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spk03: Good morning ladies and gentlemen and welcome to the Wes Fraser Q2 2024 results conference call. At this time all lines on 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 25th 2024. During this conference call Wes Fraser's representatives will be making certain statements about Wes Fraser's future financial and operational performance, business outlook and capital plans. These statements may constitute for looking information or for looking statements within the meeting of Canadian and United States securities laws. Such statements involve certain risks on certainties and assumptions which may cause Wes Fraser 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 MDNA and annual information form which can be accessed on Wes Fraser's website at Cedar Plus for Canadian investors and Edgar for United States investors. I would now like to turn the conference over to Sean McLaren, President and Chief Executive Officer. Please go ahead.
spk07: 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 Wes Fraser and joining me today are Chris Forostec, 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 Wes 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. Wes 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 US 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 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.
spk06: Thank you Sean and good morning everyone. And a reminder that we report in US dollars and all our references are to US 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 $74 million of EBITDA in Q2 of last year. Finally in Europe adjusted EBITDA was $6 million in the second quarter versus $-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 US 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 32 cents per share versus 30 cents per share previously. With that brief financial overview I will pass the call back to Sean.
spk07: 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 within which we find ourselves today. As seen in the right side figure on slide seven 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 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 west 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 through 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 percent 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.
spk03: Thank you ladies and gentlemen. Should you have a question please press the star followed by the one on your touch phone. 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 headset before pressing any keys. One moment please for your first question. Your first question comes from Kat Mamtora from
spk09: Good Morning. Perhaps to start with Sean can you give any additional color in terms of you know 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?
spk07: 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 a business our best proxy is our treated customers in our US South Lumber platform. They largely service the repair and remodeling sector and I would say what we saw this past quarter was you know muted demand through the quarter. We did not see a typical sort of season of building ahead of it and typical buying patterns throughout. You know again it was it was hard to judge you know it was just available supply on the market but we I can tell you our customers were were typically slower than what we would normally expect throughout the quarter so I think that's a demand at least in the southern repair and remodeling segment. Matt anything to add to that?
spk04: No I think that covers most of it. I think you know affordability continues to be a headwind and 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 edge of housing stock we think R&R will continue to be a long-term outlet for the product.
spk09: Got it. Now that's that's helpful and then you know Sean maybe just a little more color on 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 the reduction in operating hours and the approach that you are taking? Is there a way to sort of quantify how much you know production you're going to sort of cut in in the back half and is there sort of a timeline to how you are approaching this?
spk07: You know I'll make a few comments on that Keaton. I think the best guidance is the guidance we've given you know dropping our our annual guidance down to 2.5 to 2.7 billion board feet which is you know a reduction of 200 million board feet from our previous guidance and and I'll just speak briefly of how we you know how we think about it and 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 in January this year with with not only the closure of Fraser Lake and in in British Columbia but also the closure of Maxville and the indefinite curtailment of Hudig. So 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 is is it meets weekly on what our operating footprint is and and actions we need to take to to make sure we're running to you know the economics of that particular plant and mill as well as what demand is available in
spk09: the market. Got it that's very helpful I'll jump back in the queue good luck. Thank you.
spk03: Your next question comes from Sean Stewart from TD Corne. Please go ahead.
spk08: Thanks good morning everyone. A couple questions. Sean can you give us a sense of an 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 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?
spk07: Yeah good morning Sean. Just a few comments on your on your first comment you know I would say that the majority of the and Chris can can fill in what I 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 that came to fruition that we're 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 it'll ultimately depend on on the rate we run at for the second half of the year but we other other than unexpected you know adjustments to our operating schedule we expect really no material cost pressure we would expect cost to be stable through the second half.
spk06: Just as a reminder Sean Q4 is a seasonally slower period for us in 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.
spk08: Got
spk06: it
spk08: okay thanks for that. Next question CapEx beyond this year you guys reiterated the the 2024 budget range how do you think about discretionary projects at the sawmill level beyond 2024 not necessarily referencing specific projects but you're the backlog of potential projects you have and with a weaker market are you seeing any relief in capital costs for brownfield expansion projects at various sawmills has there been any relief on that front?
spk07: You know I'll make make a few comments here then then then Chris please fill in fill in what I don't cover but to your to your first question on on discretionary products I think well the way we think about capital in West Fraser so we have a a base load of maintenance business CapEx which is you know safety environmental all the things we need to to to manage the core part of our 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 would be normal or you know depending on the mills readiness and and and we were taking on for the larger more strategic projects you know 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 our lumber platform you know 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 projects that we're planning but in terms of taking that next step right now our focus is on finishing Henderson ramping up Maplesville ramping up continuing to ramp up Dudley things we've already done that we're we're focused on and making good progress on you know in terms of just an overall capital cost you know I you know there others Chris maybe way in here but you know we've not priced out anything recently my my our view would be is you know there's probably been a little bit of relief in 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 you know it's going to be in the same range as Henderson there might be some relief there but not material relief you know again not as fresh to that because we haven't done that work you know recently but but that would be my view that's a good summary I have nothing
spk06: to add to that
spk08: 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
spk06: 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 to next year and then I think as Sean indicated we're 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 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 years but we've also been very busy with a lot of projects as well too so there's probably you know that's probably as far as we can go on that at this time
spk08: okay that's all I have thanks very much guys thanks Sean
spk03: your next question comes from Amir Patel from CIBC capital markets please go ahead
spk05: hi uh good morning Sean given the weak uh pricing backdrop for lumber are you surprised we haven't seen more downtime in the industry both in the south and and NBC and you know with the duties going higher soon uh do you think that'll have an impact
spk07: good morning again so difficult for me to comment on others you know what others are doing other than what comes out publicly and and I would say and I may have said this in the past and in the south uh you know there is uh you know uh um the mills tend to do flex around hour shifts and who knows what everybody's up to you know maybe 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 the price environment and the demand environment you know and I I'm guessing others aren't immune to it as well but it's
spk05: hard Allendale you know one year in what what kind of operating rates you're achieving at that mill
spk07: yeah you know um uh and again uh uh happy with the progress we're making at at Allendale you know just moved our one year anniversary here uh you know several weeks ago um you know and I think we've been kind of pretty consistent right from the beginning these are uh 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 if you kind of uh 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 uh over the next couple of years a year into it
spk05: fair enough but not just the last question you know given the weak lumber market are you seeing any change in vendor expectations when you consider potential sawmill acquisitions
spk07: yeah you know and again we're you know our team is always planning and thinking about what is next you really don't you don't really get to that until you're ready to move forward and uh and and just to reiterate some comments that I made a few minutes ago uh you know 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 uh and and getting those mills up to rate and finishing 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 uh you know uh you know clearly the activity is going to be less today than it was a few years ago
spk05: yeah sure i guess i was referring more to the potential and to for us fraser take advantage of this weaker market for sawmill
spk07: acquisitions oh sorry i thought it was more capital um yeah you know and i think maybe i've touched on this in the past uh you know we're you know for us it's it's got to you know and i think you look at our what we've done the last few years with angelina allendale uh cochrane or spray lakes it really has to be has to have a path to be very competitive at the 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 uh and that's really the bar in west fraser and those opportunities are are few and far behind far between saying that i think we've got the balance sheet and you know kind of the footprint to be able to react react to anything that we're interested in that becomes available fair enough uh
spk05: that's all i had i'll turn over thanks thanks
spk03: your next question comes from matthew mckellor from rbc please go ahead
spk02: hi good morning thanks for taking my questions i think you mentioned that you're seeing lower saw log costs in the us south but some more competition for palm flora on the osb side can you give us a sense of how material these trends are and maybe if you're seeing much uh across the region
spk07: good morning matthew you know they are they are drifting lower um 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 uh you know and as we we've seen uh you know over the years in us self log costs they tend to be you know they tend to be sticky and it takes a period of time for landowner expectations and the you know things kind of find an equilibrium and the market moves down we do think availability for logs as prices are coming down uh and and production is is being adjusted you know there are pockets where availability is improved so price decreases are 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
spk02: thanks that's helpful and then one more for me um historically the industry's seen some major turnover issues in mills in the us south be able to provide any color and 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 we've
spk07: um you know our turnover has been been stable you know it's something we watch very closely and and that's why it's important to get the right shift configuration the right operating schedule 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 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 from what i would call high turnover jobs and i think that's paying some dividends for us in in this market
spk02: thanks at all that's all for me i'll turn it back matthew
spk03: ladies and gentlemen as should you have a question please as the star faddled by the moon your next question comes from ben isaacson from scotia bank please go ahead
spk10: good morning um 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 boardfeet because half the year is now behind us does that um 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
spk07: yeah good good morning ben um that's a good question the uh so i i think for the the guy game we've got 19 mills operating across our platform we've got mills that uh that are still in stages of ramp up um so you know and we've also got mills where we've 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 we're we're expecting that we're going to have to take additional action within those schedules um based on demand conditions that would move us to the lower range so so it's really hard to pin that exactly there's a lot of moving parts that uh that go into landing on an exact production number um so so that's why we we kept the range the same uh and really the 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
spk10: about it thank you and then just my final question is on um not so much channel inventory but i mean is your view that through the channel inventory has been fully de-stocked and now it's just kind of weak underlying demand or are we still going through a process of de-stocking
spk07: really hard to have visibility on invent inventories through the channel the channel is quite long you know not only where it starts at the mill through transit through our customer's yards through the end users you know i can only speak to our inventories and and we're in a normal range you know within our normal operating range i would also the only other anecdotal comment i might make ben is is just the sense of urgency around buying lumber has been readily available and i think buying patterns demonstrate that so it's i 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 there's nothing unusual that we see mad any anything bad to that
spk10: great thank you very much appreciate it thank you ben
spk01: and there are no further questions at this time i will turn the call back over to sean for closing remarks
spk07: thanks julie as always chris and i are available 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
spk03: ladies and gentlemen this concludes your conference call for today you may now disconnect thank you
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