, you know, our team is very much focused on the operational execution piece of the business every day. That's what I would say about that.
That's great. Thanks very much for those responses, and congrats, Glenn. Well deserved.
Thanks, Sean.
Thank you. The next question is from Matthew McKellar. Please go ahead.
Hi, good morning. Thanks for taking my questions. You called out tight log supplies as a factor in Q2, and with that, I was wondering if you could provide just a bit more color on, the warm weather and the impact on harvest levels you spoke to earlier in the call. Do you need to catch up to the balance of the quarter based on harvest volumes over the last couple of months to maintain production at the level you'd like? Or are you more calling out, whether it's a risk factor as the summer progresses?
Thanks, Matt. I appreciate the question. I would say that... You know, when we look at our Q3 forecast, we will have an increase in our log volume in Q3 here. And, you know, I'm not—even though we ended the quarter at 770,000 cubic meters, you know, I'm not overly concerned about that level. I think our team is also showing to ourselves that, you know, the days of having, you know, 1.5-2 million cubic meters of log inventory are probably not needed. And, you know, when you look at the operating platform, we have our ability to execute on the timberland side very, very effectively.
You know, I don't anticipate us going back to the era of, you know, 1 million cubic meters of log inventory. So, you know, is 777 a little light? Maybe on a couple of sorts, but you can kind of see the results of the focus on timberlands with respect to stratification of different log sorts as well. You know, we're really focused on the margin opportunity, on, you know, what log sort should we do on every cut block that is gonna generate the highest margin for Western and our new financial partners on some of the partnerships that we have in place. So that's what I would share as far as our go-forward log inventory strategy.
Okay, thanks. Thanks very much. Next, recognizing the apportionment hasn't been completed yet, do you expect any impact to your business from the recent reduction to AAC in the North Island timber supply area? And how should we think about the range of outcomes here?
Yeah, I don't think you'll see any material change. You know, those numbers are really catching up to, you know, the current reality that we've been operating under for the last number of years. So you won't see any material change in the actual volume that we're harvesting. Those are kind of indicative of what we've been faced with.
Okay. Thanks very much. And just one last clarifying question on, well, really to follow up on Sean's question, around the union. Are you able to arrive at a resolution with the USW Union as a company independently, or do you need a broader resolution that includes more of the coastal forest products industry?
No, this is a specific negotiation between Western and the USW.
Great. Thanks very much. I'll turn it back.
Thank you to all for the questions. At this time, I would like to turn the meeting back over to Mr. Hofer.
Okay. Well, thanks everyone for joining our call today. We appreciate your interest in our company and look forward to our next call in November.
Thank you. The conference has now ended. Please disconnect your lines at this time, and thank you for your participation.