Q2 2023 Canfor Corp Canfor Pulp Products Inc Earnings Call
Okay.
Good morning, My name is Michelle and I will be your conference operator today.
Welcome to the Canfor and Canfor pulp second quarter analyst call.
Lines have been placed on mute to prevent any background noise.
During this call Canfor and Canfor <unk>, 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's President and Chief Executive Officer. Please go ahead Mr. Kayne.
Thank you Michelle and good morning, everyone. Thank.
Thank you for joining the Canfor and Canfor pulp Q2, 2023 results conference call I'm.
I'm going to make a few comments before I turn things over to Kevin Edson Canfor's pulp President and Chief Executive Officer, and Pat Elliott, Our Chief Financial Officer of Canfor Corporation, and Canfor pulp and our senior Vice President of sustainability as well. In addition, we are joined by Kevin Pankratz, Our senior Vice President of sales and marketing.
In the second quarter, we continued our strategy to align our operating footprint in British Columbia with the available timber supply as our treatment facility was permanently closed. In addition, our Houston facility was temporarily closed pending a potential reinvestment decision.
We have worked in partnership with the USW to support our employees through this very difficult transition.
These were very tough decisions and we recognize the impact on our employees their families our contractors and our local communities.
We are continuing to advance the Houston Brownfield project, we have completed our planning a tactical work. We are also engaged in a series of discussions with the ministry of for Us to understand the future fiber supply outlook for the region we.
We need to be sure that if we proceed and go forward with construction, we will have the required economic fiber to operate consistently and successfully our.
Our discussions with government are progressing well, we hope to complete these discussions in the coming weeks and once satisfactorily concluded we will advance will be advancing this project to our board.
Turning to the current wildfire situation in Western Canada. The 2023 fire season is the worst in Canadian history across Canada over $12 million sectors has been booked to date, making it the worst wildfire season on record BC and Alberta have also set new records for the most hector's burn with British Columbia at almost one point.
$5 million sectors in Alberta at over $1 7 million actors.
With respect to the wildfires I'd like to acknowledge the two brave firefighters and pilot who have lost their lives this year battling wildfires in Canada.
I want to acknowledge and thank our employees and contractors, who are helping respond to the wildfires and are working to ensure continuity across our Canadian operations and protection of our assets. We also thank all of the firefighters emergency responders and military personnel, who are working hard responding to wildfires across the country.
While it is too early to determine the long term fiber supply impacts we have seen significant short term disruptions to our operations, including a three week curtailment of our facility and Fox Creek, Alberta in the second quarter.
Despite a challenging operating environment and depressed lumber markets in the second quarter. We continued to see positive results from our geographic diversification strategy with our European and U S South operations, performing well and generating improved results quarter over quarter.
While high interest rates and affordability constraints are projected to persist through the third quarter, we have seen an improvement in lumber prices in the last few weeks supported by better than anticipated demand and reduced supply.
We are encouraged by the medium to long term market fundamentals and remain focused on executing our diversification strategy and organic growth plans.
Our new facility in Deridder, Louisiana continues to ramp up production and is performing well with a second shift to expect it to be added late in Q3 are.
Our other projects remain on schedule and on budget, including the rebuild of our sawmill in Urbana, Arkansas, Our second Greenfield sawmill in Alabama, and our organic growth in Sweden. In addition, we continue to review additional organic and external growth opportunities as we look to grow our lumber business on a global basis.
I will now turn it over to Kevin to provide an overview of caf for pulp.
Thank you Don and good morning, everyone I want to start with an update regarding the impacts of the labor dispute at BCS ports.
13 days strike followed by an on again off again job action had severely impacted our supply chain.
For reference approximately 70% of our pulp shipped through these ports, both in Vancouver, and Prince Rupert.
As a result, we announced the curtailment at Northwood in July which lasted a week and have resulted in approximately 10000 tons of reduced MBS K production.
We anticipate the supply chain challenges to persist through much of the third quarter and with our pulp mill inventory near capacity. We are closely following the unions ratification vote, which is expected to conclude today.
Turning to our quarterly results Canfor pulp had a challenging second quarter with elevated global pulp inventories and tepid demand, resulting in a significant decline in pulp pricing.
We implemented the permanent closure of the pulp line at our Prince George pulp and paper Mill on April one.
I'd like to take a moment and thank our employees for their commitment to safety and dedication and resiliency as we navigate the current challenges facing our business.
With our operational footprint now better aligned with the current available fiber supply, we anticipate an improvement in our cost structure going forward.
In addition, we believe there is significant opportunity to improve our operational efficiency and reliability, which will support the sustainability of the company for the foreseeable future and allow us to capitalize on the strong global pulp market fundamentals, we believe will remain over the medium to long term.
To achieve this goal we have identified a significant capital reinvestment plan with approximately $500 million of capital spend identified over the foreseeable future.
This includes a major rebuild of the recovery boiler number one at Northwood, which will significantly extend the useful life of this critical asset.
We currently anticipate the work on the boiler to commence in 2025, although the timeline may be accelerated or deferred depending on the condition of the boiler, which will be inspected during our planned maintenance outage in the third quarter.
We currently anticipate spending of more than $120 million and RMB, one subject to final engineering and labor costs at the time of installation.
The balance of the recapitalization consists of smaller projects aimed at improving reliability and asset performance.
While timing and magnitude of spend will take into account market conditions and available cash flow. We currently anticipate our annual capital spend to trend in the neighborhood of $100 million.
For each of the next several years.
I will now turn it over to Pat to provide an overview of our financial results.
Thanks, Kevin and good morning, everyone. The Canfor and Canfor pulp second quarter results were released yesterday afternoon, and my comments. This morning, I'll speak to quarterly financial highlights summary of which is included in our overview slide presentation.
It is always in the Investor Relations section of <unk> website are.
Our lumber business generated an operating loss of $16 million in the second quarter, which included a 64 million recovery of a previously recorded write down of inventory in Western Canada, and an incremental noncash antidumping expense of $23 million. These.
<unk> continued to reflect losses associated with our operations in British Columbia, as a result of weak lumber pricing and a high cost operating environment.
Following the permanent and temporary closures of our chat one in Houston facilities, respectively, as well as the decline in market based stumpage, we anticipate an improvement in our cost structure in BC through the back half of 2023.
Notwithstanding the current headwinds facing our industry, we continue to benefit from our diversification strategy with our U S and European operations generating strong financial results in the quarter our.
Our U S operations benefited from an improved sales realizations as well as the contribution from Deridder, where ramp up is progressing well our European operations contributed approximately $54 million in cash earnings in the second quarter supported by improved pricing.
And for pulp generated an operating loss of $38 million in the second quarter, which included a 7 million inventory write down.
These results principally reflected the sharp decline in global pulp pricing, which more than offset a modest improvement in fiber and conversion costs in the quarter looked.
Looking ahead, we anticipate a challenging third quarter as a result of current pulp market conditions supply chain uncertainty and planned maintenance downtime at northwest notwithstanding the current challenges facing our pulp business. We believe the longer term market fundamentals remained strong.
At the end of the second quarter Canfor pulp had net debt of $46 million with approximately $180 million in available liquidity, including the commitment to receive up to $80 million of new term debt as part of our capital reinvestment plan.
In 2023, we currently anticipate capital spend of approximately $450 million to $500 million in the lumber segment and approximately $70 million for canfor pulp, including capitalized maintenance. In addition, we anticipate camera will continue to allocate a modest amount of capital to repurchasing shares throughout the year and at that time I will turn to.
Paul back to you.
Right. Thanks, Pat So I'll turn it over to you Michelle and we're ready to take questions from analysts.
Thank you.
We will now take questions from financial analysts. If you have a question. Please press star one on your telephone keypad.
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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 Amir Patel of CIBC capital markets. Please go ahead.
Good morning.
Don are you sorry are you starting to see more acquisition opportunities emerge in Europe , given the weaker demand backdrop.
Oh, no no real change in what we do see them occasionally for sure.
But I don't I.
I wouldn't characterize that as any different than what we've seen over the last 12 months to 24 months at all.
Yes, fair enough and Pat I wanted to ask about the Houston potential projects. There. If you did proceed what's your latest estimate on the potential cost and.
Capacity is the project.
Yes at this point and mirrored it's probably in the neighborhood of $200 million Canadian.
Capacity would be sort of three to 350 million board feet.
50.
And then timing of when that would come on top.
That's still to be determined depending on file and available building slots, but.
It's going to be 2025 or later.
Okay. Great. Thanks, that's helpful and just the last question I had for Kevin Pankratz on the lumber side.
With respect to European imports do you have a sense as to what kind of SPF price Prince George.
We need to to kind of see those imports.
Kind of trend one way or the other.
I think that that price level him here really.
It ranges it moves a lot depending on currencies and and what the value of residuals are so it's really hard to pinpoint an exact one year, but we did know that when prices were down at that $333 40 level that you saw that there were other options for the Europeans to tender would be it China or middle East North Africa markets. So.
I don't think Theres always a constant number I think it's going to fluctuate a little bit, but I do think and inflection point is that we maybe anticipate a little bit more pickup in European imports towards the end of Q3.
As lots of a lot of them are still obviously in the downturn.
The downturn in the markets and.
Okay.
Yes.
But it would be great yes.
We see them picking up a little bit in.
And towards the end of Q3.
As of European markets might be have a little bit more.
Cautionary tone towards the back half of the year.
Okay. Thanks, Thanks, Kevin that's that's all I had I'll turn it over.
Thank you. The next question comes from Sean Stewart of TD Securities. Please go ahead.
Thank you good morning, everyone.
Want to start with with pulp.
Kevin <unk> Pat.
I just wanted to understand this this longer term capital program because pass $1 billion, even if it's over the long run is a lot of money.
Can you speak to your comfort with.
Your current liquidity position and canfor pulp and borrowing capacity.
Any perceived needs to bolster that liquidity ahead of.
More aggressive capex and given the extensions how.
Deep. This this commodity price drop is do you see a need to bolster the balance sheet further two to fund this capex program.
Sean Kevin here and I'll answer it quickly on the basis that the purpose of the refinancing was to put us in a good solid place going forward at this point, we're not going back to the market looking for money. What we're looking to do is between that financing and generation of cash within the organization.
To tackle our reinvestment plan as quickly as we can with the available money that we have.
Okay.
Second question is on the European lumber business.
<unk> two intermittent log availability.
Partly tied to Russian law.
Imports are Russian log exports to western Europe .
Any visibility on how long you expect this to continue and how this could affect.
Costs at the segment and result in margin pressure.
I'll, maybe try to pick that one Sean it's dawn.
If you separate the central Europe from Northern Europe , because they are entirely different in terms of.
Several things, including logging in Portsmouth, Russia, but in terms of central Europe hard to say I think thats, probably going to exists here for a while I would say just based on the degree of reliability. They place on Russian imports, but in terms of northern Europe , particularly in Sweden.
There's been some challenges are on just log.
Log availability period in certain locations, but it hasnt been it hasnt had any material impact on us at all and of course from rough from a Russian imports standpoint, we don't it doesn't impact us at all there in northern Europe whatsoever.
But as it stands now Don you wouldn't expect this to undermine your your operating rates.
In your absence.
Market pressure and price pressure in general but.
Production is not constrained significantly by log availability is that a fair assessment, yes, fair assessment and wed like I think we mentioned in Q2, there's been one or two regions were up.
Minor impact in terms of log availability, but we made.
I think thats always a bit of a challenge in certain areas and it may continue to some degree, but we're not concerned about it.
Okay.
Alright, Thats all I have for now thanks, guys.
Thanks, Sean.
Okay.
Thank you.
The next question comes from K 10 men Torah beam.
BMO capital markets. Please go ahead.
Thank you good morning, and thanks for taking my questions.
Maybe first question can you give us a sense off.
Sure.
The demand trends you are seeing in order to ban remodeling and no kind of new residential.
And that's why as we've moved into kind of July .
Sure I can take that one for you and on the R&R.
Obviously year to date have towards the end of Q2, very solid strong demand and while we're not at that same pace going into July it's still at elevated levels. When you look at the the units compared to this time last year, so quite strong fundamentals and we continue to see a very strong performing sector for the balance of the.
Year, yet maybe just not quite at the pace that we saw for the first six months.
And for new home construction.
Obviously, we've seen some resurgence there on the total housing start numbers, which is encouraging better than we would've thought earlier this year and what's encouraging is that we are seeing a recovery of single family home construction versus the multifamily, which I think is positive for our sector and we're seeing certain geographies really performing well and it's good to see markets like.
Texas back which were quite quiet early in the year and Thats, a very large consuming market for lumber and for single family construction and so I think we've got a bit more positive trend on demand in both of those statements.
Alright, that's helpful. My follow up on that.
On the iron ore side. So is your volume up on a year over year basis in R&R is it kind of flattish on has that changed.
Changed materially.
<unk> recently, yes, it's up double digits versus 2022.
And that's a year to date number year to date, yes.
Got it okay.
That's helpful and then.
Switching to.
Part of it.
And coming back.
To an earlier question.
How should we think about.
Kind of the return expectation on this big reinvestment program I mean clearly.
At least in the short term.
We understand that the market fundamentals are all kind of sapphire pricing is down.
Just curious kind of how you think about.
Sort of.
Normalized.
Earnings power and deposit business.
And kind of what the three investment program, what kind of a jump you expect post that.
Hey, Timna.
I think the way I would respond to that is we remain confident in the long term fundamentals for the bulk business and.
And therefore, what we're doing is working towards ensuring our facilities.
Our.
A condition and that allows that sustainable operation long term.
In terms of specifics around returns on various projects I don't have anything there to share.
And likewise.
Looking at earning power into the future as far too dependent on what the markets are doing what we expect to do is be able to return our mills to a level within the cost curve that we think is appropriate for the facilities.
Got it okay.
I'll jump back in the queue. Thank you.
Thank you our last question comes from Paul Quinn of RBC capital markets. Please go ahead.
Yes, thanks very much.
And morning, guys, maybe just start on the lumber side, you said current market conditions I mean in terms of overall inventories, but would you say it's adequately.
Or slightly oversupplied right now.
I think Paul like right now.
I think it's adequate I think it's got a fair amount of pension.
There's been a significant supply out of the system with buyers in eastern Canada reduced European imports and of course reduce supply out of BC.
So I think it's relatively balanced right now and I think our customers inventories are probably still lower than they would normally be.
Okay, so pricing direction for the balance of the year or do you think we sort of sit in this band for awhile, just given that that set up.
Yes.
Yes, I think a lot's going to depend on obviously supply is going to be a big driver but.
I think.
We're going to be in this band and it's going to it's going to be variable and I don't see that exceeding for the balance of different ideas being within that band and that in that aspect. There and then I think the other effect.
He was our offshore markets.
Those are going to be relatively stable from what we've seen for the balance of the years, particularly Japan and China is going to I think.
Be about their opportunity with China with all the investment that they are announcing there we haven't seen a trigger into actual demand yet, but the outlook is that we may see some pickup in China towards the back end of the year.
Okay. Thanks, Kevin that's helpful. And then you guys referenced organic growth in Sweden is that.
Is that like a 2% to 3% number is at a 5% growth over year over year.
Yes, Paul I mean, it's Pat we're sort of seeing roughly 100 million feet a year over the next couple of years. So I think <unk> talked about we think we can get up towards 100% there from one 5% so.
Number of slow and steady.
Numerous projects, I guess, better and better slowly recognizing that total.
Okay, and then maybe just switching over to the pulp side for Kevin.
Yeah.
So the cost for the paper side come up in the quarter I guess, that's a result of.
Some of the cost attributed to shutting down the PG pulp and papers.
Pulp supply line.
How material were the cost drop.
I mean as paper going to sort of generate that kind of $20 million to $25 million in EBITDA going forward once you.
Once it's on the new operating platform.
Yes, we are comfortable that paper, it's a really steady part of our value added.
Program.
The most sensitive they are as to pulp prices and so I think you can track the contribution and with pulp prices easing off.
We'll see improved contribution a little bit on energy as a negative in the first quarter, but we don't see that being a significant issue going forward.
<unk> transition over to Entercom supplying has largely been able to do that and keep our cost base of paper consistent.
Okay, and then just overall I mean take a look at the enterprise value of Canfor pulp right now what I'm, saying, it's around $200 million. Canadian you guys are just kind of announce a $500 million rebuild effort what is the market missing on the valuation of your assets on capital pulp side.
Yes, I wish I understood Paul.
Alright.
Got a whole bunch of phone calls to make to find an answer to that.
Alright, I'm, a little mystified myself.
All I had best of luck guys. Thanks.
Thanks Bastian.
Thank you.
I'll turn the call over to Don King for closing remarks. Please go ahead.
Okay. Thanks, Thanks, Michelle and thanks to everyone that participated on the call. This morning, we certainly appreciate your support of Cat four and wishing you all a good safe rest of the summer and we'll talk to you at the end of this quarter take care.
Okay.
Ladies and gentlemen, this does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your lines.
Okay.
Okay.
Yeah.