Good morning, ladies and gentlemen, and welcome to West Fraser's Third Quarter 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 Tuesday, October 22,, 2019. Forward-looking statements during this conference call, West Fraser's representatives will be making certain statements about potential future developments. These 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. I would now like to turn the conference over to Ray Ferris, President and Chief Executive Officer. Please go ahead.

Good morning and thank you for joining us today. With 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 team. I will make a few opening comments and then Chris will review our third quarter results. In British Columbia, our announced permanent lumber curtailments are now fully implemented and the associated impacts primarily behind this. However late in Q3, continued log costs and availability pressures required the implementation of temporary variable operating schedules at several of our B.C. Mills to adjust to the available economic log supply. We see this as a temporary measure and we expect to return to standard operating schedules in the future. However the variable shifting currently remains in place. Although I have referenced this previously, our B.C. businesses are efficient, well capitalized with world-class employees and contractors. It is important to note that West Fraser has understood the impacts of Mountain Pine Beetle and the reduction of timber supply and invested both inside British Columbia more than $600 million and outside of B.C. accordingly. The reductions that have been executed by West Fraser are the results of the implementation of our post Mountain Pine Beetle operating plan and will better position West Fraser to operate within the available timber supply. It is important to recognize that despite current operating conditions in British Columbia has arguably some of the safest, most sustainably managed technologically advanced and efficient wood products business in the world responsibly producing high quality B.C. forest products for customers around the world. As large supply and demand normalizes, we expect to see B.C. return to a profitable region. With respect to pulp, our BCTMP operations continue to operate well in the quarter. Our NBSK results were impacted by choppy production out of our Caribou Mill after the major shutdown in Q2, while Hinton again improved over the prior quarter. Our U.S. South and Alberta saw mills combined now represent over 70% of our lumber production. Our Alberta lumber and panel assets are well capitalized, efficient, and except for several temporary weather log shortage events in the last quarter, operated well in the period. Our U.S. lumber business continues to execute on our people and capital strategy. We see significant upside in U.S. South and remain focused on achieving our expectations. I will talk shortly on a few of our more recent U.S. projects. But before I do that, I will let Chris review our Q3 financials.

Thanks, Ray, and good morning everyone. The last two months we have seen improved new home start numbers in the U.S. and improved permit numbers for the past three months. However that has not yet seem to translate into additional demand for lumber. And while pulp shipments have been in line with the prior two years, demand has been a bit softer leading to higher than typical inventories, which is negatively impact pricing. The growing list of mill curtailments are starting to have an impact on lumber shipments with production from B.C. down 18% through July on a year-to-date basis and across North America, production is down approximately two billion board feet year-to-date. Mill curtailments and closures take a period of time to be reflected in reduced supply as mill inventories are worked down. In the U.S. South, where significant capital investment has been ongoing in the industry for the past several years, production was up only 1% or 129 million board feet through July. Turning to our financial results, the lumber segment performed much as it did in the second quarter as there was little movement in product pricing overall. Panel results were slightly improved on lower volume. Even though our operating results in pulp improved significantly so in NBSK, the decline in pricing more than overcame the improvements in costs that we were able to make in the quarter and EBITDA declined from $7 million to $3 million. Comparing to the second quarter of 2019, volume was a positive contributor as SYP and pulp shipments were up over the prior quarter. Fiber costs on an overall basis improved sequentially. But a portion of this was due to the annual breakup period each Q2 where logging is suspended and certain fiber supply costs are treated as period costs. We…

Thanks, Chris. I just wanted to touch briefly on several examples of our most recent projects underway in our U.S. South business and these projects as everyone knows are a combination of several years of planning, construction, and start-up. And like most renovation type capital projects in the short-term are disruptive and consumed people and technical resources and can be quite a distraction to day-to-day operations. Although most projects involve some growth, our primary drivers are margin improvement, focused on lumber recovery, value improvement, and productivity. These four projects amongst a few others all started off in the past a month or two. In Joyce, Louisiana, we replaced and upgraded the entire front end of the mill with a new log in-feed merchandiser. And we are immediately realizing gains and recovery and lower operating costs. In McDavid, Florida, the installation of a modern canter line has significantly improved recovery, improved lumber grade well debottlenecking our primary area in the mill. In Perry, Florida, we recently upgraded to our two new continuous dry kilns, which immediately includes grades and releases capacity for Perry. And also our new Planer Mill in Augusta, Georgia. The new Planer Mill comes on the heels of continuous dry kilns and saw mill improvements completed over the past two years at Augusta. The new high speed Planer will reduce costs, improve grade, and significantly improve the working environment for employees. Overall, these projects will allow us to achieve our recovery grade and value expectations with 25 fewer positions than previous and this is a key strategy. People and turnover are key to achieving our expectations in U.S. South and providing a better work environment and better positions as part of that strategy. Our U.S. South business is transforming and we remain encouraged about our potential. So finally, in summary, headwinds in both lumber and pulp pricing contribute to a challenging third quarter. Notwithstanding pricing, we remain very positive on our geographic and product diversification and achieving further margin improvement across all of our operating platform, but particularly in U.S. South. So thank you and everyone and I will turn this back to the operator for questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. Our first question is from Mark Wilde from BMO. Please go ahead, Mark.

I wondered if you guys could just start by sharing some thoughts on this state of the pulp markets and how you see that developing over the next six to 12 months.

Hi Mark, it's Chris. I'll take a stab of that for you. We've been seeing mechanical pulp actually in reasonable shape as far as order file and demand. In our view, the real issue is still in hardwood craft. And we don't see those inventories really coming down in any meaningful way at least for the next six months or so which of course will affect our softwood business somewhat. So we're kind of thinking more the same for the next period and then gradually improving as inventories are drawn down.

Chris, what's your sense of kind of just pull-through in terms of Chinese demand right now?

Well, our view is that Chinese demand is actually pretty good. Paper market in China and the board market in China is actually pretty strong right now. They're all making money. So they are pulling in a fair bit of pulp right now. But the fact is, you look at the days of inventory and hardwood craft, and they're still -- they're still very elevated. We've certainly seen Europe slowing and the U.S. is what I would call so, so. So, yes, it's just a matter of time. And potentially, this may have to be more downtime on the hardwood craft side.

Okay, and then just finally on pulp, I'm just curious about fiber supply for all of the pulp mills in Western Canada, it just seems like between less fiber being available and more of a biofuel market in Western Canada, I'm just curious as to whether you think there's going to have to be some rationalization in the pulp business?

Mark, it's Ray here. Yes, I think it's kind of hard for us to kind of comment on fiber supply for the industry. I mean, I think it's clear that fiber supply will tighten up. And I would say that it's something that we focus on for West Fraser. So I would say we think we're in pretty good position in Alberta and we understand our position in B.C. and although tighter, I think we've got a pretty good view on how to fiber up our mills in the future. So that may be not be the best answer for you, but it's certainly going to be a tighter environment. But as far as West Fraser, I think we've a view that our fiber position is dependable.

Okay, I want to turn to a different issue Ray and that is sort of the -- it seems like the Beetle 2.0, some of the fiber suppliers in the U.S. have been talking about the impact of the European spruce bark beetle on both potentially lumber coming into the North American market as well as its impact on some of the Chinese markets because evidently a lot of that European wood is ending up over in China. Can you just speak to that issue and how you see that developing going forward?

Well, maybe Chris McIver and I will tag team on that one, Chris do you want to?

Sure. And Mark, there is no question that we're seeing more Euro wood both on the East Coast and in China, Japan as well. But generally, they can't, they're not super competitive once they get right off the coast in the U.S. We can compete with them in China; we certainly haven't seen it affect our volumes. They tend to go for a little higher end product than what we're selling there. So we bump into each other, but not in a huge way and in Japan they do struggle a bit on their length mix which gives us a bit of an advantage over them, but there's no question we're seeing more wood over there from mainly Central Europe.

Okay, all right. Last question I have is just Chris Virostek or in fact Ray, can you just talk about your priorities for kind of capital as we look out over the next 12 to 18 months, particularly in light of weaker markets, just thinking about kind of share repurchase activity versus kind of continued focus on putting capital into the mills?

Sure, I can start on that and then Ray can add some color as well. I think we've always tried to take the view that we want to be investing in our mills in a regular basis. These are long lead time projects that we work on some of these things that we're talking about, as Ray indicated, have been in the works for a year-and-a-half, two years, and it's not something that you easily turn on and turn off. And we believe the key to being low cost is having modern efficient well invested mills. So some years, depending on the number of projects we will have a little bit more capital than others. But we believe in investing in the mills consistently and with the right degree of execution risk with respect to the number of projects. And then -- and then as we go down that hierarchy is really -- it's really no different than it has been in the past is making sure we've got the financial flexibility to make the decisions we want to make and grow when the opportunities are there. And when the visibility is there with respect to capital and returning it, we're going to go ahead and return that capital. I think the market environment that we find ourselves in the last several months has been -- has been deeper and longer than I think certainly, we expected. And we're optimistic there will be some better visibility going forward on where things are going to go from a market standpoint. Ray, anything you want to add to that?

No, I think you said it very well. I think -- I kind of think we can create the margins that we expect to on with our capital and operating plan. That margin improvements, the pathway to return value to the shareholders. And so to that over the primary path that we see.

Thank you. Your next question is from Hamir Patel from CIBC. Please go ahead, Hamir.

Thanks, good morning. Ray, I appreciate the additional info on all the capital projects. Can you give us a sense yet as to some of the larger projects you might have planned for 2020 and what the overall CapEx budget would be?

Well, good morning, Hamir and good question. So we do, I don't think we've given any capital guidance yet, Chris. And so we'll probably as we kind of work on our 2020 plan probably provide a little bit more. It certainly will be at this point lower than 2019, I think I can kind of signal that. We want to make sure that really two things. I think the message I would say is that we open up an awful lot of ground in the last 18 months in the U.S. South had a lot of our portfolio kind of disrupted and under some form of capital and we want to be -- we want to limit that portfolio. So we want to kind of shrink the footprint that were impacting our results. And we also want to make sure that we can execute at a high rate. So I would say, Hamir, without I would say, we're going to do a probably a little bit smaller footprint launch next year. But we do have one or two large strategic projects that we're not ready to talk about yet that we do plan on executing in the U.S. South.

Great, thanks Ray. That's helpful. And just one for Chris McIver. Could you give us a sense as to where lumber inventories are today in the channel?

It’s a good question, Hamir. Because again, there's no -- there's really very little firm data on that. But again, I don't think they're high. Our customers are repeating, they come back very frequently. They don't seem to be loading up really heavy. So I would say they're -- they would be average. I don't think they're low, but I don't think they're high either. So I do think our customers are taking a little more risk on the inventory side than they have in the past because they felt well a) they've been able to get it anytime and the cost has been pretty reasonable.

Your next question is from Sean Steuart from TD Securities. Sean, please go ahead.

Thanks. Good morning, guys. A couple of questions. I want to follow-up on capital allocation. There's mentioned in the MD&A about preserving liquidity for potential strategic growth opportunities and maybe I'm reading too much into it, but I take that to mean potential M&A in addition to discretionary CapEx, can you give us an update on the opportunity set for M&A and what scale West Fraser would be comfortable moving ahead with in terms of capital allocation towards the M&A bucket?

Well, good morning, Sean. It's Ray. And I will maybe take crack at and maybe Chris wants to jump in. But I think we're always trying to keep our options open. So I think we don't dictate when the opportunities are come up. And we never really want to take our foot off our -- in improving our operations. And we've got -- we've got work to do to bring our assets to the level of expectations that we have at West Fraser. So I don't think it's one or the other. I think it's we always want to have that room and that flexibility and a balance sheet that allows us that we don't have to make choices that we can do both. So that -- that's and I wish we could dictate the time and the frequency of the M&A but we don't have that opportunity. So I would say it's to be able to do both when the opportunity arises.

Okay. Smaller segments for you guys but I want to ask on the panel margin this quarter, you had plywood productivity declines, price realization pressure for plywood as well in the Canadian market but your margins for panels actually improved. Can you speak to some of the cost improvement that showed up in that segment?

Yes, thanks Sean and part of it, I think is going to be associated with the breakup in the second quarter versus the third, where those -- element of those fiber costs end up as period expense in Q2 versus in the log costs. So that's part of it. But I think generally speaking, the plywood mills performed well in that -- in the second and third quarter relative to the second. And but the biggest piece is going to be associated with the breakup costs.

Okay. Thanks, Chris. And then one last one. You guys addressed tight log inventories in Alberta. Do you have a sense of how much incremental plywood and lumber downtime you might need to take through year-ends or even into early 2020 if conditions don't improve and the 650 million board feet of year-over-year lumber production declines, is that encompass further production declines in Alberta by too tight log supply?

So I will try and tackle the first couple there. So I think our view is that that it's hard to predict exactly what will happen with respect to log inventories and extra well. But I think our view is that that we expect to operate what we have. And we expect minor disruption, if any. So we don't expect that log inventories other than what we previous announced are going to have a major impact on us going forward. And what was the -- I think --

Is there any in the 650 there is nothing really of any consequence --

No.

In the 650 related to Alberta.

The 650 actually, no nothing to do with Alberta and the 650 really puts us in the position for me to make that statement which is really rightsizing, improving the size of our business relative to the available timber supplies. It gives us more confidence that that our go-forward operating strategy is one that is consistent and dependable.

Thank you. [Operator Instructions]. And next question is from Paul Quinn from RBC. Please go ahead, sir.

Hey, thanks very much. Good morning, Chris, Ray, Chris. I guess maybe just starting on the capital projects. Kind of little bit of detail on the past stuff, not quite ready to share the future stuff but in the overall scheme of the upgrades on where you -- where you -- where would you like to be? If we could use either a hockey or baseball analogy where are you through the overall program as you see it?

Well, baseball maybe it's we're in October, so maybe baseball is the one that we should use. Great, great question. I thought about this a couple of times, I mean it. I don't think we ever get to the bottom of the ninth by the way. At least I have in my career. But I think, we're probably in, in all the top of the best or something like that.

Okay. And then in terms of you mentioned, taking over 25 people in the U.S. South, give us a sense of what that employee turnover is between Canada and the U.S. South and do you expect most of the projects in the U.S. South to move people, increase productivity as well?

So there's a significant difference on turnover. And by the way, we've seen this at times in Canada, high turnover, but if we were in Canada, it might be that you're single-digits to low teens. In the U.S. South it's not that we don't have areas where it's much lower, but it's not unusual to be north of 30% or even 40%. So even our focus isn't, is really to make sure that we can pay the wages and benefits and set the expectations high enough that that I would say it's -- it's people reduction is a part of the strategy but it's more about -- more about making sure that the people that we do hire and employee are able to contribute at a high level, which allows us to pay them a much higher wage and benefit thereby lowering the turnover.

Okay. And then just -- you guys have been very proactive shutting down and rightsizing your B.C. base lumber capacity. Just wondering how you view that that supply/demand balance from a saw log side now and would you anticipate any future industry curtailments going forward here?

It's hard for me to predict what will happen here in the future. I think what all I can really speak to is the steps that we've taken, Paul, which I think takes us a long way down the path for me to say, we're not planning anything significant in the near future. But that will depend on future log availability and markets and I guess we'll see where they go. But we do believe we have log supply that we can, if we can access it, run our business in British Columbia.

Okay. And last question, I had just maybe Ray if you could comment on just give us an update on the Caribou situation with respect to your mills and what do you see the eventual outcome there?

Well, so previously the government announced an interim moratorium, they've appointed a number of people to work with the community and stakeholders to work on the future. We're engaged or will be engaged in that process not a lot of change since the announcement came out. And so at this point, I think we'll just see where it goes but it's hard to predict what the outcome would be. I think our view along with others would be is that there's room for both a very strong forest industry in the north and there's room to protect Caribou and so we can achieve both.

Okay. And just remind me of the timeline that's it to your moratorium and your expected decision at the end?

That's what the government is indicated. So I would expect them to follow through that with that at some point.

Thank you. Your next question is from Mark Wilde from BMO. Please go ahead, Mark.

Ray, is there any way to kind of quantify what you've picked up already in terms of kind of grade and yield improvement kind of across the South, not only the Gilman Mills, but the IP Mills and then sort of what you think is left?

Well, I think, of course there is stuff that we track and look at all the time against what our expectations are. But I would kind of take it back to that baseball analogy, I think and I look across our business. We have room to improve our -- all of our businesses, quite frankly. And probably that's not unusual. But when I look at -- when we look at the potential in the U.S. South, I'm going to use if we said we're in the, I think I said the top of the fifth or bottom of the fifth, I would say that's not that -- that probably applies to that expectation as well. We still see significant runway to, for a period of time to get ourselves to the point where we're somewhere near the top of the ace, let's put it that way.

Let me ask it this way. So if you go back to when you got in the South, about a little over 10 years ago, and you look at sort of what you were doing in terms of yield coming out of a log. And then you'll look at sort of where you expect to be, let's say five years down the road? How much more lumber are you getting out of a cubic meter of logs at the end of that period than you were at the start?

All right. So that -- so, a couple of things. One, we've added to our work list in U.S. South in the last few years, we've added, seven, I think seven new saw mills that, quite frankly in our world create more opportunity for us. So -- and so when we look at, it depends on the region, it depends on the area, it depends on the technology that they have, but it is not unusual. And I would say a lot of our mills are down the path on the recovery piece, but a lot of our newer mills still have that that untapped potential with new technology to increase recovery 10% to 20%. But it really depends on the log and where you are. So it's a range.

Okay. And then, just in terms of anything similar you can do to help us think about the improvement you can make from a grade standpoint?

I'm not sure I can be specific enough Mark to provide a lot of value. I mean, I think when you, I think the technology is pretty well known and I think our competitors would be probably doing a lot of the same things but whether it's anything that you do on the front end of your mill in a sawmill around recovery also has the same potential to improve value, it just comes down to your capability. And so -- and of course, then there's the technology in the Planer that allow you to extract that greater value of that same piece of lumber. So it's not insignificant and but I don't think I can kind of give you a good -- a good sort of a number of what that means. When we look at these paybacks, I think the best way to kind of characterize it our paybacks depending on the project can be anywhere from 12 months to five years. But the projects that we talked about are two to four years something like that. So that kind of gives you an idea what the improvement potential is.

Okay. And then you did call out the weakness in some of these wide-width southern grades. We've been watching this and kind of scratching our heads at, what do you think is going on there?

I will let Chris jump into that one.

Hi Mark. There is certainly firstly, in the U.S. we produce a lot more wides than we do on a relative basis to Canada. 2X4 is held up better multifamily uses a lot more 2X4; traders use a fair bit of 2X4. So the narrowest demand has been stronger through this period of higher in our usage, I think that's part of it. And as logs have gotten bigger in the South, everybody's produced more wides and so we've just to a certain degree flooded the market is what we see.

Thank you. There are no further questions. You may proceed.

Well, if there are no further questions, I want to thank everyone for their time and we look forward to talking to you in the fourth quarter. Thank you.

Thanks.

Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your lines.