Canfor Corporation

Good morning, ladies and gentlemen. Welcome to the Canfor and Canfor Pulp first quarter analyst call. A recording and transcript of the call will be available on Canfor's website. During this 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 companies would like to point out that this call will include forward-looking statements, so please refer to the press releases for the associated risk of such statements. I would now like to turn the meeting over to Mr. Don Kane, Canfor and Canfor Pulps Chief Executive Officer. Please go ahead, Mr. Kane.

Thank you, Officer, and good morning, everyone. Thanks for joining the Canfor and Canfor Pulp Quarter 1 2019 Results Conference Call. I'll make a few comments before I turn things over to Alan Nicol, 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, our Senior Vice President of Sales and Marketing, and Stephen Mackey, Senior Vice President of Canadian Operations. The first quarter was a challenging one as severe winter weather dominated our key production regions and end-use markets. These poor weather conditions impacted operations, our log costs, transportation systems, and customer demand for both lumber and pulp. That said, our pulp business ran better as the quarter progressed after suffering a number of issues early in the year. The maintenance shut at Intercon was completed in early Q2, and now the focus is on improving productivity and a return to stronger income levels. During the quarter, the company successfully completed construction of its $65 million turbo generator turbine, which will make Canfor Pulp more self-sufficient for power and provide additional green energy available to sell to the grid. Global softwood crop pulp markets are projected to remain steady through the second quarter, with inventory levels forecast to move towards a more balanced range in the latter half of 2019 with an improved pricing outlook. Moving to lumber, our BC SPF business saw continued weakness, but our Alberta, U.S., and European operations generated solid financial returns. We successfully closed the VITA acquisition at the end of February and are already seeing the benefits of their more consistent and high-margin returns. Lumber production was up in the U.S. south, but remained steady in British Columbia, reflecting continuing curtailments, most notably at Vavenby, which was down for six weeks. Last week, we announced a further 100 million board feet of curtailments in British Columbia, as weak market pricing and high log costs materially impacted our BC returns. We will continue to monitor market conditions and take necessary additional steps as required. We expect the July 1st market-based stumpage adjustment to put severe additional pressure on British Columbia production levels, which could result in additional curtailments across the industry given the increasingly challenging competitive environment. Transportation networks were impacted in the corridor due to a poor winter weather. However, the impact was not as severe as last year and we expect additional inventory reductions as weather conditions improve. Looking ahead, we expect lumber prices to show modest improvement over the next several months in response to tightening of supply due to recent curtailments and as a typically strong spring building season begins. Demand from Asian markets was slowed somewhat early in the year as inventory levels increased, although we are seeing recent improvement in port shipments. Pricing has been relatively flat in China and is expected to remain flat and gradually increase in Q3 and Q4. European markets were steady, having declined only a small amount from 2018 record levels and will be flat to moderately lower for the coming quarter. Looking ahead, we are excited about the upcoming closing on May 31st of the phased acquisition of Elliott Sawmilling, which will further grow our U.S. south footprint to 2 billion feet annually, approximately 30% of our total production. Overall, despite the challenging start to 2019, we expect gradual improvement throughout the year. Canfor will benefit from our improved geographic diversification as well as our continued focus on specialty and high-value products. And with that, I'll turn the call over to Alan, who will provide an overview of our financial results.

Thanks, Don, and good morning, everyone. As Don mentioned, the Canfor and Canfor quarterly results were released yesterday morning, and these results come together with our quarterly overview slide presentation in the investor relations section of the respective companies' websites. In my comments this morning, I'll expand on a number of Don's points and also speak specifically to several quarterly financial highlights. Our lumber segment reported an operating loss of $78 million for Q1, an improvement of $10 million from the previous quarter. Results included an additional inventory write-down of $39 million and a net duty expense of $36 million, as well as a one-month of FEDA's earnings that are included in our consolidated results. After taking account of the inventory write-downs and the duties, the operating loss was $3 million. Lumber segment results continue to reflect challenging market conditions and elevated log costs in British Columbia. The company took 95 million board feet of curtailment in BC in Q1 and additional reductions in Q2, as Don has already mentioned. While average lumber prices saw a modest improvement over the previous quarter, partly in response to the curtailed supply, the well-documented extreme weather seen across much of North America contribute to a slow start to the spring building season. resulting in higher inventories through the supply chain and significant downward price pressure experienced in March and into April. Our U.S. South and newly acquired European lumber businesses performed well in the quarter. In the case of the U.S. South, this was despite the impacts of very wet weather on log supply and takeaway. With respect to our new European business, in our MD&A, we have provided a preliminary internal benchmark price for the feeder product reflected in Swedish kronor per thousand board feet. This benchmark is indicative of the overall basket of lumber products produced by Vita, and as you will note, it has been much more stable than North American lumber prices over the last year. In our pulp business camp, where pulp generated operating income of $18 million in the first quarter, with increased operational uptime more than offsetting materially lower quarter-over-quarter prices to China. While pulp production was impacted by previously announced kiln-related disruptions, and to a lesser extent, the extreme weather and the curtailment of our tailor mill, overall operating rates improved in the first quarter. Our Northwood pulp mill ran well in February and March, following the significant challenges experienced in the previous quarter. Prices to China in Q1 reflected the sharp decrease in demand and a corresponding spike in inventory levels that we saw towards the end of 2018. After bottoming out in January, prices showed a modest recovery, but over the quarter, prices were down by about 12%. Sales realizations to North America and Europe fared somewhat better but came under pressure as the quarter progressed. And for Q2, overall pricing is anticipated to remain relatively steady as inventory levels gradually return to more balanced range through the remainder of the year. Capital spending for the first quarter totaled approximately $75 million and included about $48 million for the lumber business and $26 million for Canfor pulp. For 2019, we are currently anticipating total capital spending of $185 million and $95 million for Canfor and Canfor Pulp, respectively. Reflecting the acquisition of FIDA and our seasonal log inventory build in Western Canada, Canfor, at the end of the first quarter, had net debt of approximately $950 million and available liquidity of $340 million, excluding Canfor Pulp. We anticipate a reduction of net debt and improved liquidity in the second quarter as our Western Canadian log inventory is consumed during spring breakup. Canfor Pulp ended the first quarter with $23 million drawn down on its operating line and available liquidity of $74 million. The company has now moved back into a cash-positive position in Q2. And lastly, Canfor Pulp's directors approved the continuance of a quarterly dividend of 6.25 cents per share for the first quarter. And with that, Don, I'll turn the call back over to you.