Canfor Pulp Products Q1 2024 Earnings Call Transcript

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May 2, 2024

There are 9 speakers on the call.

Operator

Good morning. My name is Jenny, and I will be your conference operator today. Welcome to Canfor and Canfor Pulp's First 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, Hanford 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 Q1 2024 results conference call. I'm going to make a few comments before I turn things over to Kevin Edson, Canfor's Pulp President and Chief Executive Officer and Pat Elliott, Chief Financial Officer of Canfor Corporation and Canfor Pulp and our Senior Vice President of Sustainability. In addition, we are joined by Kevin Bancarat, Senior Vice President of Sales and Marketing. Before talking about our financial results, I'll share a few Q1 business updates.

Speaker 1

As you know, over the past decade, we have been focused on building a globally operating platform by increasing our footprint in the U. S. South and Europe, while working towards a smaller but stronger presence in British Columbia. Although global lumber markets remained under pressure in Q1, thanks to this strategy, we have a more resilient organization that has been better able to mitigate market related pressures and the persistent constraints we continue to face accessing economically viable fiber in British Columbia. Through a targeted and expansive capital investment program, we have been growing and transforming our manufacturing facilities in fiber rich regions to be low cost leaders that are globally competitive over the long term.

Speaker 1

As part of this effort and our plans to optimize our operational footprint in Alabama, this quarter we announced that we will permanently close our Jackson facility in June and expand production at our nearby Boonton facility with a second shift. These steps together with our new state of the art greenfield sawmill being built in Access, Alabama and pending closure of our Mobile sawmill will improve our cost structure, optimize the fiber supply in Alabama and add 100,000,000 square feet of Southern Yellow Pine production capacity in the region. By consolidating and expanding our Alabama operations, we will be better positioned to serve our global customers from a modern competitive operating platform, while providing more sustainable jobs and improved working conditions for our valued employees. Similarly, as part of our continued growth strategy in the U. S.

Speaker 1

South, yesterday we announced an agreement with Resolute Forest Products to acquire their El Dorado Lumber Manufacturing Facility in Union County, Arkansas. Bringing this facility to Canfor creates synergies and vertical integration opportunities given its complementary geographic fit with our existing operations in the region. These include our El Dorado laminating plant as well as our Urbana plant, which is progressing in its 130,000,000 dollars modernization that will increase production by 115,000,000 board feet to a total 285,000,000 board feet next year. The El Dorado acquisition will capitalize on our regional manufacturing footprint to optimize our product portfolio and maximize value. We anticipate investing a further US50 $1,000,000 to upgrade the sawmill, which will increase its production capacity to 175,000,000 ore feet per year.

Speaker 1

As we look forward to ongoing growth, we remain deeply committed to sustainability, which is embedded throughout our entire operations from the forest to the customer. This quarter, we released our 2023 sustainability report, highlighting the activities and our performance to advance our sustainability strategy. We have an ambitious plan to be a leader in sustainable business focused on 3 key areas: people, planet and products. Our report tracks our progress across 13 material topics, each with discrete goals to significantly shift the way we do business. Naturally, this includes a focus on climate change through our targets on scope 1, 2 and 3 emissions, but it also includes improving safety, expanding relationships with indigenous patients, increasing support for our operating communities and further enhancing the diversity of our workforce.

Speaker 1

Through these actions and our carbon friendly products, Canfor is well positioned to be part of the solution to climate change. Turning to our financial results, our lumber business benefited from solid lumber pricing and earnings in Europe with strong contribution from VIDA highlighting the value of our diversification strategy. In North America, weak lumber markets continue to reflect ongoing affordability issues related to inflation and the current interest rate environment in addition to a significant decline in multifamily construction activity. While our Western Canadian operations benefited from improved pricing in the Q1, our financial results continue to reflect the impact of weak North American lumber pricing challenges accessing economically viable fiber supply in British Columbia. While lumber prices are anticipated to remain under pressure in the short term, Canfor has seen steady underlying demand in the repair and remodel sector and we continue to believe the medium to long term market fundamentals remain strong.

Speaker 1

Notwithstanding current market conditions, our balance sheet remains strong, supporting continued reinvestment in our operations over the next several years. I will now turn it over to Kevin to provide an overview of Canfor Pulp.

Speaker 2

Thank you, Don, and good morning, everyone. Canfor Pulp generated improved financial results in the Q1, supported by a 7% quarter over quarter increase in pulp production and steady global pulp markets. Notwithstanding the impacts of extreme winter weather in January, we continue to see improvements in our operating performance. Given projected weakness in North American lumber markets in the short term, combined with ongoing uncertainty with regards to the availability of economically available fiber in BC, we continue to evaluate our operating conditions and remain focused on improving our operating performance and cost structure, while optimizing the available fiber supply. I would like to thank our employees for the resilience and continued efforts to enhance our operational performance as we respond to the external pressures facing our business.

Speaker 2

Turning to pulp markets. While softwood pulp markets were steady in the Q1, pricing has increased considerably to start the 2nd quarter, driven by global supply disruptions and pulp producer downtime. Looking ahead, we continue to believe strong global pulp fundamentals will remain over the medium to long term supporting our capital reinvestment plan. The magnitude of spend will be modest in 2024 with future spending completed as market and financial circumstances allow. I will now turn it over to Pat to provide an overview of our financial results.

Speaker 3

Thanks, Kevin, and good morning, everyone. The Canfor and Canfor Pulp first quarter results were released yesterday morning. In my comments this morning, I'll speak to the Q1 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 an operating loss of $57,000,000 the Q1, which included a $30,000,000 recovery of our previously recorded write down of inventory in Western Canada and a non cash duty expense of $15,000,000 related to our antidumping duty accrual rate. Adjusting for these non cash items, our lumber business generated an operating loss of $72,000,000 in the Q1 compared to a similarly adjusted loss of $111,000,000 in the prior quarter.

Speaker 3

Notwithstanding an improvement quarter over quarter, these results continue to reflect losses associated with our PC operations due to weak lumber pricing and a persistent lack of economically viable fiber. While our Western Canadian operations benefited from an uplift in SPF lumber pricing, lumber markets remain under pressure in the Q1, particularly for Southern Yellow Mine. Our European operations continue to perform well and contributed $31,000,000 in cash earnings in the Q1, reinforcing the value of our diversification strategy. These results reflect the benefit of higher production and shipment volumes as well as improved sales realizations. Canfor Pulp generated adjusted operating loss $16,000,000 in the Q1, an improvement of $10,000,000 quarter over quarter.

Speaker 3

These results largely reflected a modest uplift in pulp sales realizations combined with the increase in pulp production previously mentioned by Kevin, which more than offset the impact of a challenging January related to extreme winter weather. Canfor excluding Canfor Pulp ended the quarter with net cash of approximately $225,000,000 following a seasonal build of working capital in Western Canada. Notwithstanding current market dynamics, our balance sheet remains strong supporting the continued reinvestment in our lumber business. At the end of the Q1, Canfor Pulp had net debt of $85,000,000 $148,000,000 available liquidity, of which $80,000,000 is restricted for use towards future reinvestment in Northwood's recovery boiler number 1. On a consolidated basis, capital expenditures were approximately $103,000,000 the Q1, including approximately $12,000,000 for Canfor.

Speaker 3

We anticipate capital spend of $450,000,000 in the lumber segment in 2024 including remaining spend on our Alabama greenfield, planned capital investment at the El Dorado Sawmill and various organic growth initiatives in the U. S. South and Sweden. For Canfor Pulp, we are currently forecasting capital spend of approximately $40,000,000 in 20.24 dollars including capitalized maintenance. In addition, we anticipate Canfor will continue to allocate modest amount of capital to opportunistically repurchase shares throughout the year.

Speaker 3

And with that Don, I'll turn the call back

Speaker 1

to you. Great. Thanks Pat. And with that, I'll turn it back to you operator. And so we're now ready to take questions from analysts.

Operator

We will now take questions from Pinnacle Your first question is from Ben Isaacson from Scotiabank. Please ask your question.

Speaker 4

Thank you very much and good morning everyone. First question on Southern Yellow Pine, having come off quite a bit over the last quarter or so, can you talk about how has that impacted export economics from Europe? Are you starting to see a pullback? And could you just give some color on the dynamics there?

Speaker 1

Kevin, why don't you go share a bit to this on the oil price situation? Sure.

Speaker 4

So more yellow pine pricing for sure and also SPF pricing, Ben, has impacted it. So we're finding even with ourselves, our volumes from Sweden into the U. S. Are down a few percentage or 2. And we're actually seeing less volume coming from Central Europe.

Speaker 4

And the big reason they got better are alternative options at higher values to ship their product, be it the UK, Middle East, North Africa and Asia. So we expect to go back to maybe more historical levels for European imports and not what we saw January Q1 of the previous year. And how do you think about the spread between SPF and SYP? Obviously, it's kind of disconnected from what it's usually at. And do you think that's sustainable going forward?

Speaker 4

I think the dynamics are for sure changing versus historical spreads there, Ben. And as production out of Western Canada comes under more pressure and reduced, I think you're going to see maybe a reversal or a trend change where SPF 2x4 could be at a premium with just clearly less volume and with more volume coming on the South, that dynamic, I think will trend, so change in the future.

Speaker 5

And just last one for

Speaker 4

me quickly. I know it's early days, it's only the start of May, but we're hearing that the wildfire season could be more intense than it was last year. Do you have any color in terms of how that's progressing and what is the risk for Canfor?

Speaker 1

Sure. Well, certainly the wildfire situation continues to be a concern. And I think we continue to learn last 5 years has been a lot of difficult years there have been. So we spent a lot of time as I think as the government has to try to understand it better and to try to put in more mitigating actions to try to get in front of that a bit. And I think that's happening.

Speaker 1

But clearly, traveling up to the mills last week a bit, there's all our operations are concerned about it. There's been a few fires, particularly in Alberta, out of the gate that we've been working through. But without a doubt, it's I think that's something that we just need to just basically conclude that it's going to be an issue for several years going forward. And so I think we learn each year more about it and how to fight it, how prevent them and so forth and we'll continue to do that. And maybe that's all I can really say about that.

Speaker 4

That makes sense. Thank you so much.

Speaker 1

Thanks, Ben.

Operator

Thank you. Your next question is from Sean Steuart from TD Securities. Cowen, please ask your question.

Speaker 6

Thanks. Good morning, everyone. A couple of questions. First on El Dorado, I appreciate your comments with respect to the synergies, I suppose, with your other assets in the region. But based on my previous coverage of other companies, this asset has a checkered history.

Speaker 6

Can you give a little bit of context on how this transaction materialized and timeline to invest the remaining $50,000,000 to get capacity up to $175,000,000 board feet, a little bit more detail on that front?

Speaker 1

Yes, for sure. I mean, we again, down there, we've been, I think, real thoughtful and patient in terms of opportunities as they arise and which ones kind of make sense to us and which ones don't. And that one was one that we've looked at for a number of years and mainly because of the fiber synergies that it provides with our Urbana facility there and some of the synergies that it provides in terms of raw material supply to some of our vertically integrated facilities, particularly the El Dorado Goulan plant. That's always been an opportunity that we'd like to expand on. So that's one of the main reasons.

Speaker 1

But it has been something we've looked at for a long time, but we've also known through that period that we needed to spend some money there. We felt it was probably a bit undercapitalized before and we believe and we're very confident with our folks that if we put in the amount of money we talked about there, we can make that into a solid operation going forward in a fiber rich area with some competitive fiber and high quality fiber. So those are all the things that we kind of considered. And so anyway, so we're happy to be able to conclude that.

Speaker 6

And timeline on when you expect to get to 175,000,000 board feet for that asset?

Speaker 1

Yes, that's going to be sometime probably towards the early part of next year, next year or something like that.

Speaker 6

Okay. Don, any update on the Houston potential reinvestment plan milestones that you need to advance that initiatives? Has there been any has there been any progress on that front?

Speaker 1

Yes, for sure, Sean. Good question. And I think maybe what I would say there is, as we have talked about in several of the previous calls, maybe we certainly remain concerned about the challenging policy and operating environment here in British Columbia for us. So as a result of that, we continue to assess the impacts of some of those changes that I speak about. Today, I would say also though that we're even more concerned than we were before.

Speaker 1

The policy environment that I speak about here continues to change, seems to be quite dynamic and as a result be very uncertain. So we're like I say, we're going to continue to assess those impacts. And at the same time, Sean, I will say though that we are doing some pre planning and that's still ongoing and also some permitting.

Speaker 6

Okay. Thanks for that update, Don. That's all I have.

Speaker 1

Okay. Take care.

Operator

Thank you. Your next question is from Hamir Patel from CIBC Capital Markets. Please ask your question.

Speaker 7

Hi, good morning. Good morning. Don, it seems like you've been seeing stronger R and R takeaway than some of your peers. Do you think you've been gaining share in that big box channel?

Speaker 1

I think so, but I'll let Kevin has been doing a lot of work on that. He's the expert on that Javier. So I'll let him speak to that.

Speaker 4

Yes. So I mean, like so when we're talking like the growth there, we're talking on a volume based on dollar based, just to be clear, because I think sometimes that gets a mixed up headline. And so from our experience, for sure, January was a tough start for most people, most of the markets in the U. S. Largely because of weather.

Speaker 4

And in my meetings with folks there, since then we've seen a really good recovery in February March. So year to date, we're actually pretty flat versus 2023 and that's where the poor start in January sort of speaks to the gain momentum that we're seeing in the latter part of the quarter. And this segment continues to evolve and grow and

Speaker 3

they are growing market share. So

Speaker 6

I hope that helps.

Speaker 7

That's helpful. And then Kevin, when you think about the weakness in Southern Yellow Pine and what's been driving that, I know your outlook had commented on weakness in multifamily. But we always think a single family starts using 3 times as much lumber as multi. So maybe you could speak more to why perhaps that weakness in multi is dragging down suddenly all time prices and if you're seeing any signs of improvement there?

Speaker 4

Yes, sure. I think that's one segment there, Hamir. It's going to have it's going to take a bit of time for that market to recover. It's so dependent on the interest rate piece at just a longer time period to get those projects planned, engineered and permitted. So they can't react as fast as single family homes.

Speaker 4

I think the other economic dynamic that's impacting multifamily is that rents over the last year have declines. So when they're looking at projects, other rents have to come up or interest rates have to come down to make the economics work. And when you're talking to a lot of folks in this space, it's going to be basically maybe start to see a recovery mid-twenty 25 and then maybe not fully rolling until 2026. And the U. S.

Speaker 4

South, just like it's heavy for single family, it's really heavy for multifamily. Over 50% of multifamily projects are in the U. S. South. And so disproportionately yellow pine is more impacted.

Speaker 4

You're right, 3 to 1 on the volume for lumber, but it's not 0. And there's a lot of lumber 2 by 4, especially that goes into sill plates and into trusses and spans. And so I think that's a dynamic that is playing out right now that is contributing to the yellow pine price pressures that we're seeing.

Speaker 7

Great. Thanks for that, Kevin. That's all I had. I'll turn it over.

Operator

Your next question is from Ketan Mamtora from BMO Capital Markets.

Speaker 5

Thank you and good morning. Maybe first question on log inventory in BC. How is that for you guys at this point? There has been some talk back because of the warm weather that log inventories have not been able to be in that position where it should be for this time of the year. How are you guys positioned?

Speaker 5

Yes, for

Speaker 1

sure, Ketan. We're basically, we're in decent shape for sure and mostly that was a result of Polar Houston and probably Polar and Houston and also Chetwynd being down. So we're in good shape as a result of that.

Speaker 5

Understood. So you don't anticipate any sort of production challenges as we go through Q2 here in terms of where your log positions are and how much you need to produce sort of in a seasonally stronger time?

Speaker 1

Yes. I mean, I think overall, as a result of everything, we don't we're not anticipating any more downtime, investors who are getting that production levels going forward at all. We were basically because of the lock situation and unless but we will continue to look at it from I mean, if I understood your question correctly, because I missed part of it, I think. But in terms of what we've said numerous times, I think, over the internally and externally is we focus hard on matching production demand with our productions with market demand. And we'll continue to do that and we keep a close eye on that and it takes some downtime because of markets.

Speaker 1

Market demand will do that and we're not afraid to do that. We'll continue to do that.

Speaker 5

Got it. That's helpful. And then maybe one for Pat. Pat, on the capital allocation side, I'm just curious, as you think about sort of M and A and the acquisition that you just announced yesterday, sort of between that and share repurchases given where the stock is, how do you sort of think about evaluating those two options? Perhaps you can provide some color on that?

Speaker 3

Yes. So Kate, I mean, I think we've been fairly consistent on this the last number of years that the diversification of our business into the U. S. South and into Sweden is paramount, frankly, to improving our operating results over time, while buying back the stock clearly on straight math, you could see the value and we bought back about 2,000,000 shares in the last year. So it's not like we haven't been active, but we really see the priority is continue to invest in low cost assets in the right regions and that's our priority.

Speaker 3

And even the El Dorado, when you look at on a cost per 1,000 basis, I think it's highly competitive, the price that we paid. So we're not going to go out and buy any asset, but we're going to act opportunistically and then the reinvestment opportunistically and then the reinvestment in our own business through the greenfield, I think sets us up pretty well for the future. So I think we've been pretty consistent on that and that's our plan going forward as well.

Operator

Thank you. Your next question is from Matthew McPullar from RBC Capital Markets. Please ask your question.

Speaker 8

Hi, good morning. Thanks for taking my questions. First, I'd just like to ask about the polar mill. I think when that originally went down, when you announced it in November, you're talking about maybe a 6 month sort of period of curtailment there. Is there a path back to restarting that mill in 2024 given what you're seeing around access to economic fiber in the province?

Speaker 1

Yes, maybe for sure I'll try to answer that I guess. In British Columbia as I mentioned on the question earlier about Houston, the operating conditions are still remaining quite challenging here as we continue to face the ongoing constraints associated with the lack of economically viable fiber and we said that a lot and that continues to be the case. And in Western Canada, there still remains significant uncertainty with regards to that availability of that fiber. So we continue to anticipate sustained log cost pressures and persistent constraints accessing that fiber in BC at all of our sawmills and as well as it's been a challenging environment, fiber environment for pulp mills too. So with all that going on, we continue to evaluate some of the options and we'll adjust our operating rates in BC to align with that demand, as I mentioned again earlier, and the economically available timber supply in the near term.

Speaker 1

And we'll continue to do that through 2024. That's not going to change like I think I mentioned earlier, right. So polar falls into that category.

Speaker 8

Okay. Thanks for that color. Next, I'd like to just follow-up on Ben's question around forest fires. I think last quarter you noted a slower approval process in BC in regards to the salvage harvest following last year's fires. Could you give us a sense of how things have evolved on that front over the past couple of months?

Speaker 1

Yes, Scott. I'm Foti. Yes, for sure. I'm not sure I can answer that question 100% in terms of where we're at on that other than like I mentioned earlier there's lots of initiatives underway here to try to get ahead of the situation of wildfires for sure in BC. But Alberta, for sure, I will say this, Alberta is pretty good.

Speaker 1

They're on top of things for sure and not that BC isn't, but the bigger impact here is in BC for sure.

Speaker 8

Okay. Thank you. And then last question for me just on the Canfor Pulp side. We're seeing some competitors out there with a couple of price increases for kraft paper in the market. With that backdrop, how should we be thinking about your realizations over the balance of 24?

Speaker 2

Thanks very much for the question, Matthew. We expect to see on the pulp side, there's another round of increases coming in May. We think the step up through the first half of the year has been really solid and we're looking more stable out the back end given that it's driven largely by supply constraints. We need the market, the paper market to catch up. On the kraft paper side, we'll be announcing or have announced an increase, somewhat modest increase for the Q2 that we expect to be in place by June.

Speaker 2

Paper is moving slower than pulp and so we continue to expect some increases through the back half

Speaker 4

of the year on paper.

Speaker 8

Great. Thanks. That's all for me. I'll turn it back.

Operator

Thank you. There are no further questions. I will now turn it over to Don Cain for closing comments. Go ahead, Mr. Kain.

Speaker 1

Thanks, operator, and thanks everyone for participating in this morning's call. We appreciate your support, and we look forward to talking to you at the end of the next quarter.

Operator

Thank you. Ladies and gentlemen, the conference has now ended.

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