RBC November 28, 2022
Forest Products Conference Preview
Framing the 2023 Outlook
Our view: On Thursday, December 1, we will virtually host our annual Forest Products Conference. The event will feature a series of in-depth, interactive discussions with senior executives in the industry along with one-on-one meetings and small group discussions. In attendance will be ten forest products companies from our coverage group (please see pages 4-13 for topical questions for each), as well as two leading private companies in the fast-growing mass timber space. To register for the event directly, please click here. To request one-on-one meetings, please contact your RBC Institutional Salesperson.
Key topics for our discussions include:
The outlook for 2023 – We expect management outlooks for 2023 will be highly topical as investors try to calibrate their views for the year ahead. We think items of particular importance include: 1) expected demand conditions and potential drivers through the year; 2) anticipated changes in industry capacity and the impacts on supply-demand balance and pricing; and 3) views on capital allocation.
Demand outlook: plotting the path forward – After a turbulent couple of years that have alternately created stress and exceptional profits at various times and across different parts of the forest products sector, we think the demand outlook is again shifting on the back of high inflation and rising interest rates. Varying levels of consumer stress and affordability issues are playing out across the sector, including in building materials and containerboard demand, and tissue product preferences, among other areas. We expect trade to be an area of focus given a strong USD, a demand slowdown in Europe, constraints on Russian exports, and a potentially more meaningful reopening in China. We think the long-term outlook for wood products demand will also be topical given the contrast of a probable short- term demand pullback against perceived persistent underbuilding since the global financial crisis, with growing momentum in mass timber potentially driving additional incremental demand.
Inflationary impacts: production and capital costs, pricing, and the consumer – Rising costs for fiber, chemicals, energy, transportation, and labor, as well as construction and materials generally, have resulted in higher production and capital costs. While companies have passed through these pressures with price increases to varying degrees, we think new capacity additions against a backdrop of potentially softer economic conditions in 2023 could limit pricing power in some markets. At the same time, we think some companies are already experiencing some pockets of relief on inflation. We expect supply and demand balance by industry to be critical to returns over the next few years.
Capital allocation: where do priorities lie? – After a period of exceptional profitability for the wood products group in particular, we think capital allocation preferences could shift as cash flow takes a meaningful step lower. With balance sheets largely in good shape, yet organic growth options somewhat constrained (e.g., an uncertain near-term demand outlook, some persistent supply chain issues affecting construction timelines, elevated capital costs, etc.), we wonder whether companies will prefer to be conservative or look to M&A for growth.
ESG in focus: success stories, future opportunities and pathways to improvement – In our view, the degree to which sustainable practices and strong stakeholder relations are embedded in how the industry operates is underappreciated by investors. The end use of forest products is also typically highly sustainable compared to alternative options (e.g., a reduced carbon footprint when building with wood instead of concrete and steel; much higher rates of recycling in paper packaging versus plastic alternatives) and new technologies such as mass timber could help accelerate a shift to greater use of wood products, representing a significant opportunity to grow demand. In sum, we think that forest product companies should be on the radar screen for ESG-oriented investors.