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West Fraser(WFG) - 2023 Q1 - Earnings Call Transcript
WFGWest Fraser(WFG)2023-04-26 18:04

Financial Data and Key Metrics Changes - West Fraser generated 58millionofadjustedEBITDAinQ12023,downfrom58 million of adjusted EBITDA in Q1 2023, down from 70 million in Q4 2022, which included a one-time 7millionbenefitfromcarboncreditsanda7 million benefit from carbon credits and a 14 million insurance recovery [6][10] - The North American EWP segment's adjusted EBITDA fell to 31millionfrom31 million from 109 million in the prior quarter, impacted by a 15millioninventorywrite−down[7]−ThelumbersegmentimprovedtozeroadjustedEBITDAfromnegative15 million inventory write-down [7] - The lumber segment improved to zero adjusted EBITDA from negative 77 million in the prior quarter, which had included a 39millioninventorywrite−down[8]−Cashfromoperationswasauseof39 million inventory write-down [8] - Cash from operations was a use of 198 million for the quarter, with cash net of debt decreasing to 309millionfrom309 million from 625 million in the previous quarter [10][15] Business Line Data and Key Metrics Changes - The Pulp & Paper segment generated 7millionofadjustedEBITDAinQ12023,downfrom7 million of adjusted EBITDA in Q1 2023, down from 15 million in the prior quarter [9] - European adjusted EBITDA was 20millioninQ1,downfrom20 million in Q1, down from 30 million in Q4, affected by a one-time 7millionbenefitfromcarboncredits[9]MarketDataandKeyMetricsChanges−DemandinNorthAmericaremainedsoftduetorisingmortgageratesimpactingoverallconsumption[17]−Productioncostsbegantodecrease,anddemandimproved,particularlyintheU.S.SouthlumberandOSBsegments[18]−Thewoodbuildingproductsindustrymayfacechallengesfromfurtherratehikes,ongoinglaborconstraints,andmutedproductdemandduetohousingaffordabilityissues[23]CompanyStrategyandDevelopmentDirection−WestFraser′scapitalallocationstrategyfocusesonreinvestinginthebusiness,maintainingfinancialflexibilityforgrowthopportunities,andreturningexcesscapitaltoshareholders[12][14]−ThecompanyremainsoptimisticaboutitsU.S.growthstrategydespitechallengesinBritishColumbiaduetogovernmentpoliciesaffectinglumberproduction[22]−Thecompanyplanstoinvest7 million benefit from carbon credits [9] Market Data and Key Metrics Changes - Demand in North America remained soft due to rising mortgage rates impacting overall consumption [17] - Production costs began to decrease, and demand improved, particularly in the U.S. South lumber and OSB segments [18] - The wood building products industry may face challenges from further rate hikes, ongoing labor constraints, and muted product demand due to housing affordability issues [23] Company Strategy and Development Direction - West Fraser's capital allocation strategy focuses on reinvesting in the business, maintaining financial flexibility for growth opportunities, and returning excess capital to shareholders [12][14] - The company remains optimistic about its U.S. growth strategy despite challenges in British Columbia due to government policies affecting lumber production [22] - The company plans to invest 500 million to 600millionincapitalexpendituresin2023,including600 million in capital expenditures in 2023, including 100 million for sawmill modernization in Texas [16] Management's Comments on Operating Environment and Future Outlook - Management noted that inflationary cost pressures have moderated across the supply chain, with expectations for this trend to continue through 2023 [24] - Positive signs were observed in the spring building season, with easing mortgage rates potentially driving new construction [25] - Management expressed confidence in the company's ability to navigate challenges and capitalize on growth opportunities due to its disciplined capital allocation approach [26][27] Other Important Information - West Fraser has raised investment grade ratings from three key agencies and maintains strong liquidity with combined cash and bank lines approaching 2billion[15]−Thecompanyhasgeneratedover2 billion [15] - The company has generated over 8.5 billion in cash from operations since 2016, with more than 50% returned to shareholders through buybacks and dividends [14] Q&A Session Summary Question: Timing of Allendale restart - Management expects to restart the Allendale facility at the end of Q2 or early Q3 [29] Question: Capital allocation and share repurchase - The company has not repurchased shares since renewing the NCIB due to market conditions and will look for opportunities when it makes sense [30][31] Question: Flexibility in capital expenditures - Management indicated they have significant flexibility to adjust capital expenditures based on market conditions, but currently, they are proceeding with their capital program [32][33][36] Question: Premium for Southern Yellow Pine - Management noted a surprising premium for Southern Yellow Pine, attributing it to product substitution and lean supply chains [37][38][42] Question: Pulp downtime and fiber availability - Management highlighted that the curtailments in BC are primarily due to fiber availability rather than cost [43] Question: Opportunities in the siding market - Management expressed excitement about the Allendale facility but did not comment specifically on siding market participation [44] Question: Balance sheet and M&A appetite - Management is comfortable with liquidity and is open to M&A opportunities if they align with the company's strategic goals [47][49] Question: Mass timber market potential - Management sees mass timber as a growing market but considers it still in early stages with potential long-term opportunities [55][58] Question: European OSB prices and softwood lumber trade - Management noted that European OSB prices have stabilized but the market remains choppy, and there is little progress on softwood lumber trade negotiations [61][62]