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Canfor Corp
Canfor Corp
TSX:CFP
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Good morning. My name is Sylvie, and I will be your conference operator today. Welcome to the Canfor and Canfor Pulp Third 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 company 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 like to turn the meeting over to Mr. Don Kayne, Canfor and Canfor Pulp's Chief Executive Officer. Please go ahead, sir.
All right. Thanks, Sylvie, and good morning, everyone. Thanks for joining the Canfor and Canfor Pulp Q3 2021 Results Conference Call. I'll make a few comments before I turn things over to Pat Elliott, our Chief Financial Officer of Canfor Corporation and Canfor Pulp and our Senior Vice President of Sustainability. Pat will provide a more detailed overview of our performance in Q3. In addition to Pat and I, we are joined by Kevin Pankratz, our Senior Vice President of Sales and Marketing. Before talking about our financial results, I want to start by discussing the important changes we made to our senior leadership team earlier this month. These changes further position Canfor for long-term success and diversification. Pat has taken on the role of CFO in addition to his responsibility as the Senior Vice President of Sustainability. Given Pat's long history with Canfor and his over 10 years of senior leadership with the finance team, we are very pleased to have Pat in this role. In addition, we have formed a new business unit for bio-based solutions and bio innovation, which is being led by Alan Nicholl, who has taken on the position of Executive Vice President, Bio-based Solutions and Pulp Operations. Alan's team is focused on unlocking the full value of each log by diversifying our business into bio-based solutions. We are very pleased to have Alan lead the development of this business unit for Canfor. Alan's previous experience as our CFO will ensure we bring a disciplined approach to developing the bio-based solutions that represent the greatest potential for sustainable return on investments we make in this area. Alan and Pat's roles are also both integral to Canfor sustainability journey. Over the last year, we have been doing significant work across the business to develop our comprehensive sustainability strategy that was launched at the beginning of October. We have a bold ambition to become a global leader in sustainability. We've defined our strategy around 3 focus areas: people, planet and products. Sustainability isn't a new priority for us. We're very proud of the positive impact our sustainability efforts have had so far but we know we can do a lot more. We have focused our initial work on setting ambitious goals and comprehensive targets for the areas of safety, health and wellness, inclusion and diversity, indigenous relations and sustainable forestry. In Q1 2022, we'll be announcing our climate change targets. Our business is facing tremendous growth opportunities as the green carbon-storing benefits of wood products is increasingly recognized and valued around the world. We realize we've had -- we have an opportunity to forge new pass and become leaders, not simply as a producer of natural resource solutions, but as a producer of climate change solutions, and we're excited to take on this challenge. Turning to our financial results. Our lumber business reported operating income of $326 million in the third quarter, supported by record high earnings in Europe. Despite lower shipments associated with seasonal downtime, European results benefited from a significant increase in sales realizations in the third quarter reflecting continued strong demand in that region as well as a lag in contract pricing. In North America, sales realizations declined sharply in the third quarter, reflecting a significant decrease in benchmark lumber prices following record high pricing in quarter 2. Notwithstanding the impact of lower commodity benchmark prices and ongoing supply chain challenges, our sales realizations were supported by significantly higher offshore pricing, particularly in Japan and European pricing. As a result of the significant supply chain challenges and market uncertainty, we implemented reduced operating schedules at our BC sawmills with the exception of Wynwood at the end of August. We recognize the impact that volatile lumber markets have on our employees, on our contractors and on our communities. We have been working with them to mitigate the negative impacts. We appreciate the commitment from labor leaders and many of our indigenous partners to work together and find creative solutions that are mutually beneficial. BC continues to be a challenging jurisdiction to operate in with a smaller fiber basket in the post mountain beetle -- mountain pine beetle era, and we continue to be concerned about the overall competitiveness within the forest sector of BC. We are focused on developing a strong and sustainable primary industry so that it will enable us to continue to support value-added producers, small business, pellet plants and pulp mills to name just a few examples. It is important for industry and government to work together in partnership with all groups to develop a modern, sustainable and competitive global industry that can support everyone's interest. While we continue to operate on a reduced basis in Western Canada, we are encouraged by underlying demand fundamentals with solid U.S. housing activity steadily improving R&R demand, supporting increased pricing in recent weeks. Turning to our Pulp business. Canfor Pulp reported operating income of $16 million in the third quarter. Results in our Pulp business reflected the impact of scheduled and unscheduled downtime as well as global supply chain challenges which resulted in reduced shipments in the third quarter. While global pulp pricing declined in the third quarter, Canfor Pulp benefited from slightly higher sales realizations reflecting timing of shipments and a weaker Canadian dollar. Global pulp pricing has continued to decline heading into the fourth quarter, reflecting softening demand in Asia, elevated global inventories and ongoing logistic constraints. Notwithstanding current market uncertainty, Canfor Pulp is anticipated to benefit from increased production in Q4 following recent scheduled and unscheduled downtime. Our greenfield sawmill in Louisiana is progressing as scheduled with start-up anticipated late next year. We continue to assess additional internal and external opportunities to grow our business on a global basis although we are prepared to remain patient and disciplined for the right opportunities that meet our strategic and financial criteria. I will now turn it over to Pat to provide an overview of our financial results.
Thanks, Don, and good morning, everyone. The Canfor and Canfor Pulp quarterly results were released yesterday afternoon and come together with our overview slide presentation in the Investor Relations section of the respective company's websites. In my comments this morning, I'll briefly speak to our quarterly financial highlights, a brief summary of which is included in our overview slide presentation. Our lumber segment reported operating income of $326 million in the third quarter, which included a $27 million non-cash expense associated with antidumping accrual rate adjustments in Q3 and prior quarters. While results were down from the record high earnings reported in Q2, our high-value strategy and regional diversification supported our results in the quarter. Our lumber segment benefited from record high earnings in Europe as improved sales realizations more than offset the impact of seasonally lower production and moderately higher log costs. Operating income from our European operations contributed over 50% of our lumber segment earnings in the third quarter. In North America, while sales realizations benefited from strong offshore pricing, results generally reflected the sharp decline in North American lumber pricing as well as the impact of reduced production. British Columbia log costs increased significantly in the third quarter with a further increase expected in Q4, both reflecting the lag in market-based stumpage adjustments and the very high lumber prices seen in the summer of this year. Looking ahead to 2022, we anticipate a material reduction in BC stoppage effective from January 1. Log costs in our other jurisdictions saw more modest log increases. Our Pulp business reported operating income of $16 million in the third quarter compared to $51 million in the previous quarter. Results for the current quarter reflect significantly lower pulp shipments as Don has highlighted, offset in part by modestly higher sales realizations. Capital additions were approximately $130 million in the third quarter, including approximately $30 million on our greenfield sawmill, which is progressing as scheduled. We currently anticipate the 2021 capital spend to be approximately $330 million in the lumber segment and $50 million to $60 million for Canfor Pulp, excluding capitalized major maintenance. Taking account of our remaining greenfield spend, the RBS biofuel investment and planned organic and sustaining capital, our preliminary 2022 CapEx forecast is $450 million to $500 million, inclusive of Pulp. As Don mentioned, we continue to review various organic and external growth opportunities and currently anticipate increased capital spend in 2022, as I just mentioned, including the remaining greenfield spend and contribution to the new biofuel joint venture. In addition, we will continue to assess further the repurchase of shares under our share buyback program on an opportunistic basis. And with that, Don, I'll turn the call back over to you.
Thanks, Pat, and operator, we'll turn it back to you, and we'll take questions from analysts.
[Operator Instructions] And your first question will be from Sean Steuart at TD Securities.
First of all, congrats to Pat, very happy to see the announcement and best of luck going forward.
Thanks, Sean.
I'll start with Europe, really strong results there, very good margins. I'm hoping you can give some context on the relative strength you're seeing in that market, there was some reference in the MD&A to U.K. being especially strong. Can you give us some context on the sales mix from Europe this quarter? And there was reference to things softening a little bit in Q4. Any parameters you can give us on the magnitude of that market weakness you're seeing in the current quarter?
Yes. For sure, Sean. We'll do my best here, we'll do our best here. I think, first of all, like you mentioned, like Europe was a good positive quarter for us for sure and a lot of other things that we anticipated kind of came true again in Q3. In terms of the sales distribution that I think you're speaking more directly about, I mean, clearly, the U.K. is an important market for us, for Sweden. It's probably in the order of magnitude 25%, 30% of our business and it continues to be strong, like a lot of the areas that we've been shipping to out of our Swedish mills. I think the area, though, similar to North America, that's been and continues to be particularly solid is on the R&R side, at least it has been through Q3. As we look forward into Q4, like you mentioned, there will be certainly be probably some minor reductions in returns through Q4. It looks pretty good on a short-term basis here over the last 4 to 6 weeks, so it looks still pretty strong, for sure, partly because of the lag, as you know, in European pricing, right? But anyway, we -- so we're still -- despite the fact that it will come off to some degree, we're still pretty positive overall in the European customer base that we have.
Okay. Thanks for that detail, Don. Also I have a question on the RBO's joint venture. We're encouraged to see that moving forward. Can you give any detail on Canfor's spend for this project? And any context on project economics? I assume that this is a small scale to start with. But are there any details you can give us there?
Yes. I guess maybe the one key detail that you're probably interested in, Sean, is the and it's about $25 million on a net basis after some of the subsidies and so forth.
And will that be financed off Canfor Pulp's balance sheet?
No, Canfor.
Okay. One last question for now. You guys have been less aggressive on share buybacks than your comps and you've clearly got a rising CapEx spend this year off and into 2022. Pat or Don, can you give us some thoughts on how you think about the intrinsic value of your shares right now? And being less aggressive on buybacks and some of your peers and how you weigh those returns against asset-based growth initiatives and the returns you might see there?
For sure. Maybe, Pat, you go ahead and comment maybe for Sean on that.
Yes. Sure, Sean. Yes, I mean, absolutely. I mean, we've been trading around our book value here at various times and I would agree with you with the intrinsic value is higher. So we have had a modest program, as you know, for -- since the summer, and I think it's reflective of signaling that we agree with that premise. But at the same time, as Don said many times, we're a growth company. And we believe that the value for shareholders over time is through reducing the volatility of our business, and that comes through diversification of products and regions. And so I think it's, frankly, in the best interest of us and shareholders to continue to follow that strategy. And so it's really going to be a limited program. I think going forward, you can anticipate similar levels of buybacks as we continue to pursue accretive growth opportunities.
Next question will be from Hamir Patel at CIBC Capital Markets.
Don, we've seen a sawmill recently transact in the U.S. South that at record valuations. Has some of that sort of froth in the market changed how you look at valuation parameters? And when you look at the various regions where you focused on growth, is Europe perhaps looking more appealing today than the U.S. South?
Yes. I think it's something we can clearly look at all the time. I mean I think that that operation I think you're referring to is certainly was a good operation and a good part of the country. And so we thought that, that was certainly a good acquisition by the party that made the acquisition. I think for us, we're certainly -- again, we look at a lot of different factors to make any acquisition merger decisions that we might make. And I think if you look around the world, I mean, certainly in Europe, it continues to be a focus for us as it does in the U.S. South, right? So I mean, really, I think at the end of the day, we just look at each one on its own merits and determine whether it meets both the financial metrics but also the strategic criteria that we have as a company and how does it fit in with the growth strategies that we have, right? And I think [indiscernible] with that, but our focus, as Pat mentioned, has not changed. I mean we are a growth company have, as you know, and we're clearly focused on Europe and the U.S. both.
Great. That's helpful. And I also wanted to follow up on some of your comments about R&R rebounding. And I know it seems like we had a bit of a destocking cycle play out in that channel this year. Given the sort of growth maybe you're expecting through the end of the year, how do volumes in that channel compare this year versus last year in terms of maybe a percentage, I don't know if -- I'm assuming it's positive growth. And then what's your view as to what sort of growth you might expect there in 2022?
For sure, Hamir. Maybe I'll get Kevin to talk a bit about that because Kevin's done a lot of work on that themselves. So.
Sure, Hamir. I think when you look at year-to-date 2021 versus 2020, we're actually slightly down just because of the unprecedented takeaway that we saw last year. But when you look at in the -- towards the end of Q3, we are actually starting to trend higher than 2020 numbers, especially Southern Yellow Pine was probably the first to respond. And we've seen that growth continue even up to October and expecting that to continue into early November. SPF was a little bit later to respond. We saw that activity really picked up in September. And again, we are trending at higher than 2020 levels for Q3 and going into Q4.
Great. That's helpful. And maybe just a last question for me for Pat. Pat, you highlighted you're expecting a meaningful reduction in BC stumpage in January. Are you able to quantify yet what that might be?
Well, Hamir, as you know, the October price will be a part of that calculation. So -- but we'd anticipate, I guess, in general terms that the Q3 and Q4 increases would all come out in Q1. So depending on how those play out, that will be the change. So I think we'll be back to sort of what we saw in Q2 of 2021 for the first quarter of next year.
Next question will be from Mark Wilde at BMO.
And congratulations to Pat.
Thanks, Mark.
I wanted to start out, you're going to have an increase in duties on sales to the U.S. near year-end. Can you just remind us of how large that change will be for you? And then how that will factor into your thinking about production and also from the standpoint of where you sell AC lumber?
For sure, Mark. And maybe Pat, you go ahead with that one.
Yes. Well, on the duty rate, Mark, we're just under 5%. Now we're moving up to 21.5%. So that's really all in the antidumping and that will be effective at the end of [indiscernible]. Now just to keep in mind, I know you mentioned it will be in effect, but likely only to the summer of next year until probably August and so it will probably be an effect for 8 months.
And how will that kind of weigh into your thinking, Pat? I mean it's a 16.5% increase. So it's fairly significant.
Right.
You go ahead.
Yes. So Mark, this is where I think some of our offshore market opportunities are going to be elevated because there's obviously no duties going into those markets, so focus on that. And then, of course, we've got some -- With the higher value programs like MSR that we have in Square Edge going to the United States at higher values is going to support some stronger pricing to offset some of that. Notwithstanding it will be challenges, but we're going to have to focus on some of those higher value strategies.
Okay. And then Don, I wondered if you could give us some sense of what the M&A pipeline might look like right now in both North America as well as over in Europe just in general terms?
Yes. I mean I think that -- nothing that really surprising comes to mind, Mark, really. I mean there's certainly pockets in certain areas. There's -- you always have, particularly on the independent side, companies that, for one reason or another, have chosen to go to market. Whether that's family issues or whatever the case may be, you see that once in a while, and we're certainly attuned to that and look at those as we think it makes sense. And the same thing in Europe as well really. I mean, although when we look at Europe, we're pretty -- ourselves, at least, pretty clear in terms of where within Europe. We think some of the ops may be. But there's no more than usual, and it's kind of probably a pretty typical conditions right now, Mark, frankly. And I guess where you -- and with the way things have gone here, we haven't really seen any kind of accelerated number of companies on the market or anything at all from our standpoint anyway.
Okay. That's helpful. And then Pat, I want to just come back on this question of share repurchase activity because what's striking to me is that you've actually bought back a lot less stock this year than you did back in 2018. And I think any of us in the financial community would look at your stock today and say, at $27 a day adjusting for all the cash you're sitting on, it's a much cheaper piece of equity than it was when you were buying stock at the $28 range back in 2018, and you bought back a lot more in '18. So any thoughts on that?
Yes, Mark, I think -- I mean we look at it -- like we spoke about all the time and look and trying to determine whether there's there's a reason to increase that from where we're at today. But in the meantime, I think some of the things since 2018, Mark, I think we were a growth company then, but I think even more so now. And I think we really, really see the opportunity. If you look at -- at least from our own point of view, anyway, the diversification -- the aggressive diversification plan that we've been on for some time now, in the last 2, 3 years has been really accelerated, both on the product side and also on the regional side. And I think for us, I mean, we certainly believe that, that's the right strategy and we're going to continue to go down that role in an increasing way. Pat talked already about some of the additional CapEx we're going to spend next year, recognizing the cash balances that we do have and investing not only in sustainable capital like we always do, but also in organic and there's lots of opportunities and that we see internally to that we can invest in. So absolutely, it probably isn't up from 2018, as you said, but there's -- some of these other priorities have become with what we think, much more strategic and much more of an opportunity than they were even a short 3 years ago.
Yes. Okay. I mean, that's fair enough, Don. I guess just kind of playing the other side of it here. I mean, it seems pretty clear to me that capital costs have gone up in terms of new project costs. And it also looks from what we can see on the outside, like deal valuations have gone up on acquisitions. So just it's striking to me given that new investment or M&A has gone up and that actually -- since your stock is much cheaper today than it was 3 years ago that you wouldn't be a little more active on your stock.
Fair comment, Mark. I appreciate it.
Okay. Finally, any thoughts around what we might expect in terms of your Asian markets in the fourth quarter from both a volume and from a kind of a pricing standpoint?
Yes, for sure, Mark. And that's been a real positive surprise. And that may be a -- I mean give away. So Kevin, maybe you fill Mark in a little bit more on what you're doing there.
Sure. Just maybe just highlight 2 markets there, Mark. The first one in Japan. For sure, Q3 was our record high pricing and Q4 is going to be off, but still at extremely elevated levels compared to historical norms. And we even see that trend continuing into Q1. So fairly positive for Japan, and our volumes are pretty consistent there. I mean it's a big priority for us. The key market has been there for over 30 years. And so we have a very consistent approach there. China, very similar. We had some record high pricing in China that helped obviously offset some of the downward pressure in North America. We do have a good order file into Q4, maybe similar volumes again, as we saw in Q3. And again, but prices are definitely off, but still very competitive and above some of the North American indexes for the similar products.
Yes. That's super helpful.
Next question will be from Paul Quinn at RBC.
Congratulation, Pat.
Thanks.
Just in your risk and uncertainty section, you highlight that Blueberry River First Nation decision. Just wondering how that would affect Canfor? And is it really just the Chetwynd and Fort St. John sawmills that are at risk?
Yes. I mean I'm not sure at all whether what's at risk yet at all. I mean, clearly, we're working through some of the challenges with that decision for sure. But like we do with a lot of the First Nations that we deal with, we are spending a lot of time trying to understand as we look forward here, what the impacts are going to be on us -- for us directly. I think there's lots of things still that we don't know that we're working on as we go through it. So it would be -- it's probably a bit early -- probably better next quarter to answer to that, Paul. We can give you a little bit more color around that just because things are developing as we speak. And so I think maybe leave it at that.
Okay. Fair enough. Congratulations on the record in Europe. Just wondering, and I understand that, that market is a lot less volatile than North America here. But the Q4 price drop that we'll see in that market, is that going to be similar to what you saw in North America in Q3? And maybe just what you're experiencing, I mean, we've heard from others in the market that log costs continue to increase. So is that another factor on margins for Q4?
Yes, for sure. I'll let Kevin talk about the market. In terms of log costs there, though, just one quick comment on that. I mean, I think it would be fair to say that the quarter-over-quarter, they're probably up a neighborhood of 10%, that kind of 8% to 12% in that area. And -- but like we've mentioned before, Paul, and it's the case again. It is the one thing about Europe that we like as it tracks, the log prices, there's a lot of discipline between log prices and mill nets. And so this is no different here, right, with some of the performance on the mill nets that's what you've seen here in Europe. So it wasn't unexpected, I guess, to see a bit of a log cost increase, right? So in terms of, Kevin, overall market share on a comparative basis, maybe you can...
Yes. I would say that we're probably closer, Mark, to -- or sorry, Paul, to that 15% kind of range. It does vary by country to some degree, but I think we could guide to about a 15% drop versus what we saw in Q4 here for the SPF Canadian market, North America.
Okay. And then just anticipating this Russian log export issue that they're going to stop in '22. Do you expect that to be a material boost for for Asian lumber shipments going forward?
I would definitely see it, Paul, as a real positive. And also given the fact that China is really trying to reduce energy consumption and particulates in the air so kiln-dried lumber in general, I think, would be positive be positioned to offset the reduced volume of log exports coming into that market. So I think we'll see how that plays out. And if it actually comes to fruition, but I think that would be my expectation.
Thank you. There are no further questions. I'll turn it back over to Don Kayne for closing comments. Please go ahead, Mr. Kayne.
All right. Thanks, Sylvie, and thanks, everyone, for your participation this morning. We appreciate your support of Canfor and all the best to all of you, and we'll look forward to talking to you at the end of the year, I guess. Take care.
Thank you, Mr. Kayne. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.