West Fraser Announces First Quarter Results for 2021
West Fraser Timber Co. Ltd. (“West Fraser” or the “Company”) reported the first 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 February 1, 2021, the date of the completion of the acquisition of Norbord.
First Quarter Highlights
–Sales increased 81% from the prior quarter to $2.343 billion
–Earnings increased to $665 million, or 28% of sales, from $282 million in the prior quarter
–Adjusted EBITDA increased to $1.008 billion from $453 million in the prior quarter
–Completed the acquisition of Norbord on February 1, 2021
–Commenced commissioning at the new lumber mill in Dudley, Georgia and shipments commenced from the recently re-started OSB mill in Chambord, Quebec
–Repurchased $102 million of WFG shares for cancellation under Normal Course Issuer Bid
–Executing on plan to redeem Norbord Notes and retire $665 million of debt
–Finished the quarter with liquidity at $2.551 billion and net debt to capital ratio of (3%)
Operational Results Summary
The acquisition of Norbord was completed on February 1, 2021. As a result of the acquisition, we have combined the North American operations of Norbord and our Panels segment and renamed that segment North America (“NA”) Engineered Wood Products (“EWP”). In addition, we have created a Europe EWP segment that includes the results from the United Kingdom (“U.K.”) and Belgium operations.
Our Lumber segment generated operating earnings in the quarter of $607 million (Q4-20 – $385 million) and Adjusted EBITDA of $646 million (Q4-20 – $425 million). Prior quarter operating earnings included a $95 million duty recovery related to the AR1 duty rate finalization. Adjusted EBITDA, which includes duties, increased due to higher lumber prices, partially offset by lower shipment volumes that were negatively impacted by seasonal railcar shortages in Canada and a period of extreme winter conditions in the U.S. South. Higher SPF log costs resulting from B.C. fibre shortages and higher B.C. and Alberta stumpage rates also negatively impacted Adjusted EBITDA compared to the prior quarter. Commissioning at Dudley continues on track and all major machine centres have now been operationalized.
Our NA EWP segment generated operating earnings in the quarter of $299 million (Q4-20 – $44 million) and Adjusted EBITDA of $353 million (Q4-20 – $48 million). Segment operating earnings and Adjusted EBITDA were decreased by a one-time charge of $86 million related to inventory fair value adjustments from purchase price accounting. The addition of our OSB operations from the date of the Norbord acquisition, higher plywood pricing and robust plywood demand positively impacted the NA EWP operating earnings for the quarter. These positive drivers of operating earnings were partially offset by purchase price accounting related to the Norbord acquisition that increased cost of products sold and increased levels of amortization. Higher log costs from increased B.C., Alberta and Ontario stumpage rates, higher resin costs and increased costs from the extreme weather in the U.S. South also negatively impacted operating earnings. Production levels at Chambord continue to gradually increase toward targeted levels in line with expectations.
Our Pulp & Paper segment generated operating earnings in the quarter of $2 million (Q4-20 – loss of $28 million) and Adjusted EBITDA of $11 million (Q4-20 – negative $20 million) while the Europe EWP segment generated an operating loss in the quarter of $6 million (Q4 – N/A) and Adjusted EBITDA of $11 million (Q4-20 – N/A). Our Europe EWP segment operating earnings and Adjusted EBITDA were decreased by a one-time charge of $7 million related to inventory fair value adjustments from purchase price accounting.
Strong first quarter results increased quarter-end available liquidity to $2,551 million from $1,272 million at the end of the prior quarter. This balance sheet improvement has afforded us greater flexibility to undertake strategic capital investments, repay debt and repurchase shares.
Strategic Capital Program
With the milestones achieved at the Dudley and Chambord mills, we are also pleased to announce that we will be moving forward with approximately $180 million of additional capital projects identified under West Fraser’s strategic capital program. Work on the identified projects will begin the second half of 2021 and continue through 2023. This investment program will support safety, cost improvements and strategic growth initiatives as we continue our focus on capital execution and operational excellence. The average project payback period for this strategic capital program is expected to be three to four years. The addition of these new capital projects will largely offset lengthening lead times on projects currently underway and as such we are reiterating our capital expenditure target of approximately $450 million for 2021.
In the Lumber segment we expect to invest approximately $150 million at five of our U.S. South lumber mills under the strategic capital program. Investments at the target mills will expand capacity, increase the mix of highermargin 2x4s and reduce fixed and variable production costs.
In the North America EWP segment we expect to invest approximately $30 million at two of our OSB mills. Investments at the target mills will reduce fixed and variable manufacturing costs and improve mill productivity.
Concurrent with the closing of the Norbord acquisition we assumed Norbord’s $315 million senior notes due April 2023 (the “2023 Notes”), bearing interest at 6.25%, and $350 million senior notes due July 2027 (the “2027 Notes”), bearing interest at 5.75%.
Subsequent to quarter-end we elected to redeem the remaining 2027 Notes. On May 6, 2021, we funded the redemption using cash on hand, following which the 2027 Notes will no longer be outstanding. As discussed below, we have also given notice to redeem the 2023 Notes. Once the redemptions of the 2023 Notes and the 2027 Notes are complete, we will have retired $665 million of principal value of long-term debt and reduced annual interest expense by approximately $40 million.
Normal Course Issuer Bid
On February 17, 2021, we renewed our normal course issuer bid (“NCIB”) allowing us to acquire an additional 6,044,000 Common shares until the expiry of the bid on February 16, 2022. In the first quarter of 2021, we repurchased approximately 1.56 million shares under the NCIB at an average share price of CAD$82.86 ($65.28) for aggregate consideration of $102 million. All shares purchased by the Company under the NCIB will be cancelled.
The most significant uses for our lumber and OSB products are residential construction, repair and remodelling, and industrial applications. Low mortgage rates, low volumes of homes available for resale, favourable demographics, increasing acceptance of remote working and the underlying housing construction deficit due to several years of underbuilding appear to be positively influencing the demand for new housing in North America.
Economists are forecasting U.S. housing starts for 2021 to be approximately 1.5 million units, an increase of nearly 9% over 2020. An aging housing stock and increased repair and renovation spending should also continue to drive strong lumber, plywood and OSB demand.
We expect to maximize our capacity utilization in lumber, OSB and plywood operations subject to required maintenance downtime and assuming no unexpected disruptions from COVID-19 or other supply chain disruptions from weather, transportation, raw material availability or other factors.
Demand for our European products is expected to continue to be robust as demand for OSB as an alternative to plywood in Europe continues to grow.
Fibre costs for our B.C., Alberta, and Ontario lumber and EWP operations are expected to remain elevated as long as lumber, and EWP prices remain high and demand exceeds the available log supply in B.C. A strengthening Canadian dollar and stresses across the Company’s supply chain, owing in part to a strong global economic recovery, are also expected to contribute to inflationary pressures on our input costs in the coming quarters.
Our balance sheet remains strong and is well equipped to face potential volatility that may exist in our markets over the coming quarters and to support capital expenditure plans and returning capital to shareholders.
Norbord Integration Update
Efforts to integrate the Norbord business are in the early stages and are a Company focus. There have been some early successes identifying cost savings in our fibre supply chain, and we remain on track to achieve targeted annual synergies of $61 million over the next 18-24 months.
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About West Fraser
West Fraser is a diversified wood products company producing lumber, LVL, MDF, plywood, pulp, newsprint, wood chips, other residuals, and energy with facilities in western Canada and the southern United States.
Robert B. Winslow – Director, Investor Relations & Corporate Development – firstname.lastname@example.org – (416) 777-4426
Source: West Fraser Timber Co. Ltd.