RBC Notes December 1, 2022
Forest Products
Key takeaways from the RBC Forest Products Conference
We hosted our annual Forest Products Conference, featuring 10 leading companies in North America from our coverage as well as two private companies in the fast-growing mass timber space. The event featured a series of in-depth, interactive discussions with senior executives in the industry. Below, we summarize some key themes from the day. For company-specific commentary, please see inside this report.
Theme #1: The setup for 2023 is looking challenging... – With consumer stress and affordability issues playing out across much of the space, including in demand for building materials and containerboard, there was a consensus that the outlook for 2023 could be difficult. However, in our view, most executives expressed a sense of cautiousness and uncertainty about the near term rather than outright pessimism. The rapid rise in interest rates and concerns of a recession are clearly key drivers of many of the headwinds for 2023, and we think some companies still see a possibility of rates and economic conditions stabilizing and improving as we progress through the year.
Theme #2: ...but many companies are feeling comfortable with how they're positioned – For the building products group, two years of strong profitability has resulted in relatively conservatively positioned balance sheets, which should allow management teams to largely focus on operations rather than on managing potential leverage concerns. Certain pockets of demand should also be supportive in the new year (e.g., China, should COVID restrictions become less severe, North American repair and remodel activity). Several companies noted recent improvements in transportation and supply chains, which should be positive for operations and business planning. Some management teams also seemed ready for a slowdown after a couple of years of brisk activity, particularly those that have been acquisitive and can take advantage of a slowing market by focusing on digesting, integrating and optimizing acquired assets; conversely, some teams also sounded ready to pounce on new acquisitions should sellers' expectations normalize or if they come under stress. Finally, tissue producers are beginning to enjoy some relief on input costs, as well as some stabilization in demand trends.
Theme #3: We're here for a long time (not a good 2023) – In sharp contrast to the uncertain and potentially challenging near-term outlook, most executives expressed great optimism about the outlook for the industry over the longer term. Fiber supply issues in BC are a challenge, but taking the pain of permanent capacity reductions should help balance out continued investment in capacity in the US South. In building products, there is a consensus that under-building since the GFC and an aging housing stock will need to be reckoned with in the near future, while incremental sources of demand such as mass timber should only create further tension in the market. Further, the industry is well positioned from a sustainability standpoint, which is an issue that is likely to only increase in importance.
Theme #4: Mass timber grew despite recent period of record lumber pricing – Panelists were very bullish on the future prospects for mass timber with North America seeing a similar adoption/demand curve to that experienced in Europe. Building codes changing are accommodating the trend for mass timber, with 12-storey buildings allowed in Canada and 18-storey buildings in the US. More glulam production is needed as it complements CLT panels well.
Theme #5: ESG is integral to all forestry firms – Sustainability has long been a part of/engrained within the forestry industry and is not a new and separate goal. Carbon sequestration, when carbon is removed from the environment by photosynthesis, is an important part of meeting Canada's climate solutions targets. Companies are increasingly understanding the importance of building and maintaining Indigenous relationships.
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Western Forest Products Inc. [WEF CN]
Speaker: Stephen Williams, EVP and Chief Financial Officer
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Western Forest Products expects a slower 2023 from a demand perspective, with repair and remodeling activity settling at traditional pre-pandemic levels. The company sees a weaker Chinese market in 2023, and has shifted focus at the margin from log exports to putting logs into their own mills for lumber production.
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The company is pleased with its balanced approach to capital allocation, noting continued quarterly dividends and share repurchases with cash surpluses.
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From an ESG standpoint, the company is focused on sustainable forest management and sees value in cultivating Indigenous relationships, particularly around resource management.
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Interfor Corporation [IFP CN]
Speaker: Ian Fillinger, President and Chief Executive Officer
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Interfor’s outlook is for lumber demand to be weaker next year – a view shared by many of its peers – and noted its familiarity with the cyclicality of the industry. However, a steady repair and remodel market provides the company with some sense of stability and confidence.
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For 2023, Interfor sees a slowdown in M&A activity as it shifts its focus to digesting its growth in the last year and seeks to allocate resources into realizing identified synergies. Management noted the acquisitions of EACOM and Chaleur have resulted in diversified regional exposure as well as established infrastructure, offices, and trained personnel. Following the closing of Chaleur on November 30, the company is the largest stud producer in North America, with stud production in each of its operating regions.
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Downtime taken in Q4 was spread across the company. Taking downtime in this way helped it conduct maintenance at some facilities and should also be positive for employee retention given that some downtime has been scheduled around key holidays (e.g., US Thanksgiving). Going forward, any necessary downtime is likely to be more focused on high-cost regions.
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The company views their position as a pure play lumber company positively, noting benefits associated with a simpler operational strategy, sharing of best practices, flexible capital deployment and talent management.