Canfor Corporation Canfor Pulp Products Inc. Q1 2023 Earnings Call

And finished inventory in western Canada, as well as restructuring charges of approximately $11 million and an incremental noncash ADT expense of $19 million.

These results reflected the sustained impact of a challenging operating environment in British Columbia, driven largely by weak lumber pricing and related operational downtime, which continues to have a significant impact on our per unit cost structure.

We expect the cost curve in British Columbia to moderate through the balance of 2023, we anticipate ongoing challenges during the second quarter as a result of current lumber market.

Notwithstanding the significant loss experienced in British Columbia, We continued to see the benefits of our diversification strategy as more modest earnings from our U S operations were combined with strong results from our European business, which contributed approximately $50 million in cash earnings in the quarter.

These results reflect a slight improvement in pricing and demand in the UK and Europe as well as increased production and shipments.

Our pulp business generated an operating loss of $25 million in the first quarter, which included a $4 million inventory write down and restructuring charges of approximately $3 million on an adjusted basis results in our pulp segment improved by approximately $20 million compared to the fourth quarter.

Despite the continued impact of fiber related downtime. These first quarter results largely reflect improved NBS K productivity quarter over quarter as well as the associated benefit on per unit costs.

Forward the focus for our pulp business remains on operational reliability and preserving our balance sheet position.

With that in mind earlier this week as Kevin mentioned Canfor pulp successfully completed the refinancing to support a significant capital reinvestment plan over the next several years.

Under the terms of our amended credit agreement Canfor pulp converted at $50 million term debt into a new $160 million revolving operating loan facility of which approximately $65 million is currently drawn. In addition, we have secured a commitment to receive up to $80 million of new term debt as part of our capital reinvestment plan with the.

<unk> liquidity projected to more than sustained canfor pulp going forward in.

In 2023, we anticipate capital spending of approximately 400 to $450 to $500 million in the lumber segment, including spending on the three major investments in the U S south as well as organic growth in Sweden. In addition, we will continue our modest share buyback program throughout the year for Canfor pulp. We're currently forecast.

Capital spending of approximately $70 million, including capitalized statements and with that Don I'll turn the call back to you alright. Thanks, Pat So operator, I'll turn it back to you and we will take questions from analysts.

Thank you.

We will now take questions from financial analysts.

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For your patients.

Your first question comes from the line of <unk> Patel from CIBC. Please go ahead.

Hi, good morning.

Good morning.

Can you speak to what Youre seeing on the R&R side in both North America and in Europe .

For sure humor OLED are missed.

Mr <unk> talk about that.

Hi, good morning, Javier yes.

R&R market has also I'll start with North America.

In both Canada, and the U S has been quite resilient.

Essentially seen double digit growth versus this time last year and.

We see that continuing into Q2, and maybe maybe some slight moderation in the back half, but still really really strong and there's some pretty good drivers that are supporting that growth and we think thats going to continue.

I think in Europe , we saw a resurgence of DIY strength in.

And particularly in the UK market that was strong and supporting that and going into Q2. So overall overall the R&R market segments.

Globally have been quite have been quite resilient.

Yeah.

Great Thanks for that Kevin.

Question for Kevin Edson.

On the pulp side.

When you think about your longer term capacity and with some of the investments that you're planning.

What where do you see that.

Just looking at the fiber constraints and some of the capital you're putting there where do you see capital pulps longer term capacity trending.

Thank you for the question Amir.

When we made the decision to take the PG pulp line down what we did is we tried to forecast to the best of our ability not to fiber supply as it exists in.

In the short term this year next year, but try to look forward as far forward as possible and doing so we think we've right sized the footprint.

With the two facilities to paper machine as it is now.

The investments are going to improve our competitiveness not necessarily increase our capacity.

And ensure through that improved reliability and lower maintenance costs to be a more competitive player. So at this point unless there is some material change in terms of government policy or the like.

We believe that we're in a stable place is done I referred earlier to the smaller but stronger we feel good about where we're at we're starting to build chip inventories after coming awfully close at the end of the quarter before the shutdown.

And so I think I think what we've got right now is a good place to be and it's appropriate for the long term.

Fair enough. Thanks, that's all I had I'll I'll get back in the queue.

Great. Thanks, Greg.

Thank you your next.

Next question comes from the line of keeping Montara from BMO. Please go ahead.

Thank you and good morning.

Next question.

It really sounds like the repair remodeling market in the U S has held up remarkably well so far some of the homebuilders have also started to talk about it can be orders, we've seen OSB prices kind of spend in the last few weeks lie ahead and lumber.

Not moved higher.

<unk> are among the key issues.

Go ahead, Kevin sure.

Good morning, Keith.

So yes, you're right. The R&R has been the one segment that has been quite strong and fundamentally we just haven't seen the same growth that we've seen in the new home construction I think that's a big fundamental driver that will support the growth in some of the and some of the pricing.

We also have on the lumber side still inventories are quite high on the ports and in certain jurisdictions and it's probably going to take through Q2, maybe towards the end before we're going to start seeing I believe some price appreciation to get a little bit more attention in the market. So essentially just working through some surplus inventories.

And we're starting to see euro imports come off quite significantly and.

Coupled with maybe the impact of some of the curtailment announcements that have been announced in BC that we will have that impact and then we could see some price appreciation towards the end of Q2.

Got it that's.

Thats helpful on the new rent side are you seeing any signs at all.

Activity improving.

And the last couple of weeks and some of the recent data volumes from the homebuilders suggests that things may be turning.

Curious what you guys are hearing.

Yes, we're hearing the same thing cadence and I think the one thing thats like kind of materially different than maybe the last four or five months that the U S. South southeast has been actually quite strong thats, where the bulk of the new home construction has been but we're starting to see a resurgence in the Texas market, which is really significant its a huge consuming region.

<unk> four for lumber and we're also starting to see pockets of.

Mr. United States like in Phoenix, that's another large consuming areas start to come back after having a pretty quiet Q.

Q4 and into into Q1, so we are starting to see certain regions starting to bounce back which gives us a little bit more confidence, but would love to see how that plays out long term here.

Got it.

And then Doug.

To Houston.

Houston.

Donna maybe.

Talk about how you guys are sort of.

Thinking about it and what are the.

Kind of what are the key things you have in mind as you look to kind of finalized.

And eventually should we expect an update from you guys on it.

For sure. Thanks, Kate note I'll, maybe start with the last part of the question.

Our plan I think we indicated before was to have.

Now the decision.

From management's perspective by the end of Q2 and we're on track for that there's obviously a number of areas that we're looking at to get more clarity on before we make that decision, but that's all underway.

Now.

Human that goes in the direction that we hope which would be to get it all approved.

Approved here then the next step will be in mid July to go to our board. So that's the that's kind of a timing.

I think Kevin mentioned, it as well, but clearly our strategy of <unk>.

Thank you are aware of is we believe we're going to be we will need to be smaller but will be stronger and this will be an important part of that assuming that all goes ahead, and we will see a mill there are probably a smaller mill than we've had before but are much more focused mill much more focused on higher value and more of.

Less commodity than maybe we've been accustomed to in the past, but other than that.

That's kind of where we're at today, but there's lots and lots of questions that we still need to answer as we go forward and that will be.

Okay.

Consideration going forward with the biggest won't be in fiber fiber availability and where thats.

What kind of certainty or at least what kind of will certainly I guess, we can get around that and maybe leave it at that.

Understood that's helpful I'll jump back into queue. Thank you.

Thanks Keith.

Thank you.

Our next question comes from the line of Paul Quinn from RBC. Please go ahead.

Yes, thanks, very much morning, guys maybe.

Maybe start with dawn on softwood lumber I think last quarter, we were talking.

More optimistically about that file we had treated was sitting down with bite and I know you guys try to press to get it on the agenda.

Wasn't successful maybe you can just give us a recap of what happened and where that sits now and is there any any change.

Yeah for sure Paul.

Can add too much there other than.

Clearly we were disappointed in the fact that it wasn't on the agenda to the degree that we thought it should have been in the.

President Prime Minister meeting here, a week or two ago for sure.

And so at the end of the day, we're still we're still working on it I think we're and we're trying to make sure that at least from a pan Canadian position that we're kind of aligning there, but at the end of the day.

We still think it's a ways away here before we make any significant progress, but what we are talking about it.

As things evolve here, we got 10 close to $10 billion on deposit now account for as you know is 850 closing in on $900 million ourselves. So it's clearly something that we think.

Long term here, we need to get some certainty around but.

It's just kind of a work in progress.

And it continues to be that way.

You're pretty close with some of these U S coalition members any any movement on those guys at all any interest and sitting down now that lumber prices have fallen back to more normalized level.

No.

<unk>.

We know we're already good a bunch of us do and run into a once in a while here and there but <unk>.

Personally anyway.

I haven't heard of anything that would give me additional confidence that were.

We're seeing any kind of progress on their side I mean, clearly at this stage. There is still there's still dug in with some of their views and so are we frankly so.

I don't get any confidence yet there were making them a bunch of progress there.

But thats not to say we won't.

Ultimately these things come through our negotiations we will get there in the next might be.

<unk> is probably one to two years.

Okay, and then just turning to the BC interior I mean, it still seems like we need to shut down.

A bunch of capacity there.

You guys had taken some really hard steps in closing bells.

You look at some of the privates and what they've been doing is taking their two shift operation down to one shift, which I don't quite understand how that.

Sustainable long term does that kind of.

That move kind of through.

Frustrate, you a little bit to be able to get to more of a quicker.

Quicker supply demand balance in the B C interior.

Absolutely.

Not really I mean from our standpoint, I mean, we can't control and we don't we don't want actually spent a lot of time on what others are doing and frankly, we're just want to make sure that as we look forward, though we're just focused on where what we can do and what our geographical footprint ought to be right and so which is clearly focused on Europe folks on the U S South books on Alberta.

With some of the associated challenges here that you're aware of.

We're just trying to get the right production production volumes here to match match demand for sure and the fiber availability.

Okay, and then maybe switching over to the pulp side for Kevin.

<unk> had great markets in the last couple of years.

Macro pulp side and you guys had.

Really had challenging operations through that period now we've got a major correction happening in coal and you guys are reinvesting in some just wondering down the road.

With this reinvestment do you exit.

Do you believe that Canfor pulp is going to be well positioned to be sustainable in the long term.

I appreciate the question.

I think it would it's a bit of a full gambit if the answer wasn't yes.

But let's get to the heart of it and I think it goes back to the first question, which is around fiber supply.

As I had mentioned to him here when we look forward we anticipated additional.

Permanent closures.

The fiber supply so we think we're right sized.

For at least what we anticipate to be our fiber supply level.

When we made the decision to take the PG pulp mill down what we did is we chose the mills that had the greatest flexibility.

And whose platform.

We thought was the best from a future competitiveness level.

Yes, it would have been nice to have strong markets for another year just to help us through the transition, but we do believe that we can be amongst the most competitive on the <unk> side, we think our product.

Which is.

Amongst if not the very best in the marketplace in terms of a reinforcing product and if we can position ourselves or continue to position ourselves with those customers that appreciate that and continue to pull a premium.

That will be able to be sustainable for the long term and actually return to the kind of.

ROIC or return or <unk>, whichever measure and investors most interested in.

The same sort of degree we were.

Let's say five years ago.

It's just a function of getting from where we are to do there and it won't be easy Paul but I have a dedicated team that believes in the future and we will continue to work in that direction.

Alright, Thats a luck with that and then just one housekeeping I mean, I think the Mackenzie sell you even know February 22.

It's been over a year, what what is the status of that.

That agreement.

Well I guess right now we have been waiting for the timber supply review to take place and we're expecting to see that hopefully today actually so you're just you're about four hours are already so.

Back at four hours will give you an answer.

Okay.

That's all at best of luck. Thanks.

Excellent.

Thanks, Paul.

Thank you.

No further questions I will now turn it over to Dan Kane for closing comments go ahead, Mr. Ken Yes.

Yeah. Thanks, Thanks, Laura and thanks to everybody for joining the call. This morning, and your interest in <unk> and look forward to talking to you at the end of the second quarter.

Good day.

Thank you. Thank you so much presenters ladies and gentlemen. This concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines have a lovely day.