Q2 2021 Interfor Corp Earnings Call
After the Speakers' remarks, there will be a question and answer session.
I would like to ask a question at that time. Please press star 1 on your telephone keypad.
I will now turn the call over to Mr. Ian Fillinger you may begin.
Thank you operator, and welcome to our Q2, 'twenty, 1 investor analyst call.
I Hope you and your family are safe and doing well during this pandemic.
I would also like to acknowledge the heroic efforts of our into force staff and contractors that are fighting the wildfires in British Columbia, but on.
Also like to welcome all of our new employees, who may be listening in from the 4 mills that we purchased last quarter.
With me today, you have Bart Bender, our senior Vice President of sales and marketing along with Rick plausible on our senior Vice President and Chief Financial Officer.
Our agenda today will start off with myself, providing a recap of our financial results, our strategic focus and our improvement efforts I'll then pass the call to Rick who will cover off financial matters, and then I'll pass the call off to Bart who will cover off the market.
Turning to our financial results. Our Q2 adjusted EBITDA was again, an all time record coming in at $611 million.
By executing on our strategic plan, we are generating both top decile lumber margins and returns on capital I encourage you to look through our investor deck on our website and take note of these metrics.
Turning to our strategic focus we continue to focus on achieving greater results of capital through our unrelenting focus on operational excellence and capital deployment.
We continued on our Capex improvement plans in every region and deployed 41 million last quarter. We are now developing our next round of key strategic projects, which are focused mostly in the south platform.
We continue to work hard on our capital allocation discipline to ensure the best returns for our shareholders and we are seeing strong performances from our recent acquisitions I'm also pleased to report that we intend to restart the Quincy mill in Louisiana.
Our team has full confidence in the log supply the regional customer demand and the availability of the App ready workforce I also want to thank both the state and local governments for their support and incentives.
Our improvement efforts were again balanced across the company as we made progress in all regions.
Our operating teams achieved record production during the quarter and balance that with very strong shipment our conversion cost and overhead costs. Both continued to trend positively to our ongoing cost control and per increased production levels.
Our capital spending program continues to advance forward as we continue to modernize all of our operations of note and what doesn't always show up in production numbers is the grade mix turns that we're achieving our value extraction from logs on this so it has significantly improved.
Finally, we continue to apply a very disciplined approach to our working capital by ensuring that we don't build excess volume in the supply chain and net whereas lean and mean as possible.
Lastly, we continue to have significant financial flexibility to consider a number of further capital deployment options that Rick will cover.
In closing we are focused on maintaining the health and safety and wellbeing 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, 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 our Q2 MD&A.
As Ian mentioned this was a very strong quarter for our company.
Our fourth successive quarter of new records for both sales and EBITDA.
While the market environment has been favorable but we're also seeing the benefits we expected from capital allocation decisions. Our team has made over the past year.
And therefore continues to generate top tier margins from its lumber operations and is now consistently leading the industry in returns on capital employed.
I encourage you to take a look at our latest investor presentation on our website for more info on this.
Our recent acquisitions have been immediately accretive and we're realizing margin enhancements from our multi year strategic capital program and the strong operational focus across our business.
The result is that didn't force now very well positioned to deliver attractive margins and returns over the course of a lumber cycle.
We're also well positioned with the financial capacity to pursue further accretive growth and.
And continue optimizing our current portfolio.
Looking at Q2, specifically interflora generated record adjusted EBITDA of $611 million, representing a margin of 56% on sales of $1.1 billion.
We produced 716 million board feet on the quarter and shipped to virtually all of it.
At a record EBITDA margin of $856 per thousand board feet.
Our EBITDA margins on lumber continue to rank very well against other publically listed lumber producers.
This reflects the high quality of our sawmill portfolio and a continued focus on product mix improvements and cost control.
In terms of cash flow, we generated a record $7.46 per share from operations in the quarter.
Finishing on a net cash position with ample available liquidity of $1.2 billion.
These record results were based on the strong foundation of our management team has built over the past several years and driven by the exceptional lumber markets.
We also received $40 million of cash or <unk> 63 per share from the sale of the former Hammond sawmill site following quarter end.
The exceptional cash flows year to date have bolstered our balance sheet and allowed us to rapidly advancing our strategic plans.
To dramatically transform the scale profitability and returns potential of our business.
We've added about 900 million board feet of high quality lumber production capacity through 2 acquisitions this year.
Collectively the 5 nodes, we've acquired generate above average EBITDA margins provide significant economies of scale and increase the concentration of our asset base and the attractive U S sales the northwest regions.
The Summerville South Carolina saw mill contributed significantly to our second quarter results on the sawmills will be acquired from Georgia Pacific on July 9th have been immediately accretive to earnings and cash flow.
We've also returned a significant amount of cash to shareholders, which has helped position our business to generate even higher returns on capital from our growth.
We purchased $49 million of inner for shares in the second quarter, bringing total purchases under our N CIB to $94 million on an average price of just under $25 per share or about 1 times book value at June 30th.
1 times book value has been a very attractive price level for our shares historically.
We also rewarded our shareholders with a special cash dividend of $2 per share totaling $131 million.
Recognize of the extraordinary cash flow generated in the second quarter.
What's truly exciting is that we still have substantial financial capacity to grow further and create shareholder value as.
As part of this we've announced an expanded strategic capital plan focused on your U S South platform.
With an additional $230 million you asked to be invested over the next 3 and a half years.
To increase production by 250 million board feet per year, while on.
Also enhancing our margins.
Their force total capital expenditures are now expected to be approximately $175 million this year and likely in the range of $200 million to $250 million next year.
The company executes on its expanded strategic capital plans.
We've also announced plans to restart our recently acquired $200 million work with de Quincey, Louisiana sawmill in the first half of 'twenty 'twenty 2.
In addition to this organic growth, we see potential for more sawmill acquisition debt sensible risk adjusted returns and will continue to opportunistically repurchasing or for shares.
To wrap up our second quarter earnings and free cash flow were exceptional.
Reflecting recent market conditions as well as the deliberate steps, we've taken to position and afford to deliver strong financial performance and shareholder value.
We've also dramatically transformed the scale and free cash flow generating potential of our business through acquisitions.
Looking forward, our focus will continue to be on building shareholder value through disciplined execution of our strategic plan, while generating industry, leading returns on capital.
That concludes my remarks, I'll now hand, the call over to Bart.
Thanks Ryan.
Morning, everyone.
Macroeconomic factors remain positive for the future of lumber demand housing starts are strong interest rates remained low demographic support increase in first time buyers.
Housing stock average age will increase repair and remodel.
In terms of repair and remodel end use sector outlook remains positive. However, short term DIY buying patterns have shifted.
Every quarter, we always make the statement that we expect lumber prices to be volatile and this quarter is obviously no exception.
From a supply standpoint, we enjoyed having the summerville mill on our portfolio, which put us in a position to grow with our customers.
In addition, we look forward to realizing the opportunities that exist with the acquisition of <unk> G piece on us the product mix at the flow months, Oregon sawmill complements our existing sawmills in the region. We now produced I mentioned studs and timbers, both in Doug fir and hamper in that region.
2 other operating sawmills in Fayette, Alabama, and Beth Springer, Mississippi AD relevance and reach to our customers in the south Central region.
And lastly to Quincy I can tell you we received many calls from customers asking us when we all start to smell.
The product mix in location expand our market reach to the southwest region again put share for in a position to grow with our customers. We are looking forward to seeing the smell operating and servicing our customer base.
Back to the market through Q2 very high prices drove some short term shifts that played in to an eventual market price adjustment.
Subtle shifts in supply lines export being repatriated into North America in pursuit of those higher prices.
Softwood lumber imports increased year over year and of course, North American box store inventories increased.
Image increase their inventories in anticipation of high demand this spring.
In terms of demand.
Affordability prompted some to delay postpone or even cancel projects most prevalent in the DIY segment.
Job site demand constrained by other building materials AWP windows appliances.
Name it they're all dealing with the same supply chain issues that we are.
Lastly, and likely most significantly consumer desire to vacation connect with family and entertain trumped taking on more projects at home I think we can all get our head around that.
On top of this at such high prices distribution risk increase substantially you can't underestimate this side.
On the equation no 1 wanted to be caught with such high cost inventories purchasing became very cautious given the risks reduce demand in DIY increased availability Russell, which resulted in increased availability to other distribution channels, reducing replenishment replenish.
Replenishment weights.
Given the increase in supply within North America, and somewhat reduced demand price tension declined.
<unk>.
This said looking forward, we do remain optimistic.
New home construction remained strong.
Constraints and other building materials are expected to subside non res and industrial markets remain resilient.
Repair and remodel is starting to pick up inventories are normalizing.
<unk> pricing is more affordable and weekly consumption is improving.
The extra week market share active taking advantage of the more competitive north American lumber prices, we feel the fundamentals continue to support robust lumber markets going forward.
With that I'll turn it back to you.
Okay. Thanks Bart.
Operator, we're ready to take questions from analysts now.
At this time, if you would like to ask an audio question. Please press star 1.
Once again that is star 1 to ask an audio question.
Your first question comes from the line of Sean Stewart with TD Securities.
Thanks, Good morning, guys.
Couple of questions.
On the higher Capex guidance, and we've seen some competitors temper their their midterm capex plans due to.
Delays in backlogs for equipment.
Are you guys. How are you guys are able to avoid that and is any portion of the increased spend.
I do equipment cost inflation.
I'll take that Sean Aegean.
On the getting out front of it.
And as much notice as possible obviously.
To help the supply chain issues on.
Parts equipment steel on those things so we have factored that into our timeline.
And as far as costs and cost escalation goes we have we do do that we run different index.
Sort of hedging sort of.
Scenarios and models things like on steel and other equipment. So we do have a pretty sophisticated.
Program when it comes to covering off those risks and also.
What we have learned is.
On the contingency.
Needs to be up a couple of percent just to cover off any other risk. So all of those are factored into our IRR calculations price.
Prior to approvals on those projects.
And an IRR on this incremental capex are still consistent with the types of returns you would have talked about before from your perspective.
With me.
Okay.
And then my second question was around your comments on M&A.
And.
I guess the.
The question is how long do you expect the integration of the GP assets to take it sounds like things are proceeding well out of the gate.
When do you think you'd next be ready to move on and opportunity and any context on scale of opportunity that that might be out there.
So integration wise Shaun.
We're very proud of.
Were those.
Mills.
While Somerville and all of the GP Mills.
We take that so seriously and plan to the ninth degree.
And with partnership from the site leaders.
From GP that now with us.
Gone extremely well.
In fact, there are there was 1 report where.
I think it took 2 hours to sign up the employees and by lunchtime production was happening and we were shipping lumber inter for lumber by that afternoon and that continues to go very well, so I would say.
Our integration right now as far as impact too.
Any metric coming out of those mills is behind us So we're.
Smoking and blowing on those ones right now so we feel very good on that.
And then.
And as far as readiness for future opportunities we're.
We're ready today.
We can and we feel very strongly about the team that we have in the integration capabilities that we have that.
If the right opportunity was in front of us.
And it.
It was available and it met our thresholds we would go after it.
And make it happen.
Okay. Thanks for the detail Ian I'll get back in the queue.
You bet.
Your next question comes from the line of Mark Wilde with bank of Montreal.
Okay.
Good morning.
And Rick Burt.
Good morning, good morning.
Hum.
Start out.
Whether it's possible apart for you to give us a sense of.
Kind of demand trends in the various channels, whether it's the treaters the big boxes, the pro dealers to homebuilders.
Sure.
From our vantage point.
On the demand side on the new home construction is solid.
We've got the housing start starts to support that.
And we're seeing that through those distribution channels.
On the repair and remodel side of the business, we'd say the pro contractor.
On that business continues to be.
Quite strong.
It's the DIY sector that debt appears weak.
And I think that there was some fairly decent inventories built up in anticipation of a fairly strong spring on that segment.
And that didn't necessarily materialize.
So I would call that 1 a week.
And then looking at export actually I think exports worth mentioning that.
Now that prices have moderated in North America.
A lot of the markets that haven't been getting their supply of North American lumber have stepped in to take advantage of that so.
<unk>.
Yes, so essentially to sum it all up I would say that repair and remodel is fairly stable that'll work its way through industrial non res is very stable.
And then of course, there's obviously upside leverage to the housing segment.
Okay and is it also possible birth to get some sense of where youre seeing net of inventory on your own system kind of across the 3 regions on also kind of what's your sense is inventory is kind of through the channel.
Okay, well in terms of our own inventories.
Maintain on order file.
And so we don't sit on inventories for very long.
In fact, mostly the inventories that we have are simply working their way through the logistics process on their way to market.
I would say that that debt.
<unk>.
The box store side of the business, that's where you saw the biggest inventory build and.
And we've seen that.
With our own programs.
But we've also started to see consumption pit that pick back up so I think that they are getting close to being done with that process of right sizing those inventories and I think what happens when you when you when you get that side of the channel gets full.
The availability that flows into all the other distribution channels increases.
And as soon as that rate sides. It goes back to where it was.
So I would suggest to you that debt. The majority of distribution is still working through their high priced inventories theyre working those down and so far they haven't replenished to the degree to which they may be moving that inventory.
And so I sort of see a crossroads coming here.
Fairly soon.
We're all markets will have to replenish at some point.
Yeah, and I guess on that.
The fire situation not only in BC, but not down into Oregon.
Northern California any problems.
Getting the logs for your mills.
Hey, Mark Ian here I'll field that 1.
Well absolutely in British Columbia, There is no logging activity happening in the province, as you know is under a state of emergency with the wildfire situation.
So.
Yeah, I mean, typically log inventories in the British Columbia region are pretty low in September.
And then build through the fall and winter for US you know spring breakup. So.
Log decks.
Today, our traditionally pretty low and then you throw the wildfire on top of it and Theres not a lot of room and that's why.
You've seen us and some of our peers.
Peers, taking downtime.
On situations pretty fluid, it's not getting any better here.
And so you know.
We've got them longer that on a week to week basis, but.
If we're if.
If we're extending this much longer into August it does start to.
No impact.
Think further.
Potential curtailments in BC.
For our company in Oregon.
Washington, We're monitoring the situation we don't have.
Much risk in our areas.
Thankfully.
Yes.
Obviously challenging for other other companies that have operations in those areas, but at this point, it's business as usual for Pacific Northwest log supply.
Program.
Okay and then.
And I'm, just curious with the with your announcement about curtailing.
The production up and basically can you just help us.
Understand.
Key metrics are that you're watching.
As you make a decision to curtail whether it's kind of log supply.
Price versus cash cost inventory levels, what what are the.
Pieces of your equation and what's the relative weight of each of them.
Yeah for sure I mean.
In this situation.
Our mills.
Obviously, you're very profitable in most regions.
I would like to.
Remind everyone that our mills are located in central BC or northern BC there.
Southern BC with.
Alternate species to SPF in fact, SPF is a very small part of our interior business.
But in this situation Mark it was simply.
Can we get logs in.
On the speed and pace of production.
And the.
On a risk too.
Trying to push it on the log side.
And it just didn't the math didn't work it was we're going to be running out of logs sooner than later.
And.
And everybody up here is focusing on the wildfires and all resources.
All of our inter for logging staff is fighting fires alongside of.
On the firefighters that the provinces deployed to.
Became.
Simple as that.
I mean anytime we're making decisions on curtailments, we don't take them lightly and the impact on us.
On a whole bunch of stakeholders, most importantly employees and customers.
So we look at the profitability and try to see through the ups and downs in me.
Disciplined decisions for.
On the profitability of those whom you've hit a number of those metrics that we look at already.
Okay other than the last.
1 from a rig.
Just within the context of the Capex numbers you threw out can you give us some sense of both on how the Summerville mill and then.
<unk> females debt within those.
Capex numbers that you gave us.
Oh for sure Mark.
In terms of the Summerville mill, it's about <unk>.
$30 million U S for that project.
That'll be complete by the end of 2022.
And then in terms of the GP mills, there's a little bit of spend included in that.
Later out in the 2024.
Okay. So there's not the other.
The bulk of it.
Okay and is that.
GP spend since its you know a few.
Few years out what would you say that there is you know kind of a reasonable likelihood that you know.
Let's say you've had these mills for 6 months to 12 months that we may see some some capital for those mills kind of pulled forward.
Mark it could but I don't think it's going to be major strategic capital.
There may be some.
Projects identified.
<unk>.
Less than $10 million for example that have Super high.
The paybacks that we made deployed but.
Yeah.
At this point the strategic capital.
As part of those numbers that Rick said, but yeah.
Youre right as we get to work with the teams there and understand the mills and theirs.
Our small project here or there that we can capitalize and pay off in less than 12 months.
We will do it.
But as far as.
Board approved strategic capital those are the numbers that Rick is.
Tony.
Okay, Alright sounds good I'll turn it over.
You bet. Thanks Mark.
Once again in order to ask a question. Please press star 1 on your Touchtone phone.
Your next question comes from the line of rationing Winthrop with CIBC capital markets.
Thanks, Yeah, Hi, good morning.
I just from a couple of questions. So further on female how much production, we expect next year, but once it ramps up in January.
Well.
Flip it over to Rick first checking on this but it's not we haven't said it will ramp up in January it's the first half of.
2022, so that that mill produces annually.
<unk> 200 million board feet.
And so it will be.
Somewhere right.
<unk> million dollars, hopefully somewhere around there for that year as we bring it online, but we fully expect to get it up to the the 200 and truck order in that and.
And that debt that may advance.
Yeah.
So we're hoping it will but.
Very conservative number would be the number that I just gave you.
Okay. Thank you.
And then that's where sometimes what are you expecting it to go up in October and.
How much do you think it'll decline in January.
Hi, This is <unk> speaking.
For Q3, we're looking at probably a $100 per thousand board feet of Stumpage increase and then Q4, maybe a third of that on.
On top of what we see in Q3.
And then we're looking for it to normalize down to where it was in Q2 this year starting in Q1 from 2022.
Okay. Thank you that is all I had I'll turn it over good luck next quarter.
Youre welcome. Thank you.
Your last question comes from the from the line of Paul Quinn with RBC capital markets.
Yeah. Thanks, Good morning, guys just following up on that Stumpage question.
Lumber printed western SPF debt or 90.
Last night, just wondering if you are still cash positive in the BC mills, given the stumpage increase.
While Paul.
Right now we're down in some of our mills as you know but.
I don't know, if we really want to share that.
I can tell you that.
Adams Lake Grand Forks, and <unk> are.
As you know very top decile operations with.
Very little exposure to SPF.
So our pricing we look at SPF, but.
Those mixes with Cedar.
Hemlock for.
Et cetera.
No.
That wouldn't be a really good benchmark, let's put it that way, we're realizing higher numbers.
Okay Fair.
You've had the GP mills for almost a month now what what's the takeaway and what's required to bring back the Quincy.
Well the takeaway on the mills that are that are running so the 3 flow them as our big Springs in fed as Rick pointed out embark.
Contributing on day, 1 great teams.
When you do a deal with a company like GP you get good infrastructure you get.
No.
The ability not to have to pay for certain.
Certain site upgrades, because they're at a very high standard so.
It's been a plug and play to be honest.
For day Quincy our team has been at the site.
Prior to us owning and then every day since working with the local management team there they are.
Done a full assessment of the equipment.
Dani.
Asset health checks.
We've got.
Plans in.
For the maintenance materials and supplies that we need to bring in to the site. We've done the due diligence with our logging contractors in the area their ability to deliver done customer outreach is particularly in the tech.
Texas area.
And we've been working with local state.
State and local government on employees secured incentives.
And have been actively working for that that at ready employment base there.
So.
That's everything we've been doing over the last month, which is.
Pretty awesome effort by everybody involved at the site and in our southern platform.
Okay, and then just on.
Our equipment I mean, theres a lot of it.
A number of Greenfields that are that are being done and lots of people are upgrading given the cash flow that they've had or are you guys.
<unk> on any difficulty on access to equipment.
And are you splitting it between the 2 main sawmill providers or is it are you.
More exposed on the on 1 than the other.
No.
We have the.
We don't pioneer any new equipment. So we're not going to do any leading edge stuff. So just that's 1 thing that we have always adopted.
But no we have preferred vendors for preferred.
Equipment, and we don't vary from that and it's a mix across the equipment supply industry.
On the timelines as we've outlined in our project Gantt chart are solid and they've taken into account.
The delivery timelines commitments from the vendors et cetera.
A previous question was asked we do scenario out.
Through.
Different tools on forecasting on impacts to cost on steel costs oil costs transportation costs, and we have a pretty robust plan to forecast that out into our budgeting process. So so paul.
Short answer is our Gantt chart that.
You'll see in our investor deck.
Has been vetted 3 ways to Sunday and at this point, we don't see any risk to those timelines.
Okay, that's great and.
So on the M&A side.
I mean, you're obviously.
Ready for growth as Ive pointed out.
What's the appetite out there in terms of.
No owners looking to sell now or are they.
I mean, we've seen a big reversal on lumber prices going up and then coming down or are they now want to get out or are you seeing any change at all.
The number of offerings out there.
There seems to always be pull something in.
In that space.
We think we we always know in marine normals through obviously processes and in a lot of cases through the personal relationships that we've leveraged over the last number of years. So we are.
We see opportunities out there still.
I'm not sure if everybody's re corrected on their expectations.
Given where they were a few months ago, but.
We are thinking and talking about that every day.
Okay, and then just lastly on the softwood lumber deposits, you've got you know not that much exposure there, but you know a hefty amount of money there any movement on that file at all or what do you expect to happen going forward here.
Oh, Hi, Paul it's Rick.
You're right we've got on.
On a $58 million U S on deposit today, so pretty substantial amount. If you look at it on an after tax basis, it's about $2 per share so pretty significant.
Theres been no significant movement on the file over the course of the last quarter.
Okay. That's all that that's what I guess.
We have a follow on that thanks.
We have time for 1 last question from Mark Wilde with bank of Montreal.
Yeah, just 2 quick follow ups I wondered Rick whether you can provide us with just some general guidelines for kind of financial strategy for managing your leverage not not an issue right at the moment, but just as we look out over the next 3 or 4 years and Youre looking at M&A and taken to your Capex.
What should we think about it in terms of our balance sheet management.
Sure Mark.
If you look historically, we've probably averaged about 20% net debt to invested capital over the last 10 years or so on.
We've got a target range in mind here going forward are probably 15% to 30% net debt to invested capital and we'd be comfortable going up to about 35% net debt to invested capital and that's obviously well below our covenant at 50%. So we're leaving ourselves quite a bit of a buffer in being very conservative and we think that.
<unk> provides us lots of flexibility to take advantage of M&A opportunities and other growth opportunities when they do present themselves. So we will look to maintain a fairly conservative leverage going forward.
Okay, and then secondly, Rick is it possible to get some sense of kind of where your July lumber realizations were versus the second quarter average.
I don't have that number in front of me.
Mark is still we're actually still concluding the month mark so.
Okay, Alright, if we could get that at some point I think it'd be helpful to us.
Trying to think about sort of the sequential bridge into the third quarter.
For sure.
Okay, Alright, thanks, guys. Good luck in the in.
In the third quarter and through the balance of the year.
Thanks for your welcome. Thank you.
Operator, that's the end of the questions as I understand.
That is correct Sir.
Okay I just have a couple of concluding remarks.
Our strategy has been consistent over time and across regions.
We focus on assets with future potential by applying our efforts on operational excellence the establishment of best practice, and then followed by capital investments.
Our strategic investments are resulting in well capitalized low cost so on mill portfolio.
We're delivering top tier margin performance across all market conditions, and our strategic Capex and other capital deployment actions are having a notable impact on our return on capital.
I'd like to thank you for dialing in and participating in our update call. This morning, and your interest in our company. If you have any further questions. Please reach out to myself, Rick or Bart.
And have a great day.
This concludes today's conference call you may now disconnect.
Okay.
Hum.
Okay.
Yes.
Okay.
Great.
No.
Okay.
Revenue.
Our non-GAAP earnings.
[music].