West Fraser Timber 2026 Q2 Earnings Call

Please go ahead. Thank you, Kelsey.

Good morning, everyone, and thank you for joining our second quarter 2026 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 second quarter and then pass the call to Chris for additional comments before I share some thoughts on our outlook and offer concluding remarks. Our second quarter results reflect continued progress in a market environment where underlying demand remains measured. We generated $50 million of adjusted EBITDA with positive contributions from each of our three core reportable segments.

Through the first half of the year, we produced approximately the same amount of southern yellow pine as in the prior year period, despite operating one fewer mill, reflecting productivity gains and the continued high grading of our U.S. lumber portfolio. We are pleased with the ramp-up at our new Henderson mill as production has more than doubled in Q2 versus Q1 and is regularly exceeding levels at which the old mill produced. Our team sustained shipping momentum in the U.S. South, navigating significant transportation cost and availability challenges. In Canada, SPF production increased by 13% compared to the previous quarter. In EWP, we completed the safe wind down of our High Level Alberta OSB mill during the quarter on time and under budget. This strategic decision more closely aligns our production footprint with customer demand, enhancing operational efficiency.

We are encouraged by our performance in Europe, which has resulted in the strongest first half results since 2023. We continued to strengthen our balance sheet. We ended the quarter with approximately $1 billion of liquidity, maintaining strong financial flexibility. We are closely tracking wildfire conditions in British Columbia and Alberta. At present, all West Fraser facilities remain safe and there have been no wildfire-related impacts to our operations. Our focus remains on operating safely, serving our customers, improving the competitiveness of our assets, maintaining a strong balance sheet, and allocating capital with discipline. With that high-level overview, I'll now turn the call to Chris for additional detail and comments.

Thank you, Sean. A reminder that we report in U.S. dollars and all my references are to U.S. dollar amounts unless otherwise indicated. In the second quarter, we achieved sales of approximately $1.4 billion and delivered adjusted EBITDA of $59 million with a $13 million favorable softwood lumber duty adjustment contributing to an adjusted EBITDA margin of approximately 4%. This compares with sales of approximately $1.3 billion and reported adjusted EBITDA of negative $66 million in the first quarter, which included a $114 million non-cash duty adjustment relating to prior year periods. Excluding the duty adjustments, underlying consolidated performance was stable between the quarters. The lumber segment generated $41 million of adjusted EBITDA in Q2 compared with reported adjusted EBITDA of negative $84 million in Q1. Excluding the first quarter duty adjustment, the lumber segment generated modestly higher adjusted EBITDA this quarter.

We were encouraged by both higher mill nets and higher shipment volumes during the quarter. Results were also affected by the seasonal timing of Canadian logging costs during spring breakup, as certain costs are expensed during the temporary shutdown of logging operations rather than capitalized into inventory and NRV adjustments around quarter end pricing trends. The North America EWP segment generated $13 million of adjusted EBITDA in the second quarter, a slight improvement from the $11 million generated in the first quarter. North American OSB economics were primarily influenced by pricing dynamics, while controllable costs remained largely in line with Q1 levels despite ongoing resin inflation. North America OSB was also impacted by an NRV adjustment influenced by quarter end prices. We have analyzed the impact of the 50% tariff announcements made earlier this month under Section 338 of the Tariff Act of 1930.

For context, year to date, approximately 3% of our Canadian plywood shipments and 20% of our LVL shipments have been exported to the U.S. Our MDF shipments to the U.S., which represent approximately half our MDF shipments, are not directly subject to tariffs. We continue to assess the potential indirect effects on downstream customers and end markets. In Europe, we generated $13 million of adjusted EBITDA in the second quarter, improving on the $10 million earned in the first quarter. The Europe market continues to benefit from an improved environment of higher demand. Although resin and freight costs increased, we were able to effectively manage these increases through our pricing strategy. Our other operating segment showed an $8 million adjusted EBITDA loss, which was principally due to a maintenance shutdown at Cariboo during the quarter.

Bridging our results from Q1 to Q2, higher realized prices in both lumber and Europe generated an incremental $51 million of adjusted EBITDA. Duties and tariffs were lower, which includes the $13 million adjustment we discussed earlier. Higher resin and freight costs and changes in inventory valuation reserves contributed most of the offsets to higher realized prices. Majority of the increase in freight costs was recovered through adjustments to freight adders included in our invoicing. Canadian SPF shipments were up 18% from Q1, mainly due to the restart of our Blue Ridge, Alberta facility mid-March. Additionally, SYP shipments were up 5% despite the transportation shortages facing the U.S. South. We generated $192 million of cash from operations as the seasonal working capital investment began to reverse, enabling us to repay $148 million of operating borrowings during the quarter.

This cash flow helped us reduce our net debt in the quarter by $140 million. We exited the quarter with only $55 million drawn on our $1 billion revolver, resulting in a 5% net debt to capital ratio and giving us ample financial flexibility to continue to execute on our business plan. We chose not to repurchase any shares in the second quarter to maintain financial flexibility and strengthen our balance sheet during this phase of the cycle. Compared with the first half of 2025, unit costs across our U.S. lumber portfolio were approximately 4% lower in the first half of 2026 by lower production and Henderson startup costs. We are targeting continued improvement in these numbers as Henderson ramps up during the remainder of 2026. We have made no changes to our shipment guidance across our main products, as well as our capital expenditure range of $300 million-$350 million.

Transportation and resin costs have risen in the first half of the year. Outbound transportation costs are largely passed on to the end customer in all of our markets. Resin and wax costs are influenced by oil prices. We estimate that a $10 change in crude oil prices impacts annual resin and wax costs by approximately $15 million. Compared to Q1, we estimate there was a $13 million overall increase to our wax and resin costs. This is across both our North American and European EWP business. Encouragingly, against that backdrop, we have seen a decline in fiber costs, especially in the U.S. South, that has offset much of this increase. There remains a lot of uncertainty on oil prices, but we have been successful at managing and mitigating these impacts to our business. With that overview, I'll pass the call back to Sean.

Thank you, Chris. I'll now shift to our general outlook and add some concluding remarks. Looking ahead, our priorities are focused on improving the competitiveness of our assets and positioning the business to perform through a range of market conditions. In U.S. lumber, our multi-year portfolio optimization continues to translate into improved performance. As Henderson continues to ramp, we expect further production gains and lower unit costs. We also expect to maintain shipping momentum while effectively managing ongoing transportation constraints and finished goods inventory levels. In North American OSB, we believe the market will reward efficient operators. Our portfolio has been enhanced by the closure of High Level, the progress at Allendale, a continued focus on reliability improvements, and strong inventory and cost management. These actions lowered our unit costs in Q2, and we remain focused on further improvement.

Pulp industry closures remain a headwind for lumber residual realizations in the U.S. South, but they are also increasing regional pulpwood availability and lowering OSB fiber costs, an example of these offsets within our diversified portfolio. In Canada, our lumber mills increased production and shipments materially from Q1. We expect limited pressure on fiber inputs as the overall Canadian lumber supply has been shrinking. Duty rates will also drop coming out of the AR7 review when they take effect later this year. Our Canadian panels business continues to deliver reliable results. Our focus for the second half will be on managing potential tariff exposure, mainly in our LVL and MDF businesses, and continuing to focus on unit cost performance across all mills.