The largest board room in West Fraser’s Quesnel head office was standing-room-only on Tuesday morning (April 23) as shareholders, the board of directors and company employees gathered to hear about the forestry firm’s recent progress and its projections for the coming months.
Outgoing CEO Ted Seraphim gave a brief introduction with some comments on the company, but he deferred to his soon-to-be replacement, Ray Ferris, for the bulk of the presentation.
Seraphim drew attention to big results for the company in the last fiscal year.
“When you look at our net earnings of over $800 million, that’s a record for the company. And we had sales of over $6 billion.”
He made sure to address the giant sequoia in the room, however.
“But when you look at that fourth quarter, it’s quite a stark contrast.”
Net earnings in the last quarter of the year were a very small percentage of the year as a whole, down to $29 million altogether.
“It just goes to show you how quickly things have changed,” he pointed out. “In any event, despite these challenges, the company continues to out perform our key competitors.”
The CEO pointed to a few graphs that show favourably comparing to three largest public lumber producers in North America in last year’s shareholder returns, 2017 returns, total returns since the 2006 housing recession and the returns over the last 30 years.
“Despite the cyclical nature of the industry, and I think we just showed that even with our fourth quarter results, we continue to achieve strong financial results,” he said.
“Why is that?” he asked of the audience. “It’s due to following a consistent and straightforward business strategy, maintaining a conservative balance sheet, reinvesting in our business and striving to be the high-margin and low-cost producer in each of our business segments.
“It’s also due to the values that have driven and inspired each generation of employees. We face different challenges and opportunities than we did in 1955 [when the company was first started], but we succeed when we approach them with the values our founders instilled. Those values are humility, competitiveness and teamwork and should be no different today than they were 64 years ago.”
The company has grown significantly since it began in the 1950s with just 12 employees. West Fraser now operates 47 mills across the continent and employees almost 8,700 workers.
Their futures are soon to be in the hands of Ray Ferris, who focused most of his discussion on the markets and the key challenges he thinks the company is facing moving forward.
He touched on 2018 again.
“I do think, looking back at least year’s wild ride in lumber, [that it was] something that has value. If all we said 2018 was a record year, it would not accurately describe the market dynamics that created those record results.
“Although it’s not unusual for weather and transportation challenges, particularly in Canadian SPF (Spruce Pine Fir) lumber, to occur almost annually, certainly 2018 was more challenging than normal.”
Ferris said that volatility contributed to an under-supply in the first half of the year and, as transportation improved, an over-supply in the latter half.
The challenges the company currently faces were also expanded upon.
While he addressed the softwood lumber dispute and transportation as concerns, Ferris chose to focus more on fibre, or the company’s timber base, and operational excellence.
A discussion on fibre could not be had without talking about the forest industry’s least favourite critter.
“The B.C. Mountain Pine Beetle epidemic is essentially complete … and will ultimately reduce the AAC (annual allowable cut) by millions of cubic metres,” says Ferris.
“It’s a natural disaster, and it has been playing out for more than 15 years.”
Ferris says the company has been continually re-shaping its business to accommodate the changing timber supply by investing over $550 million into B.C. operations.
“Virtually all of our mills have been touched to make sure we have the safest and most modern advanced technology in our sector,” he said.
“Our integrated platform in British Columbia – with pulp, plywood and power generation and recently pellets out in Smithers – has positioned West Fraser, although we will be smaller, to navigate well through the next mountain pine beetle impacts.”
Ferris said the epidemic was a natural disaster, but it is one that started 15 years ago, and the industry has had time to prepare for it.
“It has had an impact with our employees in Quesnel and Fraser Lake, and we will work hard to mitigate that impact to our employees and communities.”
Ferris went on to talk about the changing geography of the company.
“Fifteen years ago, West Fraser was a considerably different company. In 2004, we were largely a B.C. company with toe holds in Alberta and the U.S. South. Today that chart is essentially reversed.”
In 2019, more than 70 per cent of the company’s lumber capacity is outside of its home province. They expect that trend to continue as they realize further gains from their United States investments.
They have acquired eight sawmills in that sector and restarted another, with 1,500 new employees realizing 1.2 billion feet of production.
Ferris did acknowledge that the assets in Western Canada are some of the most modern and efficient plants in the industry, which he said, “benefit from a relentless focus on being low-cost and continued re-investment in the latest technology.”
He continued by saying, “Excellence can only be achieved when we have a team of highly-skilled people utilizing the safest and most efficient technology in a deliberate and disciplined manner. Nothing is left to chance. There is no guessing. Everyone knows what to do and how to do it.”
Lastly, Ferris revisited a point made by current Seraphim.
“We have the great fortune to have a very consistent timeless strategy that has been handed down … for almost 65 years. It’s very simple: be low-cost, re-invest our profits in people and operations and maintain a conservative balance sheet.”