Q3 2023 Interfor Corp Earnings Call
Good day, ladies and gentlemen, and welcome to the inter for quarterly analyst call at.
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I would now like to turn the conference over to Mr. Filling your please go ahead.
Thank you operator, and thank you everyone for joining us. This morning with me today on the call I've got rig pause Bon Executive Vice President and Chief Financial Officer, and Bart Bender, our senior Vice President of sales and marketing.
Before we get into our normal course call I'd like to welcome Jeffrey Evans to our board of Directors, we look forward to working with Jeffrey and his 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 on to Rick and Bart.
Turning to our quarter, we generated a positive $32 million of adjusted EBITDA during a very challenging quarter that was impacted by both wildfires and price lumber price movements.
We advanced our capital projects in the U S South and remain flexible to adjust our plans in line with market conditions.
Our balance sheet remains well positioned during the quarter, we reduced our leverage and improved our liquidity.
With respect to our outlook, we feel housing demand has been relatively strong in the face of rising interest rates, but the most recent round of hikes appears to be having an impact.
Combined with this lower type of our slower time of year as resulted in buyers being extremely cautious and limiting purchasing two immediate needs only.
On the supply side inventories at both the producer and supply chain level are low and operating on a just in time basis for shipments.
Production curtailments are anticipated from the industry if the current prices continue.
In closing barring any winter transportation issues or unforeseen events lumber prices are expected to remain at or near industry breakeven levels for the remainder of the year.
I'll now turn the call over to Rick who will run you through the financials.
Thank you Ann and good morning, all please refer to cautionary language regarding forward looking information in our Q3 MD&A.
From a high level perspective, <unk> Q3 results reflect the ongoing lumber market uncertainty driven by the higher interest rate environment and delayed supply side responsiveness.
Regardless, and therefore remains well positioned to successfully navigate through this environment with its high quality and recently diverse portfolio of operations.
In terms of Q3 earnings and therefore generated adjusted EBITDA of $32 million on total sales of $828 million.
Compared to Q2 revenue benefited from a slight 2% increase in the average realized price on lumber sales, which was more than offset by a 10% decrease in shipments.
The lower lumber shipments were mainly due to temporary operational disruptions caused by wildfires in BC.
Production costs on a per unit basis were higher quarter over quarter due mostly to Q2 cost benefiting from a $28 million reduction in the reserve against inventories, whereas Q3, only benefited from a $3 million reduction of the same.
The operational disruption in BC caused by wildfires also contributed to higher costs in the third quarter.
From a balance sheet perspective financial flexibility improved in Q3 with a net debt to invested capital ratio dropping to below 29%.
This improvement was driven by cash flow from operations totaling $107 million.
Including $71 million of income tax refunds related to the prior year.
A portion of this cash flow was used to fund capital expenditures totaling $39 million.
Of which the majority was on strategic mill improvements in the U S South.
Looking ahead, we still expect to receive an additional $25 million use of income tax refunds before the end of this year.
We'll continue to execute on monetization of our coastal BC operations to further bolster the balance sheet.
In terms of capital allocation, our key priority is to continue managing our balance balance sheet leverage towards our target range.
Also continuing to invest in select U S. South operations were attractive opportunities exist to optimize returns.
We continue to anticipate capital expenditures for 2023 to total about $210 million.
For 2024, we estimate capital expenditures will total about $140 million.
To wrap up we will continue to focus on operational excellence to maximize maximize margin on each shipment, while conservatively managing through the ongoing market uncertainty.
That concludes my remarks, I'll now turn the call over to Bart.
Thanks, Rick as usual I'll provide comments on our market outlook in general the outlook varies whether you are focusing on the medium term or.
For the short term and the medium term the market fundamentals remain encouraging buoyed by tailings on several key factors such as under built housing demographics age of housing inventory household formation rates.
Et cetera, all of these indicators support increased lumber demand in the future.
In the short term the market outlook is less certain affordability a combination of both the price of a house and mortgage rates is impacting the demand for homes and consequently builder confidence.
This is causing some volatility in the housing starts and within housing starts the percentage of multifamily versus single family.
With new home construction accounting for approximately 30% of lumber demand and single family construction consuming three times out of multifamily construction. This volatility is impacting lumber demand.
With that being said recent data in the last few months has been encouraging with the percentage of single family starts stabilizing closer to 70% of total U S starts this will be a key item to focus on going forward.
On the repair and remodel component of end use which accounts for approximately 40% of lumber demand our takeaway remains stable with many existing homeland homeowners remaining in place remodeling opportunities have increased.
This is helping to keep repair and remodel lumber demand steady.
When you combine all the lumber demand sectors in one.
And consider current supply dynamics, including the impact of European imports. The short term outlook for 2023 and into early 2024 shows few signs of improvements from current levels.
Our market intelligence suggests end market lumber inventories are stable on the low end of the spectrum.
It's important to recognize that the lumber market is very sensitive to demand and supply dynamics.
As you work through these short term uncertainties, we know that markets can improve quickly.
We will continue to manage our business accordingly matching our production to Matt as we worked through the short term headwinds and move closer to medium term tailwind.
With that back to you Ian.
Okay. Thanks, Bart operator, we're ready for questions.
Yes.
Thank you.
Ladies and gentlemen, we will now begin the question and answer session.
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One moment. Please for your first question.
Your first question comes from roughly from.
From BMO capital. Please go ahead.
Hi, good morning.
Could you talk to talk about.
Demand trends that you're seeing in <unk>.
Just since the end of Q3.
Also just what youre seeing in the channel like in terms of inventory.
Sure I'll answer that it's Bart here.
Sure.
Our best indicator on on the repair and remodel side comes through our actual programs that we have with the customer base that services predominantly that.
And <unk> sector.
So we get.
Weekly indications of.
The kind of demand that we're seeing and I can tell you that.
The consumption that we're seeing through.
That portion of our customer base has been steady and it's been steady for some time.
Actually and so we're not seeing any any indication.
Based on actual business done.
But anything is going to change from from where its been at so we've been actually.
<unk>.
By the amount of business that we're getting on that side of it.
Moving over to inventory levels.
It's always difficult to put your finger exactly on on where the where the sort of the end market industry levels are high.
Over the intelligence that we have through conversations with customers through some reporting that is available.
Yes.
Inventory levels are sort of in that that bottom third of I would say historical norms.
Those are the end market level. So I can tell you on the.
On the inventory levels on our side of the equation, we continue to be very diligent in how we manage those.
We work very hard to make sure that.
Our in process and finished goods inventories are capped.
At strategic level switch that is the case for us.
Yes.
Oh, sorry go ahead.
No go ahead.
I was just going to add just on top of that.
We can probably do you have a better sense of what's going on with European lumber imports.
But sitting here.
U S ports.
I think for the next eight months.
Yes, I mean, obviously the year started out.
A bit differently I think than historical trends, we saw quite a quite a volume come in from the from the European importers.
But I would say from February on we've just seen a steady ratcheting down to those numbers.
And I think we will end up in.
In 2023, we will end the year at fairly similar to 2022, however, the pace of the last call. It six to eight months has been.
At at a lower level.
Would suggest that 2024 overall inventories will be coming down to kind of more historical levels of what we saw maybe in.
2020 is a good indication maybe even 2021.
So in around that high twos, low 3 billion board feet annually.
Thank you and then just a last question for me.
Perfect.
I saw your.
Preliminary Capex Capex program for next year.
$80 million I believe.
This weird.
Paul but coming from is there like a rethink on the multiyear Capex program or just any color you can provide.
This is Ian I'll take that.
Yes, our Capex program.
Continually.
Advertising.
It's flexible we have.
Capex team in place where I think.
Can be different than some other others in our industry, where our capital projects are.
Manage an engineered supervised.
<unk>.
Executed on with an internal team.
Based out of it.
That gives us the ability at different points in times for a multitude of different reasons, which could be market conditions could be labor availability.
It could be scheduling.
Moving projects to support startups of other projects so.
The Genesis behind Us moving those around has a little bit to do with all of those.
I think that's a strength of <unk>.
Got tied to long term contracts that demand projects to be.
Done at times, where the market doesn't need any extra wood coming on the market.
So really it's that.
More than anything the other thing that you also changes.
Lay out a plan from <unk>.
2018, and then.
Lay it out for five or six years as costs and in some projects.
Yes, it's <unk>.
And prudent to look at how costs have changed over the last two.
<unk> 24 to 36 months, so some of that factors into.
Possibly.
Laying or pushing out a project.
Now.
The right threshold paybacks to be achieved et cetera. So.
What you are seeing in our in our plan going into 2024 is really a combination of all of those factors.
Thanks Ian.
With that I'll turn it over good luck next quarter. Thank you.
Okay. Thanks for the questions. Thanks Rajiv.
Thank you.
Your next question comes from Gotcha.
From CZ. Please.
Please go ahead.
Hi, everyone of cash you're on the line just sticking with Ross. Your question. Ian can you provide some context around the nature of the products projects that are being deferred in 2024.
I would say that.
There is one project that we're doing.
And Thomas.
A large multi year project.
Our goal is to finish that in 2024.
Other than that there is a multitude of smaller projects in 2025.
At a couple of mills there either.
Not big projects, but have great paybacks, and then there is one or two in Ontario that we're looking at for 2025 2026.
So.
That's the high level Gantt chart of what our projects look like over the next few years.
Okay and for the projects, where you've indicated is more prudent just from a cost perspective to hold back what's the magnitude of the current compression that you've been seeing or the expected return compression.
Yes, I mean, we're always shooting for that hurdle rate to 20%.
So when they go north of that.
We take a hard look at it and then decide.
With an appropriate risk level or whether they continue or like I said, we have flexibility when when prices and equipment prices get too expensive to back off. So soon is it trips that.
Threshold it really gets our attention at the senior level and then we talk about it.
And make the right decision.
I would kind of leave it at that.
Great Okay. Thanks for that.
Maybe taking it back to market you gave some context in your prepared remarks or in order files.
Can you comment.
Or is that are stronger on a relative basis and others.
Preliminary discussions that youre, having for 2024 with us looking like.
They are generally things are trending normally from a seasonal perspective.
Yes.
All good questions.
It's interesting we've got a fairly unique perspective.
The markets with.
The regions that we operate on it I can tell you that.
Sure.
Debt markets that each region has its own sort of dynamics that are involved and it's not always one consistent region thats showing.
Increased activity versus another it does move around the market is fairly dynamic that way.
The business as we get into 2024 right now is the time that you talk about.
Our partnerships and programs and working with our customers and getting set up for next year.
The interest to partner with <unk> remains high.
We've we've got a.
Very strong customer base.
That's that's been we've been.
Servicing them for years.
And a lot of them.
The bolt on from what we acquired in the East So we feel like we're in a.
Pretty solid position they're in.
And then we just have to just see how the market goes.
It really is.
Uncertain right now and.
Yes, we will just react to the demand that we see from the market given given our sort of network of of <unk>.
Outreach too.
By region to the different customers.
Yes, I would just add to <unk> comments.
And this is.
I'm, putting words in bart's, both but he spoke about this but.
The advantage that we have.
We often get asked around growth in our last acquisition was it about a year ago today almost.
Sure and New Brunswick.
We are seeing.
Significant customers starting to recognize.
Yes.
<unk> and depth of our company.
Customers are now that would be traditionally buying one species in one area.
Our.
Are now buying from all areas in our company and so we are getting.
Great traction.
With a number of very important customers that are now.
Buying from us in different regions. So I would say that that's true.
Nice.
Synergy that we're getting the other one is that.
We are the largest.
Producer in the World.
Very.
Heavy to MSR so.
Single family.
Homes.
Start to improve which.
<unk>.
Look at FDA forecast and accept that as a trend.
We should be benefiting from that going forward.
Given that there was some depression in single family homes over the last 18.
Months or so so we do see.
As Bart opening comments medium term.
Some nice trends that.
We're expecting.
Okay. Thank you both for that thoughtful commentary last one for me.
Maybe just speak to your overall framework for thinking about where share buybacks from here.
Broader capital allocation program.
Good morning cash it's Rick.
Certainly, we think where we're trading today represents a significant value opportunity.
As we look at our balance sheet, we'd like to be back into our target range before we start thinking about share buybacks. That's certainly high on our priority list in terms of capital allocation. So we'll be keeping a close eye on that going forward.
Thanks, Rick Thanks, everyone. That's all from me I'll get back in the queue.
Thank you next question.
Thank you.
Your next question comes from Paul Quinn from RBC capital markets. Please go ahead.
Hey, good morning, guys. Thanks very much.
And then just a follow up on that targeted range. If you could remind us what that is and when do you expect to get there.
Sure Paul Good morning, it's Rick.
That range for us is 5% to 25% or just slightly above that today.
Round, 29%.
There is no real timeline.
But we can give you on guidance to get back down to 25%, but we're certainly comfortable where we're at we've got some some cash flow opportunities in terms of monetizing the coast that will certainly benefit us over the next 12 months to 24 months that will help bolster the balance sheet. We still have some additional tax refunds coming in $25 million you asked that all that will also help.
But certainly the market weakness today is.
Something well keep an eye on and that will be the largest driver of when we'll be able to.
Recover back down into our target range.
Okay. Thanks.
Congratulations on the BC coastal tenure sale.
Wondering if we can but the timeline for the remaining balances and whether we can use those.
So metrics.
Indicator for what your eventual net proceeds will be for it.
Yes.
<unk> got a policy.
Yes.
Pleased to be moving forward on that kind of unencumbered if you will.
And.
The interest.
We've been working on for probably two years now.
Extremely high.
Advanced conversations with a multitude of.
People interested in that.
10 years.
Lots of support from the BC government, who is behind the strategy.
And so.
As these things progress, which we expect will be on a regular basis.
Yes, we will keep you in the street informed but we expect these to be rolling in over the next 24 months.
And Paul if I could just add the economics on the transaction that we announced with our press release yesterday.
In line with what we would expect to be able to realize on average over the course of the next 24 months or so on the remaining 10 yourselves.
Okay, Great and then just lastly, if.
If you could give us a high level sort of update us what's happening on that softwood lumber file do you see any movement forward I mean, some of your competitors have talked about.
An increase in discussions.
If we're talking 24 months to settle that goes what's the timeline on suddenly in.
Softwood lumber.
Yeah, Paul I'll take a shot at that.
I've listened to the responses from others I don't think I can add much more other than on the Canadian side.
The cooperation from coast to coast is extremely high on what a Pan Canadian view would look like at the end of the day. It's the two governments have to come together, if theres going to be a negotiated settlement, which.
Given the political environment in both countries might be a while.
And on the courts.
Really the roadblock or getting the panel set for.
The review.
The legal case.
Which is probably in 2025 best case scenarios if there.
If there was a.
Okay.
Refund.
Through the court system, and probably be in that in and around that range and if theres a negotiated settlement to we'd probably be slightly before that.
Alright, that's helpful. Thanks, a lot.
Thanks, Paul Thanks, Paul.
Thank you Lee.
As a reminder, should you have a question. Please press star one.
Your next question comes from Irene <unk> from CIBC capital markets. Please go ahead.
Hello, Good morning, I know you broke.
Okay.
The R&R trends that Youre seeing.
To provide some color on your R&R demand expectations for 2020 or do you see.
Volume growth there.
Yes. Thanks.
I think I did mention that we expect.
Repair and remodel sector to be fairly steady.
We've seen that throughout <unk>.
<unk> 2023.
And as we look at.
Our own results plus.
What we're hearing from our customer base, where we're expecting.
Similar trends through 2024.
Okay, Great and then given your ongoing capital project what level of production you targeting next year.
Hey, good morning, we don't provide forward looking production guidance, but certainly.
Given some of the projects that are ramping up today and over the next quarter or two we expect some uplift in production from where we are this year at a current run rate basis.
Okay. Thanks, that's helpful. That's all I have for now I will turn it over thank you.
Thank you. Thank you.
Thank you.
There are no further questions at this time, Mr. Phil Wenger. Please proceed with closing remarks.
Okay. Thank you everyone for your interest in our company and if you have any further questions feel free to give us a call or drop us an email at any time.
This concludes our call. Thanks again goodbye.
Okay.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you <unk>.
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