Good morning. My name is Sylvie. I will be your conference operator today. Welcome to Canfor and Canfor Pulp's Q4 analyst call. All lines have been placed on mute to prevent any background noise. 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.
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 Corporation's President and Chief Executive Officer. Please go ahead, Mr. Kayne.
Thank you, Sylvie, and good morning, everyone. Thank you for joining the Canfor and Canfor Pulp Q4 2022 Results Conference Call. I'm gonna make a few comments before I turn things over to Kevin Edgson, Canfor Pulp's President and CEO, and Pat Elliott, Chief Financial Officer of Canfor Corporation and Canfor Pulp, and our Senior Vice President of Sustainability.
In addition, we are joined by Kevin Pankratz, our Senior Vice President of Sales and Marketing. Before talking about Q4 and 2022, I'd like to begin by acknowledging the very difficult decisions we made to restructure our lumber and pulp operations in British Columbia in January. We have taken the necessary steps to right-size our BC operations to align with the available fiber supply to ensure a more sustainable footprint for the future.
By doing this, we will create a more stable operating platform, which in turn will provide greater stability for our customers, our employees, our contractors, our suppliers, and our communities while ensuring we continue to provide high-quality, low-carbon products to our global customers. After careful review, it is clear that there is not enough fiber in the Peace region.
As a result, we made the difficult but necessary decision to permanently close our Chetwynd sawmill and pellet plant. The facility will cease operating in April. Recognizing that while there are challenges operating in British Columbia, it remains a critical region in our diversified operating platform and allows us to fully serve our customers around the globe with the products they require. Canfor's global operating regions are interdependent.
Together with our lumber operations in Alberta, Sweden, and the US, our BC operations help create a diversified operating base with flexibility to be able to meet the needs of our global customers in an ever-changing supply chain environment. That's why we also announced a potential major investment at our Houston facility. Subject to a final investment decision currently anticipated by the end of the Q2 , our intention is to build a new state-of-the-art facility in Houston.
The existing aging mill will be replaced with a modern facility utilizing the latest technology to process the high-quality fiber in the region into high-value products. The Houston facility will be closed for an extended period beginning in April 2023. We recognize and deeply regret that these decisions are significantly impacting our employees, contractors, and communities in British Columbia.
We are working to mitigate job impacts and support our employees, communities, and contractors through this transition with a variety of programs and support measures. While Canfor will have a smaller footprint in British Columbia, we will be stronger and better positioned for the future.
In terms of our financial results, despite a number of significant challenges within our lumber business, particularly in BC, we had another strong year, our second best ever, generating an operating income of CAD 1.4 billion before adjusting items. Lumber markets continued to experience significant volatility in 2022, with near record high pricing in the H1 of the year, supported by strong market fundamentals and demand in the new home construction and repair and remodel sectors.
While underlying demand fundamentals remain strong, inflationary pressures, economic uncertainty, and rising interest rates resulted in significantly reduced demand for new home construction, contributing to a sharp decline in lumber prices in the H2 of 2022. We anticipate these challenges to persist in the near term, we believe our longer-term market fundamentals remain very strong, supported by favorable demographic trends, pent-up demand for new home construction activity, and continued strength in the repair and remodel sector.
Supported by our strong financial results over the past few years, we continue to focus on global diversification and made considerable progress on several strategic initiatives in 2022. This includes a significant acquisition in Alberta, announcement of two greenfield sawmills being constructed in the US South, a major rebuild of our sawmill in Arkansas, organic growth in Europe, and continued progress on our sustainability initiatives.
Together, these investments significantly improve our cost structure, further improve our global diversification, and grow our production capacity through increased automation, innovation, and manufacturing flexibility with a focus on high-value products and sustainability.
Notwithstanding these initiatives, we have maintained a strong balance sheet. We are prepared to remain patient, disciplined, and strategic until the right M&A opportunities present themselves, and we are focused on proactively balancing production levels with market demand. We also continue to assess additional organic and value-added external growth opportunities as we look to grow our forest products business. I will now turn it over to Kevin to provide an overview of Canfor Pulp.
Thank you, Don. Good morning, everyone. Like Canfor Pulp has also made some difficult decisions due to the lack of fiber in our operating region. In January, we announced that the pulp line at the Prince George Pulp and Paper mill will be permanently closed by the end of March.
We sincerely regret the impact that the pulp line closure is having on our employees. We are committed to supporting them through this difficult transition. In addition, as a result of the reduction in the long-term supply of fiber in the Peace region, we don't see a path to restarting our Taylor facility, which has been curtailed since February of 2022.
We are currently exploring alternative uses for this site. By reducing our operating footprint, we have better aligned our operations with the available residual supply in the Prince George region. We believe these difficult decisions will support the long-term sustainability of the company and allow us to optimize the economically available fiber supply in British Columbia, operating on a more consistent basis to improve our operating margins and performance.
While 2022 was a very challenging year, global pulp market fundamentals remain strong. For 2023, fiber-related curtailments in BC, coupled with the possibility of further supply disruptions, has helped stabilize markets, especially in China. We're also heading into spring maintenance for producers in the Northern Hemisphere, which will further limit supply.
For the back half of 2023, we are projecting prices to correct off of peak levels as we head into the seasonally slower summer period, coupled with the market digesting approximately 5 million tons of new production capacity coming on stream this year. We remain focused on improving operational reliability, closely managing our cost structure, and optimizing available transportation as we look to capitalize on the strong pulp market fundamentals. I will now turn it over to Pat to provide an overview of our financial results.
Thanks, Kevin. Good morning. The Canfor and Canfor Pulp quarterly results were released yesterday afternoon and come together with our overview slide presentation in the investor relations section of the respective company's websites. In my comments this morning, I'll speak to quarterly financial highlights, a summary of which is included in our slide presentation. Our lumber business generated an operating loss of CAD 200 million in the Q4 , which included a CAD 89 million asset write-down and impairment charge and an incremental CAD 6 million inventory write-down. Adjusting for these non-cash items, our lumber business generated an operating loss of CAD 104 million in the Q4 .
Results reflected the impact of the sharp decline in global lumber prices, combined with significant operational downtime in Western Canada due to underlying market conditions and the resulting impact of this downtime on our cost structure in British Columbia.
Notwithstanding the lower pricing, results in the US South and Europe remain solid, with our European operations contributing CAD 43 million in cash earnings in the Q4 and CAD 487 million in 2022. Our pulp business generated an operating loss of CAD 91 million in the Q4 , including a CAD 50 million asset write-down and impairment charge. In total, we reduced the net book value of our lumber and pulp assets in BC by approximately CAD 140 million, reflecting the right-sizing of our balance sheet as a result of the reduced availability of fiber supply in British Columbia.
Q4 results for our pulp business principally reflected the impact of reduced residual fiber supply as a result of extensive sawmill curtailments, as well as challenging winter conditions, which contributed to an 18% decline in pulp production quarter-over-quarter. On a consolidated basis, capital expenditures were approximately CAD 278 million in the Q4 , including approximately CAD 28 million for Canfor Pulp.
Capital spend totaled CAD 625 million in 2022, of which CAD 113 million was Canfor Pulp. For 2023, we currently anticipate capital spend of CAD 450 million-CAD 500 million in the lumber segment, including the spend on three major investments in the US South, which are already underway, as well as organic growth in Sweden. For Canfor Pulp, we are currently forecasting capital spend of approximately CAD 70 million, including capitalized maintenance. With that, Don, I'll turn it back to you.
Yeah, thanks, Pat. With that, I'll turn it back to you, operator, and we're now okay to answer questions from analysts.
Thank you. We will now take questions, as stated, from financial analysts. If you have a question, please press star one on your telephone keypad. If you're using a speakerphone, please lift the handset and then press star one. If at any time you wish to cancel your question, please press star two. Please go ahead and press star one now if you have a question. There will be a brief pause while participants register for their questions. Thank you for your patience. Your first question will be from Sean Steuart at TD. Please go ahead.
Thanks. Good morning, everyone. Question for Don or Pat? You guys chewed through a chunk of your liquidity in the Q4. The 2023 CapEx budget you referenced, does that envision any cost inflation for discretionary projects you've already outlined versus previous guidance? I guess the follow-on to that, if maybe you don't even see a need to toggle back, but if this is an extended cash flow trough, do you have an ability to toggle back on that CapEx if needed?
Pat, why don't you go ahead?
Sure. Sure, Sean. I mean, obviously, you know, we're being prudent with the capital here and to the extent that we can, we can trim or make decisions that don't sort of move away from our core strategy of reinvesting in our business, we're doing that. I think we've made commitments to particularly the three big projects in the US South, and those are moving forward, and we continue to move forward with those.
As we think through our capital plan for the next couple of years, I think we're comfortable that our cash balance will support that. We've got lots of liquidity to kind of continue along that path. I think we've embedded some, you know, incremental costs related to sort of the inflationary environment we're in. I would say that we're able to kind of encompass all of our capital needs that align with our strategic priorities within that budget.
Okay. Thanks for that, Pat. Question for Kevin Edgson. The alternative uses potentially for the Taylor site, can you give any preliminary thoughts on what you're thinking of with respect to that site and when those decisions might be made?
Thank you, Sean. I'd love to be able to give you a sense of what we're looking at. At this point, what we've been able to determine is based on the lack of fiber in the Peace region, running it as a pulp mill is not a viable option. As far as what else we might be able to do with that site, at this point, we're collecting options.
It's, it's a good facility and a good location, but I can't, I can't give you any sort of color as to what that might might look like in the future. I would hope we would find a solution very quickly, but at this point, it'll really be determined by how quickly we can figure out what else we might do there, and then how quickly we might be able to execute. Sorry for the lack of color.
Okay. last question for Don. Can you give us an update on your appetite for acquisitions and what the opportunity set looks like right now in North America and/or Europe?
For sure. Thanks, Sean. I mean, I think, you know, at the end of the day, what. You know, we're continuing to look at US South and Europe. Those are our two primary regions, which we spoke about before, maybe aside from Alberta, and we'll continue to do that. But again, at the same time, and Pat maybe touched on it a little bit, but we're going to continue to remain real disciplined and real patient and real strategic because we certainly believe that, you know, that by waiting and being disciplined and patient, that we're going to get an opportunity here going forward for a probably better value than we otherwise would have seen. We think that'll continue here for the next 12-24 months.
We're gonna continue to look at it, but, 'cause there is more and more opportunities seem to be starting to show up a bit. You know, at this stage, we're very, very focused on DeRidder. As you know, we're focused on Urbana with the project there, and we're focused on the new mill that we just announced in Axis, Alabama, as well. Those are three pretty big projects for sure, combined with some of the organic capital that we're going to be investing and are investing in Europe, currently. You know, we've got lots on the go, and we'll keep our eye, though, obviously on the M&A as those opportunities arise.
Okay. Thanks, Don. That's all I have.
Thank you. Next question will be from Hamir Patel at CIBC Capital Markets. Please go ahead.
Hi. good morning. Don, we've seen Canfor announce some large permanent capacity removals in BC this this year. How much additional capacity across, you know, the rest of the industry in the province do you think is at risk of closure this year?
That's a good question. It's, you know, it's hard to comment on what others may do. All I can say, this is just from my own, you know, from traveling around and whatnot, I think there's certainly areas of the province still that have more work to do there. Not in our areas, though. I mean, I think we, with our recent announcement here at Chetwynd and our recent announcement at Houston, you know, we're probably pretty close to where we need to be. I think there will be opportunities that others are gonna need to look at in other areas of the province.
Yeah. Thanks for that, Don. What, you know, what type of potential countervailing duty relief are you expecting in the subsequent quarters over 2023?
In B.C., you know, in Q4, it came down a fair bit as we spoke about it last time that we expected that to happen. There, you know. We'll see some of that in Q1, but it won't be that material really. There's a lot of offsets there from an inflation standpoint in a number of areas that will prevent us from seeing the majority of that decrease that we saw in Q4. You know, as we go through the year, it'll depend obviously on what mill nets are throughout the year or AMV's average mill value, right?
Great. Thanks, Don. Maybe just a question for Kevin on markets. Just curious to understand, you know, your forecast for the renovation markets. It sounds like you're expecting demand there to be resilient, but would you still expect, you know, perhaps a year-over-year decline? How does that vary between North America and Europe?
Sure. Thanks, Hamir. Yeah, I think the R&R market, for sure continues to be quite resilient despite all these inflationary pressures. I think the big drivers for the R&R segment, Hmir, is like a big one is the age of the average home in the US and some degree Canada is, like, approaching 50 years or over, and they think that's gonna be sustained growth for them. They're also focusing quite a bit on the, on the pro segment.
I think that R&R segment and with their focus on the pro is gonna continue to be a big focus. We're also seeing that trend actually kind of, globally. We're seeing that in Australia as well. We're also seeing that in the European markets. The European markets, while off from, like Q4, we're starting to see a little bit of a pickup in the European market, but not to the extent that we're seeing in North America.
Great. Thanks. Thanks, Kevin. That's all I had.
Thank you. Next question will be from Paul Quinn at RBC Capital Markets. Please go ahead.
Yeah, thanks very much. Morning, guys. Maybe start on the Canfor Pulp side. Just Kevin, you referenced the 5 million tons of new capacity is coming in. I think just about all of that is on the hardwood side. Just wondering what you're seeing on the softwood side and pricing implications as a result of that?
I think, just a little over 4 million is hardwood. About 1 million is coming out of the new mill up in Finland. I think it's the Metsä mill, which is 500,000-600,000 tons. There'll be some conversions in the finished area when they can no longer get the hardwood out of Russia. From a market perspective, we're starting to see signs of life. The demand weakness that I think is evident has been more than offset by supply constraints, including our own.
North America and Euro is off a little in this quarter, maybe $20, but that's more than offset by APAC and especially China, which we saw a $30 increase in February. We're feeling pretty good about the H1 of the year in terms of stability. We do think that as we get into the more traditional period in the summer where things slow down, we'll see some erosion out the back end as the market digests that extra tonnage. Generally, I think the market's in pretty good shape for this year.
Okay. Then, switching over to the lumber side. Don Kayne, you mentioned the three big projects. Maybe you could just walk us through the timing of those. Because when I, when I take a look at your slide deck on slide 8, it looks like you got, or, DeRidder coming up in early 2023, and that's kinda confusing.
Yeah, for sure. That's correct. We've already put a couple of logs through already, so that's kind of progressing. In terms of Heritage, which is the Alabama access we talked about, that's the Q3 2024. Urbana will be Q1 2024. Millar Western, Well, that's actually already gone, so we don't even worry about that one at all. That's already 100%, so.
Okay. Just one of your competitors talking on the softwood lumber file, mentioned that, you know, the most number of meetings that, or phone calls that have been taking place is the activity on that file stepped up. Just wondering if you can comment on where you think that file is going and what's required to get a resolution?
Yeah. It's, I think it's progressing a little bit. I mean, you're, you know, for sure there's been more dialogue than we've seen in some time, frankly, and we have to have had that across Canada. I, you know, I think, you know, like I said, the dialogue's progressing for sure. I, you're probably aware the President and the Prime Minister are meeting this week, potentially, and we don't know if that'll be on the agenda or not.
We're hoping that it will. You know, we made some efforts to try and make that happen, but you never know. In terms of what it's gonna take, I mean, that's, you know, there's two concerns. We've talked about that before, market share and also how the distribution of deposits. At this stage, you know, in terms of what it will take to get a final settlement there, it's probably continues to be a bit early to try and speculate on that.
All righty. That's all I had. Best luck. Thanks, guys.
Absolutely.
Thank you. Next question will be from Ketan Mamtora at BMO Capital Markets. Please go ahead.
Thank you and good morning. Don, can you talk a little bit about what you are seeing in the European markets, both in terms of demand and prices?
What was that?
European.
Oh, European market. What are we seeing in European markets? What are you talking about?
Yes, European lumber markets.
Yeah, sure, for sure. Kevin, go ahead.
Again, Ketan, I think, in the European market, coming off a pretty tough Q4, we're actually, I think, pleasantly surprised with what we've seen recently and demand picking up, particularly in the UK market, which is a significant market for Scandinavian, Central European producers. That's been a positive. We've also seen a pickup domestically in Central Europe. I think, now how long that's going to last, it'll be hard to determine, but definitely a pickup there. Hopefully that will help maybe offset some European lumber coming into the Eastern Seaboard of the United States. Definitely a little bit better than we thought going into the year.
One thing maybe, Kevin, I'd add to that a little bit is, and I know you've been leading this for us, but the one thing about Europe, and it's one of the reasons that we've talked about why we really like Europe and it's proven out 100%, is the percentage of high value that we get in those markets.
It's significant and it's consistent for the most part. The other maybe significant point there is there's many choices in terms of markets there as well. We have ability to move around a bit more than we do in other jurisdictions. You know, to Kevin's point, you know, We've taken advantage of that and it's been real successful. That's, you know, continues to be a real benefit in terms of, in terms of Europe, at least from our standpoint.
Got it. That's helpful. Either Don or Pat, can you provide, you know, sort of some perspective on the Houston investment? I know you said, you know, at the end of second quarter is when you ought to have a final sort of decision, but it sounds like you're going to, you know, based on what you just said, going ahead with it. Can you give us some sort of perspective on, you know, kind of the size, the investment, what kind of hurdles you are looking at?
Yeah. All of those are kinda TBD. I mean, I can tell you this: It'll be a smaller, but It'll be smaller than maybe the facility we have today. And we've got lots of obstacles that we've got to overcome here going forward, but we do intend on, you know, overcoming those for sure.
You know, assuming we can, you know, get the competitive timber that we need to operate a mill in that area, right? Yeah, so we're positive at this point, but we've got, like I say, a lot of challenges that we have to overcome, you know, as we move through it you know, at this point, we expect to be able to make a decision, as you're aware of, sometime towards the end of Q2.
Okay. Don, if you decide to go ahead with it, when do you think, you know, you should be able to kind of finish building the mill and then start?
Yeah, I'm, you know, I think, probably, you know, just guessing here a bit, but 2025 for sure. It'd be something like in that area for sure.
Understood. That's helpful. Good luck in 2023.
You know, with lead times and so forth, right?
Thank you. At this time, there are no further questions. I will turn the call over to Don Kayne. Go ahead, Mr. Kayne.
All right. Thanks, Toby, and thanks everyone for joining the call and your interest in Canfor and Canfor Pulp, and we look forward to speaking to you at the end of the next quarter. Have a good day.
Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we do ask that you please disconnect your lines.