WEST FRASER/NORBORD INC.

Q1 2021 EARNINGS CONFERENCE CALL

MAY 7, 2021 - 11:30 A.M. ET

CORRECTED TRANSCRIPT

OPERATOR

Good morning. My name is Sylvie and I will be your conference operator today. At this time, I would like to welcome everyone to the Joint West Fraser Q1 2021 Results Conference Call. During this conference call, West Fraser's representatives will be making certain statements about potential future developments. These forward-looking statements include certain statements about West Fraser's future financial and operational performance, including the impact of foreign exchange rates, credit ratings and mill maintenance shutdowns.

West Fraser's business outlook, including forecasted U.S. housing starts, market conditions, demand for products and available supply and expectations concerning cost; West Fraser's capital plans, including the completion and ramp-up of capital projects and the benefits of such projects; the softwood lumber dispute, including adjustments to duty rates and related proceedings; the integration of Norbord into the West Fraser business and expected synergies; and the redemption of the Norbord 2023 notes.

These statements include forward-looking statements within the meaning of Canadian and United States securities laws and are intended to provide reasonable guidance to investors. The accuracy of these statements depends on a number of assumptions and is subject to various risk and uncertainties that may cause future events to differ materially from the events implied by these statements. Actual outcomes will depend on a number of factors that could affect the ability of the Company to execute its business plans, including those matters described under risks and uncertainties in the Company's annual management discussion and analysis as supplemented by other risks and uncertainties as set out in the Company's quarterly MD&As. These filings can be accessed on West Fraser's website or through SEDAR for Canadian investors and EDGAR for United States investors.

Accordingly, listeners should exercise caution in relying upon forward-looking statements. After the speakers' remarks, there will be a question-and-answer session.

[Operator instructions.] Thank you. Mr. Ferris, you may now begin your conference.

RAYMOND FERRIS, CEO, PRESIDENT & CORPORATE DIRECTOR

Well, thank you, Sylvie, very much for that. Well, good morning, everyone, and welcome to our first quarter 2021 conference call. I'm joined today by Chris Virostek, our Chief Financial Officer; Chris McIver, our Senior VP at Marketing and Corporate Development; and several other members of our executive team.

I will make a few opening remarks and then I'll pass the call to Chris Virostek for a review of our West Fraser's first quarter results. And then - and I'll make some concluding comments, and then we'll of course take your questions. And just a reminder to everyone that our financial results are now in U.S. dollars.

It remains an exciting period for forest products, being a meaningful part of an industry that provides sustainable and renewable building products required for a low carbon economy simply by participating in the lifecycle of forest that we live in and operate in. Manufacturing building

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materials from a sustainable and renewable forest is but one very important part of the required solution for society to meet its climate change objectives.

On February 1, 2021, we acquired the Norbord business and a highly capable and well-managed team. I want to thank and acknowledge how hard and diligent our Finance, Legal, HR and IT teams are working to make the transition as smooth as possible while relentlessly supporting our manufacturing operations, frankly without missing a beat. In fact, our operations performed well in the period. And you'll see in our first quarter results, which Chris will highlight later, the significant financial contribution the OSB business has already made to West Fraser.

With that backdrop, I'm pleased to report that the first quarter 2021 was another strong quarter for West Fraser. We remained agile and continued to work hard at minimizing the COVID-related business disruptions thanks to our focus on the health and safety of our employees and communities. I'm proud of what our team has accomplished.

In North America, the strength in U.S. home construction activity from the second half of last year continued its recovery from the weakness that unfolded during the early stages of the COVID-19 pandemic, spurring demand for wood-building products. In fact, home construction measured by new home starts has recently reached levels not seen since 2006. Repair and remodeling has also remained robust, driving solid demand for lumber and wood panels.

On the lumber side, the construction of our new manufacturing complex in Dudley, Georgia has progressed well as the mill and planer are now operational and the rest of the site is expected to come on later in Q2. We anticipate approximately 170 million board feet of additional production as the Dudley Mill ramps up towards its full annual production capacity over the next several years.

On the OSB side, supply has struggled to keep up with the stronger than expected recovery in OSB demand in recent quarters. And that strength has carried into the first quarter of 2021.

In response to that increased demand, we announced the restart of Chambord, Quebec mill which began to produce and ship panels in late March, ahead of our original expectations. Those panels are now helping to meet the demands and needs of our customers for the important spring building season. The Chambord mill is expected to ramp towards its annual rated capacity of 550 million square feet (3/8") over the next 18 to 24 months. With that, I'll now pass the call over to Chris.

CHRIS VIROSTEK, CHIEF FINANCIAL OFFICER

Thanks, Ray. And good morning, everyone. When we last reported earnings in mid-February, the recovery in lumber and OSB demand was significant. That demand strength continued through the first quarter and remains elevated versus historic norms owing to continued strength from new home construction and renovation applications, lean channel inventories, and a limited supply response. West Fraser has been adding hours and shifts where possible across our manufacturing network to increase supply and attempting to secure additional transportation resources for delivery of product.

Another item of note, our consolidated first quarter results include the financial results of Norbord as of February 1. And as of January 1 of this year and for all comparative periods presented, we are no longer excluding export duties in our adjusted EBITDA calculations. Our reportable segments now include the acquired North American OSB business and the pre-existing West Fraser Panels business as North American Engineered Wood Products and the acquired operations in the UK and Europe are reported as a separate segment.

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In terms of financial performance, West Fraser generated record consolidated adjusted EBITDA of $1 billion in the first quarter, up from $453 million in the last quarter, in part, due to the addition of Norbord's results as of February 1. I will note that this first quarter EBITDA was reduced by $93 million for an acquisition related non-cash purchase price accounting impact related to inventory fair values. This raised our cost of goods sold to their fair value as at the date of closing as required by accounting standards. $86 million of this EBITDA reduction was attributed to the North American EWP segment and $7 million was attributed to the European EWP segment.

In the prior quarter results of $453 million of adjusted EBITDA, there was a $95 million benefit for the retroactive adjustment to duty rates for 2017 and 2018.

Now, to highlight some of Q1 segmented financial results. The lumber segment reported adjusted EBITDA of $646 million versus $425 million in the fourth quarter of 2020 with the positive effect of higher pricing offsetting lower shipments, higher fiber costs, and the retroactive duty adjustment in Q4.

Our North American EWP segment performed well in the first quarter. Adjusted EBITDA for the segment grew to $353 million from $48 million in the prior quarter with gains primarily due to the addition of the OSB results for February and March, but as well due to higher plywood pricing, which more than offset fiber and raw materials cost inflation. OSB shipments were slightly lower than expectations due to extreme winter weather disruptions in the U.S. South.

Adjusted EBITDA in the pulp and paper segment increased to $11 million in the first quarter from negative $20 million in the fourth quarter owing to higher pulp pricing and reduced downtime for maintenance activities. We continue to see signs of a recovery in pulp markets.

Lastly, adjusted EBITDA in the newly formed European EWP segment was $11 million representing Norbord's February and March results for that geography, which, as I noted earlier, was reduced by $7 million due to a non-cash purchase price accounting adjustment of cost of goods sold. We are seeing recent market strength continue in Europe as demand for OSB continues to grow.

Shifting to capital allocation and the balance sheet. Capital expenditures were $62 million in the first quarter, up moderately from the first quarter of last year. And we remain on track to invest approximately $450 million on capital projects in 2021 and continue to focus on realizing the benefits of the capital we have spent in the past few years.

We view share buybacks as an appropriate use of excess cash where we believe our shares are trading below intrinsic value. And over the first quarter, we bought back $102 million worth of West Fraser shares under our normal course issuer bid. Those shares were repurchased at an average price of C$82.86, well below our internal view of intrinsic value and more than a 20% discount to yesterday's closing.

We are also pleased with the level of U.S. trading liquidity we've seen for West Fraser with the New York Stock Exchange listing. And our trading volume, which accounted for less than 10% of our total trading volume on the exchanges in February now regularly exceeds 20% of our total daily trading volume.

Given the strong Q1 results, our financial liquidity increased materially exiting the quarter with $2.55 billion of available liquidity. Leverage was modest, exiting the quarter with total debt of $1.3 billion and net cash of $164 million. You will notice also that in conjunction with our Q1 earnings

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release, we have also announced plans to redeem the Norbord 2023 notes. In combination with the recently completed redemption of the 2027 notes, we will therefore have executed on plans to redeem and retire in aggregate $665 million of high-yield Norbord debt, which will ultimately reduce annual interest costs by approximately $40 million and help rationalize our capital structure.

To meet the reporting requirements under the Norbord note indentures, we provided a summary and discussion of Norbord's first quarter results, including the month of January, in an addendum to yesterday's earnings news release. On a stand-alone basis, Norbord had generated $526 million of adjusted EBITDA in Q1 and ended the quarter with $114 million of net cash.

With that, I'll turn the call back over to Ray for our outlook on 2021 and an update on select projects and the integration.

RAYMOND FERRIS, CEO, PRESIDENT & CORPORATE DIRECTOR

Thank you, Chris. In terms of our end markets, record low mortgage rates and the ongoing trend toward greater work-from-home options continues to create strong incentives for people to purchase new single-family homes and undertake renovations and do-it-yourself projects.

Remote working when combined with the underlying housing formation deficit has continued to drive demand for single-family homes, which consumes more of our wood building products than multi-family. While we recognize there are many factors outside of our control that can temporarily influence markets, including uncertainty around the longer-term economic implications of the effects of COVID-19, we remain optimistic about the favorable market fundamentals we're currently seeing, supported by the underlying environmental benefits of building with wood, which have never been more clear and more widely accepted.

Keeping our employees and communities safe and focusing on servicing our customers' needs remain our key priorities. Our job is to create value in our Company for our shareholders. As most of you are aware, the considerable cash accumulation we're now seeing is a relatively new trend and we will look for every opportunity to create shareholder value. Therefore, you can expect us to be patient, thoughtful and balanced in our capital allocation strategy going forward.

With the significant milestones recently achieved at our Dudley and Chambord mills, I am pleased to announce an advancement of our capital program that will see us invest an additional $180 million across several projects through 2023. In the lumber segment, we expect to invest approximately $150 million at five of our U.S. South mills, which furthers our execution and strategy in that region. These investments will increase capacity and increase the value of our products while reducing production costs overall.

In the North American Engineered Wood Product segment, we expect to invest approximately $30 million to both reduce manufacturing costs and improve productivity. These are low risk proven projects within our operating portfolio with an average payback expected to be roughly three to four years.

I would again like to reinforce that all this activity is happening against the backdrop of the integration of the Norbord business.

We knew that we had a great team in business joining West Fraser, which would immediately add capacity and ability to the team. I'd like to acknowledge that our OSB team has hit the ground running and are embracing the future and are rapidly working through synergies and how to make our Company even better. The level of engagement and building momentum has been impressive.

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And although it's still early days, I have confidence that we remain on track to achieve our targeted annual synergies of $61 million over the next 18 to 24 months.

Safety remains our quest. We know we can eliminate serious incidents and injuries in our Company.

Despite driving overall injury rates and severity to record lows throughout the Company, we have much more work to do.

Finally, it is our employees that continue to do the heavy lifting, and delivering strong safety and operational results, all while dealing with obstacles and challenges of the still ongoing pandemic. It is this dedication and perseverance of the many people across the Company who I am most thankful for and proud of. Thank you.

And with that, Operator, we'll turn it back to you for questions.

OPERATOR

Thank you, sir. [Operator Instructions]. One moment for your first question, which will be from Sean Steuart at TD Securities. Please go ahead.

: Thanks. Good morning. Ray, a question on the next leg of the strategic capital plan. So, piecing together the incremental lumber and engineered wood projects that you highlighted towards the end of your comments there. Would that yield a 2022 overall CapEx number in the same ballpark as 2021? Is it less, is it more? I'm just trying to piece all that together with your maintenance CapEx and think about what the budget might look like for 2022.

: Well, good morning, Sean. So, yeah, what I'd say is, yeah, I think we say today it's in range for 2022, kind of that same number we're using for 2021. I mean, I also don't mind saying that as I - as we work through the year, if we found more high return capital that we were ready and able to execute and deliver quickly, you know, that wouldn't be a bad thing. We'd be - we'd be excited to bring that forward, but today, I've got to say it's probably in the range.

: Okay. And are you seeing any cost inflation for capital projects, steel or other inputs contractor backlogs, that sort of stuff? Is that having any material effect on budgets for these projects at this point?

: So, Sean, I'm just going to - you know, I'm even going to go kind of pre- pandemic. You know I think we saw a lot of stress and strain in the system prior to the pandemic, be it labor, be it supplier, be it those inflationary aspects. I think if there was a momentary reprieve with the pandemic, we've certainly seen I'd say that continued pace. So, I'm not going to say it's a material change in what we're seeing. But I would say for the last several years, we've seen a relentless pressure on cost and productivity across the spectrum. So, I think we're just - it's built into kind of how we're dealing with the day-to-day. I don't think it's a new issue in the last few months. I think it's the same one we've been dealing with for a while.

: Okay. Last question for now. You built up more lumber inventory than your peers did this quarter. Are you seeing any easing of shipping constraints into the current quarter? Are you going to be able to move some of that inventory into the market at a better clip coming up?

: I think the short answer would be we've seen shipping improve in the

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West Fraser Timber Co. Ltd. published this content on 06 May 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 21 May 2021 20:00:02 UTC.