Canfor Pulp Products Inc

TSX:CFX

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen, and welcome to 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 now would like to turn the meeting over to Mr. Don Kayne, Canfor and Canfor Pulp's Chief Executive Officer. Please go ahead, Mr. Kayne.

[Donald B. Kayne, President, CEO & Director]

All right. Thank you, operator, and good morning, everyone. Thanks again for joining the Canfor and Canfor Pulp Q1 2021 Results Conference Call.I'll make a few comments before I turn things over to Alan Nicholl, our Executive Vice President 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 quarter 1. In addition to Alan and I, we are joined by Kevin Pankratz, our Senior Vice President of Sales and Marketing.I'd like to begin by recognizing the hard work, the resilience and dedication of all of our Canfor and Canfor Pulp employees. Through everyone's exceptional efforts, not only have we persevered through the challenges of the pandemic, but also advanced our strategy in several areas.We are excited to be advancing our sustainability culture to the next level, significantly increased our focus on ESG reporting and are in the process of developing a comprehensive sustainability strategy that's aligned with best-in-class ESG standards.As part of this process, we are undertaking goal setting and will be implementing action plans with meaningful targets to provide a pathway to achieving these goals. This work will be outlined in our sustainability strategy that will be announced later this year.We see opportunities to capitalize on the low-carbon economy and the carbon storing green attributes of wood products in construction, and we are excited about the growing use of mass timber in nonresidential construction.In addition, with more countries banning the use of single-use plastics and increasing demand for renewable, low carbon materials, we have a great opportunity to lead in the development of sustainable products that can replace fossil fuel based products.With Arbios Biotech, our expanded joint venture partnership with Licella to convert wood biomass into high-value biofuels, we will support a reduction in greenhouse gases from the transportation sector and will also contribute to a low-carbon economy.We continue to make significant progress on our commitment to build a diverse workforce that represents the communities in which we live and work by 2030.The due to the significant commitment to diversity and inclusion throughout the organization by our senior management and Board, we are seeing results, including a solid increase in the hiring of women and indigenous people.Turning to our financial results. Our lumber business generated record-high operating income and revenues of $607 million and $1.7 billion respectively in the first quarter. Global lumber markets continue to benefit from sustained high levels of demand in excess of available supply, led by strong U.S. housing activity and R&R demand.U.S. housing activity, particularly for single-family homes, has increased sharply in recent quarters, reaching 15-year highs in March. Elevated demand continues to reflect a number of trends that have emerged since the onset of the pandemic, combined with an aging housing stock and low existing home inventories following a number of years of modest U.S. housing activity.While consumer spending habits are likely to normalize when the COVID-19 pandemic ends, we believe favorable demand fundamentals will continue to positively impact our industry going forward.In Asia, lumber demand was solid in the first quarter with improved pricing, particularly in Japan, anticipated in the second quarter, reflecting strong demand and a lag in contract pricing.Our European lumber business continues to perform well with record high earnings achieved in the first quarter. While pricing in Europe has lagged North America due to the nature of overseas contract pricing, market fundamentals in Europe remained strong, with significantly higher sales realizations anticipated in the second quarter.Turning to our pulp business. Canfor Pulp reported operating income of $5 million in the first quarter. Global pulp pricing increased significantly during the quarter, reflecting improved demand, particularly from China, combined with global transportation constraints.Following the successful replacement of recovery boiler #5 at Northwood in January, Canfor Pulp performed well in the quarter with the benefit of significantly higher pulp pricing anticipated to be fully realized in the second quarter.During the first quarter, Canfor repaid its $225 million term debt with cash on hand, and following major growth in recent years, ended the quarter with only a small amount of net debt. Supported by our improved balance sheet and strong market outlook, we anticipate increased capital spending in 2021 and continue to assess various internal and external growth initiatives as we look to grow our business on a global basis.At the same time, we are committed to remaining patient and being disciplined while we wait for the right acquisition opportunities to come along, and we will exercise judgment to pass on opportunities that do not align with our strategy or are overpriced due to today's high product prices.Canfor and Canfor Pulp will continue to deploy capital internally that target strong rates of return, consistent with our strategy, and increasing focus on sustainability.I will now turn it over to Alan to provide an overview of our financial results.

[Alan R. Nicholl]

Thank you, Don, and good morning, everyone. The Canfor and Canfor Pulp quarterly results were released yesterday morning 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 quarterly financial highlights, a summary of which is included in our overview slide presentation.As Don highlighted, our lumber segment reported record-high operating income of $607 million for the first quarter of 2021 compared to $461 million for the previous quarter. Results in Q4 included a net duty recovery of $95 million following the finalization of CVD and ADD rates applicable to the first period of review.Lumber segment results continue to reflect extremely strong global market fundamentals, with sustained high levels of demand exceeding available supply, resulting in new record prices during the quarter. Unit sales realizations in Western Canada and the U.S. South were up substantially, reflecting these positive price fundamentals and significantly outweighing the impact of market-related lower cost increases in Western Canada and moderately lower shipments stemming from transportation constraints.By way of note, North American lumber prices have continued to increase sharply early in the second quarter, supported by strong order files. Our European business continues to generate strong results and also recorded record high earnings in the first quarter, buoyed by solid demand and favorable pricing in that region. While European pricing has lagged the increases seen in North America, pricing has continued to see significant increases early in the second quarter, as Don outlined.Our pulp business reported operating income of $5 million in the first quarter compared to an operating loss of $28 million in Q4. Results for the current quarter reflected improving global pulp market conditions, combined with a 25% increase in pulp production following the successful rebuild of Northwood recovery boiler #5 that was completed in mid-January.Global pulp pricing rose sharply during the first quarter, supported by increased demand, particularly from China as well as tight supply arising from global supply chain challenges. As highlighted during our last analyst call, due to the lag between shipments and orders, the significant majority of these price increases will be realized in the second quarter.Pulp unit manufacturing costs were moderately lower than the previous quarter as a benefit of a higher production more than offset seasonally higher energy costs. Fiber costs were slightly lower than those in Q4.At the end of the first quarter, Canfor, excluding Canfor Pulp, had net debt of $25 million and available liquidity of approximately $1.2 billion. The unprecedented cash flow levels in recent quarters supported the early repayment of Canfor's $225 million term debt in Q1.Canfor Pulp ended the first quarter with net debt of $60 million and available liquidity of approximately $87 million. We anticipate higher capital spending in 2021 with approximately $300 million in the lumber segment and close to $70 million for Canfor Pulp, excluding capitalized major maintenance costs.While we are comfortable retaining and enhancing our existing liquidity until attractive opportunities present themselves, we continue to assess various potential attractive and accretive, organic and external growth and diversification opportunities and continue to look closely at the potential for restarting our share buyback program. But at the same time, we are mindful of the need to adopt a thoughtful and disciplined approach.And with that, Don, I'll turn the call back over to you.

[Donald B. Kayne, President, CEO & Director]

All right. Thanks, Alan. And over to you, operator where we'll take questions now from analysts.

[Operator]

[Operator Instructions] And your first question will be from Sean Steuart at TD Securities.

[Sean Steuart, Research Analyst]

A few questions to get through. Let's start with the European operations. We were particularly impressed with the results there. And a couple of questions on that front. First off, it looks like the production rates you've seen in Q1 and even going back to late last year, it looks like you're running more or less full out based on the capacity you've given for Europe. Any updates on how we should think about annual capacity with both Vida and Bergs? And the mix and organic expansion initiatives you're undertaking there, how should we think about total capacity?

[Donald B. Kayne, President, CEO & Director]

Yes. In terms of capacity there, we're basically running and planning to run around 1.5 billion board feet annually, including the Bergs mills and closer. We're always looking at opportunities for upside there, particularly from the Berg mills where we felt when we got into that, that there was some upside opportunity, and we are certainly seeing that. Those 3 mills that we bought, the 3 are doing extremely well. We're really pleased with that, overall.And I guess on the -- we would have expected, and maybe this is what you're getting around to a little bit here is having some bigger interruptions, I guess, due to COVID. And like all our operations, really across everywhere we operate, we really have not seen any real significant reductions at all due to COVID. We've lost a shift here and a shift there, of course, but it really hasn't had any major challenges present any major challenges for us.I think in terms of organic capital, like we've talked about in the past, I mean, we see opportunity in Sweden, for sure, for organic capital. We're in the process right now -- our President and CEO of Europe, they're evaluating those opportunities kind of as we speak. They've been working on them for a while. But certainly, there are operations, including the Berg operations that no doubt can justify organic capital.So we're just working through that. Obviously, you can appreciate it, to try to prioritize all of that is a bit of work, but we're getting through that and it will just come down now to timing that due to contractor availability and equipment and all of that, right? So -- but -- so right now, I would say, about 1.5 billion at this stage.

[Sean Steuart, Research Analyst]

Okay. And it looks like the price realizations in Europe exceeded our forecast. And I know it's -- there's byproducts, and it's not just lumber sales. But can you speak to how much of that volume is moving to North America and how that's transitioned over the last few quarters, and I suppose a potential further upside into the exceptional North American pricing we're seeing right now?

[Donald B. Kayne, President, CEO & Director]

For sure, Sean. So maybe I'll get Kevin. He's doing a lot of work and he's, of course, responsible for all of that. So maybe, Kevin, you can maybe comment on all of that for Sean.

[Kevin Pankratz, Senior Vice President of Sales & Marketing]

Sure. Yes, actually, with our European operations, they've been fairly consistent in the markets they operate. And I would say that we haven't materially changed our North American presence. It's been consistent. Maybe a couple of points here and there, but we remain very disciplined in the other markets we serve, like the U.K., Central Europe, Asia, and we're starting to see fairly good gains on pricing as they look at it quarter-to-quarter basis, but not materially shifting incremental volume to the U.S. market by maintaining our disciplined strategy, diversified markets that they serve and support those core customers.

[Sean Steuart, Research Analyst]

Okay. Kevin, while I have you, can you give context on how your order file looks in North America right now and how that length has evolved over the last quarter?

[Kevin Pankratz, Senior Vice President of Sales & Marketing]

Sure. Yes. No, we continue to see pretty strong order files. And obviously, the SPF order files are a little bit longer than the Yellow Pine ones. But we're well into Q2, which gives us confidence on the strength of Q2. And for Yellow Pine, maybe just a couple of weeks lighter than that. But order files are essentially, if not the same, in fact a little bit stronger than they were in Q1.

[Sean Steuart, Research Analyst]

The 6 weeks plus, is it fair to say for…

[Kevin Pankratz, Senior Vice President of Sales & Marketing]

Yes, 5% to 6%. Yes. For SPF, maybe just a week or 2 shier on the Yellow Pine.

[Operator]

Next question will be from Mark Wilde at Bank of Montreal.

[Mark William Wilde, Senior Analyst]

Is it possible as we're thinking about use of capital, can you give us an update on that South Carolina greenfield? And then maybe to just put some kind of priorities and some metrics around M&A that you might look at?

[Donald B. Kayne, President, CEO & Director]

Yes. Thanks, Mark. I'll maybe start on that one. First of all, South Carolina, we are not really looking at anything there.

[Mark William Wilde, Senior Analyst]

Sorry, Georgia. Georgia.

[Donald B. Kayne, President, CEO & Director]

Yes. That's okay. No problem. Unless Alan wasn't telling me something. But sorry, yes. So in Georgia, I mean, we're -- maybe just M&A in general. We haven't -- we're in the process. We've got some exciting things we're looking at there in terms of expansion on potentially overall on the greenfield front and organic-wise overall, which we're looking at right now. And -- but we haven't made a decision yet in terms of whether it's Washington or there's a couple of other potential locations that look good, both at existing operations that we have, but also potentially new ones. But we -- I guess, safe to say right now, we are looking at -- and that's been a huge part of our consideration here, capital allocation as to what we're going to do around that and where. But we are close. And there are a -- couple of them are exciting, but it -- we haven't made a decision yet in terms of whether it's Washington or potentially another location.

[Mark William Wilde, Senior Analyst]

Okay. And then just in terms of M&A, can you just help us with some guideposts in terms of where your priorities are, including kind of U.S. versus Europe?

[Donald B. Kayne, President, CEO & Director]

Yes, good question because it really does boil down to that. It's between Europe and Yellow, and the Southeastern United States. And I would say that, first of all, between the 2 locations, it'd be 50-50 in terms of -- they're both solid. We like -- we obviously like Europe a lot. But we also like -- and believe in the Southeast a lot.So it will -- we've got opportunities in both places that we're looking at. Probably in Europe, it may be a bit more realistic, I think, in terms of multiples. Certainly, in the U.S. Southeast, what we found and the fellows involved in that from our company that are looking into that and are finding real significant multiples more than what we're certainly prepared to pay at this stage of the game. And we don't see that probably changing for a while. So that's why we've really focused hard here, and we're going to increase our capital quite bit as you may have -- may know or may have seen in 2021 and on into 2022 around organic capital particularly and potentially some other even additional exciting projects that we're working on right now, right?So M&A, there might be something by -- that comes around in North America, but I'm not counting on that. We're not counting on that. Europe, maybe a bit better likelihood of that. But again, a similar approach there too, with organic capital opportunities, I mentioned on the earlier questions from Sean and also, like I said, on potential new investment there.

[Mark William Wilde, Senior Analyst]

Okay. And then, Don, if I could, just on capital, one more point. I mean this is really an extraordinary period, not only in terms of level of lumber prices, but the duration of the run. You compare this to kind of what we saw for a flash back in 2018. I'm just a little concerned about the ability of the industry to reinvest all this capital, whether it's through M&A or through kind of new projects. What would be your thought on just taking some of this windfall and just returning the cash to shareholders? And not necessarily through repurchase, maybe a special dividend. Just say, look, this is a onetime enormous windfall here. We can't possibly allocate all of this back into the operations. So the smart thing to do is just return to cash to shareholders.

[Donald B. Kayne, President, CEO & Director]

Yes, for sure, Mark. I think as we've spoken before, I think, certainly, that's a consideration, and we've had a number of discussions on some of the options around that. And -- but at the same time, I mean, we do believe -- I mean if you go back to 2020, I mean, we cut our capital back significantly, right? We cut it back from probably $250 million to $100 million, and that was a challenge to do $100 million. We've increased it to $300 million this year. And 2022 will be no question, it'll be up again, for sure.So we -- for us, I mean we really believe in the growth opportunity that are going to present itself, like I mentioned, in Europe and in the South on organic and potentially greenfield, for lack of a better word. And those are things that we're looking at.But I can tell you this, we are going to be ultra-cautious on what we do in all those regards, and that's why we don't mind at all having a cash -- a little extra cash around for sure, considering what this industry goes through, it seems on a regular basis and the cyclicality of it and all the things that you're well aware of, better than I am.And so we're taking a really cautious approach before we make any decisions at all, extremely disciplined like never before around how we're approaching that. But certainly, what you mentioned there and whether you talk about share buybacks or you talk about special dividends or all of those things, I mean, those would be a part of it. But honestly, we're really trying to focus hard now is to, like I said, get that $100 million back to $300 million and then looking at next year and what we may be able to do again in Europe and in the south, particularly, although we do have a few projects that we might want to be considering here to in the West, so.

[Mark William Wilde, Senior Analyst]

Yes. Okay. Well, it's a lot of sailors hitting the town with a lot of money in their pocket, so silly things can happen. The last question for me, the BC lumber industry produced about 9 billion board feet last year. Realistically, what does that number look like in better markets like this? What can B.C. return that you think is kind of a sustainable level over time?

[Donald B. Kayne, President, CEO & Director]

Yes. I mean I think that it's probably -- that's a good question. I mean we think it's probably going to be less. And I think, obviously, the beetle, the reductions due to the beetle are still occurring. There's going to be more decisions made here going forward in Western Canada, British Columbia, for sure. And so I think it will be a smaller number than that.And I think -- and that's what we've seen, including ourselves recently with Isle Pierre, with the permanent shut of Isle Pierre. I think we'll see more. I think if you had to throw a number out there, I think we still got another probably 1 billion feet. I'm not sure exactly. There's variable views on that. But I think probably in that 8 billion to 9 billion feet probably is realistic. And the benefit of that right now is we're seeing a lot less pressure on the purchased wood market because of some of the rationalization that's occurred. So we're not seeing the escalation on the purchased wood log market in British Columbia to the extent we saw back in 2018, where there was a lot of aggressive purchase behavior on the purchased wood market.So -- but that would be my best guess at this stage. But maybe Pat can get more specific with you on that later in terms of that number if you think it's a bit less.

[Operator]

Your next question will be from Hamir Patel at CIBC Capital Markets.

[Hamir Patel]

Don, we've seen the B.C. government recently alluded to some major changes coming to the province's 10-year allocation. Can you speak to what potential impacts you think that might have for Canfor?

[Donald B. Kayne, President, CEO & Director]

Yes. Well, I think you're -- there's -- the one that we're focused on right now, of course, is the Prince George TSA. And of course, we don't know the answer to that yet. We don't -- we haven't heard how that's going to shake out. I think it's safe to say there'll be some -- there could be some changes there for sure due to the -- particularly due to the mountain pine beetle. And so we're waiting for that and we're also waiting on the intentions paper that the Premier alluded to at the [ COPI ] conference, which we were encouraged, frankly, by some of his comments, for sure. But we -- frankly, we're really right now waiting to hear about the agenda paper and what that's going to include and also on the TSA decision.But I mean, it's safe to say that we will probably see a reduction there of -- I think I would say, though, that we're obviously following it extremely closely because it's going to have implications, right, not just for us, but all the folks in the PG TSA area that operate, right, depending on what that ends up being, right? So -- but I don't -- as expected, they got very careful in terms of trying to signal what that might be. And so we don't have any idea at this point.

[Hamir Patel]

Okay. Great. And just a question for Kevin. Curious what you're seeing now in the R&R channel? How do you think volumes there are going to fair in '21 versus 2020? And any changes you might expect as the year unfolds?

[Kevin Pankratz, Senior Vice President of Sales & Marketing]

Sure. Yes, great question there, Hamir. I would say, like for Q1, we were actually ahead of Q1 of 2020. Of course, that was prior to COVID hitting. So probably no surprises there. And we're just into early Q2 and seeing some deliniation from the pace, the extreme pace we saw last year. However, when you look at it compared to 2019, we're well ahead and in line with forecast.So I think that's still going to play out, Hamir, like this post-COVID environment and people's discretionary money where they're going to spend it. But we're still seeing a healthy business in that segment. And maybe the realization to expect the exact same energy and pace of consumption might be a bit tough to replicate, but we're starting to see it not materialize to the same degree, but well ahead of 2019 and in line with our forecast and expect a good steady year for this year.

[Operator]

Next question will be from Paul Quinn at RBC Capital.

[Paul C. Quinn]

Great. Hey, Don, at a high level, just wondering how you look at the sustainability of the current lumber cycle? And what factors or what things are you looking at specifically that would bring it in to the party?

[Donald B. Kayne, President, CEO & Director]

A couple of good questions. I mean I think that -- I think fair to say that -- first of all, we think there's some good sustainability for this year and probably on into next year. I mean some of the fundamental changes that we're seeing at a high level, we think -- you never know for sure because there's a lot of -- I can't really rely on history anymore. We're looking at -- you look at the future and some of the changes that are occurring. Number one, I think I do believe that after years of work as an industry and messaging the advantages that our products can play in a low-carbon economy and green building attributes of our products, I think that's all finally hitting home. And the reason I feel a bit better about that, and I know Kevin and I talk about this a lot is the -- some of the -- how the customer base ultimately is shifting to some of these world-class Fortune 500 companies like Microsoft and Google, and you've heard about some of those projects.So that's -- I think that gives us some confidence that that is really -- we're starting to see a big shift there, which is hard to predict how that could end up, but it will be -- it's positive for sure. The whole suburbia from urban centers move that we're seeing and the impact on single-family dwellings, I think it's been -- obviously, to start with, it's been exaggerated, but I think that going to continue going forward, which will serve us well in our industry for sure. And that will probably be followed here by some multifamily as well.The mass timber side, you talk about that yourself a lot. And we tend to agree, for sure, with some of the work you've done around that. And that it's -- the opportunity here is, we think, is large, for sure. We see it in Europe. It's growing. The commercial application will continue to grow. So we're -- all those things should bode pretty well.Supply, we don't feel overall is going to increase significantly at all. So the big concerns that we got, probably #1 is affordability. And to what degree is that affordability challenge going to accelerate here going forward. Clearly, prices pretty much every -- all of the goods have gone up a lot. And at what point does that -- do we start to see more inflation and interest rates start to move up? I mean right, those areas are critical. Concerning for us as we look forward and something that we're very, very mindful of and trying to integrate into our thinking and our forecasting.The other area that I think we really are concerned about, again, longer-term here and short-term too is just supply chain; logistics and supply chain performance with all the modes of transportation, not just rail, but rail, truck and also container and vessel traffic. So -- and that seems to be really challenged globally, not just for us but everywhere, and it's impacting us.So I think there's a lot of work as we go forward, that has to be thought through there around how do we modernize the supply chain, digitize the supply chain, all of the things that we're working on at our company and probably as an industry. So that would be the -- but those would be probably the main ones that I think certainly that we think about so.

[Paul C. Quinn]

Okay. And then just Potlatch earlier this week, the CEO there, Eric mentioned that he doesn't think U.S. South log prices will pick up materially for 4 to 5 years. Is that pretty consistent with what you're seeing in your geographies that you're operating in, in U.S. South?

[Donald B. Kayne, President, CEO & Director]

Yes, we don't -- we see a little bit here there. But if you go back the last 4 or 5 years, it's been minimal for sure. And going forward, yes, we see some increases, for sure, here and there, but overall it's not material.

[Paul C. Quinn]

Okay. And then maybe just getting off the Weyerhaeuser call, they were mentioning that the potential of the U.S. infrastructure spend could result in an incremental 1 billion to 1.5 billion board feet of lumber demand. Is that consistent with what you would see? And given that and given your sort of rosier outlook for the sustainability of the lumber cycle, I'm just wondering why you're so conservative on capital allocation?

[Donald B. Kayne, President, CEO & Director]

Well, first of all, on the 1 billion to 1.5 billion, that's -- I think it's going to be -- it's going to have a positive impact for sure. And you don't have to go back too far to conclude that. And you go back to the last recession when China really made a big commitment to infrastructure and the impact that that had at that time for our industry. I mean it was obviously very positive when you go through an infrastructure spend like the China spoke about and now the U.S. is contemplating as well. So yes, we would say that's definitely a positive.And again, on the capital piece, I think that you're alluding to is we -- why are we not spending more there of the cash that we're -- we do and we're likely to have on hand going forward. And again, I just reiterate again that we're -- despite the fact that things are very good right now, we are never going to lose sight of the fact that we're in a cyclical business. And we want to be in a position where we do have extra cash for sure when things do change again, and they will eventually here, and we want to be ready and we want to have cash available and without extending ourselves any farther than we need to.So we're -- we do have, as I mentioned at the outset, a little bit. We do have some opportunities that are in front of us that we're working on over and above the $300 million or so that Alan has identified that we're going to spend in 2021, this year. So -- but again, we're going to be extremely disciplined and very, very careful in how we deploy the capital. So -- and again -- and we are looking at some other alternatives too, as I mentioned, on NCIB, et cetera, but that's -- it's still kind of under consideration.

[Operator]

Next is a follow-up from Mark Wilde at Bank of Montreal.

[Mark William Wilde, Senior Analyst]

I'm just curious whether you are seeing any sign of customers pulling back in response to these high lumber prices, whether the do-it-yourself channel perhaps is starting to see some easing? Just color on demand destruction or demand deferral?

[Donald B. Kayne, President, CEO & Director]

Yes. Kevin, why don't you go?

[Kevin Pankratz, Senior Vice President of Sales & Marketing]

Yes, Mark, I think the one segment that we've seen a little bit of retraction would be in the multifamily segment. And you can sort of see that in the results with the U.S. census on housing starts. And those projects tend to have longer cycles and price commitments. So I think that's one area. But maybe they just don't get canceled, they just get postponed, which will maybe fulfill longer-term demand and keep it consistent.And as of the -- like with respect to like the new home construction, so far, the prices appear to be passing on. And we're obviously in this new hyper price as we're in right now. And so maybe that's an area where Don mentioned around affordability, when will that impact it a little bit. But so far, we haven't seen the resistance that you would expect. And keep in mind, other products that we would compete with are also experiencing inflation, such as steel.So I think we're in space where there's a lot of inflation going on. But we do worry about that longer-term with respect to inflation and potential impact on demand destruction. But so far, we haven't seen that resistance.

[Mark William Wilde, Senior Analyst]

Yes. Have you seen anything from the, let's say, treated lumber in the U.S. South? So you got a guy who's a do-it-yourselfer, and he looks at the price of doing a deck on his own this year versus what it would have been a year or 2 ago. And says, "Well, maybe I'll wait a little while."

[Kevin Pankratz, Senior Vice President of Sales & Marketing]

Yes, yes. I'm sure maybe there's elements of that, because we're definitely not at the same pace as we were this time last year in the treated side. But we don't do the 2, at least supply and treaters. But the demand has been steady and consistent, but not at the pace that we saw so far last year.

[Mark William Wilde, Senior Analyst]

Yes. Okay. And another question, can you guys give us some expectation of what you would expect for lumber imports into North America, particularly from Europe this year? I'm just -- I'm trying to kind of balance out these really high prices in the U.S. with the fact that you've got a market that seems quite strong over in Europe and wondering whether that will reduce the amount of flow that we might have seen into North America?

[Donald B. Kayne, President, CEO & Director]

Kevin, you can go ahead and comment on that if you'd like or…

[Kevin Pankratz, Senior Vice President of Sales & Marketing]

Sure. Yes. I think it would be logical to expect to see more come over there, Mark. And you heard from our comments, we're going to be fairly consistent and stable. But I think there is -- we are seeing that, which is, in turn, driving shortages in the European market, and it's going to support further strength in those in the coming quarters with respect to demand as their inventories become less filled. So we are expecting to see a little bit more and factor that into our analysis.

[Donald B. Kayne, President, CEO & Director]

Mark, just one thing on -- maybe I can just add, Kevin, if it's okay. Like, I mean -- and I think you will know this. But if you think about our business in Europe and one of the things that impressed us when we purchased Vida and why we were so pleased to be successful there is they have focus on customer market and customer diversification like we have for many, many years. And they have an exceptionally strong customer base, not unlike what we have here. They sell direct, very little intervention, longer-term contracts, and they live by them, and they think about the long-term like we do.We're not focused on next week or next month, right? They're in Europe, even more so, but similar, though. They are looking at -- you look at the customer base that they have from North Africa to the U.K. to Australia to domestic right within Sweden, Denmark, Central Europe, they have extremely strong customer base.And so even with prices where they're at, I think, Kevin, it's been difficult to get them over that 14%, 15% number. So I think there's some that have been opportunistic in terms of the North American market, like particularly as a result of the beetle issue in Central Europe, and they had not very high-quality logs. So they made a lot of lower grades. And of course, that was able to be shipped into the southeastern U.S. But that's coming to an end as well. And so we -- yes, to Kevin's point, it will be up for sure, but I don't think it will be anywhere near the way it was when you go back, I don't know, 15, 20 years, when there was a lot more coming this way, so.

[Mark William Wilde, Senior Analyst]

Okay. And the last one I was curious about, Don, is just how much of an impact you think transportation and logistics are contributing to kind of this -- the market situation at the moment? I mean I've heard about some rail issues coming out of the Pacific Northwest and out of Western Canada. And then, of course, the trucking scarcity in the South has gotten a lot of attention as well. So maybe just a few thoughts on how sort of that's playing into the market backdrop at the moment?

[Donald B. Kayne, President, CEO & Director]

Kevin, you're living with that every day. Maybe talk about that a little bit and maybe talk about new South express.

[Kevin Pankratz, Senior Vice President of Sales & Marketing]

Yes. No. Mark, no doubt that there has been some impact, especially in the U.S. South with trucking. I think it's quite noted that truck shortages are adding some challenges in that space there. And we've had our challenges with Western Canada to get product there, but not a real -- like we're not really building inventory as a result. But I think with our new South operations, our trucking fleet down there, that's been a real positive for us because we've been able to utilize that fleet to execute our order file and be a little less exposed to just the open truck situation, but there's no doubt. But I think the underlying impact there, Mark, is that there was only some -- like that whole working inventory lumber in the supply chain, it never fully recovered. So I think that's the real big fundamental driver that's supporting pricing.And whatever transportation challenges we're facing, for sure, there's got to be some added component to it. But I think we still haven't fully recovered from the depletion of inventory from this time last year.Listen, guys, good luck in the second quarter and take good care of the cash.

[Operator]

There are no further questions. I'll now turn it over to Mr. Don Kayne for closing comments.

[Donald B. Kayne, President, CEO & Director]

All right. Thanks, everyone, for joining the call, and thanks to all the employees that are listening as well, and we appreciate all your efforts this past year and all the support from our shareholders and investors.So thanks very much, and we look forward to talking to you again at the end of Q2. Thank you very much. Have a good day.

[Operator]

Thank you, sir. 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.