Canfor Corporation

Good morning, ladies and gentlemen, and welcome to the Canfor and Canfor Pulp third 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. And I would like to turn the meeting over to Mr. Don Kane, Canfor and Canfor Pulps Chief Executive Officer. Please go ahead, Mr. Kane.

Thanks very much, Operator. Good morning, everyone, and thank you for joining the Canfor and Canfor Pulps Quarter 3 2019 Results Conference Call. I'll make a few comments before I turn things over to Alan Nicol, our 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 three. Joining Alan and I today are Kevin Pankratz, our Senior Vice President of Sales and Marketing, Stephen Mackey, our Senior Vice President of Canadian Operations, and Brian Nguyen, our Vice President of Pulp Sales and Marketing. As everybody is aware, in August, Great Pacific made a non-binding proposal to acquire all the outstanding common shares of Canfor. Canfor's board of directors has formed a special committee of independent directors to review the offer in consultation with its legal and financial advisors. The decision to proceed or not proceed with the proposal is in the hands of the special committee and ultimately the shareholders if recommended by the special committee. While that process is underway, we continue to focus on operating our business as usual and unfortunately do not have additional information in regard to timing or outcome at this time. As such, we cannot speculate on either the timing or the decision to proceed or not during this call, as I am sure you all will understand. Moving to our specific Q3 results, the quarter was challenging for both our pulp and lumber businesses. resulting in us having to make very difficult decisions that involve temporary and permanent curtailments in British Columbia. On the pulp side, we took phased summer curtailments at our Intercon Northwood and Prince George MBSK mills, as well as at our BCTMP mill in Taylor. While these curtailments are difficult, we believe they will support a quicker market recovery in addition to solidifying our chip inventory over the winter months. On the lumber side, we made the very difficult decision in July to indefinitely curtail our McKenzie sawmill. At the same time, we also announced the permanent elimination of one shift at our ILPR mill, and we announced temporary sawmill curtailments mostly in July and September. We have not taken any of these curtailments decisions lightly. However, they reflect the very challenging lumber market conditions in combination with high fiber costs in British Columbia. On behalf of myself and the entire executive team, I want our employees to know that we deeply regret the very real impacts these decisions have had on them, our contractors, and the local communities. With the exception of McKenzie, all of our sawmills and pulp mills are currently operating. Now we'll go into a bit more detail on each of our business lines. Beginning with our pulp business, we were challenged with weak global pulp market conditions, significant market-related downtime, and fiber supply issues in British Columbia. This was the third straight quarter of weak demand combined with excess inventory in the supply chain, most notably in China and Europe, which significantly impacted global pulp prices. On the positive side, energy revenues increased in Q3, largely driven by Northwood's new turbo generator condensing turbine and higher energy prices. Looking forward, it's expected that global pulp pricing will gradually improve in Q4 and into 2020 as global inventories will come back into balance. Moving to lumber, in June we announced the permanent closure of our Wavenby Mill and subsequent agreement with Interfor to sell them the associated tenure for $60 million. The tenure transfer is subject to approval by the Minister of Forests and we continue to work through that process. We anticipate the sale will close in Q4. SPF pricing continued to be challenging in Q3 with excessive inventory impacting overall price levels. While several industry curtailment announcements were made over the last six to nine months, we believe we are just now seeing the impact of these curtailments in the market. U.S. housing starts increased modestly over the quarter, and we anticipate that that trend will continue through the balance of the year. Lumber prices in Asia, particularly in Japan, are expected to return to more normalized levels in Q4. Our lumber operations in Alberta, the U.S. South, and Europe remain strong. Price of Southern Yellow Pine remained steady over the quarter, although our sales were slightly lower than last quarter. Our European lumber business saw tempered pricing in the quarter as a result of global market weakness, but was somewhat insulated from broader pricing declines due to the relatively higher value customized products that Vita produces. This pricing pressure is expected to continue through the balance of the year and should stabilize in early 20 as global inventory levels continue to come back into balance. We remain focused on continuing to reduce our debt levels and continue to strengthen our balance sheet. I will now turn it over to Alan to provide an overview of our financial results.

Well, thanks, Don, and good morning, everyone. As Don mentioned, the Canfor and Canfor Pulse 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 this morning, I'll expand a little on the number of Dawn's points and also speak specifically to several quarterly financial highlights. Our lumber segment reported an operating loss of $70 million for Q3 compared to a loss of $61 million reported for the previous quarter. Results included a net duty expense of $54 million, restructuring costs of $6 million, and a $5 million reversal of a previously recorded inventory write-down provision. After adjusting for these items, the lumber operating loss was $16 million. Lumber segment results continued to reflect the ongoing weakness in Western SPF lumber prices, high duties, and elevated log costs in British Columbia. As Don mentioned, Canfor took significant market-related curtailments and capacity reductions in Q3, and as a result, shipments were down by 16% compared to Q2, while overall sales revenue declined 12%. Average Western SPF sales realizations saw a modest increase from the prior quarter, largely reflecting a small increase in benchmark prices and our sales mix. For our U.S. South business, average sales realizations were slightly lower than the previous quarter as the modest improvement in the 2x4 number 2 price was more than offset by lower prices for wider width dimensions. European sales realizations saw a small decrease with the region's higher value sales mix partially offsetting a decline in European benchmark prices. Our pulp and paper business reported an operating loss of $44 million for the third quarter, down $62 million from the $18 million profit reported for the second quarter. The loss reflected the very weak global pulp market conditions that Don mentioned, as well as the significant fiber supply disruptions from industry-wide sawmill curtailments in the BC interior over the summer months. Average sales realizations were well down compared to the second quarter, reflecting this backdrop. Hope production was down 42% from the previous quarter, principally reflecting the impact of 135,000 tons of market-related downtime. Hope unit manufacturing costs were significantly higher in the current quarter, largely due to that curtailment, and to a lesser extent, the advancing of some planned maintenance work during the downtime. Fiber costs showed a small decrease quarter over quarter with the impact of lower market prices for sawmill residual chips tied to market pulp prices, helping to neutralize the effect of an increased percentage of higher cost whole lot chips. Capital spending for the third quarter totaled approximately $76 million and included approximately $50 million in the lumber business and $26 million in chemical pulp. For 2019, we are forecasting a total capital spend of $180 million and $80 million for Canfor and Canfor Pulp respectively. We currently anticipate much lower capital spending in 2020 following the completion of our U.S. $125 million organic growth program and several other major upgrades by early 2020 and our strong focus on debt reduction. During the third quarter, Canfor increased its operating line of credit from $450 million to $550 million, maturing in January 2024. In addition, Canfor Pulp extended its operating line of credit through April 2023 and added a new three-year $50 million term loan expiring September 2022. At the end of the third quarter, Canfor, excluding Canfor Pulp, had net debt of approximately $1 billion and a fillable liquidity of just over $300 million. Canfor Pulp ended the third quarter with net debt of approximately $30 million with a fillable liquidity of just under $100 million. And lastly, Canfor Pulse directors approve the continuance of a quarterly dividend of six and a quarter cents per share for the third quarter.