Good morning, ladies and gentlemen and welcome to West Fraser’s Q1 2022 Results Conference Call. Please note that all lines have been placed on mute to prevent any background noise. 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 contain forward-looking information or forward-looking statements within the meaning of Canadian and United States Securities law. Such statements involve certain risks, uncertainties and assumptions, which may cause 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 risks, factors and assumptions is included both in the accompanying webcast presentation and in our 2021 Annual MD&A and Annual Information Form, which can be accessed on the West Fraser’s website or through SEDAR for Canadian investors or EDGAR for United States investors. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Ferris, you may now begin the conference.

Well, thank you, Sylvie. Good morning and thank you for everyone for joining our first quarter 2022 earnings call. My name is Ray Ferris, West Fraser’s President and CEO and I am joined today by Chris Virostek, our Chief Financial Officer. Chris McIver, Senior VP of Marketing and Corporate Development and a number of other members of our executive team. Before we get into the results today, I’d like to mention couple of housekeeping items. And then after I will pass the call to Chris who will provide Chris Virostek will provide an update to our Q1 results and before wrapping up and moving to Q&A. Today, we will limit the scope of our comments to those already provided in our Q1 disclosures. And we will refrain from addressing any questions related to our company or market outlook beyond what has been provided in those disclosures. Further, after this morning’s call and in the absence of any material developments that would require a news release, we do not intend to make any additional comments to investors or analysts after our substantial – until after our substantial issuer bid expires, which is currently expected to be June 2, 2022. With that, I am pleased to report that the first quarter 2022 was another strong quarter for West Fraser. And with that, I am going to pass the call to Chris to take us through our results.

Thanks, Ray and good morning, everyone. In the first quarter, West Fraser achieved strong financial results in the face of ongoing transportation and logistics constraints in Western Canada. As you may recall, these challenges were an impediment to our Q4 2021 shipments of SPF lumber and pulp. However, the typical weather issues that challenge our Canadian shipments each winter, these constraints lasted longer than we originally expected, carrying well through the first quarter. While our ability to supply markets was constrained, demand for our wood-based building products remained robust in the first quarter. And as such, we generated $1.59 billion of adjusted EBITDA, representing a margin of 51% of sales. The benefits of our product and geographic diversity of production were evident once again this quarter. And we saw robust sequential gains across three of our segments, with our lumber segment EBITDA up more than threefold from the prior quarter to $796 million and our North American EWP EBITDA more than doubling to $730 million. In Europe, adjusted EBITDA was $78 million, the second best result ever for that business. Price was the single largest driver for the gains in North America, while in Europe the gains were supported by improving seasonal volume trends and recapture of lost downtime for a large capital project that impacted the fourth quarter. Cash flow from operations in the first quarter was $563 million and cash net of debt increased quarter-over-quarter to nearly $1.3 billion. In the first quarter, we repurchased another $233 million of West Fraser shares and declared a $0.25 per share dividend, up from $0.20 per share in the prior quarter. You also will have seen that we announced a substantial issuer bid subsequent to quarter end. Under the SIB, we have offered to purchase up to $1.25 billion of our…

Thank you, Chris. I am confident that we are on the right path to navigate the current operating environment, including the challenging logistics environment. So, I am pleased – and with that I am pleased and very thankful of the adaptability of our team and our people as they adjust to meet our operating and customer needs. I thought I would touch briefly on supply and demand and note the step change in West Fraser’s EBITDA generation in an environment where U.S. housing starts are near or above 1.4 million. In the current housing environment in which seasonally adjusted starts have regularly come in at 1.5 million starts or higher, it is clear that the industry’s supply and demand fundamentals are robust after an extended 10 plus year recovery from the last down cycle. We continue to monitor trends and interest in mortgage rates and the potential risks to demand for new home construction and our wood building products. That said, based on what we see today, those fundamentals for housing and repair remodeling remain favorable. Our product and geographic diversity also provides a buffering effect on the cycles that can happen on our products and the relative contributions across the business segments have reduced some of the volatility quarter-to-quarter, owing to different customers and markets that we serve. Another area that I’d like to highlight is our approach to capital allocation. So moving to Slide 6, we continue to believe in a balanced approach across the business cycle and that a consistent approach to capital allocation is key to long-term value creation. A top priority for us is to ensure that we are reinvesting into our existing businesses in order to relight the assets, deploy advanced automation technologies, and drive innovation to further enhance our operating platform. We continue…

Thank you, sir. [Operator Instructions] And the first question will be from Sean Steuart at TD Securities. Please go ahead.

Thank you. Good morning, everyone. First question for Ray or for Chris McIver, can you give us a sense of what you are seeing in the market right now? I am just trying to square up the recent resiliency we have seen for lumber and OSB prices in North America. Any specific end markets where you are seeing better pull in recent days and weeks and your thoughts on sustainability of recent strength?

Hi, Sean. It’s Chris here. I will take a stab at this and maybe Ray can fill in what I miss. Yes, it’s – we certainly saw at the high prices that the R&R market slowed down, particularly DIY and the box stores. We have seen that come back pretty significantly in the last few weeks to a month. New housing remained strong throughout the entire quarter, I would say. And I think the differences that we are seeing, the box stores come back a bit saying that we would like to see the treaters come back a bit more than we have seen so far in the south. But overall, we are seeing R&R come back, which is really a stabilized market for us.

And Chris, do you have a sense of where inventories are at the big box level?

Well, I can only speak to our inventories at the big box level and they are quite lean. We have kept them lean sort of anticipating a bit of a slowdown. We backed off from that. And so they are quite lean. I would assume others are as well, but I can’t speak to others.

Okay, thanks for that. Second question, I have the Hinton reconfiguration, can you walk us through the expected economic uplift tied to that initiative and the risk of – you are not answering this question? Can you give us a sense of how concentrated the Q1 pulp and paper losses were to that mill. I am just trying to get a sense of the upside you are seeing after this reconfiguration takes place?

Good morning, Sean. And the third question might have been better, but no, I don’t think we can highlight much around Hinton per se or the losses, but I would just say first on the pulp side in Q1, we were significantly impacted in almost every aspect of our pulp business around transportation. It had dramatic impacts and on our production in our shipping ability and so we have taken significant curtailment. And so I am not going to single out one mill versus the other, but I can tell you it was incredibly difficult. As you know, pulp mills need to run and running a few days a week or at 50% or 60% capacity is not a recipe for good costs and good earnings. So it was difficult. Look, we are on the Hinton piece, we are pretty excited. We think we are landing in a spot with the product line in Hinton that we think first, we think from an asset point of view, it’s a simpler, more efficient process that I think we have demonstrated over a number of trials and with our customers that we get confident on where we are going with that. It’s going to take us a few months to transition mostly for customer reasons. And we are pretty eager to kind of continue to move forward in that. So but I would just say across the landscape, perhaps it was a tough quarter to try and run and supply our customers in across our entire pulp business.

That’s useful detail. Thanks, Ray. I’ll get back in queue.

Thanks, Sean.

Next question will be from Hamir Patel at CIBC Capital Markets. Please go ahead.

Hi, good morning. Ray, given all the inflation over the past year, I was curious to get your thoughts on what you would consider replacement costs to be today for anybody looking to build a new lumber mill or OSB mill?

Well, good morning, Hamir. And that’s a question that we ask ourselves the same one. And I would – and I think I have spoken to this in previous calls. And I am going to not everybody builds exactly the same mills or has all the same objectives. And I am going to be probably pretty vague. I think you saw what we did at Angelina. And I think there has been lots of comment on that. I think that’s probably a pretty good reflection of how we see what the costs of a Greenfield mill are today. They are significantly higher than they were 2 years ago, particularly for the mill that were – the mills we are trying to build, I would say we do probably do a few things that maybe others don’t. We believe they create more value for us. But we – there is a couple of things we often will put added energy strategy to our mills, which comes at an increased cost, which will also think comes with an enhanced payback. The other one is that we pay particular focus kind of on environmental conditions in the mill. We are shooting for environmentally controlled operations that are there. And so that comes at a bit higher cost as well. We also think that comes with the payback as well. So I am not answering your question very well Hamir. But I think our view is, if you picked a number from 2, 3 years ago, it’s up by 30%, 40%, 50% depending on what you’re looking at.

Fair enough. Thanks for that. That’s helpful. And just one for Chris McIver. Chris, can you speak to how OSB prices in Europe have changed since the conflict in Ukraine began and maybe how industry prices there have trended into April?

Good morning, Hamir. Quite honestly, the OSB prices really haven’t changed since the conflict, at least that’s our experience. The market is probably a little tighter, but we haven’t really seen any noticeable change in the market price.

Yes, the only thing I think I would add to that is good news, bad news. Things move slower. Log costs don’t move up as quickly. Product prices don’t move up as quickly. But I would say demand remains strong. Our business looks good. I see – I think we’ll see what that bodes well as for pricing in the latter half of the year, but it tends to move just a little bit slower. That’s all.

Yes. Hamir, just to add to Ray’s comments, we have seen a significant shift over the last year on pricing. So, it isn’t like prices haven’t moved. They have moved up significantly in Europe. They just haven’t moved in the last quarter.

Okay, great. Thanks. That’s all I had. I’ll turn it over.

Thanks, Hamir.

Next question will be from Mark Wilde at BMO. Please go ahead.

I got one for either Ray or Chris. I wonder if you can just walk us through your expectations for how you think trade may shift around as a result of the war in Ukraine, both in North America and in Europe?

Well, good morning, Mark. Chris?

Okay. Good morning, Mark. That’s a great question.

Hi, Chris.

It’s very early days, first of all. None of this shifts dramatically. Our view is that you will see more wood probably heading from Russia to China and little less from Russia to Europe, if any. You combine that with a really robust European market already, I think you are going to see and are seeing already less product coming to North America. But saying that, you know, there are trade flows that are, have been set up from Europe to North America and we suspect they will continue. So that’s kind of what we are seeing so far.

Certainly some conflicting views out there. And I think much depends on I think our view would be less over to good markets in Europe, less over to North America. However, if for some reason Europe slides into recession, then I think that change and product prices remain strong in North America, you can see that more products. It’s hard to predict today, but I would say in the face of how I would think about that a little bit in the face of very strong product pricing on a number of fronts. I think if you look back at the last year or two of European imports in the North America, I think it’s been far below most of our expectations. So, it’s hard to imagine it would go beyond there in any situation.

Yes. Okay, that’s good. There have been a lot of different views on what all this is going to mean. I guess the other question I have this morning is, when I look at the data for the lumber business last year and I particularly look at the U.S. South, it looks like the capacity base was up close to 1 billion board feet, yet the production was only up about 140 million. So, the operating rates dropped 400 basis points, it dropped in the face of all time record prices. So, I am just trying to get a sense of what you think happened there. I mean, is all of this just lost production, because people couldn’t get labor or labor was turning over more often. So, you had – you lost some efficiency in the mills? And then how would you expect those operating rates to trend as we go forward?

Well, Mark, again I think it’s a great question. I think it ties into a number of things. One, I would start by saying, a year in our business today seems like 10 years. And people forget that, that early in 2021, the U.S. experienced a significant winter weather event that led to disruptions, extensive disruptions to production, and consumption throughout the South. But I can speak, a number of our mills were down a week or more. And then – so I think that was a widespread impact early in 2021, hopefully I get my ears right. And then there were other weather events. Florida, Georgia area was, again, I won’t get the stats, right. But if you look at whether in certain areas, there were unprecedented levels of moisture, again, which did a number of things that impact. People ran out of logs, because they just couldn’t get into the woodlands, reduced production from some of those areas. And it increased log costs in some of those areas as well. And then the one that we talk about all the time is the production and announcements that have come out over the last number of years that capacity is not. I think we have said this a number of times. It’s easy to announce. It’s hard to bring this stuff on. And so from a capital and execution point of view, our view has been is that it will come on, it will just come on slower than maybe what some would predict. And I think that are the reflection. So, I would say weather and the ability to execute. And we are not in – we are not – West Fraser is part of that ability to execute and ramp up as quickly as you like.

Okay. Alright. If I can flip just one more and I am just curious about how you read the OSB market over the last few weeks. I mean we saw a $500 plus drop in the composite two weeks and now were bouncing. How do you interpret that?

Well, I am going to pitch this to one of the Chris’ but I would say Mark, and I don’t mean to be dismissive. But we really don’t spend a lot of time worrying about short-term fluctuations. I mean I think some of this has played out in the past few years where people start speculating on and it drives the market in certain direction and what I would see the things that we see, fundamentally don’t change our view of the next few quarters or year or 2 years. So, I see what happens, people unwind certain positions and empties out the supply chain. There is – and you go while we have seen this play out before. It’s just on that before I give it to someone smarter here is, is that the underlying theme that I think that we would have for a number of years is that the ability for the supply side, to react to just really isn’t there anymore. I mean we are – systems have remained lean for the last number of years. And I would say, and again, I tend to use that 1.4 million, 1.5 million housing starts, things are very tight. So, there may be speculation in the market, but the underlying supply and demand fundamentals speak that, that blips in the system have pronounced effects. But don’t really change our view and how we want to operate the business. Sorry, Chris, maybe?

No, I mean I would just add that it appears to us that inventories are very lean in the field. And when demand comes back you see an immediate reaction from the customer side.

One thing I have learned slowly over my career is that, particularly out of Canada, the supply chain is a lot longer. And when that gets emptied out, you just don’t turn a tap and fill it back up again. And it causes some of these swings for sure.

Yes. Okay. I appreciate the color, Ray. Thanks. And I will turn it over.

Thanks Mark.

[Operator Instructions] And your next question will be from Paul Quinn at RBC Capital Markets. Please go ahead.

Great. Thanks very much guys. Just maybe go back to this European OSB pricing question. I am surprised that you said prices are flat, even though they have come up over the last year. Given that our sort of supply side in that area, if I include Russia, Ukraine, Belarus, those countries, they are kind of 25% of European capacity. So, taking that away, because in the embargoes I would have expected prices to come up, is it due to the fact that consumption has come down there because the demand has come down there because of the conflict?

Good morning Paul. Well, a couple things Paul. One is that an awful lot of Eastern European production stays in Eastern Europe and Russia particularly. So, it’s not, the demand, I can’t speak to the demand in Russia. But very little of that product comes West. And so really, the demand situation has not changed dramatically in the West, in our experience. Saying that, demand is very good right now and so was pricing. So, but I think it’s more about where that product naturally flows. It doesn’t flow West. It stays in the East.

Yes. I mean I would think it’s more – I think Chris nailed it. And I think we are very pleased with the demand and pricing is good. And I would just say, again, it’s more of a reflection of the different style of transactions that occur in Europe, which tend to be not week-to-week and so prices do come up, but slow over time. They also come down slow over time. And it’s the same on log. So, it’s – it just doesn’t react week-to-week. But I think over the next few quarters, I think if Europe stays strong, I would expect that we would hope we would see continued strength.

Okay. And then just on the exports out of Europe. I mean last year because of the record prices we saw in North America, you had exports ramp up to kind of 650 million square feet level, which is kind of equivalent to an OSB mill. So, if there is no supply impact from Russia into Europe, do you expect it to stay at that level in ‘22?

I am not sure Paul. I mean we really – we can’t speak for others. We have had a couple of vessels that we have brought over to North America. But can’t – I am not sure what others are doing. Yes. And it’s a very small amount of OSB that comes to North America, quite frankly, pretty inconsequential.

Okay. And then that just moving over to pulp and just wondering what the road to EBITDA breakeven is, we have got a pretty decent pulp pricing here, is that expected in the short-term at some point in ‘22?

Well, I sure hope so. And so, first, we haven’t seen the same upside on BC TMP as we have MB, SK. Unfortunately, our MB, SK business has been pretty significantly impacted by transportation, that’s first quarter. I would like to tell you that we have got great visibility going forward on transportation, and that we can see nothing but green flags waving here, but it is better. Things are returning more to normal. But I can tell you this changes week-to-week. And so we are still nervous about our ability to ship, I would expect. So, that’s maybe not a great answer. But I would think we should see – our view would be we are going to capture more of the mill increases. I think that’s happening. We are going to be able to – we should be able to see improved shipping in Q2 and that should support returning to better results. But I just – if I sound like I am hedging my bet, I think our confidence in rail transportation is going to take a while to get rebuilt based on the last six months and we just don’t have that confidence yet.

Okay. And then last one I had Ray was just on the lumber M&A pipeline, I mean Angelina last year, sort of set the high watermark for capacity additions. Has that lead to higher expectations on the mill owners or is there still a fair number of saw mills available for sale?

I don’t know if it’s led to higher. I think they are pretty high before I think you look at the pricing. And 4 years in the last 5 years, I think everyone looks at whatever their capacity is and says it’s worth more than what others think it is. So, has it changed recently, I am not sure it’s significantly different. But I would say, there aren’t more opportunities available. There aren’t more high quality opportunities that we see. So, I just – I would say expectations remain high. And there is not every opportunity is one that’s going to fit a West Fraser view.

Great. That’s all I had. Best of luck.

Thanks Paul.

Thank you. And at this time, gentlemen, we have no further questions, please proceed.

Well, again, thanks everyone for joining our call and we look forward to talking to people over the next weeks or months. And for that, we will sign off and turn it back to you, operator.

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Have a good weekend.