West Fraser Announces Second Quarter 2023 Results

West Fraser Timber Co. Ltd. (“West Fraser” or the “Company”) reported the second quarter results of 2023 (“Q2-23”). All dollar amounts in this news release are expressed in U.S. dollars unless noted otherwise. 

Second Quarter Highlights

• Sales of $1.608 billion and earnings of $(131) million, or $(1.57) per diluted share 
• Adjusted EBITDA1 of $80 million, representing 5% of sales 
• Lumber segment Adjusted EBITDA1 of $10 million  
• North America Engineered Wood Products (“NA EWP”) segment Adjusted EBITDA1 of $126 million
• Pulp & Paper segment Adjusted EBITDA1 of $(74) million, including $24 million of inventory write-downs 
• Europe Engineered Wood Products (“Europe EWP”) segment Adjusted EBITDA1 of $19 million
• Released 2022 Sustainability Report
• Subsequent to quarter-end, announced an agreement to sell Hinton, Alberta pulp mill to Mondi Group plc
• Subsequent to quarter-end, extended maturities of revolving credit and term loan agreements

“Early in the second quarter of 2023, we continued to experience challenging demand markets, particularly in the Pulp & Paper segment where we managed through several unscheduled downtime events at our mills, including an extended maintenance shutdown at Hinton Pulp as well as curtailment of our Cariboo Pulp mill related to fibre supply constraints. Combined with declining pulp prices that led to a significant inventory write-down, the Pulp & Paper segment experienced higher losses than expected. Notwithstanding these challenges, we did see signs of demand improvement for some of our key wood building products as the quarter unfolded against a backdrop of mortgage rates well above year-ago levels. Our North America EWP segment saw particular improvement this quarter, with recovering demand in our OSB business, which has given us sufficient confidence to increase our North American OSB shipments guidance for 2023. As in the prior quarter, the product and geographic diversification of our European Engineered Wood Panels segment provided another positive EBITDA contribution that helped offset some of the weakness in our other businesses,” said Ray Ferris, West Fraser’s President & CEO.

“The West Fraser team continues to manage through the market cycle and while there have been indications that the upward trend in mortgage rates may be nearing an end and that new home construction has stabilized, we will continue to operate with financial discipline, leveraging our strong balance sheet to reinvest in our operations and return capital to shareholders. We believe our financial flexibility remains a competitive advantage that allows us to continue our core strategy of being a low-cost producer of wood building products while also preparing us to capitalize on opportunities as the demand environment becomes more favourable in the years ahead.”

1.	Adjusted EBITDA is a non-GAAP financial measure. Refer to the “Non-GAAP and Other Specified Financial Measures” section of this document for more information on this measure.

Results Summary

Second quarter sales were $1.608 billion, compared to $1.627 billion in the first quarter of 2023. Second quarter earnings were $(131) million, or $(1.57) per diluted share, compared to $(42) million, or $(0.52) per diluted share in the first quarter of 2023. Second quarter Adjusted EBITDA¹ was $80 million compared to $58 million in the first quarter of 2023.

Liquidity and Capital Allocation

Cash and short-term investments decreased to $994 million at June 30, 2023 from $1.162 billion at December 31, 2022.  

Capital expenditures in the second quarter were $106 million.

We paid $25 million of dividends in the second quarter, or $0.30 per share, and declared a $0.30 per share dividend payable in the third quarter of 2023.  

On February 22, 2023, we renewed our normal course issuer bid (“NCIB”), allowing us to acquire up to 4,063,696 Common shares for cancellation from February 27, 2023 until the expiry of the bid on February 26, 2024. As of July 25, 2023, no shares have been repurchased under the bid.

As of July 25, 2023, we have repurchased for cancellation 39,741,794 of the Company’s Common shares since the closing of the Norbord Acquisition on February 1, 2021 through the completion of a substantial issuer bid (“SIB”) in 2021, completion of an SIB in 2022 and normal course issuer bids, equalling 73% of the shares issued in respect of the Norbord Acquisition.

On July 25, 2023, we amended and restated the revolving credit facilities agreement to extend its maturity to July 2028 and replaced the LIBOR floating rate option with SOFR and amended and restated the term loan agreement to extend its maturity to July 2025 and replaced the LIBOR floating rate option with SOFR.

Outlook

Markets 

Several key trends that have served as positive drivers in recent years are expected to continue to support medium and longer-term demand for new home construction in North America.

The most significant uses for our North America lumber, OSB and wood panel products are residential construction, repair and remodelling and industrial applications. Over the medium term, we expect that an aging housing stock and greater entrenchment of work-from-home flexibility will help to offset near-term headwinds from higher interest rates and spur repair and renovation spending that supports lumber, plywood and OSB demand. Over the longer term, growing market penetration of mass timber in industrial and commercial applications is also expected to become a more significant source of demand growth for wood building products in North America.

The seasonally adjusted annualized rate of U.S. housing starts was 1.43 million units in June 2023, with permits issued of 1.44 million units, according to the U.S. Census Bureau. While there were near-term headwinds to new home construction earlier in the year, owing in large part to the upward reset in interest rates and the impact on housing affordability, unemployment remains relatively low in the U.S. and central bankers across North America have indicated that the current rate hiking cycle may be nearing an end. However, demand for new home construction and our wood building products may decline in the near term should the broader economy and employment slow or interest rates remain elevated or increase further than currently expected, impacting consumer sentiment and housing affordability.

Although we are experiencing near-term demand softness, we expect demand for our European products to grow over the longer term as use of OSB as an alternative to plywood grows. Further, an aging housing stock supports long-term repair and renovation spending and additional demand for our wood building products. Near-term risks, including relatively high and rising interest rates, ongoing geopolitical developments and the lagged impact of recent inflationary pressures, may cause further temporary slowing of demand for our products in Europe. Despite these risks, we are confident that we will be able to navigate through this period and capitalize on the long-term growth opportunities ahead. 

Operations

We continue to expect total lumber shipments in 2023 will be similar to 2022 levels as the transportation challenges that we faced last year are not expected to be as severe in 2023, partially offset by the permanent B.C. mill curtailments announced in August 2022, the indefinite curtailment of the Perry, Florida sawmill announced in January 2023, as well as downtime to complete capital upgrade projects at a number of our mills in the U.S. South. As such, we reiterate 2023 SPF shipments guidance of 2.6 to 2.8 billion board feet, and in the U.S. South, we reiterate 2023 SYP shipments guidance of 2.9 to 3.1 billion board feet.

In our NA EWP segment, demand has exceeded initial expectations and as such we are raising our 2023 OSB shipments guidance to 6.1 to 6.4 billion square feet (3/8-inch basis) from our original guidance of 5.9 to 6.2 billion square feet (3/8-inch basis). Our modernization capital investment in Allendale, South Carolina is now largely complete as we began the start-up phase of the mill late in Q2-23. We continue to optimize the mill and have completed the certification process for select commodity products. We anticipate a ramp-up period of up to three years to meet targeted production and as such we do not anticipate the Allendale mill contributing materially to shipments in 2023.

In our Europe EWP segment, we expect near-term demand weakness but reiterate 2023 OSB shipments guidance of 1.0 to 1.2 billion square feet (3/8-inch basis), moderately above 2022 levels.

Pulp & Paper segment shipments are not expected to increase from 2022 levels this year. Further, near-term supply and demand fundamentals are challenging as reduced global demand and new South American capacity have led to elevated global pulp inventories. There may also be a negative impact on pulp exports in Q3-23, owing to the labour disputes at B.C. ports early in the quarter.

In Q2-23, we experienced continued moderation of costs and improved availability for inputs across our supply chain, including resins, chemicals, transportation and energy, although labour availability and some capital equipment lead times remained challenging. We expect these trends to continue over the near term. 

Based on our current outlook, assuming no deterioration from current market demand conditions during the year and no additional lengthening of lead times for projects underway or planned, we reiterate guidance of approximately $500 million to $600 million in expected capital expenditures¹ in 2023. However, given the rate of 2023 capital spending to-date we now expect full-year capital expenditures to be nearer the bottom end of the guidance range.

1.	This is a supplementary financial measure. Refer to the “Non-GAAP and Other Specified Financial Measures” section of this document for more information on this measure.

Management Discussion & Analysis (“MD&A”)

Our Q2-23 MD&A and interim consolidated financial statements and accompanying notes are available on our website at www.westfraser.com and the System for Electronic Document Analysis and Retrieval+ (“SEDAR+”) at www.sedarplus.ca and the Electronic Data Gathering, Analysis and Retrieval System (“EDGAR”) website at www.sec.gov/edgar under the Company’s profile. 

Sustainability Report

West Fraser’s 2022 Sustainability Report is available on the Company’s website at www.westfraser.com. This report summarizes our Environmental, Social, and Governance (“ESG”) performance with a focus on our people, product circularity and role in the carbon cycle. It is aligned with the Sustainable Accounting Standards Board (“SASB”), Global Reporting Initiative (“GRI”), the Task Force on Climate-Related Disclosures (“TCFD”) and CDP (formerly the Carbon Disclosure Project). 

Risks and Uncertainties

Risk and uncertainty disclosures are included in our 2022 Annual MD&A, as updated in the disclosures in our Q2-23 MD&A, as well as in our public filings with securities regulatory authorities.

For the full second quarter results, click here.

About West Fraser

West Fraser is a diversified wood products company with more than 60 facilities in Canada, the United States (“U.S.”), the United Kingdom (“U.K.”), and Europe. From responsibly sourced and sustainably managed forest resources, the Company produces lumber, engineered wood products (OSB, LVL, MDF, plywood, and particleboard), pulp, newsprint, wood chips, other residuals and renewable energy. West Fraser’s products are used in home construction, repair and remodelling, industrial applications, papers, tissue, and box materials.

Contact:

Robert B. Winslow, CFA – Director, Investor Relations & Corporate Development –shareholder@westfraser.com – (416) 777-4426

Source: West Fraser Timber Co. Ltd.