Canfor Corporation (CFP) Earnings Call Transcript & Summary

Good morning. Welcome to Canfor Corporation's 2021 Annual General Meeting. A recording of the call will be available on Canfor's website. Also, the company would like to point out that this call will include forward-looking statements, so please refer to the press release for the associated risks of such statements. I will now turn the call over to Mr. Conrad Pinette, Chairman of the Board. Please go ahead.

Good afternoon. It's now 12:00 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 am very pleased to extend a warm welcome to all of you today for Canfor Corporation's 39th Annual General Meeting. We thank you all for your cooperation at this difficult time for all of us and the communities in which we operate. Out of an abundance of caution and to proactively deal with potential issues arising from the unprecedented public health impact of COVID-19, we are hosting the meeting through this virtual platform accessible to all our shareholders who have followed the procedures described in the management's information circular for the meeting to participate, submit questions and vote regardless of physical location. Please ensure you remain connected to the internet during the course of this meeting. If you need technical assistance, please see the section entitled Technical Assistance in the management information circular respecting the 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, 2020, together with the auditor's report and the report of the directors to the shareholders, fixing the number of directors at 12, electing directors for the coming year and appointing the auditors for the coming year. Once we've dealt with the necessary resolutions, I intend to ask the President and CEO, Mr. Don Kayne, to make a few short remarks. I've asked David Calabrigo, Senior Vice President, Corporate Development, Legal Affairs and Corporate Secretary to act as Secretary for this meeting. I would now like to introduce to you the other directors of Canfor Corporation, all of which are joining us online: Peter Bentley, Chair Emeritus; John Baird; Ryan Barrington-Foote; Glen Clark; Barbara Hislop; Dieter Jentsch; Don Kayne; Anders Ohlner; Dallas Ross; Ross Smith; William Stinson; and Dianne Watts. They have all worked diligently and effectively with the management team with Canfor, and we appreciate their wise counsel. On behalf of both the Board and management of Canfor Corporation, I wish to extend our sincere thanks to Barbara Hislop, who has served on the board during the past 2 years. We are most appreciative for your vision and services as Director during this tenure. Thank you, Barbie. At this time, it's the pleasure to introduce you to Mr. Frederic Stimpson of Mobile, Alabama, who is a proposed nominee of the Board of Directors of Canfor. On behalf of the Board of Directors, I'm very pleased to acknowledge our appreciation for the contributions that all the company's personnel have made during the past year. And with the consent of the meeting, I hereby appoint AST Trust company Canada to act as scrutineer for the company -- for the meeting. I will now call Mr. Calabrigo to deal with the notice of this meeting.

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 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 scrutineer's report?

We are pleased to report that there are 94 shareholders holding 106,025,933 shares represented in attendance, online or by proxy at this virtual meeting, representing 84.67% of the total and issued outstanding shares of Canfor.

Thank you. As Chairman of the meeting, I adopt the preliminary scrutineer's report and declare the attendance at this meeting to be as they have set forth. I direct that when delivered, the final scrutineers' report will be kept with the records of this meeting. In accordance with the preliminary scrutineers' report, I declare a quorum to be present and the meeting to be duly constituted for the transaction of business. Based on the preliminary scrutineer's report, a sufficient number of proxies have been deposited with AST voting in favor of all resolutions in the circular in order to pass each item of business at this meeting. I propose that we deal first with all the formal business requirements of the meeting. After the formal portion of the meeting is concluded, Don Kayne, the company's President and Chief Executive Officer, will say a few words, and there will be an opportunity for questions from registered shareholders and proxy holders, which can be submitted online. As this meeting is being held virtually, I would like to remind you that voting on all matters described in the management information circular for the meeting will be conducted by electronic ballot. To allow sufficient time for voting, the polls for all matters being voted on will be open following these introductory remarks and close at the end of the formal portion of the meeting. Only registered shareholders and duly appointed proxy holders who have been properly logged into the meeting will be able to vote at the meeting. I also remind you that if you are a registered shareholder and you have already voted by proxy, you do not need to vote again unless you want to change your vote. If you file a vote at the meeting, you may choose to vote on each resolution immediately or wait to cast your vote until after the motion for the item is proposed. Once all items of business for the virtual meeting have been put forward, I'll give registered shareholders and proxy holders, 1 final opportunity to enter their votes on the open polls if they haven't already done so and then declare voting closed on all resolutions. In order to expedite the proceedings today, I will be proposing and seconding all motions and for any motions not included in the circular, the motions will be turned based on the preliminary scrutineer's report and reliance on the discretionary authority granted in the proxies deposited for this meeting on a poll at my discretion. I now declare the polls open for all resolutions included in the management information circular for the meeting. The first item of business is to place before the meeting the consolidated financial statements of the company for the year ended December 31, 2020, 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'll regard the statements and reports as received by this 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. I direct that a poll be conducted on the motion and that the scrutineer report the results. If you haven't already cast your vote online or by proxy, please cast your vote now. [Voting]

The next item of business is the election of 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, Don Kayne, Anders Ohlner, Conrad Pinette, Dallas Ross, Dieter Jentsch, Ross Smith, William W. Stinson, Dianne Watts and Frederick Stimpson. These persons serve our management's nominees for election, as stated in the information circular mailed to the shareholders of the company. There being no further nominations, I declare nominations closed. I direct that a poll be conducted on the motion and that the scrutineer report the results. If you haven't already cast your both online or by proxy, please cast your vote now. [Voting]

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 Accountants to be appointed auditors of the company. I direct that a poll be conducted on the motion and that the scrutineer report the results. If you haven't already cast your vote online or by property, please cast your vote now. [Voting]

That concludes the matters to be voted on. For those registered shareholders and proxy holders who have not voted on all of the resolutions for which the polls remain open, please do so now as I will shortly close all such polls. [Voting]

The polls on all such resolutions are now closed. I direct the scrutineer to provide a report on the results of the poll. Based on the scrutineer's initial meeting report, I declare that the number of directors of the company has been set at 12. As only the required number of persons have been nominated to be elected as directors of the company, I declare that these persons nominated have been duly elected by acclimation as the directors of the company to hold office until the next Annual General Meeting. And KPMG LLP Chartered Accountants has been appointed as the auditors of the company. After the meeting, upon receiving the Scrutineer's final meeting report on the polls conducted during this meeting, I direct the reporting secretary of this meeting to attach the scrutineer's final meeting report to the minutes of the meeting. All of the business for which this meeting was called has been completed. Following termination of this formal part of the meeting, Don Kayne, the company's President and Chief Executive Officer, will say a few words and registered shareholders and proxyholders who wish to ask questions or make comments will be subsequently invited to do so. I propose that the formal portion of this meeting be terminated. Based on the preliminary scrutineer's report, I declare the motion carried and the formal part of this meeting is now terminated. I'll now call upon Don Kayne, the company's President and Chief Executive Officer, to address the meeting. After Don's remarks, there will be a question period for any registered shareholder or duly appointed proxy holders to ask questions using the messaging icon at the top of the virtual interface. Over to you, Don.

All right. Thanks, Conrad, and good afternoon, everyone. Welcome, and thank you for joining me today for Canfor Corporation's 2020 Annual General Meeting. We appreciate your support as we again use a virtual format due to the COVID-19 pandemic. I would like to start my remarks by acknowledging that today's meeting is being hosted from the unseated territory of Coast Salish peoples, including the territories of the Musqueam, Squamish and Tsleil-Waututh nations. We appreciate your support in attending today's live audio webcast to ensure everyone's safety. I would like to start by acknowledging Barbara Hislop for her many years of service to Canfor and Canfor Pulp as she departs Canfor's Board of Directors. Barbara first served on the Canfor Pulp Board from 2017 to 2019, at which time she became a Director of Canfor. She has provided leadership as the Chair of the Environmental, Health and Safety Committee and as a member of the Joint Corporate Governance and Capital Expenditure committees Barbara worked for Canfor for 29 years, including as Senior Vice President of our wood products operation, followed by becoming the Executive Director of Variety, the children's charity of British Columbia, and she currently is a member of Variety's International Board. Barbie has always been passionate about safety and was very respected by our customers, by our employees and the many stakeholders of the company. Barbie, thank you for your dedication and your many significant contributions [Audio Gap] Career. As Conrad [Audio Gap] We have proposed a new nominee for the Board, Fred Stimpson. Fred lead Canfor's U.S. South business as President of Canfor Southern Pine from 2015 until his retirement last December. He first became part of the executive team through the acquisition of Scotch & Gulf Lumber in 2013 where he held the role of CEO. And from 1986 to 2009, he was President of Gulf Lumber Company. We look forward to having Fred join the Board, his deep U.S. wood products knowledge and experience, extensive expertise and many key relationships will further complement our Board and will be invaluable as we continue to grow our business in the U.S. South. I'm extremely proud of the hard work, resilience and dedication of all our Canfor employees throughout 2020. It was a year that demonstrated that Canfor employees not only persevere through the tough times but also excel. Protecting our people, our operations and our operating communities has always been our key priority. COVID-19 and the economic crisis dramatically changed almost every aspect of how we live and how we work. We moved early, and we moved quickly to establish robust safety measures for all of our employees and contractors across the company. On behalf of the management team and our Board of Directors, I want to express our sincere thanks to all our employees for their resourcefulness, commitment and dedication, as we continue to navigate through these uncertain and challenging times. Turning to our 2020 financial results. It was an exceptional yet volatile year for Canfor. The extensive disruption created by the COVID-19 pandemic weighed heavily on our results during the first half of the year. This was in sharp contrast to several positive developments during the second half of 2020, including the unexpected increase in demand, low supply chain inventory levels, and record global price levels for all of our products. Canfor generated a record-high operating income of $727 million and net income of $4.35 per share in 2020 compared to an operating loss of $294 million and a net loss of $2.10 per share in 2019. For Canfor Pulp, we had another challenging year in 2020. The Pulp results reflect the significant decline in market prices through the first 3 quarters, combined with the impacts of pandemic related downtime and an extended fall maintenance outage at the Northwood Pulp Mill. Canfor Pulp recorded an operating loss in 2020 of $56 million and a net loss of $0.34 per share compared to an operating loss of $31 million and a net loss of $0.47 per share for the previous year. Global pulp markets were very challenging throughout most of the year. Reduced residual fiber supply, increased fiber cost from whole log chipping, combined with weak global demand for printing and writing papers more than offset the increase in tissue product demand and specialty product demand. Prices to China, the world's largest consumer of softwood pulp remained at low levels throughout 2020, although we began to see some increases during Q4. The gradually improving North American lumber fundamentals of late 2019 and early 2020 came to an abrupt end in the first quarter of 2020 as the COVID-19 pandemic increased in severity. In both the U.S. and Canada, a slowdown in construction activity resulted in extensive downtime during April and May, followed quickly by a surge in global repair and remodel markets and then increases in residential construction in all regions. In contrast, Asian offshore lumber demand was relatively flat through most of 2020. In Europe, reduced demand levels early in the year recovered, and we saw a strong rebound in the second half of the year, again, driven largely by increased home center demand. Notwithstanding market volatility throughout the early part of the year, lumber prices increased substantially. The company continued to execute on this global diversification strategy in 2020. In May, we announced the second phase of the Elliott Sawmilling Company acquisition, which brought Canfor's ownership interest in Elliott Sawmills to 100%. The Vida Group's acquisition of 3 sawmills from Bergs Timber closed in September of 2020. This marked a further stage of increasing production capacity and our operating footprint in Europe. These acquisitions added growth to our globally diversified operating platform and are contributing to a more stable and consistent earnings platform, more diverse product mix, access to new global markets and the ability to provide a wider variety of high-value products to our customers. In October, Canfor completed the sale of its Fort Nelson British Columbia assets to Peak Renewables. Later in the year, we agreed to sell our Fort Nelson forest tenure to Peak Renewables, subject to government approval of the tenure transfer. We continue to look for more opportunities to expand our globally diversified operating portfolio however, we will continue to be very disciplined and very patient on all M&A activity. In response to the significant impacts of the pandemic, the company announced extensive temporary capacity reductions across its global lumber operations in April and May of 2020. In addition to temporary curtailments, the company announced the permanent closure of its Isle Pierre sawmill in May of 2020, largely due to the lack of fiber as a result of the mountain pine beetle devastation. In the pulp and paper segment due to a shortage of economically viable fiber in the region caused by the pandemic induced sawmill curtailments, Canfor Pulp's Northwood Pulp Mill was shut for 3 weeks in the second quarter of 2020, followed by 4-week curtailments in the third quarter at P.G. Pulp and paper and the Intercon pulp mill. Apart from these temporary curtailments, the company has continued to operate safely with additional significant COVID-19 protocols and procedures in place. Notwithstanding the challenges brought on by the pandemic, the company significantly strengthened its balance sheet and liquidity position throughout the year. As a precautionary measure, in the height of the pandemic, the company increased the principal amount of its revolving credit facility from $100 million to $200 million, which remained in place at year-end. The increase in liquidity was a result of strong cash flow generated from operations as well as cost conservation initiatives and a disciplined approach to cash management including reduced capital spending throughout 2020. In the ongoing punitive Softwood Lumber Dispute with the U.S., we received a positive result from the U.S. Department of Commerce's first administrative review of the duties. As of December of 2020, Canfor's combined countervailing and antidumping duty rate has been significantly reduced from 20.52% to 4.62%. This reduction brings much needed relief to our industry. However, these duties are completely without merit and need to be eliminated. We will continue to defend our interest against these unfair and unjustified tariffs. Currently, we have approximately $615 million on deposit. Turning now to our 2021 Q1 results. Canfor had an operating income of $603 million compared to an operating loss of $89 million in Q1 of 2020. In the lumber segment, earnings increased $146 million quarter-over-quarter to an all-time high of $607 million compared to a loss of $89 million in Q1 2020. Canfor Pulp had an operating income of $5 million, up $33 million from the operating loss of $28 million in Q4 2020 and compared to an operating income of $6 million in Q1 2020. Global softwood kraft pulp market conditions have strengthened significantly in response to improved market fundamentals, particularly from China, where prices have surged in recent weeks. Reflecting this positive pricing momentum, the company has announced increases to its NBSK pulp list price in both China and North America. The pricing environment is projected to remain favorable throughout the first half of 2021. The ongoing solid demand for new home construction and repair and remodeling is anticipated to continue through 2021, with mortgage rates near record lows and aging housing stock in the U.S., lean inventories and demographic trends supporting growing millennial homeownership, solid wood lumber sales are expected to remain strong. U.S. housing starts in 2021 are forecast to outpace 2020 levels. In Europe, demand is also projected to remain strong, particularly in the home center segment. We remain focused on strategically growing the company. This includes investing in our facilities and innovation, improving production output at our mills and making acquisitions when the right opportunities become available. We're also focused on providing a differentiated customer experience to best serve existing customers, attract new ones and leverage opportunities in emerging markets. In 2020, we welcome Darren Barker as our new Chief Digital Officer and Senior Vice President of Global Supply Chain. Darren and his team are leading Canfor's ongoing digital transformation, which is centered on investing in more industry relevant value-creating technology solutions such as digitally enabled and optimized forest to customer supply chain. Last year, we promoted Pat Elliott to the new position of Senior Vice President, Corporate Finance and Sustainability reflecting our vision to be a global leader in sustainability. Advancing our sustainability culture to the next level includes building a sustainability team and developing a comprehensive sustainability strategy that's aligned with best-in-class environmental, social and governance standards often referred to as ESG. We are excited to have significantly increased our focus on ESG reporting, along with setting goals and implementing action plans with meaningful targets that will provide a pathway to achieving those goals. This work will be outlined in our sustainability strategy that will be later announced this year. We see opportunities to capitalize on the carbon storing green attributes of wood building products in construction, and we are excited about the growing use of mass timber. In addition, with more countries banning the use of single-use plastics and increasing demand for renewable, low carbon materials, we have a great opportunity to lead in the development of sustainable products that can replace fossil fuel based products. We also plan to expand our green innovation. As an example, in the fall, we launched Arbios Biotech, an expanded joint venture partnership to convert wood biomass into high-value biofuels. We anticipate that these advanced biofuels will have applications in the transportation sector and will help to reduce global greenhouse gas emissions and contribute to a low-carbon economy. Our people are our strength. The pandemic has demonstrated that we have an amazing group of employees who are dedicated, who are resilient and who are committed. Through their efforts, not only have we persevered through the tough times but we've excelled. In February of this year, we promoted Katy Player to the position of Senior Vice President of People. Thanks to Katy and her team, we continue to make significant progress on our commitment to build a diverse workforce that represents the communities in which we live and work by 2030. Due to the significant commitment to diversity and inclusion throughout the organization by our senior management and Board, we have already started to see positive results. Some current examples include the Diversity Council's work to create a culture of true workplace inclusion for women and members of the black, indigenous and people of color community, and we are very pleased to have recently begun to see a marked increase in the hiring of women and indigenous people. Given the impacts of the pandemic, taking care of our people was a key focus in 2020, we did numerous touch points and surveys with our workforce throughout the year to better understand what was working well and where additional support was required. All of these accomplishments contributed to why we continue to be named 1 of BC's top employers for 9 years, including in 2020. My thanks on behalf of our executive team, to our Board of Directors and our shareholders, including our majority shareholder, Jimmy Pattison, for their ongoing support and confidence. I also want to thank our employees who have been truly exceptional, and it's an honor to work with each and every 1 of them every day. I'm confident that we are well positioned to produce a high-quality, innovative and sustainable forest products that our customers expect and the world requires. Thank you very much. So with that, Conrad, I will turn it back over to you.

Thank you, Don. This is an appropriate point of the meeting to deal with questions. Are there any questions?

Mr. Chairman, we have not received any questions.

Thank you. As there are no further questions, the meeting is now concluded. So thank you all for attending today, and very, very best to everyone. Good day.

Thanks very much.

Thank you, everyone, for joining the call. This concludes the Canfor Corporation AGM.