Canfor Pulp Products Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 28, 2024

There are 9 speakers on the call.

Operator

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.

Operator

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 Cain, Canfor Corporation's President and Chief Executive Officer. Please go ahead, Mr.

Operator

Cain.

Speaker 1

Thank you, operator, and good morning, everyone. Thank you for joining the Canfor and Canfor Pulp 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 Pulp and our Senior Vice President of Sustainability. In addition, we are joined by Kevan Pankratz, our Senior Vice President of Sales and Marketing. As you know, Canfor has been focused on building on its globally diversified operating platform by increasing our footprint in Alberta, the U.

Speaker 1

S. South and Europe, while maintaining a reduced presence in British Columbia. This quarter, we 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 about 1,000,000,000 board feet of annual production capacity from our BC operations.

Speaker 1

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 U. S. Tariffs, which are expected to double again next year. Despite the challenges in the BC Interior, our Kootenay operations continue to perform well, supporting our specialty product and value added focus, including key high margin products such as MSR, J grade and homesteader grades.

Speaker 1

In Alberta, despite weak North American lumber pricing, our operations continue to provide positive earnings in Q3. In the U. S. South, our focus was on executing on our capital plan. Today, our sawmill operations at our new facility in Access, Alabama began production.

Speaker 1

When the planer mill is completed later this year, we expect the 1st shipment of finished lumber. The new sawmill will have an annual capacity of 250,000,000 board feet on a 2 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 El Dorado Mill in Arkansas, now called Iron Mountain, was completed on August 1. The Urbana upgrade project is in its final phase with start up last month and ramping up production in Q4.

Speaker 1

This project will increase capacity to 285,000,000 board feet. With respect to VIDA, although our results were marginally better than expected, 2024 has been challenging with log costs continuing to increase. On our financial results, our lumber business in North America recorded significant losses in the Q3 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 Q3. While global lumber demand remains tepid in the short term, lumber prices have steadily increased over the last several weeks.

Speaker 1

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 Q4, 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 pipeline. With respect to pulp, on an adjusted basis, our pulp business generated improved financial results in the Q3, supported by higher sales realizations.

Speaker 1

Pulp production was modestly lower than the previous quarter with our Northwood mill successfully transitioning to a one line operation in August. While Camphor 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

Speaker 2

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 Q3 financial highlights, a summary which is included in our overview slide presentation located in the Investor Relations section of Canfor's website. As Don mentioned, this was a challenging quarter with our lumber business generating an operating loss of $336,000,000 These results include an asset write down and impairment charge of $100,000,000 non cash duty related adjustments of $121,000,000 and several other items recorded in the 3rd quarter. Adjusting for these one time items, our lumber business generated an operating loss of $129,000,000 compared to a similarly adjusted loss of $115,000,000 in the prior quarter.

Speaker 2

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 BC sawmills later this year. In addition, with several major capital projects in the U. S. Sales nearing completion, we anticipate a gradual improvement in our unit cost structure as this low cost capacity begins to ramp up throughout 2025.

Speaker 2

Turning to our pulp business, Canfor Pulp generated an operating loss of $209,000,000 including a $211,000,000 asset write down and impairment charge. On an adjusted basis, Canfor Pulp generated an operating income of $2,000,000 an improvement of $7,000,000 the previous quarter, largely driven by improved pulp unit sales realizations. In total, we reduced the net book value of our lumber and pulp assets in BC by approximately $311,000,000 reflecting the rightsizing 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 Q3, Canfor Pulp had net debt of $68,000,000 and $85,000,000 of available liquidity excluding a term loan commitment of $80,000,000 related to a potential reinvestment in North Switzer recovery. Canfor excluding Canfor Pulp and the $314,000,000 duty deposit loan completed in late September ended the Q3 with net cash of approximately CAD330 1,000,000 On a consolidated basis, capital expenditures were approximately CAD117 1,000,000 in the quarter, including CAD18 1,000,000 for Canport Pulp.

Speaker 2

We anticipate capital spend of approximately $450,000,000 in the lumber segment in 2024 including the remaining spend on our Alabama greenfield 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 3 major projects. For Canfor Pulp, we are currently forecasting capital spend of approximately $50,000,000 in 2024 including capitalized maintenance.

Speaker 2

In addition, we anticipate Canflo 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.

Speaker 1

All right. Thanks, Pat. So operator, we're okay now to take questions from analysts.

Operator

Thank you. We will now take questions from financial analysts. Your first question comes from Ben Isaacson at Scotiabank. Please go ahead.

Speaker 3

Good morning. This is Apurva on for Ben. 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?

Speaker 1

Yes. Thanks very much. I'll just maybe Kevin, you could comment on that. Sure.

Speaker 4

Yes, thanks for the question. And yes, European imports are down and that was largely predicated in something pricing here in North America that made it very competitive for many of the operators there. Our volume from VIDA into North America was actually relatively stable quarter over quarter. And a lot of that is committed to program business and

Speaker 5

a bunch of that with

Speaker 4

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.

Speaker 3

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 up?

Speaker 1

Yes. So first of all, on our banner, it will be we'll be commissioning that in Q4 2024 for sure. And the spend there is about 93% completed so far as we've got a little bit more we need to spend there. The industrial capacity is going to be about 115,000,000 board feet.

Operator

Thank you.

Speaker 1

And then for Axis, you mentioned Axis also. The capacity there, that's also going to be complete. I think I mentioned in my comments that they're starting that up. But the capacity there will be 250,000,000 board feet. And we're about basically that's all I need to say around Axis, I think, for now.

Operator

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

Speaker 5

Good morning and thanks for taking my question. Maybe Don, to start with, in general, I thought your release and your comments this morning are 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 'twenty five. 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 repair and remodeling demand, new residential demand, how that's holding up and how that has trended through the quarter and into October? Thank you.

Speaker 1

Okay. So Ketan, thanks for the question, Ketan. 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 we are cautious, but we've become cautious the last couple of 3 years, right? And while we've been we've done a fair bit of traveling lately in the United States and even in Japan.

Speaker 1

And overall, I think demand looks fairly stable actually, not it doesn't look it's not disappointing us in any way. We're just being cautious for any major uptick at this time and more believe a lot of the increase that we see will come from a 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.

Speaker 1

Yes.

Speaker 4

Actually, I mean, the outlook actually looks a bit promising there, and we are a little bit cautious. However, with the state lift, we had some major interest rate drops. And a lot of our customers believe that that trend is 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.

Speaker 4

And more specifically, 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 take those are 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.

Speaker 5

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?

Speaker 5

Just rough numbers.

Speaker 2

Yes, Kate, we're fine tuning still, but I'd say it's like $250,000,000 to $300,000,000 versus $450,000,000 we spent this year. That'd be the range I'd use.

Speaker 5

For lumber 250, Pat, is that what you said for lumber? $250,000,000

Speaker 2

to $300,000,000 I see. Okay, got it.

Speaker 5

Perfect. That's all I had. I'll turn it over. Good luck.

Speaker 1

Thanks.

Operator

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

Speaker 6

ahead. Thanks. Good morning, everyone. A couple of questions. Pat, I'll start with the loan against the duty receivable.

Speaker 6

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 timeframe 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 and A opportunities. Can you give us some more context on the rationale, Pat or Don, on that front?

Speaker 2

Yes, 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 not we're on the record as sort of identifying we don't see a near term settlement.

Speaker 2

Canfor has over US725 $1,000,000 on 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 deposits. 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 sort of prudent to take sort of 40% of our current exposure off the table.

Speaker 2

And that's how we came to do it now, Sean.

Speaker 6

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 Soja in Sweden 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.

Speaker 1

Yes. I mean, I think you've raised 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, Lida was focused on that before.

Speaker 1

So we're in BC, we're in Canada and even in the U. S. 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 there.

Speaker 1

And the other thing there too, Sean, is we've got a lot more flexibility on 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 certainly have we're certainly never comfortable with increases, but we've got lots of options and with a higher value percentage of our portfolio, feel good about that too.

Speaker 6

Okay. That's great detail. Thanks Don. That's all I have for now.

Speaker 1

Yes. Thank

Operator

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

Speaker 7

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

Speaker 1

Yes. Good question. It's one that we wrestle with ourselves, right? And ourselves, we've just been going to count probably got a couple mills down and added kind of half of one back kind of thing. But at the end of the day, hard to know that and the reason it's difficult is a lot of the independents, right.

Speaker 1

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 Celargill plant operations overall that they've got to be under significant pressure. So our belief is it's definitely down. If you go back, we talked about this a lot, but if you went back 2, 3 years when a lot of these larger mills, the 15 big mega mills that everybody's built through that big construction, there is expected to be significant increases in yield of mine production, which of course this year to date is probably down 7%, 8%. So it's not anywhere near what was expected even a couple of 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 along.

Speaker 1

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.

Speaker 7

Fair enough. And Don, how do you think about Euro, 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.

Speaker 7

S. From Europe versus selling domestically?

Speaker 1

Yes. I think there's that's one of the reasons why we diversified like we did. We wanted to be able to 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 VIDA gives us some options there for sure.

Speaker 1

So we're looking at that in terms of what those are and can be going forward. So yes, there is a part to play from our view for VIDA and we know that's already underway in a lot of cases already. I know Kevin has been working on a lot of programs there already to supplement what we get out of Alberta, particularly in British Columbia. So yes, so I think if you had to look at our that acquisition and what we believe to be the case in terms of capitalizing on that diversification, I think that's planned as we thought it would, I guess, the way we thought it would.

Speaker 7

Great. Thanks. And just last question I had was, depending on obviously with the U. S. Upcoming election, if we were to have another Trump administration and, that he's talked about putting sort of across the board 10% tariff on imports.

Speaker 7

Is there any reason lumber would not also get hit with that additional 10% of that occurs? I'm just thinking with the ongoing trade dispute. And is that maybe risks that your duties which already are going to go up potentially even more?

Speaker 1

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. Obviously, just like the duties that we're dealing with today, you got price responses and timing and all of that. So really difficult one to answer at this point.

Speaker 7

Okay. Fair enough. That's all I had. I'll turn it over. Thanks.

Speaker 1

All right. Thanks, Maher.

Operator

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

Speaker 8

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?

Speaker 1

Yes. I mean, I think just from our standpoint, I mean, we certainly have been pretty active in the last 3 or 4 or 5 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 2 new greenfields and the pretty extensive brownfield that we've done in Urbana. Overall, clearly, we're continuing to look at opportunities in Europe and there's lots of opportunity, I think, all over the place. But we right now, we're just being real focused on completing the capital that we've got in place.

Speaker 1

There were those last 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.

Speaker 8

Okay. Thanks for that. And we like the cookies. Okay. Thank you.

Speaker 8

And then just one more cleanup for me on CapEx. I think I heard $250,000,000 to $300,000,000 on the lumber side next year. Are you expecting on the pulp side that $25,000,000 looks something like $24,000,000 or any comments around that please?

Speaker 2

Yes. I 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 spit it being below 50.

Speaker 8

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

Operator

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

Speaker 1

Great. 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.

Operator

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

Powered by Quartr
Earnings Conference Call
Canfor Pulp Products Q3 2024
00:00 / 00:00