West Fraser Timber Co. Ltd. (NYSE:WFG) Q4 2023 Earnings Call Transcript
West Fraser Timber Co. Ltd. (NYSE:WFG) Q4 2023 Earnings Call Transcript February 15, 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, and welcome to West Fraser's Fourth Quarter 2023 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 [Technical Difficulty] Such statements involve certain risks, uncertainties and assumptions, which may cause actual results 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 accompanying webcast presentation and in our 2023 annual MD&A and Annual Information Form, which can be accessed on West Fraser's website or through SEDAR+ for Canadian investors and EDGAR for United States Investors. Thank you. I will now hand the call over to Mr. Sean McLaren. Please go ahead.
Sean McLaren: Thank you, Jenny. Good morning, everyone, and thank you for joining our Fourth Quarter 2023 Earnings Call. I am Sean McLaren, President and CEO of West Fraser. Joining me today 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. I will begin today's comments with a brief overview of West Fraser's Q4 and fiscal 2023 financial results, and then pass the call to Chris for additional comments before I share some thoughts on our outlook and make some concluding remarks. West Fraser generated $97 million of adjusted EBITDA in the fourth quarter of 2023 as we continue to experience mixed results across our business segments, with strength in our North American engineered wood business, partially offset by continued soft demand for our North American lumber products.
While new home construction in the US remained resilient through the quarter, supporting demand for OSB, relatively high mortgage rates and continued constrain existing home sales activity which tempered repair and remodeling spending and lumber demand. For full year 2023, we generated $561 million of adjusted EBITDA, representing a 9% margin. On a pro forma basis with the inclusion of Norbord, our 2023 EBITDA was approximately $320 million higher than that of the last 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. Consistent with our strategy, we have remained disciplined in our approach to capital allocation and have preserved capital in the event that we have a down -- in a down market that we are currently experiencing, it is this discipline that has positioned us to be able to execute on our plans and invest in and improve our assets through all market conditions.
As we look ahead, our balance sheet remains strong and continues to offer significant financial flexibility which is a key priority of 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 US dollars and all my references are to US dollar amounts unless otherwise indicated. The lumber segment posted negative $51 million of adjusted EBITDA, declining from positive $44 million in the third quarter, a period that had benefited from a $62 million export duty recovery. Our North American EWP segment generated $143 million of adjusted EBITDA, down from $289 million in the prior quarter. The Pulp & Paper segment generated $2 million of EBITDA -- adjusted EBITDA in the fourth quarter, rebounding from the negative $12 million in the prior quarter, while in Europe, adjusted EBITDA was $3 million in the fourth quarter versus $4 million in the third quarter.
Lower prices were the largest driver for the sequential EBITDA declines across our North American Lumber and Engineered Wood products businesses. Cash flow from operations was $96 million in the fourth quarter, with our cash balance net of debt still at a healthy $361 million versus $663 million last quarter. This quarter, we invested $157 million back into the business through capital expenditures, repurchased $104 million of our shares, returned $25 million to shareholders through dividends, and completed the $100 million acquisition of Spray Lake sawmills in Cochrane, Alberta. In terms of our outlook for 2024, we are providing initial operational guidance for the year as detailed in our earnings release, including our expectations for key product shipments as well as our planned capital expenditures, which are in the range of $450 million to $550 million.
With that overview, I will now pass the call back to Sean.
Sean McLaren: Thank you, Chris. While difficult to predict, we expect our business will continue to experience challenges ranging from the risk of resurgence of input cost inflation and higher mortgage rates, ongoing labor constraints, as well as demand challenges that may result from housing affordability constraints. Having said that, we are encouraged by the fact that so far this year, mortgage rates in the US are well off the highs the industry experienced late in 2023. Further, inflationary cost pressures have continued to ease across much of our supply chain. At least over the near term, we expect this to continue. Regarding market fundamentals, I'd like to share with you Slide 7, which has been updated to reflect the latest FEA estimates for 2023.
This exhibit highlights the challenges the North American lumber industry has faced and continues to face adding net new supply. We have now been through a 10-year period in which total North American lumber supply has been essentially flat, with shrinking supply in British Columbia offsetting the gains in the US South, and this has occurred during a number of strong up years for lumber demand and pricing. We've spoken about the many constraints the lumber industry faces when it comes to adding capacity, and first and foremost of these is accessibility and availability of economic fiber. While the US South remains a critical area of lumber supply growth and a key region for West Fraser's growth strategy, it's important to note that this region's economic fiber supply, cost profile and access to end use markets for sawmill residuals are not homogeneous and that all of these factors are headwinds to growth.
As many of you are aware, the complexity of the operating environment in British Columbia continues to take its toll on sawmilling capacity in the province. Rapid policy change and uncertainty regarding decision-making on the land base have constrained available timber supply, resulting in a lack of access to economically viable fiber. Our recent decision to close Fraser Lake Sawmill, one of West Fraser's founding mills, after having reduced its capacity to a single shift in 2022 to match available timber supply reflects these realities. Without significant policy change in British Columbia, the forest sector in BC is on a path to further contraction. Lastly, and of additional concern today, unusually warm weather in Western Canada has hampered logging activities so far this winter, which has limited the accumulation of log inventories at some of our mills and has the potential to constrain our ability to manufacture and ship SPF lumber.
This is something we are monitoring closely. In our view, challenges to meaningful supply additions in the North American lumber industry will persist for the foreseeable future. And as such, we remain optimistic about our portfolio of assets, our capital allocation strategy, and our long-term prospects for our lumber business. When we acquired Norbord in 2021, a key strategic rationale for the deal was adding a measure of diversification to help us manage through market cycles. The benefits of this product diversity were front and center in 2023. Over the last four quarters, our North American EWP business generated nearly $600 million of adjusted EBITDA as OSB has lesser reliance than lumber on demand from the repair and remodeling segment, plus, there's generally a much lower level of OSB demand met by competing imports.
Our ongoing strategy to optimize our portfolio remains an important focus of the organization. The next slide outlines a number of key steps we have taken in recent years to refine our portfolio, as management's focus is on continuous improvement of the business and not just growth for growth's sake. More recently, we announced the sale of our three of our pulp mills, which we expect will help reduce variability of future EBITDA, as well as help us concentrate more of our resources on being the premier wood products buildings company in North America. We completed the Hinton Pulp sale earlier this month and continue to expect the sale of the BCTMP mills to close early in 2024. I'd like to briefly shift my comments to our balance sheet and liquidity, the strength of which we believe provides us with great flexibility and a competitive advantage in the current market environment.
With our prudent approach to cash management, particularly in a difficult 2023, we were able to balance capital investment in the business, execute on acquisitive growth, and distribute significant capital to our shareholders. Entering 2024, we held $900 million of cash and equivalents with nearly $2 billion of available liquidity. Of note, the limited change in our cash balance from a year ago, which is only lower by about $260 million, is nearly equal to the $100 million of dividends paid and the $129 million of shares repurchased last year. As per our Q4 disclosures, we have continued to buy back shares early in Q1 with the view that they are trading below our estimate of intrinsic value. We also plan to invest $450 million to $550 million of capital in 2024, as we believe the countercyclical investing will allow us to exit the current market downturn better off than when we entered it.
The next slide shows a longer-term track record of our balanced capital allocation strategy. Here you can see our focus has been on both re-investing in the business, which has accounted for approximately 30% of our cash flow from operations since the start of 2016, as well as returning capital to our shareholders, which has accounted for approximately 50% of our cash flow over that same period. Accumulation of supportive industry fundamentals and our execution, performance and focus on returning capital to shareholders are reflected in the attractive returns generated for West Fraser shareholders over a number of cycles. With total annualized return approaching 10% since the beginning of 2006, which includes share price appreciation and reinvested dividends, we remain proud of what the West Fraser team has been able to accomplish.
In closing, while demand markets were challenging in 2023 and there are near-term uncertainties across our business, we remain confident in our people, processes, and the foundation we have built. We have been through many industry cycles before and we have the talent, assets, and financial flexibility to handle both the challenges and opportunities that lie ahead. As always, we remain optimistic about the continued growth in demand for the types of sustainable and renewable wood products that West Fraser manufactures and for which the company is known. With that, we'll turn the call back to the operator for questions.
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