DBRS Confirms West Fraser Timber Co. Ltd. at BBB (low), Changes Trends to Positive

DBRS Limited (DBRS) confirmed the Issuer Rating and Unsecured Debentures rating of West Fraser Timber Co. Ltd. (West Fraser or the Company) at BBB (low) and changed the trends to Positive from Stable. The confirmation actions and change in trends reflect West Fraser’s continued strong performance, ongoing commitment to maintaining a conservative financial profile and its solid business risk profile, which lead to credit metrics that are very robust for the current ratings, despite the current softwood lumber export duties. The Company’s low-cost operations, which have enabled positive operating cash flow generation even during market downturns, the good progress on the integration of Gilman Companies (Gilman) and its access to sufficient high-quality wood fibre also support the rating.

In the last 12 months (LTM) ended Q1 2018, West Fraser has delivered very strong operating results. Key drivers are the steady, albeit slow, increase in U.S. housing starts toward trend level, which supported higher lumber shipments and price realizations, as well as the continued solid performance from West Fraser’s Panels and Pulp & Paper segments. LTM Q1 2018 EBITDA of about $1.2 billion, the highest level in the Company’s history, represents a nearly 75% increase compared with the 2016 level. Operating cash flow of $920 million during the period largely covered capital spending and dividends and allowed the renewal of its normal-course issuer bid. West Fraser is also well underway in integrating Gilman, which it acquired in August 2017. Gilman lumber production assets are in the southern United States and West Fraser’s lumber capacity in the United States is approximately 42%. In addition to providing increased access to the fastest growing U.S. housing market, the Gilman assets decrease the Company’s exposure to the effects of the softwood lumber export duties imposed by the United States and provide a natural currency hedge to USD-denominated lumber prices.

West Fraser is currently paying certain duties on lumber exports to the United States. The overall impact on the Company has been and is expected to remain manageable, owing to its strong financial position. DBRS anticipates that, at some point, a negotiated settlement will be reached and West Fraser should receive cash refunds for most of the cash deposits it is currently being required to post, if the historical pattern is a guide.

Going forward, DBRS estimates that the Company will continue to benefit from the currently strong market dynamics, its increased lumber capacity and southern U.S. footprint and its commitment to a conservative financial policy. DBRS expects this commitment to continue going forward, even as the Company continues to acquire additional operating assets, pay its regular dividend, buy back shares and invest in growth and maintenance projects to keep its low-cost profile and organic growth. Therefore, the Company remains well-positioned to manage the inherent cyclicality of its underlying businesses, as well as other challenges such as the softwood lumber dispute. As opposed to 2017, in 2018, the Company will pay duties on its lumber shipped to the United States and DBRS expects credit metrics to soften slightly from their currently very strong levels. The current financial metrics are very strong for the rating and provide some buffer in case the current cycle was to enter into a downturn. In the near term, DBRS expects that West Fraser will repurchase shares using its free cash flow generation and cash on hand, which will have a muted impact on credit metrics. A continuation of very strong credit metrics and a conservative financial policy could lead to a positive rating action. On the other hand, and while currently not expected, adverse market conditions, a deterioration in the Company’s business risk profile, more impactful softwood lumber export duties or a large increase in debt to fund an acquisition or share repurchases leading to material deterioration of credit metrics over a number of years could all lead to a negative rating action.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is Rating Companies in the Forest Products Industry, which can be found on dbrs.com under Methodologies.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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