TD EARNINGS UPDATE
Q1 LUMBER CONTRIBUTION SURPRISES TO UPSIDE; GRADUAL EARNINGS RECOVERY UNDERWAY
THE TD COWEN INSIGHT
WFG's Q1/24 results were better than forecast. Sawmill margins remain weak, but reflected benefits tied to U.S. South asset rationalization. We believe investors are not giving WFG enough credit for its leading ROCE track record and strong balance sheet, which we argue should support a wider valuation premium versus its peers. Our 12-month target price of $118/share and Buy rating are unchanged.
Event:
WFG reported Q1/24 results on April 23 after market close. Adjusted EBITDA of $200.0 million was above our estimate of $174.6 million and the consensus forecast of $160.3 million. North American panel operations comprised the bulk of positive Q1 margins, but a better than expected lumber segment contribution accounted for the gap between our estimate and actual results. Estimated adjusted EPS of $0.51 (excluding restructuring charges) was similarly above our forecast of $0.44 and the consensus estimate of $0.42.
Impact: SLIGHTLY POSITIVE
We are surprised by yesterday's muted share price reaction; we consider Q1 results to be high quality, led by an improving sawmill contribution (favourable mix plus cost reductions).
WFG's Q1 lumber shipment mix tilted towards Western Canada. This contributed to better than expected sawmill price realizations and margins (relative price resilience in Western Canada). Management also noted cost savings tied to rationalization initiatives in the U.S. South. Earnings growth from North American panel (EWP) operations lagged our forecast — mostly a timing issue tied to OSB order file length.
Management reiterated 2024 segment shipment and overall capex guidance ranges but indicated some risk to lumber volumes. Wood product shipment target ranges imply minimal y/y variance. Management highlighted the potential for market downtime in the U.S. South given relative price pressure (more exposed to renovation markets) and Western Canada (logging disruptions due to abnormally warm winter have affected log inventories). The 2024 capex guidance range of $450 million-$550 million (>90% of expected depreciation at the midpoint) is unchanged.
WFG's Q1-ending net cash was $211 million ($2.59/share, or 3% of the current share price) versus the Q2/21 peak of $1.73 billion ($14.51/share). In addition to weaker operating cash flows since Q4/22, lower net cash reflects returns of capital to shareholders (34% reduction to the share count since 2020), selective acquisitions, and consistent capex. With trailing available liquidity of $1.76 billion, we believe that WFG is biased towards preservation of balance sheet strength vs. opportunistic M&A.