Strong Roots May Assist Steady Wood Product Investment Growth
October 19, 2022
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2 minutes
The 10th annual Paper & Forest Products Conference brought together management teams covering a broad array of sector commodity segments. Participants addressed commodity markets, strategic priorities, capital-allocation biases, and balance-sheet management. The keynote address provided interesting context on North American wood products demand and mass timber growth potential.
Sean Steuart and Kasia Trzaski Kopytek of our Equity Research team highlight three key takeaways from this year's event:
Wood product manufacturers are focused on mid-to-long term demand tailwinds.
According to our participants, most North American lumber and panel producers anticipate further near-term demand downside as the rapid increase in mortgage rates undermines affordability. Presenters referenced long-term demand support (including demographic trends, the aging existing housing stock, and under-building since the 2007-2009 recession) as drivers of North American growth plans. Some management teams expect that U.S. South capacity growth will slow as the tight labour market and high turnover rates govern the industry's ability to add supply. There is also an expectation of permanent B.C. sawmill closures to address fiber constraints.
Returns to shareholders a priority.
As wood product-focused companies have entered this downturn with strong balance sheets, we expect that returns to shareholders will remain an important facet of capital allocation. With that context, there may be an anticipated tempered buyback pace compared to the past three years. Most presenters indicated a bias towards aggressive discretionary capex and ongoing interest in acquisitions to diversify regional bases and product lines. Preservation of balance sheet flexibility entering a weaker free cash flow environment is a priority for the sector.
Positive outlook for mass timber demand.
The mass timber market feeds into wood-based commercial construction. After an extended period of stops and starts, this market is just starting to gain positive momentum. Our keynote speaker suggested that mass timber may comprise 20% of the North American non-residential and multi-family construction market in 20 years (1-2% of the current market). This could be the equivalent of 3 billion board feet of lumber.
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Sean Steuart
Managing Director, Equity Research, TD Securities
Sean Steuart
Managing Director, Equity Research, TD Securities
Sean Steuart
Managing Director, Equity Research, TD Securities
Sean is a Managing Director in Equity Research at TD Securities, based in Toronto. He has covered the North American forest products industry over the past 23 years and the Canadian renewable energy sector at TD for the past 11 years. Sean has consistently been cited for the quality and accuracy of his research in Brendan Wood International and Thomson Reuters Starmine surveys.
Kasia Trzaski Kopytek
Associate, Equity Research, TD Securities
Kasia Trzaski Kopytek
Associate, Equity Research, TD Securities
Kasia Trzaski Kopytek
Associate, Equity Research, TD Securities
Kasia joined TD Securities in August 2010, and currently works in Equity Research. She began her career in 2007 in the public audit practice at Deloitte. Kasia is a Chartered Professional Accountant and a CFA Charterholder.
