INVESTOR PRESENTATION

Transcription

1 INVESTOR PRESENTATION May 2018 TSX:WEF

2 Forward Looking Statements and Non-GAAP Financial Measures All financial references are expressed in C$ unless otherwise noted. This presentation contains statements and estimates that may constitute forward-looking statements under the applicable securities laws. Readers are cautioned against placing undue reliance on forward-looking statements. All statements herein, other than statements of historical fact, may be forward-looking statements and can be identified by the use of words such as projected, plan, should, expect, will, target, expected, poised, likely and similar references to future periods. Forward-looking statements in this presentation include, but are not limited to, statements relating to future supply and demand; future growth plans and strategy; our marketing plans and strategy; our competitive position and expectations regarding future competition; regulatory developments; or anticipated trade challenges. Although such statements reflect management s current reasonable beliefs, expectations and assumptions, there can be no assurance that forward-looking statements are accurate, and actual results and performance may materially vary. Many factors could cause our actual results or performance to be materially different including: general economic conditions; changes in annual allowable cut; competition and selling prices; foreign trade disputes; changes in foreign currency exchange rates; labour disruptions; natural disasters; relations with First Nations groups; changes in laws, regulations or public policy; and the factors discussed in the company s annual information form, which is available on our website at The foregoing list is not exhaustive, as other factors could adversely affect our actual results and performance. Forward-looking statements are based only on information currently available to us and refer only as of the date hereof. Except as required by law, we undertake no obligation to update forward-looking statements. During the course of this presentation, certain non-gaap financial information will be presented. Definitions and reconciliation of terms can be found in the Company s annual and quarterly MD&A for Western Forest Products Inc. (the Company ). 1

3 Investment Highlights Margin-focused business strategy Superior timber asset base and secure fibre supply High-value, diverse products serving global markets Strong financial position and cash flow profile Business of scale with a liquid share capital Committed to enhancing shareholder value Western is Well-positioned to Capitalize on Improving Market Fundamentals 2

4 Operations Snapshot Margin-focused, log and specialty lumber company Serving global markets from Coastal B.C. and Washington Largest Crown timber tenure holder in Coastal B.C. BC Vancouver (Head Office) WA Canada U.S. Leading cedar lumber manufacturer in North America Timber resource unaffected by mountain pine beetle Operating seven sawmills with a capacity of 1,070 million board feet, as well as a distribution and processing facility in Arlington, Washington Mill Location Capacity 1 (MMfbm) Ladysmith Ladysmith, BC 130 Cowichan Bay Duncan, BC 215 Saltair Ladysmith, BC 240 Alberni Pacific Port Alberni, BC 175 Duke Point Nanaimo, BC 90 Chemainus Chemainus, BC 130 Somass 2 Port Alberni, BC 90 Total 1,070 (1) Based on two shifts and 250 operating days, except Chemainus at three shifts (2) Indefinitely curtailed July 2017 Strategically Located Manufacturing Locations With Secure Fibre Supply 3

5 Financial Snapshot LTM 1 revenue of $1.1 billion LTM 1 Sales by Product LTM 1 EBITDA of $162 million Market cap. of ~$1.1 billion 2 Specialty Lumber Commodity Lumber 18% 7% Quarterly dividend of $ per share $0.09 per share annually Logs By-products 19% 56% 75% Lumber Well capitalized balance sheet LTM 1 Sales by Geography Canada 3% 7% Currently in a net cash position (1) Last twelve months total external revenue ended March 31, 2018 (2) Based on closing share price of $2.79 on May 3, 2018 United States China Japan Other Europe 13% 19% 25% 33% 58% Canada & U.S. Strong Financial Performance, Net Cash Position and Attractive Dividend 4

6 Strategic Priorities Strengthen Foundation Strategic capital improvement projects Invest in people and systems to create a platform for growth Consolidation of coastal operating base Grow the Base Optimize operations Targeted products of scale to selected customers Margin improvement program Mutually beneficial relationships with coastal First Nations Explore Opportunities Pursue external opportunities to grow our margin-focused business Evaluate opportunities to grow shareholder value WFP is Executing on its Strategic Priorities 5

7 Diverse and Unique Species Mix Fibre and Processing Flow Chart Log Markets Domestic Log Markets Hemlock / Balsam Annual Allowable Cut (AAC) For Logs (~6.0 million m 3 ) External Log Sales ~32% of Logs Sold Export Log Markets Pulp Log Markets Lumber Segments Western Red Cedar Douglas Fir Yellow Cedar Log Purchases (1) (~1.2 million m 3 ) Internal Log Consumption Manufacturing Facilities Western Red Cedar Japan Specialty Niche Spruce Raw Inputs (1) Based on the twelve months ended March 31, 2018 ~68% of Logs Processed at WFP manufacturing facilities Commodity Finished Products / Sales Timber Resource is Directed to Highest Margin Opportunity 6

8 External Log Sales Log Flows Log End Market WFP Sawmills Description All five species of Western s sawlogs consumed by internal manufacturing operations Internal log supply supplemented by open market purchases to maximize margin Primary Target Geographies LTM 1 Logs by Value 69% 21% 2% 8% 31% External Log Sales Domestic Includes sawlogs, peelers and shingle logs sold through contractual commitments and open market transactions LTM 1 Logs by Volume Pulplogs Volumes committed under long-term fibre supply agreements Commitments met through internal log supply, supply contracts and open market pulplog purchases 18% 32% External Log Sales 7% Export Represents log sorts produced in excess of internal mill requirements Typically command premium prices due to strong demand Transportation optimization 68% 7% (1) Based on total external log sales and internal log consumption for the twelve months ended March 31, 2018, including purchased logs. Internal transfer values based on Vancouver Log Market prices Directing Log Volume to Highest Margin Opportunity 7

9 Manufacturing and Sales Log Supply Marketing Strategy Manufacturing Strategy Sales Strategy Log diameter determines the lumber products manufactured Log Cutting Patterns Log Dimension Product Group Narrow Dimension Wide Dimension Squares Timbers Grade & Appearance Lumber Product Type Commodity Commodity / Western Red Cedar Japan Niche / Western Red Cedar Niche / Western Red Cedar Western s Flexible Manufacturing Platform Creates Unique Marketing Opportunity 8

10 Specialty Segments Diversified Lumber Product Offering Lumber Segment Description Primary Target Geographies LTM 1 Lumber by Value Western Red Cedar Consumer-orientated products Naturally durable Ideal for outside uses Global 25% 45% 9% Japan Specialty Products for traditional post and beam construction Requires unique and rigorous quality standards 21% 75% Specialty LTM 1 Lumber by Volume Niche Specialty products and markets Focused on appearance grades, value-add products Asia Europe 27% 47% Commodity (1) Based on lumber sales for the twelve months ended March 31, 2018 Traditional dimension lumber and developing grades Currently focused on China 8% 18% 53% Specialty Allows Western to Profitably Service Multiple Markets Throughout the Cycle 9

11 Sample Lumber Products Western Red Cedar Niche Japan Specialty Commodity Diverse Product Offering From Complete Harvest Profile of Log Sizes 10

12 Specialty Product Focus Reduces Volatility 75% of lumber revenue is generated from non-commodity products LTM Average Lumber Selling Price (C$ / mfbm) $1,037 Sells at a significant premium to commodity lumber $545 $682 $666 $567 More stable margins through the cycle Product / market diversity and global exposure provide additional opportunities to seek best margin Cedar, niche and commodity grades will benefit from U.S. housing recovery and global demand (1) Includes chips, residuals and logs, as information not separately disclosed (2) KD W S-P-F #2&Btr 2x4 random converted from US$ to C$ (3) Reported lumber segment EBITDA which does not deduct for allocated corporate overhead 17.1% 3.9% 11.1% Peer 1 (1) Peer 2 Peer 3 Commodity Lumber(2) Quarterly EBITDA Margins Range (Q1-12 to Q1-18) High / Low Average 27.5% -1.8% 15.9% 23.4% 0.8% (3) (3) 12.9% 16.8% 2.7% Peer 1 Peer 2 Peer % Focus on Specialty Products Delivered 34 Consecutive Quarters of Positive EBITDA 11

13 Acquisition of Arlington Lumber Distribution and Processing Facility 18 acre site with a distribution and processing facility Centralized warehousing and distribution closer to our U.S. customers Rail spur on site serviced by BNSF Allows Western to increase production of targeted specialty products Provides Western with protection from damaging effects of U.S. lumber duties BC Arlington, WA WA AB U.S. Northeast California OR Texas ID MT Facility and Location Provide Numerous Operating and Logistic Advantages 12

14 Seasonality of the Business Weather (snow pack, heat) and daylight can impact harvest volumes and costs Inventory levels can fluctuate through the year, impacting working capital Seasonal market demand can impact lumber production Harvest Production and Log Inventory Volume 1 (000 m 3 ) Average Harvest Volume Average Closing Log Inventory 1,340 1,109 1,063 1,095 1, , Q1 Q2 Q3 Q4 Average Lumber Production Volume 1 (MMfbm) (1) Based on last 16 quarters as of Q1-18 Q1 Q2 Q3 Q4 Seasonal Influences Can Impact Operations 13

15 Competitive Strengths Sustainable, diverse timber base providing a unique range of products Customer of choice for other coastal log producers due to competitive advantages of scale, financial strength and proximity Flexible manufacturing platform that can target a variety of global markets High margin specialty products for the U.S. market cedar, timbers, moulding & millwork, industrial applications Low cost access to ocean shipping (break bulk, container & barge) providing competitive transportation to global markets and avoiding rail congestion Uniquely positioned to capitalize on growth in U.S. market. WFP s market share in Japan / China likely to benefit from repatriation of U.S. production Washington State based warehousing and distribution facility close to I-5 corridor servicing U.S. customers Western is a Compelling Pure-Play, Solid Wood Products Investment 14

16 How is WFP Different From Its Public Lumber Peers Pure play lumber and log, specialty company Cedar and specialty products focused with commodity lumber component Peers focused on commodity lumber with some specialty products Significantly higher average product pricing versus commodity lumber peers No mountain pine beetle impacted fibre No material rail or truck transportation issues; ocean going advantage WFP uses the BNSF railway line to ship products Offers an attractive dividend yield to investors Quarterly dividend of $ per share ($0.09 per share annually) 15

17 Strategic Capital Investments Capital projects expected to generate a return in excess of 20% Initiatives focused on: Chemainus Duke Point Reducing costs Increasing efficiency Improving product flexibility Growing production Applying proven technology in coastal operations Timber Deck Timber Deck Saltair Planer Planer Merchandiser Head Rig Capital Projects Benefiting Operations 16

18 Demonstrating Sustainability and Environmental Stewardship Committed to ensuring the sustainability of the natural resources in our care All of Western s timber tenures are certified according to globally recognized standards, including: Sustainable Forestry Initiative Canadian Standards Association Chain of Custody (PEFC and FSC) Third party independent audits are conducted annually of Western s Environmental Management Systems Western participates in energy conservation programs, such as the Sustainable Energy Management Program with BC Hydro Operate a tree seed orchard and a seedling nursery that produces over 6 million seeds per year and has produced over 100 million seedlings 17

19 APPENDIX

20 Western s Business to Benefit from Global Supply / Demand Factors Factors Highly Attractive Underlying Supply/Demand Dynamics 1 U.S. Economic and Housing Market Recovery Housing market and repair and remodel activity recovering from trough levels Transition from supply driven to demand driven market expected to result in improved pricing for wood products Strong Underlying Demand Drivers for Wood Products 2 Continued Growth in China Economic growth and urbanization Consumption of wood will increase Limited domestic fibre supply; increasing need for imports 3 U.S. Supply Exit from Japan Market Repatriation of U.S. lumber exports back to U.S. market creates opportunity for Western Government policy designed to increase domestic consumption Reduced Supply of Fibre 4 Canadian Fibre Supply Reduction Mountain pine beetle expected to negatively impact interior fibre supply and lumber production Eastern Canada AAC reductions 19

21 Expenditures (US$ billions) Housing Starts (millions) 1 Demand Drivers: U.S. Economic and Housing Market Recovery U.S. Housing Starts Year Average: 1.4MM A 2004A 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017A 2018E 2019E 2020E 2021E 2022E U.S. Repair & Remodel Expenditures $117 $126 $146 $135 $128 $124 $114 $116 $120 $114 $114 $120 $128 $136 $152 $155 $160 $167 $174 $ A 2004A 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017A 2018E 2019E 2020E 2021E 2022E Source: Forest Economic Advisors (May 2018) 20

22 Housing Starts (MM) 1 Demand Drivers: New Supply / Demand Dynamics Will Positively Impact Lumber Pricing Reduced supply from traditional sources combined with increased demand from U.S. and Asian markets is expected to benefit lumber prices Housing Starts (North American and Lumber Export Equivalent) vs. Western SPF Lumber Pricing Average NA Housing Starts (since 1990) = 1.3MM US$ per Mfbm A 2004A 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017A 2018E 2019E 2020E 2021E 2022E 50 U.S. Housing Starts Canada Housing Starts NA Lumber Exports (Housing Starts Equivalent) KD SPF 2x4 2+Btr (US$) (Actual) KD SPF 2x4 2+Btr (US$) (FEA Projections) Source: Forest Economic Advisors (May 2018); Western Forest Products 21

23 million m³ million m³ 2 Demand Drivers: China Growth Has Changed Global Wood Products Demand Dynamics A deficit of domestic fibre will require China to rely on imports Rising wealth/urbanization trends expected to increase demand for structural and higher grade lumber: 300 million Chinese people (roughly equivalent to the U.S. population) expected to move from rural to urban areas between 2010 and 2025 China Log Imports Chinese Lumber Imports '04A '05A '06A '07A '08A '09A '10A '11A '12A '13A '14A '15A '16A '17A Russia New Zealand North America 0 '04A '05A '06A '07A '08A '09A '10A '11A '12A '13A '14A '15A '16A '17A Russia New Zealand North America Source: China Customs; International Wood Markets (February 2018) 22

24 Lumber Imports (million m3) Lumber Imports (million m3) 3 Demand Drivers: U.S. Supply Exit From Japan Will Create Market Opportunity Japan continues to be a major source of demand for wood products and lumber from North America In recent years, suppliers in the U.S. West have increased export activities to Japan due to a lack of domestic demand in the U.S As North American housing markets recover, much of this U.S. supply will be diverted back to local U.S. markets, potentially creating a significant supply gap in Japan for imported lumber Japanese Lumber Imports of Canadian and U.S. Douglas Fir and Hemlock Japanese Imports of Canadian and U.S. Lumber and Japanese Housing Starts 1,400 ~100 million board feet opportunity to replace non-spf U.S. exports to Japan 3,000 2, ,200 1, ,000 1,500 1, Housing Starts (millions) A 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017A A 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017A 0.0 U.S. Hem U.S. Douglas Fir CDN Hem CDN Douglas Fir Softwood Lumber Imports from U.S. Softwood Lumber Imports from Canada Japan Housing Starts Source: Japan Ministry of Land, Infrastructure and Transport; The Trade Statistics, Japan Ministry of Finance; Japan Lumber Importers Association (February 2018) 23

25 AAC (million m3) AAC (million m3) 4 Supply Drivers: Canadian Fibre Supply Reduction B.C. Interior AAC A 2004A 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017A 2018E 2019E 2020E 2021E 2022E Quebec AAC A 2004A 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017A 2018E 2019E 2020E 2021E 2022E Source: Forest Economic Advisors (May 2018) Mountain Pine Beetle epidemic and lower AAC in B.C. and Eastern Canada are expected to have significant negative impact on North American lumber capacity 24

26 Historical Financial Snapshot Annual Revenue ($ millions) Adjusted EBITDA ($ millions) $668 $854 $925 $978 $1,037 $1,082 $1,187 $1,143 $1,147 $129 $109 $117 $148 $153 $162 $37 $62 $ LTM Q LTM Q1-18 Lumber Shipments (MMfbm) Adjusted EBITDA Margin % % 10.5% 10.8% 12.5% 13.3% 14.1% 5.5% 7.2% 5.5% LTM Q LTM Q

27 Historical Financial Snapshot Last 8 Quarters Revenue ($ millions) Adjusted EBITDA ($ millions) $302 $323 $43 $36 $34 $34 $47 $33 $39 $43 $293 $288 $287 $285 $283 $292 Q2-16 Q3-16 Q4-16 Q1-17 Q2-17 Q3-17 Q4-17 Q1-18 Q2-16 Q3-16 Q4-16 Q1-17 Q2-17 Q3-17 Q4-17 Q1-18 Lumber Shipments (MMfbm) Adjusted EBITDA Margin % % 11.1% 11.5% 11.8% 16.4% 11.4% 13.7% 14.7% Q2-16 Q3-16 Q4-16 Q1-17 Q2-17 Q3-17 Q4-17 Q1-18 Q2-16 Q3-16 Q4-16 Q1-17 Q2-17 Q3-17 Q4-17 Q

28 Historical Cash Flow, Capital Allocation and Debt Cash Flow from Operations 1 ($ millions) Capex 2 ($ millions) $111 $87 $99 $128 $134 $112 $38 $44 $58 $12 $19 $32 $59 $50 $62 $56 $55 $ LTM Q LTM Q1-18 Net Debt / (Cash) ($ millions) Dividends ($ millions) $100 $83 $78 $52 $54 $15 $15 ($35) ($47) Q1-18 n/a n/a n/a $16 $31 $32 $32 $32 $ LTM Q1-18 (1) After changes in non-cash working capital (2) Additions to property, plant and equipment; excludes acquisition capex 27

29 Timber Tenures and Facilities 28

30 Analyst Coverage Analyst Firm Analyst Name Contact CIBC World Market Hamir Patel Raymond James Daryl Swetlishoff RBC Capital Markets Paul Quinn Scotiabank Benoit Laprade TD Securities Sean Steuart

31 Investor Relations Contacts These materials have been prepared by Management of the Company. No regulatory authority has approved or disapproved of the contents of these materials. These materials do not constitute an offer to sell or the solicitation of an offer to buy any securities of the Company and shall not constitute an offer, solicitation or sale of the Company s securities in any jurisdiction in which such offer, solicitation or sale would be unlawful. Securities of the Company may not be offered or sold in the United States absent their prior registration or qualification or an applicable exemption from the applicable registration or qualification requirements. Stephen Williams Executive Vice President & Chief Financial Officer swilliams@westernforest.com Dallyn Willis Senior Director, Finance & Administration dwillis@westernforest.com 30