Canfor Corporation (CFP) Earnings Call Transcript & Summary

Good morning. My name is Michelle and I will be your host today. Welcome to Canfor Corporation Second Quarter 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 companies 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 Corporation President and Chief Executive Officer. Please go ahead, Susan.

Thanks, Michelle. Good morning, everyone. Thanks for joining our Q2 results conference call. I'll start off with a few comments before I turn things over to Pat Elliott, Canfor's Chief Financial Officer. I'm also joined by Stephen MacKie, our Chief Operating Officer; Kevin Pankratz, our Senior Vice President of Sales and Marketing; and Brian Yuen, our Vice President of Pulp Sales; [indiscernible] paper sales, who are available and can help with questions following our remarks. Our lumber business generated solid EBITDA in the second quarter with improved pricing driven by leaner inventories, industry capacity rationalizations over the last several years and ongoing transportation constraints in the U.S. South. While supply reductions have supported lumber pricing in 2026, we do remain cautious on our near-term outlook as demand continues to be impacted by global economic uncertainty, ongoing trade disputes and persistent affordability challenges. Pulp markets also remain under significant pressure with elevated inventories and a structural shift in market dynamics contributing to weak pricing over the last several quarters. Despite these headwinds, we are seeing improvements in our underlying performance, supported by the significant [indiscernible] we've made to our operating platform over the last several years. While we're encouraged by our second quarter results, we remain focused on strengthening our platform and positioning the bids to navigate the challenges facing our industry. As part of these efforts, we recently announced the closures of our Northwood Pulp mill later this year, along with 2 sawmills in Sweden and our [ Fox Creek ] [indiscernible] in Alberta. These are incredibly difficult decisions that impact our employees, their families and our local communities. We've made changes across our platform that are got reaching, but we are putting our business in a more sustainable footing. The changes will allow us to utilize the economically viable cyber supply across our operating regions more effectively and support a stronger, more competitive platform going forward. In the case of Northwood, reducing our pulp capacity will improve our cost structure, lower our corbon intensity and enhance the long-term competitiveness of our Intercon facility and specialty paper business, which continues to perform well. In our lumber business, the closure of [ Ersolt/Orfr ] and along with Fox Creek sawmills will allow us to optimize fiber procurement efforts support our cost structure and overall profitability as we concentrate production in fewer, more productive facilities. As we optimize our operating platform, we're also investing in higher-value opportunities. Earlier this month, we completed the acquisition of Pinkwood, which we believe will strengthen our asset base in Western Canada, further diversify our earnings profile through increased exposure to value-added products. Taken together, these actions reflect our continued focus on building a stronger, more resilient company positioned to create long-term value through the cycle. With that, I'll turn it over to Pat [indiscernible] for an overview of our financial results.

Thanks, Susan, and morning, everyone. In my comments this morning, I'll speak to our second quarter financial highlights. And as always, this is included in our overview slide presentation in the Investor Relations section of our website. Our lumber business generated adjusted EBITDA of $145 million in the second quarter, $116 million higher than the previous quarter. These results have been adjusted to onetime items totaling $16 million, comprised of restructuring and impairment charges net of a $7 million recovery of previously recorded inventory write-downs. Results included $37 million of adjusted EBITDA in our European lumber business, reflecting moderately higher pricing, increased shipments and modest log cost growth. In North America, improved lumber pricing, increased volume and cost structure improvements supported solid earnings, particularly in the U.S. South. Our pulp and paper business reported an adjusted EBITDA loss of $12 million, $4 million lower than the prior quarter, reflecting the impact of planned maintenance downtime and weakness in global pulp markets. As Susan mentioned, we announced the closure of our Northwood pulp mill later this year, driven by a structural shift in pulp market fundamentals and challenges securing economically viable fiber supply. As a result, we anticipate recording restructuring costs of approximately $30 million in the third quarter. . In addition, we announced the closure of our Fox Creek sawmill due to challenging market conditions, elevated duties and declining fiber availability in the region. As a result, we anticipate recording an asset write-down and impairment charge of approximately $35 million also in the third quarter. Turning to our balance sheet. Canfor ended the second quarter with available liquidity of approximately $1.2 billion and net debt, excluding the duty loan of $316 million, available liquidity improved by $215 in the second quarter, supported by solid earnings and a seasonal working capital unwind. We anticipate capital spend of approximately $210 million for 2026, including approximately $35 million for our Pulp business and the remaining spend associated with our Bruza facility in Sweden and our Iron Mountain facility in Arkansas. Following completion of these projects, Capital spend will moderate supported by our strong lumber platform and rightsized pulp footprint. And with that, Michelle, we are now ready to take questions from the analysts.

[Operator Instructions] And our first question is going to come from Ben Isaacson with Scotiabank.

Two questions, both on closures. First, could you give a little bit more color on the Fox Creek closure and specifically the Alberta fiber basket, how rapidly is it declining? Are there any other assets in your portfolio that are at risk or are on the fence?

Ben, it's Stephen here. Thanks for the question. Well, maybe I'll sort of work backwards, but I would say there's no other assets in our Alberta portfolio that are at risk. We think that this move as difficult as it is, really a result of the wildfires that we've experienced in Alberta over recent years and that impact of the fiber supply along with some other sort of regulatory constraints that are being applied on the land base. And when we look at our overall portfolio of assets in Alberta, this strengthens it, and we're confident that we've got sufficient fiber supply to support the remaining facilities.

That's great. And then just a broader question. So you've done a lot of footprint rationalization recently. And presumably, you're only shutting those assets that are losing money. And so if that's correct, then what is the uplift to normalized EBITDA? Or how do all these closures improve the earnings power for the company?

Matt, it's Pat. Yes, hard and probably not properly give you too good guidance [indiscernible] than to say, clearly, there's a lot of this that's been baked in since we started rationalizing in 2023. But I guess I would just guide to there's more to come. You mentioned -- we mentioned Fox Creek with the North with closure, that pulp cost structure changes materially. We're still doing an upgrade and finishing upgrade at Bruza in Sweden. We're still doing an upgrade at our Iron Mountain facility in Arkansas. So as we get into 2027, I would just say that there's more to come. And so I just have to wait for those results, but it's still come.

And the next question will come from Sean Steuart with TD Cowen.

Just to build on that last response. When you say more to come, you're talking about savings to come in '27, not necessarily more closures, correct?

Yes. Thank you for clarifying. That's exactly right, Sean. Thank you.

Okay. Okay. I wanted to make sure. You guys had really -- you had really strong Q2 lumber price gains in North America, which as comps and the published benchmarks. I know there was disproportionate strength for wider dimension stuff in the South. But any further comment you can give on mix that might have helped this quarter? And if mix was a factor, is that a sustainable trend into the back half of the year?

Yes. Sean, it's Kevin here. Yes, I think you noted the wide widths, especially in 6-inch and 10 and 12 inch, and we're seeing it across all species to there, Sean. So it might -- we'll expect those spreads to maybe moderate somewhat because it is out of the normal pattern, but we expect that to continue through Q3 and then typically come off there by Q4.

Okay. That helps. Susan, the recent I-joist acquisition you found in Alberta, just outside Calgary, I know it's a small deal, but I guess can you qualify the company's broader interest in EWP expansion? Is this a precursor to interest -- M&A interest in other deals on that side of the business?

Yes. We're constantly looking at things. This is a really good fit for us. Of course, we operate in Alberta. We provide a lot of furnish to that facility already. So we know these folks culturally a really good fit for us. We think it adds nicely to our portfolio. We're continuing to look at a number of opportunities. We're fortunate that we have a balance sheet where we can be opportunistic. Of course, we're being prudent. But we like this acquisition and we see opportunity to grow that business.

Organically or through M&A or both.

Would you like -- as usual. We're looking at all kinds of things and when we're ready to share something with you, we'll be happy to do.

Got it. Okay. Understood. One last one. The Northwood closure, I understand the context. I guess the question is how concentrated let's say, over the last few years, how concentrated were the losses in the pulp segment at Northwood versus, [ Entercom ]. And can you give some context on broader benefits tied to residual procurement for Intercon going forward, as Northwood is taken out of the mix?

Yes. I'll start, Sean, and my colleague, Stephen, would help me here. So yes, I think we didn't -- the procurement was done jointly, I guess, is what I would say. So it's a balanced balance losses, if you call it that, the opportunity here of sort of tightening the supply, reducing kind of some of that further distance, fibers like residual supply and/or whole log supply in combination with kind of, I guess, an increased focus on a smaller site really allows us to generate, I would say, material synergy and material improvement to that structure. Again, not ready to quantify that. We'll see that as we get into 2027. But I'd just say that it's a material step down in the cost structure for [ Intercos Specialty Paper ] relative to the balanced portfolio we have today.

Yes. I think the only thing I would add there, Sean, and Pat is just that it proportionally changes our mix quite dramatically as well and leverages the greater exposure to the paper business. which has been quite solid and stable and has generated positive returns for a long period, a number of years. So I think it reduces our exposure to market pulp, which along with the cost structure improvements that Pat referenced are going to position that business, we think, quite well going forward.