Canfor Pulp Products Inc. (CFX) Earnings Call Transcript
May 3, 2023
Earnings Call Speaker Segments
Ladies and gentlemen, welcome to the Annual General Meeting of Canfor Pulp Products Inc. Please note that this meeting will be recorded. I would like to introduce Michelle Ward, Vice President, Corporate Communications at Canfor. Ms. Ward, the floor is yours.
Thank you very much. Good morning, and welcome to the Canfor Pulp Products Inc. Annual General Meeting. I will be facilitating today's meeting. I will turn the meeting over to John Baird, who is a Director and Chairman of the Board of Canfor Pulp.
Well, good morning, everyone. It's now 11:00 a.m., and I'm very pleased to ask the meeting to come to order. As Michelle has said, I will be acting as Chairman for this meeting. It's a great pleasure for me to extend a warm welcome to all of you today for the AGM of Canfor Pulp Products Inc. Please ensure you remain connected to the Internet during the course of the meeting. If you need technical assistance, please see the section entitled Technical Assistance in the Management Information Circular respecting this meeting. This meeting has been convened at the AGM of shareholders and has been called for the principal purposes of receiving the consolidated financial statements for the year ended December 31, 2002, together with the auditor's report and the report of the directors to the shareholders; to fixing the number of directors of the company at 8; to electing the directors for the coming year; and finally, to appointing the auditors for the coming year. At this point, I would like to introduce Kevin Edgson, President and CEO of Canfor Pulp; and David Calabrigo, the Corporate Secretary of Canfor Pulp. There will be an opportunity for questions you may have to be addressed after the formal position of the meeting has concluded and after you've heard from both Kevin and me. I've asked Mr. Calabrigo to act as Secretary of the meeting, and I'd like to introduce you to the other directors of Canfor Pulp: Stan Bracken-Horrocks, Dieter Jentsch, Don Kayne, Conrad Pinette, William Stinson and Sandra Stuart. They have all worked diligently and effectively with the management team at Canfor Pulp, and we appreciate their service and wise counsel. With the consent of the meeting, I hereby appoint TSX Trust Company to act as the scrutineer for the meeting. I would now like to call on Mr. Calabrigo to deal with the notice of this meeting.
Mr. Chairman, a notice calling the meeting was mailed to all shareholders of Canfor Pulp entitled to receive such notice. TSX Trust Company has provided us with a certificate as to the mailing, and a copy of the certificate will be kept with the records of the meeting.
Mr. Secretary, would you please summarize the preliminary scrutineer's report?
We are pleased to report that there are 47 shareholders holding 56,517,574 shares, represented in attendance online or by proxy at this virtual meeting, representing 86.64% of the total issued and outstanding shares of the company.
As Chairman, I adopt the preliminary scrutineer's report and declare the attendance at this meeting to be as they have set forth. I direct that, when delivered, the final scrutineer's report be kept with the records of this meeting. In accordance with the preliminary scrutineer's report, I declare a quorum present and the meeting to be duly constituted for the transaction of business. Based on the preliminary scrutineer's report, a sufficient number of proxies have been deposited with TSX Trust Company voting in favor of all resolutions in the circular in order to pass each item of business in this meeting. I propose that we deal first with all of the formal business requirements of the meeting. After the formal portion of the meeting has concluded, Kevin Edgson, the company's President and CEO, will say a few words regarding the company's financial, corporate and ESG developments, and there will be a final opportunity for questions from registered shareholders and proxy holders, which can be submitted online and will be dealt with after the presentation and after the poll is closed. At this meeting -- as this meeting is being held virtually, I would like to remind you that voting on all matters described in the Management Information Circular for the meeting will be conducted by electronic ballot. To allow sufficient time for voting, the polls for all matters being voted on will be opened following these introductory remarks and close at the end of the formal portion of the meeting. Only registered shareholders and duly appointed proxy holders who have properly logged in to the meeting will be able to vote at the meeting. I also remind you that if you are a registered shareholder and you have already voted by proxy, you do not need to vote again, unless you want to change your vote. If you plan to vote at the meeting, you may choose to vote on each resolution immediately or wait to cast your vote until after the motion for an item is proposed. Once all items of business before the virtual meeting have been put forward, I will give registered shareholders and proxy holders an opportunity to discuss these items of business, make comments and ask questions and to provide one final opportunity to enter their votes on the open polls, if they haven't already done so, and then declare voting closed on all resolutions. In order to expedite the proceedings today, I will be proposing and seconding all motions. And for any motions not included in the circular, these motions will be determined based on the preliminary scrutineer's report in reliance on the discretionary authority granted in the proxies deposited for this meeting or on a poll at my discretion. I now declare the polls open for all resolutions included in the Management Information Circular for the meeting. The first item of business to place before the meeting is the consolidated financial statements of Canfor Pulp for the year ended December 31, 2022, together with the auditor's report and the report on the directors to the shareholders. These statements and reports are contained in Canfor Pulp's annual report and are available on SEDAR and/or from Canfor Pulp upon request. I will regard the statements and reports as received by the meeting. The next item of business is to fix the number of directors at 8. I propose that the number of directors be fixed at 8. And I direct that a poll be conducted on the motion and that the scrutineer report the results. If you haven't already cast your vote online or by proxy, please cast your vote now. [Voting]
The next item of business is the election of directors of Canfor Pulp. I propose that the director -- following individuals be nominated to act as directors of the company to hold office until the next Annual General Meeting: Craig Armstrong, John R. Baird, Dieter Jentsch, Don Kayne, Norm Mayr, Conrad Pinette, William Stinson and Sandra Stuart. These persons are management's nominees for election as was stated in the Information Circular mailed to the shareholders of the Canfor Pulp. There being no further nominations, I declare nominations closed. I direct that a poll be conducted on the motion and that the scrutineer report the results. If you haven't already cast your vote online or by proxy, please cast your vote now. [Voting]
The next item of business is the appointment of auditors, and it is the Board's recommendation that KPMG LLP Chartered Accountants be appointed auditors of Canfor Pulp. I propose that KPMG LLP Chartered Accountants be appointed auditors of the company. I direct that a poll be conducted on the motion and that the scrutineer report the results. If you haven't already cast your vote online or by proxy, please cast your vote now. [Voting]
That concludes the matters to be voted on. For these -- those registered shareholders and proxy holders who have not yet raised matters for discussion, made comments, asked their questions or voted on all of the resolutions for which the polls remain open, please do so as I will shortly close all such polls. There being no further discussion at this time, the polls on all such resolutions are now closed. I direct the scrutineer to provide a report on the results of the polls. Based on the scrutineer's initial meeting report, I declare that the number of directors of the company has been set at 8. As only the required number of persons have been nominated to be elected as directors of the company, I declare that those persons nominated have been duly elected by acclamation as the directors of the company to hold office until the next Annual General Meeting. And KPMG LLP Chartered Accountants has been appointed as the auditors of the company. After the meeting, upon receipt of the scrutineer's final meeting report on the polls conducted during this meeting, I direct the recording secretary of the meeting to attach the scrutineer's final meeting report to the minutes of the meeting. All of the business for which this meeting was called has been completed. Following termination of the formal part of the meeting, our CEO, Kevin Edgson, will say a few words. And registered shareholders and proxy holders who wish to ask questions or make comment will be subsequently invited to do so. I propose that the formal portion of this meeting to be terminated. Based on the preliminary scrutineer's report, I declare the motion carried, and the formal part of this meeting is now terminated. Without further ado, I am pleased to invite Kevin Edgson, President and CEO of Canfor Pulp, to address the meeting. After Kevin's remarks, there will be a question period for any registered shareholder or duly appointed proxy holder to ask questions using the Message icon at the top of the virtual interface.
Thank you, John, and good morning, everyone. Welcome, and thank you for joining me today for Canfor Pulp's Annual General Meeting. I would like to acknowledge that today's meeting is being hosted from the Vancouver head office on the unceded territory of the Coast Salish peoples, including the territories of the Musqueam, Squamish and Tsleil-Waututh Nations. We also acknowledge the traditional territories of Canfor Pulp's operating areas. Acknowledging the lands in which we are fortunate to live and work on and the people who descend from it is an important sign of respect and a step towards reconciliation. We appreciate your support and interest in attending today's live audio webcast. I would like to start by acknowledging Stan E. Bracken-Horrocks for his many years of service to Canfor Pulp as he departs our Board of Directors. Stan has been a Director of the company since 2010 and served as a Trustee of the fund from 2006 to 2011. He also served as the Director of the Board of the General Partner from 2006 to 2012. More recently, we have benefited from his dedicated service as Chair of the Audit Committee and member of both the Joint Corporate Governance and the Joint Capital Expenditure Committees. Stan, thank you for your invaluable personal contributions to Canfor Pulp over the 17 years of service. We've appreciated working with you. Your legacy will undoubtedly continue to shape our future, and we will remain grateful for your expertise and guidance. As John mentioned, we have nominated Craig Armstrong and Norm Mayr to join the Canfor Pulp Board. Craig Armstrong's work in the forest industry began 50 years ago, including a 35-year tenure at Millar Western Forest Products Ltd., where he held several progressive positions retiring as President and CEO in 2019. He is well recognized for his work in sales and marketing and his key role in developing the international market for high-yield pulp. Craig has also served as the Director of Millar Western from 2010 to 2022. We also look forward to welcoming Norm Mayr. Norm is a retired Audit Partner having spent 38 years in public practice with KPMG. He served as Lead Engagement Partner or Quality Review Partner on many of KPMG's largest clients, including in the forestry sector. We look forward to having Craig and Norm join the Board as independent directors. Their outstanding business acumen, in-depth knowledge of the industry will further complement our Board as we reposition Canfor Pulp to regain its position as a preeminent supplier of high-strength, Northern Bleached Softwood Kraft pulp and paper. 2022 was another challenging year for the company. Over the past several years, operational challenges, driven by both internal and external factors, have undermined the strong global pulp market fundamentals and near-record high pulp list prices. The combined impact of scheduled and unplanned downtime taken in 2022, including a partial rebuild of Northwood's recovery boiler #1, not only reduced the company's pulp production and shipments by approximately 30%, but also had an adverse impact on our unit manufacturing costs and the energy revenue for the year. Continued global supply chain disruptions and regional fiber shortages, combined with operational efficiency and reliability challenges at our facilities, weighed heavily on our performance and on our people. I'm proud to say that despite these challenges, our balance sheet remained strong, thanks to the dedication [ and the ] efforts of our people. On behalf of the management team and of our Board of Directors, I want to express our sincere thanks to all our employees for their continued resilience and commitment. Looking at our 2022 financial results, the company reported an adjusted operating loss of $59 million with an adjusted net loss of $43 million or $0.66 per share. Despite the operational challenges faced by Canfor Pulp in 2022, as mentioned, the company maintained a solid balance sheet, finishing the year with net debt of $50 million, available liquidity of $97 million and a net debt-to-total capitalization ratio of 10.5%. On a positive note, the company's paper business results improved by $14 million in 2022. A notable rise in the U.S. dollar kraft prices, driven mainly by the continued growth in global demand for kraft paper products, more than offset significantly higher slush pulp prices tied to the high NBSK pulp price in the current year. Global pulp market conditions strengthened through most of the year as ongoing global supply chain challenges and unplanned global supplies outages were combined with high levels of post-pandemic global demand. This gave rise to sustained periods of high global pulp pricing. As I noted at the outset, 2022 was a hard year for the company. In the first half of the year, significant transportation shortages in British Columbia disrupted operating rates at all of our pulp mills as NBSK pulp production was limited to available transportation and the company's Taylor mill was curtailed for an extended period. Following the completion in mid-April of a partial rebuild of the recovery boiler at the Northwood Pulp Mill, the company successfully completed scheduled maintenance outages at Northwood and the Intercontinental Mills, leading to an improvement in NBSK productivity. However, in the latter part of the year, our supply of sawmill residual chips came under significant pressure, mostly as a result of market-driven temporary sawmill curtailments in the interior region of the province. When combined with winter weather conditions, the shortage placed considerable strain on the operating performance of our pulp mills. In addition, as a result of these constraints, the company took temporary production curtailments at our Intercontinental Pulp Mill in the fourth quarter of 2022, which continued through January of 2023. Combined, these factors reduced NBSK pulp production by about 300,000 tonnes and BCTMP production by approximately 210,000 tonnes, all in 2022. Canfor is an organization and transformation and in 2022 helped to bring into focus the potential and path forward to regain Canfor Pulp's position as an industry leader with a strong financial performance. Early in 2023, after extensive analysis of our operating footprint and the long-term supply of residual fiber, we announced the rightsizing of our kraft operations to match the long-term supply of residual fiber. This included making the difficult decision to permanent close the pulp line at the Prince George Pulp and Paper Mill at the end of March this year. The site's specialty paper facility will continue to produce superior quality specialty printing and packaging papers, with supply and services provided by our neighboring intercontinental pulp. Unfortunately, the reduction in the long-term fiber supply in the Peace region of the province also resulted in a decision not to restart Taylor pulp, which has been curtailed since February of 2022. We're exploring alternative uses for this site. This rebalancing of our manufacturing capacity will result in better alignment with the available fiber supply in the Prince George and Peace regions and will support the long-term sustainability of Canfor Pulp. For 2023, we are focused on optimizing our smaller-but-sustainable operating footprint, improving our operational reliability in closing, managing -- closely managing our manufacturing and fiber costs. Capital spending in 2023 will be focused on these objectives. I want to touch briefly on the subject of sustainability. At Canfor Pulp, we have an enduring commitment to safeguarding the environment and ensuring we have operations that are sustainable for the long term. Together with Canfor, we've set a bold ambition to become global leaders in sustainability. For us, sustainability is not an initiative. It is what we do. Our pulp and paper operations have always had strict criteria for performance, and our record has been exemplary. Last year, we announced the implementation of a plan to achieve net-zero carbon emissions by 2050. We developed near-term and science-based targets, including reducing the carbon emissions from our operations by 42% by 2030. A big focus has been on assessing how to best set targets for our material topics that are meaningful and measurable and, in some cases, refining targets to better reflect our business and available data. Continuing our strong focus on the environmental sustainability of our company's footprint is important for 2 reasons: one, it is the right thing to do for our planet; and two, it's going to make us a stronger company and more sustainable financially and operationally moving forward. Turning now to the first quarter of 2023. Canfor Pulp reported an operating loss of $25 million and a net loss of $19 million or $0.29 a share. After adjusting for certain onetime items, including a $4 million inventory write-down in the current period, the adjusted operating loss was $22 million. These results represent an improvement of $20 million over the previous quarter, primarily driven by an increase in pulp production and the associated decline in pulp unit manufacturing costs quarter-over-quarter. Despite the challenging conditions associated with the shutdown of the pulp line at the Prince George Pulp and Paper Mill this quarter, these improved results this quarter reflect on our continued focus on improving our operational reliability and productivity within the constrained fiber environment. With a smooth and efficient wind down now complete, the pulp organization's focus remains on continuing to improve our overall performance and preserving our balance sheet. Looking forward, global softwood kraft pulp markets are anticipated to continue to weaken through the second quarter of 2023, as relatively stable demand is projected to be overshadowed by above-average global pulp production and inventory levels. Bleached kraft paper markets are projected to weaken somewhat through the second quarter of 2023, with a modest slowdown in demand anticipated as global kraft paper inventories return to more normalized levels. Turning now to the long term. The fundamentals of our sector are solid, and the outlook for Canfor Pulp is positive. Our premium reinforcing pulp has unique properties needed for specialty applications from tea bags to fiber cement to wall covering, and it's needed for high-demand products such as tissue and towel, hygiene, packaging and specialty papers. What lies before us is an opportunity to capitalize on the appreciation of our customers have for this high strength and technical attributes of our pulp, which is one of the highest qualities available anywhere in the world. In paper market, the post-pandemic demand for food-grade kraft paper products and homebuilding supplies packaged in kraft paper is expected to remain strong. While challenges remain, Canfor Pulp remains steadfastly dedicated to keeping our people safe in producing high-quality, sustainable products and positioning the company to capitalize on the ongoing transition to a low-carbon economy. I want to reiterate our confidence and commitment to regaining Canfor Pulp's position as an industry leader with strong financial performance. I'd like to end by thanking and commending our people on the dedication and perseverance that they have demonstrated through our challenges and their commitment to safety. We are focused on fostering a culture of respect and achievement through empowerment, collaborative performance and leadership. Without our people, the business does not succeed. Together, we are working towards a sustainable organization. To be clear, that is more than environmentally sustainable that is sustainable in all definitions. On behalf of the executive team, I want to thank our Board of Directors and our shareholders, including our majority shareholder [ at ] Canfor Corp, for their ongoing support and confidence. I also want to thank our customers for trusting us with their business and having confidence in us and our ability to deliver on our commitments. John, I'll turn it back over to you.
Thank you, Kevin. This is an appropriate point in the meeting to deal with any final discussion or questions from shareholders. Is there any discussion or final questions?
Mr. Chairman, we have not received any questions.
As there are no further discussions or questions, the meeting is now concluded. Thank you for those attending, and thank you for your cooperation.
Ladies and gentlemen, thank you for attending today's meeting. You can now disconnect.
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