Canfor Corporation

Good morning ladies and gentlemen and welcome to Canfor and Canfor Pulp 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. And I would like to turn the meeting over to Mr. Don Kane, Canfor and Canfor Pulps Chief Executive Officer. Please go ahead, Mr. Kane.

All right. Thank you, Operator, and good morning, everyone. Thanks again for joining the Canfor and Canfor Pulps Q1 2021 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 and Canfor Pulp. Alan will provide a more detailed overview of our performance in quarter one. In addition to Alan and I, we are joined by Kevin Pankratz, our Senior Vice President of Sales and Marketing. I'd like to begin by recognizing the hard work, the resilience, and dedication of all of our Canfor and Canfor Pulp employees. Through everyone's exceptional efforts, not only have we persevered through the challenges of the pandemic, but also advanced our strategy in several areas. We are excited to be advancing our sustainability culture to the next level, significantly increased our focus on ESG reporting and are in the process of developing a comprehensive sustainability strategy that's aligned with best-in-class ESG standards. As part of this process, we are undertaking goal setting and will be implementing action plans with meaningful targets to provide a pathway to achieving these goals. This work will be outlined in our sustainability strategy that will be announced later this year. We see opportunities to capitalize on the low carbon economy and the carbon storing green attributes of wood products in construction, and we are excited about the growing use of mass timber in non-residential construction. In addition, with more countries banning the use of single-use plastics and increasing demand for renewable low-carbon materials, we have a great opportunity to lead in the development of sustainable products that can replace fossil fuel-based products. With RBS Biotech, our expanded joint venture partnership with Lycella to convert wood biomass into high-value biofuels, we will support a reduction in greenhouse gases from the transportation sector and will also contribute to a low carbon economy. We continue to make significant progress on our commitment to build a diverse workforce that represents the communities in which we live and work by 2030. Due to the significant commitment to diversity and inclusion throughout the organization by our senior management and board, we are seeing results including a solid increase in the hiring of women and indigenous people. Turning to our financial results, our lumber business generated record high operating income and revenues of $607 million and $1.7 billion respectively in the first quarter. Global lumber markets continue to benefit from sustained high levels of demand in excess of available supply, led by strong U.S. housing activity and R&R demand. U.S. housing activity, particularly for single-family homes, has increased sharply in recent quarters, reaching 15-year highs in March. Elevated demand continues to reflect a number of trends that have emerged since the onset of the pandemic, combined with an aging housing stock and low existing home inventories following a number of years of modest U.S. housing activity. While consumer spending habits are likely to normalize when the COVID-19 pandemic ends, we believe favorable demand fundamentals will continue to positively impact our industry going forward. In Asia, lumber demand was solid in the first quarter with improved pricing, particularly in Japan, anticipated in the second quarter, reflecting strong demand and a lag in contract pricing. Our European lumber business continues to perform well with record high earnings achieved in the first quarter. While pricing in Europe has lagged North America due to the nature of overseas contract pricing, market fundamentals in Europe remain strong. with significantly higher sales realizations anticipated in the second quarter. Turning to our pulp business, Canfor Pulp reported operating income of $5 million in the first quarter. Global pulp pricing increased significantly during the quarter, reflecting improved demand, particularly from China, combined with global transportation constraints. Following the successful replacement of recovery boiler No. 5 at Northwood in January, Canfor Pulp performed well in the quarter, with the benefit of significantly higher pulp pricing anticipated to be fully realized in the second quarter. During the first quarter, Canfor repaid its $225 million term debt with cash on hand, and following major growth in recent years, ended the quarter with only a small amount of net debt. Supported by our improved balance sheet and strong market outlook, we anticipate increased capital spending in 2021 and continue to assess various internal and external growth initiatives as we look to grow our business on a global basis. At the same time, we are committed to remaining patient and being disciplined while we wait for the right acquisition opportunities to come along, and we will exercise judgment to pass on opportunities that do not align with our strategy or are overpriced due to today's high product prices. Canfor and Canfor Pulp will continue to deploy capital internally that targets strong rates of return consistent with our strategy and increasing focus on sustainability. 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 Pulp quarterly results were released yesterday morning 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. As Don highlighted, our lumber segment reported record high operating income of $607 million for the first quarter of 2021, compared to $461 million for the previous quarter. Results in Q4 included a net duty recovery of $95 million following the finalization of CVD and ADD rates applicable to the first period of review. Lumber segment results continue to reflect extremely strong global market fundamentals with sustained high levels of demand exceeding available supply, resulting in new record prices during the quarter. Unit sales realizations in Western Canada and the U.S. South were up substantially, reflecting these positive price fundamentals and significantly outweighing the impact of market-related log cost increases in Western Canada and moderately lower shipment stemming from transportation constraints. By way of note, North American lumber prices have continued to increase sharply early in the second quarter, supported by strong order files. Our European business continues to generate strong results and also recorded record high earnings in the first quarter, buoyed by solid demand and favorable pricing in that region. While European pricing has lagged the increases seen in North America, pricing has continued to see significant increases early in the second quarter, as Dawn outlined. Our pulp business reported operating income of $5 million in the first quarter compared to an operating loss of $28 million in Q4. Results for the current quarter reflected improving global pulp market conditions combined with a 25% increase in pulp production following the successful rebuild of Northwood's recovery boiler number five that was completed in mid-January. Global pulp pricing rose sharply during the first quarter, supported by increased demand, particularly from China, as well as tight supply arising from global supply chain challenges. As highlighted during our last analyst call, due to the lag between shipments and orders, the significant majority of these price increases will be realized in the second quarter. Pulp unit manufacturing costs were moderately lower than the previous quarter as a benefit of a higher production more than offset seasonally higher energy costs. Fiber costs were slightly lower than those in Q4. At the end of the first quarter, Canfor, excluding Canfor Pulp, had net debt of $25 million and available liquidity of approximately $1.2 billion. The unprecedented cash flow levels in recent quarters supported the early repayment of Canfor's $225 million term debt in Q1. Canfor Pulp ended the first quarter with net debt of $60 million and available liquidity of approximately $87 million. We anticipate higher capital spending in 2021 with approximately $300 million in the lumber segment and close to $70 million for Kanpur pulp, excluding capitalized major maintenance costs. While we are comfortable retaining and enhancing our existing liquidity until attractive opportunities present themselves, we continue to assess various potential attractive and accretive organic and external growth and diversification opportunities and continue to look closely at the potential for restarting our share buyback program. But at the same time, we are mindful of the need to adopt a thoughtful and disciplined approach. And with that, Don, I'll turn the call back over to you.