Q3 2021 Canfor Corp and Canfor Pulp Products Inc Earnings Call
Good morning, My name is Sylvia and I will be your conference operator today.
Welcome to the Canfor and Canfor pulp third quarter analyst call all lines have been placed on mute to prevent any background noise.
This call Canfor and Canfor pulp 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 would like to turn the meeting over to Mr. Don Kayne, Canfor and Canfor pulp Chief Executive Officer. Please go ahead Sir.
Alright, Thanks, Silvia and good morning, everyone.
For joining the Canfor and Canfor pulp Q3, 2021 results conference call I will make a few comments before I turn things over to Pat Elliott, Our Chief Financial Officer of Canfor Corporation, and Canfor pulp and our senior Vice President of sustainability that will provide a more detailed overview of our performance in Q3. In addition to Pat Knight.
We are joined by Kevin Pankratz, our senior Vice President of sales and marketing.
Before talking about our financial results I want to start by discussing discussing the important changes we made to our senior leadership team earlier this month.
These changes further positioning <unk> for long term success and diversification that has taken on the role of CFO. In addition to his responsibility as a senior vice president of sustainability, given patch long history with cat four and has over 10 years of senior leadership with the finance team. We are very pleased to have Pat in this role.
In addition, we have formed a new business unit for bio based solutions and bio innovation, which is being led by Alan Nicholl, who has taken on the position of executive Vice President Bio based solutions and pulp operations.
Our team is focused on unlocking the full value of each log by diversifying our business into bio based solutions. We are very pleased to have our lead the development of this business unit for CAD for.
Alice previous experience as our CFO will ensure we bring a disciplined approach to developing the bio based solutions that represent the greatest percent potential for sustainable return on investments we make in this area.
Alan and patch rules are also both integral to CAD for sustainability journey.
Over the last year, we have been doing significant work across the business to develop our comprehensive sustainability strategy that was launched at the beginning of October we have a bold ambition to become a global leader in sustainability, we defined our strategy around three focus areas people planet and products.
Sustainability isn't a new priority for us we're very proud of the positive impact of our sustainability efforts have had so far but we know we can do a lot more.
We have focused our initial work on setting ambitious goals and comprehensive targets for the areas of safety health and wellness inclusion and diversity indigenous relations and sustainable forestry.
In Q1, 2022, we'll be announcing our climate change targets, our business is facing tremendous growth opportunities as the green carbon storing benefits of wood products is increasingly recognized and valued around the world.
We realize we've had we have an opportunity to forge new paths and become leaders not simply as a producer of natural resource solutions, but as a producer of climate change solutions and we're excited to take on this challenge turning to our financial results. Our lumber business reported operating income of $326 million in the third quarter.
<unk> supported by record high earnings in Europe.
Despite lower shipments associated with seasonal downtime European results benefited from a significant increase in sales realizations in the third quarter, reflecting continued strong demand in that region as well as the lag in contract pricing.
In North America sales realizations declined sharply in the third quarter, reflecting a significant decrease in benchmark lumber prices following record high pricing in quarter, two notwithstanding the impact of lower commodity benchmark prices and ongoing supply chain challenges our sales realizations were supported by significantly.
Higher offshore pricing, particularly in Japan and European pricing.
As a result of the significant supply chain challenges and market uncertainty, we implemented reduced operating schedules at RPC saw mills with the exception of Wynwood at the end at the end of August we recognize the impact that volatile lumber markets have on our employees on our contractors and on our communities, we have been working with them to.
The negative impacts we appreciate the commitment from labor leaders and many of our indigenous partners to work together and find creative solutions that are mutually beneficial.
<unk> continues to be a challenging jurisdiction to operate in with a smaller fiber basket in the post mountain beetle mountain pine beetle era, and we continue to be concerned about the overall competitiveness within the forest sector of BC.
We are focused on developing a strong and sustainable primary industry. So that it will enable us to continue to support value added producers small business pellet plants in pulp mills.
To name just a few examples it is important for industry and government to work together in partnership with all groups to developing modern sustainable and competitive global industry that can support everyone's interests.
While we continue to operate on a reduced basis in Western Canada. We are encouraged by underlying demand fundamentals with solid U S housing activity steadily improving R&R demand supporting increased pricing in recent weeks.
Turning to our pulp business Canfor pulp reported operating income of $16 million in the <unk>.
Third quarter results in our pulp business reflected the impact of scheduled and unscheduled downtime as well as global supply chain challenges, which resulted in reduced shipments in the third quarter.
While global pulp pricing declined in the third quarter Canfor pulp benefited from slightly higher sales realizations, reflecting timing of shipments and a weaker Canadian dollar.
Global pulp pricing has continued to decline heading into the fourth quarter, reflecting softening demand in Asia elevated global inventories and ongoing logistic constraints notwithstanding current market uncertainty canfor pulp is anticipated to benefit from increased production in Q4, following recent scheduled and unscheduled downtime.
Our greenfield sawmill in Louisiana is progressing as scheduled with startup anticipated late next year, we continue to assess additional internal and external opportunities to grow our business on a global basis. Although we are prepared to remain patient and disciplined for the right opportunities that meet our strategic and financial criteria.
I will now turn it over to Pat to provide an overview of our financial results.
Thank you Donna and good morning, everyone at the Cannes Foreign Canfor pulp quarterly results were released yesterday afternoon and come together with our overview slide presentation in the Investor Relations section of the respective company's websites.
My comments this morning, I'll briefly speak to our quarterly financial highlights a brief summary of which is included in our overview slide presentation.
Our lumber segment reported operating income of $326 million in the third quarter, which included a 27 million non cash expense associated with antidumping accrual rate adjustments in Q3 and prior quarters.
Our results were down from the record high earnings reported in Q2, our high value strategy and regional diversification supported our results in the quarter or.
Our lumber segment benefited from record high earnings in Europe, as improved sales realizations more than offset the impact of seasonally lower production and moderately higher log costs.
Operating income from our European operations contributed over 50% of our lumber segment earnings in the third quarter in.
In North America, while sales realizations benefited from strong offshore pricing results generally reflected the sharp decline in north American lumber pricing as well as the impact of reduced production.
British Columbia log costs increased significantly in the third quarter with a further increase expected in Q4 at both reflecting the lag in market based stumpage adjustments and the very high lumber prices seen in the summer of this year looking ahead to 2022, we anticipate a material reduction in BC stumpage effective from January one.
Log costs in our other jurisdictions saw a more modest log increases are.
Our pulp business reported operating income of $60 million in the third quarter compared to $51 million in the previous quarter results for the current quarter reflected significantly lower pulp shipments as Don has highlighted offset in part by modestly higher sales realizations.
Capital additions were approximately $130 million in the third quarter, including approximately $30 million on our Greenfield saw mill, which is progressing as schedule.
We currently anticipate that 2021 capital spend to be approximately $330 million in the lumber segment and $50 million to $60 million for Canfor pulp excluding capitalized major maintenance taking.
Taking account of our remaining greenfield spend the RBS biofuel investment and planned organic and sustaining capital. Our preliminary 2022, Capex forecast is $450 million to $500 million inclusive of pulp.
As Dawn mentioned, we continue to review various organic and external growth opportunities and currently anticipate increased capital spend in 2022 as I just mentioned, including the remaining greenfield sand and contribution to the new biofuel joint venture. In addition, we will continue to assess further the repurchase of shares under our share buyback program on an opportunistic basis.
And with that Don I'll turn the call back over to you alright. Thanks excuse me thanks Pat.
Operator, we will turn it back to you and we will take questions from analysts certainly Sir ladies and gentlemen, as stated we will now take questions from financial analysts. If you have a question. Please press star one on your telephone keypad and if you're using a speaker phone. Please lift your receiver and then press star one if at any time.
Wish to cancel your question. Please press Star two please press star one now if you do have any questions.
Thank you for your patience.
And your first question will be from Sean Stewart at TD Securities. Please go ahead Sean.
Thank you and good morning, everyone.
First of all congrats to two patents are very happy to see the <unk>.
The announcement and best of luck going forward.
Thanks, Sean.
I'll start with with Europe really strong results there.
Very good margins.
I'm, hoping you can give some context on the relative strength youre seeing in that market. There was some reference in the MD&A J U K being especially strong can you give us some context.
On the sales mix from Europe, this quarter and there was reference to think softening a little bit in Q4.
Any parameters you can give us on the magnitude of that that market weakness youre seeing in the current quarter.
Yes for sure Sean will do my best year, we'll do our best here I think first of all like you mentioned like Europe was was good positive quarter for us for sure and a lot of other things that we anticipated kind of came through again in Q Q3.
In terms of the sales distribution that I think you're speaking more directly about I mean, clearly the UK is an important market for us.
Sweden is for.
I'll be in the order of magnitude 25, 30% of our business and it continues to be strong like a lot of the areas that we've been shipping two out of the outerwear Swedish mills I think.
The area, though similar to North America that that's been continues to be particularly solid is on the R&R side.
At least it has been through through Q3.
We look as we look forward into Q4 I would like you mentioned there'll be certainly be probably some minor minor reductions in returns through Q4, it looks pretty good on a short term basis year over over the last four to six weeks, so looks still pretty strong for sure.
Partly because of the lag as you know in European pricing right, but anyway we.
We're still despite the fact that it'll be it'll come off to some degree we're still pretty positive overall on the European.
European customer base that we have.
Okay, Thanks for that detail Don.
Also have a question on the RBS joint venture or encourage to see that moving forward can.
Can you give any detail on can force spends for this project.
Any context on project economics, I assume that.
This is a small scale.
Art with but are there any details you can give us there.
Yes, I guess, maybe the one TD detail that youre, probably interested and Sean has a net initial about $25 million on a net basis. After some of the some of the subsidies and so forth.
And will that be financed off canfor pulp balance sheet.
Okay.
One last question for now you guys have been less aggressive on share buybacks and then your comps and you've clearly got it.
<unk> Capex spend.
Spend.
Tim this year off and into 2022.
Pat or John can you give us some thoughts on how you think about the intrinsic value of your shares right now.
Being less aggressive on buybacks and some of your peers and how you weigh.
Those returns against.
Asset base growth initiatives and the returns you might see there.
For sure maybe Pat you go ahead and comment maybe for Sean on that yes, sure Sean Yes, Yes, I mean, absolutely I mean, we've been trading around our book value here at various times and I would agree with you with the intrinsic value is higher so we have had a modest program as you know.
Since the summer and I think it's reflective of signaling that we agree with that premise, but at the same time as Don said many times, we're a growth company and we believe that the <unk>.
Similar levels of buybacks, we continue to pursue.
Accretive growth opportunities.
Okay. That's all I have for now thanks, very much guys. Thanks.
Thanks, Sean.
Thank you next question will be from <unk> Patel with CIBC capital markets. Please go ahead.
Hi, good morning.
Don.
<unk> seen a as sawmill recently transacted in the U S south that record valuations.
Some of that.
Sort of froth in the market changed how you look at valuation parameters and when you look at the various regions, where you're focused on growth.
As Europe, perhaps looking more appealing today than in the U S F.
Yes, I think it's something we clearly look at all the time I mean I think that.
That operation I think you're referring to is certainly was a it was a good operation a good part of the good part of the country and so we thought that that was that was certainly a good acquisition by the by the party that made the acquisition I think for us.
Certainly.
Again, we look at a lot of different factors to make any acquisition merger decisions that we might make and I think if you look around the world I mean, certainly in Europe.
It continues to be a focus for us as it does in the U S. South right. So I mean really I think at the end of the day, we just look at each one on its own merits and determine whether it meets.
Both of us.
Financial metrics, but also the strategic criteria.
Criteria that we have as a company and how does it fit in with our growth strategies that we have right and I think that's a real key part of it so theres going to be some variability with that but our focus as Pat mentioned has not changed I mean, we are a growth company heavier as you know and were clearly focused on Europe and the U S focused.
Okay. Great. Thanks, that's helpful and I also wanted to follow up on some of your comments about R&R.
Rebounding and I know it seemed like we had a bit of a destocking cycle play out in that channel this year.
Given the sort of growth maybe youre expecting through the end of the year, how do volumes.
That channel compare this year versus last year in terms of maybe a percentage.
I don't know if were assuming its positive growth and then what's your view as to.
What sort of growth you might expect there in 2022.
Oh for sure Amir I'll, maybe I'll get Kevin to talk a bit about.
<unk> done a lot of work on themselves so sure Jeremy or I think when you look at year to date 2021 versus 2020, we're actually slightly slightly down just because of the unprecedented takeaway that we saw last year, but when you look at that in that towards the end of Q3, we are actually starting to trend higher than 2000.
'twenty numbers, especially southern yellow pine was probably the first to respond and we've seen that growth continue even up to October and expecting that to continue into early November sp.
SPF was a little bit later to respond we saw that activity really picked up in September and again, we are trending at higher than 2020 levels for Q3 and going into Q4.
Okay, great. Thanks, Kevin that's helpful and maybe just last question for me for Pat.
Pat you highlighted you're expecting a meaningful reduction in BC stumpage in January are you able to quantify yet.
Yet what that what that might be.
Well as you know that the October price will be a part of that calculation, so, but we would anticipate.
I guess in general terms at the Q3 and Q4 increases would all come out in Q1, so depending on how those play out.
That'll be that'll be the change so I think we'll be back to sort of what we saw in Q2.
22021 for the first quarter next year.
Okay, great. Thanks, Thanks, Pat.
I'll turn it over.
Sure.
Thank you next question will be from Mark Wilde at BMO. Please go ahead Marc.
Good morning, Dan Good morning, Pat and congratulations to Pat Good morning, Mark Thanks, Mark.
Okay.
Wanted to start.
Youre going to have an increase in duties on sale for the last year.
Can you just remind us of how large that change will be for you and then.
That will factor into your thinking about.
Production and also from the standpoint of where you sell AC lumber.
For sure Mark and maybe Pat you go ahead with that one yes, well on the duty rate Mark We're just under 5% now we're moving up to 21, 5%. So that's really all on the antidumping and that will be effective at the end of the separate now just to keep in mind I know you mentioned it will be in effect.
But likely only to the summer of next year until probably August and so it'll probably be in effect for eight months.
Okay.
And how will that kind of weigh into your thinking.
Yes.
16, 5% increase so it's fairly significant.
Right yes.
Yes, so mark this is where I think some of our offshore market opportunities are going to be elevated because theres, obviously, no duties going into those markets. So focus on that and and then of course.
<unk> got some with the higher value programs like MSR that we have an square edge go into United States at higher values going to support some stronger pricing.
To offset some of that.
Notwithstanding there'll be challenges, but we are going to have to focus on some of those higher value strategies.
Okay.
I'm wondering if you could give us some sense.
What the M&A pipeline might look like right now in both.
North America as well as over in Europe.
Just in general terms.
Yes.
I think that.
Nothing really surprising comes to mind, Mark really I mean, there are certainly pockets in certain areas. There's you always have particularly on the independent side.
Companies that for one reason or another chosen that go to market, whether thats family issues or whatever the case may be you see that once in a while and we're certainly.
Tuned to that and look at those as we as we as we think it makes sense and the same thing in Europe, as well really I mean, although.
When we look at Europe, we're pretty.
Ourselves at least pretty clear in terms of where within Europe. We we think some of the operators maybe but.
There is no more than usual.
Can you just kind of probably a pretty typical conditions right now mark frankly.
I guess, what youre asking.
And with the way things have gone here, we haven't really seen any any kind of accelerated a number of companies on the market or anything at all from our standpoint anyway.
Okay. That's helpful.
I wanted to just come back on this question of share repurchase activity, because let's let's striking to me.
Is that you have excellent bought back.
A lot less this year.
And you've been good back in 2018.
And I think any of us in the financial community would look at your stock today and say.
27 Bucks today adjusting for all the cash you are sitting that it's a much cheaper piece of equity.
When you were buying stock.
$28 range back in 2018.
And you bought back a lot more in 18, so any thoughts on that.
Yes, Mark I think.
We look at it.
It gives me like like we spoke about all the time and.
And try to determine whether there is.
There is.
Reason to increase from where we're at today, but in the meantime, I think some of the things since two eight since 2018, Mark I think we were a growth company, then, but I think even more so now and I think we really really see the opportunity. If you look you look at at least from our own point of view anyway. The diversification the aggressive diversification plan that we've been on for some time now.
The last thing the last two three years, it's been really accelerated both on the product side and also on the on the regional side and I think for US I mean, we certainly believe that that's the right strategy and we're going to continue to go down that road.
Greasing way Pat talked already about some of the additional capex, we are going to spend next year, recognizing the cash balances that we do have an and investing not only in sustainable capital like we always do but also in organic and there's lots of opportunities.
We see an internally at too that we can invest in in store.
Absolutely it probably isn't up from 2018 as you said, but there is some some of these other priorities have become what we think much more strategic and much more.
Much more of an opportunity than they were even a short three years ago.
Yes, Okay, I mean thats.
Fair enough Don I guess just.
Ill kind of playing the other side of it here I mean, this seems pretty clear to me that capital costs have gone up in terms of new project costs and it also looks from.
What we can see on the outside like deal valuations have gone up on acquisitions. So just what's striking to me.
Net debt.
New investments or M&A has gone up and that actually since your stock is much cheaper today than it was three years ago that you wouldn't be a little more active on the stock.
Sure No fair comment Mark appreciate it.
Okay.
Any thoughts around that.
We might expect in terms of your Asian markets in the fourth quarter.
From both a volume and from kind of a pricing standpoint.
For sure Mark and Thats been a real positive surprise in that maybe.
So Kevin maybe fill market a little bit more on what Youre doing there Jerry just maybe just highlight two markets there mark.
The first one in Japan for sure Q3 was a record high pricing and.
In Q4 is going to be off but still at the extremely elevated levels compared to historical norms and we even see that trend continuing into Q1, so very positive for Japan, and our volumes are pretty consistent there.
It's a big priority for us to key market and been there for over 30 years and so we very consistent approach there China very similar we had some record high pricing in China that helped obviously offset some of the downward pressure in North America. We do have a good order file into Q4, maybe similar to <unk>.
<unk> again as we saw in Q3 and again about prices are are definitely off but still very competitive and Bob some of the north American indexes for the similar products.
Yes, that's super helpful. Thanks, Kevin I'll turn it over.
Alright, Thanks, Mark take care. Thank.
Thank you next question will be from Paul Quinn at RBC. Please go ahead Paul.
Yes, good morning, guys.
Graduation path.
Hey.
Hey, Chris in your risks and uncertainties section you highlight that Blueberry River first nation decision just wondering how that would.
<unk> can for it and is it really just the Czech went into <unk> John saw mills that are at risk.
Yes.
Not sure at all of the weather.
Risk yet at all I mean, clearly we were working through some of the some of the challenges with that.
Decision for sure, but like we do with a lot of the first nations that we deal with.
We are spending a lot of time trying to understand as we look forward here, what the impacts are going to be on us.
For us directly I think theres lots of theirs.
Lots of things still that we don't know that were working on as we go through it. So it would be it's probably a bit early probably better next quarter to add to that Paul we can give you a little bit more color around that just because things are developing as we speak and so.
I think maybe leave it at that.
Okay fair enough congratulations on the record in Europe, just wondering.
And I understand that that market is a lot less volatile than the North America here, but.
The Q4 price drop that we will see in that market.
Is that going to be similar to what you saw in North America in Q3, and and maybe just what youre experiencing I mean, we've heard from others in the market that log costs continuing to increase so is that another factor on margins for Q4.
Yes for sure I'll, let Kevin talk about the market in terms of log costs. There, though just one quick comment on that I mean, I think it would be fair to say that there quarter over quarter. They are probably up in the neighborhood of 10% that kind of 8% to 12% in that area and doing it but look we have.
Mentioned before Paul.
As the case again is the one thing about Europe that we'd like as it tracks the log prices, there's a lot of discipline between log prices in the middle of that and so this is no different here right with some of the performance on the mill and Thats, what <unk> seen here in Europe. So it wasn't unexpected I guess to see a bit of a ball cost increase rates. So in terms of Kevin.
Overall market share on a comparative basis, maybe you could yes.
You'll see that we are probably closer to mark to our sorry, Paul too.
That 15% that kind of range. It does vary by country, yes to some degree, but I think we could guide to around about a 15% drop versus what we saw in Q4 here or.
For the SBF, Mark Canadian market in North America.
Okay.
And then just.
Anticipating this disruption log export.
Issue.
So youre going to stop in 'twenty, two do you expect that to be a material boost for for Asia lumber shipments going forward.
I would definitely see it Paul as a real positive.
And also given the fact that China is really trying to.
Reduce energy consumption and particularly in the air So kiln dried lumber in general I think it would be positive.
Positioned to offset the.
The reduced volume of log exports coming into that market. So I think we will see how that plays out and if it actually comes to fruition, but I think that would be my expectation.
Okay. That's all I had thanks very much guys.
Alright, Thanks, a lot Paul take care. Thanks, Paul.
Thank you there are no further questions I will turn it back over to Don King for closing comments. Please go ahead Mr. Kayne.
Great. Thanks, Toby and thanks, everyone for your participation. This morning, we appreciate your support of <unk> and all the best to all of you and we will look forward to talking to you at the end of end of the year I guess take care.
Thank you Mr. Kane, ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending and at this time, we do ask that you. Please disconnect your lines.
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