Canfor Corporation

Good morning. My name is Ina and I will be your conference operator today. Welcome to Canfor and CanforPulse second quarter analysis call. Online submissions to prevent any background noise. During this call, Canfor and CanforPulse 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 Q2 2024 results conference call. I'm going to make a few comments before I turn things over to Kevin Edson, Canfor Pulp's President and Chief Executive Officer, 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, and David Trent, our SVP of Supply Chain, Transportation and Digital, Before touching on markets, I'll share a few Q2 business updates. As you know, over the past decade, Canberra has been focused on building its globally diversified operating platform by increasing our footprint in Alberta, the US South and Europe, while working towards a smaller but stronger presence in British Columbia. To that end, during Q2, we made some difficult decisions with respect to our BC operations, including the permanent closure of our polar sawmill in the Prince George area and the suspension of plans to reinvest in a new Houston sawmill. Operating conditions in British Columbia remain extremely challenging as we continue to face persistent and significant constraints accessing economically viable funds. Coupled with current market conditions, we have taken steps to reduce our summer operating schedules by 90 million board feet. Despite BC's challenges, our Kootenai operations have performed well as they support our high-value product focus serving geographical diversified markets. With BC's high-cost operating environment, depressed North American lumber markets and expected increased export duties next month, we will continue to evaluate and adjust our BC operating rates to mitigate ongoing losses. In Alberta, we continued to generate positive operating income in Q2, supported by favorable log costs and strong operating results. We continue to see progress in productivity, uptime, and great improvement there. In the US South, in April, we announced a decision to permanently close our aging Jackson, Alabama mill, which was completed mid-June. This action was taken as part of our continued focus on restructuring, consolidating and expanding our production at modern facilities in regions with strong fiber baskets. Our Access Alabama Greenfield project is proceeding well as we work towards startup in the fourth quarter. On commissioning of this facility, our existing sawmill in Mobile, Alabama will close. These investments and strategic consolidation of our Alabama operations will strengthen our long-term position at well-capitalized, highly efficient facilities that are positioned to be competitive for the long term. Our pending acquisition of El Dorado, Arkansas is expected to close imminently, and after a planned U.S. $50 million capital investment will grow to a $175 million boardfoot facility over the next several years. Complementing our existing assets in the region, this acquisition will create synergies and vertical integration opportunities as we grow our footprint with top quartile operations. I also want to highlight our European operations, which continue to deliver strong earnings this quarter, largely tied to solid activity and improved market pricing. Our beta operations benefit from market optionality, and with their focus on specialty products, are able to differentiate themselves from competitors' commodity markets. I'll also touch on two issues that we're closely watching and preparing for. The first is disruption to our supply chains, particularly with the shutdown of CN's main line due to the Jasper wildfire, as well as the potential for a Canadian rail strike involving both Canadian National and Canadian Pacific, Kansas City Southern. With rail making up approximately 50% of Canfor and Canfor Pub's combined transportation capacity, the stability and reliability of Canada's two major railways is of significant concern. We're planning mitigating actions to ensure that our businesses are in the best possible position should a rail labor disruption occur. The second is the ongoing softwood lumber dispute and the increased duty environment. In February this year, the U.S. Department of Commerce announced preliminary rates for the fifth period of review, which we anticipate will rise considerably when they go into effect in August. As of the end of Q2, Canfor has paid cumulative cash deposits of $956 million. This quarter posed considerable challenges for our lumber business. While we continue to believe market fundamentals remain solid for the medium to long term, we anticipate lumber markets to remain challenging for the balance of the year. Notwithstanding current lumber market dynamics, solar results in Europe and Alberta highlight the value of our diversification strategy. We have started to see improvements in our underlying cost structure following recent capital investments and the decisions to restructure our lumber platform. We believe these decisions will allow us to capitalize on solid market fundamentals for the long term and provide a stronger platform going forward. I will now turn it over to Kevin to provide an overview of Canfor Pulse.

Thank you, Don, and good morning, everyone. Canfor Pulse generated solid financial results in the second quarter, with strong global pulp pricing more than offsetting the impact of lower production. On the back of global supply disruptions and producer downtime, health pricing in China was up 9% in the second quarter, with more pronounced increases seen in North America and Europe. While a portion of this price increase will be realized in our third quarter results, improved pricing contributed to a $16 million improvement in cash earnings quarter over quarter, before taking into consideration restructuring costs. Turning to our operating performance, our results reflected the impact of a scheduled maintenance outage at Intercon, combined with the unplanned downtime to accommodate repairs to Intercon's recovery boiler. While pulp production was down 18% quarter over quarter, operating rates improved in June and have returned to normalized levels in July. In May, we announced the decision to indefinitely curtail one production line at our Northwood MBSK pulp mill due to a lack of economically available fiber in northern BC. The containment is anticipated to commence in August. We regret the impact these decisions have on our employees, their families, and the local community, and I'd like to thank our employees for their unwavering commitment and perseverance as we respond to the external pressures facing our business. 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 results were released yesterday afternoon. In my comments this morning, I'll speak to our 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 $231 million in the second quarter. This included a $51 million write-down of inventory, a non-cash duty expense of $40 million related to our anti-dumping accrual rate, a $32 million asset impairment charge, and a $33 million restructuring expense. connection with several sawmill closures announced in the quarter. Adjusting for these non-cash items, our lumber business generated an operating loss of $75 million in the second quarter, compared to a similarly adjusted loss of $72 million in the third quarter. These results reflect sustained weakness in North American lumber markets and losses associated with certain BC operations due to constraints in accessing the phenomenon. European operations contributed $45 million in cash earnings in the quarter and approximately $76 million year-to-date, highlighting the importance of our diversification strategy. European results reflect the benefit of improved lumber sales and realizations, and to a lesser extent, increased production and shipment volumes. Amphor pulp generated an operating loss of $6 million, including a restructuring charge of $6 million related to the upcoming Northwood one-line indefinite curtailment. This compares to an operating loss of $16 million in the first quarter. As Kevin mentioned, improved results largely reflected the benefit of higher pulp pricing, which more than offset the impact of reduced production and shipment volumes associated with downtime and intracron. At the end of the second quarter, Camphor Pulp had net debt of $79 million and $154 million of available liquidity, of which $80 million is restricted for use towards a potential reinvestment in Northwood's recovery boiler number. Canfor, excluding Canfor Pulp, ended the quarter with net cash of approximately $139 million. On a consolidated basis, capital expenditures were approximately $170 million, including approximately $14 million for Canfor Pulp. We anticipate capital spend of approximately $450 million in the lumber segment in 2024, including remaining spend on our Alabama Greenfield, various growth initiatives in the US South and Sweden, and planned capital investment We anticipate a significant reduction in our capital spend in 2025 following the completion of the three major projects in the US South in this year. For CAMFOR Pult, we are currently forecasting capital spend of approximately $50 million in 2024, including capitalized maintenance. Consistent with prior quarters, we anticipate CAMFOR will allocate a modest amount of capital to opportunity purchase shares throughout the year.

And with that, Don, I'll turn it back to you. Thanks, Pat. So, operator, we're now ready to take questions from 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 leave your receiver and then press star 1. If at any time you wish to cancel your request, please press star 2. Please press star 1 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 the line of Ben Isaacson from Scotiabank. Please go ahead.

Thank you very much. Good morning, everyone. Just two quick ones for me. First, can you just run through your capital spending plan over the next three years and specifically how much flexibility is there to pull back if needed? I mean, we've seen the announcement out of Houston and you've mentioned your commitment to the El Dorado facility as well. Thank you.

I wouldn't say we have a publicly available capital plan for the next three years. Obviously, the team's got lots of ideas. I think our strategy, and that we've talked about a lot over the last couple of years, is this major reinvestment in the US South, which is coming to its conclusion this year. Our goal is to arrive at the end of this year with a very strong balance sheet, which we'll do. As I mentioned in my comments, we still have $140 million in cash. So beyond that we have not made any major commitments. We have the ability to go kind of however we want. So I would say at this point we will read the market and we'll look at sort of how we wrap up our new facilities and then we'll make decisions on that basis. But we're not committed to a major capital program beyond the end of this year.

That's helpful. Thank you. And then just my second question is on the European business. Can you just tie together how you see Europe doing in conjunction with exports coming into the U.S. market as well. Do you expect that to continue slowing down as well as Europe starts to pick up? Thank you.

For sure. Maybe I'll just make a quick comment on that. Maybe, Kevin, you can add to it. But in terms of – thanks, Ben, first of all. Bob for the question like I think in terms of our Swedish mills and shipping into the United States I mean clearly we've been pretty consistent there over the years and it still is running around 10% maybe at some point 15% but basically the real advantage of Sweden and we were able to capitalize on the fact that we've got so much optionality in terms of where our products go from Sweden because of the high value focus that we have there so we got lots of choices and from Middle East, North Africa, Australia to Japan basically all markets and so you know at As we look forward, we don't see a real big change in terms of what we're doing there. If anything, it'll probably be kind of similar to where it's at or a bit less.

Great. Thank you very much. Appreciate it.

Thanks. Thank you. And your next question comes from the line of Sean Stewart from TD Cowen. Please go ahead.

Thank you. Good morning, everyone. A couple questions up. Pat, I'll start with you, or Don, if you want to take it as well. The slow buyback activity, and this has been a trend for you guys, and arguably you were wise to wait when others were buying back stock at higher levels. I guess, given the balance sheet strength, especially as CapEx is set to moderate here, What do you guys wait for in terms of the signal to get more aggressive? Is it a clear floor on the commodity market, transparency on earnings bottoming out? Just updated thoughts on how you're thinking about the NCID.

Sure, Sean. I'll take that. Yeah, I think we have, I think, been fairly clear the last couple of years that we saw our strategic imperative for us was to continue to perspire business through capital investment in the US South and in Sweden. We've committed to that. We've done that at the same time for serving that balance sheet optionality that I just spoke about on the prior question here. And so I think as we think about where we arrive at the end of 24, we're very comfortable with our balance sheet. And frankly, we're not going to stretch it. We're not. I think when you talk about market outlook, we're still cautious about 2025. And so I think you're going to see us just continue to pick away at the share buyback. But I don't think there's a signal that would really change that. I think we believe that the stock is undervalued and we acknowledge that. But we think the bigger return in the long term is around this diversification strategy. And so we'll continue to focus on that and then continue to preserve that balance sheet strength as we move into really uncertain markets over the next 12 to 18 months.

Okay, thanks for that context. Second question is just on sawmill downtime through the back half of the year. You threw out some numbers in addition to polar going down permanently. I guess, Don, a little more clarity on how you take that downtime, whether it's in BC or the US South. How concentrated is that around a few assets Is it broad-based shift reduction? How do you, I suppose, optimize cost structure as you continue to take these rolling curtailments?

For sure, I'll take that, Sean, as Don. So, yeah, it's a good question. I think that for Q3, you can expect, first of all, a total will be around $150 to $200 million in total downtime, okay, across North America, so including the Southern Plain as well as BC particularly. And that's probably going to be in the neighborhood of 60, 65%, something like that in D.C. And when you start to look at that, what we try to do and we'll continue to do is just more, excuse me, is just to match our production as best we can with what we anticipate market demand will be. The capex or the downtime that we are taking in the U.S. South, that was basically related more to some of the capex that we're doing down there and obviously to a some degree markets for sure, because they're not fantastic there either, as you know. But also, but in BC, it's more related to market. And then, you know, some of the challenges that we continue to face seems like endlessly here in terms of accessing economic fiber. And so that's, you know, that's the decision. And that varies by mill in BC, maybe a little bit more specific to your question. We have different challenges around that in different parts of the province. But overall, it's still definitely a huge, a huge issue for us like it is, I think, for everybody in British Columbia.

Got it. Okay. Thanks for that. I'll maybe just sneak one last one in, Don. As rates on the duty side are set to increase in August again, any broader thoughts on developments in the trade file? It's my understanding the Canadian industry has been meeting regularly to try and come up with common ground to potentially go to the U.S. with. Any thoughts on a pathway towards negotiations If so, what sort of time frame are you thinking about?

Yeah, first of all, yeah, I mean, I think, you know, ultimately we need to get a settlement at some point, which I've said many times, Sean, for sure. But at the end of the day, you know, our view, and I think it's just it keeps increasing here with some of the uncertainty that's created by the situation in the U.S. politically, same in Canada really politically. But notwithstanding all of that, our view is that it's a ways away for sure. And I think I've said a few times before, but I don't think anything's changed from our point of view it's still a ways out i think it's you know whether it's one two years three years i'm not sure um in terms of the the group that's met as you referenced uh yet we've had conversations for sure and we've got a number of them actually but you know and it's good we that we do those but in terms of uh you know in terms of that uh giving us any more confidence that there's a agreement here in the near term we don't see that thanks for that detail that's all i have

Thank you. Once again, should you have a question, please press star 1 on your telephone keypad. And your next question comes from the line of Matthew McCullough from RBC. Please go ahead.

Hi. Good morning. Thanks for taking my questions. Maybe I'll lead off with one for Kevin. How do you expect the closure of the line at Northwood to affect the cost structure in the pulp business? How do you think about the kind of dynamic around lower volumes and some of the fixed cost absorption issues versus ability to source fiber from a tighter radius?

Thank you for the question, Matt. We'll start on the operating costs. The intent that we have is to maintain our competitiveness of that mill on a single line, a commensurate or improved on where it was with two lines. I think that's really required for us to maintain our position within the broader cost curve. That therefore will require reductions in our fixed costs that are proportionate with the reduction in the overall production. In terms of accessing fiber, I think as you've heard from Don, the overall structure and problem within BC is affecting pulp every bit as much as lumber. And so I don't think that there should be views of material improvements and fiber costs going forward with this reduction.

Okay. Thanks very much for that help. I think just on European lumber, it sounds like you saw relatively solid DIY activity in Europe in Q2 and just setting aside the seasonal slowdown in Q3. Do you expect that to kind of continue into Q4 in 2025? And then just can you provide us some updated color on how you're thinking about how Swedish log costs evolve over the next few quarters, please?

Maybe the first question, Kevin, you maybe talk about that.

Yeah, for sure, Matt. The DIY segment's been one of the more positive segments in the market in Europe, and expect that to continue in Q3, Q4. But the other segments, though, we are expecting a little bit more caution and challenge in the back half of the year. as far as the DIY segment goes there.

And then the second part, Matthew, on the question around log costs in Sweden, on a year-to-date basis, they're up probably in the neighborhood of 5% to 10%, probably depending on the location there as well. It varies a little. number uh well as we look forward though i think we've had some sequential increases here over the last number of quarters and i think you know our view is that that's starting to slow down now and as we go forward here um you know we expect that to continue to clock not necessarily go down but at least stabilize uh for the next while and uh part of that's due to some of the manufacturers for sure that are more commodity focused are more up against it than some of the specially focused uh companies um so overall though we would say that it's getting to a point now where it's going to start to flatten out

All right, thanks for the help. That's all for me. I'll turn it back.

Okay, thanks, Matthew.

Thank you. And your next question comes from the line of Ketan Mantara from BMO. Please go ahead.

Good morning, and thanks for taking my question. You know, I'm just curious to start with, on the lumber side, can you talk to trends on the R&R side, you know, especially as the quarter progressed and, you know, as we sit here in end of July? you know, have things stabilized? Are you seeing any kind of signs of uptake or things slowing down even from what you saw in Q2? Can you provide any additional color there?

Yes. Go ahead, Kevin. Yeah, for sure. Good morning, Katan. Yeah, on the R&R segment in Q2, for sure, we saw the first signs based on our data of it coming off from Q1. And we're tracking that data every week. And while it's off, it is still elevated above pre-COVID levels. So I think there are The R&R statement is probably guiding to that kind of trend for the balance of the year and expecting a bigger uptick in 2025 with larger projects. But definitely trending off from the pace that we have been at, that we saw in Q1. But again, just to reiterate, above the pre-COVID levels in 2019.

Yeah. Kevin, is there any way to sort of quantify on the R&R side kind of where your volumes are either on a sequential basis or on a year-over-year basis, percentage basis, any sort of ballpark sense on kind of how it's trended? Sure.

It really varies depending on which regions that you're in, but it could be anywhere from 2 to 8 percent, but it's in that kind of magnitude, but there is quite a bit of a range depending on the regions in which you're looking at the data.

And, Kevin, are there any specific regions that are weaker? Are there product categories within R&R that are weaker, or is it more broad-based?

There's no one actually real specific one there, Ketan. It's kind of hard to quantify exactly where it's happening, but it really ranges from week to week and how they're doing their inventory replenishments. But just overall, it's just in that range that I said about that 2% to 8%.

Understood. That's helpful. And then just on lumber inventories, you know, Kevin, just curious kind of what is your sense of, you know, where the inventories are, both at your mills and in the channel, kind of where we are at the time of the year.

Yeah, I mean, that's a great question and it's always one where we struggle to really identify with because when you look at the supply side, we know from the European markets, we're seeing quite a bit of reductions, especially in Central Europe. You've had the BC reductions of curtailments that we talked about already. And of course, you still have that Russian Belarus supply disruption. So there's been quite a bit of supply out of the system. And when we're in the market, talking to all of our major customers, and while demand's off, it's not horrible. So if demand's off, you know, that 8% or 5%, obviously the inventories are higher than we would think. And I think that's, it's hard to quantify, but obviously it's a little bit higher than we would think because otherwise we would see either price stabilization or some kind of price pickup. But that would just sort of be my comments.

That's very helpful. I'll jump back in the queue. Good luck. Thank you.

Thank you. Once again, should you have a question, please press star 1 on your telephone keypad. Thank you. There are no further questions. I'll now turn it over to Don Kain for closing comments. Go ahead, Mr. Kain.

Thanks, Operator, and thanks, everyone, for joining the call. We appreciate your support at CAMPOR, and we'll look forward to talking to you at the end of the next quarter.

Thank you. This concludes today's call. Thank you for participating. You may all disconnect.