West Fraser Timber Co. Ltd 2026 Q3 Earnings Call

Good morning, everyone, and thank you for joining our third quarter 2026 earnings call. I am Sean McLaren, President and CEO of West Fraser. Joining me on the call today are Chris Virostek, Executive Vice President, Chief Financial Officer, Matt Tobin, Senior Vice President of Sales and Marketing, and other members of our leadership team. On the call this morning, I'll begin with a brief overview of West Fraser's third quarter, then I'll pass the call to Chris for more detail before I share some thoughts on our outlook and offer concluding remarks. Our third quarter results reflect varying demand conditions and a mixed pricing environment across our product portfolio. We generated $38 million of Adjusted EBITDA. Chris will walk through the financial drivers in more detail shortly. Operationally, our teams continued to focus on the things within our control.

In the U.S. South, our operations continued to benefit from completed capital investments and improved operating performance year to date, despite challenging market conditions. In Canada, higher SPF pricing contributed positively to results in the quarter. Subsequent to quarter end, as outlined in our announcement last night, we have taken steps to better align our operations with customer demand with the indefinite curtailment of our Huguley OSB mill in Lanett, Alabama, and our lumber mill in Leola, Arkansas. These decisions are a response to evolving conditions and demand for wood products within new home construction and repair and renovation markets. These mills will be wound down by the end of this year. Our Huguley OSB mill has annual capacity of 500 million square feet on a three-eighths basis, and our Leola lumber mill has annual southern yellow pine capacity of 225 million board feet.

I want to thank all of our employees and their families for their hard work and contributions. We are committed to supporting them through this transition. 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 will now turn the call to Chris for additional detail and comments.

Thank you, Sean, and good morning, everyone. A reminder that we report in USD and all my references are to USD amounts unless otherwise indicated. In the third quarter, we generated sales of $1.36 billion and Adjusted EBITDA of $38 million for an Adjusted EBITDA margin of approximately 3%. This compares with sales of $1.43 billion and Adjusted EBITDA of $59 million in the second quarter. The lumber segment generated $34 million of Adjusted EBITDA. We recorded a favorable adjustment to our estimated antidumping rate this quarter. That adjustment added $12 million to our results. Pricing was roughly neutral overall. Higher SPF prices were offset by lower SYP prices. Total costs were lower, primarily reflecting lower production and shipment volumes. While total costs on a per unit basis were roughly in line with the second quarter.

In SYP, fluctuations in diesel prices influenced log haul costs and unit manufacturing costs increased. In SPF, unit manufacturing costs increased due to higher labor and energy costs. These pressures were partially offset by lower SPF log costs as logging resumed after spring breakup. There was also a $5 million favorable swing in inventory valuation in our lumber segment. SPF shipments were in line with our expectations for the quarter and about 5% less than Q2. SYP shipments were up slightly, also in line with slightly higher production. The North America EWP segment reported an Adjusted EBITDA of negative $4 million, primarily due to lower OSB prices, as our realizations were influenced by significant regional pricing fluctuations during the quarter. Higher resin costs also weighed on the quarter. However, these were partially offset by lower fiber costs and a $7 million favorable inventory valuation impact as prices rose in September.

In Europe, we generated $4 million of Adjusted EBITDA. The change from last quarter was mainly volume-related. Higher scheduled maintenance reduced OSB and MDF output, and pricing was modestly lower. Our other operating segment, which includes Cariboo Pulp and our 50% interest in Alberta Newsprint, delivered Adjusted EBITDA of $5 million, representing a $13 million improvement from Q2. The improvement was driven by reduced fiber and unit manufacturing costs, as well as the impact of a planned maintenance shutdown at Cariboo Pulp in the second quarter. Bridging Q2 to Q3, lower prices reduced Adjusted EBITDA by approximately $23 million, mostly in North America EWP. Releases of inventory valuation reserves across lumber, North America EWP, and pulp added approximately $25 million and broadly offset the price impact. Higher costs in lumber and North America EWP, including resin, labor, and diesel-related log haul, contributed $13 million to higher costs.

This also includes the outgoing freight costs, which are charged back to our customers. The majority of the balance was influenced by reduced volumes in Europe and changes in duties and tariffs within the lumber segment, where we continue to experience the effects of elevated oil-based input costs, particularly in diesel, resin, and wax. Resin and wax costs increased by approximately $3 million sequentially, on top of the $13 million impact we identified in the second quarter. Our long-term supplier contracts continue to protect supply at an advantage cost relative to the spot market. Diesel costs have increased by approximately 80% year-to-date, which represents an increase of approximately $15 per thousand board feet on our lumber's log costs in both SPF and SYP. We are managing these impacts on a mill-by-mill basis, and in some areas, we have reduced our logging operations in response to these higher costs.

Pulpwood prices have declined significantly, offsetting much of the higher oil-related input costs in OSB. We generated $72 million of cash from operations in the quarter. The quarter saw continued inventory reduction, resulting in a working capital release. We invested $53 million in capital and paid $25 million in dividends. in September, we successfully refinanced our $300 million term loan into a new $500 million term loan maturing in September 2029. This maintains largely consistent terms while expanding our financial flexibility. We exited the quarter with just over $200 million of cash, an undrawn $1 billion revolver, giving us liquidity of approximately $1.2 billion, and a net debt to capital ratio of only 6%. This flexibility enhances our capacity to effectively navigate the current phase of the cycle.

Turning to duties, on October 14th, the U.S. Department of Commerce released final AR7 results, setting our countervailing duty rate at 15.31% and our antidumping rate at 4.71%. Our combined cash deposit rate has fallen to 20.02% from 26.47% effective October 19th. This rate is currently the lowest in the industry and is below both the AR6 and preliminary AR7 rates. We expect North American product shipments, including SPF and SYP lumber, to be toward the lower end of our guidance range of 2.4 billion-2.7 billion board feet, and North American OSB shipments to be toward the lower end of the 5.9 billion-6.3 billion square feet range on a three-eighths basis. European OSB guidance of 1 billion-1.25 billion square feet remains intact. Our capital expenditure range of $300 million-$350 million is also unchanged, with $212 million spent year-to-date.

On fiber, we expect BC stumpage to remain in line with Q3, while Alberta rates are expected to decrease in Q4 given their quicker link to lumber prices. In the U.S. South, we expect elevated diesel costs and harvesting and hauling constraints to continue affecting regional log costs. North America EWP, we expect fiber costs to remain relatively stable near term, higher diesel costs are offset by lower pulpwood prices, while resin costs remain exposed to global energy developments. With that financial overview, I'll pass the call back to Sean.

Thank you, Chris. I'll now shift to our general outlook and offer some concluding remarks. Demand remains challenging. U.S. housing starts are running at about 1.22 million units annualized. Mortgage rates remain at higher levels, affordability conditions are more constrained, and higher inflation has impacted consumer and builder confidence, all of which are contributing to near-term demand remaining challenged. But the medium-term drivers remain in place: an aging U.S. housing stock, first-time buyers waiting to enter the housing market, and renewed policy focus on affordability. We continue to align production with market conditions while focusing on the competitiveness of our mill network and the things within our control. SYP pricing softened in the quarter and continues to trend down so far in Q4. Log haul costs have risen as a result of increased diesel prices. Our response is to focus on what we can control.

As Henderson advances through its 18 to 24-month ramp-up, we expect to see ongoing operating improvements over the period, and the indefinite curtailment of our lumber mill in Leola will allow us to focus our operating footprint more effectively. In Canada, the lower AR7 cash deposit rate will reduce the duty deposits we pay on U.S. shipments and further support our ability to serve U.S. customers. Combined with the operating leverage across our lumber platform, we are well-positioned to benefit when prices improve. In OSB, prices improved toward the end of the quarter. How quickly the market absorbs expected new supply will depend in part on the pace of recovery in residential construction. We acted quickly and decisively in making the decision to curtail our Huguley OSB mill, helping to focus on our most competitive operations.