Q1 2025 West Fraser Timber Co Ltd Earnings Call
Speaker Change: Good morning ladies and gentlemen and welcome to the West Fraser Q1 2025 Results Conference call. At this time all lines are in a listen only mode. Following the presentation we will conduct a question and answer session. If at any time during this call you require immediate assistance, these press star zero for the operator.
This call is being recorded on Wednesday, April 23rd, 2025 25
Speaker Change: 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.
Speaker Change: These statements may constitute fordlooking information or fordlooking statements within the meaning of the Canadian and United States securities laws.
Speaker Change: Such statements involve certain risks and uncertainties and assumptions which may cause West Fraser's, actual or future results and performance to be materially different from those expressed are implied in these statements.
Speaker Change: Access on West Fraser's website or through Cedar Plus for Canadian investors and Edgar for United States investors. I would now like to turn the conference over to Sean McLaren, President and Chief Executive Officer. Please go ahead.
Sean McLaren: Thank you, Joel. Good morning everyone and thank you for joining our first quarter 2025 earnings call.
Sean McLaren: I am Sean McLaren, President and CEO of West Fraser, and joining me today in our Quinnell office on the day of our annual general meeting, our Chris Virostek, Senior Vice President and Chief Financial Officer, Matt Tobin, Senior Vice President of Sales and Marketing, and other members of our leadership team.
Sean McLaren: On the earnings call this morning, I will begin with a brief overview of West Fraser's Q1 2025 financial results and then pass a call to Chris for additional comments before I share some thoughts on our look and offer concluding remarks.
Sean McLaren: West Fraser generated $195 million of adjusted EBITDA in the first quarter of 2025, representing a 13% margin, and a meaningful improvement over last quarter.
Sean McLaren: A particular note, our lumber segment had its best result in more than two years on the back of better SPF demand and pricing.
Sean McLaren: New home construction continued to show signs of stabilization, with annualized US housing starts averaging nearly 1.4 million units in the first quarter, as elevated mortgage and interest rates continue to challenge housing demand.
Sean McLaren: Summary, Repair and Remodeling Demand is also relatively stable, though remains somewhat subdued.
Sean McLaren: Complicating matters we are now dealing with the uncertainty of tariffs and their potential inflationary effects that have the potential to affect future demand for our wooden building products. We'll continue to watch these developments closely.
Sean McLaren: Over the trailing 12 months, we generated $668 million of adjusted EBITDA, representing an 11% margin, a meaningful improvement from the $561 million reported during the most recent trough year of 2023.
Sean McLaren: This level of trailing EBITDA will still well below our view of mid-cycle economics is largely sufficient to cover our capital allocation priorities, including key capital expenditures are quarterly dividend and opportunistic share repurchases.
Sean McLaren: In terms of our balance sheet, we had nearly $1.5 billion of available liquidity exiting Q1 and a healthy cast position, even net of debt.
Sean McLaren: A strong balance sheet and liquidity profile, along with our investment grade rating, remain key elements of our cap of allocation strategy that allows us to invest in our business countercyclically and take advantage of growth opportunities if and when they arise.
Chris Virostek: With that overview, I'll now turn the call to Chris for additional detail and comments.
Chris Virostek: Thank you, Sean, and a reminder that we report in U.S. dollars in all my references are to U.S. dollar amounts unless otherwise indicated.
Chris Virostek: The lumber segment posted adjusted EBITDA of $66 million in the first quarter compared to $21 million and adjusted EBITDA in the fourth quarter.
Chris Virostek: This improvement is mainly explained by higher product pricing and higher SPF shipments volumes offset in part by lower SYP shipments volumes that were impacted by whether related transportation disruptions in the US South.
Chris Virostek: The pulp and paper segment generated 7 million adjusted EBITDA in the first quarter compared to a $10 million adjusted EBITDA loss in the fourth quarter. This has been impacted by a major maintenance downtime and then had care of fault.
Chris Virostek: Our European business realized negative two million adjusted EBITDA on the first quarter versus positive two million in the fourth quarter with the slight decrease driven mainly by pricing.
Chris Virostek: In terms of our overall results, higher product prices for our lumber business and lower costs for lumber in North American OSB, where the largest contributing factors to the sequential EBITDA improvement in Q1 versus Q4.
Chris Virostek: We continue to see the financial benefits of the portfolio optimization initiatives that we've undertaken and that allows us to shift select production to our lower cost operations.
Chris Virostek: Cashflow from Operations was negative 75 million for the first quarter with our cash balance at 390 million down from 641 million last quarter.
Chris Virostek: The relative decrease in our cash balance reflects increased earnings in Q1, being more than offset by the seasonal build of working capital from winter logging operations, 104 million of capital expenditures, and approximately 72 million of cash deployed towards share
Chris Virostek: In terms of our guidance for 2025, both our lumber and North American OSB segments have experienced a slower than expected start to the year, owing primarily to transportation and weather-related challenges that temporarily disrupted shipments.
Chris Virostek: Well, we expect to catch up on these delayed shipments. We are conservatively reducing the top end of our 2025 Shipments Guidance Rages for SPF, SIP and OSB.
Chris Virostek: As the US administration's tariffs and other trade policies evolve, including the Section 232 investigation into US lumber imports, we will revisit the impact of the tariffs on our operations and consider whether any further revisions to our 2025 guidance forecast are required.
Chris Virostek: Regarding software lumber duties on April 4th, 2025, the U.S. Department of Commerce released preliminary CBD results for AR-6 based on the year 2023.
Chris Virostek: Our preliminary CVD rate for AR6 is 16.57%, combined with our preliminary ADD rate for AR6 of 9.48%. Our preliminary combined rate for AR6 is 26.05%.
Chris Virostek: which is in fact the lowest preliminary rate in the Canadian industry.
Chris Virostek: Final rates are expected to be released in the second half of this year.
Sean McLaren: With that financial overview, I'll pass the call back to Sean.
Thank you, Chris.
Sean McLaren: Looking forward, we see considerable macroeconomic uncertainty, particularly stemming from the US administration's evolving care of policies.
Sean McLaren: However, we want our employees and shareholders to recognize that despite many unknowns, West Fraser is well positioned to navigate challenging business environments like those we face today.
Sean McLaren: Our focus on low cost, combined with a broad mix of product segments and a wide geographic operating footprint, has been built to help provide us with a strong foundation that supports resilience.
Sean McLaren: Such financial resilience is no more evident than what we see in our quarterly segmented results as shown on slide 9.
Sean McLaren: Our lumber segment improved dramatically in Q1, posting the segment's best result in two-and-a-half years and making a significant positive contribution to overall profitability.
Sean McLaren: As we have said many times since the Norboard acquisition in 2021, while OSB and Lumber share many in-use markets, their demand drivers are not perfectly correlated and their supply fundamentals are materially different.
Sean McLaren: shifting briefly to tariffs. At this time we are unable to provide much in the way of commentary related to the potential impacts on our business from tariffs or the section 232 investigation that is currently underway. We will continue to monitor the situation closely and prepare to respond as needed.
Sean McLaren: As we noted last quarter, we are being proactive and preparing by remaining policy current and maintaining close communications with our provincial and federal governments.
Sean McLaren: actively scenario planning in our business to prepare for a range of outcomes.
Sean McLaren: Preparing our business operations and updating our operational plans so that they can be quickly aligned to various scenarios.
Sean McLaren: And lastly, preparing and engaging our employees, our community and our customers for what may lie ahead.
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in closing.
Speaker Change: At West Fraser, we aim to deliver strong financial results through the business cycle. We achieve this by leveraging our product and geographic diversity, low cost assets, and the dedication of our people and culture that is rooted in cost discipline and a commitment to operate responsibly and sustainably. And this fundamental strategy will not change even in a world with significant policy uncertainty.
Speaker Change: Although our near-term outlook is admittedly cloudy, given the broad implications of a potential global trade war, we remain optimistic about the longer-term prospects for our industry and for West Fraser, and we look forward to continuing to build one of the world's leading building products companies.
Speaker Change: Thank you, and with that, we'll turn the call back to the operator for questions [inaudible]
Speaker Change: Thank you ladies and gentlemen. We will now begin the question and answer session. If you have a question, please press star followed by the one on your touchtone phone. You will hear prompt that your hand has been raised.
Speaker Change: Should you wish to decline from the polling process, please press star followed by the two. If you are using a speaker phone, please lift the hands up before pressing any keys.
One moment, please for your first question.
Speaker Change: Your first question comes from Ketan Mamtora with BMO Capital Markets. Your line is now open.
Good morning and thanks for taking my question.
Speaker Change: You know, perhaps you start with, in your prepared remarks, you talked about, you know, a slow start of the year, but that was even mainly by kind of better transportation challenges. I'm curious as we, you know, we moved through April , we're getting into the busiest time of the year.
Speaker Change: What kind of demand trends you are seeing both in lumber, which has got more repair remodeling and OSP, which has got more new residential exposure? Can you provide us some sort of, you know, some color, some context in terms of our demand trends today?
Matt Tobin: Good morning, Ketan. I'm going to turn that question to Matt Tobin.
Matt Tobin: Good morning. I'd say, you know, lots of uncertainty over the quarter. So, you know, I think the customer purchasing and the commentary has been...
Matt Tobin: somewhat subdued, somewhat cautious, I would say, and normal demand drivers, and not seeing any significant changes from what we have in the last couple of course.
Understood. So is it fair? How would you sort of? [inaudible]
Speaker Change: In terms of expectations, you know, as you guys kind of plan for the year, I used to sort of looking at kind of flatish kind of a year in terms of volume and we just keep the terrified, you know, that it's point the fight at this point or is there any change in view there?
Speaker Change: You know, I'll make a comment and Mack and Phil and what I miss here, you know, I think Keaton, you know, it was a slow start for weather kind of on both sides of the border and transportation issues, saying that our inventory still remain in reasonable shape. And we expect, you know, barring, you know, kind of noise around tariffs, which are really difficult to protect. [inaudible]
Speaker Change: kind of volumes, kind of normalizing going forward. We dropped the top end of our guidance but still expect to fall within that.
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Speaker Change: Got it. Okay. And then, you know, switching to Nepal location, obviously, you know, balance sheet is still in a very good shape after a very difficult 2024 and in lumber.
Speaker Change: How's the MMA pipeline looking and if you see kind of more interesting values today and you know versus kind of you know, Sherry Purchases, I know you all did Purchases, you want, can you talk about those two options that you all have in front of you know.
Speaker Change: B2 options and then sort of within M&A kind of how you are thinking about sort of lumber versus OSP.
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Speaker Change: Yeah, maybe I'll touch on growth opportunities and then turn it over to Chris, so and I know we may be commented on this, you know, the last number of corners, you know, the bar.
Speaker Change: You know, of quality that's going to compete all the way through [inaudible]
Speaker Change: and so, you know, I would say, from my perspective, that's the backdrop, so there probably is opportunity but...
Speaker Change: Very few that fit that and you can look at our history with
You know, with Alan Dale, with Angelina, with Spray Lakes.
Speaker Change: You know, all those acquisitions either immediately made us stronger or had a very clear path to making us stronger and if those present themselves.
Speaker Change: Fairly well, Cycle Agnostic, and when we look at the last couple years, what we've been able to do, we've been able to buy back shares, we've paid down debt, we've raised the dividend, we did the spray legs acquisition, we've invested in our business.
Speaker Change: I think we've done all those things that generate returns for shareholders and make the company stronger over the long term. So I think the great thing is that we don't find ourselves in a position that options are removed from us.
Speaker Change: You know we have the full suite of things in front of us that we can do and the things that add the most value are the ones that we're going to choose and we're going to prioritize and that we think over the long term is the strategy that creates real value and we're not pivoting strategies. Let's see if we can do this.
Speaker Change: You know, cycle dependent on whether the market is robust or the market is weak and we're building a company for the long term.
Speaker Change: You know, on the M&A front, I think, you know, Sean covered it well. Qualities really important. I think, you know, the other thing to consider right now, too, is with the macro backdrop and the uncertainty that exists relative to tariffs.
Speaker Change: It's a pretty difficult time to price assets when you have this to kind of uncertainty overhanging things. So, it makes that situation a bit more challenging to figure out how you price things over the longer term.
Speaker Change: Thank you. That's very helpful. I'll come back in the queue.
Speaker Change: Your next question comes from Sean Steuart with TD Cowan. Your line is now open.
Speaker Change: Thanks, good morning everyone. A couple questions. Sean, I know you mentioned Reluctance to talk about the section 232 investigation, but I guess if you have any perspective on timing for resolution there, I think it's a November deadline, but it sounds like things are progressing quickly.
Speaker Change: and if your lawyers have any perspective on OSB potentially getting wrapped up in this investigation in addition to lumber, any perspective there.
Speaker Change: We probably hear some of the same commentary, but really nothing to add to what you may have heard. You know, and the only other thing I would touch on in my comments.
Speaker Change: is that, you know, I think, and of course, we have a-
Speaker Change: You know, a long history dealing with lumber duties and reacting our, you know, our kind of business, our operations and operational plans accordingly. And I think we're, and we also have a long history on, in OSB of, of flexing our production relative to demand. And I think all those, that's really where we're focused, whatever comes down.
in the next number of months here.
Okay, and that, and that, Sean is, I guess.
Speaker Change: adding any incremental production to the south of it, at the expense of Canadian production at the margin to
to mitigate any incremental impact.
Speaker Change: Yeah, and I think, you know, you look at our platform and we're split evenly on our major products between the two countries, you can see where our investments have been, you know, as we, you know, strengthened and positioned our assets in the US, and we have a good Canadian platform that we think competes well in Canada. So I think all of those things put us in, give us, give us lots of options to navigate through whatever comes. [inaudible]
Speaker Change: Thanks for that. And the question on the CAPEX guidance, which you've reiterated here, I guess with inflation risks.
Back on the radar here.
Speaker Change: I would assume all your discretionary projects this year are sort of locked in with respect to cost maybe confirm if that's the case and if inflation is an issue over the mid term you have perspective on how discretionary capex returns.
Speaker Change: Mike Tren in the 2026 and beyond, is that a concern for the company?
Speaker Change: Yeah, no, good question. So yeah, so a large part of our guidance for this year is finishing up Henderson. We're in the final stage of that product. The teams in place, we're getting ready, ready for that start up this summer.
Speaker Change: At the time we make those commitments given what the pricing will be of that equipment and so even though we haven't seen material changes in those in that pricing, if we do those products are still going to need to be able to stand on their own given that additional cost.
Understood. That's all I have for now. Thanks very much.
Thanks, Sean.
Speaker Change: Your next question comes from Amir Patel with CIBC Capital Markets. Your line is now open.
Amir Patel: Hi, good morning. Sean, we've seen at least one OSB project in the industry's stall due to tariff related cost escalation. Do you expect the tariff uncertainty to slow some of the other OSB projects that are underway?
Amir Patel: really, really tough for me to speak to that. Hamir I can only speak to how we look at it in West Fraser, you know, and what I would say is our two most recent projects, Alondale and Shabbord.
Amir Patel: are up, they're running, they're progressing well, and any kind of future projects, major projects we look at and know will be taking the cost of that equipment and any inflationary changes into account before we make those decisions.
Speaker Change: Okay, thanks. Thanks, Sean. That's helpful. I'm just a question from Matt. I'm curious if you're seeing signs of more builders substituting SPF with Southern Yellow Pine. And if you're noticing any maybe differences there between builders across regions or public private builders.
Speaker Change: Well, what we see over the quarters has been normal purchasing from our customers and, you know, I think we're, it's something we're monitoring over time for that substitution but to date we haven't seen any significant shifts.
Speaker Change: Okay, fair enough, that's all I had, I'll turn it over. Thanks
Thanks, Samir.
Speaker Change: Ladies and gentlemen, as a reminder, should you have a question, please press star one. Your next question comes from Matthew McKellar with RBC Capital Markets. Your line is now open.
Matthew Mckellar: Hi, good morning. Thanks for taking my questions. You talked about the man for your products. He's an R&R remaining somewhat subdued in Q1. Can you maybe just expand on that comment talking about how the man is trying so far just in the first few weeks of Q2 and how that progression demand into the spring would maybe compare to what you see in a typical year.
Matthew Mckellar: Sure, I'd say we don't have a great view into R&R, so while an imperfect view, we think our best lens is really into R&R is our treaty customers, and so we've seen that demand subdued the last several quarters, and I would say we haven't seen a meaningful shift in that demand to date.
Matthew Mckellar: So, you know, I think with the age of housing stock, we believe there's lots of long-term demand for R&R, but it's remains subdued the last several quarters and we haven't seen significant shift to start this quarter.
Speaker Change: Okay, thanks for that. And last for me, you talked a bit about log shortages in your STF business in the quarter. Could you give us a sense of how those log inventories look today as we kind of sit here in mid-22?
Speaker Change: Yeah, I would say generally, I mean, the weather was warm here in Western Canada, so particular in parts of our BC operations, log deliveries were less than we were expecting, saying that I think it'll be similar to Q1, you know, we kind of have balanced out managing that inventory disruption between Q1 and Q2, so not material in the whole scheme.
of Things, but an impact in SPF.
Great, thanks very much. I'll turn it back.
Thanks, Matthew.
Sean McLaren: There are no further questions that this time I will not turn the call over to Sean for closing remarks.
Sean: Thank you, Joel. As always, Chris and I are available to respond to further questions as is Robert Winslow, our Director of Investor Relations and Corporate Development. Thank you for your participation today. Stay well, and we look forward to reporting on our progress next quarter.
Speaker Change: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.