Q3 2019 Earnings Call
Ken for certainly if I could get your first and last name. Please.
Sure. It's Rachel are a C. H T O last name, it's Smits S.M.I.T.H.
And our you and analysts today.
Yes.
And.
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Your company name as well please.
Era A.I.E.R.A.
Okay, Great Oh, please see when you'll be on hold to music until it begins one moment.
Okay. Thank you.
You're welcome.
The conference is now being recorded.
Good morning, ladies and gentlemen, and welcome to the Canfora can for pulp third quarter analyst call.
Recording and transcript off the call will be available on can force website. During this call can for and cancel pulps Chief Financial officer, we'll 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 and I would like to turn the meeting over to Mr., Don King Canfora and Canfora Pulps, Chief Executive Officer. Please go ahead Mr. Kane.
Thanks, very much operator, a good morning, everyone and thank you for joining the CAD four and can't work all quarter. Three 2019 results conference call I'll make a few comments before I turn things over to Allen Nicholson, Our executive Vice President of Camper pulp operations, and Chief Financial Officer of Kemper Corporation, and Ken or Paul Allen will provide a more detailed overview.
You have our performance in quarter, three joining Alan and I today, our Kevin Pankratz, our senior Vice President of sales and marketing students Stephen Mackie, Our senior Vice President of Canadian operations, and Brian you and our vice president of sales and marketing.
As everybody is aware in August great Pacific meeting Nonbinding proposal to acquire all the outstanding common shares of Canaccord Canfor's Board of Directors has formed a special committee of independent directors to review the offer in consultation with its legal and financial advisors.
The decision to proceed or not proceed with the proposal is in the hands of the special Committee and ultimately the shareholders if recommended by the Special Committee.
Well that process is underway, we continue to focus on operating our business as usual and unfortunately do not have additional information in regard to timing or outcome. At this time as such we cannot speculate on either the timing or the decision to proceed for not during this call as I'm sure you all will understand.
Moving to our specific Q3 results the quarter was challenging for both our pulp and lumber businesses, resulting in us having to make very difficult decisions that involve temporary and permanent curtailments curtailments in British Columbia.
On the pub side, we took phase summer curtailments at our Intercon Northwood in Prince George MBS came mills as well as at RBC CMP Mill and Taylor, while these curtailments are difficult. We believe they will support a quicker market recovery. In addition to solidifying our chip inventory over the winter months.
On the lumber side, we made the very difficult decision in July to indefinitely curtail our Mckenzie sawmill.
At the same time, we also announced the permanent elimination of one ship at our I O PR mill, and we announced temporary sawmill curtailments, mostly in July and September .
We have not taken any of these curtailments decisions lightly however, they reflect the very challenging lumber market conditions in combination with high fiber costs in British Columbia on behalf of myself and the entire executive team I want our employees to know that we deeply regret the very real impacts. These decisions have had on them our contract.
And the local communities.
With the exception of Mckenzie all of our sawmills and pulp Mills are currently operating.
Now I'll go into a bit more detail on each of our business lines, beginning with our pulp business. We were challenged with weak global pulp market conditions significant market related downtime and fiber supply issues in British Columbia.
This was a third straight quarter of weak demand combined with excess inventory in the supply chain, most notably in China, and Europe , which significantly impacted global pulp prices.
The positive side energy revenues increased in Q3, largely driven by northwards new turbo generator condensing turbine and higher energy prices looking forward is expected at global pulp pricing will gradually improve in Q4 and into 2020 as global inventories will come back into balance.
Moving to lumber in June we announced a permanent closure of our Bhavan be mill and subsequent agreement with inter four to sell them the associated tenure for $60 million.
The tenure transfer is subject to approval by the minister of for US and we continue to work through that process. We anticipate the sale will close in Q4.
SPF pricing continued to be challenging in Q3 with excessive inventory impacting overall price levels, while several industry curtailment announcements were made over the last six to nine months. We believe we are just now seeing the impact of these curtailments in the market.
Uhhuh housing starts increased modestly over the quarter and we anticipate that that trend will continue through the balance of the year.
Lumber prices in Asia, particularly in Japan are expected to return to more normalized levels in Q4.
Our lumber operations in Alberta, the U.S, so and Europe remains strong.
Price of southern yellow pine remain steady over the quarter, although our sales were slightly lower than last quarter.
Our European lumber business saw a tempered pricing in the quarter as result of global market weakness, but was somewhat insulated from broader pricing declines due to the relatively higher valued customized products that meet a produces this pricing pressure is expected to continue through the balance of the year and should stabilize and early plenty as global.
Into our levels continue to come back into balance we remain focused on continuing to reduce our debt levels and continue to strengthen our balance sheet.
I'll now turn it over to Alan to provide an overview of our financial results well, thanks, Don and good morning, everyone. As Don mentioned that can foreign capital of pulp quarterly results were released yesterday afternoon.
These results come together with their quarterly overview slide presentation in Investor Relations section of the respective company's website.
In my comments this morning, I'll respond a little on a number of dawns points and also speak specifically to several quarterly financial highlights.
Our lumber segment reported an operating loss of $70 million for Q3 compared to a loss of $61 million reported for the previous quarter results included a net due to expense at $54 million restructuring costs of $6 million 5 million dollar reversal of previously recorded inventory right time provision.
After adjusting for these items the lumber operating loss was $16 million.
Lumber segment results continued to reflect the ongoing weakness in western SPF lumber prices high Judy's, an elevated log costs in British Columbia as Don mentioned counted for took significant market related curtailments and capacity reductions in Q3, and that's a result shipments were down by 16% compared to Q2, while over.
Overall sales revenue declined 12%.
Average western SBS sales realizations, so a modest increase from the prior quarter, largely reflecting a small increase and benchmark prices on our sales mix.
For our us size business average sales realizations were slightly lower than the previous quarter as a modest improvement in the two by board number two price was more than offset by lower prices are wider with dimensions.
European sales realizations saw small decrease with the regions higher value sales mix, partially offsetting a decline in Europe and benchmark prices.
Our pulp and paper business reported an operating loss of $44 million for the third quarter done $62 million from the $18 million.
Perfect reported for the second quarter.
The rocks reflect that the very weak global pulp market conditions at Dawn mentioned as well as a significant fiber supply disruptions from industrywide sawmill curtailments in the BC interior over the summer months.
Average sales realizations were well down compared to the second quarter, reflecting this backdrop.
Pulp production was down 42% from the previous quarter, principally reflecting the impact of 135000 tons of market related downtime.
Hope unit manufacturing costs were significantly higher in the current quarter, largely due to that curtailment and to a lesser extent the advancing off some planned maintenance work during the downtime.
Fiber costs showed a small decrease quarter over quarter with the impact of lower market prices for saw mill residual chips tied to market pulp prices, helping to neutralize the effect of an increased percentage of higher cost total kits.
Capital spending for the third quarter totaled approximately $76 million and included approximately $50 million in lumber business and 26 million in town Hall.
For 2019, we are forecasting a total capital spend of $180 million on any million dollars for canfora can count or pulp respectively.
We currently anticipate much lower capital spending in 2020, following the completion of our US 125 million dollar organic growth program and several other major upgrades by early 2020, and our strong focus on debt reduction.
During the third quarter can for increased its operating line of credit from $450 million to 550 million maturing in January 2024. In addition, count for pulp extended its operating line of credit 320 April 2023, and added a new through year 50 million dollar term loan expiring September twond.
The 22.
At the end of the third quarter can four excluding comp or Paul at net debt of approximately $1 billion and a favorable liquidity of just over $300 million.
For pulp and as the third quarter with net debt of approximately $30 million with a favorable liquidity at just under 100 million and lastly can pour pokes directors approved the continuance of quarterly dividends of six and a quarter cents per share for the for the third quarter Thats gone I'll turn the call back over.
Thanks, Alan Operator, we're now ready to take.
Goals from from.
Battles. Thank you.
Thank you, Sir ladies and gentlemen, we will now take questions from financial analysts. If you do have a question. Please press star on your telephone keypad saw one my apologies if you're using a speaker phone. We do Africa. Please lift your receiver and then press star one if at any time you wish to cancel your question. Please press star too.
Please go ahead and press Star one now if you have a question.
And your first question will be from Mark Wilde at BMO. Please go ahead.
Good morning, Don Good morning, Alan.
Return on.
Don I know you can't really say much about this.
Pattison bit I'm, just curious if it is possible.
But any color around the selection of Green Hill is the advisor.
I've been doing the SEC covering the sector for about 30 years, they have not ever been a real active player real knowledgeable player around this sector. So I'm just curious about how that decision might have been made.
Yes, I guess first of all I can't say much at all Mark as you probably understand as I mentioned earlier I just know that they went through a process the committee and.
And I wasn't of all net and so they chose chose greenhill and that's that's all I can really say.
Okay, Alright fair enough I wasn't sure you're really.
Which is much.
Okay.
Let's turn to the business.
First of all I wondered if you could.
Talk about just sort of lumber demand.
Moment, and how you guys see kind of lumber inventories in the channel.
Yes, Okay, I mean, I'll talk a bit about that at a high level and turn it over to Kevin who is closer to it a lot closer to our actually than I am but I think I think you know like everybody else. We've been over the last few quarters, you're concerned as to where that was headed but it does and it because it's been.
Several false starts over the last probably couple of three quarters, but we're seeing.
And partly because inventory levels, we think are starting to decline a bit more rapidly now it's taken some time.
Due to these announcements that were made six or nine months ago, it's taken a lot longer to see that in the supply chain that we would have we would have anticipated and so but we do think now we're starting to see the result of that and so that combined with pretty decent housing starts and permits in North America.
Of an improvement in China around inventory levels and in Japan with just over there recently it seems to be pretty good. So between all those things demand wise looks it's not it's not a big increase but it's at least is sort of I think has started to at least look a little bit more positive and supply is supply we're starting to the.
Tory started to have an impact on that so that's kind of so overall right now going forward I think we would see things probably looking slightly better over the next couple of quarters Kevin.
Yes, it over there recently yourself in China in particular, yes, so we're seeing.
Some good inventory.
Depletion that the major ports and to your point there Don.
We are starting to see a little bit more tension in the market compared to what we have seen earlier in the year, which which I think is disposing for little bit more of a positive uptake for the balance of the year in it.
Okay.
Don I wondered if we could just talk for a minute about this European spruce Beatle.
And the impact of that on the Vito business over in Europe , and then also sort of any ripples into that.
Southeast Us lumber operations on also potentially into your Chinese export markets.
Yes for sure.
Well I give me a state us and start that the beetle issues that thats being faced in Europe right now we're probably.
More severe than most people probably have a had expected them to beat and so in Germany, Austria and certainly all of Chuck is pretty serious right and so as result of that Theres a lot along a lot of the fiber. There has been has been in will be degraded quite significantly which is resulting in more commodity products being produced.
For some of that is going into North America, obviously, some of that's going into China, and so forth and having some impact if you look at the North America, though particularly compared to where it was you know 10 15 years ago. When we are importing in the past nowhere near the same amount, we still don't see anywhere near the same amount of volume coming into North America.
That we saw back then and we don't neither do we expect that to happen either.
Theres been a bit more at China, too, but it's even there it's not really have a significant impact on our business for sure in terms of any good question. How does it look how is that going to impact us in Sweden actually I mean, the one thing you know as we and we went through exactly the same thing on our own and Weve got into this or that the.
Pine below in British Columbia.
Well, we have saws pretty quickly an immediate reduction at the amount of prime percentage and premium products, that's exactly what's going to happen in Europe , as well who in the past has been pretty significant hi, hi.
High value product producers in Europe , so in Sweden, because we don't have the beetle or is the 1% or less there.
Mostly probably less we actually think without reduction in high value products coming out of Austria, Germany in check is actually going to benefit us up there in Sweden, because they don't have to deal with that and they do mostly make high value product. So it actually it for us at least will have we think of a positive impact on our Swedish returns on a long.
Term basis.
Okay, and just one more for me.
Wondered Alan.
We look in sort of the first three quarters of the shoot out here with that with.
The numbers have been coming down steadily.
I wondered if you guys can just address whether this change your view of earnings stability and beta and also in the third quarter. If you can just help us understand how much of the decline was kind of price versus the summer outages.
Yes, I hopefully can hopefully a little bit that are mark in terms of your first point I think clearly as Don guided there is there is somewhat dime pressure downward pressure, there, but I think what comforted I think with her well those businesses are running we are seeing log costs respond accordingly, and so.
Thats clearly going to be emitting mitigating impact, but I think probably appropriate caution for some conservatism in your numbers, but I think were comforted by some of the mitigating factors there as well and in terms of.
In terms of the third quarter as I think we disclosed in our press release that needed to take a months downtime and clearly that weighed on the shipments and the cost and so on so.
Just one just has to take that into kind, but our as I mentioned earlier, our sales mix and some of what dawn outlines clearly, helping us mitigate some of the impacts from the commodity pricing movements in Europe today.
Okay, I'll turn it over thanks.
Thanks Mark.
Thank you next question will be from Sean Stewart at TD Securities. Please go ahead.
Thanks, Good morning, everyone.
Few questions.
First on the the timber sale to enter for you guys indicated you still expect or you do expect to Q4 close this has dragged on little bit longer than initially thought can you give us a little bit more detail on the.
The process with the government approval and.
What have been the hang ups and what gives you confidence that this will close in the fourth quarter.
Yes, I think first of all we're confident that a will close in the first quarter us our fourth quarter, sorry say the right away.
Thanks.
We expect to this thing to maybe close.
Maybe a month or two quicker than it has clearly us being the first one is to really go through this processors as you go through it there's some things that you learn and things that maybe take a bit longer than you thought, perhaps but but we really at the end of the day. So for us kind of gone as we expected I don't think we've had any major surprises at all some areas, we probably had a little more work into it and so forth but for the most.
I think is kinda, it's just other than taking a bit longer. It's we haven't we haven't had any real big materials prices whatsoever hubs, and we and as a set of the start we do expect it to close in Q4.
Okay. Thanks for that and then a question on the pulp operations.
Post the the heavy downtime you heading in Q3.
Can you give us an idea of what.
What percent of the fiber will be tied to whole large shipping.
On a normalized run rate going forward and an update on the cost differential between whole lot shipping and residual chips right now.
Yes, I know it's a good question.
That's gone so I think clearly what I would say is that the auctions as tough as they were in the third quarter have positioned us well here to run through the winter months and we're in a much much better position.
Early how to take response that we did.
In terms of your question or on a whole lot Chipping I would say historically, it's been a lot lower than the is today, but looking forward I think you could use something like 30% or third thats what were kind of.
Anticipating something like that.
And the cost differential between that and and residual chips right now well, yes. So it really depends on many on many factors and clearly were motivated to apply a low cost discipline, there as well, but it's a fair statement to say it comes out of healthy premium to us on the residual today.
No no details on that Alan.
That's as much as you're prepared to not many more than I can share with you know not on the call.
Okay.
That's all I have for now thanks, guys.
Hello.
Thank you next question will be from Paul Quinn RBC. Please go ahead.
Thanks, very much on gas and first question just maybe just on the log cost side.
What youre seeing whether you've seen any place in the U.S. So.
I suspect.
Be these costs are coming down slightly and then.
Alberta versus BC.
Even one of your given an update it across all the regions sure Yeah. Good morning call.
So I think if I start in BC, Paul and maybe a contrast against Albert I mean, clearly, there's a stumpage differential between BC and Alberta, So we enjoy that benefit in our Albert operations, you're aware, obviously that July 1st Stumpage increase was pretty significant in British Columbia, lower pleased with some of the actions we've taken internally to mitigate.
Those impacts so relatively speaking quarter over quarter pretty flat long cost and starting to see some relief in British Columbia on pressure on purchase wood prices in bidding behavior out there in terms of VCTS sales, which were seeing a little bit of benefit from store expecting relatively flat.
Log cost in BC.
And similar situation in Alberta, Alberta will be pushed up a little bit as market improves as Kevin and on the indicated earlier the guys have touched on Vito, we're seeing corresponding reduction in log cost to reflect market conditions in the downward pricing pressure that Don indicated so in Europe , we're pretty pleased with the responsiveness of the market and the us out is.
Is really quite flat there is an abundance of timber high quality fiber available there so flat so.
Okay, and just maybe just follow up on that BC, you're expecting log cost to be flat going forward, but my understanding was quite a bit of logging in front of the July for stumped increase so isn't that can be if you know that that increase will be effective on all the stuff that you are logging.
Through the balance of the hearing in the first half of next year once and then increase your overall costs.
Yeah, we are expecting add there is some upward pressure there for sure Paul.
So were pretty good shape with healthy inventories, obviously, we've taken some pretty significant downtime and capacity reductions across our operations and and taking lots of steps to add to reduce some of the high cost fiber that we've gotten hardware mills. So we're confident we can offset to a large degree. So I think I would guide to relatively flat quarter over quarter log costs.
Okay, and then maybe just flipping over to the pulled side pulp costs were up significantly quarter over quarter, a lot of big attributed to downtime just wondering how much like how much can we put on that that.
Market related maintenance downtime in terms of the costs increased quarter over quarter.
No no totally fair question, Paul I mean, I think honestly the lions share of that Delta was I think the maintenance bounce and that financing of the plan maintenance work was a smaller percentage just to put it in context, but seven or $8 million, but I think the the the the principal reason clearly was tight.
To the curtailed.
Okay, and just while ago.
It sounds like you guys are more bullish in most other people are seeing a zero on coal turnaround here are you expecting a gradual increase in pricing in Q4, what what gives you that low at confidence.
Yes, so I'll, maybe pass it over to Brian to speak to that but I think in our minds. We didnt think we're being extremely positive by by talking about modest recovery fall, but I'll, maybe just ask.
Brian to speak a little bit more to what we're seeing in the market, where we're expecting prices to trends here sure I can speak about Alan good morning, Paul.
We're actually seeing stabilization in the market for sure with the price corrections over the summer, we see an uptick in Chinese demand.
Paperboard tissue producers to these guys are on making solid profits given the lower fiber costs and they're relatively stable paperboard tissue prices. We are in fact nationally see some modest improvements going into fourth quarter in Chinese pricing.
What we are keeping a close eye on however are the hardwood inventories for sure this needs to get imbalance before we see any significant improvement in pulp price.
Okay, great. Thanks for the color.
Good luck going forward thanks, guys.
Thanks, Jeff. Thank you next season, they follow up from Mark Wilde at the pump. Please go ahead.
Yes.
Back to these log costs because on page three of they release.
You talk about the increase in stumpage NBC and there's a line in here that says this will materially impact BC log costs in the upcoming quarters.
So I just wondered that you can kind of square that with what we just heard about.
Stable log costs.
Sure Mark will get Stephen to comment on that yeah, sure Mark I think that while while we certainly do expect pressure.
On stumpage and again back to that July 1st Stumpage update and increase and and we'll also see some further upward pressure as a result of improving market conditions and am be updates that will will push stumpage up I guess, it's a bit of a function of some of the actions, we're taking internally to mitigate those costs than really that great effort by our teams across the board.
See business to be responsive to the economic times, we're facing and in a lot of good work, so I'm, probably a little bit more optimistic on what we're able to achieved there to try to try to mitigate those cost increases.
Okay.
Any examples of things you can do.
I'm not probably not a lot of stuff that I mean did disclose here mark, but I think fair to say, obviously, the capacity reductions across BC, our own and others temporary and permanent or having an impact on the purchase would market and we're seeing a change in bidding behavior that that is helping offset some of those high cost fiber okay.
It's helpful.
Don any thoughts on just sort of the.
Potential for some rightsizing and kind of western Canadian pulp capacity, just given the fiber constraints.
Yes.
Hard to say at this stage, yet, but I mean, just like we've seen happened on the lumber side I mean, ultimately, there's there's probably going to be some APAC down the road yet.
We're certainly looking at that aware of that and watching that carefully ourselves, but ours as Alan mentioned I believe in his comments I mean, we think with the work that we've been doing on on our on our ship supply in our raw material supply for the pulp mills.
At least for an hour. We think we can certainly move forward with of production levels that we have today.
Okay. That's that's helpful.
Thats It for me.
Okay, well, thanks, Mark good to talk to you.
Thank you.
Ladies and gentlemen at this time, we have no further questions. So it does conclude your conference call for today, we would like to thank you for attending and asset you. Please disconnect your lines enjoy view they.
Thanks, operator, and look forward to talking to you also.
Thank you Sir.