Canfor Corporation

Good morning, my name is Joanna and I will be your conference operator today. Welcome to Canfor and Canfor Pulp's third 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, 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 Pulse Q3 2024 results conference call. I'm going to make a few comments before I turn things over to Pat Elliott, our Chief Financial Officer of Canfor Corporation and Canfor Pulse, and our Senior Vice President of Sustainability. In addition, we are joined by Kevin Pankratz, our Senior Vice President of Sales and Marketing. As you know, Canva has been focused on building on its globally diversified operating platform by increasing our footprint in Alberta, the US, South, and Europe while maintaining a reduced presence in British Columbia. This quarter, we've made some additional difficult decisions in British Columbia, announcing the closure of our Plateau and Fort St. John operations in Northern BC. Combined with previous announcements, these closures will remove 1 billion ore feet of annual production capacity from our BC operations. These decisions were driven by the persistent challenge in accessing economically viable fiber in northern BC, which is not improving. This challenge was further exacerbated by the increase in US tariffs, which are expected to double again next year. Despite the challenges in the BC Interior, our Kootenai operations continue to perform well, supporting our specialty product and value-added focus, including key high-margin products such as MSR, J-grade and Home Center grades. In Alberta, despite weak North American lumber pricing, our operations continue to provide positive earnings in Q3. In the US South, our focus was on executing on our capital plan. Today, our sawmill operations in our new facility in Axis, Alabama began production. When the planer mill is completed later this year, we expect the first shipment of finished lumber. The new sawmill will have an annual capacity of 250 million board feet on a two-ship basis. Our mobile plant ceased operations earlier this month with decommissioning being conducted throughout the remainder of 2024. The acquisition of the former Resolute Eldorado Mill in Arkansas, now called Iron Mountain, was completed on August 1. The Urbana upgrade project is in its final phase with startup last month and ramping up production in Q4. This project will increase capacity to 285 million board feet. With respect to VIDA, although our results were marginally better than expected, 2024 has been challenging with log costs continuing to On our financial results, our lumber business in North America recorded significant losses in the third quarter due to persistently weak lumber prices, increasing duties, and a lack of available economic fiber in British Columbia. Notwithstanding increasing log costs combined with seasonal downtime, our European operations generated positive operating income in the third quarter. While global lumber demand remains tepid in the short term, lumber prices have steadily increased over the last several weeks. With interest rates beginning to normalize, we anticipate affordability to gradually improve through 2025, which should support higher pricing into next year. While we anticipate a challenging fourth quarter, we believe our lumber business is well positioned to capitalize on improving market conditions over the medium to long term, supported by several significant capital investments nearing completion in the U.S. South, closures of certain high-cost assets across North America, and our strong European plan. With respect to pulp, on an adjusted basis our pulp business generated improved financial results in the third quarter, supported by higher sales realizations. Pulp production was modestly lower than the previous quarter, with our Northwood mill successfully transitioning to a one-line operation in August. While Canfora Pulp continues to navigate the uncertainty associated with fiber supply in British Columbia, we have seen improved operating results over the last several quarters and remain focused on improving our cost structure going forward. I will now turn it over to Pat to provide an overview of our financial results.

Thanks, Don, and good morning, everyone. In my comments this morning, I'll speak to our third quarter financial highlights, a summary of which is included in our overview slide presentation located in the investor relations section of Canfora's website. As Don mentioned, this was a challenging quarter, with our lumber business generating an operating loss of $336 million. These results include an asset write-down and impairment charge of $100 million, non-cash duty-related adjustments of $121 million, and several other items recorded in the third quarter. Adjusting for these one-time items, our lumber business generated an operating loss of $129 million, compared to a similarly adjusted loss of $115 million These results continue to reflect the impact of weak North American lumber markets, particularly for southern yellow pine, as well as an elevated cost structure due to significant production curtailments in North America, seasonal downtime in Europe, and losses associated with certain high-cost operations in British Columbia. We anticipate an improvement in our underlying cost structure following the orderly wind down of several B.C. sawmills later this year. In addition, with several major capital projects in the U.S. South nearing completion, we anticipate a gradual improvement in our unit cost structure as this low-cost capacity begins to ramp up throughout 2025. Turning to our pulp business, Camphor Pulp generated an operating loss of $209 million, including a $211 million asset write-down and impairment charge. On an adjusted basis, CAM4 Pulp generated an operating income of $2 million, an improvement of $7 million from the previous quarter, largely driven by approved pulp unit sales realizations. In total, we reduced the net book value of our lumber and pulp assets in BC by approximately $311 million, reflecting the right sizing of our operating footprint and balance sheet as a result of recent closure announcements and the reduced availability of economic fiber supply in the province. At the end of the third quarter, CAMFOR PULP had net debt of $68 million and $85 million of available liquidity, excluding a term loan commitment of $80 million related to a potential reinvestment in Switzerland. CAMFOR, excluding CAMFOR PULP and the $314 million duty deposit loan completed in late September, ended the third quarter with net cash of approximately $330 million. On a consolidated basis, capital expenditures were approximately $117 million in the quarter, including $18 million for Camp Port Paulding. We anticipate capital spend of approximately $450 million in the lumber segment in 2024, including the remaining spend on our Alabama Greenville, as well as various growth initiatives in the U.S. South and Sweden. We anticipate a significant reduction in our capital spend in 2025, following the completion of these three major projects. For CAMFOR PULT, we are currently forecasting capital spend of approximately $50 million in 2024, including capitalized maintenance. In addition, we anticipate CAMFOR will continue to allocate a modest amount of capital to opportunistically repurchase shares. And with that, Don, I'll turn the call back to you.

All right, thanks, Pat. So, operator, we're okay now to take 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. 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 comes from Ben Isaacson at Scotiabank.

Please go ahead. Good morning. This is Aparva on 4Ben. My first question is, we've seen a bit of a general slowdown in European lumber imports. Wondering if you could comment on what Canfor's volume out of the region looks like and how much of that slowdown is due to North American imports versus domestic demand in Europe?

Thanks very much. Maybe, Kevin, you could comment on that.

Sure. Yes, thanks for the question. And yes, European imports are down, and that was largely predicated in slumping pricing here in North America. That made it very competitive for many of the operators there. Our volume from VITA into North America was actually relatively stable quarter over quarter. And a lot of that is committed to program business and a bunch of that with the home center business. So I would say because of that, our volumes are more stable. But the more I think transactional volume did see a shift.

Thank you. And then my second question, if I can sneak it in, is, Can you provide us any update on how the modernization of Urbana is going, as well as the greenfield and access? Roughly how much incremental capacity do you expect will come online this year? And then given kind of where market conditions are today, are you considering delaying or deferring any ramp-ups?

Yeah, so first of all, on Urbana, it'll be... Commissioning that in Q4 2024 for sure. And the spend there is about 93% completed so far. We've got a little bit more we need to spend there. The additional capacity is going to be about 115 million more feet.

Thank you.

And then for access, you mentioned access also. The capacity there, that's also going to be complete. I think I mentioned in my comments as they were starting that up. But the capacity there will be 250 million more feet. And we're about, you know, basically that's all I need to say around access for now.

Thank you. The next question comes from Ketan Mamtora at BMO Capital Markets. Please go ahead.

Good morning and thanks for taking my question. Maybe, Don, to start with, you know, in general, I thought your release and your comments this morning striking a pretty cautious tone in terms of near-term demand in lumber. Some of the others that have reported are probably expecting a little more sort of recovery as we go through into Q4 and 25. I'm just curious, as you look at your demand and what you are hearing from your customers, can you comment at all in terms of you know, repair and remodeling demand, new residential demand, how that's holding up and how that is trended, you know, through the quarter and into October. Thank you.

Okay. So, Ketan, thanks for the question, Ketan. And I'll maybe start real quick and then I'll pass it over to our sales and marketing guru here, Kevin. But first of all, just really on demand, I think, you know, we are cautious, but we've become cautious the last couple, three years, right? And while we've been, you know, we've done a fair bit of traveling lately in the United States and even in Japan. And, you know, overall, I think demand looks fairly stable, actually. It doesn't look, it's not disappointing us in any way. We're just being cautious for any major uptick, you know, at this time and more, you More believe a lot of the increase that we see will come from supply reductions as opposed to demand increases. But overall, we're certainly not negative at all. As a matter of fact, looking forward, we're actually quite positive. And I'll let Kevin talk about that in more detail.

Yes, sir. Actually, I mean, the outlook actually looks a bit promising there, and we are a little bit cautious. However, with the state, you know, we had some major interest rate drops, and a lot of our customers believe that that trend's going to continue, which is going to help address affordability. And I guess it's just a question of timing. And once that affordability... threshold gets achieved, I think the demand unlock is going to be pretty good. And more specifically, if I talk like multifamily, that's been a big segment that's been underperforming, and we're starting to see that that has actually bottomed, and that could help demand down the road. But those longer-term projects that take time to get done versus a single family. So that's why we're a little bit cautious going into Q1 of 2025. But we do share that view that demand actually looks more promising. But really, the uplift in pricing today has been largely driven by supply reductions.

Got it. That's helpful context. And then, Pat, one for you. You mentioned you expect a pretty meaningful reduction in 2025 capex for lumber. Order of magnitude, how should we be thinking about that sort of reduction? Just rough numbers.

Yeah, Cade, we're fine-tuning still, but I'd say it's like $250 to $300 million versus $450 we spent this year. That'd be the range I'd use.

$250, Pat, is that what you said for lumber?

$250 to $300 million.

I see. Okay, got it. Perfect. That's all I had. I'll turn it over. Good luck. Thanks.

Thank you. Next question comes from Sean Stewart at TD Cowen. Please go ahead.

Thanks. Good morning, everyone. A couple questions. Pat, I'll start with the loan against the duty receivable. Hoping you can give us some of your rationale there, given you already have a strong balance sheet, and it looks like the borrowing costs, depending on the time frame here, could be reasonably high. I guess the read-through is... Either you're expecting this is going to be a very drawn-out process towards any sort of resolution on the trade file, or you feel the need to bolster an already strong balance sheet ahead of maybe a difficult market environment or ahead of potential M&A opportunities. Can you give us some more context on the rationale, Pat, or Don, on that front?

Yeah, sure, Sean. I mean, you're right. There's a timing call in there for sure. I think on both sides of the equation, I can't tell you when this will settle. We're on the record as sort of identifying we don't see a near-term settlement. CAMFOR has over $725 billion U.S. dollars in deposit, and with the rates increasing here to 16% and probably doubling or more again next year, we're going to have a lot more, unfortunately, on deposit. So for us, the opportunity to take some of the money off the table, even at a discount, seem to make some sense. There's no specific use of funds we have in mind, but just the flexibility, and these opportunities maybe don't come along all the time. It took us a while to do it, and so while it was there, we thought it was prudent to take 40% of our current exposure off the table, and that's how we came to do it now, Sean.

Okay, understood. Second question is on European fiber costs. You mentioned the pressure you've seen on that front, and we've seen reports that Sojourn Sweden is is increasing log costs again, I suppose over the last week or so. Can you speak to the general fiber cost environment, your ability to recoup that in local prices for lumber with the quarterly contract system that seems to be more in place there? I suppose just general comment on fiber costs in Europe.

Yeah, I mean, I think, you know, Phrase that well, I mean, I think that it's safe to say across Europe, fiber costs have increased pretty dramatically from a fairly low base, though, to start with, but still, they have definitely increased, and Northern Europe particularly have increased. I guess there is some offset there, though, in terms of quality of the fiber that we get there, and as you know, and we've spoken about it before, we have a very, very high percentage of high-value product opportunities there that we've been able to develop over years, and long before we came along, even WIDA, So we're in BC, we're in Canada, and even in the US, we're 40% to 60% high value there. It's more like 80%, 90%. So significant recovery, great recovery improvements in Sweden compared to anywhere else really in the world probably, but certainly at the top of the list. A couple of the lists there. And the other thing there too, Sean, is we've got a lot more flexibility in markets. We've got the ability to move around to where the markets are the highest value as well. And so even though log costs have gone up, we're certainly never comfortable with increases, but we've got lots of options. And with a high value percentage of our portfolio, we'll be good about that too.

Okay. That's great detail. Thanks, Don. That's all I have for now. Yeah. All right. See you.

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

Hi. Good morning. Don, I wanted to get your thoughts on, you know, how much of the capacity that's been removed this year has kind of gone for good versus just, you know, maybe idled for a period of time and at risk of coming back in a stronger market. And just thinking specifically in the U.S. South.

Yeah. Good question. It's one that we wrestle with ourselves, right? And, you know, ourselves, we've just begun a camp where we got a couple of mils down and added, you know, kind of half of one back kind of thing. But at the end of the day, hard to know. The reason it's difficult is a lot of the independents, right, they don't report, they don't speak about it, but we can only tell by the... performance in the last 12 to 18 months of the selling yellow pine operations overall, that they've got to be under significant pressure. So our belief is it's definitely down. If you go back, we've talked about this a lot, but if you went back two, three years when a lot of these larger mills, the 15 big mega mills that everybody's built through that pit construction, there was expected to be significant increases in yellow pine production, which of course this year, year to date, is probably down 7, 8%. So it's not anywhere near what was expected even a couple years ago. So our view is that the other is whether how much of that's permanently down, hard to tell. But I would say that there's a portion of that for sure is just hard to get a complete handle on. But safe to say, though, I think that we're not going to see anywhere near the increases that we thought we would have seen based on forecast a couple of years ago.

Fair enough. And Don, how do you think about, you know, euro inflation? your European exports to the U.S., just given the rationalization you've done to your BC platform, do you expect that to grow? And maybe you could speak to the relative attractiveness of selling into the U.S. from Europe versus selling domestically.

Yeah, I think there's, you know, that's one of the reasons why we... We diversified like we did. We wanted to be able to, you know, we anticipated the BC situation for a long time because of beetle and fires and everything else that you hear and trade issues and everything else. So that's why we invested in other markets to start with. So certainly Vita gives us some options there for sure. You know, so we're looking at that in terms of what those are and can be going forward. So yeah, there is a part to play from our view for Vita. And, you know, that's already underway in a lot of cases already. I know Kevin's been working on a lot of programs there already to supplement what we get out of Alberta, particularly in British Columbia. So, yeah, so I think if you had to look at that acquisition and what we believe to be the case in terms of capitalizing on that diversification, I think that's playing as we thought it would, you know, the way we thought it would.

Great. Thanks. And just the last question I had was, you know, dependent – Obviously, with the U.S. upcoming election, if we were to have another Trump administration and, you know, he's talked about putting sort of across the board 10 percent tariff on imports. Is there any reason lumber would not also get hit with that additional 10 percent of that occurs? I'm just thinking with the ongoing trade dispute and, you know, is that maybe risks that your duties, which already are going to go up, go up potentially even more?

With all due respect, Hamir, I think it's obviously a really, really difficult one to call because there's a lot of, it seems like weekly and annually we get a little surprises on that subject, but hard to speculate at this point on that at all. I mean, obviously, you know, just like the duties that we're dealing with today, you know, you've got price responses and timing and all of that. So really difficult one to answer at this point.

Okay. Fair enough. That's all I had. I'll turn it over. Thanks. All right. Thanks, Mary.

Thank you. Next question comes from Matthew McKellar at RBC Capital Markets. Please go ahead.

Good morning. Thanks for taking my question. Can you talk a bit about what you're seeing across the landscape for acquisitions in wood products today, both in North America and Europe, please?

Yeah, I mean, just from our standpoint, I mean, we, you know, certainly we've been pretty active in the last three or four or five years in terms of acquisitions and strategic geographies that we felt was important for the future. And that combined now with some of the capital projects that we've done with the two new greenfields and the, you know, pretty extensive brownfield that we've done in Urbana, you know, overall, you know, clearly we're continuing to look at opportunities in Europe and there's lots of opportunity, I think, all over the place, but right now we're just being real, real focused on completing the capital that we've got in place. Those plans we got, the startups that are forthcoming here, and we'll continue to look at opportunities as they look forward. There's nothing that I can speak to at this point at all, but you've heard us talk before, and it's still the case that we really like Europe, we really like Alberta, and we really like the U.S. suburbs.

Okay, thanks for that. Okay, thank you. And then just one more cleanup from me on CapEx. I think I heard $250 to $300 million on the lumber side next year. Are you expecting on the pulp side that $25 looks something like $24? Any comments around that, please?

Yeah, Matthew, I think given that we've rationalized the line at Northwood, we'll be below 50. We're still working through that, but I would just bid it be below 50.

That's helpful. Thank you. I'll turn it back. Thanks, Matthew.

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

Thanks, Operator, and thanks, everyone, for participating this morning. We appreciate you tuning in, and we'll look forward to talking to you at the end of Q1. Thank you.

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