West Fraser Timber Co. Ltd.

Good morning ladies and gentlemen and welcome to the West Fraser Q3 2024 results conference call. At this time, all lines are in listen-only mode. Following the presentation, we will 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, October 24, 2024. 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 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 the Wes Frazier's website or through CDAR 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.

Thank you, Emily. Good morning, everyone, and thank you for joining our third quarter 2024 earnings call. My name is Sean McLaren, President and CEO of West Fraser, and joining me today are Chris Ferostek, Senior Vice President and CFO, 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 Q3 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 $62 million of adjusted EBITDA in the third quarter of 2024, representing a 4% margin. Note that this quarter was impacted by a $32 million lumber export duty expense related to the 2022 calendar year. Results were varied across our business again in Q3, with relative strength in our North American engineered wood product segment and stronger than expected demand for SPF lumber offset by continued softness in SYP lumber demand. In the third quarter, levels of new home construction in the US showed further signs of stabilizing and the U.S. Central Bank began to trim its benchmark interest rate, which we believe is supportive of demand for OSB and to some extent SPF lumber. That said, mortgage rates remain relatively elevated and still appear to be constraining existing home sales activity, and the repair and remodeling segment, which we expect at the margin, has a greater relative impact on SYP lumber demand. On a trailing four-quarter basis, adjusted EBITDA was $630 million, which is an improvement from the $561 million reported at year end 2023. We've now been able to maintain a trailing four-quarter EBITDA above $500 million throughout this latest down cycle that started back in late 2022, aided by actions we have taken, including acquisitions, strategic initiatives to optimize our mill portfolio, and a relentless focus on cost and margin opportunities. Finally, in terms of our balance sheet, we have more than $2 billion of total liquidity at quarter end, which offers us the financial flexibility and strength to support a consistent capital allocation strategy through the cycle. With that overview, I'll now turn the call to Chris for additional detail and comments.

Thank you, Sean. And a reminder that we report in U.S. dollars and all my references are to U.S. dollar amounts unless otherwise indicated. The lumber segment posted an adjusted EBITDA loss of $62 million in the third quarter compared to a $51 million adjusted EBITDA loss in the second quarter. Note that the third quarter of 2024 included the previously mentioned $32 million export duty expense that relates to the 2022 calendar year period. Including the impact of this prior period adjustment, lumber adjusted EBITDA would have been a loss of $30 million, a nearly $20 million improvement from the prior quarter. Our North America EWP segment generated $121 million of adjusted EBITDA in the third quarter versus $308 million in the second quarter. The pulp and paper segment generated $2 million of adjusted EBITDA in the third quarter, below the $9 million reported in the second quarter. Finally, in our European business, adjusted EBITDA was $1 million in the third quarter versus $6 million in the second quarter. Lower prices were the largest factor for the sequential EBITDA decline across our North American engineered wood products and lumber businesses, which was only partially offset by higher North American OSB shipments. As noted last quarter, our lumber business continued to benefit from the actions we took earlier in the year to curtail production at three of our higher-cost mills essentially replacing that higher cost volume with production from other lower cost mills, which is positive for our overall cost structure. In the U.S. South, on a year-to-date basis, our SYP shipments are now down more than 10% from 2023, and notably, our Q3 shipments are down nearly 12% versus the prior quarter. With regard to softwood lumber duties, as noted, we recorded a $32 million duty expense in Q3, related to the finalization of the AR5 rates. West Fraser's AR5 final combined rate, which now forms the cash deposit rate, is approximately 11.9%. This is the cash deposit rate that will be in effect until the U.S. Department of Commerce finalizes AR6, which covers the period of January 2023 to December 31, 2023. If our AR6 finalized CVD rate were to remain unchanged from the AR5 finalized CVD rate and the AR6 finalized AD rate is the same as Wes Fraser's estimated rate for that period of 8.84%, our combined finalized rate would be approximately 15.7% and would take effect next August and be in effect through August of 2026. Cash flow from operations was $150 million in the third quarter, with our cash balance net of debt and lease obligations at a healthy $463 million, similar to the $469 million reported last quarter. The nominal change in our net cash balance reflects some further release of working capital this quarter, offset by $107 million of capital expenditures and approximately $65 million of cash deployed towards shower buybacks and dividends.