West Fraser Timber Co. Ltd Common stock

Good morning. My name is Sylvie and I will be your conference operator today. At this time, I would like to welcome everyone to the Joint West Fraser Q1 2021 Results Conference Call. During this conference call, West Fraser's representatives will be making certain statements about potential future development. These forward-looking statements include certain statements about West Fraser's future financial and operational performance including the impact of foreign exchange rates, credit ratings, and mill maintenance shutdowns. Wes Frazier's business outlook, including forecasted U.S. housing starts, market conditions, demand for products and available supply, and expectations concerning costs. Wes Frazier's capital plans, including the completion and ramp-up of capital projects and the benefits of such projects. the softwood lumber dispute, including adjustments to duty rates and related proceedings, the integration of Norbord into the West Fraser business and expected synergies, and the redemption of the Norbord 2023 notes. These statements include forward-looking statements within the meaning of Canadian and United States securities laws, and are intended to provide reasonable guidance to investors. The accuracy of these statements depend on a number of assumptions and is subject to various risks and uncertainties that may cause future events to differ materially from the events implied by these statements. Actual outcomes will depend on a number of factors that could affect the ability of the company to execute its business plans including those matters described under risks and uncertainties in the company's annual management discussion and analysis as supplemented by other risks and uncertainties as set out in the company's quarterly MD&As. These filings can be accessed on Wes Frazier's website or through CDAR for Canadian investors and EDGAR for United States investors. Accordingly, listeners should exercise caution and relying upon forward-looking statements. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. And if you would like to withdraw your question, please press star and the number two. Thank you. Mr. Ferris, you may now begin your conference.

Well, thank you, Sylvie, very much for that introduction. Well, good morning, everyone, and welcome to our first quarter 2021 conference call. I'm joined today by Chris Verostick, our Chief Financial Officer, Chris McKeever, our Senior VP of Marketing and Corporate Development, and several other members of our executive team. I will make a few opening remarks, and then I'll pass the call to Chris Verostick for a review of our West Fraser's first quarter results. and then make some concluding comments, and then we'll, of course, take your questions. Just a reminder to everyone that our financial results are now in U.S. dollars. It remains an exciting period for forest products. Being a meaningful part of an industry that provides sustainable and renewable building products required for a low-carbon economy simply by participating in the life cycle of forests that we live in and operate in. Manufacturing building materials from a sustainable and renewable forest is but one very important part of the required solution for society to meet its climate change objectives. On February the 1st, 2021, we acquired the Norborg business and a highly capable and well-managed team. I want to thank and acknowledge how hard and diligent our finance, legal, HR and IT teams are working to make the transition as smooth as possible while relentlessly supporting our manufacturing operations, frankly, without missing a beat. In fact, our operations perform well in the period. And you'll see in our first quarter results, which Chris will highlight later, the significant financial contribution the OSB business has already made to West Fraser. With that backdrop, I'm pleased to report that the first quarter of 2021 was another strong quarter for West Fraser. We remained agile and continued to work hard at minimizing the COVID-related business disruptions thanks to our focus on the health and safety of our employees and communities. I'm proud of what our team has accomplished. In North America, the strength in U.S. home construction activity from the second half of last year continued its recovery from the weakness that unfolded during the early stages of the COVID-19 pandemic, spurring demand for wood building products. In fact, home construction, measured by new home starts, has recently reached levels not seen since 2006. Repair and remodeling has also remained robust, driving solid demand for lumber and wood panels. On the lumber side, the construction of our new manufacturing complex in Dudley, Georgia has progressed well as the mill and planer are now operational and the rest of the site is expected to come on later in Q2. We anticipate approximately 170 million board feet of additional production as the Dudley mill ramps up towards its full annual production capacity over the next several years. On the OSB side, Supply has struggled to keep up with the stronger than expected recovery in OSB demand in recent quarters, and that strength is carried into the first quarter of 2021. In response to that increased demand, we announced the restart of Chambord Quebec Mill, which began to produce and ship panels in late March, ahead of our original expectations. Those panels are now helping to meet the demands and needs of our customers for important spring building season. The Sham Board Mill is expected to ramp towards its annual rated capacity of 550 million square feet, 3 eighths, over the next 18 to 24 months. With that, I'll now pass the call over to Chris.

Thanks, Ray, and good morning, everyone. When we last reported earnings in mid-February, the recovery in lumber and OSB demand was significant. That demand strength continued through the first quarter and remains elevated versus historic norms. owing to continued strength from new home construction and renovation applications, lean channel inventories, and a limited supply response. West Fraser has been adding hours and shifts where possible across our manufacturing network to increase supply and attempting to secure additional transportation resources for delivery of product. Another item of note, our consolidated first quarter results include the financial results of Norboard as of February 1. and as of January 1 of this year and for all comparative periods presented, we are no longer excluding export duties in our adjusted EBITDA calculations. Our reportable segments now include the acquired North American OSB business and the pre-existing West Fraser Panels business as North American engineered wood products, and the acquired operations in the UK and Europe are reported as a separate segment. In terms of financial performance, West Fraser generated record consolidated adjusted EBITDA of $1 billion U.S. in the first quarter, up from $453 million in the last quarter, in part due to the addition of Norboard's results as of February 1st. I will note that this first quarter EBITDA was reduced by $93 million for an acquisition-related non-cash purchase price accounting impact related to inventory fair values. This raised our cost of goods sold to their fair value as of the date of closing, as required by accounting standards. 86 million of this EBITDA reduction was attributed to the North American EWP segment, and 7 million was attributed to the European EWP segment. In the prior quarter results of 453 million of adjusted EBITDA, there was a $95 million benefit for the retroactive adjustment to duty rates for 2017 and 2018. Now to highlight some of Q1's segmented financial results. The lumber segment reported adjusted EBITDA of $646 million versus $425 million in the fourth quarter of 2020, with the positive effect of higher pricing offsetting lower shipments, higher fiber costs, and the retroactive duty adjustment in Q4. Our North American EWP segment performed well in the first quarter. Adjusted EBITDA for the segment grew to $353 million from $48 million in the prior quarter, with gains primarily due to the addition of the OSB results for February and March, but as well due to higher plywood pricing, which more than offset fiber and raw materials cost inflation. OSB shipments were slightly lower than expectations due to extreme winter weather disruptions in the U.S. South. Adjusted EBITDA in the pulp and paper segment increased to $11 million in the first quarter, from negative 20 million in the fourth quarter, owing to higher pulp pricing and reduced downtime for maintenance activities. We continue to see signs of a recovery in pulp markets. Lastly, adjusted EBITDA in the newly formed European EWP segment was 11 million, representing Norboard's February and March results for that geography, which, as I noted earlier, was reduced by 7 million due to a non-cash purchase price accounting adjustment to cost of goods sold. We are seeing recent market strength continue in Europe as demand for OSB continues to grow. Shifting to capital allocation in the balance sheet, capital expenditures were $62 million in the first quarter, up moderately from the first quarter of last year. We remain on track to invest approximately $450 million on capital projects in 2021 and continue to focus on realizing the benefits of the capital we have spent in the past few years. We view share buybacks as an appropriate use of excess cash where we believe our shares are trading below intrinsic value. And over the first quarter, we bought back $102 million worth of West Fraser shares under our normal course issuer bid. Those shares were repurchased at an average price of Canadian $82.86, well below our internal view of intrinsic value, and more than a 20% discount to yesterday's closing. We are also pleased with the level of US trading liquidity we've seen for Wes Fraser with the New York Stock Exchange listing, and our trading volume, which accounted for less than 10% of our total trading volume on the exchanges in February, now regularly exceeds 20% of our total daily trading volume. Given the strong Q1 results, our financial liquidity increased materially, exiting the quarter with $2.55 billion of available liquidity. Leverage was modest, exiting the quarter with total debt of $1.3 billion and net cash of $164 million. You will notice also that in conjunction with our Q1 earnings release, we have also announced plans to redeem the Norboard 2023 notes. In combination with the recently completed redemption of the 2027 notes, we will therefore have executed on plans to redeem and retire in aggregate $665 million of high-yield Norboard debt which will ultimately reduce annual interest costs by approximately $40 million and help rationalize our capital structure. To meet the reporting requirements under the Norbord note indentures, we provided a summary and discussion of Norbord's first quarter results, including the month of January, in an addendum to yesterday's earnings news release. On a standalone basis, Norbord generated $526 million of adjusted EBITDA in Q1 and ended the quarter with $114 million of net cash. With that, I'll turn the call back over to Ray for our outlook on 2021 and an update on select projects and the integration.

Thank you, Chris. In terms of our end markets, record low mortgage rates and the ongoing trend toward greater work from home options continues to create strong incentives for people to purchase new single family homes and undertake renovations and do-it-yourself projects. Remote working, when combined with the underlying housing formation deficit, has continued to drive demand for single-family homes, which consumes more of our wood-building products than multifamily. While we recognize there are many factors outside of our control that can temporarily influence markets, including uncertainty around the longer-term economic implications of the effects of COVID-19, we remain optimistic about the favorable market fundamentals we're currently seeing. supported by the underlying environmental benefits of building with wood, which have never been more clear and more widely accepted. Keeping our employees and community safe and focusing on servicing our customers' needs remain our key priorities. Our job is to create value in our company for our shareholders. As most of you are aware, the considerable cash accumulation we're now seeing is a relatively new trend. and we will look for every opportunity to create shareholder value. Therefore, you can expect us to be patient, thoughtful, and balanced in our capital allocation strategy going forward. With the significant milestones recently achieved at our Dudley and Chambord mills, I am pleased to announce an advancement of our capital program that will see us invest an additional 180 million US across several projects through 2023. In the lumber segment, we expect to invest approximately $150 million at five of our U.S. south mills, which furthers our execution and strategy in that region. These investments will increase capacity and increase the value of our products while reducing production costs overall. In the North American engineered wood product segment, we expect to invest approximately $30 million to both reduce manufacturing costs and improve productivity. These are low-risk, proven projects within our operating portfolio, with an average payback expected to be roughly three to four years. I would again like to reinforce that all this activity is happening against the backdrop of the integration of the Norboard business. We knew that we had a great team in business joining West Fraser, which would immediately add capacity and ability to the team. I'd like to acknowledge that our OSB team has hit the ground running and are embracing the future, and are rapidly working through synergies in how to make our company even better. The level of engagement and building momentum has been impressive, and although it's still early days, I have confidence that we remain on track to achieve our targeted annual synergies of $61 million over the next 18 to 24 months. Safety remains our quest. we know we can eliminate serious incidents and injuries in our company. Despite driving overall injury rates and severity to record lows throughout the company, we have much more work to do. Finally, it is our employees that continue to do the heavy lifting and delivering strong safety and operational results, all while dealing with obstacles and challenges of this still ongoing pandemic. It is this dedication and perseverance of the many people across the company who I am most thankful for and proud of. Thank you. And with that, operator, we'll turn it back to you for questions.

Thank you, sir. Ladies and gentlemen, as stated, if you would like to ask a question, please press star followed by one on your touchtone phone. You will then hear a three-tone prompt acknowledging your request. And if you would like to withdraw your question, simply press star followed by two. And if you're using your speakerphone, we do ask that you please use the handset. One moment, please, for your first question, which will be from Sean Stewart at TD Securities. Please go ahead.

Thanks. Good morning. Ray, question on the next leg of the strategic capital plan. So piecing together the incremental lumber and engineered wood projects that you highlighted towards the end of your comments there, Would that yield a 2022 overall CapEx number in the same ballpark as 2021? Is it less? Is it more? I'm just trying to piece all that together with your maintenance CapEx and think about what the budget might look like for 2022. Well, good morning, Sean.

What I'd say is I think we'd say today it's in range for 2022, kind of that same number that we're using for 2021. I also don't mind saying that as we work through the year, if we found more high return capital that we were ready and able to execute and deliver quickly, that wouldn't be a bad thing. We'd be excited to bring that forward, but today I'd say it's probably in the range.

Okay. And are you seeing any cost inflation for capital projects, deal or other inputs, contractor backlog, that sort of stuff? Is that having any material effect on budgets for these projects at this point?

So, Sean, I'm just going to, you know, I'm even going to go kind of pre-pandemic. You know, I think we saw a lot of stress and strain in the system prior to the pandemic, you know, be it labor, be it supplier. be it those inflationary aspects. I think if there was a momentary reprieve with the pandemic, we've certainly seen, I'd say, that continued pace. So I'm not going to say it's a material change in what we're seeing, but I would say for the last several years, we've seen a relentless pressure on costs and productivity. across the spectrum. So I think it's built into kind of how we're dealing with the day-to-day. I don't think it's a new issue in the last few months. I think it's the same one we've been dealing with for a while.

Okay. Last question for now. You built up more lumber inventory than your peers did this quarter. Are you seeing any easing of shipping constraints into the current quarter? Are you going to be able to move some of that inventory into the market at a better clip coming up?

I think the short answer would be we've seen shipping improve in the early parts of Q2.

Could you move that? I think you built up just over 100 million board feet in Q1. Would you be able to move all of that this quarter?

Ask me at the end of Q2, and I'll be able to tell you. But I would say we're trending well, but we've got quite a bit of work to do.

If you look at the pattern of the last few years, Sean, it's not unusual that there's a little bit of slippage in Q1. It's usually caught up in Q2. It's not entirely within our control, but certainly we're doing everything we can to secure those resources to move the product to the market.

Got it. Okay, thanks very much, guys. I'll get back in the queue. Thanks, Sean.

Thank you. Next question will be from Paul Quinn at RBC Capital Markets. Please go ahead.

Yeah, thanks very much. Good morning, guys. Good morning. I just wondered, you know, you've got lots of CapEx projects going on in terms of, you know, additional volume with Dudley. Just wondering what we should anticipate for sort of the end of the year 2021 shipment levels relative to 2020. Should we see a material pickup, and if so, how much?

Yeah, thanks, Paul. We've put the guidance in there in terms of what we think the production levels of SYP and SPF we think are for the year. It's the same as kind of what we put out in February. you know, at about $3.3 billion on SPF and about $3 billion on SYP. We would expect on a full year basis that we're shipping all of our production subject to some seasonal fluctuations. So, you know, that's what we've kind of put out there for the last two publications in terms of where we're thinking lumber shipments are headed on a full year basis.

This capital won't impact 2021 for sure? No.

Okay, and then just over the sustainability of the current pricing run here, specifically in lumber, I guess it's a question for McKeever there. Do you see a pullback at some point in the summer? I mean, it seems to be going up 8% to 10% every week, and I know lots of questions about just how sustainable that is.

Well, Paul, I would say that your estimate would be as good as mine, but if you look historically, One would say that this won't last forever, and I don't think we think it will. Saying that, though, there does seem to be very strong underlying demand that's potentially different than what we've seen over the last number of years. We think the fundamentals are really good in housing and R&R. I can't speculate as to where prices are going, but they are very high.

Okay, and then lastly, you know, OSB markets are, you know, even higher than lumber prices on a relative basis. You know, there's been some mills that have been brought back, but clearly we need more capacity. You know, you brought up Chambord, you brought up, well, I guess, former company Norwood brought back their Cordillo line. Just wondering if you're looking at the existing mill base and looking at greenfield projects or even brownfield at the existing mills.

Well, I'll try and answer that, Paul. I mean, look, you know, I think we're always looking on how to kind of grow the company, make it better. I'm going to give you a pretty generic answer. But I would think if you look at the history, you know, we primarily focus on organic growth, and that's typically how we drive what we think is drive the best values. I'd never say never to a green field, but but it's usually lower down in our capital allocation strategy. But I would say we look at everything, but we look internally first.

All right. Look forward to your Q2 results. Thanks. Thanks, Paul. Thanks, Paul.

Thank you. Once again, as a reminder, ladies and gentlemen, if you do have any questions, please press star followed by one on your touchtone phone. And your next question will be from Mark Wild at Bank of Montreal.

Good morning, Ray. Good morning, Chris. Good morning, Mark. Just to start out, I wonder when we're thinking about capital allocation, Norbord had a variable dividend policy. How would you guys think about the potential for either a variable dividend or for the payment of special dividends in extraordinary times like this? Just any general sense?

Thanks, Mark. I appreciate the question. Look, I think this is, as Ray kind of referenced in his comments, this is a scenario that's really unfolded in a matter of a few months in terms of this accumulation of cash and where the balance sheet has gotten to quite quickly. Just as, you know, while this may have come upon us pretty quickly, I don't think it's something that we go and solve in a matter of four months or six months, you know, as quickly as it accumulated. And we'll be patient and we'll be thoughtful. as Ray indicated, about how we deal with the situation that we have today, we think it's a time to be prudent and methodical. We'll look at all the tools that are in the toolbox. I don't think we're committing to anything today here, one way or the other, but we're always looking at all those options and exploring every way that's out there to create shareholder value and are going to be discussing every alternative that's there over the next several quarters.

Okay, reasonable and rational reply, Chris. Ray, can you give us any thoughts on what you think both the lumber and the panel markets are able to supply these days, just in terms of, you know, start levels? I mean, is there enough capacity out there in OSB to, you know, support a, let's say, a million eight? And what would the number look like over in the lumber market right now? Any sense?

Yeah, well, good morning, Mark. I think we provided some materials in our investor presentation that kind of gives a bit of a view on you know, what we see is, you know, the current supply and, you know, against kind of today's demand. So, you know, I'm not going to peg a number because, you know, I really don't, you know, can't speak for all the supply initiatives that are kind of going on in the industry today. And the one thing about strong pricing is that, you know, it's going to encourage more supply to come on more rapidly, and that's kind of hard to predict. But Today, look, I think we've consistently said for a number of years that once we kind of get to 1.4 million housing starts, based on how we saw supply coming on and not really knowing when demand would get to kind of 1.4 million housing starts that we saw, we would expect significant tension in the system. Of course, nobody expected housing starts to jump to 1.6 or wherever they are today, and that's causing a lot of strain in the system. I think it's the same issue on the OSB side. I don't think they're fundamentally different. Again, I think it's been... So I hope that answers your question, Mark. I think we're seeing the strain of trying the industry to supply an industry or a market that's running at about 1.6 today.

Okay. All right. And then, Ray, is it possible to just give us kind of a brief thumbnail on what you're seeing on the trade side, both what you think the potential is for lumber and OSB imports? into North America, and then also, you know, what kind of activity levels you're seeing in terms of your exports both out of Western Canada and any exports out of the southern U.S.?

Well, I'll start, and I'll kind of see if I can get Chris to save me here. But, you know, I think we've been surprised that there hasn't been a stronger response from Europe on imports. I mean, obviously, European imports are up. They're up pretty significantly. I think we've always recognized there was probably a bit of a limit to those, and I think we're kind of seeing that. I think it's an indication of how strong other markets are around the world that are maybe keeping those limited import opportunities even lower than maybe what we'd expect. And, you know, I think, you know, there's obviously less OSB imports that lumber, a lot more production in Europe on lumber than there is in OSB. I think it's pretty limited about the opportunities to see OSB come into production. into the U.S., but we're looking at that as well. Chris, do you want to add anything?

Yeah, Mark, I would just add potentially we've definitely seen a reduction in exports on the lumber side and to a much lesser degree on the OSB side being much smaller. The market really – so that's made up a bit of the shortfall for sure, and I think that will continue. We are seeing Japan recover somewhat, but – It appears that China's able to get enough fiber at the pricing that they're at, that they seem satisfied without getting towards the numbers where we're at in North America. But to Ray's comments, the European lumber market is much stronger than it was previously in the last run-up, so that's a big part of the reason we're not seeing the supply response from there.

Yeah, okay. That's what it seemed like to me. The last one I had is, is this market kind of changing the dialogue at all around the U.S. kind of Canada trade case? I see a lot of stuff out of like the National Association of Home Builders, but I have no sense of whether this is really generating kind of any activity behind the scenes right now.

So, Mark, I think the short answer is I think we can hope that it will change the dialogue, and that's certainly what we would wish for. But I think fundamentally, to this point, it really hasn't changed the dialogue. There's really, you know, we're just working through our – CBD and ADD and administrative reviews and that's the process that's going on really as far as I'm aware not really anything else happening at this point.

Okay. All right. Thanks. I'll turn it over.

Thank you. Next question will be from Amir Patel at CIBC. Please go ahead.

Hi. Good morning. I want to ask about the former Norbord OSB business, the specialty piece, which I recall was kind of 20% furniture, 5% Japan. Can you comment on how prices there moved in Q1? And as you look out for the remainder of the year, is there a certain date where maybe a lot of that business gets repriced?

Yeah, Hamir, it's Chris here. You know, I would say that, you know, the industrial business is a strategic business on the OSB side to diversify. And quite frankly, you know, from our view, it's been very successful. With regards to pricing, it's a bit slower than the commodity side, but we are seeing substantial improvements and continue to expect that to happen. but they're different markets and different end uses.

And Chris, can you remind us, are those formally indexed to the random months prices at all?

Yeah. I'm not exactly sure how that, how that's done.

Yeah. I don't know if we comment on how we sell or, you know, is that part of him here? But I mean, I think, you know, just, I mean, I think we'd like that business. We'd like the fact that, that it moves in a different cycle to some of the other commodity pricing and, There's ebbs and flows to it, but we see that as kind of a positive thing in the long term. You know, quarter to quarter, you know, you can kind of go, well, I wish this or wish that, but I think, you know, over the long haul, we like the strategy, we think it's a successful one, and pricing will move as pricing moves.

Fair enough, Ray. And the other question I had about that business was, well, just Norbert in general. I know they used to have a much larger business, sort of mill profit share set up across their mills. I don't know, is that still in effect with given maybe the existing labor agreements or has that all shifted to the existing West Fraser approach?

Well, interesting question, Hamir. Wage and benefit programs that people have are still in place.

Okay. Thanks, Roy. And just the last question for me, BC stumpage, you know, given how things are playing out, what sort of year-over-year increase do you think we'll see, 21 versus 20?

Year-over-year, well, I think we're up, I think we're thinking a $30 increase in July. Okay. So I think I'll stay away from kind of predicting what the year-over-year increase will be, but we're seeing BC log costs going up over the year for sure.

Great. Thanks, Ray. That's all I had. I'll turn it over.

Thanks, Samir.

Thank you. And at this time, Mr. Ferris, we have no other questions registered. Please proceed.

Well, thanks for that. Remind everybody that I think 80% of our business now is outside of BC, which, you know, is what it is. Listen, thanks to everyone, and thank you, Sylvie. As always, Chris and I are available to respond to questions, as is Robert Winslow, our Director of Investor Relations. And thank you for participation, and stay safe, and we'll look forward to talking to you next quarter.

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Have a good weekend.