Interfor Corporation Q1 2023 Earnings Call

Okay.

Good morning, ladies and gentlemen, and welcome to the inter for quarterly Analyst Conference call. At this time all lines are in a listen only mode.

During the presentation, we will conduct a question and answer session.

At times during this call.

Richard assistance. Please press star zero for the operator. This call is being recorded on Friday May five 2023, I would now like to turn the conference over to Ian Fillinger. Please go ahead.

Thank you operator, and thank you everyone for joining US. This morning are with me on the call I have Rick Pas Bond 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 as usual in Q1 2023, and our strategic positioning I'll then pass the call off to Rick who will cover off Q1 financial results and then Rick will pass the call off to Bart who will cover off market, but first off I'd like to call out a couple of.

Key milestones for <unk> that we're very proud of.

This quarter, we marked our 10 year anniversary of one of the most important developments in Air Force history. When we made our first move to the U S. South before these acquisitions, we are a western based company and over the past decade, we have become a major player in the southern lumber industry today, we have a southern portfolio about 13 mill.

Across six states.

Just a decade in or four has become the third largest lumber producer in the region as part of an evolution that has made US one of the largest lumber producers across the continent.

Our vision 10 years ago was about operating in the South and building a business there for the long term now the region accounts for approximately 45% of our total lumber production.

Also tomorrow may six marks the 16th year of our company's founding.

From the beginnings as a single sawmill, we built a company with more than 30 operations located in all the key fiber and lumber producing regions across the continent.

Our history is one of vision focus and discipline.

The lumber industry is famously cyclical and reaching our 16th anniversary is a testament to the tenacity and commitment of our people through the years and the ability of the company to weather the tough times as well as identify and seize opportunities.

Now turning to this past quarter, we generated an EBITDA of 26 billion significantly up when compared to the previous quarter.

Production increased around 18% quarter over quarter due to our curtailments easing to match demand long with our first full quarter of production from our New Brunswick operations.

Quarter over quarter, we achieve performance metric improvements in conversion costs net log costs and shipment volumes at our new Brunswick operations contributed positively to our financial results.

We continue to advance our key capital projects in the South and we also completed our planer upgrade project at Cassidy RBC.

With respect to the outlook, we remain positive on the medium to long term outlook for demand as demographic trends and years of under building will continue to provide strong tailwind.

Focusing on the controllable so the <unk> team has used the recent downturn well to accelerate the integration and the operating techniques in our eastern Canadian region to ensure we're stronger than we've ever been before.

On the supply side, we believe that SPX volume will continue to come out of the BC industry in a meaningful way to.

To sum things up before I turn it over to Rick embark our guiding principles have always been operate operational excellence and capital allocation discipline.

These principles have ensured that we are well set up to withstand the current market and are very well positioned to benefit from the stronger markets. We see ahead.

With that I'll turn the call now over to Rick to run through the financials.

Thank you Ian and good morning, all please refer to cautionary language regarding forward looking information in our Q1 MD&A.

Before speaking to the Q1 financial results.

First like to provide an update on our growth into eastern Canada through two acquisitions last year.

Overall, we continue to be very pleased with this strategic expansion and regional diversification, which has substantially increased our production of SPF lumber.

This positions us well to benefit from the ongoing decline in supply of SPF lumber from British Columbia.

We continue to make solid progress on the integration of these operations and are on track to fully realize the $30 million of identified annual synergies by the end of this year.

These acquisitions contributed to enter for achieving a record level of lumber production in the first quarter with over 1 billion board feet produced.

This record is despite taking temporary market related and project related downtime in the quarter equating to over 100 million board feet of production.

Turning to the financial results the $26 million of adjusted EBITDA generated in Q1 represents a significant quarter over quarter improvement.

Despite key benchmark prices being lower on average compared to the prior quarter.

One earnings benefited from an increase in sales volume combined with substantially lower unit costs as log costs continued to adjust downward across all regions to better align with the current lumber price environment while.

While conversion costs improved on a unit basis, driven by a substantial reduction in temporary market related curtailments quarter over quarter.

These lower costs helped drive a $22 million release of the valuation reserve recorded against log and lumber inventories in the prior quarter.

In terms of cash flows the typical season seasonal build in working capital led to a cash outflow of $85 million from operations was $64 million was invested in capital projects as we continue to make solid progress on our strategic capital program.

From a balance sheet perspective, we ended the first quarter in a comfortable position with net debt to invested capital of 31% and available liquidity of $321 million, providing ample flexibility.

We would expect our leverage position to fall meaningfully over the next few quarters as we draw down the seasonally high working capital balance and collect on pending income tax refunds of nearly $100 million.

With all else being equal.

Looking longer term, it's worth noting again that the air force lumbered duties on deposit totaled $521 million you asked at quarter end, representing about $10 per share on an after tax basis.

Regarding capital allocation looking forward.

<unk> focus on a balanced approach remains unchanged in combination with maintaining conservative leverage on our balance sheet.

Ultimately our capital allocation decisions will be made with the objective of maximizing returns on capital for our shareholders over the long term.

We currently anticipate capital expenditures of $210 million for 2023.

Of which the majority relates to discretionary projects with attractive returns.

Our significant quarter over quarter earnings improvement was a step in the right direction.

One that we are well positioned to build upon going forward.

That concludes my remarks, I'll now turn the call over to Bart.

Thanks, Rick I'll provide comments on our market outlook for Q2 2023 and beyond.

Fundamentals remain intact and positive for the underlying demand for lumber.

North American housing market is on your belt and each of our supply, especially if we consider the demographic reality.

Cohort first term first time homebuyers is increasing.

The average age of the home is 41 years in the U S. The oldest it's ever been and this is driving continued repair and remodel activity but.

But also an elevated number of replacement construction belts.

Home equity remained solid putting homeowners in a position to invest in their homes.

All good things when you think about the demand for lumber.

In the near term high interest rates continue to negatively impact overall affordability, which will continue to suppress the overall housing starts numbers. This demand for houses is not going away, but rather a deferral to win affordability approach, which we all know well.

On the repair and remodel end use sector with homeowners remaining in place the incentive is to consider home improvement projects.

We've seen this with our box store comps, which have been strong year to date and outlook remains favorable for the balance of the year.

Well the reality is that lower demand has adjusted downwards year to date 2023, the situation has stabilized and the outlook across our end use sectors as more positive than negative.

In particular I'd like to share a couple of product specific insights.

I joist demand often seen as a barometer of new home construction is improving.

Network of distributors as Youre reporting increased demand and have increased resupply of inventories.

Our number one position instead production offered by three of our four producing region regions puts us in a unique position on this product line to see changing market patterns and capture the inevitable demand from the new home.

Sector. An example, we've seen notable increase in demand reflecting approved early improvements in single family construction.

Like studs.

Largest producer of MSR in the World MSR as you use primarily for truck applications like Hi, Joyce are often seen as a barometer of the home construction markets.

Single and multifamily.

The demand for MSR has improved recently and is an encouraging sign for the broader market.

On the supply side, there have been many curtailments, both temporary and permanent that had brought some balance into the marketplace.

The level of inventories at this stage of the year or in a really good position, we have not seen the logistics issues that we did last time at this time last year at this time, so what has flowed to the market consistently.

In terms of in market inventories always a bit more difficult to read what we understand they are adequate to on the low end, depending on the region and the customer type.

Recently I attended the Montreal, what convention here in Montreal with record attendance over 1100, I was able to connect with our customers both from the U S and Canada.

Our recent expansion into Eastern Canada makes center for a strategic supplier for almost anyone attending this show.

The mood was upbeat and encouraging with many comments supporting an improving market, especially on new home construction.

Overall, while the near term has been impacted by inflation and interest rate movements, we feel the fundamentals will once again rise to the forefront.

Set us up for an overall improving trend going forward.

With that I'll turn it back over to you Ian.

Thanks Bart.

Operator, so were available now for questions.

Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star one on your telephone keypad.

We'll hear Ajay pumps acknowledging your request questions will be taken in the order received.

Alicia to cancel your request please press the star followed by that too.

We are using a speaker phone please lift the handset before pressing any keys.

One moment. Please for your first question.

Your first question comes from the line of Sean Steuart from TD Securities.

Your line is now open.

Thanks, Good morning, everyone.

A couple of questions.

First with respect to the Capex guidance, which is tempered a little bit I think the wording was.

Partly being conservative with markets, having declined as much as they have and part of it is equipment delays.

With respect to the ladder.

One piece of equipment or more of a generic constraint on on.

On delays and if youre breaking up between the two how much of the more conservative Capex is.

Just being cautious around the balance sheet and how much is equipment.

Hey, Sean.

Thanks for the question.

So I'll tackle that.

The.

More of a deferral then so just to be clear, we haven't canceled any projects whatsoever. So theres no.

There is no dropping the projects that are.

Important for us and.

And it's more just shifting schedules.

And more on that than on equipment delay.

So.

Just shifting it in in our project chart.

A couple of months here or there.

Moving parts around as you know we have our own internal capex team, we're not tied to turnkey projects that we have.

Great flexibility with that.

With our Capex team to do these type of things and this is what we worked hard on for.

Almost 17 18 years to build so more on that Sean I'll see that.

Major equipment supplier.

To the industry was indicating recently that they had a two year.

Backlog of an order file and they haven't seen any.

Projects canceled so I think thats.

Yes.

And indicators that really shows the confidence of the industry that the.

The market in the medium to long term is favorable so.

I took it that way but.

We're in good shape, we're just using our flexibility.

The nimbleness that we built more than anything.

Okay, Thanks for that detail Ian.

And then just follow up for Bart on current lumber market conditions.

Everything you are saying is consistent with what a lot of your peers are saying with respect to inventories through the channel being <unk>.

Normal to maybe slightly below normal.

We're seeing at the margin.

Your news from U S. Homebuilders housing starts that are coming in maybe a little bit better than expected.

So I guess just more context on why we're lacking traction here.

European imports continuing how much of an issue is that.

Have you been surprised there haven't been more closure announcements to this point.

For higher cost capacity.

Any issues on the supply side that you think are constraining prices at this point.

Okay.

A lot in that question.

I guess first I'll start off is that is that.

From the demand side of the equation we are seeing.

Some improvement I mean repair and remodel as always.

I think multifamily although volatile it's still.

Still very.

Very decent.

Single hub.

Single family home construction Thats.

The one that we want to keep our eyes on it.

Certainly from what we hear from the builders and from our customers things are improving there. So so we are waiting for that and being patient.

For that to translate into into more demand for the mills I can tell you on the import side a lot of what we saw in the first quarter was a bit of a hangover from I think what they were planning on it producing towards in the fourth quarter and so a lot of that would finally made its way to market I think in first quarter and.

The information that I've received is that we can expect.

A fairly significant decline in what what might come our way in second quarter that will help but at the end of the day I mean imports here are.

They are they are there.

They are.

Relevant, but they're not significant in my view.

In terms of the total supply so.

I do believe the inventories in the marketplace or on the lower <unk>.

I think that the situation is very different than the north from a logistics standpoint compared to this time last year.

And so I would expect that as this demand sees its way through the through the building cycle.

That tension should be received fairly quickly at the mills.

So I'd say at this stage patients.

Is the virtue for sure.

Got it I'll stop there okay.

Thanks for that part that's all I have for now thanks, everyone.

Okay. Thanks, Sean.

Thank you and your next question comes from the line of Paul Quinn from RBC. Please go ahead.

Yeah. Thanks, Good morning, guys just.

One thing, we're seeing a big premium on southern yellow pine versus <unk>.

It seems to be narrowing slightly but its still around 150 Bucks.

That's way off the tip. It goes through its <unk>, what do you make of that and how.

How do you think that gap closes out of western SPF coming upwards at a southern yellow pine coming down.

Yes.

Well, Hey, Paul Ian here I'll take a stab at it and Bart maybe you can jump in if I missed anything but the gap is definitely unusual we do see that our view is that.

What the previous call or question was is that there is obviously.

European imports.

Gone up over the last few quarters, we do actually see or have been.

Reading that that should taper down pretty significantly.

One research firm.

Adding that view.

But I also think that the SPF volume that.

Within the ounces in Q4, and Q1, both temporary and permanent <unk>.

<unk> did not come off the market in our view.

The wood.

With process through the back end of the mill and put on trucks and in the.

The permanent curtailments are.

View would be that.

That volume gap.

Really isn't going to start showing up until Q2 Q3. So.

There may have been excess volume on the on the market in Q1.

That's not going to be there in Q2 Q3.

So.

I think it's a combination of European imports still having a bit of a hangover on it and then also.

Supply side didn't really.

Taper down in Q1, and probably forced that gap, but.

I don't know Bart.

Barton Montreal, So, we're sort of past and call back and forth, Rick and I are in Vancouver. So BARDA is there anything you'd like to add to that.

Yes, there is a couple of things.

I think that differentially up to you have to kind of look at western SPF in eastern SPF. There's some differences there eastern has held up.

Then I would say the western SPF side.

And really when I when I look at that and I see the volatility in the market and the kind of focus that's been put on inventories.

Understanding that southern yellow pine that market is 85% serviced by truck shipment.

So it's fairly quick quick turnarounds the lead times before you get the what is a lot quicker.

Well within when you would have to pay for that invoice, whereas from the.

Let's say the BC interior, making its way to markets Youre talking about a three to five weeks.

Lead time, and I think in this particular market right now that's relevant.

The other one is on the repair and remodel.

Big trader market itself.

I think that there has been some decent activity in that end use sector that perhaps SPF has.

Joy to the same degree so but over time, we will look at that gap to close and.

It's hard to predict which way it will go but let's let's let's hope the SPF moves up towards the southern yellow pine.

Okay.

Okay.

And it's confusing me a little bit is we've seen a little.

A little bit of a recovery here in OSB prices, which have got more leverage.

Correct and then then lumber.

You guys think about that.

And that is starting to pick up in Q1, and Weyerhaeuser Echo those comments.

Why are those areas growing.

So much in lumber is still stagnant here.

Okay.

Go ahead Bart.

Okay, that's a tough one.

Yeah.

I think that.

I Joist you are directly correlated to new home construction I mean, thats used for that end use whereas dimension lumber is used in so many different things and so.

It certainly is a portion of new home construction, but it's used in all of the end use sectors and so.

I think in order to get attention.

On that particular product line, you do need to see.

Some activity across all the sectors. So I think.

I think that on the I joist side I can tell you from from our.

From <unk> and from our vantage point.

Very responsive to the demand seen from our distributors' inventories had been managed well and now we're starting to see those kind of come back and there's a bit of a lead time with the <unk> to get them into market and ready to respond so.

Maybe they're added a little bit quicker than.

I think we will see I think we'll see that activity start to move its way.

Towards dimension lumber as we go through the quarter.

Alright, so I'll, let answer Bart thanks, guys good recovery.

Best of luck.

Okay. Thanks, Paul.

Thank you and your next question comes from the line of fresh Neel Mitra from BMO capital markets. Your line is now open.

Hi, good morning.

Good morning.

Just two quick questions. Please first.

You mentioned the tax refunds I was just wondering if you had any idea of timing on that front.

For sure Ross ultimately it depends on the tax authorities, but we're pushing hard to get them back as soon as possible. We currently anticipate about 20% of the balance in Q3 being received and the rest in Q4, but certainly could see some acceleration of that timing.

Okay, Great and then also do you have any update on the monetization of the BC 10 years any way to quantify any update there.

Yes, Ian here.

Yes, it's a work in process we've got.

Good solid interest.

From a number of parties in that in the 10 years or so.

C.

Our work in process as we're getting those term sheets that have been.

Signed and.

Getting those to the next.

The next level take some time, so we don't have a timeline on that.

We can't provide anything solid from a modeling perspective.

We can let you know that this is.

Right up here.

Top five things in our company that we're putting a full court press on so.

We'd like it to go sooner but.

Stakeholders.

That has to you also.

Following timeline in the process so.

Well, just keep working on it and keep reporting on it every quarter.

Okay Fair enough. That's all I had good luck next quarter. Thank you.

Thank you. Thank you.

Thank you. Your next question comes from the line of <unk> Patel from CIBC capital markets. Please go ahead.

Hi, good morning.

I was just wondering with the weakness we're seeing in.

Pulp markets is that starting to weigh on maybe some of the chip pricing that you see in eastern Canada.

No we're not we're not seeing that.

And in fact.

Yes.

Most of our regions.

The prices have been solid in a few cases have actually improved.

Improved on residual pricing through the curtailment that.

The industry has taken its put a bit of a stressor in the areas that we operate on so.

So no to answer your question note and in some cases, we've seen price appreciation just given our.

Locations and the mills that were partnered with for our customers.

Okay interesting and then Ian with respect to the Stumpage I know.

I think new Brunswick has some large decreases.

Slated to take effect that went well.

What kind of level moderation are you expecting.

Perhaps new Brunswick, Quebec, and Ontario, and then also in there.

B C interior as you look towards Q2 and into Q3.

Yes.

I think Rick maybe you've got some numbers or data or at least some information you may want to share on that sure. Thanks, Ian Good morning Amir.

In terms of the BC interior, we still expect some moderation of stumpage over the next couple of quarters, let's say in the five to $8 range per quarter on a cubic meter basis.

If we look at New Brunswick Youre right.

This new stumpage system is coming to effect this quarter and we do expect some reduction.

Bring log costs down more in line with fair market value and based on lumber prices, so that that could be let's.

Let's say anywhere in the 10% to $15 range on a cubic meter basis in this next quarter versus last quarter.

Great and.

Ontario, and Quebec, any sort of moderation.

No, Ontario should be relatively flat. Its stumpage system is very quick to react to lumber prices and Quebec should be relatively flat as well.

Great.

That's all I had I'll turn it over thanks.

You're welcome Thanks Amir.

Thank you Mr. Filton Zhejiang no further questions at this time. Please proceed.

Okay, just to wrap up thanks, everybody for your time this morning, and the interest intercompany and please feel free to reach out to.

Any one of us if theres any follow up questions. Thanks have a great day.

Thank you that does conclude our conference for today. Thank you all for participating you may now disconnect.