West Fraser(WFG) - 2025 Q1 - Quarterly Report

Management's Discussion & Analysis Introduction This section introduces the Management's Discussion and Analysis (MD&A) for the second quarter ended June 27, 2025, specifying that it should be read with other IFRS financial statements, clarifying fiscal periods, non-GAAP measures, and forward-looking statements * This MD&A covers the financial performance for the three and six months ended June 27, 2025[1][2] * The financial statements are prepared in accordance with International Financial Reporting Standards (IFRS)[1] * The report utilizes Non-GAAP financial measures, including "Adjusted EBITDA", and contains forward-looking statements[3][4] Our Business and Strategy West Fraser is a diversified wood products company operating in North America and Europe, focused on cost control, a strong balance sheet, and balanced capital allocation to navigate industry cycles and economic sensitivities * West Fraser is a diversified wood products company manufacturing lumber, engineered wood products (EWP), pulp, and other related products with facilities in Canada, the U.S., the U.K., and Europe[6] * The company's strategy emphasizes cost control, financial conservatism, and maintaining a strong balance sheet to manage business cycles[7][10] * Earnings are highly sensitive to world economic conditions, particularly the U.S. housing market, commodity price fluctuations, and foreign exchange rates[8][9] Recent Developments U.S. new home construction slowed to 1.32 million units annualized in June 2025 due to high mortgage rates, while the company renewed its $1 billion credit facility and upsized its term loan to $300 million in May 2025, amidst ongoing Canadian softwood lumber and U.S. Section 232 timber import disputes Markets * The seasonally adjusted annualized rate of U.S. housing starts averaged 1.32 million units in June 2025, down from 1.37 million in 2024, indicating a slowdown in new construction[11] * Demand from repair and remodeling applications remains subdued, pressured by historically low rates of existing home sales[12] * North American lumber supply is contracting in key regions, offsetting new capacity additions in the U.S. South[13] Credit Facility & Term Loan Renewals * In May 2025, the company renewed its $1 billion revolving credit facility, extending the maturity to May 2030[17] * The company also increased its term loan facility from $200 million to $300 million and extended its maturity to May 2028[17] Tariffs * Canadian softwood lumber exports to the U.S. have been subject to countervailing and antidumping duties since April 2017[18] * A Section 232 investigation by the U.S. Department of Commerce into the national security effects of timber imports is ongoing, creating further uncertainty[18][19] Second Quarter 2025 Results The company reported a net loss of $24 million in Q2 2025, a sharp downturn from a $42 million profit in Q1 2025 and a $105 million profit in Q2 2024, driven by lower product pricing, significant inventory write-downs, and increased fibre costs, leading to Adjusted EBITDA of $84 million Q2 2025 Financial Summary | Metric | Q2-25 ($M) | Q1-25 ($M) | YTD-25 ($M) | Q2-24 ($M) | YTD-24 ($M) | | :--- | :--- | :--- | :--- | :--- | :--- | | Sales | 1,532 | 1,459 | 2,990 | 1,705 | 3,332 | | Operating (loss) earnings | (45) | 64 | 19 | 132 | 180 | | Earnings (loss) | (24) | 42 | 18 | 105 | 139 | | Adjusted EBITDA | 84 | 195 | 279 | 272 | 472 | * The decrease in earnings from Q1-25 to Q2-25 was primarily attributed to the impact of lower product pricing, inventory write-downs, and higher fibre costs[23] Discussion & Analysis by Product Segment The Lumber segment swung to an operating loss of $31 million, North America EWP segment's operating earnings declined to a loss of $5 million, and Pulp & Paper also reported an operating loss of $5 million, while Europe EWP narrowed its operating loss to $8 million due to improved pricing and higher volumes Lumber Segment Lumber Segment Q2-25 Performance | Metric | Q2-25 ($M) | Q1-25 ($M) | Q2-24 ($M) | | :--- | :--- | :--- | :--- | | Sales | 713 | 674 | 697 | | Operating (loss) earnings | (31) | 21 | (100) | | Adjusted EBITDA | 15 | 66 | (51) | * Operating earnings decreased by $52 million compared to Q1-25, primarily due to lower product pricing and a $26 million unfavorable inventory valuation adjustment[25][35][46] * Export duties and tariffs totaled $21 million in Q2-25, slightly down from $22 million in Q1-25 but up from $15 million in Q2-24[43] * The company is a "mandatory respondent" in the U.S. softwood lumber dispute investigations, receiving company-specific duty rates[50] North America Engineered Wood Products (NA EWP) Segment NA EWP Segment Q2-25 Performance | Metric | Q2-25 ($M) | Q1-25 ($M) | Q2-24 ($M) | | :--- | :--- | :--- | :--- | | Sales | 612 | 598 | 811 | | Operating (loss) earnings | (5) | 52 | 236 | | Adjusted EBITDA | 68 | 125 | 308 | * Operating earnings fell by $57 million from Q1-25, driven by a $48 million negative price variance from lower OSB pricing and an $18 million unfavorable inventory valuation adjustment[61][67][71] * OSB shipment volumes increased compared to Q1-25, benefiting from higher production and recovery from previous weather-related transportation delays[62] Pulp & Paper Segment Pulp & Paper Segment Q2-25 Performance | Metric | Q2-25 ($M) | Q1-25 ($M) | Q2-24 ($M) | | :--- | :--- | :--- | :--- | | Sales | 92 | 85 | 92 | | Operating (loss) earnings | (5) | 3 | 0 | | Adjusted EBITDA | (1) | 7 | 9 | * Operating earnings decreased by $8 million from Q1-25, impacted by higher costs, including a $6 million unfavorable inventory valuation adjustment[79][83] * Financial comparisons are affected by the sale of three pulp mills in 2024 and the company attaining sole control of Cariboo Pulp & Paper (CPP) in Q1-24[75][76] Europe Engineered Wood Products (Europe EWP) Segment Europe EWP Segment Q2-25 Performance | Metric | Q2-25 ($M) | Q1-25 ($M) | Q2-24 ($M) | | :--- | :--- | :--- | :--- | | Sales | 130 | 117 | 119 | | Operating loss | (8) | (13) | (6) | | Adjusted EBITDA | 2 | (2) | 6 | * The operating loss narrowed by $5 million compared to Q1-25, driven by higher OSB product pricing, increased shipment volumes, and the favorable impact of a stronger British pound (GBP)[86][92] Discussion & Analysis of Specific Items Selling, general, and administration (SG&A) costs decreased to $69 million, a $5 million recovery in equity-based compensation was recorded, net finance income fell to $4 million, and the company reported a tax recovery of $19 million with an effective tax rate of 44% due to currency effects and valuation allowances * Selling, general and administration (SG&A) costs were $69 million in Q2-25, a decrease from $73 million in Q1-25[94] * A recovery of $5 million was recorded for equity-based compensation in Q2-25, primarily due to a decrease in the company's common share price[100] * Net finance income decreased to $4 million in Q2-25 from $6 million in Q1-25, partly due to the amendment of the term loan facility[101][102] * The company recorded an income tax recovery of $19 million in Q2-25, resulting in an effective tax rate of 44%, which was impacted by functional currency differences and changes in valuation allowances[106][107] Outlook and Operations The company anticipates continued near-term market headwinds, lowering 2025 shipment targets for lumber and North American OSB, while the ongoing softwood lumber dispute poses a significant risk with a potential 26.05% combined cash deposit rate, yet capital expenditure forecasts remain at $400 million to $450 million with continued capital returns to shareholders Business Outlook * Medium and longer-term demand for wood products is expected to be supported by favorable demographics and an aging U.S. housing stock[113][114] * Near-term demand faces uncertainty from high mortgage rates and housing affordability challenges in North America, and geopolitical and economic risks in Europe[115][117] * The softwood lumber dispute continues, with preliminary AR6 rates for 2023 indicating a potential combined duty rate of 26.05%, which would result in a $65 million expense if confirmed[120] Operations * Due to a slower demand environment, 2025 lumber shipment targets have been reduced to 2.6-2.8 billion board feet for SPF and 2.4-2.6 billion board feet for SYP[122] * The 2025 North American OSB shipment target has been lowered to 6.3-6.5 billion square feet (3/8-inch basis) due to slowing demand and trade policy uncertainty[124] * The global pulp market is facing demand uncertainty, particularly from China due to U.S. tariffs, which is expected to cause NBSK pricing weakness[126] Cash Flows and Capital Allocation * Expected capital expenditures for 2025 remain in the range of $400 million to $450 million[128] * The company renewed its Normal Course Issuer Bid (NCIB) in February 2025, allowing for the repurchase of up to 3.87 million common shares[130] * The company expects to continue paying its quarterly dividend, currently set at $0.32 per share[132] Liquidity and Capital Resources As of June 27, 2025, West Fraser maintained $1,692 million in available liquidity, prioritizing a strong, investment-grade balance sheet; financing activities included renewing a $1 billion credit facility and increasing its term loan to $300 million, while cash from operations declined due to lower earnings, and capital was returned to shareholders via repurchases and dividends Capital Management and Liquidity Measures * The company's capital management policy prioritizes maintaining a strong balance sheet and an investment-grade credit rating[135][137] Liquidity Summary | Metric ($ millions) | June 27, 2025 | Dec 31, 2024 | | :--- | :--- | :--- | | Cash and cash equivalents | 646 | 641 | | Available operating lines | 1,046 | 1,044 | | Available liquidity | 1,692 | 1,685 | | Net debt to total capital | (5%) | (6%) | Credit Facilities and Debt * In May 2025, the company renewed its $1 billion committed revolving credit facility, extending its maturity to May 2030[142][143] * The term loan facility was increased to $300 million with a new maturity date of May 2028[146] Shareholder's Equity and Repurchases * Under its 2025 Normal Course Issuer Bid (NCIB), the company has repurchased 741,748 common shares as of July 22, 2025[152] * Since the Norbord acquisition in February 2021, the company has repurchased 82% of the shares issued for that transaction[131] Cash Flow Analysis * Cash provided by operating activities was $285 million in Q2-25, a decrease from $378 million in Q2-24, primarily due to lower earnings[159][160] * Financing activities provided $32 million in cash during Q2-25, mainly from the $100 million proceeds of the upsized term loan[159][165] * Investing activities used $70 million in cash in Q2-25, which included $78 million in capital expenditures[159][167] Risks and Uncertainties This section refers readers to the company's Annual MD&A and other public filings for a comprehensive discussion of the various risks and uncertainties affecting its business * The company's business is subject to a number of risks and uncertainties that are detailed in its Annual MD&A and other public filings[169] Controls and Procedures Management confirms responsibility for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), reporting no material changes to its ICFR during Q2 2025 * Management is responsible for establishing and maintaining adequate disclosure controls and procedures, as well as internal control over financial reporting[170][172] * There were no changes in internal control over financial reporting during Q2 2025 that have materially affected, or are likely to materially affect, these controls[173] Definitions, Reconciliations, and Other Information This section defines and reconciles non-GAAP and other specified financial measures like Adjusted EBITDA and available liquidity, provides a glossary of key terms, and includes a cautionary note on forward-looking statements Non-GAAP and Other Specified Financial Measures * The report uses non-GAAP financial measures (e.g., Adjusted EBITDA), capital management measures (e.g., available liquidity), and supplementary financial measures (e.g., expected capital expenditures)[175] * Adjusted EBITDA is defined as earnings adding back finance income/expense, taxes, amortization, equity-based compensation, restructuring charges, and other income/expense[178] * Reconciliations are provided for Non-GAAP measures like Adjusted EBITDA to their most directly comparable IFRS measures, such as earnings or operating earnings[177][182][183] Glossary of Key Terms * Provides definitions for abbreviations and terms used in the MD&A, such as OSB (Oriented strand board), SPF (Spruce/pine/balsam fir lumber), and USDOC (United States Department of Commerce)[195][196] Forward-Looking Statements * This section contains a cautionary note that the MD&A includes forward-looking statements regarding the company's strategy, market conditions, operational outlook, and financial performance[197][198] * It lists numerous assumptions, risks, and uncertainties that could cause actual results to differ materially from these statements, including economic conditions, trade restrictions, and operational disruptions[199][200]