Canfor Corporation

Good morning. My name is Joelle, and I will be your conference operator today. Welcome to Canfor and Canfor Pulse second quarter analyst call. All lines have been placed on mute to prevent any background noise. During this call, Canfor and Canfor Pulse 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 Susan Yerkovich, President and CEO of Canfor Corporation.

Please go ahead. Thanks, Joelle, and good morning, everyone. Thanks for joining the Canfor and Canfor Pulse Q2 2025 results conference call. I'm going to open up with a few remarks, then I'll turn it over to Stephen Mackey, Canfor's Chief Operating Officer. and CEO of Canfor Pulp, followed by Pat Elliott, our Chief Financial Officer of Canfor Corp and Canfor Pulp. We've also got Kevin Pankratz, Canfor Senior Vice President of Sales and Marketing, and Brian Ewan, Vice President of Sales and Marketing for Canfor Pulp, who are here with us and available to take questions. While the market conditions remain really challenging, we continue to see improvements in our underlying business, supported by our geographic diversification, the capital investments that we've completed over the last few years, and our ongoing commitment to optimizing our portfolio of assets to enhance our financial performance. To that end, as you know, we made some very tough decisions to close a number of facilities in British Columbia since 2023 due to high costs and ongoing fiber challenges. And in addition, this quarter, we announced the closure of our Estill and Darlington facilities in South Carolina due to persistent weak market conditions and sustained loss at those facilities. In combination, these closures have removed more than 2 billion board feet, better aligning our production capacity with market demand. While extremely difficult for our people and communities, these decisions will enhance Canfor's ability to withstand significant trade headwinds, challenging market conditions, and the general uncertainties that are impacting our business at this time. In transforming our business and leveraging across our globally diversified lumber platform, we believe we will be able to generate more stable cash flow, and enhance our competitiveness over the long term. Despite the challenging market dynamics we're facing right now, our balance sheet remains strong, and it's allowing us to pursue strategic growth at the bottom of the cycle. And this quarter, we were very pleased to announce the pending acquisition of three small sawmills from Carl Hedin in Sweden. These sawmills have exceptionally high-quality fiber in central Sweden, which is a new operating region for Canfor Vida, and will enhance our ability to access global markets and further reduce our reliance on the U.S. market. Supported by recent capital investments and a strong cultural alignment with the identified synergies, these sawmills will complement VITA's operating platform once the acquisition, which is subject to normal closing conditions, is completed later this year. Following this acquisition, our lumber platform will include approximately 35% of our lumber production based in the U.S. South, 35% in Sweden and 30% in Western Canada, providing meaningful geographic product and market diversification for the company. With respect to duties and tariffs, we have, of course, been expecting the increase in duty rates that come into effect this week and have been adjusting our sales strategy accordingly. However, there remains significant uncertainty regarding tariffs and the ongoing Section 232 investigation in the U.S., as well as the broader trade environment. We continue to monitor these developments closely and will adjust our plans to mitigate the impacts to the greatest extent possible. Notwithstanding this uncertainty, we are well-positioned to navigate these challenges, supported by the actions that we've taken over the last several years to build out our low-cost, globally diversified lever platform. I'd now like to turn it over to Stephen Mackey to provide an overview of Camp 4Pol.

Thanks, Susan, and good morning, everyone. Camper pulp generated modest EBITDA in the second quarter, with results reflecting the impact of lower sales realizations due to persistent economic and global trade uncertainty, as well as a 4% stronger Canadian dollar. Weak demand and elevated global pulp inventories contributed to a sharp decline in pricing, particularly in China, where prices fell 7% in the quarter. However, the full impact of these price declines will not be evident in our sales realizations until the third quarter. While pulp pricing in China has stabilized recently, we anticipate weak market fundamentals to persist throughout the third quarter. While our paper business performed reasonably well, we also saw a sharp decline in sales realizations in the second quarter, reflecting the stronger Canadian dollar, weaker pricing in North America due to ongoing tariff and economic uncertainty, and weaker demand driven by the aforementioned economic uncertainty. Notwithstanding the current macroeconomic challenges, camphor pulp continues As an organization, we are adapting to align with current market conditions. We have made progress on improving our productivity and reliability. We currently have an adequate chip supply to support our operating footprint, and we are intently focused on improving our cost structure. While market fundamentals are challenging in the short term, we believe our specialty product focus and unique fiber characteristics combined with an enhanced focus on operational execution and disciplined cost management will allow us to navigate the current market dynamic. We'll now turn it over to Pat to provide an overview of our financial results.

Thanks, Stephen, and good morning, everyone. In my comments this morning, I'll speak to our second 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 adjusted EBITDA of $62 million in the second quarter, a million dollars higher than the prior quarter. Adjusted EBITDA includes restructuring charges following the announced closures at Estill and Darlington that Susan mentioned earlier. Excluding these one-time items, our lumber business generated EBITDA of $68 million in the second quarter, up approximately $8 million from Q1, supported by solid earnings in Europe and continued ramp-up of low-cost capacity in the U.S. South. While global lumber markets remain challenging in the short term, the transformation of our lumber business in recent years has supported an improved cost structure and improved profitability. Our lumber business generated EBITDA, excluding one-time items, of approximately $130 million in the first half of 2025. While market conditions appear challenging through the balance of the year, our lumber platform is well-positioned to capitalize on stronger lumber prices over the medium to long term, supported by our geographic diversification and low operating costs. Turning to our pulp business, Camphor Pulp generated adjusted EBITDA of $6 million in the second quarter, down $15 million from the prior, reflecting the impact of lower pulp and paper sales realizations and, to a lesser extent, an uplift in pulp manufacturing costs. At the end of the second quarter, Canfor Pulp had net debt of $74 million and $80 million of available liquidity, while Canfor, excluding Canfor Pulp and the duty loan, ended the second quarter with net debt of approximately $87 million and available liquidity of $1.3 billion. On a consolidated basis, capital expenditures were approximately $51 million in the second quarter, including approximately $5 million for Canfor Pulp. Following completion of several major capital investments in recent years, we are anticipating significantly lower capital spending starting this year, with approximately $240 million projected in our lumber business. Of this amount, approximately $160 million was spent in the first half of the year. For Canfor Pult, we are currently forecasting capital spend of $45 million in 2025, including capitalized maintenance. Following completion of our recently announced acquisition in Sweden later this year, our balance sheet remains solid, supported by our improved operating platform, a seasonal working capital reduction in Sweden, and an expected tax refund in Canada. In addition, we anticipate CAMFOR will continue to allocate a modest amount of capital to opportunistically repurchase shares throughout the year under its normal course, issuer bid. And with that, 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 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. Your first question comes from Keaton Mantora with BMO. Your line is now open.

Thank you, and good morning. Maybe to start with, can you talk about if you saw any pre-buy ahead of, you know, kind of duties going higher, you know, on the Western SPF side?

Devin, you want to answer that? Sure.

Yeah, we actually, the buying behavior has actually been relatively steady, like through June and July, and there might be a little bit of pre-positioning, but quite frankly, customers are more or less keeping inventories adequately stocked in order just to meet their just-in-time demand. So I haven't seen any material buying increases.

Understood. So, I mean, is it fair to say that inventories, you don't see kind of any material very often in inventories?

I think our customer's inventory positions are actually relatively balanced. And like I said, with all the uncertainty that they're facing, I think they're just going to be buying as they need in the just in time basis.

That's helpful.

And then just one other question, you know, with the sort of duties, you know, going higher here, I'm curious kind of as to your sort of approach to production, You know, particularly in light of kind of housing demand kind of being softer. Especially if sort of, you know, is your approach to pass through the entire price, the duty increase? Can you just give us sort of some sense of how you all are approaching this?

Yeah, good morning, Kate and Stephen Mackey. Just I think from a production perspective, you know, we obviously made some very difficult decisions over the last couple of years and we've rationalized some of the higher cost capacity that we had in Canada. And so our expectation is to run and that's certainly our plan is to operate through the cycle. We think we're well positioned with limited exposure overall if you look broadly across our global platform to the U.S. So obviously there's lots of volatility and things can change and we'll be responsible due to the market dynamics that we see out there, but our plan is to operate.

Understood. That's very helpful. I'll jump back in the queue. Good luck. Your next question comes from Sean Stewart with TD Cowen.

Your line is now open.

Thank you. Good morning, everyone. I want to start with Europe. The pending acquisition there looks like attractive terms, and the margin profile there remains really resilient. I guess I'd be interested in your perspective on other M&A opportunities in Europe. Is the interest still specific to Sweden? Is there any opportunity to maybe expand beyond Scandinavia for growth opportunities there?

Yeah, thanks, Sean. It's Susan. Yeah, we really like this. We like this Hedin acquisition. They're really good mills. They fit well into the BIDA platform, and there's a lot of opportunity for us. It's mostly going into the European market and some into Japan, so it's really good for us. We'll be looking at integrating those three facilities into our operations. Of course, we're always keeping our eye open, but this does open up really another region for us because these apps are located in central Sweden, which is a different sort of operating area for Canfor Vita.

And any, I should read that as, I guess the appetite for further growth initiatives there, your balance sheet's still in relatively strong shape. Are you content to integrate this deal and Is it tight, or if other opportunities would come forward, would you consider them at this point?

Well, Sean, you know, we're always looking for things. We're looking for things all the time. We're looking at opportunities across our platform. But, you know, right now we've got a job to do to integrate these assets into our platform, and we're going to do that, but we'll keep our eyes open.

Okay. Thanks for that. And then, Susan, maybe a question you don't want to answer, but I just want to get your thoughts on trade evolution here on Canada-U.S. lumber. How is your optimism that lumber can be included in a broader U.S.-Canada negotiation? And do you have any thoughts that you would share on quota being a potential facet of a potential deal?

Yeah, sure. I mean, I think what we've heard is signals from the federal government, important signals that, you know, lumber is a priority out there, along with, you know, steel and aluminum and auto and a couple of other sectors. And so I think we appreciate that. This is a really important industry to Canada. I think these are incredibly complex multilateral discussions, and I think my strong hope is that lumber is included in this. If we can achieve an agreement, I would very much like for lumber to be included in that resolution. As you know, this is a really long-standing agreement. As far as the form of that agreement, I think we leave it to our very competent negotiators, including the chief negotiator for Canada, Kirsten Hillman, who's a very seasoned negotiator, our ambassador in the U.S. And I think they're going to need some flexibility to try and reach resolution. So I'm not sure what form that resolution will take, but certainly we've been working across, you know, working with the industry and are ready to support the federal government in finding a resolution on this file for lumber.

Thank you for that detail. That's all I have for now.

Thank you.

Your next question comes from Amir Patel with CIBC Capital Markets. Your line is now open.

Hi. Good morning. Kevin, I was wondering if you could give us a sense how lumber demand has fared with your key R&R customers this year, both in North America and in Europe.

Yeah, thanks for the question. Actually, our experience here has been actually relatively steady, and I would say year to date, compared to last year, relatively flat. However, we did see a little bit of a slowdown in the summer, but then since then, or sorry, like in early July, but I've seen since the pickup. So I think that's been a positive in the marketplace. And then as far as Europe, I think they're experiencing the same thing, that DIY segment has been performing relatively steady and then keeping pace with the relatively year-over-year comps. Which is actually much better than what we're seeing in new home construction, which is actually awesome.

Okay, thanks for that, Kevin. Susan, I had a question for you with, you know, assuming the current trade situation continues, just given the large reductions to your BC platform over the past year, when you think about the difference between your combined anti-dumping countervailing rate and the rate for West Fraser rate, Will you expect that spread to really narrow when the AR7 preliminary rates come out?

Yes. Okay.

And any, I mean, would that sort of play out over two years, or it'll be a big step down, you think, in AR7, just given the geographic?

There'll be a step down, and you'll, yeah, there will be a step down, but yes, we expect that that that spread will be diminished.

Yeah, that's all I had. I'll turn it over. Thanks. Your next question comes from Matthew McKellar with RBC. Your line is now open. Matthew McKellar, your line is open.

Hi, good morning. Thanks for taking my questions. First for me, just with the changes to your Southern Yellow Pine portfolio and the current market backdrop, how should we be thinking about SYP shipments in the second half? And what kind of maybe reduction in fixed costs should we associate with those two most recent low closures? Thanks.

Maybe, Kevin, you want to talk about the markets and then Stephen? Sure.

Okay, yeah, I think our outlook for shipments will be actually pretty flat, I think quarter over quarter. And then Steven?

Yeah, I think our shipments, what you can expect, Matt, is that, you know, obviously we've seen the impact or will see the impact of the Essel and Darlington closures and those capacity reductions. Those will be offset to a fairly large degree with the ramp-up in capacity of some of our recent capital investments down in the southeast U.S. with the modernization of our Urbana facility, the construction of our new Greenfield facility at Axis, and both of those operations are progressing through their startup curves very well. And we're also looking at some potential incremental capacity to a couple of our other facilities, so I think we'll largely offset and be reasonably flat on an annualized basis.

Okay, thanks for that detail. Next, you talked about adjusting your sales strategy following the implementation of higher duties. I guess things could change here, but based on your expectations of how you'd expect demand and pricing to evolve, What percentage of Canadian produce would we expect to sell into the U.S. in a sort of status quo scenario where higher anti-dumping duties are made in place, final countervailing duties are in line with preliminary results, and we see no incremental Section 232 tariffs? Or maybe to even reframe it, how could we expect the geographic sales and extra limits to evolve here over the next couple quarters?

Thanks, Mac. Actually, the situation is quite fluid, as you can imagine, and so a lot's going to depend on how pricing reacts in the U.S. market versus the Canadian market, and we have the flexibility to navigate through that, and it's something that we're going to have to monitor and will be monitoring on a daily basis, and so it's kind of hard to exactly say because throughout this whole journey, even the last couple of months, week to week, it has pivoted and changed depending on demand, liquidity, and financial results, so that's I mean, it's kind of hard to say exactly because we're not dealing with a real fixed situation.

Okay, that's fair. And then last for me, could you just please refresh us on the most impactful initiatives you have underway to improve the cost structure at Canfor Pulp? Thank you.

Yeah, thanks, Matt. I mean, for the most part, the single biggest thing that we can do is really improve or continue to improve our reliability and our operational performance uptime and execution. So, I think the team is intently focused on running the facilities with greater stability. We've shored up the fiber supply. We've got sufficient fiber to support our operating footprint today. So, we're in good shape. there and we see continued modest progress downward on that cost curve within the fiber supply. And then it's really about operational reliability and stability. Our cost structure can be competitive when we run and run well. And that's the focus of the team, particularly as we head through the third quarter and into the fourth quarter and the turnaround that we'll have at Northwood in Q4. So that's what I would say about that, Matt.

Thanks for all the detail. I'll pass it back. Thank you. There are no further questions. I'll now turn it over to Susan for closing comments. Thanks very much for joining us. We'll see you next quarter. Ladies and gentlemen, this concludes your conference call for today.

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