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Good morning, ladies and gentlemen. Welcome to the Canfor and Canfor Pulp first quarter analyst call. A recording and transcript of the call will be available on Canfor's website. 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 and Canfor Pulp's Chief Executive Officer. Please go ahead, Mr. Kayne.
Thank you, operator, and good morning, everyone. Thanks for joining the Canfor and Canfor Pulp Quarter 1 2019 Results Conference Call. I'll make a few comments before I turn things over to Alan Nicholl, Executive VP of Canfor Pulp Operations and Chief Financial Officer of Canfor Corporation and Canfor Pulp. Alan will provide a more detailed overview of our performance in Q4. Joining Alan and I today are Kevin Pankratz, our Senior Vice President of Sales and Marketing; and Stephen MacKie, Senior Vice President of Canadian Operations.The first quarter was a challenging one as severe winter weather dominated our key production regions and end use markets. These poor weather conditions impacted operations, our log costs, transportation systems and customer demand for both lumber and pulp. That said, our pulp business ran better as the quarter progressed after suffering a number of issues early in the year. The maintenance shut at Intercon was completed in early Q2, and now the focus is on improving productivity and a return to stronger income levels.During the quarter, the company successfully completed construction of its $65 million Turbo Generator turbine, which will make Canfor Pulp more self-sufficient for power and provide additional green energy available to sell to the grid. Global softwood kraft pulp markets are projected to remain steady through the second quarter, with inventory levels forecast to move towards a more balanced range in the latter half of 2019 with an improved pricing outlook.Moving to lumber. Our BC SPF business saw a continued weakness, but our Alberta, U.S. and European operations generated solid financial returns.We successfully closed the VIDA acquisition at the end of February and are already seeing the benefits of their more consistent and high-margin returns. Lumber production was up in the U.S. South but remained steady in British Columbia, reflecting continuing curtailments, most notably at Vavenby, which was down for 6 weeks. Last week, we announced a further 100 million board feet of curtailments in British Columbia as weak market pricing and high log costs materially impacted our BC returns. We will continue to monitor market conditions and take necessary additional steps as required. We expect the July 1 market-based stumpage adjustment to put severe additional pressure on British Columbia production levels, which could result in additional curtailments across the industry given the increasingly challenging competitive environment. Transportation networks were impacted in the quarter due to a poor winter weather, however, the impact was not as severe as last year, and we expect additional inventory reductions as weather conditions improve.Looking ahead, we expect lumber prices to show modest improvement over the next several months in response to tightening of supply due to recent curtailments and as a typically strong spring building season begins.Demand from Asia markets was slowed somewhat early in the year as inventory levels increased, although we are seeing recent improvement in port shipments. Pricing has been relatively flat in China, and it is expected to remain flat and gradually increase in Q3 and Q4.European markets were steady, having declined only a small amount from 2018 record levels and will be flat to moderately lower for the coming quarter.Looking ahead, we are excited about the upcoming closing on May 31 of the phased acquisition of Elliott Sawmilling, which will further grow our U.S. South footprint to 2 billion feet annually, approximately 30% of our total production.Overall, despite the challenging start to 2019, we expect gradual improvement throughout the year. Canfor will benefit from our improved geographic diversification as well as our continued focus on specialty and high-value products. And with that, I'll turn the call over to Alan, who will provide an overview of our financial results.
Thanks, Don, and good morning, everyone. As Don mentioned, the Canfor and Canfor Pulp quarterly results were released yesterday morning. And these results come together with our quarterly overview slide presentation in the Investor Relations section of the respective company's websites.In my comments this morning, I will expand on a number of Don's points and also speak specifically to several quarterly financial highlights.Our lumber segment reported an operating loss of $78 million for Q1, an improvement of $10 million from the previous quarter. Results included an additional inventory write-down of $39 million and a net duty expense of $36 million as well as a onetime -- 1 month of VIDA's earnings that are included in our consolidated results. After taking account of the inventory write-downs on the duties, the operating loss was $3 million.Lumber segment results continue to reflect challenging market conditions and elevated log costs in British Columbia. The company took 95 million board feet of curtailment in BC in Q1 and additional reductions in Q2, as Don has already mentioned. While average lumber prices saw a modest improvement over the previous quarter, partly in response to the curtailed supply, the well-documented extremely wet weather seen across much of North America contributed to a slow start to the spring building season, resulting in higher inventory through the supply chain and significant downward price pressure experienced in March and into April.Our U.S. South and newly acquired European lumber businesses performed well in the quarter. In the case of the U.S. South, this was despite the impacts of very wet weather on log supply and takeaway. With respect to our new European business, in our MD&A, we have provided a preliminary internal benchmark price with a VIDA product reflected in Swedish krona per 1,000 board feet.This benchmark is indicative of the overall basket of lumber products produced by VIDA and, as you all noted, has been much more stable than North American lumber prices over the last year.In our pulp business camp, where pulp generated operating income of $18 million in the first quarter, with increased operational uptime more than offsetting materially lower quarter-over-quarter prices to China.While pulp production was impacted by previously announced kiln-related disruptions and to a lesser extent the extreme weather and the curtailment of our Taylor mill, overall operating rates improved in the first quarter.Our Northwood pulp mill ran well in February and March following the significant challenges experienced in the previous quarter.Prices to China in Q1 reflected the sharp decrease in demand and a corresponding spike in inventory levels that we saw towards the end of 2018. After bottoming out in January, prices showed a modest recovery, but over the quarter, prices were down by about 12%.Sales realizations to North America and Europe fared somewhat better but came under pressure as the water -- as the quarter progressed. And for 2 -- for Q2, overall pricing is anticipated to remain relatively steady as inventory levels gradually return to more balanced range through the remainder of the year. Capital spending for the first quarter totaled approximately $75 million and included about $48 million for the lumber business and $26 million for Canfor Pulp. For 2019, we are currently anticipating total capital spending of $185 million and $95 million for Canfor and Canfor Pulp, respectively.Reflecting the acquisition of VIDA and our seasonal log inventory build in Western Canada, Canfor at the end of the first quarter had net debt of approximately $950 million and available liquidity of $340 million, excluding Canfor Pulp. We anticipate a reduction of net debt and improved liquidity in the second quarter as our Western Canadian log inventory is consumed during spring breakout.Canfor Pulp ended the first quarter with $23 million, drawing down on its operating line and available liquidity of $74 million. The company has now moved back into a cash positive position in Q2.And lastly, Canfor Pulp's directors approved the continuance of a quarterly dividend of $0.0625 per share for the first quarter. And with that, Don, I will turn the call back over to you.
Thanks very much, Alan. So with that, operator, we'll turn it back to you for questions from analysts.
[Operator Instructions] Your first question is from Ketan Mamtora from BMO Capital Markets.
First question. And this is just a clarification. Did you say that you all are taking 100 million of economic downtime in the second quarter in the BC? Did I hear that correctly?
Sorry. Ketan, can you repeat that question? I couldn't hear that.
I'm sorry. Is this better?
Yes, that's better, much better.
Just wanted to clarify. Did you just say that you all are continuing the downtime that you all took in Q1, and for Q2 it will be about 100 million board feet? Did I catch that correctly?
With the 1 week at all the mills in British Columbia except for WynnWood, it equates to about 100 million feet in total downtime.
Got it. That's helpful. And then second question on VIDA. Is there any way for you to just give us at least sort of rough sense in terms of sales and EBITDA contribution in Q1 from VIDA? I know it was only for 1 month, but if you can quantify in any way?
We can't do that for sure, Ketan. But what I can say is, having spent some time with them and seen some of the recent performance there, that it's in line with what we expected for sure, if not a little bit better, but certainly in line with what we expected.
I see. Okay. That's helpful. And then can you provide some thoughts on the recent policy initiative by the BC government regarding the Cariboo plan and Bill 22?
Yes. I mean for sure, and I think it's early -- that's early days on that at this stage of the game. And certainly, we're all looking at some of the details of that closely because -- but clearly what that's mostly about is certainly the ability to transfer tenure between companies and within the company. And so that's the main thing that we're working on right now. So we're trying to -- we're just evaluating ourselves in terms of what that might be in terms of impacts on us. And we're not there yet on that. So we're -- but I will say though that if you think about overall just the competitiveness challenges that we face in BC, they're obviously severe, and they're all -- we're working on all of those as a result of the imbalance of supply and demand in British Columbia. And with the reduction of AAC is a result of the beetle. And then clearly, you talked about Bill 22 and the OIC and Cariboo and [indiscernible], all of those things that we're faced with, we're -- all those are things that we're looking at right now, but I can also say though that we are working closely, as we have been all along, with government to try to figure out and look for solutions and how to deal with this going forward to ensure ultimately, which we're all focused on, I think, as an industry, to get this industry in BC back in a competitive situation.
Got it. That's helpful color. And then just one last question before I turn it over. Turning to the U.S. South. We know that because of very wet weather, log costs were up quite a bit in Q1. But what are you seeing so far in Q2? Have those moderated? Or are you seeing some log cost inflation in the U.S. South?
Yes. As we've mentioned, I believe, before as you state accurately in Q1, with the weather situation and all the -- particularly the wet weather that we've seen, they were up in the first quarter more than we typically see. We do see that moderating, through, for the balance of the year. And we would say on average probably going to end up about 2% in that order of magnitude in terms of price inflation on logs in the South.
Your next question is from Sean Steuart from TD Securities.
Few questions. Want to circle back on VIDA. When you announced the deal, you'd indicated that 2018 EBITDA was at an annual run rate of, I think, about $145 million. You referenced in the MD&A stable prices for Sweden, specifically for lumber, but the wood markets international, their European composite lumber price, it's shown some more pronounced weakness recently. And I guess what I'm trying to get at is, are you at -- are you around that $145 million run rate right now? Or when you say it's meeting expectations, is it meeting expectations in the context of some broader price pressure in Europe?
Yes, maybe I'll start off here, Sean. So understand where you're coming from. I will tell you that March was very much consistent with that guidance. And it was a very strong month, as Don guided. Over the balance of the year, I think the prices absolutely are much more stable, and there will be some decline here to the point you mentioned. But we're still guiding, as I think we said in our press release, to a very solid financial results for the year that clearly show the benefits of that more stable environment.
Okay. North American demand -- let's start with, I guess, the renovation segment. Are you seeing any headwinds there? And can you speak to broader volume growth assumptions into the U.S. rental market that you're forecasting this year?
Just on that, Sean, as we've mentioned before, and I think you're accurate there, is the R&R business has been a positive surprise for us the last several quarters. Looking forward, we think that will continue from our best guesstimate, and we had Home Depot actually in town and Lowe's, all the guys here recently. And so our -- from our standpoint, we're pretty consistent here. They are pretty consistent in they expect it to be a solid year for them. So we're not seeing any headwinds at this point whatsoever from our standpoint. So.
Okay. So similar growth rates to what we've seen in recent years continuing.
Yes, yes, for sure.
Okay. And on the single-family new home construction side in the States, the slump we've seen, a lot of it feels like it's probably weather. How much of it do you think is weather versus structural headwinds, whether it's labor shortages, land availability shortages? Can you handicap the slump we've seen in recent months there? How much do you think it's weather versus more structural issues?
I'll let Kevin talk about some of the details on that. But I mean just overall, Sean, we've guided before, and I think we still believe that demand's going to increase between 1 billion and 2 billion board feet annually, overall. And our retail, as we mentioned, is going to be a big part of that. But on the housing side, there's no question. That precipitation, everywhere we go, we hear more and more about that. I was down in the South last week and saw it firsthand, even in April. So it's definitely real. I think the one number that -- there's lots of different numbers to look at -- the one number we do look at if you look at permits versus starts, there is a gap there. What gives us at least some comfort that, as you look forward there, there is some pent-up demand here that has to happen. And from what we've heard from our guys in the South, never mind customers from our own operations, that it has been a difficult situation getting to the drop sites with the trucks and so forth. And going forward, Kevin, you've had lots of conversations with some of the builders. What are they telling you?
I think to that point, Don, we are seeing a little bit more positive activity in the future for the balance half of the year. And a lot of it is maybe more land will be developed for housing, which could be a potential headwind that we experienced in Q1. So that would be a positive. And the other ones we're obviously seeing is a pretty dramatic increase in mortgage applications, which is the highest it's been in 9 years. So another positive indicator. And of course, I think some of the affordability issues that were addressed in Q4 that overhang into Q1 played some role there, Sean, and with the easing of monetary policy there, that thing is going to support some of the affordability challenges that were always a bit of a potential headwind on housing.
[Operator Instructions] Your next question is from Paul Quinn from RBC Capital Markets.
Can't hear you, Paul.
Is this better?
Yes, better.
Okay. Good. I'll start on the pulp side. Just that Northwood Turbo Generator project, what's the financial contribution that you'll get from that going forward?
Alan, you could...
Yes. So Paul, so I mean, we say $65 million, and we're at -- which is good -- are beginning to see. In terms of your question, we're expecting north of $10 million annually from that project as our contribution.
Well, yay. Are you locked up in a long-term energy agreement with BC government over that? Or is that just your expectation from the -- from I guess, reduced energy purchases?
Yes. So it -- the project clearly is going to drive a lot of efficiencies in different areas as well as provide us the opportunity to sell additional power over the group. So it's a combination there, but we have contracts in place, yes.
Okay. Then Alan, you seem mildly optimistic on pulp markets although I'm still seeing prices falling. I think you described it as somewhat stable. What gives you that confidence that it is actually stable going forward?
I chat to my sales guys regularly, Paul, but I mean, I think I'll maybe start, and then I'll pass over to Brian on that. I mean, I think clearly we see some challenges as we work with the inventories, particularly in China. And I think we have to accept that there will be a kind of moderation, if you will, of a price recovery over the next few months. But the outlook, certainly looking out to medium term and long term, I think is still positive, and that gives us solid grounds for optimism. Maybe I'll just ask Brian to expand a little bit on what we're seeing in terms of China specifically.
Sure. Thanks, Alan. Yes, over to China, the market's relatively stable. We saw some modest price improvement over March and April. Lately seen some prices correct closer to where they were earlier in the year. Bottom line is the global pulp inventories are on the high side. However, the March [ row 20 ] data [indiscernible] indicates that we are trending in the right direction. Both hardwood and softwood inventories fell by 3 days. Annual [indiscernible] in mix will definitely help correct inventories to a better supply-demand balance as well. And we're optimistic that we'll see an uptick in the market for the second half of the year [indiscernible] mix up, and we'll some reduced kraft supply due to conversions to dissolving pulp.
Yes. Maybe you could -- I know there's a couple mills that are converting to dissolving. Maybe you could give me some detail around that.
Yes, the 2 big ones, they're -- they total [ 900,000 ] tonnes. The [ store ] mill in Sweden. We've got Arauco [indiscernible] in Chile. [indiscernible] predominantly, Paul.
Okay, great. Okay. And then just switching to the lumber side. I know you guys -- you've taken some temporary downtime. When does it make sense to shut down a mill permanently in BC?
Good question, Paul. And I think something that I think everybody is evaluating. I mean look, the numbers that we've said, and we -- when we still believe in them 100% is that we expect there needs to be with the imbalances between supply and demand today and with the cutbacks on AAC, around 2 billion board feet that needs to be out of the market. And I think what you're seeing here recently, especially and in the last 6 or 8 weeks, is a pretty good indication, I think, [indiscernible] that we're all in, in British Columbia as a result of the competitive situation related to log cost and log availability. And so going -- I guess, just speaking for us is that, that's something we're, obviously, continuing to evaluate. And I think as we move forward, we will have more to say about that. But at this point, we are just looking at temporary shutdowns at this point, and we'll continue to evaluate those on a weekly basis based on price levels and market levels for fiber, et cetera.
Okay. And then just following up on Ketan's question on policy change by the BC government. I mean that -- for me that came from less deals in that we have this decline in the AAC and the province. Obviously, mills need to shut. And then they come up with Bill 22, which in my mind just makes it significantly harder to transfer tenure, and you don't know whether you're getting full values for the tenure you're transferring or whether government's going to reallocate. Is that something that they -- the government discussed with industry before they came up with Bill 22? Because my understanding is that at the COFI conference, I mean, the premium was pretty upfront saying we're going to work together going forward. And this seemed to come out of left field. Is that true?
I think, Paul, what I'll say there is that I think it's fair to say that the government recognizes that rationalization needs to take place in British Columbia, first of all. I think that, that's something that's been developing over time here, but I do believe that they are -- they absolutely understand now some of the situations that -- real difficult situations that we're all facing in British Columbia related to some of those competitive issues, for sure. In terms of the impact the Bill 22 is going to have on our ability to rationalize as an industry or as a company, that's -- we're expecting with the right business case to do that, that we'll be able to do that and make progress on that. Absolutely, it has to happen. There's no shortcuts there. And so right now, it's just a question of once those start to happen, putting together the right business case and explaining that well. And we would expect 100% that if we do that, all those and all that, and meet that criteria, that will be successful. I mean, I can't really say any more than that, Paul. So time will tell, and the test will come here probably soon.
Okay. And then just, I guess, lastly, I mean, we've seen BC interior overall operations, yours included, go from sort of top quartile in that market to where they sit right now, it's almost the highest-cost jurisdiction in that market. What are the major things that's got to change to get the BC industry competitive again?
Rationalization. I mean there's no -- it's at the end of the day, log costs are 70% of our costs roughly. And that's what has to happen, and we've got 2 billion feet that have to come out of the market, like I mentioned, out of production. And that's probably going to end up being hopefully front-end loaded. Emergency around that just because of the AAC cutbacks that we're going to be facing. But to me -- or I think to us, until we see that rationalization occur, we're -- it's going to be extremely difficult, if not impossible, to become where we need to be, which is the most competitive region in the world. And when we got to recognize that if we're competing on a global scale for sure now and not just within BC. And that's getting I think recognized more and more. But hey, that's what we're facing. That's reality. And so we all need to get our act together here and start to move through this whole piece, so that we do become competitive with the rest of the world and we can continue to invest and do some of the things that we want to do, because we've been in BC a long time. We intend on staying here, and moving forward it's a great location and close to markets and so forth, so.
We have a follow-up question from Sean Steuart from TD Securities.
Just a couple of easy ones for you. On the pulp mills, can you give us a sense of what percentage of the fiber right now is whole log chipping? Where you see that trending over the next few years? And if you can remind us of the cost differential for log chipping versus chips from your sawmills.
Well, yes, I think there's a few questions here that not all of which probably can be answered in the short time frame we have here, and so happy to chat a little bit more off-line. But in terms of a couple of points I would make, I think, clearly in light of the curtailment we've seen, we've obviously been doing more whole log chipping and as well as moving product further. So we've been incurring higher transportation costs as well. Typically, what we used to guide to is close to 5/6 -- or 80% of our product is more sawmill residual based. I think it's fair to say that over the next few years, pending rationalization, that number could change, and we're fully expecting whole log chipping in the future to increase in the percentage of wood that we process. But the benefit we have from being a vertically integrated company is that we've got a lot of that supply coming from our parent. So feeling confident but not complacent.
The last question. The acquisition agreement you have for the 125,000 cubic meters of fiber, can you tell us where that is in the province?
Sean, it's Stephen here. So I don't want to -- I'm not going to disclose where that is in the province, but we're pleased to have been able to enter into that agreement. We enter into similar long-term fiber supply agreements all over our operations. This one's not different or unique in that regard. Just a little bit different structure to the deal that required an upfront advance of payment. So that's why it got disclosed, but we're pleased to have that fiber supply supporting our operations.
Thank you. Ladies and gentlemen, this concludes your conference call today. We thank you for participating and ask that you please disconnect your lines.