West Fraser Timber Co Ltd (WFG) 2025 Q3 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the West Fraser third-quarter 2025 results conference call.

(Operator Instructions)

This call is being recorded on Thursday, October 23, 2025.

During this conference call, West Fraser's representatives will be making certain statements about West Fraser's future financial and operational performance, business outlook, and capital plans. These statements may constitute forward-looking information or forward-looking statements within the meaning of Canadian and United States securities laws. Such statements involve certain risks, uncertainties, and assumptions which may cost West Fraser's actual or future results and performance to be materially different from those expressed or implied in these statements.

Additional information about these risk factors and assumptions is included both in accompanying webcast presentation and in our [2024] annual MD&A and annual information form as updated in our quarterly MD&A, which can be accessed on West Fraser's website or through SEDAR+ for Canadian investors and EDGAR for United States investors.

I would like to turn a conference over to Mr. Sean McLaren. Thank you. Please go ahead.

Thank you, Ina.

Good morning and thank you for joining our third-quarter 2025 earnings call. I am Sean McLaren, President and CEO of West Fraser, and joining me on the call today are Chris Virostek, Executive Vice President and Chief Financial Officer; Matt Tobin, Senior Vice President of Sales and Marketing; and other members of our leadership team.

On the earnings call this morning, I will begin with a brief overview of West Fraser's Q3 2025 financial results, and then pass the call to Chris for additional comments before I share some thoughts on our outlook and offer concluding remarks.

West Fraser posted negative $144 million of adjusted EBITDA in the third quarter of 2025 as we continue to operate within an extended cycle trough. Of note, this quarter included a $67 million out of period duty expense related to the finalization of administrative Review 6 or AR6.

New home construction remained relatively stable during the period, albeit at uninspiring levels, with annualized US housing starts averaging just 1.31 million units through August on a rolling three-month seasonally adjusted basis, as mortgage and interest rates continue to present headwinds to US housing demand and affordability. And as we've noted for several quarters, repair and remodeling demand was subdued once again this quarter.

Despite the tough Q3, our balance sheet continues to demonstrate strength as we exited the quarter with nearly $1.6 billion of available liquidity and a healthy cash position that remains positive net of debt. A strong balance sheet and liquidity profile, along with our investment-grade rating remain key elements of our defensive capital allocation strategy, which allows us to invest in our business countercyclically and take advantage of investment opportunities if and when they arise.

With that brief overview, I'll now turn the call to Chris for additional detail and comments.

Thank you, Sean, and a reminder that we report in US dollars, and all my references are to US dollar amounts unless otherwise indicated.

The lumber segment posted an adjusted EBITDA of negative $123 million in the third quarter, inclusive of the previously mentioned $67 million out of period duty expense. This is in comparison to $15 million of adjusted EBITDA reported in the second quarter, with the sequential change driven largely by lower pricing and the AR6 duty expense.

Of note, operations at our old Henderson site are winding down, and the new mill is entering its commissioning phase.

Our North America EWP segment posted negative $15 million of adjusted EBITDA in the third quarter, down from $68 million in the second quarter, with the sequential change largely driven by lower OSB pricing.

The pulp and paper segment posted $6 million of adjusted EBITDA in the third quarter compared to negative $1 million in the second quarter, with a sequential change largely attributable to Cariboo Pulp's annual maintenance shut that occurred in the third quarter. Prior to and following the maintenance outage, we are seeing improved operating performance from Cariboo Pulp in terms of daily output.

Finally, our Europe business generated $1 million of adjusted EBITDA in the third quarter, similar to the $2 million reported in the second quarter.

In terms of our overall Q3 results, lower product prices for our lumber and North American OSB products were the largest contributing detractors as compared to Q2. We were also buffeted by a number of major maintenance activities during the quarter, most significantly, the Cariboo maintenance shut.

Cash flow from operations was $58 million in the third quarter, with our net cash balance at $212 million, down from $310 million in the prior quarter. The relative decrease in our net cash balance reflects lower earnings offset and in part by a reduction of working capital plus the impact of $90 million of capital expenditures and approximately $65 million of cash deployed towards share buybacks and dividends.

In terms of our 2025 shipment guidance, with the demand softness, we continue to experience across our lumber product portfolio, we are narrowing our outlook by reducing the top end of the guidance range for both SPF and SYP2025 shipments while we're maintaining the North American OSB and EU OSB shipment guides for 2025. We are also confirming our 2025 CapEx guidance range of $400 million to 5 -- $450 million. All updated views on our 2025 outlook are presented on slide 8.

Regarding softwood lumber duties, earlier in the third quarter, the US Department of Commerce released final CBD and ADD rates for AR6, which are based on the year 2023. These rates were largely as we had anticipated and at a combined rate of 26.5%. West Fraser has the lowest duty rate in the Canadian industry.

More recently, the US administration issued a proclamation that imposed Section 232 tariffs of 10% on imported softwood, timber, and lumber into the US, which came into effect on October 14, 2025. This tariff is in addition to the existing softwood lumber duties.

With that financial overview, I'll pass the call back to Sean.

Thank you, Chris.

Looking forward, we continue to monitor macroeconomic conditions complicated by shifting trade policies. Despite such a backdrop, the company remains well positioned to navigate the dynamic and difficult business environment we face today, backstopped by a strong financial position. As a reminder, we acted early in this down cycle, optimizing our portfolio of assets to create a more resilient company.

This included permanently removing 170 million board feet of capacity in our Canadian lumber business in 2022 and 650 million board feet of capacity in 2023 and 2024 through the permanent or indefinite closure of five of our least economic lumber mills in the US and Canada. Combined, these capacity removals account for 820 million board feet, representing approximately 12% of the company's lumber capacity prior to the actions taken.

Considering our shipment guidance for 2025, our implied Q4 operating rate reflects a curtailment of approximately 20% to 25% of that capacity. Furthermore, we divested three pulp mills for $124 million in 2024 and acquired high-quality lumber and OSB assets. In the aggregate, all these actions to high grade the portfolio have made us better at the bottom of the cycle.

Going forward, we will continue to take this approach of managing our asset portfolio to do what is both prudent for the long term and necessary in the short term. You should also expect us to continue to be flexible in our operating strategy, meeting the needs of our customers and operationalizing the benefits of our strategic capital to drive down costs, all while keeping our focus on a safe working environment for our employees. We are wrapping up a number of capital projects that have been in progress during the current market and expect the start of these projects will continue to lower costs as they are operationalized.

We will also continue to pursue a balanced capital allocation strategy that includes investment in value-enhancing projects, pursuit of opportunistic investments and growth, and the return of capital to shareholders as we leverage the competitive advantage of our balance sheet strength and available liquidity.

In terms of our more general medium- to longer-term outlook, we will continue to lean on our industry knowledge and experience to make the decisions that we believe will not only keep the company resilient in the trough of the cycle, but will also allow the company to be better prepared for the next industry demand recovery, whenever that may be.

North American lumber supply has been trending lower in recent years, with a material proportion of that capacity closed permanently due to factors including high-cost fiber supply, legacy technology, shrinking residual markets, and now more recently, increased duties and tariffs.

When lumber supply demand dynamics eventually find balance and demand cyclically improves, we expect our ability to add material new supply will face the same significant obstacles: access to economically viable fiber, high capital costs that challenge returns on new investment, and long-term viable outlets for residual products.

Shifting briefly to tariffs. Regardless of what may happen on this front, as we have said before, we continue to monitor the Canada-US trade situation closely and remain agile and ready to respond as needed, and we will continue to work closely with our federal and provincial governments to support discussions when called upon as they relate to softwood lumber.

In closing at West Fraser, we aim to deliver strong financial results through the business cycle. We achieved this by leveraging our product and geographic diversity, modern, well-capitalized assets, and the dedication of our people and culture rooted in cost discipline and a commitment to operate responsibly and sustainably. We remain steadfast in the strategy.

Although we continue to have a challenge in [near-term] outlook, we are optimistic about the longer-term prospects for our industry and for West Fraser, and we look forward to continuing to build one of the world's leading sustainable buildings products companies.

Thank you.

And with that, we'll turn the call back to the operator for questions.

(Operator Instructions)

Ketan Mamtora, BMO Capital Markets.

Maybe to start with and recognizing that this is a pretty tough backdrop right now. I'm just curious sort of your approach to managing production in both lumber and North America OSB. Particularly, in this environment which increasingly looks like that demand is likely to remain soft here in the near term, can you sort of just give us some thoughts on sort of how do you approach -- sort of managing production, particularly as we are looking at sort of another year where EBITDA could be kind of negative in lumber.

Yeah, good morning, Ketan, happy to touch on that and maybe I'll just start by reinforcing a few things that the actions we took early in the cycle, which were closing either permanently or indefinitely a number of our mills, adjusting our shift configurations, and we have remained nimble in our lumber portfolio against after those actions and as sort of you seen in our guidance as the years unfolded. So we maintain on -- in both of our main pro -- on all of our product lines, but in particular lumber and OSB, a variable kind of operating strategy that first runs to our economics and our customer demand needs. So that's how we manage that and we make those decisions all the time within our platform.

Understood.

And then on OSB, what was sort of the implied, Q4 operating rate look like based on what you'll have discussed? You talked about 25% temporary curtailment in lumber. How does that look like in OSB?

Yeah, I'll let Chris touch on that one.

Yeah, I think Ketan, as you'll recall, I think when we've discussed this before, right? Q4 is always very heavy for us on maintenance shuts. We strategically take that maintenance downtime in Q4 because it is a weaker seasonal period. So I think with the shipment guide that is out there, that would imply an operating rate of somewhere around 80% in the fourth quarter.

Understood.

And then just last one from me, on the balance sheet side, clearly the balance sheet is very strong. You've got a net cash position. Curious about sort of how you think about M&A opportunity in this down cycle at the moment and where do you think you've got the most opportunity for inorganic growth?

Yeah sure, I'll jump in there and then Sean, you can add if you like.

I think we've been very consistent the last several years in how we've talked about M&A and for us, it's quality first, right? And I think, clearly an environment like we're in today necessitates that quality. It just shows how important that quality-first approach is around all those things that Sean mentioned that are challenges, whether that's residual supply or asset quality or workforce availability or timber availability.

So I think the way that we have the balance sheet, we have flexibility to pursue our -- the strategy that we've always had and growth has always been part -- inorganic growth has always been part of the company's DNA going back decades so -- but we're going to be guided first and foremost by quality and things that that make the company stronger, and I think you can see that certainly in the actions that we've taken over the last several years where we've added to the portfolio, it's been very selective and high-quality, and we've also removed things from the portfolio that we don't think make us stronger at the bottom of the cycle. So I think that'll be the guide as to what we consider as opportunities is there's got to be -- we got to be satisfied with the quality that's out there. Sean?

No, that's perfect, Chris. I'll -- quality and enhancing our strength at the bottom of the cycle. Those are the priorities as we think about what might be next for West Fraser.

Understood. Now that's very helpful color. Good luck. I'll jump back on the queue.

Ben Isaacson, Scotiabank.

Just two questions for me.

Sean, I think last conference call, so three months ago, the federal government was starting to talk about a possible support and conversations around that when it comes to lumber. So it's been three months and things have not really improved in terms of the macro backdrop. Can you talk about what you're willing to share in terms of how those conversations are going and how federal support for lumber is starting to stack up?

I can't remember the -- good morning, Ben -- and I don't have the exact date in front of me. I believe it was in early August and it was in British Columbia, which was encouraging at a small business in Kelowna, a small lumber business where the premier rolled out some different support measures. I don't have all the details. They're all in the public domain, but they were providing some level of support for the industry, some level of funding for exploring different markets, but that would all be in the public domain. I think we -- as a mandatory respondent, we continue to -- and frankly with a balance sheet that we -- that remains strong, we continue to support those measures for the industry with the government, and at the same time, are kind of maintaining our own balance sheets, which is reinforcing our operations. So I probably wouldn't add more than that, Ben.

Okay, that's fair.

And then just second question is perhaps for you or for Matt. With respect to your own customers that you talk to regularly, can you get some kind of sense in terms of how many months or days or weeks of inventory is in the US channel, again, when it comes to your customers only relative to normal conditions for mid-October.

Go ahead there, Matt.

Sure, I can answer that.

I would say, we don't really have visibility into our customers supply chain or their inventory levels. What I can't speak to is our inventory levels and their lean in both SYP and SPF, which has been intentional in this uncertain market to run our inventory (technical difficulty) [clean].

Okay, so just to be clear, I mean, from the rate of reorder, you don't have a sense as to in terms of planning when your customers are going to come back and what their needs will be in the next kind of two to three months.

No, I'd say, they're buying as their needs come to them and we're ready to service them in whatever regions they're in but I would say no fundamental change of visibility to their inventory levels.

I think one thing I might add to that, Ben is, our customers are products readily available, so they're buying what they need as they need it. And I think our guidance would -- we're maintaining our inventories in a below-average position, and so our guidance would -- things are flowing through based on that guidance.

Sean Steuart, TD Cowen.

Sean, I want to follow-up on the M&A question, and I appreciate your comments around quality assets and building strength at the bottom of the cycle. I guess the follow on is, we're three years into this lumber downturn in North America. Have you seen more opportunities coming to the surface? And if so, would those opportunities include the types of assets you're looking for, right? I guess I'm trying to gauge what the opportunities that looks like now and how that's changed over the last three to six months.

Yeah, good morning, Sean. Probably not. I think we maybe had this this question on a prior call. Probably not a lot of change this year. I think they're -- what you typically see is early in an upswing as people are thinking about if a quality asset to sell, people would then maybe look to market that.

And then, I would say in the pipeline, I don't think there's anything any more than normal, and for sure, higher quality assets typically are being held to a better time to market them. So all those things saying that we wouldn't be -- there wouldn't be anything, that is jumping out today that is high-quality and available that that fits, so.

Okay, thanks for that context.

And I also wanted to follow-up with your comments on North American supply management on the lumber side and you know appreciating you've done a lot of work on permanent and indefinite closures over the last three years.

Is a part of the decision making for you at this point in the cycle, we're arguably closer to the end of this downturn than the start at this point, hopefully. Is there a reluctance to take more permanent or indefinite shots at this point when maybe we can see the light at the end of the tunnels, affordability headwinds start to ease. Is that part of the thinking and the thought process when you're gauging rolling down time versus further indefinite or permanent closures?

Yeah, no, it's a good question.

I think we always look at it against the backdrop of how is that asset holding up during the current down cycle, and do we have a clear path for the next down cycle, and we make kind of decisions against that backdrop. It's really hard to predict. I mean, I agree with your comments that hopefully, we're here closer to the end than in the middle or the beginning, but we really don't know that.

So I think we always have to really challenge ourselves, especially in this environment. Is there a better operating model that lowers our cost here at the and makes us more at the bottom of the cycle? And I would look across our SPF business, Southern Yellow Pine, OSB, our major business lines and volume is coming out of those businesses and costs are lower. So that's really the way we look at all those decisions and but they really -- every asset gets pressure tested in this environment.

Matthew McKellar, RBC Capital Markets.

I appreciate all the details so far.

Firstly, could you maybe just share with us, how conditions in the Canadian markets have evolved over the past few months, there's anything to call out in terms of differences with the band between the US and Canada, and then are you seeing any -- of your competitors behave any differently in the Canadian market since higher US duties or the tariffs took effect. Thanks.

[Matt]?

Yeah, I can take that.

I would say that the Canadian market remains competitive, it's a much smaller market than US market. So while it's an important market for us and we service those customers, it generally, doesn't drive demand. And I would say, it remains competitive just with where we are in the cycle and all the other things you've mentioned going on, but I would say nothing unusual, just having to compete every day to service our customers in that market.

Okay, thanks very much.

And then just a couple of cleanups. If we're in an improved but still relatively soft wood products market next year, actually we'd be thinking about CapEx. Appreciate that [Anderson] will fade year over year. How does that evolve into '26 in your view?

And then second would be, just the fire at the [Cowie] facility. Can you help us understand what the state of that facility is today?

Thank you.

Sure, yeah, thanks. So on CapEx as we look forward, I think as we said in the comments, right, like we've spent a lot of capital, and I think that's one of the advantages of our strong balance sheet is we've been able to be durable with our capital allocation strategy and invest for the future in what have been pretty difficult markets the last couple of years.

Considering that, as Sean said, we're wrapping up a lot of fairly major projects here and our focus is shifting to operationalizing those. So I think you can think about what that means relative to 2026. We'll be out in February with our 2026 CapEx guidance. We have had two pretty busy years with big projects going on.

Respect to Cowie, I think [flagged] in the materials, right, that incident happened about five weeks before the end of the quarter. Facility's been repaired back up and running, and I think we're pretty pleased with what we're starting to see in the European segment in terms of maybe some green shoots of things starting to turn around there.

(Operator Instructions)

Hamir Patel, CIBC Capital Markets.

Sean, we don't have access to the US trade data at the moment during the shutdown, but on the ground, are you seeing any signs of European lumber imports increasing just given that their competitive position has improved relative to Canada with all the duty and tariff changes since August.

Ask Matt if there's -- I don't think we have a lot of visibility to that, Hamir, without the data coming in, but Matt, would you add anything to that?

No, I'd say like just like you said, not a lot of visibility and no meaningful change that we can see in the market.

Okay, fair enough.

And I just want to ask, in Europe, if you have any comments on with respect to OSB demand, how things are faring on both the new res and RNR side.

Yeah, and Chris sort of touched on that as unfortunate incident at Cowie. Our team did an excellent job of making the repairs and getting the mill back up and running. And it kind of shadowed that event really did shadow some progress in Europe and we are seeing hard to say how much is kind of demand driven, some of it still may be supply driven. But kind of sequentially, quarter over quarter, we are seeing some price improvement in OSB and seeing some demand improvement there. So we're looking more optimistically in Europe over the next few quarters and we'll see how all that unfolds.

Sean Steuart, TD Cowen.

Just one other one.

Chris, you guys have done a good job on working capital management. And yeah, I appreciate their seasonality in Q1. You'll have big log deck builds in in Canada. Can you speak generally though to, I guess the changes you made in terms of how you're managing working capital over the mid- to long-term room for more reductions there ability to pull more cash out of that just broader perspective on how you're thinking about that item.

Yeah, look, I got to give a lot of kudos to the operations teams across the company on this front, right? I think it spans all elements of the working capital. We manage our credit and receivables very tightly while still maintaining good relationships with our customers. The cycle there is pretty short.

I think, as Matt indicated in his comments in many of our businesses, we're at or below target levels and operating with fairly lean inventories, which look, presents some challenges from time to time in terms of filling orders, but the teams are doing a remarkable job of managing through that and learning how to operate with lower inventories. And then lots of work I'll say going on in terms of on the procurement side as well is vendors and vendor selection and things like that.

So I'd say it spans all aspects of this and I'd say it's not just something that because of the environment that we're in that it's getting -- any more focused than it ordinarily does, I think the teams work hard on this stuff all the time. They're probably tired of hearing me talk about working capital, but it's really been -- I think a source of strength for us here in the last while, really focusing on frankly all aspects of the balance sheet and it helps run a more efficient and effective business.

So what does that translate into going forward? Hard to say on the way out, but I think, some great learnings across the business and a deep focus on strong execution.

Thank you. And there are no further questions at this time. I will now hand a call back to Mr. Sean McLaren for any closing remarks.

Thank you, Ina.

As always, Chris and I are available to respond to further questions, as is Robert Winslow, our Director of Investor Relations & Corporate Development.

Thank you for participation today. Stay well and we look forward to reporting on our progress next quarter.

And this concludes today's call. Thank you for participating. You may all disconnect.