West Fraser Timber Co Ltd T.WFG

RBC

[retiredcf]

September 13, 2022

West Fraser Timber Co. Ltd.
Highlights from the RBC Global Industrials Conference

NYSE: WFG | USD 83.93 | Outperform | Price Target USD 120.00

Sentiment: Neutral

Ray Ferris, President and Chief Executive Officer; Chris Virostek, Senior Vice President, Finance and Chief Financial Officer; and Robert Winslow, Director, Investor Relations and Corporate Development, presented to an audience of institutional investors as part of our Global Industrials Conference. We came away from the session with a reaffirmed view that the company can continue to pursue its strategy of being a low-cost operator with growing geographic diversification and a laser focus on capital allocation across its organic opportunities, return of capital initiatives, and select acquisitions in businesses where the company has existing expertise. We rate West Fraser's shares at Outperform.

Long-term fiber availability and policy concerns in BC likely drive further capacity rationalization by industry. Despite the company's long history in the province, productive assets, and skilled workforce, management noted that it sees the operating environment in the province as being challenged by policy and fiber availability issues. While the company announced in August that it would permanently curtail ~170 mmfbm of combined production at its Fraser Lake and Williams Lake sawmills and approximately 85 mmsf of production at its Quesnel plywood mill (please click here), the company expects further rationalization in the province across the industry given these fiber availability and policy/cost structure issues. Meanwhile, management sees the US South, Europe, Alberta, and Eastern Canada as being relatively more attractive operating environments and noted that Europe in particular is an important part of the company's growth story.

Looking through the cycle with respect to organic capital. West Fraser plans its capital projects with a multi-year view and noted that it can typically take up to three years to ramp up mills to reasonable productive capacity. Despite near-term weakness in OSB pricing in particular, management thinks the company is relatively well positioned in the context of several other industry OSB capacity additions that have been projected to come online in 2023 and that the supply/demand balance may be better than some expect given the previously mentioned multi-year ramp-up periods for new facilities. It noted that lumber production is actually down year-over-year through May (please click here) despite recent industry investments in the US South. More broadly, we got the sense that the company remains confident in its portfolio of organic capital opportunities across the business.

Favourable long-term outlook for wood products demand. Management outlined its case for its favourable long-term view, citing growing wood products demand and declining softwood fiber availability across North America and Europe. In the shorter term, while interest rates and a slowing economy pose concerns, a housing recession could help reset affordability and support demand as the cycle turns. We note significant share repurchase activity over the past two years, and with the company evaluating its repurchases against its long-term view of the company's intrinsic value. So we expect the company may continue to favour this option as part of its capital allocation process if near-term pessimism weighs on the company's share price.

Little relief on the horizon for transportation issues or labour and capital costs. While transportation issues in Western Canada (as well as in other regions) have been particularly acute over the past two years, management noted that despite some recent relief, it views the issues in Western Canada as having built up over several years (i.e., starting pre-COVID), and sees no resolution in sight. Management stated that it is making shifts in how it moves product to market, although with winter on the horizon, we expect transportation could become more challenging in Western Canada in particular in the near term. Meanwhile, a tight labour market across North America continues to be a constraint and driver of inflation in the cost structure, while capital cost inflation that started to take hold several years ago has also raised the cost of bringing new capacity online. In this context, the company continues to favourably view brownfield investment given fewer operational considerations (including around having an ecosystem of skilled labour, contractors, timber supply, residual outlets, etc.) and what would typically be quicker ramp-up periods.