INVESTOR PRESENTATION November 2018 TSX:WEF Forward Looking - - PowerPoint PPT Presentation

November 2018

INVESTOR PRESENTATION

TSX:WEF

1

Forward Looking Statements and Non-GAAP Financial Measures

All financial references are expressed in C$ unless otherwise noted. This presentation contains statements and estimates that may constitute forward-looking statements under the applicable securities laws. Readers are cautioned against placing undue reliance on forward-looking statements. All statements herein, other than statements of historical fact, may be forward-looking statements and can be identified by the use of words such as “will”, “estimate”, “project”, “expect”, “anticipate”, “plan”, “intend”, “believe”, “seek”, “should”, “likely”, “pursue” and similar references to future periods. Forward-looking statements in this presentation include, but are not limited to, statements relating to our current intent, belief or expectation with respect to: domestic and international market and economic conditions; our growth, marketing and capital allocation plans and strategies; our competitive position and expectations regarding future competition; regulatory developments, including, but not limited to, annual allowable cut levels; and product pricing and logistics. Although such statements reflect management’s current reasonable beliefs, expectations and assumptions as to, amongst other things, the future supply and demand of forest products, global and regional economic activity and the consistency of the regulatory framework within which the Company current operates, there can be no assurance that forward-looking statements are accurate, and actual results and performance may materially vary. Many factors could cause our actual results or performance to be materially different including: general economic conditions, international demand for lumber and logs, competition and selling prices, international trade disputes, changes in foreign currency exchange rates, labour disruptions, natural disasters, relations with First Nations groups, changes in laws, the availability of fibre and annual allowable cut, changes in regulations or public policy affecting the forestry industry, changes in opportunities and the factors discussed in the Company’s annual MD&A, which is available on our website at www.westernforest.com. The foregoing list is not exhaustive, as other factors could adversely affect our actual results and performance. Forward-looking statements are based only on information currently available to us and refer only as of the date hereof. Except as required by law, we undertake no obligation to update forward-looking statements. During the course of this presentation, certain non-GAAP financial information will be presented. Definitions and reconciliation of terms can be found in the Company’s annual and quarterly MD&A for Western Forest Products Inc. (the “Company”).

2

Investment Highlights – Why WFP?

• Margin-focused strategy with exposure to growing lumber demand
• Superior timber asset base and secure fibre supply
• High-value, diverse products serving global markets
• Strong financial position and attractive dividend
• Stability of earnings due to specialty product focus
• Business of scale and leader in our key markets
• Committed to enhancing shareholder value

Western is well-positioned to capitalize on improving market fundamentals

Mill Location Capacity1 (MMfbm) Saltair Ladysmith, BC 240 Cowichan Bay Duncan, BC 215 Alberni Pacific Port Alberni, BC 175 Ladysmith Ladysmith, BC 130 Chemainus Chemainus, BC 130 Duke Point Nanaimo, BC 90 Somass2 Port Alberni, BC 90 Total 1,070

3

Operations Snapshot

• Margin-focused, log and specialty

lumber company

• Serving global markets from Coastal

B.C. and Washington

– Largest Crown timber tenure holder in Coastal B.C. – Leading cedar lumber, timbers and Japan square manufacturer in North America – Forest resource unaffected by mountain pine beetle

• Lumber capacity in excess of one

billion board feet at 7 sawmills

• Three centralized remanufacturing

facilities

BC WA

Vancouver (Head Office)

Canada U.S.

Strategically located manufacturing locations with secure fibre supply

(1) Based on two shifts and 250 operating days, except Chemainus at three shifts (2) Indefinitely curtailed July 2017

57% 21% 15% 7%

Specialty Lumber Commodity Lumber Logs By-products

37% 24% 16% 13% 8% 2%

Canada United States China Japan Other Europe

4

Financial Snapshot

• LTM1 revenue of $1.2 billion
• LTM1 EBITDA of $164 million
• Market cap. of ~$750 million2
• Quarterly dividend of

$0.0225 per share

– $0.09 per share annually

• Well capitalized balance

sheet

– Currently in a net cash position

Strong financial performance, net cash position and attractive dividend

(1) Last twelve months ended September 30, 2018 (2) Based on closing share price of $1.90 on November 8, 2018

LTM1 Sales by Product LTM1 Sales by Geography

78% Lumber 61% Canada & U.S.

$1.2

billion

$1.2

billion

Final destination

• f a portion of

Canadian sales are to international markets

5

Executing on Strategic Priorities

Focus on growing long-term shareholder value

• Strategic capital

improvement projects

• Invest in people and

systems to create a platform for growth

• Consolidation of

coastal operating base

Strengthen Foundation Grow the Base

• Optimize operations
• Targeted products of

scale to selected customers

• Margin improvement

program

• Mutually beneficial

relationships with coastal First Nations

Explore Opportunities

• Pursue margin-

focused business

• pportunities that

complement our position in selected markets

1 2 3

6

Growth Opportunity: New Wholesale Lumber Business Unit

• Form strategic agreements with global suppliers, enabling WFP to broaden

the scope of our specialty products offerings

• Combination of WFP’s existing product portfolio and complementary supply

from new strategic relationships, will enable WFP to offer an expanded product line that will deliver greater value to our customers

– Will make our existing business and product offerings stronger

• New products will originate in the U.S., Asia, Europe and Canada

– Comprised of finished products, as well as lumber products that could be further processed at Arlington or with other strategic remanufacturing partners

• Newly appointed Don McGregor, VP Wholesale Lumber, will lead the group

– Approximately 30 years of lumber marketing experience, including over 20 years at a leading wholesale lumber company

Growing global supply of targeted specialty products for our selected customers

7

Margin Strategy / Fibre and Processing Flow Chart

Timber resource is directed to highest margin opportunity

(1) Based on the twelve months ended September 30, 2018

Hemlock / Balsam Western Red Cedar Douglas Fir Yellow Cedar Annual Allowable Cut (AAC) For Logs (~6.0 million m3) Log Purchases(1) (~1.2 million m3) External Log Sales Internal Log Consumption

Japan Specialty Western Red Cedar Niche Export Log Markets Domestic Log Markets Pulp Log Markets Commodity

Spruce

Raw Inputs Finished Products / Sales

~70% of Logs Processed at WFP sawmills and custom cut division ~30% of Logs Sold (by volume) Diverse and Unique Species Mix Lumber Segments Log Markets

Standing Timber Log Availability Margin Decision Market Segments

20% 7% 3% 70% 21% 3% 3% 73%

8

Log Markets Determine Margin Decision

Directing log volume to highest margin opportunity

Log End Market Description Primary Target Geographies

WFP Sawmills

• All five species of Western’s sawlogs

consumed by internal manufacturing

• perations
• Internal log supply supplemented by
• pen market purchases to maximize

margin

Domestic

• Includes sawlogs, peelers (for

engineered wood applications) and shingle logs sold through contractual commitments and open market transactions

Pulplogs

• Volumes committed under long-term

fibre supply agreements

• Commitments met through internal log

supply, supply contracts and open market pulplog purchases

Export

• Represents log sorts produced in

excess of internal mill requirements

• Typically command premium prices

due to strong demand

• Transportation optimization

(1) Based on total external log sales and internal log consumption for the twelve months ended September 30, 2018, including purchased logs. Internal transfer values based on Vancouver Log Market prices (2) Net of freight and fee in lieu

External Log Sales

LTM1 Logs by Value LTM1 Logs by Volume

27% External Log Sales 30% External Log Sales

$662

million(2)

5.4

million m3

9

Manufacturing and Sales

Log Supply Marketing Strategy Manufacturing Strategy Sales Strategy

11 - 18” 5 – 11” 16 - 22” 20 - 30” 24”+

Log Cutting Patterns Log Dimension Product Group Lumber Product Type

Narrow Dimension Wide Dimension Squares Timbers Grade & Appearance Commodity Commodity / Western Red Cedar Japan Niche / Western Red Cedar Niche / Western Red Cedar

Log diameter and margin determines lumber products manufactured

Flexible manufacturing platform presents unique opportunity to create margin

42% 20% 11% 27% 25% 16% 10% 49%

10

Diversified Lumber Product Offering

Allows Western to profitably service multiple markets throughout the cycle

(1) Based on lumber sales for the twelve months ended September 30, 2018

Lumber Products Description Primary Target Geographies

Western Red Cedar

• Consumer-orientated products
• Premier softwood for external

applications

• Naturally durable

Japan Specialty

• Specialized products for

specific end uses

• Requires unique and rigorous

quality standards

Niche

• Specialty products and

markets

• Focused on appearance

grades, value-add products

Commodity

• Traditional dimension lumber

and developing grades

• Currently focused on China

Specialty Products

Asia Europe

LTM1 Lumber by Value LTM1 Lumber by Volume

73% Specialty 51% Specialty Global

$929

million

862

MMfbm

11

Sample Lumber Products

Diverse product offering manufactured from sustainably harvested coastal forest profile

12

Arlington, Washington Lumber Distribution and Processing Facility Update

• Acquired January 2018 for $11.6 million

– 18 acre distribution and processing facility; 170,000 sqft covered storage – Rail spur on site serviced by BNSF

• Complementary to our lumber sales strategy

– Increase production of targeted specialty products and expanded finishing capacity – Increase margins by growing sale of finished products, closer to the end customer – Centralized warehousing and distribution near the high value U.S. west coast corridor

• Capital improvements update

– Site and infrastructure improvements completed in Q2-18, enabling distribution activity to commence from the site – Equipment installation is on schedule and expect to begin secondary processing

• perations in early Q1-19

Arlington creates centralized distribution and growth in finished products

13

Arlington Photos: Equipment Installation Continues on Schedule

Packager Grading area and trimmer Trimmer decline Trimmer

$1,077 $606 $745 $698 $660 Peer 1 Peer 2 Peer 3 Commodity Lumber 6.1% 11.5% 13.8% 2010 to 2012 2013 to 2015 LTM

14

Specialty Product Focus

• 73% of lumber revenue is

generated from non- commodity products

• Significant premium to

commodity lumber

• More stable margins through

the cycle vs. commodity peers

• Product / market diversity and

global exposure provide additional opportunities to seek best margin

• Cedar, niche and commodity

grades will benefit from U.S. housing recovery and global demand

Focus on specialty products delivered 36 consecutive quarters of positive EBITDA

(1) Includes chips, residuals and logs, as information not separately disclosed (2) KD W S-P-F #2&Btr 2x4 random converted from US$ to C$

LTM Average Lumber Selling Price (C$ / mfbm) WFP Average EBITDA Margins

(2) (1)

1,109 1,290 1,015 1,095 990 1,100 997 983 Q1 Q2 Q3 Q4 Average Harvest Volume Average Closing Log Inventory 211 226 218 214 Q1 Q2 Q3 Q4

15

Seasonality of the Business

• Weather (snow pack, heat)

and daylight can impact harvest volumes and costs

• Inventory levels can fluctuate

through the year, impacting working capital

• Seasonal market demand

can impact lumber production Seasonal influences can impact operations

(1) Based on last 16 quarters as of Q3-18

Harvest Production and Log Inventory Volume1 – (000 m3) Average Lumber Production Volume1 – (MMfbm)

16

Capital Allocation Approach

• Investing in high return capital projects in our existing business

– Reducing costs, increasing efficiency and growing production capacity

• Maintaining a sustainable dividend

– Returned $168 million to shareholders since implementing dividend in 2013

• Acquisitions and growth opportunities

– Pursue margin-focused business opportunities that complement our position in selected markets – Must make strategic and financial sense through the lumber cycle

• Continue to be opportunistic under our normal course issuer bid (“NCIB”)

– Will be opportunistic, yet prudent when buying back shares – Complementary to our dividend program

Balanced approach to capital allocation; create long-term shareholder value

17

Strategic Capital Investments

• Capital projects expected to

generate a return in excess of 20%

• Initiatives focused on:

– Reducing costs – Increasing efficiency – Increasing production of targeted products – Growing production

• Applying proven technology in

coastal operations Capital projects benefiting operations

Duke Point

Planer Planer Head Rig

Chemainus

Timber Deck Timber Deck

Saltair

Merchandiser

18

Competitive Strengths

• Sustainable, diverse timber base providing a unique range of products
• Customer of choice for other coastal log producers due to competitive

advantages of scale, financial strength and proximity

• Flexible manufacturing platform that can target a variety of global

markets

• High margin specialty products for the U.S. market – cedar, timbers,

moulding & millwork, industrial applications

• Low cost access to ocean shipping (break bulk, container & barge) to

global markets

• Warehousing and distribution facility to service U.S. customers in high

value U.S. west coast corridor

Western is a compelling pure-play, solid wood products investment

1 2 3 4 5 6

19

How is WFP Different From Its Public Lumber Peers

• Pure play lumber and log, specialty company
• Cedar and specialty products focused with commodity lumber component

– Peers focused on commodity lumber with some specialty products – Significantly higher average product pricing versus commodity lumber peers

• No mountain pine beetle impacted fibre
• No material rail or truck transportation issues; ocean going advantage

– WFP uses the BNSF railway line to ship products

• Offers an attractive dividend yield to investors

– Quarterly dividend of $0.0225 per share ($0.09 per share annually) 1 2 3 4 5

20

Demonstrating Sustainability and Environmental Stewardship

• Operate a seed orchard and a seedling nursery

that produces over 6 million seeds per year

• All of Western’s timber tenures are certified

according to globally recognized standards, including:

– Sustainable Forestry Initiative – Canadian Standards Association – Chain of Custody (PEFC and FSC)

• Third party independent audits are conducted

annually of Western’s Environmental Management Systems

• Western participates in energy conservation

programs, such as the Sustainable Energy Management Program with BC Hydro

Committed to ensuring the sustainability of the natural resources in our care

Appendix

Supplemental Materials

22

Western’s Business to Benefit from Global Supply and Demand Factors

Factors Highly Attractive Underlying Supply / Demand Dynamics U.S. Economic and Housing Market Recovery

• Housing market and repair and remodel activity recovering from

trough levels

• Transition from supply driven to demand driven market expected to

result in improved pricing for wood products Continued Growth in China

• Economic growth and urbanization
• Consumption of wood will increase
• Limited domestic fibre supply; increasing need for imports

U.S. Supply Exit from Japan Market

• Repatriation of U.S. lumber exports back to U.S. market creates
• pportunity for Western
• Government policy designed to increase domestic consumption

Canadian Fibre Supply Reduction

• Mountain pine beetle to negatively impact B.C. interior fibre supply

and lumber production

• Eastern Canada AAC reductions

Strong Underlying Demand Drivers for Wood Products Reduced Supply

• f Fibre

1 2 3 4

$118 $128 $148 $137 $130 $125 $115 $117 $122 $115 $115 $122 $130 $138 $158 $161 $163 $170 $177 $179 50 100 150 200 2003A 2004A 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017A 2018E 2019E 2020E 2021E 2022E Expenditures (US$ billions) 1.85 1.95 2.07 1.81 1.34 0.90 0.55 0.59 0.61 0.78 0.93 1.00 1.11 1.18 1.21 1.30 1.40 1.49 1.61 1.48 0.0 0.5 1.0 1.5 2.0 2.5 2003A 2004A 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017A 2018E 2019E 2020E 2021E 2022E Housing Starts (millions) 50-Year Average: 1.4MM

23

Demand Drivers: U.S. Economic and Housing Market Recovery

1

U.S. Housing Starts U.S. Repair & Remodel Expenditures

Source: Forest Economic Advisors (November 2018)

50 150 250 350 450 550 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 2003A 2004A 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017A 2018E 2019E 2020E 2021E 2022E US$ per Mfbm Housing Starts (MM) U.S. Housing Starts Canada Housing Starts NA Lumber Exports (Housing Starts Equivalent) KD SPF 2x4 2+Btr (US$) (Actual) KD SPF 2x4 2+Btr (US$) (FEA Projections) Average NA Housing Starts (since 1990) = 1.3MM

24

Demand Drivers: New Supply / Demand Dynamics Will Positively Impact Lumber Pricing

• Reduced supply from traditional sources combined with increased demand

from U.S. and Asian markets is expected to benefit lumber prices

1

Source: Forest Economic Advisors (November 2018); Western Forest Products

Housing Starts (North American and Lumber Export Equivalent) vs. Western SPF Lumber Pricing

5 10 15 20 25 30

'06A '07A '08A '09A '10A '11A '12A '13A '14A '15A '16A '17A LTM Mar-18

million m³ Russia New Zealand North America 5 10 15 20 25 30 35 40

'06A '07A '08A '09A '10A '11A '12A '13A '14A '15A '16A '17A LTM Mar-18

million m³ Russia New Zealand North America

25

Demand Drivers: China Growth Has Changed Global Wood Products Demand Dynamics

• A deficit of domestic fibre will require China to rely on imports
• Rising wealth / urbanization trends expected to increase demand for

structural and higher grade lumber:

– 300 million Chinese people (roughly equivalent to the U.S. population) expected to move from rural to urban areas between 2010 and 2025

2

Source: China Customs; International Wood Markets (April 2018)

China Log Imports Chinese Lumber Imports

200 400 600 800 1,000 1,200 1,400 2007A 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017A LTM Sep-18 Lumber Imports (million m3) U.S. Hem U.S. Douglas Fir CDN Hem CDN Douglas Fir 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 500 1,000 1,500 2,000 2,500 3,000 2007A 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017A LTM Sep-18 Housing Starts (millions) Lumber Imports (million m3) Softwood Lumber Imports from U.S. Softwood Lumber Imports from Canada Japan Housing Starts

26

Demand Drivers: U.S. Supply Exit From Japan Will Create Market Opportunity

• Japan continues to be a major source of demand for wood products and

lumber from North America

• In recent years, suppliers in the U.S. West have increased export activities to

Japan due to a lack of domestic demand in the U.S

– As North American housing markets recover, much of this U.S. supply will be diverted back to local U.S. markets, potentially creating a significant supply gap in Japan for imported lumber

3

Source: Japan Ministry of Land, Infrastructure and Transport; The Trade Statistics, Japan Ministry of Finance; Japan Lumber Importers’ Association (October 2018)

Japanese Lumber Imports of Canadian and U.S. Douglas Fir and Hemlock Japanese Imports of Canadian and U.S. Lumber and Japanese Housing Starts

~100 million board feet opportunity to replace non-SPF U.S. exports to Japan

30.5 30.5 24.3 24.3 24.3 24.3 23.3 23.3 23.3 23.3 20.0 20.0 21.2 21.2 21.2 23.0 23.0 23.0 23.0 23.0 10 20 30 2003A 2004A 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017A 2018E 2019E 2020E 2021E 2022E AAC (million m3) 55.4 62.2 64.1 65.7 68.0 67.0 66.9 66.4 61.5 60.8 61.3 60.7 62.1 56.5 50.3 50.3 50.3 49.3 49.3 48.8 20 40 60 80 2003A 2004A 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017A 2018E 2019E 2020E 2021E 2022E AAC (million m3)

27

Supply Drivers: Canadian Fibre Supply Reduction

4

Source: Forest Economic Advisors (November 2018)

Mountain Pine Beetle epidemic and lower AAC in B.C. and Eastern Canada are expected to have significant negative impact on North American lumber capacity

B.C. Interior AAC Quebec AAC

669 811 894 895 909 883 935 839 862 2010 2011 2012 2013 2014 2015 2016 2017 LTM Q3-18 5.5% 7.2% 5.5% 13.2% 10.5% 10.8% 12.5% 13.3% 13.8% 2010 2011 2012 2013 2014 2015 2016 2017 LTM Q3-18 $37 $62 $51 $129 $109 $117 $148 $153 $164 2010 2011 2012 2013 2014 2015 2016 2017 LTM Q3-18 $668 $854 $925 $978 $1,037 $1,082 $1,187 $1,143 $1,195 2010 2011 2012 2013 2014 2015 2016 2017 LTM Q3-18

28

Historical Financial Snapshot – Annual

Revenue ($ millions) Lumber Shipments (MMfbm) Adjusted EBITDA ($ millions) Adjusted EBITDA Margin %

231 225 194 220 200 215 235 212 Q4-16 Q1-17 Q2-17 Q3-17 Q4-17 Q1-18 Q2-18 Q3-18 11.5% 11.8% 16.4% 11.4% 13.7% 14.7% 15.3% 11.0% Q4-16 Q1-17 Q2-17 Q3-17 Q4-17 Q1-18 Q2-18 Q3-18 $34 $34 $47 $33 $39 $43 $50 $32 Q4-16 Q1-17 Q2-17 Q3-17 Q4-17 Q1-18 Q2-18 Q3-18 $293 $288 $287 $285 $283 $292 $328 $293 Q4-16 Q1-17 Q2-17 Q3-17 Q4-17 Q1-18 Q2-18 Q3-18

29

Historical Financial Snapshot – Last 8 Quarters

Revenue ($ millions) Lumber Shipments (MMfbm) Adjusted EBITDA ($ millions) Adjusted EBITDA Margin %

n/a n/a n/a $16 $31 $32 $32 $32 $34 2010 2011 2012 2013 2014 2015 2016 2017 LTM Q3-18 $100 $52 $15 $83 $78 $54 $15 ($35) ($43) 2010 2011 2012 2013 2014 2015 2016 2017 Q3-18 $12 $19 $32 $59 $50 $62 $56 $55 $75 2010 2011 2012 2013 2014 2015 2016 2017 LTM Q3-18 $61 $60 $42 $124 $94 $106 $157 $129 $147 2010 2011 2012 2013 2014 2015 2016 2017 LTM Q3-18

30

Historical Cash Flow, Capital Allocation and Debt

Cash Flow from Operations1 ($ millions) Net Debt / (Cash) ($ millions) Capex2 ($ millions) Dividends ($ millions)

(1) Before changes in non-cash working capital (2) Additions to property, plant and equipment; excludes acquisition capex

31

Timber Tenures and Facilities

32

Analyst Coverage

Analyst Firm Analyst Name Contact

CIBC World Market Hamir Patel

• 604 331-3047
• hamir.patel@cibc.com

Raymond James Daryl Swetlishoff

• 604 659-8246
• daryl.swetlishoff@raymondjames.ca

RBC Capital Markets Paul Quinn

• 604 257-7048
• paul.c.quinn@rbccm.com

Scotiabank Benoit Laprade

• 514 287-3627
• benoit.laprade@scotiabank.com

TD Securities Sean Steuart

• 416 308-3399
• sean.steuart@tdsecurities.com

33

Investor Relations Contacts

These materials have been prepared by Management of the Company. No regulatory authority has approved or disapproved of the contents of these materials. These materials do not constitute an

• ffer to sell or the solicitation of an offer to buy any securities of the Company and shall not

constitute an offer, solicitation or sale of the Company’s securities in any jurisdiction in which such

• ffer, solicitation or sale would be unlawful. Securities of the Company may not be offered or sold in

the United States absent their prior registration or qualification or an applicable exemption from the applicable registration or qualification requirements.

Stephen Williams

Executive Vice President & Chief Financial Officer 604-648-4572 swilliams@westernforest.com

Dallyn Willis

Senior Director, Finance & Administration 604-648-4595 dwillis@westernforest.com