Canfor Corporation (CFP) Earnings Call Transcript & Summary

Good morning. My name is Michelle, and I will be your conference operator today. Welcome to Canfor and Canfor Pulp's Second Quarter Analyst Call. [Operator Instructions] 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. Also, the company's 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 Kayne, Canfor Corporation's President and Chief Executive Officer. Please go ahead, Mr. Kayne.

Thank you, Michelle, and good morning, everyone. Thank you for joining the Canfor and Canfor Pulp Q2 2023 Results Conference Call. I'm going to make a few comments before I turn things over to Kevin Edgson, Canfor's Pulp President and Chief Executive Officer; and Pat Elliott, our Chief Financial Officer of Canfor Corporation and Canfor Pulp and our Senior Vice President of Sustainability as well. In addition, we are joined by Kevin Pankratz, our Senior Vice President of Sales and Marketing. In the second quarter, we continued our strategy to align our operating footprint in British Columbia with the available timber supply as our Chetwynd facility was permanently closed. In addition, our Houston facility was temporarily closed pending a potential reinvestment decision. We have worked in partnership with the USW to support our employees through this very difficult transition. These were very tough decisions, and we recognize the impact on our employees, their families, our contractors and the local communities. We are continuing to advance the Houston brownfield project. We have completed our planning and technical work. We have also engaged in a series of discussions with the Ministry of Forests to understand the future fiber supply outlook for the region. We need to be sure that if we proceed and go forward with construction, we will have the required economic fiber to operate consistently and successfully. Our discussions with government are progressing well. We hope to complete these discussions in the coming weeks and, once satisfactory concluded, we will advance -- we'll be advancing this project to our Board. Turning to the current wildfire situation in Western Canada, the 2023 fire season is the worst in Canadian history. Across Canada, over 12 million hectares has been burned to date, making it the worst wildfire season on record. BC and Alberta have also set new records for the most hectares burned, with British Columbia at almost 1.5 million hectares and Alberta at over 1.7 million hectares. With respect to the wildfires, I'd like to acknowledge the 2 brave firefighters and pilot who have lost their lives this year battling wildfires in Canada. I want to acknowledge and thank our employees and contractors who are helping respond to the wildfires and are working to ensure continuity across our Canadian operations and protection of our assets. We also thank all of the firefighters, emergency responders and military personnel who are working hard responding to wildfires across the country. While it is too early to determine the long-term fiber supply impacts, we have seen significant short-term disruptions to our operations, including a 3-week curtailment of our facility in Fox Creek, Alberta, in the second quarter. Despite a challenging operating environment and depressed lumber markets in the second quarter, we continue to see positive results from our geographic diversification strategy, with our European and U.S. South operations performing well and generating improved results quarter-over-quarter. While high interest rates and affordability constraints are projected to persist through the third quarter, we have seen an improvement in lumber prices in the last few weeks, supported by better-than-anticipated demand and reduced supply. We are encouraged by the medium to long-term market fundamentals and remain focused on executing our diversification strategy and organic growth plans. Our new facility in DeRidder, Louisiana, continues to ramp up production and is performing well, with a second shift expected to be added late in Q3. Our other projects remain on schedule and on budget, including the rebuild of our sawmill in Urbana, Arkansas; our second greenfield sawmill in Alabama; and our organic growth in Sweden. In addition, we continue to review additional organic and external growth opportunities as we look to grow our lumber business on a global basis. I will now turn it over to Kevin to provide an overview of Canfor Pulp.

Thank you, Don, and good morning, everyone. I want to start with an update regarding the impacts of the labor dispute at BC's ports. The 13-day strike followed by an on-again, off-again job action has severely impacted our supply chain. For reference, approximately 70% of our pulp ships through these ports, both in Vancouver and Prince Rupert. As a result, we announced a curtailment at Northwood in July, which lasted a week and resulted in approximately 10,000 tonnes of reduced NBSK production. We anticipate the supply chain challenges to persist through much of the third quarter, and with our pulp mill inventory near capacity, we are closely following the union's ratification vote, which is expected to conclude today. Turning to our quarterly results. Canfor Pulp had a challenging second quarter with elevated global pulp inventories and tepid demand resulting in a significant decline in pulp pricing. We implemented the permanent closure of the pulp line at our Prince George Pulp and Paper mill on April 1. I'd like to take a moment and thank our employees for their commitment to safety and dedication and resiliency as we navigate the current challenges facing our business. With our operational footprint now better aligned with the current available fiber supply, we anticipate an improvement in our cost structure going forward. In addition, we believe there is significant opportunity to improve our operational efficiency and reliability, which will support the sustainability of the company for the foreseeable future and allow us to capitalize on the strong global pulp market fundamentals we believe will remain over the medium to long term. To achieve this goal, we have identified a significant capital reinvestment plan with approximately $500 million of capital spend identified over the foreseeable future. This includes a major rebuild of the recovery boiler #1 at Northwood, which will significantly extend the useful life of this critical asset. We currently anticipate the work on the boiler to commence in 2025, although this timeline may be accelerated or deferred depending on the condition of the boiler, which will be inspected during our planned maintenance outage in the third quarter. We currently anticipate spending of more than $120 million on RB1, subject to final engineering and labor costs at the time of installation. The balance of the recapitalization consists of smaller projects aimed at improving reliability and asset performance. While timing and magnitude of spend will take into account market conditions and available cash flow, we currently anticipate our annual capital spend to trend in the neighborhood of $100 million for each of the next several years. I will now turn it over to Pat to provide an overview of our financial results.

Thanks, Kevin, and good morning, everyone. The Canfor and Canfor Pulp second quarter results were released yesterday afternoon. In my comments this morning, I'll speak to quarterly financial highlights, a summary of which is included in our overview slide presentation located as always in the Investor Relations section of Canfor's website. Our lumber business generated an operating loss of $16 million in the second quarter, which included a $64 million recovery of a previously recorded write-down of inventory in Western Canada and an incremental noncash anti-dumping expense of $23 million. These results continue to reflect losses associated with our operations in British Columbia as a result of weak lumber pricing and a high-cost operating environment. Following the permanent and temporary closures of our Chetwynd and Houston facilities, respectively, as well as the decline in market-based stumpage, we anticipate an improvement in our cost structure in BC through the back half of 2023. Notwithstanding the current headwinds facing our industry, we continue to benefit from our diversification strategy with our U.S. and European operations generating strong financial results in the quarter. Our U.S. operations benefited from an improved sales realization as well as a contribution from DeRidder, where ramp-up is progressing well. Our European operations contributed approximately $54 million in cash earnings in the second quarter, supported by improved pricing. Canfor Pulp generated an operating loss of $38 million in the second quarter, which included a $7 million inventory write-down. These results principally reflected the sharp decline in global pulp pricing, which more than offset a modest improvement in fiber and conversion costs in the quarter. Looking ahead, we anticipate a challenging third quarter as a result of current pulp market conditions, supply chain uncertainty and planned maintenance downtime at Northwood. Notwithstanding the current challenges facing our pulp business, we believe the longer-term market fundamentals remain strong. At the end of the second quarter, Canfor Pulp had net debt of $46 million, with approximately $180 million of available liquidity, including the commitment to receive up to $80 million of new term debt as part of our capital reinvestment plan. In 2023, we currently anticipate capital spend of approximately $450 million to $500 million in the lumber segment and approximately $70 million for Canfor Pulp, including capitalized maintenance. In addition, we anticipate Canfor will continue to allocate a modest amount of capital to repurchasing shares throughout the year. And with that, Don, I'll turn the call back to you.

All right. Thanks, Pat. So I'll turn it over to you, Michelle, and we're ready to take questions from analysts.

[Operator Instructions] Our first question comes from Hamir Patel of CIBC Capital Markets.

Don, are you starting to see more acquisition opportunities emerge in Europe given the weaker demand backdrop?

No real change, and we do see them occasionally for sure. But I don't -- I wouldn't characterize that as any different than what we've seen over the last 12 to 24 months at all. Yes.

Fair enough. And Pat, I want to talk about the Houston potential project there. If you did proceed, what's your latest estimate on the potential cost and capacity of the project?

Yes. At this point, Hamir, it's probably in the neighborhood of CAD 200 million and the capacity to be sort of 300 million to 350 million board feet.

350 million. And then timing of when that would come on, Pat?

That's still to be determined depending on available building slots, but it's going to be 2025 or later.

Okay. Great. That's helpful. And just the last question I had for Kevin Pankratz on the lumber side. With respect to European imports, do you have a sense as to what kind of SPF price Prince George we need to kind of see those imports kind of trend one way or the other?

I think that price level, Hamir, really ranges, it moves a lot depending on currencies and what the value of residuals are. So it's really hard to pinpoint an exact one here, but we did know that when prices were down at that $3.30, $3.40 level that you saw, that there were other options for the Europeans to send their wood via China or Middle East, North Africa markets. So I don't think there's always a constant number, and I think it's going to fluctuate a little bit. But I do think an inflection point is that we maybe anticipate a little bit more pickup in European imports towards the end of Q3 as a lot of them are still obviously in downturns in the markets. And yes -- we see them picking up a little bit towards the end of Q3 as the European markets might be having a bit more cautionary tone towards the back half of the year.

The next question comes from Sean Steuart of TD Securities.

I want to start with pulp, Kevin and/or Pat. I just want to understand this longer-term capital program, because $0.5 billion, even if it's over the long run, is a lot of money. Can you speak to your comfort with your current liquidity position at Canfor Pulp and borrowing capacity and any perceived needs to bolster that liquidity ahead of more aggressive CapEx? And given the extent of how deep this commodity price drop is, do you see a need to bolster the balance sheet further to fund this CapEx program?

Sean, Kevin here, and I'll answer it quickly on the basis that the purpose of the refinancing was to put us in a good solid place going forward. At this point, we're not going back to the market looking for money. What we're looking to do is, between that financing and generation of cash within the organization, to tackle our reinvestment plan as quickly as we can with the available money that we have.

Okay. Second question is on the European lumber business. There was reference to intermittent log availability partly tied to Russian log imports, or Russian log exports to Western Europe. Any visibility on how long you expect this to continue and how this could affect costs of the segment and result in margin pressure?

I'll maybe try to take that one, Sean, it's Don. Yes, you separate Central Europe from Northern Europe because they're entirely different in terms of several things, including log imports from Russia. But in terms of Central Europe, hard to say. I think that's probably going to exist there for a while, I would say, just based on the degree of reliability they place on Russian imports. But in terms of Northern Europe, particularly in Sweden, there's been some challenges there on just log availability, period, in certain locations, but it hasn't been -- hasn't had any material impact on us at all. And of course, from a Russian import standpoint, we don't -- it doesn't impact us at all there in Northern Europe whatsoever.

But as it stands now, Don, you wouldn't expect this to undermine your operating rates, absent market pressure -- price pressure in general, but your production is not constrained significantly by log availability. Is that a fair assessment?

Yes, fair assessment. And like I think we mentioned in Q2, there's been 1 or 2 regions where it's had a minor impact in terms of log availability. But we -- I mean, I think that's always a bit of a challenge in certain areas, and it may continue to some degree, but we're not concerned about it.

The next question comes from Ketan Mamtora of BMO Capital Markets.