Q3 2023 Canfor Corp Canfor Pulp Products Inc Earnings Call

[music].

Okay.

Good morning, My name is Johnny.

I will be your conference operator today, welcome to Canfor and Canfor pulp 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.

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 a stick.

I would now like to turn the meeting over to Mr. Don Kayne.

And for corporations, President and Chief Executive Officer. Please go ahead Mr. Kayne.

Thank you operator, and good morning, everyone. Thank you for joining the <unk> four and the Canfor pulp Q3, 2023 results conference call I'm going to make a few comments before I turn things over to Kevin Edson Canfor pulp President and CEO and Pat Elliott Chief Financial Officer of Canfor Corporation, and Canfor pulp and <unk>.

Senior Vice President of sustainability. In addition, we are joined by Kevin Pankratz, Senior Vice President of sales and marketing I'd like to begin by acknowledging the devastating wildfire season in BC, Alberta and across Canada. This summer.

I think the firefighters the first responders the military personnel enforce the contractors, who worked tirelessly over the summer responding to record breaking wildfires, we are working with the provincial governments to assess the impact of the buyers on the fiber supply ensuring timely access to fiber and discuss any lessons.

Alert we appreciate the government's willingness to have these open and honest discussions while we saw an improvement in our cost structure in British Columbia in the third quarter. It remains a challenging jurisdiction as the fiber supply in the interior of British Columbia continues to be constrained due to the impacts of the wildfires pest infestation.

Government policy and land use decisions. These factors in combination with a lack of a reliable access to economic fiber and weak market conditions are resulting in a very challenging near term outlook in British Columbia.

While recognizing the significant current challenges we remain committed to our strategy of having a smaller but stronger operating footprint in British Columbia.

September we announced that we will build a new low cost highly efficient facility in Houston that will be globally competitive.

This investment decision came after a careful review of the economically available fiber supply in the region and after extensive discussions with government and indigenous nations in the region.

I had the opportunity to meet with many of our employees in Houston, a few weeks ago. We certainly appreciate their patience and perseverance, while we made the decision and they share our excitement to have a modern state of the art facility in their community. We are now working on a detailed project engineering and permitting requirements.

While lumber prices are anticipated to remain under pressure in the short term due to affordability constraints and high interest rates, we do remain optimistic about the medium to longer term prospects of our industry.

We continue to see the benefits of our diversification strategy through the third quarter with strong earnings earnings generated in the U S South and solid earnings in Europe, Despite seasonal downtime.

We are pleased with the ramp up of our <unk> facility, which added a second shift in August and the progress of our other organic growth initiatives, including a rebuild of our Arkansas mill second Greenfield that Alabama and organic growth in Sweden.

We remain committed to our organic growth program with the investments further improving our global diversification, reducing our cost structure and significantly increasing our production capacity.

Our balance sheet strength will support continued reinvestment in our operations and while we are prepared to remain patient until the right opportunities present themselves. We continue to assess various external growth initiatives as we look to further grow our lumber business globally.

Now I'll turn it over to Kevin to provide an overview of capital of pulp.

Thank you Don and good morning, everyone Canfor pulp had a challenging third quarter with continued weakness in global pulp market significant operational downtime weighing on our financial results.

The Northwood pulp mill experienced the brunt of lost production due to a combination of the downtime related with the labor dispute at BCS ports are planned maintenance shut down late in the quarter and then the struggles to restart after both of these curtailments in total third quarter production was reduced by approximately 65000 tons.

A further 30000 tonnes will be lost in the fourth quarter.

With regards to North Woods planned maintenance shut down the key activity was a comprehensive inspection of record recovery boiler number. One we are pleased that the results confirmed our expectation that RMB one remains in stable condition, thus removing any concerns about the need to advance the rebuild any earlier than 2025.

Hi.

We're also pleased with recent market developments with the reduction of demand supporting price increases in Asia and announcements recently in North America and Europe.

We would note that our reduced output in Q3 and expected impact in Q4, the anticipated lag between market mill net realizations will extend such that we do not expect to see the impact of these increases until early in the new year.

Previously, we announced the recapitalization program covering all three of our facilities Northwood Entercom and specialty paper, we remain committed to this program supported by cash generated from operations and existing liquidity, though the market is improving we are still cautious about the outlook. So our early guidance on cap.

<unk> will be for another modest year in 2024.

I'd like to take this moment to acknowledge and extend our appreciation to the employees at Northwood and Intercontinental specialty paper for their continued efforts perseverance and commitment to safety as we navigate the current challenges facing our business and.

And with that I will turn it over to Pat to provide an overview of our financial results.

Thanks, Kevin and good morning, everyone can foreign Canfor pulp third quarter results were released yesterday afternoon.

My comments this morning, I'll speak to quarterly financial highlights summary of which is included in our overview slide presentation in Investor Relations section of <unk> website.

Our lumber business generated an operating loss of $1 million in the third quarter, which included a $19 million recovery that previously recorded write down of inventory in Western Canada, and a net duty recovery of $43 million.

While our cost structure, British Columbia improved slightly in the third quarter. These results continued to reflect losses associated with our BC operations as a result of weak lumber pricing and <unk>.

High cost operating environment.

Notwithstanding these challenges we continue to see the benefit of our diversification strategy. Our U S operations generating strong results in the third quarter supported by stable unit margin and increased volume or.

Our European operations contributed cash earnings of approximately $31 million in the quarter with slightly improved sales realizations offset by.

Some are down.

European operations have generated cash earnings of $135 million to date 2020.

<unk> generated operating loss of $49 million in the quarter, which included a 2 million recovery of previously recorded inventory write down.

These results reflect the weak global pulp markets and extensive downtime at Northwood Despite gene interruptions.

It will have maintenance downtime and reliability issues upon restart which weighed heavily on production and unit cost structure in the quarter.

With production that northward stabilizing we anticipate improved results in the fourth quarter, although our results will reflect the impact of unplanned downtime in October and an unfavorable timing lag in shipments versus orders.

At the end of the third quarter Canfor pulp had net debt of $81 million and $146 million of available liquidity, which $80 million is restricted for use towards future reinvestment in north woods recovery boiler number one.

Notwithstanding the current challenges facing our pulp business, we believe the longer term market fundamentals remain strong.

In the short term, we have undertaken a series of measures to mitigate the financial impact of weak global market and persistent reliability issue.

In 2023, we anticipate a capital spend of approximately $500 million in the lumber segment and $70 million for canfor pulp, including capitalized maintenance.

We anticipate capital spend of $450 million to $500 million in the lumber segment in 2024, including the remaining spend at Urbana and our Alabama, Greenfield and various organic growth initiatives in the U S South.

For Canfor pulp, we expect capital spending to be at or lower than 2023 in.

In addition, we anticipate camera will continue to allocate a modest amount of capital to repurchase shares and with that Don I'll turn it back.

Thanks, Pat So operator, where we're at.

Okay now to go ahead with questions from analysts.

Thank you we will now take questions from financial analysts. If you have a question. Please press Star Star.

Star one sorry on your telephone keypad.

Finally, please switch zebra and then plus star one if at any time you wish to cancel your question. Please press star zero.

I'll be brief pause while participants register for questions. Thank you for your patience.

Our first question comes from Amit <unk> from CIBC. Please ask your question.

Hi, good morning.

Don in your outlook, you were pointing to a European lumber prices coming under some pressure in Q4 has there been any change this year in the sort of share of your European.

Lumber output that's exported to the U S.

Could you comment on how the returns for Vida might compare between selling to the U S versus selling within Europe.

Yes for sure.

So maybe I'll take the first part Kevin maybe you can talk a little bit with a mirror in terms of the volumes coming into U S compared to last year first of all.

Yes.

Like obviously.

I would say, it's a little bit off from last year, but overall, it's pretty consistent year over year in the markets that we serve.

Because we do have a core programs that we support and Theres, maybe a pivot of about 20% that we could allocate to markets that are maybe better demand signals are stronger economics, but I would say that in Q3 off a little bit into into into the U S.

And then the pick up on that volume was into other markets such as that.

Middle East North Africa markets, and and of course into the UK and then more into Japan, So really leveraging the global footprint and the diversification in the market. These are maybe just add to that I mean, I think Kevin.

One thing for sure that we have in Sweden is where first of all reverse specific on our products that we manufacture there for North America.

It's very specific and customized products, but at the same time, we've got a lot of flexibility and a lot of options in other markets that into a lot of cases are more favorable from a return standpoint. So I think the key takeaway really in Europe or in North America as we've got lots of flexibility and we utilize that as we need to for customized for the most.

Pardon.

Great. Thanks, Tom that's helpful. And then just turning to the U S market just given some of the affordability headwinds facing consumers what.

What would be your view for 2024 for the R&R market in terms of volumes.

Sure Yes.

Like as we've said on previous calls the R&R market has actually been quite resilient and while we're not at the pace that we were at the first half of the year, we're still at more normalized ROE kind of expect agent and that sort of like 2% to 3%. So for 2023 will be at the end of 2022 and 2020.

Four we are guiding to just a modest debt increases not too that some of the <unk>.

Surges that we've seen in the past few years to your point because of some of the affordability and interest rate challenges, but the key drivers that are driving R&R are still there the age up holes.

A big driver that they look at and of course people staying in their homes not selling as much and investing in their homes. So we do still think that that segment is going to be resilient through 2024.

Okay fair enough.

Thats, all I had I'll turn it over thanks.

Excellent.

Thank you. Your next question is from Keaton Memorial from BMO capital markets. Please ask your question.

Thank you.

Hey, just coming back on the on the pilot.

Capital expenditure or can you just remind me again.

You guys are thinking about the multi year program that you have on slide.

Sounds like you guys seem to have pushed it back a little bit correct me, if I'm wrong on that and just thought up how you think about sequencing over the next few years.

Are you referring to the pulp recapitalization.

That is correct.

So Keith when we made the announcement what we were doing is indicating the level of reinvestment that we felt was needed in these facilities. We also indicated at that time that it would have to come from existing liquidity and the ability of our operations to generate cash what we were concerned about was how.

Our recovery boiler at Northwood was bearing.

The feedback from the latest turnaround is it's actually in very solid condition.

We did not see any material deterioration and therefore at this point don't have a timeline on that which allows us to have some more flexibility around the priorities on capitalization and matching that to our ability to generate cash.

It's a long winded way of getting back to I do believe that we are stretching out that capital.

Over a longer period of time to ensure that we protect the balance sheet as it is.

Got it okay. That's very helpful I'll jump back in the queue.

Thanks Keith.

Thank you. Your next question is from Sean Stewart from TD Securities. Please ask your question.

Thank you good morning, everyone.

Kevin I would like to turn I wanted to follow up.

Just wanted to follow up on that last question with respect to the pulp Capex plan.

So beyond RB one at Northwood.

The rest of these initiatives that you had planned over a four to five year timeframe.

This is all modular discrete spending initiatives across the portfolio that you can.

Toggle on timing.

This flexibility beyond RB one is that the right way to think about it.

Absolutely, Sean and the way I would look at it is it's a general commitment to maintenance capital is low one.

Nick Earl ROI, and really should be viewed at recapitalizing, the mills to get them back into the best condition. They can be and so the trade off on when you do that is what are the maintenance costs.

And what are the impacts on productivity between now and that and so there are a multitude of smaller discrete projects that will be prioritized based on the risk and the impact that they have and there'll be slotted based on available liquidity or cash to advance.

Okay that helps.

It helps frame it for me.

Second question for Pat.

You had 48 million of investments that you acquired this quarter can you give us any context on what that was.

$48 million of investments like in our.

On the cash flow sorry, Shawn.

Yes, Sean I'm going to have to get back to you apologies for that I will get back to you.

Hey.

Alright, Thats all I had thanks guys.

Thanks, Sean.

Thank you.

Our next question is from Matthew Mckellar from RBC capital markets. Please ask your question.

Hi, good morning, Thanks for taking my questions.

First when you look across the markets.

Can you just kind of following amir's question, but do you see any risk of increased imports of European lumber into North America, given some of the softness in European demand, where does the combination of relatively low lumber prices in the U S and reduce supply into Europe from.

Russia, and Belarus, just not support that scenario.

Go ahead, Sir Yes, Hi, Matthew Yes, I think.

I think the European producers are going to look at other markets for sure U S will be one of them how much outside.

It's going to be hard to really estimate but theres.

Just any other markets that are going to support growth that are going to have comparable if not better returns.

China and Japan the middle.

Middle East.

And so I do think we'll see some modest things there, but they are also facing some cost challenges as well until if we don't see a material pick up in prices North America could keep those volumes.

But.

That's our outlook.

Yeah.

Okay. Thanks for that.

Maybe just sticking to the lumber business here.

At about a 50 million board foot mill in Sweden in the quarter. It sounds like there is potential to expand that mill.

Can you talk at all around what that looks like today and then as you think about the potential expansion, how we should think about.

Maybe a timeline there or required investment dollars return on investment targets things of that nature.

Sure Matthew it's Don I'll, just real quickly on the at least the first part of it it's really a facility. That's a unique a unique opportunity that came up came up for us for our Swedish folks. So we really thought could add some certainly some more specific added value to our customer base. So it was really driven by our customers and the opportunity is to treated lumber facility.

Basically.

We've got opportunities to increase production there.

Move into next year in terms of how much dollars is going to get to the cost to get that incremental production without its early days on that we just closed recently here Buddy.

It's a real good opportunity here to get closer to our customer base in Sweden.

Our Swedish company one of the things that they do that we think is.

Huge advantage and one of the reasons, we have such an interesting and it is a focus on value added products and distinguish themselves outside of the commodity arena and this is just another example of that that we really think we can capitalize on.

Great. That's helpful. Thank you.

And then just maybe to close of pulp.

Can you elaborate at all on exactly what the operational issues were at Northwood around the restarts.

Matthew It's a very fair question and I wish I could point at one thing being a problem, but it was very sadly a combination of different things.

Just failing to operate a restart the way we wanted and then the struggles that we had to get those mills up and stable.

And of course, they're very complex facilities as everybody knows but we really stumbled out of the gate.

None of the issues that we ran into were related to work that was done on the turnaround. It was all various pumps and different cleaner and screens and the like that just stripped us up all the way along.

And so I don't have a singular.

One thing to point out other than the general condition of the facility.

Okay. Thanks, that's all for me I'll turn it back.

Okay.

Thank you.

Another question from Quito Memorial from BMO capital markets. Please ask your question.

Thank you Hey can you just on the lumber side can.

Can you talk about what you guys are seeing.

On the loss cost.

In the south in BC and in Europe.

Log costs. If you just if I understand the question keeton, 100%, yet la caution NBC or relatively flat stumpage down a bit so it will be down.

Small amount I would say overall and we expect that to kind of continue in terms of Europe is up log costs in Europe were up a bit for sure.

But not significantly but they are up definitely.

But.

We're not concerned about that.

Got it okay perfect. That's helpful. Good luck.

Alright. Thanks.

Thank you there are no further questions.

I'll now turn the call over back to you Mr. John Kane for any closing remarks. Please go ahead, Sir alright, thanks, operator, and thanks, operator, and thanks to everyone that participated in the call and we look forward to talking to you at the end of the year. Thank you very much.

Thank you.

Ladies and gentlemen that concludes our.

Conference call for today. Thank you all for participating you may all disconnect.