Canfor Corporation

Good morning, my name is Jenny, and I will be your conference operator today. Welcome to Canfor and CanforPulse's third quarter analyst call. All lines have been placed on mute to prevent any background noise. During this call, Canfor and CanforPulse'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 but 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, Hanford Corporation's President and Chief Executive Officer. Please go ahead, Mr. Kane.

Thank you, Operator, and good morning, everyone. Thank you for joining the Canfor and the Canfor Pulp Q3 2023 results conference call. I'm going to make a few comments before I turn things over to Kevin Edson, Canfor Pulp's President and CEO, and Pat Elliott, 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'd like to begin by acknowledging the devastating wildfire season in BC, Alberta and across Canada this summer. I want to thank the firefighters, the first responders, the military personnel and forestry contractors who worked tirelessly over the summer responding to record breaking wildfires. We are working with the provincial governments to assess the impact of the fires on the fiber supply, ensuring timely access to burnt fiber and discuss any lessons learned. We appreciate the government's willingness to have these open and honest discussions. While we saw an improvement in our cost structure in British Columbia in the third quarter, it remains a challenging jurisdiction as the fiber supply in the interior of British Columbia continues to be constrained due to the impacts of the wildfires, pest infestations, government policy and land use decisions. These factors, in combination with a lack of reliable access to economic fiber and weak market conditions, are resulting in a very challenging near-term outlook in British Columbia. While recognizing the significant current challenges, we remain committed to our strategy of having a smaller but stronger operating footprint in British Columbia. In September, we announced that we will build a new low cost, highly efficient facility in Houston that will be globally competitive. This investment decision came after careful review of the economically available fiber supply in the region and after extensive discussions with government and indigenous nations in the region. I had the opportunity to meet with many of our employees in Houston a few weeks ago. We certainly appreciate their patience and perseverance while we made the decision and they share our excitement to have a modern state-of-the-art facility in their community. We are now working on a detailed project engineering and permitting requirements While lumber prices are anticipated to remain under pressure in the short term due to affordability constraints and high interest rates, we do remain optimistic about the medium to longer term prospects of our industry. We continue to see the benefits of our diversification strategy through the third quarter, with strong earnings generated in the US South and solid earnings in Europe despite seasonal downtime. We are pleased with the ramp-up of our De Ritter facility, which added a second shift in August, and the progress of our other organic growth initiatives, including a rebuild of our Arkansas sawmill, second greenfield in Alabama, and organic growth in Sweden. We remain committed to our organic growth program, with the investments further improving our global diversification, reducing our cost structure, and significantly increasing our production capacity. Our balance sheet strength will support continued reinvestment in our operations. And while we are prepared to remain patient until the right opportunities present themselves, we continue to assess various external growth initiatives as we look to further grow our lumber business globally. I will now turn it over to Kevin to provide an overview of Camp Fort Polk.

Thank you, Don, and good morning, everyone. Canfor pulp had a challenging third quarter with continued weakness in global pulp markets and significant operational downtime weighing on our financial results. The Northwood pulp mill experienced the brunt of lost production due to a combination of the downtime related with the labor dispute at BC's ports, a planned maintenance shutdown late in the quarter, and then the struggles to restart after both of these curtailments. In total, third quarter production was reduced by approximately 65,000 tons with a further 30,000 tons will be lost in the fourth quarter. With regards to Northwood's planned maintenance shutdown, the key activity was a comprehensive inspection of recovery boiler number one. We are pleased that the results confirmed our expectation that RB1 remains in stable condition, thus removing any concerns about the need to advance the rebuild any earlier than 2025. We are also pleased with recent market developments with a resumption of demand supporting price increases in Asia and announcements recently in North America and Europe. We would note that our reduced output in Q3 and expected impact in Q4, the anticipated lag between market mill net realizations will extend such that we do not expect to see the impact of these increases until early in the new year. Previously, we announced the recapitalization program covering all three of our facilities, Northwood, Intercon, and Specialty Paper. We remain committed to this program, supported by cash generated from operations and existing liquidity. Though the market is improving, we are still cautious about the outlook, so our early guidance on capital will be for another modest year in 2024. I'd like to take this moment to acknowledge and extend our appreciation to the employees at Northwood and Intercon and Specialty Paper for their continued efforts, perseverance, and commitment to safety as we navigate the current challenges facing our business. And with that, I will turn it over to Pat to provide an overview of our financial results.

Thanks, Kevin, and good morning, everyone. The Canfor and Canfor Pulp third quarter results were released yesterday afternoon. In my comments this morning, I'll speak to quarterly financial highlights, a summary of which is included in our overview slide presentation in the investor relations section of CanFor's website. Our lumber business generated an operating loss of $1 million in the third quarter, which included a $19 million recovery but previously recorded write-down of inventory in Western Canada and a net duty recovery of $43 million. While our construction in British Columbia improved slightly in the third quarter, These results continue to reflect losses associated with our BC operations as a result of weak lumber pricing and a high-cost operating environment. Notwithstanding these challenges, we continue to see the benefit of our diversification strategy with our U.S. operations generating strong results in the third quarter, supported by stable unit margins and increased volume. Our European operations contributed cash earnings of approximately $31 million in the quarter, with slightly improved sales realizations offset by summer down. Our European operations have generated cash earnings of $135 million to date in 2023. Sanford pulp generated an operating loss of $49 million in the quarter, which included a $2 million recovery of a previously recorded inventory write-down. These results reflected weak global pulp markets and extensive downtime at Norclid due to spike chain interruptions scheduled maintenance downtime, and reliability issues upon restart, which weighed heavily on production and unit cost structure in the quarter. With production at Northwood stabilizing, we anticipate improved results in the fourth quarter, although our results will reflect the impact of unplanned downtime in October and an unfavorable timing lag in shipments versus orders. At the end of the third quarter, Canfor Pult had net debt of $81 million and $146 million of available liquidity, of which $80 million with recovery boiler number one. Notwithstanding the current challenges facing our pulp business, we believe the longer term market fundamentals remain strong. In the short term, we have undertaken a series of measures to mitigate the financial impact of weak global markets and persistent reliability issues. In 2023, we anticipate a capital spend of approximately $500 million in the lumber segment and $70 million for camphor pulp, including capitalized maintenance. anticipate capital spend of 450 million to 500 million dollars in the lumber segment in 2024 including remaining spend at urbana and our alabama greenfield and various organic growth initiatives in the u.s south and sweet for camphor pulp we expect capital spending to be at or lower than 2023. in addition we anticipate camphor will continue to allocate a modest amount of capital to repurchase and shares and with that don i'll turn it back to you

Thanks, Pat. So, operator, we're okay now to go ahead with questions from analysts.

Thank you. We will now take questions from financial analysts.

If you have a question, please press star one on your telephone keypad. If you are using a speakerphone, please lift your receiver and then press star one. If at any time you wish to cancel your question, please press star two. There will be a brief pause while participants register for questions.

Thank you for your patience. Our first question comes from Hamir Patel from CIBC.

Please ask your question.

Hi, good morning. Don, in your outlook, you were pointing to European lumber prices coming under some pressure in Q4. Has there been any change this year in the sort of share of your European lumber output that's exported to the U.S.? And can you comment on how the returns for Vita might compare between selling to the U.S. versus selling within Europe?

Yeah, for sure. Maybe the first part, Kevin, maybe you can talk a little bit with Hamir in terms of the volumes coming into U.S. compared to last year, first of all.

Sure. Yeah, Hamir, like, obviously, I would say it's a little bit off from last year, but overall, it's pretty consistent year over year in the markets that we serve. And because we do have a core program that we support, and there's maybe a pivot of about 20% that we could allocate to markets that maybe have better demand signals or stronger economics. But I'd say that in Q3, off a little bit into the US, and then the pickup on that volume was into other markets, such as the Middle East, North Africa markets, and of course, into the UK, and then more into Japan. So just really leveraging the global footprint and the diversification in the markets they serve.

Maybe just, Hamir, add to that. I mean, I think, Kevin, one thing for sure that we have in Sweden is, first of all, we're very specific on the products that we manufacture there for North America. And it's very specific and customized products. But at the same time, we've got a lot of flexibility and a lot of options in other markets that in a lot of cases are more favorable from a return standpoint. So I think the key takeaway really in Europe or North America is we've got lots of flexibility and we utilize it as we need to for customized use for the most part.

Great. Thanks, Don. That's helpful. And then just turning to the U.S. market, just given some of the affordability headwinds facing consumers, what – you know, what would be your view for 2024 for the R&R market in terms of volumes? Go ahead, Kevin. Sure.

Yeah. I mean, like as we said on previous calls, the R&R market has actually been quite resilient. And while we're not at the pace that we were at the first half of the year, we're still at more normalized growth kind of expectations in that sort of like two to 3%. So for 2023, we'll be ahead of 2022. And 2024, we're guiding to just some modest increases, not to some of the surges that we've seen in the past few years, to your point, because of some of the affordability and interest rate challenges. But the key drivers that are driving R&R are still there. The age of homes is a big driver that they look at. And of course, people staying in their homes, not selling as much and investing in their homes. So we do still think that that segment is going to be resilient through 2024.

Fair enough.

That's all I had. I'll turn it over. Thanks. Excellent.

Thank you.

Your next question is from Cheetan Mamura from BMO Capital Markets. Please ask your question.

Thank you. Hey, just coming back on the pulp capital expenditure, can you just remind me again how you guys are thinking about the multi-year program that you have. Sounds like 2020, sounds like you guys seem to have pushed it back a little bit. Correct me if I'm wrong on that. And just sort of how you think about sequencing over the next few years.

Ethan, are you referring to the pulp recapitalization? That is correct. So Keaton, when we made the announcement, what we were doing is indicating the level of reinvestment that we felt was needed in these facilities. We also indicated at that time that it would have to come from existing liquidity and the ability of our operations to generate cash. What we were concerned about was how our recovery boiler at Northwood was faring. And the feedback from the latest turnaround is it's actually in very solid condition. We did not see any material deterioration and therefore at this point don't have a timeline on that, which allows us to have some more flexibility around the priorities on capitalization and matching that to our ability to generate cash. So it's a long-winded way of getting back to, I do believe that we're stretching out that capital over a longer period of time to ensure that we protect the balance sheet as it is.

Okay, now that's very helpful. I'll jump back in the queue. Thank you.

Thank you. Your next question is from Sean Stewart from TD Securities.

Please ask your question.

Thank you. Good morning, everyone. Kevin, I just want to follow up on that last question with respect to the pulp CapEx plan. So beyond RB1 at Northwood, The rest of these initiatives that you had planned over a four to five year time frame, this is all modular, discrete spending initiatives across the portfolio that you can toggle on timing. There's flexibility beyond RB1. Is that the right way to think about it?

Absolutely, Sean. And the way I would look at it is it's a general commitment to maintenance capital. It is low on strategic ROI and really should be viewed at recapitalizing the mills to get them back into the best condition they can be. And so the tradeoff on when you do that is what are the maintenance costs and what are the impacts on productivity between now and then. And so there are a multitude of smaller, discrete projects that will be prioritized based on the risk and impact that they have, and they'll be slotted based on available liquidity or cash to advance on them.

Okay, that helps frame it for me. Second question for Pat. You had $48 million of investments that you acquired this quarter. Can you give us any context on what that was?

$48 million of investments like in our. I need cash flow. Sorry, Sean. Yeah, Sean, I'm going to have to get back to you. Apologies for that. I'll get back to you.

Okay. All right. That's all I had. Thanks, guys. Thanks, Sean.

Thank you.

Your next question is from Matthew McKellar from RBC Capital Markets. Please ask your question.

Hi, good morning. Thanks for taking my questions. First, when you look across the market, and this is kind of following Hamir's question, but do you see any risk of increased imports of European lumber into North America, given some of the softness in European demand? Or does the combination of relatively low lumber prices in the U.S. and reduced supply into Europe from Russia and Belarus just not support that scenario?

Go ahead, Kevin. Hi, Matthew. I think that the European producers are going to look at other markets, and for sure, US will be one of them. How much upside? It's going to be hard to really estimate, but there's going to be other markets that are going to support growth that are going to have comparable or if not better returns, be it China, be it Japan, be it the Middle East. I do think we'll see some modest things there, but there are also facing some cost challenges as well. And so if we don't see a material pickup in prices in North America, it could keep those volumes at bay.

But that's our outlook as of today.

Okay, thanks for that. Let me stick in the lumber business here. Vita bought a 50 million board foot mill in Sweden in the quarter. Sounds like there's potential to expand that mill. Can you talk at all around what that mill looks like today and then as you think about a potential expansion, how we should think about maybe a timeline there or required investment dollars, return on investment targets, things of that nature?

For sure, Matthew. It's Don. Just real quickly on at least the first part of it. It's really a facility that's a unique opportunity that came up for us, for our Swedish folks that we really thought could add some certainly some more specific added value to our customer base. It was really driven by our customers and the opportunity. It's a treated lumber facility, basically, and we've got opportunities there to increase production there as we move into next year. In terms of how much dollars it's going to cost to get that incremental production, it's early days on that. We just closed recently here, but it's a So it's a real good opportunity here to get closer to our customer base in Sweden. As you know, our Swedish company, one of the things that they do that we think is a huge, huge advantage. And one of the reasons we have had such an interest in it is our focus on value added products and distinguish themselves outside of the commodity arena. And this is just another example of that that we really think we can capitalize on.

That's helpful. Thank you. And then just maybe to close up, Paul, Can you elaborate at all on exactly what the operational issues were at Northwood around the restarts? Thanks.

Matthew, a very fair question, and I wish I could point out one thing being a problem, but it was very sadly a combination of different things. Just failing to operate or restart the way we wanted and then the struggles that we had to get those mills up and stable. And of course, they're very complex facilities, as everybody knows. But but we really stumbled out of the gate and none of the issues that we ran into were related to work that was done on the turnaround. It was all various pumps and different cleaners and screens and the like that just tripped us up all the way along. And so I don't have a singular thing to point out other than the general condition of the facility.

Okay, thanks. That's all from me.

I'll turn it back.

Thank you. We have another question from Keita Memora from BMO Capital Markets.

Please ask your question.

Thank you. Hey, can you just on the lumber side, can you talk about what you guys are seeing on the log costs in the South and in BC and in Europe?

Yeah, log costs, if I understand the question, Keaton, 100%. Yeah, log costs in BC are relatively flat. Stumpage is down a bit, so it'll be down a small amount, I would say, overall, and we expect that to kind of continue. In terms of Europe, it's up. Log costs in Europe are up a bit, for sure, but not significantly, but they are up definitely.

But certainly, we're not concerned about that. Got it. Okay, perfect. That's helpful. Good luck. All right. Thanks, Keith. Thank you.

There are no further questions.

I'll now turn the call over back to Mr. Don Kane for the closing remarks. Please go ahead, sir.

All right. Thanks, operator, and thanks to everyone that participated in the call, and we look forward to talking to you at the end of the year.

Thank you very much.

Thank you. Ladies and gentlemen, that concludes our conference call for today.

Thank you all for participating. You may all disconnect.