Canfor Corporation

Ladies and gentlemen, welcome to the Canfor and CanforPulse fourth quarter analyst call. A recording and transcript of the call will be available on Canfor's website. During this call, Canfor and CanforPulse 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 will now turn this 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, everyone. Thanks for joining the Canfor and Canfor Pulp Quarter 4 2019 Results Conference Call. I'll make a few comments before I turn things over to Alan Nickell, 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 Q4. Joining Alan and I today are Kevin Pankratz, our Senior Vice President of Sales and Marketing, Stephen Mackey, our Executive Vice President of North American Operations, and Brian Ewan, our Vice President of Pulp Sales and Marketing. I will focus my comments on 2019 as a year, which overall was a very challenging year for both our lumber and our pulp businesses. Firstly, Canfor Pulp reported an operating loss of $31 million in 2019. Throughout the year, we experienced decreasing availability of chips and increasing costs due to the significant sawmill curtailments in British Columbia, while global pulp prices fell sharply over the course of the year, reflecting elevated inventory levels and weaker global demand in certain regions. Following the market-driven downtime taken in the latter half of 2019, our focus is on optimizing our production performance reducing overall costs and maximizing fiber utilization in the coming months as we look to fully capitalize on the projected improvement in market conditions in 2020 and 2021. While global pulp markets are projected to remain challenging for the first half of 2020, market conditions and prices should gradually improve in the back half of the year as global inventories continue to become more balanced with demand. For Cancor overall, we reported an operating loss of $294 million in 2019. The very difficult operating results overshadow the transformational global diversification undertaken by the company during the year with the acquisition of Vita and further expansion in the US South with the Elliott Sawmill acquisition in Estill, South Carolina. We are already starting to leverage benefits from this diversification strategy while maintaining focus on improving productivity, maximizing fiber utilization, and reducing costs and debt levels so we are well positioned to fully capitalize as market conditions improve. Our VC operations continue to face several challenges. However, we remain focused on working diligently to minimize the financial impacts of these constraints on our VC operations and our overall business. Global lumber markets showed a modest improvement late in 2019, particularly in the U.S., Demand in China was weaker, but Japanese sales rebounded in the second half of the year after a relatively slow start. European lumber demand was also subdued due to global and regional issues, but our operations performed well in the year, generating EBITDA of $112 million in 2019. We expect government's approval of the Vavenby tenure sale in Q1. Looking ahead, recovery in the U.S. housing market is expected to continue into 2020, and the repair and remodel markets appear to be steady as well, with increases also expected in 2020. While supply from Europe to North America is increasing, and there has been new U.S. south sawmill capacity added, albeit much less than forecast, we don't expect this additional supply to outpace increased demand in the coming year. Overseas markets are forecast to be mixed, with Japan and our European markets improving modestly. On the other hand, we expect China to continue to be challenging, owing to increasing amounts of European fibre, as well as the coronavirus impact, which is currently impacting the country. We continue to monitor the coronavirus and expect it to have an overall impact on lumber and pulp demand, particularly in China and Southeast Asia. Additionally, recent blockades of Canadian rail infrastructure have impacted our supply chains and we will be monitoring those events closely and implementing mitigating actions to the extent possible. The US Commerce Department released a revised duty rate calculation for CAN-4 in January, which, when finalized, would reduce our cash deposit rate from 20.5% to 4.6% as a result of the first administrative review. Until the dispute is resolved, Commerce will continue to do annual reviews of the duties with the cash deposit rate reset at that time. Until there is a settlement, we will not receive a refund of any duty amounts. So lastly, despite it being a very challenging year this past year, to say the least, we are thankful and grateful for the support, the commitment, and the dedication of our excellent employees, our contractor base, and, of course, the communities that we operate in. I will now turn it over to Alan to provide an overview of our financial results.

Thank you, Don, and good morning, everyone. As Don mentioned, the Canfor and Canfor Pulse annual and quarterly results were released yesterday afternoon. These results come together with our 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 $27 million for Q4, compared to a loss of $67 million for the previous quarter. Results included a net duty expense of $44 million, restructuring costs of $3 million, and a $17 million reversal of a previously recorded inventory write-down provision. After adjusting for these items, the lumber operating loss was $3 million. In Western Canada, operations continue to be impacted by prolonged market and fiber-related challenges, despite a moderate uptick in U.S. housing activity towards the end of the year, which contributed to a 7% increase in pricing for most Western SPF dimensions. The company's U.S. South operations experienced a more challenging quarter in Q4 as a result of moderately lower prices across most grades, as well as the impact of capital-related downtime at several office operations. Our European lumber business continued to generate solid financial results, notwithstanding a modest decline in European benchmark prices during the fourth quarter. seasonally higher production volumes, and a market-related decline in unit log costs contributed to lower unit manufacturing costs. In early 2020, the US Department of Commerce announced preliminary results for the 2017 and 2018 first period of review. Based on the preliminary determination, the company anticipates a material reduction in its duty deposit rates effective in the third quarter of 2020. and a corresponding recovery of approximately $217 million, reflecting differences between the current cash deposit rate and preliminary rates as determined in the first period of review. Of this recovery, approximately $77 million has been previously recognised in the company's financial statements, based on management's estimated ADD accrual rate over the first period of review. Our pulp business reported an operating loss of $24 million in the fourth quarter compared to a loss of $44 million reported in the third quarter, with the results continuing to reflect weak global pulp pricing. While purchasing activity from China picked up during the quarter, weaker prices in North America and Europe contributed to a modest decline in average sales realizations compared to the third quarter. Pulp production was up 64% in the fourth quarter following the market-related curtailments taken in Q3. Fiber costs showed a small decrease quarter over quarter with the impact of lower market prices for sawmill residual chips tied to pulp prices helping to neutralize the effect of an increased proportion of higher-cost OLOG chips. Capital spending for the fourth quarter totaled approximately $70 million and included $43 million in lumber and $27 million in camp or pulp. Total spend in 2019 was just over $300 million and included $200 million in the lumber business and $103 million in camp or pulp. Excluding pulp capitalized major maintenance in 2020, we currently anticipate capital spending of approximately $150 million in 2020, following the completion of our US $125 million organic growth program and several other major upgrades in early 2020. At the end of the fourth quarter, Canfor, excluding Canfor pulp, had net debt of approximately $960 million and available liquidity of close to $380 million. Canfor Pulse ended the fourth quarter with net debt of $58 million, with available liquidity of $83 million. And lastly, Canfor Pulse directors approved the continuance of a quarterly dividend of 6.25 cents a share for the fourth quarter. And with that, Donald, I'll turn the call back to you.