Our view: On Thursday, December 2nd, we will host our annual Forest Product Conference, featuring twelve of the leading forest product companies in North America. The event will feature a series of in-depth, interactive discussions with senior executives in the industry followed by highly interactive one-on-one meetings and small group discussions. To register, please contact your RBC Institutional Salesperson for additional details and to request one-on-one meetings.

Key topics for our discussions include:

• The 2022 Outlook – With investors looking beyond 2021 results, we expect that key topics of discussion will include management outlooks for the following year. In our view, items of particular importance include: 1)expected demand conditions; 2) changes in industry capacity; and, 3) inventory levels throughout the respective supply chains.
• The impact of supply chain disruptions on commodity markets – Supply chain disruptions have had substantial impacts across industries in 2021. For customers, security of supply has become more important than ever, resulting in premium pricing for companies that can reliably deliver on time. However, producers are dealing with ongoing shortages of key products which can make it challenging to meet delivery schedules. How quickly supply chains can get back to normal is unknown, but the recent flooding in southern BC is likely to have lingering impacts on lumber and pulp markets.
• Inflationary impacts on production costs and pricing – Costs for nearly everything, including fiber, chemicals, transportation and labor, are increasing and resulting in rising production costs. Given the strong demand, most companies have been able to pass through price increases so far, but new capacity could limit the ability to pass through additional price increases unless demand improves further. We expect this balance between supply and demand will dictate returns over the next few years.
• Capital allocation – With 2021 shaping up to be another record year for many companies, the question becomes, what will they do with the free cash flow? In our view, investors have discounted industry performance due to challenges deploying capital in a value-added way. For example, investing in capacity tends to cause reduced pricing, while share repurchases tend to coincide with cyclical share price highs. We expect that executives will be thoughtful about how they deploy the excess capital from a record year.
• The Environmental case for Forest Products – In our view, the environmental benefits of forest products are underappreciated by investors and under communicated by producers. In construction, wood products reduce the carbon footprint of buildings when compared to concrete and steel and store carbon for the life of the building. New technologies such as mass timber could help to accelerate the shift to wood products. There is also increasing use of biomass to reduce carbon emissions in a sustainable way. While mature trees are cut down, forest product producers also re-plant new ones, with new growth generally absorbing carbon from the atmosphere at a higher rate.

Paul C. Quinn (Analyst) (604) 257-7048; paul.c.quinn@rbccm.com