West Fraser Timber Co. Ltd.

Good morning, ladies and gentlemen, and welcome to West Fraser Q4 2021 results conference call. Please note that all lines have been placed on mute to prevent any background noise. During this conference call, West 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 contain forward-looking information or forward-looking statements within the meaning of Canadian and United States securities law. 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 risks, factors, and assumptions is included both in the accompanying webcast presentation and in our 2021 annual MD&A and annual information form, which can be accessed on Wes Fraser's website or through CDAR for Canadian investor or EDGAR for United States investors. 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 number one on your telephone keypad. And if you would like to withdraw from the question queue, please press star then number two. Thank you. Mr. Verastic, you may now begin the conference.

Well, thank you, and good morning, everyone, and thank you for joining our Q4 2021 earnings call today. I'm Chris Verastic, CFO, and I'm joined by Ray Ferris, our President and CEO, and Chris McKeever, our Senior Vice President, Marketing and Corporate Development. This morning, I'll start with a brief recap of Wes Fraser's Q4 and 2021 financial results. I'll then pass the call to Ray, who will provide an update on the business, including a discussion about some of West Fraser's recent initiatives, the opportunities we see ahead for the company, followed by a few concluding remarks before we transition to Q&A. In the fourth quarter, West Fraser achieved strong financial results, capping off a record year despite unprecedented weather-related challenges in Western Canada at the end of 2021. We managed to navigate significant transportation and mill disruptions during a fourth quarter that experienced some of the worst flooding seen in modern times in the BC interior and lower mainland of Vancouver, which severely disrupted our ability to transport our finished goods from Western Canada to market. As announced in an operational update news release last November, We navigated these challenges by reducing operating schedules at multiple Western Canadian locations to manage our inventory levels, raw material supplies, and our integrated fiber supply chain. In the face of these supply constraints, demand for our wood-based building products remained robust in the fourth quarter, and as such, we generated $615 million of adjusted EBITDA, representing a margin of 30% of sales, taking full-year adjusted EBITDA to a record $4.57 billion, or 43% of sales. As in the third quarter, the benefits of our product and geographic diversity of production were a significant advantage. We had a strong sequential improvement in our lumber business, which saw adjusted EBITDA nearly triple to $240 million from the third quarter, helping to offset the sequential decline in our North American EWP business that generated 343 million of adjusted EBITDA in the fourth quarter. In Europe, adjusted EBITDA was 61 million, the second best result ever for that business. Price, seasonal volume trends, and downtime for a capital project all played a role in the European results. Cash flow from operations in the fourth quarter was 290 million, and cash, net of debt, declined quarter over quarter to approximately 1 billion after completing two acquisitions in the quarter for a combined consideration of approximately $580 million. In the fourth quarter, we repurchased another $100 million of West Fraser shares, taking our full-year share repurchases to $1.3 billion. With our Q4 earnings release, we also declared a $0.25 per share dividend, up from the previous level of $0.20 per share. We continue to deploy capital not only to shareholder returns, but also to growth opportunities as evidenced by the recent closings of the two acquisition transactions in the fourth quarter, namely our turnkey Angelina sawmill in Lufkin, Texas and the idled OSB mill near Allendale, South Carolina. We're now in our third month since closing the acquisition of Angelina Forest Products. Our integration is proceeding well and results have exceeded the expectations we had at the time of acquisition. And on Allendale, we have commenced work on the mill to prepare for an eventual restart and are pleased with the progress to date. In November, the Administrative Review 2 rate was finalized and set the new cash deposit rates for countervailing and anti-dumping duties for the Canadian softwood lumber industry. Our rate for cash deposits changed from 8.97% to 11.14% for lumber shipments from Canada to the U.S., on or after January 10th of 2022, whereas the rate for all other non-mandatory respondents in Canada is 17.91%. These rates will be in place until at least June 2022. In terms of outlook, we are providing operational guidance for 2022, which you can see on slide 4, where we have provided ranges for key product shipments and our planned capital expenditures. We have also identified in our earnings release some of the key challenges currently facing our overall operations early in the year, namely that we continue to see the logistics and transportation constraints affecting our business early this year. While infrastructure repairs to rail and truck routes resulting from the severe BC weather and flooding in late 2021 are progressing, rail service availability, operator shortages, and the backlog from disruptions in the fourth quarter are all still negatively impacting our ability to ship products, with January 2022 Western Canadian lumber and plywood shipments down approximately 20% compared to the prior year. Even our Western Canadian OSB operations have been forced to take unscheduled downtime as a result of these transportation constraints. Given these developments, further reductions of operating schedules across our production platform in order to manage inventory levels, raw material supplies, and our integrated fiber supply chain may be required. Currently, it's not possible to estimate when full transportation services will be available or when the backlogs will be cleared, but we will continue to actively seek out and utilize alternative transportation routes and methods to the extent they are available to continue servicing our customers. With that, I'll now pass the call to Ray.

Thanks, Chris, and thanks to everyone for joining our call today. I'm going to refer to a few specific slides from our webcast deck during my comments. And just to further to Chris's comments, I'd comment that particularly in Western Canada, these transportation challenges are really unprecedented in both scale and duration and led to a very challenging operating environment in the fourth quarter and have continued to this point in Q1. Through this period, our team has been very resilient, working diligently through those challenges, all the while minimizing COVID-related business disruptions from the latest wave. Although lack of transportation primarily was resolved with extreme flooding noted, impacted almost all of our Western Canadian platform, it most heavily impacted our BC lumber, plywood, and pulp shipments in the central Caribou region. Under these conditions, I'm proud of what our people and our teams have accomplished, in particular our BC and Alberta people for their patience and commitment for constantly adjusting to a rapidly changing and uncertain conditions. In that context and background, we're pleased to report that Q4 21 was another good quarter and that 2021 another record year for West Fraser. Just over one year ago, on February 1, 2021, we acquired Norbord. And now, with those 12 months of combined performance behind us, it is very rewarding to see the benefits of the product and geographic diversity the acquisition has brought to West Fraser. Not including the cash acquired at close, it's important to note that the EBITDA achieved from the Norbord business in the first 11 months of ownership accounted for approximately 66% of the transaction purchase value at the time of closing of the acquisition. Similar as we did last quarter, I wanted to identify a few areas of the business that I wanted to highlight. In Q3, I talked a little bit about our OSB and industrial specialty strategy and how that's developed over the last year or two. I want to talk a little bit about our lumber team. Our lumber team experienced significant market and operational challenges we discussed in Q4, yet despite this, our results improved materially from the prior quarter, supported in part by our US South growth strategy. This growth and operating strategy has resulted in expanded profitability both through greater percentage and greater percentage of premium grades of 2x4s. Why this is important is that 2x4 often trades at a premium price to wider dimensional lumber, which can support improved margins. As you can see on slide 5, our overall proportion of 2x4s has grown by approximately 700 basis points, and our mix of 2 and better 2x4s has grown approximately 600 basis points over the last few years. Further, the recently acquired Angelina mill is expected to support additional improvement both in 2x4% and in premium grades. Our US South growth strategy remains a key focus for West Fraser. Although we are pleased with our trend in results, we expect to see continued improvement in our US South operating metrics as we execute on our operational and capital transformation strategy. One other area I'd like to highlight is our return on capital employed. So moving to slide six, you know, West Fraser generated $4.57 billion of adjusted EBITDA and $3.95 billion of operating earnings. This level of operating earnings drove a ROKI, or return on capital employed, of 70%, representing the company's fifth year out of the last six with a ROKI in excess of 15%. These returns are not just a reflection of a healthy market fundamentals, but are also a result of continued attention to lowering costs and expanding margins through improved productivity and product mix, particularly in our key products of OSB and lumber. Moving to slide seven, I'd like to talk about Wes Fraser's commitment to sustainability and climate action. And with that, I'm very pleased to share that we have formally committed to science-based targets and the Science-Based Targets Initiative. We believe a thoughtful ESG strategy is our foundation for building a company that has financial resilience for the long term. Key to that strategy is establishing clear and credible goals with well-defined metrics that are part of our ongoing commitment to the environment and sustainability. As you can see on slide 7, we have now taken an important step on our sustainability journey by committing to reduce our Scope 1 and 2 greenhouse gas emissions by 46% and our Scope 3 emissions by 25% by 2030. Further, to achieve these emission targets, we have committed to invest an average of approximately $50 million annually in greenhouse gas reduction projects and opportunities of approximately $400 million before 2030, as shown on the next slide. By committing to reduce emissions in line with climate science, in line with the Paris Agreement goals by 2030, we are building on our solid legacy of sustainability performance of our products, while enhancing social, environmental and economic benefit in the communities in which we operate. In summary, We're pleased with our results this quarter and this year despite a number of market and operational challenges. After repurchasing $1.3 billion worth of our shares in 2021, our balance sheet remains strong with considerable liquidity and ability to navigate future opportunities and challenges. We will continue to take a balanced, disciplined, and patient approach to capital allocation. And we will deploy capital in a manner that we believe will increase long-term shareholder value. We have continued to move forward with strategic capital projects while also pursuing acquisitive growth, providing additional resilience and durability to meet the needs of our customers and to steer through whatever market challenges come our way. Looking forward, while we expect the first quarter to be challenged by near-term transportation and logistics constraints, we remain optimistic about the medium to long-term fundamentals of our wood products business. Our geographic and product diversity creates a platform to serve our customers and shareholders very well. But I am most energized and excited about the depth, skill, capability, and commitment of our people who remain focused on lowering our costs and improving our margins through operational excellence, and executing on the benefits of strategic capital, such as our Dudley Sawmill, our Chambord OSB restart, the Inverness expansion, the recent Gank upgrade in the last quarter, and our Allendale OSB acquisition late last year, while integrating and ramping up at our recently acquired Angelina Mill. We'll turn the call back to the operator and ask for questions.