Mr. Ray Ferris reports
WEST FRASER ANNOUNCES THIRD QUARTER 2022 RESULTS
West Fraser Timber Co. Ltd. has released the third quarter results of 2022 (Q3 2022). All dollar amounts in this news release are expressed in U.S. dollars unless noted otherwise.
Third Quarter Highlights
Sales of $2.088 billion and earnings of $216 million, or $2.50 per diluted share
- Adjusted EBITDA1 of $426 million, representing 20% of sales
- Lumber segment Adjusted EBITDA1 of $160 million, including $81 million of export duty recovery
- North America Engineered Wood Products ("NA EWP") segment Adjusted EBITDA1 of $215 million
Pulp & Paper segment Adjusted EBITDA1 of $29 million
Europe Engineered Wood Products ("Europe EWP") segment Adjusted EBITDA1 of $24 million
Repurchased 2.224 million shares for aggregate consideration of $182 million
1. Adjusted EBITDA is a non-GAAP financial measure.
"West Fraser generated solid financial results in the third quarter of 2022 and returned more than $200 million of capital to shareholders through share repurchases and a quarterly dividend. Overall, West Fraser continues to benefit from product and geographic diversity and a track record of disciplined capital allocation," said Ray Ferris, West Fraser's President & CEO. "We saw considerable improvement in the transportation challenges that had impacted our business earlier this year. However, ongoing inflationary cost pressures and slowing demand for many of our key products impacted our financial results this quarter. Our team continues to prioritize financial discipline as we navigate near-term market uncertainties to ensure we are best positioned to take advantage of the more favourable demand markets we envision over the medium and longer term."
"To that end, with the support of the local community, we are pleased to announce the planned addition of a new state-of-the-art lumber manufacturing complex with the brownfield development at our Henderson, Texas facility. This project is another important step in our strategy of optimizing our lumber portfolio by continuously driving cost efficiency through deployment of advanced technologies utilized by our skilled and engaged teams."
Third quarter sales were $2.088 billion, compared to $2.887 billion in the second quarter of 2022. Third quarter earnings were $216 million, or $2.50 per diluted share, compared to $762 million, or $7.59 per diluted share in the second quarter of 2022. Third quarter Adjusted EBITDA1 was $426 million compared to $1,124 million in the second quarter of 2022.
Liquidity and Capital Allocation
- Cash and short-term investments decreased to $1.323 billion at September 30, 2022 from $1.568 billion at December 31, 2021.
- Capital expenditures in the third quarter were $147 million.
- We paid $27 million of dividends in the third quarter, or $0.30 per share, and declared a $0.30 per share dividend payable in the fourth quarter.
In the third quarter of 2022, we repurchased 2,223,633 shares under our Normal Course Issuer Bid ("NCIB") for aggregate consideration of $182 million. As of October 25, 2022, 9,725,139 shares have been repurchased under the current NCIB, leaving 468,861 shares available to purchase at our discretion until the expiry of the NCIB.
As of October 25, 2022, we have repurchased for cancellation 39,272,933 of the Company's Common shares since the closing of the Norbord acquisition on February 1, 2021 through the completion of the 2021 SIB and the 2022 SIB as well as normal course issuer bids, equalling 72% of the shares issued in respect of the Norbord Acquisition.
Several key trends that have served as positive drivers in recent years are expected to continue to support medium and longer-term demand for new home construction in North America.
The most significant uses for our North America lumber, OSB and wood panel products are residential construction, repair and remodelling and industrial applications. Over the medium-term, we expect that an aging housing stock, lagging completions of previously started new home construction and greater acceptance of work-from-home practices may help to offset near-term headwinds and spur repair and renovation spending that supports lumber, plywood and OSB demand. Over the longer-term, growing market penetration of mass timber in industrial and commercial applications is also expected to become a more significant demand growth driver for wood building products in North America.
The seasonally adjusted annualized rate of U.S. housing starts averaged 1.44 million units in September 2022, with permits issued averaging 1.56 million units, according to the U.S. Census Bureau. However, demand for new home construction and our wood building products may decline in the near-term should interest rates continue to rise and consumer sentiment and housing affordability continue to be impacted.
The demand for our European products is also expected to remain robust over the longer-term as use of OSB as an alternative to plywood continues to grow, and an aging housing stock supports long-term repair and renovation spending and additional demand for our wood building products. Near-term challenges, including rising interest rates, ongoing geopolitical developments and inflationary pressures, are expected to cause a temporary slowing of demand for our products in Europe, however, we are confident that we will be able to navigate through these periods and capitalize on opportunities for long-term growth ahead.
The extent of transportation challenges experienced in Western Canada earlier in 2022 was more acute and of longer duration than originally anticipated, and as such we had reduced production at a number of our lumber facilities in Western Canada to account for these constraints. More recently these transportation challenges have eased, however, we have experienced continued slowing of demand, in part owing to the transition into the seasonally slower Fall construction period. Given this combination of factors, we now expect our SPF lumber shipments for 2022 to be modestly below the bottom end of the prior guidance range of approximately 2.8 to 3.0 billion board feet while we reiterate expectations for our 2022 SYP shipments to be approximately 3.0 to 3.2 billion board feet. On October 1, 2022, stumpage rates decreased in B.C. due to the market-based adjustments related to lumber prices, and in the current commodity price environment, B.C. stumpage rates are expected to decrease again early in 2023. Despite falling lumber prices we expect U.S. log costs to remain elevated in a number of our operating regions over the next several quarters.
In our NA EWP segment, transportation and logistics constraints across North America showed signs of improvement in the third quarter, though we continue to see signs of slowing demand for our products. Therefore, we reaffirm expectations for OSB shipments in 2022 to be approximately 5.9 to 6.2 billion square feet (3/8-inch basis). We also continue to expect that input costs for the NA EWP business will remain elevated in the near-term, due primarily to high energy and resin costs. Work at the Allendale OSB facility is ongoing to prepare the mill for an eventual restart when warranted by customer demand. We continue to expect the capital investment for the project to be approximately 10% above the original estimate of $70 million and project completion to be by the end of the first quarter of 2023.
We do not expect to increase our Pulp & Paper segment shipments in 2022.
Given ongoing inflationary and macroeconomic challenges in Europe, including the Russia-Ukraine conflict, we expect OSB shipments for our Europe EWP segment in 2022 to be at the bottom end of the range of our guidance of approximately 1.0 to 1.2 billion square feet (3/8-inch basis). Input costs for the Europe EWP business are expected to remain elevated in the near-term, due primarily to higher electricity, energy and resin costs.
Across much of our supply chain, we continue to experience greater than usual inflationary cost pressures and availability constraints for labour, raw materials such as resins and chemicals, transportation and energy. We expect these factors to persist through the remainder of 2022 and into 2023.
Last quarter we indicated that capital spending was expected to be near the bottom end of the $500 million to $600 million guidance range. However, based on our current outlook and owing to lengthening lead times for projects underway or planned, we anticipate that there will be a carryover of capital spending into 2023 for projects in progress, and as such we now expect to invest approximately $450 million in 20221.
1. This is a supplementary financial measure. Refer to the "Non-GAAP and Other Specified Financial Measures" section of this document for more information on this measure.
Modernization of Henderson Lumber Manufacturing Complex
As part of West Fraser's ongoing modernization plans, the Company is undertaking a brownfield re-development of its facility in Henderson, Texas. Similar to the Opelika, Alabama and Dudley, Georgia modernizations in recent years, the Company is planning to construct the new mill next to the existing Henderson mill in order to leverage the positive attributes of the local ecosystem, including a robust fibre basket, close proximity to key end-markets, a strong workforce, and existing residuals outlets and transportation infrastructure. Capital investment for the new mill is an estimated $255 million with construction start expected in Q4-22 and mill start-up planned for Q2-24; full run-rate production is not anticipated before 2025. Many of the latest technologies will be incorporated into the new mill, helping to reduce unit costs, increase product flexibility and improve employee working conditions and safety. Solar panels will also be incorporated at the facility in order to reduce emissions. Capacity of the new mill is anticipated to be 275 MMfbm, an approximate doubling of the existing mill's annual capacity, with the mill's mid-cycle EBITDA estimated to increase nearly four-fold, supporting a projected 12% after-tax internal rate of return.
Our Q3-22 MD&A and unaudited interim condensed consolidated financial statements and accompanying notes are available on our website and the System for Electronic Document Analysis and Retrieval ("SEDAR") and the Electronic Data Gathering, Analysis and Retrieval System ("EDGAR") website
under the Company's profile.
West Fraser's 2021 Sustainability Report is available on the Company's website. This report reviews the Company's key Environmental, Social, and Governance ("ESG") performance and includes information aligned with the Sustainable Accounting Standards Board ("SASB"), Global Reporting Initiative ("GRI"), the Task Force on Climate-Related Disclosures ("TFCD") and CDP (formerly the Carbon Disclosure Project).
West Fraser will hold an analyst conference call to discuss the Company's Q3-22 financial and operating results on Thursday, October 27, 2022, at 8:30 a.m. Pacific Time (11:30 a.m. Eastern Time). To participate in the call, please dial: 1-888-390-0605 (toll-free North America) or 416-764-8609 (toll) or connect on the webcast. The call and an earnings presentation may also be accessed through West Fraser's website. Please let the operator know you wish to participate in the West Fraser conference call chaired by Mr. Ray Ferris, President and Chief Executive Officer.
Following management's discussion of the quarterly results, investors and the analyst community will be invited to ask questions. The call will be recorded for webcasting purposes and will be available on the West Fraser website.
About West Fraser
West Fraser is a diversified wood products company with more than 60 facilities in Canada, the United States ("U.S."), the United Kingdom ("U.K."), and Europe. From responsibly sourced and sustainably managed forest resources, the Company produces lumber, engineered wood products (OSB, LVL, MDF, plywood, and particleboard), pulp, newsprint, wood chips, other residuals and renewable energy. West Fraser's products are used in home construction, repair and remodelling, industrial applications, papers, tissue, and box materials.
We believe that disclosing these measures assists readers in measuring performance relative to other entities that operate in similar industries and understanding the ongoing cash generating potential of our business to provide liquidity to fund working capital needs, service outstanding debt, fund future capital expenditures and investment opportunities, and pay dividends. Adjusted EBITDA is used as an additional measure to evaluate the operating and financial performance of our reportable segments.
Quarterly Adjusted EBITDA
Earnings 216 762
Finance (income) expense, net (3) 3
Tax provision 80 240
Amortization 140 144
Equity-based compensation 5 (1)
Other (12) (24)
Adjusted EBITDA 4261,124
We seek Safe Harbor.
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