Q1 2021 Interfor Corp Earnings Call
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We invested $74 million to acquire the Sun on Summerville, South Carolina to grow plot for them in the U S zone at an attractive valuation.
Last but not least we purchased $20 million of inner for shares at an average price of just over $26 per share, which is attractive relative to book value and the current market price.
Even with this multifaceted capital allocation, our balance sheet strength and further and in the quarter on a net cash position of $236 million with available liquidity of $944 million.
We don't have any significant debt maturities until 2020 for our softwood lumber duties on deposit with the U S government totaled U S $142 billion at quarter end.
Which is mostly off balance sheet.
Our capital allocation priorities going forward remain unchanged.
As we focus on growing our business, while consistently generating attractive returns on capital employed.
We will continue to prioritize investment in our existing operations to grow production and enhance margins.
We will continue to seek out lumber focused acquisition opportunities with discipline around valuation.
We'll also continue to opportunistically purchase and or for shares.
In addition, we're on.
We're actively evaluating a further return of any surplus cash to our shareholders.
While at the same time, maintaining enough flexibility to complete our capital plans and execute on M&A opportunities.
To wrap up our first quarter earnings and free cash flow are both exceptional we also allocated capital successfully on several fronts.
Enhancing air Force path of continued growth and generating attractive returns for our valued investors.
That concludes my remarks, I'll now hand, the call over to Bart.
Thanks, Rick and good morning, everyone. So I'll provide.
Some comments on the market the.
The macroeconomic indicators are supporting continued confidence in our markets fiscal stimulus job growth and diminishing risks of COVID-19 are encouraging spending.
Particularly in relation to new home construction and repair and remodel.
<unk> starts are trending positively repair and remodel spending continues to grow all supporting an overall increase in the demand for lumber.
The North American lumber markets remain extremely active sawmills in North America are operating at effective capacity imports are forecast to grow in 2021, however, robust traditional markets and logistical challenges will temper that forecasted increase either way at less than 4% of total North American demand, we don't expect.
For imports to be a factor.
In terms of exports overall, our volumes continue to be under pressure. However, we expect improvements as we progress through 2021 in particular, we're encouraged by the support we are seeing from our Japanese market for our coastal piece.
B C interior and southern yellow pine lumber products for China, we are maintaining our presence and look to see this market improves through the year.
With increased demand and stable supply lumber inventories in North America remain at historical lows. Since this time last year. The market has provided limited opportunities to build inventories and in fact, we continue to see inventories pushed to critical levels.
Even if there was an opportunity to build inventories distribution channels would be reluctant at current market prices we.
We expect this scenario exists through 2021 into 2022, such expect volatility in pricing with little to no buffer and inventories.
Logistics has been a challenge of late we're managing however, it seems every week brings new challenges in different regions.
At present, all of our regions are managing to get what they need whether railcar truck shipments. It just takes a bit longer to be clear, we're managing with no significant inventory builds and expect logistics to be challenging through the balance of the year.
Overall, we see strong market fundamentals that will elevate lumber demand in Q2 and beyond we are expecting price volatility as markets adjust to high prices seasonality and supply chain risk.
I think I'll stop there with that I'll turn it back over to you Ian.
Okay. Thanks Bart.
Operator.
Ready to take questions from our analysts group now.
At this time I'd like to remind everyone in order to ask a question press star one on your telephone.
Draw your question press the pound key.
For a moment to compile the Q&A roster.
Your first question comes from Amir Patel from CIBC capital markets.
Hi, good morning.
Yeah, and I know, we've seen a you know more M&A for sawmills in Eastern Canada.
This year could you speak to how maybe robust M&A pipeline is and are there certain geographies in North America that are on maybe looking more interesting today.
Yeah, Amir I think its.
Wouldn't say, it's more robust than maybe it normally is.
I think theres always.
Opportunities out there that we're looking at where we're busy looking at.
As you know every day.
So I don't see like a big influx of.
You know how many opportunities there.
Normally probably wouldn't be in the market.
And then for US I mean, we're investing in British Columbia and are in the mills that we have there.
But our growth is really targeted beyond on BC for any new acquisitions like we did in summerville.
So.
Yes, there is always stuff in play here and there there is stuff in play today.
Today in the six months ago, there was a year ago there was for <unk>.
I guess, that's my best answer for you there from here.
Sure enough.
So you guys doing some more projects in NBC just curious how are.
You think about it.
Your willingness to investing in D C with the uncertainty with the fiber situation than I am.
If you have any thoughts on what you know what what you know for May start doing differently to.
Kind of come in line with what the provinces, hoping for the industry to achieve in terms of partnerships with first nations.
Yes for the investments in BC I mean.
As you as you well know we invested of of Hamad on the coast.
But the investments in the interior British Columbia at Adams Lake.
That was on the details of the acquisition, we did on the additional fiber supply.
Earlier this year.
I think that that payback Rick on that kiln startup mid February is like for.
For weeks or so we really.
Hit the cover off the ball on that one.
And that improves.
Productivity and grade mix.
When Youre Kim constrained by Adams Lake was with the new fiber often that means you have to look for alternative products in a green former non dry for <unk>.
So that that's really helped the division.
Hugely khalsa.
There is.
Phase, they're in the planar which.
There is a slight productivity increase but a lot on the grade.
On cost Green.
Great improvement cost reductions and the Planer mill facility, there and you'll recall on.
All of our B C interior mills.
Have a very high quota.
Volume so not.
At times, we're not exposed to the open market when.
When we do have.
A very very significant amount of our volume at all three BC mills under quota so.
And then on on the coast with with first nations partnerships.
Stay tuned on that we're working very very closely with.
Our first nations group, we have a.
Team on that and.
Yes.
We are advancing well and.
We're feel positive about some of the business opportunities with.
With our first nations partners.
In the coast.
Great. Thanks, Ian that's that's all I had I'll get back in the queue.
Okay. Thanks for Merit.
Your next question comes from Paul Quinn from RBC capital markets.
Yeah, Thanks, very much morning, guys great quarter.
Thanks, Paul.
Hey, Jim.
On the share buybacks it looks like yet.
Net 'twenty, six 'twenty or whatever per share seem to be a bit at the midpoint of day trading range in Q1, just if you could.
Let us know if you continue to buy back shares here in Q2, and how you look at share buybacks versus special dividends.
Yeah.
Thanks, Paul This is Rick.
In terms of.
Parameters around buying back shares if you've got a couple that we looked at it.
In particular, we do look at book value per share and how the shares are trading relative to that.
And.
In terms of a comparison against a special dividend. So we like the you know the opportunity opportunistic aspect of buying back shares at attractive values.
And certainly.
A special dividend would be the next option for us with any surplus cash that we have in.
Fair to say that we're actively evaluating that option.
Option.
Okay, and then maybe over to you Bart on chips at sustainable sustainability of the current pricing.
Trend I mean, it seems to be going up 8% to 10%.
On lumber every week and just wondering where are you where are you seeing and what do you see a pullback.
And.
What's your Crystal ball say.
Well.
It's always always tough to forecast.
Reising so on.
Hesitant to do anything like that but I will say that.
We're really just getting into the spring building season.
I think the new home construction side has been it's been very active all the way through and so we've seen sustained demand from that segment repair and remodel.
Feels like it's really sort of gaining momentum now.
Quite frankly, I mean, I think we've dealt with.
Some weather in first quarter and as we move into the second quarter things like that seem to subsidence and people are sort of <unk>.
Starting there their projects and whatnot so.
If you look at things today.
On the demand is as high as it has ever quite frankly.
Relative to the supply on the marketplace. So.
That momentum feels good for Q2.
And certainly the one on when you look at all the demand indicators that are out there on the interest rates the balance household balance sheets, all those things support continued investment in People's homes weather.
Whether it's new homes.
Or or renovations going forward. So we're expecting him on that momentum to carry us into into Q3, and then of course queue for Theres always the seasonality factor and that's a that's a tough one to predict.
So that's that's that's a risk that's out there, but certainly looking at the markets today.
They're as good as I've ever seen them.
Okay.
Okay Fair and just lastly, if you could give us an update on on that.
The sale of they haven't site.
Got pretty strong housing markets and I thought this would be concluded now and just wondering where we're at.
Yeah.
Paul we're continuing to advance on that progress has been made.
In the last quarter.
And.
We're feeling positive that debt.
Debt could transact before the end of the year.
Sure.
Alright, that's all I had best of luck for you too.
Thanks, Paul.
Your next question comes from Sean Stewart from TD Securities.
Thanks, Good morning, guys.
On a couple of questions in as you move to the next phase of most of the Capex program, which involves smaller scale initiatives versus the Eaton project anyway.
Can you speak to changing return expectations over the long run and and further to that.
Are you starting to see any cost inflation in these types of projects, whether it's steel or or other inputs.
Is that factoring into your budgets.
As you move ahead with these projects.
Yeah.
Sean So thanks for the question yes.
Yes, even Tim is a big project for US net in fact, I think I think we brought you there a few years ago to show you the old mill, but in others, So thats coming on.
Along really nicely.
We have back.
Actually we are in Georgia, we have another project going on there Thomas in Georgia, we have a strategic.
Capital plan, that's being developed for that operation. So that's coming down the pipe and then of course, we've got period Cal score on the deck and then there are a number of other projects that are.
In the planning development phase for other Mills example, in the northwest so.
So we do see.
Good opportunity to deploy.
Cash and capital into.
Some of our existing assets to obviously moving them forward in some cases from early competitive ones, even making them ultra competitive. So we're really setting up for that nicely with our capex team and our operations team working on that cost inflation for sure Sean.
When we look at steel pricing.
Or delays in deliveries and equipment.
Our challenge is to.
Source some electrical components.
COVID-19 seem to.
Throw a wrench into pretty much every every product out there.
And so we're balancing that.
But the the paybacks.
On the projects that we already have existing we've tend to lock them up early on.
We we've tended to use different index pricing on things like steel to cover off that risk.
We have a different we have a set of tools that we're applying to all of these projects to make sure that you know.
When they do start the budget hasn't significantly moved.
And with that debt, we have a contingency built into the budget that reflect on.
On a risk whether it be other components that you don't have price increases or.
Equipment delivery.
Delays.
Things like that so.
Yes, we're looking at things not that we weren't looking at things really close before but it's kind of ultra sensitive close now on when it comes to planning and budgeting on on.
On the project.
Thanks for that detail and then broader.
Broader question on capital allocation.
What we're dealing with now for pricing.
Clearly unsustainable, but.
Magnitude and duration of the cycles.
Than anything we've seen.
He's taking a revised.
Thought process with respect to longer term pricing assumptions for lumber that.
You're building into your models and you're considering capex plans going forward.
As shown on this is Rick I can take that.
Generally we take some near term market view into our pricing assumptions on we're evaluating capital allocation.
Over the long run, though we would use it trend price and evaluating projects.
That has something with a four handle to it.
But generally yes with this hot markets that we are facing here I mean, we do factor in some.
Upside in evaluating projects at least in the near term.
Okay.
That's helpful. That's all I have guys. Thanks.
Sure.
As a reminder to ask a question press Star one on your next question comes from Mark Wilde from Bank of Montreal.
Good morning, Ann Rick Bart.
I wanted to just start off by commending you guys.
Capital allocation debate in your tenure I think it's it's very easy to get carried away in markets like this and and you seem to be maintaining a good discipline on move.
Moving from that though I would like to get a sense of.
When we think about year over year, how much do you think you'll be able to flex. Your production. This year I mean, you clearly you won't have the outages. We had last April and then you'll have you know kind.
Kind of productivity Debottlenecking gains can you give us some sense.
In terms of either board feet or percentage wise, what that might mean this year.
Yeah.
It.
It's not easy to.
No.
<unk>.
Bunch of.
Pasadena as much as we would like to.
The.
We're having a number of.
Capital projects that kind of create little disruptions here and there in our system and then and then the people side of it particularly in the.
For the U S is challenging.
Challenging so I don't see.
Yeah.
Our our major project debt at Eton team coming on until the end of this year and then beginning in mid next year.
So I would say, it's fairly tight as far as are your year over year goes I mean.
We will have some incremental improvement, but it's on the on the merger.
Jim.
So.
Yeah.
<unk>.
I guess, the one thing Mark is factoring in Summerville.
Into containing models would would be positive to what we didn't have a day at the beginning of this year. So.
Yes.
Summerville is what Rick about $125 125 million somewhere around there.
Yes, I think for enrollments on the capital project over the next year or two.
Moving on up to the $190 million to $200 million range.
Okay, Alright, that's helpful and then Bart I'm, just curious whether you can give us some color.
On how you see customers trying to respond to higher prices.
Either you know economizing our.
Looking at alternatives or perhaps deferring some things.
Yeah.
Okay. So I would say I would say the customers today.
The conversations are.
More about supply than anything else.
There is an ability to pass on the pricing through.
Through the distribution channel I think the the risk comes into it when the day.
They just don't want to be carrying inventories high priced inventory shifts if there is going to be on market share. So there is that anxiety that sitting in the background, but for the most part the momentum is so significant.
Debt it becomes more about Marvel supply.
This event is demand based.
There's no question about it supply has been fairly stable.
Quarter over quarter, and so the idea of deferment on projects as Israel.
And on I would say that there were a number of projects that were deferred last year to this year and there's a number of products that will be different this year to next year.
At the end of the day the.
From from our vantage point, the supply or sorry, the demand levels are so significant.
That ultimately I think that that's going to be a necessity.
It's going to have they're going to have to be deferred.
Because theres just not to supply to.
To cover for everybody off sorry.
So right now just sum up.
It's all about it's all about continued shipments and.
In servicing our customers and it's less about price.
Yeah, Okay, I, just I remember 15 years ago, there was a lot of chatter about steel studs.
Given some of the steel market right now, we don't seem to be getting any of that.
No.
It's fair I mean.
We're keeping our eye open for substitution.
And quite frankly, it just seems like every aspect of.
Of manufacturing is busy right now and so the idea of for.
Our replacing wood with with steel comes with all kinds of complications stairs there's application.
There's lead times, even to get that those products.
There's an old pricing relief and and then of course there are some labor.
Component of actually installing and so.
I think a lot of a lot of folks have figured out that they just need to make sure they continue to get supply.
And feed there.
Projects Accordingly, I don't think Theres a lot for substitution for right now, it's just not easy to do.
Yeah.
One other question Bart.
We're getting some reports that theres been an easing in demand out of the big boxes that maybe the do it yourself for us are a little more of a price sensitive area of the market or are you getting any similar sense of that.
I mean, we know new housing and kind of professional repair and remodel are quite strong, but I'm. Just curious when you get down to the guy who might be building is on back or whatever.
Whether there's any change in behavior there.
Well, there's certainly sticker shock that's for sure.
Yes, we know that.
But what I will say about the box stores, there was a fair bit of focus.
Through Q1, and making sure that the pipeline was.
Amply.
Supplied I suppose for.
For the box stores. So it just really didn't want to experience what they did last year with shortage of shortages of products and so.
There was there was inventory.
And in those stores.
And so I think as we came out of Q1, the weather events got behind US people got more sort of open to the idea of doing a home projects they started to to.
Pull from the from the box stores and we're now seeing that translate into.
Resupplying.
So I think.
We're really just starting to see.
The momentum on that side with.
With the box stores and I can tell you that the last.
The last 30 days have been have been I wouldn't say crazy strong, but they have been.
Solid consumption that we're seeing from that that segment.
Okay, Alright, and just one final one for you.
I'm just curious.
I have heard in the sort of interim mountain region of the U S.
No railcars are tight and you know there have been delays.
Any way to kind of assess.
All of those logistics issues might just be affecting the psychology of the market. I mean, we are a kind of peak season here and as people are concerned that there are going to be delays that may just further kind of act like a little more gas on the fire.
Yeah.
Well I can tell you that there is there is nothing like what we saw in 2018.
Are there was substantial volumes of wood unable to get to the marketplace I think.
Whether it's the inner mountain coast Southeast I mean, everyone, even export vessels containers I think that there's some pressure.
And in all regions.
It's it's not that the cars aren't there.
It's how they are flowing in and the consistency of that flow and I think thats, causing some volatility in actual.
In the on the shipment side so.
Certainly our experience has been that we're getting our wood to market.
There's no question, it's just that we're having to deal with sort of spot issues in different regions and its nothing thats on surmountable.
It's just.
A factor of the business right now and so I I think there are I think it's taking longer for people to get their orders.
But not not that significant maybe maybe a week or something like that where we see some weaker to see some delays at least at least.
From our vantage point.
So that's really helpful color.
Yeah, so for.
Sure.
Okay, I'll turn it over guys. Thanks.
Thank you.
And that was on our last question at this time I will turn the call back over to the presenters.
Okay. Thanks, operator, I'd like to thank everyone for dialing in and participating in our update call. This morning, and your interest in our company as usual if you have any further questions. Please feel free to reach out to myself.
Rick or Bart and we'd be happy to answer those for you. Thanks, everyone have a great day be safe.
Thank you operator call is over.
This concludes today's conference call. Thank you for participating you may now disconnect.
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Okay.
Non-GAAP.
Yes.
Okay.
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