Canfor Corporation

Good morning, ladies and gentlemen. Welcome to the Canfor and Canfor Pulp's 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 risks of such statements. Now it's time to move over to Mr. Don Kane, Canfor and Canfor Pulp's Chief Executive Officer. Please go ahead, Mr. Kane.

Thank you, Officer, and good morning. Thank you for joining the Canfor and Canfor Pulp Q1 2020 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 Q1, as well as the numerous initiatives underway to mitigate the financial impacts of this downturn. I would like to start by thanking our incredible employees who are dealing with the unprecedented challenges of the COVID-19 pandemic with perseverance, resilience, and an unfailing dedication to health and safety, while at the same time focusing on executing on our strategy. For the last several weeks, our organization has been almost exclusively focused on our COVID-19 response. Our top two priorities are protecting the health of our employees and executing on our strategy to sustain the business for the long term. In terms of our people, we quickly implemented a COVID-19 action plan, which has continued to evolve. This plan includes implementing physical distancing measures, including at our facilities, having as many employees as possible work from home, restricting all travel, implementing cleaning and hand-washing protocols, and implementing self-isolation and quarantine policies. As a result of the pandemic, we have had to take extended downtime across all of our operating regions, with our sawmills in British Columbia impacted the most. These are very difficult decisions, as we know they are having a significant impact on our employees, contractors, communities, and customers, which we deeply regret. Across our organization, our employees are making a number of very difficult sacrifices to ensure we are removing as many discretionary costs as possible. I also want to thank the federal and provincial governments who have provided additional support at this difficult time. Turning to our markets and beginning with lumber, the company anticipates conditions will remain extremely volatile and challenging through the second quarter. Global lumber market demand in recent weeks has declined sharply in the wake of the closures of non-essential businesses and lockdowns implemented in many parts of North America and Europe. The company currently anticipates that North American home construction activity will remain at reduced levels with significant regional demand volatility. Following a steep reduction in pricing from mid-March through early April, prices have stabilized somewhat in response to a material reduction in supply in recent weeks. We are anticipating that the second quarter will have limited demand, particularly for April and early May. Looking further ahead to the second half of 2020, it is anticipated that supply and demand balance will improve and support a modest improvement in prices later in the year. Lumber prices to China are seeing more moderate declines in North America as that region is gradually returning to more normal business conditions following the early outbreak of the COVID-19 pandemic, while short-term prices to Japan are anticipated to be in line for the current quarter. European lumber markets and pricing are also being materially impacted by aforementioned global economic downturn, and the company currently anticipates market conditions are expected to remain challenging through the second quarter before improving later in the year. Global softwood pulp demand is currently projected to be solid through the second quarter of 2020, particularly from China as that region continues to gradually recover from the pandemic while containment measures across Western Europe and North America are forecast to weigh on market demand for printing and writing paper. While pulp and paper operations are designated as essential services of many regions, it is projected that supply disruptions will continue in various regions as a result of the pronounced defects from COVID-19 on various business sectors, including lumber manufacturers. The current weakness in lumber markets is resulting in numerous sawmill curtailments in the B.C. interior, and lower volumes of SAML residual chips available to pulp mills. So this brings with it the risk of additional downtime at not only the company's operations, but also across the industry. And with that, I'll turn it over to Alan to talk about the quarter and some of the initiatives that we have underway to enhance our already solid liquidity position.

Well, thank you, John, and good morning, everyone. The Canfor and CanforPOP quarterly results were released Wednesday afternoon and come together with our overview slide presentation in the investor relations section of our respective companies' websites. In my comments this morning, I'll speak briefly to quarterly financial highlights and expand, as Don mentioned, on a number of initiatives that the company has put into place in response to the COVID-19 pandemic, a brief summary of which is included in our overview slide presentation. Our lumber segment reported an operating loss of $89 million for the first quarter of 2020 compared to an operating loss of $27 million for the previous quarter. Results included a net duty expense of $44 million and a $63 million inventory write-down provision that reflected a steep decline in lumber prices towards the end of the quarter and into early April. After adjusting for these items, the lumber segment generated operating income of $19 million. Lumber segment results benefited from moderately higher sales realizations in North America, reflecting strong U.S. housing activity earlier in the quarter, as well as continued solid results generated by the company's European operations at an annualized rate of $90 million in the quarter. However, as Don mentioned, these positives were overshadowed by the rapid deterioration in global lumber market conditions in March as the effects of COVID-19 spread globally. resulting in significant price declines thereafter. Our pulp business reported operating income of $6 million for the first quarter compared to an operating loss of $24 million reported in the previous quarter. Results for the current quarter reflected a solid operating performance as well as an $11 million recovery of a previously recorded inventory write-down provision. Pulp shipments were up 9% in the quarter, reflecting a 4% increase in pulp production as well, as a modest improvement in purchasing from China, particularly for tissue. Pulp unit manufacturing costs reflected this improved productivity and slightly lower fiber costs in the quarter. As Don mentioned, in response to the unprecedented challenges presented by COVID-19, the company has undertaken a series of measures to mitigate the financial impacts from deteriorating global lumber demand. These include extensive capacity reductions across all of our operations, reduced capital spent for both the lumber and pulp businesses, as well as numerous initiatives put into place to support both companies' financial positions through the pandemic. At the end of the first quarter, Canfor, excluding Canfor Pulp, had net debt of approximately $1 billion and available liquidity of $400 million. Canfor Pulp ended the first quarter with net debt of $43 million with available liquidity of approximately $100 million. Looking ahead, CanForce cash flow is forecast to benefit from a seasonal reduction of working capital in the second quarter and the receipt of approximately $125 million of tax refunds over the balance of 2020. This combined with the reduced capital spending and the suspension of all non-essential overhead will improve the company's liquidity and help preserve its solid balance sheet position. For our pulp business, recognizing the material challenges facing the global economy and the supply disruptions resulting from the extensive sawmills downtime that Don mentioned, Canfor Pulse Board of Directors have decided to suspend the quarterly dividend for the foreseeable future as part of its cash preservation efforts. And with that, Don, I'll turn the call back over to you.