West Fraser Timber Co. Ltd. (NYSE:WFG) Q1 2024 Earnings Call Transcript April 24, 2024
West Fraser Timber Co. Ltd. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, ladies and gentlemen. Welcome to West Fraser Q1 2024 Results Conference Call. Please note that all lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] 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 companion webcast presentation and in our 2023 annual MD&A and annual information form, which can be accessed in West Fraser’s website or through SEDAR+ for Canadian investors and EDGAR for United States Investors. Please note that today’s call is being recorded. I would now like to turn the call over to Mr. Sean McLaren, President and Chief Executive Officer. Please go ahead.
Sean McLaren: Thank you, Lara. Good morning, everyone, and thank you for joining our first quarter 2024 earnings call. I am Sean McLaren, President and CEO of West Fraser. And joining me today in our Quesnel office on the day of our Annual General Meeting, are Chris Virostek, our Senior Vice President and Chief Financial Officer; Matt Tobin, our Senior Vice President of Sales and Marketing; and other members of our leadership team. As just mentioned, later today, we will be holding our AGM or among other things, we plan to discuss our progress with sustainability initiatives, some of the broader challenge that the North American lumber industry continues to face adding meaningful supply, our recent track record, allocating capital, including capital returns through buybacks and dividends and the attractive long-term total returns realized by West Fraser stockholders.
On the earnings call this morning, I will begin with a brief overview of West Fraser’s Q1 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 $200 million of adjusted EBITDA in the first quarter of 2024, representing a 12% margin. We experienced mixed results across our business again in Q1 with strength in our North American Engineered Wood Products segment, as well as SPF lumber markets, partially offset by continued soft demand for SYP lumber products and in our European business. While new home construction in the U.S. remained resilient through the quarter, supporting demand for OSB and to a large extent, SPF lumber, continued elevated mortgage rates appear to be constraining existing home sales activity and tempering repair and remodeling spending, which had a greater impact on SYP lumber demand.
On a trailing four quarter basis, adjusted EBITDA was $703 million, up from the $561 million we reported for fiscal 2023. On a pro forma basis, with the inclusion of Norbord this level of trailing four quarter adjusted EBITDA is approximately $460 million higher than that of the down cycle in 2019, reflecting synergies from the Norbord transaction, the benefits of our capital investment program as well as the acquisitions and strategic initiatives we’ve undertaken in recent years. Finally, our resilient balance sheet and $1.8 billion of total liquidity at quarter end remained strong, offering the financial flexibility with which to support our capital allocation strategy. With that overview, I’ll now turn the call to Chris for additional detail and comments.
Chris Virostek: Thank you, Sean, and good morning, everyone. 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 $10 million of adjusted EBITDA in the first quarter, improving from negative $51 million in the fourth quarter. Our North American EWP segment generated $188 million of adjusted EBITDA in the first quarter, up from $143 million in the fourth quarter. The Pulp & Paper segment generated $3 million of adjusted EBITDA in the first quarter, similar to the $2 million reported in the fourth quarter, while in Europe, adjusted EBITDA was a negative $1 million in the first quarter versus $3 million in the fourth quarter. Higher prices were the largest driver for the sequential EBITDA increase across our North American lumber and engineered wood products businesses, while increased shipments of SPF products also contributed meaningfully to the sequential improvement.
Further, our lumber business benefited from the actions we took in January to curtail production at two higher cost mills. In effect, we replaced that volume with production from other lower cost mills. Cash flow from operations was negative $41 million in the first quarter, with our cash balance net of debt still at a healthy $174 million versus $361 million last quarter. The relative decrease in our cash balance reflects a combination of the typical seasonal build in working capital. $122 million of capital expenditures plus the approximate $31 million of cash deployed towards share buybacks and dividends. With that brief financial overview, I will pass the call back to Sean.
Sean McLaren: Thank you, Chris. We are proud of the company we have built with the geographic and product diversification that has allowed us to weather what has been a period of challenging markets, particularly in our lumber business. As seen in the right side figure on Slide 6, our North American EWP segment has generated nearly $750 million of adjusted EBITDA over the last four quarters, which has been a period of tougher cyclical conditions for our other segments. It is this diversity in our wood building products offering that’s allowed us to generate more than $700 million of adjusted EBITDA on a consolidated basis over the last four quarters, representing a meaningful improvement from the down cycle of 2019. As an update to our ongoing portfolio optimization strategy, we recently completed two important transactions, namely the disposition of our Hinton pulp mill in February and more recently, the disposition of our two BCTMP mills which we disclosed earlier this week.
We also announced in April the dissolution of our 50-50 joint venture at Cariboo Pulp & Paper where we are now the sole owner and operator of the mill, which better positions us to support the mill’s needs as well as its talented workforce. On balance, we believe the sale of the three pulp mills along with many other recent adjustments to high grade our mill portfolio will allow us to reduce the variability of our earnings stream, while also improving a higher EBITDA floor through the cycle. Shifting to our outlook and concluding remarks. We expect to continue to face a number of market uncertainties over the near term. Having said that, we remain encouraged that inflation expectation and mortgage rates in the U.S. are below the highs of last year.
Inflationary cost pressures have largely stabilized across much of our supply chain and we do not expect to see any meaningful upward cost pressures over the near term. Further, constraints to new supply are very real, particularly for the North American lumber industry, where net new supply growth has been essentially nil over the last several years despite a number of strong up cycles. Of modest concern, as we are suggested on our Q4 2023 earnings call in February, unusually warm weather in Western Canada hampered our winter logging activities, limiting the accumulation of log inventories at some of our mills, which required us to take downtime at select SPF mills in the first quarter. The impact of weather on our log decks remains a risk factor to our near-term ability to manufacture and ship SPF lumber in Western Canada, and we continue to monitor the situation closely.
For our lumber operations in the U.S. South, persistently weak market conditions are a challenge, and have increased the downside risk to our near term production and shipments of SYP in the region. In conclusion, while demand markets remain mixed early in 2024 and there are near-term challenges across our business, we continue to be pleased how our teams are performing all across West Fraser. We remain confident that we have the right people, processes and foundation to execute on challenges and opportunities as they unfold. As always, we remain optimistic about the continued growth in future demand for the types of sustainable and renewable wood products that West Fraser manufacturers and for which the company is known. With that, we’ll turn the call back to the operator for questions.
Operator: Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Ben Isaacson from Scotiabank. Please go ahead.
Apurva Kilambi: Good morning. This is Apurva on for Ben. Congrats on the quarter, folks. My first question is whether you can give us a sense of how customer buying patterns have — sorry, customer buying patterns have evolved over the quarter. I think last quarter, you mentioned that things looked stable. So wondering, if there’s been any evolution there?
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