West Fraser(WFG) - 2022 Q2 - Quarterly Report

Management's Discussion & Analysis Introduction The MD&A covers financial performance for Q2 and YTD 2022, prepared in accordance with IAS 34 Interim Financial Reporting - The MD&A covers financial performance for Q2 and YTD 2022, prepared in accordance with IAS 34 Interim Financial Reporting[1][2] - The report utilizes various Non-GAAP and other specified financial measures, including "Adjusted EBITDA", "available liquidity", "total debt to capital ratio", "net debt to capital ratio", "expected capital expenditures", and "expected potential synergies from Norbord acquisition", which are explained in a dedicated section[2] - Dollar amounts are expressed in U.S. currency unless otherwise indicated, and the information is current as of July 27, 2022[4] Our Business and Strategy West Fraser is a diversified wood products company with facilities across North America and Europe, focusing on cost control, sustainability, and a conservative financial approach - West Fraser is a diversified wood products company with facilities in Canada, the U.S., the U.K., and Europe, manufacturing lumber, engineered wood products (OSB, LVL, MDF, plywood, particleboard), pulp, newsprint, wood chips, and renewable energy[5] - The company's strategy emphasizes cost control, responsible and sustainable operations, and a financially conservative approach to generate strong financial results through business cycles[6] - West Fraser joined the Science Based Targets Initiative (SBTi) in Q1 2022, committing to setting specific science-based targets for near-term greenhouse gas reductions across all its operations[9] - The company aims to maintain a strong balance sheet and liquidity, along with an investment-grade debt rating, to execute a balanced capital allocation strategy, reinvest in operations, capitalize on growth opportunities (including acquisitions), and return capital to shareholders[10] Recent Developments Recent developments include U.S. housing market trends, demand for repair and remodeling products, and details of the 2022 Substantial Issuer Bid - U.S. housing starts averaged 1.56 million units in June 2022, with permits at 1.69 million units, facing near-term headwinds from rising interest rates and potential impact on affordability[11] - Demand for repair and remodeling products showed signs of easing in Q1 2022 but experienced a healthy recovery in Q2 2022 as wood product prices retreated from elevated levels[12] 2022 Substantial Issuer Bid (SIB) Details | Metric | Value | | :--- | :--- | | Shares Offered to Purchase | Up to $1.25 billion | | Tender Price Range | $80.00 to $95.00 per share | | Shares Purchased | 11,898,205 Common shares | | Purchase Price per Share | $95.00 | | Aggregate Purchase Price | $1.13 billion | | % of Outstanding Shares Repurchased | ~11.7% | - Since the Norbord acquisition (Feb 1, 2021), West Fraser has repurchased 36,745,718 Common shares, equating to 67% of shares issued for the acquisition[15] Second Quarter Results Second quarter results show decreased earnings primarily due to lower lumber and OSB pricing, despite higher shipment volumes, with increased log and input costs Summary Financial Results (Q2-22 vs. Q1-22, YTD-22, Q2-21, YTD-21) | ($ millions) | Q2-22 | Q1-22 | YTD-22 | Q2-21 | YTD-21 | | :--- | :--- | :--- | :--- | :--- | :--- | | Sales | $2,887 | $3,110 | $5,997 | $3,779 | $6,122 | | Operating earnings | $981 | $1,427 | $2,408 | $1,986 | $2,865 | | Earnings | $762 | $1,090 | $1,852 | $1,488 | $2,153 | | Adjusted EBITDA | $1,124 | $1,592 | $2,716 | $2,160 | $3,168 | Selected Quarterly Financial Amounts (Q2-22 vs. Prior Quarters) | ($ millions, unless otherwise indicated) | Q2-22 | Q1-22 | Q4-21 | Q3-21 | Q2-21 | Q1-21 | Q4-20 | Q3-20 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Sales | $2,887 | $3,110 | $2,038 | $2,358 | $3,779 | $2,343 | $1,294 | $1,268 | | Earnings | $762 | $1,090 | $334 | $460 | $1,488 | $665 | $282 | $262 | | Basic EPS (dollars) | $7.66 | $10.35 | $3.13 | $4.20 | $12.32 | $6.96 | $4.09 | $3.82 | | Diluted EPS (dollars) | $7.59 | $10.25 | $3.13 | $4.20 | $12.32 | $6.96 | $4.09 | $3.82 | - The decrease in Q2-22 earnings is primarily due to decreases in lumber and OSB pricing, partially offset by higher shipment volumes, while Western Canada log costs and other input costs have significantly increased over the past two years[17] Discussion & Analysis by Product Segment This section provides a detailed financial and operational analysis of the Lumber, North America EWP, Pulp & Paper, and Europe EWP segments Lumber Segment The Lumber Segment experienced lower sales and earnings in Q2 2022 compared to prior periods, primarily due to decreased product pricing, despite higher shipment volumes quarter-over-quarter Lumber Segment Earnings (Q2-22 vs. Q1-22, YTD-22, Q2-21, YTD-21) | ($ millions unless otherwise indicated) | Q2-22 | Q1-22 | YTD-22 | Q2-21 | YTD-21 | | :--- | :--- | :--- | :--- | :--- | :--- | | Sales | $1,326 | $1,501 | $2,827 | $1,839 | $3,139 | | Operating earnings | $405 | $750 | $1,155 | $955 | $1,562 | | Earnings before tax | $414 | $738 | $1,152 | $940 | $1,549 | | Adjusted EBITDA | $449 | $796 | $1,245 | $994 | $1,640 | | SPF Production (MMfbm) | 691 | 701 | 1,392 | 867 | 1,705 | | SPF Shipments (MMfbm) | 790 | 619 | 1,409 | 950 | 1,698 | | SYP Production (MMfbm) | 776 | 770 | 1,546 | 688 | 1,373 | | SYP Shipments (MMfbm) | 809 | 750 | 1,559 | 678 | 1,319 | - Lumber sales for Q2-22 and YTD-22 were lower than comparative periods primarily due to lower product pricing, partially offset by higher shipment volumes compared to Q1-22[20] - SPF shipment volumes increased QoQ due to easing transportation constraints but decreased YoY due to more pronounced railcar shortages[21] - SYP shipment volumes increased QoQ and YoY, driven by improved truck services, the Angelina lumber mill acquisition (Q4 2021), and ramp-up of the Dudley, Georgia mill[22] Lumber Segment Adjusted EBITDA Variance ($ millions) | Metric | Q1-22 to Q2-22 | Q2-21 to Q2-22 | YTD-21 to YTD-22 | | :--- | :--- | :--- | :--- | | Adjusted EBITDA - comparative period | $796 | $994 | $1,640 | | Price | $(365) | $(461) | $(239) | | Volume | $86 | $(24) | $(27) | | Changes in export duties | $11 | $56 | $66 | | Changes in costs | $(83) | $(107) | $(153) | | Other | $4 | $(9) | $(42) | | Adjusted EBITDA - current period | $449 | $449 | $1,245 | - SPF log costs in Q2-22 were higher QoQ due to increased costs in Alberta and unabsorbed fixed costs from curtailed logging, and higher YoY due to increased stumpage rates and hauling/fuel costs[31] - SYP log costs increased across all comparative periods due to increased competition[32] - Export duty expense was lower than comparative periods due to a lower estimated ADD rate and lower pricing, partially offset by higher softwood lumber volume shipped to the U.S[34] Softwood Lumber Dispute - CVD and ADD Rates (Selected Periods) | Effective dates for CVD | Cash Deposit Rate | AR POI Final Rate | | :--- | :--- | :--- | | April 28, 2017 - August 24, 2017 | 24.12 % | 6.76 % | | January 1, 2018 - December 31, 2018 | 17.99 % | 7.57 % | | January 1, 2019 - December 31, 2019 | 17.99 % | 5.08 % | | January 1, 2020 - November 30, 2020 | 17.99 % | n/a | | January 1, 2021 - December 1, 2021 | 7.57 % | n/a | | January 10, 2022 – June 30, 2022 | 5.08 % | n/a | | Effective dates for ADD | Cash Deposit Rate | AR POI Final Rate | West Fraser Estimated Rate | | June 30, 2017 - December 3, 2017 | 6.76 % | 1.40 % | 1.46 % | | January 1, 2018 - December 31, 2018 | 5.57 % | 1.40 % | 1.46 % | | January 1, 2019 - December 31, 2019 | 5.57 % | 6.06 % | 4.65 % | | January 1, 2020 - November 29, 2020 | 5.57 % | n/a | 3.40 % | | January 1, 2021 - December 1, 2021 | 1.40 % | n/a | 6.80 % | | January 1, 2022 - June 30, 2022 | 6.06 % | n/a | 0.80 | - Preliminary results for AR3 (2020) indicate a potential U.S. dollar recovery of $43 million, with a revised combined cash deposit rate of 13.09% if finalized[42] - AR4 (2021) commenced in March 2022, with West Fraser selected as a mandatory respondent[43] North America Engineered Wood Products Segment The NA EWP segment experienced decreased sales and earnings in Q2 2022 compared to Q1 2022 and Q2 2021, primarily due to lower OSB and plywood pricing, despite increased OSB shipment volumes NA EWP Segment Earnings (Q2-22 vs. Q1-22, YTD-22, Q2-21, YTD-21) | ($ millions unless otherwise indicated) | Q2-22 | Q1-22 | YTD-22 | Q2-21 | YTD-21 | | :--- | :--- | :--- | :--- | :--- | :--- | | Sales | $1,165 | $1,217 | $2,382 | $1,581 | $2,362 | | Operating earnings | $545 | $647 | $1,192 | $1,017 | $1,316 | | Earnings before tax | $548 | $651 | $1,199 | $1,016 | $1,314 | | Adjusted EBITDA | $623 | $730 | $1,353 | $1,106 | $1,459 | | OSB Production (MMsf 3/8" basis) | 1,590 | 1,517 | 3,107 | 1,634 | 2,659 | | OSB Shipments (MMsf 3/8" basis) | 1,568 | 1,429 | 2,997 | 1,585 | 2,595 | | Plywood Production (MMsf 3/8" basis) | 179 | 181 | 360 | 209 | 411 | | Plywood Shipments (MMsf 3/8" basis) | 166 | 167 | 333 | 213 | 404 | - Sales decreased QoQ due to lower OSB pricing, partially offset by increased OSB shipment volumes[52] - Sales decreased YoY (Q2-21) due to lower OSB and plywood pricing[53] - YTD-22 sales increased due to an additional month of OSB shipments and the ramp-up of the Chambord OSB mill[53] - North American OSB prices decreased in Q2-22 due to buyer caution regarding interest rates and inflation[55] - Plywood and MDF pricing increased due to orders exceeding supply, limited by supply chain constraints[55] NA EWP Segment Adjusted EBITDA Variance ($ millions) | Metric | Q1-22 to Q2-22 | Q2-21 to Q2-22 | YTD-21 to YTD-22 | | :--- | :--- | :--- | :--- | | Adjusted EBITDA - comparative period | $730 | $1,106 | $1,459 | | Price | $(137) | $(358) | $(150) | | Volume | $56 | $(40) | $110 | | Changes in costs | $(26) | $(85) | $(53) | | Other | $0 | $0 | $(13) | | Adjusted EBITDA - current period | $623 | $623 | $1,353 | - Costs of products sold increased QoQ due to higher OSB shipment volumes and higher fibre/input costs (especially resin)[59] - Costs increased YoY due to higher fibre/input costs, partially offset by improved productivity[59] Pulp & Paper Segment The Pulp & Paper segment reported a loss before tax and negative Adjusted EBITDA in Q2 2022, despite increased sales compared to Q1 2022 due to higher shipment volumes and pulp pricing Pulp & Paper Segment Earnings (Q2-22 vs. Q1-22, YTD-22, Q2-21, YTD-21) | ($ millions unless otherwise indicated) | Q2-22 | Q1-22 | YTD-22 | Q2-21 | YTD-21 | | :--- | :--- | :--- | :--- | :--- | :--- | | Sales | $213 | $171 | $384 | $216 | $393 | | Operating earnings | $(11) | $(37) | $(48) | $17 | $19 | | Earnings (loss) before tax | $(8) | $(38) | $(46) | $18 | $19 | | Adjusted EBITDA | $(3) | $(15) | $(18) | $25 | $36 | | Pulp Production (Mtonnes) | 245 | 219 | 464 | 288 | 564 | | Pulp Shipments (Mtonnes) | 256 | 239 | 495 | 279 | 555 | - Sales increased QoQ due to higher shipment volume and pulp pricing[68] - Sales were comparable YoY as increased pulp pricing was offset by lower shipment volumes[68] - Pulp production increased QoQ as transportation issues eased but decreased YoY due to planned annual maintenance shutdowns and reduced operating schedules[70][71] Pulp & Paper Segment Adjusted EBITDA Variance ($ millions) | Metric | Q1-22 to Q2-22 | Q2-21 to Q2-22 | YTD-21 to YTD-22 | | :--- | :--- | :--- | :--- | | Adjusted EBITDA - comparative period | $(15) | $25 | $36 | | Price | $29 | $17 | $35 | | Volume | $2 | $(4) | $(7) | | Changes in costs | $(15) | $(33) | $(64) | | Other | $(4) | $(8) | $(18) | | Adjusted EBITDA - current period | $(3) | $(3) | $(18) | - Costs of products sold increased across all comparative periods due to higher shipments, planned annual maintenance shutdowns, and increased energy and chemical costs[72] - A $13 million impairment charge was recorded in Q1-22 for equipment to be decommissioned as part of the Hinton pulp mill's transition to UKP, which remains on track[74] Europe Engineered Wood Products Segment The Europe EWP segment reported decreased sales and Adjusted EBITDA in Q2 2022 compared to Q1 2022, primarily due to the strengthening USD against GBP and lower shipment volumes Europe EWP Segment Earnings (Q2-22 vs. Q1-22, YTD-22, Q2-21, YTD-21) | ($ millions unless otherwise indicated) | Q2-22 | Q1-22 | YTD-22 | Q2-21 | YTD-21 | | :--- | :--- | :--- | :--- | :--- | :--- | | Sales | $207 | $241 | $448 | $178 | $290 | | Operating earnings | $42 | $61 | $103 | $15 | $9 | | Earnings before tax | $45 | $59 | $104 | $14 | $8 | | Adjusted EBITDA | $54 | $78 | $132 | $39 | $50 | | OSB Production (MMsf 3/8" basis) | 281 | 281 | 562 | 318 | 522 | | OSB Shipments (MMsf 3/8" basis) | 278 | 296 | 574 | 307 | 533 | | USD - GBP Average Exchange Rate | 0.7961 | 0.7451 | 0.7698 | 0.7151 | 0.7202 | - Sales decreased QoQ due to the strengthening USD against GBP and lower shipment volumes, despite increased local currency product pricing[79] - Sales increased YoY due to higher product pricing[79] - Shipment volumes decreased QoQ and YoY due to reductions in operating schedules to balance inventory as sales demand in Europe softened[80] Europe EWP Segment Adjusted EBITDA Variance ($ millions) | Metric | Q1-22 to Q2-22 | Q2-21 to Q2-22 | YTD-21 to YTD-22 | | :--- | :--- | :--- | :--- | | Adjusted EBITDA - comparative period | $78 | $39 | $50 | | Price | $13 | $74 | $145 | | Volume | $(21) | $(14) | $14 | | Changes in costs | $(11) | $(41) | $(73) | | Other | $(5) | $(4) | $(4) | | Adjusted EBITDA - current period | $54 | $54 | $132 | - Costs of products sold increased YoY due to increases in input costs, with energy and resin being the most significant components, driven by availability constraints and rising natural gas costs[83] Discussion & Analysis of Specific Items This section analyzes specific financial items including selling, general and administration costs, equity-based compensation, finance expense, other income, income tax, and comprehensive earnings Selling, general and administration Selling, general and administration costs for Q2-22 decreased QoQ but increased YoY and YTD, primarily due to higher salaries, professional fees, and additional operating expenses Selling, General and Administration Costs ($ millions) | Period | Amount | | :--- | :--- | | Q2-22 | $87 | | Q1-22 | $94 | | Q2-21 | $73 | | YTD-22 | $181 | | YTD-21 | $151 | - SG&A costs increased compared to Q2-21 and YTD-21 due to higher salaries and wages, increased professional fees for integration activities, and the inclusion of an additional month of OSB team operating expenses[90] Equity-based compensation The company recorded a recovery in Q2-22 and YTD-22 for equity-based compensation, reflecting a decrease in share price, contrasting with expenses in prior periods Equity-based Compensation (Recovery/Expense) ($ millions) | Period | Amount | | :--- | :--- | | Q2-22 | $1 (recovery) | | Q1-22 | $5 (recovery) | | Q2-21 | $(12) (expense) | | YTD-22 | $6 (recovery) | | YTD-21 | $(19) (expense) | - The recoveries in Q2-22 and YTD-22 reflect a decrease in the company's share price during those periods[94] Finance expense, net Net finance expense decreased QoQ due to higher interest income and was lower YoY due to the redemption of Norbord senior notes in Q2-21 - Finance expense, net decreased compared to Q1-22 due to higher interest income on short-term investments[96] - Finance expense, net was higher in Q2-21 and YTD-21 due to additional interest on Norbord senior notes, which were redeemed in Q2-21[96] Other Income/Expense Other income for the Corporate & Other segment in Q2-22 and YTD-22 was primarily driven by mark-to-market gains on interest rate swap contracts and foreign exchange gains Other Income (Corporate & Other Segment) ($ millions) | Period | Amount | | :--- | :--- | | Q2-22 | $6 | | Q1-22 | $1 | | Q2-21 | $8 | | YTD-22 | $7 | | YTD-21 | $4 | - Other income in the current period primarily relates to mark-to-market gains on interest rate swap contracts and foreign exchange gains on CAD-denominated monetary assets and liabilities[97] Income Tax Income tax expense for Q2-22 was $240 million with an effective tax rate of 24%, consistent with Q1-22 and prior year periods Income Tax Expense and Effective Tax Rate ($ millions) | Period | Income Tax Expense | Effective Tax Rate | | :--- | :--- | :--- | | Q2-22 | $240 | 24% | | Q1-22 | $330 | 23% | | Q2-21 | $478 | 24% | | YTD-22 | $570 | 24% | | YTD-21 | $683 | 24% | Other Comprehensive Earnings – Translation of Foreign Operations The company recorded a translation loss in Q2-22 and YTD-22, reflecting a strengthening of the USD against the British pound sterling and Euro, impacting European EWP operations Translation Gain/Loss ($ millions) | Period | Amount | | :--- | :--- | | Q2-22 | $(51) (loss) | | Q1-22 | $(20) (loss) | | Q2-21 | $0 | | YTD-22 | $(71) (loss) | | YTD-21 | $1 (gain) | - The translation loss in Q2-22 and YTD-22 reflects a strengthening of the USD against both the British pound sterling and Euro[102] Other Comprehensive Earnings – Actuarial Gains/Losses on Retirement Benefits The company recorded an after-tax actuarial gain in Q2-22 and YTD-22, primarily due to an increase in the discount rate for plan liabilities, partially offset by lower asset returns After-tax Actuarial Gain/Loss ($ millions) | Period | Amount | | :--- | :--- | | Q2-22 | $69 (gain) | | Q1-22 | $94 (gain) | | Q2-21 | $(4) (loss) | | YTD-22 | $163 (gain) | | YTD-21 | $85 (gain) | - The gains in Q2-22 and YTD-22 reflect an increase in the discount rate used to calculate plan liabilities, offset in part by lower returns on plan assets[104] Outlook and Operations This section outlines the business outlook, operational challenges, Norbord integration progress, and cash flow expectations, including revised shipment guidance and capital expenditure forecasts Business Outlook The company anticipates sustained medium- to longer-term demand for wood products in North America and Europe, alongside growing pulp demand, despite near-term economic headwinds and ongoing trade disputes - Medium- and longer-term demand for North American lumber, OSB, and wood panel products is expected to be supported by aging housing stock, lagging new home construction completions, work-from-home trends, and growing market penetration of mass timber[106] - Near-term demand for new home construction and wood products may be reduced if interest rates continue to rise and housing affordability is impacted[107] - European EWP demand is expected to remain robust longer-term, driven by OSB's growth as a plywood alternative and repair/renovation spending, despite near-term challenges from rising interest rates, geopolitical developments, and inflation[108] - Pulp demand is anticipated to grow longer-term due to increasing boxboard and tissue production in Asia and greater substitution of single-use plastics[109] - The Hinton mill is transitioning to UKP by end of 2022, offering environmental benefits and benefiting from increased demand for UKP in packaging[109] - The Softwood Lumber Dispute continues, with CVD and ADD duties in place since April 2017[110] - Preliminary AR3 duty rates were issued in Q1-22 and are expected to be finalized in August 2022, while AR4 commenced in March 2022 with final rates expected in August 2023[110] Operations Operations face challenges from rising interest rates, transportation issues, softening demand, labor shortages, and inflation, leading to revised shipment guidance and increased costs for the Allendale OSB facility restart - Operations are negatively affected by increases in interest rates, transportation availability, softening demand, labor availability, the Ukraine conflict, inflationary pressures (energy prices), adverse weather, intense competition for logs, elevated stumpage fees, and production disruptions[111] 2022 Shipment Guidance Updates | Product | Original Guidance | Revised Guidance | Reason for Change | | :--- | :--- | :--- | :--- | | SPF Lumber | 2.8 to 3.0 billion board feet | Closer to bottom end of range | Acute and longer-duration transportation challenges in Western Canada | | SYP Lumber | 3.0 to 3.2 billion board feet | Reiterated at 3.0 to 3.2 billion board feet | No change | | NA EWP OSB | 6.1 to 6.4 billion square feet | 5.9 to 6.2 billion square feet | Transportation and logistics constraints, slowing demand | | Europe EWP OSB | 1.1 to 1.3 billion square feet | 1.0 to 1.2 billion square feet | Reduced expectations | - The Allendale OSB facility restart project's capital investment is expected to increase by approximately 10% from the original $70 million estimate, and project completion is shifted to the end of Q1 2023, due to inflationary cost pressures and supply chain challenges[113] - Elevated inflationary cost pressures and availability constraints for labor, transportation, raw materials (resins, chemicals), and energy are expected to persist through 2022[115] Norbord Integration The Norbord business integration is progressing well, with the company on track to achieve targeted annual synergies of $61 million by the end of 2022 - The integration of the Norbord business is progressing well, with targeted annual synergies of $61 million expected to be achieved by the end of 2022[117] Cash Flows (Outlook) Operating cash flows and available liquidity are expected to support capital spending, with 2022 capital expenditures anticipated at the lower end of the $500-$600 million range, alongside significant share repurchases and increased dividends - Operating cash flows and available liquidity are expected to support capital spending, with 2022 capital expenditures anticipated to be nearer the bottom end of the $500-$600 million guidance range[117] - The company aims to maintain its investment-grade debt rating and preserve sufficient liquidity to capitalize on strategic growth opportunities[117] - During Q2-22, the company purchased $1.13 billion of Common shares under the 2022 SIB and increased its quarterly dividend to $0.30 per share from $0.25 per share[118][120] Liquidity and Capital Resources This section details West Fraser's liquidity, capital resources, credit facilities, long-term debt, debt ratings, and shareholder equity, including share repurchases and options Liquidity and Capital Resource Measures As of June 30, 2022, West Fraser's available liquidity decreased to $2,334 million, while its total debt to total capital ratio remained at 7% and net debt to total capital improved to (10%) Summary of Liquidity and Debt Ratios ($ millions, except as otherwise indicated) | Metric | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Cash and short-term investments | $1,281 | $1,568 | | Operating lines available | $1,053 | $1,025 | | Available liquidity | $2,334 | $2,593 | | Total debt to total capital | 7% | 7% | | Net debt to total capital | (10%) | (16%) | Credit Facilities As of June 30, 2022, West Fraser maintained $1 billion in committed revolving credit, $35 million in uncommitted U.S. facilities, and an $18 million European facility, all undrawn, with $135 million supporting letters of credit - As of June 30, 2022, the company had a $1 billion committed revolving credit facility (maturing July 2026), $35 million in uncommitted U.S. facilities, and an $18 million European facility, all of which were undrawn[124][125] - Credit facilities totaling $135 million supported $61 million in letters of credit as of June 30, 2022[126] Long-Term Debt West Fraser's long-term debt includes $300 million of 4.35% senior unsecured notes due October 2024 and a $200 million 5-year term loan maturing August 2024, with interest rates fixed via swap agreements - Long-term debt includes $300 million of 4.35% fixed-rate senior unsecured notes due October 2024[127] - A $200 million 5-year term loan matures on August 25, 2024, with interest payable at floating rates[128] - The company uses interest rate swap agreements with a total notional amount of $200 million to fix the interest rate on the term loan through August 2024, at rates of 1.78% and 0.51%[129] Debt Ratings West Fraser holds investment-grade debt ratings from DBRS (BBB Stable), Moody's (Baa3 Stable), and Standard & Poor's (BBB- Stable) as of July 27, 2022 Debt Ratings (as at July 27, 2022) | Agency | Rating | Outlook | | :--- | :--- | :--- | | DBRS | BBB | Stable | | Moody's | Baa3 | Stable | | Standard & Poor's | BBB- | Stable | Shareholder's Equity As of July 26, 2022, West Fraser had 86,551,490 shares outstanding, comprising Common and Class B Common shares, with Class B shares being exchangeable one-for-one for Common shares - As of July 26, 2022, total issued and outstanding shares were 86,551,490, consisting of 84,270,012 Common shares and 2,281,478 Class B Common shares[132] - Class B Common shares are equal to Common shares in all respects, including dividends and voting rights, and are exchangeable on a one-for-one basis for Common shares[133] Share Repurchases West Fraser renewed its NCIB in February 2022, authorizing repurchases of up to 10,194,000 Common shares, and completed a 2022 SIB purchasing 11,898,205 Common shares for $1.13 billion - The NCIB was renewed on February 23, 2022, authorizing the repurchase of up to 10,194,000 Common shares until February 22, 2023[135] Share Repurchases (2021-2022) | Program | Period | Common Shares | Average Price (USD) | | :--- | :--- | :--- | :--- | | NCIB | Feb 17, 2021 - Dec 31, 2021 | 7,059,196 | $74.60 | | 2021 SIB | Aug 20, 2021 | 10,309,278 | $76.84 | | NCIB | Jan 1, 2022 - Jun 30, 2022 | 6,694,346 | $83.76 | | 2022 SIB | Jun 7, 2022 | 11,898,205 | $95.00 | - The 2022 SIB resulted in the purchase of 11,898,205 Common shares at $95.00 per share for an aggregate of $1.13 billion, representing approximately 11.7% of total outstanding shares[138] Share Options As of July 26, 2022, 917,745 share purchase options were outstanding, with exercise prices ranging from CAD$31.77 to CAD$123.63 per Common share - As of July 26, 2022, 917,745 share purchase options were outstanding, with exercise prices ranging from CAD$31.77 to CAD$123.63 per Common share[140] Cash Flow This section analyzes cash flows from operating, financing, and investing activities, highlighting changes in earnings, tax payments, share repurchases, and capital expenditures Operating Activities Cash provided by operating activities decreased in Q2-22 and YTD-22 due to lower earnings and higher income tax payments, with working capital decreasing from lower receivables and inventory Cash Provided by Operating Activities ($ millions) | Period | 2022 | 2021 | | :--- | :--- | :--- | | Three Months Ended June 30 | $1,064 | $1,886 | | Six Months Ended June 30 | $1,627 | $2,348 | - Cash provided by operating activities was lower in Q2-22 and YTD-22 versus comparative periods due primarily to lower earnings and higher income tax payments[144] - Income tax payments were higher in YTD-22 ($844 million) primarily due to payments for 2021 results and increased 2022 tax installments[145] - Working capital decreased in Q2-22 due to decreases in accounts receivable (lower product pricing) and inventory (reduced logging, clearing backlogs)[146][147] Financing Activities Cash used in financing activities significantly increased in Q2-22 and YTD-22, primarily driven by substantial common share repurchases under the 2022 SIB and higher dividend payments Cash Used for Financing Activities ($ millions) | Period | 2022 | 2021 | | :--- | :--- | :--- | | Three Months Ended June 30 | $(1,515) | $(1,000) | | Six Months Ended June 30 | $(1,732) | $(1,109) | - Cash used in financing activities increased in Q2-22 compared to Q2-21 primarily due to additional common share repurchases and higher dividends paid, offset by lower repayments of long-term debt[149] - The company returned $1,475 million (Q2-22) and $1,664 million (YTD-22) to shareholders through common share repurchases under NCIB and SIB programs, significantly higher than prior year[150] - Dividends paid increased to $26 million (Q2-22) and $47 million (YTD-22) due to an increase in the dividend amount per share[151] Investing Activities Cash used for investing activities increased in Q2-22 and YTD-22 due to higher capital expenditures for mill reinvestment, contrasting with the prior year's Norbord acquisition which included acquired cash Cash Provided by (Used for) Investing Activities ($ millions) | Period | 2022 | 2021 | | :--- | :--- | :--- | | Three Months Ended June 30 | $(86) | $(64) | | Six Months Ended June 30 | $(178) | $518 | Capital Expenditures by Segment ($ millions) | Segment | Q2-22 | Q2-21 | YTD-22 | YTD-21 | | :--- | :--- | :--- | :--- | :--- | | Lumber | $25 | $26 | $58 | $60 | | North America EWP | $44 | $29 | $102 | $49 | | Pulp & Paper | $13 | $6 | $14 | $10 | | Europe EWP | $5 | $4 | $6 | $8 | | Corporate | $1 | $1 | $1 | $1 | | Total | $88 | $66 | $181 | $128 | - Capital expenditures increased to $88 million in Q2-22 and $181 million YTD-22, reflecting continued reinvestment in mills[153] Risks and Uncertainties The company's business is subject to various risks and uncertainties, as detailed in its Annual MD&A and updated in quarterly disclosures and public filings - The company's business is subject to a number of risks and uncertainties, which are included in its Annual MD&A and updated in quarterly MD&A disclosures and public filings[155] Controls and Procedures This section addresses the company's disclosure controls and procedures, and internal controls over financial reporting, confirming their design for reasonable assurance and no material changes Disclosure Controls and Procedures The company's disclosure controls and procedures are designed to ensure timely and accurate recording, processing, summarizing, and reporting of required information to management - Disclosure controls and procedures are designed to provide reasonable assurance that required information is recorded, processed, summarized, and reported within specified time periods[157] Internal Controls and Procedures Management is responsible for maintaining adequate internal control over financial reporting to ensure reliable financial reporting and IFRS-compliant consolidated financial statements, with no material changes in Q2 2022 - Management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and IFRS-compliant consolidated financial statements[158] - No material change in internal controls over financial reporting occurred during the three months ended June 30, 2022[159] Definitions, Reconciliations, and Other Information This section provides definitions, reconciliations, and other important information, including Non-GAAP financial measures, a glossary of terms, forward-looking statements, and additional information sources Non-GAAP and Other Specified Financial Measures This section defines and explains Non-GAAP Financial Measures, Capital Management Measures, and Supplementary Financial Measures, emphasizing they are not IFRS standardized alternatives Adjusted EBITDA and Adjusted EBITDA by Segment Adjusted EBITDA is defined as IFRS earnings adjusted for finance expense, tax, amortization, equity-based compensation, restructuring, impairment, and other items, with a similar definition for segment-level reporting - Adjusted EBITDA is defined as earnings determined in accordance with IFRS, adding back finance expense, tax provision, amortization, equity-based compensation, restructuring and impairment charges, and other[162] - Adjusted EBITDA by segment is defined as segment earnings before tax, adding back finance expense, amortization, equity-based compensation, restructuring and impairment charges, and other for that segment[163] Reconciliation of Quarterly Adjusted EBITDA to Earnings ($ millions) | ($ millions) | Q2-22 | Q1-22 | YTD-22 | Q2-21 | YTD-21 | | :--- | :--- | :--- | :--- | :--- | :--- | | Earnings | $762 | $1,090 | $1,852 | $1,488 | $2,153 | | Finance expense, net | $3 | $7 | $10 | $20 | $33 | | Tax provision | $240 | $330 | $570 | $478 | $683 | | Amortization | $144 | $157 | $301 | $162 | $284 | | Equity-based compensation | $(1) | $(5) | $(6) | $12 | $19 | | Impairment charges | $0 | $13 | $13 | $0 | $0 | | Other | $(24) | $0 | $(24) | $0 | $(4) | | Adjusted EBITDA | $1,124 | $1,592 | $2,716 | $2,160 | $3,168 | Available Liquidity Available liquidity is defined as the sum of cash, short-term investments, and funds available under committed and uncommitted bank credit facilities - Available liquidity is the sum of cash and short-term investments and funds available under committed and uncommitted bank credit facilities[170] Available Liquidity ($ millions) | Metric | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Cash and short-term investments | $1,281 | $1,568 | | Operating lines available | $1,053 | $1,025 | | Available liquidity | $2,334 | $2,593 | Total Debt to Total Capital Ratio The total debt to total capital ratio is calculated as total debt divided by total capital, expressed as a percentage - Total debt to total capital ratio is total debt divided by total capital (sum of total debt plus total equity), expressed as a percentage[172] Total Debt to Capital ($ millions) | Metric | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total debt | $596 | $595 | | Shareholders' equity | $7,856 | $7,656 | | Total Capital | $8,452 | $8,251 | | Total debt to capital | 7% | 7% | Net Debt to Capital Ratio The net debt to capital ratio is calculated as net debt (total debt less cash, equivalents, letters of credit, and swap liabilities) divided by total capital (net debt plus total equity) - Net debt to capital ratio is net debt (total debt less cash and cash equivalents, open letters of credit, and fair value of interest rate swap liabilities) divided by total capital (net debt plus total equity)[176] Net Debt to Capital ($ millions) | Metric | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Net Debt | $(746) | $(1,039) | | Shareholders' equity | $7,856 | $7,656 | | Total Capital | $7,110 | $6,617 | | Net debt to capital | (10%) | (16%) | Expected Capital Expenditures Expected capital expenditures represent the best estimate of cash outflows for capital asset additions in the upcoming year, primarily for improvement, maintenance, optimization, automation, and greenhouse gas reduction projects - Expected capital expenditures represent the best estimate of cash outflows for capital asset additions for the upcoming year, primarily for improvement projects, maintenance, optimization, automation, and greenhouse gas reduction[179] Expected Synergies from the Norbord Acquisition Expected synergies from the Norbord Acquisition represent the best estimate of revenue and cost synergies realized through integration, including reduced overhead, optimized operations, and procurement savings - Expected synergies from the Norbord Acquisition represent the best estimate of revenue and cost synergies from integration, realized through reduced corporate overhead, optimized sales/transportation, procurement savings, and shared operational best practices[181] Glossary of Key Terms This glossary defines various capitalized terms, abbreviations, and acronyms used throughout the MD&A to ensure clarity and consistent understanding - The glossary defines key terms, abbreviations, and acronyms used in the MD&A, such as ADD (Antidumping duty), CVD (Countervailing duty), EWP (Engineered wood products), IFRS (International Financial Reporting Standards), OSB (Oriented strand board), SPF (Spruce/pine/balsam fir lumber), and SYP (Southern yellow pine lumber)[182][183] Forward-Looking Statements This section provides a cautionary note on forward-looking statements, outlining management's expectations and the inherent risks and uncertainties that could cause actual results to differ materially - Forward-looking statements are predictive in nature, reflecting management's expectations regarding operations, business, financial condition, results, and outlook, identified by words like "expects," "anticipates," "plans," and "will"[184] - Key forward-looking statements cover corporate strategy, market outlook, administrative review of export duty rates, projected lumber and OSB shipments, operating costs, Norbord integration synergies, and expected cash flows and capital expenditures[185][186] - These statements involve numerous assumptions, inherent risks, and uncertainties, including economic and financial conditions, interest rate increases, inflation, global supply chain issues, competition, input costs, transportation availability, and regulatory changes[186][187] Additional Information This section directs readers to the company's website, SEDAR, and EDGAR for additional information, noting that third-party data has not been independently verified - Additional information on West Fraser, including Annual Information Forms and other public filings, is available on the company's website (www.westfraser.com), SEDAR (www.sedar.com), and EDGAR (www.sec.gov/edgar.shtml)[189](index=189&type=chunk) - Third-party information in the MD&A is believed to be reliable but has not been independently verified for accuracy or completeness[190]