Canfor Corporation

Good morning, ladies and gentlemen. Welcome to the Canfor and Canfor Pulp's second 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 risks of such statements. I would now like to turn the meeting over to Mr. Don Kane, Canfor and Canfor Pulp's Chief Executive Officer. Please go ahead, Mr. Kane.

Thank you, Operator, and good morning. Thank you for joining the Canfor and Canfor Pulp Q2 2019 Results Conference Call. I'll make a few comments before I turn things over to Alan Nickell, Executive Vice President 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 Quarter 2. Joining Alan and I today are Kevin Pankratz, Senior Vice President of Sales and Marketing, Stephen Mackey, Senior Vice President of Canadian Operations, and Brian Ewan, Vice President of Pulp Sales and Marketing. Starting with our pulp business, our mills deliver solid operating and financial performance in Q2, despite continued elevated global pulp inventory levels. However, as the quarter progressed, prices declined as a result of a sharp decline in demand, combined with above normal inventory levels in several key markets. The resulting price erosion, combined with the effects of widespread sawmill curtailments in the British Columbia interior, put a major strain on fiber supply in the interior of BC and led to our decision to take phased curtailments over the summer at Northwood, PGI, and Taylor. These curtailments will assist us in achieving sufficient chip supply through the fall and the winter. In addition, we expect to see a modest increase in pulp prices in Q4, and into 2020 as global inventory levels move back into balance, which will support improved earnings in the fourth quarter. Moving to lumber, I'll start with our B.C. business, which continues to face significant challenges due to very high log costs and depressed market pricing. This has resulted in significant curtailments in the B.C. industry, including Canfora. In June, we announced that our Wavenby mill will be permanently closing and announced an agreement to sell our forest tenure in Wavenby to Interfor for $60 million. The tenure transfer is subject to approval by the Minister of Forests, and we are working to meet all obligations for a closing in Q3. Also in June, we announced significant curtailments at all but one of our BC sawmills. The majority of the downtime was in June and July and will result in reduced supply of approximately 200 million board feet. Last week, we also made the difficult decision to indefinitely curtail our McKenzie mill and permanently reduce our Isle Pierre mill from two shifts to one. This will enable Isle Pierre to better align its production capacity with a sustainable, high-quality fibre supply in the region. We deeply regret the impact all of these closures and curtailment announcements are having on our employees, contractors, families and the local communities. This is a very difficult time for our people and the communities, and we thank them for their dedication and support through these difficult times. At our current operating rate, our regional production exposure is 45% in British Columbia, 5% in Alberta, 32% in the U.S. South, and 18% in Europe. SPF pricing continues to be weak as the market continues to be oversupplied. We believe that many of the permanent curtailments announced in the last number of months are just now becoming effective. As a result, we forecast that supply will be in a much improved balance later in the year. In addition, the very wet weather conditions, which were pervasive across much of North America over the winter and spring, appear to be improving and we anticipate increased demand in the fall. These two factors lead us to believe pricing for SPF will show a gradual improvement over the balance of the year. Housing starts have remained challenging due to an acute shortage of labor. However, we believe market participants are actively working to develop labor solutions in order to meet underlying demand. Offshore markets have suffered from high inventory levels as well, and pricing has also been relatively weak. We expect that to resolve over the course of the next number of months, particularly in Japan. Demand in pricing in China is expected to improve towards the end of the year. Southern yellow pine prices faced less of a supply issue and have rebounded somewhat in recent weeks as demand has improved. Our European business continues to run very profitably, consistent with levels seen in 2018, and we expect European SPF prices to moderate slightly in Q3 and Q4, driven by the weakness experienced in other markets, but this will be somewhat offset by lower log costs. At the end of May, we closed the first phase of the Elliott acquisition, and we now have a 49% ownership position in that company and expect to complete the final phase in May of 2020. We remain focused on continuing to reduce our debt levels and continuing to strengthen our balance sheet. Overall, despite the challenges we're experiencing in British Columbia, we continue to expect gradual improvement over the year, and we will continue to benefit from our geographic and product diversification. I will now turn it over to Alan Nicol to provide an overview of our financial results.

Thanks, Don, and good morning, everyone. As Don mentioned, the Canfor and Canfor Pub quarterly results were released yesterday afternoon. These results come together with our quarterly overview slide presentation in the investor relations section of the respective companies' websites. In my comments, 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 $61 million for Q2, an improvement of $17 million from the previous quarter. Results included a net duty expense of $45 million, restructuring costs of $12 million, and a $25 million reversal of our previously recorded inventory write-down provision. After taking account of these items, our operating loss was $29 million. Lumber segment results in Q2 continue to reflect challenging market conditions and elevated log costs in British Columbia. The company took close to 150 million board feet of curtailment in BC and announced additional permanent and temporary reductions in Q3 as Don has outlined. Average Western SPS sales realizations reflected a 10% decline in pricing across most dimensions. This more than offset modestly lower unit log costs and a seasonal decline in cash conversion costs. For the US South, record rainfall and severe flooding across that region delayed the start of the typically busy spring construction season, tempering demand and contributing to lower lumber sales realizations in the quarter. Despite these conditions, however, our US South operations continued to deliver solid results again this quarter. As Don also noted, our newly acquired European lumber business performed well in Q2, with lumber prices and demand remaining relatively stable in that region. Operating income before amortization in the quarter was over $30 million before adjusting for acquisition-related items. Our pulp business also had a solid quarter in Q2 with Canfor Pulp reporting operating income of $18 million. After adjusting for an inventory write-down at period end, the company reported operating income of $32 million for Q2, an improvement of $14 million from the previous quarter. Our manufacturing costs benefited from improved operating rates at our mills and also reflected scheduled maintenance outages at Intercon and Taylor. Average pulse sales realizations showed a moderate decline quarter over quarter, but prices deteriorated as the quarter progressed, with prices in China falling 17% through May and June in response to significantly lower demand and continued elevated inventory levels. Most of the effects of this price erosion will be reflected in our Q3 results, given the timing of shipments versus orders. The tough market and fiber-related conditions resulted in us implementing phase summer curtailments at our InterCon and Northwood NBSK mills and our Taylor BCTMP mill, reducing Q3 production by an estimated 75,000 tons of NBSK pulp and 25,000 tons of BCTMP, respectively. Yesterday, we announced an extension of our curtailment at Taylor until September the 9th, further reducing BCTMP production by 25,000 tons. Capital spending for the second quarter totaled approximately $82 million and included approximately $58 million in the lumber business and $24 million in Canfor pulp. For 2019, we're currently anticipating total capital spend of approximately $185 million dollars for Canfor and $95 million for Canfor Pulp. We anticipate much lower capital spending in 2020 following the completion of several major upgrades and projects in both companies in 2019. At the end of the second quarter, Canfor, excluding Canfor Pulp, had net debt of approximately $960 million and available liquidity of $290 million. Canfor Pulp ended the second quarter with zero net debt with available liquidity of just under $100 million. And lastly, Canfor Pulp's directors approved the continuance of a quarterly dividend of 6.25 cents per share for the second quarter yesterday. And with that, Don, I'll turn the call back to you.