CFP Canfor Corporation

VANCOUVER, BC, July 27, 2023 /CNW/ - Canfor Corporation ("The Company" or "Canfor") (TSX: CFP) today reported its second quarter of 2023 results¹:

• Q2 2023 operating loss of $67 million including a $57 million reversal of a previously recognized inventory write-down; adjusted operating loss of $124 million; adjusted shareholder net loss of $44 million, or $0.36 per share
• Strong earnings continued at the Company's European and US South operations with persistent challenges in British Columbia
• Sustained pressure on global lumber market fundamentals and pricing, particularly in North America
• Increased North American lumber production & shipments despite ongoing curtailments in British Columbia and permanent closure of Chetwynd facilities and temporary closure of Houston sawmill
• Significant deterioration in global pulp market fundamentals; closure of the pulp line at Prince George Pulp and Paper Mill; subsequent to quarter-end, short curtailment of Northwood NBSK pulp mill amidst British Columbia port strike

The following table summarizes selected financial information for the Company for the comparative periods:

The Company reported an operating loss of $66.7 million for the second quarter of 2023, compared to an operating loss of $208.5 million in the first quarter of 2023. After taking into consideration a net $57.4 million reversal of a previously recognized inventory write-down, the Company's adjusted operating loss was $124.1 million for the second quarter of 2023, compared to an adjusted operating loss of $146.4 million for the first quarter of 2023. These results were driven by improved lumber segment earnings, offset in part by a decline in pulp and paper segment results.

Commenting on the Company's second quarter results, Canfor's President and Chief Executive Officer, Don Kayne, said, "Despite the continued pressure on global lumber markets throughout the quarter, we remain committed to our long-term strategy, as our lumber results once again reflected the advantages of our global diversification strategy. Our European and US South operations results were strong and improved quarter-over-quarter. This helped partially offset the results from our Western Canadian lumber business, especially our British Columbian operations, that continued to face challenges due to persistent weak Western Spruce/Pine/Fir market conditions. Also, in this quarter, we completed the permanent closure of our Chetwynd facilities and the temporary closure of our Houston sawmill. Both wind downs were completed safely, and we thank our employees for the grace and resilience they have demonstrated during this difficult period. For the pulp business, this quarter was a difficult period, as declining global pulp market conditions weighed heavily on results."

For the lumber segment, adjusted results increased $31.4 million quarter-over-quarter principally reflecting the benefit of global diversification, with strong earnings from the Company's European and US South operations. Results from the Company's Western Canadian operations continued to be challenging quarter-over-quarter driven largely by the ongoing high-cost operating environment in British Columbia ("BC"). For the quarter overall, results reflected generally weak lumber benchmark pricing, as a 7% decline in the average North American Random Lengths Western Spruce/Pine/Fir ("SPF") 2x4 #2&Btr was offset in part by stable Southern Yellow Pine ("SYP") East 2x4 #2 pricing, higher pricing for certain SYP wider-width dimension products and an uplift in European market pricing. These pricing factors were coupled with higher North American production and shipment volumes in the current period despite the ongoing market-related temporary downtime and sawmill closures in BC.

North American lumber market conditions faced continued downward pressure through most of the second quarter of 2023. While demand in the repair and remodeling sector remained strong in the current period, the housing sector experienced the ongoing effects of persistent inflation and high interest rates. Despite these affordability constraints and cautious prospective homeowners, residential construction activity increased modestly during the current quarter largely as a result of low existing home inventories.

Mixed demand trends coupled with a depletion of European inventories and corresponding influx of supply into the North American market, led to a decline in most North American US-dollar benchmark lumber prices early in the period. As the quarter progressed, however, declining European supply, accompanied by BC sawmill curtailments, resulted in some modest positive momentum in certain North American US-dollar benchmark pricing towards the end of the current quarter.

Offshore lumber demand and pricing to Asian markets remained weak throughout the second quarter of 2023. In China, despite the introduction of government stimulus measures, reduced consumption in the current period was met with an influx of supply from Europe and Russia that held inventories in that region at high levels. Demand in Japan was muted for most of the quarter but recovered slightly towards the end of the period as inventories began to move towards a more balanced range.

In Europe, lumber demand and pricing remained relatively stable in the second quarter of 2023, as a decline in residential construction activity and lower domestic supply was mitigated by increased activity in the do-it-yourself sector. 

Looking ahead, the outlook for North America remains uncertain as positive longer-term lumber market fundamentals continue to be challenged by short-term affordability constraints. High interest rates are projected to endure through the third quarter of 2023, keeping existing home inventories at low levels of supply. It is anticipated that new home builders will continue to offer concessions, however, in an attempt to potentially relieve some affordability pressures for prospective homeowners. As a result, residential construction activity is projected to experience a slight improvement through the third quarter of 2023 as the underlying demand for housing in North America remains. In the do-it-yourself space, demand is forecast to slow towards the end of the third quarter, largely attributable to seasonal factors.

In terms of North American lumber supply, operational constraints in the current quarter, particularly in Western Canada led by market-related curtailments and wildfires, are anticipated to continue well into the third quarter of 2023. Currently, Canada is about halfway through the traditional wildfire season and already new records have been set in both Alberta and BC for total hectares burned. These extreme conditions are disrupting the Company's operations as well as access to fibre, harvesting and hauling activities. Management is and will continue to monitor the wildfire situation while working closely with local communities and Provincial wildfire associations. The Company will adjust operating rates, as needed, through the balance of 2023, as the full extent of the impact on its operations, including sustainable timber supplies and future harvesting plans will be assessed over the coming months.

In the US South, the ramp-up in production at the Company's greenfield facility in DeRidder, Louisiana, which commenced in the current quarter, is progressing better than anticipated, and is forecast to continue to improve through the balance of 2023.

Offshore lumber demand in Asia is forecast to experience a modest recovery in the second half of the year, particularly in China and Japan, following the gradual drawdown of high inventory levels, and supported by economic stimulus measures introduced by the Chinese Government.

European lumber pricing is anticipated to come under modest pressure in the third quarter of 2023 largely driven by reduced activity in the residential construction sector coupled with ongoing log supply constraints, offset to a degree by a seasonal uptick in the repair and remodeling segment.

Planning and technical work on the Houston, BC, facility redevelopment has been completed. Work to assess the availability of an adequate supply of economic fibre to support an investment of this size and scope is continuing. This work includes discussions with the Government of BC to seek assurances on the long-term fibre supply outlook for the region. Management hopes to conclude these discussions within the coming weeks.

For the pulp and paper segment, the adjusted operating loss was $31.0 million for the second quarter of 2023, compared to an adjusted operating loss of $21.6 million for the first quarter of 2023. These results, for the most part, reflect the impact of substantial global pulp pricing declines in the current quarter driven by elevated global market pulp producer inventory levels and weak global softwood pulp demand.

In January 2023, Canfor Pulp Products Inc. ("CPPI") announced the decision to restructure its operating footprint to align its manufacturing capacity with the long-term supply of economic residual fibre and, as a result, in April 2023, CPPI wound down and permanently closed the pulp line at its Prince George ("PG") Northern Bleached Softwood Kraft ("NBSK") Pulp and Paper mill. In connection with this closure, CPPI's Intercontinental NBSK pulp mill ("Intercon") was successfully converted to provide slush pulp to its specialty paper facility. The combined impact of these operating structure changes is a reduction of approximately 280,000 tonnes of market kraft pulp production annually. 

Global softwood pulp market fundamentals and pricing experienced considerable pressure during the second quarter of 2023 as tepid global demand was combined with rising global softwood pulp producer inventory levels. As a result, NBSK US-dollar list prices to China dropped sharply throughout the quarter to end June at a low of US$648 per tonne. For the current quarter overall, US-dollar NBSK pulp list prices to China averaged US$668 per tonne, down US$223 per tonne, or 25%, from the previous quarter. Prices to other global regions experienced less pronounced declines in the current period, with the average US-dollar NBSK pulp list price to North America at US$1,510 per tonne (before discounts), down US$165 per tonne, or 10%, from the prior quarter. Global softwood pulp producer inventories climbed substantially throughout the current quarter and, at the end of May 2023 were significantly above the balanced range at 54 days of supply, an increase of five days from March 2023. (Market conditions are generally considered balanced when inventories are within a normal range of 32-43 days of supply).

Looking forward, global softwood kraft pulp markets are anticipated to remain challenging through the third quarter of 2023, as record high global pulp producer inventory levels are projected to continue to be met with weak global pulp demand, particularly for paper and writing grades. In addition, the traditionally slower summer months are anticipated to further soften global pulp demand, particularly in the short-term. CPPI will continue to monitor the challenging market conditions and will adjust operating rates, if appropriate, through the balance of 2023.

The labour dispute at the Ports of Vancouver and Prince Rupert that commenced on July 1, 2023, put pressure on a constrained logistics network in BC. As a direct result, with pulp mill inventories at capacity, CPPI curtailed its Northwood NBSK pulp mill ("Northwood") in July for approximately one week, with an estimated 10,000 tonnes of reduced NBSK pulp production.   

Results in the third quarter of 2023 are also forecast to reflect a scheduled maintenance outage at Northwood in September, with a projected 25,000 tonnes of reduced NBSK pulp production, as well as higher associated maintenance costs and lower projected shipment volume. As part of this outage, CPPI will complete an inspection of its assets at this facility, including the two recovery boilers, with the intention of formulating a re-investment plan for Northwood's recovery boiler number one ("RB1"), as well as the facility as a whole, that is focused on optimizing this mill for the long-term.

A conference call to discuss the second quarter's financial and operating results will be held on Friday, July 28, 2023, at 8:00 AM Pacific time. To participate in the call, please dial Toll-Free 1-888-390-0546. For instant replay access until August 11, 2023, please dial Toll-Free 1-888-390-0541 and enter participant pass code 989608#. The conference call will be webcast live and will be available at www.canfor.com. This news release, the attached financial statements and a presentation used during the conference call can be accessed via the Company's website at www.canfor.com/investor-relations/webcasts.

Throughout this press release, reference is made to certain non-IFRS financial measures which are used to evaluate the Company's performance but are not generally accepted under IFRS and may not be directly comparable with similarly titled measures used by other companies. The following table provides a reconciliation of these non-IFRS financial measures to figures reported in the Company's condensed consolidated interim financial statements:

Certain statements in this press release constitute "forward-looking statements" which involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from any future results, performance or achievements expressed or implied by such statements. Words such as "expects", "anticipates", "projects", "intends", "plans", "will", "believes", "seeks", "estimates", "should", "may", "could", and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are based on Management's current expectations and beliefs and actual events or results may differ materially. There are many factors that could cause such actual events or results expressed or implied by such forward-looking statements to differ materially from any future results expressed or implied by such statements. Forward-looking statements are based on current expectations and Canfor assumes no obligation to update such information to reflect later events or developments, except as required by law.

Canfor is a leading integrated forest products company based in Vancouver, BC with interests in BC, Alberta, North and South Carolina, Alabama, Georgia, Mississippi, Arkansas and Louisiana, as well as in Sweden with its majority acquisition of the Vida Group. Canfor produces primarily softwood lumber and also owns a 54.8% interest in CPPI, which is one of the largest global producers of market Northern Bleached Softwood Kraft Pulp and a leading producer of high performance kraft paper. Canfor shares are traded on The Toronto Stock Exchange under the symbol CFP. For more information visit canfor.com.

SOURCE Canfor Corporation