Q4/22 First Take – Once Again EWP Outperforms Lumber West Fraser Timber Co. Ltd.
WFG-T: C$110.48
Target: C$132.00
Rating: Sector Outperform
Q4/22 First Take – Once Again EWP Outperforms Lumber
OUR TAKE: Mixed. WFG reported Q4/22 adj. EBITDA of $87M (after $12M of duties paid and inventory write-down of $39M), well above our $20M estimate but 29% below consensus of $123M. This compares with $350M (after $23M of duties) in the previous quarter and $565M (after $20M of duties) in Q4/21.
Capital allocation. In Q4/22, WFG repurchased ~1.6M shares (~1.9% of o/s) for $117M (average price of ~US$75), completing the ~10.2M shares NCIB program expiring on February 22, 2023. In 2022, the company returned ~US$2.1B (incl. dividends) to shareholders. WFG has now repurchased the equivalent of 73% of the shares issued to acquire Norbord in Q1/21 with significant excess capital remaining to continue buyback activity. Management is guiding for 2023 capex to be in the $500-$600M range, below the $700M we were previously expecting.
We reiterate our Sector Outperform rating and C$132 target. The downward revision to our 2023 EBITDA forecast reflects primarily weaker lumber and OSB shipments, bringing it in line with management guidance, as well as an expected increase in lumber duty deposit rates from Q4/23 onward as per published preliminary rates (from 8.25% to 9.38%).
KEY POINTS
Variance analysis. The adj. EBITDA variance compared to our forecast was driven by higher-than-expected results in NA EWP (+$77M) and EU EWP (+$14M), partially offset by lower-than-expected Pulp & Paper (-$16M) and Lumber (-$4M) results, and higher-than-expected Corporate costs (-$4M).
Operational Guidance for 2023. Management expects somewhat flat y/y shipments for SPF (between 2.6 and 2.8 Bbf), SYP (2.9 - 3.1 Bbf), and N.A. OSB shipments (5.9 and 6.2 Bsf). This compares with 2022 shipments of ~2.7 Bbf, ~3.0 Bbf and ~6.0 Bsf for SPF, SYP and N.A. OSB, respectively. On the other hand, management expects slightly higher OSB shipments in Europe (between 1.0 and 1.2 Bsf compared to ~0.9 Bsf in 2022), and lower pulp and paper shipments y/y.
Excess Capital Available. The company had cash on hand of US$1.162 billion and a net cash position of US$0.625 billion at December 31, 2022. Our forecast suggests the net cash position will reach ~US$0.8 billion by the end of 2023 after capex estimated at $600M in 2023. This could support additional share repurchases in the absence of incremental growth initiatives.
Conference call. February 15, 2023, at 11:30 a.m. (ET). Dial-in: 1-888-390-0605.
Quarterly Financials
Yearly Financials
Historical price multiple calculations use FYE prices. All values in US$ unless otherwise indicated.
Source: FactSet; company reports; Scotiabank GBM estimates.
2020 financials are in C$. WFG changed their reporting currency to US$ at the beginning of 2021.
Qtly Adj EBITDA (M) Q1 Q2 Q3 Q4 Year EV/Adj. EBITDA
2021A $1,016 $2,178 $825 $565 $4,584 1.9x
2022A $1,583 $1,094 $350 $87 $3,114 2.0x
2023E $96 $299 $261 $174 $830 7.8x
2024E $288 $369 $340 $284 $1,280 4.8x
Q4/22 Highlights
WFG reported Q4/22 adj. EBITDA of $87M (after $12M of duties paid and inventory write-down of $39M), well above our $20M estimate and 29% below consensus of $123M. As expected, Q4 results came in well below the previous quarter’s $350M (after $23M of duties paid) and last year’s $565M (after $20M of duties paid) on the back of lower lumber and OSB prices.
Variance analysis. The adj. EBITDA variance compared to our forecast was driven by higher-than-expected results in NA EWP (+$77M) and EU EWP (+$14M), partially offset by lower-than-expected Pulp & Paper (-$16M) and Lumber (-$4M) results, and higher-than-expected Corporate costs (-$4M).
Highlights by segment
Lumber. Adj. EBITDA came in at -$61M vs. $84M last quarter (after $12M and $23M of export duties paid, respectively) and our -$57M estimate. Adjusted EBITDA margins came in at -9% during the quarter (after duties) compared to +9% in Q3/22 and +22% in Q4/21. On a q/q basis, SPF shipments were down 10% to 582 MMfbm (vs. our 650 MMfbm forecast), while SYP shipments decreased by 5% to 713 MMfbm (vs. our 750 MMfbm forecast) due to weaker demand and a reduction in operating schedules, in both cases. On a q/q basis, adj. EBITDA was impacted by weaker prices (-$132M), inventory write-down (-$32M) and other expenses (-$10M), partially offset by lower costs (+$20M) and lower duties (+$11M). Compared to our forecast, higher-than-expected lumber prices (+$30M), shipments (+$7M) and lower-than-expected duties (-$4M) were partially offset by higher-than-expected manufacturing costs (-$33M).
North America Engineered Wood Products (NA EWP). Adj. EBITDA came in at $109M, or well above our $32M estimate and 49% below $215M in Q3/22. OSB shipments came in at 1,409 Msf, below last quarter’s 1,600 Msf (-12% q/q) due to easing demand, as well as below 1,543 Msf in Q4/21 (-9% y/y). The adj. EBITDA margin was 18% in the quarter, down from 27% in Q3/22. Lower product prices (mainly OSB) accounted for the majority (-$100M) of the q/q decrease in the segment’s adj. EBITDA, further dragged by slightly lower volumes (-$24M), partially offset by lower costs (+4M) and other expenses (+$14M). The adj. EBITDA variance to our forecast was primarily due to higher-than-expected realized panel prices (+$88M), partially offset by higher-than-expected manufacturing costs (-$4M).
Europe Engineered Wood Products (EU EWP). Adj. EBITDA came in at $30M, above our $16M estimate as well as 25% above $24M in the prior quarter, while 51% below $61M in Q4/21. OSB shipments came in flat q/q at 201 Msf compared to 202 Msf last quarter. The adj. EBITDA margin for this segment came in at 21%, up from 16% in Q3/22 and 33% in Q4/21. The q/q increase in adj. EBITDA was due to lower costs (+$8M) and other expenses (+$6M), partially offset by lower volume (-$7M) and lower prices (-$1M).
Pulp & Paper. Adj. EBITDA came in at $15M, below last quarter's $29M and below our $31M estimate. Pulp shipments came in 15% lower q/q at 217 Mtonnes. The decline in shipments was a result of lower production due to Hinton pulp mill’s transition from a double-line NBSK producer to a single-line UKP producer in October 2022 as well as curtailment at the Cariboo pulp & paper mill. On a q/q basis, adj. EBITDA was impacted by lower pulp prices (-$14M), lower volume (-$3M) and higher costs (-$4M), partially offset by lower other expenses (+$7M). Compared to our forecasts, lower-than-expected shipments (-$6M), prices (-$4M) and higher-than-expected manufacturing costs (-$9M) explain the majority of the variance.