Q4 2022 Canfor Corp and Canfor Pulp Products Inc Earnings Call
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Good morning, My name is Sylvia and I will be your conference operator today, welcome to Canfor and Canfor pulp fourth quarter analyst call.
Things 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 Corporation, President and Chief Executive Officer. Please go ahead Mr. Kayne.
Thank you Sylvia and good morning, everyone.
You for joining the Canfor and Canfor pulp Q4 of 2022 results conference call I'm going to make a few comments before I turn things over to Kevin Edson.
<unk> pulp Canfor pulp president and CEO , and Todd Elliott, Chief Financial Officer of Canfor Corporation, and Canfor pulp and our senior Vice President of sustainability.
We are joined by Kevin Pankratz, our senior Vice President of sales and marketing.
We're talking about Q4, and 2022 I'd like to begin by acknowledging the very difficult decisions, we made to restructure our lumber and pulp operations in British Columbia in January we have taken the necessary steps to rightsize, our BC operations to align with the available fiber supply to ensure a more sustainable footprint for the future.
By doing this we will create a more stable operating platform, which in turn will provide greater stability for our customers our employees, our contractors, our suppliers and our communities, while ensuring we continue to provide high quality low carbon products to our global customers.
After careful review it is clear that there is not enough fiber in the peace region and as a result, we made the difficult but necessary decision to permanently close our <unk> sawmill and pellet plant. The facility will cease operating in April recognizing that while there are challenges operating in British Columbia. It remains a critical region and our diversified operating platform.
And it allows us to fully serve our customers around the globe with the products. They require Ken for its global operating regions are interdependent together with our lumber operations in Alberta, Sweden, and the U S. Our BC operations helped create a diversified operating base with flexibility to be able to meet the needs of our global customers and an ever change.
Supply chain environment.
That's why we also announced a potential major investment at our Houston facility subject to a final investment decision currently anticipated by the end of the second quarter. Our intention is to build a new state of the art facility in Houston, the existing aging Bill will be replaced with a modern facility utilizing the latest technology.
Process, the high quality fiber in the region into high value products.
Houston facility will be closed for an extended period beginning in April 2023, we recognize and deeply regret that these decisions are significantly impacting our employees contractors and communities in British Columbia, We are working to mitigate drive impacts and support our employees communities and contractors through this transition with.
A variety of programs and support measures, while Canfor will have.
Waller footprint in British Columbia, we will be stronger and better positioned for the future in terms of our financial results. Despite a number of significant challenges within our lumber business, particularly NBC. We had another strong year, our second best ever generating an operating income of $1 $4 billion before adjusting items.
Lumber markets continue to experience significant volatility in 2022 with near record high pricing in the first half of the year supported by strong market fundamentals and demand in the new home construction and repair and remodel sectors, while underlying demand fundamentals remained strong inflationary pressures economic uncertainty and rising interest rates resulted in.
Significantly reduced demand for our new home construction.
Contributing to a sharp decline in lumber prices in the second half of 2022, while we anticipate these challenges to persist in the near term, we believe our longer term market fundamentals remain very strong supported by favorable demographic trends pent up demand for new home construction activity and continued strength in the repair and remodel Sir.
<unk>.
Supported by our strong financial results over the past few years, we continue to focus on global diversification and made considerable progress on several strategic initiatives. In 2022. This includes a significant acquisition in Alberta and announcement of two Greenfield sawmills being constructed in the U S. A major rebuild of our sawmill in Arkansas.
Organic growth in Europe , and continued progress on our sustainability initiatives together these investments significantly improve our cost structure further improve our global diversification and grow our production capacity through increased automation innovation and manufacturing flexibility with a focus on high value products and sustainability.
Notwithstanding these initiatives we have maintained a strong balance sheet, we are prepared to remain patient disciplined and strategic and kill them make the right M&A opportunities present themselves and we are focused on proactively balancing production levels with market demand. We also continue to assess additional organic and value added external growth.
As we look to grow our forest products business I will now turn it over to Kevin to provide an overview of canfor pulp.
Thank you John and good morning, everyone like can for Canfor pulp has also made some difficult decisions due to the lack of fiber in our operating region in.
January we announced that the pulp line as the Prince George pulp and paper mill will be permanently closed by the end of March we sincerely regret the impact that the pulp line closure is having on our employees and we are committed to supporting them through this difficult transition.
In addition, as a result of the reduction in the long term supply of fiber in the <unk> region, we don't see a path to restarting our Taylor facility, which has been curtailed since February of 'twenty, two and we are currently exploring alternative uses for this site.
By reducing our operating footprint, we are better aligned our operations with the available residual supply and the Prince George region.
We believe these difficult decisions will support the long term sustainability of the company and allow us to optimize the economically available fiber supply in British Columbia operating on a more consistent basis to improve our operating margins and performance.
While 2022 was a very challenging year global pulp market fundamentals remain strong for 2023 fiber related curtailments in BC, coupled with the possibility of further supply disruptions has helped stabilized markets, especially in China.
We're also heading into spring maintenance for producers in the northern Hemisphere, which will further limit supply for.
For the back half of 2023, we are projecting prices to correct off of peak levels as we head into the seasonally slower summer period, coupled with the market digesting approximately 5 million tons of new production capacity coming on stream. This year, we remain focused on improving operational reliability closely managing our cost structure and optimizing available.
Transportation as we look to capitalize on the strong pulp market fundamentals I will now turn it over to Pat to provide an overview of our financial results.
Thanks, Kevin and good morning, the Canfor and 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.
In my comments this morning, I'll speak the quarterly financial highlights a summary of which is included in our slide presentation. Our lumber business generated an operating loss of $200 million in the fourth quarter, which included an $89 million asset write down and impairment charge and an incremental $6 million inventory write down adjusting for these noncash items our lumber business.
<unk> had an operating loss of $104 million in the fourth quarter.
Results reflected the impact of the sharp decline in global lumber prices combined with significant operational downtime in western Canada due to underlying market conditions, and the resulting impact of this downtime on our cost structure in British Columbia, notwithstanding the lower pricing results in the U S. South in Europe remains solid with our European operations contributing $43 million in cash.
Earnings in the fourth quarter and $487 million in 2022.
Our pulp business generated an operating loss of $91 million in the fourth quarter, including a $50 million asset write down and impairment charge in total we reduced the net book value of our lumber and pulp assets NBC by approximately $140 million, reflecting the right sizing of our balance sheet as a result of the reduced availability of fiber supply in British Columbia.
Fourth quarter results for our pulp business, principally reflected the impact of reduced residual fiber supply as a result of extensive soma sawmill curtailments as well as challenging winter conditions, which contributed to an 18% decline in pulp production quarter over quarter on.
On a consolidated basis capital expenditures were approximately $278 million in the fourth quarter, including approximately $28 million for Canfor pulp capital spend totaled $625 million in 2022 of which a $113 million with canfor pulp.
For 2023, we currently anticipate capital spend of $450 million to $500 million in the lumber segment, including the spend on three major investments in the U S dollar, which are already underway as well as organic growth in Sweden for Canfor pulp. We are currently forecasting capital spend of approximately $70 million, including.
Including capitalized maintenance and with that Don I'll turn it back to you.
Thanks, Pat and with that I'll turn it back to you operator.
Okay to ask your questions from analysts.
Thank you.
We will now take questions I've stated from financial Analyst. If you have a question. Please press star one on your telephone keypad, if you're using a speaker phone please lift the handset.
And then press star one and if at any time you wish to cancel your question. Please press Star two. Please go ahead and 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.
And your first question will be from Sean Stewart at TD. Please go ahead.
Thanks, Good morning, everyone.
A question for Don or Pat you guys chewed through a chunk of your liquidity.
In the fourth quarter. The 2023 Capex budget, you referenced does that envision any cost inflation for discretionary projects, you've already outlined versus previous guidance.
And I guess a follow on to that.
Maybe you don't even see a need to toggle back, but if this is an extended.
Cash flow trough do you have an ability to toggle back on that Capex.
You did.
Why don't you go ahead, yes, sure sure Sean Yes, so I mean, obviously.
We're being we're being prudent with the capital here and to the extent that we can we can trim or make decisions that don't sort of move away from our core strategy of reinvesting in our business, we're doing that but I think we've we've made commitments to particularly the three big projects in the U S. South and those are moving forward and we continue to move forward with those as.
As we think through our capital plan for the next couple of years I think we're comfortable that our cash balance will support that we've got lots of liquidity to kind of continue along that path. So I think we've embedded some incremental costs are related to sort of the inflationary environment. We're in but I would say that we're able to kind of encompass all of our capital needs that align with our strategic priorities within that budget.
Okay. Thank.
Thanks for that Pat.
Question for Kevin Hudson.
The alternative uses potentially for the Taylor side can you can you give any preliminary thoughts on what youre thinking with.
With respect to that site.
When those decisions might be made.
Thank you, Sean I'd love to be able to give you a sense of what we're looking at.
At this point, what we've been able to determine is based on the lack of fiber in the peace region running it as a pulp mill is not a viable option as far as what else we might be able to do with that site at this point, we're collecting options.
It's a good facility in a good location, but I can't I can't give you any sort of color as to what that might.
Might look like in the future I would hope we would find a solution very quickly but at this point it really determined be determined by how quickly we can figure out what else we might do there.
Then how quickly we might be able to execute so sorry for the lack of color.
Okay.
Last question for Don can you give us an update on your appetite for acquisitions.
What the opportunity set looks like right now in North America.
Or Europe .
For sure Thanks, Sean.
At the end of the day, what we're continuing to look at U S. South in Europe . Those are up two primary regions, which we spoke about before maybe aside from Alberta.
And we will continue to do that but again at the same time and Pat maybe touch on a little bit, but we're going to we're going to continue to remain really disciplined in real patient and real strategic because we we.
We certainly believe that.
By waiting.
Being disciplined and patient that we're going to get an opportunity here going forward for probably better value than we otherwise would have seen and we think that will continue here for the next 12 to 24 months. So we're going to continue to look at it.
But because there is more and more opportunities seem to be starting to show up a bit but at this stage. We're very very focused on deridder as you know we're focused on or better with the project. There are focused on the new mill that we just announced an axis, Alabama as well those are three pretty big projects for sure.
Bind with some of the organic capital that we're going to be investing and are investing in Europe currently.
We've got lots of on the go and we'll keep our eye, though obviously on M&A as.
Those opportunities arise.
Okay. Thanks, John that's all I have.
Thank you next question will be from <unk> Patel at CIBC capital markets. Please go ahead.
Good morning, John .
We've seen <unk> announce some large permanent capacity removals in BC.
This year how much additional.
Capacity across.
The rest of the industry and the province do you think is at risk of closure this year.
That's a good question.
It's hard to comment on what others May do I can all I can say from just to just for my own.
From traveling around and whatnot I think there's certainly areas of the province spill that have more work to do there.
In our area. So I think we with our recent announcement here at job one at our recent announcement of Houston.
We're probably pretty close to where we need to be but I think there will be opportunities that others are going to need to look at in other areas of the province.
Okay, Thanks for that and what what type of potential stumpage relief are you expecting.
In the subsequent quarters over 2023.
So in BC.
Q4, it came down.
They're a bit as we spoke about last time that we expected that to happen, but there is so we will see some of that in Q1, but it won't be that material really there is theres a lot of offsets there from an inflation standpoint in a number of areas that will prevent us from seeing the majority of that decrease that we saw in Q4. So as we go through the year it will depend obviously on.
What what mill nets are throughout the year <unk> average per value right. So.
Okay, great. Thanks, Don and maybe just a quick question for Kevin on markets.
Just curious to understand you.
Your forecast for the renovation markets it sounds like you're expecting demand there to be resilient, but would you still expect.
A year over year.
The decline and how does that vary between North America and in Europe .
Sure. Thanks, Amir I think the.
The R&R market for sure it continues to be quite resilient. Despite all these inflationary pressures.
And I think the big drivers for the R&R statement.
Big one is the age of the average home in the United States in some degree Canada is like protein 50 years are over and they think thats going to be.
Sustained.
Sustained.
Growth for them and then also they are also focusing quite a bit on the on the pro segment. So I think that R&R segment and with their focus on the pro is going to continue to be a big focus.
We're also seeing that trend actually kind of globally, we see in that in Australia as well we're also seeing.
Seeing that in the in the in the European markets and the European markets, while off from like Q4, we're starting to see a little bit of a pickup in the in the European market, but not to the extent that we're seeing in North America.
Great. Thanks, Thanks, Kevin.
Ed.
Thank you next question will be from Paul Quinn RBC capital markets. Please go ahead.
Yes, thanks, very much good morning, guys, maybe start with Canfor pulp side, yes.
Kevin you referenced the 5 million tonnes of new capacity is coming and I think just about all of that is on the hardwood side, just wondering what youre seeing on the softwood side and.
And pricing implications as a result of that.
So I think just a little over $4 million as hardwood about $1 million is coming out of the new mill up and finally I think it's the Mercer mill.
Which is five or 600000 tonnes there'll be some conversions in the Finnish area when they can no longer get the hardwood out of Russia.
From a market perspective, we're starting to see signs of life.
The demand weakness that I think is evident has been more than offset by supply constraints, including our own.
North America in euros off a little in this quarter, maybe $20, but that's more than offset by APAC, and especially China, which we saw a $30 increase in February we're feeling pretty good about the first half of the year in terms of stability. We do think that as we get into the more traditional period in the summer where things slow down we'll see.
Some erosion of the backend as the market digests that extra.
Tonnage, but generally I think the market has been pretty good shape for this year.
Okay, and then switching over to the lumber side, Don you mentioned that three big projects, maybe you could just walk us through the timing of those.
But when I take a look at your slide deck on slide eight it looks like.
Got it.
At Deridder coming up in early 'twenty, three and that's kind of confusing.
Yes for sure so that's correct.
We've already put a couple of logs through already so thats kind of progression, but in terms of heritage, which is the Alabama axis, we talked about that's a Q3 2024.
Urbana will be Q1, 2024 and Miller western.
The latest well that's actually already gone so we don't even worry about that one at all that's already 100% so.
Okay and then.
Just one of your competitors talking on the softwood lumber file mentioned that.
The number of meetings.
Phone calls would've been taken places.
Yeah.
The activity on that file stepped up just wondering.
If you can comment on where you think that file is going and what's required to get to resolution.
Yes.
I think it's progressing a little bit I mean for sure. There has been more dialogue than we've seen in some time frankly, and we have that have had that across Canada, and so I think I think.
Like I said the dialogue is progressing for sure.
Probably aware the president and the Prime Minister or a meeting this week potentially and we don't know if that will be on the agenda or not we're hoping that it will.
We've made some efforts to try and make that happen, but you never know in terms of what it's going to take I mean, that's.
Theres two concerns we've talked about that before our market share and also the how that.
Distribution of deposits, but at this stage in terms of what it will take to get a final settlement. There. It's probably continues to be a bit early.
Try to speculate on that.
Alright, that's all I had best of luck thanks, guys.
Thank you next question will be from Caitlin Ventura at BMO capital markets. Please go ahead.
Thank you and good morning.
Can you talk a little bit about God youre seeing in the European markets, both in terms of demand and prices.
And what was that.
European market, what are we seeing in European markets.
So obviously a number of markets.
Sure.
Again that I think Tom in the European market coming off a pretty tough Q4, we're actually.
Pleasantly surprised with what we've seen recently and AD demand picking up particularly in the UK market, which is a significant market for Scandinavian central European producers. So that's been a positive and.
And we've also seen it picked up that domestically in central Europe . So I think how long that's going to last it's it'll be hard to determine but definitely a pick up there and then hopefully that will help maybe offset some some european lumber coming into the eastern seaboard, United States, but definitely a little bit better than we thought going into the year.
One thing, maybe Kevin I would add to that a little bit is and I know <unk> been lead this for us, but the one thing about Europe is one of the reasons that we've talked about why we really like Europe and has proven over 100% as the percentage of high value that we get in those markets. It's significantly and is consistent for the most part.
Other the other maybe significant point there is as many choices in terms of market share as well. So we have the ability to move around a bit more than we do in other jurisdictions and so.
Two to Kevin's point, we have.
<unk> been trying it we've taken advantage of that and it's been real successful. So that's continues.
Continues to be a real benefit in terms of in terms of Europe at least from our standpoint.
Got it that's helpful and then.
Either Dan or Pat can you provide.
Some perspective on the Houston investment I know you said.
At the end of second quarter is there any thoughts on how the final startup decision, but it sounds like youre going to based on what you. Just said going ahead, but can you give us some perspective on kind of the size of the investment what kind of partners you are looking at.
And with all of those are kind of TBD.
Can tell you there is there will be a smaller but it'll be smaller than maybe the facility we have today.
And we've got lots of obstacles that we've got to overcome here going forward, but we do intend on.
Overcoming those for sure.
Assuming we can get to.
Competitive timber that we need to operate our mill in that area right, but but yes. We're positive at this point, but we've got like I say a lot a lot of challenges that we offer.
Have to overcome as we move through it but at this point, we expect to be able to make a decision as youre aware of some time towards the end of Q2.
Okay.
If you decide to go ahead with that when do you think.
You should be able to kind of finish building the mill and then stock.
Yes.
Probably guessing here a bit by 2025 for sure it'd be something like in that area for sure.
Sure.
Understood that's helpful, but luck and grant.
With lead times, and so forth right. So.
Thank you.
And at this time there are no further questions I will turn the call over to Don Kim Go ahead, Mr. Kayne, Alright, Thanks, Toby and thanks, everyone for joining the call and your interest in Cat four and cat for pulp and we look forward to speaking to you at the end of next quarter have a good day.
Thank you, Sir 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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