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Edited Transcript of CFP.TO earnings conference call or presentation 27-Apr-17 2:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Canfor Corp and Canfor Pulp Products Inc Earnings Call

VANCOUVER May 21, 2017 (Thomson StreetEvents) -- Edited Transcript of Canfor Corp earnings conference call or presentation Thursday, April 27, 2017 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alan R. Nicholl

Canfor Corporation - CFO and SVP of Finance

* Brett Robert Robinson

Canfor Pulp Products Inc. - President

* Donald B. Kayne

Canfor Corporation - CEO, President and CEO of Canfor Pulp

* Peter Hart

Canfor Corporation - VP of Pulp & Paper - Sales & Marketing

* Stephen Mackie

* Wayne Ross Guthrie

Canfor Corporation - SVP of Sales and Marketing

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Conference Call Participants

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* Hamir Patel

CIBC World Markets Inc., Research Division - Research Analyst

* Sean Steuart

TD Securities Equity Research - Research Analyst

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Presentation

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Operator [1]

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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 the Canfor and Canfor Pulp websites.

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 each 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.

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Donald B. Kayne, Canfor Corporation - CEO, President and CEO of Canfor Pulp [2]

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Thank you, operator, and good morning, everybody. Thank you for joining the Canfor and Canfor Pulp Q1 2017 Results Conference Call this morning. I'll make a few comments before I turn things over to Alan Nicholl, Chief Financial Officer for both Canfor Corporation and Canfor Pulp. Alan will provide a more detailed overview of our performance in Q1 and then we will take questions. In addition to Alan, on the line with me today are: Brett Robinson, President of Canfor Pulp; Peter Hart, Vice President of Pulp Sales; Wayne Guthrie, our Senior Vice President of Lumber Sales and Marketing and Stephen MacKie, Senior VP of Canadian operations.

So starting with Canfor Pulp. Strong market demand and higher shipments led to improved results in the quarter. Overall, despite several extreme weather-related challenges the mills ran well and productivity increased. Global demand particularly from Asia continued strong in quarter 1. Global softwood demand was positive for both NBSK and BCTMP and we expect that will continue through Q2 as many companies begin their spring maintenance trucks. With the addition of new softwood and hardwood capacity in 2017, we continue to see some risk to pricing later on this year and into 2018. For our lumber operations weather continued to be a challenge throughout the quarter but through the significant efforts of our people we saw our productivity improved overall relative to Q4.

All of our operations, pulp and lumber had exceptional performance in safety over the quarter building on an excellent year for safety overall in 2016. Our companywide MIR for Q1 was 1.24 which is the lowest level we have ever achieved in the history of our company. Prices were up for both SPF and Southern Yellow Pine due to increased consumption and solid demand across all sectors of our business. North American demand continues to be strong in both new home construction and repair and remodel and our view is that the increased demand will continue to support higher returns going forward. Our key offshore markets continued to improve in the first quarter and as I said previously our shipment volumes to Asia remained steady and our outlook for Q2 is positive.

Finally, I will comment on the softwood lumber dispute and the preliminary countervailing duty rates that we've announced on Monday. Canfor was assigned a rate of 20.26%, slightly higher than the all-others rate of 19.88%. We were not subject to a critical circumstances determination meaning we're not exposed to retroactive duty payments. These duties are punitive and completely unwarranted, they are not based on fact but are a result of protectionist efforts by the influential U.S. lumber lobby aimed at artificially restricting supply for their own benefit at the expense ultimately of U.S. consumers.

We will defend our company and work with our colleagues to defend our industry against these completely unjustified duties, as we have done successfully in the past. We fully expect this determination by the Department of Commerce to be overturned by independent NAFTA and WTO panels and that the duties will ultimately be rescinded and returned. We have had excellent support and collaboration from the Canadian Federal and BC provincial governments and have every confidence that they will take all appropriate steps to successfully fight these outrageous trade actions again as they have done previously. However, for now, our company will be subject to a duty rate of 20.26% on shipments to the U.S. market beginning May 1. We have been preparing for several years for possible trade issues and as a result have significantly diversified our markets. We've grown global markets in general through promotion of wood as a green building material, we've added 14 operations in the U.S. South representing $1.6 billion board feet or 30% of our production and made significant capital investments at our BC operations to ensure our global competitiveness close to $1 billion the last 5 years. So we've made the investments, we built new markets and we have a solid plan that we're executing excluding on.

So with that, I will turn the call over to Alan to provide an overview of our financial results.

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Alan R. Nicholl, Canfor Corporation - CFO and SVP of Finance [3]

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Thanks, Don and good morning, everyone. As usual, my comments this morning will focus principally on our financial performance for the first quarter of 2017 by reference to the previous quarter. Full details of our results are contained in the Canfor Pulp and Canfor news releases both of which were issued earlier this week. As always, you'll find an overview slide presentation on both the Canfor and Canfor Pulp websites in the Investor Relations section under webcasts. The presentation highlights consolidated and segmented results and I'll be referring to this presentation during my comments.

For the first quarter of 2017, Canfor reported shareholder net income of $66 million or $0.50 a share, up from net income of $38 million or $0.29 a share reported for the fourth quarter of 2016 and well up from net income of $26 million or $0.20 a share reported for the first quarter of 2016. On Slide 3 of our presentation, we highlight various nonoperating items, net of tax and noncontrolling interest, which affect the comparability of our results between the quarters. In the first quarter of 2017, these items included a $3 million post-tax gain on the sale of our joint venture with Anthony EACOM, an IOHS fund acquired with the Anthony transaction in late 2015.

After adjusting for the aforementioned items, shareholder net income for Q1 was $59 million or $0.45 a share compared to an adjusted shareholder net income of $38 million or $0.29 a share for the fourth quarter of 2016. Results for the lumber segment are highlighted on Slide 5 of our presentation. The segment recorded operating income of $84 million for Q1, a $26 million increase from the prior quarter. The increase in operating income principally reflected higher Western SPF and Southern Yellow Pine where sales realizations and solid demand across all sectors contributed to improve lumber prices. This was offset in part by a higher market-based stumpage and weather-related challenges and increased log costs in Western Canada.

Production was up 5% compared to the previous quarter while shipments were in line with Q4 reflecting a tightening supply of rail cars and trucks in North America mostly as a result of the harsh weather conditions. Unit manufacturing costs were broadly in line with the previous quarter with the positive impact of productivity gains and stable log costs in the U.S. offsetting the increased log costs for Western SPF. Canfor's pulp and paper segment comprises the results of Canfor Pulp Products Inc. The company reported net income of $24 million or $0.36 a share compared to net income of $10 million or $0.15 a share for the fourth quarter and net income of $23 million or $0.34 a share for the first quarter of 2016. As you'll see on the summary of Canfor Pulp's operating results on Slide 6, the increase in operating income primarily reflected higher pulp shipments in the quarter, reflecting both in improved softwood pulp markets and a delayed vessel shipment from Q4. NBSK pulp sales realizations were relatively unchanged from the previous quarter, reflecting shipments of a higher proportion of orders taken in late 2016 and early 2017 as well as further pressure in customer discounts on a stronger Canadian dollar. Much of the benefit from the success of price increases implemented during the first quarter will be reflected in our second quarter sales realization. Higher BCTMP sales realizations reflected a continued improvement in demand and prices during the quarter. Pulp shipments were up 22% from the previous quarter, mostly due to increased shipments particularly to China and the 14,000-ton delayed shipment from the previous quarter as well as improved productivity. Unit manufacturing costs were lower in the quarter largely affecting improved productivity and lower fiber costs offset by seasonally higher energy usage. Operating income for the paper segment in Q1 was $7 million, down $1 million from the previous quarter mostly due to the stronger Canadian dollar. Capital spending in the first quarter totaled $39 million, and included $19 million in the lumber business and $17 million in Canfor Pulp. The 2017 capital spend is currently projected to be approximately $165 million for Canfor and $75 million for Canfor Pulp, including major maintenance. Consistent with the prior quarters, Canfor Pulp's Board of Directors approved a continuance of a quarterly dividend of $.0625 a share. In the first quarter, Canfor Pulp restarted its shares repurchasing program, spending approximately $3 million. We will continue to look for appropriate opportunities to repurchase additional shares going forward. At the end of the first quarter of 2017, Canfor excluding Canfor Pulp had net debt of $352 million with available liquidity of $319 million. Canfor Pulp had net cash of $28 million with available liquidity of just over $100 million. Net debt to total capitalization excluding Canfor Pulp was 18.2%. For Canfor Pulp with a 0 on a consolidated basis, it was just over 15%. And with that Donald, I will turn the call back over to you.

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Donald B. Kayne, Canfor Corporation - CEO, President and CEO of Canfor Pulp [4]

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Thanks Alan. So operator we are now ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from Sean Steuart from TD.

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Sean Steuart, TD Securities Equity Research - Research Analyst [2]

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Few questions. The lift in corporate costs that we saw this quarter, I gather it was tied to legal expenses on softwood lumber. How should we think about that run rate going forward? Is that a steady quarterly amount going forward until the next bilateral agreement is hopefully struck?

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Donald B. Kayne, Canfor Corporation - CEO, President and CEO of Canfor Pulp [3]

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Maybe, Alan you can touch on that.

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Alan R. Nicholl, Canfor Corporation - CFO and SVP of Finance [4]

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Yes. Good question Sean. I think it's a general comment that run rate is much higher in Q1 than we would expect to see going forward clearly there was a lot of work being undertaken in Q1 in light of everything that's happened, so fair to expect some continuing legal costs obviously, but not at that run rate.

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Sean Steuart, TD Securities Equity Research - Research Analyst [5]

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Okay.

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Donald B. Kayne, Canfor Corporation - CEO, President and CEO of Canfor Pulp [6]

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And Sean, one thing we are facing as a result of being one of the respondents, paying a heavy bill there relative to maybe some others.

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Sean Steuart, TD Securities Equity Research - Research Analyst [7]

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Understood. Question on pulp market, I guess for Brett. You guys referenced the strong run we've seen in pricing, softwood and BCTMP since I guess last November and sounds like you are expecting markets to stay tight through the second quarter as maintenance kicks in. Just thoughts on the sustainability of recent momentum through the second half of the year. We're hearing some anecdotal reports of resistance in China to ongoing price increase efforts, how are you guys thinking about the second half of the year shaping up?

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Brett Robert Robinson, Canfor Pulp Products Inc. - President [8]

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I'll start off and then I'll kick it over to Peter Hart, but as we look out we continue to watch what's going on with the new capacity coming on around the world. And we take people at their word for their guidance on startups. There's been a lot of challenges with these mills hitting their milestones and ramping up. So we got to watch what happens here with market but Peter can give you maybe a little bit more color. Peter?

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Peter Hart, Canfor Corporation - VP of Pulp & Paper - Sales & Marketing [9]

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Thanks, Brett. Certainly, in the last couple of weeks that we've seen a bit of slowdown in order intake from China but that's counterbalanced by spring maintenance. So, not unexpected and to Brett's point, depending on when the new capacity comes onstream in the second half of the year. There is a risk of weakness up there.

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Sean Steuart, TD Securities Equity Research - Research Analyst [10]

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Okay, thanks for that. And then lastly, you referenced strength in North American lumber demand is a contributor to tighter markets. Can you give us a little context on what you're seeing in offshore markets particularly China right now for lumber demand?

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Donald B. Kayne, Canfor Corporation - CEO, President and CEO of Canfor Pulp [11]

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Sure. Why don't you talk a little bit about that.

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Wayne Ross Guthrie, Canfor Corporation - SVP of Sales and Marketing [12]

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Good morning, Sean. In China we were very very pleased with the way China looks, we've got a good order file for Q2 and more demand in excess of that, so China looks really strong going into at least through the next quarter. Sometimes you'll have a little bit of a slowdown in the summer there and during the heat there but then through is a holiday season but we're expecting to exceed our plans into China for 2017. Furthermore, we make a lot less low grade then we used to because of the grading up and so if you look at the absolute volume shipping to China, you may see some slippage there because we're not just going to make the low grade but with the higher value going there and the bigger issue with China is the traction in wood frame construction. So we expect more and more, 2 and better to make its way there here over the next couple of quarters.

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Wayne Ross Guthrie, Canfor Corporation - SVP of Sales and Marketing [13]

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Japan continues to be resilient and we're really pleased with the start and we're expecting another good quarter in Japan going forward.

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Operator [14]

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Your next question comes from Hamir Patel with CIBC.

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Hamir Patel, CIBC World Markets Inc., Research Division - Research Analyst [15]

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Wayne, I was wondering if you could give us some color as to the magnitude of price changes in China compared to North America for lumber since the beginning of February? Obviously we saw a big surge in North America but curious maybe about the level of pricing differences between both markets right now?

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Wayne Ross Guthrie, Canfor Corporation - SVP of Sales and Marketing [16]

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I don't want to give any specifics on pricing here as you can appreciate. All the markets are trying to digest all the news here of the last few weeks and going forward. Can say this, though, that our -- the pricing in China is progressing faster than we thought it would, very solid. We've been aided there a little bit by some European container rates that have gone up substantially. And also, maybe a little less shipments to China by some others have created low inventory. So we're pleased with the price appreciation there. And as far as how that will relate to the other markets we'll have to see how this all shakes out in the next few weeks.

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Hamir Patel, CIBC World Markets Inc., Research Division - Research Analyst [17]

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Thanks Wayne, that's helpful. And just another question on the lumber side was -- I know the market-based BC stumpage system is pretty complicated but can you help us understand how stumpage prices would change because of the duties, because I was under the impression that duties in themselves would have a downward impact on stumpage particularly in BC but I gather that July revision is expected to lead to higher prices. Could you help us reconcile those 2 things?

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Donald B. Kayne, Canfor Corporation - CEO, President and CEO of Canfor Pulp [18]

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Why don't you speak to that, Stephen?

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Stephen Mackie, [19]

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Sure. Hamir that's a good question. Just in terms of the BC stumpage system you're right that ultimately although it lags, it does reflect the changes in lumber prices realization and AMB's. However, if the thing that is really impacting the stumpage rates in British Columbia today is more than anything else is just extreme competition for fiber and on a dwindling fiber supply. So although we would expect that ultimately the impacts of the duties will be reconciled in BC, we still anticipate upward pressure on log cost above 3% to 5% for the balance of the year.

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Hamir Patel, CIBC World Markets Inc., Research Division - Research Analyst [20]

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Thanks, that's helpful. Just final question I had for Don. Could you maybe speak to the company's advertise for larger scale M&A now that you have certainty on at least the countervailing portion of the duties?

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Donald B. Kayne, Canfor Corporation - CEO, President and CEO of Canfor Pulp [21]

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Yes, I guess when you say larger scale, I'm not sure what that means but overall I think that certainly we've got an appetite for an M&A of course. We always have, it's just one of several priorities. And maybe just say real briefly to speak about how we look at the capital allocation which hasn't really frankly change much but maybe I would say that just to give you a bit of context, Hamir. #1, we made some significant progress on improving our balance sheet in the last couple of years and that was our focus and I think we're certainly in that area now that we are glad we are with all the uncertainties that are going on everywhere. And so I think we're in a very, very good shape there. Going forward though clearly we're going to be balancing off and looking at, we believe, some pretty significant opportunities for organic growth within the company and we're targeting ourselves of around $200 million through now and somewhere in 2018 and even beyond that we see another couple of $100 million potentially that just organically that we see amongst our own operations. We're also and Alan may talk about it a bit later but talking about certainly ranking in there qualifying in there is share buybacks. And then lastly M&A and so M&A clearly now with the valuations and so forth, we're closely watching that but clearly we're -- we want to continue to grow in the South as we've said many, many times and we still do so we're just evaluating those -- all those opportunities that may come up on an individual basis.

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Hamir Patel, CIBC World Markets Inc., Research Division - Research Analyst [22]

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And Don, would Canfor be open to other areas of the wood product spectrum like I know you tried OSB several years ago. You got out of that but arguably that market is structurally different now than it was when you exited it and your platform in the south is lot bigger now than it was when you had exited.

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Donald B. Kayne, Canfor Corporation - CEO, President and CEO of Canfor Pulp [23]

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Yes, speaking Hamir, specifically about OSB, I think we'll leave that to others that are -- got a lot of expertise in that, there's been lots of consolidation taking place there and so I don't see ourselves getting into OSB again at all or panels for that matter at all, period. The way we would look at it is where else -- in addition perhaps even to Southern Yellow Pine that may make sense globally that we might be interested in but for the most part it will be wood products or forest products oriented between pulp and paper, energy and solid wood.

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Operator [24]

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Thank you. There are no further questions at this time. I will now turn the call back over to Mr Kayne.

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Donald B. Kayne, Canfor Corporation - CEO, President and CEO of Canfor Pulp [25]

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All right. Thanks, operator, and thanks everyone, for participating on the call this morning. And we look forward to talking to you at the end of Q2. Thanks very much.

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Operator [26]

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Ladies and gentlemen, this concludes today's conference call. We thank you for participating. And we ask that you please disconnect your lines.