West Fraser Timber Co. Ltd. (NYSE:WFG) Q3 2021 Earnings Conference Call October 28, 2021 11:30 AM ET Company Participants Raymond Ferris - President and CEO Chris Virostek - CFO Peter Wijnbergen - President, Engineered Wood Products Conference Call Participants Mark Wilde - BMO Sean Steuart - TD Securities Paul Quinn - RBC Operator Good morning, ladies and gentlemen, and welcome to the West Fraser Q3 2021 Results Conference Call. During this conference, West Fraser's representatives will be making certain s ...

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Financial Data and Key Metrics Changes - West Fraser generated consolidated adjusted EBITDA of $2.16 billion in Q2 2021, up from $1 billion in the previous quarter, largely due to the addition of Norbord's financial results and higher lumber and panel prices [13] - The company exited the quarter with $3.39 billion of available liquidity, up from $2.55 billion last quarter, with total debt of $500 million and net cash of $1.7 billion [16] Business Line Data and Key Metrics Changes - The Lumber segment reported adjusted EBITDA of $994 million in Q2 2021, compared to $646 million in Q1 2021, driven by higher pricing and shipments [14] - The North American Engineered Wood Products (EWP) segment saw adjusted EBITDA increase to $1.106 billion from $353 million in the prior quarter, primarily due to the addition of Norbord results and higher OSB and plywood pricing [14] - The Pulp & Paper segment's adjusted EBITDA increased to $25 million from $11 million in the previous quarter, attributed to higher pulp pricing [14] - The European EWP segment reported adjusted EBITDA of $39 million, up from $11 million in the prior quarter, reflecting recent market strength in Europe [14] Market Data and Key Metrics Changes - US home construction activity continued to strengthen, with new home starts reaching levels not seen since 2006, although there was a short-term pullback in repair and remodeling activity [10] - The company noted that the repair and remodeling market was more affected for lumber and plywood compared to engineered wood products [10] Company Strategy and Development Direction - The company is focused on sustainability, having planted its 2 billionth tree as part of its reforestation program, emphasizing its commitment to environmental stewardship [9] - West Fraser is optimistic about market fundamentals, driven by low mortgage rates and a housing formation deficit, which supports demand for single-family homes [18] - The company is actively managing its capital allocation strategy, including a substantial issuer bid to repurchase up to CAD1 billion of its common shares [20] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the impact of wildfires in Western Canada on production and transportation, which may affect operations in the second half of 2021 [19] - The company remains constructive about the long-term outlook despite short-term challenges, emphasizing the environmental benefits of building with wood [18] Other Important Information - Capital expenditures were $66 million in Q2 2021, with an updated target for 2021 capital expenditures now expected to be in the range of approximately $400 million to $450 million [15] - The company has retired an aggregate $665 million of high-yield Norbord debt, which will reduce annual interest costs by approximately $40 million [16] Q&A Session Summary Question: Thoughts on the speed and magnitude of the lumber price correction - Management expressed surprise at the rapid price correction but noted it was expected after the previous increase, indicating a stabilization in the lumber market [29] Question: Expectations for BC fiber cost movements - Management indicated a significant increase in stumpage costs expected in October, which will impact fiber costs [33] Question: Lumber inventories at mill and customer levels - Management noted a disparity between the DIY/R&R market and new housing, with inventories for new housing being relatively low [36] Question: Non-fiber cost inflation - Management clarified that while wage inflation is a factor, the bulk of cost pressures are from non-wage inflation, including transportation and supply chain costs [39] Question: Capital expenditures being back-end weighted - Management explained that the timing of capital expenditures is influenced by the completion of major acquisitions and projects, leading to a back-end weighted capital program [44] Question: Interest in cross-laminated timber and engineered wood products - Management indicated openness to exploring opportunities in engineered wood products, including cross-laminated timber, as part of their growth strategy [50]

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Financial Data and Key Metrics Changes - West Fraser generated record consolidated adjusted EBITDA of $1 billion in Q1 2021, up from $453 million in the previous quarter, partly due to the addition of Norbord's results [19] - The first quarter EBITDA was reduced by $93 million due to acquisition-related noncash purchase price accounting impacts [20] - The company exited the quarter with $2.55 billion of available liquidity and total debt of $1.3 billion, with net cash of $164 million [28] Business Line Data and Key Metrics Changes - The Lumber segment reported adjusted EBITDA of $646 million in Q1 2021, compared to $425 million in Q4 2020, driven by higher pricing despite lower shipments and higher fiber costs [21] - The North American Engineered Wood Products (EWP) segment's adjusted EBITDA grew to $353 million from $48 million in the prior quarter, primarily due to the addition of OSB results and higher plywood pricing [22] - The Pulp and Paper segment's adjusted EBITDA increased to $11 million from negative $20 million in the previous quarter, attributed to higher pulp pricing and reduced maintenance downtime [23] Market Data and Key Metrics Changes - U.S. home construction activity continued to recover, with new home starts reaching levels not seen since 2006, driving demand for wood building products [11] - The OSB market experienced stronger-than-expected demand recovery, leading to the restart of the Chambord mill in Quebec [14] - The company noted that the European EWP segment reported adjusted EBITDA of $11 million, reflecting Norbord's results for February and March [24] Company Strategy and Development Direction - The company plans to invest an additional $180 million across several projects through 2023, focusing on increasing capacity and reducing production costs [35] - West Fraser aims to achieve targeted annual synergies of $61 million from the integration of Norbord over the next 18 to 24 months [37] - The company emphasizes organic growth as a primary focus for capital allocation, while remaining open to other opportunities [56] Management's Comments on Operating Environment and Future Outlook - Management remains optimistic about favorable market fundamentals, supported by low mortgage rates and a trend towards remote work driving demand for single-family homes [31][33] - The company acknowledges potential external factors that could influence markets but maintains a positive outlook on the underlying demand for wood products [33] - Management is focused on creating shareholder value and will be patient and thoughtful in capital allocation strategies [34] Other Important Information - Capital expenditures were $62 million in Q1 2021, with plans to invest approximately $450 million on capital projects throughout the year [25] - The company repurchased $102 million worth of shares at an average price of CAD82.86, indicating a belief that shares are trading below intrinsic value [26] - The company plans to redeem Norbord's 2023 notes, which will reduce annual interest costs by approximately $40 million [29] Q&A Session Summary Question: What is the anticipated CapEx number for 2022? - Management indicated that the 2022 CapEx number is expected to be in the same range as 2021, with potential for additional high-return capital projects [42][43] Question: Are there any cost inflation concerns for capital projects? - Management noted ongoing pressures on costs and productivity, which have been present for several years, but did not indicate a material change recently [44][45] Question: Will the company be able to move the built-up lumber inventory into the market? - Management observed improvements in shipping early in Q2 and expressed optimism about moving inventory, but acknowledged the need for continued effort [46][48] Question: What are the expected shipment levels for 2021? - Management provided guidance of approximately $3.3 billion for SPF and $3 billion for SYP, expecting to ship all production subject to seasonal fluctuations [50][51] Question: How does management view the sustainability of current lumber pricing? - Management acknowledged strong underlying demand but indicated that high prices may not last indefinitely [54] Question: Is the company considering greenfield projects? - Management stated that while they are always looking for growth opportunities, they primarily focus on organic growth and consider greenfield projects lower on their capital allocation strategy [56] Question: What is the outlook for lumber and OSB imports? - Management noted limited import opportunities for OSB and a reduction in exports on the lumber side, with stronger European markets impacting supply responses [65][68] Question: How is the trade dialogue evolving regarding U.S. trade cases? - Management expressed hope that current market conditions might change the dialogue but noted that no significant changes have occurred yet [70] Question: What is the outlook for Norbord's specialty OSB business? - Management indicated that pricing in the industrial business is improving, albeit at a slower pace than commodity pricing [72]

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