Canfor Corporation

Good morning. My name is Miranda, and I will be your conference operator today. Welcome to CAN4 and CAN4PALP fourth quarter analyst call. All lines have been placed on mute to prevent any background noise. During this call, CAN4 and CAN4PALP's chief executive officer will be referring to a slide presentation that is available on 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 call over to Mr. Don Kane, Canfor and Canfor Pulp's Chief Executive Officer. Please go ahead, Mr. Kane.

Okay, thank you, Operator, and good morning, everyone. And thanks for joining the Canfor and Canfor Pulp Q4 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 Q4. In addition to Pat, we are joined by Kevin Pankratz, Senior Vice President of Sales. I want to start by recognizing all of our employees across the organization who, in the face of many challenges, including the pandemic and significant supply chain challenges, Our employees demonstrated exceptional resilience and dedication, and they were key to our success in 2021. We continue to deliver on our strategy during the year, and I would like to highlight just a few key areas. In October, we announced our bold ambition to become a global leader in sustainability. I'd like to thank everyone across the organization who was contributing to setting and achieving our sustainability goals. This is a team effort, and it's great to see the support it's receiving from our employees. One area of focus over the last few months has been working to develop our carbon target, which we expect to announce in Q2. We are pleased that forest products are increasingly being recognized for how they can help mitigate climate change as the world moves away from fossil fuel-based products. In October, we announced our planned investment in a new biofuel plant in Prince George through our Arbius joint venture, and progress continues to be made towards construction of the facility. In 2021 we continued our focus on global diversification and successfully executed on several strategic initiatives announcing plans to construct the state of the art Greenfield sawmill in Louisiana. Completing a number of organic capital investments purchased an additional operation in Sweden and concluded an agreement for the purchase of Miller Western solid wood assets. Since 2018, and including Miller Western, Canfor has added 2.2 billion board feet in annual production capacity through our $1.2 billion of investments and acquisitions, which have been focused mostly in the U.S. South, Europe, and in Alberta. A much more globally diversified operating footprint is ensuring that we are able to provide exceptional service to our global customers as we navigate the many challenges throughout the supply chain, and this was evident in Q4. We are continuing to assess additional organic and value-added external growth opportunities as we look to grow our lumber business globally. In terms of our results, our lumber business benefited from record high pricing and strong operational performance during 2021, with operating income of $2.2 billion before adjusting items. In the fourth quarter, our lumber business operating income before adjusted items was $273 million, supported by continued strong results in Europe. Despite extreme volatility experienced during the year, lumber demand far exceeded available supply, resulting in unprecedented price increases and record high earnings for our lumber operations. While our operations benefited from favorable market conditions, we faced a number of significant challenges during the year, including extreme wildfires, historic flooding, the impact of COVID-19, along with the many supply chain issues. As a result of these challenges, As well as ongoing uncertainty associated with fibre supply in British Columbia, many of our sawmills were on reduced operating schedules during the third and fourth quarter. BC continues to be a challenging jurisdiction to operate in due to a smaller fibre basket as we enter the post-mountain pine beetle era. In addition to significant uncertainty brought on by several new and proposed policy changes, land use decisions and legal decisions. A few weeks ago, we announced the difficult decision to permanently reduce the production capacity at our Plateau facility to align production capacity with the sustainable fiber supply in the region. We regret the impact this decision will have on our employees, and we are committed to supporting those impacted through the transition, including providing jobs to those who would like to stay with Canfor. We also announced a $14 million investment in Plateau to improve manufacturing flexibility and lumber recovery. and better align the manufacturing capabilities of the Plateau operation with existing fibre supply. While these closure decisions are difficult, we remain focused on enhancing value and maximizing returns from our fibre basket in British Columbia, ensuring the long-term success of our operations with a footprint that aligns with available, economically viable fibre. We continue to work with government and our Indigenous partners to ensure a sustainable, globally competitive forest sector in BC, and are pleased to announce our intent to sell our Mackenzie tenure to the McLeod Lake Indian Band and Sekai Dene Nation, which provides an opportunity to grow the nation's leadership in the forest economy and stewardship opportunities within their traditional territories. Turning to Canthorpe pulp, 2021 was more challenging. particularly in the second half of the year due to significant transportation delays related to the extreme weather in British Columbia, COVID-19, production downtime, and weakness in the global pulp markets. Before taking account of an asset impairment charge that Pat will speak to, Canfora Pulp had operating income of $32 million in 2021 with an operating loss of $41 million in the fourth quarter, as a result of significant downtime associated with supply chain constraints, as well as the ongoing repairs to Northwoods recovery boiler number one. While pulp markets have improved significantly in early 2022, Canfor pulp continues to be impacted by ongoing supply chain challenges. With our major maintenance on Northwoods recovery boiler progressing as scheduled, on time and on budget, we remain focused on improving operational reliability closely managing costs and maximizing fiber utilization going forward. Lastly, I would like to thank Alan Nichol, who, after 14 years with Canfor, will be leaving the company this month. Alan will continue to serve as President and CEO of Arbius and has taken on the role of Managing Director with Lysella Holdings, our partner in the Arbius joint venture. I will now turn it over to Pat to provide an overview of our financial results.

Thanks, Don, and good morning, everyone. The Canfor and Canfor 12 quarterly results were released yesterday afternoon and come together with an overview slide presentation in the investor relations section of the respective companies' websites. In my comments this morning, I'll speak to quarterly and annual financial highlights, a summary of which is included in our overview slide presentation. As Don has already mentioned, 2021 was an exceptional year for Canfor. In the face of significant weather and supply chain challenges, we saw the benefit of our diversification strategy with our global lumber platform generating unprecedented earnings during the year. We are pleased to have executed on a number of strategic initiatives during the year, supported by our strong balance sheet and record earnings. Capital expenditures were approximately $430 million in 2021, which included $83 million for our greenfield sawmill, as well as various organic growth initiatives largely undertaken in the U.S. South and Europe. Our greenfield mill is progressing well, but due to a challenging supply chain, is slightly behind schedule and is anticipated to start up in early 2023. We repurchased approximately $20 million of shares during the year and repaid over $420 million of term debt, ending the year with net cash of $1.1 billion. Looking ahead to 2022, we currently anticipate capital spending of approximately $430 million in the lumber segment, have just completed the miller western acquisition yesterday for 420 million dollars including target working capital of 56 million dollars for can for pulp we are forecasting 70 million dollars in spending including approximately 30 million dollars towards ongoing repairs to northwood's recovery boiler number one in addition to an expanded capital program in 2022 we continue to look at several organic and external growth opportunities and plan to restart our share buyback program and anticipate moderate opportunistic use during the year. Turning to our quarterly results, our lumber segment generated operating income of $273 million in the fourth quarter, before adjusting for an asset impairment charge of approximately $200 million. Results in the fourth quarter benefited from continued strong earnings in Europe, with our European operations contributing approximately 50% of our lumber segment earnings for the second consecutive quarter. In 2021, EBITDA from our European operations was approximately $630 million. In North America, our results reflected the impact of reduced operating rates with production and shipment volumes well below the previous quarter due to significant supply chain challenges, severe flooding in British Columbia, and reduced trucking availability in the U.S. South. Log costs in Western Canada also reflected moderately higher market-based stumpage. While pricing in North America increased significantly as the quarter progressed, offshore sales realizations declined following the record high prices experienced in Q3. Due to timing of shipments versus orders, the surge in lumber prices towards the end of the fourth quarter will largely be realized in early 2022. As noted, we reduced the net book value of both our lumber and pulp assets in British Columbia following an impairment test completed in accordance with IFRS. This nearly $300 million charge reflects the right sizing of our balance sheet to reflect the reduced availability of fiber supply in certain regions of British Columbia. Our pulp business had an operating loss of $41 million in the fourth quarter, before adjusting for the asset impairment charge of $95 million. Results in our pulp business reflected weaker global pulp market conditions, as well as the impact of severe flooding in British Columbia, which crippled transportation networks and resulted in significant operational downtime during the quarter. In addition, Camphor Pulp announced extended capital-related downtime at Northwood, the rebuild of the lower portion of the recovery boiler number one is going well and the mill is expected to return to full production at the end of Q1. While global pulp markets have improved significantly in early 2022, CAMFOR pulp continues to be impacted by ongoing transportation challenges with a significant lag in sales realizations anticipated in the first quarter. As the rebuild of RB1 approaches completion, CAMFOR pulp is focused on improving operational reliability, improving fiber yield, and reducing and stabilizing manufacturing costs. And with that done, I'll turn the call back over to you.