Good morning, ladies and gentlemen, and welcome to the West Fraser Q2 2019 Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Friday, July 19th, 2019. Please note that during this conference call West Fraser's representatives will be making certain statements about potential future developments. Those forward-looking statements are intended to provide a reasonable guidance to investors but the accuracy of these statements depends on a number of assumptions and is subject to various risks and uncertainties. Actual outcomes will depend on a number of factors that could affect the ability of the company to execute its business plans including those matters described under Risks and Uncertainties in the company's annual MD&A which can be accessed on West Fraser's website or through SEDAR and as supplemented by the company's quarterly MD&As. Accordingly, listeners should exercise caution in relying upon forward-looking statements. At this time, I would like to turn the call over to Ray Ferris President and Chief Executive Officer. Please go ahead sir.

Thank you, Sylvie. Good morning and thank you for joining us today. Joining me is our CFO, Chris Virostek; as well as Chris McIver, our VP of Sales and Marketing; and several other members of our senior management group. I will make a few opening comments and then Chris will review our second quarter results. First half of 2019 comes in stark contrast to the first half of 2018. And although Chris will talk about market demand and supply trends in a few minutes the impact of poor commodity and market pricing on financials, the first half of 2019 has been one of much disruption and heavy lifting by our employees across West Fraser. To adapt to available timber supply in British Columbia due to the impact of Mountain Pine Beetle, West Fraser announced the permanent reduction of approximately 300 million board feet of production by eliminating third shifts at Cornell and Fraser Lake impacting 135 employees. This transition to two shifts although announced in late 2018 has now just been completed as of early Q3. We also recently announced the permanent closure of Chasm and the elimination of the third shift at 100 Mile, permanently reducing production by a further 314 million board feet impacting an additional 210 employees. Our management team is working hard to relocate and place as many of these employees throughout our openings in Western Canada. Our forecast is that Chasm will cease operations and the site shutdown sometime in September. The third shift at 100 Mile was eliminated before the end of the second quarter. These permanent reductions coupled with the impact of the temporary curtailments in the first half of 2019 by approximately 250 million board feet have been disruptive, costly, extremely difficult for employees, our log contractors, our suppliers, and our communities.…

Thanks, Ray, and good morning. The underlying fundamentals that influence lumber demand have been trending mildly favorable for the past few months. Year-to-date, housing starts are in line with the prior two years, which were robust years for lumber demand. However, as of yet, this does not appear to have translated into a similar demand scenario for lumber. Lumber shipment data of which the most recently available is April, indicates that shipments have been trending down in the aggregate and in all regions other than the U.S. South, which managed a 1% gain in shipments year-over-year. It is important to keep in mind that the prior year comparative shipment numbers were during a period of significant shipment volatility in Western Canada. As the year has gone on, the number and magnitude of production curtailments has continued to increase and accelerated in the second quarter of 2019. However, the impact on supply from these curtailments is likely to manifest more significantly later in the year as the announced mill closures take effect and mill inventories are liquidated. Turning to our financial results. There were headwinds at all of our segments as compared to the first quarter. Weather challenges in the U.S. South continued into the second quarter. Production curtailments in B.C. disrupted operating rhythm and productivity and we had our second major maintenance shutdown at an NBSK mill. Commodity pricing was difficult across all segments and our consolidated adjusted EBITDA was reduced to $56 million in the quarter. However, we remained adjusted EBITDA-positive in all segments. We recorded a $26 million restructuring charge in connection with the announced closure of the Chasm sawmill, which incorporates both asset impairment charges and cash closure costs such as severance and contract extinguishment costs. We recorded an additional $17 million tax recovery in the quarter…

Thanks, Chris. So from a strategic standpoint, much of our heavy lifting in British Columbia is now behind us. Going forward, we expect a less disruptive second half across many of our businesses, particularly in the U.S. South with several projects now in ramp-up. We expect continued improvement from our pulp operations, particularly with our two major pulp shots behind us. And with the curtailed B.C. lumber production taking hold in Q3, Q4, we will -- or we -- and should contribute to a more balanced supply and demand and subsequently a more positive outlook on the medium-term lumber markets. Finally, the decisions that we have made in the past few months have been difficult, but necessary and that when combined with our geographic and product diversity, we believe leaves us well positioned going forward. So thank you. And Sylvie, I'll turn it back to you for questions.

Thank you, Mr. Ferris. [Operator Instructions] And your first question will be from Mark Wilde at BMO. Please go ahead.

Good morning, Ray and welcome to the new job.

Well, thank you, Mark. Appreciate that I think.

It's probably not the easiest quarter to do this. All right. I have a number of questions. I'll just start. I wondered Chris, if you could help us with the inventory write-down in lumber, because if you just look from end of the first quarter to end of the second quarter and SPF prices were actually up a bit, so the write-down caught us by surprise. Maybe you can help us understand that.

Sure, Mark. So I think there's a few factors that weigh on that. With the July one stumpage increase, we took efforts to bring in more log inventory in advance of that and so we're carrying a higher log inventory than we otherwise maybe would have at that point in time that will carry us we think well into the third quarter. And along with that comes even -- the one price is one thing, but it's the great mix and what we have on hand in that time period that sort of influenced that over that period. So there was a number of factors that played into it, but I think the biggest piece is the additional hauling that we did in the second quarter in advance of that when we think about kind of where we're positioned.

Okay. And then, I just -- to toggle over to pulp a couple of questions. Any impact as you look into the second half from just tighter chip supplies as we see kind of lumber production go down across the province?

So, Mark, I'll take a shot at that. So I think the best -- so today, Mark, I mean, we're -- we look at our business in the interior every day and of course decide how we're going to run our integrated platform. Our view at the moment is lumber and pulp that would continue on similar to what we've seen in the past, quite frankly. So we're not anticipating at this time any disruptions, but we'll have to monitor it as it goes forward and adjust accordingly. But at the moment, I think, it's kind of gets carried on.

Okay. And then, just also on pulp, Ray. Hinton had a pretty rough time in the first quarter. I think there was about $25 million; we were estimating, drag there in the first quarter. How much of that did you get back in the second quarter, would you estimate?

I don't think I can estimate that, Mark, and it's not that I don't want to. I just haven't really looked at it in that context. You couldn't have had a worse quarter in the first quarter than we had at Hinton. And I would say our improvements -- we're certainly happy with the trend. Happy might be strong, satisfied with the trend that we saw in Hinton in the second quarter. But how much of that, I can't give you a specific number. I don't have it.

Okay. Just when we were modeling this we were assuming you were getting a little more bounce than you evidently got. And then, finally, just to turn to capital. You bumped up the CapEx number by about $25 million. Can you give us a little bit of color on what might have changed there?

I'm not sure there's a big change, Mark. I think it's just an adjustment of what we see going forward. We're very excited about the projects that we have and certainly heavily skewed to U.S. South. Kind of see -- so we stepped it up, because quite frankly we want to continue to execute on our strategic capital plan. At the same time, we're going to be keeping a good eye on the market and economic conditions and to ensure that we're going to keep a strong balance sheet. But we're pretty excited about our capital program and these are good projects. And so, can't always time exactly what's going to happen in the cycle in the market, but our plan would be to fix our operations and make them better as quickly as we can.

Okay. The last one I have is just a kind of a question, because I operate so far away from all of you guys. I'm just curious. We've got this situation in B.C. where there's just -- there's less available fiber going forward. And I'm -- and we clearly -- you've done rationalization moves. Others have done rationalization moves. But I just -- I'm curious as to whether you think politically you could see more consolidation take place within the B.C. lumber industry, which might help this process, or if that's just the kind of a political no-go at this point and understanding we're on public conference call here. But if you could maybe just help us with that a little bit.

So, Mark, I would -- I mean, I can't speak for what government would do or not do and what other companies would do or not do. But I think there's a number of files today they're in front of government, and I guess we'll see how that plays out. But I think the industry is – I think we're rationalizing within the available timber supply that we see. I can't speak for others, but I suspect they're looking at the same way. But at this point I – we're thinking that it's – industry is going to find a spot to operate and we don't see significant impediments to that at this point.

Okay. Very good. I'll turn it over. Ray, thank you.

Thank you. The next question will be from Hamir Patel at CIBC Capital Markets. Please go ahead.

Hey, good morning. Ray, given the cost challenges in B.C. do you think there's a case to be made that the current stumpage system which is supposed to be market-based is not reflecting the current market of low lumber prices and really the B.C. industry should look to change the stumpage system even after risks potential retaliatory action from the U.S.?

So Hamir, no I don't think we should be changing the stumpage system. I think the stumpage system has a lag impact. And I think over time, the stumpage will change to reflect supply and demand changes. So I think it's – we need to live within the system we have.

Yeah. Fair enough. And Ray, we've seen more permanent capacity curtailments out of Canfor yesterday. You guys have announced things for 2019. Based on what you've announced, do you think you've right-sized your B.C. platform? Or should we expect further permanent closures from West Fraser over the next year?

Well, I mean, Hamir – I mean, I think we've – what I would characterize is that we've done a lot, and we've gone a long way down that path. Very difficult to predict exactly what the future will unfold as far as any other constraints around timber supply or what others may or may not do. And so we'll monitor this going forward, but we're content with where we are for the time being. But on a go-forward basis, we'll adjust our business operations to – as needed in order to make sure that we're positioned well in British Columbia.

Thanks. Thanks, Ray, that's helpful. And just a final one for Chris McIver. Chris, can you give us a sense what you're seeing in China right now for both lumber and pulp?

Sure. Good morning, Hamir. I'll start with lumber. Demand is actually – first of all, summers are slower on the lumber side in China always, because of the heat. So we have seen what I would call a traditional slowdown a little bit. But the market's actually fairly robust. They are taking advantage of what I would call is a weak market in North America. They're very good buyers. But demand is pretty strong. And part of that is, there's less wood going over from some of our competition in Canada than it has been in the past. So that's helpful. But overall, I'd say, demand is what I'd call steady. We're able to ship as much as we like. Obviously, not probably at the prices we like, but reasonably okay. With regards to pulp, not so unlike lumber, you do see us a slowdown in the summertime. We are seeing the buyers come back a little bit not tremendously. Obvious, price pressure remains there, due to very, very high hardwood inventories both in China and outside of China. We suspect that, we're going to see it a bit tough there certainly through the third quarter and then see a bit of a rebound as we move into the fourth quarter.

Great. Thanks, Chris. That's all I had. I'll turn it over.

Thank you. Next question will be from Sean Steuart at TD Securities. Please go ahead.

Thanks. Good morning, guys. A few questions, I want to get into the lumber results in a bit more detail. First, maybe for Chris, if you could speak to sales mix this quarter. Your price realizations were down a bit $10 for 1000 board feet, which held up better than we thought would be the case. Can you speak to mix? And then, further to that, it looks like costs – even, if I back out the inventory adjustment and duties, it looks like costs were up quite a bit, which given maybe a richer mix was a bit of a surprise. It's a load of question maybe, but if you could speak to mix first and why costs might have been up as much as they were quarter-over-quarter?

Good morning, Sean. Our mix -- I don't have the exact numbers right in front of me, but our mix really is not a lot different than it should traditionally is. We're selling what we make every day. We did take a big chunk in inventory out, but that should be at a pretty regular mix. I don't think there was a huge change on our mix. We did pick up -- some of our higher-end Japanese business picked up in Q2 over Q1 because Q1 was really, really slow. But other than that, I really don't have a lot to say. I mean Ray may have some comments around costs but...

On costs Sean -- and good morning, I mean, all I would say is that permanent curtailments aren't free and temporary ones aren't free either. So, there's a pretty significant impact on costs and to a certain extent productivities work through that. The good news is we've gotten a lot of that behind us and hopefully not too much more in the future.

Okay, thanks for that Ray. Can you reference -- I guess your ability to take further inventory out in Western Canada through the remainder of the year. I was surprised how much you drew down this quarter. As you take more of the shots, is there more room to take inventories lower at this stage?

So I'll take a shot at that. I mean, Sean, there's always room to take more inventory out. But, I would say on our inventories, I think last quarter we said they were pretty good. This quarter they're even better. So we're -- there's always some room, but we're -- there's really not much.

Okay. And last question, the July 1 stumpage hike, I'm just trying to gauge how fast we should build that into our estimates. And I guess the question is it sounds like you built up your log decks ahead of the hike. How much harvesting should we expect in Q3? And how fast should we expect that stumpage hike to roll into your sawmill margins in B.C.?

Let me take.

Sure.

Yes. So, I think Sean the way we're probably thinking about it is, it will be later in the third -- probably later in the third quarter when we start to see that start to come through. We're in a pretty good place with logs we think in B.C. right now. Stumpage is the one aspect. The other wildcard is the purchased wood market and what impact does everything that's going on in B.C. right now have on the purchased wood market and which direction is that going to go because that can have an impact too. And that's one that can tend to be maybe a little bit more timely in terms of how it impact things.

Are you seeing more rational bidding as mills come out? And I appreciate most of the closures will happen in the coming months, but any rational bidding coming into this market yet?

I guess that depends on perspective on what rational is. There's certainly been some softening. I think its public information that would be out there. But there's some softening. I would say there's not a lot of buying going on. And there's been certainly some reduction, but I don't know how much of that really impacts in Q3 like to support Chris' comments.

Okay. That’s all I have. Thanks very much guys.

Thanks Sean.

Thank you. Next question will be from Paul Quinn at RBC. Please go ahead.

Yes, thanks very much and good morning.

Good morning, Paul.

Maybe start with Ray. Ray, you sound pretty optimistic of B.C.'s return to profitability given the industry I guess productivity. If I add up the capacity closures, it looks like somewhere around 1.8 billion board feet. Is that enough to get a more rational bidding behavior in the marketplace? And what's the time line that you do expect to get back to decent levels of profitability in B.C.?

I can't predict the time line, Paul because I'm not sure what the behavior of others will be. And so I -- we tend to focus on our geographic regions and where we operate. And so to me, I think the point is, is that there's actually very good fundamentals in British Columbia. It's a high-quality timber resource. There's very good assets everywhere and we've got a significant people resource. And I'm not sure exactly how long that will take, but we do think that through a cycle or whatever that is you're going to -- supply and demand will come in more into balance. Rational behavior returns to log buying, because quite frankly you don't need to buy as many logs. So it’s hard to predict exactly what that is. It's certainly not imminent. It's I think down the roadways. But we do have confidence that once we make our way through that that we do see a brighter future. And whether it's the next year or two, I can't be certain.

Okay. And one thing you guys had talked about is costs, and I guess there's two main components of that. One is stumpage or just log costs and we know about the B.C. situation. Maybe you could just detail what you're seeing in the log costs inflation or deflation in both Alberta and the U.S. South?

Sure. So I think in Alberta that system is generally more responsive to lumber prices. And in the U.S. South, it's been an interesting year in the U.S. South. The fiber supply there is just as robust as it's always been. The challenge has been it's been raining so much in the last seven to 10 months down there that access to the land base has been a real challenge in a number of areas. And so in those areas where access to the land base has been challenging, it's certainly led to some fiber cost inflation, which we anticipate will be hopefully short-term in nature. But just the other day we were talking about one of the operating regions had got nine inches of rain overnight. When you have that kind of precipitation on the land base, it makes it a little hard to get in and really restricts your options about where you can get timber from and that puts pressure. It's a supply constraint and it also affects other things like your diameter mix and your optimal mix of things that you can get that have not gone in fact from a production standpoint. So we're seeing a little bit in the U.S. South. We're of the belief that it's going to be short-term, reasonably short-term in nature if we get back to somewhat normal operating conditions. But part of that is kind of out our control in terms of what happens to weather.

Okay. Then just your inventories on the lumber side came down significantly in the quarter. What is your perception of customer inventories at this point? Is that high, relatively high and that's why we're seeing a weak pricing environment?

Good morning Paul. It's a great question. It's probably the hardest piece for us to really get a strong handle on is our customer inventories. I would say not. They've certainly been buying steadily. They're in the market everyday. Sometimes it's a bit tough to build an order file, but they are buying everyday. And they tell us that their inventories are flowing through pretty well. I don't see any reason why they would carry higher inventories at this moment unless all of a sudden their off-take really drops. So anecdotally we don't think they're super high. I don't think they're incredibly low by any means, but I would say they're average.

Okay. And then I guess just lastly just you mentioned the $31 million in share repurchases in the quarter. Your share price is right. It's just a tad above your 52-week load. Any -- or maybe another way to frame it, what's your view on accelerating share repurchases given looks like a better outlook for the second half of the year?

So we're looking at that all the time in terms of the best way that we can allocate our capital and the opportunities that are in front of us. I think when we're going through periods where we're making announcements like we are there's restrictions on what we can do in that market, and so we have to take those things into consideration. So we'll continue to evaluate the situation, the strength of our balance sheet, the market condition, the liquidity all those same factors that we would anticipate in any market in terms of figuring out how to deploy that capital.

All right. That’s all I had. Best of luck guys.

Okay. Thank you, Paul.

Thank you. [Operator Instructions] Next is a follow-up from Mark Wilde at BMO. Please go ahead.

Yeah. Ray and Chris just a little longer-term question on the demand side and how you think about demand, it seems like every analyst on this call and probably most of the companies in the industry have been overly optimistic for most of the last decade about new starts and how new starts are going to improve. And then today you've got some stuff in here from the joint center in Harvard on repair and modeling, and I just got a release from them yesterday that they've pulled down their estimate of how big the repair and remodeling market is, because they think they've overstated it the last few years. And they're predicting that by this quarter next year, the repair and remodeling market is only going to be growing at a 0.4% pace. So I'm just curious in all of this, are you thinking about how big the market is, and where the market is growing differently today than you did five years ago?

Yeah. Mark I'm going to ask Chris McIver to -- because I've got the same question. So, Chris?

Yeah. Thanks Mark. I've had to say that yes, we are thinking differently. But we really go back to demographics households formations this next group of potential homeowners and millennials, the aged they're moving into. Are they going to be buying single-family homes? Are they going to be more multi? Certainly, great questions. I do think though that what we see is still -- we feel optimistic is a mix correct. Is it going to be exactly what it was historically or starts peaking out at $2 million? That sort of thing. We think not, but -- and your comments around R&R are bang on. I mean, it certainly in our view has held up the market for the last number of years. So a slow down there is -- would be concerning. But I do think that the next 10 years will never be like the last 10 years, and our job really is to form a view. And hopefully, we can -- the company can build the company around that so that we're good going forward. But saying that, you look at mass timber, there are tall buildings, offshore demand potential growth in India for example. There's a lot of very positive things for wood we feel going forward. So will it all be single-family? No. So that's kind of where our view is right now.

So I'm just going to add some to that Mark. I mean, I think we've been pretty consistent and it is -- I think its surprises on the demand side somewhat. It's surprised everyone, but I think we've been pretty consistent saying really getting to a 1.3 million housing starts is when you -- we believe you start to see some real attention in the system. And we're not predicting 1.4 or 1.5 or like Chris has saw it. To me we're not -- we're -- I think we're trying to take all those factors into account and saying, we don't need a robust return to have good pricing or model. That's certainly how we're still looking forward -- looking at it going forward.

Okay. That's helpful Ray and Chris. Thanks very much.

Thank you. [Operator Instructions] And at this time Mr. Ferris, we have no other questions. So I would like to turn the call back over to you.

Well, thank you operator. Thanks everyone for joining the call and we look forward to talking to you in the next quarter. Thanks.

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 yourself a great weekend.