Canfor Corporation

Good morning. My name is Joanna, and I will be your conference operator today. Welcome to Canfor and Canfor Pulp's fourth 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 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 Canfor Pulp Q4 2023 Results Conference Call. I'm going to make a few comments before I turn things over to Kevin Edson, Canfor's Pulp President and Chief Executive Officer, 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, our senior vice president of sales and marketing. Before talking about our results, I'd like to begin by acknowledging our dedicated employees around the globe who have worked relentlessly to navigate the challenging marketing or market environment of 2023 to continue to improve our competitiveness and to deliver on our strategic priorities. CanForce achievements are only possible through the abilities and commitment of our people, and I'm extremely proud of the resilience they demonstrate every day. 2023 was a year of significant volatility. In addition to very difficult lumber markets, we also experienced extremely high log costs, reduced shipping volumes, and an extremely difficult operating environment, particularly in British Columbia, where conditions have been further exacerbated by a lack of access to economic fiber. This led to a series of difficult decisions taken to create a more sustainable operating footprint by optimizing and aligning our manufacturing capacity in British Columbia with the available long-term supply of economic fiber. Production at our BC operations was reduced by a total of 750 million board feet in 2023 through the permanent closure of our Chetwynd sawmill and temporary closure of our Houston sawmill as we look to firm up plans going forward. Late in 2023, we also announced a fiber driven temporary curtailment at our Polar sawmill, which began in January of 2024. The reconfiguring of CanCorp's operating portfolio in British Columbia underscores our commitment to fulfill our smaller but stronger operating footprint. We regret the impact that these closures and curtailments have had on our employees, our First Nations partners, small businesses, contractors and communities. I'd also like to thank the United Steelworkers Union for their partnership supporting our employees through the transition. 2023 was also a devastating wildfire season, with both BC and Alberta setting wildfire severity records. First and foremost, we recognize the lives tragically lost and extend our appreciation to the BC and Alberta wildfire services, emergency responders, and the many volunteers who kept people, communities, and infrastructure safe while helping to preserve provincial forest resources. The impact of wildfires on available timber supply is best mitigated by expedited salvage harvesting. We have had solid success with this in our Alberta operations, while in British Columbia, the slow approval process has resulted in a slower salvage operation. We will continue to work collaboratively with the BC government, First Nations and forest stakeholders in an effort to increase the supply of economic fiber. The challenges of 2023 underscore the importance and value of Canberra's globally diversified supply and customer base, with our operating footprint in the US, Europe, and Alberta, while maintaining a smaller but stronger presence in BC. Our diversified business portfolio creates resilience to changing market dynamics and fluctuations in demand, giving us access to new global markets and the resources, flexibility, and reliability to consistently provide our customers with competitive high-quality products. Despite the down cycle we're currently experiencing, we have made considerable progress on several strategic initiatives in 2023. Construction was complete on our first state-of-the-art greenfield facility in Derrida, Louisiana. It began operation in Q1 2023 and continues to outperform our startup expectations. Development of our Access Alabama second greenfield project is on budget and scheduled to start up at Q4 2024. Similarly, our brownfield project at the urbana Arkansas facility is progressing well 130 million dollar investment will increase production capacity there by 115 million for feet and improve manufacturing flexibility to accommodate additional high value products. At our European operations in October, we closed on the strategic acquisition of a small value-added facility in Ingarp and announced an investment of approximately $85 million at Vita's Brutha sawmill, which will expand production from 175 million more feet to 240 million. Turning to our financial results, and due to the ongoing affordability issues related to overall inflation and interest rate levels, our industry experienced a sharp decline in global lumber prices in 2023. Notwithstanding market dynamics and challenges in British Columbia, we generated solid financial results in Europe and the U.S. South in 2023, again highlighting the value of our diversification strategies. Despite this significant capital investment made in 2023, our balance sheet remains strong with over $350 million of net cash at the end of December, supporting continued reinvestment in our operations over the next several years. With our smaller but stronger footprint in British Columbia and the organic growth initiatives in the U.S. and Sweden, we anticipate a significant reduction in our performance cost structure, increased production capacity, and increasing geographic diversification. lumber prices are anticipated to remain under pressure in the short term our strategy is supported by the strong underlying market fundamentals over the medium to long term while we are prepared to remain patient until the right opportunities present themselves our balance sheet strength will support various external growth initiatives as we look to further grow lumber business globally and with that i will now turn it over to kevin to provide an overview of campbell

Thank you Don and good morning everyone. 2023 was a challenging year for Camp Fort Pol with our results reflecting weak global pulp pricing and the impact of extensive summer curtailments due to weak lumber market conditions and the lack of economically available fiber. As a result of persistent fiber supply challenges, we permanently closed our tailored facility in 2023 and made the difficult decision to close the pulp line at our print storage pulp paper mill in April of the year. I'd like to thank our employees for their dedication, perseverance, and commitment to safety as we responded to the external pressures facing our business. While these decisions were not taken lightly, they were required to support the long-term sustainability of Camp Fort Pol. Looking ahead, we remain focused on improving our operating performance and cost structure while optimizing the available fiber supply. Turning to our financial results, following the restart of Northwood in October, we saw a significant improvement in productivity rates at both our pulp mills, which supported improved results in the fourth quarter. As previously mentioned, we have identified a significant capital reinvestment plan at all our mills to further support productivity and reliability. Though we remain committed to this recapitalization, the timing and magnitude of spend is still to be determined and will be completed as market financial circumstances allow. As such, capital spending in 2024 will likely remain modest. I will turn it over to Pat to provide an overview of our financial results. Thanks, Kevin, and good morning. The Canfor and Canfor Pulse fourth quarter and 2023 annual results were released yesterday afternoon. In my comments this morning, I'll speak to the fourth quarter financial highlights, a summary of which is included in our overview slide presentation located in the investor relations section of Canfor's website. Our lumber business generated an operating loss of $162 million in the first quarter, which included a $30 million recovery of a previously recorded rate of inventory in Western Canada and a non-cash duty expense of $82 million related to our anti-dumping duty accrual rate. Adjusting for these non-cash items, our lumber business generated an operating loss of $111 million in the fourth quarter. These results reflect significant losses associated with our BC operations due to weak lumber pricing and persistently high log costs as we continue to be faced with challenges accessing economically viable fibre. Our US health operations saw a sharp decline in earnings in the fourth quarter, led principally by an 18% decline in the Southern Yellow Pine 2x6 benchmark lumber price quarter over quarter. Our European operations contributed $16 million in cash earnings in the fourth quarter, with increased production and shipments partly offsetting the impact of lower pricing. In 2023, our European operations contributed approximately $150 million in cash earnings, reinforcing the value of our diversification efforts over the last several years. Hanford Pulp generated an operating loss of $15 million in the fourth quarter, which included an $11 million recovery on its previously recorded inventory right now. On an adjusted basis, Canfor pulp generated an operating loss of $26 million in the fourth quarter, an improvement of $25 million quarter over quarter. These results largely reflect a moderate improvement in global pulp pricing and a 20% increase in pulp production in the fourth quarter. As Kevin mentioned, following Northwood's challenging restart in October, our pulp mills benefited from an improved operating rate through the balance of Q4. At the end of the fourth quarter, Canfor pulp had net debt of $86 million, and $147 million of available liquidity, of which $80 million is restricted for use towards future reinvestment in Northwood's recovery border number one. On a consolidated basis, capital expenditures were approximately $172 million in the fourth quarter, including approximately $22 million for Canthorpe Hall. Capital spending totals $587 million in 2023, of which $61 million was for anticipate capital spending of approximately 400 million dollars in the lumber segment in 2024 including remaining spend on our alabama alabama greenfield and various organic growth initiatives in the u.s south and sweden for camphor pulp we are currently forecasting capital spend of 40 million dollars in 2024 including capitalized maintenance in addition we anticipate camphor will continue to allocate a modest amount of capital to opportunistically repurchase I'll turn the call back for you.

All right. Thanks, Pat. And with that, Operator, we're now ready to take questions from the analysts.

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 are 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. First question comes from Kitan Mamtora at BMO. Please go ahead.

Thank you. Morning, Don, Pat, and Dean. First question, on the European lumber business, can you talk about trends you are seeing um thus far in in 2024 you know we saw a pretty big drop in q4 lumber ebitda um can you talk to us all of you know the price trends um that you're seeing in europe sure i hope they've had it's uh kevin here

Actually, it was just over in Europe there last week, so your timing is good. And actually, for the first quarter, we're actually seeing improved pricing for a lot of the European markets and in other markets as well, like in the MENA markets and the Asian markets in which they serve. A lot of it in Europe is not necessarily predicated on increased demand, like increased construction activity, but rather very low inventories in the field and the need to replenish. So we are actually seeing improved pricing, and we're just waiting to see how that will continue into Q2.

One thing, maybe we might say two, Kevin, because I know you've been working on this too. One thing that's worth mentioning is that in Europe, where we don't have everywhere else, you don't have North America, there's flexibility too on markets. And so you look at, Kevin talked about Middle East, North Africa, you've got Australia, you've got Asia, and you've got North America and a number of other areas as well. So that's one of the advantages that we do have in Europe that we don't see to the same degree anyway in North America. And with having those kind of options, it really allows you to continue to maximize the revenue as you look forward. So we're seeing that and continue to see that. Just wanted to add that maybe.

Great. No, that's very helpful. So Kevin, given what you just said in terms of low inventories and pickup in activity, how do you expect that to impact import into the US? Would you expect it to kind of be at the levels that we've seen here in the last little bit? Do you expect it to go up, go down? Any thoughts there?

Yeah, I would say that we're definitely seeing for the first quarter lower shipments. You're seeing less inventory at the docks in Europe, as Don expressed. And I mentioned to you, there is actually pretty good options for them currently in the quarter. And it also takes them a bit of a lead time. It's not like North America where you can react pretty quick. They have to plan their supply chains quickly. get the stock available to compare to the docs and then and ship so if we're going to see any kind of increased shipments it's probably going to be more of a q2 play but a lot's going to have to develop by then to see what's going on with currencies and with demand and pricing and other options but overall i would just say i would our view was that we'd be trending lower than last year european shipments into north america sorry no that's very helpful i'll jump back in the queue thank you

Thank you. The next question comes from Sean Stewart from TD. Please go ahead.

Thanks. Good morning, everyone. Question on the CAPEX plan for 2024. You guys referenced the Alabama, Arkansas, and Swedish sawmill projects, but didn't reference the Houston rebuild. Just any updated thoughts on that project and whether BC Land Act legislation broader regulatory friction in the province. Has any bearing on your commitment to reinvesting in BC? Any comments there, Don?

Yeah, for sure, Sean. Maybe I'll take that one just quickly here. So just to start with, in terms of Houston, I guess what I would say at this point, it's still progressing. At this point, we're working through some of the environmental permitting that has to happen, and there's some engineering work being also done at the same time. I guess a second part of your comments there, what we're also doing in conjunction with that at the same time, and partly because of the Land Act, but partly just overall in British Columbia and some of the uncertainties that we spoke about before, we're just continuing to monitor the policy environment here in BC, and we'll continue to do that as we look forward. In terms of the Land Act, as you know, that was canceled. The amendments that they were proposing have been, at least at this time anyway, canceled. So we'll see what happens down the road here. So that's maybe all I can say at this point.

Just maybe more to the point, the $400 million of capex allocated to lumber in the plan, how much of that would be for Houston?

Yeah, very little, if any, just a small amount, just the engineering part, which is minuscule, not even worth talking about.

And then more broadly on the CapEx plan, the overall guidance is 25% reduction year over year. Given the balance sheet strength, you have no liquidity constraints. Some of your competitors have noted pressure on organic project returns as being a concern and a reason for them curbing their CapEx plans. Any concerns? directional commentary on the lesser spend this year? Is it just a function of some of the bigger projects already being wrapped up? Any broader thoughts on the CAPEX plan?

No, not really. I think the main points that you might be interested in is the strategic projects that we have identified and we've been clear about, I think, from day one. They're all on schedule. We haven't tempered them whatsoever. all the time and you got opportunities to adjust and we've sort of done that but in terms of any impact on what we're trying to accomplish here from a strategic standpoint in growth and modernizing our sawmills there's no change whatsoever and you know and if we need further flexibility down the road we've got it we've talked about that before and and that still exists today yeah understood um okay don that's all i have for now thank you very much all right thanks john take care

Thank you. Next question comes from Hamir Patel at CIBC Capital Markets. Please go ahead.

Hi, good morning. Don, given the various projects you have underway in the south and current lumber markets, would you still anticipate shipment growth out of the southern platform in 2024?

Did you say shipment growth, Hamir?

Yeah, lumber shipments.

Yeah, for sure. And as these operations come online, we'll definitely see that from that. And also, if you go back, some of the organic capital that we spent over the last two, three years, too, in terms of modernizing our business, you heard us talk about Camden and a few other operations, all of that is benefiting us. So we will see more this year, for sure.

Okay. And Don, are you able to maybe quantify what kind of uplift you might expect?

A lot of it's wrapping up late in the year. I think we're shipping in that $430 to $440 in Q4. It'll be a little lift from there, but it's not going to be passive. The bulk of it's going to be in 2025 and beyond.

Great. Thanks, Pat. The last question I had was on Europe. We've seen some of your peers that operate in Central Europe benefit from temporarily much lower fiber costs. Don, just given your own experience with the beetle in BC, how do you see the relative cost position of your Swedish assets playing out over the next couple of years, just as maybe fiber costs reset in Central Europe?

Yeah, I mean, I think there's pretty two distinct areas, too. You're talking about Central Europe, there's really a low cost economy, nearly as good as what we see in Northern Europe for sure. So that's a big differentiating factor to start with. However, saying that, in Europe or in Northern Europe, and especially in Sweden and Finland too, I guess for that matter, definitely log costs have gone up. But the one thing that we also talk about on a regular basis, we've got lots of flexibility there in terms of the value-added contribution that we're able to able to deliver up in those mills and quite significantly more than what you typically see in Central Europe. And that's a huge offset and a huge advantage. And it's the strategic reason why we've chosen Northern Europe to really focus on versus Central Europe.

Great. Thanks, Don. That's all I had. I'll turn it over.

All right. Thanks, Marcia.

Thank you. Next question comes from Ben Isaacson from Scotiabank. Please go ahead.

Thank you very much and good morning, everyone. Good to be on. First question is on European imports into the US. You talked about prices rising this quarter in Europe. How much more do they have to rise before netbacks no longer make sense to export to the US? I'm just also thinking about higher freight rates as well. Kevin, you want to?

I'll take a bit of a flyer there. It really varies. It depends on exchange rates. And not a lot of European meals, 100%, can actually switch and chase after the U.S. market, whether they have the grade stamps or they have the planning and finishing capacity. But it really does vary. I don't know. It could be in that $50 to $100 range, potentially.

Okay, that's helpful. Thank you. Second question is, given the weather that we've seen in BC so far this quarter, have there been challenges building log inventory as you think about rolling into Q2?

Absolutely. And, you know, for sure, the weather's been a, you know, it's been a particularly mild winter for sure. And we're feeling the effects of that. You know, we've had the cold spell too, which has had issues too. So generally speaking, overall, the log inventories are low compared to where they ought to be and normally are for this time of year. So that will definitely have an impact here as we move into the wintertime.

Last one for me is visibility into channeled inventory of the whole supply chain. Can you talk about how lumber inventories have evolved quarter over quarter to the extent that you have any visibility beyond yourselves?

Yeah, sure. From a customer perspective, I would say it's lower than historical norms there have been. And even when you look at inventory at the ports, we're starting at a much lower position than this time last year. So if we do see a little bit of pickup and demand, there's just going to be a little bit more tension than we would have had this time last year. But overall, I would say inventories are more or less stable. balance right now for our pros in that segment there, but they are lean and tight. They've got a good book of business going into March, April. I just don't think there's any surplus inventory in the market at all.

If you really look at it too, Ben, if you look at overall R&R, at least from our standpoint, it's been better than we think, Kevin, for sure. When you look at the Percentage of single-family housing, that's remained pretty strong. Actually, it's probably increased. And we know the multiplier there in terms of lumber use versus multifamily. So that's been actually pretty good. And then you factor in, there's been a lot of downtime overall. And notwithstanding all the numbers recently, but there's been a significant decrease. And there's Columbia for sure. There's been some downtime in Alberta. There's been lots of downtime even in some of the parts of Europe. So when you really think about it over time here, logically, you'd think that it will create some pressure on prices here. at some point. That's certainly what we believe.

Very last one for me is odds makers have Trump winning the presidency. And what could that mean for Canfor if we see Trump winning in terms of what policies he's talked about?

I think if I hear your question correctly, we don't really see a lot of change there whatsoever. I mean, we're focused on it now and We don't see any change whatsoever at this point anyway.

Okay, that's helpful. Thanks so much. Appreciate it.

Thank you. Before we take our last question in the queue, as a reminder, if anyone has any questions, please press star 1. Next question comes from Matthew McKellar at RBC Capital Markets. Please go ahead.

Hi, good morning. Thanks for taking my question. I think you talked about seeing yourselves as continuing to have capacity to invest in some global growth here. Can you just give us an update on what you're seeing in terms of the M&A landscape at present?

Yeah, for sure. I mean, it's something, you know, as we talk about kind of regularly, Matt, every quarter, certainly Europe and the U.S. South is areas that we focus on and continue to look at, but we've been super patient and will continue to be patient here. And you know, in a lot of cases, what we looked at a couple years ago or less today even, but right now, you know, we're just to continue to keep our eye on that at the same time. And you know, really at this point, unless it's a significantly strategic opportunity for public pass right now, right? And we still think there's a ways to go in terms of being more competitive on the M&A front here. So we're at this point, we're just watching it, super careful, super disciplined, super thoughtful.

Great.

Thanks. That's all for me.

I'll turn it back. Okay. Thanks, Matt.

Thank you. The next question is a follow-up from Ketan Memtora at BMO. Please go ahead.

Thank you very much. I'm just curious how, you know, what kind of demand trends you are seeing in some of your key end markets. I'm especially curious about repair and remodeling. Can you talk to sort of what kind of, you know, trends you are seeing there?

Kevin, why don't you take a shot? Sure, yeah. So on the R&R market there, we're still pretty optimistic with the drivers that are supporting that. The age of the U.S. homes is significant, and that's driving, you know, really positive takeaway there. And, you know, you've got to think, for the first six months of 2023, they were at a very high pace running, and then they tempered off for the back half. But when we're tracking Q1 of this year, they were actually tracking at a pretty good pace like we saw in 2023. So the outlook looks very positive. And they're also well positioned. They're also going after a bit more of that pro business. And they're continuing to invest in that segment there. And so I think they're well on track there. As Don mentioned there, too, we're seeing our pro segments being quite active, as I mentioned earlier. Both of them got a pretty good book of business into March and April. January was a really tough start weather-wise, and it really did impact our R&R takeaway early in January and the Texas markets, and those are all rebounding quite strong. So I think we're seeing some positive trends, a long ways to go to get prices where we need them to be. But we are seeing some encouraging trends.

Understood. So, Kevin, just so that if I understood you correctly, Jan was off to a slower start, but you are seeing kind of now activity come back as we move through kind of Feb and into March. And right now volumes are kind of slattish year over year. Is that the right read?

Yeah, I mean, generally it's a slower start, but we're more than making up for that start into the balance of the quarter.

Understood. Okay. And then just one last question. I mean, recognizing that it has been a difficult and challenging environment, what is your approach, you know, towards kind of managing production as we move through the first quarter? And, you know, if you can talk to sort of, you know, any temporary curtailments you are taking, whether in terms of shifts or just the utilization rate, that would be helpful. Real simple.

We will continue to match the production levels with market demand and availability of economic fiber, period. And that's been the way we've been kind of operating for a while, and we'll continue to do that and keep our eyes on that. And we won't be afraid, though, if we have to take some downtime, we will.

Okay, that's very helpful, Don. I'm back in the queue. Good luck.

Okay, thanks, Jan. Take care. Good talking to you.

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

Thanks, Operator, and thanks, everyone, for joining the call and for your interesting canter. We certainly appreciate that and look forward to talking to you at the end of the next quarter.

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