Canfor Corporation (CFP) Earnings Call Transcript & Summary

Good afternoon, everyone. Welcome to the Canfor Annual General Meeting. A reminder to please keep your phone or audio on mute, and this call is being recorded. The recording will be available on Canfor's website. I will now turn the call over to Mr. Conrad Pinette, Chairman of the Board.

Good afternoon. It's now 1:00 p.m., and I would ask the meeting to please come to order. My name is Conrad Pinette. I'm a Director and Chairman of the Board of Canfor Corporation and will be acting as Chairman for this meeting. I'm very pleased to extend a warm welcome to all of you today for Canfor Corporation's 30th -- 38th Annual General Meeting, particularly those of you joining us by webcast and the conference call. As you know, as part of COVID-19's action plan, we encourage shareholders to use the webcast and conference call media to be part of today's meeting in order to reduce the risk of holding a larger gathering in person. Thank you all for your cooperation at this difficult time for all of us, the communities in which we operate and to those of us who have taken time to forward us in advance their questions for this meeting. This meeting has been convened as an Annual General Meeting of Shareholders and has been called for the principal purposes of receiving the consolidated financial statements for the year ended December 31, 2019, together with the auditor's report and the report of the directors to the shareholders; fixing the number of directors 12, the electing directors for the coming year; and appointing the auditors for the coming year. Once we have dealt with the necessary resolutions, I intend to ask the President and CEO, Mr. Don Kayne, to make a few remarks. I've asked David Calabrigo, Senior Vice President of Corporate Development, Legal Affairs and Corporate Secretary, to act as the secretary for this meeting. I would now like to introduce you to the other directors of Canfor Corporation, all of which are joining us online: Peter Bentley, Chairman Emeritus; John Baird; Ryan Barrington-Foote; Glen Clark; Barbara Hislop; Don Kayne; Dallas Ross; Mack Singleton; Ross Smith; William Stinson; and Dianne Watts. They have all worked diligently and effectively with the management team at Canfor, and we appreciate their wise counsel. On behalf of both the Board and the management of Canfor, I wish to extend our sincere thanks to Mack Singleton, who has decided not to put his name forward for reelection to the Board. Mack has been the Director of Canfor since 2007. We are grateful for your service as a director and know that you will remain supportive of the company. Thank you very, very much, Mack. At this time, it's a pleasure to introduce you to Mr. Dieter Jentsch of King City, Ontario; and Mr. Anders Ohlner of Sweden, who are proposed new nominees of the Board of Directors of Canfor and who are joining us online as well. On behalf of the Board of Directors, I am very pleased to acknowledge our appreciation for the contribution all the company's personnel have made during the past year. With the consent of the meeting, I hereby appoint AST Trust Company, Canada, to act as scrutineers for the meeting. I'll now call on Mr. Calabrigo to deal with the notice of this meeting. David?

Mr. Chairman, a notice calling the meeting was mailed to all shareholders of the company entitled to receive such notice. AST Trust Company of Canada has provided us with a certificate as to the mailing and a copy of the certificate will be kept with the records of the meeting.

Thank you. Mr. Secretary, will you please summarize the preliminary scrutineers report?

We are pleased to report that there are 70 shareholders, holding 105,551,802 shares, represented in-person or by proxy at this meeting, representing 84.3% of the total issued and outstanding shares of the company.

Thank you. As Chairman of the meeting, I adopt the scrutineer's report and declare the attendance of this meeting to be as they have set forth. In accordance with the scrutineer's preliminary report, I declare a quorum to be present and the meeting to be duly constituted for the transaction of business. In order to expedite the proceedings today, I will be proposing and seconding all motions. The minutes of the last meeting of shareholders are available for perusal by any shareholder. I propose that the minutes be taken as read. In favor? Contrary? Carried. [Voting]

The next item of business is to place before the meeting the consolidated financial statements of the company for the year ended December 31, 2019, together with the auditor's report and the report of directors to the members. These statements and reports are contained in the company's annual report and are available on SEDAR or from the company upon request. I will regard the statements and reports as received by the meeting. The next item of business is to fix the number of directors of the company at 12. I propose that the number of directors be fixed at 12. Favor? Contrary? Carried. [Voting]

The next item of business is the election of the directors. I propose that the following individuals be nominated to act as directors of the company to hold office until the next annual general meeting: John R. Baird; Ryan Barrington-Foote; Glen Clark; Barbara Hislop; Don Kayne; Anders Ohlner; Conrad Pinette; Dallas Ross; Dieter Jentsch; Ross Smith; William Stinson; and Dianne Watts. These persons are management's nominees for election, as was stated in the information circular mailed to the shareholders of the company. There being no further nominations, I declare the nomination is closed. As only the required number of persons have been nominated, I declare that those persons nominated have been duly elected by acclamation as the directors of the company to hold office until the next annual general meeting. The next item of business is the appointment of auditors, and it is the Board's recommendation that KPMG LLP Chartered Accountants be appointed auditors of the company. I propose that KPMG LLP Chartered Accounts to be appointed auditors of the company. Favor? Contrary? Carried. [Voting]

I declare KPMG LLP Chartered Accounts appointed auditors. I'll now call upon Don Kayne, the company's President and Chief Executive Officer, to address the meeting. Over to you, Don.

Thanks, Conrad, and good afternoon, everyone. Welcome, and thank you for joining us at Canfor Corporation's Annual General Meeting. Today's meeting is being virtually broadcast from the unseated territory of the Coast Salish peoples, including the territories of the Musqueam, Squamish and Tsleil-Waututh nations. Given the unprecedented circumstances, the world finds itself in today with the COVID-19 pandemic, I want to thank you for attending today's AGM virtually in an effort to protect everyone's health. I'd like to start by acknowledging the retirement of Mack Singleton from Canfor's Board. Following Canfor's acquisition of New South Companies in 2006, Mack joined our Board. Mack has been an invaluable resource as Canfor has expanded in the Southern U.S. Mack, thank you for your leadership and support, and we will miss you greatly on the Board. As Conrad mentioned, we have 2 new additions to our Board, Dieter Jentsch and Anders Ohlner. Dieter was formerly a senior executive with Scotiabank, and Anders held a variety of senior roles at Handelsbanken in Sweden and was previously a Director of Vida Group. We look forward to having Dieter and Anders join the Board. Their broad global experience will be a definite asset to Canfor. With the significant impacts of the COVID-19 pandemic, the last several weeks have been a challenging work environment for our employees, who are the backbone of our company. It's through their hard work that we consistently deliver high-quality products to our customers. Now more than ever, our employees are continuing to be resilient and persevere through challenging and uncertain times. On behalf of the management team and our Board of Directors, I want to express heartfelt thanks to all of our employees. Turning to 2019. The significant challenges the company faced towards the end of 2018 continued into 2019. Following 2 years of catastrophic forest fires in 2017 and 2018, in 2019, our lumber business faced very high log costs, depressed pricing, weak global markets and significant curtailments. In addition, our key consuming regions in the United States were plagued with extreme weather, which led us to having a second wettest year on record. These conditions had the greatest impact on our BC sawmills. Our Alberta, U.S. and European operations have not experienced the same challenges and have continued to perform well. For 2019, Canfor had an adjusted operating loss of $92.3 million, largely reflecting the challenging operating environment in British Columbia and low prices. Canfor Pulp also had a challenging year due to weak global pulp markets, escalating fiber costs and reduced supply, which resulted in mill curtailments. Canfor Pulp recorded an operating loss of $31 million in 2019. Global pulp prices fell sharply over the course of 2019 as purchasing activity in our largest market, China, declined and markets elsewhere also weakened. Overall, the global pulp inventory remained high over the course of the year. In Europe, demand for printing and writing papers fell significantly. After a challenging start to the year, global lumber markets showed a modest improvement in late 2019, particularly in the U.S. Demand in China was weaker overall, reflecting a slow unwind of high inventory levels and market uncertainty stemming from the ongoing trade dispute between China and the United States. Sales in Japan rebounded in the second half of the year. European lumber demand was strong in the first half of the year and was more subdued in the second half of the year, partly due to the spruce beetle infestation. 2019 began with the closing of the agreement to purchase 70% of the Vida Group, Sweden's largest privately owned sawmill company. This acquisition represents transformational global diversification for Canfor, marketing and customer synergies developed between Canfor and Vida over the course of 2019, and we believe these will continue to be realized in future years, strengthening the Canfor and Vida brands around the globe. Vida sawmills have added approximately 1.1 billion board feet to our total production capacity. And in May of last year, we also closed the first phase of the agreement to acquire 49% of Elliott Sawmilling company in South Carolina, which is an additional expansion for Canfor into the U.S. The remaining 51% will be acquired next month. The BC forest industry faced several significant challenges in 2019, which included low lumber prices, weak markets and high-fiber costs. As a result, we had to make a series of difficult decisions, including multiple curtailments, permanently closing the Vavenby sawmill, indefinitely curtailing the Mackenzie sawmill and permanently eliminating a shift at Isle Pierre. These are not easy decisions, and we regret the impact that they have had on our employees, our contractors and our communities. With a declining annual allowable cut in British Columbia, the fiber basket in the province is shrinking. As a result, the industry is going through a process to right size its production capacity to a level that aligns with the fiber supply and is sustainable for the long term. The operating challenges in BC have reinforced to us why it has been so important to diversify our operating footprint beyond Canada. Our pulp business was also impacted by the challenging operating conditions in British Columbia. The sawmill curtailments impacted the available supply of chip residual. And as a result, we took phased curtailments at our pulp mills over the summer of 2019. We have worked to reinforce our fiber supply by securing cost competitive fiber agreements over the long term. Through 2019, we continue to pay combined duties of approximately 20% on softwood lumber exports to the U.S. At the end of 2019, we had approximately $421 million in duties on deposit. In early 2020, the U.S. Department of Commerce announced the preliminary results of the first administrative review period, which will significantly reduce our rates to approximately 5% beginning in August. However, until a negotiated settlement can be reached, the dispute will continue to wind its way through the courts, and we will continue to pay duties. Turning now to our Q1 results. Canfor had an operating loss of $89 million or an adjusted loss of $26 million after allowing for the $63 million inventory write-down to the lumber segment. Canfor Pulp had an operating income of approximately $6 million. We have undertaken a series of measures, including the curtailments announced and other measures to mitigate the financial impact of reduced global lumber demand. These include the curtailments I've already outlined and significant reductions in capital projects, which I'll speak to shortly. We are taking these steps to help maintain healthy balance sheets and to protect our liquidity. Due to the COVID-19 pandemic and global economic downturn, it is difficult to predict how demand and pricing will be impacted. We anticipate that U.S. home construction activity will remain at depressed levels with demand volatility varying on a regional basis. Lumber prices to China are modestly stronger than in North America, as that region is gradually returning to more normal business conditions following the pandemic. Short-term prices to Japan are anticipated to be in line with the current quarter. European lumber markets and pricing are also being materially impacted by the global economic downturn, and we anticipate market conditions will remain challenging through Q2 before improving later in the year. Global softwood pulp demand is currently projected to be solid through the second quarter of 2020, particularly from China as that region continues to gradually recover from the pandemic. While containment measures across Western Europe and North America are forecast to weigh on market demand for printing and writing paper, in addition, Canfor continues to produce a segment of pulp that is used to manufacture medical packaging papers and filter papers for masks. In the last several weeks, our organization has been almost exclusively focused on COVID-19. Our top 2 priorities are protecting the health of our employees and executing on our strategy to sustain the business for the long term. In terms of our people, we quickly implemented the COVID-19 action plan, which has continued to evolve. The plan includes implementing physical distancing measures at our facilities, having as many employees as possible work from home, restricting all travel, implementing cleaning and hand washing protocols and implementing self-isolation and quarantine policies. In all of the states and provinces where we operate, forestry, including pulp and paper, has been deemed an essential service, which has enabled us to continue operating. We continue to assess our production capacity against overall demand to maintain the correct balance. Since the end of March, we have taken extensive downtime on our BC sawmills. In addition, our Canfor Southern Pine and Vida facilities are continuing to operate at less than full capacity through variable operating schedules and downtime. On the pulp side, our Northwood Pulp Mill will be curtailed for 3 weeks beginning April 25. Depending on market conditions, further downtime could be required. This continues to be a very fluid situation, and it's hard to predict the longer-term trends. We are working closely with all levels of government regarding the worker and business support programs they put in place. The American and Canadian governments continue to refine and expand their programs in an effort to address the areas of greatest need. To help address the impact to our revenue, we have announced reductions in our capital expenditures. Given the global economic uncertainty, capital spending for our Canfor Pulp is estimated to be $25 million, which is $55 million less than we spent in 2019, and Canfor is reducing its planned capital spending by $20 million for Canadian and U.S. operations. This is in addition to an already modest capital budget for 2020. We have also implemented hiring and salary freezes. As we get through the pandemic, we're starting to give more thought to what our business will look like in the future. For more flexible work environments to more virtual connections with colleagues, customers and suppliers, to embracing more efficiencies across the company, our priority today remains ensuring a stable operating environment in this uncertain world. I believe our new normal will continue to be redefined over the coming months. Before I close, I want to take a moment to acknowledge the upcoming retirement of a key member of our executive team: Mark Feldinger, who is our Senior Vice President of Supply Chain. Mark has been with Canfor for 35 years, serving in a variety of increasingly senior roles. Mark was originally scheduled to retire on May 1, but he has graciously agreed to stay on for a few more months as we continue to weather the full impacts of the COVID-19 pandemic. Mark, on behalf of the executive team and the Board, thank you for your leadership, loyalty and dedication. You have been a great asset to Canfor, and you will be greatly missed. My thanks on behalf of our executive team to our Board of Directors and our shareholders, including our majority shareholder, Jimmy Pattison, for their support and guidance in 2019. I also want to thank our terrific, dedicated and committed employees for their hard work each and every day, especially under the challenging circumstances we are currently facing. Thank you very much. Conrad, I'll turn it back over to you.

Thank you, Don. This is the appropriate point in the meeting to deal with questions received in advance of the meeting. We have received a number of questions. Don, the first question is, is there any plan for Canfor to offer a dividend in the future once the company becomes profitable again. Don? Don? It sounds like we've lost Don. So I'll read his response...

Oh, can you hear -- oh, sorry, I had it on mute, Conrad, apologies.

No, sorry, okay. There you go, Don. Over to you now.

Thank you for the opportunity giving me a second chance. No, the Board is not currently considering the establishment of a dividend. The company's philosophy is to invest profits back into the company to ensure well-capitalized operations to support growth into new regions, such as the acquisition of Vida and continued expansion into the U.S. and to help maintain a healthy balance sheet.

Thank you, Don. The next question is, given Great Pacific's interest in privatizing Canfor, what strategies, if any, are being considered, so that minority shareholders receive a price that better meets analyst expectations of the company's mid-cycle value? Over to you, Don.

Thanks. Today, Canfor remains a public company, and there are no current offers to take the company private. We believe we are maintaining value in the company by continuing to strengthen our balance sheet, diversifying our operating regions and investing in our facilities.

Thank you. Another question. Have the COVID-19 emergency relief measures in different countries had an impact on where mill downtime has been taken?

No. We have taken downtime across all of our operating regions with BC being the most significantly impacted. The extensive downtime in BC is due to a sharp decrease in customer demand for Western SPF products.

Thank you. The other -- another question. Will the recent equity market losses impact Canfor provision for the legacy defined pension plans?

No. The majority of the defined benefit pension plan liability has been annuitized, so it's not impacted by changes in the equity market.

Thank you. And our final question is what is the time for a possible return of U.S. duties?

It's not possible to accurately estimate when there could be a return of the duties. The trade dispute is currently moving through the legal channels.

Thank you very much, Don, for responding to all those questions. That concludes the questions. And if there's no further business, I propose to conclude the meeting. All in favor? Contrary? Carried. [Voting]

I declare the meeting close, and thank you for your cooperation and all your support, thank you.

Thank you, everyone, for joining the meeting. The Canfor Annual General Meeting has been concluded.