Q3 2021 Interfor Corp Earnings Call

Yeah.

Good day, and thank you for standing by welcome today into four quarter. He I know this call.

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I would now like to hand, the conference shows where th speaker today, Mr. Ian Fillinger. Please go ahead.

Thank you operator, and good morning, everyone welcome to our Q3 'twenty one analyst call.

You and your family are safe 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 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.

Off the call to Rick who will cover off financial matters, and then I'll pass the call to park, who will cover off the market.

Turning to our financial results, our Q3, adjusted EBITDA was 94 million.

By executing on our strategic plan, we are generating industry, leading margins and returns on capital.

You can look through the investor deck, that's posted on our website to take no one of these metrics.

Turning to our strategic focus.

We continue to focus on achieving greater returns on capital through our unrelenting focus on operational excellence and capital deployment.

We continued on our Capex improvement plans in every region spending $44 million in the quarter and on track for $170 million by the end of the year.

We continue to work hard on our capital allocation discipline to ensure the best returns for our shareholders and we're continuing to see strong performances from our internal projects and our recent acquisition.

I'm also very pleased to report that our southern team has made solid progress on the restart plan for de Quincey email in Louisiana.

Anticipating running the marijuana one shift basis and approximately three months.

And a two shift basis in Q4 next year.

Our improvement efforts were again balanced across the company as we made progress in all regions.

Operating teams achieved higher production volumes, primarily driven by our acquisitions in the south and the Pacific Northwest region.

We continue to apply a very disciplined approach to working capital by ensuring we don't build excess volume in the supply chain and we're lean and mean as possible.

Finally earlier this week on November 2nd the BC government announced a proposed deferral of harvesting within two 6 billion Hector's a b C for us.

Proposal deferral if implemented.

It's been identified as temporary and its subject to first nations engagement, which is currently ongoing.

We will require additional and more specific information to understand the potential impacts. However, as most of you know our operations on the BC coast and the BC interior account for 4% and 19% of our total lumber capacity in our BC operations are very well <unk>.

Otherwise.

Highly competitive within their operating regions.

Lastly, we continue to have significant financial flexibility to consider a number of further capital deployment options that Rick will cover off.

In closing we are focused on maintaining the health 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, I'll first off I'll refer you to cautionary language regarding forward looking information in our Q3 M D N a.

The third quarter saw enter four continue its positive operating momentum.

With strong performance and results delivered from across our portfolio.

And as Ian spoke to this is a transformative quarter for our company as we added 23% of production capacity through the acquisition of four U S sawmills with a strong strategic fit.

In terms of third quarter operating performance, we achieved record results producing 731 million board feet of lumber and shipping 753 million board feet.

These records reflect the ongoing focus and commitment that we bring to operational excellence and demonstrates that our mills continue to operate effectively despite ongoing challenges from the Covid pandemic.

From a financial perspective, and therefore generated adjusted EBITDA of $94 million, representing a margin on sales of 14%.

Lower earnings as compared to Q2, mostly reflect the rapid decline of commodity lumber prices early in the quarter, which then began to rebound in the second half.

Profitability in the quarter was also impacted by several mostly external factors to our business.

<unk> elevated stumpage rates in BC.

Operational disruptions from BC wildfires some.

Some inflationary pressures on wages and supplies and $15 million of one time inventory purchase accounting adjustments and other acquisition related costs.

In terms of cash flow, we generated $72 million from operations with an additional $124 million of cash release from working capital all totaling $3 13 per share.

This was driven in part by the collection of accounts receivable from higher priced sales in Q2, and the drawdown of inventories as we sold more lumber than we produced.

We also completed the sale of the former Hammond sawmill site generating $40 million of cash.

And ended the quarter in a net cash position of $134 million.

With ample available liquidity of $836 million.

On capital allocation, we continued to take a balanced and disciplined approach in the quarter in line with our long standing priorities.

Invested $44 million in capital improvements focused on high return enhancements across our U S south portfolio.

$372 million U S to acquire the Horizontals I mentioned earlier.

Significantly increasing our lumber production and improving our go forward profitability.

And last but not least we returned $83 million to our shareholders through share buybacks, thus completing our 10% in CIB at attractive average price of $26 56 per share or just 1.0 to three times book value at quarter end.

Looking ahead to our capital allocation for next year, we plan to take the same balanced disciplined and growth oriented approach as we have over the past year, we expect to spend in the range of $220 million to $240 million on capital improvement largely focused on growing and optimizing our U S sales platform.

And we've also just announced the renewal of our share buyback program to purchase up to 10% of our public float over the next 12 months.

To wrap up we've exited the third quarter with a significantly stronger and even better positioned business.

It's still have ample financial capacity for further growth in line with our fundamental commitment to capital discipline.

Our focus looking forward is to continue enhancing shareholder value through disciplined execution of our strategic plan as we grow and optimize our business, while generating industry leading returns on capital.

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

Thanks, Rick.

Okay, I'll give Mike Q3, 2021 market outlook comments after a volatile Q2 lumber market stabilized in Q3 and entered Q4 with positive momentum.

Market fundamentals remain intact solid housing starts and permits interest rates remain at historical lows household balance sheets are strong.

Housing stock average age continues to increase.

And new sectors, showing solid participation this quarter new home construction continues to be robust again with solid housing starts and permits yet year to date.

Repair and remodel is reset with lower lumber inventories more attractive pricing and reengage customers.

Industrial and nonresidential or stable on the export side participation has increased we.

We haven't seen that for some time, our Japanese business has always been consistent supportive and in Asia with more competitive pricing shipments increased throughout the quarter.

No market share without challenges and looking forward, we see supply chain is an area of acquiring more attention.

Within North America truck availability remains tight resulting in slightly longer lead times within some lanes.

Rail service has been consistent and we have great support from our class one carriers.

On the export side port congestion container availability has limited our participation to an extent.

Over time all of these areas you'll settle down however, we expect the current situation to remain through Q4 and into 2022.

In Q4, we expect seasonality to have a slight impact on lumber markets. However, early indications are that our customers order books are healthy going into Q1 and Q2.

Therefore, our expectation is for a robust, albeit volatile lumber markets to continue into 2022.

I'll leave it at that and pass it back to you Ian.

Thanks, Bart Thanks, Rick operator, we're ready to take questions at this time.

Thank you.

As a reminder to ask a question please spread star one on your telephone keypad again Thats star one to ask a question. Please.

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Now they can't even roster.

Yes.

Your first question comes from Sean Stewart from <unk>.

TD Securities Your line is open.

Thank you and good morning, everyone.

Two questions.

Ian.

We've seen a recent.

M&A transaction in the U S.

Arguably it lofty valuation parameters.

Can you give us some updated thinking on the opportunity set there.

What valuations are looking like in the region and how that affects your.

The bias for for continued growth in that region.

Sure Sean.

I agree with your opening comments there.

I would say Sean that.

For us.

Excuse me for us.

The capital program that we've laid out, especially bolting on argue.

Mills, and <unk> really got us internally focused for the next period of time and so from a timing perspective.

Thanks, Andy.

<unk>.

Acquisition pipeline at this point I've been too expensive in the shows.

And I feel good that we've got are.

Project can't charge and all of our capital projects lined up for the next few years, so I really see us concentrating on that and.

Onboarding.

The mills that we bought in the short mid term and then getting to Quincy up.

For us.

The planning in advance.

Capital project pipeline, along with the acquisitions, we did I think we're in good shape to kind of.

Yeah.

Monitor possible acquisitions in this how we win.

I think it's.

Kind of awkward period of time after that last acquisition.

All right.

I would say that Sean if that helps you out on <unk>.

<unk> view for the short to mid term.

It does thanks for that and following on that.

With respect to the discretionary Capex program, we've seen some of your competitors.

Furthering some of the spending based on equipment backlogs contractor availability.

And any updated thoughts on the 2022 Capex budget presume, it's still going to be a busy year, but has your thinking on the pace of spending changed at all in light of some industry headwinds.

No Sean.

You know what.

It was a few years ago, you've been covering this with us.

So youll recall, we had you know phase one phase two phase III and.

And so I believe it was around 2017 ish when we.

Implementing that tool.

We really did have a five year capital plan until our project team has been able to engineer and a man, which you need first before you can order any equipment and then lineup with the vendor.

Commitment so from our perspective.

While we are presenting and we feel is accurate.

Having said that.

There could be something there.

We don't see which is.

Possible way.

I would say that we're solving on.

What you are seeing in our press releases and in our materials that we're putting out I wouldn't adjusted at this time.

Okay.

That's all I have for now thanks, very much I'll get back in queue.

Great. Thanks, Sean.

Our next question comes from Mark Wilde from Bank of Montreal Your line.

With me.

Thanks, Good morning, Greg Ian Bart.

And I do want to just open by saying you know I'm really impressed with the thoughtful job you guys have done on capital allocation. This year kind of across the spectrum, whether it's the special dividend or the repurchases and the acquisitions.

Moving on from that though can you just can you give us a lift.

For the time.

Timing ramp ups at the Quincy does seem first of all like its coming a little earlier than you had initially indicated.

And then what's the just cadence from a kind of a financial standpoint in terms of when the mill would turn profitable.

And finally kind of cost and expenses of the restart and the net effect of those after considering any incentives you might be getting from the state of Louisiana.

For sure so.

I just wrote this down to from a.

From a timing Mark you're you're Bang on.

It is advancing.

<unk> quicker than we.

We had previously outlined.

He was a bit of.

If that estimate on hiring by test we currently actually have.

First shift substantially hired already.

And though we Havent turned the mill at this point. So that's that gives us a huge level of client confidence we had.

Very welcoming response in the community and from former employees.

Wanted to come back to the mill.

After we purchased it so we were very.

Very surprised that we had that very strong response, so that was that's great.

And yes, we do anticipate running and testing equipment within the next four weeks at that mill. So if you can imagine we've got to go through a lot of restarting protocols, but.

Our first.

Oh and it blocks actually rolled in earlier this week, so everything's lining up very nicely for Q1, one shift there and of course, we'll be hiring the second shift all the way along I think we're being a bit conservative on the queue.

Four.

I don't want to change that at this point, but we're.

Hopeful that the efforts some of their teams putting in may bring that up sooner but.

We don't want to commit to that at this point.

The investment cost to get the mill back operational is under $10 million.

So very.

Very low cost.

<unk>.

<unk>.

As part of that acquisition and.

For 200 million board feet.

Yeah.

The capacity of that mill.

So Rick as far as profitability goes.

We can guess mark.

Jumping right. If you think I'm off base, but one shift I would expect.

With trend margins would probably be.

Breakeven on a trend basis.

And then any incremental hours over one shift.

Shape.

Just based on past experiences that starts to add.

Some value.

Yeah, that's fair that's at CN for sure and then in terms of state incentives Mark we.

We don't have it quantified exactly yet, but I would say it's on the same level as the Greenfield would receive in the state.

So quite significant.

All right. That's helpful. And then I was just struck when I when I went through the M DNA that you're.

Southern lumber production.

The third quarter was only up about 24 million board feet, which.

Kind of small to me considering you added Tucson metals for most of the quarters.

Is that because of downtime or do you have kind of issues with labor and supply chain.

I'm trying to understand why the relatively small quarter to quarter gain when you had such a significant addition to capacity.

Yes for sure Marc I'll hit it rich.

Rick can jump in here.

I've missed anything but I would say there is two major factors one was the weather that.

Whether that they have to show it and I don't think we're the only ones, but in some of our regions.

Awesome competitors got hammered pretty hard in that.

Caused some disruption.

Covid deaths.

Definitely took a.

An impact on some hours.

It hasn't been.

Hi knows.

So we're still.

Kind of hand them out on some.

Shifts on that as that works through.

And then the capital deployment.

Particularly at Eden and.

And backs lease with both $2 million in Georgia.

K downtime, we had to tie and different components.

Jackson flow projects too.

Bring those projects to that.

To their completion.

So that would be the.

The top three whether COVID-19 related and then capital project upgrades.

Okay last one last one for me just Paul.

Kind of talking with some of the big.

Private timberland asset managers it it does seem that there's a little more of a pick up.

In southern log prices that is showing up in timber Mart, south or even in some of the public company reporting yet because there are some lags in there and I'd like to know if you agree with that and then also just give us a sense of you know.

How you thought about southern log prices.

As you built your southern position over the last 10 years.

I'm sure you'll you'll looked at these log prices and knew that they were quite low by historic terms. So you probably didn't underwrite a hurdle at the pricing levels, we've had over the last two.

10, or 15 years and sell but maybe you could put a little color on that.

Yes for sure Mark So we subscribe to all that benchmarking info and.

The average log cost increase.

We haven't seen that.

We're below that increase or.

We're pleased with our log supply.

Relative to.

The industry average.

But I will note that there is a couple of things.

The log prices on the coastal regions in South Carolina, and Georgia, We did see and we have seen pickups in those areas.

When you when we blend our log costs.

We are below the average increase but we do have a couple of.

Operations on the coastal <unk>.

A slight increase through competition or are wetter weather on the coast.

We're pleased with it and continues to be.

One of.

The best regions when it comes to <unk>.

Log cost and.

Just gives us it.

Confidence.

The right areas to invest.

Oh, that's probably the best I can give you an answer on that market at this point.

Alright, I'll turn it over thanks Ian.

You bet.

Again to ask a question. Please press star one on your telephone keypad.

Our next question comes from Paul Quinn from RBC capital markets. Your line is open.

Yeah, Thanks, very much good morning, guys.

Good morning, good morning.

Yeah.

You you made some significant acquisitions during COVID-19, which might have led to compromise your normal due diligence just wondering if there was any.

Surprises to the to the positive or negative that you've seen.

With the with the G. P E G P and west rushed on those.

So.

So Paul we did not compromise our due diligence at all.

We had.

His intent to focus on on that as well.

Half before and in fact, I would say that.

Improved with every deal on due diligence.

No.

The surprises have been around.

Positive surprises so.

These acquisitions were not.

Independent until when we bought the Summerville.

Operation off West rock.

Very well run.

Great infrastructure.

Being part of that company great people.

It wasn't any spending that it needed to get done.

Yeah.

For safety or other things that you sometimes have to do when you're maybe taken an independent.

Mill over safety was great people plants are great management leadership is great.

I can say the same thing for the GP mills all of the ones that we picked up have been we've been positively I wouldn't say surprised but we've just been positive.

The impact to.

Everything and again professionally run organization, great standard, great procedures and policies and Pete.

We've been able to.

Retained all key leaders.

We've integrated all of those which hasnt always been the case when youre, bringing two companies together.

Sometimes you lose good people and we're just.

Very pleased.

We've retained all of the key leaders.

They are embedded into our company and we continue to work.

Worked very closely with them and we're sharing best practices, we've picked up best practices.

Yes.

This so far has gone very well for us and that's been.

I'm very pleasant I wouldn't say surprised but benefit.

That and we're realizing it now.

Yeah.

So it's a pretty positive on the labor side. What about are you know labor has been a consistent problem in the U S. So probably other areas as well as things tighten up any any other issues on the on the labor side.

There was is that situation getting better or worse or you know.

How do you view that going forward.

Yes, Paul.

I don't think it's changed much.

Over the last while but.

We haven't had other than some COVID-19 related.

One or two people might get it and then you've got a core team of few people you might lose a shift here or there.

The normal challenges or.

Yeah.

I think us and others have it still exist.

So no material changes all of it.

I can think of larger rig compute.

Anything to add to that.

I wouldn't say internally, but externally obviously some challenges around trucking capacity.

And labor there, but.

Other than that.

Things have been going well.

Okay and then just on the you did a great job detailing.

Youre log cost inflation expectations in the U S. So just wonder what your what you're thinking about the Pacific Northwest in D C going forward.

Yeah, well the Pacific Northwest, we have seen some increases as the fire salvage.

Volume.

Starts to decrease.

But on a trend basis.

Looks good we did have obviously benefits, which is great for diversification and our geography too.

Just paid in those.

Reduced log costs in the Pacific northwest, but we're seeing them come back to trend.

BC obviously.

Stumpage is really <unk>.

Impacted.

Many people but.

But we do see as I know I said I know what you know Paul.

We see that stumpage decreasing coming into 2022 and the first quarters.

Okay and then just lastly, just on the softwood lumber file we get the rate doubling towards the end of the year here well they expectation anyways any movement on that file or you know, especially in light of the BC.

BC government's announcement on an old growth.

Hey, good morning, Paul it's Rick on that far we havent seen any movement, we'd like to see some but we haven't yet.

The timing is unknown at this point.

Alright, that's all I had best of luck guys. Thanks.

Thanks, Paul.

<unk>.

Yeah.

There is no further question at this time I would now like to turn the call over back to Mr. Ian Fillinger for closing remarks.

Thank you operator, I'd like to thank everyone for dialing in and participating in our update call. This morning, and your interest in our company.

Any further questions. Please feel free to reach out to myself, Bart or Rick at anytime.

Be safe take care and thank you again goodbye operator.

This concludes today's conference call. Thank you all for joining you may now disconnect.

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Okay.

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