Canfor Corporation

Good morning. My name's Colin, and I'll be your conference operator today. Welcome to the Canfor and Canfor Pulse second quarter analyst call. All lines have been placed on mute to prevent any background noise. During this call, Canfor and Canfor Pulse 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 Pulp's Chief Executive Officer. Please go ahead, Mr. Kane.

Thank you, Operator, and good morning, everybody. Thanks for joining the Canfor and Canfor Pulp Q2 2021 Results Conference Call. I'll make a few comments before I turn things over to Alan Nickell. 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 Q2. In addition to Alan and I, we are joined by Kevin Pankratz, our Senior Vice President of Sales and Marketing. I want to begin by acknowledging the extreme wildfire situation we are currently experiencing in Western Canada, both as an industry and Canfor. There is no imminent risk to Kanfor infrastructure and our teams and contractors continue to work closely with provincial wildfire services to actively mitigate risks and support wildfire identification, response and suppression efforts. I want to thank all of the firefighters and first responders on the ground who are fighting the fires and supporting people who have been forced to evacuate their homes. I also want to thank our employees for their continued perseverance and resilience as we face the ongoing challenges of the forest fires, supply chain challenges, and the ongoing COVID-19 pandemic. As I noted last quarter, Canfor is continuing to make progress on developing a comprehensive sustainability strategy that's aligned with best-in-class ESG standards. The strategy will be launched in early October along with the release of our 2020 sustainability report. Our strategy will further advance our commitments to the health and safety of our people the communities where we operate and continue producing sustainable low carbon products. Our strategy will also push us to reach further and expand the sustainable impact we can have as an organization on global climate change. We believe that increasing our focus on sustainability will provide more predictable and sustainable earnings and ensure Canfor's long term success. Turning to our financial results, our lumber business generated record high operating income and revenues of $1 billion and $2.2 billion respectively in the second quarter. Global lumber markets benefited from strong demand and limited available supply during the second quarter with prices reaching record high levels in May. With COVID-19 restrictions easing and consumer spending habits returning to pre-pandemic levels, we have seen a decline in R&R activity in the summer months, contributing to a sharp decline in North American lumber pricing over the last several weeks. Notwithstanding the current market volatility, U.S. housing activity remains strong, reflecting a number of demand 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 housing activity. Lumber demand in Asia was strong in the second quarter with significantly higher pricing supported by lean inventories in the supply chain and solid consumption levels. Our European lumber business continues to perform well with significantly higher sales realizations supporting record high earnings in the second quarter. European sales realizations have continued to increase in the third quarter supported by the traditional lag in contract pricing and strong market fundamentals in the region. Turning to our pulp business, Canfor Pulp reported operating income of $51 million in the second quarter. Canfor Pulp benefited from improved productivity, increased shipments, and significantly higher sales realizations following the sharp increase in global pulp prices experienced in the first quarter. Pulp demand from China has moderated somewhat heading into the third quarter, reflecting elevated inventory levels and seasonally slower demand. Extreme wildfires have significantly impacted transportation networks in Western Canada early in the third quarter, with limited and intermittent rail service to and from our lumber and pulp operations. As a result of the significant transportation backlog and elevated inventory levels, we announced temporary production curtailments at our sawmills in Western Canada. Our operations leaders have shown creativity and flexibility to develop site-specific plans to limit the impact of their curtailments on our employees and we appreciate everyone's efforts as we continue to manage the dynamic wildfire season. We anticipate that inventory levels will gradually improve through the balance of the third quarter. During the second quarter, Canfor also announced plans to construct a new state-of-the-art greenfield sawmill in Derrida, Louisiana. The facility will have an annual production capacity of 250 million board feet and is anticipated to start up in the third quarter of 2022. In addition, Canfor repaid $150 million of US dollar debt in the second quarter and following major growth in recent years with Canfor, excluding Canfor Pulp, ending the quarter with net cash of $930 million. Supported by our improved balance sheet, we continue to assess additional internal and external growth initiatives as we look to grow our business on a global basis. At the same time, we continue to remain patient and disciplined as we wait for the right opportunities to present themselves. 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 Pub 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 speak briefly to quarterly financial highlights, a summary of which is included in our overview slide presentation. Our lumber segment recorded record high operating income of $1 billion for the second quarter of 2021, up almost $400 million from the previous quarter. Lumber segment results continue to reflect strong global market fundamentals, with tight supply and strong demand supporting significant price increases across most grades and jurisdictions. Earnings were also boosted by a 6% increase in shipments. In North America, Western SPF benchmark prices climbed to unprecedented record high levels in May before coming off sharply over the balance of the quarter. Nonetheless, Western SPF 2x4 2 and better prices were still up $370 U.S. or 38% from Q1. Southern yellow pine prices trended similarly to Western SPF early in the quarter, and while weaker demand thereafter resulted in the average 2x4 number 2 price being largely unchanged quarter over quarter, Strong pricing gains for wider-width dimension products resulted in a significant increase in average sales realizations for our U.S. South business. The downward trend in North American lumber prices has continued into July, largely reflecting paired-back consumer spending in the R&R sector and, to a lesser extent, moderated new home construction activity. Turning to our European business, our record high earnings in the second quarter reflected continued solid demand and favorable pricing in that region. And prices have continued to improve early in the third quarter due to the traditional lag in contract pricing. Offshore sales realizations to Asia were also well up in Q2 from Q1, with pricing gains particularly strong in Japan. Similar to Europe, prices for Q3 are anticipated to track higher compared to Q2. Our pulp business reported operating income of $51 million in the second quarter compared to $5 million in the previous quarter. Results for the current period reflected significantly higher NBSK pulp unit sales realizations, as well as an 8% increase in shipments in the quarter. The improved sales realizations reflected the material increase in pulp prices on orders taken in Q1 and shipped in Q2, as well as more stable pricing in the current period. Pulp unit manufacturing costs were modestly higher than the previous quarter, with increased fiber costs offsetting the benefit of improved production and seasonally lower energy costs. At the end of the second quarter, Canfor, excluding Canfor Pulp, had net cash of $930 million and available liquidity of approximately $2.2 billion. Canfor Pulp ended the second quarter with net debt of $14 million, and available liquidity of approximately $133 million. The unprecedented cash flow levels generated in recent quarters supported a further $150 million U.S. repayment of CanForce term debt in Q2, taking the total amount of term debt repaid in 2021 to approximately $410 million Canadian, and lowering our North American term debt down to $150 million U.S. As Don mentioned during the second quarter, Canfor announced plans to invest $160 million U.S. in a state-of-the-art greenfield sawmill located in Louisiana with the startup currently anticipated late in the third quarter of 2022. We anticipate higher spending in the capital realm in 2021 with approximately $250 to $300 million in the lumber segment and approximately $50 to $70 million for Canfor pulp excluding capitalized major maintenance. The range reflects supply chain related risks, mostly around long lead times. The majority of the greenfield sawmill spend will occur in 2022. While we are comfortable retaining our existing liquidity until attractive opportunities present themselves, we continue to assess various organic and external growth opportunities and plan to continue to repurchase additional shares under our share buyback program on an opportunistic basis in the coming quarters. And with that, Don, I'll turn the call back to you.