Our View: Although the Investor Day was more informational than incremental, we think investors can come away from the event confident in the company's consistent operating and capital allocation philosophy. Below, we summarize our key takeaways from the event:
West Fraser has a long runway of Dudley-like projects – According to Sean McLaren, who heads up West Fraser's Solid Wood division, the company continues to review brownfield opportunities, but will be deliberate with the pace. In our view, major projects are more likely at some of West Fraser's smaller US South sawmills such as Blackshear, Lake Butler, Maxville, or Whitehouse. Brownfield projects are viewed as more attractive given that West Fraser can leverage existing infrastructure and employees to increase the probability of a successful startup.
OSB capacity growth is more likely to be incremental – While West Fraser prefers to grow through M&A, those opportunities are becoming harder to come by. Therefore, we expect that future growth will be more incremental through upgrades at existing facilities. Peter Wijnbergen noted that returns on these types of projects are more favourable, with paybacks in the 2-3 year range; however, they can be challenging operationally as the mill continues operating while upgrades are completed.
• We think that the most likely candidate for expansion is the Huguely mill, which we believe could undergo a similar debottlenecking project to the one completed at the Joanna, South Carolina mill. In 2013/2014, Norbord invested ~$30MM to redesign/rebuild the wood handling end of the mill, which debottlenecked the continuous press and increased capacity by ~150 mmsf ($200/msf).
Lumber and OSB greenfield payback periods are both in the 5-7 year range – West Fraser pegged lumber replacement cost in the $550-650/ mfbm range. This is largely in line with our expectation and 2021 greenfield announcements which have fallen in the $500-750/mfbm range. On the OSB side, West Fraser believes greenfield OSB mill costs would be over $500/msf, with 3-4 years to start production and an 18+ month ramp up period. West Fraser's estimate is well above recent announcements in the $210-350/msf range. The company does not expect the recent new capacity announcements to impact the supply-demand balance for at least 3-5 years, which is largely in line with our expectation.
West Fraser plans to introduce an ESG strategy next year – The company indicated that it plans to introduce a comprehensive ESG strategy in 2022, which will outline long-term targets for greenhouse gas emissions, among other things. We view this positively as we believe that West Fraser has a good sustainability story to share with investors. Introducing metrics will also likely result in the company scoring higher in ESG rankings.