Q2 2021 Canfor Pulp Products Inc and Canfor Corp Earnings Call
Good morning, My name is calm and I'll be your conference operator today welcome to the Cat 4 and Canfor pulp second quarter analyst call on.
All lines have been placed on mute to prevent any background noise. During this call Canfor and canfor.
Cam for pulse 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.
I'd now like to turn the meeting over to Mr. Don Kayne, Canfor and Canfor pulp Chief Executive Officer. Please go ahead Mr. King.
Thank you operator, and good morning, everybody.
Thanks for joining the Ken Foreign Canfor pulp Q2, 2021 results conference call I'll make a few comments before I turn things over to Alan.
And Nicole our executive Vice President of Canfor pulp operations, and Chief Financial Officer of Canfor Corporation, and Canfor pulp Alan will provide a more detailed overview of our performance in Q2. In addition to Alan and I. We are joined by Kevin Pankratz, Our senior Vice President of sales and marketing.
I want to begin by acknowledging the.
Extreme wildfire situation, we are currently experiencing and western Canada, both as an industry and can for there is no imminent risk to Ken for infrastructure and our teams and contractors continue to work closely with provincial wildfire services to actively mitigate risks and support wildfire identification response.
And suppression efforts, 1 and thank all of the firefighters and first responders on the ground who are fighting the fires and supporting people who have been forced to evacuate their homes.
I also want to thank our employees for their continued perseverance and resilience as we face the ongoing challenges of the forest fires and supply chain challenges.
And the ongoing COVID-19 pandemic.
And as I noted last quarter Canfor is continuing to make progress on developing make developing a comprehensive sustainability strategy that is aligned with best in class ESG standards and the strategy will be launched in early October along with the release of our 2020 sustainability report our.
Our strategy will further advance our commitment to the health and safety of our people the communities, where we operate and continue producing sustainable low carbon products and our strategy will also push us to reach further and expand the sustainable impact we can have as an organization on global climate change.
We believe that increasing.
Our focus on sustainability will provide more predictable and sustainable earnings and insurer can force long term success.
Turning to our financial results, our lumber business generated record high operating income and revenues of $1 billion and $2.2 billion, respectively, and the second quarter.
Global lumber markets benefited.
From strong demand and limited available supply during the second quarter with prices, reaching record high levels in may.
As COVID-19 restrictions easing and consumer spending habits, returning to pre pandemic levels, we have seen a decline and R&R activity and the summer months contributing to a sharp decline and north American lumber pricing.
And last several weeks notwithstanding the current market volatility U S housing activity remains strong, reflecting a number of demand trends and has that have emerged since the onset of the pandemic combined with an aging housing stock and low existing home inventories following a number of years of modest housing activity.
And over the demand and Asia was strong and the second quarter with significantly higher pricing supported by lean inventories and the supply chain and solid consumption levels.
Our European lumber business continues to perform well with significantly higher sales realizations supporting record high earnings and the second quarter European sales realizations have.
Lumber and to increase and a third quarter supported by the traditional lag and contract pricing and strong market fundamentals in the region.
Turning to our pulp business Canfor pulp reported operating income of $51 million and the second quarter Canfor pulp benefited from improved productivity.
Increased shipments and significantly higher sales realizations following the sharp increase and global pulp prices.
And experienced and the first quarter pulp.
Pulp demand from China has moderated somewhat heading into the third quarter, reflecting elevated inventory levels.
And seasonally slower demand extreme wildfires have significantly impacted.
Acted transportation networks and Western Canada early in the third quarter with limited and intermittent and rail service to and from our lumber and pulp operations as a result of the significant transportation backlog and elevated inventory levels, we announced temporary production curtailments at our sawmills and Western Canada.
Our operations leaders have shown.
Activity and flexibility to develop site specific plans to limit the impact of the curtailments on our employees and we appreciate everyones efforts as we continue to manage the dynamic wildfire season, we.
We anticipate that inventory levels will gradually improve through the balance of the third quarter.
During the second quarter accounts.
<unk> also announced plans to construct a new state of the art Greenfield sawmill and Deridder, Louisiana.
<unk> facility will have an annual production capacity of 250 million board feet and is anticipated to startup and the third quarter of 2022. In addition, canfor repaid $150 million of U S dollar debt and.
Canfor quarter and following major growth in recent years with Canfor, excluding canfor pulp ending the quarter with net cash of $930 million.
Supported by our improved balance sheet, we continue to assess additional internal and external growth initiatives as we look to grow our business on a global basis at the same time, we continue.
And the second being patient and disciplined as we wait for the right opportunities to present themselves I will now turn it over to al and to provide an overview of our financial results.
Thank you Don and good morning, everyone.
The counselor and Canfor pulp quarterly results were released yesterday afternoon, and income together with our overview slide presentation and the Investor Relations.
<unk> search and also the respective company's websites and <unk>.
My comments this morning, I'll speak briefly to quarterly financial highlights a summary of which is included and our overview slide presentation.
Our lumber segment recorded record high operating income of $1 billion for the second quarter of 2021 up almost 400.
From the previous quarter.
<unk> segment results continued to reflect strong global market fundamentals with tight supply and strong demand supporting significant price increases across most grades and jurisdictions earnings were also boosted by a 6% increase and shipments and.
And North America, Western SPF benchmark price.
<unk> claimed to unprecedented record high levels and made before coming off sharply over the balance of the quarter. Nonetheless, Western SPF grew by 4.2 and better price was still up $370 <unk> or 38% from Q1.
Southern yellow pine price this trended similarly to western SPF early in the quarter and while.
While weaker demand thereafter resulted and the average too but for number 2 price being largely unchanged quarter over quarter strong pricing gains for wider width dimension products resulted in a significant increase and average sales realizations for our U S site business.
And we are trend and North American lumber prices has continued.
Into July largely reflecting pared back consumer spending and the R&R sector and to a lesser extent moderated to new home construction activity.
Turning to our European business, our record high earnings and the second quarter reflected continued solid demand and favorable pricing in that region and prices have continued to improve early.
Third quarter.
Due to the traditional lag and contract pricing.
Offshore sales realizations to Asia were also well up in Q2 from Q1 with pricing gains, particularly strong and Japan.
Similar to Europe price for Q3 are anticipated to track higher compared to Q2.
Our pulp business reported operating income of $51 million in the second quarter compared to $5 million and the previous quarter.
Results for the current period reflected significantly higher NPS K pulp unit sales realizations, as well as and 8% increase and shipments in the quarter.
The improved sales realizations will affect reflected.
And the material increase and pulp prices on orders taken in Q1 and shipped in Q2 as well as more stable pricing and the current period pulp.
Pulp unit manufacturing costs were modestly higher than the previous quarter with increased fiber cost.
Offsetting the benefit of improved production and seasonally lower energy costs.
At the end of the second quarter Canfor, excluding canfor pulp had net cash of $930 million.
And available liquidity of approximately $2.2 billion.
Canfor pulp ended the second quarter with net debt of $14 million.
And available liquidity of approximately $133 million.
The unprecedented cash flow levels generated in recent quarters supported a further $150 million U S repayment of can't force term debt and Q2 and taking the total amount of term debt repaid in 2021 to approximately $410 million Canadian and lowering our North America and turn that.
And to $150 million U S.
As Don mentioned during the second quarter, Canfor <unk> plans to invest $160 million U S and the state of the art Greenfield stall mill located in Louisiana with the startup currently anticipated late in the third quarter of 2022.
And we anticipate higher spending.
At <unk> and the capital round, and 2021 with approximately $250 million to $300 million and the lumber segment and approximately $50 million to $70 million for Canfor pulp excluding capitalized major maintenance the range reflects supply chain related risks, mostly around long lead times the majority of the Greenfields.
So on mill spend will occur in 2022.
And while we are comfortable retaining our existing liquidity until attractive opportunities present themselves. We continue to assess various organic and external growth opportunities and plan to continue to repurchase additional shares under our share our share buybacks.
Spending them on an opportunistic basis in the coming quarters and with that Don I'll turn the call back to you alright. Thanks, Alan So operator, I'll turn it back to you and where we'll.
And we'll be pleased to answer questions from analysts.
Questions from financial analysts.
<unk>. Please press star 1 on your telephone keypad, if you're using a speaker phone. Please lithia receiver and then press star 1 if at any time you wish to cancel your question. Please press star followed by 2 please press star 1 now if you have a question there will be a brief pause while participants register for questions.
Bipolar patients.
Okay. Your first question comes from Sean Stewart from TD Securities Shawn. Please go ahead.
Thank you and good morning, everyone.
Don or Kevin.
You guys are closer to the big box retail part of the lumber market.
Thanks <unk>.
I'm wondering if you can give us a sense of your impression on where inventories sit in that channel right now.
How much.
Does that sector and need to churn through in terms of supply before before you you anticipate.
A rebound potentially coming and demand there.
Thanks, Shawn maybe I'll get Kevin real close to that you can make some comments for you sure.
Sean Yes, obviously.
On the home centers that experienced some fairly larger inventories through basically building up since about April ish and.
But the last couple of weeks we've.
And we've seen and improved.
Equally and we anticipate that we can get back to a bit of a more normalized supply demand equation by maybe late September but we think we've got a little bit more work to do still.
Okay. Thanks for that Kevin.
And second question I had was on your Greenfield.
There.
Competitor.
And just announced.
Greenfield project also in Louisiana, and it looks like their budget.
Paucity multiple is about $750 per thousand board feet, which is a premium to what you are targeting can.
Can you remind us if you locked in at that.
Project that you guided to.
And remind us of any incentives you have at the state or local level and and how that factors into the cost economics for the project.
Absolute on liquidity, yes.
Yes so.
The numbers are pretty solid for our salt.
Net bikes on mill pleased about that and to your point, Sean there are incentives there, it's a fairly supportive state and.
And we're very pleased with the engagement, there and kind of get into specific numbers, but.
Pleased with what we think is available and certainly we'll be working hard to get as much as not as soon as possible.
Okay. Thanks Alan.
So last question I have.
European results continue to be really strong for you guys and.
Don can you give us an impression of what the M&A opportunity set looks like in Europe, and how do you weigh expansion opportunities there versus the opportunity set that you might have and.
And then for cell and low growth.
Yes for sure Sean I mean like you have like you mentioned at the outset. There first of all we are very pleased with both the European acquisition and the way that that's performed and continues to perform and more importantly, what the future looks like there.
And in Europe.
When you look on all the markets that they serve and look.
It looks very very positive and.
On the fiber side relatively consistent good good fiber there as well in terms of opportunities there going forward and we certainly are something that we look at.
On a relative basis, and North America, but as we've said.
Or it's really Europe, and the U S. South that we're really focused on and we've been pretty consistent on that for a while.
And so.
And that continues to be the case.
Like Blake It is in North America, as well with Mark to markets doing what they've done.
<unk> are for sure and aggressive right now.
Said before it's something that we're watching but certainly there and we believe there are opportunities there for sure and we'd be looking at them on on probably on a pretty similar basis as we are on the U S.
Thanks for that that's all I have guys. Thanks, alright. Thanks, Thanks John.
Your next question comes from <unk> Patel from.
CIBC. Please go ahead.
Hi, good morning.
And I want to ask you, where do you think BC industry.
Breakeven levels are today and.
Any thoughts about where that kind of might move into by early 2022, just given the duties and going.
Gone up and stumpage changes that you might expect for us on October.
Yes.
For sure Amir I mean, certainly.
You've.
Heard and spoken to us a little bit already in terms of some of the expectations on stumpage increases going forward, but I think if you look at kind of where we're at today.
So our current prices at least for tube for SPF and it's tough to make any kind of income at these levels for sure at these numbers and there's no question about got it.
And with it with a duty as you mentioned and the back later in the back half and and some of the increases that we're seeing and stumpage and October will make it challenging for Q4 for sure if prices were to.
In terms of their app without a doubt.
If you look beyond that though in Q1 of next year, we are looking at material reductions, though and stoppage. So so really it's the next 3 to 6 months here that are potentially be difficult for <unk> to operate at these levels. If the prices were to stay at these levels.
But some improvement hopefully.
Certainly.
Stay walk hospital and abuse earned and the beginning of 2022.
Okay. Thanks, a lot and that's helpful and and what you know can you maybe scale for us what that improvement level might be.
It'll be material for sure I mean, we're looking somewhere and for Q3, given a bit of a relative basis here.
From a Q3, we're looking at probably 30 plus for cubic meter increase and then Q4, probably 10 plus cubic meter increase for Q4 and in Q1, we will see a material reduction from both of those numbers coming down.
Yeah.
Okay. Thanks on that.
That's helpful. And then just last question from me for Kevin.
And you know how much of the Sps.
Mix right now is J grade and.
And I, just ask and it looks like lumber prices there are still holding up quite high relative to North America.
Yes, yes.
It's actually fairly consistent for us it's around that 10% range.
The percentage okay.
That's great so everything on that thanks.
Thanks Robert.
Your next question comes from Mark Wilde from BMO capital markets Mark. Please go ahead.
Good morning, Dan and good morning, Alan Congratulations on a very good quarter.
Thanks, Martin on and Mark good to talk to you.
Just to start off and I wondered if we could talk a little bit about.
So of lumber coming in from Europe.
And your own volume of exports into North America, and then and also what Youre seeing from other producers I noted last night Mercer said that.
39.
And of their second quarter lumber and Europe came to the North American market.
Alright.
Yeah I mean.
Kevin and talk about that but just a couple quick things first of all.
Ourselves, it's pretty consistent and we're not we're not big shippers into into North America for a bunch of reasons and probably the main 1 being is we're not focused on much on commodity products.
<unk>, where most of these specialty products and they go to.
On a lot of more offshore destinations I would say in terms of some of the others or that particular, the ones and central Europe would be more commodity based and so there is and definitely we're seeing some increases and there, but we don't we're not really too concerned about that because at all because we don't really compete with that first of all.
And any measurable way if you compare it also took back 15.20 years ago in Alaska, and we had a big.
Surge of imports, it's still well less and that if you look at that on that basis. So I don't know, Kevin and I mean in terms of our customer base what are what would they say, yes, yes, and Dan you're Bang on with respect to our.
And our European volume and I think another thing to add there.
Mark is that the supply chain to make those changes.
It takes a lot longer than the north American producers like they've got vessels and commitments and so even if they wanted to change its going to take a little while for them to make that a comment that that accommodation but.
Broadly hearing reports of them migrating woods back to feed the shortages within central Europe and into some of the Asian markets, but that might play out later in the year should prices stay the same but.
The only thing I would add and I think when you think about that Mark is it's a good question and I just when we hear about a lot, but if you really think about.
All the manufacturers and Europe other than maybe the ones that are that are and that commodity region of central Europe that were impacted by the beetle most of the rest if not all of the rash and really build alternative markets around the world with a heavy heavy focus on high value products, so, they're and they're mostly contract.
On track that out for longer terms, and what we see and North America as well, so the ability or even a desire to shift markets is very minimal and and.
And so that's the case with us, but we also have.
Well develop relationships with most of the producers over there and I would say that that's certainly what we hear.
And quite a prevalent way.
Okay. That's really helpful and just back on Deridder here real briefly I'm I'm just curious we hear all this talk about.
Contractor shortages equipment being tight.
Tight, but youre getting this up and what seems like pretty.
Impressive time and can you can you help us understand that were you able to just hold a position from that Georgia project a few years ago.
No. We're no doubt we'll have some of the same challenges I mean, we I mentioned I think or Alan did and his.
Getting comments here that we're going to.
And we're planning.
And third quarter early fourth quarter of 2022 to complete everything but then from there. We're looking at 18 to 24 months startup kind of timeframe overall and.
To be determined yet in terms of how that spend will occur over that period, but but certainly what you are hearing from others around challenges labor wise challenge and supply chain wise challenges.
On the lead time wise all of those key areas. We got we're experiencing some of the same challenges and.
Just trying to stay on top of that as best we can to 2.
And to meet some of the deadlines that we stated.
Yes, Dan I'm also just kind of curious I mean, you are building 250 million board feet, which seems to be kind of right and the sweet.
And for most mills that are being built and the south but I noticed that roseburg announcement, and North Carolina is 400 million board feet I mean, that's.
Maybe the biggest sawmill and the southern U S or are we seeing kind of a you think over time kind of a step change.
And kind of size and productivity and the south because typically.
Spot and way behind what you have and Western Canada.
Yes for sure and I think first of all I mean the.
250 number that you allude to I think Thats, a fair comment for sure and that's come up a long ways. I mean, if you go back as you would know mark several years ago that probably the number is closer to a 100.150 at the most 250 <unk> step up in terms.
They'd step up I mean, I can't I can't comment at all in terms of Roseburg on me and clearly they must have they would have done a lot of due diligence there and had the fiber and had the labor which are the 2 biggest issues there and not to steal so much for us we like that 250 number I mean, we do and we think it gives us a lot of flexibility and and we can.
Of that net of manage some of the fiber resource as well.
Better at those numbers, but I don't know the circumstances on all that Rosemary and made those decisions but.
Ourselves, we haven't really contemplated anything materially larger than a 250 million foot mill sort of thing.
And we're able and then finally, Alan can you just give us a little bit of help on the pulp side and that's canfor pulp and thinking about the impact of maybe lower shipments as well as that 47000 tons of production out in the third quarter and what the kind of financial impact may be separate from price.
And certainly give my best Mark and I think.
In terms of the supply chain and transportation shipments and so on.
Q2 things East and then they tightened up and of course some of those challenges of spills over to July.
And I think you are alluding to so clearly we've got a few challenges ahead of us I think.
Okay and are starting to improve and notwithstanding the risk from the wildfires. So we're hoping that shipped and certainly will stay at similar levels to Q2 if things.
Things were guidance, maybe a little bit higher, but clearly we'll have to wait and see.
In terms of production.
And that you referred to some of that clearly as planned and.
And in terms.
Things on and this downtime obviously some of that was compliant.
So that will that will have an effect for sure but.
<unk> that we'll be able to have.
A strong.
Production after we get up and running particularly on the north which site and remark so.
Other than what we've kind of guided and the press release I think you've kind of got on in terms of cost.
And nothing more than what you would typically expect from this type of upset and maintenance turnaround.
Okay. It sounds good and Alan I'll turn it over.
Thanks Mark.
Your next question comes from Paul Quinn from RBC capital markets. Paul. Please go ahead.
Yes.
And kind of much good morning, guys.
On the call.
And just maybe to start on that pulp side.
We're seeing higher global inventories, China prices rolling over what do you expect for the balance of the year overall.
Sure Paul.
Sure if we're seeing prices stabilize.
Thanks, Kevin.
And for basically the back part of here in the summer months, and then we do see a little bit of strength in the in the back half of the year is what our outlook is pulp.
Okay, and then specifically at Northwood.
<unk> had some issues with RMB 5 that seems to be behind and maybe you could comment on that but this quarter you.
Is that I guess your issues how material are those.
Yes and terms.
Recovery boiler performance, we're very pleased with it.
Paul no issues at all they're running very well and so this suggests they're upset that we had at the beginning of this quarter. It didn't impact Q2, but at the beginning of this quarter is something that.
We've got folks focused.
Focus on but.
I would I would classify it as a.
Not an insignificant operational offset the 1 that we can quickly recover from and we're hoping that things will be up and running here and.
But a weeks' time and certainly our targets so nothing to be unduly alarmed, but it would be.
<unk>.
And my view on that 1.
Okay.
<unk> had some so that that 22, capex budget that $50 million to $70 million for the pulp assets what percentage of that or how much is maintenance and how much is margin enhancing projects.
Yes and.
Terms of the upper range I would say, it's close to 50.50.
Paul and.
It's.
And then so obviously if.
We were unsuccessful and spending the full 70 this year it will be a bit higher on the maintenance side given that that's essential.
Maintenance of business spend.
Okay.
And then I guess flip it over to.
And North American lumber markets.
Hopefully we've seen a bottom.
And just just thinking about how you see operating and BC and a long term basis I mean, obviously, we've got a premier here and that's looking for more investment and you said something that cant force willing to do given that given the cost structure that we see and NBC.
Yes, Thanks, Paul and I think certainly BCS.
Here actually performed pretty well here at Alaska last 18 months to say, the least or 12 months anyway. I mean, if you look forward I think what our focus has been and will continue to be is the well.
Being in the Kootenay, we like the area. It's a good area. We've got lots of fiber, we got a lot on the labor market there is pretty decent for sure.
Access to all the markets.
<unk> market access install and so we like the Kootenay has and will be there and we'll make sure. Those mills are capitalized to the degree they need to be we also like the peace region, where we are as you know with forcing drawn and shuttling and we're not the only game in town, but we're 1 of the only ones and those mills, we've invested, particularly unfortunately, John and but Theres lots.
In terms of our up there as well and we like those areas. So we're focused there as well and will continue to capitalize those mills appropriately as well and then the central interior.
<unk> seen without peer and made some decisions elsewhere as well.
But the ones that we have there right now we certainly believe that those are viable operations as well of course.
So 5 and that will continue to capitalize them as we need to to ensure that they are competitive on a worldwide basis and.
I think that's pretty consistent with what we've said we know that we're down a long way from where we are but we think that the footprint that we that we are getting close to here is certainly can be competitive on a long term basis.
Okay, and then and just lastly, if I take a look at camp where share price performance over the year, I mean use lag and everybody else and the group just wondering what investors are missing or.
Other things that day.
Guys can do on the management side to improve that performance.
Alright, and try that out.
Yes, it's.
It's a fair question, Paul I mean, it's.
Non <unk>, so youll appreciate that and I do think that.
Our diversification strategy will become increasingly evident here as we go through the year, particularly in Q3 bearing in mind, what's happening and I think our exposure.
To Europe and other places.
Yield dividends there.
It's hard to speculate on all of the factors that.
And it may be may be impacting share price relative to other companies.
Alright, and I hope you're right best of luck guys. Thanks.
Thank you.
There are no further questions I'll turn it over to dawn.
And on Kane for closing comments go ahead, Mr. Kayne.
Alright, thanks, operator, and and <unk>.
Thanks to all of you that participated in the call. This morning, we appreciate all your support and on.
Enjoy the rest of the summer and we'll look forward to talking to you at.
And the end of the third quarter.
Ladies and gentlemen.
Ladies and gentlemen.
This concludes your conference call for today.
Thank you for participating and ask that you. Please disconnect your lines.