Q1 2023 West Fraser Timber Co Ltd Earnings Call
Good morning, ladies and gentlemen, welcome to the West Fraser Q1, 'twenty 'twenty results conference call.
Please note that all lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time of your press Star then the number one on your telephone.
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Your question. Please press the star followed by two.
During this conference call Ms Fraser's representatives will be making certain statements about.
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 because.
Actual future results and performance to be materially different from those expressed or implied in these statements.
Information about.
These risk factors and assumptions.
Webcast presentation.
Our 2022 annual MD&A and annual information form, which can be accessed on west Fraser's website or interest.
Peter for Canadian investors and Ed sorry.
Investors. Thank you Mr. Chris <unk>.
You may begin your conference.
Thank you Julie good morning, everyone and thank you for joining our first quarter 2023 earnings call.
Christopher <unk>, Chief Financial Officer of West Fraser and joining me today are Ray Ferris, our president and CEO and Matt told but our vice president of sales and marketing and other members of the executive team.
I'll begin with a brief overview of West Fraser's Q1, 2023 financial results and then pass the call to Ray who will give an update on the business as well as provide a few concluding remarks before we transition the call to Q&A.
Our comments today will be brief as we recently provided a company update at last week's annual general meeting.
As a reminder, we report in U S dollars and all references today will be the U S dollar amounts unless otherwise indicated.
West Fraser generated $58 million of adjusted EBITDA in the first quarter.
This was largely comparable to the $70 million of adjusted EBITDA generated in the fourth quarter, which included a onetime $7 million benefit of carbon credits from our EU business.
As well as a $14 million insurance recovery from our North American engineered wood business.
Our North American AWP segment generated $31 million of adjusted EBITDA down from $109 million in the prior quarter.
This Q1 result included a $15 million inventory write down while the prior quarter had benefited from the $14 million insurance recovery just noted.
The lumber segment.
Zero adjusted EBITDA improving.
Improving from negative $77 million in the prior quarter.
Youll recall that prior quarter included a 39 million inventory write down recognized as lumber prices reached a near term low at the end of last year.
The pulp and paper segment generated $7 million of adjusted EBITDA in the first quarter versus $15 million in the prior quarter.
While in Europe , adjusted EBITDA was $20 million in the first quarter down from $30 million in the fourth quarter.
That has included a onetime $7 million benefit from the sale of carbon credits.
Price decreases were the largest driver of the sequential EBITDA declines across our lumber and North American AWP businesses.
Cash from operations was a use of $198 million for the quarter, though our cash position remained very healthy.
Cash net of debt decreased to $309 million in the first quarter from $625 million last quarter, as we paid $25 million of dividends spend nearly $100 million on capital expenditures and.
And invested seasonally more than $200 million and our working capital build.
In terms of our outlook for 2023, where we are reiterating our operational guidance for the year as detailed in our earnings release, including ranges for key product shipments and our planned capital expenditure.
Capital allocation is an important part of how we run our business every day at West Fraser.
Our capital allocation strategy is a durable three pronged approach, where we reinvest in the business maintained financial flexibility that allows us to pursue inorganic and organic growth strategic growth opportunities.
And return excess capital to shareholders.
This strategy has served us well over the years and frankly, we think it is balanced and prudent approach that has put us in a position of strength today, despite softer market conditions.
Let's dig into the specifics for a moment.
Since 2016 period that has seen both up and down cycles, we have generated more than eight $5 billion of cash from operations.
Nearly one third of that cash flow has been invested in the business through capital projects and acquisitive growth.
Approximately 10% has been allocated to repay debt and build a cash buffer.
And more than 50% or nearly $4 5 billion has been returned to shareholders through share buybacks and dividends.
Slide nine provides a snapshot of a few of our key balance sheet and liquidity metrics.
Further highlighting the success of our patient and balanced approach with capital.
Of note West Fraser is rated investment grade by three key ratings agencies. We also continue to have strong liquidity with combined cash and bank lines approaching $2 billion and our debt ratios remained well within the bounds of our lending covenants.
As we look ahead west Fraser remains committed to investing in the business and we have reiterated guidance of $500 million to $600 million of capital expenditures in 2023, including an estimated $100 million that we plan to spend on the saw mill modernization in Henderson, Texas.
With that overview I will now pass the call over to Ray.
Thanks, Chris.
As mentioned in Q1, 2023, we experienced soft demand.
Particularly in North America.
As the rapid increase in mortgage rates in 2022 continued to have an impact on overall consumption.
I will note that as the first quarter unfolded.
We did see many of our production costs come down and trajectory of our demand improve.
This demand improvement was particularly true for our U S South lumber and OSB segments, which allowed us to return to a more normalized operating environments linker.
When compared to the significant production downtime, we took in the fourth quarter.
In Western Canada, and specifically in BC, where we have an integrated operating strategy our business decisions can be more complex as we evaluate profitability in the aggregate across our lumber Paul.
Plywood panels segment.
While also trying to balance short term decisions with the long term considerations of preserving key aspects of our manufacturing fiber procurement and staff ecosystems.
As a result, our overall beauty business in the aggregate less profitable in the first quarter due to our advanced downstream integration.
As mentioned with MDF plywood pulp.
In terms of our more important longer term strategy, while the first quarter SPF production.
<unk> was flat to slightly up in Q4, the historic downward trend in our BC production has been.
From 2018 through 2022, our West Fraser BC lumber production declined by more than 40%, representing a reduction of nearly 1 billion board feet through that period.
Reflecting our continued.
Adjustments to.
Available economic.
Fiber and customer demand.
With ongoing government policies, such as oil growth deferrals species at risk and other potential further reductions due to policy.
We expect.
Annual allowable cuts to continue to be constrained.
We reiterate our optimism about our U S growth strategy for the long term aspects and prospects for our lumber business.
With respect to outlook.
The wood building products industry may continue to face challenges ranging from further rate hikes by central banks ongoing labor constraints and the potential for <unk> product demand due to the apparent constraints that consumer space with regard to housing affordability.
At least in the short term.
That said inflationary cost pressures have moderated across much of our supply chain for the raw materials, such as energy resins and chemicals.
And fiber and we believe this trend will continue through the remainder of 2023.
On the demand front, we are seeing some positive signs.
In the spring building season much to do with.
The public.
Homebuilder commentary that is in the marketplace and the upward trend in mortgage rates that we experienced much of last year at <unk> appears to be slowing or easing.
Both of these factors are helpful for driving new home construction and conception of our wood building product.
Business products.
In closing, while near term uncertainties exist across the industry and our business. We remain confident in the foundation we have built.
We have been through these cycles before and is not by accident that we have the talent.
And the financial flexibility to position us well to handle both the challenges and the opportunities that lie ahead.
We have been disciplined in our approach to capital allocation and preserved capital in the event that we have a down market like the one we're currently experiencing.
Is this discipline has positioned us to be able to execute on our strategy to invest in and improve our assets through all market conditions as well as be ready to take advantage of growth opportunities if and when they arise.
As we look ahead, we will continue to focus on our core strengths of being low cost.
Remained true to our capital allocation strategy, and we look forward to a future with a growth in demand for the types of sustainable renewable wood products for which west Fraser's note.
Yeah.
With that I'll turn the.
The call back to the operator, and we'll take Q&A. Thank you.
Thank you ladies and gentlemen, so do you have a question. Please press the star followed by the one on your Touchtone phone you should like to withdraw your question. Please press the star followed by the two one moment. Please for your first question.
Your first question comes from Keith <unk> from BMO. Please go ahead.
Thank you very much.
Last question.
I was hoping you can provide.
Some additional color around timing of Allendale restart I noticed that the release.
From last evening, so, let's say, it's at a potential restart are there any indicators that you are watching our we should be watching.
That could have an impact on.
Then make good stock up I know you've talked about potential at the end of Q2.
Well good morning, Keith.
Thanks for that so.
Yeah, our past guidance on that I think remains unchanged.
Sure.
We're quite pleased with the progress that the team has made there and we expect to start you know as we talked about and I think what we've said is.
Really at the end of Q2 early Q3 as kind of.
On that same same timeframe.
Understood. Okay. That's helpful and then.
Switching to capital allocation.
You guys renewed the NCI be late February .
<unk> was there any kind of blackout periods or anything else that I should be you know that we should be thinking about in terms of.
Why you had been repurchased shares.
Thanks for the question Keith.
Look I think as we as we think about it that program lasts.
For 12 months and what we're able to up.
Uptake in the program. This year is somewhat smaller in terms of share count than it's been historically, just because we've reduced the share count so much.
In the last couple of years and so.
We will look for those opportunities to step in when it makes sense for us.
We consider all kinds of things the macro backdrop.
Our liquidity how things are trading.
And so where.
We've been quite disciplined I think about how we execute that and CIB over the last couple of years and we'll continue to do so.
And the pace of those purchases.
It can ebb and flow during the year.
So really not that much time has passed since we renewed at the end of February . So I think that's about all we can we would say about that.
Got it that's helpful perspective question just final question before I turn it over.
'twenty 'twenty CE Capex, Chris can you talk a little bit about what flexibility you have.
But we the dial up or dial down.
Depending on market conditions, and let's say if in a back half with Dr turns out to be kind of software.
What flexibility do you have there thank you.
Chris and I are looking at each other deciding who's going to answer this one so.
And Chris can jump in here look I think we have tremendous flexibility to go up or down.
Based on our balance sheet and the capability of the company but.
So we are always and I think we've demonstrated in the past that we can dial that up or dial that down.
<unk> on an on.
And what we think is in the best best interest.
But.
Look.
At this point.
We're.
We're.
Full steam ahead and pushing to execute on all of our capital program.
We see these periods as the opportunity to get ourselves.
Good position.
To be ready for <unk>.
Turnaround so it's.
At this point.
Full steam ahead.
I think what we've said consistently over the last couple of years is as we've managed the the allocation of the capital in those outsized amounts of capital that were generated in the last couple of years is we're going to be patient and thoughtful about this because we know that these market conditions won't last forever and we don't want to be having to be some theyre facing in.
<unk> that we got because of market conditions, we got turned down high return capital.
Actually just as soon be doing some of that capital in weak markets and preparing for when when things turnaround, which they eventually well. So I think the spend this year is really a reflection of we got a lot of projects that we're quite excited to do and we preserve the balance sheet over the last two years. Despite all.
The share buybacks and the activity that we've done we've preserved the balance sheet and liquidity that we don't have to cut capex. We can continue to execute our strategy and good markets and in bad.
Got it got it that's very helpful.
Thanks, Chris I'll jump back in the queue. Good luck.
Your next question comes from Amir <unk> from CIBC capital markets. Please go ahead.
Good morning.
Right.
Wondering if you have any thoughts as to what's driving the large premium we're seeing for southern yellow pine two tests.
Well, yes.
Well good morning and.
Look I asked the same question I can give you I can give you what our best guess is our and.
And I think we'll be smarter as as the next quarter or unwind.
So look I think I think it's been a surprise to us to see this gap I suspect, it's a surprise to many.
And.
Our views are kind of this I think we'll look at.
Obviously, it's been.
It's.
You see a bit of a slowdown.
On on demand and so the first one.
That we look at is that when you look at the robustness of the <unk>, we really believe there's been a bit of product substitution because because of the supply chain, which is people aren't really interested taking risk on inventories and the supply chain from or at least from our view appears very lean and.
U S. <unk> is quite prompt and can get to the market very quickly.
Much more quickly or quicker than what we can ship it into the U S. So we think thats one aspect.
Uh huh.
Look I think it's also been a bit of a surprise to see.
European imports coming in to the level that they have.
I guess, we'll see how much legs that has I think.
Would expect they're surprised with that.
How low SPF is gone but.
So theres been a bit of an offset seeing European imports come in to the level that they have at least in the early in the air.
And then the third part.
The third part is.
I think there has been.
You see a lot of these announcements that come out of British Columbia.
And it's a significant volume both temporary and permanent that's been announced.
And for the stuff that probably wasn't announced.
And that's a big number, but but but the market doesn't see the impact of those.
Yes.
Curtailments.
Until really.
Now or in the next month or two.
And so that volume of wood has continued to flow, but as we get into the end of this well really over the next month or two we would expect to see that that supply constraint SPF kind of.
Please set of Canada hit the ground. So those are the three things that we look at it and we are starting to see that gap moderate.
Because it was I think it was around probably around 200, a onetime and it's certainly come off of that but I'd.
Thoughts would be is that it's a temporary dislocation and expect over time for that to correct.
Okay. Thanks, Thanks for that that's helpful.
Then kind of sticking with that would be see it.
Seems like Theres, a lot of pulp downtime.
Coming throughout Western Canada, just given that the decline in pulp prices do you think that's been a further way on costs for the BC industry I am just thinking epic sciences risks that chip prices fall materially here.
Well EMEA right.
NBC and I can only speak for us I mean, we've announced.
Our caribou curtailments, that's primarily.
As a result of.
Of.
Sure.
Not being able to find enough fiber quite frankly somewhat because of all.
All the sawmill curtailments that have occurred.
So I see I see.
Look there's obviously a cost impact depending on where people are sourcing fiber and how far are you willing to go to do that.
And I think we've made.
So we've made decisions around that but.
I think it's less about cost it's more about fiber availability at this point.
Great. Thanks, Brian just the last question I had on the on the OSB side, where we're seeing more idled capacity.
<unk>.
Being converted or plans to be converted to at to siding.
And in coming years, do you see any opportunities for west Fraser to participate in growth in that siding market.
Well first of all so I'd like to kind of just.
On the idled capacity I think we're pretty excited about our allendale facility and the position that we're in and our startup in and where we think we're going to be on the cost curve and in our in our strategy.
On other products.
Yeah.
I would say, we like our product strategy and.
And.
And but look we're always looking to find ways.
Growing our customer portfolio.
With respect deciding I can't comment on that.
There's companies out there that do a pretty good job at that and.
<unk>.
So, but we're pretty comfortable with where we are with our strategy to date on OSB.
Yes fair enough.
All I had I'll turn it over thanks.
Thanks Amir.
Your next question comes from Sean Stewart from TD Securities. Please go ahead.
Thanks, Good morning, everyone.
First question on on the balance sheet.
You touched on the ample liquidity position you have but you're churning through it through this with extended trough.
Just wondering ray or Chris if you can speak to your appetite for leverage on the balance sheet updated thoughts on that Brian .
And how potential M&A ambitions factor into to that outlook for the company.
Sure.
So I think what we've got to keep in mind about the first quarter Shawn is that that consumption of cash and liquidity in the first quarter is really around.
The working capital build in the log decks right, so probably $200 million of that.
Consumption was.
It was around.
Around the seasonal inventory build in that typically unwind.
The second and into the end of the third quarter. So probably some of that a good portion of it gets clawed back here over the next couple of quarters. So.
We're pretty comfortable with where we think liquidity is going to end.
At the end of the year, even in a fairly conservative conservative outlook for the market. So.
I don't I don't think.
The addition of leverage for US is a real pressing issue right now that we got to go out and secure leverage because of tightness of liquidity.
In respect of capacity.
What I would say is we're carrying the same debt level that we carried prior to our board at $500 million U S with a substantially larger company, that's more diversified across products and geography. So.
We operated at that 500 number and a much smaller and much different environment and so if the right opportunities.
<unk> out there for us to continue to.
To improve the company.
I am confident we'll find a way to finance those things the right way.
Yes, it was more I'm not worried about you guys getting any liquidity well.
Trying to gauge the scale of the M&A opportunity you might look at vis vis your current liquidity position, but that's okay.
To that.
One follow up question on Allendale.
As you think about the restart here in the coming months.
I appreciate it this is going to be an extended ramp but I.
I believe one of the issues with that asset historically in that part of the south is acute.
Acute labor constraints.
How things trended with respect to that variable and.
Youre comfortable that the staffing is there.
Need it for an extended ramp up for that that asset.
Well, Sean Thanks so.
I think we've got about 85 people on site something like that right now and it might be a little bit more than that that's going to actually better than we expected.
And I can only take my hat off to the team that's worked extremely hard in the last year to get it to that stage. So.
If you'd asked me a year ago I would have been cautious on my comment I think.
Sure.
We got a lot more confidence today than we did a year ago and so we're seeing that is.
As.
A much lower risk than we would have a year ago, but look.
It remains throughout North America, and particularly the U S South.
Skilled and unskilled labor is constrained in <unk>.
And you need to work hard to ensure that.
People want to come work for you and stay for the long term. So that remains a challenge at this point I wouldn't put allendale.
At a different risks and any one of our other U S south assets quite frankly.
Okay.
That's great context, thanks, that's all I have.
Your next question comes from Andrew Kuske from Credit Suisse. Please go ahead.
Thanks, Good morning, I guess, maybe a broad question, but it comes back to the balance sheet, you've got ample flexibility.
Despite the market environment, we're in right now.
And you've mentioned mass timber in the past is really being a driver of wood products demand.
What degree or what extent do you find that market just interesting fundamentally given the growth potential for Europe actually being involved in end market mass timber.
Well good morning.
Andrew So I'll just put it in context so.
West Fraser.
No.
With really the softwood lumber board.
For the last dozen years has played a major role and developing those markets in North America. So theres been millions of dollars, which we've been a big part of that going into creating that opportunity. So so so we're excited by my answer.
I think mass timber as one example.
The growing wood product demand because of that said sustainability and <unk>.
And ESG.
Qualities and characteristics. So thats, yes, I mean, thats why we talk about it.
Look at the growth of mass timber in the last few years and then it's exploding we're very supportive of that industry and we see ourselves as someone that wants to supply those.
<unk> manufacturing business.
Whether we do or we don't.
It's another it's another area of example of growing demand.
So.
Think that that's the context of what I would.
I would say is now now look I think depending on who you talk to how big will mass timber b.
Our eyes are still focused on on.
I think if it's wildly successful it's going to be somewhere.
And this is really comes from mass LTE or SBA or others, but youre looking at.
Somewhere between 3% and 10% of the overall market. So we will see is still historically stages.
We just think it's an example of wood products demand that didn't exist 10 years ago. When we started thinking about.
Where are the future constraints are going to be on supply and demand.
That's helpful. So maybe just for just a point of clarity so on the C. L T not saying no to that industry, but it's just sort of early right now it's stimulative for your core business, but it could be an interesting opportunity longer term should it become bigger.
I think Thats fair <unk>.
Okay I appreciate it that's it that's it for me.
Thank you.
Ladies and gentlemen, as a reminder, should you have a question. Please press star one.
Next question comes from Paul Quinn from RBC capital markets. Please go ahead.
Yes, thanks, very much good morning, guys.
<unk> good quarter, just wondering if European OSB prices have stabilized here, what's your expectation for the balance of the year.
Uh huh.
Well.
What I would say is that energy costs have come down.
No.
And so.
Help kind of offset a little bit around fiber.
And you know.
The market everywhere, including Europe , Europe is still choppy, but it's held up better than what we had expected Paul I think thats.
As far as yes.
Yes.
It's hard to me to forecast what this is going to look like over the next few quarters, but I would just say when we look backwards in the last couple it's held up better than we expected and I guess.
Well, we'll see what the balance of the year looks like but.
Yes, I think thats would be all I can say on that.
Okay, and then looking for a thorough update on softwood lumber I know the industry was trying to get.
That on the agenda when triggered sat down with bi.
Where are we at on that and where we add on the on there.
Just simple trade.
WTO and NAFTA processes as well.
So we'll look at that.
The WTO in and litigation and trade processes.
We need five experts to get into unpack that.
Just incredibly complicated but what.
What I would say is we are.
Disappointed that it really didn't.
Becoming something that our political leaders really wanted to take forward.
And so I will just leave that at that they're really there really isn't.
Much going on around.
So really it just continues to go along on the on really managing.
Through the administrative review process on an annual basis today, and so I mean, and you've seen the disclosure in our in our <unk>.
In our statements.
Describes it better than than I ever well, but but from a negotiation standpoint, there's not anything much going on that I'm aware of band.
And I don't.
Don't have a.
Our strong view that it will get resolved anytime in the near future.
Okay and then just lastly, just looking at the.
Your M&A opportunities here.
What do you see in the marketplace right now or are you guys getting more realistic.
On pricing given the drop in.
Overall commodity prices.
Thanks, Paul.
You know so.
<unk>.
If I just reflect on the last few periods I mean.
Look there continues to be opportunities out there to do things I think.
I think our view is.
We're going to focus on on.
On quality and on things that we think we can execute and achieve.
Al.
Meaningful synergies and kind of have an opportunity to be in that kind of those that first and second quartile type thing.
I would just say we continue to say no.
Sure.
Rather than yes, I would say.
I think it has been active and I'd say it remains to be active I think when it comes to value.
I think.
Everyone RSA many have the same view on the future that we do and that they are bullish and I would say expectations probably made in that so I guess, if they are stressed assets, that's something different but I think.
Most people are pretty good shape and have.
I can't speak for others, but I would say experience.
Experience would say people have a bullish outlook.
On the on the mid to longer term.
Alright, thanks, very much best of luck. Thank you Paul.
Presenters there are no further questions at this time. Please proceed with your closing remarks.
Well listen thanks, everyone for tuning in today, and we'll look forward to talking to you.
The end of Q2, thank you.
Ladies and gentlemen, this concludes your conference call for today, we thank you for joining and you may now disconnect your lines.
Okay.
Yes.
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