West Fraser Timber Co. Ltd.

Good morning, ladies and gentlemen, and welcome to the West Fraser Q3 2021 results conference call. During this conference call, West Fraser's representatives will be making certain statements about potential future developments. 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. West Fraser's business outlook, including forecasted U.S. housing starts, market conditions, demand for products and available supply, and expectations concerning costs, West Fraser'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 Norboard into the West Fraser business and expected synergies, and recent developments, including the impact of wildfires, the recently announced acquisitions of the Lufkin, Texas, SYP Lumber Mill and the Allendale, South Carolina, OSB Mill, and Wes Frazier's plans to restart the Allenby OSB Mill. 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 depends 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's discussion and analysis, as supplemented by other risks and uncertainties as set out in the company's quarterly MDNAs. 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 in 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 1 on your telephone keypad. If you would like to withdraw your question, please press star, followed by 2. Thank you. I will now turn it over to Chris Vorostek. You may begin your conference.

Thank you, Chris. Good morning, everyone, and thanks for joining our Q3 2021 earnings call today. I'm Chris Vorostek, CFO, and I'm joined today in our Vancouver office by Ray Ferris, West Fraser's President and CEO, Chris McKeever, Senior Vice President, Marketing and Corporate Development, and several members of our executive team. This morning, I'll start with a brief recap of our Q3 financial results and then I'll pass the call to Ray, who will provide an update on the business, including a discussion about some of West Fraser's recent activities, the opportunities we see ahead for the company, followed by a few concluding remarks before we transition to Q&A. In the third quarter, we experienced a significant product price reduction from levels in the first half of the year across lumber, OSB, and plywood. In addition to softer demand in the third quarter, we faced several other challenges, including a very active wildfire season in BC, which affected our ability to access the land base and to ship our products, transportation availability constraints, and raw material and other input price challenges. We had three separate shutdowns in our pulp business, including an unscheduled outage at our caribou mill and an extended annual shut at Hinton Pulp. Higher power costs in the summer also negatively affected the pulp mills. We also faced disruptions from a log yard fire at our Chetwynd, BC lumber mill. Throughout the period, we adjusted the pace of our operations across our business to respond to these challenges. This resulted in a lower level of shipments than we experienced in the first half of the year. Despite these headwinds, in our core markets, the benefits of our product and geographic diversity of production were a significant advantage in the quarter. We had continued strong results in our EWP business, both in North America and in Europe, where we reported a record quarter. Ray will touch on this performance more in his comments. Our MDF, LBL, and plywood businesses that are part of our fiber integration strategy in Western Canada all performed well. While our financial results declined from the pace of the first half, we still recorded adjusted EBITDA of $786 million in the third quarter, which represents a margin of 33% of sales. The majority of the change in adjusted EBITDA from the prior quarter is attributable to price, with the volume reductions playing a small part and cost headwinds also moderating the results. Cash flow from operations was $914 million, and after repurchasing Canadian $1 billion of shares in our substantial issuer bid and continuing to execute on our normal course issuer bid, our cash balance, net of debt, declined only modestly to $1.6 billion. With the recent announcements of the two acquisition transactions, we continue to deploy capital not only to shareholder returns, but also to attractive growth opportunities. In November, we expect the AR2 rates relating to the softwood lumber dispute to be finalized and set the new cash deposit rates for countervailing and anti-dumping duties for the Canadian softwood lumber industry. We expect our rate for cash deposits to change from 8.97% to 11.38%, whereas the rate for all other non-mandatory respondents in Canada will be 18.32%. These rates will be in place until at least August of 2022. With that financial overview, I'll now pass the call to Ray.

Thank you, Chris, and thanks to everyone for joining our call today. I will be referring to a few specific slides in our deck during comments today. As Chris has noted, Despite quite challenging operating conditions in several regions, I'm pleased to report that the third quarter 2021 was another strong quarter for West Fraser. As our team remained resilient and agile, working diligently to minimize COVID related business disruptions. In particular, our BC interior caribou, lumber and plywood operations were the most heavily impacted in the quarter due to wildfire activity. It's important to note that these operations are highly integrated and that we often extract both a plywood log and a saw log from the same tree. I'm proud of the agility of our BC team to manage the integrated wood, plywood and lumber and MDF products business in a responsible manner and overall profitable through a very challenging time. On February 1st of 2021, we acquired Norboard, And although we are just nine months removed, it is very exciting to see the benefits of the product and geographic diversity that the acquisition has brought to us for Azure. And although there are several areas that I could highlight, I thought I would just pick a few. So first, product diversity. Our OSB team experienced market and operational challenges while in Q3, yet despite these hurdles, our results were strong, driven in part by our continued growth in our specialty OSB business. So as you can see on slide three, the specialty business, which comprises sales of our OSB products into industrial and export markets, has continued to expand and now accounts for approximately 30% of our North American shipments, up from approximately 23% five years ago. Looking at the numbers, you'll see that this ongoing and strategic shift to specialty has reduced our relative exposure to commodity OSB by about 450 million square feet over that timeframe. This interestingly approximates to roughly one small scale OSB mill. I think it's important to note that this growth, particularly in the last 12 months, has been against the backdrop of record high commodity prices. Our specialty and industrial team has continued to grow these markets and look for new opportunities. We like the specialty business, which typically experiences less pricing volatility, more stable margins, and volumes than our commodity OSP business through the cycle. And we expect to continue to grow this business and similar businesses. Another area that I would like to highlight is geographic diversity. So moving to slide four in Europe. As Chris noted in Q3, it was a record quarter for our European EWP operations, where we generated $90 million of adjusted EBITDA, more than doubling our previous best quarter for that business. This, too, reflects the benefits of geographic diversification of our company today, as our customer demand in Europe is typically delinked from North American markets. We see continued demand growth for West Fraser's wood-based panel products in Europe, with the opportunity for our domestically produced panels to continue to gain share over imported plywood. In order to meet that demand growth, we expect to continue to ramp production and shipments from our Phase 2 investment at our Inverness mill in Scotland over the coming period. Our Europe business is well managed and executing at a high level, and we are encouraged about potential future opportunities. I want to now talk about some of our other activities during the period, specifically two transactions in our building products business that occurred subsequent to the period. That being the acquisitions of a lumber mill and of a currently idled OSB mill. Our optimism about the future of wood products demand is supported by a robust balance sheet and has allowed us to continue to allocate capital toward attractive M&A growth opportunities. So on slide five, I'll start with the Angelina Forest Products lumber mill, which is located near Lufkin, Texas. We are very excited about this opportunity and are confident we'll be able to obtain the necessary regulatory approvals required to close the transaction. Although the headline price of approximately $300 million, or $276 million after tax attributes, is a very healthy price to pay for this mill, as it is, we are quite pleased with the outcome. We expect this mill to be one of the company's lowest cost lumber mills when ramped up. We see significant strategic value in the Angelina Mill as a modern turnkey operation located in a low cost and abundant fibre basket near growing markets in the US South. We expect the mill to contribute to cash flows immediately after the deal closing, shaving considerable time from what one would expect required to achieve strong cash flows for a similar greenfield project. We typically, and still do, take quite a conservative view in our analysis when calculating returns. Saying that, given our views on North American lumber supply and demand, we believe this acquisition not only has strategic long-term value for West Fraser, but is largely de-risked as a greenfield alternative. Moving to slide six. Moving to our announced acquisition of Georgia Pacific's OSB Mill near Allendale, South Carolina. Similar in many ways to the Angelina Mill acquisition, we are excited about the opportunity to close on the Allendale Mill after we receive the necessary regulatory approvals. Like Angelina, Allendale is close to a low-cost abundant fiber and to growing end markets. We estimate that we'll have to spend another $70 million to update and optimize the mill in preparation for its restart, but when that investment is complete, we anticipate Allendale will be well positioned as one of the lowest cost OSB mills in the company's portfolio. Further, as for Angelina, and based on current market demand, we expect to be able to achieve expected production and cash flows much sooner for Allendale than we would if we were to build a greenfield mill, which we estimate requires at least three years to get to that first panel and would require significantly more capital investment and would expose us to greater construction and execution risks. Next, I want to touch just briefly on wood products and sustainability. I'm happy to share that we recently released our 2020 sustainability report and that over the summer, West Fraser planted its two billionth tree as part of our reforestation program. We believe a thoughtful ESG strategy is our foundation for building a company that has financial resilience for the long term. Key to establishing these goals must be a clear, credible action plan and well-defined metrics as part of an ongoing commitment to the environment and the sustainability of the communities in which we operate. The wood products industry is a natural fit in a circular economy and will contribute to the collective goal of supporting carbon sequestration and global climate change. Forests, wood, and wood products have an important and vital role to play in the fight against climate change. And as the world demands more sustainable and renewable building materials, so do we believe that new products and uses of wood products will grow. Further to that point, and on slide 8, I thought I would highlight an area that has been experiencing growth in North America. And just a caution, first, we're not planning on moving into mass timber production or CLT at this time at West Razor, but I thought it's important to kind of acknowledge the growth. But we are eager to supply those needs and to meet those needs. So according to the Softwood Lumber Board, in 2018 there were 74 mass timber projects in North America. Just three short years later, in 2021, that number has risen to more than 1,240. through the end of September, reflecting impressive early growth. Further, the Softwood Lumber Board expects meaningful longer-term future growth for mass timber, with potential to add incremental lumber demand of somewhere between 3 to 6 billion board feet. This represents the equivalent demand of approximately 300,000 to nearly 600,000 new housing starts. Time will tell. It's early days, but we are optimistic and believe this type of medium to longer-term demand dynamic is in addition to conventional housing and repair and remodel demand and stands to provide important tailwinds for the North American wood products industry for years to come. In summary, we are pleased with our results this quarter despite a number of market and operational changes. After repurchasing $1 billion Canadian worth of our shares and a substantial issuer bid, and a further US$100 million to our normal course issuer bid, we exited the quarter with strong liquidity. We have continued to move forward with strategic capital projects while also pursuing acquisitive growth, providing even more resilience and durability to meet the needs of our customers and whatever the market challenges come next. Looking forward, we expect a less eventful fourth quarter, and we believe we are seeing the early signs of demand recovery after a soft third quarter, and we remain optimistic on the longer-term fundamentals of the wood products space generally. We will continue to focus on operational excellence, operationalizing the benefits of strategic capital and executing on current growth projects at Dudley, Chambord, Inverness, while looking to close on the Angelina and Allendale acquisitions. And we will continue to provide enhanced ESG disclosures as we look to define or refine a credible and thoughtful ESG strategy that fuses our aspirational goals with believable plans. And we will take the time to get that right. Finally, I'd like to recognize Peter Weinbergen, our president of Engineered Wood Products, that he will be retiring from West Fraser at the end of this year after a long and distinguished career. Having joined what was then called Miranda Forest Sales in 1987, Peter has spent his entire career in the OSB and wood products business and helped build Norboard into the world's largest OSB company. Peter led Norboard as CEO since 2014 before joining West Fraser earlier this year. Frankly, the success built by Peter and his OSB team was a key aspect of what led West Fraser to acquire the company earlier this year. I am thankful and glad that Peter made the choice to join our company and help guide and support a smooth and successful integration into West Fraser. It has gone better and faster than what we would have expected, and Peter's leadership and involvement has been key to this. On behalf of the company and myself personally, I want to thank Peter for taking this on and helping us with the integration of Norbord into West Fraser. His knowledge and passion for the business will be missed. Later this year, we will be allocating Peter's roles and responsibilities within the organization. Until that time, Peter will continue in his current role. I have great confidence that our team is able to meet the challenge going forward. With that, we'll turn the call back to the operator for questions.