Canfor Corporation

Good morning. My name is Constantine, and I will be your conference operator today. Welcome to Canfor and Canfor POP's third quarter analyst call. All lines have been placed to mute to prevent any background noise. During this call, Canfor and Canfor POP'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 Susan Yurkovich, Canforia Corporation's President and Chief Executive Officer. Please go ahead, Susan.

Thanks, Konstantin, and good morning, everybody. Thanks for joining the Canfor and Canfor PULP Q3 2025 results conference call. I'm going to start off with a few comments before turning it over to Stephen Mackey, Canfor's Chief operating officer and CEO of Canfor Pulp and Pat Elliott, Chief Financial Officer of Canfor Corporation and Canfor Pulp. Kevin Pankratz, our Senior Vice President of Sales and Marketing would normally be with us as well, but he's traveling in the market today with customers. And so we will do our best to handle your lumber market questions. But of course, if there's any that need follow up, we can do that after the call. However, we do have Brian Yuen, our Vice President of Sales and Marketing for Canfor Pulse with us, and he can take any questions related to the pulp market. As we've indicated in previous calls, over the last several years, Canfor has taken significant actions to further diversify our portfolio, improve our underlying cost structure, and prepare for the challenging duty environment that our industry is facing. And this has included making difficult decisions to permanently close some of our higher cost operating assets, including the recent closure of our Estill and Darlington sawmills in South Carolina this last quarter. At the same time, we've largely completed a significant modernization of our fleet in the US South and expanded our presence in Sweden with the acquisition of three additional sawmills from Carl Hedin, a transaction that closed in September. As a result, while global lumber market conditions remain very challenging, we have better aligned our production capacity with market demand and significantly improved our cost competitiveness and leveraged our balance sheet strength to opportunistically acquire strategic assets. This transformation has been hard work. However, we now have a diverse portfolio of assets that are better positioned to both serve our customers and withstand these difficult market conditions. And with approximately 70% of our business located out of Canada, we are also able to mitigate some of the impacts of the punishing duty environment we are currently facing. While we expect the economic uncertainty is likely to persist in the near term, Canfor is well positioned to navigate these turbulent times. And importantly, our balance sheet remains strong. And with over $1.2 billion of available liquidity, we have significant financial flexibility to withstand current market conditions while also pursuing opportunistic strategic investments at the bottom of the cycle. I'd now like to turn it over to Stephen to provide an overview of CAMFORT PULP.

Thanks, Susan, and good morning, everyone. CAMFORT PULP continues to be impacted by challenging global pulp markets with elevated inventories and weak demand weighing on our financial results in the third quarter. While our paper business continued to perform well, we also experienced subdued demand for bleached craft paper. With challenging market fundamentals and current economic uncertainty, CamperPulp continues to focus on achieving targeted cost reductions and improving our operating performance. We've made progress on several operating initiatives in recent quarters, including sourcing additional fiber supply to support our current operating footprint, enhancing reliability and productivity, and improving our cost structure. Notwithstanding recent operational improvements, results in the fourth quarter will continue to reflect the impact of weak global pulp markets and results will also be impacted by a scheduled maintenance outage at Northwood. This outage was recently completed and the Northwood operation is currently in the process of restarting. As a management team, we remain focused on mitigating the impacts of global trade and economic uncertainty as we closely manage factors within our control. Within the challenging financial position of Camp for Pulse, management has introduced additional cost-saving measures, working capital reductions, and the deferral of some capital expenditures in 2026 as we continue managing our financial covenants, debt levels, and available liquidity. We'll now turn it over to Pat to provide an overview of our financial results.

Thanks, Stephen. 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 Canfor's website. Our lumber business generated an adjusted EBITDA loss of $2 million in the third quarter, which was $70 million lower than the prior quarter. These results reflect weak lumber market conditions, particularly for Southern Yellow Pine, in addition to seasonal downtime in Europe in the quarter. Notwithstanding current market conditions and the impact of elevated duties and tariffs, we've seen a notable improvement in our underlying cost structure in recent quarters. While markets are expected to remain challenging in the near term, our lumber platform is well positioned to navigate the current market dynamics, supported by a solid balance sheet and actions taken in recent years to transform our operating platform. As Susan mentioned, during the third quarter, we completed the acquisition of three sawmills in Sweden, Total consideration of $171 million, which included $22 million of cash and $44 million of non-cash net working capital. With the completion of this acquisition, diversification of our portfolio, and optimized sales strategy, approximately 15% of our production capacity is currently exposed to duties and tariffs. Turning to our pulp business, Canfor Pulp reported an adjusted EBITDA loss of $2 million in the quarter, which was $9 million lower than the prior quarter, reflecting the impact of lower pulp and paper sales realizations, which more than offset a modest reduction in pulp manufacturing costs and improved productivity. Canfor Pulp ended the third quarter with net debt of $89 million and $64 million of available liquidity. while Canfor, excluding Canfor Pulp and the duty loan, which we completed in 2024, ended the third quarter with net debt of approximately $247 million and available liquidity of $1.2 billion. On a consolidated basis, capital expenditures were approximately $40 million in the third quarter, of which $4 million was for Canfor Pulp. We anticipate capital spend of approximately $240 million in our lumber business for 2025, with approximately $45 million remaining to be spent in the fourth quarter. For CAM4 pulp, we anticipate capital spend, including capitalized maintenance, of approximately $45 million in 2025. Of that, $27 million remains in the fourth quarter. As Stephen mentioned, given current pulp market conditions, operational downtime at Northwood due to its scheduled maintenance, and remaining capital spend in the fourth quarter, Camphor Pulp has implemented several cost-saving measures to improve its financial position. We have noted in our financial statements the material uncertainty that exists in the current business, given the significant debt load, remaining capital spend for the year, and market conditions. As we have disclosed, we are in active negotiations with our lenders around additional covenant relief. Looking ahead to 2026, we anticipate capital spend of approximately $175 million in our lumber business, and approximately $35 million for Canfor Pulp, including capitalized maintenance. In addition, we anticipate Canfor 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, Constantine, we're 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're 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. Your first question comes from the line of Kitem Emtora from BMO. Please go ahead.

Thank you, and thanks for taking my question. Maybe to start with, can you talk a little bit about sort of European performance in Q3? If I'm reading this correctly, to me it seemed like there was an EBITDA loss in Europe in Q3. Can you just talk about some of the sort of the big moving pieces there?

Sure, Kate and this is Pat. Thanks for the question. Yeah, you're right. We've had great performance in Europe the whole time since we've owned them back in 2019. So it's a little surprising to see the situation. I would note that there's an inventory deval in Vita, which is about nine of the 10 million. So it's the vast majority. But your point is correct. We're continuing to see log cost pressure in Europe. We think that's going to moderate as we move into next year, but it has been significant over the last number of quarters. I think additionally we've seen inventory levels in Europe building and pricing as a result has been depressed. And so I think the operating conditions in Europe are the most challenging we've seen since we've owned Vita. But we continue to be encouraged by how well they perform on a relative basis. And we think as we move into next year and we see some of the downtime that's happening start to take hold, we'll see better results. But you're right, this is sort of a first of a kind since we've owned Vita.

That's right. I was looking at my model, and I don't think I've seen, like, a negative EBITDA, so got it. So when do you expect sort of things to start getting better in Europe at?

Yeah, well, I think it's a global story, right, Caden? And, I mean, I think that we're definitely seeing some retrenchment in Europe, and the shipments into North America have, you know, declined somewhat certainly since the peaks. I think they're trending kind of at 2.5%. building board feet. And so it's really going to be a question of how quickly that inventory can be run down. And I think as in North America, we're definitely hearing about lots of downtime, not so many kind of big announcements, but we definitely know that downtime is being taken. And so I think as we move into, you know, certainly we're more like into 2026 than in the fourth quarter here. You know, we think things will rebalance and we'll start to see improving conditions. And on the log side, we're definitely seeing that stop rising, which is an encouraging sign, and the trend is definitely down. But, of course, that takes a number of months to work through our system.

Mark, is that it? Order of magnitude, what kind of log inflation are we talking about here in Europe, Pat?

Well, over the course of the last number of quarters, it's been 30, 40%. I mean, it's been significant. And so that's really not sustainable. And that's why we're starting to see it turn the other way.

Understood. And then just switching to North America, Can you give us sort of your approach to managing production here for the next, I don't know, couple of quarters? One is, of course, the seasonal component in Q4, but just particularly as well, things seem to be a little slow. So can you just talk about what trends you are seeing here into October and your approach to managing production?

Sure, Caden, it's Stephen here. With respect to the Q4 production levels, our intent is to run our facilities. We have, as you know, we've made a number of difficult decisions and really worked hard to optimize our operating portfolio across North America over the last several years, including the recent closures of our Essel and Darlington facilities in South Carolina. this past quarter, which removed about 350 million more feet. So we're comfortable with where we are. We've got a solid asset base, competitive facilities, and our intent is to operate across North America. So I think you can expect to see that through Q4 and into next year. Now, of course, we're always continuously assessing the situation relative to demand and pricing levels, but our intent is to run.

Your next question comes from the line of Sean Stewart from TD Cowen. Please go ahead.

Thanks. Hi, everyone. First question is on. Good morning, everyone. First question on Canfor Pulp. If you don't get waivers from the lenders, can you give us the path forward for Canfor Pulp as a standalone entity? You know, how might this play out, I suppose, over the next few quarters?

Sean, that feels like a question for me. It's Pat. Certainly hard to, you know, speculating here is a bit dangerous. So what I would say is that Stephen mentioned, I mentioned where we've got, you know, significant cash and margin improvement program going inside the business. you know, we are certainly not in a place from a liquidity point of view that feels comfortable, but we are really working to do everything we can to kind of get through the near-term challenge that we're in, which is really the market conditions. And, you know, I think if we look at going forward, I'm not sure we have prices rocketing up, but certainly the trend line is for improving prices and with sort of some, you know, decent operational performance and improving prices, it puts us in a better position. So we're just, we're tighter than we want to be. And that's why we've kind of got to go back and deal with our lenders here, particularly at the end of the year. But I think that, you know, we'll just have to see how things play out because it'll be very dependent on how markets perform over the next number of quarters.

Okay, understood. Second question is on your North American lumber operations this quarter. The price realizations actually surprised the upside versus what we were expecting. And I'm hoping you can sort of connect some dots. Your shipments skewed more heavily to the U.S. south this quarter than they did in Q2, which all else equal, I would think, would hurt your price realizations. Any context you can give on mix this quarter, certain dimensions outperforming others? Can you explain that at all?

Yeah, like I think, Sean, there's some, and without Kevin here, it's a bit dangerous for the finance guy to talk about marketing, but, you know, the... We do have a broader, you know, sort of go-to-market strategy that, you know, and how we ship to different jurisdictions and the widths that we produce. With the new, kind of new and improved mills that we have, we have much more flexibility to be, I would say, a bit more dynamic about that. And we've been able to sort of optimize our profile. I think additionally, you know, some of the products that we produce in BC and Alberta are maybe of a higher quality than some of the mills that were further north that we're more of a call as standardized profile. So I think it's really, a little bit of the fruition of all of the changes that we've made in our production footprint over the last number of years kind of coming together, particularly in tougher markets, kind of the opportunity to outperform when you have some of that higher value or you're a little more dynamic, I think is pretty positive. And so I appreciate you noticing it because it's certainly something we're working on, but obviously embedded in that is a bit of our own sort of formula of go-to-market that we sort of hesitate to get into beyond that.

Ladies and gentlemen, we will be taking one question and one follow-up per participants. If you have any follow-up questions, please feel free to rejoin the queue. Your next question comes from the line of Ben Isakson from Scotiabank. Please go ahead.

Good morning, and thank you very much for taking my questions. I just have two of them. Susan or Pat, I was hoping you could spend a little bit of time just talking about Canfor's portfolio diversification, particularly in Europe. Why is the outlook, you talked a little bit, or maybe I'll phrase it this way. How disconnected or interconnected is the European business from your North American portfolio? Is the weakness in Europe coincidental to the weakness in the U.S., or are these just global commodities and that's having an impact all over?

So, thanks, Ben. I mean, we see weaknesses in markets across the globe. I think there's a lot of uncertainty. I don't have to sort of tell you that. It's a very volatile environment right now, and so we're seeing that in North America and also in Europe. I think that, you know, for us, the European piece is a kind of, it's a business, that business has a lot of market optionality. So, of course, we operate in Sweden, but we have access to many, many markets in Europe, Middle East, North Africa, and Australia. So we've got a lot of options for our products. So when, you know, one market is tough, we can move to other markets. And so there's a lot of optionality and flexibility we've got very high quality fiber there um and that and we have um we've had a very good business i mean you know we've talked about the fact that um this is an anomaly uh normally the european business has been very very steady and we expect it to come back into that place that's why we have added to our portfolio with the hedin assets and was at the new mills a few weeks ago, five weeks ago, I guess now. Those are really good assets to add to our portfolio. We like the fiber quality is phenomenal. And we've got really good, we've acquired some really capable operators there that share a very similar culture to VIDA. So we're very happy with that and happy to be able to have that in our portfolio.

Great. Thank you, Susan. And just a follow-up question for you, and perhaps you can think out loud on this, and it's not related to Canfor or any company at all, but it's clear to me that all management teams are controlling their controllables as best they can. But obviously, external market forces are still a meaningful overhang. So in your view, does the industry need to see meaningful sector consolidation, and is it possible that lumber pricing power can be taken back or at least improved, even if this is a five-, ten-year process? In other words, philosophically speaking, is an industry consolidation path inevitable? Thank you.

Well, that's a very big question, Ben. Yes, there's a lot of operators in our space, and I have my own views about what should or shouldn't happen, but I think what you hit the nail on the head, and we are focusing on the things that we can control. We're looking at our own portfolio. We are working to a place where we have very strong assets that are able to withstand all kinds of market volatility. And I think you're seeing, you know, that's been a change that's been occurring over a number of years, but I think you're starting to see that play out. Can we consolidate to the place where we can have more impact on price? Perhaps, but that's a long journey. I don't know how many operate lumber manufacturers there are in the U.S., but I bet there's 500 plus. So that would be a very long journey. So I think, you know, what we are really focused on is our portfolio where we want to position ourselves and the growth opportunities that we see.

Your next question is from the line of Hamir Patel from CIDC. Please go ahead.

Hi, good morning. Susan, I imagine your Alberta operations are always in the black, but just given the large extended losses sawmills are experiencing here in BC and the greater duty headwinds Canfor is contending with, how do you think about whether you'd be better off just shutting all your BC mills until prices move above breakeven?

Well, look, as you know, we've made a lot of changes to our BC portfolio, and, you know, those are really tough changes for us. We are a BC-based company. We've got a long history here, and we've made a lot of – we've made a dramatic change here to try and optimize our portfolio. What we have in our portfolio now we like. We've got, you know, we're in the cooties largely. We've, of course, got our Prince George sawmill, which is really useful in supporting our pulp business. and is a good facility, but we also have our mills in the Kootenays, which has a different fiber mix and allows us to make a number of products that our customers are looking for, and so we have greater kind of optionality and flexibility there as well. We like Alberta. We've made changes, and we like the portfolio we have right now, so we don't have any intention to make further changes at this time.

Fair enough. And Pat, are you able to kind of comment on maybe how your operating rates have been faring this year, Alberta versus B.C.? ?

Go ahead, Stephen.

Hi, I'm here. It's Stephen. Yeah, all of the mills across our operations, actually, I would say broadly across North America, again, we're pleased with the progress. Susan referenced the modernization capital that we've done down in the U.S. South. Our facilities are running well down in the U.S., and I know your question's about B.C. and Alberta, and we're running well in a Canadian context as well. The mills are doing a great job. The teams out there, our folks out controlling what they can control and we're happy with the operating performance across our suite of assets so again we feel pretty good about not about the market conditions and obviously the challenges we're facing from a financial perspective but teams are performing well and we know how tough it is out there for us and and how tough it will be out there for others as well given our current operating rates and how well our teams are performing

Ladies and gentlemen, as a reminder, if you would like to ask a question, please press Tar, then the number one on your touchtone phone. If you are using a speakerphone, please make sure to lift your handset before pressing any case. The next question comes from the line of Matthew McCuller from RBC Capital Markets. Please go ahead.

Good morning. Thanks for taking my questions. First, it sounds like there's still quite positive on the European opportunity. Do you see further growth in Sweden of the Nordic countries more broadly over the medium term as continuing to be attractive here, and if so, could you maybe remind us what your checklist would be for any further acquisitions? Thanks.

Yeah, I mean, we like Europe, and we are continuing to look. I would say that right now we are razor-focused on integrating the assets that we just acquired from Carl Hedin, and we've got lots of work underway to do that. We're always looking around, whether it's in Sweden or elsewhere in the Nordic countries, and we will continue to do that, as we do in North America, and we're fortunate to be able to do that, given the strength of our balance sheet.

Thanks very much. And just one high-level question on market conditions in pulp. In your view, what does the pathway from here to a healthier pulp market look like? either the near term or the medium term. How do you think about how conditions improve from here? Thanks very much.

Good morning, Matthew. Thank you. It's Brian here. As Stephen highlighted earlier, we see markets to remain challenged for the balance of the year. Having just returned from overseas, seeing our customers at the end of the day, given all the economic uncertainty, the situation right now for the remainder of the year we see will remain unchanged. At the end of the day, there's just simply too much capacity supply in this system. And we all know at current price levels, they are not sustainable. So we need to see, I guess, material reduction on the supply side to see a change in the market conditions.

Okay, thanks. And do you have a sense of the magnitude of response you'd be looking for compared to where we are today that would maybe catalyze that stronger environment?

Yeah, for sure. I mean, if we look at the stats right now, rough and dirty in terms of producer stocks on the software side, we guesstimate there's roughly about half a million tons of excess inventory in the system. If you add on top of that, Some of the, I guess, data that we're picking up out of China, the domestic ramp-up of softwood craft, anywhere between a million to a million and a half tons. I'd have to say you're looking at a million and a half tons out of the system. Unless there's a material uptick in demand, there needs to be a million, a million and a half tons of supply that has to be taken out of the system.

Thanks very much. I'll turn it back.

Thank you. There are no further questions at this time. I will now turn the call over back to Susan Yerkovich for closing comments. Please go ahead.

Thanks so much for joining us, and we look forward to hearing from you next quarter. Thank you, operator.

Ladies and gentlemen, this concludes today's conference call. Thank you very much for your participation. Give me now this connection.