Good morning. My name is Kevin, and I'll be your host today. Welcome to Canfor's Q1 2026 analyst call. At this time, all participants have been placed on mute to prevent any background noise. A question and answer session will be available after today's presentation. During this call, Canfor'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 company would like to point out that this call will include forward-looking statements. Please refer to the press release for the associated risk of such statements. I would now like to turn the meeting over to Susan Yurkovich, Canfor Corporation President and Chief Executive Officer. Please go ahead, Susan.
Thank you, Kevin. Good morning and thanks for joining Canfor's Q1 2026 results conference call. I'm gonna open with a few comments this morning before turning things over to Pat Elliott, our Chief Financial Officer. We're also joined by Stephen Mackie, Canfor's Chief Operating Officer, Kevin Pankratz, our Senior Vice President of Sales and Marketing, and Brian Yuen, our Vice President of Pulp and Paper Sales, who are gonna be available and happy to take questions at the end.
Our lumber business generated modest EBITDA in the Q1 with improved pricing supported by seasonally higher demand and more limited supply, partly reflecting the significant capacity reductions in our industry we've seen in the last couple of years.
While supply has been somewhat constrained, lumber prices have started to moderate in recent weeks, particularly for southern yellow pine, as demand continues to be impacted by the uncertainty facing the global economy. Similarly, our pulp business continues to face significant headwinds, with elevated inventories and weak global pulp demand offsetting modest cost improvements realized in the Q1 .
Notwithstanding the current economic landscape, we continue to position the business to navigate the challenges facing our industry. Our goal remains to be more resilient and better able to deliver more stable returns over the cycle. We are focused on executing our strategy, strengthening our operating platform, improving our cost competitiveness, and diversifying our business.
Looking ahead, we anticipate further reductions to our cost structure as we continue to ramp up our low-cost capacity in the U.S. South and see a reduction in our antidumping and countervailing duties beginning in October. In Europe, while results have been challenging for several quarters, we are beginning to see modest low cost relief, higher pricing, and the benefits from our acquisition of the Karl Hedin assets last September.
Following significant capital investment in recent years, we're focused on operating our low-cost sawmills efficiently as we look to optimize regional fiber supply and maximize the returns on our investment. Going forward, we are anticipating significantly lower capital requirements due to the improvements in our underlying asset base. While markets are anticipated to remain challenging in the near term, our business is well-positioned to generate strong free cash flow as the market recovers.
In addition, we've maintained a solid balance sheet, which provides us with flexibility to pursue strategic growth should the right opportunities present themselves. I'll turn it over to Pat to provide an overview of our financial results.
Thanks, Susan, and morning, everyone. In my comments this morning, as always, I'll speak to our Q1 financial highlights, which is included in an overview slide presentation located in the investor relations section of our website. Our lumber business generated adjusted EBITDA of CAD 29 million in the Q1 , CAD 37 million higher than the previous quarter. These results have been adjusted to exclude a CAD 20 million recovery of a previously recorded inventory writedown.
Improved earnings in the Q1 largely reflected an increase in North American lumber pricing, particularly for southern yellow pine, as well as lower unit manufacturing costs. While North American lumber prices benefited from tighter supply, global demand remains challenging. As a result, our European lumber business generated adjusted EBITDA loss of CAD 12 million, CAD 4 million lower than the prior quarter.
Looking ahead, we anticipate a modest improvement in European lumber prices, driven by seasonally higher demand and reduced supply. In addition, log costs are anticipated to decrease slightly through the balance of 2026, which should support improved earnings going forward. Our pulp business reported an adjusted EBITDA loss of CAD 8 million in the Q1 , CAD 8 million better than the prior.
While our Q1 results benefited from improvements to our underlying cost structure, global pulp markets continue to be impacted by elevated inventories and weak demand, which we believe will persist. Following Canfor's acquisition of Canfor Pulp in March, our pulp business is better positioned to manage through the current market dynamics.
Turning to our balance sheet, following a refinancing of our credit facility in March, it ended the Q1 with available liquidity of approximately CAD 970 million and net debt excluding the duty loan of approximately CAD 530 million. We forecast capital spend of CAD 210 million in 2026, and this includes CAD 35 million for pulp and remaining spend associated with our Bruza facility in Sweden and our Iron Mountain facility in Arkansas.
Following completion of these projects, we expect capital spend to moderate further over the next several years, supported by our strong lumber platform. With that, we're now ready to take questions from analysts.
Thank you. We will now take questions from financial analysts. Our first question comes from Ben Isaacson with Scotiabank. Your line is open.
Thank you very much, and good morning. Susan or Pat, can you talk about where you are on your cost improvement journey on a portfolio-weighted basis? I think you mentioned you're looking to lower costs in the U.S. South, but is that to really wrap up a bigger program? How should we think about the magnitude and timing of those cost improvements going forward?
Morning, Ben. I'll get Pat to take that.
Thanks, Ben. Morning. Obviously the last number of years with the combination of rationalization of some of the higher cost assets that we had and the new investment that we made, the significant new investment that we made, particularly in the U.S. South, we've seen a continued drop in our operating cost footprint. I would say we're the vast majority of the way through that. As you know, we're still gonna be completing the Iron Mountain project here at the end of this year, which really goes live into next year.
There's still some efficiencies to be gained from, like, our Axis project andDeRidder are doing great, but they're still probably a little bit more to squeeze there. Hard to quantify other than to say the majority of it is sort of baked into our results already in 2026.
Great. Thank you. Then, just two more, if I may. On Vida, can you talk about what the parameters are to consolidate that and to kind of finalize that transaction? Is there a valuation formula that's set? Is now a good time considering the market outlook is weak? Would there be operational risk if you took full ownership of that? Can you just flush that out a bit? Thank you.
Sure. I'll keep going, Ben. Yeah, so there's a fixed mechanism for that. Both the timing and the amount are fixed. They're not impacted by current events. So that is fixed. So there's no opportunity for either side to transact before that. I would kind of roll back to the original intent with the minority ownership structure was to keep in place those sort of strong operators who had a great track record of success in our business. So we're not looking to make any change, and frankly, the agreement doesn't allow for it.
Great. Just finally on the 25% net debt to cap ratio, can you just remind us how your creditors treat that duty deposit loan as it relates to covenant calculations? Do we subtract 9% or 10%? Is that the right way to think of it?
No, they include it, Ben. It's included in our calcs. Yes, it's included.
Okay. Thank you very much.
One moment for our next question. Our next question comes from Sean Steuart with TD Cowen. Your line is open.
Thanks. Good morning, everyone. Question, follow-up question on Europe. It sounds like you have some visibility that things are going to get better gradually there. Wondering if the slump though that we've seen over the last three quarters and presuming that's representative of what's going on across the industry in that part of Europe, has that changed the M&A opportunity set at all as more opportunities come to the fore and is your ambition there at all tempered by what you've seen over the last few quarters?
Hi, Sean. It's Susan. You know, we still really like and believe in Sweden. Of course, we did make the acquisition of the three additional Hedin mills 2023, closed, I think, in September. Those are really good additions to our portfolio and also move us into sort of middle Sweden. We have a concentration of assets in southern Sweden.
This sort of takes us into a different region, less populated, I would say, with sawmills. We still like that. We have seen our log costs moderate. I think, you know, the industry there in total is taking a bit of more disciplined approach to the purchase of fiber. We see that coming. We see those prices moderating.
It's gonna take some time, but we do see that coming back in line. We still do like that market or that jurisdiction because there's just so many, you know, they've got a lot of market opportunities there. I don't know if Kevin may want to add a couple of comments, but we do have a lot of options for our products. We have a lot of different markets and a lot of opportunities to be able to reach a lot of different customers. I don't know, Kevin, if you want to add anything else.
No, that's good, Susan.
Yeah.
The ambition would be strictly to Sweden still or broader Scandinavian interest?
We continue to look at, you know, variety. We look at surrounding areas. We're continuing to evaluate opportunities. We like having the diversified portfolio where we've got assets in Canada, also in the U.S. and now in Europe, and we like that mix for us. We'll, you know, we'll continue to evaluate things as we move forward.
Okay. One other one, Susan, on the trade file. I know you're close to it. Any perspective on lumber potentially being brought into the broader USMCA renegotiation? Any perspective on that front?
Yeah. Just to, you know, the USMCA or CUSMA, it's not a renegotiation, it's a review. It's a 16-year agreement, we are in year six, this is a review of that agreement. I know that lumber is definitely in the mix in these discussions. It's gonna be, you know, it's a complicated environment to have those discussions. I know certainly it is certainly is one of the top issues that the government continues to raise from Canada's perspective. It is gonna take some time.
I know there's a focus on not only the duties that we are paying, that we are familiar with paying, but also the Section 232 tariffs, which are that, of course, 10% burden to our business, and also picked up other industries. You know, it's gonna take some time. I don't see anything imminent, but of course, discussions are continuing on both sides of the border, and there will be a formal process that kicks off here. You know, it's underway now, but the formal portion of those discussions will kick off this summer.
Thanks for that perspective. That's all I have for now.
One moment for our next question. Our next question comes from Matthew McKellar with RBC Capital Markets. Your line is open.
Good morning. Thanks for taking my questions. Can I maybe stick with trade for a moment? The preliminary AR7 results would suggest your duty rate could step significantly lower later this year with a tighter spread to the all others rate compared to today. What should we understand about what that step lower means for your business and, I guess, how you run your Canadian business in particular and market your lumber? Thanks.
Obviously, the duties coming down that the, you know, our perspective, the duties shouldn't be there in the first place, coming down is a good thing for our business. Obviously, you know, at 56%-57%, it's very challenging to operate our Canadian business. We've done a really good job of focusing on alternate markets, of course, the U.S. is still a very big market for our product.
They need our product, they want our product, we are still selling some there. Of course, having the duties come down by 16-ish% is gonna be helpful to our Canadian business for sure. Of course, as we move forward, we expect that duty rate to come down even further. You know, that's a good thing for our business. We are at the peak.
It's been a very challenging time to operate, but we are making our way through it, and we do see a light on the, at the end of the tunnel here.
Great. Thanks. Thanks very much. Maybe next, just in North American lumber, your outlook talked about an expectation that prices may soften as supply increases with the run of better lumber prices we've seen. I guess we've seen southern yellow pine come under some pressure over the last couple weeks. Could you speak to the supply response that you're seeing so far at an industry level and maybe what that has looked like to this point after a pretty healthy run for southern yellow pine? Thanks.
Sure. Hey, Matthew, it's Stephen here. Maybe I'll start, and then I can let Kevin talk a little bit about the market more broadly from a price perspective. I think on the supply side, you know, it's really difficult for us to sort of comment on what others are doing or may be doing. We do still believe that the operating rates across the U.S. South are lower than historical norms, generally for the industry.
However, within our own operations, which is really all we can comment on, you know that we have made a lot of challenging decisions over the last number of years to rationalize higher cost capacity across our operating platform and optimize our portfolio of assets, make investments in additional low-cost capacity.
Our focus has been to run our remaining operating facilities at full capacity, and that's what we've been working to do, is maximize the utilization rates across our fleet, and that was true in Q1 and will be true going forward. I think there's probably some waiting capacity that we may have seen folks add a few hours and take advantage of a little bit higher pricing in Southern Pine. Kevin, I don't know if you wanna add anything.
Yeah, no, just from the Matthew McKellar, you nailed it there with the run-up in pricing from the lows that we saw in mid-December. A real, you know, rapid increase in pricing. That what really was the big catalyst, of course, was extremely low customer inventories in the field, coupled with a demand response that we hadn't seen in a while, like a fairly strong Q1 demand supported by the housing start numbers that we've recently seen. Going into Q2, we do typically see a seasonal, down drop in pricing. Of course, we're starting to see some cracks happen in that space there.
I think what house builders and our customers are guiding to us too is just a bit more moderated demand given the uncertainty that we're seeing as a result of energy and Iran war.
Great. If I could maybe just sneak one last one in. Are there any differences we should understand about the implications of the Iran war as it relates to cost pressures or maybe even demand implications that would be different between your North American and European operations? Very, you know, difference to call out between the two segments?
Well, I mean, you know, there's a lot of cost pressures all, in all parts of our business. Certainly, you know, we've had uncertainty in sort of because of tariff on, tariff off and a lot of volatility in the decisions coming out of the U.S. Of course, the Iran conflict adds additional uncertainty in the globe, and sort of that's certainly having an impact.
It's kinda hard to estimate what that would be and what the split would be between our European operations and our North American operations. Again, as Stephen mentioned, the focus for us is really just running as efficiently as we possibly can. I don't know, Stephen, if you wanna add anything?
No, I think that's good, Susan.
Great. Thanks for all the help. I'll turn it back.
One moment for our next question. Our next question comes from Hamir Patel with CIBC Capital Markets. Your line is open.
Hi. Good morning. Pat, you referenced CapEx this year of CAD 210 million stepping down in 2027. How should we think about just how steep that decline could be in 2027, and would that sort of be a new normal?
Yeah. Yeah, thanks, Hamir. Yeah, obviously the 2027 capital plan is not finalized yet, but in terms of guidance, I think you're around in that 150+ level, so, you know, kind of another 20%-25% lower than where we are today.
Okay, great. I guess a question for Susan. You know, now that you've taken in Canfor Pulp, how do you think about some of the sort of longer strategic decisions that you might need to do to right-size that pulp platform and you know, where sort of maybe mid-cycle production for Canfor Pulp likely settles?
Yeah. Thanks, Hamir. Morning. Of course, you know, we've just concluded that in March, I guess it was about March 17th. We're obviously doing that work right now. We're looking at all the options for that business. Certainly, it's a challenging business, that's the work that we're doing right now.
Yep. Fair enough. That's all I had. I'll turn it over. Thanks.
Thanks, Hamir.
At this time, I'm not showing any further questions. I'd like to turn the call back to Susan for any closing remarks. Please go ahead, Susan.
Thanks very much for joining us. We'll see you all next quarter.
Ladies and gentlemen, this concludes today's presentation. We thank you for your participation. You may now disconnect and have a wonderful day.