Canfor Corporation

Good morning, ladies and gentlemen. Welcome to the Canfor Corporation and Canfor Pulp second quarter analyst call. A recording and transcript of the call will be available on Canfor's website. During this call, Canfor Corporation 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 company's I 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 Corporation and Canfor Pulp's Chief Executive Officer. Please go ahead, Mr. Kane.

Thanks, Colin, and good morning, everyone, and thank you very much for joining the Canfor and Canfor Pulp Quarter 2 2020 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 our Chief Financial Officer of both Canfor Corporation and Canfor Pulp. Alan will provide a more detailed overview of our performance in quarter two. In addition to Alan and I, we are joined by Kevin Pankratz, who is our Senior Vice President of Sales and Marketing. I would like to start by thanking our incredible employees for their continued dedication and perseverance as we navigate the unprecedented challenges of COVID-19. As we've adapted to new working conditions, our employees have continued to perform extremely well, which contributed significantly to our positive results this quarter. In addition, our new systems have worked very well with the majority of our corporate employees continuing to work from home, which has been the case since mid-March. As an organization, we've demonstrated that we can work well in times of crisis and uncertainty, Our top two priorities continue to be protecting the health and safety of our employees and executing on our strategy to support our valued customers and sustain the business for the long term. As a result of the pandemic, we had to make a series of difficult decisions to take extended downtime across all of our operating regions, with our operations in British Columbia being impacted the most. In addition, due to an insufficient supply of economically viable timber, we made the decision to permanently close our Isle Pierre sawmill in May. The timing of this decision was expedited by the impacts of the pandemic on our overall business. We deeply regret the impacts these very difficult decisions have had on our employees, on our contractors, and the local communities. I want to thank our valued customers for their understanding and support through this difficult period. Since the onset of the pandemic, we have been working closely with the federal, provincial, municipal, and state governments and appreciate their willingness to work in partnership with Canfor and our industry. Turning to our markets and beginning with lumber, conditions were extremely volatile during the second quarter. In April, global lumber demand declined sharply in the wake of closures of non-essential businesses and lockdowns in many parts of North America, Europe, and Asia. Unprecedented demand from the repair and remodeling segment, lean inventories across the supply chain, and reduced lumber supply resulted in dramatic increases in North American and European lumber pricing as the quarter progressed. Lumber prices have continued to increase early in the third quarter, reflecting strong demand fundamentals and limited available supply, combined with some challenges on the transportation front. While lumber demand has been encouraging, there remains significant uncertainty over the long term. Offshore lumber demand was relatively stable during the quarter, with prices seeing more modest increases. During the second quarter, we completed the 100% ownership of the Elliott Sawmilling Company, which increases our capacity in the US South by a further 210 million board feet. In addition, VIDA entered into an agreement to purchase the three sawmills in Sweden from Bergs Timber. This transaction is anticipated to close in the third quarter, and is supported by Vita's strong performance and solid balance sheet. These two acquisitions are a further step in our goal to diversify our business globally. In particular, the strong local relationships of our co-owners in Vita allowed us to identify and complete the Berg's timber transaction at very attractive pricing. After taking account of these acquisitions, our regional production mix is 43% British Columbia, 31% the U.S. South, 22% in Europe and 4% in Alberta. Compared to 2013, when our business was 88% Canadian-based, we believe this more regionally diversified operating portfolio provides a more stable earnings platform for the future. Our pulp business was significantly impacted by reduced residual fiber supply and increased fiber costs due to the extensive sawmill curtailments in British Columbia during the second quarter. In addition, we experienced challenging global pulp prices as the quarter progressed in response to much lower demand for printing and writing papers. Global pulp markets are anticipated to remain under pressure through the third quarter as a result of higher inventories and ongoing weakness in demand. In response to reduced fiber availability and challenging market conditions, CanCorp pulp took a three-week curtailment at Northwood in the second quarter, and is currently taking a four-week curtailment at PG and Intercon pulp mills. As a result of the challenges and uncertainty caused by COVID-19, both Canfor and Canfor Pulp have taken a number of steps to further enhance our already solid liquidity position. I will now turn it over to Alan Nichol to talk about the quarter.

Yes, thank you, Don, and good morning, everyone. The Canfor and Canfor Pulp quarterly results were released yesterday afternoon and come together with our overview slide presentation in the investor relations section of the respective companies' websites. In my comments this morning, I'll briefly speak to quarterly financial highlights, a summary of which is included in our overview slide presentation. Our lumber segment reported operating income of $107 million for the second quarter compared to a loss of $89 million for the previous quarter. Our Q2 results included a net duty expense of $19 million, restructuring costs of $14 million, and an $81 million recovery of a previously recorded inventory write-down provision, reflecting the steep increase in lumber prices that we saw towards the end of the quarter and into July. After adjusting for these items, the lumber segment generated operating income of $60 million. Notwithstanding the disruptive impacts of COVID-19, which resulted in extensive production curtailment across all of our operating regions during the quarter, improved lumber segment results reflected a marked improvement in lumber demand and prices as the quarter progressed. The company's U.S. South operations benefited from a strong pickup in Southern Yellow Pine lumber prices in May and June, which translated into improved sales realizations and operating results. despite a 12% COVID-related decline in production quarter over quarter. Our European lumber business continued to perform well in the quarter, also generating improved results versus quarter one against a backdrop of minimal production disruption and solid demand, particularly from the repair and remodeling sector during the quarter. The business continues to meet our initial expectations with earnings so far in 2020 tracking ahead of 2019. In Western Canada, operating results were impacted by extensive production curtailments as Western SPF lumber prices remained under pressure for most of the quarter. However, the sharp increase in Western SPF prices supported a return to more normal operating rates in June, and a strong finish to the quarter was the major factor in improved quarter-over-quarter operating results for that region. Our pulp business reported an operating loss of $6 million for the second quarter compared to an operating income of the same amount reported for the previous quarter. For the quarter, the benefits of a weaker Canadian dollar and improved BCTMP prices were outweighed by increased fiber costs resulting from materially lower fiber volumes available, as well as the $8 million inventory write-down at the end of June reflecting the weaker prices. Pulp shipments were down 14% in the quarter, reflecting a 13% in pulp production related to production curtailments at Northwood, combined with a special slippage over quarter end. Pulp unit manufacturing costs reflected the increased, aforementioned increase in fibre costs, as well as the impact of reduced production volumes, but were largely offset by seasonally lower energy costs and reduced maintenance spending. At the end of the second quarter, Canfor, excluding Canfor Pub, had net debt of approximately $860 million and available liquidity of approximately $655 million. Liquidity improved by approximately $255 million during the quarter, reflecting higher cash earnings, a seasonal unwind of working capital, a tax refund, various cash conservation measures in response to COVID-19, as well as increased and extended banking facilities. Canfor pulp ended the second quarter with net cash of $6 million and available liquidity of approximately $150 million. Liquidity improved by approximately $50 million during the quarter, supported by a drawdown of accounts receivable balances and partial insurance proceeds related to the Northwood recovery boilers unscheduled outage in the fall of 2018. Excluding capitalized major maintenance, we currently anticipate the 2020 capital spending will be approximately $100 million for the lumber segment and $45 million for camphor pulp. The aforementioned insurance proceeds for pulp will be reinvested in that same recovery boiler during an extended scheduled maintenance outage in the fall. And with that, Don, I'll turn the call back over to you. Thank you.