Canfor Corporation ($CFP)

Good morning. My name is Kevin, and I'll be your host today. Welcome to Canfor's First Quarter 2026 Analyst Call. [Operator Instructions] During this call, Canfor'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 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 would now like to turn the meeting over to Susan Yurkovich, Canfor's Corporation President and Chief Executive Officer. Please go ahead, Susan.

Thank you, Kevin. Good morning, and thanks for joining Canfor's Q1 2026 Results Conference Call. I'm going to open with a few comments this morning before turning things over to Patrick A. Elliott, our Chief Financial Officer. We're also joined by Stephen MacKiey, Canfor's Chief Operating Officer; Kevin Pankratz, our Senior Vice President of Sales and Marketing; and Brian Yuen, our Vice President of Pulp Sales -- Pulp and Paper Sales, who are going to be available and happy to take questions at the end. Our lumber business generated modest EBITDA in the first quarter with improved pricing supported by seasonally higher demand and more limited supply, partly reflecting the significant capacity reductions in our industry we've seen in the last couple of years. While supply has been somewhat constrained, lumber prices have started to moderate in recent weeks, particularly for Southern Yellow Pine as demand continues to be impacted by the uncertainty facing the global economy. Similarly, our pulp business continues to face significant headwinds with elevated inventories and weak global pulp demand offsetting modest cost improvements realized in the first quarter. Now, withstanding the current economic landscape, we continue to position the business to navigate the challenges facing our industry. Our goal remains to be more resilient and better able to deliver more stable returns over the cycle, and we are focused on executing our strategy, strengthening our operating platform, improving our cost competitiveness and diversifying our business. Looking ahead, we anticipate further reductions to our cost structure as we continue to ramp up our low-cost capacity in the U.S. South and see a reduction in our antidumping and countervailing duties beginning in October. In Europe, while results have been challenging for several quarters, we are beginning to see modest log cost relief, higher pricing and the benefits from our acquisition of the Karl Hedin assets last September. Following significant capital investment in recent years, we're focused on operating our low-cost sawmills efficiently as we look to optimize regional fiber supply and maximize the returns on our investment. Going forward, we are anticipating significantly lower capital requirements due to the improvements in our underlying asset base. So while markets are anticipated to remain challenging in the near term, our business is well positioned to generate strong free cash flow as the market recovers. In addition, we've maintained a solid balance sheet, which provides us with flexibility to pursue strategic growth should the right opportunities present themselves. Now I'll turn it over to Pat to provide an overview of our financial results.

Thanks, Susan, and good morning, everyone. In my comments this morning, as always, I'll speak to our first quarter financial highlights, which included an overview slide presentation located in the Investor Relations section of our website. Our lumber business generated adjusted EBITDA of $29 million in the first quarter, $37 million higher than the previous quarter. These results have been adjusted to exclude a $20 million recovery of a previously recorded inventory write-down. Improved earnings in the first quarter largely reflected an increase in North American lumber pricing, particularly for Southern Yellow Pine as well as lower unit manufacturing costs. While North American lumber prices benefited from tighter supply, global demand remains challenging. As a result, our European lumber business generated an adjusted EBITDA loss of $12 million, $4 million lower than the prior quarter. Looking ahead, we anticipate a modest improvement in European lumber prices, driven by seasonally higher demand and reduced supply. In addition, log costs are anticipated to decrease slightly through the balance of 2026, which should support improved earnings going forward. Our pulp business reported an adjusted EBITDA loss of $8 million in the first quarter, $8 million better than the prior. While our first quarter results benefited from improvements to our underlying cost structure, global pulp markets continue to be impacted by elevated inventories and weak demand, which we believe will persist. Following Canfor's acquisition of Canfor Pulp in March, our pulp business is better positioned to manage through the current market dynamics. Turning to our balance sheet. Following a refinancing of our credit facility in March, Canfor ended the first quarter with available liquidity of approximately $970 million and net debt, excluding the duty loan of approximately $530 million. We forecast capital spend of $210 million in 2026, and this includes $35 million for pulp and remaining spend associated with our Bruza facility in Sweden and our Iron Mountain facility in Arkansas. Following completion of these projects, we expect capital spend to moderate further over the next several years, supported by our strong lumber platform. And with that, we're now ready to take questions from analysts.

[Operator Instructions] Our first question comes from Benjamin Isaacson with Scotia.

Susan or Pat, can you talk about where you are on your cost improvement journey on a portfolio-weighted basis? I think you mentioned you're looking to lower costs in the U.S. South, but is that to really wrap up a bigger program? How should we think about the magnitude and timing of those cost improvements going forward?

Ben, I'll get Pat to take that.

Yes. Thanks, Ben. Yes, obviously, the last number of years with the combination of rationalization of some of the higher cost assets that we had and the new investment that we made, the significant new investment that we made, particularly in the U.S. South, we've seen a continued drop in our operating cost footprint. I would say we're the vast majority of the way through that. As you know, we're still going to be completing the Iron Mountain project here at the end of this year, which really goes live into next year. And there's still some efficiencies to be gained from like our Axis project in Twitter are doing great, but are still -- there's still probably a little bit more to squeeze there. So hard to quantify other than to say the majority of it is sort of baked into our results already in 2026.

Great. And then just two more, if I may. On Vida, can you talk about what the parameters are to consolidate that and to kind of finalize that transaction. Is there a valuation formula that set? Is now a good time considering the market outlook is weak? Would there be operational risk if you took full ownership of that? Can you just flesh that out a bit?

Sure. I'll keep going, Ben. Yes, so there's a fixed mechanism for that. Both the timing and the amount are fixed. They're not impacted by current events. So that is fixed. So there's no opportunity for either side to transact before that. And I would kind of go back to the original intent with the minority ownership structure was to keep in place those sort of strong operators who have a great track record of success in our business. So we're not looking to make any change. And frankly, the agreement doesn't allow for it.

Great. And then just finally, on the 25% net debt to cap ratio. Can you just remind us how your creditors treat that duty deposit loan as it relates to covenant calculations? Do we subtract 9% or 10%? Is that the right way to think about?

They include it, Ben. It's included in our accounts. So yes, it's included.

Our next question comes from Sean Steuart with TD Cowen.

Question -- a follow-up question on Europe. It sounds like you have some visibility that things are going to get better gradually there. Wondering if the slump though that we've seen over the last three quarters and presuming that's representative of what's going on across the industry in that part of Europe. Has that changed the M&A opportunity set at all as more opportunities come to the fore? And is your ambition there at all tempered by what you've seen over the last few quarters?

Sean, it's Susan. Yes, we still really like and believe in Sweden. And of course, we did make the acquisition of the 3 additional [indiscernible] mills last year closed, I think, in September. And those are really good additions to our portfolio and also move us into sort of middle Sweden and we have a concentration of assets in Southern Sweden, and this sort of takes us into a different region, less populated, I would say, with sawmills. So we still like that. We have seen our log costs moderate. And I think the industry there is taking maybe in total, is taking a bit of more disciplined approach to the purchase of fiber. So we see that coming we see those prices moderating. It's going to take some time, but we do see that coming back in line. And we still do like that market or that jurisdiction because there's just so many -- they've got a lot of market opportunities there. I don't know if Kevin may want to add a couple of comments, but we do have a lot of options for our products. We have a lot of different markets and a lot of opportunities to be able to reach a lot of different customers. I don't know, Kevin, if you want to add anything else?

No, that's good too.

And the ambition would be strictly to Sweden still or broader Scandinavian interest?

Yes. We continue to look at a variety. We look at surrounding areas. We're continuing to evaluate opportunities. We like having the diversified portfolio where we've got assets in Canada and also in the U.S. and now in Europe, and we like that mix for us. So we'll continue to evaluate things as we move forward.

Okay. One other one, Susan, on the trade file. I know you're close to it. Any perspective on lumber potentially being brought into the broader USMCA renegotiation? Any perspective on that front?

Yes. So just the USMCA or CUSMA, it's not a renegotiation. It's a review. It's a 16-year agreement, and we are in year six. And so this is a review of that agreement. So I know that lumber is definitely in the mix in these discussions. It's going to be -- it's a complicated environment to have those discussions. And so I know certainly it is certainly one of the top issues that the government continues to raise from Canada's perspective. But it is going to take some time. I know there's a focus on not only the duties that we are paying -- that we are familiar with paying, but also the 232 tariffs, which have that, of course, 10% to burden to our business and also picked up other industries. But it's going to take some time. I don't see anything imminent, but of course, discussions are continuing on both sides of the border, and there will be a formal process that kicks off here. Well, it's underway now, but the formal portion of those discussions will kick off this summer.

Our next question comes from Matthew McKellar with RBC Capital Markets.

Can I maybe stick with trade for a moment. The preliminary AR7 results would suggest your duty rate could step significantly lower later this year with a tighter spread to the all others rate compared to today. What should we understand about what that step lower means for your business? And I guess, how you run your Canadian business in particular and market your lumber?

Well, obviously, the duty is coming down, our perspective, the duty shouldn't be there in the first place, but coming down is a good thing for our business. Obviously, at 56% and 57%, it's very challenging to operate our Canadian business. We've done a really good job of focusing on alternate markets. But of course, the U.S. is still a very big market for our product. They need our product. They want our product. And so we are still selling some there. And of course, having the duties come down by 16-ish percent is going to be helpful to our Canadian business for sure. And then, of course, as we move forward, we expect that duty rate to come down even further. So that's a good thing for our business. We are at the peak. It's been a very challenging time to operate, but we are making our way through it, and we do see a light on the -- at the end of the tunnel here.

Maybe next, just in North American lumber, your outlook talked about an expectation that prices may soften as supply increases with the run of better lumber prices we've seen. I guess we've seen Southern Yellow Pine come under some pressure over the last couple of weeks. But could you speak to the supply response that you're seeing so far at an industry level and maybe what that has looked like to this point after a pretty healthy run for Southern Yellow Pine.

Sure. Matthew, it's Stephen here. Maybe I'll start and then I can let Kevin talk a little bit about the market more broadly from a price perspective. I think on the supply side, it's really difficult for us to sort of comment on what others are doing or may be doing. We do still believe that the operating rates in -- across the U.S. South are lower than historical norms generally for the industry. However, within our own operations, which is really all we can comment on. You know that we have made a lot of challenging decisions over the last number of years to rationalize higher cost capacity across our operating platform and optimize our portfolio of assets, make investments in additional low-cost capacity. And so our focus has been to run our remaining operating facilities at full capacity. And that's what we've been working to do is maximize utilization rates across our fleet, and we -- that was true in Q1 and will be true going forward. So I think there's probably some capacity that we may have seen folks add a few hours and take advantage of a little bit higher pricing in Southern Pine. But Kevin, I don't know if you want to add anything.

Yes. No, just from the -- Matthew, you nailed it there with the run-up in pricing from the lows that we saw in mid-December, a real rapid increase in pricing -- and what really was the big catalyst, of course, was extremely low customer inventories in the field, coupled with a demand response that we hadn't seen in a while, like a fairly strong Q1 demand supported by the housing start numbers that we've recently seen. And then going into Q2, we do typically see a seasonal down drop in pricing. And of course, we're starting to see some cracks happen in that space there. And so I think what housebuilders and our customers are guiding to us to is just a bit more moderated demand given the uncertainty that we're seeing as a result of energy and Iran war issues.

Great. And if I can maybe just sneak one last one in. Is there any differences we should understand about the implications of the Iran war as it relates to cost pressures or maybe even demand implications that would be different between your North American and European operations? Is there any difference to call out between the 2 segments?

Well, I mean, there's a lot of cost pressures in all parts of our business. And certainly, we've had uncertainty in sort of -- because of tariff on tariff off and a lot of volatility in the decisions coming out of the U.S. Of course, the Iran conflict adds additional uncertainty in the globe and sort of that -- that's certainly having an impact. It's kind of hard to estimate what that would be and what the split would be between our European operations and our North American operations. But again, as Stephen mentioned, the focus for us is really just running as efficiently as we possibly can. I don't know, Stephen, if you want to add anything.

No, I think that's good, Susan.

Our next question comes from Hamir Patel with CIBC Capital Markets.

Pat, you referenced CapEx this year of $210 million stepping down in '27. How should we think about just how steep that decline could be in '27? And would that sort of be a new normal?

Yes. Thanks, Hamir. Yes, obviously, the '27 capital plan is not finalized yet. But in terms of guidance, I think you're around in that $150 million plus level. So kind of another 20% to 25% lower than where we are today.

Okay. Great. And I guess a question for Susan. Now that you've taken in Canfor Pulp, how do you think about some of the sort of longer strategic decisions that you might need to do to rightsize that pulp platform and where sort of maybe mid-cycle production for Canfor Pulp likely settles?

Yes. Thanks, Hamir. Of course, we've just concluded that in March, I guess it was about March 17. We're obviously doing that work right now. We're looking at all the options for that business. Certainly, it's a challenging business, and that's the work that we're doing right now.

At this time, I'm not showing any further questions. I'd like to turn the call back to Susan for any closing remarks. Please go ahead, Susan.

Thanks very much for joining us. We'll see you all next quarter.

Ladies and gentlemen, this does conclude today's presentation. We thank you for your participation. You may now disconnect, and have a wonderful day.