Q4 2020 Interfor Corp Earnings Call

February 5, 2021

Ladies and gentlemen, thank you for standing by and welcome to the answer for quarterly analyst call. At this time all participants lines are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question on during the session you will need to press star one on your telephone please be advised that todays call.

And is being recorded if you require any further assistance. Please press star zero and I would now like to hand, the conference over to your speaker today, Mr. Ian Fillinger. Thank you. Please go ahead Sir.

Thank you operator.

I will provide some opening comments first off welcome to our Q4 'twenty investor analyst call.

Firstly I'd like to say that I hope you and your family are safe and healthy and doing well during this pandemic.

With me today, you have Bart Bender, our senior Vice President of sales and marketing along with Rick plausible and 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, although and pass the call on the rig who will cover off financial matters, and then Bart who will cover off the markets.

So turning to our strategic focus we continue to focus on achieving greater returns on capital through our unrelenting focus on operational excellence. We continued on our Capex improvement plans and every region and.

And we've made considerable progress on our multi year Capex program since 2017, and we're really starting to hit our stride across multiple projects.

We continue to work hard on our capital allocation discipline to ensure best returns for our shareholders.

Our improvement efforts were again balanced across the company as we made progress in all regions. Our operating teams improve their production volumes quarter over quarter, as Covid and capital improvement projects, where again addressed and completed.

Of note, we recorded one of our highest production volume quarters and Air Force history, but we did so with two less mills and our portfolio compared to the last time that we reach these levels.

And our conversion costs and overhead costs, both continued to trend positively during.

During the quarter and due to our ongoing on.

Operating cost controls and increased production levels.

Our capital spending program continues to advance forward as we continue to modernize all of our operations improving not only our operating costs, but also our value extraction from our logs.

Last quarter, we spent 36 billion to improve our plants across all regions up from $23 million last quarter.

Of note, we are seeing a reduction and our maintenance capex as we complete our modernization programs.

Working capital and its impact on cash flow has continued to be a key focus for us we implemented a new disciplined approach earlier this year by better matching market demand to both our lumber and log inventories and also our operating schedules. This ensures we don't build excess volume into the supply chain and our as Lee.

Lean and mean as possible.

Turning to our financial results. Our Q4 adjusted EBITDA was very strong once again coming in at $249 million or lumber margins were very strong and we continue to focus on efficiency and costs across the company.

Lastly, we have significant financial flexibility to consider a number of capital deployment options, which Rick will cover.

That concludes my opening remarks, and I'll now hand, the call over to Rick.

Thank you Ian and good morning, everyone before getting started I'll refer you to cautionary language regarding forward looking information on the first page of our Q4 MD&A.

As Ian mentioned and reported generated record adjusted EBITDA of $249 million and Q4, representing a margin of 38% on sales of $662 million.

And <unk> shipment volume and lumber price were both significant factors and a quarter.

We shipped 683 million board feet of lumber and Q4 up 11% over the prior quarter as we operated essentially at capacity despite challenges presented by the Covid pandemic.

We realized an average price of $842 per thousand board feet, and Q4, which is 49% higher year over year and.

And down only 8% from our all time high achieved in the prior quarter Q.

Q4 lumber pricing was unseasonably strong and.

Growing demand for new homes and favorable weather for construction was combined with relatively low lumber inventories and limited slack and production capacity across the industry.

EBITDA margin per thousand board feet continues to benefit from our ongoing strategic capital investments, which have led to higher grade our turns and cost reductions and productivity improvements.

And when Benchmarked against other publicly traded lumber producers are adjusted EBITDA margin per thousand board feet is now consistently amongst the leading group.

Included in the $249 million of adjusted EBITDA is $38 million on income to reverse a portion of softwood lumber duties expense during 2017 and 2018, our preliminary rates.

The department of Commerce finalized combined rates for these years at below 9% versus cash deposits made on 20%.

This 38 million dollar amount along with associated interest is recorded as the deposits on our balance sheet at year end.

In terms of cash flow, we generated $205 million from operations before working capital and the fourth quarter.

Amounting to $3 seven per share.

And a reduction in working capital out and another $25 million of cash flow and the quarter in terms of Capex $36 million was invested in Q4 for a total of $110 million and 2020.

Approximately $22 million on the Q4 investment related to discretionary projects focused and the U S zone.

We also used $24 million to buyback over one 3 million shares and the quarter on.

On an average price of $18 40 per share.

Our cash income tax obligations in 2020 were largely mitigated by the use of available tax loss carryforwards.

However, our outlook on cash taxes and shifted meaningfully based on the robust Q4 earnings.

We are heading into 2021 without any tax loss carryforwards remaining and our U S operations.

And we expect to utilize all remaining Canadian tax loss carryforwards within the first half of this year.

Our cash tax obligations will continued to be partly mitigated by accelerated depreciation of ongoing capital investments.

Our balance sheet strength and further in Q4 and continues to provide significant flexibility.

We ended the quarter and and net cash position of $75 million with available liquidity of $788 million.

Our liquidity is comprised of $457 million of cash on hand, and our undrawn revolving term line.

We don't have any significant debt maturities until 2024, and our softwood lumber duties on deposit with the U S government totaled $134 million at quarter, and which are mostly off balance sheet.

Next I'll speak to our current thinking on capital allocation, which continues to evolve based on the ongoing deleveraging of our balance sheet.

The fundamental objective and managing capital for our shareholders over the long term continues to be the generation of returns above and our force cost of capital.

And while maintaining a conservative balance sheet appropriate for the lumber industry.

Our first priority and achieving this objective is to invest in and optimize the returns from our current portfolio of sawmills.

Our outlook for Capex, and 2021 remains consistent with prior guidance at $150 million.

Our Capex plans for 2022 are still in development, but will likely be and a range of $150 million to $180 million.

Our second priority is to grow our sawmill platform through acquisitions and.

And generate incremental value from our operational expertise scale and portfolio diversification we.

We continue to believe attractive acquisition opportunities will present themselves and our intention is to be patient and disciplined and the execution of our growth strategy.

To the extent, we arent able to identify internal and external investment opportunities with appropriate returns on our third priority is to return cash to shareholders.

Preferred approach for this is share buybacks under our normal course issuer bid.

We will remain active and buying back shares when certain conservative and internal parameters are met.

We will also consider other alternatives to the extent that surplus capital remains after considering the aforementioned priorities.

To wrap up our Q4 earnings and free cash flow generation were both very robust.

And our current balance sheet gives us the ability to continue optimizing our selling and our portfolio and execute on our growth strategy for shareholders.

That concludes my remarks, I'll now hand, the call over to Bart.

Thanks, Ryan and.

Turning and the markets, it's hard to find and negative economic indicators. These days and our business and interest rates and subsequently affordability homebuilder confidence desire for space demographics homes for sale all support a favorable climate for new construction and.

Repair and remodel supported by an aging housing stock great household balance sheets and newly created desire to work from home lifestyles on.

All in these are favorable for our business and to get them all at the same time as unusual.

Speaking to the market lumber demand remained very consistent through Q4, and repair and remodel and new sector showed its typical seasonal slowing, whereas the new home construction and new sector continue to demand more lumber.

Interestingly and lumber prices were on and on the move throughout the quarter.

Initially prices were under pressure as we headed into a seasonally slower time of year at very elevated prices.

And this drove many purchasers to the sidelines as they look to balance significant supply chain risks with overall needs and.

And market needed to adjust the levels that could be seen as investment grade.

With end market inventories and historical lows lumber demand resisting and seasonal slowing.

Ability for customers to hold off from purchasing was short lived.

The net result was that we saw sauce, leaving 2020 with strength.

As we move into Q1, and 2021 and it is clear the demand for lumber remains strong.

U S housing starts and repair and remodel forecasts are strong and particular repair and remodels preparing for and active spring, we expect volatility to remain high as the supply chain managers through low inventories and.

And high pricing and risk.

In terms of over our overseas business, our business to Japan as improving last.

And last year saw a fairly significant decline and lumber demand and resulting from primarily a reduction and housing starts inventories have now balanced and pricing and Japan has stabilized.

And the rest of Asia, our business has declined somewhat on primarily to a disconnect and pricing relative to North America. We expect this to improve as we move further into the year.

Overall, we are encouraged with how the year started and optimistic that 2021 and will prove to be and solid year and a longer business.

I'll stop there.

To you again.

Okay. Thanks, Bert Thanks, Rick.

Operator, we're ready to take calls from our analysts group now.

Okay. As a reminder, if you'd like to ask a question you will need to press star one on your telephone keypad.

Your first question on comes from the line of Sean Stewart with TD Securities.

Thank you and good morning, everyone.

And like to discuss the growth opportunity set a little bit more you touched on something else, which is obviously your your bread and butter.

Is the opportunity set large enough there and and I'm.

And I'm wondering how you guys are thinking about potential lateral news into engineered wood.

Potentially some other vertically integrated building product type businesses is that on the radar for you at all.

Yes.

And I think Theres two questions and Theyre Shaun we do think that that there is opportunity that will present itself when when the time's right.

And the lumber business.

And the regions that we operate so we're.

Barry.

Close to that and paying attention to that.

We have a.

A pretty.

And robust goal and growth plan that that were working to achieve and what we realized is that.

To achieve those.

Goals and plans that we may need to what we call.

Lead with lumber and.

And as our growth platform, which which means.

And that.

Lumber is our preferable way, but if that means.

You know picking up.

And associated business with a lumber mill, whether it's pellets or plywood or engineered wood products that we.

We shouldn't just confine ourselves to simply lumber I mean, our preference is that we would lead with that but we would also look at opportunities that would.

It would be associated with acquisitions of lumber mills.

Okay, Thanks for that Ian and.

Second questions for Rick.

And you mentioned.

There are alternatives to return capital to shareholders.

Surplus capital builds on the balance sheet.

Should we think of that as special dividends and.

Any context, you can give us there.

Hey, good morning, Sean, Yes for sure or special dividends and certainly one option.

All evaluating what that might look like in terms of surplus cash on our balance sheet and what the options are.

I'll say, our approach will be aligned with us being a growth oriented company and a commodity industry.

Okay.

Thanks, very much I'll turn it over.

Thanks, Sean.

Your next question comes from the line of Amir Patel with CIBC.

Hi, good morning, and.

Could you give us an update on the Hammond mill land sale process.

Yes.

There is interest him here.

And it's currently for sale I mean, it's a valuable we think a valuable piece of property that would skirts and Vancouver with river and.

Road and rail all associated with with that site. So.

There is interest and it and we're working with.

Our agent to advance on that we're hoping that.

Net.

A deal is done and the next 12 months or so, but it's still in process.

Okay. Thanks, that's helpful and I and Im just curious your thoughts on how.

Covid might be weighing on industry production and you see any differences and the south versus the.

The U S and and Pacific Northwest and Canada.

Yeah, well internally there is there is a difference for sure.

Our <unk> team and our Pacific Northwest team is.

<unk> had some additional challenges compared to our British Columbia team.

But we're seeing some.

Tapering of that particularly in the south, but there was a quarter over quarter jump and disruptions when it came to positive cases or employees that needed to.

On self quarantine for exposure so.

<unk> said that.

And we didn't we didn't Miss a beat the teams were able to.

Operating around those and achieve their their production volumes, which as I mentioned in my opening comments were a record.

What we have heard him mirrors that.

And it's just.

More.

Our industry talk.

Some operations are struggling a little bit more.

And and.

Examples of where our filing room would get and exposure and then.

All of the soft filers have to go off and then you can't run your meal because you can't change you saw on us or maintain year you saw us so.

But nothing.

And massive that we're picking up.

Just.

Mill here mill there, but.

And I guess I'd leave it at that I don't have anything concrete for you I can just tell you that we did see a big increase particularly.

Particularly and Michele.

Quarter over quarter, but.

It appears to be leveling off a little bit now.

Great.

Very helpful. Thanks, again, and that's all I had I'll turn it over.

Thanks Samir.

Your next question comes from Paul Quinn with RBC capital markets.

Yeah. Thanks, good morning, guys.

Maybe a few questions here.

One of your competitors and the states potlatch.

Try and estimate there.

Theyre lumber production and loss due to COVID-19 and they put it around 4% and they thought that was pretty.

Pretty real estate for the whole industry, and that's something that you've kind of experience.

We have not experienced that.

Paul.

And our guys have found creative ways, whether it's adding hours or some extra shifting or that type of thing.

To get around that and and the south.

Even some of our management team and some cases.

<unk> had to really lean in on this and.

Occasionally have to run equipment.

And as they deal with.

And they come in one day and all of a sudden 12 employees or are off through exposure or something like that so.

Hats off to our frontline.

Workers.

Both hourly and staff.

And have managed out really well so we have not seen her experience I've seen some decline.

And then and maybe on your on the growth side.

Guys took a look a deep dive into greenfield.

<unk> pulled away is that still a consideration and if not why isn't it consideration here.

Yes, Paul.

The Greenfield.

Binder is on on our desk and.

And we we have a.

And engineered layout and we know what your equipment to put in so the design and.

Everything is kind of shelf ready if you will but the challenge that we find is that's really.

Sort of handicapped and Greenfield for us is that the whole people side of it.

And sourcing.

250 frontline employees.

And often with experience.

Does create some concern for us around startups and.

And the length of those to get those going so at this point.

We're just starting to come to.

The last I guess 24 months or so of our cash.

Capex that we launched back in 2017, you'll remember when you were down and the South we were talking about that a few years ago.

And <unk>.

Now, we're turning our attention to the next round of internal and we think we got some pretty exciting projects.

And we can advance on and get the engineering started earlier and the equipment orders in earlier. So we are.

And are moving from that one phase that we outlined a couple of years ago, we're getting to the end of that and we are.

A couple of years now looking at.

What we're doing with the rest of the mills to improve them, even more so I guess, that's where our focus is on the greenfield if if we can figure out the people side.

And have some more confidence around that.

I think that would be a bit of a change of mindset for us. So.

We're paying attention to it but our preference would be to.

Grow through acquisition versus a greenfield.

Okay and then just.

When you made the comment on.

This is the cap lease and you've seen some reduced maintenance and what it's your share of.

Total company and maintenance and what kind of reduction is material.

I think Rick correct, and we're wrong, Paul I think on the trend basis, we're getting down to around 16 million or so and in our maintenance, which is on a trend basis.

Fairly.

Fairly reduced I guess from from history and.

That's a direct correlation to.

And the investments that we've been putting in and the mills and more modern and less less fixed so we have to do and the equipment is newer so.

Costs are lower.

Somewhere around and there, but we could you could probably.

Rick or Mike Afterwards, we can we can give you that information.

Okay, and then maybe just last question I guess direct and in part.

Alright, you mentioned that inventories are low how are you measuring those and then secondary.

And he said that you expect Asia to accrue.

Through 2021, and because of this price disconnect is that a reference to north American prices, lowering or Asian prices coming up to meet those north American prices.

Okay.

Two good questions on the inventory side I mean, there's always.

On the.

And we see FBA type publications that do comment on that those are generally lagging.

And you can tell.

Just by communication with our customers I mean, it's a constant question that we're asking and.

In terms of their inventory positions.

And plus you can get it you can get a pretty good feel out of the marketplace on where we're at and how critical availability and shipment times are and it's very clear to us that.

That the market.

As is operating on reduced inventories and so there is a real premium on availability.

There's less discussion about price and quite frankly, just want to make sure they get the supply.

So I think that supports are ours and other peoples and interpretation of the inventories when it comes to Asia.

And we're talking about the Asian prices improving.

North American prices declining to meet the Asian market I think if you look at the inventory positions.

And the overseas markets.

And China in particular.

They are declining to a stage where.

And I think it's going to become critical to resupply and resupply regardless of where youre going to get that product from is that elevated prices.

We expect.

And that that market will show that and improvement over time.

Yes.

Excellent that's all I had a silica.

Thanks, Paul.

Your next question comes from the line of Mark Wilde with bank of Montreal.

Good morning, guys.

Hey, Margaret.

And I wanted just to start out by saying how impressed ive been on over the last year about how you guys have.

And that's handled yourself you were very early mover in terms of pulling back on production last spring and up one but on a cruise ship.

And then I think your your discipline around capital allocation has actually been quite quite commendable and share so with that out of the way I got a couple of questions I think mainly for Bart and.

On Bard there was some talk recently that a lot of the southern yellow pine strength was really being driven by kind of treaters trying to get ahead of the season.

Maybe with a little bit of a nudge from some of the big box retailers can you comment on that.

While repair and remodel certainly as strong and I think that there is and anticipation of a strong spring.

And I can tell you that last year.

On the that segment was somewhat reactive when it comes to supply and so I think there is and level of <unk>.

Pro activity, that's coming into this year, but I would say that that's more normal the reactive piece would have been abnormal.

So I don't see anything there that's that's unusual.

The.

Going going outside of the Treaters every every segment customer segment that we have is busy.

And in particular the trust manufacturers.

They have strong order files that are out.

Several quarters.

And they were running at capacity so.

Think this market is showing us.

Not any one particular segment as being strong and it's showing everyone.

And as being strong.

And obviously, we're seeing that and the pricing.

And would you say that you can can you spot any places where you think these prices at these levels is actually creating some demand destruction.

Well, it's certainly something that we're keeping our minds open to <unk>.

I think when you get into elevated price prices like this.

And.

Results and higher distribution and risk.

And I think that that's playing into the volatility that we're seeing and the marketplace not necessarily driven by demand fundamentals, but more just the mental side of the of the market and the fact that.

The prices that we have if.

And if theres ever.

And adjustment and it can it can hurt our distributor type customers. So thats definitely playing into this to this market from on demand side.

I can tell you the conversations that I'm having.

They don't they don't talk a lot about price they talk a lot about availability and supply.

And our customers are looking for us to continue to service them.

They want to continue to to be supplied the volumes that they have been historically.

And.

Yes.

And it makes us feel pretty good about where we're at so far and 2021.

Well I guess.

Bart I was thinking mainly about like lets say.

And the do it yourself Mark.

And folks that might build their own debt and they go out and they look at the price of lumber and as you know.

It's a lot higher than it was 18 months ago. So maybe they decide GL and I'll put this off for another year.

And that kind of behavior.

Yes, I mean, that's that's that's certainly a factor but.

And the U S. You've got you've got and aging household stock I mean were at an average of.

Over 42 years now.

And I think that household balance sheets are pretty spectacular right now and there is there are some disposable income that isn't going into cruises and.

And holidays and is staying at home right now so I think a lot of that money and actually the other one is just the equity that's being built and people's homes and access to that.

For home improvements so yeah.

Yeah lumber cost a little bit more but.

But there certainly seems to be a number of people that are pretty focused on improving their homes.

Okay, that's fair.

And then over on the supply side could you can you just recap for us what you're seeing in terms of incremental spot, particularly.

And then the southern U S.

And then I know we've got these klausner mills are traded bonds.

On to what I think is a pretty well run Austrian privately held company with.

<unk> seen at least a couple of small middle announcements over on.

Mississippi, we've seen some.

And announcements on Debottlenecking. So if you could just recap for us.

And you see out there.

Yeah for sure maybe I'll take a shot at it and then if I'm missing anything burden Ricky guys can jump in but we are seeing what you outlined mark is.

Pretty much what we're seeing also.

On the I mean, the big.

Leavers I guess would be the new mill capacity is coming online and.

The announcements are coming out they are typically private companies.

We.

We've looked and those areas, we still think that there's challenges on the timeline.

And particularly around the people.

And when we're talking or I'm talking with the major vendors to these greenfields.

They're they're getting booked up and timelines and are increasing so I think there's announcements coming out with pretty aggressive.

Budgets and.

Headline cost to do it and timelines and I.

Just.

I'm not sure whether that's the headline or the actual that's really going to happen and I do think it's going to take longer.

And on these announcements and.

And as coming out and I think theyre going to be more expensive and what's being.

Headlined.

I think often the headline is what the equipment and installation costs are versus the total cost.

Land purchase was with the infrastructure was the concrete.

The sprinkler systems for fire suppression.

Type of thing.

And my and my reading of those whether those are all captured in those and those numbers.

Okay. That's fair and then also on the supply side.

And that's on.

The impact of incremental imports or what you might expect in terms of incremental imports.

From Europe, or maybe from South America.

So.

They increased the imports this year, sorry, 2020 about 500 million feet I think the forecast is for something similar in 2021.

And my discussions with.

And my counterparts.

Over there.

And Mark there on traditional markets are quite active I mean this.

This push on demand for lumber is not.

Just in the U S market.

And it's happening and a number of markets.

And so they they've got lots of attention on their supply as well.

And how much they direct to the north American market will be offset by them.

And then supplying them on traditional market. So we don't see a massive response, we see fairly consistent growth.

Both.

We have recently and and and we think the North American market is.

Q4 2020 Interfor Corp Earnings Call

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