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Edited Transcript of CFP.TO earnings conference call or presentation 24-Apr-20 3:00pm GMT

Q1 2020 Canfor Corp Earnings Call

VANCOUVER Apr 28, 2020 (Thomson StreetEvents) -- Edited Transcript of Canfor Corp earnings conference call or presentation Friday, April 24, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alan R. Nicholl

Canfor Corporation - CFO and Executive VP of Finance & Canfor Pulp Operations

* Donald B. Kayne

Canfor Corporation - President, CEO & Director

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Conference Call Participants

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* Hamir Patel

CIBC Capital Markets, Research Division - Director of Institutional Equity Research and Paper & Forest Products Analyst

* Mark William Wilde

BMO Capital Markets Equity Research - Senior Analyst

* Paul C. Quinn

RBC Capital Markets, Research Division - Director of Paper and Forest Products & Paper and Forest Products 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's 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.

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Donald B. Kayne, Canfor Corporation - President, CEO & Director [2]

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Thank you, operator, and good morning. Thank you for joining the Canfor and Canfor Pulp Q1 2020 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 Q1 as well as the numerous initiatives underway to mitigate the financial impacts of this downturn.

I would like to start by thanking our incredible employees who are dealing with the unprecedented challenges of the COVID-19 pandemic with perseverance, resilience and an unfailing dedication to health and safety, while at the same time, focusing on executing on our strategy.

For the last several weeks, our organization has been almost exclusively focused on our COVID-19 response. Our top 2 priorities are protecting the health of our employees and executing on our strategy to sustain the business for the long term. In terms of our people, we quickly implemented a COVID-19 action plan, which has continued to evolve. This plan includes implementing physical distancing measures, including at our facilities, having as many employees as possible work from home, restricting all travel, implementing cleaning and hand washing protocols and implementing self-isolation and quarantine policies.

As a result of the pandemic, we have had to take extended downtime across all of our operating regions, with our sawmills in British Columbia impacted the most. These are very difficult decisions as we know. They are having a significant impact on our employees, contractors, communities and customers, which we deeply regret.

Across our organization, our employees are making a number of very difficult sacrifices to ensure we are removing as many discretionary costs as possible. I also want to thank the federal and provincial governments who have provided additional support at this difficult time.

Turning to our markets and beginning with lumber, the company anticipates conditions will remain extremely volatile and challenging through the second quarter. Global lumber market demand in recent weeks has declined sharply in the wake of the closures of nonessential businesses and lockdowns implemented in many parts of North America and Europe.

The company currently anticipates that North American home construction activity will remain at reduced levels with significant regional demand volatility. Following a steep reduction in pricing from mid-March through early April, prices have stabilized somewhat in response to a material reduction in supply in recent weeks.

We are anticipating that the second quarter will have limited demand, particularly for April and early May. Looking further ahead to the second half of 2020, it is anticipated that supply and demand balance will improve and support a modest improvement in prices later in the year.

Lumber prices to China are seeing more moderate declines in North America as that region is gradually returning to more normal business conditions following the early outbreak of the COVID-19 pandemic, while short-term prices to Japan are anticipated to be in line for the current quarter.

European lumber markets and pricing are also being materially impacted by aforementioned global economic downturn, and the company currently anticipates market conditions are expected to remain challenging through the second quarter before improving later in the year. Global softwood pulp demand is currently projected to be solid through the second quarter of 2020, particularly from China as that region continues to gradually recover from the pandemic while containment measures across Western Europe and North America are forecast to weigh on market demand for printing and writing paper. While pulp and paper operations are designated as essential services in many regions, it is projected that supply disruptions will continue in various regions as a result of the pronounced effects from COVID-19 on various business sectors, including lumber manufacturers. The current weakness in lumber markets is resulting in numerous sawmill curtailments in the BC Interior and lower volumes of sawmill residual chips available to pulp mills. So this brings with it the risk of additional downtime in, not only the company's operations, but also across the industry.

And with that, I'll turn it over to Alan to talk about the quarter and some of the initiatives that we have underway to enhance our already solid liquidity position.

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Alan R. Nicholl, Canfor Corporation - CFO and Executive VP of Finance & Canfor Pulp Operations [3]

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Well, thank you, Don, and good morning, everyone. The Canfor and Canfor Pulp quarterly results were released Wednesday afternoon and come together with our overview slide presentation in the Investor Relations section of our respective company's websites. In my comments this morning, I'll speak briefly to quarterly financial highlights and expand, as Don mentioned, on a number of the initiatives that the company has put into place in response to the COVID-19 pandemic, a brief summary of which is included in our overview slide presentation.

Our lumber segment reported an operating loss of $89 million for the first quarter of 2020 compared to an operating loss of $27 million for the previous quarter. Results included a net duty expense of $44 million and a $63 million inventory write-down provision that reflected a steep decline in lumber prices towards the end of the quarter and into early April.

After adjusting for these items, the lumber segment generated operating income of $19 million. Lumber segment results benefited from moderately higher sales realizations in North America reflecting strong U.S. housing activity earlier in the quarter as well as continued solid results generated by the company's European operations at an annualized rate of $90 million in the quarter.

However, as Don mentioned, these positives were overshadowed by the rapid deterioration in global lumber market conditions in March as the effects of COVID-19 spread globally, resulting in significant price declines thereafter.

Our pulp business reported operating income of $6 million for the first quarter compared to an operating loss of $24 million reported in the previous quarter. Results for the current quarter reflected a solid operating performance as well as an $11 million recovery of a previously recorded inventory write-down provision. Pulp shipments were up 9% in the quarter, reflecting a 4% increase in pulp production as well as a modest improvement in purchasing from China, particularly for tissue. Pulp unit manufacturing costs reflected this improved productivity and slightly lower fiber costs in the quarter.

As Don mentioned, in response to the unprecedented challenges presented by COVID-19, the company has undertaken a series of measures to mitigate the financial impacts from deteriorating global lumber demand. These include extensive capacity reductions across all of our operations, reduced capital spend for both the lumber and pulp businesses as well as numerous initiatives put into place to support both companies' financial positions through the pandemic.

At the end of the first quarter, Canfor, excluding Canfor Pulp, had net debt of approximately $1 billion and available liquidity of $400 million. Canfor Pulp ended the first quarter with net debt of $43 million with available liquidity of approximately $100 million.

Looking ahead, Canfor's cash flow is forecast to benefit from a seasonal reduction of working capital in the second quarter and the receipt of approximately $125 million of tax refunds over the balance of 2020. This, combined with the reduced capital spending and the suspension of all nonessential overhead, will improve the company's liquidity and help preserve a solid balance sheet position.

For our pulp business, recognizing the material challenging -- material challenges facing the global economy and the supply disruptions resulting from the extensive sawmills downtime that Don mentioned, Canfor Pulp's Board of Directors have decided to suspend the quarterly dividend for the foreseeable future as part of its cash preservation efforts.

And with that, Don, I'll turn the call back over to you.

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Donald B. Kayne, Canfor Corporation - President, CEO & Director [4]

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Yes. Thanks, Alan. So operator, we're now prepared to answer any questions that the analysts may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Hamir Patel from CIBC Capital Markets.

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Hamir Patel, CIBC Capital Markets, Research Division - Director of Institutional Equity Research and Paper & Forest Products Analyst [2]

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Don, I've seen Alberta give a 6-month interest-free deferral of stumpage dues. Are you seeing any signs that BC may implement a similar program?

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Donald B. Kayne, Canfor Corporation - President, CEO & Director [3]

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Yes. I think -- thanks, Hamir. We're looking at several opportunities in British Columbia around -- on the stumpage side. Clearly, that would be one of the options and alternatives that we are looking at and have had conversations about. So it's a little too early to tell you the results of that yet. But hopefully, we'll see some positive responses on a few issues and possibly that one as well.

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Hamir Patel, CIBC Capital Markets, Research Division - Director of Institutional Equity Research and Paper & Forest Products Analyst [4]

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Great. And Don, can you give us a sense as to what you're seeing in the repair and remodel channel? It seems like perhaps that's maybe held up at the desk. How -- and if you can just remind us how the pricing mechanism works for that book of business?

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Donald B. Kayne, Canfor Corporation - President, CEO & Director [5]

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Yes. For sure, Hamir, and you're accurate, Hamir, for sure. I mean, the R&R business has been surprisingly resilient. It's a bit regionally based, though I will say, as it was not all over the North America. But certainly, there's areas where it's really done well. In our own -- from our own standpoint, it's up about 20% quarter-over-quarter, so pretty significant. And so we are -- there's one area that we're pleased with and feel good about it is that whole R&R side. So that's -- and we -- at this stage, at least, we think that should continue going forward. We've heard some pretty positive -- lot of positive results there from some of our customers in the DIY space. So definitely a pretty decent-looking picture there. In terms of the pricing mechanism there, the way -- I think pretty much everybody is the same that we just have an agreed-upon premium that we have over and above the random-like prices to reflect the high-quality product that we -- high-quality product in the merchandising that we have to do for those products, and it reflects a significant premium as a result of that.

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Hamir Patel, CIBC Capital Markets, Research Division - Director of Institutional Equity Research and Paper & Forest Products Analyst [6]

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Okay, great. Don, that's helpful. Alan, I was wondering if in the financials in the COVID-19 Risk section, there was some mention that depending on the duration and intensity of the pandemic, it could affect the valuation of your long-lived assets. How should we think about the conditions that would cause write-downs of your mill carrying values?

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Alan R. Nicholl, Canfor Corporation - CFO and Executive VP of Finance & Canfor Pulp Operations [7]

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Yes. Hamir, yes. No, I think what you saw in that section really is what would typically be expected in risk and uncertainties area. I mean, I think for now, we're not concerned about that. But clearly, if situation were to unfold that our mills were down for significant longer and we have to, in some cases, indefinitely idle the mills, and those would be the sorts of trigger events that would clearly warrant us to have a closer look at potential impairment. It's not something today that we're particularly concerned about. It's just more that we put it in as part of that expanded disclosure.

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Hamir Patel, CIBC Capital Markets, Research Division - Director of Institutional Equity Research and Paper & Forest Products Analyst [8]

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Okay, great. And Alan, what's your sense as to the absolute bare bones CapEx of the business if we did have a prolonged period of weak markets?

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Alan R. Nicholl, Canfor Corporation - CFO and Executive VP of Finance & Canfor Pulp Operations [9]

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Yes. No, again, fair question, Hamir. I mean I think what we're guiding to for 2020 is probably close to bare bones. I think we could maybe take a little bit shift, a little bit off, in terms of our lumber business, although my operating colleagues would probably see an issue with that, but I think we could probably take a little bit off that. But I think what we've got in there today, which is close to $65 million for lumber and $25 million for pulp is pretty much close to the bottom.

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Operator [10]

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The next question comes from Sean Steuart from TD Securities.

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Sean Steuart, TD Securities Equity Research - Research Analyst [11]

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A couple of questions. I mean you're expressing, I guess, confidence in your liquidity position. A couple of your competitors did expand available liquidity, one of them heading into the pandemic and one of them more recently. Are you guys pursuing any initiatives to further boost liquidity with additional borrowing capacity? And more generally speaking, can you speak to comfort on your covenant headroom as we go through the next few quarters?

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Alan R. Nicholl, Canfor Corporation - CFO and Executive VP of Finance & Canfor Pulp Operations [12]

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Yes. No, for sure, Sean. So I think, as I said in my opening comments, I think we feel that we have ample liquidity here to see us through this pandemic impacts. Today, I think we're guiding to north of $450 million of liquidity by the end of the second quarter, clearly, contingent upon certain things materializing as we expect them to.

But at the same time, we are looking at a couple of near-term opportunities just to top-up our liquidity and gives us a little bit more of an extra cushion, if you will. And so we hope to have news and updates on that before we get to the end of this quarter.

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Sean Steuart, TD Securities Equity Research - Research Analyst [13]

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Okay. And then I suppose one of the other bright spots through -- relative bright spots for lumber demand is Asia right now. And can you give us a sense over the next couple of quarters how much incremental Western Canadian volume you think you can move into Asia? And maybe the better way to ask it is what was the percentage of volume heading there prior to the pandemic? And how do you think that can trend into the summer?

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Donald B. Kayne, Canfor Corporation - President, CEO & Director [14]

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Yes, for sure. Well, maybe in terms of -- first of all, in Japan, we'll talk with Japan. That's been consistent, Sean. It's been -- we went into the year strong in the quarter, and we basically sold out through the second quarter. And based on production levels and whatnot, we're pretty -- we're -- at this point anyway, we're confident that Japan will continue relatively flat. Most of the business that we have in Japan is with a similar customer base and mostly end users, and so it's pretty consistent. Notwithstanding that there are some elevated concerns in Japan around COVID-19, as you will be aware of, and so we're watching that very closely. But at this time, the one thing about Japan is you normally have a fairly solid order file that normally extends out. They are quite a long ways compared to other markets. So that's -- from our standpoint, we're pretty comfortable there with Japan but watching it closely.

In terms of China, that has been, again, another positive surprise, as you articulated. Business going into the year, we would have expected that we would have done in the neighborhood of 20% to 25% of our business there. They have been much more active now with their recovery from COVID-19. So I heard of others and maybe even to a greater degree than ourselves. But it's -- if you at least use 25% as a base, I think there's a -- it's reasonable to expect that we could get -- we could increase that another 10% if we chose to. So it is, in one way, a bit of a backstop. There also is a bit of an additional opportunities that we think we have to ensure ourselves against additional weakness in North America.

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Operator [15]

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The next question comes from Mark Wilde from BMO.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [16]

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Just to start off. I wondered Don or Alan, any update to kind of the Q2 production schedules that you've put out there?

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Donald B. Kayne, Canfor Corporation - President, CEO & Director [17]

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Yes, I think maybe, Alan, I'll just touch on that here, and you can talk about pulp as well. But in terms of on the lumber side, clearly, we're watching it real closely. I know that you're referring probably to the announcements that we made up until May 1 and what's going to happen beyond that.

Currently, we're watching it very closely. I think I alluded in the early part of the conversation here that we are seeing some areas that are a bit better than what we would expect, but it's -- that -- the decisions around that, we haven't made them yet. We are looking at -- and hopefully and possibly making a couple of adjustments there going forward. But as you can appreciate, it's extremely dynamic, and we want to make sure that we make the decision that we got some sustainability there too in terms of increasing. That -- a couple of quick things, maybe on that, Mark, that you might find helpful here is that, first of all, right now, the supply and demand is extremely sensitive, and we're watching that carefully also because we don't want to tip it in the wrong direction there. Our internal analysis and analytics that we do is that we figure that 2020 demand overall will be down about 6 billion feet. That's what our numbers show us with all the -- with -- as a result of COVID-19. On the supply side, though, we think there's corresponding decreases there. There's going to be probably pretty close to that, if not a bit more than that, but certainly in that neighborhood as well. So we figured, as we -- over the next month, 2, 3 here that we're going to be in relative balance, so to speak. So that's why we're taking a very cautious approach here in terms of when and if to increase production levels. But certainly, it is something that we're looking at on a daily and weekly basis.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [18]

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That's helpful. I wondered, Alan, do you want to say anything about the pulp side?

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Alan R. Nicholl, Canfor Corporation - CFO and Executive VP of Finance & Canfor Pulp Operations [19]

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Yes. No. Maybe just to add to that. So I think as Don outlined in his comments, clearly the pulp business is very much dependent on sawmill operating rates. And so clearly, we're not immune from some of the challenges that we've seen impacting us almost, particularly in BC, and so we're tracking that very closely. I think we guided to the downtime at Northwood, which just started yesterday, and that will be for 3 weeks or just over 3 weeks. But we are watching it closely, similar to what Don outlined for the sawmills, Mark.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [20]

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Okay. And then just staying on pulp, Alan, I wondered if you can just help us in thinking about sort of medium-term BC fiber supplies and what that implies for kind of pulp mill capacity in BC. Do you -- for example, do you have adequate supply for your 4 mills, if we look out over the next 2 to 3 years?

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Alan R. Nicholl, Canfor Corporation - CFO and Executive VP of Finance & Canfor Pulp Operations [21]

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Yes. No. Thanks, Mark. I mean, I think as you may recall at our last conference call, I made reference to the fact that we've been successful in procuring additional supply both on the sawmill side and sawmill residual chip side and indeed, more whole log chips as well. So we feel we're pretty good there. I mean, things are tight. I think every producer today, quite frankly, would say that things are tight. And all of us recognize that as an industry, we don't have an abundance of fiber, but we are watching the position very closely. We clearly, I think, are going to be impacted by extensive curtailments, but then I think we're not alone in that regard.

Looking out, Mark, it's clearly hard to call, and it's probably unhelpful to speculate too far. But right now, we're -- we feel as if we've got a reasonable balance.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [22]

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Okay. Last one for me on this ground. I wondered if you guys can just walk us through kind of demand, pricing and cost trends over Vida and particularly, sort of where things are right now versus kind of the first quarter numbers.

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Donald B. Kayne, Canfor Corporation - President, CEO & Director [23]

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Yes. I can maybe start with that, Alan. I think first of all, in Europe, I will say that we are -- after the first quarter, we are definitely satisfied and actually feel good about the results in Q1 from our European operations. Clearly, January, as you might remember, was off -- we got off to a little bit of a rough start there because the weather was so serious there. And also, there was a lot of rhetoric around Brexit and so forth and a lot of speculation and so forth. But it basically rebounded quite well in February and March. And while there's been some impact in some of the U.K. business in particular, it's -- even there, it's been -- it's probably, I would say, our guys would say it was a bit better than what we would have expected, particularly, again, on the home center side and the DIY side.

And so in -- and the other thing about over there in Europe, because of the product mix that we manufacture over there, you've got a lot of alternative markets that you can go to, which is what we've been able to do there relatively well for sure. So in terms of the operational performance, and as a result of COVID-19, we really haven't had any real impacts at all. We've got -- we're running about 80% of our production. Right now, we've got 2 mills that are curtailed. All the rest are running 100% capacity. And we haven't had really any issues from an absenteeism point of view or COVID-19 impact point of view at this stage, and they are running it very well.

And the other thing I would say in Europe, just to fill out the -- fill out all the variables here, Mark, is around log cost. And one thing -- and I think we've spoke about this before, Alan, or I have, is that the one thing in Europe is they're very responsive to market prices. So when market prices are under pressure or we see any kind of a deflation on lumber prices, you typically see a corresponding, albeit a bit of a lag, reduction in log cost. And that's what we're seeing again. And so that helps to preserve the margins that you're forecasting.

So overall, I would have to say that in Europe at this point, it's living up to what we expected, and it has been relatively positive here, and we expect that to continue at this stage, at least going forward.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [24]

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Okay. So Don, from what you've said then, it's -- this sort of 18% drop just year-over-year that you flagged in the release is not corresponding to kind of a similar drop of like 1,800 bps in your margins over in Sweden. Is that correct?

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Donald B. Kayne, Canfor Corporation - President, CEO & Director [25]

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That's correct.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [26]

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And did I hear you say that the run rate in the first quarter for Vida equated to about $90 million a year?

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Donald B. Kayne, Canfor Corporation - President, CEO & Director [27]

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No, I didn't say that. What I said was -- unless you read that somewhere -- I don't -- if you look at our asset...

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [28]

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I thought I heard $90 million in the commentary.

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Alan R. Nicholl, Canfor Corporation - CFO and Executive VP of Finance & Canfor Pulp Operations [29]

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Yes. So Don, maybe I can jump in here. So Mark, what we're guiding to there is obviously Q1 extrapolated there. And I think the point was to convey that again, Europe, from our perspective, is still performing well and delivering very solid returns. So apologies for any confusion caused.

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Operator [30]

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And the next question comes from Paul Quinn from RBC Capital Markets.

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Paul C. Quinn, RBC Capital Markets, Research Division - Director of Paper and Forest Products & Paper and Forest Products Analyst [31]

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Just following up on Hamir's R&R question. You mentioned there's a difference regionally. Maybe you could go through which of the regions that are strong that you're seeing and where the areas are weaker?

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Donald B. Kayne, Canfor Corporation - President, CEO & Director [32]

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Yes. I think, for sure, Paul. Right now, certainly, the Southeast continues to be -- the takeaway there is relatively strong. Certainly, the Midwest has been good. California is picking up somewhat, although we don't do a lot of business there. It's definitely getting a little bit better. Probably the slowest area is certainly obviously the Northeast. That whole area would be the least. But certainly, the Midwest and Southeast, those are big -- obviously, big markets for -- well, for lumber, period, but certainly for us, and that's where we've seen most of it. Still a little bit slower down on a deep South maybe. But yes, overall, that's kind of how we would look at it. California was really tough at the beginning, but it's starting to come back a bit as is Washington, Oregon.

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Paul C. Quinn, RBC Capital Markets, Research Division - Director of Paper and Forest Products & Paper and Forest Products Analyst [33]

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Okay. And then just on the new home side. What are your customers saying about how they're looking at 2020 at this point?

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Donald B. Kayne, Canfor Corporation - President, CEO & Director [34]

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Yes. I think our -- from our standpoint, we're forecasting 1 million starts this year. And that's -- basically, that's as a result of some of the analytics that we do, but also in conversation that we have with a lot of national builders or whatnot. And there's a lot of initiatives out there. I mean, clearly, that's the one segment where we're going to see the biggest impact. We need to face the facts on that. We know that. However, there's a lot of initiatives, and there's a lot of work being done by the national builders through subsidized mortgage rates and several other initiatives that they're looking at to try to preserve as much as they possibly can and keep that whole side of the business going. But if you talk to the national builders, I would say that we would be in that 1 million kind of areas, probably on average, pretty consistent.

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Paul C. Quinn, RBC Capital Markets, Research Division - Director of Paper and Forest Products & Paper and Forest Products Analyst [35]

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Okay. And then maybe just overall on COVID-19, how has it affected your operations so far? Have you got a number of people that have tested? Have you had to shut operations for any period of time? And how does that split between lumber and pulp?

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Donald B. Kayne, Canfor Corporation - President, CEO & Director [36]

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Yes. So we don't -- we've -- clearly, it's -- the impact -- we haven't really -- we've got a few cases for sure, between -- we got 1 or 2 in Sweden and 1 or 2 in the U.S., so -- but that's the extent of that. We've done -- what we've really put in place right from the start, significant amount of work in terms of trying to preserve the health of our people, right? So we've put a number of policies in place around social, physical distancing piece, particularly and keeping the sites clean. If there's any suspicion on -- of any area, we shut it down and we'll clean it up, and we'll do whatever we need to do. So we think -- and we've done a lot of -- ourselves checked with a lot and we've done -- actually done a survey at the whole company and really to understand what level we're at there, and everybody is pretty positive there.

So we haven't really -- that's been pretty good. We haven't really suffered anything from the standpoint of increased absenteeism for the most part. Probably the biggest issue is just people are concerned about the longer term. And unlike most things we go through, when it's going to end, right? So -- but other than that, it's more of a personal thing. And so if you just look at the business though, I think we've done a terrific job. Our HR group and all the folks have done a really good job kind of working our way through this as best as one can.

And Europe has been really -- not really any impact at all. The U.S., we're still -- the mills that are running are running. We haven't had really a lot of issues there. And yes, so overall, obviously, a lot of concern, a lot of apprehension, a lot of stress as a result of it. But we're trying to communicate, like we've never communicated before and keeping everybody up to speed on what we're doing and recognizing that everybody at this stage of the game is making sacrifices, and we're extremely appreciative of that. And we understand the stress it's putting everybody under, right? So anyway, that's kind of long-winded, Paul, but that's kind of how we're kind of trying to operate through this deal right now.

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Paul C. Quinn, RBC Capital Markets, Research Division - Director of Paper and Forest Products & Paper and Forest Products Analyst [37]

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Great. And maybe just last question, Alan, on the pulp side here. It looks like tissue demand is up. I don't know how much of that is a pull forward, but it looks like paper is well off the cliff here and specialties sort of a mixed bag. Maybe you can remind us on your sort of percent of those 3 main end-use buckets in terms of your pulp shipments?

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Alan R. Nicholl, Canfor Corporation - CFO and Executive VP of Finance & Canfor Pulp Operations [38]

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Yes. No. I think you summarized it well there, Paul. I think just tissue was very good for us. It's still very good. It's moderating a little bit, normalizing, if you will. I think printing and writing has been hit hard, as you correctly say. So in terms of answering your question, I think close to 50% of our product business is what we would call specialties. And a good 1/3 is -- or more is tissue. So printing and writing, obviously is a much smaller percentage of our portfolio, which is it's by design, quite frankly. So our product mix and our customer mix has helped to insulate us against some of the pressures that we're seeing from that segment.

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Operator [39]

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Our next question is a follow-up from Mark Wilde from BMO.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [40]

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Yes, I've got 3 follow-ups here. One -- first, Don, just any kind of thoughts you'd want to offer on the sort of how the COVID thing has played out over in Sweden, where they've clearly had a little different model than most of the other western countries. How you think that's worked or not worked effectively?

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Donald B. Kayne, Canfor Corporation - President, CEO & Director [41]

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Yes. Interesting. That whole situation is quite interesting because as you outlined there, Mark, they've taken a bit of a different tack, especially early on. I think now, talking to our folks from Sweden, they're spending a bit more -- they're a bit more focused now on, particularly on the social distancing and/or physical distancing, whatever you want to call it. No question compared to what it was a couple 3, 4 weeks ago. But still, though, if you really look at it, they are -- you talk to them, they definitely have a bit of a different model. They definitely have a lot of trust in their government and what they're doing around it there. And so -- and as a result of that, we really haven't seen -- it's allowed our mills to run. The ones that are running there of their operations, all but 2, essentially at 100%. Absenteeism has been very minimal, if at all. And you probably saw recently Volvo announced that they're back operating again, which is big. They're a big company there, and it's symbolic as well. So from their standpoint, they are very, very confident that they're taking a different tack, that they do think it's -- at this stage, anyway, it's the right one, and it's essentially a modified approach than what we've got here in North America, for sure. Yes. So anyway, that's kind of what we see right now. And so far, it seems to be working.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [42]

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Okay. Next, I want to just go over to lumber. You mentioned how sensitive the whole business is to kind of supply-demand balance. I wondered if you could give us some sense of how you see takeaway right now but also sort of how you see kind of inventory in the channel because it does seem for the last 4 to 6 weeks like there must be a heck of a lot of inventory coming out of the channel because it didn't sound like anybody was taking away anything from the mills, yet there was still quite a bit of construction activity going on.

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Donald B. Kayne, Canfor Corporation - President, CEO & Director [43]

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Yes. And I think that's accurate. I mean, first of all, the takeaway, as I mentioned on the R&R side has been pretty consistent and pretty solid, particularly in some of the regions that I indicated to one of the other fellow's questions. But yes, on the R&R side, the takeaway has been definitely solid.

In terms of the overall inventory in the channel, I think definitely that it's not stressed at all. I think it's going to be stressed from a standpoint of on up because if you look at all the downtime that's taken place, the premium products, in particular, that most of the home centers look for and the treated guys are looking for, 2 of the successful areas, they'll want a high-end product definitely. And -- so when you start to take away production, it has a corresponding increased impact on prime product recoveries. And so that's why we would say, in terms of overall inventory, it's pretty tight, and it's going to -- going to get tighter, in our view, particularly if demand stays kind of relatively close to what we're seeing today.

If you switch over to the 2&Btr side, clearly, with the pros being down a bit more, obviously, are down on a fair bit, you would think that would have an impact, but there's a lot of 2&Btr production down, too. We figured across North America market that the overall production is down 25%. That would be our kind of guess. And that's across everywhere. And whether it's the U.S. Northwest, there's examples of 7 out of 8 mills completely down. There's lots of -- a lot of production out right. So even on the 2&Btr, I think it's relatively tight also.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [44]

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Okay. Last one for me is -- and this is kind of a sensitive one, I appreciate. But it's a really difficult period for kind of workers for communities up in the BC Interior. I just wonder, if we just left politics aside, are there any ways in which sort of -- if the industry was more consolidated, it might make that process of kind of rationalization and restructuring easier or more rapid, Don?

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Donald B. Kayne, Canfor Corporation - President, CEO & Director [45]

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Yes. I mean, I think my -- our view continues to be and it has been for a long time before -- long before COVID started was the rationalization still has to continue to take place in British Columbia. And it's due -- 100% or not 100% but close to it due to the pine beetle and what we're -- we've been facing for a long time there. So we -- our view still continues to be that there needs to be more production coming out regardless of COVID-19 over the long term here. And that's just face the facts. We don't have the fiber going forward like we had in the past. And we've got a bit of spruce beetle in certain parts of the province too that's adding to that problem. We've had forest fires. You don't grow those trees back in a week either, right? So you combine all those things in the last couple 3 years, and it's not hard to conclude that there's going to be needed more rationalization or just one more rationalization across British Columbia.

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Operator [46]

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There are no further questions. I will now turn it over for closing comments.

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Donald B. Kayne, Canfor Corporation - President, CEO & Director [47]

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All right. Thanks, operator, and appreciate everyone participating in the call here. And all of you, please stay safe, and we certainly look forward to speaking with you at the end of Q2. So thanks a lot for your support in Canfor and we'll -- and Canfor Pulp, and we'll talk to you soon. Thanks.

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Operator [48]

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