Q3 2022 Canfor Corp and Canfor Pulp Products Inc Earnings Call

Good morning, My name is Michelle and I will be your conference operator today.

Welcome to the Q4 and Canfor pulp Eric.

Third quarter analyst call.

All lines have been placed on mute to prevent any background noise.

During 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 would now like to turn the meeting over to Mr. Don Kayne Canfor for corporations, President and Chief Executive Officer. Please go ahead Mr. James.

Thanks, operator, and good morning, everyone.

For joining the Catholic pulp Q3, 2022 results conference call.

I'll make a few comments before I turn things over to Kevin.

And of course pulp President and CEO , Todd Elliott Chief Financial Officer of Kemper Corporation.

That's where pulp and our senior Vice President of sustainability and Additionally, we are joined by Kevin Pankratz, Senior Vice President of sales and marketing.

The third quarter resulted in reduced margins at our local business as prices move lower throughout the period. However, we continue to benefit from the diversification of our earnings stream as Europe and the U S. So generated solid returns.

Our strategic growth in regions that are strong and competitive fiber baskets. The U S. So Sweden at Alberta will allow us to generate more consistent earnings throughout the cycle.

In British Columbia, the allowable annual cut continues to decrease due to the mountain pine beetle damaged government policy decision species at risk and wildfires, we continue to assess our operating rates against the available fiber supply in the region and remain focused on producing higher value products and managing production to meet market demand.

In order to maximize the value of every customer of law.

As a result cap work took operational downtime throughout the third quarter with the majority of our BC sawmills continuing to operate today on a reduced basis.

To acknowledge our employees for their ongoing hard work and dedication through the downtime we have work to support our employees and thank them for their flexibility.

U S lumber demand and the repair and remodel sector remains solid throughout the quarter. However, with rising interest rates ongoing inflationary pressures and reduced housing affordability slowing new home construction activity in the U S led to lower demand in that segment.

In Europe , our largest or our lumber business generated solid financial results in the third quarter. Despite the impact of seasonal down principally in July .

Rising interest rates inflationary pressures and storing energy costs in Europe have however contributed to a sharp decline in lumber consumption in recent months, particularly for the retail sector, even though pricing is anticipated to remain relatively solid we will continue to evaluate market activity levels and manage production.

And as necessary through the fourth quarter to align with current demand to date. The mills have taken medical downtime notwithstanding the current macro economic uncertainty North American lumber prices continue to trade above pre pandemic levels.

Ported by lean inventories throughout the supply chain steady underlying demand in the repair and remodel sector and pent up demand for new home construction in the United States.

While inflationary pressures are anticipated to persist in the near term we remain focused on growing our lumber business on a global basis currently through three major capital projects in the U S. So I will now turn it over to Kevin to provide an overview of <unk> pulp. Thank you Don and good morning, everyone.

Canfor pulp had a strong third quarter.

Solid financial results driven by the sustained strength in global pulp pricing and an improved operational performance. This contributed to a 4% increase in pulp production. Despite planned maintenance downtime at Northwood and intercom during the quarter.

As previously discussed on these calls the management team at Canfor pulp remains focused on improving asset reliability and running the mills more consistently we have seen some positive momentum in this regard over the last few months and I expect continued progress over the coming quarters.

Sourcing economic fiber remains a challenge in BC due to the decrease in residual chip supply and inflationary cost pressures on pulp logs as a result, we recently announced extended downtime at our Intercontinental in order to better balance our chip supply for the winter.

Transportation networks improved through the third quarter and in general we're able to support our production volume. Our Taylor mill continues to be faced with supply chain challenges and at this time, we are not anticipating a restart before the spring of 2023.

While we are encouraged by recent operational performance, we are prepared to adjust future operating plans to match available logistics and economically available fiber.

We appreciate the resilience and dedication of our employees as we manage through these headwinds I will now turn it over to Pat to provide an overview of our financial results.

Thanks, Kevin and good morning, Canfor and Canfor pulp quarterly results were released yesterday afternoon and come together with our overview slide presentation to the Investor Relations section of the respective company's websites in my comments. This morning, I'll speak to quarterly financial highlights a summary of which is included in our overview slide presentation.

Our lumber business generated operating income of $102 million in the third quarter, which included a net duty recovery of $98 million and a 90 million inventory write down related to loss in British Columbia.

<unk> reflected a steady decline in global longer prices throughout the quarter as well as the impact of significant operational downtime in Western Canada.

As Dawn mentioned, we continue to realize the benefit of our diversification strategy with our European operations contributed $57 million in cash earnings in the third quarter, despite taking its traditional summer downtime.

Looking ahead, we anticipate a more challenging fourth quarter, reflecting current lumber market conditions as well as the impact of downtime on unit manufacturing costs, while we expect BC stumpage rates to fall in the fourth quarter. It would likely take much of the quarter before we realize those lower prices into our results.

Our pulp business generated operating income of $19 million in the third quarter, an improvement of $27 million quarter over quarter as Kevin mentioned third quarter results benefited from significantly higher sales realizations and improved productivity offset in part by increased fiber cost.

Despite significant challenges in recent quarters Canfor pulp has maintained its strong balance sheet and remains focused on improving productivity closely managing inflationary cost pressures and optimizing the available transportation and economically available fiber.

Capital expenditures were approximately $139 million in the third quarter, including approximately $29 million for Canfor pulp, we project capital spend of approximately $450 million for our lumber business in 2022, and approximately $110 million for Canfor pulp.

Looking ahead to 2023, we're currently forecasting a capital spend of approximately $500 million for our lumber business, including the remaining spend on our Deridder Greenfield saw mill, which is currently on track for completion in the first quarter of 2023.

We also anticipate being modestly active on cancel a share buyback program in the fourth quarter as Canfor pulp continues their focus on asset reliability and productivity improvement our expectation for capital spending in 2023 $60 million to $80 million depending on market conditions.

I'll turn the call back over to you. Thanks, Pat So operator, we're now ready to take calls from our questions excuse me from analysts.

Thank you.

We will now take questions from financial analysts if.

If you have a question. Please press star one on your telephone keypad.

If you are using a speaker phone please list.

And then press star one.

Anytime you may wish to cancel your question. Please press star two.

Please press Star one now if you have a question.

There will be a brief pause while participants register for questions. Thank you for your patience.

Our first question comes from Mark Wilde Bank of Montreal. Please go ahead.

Thanks, Good morning, Don Kevin Pat.

Good morning, good morning.

First question I have you just give us a little more color on the European lumber situation because it sounds like you might be taking a little less downtime than you're pointing to.

Month or two ago.

Yeah for sure market and Thats correct first of all and we.

Anticipated initially that we would be taking a little more than we have had to and but we've been fortunate. Despite the challenges in our key market in the UK, we've been able to.

Do a real good job the guys who are on the ground here have done a really good job along with our marketing group in Vancouver to a lot of that volume quicker and more expeditiously than we would've thought to alternative markets. So we've been a real real surprise enough. So one of the reasons why we would have done that.

Okay is it also is it possible down to get some sense of how much price that moved in the European market.

I know it moves differently than it does here in North America, but if we could just get some sense of.

Price movement.

If Kevin you want to profitability for sure around Mark I would say is in that 10% to 12% range down.

Quarter over quarter, there was a bit more pressure towards the end of Q3, but that's in that range of sort of what we what we experienced.

I think mark just quickly add.

In terms of our European business, and you've heard us speak about this before but one other reasons.

I keep saying this but I will say it again one of the reasons why we focus heavily on Europe and you have for wireless the flexibility of that range.

Presents us that you often don't see that in other markets. So we've really we really see that move around as we seek to take advantage of market levels as we as we see fit right. So it's really that.

As part of our acquisition has really turned out at least as good or better than we ever expected.

Yes, just one more on Europe .

Your expectations looking into 'twenty three in terms of.

European volume into the North American market I mean demand is down in both markets, but the euro is quite weak now, which you might think would push a little more volume over toward North America.

Yes.

Let Kevin talk about that pressure you could have on the schedule, but that's clearly what we're seeing and thats one of the alternatives.

Really come.

That has come about here over the last little while here, but certainly we see an increase in North America to what the great actually a pretty good degree actually is going to help us a lot in North America with some of the PUC starts that we've been experiencing.

Kevin you know way more.

Just what I am hearing there are two markets that the underlying demand is pretty good with the big issue that they're dealing with over in Europe is really about energy and really how it is going to play out over the next six.

Six to eight months, and then I think energy prices come down to a certain degree then you could see potentially a pickup at some European today, but short term for sure I think you can expect to see increased volumes coming into North America, and actually other markets as well.

Okay, Alright, and then the other question I have is just on capital allocation.

And the share repurchase even if I go back to 2018.

You bought a couple of million shares up at 28.

And today the stock is $20 a share you've got over $10 a share in net cash and $7 a share and deposits it looks like.

Far better value than it was in 18, so I'm just.

Im curious as to why we're not seeing a little more activity. There. There was it looked like there was anything in the third quarter.

What are your customers a little bit of pulp.

They can talk also about overall capital allocation thinking.

Yeah sure Mark so yeah, I'm not I'm not sure I can reconcile the NAFTA 2018 directly what I would say as we kind of thinking that there is a pullback coming I don't think thats a big surprise.

We've made some significant capital investments three big projects as Don mentioned in yourself.

$500 million.

And I, just think we kind of took a little bit of pause and assess how things sort of play out we do have a very strong balance sheet and we want to have a very strong balance sheet, but we also want to be able to build and diversify our business either through organic growth or M&A, and frankly, I think arriving into a weak market with a balance sheet like we have is going to be a strategic advantage. So we're always going to either.

On a modest basis anyways.

Some of the background on that liquidity in our stock so.

As I said in my comments I think we will be active again.

But it will remain a modest part of our overall capital allocation.

Oh for sure.

Absolutely and if you look at it overall that we do.

Feeling this way for a while now probably.

Later late half of the second quarter that things are but the masking of tougher for quite a bit due to affordability and probably carry on through a good part of 2023. So we try to be extremely disciplined here and we'll call. It conservative whatever your water patients around the fact that we do believe we're going to get opportunities here over the next 12 to 18 months.

Or a better value and weakness in the last 24 months.

Okay.

One more pad.

You mentioned that those log costs it <unk> take a while to work their way through.

Your inventories can you give us just a little more color on that.

Yes ill go for sure.

Q3, Q4, Q3, LOE costs were up 35 Bucks a cubic meter run.

Dirty that came down to roughly that in Q4 and that.

That lag probably two to three months something like that into Q1. So we're seeing probably dropped in the order of $5 cubic meter right. So <unk>.

Probably two to three months something like that of course with personnel and to harvest. So thats, our that would be our guess right now.

Okay, Alright, that's helpful I'll turn it over.

Thank you. The next question comes from Paul Quinn RBC. Please go ahead.

Yes, thanks, very much morning, guys.

Thanks, Paul.

Im just trying to understand this European dynamic with with lumber prices and log prices, so what I've seen in the past.

Remember prices come down log prices are coming down as well so that margin sort of seems a little bit more stable than what you'd typically expect experienced in North America as that's the case right now.

Yes, I think for the most part I mean, we all try to compare a little bit.

The western Canadian and so if you have a bunch of water main certainly European log prices are up.

<unk> been definitely manageable for sure and most of that increase was due to some of the pressure around the pulp and energy, primarily which is really.

Excuse me.

So we've seen significant increases in energy cost, particularly in Europe across Europe .

So.

Again.

Obviously, there's a bit of a more of a change there as in the past, but it's still definitely in Nashville at about anywhere near like it is here in North America.

Okay and then.

Maybe over Canfor pulp side, just the BC log supply continues to decline just wondering when you look at future chip available availability for the Canfor pulp mills.

Did that.

Does that equate to all the existing mills that Youre operating right now or is it more prudent to take one mill out of that.

Out of the out of the quiver as opposed to take.

Rotating downtime the lack of chip.

Thank you for the question Paul I think we also recognize the fact that there have been both.

Indefinite and permanent curtailment with NBC on the milling side, there have been a number of pulp assets that have likewise been either curtailed permanently or indefinitely. It would be my opinion.

For the industry is not yet done.

As to where we fit will be a function of how well our assets running the fiber supply is in our region versus other regions with NBC.

Okay and then just.

Maybe on a.

Thinking strategic here.

Couple of pulp mills that are available in eastern Canada is that something that you guys would be interested in growing net debt pulp business on the canfor pulp.

Well I think today, our primary focus is ensuring that the assets, we have are well capitalized and running well before we start looking at expansion.

So at this point I don't think that Thats really a key focus for us.

Alright, that's all I had best of luck.

Thanks, Paul.

Thank you.

There are no further questions I will turn the call over to John Kane for closing comments go ahead, alright. Thanks, Joe Thanks, operator, and thanks, everyone for joining the call and we'll look forward to talking to you.

As the year progresses here. Thanks.

This does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your lines.

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