Q4 2021 Interfor Corp Earnings Call
Yeah.
Good day, Thank you for standing by and welcome to the IND in therefore quarterly analyst call.
This time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
To ask a question during that session you will need to press star one on your telephone keypad if require any further assistance. Please press star zero.
I would now like to hand, the conference over to your speaker today, Mr. Ian Fillinger the floor is yours.
Thank you operator, and welcome everyone to our Q4 2021 analyst call with me today, you have Rick <unk>, our senior Vice President and Chief Financial Officer, and Bart Bender, our senior Vice President of sales and marketing.
Gender today, we'll 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 Rick will pass the call to Bart who will cover off the market.
Turning to our financial results, our Q4, adjusted EBITDA was $150 million approximately 60% higher than in Q3.
During the quarter benchmark lumber prices weaken slightly in November before increasing significantly through December .
We are executing on our strategic plan and we are generating industry, leading margins and returns on capital and I encourage you to look through the investor deck on our website.
Our improvement efforts were again balanced across the company as we made progress in all regions. Our production volumes were an all time high quarterly record, reaching over 750 million feet or production costs decreased quarter over quarter.
We continued our Capex improvement plans in every region spending $63 million in the quarter up from the previous quarter and on track and on target for the year at $177 million of which $111 million was discretionary high payback projects.
We continue to apply a very disciplined approach to our working capital by ensuring we don't build excess volume into the supply chain as we are as lean and mean as possible.
Turning to our financial capacity, we continue to have significant financial flexibility to consider several further capital deployment auctions, which Rick will cover off shortly.
We've had some questions about the BC government policy changes, so I want to provide a quick update on that front.
You'll recall on November <unk> 2021, the BC government announced their intention to work in partnership with first nations to defer harvest of up to $2 6 million hector's of old growth forests.
Representing the potential for 4 million cubic meters or over 1 billion board feet of production.
By implementing our diversification strategy and with the completion of E. Com soon we have right size, our exposure to BC with 88% of our production capacity soon to be outside of D. C.
The province has signaled their preference for companies to work directly with first nations and inter for has been doing this for years and recently completed another 210 year sale projects with bands in both the interior and coastal regions of British Columbia.
Turning to our strategic focus we continue to achieve greater returns on capital through our unrelenting focus on operation Excellence and capital deployment as.
As such I want to outline a few key initiatives that are nearing completion.
Our <unk> de Quincey mill restart in Louisiana is progressing well in fact, our first shift started on January 10th and we're expecting this mill to provide a meaningful contribution this year.
In Georgia, our largest capital project that are in Tin mill is on track and on budget.
<unk> phase is scheduled to be completed by the end of Q1. This year with the officials statewide startup date at the beginning of April we fully expect this project to set a new standard for our U S. South operations in terms of volume conversion costs and earnings <unk>.
Turning to Eastern Canada R. E. Com acquisition is going well, we are very pleased with how the integration planning is going and we expect to close on this deal within the next four to six weeks, adding.
Adding another 985 million feet to our annual capacity, bringing our company to just under 5 billion board feet of annual capacity.
Which equates to 2 billion board feet added in the last 12 months.
In summary, our returns on capital were exceptionally strong in 2021 generating a 56% return on capital employed.
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 acquisitions.
That concludes my opening remarks, 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 Q4 MD&A.
The fourth quarter signer for continuous positive operating momentum across our growing portfolio of sawmills.
<unk> and the most lumber production in our history as Ian mentioned 758 million board feet.
During the past quarter. We also made significant progress on positioning our portfolio for even greater production and earnings capacity going forward, we advanced several strategic capital projects in the South we.
<unk> the restart of our Quincy, Louisiana sawmill acquired in Q3, and we reached agreement to acquire E com moving us into a new operating region with attractive fundamentals that provides enhanced growth potential.
These positives to build on the other initiatives, we have discussed with you throughout the year that have transformed our company.
Set us up to thrive and create value going forward throughout market cycles.
Taken together, we have repositioned to enter for as a major producer in the lumber industry.
And this repositioning is not simply about pure production growth from a foundation of capital discipline, which has delivered top tier returns on capital.
This disciplined and balanced approach to capital allocation, we will continue to guide our decision making.
Combined with our core and ongoing focus on operational excellence.
From a financial perspective, Interflora generated adjusted EBITDA of $150 million in the fourth quarter, representing a margin of on sales of 22%.
Profitability benefited from stronger operating performance and quickly rising lumber prices in the second half of this quarter, partly offset by several most of the external factors to our business, including elevated stumpage rates in BC and increase in duty rates and ongoing inflationary pressures.
In addition, weather and flooding events had some impact on shipments from our western operations.
Overall, we shipped 95% of our production in the fourth quarter, but we're now seeing improved logistics availability in Q1.
In terms of cash flow, we generated $133 million from operations of this $47 million is reflected in a buildup of working capital mostly in the form of lumber and seasonal log inventories, while $63 million was reinvested into capital projects as we continue optimizing our portfolio and enhancing its earnings.
Potential.
We ended the quarter with a very strong balance sheet and ample liquidity with cash on hand of $539 million and over $1 billion of available liquidity.
This pisses positions us very well financially to close on the E Com acquisition in the near term and.
And to continue executing on our strategic initiatives, including consideration of further growth opportunities.
Within our criteria.
Looking ahead to our capital allocation for 2022, we've tried to take the same balanced disciplined and growth oriented approach as we did in 2021.
Third on maintaining a conservative balance sheet.
We now expect to spend in the range of $250 million to $275 million on capital improvements.
In the year with about two thirds of this representing discretionary investments to continue growing and optimizing our existing platform.
We will also look to buy back shares under our normal course issuer bid win and therefore, our share price is attractive relative to underlying intrinsic value.
To wrap up in 2021, and therefore are delivered both tremendous operating and financial results across all of its regions.
And looking ahead, we are very well positioned to continue our momentum our balance sheet is strong and provides financial flexibility to invest in our business and pursue growth.
We're adding significant near term growth and diversification with the expected closing of the E Comm acquisition this quarter.
In our growing track record of top tier returns on capital demonstrates that our team and our approach are delivering results that are repeatable and translate into growing value for shareholders.
That concludes my remarks, I'll now hand, the call over to Bart.
Thanks, Rick.
Good morning, everyone I'll make a few comments on our local market.
Strengthen the lumber markets increased as we progressed through Q4 2021 into Q1 2022 from a pricing perspective the patterns. We're seeing so far this year are very similar to how we entered Q1 last year.
We are getting there is slightly different however, clearly we have strong all of our markets as we move towards 2022 building season.
The fundamentals supporting this market remain unchanged.
Home construction, both single and multifamily continued to grow.
Housing inventories, whether new or used remained low.
Builder confidence is high.
This whole balance sheets are strong.
<unk> stock average age remains greater than 40 years.
Tailwind for repair and remodel lumber markets.
Rising home equity is supporting continued investment in their homes.
Millennial demographics or the increased entry into housing markets and of course, historically low interest rates are holding in the near term.
Supply chain.
Jane challenges remain across North America, some regions more challenging than others. She.
Shifting from British Columbia, whether overseas within the province, or south into the USA has been exceptionally difficult.
Whether COVID-19 activity, new regulations on crossing borders, but even greater strength and an already fragile supply chain network.
The work that's been done by our logistics employees, our shipping partners in our operations to keep lumber moving it was nothing short of exceptional.
We expect this to normalize in Q1 2022.
Overall, we're very encouraged with what we see.
As we enter Q1, and we look for that momentum to make 2020 to another good year.
With that I'll pass back to you.
Okay. Thanks Bart.
Operator, we're ready to take analyst calls now.
As a reminder to ask a question you will need to Bash star one on your telephone keypad again that is star one on your telephone keypad.
You have your first question coming from the line of Javier.
From CIBC capital markets. Your line is now open.
Hi, good morning.
I wanted to get your thoughts on.
What extent some of the omicron related absenteeism has affected.
The industry at large.
If you have any maybe different experience.
Sure.
Thanks Samir.
I would say a couple of weeks ago.
It was.
Probably at the peak within the numbers that we track for both Covid.
Positive cases or exposure. So we had a significant number of employees.
It really peaked.
Guess, amir, but probably about two weeks ago 10 days ago.
Kind of when we were doing the call with you and then over the last couple of weeks, we've seen that drop by about a third.
For our internal numbers, so it's definitely.
Impacted us through December .
Better part of January most of January , but we're seeing some stabilization now.
From a production standpoint, I would say somewhere in the neighborhood of maybe 5% impact.
Little bit more on labor cost, just because of employees having to fill in or.
Run equipment that normally hadn't but the teams on the frontline and have done a great job and so nothing.
Significantly material, but it looks like it's it's.
Stabilizing now and dropping slightly so very positive from that point.
Great. Thanks, that's helpful. And then I was just curious where across the business where are you seeing the most cost inflation and is freight essentially always the pass through of Cros.
How you sell lumber in the different markets.
Yes for sure I'll take the first part and then headed to Bart on the freight side, but yes Amir.
I mean, we're seeing it on pretty much all of the consumable materials that we use everyday in the mills.
And.
It's it's significant but.
From watching what how we're doing within the peer group I would say.
Very competitive a controlling lowest cost.
And.
From a capital standpoint.
Projects.
One of the largest costs, our steel roughly 30% of projects within our industry or manufacturing with steel or the cost is in.
So we try to mitigate that by.
Lead times in planning and those type of things and then also I would say that the labor side of it particularly in the U S.
There's I believe there's going to be cost pressures on the wage side as we continue to.
Implement our recruitment.
Retaining strategy for employees, it's just.
Something that I don't think any of us can avoid.
But at this point our cost Inflations.
And it might get a little bit wrong, but are under 10% in total.
Sure.
The south I cant remember the northwest or BC.
Generally we're below that threshold, which I think is.
Probably really well within our peer group as far as the level goes.
Okay. Thanks. Thanks, that's helpful and just the last question I had for Rick.
The $2 50 to $2 75 billion Capex guidance for the year.
Are there any larger projects planned at the conference this year.
Hi, good morning.
Not within that number we've got about $15 million of Capex for general maintenance spend as we evaluate the platform.
Once we take ownership.
We'll see where the projects are.
<unk> fits in.
Drive the most value going forward, but its too early to tell on that front.
But but fair Rick Amir, we don't we don't see any major strategic projects coming at us from the.
E Com.
Acquisition.
Okay, great. Thanks, that's all I had I'll turn it over.
Your next question comes from the line of Mark Wilde from Bank of Montreal. Your line is now open.
Thanks, Good morning, Ann Good morning, Rick Bart.
Wanted to first make two observations first of all I do want to complement the whole team on sort of how you've managed capital over the last couple of years.
<unk> been impressed and the second thing I want to make the observation that I think once <unk> closes.
And that you will be.
Essentially at par with with Weyerhaeuser in terms of lumber capacity, which is something none of us would have imagined.
Even a decade ago, so but my question is.
First of all I wanted to talk just a little more about logistics and we've had some people.
Down in the U S talking about like railcar availability.
Bart any any color you can give us around both kind of rail and trucking and whether you've seen any relative improvement recently.
Sure Mark.
I think everyone knows on the logistics side, it's been somewhat difficult I think battling weather COVID-19 restrictions and all of those things so depending on the region you see fluctuations in capacity, but.
I always referred to it as clunky.
We can get the capacity, sometimes it doesn't come exactly when you want it but it eventually comes.
So in particular in the south.
That's what your question was.
We've had great capacity on the truck side.
Frankly, I mean, it's we've got we've been working hard on our partnerships from that standpoint, and we've managed that make sure that we've got consistent capacity.
For that portion of our sales on the rail side, it's less I mean, it's just a much smaller percentage of the volume that goes by rail and working with our partners down there, it's not perfect, but we're managing to get what we need eventually.
And.
It seems like we will see improvements and then we will see regression to that and then we will see improvements and I think overall we're.
Figuring out.
How to get out to market.
And service our customers appropriately so we're getting through.
Okay.
Bart any sense that you can give us just in terms of your order files kind of region by region.
Well they are fairly consistent across the region.
We tend to <unk>.
Especially when we get into these types of markets, we tend to seek an order file.
And I can tell you're going into.
At the end of January we were and that sort of three to four week range across the platform.
So we're very very happy with the participation that we have seen from our.
Our distribution partners and we think we've got ourselves in a very good position as we move towards that.
Green building season.
Okay.
Wanted to turn next to just to log costs.
Yesterday, Rayonier was pretty upbeat about their solid pricing in the south in the fourth quarter I know you know.
I think for your Sanville, some form of ran Arizona mill, but I assume that youre buying some logs from for brand ear. So maybe you could just talk with us a bit about what youre seeing in the southern market. What you might expect over the next two or three years and also just an update on what youre seeing in the northwest D. C. Over the next couple of quarters in terms of log pricing.
Yes for sure Mark so.
<unk> had.
The big run up with the stumpage.
Numbers this last quarter, that's come down pretty dramatically. So we're seeing a very nice reduction here. Although we expect later this year.
I will go back up but.
It's double digit type drops in percentage on the.
The BC the northwest is.
I would say a much more stable.
Had the advantage of some lower log costs in the northwest with the fires that were in Oregon, and Washington and the.
State governments that wanted to get that fiber out.
And so us and others benefited from that now back to traditional levels. So.
That advantage has kind of gone away I would say, but but still stable which is great.
We had a run up of log costs in the later part of 2021.
I would say Rick I can't remember linked to a few dollars per ton something like that.
Mark.
Percentage it might sound like a lot, but I mean, the lot costs are very attractive as you well know down there so.
But we are seeing now that those log costs are starting to come down again.
We just spent a couple of days together as a senior team and the thinking on the south log cost was really weather related issues.
Drove that up and also some COVID-19 impact along with.
Some start ups from some of our competitors.
But we are seeing that south log costs are now.
We're predicting that over the next.
Several months it will come back to its traditional level from where it has been but we did see definitely.
A few dollars put on the log cost in the last part of last year, but we do anticipate that coming back down shortly.
Okay, Alright, and then is it also possible to get some sense with the newer southern sawmill summer Summerville, the GP mills and the Quincy.
Where the production rates are right now and sort of how you might expect that to kind of cadence as we move through the year.
Yes, so the production rates are very similar to.
The GP rates that we were running so well.
We're actually pleased with that Mark because often as you know when we do acquisitions and you come in as a new owner and you implement.
No changes what have you often it takes several months.
The adjustments being made before before the levels are back but.
But we haven't missed a beat the team down there just integrated really well.
I can't remember the exact capacity numbers of those mills.
At this point, Mark, but I would say that we've had no setback.
Whatsoever.
In some cases, we're trending.
Very nicely.
With or above where GP was running those mills.
Okay, Alright, and then last one for me and I'm just curious.
You read the whole management team.
We've come through probably the most extraordinary lumber market I've ever seen.
It's kind of ongoing but.
What are you watching for in terms of signals.
That might suggest to you kind of a need to pull back from a cyclical perspective at all.
Well I think.
The macro economy, I mean, we're always like everyone watching that.
The fundamentals on the demand side.
Big box store takeaway repair remodel market.
The demand or the.
The supply side anticipation of.
Potential volume coming out of British Columbia.
The order file.
Price in that order file.
And then really the daily reports that we get from Art's team in every region.
It's kind of neat for us will be need for us to have not only lines of sight and.
No.
Washington, Oregon, BC, but soon to be Ontario, and Quebec, and really getting that full.
North American continent coverage and data on.
Which markets and how they're performing and what the issues are both positively and negatively but I would say.
Those would be the ones that I think I'd look at the housing starts permits obviously all of that all of that data is.
In our model and we use that every week.
Evaluate our decisions and just check in but Rick anything else that you'd add on that I think you've captured a wellington.
Okay that sounds good I appreciate it and Rick and I'll turn it over.
Thanks Bart.
Next question is from the line of Sean Stewart from TD Securities. Please go ahead.
Thanks, Good morning, everyone.
Just one question for me.
E Comm I appreciate you'll close that acquisition acquisition shortly it'll be.
<unk> integration and Youll see where the dust settles with respect to this market and what your balance sheet looks like but.
As you guys are.
Still growth focused can.
Can you give us a sense of what you see the eastern Canadian M&A.
M&A pipeline looking like versus the other regions.
Do you have a footprint in.
How does that compare and contrast, do you see further opportunity to expand in Ontario, and Quebec.
Yes, sure Sean So our strategy.
As beyond British Columbia So.
Are we are active in all the regions.
We're seeking.
Good opportunities that meet the thresholds are met.
Meet our expectations.
I would say that.
Whether its eastern Canada, or the others it really well.
Taking every opportunity to look at it a growth opportunity the same way.
A lot of the same.
Criteria and.
I think that our job number one right now is to integrate E com.
And thats going very very well.
It's a professionally run organization.
The values in E comm lineup, very well with with inner for it.
And the team I believe is very excited to be owned by <unk>.
A company like into for <unk>.
<unk> is a private equity out of out of New York and nothing wrong with that at all but for the employee on the frontline or the mill manager of the sales.
Person being part of a.
Company, that's got a long future is great and we're seeing unbelievable enthusiasm coming from.
Everyone in E Com and we're just.
Pretty pumped on that but.
So there are opportunities out in every region.
And we're just.
Quietly looking at anything that makes sense.
We say no more than we say, yes, I'll tell you that like there's always something for sale.
In North America in the lumber business, but.
Very few.
Get beyond just each one but and.
And that includes Ontario, Quebec and other areas.
Canada.
Okay.
And I think the.
The store, you're still trying to tell as you lead with lumber and Thats the focus youre getting an I joist plant with.
With E com.
Any broader thoughts on engineered wood being as incremental interest going forward.
For the company.
Yes, Sean I mean.
We had our strategic plan.
Review in November as a team.
For the last year, one of the projects that that Bart was commissioned with was to evaluate all the different engineered wood products.
And come back to us with a view of what could fit what doesn't reasons why so we do have a view on engineered wood products thats been well researched.
And as we look to grow.
The engineered wood product I would say we're interested in but.
We do really feel that.
Lumbers.
So all of our company.
To the extent that we acquire.
Non lumber component it would have to.
It would have to come with some.
Lumber associated businesses.
It's just what we do and what drives our results and it kind of who we are and we know how to run mills and we know how to deploy capital in those mills.
We need to stay true to who we are and.
But at the same time.
And I joist plants are a plywood plant or <unk>.
Or other.
<unk> product lines.
We'll definitely look at it.
But it does have to.
Check the lumber box for us.
Move it up to the top tier.
Yes.
Projects, we're looking at.
Thanks for that detail, that's all I have.
Thanks, Sean.
Again to ask a question. Please press star one on your telephone keypad.
You don't have any more questions at this time I will turn the call back over to Oh, sorry, we have a question coming from the line of.
David John but again she he withdrawn his question so I'll turn the call Albert back to you Ms. Mr. Phil Ninja.
Okay. Thank you operator.
Closing, we're focused on maintaining the health safety and wellbeing of our employees, we continue to drive cost reductions across our company and we're matching our production rates with our order files.
I'd like to thank you for dialing in and participating in our update call. This morning, and your interest in our company and if you have any questions or follow up.
Please reach out to myself or Rick or Bart at any time. Thank you operator that will conclude the call.
That concludes today's conference call. Thank you all for participating you may now disconnect.
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