Morningstar DBRS Confirms West Fraser's Issuer Rating at BBB With Stable Trends and Withdraws the Unsecured Debentures Rating

DBRS Limited (Morningstar DBRS) confirmed West Fraser Timber Co. Ltd.'s (West Fraser or the Company) Issuer Rating at BBB with a Stable trend. Morningstar DBRS also discontinued and withdrew West Fraser's Unsecured Debentures rating following repayment.

KEY CREDIT RATING CONSIDERATIONS
Despite the rate cut announcements over last few quarters by the U.S. Fed and Bank of Canada, the interest rates continued to remain above pre-pandemic levels, which have resulted in weaker housing construction and Repair/Remodeling (R&R) activity. As a result, the lumber and OSB prices remained soft throughout 2024, consistent with our expectations. We also expect the prices to remain subdued through 2025 as the effects of anticipated rate cuts materialize and drive a meaningful recovery in housing demand and construction activity. The earnings profile of the Company for the last 12 months (LTM) ending September 2024 was in line with 2023 results with some improvement in profitability. This was primarily driven by strategic actions, including curtailments of higher-cost mills, transitioning production to lower-cost facilities, and targeted investments in modernization projects. Additionally, the Company focused on optimizing its product mix and improving its operating efficiency in the U.S. South.

We expect West Fraser's performance in 2025 to remain consistent with 2024, supported by ongoing demand stabilization along with completion of modernization projects like the Henderson sawmill and Allendale OSB plant which positions the Company to maintain competitive margins. However, lingering headwinds, including elevated softwood lumber duties and the ongoing impacts of higher interest rates on housing affordability, may temper their growth potential in near term. 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, we expect the Company to gain from R&R activity and new housing construction activity once interest rates start to moderate.

Our forecast considers conservative lumber and OSB pricing for 2025. As a result of low leverage, the Company's key credit metrics, including debt-to-EBITDA ratio, are expected to remain under 1.0 times (x), thus supporting the Company's BBB Issuer Rating.

CREDIT RATING DRIVERS
A positive credit rating action will require a material improvement in the Company's business risk profile. Although unlikely, a negative rating action could be triggered 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.

EARNINGS OUTLOOK
Lumber and OSB prices are largely linked to U.S. housing construction activity. After peaking in the first half of 2021, lumber and OSB prices have been mostly subdued as North American housing construction activity contracts due to elevated interest rates, inflationary cost pressures, and a slowing economy. Despite these near-term headwinds, the Company expects, over the medium and longer term, that an aging housing stock, the acceptance of remote working, and growing market penetration in industrial and commercial applications should be key drivers in supporting the demand for new housing in North America and, in turn, the demand for wood building products. However, if a 25% tariff on Canadian exports to the U.S. is imposed, as suggested under the incoming Trump administration, West Fraser's earnings could potentially face a significant impact. We believe that the Company could partially offset the impact of such tariffs as a result of potential shift in demand supply dynamics for Southern Yellow Pine (SYP) lumber, benefiting the Company as it has significant SYP operations in the U.S. South, which is not subjected to such tariffs. Also, given low leverage levels and strong financial flexibility, the company should be in a position to absorb some of the impact of tariffs.

FINANCIAL OUTLOOK
Operating cash flow is anticipated to remain subdued in 2025 if interest rates remain elevated, which will cause headwinds for North American housing construction activity, weighing on demand and pricing for wood building products. Morningstar DBRS expects the Company to maintain a conservative capital spending program as demonstrated in 2024.

CREDIT RATING RATIONALE
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 (OSB products, which constitute the majority revenue for the Company, is highly correlated to housing construction activity, which is typically volatile.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of West Fraser, the relative weighting of the BRA factors was approximately equal.

(B) Weighting of FRA Factors
In the analysis of West Fraser, the relative weighting of the FRA factors was approximately equal.

(C) Weighting of the BRA and the FRA
In the analysis of West Fraser, the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in the Mining and Forest Products Industries (November 14, 2024), https://dbrs.morningstar.com/research/442961

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024; https://dbrs.morningstar.com/research/431186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:
-- Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186
-- Morningstar DBRS Criteria: Approach to ESG Factors in Credit Ratings (August 13, 2024)
https://dbrs.morningstar.com/research/437781

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

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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@morningstar.com.

The credit rating was not initiated at the request of the rated entity.

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

Morningstar DBRS 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. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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