Q2 2022 Interfor Corp Earnings Call
Good morning ladies and gentlemen and welcome to the Inter4 quarterly analyst conference call. At this time all lines are in listen only mode.
Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Friday, August 5, 2022. I would now like to turn the conference over to Ian Fillinger. Please go ahead.
Thank you operator and good morning and welcome to everybody listening in on our call and welcome to our Q2 2022 analyst call. Before we get into the report out, I would like to welcome Tom Temple to our board of directors. Tom is a seasoned industry executive and we look forward to working with Tom over the years ahead.
Today with me you have Rick Pazabon, our Senior Vice President and Chief Financial Officer, and Bart Bender, our Senior Vice President of Sales and Marketing. 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 Rick will pass the call to Bart to cover off the markets.
Turning to our financial results, our Q2 adjusted EBITDA was 429 million.
We are continuing to execute on our strategic plan and we are generating industry-leading lumber margins in returns on capital. I encourage you to look through the investor deck on our website and look at these metrics.
Our improvement efforts, again, were about balance across the company as we made progress in all regions. For the fifth consecutive quarter, our production volumes were again at an all time high, largely due to the production quarter of our Eastern Canadian platform, and the rampups of our mills in Daquinti, Louisiana, and our mill in Edenton, Georgia.
We are proactively reducing inventory levels throughout the quarter by managing lumber production, and we achieved improvements in logistics and capacity availability. This combined with seasonal impacts resulted in a significant reduction in working capital in the quarter.
Our SG&A expense decreased quarter over quarter as economies of scale are being realized from our growth through acquisitions and our capital investments.
despite persistent inflationary pressures.
We continue with our CAPEX improvement plans in every region spending $65 million in the quarter up from the previous quarter.
Turning to our financial capacity, we continue to have significant financial flexibility to consider several further capital deployment options which Rick will cover off shortly, including our 100 million SIB buyback that we announced last week.
I would also like to provide an update on how the integration is progressing with our Canadian Eastern platform.
Since the acquisition date in February this year, the East region has contributed a robust 206 million of EBITDA in the first 4.5 months, or approximately 42% of the 490 million purchase price.
Our key focus areas in this region are to enhance our historical operating performance, identify further opportunities for operational improvements and synergy realization, and assess potential long-term strategic investments.
Turning to our strategic focus, we continue achieving greater returns on capital through our unrelenting focus on operational excellence and our balanced and situational specific approach to capital allocation. As such, I want to outline a few key initiatives.
We continue to optimize our portfolio, which included the sale of our Acord mill on the coast of British Columbia. Our De Quinci mill in Louisiana continues to progress well, and we have now fully moved to a two-shift operation several months ahead of schedule.
In Georgia, our largest capital project at our Etonton Mill is now complete with very solid production, great outturn and cost-permanual formages thus far.
In summary, our balance sheet is in great shape, our returns on capital, ROKI, are again exceptionally strong in Q2 at 53% and year-to-date at 69%.
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. We continue to work hard on our capital allocation discipline to ensure the best returns for our shareholders. We continue to work hard on our capital allocation discipline to ensure the best returns for our shareholders. We continue to work hard on our capital allocation discipline.
That concludes my opening remarks and I'll now hand the call over to Rick.
Thank you, Ian and good morning.
First off, I'll refer you to cautionary language regarding forward-looking information in our Q2 MD&A.
Interference second quarter was successful in many respects. Most notably, we continued to capitalize on our significantly increased scale and capabilities to produce and ship the most lumber in our history. To produce and ship the most lumber in our history.
We further enhance the competitive positioning of our somal portfolio.
including ramping up our frequency sawmill to two shifts and completing the full rebuild of our eastern sawmill.
And we also extended our track record of generating the best returns on capital in our industry.
Through our continued focus on operational excellence and discipline capital allocation.
Our capital allocation in the quarter was balanced.
and driven by our focus on maximizing shareholder value over the long term.
We continue to invest in significant capital upgrades to our sawmill portfolio in line with our multi-year plans.
and repurchased over 1 million Interforce shares at an attractive valuation.
to complete our normal course issue a bit.
We continue to see significant value in inter-force shares. And last week announced our intention to commence a substantial issue a bid to purchase up to $100 million of inter-force shares within a tender price range of $29 to $34 per share.
Assuming successful completion of this bid at $29 per share, interfort would have then bought back and canceled over 24% of its shares within the past two years.
Over the same span, we've grown our lumber production capacity by over 60%.
and added significant diversification with our growth into eastern Canada.
In terms of financial results, Interfore generated just a DBITDA of $429 million in the second quarter.
These exceptional earnings include $116 million from our recently acquired Eastern Canadian operations.
which is net of $17 million of non-recurring purchase accounting expense.
Excluding this, total adjusted EBITDA would have been $446 million in the quarter.
Earnings benefited from selling a record 1.1 billion board sheet of lumber and historically strong lumber prices
while general cost inflation continued to be a headwind.
Casual from operations was $280 million, with another $176 million generated from working capital reductions. Casual from operations was $280 million, with an increasing cost be heard if you're from the
for a total of over $7 per share.
The working capital reduction was driven by the collection of trade receivables, improved lumber shipment rates, and seasonal reductions in log inventories.
Our current lumber inventory level is now within our target range, and we will continue to adapt our production rates to match demand it's necessary going forward.
Regarding capital allocation in the quarter, we invested $65 million into capital projects and returned $33 million to shareholders through buybacks.
We ended the quarter with our balance sheet and then we ended up with a net debt to invest a capital position of 5%.
which is at the lower bound of our target leverage range.
This leaves us with ample liquidity to continue pursuing our strategic plans.
which includes spending in the range of $275 to $300 million on capital improvements for the full year 2022, which is up about $25 million over prior guidance.
We'll also continue to be disciplined in looking for accretive lumber acquisition opportunities.
To wrap up, I'll highlight two points. First,
Our business is well positioned, operationally and financially, to succeed through ongoing market volatility. And second, our record setting financial results in Q2 have demonstrated the benefits of our strategic growth and portfolio optimization.
including generating the best returns on capital in our sector.
That concludes my remarks. I'm now turning the call over to Bart. I'm now turning the call over to Bart.
Okay, thank you, Rick, and good morning, everyone. I'll provide an outlook on lumber markets through Q3 and into Q4. First, I'll start off with logistics. Our ability to service our customers has been challenging as equipment availability and labor continues to impact logistics capacity. Overall, I'm pleased with how our team mitigated the situation and with the progress we made through Q2, into Q3. Our inventories have essentially normalized and the service levels from our carrier partners has improved.
It's not perfect yet, but it's better in all of our operating regions. With respect to end market inventories, our understanding is that levels are holding at below a store of the lows and should be considered minimal.
In terms of the markets, much like we discussed last quarter, they're continuing to be some uncertainties that is pushing our customer base to be cautious in their procurement strategy. Current demand levels remain quite good. The uncertainty dislies with what might be kind of. Certainly, the overall fundamentals in the market continue to support medium-term solid demand for lumber, however, the impacts of affordability weigh on expectations. In particular, new home construction is facing the affordability issues given house prices and interest rates.
seem to slow demand. However, today I can tell you our sales through the segment of the market are encouraging.
In the industrial and non-residential markets, they're essentially holding and continue to be steady.
Q2 marks our first full quarter with IJoyce as a part of our product offering. Our distributors continue to support our production levels and I'm encouraged by the resilience of this product in the market which is supported by high quality standards and excellent customer service.
Overall, our outlook for the balance of the year is for less volatility and lumber prices at higher than historical levels.
So with that, I'll stop there and pass it back over to you. And okay, thanks Bart and Rick. Operator, we're open to take questions from our analysts now. Operator, we're open to take questions from our analysts now.
Thank you ladies and gentlemen we will now begin the question and answer session. Should you have a question? Please press star followed by one on your touch-tone phone.
You will hear a three-tone prompt acknowledging a request and your questions will be pulled and the order they are received.
Should you wish to decline from the polling process, please press star followed by 2.
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Your first question comes from Sean Stewart, TD Securities. Sean, please go ahead.
Sean, your line is open.
Sorry guys, a couple of questions. Bart, I'll start with markets and you noted that your inventories at the middle level of normalized, you
highlighted a sense that inventories at the buyer level are.
or low, and I'm just hoping you can square that with
The pressure we're seeing on prices right now, it feels like we're below cash costs for higher cost producers in BC at this point.
it feels like we're below cash costs for higher costs producers in BC at this point.
How are you squaring good takeaway from repair and remodeling and what seems like tight inventories from your perspective with ongoing pressure on prices? Is this just a seasonal thing or is there more to it than that?
I think there's probably a bit more to it than that, Sean. You know, when you think about the uncertainties that are ahead, people look at their inventories and they base what they feel is acceptable based on their consumption rates. And if they're expecting those consumption rates to fall, they'll adjust accordingly. And I really feel that that's part of this. And so people are prepared to...
to take their average inventory levels lower in anticipation of a future decline. And I think that a lot of the interests that we're getting from our customers is their particular on specification and they're very particular on shipment. Shipment is a big part of it. And that tells us that they don't have the inventories. They need the wood fairly quickly to meet the demand that they're...
continuing to see in the marketplace. And so I think and tell those expectations or so that those uncertainties are more known, we're just gonna see a very cautious tone from our customer base.
Okay, thanks for that detail. A question for Ian and or Rick.
I want to sort of wrap my head around the next leg of...
discretionary cap-back. This is obviously the easiest spending year and I think the indication in your...
Your slide deck is that CAPEX should moderate in 2023.
Can you give us a better idea of what the next round of CapEx looks like for the company? Is it going to stay as focused in the US South? Or is it more spread out? How should we think about that?
Sean Toe in here. Thanks for the question. We're...
you know, have a great view of obviously our South Pacific Northwest in Washington and Oregon and BC Mills. What we're working on pretty hard is the Eastern Canadian platform looking at what strategic projects and discretionary projects could look like over the coming years.
I think to be able to answer that with a bit more clarity is probably a few months away as we go through our normal course.
you know, planning exercises on fiber and, you know, synergies, etc. like that. So we're, you know, we're kind of, you know, November , January-ish, probably be able to provide better context on that, but I can tell you that there are several operations that are on our radar that we're working on currently with different levels of business cases and it's just a little early for us, but
the guidance that's in the south that we've provided over the last year or so is still accurate and solid and it's just the new platform that we've got in eastern Canada that we're spending some time on now.
And the bump to CapEx this year, that's strictly capital cost inflation for these types of projects, where is there any pull forward of?
The project is the act vision for 2023.
It's actually the first point you brought up is accurate. The second would be that, you know, after acquiring the Eastern Canadian platform, there was some, you know, capital spending that we did pretty immediately, and some of it's been implemented and some of it will be implemented by the end of the year. So I would say the majority of that is inflation and new projects that were identified over the last.
over the last couple of years. We've really been in a very unusual environment, and I think you've actually, from a capital allocation standpoint, you've managed it very well. So with that said, I wonder just if you could give us some sense of where you think cash cost is sitting right now in B.C. and how that will change over the next couple of quarters as we see stumpage costs going down.
Yeah, I don't know if we could share the exact number that we have in mind, but I think that you know several
you'll
The points of you are out there, but I don't know, Rick, if you have anything else to add. It definitely is that as you've clearly identified mark, it is the bench mark down. The C is the highest casting. The C is the highest casting.
in these situations, that's where we think the downtime will come.
not necessarily with us as you well know or.
three operations in British Columbia are not. In the same fiber basket as some of our competitors. Until we enjoy.
the ability to cut different species and stay off the random length, you know, price deck, uh, a fair amount with Adam's Lake Cascar and Grand Forks, but price deck, uh, a fair amount with Adam's Lake Cascar and Grand Forks, but
Rick, anything else data?
Let's say maybe it's important to look at where SPF prices have bottomed out recently.
In terms of what cash costs might do over the next couple quarters, if you look at stumpage rates in the BC interior, there are about $60 per cubic meter in Q2. They're going up to about $90 in the current quarter, and then in Q4 down to about $50 per cubic meter. And then in Q4 down to about $50 per cubic meter.
So that will drive some reduction in cost.
throughout the rest of this year.
Okay, all right, that's helpful Rick. And then can you also just help us with kind of what's going on with the log costs for you in the Northwest and in the US South? It does seem like in the South that we have finally hit an inflection point over the last probably six or seven quarters. I just be curious about what you're seeing in terms of log pressure there and again down into Northwest.
Yeah, I mean, different dynamics starting with the south, Mark. In our platform there, one thing we do enjoy in some of our areas is the
you know, some proximity advantages between operations. So, you know, when log costs tend to go up in the south, our opinion is largely it's through some upset conditions, whether it's weather events, you know...
that causes shortages at pulp mills or competing mills and then there's a short-term bid, if you will, or bidding war that goes up for a few weeks.
And so where we have...
cluster of mills, we're able to mitigate that and so in some areas in the south it's been pretty flat and in some cases a little bit down. In other cases, you know, it's gone up and you know, when it does go up we sense that it's not a fundamental shift, it's more of a situational or an upset condition that you know after a few weeks, you know, works itself out. So I think we're in pretty good balance.
And we just have puts and takes but there's nothing material that that's on our radar in the south.
Pacific Northwest is actually
you know, I would say balanced also. You know, we actually saw a lot of costs decrease.
this past quarter in the Pacific Northwest.
which was great to see. And we don't see any major swings.
up or down coming at us and I think that log cost decrease was around 3% or something if I've got that right in the Pacific Northwest. So fairly imbalanced.
I think the growth that we've done is both in the Pacific Northwest with philomath. If you look down the coast of Washington, Oregon, our mills and the bog circles and competition circles are... Potcak
you know, very strategically lined up in the Northwest and that's helping us from Port Angeles all the way down to Fullmouth.
Okay, turning to the sale of the perspective sale of the harvest rights.
I'm sitting out here in suburban New Jersey. It's really why you can help me to frame perspective values when you sell harvest rights and the BC coast.
Yeah, I'll take a shot of this and then if, you know, Ripper, I'll have anything else to add but the... I'm sure you're worried about anything else to add but the...
Yeah, I'm glad you actually asked this question, Mark. You obviously picked that up and that's great. So just the back story is, you know, ACORN was our last coastal manufacturing operation. And, you know, with that now off or out of our company, we're assessing a number of strategic alternatives for the coastal business, including potential asset and tenure sales.
You know, I would add that you know any dispositions are subject to.
you know working with first nations and consent from the BC government. And we've been advancing and have advanced talks with both of those stakeholders and it's going very positively. and it's going very positively.
From a timing perspective, you know, we would think between 12 and 18 months
for the process to unfold.
And from a value, I think to your questions, it's a little bit hard for us to provide reliable guidance on a spot.
the disposition of the entire coast, 10 years is about 1.6.
million cubic meters and we would expect that to be significant in material.
And then for context.
our coastal assets.
If I've got this right, at book value, or at the end of Q2, around 94 million.
So we'll continue to work on this. We think there's great value for our shareholders and we'll obviously announce anything significant at the right time.
Okay, last question for me, I mean, it's very impressive results coming out of Eastern Canada. I'm just curious. I'm just curious.
If you could help us think about the contribution from that pie Joyce business because
I mean, I Joyce prices the last six quarters have moved like I've never seen a move in my entire career. So I'm just curious about what type of benefit you're garnering from that tightening in the I Joyce market.
Pretty strong mark.
A lot. Maybe leaving it that but we're very pleased with...
the contribution from our I.J.O.S. plant.
You know, we control a lot of the input stock through MSR. You know, a great outturns from our internal operations in Ontario and Quebec. We have an advantage, I believe on that side of it, but we're very pleased with with Susanne Marie's contribution.
Any way to quantify just overall, like is it 10% is it 20% is it 30% of kind of the earning stream right now, and just looking for kind of a rough order of magnitude.
Yeah, I'd be a little hesitant to share that in this form, Mark, but I can say that we were very pleased with his contribution.
Okay, all right, well, we'll leave this at that. Thanks very much, Alternate Hour.
Okay, thank you, Mark. Thank you. Your next question comes from Hamir Patel, CIBC Capital Markets. Hamir, please go ahead.
I, uh, good morning.
Ian, there may be some pulp mills that come up for sale in Ontario. Just given some of the co-dependency you have in Eastern Canada, is in, of course, starting to move beyond the lead with lumber approach to also potentially include pulp assets into the mix of potential targets.
No, that's not our priority. The lead with lumber is still core to our company. When we do say that...
Businesses like say the eye joist that come with significant lumber volume were very interested in but but we really are focused in on growth and lumber and having said that, you know, I can never say never but you know
We like to look at assets that come with significant lumber capacity. And if there's a side non-core business, you know, we'll look at it and we'll have a plan for it one way or the other. But, uh...
Yeah, I would say, him here that, you know, we were a court of lumber.
Fair enough thanks, thanks Ian, that's helpful. And Rick, I just follow up on the BC coastal logging operations. Are you able to say how much EBITDA is associated with that business?
No, I think similar to the iJoyce, we don't disclose that level of information here. It's a pretty steady business, I'll say.
Okay, fair enough. That's all I had. I'll turn it over.
Thank you ladies and gentlemen as a reminder should you have a question please press star one on your touch tone phone Your next question comes from Paul Quinn RBC Capitol markets Paul please go ahead
Yeah, thanks, Murray guys. Just question, operating rates going forward, would you expect any change or should be expected? USO is kind of ran, I guess, my number is 81% in Q2. Should that increase to, you know, kind of 90% over the next three to four quarters. Kind of 90% over the next three to four quarters.
Yeah I would think so. Paul, Ian here, you know as we continue to ramp up on DeQuincy and Eatonton and there's several other projects, Paul, that you know across the company that have had you know some you know
minimal amounts of downtime for implementing capital and you know, you have Friday here and a Monday here and What have you but a lot of those are
You know coming to an end here in the next couple of quarters Having said that, you know, we're also planning you know future strategic capital for you know 20 23 right up 20 27 but
I see the south as...
You know, I continue to improve on the run rate there.
Okay, and then uh,
I guess BC, you're running the entire assets at around 80%. We can expect that. And I'm very happy, OK? You got inspiring about how we play pues and how to correct three actions at some setting. In that category, we can change texts in a way that your bring you back up to, things that you've said earlier, a specific considerable impact upon. The Utah ?? as well. you
Who won?
Yeah, I would think that we had a bit of downtime at Calcivar for the planer rebuild that we're doing, but that's coming to an end here in the next month or so. And then the other impacts have really been around managing our inventory levels in a falling market.
So we'll continue to monitor that. There may be some, but we don't see any material events happening in the interior of British Columbia for us.
Okay, and then when I do the math on Eastern Canada, that's sort of the 116 and you get kind of, you know, nets out to 550 contribution per thousand, you know, which is, if I look at the rest of your operations, less Eastern Canada, it's quite a bit higher. What's the special about Eastern Canada this quarter and is it something that's sustainable going forward? Rex-
Yeah, I mean it's um...
As we went through the process, these are what we're expecting. And I would say that we see improvements in eastern Canada that we're working on minor CAPEX or non-CAPEX improvements, whether that's in grade out turns or production. So we do see actually improved performance coming from the
the operations in eastern Canada. We had downtime at earfalls as an example for several weeks from a road that washed out. I mean highway that's down behind us. I mean highway that's down behind us.
And there's been a few other, you know, weather-related upset conditions, but the teams have done a great job. They did have an outstanding quarter for interfor. And as expected when we did our due diligence, they're performing exactly how we expected them to. And Paul, I'll just add...
The $116 million will include the IJoyce results.
So I'm not going to write your fact about something for that. Let's get into your number. Let's get into your number.
Yeah, it's still, even if I back out something for that, I mean, it still seems like it's above the average of the rent. Yeah, another thing to look at, Spark here. Another thing to consider for the East is the proximity of those assets to the markets.
very strategic locations to the GTA and also to the Great Lakes markets. So I think that that that also helps the top line of that equation.
Alrighty, great, thanks. That's all I had. Best of luck.
Thank you. Your next question comes from Mark Wildey, BMO. Mark, please go ahead.
Yeah, I just wanted to kind of follow up a little bit. Get the...
You know, some part on capital allocation, particular around the SIDB.
Sorry, Marke, you cut out there.
Yeah, Ian, I just wondered if you'd like to share any more thoughts about capital allocation and the SIB.
For sure, Mark, the SIB is a continuation of the balanced approach we've been taking over last couple of years. For sure, Mark, the SIB is a continuation of the balanced approach we've been taking over
As I mentioned in my remarks, we see continued value in our share price, and when we look at our balance sheet, our share price, our share price, our share price, our share price,
Our leverage range is like I said at the lower end of our target range and we saw an opportunity to buy back shares at an attractive price and still remain with a very strong balance sheet at the end of it.
That's really the summary of the thinking there.
Okay, and then Ian, I wonder just finally, only the incremental thoughts, since we picked up the Eastern Canadian assets, including the shares in Green first, just a bad sort of opportunities across the Eastern Canada, and the Eastern Canadian lumber business in my career has always been sort of a poor stepchild to, you know, bunch of the rest of the North American lumber industry.
Yeah, we actually don't see it that way at all.
You know, I think that when you look at what's happening in British Columbia and...
and in the other timber producing region in the south.
You'll have a competition and you know, green fields being announced.
etc etc. Our strategy was...
you know, to diversify and reduce risk.
And we're very pleased with the governments of Quebec and Ontario, their approach to business.
Their support for our industry and their support for Interfor has been...
top shelf, so we see that as...
You know, a very key component to interfort.
Obviously today and going forward and we will continue to be as strong and competitive as we can in that region and spend the appropriate time and money to make sure that we're doing that.
And I'm just going forward. Do you think that we should anticipate a different relationship between pricing on these regional lumber grades? Because it is striking that the curve has moved a lot over the last 10 or 15 years. BC's gone from being kind of low cost to high cost. Is this changed the relative price of, let's say, STF lumber relative that kind of...
mills are not located in BC, we think it could get a little rough and that SPF premium....
that had been enjoyed traditionally, I think it's just gonna continue to be there. And...
What are the key?
You know, reasons for going to the East for us was to secure...
quite a bit more of that SPF.
preferred species for the foreseeable future. And so we do see.
you know, benefit of having SPF.
volume outside of British Columbia.
Okay, sounds good. How will I turn it over? Good luck in the second half of the year.
Thanks, Mark. Thank you. Thank you. There are no further questions at this time. I will now turn it back for closing remarks.
Okay, thank you operator just in closing. We are focused on maintaining the health and safety and well-being of our employees. We are focused on maintaining the health and safety and well-being of our employees.
I hope you heard that we continue to drive cost reductions across our company. We are matching production rates and order files.
and continuing with our balanced approach to capital allocation.
Like you think thank everybody for dialing in and participating in our call this morning and your interest in our company
If you have any further questions at all, please feel free to reach out to Rick, Bart, or myself at any time.
Thanks everyone, have a great day.
Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.