Q1 2022 West Fraser Timber Co Ltd Earnings Call

Good morning, ladies and gentlemen, and welcome to West Fraser's Q1, 2022 results Conference call. Please note that all lines have been placed on mute to prevent any background noise. During this conference call West Fraser's Representatives will be making certain statements about west Fraser's future financial and operational performance business.

And capital plans. These statements may contain forward looking information or forward looking statements within the meaning of Canadian and United States Securities Law and such.

Statements involve certain risks uncertainties, and assumptions, which may cause west fraser's actual or future results and performance to be materially different from those expressed or implied in these statements additional.

Information about these risks factors and assumptions is included both in the accompanying webcast presentation and in our 2021 annual MD&A and annual information form which can be accessed on the west Fraser's website or through SEDAR for Canadian investors and Edgar.

So United States investors 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 followed by one on you touched on phone and if you would like to withdraw yourself from the question queue. Please press star followed by two thank you Mr. Furbish Skus you may begin your conference.

Well. Thank you Sylvia good morning, and thank you for everyone for joining our first quarter 2022 earnings call.

My name is Ray Ferris West Fraser's, President and CEO and I'm joined today by Christopher <unk>, Our Chief Financial Officer, Chris Mcgeever, Senior VP of marketing and corporate development and a number of other members of our executive team.

Before we get into the results today I'd like to mention a couple of housekeeping items.

And then after I'll pass the call to Chris who will provide.

Christopher our second half will provide an update to our Q1 results.

And before wrapping up and moving to Q&A.

Today, we will limit the scope of our comments to those already provided in our Q1 disclosures and we will refrain from addressing any questions related to our company for market outlook beyond what has been provided in those disclosures.

Further after this morning's call and in the absence of any material developments that would require a news release, we do not intend to make any additional comments to investors.

Our analyst chapters after our substantial until after our substantial issuer bid expires, which is currently expected to be chosen as the second 2022.

With that I am pleased to report that the first quarter 2022 is another strong quarter for West Fraser.

With that I'm going to pass the call to Chris to take us through our results.

Thanks, Ray and good morning, everyone.

In the first quarter West Fraser achieved strong financial results in the face of ongoing transportation and logistics constraints in Western Canada as.

As you May recall these challenges were an impediment to our Q4 2021 shipments of SPF lumber and pulp.

However, the typical weather issues that challenge our Canadian shipments each winter these.

These constraints lasted longer than we had originally expected carrying well through the first quarter.

While our ability to supply markets was constrained demand for wood based building products remained robust in the first quarter and as such we generated U S. 1.5 dollars 9 billion of adjusted EBITDA, representing a margin of 51% of sales.

The benefits of our product and geographic diversity of production were evident once again this quarter and we saw robust sequential gains across three of our segments with their lumber segment EBITDA up more than threefold from the prior quarter to $796 million and our North American AWP EBITDA.

More than doubling to $730 million.

In Europe , adjusted EBITDA was $78 million the second best result ever for that business.

Price was the single largest driver for the gains in North America, while in Europe . The gains were supported by improving seasonal volume trends and recapture of lost downtime for a large capital projects that have impacted the fourth quarter.

Cash flow from operations in the first quarter was $563 million in cash net of debt increased quarter over quarter to nearly $1 3 billion.

In the first quarter, we repurchased another 233 million of West Fraser shares and declared a <unk> 25 cents per share dividend up from 20 <unk> per share in the prior quarter.

You also will have seen that we announced a substantial issuer bid subsequent to quarter end.

S. I B, we have offered to purchase up to $125 billion of our common stock by way of a modified Dutch auction with a tender price range of 80 to 95 U S per share and that is set to expire on June 2nd.

We look forward to sharing with you results of the tender process when those results become available.

In terms of our 2022 operational outlook, we're trimming the range of expected SPF shipments to 2.8 to 3.1 billion board feet from our original range of three <unk> to $3 2 billion board feet as the transportation constraints in Western Canada have been more acute.

[noise] of longer duration than originally anticipated.

We are reiterating the outlook for southern yellow pine, North American OSB, and European OSB shipments as well as planned capital expenditures for 2022.

As we identified in our earnings release, we continue to see logistics and transportation constraints affecting our business early in the second quarter, particularly in Western Canada.

Currently it is not possible to estimate when full transportation services will be available or when the backlogs will be cleared and so further reductions of operating schedules across our production platform may be required to manage inventory levels raw material supplies and our integrated fiber supply chain.

Rest assured we continue to actively seek out and utilize all alternative transportation routes and methods to the extent, they're available to continue to service our customers and to operate our facilities.

With that overview I'll return the call to Ray.

Thank you Chris.

You know I'm confident that we're on the right path to navigate the current operating environment.

Including the challenging logistics.

Hum environment. So I'm pleased with that I'm pleased I'm very thankful of the adaptability of our team and our people as they adjust to meet our operating and customer needs.

I thought I would I thought I would touch briefly on supply and demand and note and note the step change in west Fraser's EBITDA generation and in an environment, where a U S housing starts are near or above $1 4 million.

In the current housing environment in which seasonally adjusted starts have regularly come in at one 5 million starts or higher it is clear that the industry supply and demand fundamentals are robust after an extended 10 plus year recovery from the last down cycle.

We continue to monitor trends in interest and mortgage rates and the potential risk to demand for new.

Home construction in our wood building products.

That said based on what we see today those fundamentals for housing and repair and remodeling remain favorable.

Our product and geographic diversity also provides a buffering effect on the cycles that can happen in our products and the relative contributions across the business segments have reduced some of the volatility quarter to quarter.

Owing to different customers and markets that we serve.

Another area that I'd like to highlight is our approach to capital allocation.

So moving to slide six we continue to believe in a balanced approach across the business cycle and then a consistent approach to capital allocation is key to long term value creation.

A top priority for us is to ensure that we are reinvesting into our existing businesses in order to re life assets.

Deploy advanced automation technologies and drive innovation to further enhance our operating platform.

We continue to see opportunity to improve our business further over the next few years.

We also remain financial maintain financial flexibility through the cycle.

Sufficient cash to be able to be opportunistic acquirers or to pursue larger scale of strategic growth initiatives when they are available.

And then finally, we believe that returning excess capital to shareholders is a key priority, whether that's through dividends or share repurchases. When our shares are trading at a discount to our estimate of intrinsic value.

Reflecting on these priorities slide seven shows our recent track record.

Through both capital expenditures and acquisitions, nearly 40% of our cash generation has gone toward improving and expanding the company since 2016.

Approximately one quarter of our cash flow has been retained are used to pay down debt.

And lastly.

More than a third of our cash flow generation has been returned to shareholders, including $2 2 billion of share repurchases over the last six plus years highlighted the fire 1 billion Canadian substantial issuer bid last year.

In summary, we are pleased with our results this quarter.

Our balance sheet remains strong with considerable liquidity offering us the ability to navigate future challenges and opportunities.

Including the recent launch of our second.

In less than 12 months.

We have the knowledge and expertise to continue to move the company forward and are able to grow accretive late as attractive M&A opportunities arise while remaining.

Focused on our on our operating platform.

In closing we remain optimistic about the continued growth in use of sustainable and renewable wood products of which we believe are well, which we believe we are well positioned to serve.

And I remain energized and excited about the depth scale capability and commitment of our people who remain focused.

And being agile and creative to navigate our supply challenges in the evolving needs of our customers.

With that I will.

I will turn the call back to the operator, Sylvia or yourself and and take questions.

Thank you Sir.

Ladies and gentlemen ask David if he would like to ask a question. Please press star followed by one on your Touchtone phone you will then hear a three Tom prompt acknowledging your request and if he would like to remove yourself from the question queue. Please press star followed by two.

Finally, if you are using a speaker phone we do ask that you. Please lift the handset before pressing any keys. Please go ahead and press Star one now if you have a question.

And the first question will be from Sean Stewart at TD Securities. Please go ahead.

Thank you and good morning, everyone.

First question for Ray or for Chris Mckeever.

Can you give us a sense of what youre seeing in the market right now I'm just trying to square up the recent resiliency, we've seen for for lumber and OSB prices in North America.

Any specific end markets, where you're seeing better pole in in recent days and weeks and your thoughts on sustainability of recent strength.

Hi, Sean it's Chris here I'll take a stab at this and maybe ray can fill in where I Miss.

Yeah.

We certainly saw as a high prices.

R&R market slowdown, particularly DIY.

The box stores.

We have seen that come back pretty significantly in the last.

A few weeks to a month.

New housing remains strong throughout the entire quarter I would say and I think the differences that we are seeing there.

The box stores come back a bit.

Saying that we would like to see the treaters come back a bit more than we've seen so far in the south.

But overall, we're seeing R&R come back, which is which is really a stabilized market for us.

And Chris do you have a sense of where inventories are at the big box level.

Ah well you know I can only speak to our inventories at the big box level and they're quite lean.

We've kept them leave.

Sort of anticipating a bit of a slowdown.

Backed off from that and so they're quite lean and I would assume others are as well.

But I can't speak to others.

Okay. Thanks for that.

Second question I have the Hinton reconfiguration.

Can you walk us through the expected economic uplift tied to that initiative and the risk and you're not answering. This question can you give us a sense of how concentrated the Q1 pulp and paper losses were to that mill I'm, just trying to get a sense of the upside you're seeing after this.

Reconfiguration takes place.

Oh, Yeah, good morning, Sean and.

We.

The third question might have been better but.

No I don't think we can you know.

Highlight much around around hinton per se or the losses, but I would I would just say first on on the pulp side in in Q1.

We were significantly impacted.

In almost every aspect of our pulp business around transportation. It had dramatic impacts as you know and on our on our production.

And our shipping ability and so we've taken significant curtailment and and so you know I'm not going to single out one versus the other but I can tell you it was a incredibly difficult.

As you know pulp mills need to run.

And running a few days a week or 50 or 60% capacity is not a recipe for a good cause.

And and good earnings so it was difficult.

On the Hinson piece.

We're pretty excited that we think you know.

We're landing in the spot.

You know what the product line and in Hinton that we think we think first we.

From.

From an asset point of view, it's a it's a simpler and more efficient process.

I think we've demonstrated over a number of trials with our customers that we get confident on where we're going with that.

To take US a few months to transition, mostly mostly for customer reasons, and and we're pretty eager to kind of continue to move forward on that so, but but I would just say across the landscape has it was a it was a tough quarter to try and run into supply our customers in our across our entire pulp business.

That's that's useful detail, thanks, I'll get back in the queue. Thanks.

Thanks, Sean.

Next question will be from Amir Patel CIBC capital markets. Please go ahead.

Good morning.

Given all the inflation over the past year I was curious to get your thoughts on you know what.

What you would consider replacement cost to be today for anybody looking to build a new lumber mill or OSB mill.

Well good morning him here and.

The question that we ask ourselves the same one and I would I would and I think I've spoken to this.

In previous calls.

Anna and I havent going on I'm going to I'm going to not not not everybody builds exactly the same mills or has all of the same objectives.

And all I'm going to be probably.

Pretty pretty vague I think you saw what we did at Angelina and I think there's been lots of comment on that I think thats, probably a pretty good reflection of how we see what the cost of a greenfield mill are today. They are significantly higher than they were two years ago, particularly for the mill that were the mill.

We're trying to build I would say, we do probably do a few things that maybe others don't we believe they create more value for us but.

But we know there's a couple of things, we often will put added.

Energy strategy to our mills, which comes at an increased cost, which I also think it comes with an enhanced payback. The other one is that we pay particular focus kind of on environmental conditions in the mail, we were shooting for an environmentally controlled operations at that.

That that are so big that comes at a bit higher cost as well. We also think that comes with a payback as well so.

Yeah, So I'm not answering your question very well him here, but I think our view is if you pick the number from two or three years ago, it's up by.

All 30, 40%, 50% depending on.

On what you are looking at.

Fair enough. Thanks for that that's helpful and just one for Chris Mciver, Chris can you speak to how OSB prices in Europe have changed since the conflict in Ukraine began and.

You know, maybe how industry prices there have trended into April .

Good morning Amir.

Quite honestly the <unk>.

Beef prices really haven't changed since the conflict.

At least that's our experience.

The market is probably a little tighter, but we haven't really seen any noticeable changes in the marketplace.

Yeah. The only thing I think I would add to that as you know the good news bad news things move slower.

Log costs don't move up as quickly product prices don't move up as quickly.

But I would say.

Demand remains strong our business looks good.

So, let's see I think we will see what that bodes well for pricing in the latter half of the year, but.

It tends to move just a little bit slower that's all yeah in him here just just to add to Ray's comments, we have seen a significant shift over the last year on pricing.

So it isn't like prices have moved they have moved up significantly and in Europe . They just haven't moved in the last quarter.

Okay, great. Thanks, that's all I had I'll turn it over.

Thanks Amir.

Next question will be from Mark Wilde at BMO. Please go ahead.

I got one for either Ray or Chris I Wonder if you can just walk us through your expectations for how you think trade may shift around as a result of the war in Ukraine.

Both in North America and in Europe .

Well good morning, Mark Chris.

Good morning, Mark that's a great question.

It's very early days first of all none of this is shifts dramatically.

You know our view is that you will see more would probably heading from Russia to China.

And a little less from Russia to Europe , if any.

You combine that with a really robust European market already I think youre going to see and are seeing already.

Less product come into North America, but saying that there are there are trade flows that are have been set up from Europe to North America, and we suspect they will continue.

That's kind of what we're seeing so far certainly some conflicting views out there and I think much depends on I think our view would be less silver two good markets in Europe less over to North America. However, if for some reason Europe slides into recession, and I think that that change and product prices remained strong in <unk>.

North America.

You can see that are more price. So it's hard to predict today, but that I would say in the face of you know how I would think about that a little bit in the face of.

Very strong product pricing on a number of fronts I think if you look back at the last year or two of European imports into North America.

It's been far below most of our expectation so it's hard to imagine it would go beyond there.

The situation.

Yeah, Okay. That's good.

Kind of a lot of different views on what all of this is going to be I guess the other question I have this morning is when I look at the data for the lumber business last year and I, particularly look at the U S South.

It looks like the capacity base was up close to 1 billion board feet.

Yet the production was only up about 140 million so the operating.

Operating rates dropped 400 basis points.

Dropped in the face of all time record price so I'm just.

Trying to get a sense of what you think happened there I mean is all of this just lost production because people couldn't get labor or labor was turning over more offerings.

You had you lost some efficiency in the Mills and then you know how would you how would you expect those operating rates to trend as we go forward.

Well Mark.

But I think it's a great question I think.

It ties into a number of things one I would start by saying a year a year in our business today seems like 10 years.

And the people forget that that early in 2021, the U S experienced a significant winter weather events that led to.

Disruptions.

Extensive disruptions to production and consumption throat throughout the south but I you know I can speak you know a number of our mills were down a week or more.

And and then and then so I think that was a widespread impact early in 2021, hopefully I get my years right.

And then you know there were other weather events, you know, Florida, Georgia area was.

Again, I won't get the stats right, but if you look at.

Weather in certain areas is they were unprecedented levels of moisture again, which did a number of things that impact.

People ran out of logs because they just couldn't get into the to the woodlands.

Reduced production from some of those areas.

And and an increased log cost in some of those areas as well.

And and then the one that we talk about all the time is.

You know.

The production and announcements that have come out over the last number of years. The capacity is is not I think we've said this a number of times, it's easy to announce its harder to bring this stuff on and so from a capital and execution point of view. Our view has been is that it will come.

It'll just come on slower than.

And then maybe what some would predict.

And I think thats the reflection, so I'd say weather and.

And the ability to execute.

And we're in we're not in we're not a west Fraser had prior to that ability to execute and ramp up as quickly as you'd like.

Okay Alright.

If I can slip just one more and I'm just curious.

How you read the OSB market over the last few weeks I mean, we saw a 500 plus dollar drop in the composite in two weeks and now we're bouncing.

How do you how do you interpret that.

I'm going to I'm going to pitch this to one of the crisis.

But I would just I would say mark.

You know and I don't I don't mean to be dismissive, but.

We really don't spend a lot of time worrying about you know the short term fluctuations.

You know I think some of this has played out in the past few years, where.

People start speculating on on and it drives the market in a certain direction in what I would say the things that we see fundamentally don't change our view of the next few quarters or year or two so.

I see what happens as people unwind certain positions that are empty as has the supply chain.

And you go well we have seen this play out before.

And in it.

Just on that before I give it to someone smarter here is.

Is that is that you know the.

You're lying theme that I think that we've had for a number of years is that the ability for the supply side.

To react to you now.

Just really isn't there anymore I mean, we're a cyst.

Our systems have remained lane for the last number of years and I would say you know and again I tend to use that 141 5 million housing starts things are very tight. So there may be speculation in the market, but the underlying supply and demand fundamentals speak that.

Blips in the in the system or have pronounced effects, but but but don't really change our.

Our view on how we want to operate the business sorry, Chris maybe no I mean, I would just add that it.

It appears to us that inventories are very lean in the field and.

And when demand comes back.

An immediate reaction.

The customer side.

One thing I've learned slowly over my career is that particularly out of Canada. The supply chain is a lot longer.

And.

When that gets emptied out you just don't turn a tap and fill it back up again and it causes some of these.

Some of these swings for sure.

Yeah, Okay I appreciate the color Ray, Thanks, and I'll turn it over thanks.

Thanks Mark.

As a reminder, ladies and gentlemen, if you would like to ask a question. Please press star followed by one you touched on the phone and.

And your next question will be from Paul Quinn at RBC capital markets. Please go ahead.

Great. Thanks, very much guys just maybe go back to this European OSB pricing question.

I'm surprised that a that you said prices are flat, even though they have come up over the last year. Given that you know are sort of a supply side and in that area. If I include Russia, Ukraine Belarus.

Those countries there are kind of around 25% of European capacity, so taking that away to get through the embargoes I would've.

Expected prices to pick them up is it is it due to the fact that our conception has come down there because the demand has come down there because of the conflict.

Okay.

Good morning, Paul.

Well a couple of things Paul one is that an awful lot of that eastern European production stays in eastern Europe , and Russia, particularly so it's not the demand I can't speak to the demand in Russia.

But very little of that product comes west and so really the demand situation has not changed dramatically in the west and our experience, saying that Matt.

And that is very good right now and so it was pricing so.

But I think it's more about where that product naturally flows it doesn't flow less if it stays in the east.

Yeah, I mean, I would think it's more I think Chris nailed. It I mean, I think we're very pleased with the demand and the pricing is good.

And I would just say again, it's more of a reflection of the different style of transactions that occur in Europe , which tend to be.

<unk>.

Not.

Not week to week, and and so and so if prices do come off but slower over time. They also come down slowly over time.

And it's the same on log so it's.

Al.

It just doesn't react week to week, but I think over the next few quarters I think.

Got it.

If Europe stays strong I would expect that we would.

I would hope we'd see continued strength.

Okay, and then just on the exports out of Europe in the last year, because we had a record prices. We saw in North America you had.

Yeah. It exports ramp up to kind of 650 million square feet level, which is kind of equivalent to a to an OSB mill.

So if there's no supply impact from Russia into Europe do you expect it to stay at that level in 'twenty two.

I'm.

I'm not sure Paul I mean, we really you know we can't speak for others. We've had a couple of vessels that we brought over to North America.

But.

I'm not sure what others are doing.

It's a very small amount of OSB that comes to North America.

Quite frankly pretty inconsequential.

Okay, and then just moving over to pulp and paper just wondering what the road to see EBITDA breakeven as you know.

We've got pretty decent pulp pricing here is that expected in the in the short term at some point in 'twenty two.

Well I sure hope, so and and so.

You know first.

We haven't seen the same upside on <unk> as we have all MBS K and unfortunately, a R. M. B S. K business has been pretty significantly impacted by transportation or first quarter.

I'd like to tell you that we've got great visibility going forward on transportation and that we can see.

Nothing, but green flags waving here, but it.

It is better.

Things are returning more to normal, but but but but I can tell you. This changes week to week and so we're we're still we're still nervous about our ability to to ship.

I would expect.

So that's maybe not a great answer, but I would I would think we should see we should see our view would be we're going to capture more of the norm that increases I think that's happening we're going to be able to we should be able to see improved shipping in Q2 and that should support.

You know returning to a.

Better results, but I, just if I sound like I'm hedging my bet.

I think I think our confidence in <unk>.

In rail transportation is going to take a while to get rebuilt based on based on the last <unk>.

Six months in and if we just don't have that confidence yes.

Okay, and then last one I had was just on the lumber M&A pipeline I mean, Angelina last year sort of set the high water market a high watermark for capacity additions.

That led to higher expectations on that.

No longer or is there still a fair number or something that was available for sale.

I don't know if its led to higher I think they are pretty high before I think you look at the pricing and in all four of the last five years I think everyone.

Looks at whatever their capacity is and it says it's worth more than what others think it is so so it has it has has it changed recently.

I'm not sure it's significantly different but.

I would say you know.

There are more opportunities available there aren't more high quality opportunities that we see.

So and.

So I, just I would say expectations remain high and and and and and.

You know there's.

Not every opportunity is one that's going to fit our west Fraser.

Our view.

Alright, that's all that's left.

Thanks, Paul.

Thank you and at this time gentlemen, we have no further questions. Please proceed.

Well.

Again, thanks, everyone for joining our call and and we'll look forward.

Talking to people over the next weeks and months and for that we'll sign off and turn it back to you operator.

Thank you, Sir ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending and at this time, we do ask that you. Please disconnect your lines have a good weekend.

Okay.

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