Canfor Corporation

Good morning. My name is Chris, and I'll be your conference operator today. Welcome to the Canfor and Canfor Pulp first quarter analyst call. All lines have been placed on mute to prevent any background noise. 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. 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, everyone. Thank you for joining the Canfor and Canfor Pulp Q1 2022 Results Conference Call. I'd like to start by introducing Kevin Edson, who joined Canfor Pulp as President and Chief Executive Officer in April. I've had the great pleasure of knowing Kevin for several years and Kevin most recently served as the President and Chief Executive Officer of Ecom Timber and has extensive experience across the forest sector, including pulp and paper, lumber, and engineered wood products. We're very pleased to have Kevin on board. I'm going to make a few comments before I turn things over to Kevin and Pat Elliott, our Chief Financial Officer of Canfor Corporation and Canfor Pulp, and our Senior Vice President of Sustainability. In addition, we are joined by Kevin Pankratz, Senior Vice President of Sales and Marketing, I would like to begin by acknowledging the hard work, dedication, and resilience of our employees over the last quarter. They continue to persevere in the face of the global supply chain crisis. The crisis started at the beginning of the COVID-19 pandemic and has worsened as the demand for goods has continued to rise. In addition, the supply chain is still experiencing significant COVID-related interruptions, and in British Columbia, we experienced extreme weather and wildfires last year that also disrupted the supply chain. The global supply chain crisis has had a significant impact to Canfor and Canfor Pulp in recent quarters. This has resulted in operational downtime with our sawmills in Western Canada currently running on a reduced schedule to manage excess inventories at our mills. Canfor Pulp has also experienced prolonged and significant operational impacts as Kevin will speak to. We anticipate that supply chain crisis will continue for several more months. Last week, we announced that we are implementing a comprehensive plan to achieve net zero carbon emissions by 2050. We have developed near-term science-based targets to reduce carbon emissions from our pulp and wood products operations by 42% by 2030. In addition, by 2024, we will measure and assess our global supply chain and woodlands emissions, which are defined as scope three, and set a science-based reduction target. We are pleased that forest products are increasingly being recognized for their ability to help mitigate climate change as the world continues to reduce its dependency on fossil fuel-based products. As outlined in October, as part of our sustainability strategy goals, we are focused on building comprehensive and meaningful relationships with our Indigenous partners upon whose traditional territories we operate. We believe we have a responsibility to work in partnership with Indigenous nations to better understand each nation's priorities and to develop opportunities to support those priorities. We are committed to having agreements with all willing Indigenous nations in our operating areas by 2030. Last week, the government of British Columbia announced a doubling of forest revenues shared with First Nations and committed to developing a new forestry revenue sharing model. We believe this is an important step forward with more work to be done to support the interests of Indigenous nations for a greater share of revenues generated from the land base. Turning to our financial results, our lumber business benefited from significantly improved sales realizations in the first quarter, a strong global demand outpaced available supply. While rising interest rates and inflationary pressure may temper lumber demand somewhat, market fundamentals remain strong led by solid repair and remodel activity, household balance sheets, and pent-up demand for new home construction in the United States. Our lumber business continues to be supported by our diversification strategy with our European operations generating another quarter of very strong earnings. With the current fiber supply in British Columbia anticipated to continue declining in 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, we are pleased to have closed the acquisition of Miller Western Solid Wood assets in Alberta in the first quarter. This acquisition provides us with an expanded product offering, an increased footprint in Alberta, and provides additional supply of high-quality Western SPF lumber. We recently announced a significant capital investment in our Urbana sawmill in Arkansas, which will increase our Southern Yellow Pine production capacity by 115 million board feet. We continue to assess additional organic and value-added external growth opportunities as we look to grow our lumber business on a global basis. We are continuing to make progress on the construction of our Greenfield Mill in Louisiana and recently held a groundbreaking event with community leaders. I will now turn it over to Kevin to provide an overview of Canfor Pulp.

Thank you, Don, and good morning, everyone. Canfor Pulp had another difficult quarter, with results continuing to reflect the ongoing global supply chain crisis, which impacted our operating rate, shipment volumes, and sales realizations. In addition, results reflected the impact of capital-related downtime at Northwood to rebuild the lower furnace of RB1, which was completed on budget in mid-April. While pulp markets have improved significantly to start 2022, we anticipate the current transportation challenges to persist with the benefit of improved pulp pricing not anticipated to be fully realized until at least the end of the second quarter or well into the third quarter, given the extreme lag between shipments versus orders. We continue to closely manage inventory levels at our mills as we work to optimize available transportation. While we regret the impact the current supply chain crisis has had on our employees, contractors, and communities, we will continue to adjust future operating plans to match available logistics. With the rebuild of RB1 now behind us, our focus as a management team is to improve operational reliability and closely managing costs to preserve our strong balance sheet. I will now turn it over to Pat to provide an overview of our financial results.

Thanks, Kevin, and good morning, everyone. Canfor and Canfor Pulp quarterly results were released Tuesday 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 speak to quarterly financial highlights, a summary of which is included in our overview slide presentation. Our lumber business generated operating income of $783 million in the first quarter, benefiting from strong lumber prices in North America, the March 1st acquisition of assets from Miller Western, and very strong earnings in Europe. Our lumber business continues to benefit from our global platform, with our European operations contributing approximately $200 million of EBITDA in the first quarter, reflecting strong lumber demand, improved pricing, and stable manufacturing costs in that region. In North America, lumber prices increased sharply in the first quarter as strong demand was met with limited available supply due to ongoing supply chain challenges. Our results also reflected significantly improved operating rates in Western Canada and the U.S. South following the challenges experienced in the fourth quarter, as well as reduced log costs in British Columbia due to the timing of market-based stumpage. Looking ahead, while we anticipate benefiting from a full quarter of production from our recently acquired mills in Alberta, our Western Canadian operations have been running on reduced operating schedules in April to address excess inventory levels at our mills, as Don previously mentioned. In Europe, we anticipate a strong second quarter, reflecting continued solid demand and improved pricing in the region. Our pulp business had an operating loss of $26 million in the first quarter, with results continuing to reflect the impact of extreme supply chain challenges, as well as capital-related downtime at Northwood. While pulp pricing has increased sharply to start 2022, the ongoing transportation challenges have resulted in a significant lag in sales realizations, given the timing of shipments versus orders. with the benefit of recent pricing not anticipated to be fully realized until at least the end of the second quarter and well into the third quarter. As Kevin mentioned, CAMFOR Pulp is focused on improving operational reliability going forward and continues to manage fiber and manufacturing costs closely, considering market and inflationary cost pressures. Capital expenditures were approximately $81 million in the first quarter, including $16 million of spend on our Greenfield sawmill, which continues to be on schedule to start up in early 2023, as well as costs associated with the recently completed rebuild of the lower furnace of RB1 at Northwood. After taking account of tax payments largely related to 2021, the $440 million acquisition of Miller Western, and modest share repurchase activity, Canfor, including Canfor Pulp, ended the quarter with net cash of approximately $880 million. Canfor Pulp ended the quarter with net debt of approximately $36 million and has retained a solid balance sheet despite the significant challenge experienced in recent quarters. In addition to an expanded capital program in 2022, we continue to look at several organic and external growth opportunities and plan to continue repurchasing shares under our NCIB which was renewed towards the end of the first quarter. And with that, Don, I'll turn the call back over to you.

Thanks, Pat. So, operator, we can turn over to the question and answer period now from analysts. Thank you.

Thank you. We will now take questions from financial analysts. If you have a question, please press star 1 on your telephone keypad. If you're using a speakerphone, please lift your receiver and then press star 1. If at any time you wish to cancel your question, please press star 2. Please press star 1 now if you have a question. There will be a brief pause while participants register for questions. Thank you for your patience. Your first question comes from Paul Quinn, RBC Capital Markets. Paul, please go ahead.

Thanks very much, and morning, guys. Welcome aboard, Kevin. I'll start with you. Just on camphor pulp, just trying to understand this recovery that we'll expect in Q2. Obviously, pricing has materially moved higher. One question just on the sustainable sustainability of that price increase. And then with the downtime at BCTMP because of the transportation issues, also at Northwood, is there going to be a recovery, financial recovery between Q1 and Q2 pre-muted?

Thank you very much for the question, Paul, and I'm really glad to be back in the West and, quite frankly, back into the pulp business. I think the question around pricing, you're spot on. It's really strong now. I think in large part it's supported by constraints, and therefore the ability for it to continue strong through the year will really be a function of what or when that logistic issue or global supply issue is resolved. We don't have good visibility in terms of underlying demand, especially out of China right now. We know we're seeing some cracks, but given the lack of ability to supply by industries around the world, it seems to be balancing out fairly well. In terms of operating through the second quarter, we think that outside of the TA that Northwood has planned, which will be about 35,000 tons coming out, The balance is really going to be related to logistics between both the big mills and the BCTMP mill. We'd give guidance that our output probably will be under 200,000 tons for the quarter, but better than the 175,000 or so that we saw in the first quarter.

Yeah, that's great. Maybe switching over to lumber for Don or the other Kevin. European lumber demand You say strong in Q1, looks like it's strengthening into Q2. Just wondering what that situation is with respect to supply and demand given the rest of Ukraine conflict. Kevin, go ahead.

Sure. Good morning, Paul. Yeah, for Q2, definitely because we sell so far forward, we already have a pretty good view on the demand and have that pretty much locked up for the quarter. and seeing pricing, you know, guiding pricing be up about 20%. And so we are seeing increased inquiry for regions that we don't historically would sell to, like into some of the Baltic countries that rely on the products either from Belarus or from Russia, and Ukraine for that matter. So definitely a lot of dynamics on trade flows. Is that maybe sort of what you're getting to? And that impact, I think, is, well, not yet fully realized. is going to be playing out in the second quarter and for the balance of the year.

Okay, so Kevin, last year I think we saw sort of $1.65 billion, if I remember that stat right, of European exports into North America. What are you expecting that level to be in 2022 here?

Yeah, so I think we had a pretty good start to the year, and we do expect, including ourselves, slightly less going into Q2. But I don't see it going higher than that and do see that to moderate, and that's going to create some supply tension in the North American market as they need that product to support the demand domestically within Europe. But, you know, hard to say exactly what it is, but I do expect it to be slightly less.

Okay, and then just lastly, just on overall lumber demand in North America, I mean, we obviously saw prices take off early, well, I guess late in 21 and early in 22, and then a correction. Now they stabilized here. What's your expectation going forward here?

Yeah, actually, you're right. We did see prices stabilize both in SYP and in SPF, and we're seeing a resurgence of demand. New home construction remains to be extremely solid. Most of our customers have got a great book of business well into Q2 and some into Q3. So for that reason, we think that, you know, Q2 looks, you know, we're going to be more or less in line, sort of where we're at, maybe plus or minus a little bit, but feel pretty good there. And for the R&R segment that, you know, we saw some, you know, some weakness there, some pullback in late in Q1 and early Q2. But the last couple of weeks, we've actually seen a recovery in that demand. And so for those reasons, I think Q2 is going to be in a range that we are here just based on order file and still challenging transportation challenges out of BC that's going to temper that supply that'll come into the North American market. So feel pretty positive for the second quarter. And then, of course, for the balance of the year, while the fundamentals are extremely good, there are some risks, obviously, with inflation and the mortgage rates and things like that that could impact some of the demand. But to the supply response, that's going to be maybe enough to keep that in balance, especially with maybe less European volume. And depending what happens with BC and other jurisdictions with transportation, we think that's going to be moderated from Q2, but still pretty healthy.

Great. Strong results. Thanks, guys.

Great. Thanks, Paul.

Thank you. Your next question comes from Sean Stewart, TD Securities. Sean, please go ahead.

Thanks. Good morning, guys. Two questions. Don or Pat, start with the balance sheet. Still overcapitalized even after the Miller Western acquisition. And it looks like the bias is still M&A and organic capex over more aggressive share buybacks, which is, I guess, a consistent story from you guys. On the M&A front, can you give us a sense of where maybe not the best opportunities are right now, but where there are more opportunities coming to market. And on the back of Miller Western and your existing footprint in Alberta, do you see more room for growth there specifically?

Yeah, for sure, Sean. I mean, it's Dawn. I guess a couple of things, just going to talk about the three areas that you alluded to there. We would, in our view right now, probably, and there's not really a lot that are obviously available as we sit right now, for sure, to start with. However, we would say that in terms of opportunities, probably the likelihood that they exist, certainly in Europe, to some degree, when we're evaluating not only Sweden, but other areas too, as we've mentioned before. And then the U.S. South, potentially, some opportunities there too. But I think in the U.S. South, for us anyway, it's probably going to be more likely to be more brownfield-oriented than greenfield-oriented. frankly, for a number of reasons. And then in terms of Alberta, certainly if opportunities came up in Alberta, we would definitely be interested if they were to complement our existing operations for sure. But again, as you know, in Alberta, it's pretty tightly controlled already. So the opportunities there typically are smaller and fewer of them.

Thanks for that detail, Don. Question for Kevin Pancratz. Your comments on affordability headwinds are appreciated. I'm wondering how you think about the growing gap between housing starts, which has stayed quite strong, and housing completions, which have fallen off. And I think it's the widest gap we've seen in 35 years for those two metrics. Do you view that as a headwind in terms of keeping the starts momentum? And I appreciate it's related to broader projects. supply chain disruptions and labor disruptions. But how do you think about that gap potentially affecting wood product demand?

Yeah, for sure. We haven't noticed that trend ourselves. And so far, we haven't really seen it impact the starts performance necessarily. But I do think maybe on a longer view, I think that's where you're going to see maybe some innovation in the marketplace. with respect to like more industrialization, more like wall panels. And I think some of our, the builders and our customers are trying to figure that out themselves and try to trick that supply chain. And I noticed that some of them are improving in some of the categories that we're delaying that like windows and doors, and maybe some other things that are causing some of that concern. But I think we've been at it for two years like that, where supply chains have been really hampered and some improvements in some of the product categories and Maybe the worst is over, but I do think folks are looking at things differently and knowing that they just can't sustain doing that, and hopefully that will start to turn itself. But I don't have anything other insightful more than that, but hopefully it tampers down a little bit.

That helps. One quick last one for Kevin Edgerton. Welcome aboard. The downside in this quarter – The number that sort of got buried in the mix was the 30,000 tons of unexpected disruptions, which in a normal quarter would be a lot, and you had so much other downtime for market and maintenance reasons and repair reasons that maybe gets lost in the mix. Can you give us some context on what happened there and if those temporary disruptions are resolved?

Thank you, Sean, and it's good to chat with you again. I think, quite frankly, the rebuild of RB1 masked the logistics challenges that existed in the first quarter. And I would suggest to you that we may well have seen the same level of curtailment had it not been for the maintenance efforts that we put forward, largely because the logistics supply chain from the mills to the port and from the port to the customers is in such disarray at this point. And therefore, even with RB1 being completed and the mill capable of ramping back up, we're seeing ongoing constraints well below our capacity.

Okay. That's useful context. That's all I have for now. Thanks, everyone. Thanks, Sean.

Thank you. Your next question comes from Hamir Patel, CIBC. Hamir, please go ahead.

Thanks. Good morning, and welcome, Kevin. Don, I wanted to ask you first on the R&R side. I know Kevin Pankratz mentioned there's been some improvement there of late, but when you think of maybe on a full year basis, how do you see volumes in that channel on a year-over-year basis in 2022?

I think there's some variation globally, but the way we look at R&R now is really it's a big part of our business in Europe. as it is in North America, probably similar actually. It's 35, 40% of our business, I think, clearly everywhere. So we, you know, I think overall, I mean, yeah, like Kevin, I think Pankratz mentioned earlier that we've, you know, seen, you know, a little bit of volatility there here over the last six months. Clearly that the volumes that we're seeing are, we believe, are pretty darn sustainable, even with the current environment. And I would even say that from some of the European companies, you know, B&Q, Castorama, obi some of the ones you'd be familiar with it's actually been you know very strong and looking darn good for a second third quarters uh once you get out beyond that you know you know like everybody they're concerned about uh you know some of the issues globally or that are going on inflation wise and geopolitically and everything else so it's hard to comment what what might the impact of that would be but however in terms of where we are today uh we're actually quite uh quite confident and optimistic actually that things are going to be relatively good here for the next while here on the home center side. It continues to be pretty darn sustainable. Okay, great. Thanks, Don.

Yeah, Don, just like there are some challenges maybe on the inflation side, but on the flip side, I think it's well documented. The age housing in the U.S. is like, what, 42 years? Equity is really strong in people's So there's a lot of big drivers that are positive that support continued growth in the R&R segment.

Great. Thanks, Kevin. That's helpful. And just a question for Kevin Edgerson. Kevin, just from your time so far at Canfor Pulp, when you think about maybe a sustainable level of output across the mill base over the medium to long term, What kind of levels do you think are realistic, just given how you see the fiber environment progressing in BC?

Amir, I think it's a critical question, but it's far too early to be able to throw a number out with any confidence. What I would let you know is that at our current operating rates, we've been able to build a rather significant chip pile in front of the mills. And so as we go forward, we're going to have to be able to figure what sustainable fiber supply looks like and then make sure that we're right-sized on an asset base. But it's just too early at this point for me to give any sort of indication with confidence.

Fair enough. And just a last question for me for Pat Elliott. Pat, with the Urbana investment and just given the timing of the spend, what should we expect for total capex at Canfor this year?

Hey, Mir, we're going to be like $440 million. Actually, very little Urbana spend. That'll be mostly weighted into 2023, so $440 million. And up that, about $100 million, $105 million to Greenfield, and about $30 million to $35 million in Sweden.

Okay, great. Thanks. That's all I had. I'll turn it over. Thanks, Mir.

Thank you. Your next question comes from Mark Wildey, Bank of Montreal. Mark, please go ahead.

Thanks. Good morning, guys. Hey, Mark. I wonder, just to start out, Don, can we get an update on Western Canadian transport and logistics and any of your thoughts on how long it may take for all of this to clear itself?

Yeah, no, for sure. That's one of our biggest concerns that I mentioned in my comments, I think, a little bit. And we've had a number of conversations with the carriers, for sure, like I'm sure everybody else has, and You know, and I think there's no easy fix. There's no quick solutions, I don't think. I mean, some of the issues that we have today are are issues that have been building up for quite a long time, actually. And so, you know, we don't think there's any, you know, there's no miracle that's going to happen here anytime quickly. In our view, it's probably going to carry on for at least the next three to six months to some degree, for sure. Hopefully it's better than that, but we're not planning for that, how's that? And so we, you know, there are areas, though, that we have a dialogue with the carriers, both on the trucking side as well as the rail side, to try to make as much progress as we can, but it's going to be a tough go here, we think, for the next three to six months, Mark.

So it's not like, Don, if I don't want to put words in your mouth, but it's not as if you expect us to sort of clear itself over the course of the second quarter, which we've sometimes seen in past years. We don't, frankly, we don't see that.

And just because of the pent-up issues that are in the supply chain right now. We just think that that's going to take a while. And when I say that, I'm talking inventory in the supply chain overall.

Okay. And then toggling over to that issue, is it possible to get some sense of the downtime you've taken in the second quarter so far in Western Canada? And any estimate you might have on what the first quarter looks downtime in lumber cost you?

Well, let me, the first question, just around the downtime, right now, as you probably know, principally in the West here, for sure, principally in BC, excuse me, we're running 80% of capacity right now for four days a week, and we've been doing that for a while. It amounts to about $100 million a month, so for the quarter, based on the five-week month, probably on a quarterly basis, $250 million four feet roughly that'll come out. And then looking into Q3, and whether or not we come back to a longer operating schedule will totally depend on what obviously the supply chain does and the recovery of that. That'll play a big part in that. And then looking into Q3, potentially industry-wide probably there'll be potential for some summer shuts or summer curtailments at least. And, you know, that could be the only unknown at this point that could have an impact for Q3. So in terms of the cost of that, Pat, I don't know if you want to answer that.

Yeah, Mark, I mean, in Q1, we shipped just under 600 million feet out of Western Canada. I'd say, you know, in the sort of pre-Miller configuration, we would have probably be sort of 750 in capacity. So, you know, kind of similar, like a 20% sort of shave off of our potential shipping rate. And then... I think on the pulp side, Kevin mentioned sort of 200,000 tons is our target for Q2, and I think we're sort of more 175 in Q1. So that's sort of the order of magnitude against normal numbers.

Okay. Is it possible at this point to get some sense of just where you're thinking about production volumes in Sweden and Western Canada and the Southern U.S. for the full year? I'm just curious not only in terms of the impact of the downtime, but, you know, Also, any recovery you might expect this year from, you know, less COVID effect on the workforce and maybe ability to run the mills a little more fully?

Yeah, Mark, it's Pat again. I mean, I think in the U.S. cells, we're going to run just under 2 billion feet, probably 1.8, 1.9. And then in Western Canada, we'll probably be you know, 2.4, something like that. So you can probably run like 4.4 in North America, and then we've got another 1.6 over in Europe. So I think that would be sort of 6 billion feet, if my math is right. That's probably where we'll run this year. Okay. Sorry, Mark. That just assumes like a continuation, as Don said earlier in his comments on supply chain challenges through, you know, certainly through most of the next two quarters, that would be baked into that.

Okay. And then back over to Europe again. I'm just curious, Kevin, if you could maybe give us a little bit more color on both kind of what you're seeing and kind of European demand right now, whether there's been any sign yet from your customers over there that, you know, the ramp up in inflation and the war have had any impact on demand. And then also, you know, If you look beyond the second quarter, kind of how you might be thinking about pricing over in Europe in the second half of the year. Sure.

Go ahead. Yeah, sure. Thanks, Mark. Yeah, I mean, like I said, I think on an earlier question there, we already have the book of business for Q2, and definitely demand has been strong. I think there was some, you know, lighter inventory positions taken by our customers in Q1, so definitely stepping back in. which is reflecting some, you know, stronger pricing. So we are guiding, you know, to increase pricing in Europe. So feel pretty good about Q2. Q3 is for sure some question with respect to inflation, especially around energy and hearing that from our customers. So we are guiding to some, maybe some lower pricing in Q3 and Q4, but often some pretty high pricing in Q2. But I mean, A lot of a few unknowns there on the European front for sure. But I think that's our best view right now. But definitely it's a topic amongst all of our customers in Europe.

Okay. I'll just slip a last one in for Kevin. I'm just curious, Kevin, how you read this big box situation because it just seems like demand from that segment has really been unusually volatile over the last, I don't know, three to six months. And we've heard from others about the boxes stepping up again over the last few weeks after being pretty punk there for a stretch in March and April. What is going on there, do you think? Is it just prices coming down and that's kind of reigniting demand, or is there something else going on?

No, it's a great question. And I do think at times when we see prices, we hit record high prices for this time of year. And that, you know, that does maybe cause some pause. We saw that last year when prices hit over $1,600 in a time where that, you know, that starts to temper some of the demand. So there's a bit of that. I think also, you know, you've got folks that got more time now and money and doing some other things and perhaps investing. I'm speculating a little bit here because I don't know exactly, but you just started looking at the consumer behavior that could have some impact. But now the prices have moderated and at a level there, we're definitely seeing folks stepping back in and expect that to continue. So it might be a combination of those things. And, you know, weather played, you know, we had some weird weather in certain parts of the country that impacted, but no exact answer. But definitely seeing the pickup in demand for sure and expecting that to continue into Q2. Okay.

All right. Sounds good. I'll turn it over, guys. Thank you. Okay.

Thanks. Thank you. There are no further questions at this time. I'll now turn it over to Don Cain for closing comments. Go ahead, Mr. Cain.

All right. Thanks, everyone, for joining our Q1 call, and we look forward to talking to you again at the end of the second quarter. Thanks very much for participating.

Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.