Q2 2024 Canfor Corp Earnings Call

Good morning, My name is Gina and I will be your conference operator today welcome to Canfor and Canfor pulp second Quaker analyst call all lines have been.

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 Companys 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.

All 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 operator, and good morning, everyone.

Thank you for joining the Canfor and Canfor pulp Q2, 2024 results conference call I'm going to make a few comments before I turn things over to Kevin had some enforced ops, President and Chief Executive Officer, Elliott, Our Chief Financial Officer of Kemper Corporation and Ken.

And our senior Vice President of sustainability. In addition, we are joined by Kevin Pankratz, Senior Vice President of sales and marketing and David <unk>, our SVP of supply chain transportation and digital.

Touching on markets I'll share a few Qt Q2 business days as you know over the past decade, Kemper has been focused on building its globally diversified operating platform by increasing our footprint in Alberta, the U S and Europe, while working towards a smaller a stronger presence in British Columbia.

During Q2, we made some difficult decisions with respect to our BC operations, including the permanent closure of Polish Formula and the Prince George area and the suspension of plans to reinvest in our new Houston sawmill.

Operating conditions in British Columbia remain extremely challenging as we continue to face persistent and significant constraints accessing economically viable.

Coupled with current market conditions, we have taken steps to reduce our summer operating schedules by 90 million board feet. Despite.

Despite these challenges our kootenay operations have performed well as they support our high value product focus serving geographical diversified markets with Bce's high cost operating environment depressed North American lumber markets and expected increase export duties next month, we will continue to evaluate and adjust our you see operating rates.

To mitigate ongoing losses.

Florida, we continue to generate generate positive operating income in Q2 supported by favorable loss cost and strong operating results. We continue to see progress in productivity time and great improvement there.

In the U S. South in April we announced the decision to permanently close our aging Jackson, Alabama Mill, which was completed in mid June.

Action was taken as part of our continued focus on restructuring consolidating and expanding our production at modern facilities in regions with strong fiber baskets.

Our axis, Alabama, Greenfield project is proceeding well as we work towards startup in the fourth quarter.

On commissioning of this facility our existing sawmill in mobile, Alabama will close.

These investments and strategic consolidation of our Alabama operations will strengthen our long term position well capitalized highly efficient facilities that are positioned to be competitive for the long term.

Pending acquisition of El Dorado, Arkansas is expected to close imminently. After our planned U S 50 billion dollar capital investment will grow to $175 million Northlake facility over the next several years.

Implementing our existing assets in the region. This acquisition will create synergies at vertical integration opportunities as we grow our footprint with top quartile operations.

I also want to highlight our European operations, which continue to deliver strong earnings this quarter, largely tied to solid activity and improved market pricing, our beta operations benefit from market Optionality and with their focus for specialty products, we're able to differentiate themselves from competitors oddity markets.

I'll also touch on two issues that we're closely watching and preparing for the first is disruption to our supply chain, particularly with the shutdown of <unk> mainline due to that Josh wildfire as well as the potential for a Canadian rail strike involving book Canadian National and Canadian Pacific Cassie Southern.

With rail, making up approximately 50% of cat four and cat helps combined transportation capacity stability and reliability of candidates to major railway says a significant concern.

We're planning mitigating actions to ensure that our businesses are in the best possible position should a rail labor disruption occur. The second is the ongoing softwood lumber dispute and crews increased duty environment in February this year. The U S Department of Commerce announced preliminary rates for the period of review, which we would anticipate.

Beth will rise considerably when they go into effect in August.

As of the end of Q2 temporary has paid cumulative cash deposits of $956 billion.

This quarter post considerable challenges for a lower business, while we continue to believe market fundamentals remain solid for the medium to long term, we anticipate lumber markets to remain challenging for the balance of year.

Notwithstanding current lumber market dynamics solid results in Europe, and Alberta highlight the value of our diversification strategy.

Started to see improvements in our underlying cost structure, following recent capital investments and the difficult but necessary decisions to restructure our platform. We believe these decisions will allow us to capitalize on solid market fundamentals for the long term and provide a stronger platform.

I will now turn it over to Kevin to provide an overview.

Thank you Don and good morning, everyone.

For pulp generated solid financial results in the second quarter with strong global pulp pricing more than offsetting the impact of lower production.

On the back of global supply disruptions that producer downtime help pricing in China was up 9% in the second quarter with more pronounced increase sustained in North America and Europe.

While a portion of this price increase will be realized in our third quarter results improved pricing contributed to a $16 million improvement in cash earnings quarter over quarter before taking into consideration restructuring costs.

Turning to our operating performance our results reflected the impact of the scheduled maintenance outage at <unk> combined with the unplanned downtime to accommodate repairs to enter cons recovery boiler.

Pulp production was down 18% quarter over quarter operating rates improved in June and returned to normalized levels in July.

In May we announced the decision to indefinitely curtail one production line at our North Dakota, MBS pulp mill due to a lack of economically available fiber in northern BC.

<unk> is anticipated to commence in August.

Speaker Change: The impact these decisions have on our employees their families and the local community and I'd like to thank our employees for their unwavering commitment and perseverance as it were.

Speaker Change: Spot to the external pressures facing our business I will now turn it over to Pat to provide an overview of our financial results.

Thanks, Kevin and good morning, everyone Canfor and Canfor pulp results were released yesterday afternoon, and my comments. This morning, I'll speak to our financial highlights summary of which is included in our overview slide presentation located in the Investor Relations section.

Right.

Our lumber business generated an operating loss of $231 billion second quarter included $51 million range out of inventory.

Cash <unk> expense of $40 million target antidumping accrual rate of $32 million asset impairment charge and a $33 million restructuring expense in connection with several sawmill closures announced in the quarter.

Adjusting for these noncash items, our lumber business generated an operating loss of $75 million in the second.

Compared to a similarly adjusted loss of $72 million.

These results reflects eight weakness in north American lumber markets and losses associated with certain DC operations due to constrained access.

Okay.

European operations contributed $45 billion in cash earnings in the quarter at approximately $76 million.

Speaker Change: Highlighting the importance of our diversification strategy.

European results reflect capacity improved lumber sales realizations and to a lesser extent increased production volumes.

Canfor pulp generate an operating loss of $6 billion, including a restructuring charge of $6 million Canadian.

Related to the upcoming north with one line indefinite curtailment.

Paris to an operating loss of $16 million.

First quarter <unk>.

Kevin mentioned improved results largely reflect reflected the benefit of higher pulp pricing, which more than offset the impact of reduced production and shipment volumes associated with downtime.

At the end of the second quarter Canfor pulp had net debt of $79 million to $154 million of available liquidity of which $80 million is restricted for use towards a potential reinvestment in our sweets recovery boiler number one.

And four excluding Canfor pulp ended the quarter with net cash of approximately $139 million.

Speaker Change: On a consolidated basis capital expenditures were approximately $170 million, including approximately $14 million for Canfor pulp.

We anticipate capital spending of approximately $450 million in the upper segment in 2024, including our remaining spend on our Alabama UCL various growth initiatives in the U S South and sweetener.

Land capital investments.

El Dorado facility, we anticipate a significant reduction in our capital spend in 2025 following the completion of three major projects in the south.

Speaker Change: For Canfor pulp, we're currently forecasted capital spend of approximately $50 million 2024, including capitalized.

Consistent with prior quarters anticipate Campo allocate a modest amount of capital to opportunistically repurchase shares throughout the year.

With that Tom I'll turn it back to you.

Thanks Pat.

Operator, we're now ready to take questions from analysts.

Okay.

Thank you we will now take questions from financial analysts. If you have a question. Please first one on your telephone keypad.

Using a speaker phone. Please keep your Vascepa and then Chris Star one if at any time you wish to cancel your request. Please press star two.

Speaker Change: Press Star one if you have a question there will be EBIT Bos Web participants Register a quick question.

Speaker Change: For your patients.

Your first question comes from the line of Ben Isaacson from Scotiabank. Please go ahead.

Thank you very much and good morning, everyone. Just two quick ones for me first can you just run through your capital spending plan over the next three years and specifically how much flexibility is there to pull back if needed.

The announcement of Houston that you've mentioned.

Commitment to the El Dorado facility as well thank you.

I hate to ask Pat I'll go ahead, so I wouldn't say we have.

Publicly available capital plans for the next three years, obviously the teams got lots of ideas I think our strategy that we've talked about a lot over the last couple of years is this major reinvestment in yourself, which is kind of coming to conclusion. This year.

Our goal has started to arrive at the end of this year was a very strong balance sheet, which will view as I mentioned in my comments, we still have $140 million of that cash.

So beyond that we have not made any beach. So we have the ability to go kind of how can we want so I would say at this point, we will read the market and we will look at sort of how we ramp up our new facilities and then we'll make decisions on that basis, we're not committed to a major capital program.

At the end of this year.

That's helpful. Thank you and then just my second question is on the European business can you just tie together, how you see Europe doing.

In conjunction with exports coming into the U S market as well or do you expect that to continue slowing down as well as Europe starts.

To pick up thank you.

For sure if that maybe I'll just make a quick color on that maybe Kevin you can add to it but in terms of thanks, Pat first of all.

The question I think in terms of.

Speaker Change: Swedish mills that should begin to the United States I mean, clearly we've been pretty consistent over the years and our store is running around 10%, maybe it's not quite 50%, but basically they're really advantage of Sweden.

They were able to capitalize on the fact that we've got so much optionality in terms of where our products go from Sweden because of the high value focus that we have there is we got lots of choices from Middle East North Africa, Australia took basically all markets.

So.

As we look forward, we don't see a real big change in terms of what we're doing there if anything it will probably be kind of similar to where it's at or a bit less.

Great. Thank you very much appreciate it.

Thanks. Thank you and your next question comes from the line of Sean Stewart from TD Cowen. Please go ahead.

Thank you good morning, everyone a couple.

Couple of questions.

I'll start with you or Don if you want to take it as well.

Yes.

The slow buyback activity and this has been a trend for you guys and arguably your wise to wait when others were buying back stock at higher levels.

I guess, what given the balance sheet strength, even as especially as capex and set to moderate here.

What do you guys wait for in terms of the signal to get more aggressive is it clear floor in the commodity market transparency on earnings bottoming out.

Just updated thoughts on how youre thinking about.

T I D.

Sure Sean I'll take that.

Speaker Change: Yes, I think fair quite weak.

I think been fairly clear in the last couple of years that we saw a strategic imperative for US was to continue to perspire business through capital investment in <unk> in Sweden.

We've committed to that we've done that at the same time preserving balance sheet optionality that I just spoke about on the prior question here and so I think as we think about where we arrive at the end of 'twenty four very comfortable with our balance sheet and frankly, we're not going to stretch it.

Speaker Change: When you talk about market outlook, we're still cautious about 2025.

Youre going to see US just continue to pick away at the share buyback, but I don't think there is a signal that would really change that I think we believe that the stock is undervalued and we acknowledge that.

We think the bigger returning to long term as Rob This diversification strategy and so we will continue to focus on that and then continue to preserve that balance sheet strength.

Really uncertain markets over the next 12 to 18 months.

Okay. Thanks for that context.

Second question is just on the sawmill downtime through the back half of the year you threw out some numbers in addition to.

Polar going down permanently.

I guess.

Don a little more clarity on how you take that downtime, whether it's an NBC or the USA. How concentrated is that around a few assets is it broad based shift reduction how do you suppose optimize cost structure as you continue to take these these rolling curtailments.

For sure I mean, I'll take that Sean This is Scott. So yes. It's a good question I think that for Q3.

Expected first of all in total will be around $150 million to $200 million in total downtime across North America, including the southern tide as well as PC, particularly and Thats, probably going to be in the neighborhood of 60% to 65% something like that in BC.

When you start to look at that.

What we try to do and we'll continue to adjust for.

Excuse me just to match our production as best we can with what we anticipate market demand will be the capex or the downtime that we are taking in the U S. Telcos basically related more to some of the capex that were doing down there and obviously to some degree markets for sure.

They are either as you know, but also but NBC is more related to market and some of the challenges that we continue to face it seems like Atlas of the year in terms of accessing economic fiber.

Speaker Change: So that's the decision and that varies by mill NBC, maybe a little bit more specific to your question, we have different challenges around that in different parts of the province, but overall, it's still definitely a huge a huge issue for us like it is I think for everybody in British Columbia.

Got it okay. Thanks for that I'll, maybe just sneak one last one and done.

As rates on the duty side are set to increase in August again.

Speaker Change: Any broader thoughts on.

Developments in the trade file it's my understanding the Canadian industry has been meeting regularly to try and come up with common ground.

To potentially go to the U S with <unk>.

Any thoughts on a pathway towards negotiations if so what sort of timeframe are you thinking about.

Yes.

Speaker Change: First of all.

I think ultimately we need to get a settlement at some point.

Which I've said many times, Sean for sure, but at the end of the day, our view and I think it's just it keeps increasing here with some certainty that's created by the situation in the U S. Political these same in Canada really politically.

But notwithstanding all of that are viewed as the just the ways away for sure and I think it was.

A few times before but I don't think anything's changed from our point of view, it's still a ways out I think.

Whether it's two years three years I'm not sure.

The group this Matt as you referenced we've had conversations for sure and we've got a number of them actually but.

And as we do those but in terms of.

In terms of that.

Given us more confidence that there is an agreement here in the near term, we don't see that.

Thanks for that detail, that's all I have.

Thank you once again should you have a question. Please press star one on your telephone keypad.

And your next question comes from the line of Matthew Mckellar from RBC. Please go ahead.

Hi, good morning, Thanks for taking my questions maybe.

Maybe I'll lead off with one for Kevin.

How do you expect the closure of the line at Northwood affect your cost structure in the pulp business.

How would you think about the kind of dynamic around lower volumes in some of the fixed cost absorption issues versus ability the first fiber from the tighter radius.

Thank you for the question, Matt who will start on the operating costs. The intent that we have is to maintain our competitiveness at that made a lot of single line, a commensurate or improved.

Speaker Change: Where it was with two light I think that's really required for us to maintain our position within the broader cost curve.

Therefore, we will require reductions in our fixed costs better.

Better proportionate with the reduction in the overall.

<unk> in terms of accessing fiber.

Speaker Change: As you've heard from Don the overall structure and problem with NBC, it's affecting pulp every bit as much as lumber and so I don't think that there should be viewed as a material improvements in fiber cost.

Going forward with this reduction.

Okay. Thanks, very much does that help.

And then just on European lumber.

It sounds like you saw relatively solid DIY activity in Europe in Q2, and just setting aside the seasonal slowdown in Q3 do you expect that to kind of continue into Q4 and 2025.

And then just can you can you provide some updated color on how youre thinking about how Swedish log costs evolve over the next few quarters. Please.

Maybe the first question, Kevin you've talked with us.

Yes, yes for sure.

The DIY segment has been one of the more positive.

Statements in the marketing and expect that to continue in Q3 Q4, but the other statement. So we are expecting a little bit more caution and challenge in the back half of the year.

As far as the DIY cyclical.

And then the second part about your other question around log costs in Sweden.

Speaker Change: On a year to date basis, they're up probably in the neighborhood.

10%, probably depending on the location there as well.

But on average that's probably safe.

What's that number as we look forward, though I think we've had some sequential increases here over the last number of quarters and I think our view is that starting to slow down now as we go forward here.

We expect that to continue to decline.

Speaker Change: Sorry go down, but it will be stabilized.

And the next while.

Part of that's due to some of the manufacturers for sure that are more commodity focused or more of our guests and some of the specialty focused companies.

So overall, though we wouldn't say that it's scheduled quite hours going to start to flatten out.

Alright, Thanks for the help that's all from me I'll turn it back.

Okay. Thanks, Matt.

Thank you and your next question comes from the line of Jason Montara from BMO. Please go ahead.

Good morning, and thanks for taking my question.

I'm just curious to start with on the lumber side can you talk to trends on the R&R side.

Especially as the quarter progressed and as you said you had an end of July.

Have things stabilized are you seeing any kind of signs of uptake are things slowing down even from from what you saw in Q2 can you provide any additional color there.

Yes go ahead Kevin.

Good morning, John.

Yeah on the R&R segment in Q2 for sure we saw the first signs that based on our data.

Coming off of Q1 and.

And we're tracking that data every week and while its off it's still elevated.

Above pre COVID-19 levels, So I think Kevin.

The R&R statement, probably guiding to that kind of trend for the balance of the year and expecting a bigger uptick in 2025 with larger projects, but definitely trending off from the pace that we have been that we saw in Q1, but again just to reiterate above the pre COVID-19 levels at 2019.

Yes.

Is there any way to sort of quantify on the R&R side, you know kind of where your volumes are either on a sequential basis or on a year over year basis percentage basis any kind of.

Ballpark sense on kind of how would that how it's trended area.

<unk>.

So it really it really varies depending upon which region that you're in but.

It could be anywhere from 2% to 8%, but it's in that kind of magnitude, but there is quite a bit of a range depending on the regions in which you are looking at the data.

And given the.

Specific regions that have zika or the product categories within auto that have equal or is it more broad based.

Okay.

It's there's no one that actually will have a specific one there cotan, it's kind of hard to quantify exactly where.

Speaker Change: When it's happening but it's.

Speaker Change: It remains just only to weaken and how theyre doing their inventory replenishment, but just overall, it's just in that range that I said about that two 8%.

Understood. That's helpful and then just on lumber inventories.

Kevin just curious kind of what is your sense of.

There the inventories are both both that you all know then add in the channel.

Kind of where the multi.

Multi year.

Speaker Change: Yes, I mean, that's a great question and that's always what we struggled to really identify with because when you look at the supply side, we know from our European markets were seeing quite a bit of a reduction, especially in central Europe, you've had the BCE reductions.

Speaker Change: Curtailments that we've talked about already and of course, you still have that Russia and Belarus.

<unk> disruption so there's been quite a bit of supply out of the system and when we are in the market talking to all of our major customers and while demand is off it's not horrible. So if demand is off.

The 8% or 5%.

The inventories are higher than we would think and I think thats it.

It's hard to quantify but obviously, it's a little bit higher than we would think because otherwise we would see.

Speaker Change: Either price stabilization or some kind of price a pickup.

So it would be my comments.

That's very helpful I'll jump back in the queue. Good luck.

Thank you.

Thank you once again should you have a question. Please press star one on your telephone keypad.

Okay.

Thank you there are no further questions I will now turn it over to Don King for closing comments go ahead, Mr. Kayne.

Alright, Thanks, operator, and thanks, everyone for joining the call. We appreciate your support of cap core and we will look forward to talking to you at the end of the next quarter. Thank you.

Speaker Change: This concludes today's call. Thank you for participating you may all disconnect.

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