Western Forest Products Stock

Good morning, ladies and gentlemen. Welcome to Western Forest Products Second Quarter 2026 Results Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] 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, Gary, and good morning, everyone. I would like to welcome you to Western Forest Products 2026 Second 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 second quarter results yesterday. I will provide you with some introductory comments and then ask Glen to take you through our financial results. Bruce will follow with our market outlook section before we open the call to your questions. We saw modest improvements in lumber pricing and seasonal demand in the second quarter. We continue to demonstrate clear progress in advancing our strategic priorities while also solidifying a strong balance sheet to manage through near-term volatility.

Since our last call, this has included completing our strategic kiln drying investments at our value-added division with the commissioning of the second continuous dry kiln and our thermal kiln. With 3 highly modern, low-cost continuous dry kilns operating on the BC Coast with a capacity of 206 million board feet, Western's investment will support higher-margin value-added kiln dried lumber production and enable the expansion of our global customer base. In addition, we are also upgrading our autograder technology at our Duke Point planer facility. The new autograder uses AI technology to grade each piece of lumber, resulting in more precision grading than manual grading, leading to higher margin potential.

The $4.1 million investment is anticipated to be commissioned in early 2027. This will complement the autograder technology previously deployed in the Duke Point sawmill facility. From an operational perspective, our Timberlands group continued to focus on managing costs and log margin opportunities. Harvest volume increased by 35% compared to the same quarter last year due to improved permit approvals and more favorable weather conditions. In manufacturing, we improved our operational uptime to 88% in the second quarter of 2026 compared to 87% in both the first quarter of 2026 and the second quarter of 2025. This is an all-time high for Western Forest Products manufacturing sector.

In sales and marketing, we continued our customer focus, developing value-added products and programs targeted with the end user in mind. Specialty products comprised 57% of sales in the second quarter of 2026 compared to 52% in the same quarter last year. From a cash flow and balance sheet perspective, we collected the Columbia Vista property insurance proceeds of USD 22.8 million in the second quarter and completed the sale of the sawmill site for USD 14.7 million in July. We look to finalize the Columbia Vista business interruption insurance process in the third quarter, and we continue to advance the $80 million sale of our Stillwater Forest Operations, which is anticipated to close in the second half of 2026.

Assuming the completion of all these items, we expect to end the year with a pristine balance sheet, which will be in a net cash position. Looking ahead, we remain focused on executing our strategy and maintaining a strong balance sheet. We see gradual improvements to lumber markets over the midterm. However, in the near term, due to persistently weak market conditions, high softwood lumber duties and tariffs and factors relating to the BC operating environment, we plan to curtail our collagen-based sawmill for the remainder of 2026. I will now turn it over to Glen to review our key financial results.

Thanks, Steven. Second quarter adjusted EBITDA was $0.4 million as compared to $0.5 million in the same period last year. Second quarter EBITDA in 2026 included $2.3 million in share-based compensation due to a 20% increase in our share price. As compared to the prior year, results in the second quarter benefited from improved lumber pricing across many product lines, a strong specialty lumber sales mix, more favorable harvesting conditions and a strong external log sale mix. This was primarily offset by a 25% reduction in lumber shipment due to softer demand and loss of sales from our Columbia Vista division and higher softwood lumber duties and tariffs with a combined duty and tariff rate of 45% compared to 14% in the same period last year.

We closed the second quarter with approximately 67 million board feet of lumber inventory and 622,000 cubic meters of log inventory. Turning to CapEx. Our 2026 total CapEx spending is expected to be between $45 million to $50 million, which includes approximately $20 million related to 2 previously announced continuous kilns and one thermal kiln at our value-add division and the autograder at Duke Point. From a balance sheet perspective, our Q2 ending net debt declined by $14.4 million and liquidity improved compared to the end of the first quarter. We ended the second quarter with a net debt to capitalization ratio of 6% compared to 9% at the end of the first quarter.

After the end of the second quarter, we completed the sale of the Columbia Vista sawmill site for USD 14.7 million. With the planned sale of our Stillwater Forest Operations, which is anticipated to close in the second half of 2026, we expect to be in a net cash position at the end of the year. 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. While we have yet to experience any significant forest fires in our areas of operation, hot and dry conditions may impact harvest levels through the summer. I will now turn it over to Bruce to go through the market outlook.

Thanks, Glen. Turning to our market outlook. North American lumber markets are expected to be relatively stable through most of the third quarter of 2026. Housing affordability continues to be the most significant issue leading to reduced housing demand. Elevated interest rates, higher fuel costs and broader economic uncertainty are contributing to subdued consumer confidence and the reduced housing demand. Despite these headwinds, reduced lumber supply across North America has helped to offset weaker demand and support price stability across key product categories and market segments. Lumber demand in Japan has improved as housing starts gained momentum through the second quarter of 2026, while lumber inventories at the ports decreased.

The Japanese lumber market is expected to be stable through the third quarter of 2026. Demand for softwood lumber in China is anticipated to soften in the third quarter of 2026 as seasonal weather and high temperatures reduced construction activities. Overall, we currently have a third quarter order file of approximately 118 million board feet. Steven, that concludes my remarks.

Thanks, Bruce. With that, Gary, we can open the call up to questions.

[Operator Instructions] The first question today comes from Sean Steuart with TD Cowen.

Steven, I want to start with the log harvest volume gain you saw this quarter. You referenced better weather, but also improved permit approvals. And I'm wondering if you can give some more context on the latter point and the sustainability of that change going forward.

Thanks, Sean. We've had a pretty good start overall in our Timberlands operation starting in Q1, where early on in January and February, we were able to get into higher elevation areas and more old growth. And that's just continued through Q2. Weather has been very favorable to our operating environment on the BC Coast. We've only lost a couple of days related to temperatures that put us in a safety watch zone. From a permitting standpoint, I'm really pleased at where we're at. It just speaks to our team's engagement and the investment we've made in developing long-term partnerships and long-term relations related to the First Nations in the traditional territories that we operate.

So it's taken us some time, but I'm really pleased that the forward look that we now have on permitting, lots of work left to do. But through our planning group, through our First Nations relations group, through our Timberlands operating group, all the work we've been doing around integrated resource management plans, the first forest landscape planning plan that was completed here in British Columbia. We're starting to reap the rewards of that investment. So it really speaks to the work that's been going on for the last couple of years, and now we're starting to see the benefits of that.

That's great to hear. And you gave some context around your order file headed into the third quarter on the lumber side. Given all the puts and takes you've talked about here, can you give us perspective on the lumber production profile through the second half of the year and how that might translate into the shipment trend in Q3 and Q4?

Yes. So we've had the Chemainus sawmill curtailed since the beginning of the year. That started actually in 2025. We've had Cow Bay curtailed for the majority of Q2. So I think the lumber shipments are going to be fairly similar for Q3, Q4 as what we had here for the first 2 quarters. What we're doing is that if we see opportunities to increase our volumes, we have the opportunity to restart quickly or to add some incremental hours at our existing facilities that are running. So directionally, I would say they'll be fairly consistent here for the next couple of quarters.

Okay. One last one for me, Steven. We asked the same question last quarter, but you've got really good visibility on balance sheet transitioning to net cash and lots of flexibility. Has management team and the Board given updated thoughts to bigger picture growth ambitions, whether it's specific discretionary CapEx projects or acquisition opportunities? Any evolution in the thinking on your appetite on that front?

Yes. I would say today that we've worked incredibly hard to put our balance sheet in this position. We're going to continue to be very disciplined as we assess opportunities, whether they're here in British Columbia or in different geographic jurisdictions. We have a very clear strategic plan with strategic priorities. We know that our cost structure inside of our manufacturing facilities is too high. And everything that we're doing is focused on reducing that. So when I think about kind of the next phase of strategic capital that we would look to deploy, it would really be around addressing some of these inherent cost structure challenges that we have on the manufacturing side.

So we have a modest investment plan that we've previously talked about inside of our engineered wood facilities in Washington State. We continue to be encouraged by the results we're seeing on the mass timber side in North America and the adoption of that building system, and we plan to move forward with that investment as we go into 2027. So I would say directionally, we continue to look at opportunities as they present themselves, but we're very much aware of some of the internal challenges that we have and that will need to get addressed. So I would view that as our initial priority, Sean.

The next question is from Ben Isaacson with Scotiabank.

Just 2 questions from me. The first one is on Cowichan Bay. So you've curtailed for the balance of '26. What exactly do you need to see to restart that mill? And can you talk about risk of permanent closure?

Yes. I won't comment on the second question. I will comment, though, on the first question. So the Cowichan Bay sawmill is primarily focused on Western Red Cedar. And the log profile that we consume there is a combination of both small diameter chip and saw and then kind of medium diameter gang cedar. And clearly, the key and largest market for knotty cedar that, that mill produces is in the United States. And so what would we need to see? We've run into, I would call a ceiling in our ability to increase prices to compensate for the current 45% tariffs. So what we would need to see is a meaningful reduction in duty and tariff that allows us to be competitive in that key market to sell knotty finished product for Western Red Cedar, decking and soffit and sidings and those type of product lines. So I guess the short answer is a negotiated settlement to the current softwood lumber agreement and the Section 232 tariffs that we currently face.

That's super helpful. I appreciate that. Next question is on these kiln investments, these value-added investments. Can you just talk about the EBITDA uplift or margin improvement or IRR? Like how should we think about what you're seeking to earn on the capital deployment?

Sure. Maybe I'll just -- I'll ask -- I'll speak to it at a very high level, and then I'll turn it over to Glen and Bruce. Directionally, what we're doing here is we're increasing our overall kiln capacity, and then we're lowering the cost structure of the go-forward cost to kiln dry lumber. And so these new continuous dry kilns are much more efficient from a natural gas utilization standpoint. They dry lumber faster. And so at a high level, that's what we're doing. And then we're shutting -- we essentially have shut down all of our high-cost batch kilns that were currently being used. But Glen and Bruce, maybe some additional color from you, gentlemen.

Yes, sure. On the CDKs, as Steven mentioned, not only is it a cost reduction point, but we now have enough capacity to dry 100% of our dryable fiber, which we did not have prior to this investment. So we're now in that position. The other thing that we've seen with this new technology and the control and the drying process is a significant uptick in the outturns of the products coming out of the mill, which is adding significant value to our product mix as well.

And maybe, Ben, just from a return perspective, obviously, internally, we set return thresholds at greater than 20% IRRs. I'd say that all these kiln projects are well in excess of that, probably well in excess of 40% overall relative to the capital cost.

That's great. And then if I can, just one last one. I'm not very familiar with how these title claims work on your tenure. Can you just kind of explain, is there -- are there more claims that could pose a risk versus the one that you guys talked about? Or how should -- how do we think about that?

Well, we don't have any specific title claims being litigated with any of our existing Tree Farm Licenses. We have a forest license out in Nootka Sound. It's relatively small, and that is part of the Nuchatlaht litigation. But that's the only impact at this point in time that we have on our -- on any of our volume coming off of TFLs and/or forest licenses.

I understand. That makes sense. And so just to be clear, you don't see any risk right now to anything else being challenged?

I don't.

The next question is from Matthew McKellar with RBC.

I'd like to follow up a bit on your comments in response to Sean's question. I just ask if there's any more detail you can share around your plans at Fruit Valley. I think you talked about new fabrication machine related to glulam beams, but also evaluating opportunities to modernize and consolidate glulam facilities in the region at Fruit Valley. Can you just give a bit more color on how these initiatives are progressing and maybe what demand signals you're seeing from the mass timber market at this point, please?

Thanks, Matt. This is a pretty exciting area of our business, but it is relatively small in the grand scheme of things. But we do view it as a strategic and a core piece of our business as we go forward. So when we bought the Calvert company, Calvert had 2 facilities that they manufactured glulam beams at. And as part of the Columbia Vista manufacturing footprint, there were 2 separate locations. There was the Columbia Vista sawmill and then the Columbia Vista kilns and planer. That's called Fruit Valley. And so our strategic plan has us consolidating the 2 facilities that we currently are at, one in Washougal, Washington, one in Vancouver, Washington to the Fruit Valley facility that's in Vancouver, Washington.

And we will utilize some of the existing kilns that are there to purchase rough green lamstock. Those are state-of-the-art low-cost kilns. We will utilize the planer in the manufacturing process as well. And we own the facility for free and clear. So it's really an opportunity for us to move from 2 facilities to 1, no longer on lease property and leverage a really nice manufacturing complex that is there. So we have the Hundegger fabrication machine on order. That allows us to start fabricating our glulam beams, and that will happen in the first quarter of 2027. We've added some additional sales, engineering resources as well as technical design resources. And we continue to participate in that mass timber building segment for the glulam mass timber beams, so columns and headers that are complementary to others providing CLT.

So we don't envision ourselves being in the CLT business, but we do want to be in the mass timber glulam business that requires us to participate in design, engineering, fabrication, including all the hardware that goes with it. And we're pretty excited about the growth prospects, especially in the Pacific Northwest. If you think about where the subject matter expertise resides with respect to mass timber architecture and design and specification between Seattle and Portland, it's heavily concentrated in that region. So we're developing relationships with large general contractors with specifiers. And yes, and we're winning some jobs, which is pretty exciting. So it's an area of our business, again, that's not huge, but it's -- we see it as an opportunity for us to continue to learn and grow and ideally strategically grow that in perhaps a couple of different geographic jurisdictions.

That's great. If I could ask one more on capital projects. I'd be curious also to hear a bit more detail on the auto grader upgrade at Duke Point. I think that MSR grader dates just a few years back. Is this upgrade using technology that wasn't available a few years ago? Could you help us understand how it complements kind of what you have already? And maybe what kind of return you expect on that upgrade as well?

Sure. So as you know, the auto grading technology has been around for a number of years. When we put the first auto grader in the Duke Point sawmill, it really allowed us to start separating out rough green specialty grades inside the sawmill and that had an immediate payback. And I think it significantly exceeded our expectations, both from a grade recovery, productivity, lower costs and it's just been a great project. The planar mill did have -- or does have an older outdated auto grading technology, but it's at end of life. And it still required us to have a significant amount of our team members manually grading lumber.

And so the new platform we're putting in, it's -- again, it's proven, it's tested. We're working with the market leader in North America. It has the most advanced AI platform that sits on top of the software. And we expect it to be very complementary to the previous investment on the MSR capability and essentially is I'm not trying to simplify it, but it is a plug-and-play operating platform that is very complementary to the one we already have in the sawmill. So it leverages all the investment we've previously made, both on hardware, software and people. And we're pretty optimistic that this will again exceed our internal return hurdles. So pretty excited about the project.

Very helpful. And just one quick modeling one for me. Apologies if I missed it, but on the Columbia Vista site sale, do you expect much of a tax impact? What do you expect net proceeds to look like?

Yes. Matt, it's Glen. So between the property insurance proceeds and the sale of the property, we expect the tax impact to be about CAD 5 million, which would not be payable until 2027.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Hofer for any closing remarks.

Well, thanks, everyone, for joining our call today. We appreciate your continued interest in our company, and we will look forward to our next call in November. Have a great day.

The conference has now concluded. Please disconnect your lines at this time, and we thank you for your participation.

Good day, ladies and gentlemen. Welcome to the Western Forest Products First Quarter 2026 Results Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] 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, Galen, 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 $80 million to the Tla'amin First 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 USD 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 second continuous kiln, which is expected to be commissioned in mid-2026, on schedule and on budget as well as the new thermal kiln, which is expected to be commissioned in the third 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 second 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, and 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.

Thanks, Steven. First quarter adjusted EBITDA was negative $13.6 million as compared to $3.5 million in the same period last year. First quarter adjusted EBITDA included a one-time $2.8 million expense related to changes in inventory accounting estimates and $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 $45 million to $50 million, which includes approximately $16 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 $229 million and a net debt to capitalization ratio of 9%. During the quarter, we entered into a new $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 operations, combined with anticipated Columbia Vista property and business insurance -- interruption insurance proceeds, we expect to receive net proceeds after tax of approximately $110 million to $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, increase in direct operational costs plus current fuel surcharges from timberland contractors and logistics providers represent approximately 3% of our overall cost structure. We continue to monitor the situation, and we'll 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 and 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 production with market demand.

Steven, that concludes my comments.

Thanks, Glen. So turning to our market outlook. Demand and pricing in North American lumber markets improved towards the end of the first quarter. As the spring season approaches and building activity picks up pace, pricing is expected to increase before stabilizing by the end of the second quarter. That said, persistently high interest rates, along with recent increases in oil prices, may curb demand in the short term. Some Western Red Cedar inventories remain high in certain markets, and customers remain disciplined in managing their inventory levels to avoid slower-moving products.

Lumber demand in Japan is showing signs of recovery in the second quarter of 2026, and supported by an anticipated increase in housing starts during April and May. This improvement is expected to be partially offset by higher fuel surcharges and a weak yen to U.S. dollar foreign exchange rate. Lumber markets in parts of China began to show signs of renewed demand following the Lunar New Year slowdown. The Chinese market remains competitive for price with offers readily available from all global suppliers and modest price increases are anticipated in the second quarter.

Overall, we currently have a second quarter order file of approximately 103 million board feet. Looking ahead, we remain focused on executing our strategic priorities and CapEx plans, including realizing significant cash flow from asset sales to ensure we maintain a strong balance sheet.

With that, operator, we can open the call up to questions.

[Operator Instructions] Our first question is from Ben Isaacson with Scotiabank.

I have 3 quick ones. The first one is, can you just talk about this new measurement that you announced in your disclosure? And what was the purpose of making the change? And how does it improve disclosure?

Sure, Ben. Maybe I'll take that one. As you know, obviously, us being slightly different than the commodity lumber players, we have a mix of specialty and commodity lumber products. Historically, those products were measured on different measurements than the commodity lumber peers that measure commodity lumber typically all on a nominal measure basis.

So historically, as you look through our results, you have a mix of both net lumber measurement and nominal lumber measurement, which would sort of cloud some of the volumes and board foot or per thousand board foot measures. And so this step was really just to take that noise out of the data. Obviously, the 2 years of historical restated in the numbers going forward to take that more take that complexity out of the numbers we disclosed going forward and help the comparability of board-foot measures when you look quarter-over-quarter.

Okay. That's helpful. That makes sense. So maybe on that point then, that's a good segue. I noticed that your specialty mix was about -- I think you said 57% versus closer to 50% or 51% previously. Is that just a function of the market and kind of where demand is right now? Or is that moving towards a longer-term target of more specialty product and potentially reduce volatility on your free cash flow or on your earnings?

Yes, I'll take that one, Ben. Maybe it's a mix of both. I think historically, what we've said or targeted is a specialty mix of somewhere between 55% to 60%. I think that is our long-term target. And as we continue on with advancing and finalizing our kiln investments to move our products up that value chain that is what we would look to target from a specialty mix. And as you're well aware, it provides a little bit more stability, a little more margin and sort of takes out the commodity volatility of our business.

And then just last question is on this 3%. I think you talked about higher cost. I'm just trying to understand how much of it is structural versus transitory as a result of what's happening in the Middle East? And assuming that winds down, do we -- do you get some of that cost pressure back?

Yes. And so when we talk about the 3%, and just for simple numbers on an annualized basis, it's about $30 million to $35 million impact that is all just pure fuel, none of it's structural. So our expectation is we're seeing fuel surcharges come from, whether it's contractors or logistics providers. And obviously, they're very fast at putting these surcharges in. If we did see a resolution to the conflict in the Middle East and oil prices do decline, our expectation is that those surcharges will come off just as quickly.

So we view it as more a temporary aspect. Obviously, no one has a crystal ball to say how long they may be in place. But yes, our expectation is that any of these fuel surcharges would come off as oil -- if oil was to move back to more typical levels it had prior to the conflict in the Middle East.

The next question is from Sean Steuart with TD Cowen.

A couple of questions. So after the Stillwater sale, the insurance claims and I guess, Columbia Vista site sale, eventually, you guys have net cash on the balance sheet. And I'm wondering how you're thinking about capital deployment options. You've got these kiln projects rolling through, what's the intent going forward with a capital structure that makes sense given where we are in the cycle and inherent volatility? And is there any incremental capital allocation target, be it incremental CapEx or M&A that might make sense for the company?

Yes, Sean. It's Glen. Maybe I'll take that one. Yes, if we're successful in these asset sales, we do expect to be in a net cash position by the end of the year. I think our first priority, obviously, some of that cash will be used to complete or kiln projects that are currently underway. I'd say in the near term, we might be a little more conservative on the balance sheet and maybe sit on some excess dry powder here until we potentially see signs of a broader recovery. So you might sit on some cash in the near term. I'd say longer term, we still remain quite interested in obviously growing the business. Engineered wood is still an area that we like and would like to grow in.

I think there would be opportunities for us to consider on the strategic CapEx side, whether in our existing business or externally via M&A. But if I had to look over, say, the next 12 to 18 months, our focus is getting these assets sold, getting the kilns in place, and then maybe we're going to sit on some -- a little bit of excess dry powder here just until we see maybe some clarity around the duties and tariffs and some clarity around some recovery -- further recovery in lumber markets.

Okay. Got it. And Glen, just with respect to the cadence of lumber volumes here going forward. Log inventories are tight. This is a busier harvest quarter. Any context on over the next couple of quarters, incremental volume uplift on the lumber side relative to what we saw in Q1? Just trying to get a sense of how this plays out through the year.

Yes. So seasonally, we would expect lumber volumes to increase here in the second quarter off Q1, which is typically a lower quarter. I think it will be a gradual increase. I mean last year, we restated or readjusted, we were about 173 million board feet. Obviously, that included our Columbia Vista sawmill, which was about 15 million, I'd say if you take that off, we're probably slightly below that. But you should sequentially here versus Q1, you see an increase in volume. I'd probably say somewhere into the 130 million to 145 million range in the second quarter.

The next question is from Matthew McKellar with RBC Capital Markets.

First one, duties are likely to step lower for you later this year. I know the U.S. is a smaller market for you than maybe some of your Canadian peers, but what does that step lower in duties mean for how you manage your business and market your lumber? And maybe as a related question, and I'll keep it pretty open-ended, are there any product categories where you expect to be better positioned competitively as substitute products, maybe see some cost push, price inflation, downstream of the petrochemical industry disruptions we're seeing?

Thanks, Matt. As we look at the step change down, obviously, it is meaningful to us. That all expected to take place sometime probably October, it might even get pushed a little bit later than that depending on how the U.S. decides to implement it. But despite our volumes being -- I think we're only about 18% in the quarter, the U.S. market is an incredibly important market to us from a value perspective. And so it does drive the core sales for a lot of our high-grade Cedar and even some of our knotty cedar product lines. So critically important that we do find a resolution to the ongoing trade dispute.

In terms of what it could potentially mean for capturing some additional market share, clearly, there's not a lot of -- aside from the impact on our conversion costs with the increase in fuel and some potential logistics costs. Our products don't have any fuel or petrochemicals as an input like some other substitutes. So I think there might be some opportunity with respect to some of the other exterior cladding, exterior decking products that are non-wood. But I think the key piece is we want to get the trade settlement solved and then find a path forward to having greater affordability take place across the U.S. housing market. Those are the 2 key drivers that we see as really important for continued growth in our sales into that key market.

Great. That's helpful. And just last for me. I think you said in your prepared remarks that your new kiln capacity opens opportunities related to your global customer base. Could you just maybe elaborate a bit there? Will your exposure to non-Canadian, non-U.S. markets grow as these kilns come online? How meaningful are oil and ocean transportation costs as it relates to how this business develops?

Yes. I would say that when we look at Japan, obviously, that market is now essentially 100% kiln-dried solid wood products, and we want to continue to capture market share in Japan. We looked at some of the evolving market trends in China, historically because of a lack of kiln-dried capacity, we were a supplier of rough green lumber and now we're able to kind of move up the value chain, so to speak, and go into that market with significantly more kiln-dried product. And that market continues to get more sophisticated and demand more kiln-dried products and we're seeing that as a real opportunity for us.

So directionally, as you think about the balance, the second half of this year and into next year, our percentage of kiln-dried product going into China will be growing. With respect to logistics and the impact of the current fuel surcharges. I think the first round of cost increase came in at around $200 a container. They were trying to put forward. And I think the number settled at about $50. So everyone's pretty quick to try and ratchet up the price and we're pushing back significantly on that. But in the short term, we will have $50 to probably $75 a container. So not a real significant impact at this point into that particular market.

This concludes the question-and-answer session. I'd like to turn the conference back over to Mr. Hofer for any closing remarks.

Well, thanks, everyone, for joining our call today. We certainly appreciate your continued interest in our company, and we look forward to our call in August. Have a great day.

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.

Ladies and gentlemen, welcome to Western Forest Products' Fourth Quarter 2025 Results Conference Call. As a reminder, all participants are in listen-only mode, and the conference is being recorded.

[Operator Instructions]

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 points. 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 the 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 on 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, Galen, and good morning, everyone. I'd like to welcome you to Western Forest Products 2025 Fourth Quarter Conference Call. Joining me on the call today is Glen Nontell, our Chief Financial Officer. Before we get started, I'd just like to extend our thoughts and prayers to the community of Tumbler Ridge to all the victims and all the families impacted. We issued our 2025 fourth quarter and full year results yesterday. I will provide you with some introductory comments and then ask Glen to take you through our financial results. I will follow Glen's review with our outlook section before we open the call to your questions.

Despite more challenging markets and higher softwood lumber duties and tariffs in 2025, we entered 2026 with a significantly improved balance sheet to navigate the expected near-term market uncertainty. We also continue to execute on our strategic priorities to accelerate our transition to higher-value products.

Some highlights over the last year include: surpassing our health and safety targets for the company's Medical Incident Rate achieving an MIR of 2.7 in 2025 compared to our target of 2.87 and 3.84 in 2024. We are also proud to report several operations achieved 0 recordable incidents in 2025. In Timberlands, we continue to focus on improving log sorts stratification to drive incremental margin. These efforts alongside a disciplined focus on log inventory management has resulted in 11% improvement in log inventory turnover since 2023.

In manufacturing, we have improved our operational uptime to 86% in 2025 and compared to 85% in 2024. Our Duke Point facility achieved a 92% uptime in the fourth quarter. We also continue to focus on log and lumber recovery while improving lumber inventory turnover by 9% year-over-year.

In sales and marketing, we continued our customer focus, developing value-added products and programs targeted with the end user in mind. Specialty products comprised 52% of sales in 2025, and we increased kiln dried sales to a record 41% of total sales in 2025 and compared to 37% in 2024. In addition, we achieved improved on-time shipping performance of 88% in 2025 compared to 84% in 2024.

We made significant progress advancing our strategic capital investments in kilns to support higher-value products. Our two continuous kilns and one thermal kiln at our value-added division are expected to be commissioned in 2026. These investments will allow for more kiln-dried lumber production, generating higher margins than green lumber.

From a labor perspective, we completed a 6-year collective agreement that covers the company's USW hourly employees. The agreement is one of the longest term agreements in the history of the BC Coastal forest sector. And finally, we strengthened our balance sheet and liquidity position through $76 million in non-core asset sales and the extension of our $250 million credit facility to July 2028.

Overall, I am proud of the significant contributions across our entire organization, which have provided a strong foundation to build from in 2026.

I will now turn it over to Glen to review our key financial results.

Thanks, Steven. Fourth quarter adjusted EBITDA was negative $6.2 million as compared to $14.4 million in the same period last year. As compared to the prior year, results in the fourth quarter were impacted by a 26% reduction in lumber shipments, a 34% reduction in log shipments given lower harvest volumes and higher softwood lumber duties with a combined duty and tariff rate of 45% compared to 14% in the same period last year. This was partially offset by higher log prices on Cedar and first sawlogs and lower stumpage expense. We closed the fourth quarter with approximately 50 million board feet of lumber inventory and 649,000 cubic meters of log inventory.

Turning to CapEx. Our 2026 total CapEx spending is expected to be between $45 million to $50 million, which includes approximately $16 million related to 2 previously announced continuous kilns and one thermal kiln at our value-added division. From a balance sheet perspective, we ended the fourth quarter with liquidity of approximately $212 million and a net debt-to-cap ratio of 7%.

Touching on our Columbia Vista sawmill, we have made the difficult decision not to rebuild at the site and listed property for sale in December. We have received significant interest for the property, receiving multiple offers above the asking price of USD 10.6 million to date. We will look to finalize the sale of the property late in the first quarter or early in the second quarter of 2026. In addition, we are working with the insurance adjuster to finalize available property insurance proceeds. We plan to use proceeds from the property sale and insurance to initially repay debt to further deleverage our balance sheet.

Turning to first quarter seasonality. In typical first quarters, our timber harvesting activity can be periodically interrupted by winter weather. Harvest volumes are typically skewed to the end of the quarter when the weather and light conditions support greater activity. From a market perspective, sales typically accelerate through the quarter. We plan to continue to manage production to market demand and available log supply.

Steven, that concludes my comments. .

Thanks, Glen. Turning to our market outlook. Lumber markets remain challenged heading into 2026. Customer expectations are there will not be a significant improvement in demand during the first half of the year. That said, operating curtailments from lumber producers in 2025 are expected to decrease available supply towards the end of the first quarter, which could lead to upward price pressure as demand improves. We remain cautiously optimistic that the U.S. 30-year mortgage rates now at 3-year lows, may support improved housing affordability and modestly stimulate U.S. housing demand this year.

Demand in Western Red Cedar product lines remain slow following the trajectory of other building products. In Japan, the yen has further weakened against the U.S. dollar and housing starts continue to be below $800,000 on an annualized basis. Western continues to be focused on the competitiveness of Hemlock and Douglas fir maintain current market share. But market demand for the first quarter of 2026 is lower compared to the fourth quarter of 2025. Overall, we currently have our first quarter order file of approximately 78 million board feet.

Touching on the La-kwa sa muqw Forestry Limited Partnership in TFL 64. During the second quarter of 2025, employees represented by the USW commenced a strike at the limited partnership. In January of this year, USW members voted to reject a new collective bargaining agreement with the limited partnership. If there is no near-term resolution to the strike, additional operating curtailments may be required at our Saltair and Duke Point sawmills near the end of the first quarter due to log supply. The limited partnership continues to work to bring a resolution to the strike, and both parties have agreed to mediation process, which is occurring this week.

Turning to our Engineered Wood Products Group. To support a modest expansion of our product and service portfolio, including ready to finish -- sorry, ready to install fabricated glulam beams, we are investing in a new CNC fabrication machine at our existing Fruit Valley manufacturing site in Vancouver, Washington. We are currently in the process of finalizing procurement of the manufacturing equipment with delivery and installation anticipated towards the end of this year. In parallel, we are also evaluating opportunities to modernize and consolidate our existing glulam facilities in the region at our Fruit Valley facility. Project planning will continue through 2026, and additional details will be shared as the strategy progresses.

Looking ahead, we will remain focused on executing our strategic priorities and CapEx plans while also ensuring we maintain a strong balance sheet.

With that, we can open the call up to questions.

[Operator Instructions] First question is from Ben Isaacson with Scotiabank. .

First question is on the Columbia Vista decision not to rebuild it. Is that going to require some CapEx spend to reconfigure mills elsewhere? .

Thanks, Ben. Appreciate the question. No. What we've essentially done is been able to add supply from our Saltair facility in Canada, to maintain our market share in both Douglas Fir and Hem-Fir KD squares to Japan. So it's essentially, we've just reallocated that product line to one of our existing facilities.

My next question is, we've seen wood products pricing move higher -- you did talk about demand in Red Cedar, not really keeping up. How close are you to a run rate breakeven EBITDA right now?

Maybe I'll take that one, Ben. I mean, obviously, you can see in the results in the fourth quarter and the curtailment that we've taken ourselves and others are fairly close to breakeven. I'd say, looking into the first quarter here, we see still some challenging headwinds. We might see some pickup late in the first quarter and early in the second quarter. But if you're talking at this point, we have -- definitely do have Cedar product lines that are profitable and others that are more challenged from a breakeven perspective. .

And then just last question. You said Douglas Fir and Hemlock squares are down quarter-over-quarter for Q1. Can you just give some magnitude on how much we should expect them to be done? .

Yes. I mean the current order file right now is -- I'm going to say it's probably in the 5% to 7% quarter-over-quarter. We're a little optimistic as we go into the middle of the year and into Q3 that things will normalize. The yen is having a big impact on the overall competitiveness of all imports into the Japanese market. So we'll be paying attention to what occurs on the exchange rate as we go forward here. But our focus, both from a log standpoint and from a manufacturing standpoint is to be globally competitive in that marketplace. It's a very important market for our company, for the species that we have access to.

And frankly, the Japanese market, they prefer the species that we have and the quality that we deliver to that marketplace. So obviously, some short-term headwinds right now on overall demand in the quarter, but I think we'll see a normalization as we go into the balance of the year.

The next question is from Sean Steuart with TD Cowen.

A couple of questions. Steven, I want to talk about your operating rate trajectory here. You guys have taken a lot of curtailments that you spoke to. And I gather most of this decision is tied to markets and rising duty deposits and Section 232 tariffs. Can you help put some perspective around how much of the curtailments are related to log supply constraints in the coast? How much of the decision is being driven by the fiber situation.

Thanks, Sean. It probably would take a little bit more time to kind of go through it at an operational by operational basis. Each mill has some different dynamics in play. Some are directly impacted by the change in tariffs from 14% to our rate today of 45%. Other facilities are constrained by certain log profiles that are in, I would say, limited supply and are uneconomic, and that would kind of be the discussion, for example, at Chemainus.

But we're really focused on ensuring that when we run that it's -- it has a chance of being profitable for us. So we're not taking any risk on running below our cash shutdown costs and building excess inventory. So we're just being very, very disciplined on our run rates across each of the facilities.

I will say though that I'm really pleased on the level of execution within our facilities around reliability and uptime. So despite some curtailments, our team on the manufacturing side has just done an outstanding job in the last couple of years of demonstrating that we can run our facilities at higher levels of reliability and uptime.

Okay. And I guess the follow-on there is appreciating Chemainus still be down this year. Do you feel like the current capacity footprint is viable for the company? And appreciating there's an anticipation that demand will eventually start to recover here and volumes should improve. I'm just trying to weigh the cost benefit of this extensive rolling downtime versus potential permanent capacity closures. Is this the right capacity footprint for the company going forward? .

Well, those are questions that we have every day, including with our board and with our shareholders around what is the optimal operating configuration for Western relative to the overall log profile and log supply on the BC Coast. And so you can see that we continue to be focused on optimizing our operating platform, and we're having to make some really difficult decisions. And that's evident at a place like Chemainus, where we just, in today's market environment and the log profile at that mill was designed to consume that we don't have a profitable program there for that mill. So it will stay curtailed for the balance of this year. But the question is around what is the optimal manufacturing configuration for our company. We're focused on that every day.

Okay. Just 1 last one for me. Columbia Vista, the site sale process, can you give us perspective on timing and maybe not willing to divulge, but any thoughts on potential proceeds for that site? .

Yes, Sean, it's Glen. We listed the property for sale in December at an asking price of USD 10.6 million. To date, we've received multiple offers at or above that asking price. And we are working to finalize that sale late in the first quarter or early in the second quarter. Concurrent with that, we are also looking to finalize the insurance process, which would be incremental potential proceeds to that land sale.

The next question is from Matthew McKellar with RBC.

Maybe first, just a question on the thermally modified Hemlock initiatives. Could you maybe talk a bit about how that product will be marketed and what kind of demand indications you have for today? And then help us understand how you potentially approach considering any further investments in capacity there? .

Thanks, Matt. We're really excited about this initiative. It's certainly we see that as a path forward to add incremental value and margin to our Hemlock profile. So the first thermally modified kiln will become operational towards the end of this year. I would say that we are being very disciplined in managing expectations. We're going to start relatively small, and we're going to walk before we run, and we're going to deliver -- exceed expectations from a product quality and from a product usability standpoint.

The opportunity for thermal modified hemlock will be primarily around decking -- exterior decking applications, siding applications and Soffit and Fascia applications. But again, this is just 1 kiln, relatively small volumes to start with. But we do see a very unique opportunity to continue to build a viable, profitable program.

As far as the go-to-market strategy, this will not be commodity. This will be inside of our specialty product category. And typically, this gets sold through very targeted distribution partners who are aligned around specialty building materials. So we're engaged in that process today. There's a lot of work being done on technical specifications, usability standards, installation requirements, marketing collateral, so forth. So it's not a commodity piece of 2x4. It will be -- definitely be a niche specialty product and a marketing program that aligns with that.

Great. I'd also like to ask about the CDKs. And I think you said the kiln dried sales are maybe 41% of total with the capacity you're bringing on, how should we expect that mix to evolve to maybe exit '26? Would you expect to fill up that incremental capacity quite quickly with your kind of current level of activity and mix? Or how should we kind of set our expectations there? .

Yes. I think the easiest way, Matt, is just to think about each continuous dry kiln with the species mix that we have and the product line that we manufacture. You can kind of look at each kiln having an annual capacity of around 80 million board feet. If you just look at -- you can do the math on the back of the envelope there what that will do to our incremental kiln-dried product. So each kiln on an annualized basis will be around 80 million feet of additional kiln dried product.

Perfect. Okay. That's straightforward. And if I could just 1 last one in. Just around the glulam markets and maybe your motivation around the expansion of the product portfolio. Maybe what you're seeing around demand or supply-demand balance and the market opportunity there?

Yes. I mean our investment that we're referencing is relatively modest. Our -- previously, we've been a supplier of what we would call glulam billets into the mass timber market. We have a very strong existing glulam product line in curved beams as well as in industrial beams. But this investment in fabrication is really targeted toward the mass timber market. And every opportunity that we have to capture incremental margin in that segment, we want to capture that.

And -- so as we move down this product offering, it's just being able to do a certain level of fabrication on those beams that are going into a mass timber project. And there's quite a nice incremental margin there that we're able to capture. So relatively short payback. We've added a couple of very strong technical resources to our team, and we're seeing some really nice uptick in our ability to provide a fabricated beam with all the installation hardware into some very unique projects that are very, very profitable. So again, we're -- it's a phased approach. It's a modest investment and it's all focused on capturing that incremental margin in the supply chain.

This concludes the question-and-answer session. I'd like to turn the conference back over to Mr. Hofer for any closing remarks. .

Well, thanks, everyone, for joining our call today. We appreciate your continued interest in our company, and we look forward to our next call in May. Have a great day.

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.

Good morning, ladies and gentlemen. Welcome to Western Forest Products Third Quarter 2025 Results Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] 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 may be -- excuse me, 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 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, Gary, and good morning, everyone. I'd like to welcome you to Western Forest Products 2025 Third Quarter Conference Call. Joining me on the call today is Glen Nontell, our Chief Financial Officer.

We issued our 2025 3rd quarter results yesterday. I will provide you with some introductory comments and then ask Glen to take you through our financial results. I will follow Glen's review with our outlook section before we open the call to your questions. Despite challenging markets and increases in lumber duties, we continue to focus on our operational controllables and maintaining a strong balance sheet.

In the third quarter, this included reducing working capital and reducing our debt by $15.7 million compared to the second quarter. In our Timberlands group, we continue to focus on cost and inventory management with log inventory turnover improving 11% since 2023. However, ongoing permitting challenges in BC and a strike at our La-kwa sa muqw Limited Partnership continue to challenge harvest levels.

In our Manufacturing group, our mills achieved above target uptime levels of 87% in the third quarter, an 11% improvement in lumber inventory turnover year-over-year. We were also proactive in staging lumber inventory into the U.S. ahead of duty increases, leading to approximately $3.3 million in duty savings.

In our sales and marketing group, we continue to grow strategic customers and advance opportunities to grow our domestic and international customer base as we actively navigate the effect of tariffs and increased duties. In the first 9 months, U.S. lumber shipments accounted for 21% of total shipments from our Canadian operations, compared to 25% in the year ago period. We achieved ahead of target on-time shipping performance of 92% in the quarter.

We continue to advance progress on 2 continuous kilns at our value-added division with construction commencing and commissioning of the first kiln expected in early 2026. These investments will increase the production of value-added kiln-dried lumber products, lower our drying costs and help support the diversification of our global customer base. With significant increases in softwood lumber duties and softness in the North American lumber demand, we expect challenging market conditions to persist in the near term. However, through the successful repositioning of our balance sheet in 2025, we are prepared to navigate near-term uncertainty.

I'll now turn it over to Glen to review our key financial results.

Thanks, Steven. Third quarter adjusted EBITDA was negative $65.9 million as compared to negative $10.7 million in the same period last year. Our results for the quarter included a noncash export duty expense of $59.5 million related to the finalization of duty rates from the sixth administrative review.

As compared to the prior year, results in the third quarter were negatively impacted by softer macroeconomic conditions, U.S. trade tensions and an ongoing strike at our La-kwa sa muqw Limited Partnership. This resulted in lower lumber shipments, a weaker specialty lumber sales mix and reduced log harvesting and lower external log shipments. This was partially offset by higher average realized lumber prices in most markets and improvements in realized log prices due to a stronger sales mix. We closed the third quarter with approximately 53 million board feet of lumber inventory and 602,000 cubic meters of log inventory.

Turning to CapEx. We have reduced our planned 2025 capital expenditure spending to between $30 million to $35 million. We will continue to rigorously evaluate our planned CapEx spending and adjust proactively.

From a balance sheet perspective, we ended the third quarter with an improved balance sheet, reducing debt by $15.7 million compared to the second quarter and ending with a net debt to capitalization ratio of 2%. Our available liquidity also improved to $234 million, supported through working capital reductions and a new $30 million letter of credit facility.

With respect to softwood lumber duties and U.S. trade, the U.S. Department of Commerce announced its final determination for countervailing and antidumping duty rates related to the sixth administrative review. The combined effective rate increased to 35.16% and compared to the prior combined rate of 14.4%. In addition, on September 29, U.S. President, Donald Trump, imposed a 10% tariff on imported lumber products through Section 232 of the Trade Expansion Act. The incremental 10% tariff became effective on October 14. We continue to prioritize diversifying our shipments into other jurisdictions to minimize our U.S. exposure.

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 cost.

Steven, that concludes my remarks.

Thanks, Glen. Turning to our market outlook. North American markets are expected to remain weaker in the near term. U.S. channel inventory levels remain elevated and the incremental U.S. tariff of 10% has further complicated an already weak demand environment. However, with the anticipation of further Central Bank interest rate cuts and the 30-year mortgage rate approaching 3-year lows, this may support improved housing affordability and modestly stimulate U.S. housing demand in 2026.

Markets may start to improve towards the end of the fourth quarter of 2025 or into early 2026, as supply decreases and as distributors start to build inventories ahead of the spring building season. However, in the near term, distributors, pro dealers and home centers continue to buy on an as-needed basis. In Japan and China, housing demand continues to trend downwards, but market lumber inventories remain low, resulting in near-term stable pricing. Overall, we have a fourth quarter order file of approximately 87 million board feet and on track to meet our Q4 operating plans.

From an operational perspective, given seasonal market conditions combined with U.S. -- with high U.S. duties and tariffs, we plan to reduce lumber production by approximately 35 million board feet in the fourth quarter. We will continue to align our operating schedules to market demand and available log supply.

Looking ahead, we remain focused on maintaining a strong balance sheet while also executing on our strategic priorities.

With that, Gary, we can open up the call to questions.

We'll now take questions from the telephone lines. [Operator Instructions] The first question is from Kasia Kopytek with TD Cowen.

Kasia on the line. First question is around the strike of the La-kwa LP. Can you provide an update on that? And also your outlook for log availability, not necessarily on the back of the strike action, but also just more broadly across the platform?

Good morning, and thanks for the question. I'll share a couple of comments on the strike. So obviously, as everyone knows, that continues to play out. We completed a 6-year agreement with the USW, which was ratified in January of this year. And while Western encouraged contractors, including La-kwa sa muqw to do a me-too to our agreement, not all did. La-kwa sa muqw has a right under labor laws to negotiate their own agreement, and they decided to exercise that right. And while Western is a majority shareholder, the governance structure is constructed to ensure that the views of the other partners are not unilaterally overruled by Western.

So we can't comment on the specific issues in detail, but can say they are related to the unionization process when new First Nation-owned contractors are engaged. And so we're hoping for a resolution of this in the near future and look forward to having that business unit come back online.

And with respect to your question on overall log inventories, at this point in time, we ended the quarter -- end of Q2 at 602,000 cubic meters. They are -- our inventories are lower than they would be historically. We do continue to have some permitting delays on certain tenures and continue to work very closely with government and the respective First Nations to help alleviate those.

But overall, as we look at our operating plan in Q4 and into Q1, we do see adequate inventories to execute on our operating plan.

I appreciate it. You touched on working capital reductions already. I just wanted to ask, is there any additional opportunities to reduce working capital further?

Yes. Kasia, it's Glen. Maybe making a more broad comment. I think we've done a lot this year to reposition our balance sheet to navigate through the near-term uncertainty, including monetizing some significant noncore assets earlier this year. In the third quarter, we also closed an incremental USD 30 million letter of credit facility, which helped to further bolster our liquidity to approximately $234 million at the end of the quarter.

I'd say we've taken steps to manage and reduce our working capital, improving turnover metrics related to our working capital. I'd say we probably have come -- are approaching what we can achieve on further reducing working capital levels just given Steven's comments where we are around log inventory. So all that said, we continue to access other available liquidity alternatives to some of the government programs that have been announced federally as well as advancing other strategic priorities, including limited partnership opportunities that we've demonstrated success on previously in TFL 44 and 64 as potential sources of additional liquidity.

So overall, I'd say we remain focused on maintaining a strong balance sheet and adequate liquidity as we navigate through the uncertain environment here in the near term.

Final question for you or Steven. Stepping back and looking at the competitive landscape for your decking product into the U.S., what is what is the profile of that right now, just given the higher value nature of your product versus your competitors?

Well, that's -- as you can expect, the knotty cedar decking profile has come under significant price pressure. So we've tried to push as much of the incremental tariffs through to the end user. While we have been able to see some modest gains, we have not been able to achieve the entire amount. And I guess the piece that I would say is that, no product line is immune from the current downturn in both the R&R market as well as in new home construction. And that includes cedar decking and all the substitutes that are on the shelf alongside cedar.

The good news is that there is an element of consumers who are very discerning and continue to want to have the highest quality decking available, and that is where cedar fits in. So we have seen some replenishment take place in the last 10 to 14 days as distributors start to reposition for the spring and that does provide some comfort that there is an opportunity for cedar to continue to have a place in the U.S. decking market. But we shouldn't kid ourselves that there are some -- there are ceilings on where a consumer is prepared to pay for decking, whether it be cedar or any alternative.

So our teams are working very aggressively alongside all of our key distributors in the U.S. We have a group in the U.S. this week actively discussing strategic partnerships for next year and what that demand curve looks like. But yes, you're correct on saying that there is some price pressures on cedar.

This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Hofer for any closing remarks.

Well, thanks, everyone, for joining our call today. We certainly appreciate your continued interest in our company and look forward to our next call in February. Have a great day.

The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.