DBRS Morningstar Confirms West Fraser Timber Co. Ltd. Credit Ratings at BBB With Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Unsecured Debentures credit rating of West Fraser Timber Co. Ltd. (West Fraser or the Company) at BBB with Stable trends. The Company's credit 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, conservative financial policy, and the demonstration of a solid record of navigating through business cycles. The credit ratings continue to be constrained by the Company's high exposure to the inherent volatility of the forest products industry. The demand for lumber and oriented strand board (OSB) products, which constitute the majority revenue for the Company, is highly correlated to housing construction activity, which is typically volatile.

As a result of rising interest rates, which have softened demand in housing construction, lumber and OSB prices witnessed a sharp decline from the second quarter of 2022, which remained subdued in 2023 as well. As a result, the Company witnessed a sharp decline in its earnings and cash flows for the last 12 months (LTM) ending September 30, 2023. DBRS Morningstar expects housing construction activity to remain modest through 2024 as well. However, West Fraser's very favourable liquidity profile, with low levels of debt, low cost structure, and diversity in operations enables it to manage through this challenging market environment. Being one of the largest lumber and OSB suppliers in North America, DBRS Morningstar expects the Company to gain from remodelling and new housing construction activity once interest rates start to moderate.

As a result of a low lumber and OSB pricing environment coupled with high inflationary costs, the Company reported a negative free cash flow for the LTM September 30, 2023. West Fraser also revised its capital expenditure targets for F2023 to $450 million from the initial advised range of $500 million to $600 million. The Company also demonstrated a conservative approach in terms of its share buyback program in F2023. For the first half of F2023, the Company did not repurchase its shares. West Fraser continues to maintain a favourable liquidity profile with cash and cash equivalents of $1.2 billion at September 30, 2023, and a $1.0 billion undrawn revolving credit facility.

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

ESG CONSIDERATIONS
There were no environmental, social, or governance factors or consideration with 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/416784 (July 4, 2023).

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

DBRS Morningstar applied the following principal methodologies:
-- Global Methodology for Rating Companies in the Forest Products Industry (March 28, 2023) https://www.dbrsmorningstar.com/research/411584

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

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.

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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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].

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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