Canfor Reports Results for Second Quarter of 2022

Canfor Corporation (“The Company” or “Canfor”) reported its second quarter of 2022 results:

Overview

• Q2 2022 reported operating income of $532 million; quarterly sales of $2.2 billion
• Downward pressure on North American lumber market fundamentals; significant decline in US-dollar lumber benchmark pricing; uptick in European market pricing largely tied to traditional quarterly lag
• Improved lumber & pulp shipments despite ongoing transportation challenges
• Shareholder net income of $374 million, or $3.02 per share

Financial Results

For the second quarter of 2022, the Company reported operating income of $531.6 million, down $210.3 million from the operating income of $741.9 million reported for the first quarter of 2022 largely reflecting lower lumber segment earnings following the strong earnings in the previous quarter, offset to a degree by improved 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 pressures on North American lumber market fundamentals this was a strong quarter for our lumber business, as our results continue to far exceed pre-pandemic levels and we continue to capitalize on our global diversification strategy. In our North American operations, ongoing global supply chain constraints resulted in the difficult decision to reduce operating schedules at our Western Canadian sawmills during the second quarter and into the summer months. We greatly appreciate our employees’ ongoing resilience in managing through these supply chain challenges. For our pulp business, some relief in transportation constraints late in the period enhanced our ability to realize near-record high pricing and recognize improved results in the quarter.”

Results in the lumber segment decreased $230.9 million quarter-over-quarter principally reflecting a significant downward correction in Western Spruce/Pine/Fir (“SPF”) and Southern Yellow Pine (“SYP”) US-dollar benchmark pricing in the current period, with the average North American Random Lengths Western SPF 2×4 2&Btr price down US$408 per Mfbm, or 32%, and the average SYP East 2×6 #2 down US$546 per Mfbm, or 50%. The decline in North American benchmark lumber pricing in the current quarter was mitigated somewhat by increased North American shipment volumes, reflecting a marginal improvement in a challenging transportation environment, particularly in Western Canada. Current quarter results continued to reflect strong earnings from the Company’s European operations as a moderate uplift in European lumber unit sales realizations (largely tied to the quarterly lag in pricing), was offset in part by an increase in European unit manufacturing costs and a 5% stronger Canadian dollar (versus the Swedish Krona (“SEK”)).

Following significant strength in the previous quarter, North American market fundamentals experienced downward pressure throughout most of the current quarter, principally driven by the impact of elevated interest rates and rising inflation. These economic headwinds weighed on lumber market demand in the current period, prompting a modest decline in new home construction activity in the US, particularly for single-family units. Decreased demand combined with relatively steady inventory levels in the supply chain resulted in a significant drop in North American benchmark lumber prices in the current quarter. In the repair and remodeling sector, despite inflationary cost pressures and competing uses for discretionary spending, demand improved as the quarter progressed with consumers taking advantage of lower cost building materials tied to the significant decline in US-dollar benchmark lumber prices.

Offshore lumber demand and prices in Asia showed continued weakness in the second quarter of 2022, especially in China due to the implementation of a ‘zero-COVID’ strategy which immobilized economic activities in the region as citizens were subject to strict testing and quarantine policies. In Japan, demand also experienced downward pressure as high inventory levels were coupled with supply chain challenges which slowed consumption in the industrial and construction sectors. Lumber demand in Western Europe and Scandinavia remained strong throughout most of the current quarter largely driven by sustained residential construction activity. Late in the period, however, reduced consumer spending, attributed to rising inflation and high energy costs, generated a decline in the European “do-it-yourself” sector.

Results in the pulp and paper segment largely reflected materially higher Northern Bleached Softwood Kraft (“NBSK”) pulp unit sales realizations, and to a lesser extent, a 16% uplift in pulp shipments, as transportation disruptions globally and in British Columbia (“BC”) eased somewhat in the latter part of the current quarter. These factors more than offset the impact of market-related fibre cost increases and inflation-driven cash conversion cost pressures in the current period.

Pulp production was up 6% from the previous quarter, as NBSK productivity in the current quarter was maximized to available transportation. Concurrently, logistics-related downtime at Canfor Pulp Product Inc.’s (“CPPI”) Taylor Bleached Chemi-Thermo Mechanical Pulp (“BCTMP”) mill (“Taylor”), which commenced in the first quarter of 2022 and continued throughout the second quarter, reduced production by approximately 60,000 tonnes. In addition, NBSK pulp production in the current period included the completion in mid-April of CPPI’s Northwood NBSK pulp mill’s (“Northwood”) recovery boiler number one (“RB1”) capital upgrade (approximately 10,000 tonnes) as well as a scheduled maintenance outage at Northwood which commenced in June and was completed mid-July (approximately 30,000 tonnes in the second quarter and a further 16,000 tonnes in July).

Looking ahead, global lumber market fundamentals are anticipated to be relatively solid through the third quarter of 2022. New home construction activity in North America is projected to weaken in the wake of high mortgage rates and decreasing housing affordability, particularly for first-time homebuyers, while activity in the repair and remodeling sector is estimated to be steady. Offshore lumber demand in Asia is anticipated to face continued downward pressure in the third quarter as high inventory levels in the region continue to exceed consumption.

Results in the third quarter are anticipated to reflect the continuation of reduced operating schedules across the Company’s Western Canadian sawmills, including two weeks of rotating downtime in July and August, to help align production capacity with transportation availability, market demand and sustainable timber supply. The Company is forecast to use this downtime to complete maintenance projects and other site activities to help mitigate the impact on employees. These capacity reductions are anticipated to result in an incremental impact to production of at least 275 million board feet. In addition, with the material reduction in North American benchmark lumber prices, rising inflationary cost pressures, ongoing transportation challenges and the significant increase in BC stumpage rates effective July 1, 2022, the Company will continue to assess and adjust operating rates in Western Canada to align capacity with market demand through the balance of 2022.

European lumber pricing is anticipated to experience ongoing pressure through the third quarter of 2022, driven principally by weakness experienced in the North American region in the second quarter, combined with the continued downward pressure in the repair and remodeling segment in Europe. The Company’s European lumber business will take its traditional seasonal production downtime in the third quarter of 2022, reducing European lumber production by approximately 100 million board feet.

Global softwood kraft pulp markets are projected to remain solid through the third quarter of 2022, reflecting both global pulp production and supply constraints, as well as steady demand. High yield markets are forecast to see slight improvements through the third quarter of 2022, also tied to limited supply availability.

Notwithstanding the modest improvement in BC’s transportation networks seen in the later part of the second quarter, results in the third quarter are anticipated to reflect the continued impact of and uncertainties associated with a constrained rail service network and the related pressures on CPPI’s operations and shipments. Furthermore, it is projected that a restart of Taylor will not be contemplated until such time as there is a return to more normal transportation service levels to all of CPPI’s pulp and paper mills. CPPI will continue to closely monitor the supply chain challenges and will adjust future operating plans accordingly, through the balance of 2022.

In addition, pulp and paper segment results in the third quarter of 2022 will reflect the impact of the continuation of Northwood’s scheduled maintenance outage into mid-July (approximately 16,000 tonnes), as well as a scheduled maintenance outage at CPPI’s Intercontinental NBSK pulp mill in the latter part of the third quarter and into the fourth quarter, with a projected 12,000 tonnes of reduced NBSK pulp production.

For the full second quarter results, click here.

About Canfor Corporation

Canfor is a leading integrated forest products company based in Vancouver, British Columbia (“BC”) with interests in BC, Alberta, North and South Carolina, Alabama, Georgia, Mississippi, Arkansas and Louisiana, as well as in Sweden with 70% interest in Vida Group. Canfor produces primarily softwood lumber and also owns a 54.8% interest in Canfor Pulp Products Inc., 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.

Contact:

Michelle Ward – Senior Director, Communications & GR – communicaitons@canfor.com – (604) 661-5225

Source: Canfor Corporation