West Fraser Timber Co. Ltd.

Good morning, ladies and gentlemen. Welcome to West Fraser Q1 2023 Results Conference Call. Please note that all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star, then a number 1 on your telephone keypad. If you'd like to withdraw your question, please press the star followed by 2. 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 constitute forward-looking information or forward-looking statements within the meaning of Canadian and United States securities laws. Such statements involve certain risks, uncertainties, and assumptions, which may cause West Fraser's actual future results and performance to be materially different from those expressed or implied in these statements. Additional information about about these risk factors and assumptions is included both in the Accompanying webcast presentation in our 2022 annual MD&A in Annual Information form, which can be accessed on Wes Fraser's websites, Arthur Seder for Canadian investors, and Edgar for United States investors. Thank you, Mr. Chris Varastic. You may begin your conference.

Thank you, Julie. Good morning, everyone, and thank you for joining our first quarter 2023 earnings call. I'm Chris Verostik, Chief Financial Officer of West Fraser, and joining me today are Ray Ferris, our President and CEO, and Matt Tobin, our Vice President of Sales and Marketing, and other members of the executive team. I'll begin with a brief overview of West Fraser's Q1 2023 financial results, and then pass the call to Ray, who will give an update on the business, as well as provide a few concluding remarks before we transition the call to Q&A. Our comments today will be brief as we recently provided a company update at last week's Annual General Meeting. As a reminder, we report in U.S. dollars and all references today will be to U.S. dollar amounts unless otherwise indicated. West Fraser generated $58 million of adjusted EBITDA in the first quarter. largely comparable to the $70 million of adjusted EBITDA generated in the fourth quarter, which included a one-time $7 million benefit of carbon credits from our EU business, as well as a $14 million insurance recovery from our North American engineered wood business. Our North American EWP segment generated $31 million of adjusted EBITDA, down from $109 million in the prior quarter. This Q1 result included a $15 million inventory write-down, while the prior quarter had benefited from the $14 million insurance recovery just noted. The lumber segment had zero adjusted EBITDA, improving from negative 77 million in the prior quarter. You recall that prior quarter included a $39 million inventory write-down, recognized as lumber prices reached a near-term low at the end of last year. The pulp and paper segment generated $7 million of adjusted EBITDA in the first quarter versus $15 million in the prior quarter, while in Europe, adjusted EBITDA was $20 million in the first quarter down from $30 million in the fourth quarter, a period that had included a one-time $7 million benefit from the sale of carbon credits. Price decreases were the largest driver of the sequential EBITDA declines across our lumber and North American EWP businesses. Cash from operations was a use of $198 million for the quarter, though our cash position remained very healthy. Cash net of debt decreased to $309 million in the first quarter from $625 million last quarter as we paid $25 million of dividends, spent nearly $100 million on capital expenditures, and invested seasonally more than $200 million in our working capital build. In terms of our outlook for 2023, we are reiterating our operational guidance for the year as detailed in our earnings release, including ranges for key product shipments and our planned capital expenditure. Capital allocation is an important part of how we run our business every day at West Fraser. Our capital allocation strategy is a durable, three-pronged approach where we reinvest in the business, maintain financial flexibility that allows us to pursue inorganic and organic strategic growth opportunities, and return excess capital to shareholders. This strategy has served us well over the years, and frankly, we think it is this balanced and prudent approach that has put us in a position of strength today, despite softer market conditions. Let's dig into the specifics for a moment. Since 2016, a period that has seen both up and down cycles, we have generated more than $8.5 billion of cash from operations. Nearly one-third of that cash flow has been invested in the business through capital projects and acquisitive growth. Approximately 10% has been allocated to repay debt and build a cash buffer, and more than 50%, or nearly $4.5 billion, has been returned to shareholders through share buybacks and dividends. Slide 9 provides a snapshot of a few of our key balance sheet and liquidity metrics, further highlighting the success of our patient and balanced approach with capital. Note, West Fraser is rated investment grade by three key ratings agencies. We also continue to have strong liquidity, with combined cash and bank lines approaching $2 billion, and our debt ratios remain well within the bounds of our lending covenants. As we look ahead, West Fraser remains committed to investing in the business, and we have reiterated guidance of $500 to $600 million of capital expenditures in 2023, including an estimated $100 million that we plan to spend on the sawmill modernization in Henderson, Texas. With that overview, I will now pass the call over to Ray.

Thanks, Chris. As mentioned, in Q1 2023, we experienced soft demand, particularly in North America. as the rapid increase in mortgage rates in 2022 continued to have an impact on overall consumption. I will note that as the first quarter unfolded, we did see many of our production costs come down and the trajectory of our demand improve. This demand improvement was particularly true for our U.S. south lumber and OSB segments. which allowed us to return to a more normalized operating environment when compared to the significant production downtime we took in the fourth quarter. In Western Canada, and specifically in BC, where we have an integrated operating strategy, our business decisions can be more complex as we evaluate profitability in the aggregate across our lumber, pulp, plywood, and panels segments. while also trying to balance short-term decisions with the long-term considerations of preserving key aspects of our manufacturing, private procurement, and staff ecosystems. As a result, our overall BC business in the aggregate was profitable in the first quarter due to our downstream integration, as mentioned, with MDF, plywood, and pulp. In terms of our more important longer-term strategy, while the first quarter SPF production was slightly up in Q4, the historic downward trend in our BC production has been . From 2018 through 2022, our West Fraser BC lumber production declined by more than 40%, representing a reduction of nearly 1 billion board feet through that period, reflecting our continued adjustment to available economic fiber and customer demand. With ongoing government policies such as old growth deferrals, species at risk, and other potential further reductions due to policy, we expect annual level cuts to continue to be constrained. We reiterate our optimism about our U.S. growth strategy for the long-term aspects and prospects for our lumber business. With respect to outlook, the wood building products industry may continue to face challenges ranging from further rate hikes by central banks, ongoing labour constraints and the potential for muted product demand due to the apparent constraints that consumers face with regard to housing affordability, at least in the short term. That said, inflationary cost pressures have moderated across much of our supply chain for the raw materials such as energy, resins, chemicals and fibre and we believe this trend will continue through the remainder of 2023. On the demand front, We are seeing some positive signs in the spring building season, much to do with the public home builder commentary that is in the marketplace, and the upward trend in mortgage rates that we experienced much of last year appears to be slowing or easing. Both of these factors are helpful for driving new home construction and conception of our wood building business products. In closing, while near-term uncertainties exist across the industry and our business, we remain confident in the foundation we have built. We have been through these cycles before and it is not by accident that we have the talent, assets, and the financial flexibility to position us well to handle both the challenges and the opportunities that lie ahead. We have been disciplined in our approach to capital allocation and have preserved capital in the event that we have a down market like the one we are currently experiencing. It is this discipline that has positioned us to be able to execute on our strategy to invest in and improve our assets through all market conditions, as well as be ready to take advantage of growth opportunities if and when they arise. As we look ahead, we will continue to focus on our core strengths of being low cost, remain true to our capital allocation strategy, and we look forward to a future with a growth in demand for the types of sustainable and renewable wood products for which West Fraser is known. With that, I'll turn the call back to the operator and we'll take Q&A. Thank you.