Canfor Corporation (TSX:CFP) and its subsidiary Canfor Pulp have announced their first-quarter results for 2024. During the earnings call, CEO Don Kayne discussed the company's strategic efforts to diversify globally, specifically highlighting their growing presence in the US South and Europe.
The call revealed the permanent closure of the Jackson facility, the expansion at the Fulton facility in Alabama, and the acquisition of Resolute Forest (NYSE:RFP) Products' El Dorado lumber manufacturing facility in Arkansas. Despite extreme winter conditions, Canfor Pulp President Kevin Edgson reported operational improvements and stable global pulp markets. CFO Pat Elliott outlined the financial landscape, noting an operating loss in lumber but improved performance for Canfor Pulp, a strong balance sheet, and anticipated capital expenditures.
Key Takeaways
- Canfor is closing its Jackson facility and expanding the Fulton facility in Alabama.
- The company has acquired the El Dorado lumber facility in Arkansas, aiming for a production capacity of 175 million board feet by next year.
- Canfor Pulp shows improved performance despite harsh winter weather, with steady pulp markets and expected price increases for kraft paper.
- Concerns about wildfire risks and the challenging policy environment in British Columbia were addressed.
- Market share gains in the big box channel and recovery in the latter part of the quarter were noted.
Company Outlook
- Canfor is focusing on investing in low-cost, strategically located assets.
- The company is working on diversifying its operations, with a particular emphasis on the US South and Europe.
- They are pre-planning and permitting for a potential reinvestment plan in Houston.
Bearish Highlights
- There is an operating loss reported in Canfor's lumber business.
- The Southern Yellow (OTC:YELLQ) Pine market's recovery has been slow, influenced by a sluggish multifamily segment and declining rents.
- Canfor faces challenges in British Columbia due to access to economically viable fiber and ongoing approval processes for salvage harvests after forest fires.
Bullish Highlights
- Canfor Pulp's financial performance has improved.
- The company has a strong balance sheet and anticipates capital expenditures for growth and expansion.
- Canfor expects further price increases for kraft paper, with a modest increase projected for the second quarter and more in the second half of the year.
Misses
- Canfor's lumber business has suffered losses, though specific figures were not disclosed.
Q&A Highlights
- Executives discussed the impact of the challenging policy and operating environment in British Columbia.
- The acquisition of the El Dorado facility is expected to offer fiber synergies and raw material supply benefits.
- The company addressed concerns about the upcoming wildfire season and strategies to mitigate risks.
In summary, Canfor is navigating a complex environment with strategic acquisitions and facility expansions while managing operational challenges, particularly in the lumber segment and British Columbia. The company remains focused on diversification and improving its financial standing amidst fluctuating market conditions.
Full transcript - None (CFPUF) Q1 2024:
Operator: Good morning. My name is Jenny, and I will be your conference operator today. Welcome to Canfor and Canfor Pulp's First Quarter Analyst Call [Operator Instructions]. During this call, Canfor and Canfor Pulp's 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 Chief Executive Officer. Please go ahead, Mr. Kayne.
Don Kayne: Thank you, operator, and good morning, everyone. Thank you for joining the Canfor and Canfor Pulp Q1 2024 Results Conference Call. I'm going to make a few comments before I turn things over to Kevin Edgson, Canfor Pulp President and Chief Executive Officer; and Pat Elliott, Chief Financial Officer of Canfor Corporation and Canfor Pulp and our Senior Vice President of Sustainability; and additionally, we are joined by Kevin Pankratz, Senior Vice President of Sales and Marketing. Before talking about our financial results, I'll share a few Q1 business updates. As you know, over the past decade, we have been focused on building a globally diversified operating platform by increasing our footprint in the US South and Europe, while working towards a smaller but stronger presence in British Columbia. Although global lumber markets remained under pressure in Q1, thanks to this strategy, we have a more resilient organization that has been better able to mitigate market-related pressures and the persistent constraints we continue to pace accessing economically viable fiber in British Columbia. Through a targeted and expansive capital investment program, we have been growing and transforming our manufacturing facilities in fiber-rich regions to be low-cost leaders that are globally competitive over the long term. As part of this effort and our plans to optimize our operational footprint in Alabama, this quarter, we announced that we will permanently close our Jackson facility in June and expand production at our nearby Fulton facility with a second shift. These steps together with our new state-of-the-art greenfield sawmill being built in Axis, Alabama and pending closure of our mobile sawmill will improve our cost structure, optimize the fiber supply in Alabama and add 100 million board feet of Southern Yellow Pine production capacity in the region. By consolidating and expanding our Alabama operations, we will be better positioned to serve our global customers from a modern, competitive operating platform while providing more sustainable jobs and improved working conditions for our valued employees. Similarly, as part of our continued growth strategy in the U.S. South, yesterday, we announced an agreement with Resolute Forest products to acquire their El Dorado lumber manufacturing facility in Union County, Arkansas. Bringing this facility to Canfor will create synergies and vertical integration opportunities given its complementary geographic fit with our existing operations in the region. These include our El Dorado laminating plant as well as our Urbana plant, which is progressing in its USD 130 million modernization that will increase production by 115 million board feet to a total of 285 million board feet next year. The El Dorado acquisition will capitalize on our regional manufacturing footprint to optimize our product portfolio and maximize value. We anticipate investing a further USD 50 million to upgrade the sawmill which will increase its production capacity to 175 million board feet per year. As we look forward to ongoing growth, we remain deeply committed to sustainability, which is embedded throughout our entire operations from the forest to the customer. This quarter, we released our 2023 sustainability report, highlighting the activities and our performance to advance our sustainability strategy. We have an ambitious plan to be a leader in sustainable business focused on three key areas: people, planet and products. Our report tracks our progress across 13 material topics, each with discrete goals to significantly shift the way we do business. Naturally, this includes a focus on climate change through our targets on Scope 1, 2 and 3 emissions but it also includes improving safety, expanding relationships with indigenous nations, increasing support for our operating communities and further enhancing the diversity of our workforce. Through these actions and our carbon friendly products, Canfor is well positioned to be part of the solution to climate change. Turning to our financial results. Our lumber business benefited from solid lumber pricing and earnings in Europe with strong contribution from Vida highlighting the value of our diversification strategy. In North America, weak lumber markets continue to reflect ongoing affordability issues related to inflation and the current interest rate environment in addition to a significant decline in multifamily construction activity. While our Western Canadian operations benefited from improved pricing in the first quarter, our financial results continue to reflect the impact of weak North American lumber pricing, challenges accessing economically viable fiber supply in British Columbia. While lumber prices are anticipated to remain under pressure in the short term, Canfor has seen steady underlying demand in the repair and remodel sector, and we continue to believe the medium- to long-term market fundamentals remain strong. Notwithstanding current market conditions, our balance sheet remains strong, somewhat continued reinvestment in our operations over the next several years. I will now turn it over to Kevin to provide an overview of Canfor Pulp.
Kevin Edgson: Thank you, Don, and good morning, everyone. Canfor Pulp generated improved financial results in the first quarter, supported by a 7% quarter-over-quarter increase in pulp production and steady global pulp markets. Notwithstanding the impacts of extreme winter weather in January, we continue to see improvements in our operating performance. Given projected weakness in North American lumber markets in the short term, combined with ongoing uncertainty with regards to the availability of economically available fiber in BC, we continue to evaluate our operating conditions and remain focused on improving our operating performance and cost structure while optimizing the available fiber supply. I would like to thank our employees for their resilience and continued efforts to enhance our operational performance as we respond to the external pressures facing our business. Turning to pulp markets. While softwood pulp markets were steady in the first quarter, pricing has increased considerably to start the second quarter, driven by global supply disruptions and pulp producer downtime. Looking ahead, we continue to believe strong global pulp market fundamentals will remain over the medium to long term, supporting our capital reinvestment plan. The magnitude of spend will be modest in 2024 with future spending completed its market and financial circumstances allow. I will now turn it over to Pat to provide an overview of our financial results.
Pat Elliott: Thanks, Kevin, and good morning, everyone. The Canfor and Canfor Pulp first quarter results were released yesterday morning. In my comments this morning, I'll speak to the first quarter financial highlights, a summary of which is included in our overview slide presentation located in the Investor Relations section of the Canfor website. Our lumber business generated an operating loss of $57 million in the first quarter, which included a $30 million recovery of a previously recorded write-down of inventory in Western Canada and a noncash duty expense of $15 million related to our antidumping duty accrual rate. Adjusting for these noncash items, our lumber business generated an operating loss of $72 million in the first quarter compared to a similarly adjusted loss of $111 million in the prior quarter. Notwithstanding an improvement quarter-over-quarter, these results continue to reflect losses associated with our BC operations due to weak lumber pricing and a persistent lack of economically viable fiber. While our Western Canadian operations benefited from an uplift in SPF lumber pricing, lumber markets remained under pressure in the first quarter, particularly for Southern Yellow Mine. Our European operations continued to perform well and attributed $31 million in cash earnings in the first quarter, reinforcing the value of our diversification strategy. These results reflect the benefit of higher production and shipment volumes as well as improved sales realizations. Canfor Pulp generated an adjusted operating loss of $16 million in the first quarter, an improvement of $10 million quarterly. These results largely reflected of modest uplift pulp sales realizations, combined with the increase in pulp production previously mentioned by Kevin, which more than offset the impact of a challenging January related to extreme winter weather. Canfor, excluding Canfor Pulp ended the quarter with net cash of approximately $225 million, following a seasonal build of working capital in Western Canada. Notwithstanding current market dynamics, our balance sheet remains strong, supporting the continued reinvestment in our lumber business. At the end of the first quarter, Canfor Pulp had net debt of $85 million and $148 million of available liquidity and of which $80 million is restricted for use towards future reinvestment in Northwood's recovery boiler number one. On a consolidated basis, capital expenditures were approximately $103 million in the first quarter, including approximately $12 million for Canfor. We anticipate capital spend of approximately $450 million in the lumber segment in 2024 and including remaining spend on our Alabama greenfield, planned capital investment at the El Dorado sawmill and various organic growth initiatives in the US South. For Canfor Pulp, we are currently forecasting capital spend of approximately $40 million in 2024, including capitalized maintenance. In addition, we anticipate Canfor will continue to allocate a modest amount of capital to opportunistically repurchase shares throughout the year. And with that, Don, I'll turn the call back to you.
Don Kayne: Great. Thanks, Pat. And with that, I'll turn it back to you, operator, and so we're now ready to take questions from analysts.
Operator: [Operator Instructions] Your first question is from Ben Isaacson from Scotiabank.
Ben Isaacson: First question on Southern Yellow Pine, having come off quite a bit over the last quarter or so. Can you talk about how has that impacted export economics from Europe, are you starting to see a pullback? And could you just give some color on the dynamics there?
Don Kayne: Kevin, why don't you go ahead [Multiple Speakers] Southern Yellow Pine situation?
Kevin Pankratz: So Yellow Pine pricing for sure and also SPF pricing, Ben, is impacted it. So we're finding even with ourselves, our volumes from Sweden into the US are down 1 percentage or 2%. And we're actually seeing less volume coming from Central Europe. And the big reason they got better or alternative options at higher values to ship their products, be it the UK, Middle East, North Africa and Asia. So we expect to go back to maybe more historical levels for European imports and not what we saw January and Q1 of the previous year.
Ben Isaacson: And how do you think about the spread between SPF and SYP? Obviously, it's kind of disconnected from what it's usually at, and do you think that's sustainable going forward?
Kevin Pankratz: I think the dynamics are for sure changing versus historical spreads out there, Ben. And as production out of Western Canada comes under more pressure and reduced, I think you're going to see maybe a reversal or a trend change where SPM 2x4 could be at a premium with just [Technical Difficulty] less volume and with more volume coming on to that dynamic, I think, will trend change in the future.
Ben Isaacson: And just last one for me quickly. I know it's early days. It's only the start of May, but we're hearing that the wildfire season could be more intense than it was last year. Do you have any color in terms of how that's progressing and what is the risk for Canfor?
Don Kayne: Certainly the wildfire situation continues to be a concern. And I think we continue to learn. Last 5 years, there's been a lot of typical years there, Ben. So we spent a lot of time as I think because the government has to try to understand it better and to try to put in more mitigating actions to try to get in front of that a bit, and I think that's happening. But clearly, traveling up to the mills last week a bit. There's -- all our operations are concerned about it. There's been a few fires, particularly in Alberta out of the gate that we've been working through. But without a doubt, it's -- I think that's something that we need to see to just basically conclude that it's going to be a issue for several years going forward. And so I think we learn each year more about it and how to fight it, how to prevent them and so forth, and we'll continue to do that. And maybe that's all I can really say about that.
Operator: Your next question is from Sean Steuart from TD Securities Cowen.
Sean Steuart: A couple of questions. First on El Dorado. I appreciate your comments with respect to the synergies I suppose with your other assets in the region. But based on my previous coverage of other companies, this asset has a checkered history. Can you give a little bit of context on how this transaction materialized and time line to invest the remaining $50 million to get capacity up to 175 million board feet, a little bit more detail on that front.
Don Kayne: I mean, again, down there, we've been, I think, real thoughtful and patient in terms of opportunities as they arise and which ones kind of make sense to us and which ones don't, and that one, it was one that we've looked at for a number of years and mainly because of the fiber synergies that it provides with our Urbana facility there and some of the synergies that it provides in terms of raw material supply to some of our vertically integrated facilities, particularly in the El Dorado Glulam plant. That's always been an opportunity that we'd like to expand on. So that's one of the main reasons. But it has been something we've looked at for a long time. But we've also known through that period that we needed to spend some money there. We felt that we be a bit undercapitalized before. And we believe -- and we're very confident that with our folks that if we put in the amount of money we talked about there, we can make that into a solid operation going forward in a fiber bridge area with some competitive fiber and high-quality fiber. So those are all the things that we kind of considered. And so anyway, so we're happy to be able to conclude that.
Sean Steuart: And time line on when you expect to get to 175 million board feet for that asset?
Don Kayne: Yes, that's going to be sometime probably towards the early part of next year -- middle of next year or something like that.
Sean Steuart: Don, any update on the Houston potential reinvestment plan milestones that you need to advance that initiative? Then has there been any progress on that front?
Don Kayne: And I think maybe what I can say there is, as we have talked about in several of the previous calls, we maybe -- we certainly remain concerned about the challenging policy and operating environment here in British Columbia. For us, so as a result of that, we continue to assess the impacts of some of those changes that I speak about. Today, I would say also though that we're even more concerned than we were before that policy environment that I speak about here continues to change, seems to be quite dynamic and as a result, be very uncertain. So we're -- like I say, we're going to continue to assess those impacts. And at the same time, Sean, I will say though that we are doing some pre-planning and it's still ongoing with -- and also some permitting.
Operator: Your next question is from Hamir Patel from CIBC Capital Markets.
Hamir Patel: Don, it seems like you've been seeing stronger R&R takeaway than some of your peers. Do you think you've been gaining share in that big box channel?
Don Kayne: I think so, but I'll let -- Kevin has been a lot of work on that. He's the expert on that, have [Multiple Speakers] let him speak to that.
Kevin Pankratz: So I mean -- so when we're talking about the growth there, we're talking on a volume-based on dollar base, just to be clear, because I think sometimes that gets a mixed-up headline. And so from our experience, for sure, January was a tough start for most people. Most of the markets in the US largely because of weather. And in my meetings with folks there. Since then, we've seen a really good recovery in February and March. So year-to-date, were actually pretty flat versus 2023, and that's what the poor start in January. So it sort of speaks to the gained momentum that we're seeing in the latter part of the quarter. And this segment continues to evolve and grow, and they are growing market share. I hope that helps.
Hamir Patel: And then, Kevin, when you think about weakness in Southern Yellow Pine and what's been driving that? I know your outlook had commented on weakness in multifamily, but we always think single-family starts is using 3x as much lumber as multi. So maybe you could speak more to why perhaps that weakness in multi is dragging down Southern Yellow Pine price and if you are seeing any sign of improvement there.
Kevin Pankratz: I think that's one segment there, Hamir. It's going to have -- it's going to take a bit of time for that market to recover. It's so dependent on the interest rate piece at just a longer time period to get those projects planned, engineered and permitted. So they can't react as fast as single-family homes. I think the other economic dynamic that's impacting multifamily is that rents over the last year of decline. So when they're looking at projects, either rents have to come up or interest rates have to come down to make the economics work. And when you're talking to a lot of folks in this space, it's going to be basically -- maybe start to see a recovery mid-2025 and then maybe not fully rolling until 2026. And the US South, just like it's heavy for single family, it's really heavy for multifamily. Over 50% of multifamily projects are in the US South. And so disproportionately Yellow Pines is more impacted you're right, 3:1 on the volume for lumber, but it's not zero. And there's a lot of lumber 2x4 especially that goes into sill plates and into trusses and spans. And so I think that's a dynamic that is playing out right now that is contributing to the Yellow Pine price pressures that we're seeing.
Operator: Your next question is from Ketan Mamtora from BMO Capital Markets.
Ketan Mamtora: Maybe first question on log inventory in BC. How is that for you guys at this point? There's been some talk back because of the warm weather that log inventories have not been able to be in that position where it should be for this time of the year? How are you guys positioned?
Don Kayne: Basically, we're in decent shape for sure and mostly that was a result of Polar Houston and yes, probably Polar and Houston, also Chetwynd being down, so we're in good shape as a result of that.
Ketan Mamtora: So you don't anticipate any sort of production challenges as we go through Q2 here in terms of where your lot positions are and how much you need to produce in a seasonally stronger time?
Don Kayne: I mean I think overall, as a result of everything, we don't -- we're not anticipating any more downtime investor getting at production levels. going forward at all. We're basically in a [lock] situation. And unless -- but we will continue to look at it from -- if I understood your question correctly because I missed part of it, I think. But in terms of what we've said in numerous times, I think, over the internally and externally is we focus hard on matching production demand with our production with market demand. And we'll continue to do that, and we keep a close eye on that and it takes some downtime because of market demand will do that, and we're not afraid to do that. We'll continue to do that.
Ketan Mamtora: And then maybe one for Pat. But on the capital allocation side, I'm just curious, as you think about sort of M&A and the acquisition that you just announced yesterday, between that and share repurchases given where the stock is, how do you sort of think about evaluating those two options. Perhaps you can provide some color on that.
Pat Elliott: So Ketan, I mean, I think we've been fairly consistent on this the last number of years that the diversification of our business into the US South and into Sweden is paramount, frankly, to improving our operating results over time while buying back the stock clearly on straight math, you see the value. We bought back about 2 million shares in the last year. So it's not like we haven't been active. But we really see the priority is continue to invest in low-cost assets in the right regions, and that's our priority. And even the El Dorado, when you look at on a cost per thousand basis, I think it's highly competitive on the price that we paid. So we're not going to go out and buy any asset, but we're going to act opportunistically and then the reinvestment in our own business through the greenfield, I think sets us up really well for the future. So I think we've been pretty consistent on that, and that's our plan going forward as well.
Operator: Your next question is from Matthew McKellar from RBC Capital Markets.
Matthew McKellar: First, I'd just like to ask about the Polar mill. I think when that originally went down when you announced it in November, you were talking about maybe a 6-month sort of period of curtailment there. Is there a path back to restarting that mill in 2024, given what you're seeing around access to economic fiber in the province?
Don Kayne: Maybe for sure, I'll try to answer that, I guess. In British Columbia, as I mentioned on the question earlier about Houston, the operating conditions are still remaining quite challenging here as we continue to face the ongoing constraints associated with the lack of economically viable fiber. And we've said that a lot, and that continues to be the case. And in Western Canada, there still remains significant uncertainty with regards to that availability on that fiber. So we continue to sustain log cost pressures and persistent constraints accessing that fiber in BC at all of our -- at those sawmills. And as well as it's been a challenging environment -- fiber environment, for pulp mills too. So with all that going on we continue to evaluate some of the options, and we'll adjust our operating ratio BC to align with that demand, as I mentioned again earlier, and the economically available timber supply in the near term. And we'll continue to do that through 2024. That's not going to change, like I think I mentioned earlier, right? So Polar falls into that category.
Matthew McKellar: Next, I'd like to just follow up on Ben's question around forest fires. I think last quarter, you noted a slower approval process in BC in regards to the salvage harvest following last year's fires. Could you give us a sense of how things have evolved on that front over the past couple of months?
Don Kayne: I'm not sure I can answer that question 100% in terms of where we're at on that. Other than, like I kind of mentioned it earlier, there's lots of initiatives underway here to try to get ahead of situation of wildfires, for sure, NBC. But Alberta, for sure, I will say this, Alberta is pretty good. They are on top of things for sure and not that BC isn't, but the bigger impact here is in BC for sure.
Matthew McKellar: And then last question for me, just on the Canfor Pulp side. We're seeing some competitors out there with a couple of price increases for kraft paper in the market. With that backdrop, how should we be thinking about your realizations over the balance of '24.
Kevin Edgson: We expect to see on the pulp side, there's another round of increases coming in May. We think the step up through the first half of the year has been really solid. And we're looking more stable out the back end given that it's driven largely by supply constraints, we need the market -- the paper market to catch up. On the graph paper side, we'll be announcing or have announced an increase -- somewhat modest increase for the second quarter that we expect to be in place by June. Paper is moving slower than pulp. And so we continue to expect some increases through the back half of the year on paper.
Operator: There are no further questions. I will now turn it over to Don Kayne for closing comments. Go ahead, Mr. Kayne.
Don Kayne: Thanks, operator, and thanks, everyone, for participating in this morning's call. We appreciate your support, and we look forward to talking to you at the end of next quarter.
Operator: Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect.
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