Q3 2022 West Fraser Timber Co Ltd Earnings Call
Good morning, ladies and gentlemen, and welcome to the West Fraser Q3, 2022 results conference call.
At this time all lines are in listen only mode.
Following the presentation, we will conduct a question and answer session.
If at any time you require immediate assistance. Please press star zero for the 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 constitute forward looking information or forward looking statements within the meaning of Canadian and United States Securities laws.
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 risk factors and assumptions is included both in the accompanying webcast presentation.
And in our 2022 annual MD&A and annual information form, which can be accessed on west Fraser's website or through SEDAR for Canadian investors and Edgar for United States investors.
I'd like to remind everyone that today's call is being recorded Thursday October 27th 2022.
I would now like to turn the conference over to Ray Ferris, President and Chief Executive Officer. Please go ahead Sir.
Thank you Michelle and good morning, and thank you for everyone for joining our third quarter 2022 earnings call.
As Michelle noted I'm Ray Ferris, President and CEO of West Fraser.
And I am joining todays call from Greenville, South Carolina, which is home of West Fraser's advanced controls and development Center.
Joining me on the call from Greenville, as Chris Mciver, our senior Vice President marketing and corporate development.
Along with a few other senior leaders.
As well joining us from Vancouver, British Columbia is there a senior VP and Chief Financial Officer, Christopher <unk>.
It feel.
Humor me a bit I'd like to take a few minutes to describe what our team in Greenville does and the role we expect them to play in support of our broader efforts are further improving our operational and cost performance as we continue our transformation into a leading global wood products company.
For background. The advanced control Center was an initiative launched by the <unk> team in 2020 to support the 12, North American OSB facilities and best in class safety.
Operational performance and the sharing of best practices.
Following the completion of the Norbert acquisition in February 2021, our platform has now grown to 13, OSB operations and specifically <unk> two mil sawmills in the U S.
Although the center will support other regions. We believe the critical mass we now have in the U S is an important strategic advantage of scale upon which to execute.
Support technology transfer to more rapidly advance the highest safety automation and operational efficiencies.
Which are key to further driving our low cost strategy.
To do this it's important that we have the best people and processes in place and Thats, where the advanced control Center comes yes.
From this center, we have a team of engineers and control specialists that are wired into many of our operations to directly support our onsite teams.
At a high level.
Advanced controls and development centers key objectives are to train and educate and develop our employees to deploy and utilize best in class automation and control skills.
To share in real time best practices on safety and operational excellence.
And to be an incubator and developing and implementing the latest automation optimization and robotic technologies.
Doing this should also result in a work environment that attracts and retains the most engaged and talented people for our company.
We are pleased with the energy and progress at our U S South leadership team.
So far in this initiative.
We're excited about the opportunities ahead, as we drive competitive advantages through people and technology to support our safe low cost and highly efficient operating philosophy.
With that.
I will now give a brief overview of key financial highlights.
West Fraser's Q3 results and then pass the call to Christopher <unk> for additional comments.
In the third quarter Westphalia saw a further improvement in transportation constraints that have challenged our financial results earlier this year.
Concurrently we saw market demand weakened with rising mortgage rates impacting near term housing affordability.
Against this backdrop, we achieved solid financial results for the quarter.
January $426 million of adjusted EBITDA, representing a margin of 20% of sales.
In terms of capital allocation.
Nearly $150 million in capital equipment this quarter.
While continuing our track record of returning significant capital to our shareholders.
By repurchasing $182 million of our shares and also paying out $27 million in quarterly dividends dividends.
The company has now repurchased approximately 39 million common shares through our normal course issuer bids.
With the completion of two substantial issuer bids since early 2021.
Representing approximately 72% of the shares issued in respect of the Norbert acquisition.
Notwithstanding this return of capital.
Softening of marketing demand our balance sheet continues to offer significant financial flexibility, which remains a key priority.
For us in our capital allocation strategy.
With that overview I will now turn the call over to Chris for additional details and comments.
Thank you Ray 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 America, AWP segment generated $215 million of adjusted EBITDA down from $623 million in the prior quarter, while lumber generated $160 million of adjusted EBITDA.
Declined from $449 million in the prior quarter.
Note that the lumber segment benefited from an $81 million duty recovery of the administrative review period three export duties during the third quarter.
The pulp and paper segment generated $29 million of adjusted EBITDA, a significant improvement from recent quarters.
Notwithstanding this progress we continue to focus on long term solutions to improve the pulp segment, which includes our unbleached Kraft pulp strategy.
In Europe , adjusted EBITDA was $24 million versus $54 million in the second quarter.
Price was the single largest driver for the sequential EBITDA change across our North American lumber and engineered wood products businesses in North America and Europe .
Cash flow from operations in the third quarter was $433 million, while cash net of debt increased quarter over quarter to $789 million, even as we repurchased $182 million of our common shares in the quarter.
I'll now shift to our 2022 operational outlook.
While we did experience a notable improvement in transportation in the third quarter, particularly in Western Canada, we are reducing our annual SPF guidance lumber guidance.
We now expect Sps shipments to be modestly below the bottom end of the prior guidance range of $2 83 billion board feet.
Maintaining our guidance for Syp's shipments, which we expect to fall within the range of three to $3 2 billion board feet. This year.
We're also reiterating our north American OSB annual shipments guidance of five 9% to $6 2 billion square feet on a three eight cents basis.
In Europe , we are seeing a continuation of the slowing demand we discussed last quarter and as such we now expect OSB shipments to be at the bottom end of the guidance range of one to $1 2 billion square feet on a three inch basis. This year.
Lastly, given the rate of expenditures in the first three quarters of 2022, and because we now expect project spending to carry into 2023 for a number of our projects that are underway.
We are tempering, our 2022 capital expenditures guidance to be approximately $450 million as compared to the prior guidance range of $500 million to $600 million.
We continue to see weakening demand for a number of our products, particularly for those serving new home construction markets as rising mortgage rates appear to be impacting affordability.
And while we still see positive medium to longer term market supply and demand fundamentals for our key products.
We are acutely aware of these near term headwinds.
Given this uncertainty further changes to operating schedules across our production platform may be required to manage raw material supplies inventory levels transportation and our integrated fiber supply chain.
Consistent with recent quarters across much of our supply chain, we continue to experience greater than usual inflationary cost pressures and availability constraints for labor energy and raw materials, such as resins and chemicals and to a lesser extent transportation.
We expect these cost pressures and availability constraints to remain elevated through the remainder of 2022 and into early 2023.
With that overview I'll now turn the call back to Ray.
Thank you Chris.
I'll make a few comments about west Fraser's exposure.
New home construction markets in the U S.
And as Chris mentioned, we certainly recognize the uncertainty surrounding rising interest rates and the potential impact that these and other factors.
It may have on near term housing affordability and the potential of short term fluctuations in demand.
For our building products.
However, it is important to note that while new home construction is a key market for our company today's west Frazier is much more diverse and resilient in the west Fraser are the paths.
Part because of our deliberate actions that we've taken across the company.
Not only do we have exposure to different different geographic markets today, but the relative mix of our demand drivers has changed over time with significant growth coming from segments that are not as tied to new home construction.
To this end.
Market exposure for our lumber segment as you can see on slide eight.
That repair and remodeling markets have become much more significant drivers of industry lumber demand over the past 20 years.
Comprising just one quarter of industry demand in 2000, those same repair and renovation markets now represent nearly 40% of north American lumber demand.
Similarly on slide nine it is clear that both repair and renovation and industrial markets are now much larger contributors to north American industry demand for OSB.
Demand from these two end markets has increased substantially over the last 20 years, Greg from just 22% to approximately 33% of total OSB demand over that period.
What this data tells US industry data tells us is that while new home construction will continue to be a key driver with building products demand in North America repair and renovation and industrial markets have become more significant drivers of overall demand for our products.
Further.
The repair and renovation industrial end markets historically tend to have significantly less demand variability through the cycle.
The data of new home construction.
We believe that this is an important to note as it shows we are better positioned today to weather future cycles in the U S housing market.
I would now like to update you on the announcement yesterday.
Maybe undertaking a brownfield mill modernization of our Henderson, Texas lumber facility.
Much as we did with Opelika and Dudley projects, we will continue to operate the existing mill as we constructed $255 million state of the art lumber manufacturing complex at Henderson.
Undertaking this type of brownfield project allows us to pursue our low cost strategy, while leveraging the current mills existing ecosystem.
Including a skilled workforce abundant fiber close proximity the strong end markets and then existing outlet for our mill residuals and.
And of course, including importantly, the local transportation infrastructure.
Construction will begin this fall and we begin to expect to be in the mills ramp up curve.
Sometime in the second half of 2024.
Once completed the Henderson mill's capacity will will nearly double.
Full production, we estimate the mid cycle EBITDA will increase by almost four times.
The current mid cycle EBITDA.
In summary, while demand markets were challenging in the third quarter and we see near her near term headwinds impacting the business. We remain confident in the foundation we have in place.
In addition to our geographic and product diversity, our balance sheet remains strong.
Have the necessary liquidity to allow us to navigate current and future challenges and benefit from the opportunities that may arise.
Just as important we have the people and the talent to continue to move the company forward and create value.
Whether organically.
Or through acquisitions.
And when attractive M&A opportunities arise.
Overall, we remain optimistic about the company's longer term prospects as well as continued growth in the use of sustainable and renewable wood products.
With that I will turn the call back to the operator and ask for questions.
Thank you Sir.
Ladies and gentlemen, we will now begin the question and answer session.
We'd like to ask a question. Please press star followed by the number one on your telephone keypad.
If your question has been answered and you would like to withdraw please press star followed by the number too.
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One moment. Please for your first question.
Your first question will come from Sean Stewart of TD Securities. Please go ahead.
Thank you good morning, everyone.
A question on the the Henderson project the capacity multiple looks.
It looks it looks rich versus other recent new saw mill announcements can you reconcile the capacity multiple which looks like it's almost 930 <unk>.
Per thousand board feet with the 12% IRR target.
And that IRR looks pretty similar to what you guys would have targeted for deadly and opelika in.
I'm just wondering if you can reconcile.
That discrepancy for me.
Well.
Good morning, Sean.
I think Chris and I will tag team on this one Chris do you want to maybe start with that.
<unk>.
Sure Shaun I think theres been a number of.
Announcements around there I think.
It also depends how not all of these not all mills are all sort of constructed equivalent and I would say what we've done here is build on what we've learned from opelika in Dudley and what we've seen certainly with the tremendous success we've had in.
In Angelina, which I think if you look at that as a reasonable comparison.
That's the number.
Fairly equivalent I think an evaluation standpoint.
There.
Yeah.
Look I think.
Our view of mid cycle has typically been I think a conservative one and we've typically.
Tried to do better on these things around that so.
I don't know that will go into a bunch more specifics around kind of these assumptions, but I think it is are our approach to modeling this out.
Its been consistent I think in the case of the other the other green the other brownfields.
We've been quite pleased to exceed our expectations, but we've approached this one just as conservatively ray anything you want to add to that.
Yes, I would just say look it's hard.
Again, all things aren't created equal and I would say Sean this.
For West Fraser.
And how we look at our company and where our operations are and where we want to be this is really a continuation of our east our east, Texas and quite frankly part of our Arkansas strategy and so.
So we understand.
All the synergies that I think it brings for us I would say.
And let's say, it's an important piece for us and.
I would also say is that we tend to be quite conservative.
And so when we think of.
Pricing and ramp up schedules.
Our conservative nature comes up our expectations would be to do better in both but it's a reflection of I think.
Our nature in the company, but also.
To be strategic on what we do it's not just the mill, it's a region and an approach that we have so hopefully that answers your question.
Yes that helps I appreciate that context.
Second question U S.
Log costs.
In the MD&A. It was mentioned the inflation you've seen there and I know it varies quite a bit from state to state and within states, but can you give us a sense overall.
Your average log costs in the south how much they've increased on a percentage basis, either quarter over quarter or year over year, and what youre seeing headed into the latter part of the year as well.
Well I can't I can't.
Have a percent bromine it probably wouldn't be meaningful anyway, what I would say is is that.
Is that.
No.
Certainly we've seen some regions go up much quicker and whether that's.
Weather.
And.
Or.
Weather and then.
Whether it's Paul for others, we've seen it but.
It certainly we've seen a shift in a couple of regions.
Due to that but I think the industry data out there Sean with with <unk>.
Probably be the best place to source that one.
Okay.
That's all I have thanks very much.
Thanks Scott.
Your next question will come from him your purchase of CIBC capital markets. Please go ahead.
Hi, good morning.
Some of the charts in the Investor presentation show.
The company's view that North American lumber and OSB markets are kind of sized for one 5 million U S housing starts.
Three ends up being a fair bit lower than that do you think we'll see.
An acceleration of some of the permanent shuts it.
You might expect.
NBC and how do you think about your own capacity base in the province going forward.
Well thanks Samir.
Really glad to see someone was looking at the charts that will make Robert Winslow quite happy.
And so.
So look.
What I would say is that.
I don't want to get region specific because I do think these things move around but I would say.
We're going to.
We're going to operate to and whatever region. It is or for product. It is.
Going to operate.
To that.
Economic logs.
To the transportation we have available.
And what the customers want to purchase and so.
I would say that can be different in every region and look BC has a high cost for.
We've made a lot of change.
Changes in BC.
But I would say our operating philosophy will be the same which is.
We have to have economic logs, we have to have a transportation that will accept the customer's orders and we have to have orders to do that and we'll adjust as needed to meet either one of those factors.
Okay. Thanks, Thanks for that that's helpful and just turning over to Europe .
I'm not sure if you're able to quantify how OSB prices changed there in Q3 and any comments about what you might be seeing on the pricing front in Q4.
I would.
Hard to give a lot of color on that I would say.
I would say if I were to comment on something certainly energy and fiber costs are issues throughout Europe as a general statement.
Obviously, the market has cooled quite a bit.
And so.
As far as far as forecast on pricing I mean, I guess, we'll have to see where it goes but.
I I like how our team is operating and managing managing our.
Are both fiber and energy and in adjusting to what the demand is and so.
From that perspective, I guess, we'll see where pricing goes but.
Yes.
Hard to have a lot of visibility in Europe .
Okay Fair.
Fair enough. Thanks for that that's all I had I'll get back in the queue.
Eric.
Your next question comes from Mark Wilde of BMO. Please go ahead.
Good morning, Ray, Chris and Chris.
First question I had is I wonder if you can just help us at all.
How you're thinking about demand over the next few quarters. We know the builders have had a pretty healthy backlog bit there, presumably working their way through now even as the.
Buyer traffic drops off how do you see demand playing out over the next few quarters based on what you know right now.
Well Mark.
So Chris and Chris both don't think Theyre getting the answer enough question, So im going to turn this one.
Hey, good morning, Mark.
Yes.
That is a that's it.
Very difficult question to answer quite frankly, but.
Well, what we're seeing is.
Single family is to Nobody's surprise is beginning to drop off but repair and remodel is holding up very robustly, both in panels and lumber.
Where it goes from there.
We really don't know.
Yes, I guess, what I'm, just trying to get at Chris is.
How much of a buffer.
Is creating in the short term just because of the builders have a lot of a lot of backlog to work through.
And.
How significant of a drop off we might see somewhere else in the first half of next year.
Yeah again.
We really don't know Mark what I would say is that.
Our inventory levels.
And panels and lumber are very comfortable levels.
And we'll see what happens from here, Yes, I mean, Mark just from my perspective, I mean, I think we all look at the same numbers as far as completions and starts and I think.
The near term.
Pick a number whether it's next quarter or two.
Ed.
Demand has been more resilient than what we have.
I think some of the numbers would indicate it.
But saying that I think the unknown is how much how much more when interest rates go up.
Will they go up it and at what pace and what elevation, then I think within that it's really hard to predict what the impact will have.
But there is certainly some buffer but yes.
Yes.
Okay couple of other questions one.
<unk> been quite clear.
You work down at Allendale, but youre going to Youre.
Going to start that up when you see the market being there for the for the product I wondered how you're currently planning for that startup at this point in other words are you like hiring and training workforce.
For the facility for kind of a.
Q1 start up or is that on pause right now.
Well I'm going to give you two answers.
Mark.
One is that look.
Made that investment base.
Based on what we think are very good long term fundamentals.
Starting up and.
And any of our facilities, including in Allendale. These are long term that.
Let's take two or three or more years to get to where we want any decisions that we make around those will be long term in nature. So.
And I would say.
General comment would be when we look across our portfolio.
We are going to make sure I mean, all we can do is like I mentioned is that is that.
Almost.
Which sector. It is is that we have to have.
On the right log at the right price we have to have.
We hope to have a facility that has the right cost structure, we have to have a transportation.
That will support it and we have to have customers willing to to buy the product.
Any one of those could be reasons why.
Across our portfolio.
We may adjust our operating platform so.
Rather than speak specifically to Allendale.
That'll be the.
Whether we start up in.
Q1 or at the end of Q1, as we planned or whether we adjust.
Based on.
I think I think we're going to.
Make sure that all the fundamentals are in place across our operating portfolio.
Okay. All right last one for me I'm, just curious ray if we look out over the next three to five years.
Seeing capacity shrink a lot out in BC, we're seeing capacity grow a lot in the southern U S would you expect that we see little change in the relationship.
Tween.
Western grades of lumber and southern grades over time.
Can you be a bit more specific mark I'm just trying to think we have we have less SPF supply. It's clearly preferred for some markets at the same time, we've got a lot more southern pine capacity. It tends to go to somewhat different markets and has much lower cost. So I'm just trying to figure out whether the sort of.
The historical pricing relationship.
Between those two grades going to shift a bit whether the.
A rebound in southern prices might be smaller or weather.
You might see SP.
SPF prices rise to a newer and higher level on a trend basis.
Thanks, Mark Chris here I'll take that one.
<unk>.
Well you are correct in that typically you see slightly different end uses for both as white DNS, but but there is a fair bit of overlap and we do see arbitrage.
On certain products and I'll give you. An example, when we trust manufacturers they will go back and forth between <unk> and SBS.
I suspect over time as there is more availability as wide it will begin to be using more end uses.
That's just what we're seeing but.
It's pretty much anyone's guess as to where it is one thing I might add Marc would be I think.
Agree with your thesis or have a view that to support that thesis I think one of the things that cloud that is.
Is that the supply chain has been very tight in the supply chain out of Canada with transportation challenges it creates dynamics.
Dynamics Thats hard to unpack that question I think we will I think over time I think we will be but I think the thesis is good.
What is.
Needs to be understood is that there is a.
Very tight supply chain and transportation is.
More critical issue today and going forward than it has been historically, so we'll have to see how that plays out in the marketplace.
Okay, I'll turn it over thanks Ray.
Thank you.
Ladies and gentlemen, a quick reminder, if you would like to ask a question. Please press star one at this time.
Your next question comes from Paul Quinn of RBC capital markets. Please go ahead.
Yes, thanks, very much good morning, guys.
Morning, Paul.
Wondering if you've noticed.
Effected the Russian wood products' export ban I think that came in early July and whether you've noticed that in tightening up Europe's slipped slightly.
The weakening economy as well as North America.
Well.
Look.
We did expect to see something.
And particularly as we get into August .
That's been very difficult to see with with things that are going on in Europe , I do think that.
I do think that we will see that I think our view would be it has to have an impact on Europe . It certainly had an impact on fiber costs in certain regions.
But less so on an overall demand, but I think in a couple of quarters, we're going to have more visibility on I.
I think the industry will have more visibility exactly what the impact of the sanctions have been.
Okay, and then you guys said.
Good bad or highlighted resin costs up year over year, I guess, that's with energy.
What's the percentage change in resin costs and is it is it.
Comparable between North America and Europe .
Yeah, that's a pretty.
Yes.
It's hard it's hard to draw a line to those so so you know <unk>.
Energy costs have spiked.
<unk> certainly more in Europe .
And then we've seen generally North America.
But it's.
It's very regional it is hard to generalize.
It's country and region specific so I can make the same discussion in North America as that.
Youll see regional dislocation that that may or may not get correct and if it does.
Does move around and I think this past few quarters has been an example of that.
It is moving around and we would expect move around.
Further over the next few quarters.
Okay, and then just lastly, I mean with slowing North American housing market here.
Just wondering what your ability to pivot to export markets with either lumber and panels.
Hey, Paul its Chris.
I'll give.
People that want to try.
I would say that.
All of our offshore markets have been.
Slower than historical for sure including Japan.
And China in particular has been very challenging and kind of for three reasons.
We believe there is a fair bit of Russian and European lumber, that's being exported there for the same reason.
Their markets have slowed obviously in Russia.
We've seen a depressed.
Market in China, and then there are geopolitical concerns as well that market access has been a problem from Canada. So.
The export markets have been tough and we.
We expect them.
To detail.
Alright, that's all I had guys. Thanks.
Thanks, Paul.
Your next question comes from Mark Wilde of BMO. Please go ahead.
Just two quick follow ups first I'm, just curious down in Henderson that $2 55 number is that net.
Any kind of incentives that you may be picking up from either kind of local or state government.
I know sometimes in the.
With some of the new projects that have been announced in the industry. I think there are some fairly significant incentives that affect the capital cost.
So it might be on mute sorry go ahead, Chris.
Yes.
The local community has been very supportive of us there, but that $2 55 is the total capital cost.
Okay, Alright, and then ray.
Just one other one any progress on the trade issue is as markets get tougher because it really seems like it's been quite quiet over the last few years and I just wonder if the prospects of more challenging markets are bringing people back to the table at all.
It's a great question Mark.
I think.
I think the answer is simple, there's really nothing going to happen until we get through the.
The mid term elections.
So there really isn't anything going on today, but I would say historically you need to get beyond.
The mid term elections, and I guess, if there if there was an opportunity.
Whatever the factors are that might create a catalyst to have discussions might get my guess or opinion would be at some time.
Later next year.
Okay, Alright sounds good thanks Ray.
Yes, thanks Mark.
At this time there are no further questions on the phone lines. So I will turn the conference back to Mr. Ray Ferris for any closing remarks.
Well listen thank you Michelle and very much appreciate everybody's time, the calls as always Chris and myself, but really Chris and Robert.
It was our director of Investor Relations are available to follow up on other questions. Thank you for your participation and we look forward to talking in Q4. Thank you.
Ladies and gentlemen, this does conclude your conference call for today.
We'd like to thank everyone for their participation and you may now disconnect your lines.
Okay.
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