Q3 2022 Interfor Corp Earnings Call
Good morning, ladies and gentlemen, and welcome to enter four quarterly analyst call. At this time all lines are in a listen only mode. Following the presentation, we'll 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 November 4th.
2022 ill now like to turn the conference over to Ian Fillinger. Please go ahead Sir.
Thank you operator, and good morning, everyone welcome to our quarterly analyst call with me today, you have brick pause Barnes, our executive 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.
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 markets.
Turning to our financial results, our Q2, adjusted EBITDA was $129 million.
We are continuing to execute on our strategic plan and we're generating industry, leading lumber margins and returns on capital I encourage you to look through the investor deck on our website.
Our improvement efforts were again balanced across our North American platform.
Our production was slightly below the record level of the previous quarter.
Our lumber inventory was reduced during the quarter and remains within our target range, our financial flexibility is strong.
Our <unk>, Louisiana Mill has reached its full to shift capacity.
Our Eton, Georgia sawmill rebuild is complete and is in the final stages of ramp up.
Our new Planer Mill project at our Cal Cigar British Columbia Mill will be completed in Q4, and we expect a value uplift and greater returns. This mill pulls from the very high quality fiber in this region of British Columbia.
In total our Capex was balanced as we deployed $86 million across four regions.
The beginning of October we announced the agreement to acquire <unk> two mills in New Brunswick.
These two quality assets, along with woodlands management business will add value scale and further geographical diversification to our portfolio.
Despite persistent.
Inflationary pressures, our SG&A expense continues to decrease quarter over quarter as economies of scale are being realized from our strategy.
I would also like to Brian and update on our integration is progressing with our Canadian eastern platform.
Our key focus areas in the near term are to enhance the historical operating performance to identify further opportunities for operational improvements and synergy realization and to assess potential long term strategic investments.
In summary, our balance sheet is in great shape, and our 48% year to date return on capital again is very strong.
That concludes my opening remarks, and I'll now hand, the call over to Rick.
Thank you Ian and good morning, everyone.
First off I'll refer you to cautionary language regarding forward looking information in our Q3 MD&A.
<unk> third quarter results were relatively strong given the normalization of lumber prices as market uncertainty dampened demand.
We generated adjusted EBITDA of $129 million and extended our track record of generating the best returns on capital of all publicly listed lumber producers. These.
These positive results demonstrate the significant benefits of intercourse transformation over the past several years with significant scale and regional diversification achieved through acquisitions continuous investment and portfolio optimization.
And our focus on operational excellence.
Our capital allocation in the quarter continued to be balanced and driven by our focus on maximizing shareholder value over the long term.
We recognize significant value and therefore, our share price and launched a $100 million substantial issuer bid successfully buying back six 1% of outstanding shares at a historically attractive valuation of seven two times book value per share.
We continue to optimize our saw mills through discretionary capital investments at attractive risk adjusted returns.
And we see as an opportunity to strengthen our company through the acquisition of <unk> operations in New Brunswick, with an annual capacity of 350 million board feet.
These are top quartile operations with attractive fiber costs.
Fiber security and.
And are expected to boost <unk> profitability and returns through all parts of our business cycle.
The renewal of our normal course issuer bid to buy back up to 10% of intercourse free float provides us flexibility to return capital to shareholders and increase leverage to earnings for remaining shareholders. We intend to operate this buyback program under parameters, ensuring we purchase shares at an attractive valuation while remaining within our concern.
That target leverage range.
Expanding on our financial results third quarter earnings benefited from our larger scale and regional diversification.
<unk> shipped a near record $1 1 billion board feet in the quarter with positive EBITDA contributions from each of our operating regions.
Earnings also benefited from $26 billion of recovery recorded for softwood lumber duties previously Expensed as the department of Commerce finalized duty rates for the 2020 period at a reduced level.
We continue to see transitory cost inflation across several aspects of our business and remain focused on operating decisions to maximize returns and profitability.
From a balance sheet perspective, our financial flexibility remains strong with ample available liquidity on existing facilities of over $600 million.
With substantially more financial capacity available within our financial covenants if needed.
Pro forma the closing of the Schuler Forest products acquisition expected in the current quarter.
Net debt to invested capital at September 30 would have been approximately 23%.
And remained within our conservative target range of 5% to 25%.
It's also worth noting that inner for softwood lumber duties on deposit totaled $419 million you asked at quarter end, representing $8 per share on an after tax basis.
To wrap up I'll highlight that our business continues to be well positioned operationally and financially to succeed through ongoing market volatility.
Our priority will continue to be disciplined capital allocation to maximize returns on capital and shareholder returns over the long term.
That concludes my remarks, I'll now turn the call over to Bart.
Thank you Rick.
Morning, everyone I will provide an outlook on lumber markets through quarter, four 2022 and into quarter, one 2023 and medium to long term fundamentals remain favorable to overall lumber demand demographics support an increased level of participation in the first.
Homebuyers market aging.
Aging housing stocks encourage increased repair and remodel work household balance sheets are solid led by equity in their homes and new home construction has lagged underlying demand for some time, increasing the pent up demand for homes in the U S.
In the short term there are some my correct macroeconomic challenges that are reducing the demand for lumber in North America inflation, and economic uncertainty will drive conservatism in spending.
Interest rate increases are impacting the affordability in new home construction and simultaneously encouraging those with more affordable market mortgages to stay in their existing homes.
Homebuilders addressing this to a certain extent through incentives and features some more is to be seen on that side of it.
Repair and remodel has impacted however to a lesser degree those avoiding that move up housing market will undoubtedly consider more repair and remodel work equity in homes will support. This however to the extent that that is required for stability could still be a factor.
We've been proactive in addressing the reduction in lumber demand with a reduction in production.
The curtailments that we've announced for the balance of 2022, I'll ask two aligned to our customers' needs.
Switching to the supply side of the equation. It's times like these that remind us of how important diversity is in our business, making sure. We have the right products in the right areas to meet the demands of our distribution partners.
Interflora has always had diversification as a part of our corporate strategy and that continues today I'd like to highlight that since 2019 through acquisitions, we've added to that diversification.
Only supplier with production in four major producing regions in North America.
Our SBS capacity has increased from 8% to 25% of our production.
We've added the eastern region and once you are more most recent acquisition closes increased our capacity to $1 $2 75.
1 billion board feet.
Added dimension and timber production to our PNW regions, which prior to this was a 100% stutz.
We also acquired three dimension mills in the southwest region, increasing our ability to service our customers further west and the south.
And therefore, it's never been positioned better to serve our customers across North America today, which is supporting US a seat at the boardroom table with any distributor in North America.
Overall, we are well positioned to address the short term uncertainty in the market with diversity and we look to markets to improve as we work our way through the balance of 2022 and through 2023.
With that I'll turn it back over to you Ian.
Thanks Mark.
Operator, we're ready to take our analyst calls now.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star key followed by the number one on your Touchtone phone, you'll hear a <unk> probe technology and your request questions will be taken in the order. They are received should you wish to withdraw your request simply press the star key followed by the <unk>.
Two if you're using a speaker phone please lift the handset before pressing any keys, one moment, while we assemble the queue and we will take our first question from Sean Stewart with TD Securities. Your line is now open.
Thank you good morning, guys couple.
Couple of questions.
I wanted to talk about the in CIB renewal and Rick you mentioned that.
Adjusted for shell or your net debt to cap up to 23%, which is towards the upper end of your stated target range.
And I'm wondering if ian or Rick can comment on where buybacks fit into the capital allocation pecking order as leverage has climbed in.
Free cash flow prospects are moderating here, how do you how do you think about the willingness to proceed with that and CIB over the next year.
Sure Yeah, Rick do you want to take that sure Hey, good morning, Sean.
Buybacks certainly has been a priority for us when theres a disconnect between the share price and what we think is the underlying value of the shares.
We will continue to operate our NCI program under a few parameters. One is certainly a pricing parameter to make sure we're not overpaying for our shares in the second parameter would be around leverage so.
We don't intend to buy shares outside of our target range in terms of leverage so we'll be following those just like we have throughout the last couple of years.
Our priority in terms of capital allocation continues to be.
Our internal investment in our saw mills are discretionary capital program that we have well underway.
And certainly growth is an objective of ours and we will continue to look for M&A opportunities.
Consider those as they come about.
Okay, and just to clarify right. So that the 25% net debt to cap is that the ceiling above which.
You would not consider buybacks or is there some wiggle room around that depending on.
How things are shaping up quarter to quarter.
Yes. It was I would say, it's a guideline for US is it a hard stop no, but it's something we want to target staying within that range.
Okay.
Second question for Ian.
I'm wondering if you can speak to to fiber costs.
Your various regions.
Specifically in the U S. So that's where we've seen some inflation in.
Im hoping you can categorize that as well.
Is this <unk>.
<unk> build on lumber in the U S are driving increased demand for fiber or is it freight surcharges and contractor.
Cost inflation, that's driving it and in your outlook with respect to that region, specifically as we move ahead into next year.
Yes for sure Sean Thanks.
Well the South region.
First off as one of our top performing regions and continues to be right there.
The specific to your question on log costs, there have been some minor inflations.
That we've experienced but.
I would say it's less.
Less than 5% and in some cases.
Generally flat.
If I had to.
Characterize the whole region from Louisiana to South Carolina.
They remain flat.
And there is pockets of.
And higher and then there's pockets where it has been actually lower in some cases, but generally flat across the region.
Just some <unk>.
Small pockets of dynamics, depending upon where the the sawmill is located.
Okay understood.
Thats all I have for now thanks, guys.
Thanks, Sean.
And ladies and gentlemen, as a reminder to ask a question press the star key followed by the number one on your telephone Keypad next we'll go to Mark Wilde with Bank of Montreal. Your line is now open.
Good morning.
Ian Rick Burt.
Good morning, Hey, Mark morning.
Uh huh.
I wanted to just start off by saying.
Eni.
A lot of regard for what you guys have done over the last two and a half years in terms of kind of capital allocation and the balance that you have.
You have shown your kind of definitely.
Walk the talk on that.
As we look ahead, though I'm just I'm curious, we're clearly heading into what looks like much more challenging markets.
We've definitely seen copper markets then we're dealing with at the moment. If we just look back over the last four five years I'm just curious about your preparations for more challenging markets.
Yeah for sure.
Mark.
As long as you've been covering this industry and we've worked in and we've seen these ups and downs so.
Our playbook is pretty refined on that it does.
The first lever is making sure that your inventories are matching your order files.
And your profitability and win some of that starts to disconnect.
We feel obligated to make decisions like we did announcing curtailments in Q4 so.
That would be the first lever that we look at is just making sure we're not running for the sake of running in that we're looking at the whole.
Value.
Outlook.
From a shareholder perspective, so there's that and then.
Then you can get a little bit more specific down to plant level.
Numbers and be prepared for your staff or whatever to do those we don't see that.
Coming at this time, we obviously like others and yourself.
It could be a little bit of a rough.
2023.
But.
The difference I think mark when we look at <unk> four.
The strength of our company today compared to.
10 years ago is just dramatically different.
So some of that risk.
We have an old playbooks.
We've updated it.
Obviously fuel.
We're a much stronger company.
If we have some headwinds here in the next 12 to 18 months.
So I would say that the mark theres all kinds of different.
Levers that we can pull beyond that but the most is just making sure you're not building your inventory and taking write downs and trying to force a product in your market.
It doesn't want it and so we'll monitor that pretty closely as we are right now for the next several months.
Okay second question I had I know this is a sensitive one for you but is there any way for you to give us some sense of sort of.
Profitability by region across your portfolio right now.
No Mark.
We can't we can't really do that I mean, what we what we have shared is just the trend by region over.
A long period of time, I think it's 10 years or so and what.
What we find is that it.
Its balance there's puts and takes at different times.
So we're.
So really pleased with the.
Geographical.
Suffocation, because we do see.
That is.
And especially in lumber for us, which is kind of what we do being able to have those different regions, which have different log dynamics at different points in times in the cycle.
And different.
Product dynamics.
<unk>.
When we think about the Sps volume that Bart talked about.
It's a big change for us and.
And we think that's a very.
Positive.
Contributor to enter for as far as our strength goes as we go forward, but regionally.
One year, one region might be stronger than the other but over a period of time.
It's pretty balanced across North America in our portfolio anymore.
Okay last one for me and I wondered if we just step back I think it was about.
Nine years ago that you bought the Rainier mills down in the South I wish your first move into the U S. So can you give us some sense of.
What you've been able to do bulk capacity wise and profitability wise that the Rand your mills since that acquisition.
Yes that was it.
Great acquisition for Us and you've got it right Mark who is 2013.
Those three operations.
I'll start with.
Swain Berlin Baxley.
We havent had to put a lot of capital into those plants. They were they were.
Well run and they have a great product lines.
Those those two clients contribute very well today.
Even to implant, which.
Was the third of those Rangers.
<unk>.
It's a top quartile top decile plant right now.
We just finished.
The upgrade and it's going north of 200 million board feet from.
It was around $89 million when we when we bought it.
And even being a little bit less.
But the purchase price.
<unk>.
And therefore.
It goes up so attractive.
<unk> been extremely pleased with those.
Very pleased to see.
In a.
Highly.
Optimized.
Technical mill.
Best in class.
Engineering and equipment, and so I would I would say that.
That'd be the one that we have rebuilt one of those.
And it'll be.
One of the best in our portfolio.
Okay, Alright, I'll turn it over thank you.
Hey, Mark.
Next we'll go to Paul Quinn with RBC capital markets. Your line is now open.
Okay. Thanks very much.
Okay Paul.
Just wondering.
If we assume that 2023, it's going to be a very tough year or are you going to change your operating plan from what we're seeing in Q4 or is that is that what we're doing with next year.
Well I think Paul it will I mean, we look at it.
As you know a regular basis. So Q4 I think is.
It just felt it looks like.
We needed to match production due to shipment.
We'll see what Q1 looks like we'll probably have a view of that mid December ish.
We'd like to run our plants.
And keep our employees retained in.
Keep the logging contractors in the supply chain to the markets.
Fulfilled, but we're not shy of making decisions.
We just see that building inventories there are risks.
We don't want to take beyond normal threshold limits, which I would say.
Our.
Tight and we want to keep them that way.
So, yes, Paul I would say mid.
Mid December we're probably going to take a view of Q1 and see how things are looking in.
Talk with Bard and sit down as a group.
What that schedule looks like but it'll be quarter to quarter.
Decisions.
Okay and then just.
Okay. That's helpful. Mary I mean get deposits over 11 Bucks a share.
And I understand that.
Sure acquisition Youre, taking on those deposits how much of those deposits sitting out.
Tell me about.
It works out to about.
It's a moving target Paul it's Eric speaking be about $90 million or so U S.
Of deposits.
Okay, and anything happening on our filers with whats Interfirst stats I was trying to get some of this money back.
Yeah, Paul I'll take that.
I guess the short answer is that there's not too much happening Acousma appeal processes is really just getting started and we've now got the panel set up for the original investigative results. So that that process is now underway took five years to get that far.
We do have a sunset review that's coming up.
Where they'll take a look at it and make a determination of whether injuries still.
Possible.
And whether this continues so we don't expect too much to come out of that but it is a review process that happens at the five year Mark.
Beyond those two things.
There's really there's really no extensive conversations beyond the normal I think that.
That would point to anything changing.
The near term.
Okay.
Okay. So just on timing when is the injury review come up.
Is that a couple of months and youre not expecting something favorable for the Canadian today.
That's correct.
It's always.
I always had the five year, Mark it's called a Sunset review.
And we will see what that process banks brings but we're.
Any of the active participants in this file will be busy preparing statements and whatnot.
To present through that process.
We'll see we'll see where it goes but again.
You can't really speculate.
But I can tell you that.
Generally not many people are thinking it's going to add add up too much.
Okay and the timing on the original review that's now underway is that a year long process or is that longer with typical out of it.
So I don't know that you can even look at what's typical.
Five years to get to.
To get a panel struck.
So they've got a bit of a catch up here to.
Go on that so.
I think.
I actually don't know Paul it's one of those things that.
That goes real time, and I wouldn't want to speculate on exactly how long that process would take I'm just glad that it's underway.
Okay, and Bart while I got you just.
Pretty familiar with North American market. So if you can just give me a recap of what's going on offshore.
Sure I mean.
The business offshore.
I would I would I would term it as average certainly our exports to Japan.
Albeit.
Stabilized post quarter over quarter, but I would call them slightly depressed is that market works through what was a fairly significant inventory position.
So we will be looking for that market to to improve as we as we move into 2023.
When it.
It comes to the other markets. There's just there's some geopolitical issues there that you have to be mindful too.
So I don't I believe there'll be generally opportunistic markets.
The price of lumber in North America is attractive.
So that.
That will spur on some some business however, I'm.
Im not looking to the export markets to to.
To solve any of the <unk>.
Demand side issues that we're going to be facing in 2023.
Some people will be more of the same I suspect.
Great. That's all I had best of luck guys. Thanks.
Thanks, Paul <unk> Paul.
And next we'll go to Amir Patel with CIBC capital markets. Your line is open.
Hi, good morning.
Ian could you give us your sense as to how your costs in B C would kind of.
Change in Q4, and Q1, just at least in terms of stumpage.
Yes.
While Rick Scott He is pointing at me he's got the numbers, who go ahead, Rick Hey, good morning, <unk> speaking.
Just looking at BC interior stumpage in Q3, it was about $86 a cubic meter.
<unk> got to drop down in Q4 to about $45 a cubic meter and then looking out to Q1 'twenty three it'll be about $30 per cubic meter as an estimate.
Okay. Great. Thanks, that's helpful and just the last question I had was just on Capex, what should we expect for full year 'twenty, two and he sets yet on 23.
Yes.
<unk>.
About 300, or so is that right that's right and looking out to 2023, we're still going through our budgeting planning process, but you can expect it to be in the same ballpark as this year, so around $300 million.
Great.
That's all I had I'll get back in the queue.
There are no further questions at this time I'll now turn the call back over to Ian Fillinger for any additional or closing remarks.
Okay. Thank you operator in closing we're focused on maintaining the health safety and wellbeing of our employees, we continue to drive cost reductions across our company.
Matching our production rates to our order files and we're continuing with a balanced approach to capital allocation I'd like to thank everyone for dialing in and participating in our call. This morning, and your interest in our company. If you have any further questions. Please feel free to reach out to myself, Rick or Bart at anytime thanks and have a great day.
Yes.
Ladies and gentlemen that concludes the conference call for today, we thank you for your participation you may now.
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