Good morning, ladies and gentlemen. Welcome to the Western Forest Products third quarter 2022 results conference call. During this conference call, Western's representatives make forward-looking statements within the meaning of the 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. Please go ahead, sir.
Thank you, Valerie, and good morning, everyone. I'd like to welcome you to Western Forest Products 2022 third quarter conference call. Joining me on the call today is Stephen Williams, Executive Vice President and Chief Financial Officer, and Glen Nontell, Vice President of Corporate Development. We issued our 2022 third quarter results yesterday. I will provide you with some introductory comments and then ask Steve to take you through a summary of our financial results. I will follow Steve's review with our outlook section before we open the call to your questions. I am excited and honored to have this opportunity to build on the strong foundation established through the many years of leadership at Western. This includes Western's commitment to finding a sustainable and profitable path forward that benefits employees, our communities, First Nations, shareholders, and other partners.
I've spent the first 60 days listening and engaging with our employees throughout our company, as well as customers, First Nations, and other stakeholders and partners. It is clear to me that Western has a solid foundation with many strengths, including its focus on safety and its diverse and talented workforce. Looking ahead, we remain very focused on growing long-term shareholder value and allocating capital to the highest return opportunity. We will continue to focus on profit margin across our business, all while driving to provide the best-in-class service to our customers. I will now turn it over to Steve to review our key financial results.
Thanks, Steven. We reported third quarter adjusted EBIT of CAD 17.3 million as compared to CAD 66.3 million in the same quarter last year. Adjusted EBIT in the third quarter of 2022 included CAD 23.1 million of inventory provisions due to weaker lumber markets and CAD 18 million of export tax recovery related to the finalization of the most recent softwood lumber administrative review. Compared to the same period last year, results in the third quarter of 2022 were also impacted by lower lumber demand, lower prices, and a weaker mix. Higher costs, including an incremental CAD 27.3 million in stumpage, freight, and export tax expenses, and sawmill operating curtailments as we balanced production to market conditions. Offsetting these impacts was an increase in external log shipments and revenue.
During the quarter, the Department of Commerce finalized its most recent administrative review, resulting in a decrease in the softwood lumber export tax rate to 8.59%. Looking at third quarter cash flow and capital management. We completed the acquisition of Calvert during the third quarter of 2022. The acquisition will help position Western to capitalize on the growing North American mass timber building market. We also continued with our balanced approach to capital allocation, returning CAD 14.1 million to shareholders via dividends and share repurchases. We continue to make progress in our CAD 29 million of previously announced strategic capital projects. These investments will support and grow Western's value-added wood products business and will be completed over the rest of 2022 and in 2023.
For 2022, excluding the acquisition of Calvert, we anticipate total capital expenditures between CAD 45 million and CAD 55 million. Our balance sheet remains well-positioned heading into the fourth quarter. We ended the quarter with CAD 269 million in available liquidity, which will continue to support our balanced approach to capital allocation. 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. Our log inventories remain well-positioned as we head into the fourth quarter. We ended the third quarter with approximately 986,000 cubic meters of log inventory.
We will continue to match production to market demand.
Even that concludes my comments.
Thanks, Steve. Our results in the quarter reflect challenging global market conditions, reduced lumber sales volumes, and continued pressure on log costs and logistics. In the near term, with central banks continuing to increase interest rates and tighten financial conditions around the world, we expect lumber markets to remain volatile until a rebalancing of supply and demand occurs. The current headwinds emphasize the need for improved operational execution on costs, recovery, and product values, including moving at pace on our strategy to move up the product value chain. To that end, I am pleased with our progress in the quarter in advancing strategic value-focused capital projects and completing the acquisition of Calvert Company, adding glulam to our portfolio of specialty products. Longer term, we continue to believe that wood products have an important role to play in a low carbon world.
We expect long-term housing market fundamentals and growth in mass timber construction will continue to drive demand for lumber. With that, Valerie, 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're using a speakerphone, please lift your handset before making your selection. 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. Our first question is from Sean Steuart. Please go ahead.
Thank you. Good morning. Steven, question for you. You're a couple of months into the seat in the job, and I'm wondering if you can give some thoughts on the pace and direction of Western's strategic shift. The history has been a gradual approach to transition for some time. Do you have any thoughts on your approach to a strategic shift for this company and how long you intend to take to implement it?
Well, thank you and, great to have you on the call. You know, clearly for me, the first 60 days has really just been around, onboarding and immersion. I've spent the last 60 days primarily visiting all the different business units, both in the United States and here in British Columbia, engaging with a wide range of both internal and external stakeholders. Certainly, no immediate changes to our strategy. Our strategic priorities remain the same, whether it is advancing First Nation partnerships, exploring accretive growth opportunities, or moving our products up the value chain to earn incremental margin. As I shared certainly here in the near term, you know, our focus internally here are all around costs and margin and continuing our balanced approach to capital allocation.
Okay, thanks for that. Question on the Calvert deal and glulam as an entryway into mass timber. What about that product versus some of the others that have exposure to mass timber? Are you guys excited about and potential to build on that as a jumping off point in mass timber?
Yeah, Sean, it's Glen here. Maybe I'll provide some introductory comments on Calvert and let others jump in. You know, we're excited about our Calvert acquisition at Western. You know, an opportunity to grow our specialty product offering, moving, you know, up the value chain, as well as providing some potential vertical integration opportunities with our sawmills. You know, to your point, you know, we definitely see it as an opportunity to capitalize on mass timber building in North America, which we believe is gonna grow substantially over the next, you know, five to 10 years. It's also a sustainable product, you know, which sort of meets our product criteria. We view Calvert obviously as a small acquisition, but we view it as a stepping stone into mass timber, and potential other, you know, mass timber products longer term.
You know, also provide some geographical diversification for us. I think in the near term here, our focus is on growing volumes at Calvert. You know, over the last few years, it's done between 13-15 million board feet. You know, it'd be nice to grow that to 20 over the next 12-18 months. From there, you know, I think we remain interested in opportunities throughout the mass timber value chain. You know, what products that may be or whereabouts, you know, we're looking into all those. You know, we remain open to any opportunity that's gonna create shareholder value over the long term.
Okay. Thanks for that, Glen. I appreciate it. That's all I have for now.
Thanks, Sean.
Thank you. Our next question is from Paul Quinn. Please go ahead.
Yeah, thanks very much. Morning, guys.
Morning, Paul.
Let's start with Steven. You've been around for a while and at different operations and equipment suppliers. You know, I think you've characterized Western's strengths well. Where are they weak, and where are the big opportunities you see for Western over the next five-10 years?
Well, it's a great question, Paul. You know, I've been fortunate to spend the last number of years with the BID Group, and I think everyone on this call knows what BID has done in the U.S. Southeast in terms of building, you know, top of top quartile manufacturing complexes for a wide range of customers. You know, certainly when I look at the Western manufacturing footprint, you know, there is a need for, you know, some additional capital to help on a number of fronts, both on, you know, driving lower costs, conversion costs, achieving higher levels of operational uptime, you know, getting technology current with respect to automation and optimization inside the facility.
We have some work to do, but I can tell you what's really stood out to me in the first 60 days is really the strength of our people. Capital is one side of the equation, people is the other side of the equation, and I'm very confident that we have a very strong, committed, passionate group of leaders in our company, both on Timberlands and in the operations side, that are able to execute at a very high level with the capital that we plan to deploy.
Okay. You know, in your press release, you mentioned that HVLP is not pulling through with the additional TFL 44 purchase and their investment in APD. What's going on there? Why the change?
Yeah, Paul, maybe I'll take that one. It's Glen. You know, when we structured the original transaction, it was always an option for, you know, the First Nations to purchase an incremental ownership interest in, both the tenure and then potentially APD. You know, the First Nations were surprised I had to comment, but, you know, the feedback we got from them was, you know, changing circumstances, since the original transaction. What I'd say is that doesn't necessarily change our focus or us wanting to do more of these partnerships. I think that's a key strategic priority for us.
you know, while the time period for the option has expired on that particular limited partnership, you know, we continue to have discussions with interested area First Nations or First Nations in the tenure on acquiring incremental ownership in that C̕awak ʔqin Forestry Limited Partnership.
All right. That's all I have. Thanks, guys.
Thanks, Paul.
Thanks. Thank you. Once again, please press star one at this time if you have a question. Our next question is from Hamir Patel. Please go ahead.
Hi. Good morning. Stephen, could you speak to, you know, what you're hearing from some of your key R&R partners, in terms of expected cedar demand in 2023?
Yeah, Hamir, I'll kick it off, and we'll see if Steve or Stephen would like to jump in. I mean, you know, if I talk more about, you know, cedar more broadly, I think, you know, it's typically a seasonally slower time of the year for cedar. It's sort of been a tale of two markets, you know, where wides, timbers and clears have been fairly steady, whereas, you know, the narrows, decking and trim have been a bit weaker. You know, I don't think, you know, we're expecting any changes to that until we enter the first quarter of next year as, you know, customers look to put, you know, orders ahead of the spring building season. You know, from a channel perspective, you know, speaking more broadly, you know, I think most customers are operating on lower inventory levels.
I think most of them are looking to manage their risk given, you know, the potential talk of, you know, a recession in 2023 that may impact demand. I think what we're seeing, you know, on the Cedar side is, you know, customers sort of ordering only what's needed in the near term, and then, you know, channel inventories are fairly low until, you know, they see potentially a shift in demand.
Great. Thanks. Thanks, Glen. That's helpful. Just lastly, what should we expect for CapEx in Q4? Any sense yet on 2023?
Yeah, Hamir, I'll take that one too. I think for the full year, our CapEx, you know, it's between CAD 45 million-CAD 55 million plus the acquisition of Calvert. You know, the range is there because, you know, there might be some slight delays in terms of the timing of the specific CapEx. You know, that range is probably a reasonable range for full year.
Uh-
And then 2023, still working through our plan for next year. Maybe just talking about, you know, the strategic capital products we have underway. We had previously announced this year about CAD 29 million in strategic capital projects, you know, around growing our value-added manufacturing position on the coast. You know, to date, we've spent around, you know, CAD 7 million of that. You know, in the back half of this year and into 2023, there's about, you know, CAD 22 million of strategic capital to come, as well.
Okay. Thanks. Thanks, Glen. That's all I have.
Great. Thanks, Hamir.
Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to Mr. Hofer.
Thanks, Valerie. Well, thanks to everyone for joining our call today. We certainly appreciate your interest in our company, and we look forward to our next call in February. Have a great day, everyone.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.