Earnings call transcript: Western Forest Products faces Q1 2026 challenges

Western Forest Products Inc. (WFP) reported a challenging first quarter of 2026, marked by significant financial headwinds and operational improvements. The company faced increased tariffs and duties, impacting profitability despite strategic investments in value-added manufacturing. The stock price saw a modest increase of 0.42% following the earnings release.

Western Forest Products faced a challenging quarter with a significant deterioration in adjusted EBITDA compared to the previous year. The company reported a negative CAD 13.6 million in Q1 2026, compared to a positive CAD 3.5 million in Q1 2025. The increased tariffs and duties were a major headwind, although higher log prices and a stronger sales mix offered some offsetting benefits. Despite these challenges, Western Forest Products continued to invest in its strategic initiatives, focusing on expanding its kiln capacity to enhance its specialty product mix.

Western Forest Products anticipates a sequential increase in lumber volumes for Q2 2026, with expected shipments between 130-145 million board feet. The company remains focused on completing its kiln projects and asset sales, which are expected to generate significant cash proceeds. The ongoing strategic shift towards kiln-dried products is aimed at capturing market share in Japan and China, with a long-term specialty product mix target of 55%-60%.

Executives highlighted the company’s strategic focus on value-added manufacturing and its efforts to mitigate tariff impacts. "Our kiln investments are critical for expanding our specialty product offerings and capturing market opportunities in Japan and China," stated the CEO. The company is also optimistic about its balance sheet strength, with expected asset sale proceeds supporting future growth initiatives.

Western Forest Products remains committed to its strategic investments and operational improvements, despite facing significant challenges in the current quarter. The company’s focus on specialty products and kiln capacity expansion positions it well for future growth opportunities.

Gailine, Conference Operator: Good day, ladies and gentlemen. Welcome to the Western Forest Products first quarter 2026 results conference call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. Following the prepared remarks, there will be an opportunity for analysts to ask questions. To join the question queue, press star 1 on your telephone keypad. Should anyone need assistance during the conference call, they may reach an operator by pressing star 0. 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.

Steven Hofer, President and Chief Executive Officer, Western Forest Products: Thank you, Gailine, and good afternoon, everyone. I’d like to welcome you to Western Forest Products 2026 first quarter conference call. Joining me on the call today is Glen Nontell, our Chief Financial Officer, and Bruce Alexander, our Senior Vice President of Sales, Marketing, and Manufacturing. We issued our 2026 first quarter results yesterday. I will provide you with some introductory comments and then ask Glen to take you through our financial results, and then I’ll follow Glen’s review with our outlook section before we open the call to your questions. We saw improvements in lumber pricing in the first quarter, despite some softness in demand for certain product lines. We continue to execute our strategic priorities and have taken steps to solidify our balance sheet to manage through near-term uncertainty.

Since the beginning of the year, this has included announcing the sale of our Stillwater Forest Operation, including TFL 39, Block 1 for CAD 80 million to the Tla’amin Nation. Western will enter into a long-term fiber supply agreement with the purchaser to ensure log supply supports our BC manufacturing facilities. This landmark transaction is anticipated to close in the second half of 2026. At our Columbia Vista sawmill site, we finalized our property insurance claim for $28.8 million. In addition, we continue to work towards the finalization of the sale of the sawmill site property and have also submitted our business interruption insurance claim to our adjuster. We commissioned the first of our 2 continuous dry kilns at our value-added division, achieving start-up uptime above our target.

Site construction continues on the 2nd continuous kiln, which is expected to be commissioned in mid-2026 on schedule and on budget, as well as a new thermal kiln, which is expected to be commissioned in the 3rd quarter of this year. These investments will allow for more kiln-dried lumber production, generating higher margins than green lumber and enabling the expansion of our global customer base. From a labor perspective, we completed a 6-year collective agreement that covers USW employees at the La-kwa sa muqw Forestry Limited Partnership, ending a strike that began in the 2nd quarter of 2025. In our Timberlands group, we continue to focus on managing costs and log margin opportunities, as well as the safe restart of operations at the La-kwa sa muqw Forestry Limited Partnership.

In our manufacturing group, we improved our operational uptime to 87% in the first quarter of 2026, compared to 82% in the first quarter of last year, with improvements noted at every one of our sawmills. In our sales and marketing group, we continue to focus on market diversification efforts to grow our global customer base. We have seen some modest improvements in lumber demand as we start the second quarter, but anticipate continued near-term volatility given combined duties and tariffs of 45%. I will now turn it over to Glen to review our key financial results.

Glen Nontell, Chief Financial Officer, Western Forest Products: Thanks, Steven. First quarter adjusted EBITDA was negative CAD 13.6 million, as compared to CAD 3.5 million in the same period last year. First quarter adjusted EBITDA included a one-time CAD 2.8 million expense related to changes in inventory accounting estimates and CAD 1.9 million of share-based compensation expense due to a 34% increase in share price in the first quarter. Other items that impacted first quarter results compared to the same period last year included: a 28% reduction in lumber shipments, a 29% reduction in log shipments due to lower harvest volumes, and higher softwood lumber duties with a combined duty and tariff rate of 45% compared to 14% last year. This was partially offset by higher log prices and a stronger mix of log sales and higher average lumber prices and stronger specialty sales mix.

We closed the first quarter with approximately 63 million board feet of lumber inventory and 500,000 cubic meters of log inventory. Our log inventory is very lean and the lowest it’s been in over the last decade, which may result in some sawmill operating curtailments in the second quarter. Turning to CapEx, our 2026 total CapEx spending is expected to be between CAD 45 million-CAD 50 million, which includes approximately CAD 60 million related to 2 previously announced continuous kilns and 1 thermal kiln at our value-added division. From a balance sheet perspective, we ended the first quarter with liquidity of approximately CAD 229 million and a net debt to capitalization ratio of 9%. During the quarter, we entered into a new CAD 30 million term loan, which was utilized to repay drawings under our syndicated credit facility.

Assuming the successful completion of the sale of our Columbia Vista sawmill property and Stillwater Forest Operation, combined with anticipated Columbia Vista property and business interruption insurance proceeds, we expect to receive net proceeds after tax of approximately CAD 110 million-CAD 120 million in 2026 based on the current U.S. dollar to Canadian dollar foreign exchange rate. Touching on fuel and oil costs. At current oil prices, increases in direct operational costs plus current fuel surcharges from timberland contractors and logistic providers represents approximately 3% of our overall cost structure. We continue to monitor the situation and will seek to manage and mitigate increases in fuel and oil-related costs in our business where possible. Turning to second quarter seasonality.

Typically in the second quarter, our harvest volumes increase as snow recedes, we expand operations across the entire timber harvesting land base. As our harvest activity moves further up the hillsides, our costs tend to rise as steeper and more difficult terrain increases harvesting complexity. While no forest fires are currently impacting our operations, early hot and dry weather on the BC coast may impact timber operations in the second quarter. From a market perspective, North American lumber consumption typically increases as we move into the spring season. We plan to continue to match lumber pro