West Fraser Timber Co. Ltd. (WFG) Q1 2023 Earnings Name Transcript

West Fraser Timber Co. Ltd. (NYSE:WFG) Q1 2023 Outcomes Convention Name April 26, 2023 11:30 AM ET

Firm Contributors

Ray Ferris – President and Chief Govt Officer

Chris Virostek – Chief Monetary Officer

Matt Tobin – Vice President of Gross sales and Advertising

Convention Name Contributors

Ketan Mamtora – BMO

Hamir Patel – CIBC Capital Markets

Sean Steuart – TD Securities

Andrew Kuske – Credit score Suisse

Paul Quinn – RBC Capital Markets

Operator

Good morning, girls and gents. Welcome to West Fraser Q1 2023 Outcomes Convention Name. Please notice that each one strains have been positioned on mute to forestall any background noise. After the audio system’ remarks, there shall be a question-and-answer session. [Operator Instructions]

Throughout this convention name, West Fraser’s representatives shall be ensuring statements about West Fraser’s future monetary and operational efficiency, enterprise outlook and capital plans. These statements could represent forward-looking info or forward-looking statements throughout the which means of Canadian and United States securities legal guidelines.

Such statements contain sure dangers, uncertainties and assumptions as a result of Fraser’s precise future outcomes and efficiency to be materially totally different from these expressed or implied in these statements.

Extra details about these threat elements and assumptions is included each within the accompanying webcast presentation in our 2022 annual MD&A and annual info type, which will be accessed on West Fraser’s web site or by way of SEDAR for Canadian traders and EDGAR for United States traders.

Thanks. Mr. Chris Virostek chances are you’ll start your convention.

Chris Virostek

Thanks, Julie. Good morning, everybody, and thanks for becoming a member of our first quarter 2023 earnings name. I am Chris Virostek, Chief Monetary Officer of West Fraser. And becoming a member of me as we speak are Ray Ferris, our President and CEO; and Matt Tobin, our Vice President of Gross sales and Advertising; and different members of the chief crew.

I am going to start with a short overview of West Fraser’s Q1 2023 monetary outcomes, after which cross the decision to Ray who will give an replace on the enterprise in addition to present a couple of concluding remarks earlier than we transition the decision to Q&A.

Our feedback as we speak shall be temporary as we lately offered an organization replace finally week’s Annual Common Assembly. As a reminder, we report in U.S. {dollars} and all references as we speak would be the U.S. greenback quantities, except in any other case indicated.

West Fraser generated $58 million of adjusted EBITDA within the first quarter. This was largely similar to the $70 million of adjusted EBITDA generated within the fourth quarter, which included a one-time $7 million good thing about carbon credit from our EU enterprise in addition to a $14 million insurance coverage restoration from our North American engineered wooden enterprise.

Our North American EWP phase generated $31 million of adjusted EBITDA, down from $109 million within the prior quarter. This Q1 end result included a $15 million stock write-down, whereas the prior quarter had benefited from the $14 million insurance coverage restoration simply famous.

The lumber phase had zero adjusted EBITDA bettering from detrimental $77 million within the prior quarter. You recall that prior quarter included a $39 million stock write-down acknowledged as lumber costs reached a near-term low on the finish of final 12 months.

The Pulp & Paper phase generated $7 million of adjusted EBITDA within the first quarter versus $15 million within the prior quarter. Whereas in Europe, adjusted EBITDA was $20 million within the first quarter, down from $30 million within the fourth quarter. A interval that has included a onetime $7 million profit from the sale of carbon credit.

Value decreases have been the most important driver of the sequential EBITDA declines throughout our lumber and North American EWP companies.

Money from operations was a use of $198 million for the quarter, although our money place remained very wholesome. Money internet of debt, decreased to $309 million within the first quarter from $625 million final quarter as we paid $25 million of dividends, spent almost $100 million on capital expenditures and invested seasonally greater than $200 million in our working capital construct.

When it comes to our outlook for 2023, we’re reiterating our operational steerage for the 12 months, as detailed in our earnings launch, together with ranges for key product shipments and our deliberate capital expenditure.

Capital allocation is a vital a part of how we run our enterprise day by day at West Fraser. Our capital allocation technique is a sturdy three-pronged strategy the place we reinvest within the enterprise, preserve monetary flexibility that enables us to pursue inorganic and natural development — strategic development alternatives and return extra capital to shareholders.

This technique has served us properly through the years. And albeit, we predict it’s this balanced and prudent strategy that has put us able of power as we speak regardless of softer market circumstances. Sticking to the specifics for a second, since 2016, a interval that has seen each up and down cycles, we’ve generated greater than $8.5 billion of money from operations.

Practically 1/3 of that money move has been invested within the enterprise by way of capital initiatives and acquisitive development. Roughly 10% has been allotted to repay debt and construct a money buffer and greater than 50% or almost $4.5 billion has been returned to shareholders by way of share buybacks and dividends.

Slide 9 supplies a snapshot of some of our key stability sheet and liquidity metrics additional highlighting the success of our affected person and balanced strategy with capital. Notice, West Fraser has raised funding grade by three key scores businesses. We additionally proceed to have sturdy liquidity with mixed money and financial institution strains approaching $2 billion, and our debt ratios stay properly throughout the stability of our lending covenants.

As we glance forward, West Fraser stays dedicated to investing within the enterprise and we’ve reiterated steerage of $500 million to $600 million of capital expenditures in 2023, together with an estimated $100 million that we plan to spend on the sawmill modernization in Henderson, Texas.

With that overview, I’ll now cross the decision over to Ray.

Ray Ferris

Thanks, Chris. As talked about, in Q1 2023, we skilled gentle demand, notably in North America because the speedy improve in mortgage charges in 2022 continued to have an effect on total consumption.

I’ll notice that as the primary quarter unfolded, we did see lots of our manufacturing prices come down and the trajectory of our demand enhance. This demand enchancment was notably true for our U.S. South lumber and OSB segments, which allowed us to return to a extra normalized working environments when in comparison with the numerous manufacturing downtime we took within the fourth quarter.

In Western Canada, and particularly in BC, the place we’ve an built-in working technique, our enterprise choices will be extra advanced as we consider profitability within the mixture throughout our lumber, pulp, plywood, and panels phase, whereas additionally attempting to stability short-term choices with the long-term concerns of preserving key elements of our manufacturing, fiber procurement and employees ecosystems.

Consequently, our total BC enterprise within the mixture was worthwhile within the first quarter because of our downstream integration, as talked about with MDF, plywood and pulp.

When it comes to our extra vital longer-term technique, whereas the primary quarter SPF manufacturing was flat to barely up in This fall, the historic downward pattern in our BC manufacturing has been — from 2018 by way of 2022, our West Fraser BC lumber manufacturing declined by greater than 40%, representing a discount of almost 1 billion board toes by way of that interval, reflecting our continued adjustment to obtainable financial fiber and buyer demand.

With ongoing authorities insurance policies similar to previous development deferrals, species in danger and different potential additional reductions because of coverage, we count on annual in a position cuts to proceed to be constrained. We reiterate our optimism about our U.S. development technique for the long-term elements and prospects for our lumber enterprise.

With respect to outlook, the wooden constructing merchandise trade could proceed to face challenges starting from additional charge hikes by central banks, ongoing labor constraints and the potential for muted product demand as a result of obvious constraints that buyers face with regard to housing affordability, at the least within the brief time period.

That mentioned, inflationary value pressures have moderated throughout a lot of our provide chain, however the uncooked supplies similar to power, resins, chemical compounds and fiber, and we imagine this pattern will proceed by way of the rest of 2023.

On the demand entrance, we’re seeing some optimistic indicators within the spring constructing season, a lot to do with the general public homebuilder commentary that’s within the market and the upward pattern in mortgage charges that we skilled a lot of final 12 months seems to be slowing or easing. Each of those elements are useful for driving new mortgage development and conception of our wooden constructing product enterprise — merchandise.

In closing, whereas near-term uncertainties exist throughout the trade and our enterprise, we stay assured within the basis we’ve constructed. We’ve got been by way of these cycles earlier than and isn’t accidentally that we’ve the expertise belongings and the monetary flexibility to place us properly to deal with each the challenges and the alternatives that lie forward. We’ve got been disciplined in our strategy to capital allocation and a preserved capital within the occasion that we’ve a down market just like the one we’re presently experiencing.

As this self-discipline has positioned us to have the ability to execute on our technique to take a position and enhance our belongings by way of all market circumstances in addition to be able to make the most of development alternatives, if and after they come up. As we glance forward, we are going to proceed to give attention to our core strengths of being low value, stay true to our capital allocation technique and we look ahead to a future with a development in demand for the forms of sustainable renewable wooden merchandise for which West Fraser is thought.

With that, I am going to flip the decision again to the operator, and we’ll take Q&A. Thanks.

Query-and-Reply Session

Operator

[Operator Instructions] Your first query comes from Ketan Mamtora from BMO. Please go forward.

Ketan Mamtora

First query, I hoped you possibly can present some further shade round timing of Allendale restart. I seen that the discharge from final night nonetheless says that it is a potential restart. Are there any indicators that you’re watching or we ought to be watching that might have an effect on when the mill would begin up? I do know you’ve got talked about potential on the finish of kind of Q2?

Ray Ferris

Ketan, thanks for that. So, sure, our previous steerage on that, I feel, stays unchanged. We’re fairly happy with the progress that the crew has made there. And we count on to begin as we talked about. And I feel what we have mentioned is absolutely on the finish of Q2, early Q3 is sort of — we’re nonetheless on that very same time-frame.

Ketan Mamtora

Understood. Okay. No, that is useful. After which switching to capital allocation, you guys renewed the NCIB late February, however have not repurchased any shares since then. Was there any sort of blackout intervals or the rest that we ought to be interested by by way of why you did not repurchase shares?

Chris Virostek

Thanks for the query, Ketan. Look, I feel as we give it some thought, that program lasts for 12 months. And what we’re in a position to uptake in this system this 12 months is considerably smaller by way of share rely than it has been traditionally simply because we lowered the share rely a lot within the final couple of years. And so, we’ll search for these alternatives to step in when it is sensible for us.

We take into account every kind of issues, the macro backdrop, our liquidity, how issues are buying and selling. And so, we have been fairly disciplined, I take into consideration how we execute that NCIB during the last couple of years and can proceed to take action and the tempo of these purchases can ebb and move in the course of the 12 months. The renewal was the top of February. So, actually not that a lot time has handed since we renewed it on the finish of February. So, I feel that is about all we are able to — we’d say about that.

Ketan Mamtora

Bought it. No, that is useful perspective. Chris, only a remaining query earlier than I turned over. The 2023 CapEx, Chris, are you able to discuss just a little bit about what flexibility it’s important to both dial up or dial down relying on market circumstances? And as an example, if again half of the 12 months seems to be sort of softer, what flexibility do you’ve there?

Ray Ferris

So Chris and I are taking a look at one another, deciding who’s going to reply this one. So — and Chris can bounce in right here. Look, I feel we’ve great flexibility to go up or down based mostly on our stability sheet and the potential of the Firm.

However — so we at all times — and I feel we have demonstrated previously that we are able to dial that up or dial that down, based mostly on what we predict is in the most effective curiosity of everybody. However look, at this level, we’re full steam forward and pushing to execute on all of our capital program.

We see these intervals as the chance to get ourselves in good place to be prepared for a turnaround. So, it is — at this level, it is full steam forward.

Chris Virostek

Sure, I feel what we have mentioned persistently during the last couple of years, as we have managed the allocation of the capital and people outsized quantities of capital that have been generated within the final couple of years is we will be affected person and considerate about this as a result of we all know that these market circumstances will not final without end.

And we do not wish to be having to be and so they’re dealing with a choice that we bought to — due to market circumstances, we bought to show down high-return capital. We would really simply quickly be doing a few of that capital in weak markets and getting ready for when issues flip round, which they finally will.

So, I feel the spend this 12 months can be a reflection of — we bought a whole lot of initiatives that we’re fairly excited to do, and we protect the stability sheet during the last two years regardless of all of the share buybacks and the exercise that we have completed. We have preserved the stability sheet and liquidity that we do not have to chop CapEx. We will proceed to execute our technique in good markets and in unhealthy.

Operator

Your subsequent query comes from Hamir Patel from CIBC Capital Markets. Please go forward.

Hamir Patel

Ray, I used to be questioning when you have any ideas as to what’s driving the big premium we’re seeing for Southern Yellow Pine to SPF?

Ray Ferris

Nicely, Hamir, and look, I ask the identical query. I can provide you what our greatest guesses are. And I feel we’ll be smarter as the subsequent quarter unwind. And so look, I feel it has been a shock to us, to see this hole. I believe it is a shock to many. And our views are sort of this. I feel, look, clearly, it has been — it is — we see a little bit of a slowdown on demand.

And so, the primary one which we take a look at is that once you take a look at the robustness of the SYP, we actually imagine there’s been a little bit of product substitution due to the provision chain, which is folks aren’t actually serious about taking threat on inventories. The provision chain from our — at the least from our view, seems very lean and that SYP is kind of immediate and might get to the market in a short time, far more faster than what we are able to ship it into the U.S. And we predict that is one side.

Look, I feel it is also been a little bit of a shock to see European imports coming into the extent that they’ve. I suppose we’ll see how a lot legs that has. I feel I might count on that the shock with the — how low SPF has gone. However — so there’s been a little bit of an offset seeing European imports are available to the extent that they’ve, at the least within the early within the 12 months.

After which the third half is, I feel there’s been — you see a whole lot of these bulletins that come out of British Columbia. And it is a important quantity, each non permanent and everlasting that is been introduced and for the stuff that most likely wasn’t introduced, and that is an enormous quantity.

However the market does not see the influence of these curtailments till actually now or within the subsequent month or two. And in order that quantity of wooden has continued to move. However as we get into the top of this — properly, actually over the subsequent month or two, we count on to see that provide constraint in SPF sort of at the least out of Canada hit the bottom.

So, these are the three issues that we take a look at. Now we’re beginning to see that hole reasonable as a result of it was — I feel it was round — most likely round 200 at one time and definitely come off to that. However I feel our ideas could be that it is a non permanent dislocation, and count on over time for that to appropriate.

Hamir Patel

Okay. That is useful. After which sort of sticking with BC, it looks like there’s a whole lot of pulp downtime coming all through Western Canada, simply given the decline in pulp costs. Do you suppose that is going to additional weigh on prices for the BC trade? I am simply considering if there’s threat that chip costs fall materially right here?

Ray Ferris

Nicely, Hamir, I feel in BC, and I can solely communicate for us. I imply, we have introduced our Caribou curtailments. That is primarily on account of not with the ability to discover sufficient fiber, fairly frankly, considerably due to all of the sawmill curtailments which have occurred. So, I see — look, there’s clearly a price influence relying on the place persons are sourcing fiber and the way far are you prepared to go to do this. And I feel we have made — clearly, we have made choices round that. However I feel it is much less about value, it is extra about fiber availability at this level.

Hamir Patel

Nice. And simply the final query I had on the OSB aspect, we’re seeing extra idle capability being transformed or deliberate to be transformed to siding in coming years. Do you see any alternatives for West Fraser to take part in development in that siding market?

Ray Ferris

Nicely, to begin with, so I might prefer to sort of simply — on the idle capability, I feel we’re fairly enthusiastic about our Allendale facility and the place that we’re in and our startup and the place we predict we will be on the fee curve and our technique. On different merchandise, I might say we like our product technique, and — however look, we’re at all times seeking to discover methods of rising our buyer portfolio.

So with respect to siding, I am unable to touch upon that. I imply, there’s firms on the market that do a fairly good job at that. And — so — however we’re fairly snug with the place we’re with our technique to date on OSB.

Operator

Your subsequent query comes from Sean Steuart from TD Securities. Please go forward.

Sean Steuart

First query on the stability sheet. You touched on the ample liquidity place you’ve, however you might be churning by way of it by way of this prolonged trough. Simply questioning, Ray or Chris, when you can communicate to your urge for food for leverage on the stability sheet, up to date ideas on that entrance, and the way potential M&A ambitions issue into that outlook for the Firm?

Chris Virostek

Certain. So, I feel what we have got to remember in regards to the first quarter, Sean, is that, that consumption of money and liquidity within the first quarter is absolutely across the working capital construct and the log decks, proper? So most likely $200 million of that consumption was round that seasonal stock construct and that usually unwinds within the second and into the third quarter.

So, most likely a few of that, a superb portion of it will get clawed again right here over the subsequent couple of quarters. So we’re fairly snug with the place we predict liquidity goes to finish on the finish of the 12 months even in a reasonably conservative outlook for the market. So I do not suppose the addition of leverage for us is an actual urgent difficulty proper now that we bought to exit and safe leverage due to tightness of liquidity.

In respect of capability, what I might say is we’re carrying the identical debt degree that we carried previous to Norbord at $500 million with a considerably bigger firm that is extra diversified throughout merchandise and geography. So, we operated at that $500 million quantity in a a lot smaller and far totally different atmosphere. And so, if the correct alternatives are on the market for us to proceed to enhance the Firm, I am assured we’ll discover a technique to finance these issues the correct means.

Sean Steuart

Sure. I used to be extra — I am not fearful about you guys hitting any liquidity properly however attempting to gauge the size of the M&A chance you may take a look at vis-à-vis your present liquidity place, however I feel I’ve a way of that. One follow-up query on Allendale. As you consider the restart right here within the coming months, and I respect that is going to be an prolonged ramp. However I imagine one of many points with that asset traditionally and that a part of the siding is acute labor constraints. How have issues trended with respect to that variable and also you’re snug that the staffing is there as wanted for an prolonged ramp-up for that asset?

Ray Ferris

Nicely, Sean, thanks. So, I feel we have got about 85 folks on website, one thing like that proper now, and it is likely to be just a little bit extra in that. That is going really higher than we anticipated. And I can solely take my hat off to the crew that is labored extraordinarily arduous within the final 12 months to get it to that stage.

So, when you’d requested me a 12 months in the past, I might have been cautious on my remark. I feel we’re — we bought much more confidence as we speak than we did a 12 months in the past and so, we’re seeing that as a a lot decrease threat than we’d have a 12 months in the past. However look, it stays all through North America, and notably the U.S. South.

Expert and unskilled labor is constrained and it’s worthwhile to work arduous to make sure that folks wish to come give you the results you want and keep for the long run. So that continues to be a problem. And at this level, I would not put Allendale at a distinct threat than any one among our different U.S. South belongings, fairly frankly.

Operator

Your subsequent query comes from Andrew Kuske from Credit score Suisse. Please go forward.

Andrew Kuske

I suppose possibly a broad query, nevertheless it comes again to the stability sheet. You have bought ample flexibility regardless of the market atmosphere we’re in proper now. And you have talked about mass timber previously as actually being a driver of wooden merchandise demand. To what diploma or what extent do you discover that market simply fascinating essentially given the expansion potential for you really being concerned in finish market mass timber?

Ray Ferris

Nicely, Andrew. And so I am going to simply put it in context. So West Fraser with actually the softwood lumber board for the final dozen years has performed a significant function in creating these markets in North America. So, there’s been tens of millions of {dollars}, which we have been an enormous a part of that going into creating that chance.

So, we’re excited by — and I feel mass timber is one instance of the rising wooden product demand due to the sustainability and ESG qualities and traits. In order that’s it. I imply, that is why we discuss it. You take a look at the expansion of mass timber in the previous few years, and it is exploding.

We’re very supportive of that trade. And we see ourselves as somebody that wishes to provide these — the CLT manufacturing enterprise. And whether or not we do or we do not, it is one other space of instance of rising demand. So I feel that is the context of what I might say is now, look, I feel relying on who you discuss to, how huge will mass timber be? Our eyes are nonetheless targeted on — I feel if it is wildly profitable, it will be someplace and this actually comes from SLB or FDA or others.

However you are taking a look at someplace between 3% and 10% of the general market. So we’ll see. It is nonetheless early levels, however we simply suppose it is an instance of wooden merchandise demand that did not exist 10 years in the past once we began interested by the place the longer term constraints are going to be on provide and demand.

Andrew Kuske

That is useful. So possibly only for an extra level of readability. So on the CLT, not saying not of that trade, nevertheless it’s simply kind of early proper now, it is stimulative in your core enterprise, nevertheless it may very well be an fascinating alternative long term, ought to it turn into larger?

Ray Ferris

I feel that is truthful, Andrew. Certain.

Operator

[Operator Instructions] Your subsequent query comes from Paul Quinn from RBC Capital Markets. Please go forward.

Paul Quinn

Difficult quarter. Simply questioning if European OSB costs have stabilized right here? Or what is the expectation for the stability of the 12 months?

Ray Ferris

Nicely, what I might say is that power prices have come down. And in order that’s helped sort of offset just a little bit round fiber. And the market all over the place, together with Europe continues to be uneven, nevertheless it’s held up higher than what we had anticipated, Paul. I feel that is — so far as — so it is arduous to me to forecast what that is going to appear to be over the subsequent few quarters. However I might simply say, once we look backwards within the final couple, it is held up higher than we anticipated. And I suppose we’ll see what the stability of the 12 months seems like. However sure, I feel that may be all I can say on that.

Paul Quinn

Okay. After which I am in search of a kind of replace on softwood lumber. I do know the trade was attempting to get that on the agenda when true to set down with Biden. The place are we at on that and the place we’re on the, is it commerce WTO NAFTA processes as properly?

Ray Ferris

So look, the WTO and litigation and commerce processes, I imply we’d like 5 consultants to get in and unpack that. It is simply extremely difficult. However what I might say is we’re disillusioned that it actually did not turn into one thing that our political leaders actually wish to take ahead. And so, I am going to simply go away that at that.

There actually is not very a lot happening round — so actually simply persevering with to go alongside on the — actually managing by way of the executive evaluate course of on an annual foundation as we speak, and so I imply — and you’ve got seen the disclosure in our statements. That describes it higher than I ever will, however from a negotiation standpoint, there’s not something a lot happening that I’m conscious of. And I haven’t got sturdy view that it’ll get resolved anytime within the close to future.

Paul Quinn

Okay. After which simply lastly, simply trying on the — your M&A alternatives right here. What do you see within the market proper now? Or are you guys getting extra practical on pricing given the drop in total commodity costs?

Ray Ferris

Sure. Thanks, Paul. So if I simply replicate on the previous few intervals, I imply, look, there continues to be alternatives on the market to do issues. I feel our view is we will give attention to high quality and on issues that we predict we are able to execute and obtain significant synergies and sort of have a chance to be in that sort of these first and second quartile sort of issues. So, I might simply say we proceed to say no loads quite than sure.

So, I might say I feel it has been energetic, and I might say it stays to be energetic. I feel in relation to worth, look, I feel everybody or say many have the identical view on the longer term that we do and that they are bullish. And I might say expectations most likely stay that — so I suppose in the event that they’re confused belongings, that is one thing totally different, however I feel most individuals are in fairly fine condition and have — I am unable to communicate for others, however I might say expertise would say folks have a bullish outlook on the mid- to long term.

Operator

Presenters, there aren’t any additional questions at the moment. Please proceed together with your closing remarks.

Ray Ferris

Nicely, pay attention, thanks, everybody, for tuning in as we speak, and we look ahead to speaking to you on the finish of Q2.

Thanks.

Operator

Girls and gents, this concludes your convention name for as we speak. We thanks for becoming a member of, and chances are you’ll now disconnect your strains.