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

Good afternoon, everyone, and welcome to the Canfor Pulp Annual General Meeting. [Operator Instructions] A recording of this call is underway. I will now turn the call over to Mr. Conrad Pinette, Chairman of the Board.

Good afternoon. It's now 12:30 p.m., and I would ask the meeting to please come to order. My name is Conrad Pinette. I am a Director and Chairman of the Board of Canfor Pulp Products Inc. and will be acting as Chairman for this meeting. It is a great pleasure for me to extend a warm welcome to all of you today for the Annual General Meeting of Canfor Pulp Products Inc., particularly those of you joining us by webcast and conference call. As you know, as part of Canfor's COVID-19 action plan, we encourage shareholders to use the webcast and conference call media to be part of today's meeting in order to reduce the risk of holding a larger gathering in person. We thank you all for your cooperation at this difficult time for all of us, the communities in which we operate and to those who have taken time to forward to us in advance their questions for this meeting. The 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, 2019, together with the auditors' report and the report of the directors to the shareholders; fixing the number of directors of the company at 6; electing the directors for the coming year; and appointing the auditors for the coming year. Once we have dealt with the necessary resolutions, I intend to ask the President and CEO, Don Kayne, to make a few short remarks. I've asked David Calabrigo, Corporate Secretary, to act as a secretary of this meeting. Firstly, I'd like to introduce to you the other directors of Canfor Pulp, all of which are joining us online. Chairman Emeritus, Peter Bentley; John Baird; Stan Bracken-Horrocks; Don Kayne; and William Stinson. They have all worked diligently and effectively with the management team of Canfor Pulp, and we appreciate their wise counsel. At this time, it's a pleasure to introduce you to Mr. Dieter Jentsch of King City, Ontario as a proposed nominee of the Board of Directors of Canfor Pulp and who's joining us online. Welcome, Dieter. With the consent of the meeting, I hereby appoint AST Trust Company (Canada) to act as a scrutineer for the meeting. And now I'd like to call on Mr. Calabrigo to deal with the notice of this meeting, David?

Mr. Chairman, a notice calling the meeting was mailed to all shareholders of Canfor Pulp entitled to receive such notice. AST Trust Company (Canada) has provided us with a certificate as to the mailing, and a copy of the certificate will be kept with the records of the meeting.

Mr. secretary, would you please summarize the preliminary scrutineer's report?

We are pleased to report that there are 44 shareholders holding 57,274,396 shares represented in person or by proxy at this meeting, representing 87.8% of the total and issued outstanding shares of the company.

Thank you. As Chairman, I adopt the scrutineer's report and declare the attendance at this meeting to be as they have set forth. I direct then, when delivered, the financial scrutineer's report be kept with the records of this meeting. In accordance with the scrutineer's preliminary report, I declare a quorum present and the meeting to be duly constituted for the transaction of business. In order to expedite proceedings today, I will be proposing and seconding all motions. The minutes of the last meeting of shareholders are available for perusal by any shareholder. I propose that the minutes be taken as read and approved. In favor? Contrary? [Voting]

Carried. The next item of business to place before the meeting is the consolidated financial statements of Canfor Pulp for the year ended December 31, 2019, together with the auditors' report and the report of the directors to the shareholders. These statements and reports are contained in Canfor Pulp's annual report, which are available on SEDAR or from the company upon request. I'll regard the statements and reports as received by the meeting. The next item of business is to fix the number of directors in 6. I propose that the number of directors be fixed at 6. In favor? Contrary? [Voting]

Carried. The next item of business is the election of directors of Canfor Pulp. I propose that the following individuals be nominated to act as directors to the company to hold office until the next Annual General Meeting. John R. Baird, Stan Bracken-Horrocks, Dieter Jentsch, Don Kayne, Conrad Pinette and William Stinson. These persons are management's nominees for election, as was stated in the information circular mailed to the shareholders of Canfor Pulp. There being no further nominations, I declare nominations closed. As only the required number of persons have been nominated, I declare that those persons nominated have been duly elected by acclamation as directors of Canfor Pulp to hold office until the next Annual General Meeting. 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 Canfor Pulp. I propose that KPMG LLP, chartered accountants, be appointed the auditors of the company. In favor? Contrary? [Voting]

Carried. I declare KPMG LLP, chartered accountants, appointed auditors. Now I'll call on Don Kayne, Canfor Pulp President and CEO, to address the meeting. Don?

Thanks, Conrad, and good afternoon, everyone. Welcome, and thank you for joining us at Canfor Pulp's Annual General Meeting. I would like to start by acknowledging that today's meeting is being virtually broadcast from the unceded territory of the Coast Salish peoples, including the territories of the Musqueam, Squamish and Tsleil-Waututh Nations. Given the unprecedented circumstances the world finds itself in today with the COVID-19 pandemic, I want to thank you for attending today's AGM virtually in an effort to protect everyone's health. As Conrad mentioned, we have a new addition to our Board, Dieter Jentsch. Dieter was formerly a senior executive of Scotiabank, and we look forward to having Dieter join the Board. His broad global experience will be an asset to Canfor Pulp. With the significant impacts of the COVID-19 pandemic, the last several weeks have been a challenging work environment for our employees who are the backbone of our company. It's through their hard work that we consistently deliver high-quality pulp and paper products to our customers. Now more than ever, our employees are continuing to be resilient and persevere through challenging and uncertain times. On behalf of the management team and our Board of Directors, I want to express heartfelt thanks to all our employees. Turning to 2019. Canfor Pulp saw a sharp reversal of market conditions following record-high pulp prices and operating income in 2018. 2019 was a challenging year due to weak global pulp markets, escalating fiber costs and a reduced supply of residuals, which resulted in mill curtailments. Canfor Pulp recorded an operating loss of $31 million for 2019. We continued our quarterly dividend program with $16.4 million returned to shareholders. Global pulp prices fell sharply over the course of 2019 as purchasing activity in our largest market, China, declined, and markets elsewhere also weakened. Overall, the global pulp inventory remained high over the course of the year. In Europe, demand for printing and writing papers fell significantly. Our pulp business was also impacted by challenging operating conditions in British Columbia. The shrinking fiber supply in the province due to sawmill curtailments resulted in significantly reduced chip residuals and caused major disruptions to our pulp mill operations. As a result, we took phased curtailments at our pulp mills over the summer of 2019. We have been working to reinforce our fiber supply by securing cost-competitive fiber agreements over the long term. Our energy business increased its power generation in 2019 following the commercialization and ramp-up of Northwood Pulp Mill's new 32-megawatt condensing turbogenerator. Last year, we also implemented a new enterprise resource planning software system to modernize our supply chain. The system is improving alignment and integration between customer orders and production. Turning now to our Q1 results. Canfor Pulp had an operating income of $6.1 million. The results reflect a solid operating performance, higher production and a corresponding decline in operating costs, along with a weaker Canadian dollar, mitigated the impacts of the COVID-19 pandemic in the latter half of the quarter. We have undertaken a series of measures, including the curtailments I outlined and other measures to mitigate against the deteriorating global economy. In addition, Canfor Pulp's Board of Directors has decided to suspend the quarterly dividend for the foreseeable future as part of our efforts to preserve cash. We are taking these steps to help maintain a healthy balance sheet to ensure strong liquidity going forward. Due to the pandemic and global economic downturn, it is difficult to predict how demand and pricing will be impacted going forward. Global softwood pulp demand is currently projected to be solid through the second quarter of 2020, particularly from China, as that region continues to gradually recover from the pandemic. Containment measures across Western Europe and North America are forecast to weigh on market demand for printing and writing paper. In addition, Canfor continues to produce a segment of pulp that is used to manufacture medical packaging papers and filter papers for masks. For the last several weeks, our organization has been almost exclusively focused on COVID-19. Our top 2 priorities are protecting the health of our employees and executing on our strategy to sustain the business for the long term. In terms of our people, we quickly implemented a COVID-19 action plan, which has continued to evolve. The plan includes implementing physical distancing measures, including at our mills; having as many employees as possible work from home; restricting all travel; implementing cleaning and hand-washing protocols; and implementing self-isolation and quarantine policies. In British Columbia, the pulp and paper industry has been deemed an essential service, which has enabled us to continue operating. We continue to assess our production capacity against overall demand and the available supply of chip residuals. At the end of March, we announced that our Northwood Pulp Mill will be curtailed for 3 weeks beginning April 25. The mill's scheduled maintenance has been delayed to later in the year. The current weakness in lumber markets may result in extended sawmill curtailments in British Columbia, which could result in lower volumes of residual chips available to pulp mills. This could result in additional downtime for Canfor Pulp. This continues to be a very fluid situation, and it's hard to predict the longer-term trends. We are working closely with all levels of government regarding the worker and business support programs they've put in place. The Canadian and B.C. governments continue to refine and expand their programs in an effort to address the areas of greatest need. To help address the current impact to our revenue, we have announced reductions in our capital expenditures. Given the global economic uncertainty, capital spending is estimated to be $25 million, which is $55 million less than was spent in 2019. We have also implemented hiring and salary freezes. As we get through the pandemic, we're starting to give more thought to what our business will look like in the future for more flexible work environments to more virtual connections with colleagues, customers and suppliers, to embracing more efficiencies across the company. Our priority today remains ensuring a stable operating environment in this uncertain world. I believe our new normal will continue to be redefined over the coming months. Before I close, I want to take a moment to welcome Kevin Anderson, who recently joined Canfor Pulp as the Vice President of Operations. Kevin has over 27 years of experience and brings a wealth of experience in both Canadian and international pulp and paper operations. We are very pleased to have Kevin onboard. My thanks on behalf of our executive team, to our Board of Directors and our shareholders for their support and guidance in 2019. I also want to thank again our terrific, dedicated and committed employees for their hard work each and every day, especially under the challenging circumstances we are currently facing. Thank you very much. So Conrad, I'll turn it back to you.

Thank you, Don. This is now an -- point in the meeting to deal with questions received in advance of this meeting. We received one question. And the first question reads, if any other offer is made from Canfor, like the offer made in 2019, which would mean that Canfor Pulp will become a private company, how will the directors protect the interest of Canfor Pulp's shareholders? Don, would you please respond to that for us?

Yes, Conrad. The privatization offer last fall was only for Canfor. As a result, even if Canfor had become a private company, Canfor Pulp would have remained a public company.

Thank you. As there's no further business, I propose that we terminate the meeting. All in favor? Contrary? [Voting]

Carried. I declare the meeting closed, and thank you all for your cooperation. Over.

Thank you, everyone, for joining the call. This concludes the Canfor Pulp AGM. To listen to the Canfor Annual General Meeting, please remain on the line, and it will begin at 1 p.m. Please continue to keep your line muted. Thank you.