Canfor Corporation

Thanks very much, operator, and good morning, everyone. Thanks for joining the Canfor and Canfor Pulp Q4 2024 results conference call.

I'm going to make a few comments to start, before I turn things over to Stephen Mackie, Canfor's Chief Operating Officer and Canfor Pulp's CEO, and Pat Elliott, Chief Financial Officer of Canfor Corporation and Canfor Pulp. In addition, today, we're joined by Kevin Pankratz, our Senior Vice President of Sales and Marketing.

While 2024 was an extremely challenging year, we did successfully execute several strategic priorities that, combined with our efforts over the last few years, have transformed the structure of our business and will help us navigate the waters ahead. As you'll know, we made some difficult but necessary decisions to close several high-cost assets in British Columbia given the challenges accessing economically viable fibre in the province.

In addition, we rationalized two high-cost mills in the US South, replacing them with low-cost capacity following the completion of our second greenfield sawmill in Alabama and a major brownfield investment in Arkansas during the year. While it's going to take some time to ramp up these assets, we've already started to see the benefits of these investments in 2025 and are entering the year with an improved operating cost base, strong balance sheet and enhanced geographic diversification with approximately 70% of our lumber business located outside of Canada.

While 2025 will bring its own set of challenges largely associated with elevated duties and the implementation of tariffs, we have made changes to our operating platform and sales strategy to mitigate as much as possible the impacts of the ongoing trade disputes with only 20% of our sales exposed to duties or tariffs. While global lumber demand remains tepid, lumber prices have steadily increased over the last several months, which has supported improved profitability in our business, particularly in Western Canada.

In the short-term, we anticipate continued volatility and market uncertainty with both the threat and implementation of tariffs, but are positioned to manage this volatility and are supported by our strong balance sheet. Looking ahead, we continue to believe the mid- to longer-term lumber demand fundamentals remain strong and we're well positioned to capitalize on improved market dynamics going forward.

As well, notwithstanding current market uncertainty, our balance sheet strength allows us to continue to evaluate strategic growth opportunities should the right opportunity present itself, although we will continue to be patient and disciplined in terms of the allocation of capital. This includes a more modest CapEx plan in 2025 aligned with our significantly improved asset base, and we also expect to opportunistically repurchase shares throughout the year under our normal course issuer bid.

I'd now like to turn it over to Stephen Mackie to provide an overview of the Canfor Pulp.

Thank you, Susan, and good morning, everyone. Canfor Pulp generated solid financial results in the fourth quarter, largely supported by stable global pulp markets and strong performance in our paper business.

Following the successful transition to a smaller operating footprint in recent months, our focus remains on optimizing the economically available fibre supply and improving our cost structure. While we have stabilized our operations and currently have adequate chip inventories, there remains uncertainty with respect to fibre supply in 2025 due to elevated softwood lumber duties and the potential for additional tariffs.

Notwithstanding the ongoing uncertainty associated with the fibre supply, Canfor Pulp is currently benefiting from weak Canadian dollar and is well positioned to minimize the impact of tariffs in the short-term, given our unique high-strength fibre characteristics, specialty product focus and market diversification. As an organization, we will remain focused on operational excellence as we closely manage factors within our control.

I would like to thank our dedicated employees for their resilience as we restructured the pulp business through 2024 and their ongoing commitment as we navigate the challenges facing us in 2025. I will now turn it over to Pat to provide an overview of our financial results.

Thanks, Stephen. Good morning, everyone.

In my comments this morning, I'll speak to our fourth quarter financial highlights, a summary of which is included in our overview slide presentation located in the Investor Relations section of Canfor's website. Our lumber business generated adjusted EBITDA of $22 million in the quarter, up $64 million from the third quarter.

These results reflect the benefit of increased lumber prices in North America, continued steady earnings in Europe, and modest improvements to our cost structure. Looking ahead to 2025, we anticipate further improvements to our underlying cost structure following the closure of several high-cost assets in North America and the ramp up of low-cost capacity in the US South, as Susan has previously mentioned.

While our cash deposit rate will increase later this fall, as a company, we've been preparing for elevated duties for the last several years and have previously taken steps to reduce the impact on our business. In addition, we note the recently announced antidumping duty rate associated with the sixth administrative review was slightly below our internal estimate of 35%, with the impact already fully accrued in our 2023 results.

As a result, we will expect to book a small recovery later in the year. Turning to our pulp business, Canfor Pulp generated adjusted EBITDA of $12 million in the fourth quarter, down $7 million from the prior quarter, largely reflecting a 22% reduction in shipments following the winddown of one production line at Northwood in August of last year.

At the end of the fourth quarter, Canfor Pulp had net debt of $83 million and $71 million of available liquidity, while Canfor, excluding Canfor Pulp and the duty loan, ended the fourth quarter with net cash of approximately $115 million. On a consolidated basis, capital expenditures were approximately $137 million in the fourth quarter, including $6 million for Canfor Pulp.

Total capital spend in 2024 was $525 million, including $51 million for Canfor Pulp. Following completion of several major capital investments in recent years, we are anticipating significantly lower capital spend starting in 2025, with approximately $250 million of capital spend projected for our lumber business, including final payments associated with our Alabama greenfield, the planned investment at our recently acquired sawmill in El Dorado and an ongoing brownfield planer investment in Sweden.

For Canfor Pulp, we are currently forecasting capital spend of approximately $50 million in 2025 including capitalized maintenance. In addition, as Susan mentioned, we anticipate Canfor will allocate a modest amount of capital to opportunistically repurchase shares throughout the year.

And with that, I'll turn it back to you, Ina, for questions from analysts.

Thank you very much, and good morning, everyone. A couple of questions.

First one is on the Canadian portfolio. You have taken a lot of cost structure out of that portfolio over the last 12 to 18 months.

Can you talk about the shape of the margin profile of the Canadian portfolio? In other words, what is the dispersion between the lowest- and the highest-margin miller?

How flat is that profile? Thank you.

Yeah. Good morning, Ben.

It's Stephen Mackie. That's probably a level of detail, Ben, that we're not going to disclose, but I can tell you that we are encouraged with the improvement that we've seen in the Canadian business.

The Alberta jurisdiction continues to perform quite strong for us and wish the challenging decisions we made last year to take out some of those high costs -- higher cost and fibre supply challenged mills in BC. We certainly improved the portfolio and we're performing well.

Perfect. Okay.

And then, just two more quick ones. Can you talk about how much inventory you have positioned outside of what you would normally do in advance of these tariffs?

Like, have you been moving as much lumber as possible, or do you just not have the logistics and infrastructure to do more than you would normally do?

Hi Ben, it's Kevin here. Yeah, I mean, the tariffs were actually announced quite recently and there wasn't really any kind of material shift of inventory in advance of that.

I mean, there's some modest ones we do seasonally and with more plant positions, but it's not material.

Okay. And then, my last question is, are we seeing -- is there a risk that we're going to have buyer fatigue in a month, two months, three months?

Meaning, are you seeing some inventory building right now and some panic buying in advance of these tariffs that we'll have to pay back in a few months? Or is it steady state right now?

I would say it's definitely -- no one's going long here. It's quite unnerving with the uncertainty that's in the marketplace.

A lot of customers and buyers globally are just not quite as confident what's going to play out in the coming months. And so, I would say, it's a little closer.

We are seeing, in fact, today a little pickup, more inquiry, but more in-line with what we would see seasonality.

Okay. That's all my questions.

Thanks so much. Appreciate it.

Good morning, and thanks for taking my question. Perhaps to start with, can you talk a little bit about what you are seeing in underlying demand trends?

And I know, obviously, trade is dominating a lot of discussions, but outside of that, kind of what you are seeing in activity levels? And if you can give us just some flavor in terms of how you are thinking about sort of shipments for the full year in 2025 between SPF, SYP and Europe?

Sure, Ketan, I'll take a stab at that. So, underlying demand, I would say that we think it's going to be quite flat for the year.

And I would even say that from a global basis. Speaking with some of our larger customers and regional customers, I think demand is just somewhat muted.

Some of our bigger, like, on the retail side, their outlook is more or less of a flat outlook. And I think some of -- you've seen the larger homebuilders, they're probably tempering down a little bit of their outlook, but still having some growth.

And then, for the regional outlook for SPF, just from a volume perspective, we're going to be in that 1.6 billion board feet range and SYP in that 2 billion board foot range, and then, Europe is probably about 1.6 billion.

Got it. That's helpful.

And then, just one other question as with regards to tariff. So, right now, is lumber part of that one-month long pause, or the lumber that's coming in from Canada today, are you all paying 25% duties today?

I mean, tariff, just to be clear. Sorry.

Yeah. It's been a busy week on the tariff file and lots of just changing news, but we, of course, got the news as everyone did in the media yesterday.

We have had an opportunity to consult with both our legal counsel and our custom brokers to understand whether we would be included in that pause and all of their indications are that we will, and we are not being charged the 25% from our customs brokers at this point.

Understood. Okay.

That's helpful. And then, just one final question from my side.

So, as we think about 2025 CapEx, can you talk about sort of what are the key buckets of spending? And how much within that is just pure maintenance and how much is kind of other things that you all are doing?

Hey, Ketan, it's Pat. Yeah, as I said, we're guiding to $250 million in lumber and $50 million in pulp.

And pulp, over half of it is in the capitalized maintenance, of course. On the lumber side, we've got really three buckets of spend that is really not maintenance of business capital and that's the El Dorado upgrade and we're doing a portion of the US$50 million that we spoke about when we bought the mills, the Bruza sawmill, and the remaining spend at Axis.

So, kind of round numbers, $175 million to $200 million is kind of that maintenance of business and then the remainder is that strategic capital.

Thanks, Pat. That's very helpful.

I'll turn it over. Good luck.

Thanks.

Thank you. Good morning, everyone.

Couple of questions. Susan, you mentioned that 20% of your sales would be exposed to tariffs and duties.

Is that based on 2024 actuals or is that adjusted for all of the capacity rationalization you guys have undertaken in BC over the last year?

Hey, Sean. Sorry.

It's Pal. I'll cut that one off from Susan.

That's the pro forma. And as we move out into 2026, actually that rate will come down somewhat.

As Kevin mentioned earlier, we're forecasting 2 billion feet of SYP this year, but our pro forma is 2.5 billion. So that amount will decline over time, but that's a good number for this year.

Great. Thanks for that, Pat.

And there was mention in the MD&A around actions you'll take, presuming, I suppose, tariffs go ahead in a month, actions you can take to divert supply to Canada and offshore markets. Any context you can give on the magnitude of those volumes what that might look like if these tariffs do go ahead in a month?

Yeah, Sean, I'll answer that. It's Kevin.

I would say that, obviously, we will leverage our global footprint and, I mean, we're going to have to monitor that as opportunities and situations change, but we have done that in the past. And with our Swedish mills, the US South and our Canadian operations, and it gives us that flexibility to pivot on those markets.

So, I know, we'll just keep monitoring those opportunities and we've done some of that already.

Thanks for that, Kevin. One last one.

You guys bought out another piece of Vida over -- in the fourth quarter. Can you remind me of what the mechanism is to potentially continue that process and buy out the partner there over time?

Is there a path forward to you guys consolidating all of this?

Yeah, Sean. It's Pat again.

So, yeah, there is a series of puts that the former owners have between now and 2032. So -- and then, Canfor has a call option in 2032.

At this point, we'll just let that play out. It's been a great relationship.

We've loved having them as partners. There's really no urgency to change, where we sit today, but that's the way that it would work over the next seven years here.

Okay. That's all I have for now.

Thanks very much everyone.

Hi, good morning. Thanks for taking my questions.

Maybe first, could I ask how you think about the issue of substitution of SPF with SYP? If higher duties and then also tariffs on wood products mean the prices for SPF into the US need to move higher.

What degree of substitution into SYP or other species would you expect to see? And how wide do you think the spread between the lumber prices for SPF and SYP could be?

Hey, Matt. It's Kevin here.

Yeah, we've started to see, some of the substitution going on in certain jurisdictions. It's not just all across the whole United States, but, I think, we've -- I mean, early days, it's already started in the wide width lumber, like two-by-ten, two-by-eight, two-by-twelve, and we're starting to see it in certain applications.

I think the biggest segment that has substitution applications would be MSR, machine stress rated, lumber for roof trusses that actually has a strength designation. And so that one there is probably well on its way.

And then, as far as the construction framing kind of aspect there, I think it's still kind of early. For sure, the conversation has picked up more and we're seeing a little bit more of it like in that Texas market that was a fairly big SPF, Hemlock, Doug fir market and just largely also given some of the spreads.

And on the spreads there, we do think that SPF is going to strengthen pricing and the spread to SYP just by the nature of the volume exposed, I would say my outlook would be that we would see that to continue.

Great. That's helpful.

Thanks for the color there. And then, just shifting gears, it sounds like you're expecting some upward momentum in European lumber pricing.

Could you maybe just provide a bit more color on the supply constraints you're seeing in that market in a broad sense? And then maybe specifically comment on the fibre cost and availability you're seeing for your own business in Sweden, please?

Okay. So, Matt, maybe I'll just talk to the market piece and I'll get to Stephen to maybe comment on the cost.

But for sure, very much like North America, supply constraints are actually contributing more to the increase that we're seeing in pricing. I would say that's actually a trend that we're seeing in a lot of markets via Japan, Australia and North America here that there is finally some traction.

It always takes longer than you think when supply comes out of the system and then it gets realized in the marketplace. And so, I think that is a big contributor to what we're seeing with the improved pricing and expect that to continue into Q2.

And then, maybe, Stephen, if you want to comment on the cost.

Yeah, sure. Matt, maybe just what I'd add on the cost side is, as you know, I think we've talked about before, we're pleased with how the European market sort of log costs generally align well with market conditions, and we are experiencing some upward pressure on price and some constraints on fibre supply in our European operations.

But generally, I think as Kevin commented on the market, we're hoping for a little bit of a reset there with respect to stronger correlation between log costs and market price. We have announced a little bit of capacity reduction through -- over the short-term in Vida as well to try to reset that.

Thanks very much. I'll turn it back.

Thank you. Hey, I'm just curious with the preliminary duty is just announced and given the trade dynamics, I'm curious if there is kind of more discussion going on around the softwood lumber agreement in terms of just discussions?

Yeah. I mean, we -- it's obviously been a very busy week with respect to duties and tariffs.

And of course, we have our normal process that have been in play, and we had our preliminary AR6 dumping rates announced this week. This week?

Yeah.

All the weeks blend together, this week, and then, of course, follow up to CBD. I think it's a very challenging time to sort of have those discussions.

Of course, there's lots of activity in the US. It seems to be a very busy time for the US administration.

In addition, Canada, we have some changes coming up at the federal side. So, I don't see a line of sight to that currently.

It doesn't mean that it doesn't come in the future, but at this point, we're really just trying to manage the duties and tariffs announcements and don't see any discussions at this point.

Okay. That's helpful, Susan.

I'll turn it over. Thank you.

Thanks very much for joining us today, and we'll look forward to talking to you next quarter. Thanks, operator.