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Q3 2021 ‘one of West Fraser’s strongest quarters ever’


October 28, 2021
By West Fraser

West Fraser Timber Co. Ltd. reported today the third quarter results of 2021. All dollar amounts in this news release are expressed in U.S. dollars unless
noted otherwise.

The results of operations presented and discussed below include those of Norbord from Feb. 1, 2021, the date of the completion of the acquisition of Norbord.

Third quarter highlights

  • Sales of $2.358 billion and earnings of $460 million, or 20 per cent of sales
  • Adjusted EBITDA of $786 million, representing 33 per cent of sales
  • Record Adjusted EBITDA of $90 million for Europe EWP segment
  • Finished the quarter with liquidity at $3.130 billion and net debt to total capital ratio of (27) per cent
  • Announced agreement to acquire Angelina Forest Products lumber mill for approximately $300 million and Georgia Pacific OSB mill for approximately $280 million, both subsequent to quarter-end

“Despite a number of challenges, the third quarter of 2021 was one of West Fraser’s strongest quarters ever,” said Ray Ferris, West Fraser’s president and CEO. “We operated responsibly across the business, managing the complexities of transportation and mill disruptions in the face of higher duties and B.C. stumpage and softer demand in a cyclical commodity environment.”

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“The benefits of product and geographic diversification following the Norbord acquisition were especially evident this quarter in the relative strength of our North American OSB results and the record performance from Europe EWP, where Adjusted EBITDA more than doubled quarter-over-quarter. While demand for a number of our products softened in the third quarter, fundamentals for housing remain favourable and we are seeing early signs of a recovery in repair and remodelling demand. As always, we remain focused on the health and safety of our employees and will manage the business to be flexible to meet the changing needs of our customers.”

Operational results summary

West Fraser’s lumber segment generated operating earnings in the quarter of $52 million (Q2-21 – $955 million) and Adjusted EBITDA of $93 million (Q2-21 – $994 million). Adjusted EBITDA decreased due to lower lumber prices, lower shipment volumes and increased duty rates. The company’s British Columbia lumber mills operated at 79 per cent of stated capacity in the quarter. Adjusted EBITDA was also negatively affected by higher manufacturing costs due in part to increased SPF log costs, higher expenditures related to increased employee costs in the U.S. South associated with managing through COVID-19 impacts and other input cost inflation.

West Fraser’s NA EWP segment generated operating earnings in the quarter of $539 million (Q2-21 – $1,017 million) and Adjusted EBITDA of $612 million (Q2-21 – $1,106 million). Adjusted EBITDA decreased due to lower OSB and plywood prices and lower shipment volumes as a result of reduced demand and due to wildfires in British Columbia, which disrupted transportation services. Higher log costs from increased B.C. stumpage rates and higher resin costs also negatively impacted Adjusted EBITDA.

Acquisition of Texas lumber mill and South Carolina OSB mill

On Oct. 12, 2021, West Fraser announced its entry into an agreement to acquire the Angelina Forest Products’ SYP lumber mill located in Lufkin, Texas for approximately $300 million subject to certain post-closing
adjustments. The company intends to fund this acquisition using cash on hand. The new turn-key facility began construction in 2018 and commenced operations in late 2019. The facility is expected to progress toward production capacity of approximately 305 million board feet over the next three to four years. The transaction is anticipated to close following successful completion of U.S. regulatory reviews and satisfaction of customary closing conditions.

On Oct. 26, 2021, West Fraser announced its entry into an agreement to acquire Georgia Pacific’s OSB mill located near Allendale, S.C., for approximately $280 million. The company intends to fund this acquisition using cash on hand. The Allendale facility commenced production in 2007, has been idle since late 2019 and has an estimated stated capacity of approximately 760 million square feet (3/8-inch basis). The company intends to invest an estimated $70 million of additional capital to upgrade and optimize the facility in preparation for its restart. The transaction is anticipated to close following successful completion of U.S. regulatory reviews and satisfaction of customary conditions.

Outlook

Markets

The most significant uses for West Fraser’s lumber and OSB products are residential construction, repair and remodelling, and industrial applications. Low mortgage rates, low volumes of homes available for resale and increasing acceptance of remote working appear to be positively influencing the demand for new housing in North America. An aging housing stock and repair and renovation spending should also continue to drive lumber, plywood and OSB demand. Growing market penetration of mass timber in industrial and commercial applications also stands to support medium-to-longer term demand growth for wood building products.

The demand for West Fraser’s European products is expected to continue to be robust as demand for OSB as an alternative to plywood in Europe continues to grow. An aging European housing stock is also expected to drive repair and renovation spending, supporting the growing demand for our wood building products.

West Frsaer’s balance sheet remains strong and well equipped to face potential volatility in the markets over the coming quarters, to support capital expenditure plans and to return capital to shareholders.

Operations

Due to wildfires in British Columbia, slowing orders for forest products, constraints on the availability of resins used in the manufacture of panel products, transportation service interruptions and overall inventory levels, output was reduced at West Fraser’s British Columbia SPF, U.S. South SYP, North American OSB and Canadian plywood facilities in the third quarter of 2021. West Fraser has since begun to increase operating schedules and anticipates increasing operating rates through the remainder of the fourth quarter, depending on developments relating to the factors noted above as well as economic log supply, weather conditions and availability of labour due to the continuing impacts of COVID-19.

On Jan. 1, 2021, stumpage rates increased in B.C. due to the market-based adjustments related to lumber prices and purchase log costs. Further increases in B.C. stumpage rates occurred on July 1, 2021 and Oct. 1,
2021, but West Fraser expects B.C. stumpage to decrease on Jan. 1, 2022. In Alberta and Ontario, stumpage rates have declined from levels earlier in the year, as they are closely linked to the price of lumber and OSB and respond rapidly to changes in lumber and OSB prices. West Fraser expects SYP log costs to increase modestly in the fourth quarter. The company also has routine maintenance outages planned for the fourth quarter at several of its EWP facilities.

British Columbia wildfires

British Columbia faced extreme heat and dry ground conditions, resulting in a significant number of wildfires in the second and third quarters of 2021. By September 30, approximately 869,000 hectares of area were burned from wildfires in British Columbia in 2021, trailing only the provincial area lost from wildfires in 2017 and 2018. The near-to-medium-term impact of these losses on West Fraser’s future production and shipments is still to be determined.

Norbord integration update

The integration of the Norbord business is progressing well and continues to be a company focus. West Fraser remains on track to achieve targeted annual synergies of $61 million by the end of 2022.