Canfor Corporation

Good morning, ladies and gentlemen. Welcome to the Canfor and Canfor Pulp third quarter analyst call. 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 Pulps Chief Executive Officer. Please go ahead, Mr. Kane.

Thanks, Operator, and good morning, everyone. Thank you for joining the Canfor and Canfor Pulp Q3 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 Chief Financial Officer of Canfor Corporation, as well as Canfor Pulp. Alan will provide a more detailed overview of our performance in Q3. In addition to Alan and I, we are joined by Kevin Pankratz, our Senior Vice President of Sales and Marketing. I would like to start by recognizing the exceptional efforts of our employees to ensure a safe work environment in the midst of a global pandemic. Their dedication, their resilience, and their hard work has been very impressive, particularly in view of the challenges people are no doubt facing with the uncertainty and stress of the pandemic on everyone's lives. The financial results we experienced in Q3 were not what anyone had expected, particularly during the early days of the pandemic. Our industry has become more disciplined, more responsive, and more dynamic, and we are well prepared and able to operate efficiently and effectively in this changing and new environment. We do believe that several of the trends we've seen emerging during the pandemic are going to be sustainable and will continue to positively impact our industry. Pre-pandemic, for many people, their home was primarily for shelter, for sleeping and eating. Now the home is becoming an office, a school, an entertainment area and a recreation space in addition to sleeping and eating. People want their homes to be comfortable and are able to accommodate all of these additional activities. We see evidence of this in the strong R&R and DIY demand and believe it will continue to evolve and increase in importance. We're also seeing a shift from urban living to suburban and rural living as people buy more spacious single-family homes and have greater flexibility to work from home. The strong housing starts are being supported by the low mortgage rates and desire to own a single family or multi-family low or mid-rise home and increasing trends from urban high-rise condo living to less dense housing and we see this worldwide. In addition, the age of homes has also increased significantly and have now reached levels not seen since World War II. We were encouraged by the recent US housing data, which was led by strong demand for single-family homes, which represented over 78% of the total housing starts in September. Additionally, both single-family starts and building permits reached highs not seen since 2007. Turning to our markets, our lumber business generated record high adjusted operating income of $387 million and record revenues of $1.3 billion. Record lumber prices, disciplined cost management, strong productivity, and a return to more normalized operating rates contributed to our lumber segment results. Lumber prices increased rapidly as the quarter progressed, driven by unprecedented demand in the repair and remodel and treated lumber segments in North America and Europe, strong US housing starts, and low field inventories throughout the supply chain worldwide. Demand from offshore markets was relatively stable during the quarter, however, they have not achieved price levels seen in North America due to the typical lag in pricing these markets typically face. Our outlook for the remainder of 2020 is a continuation of strong markets, although we anticipate lumber prices will correct as they currently are through the fourth quarter due to typical seasonal demand reductions during this period. During the third quarter, Beta completed its acquisition of three sawmills from Bergs Timber, This acquisition further improves our global diversification with approximately 22% of our production capacity now located in Europe. We continue to be very pleased with our acquisition as well as the ester operation in South Carolina. As of today, we have approximately 44% of our production in British Columbia, 4% in Alberta, 22% in Europe, and 30% in the United States. Results in our pulp business reflect the impact of extensive fiber-related production downtime combined with weak global pulp markets stemming from the ongoing impact of COVID-19. Following extensive sawmill curtailments early in the second quarter, Canfor Pulp took a four-week curtailment at the Intercon and PG Pulp Mills during the third quarter, in addition to scheduled maintenance downtime at Northwood and Taylor. As you will have seen in our news releases, we have made the decision to replace the lower furnace for RB5 at Northwood, which Alan will discuss further in his comments. Global softwood pulp demand is anticipated to improve slightly through the fourth quarter as markets continue to recover slowly from the economic impact of COVID-19 and elevated inventory levels following the seasonally slower summer months. I would also like to highlight that our 2019 sustainability report was released in September. We are regularly revisiting our corporate strategy and reassessing our sustainability and ESG reporting processes to ensure we are aligned with the best-in-class standards. Sustainability and ESG are a top priority for the executive team, and to demonstrate its importance, Pat Elliott's role has been expanded to Senior Vice President of Corporate Finance and Sustainability. In addition, this quarter, we filled the newly created position of Director of Environment and Sustainability, which is responsible for the development and advancement of our comprehensive sustainability strategy. As we look forward to 2021, we will continue to focus on improving our balance sheet, deploying capital internally that targets rapid payback and high return projects, and consider external acquisitions that will improve our global diversification. I will now turn it over to Alan to provide an overview of our financial results.

Thank you, Don, and good morning, everyone. The Canfor and Canfor 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 brief summary of which is included in our overview slide presentation. Our lumber segment reported operating income of $337 million for the third quarter, compared to $107 million for the previous quarter. After adjusting for a net duty expense of $51 million, the lumber segment generated operating income of $387 million, up $327 million from the previous quarter. A record high lumber business results reflected an unprecedented increase in North American lumber pricing as the quarter progressed with a significant surge in demand outpacing available supply following widespread industry containment earlier in the year. As a result, unit sales realizations in North America saw substantial increases in the quarter. In Europe, unit sales realizations benefited from stronger demand, a favorable geographic sales mix, as well as a 5% weaker Canadian dollar. With most business in Europe based on pricing negotiated quarterly in advance, European prices are projected to show solid increases through the fourth quarter of 2020. Notwithstanding seasonal downtime at the company's European lumber operations, overall lumber unit manufacturing costs benefited from stable log costs and a 36% increase in production through the quarter, with substantially all mills operating at full capacity following the COVID-19 related production curtailments taken in the earlier part of the second quarter. In addition, lumber production reflected Vita's September 1st acquisition of Berg's Timber. Our pulp business reported an operating loss of $28 million in the third quarter, compared to an operating loss of $6 million reported for the previous quarter. Results for the current quarter reflected weak global pulp market conditions, significant fiber-related downtime, as well as a previously deferred scheduled maintenance outage at Northwood. These factors being related to the ongoing impact of COVID-19. Pulp production was down 13% in the quarter, largely reflecting a four-week curtailment at the Indercon and PG pulp mills, as well as the scheduled maintenance downtime at Northwood and Taylor's annual maintenance as well. Pulp unit manufacturing costs were moderately higher than the previous quarter, principally reflecting the aforementioned lower production. During Northwood's scheduled outage, the mill's recovery boiler number one was found to be in stable condition and maintenance was completed in one production line in early October. Regarding Northwood's recovery boiler number five, previously announced capital upgrades to the upper furnace are progressing well. Early this week, management made the decision to extend the outage on RB5 to enable the replacement of the lower furnace at an estimated cost of $30 million. This work will be undertaken in the fourth quarter, and this is anticipated to result in approximately 60,000 to 70,000 tons of reduced pulp. In conjunction with the upper furnace project, this lower furnace upgrade will ensure that RB5's continued operation for another 15 to 20 years. In light of the assessments made by management with regards to RB1 and RB5, the previously considered option of a super recovery boiler at an estimated cost of $400 million will now not be required. At the end of the third quarter, Canfor, excluding Canfor Pulp, had net debt of $506 million with available liquidity of approximately $1 billion. After taking account of FIDA's acquisition of Bergs, liquidity improved by approximately $345 million during the quarter, reflecting significant cash earnings combined with favorable working capital movements. As of September 30th, Canfor had paid cumulative cash duty deposits of approximately $550 million and is currently anticipating a material reduction of approximately 15% in the company's cash duty deposit rate towards the end of the fourth quarter. upon finalization of the rates of the first period of review. Canfor pulp ended the third quarter with net debt of $19 million and available liquidity of approximately $130 million. Excluding capitalized major maintenance, we currently anticipate 2020 capital spending of approximately $125 million in the lumber segment and approximately $75 million for Canfor pulp, including the RB5 work currently being undertaken. With regard to 2021, we are currently anticipating capital spending of approximately $200 million for lumber and approximately $60 million for pulp.