Q1 2021 West Fraser Timber Co Ltd Earnings Call
And then.
[music].
Carl.
During this conference call West Fraser's Representatives will make certain.
We will be making certain statements about potential future developments. These forward looking statements include certain statements about west Fraser's future financial and operational performance, including the impact of foreign exchange rates credit ratings and mill maintenance shutdowns West Fraser business out.
Look, including forecasted U S housing starts and market conditions demand for products and a bill supply and expectations concerning cost West Fraser capital plans, including the completion and ramp up of capital projects and the benefits of such projects.
Softwood lumber dispute, including adjustments to do day rates and related proceedings, the integration of nor board into the West Fraser business and expected synergies and the redemption of the Norbert 2023 notes.
These statements include forward looking statements, which.
Forward looking statements within the meaning of Canadian and United States Securities laws and are intended to provide who use and the book guidance to investors. The accuracy of these statements depend on a number of assumptions and is subject to various risks and uncertainties that may cause future events.
Differed materially from day events implied by these statements.
Outcomes will depend on a number of factors that could affect the ability of the company to execute its business plans, including those matters described under risks and uncertainties and the company's annual management's discussion and analysis and supplemented by other risks and uncertainties as set out and.
The Companys quarterly M D and age.
These filings can be accessed on west Fraser's website or through SEDAR for Canadian investors, and Edgar and for United States investors.
Accordingly, listeners should exercise caution and relying upon forward looking statements.
After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad and.
If you would like to withdraw your question. Please press star and the number two thank you. Mr. Ferris you May now begin your conference.
Well, thank you very much for that.
Well good morning, everyone and welcome to our first quarter 2021 conference call on <unk>.
Joining today by Christopher <unk>, our Chief Financial Officer, Chris Mckeever, Senior VP of marketing and corporate development and several other members of our executive team.
And I will make a few opening remarks, and then I'll pass the call to Christopher <unk> for a review of our West Fraser's first quarter results and.
And then make some concluding comments and then we'll of course take your questions.
And just a reminder to everyone that our financial results results are now and U S dollars.
It remains an exciting period for forest products being a meaningful part of an industry that provide sustainable and renewable building products required.
Our required for a low carbon economy economy simply by participating in the lifecycle of force that we live in and operate them.
Manufacturing building materials from a sustainable and renewable force is about one very important part of the required solution for society to meet its climate change objectives on.
On February the first 2021, we acquired the <unk> business and a highly capable and well managed team.
And I want to thank and acknowledge how hard and diligent our finance legal HR and it teams are working to make the transmit transition as smooth as possible, while relentlessly supporting our manufacturing operations frankly without missing a beat.
And in fact, our operations performed well and the period and.
And Youll see and our first quarter results, which Chris will highlight later the significant financial contribution and the OSB business has already made to west Fraser.
With that backdrop and I'm pleased to report that the first quarter 2021 was another strong quarter for West Fraser, We remained agile and continue to work hard and minimizing the COVID-19 related business disruptions and thanks to our focus on the health and safety of our employees and communities and I'm proud of what our team.
<unk> has accomplished.
And North America, the strength and U S home construction activity from the second half of last year continued its recovery from the weakness and unfolded during the early stages of the COVID-19 pandemic.
Spurring demand for building products in fact homes home construction measured by New home starts has recently reached levels not seen since 2006.
Repair and remodeling has also remained robust driving solid demand for lumber and wood panels.
On the lumber side and the construction of our new manufacturing complex and Dudley, Georgia has progressed well as the mill and planar are now operational and the rest of the site is expected to come on later in Q2.
We anticipate approximately 170 million board feet of additional production is a deadly mill ramps up towards this full annual production capacity over the next several years.
On the OSB side.
Supply has struggled to keep up with the stronger than expected recovery and OSB demand in recent quarters and that strength has carried into the first quarter of 2021.
And response that increased demand, we announced the restart of Shamburg, Quebec mill, which began to produce and ship panels and late March ahead of our original expectations.
Those panels are now helping to meet the demands and needs of our customers for important spring building season, the shambaugh and mill is expected to ramp towards this annual rate and capacity of 550 million square feet three eights over the next 18 to 24 months.
With that I'll now pass the call over to Chris.
Thanks, Ray and good morning, everyone. When we last reported earnings and mid February the recovery and lumber and OSB demand was significant and that.
And that demand strength continued through the first quarter and remained elevated versus historic norms. Owing to continued strength from new home construction and renovation applications lean channel inventories and a limited supply response.
Fraser has been adding hours and shifts where possible across our manufacturing network to increase supply and attempting to secure additional transportation resources for delivery of product.
Another item of note our consolidated first quarter results include the financial results of nor board as of February one and as of January one of this year and for all comparative periods presented we are no longer excluding export duties and our adjusted EBITDA calculations on.
Our reportable segments now include the acquired North American OSB business, and the preexisting West Fraser panels business as North American engineered wood products and the acquired operations and the U K and Europe are reported as a separate segment.
In terms of financial performance West Fraser generated record record consolidated adjusted EBITDA of $1 billion U S and the first quarter up from $453 million and the last quarter and part due to the addition of <unk> results as of February one.
I will note that this first quarter EBITDA was reduced by $93 million four and acquisition related non cash purchase price accounting impact.
Related to inventory fair values. This raised our cost of goods sold to their fair value as of the date of closing as required by accounting standards.
And $86 million of this EBITDA reduction was attributed to the North America, and AWP segment and $7 million was attributed to the European AWP segment and.
And the prior quarter results of 453 million of adjusted EBITDA, There was a $95 million benefit for the retroactive adjustment to duty rates for 2017 and 2018.
And now to highlight some of Q1 segmented financial results.
The lumber segment reported adjusted EBITDA of $646 million versus $425 million and the fourth quarter of 2020 with a positive effect of higher pricing offsetting lower shipments higher fiber costs and the retroactive duty adjustment in Q4.
Our North American AWP segment performed well and the first quarter adjusted EBITDA for the segment grew to 353 million from $48 million and the prior quarter with gains primarily due to the addition of the OSB results for February and March, but as well due to higher plywood pricing, which more than offset fiber and raw materials cost inflation.
OSB shipments were slightly lower than expectations due to extreme winter weather disruptions in the U S sales.
Adjusted EBITDA and the pulp and paper segment increased to $11 million and the first quarter from negative $20 million and the fourth quarter, owing to higher pulp pricing and reduced downtime for maintenance activities.
We continue to see signs of a recovery and pulp markets.
Lastly, adjusted EBITDA and the newly formed European AWP segment was $11 million, representing Norbert February and March results for the geography, which as I noted earlier was reduced by $7 million due to a noncash purchase price accounting adjustment to cost of goods sold.
We are seeing recent market strength continue in Europe as demand for OSB continues to grow.
Shifting to capital allocation and the balance sheet capital expenditures were $62 million and the first quarter up moderately from the first quarter of last year.
And we remain on track to invest approximately $450 million on capital projects and 2021.
And continue to focus on realizing the benefits of the capital we have spent and the past few years.
We view share buybacks as and appropriate use of excess cash where we believe our shares are trading below intrinsic value and over the first quarter, we bought back $102 million worth of West Fraser shares under our normal course issuer bid.
Those shares were repurchased at an average price of Canadian 80 to 86, well below our internal view of intrinsic value and more than a 20% discount to yesterday's closing.
We are also pleased with the level of U S trading liquidity, we've seen for West Fraser with the New York Stock exchange listing and our trading volume, which accounted for less than 10% of our total trading volume on the exchanges and February now regularly exceeds 20% of our total daily trading volume.
Given the strong Q1 results, our financial liquidity increased materially exiting the quarter with $2 $5 5 billion of available liquidity.
Leverage was modest exiting the quarter with total debt of $1 3 billion and net cash of $164 million.
You will notice also that in conjunction with our 2020 with our Q1 earnings release, we have also announced plans to redeem the <unk> 2023 notes and combination with the recently completed redemption of the 2027 notes. We will therefore have executed on plans to redeem and retire and aggregate $665 million of high yield Norbert.
Net which will ultimately reduce annual interest cost by approximately $40 million and help rationalize our capital structure.
To meet the reporting requirements under the normal note indentures, we provided a summary and discussion of <unk> first quarter results, including the month of January and.
On an addendum to yesterday's earnings news release.
On a standalone basis, nor worded generated 526 million of adjusted EBITDA in Q1 and ended the quarter with $114 million of net cash.
That I will turn the call back over to Ray for our outlook on 2021, and an update on select projects and the integration.
Thank you Chris.
In terms of our end markets record low mortgage rates and the ongoing trend toward greater work from home options continues to create strong incentives for people to purchase new single family homes and undertake renovations and do it yourself projects.
Remote working when combined with the underlying housing formation deficit has continued to drive demand for single family homes, which consumes more of our wood building products than multifamily.
And while we recognize there are many factors outside of our control that can temporarily influenced markets, including uncertainty around the longer term economic implications of the effects of COVID-19, we remain optimistic and both the favorable favorable market fundamentals. We're currently seeing.
Supported by the underlying environmental benefits of building with what which have never been more clear and more widely accepted.
And keeping our employees and communities safe and focusing on servicing our customers needs remain our key priorities.
Our job is to create value and our company for our shareholders.
As most of you are aware.
And.
Considerable cash accumulation, we're now seeing is a relatively new trend.
And we will look for every opportunity.
To create shareholder value.
Therefore, you can expect us to be patient thoughtful and balanced and our capital allocation strategy going forward.
With a significant milestones recently achieved at our Dudley and Sham Board Mills, I am pleased to announce and advancement of our capital program that will see us invest an additional 180 million U S across several projects through 2023.
And the lumber segment, and we expect to invest approximately $150 million at five of our U S South mills, which furthers our execution and strategy and that region. These investments will increase capacity and increase the value of our products, while reducing production costs overall.
And the North American EBIT engineered wood products segment, we expect to invest approximately $30 million to both reduced manufacturing cost and improved productivity.
These are low risk proven projects within our operating portfolio.
With an average payback expected to be roughly three to four years.
I would again like to reinforce that all of this activity is happening against the backdrop of the integration of the <unk> business we.
And we knew that we had a great team and business, joining west Fraser, which would immediately add capacity and ability to the team.
I'd like to acknowledge that our OSB team has hit the ground running and are embracing the future and are rapidly working through synergies and how to make our company even better.
The level of engagement and building momentum has been impressive and all and although it's still early days I have confidence that we remain on track to achieve our targeted annual synergies of $61 million over the next 18 to 24 months.
Safety remains our quest.
We know we can eliminate serious incidents and injuries and our company.
Despite driving overall injury rates and severity to record lows throughout the company, we have much more work to do.
And finally, it is our employees that continue to do the heavy lifting and delivering strong safety and operational results all while dealing with obstacles and challenges of this still ongoing pandemic. It is this dedication and perseverance of the many people across the company and most thankful for and proud of.
Thank you and with that operator, we'll turn it back to you for questions.
Thank you Sir.
Ladies and gentlemen ask David if he would like to ask a question. Please press star followed by one on you touched on the phone and you will then hear a suite on prompt acknowledging your request and if you would like to withdraw your question simply press star followed by to Michel and he was on your speaker phone. We do ask that you. Please use the handset.
One moment. Please for your first question.
Which will be from Sean Stewart at TD Securities. Please go ahead.
Thanks, and good morning.
Question on the next leg of the strategic capital plan.
So piecing together, the incremental lumber and and engineered wood projects that you highlighted that towards the end of your comments there.
And that yield and 2022 overall capex number and.
And the same ballpark as 2021.
And it lessens and more and I'm just trying to.
Piece, all that together with your maintenance Capex and and.
And think about what the budget might look like for 2022.
Well good morning, Sean.
So what I'd say is yes, I'd say its I think we'd say today. It says it's in range for 2022 kind of that same number that reason for 2021.
And all.
I also don't mind, saying that as we work through the year.
If we found more high return capital that we were ready enable to execute and deliver quickly.
That wouldn't be a bad thing we'd be we'd be excited to bring that forward, but today I would say, it's probably in the range.
Okay, and and are you seeing any cost inflation for capital projects deal or other inputs con.
Contracted backlog that sort of stuff is that having any material effect on budgets for these projects at this point.
So Sean I am just going to I'm, even going to kind of pre pandemic.
We saw a lot of stress and strain and the system prior to the pandemic.
Be it labor be it supplier.
Those inflationary aspects I think if there was a momentary reprieve with the pandemic, we've certainly seen I would say that continued pace. So.
I'm not going to say, it's a material change and what we're seeing but.
Look I would say for the last several years, we've seen a relentless.
And pressure on cost and productivity.
<unk> the spectrum. So I think we're just it's built into kind of how we're dealing with the day to day I don't think it's it's a new issue and the last few months I think it's the same one we've been dealing with for a while.
Okay last question for now you built up more lumber inventory.
And your peers did this quarter.
Are you seeing any easing.
Shipping constraints and to the current quarter.
Or are you going to be able to move some of that inventory into into the market and a better clip coming on.
I think the short answer would be we've seen shipping improve and the early parts of Q2.
Could you move that I think he built up just over 100 million board feet and Q1 would you be able to move all of that this quarter.
Asked me at the end of Q2, and I'll be able to tell you.
I'd say I would say, we're trending well, but we've got and we've got quite a bit and work to do if you look at the pattern and the last few years, Sean it's not it's not unusual that there is a little bit of slippage and Q1, and it's usually caught up and in Q2.
Not entirely within our control, but certainly we're doing everything we can to secure those resources to move the product to the market.
Got it.
Okay. Thanks, very much guys I'll get back in the queue. Thanks, Sean.
Thank you next question will be from Paul Quinn RBC capital markets. Please go ahead.
Yes, thanks, very much good morning, guys.
Good morning.
And I just wanted to add.
<unk> got lots of Capex projects going on in terms of additional volume.
And with deadly just wondering what we should anticipate for sort of the ended the year 2021 shipment levels relative to 2020, you should see a material pick up and if so how much.
Okay.
Yeah. Thanks, Paul we've put the guidance and there is in terms of what we think the production levels of <unk> and SPF.
Bank or for the year, it's the same as kind of what we put out in February.
At about $3 3 billion on on SPF and about $3 billion on S. Y P. We would expect on a full year basis that were shipping all of our production subject to some seasonal fluctuation so.
And that's what we've kind of put out there for the last the last two publications and in terms of where we're thinking on lumber shipments are headed on a full year basis. This capital won't impact 2021 for sure.
Okay, and then just use over the sustainability of the current pricing and run here and.
Specifically on lumber.
I guess just a question for from Mckeever there.
Do you see a pullback at some point and this summer or I mean, it seems to be going up 8% to 10% every week and then.
And lots of questions about just how sustainable that is.
Well, Paul I would say that your your estimate would be as good as mine.
But if you look historically, one would say that this wont last forever and I don't think we think it will.
Saying that though there.
Does seem to be very strong underlying demand.
Potentially different than what we've seen over the last number of years. So we think the fundamentals are really good and housing and R&R.
I can't speculate as to where prices are going.
But they are very high.
Yeah.
Okay, and then lastly, OSB market share, even even higher than lumber prices on a relative basis theres been some mills that have been brought back that clearly we need more capacity.
You brought up share board you brought up.
Well I guess forward company Norberg brought back their cordele line. Just wondering if you are looking at the existing mill.
Base and looking at Greenfield projects or even brownfield debt the existing mills.
I'll try and answer that Paul I mean look.
I think we're always looking on how to kind of grow the company and make it better and going to give you a pretty generic answer.
But I would think if you look at the history, where we primarily focus on organic growth and <unk>.
And that's typically how we drive what we think and drive the best value is I'd never say never to a greenfield but.
But it's usually lower down on our capital allocation strategy, but.
I would say, we look at everything but.
And we're looking internally first.
Alrighty and look forward to your Q2 results. Thanks.
Thanks, Paul and thanks, Paul. Thank you once again as a reminder, ladies and gentlemen, if you do have any questions. Please press star followed by one on you touched on phones.
And your next question will be from Mark Wilde Bank of Montreal.
Right.
Good morning, Greg Good morning, Chris Good morning, Mark.
Just to start out I wondered when we are thinking about capital allocation.
Nor aboard had a variable dividend policy.
Policy.
How would how would you guys think about the potential for either a variable dividend or for the payment of special dividends and extraordinary times like this just any general sense.
Thanks, Mark I. Appreciate the question look I think this is ray kind of referenced in his comments right. This is this is a scenario that's really unfolded and the matter of a few months right in terms of this this accumulation of cash and.
And where the balance sheet has gotten too quite quite quickly and so just as while this may have come upon us pretty quickly I don't think it's something that we go and solve and a matter of four months or six months as quickly as it is it accumulated and we will be patient and we'll be thoughtful as ray indicated.
And how we deal with the situation that we have today.
We think it's a time to be to be prudent and methodical and we'll look at all the tools that are and the toolbox.
And I don't think we're committing to anything.
Good day here, one way or the other but we're always looking at all those options and exploring every way that's out there to create shareholder value.
And and are going to are going to be discussing every alternative and thats there and over the next several quarters.
Okay reasonable and <unk>.
<unk> gross.
Right is it can you give us any.
Any thoughts on what you think the.
Both the lumber and panel markets.
And we're able to supply these days just in terms of.
Start levels I mean is there enough capacity out there and OSB to support a let's say on.
And 1 million eight and and what would the number look like over and the lumber market right now.
And good morning, Mark I think we provided some materials and our and our investor presentation that kind of gives a bit of a view on and what we see is.
And the current supply and.
Sure.
And against kind of today's demand so.
I'm not going on peg a number because I really.
Can't speak for all the supply initiatives that are kind of going on and the industry today and the one thing about strong pricing is that.
It's going to encourage more supply to come on and more rapidly and that's kind of hard to predict but.
Today look and I think.
And we've consistently said for a number of years.
Once we kind of get to one 4 million housing starts based on how we saw supply coming on.
And.
And not really knowing when demand would get to kind of one 4 million housing starts and we saw.
Would expect significant tension and the system.
And of course, nobody expected housing starts to jump to one sex or wherever they are today, and that's causing a lot of strain and the system and I.
I think it's the same the same issue on the on the on the on the OSB side I don't think.
I don't think they are fundamentally different and so.
<unk>.
And again I think it's been it's been.
So I hope that answers your question Mark I think OLED.
And we're seeing the strain I'm trying the industry to supply and industry.
On the market that's running at about one six today.
Okay, Alright, and then.
Ray is it possible and just give us a kind of a brief thumbnail.
And on what Youre seeing on the trade side, both what you think the potential is for lumber and OSB imports.
And the North America, and then also what kind of activity levels Youre seeing in terms of your exports, both on and Western Canada and any exports out of the southern U S.
Well I'll start and on kind of see if I can get Chris to save me here, but.
I think we've been.
And surprised that there hasn't been a stronger response from Europe on imports.
And obviously European imports are up.
They were up pretty significantly and I think.
We've always recognized there was probably a bit of a limit to those.
And.
And and I think we're kind of seeing that I think it's an indication of how strong other markets are around the world.
That are.
And may be keeping those ltd import opportunity is even lower than maybe what we would expect.
And.
So I think there is obviously less OSB imports.
<unk>.
<unk>.
A lot more production in Europe and on lumber and then there is an OSB and think it's pretty limited to both the opportunities to see OSB come into.
Into into the U S. But we're looking at that as well, Chris do you want to add any day Mark.
I would just add potentially we've definitely seen a reduction and exports.
On the lumber side and to a much lesser degree on the OSB side being much smaller.
The market really.
And so thats made up a bit of a shortfall for sure and I think that will continue.
We are seeing Japan recover somewhat but.
It appears that China is able to get enough fiber pad.
And at the pricing that they are at the day or so.
Satisfied without getting towards the numbers, we're at North America. So.
But but to Ray's comments, the European lumber market is much stronger than <unk>.
As previously and the last run up.
So.
And Thats part big part of the reason, we're not seeing the supply response from there.
Yeah, Okay. That's what it seemed like to me the last one I have is.
Yes.
Is this market kind of changing the dialogue and all around the U S kind of candidate Craig day surges.
And I've seen a lot of snap on and the like the National Association of Homebuilders, but I just I have no sense of whether this is really generating kind of any activity behind the scenes right now.
So mark I think the short answer is.
I think we can hope that it will change the dialogue and and.
And and that certainly.
And what what we would wish for but.
But I think fundamentally it to this point it really hasnt changed the dialogue.
<unk> work.
And just working through our.
CVD and HDD and administrative reviews and that's the process, that's going on and really as far as I'm aware and not really anything else happening at this point.
Okay, alright, thanks, and I'll turn it over.
Thank you next question will be from Amir Patel CIBC. Please go ahead.
Hi, good morning, and once you ask about.
Nor boards.
And the former Norbert OSB business, the specialty piece, which I, if I recall, it was kind of 20% furniture and 5% Japan.
Could you comment on how price is there moved and Q1 and as you look out for the remainder of the year.
And there are certain date, where maybe a lot of that business gets re price.
Yes, Amir it's Chris here.
I would say that the.
And the industrial business and strategic business on the OSB side to.
And to diversify and and.
And quite frankly from our view, it's been very successful.
With regards to pricing it is a bit slower than the commodity side, but we are seeing.
Substantial improvements and continue to expect that to happen.
But they are different markets and different end uses.
And Chris can you remind us are those formally index to the random lengths prices at all.
Yeah, and Meera Im not exactly sure how that how that's gone.
I don't know if we can comment on how we seller and thats prior to him here, but I mean, I think just and I think we like that business, we like the fact that debt it moves and a different cycle to some of the other commodity pricing and there is ebbs and flows to it and and.
And but we see that as kind of a positive thing and the long term.
Quarter to quarter.
You can kind of go Wow I wish this sort of wished that and I think.
Over the long haul we like the strategy, we think it's a successful line and and pricing will move as pricing moves.
Sure fair enough right and.
The other question I had about debt business, which well just norbert and general I know that used to have a much larger.
And our mill profit share setup across there.
And our mills.
And how is that still in effect with given maybe the existing labor agreements or is that all shifted to the existing west Fraser approach.
Well interesting question here.
And wage and benefit programs that debt.
People have are still in place.
Okay.
And just last question from me BC stumpage.
And given how things are playing out what sort of.
Year over year increase do you think we'll see 'twenty one versus 'twenty.
Year over year, why I think we're up.
I think we're thinking on $30 increase and in July.
So I think I'll stay away from kind of predicting what the what the year over year increase will be but but we.
And we're seeing.
See log costs.
<unk>.
Going often.
Over the year for sure.
Great. Thanks, that's all I had I'll turn it over.
Thanks and here.
Thank you and at this time Mr. First we have no other questions registered please proceed.
Well thanks for that.
And remind everybody that I think 80% of our business now is outside of BC, which.
It is what it is listen thanks to everyone and thank you silvie as always Chris and I are available to respond to questions as is Robert Winslow, Our director of Investor Relations and thank you for participation and stay safe and we'll look forward to talking to you next quarter.
Thank you, Sir ladies and gentlemen, this does indeed conclude your conference call for today.
Again, thank you for attending and at this time, we do ask that you. Please disconnect your lines have a good weekend.
Okay.
Hum.
Yes.
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Yes.
And then.
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Ladies and gentlemen.
Mark.
And.
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