speaker
Julie
Conference Operator

Good morning, ladies and gentlemen, and welcome to the Wes Fraser Q2 2024 results conference call. At this time, all lines are in a listen-only mode. Following the presentation, we'll conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, July 25, 2024. During this conference call, Wes Fraser's representatives will be making certain statements about West Fraser's future financial and operational performance, business outlook, and capital plans. These statements may constitute forelooking information or forelooking statements within the meeting of Canadian and United States securities laws. Such statements involve certain risks, uncertainties, and assumptions, which may cause West Fraser's actual or future results and performance to be materially different from those expressed or implied in these statements. Additional information about these risk factors and assumptions is included both in the accompanying webcast presentation and in our 2023 Annual MD&A and Annual Information Form, which can be accessed on Wes Fraser's website or through CEDAR+, 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.

speaker
Sean McLaren
President and Chief Executive Officer

Thank you, Julie. Good morning, everyone, and thank you for joining our second quarter 2024 earnings call. I am Sean McLaren, President and CEO of West Fraser, and joining me today are Chris Verostek, Senior Vice President and Chief Financial Officer, Matt Tobin, Senior Vice President of Sales and Marketing, and other members of our leadership team. On the earnings call this morning, I will begin with a brief overview of West Fraser's Q2 2024 financial results and then pass the call to Chris for additional comments before I share some thoughts on our outlook and offer concluding remarks. West Fraser generated $272 million of adjusted EBITDA, in the second quarter of 2024, representing a 16% margin. We experienced mixed results across our business again in Q2, with strength in our North American engineered wood product segment partially offset by continued soft demand for SYP lumber products. While levels of new home construction in the U.S. showed signs of stabilizing in the second quarter, supporting demand for OSB and to some extent SPF lumber, continued elevated mortgage rates appear to be constraining existing home sales activity and repair and remodeling spending, which we believe has a greater relative impact on Southern Yellow Pine lumber demand. On a trailing four-quarter basis, adjusted EBITDA was $894 million, which is an improvement from the $703 million reported in the trailing four quarters as of Q1 2020. and the $561 million reported at year-end 2023. On a pro forma basis, with the inclusion of Norboard, this level of trailing four-quarter adjusted EBITDA is approximately $650 million higher than that of the last down cycle in 2019, in part reflecting synergies from the Norboard transaction, the benefits of our capital investment program, as well as the acquisitions and strategic initiatives we've undertaken in recent years. Finally, in terms of our balance sheet, we have $2 billion of total liquidity at quarter end, which offers us the financial flexibility and strength to support our capital allocation strategy. With that overview, I'll now turn the call to Chris for additional detail and comments.

speaker
Chris Verostek
Senior Vice President and Chief Financial Officer

Thank you, Sean, and good morning, everyone. And a reminder that we report in U.S. dollars. and all our references are to U.S. dollar amounts, unless otherwise indicated. The lumber segment posted an adjusted EBITDA loss of $51 million in the second quarter, compared to $10 million of positive adjusted EBITDA in the first quarter. Our North America EWP segment generated $308 million of adjusted EBITDA in the second quarter, up from $188 million in the first quarter. The pulp and paper segment generated $9 million of adjusted EBITDA in the second quarter, ahead of the $3 million reported in the first quarter, and perhaps more significantly, versus the negative $74 million of EBITDA in Q2 of last year. Finally, in Europe, adjusted EBITDA was $6 million in the second quarter versus negative $1 million in the first quarter. Higher prices and shipments drove the sequential EBITDA increase across our North American engineered wood products business. while lower lumber prices and the resultant required inventory valuation adjustments were a primary EBITDA detractor in the quarter. Worth noting, however, that our lumber business benefited from the actions we took earlier in the year to curtail production at two higher-cost mills, essentially replacing that higher-cost volume with production from other lower-cost mills. Specifically, in the U.S. South, on a year-to-date basis, Our SYP shipments are down approximately 10% from 2023. With regard to softwood lumber duties, as you may have already seen disclosed in our Q2 financial statements, if the preliminary administrative review five rates are confirmed later this quarter, we anticipate realizing a $35 million duty expense adjustment in Q3 and for our combined cash deposit rate for duties to increase to approximately 12%. Cash flow from operations was $378 million in the second quarter, with our cash balance net of debt and lease obligations at a healthy $469 million versus $174 million last quarter. The relative increase in our cash balance reflects a combination of improved earnings, the typical seasonal release of working capital, plus proceeds from the sale of the pulp assets, all of that partially offset by $102 million of capital expenditures, and approximately $95 million of cash deployed towards share buybacks and dividends. Of note, in the second quarter, we repurchased another approximately 900,000 shares, or nearly 25% of the shares available under this NCIB, and we increased our quarterly dividend by approximately 7%, declaring a dividend of $0.32 per share versus $0.30 per share previously. With that brief financial overview, I will pass the call back to Sean.

speaker
Sean McLaren
President and Chief Executive Officer

Thank you, Chris. We remain proud of the company we have built, including the geographic and product diversification that has allowed us to weather the extended period of challenging lumber markets within which we find ourselves today. As seen in the right side figure on slide 7, our North American EWP segment, which is shaded brown, has generated $927 million of adjusted EBITDA over the last four quarters. a period of tougher cyclical conditions for our other segments. It is this diversity in our wood building products offering that has allowed us to generate $894 million of adjusted EBITDA on a consolidated basis over the last four quarters, shown in the figure on the left, more than three and a half times the level of pro forma EBITDA experienced in the down cycle of 2019. We released our 2023 sustainability report at the end of May, three weeks earlier than the release of last year's report. Once again, it was the accumulation of significant effort by many people, both within and outside the organization, working together to bring this important document to fruition. The latest version of our sustainability report highlights the company's performance across a variety of environmental, social, and governance goals. I am proud of the work we have done to date and the level of commitment shown across our entire organization towards achieving our sustainability goals. Although we have more work to do, I'm confident we're on the right path. If you haven't already reviewed our 2023 sustainability report, I encourage you to do so. I'll now shift to our outlook and add some concluding remarks. Although we expect to continue to face a number of market uncertainties over the near term, we remained encouraged that inflation expectations and mortgage rates in the U.S. are below the highs of last year and have been generally trending lower. Inflationary cost pressures appear to have stabilized across much of our supply chain, and on balance, we do not expect to see any meaningful upward cost pressures throughout the remainder of the year. For our lumber operations in the U.S. South, the weak market conditions of recent quarters are ongoing, and as such we must continue to be nimble with our operating strategy. As a reminder, last year we permanently removed approximately 100 million board feet of lumber capacity with a mill closure in Florida, and earlier this year we further rationalized our lumber platform, announcing the closure or curtailment of three of our higher cost mills, which included approximately 270 million board feet of total capacity at two mills in the US South and approximately 160 million board feet of capacity in British Columbia. We have also reduced the number of shifts or hours of operations at several other mills. In conjunction with these capacity adjustments and to manage costs, we have transitioned some production to our lower cost, more productive mills where we have been spending our modernization capital. In Q3, we plan to continue to operate with fewer hours across both our SPF and SYP platforms, and we expect to do so through the second half of 2024, so long as market demand warrants such action. In our North American engineered wood products business, we continue to ramp up production at our Allendale OSB mill where we are pleased with the cost progression of that facility, having recently marked the first anniversary of its restart. We continue to expect that Allendale will be among our lowest cost OSB mills when it achieves its full operating rate. Given this backdrop, we have reduced 2024 guidance for Southern Yellow Pine shipments to a range of 2.5 to 2.7 billion board feet. versus our prior guide of 2.7 to 2.9 billion board feet. This reduced guide implies approximately 1.1 to 1.3 billion board feet of SYP shipments in the second half of 2024, with the bottom end of this range representing a nearly 20% reduction from our first half shipments. We are not adjusting shipment guidance for our other key products at this time, though we will adapt our operating rhythm and guidance if and as warranted by changes in market demand. In conclusion, while demand for our various products remains mixed and there are near-term challenges across our businesses, we continue to be pleased with how our teams are performing. We remain confident in our people, processes, and foundation to continue to execute on both the challenges and opportunities in front of us. We also remain optimistic about the future and long-term demand prospects for the types of renewable wood products that we manufacture and are known for here at West Fraser. With that, we'll turn the call back to the operator for questions.

speaker
Julie
Conference Operator

Thank you, ladies and gentlemen. Should you have a question, please press the star followed by the one on your touch screen. If you'd like to withdraw your question, please press the star followed by the two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Kat Mamtora from BMO Capital Markets. Please go ahead.

speaker
Kat Mamtora
Analyst, BMO Capital Markets

Thank you for taking my question. Good morning. Perhaps to start with, Sean, can you give any additional color in terms of the repair and remodeling trends in the quarter? Is there a way to sort of ballpark what kind of percentage declines you saw in that segment of the market and how it trended through the quarter?

speaker
Sean McLaren
President and Chief Executive Officer

Good morning, Keaton. I'll maybe make a few comments and then ask Matt Tobin, our Senior Vice President, Sales and Marketing, to pick up what I missed. From my perspective, we would typically see our best proxy is our treated customers in our U.S. South lumber platform. They largely service the repair and remodeling sector. And I would say what we saw this past quarter was muted demand through the quarter. We did not see a typical sort of season of building ahead of it and typical buying patterns throughout. Again, it was hard to judge. It was just available supply on the market. But I can tell you our customers were typically slower than what we would normally expect throughout the quarter. So I think that's a good proxy of overall demand, at least in the southern repair and remodeling segment. Matt, anything to add to that?

speaker
Matt Tobin
Senior Vice President of Sales and Marketing

No, I think that covers most of it. I think affordability continues to be a headwind in R&R, but historically has been a GDP-like grower, and we expect that to continue to be the case over the longer term. The age of housing stock, we think R&R will continue to be a long-term outlet for the product.

speaker
Kat Mamtora
Analyst, BMO Capital Markets

Got it. Now, that's helpful. And then, Sean, maybe just a little more color on what you were mentioning a little bit earlier around kind of southern yellow pine, you know, production in the back half. Can you provide any additional color in terms of, you know, sort of the reduction in operating hours and the approach that you're taking? Is there a way to sort of quantify how much, you know, production you're going to sort of cut in the back half? And is there sort of a timeline to how you are approaching this?

speaker
Sean McLaren
President and Chief Executive Officer

I'll make a few comments on that, Keaton. I think the best guidance is the guidance we've given, dropping our annual guidance down to 2.5 to 2.7 billion board feet, which is a reduction of 200 million board feet from our previous guidance. And I'll just speak briefly of how we think about it. And again, as a reminder, we took action early. You know, frankly, starting in early 2023 with the closure of Perry, and then again in January of this year with not only the closure of Fraser Lake in British Columbia, but also the closure of Maxville and the indefinite curtailment of Huddig. So that removed, you know, removed high cost out of the system and did it in a way that was cost-effective. From there, we continued to monitor price as well as the demands from our customer. And we made a series of changes throughout the quarter, which was shift reductions and operating hour reduction along with inventory curtailments. And that is the mode we continue to operate in. And I can tell you our team meets weekly on what our operating footprint is and actions we need to take. to make sure we're running to the economics of that particular plant and mill, as well as what demand is available in the market.

speaker
Kat Mamtora
Analyst, BMO Capital Markets

Got it. That's very helpful. I'll jump back in the queue. Good luck. Thank you.

speaker
Julie
Conference Operator

Your next question comes from Sean Stewart from TD Cohen. Please go ahead.

speaker
Sean Stewart
Analyst, TD Cohen

Thanks. Good morning, everyone. A couple questions. Sean, can you give us a sense of in the EWP segment, OSB in North America in particular, how much of the sequential volume growth was Allendale ramping versus pushing legacy mills harder into what was a strong price environment until towards the quarter end? And then following on that, there's an implied pullback in your second half volumes for OSB. just given the guidance range you reiterated, how much of the unit cost gains we saw for that segment in Q2 do you think you might give up if you're pulling back volumes through the back half of the year?

speaker
Sean McLaren
President and Chief Executive Officer

Yeah, good morning, Sean. Just a few comments on your first comment. You know, I would say that the majority of the, and Chris can fill in what I kind of miss here, but the majority of the increase would have been Allendale continued to ramp up, saying that we had a number of mills that operated very well in Q2 and major capital projects that were done over the last 12 to 24 months that came to fruition that were seeing the benefits of it. So I would say just generally across our OSB platform, we're very pleased with our operating performance across the segment. To your second question around the implied pullback and what that will do to our cost, I would say, again, it'll ultimately depend on the rate we run at for the second half of the year. But other than unexpected adjustments to our operating schedule, we expect really no material cost pressure. We would expect cost to be stable through the second half.

speaker
Chris Verostek
Senior Vice President and Chief Financial Officer

Just as a reminder, Sean, Q4 is a seasonally slower period for us in OSB to slow down in building activity. And then that's when we typically schedule a lot of our maintenance downtime across the fleet in the fourth quarter. So that plays in a little bit to the weighting of the shipments first half versus second half as well.

speaker
Sean Stewart
Analyst, TD Cohen

Got it. Okay, thanks for that. Next question. CapEx beyond this year, you guys reiterated the 2024 budget range. How are you thinking about discretionary projects at the sawmill level beyond 2024? Not necessarily referencing specific projects, but the backlog of potential projects you have and with a weaker market, are you seeing any relief in capital costs for brownfield expansion projects that... various sawmills. Has there been any relief on that front?

speaker
Sean McLaren
President and Chief Executive Officer

I'll make a few comments here and then Chris, please fill in what I don't cover. But to your first question on discretionary products, I think the way we think about capital in West Fraser, so we have a base load of maintenance business CapEx, which is a you know, safety, environmental, all the things we need to manage the core part of our business on an ongoing basis. We always have a basket of what I would call small capital, you know, high payback, opportunistic projects. I would probably see those would be normal or, you know, depending on the mill's readiness and what we were taking on. For the larger, more strategic projects, I can tell you our view in West Fraser is finishing what we've started and wrapping up what we've already completed, and that's job one for us. We're always planning what's coming next, but in terms of that being, especially in our lumber platform, it's more about our capacity to take that on and our readiness to move forward with those projects. I think we'll always have a number of projects that we're planning, but in terms of taking that next step, Right now our focus is on finishing Henderson, ramping up Maplesville, continuing to ramp up Dudley, things we've already done that we're focused on and making good progress on. In terms of just an overall capital cost, Chris may be way in here, but we've not priced out anything recently. Our view would be is There's probably been a little bit of relief in steel costs, but not a material change in the overall cost of a brownfield. I think if we were looking at a brownfield or greenfield today, it's going to be in the same range as Henderson. There might be some relief there, but not material relief. Again, not as fresh to that because we haven't done that work recently, but that would be my view. That's a good summary. I had nothing to add to that.

speaker
Sean Stewart
Analyst, TD Cohen

I just want to follow on Chris. I mean, all else equal, just based on Sean's comments there, would you expect 2025 CapEx to moderate a little bit year over year?

speaker
Chris Verostek
Senior Vice President and Chief Financial Officer

Well, there's a big number, I think we said in there for Henderson this year, and that'll kind of wrap up going into next year. And then I think as Sean indicated, we don't have firm plans or commitments yet on another big major project like Henderson that spans over over two to three years. You know, that being said, we go through that process in the back half of the year. We've got a pipeline of things in front of us. But, you know, the timing of when we sort of pull the trigger on those as far as execution will be dependent on a bunch of things. And, you know, we'll be back to you guys, you know, early in the year with guidance for 2025 on CAPEX. But we've been pretty stable in terms of our CAPEX the last couple of years, but we've also been very busy with a lot of projects as well, too. That's probably as far as we can go on that at this time.

speaker
Sean Stewart
Analyst, TD Cohen

That's all I have. Thanks very much, guys. Thanks, Sean.

speaker
Julie
Conference Operator

Your next question comes from Amir Patel from CIBC Capital Markets. Please go ahead.

speaker
Amir Patel
Analyst, CIBC Capital Markets

Hi, good morning. Sean, given the weak pricing backdrop for lumber, are you surprised we haven't seen more downtime in the industry, both in the South and NBC and, you know, with the duties going higher soon? Do you think that'll have an impact?

speaker
Sean McLaren
President and Chief Executive Officer

Good morning. Again, so difficult for me to comment on others, you know, what others are doing other than what comes out publicly. And I would say, and I may have said this in the past and in the South, uh, You know, there is, you know, the mills tend to do flex around hour shifts and who knows what everybody's up to. You know, maybe I'll just reinforce a few things from our perspective, you know, down 10% year over year, guiding significantly lower in the south in the second half. So I guess the surprising part for me is the extent of action we've had to take, you know, because of the price environment and the demand environment. You know, and I'm guessing others aren't immune to it as well, but it's hard to have visibility to that.

speaker
Amir Patel
Analyst, CIBC Capital Markets

Fair enough. And are you able to give a sense as to Allendale, you know, one year in, what kind of operating rates you're achieving at that mill?

speaker
Sean McLaren
President and Chief Executive Officer

Yeah, you know, and again, happy with the progress we're making at Allendale. You know, just moved our one-year anniversary here recently, you know, several weeks ago. You know, and I think we've been kind of pretty consistent right from the beginning. These are, call it a 36, 24 to 36 month, call it 36 month ramp up curve. And it's steeper in the beginning, you know, but if you kind of drew a line from zero to 36 and then maybe elevated a little bit in the first year, you're probably going to be pretty close. So we're tracking as we would expect. to get this mill up to rate over the next couple of years, a year into it.

speaker
Amir Patel
Analyst, CIBC Capital Markets

Fair enough. And just the last question I had was, given the weak lumber market, are you seeing any change in vendor expectations when you consider potential sawmill acquisitions?

speaker
Sean McLaren
President and Chief Executive Officer

Yeah, you know, and again, we're, you know, our team is always planning and thinking about what is next. You really don't get to that until you're ready to move forward and actually make a commitment, issue a purchase order. And just to reiterate some comments that I made a few minutes ago, we are really focused on we've had a lot of capital. We're in startup at several places still. We want to finish Henderson. We've had some success at Allendale, other OSB projects. Job one for us is really delivering on the commitments we've made and getting those mills up to rate and finishing what we have in motion. So, you know, taking on the next big project, we're doing a lot of planning, but we're really not at the point to test that, saying that, you know, clearly the activity is going to be less today than it was a few years ago.

speaker
Amir Patel
Analyst, CIBC Capital Markets

Yeah, Sean, I guess I was referring more to the potential – And so for us, Fraser, take advantage of this week of market for sawmill acquisitions.

speaker
Sean McLaren
President and Chief Executive Officer

Oh, sorry, I thought it was more capital. Yeah, you know, and I think maybe I've touched on this in the past. You know, we're, you know, for us, it's got to, you know, and I think you look at our, what we've done the last few years with Angelina, Allendale, Cochrane or Spray Lakes, it really has to be It has to have a path to be very competitive in this kind of market, the bottom of the market. It's got to be synergistic with our existing business. It's got to be in the right fiber basket. So it's got to be high quality, and that's really the bar in West Fraser. And those opportunities are few and far between. Saying that, I think we've got the balance sheet and kind of the footprint to be able to react to anything that we're interested in that becomes available.

speaker
Amir Patel
Analyst, CIBC Capital Markets

Fair enough. That's all I had. I'll turn it over. Thanks. Thanks.

speaker
Julie
Conference Operator

Your next question comes from Matthew McKellar from RBC. Please go ahead.

speaker
Matthew McKellar
Analyst, RBC

Hi, good morning. Thanks for taking my questions. I think you mentioned that you're seeing lower saw log costs in the U.S. South, but some more competition for pulpwood on the OSB side. Can you give us a sense of how material these trends are, and maybe if you're seeing much variance across the region?

speaker
Sean McLaren
President and Chief Executive Officer

Good morning, Matthew. You know, they are drifting lower. You know, I would say from a materiality, it's, you know, it's in, you know, it's a few percentage points and moving in that direction. So it's not significant saying that they are coming down. You know, and as we've seen, you know, over the years in U.S. self-log costs, they tend to be they tend to be sticky and it takes a period of time for landowner expectations and things kind of find an equilibrium and the market moves down. We do think availability for logs as prices are coming down and production is being adjusted. There are pockets where availability is improved, so price decreases or more. Other areas where landowner expectations are different, so it's taking a little bit longer. But I'd say overall, it's moving in the right direction. Probably not as quick as any of us would like though.

speaker
Matthew McKellar
Analyst, RBC

Thanks. That's helpful. And then one more for me. Historically, the industry has seen some labor turnover issues in mills in the US South. Are you able to provide any color on whether you're seeing any increase in turnover with some of the reductions in hours and shifts you implemented in your SYP platform in Q2?

speaker
Sean McLaren
President and Chief Executive Officer

Our turnover has been stable. You know, it's something we watch very closely, and that's why it's important to get the right shift configuration, the right operating schedule. It's really difficult to turn these mills on and off and not have an impact there. So we tend to make longer-term decisions around shifting and operating hours so we can give people predictability and that stability in a tough market. I would say also our capital program, we've been very... very focused on improving work conditions, making the jobs better, taking away dependency from what I would call high turnover jobs. And I think that's paying some dividends for us in this market.

speaker
Matthew McKellar
Analyst, RBC

Thanks, Adel. That's all from me. I'll turn it back. Matthew.

speaker
Julie
Conference Operator

Ladies and gentlemen, as a reminder, should you have a question, please press the star followed by the moon. Your next question comes from Ben Isaacson from Scotiabank. Please go ahead.

speaker
Ben Isaacson
Analyst, Scotiabank

Good morning. First question is on SYP. You lowered your volume guidance to 2.5 to 2.7, but you kept the range the same of 200 million board feet. Because half the year is now behind us, does that unchanged range, does that imply that there's greater uncertainty now than you had earlier in the year? And if so, is that greater uncertainty all on the demand side, or do you have an expectation of competitor supply cuts as well? Just trying to figure out what brings you to the lower end or the higher end of that range.

speaker
Sean McLaren
President and Chief Executive Officer

Yeah, good morning, Ben. That's a good question. So I think for the game, we've got 19 mills operating across our platform. We've got mills that are still in stages of ramp-up. And we've also got mills where we've adjusted operating schedules If we run those full adjusted operating schedules, we're moving towards the higher of the range, but we're expecting that we're going to have to take additional action within those schedules based on demand conditions. That would move us to the lower range. So it's really hard to pin that exactly. There's a lot of moving parts that go into landing on an exact production number. So that's why we kept the range the same. And really the low end, you know, the high end of the range would be a more stable demand in the second half of the year. A low end of the range would be a continued deterioration that we saw in the second quarter.

speaker
Ben Isaacson
Analyst, Scotiabank

Got it. Thank you. And then just my final question is on not so much channel inventory, but I mean, is your view that through the channel inventory has been fully destocked and now it's just kind of weak underlying demand? or are we still going through a process of destocking?

speaker
Sean McLaren
President and Chief Executive Officer

Really hard to have visibility on inventories through the channel. The channel's quite long, not only where it starts at the mill, through transit, through our customers' yards, through the end users. I can only speak to our inventories, and we're in a normal range, within our normal operating range. I would also, the only other anecdotal comment I might make, Ben, is just the sense of urgency around buying. Lumber's been readily available, and I think buying patterns demonstrate that. So there's not been an urgency to build inventory. Saying that, people might be being opportunistic to take positions at low prices, but our view would be that there's nothing unusual that we see. Matt, anything to add to that?

speaker
Matt Tobin
Senior Vice President of Sales and Marketing

I don't think that's a good summary.

speaker
Ben Isaacson
Analyst, Scotiabank

Great. Thank you very much. Appreciate it. Thank you, Ben.

speaker
Operator
Conference Operator

And there are no further questions at this time. I will turn the call back over to Sean for closing remarks.

speaker
Sean McLaren
President and Chief Executive Officer

Thanks, Julie. 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
Julie
Conference Operator

Ladies and gentlemen this concludes your conference call for today. You may now disconnect. Thank you.

Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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