Canfor Pulp Products Inc. (CFP) Earnings Call Transcript & Summary

Good morning. My name is Lara, and I will be your conference operator today. Welcome to Canfor and Canfor Pulp's First Quarter Analyst Call. All lines have been placed on mute to prevent any background noise. 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 companies 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, Lara, and good morning, everyone. Thank you for joining the Canfor and Canfor Pulp Q1 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, Chief Financial Officer of Canfor Corporation and Canfor Pulp, and our Senior Vice President of Sustainability. In addition, we are joined by Kevin Pankratz, our Senior Vice President of Sales and Marketing. The first quarter and April were very challenging for Canfor as we announced and implemented the restructuring plans for our lumber and pulp operations in British Columbia. Our Chetwynd sawmill and pellet plant, as well as our pulp line at Prince George Pulp and Paper have permanently closed, while our Houston facility has been closed for an extended period. Despite the current challenges operating in British Columbia, this province remains a critical part of our diversified operating platform. To that end, we continue to make progress on finalizing the business case to build a new operation in Houston. We sincerely regret the impact these decisions have had on our employees, our contractors and our communities. However, with a smaller but more stable operating platform in British Columbia, we will be stronger and better positioned for the future. Turning to our other operating regions. Construction of our greenfield sawmill in DeRidder, Louisiana is progressing well with the sawmill starting up in late February, followed by the planer in early April. With the facility now fully operational, we continue to make progress through the start-up curve. We're pleased with the initial performance. We will continue to ramp up production through the balance of this year and on in to 2024. In addition, we continue to execute on our other growth initiatives, including the rebuild of our sawmill in Arkansas, second greenfield sawmill in Alabama and some organic growth in Sweden. Notwithstanding current lumber markets, we continue to believe the longer-term market fundamentals remain strong, supported by favorable demographic trends, continued strength in the repair and remodel sector and pent-up demand for new home construction activity. Despite the seasonal working capital build in the first quarter, our balance sheet remains strong. While we are prepared to remain patient and disciplined until the right opportunities present themselves, we continue to assess 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. As Don mentioned, Canfor Pulp implemented the permanent closure this quarter of the pulp line at our Prince George Pulp and Paper Mill. This was a very difficult decision, and we regret the impact it has had on our employees and the community, but we are focused on improving operational efficiency and reliability with a more stable operating footprint. In addition, over the next several years, we have identified a significant capital reinvestment plan aimed at improving the operational reliability and stability of our remaining pulp mills. To that end, we are pleased to announce the refinancing that will provide the necessary liquidity for the next 4 years to backstop this recapitalization. We have provided guidance of $70 million of capital this year, but expect taking into account market conditions and cash flow that in the coming years, our capital expenditures will trend in the neighborhood of $100 million, consistent with the past couple of years. The spending will focus on improving reliability, and the only significant project that we see on the horizon is the completion of the rebuild of recovery boiler #1 at Northwood, which was started in late 2021. Notwithstanding the significant challenges we have experienced over the last several years, we believe an expanded reinvestment plan will support the sustainability of the company for this foreseeable future, and allow us to capitalize on the strong global pulp market fundamentals we believe will remain over the medium to long term. 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 first quarter results were released yesterday morning. In my comments this morning, I'll speak to quarterly financial highlights, a summary of which is included in our overview slide presentation located in the Investor Relations section of Canfor's website. Our lumber business generated an operating loss of $170 million in the first quarter, which included a $59 million write-down to the carrying value of logs and finished inventory in Western Canada, as well as restructuring charges of approximately $11 million and an incremental noncash ADD expense of $19 million. These results reflected the sustained impact of a challenging operating environment in British Columbia, driven largely by weak lumber pricing and related operational downtime, which continues to have a significant impact on our per unit cost structure. While we expect the cost curve in British Columbia to moderate through the balance of 2023, we anticipate ongoing challenges during the second quarter as a result of current lumber markets. Notwithstanding the significant loss experienced in British Columbia, we continue to see the benefits of our diversification strategy as more modest earnings from our U.S. South operations were combined with strong results from our European business, which contributed approximately $50 million in cash earnings in the quarter. These results reflect a slight improvement in pricing and demand in the U.K. and Europe as well as increased production and shipments. Our pulp business generated an operating loss of $25 million in the first quarter, which included a $4 million inventory write-down and restructuring charges of approximately $3 million. On an adjusted basis, results in our pulp segment improved by approximately $20 million compared to the fourth quarter. Despite the continued impact of fiber-related downtime, these first quarter results largely reflect improved NBSK productivity quarter-over-quarter as well as the associated benefit on per unit costs. Looking forward, the focus for our pulp business remains on operational reliability and preserving our balance sheet position. With that in mind, earlier this week, as Kevin mentioned, Canfor Pulp successfully completed the refinancing to support a significant capital reinvestment plan over the next several years. Under the terms of our amended credit agreement, Canfor Pulp converted its $50 million term debt into a new $160 million revolving operating loan facility, of which approximately $65 million is currently drawn. In addition, we have secured a commitment to receive up to $80 million of new term debt as part of our capital reinvestment plan with the additional liquidity projected to more than sustain Canfor Pulp going forward. In 2023, we anticipate capital spending of approximately $450 million to $500 million in the lumber segment, including spending on the three major investments in the U.S. South as well as organic growth in Sweden. In addition, we will continue a modest share buyback program throughout the year. For Canfor Pulp, we are currently forecasting capital spending of approximately $70 million, including capitalized maintenance. And with that, Don, I'll turn the call back to you.

All right. Thanks, Pat. And so operator, I'll turn it back to you, and we'll take questions from analysts.

[Operator Instructions] Your first question comes from the line of Hamir Patel from CIBC.

Don, can you speak to what you're seeing on the R&R side in both North America and Europe?

For sure, Hamir. I'll let our -- I'll let Mr. Pankratz talk about that.

Yes, the R&R market has -- so I'll start with North America, and both Canada and the U.S. has been quite resilient, essentially seeing double-digit growth versus this time last year. And we see that continuing into Q2, and maybe some slight moderation in the back half, but still really, really strong. And there's some pretty good drivers that are supporting that growth, and we think that's going to continue. I think, in Europe, we saw a resurgence of DIY strength, in particular, in the U.K. market, that was strong and supporting that going into Q2. So overall, the R&R market segments actually, globally, have been quite resilient.

Great. And then just the next question for Kevin Edgson on the pulp side. When you think about your longer-term capacity and with some of the investments that you're planning, what -- where do you see the -- just looking at the fiber constraints and some of the capital you're putting there, where do you see Canfor Pulp's longer-term capacity trending?

Thank you for the question, Hamir. When we made the decision to take the PG pulp line down, what we did is we tried to forecast, to the best of our ability, not the fiber supply as it exists in the short term this year or next year, but try to look forward as far forward as possible. In doing so, we think we've rightsized the footprint with the two facilities, the paper machine as it is now. We think the investments are going to improve our competitiveness, not necessarily increase our capacity and ensure through that improved reliability and lower maintenance costs to be a more competitive player. So at this point, unless there is some material change in terms of government policy or the like, we believe that we're in a stable place, as Don referred earlier to the smaller but stronger. We feel good about where we're at. We're starting to build chip inventories after coming awfully close at the end of the quarter before the shutdown. And so I think what we've got right now is a good place to be and it's appropriate for the long term.

Your next question comes from the line of Ketan Mamtora from BMO.

First question. I mean it certainly sounds like the repair and remodeling market in the U.S. has held up remarkably well so far. Some of the homebuilders have also started to talk about uptick in the orders. We've seen OSB prices kind of strengthen the last few weeks. Why hasn't lumber not moved higher? What do you think are among the key issues?

Go ahead, Kevin.

Sure. So yes, you're right, the R&R has been the one segment that has been quite strong. And fundamentally, we just haven't seen the same growth that we've seen in the new home construction. I think that's a big fundamental driver that will support the growth in some of the pricing. We also have, on the lumber side, still inventories that are quite high on the ports and in certain jurisdictions. And it's probably going to take through Q2, maybe towards the end before we're going to start seeing, I believe, some price appreciation get a little bit more attention in the market. So essentially, just working through some surplus inventories and we're starting to see euro imports come off quite significantly. And coupled with maybe the impact of some of the curtailment announcements that have been announced in BC, we'll have that impact, and then we could see some price appreciation towards the end of Q2.

Got it. That's helpful. On the new resi side, are you seeing any signs at all of activity improving? I mean, in the last couple of weeks and some of the recent data points from the homebuilders suggest that things may be turning. Curious what you guys are hearing?

Sure. Yes, we're hearing the same thing, Ketan. And I think the one thing that's kind of materially different than maybe the last 4 or 5 months, the U.S. South, Southeast has been actually quite strong. That's where the bulk of that new home construction has been. But we're starting to see a resurgence in the Texas market, which is really significant. It's a huge consuming region for lumber. And we're also starting to see pockets of Western United States like in Phoenix, that's another large consuming area to start to come back after having a pretty quiet Q4 and into Q1. So we are starting to see certain regions starting to come -- bounce back, which gives us a little bit more confidence, but we'll have to see how that plays out long term here.