Q2 2020 Interfor Corp Earnings Call
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Thank you operator, and welcome everyone to our Q2 20, a investor analyst call Firstly.
I'd like to say that I hope you and your family are safe and healthy doing well during this pandemic.
And with me today, you have bard vendor or senior Vice President sales and marketing long with Rick plausible on our new senior Vice President and Chief Financial Officer.
Our agenda, they will start off with myself, providing a recap of her strategic priorities and key themes. I'll then pass the call to Rick who will cover off financial matters, and then I'll pass the call off the board, who called cover off market matters.
[music] turning to our strategic focus Q2 was quite a ride.
We started the quarter with a highly uncertain lumber market and finished the quarter in a completely different spot.
However, our overarching priorities have not changed quarter. We're a company is maintaining our capital allocation discipline and ensuring our balance sheet integrity and that we have strong liquidity.
This approach has served us well over the years low we got to control our future. It take advantage of both internal and external growth opportunities.
I could talk a little bit about corbett impacts and some of our forward plan.
Production in the quarter was impacted by market related downtime.
In adjustments to match or order flow this impacted our quarterly operating rate.
However by mid quarter, we're back to maximum operating rates and continue to do so today.
We are experiencing increasing cobot related incidents, particularly in the south platform and to a lesser extension or Pacific Northwest region.
Health and safety ever employees and contractors is at the top of our priority list and we will continue to adapt and adjust our safety protocols. In some cases are operating cadence based on her teams safety.
There's no doubt we are experiencing very strong lumber market that appears to reflect real demand.
The impacts of Cobot 19 early on with curtailment.
And the permanent supply reduction made in BC interior last year appeared to have positioned us well during this demand driven market condition.
Our improvement efforts, where again balanced across the company as we made progress in all regions.
And B.C., we approve the construction of an additional dry kill him out or Adams Lake operation.
This project complement the completed timber acquisition earlier this year and further positions RBC interior region as one of the best in the industry.
All of RBC mills are well positioned with secure long term fibrek 10 years and modern highly efficient mills.
In the Pacific Northwest, we completed and have started up a major project at one of our stud mills.
The startup keep <unk> recovery cost productivity et cetera are tracking ahead of our pro forma expectations already.
In the South we advanced our phase two strategic Capex plans at our event in Georgia operation and our Georgetown South Carolina operation.
We've talked a little bit about our balance sheet and liquidity.
Our EBITDA was 43 million despite facing significant early cobot 19 market related downtime in April in early May.
This quarter represents a strong as earnings since Q2 18.
We improved our balance sheet and liquidity by a very proactive operating discipline on working capital conversion costs, and GE and a reduction activities.
Our net debt to invested capital and available liquidity, both improved ending Q2 at 22% and 497 million.
We continue to closely manage our working capital in class and we see no need to take on any working capital risk in this market, we're still cautious in regards to the overall economy.
In closing, we are focusing in on maintaining the health and safety and well being over employees. We continue to drive cost reductions and we're matching our production rate to our order files.
That concludes my opening remarks, Amal now going to hand, the call over to Rick who will cover off the financial matters.
Urea and good morning, everyone before getting started I refer you to cautionary language regarding forward looking information on the first page of our Q2 and DNA.
Second quarter was positive from an earnings standpoint.
Adjusted EBITDA of 43 million dollar was improved.
From $37 million in Q1, this improvement reflects higher realized lumber prices, partly offset by lower sales volume.
Our average realized price was $646 per thousand board feet up 9% over the preceding quarter, reflecting overall lumber market strength.
Lumber sales volumes were 22% lower than the first quarter, resulting from Procter production curtailments taken in the first half of Q2 in response to covert 19 uncertainty.
Midway through the second quarter production volumes returned to levels typical before the pandemic.
Cash taxes have been minimal year to date and are expected to remain so over the near term based on existing tax loss carry forward balances and current legislation.
Cash flow generated from operations in the second quarter was $103 million.
This includes 66 million from inventory reductions as we focused on balancing inventories to our order file and market conditions.
In terms of capital expenditures $24 million was spent in Q2 with approximately 18 million about related to our strategic projects on which we are seeing positive results.
We have readjusted, our Capex program for 2020 to total approximately $120 million up 20 million from previous guidance.
Our plan Capex for 2021 remains unchanged at substantially less than $100 million.
As he mentioned our balance sheet improved quarter over quarter.
We continue to have significant financial flexibility.
We ended the quarter with net debt of $239 million.
Cash on hand of 170 million and our $350 million revolving term line undrawn.
In addition, softwood lumber duties on deposit with the U.S. government totaled $107 million U.S. at quarter end.
Substantially all of which are not recorded on our balance sheet.
While we regularly evaluate all options for capital allocation, our priorities in the foreseeable future our to complete our existing strategic capital program.
Continue to de leverage and be well position to capitalize on value rather growth opportunities.
In summary, Q2 financial results are solid and we're well positioned to get a strong balance sheet to respond proactively to market developments and opportunities for growth.
That concludes my remarks, I'll now hand, the call over to Bart.
Thanks, Rick.
Talk little bit above the market Q2, 2020 may go down as the most real in history for lumber markets.
There is no pandemic playbook in our business showing an English possible.
My last quarter outlook comments essentially were that we were going to match our production to the man that we're seeing from our customers.
In April this man curtailments and inventory reduction.
Through May and June as demand began to come back we reacted accordingly with restarted operations the markets have not look back sense.
Today demand continues to be very strong in most every market in North America repair and remodel new home construction remains vibrant both sectors resuming growth stats.
Time at home low interest rates and a desire to seek less densified living has driven the demand for lumber.
These tailwinds continue into Q3 and currently we're not showing any signs of slowing.
In our export markets our approach remains strategic at roughly 4% of our sales China remains steady from a volume perspective, our wide variety of species and sizes affords us flexibility and our approach to this market.
In terms of Japan, we have seen a reduction in housing starts commensurate reduction in demand for lumber.
[laughter] I've been asked many times how this active market compares to the market we experienced in 2018.
From our vantage point, the feeling is very different.
2018 supply was artificially constrained for a period due to wet weather impacted railcar supply being insufficient to get lumber to market.
Additionally, on the demand side, new home sales were slowing due to affordability.
This market does not have these factors interest rates and a renewed desire for single family homes, and a robust repair and remodel demand is driving lumber demand.
On the supply side, we feel those mills that can produce lumber doing so feverish.
And the recent past logistic has not let logistics has not played a material role and constraining longer supplying the market and inventory levels throughout the supply chain remain lean by all accounts.
So we should expect some volatility in car supply as rail ramp ramps back up to capacity.
This being said who will be cobot 19 will continue to drive uncertainty in the months ahead.
So as always we're focusing on the fundamentals producing quality lumber and servicing our valued customers.
I think I'll leave it there.
Yeah.
Okay. Thanks, Rick in March so.
So operator, we're ready to cig analyst calls now.
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As a reminder, today's kuni session is for analysts only please standby will be compiled acuity roster.
Your first question comes from Sean Stewart from TD Securities.
Thanks, Good morning, Congratulations Rick on the appointment.
Thank you.
Questions.
I guess for Ian or parts, it seems that theres constraints in the lumber industry's ability to add supply quickly to to address.
The price environment, we're in right now and really strong demand.
Can you speak too I just perspective on on your system's ability to add incremental supply in the near term on.
Our thoughts on on industry constraints over the near the mid term.
Well take a shot and then maybe Burke.
Take a shot added to Sean so thanks.
So for our mills and operation, Sean We're I mean, we're running out.
All hours that are available.
So the.
You know where where it's outside our it gets where the constraints would come in or the the ability to add is pretty limited.
The.
I guess the fall back for where we may not be producing is when we're actually doing capital projects. So.
For example in in the last quarter, we had our Eaton Tin mill in Georgia was down for a significant part of the quarter and has recently started up our mall a mill and.
You know.
Pacific Northwest also was down for project for a number week, so it's sort of self induced.
Downtime that we had.
Now those mills are back up and running and so as we're working through the project schedule is where were maybe losing some hours, but obviously that that works paying off as we bring those mills backup as example, Malone I need to.
The labor availability.
Relative to co bid is.
The other factor and.
There is particularly in the so a lot of employees that are either self quarantining or in some cases have tested positive so.
Our team and so it is really adjusting operating schedules to match that.
At this point there hasn't been anything significant that has or material that has impacted us from an operating standpoint. So we really are adding running all hours we can.
The availability of labor is a bit of an issue to hire or try to add additional shifts and stuff like that like that and it's.
The government subsidy.
Programs and other factors, even though unemployment rates continue to be high.
Will struggle.
In some regions to.
Get employees, but we're working on that but.
I'll I'll pause there, Sean and this year or wants to add any color to two it from his perspective.
Just two things.
Firstly, you know at these kind of numbers everyone's trying to figure out how to make a little bit more.
And that's been happening for some time.
So I would I would.
I'd be surprised if theres any mill in North America that isn't doing everything they can.
The other point is on on the imports into the us.
Namely from Europe.
We are seeing some increases there.
There are on track.
Likely for 2030% increase however, they're starting off from a fairly immaterial base.
Production so.
When you when you take that all of that into account I.
I think decides supply side response is in full motion.
And really this thing is is about.
The Tories and they are and the supply chain.
And then just the extraordinary demand levels that were seeing for lumber.
That's a that's useful detail thanks for that.
Second question before I get back into queue, you log sales moderated a little from Q1 and that was that I think a big driver in Q1, how should we think about.
Log sales I guess, mostly from the coast going forward for you guys.
Well I'll take that and then maybe Rick if I Miss anything you can jump in but yeah, you're right, Sean we had a really strong.
Sales program in in Q1.
And drove our inventory down on the coast, So Q2, wasnt as robust on that and but it's now building and and we see.
Very positive outlooks in.
This quarter coming up with our log sales from the coast.
So it was an inventory drive down in Q1.
I have a rebuild.
Through Q2 and.
We believe is a decent set up getting into this quarter.
Okay, I'll get back into queue. Thanks, very much you.
As a reminder to ask a question press Star Star one.
Your next question comes from Paul Quinn from RBC capital markets.
Thanks, very much more I guess.
Morning.
Hey, just to sort of lumber shipments in the quarter, we expected that downtime in Canada, given the lack of a price response for for western SBS, but southern yellow pine prices were actually pretty strong in Q2 and.
Obviously strengthened further in Q3 here and so I expected see more volume out of the U.S. So.
But I suspect part of that as tickets Eaton.
Probably something else is down on a quarter do we do we expect Q3 to ramp backup to.
Q1 volumes or possibly Q4 of 19.
Yes, Paul There was you know those two mills that you talked to vote or were impacted and that did when we did come back they were down for a number weeks there both running now.
We do have some scheduled downtime at Georgetown.
With its second part of its project, but.
Nothing else materials to our run rate or production rate.
I would expect as long as you know everything issues as good as it is today will will be higher than it was in Q2.
Okay, Let's hope so and just maybe on.
Export.
Export lumber I thought or do you see.
4% of sales is exported but was that just China or what is it I get sick question is really what's as percent export right now and what was that number like three or four years ago.
So it's specific to China.
And is the number was higher four or five years ago.
Our business in China is.
I would say a bit uni relative to our competitors, we've got such a wide variety of species that that we produce in products that we produce and so.
The business that we target over there is it's really somewhat a niche oriented and we're really afforded the.
The ability to step in and step out and so.
A large part of what drives what we do over there is what's happening in North America.
There are certain products that that the overseas markets are always competitive on and those shipments continue to be steady.
And then there's others some of the higher valued products, where when you get a healthy north American market.
Our challenge to keep up they've got out there all all alternatives from other producing regions and so.
I think theres sort of a meeting of the mines that they pause on those types of items when when when north America's busy so right now its.
It's 4%, but the you know the I guess that.
The purpose of that comment.
Really is to provide some context.
Around the fact that we're not this but we're not a large SPF producer that Scott.
A significant material business in China, or even a dependency on China.
Well, we're sort of.
Consolidated boutiques supplier of a number of different products and species said.
That that we sell.
When it makes sense to our overseas markets.
Okay and then just.
Maybe you could talk too, but the sustainability of the current demand.
What are your customers are telling you.
With respect to.
Man.
No.
Company appeal that.
Prices there.
Its level of demand is sustainable.
When ticked up Burton.
Yes.
$64 million anyone easy way, yeah, that's right.
So what I can do is I can give you some.
I can give you some context on the conversations that have taken place over the last call. It two to three months when this thing first.
When the coal that 19 sort of step down in March in early April.
The conversations with the customers. We're all focused on the next two weeks.
And that's really all the only visibility that anybody seem to have confidence and adding out beyond that.
It was obviously less less certain.
That that has segue to end too.
Some pretty good certainty over the 30 to 60 day period I can get a very good feel for where our customers are 60 days out.
But I can tell you the narrative. It's almost every time you make the phone call the narrative shift slightly and now the conversation is.
Is that is that at jeez I hope, we get a little bit of a low in Q4 that puts us in a position to read build the inventory supply chain. So that we're ready for Q1.
2021, and so yes, starting to get some some of the large some of our large distributors I'm talking about how this is going to set up for 2021, which gives me.
Pretty good feeling for obviously through Q3, but even even to an extent.
You for.
So hopefully that gives you a context in terms of.
What's going to happen an actionable all I think I think we're all.
Plan, our cards fairly close on on on saying anything that would be specific in that regard.
Okay. That's helpful and just lastly, I'd.
Southern yellow pine lumber sales to China.
Got it in my mind anyways.
I think advantage given the proximity of your mills to ports.
That picked up and how material would that be going forward.
So again, it's somewhat similar to what's happening in the west.
So the there are certain low grades that that.
The overseas markets are competitive.
When it comes to number two and better.
Those products are are are just lagging the patients are lagging.
Overseas and by a significant amount not just a small amount.
And so really those markets aren't aren't buying those right now.
It's mostly a low grade plate and those volumes continue as they always have.
Now so that's a short term phenomenon, we all know that.
North American markets are far more volatile and.
Then once experienced in the overseas markets and so.
We know for a full well that in the medium to longer term the diversification of southern yellow pine lumber into the export markets is important.
Theres a number of us that are focused on it.
And we feel good about the future.
It's just short term right now.
They've got alternatives that.
Allow them to purchase the lumber they need for for less than what they can buy north American lumber today.
Already the till that thanks, so much good that's it.
Thanks.
Your next question comes from Mark Wilde from Bank of Montreal.
Good morning, guys.
Hey, Mark.
I wondered could I.
Let's start with Bart I'm, just curious Bart if you can talk with us about kind of.
Minimal cadence in the lumber business I'm, just trying to get a sense of when we would typically expect to see some just some seasonal slowing in demand just because of the weather.
Yes, well so right now we're kind of.
I suppose bucking the trend a little bit.
Oh August is normally.
A period of time, especially in the south where we see demand.
Taper off but.
That is not the case today, so it's almost like the.
The seasonality piece is shifting around and I think part of that the biggest issue I see out there is.
It's really the supply chain I mean, there was a period of time, where we were we were lowering our inventories.
You know our competitors, obviously were as well, but the distribution channels were also lowering their inventories and so we've got ourselves in a in a position where.
The demand has increased and there is really just not the buffer of inventory in the marketplace.
That would absorb some of that.
Some of that volatility in demand and so.
That demand.
That is just being felt rate immediately at the mill level.
And so when I look at fourth quarter normally normally seasonality would say that the demand what would slow down a bit and that me that man, probably likely will be the case.
The the part that I'm not so sure of is from an inventory perspective and to what degree will that period be used as the opportunity to build back up the supply chain in anticipation of.
What.
Could be a robust Q1, Q2 2021, and that's that's the piece that could see us.
With a with a decent market through the balance of the year.
Okay. That's the second question I had it maybe it's for Ian can you just speak to what you're seeing in terms of log costs around altria your regions.
Yeah for sure Mark the.
The U.S. So this is.
Stable I would put it that way we haven't.
We haven't seen any major swings theres little uniqueness here in there.
Civic northwest much the same.
BC interior with the July 1st Stumpage reset.
$10 per cubic meter down.
Positive that way.
The concern I guess that.
I guess, what we would like to cheese.
On the BC side of it is in this market just monitoring the bid prices of the open argued timber.
And seeing how.
That the behavior of the lumber market might drive some of that bidding behavior on the open market.
Just as a reminder, on BC interior the.
Three mills that we have there I'm pretty secure tenure so.
The strategic acquisition, we did around out and Blake last year was to be able to insulate us from those swings that we seem to be see interior when the open log market.
Exceeds what your own delivered tenure can do so.
Grand Forks, Gallagher and very good shape Adams leaks in much better shape.
So.
I would I would say generally okay right now.
And we don't see anything significant on the horizon changing in most regions other than when I talked about with BC and just monitoring the aftermarket bidding.
Yes, the three regions you're in units, it's always seem to me that in the Pacific Northwest. There is a linkage between kind of the movement up or down in lumber prices and.
With a wide kind of a similar move and log prices youre not seeing anything on the upside right now in terms of your log costs.
Not significant mark the I think what drove what drives a lot of the Pacific northwest as the export log market also in that that's where.
Where we'll see.
Major competition for that that log in and at this point logs are staying in the northwest and Theyre being.
Consumed by the domestic producers in the log export market just.
Hasnt driven up the Pacific northwest logs.
Like we've seen in different situations.
Okay. Then the last one from me or just kind of.
Around around demand the potential demand destruction I remember several years ago. When we had high lumber prices people started talking about steel studs and things like that I'd like to get your thoughts on that and then I did note the other day.
The National Association for Homebuilders wanted to go see Wilbur Ross and light Pfizer and some of the other members of the administration on the trade issue do you think.
But if the lumber prices continue to push up or even domain anywhere near where they are right now that that create some political pressure.
To come up with a settlement.
Yeah I saw that headline also the other day.
Yes, I don't know Mark I think that.
If you Fiona sawmill today, whether it's in the U.S. for candidates.
It's a pretty good business.
But yes, I guess I don't know how to answer that one on the national homebuilders and whether they'll make progress on that.
But on the substitute products.
I'll, let Bart take but the short answer is we're not seeing a lot of pressure from that but.
Yes no.
It's not it's not a topic that I'm hearing a lot about when it comes to like framing lumber.
I mean, it's always a topic when it comes to the Western Rich theater.
You know, whether its decking or citing or any of those things. There's other substitutable products that are active in the marketplace today haven't heard a lot about this the steel studs.
The piece said actually concerns me more is when you get into prices like today.
You'll get some people deferring their projects, especially on the multifamily side.
I would imagine and while I actually not a match I know that lumber is not the only.
Product, that's up and price right now and and so there are number of.
Inputs to building.
Multifamily or single family home that are that are up again lay off from a cost perspective, and so as those developers look at that opportunity.
To what degree will they push projects out further.
And deferred demand into into next year as is a question Mark now that said theres all kinds of demand and and the business is good on on on from a sales perspective for the builders. So.
I suppose it's make hay well the Sun shining.
Okay actually I have I have one other one for EM and that is.
It doesn't seem like the markets.
He is really reflecting what's going on.
In most lumber equities right now.
And I'm just curious I mean, we're kind of in all likelihood.
We have quite an amazing third quarter would you consider taking any portion of kind of the third quarter windfall as at work.
And looking at share repurchase activity.
Yeah, you know Mark we I mean, we talk about dining debate that back and forth but.
You know where where we're at right now.
And that's always subject to change on different conditions, but we're out right now.
With looking at the uncertainty of home.
The economic your broader economy.
Employment rates in how governments in ever everyone's going to respond to this it's.
Kind of playing in a bit safe on that front.
However, we are we do have opportunities internal that.
Center on our list of strategic projects and so that's being refined and we're looking at some of those.
Obviously M&A comes up.
You know and being ready to do something if.
Things lined up.
And then the other components of.
Like I referred to keeping that dry powder available for.
Better insight into how cool that's going to play out through the fall and into the into next year. So.
Is definitely one of the Libors, but at this point, we just don't see us doing that right now and that at the price we're ready right now.
Okay, well I'm, a big fan of dry powder, but I also.
I hope that you are willing points that that act opportunistically on things like that.
Like repurchase activity because that often is the lowest price lumber capacity you bought.
Yeah for sure and like I said, we do kick that around on a regular basis. So we're we're always looking at that opportunity.
Sounds good I'll turn it over.
Your next question comes from Sean Stewart from TD Securities.
Thanks, just a couple of follow ups and I apologize, but I missed it in the release, but did you guys have any the Canadian wage subsidy embedded in EBITDA this quarter.
Sean That's correct, yes, we did we had $4.7 million included in our adjusted EBITDA for the quarter.
It's not something we expect to qualify for going forward, though.
Given our current ramp up.
Understood and.
On the the 2021 Capex, you're you're guiding to.
Still a conservative number I mean, presumably still got a lot you can advance whether its finishing up phase two or early stuff on the third phase in the south.
Yes, this might be temporary cash flow windfall, but.
Any contacting you can give us on your decision to stay conservative in 2021 on Capex.
Well ill Sean the.
Like the major Capex program through phase one phase two.
And then.
US looking at.
Phase three and particularly one of the mills in Georgia, where.
We're getting to the point, where a lot of.
What we plan to do is starting to get realized and in the mills getting reposition tour, where we want it.
So.
It's it's not at this point would be a lack of.
Cash or funding its.
Where's the next opportunity and how do we get that on onto the books. So I.
I would put it more that we.
We.
In 2021 and are looking at obviously completing.
The next phase at Eton.
And then looking at.
Another major capital in Georgia.
And.
In available to do more but at this point.
We've been out it for a number of years down and we're starting to.
Getting the rhythm of now being able to run these things flow and I would say that's more of the driver of the 2021 capex than than anything else.
Thanks for that Thats, all I had.
Okay.
There are no further questions at this time I will turn the call back over to the presenters.
Okay. Thanks, operator.
Concluding remarks.
Like to thank everybody for dialing in and participating in the call and your interest in our company. Obviously, if you have any questions or follow up.
Myself Rick.
Barter available anytime.
Thanks, everyone and stay safe. Thank you operator.
You're welcome ladies and gentlemen.
This concludes todays call. Thank you for participating you may now disconnect.
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