Q3 2020 Interfor Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the injure for quarterly Analyst Conference call. At this time all participants are in a listen only mode. After the speakers present cashing there'll be a question and answer session to ask a question. During the session you will need to press star one on your telephone please be advised that todays conference is being recorded.
If you require any further assistance. Please press star zero I would like to now hand, the conference over to your speaker today.
Challenger President and CEO. Please go ahead Sir.
Thank you operator, welcome everyone to our Q3 20 investor analyst call.
Firstly I'd like to say that I hope by you and your family or save healthy and doing well during this pandemic with.
With me today, you have board Bender, our senior Vice President of sales and marketing along with Rick Osborne, Our senior Vice President and Chief Financial Officer.
Our agenda today will start off with myself, providing a recap of our strategic priorities and key themes. I'll then pass the call to Rick who will cover our financial matters and then over to Bart who will cover off market.
Turning to our strategic focus we continue to focus on operational excellence. This is an underlying driver of our company to achieve greater returns on capital today and through the cycle.
Accordingly, our portfolio status has been adjusted in 2020, we have continued to rightsize the BC coastal business earlier. This year, we acquired the additional timber for interior BC region, and we have now embedded this volume into our Adams Lake facility we've.
We've completed a major upgrade at one of our U.S. Pacific Northwest Stud Mills, and we bolstered divested from one of our specialty mills in Oregon.
And in the South we've completed major projects at three of our nine operations.
We continue to work hard on our capital allocation discipline to ensure best returns for our shareholders.
Our improvement efforts were balanced across the company as we made progress in all of our regions.
All of our operating region to improve their production volumes quarter over quarter as Covidien capital improvement projects were addressed and completed of note. We recorded the highest production per hour in our mills for the entire company since we started our so either modernization program.
Our conversion and overhead costs, both continued to trend positively through our ongoing cost control and increased production levels.
We also closed down or head office in Vancouver, and relocated the staff to our Metro town office in Burnaby.
Our total cash cost decreased $30 quarter over quarter, driven by relatively stable log costs.
And lower conversion costs across all of our regions.
Our capital spending program continues to advance forward.
As we continue to modernize and improve not only our operating costs, but also our value extraction from logs.
Last quarter, we spent $23 million to improve our plants across all regions.
Working capital and its impact on cash flow continues to be a key focus for us.
We've implemented new discipline procedure earlier this year by matching market demand to both our lumber and log inventories and also our mill operating schedule. This ensures we don't build excess volume into the supply chain and we're as lean and mean as possible.
Turning to our financial results. Our Q3 adjusted EBITDA was an all time record at 222 million.
Our lumber margins were very strong and we continue to focus on efficiency and cost across our company.
Lastly, we have significant financial flexibility to consider external capital deployment and also other options, which Rick will address.
In closing we are focused on maintaining the health and safety and well being of our employees. We continue to drive cost reductions and we're matching our production rates to our order files.
That concludes my opening remarks, I'll now hand, the call over to Rick.
Thank you and good morning, everyone before getting started I'll refer you to cautionary language regarding our forward looking information on the first page of our Q3 Mdna.
As Ian mentioned enter four generated record adjusted EBITDA of $222 million in Q3 improved from $43 million in the prior quarter.
This improvement reflects significantly higher realized lumber prices and shipment volumes as well as a continued focus on cost across our business.
Our average realized price was $910 per thousand board feet up 41% over the preceding quarter driven by the record lumber market appreciation as.
As is typical and affords realized lumber prices lagged the key benchmark prices due to timing differences between orders and shipments.
Number shipment volume was up 24% over the second quarter and wood sales were limited by production curtailments in response to cope with 19 uncertainty and project related downtime.
Cash income taxes have been nominal year to date.
And are expected to remain so over the near term in Canada and over the mid term in the US based on existing tax loss carry forward balances and current tax legislation.
Cash flow generated from operations in the second quarter was $175 million.
This includes a 39 million dollar investment in working capital of which the majority is related to the impact of increased sales levels on trade accounts receivable.
In terms of capital expenditures $23 million was spent in Q3 with approximately $17 million about related to discretionary projects, which are progressing well.
Our balance sheet strengthened further quarter over quarter, and we continue to have ample financial flexibility.
We ended the quarter with net debt of $89 million and available liquidity of $637 million.
Our liquidity is comprised of $311 million of cash on hand, and our undrawn revolving term line.
In addition, softwood lumber duties on deposit with the U.S. government totaled $121 million at quarter end. So.
Substantially all of which are not recorded on our balance sheet.
Regarding capital allocation our objective over the long term is to generate returns for our shareholders above and our force cost of capital, while maintaining a conservative balance sheet are appropriate for the lumber industry.
In this regard we revised our near term internal capex plans to spend approximately $115 million and 2020 and $150 million in 2021.
At the same time, we continue to pursue growth through acquisition.
But remain disciplined in evaluating opportunities against our return hurdles.
When surplus liquidity exists after considering these priorities we will assess the various options for returning capital to shareholders. In this regard and therefore has announced a normal course issuer bid to purchase up to 10% of the company's public share flow over the next 12 months.
We believe that the purchase of inner four shares may represent an appropriate allocation of capital depending on the market price.
In summary, Q3 financial results were exceptional and we are well positioned with a strong balance sheet to execute on our priorities and maximize returns for our shareholders.
That concludes my remarks, and I'll hand, the call over to Bart.
Thanks, Rick.
Ill give that.
Some market comments strengthen our lumber market seen in late Q2 20 continued through Q3 20 demand was elevated in all end use sectors, most notably residential construction and repair and remodel season.
Seasonality in Q4, what has prompted all parties to take a breather as we ready for 2021, we are expecting price volatility to continue through the quarter and into 2021.
In North America, the market fundamentals are encouraging residential construction is showing no signs of weakness and in fact in 2021 outlook from the major homebuilders talk to continued strength in their markets.
Seems a desire for space has prompted new entrants into the housing markets shift away from higher density urban areas.
With repair and remodel activity levels from our customers remain above the recent averages however off slightly from the peak seen in Q2 and Q3 cheese.
Seasonality will play a role here our expectations are for continued strength and repair and remodel as we enter 2021.
Our export markets have been less active for us in Q3 both.
Both from Japan, and other Asian countries, Japan is largely attributed to a reduction in housing starts to the year recovery is started in this regard so expect our business will improve in 2021.
Our customers in China have options for lumber beyond North America, So when faced.
With significant price increases they have an ability to source elsewhere.
Activity has picked up in Q4 as our ability to compete has improved.
With respect to inventories.
Always difficult to pinpoint alright.
Our Intel continues to tell us that the levels in the market, our EPS seasonal lows and can be best described as lead.
Further from Air Force perspective, our own inventories are 30% lower end of September 2020 versus prior year.
It's worth noting these inventories are substantial external.
We only have operational levels of unsold and support all mills with order funds I would suspect. This is a similar situation to our competitors and really tells us that supply at the mill level should also be regarded as lean.
Overall, we are optimistic the fundamentals that drove the demand for lumber and 2020, we will continue and 2021.
With that I'll hand, it back to you as well.
Okay. Thanks, Bart Thanks, Rick.
So operator.
Were good to open up the the call to any questions from from analysts.
As a reminder to ask a question you will need to press star one on your telephone Mr. why your question. Please press the pound or hatched. Please stand by we compile the Q and a roster.
Your first question comes from the line of Stewart from TD Securities. Your line is open.
Thanks, Good morning, guys.
A few questions.
The.
The 2021, Capex guidance, a little bit year over year from.
I guess low levels in 2020.
And can you give us specifics on where the incremental discretionary chunk of that the 21 spend is going I know you guys have sort of gotten away from the.
Phase one phase two of us so modernization.
Any detail you can give us on on larger projects that will be in the mix next year.
Yes, Sean.
We will complete.
Fees to.
Which is largely eating too.
George and then Tom it's been down in Georgia, which is.
A major project that Weve improved your or so ago.
But we're re scoping that actually down.
And the rest of the capital is pretty pretty balanced.
Across the organization there's projects at several mills in the so there is a project.
In British Columbia, that's on the books that were just vetting out to finish the final budget on that so.
I would say.
It's heavily into the south to complete a few of the major ones down there.
And then it's smaller strategic projects.
In the other regions.
Much less so at Pacific less so in the Pacific Northwest after.
The the project that we just completed there which was substantial.
Got it and.
Ian can you give us some context on fiber cost trends.
We have pretty good sense of what will be happening in BC.
Early next year.
But Pacific northwest so.
What trends are you seeing or are you expecting in those regions.
Yes for sure so in this so.
Pretty stable Sean quarter over quarter in the past.
Going forward, we're we're not seeing.
Price.
Appreciation there.
So that looks solid.
In balance.
And then in the Pacific Northwest in this short term, there's some actually.
Views and what we're seeing relative to the fires that happened in Oregon and in Washington that there is some price relief in the Pacific Northwest regarding the salvage wood that that's happening now so in the.
Short term.
Seeing a decrease we do think that the.
The Pacific Northwest eventually one said salvage wood is consumed and dealt with that it.
It will be a little more responsive to the whatever the lumber price is doing at that time, but in the short term, it's actually flat or down in some of our.
Operation in the Pacific Northwest.
Okay, Thanks for that detail.
Just one last question for me.
Rick you mentioned with respect to the cash tax profile.
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You gave some generalities around the transition in Canada in the U.S. Im wondering if you can just dial in a little bit more and give us a sense of where your overall tax shields are in each country.
Yes for sure Sean Good morning in Canada, We've got $54 million Canadian event or wells at September Thirtyth, and then the US we've got $94 million us at September Thirtyth.
And just looking out in Canada.
Its possible just depending on lumber markets could be paying cash taxes in the next six to 18 months. It really just depends and the U.S. given some of the legislation down there it allows us to accelerate our capex write offs like.
Likely won't be for one or two more years although.
Although depending on the market.
Great.
Okay, guys. That's all I have for now thank you very much.
Thanks Chuck.
Your next question comes from the line of Amir Patel from CBC capital markets. Your line is now open.
Good morning.
I wanted to ask you about.
The U.S. south.
Like Theres a lot of composition.
Composite decking capacity coming on in the U.S. over the next few years do you think that could start to weigh on.
Demand for lumber from you're treating customers. This as kind of as we move through 2021.
Yes, I think Mir I'll, probably pass it over to Bart to hit on that particular segment Yeah I.
I mean any time you get it.
Very high priced environment Theres always the possibility of substitution that can take place. So a composite decking is is one of those things.
So it's always always a possibility however.
From what we've seen from the markets and the indication that we see from our customers we expect the demand.
For those types of items to continue strong.
I think there's room, there's room for everyone in the market that we're currently in.
Okay. Thanks. Thanks, Bart that's so that's helpful and just a last question I had was just wanted to follow up on the Hamlin mill any update on.
Timing aside the likely sale.
Sure I can take that so we're still working through a sale process and in terms of timing likely won't be in 2020.
Okay, and any idea that sort of magnitude of the potential proceeds.
Not at this time.
Fair enough, but that's that's all I had all alternatives. Thanks.
Dan if you'd like to ask a question. Please press star one on your telephone. Your next question comes from the line of Mark Wilde from Bank of Montreal. Your line is now open.
Good morning, nice quarter, guys and I think good capital decisions Bart I wondered if we could just talk about sort of what you're seeing in the market right now it seems to me that the commentary and the trade papers last night.
Was a little bit more constructive what's your read of the situation.
It's a good question I mean, obviously.
The markets are shifting around.
Quite a bit.
So far and Q4.
You know I think that I think that the market needs to build some inventory.
It's very lean out there, it's very lean at the mills and Theres, just a reluctance to do it at the high prices that we added and so.
There's been adjustments made and I think we're now establishing what I would call investment levels.
And that's bringing some people off defenses in and they're now starting to purchase.
For.
Whatever consumption, they're going to have for the balance of the year, but probably more importantly, the the.
The Q1 Q2 season next year.
I think the expectation is that.
That business should be fairly decent.
And so there is some would that needs to be bought.
One thing I'd point out and when you look at when you look at the how pricing has moved I mean, that's the speed the different species of really move differently.
If you if you look at southern yellow pine and Sps in those seem to be the big sort of commodity species that that saw the most volatility.
Theres, others, obviously very important for us they've done for them for.
And those types of things that Didnt see the same degree of volatility in and.
Worse, we're seeing the same adjustment take place but.
It's now getting re established investment levels that are different for each of those species.
Okay, and then can you give us a sense of kind of where your where your order books are at this point.
You mean in terms of an order fall yeah.
We we always have an order file for the balance.
We very seldom get below a week.
And often were north of two weeks.
And our real aggressive for market were three to four weeks.
So.
Order files.
Our possible.
It's just a just a matter of meeting the price levels that you need in the marketplace. So right. Now were you know I would just call it right around two weeks to two and a half weeks somewhere in there.
Okay. All right. That's helpful. And then the final one I was curious about was just you address that.
Export markets out of Western Canada, but I.
I know you've had a plant you and all others to try to develop export markets out of the southern U.S. more and perhaps you could just give us a little update on that.
Yeah that's.
It's a good question I would say the impacts have been fairly similar the.
The overseas market seem to be able to compete on the lower grade type products and.
And so that business continues whether it's in the south or in the west.
It's more the two in better that that.
There was really a competitive issue.
And for the so.
When we get into situations, where there is a big gap between what can be achieved in North America versus overseas, we get strategic and kind of reduce our our our business to what we call maintenance levels.
And this is simply keeping our strategic.
Strategic distributors or customers.
In some supply.
But not as high of a supply as you would get normally.
The gap if you look at the gap in Q3. It was just it was too significant.
There was too much of an opportunity cost and so there was a there was a general pull back and I would say that that wouldn't be the case for.
For any of us quite frankly.
Okay.
Yeah good.
No I was just going to ask one final question I had is usually the industry built some inventory you know kind of fourth quarter early first quarter and I'm just curious given given that theres just doesn't seem to be a whole lot of inventory out there right. Now are we going to be able to get back to some kind of a normal level.
Hi.
Midway through the first quarter or is the potential that with the strong as housing seems to be right now that we enter next year with inventories still on the low side.
Well I.
Kind of hitting 60.
64 million dollar question right there.
It's a.
The market would like and needs more inventory.
It's fairly lean.
Today.
But you know I mean, you have to kind of put yourself in the distributors shoes I mean, it's.
They don't want to build inventories at these kind of levels.
The.
So I think it's pretty much hand in multis, it's what they need short term.
Until they determine that they've got something that they can feel that's fairly risk adjusted for them to put on the ground for future business. So I think largely the volumes that are getting bought today are are.
Our sold or are there going against business needs in Q1 or balance of this year.
So I.
It's a really tough question to ask I mean, I I think that.
We're going to end up going into into Q1.
Quite similarly to how we went into Q1 last year.
At the lower end range of inventory levels in North America.
And how thats going to.
Translate into into pricing through Q1 as is kind of anyone's guess at this point.
But I would say that we're we're encouraged with where we are.
Okay, all right I'll turn it over thanks, guys and again.
I'm happy to see both capex, not ramping up sharply, which as often happens when people get in good markets and then the return of capital to shareholders.
Thanks, Thanks Mark.
There are no further questions at this time I'll turn the call back over to the presenters.
Okay, just some concluding remarks I would like to thank everyone for dialing in participating in our update call. This morning, and obviously the interest in our company. If you have any further questions just track down myself, Rick or Bart and we'd be happy to address those thanks, everyone have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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