Q4 2022 West Fraser Timber Co Ltd Earnings Call

Good morning, ladies and gentlemen, and welcome to the West Fraser Q4, 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.

Instructions will be provided at that time for you to queue up for a question.

If anyone has any difficulties hearing the conference. Please press star zero for operator assistance at any time.

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 would like to remind everyone that this call is being.

Recorded today Wednesday, the 15th of February 2023.

I'd now like to turn the conference over to Ray Ferris, President and Chief Executive Officer. Please go ahead Mr. Ferris.

Thank you Michelle.

Good morning.

Thank you everyone for joining our fourth quarter 2022 earnings call.

Joining me today are Chris <unk>, our senior Vice President Chief Financial Officer, Chris Mckeever, Our senior Vice President marketing and corporate development.

And Matt Tobin.

Vice president of sales and marketing and several other members of our executive team.

Im going to begin with a brief overview of west Fraser's fourth quarter and full year 2022 financial results and then I'll pass the call over to Christopher <unk> for some additional comments.

West Fraser generated $70 million of adjusted EBITDA in the fourth quarter of 2022, as we experienced weakening demand across several key products, particularly in North America.

We're rising interest rates are rising mortgage mortgage rates impacted near term housing affordability.

This weakness was particularly evident in our lumber segment.

And was partially offset by positive EBITDA contributions from our engineered wood products and our pulp business.

Overall, however, 2022 was a strong year performance for West Fraser as we generated $20 86.

Diluted earnings per share and over $3 2 billion of adjusted EBITDA, representing a 33% margin.

In the fourth quarter, we invested nearly $150 million back into the business through capital expenditures, we repurchased $117 million of shares and returned $25 million to shareholders through dividends for.

For the full year, we repurchased nearly $2 billion of shares through our normal course issuer bids a substantial issuer bid and now the company has now repurchased approximately $39 7 million common shares since early 2021.

Representing about 73% of the shares issued with the Norbert acquisition.

We have been disciplined in our approach to capital allocation and preserved capital in the event that we have.

Down market.

Like the one we are currently experiencing.

It is this discipline has positioned us to be able to execute on our strategy and invest and improve our assets through all market conditions.

As we look ahead, our balance sheet remains strong and continues to offer significant financial flexibility, which is a key priority of our capital allocation strategy with that short overview I'll turn the call over to Chris for some additional detail.

Thanks, Ray and good morning, everyone and thanks for joining 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 $109 million of adjusted EBITDA down from $215 million in the prior quarter.

This result benefited from a $14 million insurance recovery that partially offset repair costs and lost margins charged to earnings in previous quarters stemming from unscheduled downtime at one of our OSB Mills.

Lumber segment posted negative $77 million of adjusted EBITDA declining from $160 million in the third quarter a period that included an $81 million recovery of export duties associated with <unk> III.

Note that these fourth quarter lumber segment results include a 39 million inventory write down which we recognized as lumber prices reached a near term low at the end of the year.

Also of note in the absence of these Q4 inventory write downs, our BC business in the aggregate was profitable in the quarter due to our downstream integration and MDF plywood and Paul.

The pulp and paper segment generated $15 million of adjusted EBITDA in the fourth quarter versus $29 million in the prior quarter, while in Europe , adjusted EBITDA rose to $30 million in the fourth quarter from $24 million in the third quarter.

Price declines were the largest driver for the sequential EBITDA declines across our north American lumber and engineered wood products businesses.

We generated $147 million in cash from operations for the quarter. So our cash balance net of debt, while still at a very healthy level decreased modestly quarter over quarter from $625 million from $789 million as we allocated a $142 million to share repurchases.

And dividend payments and spent $149 million on capital expenditures in the quarter.

In terms of our outlook for 2023, we are providing initial operational guidance for the year as detailed in our earnings release and on slide six including ranges for key product shipments and our planned capital expenditures with.

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

Thanks, Chris.

Although two difficult are difficult to predict we believe that in the near term, we expect that the business will continue to experience challenges ranging from the.

The risk of resurgence in the inflationary cost pressures.

Ongoing and continued labor constraints and the potential for dampened product demand following two overhang of about half spillover getting of housing affordability.

The housing and building products industries.

Inflationary cost pressures have been moderating across much of our supply chain for raw materials, such as energy resins and chemicals and we expect this trend to continue throughout 2023.

On the demand front.

There may be early indications that demand conditions are improving as the cadence and magnitude of mortgage rate increases has eased somewhat.

This is particularly relevant for the use of our products in new home construction.

With respect to market fundamentals I would like to share with you slide seven.

Which highlights the challenges that the north American lumber industry has faced and continues to face in terms of supply.

We have now been through a period in which four of the last six years have experienced strong lumber demand and pricing.

Yes, the growth in North American lumber supply has been effectively zero.

We often speak about the many constraints that the lumber industry faces when it comes to adding capacity.

And the first and foremost of these as fiber availability.

As this slide indicates while the U S sales remains a critical area of supply growth within North America, and a key region for West Fraser's growth strategy shrinking fiber baskets in other regions.

Most notably British Columbia have offset USF growth in recent years in our view these fiber supply challenges will persist for the foreseeable future and as such we remain optimistic about our U S growth strategy with respect to the long term prospects for our lumber business.

Nonetheless, we remain very attuned to the potential risks that west Fraser paces and will continually.

And diligently manage our operations accordingly to meet available customer demand.

With our geographic and product diverse operations.

Executing on our core strategy to be low cost.

To reinvest in our operations and to continue to prior tours prioritize financial discipline, which we believe will allow us to be well positioned to capitalize on the more favorable supply and demand fundamentals, we expect to see for our products over the medium and longer term.

Importantly, our team has a proven track record of managing through market cycles, and we will continue to focus.

On being a low cost producer of with building products.

With another fiscal year behind us I would like to provide an update on our track record on.

On return of capital employed.

Moving to slide eight.

Our strong performance in 2022 underpinned by adjusted EBITDA and operating earnings of $3, two 1 billion and $2 $5 6 billion, respectively drove a rocchi of 28% for the year.

Notably, including 2022, the company's Rocchi has now exceeded 15% and six of the last seven years and has averaged more than 25% since 2016.

Attractive returns like these are a reflection of our continued attention to managing costs and expanding margins through product mix improvements and as well as our product and geographic diversification.

We believe these strong returns and performance are underpinned by the continued gains we have made in our environmental social and governance efforts in 2022.

Such as committing to the greenhouse gas emissions reduction targets to the science based targets initiative, which demonstrates our commitment to sustainability leadership and contribution to global climate action.

I am pleased to see that much of the work of our team has done to improve these attributes and disclosures is now being more broadly recognized externally.

Slide nine highlights several of the organizations that provide ESG ratings of.

West Fraser.

And in many cases, we are not only scoring well, but showing improving trends.

Although we have more work to do we believe this will continue to be an improving and very good story to tell as we move forward.

On slide 10.

The combination of supportive industry fundamentals and our execution and performance are reflected in the attractive returns generated for west Fraser to shareholders over a number of cycles as you can see.

With a total annualized return in excess of 12% since 2006.

Which includes share price appreciation and reinvested dividends, we are proud of what the west Fraser team has been able to accomplish.

In closing while demand markets were challenging in the fourth quarter and there are near term uncertainties across our business. We remain confident in the foundation, we have built and our strong momentum.

And as I alluded to earlier.

Yes.

We've been through industry cycles, before and believe we have the talent assets of financial flexibility.

To handle both the challenges and opportunities ahead, whether they'd be in the near medium or long term.

We remain optimistic about the continued growth in demand for the types of sustainable and renewable wood products at West Fraser manufacturers and for which the Companys notes.

Finally.

I want to share.

That my friend and colleague Chris Mckeever.

West Fraser Senior Vice President marketing and corporate development.

He will be retiring at the end of March.

Chris has had a long and distinguished career with the company spanning more than 32 years during which he has made significant contributions to west Fraser.

Chris you will be missed.

We look forward to hearing.

And congratulate you and hearing about your.

Adventures as you move forward.

With that we'll turn the call back to the operator for questions.

Thank you Sir.

Ladies and gentlemen, we will now begin the question and answer session.

If you would 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 from the queue. Please press star followed by the number too.

You are using a speaker phone please lift the handset before entering any piece.

Your first question will come from Ken Montara of BMO capital markets. Please go ahead.

Thank you and good morning.

I was just curious how you are thinking about timing of the restart of the Allendale OSB mill.

The release talked about sort of potential restart in Q2.

So if you can just help us understand you know.

Would that still depend on where demand is our IL planning to go ahead with the restart in Q2. Thank you.

Well good morning.

Katana.

Thanks for the question.

Yeah.

Our purchase of that asset and our our reinvestment strategy.

As.

As a long term.

Consideration and so.

Our restart that we expect in I think at the end of Q2 2023.

Really has only been pushed out by supply chain issues, we're quite we're quite pleased with how the.

The team has performed and how healthy capital and.

And.

Preparing for a restart has gone on so.

We remain committed to that long term investment strategy.

And look.

As we think about how we run our business. It will always be above 10, finding a way to make sure that we meet available customer demand.

In.

Sure.

In the best way possible, but I think it's important to note that allendale, we see.

As an important part of that of that portfolio mix that.

As we wrap that up over the next two years or three years.

We see it as.

Being one of our best positioned and lowest cost assets that will have and so we remain committed to that at this time.

Got it.

That's helpful.

And can.

Can you provide a little more adults knockoff perspective in terms of what you are seeing.

With current demand it seems like most homebuilders are pointing to a better than expected stock through January I'm, not asking for specific January numbers, but in terms of what youre hearing from your customers as we start bringing 23.

Yeah.

We've got Chris Mckee, who are on the line Mr. Mckeever would you like to take a shot at that.

Sure. Thanks Ray.

Morning, Ken.

Uh huh.

I think what we're hearing is very similar to what you are hearing firstly, our R&R business, both on panels and lumber is stronger than we probably thought it was going to be right now.

Held up very well and we're beginning to hear that the builders are.

Or actually seeing things better than what they expected.

Our takeaway on the lumber side in panels.

We see customers keeping their inventories pretty lean and they'll come in and buy and then they'll back away a bit. So I think it's very early to make any sort of forecast as to what's going to happen in the balance of the year, but I would say demand is better than we expected at this time.

Okay. Now that's helpful perspective, Thank you I'll jump back in the queue.

Okay.

Your next question comes from Amir Patel of CIBC capital markets. Please go ahead.

Hi, Good morning, I, just wanted to follow up on that the question about the demand.

Mr Mckeever.

Respect to that R&R channel.

Do you expect demand there to be up this year or.

Are you building in a decline because we've seen a wide range of forecasts for R&R activity for 'twenty three.

Hi, good morning, I'm here.

You know I think that's a pretty difficult question for US you know.

We really don't.

Put out forecast as far as.

As what where we think the markets are going to go what I would say that.

It's holding up better than we expected and and and.

They continue to tell us that they expect business to continue much along what we've seen in January so.

Beyond that I really don't know so.

Okay fair enough. Thank you for that.

I would just add a comment there Mary I think thats very true I think.

I think everyone is visibility is about the same I think it's so early in the year.

To get a sense of where interest rates are going to go and whether.

Whether it's a recession shallow deeper I think we're all kind of.

I think that'll be the primary driver of.

Short term demand for building products.

Yeah.

Can be addressed and see how it plays out.

Yeah, No that's fair enough and Ray we've seen some of your peers announce some permanent mill closures in UBC for both lumber and pulp.

How much more lumber and pulp capacity do you think needs to come out of the province and.

<unk>.

How do you think west Fraser fits into that.

Well thanks Amir.

I have no idea what others will do.

I think over the last number of years.

We've continually.

<unk>.

Shaped and position our assets to the available timber supply we will continue to do that.

And.

Much of this depends on on policy decisions that continue to.

The impact of those policy decisions, sometimes is still yet unknown what impact that will have on going forward.

And as those decisions, we will adjust our capacity is necessary whether thats.

Up or down and.

And I kind of leave it at that.

Yes.

It's really a provincial decision on how much fiber they want to make available to the industry.

Right Okay. Thanks.

Thanks, Ray and just the last question I had was on on mass timber.

I know the company always gives us slide there about the long term.

Potential there and I noticed the sort of 2035 demand.

Our base case there.

Been reduced from I think it was about 5 billion last quarter to just over $1 billion.

This quarter. So can you speak to maybe what made you reset your expectations there.

Yeah.

Great question here.

Post to know the answer but I don't think I did so.

We we Britain.

It's probably a NASA LDR softwood lumber board data, but what I would say is.

What I would say is we're big fans of the mass timber market, we've been big supporters of helping develop that market.

Through participation in industry associations like the softwood lumber board and others, we think.

And I think youre seeing that.

We see that.

Continuing to grow in certain segments of the building sector.

And whether.

Whether it's 2 billion or $5 billion I don't know, but I do think it's another indication.

More around the growing.

The growing demand for wood products I think.

Just those sustainable environmental carbon capturing attributes of wood products I think mass timber is just one example.

People are familiar with it but.

Yes.

That's helpful.

Im not sure exactly what the final number will be.

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

Your next question will come from Sean Stewart at TD Securities. Please go ahead.

Thanks, Good morning, guys.

A couple of in the weeds questions.

The carbon allowance.

Gain on sales in Europe , you had this quarter can you give us some context on that item and.

Any element of recurring gains going forward related to that.

Hi, Sean.

Thanks for that.

I would say probably not be thinking about that as a as a recurring item here confluence of events over the last couple of years in terms of energy consumption and energy pricing.

In the markets there.

Enabled us to generate a bit of a bit of a windfall on that.

In 2022, but I wouldn't suggest it should be.

It should be baking that into kind of long term run rates in terms of.

Earnings potential for us or the generation of those credits over the longer term.

Okay. Thanks for that Chris.

And with respect to the Caribou curtailments, you guys outlined a few weeks ago.

Any context, you can give us on the expected earnings impact in 2023.

Not at this time.

Okay.

Okay.

The rest of my questions have been answered thanks, very much guys.

Ladies and gentlemen, as a reminder, if you would like to ask a question. Please press star one at this time.

Your next question will come from Paul Quinn at RBC capital markets. Please go ahead.

Yeah. Thanks, good morning, guys.

So mckeever an a on the hot seat here just because these are fading off and in a sense that but Chris maybe you can sort of describe what youre seeing in terms of M&A opportunities for West Fraser is that is that increased with the drop in lumber prices or is it sort of status quo.

Yeah.

Yeah.

Good morning, Paul.

Yeah.

Firstly, we don't really answer any questions around M&A, but.

But what I would say is that you know we're always in the market looking at opportunities in.

In North America, and in Europe , and other spots and.

I would say that.

It's sort of business as usual.

As we sort of go along but there is nothing.

Nothing nothing specific.

And you guys have you guys noticed any anymore.

Equipment available in the industry. It's guys that are looking to build either some mills are OSB mill to be backed away given the given the difficult conditions pretzel.

I can take that one Paul and good thing good morning.

Generally I would say I would say.

We're seeing some signs of.

Supply chain getting better.

But it's more it's more looking down the road then then right in front of us today. So.

With respect to equipment availability.

In in.

Specifically to say capital that's still remains challenged again as you look out say in there.

Number of months from now it looks like its improving but in the short term it's.

It's still it's still quite constrained.

And I don't have any visibility too.

What others may or may not have data around orders, but for our process business as usual, we're moving ahead with.

With everything that we have planned and <unk>.

Trying to move up what we can and adjusting to.

Whatever the cost rate might be on a particular item.

Alright, and then just lastly, you've got on slide seven third your expectation in the 2023 outlook on fiber costs.

Near term log costs expected to moderate in the U S.

Just wondering.

Can you quantify moderation is that a 5% 10% drop in.

Does that change the outlook for the.

The closer it period.

So so generally I would say in.

In North America.

Most of our regions, we have seen some moderation in fiber cost.

And.

And including the U S South.

And including the area around Perry, but look we made that decision.

Not as a.

And all.

With with a view to the next year. The next six months to year sort of thing so.

I can't give it to you in a percent because.

A because.

There is not done.

And so things can change and it varies widely between regions quite frankly very region specific and two.

To a great extent, the Perry decision was very regional.

Specific.

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

Paul Thanks, Paul.

At this time there are no further questions. So I will turn the conference back to Mr. Ray Ferris for any closing remarks.

Well look thanks, everyone for taking the time on your schedule to join us on our call and.

We'll look forward to talking to you next quarter. Thank you.

Thank you operator.

Ladies and gentlemen, this does conclude your conference call for this morning, we would like to thank you all for participating and ask you to please disconnect your lines.

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