Canfor Corporation

Good morning. My name is Sylvie, and I will be your conference operator today. Welcome to the CanFor and CanForPop third quarter analyst call. All lines have been placed on mute to prevent any background noise. During this call, CanFor and CanForPop's chief financial officer will be referring to a slide presentation that is available in the investor relations sections 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 like to turn the meeting over to Mr. Don Kane, Can-4 and Can-4 Pulse Chief Executive Officer. Please go ahead, sir.

All right, thanks, Sylvia, and good morning, everyone. Thanks for joining the Can-4 and Can-4 Pulse Q3 2021 Results Conference Call. I'll make a few comments before I turn things over to Pat Elliott, our Chief Financial Officer of Canfor Corporation and Canfor Pulp, and our Senior Vice President of Sustainability. Pat will provide a more detailed overview of our performance in Q3. In addition to Pat and I, we are joined by Kevin Pankratz, our Senior Vice President of Sales and Marketing. Before talking about our financial results, I want to start by discussing the important changes we made to our senior leadership team earlier this month. These changes further position Canfor for long-term success and diversification. Pat has taken on the role of CFO in addition to his responsibility as the Senior Vice President of Sustainability. Given Pat's long history with Canfor and his over 10 years of senior leadership with the finance team, we are very pleased to have Pat in this role. In addition, we have formed a new business unit for bio-based solutions and bio-innovation. which is being led by Alan Nichol, who has taken on the position of Executive Vice President, BioBase Solutions and Pulp Operations. Alan's team is focused on unlocking the full value of each log by diversifying our business into BioBase solutions. We are very pleased to have Alan lead the development of this business unit for Canfor. Alan's previous experience as our CFO will ensure we bring a disciplined approach to developing the BioBase solutions that represent the greatest potential for sustainable return on investments we make in this area. Alan and Pat's roles are also both integral to Canfor's sustainability journey. Over the last year, we have been doing significant work across the business to develop our comprehensive sustainability strategy that was launched at the beginning of October. We have a bold ambition to become a global leader in sustainability. We've defined our strategy around three focus areas. people, planet and products. Sustainability isn't a new priority for us. We're very proud of the positive impact our sustainability efforts have had so far, but we know we can do a lot more. We have focused our initial work on setting ambitious goals and comprehensive targets for the areas of safety, health and wellness, inclusion and diversity, indigenous relations and sustainable forestry. In Q1 2022, we'll be announcing our climate change targets. Our business is facing tremendous growth opportunities as the green carbon storing benefits of wood products is increasingly recognized and valued around the world. We realize we have an opportunity to forge new paths and become leaders, not simply as a producer of natural resource solutions, but as a producer of climate change solutions, and we're excited to take on this challenge. Turning to our financial results, Our lumber business reported operating income of $326 million in the third quarter, supported by record high earnings in Europe. Despite lower shipments associated with seasonal downtime, European results benefited from a significant increase in sales realizations in the third quarter, reflecting continued strong demand in that region, as well as a lag in contract pricing. In North America, sales realizations declined sharply in the third quarter, reflecting a significant decrease in benchmark lumber prices following record high pricing in quarter two. Notwithstanding the impact of lower commodity benchmark prices and ongoing supply chain challenges, our sales realizations were supported by significantly higher offshore pricing, particularly in Japan and European pricing. As a result of the significant supply chain challenges and market uncertainty, we implemented reduced operating schedules at our BC sawmills, with the exception of Wynwood at the end of August. We recognize the impact that volatile lumber markets have on our employees, on our contractors, and on our communities. We have been working with them to mitigate the negative impacts. We appreciate the commitment from labour leaders and many of our Indigenous partners to work together and find creative solutions that are mutually beneficial. BC continues to be a challenging jurisdiction to operate in with a smaller fibre basket in the post-mountain pine beetle era, and we continue to be concerned about the overall competitiveness within the forest sector of BC. We are focused on developing a strong and sustainable primary industry so that it will enable us to continue to support value-added producers, small business, pellet plants and pulp mills, to name just a few examples. It is important for industry and government to work together in partnership with all groups to develop a modern, sustainable and competitive global industry that can support everyone's interests. While we continue to operate on a reduced basis in Western Canada, we are encouraged by underlying demand fundamentals, with solid U.S. housing activity steadily improving R&R demand, supporting increased pricing in recent weeks. Turning to our pulp business, Canfor Pulp reported operating income of $16 million in the third quarter. Results in our pulp business reflected the impact of scheduled and unscheduled downtime, as well as global supply chain challenges, which resulted in reduced shipments in the third quarter. While global pulp pricing declined in the third quarter, Canfor Pulp benefited from slightly higher sales realizations reflecting timing of shipments and a weaker Canadian dollar. Global pulp pricing has continued to decline heading into the fourth quarter, reflecting softening demand in Asia, elevated global inventories, and ongoing logistic constraints. Notwithstanding current market uncertainty, Canfor Pulp is anticipated to benefit from increased production in Q4 following recent scheduled and unscheduled downtime. Our Greenfield Sawmill in Louisiana is progressing as scheduled, with startup anticipated late next year. We continue to assess additional internal and external opportunities to grow our business on a global basis, although we are prepared to remain patient and disciplined for the right opportunities that meet our strategic and financial criteria. I will now turn it over to Pat to provide an overview of our financial results.

Thanks, John, and good morning, everyone. The CanFor and CanForPulp 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 our quarterly financial highlights, a brief summary of which is included in our overview slide presentation. Our lumber segment reported operating income of $326 million in the third quarter, which included a $27 million non-investment cash expense associated with anti-dumping accrual rate adjustments in Q3 and prior quarters. While results were down from the record high earnings reported in Q2, our high value strategy and regional diversification supported our results in the quarter. Our lumber segment benefited from record high earnings in Europe as improved sales realizations more than offset the impact of seasonally lower production and moderately higher log costs. Operating income from our European operations contributed over 50% of our lumber segment earnings in the third quarter. In North America, while sales realizations benefited from strong offshore pricing, results generally reflected the sharp decline in North American lumber pricing, as well as the impact of reduced production. British Columbia log costs increased significantly in the third quarter, with a further increase expected in Q4, both reflecting the lag in market-based dumpage adjustments and the very high lumber prices seen in the summer of this year. Looking ahead to 2022, we anticipate a material reduction in BC stoppage effective from January 1st. Log costs in our other jurisdictions saw more modest log increases. Our pulp business reported operating income of $60 million in the third quarter compared to $51 million in the previous quarter. Results for the current quarter reflected significantly lower pulp shipments, as Don has highlighted, offset in part by modestly higher sales realizations. Capital additions were approximately $130 million in the third quarter, including approximately $30 million on our greenfield sawmill, which is progressing as scheduled. We currently anticipate the 2021 capital spend to be approximately $330 million in the lumber segment and $50 to $60 million for camphor pulp, excluding capitalized major maintenance. Taking account of our remaining greenfield spend, the RBS biofuel investment and planned organic and staining capital, Our preliminary 2022 CapEx forecast is $450 to $500 million inclusive of pulp. As Don mentioned, we continue to review various organic and external growth opportunities and currently anticipate increased capital spend in 2022, as I just mentioned, including the remaining greenfield spend and contribution to the new biofield joint venture. In addition, we will continue to assess further the repurchase of shares under our share buyback program on an opportunistic basis. And with that, Don, I'll turn the call back over to you.