Canfor Corporation

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

All right, thanks, Operator, and good morning, everyone. Thanks for joining the Canfor and Canfor Pulp Q4 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 Q4. In addition to Alan and I, we are joined by Kevin Pankratz, our Senior Vice President of Sales and Marketing. Before I talk about our 2020 and Q4 results, I'd like to start by recognizing the exceptional efforts of our employees this past year. 2020 was a very volatile and unpredictable year with extreme highs and extreme lows, largely due to the uncertainty caused by the COVID-19 pandemic. Our employees have demonstrated an unwavering commitment to health and safety and have implemented our COVID-19 protocols, policies, and procedures, and I can't thank them enough for their resilience, determination, and commitment to Canfor and Canfor Public. 2020 also marked a shift for us as we started the process of developing a comprehensive sustainability strategy and significantly increasing our focus on ESG and associated priorities. Around the world, countries are embracing low-carbon strategies to aggressively reduce greenhouse gas emissions, and as a producer of renewable green forest products, we are excited about the role we can and are playing in reducing society's environmental footprint. The green attributes of our products are increasingly being recognized, whether it's in mass timber hybrid construction applications or bio innovation opportunities. In addition, with increasing opportunities in the bio economy and bio innovation space, there are exciting opportunities to produce both advanced biofuels and bio products. We're also pleased that we've been able to generate significant economic activity throughout most of the pandemic and believe the forest industry will continue to play a significant role in the post-pandemic economic recovery. Turning to our financial results, beginning with our pulp business, Canfor Pulp reported an operating loss of $56 million in 2020, reflecting the significant impacts of COVID-19. Global pulp market fundamentals were very challenging throughout most of the year, In response to weak markets and extensive sawmill curtailments at the onset of the pandemic, Canfor Pulp took significant operational downtime during the year, which weighed heavily on our financial results. During the fourth quarter, we also made the decision to replace the lower furnace of our main recovery boiler at Northwood, which was completed on time and under budget in early 2021. Despite the many challenges faced during the year, Canfor Pulp maintained its solid balance sheet And with significant capital projects now behind us, we are well positioned to capitalize on the recent increases in the price of pulp and the improved market fundamentals we are seeing in early 2021. Turning to lumber, despite extreme volatility experienced during the year, our lumber business generated record high operating income of $816 million in 2020, reflecting unprecedented strength in lumber markets worldwide, particularly in the second half of the year. At the onset of COVID-19, significant market uncertainty resulted in widespread production curtailments across the lumber industry. Reduced supply was not able to meet the unexpected increase in demand as a result of strong R&R activity, a change in consumer spending habits due to a large percentage of people working from home, and a sharp increase in North American new home construction activity. These favorable demand conditions far exceeded available supply, resulting in unprecedented price increases and record high earnings for our lumber operations in North America. Our European lumber business achieved record high earnings in the fourth quarter of 2020, supported by strong market fundamentals in Europe and increased production levels. While European pricing has lagged North America due to the nature of overseas contract pricing models, our operations performed well in the year, generating annual EBITDA of approximately $180 million. in 2020. Despite the unprecedented challenges due to the pandemic, we continued to make significant progress on our strategy during the year with our recent acquisitions in Europe and growing footprint in the U.S. South and significantly improving our geographic diversification. Following major growth in recent years, we significantly strengthened our balance sheet in 2020, supported by strong lumber markets, solid operational performance, and a disciplined approach to cash management. Looking ahead to 2021, we anticipate increased capital spending supported by our strong balance sheet, favorable lumber market fundamentals, and improving global pulp market conditions. Canfor and Canfor Pulp will continue to deploy capital internally that targets strong rate of return projects that align with the strategy and consider M&A opportunities that will grow our business on a global basis. I will now turn it over to Alan to provide an overview of our financial results.

Thanks, 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 $461 million for the fourth quarter, compared to $337 million in Q3. Results included a net duty recovery of $95 million following the finalization of CVD and ADD rates applicable to the Department of Commerce's first period of review. After adjusting for this, the lumber segment generated operating income of $366 million compared to similarly adjusted operating income of $387 million in the previous quarter. Lumber segment results continued to reflect strong global market fundamentals. While North American benchmark lumber prices saw extreme volatility through the fourth quarter, increased demand over the traditionally slower season further reduced the inventory levels and supported material price increases towards the end of the fourth quarter and into early 2021. Unit sales realizations in Western Canada increased moderately in the fourth quarter, reflecting a favorable timing lag in shipments versus orders, as well as improved offshore sales realizations, and to a lesser extent, a reduction in the duty deposit rate to 4.62% in December. In the U.S. South, notwithstanding the impact of seasonally lower pricing in wider-width southern yellow pine lumber products, Our operations performed well and continue to generate strong financial results in the fourth quarter, supported by historically high lumber prices and stable log costs. North American lumber demand has continued to increase in early 2021 and strong market fundamentals and order files have supported record high Western SPF and Southern Yellow Pine pricing in recent weeks. Our European business reported record high earnings in the fourth quarter, supported by improved unit sales realizations and higher production following the September 1st acquisition of Burgs Timber in southern Sweden. With most business in Europe conducted based on pricing negotiated quarterly in advance, European prices are also seeing solid increases in the first quarter of 2021. In contrast to our lumber business, our pulp business reported an operating loss of $28 million in the fourth quarter, which was in line with that of the previous quarter. Results for Q4 reflected continued soft market conditions and weak prices on pulp shipments as well as the capital-related downtime at Northwood. While global pulp markets improved towards the end of the fourth quarter, unit sales realizations were in line with those of the previous quarter, due in part to the timing of shipments versus orders. Global pulp prices have surged in recent weeks, with improved market fundamentals supporting significant price increases. In the fourth quarter, as previously reported, Northwood completed a scheduled maintenance outage in October and took an extended outage on one production line to enable the replacement of the lower furnace in the mill's recovery boiler number five. The lower furnace replacement was completed as scheduled in mid-January at a total capital cost of approximately $27 million. Pulp production was up 3% from the previous quarter, while unit manufacturing costs were slightly lower as reduced fiber costs outweighed seasonally higher energy costs and usage. At the end of the year, Canfor, excluding Canfor Pulp, had net debt of $227 million and available liquidity of approximately $1.3 billion. Liquidity improved by approximately $255 million during the quarter, reflecting the significant cash earnings associated with the strong lumber markets. Canfor Pulp ended the year with net debt of $43 million and available liquidity of approximately $105 million. Excluding capitalized major maintenance, we currently anticipate significantly higher capital spending in 2021, with approximately $300 million in the lumber segment and $70 million for Canfor pulp. From a broader capital allocation perspective, we continue to assess various options related to M&A and growth and diversification in our preferred regions of the U.S. South and Europe. In addition, we will consider the potential for restarting our share buyback program on an opportunistic basis. Having said that, we are comfortable with retaining and enhancing our existing liquidity until a reasonable opportunity presents itself. With that, Don, I'll turn the call back to you.