DBRS Morningstar Confirms West Fraser Timber Co. Ltd. at BBB, Maintains Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Unsecured Debentures rating of West Fraser Timber Co. Ltd. (West Fraser or the Company) at BBB. All trends remain Stable. The Company's ratings are underpinned by its large size, low-cost operations, diversification across a wide range of forest products and markets including North America and Europe, financial resilience through a commitment to a conservative financial policy, and solid record of navigating through business cycles. The ratings are constrained by West Fraser’s high exposure to the inherent volatility of the forest products industry. DBRS Morningstar notes the Company’s acquisition of Norbord Inc. (Norbord) materially increased West Fraser’s scale and improved market/product diversification. However, it did not mitigate West Fraser's exposure to cyclicality in the housing construction segment as lumber prices and oriented strandboard (OSB) prices, which account for most of Norbord’s production capacity, have historically exhibited a high degree of correlation with housing activity.

West Fraser reported very strong earnings and operating cash flow for the last 12 months (LTM) ended September 2022 and F2021 as a result of the Norbord acquisition (completed February 1, 2021) and very strong pricing for lumber and OSB, particularly during F2021. The Company generated a free cash flow (FCF; after dividends and capital expenditure) surplus of $1.92 billion during the LTM ended September 2022 and $3.15 billion for F2021. West Fraser has largely deployed FCF surpluses and available cash on hand to reduce debt, buy back shares, and fund the acquisition in late 2021 of two mills in the Southern U.S. The Company has a favourable liquidity profile with cash and cash equivalents of $1.32 billion at September 30, 2022, and a $1.0 billion undrawn revolving credit facility.

Since Q2 2022, lumber and OSB prices have fallen sharply as interest rates rise and housing construction activity contracts. If interest rates remain elevated or continue to rise, DBRS Morningstar believes housing construction activity will continue to soften. As a consequence, West Fraser’s key credit metrics will likely deteriorate in 2023 and possibly stay weak through 2024. Nonetheless, the Company’s favourable liquidity profile; low level of debt; and low cost, diversified operations will enable it to manage through a more challenging market environment.

Even though DBRS Morningstar’s forecast takes into account considerably lower sales through 2024, the Company’s key debt-to-EBITDA ratio is likely to still be below 1.0 times (x), thus supporting the Company’s BBB Issuer Rating. While a positive rating action will require a material improvement in the Company's business risk profile, the ratings could be negatively affected if there is a sustained and material deterioration its financial risk profile such that the debt-to-EBITDA ratio rises above 2.5x and remains there for some time.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

There were no environmental, social, and governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is Global Methodology for Rating Companies in the Forest Products Industry (August 29, 2022; https://www.dbrsmorningstar.com/research/402116), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.

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 [email protected].

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

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

DBRS Morningstar 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 [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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