All participants, thank you for standing by. The conference is ready to begin. Good morning, ladies and gentlemen. Welcome to the Western Forest Products second quarter 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, Patrick. Good morning, everyone. I'd like to welcome you to Western Forest Products' 2023 second quarter conference call. Joining me on the call today is Stephen Williams, our Executive Vice President and Chief Financial Officer, and Glen Nontell, our Vice President of Corporate Development. We issued our 2023 second quarter results yesterday. I will provide you with some introductory comments and then ask Steve to take you through our financial results. I will follow Steve's review with our outlook section before we open the call to your questions. In the second quarter of 2023, we continued to face a more challenging demand environment. Headwinds from rapid interest rate increases over the last year continued to work through the economy. This has resulted in weaker lumber demand and prices compared to the same time last year.
Our second quarter results also reflect an organizational structure which was not aligned to the current operating environment. A result, we took steps during the quarter to realign and reorganize certain aspects of our timberlands, manufacturing, and sales and marketing groups. This included the optimization of certain operations and the streamlining of operational structures to drive a more lean and nimble organization moving forward. Part of our operational excellence strategic priority, we remain focused on driving improved profit margins going forward, and we'll continue to evaluate all opportunities to do so. Despite the more challenging environment, we continue to advance opportunities to position our business for long-term success. This including advancing multiple sales, marketing, and quality assurance initiatives to support our customer excellence promise. We also advanced our BC strategic capital investments to support value-added manufacturing.
We completed installation of our MSR grader at our Duke Point facility and are in the process of testing and calibrating prior to commissioning. We also continued to progress our continuous kiln project at our Saltair sawmill. These investments will support the production of more kiln-dried lumber products and move our products further up the value chain to drive increased profitability over the long- term. In addition, we remain focused on other strategic priorities, including advancing collaborative forest planning activities and partnership opportunities with First Nations and growing our engineered wood products division. Our balance sheet remains strong, and we remain focused on maintaining financial flexibility to support our strategic priorities and balanced approach to capital allocation. I will now turn it over to Steven to review our key financial results.
Thanks, Stephen. Second quarter adjusted EBITDA was -CAD 12 million, which included an increase of CAD 8.5 million in inventory provisions. Despite improvement in some lumber prices from the first quarter of 2023, weaker pricing in certain lumber segments impacted log and lumber values. Compared to the same period last year, results in the second quarter of 2023 were impacted by lower lumber prices and shipments, lower log and byproduct revenues, and sawmill curtailments as we continue to match production to market demand. These were partially offset by lower stumpage and freight expense, lower export taxes, a stronger U.S. dollar, and specialty mix. In our Engineered Products division, we continue to be pleased with the performance of our Calvert acquisition, delivering another quarter of EBITDA margins in excess of 20%.
Since completing the acquisition in August of last year, we have generated EBITDA of CAD 6.3 million on an annualized basis. Turning to second quarter cash flow and capital management, we continue with our balanced approach to capital allocation, returning CAD 3.9 million to shareholders via dividends. We also received our income tax refund of CAD 15.2 million. For 2023, we expect total CapEx to be approximately CAD 60 million, which includes a mix of maintenance of business, roads, and strategic CapEx. Our balance sheet remains strong, ending the quarter with CAD 196 million in available liquidity and a net debt to capitalization ratio of 5%. We will continue to prioritize financial flexibility of our balance sheet to support our strategic initiatives and manage through current market conditions.
Subsequent to the end of the second quarter, the Department of Commerce released the final duty rates related to the fourth administrative review. The combined all others duty rate applicable to Western was 7.99%, as compared to the current rate of 8.59%. Softwood lumber duties will now accrue at 7.99% until the completion of the next administrative review, which is scheduled to be completed in 2024. We will record an export duty recovery of approximately $4.5 million in the third quarter of 2023 related to the finalization of the fourth administrative review. Turning to third quarter seasonality. Typical third quarters can be challenging operationally, as hot, dry weather can restrict logging activity, reducing harvest volumes and impacting costs.
During the end of the second quarter and into the third quarter, we have taken some operational downtime in our timberland operations due to dry conditions. We will 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, we expect lumber markets to remain challenging as lumber supply and demand rebalances in certain markets. We have seen some positive signs in Japan as channel inventories have rebalanced, but we expect some downward pressure on prices in the near- term. Long- term, we expect to see growth opportunities for our Engineered Wood Products and Lumber business, supported by our strategic capital investments and increased demand for mass timber building in North America. We are highly focused on profit margin and our cost structure across our business. We will continue to deliver best-in-class service to our customers and ensure we create long-term shareholder value as we execute on our strategic priorities. With that, Patrick, we can open up the call to questions.
Thank you. We'll now take questions from the telephone lines. If you have a question and you're using a speakerphone, please mute your handset before making your selection. 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. The first question is from Sean Steuart from TD Securities. Please go ahead.
Thanks. Good morning, everyone. Thanks for taking the questions. Steven, wondering if you can give us a little bit more detail on some of these realignment initiatives you've undertaken this most recent quarter, and I guess what could follow from that, and just trying to gauge, absent an eventual recovery for the for pricing for the grades you produce, what you guys can do to improve margins on your end, and if you're able to put any numbers on that, and I'm thinking of initiatives you can take that are capital light to start to turn the margins around.
Thanks, Sean. Appreciate the question. Normally, we wouldn't publicly comment on our restructuring activity that happens internally. You know, our focus really was around ensuring, you know, very strong alignment and integration, you know, between our timberland units, our Manufacturing business, and our Sales and Marketing organization. We certainly saw some opportunities to participate in some shared service initiatives within the respective area of business, as well as in between the business units. I would, I would say it's just about understanding the current business environment that we have, looking forward for the next 12- 24 months, and ensuring that organizationally, that we're structured in the manner that's gonna give us the, you know, the highest probability for success and execution.
Okay. A follow-on question on, on markets, and I guess just excluding Japan and, and your commodity grades, we've seen sort of consistent pressure for various specialty niche grades you guys produce. I guess, in your sense of how close are we to rebalancing for some of those grades, perception of inventory through the channel, you guys have taken some downtime, I see others are as well. In your sense, we're close to getting towards a rebalance point for, for some of those niche and specialty grades?
Maybe I can just share a few comments with respect to the, you know, a few of the categories. Certainly, when we look at cedar, you know, overall market demand continues to be slow. We have some categories inside the cedar profile in timbers and clears that are certainly stronger than the, the 1- and 2-inch merch products. You know, there is some, some good news coming from our customers in North America that, you know sales in the last few months have improved compared to where we started off, off at in Q1. The home center business is probably the bright spot of, of our cedar business, with, you know, very strong demand and takeaway for this, for this time of year, and, and we're seeing it extend into, you know, August and September.
Having said that, you know, customers are managing inventories pretty carefully and, and buying within a kind of 1 to 2-month window. On the and then maybe just one last comment on the on the cedar home center business, that's an area of of very strong focus for us. We continue to build out additional programs with the big retailers. We'll see most of that opportunity occur in in Q4 and into 2024. On the industrial side, you know, the Doug fir timber business, that happens at Chemainus as well as at our custom cut group, you know, overall demand is stable and pricing is stable.
One product category that's had a pretty significant impact on our business in industrials is the mat stock business, and that is primarily rough green 2x8 mat stock out of Saltair and Ladysmith, and then the 12x12 crane mat material out of Duke Point. All that product goes out as rough green, and we saw a very significant pullback in Q2 as a result of a few of the big major pipeline projects coming to a completion. That's a challenging component for us because all that rough green now has to get put into a kiln-dried product, and we are faced with limited kiln drying capacity, and it's relatively high cost till we get the new continuous dry kiln built at Saltair. You know, Japan inventories are at a healthier level.
That rebalancing that we talked about in the previous call, that largely occurred in the quarter. The yen to the US dollar is gonna present a challenge for us to increase any of our pricing. On the commodity side, just to finish off, you know, some recent improvements in North America from, you know, June through July. One bright spot is the trading sector, and that's, that's shown to be much stronger than expected, and that's allowed us to continue to run some of our cut programs, specifically targeting, you know, our four square premium 2-inch dimension into that market segment.
Lastly, I'll just wrap up by saying, you know, China's, China's weak in both demand and pricing as they struggle through, you know, some, I would call, structural changes and transformation in their overall real estate portfolio there.
That is great detail. I appreciate it. That's all I have, guys.
Thanks, Sean.
Thank you. The next question is from Paul Quinn from RBC Capital Markets. Please go ahead.
Yeah, thanks, guys. Good morning. Just, what's the update on, on Port Alberni, process right now?
Good morning, Paul. As we, as we announced on April twenty-seventh, we concluded the 90-day working group process, and that we would not restart the facility. We've commenced negotiations, and, related to the proposals that we've received, due diligence is underway, and we're working, diligently to move forward as quickly as possible. As soon as we have, additional updates that we can share, we'll absolutely do that, Paul.
Any expected timeline with that? Is that the end of the year, or?
We certainly would like to have like to have a conclusion, I'm gonna say, you know, October, and, and have it, have something announced in that time frame.
Okay. Then, you know, last year, you, you, you, you bought Calvert. I suspect that that facility is doing quite well, given the strength in timber right now. If you could confirm that, and, and, you know, is there any other opportunity for you to, to acquire like assets for Calvert?
Yeah, we, we really like what we've seen so far with Calvert. We just had our board of directors visiting the Columbia Vista and the Calvert assets this week. You know, we spent a lot of time on the vertical integration piece, really understanding where the value creation could be recognized between Calvert and our BC sawmills, and right back to our, you know, our timberlands operation. Demand continues to be quite strong with the industrial product line that we make there. We continue this to build out our lamstock in both Doug fir and in yellow cedar from our TFLs and BC s awmills. We're very optimistic that we can continue to have that as a core piece of the overall supply that Calvert requires.
As far as additional opportunities, you know, it, it's certainly an area of our focus as we, we look at additional tuck-in, you know, Calvert-sized opportunities in that market segment. Again, it's, it's been a bright spot for us. We've learned a lot about the value of the vertical integration opportunity and, you know, very optimistic that we can grow that business. I think we're. Compared to where they were in 2022 in terms of production volume, or sorry, production capacity, we will have increased that around 29% in 2023. We'll see if we can take, you know, take that even further as we go into 2024.
Yeah. Sounds good. Any update at all on what you're seeing? I mean, of the lumber companies, you know, that are impacted by the softwood lumber rates right now. You know, you guys are, the way I look at it, unfairly penalized, you know, just given the higher sales price of the product. Any, any movement on that file at all? Do you see any way forward for you guys?
Well, there's, there's certainly conversations occurring amongst, amongst the industry, but, you know, it's gonna take the counterparty to, you know, want to, want to have a settlement. I think there's probably a gap there still, Paul, in terms of, you know, certain members of the Coalition actually, you know, raising their hand and say, "Let's have a dialogue. Let's see what we can, let's see what we can accomplish here." You know, I would say there's not a lot... There's very little momentum today.
You know, I think I shared in the last call, you know, when President Biden visited, Prime Minister Trudeau, we worked every phone, every email, every relationship that we had, as an industry, a Pan-Canadian approach from British Columbia to New Brunswick and, and Quebec, to get softwood lumber on the discussion paper between the two executives. Couldn't make it happen. That was a real disappointment and really a lost opportunity.
Yeah. Okay. Then just lastly, I mean, Interfor trying to monetize their BC coastal assets. Any interest on, you know, from Western's standpoint, to, to pick up additional capacity in BC?
Well, I think if I look at, you know, what Ian has, has left here on the BC coast, you know, there's, there might be some opportunities around, you know, log, log dumps and more infrastructure related, the, in, in areas where they're, you know, where they're going to, to leave. You know, in due course, we'll have some conversations, you know, with-.
I'm sorry, the moderator line is disconnected. Please stay on the line. All participants, please continue to stand by. Please go ahead, Mr. Hofer. I'm sorry, your line disconnected. You're back in the call now.
Sorry about that, Paul. I'm gonna have to change, change, telecom carriers here. Where did I, where did I leave off, leave off at, Paul? Where did you ask me at?
At the beginning. Sorry.
Okay. We were talking-
Interfor.
This was about, this was the Interfor question, right?
Yeah.
Yeah. What I was sharing there was, you know, we'll, we'll certainly have a conversation with Ian and his team. I think any opportunities between, you know, the two companies would be mostly around, I would call infrastructure related. You know, so, you know, log sorting facilities, log dumps, you know, things like that, that, you know, they'll no longer need and, and maybe we, you know, we could benefit from. We'll have a conversation, you know, with Ian and the team as, as that opportunity unfolds.
All right. That's all I have. That's why.
Okay. Thanks, Paul, and sorry for the disconnect.
No worries.
Thank you to all for the questions. At this time, I would like to turn the meeting back over to Mr. Hofer.
Okay, well, if there's no further questions, thanks everyone for joining our call today. We certainly appreciate your continued interest in our company. We look forward to our call in November. Have a great long weekend, everyone.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.