Canfor Corporation

Good morning. My name is Jenny, and I will be your conference operator today. Welcome to Canfor and CanforPulse's first quarter analyst call. Call 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 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 Club Q1 2024 results conference call. I'm going to make a few comments before I turn things over to Kevin Edson, CanForce 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, Senior Vice President of Sales and Marketing. Before talking about our financial results, I'll share a few Q1 business updates. As you know, over the past decade, we have been focused on building a globally diversified operating platform by increasing our footprint in the US South and Europe, while working towards a smaller but stronger presence in British Columbia. Although global lumber markets remained under pressure in Q1, thanks to this strategy, we have a more resilient organization that has been better able to mitigate market-related pressures and the persistent constraints we continue to face accessing economically viable fiber in British Columbia. Through a targeted and expansive capital investment program, we have been growing and transforming our manufacturing facilities in fiber-rich regions to be low-cost leaders that are globally competitive over the long term. As part of this effort and our plans to optimize our operational footprint in Alabama, this quarter we announced that we will permanently close our Jackson facility in June and expand production at our nearby Fulton facility with a second shift. These steps, together with our new state-of-the-art Greenfield sawmill being built in Axis, Alabama, and pending closure of our Mobile sawmill, will improve our cost structure, optimize the fiber supply in Alabama, and add 100 million more feet of southern yellow pine production capacity in the region. By consolidating and expanding our Alabama operations, we will be better positioned to serve our global customers from a modern, competitive operating platform while providing more sustainable jobs and improved working conditions for our valued employees. Similarly, as part of our continued growth strategy in the US South, yesterday we announced an agreement with Resolute Forest Products to acquire their El Dorado Lumber Manufacturing Facility in Union County, Arkansas. Bringing this facility to Canfor create synergies and vertical integration opportunities given its complementary geographic fit with our existing operations in the region. These include our El Dorado laminating plant as well as our Urbana plant, which is progressing in its $130 million U.S. dollar modernization that will increase production by 115 million board feet to a total 285 million board feet next year. The El Dorado acquisition will capitalize on our regional manufacturing footprint to optimize our product We anticipate investing a further $50 million to upgrade the sawmill, which will increase its production capacity to 175 million per feet per year. As we look forward to ongoing growth, we remain deeply committed to sustainability, which is embedded throughout our entire operations, from the forest to the customer. This quarter, we released our 2023 sustainability report, highlighting the activities and our performance to advance our sustainability strategy. We have an ambitious plan to be a leader in sustainable business, focused on three key areas, people, planet, and products. Our report tracks our progress across 13 material topics, each with discrete goals to significantly shift the way we do business. Naturally, this includes a focus on climate change through our targets on scope one, two, and three emissions, but it also includes improving safety, expanding relationships with indigenous nations, increasing support for our operating communities and further enhancing the diversity of our workforce. Through these actions and our carbon-friendly products, Canfor is well positioned to be part of the solution to climate change. Turning to our financial results, our lumber business benefited from solid lumber pricing and earnings in Europe, with strong contribution from VDOT highlighting the value of our diversification strategy. In North America, weak lumber markets continue to reflect ongoing affordability issues related to inflation and the current interest rate environment, in addition to a significant decline in multifamily construction activity. While our Western Canadian operations benefited from improved pricing in the first quarter, our financial results continue to reflect the impact of weak North American lumber pricing. challenges accessing economically viable fiber supply in British Columbia. While lumber prices are anticipated to remain under pressure in the short term, Canfor has seen steady underlying demand in the repair and remodel sector, and we continue to believe the medium to long-term market fundamentals remain strong. Notwithstanding current market conditions, our balance sheet remains strong, supporting continued reinvestment in our operations over the next several years. I will now turn it over to Kevin to provide an overview of Canfor Pulp.

Thank you, Don, and good morning, everyone. Canfor pulp generated improved financial results in the first quarter, supported by a 7% quarter-over-quarter increase in pulp production and steady global pulp markets. Notwithstanding the impacts of extreme winter weather in January, we continue to see improvements in our operating performance. Given projected weakness in North American lumber markets in the short term, combined with ongoing uncertainty with regards to the availability of economically available fiber in B.C., We continue to evaluate our operating conditions and remain focused on improving our operating performance and cost structure while optimizing the available fiber supply. I would like to thank our employees for the resilience and continued efforts to enhance our operational performance as we respond to the external pressures facing our business. Turning to pulp markets, while softwood pulp markets were steady in the first quarter, pricing has increased considerably to start the second quarter, driven by global supply disruptions and pulp producer downtimes. Looking ahead, we continue to believe strong global pulp market fundamentals will remain over the medium to long term, supporting our capital reinvestment plan. The magnitude of spend will be modest in 2024, with future spending completed as market and financial circumstances allow. I will now turn it over to Pat to provide an overview of our financial results.

Thanks, Kevin, and good morning, everyone. The Canfor and Canfor pulp first quarter results released I'll speak to the first quarter financial highlights, a summary of which is included in our overview slide presentation located in the investor relations section of the Canfor website. Our lumber business generated an operating loss of $57 million in the first quarter, which included a $30 million recovery of our previously recorded write-down of inventory in Western Canada and a non-cash duty expense of $15 million related to our anti-dumping duty accrual rate. Adjusting for these non-cash items, our lumber business generated an operating loss of $72 million in the first quarter, compared to a similarly adjusted loss of $111 million in the prior quarter. Notwithstanding an improvement quarter over quarter, these results continue to reflect losses associated with our PC operations due to weak lumber pricing and a persistent lack of economically viable fibers. While our Western Canadian operations benefited from an uplift in SPF lumber pricing, lumber markets remained under pressure in the first quarter, particularly for Southern Yellow Mine. Our European operations continued to perform well and contributed $31 million in cash earnings in the first quarter, reinforcing the value of our diversification strategy. These results reflect the benefit of higher production and shipment volumes, as well as improved sales realization. Canfor pulp generated an adjusted operating loss of $16 million in the first quarter, an improvement of $10 million quarter over. These results largely reflected a modest uplift in pulp sales realizations, combined with the increase in pulp production previously mentioned by Kevin, which more than offset the impact of a challenging January related to extreme winter weather. Canfor, excluding Canfor Pulp, ended the quarter with net cash of approximately $225 million, following a seasonal build of working capital in Western Canada. Notwithstanding current market dynamics, our balance sheet remains strong, supporting the continued reinvestment in our lumber business. At the end of the first quarter, Canfor Pulp had net debt of $85 million and $148 million in payable liquidity, of which $80 million is restricted for use towards future reinvestment in Northwood's recovery boiler number one. On a consolidated basis, capital expenditures were approximately $103 million in the first quarter, including approximately $12 million for CAMFOR. We anticipate capital spend of approximately $450 million in the lumber segment in 2024, including remaining spend on our Alabama Greenfield, planned capital investment at the Eldorado Sawmill, and various organic growth initiatives in the U.S. South and South. For CAMFOR PULP, we are currently forecasting capital spend of approximately $40 million in 2024, including capitalized maintenance. In addition, we anticipate CAMFOR will continue to allocate the modest amount of capital to opportunistically repurchase shares throughout the year. And with that, Don, I'll turn the call back to you.

Great. Thanks, Pat. And with that, I'll turn it back to you, Operator. And so we're now ready to take questions from analysts.

We will now take questions from prenatal 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. Please press star one 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 is from Ben Isaacson from Scotiabank. Please ask your question.

Thank you very much, and good morning, everyone. First question on Southern Yellow Pine, having come off quite a bit over the last quarter or so, can you talk about how has that impacted export economics from Europe? Are you starting to see a pullback, and can you just give some color on the dynamics there?

Evan, why don't you go ahead and begin with that? yellow pine situation sure um so more yellow pine pricing for sure and also spf pricing uh ben has impacted it so um we're finding even with ourselves our volumes from sweden into the us are down a few you know a percentage or two And we're actually seeing less volume coming from Central Europe. And the big reason they got better are alternative options at higher values to ship their product, be it the UK, Middle East, North Africa and Asia. So we expect to go back to maybe more historical levels for European imports and not what we saw January Q1 of the previous year.

And how do you think about the spread between SPF and SYP? Obviously, it's kind of disconnected from what it's usually at. And do you think that's sustainable going forward?

I think the dynamics are for sure changing versus historical spreads there, Ben. And as you know, production out of Western Canada comes under more pressure and reduced. I think you're going to see maybe a reversal or a trend change where SPF two by four could be at a premium with just really less volume and with more volume coming on that South, that dynamic, I think will trend, will change in the future.

And just last one for me quickly. You know, I know it's early days, it's only the start of May, but we're hearing that the wildfire season could be more intense than it was last year. Do you have any color in terms of how that's progressing and what is the risk for CanPOR?

For sure. Well, certainly the wildfire situation continues to be a concern. And I think we continue to learn over the last five years has been a lot of difficult years there, Ben. So we spend a lot of time, I think, as the government has to try to understand it better and to try to put in more mitigating measures. actions to try to you know get in front of that a bit and I think that's that's happening but clearly you know traveling up to the mills last week a bit there's all our operations are concerned about it there's been a few fires particularly in Alberta out of the gate that we've been working through but without a doubt it's I think that's something that we just need to just basically conclude that it's going to be an issue for several years going forward and so I think We learn each year more about it and how to fight it, how to prevent them and so forth, and we'll continue to do that. And maybe that's all I can really say about that.

That makes sense. Thank you so much.

Thanks, Ben.

Thank you. Your next question is from Sean Stewart from TD Securities. Carolyn, please ask your question.

Thanks. Good morning, everyone. A couple questions. First on El Dorado. I appreciate your comments with respect to the synergies, I suppose, with your other assets in the region. But based on my previous coverage of other companies, this asset has a checkered history. Can you give a little bit of context on how this transaction materialized and timeline to invest the remaining 50 million to get capacity up to 175 million board feet? A little bit more detail on that front.

Yeah, for sure. I mean, again, down there, we've been, I think, real thoughtful and patient in terms of opportunities as they arise and which ones kind of make sense to us and which ones don't. And that one is one that we've looked at for a number of years and mainly because of the fiber synergies that it provides with our Urbana facility there and some of the synergies that it provides in terms of raw material supply to some of our vertically integrated facilities, particularly the Eldorado glulam plant. You know, that's always been an opportunity that we'd like to expand on. So that's one of the main reasons. But, you know, it has been something we've looked at for a long time. But we've also known through that period that we needed to spend some money there. We felt it was probably a bit undercapitalized before. And we believe and we're very confident with our folks that if we put in the amount of money we talked about there, we can make that into a solid. with some competitive fiber and high-quality fiber. So those are all the things that we kind of considered. And so anyway, so we're happy to be able to conclude that.

And timeline on when you expect to get to 175 million board feet for that asset?

Yeah, that's going to be sometime, probably towards the early part of next year, middle of next year or something like that.

Okay. Don, any update on the Houston potential reinvestment plan milestones that you need to advance that initiative? Has there been any progress on that front?

Yeah, for sure, Sean. Good question. And I think maybe what I would say there is, as we have talked about in several of the previous calls, we certainly remain concerned about the challenging policy and operating environment here in British Columbia. For us, you know, so as a result of that, we continue to assess the impacts of some of those changes that I speak about. Today, I would say also, though, that we're even more concerned than we were before. The policy environment that I speak about here continues to change, seems to be quite dynamic, and as a result, be very uncertain. So we're, like I say, we're going to continue to assess those impacts. And, you know, at the same time, Sean, I will say, though, that we are doing some pre-planning, you know, that's still ongoing, and also some permitting.

Okay. Thanks for that update, Don. That's all I have. Okay. Take care.

Thank you. Your next question is from Hamir Patel from CIBC Capital Markets. Please ask your question.

Hi. Good morning. Don, it seems like you've been seeing stronger R&R takeaway than some of your peers. Do you think you've been gaining share in that big box channel?

I think so, but Kevin's been doing a lot of work on that. He's the expert on that. I have air, so I'll let him speak to that.

When we're talking about the growth there, we're talking on a volume-based, not dollar-based, just to be clear, because I think sometimes that gets a mixed-up headline. And so from our experience, for sure, January was a tough start for most people and most markets in the US, largely because of weather. And in my meetings with folks there, since then, we've seen a really good recovery in February and March. So year to date, we're actually pretty flat versus 2023. And that's what the poor start in January sort of speaks to the gain momentum that we're seeing in the latter part of the quarter. And, you know, this segment continues to evolve and grow, and they are growing market share. So I hope that helps.

That's helpful. And then, Kevin, when you think about, you know, weakness in southern yellow pine and what's been driving that, I know your outlook had commented on weakness in multifamily. But, you know, we always think of single-family starts as using three times as much lumber as multi. So maybe you could speak more to why that's

uh perhaps that weakness in multi is is dragging down some of the all-time prices and and if you're seeing any signs of uh improvement there yeah sure i think that's one segment there here is going to have it's going to take a bit of time for that market to recover it's so dependent on on the interest rate piece and just a longer time period to get those projects you know planned engineered and permitted so they can't react as fast as single family homes um I think the other economic dynamic that's impacting multifamily is that rents over the last year have declined. So when they're looking at projects, either rents have to come up or interest rates have to come down to make the economics work. And when you're talking to a lot of folks in this space, it's going to be basically maybe start to see a recovery mid 2025 and then maybe not fully rolling until 2026. And, you know, the U.S. South, just like it's heavy for single family, it's really heavy for multifamily. Over 50% of multifamily projects are in the U.S. South. And so, disproportionately, yellow pines is more impacted. You're right, 3 to 1 on the volume for lumber, but it's not zero. And there's a lot of lumber, 2 by 4 especially, that goes into sill plates. and into trusses and spans. And so I think that's a dynamic that is playing out right now that is contributing to the yellow pine price pressures that we're seeing.

Great. Thanks for that, Kevin. That's all I had. I'll turn it over.

Thank you. Your next question is from Keetan Mamtoora from BMO Capital Markets. Please ask your question.

Thank you, and good morning. Maybe first question on log inventory in BC. How is that for you guys at this point? There's been some talk that because of the warm weather that log inventories have not been able to be in that position where it should be for this time of year. How are you guys positioned?

Yeah, for sure. We're basically, we're in decent shape for sure. And mostly that was a result of, you know, Polar Houston and probably Polar in Houston and also Chatwin being down. So, you know, we're in good shape as a result of that.

So you don't anticipate any sort of, you know, production challenges as we go through Q2 here in terms of, you know, where your log positions are and how much you need to produce off in a seasonally stronger time?

Yeah, I mean, I think overall, you know, as a result of everything, we don't, we're not anticipating any more downtime investors who are getting out of production levels going forward at all. We're basically, you know, because of the log situation and unless, you know, but we will continue to look at it from, I mean, if I understood your question correctly, because I missed part of it, I think, but in terms of the, you know, what we've said numerous times, I think over the, internally and externally is, focus hard on matching production demand with our productions with market demand. And we'll continue to do that. And we keep a close eye on that. And we need to take some downtime because of markets. Market demand will do that. And we're not afraid to do that. We'll continue to do that.

That's helpful. And then maybe one for Pat. Pat, on the capital allocation side, I'm just curious, you know, as you think about sort of M&A and the acquisition that you just announced yesterday, between that and share repurchases given where the stock is, how do you sort of think about evaluating those two options? Perhaps you can provide some color on that.

Yeah. So, Kate, I mean, I think we've been early consistent on this the last number of years that you know the diversification of our business into the us south and into sweden is paramount frankly to improving our operating results over time while buying back the stock clearly you know on straight math you can see the value we bought back about 2 million shares in the last year so it's not like we haven't been active but we really see the priority is continuing to invest in low-cost assets in the right regions and and that's our priority and even the el dorado you know when you look at on a cost per thousand basis i think it's highly competitive um the price that we paid so we're not going to go out and buy any asset but um we're going to we're going to act opportunistically and then the reinvestment our own business through the green field i think sets us up really well for the future so i think we've been pretty consistent on that and that's that's our plan going forward as well sorry that's helpful i've done it over good luck thank you

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

Hi, good morning. Thanks for taking my questions. First, I'd just like to ask about the polar mill. I think when that originally went down, when you announced it in November, you were talking about maybe a six-month sort of period of curtailment there. Is there a path back to restarting that mill in 2024, given what you're seeing around access to economic fiber in the province?

yeah maybe for sure i'll try to answer that i guess you know in british columbia as i mentioned on the question earlier about houston the operating conditions are still remaining quite challenging here as we continue to face the you know ongoing constraints associated with the lack of economically viable fiber and we've said that a lot and that continues to be the case and in western canada there still remains significant uncertainty with regards to that availability of that fiber So we continue to anticipate sustained log cost pressures and persistent constraints accessing that fiber in BC at all of our sawmills, as well as it's been a challenging environment, fiber environment for our camphor pulp mills too. So with all that going on, we continue to evaluate some of the options and we'll adjust our operating rates in BC to align with that demand, as I mentioned again earlier, and the economically available timber supply in the near term. And we'll continue to do that through 2024. That's not going to change like I think I mentioned earlier, right? So, you know, polar falls into that category.

Okay, thanks for that, Keller. Next, I'd like to just follow up on Ben's question around forest fires. I think last quarter you noted a slower approval process in BC in regards to the salvage harvest following last year's fires. Could you give us a sense of how things have evolved on that front over the past couple of months?

Yeah, Scott, for sure. I'm not sure I can answer that question 100% in terms of where we're at on that, other than, like I mentioned earlier, there's lots of initiatives underway here to try to get ahead of the situation of wildfires, for sure, in B.C. But Alberta, for sure, I will say this, Alberta's pretty good. They're on top of things, for sure, and not that B.C. isn't, but the bigger impact here is in B.C., for sure.

Okay, thank you. And then last question for me, just on the Canford pulp side. We're seeing some competitors out there with a couple of price increases for craft paper in the market. With that backdrop, how should we be thinking about your realizations over the balance of 24?

Thanks very much for the question, Matthew. We expect to see on the pulp side, there's another round of increases coming in May. We think the step up through the first half of the year has been really solid, and we're looking more stable out the back end, given that it's driven largely by supply constraints. We need the paper market to catch up. On the graph paper side, we'll be announcing or have announced an increase, a somewhat modest increase for the second quarter that we expect to be in place by June. paper is moving slower than pulp, and so we continue to expect some increases through the back half of the year on paper.

Great. Thanks. That's all for me. I'll turn it back.

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

Thanks, operator, and thanks, everyone, for participating in this morning's call. We appreciate your support, and we look forward to talking to you at the end of the next quarter.

Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect.