Canfor Corporation

Good morning, ladies and gentlemen, and welcome to the Canfor and Canfor Pulp fourth quarter analyst call. A recording and transcript of the call will be available on Canfor's website. During the call, Canfor and Canfor Pulp's chief financial officer will be referring to a slide presentation that is available in the investor relations section of the company's website. Also, the company's We'd like to point out that this call will include forward-looking statements, so please refer to the press releases for the associated risks of such statements. And I would like to turn the conference over to Mr. Don Kane, Canfor and Canfor Pulps Chief Executive Officer. Please go ahead, Mr. Kane.

Okay, thank you, Operator, and good morning, everyone. Thank you for joining the Canfor and Canfor Pulp Q4 2018 Results Conference Call. I'll make a few comments before I turn things over to Alan Nicol, our Executive VP of Canfor Pulp Operations and Chief Financial Officer of Canfor Corporation and Canfor Pulp. Alan will provide a more detailed overview of our performance in Q4. Joining Alan and I today are Kevin Pankratz, Senior VP of Sales and Marketing, and Stephen Mackey, Senior Vice President of Canadian Operations. I would also mention that in January, Kevin Pankratz assumed the responsibility for the sales and marketing of our pulp group in addition to our lumber group, and Ryan Ewan, who has had several years of increasing responsibilities in our pulp group, was appointed vice president of pulp paper sales and marketing. Before I discuss the fourth quarter, I'd like to make a couple of comments about 2018. Canfor Pulp reported record operating income of $247 million and a return on invested capital of 37%. Canberra Corporation reported operating income of $609 million, the highest in over 10 years, and a return on invested capital of 19%. These results were achieved in a year which featured extreme transportation challenges, extreme weather events, significant forest fires, log supply constraints, significantly higher log costs, and market volatility. Despite these many challenges, our people performed exceptionally well under these difficult circumstances. During the year, we completed our $100 million investment in green energy upgrades at Taylor and Northwood. In addition, our $350 million board-foot, $125 million U.S. dollar organic capital program at our U.S. South operations remains on track to be substantially completed by the end of 2019. The spending includes large sawmill rebuilds at Camden, South Carolina and Moultrie, Georgia, a new planer at Fulton, Alabama, and continuous dry kilns at Darlington, South Carolina, and Urbana, Arkansas. Now turning to the fourth quarter, earnings were significantly impacted by a sharp decline in market pricing for both lumber and pulp with a consolidated operating loss of $79 million. For Canfor Pulp, the company had a challenging quarter, generating operating income of $16 million, which was down significantly from the third quarter, principally due to lower shipment levels reflecting repair work on our recovery boiler at Northwood and a natural gas pipeline explosion near Prince George. Total scheduled and unscheduled downtime reduced our MBSK production by 90,000 tons. Global softwood craft pulp markets are projected to remain steady throughout the first half of 2019, reflecting a forecast increase in demand in China, and reduce supply due to the traditional spring maintenance period for our pulp mills. Moving to our lumber business, we reported an operating loss of $88 million. Lumber production was down significantly in the quarter, reflecting a series of production curtailments in British Columbia and inclement weather in the U.S. South, which impacted log inventories, log profiles, and overall manufacturing costs. We have further curtailed our BC operations in Q1 by 90 million feet across our system, primarily at Bavinby, Houston, and McKenzie due to continued log supply constraints, significantly increased log costs, and market conditions. We will continue to review our operating rates as market conditions warrant. Current markets have been challenging. However, our outlook is for pricing to stabilize and gradually increase, which we have begun to see in early 2019. We expect a normal seasonal pickup in demand to coincide with relatively low inventory and supply chains and have seen strong increases in both our retail and builder business. Demand from offshore markets continues positive after a strong Q4 and expected to remain solid through the first quarter of the year. Overall supply continues to be impacted in BC with an estimated 1 billion board feet of announced temporary or permanent capacity reductions. We are encouraged that a memorandum of agreement for a new five-year term has been reached with the USW. The agreement includes seven of CanCorp's certified mills in British Columbia. The USW will be conducting ratification votes on the agreement over the coming weeks. In addition, we have three mills represented in the negotiation process being led by the Interior Forest Labor Relations Association. We remain optimistic that a settlement will be reached between the association and the USW. Transportation networks have been generally good, but we are seeing increased challenges due to significant cold weather in parts of Western Canada. With respect to our previously announced Greenfield Mill in Washington, Georgia, we are deferring any decision on this project to the end of 2019. This decision is based on challenging market conditions and inflationary cost pressures. In terms of softwood lumber agreement, there are currently no negotiations underway. In early December, a NAFTA panel was formed that includes three Canadian and two American panelists. We'll be following the decisions of the panel very closely. Finally, we are anticipating closing the VITA transaction shortly. We are extremely excited about our investment in Europe as it further diversifies our business from both a geographic and product profile standpoint, an earnings profile that is much more consistent than what we typically see here in North America. This purchase supports our long-term strategy of growing our high-value and non-commodity lumber businesses and further positions the company for strong, stable earnings in the future. I will now turn the call over to Alan Nicol, who will provide an overview of our financial results.

Thank you, John, and good morning, everyone. My comments will focus principally on our financial performance for the fourth quarter by reference to the previous quarter. And full details of our results are contained in the Canfor pulp and Canfor news releases, both of which were issued yesterday afternoon. As always, you'll find an overview slide presentation on both the Canfor and Canfor pulp websites in the investor relations section under webcasts. And the presentation highlights consolidated and segmented results, and I'll be referring to this presentation during my comments. For the fourth quarter of 2018, Canfor reported the shareholder net loss of $52 million, or 42 cents a share. down from net income of $125 million, or $0.98 a share, reported for the third quarter, and net income of $132 million, or $1.02 a share, reported for the fourth quarter of 2017. On slide three of our presentation, we highlight various non-operating items, net tax and non-controlling interests, which affect the comparability of our results between the quarters. In the fourth quarter of 2018, these items totaled $24 million, the largest being a $29 million expense related to counterfeiting and anti-dumping duty deposits. After adjusting for these non-operating items, the shareholder net loss was $28 million, or 23 cents a share, for Q4, compared to net income of $157 million, or $1.23 a share, for the third quarter. As highlighted on slide 6 of our presentation, the lumber segment recorded an operating loss of $88 million for Q4, down $237 million from the previous quarter. After adjusting for CVD and ADD, as highlighted on slide 5, as well as an inventory write-down of $37 million at year-end, the Q4 operating loss was $11 million down 203 million from a similarly adjusted operating income of $192 million in Q3. The major variance reflected substantially lower Western SPF and Southern Yellow Pine lumber prices, which translated into materially lower unit sales realizations. These declines were accompanied by higher unit log costs in Western Canada and lower production and shipments. The significant price erosion reflected slowing North American demand coupled with excess inventory in the supply chain. The North American random lengths Western SPF price averaged $327 per 1,004 feet, down some 32% from the previous quarter, while prices for other grades saw a more moderate correction. Southern yellow pine sales realizations reflected a 6% decline in the benchmark 2x4 price, but declines in wider width dimensions were more pronounced, some of which was attributable to seasonal factors. As a result of these weaker market conditions, as well as log supply constraints and elevated log costs, the company took approximately 100 million board feet of curtailment at its BC lumber operations in Q4. This was the primary contributing factor, accounting for a 12% decline in production and a 14% decline in shipment volumes in the current quarter. The higher unit manufacturing costs in Q4 reflected a 10% increase in Western Canadian log costs, resulting mainly from the timing of market-based stumpage increases, higher purchase wood costs and log supply shortages, as well as lower productivity in both regions, reflecting both the impact of curtailments in B.C. as well as weather-related challenges at the company's U.S. South operations. Log costs in the U.S. South remain stable through the quarter-month. Canfor's pulp and paper segment comprises the results of Canfor Pulp Products Inc. As highlighted on slide seven, the company reported net income of $14 million or 21 cents a share for the fourth quarter of 2018, compared to net income of $43 million or 66 cents per share for the previous quarter. As slide seven highlights, the Q4's financial results reflected the continuation of the scheduled maintenance outage at Northwood from the previous quarter. It previously announced repairs to Northwood's No. 5 recovery boiler, unscheduled downtime taken as a result of a third-party natural gas pipeline explosion in Prince George just early in the quarter, and to a lesser extent, several other operational challenges during the quarter, all of which reduced NBSK bulk production by approximately 90,000 tonnes. In addition, BCTMP production was impacted by a seven-day curtailment in late December as a result of reduced residual fibre availability. following various sawmill curtailments in the region. At the end of December and into January, the company experienced kiln-related operational disruptions at two of its MBSK bulk mills. While these challenges have now been resolved, the related production loss was approximately 20,000 tonnes early in the first quarter of 2019. Unit manufacturing costs in Q4 were significantly higher than the previous quarter as a result primarily of the lower Q4 production as well as higher related maintenance, energy and chemical costs associated with the unscheduled outages, particularly at Northwood. Sales realisations were broadly in line with the previous quarter, as weaker US dollar list prices to China were partially offset by higher list prices to North America and proportionately higher shipments to the US and, to a lesser extent, Europe. Operating income for the company's paper segment in Q4 was $4 million, up slightly from the previous quarter, reflecting solid operating performance of the company's PG paper machine and steady paper unit sales realizations. Capital spending for the fourth quarter totaled approximately $140 million and included approximately $100 million for the lumber business and $40 million in canned ore pulp. In 2018, capital spent totaled just over $400 million and comprised $272 million for lumber and $121 million for pulp. As Don mentioned, the company continues to execute on its $125 million U.S. dollar organic growth program, targeting an additional 350 million board feet of production in the U.S. South. And we remain on schedule to have this program substantially completed by the end of this year. Including organic growth, our 2019 forecasted capital spend is approximately $300 million, with approximately $190 million for lumber and $110 million for pulp. At the end of the year, Canfor, excluding Canfor Pulp, had cash of $246 million and drawn debt of $408 million. with $450 million of available liquidity under its operating line, as well as additional $100 million Canadian dollar and $100 million U.S. dollar term debt facilities, both of which are currently on draw. All of our operating and term credit facilities now go out to 2024 or later. It's currently contemplated that the FIDA acquisition price will be paid from the company's cash on hand, the additional term debt facilities, and the balance from the operating line. We are currently forecasting CanForce net debt to total capitalization at the end of Q1 to be approximately 30% when we typically have our peak log inventories. This is significantly below the level at which any financial confidence would kick in. While these debt levels are relatively high by CanForce standards, we anticipate a healthy reduction in the second quarter as our Western Canadian log inventory is consumed during spring break-up. Canfor Pulp had net cash of $7 million, with a fillable liquidity of $99 million at the end of the year. Net debt to total capitalization, excluding Canfor Pulp, was 7%, and on a consolidated basis was 6%. Yesterday, Canfor Pulp's Board of Directors approved the continuance of a quarterly dividend of 6.25 cents a share for the fourth quarter. And finally, by way of information, our earnings in 2019 will reflect the transition to new lease accounting standards, And as a result, our EBITDA is projected to increase by approximately $13 million for lumber and $1 million for pulp. And with that, Don, I'll turn the call back over to you.