INVESTOR PRESENTATION

Transcription

1 INVESTOR PRESENTATION August 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 Why WFP? Margin-focused strategy with exposure to growing lumber demand Superior timber asset base and secure fibre supply High-value, diverse products serving global markets Strong financial position and attractive dividend Stability of earnings due to specialty product focus Business of scale and leader in our key markets 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, timbers and Japan square manufacturer in North America Forest resource unaffected by mountain pine beetle Lumber capacity in excess of one billion board feet at 7 sawmills Three centralized remanufacturing facilities Mill Location Capacity 1 (MMfbm) Saltair Ladysmith, BC 240 Cowichan Bay Duncan, BC 215 Alberni Pacific Port Alberni, BC 175 Ladysmith Ladysmith, BC 130 Chemainus Chemainus, BC 130 Duke Point Nanaimo, BC 90 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 $1.2 billion LTM 1 Sales by Product LTM 1 EBITDA of $165 million Market cap. of ~$930 million 2 Quarterly dividend of $ per share $0.09 per share annually Specialty Lumber Commodity Lumber Logs By-products 17% 23% 7% $1.2 billion 53% 76% Lumber Well capitalized balance sheet Currently in a net cash position (1) Last twelve months ended June 30, 2018 (2) Based on closing share price of $2.37 on August 3, 2018 LTM 1 Sales by Geography Canada United States China Japan Other Europe 14% 18% 2% 7% $1.2 billion 23% 36% Final destination of a portion of Canadian sales are to international markets 59% Canada & U.S. Strong financial performance, net cash position and attractive dividend 4

6 Executing on 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 marginfocused business opportunities that complement our position in selected markets Focus on growing long-term shareholder value 5

7 Margin Strategy / Fibre and Processing Flow Chart Standing Timber Log Availability Margin Decision Market Segments Log Markets Domestic Log Markets Diverse and Unique Species Mix Hemlock / Balsam Western Red Cedar Douglas Fir Yellow Cedar Spruce Raw Inputs (1) Based on the twelve months ended June 30, 2018 Annual Allowable Cut (AAC) For Logs (~6.0 million m 3 ) Log Purchases (1) (~1.2 million m 3 ) External Log Sales ~32% of Logs Sold (by volume) Internal Log Consumption ~68% of Logs Processed at WFP sawmills and custom cut division Export Log Markets Pulp Log Markets Lumber Segments Western Red Cedar Japan Specialty Niche Commodity Finished Products / Sales Timber resource is directed to highest margin opportunity 6

8 Log Markets Determine Margin Decision External Log Sales Log End Market WFP Sawmills Domestic Pulplogs Export Description All five species of Western s sawlogs consumed by internal manufacturing operations Internal log supply supplemented by open market purchases to maximize margin Includes sawlogs, peelers (for engineered wood applications) and shingle logs sold through contractual commitments and open market transactions Volumes committed under long-term fibre supply agreements Commitments met through internal log supply, supply contracts and open market pulplog purchases Represents log sorts produced in excess of internal mill requirements Typically command premium prices due to strong demand Transportation optimization Primary Target Geographies LTM 1 Logs by Value 71% 68% $652 million (2) 20% 19% 3% 6% LTM 1 Logs by Volume 5.3 million m 3 7% 6% 29% External Log Sales 32% External Log Sales (1) Based on total external log sales and internal log consumption for the twelve months ended June 30, 2018, including purchased logs. Internal transfer values based on Vancouver Log Market prices (2) Net of freight and fee in lieu Directing log volume to highest margin opportunity 7

9 Manufacturing and Sales Log Supply Marketing Strategy Manufacturing Strategy Sales Strategy Log diameter and margin determines 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 Flexible manufacturing platform presents unique opportunity to create margin 8

10 Diversified Lumber Product Offering Lumber Products Description Primary Target Geographies LTM 1 Lumber by Value Specialty Products Western Red Cedar Japan Specialty Consumer-orientated products Premier softwood for external applications Naturally durable Specialized products for specific end uses Requires unique and rigorous quality standards 30% Global $904 million 9% 21% 40% 70% Specialty LTM 1 Lumber by Volume Niche Specialty products and markets Focused on appearance grades, value-add products Asia Europe 25% Commodity Traditional dimension lumber and developing grades Currently focused on China 50% 871 MMfbm 8% 17% (1) Based on lumber sales for the twelve months ended June 30, 2018 Allows Western to profitably service multiple markets throughout the cycle 50% Specialty 9

11 Sample Lumber Products Diverse product offering manufactured from sustainably harvested coastal forest profile 10

12 Arlington, Washington Lumber Distribution and Processing Facility Update Acquired January 2018 for $11.6 million 18 acre distribution and processing facility; 170,000 sqft covered storage Rail spur on site serviced by BNSF Complementary to our lumber sales strategy Increase production of targeted specialty products and expanded finishing capacity Increase margins by growing sale of finished products, closer to the end customer Centralized warehousing and distribution near the high value U.S. west coast corridor Capital improvements update Site and infrastructure improvements completed in Q2-18, enabling distribution activity to commence from the site Equipment installation is on schedule and expected to be completed by Q4-18 Arlington creates centralized distribution and growth in finished products 11

13 Arlington Photos Upgraded wall structure complete New roof installed First railcar shipment in Q

14 Specialty Product Focus 70% of lumber revenue is generated from noncommodity products LTM Average Lumber Selling Price (C$ / mfbm) $1,037 Significant premium to commodity lumber $580 $713 $676 $629 More stable margins through the cycle vs. commodity peers Product / market diversity and global exposure provide additional opportunities to seek best margin Cedar, niche and commodity grades will benefit from U.S. housing recovery and global demand WFP Average EBITDA Margins Peer 1 (1) Peer 2 Peer 3 Commodity Lumber (2) 13.9% 11.5% 6.1% (1) Includes chips, residuals and logs, as information not separately disclosed (2) KD W S-P-F #2&Btr 2x4 random converted from US$ to C$ 2010 to to 2015 LTM Focus on specialty products delivered 35 consecutive quarters of positive EBITDA 13

15 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 1,290 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 Q2-18 Q1 Q2 Q3 Q4 Seasonal influences can impact operations 14

16 Capital Allocation Approach Investing in high return capital projects in our existing business Reducing costs, increasing efficiency and growing production capacity Maintaining a sustainable dividend Returned $159 million to shareholders since implementing dividend in 2013 Acquisitions and growth opportunities Pursue margin-focused business opportunities that complement our position in selected markets Must make strategic and financial sense through the lumber cycle Continue to be opportunistic under our normal course issuer bid ( NCIB ) Will be opportunistic, yet prudent when buying back shares Complementary to our dividend program Balanced approach to capital allocation; create long-term shareholder value 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 Increasing production of targeted products Growing production Applying proven technology in coastal operations Timber Deck Timber Deck Saltair Planer Planer Merchandiser Head Rig Capital projects benefiting operations 16

18 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) to global markets Warehousing and distribution facility to service U.S. customers in high value U.S. west coast corridor Western is a compelling pure-play, solid wood products investment 17

19 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) 18

20 Demonstrating Sustainability and Environmental Stewardship Operate a seed orchard and a seedling nursery that produces over 6 million seeds per year 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 Committed to ensuring the sustainability of the natural resources in our care 19

21 Appendix Supplemental Materials

22 Western s Business to Benefit from Global Supply and 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 to negatively impact B.C. interior fibre supply and lumber production Eastern Canada AAC reductions 21

23 1 Demand Drivers: U.S. Economic and Housing Market Recovery U.S. Housing Starts 2.5 Housing Starts (millions) 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 200 Expenditures (US$ billions) $146 $151 $154 $157 $163 $171 $173 $117 $126 $135 $128 $124 $114 $116 $120 $114 $114 $120 $128 $ A 2004A 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017A 2018E 2019E 2020E 2021E 2022E Source: Forest Economic Advisors (August 2018) 22

24 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 Housing Starts (MM) 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 (August 2018); Western Forest Products 23

25 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 million m³ million m³ '06A '07A '08A '09A '10A '11A '12A '13A '14A '15A '16A '17A LTM Mar-18 Russia New Zealand North America 0 '06A '07A '08A '09A '10A '11A '12A '13A '14A '15A '16A '17A LTM Mar-18 Russia New Zealand North America Source: China Customs; International Wood Markets (April 2018) 24

26 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 Lumber Imports (million m3) 1,400 1,200 1, ~100 million board feet opportunity to replace non-spf U.S. exports to Japan Lumber Imports (million m3) 3,000 2,500 2,000 1,500 1, Housing Starts (millions) A 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017A LTM May-18 U.S. Hem U.S. Douglas Fir CDN Hem CDN Douglas Fir A 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017A LTM May-18 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 (May 2018) 25

27 4 Supply Drivers: Canadian Fibre Supply Reduction B.C. Interior AAC 80 AAC (million m3) A 2004A 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017A 2018E 2019E 2020E 2021E 2022E Quebec AAC 30 AAC (million m3) A 2004A 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017A 2018E 2019E 2020E 2021E 2022E Source: Forest Economic Advisors (August 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 26

28 Historical Financial Snapshot Annual Revenue ($ millions) Adjusted EBITDA ($ millions) $668 $854 $925 $978 $1,037 $1,082 $1,187 $1,143 $1,188 $129 $109 $117 $148 $153 $165 $37 $62 $ LTM Q LTM Q2-18 Lumber Shipments (MMfbm) Adjusted EBITDA Margin % % 10.5% 10.8% 12.5% 13.3% 13.9% 5.5% 7.2% 5.5% LTM Q LTM Q

29 Historical Financial Snapshot Last 8 Quarters Revenue ($ millions) Adjusted EBITDA ($ millions) $323 $293 $288 $287 $285 $283 $292 $328 $36 $34 $34 $47 $33 $39 $43 $50 Q3-16 Q4-16 Q1-17 Q2-17 Q3-17 Q4-17 Q1-18 Q2-18 Q3-16 Q4-16 Q1-17 Q2-17 Q3-17 Q4-17 Q1-18 Q2-18 Lumber Shipments (MMfbm) Adjusted EBITDA Margin % % 11.5% 11.8% 16.4% 11.4% 13.7% 14.7% 15.3% Q3-16 Q4-16 Q1-17 Q2-17 Q3-17 Q4-17 Q1-18 Q2-18 Q3-16 Q4-16 Q1-17 Q2-17 Q3-17 Q4-17 Q1-18 Q

30 Historical Cash Flow, Capital Allocation and Debt Cash Flow from Operations 1 ($ millions) Capex 2 ($ millions) $61 $60 $42 $124 $94 $106 $157 $129 $144 $12 $19 $32 $59 $50 $62 $56 $55 $ LTM Q LTM Q2-18 Net Debt / (Cash) ($ millions) Dividends ($ millions) $100 $83 $78 $52 $54 $15 $15 ($35) ($42) Q2-18 n/a n/a n/a $16 $31 $32 $32 $32 $ LTM Q2-18 (1) Before changes in non-cash working capital (2) Additions to property, plant and equipment; excludes acquisition capex 29

31 Timber Tenures and Facilities 30

32 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

33 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 32