Q3 2023 West Fraser Timber Co Ltd Earnings Call
[music].
Good afternoon, ladies and gentlemen.
Welcome to the West Fraser Q3, 2023 results conference call. Please.
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During this conference call.
West Fraser's representatives will be making certain statements about <unk>.
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.
Certainties and assumptions, which may cause <unk> actual or future results and performance to be materially different from those expressed or implied in these statements.
Additional information about risk factors and assumptions is included both CD accompanying webcast presentation and in our 2023 annual MD&A and annual information form which can be accessed on west Fraser's website or through SEDAR, plus we're getting get investors on Edgar for United States.
Thank you Mr. Paris, you may begin your conference.
Well. Thank you operator and look good morning, and thank you for everyone joining our third quarter earnings call.
My name is Ray Ferris, President and Chief Executive Officer of West Fraser.
And joining me today is John Mclaren, our Chief operating Officer, who we previously announced will be assuming the role of President and CEO effective January the first 2024.
And Chris <unk>, our Chief Financial Officer.
As well as Matt Tobin, our VP of sales and marketing and several other members of our leadership team.
This quarter I am very pleased to inform you.
As John Mclaren and I and match are joining the call from our OSB mill and Shambolic, Quebec.
As I am sure you are aware, our west Fraser team has been particularly busy this past period with the recently announced divestitures of three of our pulp mills and the acquisition of a sawmill in wood treatment operation and associated force management agreements in Alberta.
All of these moves are aligned with our long term strategy to be a premier low cost sustainable and renewable wood building products.
Producer and key supplier to our customers.
Our team has been successfully processing and executing on these announced changes all the while navigating uncertain, sometimes conflicting difficult to predict demand fluctuations within the very product and geographic regions. We serve.
Before I hand, the call to Christopher I'll stick to discuss our third quarter financials further.
Like to reinforce how thankful and grateful we are for the team at West Fraser are continually adapting to meet the needs of our growing company.
In particular to our employees within our pulp team.
Of which no organization could ask for more.
The dedication and hard work of this is shared and appreciated by all of our nearly 11000 employees.
As we'll discuss on this call. Despite persistently buried in mixed demand markets, we posted strong improvement in EBITDA over the prior quarter.
And as we will talk further we will also have Shawn available to answer questions later on your call as.
As well, but for now let me hand, it back to Chris who will walk us through our Q3 financial results.
Thank you Ray and good morning, everyone.
Just as a reminder, we report in U S dollars and all the references today in our comments will be the U S dollars unless specified otherwise.
West Fraser generated $325 million of consolidated adjusted EBITDA in the third quarter, improving from the $80 million of adjusted EBITDA reported in the second quarter.
Our North American AWP segment generated $289 million of adjusted EBITDA up from $126 million in the prior quarter OSB strength carried over from the price strength carried over from the prior quarter.
Our lumber segment posted $44 million of adjusted EBITDA This quarter up from $10 million in the prior quarter with.
With this quarter negatively impacted by production curtailments for capital projects as well as extreme weather in parts of Florida and Georgia.
The majority of the sequential improvement this quarter was driven by a $62 million export duty recovery.
In the prior quarter, we benefited from favorable changes related to inventory value adjustments valuation adjustments.
While these adjustments were not a significant part of the Q3 results in lumber.
The net result was a $35 million negative impact relative to the second quarter on a sequential basis.
The pulp and paper segment improved but profitability remains challenging in the third quarter, posting negative $12 million of adjusted EBITDA versus negative $74 million in the prior quarter.
As a reminder, last quarter was marked by considerable disruption within the pulp segment with all four of our pulp mills taking downtime.
In Europe, adjusted EBITDA was $4 million in the third quarter as the demand weakness that had begun to unfold late in the second quarter persisted.
<unk> Q3 results were down from $19 million of adjusted EBITDA in the second quarter.
In summary price strength across our North American AWP business was the largest positive driver of the company's sequential EBITDA improvement.
Which more than offset demand challenges in our lumber pulp and EU segments.
Cash flow from operations was $355 million this quarter in cash net of debt increased to $663 million from $449 million last quarter.
This quarters cash flow more than covered $25 million of dividends paid and $115 million for capital expenditures.
We also repurchased $25 million of shares in the third quarter and a further $53 million between quarter end and October 24th.
In terms of our operational outlook for 2023, we are reiterating guidance for North American OSB in SPF lumber shipments, but reducing guidance for FY <unk> shipments as market demand for lumber in the U S. South has begun to cool and we therefore now expect <unk> shipments to be at the bottom end of the guidance range.
Of two 9% to $3 1 billion board feet.
Also given the weakening trend in European OSB demand, we now expect OSB shipments there to be near the low end of the guidance range of one to $1 2 billion board feet on a three percentage basis.
In terms of capital spending for 2023 based on equipment delivery schedules and spending levels to date, we now anticipate capital investment will be approximately $450 million down.
Down from last quarter's expectation that we would spend near the bottom end of our $500 million to $600 million guidance range.
Looking back over the last four quarters, which have undoubtedly been challenging for the wood products industry.
Our diversified portfolio of assets has generated consolidated EBITDA of $472 million, excluding the $62 million export duty recovery this quarter.
This trailing 12 months EBITDA would have been markedly higher on a pro forma basis after giving effect to the pending sale of the three pulp mills and the pending acquisition of spray Lake sawmills.
For comparison this latest level a trough like EBITDA is significantly higher than our financial results generated and similarly weak markets experienced in 2019.
Which reflects the success of the Norbert acquisition and integration as well as the other mill additions and capital improvements we have made to the west Fraser portfolio in recent years with.
With that overview I will now pass the call back to Ray.
Thank you Chris.
Before I kind of further reflect on our financial performance in the third quarter I will just spend a couple of moments addressing some of that corporate development initiatives we've undertaken.
Recently as Chris has mentioned, namely the sales of the pulp mills as well as the acquisition of the saw mill in Alberta.
In early July we announced the planned sale of our Hinton, Alberta pulp mill to a key strategic partner.
<unk> Group plc.
We addressed on our last earnings call. So I won't spend much time on that transaction other than to say that we now expect the transaction to close early in 2024.
Since the hidden announcement, we also announced the planned sale of our <unk> mills, namely the slave Lake pulp mill in Alberta, and the Cornell River pulp mill in British Columbia to Atlas Holdings for 120 million U S dollars.
Upon closing of this transaction, which is expected in early 2020 for these two mills are to be operated by Miller Western Forest products.
100 year old Canadian Forest products company that joined Atlas Holdings in 2017.
We believe this transaction will provide these great pulp mill assets and.
And teams with a strong strategic future.
Also allowing west Fraser to focus its resources on our objective of being a premier wood building products company.
This quarter, we also announced the planned $140 million Canadian.
Acquisition of spray Lake saw mills located in Cocker in Alberta.
This transaction includes not just a saw mill in wood treatment facility.
Which produces a very value added treated wood products as well as a variety of innovative wood residuals and other bio products byproducts.
This acquisition also comes with two forest management agreements with a total annual allowable cut of approximately 500000 cubic meters.
But the current expected transaction.
Close by year end this will enable west Fraser to grow its footprint in southern Alberta, and expand its Canadian treated wood business, while providing access to our high quality fiber supply.
Which is synergistic with our existing saw mill and treating facilities in sundry Alberta.
We believe over the long term.
These three transactions are a continuation of our ongoing strategy of always looking to improve our earnings quality through the cycle of the regions and products we serve.
Now shifting costs back to Q3.
This quarter, we continued to experience relatively soft demand, particularly in our lumber segment as consumers manage through a period of elevated mortgage and interest rates, which appear to be impacting affordability and overall consumption.
Market weakness was also evident in our European operations, where high inflation and mortgage rates are dampening housing and home improvement markets.
Contrast, these trends however, with our North American engineered wood panels business, where we experienced more solid demand through much of the quarter before showing signs of slowing towards the end of the quarter, particularly for our OSB products.
With respect to outlook.
We expect the wood building products industry will continue to face near term challenges from factors, including interest rates that may remain higher for longer ongoing labor constraints and the potential for muted product demand.
Primarily due to the housing affordability headwinds.
In recent quarters, we have seen inflationary cost pressures moderate across much of our supply chain.
Including for raw materials, such as energy resins, and chemicals and to some extent wood fiber.
And though difficult to predict we do expect some upward cost pressure in Q4, particularly for energy related inputs.
In terms of new home construction and repair and remodeling markets, while we do see demand risks in the near term. We continue to believe the North American housing market is structurally under belt. It has an aging housing stock.
Over the mid to longer term will should and will support.
Favorable demand potential for our building products.
In closing, while near term uncertainties exist across the industry and our business. We are confident in the geographic and product diversity, we have built.
And in our operating and growth strategies.
Our company has a long and successful track record of steadily and progressively evolving to meet the needs of our employees our communities and of course our shareholders.
Including more recently with the acquisitions of nor aboard the modern Angelina sawmill, the large scale Allendale OSB mill.
That is currently in startup.
Our recent now our balance sheet remains strong and well positioned for the future.
This team has been through economic and industry cycles before and we continue to believe we have the people the assets and financial flexibility to allow us to take advantage of opportunities.
<unk> challenges when they arise.
And although it is unclear when Michael market cycles will turn we will remain disciplined in our capital allocation strategy.
First thing in improving our assets through the cycle.
As we look ahead, we will continue to focus on being a low cost efficient supplier of renewable and sustainable with billing products, while we remain committed to our prudent capital allocation strategy.
And to the future. We're good fundamentals support growth in demand for the types of sustainable renewable wood products for which west Fraser is known.
Finally.
Okay.
Before I turn the call over for Q&A I thought I would mentioned a few things about the transition to Sean as president and CEO at year end.
Sean and I have worked very closely together for almost 20 years, both growing together with the company.
Sean originally joined with Wild with Canada based in Vancouver.
It has lived and worked across the company from Burns like British Columbia to Hinton, Alberta, both in pulp and lumber the sundry, Alberta to Rocky Mountain House, laminated veneer lumber to Cornell pulp and lumber operations, including.
Two different stance is one in Savannah, Georgia, Georgia and of course, the last number of years based in our Memphis office in Tennessee.
Shawn has been a key driver and a leader across multiple basis segments and regions, often moving seamlessly between finance and operations roles.
So fortunate to have such a strong knowledgeable natural people leader in our company, which will support a seamless inefficient trends position for all of US here at West Fraser and for me I'm very thankful for that.
With that I will turn the call back to the operator for questions.
Thank you ladies and gentlemen, we will now begin the question and answer session did you have a question. Please press the star followed by the one on your Touchtone phone.
Will you retreat on prompt acknowledging your request questions will be taken in the order received should you wish to cancel your request. Please press the star followed by the two.
If you're using a speaker phone please lift the handset before pressing any key.
Once again that is star one should you wish to ask a question.
And your first question is from Amit <unk> from CIBC. Please ask your question.
Hi, yes, good morning.
I saw the Henderson startup looks like it's pushed out to two quarters.
Can you speak to some of the other projects that you might have over the next couple of years I know you didn't.
<unk> Henderson, but I'm, assuming there's some other ones that are.
Our to follow and what sort of.
Scale, we could expect in terms of production growth.
Well good morning, Amir and good question.
Maybe get shine to tap in on the end of this one but before I do that.
I think at one.
One point I would want to make on Henderson as anymore and all of our capital. It is what I would call full steam ahead, the only thing that slows us down today is really supply chain issues.
And.
And look we.
So that's the only reason for the <unk>.
Delay and where.
We're pretty excited about.
Getting through and seeing that mill startup.
With respect to.
I'm not sure exactly what we'd given in guidance, what I would say is.
We're continuing to make progress on our end on.
Significant progress on our on our.
<unk>.
Our platform U S lumber platform, but we still do have a few more.
What I would call.
Excellent projects that we have in the queue.
I don't think we've given a lot of detail on that but I kind of look at these are ones that where we're going to be very excited to announce them and bring them forward when that time is right and and.
And looking forward to having those conversations so when we think about our future in the U S. South it's one where we see.
Much opportunity to improve what we have.
Both by lowering costs and by growing our footprint, but Sean anything you want to add to that.
I think that is.
Perfect Great I mean, we continue.
To have a number of projects merchandisers Cantor lines different things that are smaller in nature than our Henderson, but really.
Move or move our cost curve and our competitive position us. So so so number of those are in motion and very pleased with the progress on them.
Okay, great. Thanks, Thanks, Ryan.
And Sean.
The other question I had for you is with the pending sale of most of the pulp and paper assets do you expect future M&A to be focused on.
The remaining sort of lumber and OSB businesses or do you see some adjacent categories and.
In wood products.
That might interest the company to grow into either organically or via M&A.
Yeah.
Good morning Humira.
From an M&A perspective, I think you can look at what we've done over the last several years.
That make us stronger the bar is quite high for us in West Fraser in terms of if we look at a lot of things, but in terms of things that that.
That we know will fit into our existing footprint and make it make us make us immediately stronger we've got our biggest opportunity is modernizing what we have internally. So I think we'll continue on that path.
If it's synergistic to our existing business in wood products, we'd look at it and if it's a strong addition to the company we continue to discuss it internally so.
I would add onto that mirrors that built into the DNA of the company is I think every day, we sit down and talk about what we need to do.
And things that we may not have considered yesterday, we might be able to consider going forward is to continue as the company continues to change so I think it's.
It's an ongoing conversation and as the world changes on I'm sure we're going to continue to.
Look at all all things that are out there and figuring out where to take the company.
Okay fair enough. Thanks.
That's all I had ray are all best in a retirement. Thanks. Thanks. Thank you him here.
Thank you once again, please press star one should you wish to ask a question.
And your next question is from Sean Stewart from TD Securities. Please ask your question.
Thank you and good morning, everyone.
Couple of questions and Ray or Sean I wanted to just follow up on the Capex question.
With respect to supply chain lag and longer.
Lead times for equipment.
I would have expected that with weaker markets there might've been a little more.
Slack in that element.
Potentially some of your competitors slowing there.
The discretionary spending plans because markets are weak and is there any particular part of the supply chain particular pieces of equipment, where you're seeing these these lags intensify just any more detail you can give us on that front.
Well good morning, Sean and I will take a crack at it first here look I mean.
I think it.
We'll see what happens over the next few years here, but but but I would say there is.
There was so much stuff in the pipeline that I think as we look out.
You can see that things are improving and easing, but the things that were in the pipeline. We are still in the pipeline. So you know.
I think there are certain.
Certain segments and parts that where you can see equipment and things coming quicker than others, which quite frankly haven't changed at all yet, but they made down the road, but look the one thing that hasn't changed.
<unk> is access to people and.
The what I call the contractors and people that can actually build and.
Delta projects, So labor is still the primary constraint.
Assuming you've overcome your equipment equipment part so.
Good morning, John not a lot to add to that I really think the Henderson.
Some of the delays we have experienced have been due to the backlog and that is getting better.
So I think on future projects that might be some a bit faster, but but theres still a backlog both there.
Okay.
Thanks for the extra detail there.
A question on your European AWP business.
Weakest margins, you've seen there for for a while which I suppose isn't entirely surprising given the macro economic backdrop.
Can you give us a sense give.
Given that it's it less transparent market.
Ongoing pressure youre seeing into the fourth quarter and maybe early next year.
And it sounded like you're curtailing.
Your shipment guidance, a little bit for that business do you have a sense of any incremental downtime that's being taken elsewhere given.
Skinny margins for that business at this point.
We will shine look I.
No don't really have anything on respect to.
Other curtailments or.
Or what.
But I think you can look at the trends over the last year.
The.
I mean the economy.
<unk> certainly has continued to slow steadily throughout the last year.
And it remains weak at the moment I think our visibility.
Into next year is probably the same as yours and <unk>.
And.
No I think.
We're just really focused on what I would say is where.
We're really quite pleased with how.
Our operations.
Our performing over in Europe.
Really.
Operating to meet available customer demand. So you know what I would say in a very difficult.
Yes.
Demand in market I think we're pretty.
Pretty happy with the way, we're kind of so it gives us quite a bit of confidence that even that things slow down a little bit more that our team has figured out how to kind of.
Whether that storm if you will if that's the right way to put that but.
But I guess I guess, we'll see but I do think you know our outlook is.
It's.
Probably probably much more.
A little bit slower.
Going forward at least in the short term.
Okay Alright.
Alright, thanks, very much for the detail congrats.
<unk>, Jon and Ray.
The transition.
We look forward to seeing what comes of it going forward.
Yes.
Thank you Sharon Thank you John.
Yes.
Thank you. Your next question is from Keith and Ventura from BMO capital markets. Please ask your question.
Hello, Keith Your line is now open.
It seems that Peter has disconnected.
I will just take the next question.
It is from Paul Quinn from RBC capital markets. Please ask your question.
Yes, thanks, very much good morning, guys.
Just to start with the Allendale.
Sorry that mill up in June just what's the run rate at the end of Q3 or how do you how do you see that.
Mill progressing and what is it qualified to to sell.
Okay.
Well good morning, Paul and.
Yes, good morning call so.
Look at it.
We're quite pleased with the start up so far as you might.
I understand it's pretty early in.
<unk>.
It's pretty early in the ramp up curve, which I think we've said kind of two to three years.
I don't know if we've given what the actual guidance was for this year and so but I would say historically you look back and you look at the OSB ramp up curves, where we are.
Were very closer on plan with where we want to be happy with the start up so far actually in.
And but I think what we've said is.
It wouldnt be significant this year that I guess.
Don't mean to be flippant, but I guess, perhaps stay tuned to see how well that goes next year.
Okay, and then just noticing that you have got now almost $825 million on deposit.
So some of your competitors that there's.
Been some chatter on that file that suffered lumber.
What is your what is your take on.
On the current situation and how do we get to a resolution.
Well I would say it remains certainly.
Frustration for the industry and for West Fraser I think.
I mean, obviously, we're on both sides of the border.
We certainly do not agree.
With the with the duties and I think thats well documented.
Paul.
You will see chatter in the paper from time to time.
With the industry.
Im trying to work together to.
Develop.
Some thoughts about how to.
Overcome the impasse, but.
Can also say there is there really isn't anything going on other than.
People talking about what could be done or what might be done and should things improve but today the governments arent talking and Theres really no discussion between the U S and Canada.
But look we're.
We continue to want to see resolution to the duties.
And.
Look for those catalysts to try and do that for what for what.
Got it impact West Fraser has on those decisions.
Okay and just in the past you know that sort of the legal route whether were three NAFTA WTO Houston really serious burn on those discussions where we at in those two.
The legal path.
<unk>.
Quite.
I'm not quite involved and I can actually tell you that has evolved over I am confused about if I tried to describe the legal status of all the different things that were going on between CBD and antidumping I'm sure I would get it wrong.
And.
I mean, I think it's out there in the public domain and so I just don't want to try and trip something up I think you saw that.
A couple of recent announcements around.
Decisions being remanded back to the department of Commerce, but.
Then those immediately go on appeal and away. We go again, so I would say despite the fact that youll see and read things in the media and there is there are some decisions being made I don't think from a west raise your point of view, it's fundamentally changed.
Materially where were at is that where we are.
It Hasnt moved us closer to a resolution at this standpoint, so from our perspective.
It looks like this is this is a ways away before resolution.
Okay, and then just lastly, I mean I've been covering the company for 20 years and it seems you know when I first started west ratio at a pretty decent.
GAAP on competitors it seems to be eroded over time, and just wondering is that because the competitors.
Got a lot better or what do you attribute that that debt.
I mean, you used to have a little bit of blue sky between.
You and others.
Now it seems to be you're right there were neck and neck with it with the top ones what's the change.
Well.
Not sure I, 100% agree with that statement, Paul, but I will say I will say I don't think anyone has grown more.
Then west Fraser, we continue to operate in and our lumber side three distinct areas.
British Columbia, Alberta, and the U S South.
And these are the tale of three cities and and so.
<unk> I would say, we're very happy in some areas.
And not so happy and others and making the decisions.
Our portfolio and operating strategy to put ourselves in a position in the long term but.
And so.
Those that don't have to spend a lot of time in the more difficult areas.
You know.
That can be helpful, but I really do I think we not me, but we very much think we have the right.
Asset mix and are growing in the regions that we want to grow in and shrinking in the regions that we think we need to and so it's a long race I guess, we'll see where we get to.
Alright.
Congratulations on the retirement rate that's luck shock.
Thank you once again, ladies and gentlemen, please press star one should you wish to ask a question.
The next one is from Keaton Ventura from BMO capital markets. Please ask your question.
Okay, Let's try this again can you hear me.
And here at cadence.
Can you hear me okay.
We can hear you Kevin.
Okay, perfect sorry about that earlier, Hey, Chris maybe just start with can you give us some sense of how you are thinking about capex for 2024, it certainly sounds like that has some.
Carrying forward from 2023, particularly in this environment there is still quite a lot of uncertainty.
Perhaps maybe even at a high level and that would be helpful.
Sure.
So I think when we consider kind of what's happened the last couple of years as we've had fairly ambitious capital plans and we've been.
In particular over the last couple of years a bit frustrated by the delays that have happened from a supply chain standpoint, and have had spillover into the following year.
In that case in the last couple of years and it looks like 2023 to 2024 is not going to be any different.
In that front in terms of the philosophy that and how we're thinking about capex kind of relative to the market as we were quite careful through 'twenty, one and 'twenty two to preserve liquidity to make sure that our allocation strategy could be durable.
You know agnostic to market cycles, and so we've got some great opportunities to invest capital as Sean and Ray indicated that continues to take action in the portfolio, where it makes sense to improve the asset quality over time and frankly some of the best time to do that is in a week.
Market.
As the market will recover at some point in time, and we'd rather spend the capital now and make the improvements now and thats across everything it's not just about capacity. It's great. It's recovery its cost all of those all of those elements and to do that work now in a softer market. When there is room to do it from a from a supply demand standpoint.
And then when the market recovers, we are ready to meet our customers' demands and produce what they're looking for and the quantities. They are looking for it at that at that time. So.
I think with where we positioned the balance sheet. We don't we're not contemplating major cuts to capex here over the next 12 months and we do still have a lot of projects in flight that are are spilling over so.
I'd welcome Ray or Sean to kind of add to that if they've got other thoughts on that.
Yeah.
No nothing to add Chris.
Okay. So Chris.
Would it be then fair to say that granite 'twenty four capex should be actually similar if not higher is that directionally the right way to think about it.
Yes.
Release, our Capex guidance, when we put our year end financials out just as we put our shipment guidance for next year out at the at that same point in time.
And so that's when we'll be driving capex for the next year, but there is we started with a range of $5 to 600. This year and we're saying that there is probably 50 to 100, that's going to spill over into next year is carryover.
On top of maintenance and the other stuff that we wouldn't ordinarily do next year.
Got it.
That's fair.
Maybe shifting to.
Capital allocation, obviously balance sheet is in.
A very strong position you've got a lot of sitting on quite a bit of net cash.
No.
Can you talk about one sort of holiday M&A pipeline looking at this point have seller expectations moderated given what <unk> seen so far this year.
And then on the other side, how you think about sort of appetite for all kind of up in the largest share repurchases. Thank you.
I can start there and then if ray wants to jump in as well too.
On the M&A front theres been a number of active years I think.
Participants in the industry understand that theres cycles here and valley.
Valuations don't really sort of wildly adjust whether you're in a soft market.
Frothy market here, it's really about asset quality.
Which has been.
Particular importance to us in the last few years when you look at our strategy around how we've deployed capital so.
There is always stuff happening for us as Ray said earlier, we're going to be quite selective around the opportunities that we action because they need to be high quality opportunities and we believe we're positioned with the balance sheet that if those opportunities are there, we're well positioned to take take advantage of those those high quality opportunities.
On the share buybacks.
Lots of things that impact that decision process, including our view on the macro environment.
We're not going to commit to where and when and how many.
On a call like this but we can say when it's at a discount to intrinsic.
And the balance sheet is where we want it to be and when our other priority uses of cash are met we have that opportunity to return capital through the buybacks and our track record shows that we do that so.
I think that's about all that we would say on on share buybacks.
That's fair I appreciate the topline <unk>. Thank you.
Thank you once again, ladies and gentleman. Please press star one should you wish to ask a question.
There are no further questions at this time. Please proceed.
Well, thank you everyone and thank said and as always Chris.
Robert.
And I are available to respond.
Thank you for your participation.
Like you all look forward to turning into the.
Next quarter and hearing the update thank you Benno.
Thank you ladies and gentlemen, the conference has now ended thank you all for joining you may all disconnect.