Q2 2023 Interfor Corporation Earnings Call

Good morning, ladies and gentlemen, and welcome to enter four quarter Analyst Conference call.

At this time all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session.

If at any time during this call you are required immediate assistance. Please press star zero for operator.

This call is being recorded on Friday.

August 2023, I would now like to turn the conference over to Ian Fillinger. Please go ahead Sir.

Thank you operator, and thank you everyone for joining us. This morning with me today on the call I have Rick pause Barton, our executive Vice President and Chief Financial Officer.

With Bart Bender, our senior Vice president of sales and marketing.

First off I'd like to welcome Nicole Butcher to our board of directors and we look forward to working with her and her contributions over the years to come.

I'll start off by providing a brief recap of our quarter and then I'll pass the call over to Rick embark.

Turning to last quarter, we experienced production cost decreases price stabilization and record shipment volumes, which all contributed to an adjusted EBITDA of 41.9.

<unk> 9 million an improvement over the previous quarter.

We also continued to advance our key multi year capital projects in the U S South which are focused on delivering significant returns.

With respect to our outlook recent housing data has shown modest improvements, including in the single family sector.

It appears that strong underlying demand for housing continues to outweigh the impact of higher interest rates and homebuilding activity has been resilient so far.

On the supply side, both North American production and European imports are easing, adding tension to the lumber market, while creating a positive supply demand situation.

I'll now turn the call over to Rick who will walk through the financials over to you Rick.

Thank you Ann and good morning, all please refer to cautionary language regarding forward looking information in our Q2 MD&A.

From an overall perspective, <unk> Q2 results represent significant and ongoing improvement since the fourth quarter of last year.

In terms of earnings adjusted EBITDA improved 61% quarter over quarter to $42 million.

Revenues benefited from an 11% increase in lumber sales volume combined with a 2% increase in the average realized lumber sales price with both driven by strengthened end use demand.

At the same time cost benefited from continued moderation of log costs to better reflect current lumber prices and a $27 million reduction in the valuation reserves previously recorded against inventories.

Q2 results were also positive in terms of cash flow and our balance sheet.

Cash flow from operations totaled $123 million.

Including $97 million from inventory reductions.

These inventory reductions reflect a conscious management effort to reduce working capital investment on a sustained basis going forward.

Especially at the operations, we acquired last year in Eastern in Atlantic, Canada, which presented significant opportunity.

For context, our total lumber inventory volume at the end of Q2 represented a 24% reduction year over year on a pro forma basis, including all acquired operations.

We also reduced our total Canadian log inventory volume by 24% over the same period and on the same basis.

The positive cash flow from operations led to our net debt to invested capital leverage ratio dropping to 29, 6% at quarter end.

With all else being equal we expect further leverage reduction over the next few quarters with the collection of pending income tax refunds totaling approximately $100 million.

In terms of.

Capital allocation over the remainder of this year. Our two key priorities are to continue reducing balance sheet leverage into our target range and to continue investing in U S sales focused organic growth and optimization.

We continue to anticipate total capital expenditures of about $210 million for 2023.

Of which the majority relates to discretionary projects in the U S south with attractive returns.

As our balance sheet continues to Delever, we will remain open to evaluating other attractive capital allocation opportunities that fit with our strategic plan.

To wrap up our second quarter results.

There are another step in the right direction.

Looking ahead, we will continue to focus on generating the best returns on capital in our industry.

Maintaining balance sheet flexibility to navigate market volatility and execute on our strategic plan.

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

Thanks, Greg.

Provide some comments on our market outlook for the remainder of 2023, although some of the macroeconomic factors relevant to our business remain uncertain.

Sellers reasons to feel optimistic as we work our way through the balance of 2023 and head into 2024.

U S single family starts for man June are encouraging.

Both represent a marked shift from the previous 12 months to homebuilders in the U S are all reporting encouraging results in their quarterly earnings report and guidance supports a continued trend for the balance of the year.

With many existing homeowners, having relatively competitive mortgage terms the number of existing homes for sale remains low which supports newly constructed homes, taking a larger share of home sales going forward.

<unk> for the overall demand for lumber.

Builder sentiment remains strong and trending upwards.

Our block store comparable remain favorable and point to a steady repair and remodel market going forward. All of these factors coupled with the other fundamentals such as under bent on Newbuild housing demographics age of homes home equity et cetera leave us feeling optimistic that improved lumber demand going forward.

And our Q1 2023 quarterly market outlook, we discussed improving.

Proving I joist demand.

This trend has continued through Q2 and the outlook remains favorable for Q3 and Q4.

In terms of lumber supply North American production has tightened in the first half of 2023 curtailments and most recently wildfires have impacted operating rates and interior shipments in both Canada and the U S have declined.

We expect this trend to continue as the industry works through the long longer impacts of the wildfires in both the Canadian East and West.

In market inventories remain in the lower end of historical norms and as Rick mentioned, we have driven all driven our overall inventory is down by 24% year over year.

We expect that as the lumber demand increases.

Lead times to supply will trend upwards. This will put pressure on distributors of lumber to purchase for immediate needs plus additional volumes to grow inventories needed to offset greater lead times to restock.

Overall, we're encouraged with the market direction and look to work our way through Q3 into Q4 and finished the year with momentum.

With that back to you Ian.

Thanks Bart.

Operator, we're at the point to take any questions.

Thank you, ladies and gentlemen, we will now conduct a question and answer session. If you have a question. Please press star followed by the number one on your Touchtone phone.

At $3 acknowledging your request.

If you would like to cancel your request please press star two.

Please enter your lift the handset that you are using a speaker phone before pressing entities.

First question comes from the line of Sean Stewart from TD Securities. Your line is now open.

Thanks, Good morning, everyone.

Hi, guys.

Bart I'll start with a question just following up on your comments on the market.

Your positioning.

Your take on channel inventories as still being.

Below normal and maybe I'm paraphrasing, but.

Just your perspective on.

Mark at lumber markets stalling.

The last few weeks and weakening and gets a little bit this week.

You're attributing this to <unk>.

Summer slowdown.

Given your perspective that inventories are still lean through the channel.

Wondering if you can contrast, those two things against each other in public.

<unk> explained why we've seen things stall a little bit the last few weeks.

No problem Shawn good questions.

Definitely I think volatility is always one of those things thats going to remain and so we're not going to we're not going to escape that but if you. If you sort of step back and you look at Q2.

Yeah.

And historically Q2 has always been a quarter where supply chain issues seem to be at its lowest so I think we're pretty fluid and getting.

Demand to market our supply to market.

When you look at the.

This summer I mean, obviously, we dealt with some adversity on weather.

Pretty much across North America.

If you look at the U S. South I mean, right now we've got people in Phoenix, putting up with 110 degree weather.

Not going to see the pace of building that you would normally.

And that kind of thing goes on it so I do think that that's probably part of it.

And again I've got to highlight the supply chain side, everyone talks about the improvements.

And that's a real thing they have improved and so getting resupply is pretty quick for our distributors and I think that garners a different approach to the market.

Okay.

That's helpful.

A question on working capital you guys gave us good detail on how much log and lumber inventories are down year over year.

Are you guys at bare minimums at this stage is there any room for further reductions at this point.

Sean Good morning, it's Eric speaking.

We're currently in terms of lumber inventories around 18 to 19 days of production. We think on the margin there is still a little bit to squeeze out there, but we're pretty comfortable where we're at.

Okay.

Alright.

Just one last one.

Ian.

This process for potentially selling the tenure on the coast can you give us a little bit more detail what's involved in this sub dividing process.

Your conversations with the Ministry to get approval, how long are you guys thinking two to resolve this.

Yes, Thanks, Sean.

I mean, it is a file that we're working on.

We've been on the coast for.

60 years so.

<unk>.

Complexity of dealing with all kinds of different stakeholders, including the government is not.

Not always on a timeline or piece of that.

We move out.

But all the conversations with the government have been supportive in British Columbia.

Our vision of.

How this could unfold is very consistent with the government mandate and so I would say that.

We're confident in the partnership and leadership that the government showing to date and we just continue to work on that the timelines just.

Hard to predict and I know, it's really hard to model.

But we have transacted on a couple of.

10 year sales in the past.

And we feel that we've got good counterparties lined up.

And we'll just continue to work on it.

It'll be a slow.

Trickle in we believe over a quarter to quarter and we would include.

When we're successful one on sales in our quarterly reports.

Yes.

Understood.

That's all I have thanks very much guys.

Great. Thanks, Chuck Thanks, Sean.

Our next question comes from the line of Paul Quinn from RBC.

RBC capital markets. Your line is now open.

Hey, Thank you very much good morning, guys just.

Just trying to determine that.

How much more strength, we need to see in the Canadian U S housing market to be able to tighten up. This this lumber market is your feeling that.

You know that prices could move materially higher if we get to.

Kind of one 5 million starts next year.

How do you guys see the.

The unfolding going forward.

Yes.

Paul It's Bart here.

I mean, certainly we've been encouraged with what we're seeing on the housing starts we have got the single family piece, that's creeping up from a low of 60% getting up into the 65% now of the starts.

Obviously, that's a boost for lumber demand and so we think we're going to see more of that.

<unk>.

As things move along.

When you look at the big builders in.

The things that they talk about.

It's pretty encouraging in most if not all are are talking about improvements going forward. So.

It's hard to put a number on it but I think it's probably more a percentage of single family to the multifamily that needs needs to come up.

And yes, we just need to continue on with what we're doing.

That will come.

Sure.

I would just add on the supply side, Paul as you.

Well no I mean, we are seeing a dramatic reduction in the imports from.

From Europe into the U S, which is super encouraging.

Given that it was quite high and now it's steep drop off so.

That with curtailments, and some permanent curtailments and we still believe theres more to come out.

I think just kind of adds to your comment around.

One five.

Barts comments around the market and the supply side contracting in a couple of areas.

I think at one five.

It used to be a great number and.

Just given these dynamics.

Who knows what the market will do but I think the fundamentals are lining up pretty nicely.

Okay and then just.

Just wondering given the current conditions, we're going to see any change in your production profile in the back half of the year from the front half of the year.

I would I would say there given the curtailments that we have taken in the first.

Six months.

Particularly around balancing the.

The inventory that Rick had talked about.

The market weakness.

We probably.

Given everything equal today should see production increase going forward in the last half of this year.

Alright, that's all I had thanks.

Thanks.

Thanks, Paul.

Your next question comes from the line of Ken Montara from BMO. Your line is now open.

Good morning, and thank you.

How are the inventories.

The European.

Imports.

Alright, I know the actual volumes have started to come down.

But there's still a lot sitting sitting along the eastern seaboard.

Yes, it's definitely moderating for sure.

I mean, obviously, we saw some fairly significant increases on what was the imported tail end of last year and beginning of this year.

And that was all about the correction of the supply chain constraints that were that were happening over in Europe .

So a lot of that would made its way to market.

I will say that that quite a bit of that what it was aged so you could tell it was sitting on the docs, whether in Europe or in.

In the U S for some time and so that's one issue that the.

That the Indias industry and the markets are working through.

I can tell you the well you see the stats as well the imports that are coming in have dropped dramatically.

And our Intel tells us that there is potential for further.

Further declines.

So it's just a matter of time before everything cleans up but we're certainly hearing a lot less about imports today than we were.

Call. It Q1, so definite improvement.

Got it that's helpful and then.

Can you give us a quick update on how you guys are thinking about.

The multiyear Capex program that you all have talked about in the past is there any thought about.

Are you reassessing in terms of how you should approach it given.

And market backdrop, which is quite fluid.

Kitchen, Ian here, Thanks for the question.

Our adjustments to the Capex strategic Capex plan.

Largely unchanged.

Since our last call.

The key projects in the U S South.

Moving along.

And.

We continue to stay committed to those and feel that in the long term medium term long term loans will obviously pay off nicely for us.

So no no update.

Or changes expected in the Capex plan.

From last quarter.

Got it.

I'll jump back in the queue. Good luck.

Okay. Thank you.

Ladies and gentlemen, I say reminder, should you have any questions. Please press star followed by the number one.

Your next question comes from the line of heavier Battle from CIBC capital markets. Your line is now open.

Hi, good morning.

Do you expect in <unk>.

We'll be selected as a mandatory respondent and the trade case for me ongoing review and do you see any risks there just given the approach that the commerce previously took with the other eastern producer that was previously selected.

Yeah, Hey, remember I mean, we scenario plan for this so.

Or is <unk> ready to respond and take on the.

The work that is required if you are a selected so we're in really good shape that way. Obviously, we're continually running models. So we don't see a big risk coming at us either way whether were selected or not.

Yeah, I don't really have much more to comment on that.

Okay, Great and do you have a sense of timing as to when maybe a determination would be made there and when would that essentially take effect.

No.

No I don't actually.

Yes.

It's not this year so it would be.

It would be next year or the year after but.

Don't have the exact timing there.

Okay.

Fair enough and just last question on Amazon the fiber cost side, how do you see <unk> playing out.

It's a different operating regions.

Here.

Yeah.

Obviously in BC and Rick you can jump in if you if I missed anything BCE was the stumpage adjustment was great for us.

Is it sort of realign log costs to current market conditions.

The BC government move too.

A shorter timeline on stumpage adjustments, we think is positive and something that we've been working with our partners with and government to make happen for many years. So that's that's great.

But yes.

In our other jurisdictions, they're holding or reassessing downward so.

Yes.

Confident that given the market condition today, we're seeing the right trends and log costs across our system.

Good morning, it's Rick.

Exactly what Ian said, the BC interior expect stumpage to come down another 10 to $15 a cubic meter in Q3 versus Q2, and then we're also going to see some benefit in Quebec from fire salvage timber. So it will be a reduction in stumpage rate likely at the end of Q3 into Q4 and beyond.

$5 to $10 a cubic meter.

Okay.

Alright, great. Thanks.

All I had I'll turn it over.

Thank you.

There are no further questions at this time I will now hand over to the call to Mr. Fillinger. Please continue.

Okay, just to wrap up thanks for your interest in the company and as usual feel free to reach out to any one of us at anytime concludes.

Concludes our call and have a great weekend.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.