West Fraser Timber Co., Ltd (WFG) Q2 2026 Earnings Call Transcript

Good morning, ladies and gentlemen, and welcome to the West Fraser Q2 2026 results conference call. At this time, all lines are in listen-only mode, and following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, July 30, 2026. During this conference call, Wes Fraser's representatives will be making certain statements about Wes Fraser's future financial and operational performance, business outlook, and capital These statements may constitute forward-looking information and forward-looking statements within the meaning of Canadian and United States security laws. Such statements involve certain risks, uncertainties, and assumptions, which may cause Wes Fraser's actual or future results and performance to be materially different from those expressed or implied in these statements. Additional information about these risk factors and assumptions is included in both accompanying West webcast presentation and in our 2025 annual MD&A and annual information form. As updated in our quarterly MD&A, which can be on West Fraser's website or through CDAR Plus for Canadian investors and EGAR for United States investors. I would now like to turn the conference call over to Mr. Sean McLaren, President and Chief Executive Officer. Please go ahead.

Thank you, Kelsey. Good morning, everyone, and thank you for joining our second quarter, 2026. Sean McLaren, President and CEO of West Fraser, and joining me on the call today are Chris Verostek, 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 Wes Fraser's second quarter and then pass a 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. Last 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 costs 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. 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. focus remains on operating safely, improving the competitiveness of our assets, maintaining a strong balance sheet, and allocating capital. With that high-level overview, I'll now turn the call to Chris for additional detail and comments.

Thank you, Sean, and a reminder that we report in U.S. dollars and all my references unless otherwise indicated. Second quarter, we achieved sales of approximately $1.4 billion and delivered adjusted EBITDA of $59 million with a $13 million dollar 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. Including 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 in Q1. Excluding the first quarter duty adjustment, the lumber segment generated modestly higher adjusted EBITDA, encouraged by both higher mill nets and higher shipment volumes during the quarter, affected by the seasonal timing of Canadian logging costs during spring break-up, 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. The 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 Caribou. 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 in freight costs and changes in inventory valuation reserves contributed most of the offsets to higher realized prices. The majority of the increase in freight costs was recovered through adjustments to freight adders included in our invoicing. The 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. Marshall 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. It was not to repurchase any shares in the second quarter to maintain financial flexibility and strengthen our balance sheet during this phase of the cycle. 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. No changes to our shipment guidance across our main products, as well as our capital expenditure range of $300 million to $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. We estimate that a $10 change in crude oil prices impacts annual resin and wax costs by approximately $15 million. In Q1, we estimate there was a $13 million dollar 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 fibre 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 a general outlook and add some concluding remarks 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. 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. The years remain a headwind for lumber residual realizations in the U.S. South, but they are also increasing regional pulpwood availability and lowering OSB fibre costs, an example of these offsets within our diversified portfolio. In Canada, our lumber mills increase production and shipments materially from Cuba. All 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 with strong year-over-year growth in both with teams successfully navigating energy-related cost pressures through strategic pricing, procurement, and disciplined operational execution. Over the longer term, we continue to see support for wood-based construction in Europe, including increased adoption of timber frame in the UK. The demand environment remains challenging. Mortgage rates are elevated and consumers are focused on affordability. Notwithstanding these pressures, lumber pricing has improved given a tightening supply-demand balance, reduced European imports, and transportation constraints. Prices remain near levels that are challenging for higher cost capacity. Our priorities continue to lower our cost base, managing production and working capital. Priorizing our discussion today, our second quarter performance demonstrates that the investments and portfolio actions we have taken are delivering results. The breadth of our portfolio is an important advantage. We reported positive EBITDA in all three of our operating segments and supporting our operations is a strong balance sheet that provides us full financial flexibility with $1 billion of liquidity and low net debt levels. Thank you again for your time and continued interest, and we look forward to updating you next quarter. Operator, for questions.

Thank you. Ladies and gentlemen, we'll now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear prompts that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the two. If you are using a speakerphone, please lift the hands up before pressing any keys. One moment, please, for your first question. The first question comes from Ben Isaacson from Scotiabank. Please go ahead.

Thank you very much and good morning, everyone. I just have three quick questions, if that's okay. First one is, can you provide some color on these transportation constraints are there more than is there more than one issue is it getting worse is is there a solution that I could improve over time how do you frame these transportation issues thanks okay good good morning Ben what I might do is ask Matt Tobin here just to to give a bit of an update on transportation good morning ben um i would say that uh you know it's been a multi-layered uh uh challenge i think uh you know if you go back to quarter four we saw a lot of bankruptcies from trucking companies taking out supply

and then on top of that we layered a spiking fuel and then usually uh end of q1 early q2 is a seasonally tight period for trucks in the south since we've seen produce pick up and just increased demands so um so you know we've seen that easing as of late uh we've seen you know also railways responding more product moving by rail a little bit of easing as the seasonality of that tightness uh slows down but i think with the uh geopolitical pressures and the fuel it'll remain tight, but we do see that using somewhat here.

Great. Thank you for that. My second question, Sean, you mentioned that duty rates will drop later this year. Would you expect pricing to fall on a dollar-for-dollar basis, or is there an opportunity for margin capture? What is your experience watching these duties change over the years and through different cycles?

Yeah, you bet, Ben. I'll make a couple of comments, and then I'm going to ask Matt to just add on to that. Obviously, duties impact the cost floor, and really market conditions are supply-demand related. It really depends on the supply-demand dynamics for that product in that moment. It's really difficult to predict if, you know, if there's an imbalance there, you know, pricing will be based on demand. If they're not, then really the cost floor adjusts. And it really depends on actions from, you know, from everybody who's supplying that market. So really, really difficult to predict. I might ask Matt if he would add anything to that.

No, I agree. I mean, I think it's really a question of supply demand and, you know, what demand is as those things change. We've been navigating this environment for the last nine or 10 years, and I'd say we historically have had a long-term advantage on rates, and supply demand will tell us what happens when the rates drop off from there.

Yeah, no, thanks, Matt. And I think I might add, we continue to kind of lean into our integrated model in Western Canada and work on our cost structure and our competitive a position regardless of what the border measure is.

That's perfect. Thank you. And then just a final one for Chris. Chris, you mentioned that you have not done buybacks this year. You do have an open NCIB, I believe. But I found that the tone in your Q2M DNA has improved somewhat. Leverage is now moving in the right direction. Liquidity is ample. What should we, what do we need to see in order for you to want to restart buybacks? Are there certain metrics that you're looking for?

Yeah, thanks, Ben, and great question. And look, I think as you probably heard in our remarks and noted in the MD&A, we're quite pleased with the progress that we're making organizationally across the company. And it really spans across all the segments, seeing seeing improvements in Europe, you know, the Henderson ramp up proceeding, the successful wind down of high level, managing through the geopolitical impact on oil and resins and things like that. You know, that being said, maintaining financial flexibility to preserve, you know, full optionality of a range of outcomes for us remains a priority for us, whether that be organic growth and continued investment in the business, inorganic opportunities that may present themselves at this time in the cycle, or share buybacks. You know, so it'd be hard to nail it down to a, you know, a single factor or a couple factors that we say are going to influence that decision. It's really looking at all those variables and where do we think we can deploy capital in the way that creates the most value for shareholders over the long term, and that's really going to guide our thinking here. I do think, you know, that, you know, this far in on the lumber side, we are starting to see potentially an inflection point on the lumber here, and we've worked very hard over the last three years to do the right things for the business in as much of a cycle agnostic way as we can.

That's perfect. Thanks so much. Appreciate it.

Thank you. And your next question comes from Amir Patel from CIBC Capital Market. Please go ahead.

Hi, good morning. Sean, with your European OSB business finally rebounding, how do you think about your positioning in Europe and potential to expand that platform into other wood products, Just thinking as perhaps some more distressed assets might come to market.

Good morning. Good morning, Amir. Of course, we're pleased with our progress over in Europe. I think as I mentioned on prior calls, we have a strong management team, efficient assets. And I think some of the, even though the macro conditions in Europe are not great, I would say, you know, our cost position and location of our assets, I think as there's cost pressure in other regions in Europe, we're pretty well positioned to compete through that. But in terms of growth, I think, you know, you know, what Europe Brazor was just another region for us to look at opportunities. And I think any growth opportunity would, you know, would compete in Europe like it would compete anywhere else in our platform and would stand kind of us on his own two feet. And if it was compelling, we'd be considering it.

Fair enough. And just thinking about some of the perhaps organic opportunities. It looks like the Henderson ramp-up is progressing quite well. What's the next sort of Henderson-type project that you're considering? And would that be, you know, are there also opportunities perhaps on the OSB side for something similar?

You know, Hamir, we've done a lot of work on our portfolio the last four or five years. And I think we are very much in the mode of operationalizing those investments and making good progress in each one of our segments on the investments we've made. Really, our Bemidji project is the only major project that we have that is, you know, kind of under construction and will be ramping up early next year. And it's really a relife of a very solid asset. I would say we do have a basket of other opportunities, but our focus today is getting the value from the investments we've made and operationalizing that and keeping our focus there.

Thanks, Ryan.

My other thing to add to that is, you know, through this cycle, we've done quite a lot of counter-cyclical investing. And so if we are, you know, if or when we reach that inflection point, we're not entering that with a bunch of deferred capex or deferred maintenance that we need to catch up on, is that we feel we've done a really good job through the bottom of this cycle of maintaining and hydrating our asset portfolio.

Great, thanks. That's all I had.

Thank you. Again, if you do have a question, please press star one. Your next question comes from Keaton Mentora from BMO Capital Market.

Please go ahead.

Yeah, I don't think Keaton is.

Keaton, I don't know if you're on. We can't hear you. May need to go to the next question.

Perfect. So our next question comes from Sean Stewart from TD Bank. Please go ahead.

Hi, good morning, everyone. A couple questions for Sean or Matt. Trying to get a sense of what you're seeing from North American customers in terms of what products demand. We've seen a great lift in lumber prices year to date for a lot of the reasons you laid out on the supply side, but we have 30-year mortgage rates up 70 to 80 basis points in February affordability would still seem to be compromised can you give us a sense for OSB and lumber what you're seeing in terms of order file activity demand pull across I guess both new home construction and repair and remodeling I'd ask Matt to maybe provide some commentary on that sure you know I think like we talked earlier in the call that uh you know on the lumber side we're seeing a little bit better supply demand mix and

and that's held prices uh you know over the quarter and and i'd say we you know we see consistent uh ordering and and uh and and no real shifts and change i would say uh over the last period other than i'd say just that a little bit better balance i feel like um and then on the rnr side you know we don't really have great visibility into rnr uh but you know while imperfect we think treaters offer a good lens into R&R. And I'd say, you know, we're seeing seasonally in-line order patterns from our treaters and our customers. And I wouldn't say we had seen a meaningful shift in demand that would change our view from the last few quarters on either R&R or new home construction.

Okay, that's encouraging. For Sean or Chris, you know, I think a lot of the wording in previous calls with respect to North American M&A ambitions was you want to keep your powder dry, preserve financial flexibility, but you did anticipate more opportunities coming to market in the initial stages of a cyclical upturn. And, you know, I don't know if what we've had year-to-date qualified as a cyclical upturn yet, but has the M&A opportunity set in North America evolved at all year-to-date? Are you seeing more opportunities?

I wouldn't say it's changed much. You know, I think folks are probably, you know, I'm just speculating, but I would imagine folks are waiting to see if there's durability to this. You know, we're really only a couple of quarters in SYP to improve conditions and hard to say when others make choices about what they may want to do.

And I think, you know, what I would add is I think we've been fairly consistent uh all along that you know one of the one of the main things that we're looking for is is quality is high quality assets um and uh you know those those we're going to be pretty selective on uh if those opportunities do arrive okay thanks for that just one last quick one north american engineered wood costs or unit costs were really held in check nicely this quarter that was a surprise to us and i know there's a lot of moving pieces some which you highlighted but between lower pulpwood costs and maybe margin benefits associated with high level being out

of the mix can you give us a sense of if either one of those two items weighed or was a more important determinant of of that cost progression this quarter um that that was a nice surprise from our perspective yeah um you know maybe just a few comments uh um on that uh you know i'd say frankly across the company but but as it relates to our um north american osb team uh you know we continue to lean into cost reduction and i think it's a whole number of things one i think we've become very adept at flexing our our portfolio of assets to meet our customer demands as they fluctuate um you know and as we saw um as we saw demand drifting lower and uh um you know at like lumber we took action early at high level i mean it took a number of months to unwind the log inventory there we've really yet to see the full benefit of that but redeploying that uh those products to other mills will improve our efficiency and and we expect to continue to help us manage cost. Finally, really operationalizing the capital investments we've made. You know, Allendale, Shambord, both are exceeding, meeting exceeding expectations and continue to operate at a high level and have really reduced our, allowed us to reduce cost. That along with, you know, as Chris talked about in his comments, you know, kind of southern wood cost as pulp mill, you know, pulp mill have been, pulp mills have been restructured, you know, as it relates to speed mills.

That's great. Thanks for that context, Sean. That's all I have.

Thank you. And our last question comes from Keaton Mantora from BMO Capital Markets.

Please go ahead.

Keaton, you may have a line problem. We can't hear anything here.

Okay. So we do have one last question from Matthew McKellar from RBC Capital Markets. Please go ahead.

Great. Good morning. Thanks for taking my questions. Appreciate all the help so far. Just a couple of cleanups on costs. First, I guess, how would you expect diesel prices to affect your Canadian log prices in Q3? I think you've been consuming quite a bit of the log deck built through Q1 during Q2. What's the impact of rolling on to, I guess, more current costs as you progress into Q3?

You know, the way I might answer that, Matthew, is, you know, I think most of our kind of agreements with our contractors, we would have fuel riders in there. So there'll be some impact depending on where diesel pricing is at that moment. saying that. I think we have a number of other cost initiatives underway in Western Canada that are going to allow us to manage any inflationary pressure there and manage those costs in the coming quarters.

Okay, great. Thanks. And then shifting over, I appreciate the help with the sensitivity provided, but maybe just to come to a bit of a finer point, given recent volatility, any nuances around timing, do you have a sense of how much of a sequential headwind, resin, and wax costs should be for North American EWP in Q3 versus Q2? Thank you.

Yeah, again, you know, I think we've, you know, provided some sensitivity. You know, the way I would describe that sensitivity in our disclosure, though, is all things being equal. You know, we had that headwind in Q2, but through a number of other initiatives, We were able to more than offset that, you know, and I think we're going to continue to be navigating changes in the resin market. The, you know, our agreements we have around resin pricing and our other kind of chemical inputs are good. And I think we're going to be pretty, you know, it's going to affect the industry and I think we'll be pretty well positioned to navigate through it.

Okay, thanks for the help. I'll pass it back.

Okay.

Thank you. And there are no further questions at this time. You may continue your conference, Mr. McLaren.

Thank you, Kelsey. As always, Chris and I are available to respond to further questions, as is Anil Agarwala, our Director of Treasury and Investor Relations. Thank you again for your participation today. Stay well, and we look forward to reporting on our progress next quarter.

Thank you, gentlemen. This is your conference call for today. We thank you very much for your participation. You may now disconnect. Have a great day.