Donald Demens - President and Chief Executive Officer Stephen Williams - Senior Vice President, Chief Financial Officer and Corporate Secretary

Sean Steuart - TD Securities Paul Quinn - RBC Capital Markets

Thank you, operator, and good morning, everyone. I'd like to welcome you to Western Forest Products third quarter conference call.

Joining me on the call today is Steve Williams, our Chief Financial Officer. We issued our third quarter results yesterday.

I'll provide you with some introductory comments, and then ask Steve to take you through a summary of our financial results. I'll then share our outlook for the next few quarters and provide you a review of our capital projects, then we can open up the queue for your questions.

So I'm pleased to report that we achieved a company-record third quarter adjusted EBITDA result of $28.7 million in third quarter. Our well-positioned log and lumber inventories and a flexible operating platform allowed us to focus production and direct sales toward improved lumber demand in Japan and continued strong demand for Western Red Cedar.

Our unique ability to adjust production and focus on specialty lumber markets have allowed us to deliver consistent adjusted EBITDA results throughout 2015, while commodity lumber markets have underperformed. For second consecutive quarter, we improved our lumber sales mix and benefited from a weaker Canadian dollar, helping us drive record average realized lumber pricing.

An improving market in Japan and continued strong demand in Western Red Cedar were key drivers to the improved sales mix, which resulted in a 13% increase in lumber revenue over the third quarter of 2014. In addition to increasing production and sales of specialty lumber, we took advantage of improved Timberlands operating conditions and increased log production 17% compared to last year.

And while we were capitalizing on specialty lumber markets and increasing our harvest volumes, we continue to implement our strategic capital plan, taking three weeks of downtime in the quarter to install the last phase of our $40 million sawmill upgrade at our Saltair sawmill. In addition, we continue to invest in our Duke Point sawmill and planer.

So to summarize, we capitalized on improved harvesting conditions. We utilized our flexible operating platform and strategic log and lumber inventories to increase specialty lumber sales.

We continue to make progress on the implementation of our strategic capital plan. And we delivered almost $9 million more in adjusted EBITDA compared to last year, despite the poor commodity log and lumber markets.

And finally, we continue to have balanced approach to capital allocation by returning $7.9 million to our shareholders through our quarterly dividend program. So with that, I'll turn it now over to Steve to review our numbers.

Thanks, Don. Let me start with our adjusted EBITDA results.

As Don previously mentioned, adjusted EBITDA for the quarter was $28.7 million or a 44% increase over the same period last year and consistent with adjusted EBITDA from the two most recent quarters. The increase in adjusted EBITDA was a result of growth in Japan in Western Red Cedar lumber shipments and increase in domestic and export log realizations, all supported by a weaker Canadian dollar.

This was slightly offset by lower commodity lumber pricing, a decline in export log volumes and the imposition of softwood lumber agreement export duties. Lumber revenue increased 13%, as our realized lumber prices reflected the benefits of an improved sales mix and a weaker Canadian dollar.

Log revenue decreased 13% as compared to the third quarter of 2014, primarily due to lower export log volumes. By-product revenue improved 11% as compared to the third quarter of 2014 due to improved pricing.

Selling and administrative expense was reduced by 25% or $2.1 million from a year ago at $6.2 million, primarily due to lower performance-based compensation cost, stock option forfeitures and lower share-based compensation expense. From a profit and loss perspective, net income was $17.1 million or $0.04 per share on the strength of our operating results and reduced restructuring charges.

This compares to $2.7 million or $0.01 per share in the same period last year. In the third quarter of 2015, we recognized restructuring charges of $2.9 million, due largely to the consolidation of our Central Island Forest Operation.

Restructuring charges were $8.3 million in the same period last year. Now, moving on to cash flow for the third quarter.

Cash provided by operating activities amounted to $38.4 million compared to $22.1 million in the third quarter of 2014. This improvement was due largely to increased income from operations and a reduction of restructuring charges.

Our capital expenditures totaled $17.2 million in the quarter, made up of discretionary maintenance capital of $4.1 million, discretionary investments in roads of $4 million and increased strategic capital spending of $9.1 million. Our third quarter strategic capital relates primarily to investments made in the completion of the Saltair log merchandiser and debarker installation project and advancements to the Duke Point sawmill and planer modernization projects.

Also during the third quarter, we distributed dividend to our shareholders of $0.02 per common share, totaling $7.9 million. At September 30, 2015, we had total liquidity of $173 million compared to $134 million at the end of 2014.

The increased liquidity was driven by cash generated from operations from the sale of the former Squamish pulp mill site in February. And finally, on November 2, we completed agreements with our lenders to amend our existing revolving credit long-term debt facilities to renew certain covenants, provide more flexibility and improved pricing.

In addition, we extended the expiry of our revolving credit facility by one year to December 2016. With improved cash flow from operations and a strong balance sheet, we are well-positioned to execute on our strategy.

Great. Steve, thank you.

So let's start off with the outlook section by touching on fourth quarter seasonality on the B.C. Coast.

In typical fourth quarters, large harvest volumes decline, as we lose daylight operating hours. In addition, our operations could be negatively impacted by severe weather, which can limit production.

Reduced volumes can put upward pressure on costs. Looking to our markets, our mid-to-long term global outlook remains optimistic.

The gradual recovery in United States new home segment is continuing. And in the longer-term we believe that increased demand from the U.S.

recovery and continued demand from China will combine with a reduction in supply from traditional Canadian sources to deliver a stronger pricing environment. Until we reach that point, however, we expect pricing in the commodity markets to remain volatile, until supply and demand become more balanced.

As we enter the fourth quarter, we expect to see typical seasonal declines in demand for lumber in North America. But for the first time in a long time, we believe we will see some improvement in demand and pricing from China.

We're hopeful the improved demand in China will somewhat offset the seasonal declines in North America, creating some market stability and what has otherwise been a pretty unstable market throughout the year. The repair and renovation market in North America remain strong and have sustained demand for our Western Red Cedar lumber products this year.

As we enter the fourth quarter, we expect to see the typical seasonal decline in cedar demand and sales volume. Accounted in typical fourth quarters, we anticipate pricing to remain firm due to limited supply.

Conversely, pricing in some of our niche products will face pressure due to high inventories. But we expect to maintain a flat overall price realizations by adjusting niche production and sales mix, accordingly.

Japanese new home construction has been strong for a number of months, which has supported increased demand for our lumber products. We expect demand to remain strong in the fourth quarter, but pricing will only improve marginally, due to intense international market share competition.

We expect log markets to remain mixed through the fourth quarter of 2015. Domestically, we believe reduced supply due to a year-over-year decline in total B.C.

Coastal harvest volumes will support sawlog pricing. Our domestic returns will be somewhat tempered by our mix available for sale.

In contrast, prices for pulp logs will remain under pressure. Export log market fundamentals have started to recover, as inventories in China declined.

While recover is still in the early stages, we expect to see modest improvements in both volume and price over the fourth quarter. And I think, of note, our log inventories are well-positioned, as we enter the fourth quarter.

Now let me update you on our capital plan. As you're aware, we continue to implement a planned strategic capital program.

We've announced approximately $95 million of approved capital projects. Thus far as part of our $125 million strategic capital program, and those projects are in various stages of implementation or completion.

We expect to invest an additional $13 million strategic capital in the last quarter of 2015. These investments are consistent with our strategy to position Western as the only company in the coast of BC with the manufacturing capacity capable of competitively consuming the complete harvest profile of the coastal forest.

Our capital plan further supports our ability to sustainably harvest our tenures, which is key to long-term profitability. We'll continue to work on four projects in the fourth quarter.

First off, we'll continue with the $16 million Duke Point Phase 3 sawmill modernization; selling optimization and sorting equipment in the quarter; we're also working on relocating our timber deck, we expect this project to complete in early 2016. We will complete the $5 million Duke Point Phase 1 planer project and rebuild that will increase our specialty planning capacity.

And we will continue with the $12 million Duke Point Phase 2 planer project that will expand our kiln dried processing capacity, supporting production for Japan, niche and commodity markets. This project will complete in the second quarter of 2016.

Our timber deck upgraded at our Chemainus mill will be complete in the fourth quarter, which will expand Western Red Cedar timber manufacturing capacity. We expect to complete no modifications at our Ladysmith mill, which will convert that mill to a single canter line, which will reduce production cost and improve recovery.

And finally, we will continue to ramp our production of the Saltair sawmill. We've been very pleased with the results thus far having achieved various shipped production records during the ramp up.

Our capital investments are expected to increase productivity, reduce production costs and support our product mix with the objective of driving our adjusted EBITDA margins higher and the benefits will be evidence through the ramp up in 2016. And finally, before we take questions, I want to inform you that on October 29, we were successful on concluding a labor agreement with our employees at our Ladysmith sawmill, were represented by the PPWC.

The new five year agreement includes variable pay components that better aligns employee, union and Western's interests. I'm pleased with the innovative and sustainable solution we've achieved through this agreement and look forward to our shared success.

That's it from my comments. And, operator we can now open it up for questions.

Few questions. Just with respect to the capital program, Don, are you at a point yet where you can give us 2016 guidance breaking it down between, I guess, discretionary capital and maintenance and roads?

And I guess I'm just trying to get a handle, there is a lot of moving parts with your program, where are you in the grand scheme of things on the total spend? And can you give us 2016 guidance yet?

So where we are on the strategic capital spend is, we have announced over $95 million worth of strategic capital programs. We have $65 million already invested through the third quarter 2015.

And we anticipate our $13 million to be invested in the fourth quarter with the balance in the first half of 2016 on strategic. And I think for maintenance perspective we've provided guidance in the past of between $35 million and $40 million of discretionary maintenance capital that we invest yearly.

And that's invested in roads and bridges, and in replacing equipments and in just basic maintenance upgrades at our sawmills.

And then following on that, Don, I mean should we expect more discretionary projects to be announced sort of the next phase of this bigger spending plan? I imagine this is sort of a rolling program at this point.

Is that the right way to look at it?

Sean, I think that is the right way to look at it. So if I just go back to -- we did announce a couple of years ago a $125 million program.

Our total is around $95 million announced thus far. We will complete with some announcements in the near-term, we anticipate to complete it, the $125 million.

And then we will provide guidance going forward as to additional capital. I would say, that we, and as many of the lumber peers have been extremely successful of implementing capital and getting very positive returns from, that we will continue to work at upgrading our asset base to achieve our strategy, which is to ensure we have been most competitive operating platform in the cost of BC.

Just one question on markets, and then I'll get back in the queue. Just on the Japanese lumber market, you guys had much better volumes in Q3, pretty consistent with what we saw across the industry.

Didn't see much price momentum or any in the third quarter? I gather from your comments on the call and on the MD&A, you're starting to see some traction in Q4, and you mentioned select product lines in Japan.

Can you go into a bit more detail on where you're seeing those pockets of strength?

I think, in Japan, we increased year-over-year sales over 21% in volume perspective. You're accurate to say that the pricing has been competitive, as suppliers from around the globe are putting volume into Japan and export log producers, especially in the Pacific Northwest seem to be satisfied their current levels, which is basically keeping a cap on pricing.

Where we're seeing some marginal improvement, Sean, would be in our squares, predominantly kiln dried squares, which I think you can see some of those numbers in random links, and which I would expect to see those prices edge up slightly, but we certainly believe, as I said, that it's going to be a competitive environment for market share going forward until the U.S. market improves and starts taking more volume away from Japan.

To start with log inventories, you mentioned that they're well-positioned. How do you rank that?

Is there a certain level cubic meters? Can you give us that number, where you'd like to be at various points during the year?

So the volumes of logs that we're targeting is, of course, to support our production volumes. And so what I can tell is we're about 20% ahead compared to last year.

And you living out in the west, you would understood, last year was a very difficult harvesting environment and our inventories were very low. So we're pleased that we're 20% ahead right now.

And I think it's important to note, we're 20% ahead, while coastal harvest was down according to the government's Harvest Billing System, down about 22% year-over-year. In contrast, ours was up 17%.

So we're comfortable with the percentage about up 20%, and to support increased lumber production in the fourth quarter.

So given 20% higher last year, but last year was a low base. Is this the level that you'd like it higher, or put it another way, if the coastal harvest wasn't down 22%, would you like to have a higher log inventories?

Yes, probably slightly. And to explain that what we'd like to do is create the largest log basket possible to implement our strategy of segmenting the logs by diameter and target into specific mills.

By creating that uniformity and adding technology with our capital investments, we're going to be able to drive down our unit costs. So I would say, slightly more, Paul, but not substantially.

And then just at a high-level on the CapEx plans, I suspect, and correct me if I'm wrong, but the Saltair should be done after the latest spend. It looks like you spent -- will spend about $33 million at Duke Point, I suspect there is more to come there?

Yes. So Saltair is for all intents and purposes done on this current program.

And again, we are pleased with the wrap up. You are accurate to assume there will be some more investments, I anticipate, in Duke Point going forward.

But before we get to that, we have to modernize the facility. But before we get to that point, we're going to complete the existing $16 million Phase 3.

And then just on Chemainus, you mentioned that you're getting higher Western Red Cedar production out of there. What's the production lift?

So the production lift is more driven by the production of the right products. And so the investment at Chemainus is to expand the capacity and efficiencies to round our timber deck and that will increase the production of Western Red Cedar timbers.

And I think that will position us well in that growing segment of the market. So from a lift perspective, our annual capacity at Chemainus is about 130 million feet, you would see a substantial lift there, but it's in the product line that make us the most amount of money, it's where you'll see the lift.

And what's the current run rate spending in the Alberni Valley and what's the plan going forward?

For the Alberni Valley, I mean we continue to run our two sawmills in that area and are looking to trying to see if we can increase some operating rates there. We don't discuss spin rates by operation.

And we've got a lot of good initiatives underway there and expect to, say, looking forward to increase in run rates.

Well, thank you operator. And thank you, everyone, for joining us.

We continue to be encouraged by our most recent results and look forward to sharing with you our fourth quarter results in New Year. Thank you.