West Fraser Timber Q3 2024 Earnings Call Transcript

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October 24, 2024

There are 7 speakers on the call.

Operator

This call is being recorded on Thursday, October 31, 2018. During this conference call, West Fraser's representatives will be making certain statements about West Fraser's future financial and operational performance. Business outlook statements may constitute forward looking information or forward looking statements within the meaning of Canadian and United States securities laws.

Operator

Such statements involve certain 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 factors and assumptions is included both in the accompanying webcast presentation and in our 2023 annual MD and A and annual information form through website or through SEDAR Plus for Canadian investors and EDGAR for United States investors. I would now like to turn the conference over to Sean McLeod.

Speaker 1

Thank you, Emily. Good morning, everyone, and thank you for joining our Q3 2024 earnings call. My name is Sean McLaren, President and CEO of West Fraser and joining me today are Chris Firostek, Senior Vice President and CFO Matt Tobin, Senior Vice President of Sales and Marketing. On the earnings call this morning, I will begin with a brief overview of West Fraser's Q3 2024 financial results and then pass it before I share some thoughts on our outlook and offer concluding remarks. West Fraser generated $62,000,000 of adjusted EBIT24, representing a 4% margin.

Speaker 1

Note that this quarter was impacted by a $32,000,000 lumber export duty expense. Results were varied across our business again in Q3, with relative strength in our North American Engineered Wood Products segment and stronger than expected demand set by continued softness in SYP lumber demand. In the Q3, levels of new home construction in the U. S. Showed further signs of State Bank began to trim its benchmark interest rates, which we believe is supportive of demand for OSB and to some extent SPF lumber.

Speaker 1

That said elevated and still appear to be constraining existing home sales activity and the repair and remodeling segment, which we expect that the margin has a high P lumber demand. On a trailing 4 quarter basis, adjusted EBITDA was $630,000,000 which is an improvement from the $561,000,000 reported at year end 2023. We've now been able to maintain a trailing 4 quarter EBITDA above 500 down cycle that started back in late 2022 aided by actions we have taken including acquisitions, strategic initiatives to optimize opportunities. Finally, in terms of our balance sheet, we have more than $2,000,000,000 of total liquidity at quarter end, which offers us 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.

Speaker 1

Thank you, Sean. And a reminder that we report in U. S. Dollars and all my references are to U. S.

Speaker 1

Dollar amounts unless otherwise indicated. So $62,000,000 in the 3rd quarter compared to a $51,000,000 adjusted EBITDA loss in the 2nd quarter. Note that the Q3 of 2024 included the previous work duty expense that relates to the 2022 calendar year period. Excluding the impact of this prior period adjustment, lumber adjusted EBITDA would have been a loss of $30,000,000 a nearly $20,000,000 improvement from the prior quarter. Our North America EWP segment generated $2,000,000 of adjusted EBITDA in the 3rd quarter versus $308,000,000 in the 2nd quarter.

Speaker 1

The Pulp and Paper segment generated $2,000,000 of adjusted EBITDA in the 3rd quarter 2nd quarter. Finally, in our European business, adjusted EBITDA was $1,000,000 in the 3rd quarter versus $6,000,000 in the 2nd quarter. Lower prices were in 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 3 of our higher cost mills, essentially replacing that higher cost volume or cost mills, which is positive for our overall cost structure. In the U.

Speaker 1

S. South, on a year to date basis, our SYP shipments are now down more than down nearly 12% versus the prior quarter. With regard to softwood lumber duties, as noted, we recorded a $32,000,000 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 0.9%. This is the cash deposit rate that will be in effect until the U.

Speaker 1

S. Department of Commerce finalizes AR6, which covers to December 31, 2023. If our AR6 finalized CVD rate were to remain unchanged from the AR5 and the AR6 finalized AD rate is the same as West Fraser's estimated rate for that period of 8 0.84% 15.7% and would take effect next August and be in effect through August of 2026. Cash flow was $1,000,000 in the 3rd quarter with our cash balance net of debt and lease obligations at a healthy $463,000,000 similar to the $469,000,000 reported last quarter. The nominal change in our net cash balance reflects some further release of working capital this quarter, offset by $107,000,000 of capital expenditures, dollars 65,000,000 of cash deployed towards Shower buybacks and dividends.

Speaker 1

With that brief financial overview, I will pass the call back to Sean. We remain steadfast in our strategy and proud of the company we have built with its geographic and product diversification that has allowed us to weather the period experience for more than a year now. As seen in the right hand right side figure on slide 7, our North American EWP segment did $760,000,000 of adjusted EBITDA over the last four quarters, a period of challenging cyclical conditions for our other segments. It is this diversity in our wood building product offering that has allowed us to generate $630,000,000 of adjusted EBITDA on a consolidated basis, which is more than 2.5 times the level of pro form a EBITDA experienced in the down cycle of 2019. I'll now include the remarks.

Speaker 1

We remain encouraged that the Fed's rate hiking cycle is seemingly in the rearview mirror and that rate cuts are now over the near term, which should be supportive of demand for wood building products in the housing and repair and remodeling markets we serve. Overall inflation risks are relatively benign with costs having stabilized across much of our supply chain. As such and based on what we can see today, we are confident that we are unlikely to experience meaningful upward cost pressures over the near term. For our lumber operations, we make progress refining and optimizing our operations by removing costs and looking for additional margin opportunities. Although market condition today, the industry supply demand balance appears to be stabilizing, which is supportive for the industry over the medium term.

Speaker 1

As of shift reductions, mill closures and indefinite curtailments, we have reduced available capacity by more than 800,000,000 board feet since it includes the latest announcement to indefinitely curtail 110,000,000 board feet at our lumber mill in Lake Butler, Florida. We have also reduced the number of shifts or hours of operations at various lumber mills across our platform. In conjunction with these capacity adjustments and to manage costs more productive mills where we have been spending our modernization capital. SPF products realized better demand than we originally expected in Q3 as new housing markets appear to have demonstrated more resilience than repair and remodeling markets in which we tend to see a greater demand pull for our our. In our North American EWP business, we continue to ramp production at our Allendale OSB mill where we are pleased with the cost production progression.

Speaker 1

We expect the mill to be among our lowest cost OSB facilities when it achieves its full operating rate. Given this backdrop, we now expect SPS shipments to slightly exceed the top end of our previous 2024 guidance range of $2,600,000,000 to $2,800,000,000 Board to reiterate our previously reduced 2024 guidance for SYP shipments in the range of $2,500,000,000 to $2,700,000,000 Board North American OSB shipments to be closer to the top end of the guidance range of $6,300,000,000 to $6,600,000,000 Lastly, as we near year end, we are narrowing the guidance range for our 2024 capital expenditures to $475,000,000 versus our previous guidance range of $450,000,000 to $550,000,000 Before I shift to my concluding remarks, I wanted to briefly reflect upon the attractive returns generated for our shareholders. As you can see in the figure at the bottom of slide 9, our shareholders have as we have executed on our plans to grow the business both organically and inorganically, We have optimized our portfolio through dispositions variable or underperforming assets such as pulp as the pulp mill divestments we recently completed and we have returned surplus capital through dividends and buybacks. We expect for us to look to do more of the same on our journey towards creating value for our shareholders.

Speaker 2

In conclusion, the debt is

Speaker 1

favorable over the near term, which should be supportive for industry demand. We are taking actions that we expect will make us even stronger when the industry begins. We will continue to focus on costs and margins in order to build a more resilient business through the cycle, while maintaining the type of financial strength to be able to take advantage of opportunities if and as they arise. We remain optimistic about the longer term demand prospects for West Fraser build, one of the world's leading wood building products companies. With that, we'll turn the call back to the operator for questions.

Operator

Ketan Mamtora from BMO Capital Markets. Please go ahead.

Speaker 3

Good morning and thank you for taking my question. Ashant, perhaps to start with, can you give some additional color on how the R and R demand is trending as we think about lumber first? Or is it more the same and looking for interest rates to drop before things actually start to stabilize?

Speaker 1

Good morning, Ketan. I'll make a couple of comments here and then maybe ask Matt to fill in what I missed. I would say from our progress, we have seen a little better demand on the Southern yellow pine side. Saying that, I think largely the recent price improvement we and others have taken. Our treated businesses our treated customers are our best proxy for that.

Speaker 1

But with that maybe I'd ask Matt to No.

Speaker 2

I think I agree on the supply adjustments that have created positive pricing environments for us. And we believe that it influenced that pricing and our demand is one of them. And our long term view of R and R is unchanged. Historically, it's a GDP like Kroger and we expect that to be the case over

Speaker 3

Understood. Just maybe one more on this. You talked about in SYP, supply demand in a better shape, yet STF, you've taken up your volume target. Any just sort of high level thoughts on why these the bigger price response in SPF given that new residential is holding up better relative to R and R?

Speaker 1

Jan, it's what customers do and the products they choose to buy or not to buy. I would say to look beyond the benchmark pricing early on in the quarter between SPF and SYP that's corrected. But if you go to the wider widths 2 by 6, 2 by 8 those spreads continue for SPF. So I think combined with more curtailments on the SPF side, the supply demand balance is that's why there's more volume coming from us than SPF.

Speaker 3

Got it. And just one last question from me. Chris, as you think about CapEx for next year without getting into specific projects, how would you have us think about it at this point? Would it be similar to 2024, lower, higher? Just a

Speaker 1

Yes. And we'll have some guidance out kind of at when we release year end around kind of where we think the CapEx range is going to be next year. I'd say a few things we've had quite a bit of projects underway and we're quite happy to be bringing those projects to completion here just as we maybe we're reaching an inflection point on and feel that will really prepare us well for the backside of this cycle when it improves. I'd say a few things. Henderson will be wrapping up.

Speaker 1

That's been here over the last couple of years. I don't think we're quite ready to start something as big as Henderson again in the near term. Here we do have more opportunity things. So I think where we've been the last couple of years is a good place to start. But Bias is probably a little bit to look forward just because we're bringing so much stuff to completion here over the next couple of quarters, which we're actually really excited about, about ramping up some of these projects that we think will serve.

Speaker 3

That's very helpful. I appreciate it. Good luck. Thank you.

Speaker 4

Thanks. Thank you.

Operator

And your next question comes from Chris. Go ahead.

Speaker 5

Thanks. Good morning, everyone. A couple of questions. I want to first touch on capacity closures in the South. And you attributed some of the recent price momentum for Southern Yellow Pine Lumber to the capacity shut announcements.

Speaker 5

A lot of that won't actually start to hit the market until towards the end of this year and into early 2025. So wondering if you can give some context on how the actual market is getting tighter or speculative buying ahead of these supply reductions actually hitting the market?

Speaker 1

Good morning. I guess, it's hard for me to speak for across the whole industry, but I will speak for us. We took action and as things really kind of deteriorated even further through Q2, we took further action. And I would say that the impact of the inventories are relatively small in a Southern mill compared to what you'd see in a Northern mill or areas where bigger log and process inventories. So I'm just speaking for West Fraser, probably are a little better, but not materially different.

Speaker 1

But so the improvement we've seen in our to the actions we've taken on the supply side. I think Sean when you're unwinding all the inventory at a mill in the north and the supply chain the length of it, it's probably a matter of months to see the impact as you unwind everything. In the south, when we think about our recent experience around the facilities that we've closed in the weeks until the inventory is exhausted.

Speaker 5

Got it. So Lake Faudler, we've sold all the inventory off at this point?

Speaker 1

Correct. Yes, very quickly.

Speaker 5

Thank you for that. Second question is on softwood lumber trade file. We've seen a competitor borrow against receivable. You guys don't need the money, but wondering if you can comment on those types of opportunities and any updated thoughts on to wait for elections to play out before we get any potential momentum towards this? Any updated thoughts on the trade file?

Speaker 1

Maybe I'll take the liquidity side of it and Sean can deal with kind of path forward on it. Sean, I would say, when we think about where we are from a liquidity standpoint, I would agree we don't some sort of duty transaction. We repaid our notes a couple of weeks ago. So our gross debt is down to $200,000,000 from Moody's upgraded another notch. So feel very good about the investment grade rating that we have and our ability to access capital markets if there was something else for us our primary sources of financing would be the traditional sources of financing that we would tap into.

Speaker 1

So on liquidity front, I think we're very well covered off from that standpoint. And Sean maybe you want to comment on path forward here. Yes, sure. Maybe a couple of comments on path forward perspective. Our perspective really not a lot new to report.

Speaker 1

As everybody on this call knows, West Fraser has always been supportive of some type of management of moving parts in the political arena. And this is a deal between 2 governments. So really tough to see how something happens in the short term, but I guess you never know. I would say on controlling what we can, which is our costs and how that plays into any duty rates that we're going to be exposed to and the piece of new ink to litigate to get a refund of money that is owed to us.

Speaker 5

Understood. Thanks for that detail. That's all I have for now. Thanks guys.

Speaker 1

Sean.

Operator

And the next question comes from Ben Isaacson from Scotiabank. Please go ahead.

Speaker 4

Thank you very much. First question Sean, can you talk about your order book for SYP, SPF and OSB? What should it be at this time of the year? It's been over the summer.

Speaker 1

Good morning, Ben. I'll just make a quick comment then maybe Matt can add. But our in lumber our order book and it typically doesn't materially change seasonally. It generally is not that long and it's a cash market and it but not a great extent and nothing unusual that I would say today. Matt anything to add to that?

Speaker 2

No. No. I think I covered it.

Speaker 4

Okay. Thank you for that. To the supply curtailments that we've seen in the industry. So I understand we've seen about roughly 5,000,000,000 board feet and most of that looks like it's going to be structural. Do you think that the supply side has now done enough and we really are just waiting for demand to normalize?

Speaker 4

Or do you think that there's still up demand?

Speaker 1

Again, a really tough to have because it really depends on what future demand is going to be. I can only speak to the actions we've taken. And just as I know I said it in my comments, but 800,000,000 board feet since 2022 that we have taken action on frankly has brought us to a point where we're essentially in balance with what our customers are currently buying and their demand. If that changes, so that would be the way I would but I think we feel like we the moves we've made, we're well positioned to build from here as demand gets better.

Speaker 4

Question for me on the OSB side. You mentioned in the press release that curtailments at the mills have created chip shortages for pulp producers when that's impacting OSB margins. Can you talk about where we are on that kind of path? Are pulp logs still going to go higher in your view starting to stabilize? And when OSB prices kind of get back to their normal run rate, we should get back to normal margins?

Speaker 1

Yeah. It's depending on the drain, depending on where the pulp mill is located. Very short term, I would our view would be that longer term our position. There will be more production over the long term shifting to Southern Yellow Pine, which will create more chips, which will oatmeal closures that have happened in the U. S.

Speaker 1

South this year, we believe will mean there'll be a favorable trend to wood costs long term versus any short term.

Speaker 4

Got it. Thank you very much.

Operator

And your next question comes from Hamir Patel from CIBC. Please go ahead.

Speaker 1

Sean, when you think of the closures announced in the South over the past 12 months, it looks like they totaled maybe over 1,500,000,000 board

Speaker 4

feet. How much of that

Speaker 1

would be in a cold idle state that perhaps would come back in a stronger market? Good morning, Hamir. Again, hard for me to comment. I'll just comment on West Fraser. So we've had 4 Southern mills.

Speaker 1

2 have been permanent. 2 have been in my view. All that means the difference in West Fraser means is we don't immediately begin taking down the mill. The and back to 2,008, we announced Folkston, Citronelle and McDavid. Folkston and Citronelle were dismantled after about a year or so.

Speaker 1

They were permanent closures. McDavid was before that mill restarted. These are not short term month to month quarter to quarter decisions. There needs to be adequate wood supply, adequate plan that makes that mill competitive at the bottom of the market. There's a reason the mill shuts down because it's not competitive.

Speaker 1

We would not restart a mill until we had a plan to make it competitive. And that is an uncertain time. There's a lot of factors that go into that before we make that decision. In terms of what others are doing, hard for me to comment on that. Fair enough.

Speaker 1

I'll ask on the European Panels business. It looks like it's kind of basically gone to 0 over the past year. I know historically that used to be kind of the steadiest part of the old intake to restore profitability in Europe. It continues to be slow over there. I would say a major kind of shutdown at actually our MDF facility in Scotland that was planned for some time.

Speaker 1

OSB side, I would say we really we've seen a little bit of price improvement, but we've seen more volume improvement. So I think it's going to take general economic gear up for things to get back to maybe normal or where they were previously. We feel quite good about our position. Our investments as we've got to know the European business Norbord made and we continued on really have put those plants in a good place in a tough market. Great.

Speaker 1

Turn it over.

Operator

And your next question comes from Matthew McPhee. Please go ahead.

Speaker 6

Hi, good morning. Thanks for taking my questions. I'd like to start by asking about your conversations with customers in the lumber business and specific to secure larger volumes of lumber in the contract for

Speaker 2

2025? I think that demand our customer demand relative to what they're we're looking for. We're going through what I would say is season right now is 2025 planning, but those volumes can adjust and shift over time. So I think from a customer standpoint, they see the shortage of homes long term, but still uncertainty around affordability. But certainly, doing that planning with our customers to ensure their supply over 2025.

Speaker 6

Okay. Thank you. Maybe next, on lumber operations in the U. S. South, you mentioned looking for some additional cost savings and margin opportunities.

Speaker 6

Can

Speaker 3

you maybe

Speaker 6

just provide a bit of what you're pursuing in the South right now?

Speaker 1

Yes. Good morning, Matthew. I think really a lot of the stuff will be a continuation of a lot of high cost volume with the 4 mills we curtailed. And as we brought on volume, it's going to modernize plants coming on mid next year. Other projects that we've completed that are all related to a margin of better grade, better productivity, better working conditions that improve our turnover, a number of things that we've done.

Speaker 1

And those we've got a whole series of smaller engine for some time. Been at this for a while. And it will be a continuation of that which we expect will continue to make our Southern business more competitive.

Speaker 6

Great. Thanks very much. And then last one for me just a quick cleanup on Caribou. It looks like you're expecting to be down for 4 weeks in the quarter versus maybe 2 weeks previously. Can you talk about

Speaker 1

Yeah, absolutely, Matthew. Yeah, so Caribou we it's been 18 months I think since our last major. So we had a lot of work lined up for our major shutdown. We expected it to be a full 2 weeks. We had an additional 2 projects that we wanted to complete as well as our sawmill curtailments here in British Columbia.

Speaker 1

We need to be able to make sure we've got adequate fiber supply to get through the coldest months. So that additional 2 weeks as well as gets the mill through the coldest part of the season and we feel good about next year's fiber supply. We wanted to make sure we didn't have any problem.

Speaker 6

Great. Thanks for that. That's all for me. I'll turn it back.

Speaker 4

Thank you. At this

Operator

time, we have no other questions. Please proceed.

Speaker 1

Thanks, Emily. As always, Chris and I are available to respond to further questions as is Robert Winslow, our Director of Investor Relations. Stay well and we look forward to reporting on our progress next quarter.

Operator

Ladies and gentlemen, this concludes the conference.

Speaker 4

You

Operator

may now disconnect your line.

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Key Takeaways

  • West Fraser reported Q3 2024 adjusted EBIT24 of $62 million (4% margin) despite a $32 million lumber export duty expense, and achieved a trailing-four-quarter adjusted EBITDA of $630 million.
  • The North American Engineered Wood Products segment outperformed amid softer SYP lumber demand, while Pulp & Paper and European segments generated less than $3 million each in Q3 adjusted EBITDA.
  • Management maintained over $2 billion in total liquidity with a net cash balance of ~$463 million, deploying $107 million in CapEx and $65 million in share buybacks and dividends during the quarter.
  • Since late 2022, West Fraser has cut more than 800 million board feet of lumber capacity through curtailments and closures, and is ramping up its low-cost Allendale OSB mill.
  • 2024 guidance: SYP shipments narrowed to 2.5–2.7 billion board feet, North American OSB shipments to the top end of 6.3–6.6 billion board feet, and CapEx guidance tightened to $475 million.
A.I. generated. May contain errors.
Earnings Conference Call
West Fraser Timber Q3 2024
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