Q2 2022 West Fraser Timber Co Ltd Earnings Call

If at any time during the call you require immediate assistance. Please press star zero for operator during this conference call West Fraser's Representatives will be making certain statements about west Fraser's future financial and operational performance business outlook and capital plans. These statements may contain forward looking information.

<unk> or forward looking statements within the meaning of Canadian and United States Securities Law.

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 west Fraser's website or SEDAR for Canadian Investor and Edgar So United States investors.

This call is being recorded on Thursday July 28, 2022, and I would like to turn the conference over to Mr. Ray Ferris. Please go ahead Sir.

Thank you Shelly and while that so listen good morning, everyone and thank you for joining our second quarter 2022 earnings call today. So.

<unk>, President and CEO of West Fraser, and I'm joined today by Chris <unk>, Our Chief Financial Officer and.

Chris Mckeever, our senior VP marketing and corporate development and several other members of our executive team.

I'll begin with a brief overview of key highlights West Fraser second quarter results and then pass the call to <unk> for additional comments.

In the second quarter West Fraser achieved strong financial results in the face of ongoing transportation and logistics challenges.

As you may recall from recent quarters transportation challenges have been particularly acute and of longer duration than we and others had originally expected.

However, we did see a start.

Signs of improvement in the second quarter and that trend has continued early into the third quarter.

Demand for wood based building products was robust in the second quarter generating $1. One 2 billion USD of adjusted EBITDA, representing a margin of 39% of sales.

The benefits of our product and geographic diversity continued to be a differentiator for west Fraser.

As a result, we saw more resilient ebitdas for the North American Wood products segment in a quarter, where our lumber business saw a more significant sequential decline.

On capital allocation, it's important to note that in the past 18 months. The company has repurchased approximately 37 million common shares through our normal course issuer bids and the completion of two <unk>.

Altogether. This equaled 67% of the shares issued in respect of the Norbert acquisition.

Through this same period, we have increased our dividend three times to the level of 30.

D. Today.

Notwithstanding this return of capital.

Our balance sheet.

Our balance sheet continues to offer significant financial flexibility, which is a key priority of our capital allocation strategy.

With that short overview I'll now turn the call to Chris for additional detail and comments.

Thank you Ray and good morning, everyone.

And a reminder, that we report in U S dollars and all of my references are to U S dollar amounts unless otherwise indicated.

Our North American DWP segment generated $623 million of adjusted EBITDA down approximately 15% from the first quarter, while lumber generated $449 million of adjusted EBITDA down approximately 44% from the prior quarter.

And while improved from the prior quarter, the pulp and paper segment had a negative $3 million of adjusted EBITDA in the quarter.

And while we're not satisfied with the pace of progress we are making in this business. We remain focused on our long term solutions to improve the pulp and paper segment, which includes our U K P strategy.

In Europe , adjusted EBITDA was $54 million versus $78 million in the prior quarter.

Price was the single largest driver for the sequential EBITDA declines in North America more than offsetting improvement in shipments from the first quarter, while Europe , while in Europe , lower second quarter shipments more than offset better pricing.

Cash flow from operations in the second quarter was $1 6 billion.

Ported in part by a seasonal decrease in working capital, while cash net of debt declined quarter over quarter to $746 million as we repurchased nearly $1 5 billion of our common shares in the second quarter.

Included in this any share repurchases was one $1 3 billion of shares repurchased upon the successful closing of our second substantial issuer bid in the last 12 months.

Furthering our track record of returning significant capital to shareholders.

As Ray mentioned, we also raised our quarterly dividend to <unk> 30 per share.

Distributor substantially similar amount of cash through dividends after giving effect to the shares repurchased through the end CIB and the <unk> side.

I'll now shift to our 2022 operational outlook for the balance of the year.

In part due to the ongoing transportation challenges in North America, and despite the considerable progress we've made with our Q2 shipment volumes compared to Q1, we are providing a slightly more cautious annual SPF lumber guidance. We now expect SPF shipments to be closer to the bottom end of the range of $2 eight to 3 billion board feet.

We are maintaining our guidance for syp's shipments, which we still expect to fall within the range of three to $3 2 billion board feet. This year.

For our North American OSB business, given continued constraints to trucking services and signs of slowing demand, we are reducing our annual shipments guidance to a range of five 9% to $6 2 billion square feet on a <unk> basis.

In Europe , we are seeing early signs of slowing demand and as such are slightly reducing our OSB shipments guidance. We now expect one to $1 2 billion square feet on a three eight cents basis. This year.

And lastly, we are reiterating our guidance range of $500 million to $600 million for planned capital expenditures in 2022. However.

However, given the rate of expenditures in the first half of the year and ongoing supply chain challenges, we expect our capital spend may fall closer to the bottom end of this range.

As discussed last quarter it remains difficult to estimate when full transportation services will be available in.

In the meantime, we continue to actively seek and utilize alternative transportation routes and methods to the extent they are available to continue servicing our customers.

Given this uncertainty further reductions of operating schedules across our production platform may be required to manage raw material supplies inventory levels and our integrated fiber supply chain.

Consistent with our previous quarters across much of our supply chain.

Are experiencing greater than usual inflationary cost pressures and availability constraints for labor transportation energy and raw materials, such as resin and chemicals.

We expect these cost pressures and availability constraints remain elevated through the remainder of 2022.

With that overview I'll now turn the call back to Ray.

Thank you Chris.

Look as we navigate the current operating environment and manage the ongoing challenges as Chris noted.

Main confidence that our product and geographic diversity.

Our culture of cost control and operational discipline, our strong customer relationships and our balanced approach to capital allocation, we will continue to serve us well.

Equally as important is the diligence and determination of our people who continue to adjust as needed to meet our operating and customer needs.

Given the macro and market developments in recent months I'd like to make just a few comments about the environment, which we find ourselves today.

We intend to be acknowledged that there is a growing uncertainty surrounding rising interest rates elevated energy prices and broad inflationary cost pressures that in many instances are directly connected to strained supply chain.

In particular, there are questions surrounding the potential impact of these and other factors may have on housing affordability.

And repair and remodel renovation spending which may result in short term fluctuations in demand for building products.

It's important to remind everyone that our focus is on the long term and our simple improvement strategy is to be low cost.

We have great people and assets and supported by a strong balance sheet.

And we are very fortunate to have a seasoned team with a proven track record of successfully navigating through previous cycles.

So in terms of market fundamentals. Despite these near term headwinds, we believe the longer term supply demand.

The growing importance with the growing role.

And importance of sustainable forest products in a low carbon economy.

We remain robust.

Ongoing constraints, both due to limited fiber availability and supply chain may continue to make it difficult to quickly adapt to increasing demand.

Also historically key lumber producing region of British Columbia continues to see downward pressure.

Longer term ability to contribute to the needed supply.

And this has recently been exacerbated by increasingly stringent public policies that are driving further reductions to that promises annual allowable cut.

In contrast.

Despite significant industry investment growth in U S. South region overall, North American supply response has not been sufficient to offset reductions in other regions.

In terms of demand and apparent housing shortage in North America appears to have been constrained by affordability limiting consumers' ability to purchase homes.

Rising interest rates and wage inflation, although a short term impact can play an important role to improving housing affordability and the longer term.

I would now like to update you on the progress we've made with some of our recent acquisitions, specifically, the Allendale OSB mill and the Angelina selling them.

First with Allendale, which is our idled OSB mill, we acquired late last year, we continue to make progress rebuilding the front end of the mill, which we expect will simplify the process. It makes it easier to operate thereby improving productivity.

I'm also pleased to note that our Allendale team has made good progress with our early staffing needs, giving us confidence that we will be able to attract the necessary talent as you move towards eventual startup.

Supply chains and cost deflation have impacted us everywhere, including Allendale and we now expect our potential restart date will be in the first quarter of 2023.

We believe the large scale Allendale mill with the help of our skilled OSB team will be among the lowest cost mills in our OSB portfolio when its operating at full production.

Secondly, moving to Angelina.

I am pleased to report that this acquisition has gone very well so far.

Exceeding many of our base assumption is for that saw mill.

Operationally, we are seeing better production and at lower costs than we anticipated.

The metals Ebitdas since acquisition is approximately three times, our original base forecast.

Thanks to this financial performance and better than expected timing of certain tax deductions, we estimate the IRR for this acquisition, while still early is approaching high teen percentages well ahead of our original estimate of approximately 13%.

With the announcement of our second quarter financial results I'm also pleased to announce the publication of our 2021 sustainability report.

A tremendous amount of work went into this report and we are proud of our progress to date.

I wish to specifically recognize our chief sustainability officer, Shenandoah, Johns and our dedicated team for the progress we have made.

As we continue to take steps towards becoming a sustainability later.

Thanks for the report, which I encourage all to read include West Fraser, becoming the first Canadian Wood products company to commit to joining the science based targets initiative to materially reduce greenhouse gas emissions by 2030 and alignment with the Paris agreement.

As well as improving the overall diversity inclusion of our workforce more than doubling the female representation on our board in 2021.

And perhaps most importantly, and why we clearly understand that we have much more work to do to eliminate serious incidents and injuries in the company, we achieved our lowest recordable injury rate in our history.

Before turning to the Q&A portion of today's call I'd like to make a few additional remarks on our capital allocation strategy.

Our priorities aimed to balance disciplined investments in the business with returning capital to shareholders, all while maintaining our financial flexibility.

We continue to believe that a consistent balanced approach is key to long term value creation.

To that end a top priority for us continues to be reinvesting in our existing businesses.

This includes deploying capital towards advanced automation technologies that drive further innovation to enhance our operating platform.

We will also continue to prioritize returning excess capital to our shareholders, whether that's through dividends or share repurchases. When we believe our shares are trading at a discount to their intrinsic value.

At the same time with the objective to maintain financial flexibility through the cycle, keeping sufficient cash to invest in the business.

And enable opportunistic acquisitions.

<unk> pursue larger scale strategic growth initiatives when they are available.

Given our strong balance sheet, we will continue to look for additional opportunities to effectively deploy our capital as we execute on our strategic objectives.

Reflecting on these priorities slide 11 shows our track record.

Since 2016, nearly 35% of our cash generation has gone toward capital expenditures and acquisitions directed to improving and expanding the company.

Approximately 15% of our cash flow has been retained or used to pay down debt.

And lastly.

Nearly half of our cash flow generation has been returned to shareholders, including approximately $3 7 billion USD <unk> <unk>.

Share repurchases over the last six plus years.

Highlighted by the successful completion of the two substantial issuer bids in the last 12 months.

Insurers and.

And overall, we are pleased with our results this quarter.

Our balance sheet is strong we are.

The necessary liquidity to allow us to absolutely navigate future challenges and opportunities.

And just as important we have the knowledge of bench strength to continue to move the company forward and to grow and create value whether organically or through acquisitions, if and when attractive opportunities arise.

All while recognizing there are potential near to hereby headwinds for our business.

Remain optimistic optimistic about our people and the companys longer term prospects as well as continued growth in the use of sustainable and renewable wood products.

And we remain diligent and focused on being agile to navigate and adapt to market challenges and the demands of our customers.

Finally, I'd be remiss if I did notice as you are all aware we issued a press release last week in response to recent media speculation.

I believe that the releases player is concise.

And so in that spirit I will not be adding any further comments and we will simply refer you to the press release.

I think with that al.

Turn the call back to the operator and ask for questions. Thank you. Thank you, Sir ladies and gentlemen, if you would like to ask a question at this time. Please slowly press star followed by one on your Touchtone phone you will then hear a threefold prompt acknowledging your request and if you would like to withdraw yourself from the question queue. Please press star followed by two.

And if you're using a speaker phone, we do ask that you. Please lift the handset before pressing any keys. Please go ahead I'm slowly press star one now if you have a question.

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

Thank you and good morning, everyone.

Two questions for you Ray.

With respect to the lower 2022 volume guidance for a few of the segments.

It sounds like it's a combination of ongoing free.

Availability constraints and in demand backing off and I guess I'd like to focus on the later a little bit in.

North America can you give us a bit more detail on.

Specific end market weakness it feels like it's more skewed to new home construction right now than repair and remodeling but.

Any any details you can give us on what you're seeing in the North American end markets for lumber and.

And panels.

Well good morning, Sean.

I'm going to we're going to tag team on this one I'm going to.

And I'll turn it over to mckeever here, but I.

But I would say.

For the second quarter.

I would say that a lot of our.

Demand has fallen off.

You know interestingly enough, we saw furniture demand in some of our in our OSB in industrial.

Specialty business slow down significantly I think we've seen more softening in those areas and less in the single family housing area, but.

I think thats ill, let Chris kind of fill the gap there Chris.

Good morning, Sean.

Not a lot to add really I think I think we suspect.

We think that we will see a little slowing down in single family going forward, but but so far we haven't and repair remodel has remained robust.

Okay, Thanks for that detail Chris.

On Allendale it sounds like you are taking a measured approach to doing the work. There ahead of the restart and you mentioned the Q1 2023 target.

I think in some of your other work in the slide deck and Investor materials in our work would correspond with US where you think the OSB market right now the capacities.

It's basically one 5 million U S.

Housing start starts and I guess the question is yes.

If we trend a little bit below that on an annualized basis is there a potential that the allendale restart could be pushed out later in 2023 or even 2024 as demand.

Demand dictates that.

We will show on look I mean, we've got a plan.

We're executing on that our intention is to start that up that start that mill up.

As we've discussed as you can imagine starting a mill it will take us at least a couple of years to get up to somewhere near rated capacity and so.

Decisions that we make are likely to be quarter to quarter ones theyre going to be longer term ones. This is a longer term decision.

But look.

You know, we'll read the tea leaves as we get closer to that at all.

That final decision.

And.

Yes, Mark.

<unk> doesn't want any more OSB, we're going to have to take that into context, but but again, we'll be we'll be looking to the long term and making that decision, but currently it's.

Our plans are to continue ahead.

As we've discussed.

Okay. Thanks, very much Ray I will get back in the queue.

Thanks, Sean.

Thank you next question will be from Hermes Pretzel at CIBC. Please go ahead.

Hi, good morning.

I wanted to first ask you about the European OSB business.

Wondering if you can give us more sense as to how much demand has moderated there if there's any notable differences between maybe the new resin and R&R components.

And how you see prices evolving for OSB in Europe in the second half.

Well good morning Amir.

I think that's good.

Question I think the European.

OSB is.

Is is interesting I think.

With the onset of the war and the impact on Russia, Ukraine, Belarus, I think theres been a lot of focus about how that will shake out.

I think many of us are still.

Seeing how that sorts out I think.

So look demand did soften it's hard to determine exactly where that why that is part of it we believe our.

It has to do with the fact that although all these sanctions come on and you have to remember these impact on.

On shipments out of Russia, Belarus, and other areas didn't take effect until July 10th I think it's going to be interesting to see what Q3 and Q4 look like for demand, but I do think it's going to take some time to kind of understand what the impact of those sanctions are.

And to understand how much demand is soft and versus.

Potentially.

A lot of shipments getting out of eastern bloc countries and getting into Europe . So.

I wish I had a better answer for you, but I think we're trying to understand that.

<unk> is certainly a softness slowed but I would say rather than a specific.

R&R or single family I would say, it's probably even across the segment.

Fair enough. Thanks for that that's helpful and just coming back to be at the lumber business and I know <unk> is only about a quarter of your capacity.

But could you.

Just fill us in on how much stumpage in the province.

At least in your geographies is up in Q3, where you see that going into Q4 and you know what.

You would estimate breakeven is today for that so the BC industry.

Well I think we've I think in the <unk>.

Earlier in Q1, I think we said we thought it was going to be around $40 a cubic meter I think the final number came out around 35% to 40, depending on the region that you're in so that's a pretty significant jump in cost now.

So, it's obviously pays an impact on.

How much.

On on the available economic fiber that you are willing to go out and chase to bring into your operations.

I'm not going to comment on what I think the breakeven prices in British Columbia, I think theres lots of information out there.

And I'd say, it's directionally accurate, depending when you look at it's a pretty high number and.

And we don't see stumpage shafting until.

You don't really Q4 so.

So.

Thanks Amir.

Okay, great. Thanks, Ray that's that's all I had I'll get back in the queue.

Thank you next.

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

Thanks, Good morning, Greg.

Good morning, Mark.

Got a question for Chris Mckee, but I Wonder if you could just talk with us a little bit about what he sees in channel inventories.

Whether he's seen buyers a little more willing to kind of step in and take on some inventory with lower prices and then also just help us with.

With your thinking around the <unk>.

How much carry crew there is with builders just working through kind of current backlog right now.

Well good morning, Margaret to ease a bit good morning, Chris.

That's.

That's a big question, but yes.

Yes, well firstly around inventories.

The information is anecdotal.

Because there's no what I would call.

Any any really legitimate.

Measure, but we understand from our customers that that generally they're being cautious inventories are low and they are.

They are purchasing as they need to so.

Which I think is very good for the industry.

With regards to prices coming off we've seen.

A rebound in the retail sector, which has been very helpful and and with regards to builders.

Again, we hear what you do there are finishing what they have and sort of look into the future, but that's that's more or less what we are seeing.

Do you have any view, Chris on how long that sort of <unk>.

Working off the backlog.

Process might take do you have a view that you know kind of six months four months is that eight months with what would be kind of your best estimate of that.

Yes, Mark we really don't have a view we don't have.

Don't have visibility into that.

From builder to builders so for the cancer.

Okay, and then I'm just curious has there been any impact on your OSB and plywood operations from all this litigation around Brazilian plywood imports.

No none.

Nothing that we have we have noticed anyways.

Okay, Alright, that's it for me. Thank you. Thanks.

Thanks Mark.

Once again as a reminder, ladies and gentlemen, if you would like to ask a question. Please slowly press star followed by one on your Touchtone phone and your next question will be from Paul Quinn at RBC.

Yes, thanks very much good morning, guys. Good morning.

Paul I just want to follow up on this clean under there looking forward on your slide deck that you continue to ramp up at our Inverness phase two and gang and try to reconcile that with the comments that shipments overall in 'twenty two year will be down.

Yeah.

Can you.

I hate to do this but can you repeat that question Paul sure. So just on your I guess this is.

Slide eight you've got.

A point that you're continuing to ramp up at Dudley can board, but you've also named Inverness phase, two and gang and and I know you've got capital projects.

That's a lot of money at both those facilities just trying to reconcile that with your your reduced guidance on shipments going forward to the balance sheet 22 does that mean youre getting increased operating rates, but bid build inventory or how do we reconcile that.

You're forcing me to look at the webcast now and I'm trying to.

Yes, I think we're looking at.

Yes.

Yes.

I'm trying to unpack the question there Paul I mean I think.

You know.

When it comes to <unk>.

Look I'll just kind of go through this and tell you what what we're trying to say so so.

Sham Board, we're where we're ahead of our plan.

And.

And I'm going to call it let's call it somewhere around three quarters of.

Capacity sort of thing, but we're quite pleased with the progress the team has made there.

Inverness is essentially there.

And.

I think we've talked about.

The slowdown in Europe .

We are kind of operating to meet meet market.

Hi gang is running extremely well I think we've talked about Angelina.

Al.

And I'm not sure I'm answering your question very clearly Paul but.

Yeah.

Maybe I can help clarify something if you have a follow up question.

Maybe actually get to Husky easier question, maybe just flipping over to the lumber side now that.

North American prices have come down.

Does that give you a bigger opportunity or an increased opportunity to export more in offshore markets.

Well first of all Paul I need easy questions you should you know that so.

So thanks for that.

Look.

Yes.

I would say.

The contraction in pricing has been relatively short lived I would say.

I would say.

No no real change at this point I think it would take an extended period of time before we'd see an opportunity to.

To create further opportunity.

I think Chris mentioned I think.

Although things have softened and people have become more cautious.

Think people still have a pretty robust view.

Around the supply and demand fundamentals of our business and.

And the needs out there. So I think if you look past the next few months or next couple of quarters I.

I would think people's expectations are still are still pretty strong.

Okay, and then just lastly, not that you need the cash.

Just wondering.

What you're going to take to get a solution on softwood lumber is there any movement here at all and is it something that you guys are pushing for it.

Well.

Certainly we believe that.

You know the continue that.

The dispute is without merit.

We expect to see those duties returned.

And continue to fully support the litigation process that we're involved in and.

We'll see.

Would expect to see an announcement around final termination of the <unk>.

Ah three in the next week or two.

And we expect that to support that.

Point of view, so, but with respect to negotiations and resolve.

Theres really nothing happening is theres, a little bit of it.

No.

And for us in the media, but.

It doesn't really appear to be anything meaningfully helping to move that forward.

Okay, and just as a follow up I understand they are three coming out, but where we have with the WTO and NAFTA processes and is there is there any expectation that you'll get some get a ruling in 'twenty two or 'twenty three.

I'm not I'm not I really don't have anything to add there Paul.

Can't predict what comes from them and at what time.

Alright, that's all I had best of luck guys. Thanks.

Thank you Paul.

And at this time Mr. Ferris, we have no further questions. Please proceed.

Well listen thank you so much for everyone joining the call and we'll look forward to talking to you on our Q3 results. Thank you.

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.

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Yeah.

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