Q1 2024 Interfor Corporation Earnings Call
Good morning, My name is Julian and I will be your conference operator today.
Speaker Change: At this time I would like to welcome everyone to the enter four analyst conference call. All lines have been placed on mute to prevent any background noise. After.
Speaker Change: Go to speakers remarks, there will be a.
A question and answer session, if you'd like to ask a question during this time.
Press Star then the number one on your telephone keypad, if you'd like to withdraw your question. Please press star two thank you Ian Fillinger you may begin your conference.
Ian M. Fillinger: Thank you operator, and thank you everyone for joining us. This morning with me on the call I have brick Plaza Bonner Executive Vice President and Chief Financial Officer, and Bart Bender, our senior Vice President of sales and marketing.
I'll start off by providing a brief recap of our quarter provide some comments on the market outlook in several key initiatives before passing the call on to Ricky Bart.
Turning to our Q1 results our adjusted EBITDA was a loss of 22 million during another challenging quarter that was impacted by continued weak pricing to be clear current pricing is generally below industry breakeven levels, which is simply not sustainable for an extended period of time.
We've been proactive in addressing the controllable during these market conditions last quarter, we made the decision to indefinitely curtail or flown with operation in Oregon.
We've also done a good job, reducing working capital and recently, we announced the removal of 175 million feet of production across all North American regions to address the oversupply and weak pricing that exists today.
We've always been fact based and disciplined they consistently have been an industry leader when it comes to dealing with adjusting capacity are making tough decisions to strengthen our portfolio of operations.
We have a more positive outlook as we head into the back half of 'twenty 'twenty four and into 2025. However, we intend to continue to manage the business and our balance sheet conservatively.
Now ill turn the call over to Rick and he'll walk you through the financials.
Thank you Ian and good morning, all please refer to cautionary language regarding forward looking information in our Q1 and DNA.
At a high level and of course Q1 results were a slight improvement over the preceding quarter. The lumber markets continued to be challenging lumber.
Lumber prices remained unsustainably weak relative to average cost across the industry, resulting in cash margins hovering around breakeven levels across North America.
As Ian mentioned, our focus continues to beyond the controllable within our business. We're using this down market as an opportunity to strengthen the core of our business and set up for success over the long term.
Turning to Q1 earnings Interflora generated an adjusted EBITDA loss of $22 million on total revenue of $813 million.
Paired to the previous quarter revenue benefited from a 5% increase in lumber shipments and a 2% uplift in the average realized lumber price.
On the cost side reported production costs on a per unit of lumber basis were 5% lower quarter over quarter benefiting from a $14 million decrease in the provision against inventories.
Net loss of $73 million was realized in the quarter, which included $31 million of gains from the ongoing sale of coastal BC Forest tenures.
In terms of cash flows there was a 17 million dollar outflow from operating activities in the quarter as negative operating earnings were partially mitigated by the management of inventories to reduce levels.
Capital expenditures were as expected at $26 million in the quarter.
The sale of forest tenures contributed $29 million of cash.
Ultimately, our net debt to invested capital leverage ratio ended the quarter at 34, 7% looking.
Looking out over the remainder of 2024, we continue to expect collection of $64 million in tax refunds and further cash proceeds from the sale of coastal BC Forest tenures.
Regarding capital allocation, we will continue to take a conservative approach as we manage through this sustained market weakness.
Primary focus is on reducing financial leverage into our target range below 25% net debt to invested capital.
Capital expenditures will continue to be restrained in line with previous guidance.
To wrap up and of course Q1 results reflect significant ongoing market weakness, which we view as unsustainable for the industry as a whole.
Fortunately for us well positioned to successfully navigate through this period supply rebalancing with demand.
That concludes my remarks, I'll now turn it over to Bart.
Okay. Thanks, Rick Good morning, everyone lumber markets have been difficult to forecast for some time now the near term market indicators remained remain mixed longer term fundamentals remain positive.
Bart Bender: Our expectation wise to see an improvement in lumber demand through the spring building season. However, at this time remains elusive and less likely as time goes on.
We are encouraged with the single family housing starts with new homes, continuing to take an increased share at home sales. We expect this to continue as we finish out the year.
Multifamily construction is less certain.
Affordability takes a greater toll on that segment.
When interest rates start to decline in multifamily is positioned to benefit.
With that builder sentiment has been mostly positive although most recently it started to decrease we expect this to stabilize in the coming months.
Repair and remodel end use segments have been mixed have seen mixed results recently the programs, we have with box stores continue to meet expectations at this time of year.
However, with U S household savings largely exhausted, we're expecting barring rates to factor into future spending.
Lumber markets are highly sensitive to demand and supply levels and we know that there is a fine line here, we've recently announced curtailments and expect to continue to manage our production to meet our customers' demands.
We're seeing a similar response across our industry as it becomes more evident that lumber demand is likely to remain at current levels for longer.
As we move back into as we move into the back half of 2024, we expect a better balance between supply and demand.
I'll stop there Ian back to you.
Ian: Okay. Thanks, Bart Thanks, Rick.
Speaker Change: Operator were.
Ready to take any questions.
Thank you for analyst should you have a question. Please press star one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing any keys. If you would like to withdraw your question. Please press star two.
Please for your first question.
Your first question comes from Sean Stewart from TD Cowen. Please go ahead.
Thanks, Good morning, everyone.
In the question on the downtime plans from May through September.
The implication I guess is youre, taking it across the platform.
I'm wondering if you can give a sense of relative weight region to region, and then I guess, what I'm trying to get at is.
Generally the U S South is.
Speaker Change: Quite compromised at these prices in terms of margins any more granularity you can give on.
The relative weighting of of where they stand times can be taken.
Yes, John I don't have the specifics yet because.
We kind of look at when we look at the downtime we look at the operations there.
Yes.
Performing.
Better so BC.
Is.
Okay right now.
In the northwest.
And when we look at eastern Canada in the South we look at it on individual mill basis more than <unk>.
Regional basis so.
Where our mill is in.
In a situation, where it's more positive than a mill that may be in a tougher situation. We're taking the tougher situation in the downtime and continuing to obviously operate the mills that are.
In a more positive situation. So it really is.
Not more regional it's more mill specific and so we're being smart about obviously our portfolio.
Mills and running the ones that we.
We feel our.
Maybe a little advantaged over other ones at this point in the market.
So that's how we're managing that and it really is spread.
Speaker Change: Across North America, each region has.
Okay. Thanks for that.
Second question for Rick.
On leverage.
I guess in the hopefully unlikely event that this price trough extends substantially longer.
At what point.
Is do you start to think about it.
Getting ahead of the covenant on debt to cap and presumably this isn't.
The concern in the next few quarters, but.
You likely don't want that ratio to get to 50% before you worry about it how do you think about.
Available liquidity and covenants at this point.
Hey, good morning, Sean.
Yes.
Leverage ratio is at 34, 7% at quarter end.
And we've got plenty of headroom.
Up to our leverage covenants, we also have ample liquidity today of around $300 million. So.
And here now where we're not concerned and when we look out we've got plenty of levers to pull to manage our leverage ratio well first and foremost its operational excellence, making sure. We're doing the right things at the right time within the business focusing on maximizing cash flows from from operation has alluded to where we're targeting our underperforming operations when it comes to downtime.
Those sorts of things. So that's the first level, we're focused on to sustain ourselves through this market weakness.
As I mentioned in my comments, we've got significant nonoperational cash flows coming ahead, which bolster our liquidity and leverage ratio. So that would be the tax refunds. This year of around $64 million and when we look out to 2025.
We're generating.
Losses, this year, which will.
The result in cash refunds next year as well on a tax basis. So.
Theres not to look ahead to as well in 2025.
And then when we think about our BC coastal tenures we've got.
Significant progress made already but looking ahead there are substantial cash flow as we expect this year and into 2025, you can think about that in the range of $65 million to $70 million in total net cash flows to enter four to come over the next 12 to 18 months.
You can think about half of that happening in the next nine months of 2024, and then the remainder into 2025.
And when you factor all of those things in we feel we've got plenty of headroom, but certainly.
As the market stays down and we progressed through this we're going to be proactive if we need to be but we're not at that stage.
Yes.
That's great detail, thanks very much.
That's all I have for now I will follow up if I need anything else.
Okay. Thanks, Sean.
Your next question comes from Matthew Mckellar from RBC capital markets. Please go ahead.
Hi, good morning, Thanks for taking my questions.
Maybe first I think you mentioned seeing a supply response in lumber across the industry.
Do you think the impact of that response is reflected in the market and current cash pricing today or should we expect that impact to be increasingly felt.
As the quarter progresses.
Yeah, Hey, Matt Ian here I'll jump in and Bart.
Do the same but I would say Matt.
We've been underwhelmed by the response.
From the industry to really kind of it.
Rebalanced the situation here.
Having said that well.
We are getting Intel both from announced curtailments in.
Quiet curtailments there that are happening. So we're positive on that that people are starting to do that I would say Matt that we're.
We're probably not going to feel that capacity.
Coming out for.
60, or so days.
Just given that as you well know.
When you do take a saw mill down you generally.
You need to run the Planer mill and continue to move your inventory and that peaks.
Week to work through so.
I think theres a lag there before there'll be really any.
Feeling in the supply side in the in the market BARDA is that fair totally and the only thing I would add to that is that the distribution channels.
Over over the years have have kind of.
Introduced a discipline, where theyre not reacting to announcements, but rather they're reacting to whether they are able to to resupply or what the lead times look like or what the.
Demand side of the equation looks like and so.
They won't react I don't think until they actually see it.
So less so on the announcements more so on an actual constraint in the marketplace.
<unk> point, that's going to take 60 60 to 90 days in my opinion.
Yes, Matt maybe just to close on this question.
We have seen a sizable decrease in our own inventories through some of the levers that we pulled.
A quite a bit on the lumber side.
So it is.
Our our check or opinion is it's pretty lean out there.
And so as this works through it will be interesting to see how.
How things unfold.
I would use that.
The word sizable decrease for for our situation in lumber and log inventories.
Thanks, I appreciate all the color.
And then last one for me I think you noted in February that Ics will be one whether it impacted log deliveries in BC.
Can you provide an update on how things have trended over the past couple of months and how the logged exit your mills of the profits are looking at this point.
Yes, I think in BC.
Yes.
<unk> got pretty competitive operations.
And we have.
Speaker Change: Water storage.
Couple of our mills, so I would say that were comfortable.
Generally in British Columbia, I would say, though that in eastern Canada.
Speaker Change: There's been challenges.
Yes.
In particularly in Quebec, when it comes to.
Log inventories with.
The warm weather and what have you so.
Yes, I think it's tight.
Inventories generally are in Canada are down more than double digit percentages.
If you kind of look from new Brunswick, all the way to to British Columbia in every region that we operate in kind of use that as an average.
Again double digit percentages down in Canada.
I wouldn't be surprised.
Come summer time.
Speaker Change: The industry some industry mills may be taking downtime for for log shortages, especially if there's an upset condition like <unk>.
Higher season, or something like that that would restrict logging during any kind of summer hours.
Speaker Change: Thanks for all the help that's all from me I'll turn it back.
Speaker Change: Thanks, Matt.
Your next question comes from Ben Isaacson from Scotiabank. Please go ahead.
Good morning, this is victor jumping on for Ben.
Victor: I just wanted to ask about the timing of recent curtailment supply seems to be acting rationally.
And with lumber prices up somewhat sequentially and we are we are in what is usually the peak construction season. So how do you see the demand side of the supply and demand balance it looks for the rest of the year and throughout the summer and into winter.
Okay, We've got a lot lot to unpack in there Victor.
I would I would have to say that.
The demand side as.
We're coming into the spring building season.
We're expecting we were expecting to see.
An increase in activity and frankly that hasnt that hasnt taken place and so.
It seems like this year, we're going to Miss.
Missed that part of it and when we're looking at that we think it comes down to two factors.
A decline on the repair and remodel side of it, especially when you talk about treating that's an area that we've seen.
Victor: Some.
Some slowdown and the other is multifamily.
Especially in the South multifamily is.
Has decreased and so.
The demand side of the equation has has seen a slowdown in and I would say that the supply side.
Has not from an industry perspective is not <unk>.
Bonded yet.
So we're still in a position where we think the markets are oversupplied and quite frankly the pricing.
That's in place is reflecting that.
So overall, we think demand is going.
Victor: Going to be quite similar.
Year to date for the balance of the year.
Hey, Victor Ian here.
I'll just add to barge.
We see that the spring buying season is essentially failed to take off this year.
And so when we look at that.
And we look at where the U S South.
Pricing is in the U S south typically isn't impacted by downtime decisions.
Given the low cost fiber base, there, but prices in the U S south or near 50 year lows on an inflation adjusted basis.
So as you start to see these impacts are permanent and temporary curtailments coming into effect.
With lean inventories that we talked about throughout the supply chain I mean, any uptick in demand could provide meaningful tension in the pricing.
But if they don't recover obviously, we expect given.
Particularly in the U S south it.
The 50 year lows.
Continued supply responses.
Thanks for the color guys.
Ladies and gentlemen, as a reminder, do you have a question. Please press star one.
Your next question comes from Keith Janet.
From BMO capital markets. Please go ahead.
Keith Janet: Thank you and thanks for taking my question.
Keith Janet: But I mean I.
I think this.
Weaker than expected pick up in.
Demand is echoed by some of the other.
Sure.
Can you talk about what you guys are seeing in terms of your volumes in R&R on that percentage year over year basis, any any color around that.
I won't get into the to the.
To the detail, particularly but I will commentary is.
We have a box store programs.
That are out there. So we have a pretty good view of the consumption. That's taking place there and I would say, it's matched with what we budgeted so far year to date.
Generally Q1 is a bit slower Q2 starts to pick up and that's what we're that's what we're seeing quite frankly.
It's the trading side of the business.
I think is has really seen a slowdown.
And we see that through the programs that we have in place for that as well and so.
Really almost need to look at it.
Two way so that the DIY out of the box store fairly stable.
But there does seem to be.
Slowdown with with any of the treated products. Obviously, that's your exterior type projects in the backyard and those types of things those are those have definitely slowed.
And I would say if I was just going to give you a percentage on the treated side youre looking at in the 20% range.
Decline on that side, so fairly significant.
Okay.
That's helpful and then.
Rick on 'twenty 'twenty four Capex is 90 million till the plan do.
Do you have any flexibility there.
Hi, Kate.
Yes, $90 million still is the plan and we're on track for that.
There's certainly a little bit of flexibility there as we take some downtime and maybe that requires less maintenance capex, but as it stands right now we're still on plan for the $90 million.
Got it and then just coming back to financial leverage.
So you called out a couple of items the tax proceeds BP and yours.
Anything outside of that you can do that.
To accelerate bringing down.
The financial leverage.
Do you have any of the advanced materials recently sold.
There are number of duty rates.
Is that something that you guys are considering at all.
For sure we did see those transactions announced without knowing all the terms, though it's hard for us to comment on the economics. It is nice to see though that some value as being ascribed to the duty deposits out in the open market. We certainly believe our $560 million you asked it.
<unk> represents significant value to our shareholders.
In dollar terms on a per share basis, our duty deposits represent about $11 Canadian on an after tax basis. So there is significant value there in our minds in terms of the leverage piece.
As we look out I mentioned, it's the operational excellence piece, making sure we're getting the most out of our operations out of each individual operation. So we look closely each and every week at each operation and make decisions based on the outlook for those in with the mindset of maximizing operational cash flows and minimizing the impacts that are.
Our leverage as you worked through the down market.
Maybe Rick I mean.
Okay Tim.
When we look at those transactions that happened I mean, they're not attractive.
To us to consider I guess.
I agree.
Alright.
That's helpful color.
Kevin One thing that you know.
When you talked about R&R and what have you just to come back to that for a second.
Southern yellow pine.
Supplies a lot of that.
And then just kind of want to remind.
Folks that were not.
Heavily southern yellow pine is maybe some people think we do with eastern Canada about a third of our production is in the SPF.
Ed.
Important is that.
SPF in southern yellow pine.
Entirely exchangeable are substitutable. So we are benefiting on the Sps side of the business when it comes to pricing on.
Keith Janet: When you look at the southern yellow pine.
Our diverse geography.
And to move to to eastern Canada to capture some of the Sps that was available through those acquisitions is we're seeing positive.
Pricing.
When we look at those gap.
Thank you and I appreciate the color I'll jump back into queue.
Thanks Peter.
Your next question comes from Amir <unk> from CIBC capital markets. Please go ahead.
Good morning.
Bart I wanted to follow up on the earlier question about the multifamily weakness.
I was just wondering if you had a sense as to perhaps how much more would intensive multi starts are in the south versus.
The rest of the U S.
Maybe southern Pine just that much more prevalent in multifamily usage in the south because when you look at the actual starts they're down more in the south but not necessarily that much more than the whole U S.
Yes.
I would take a look at the permits side of that equation as well.
But I think if you look at the big the states that are big consumers.
<unk>.
And builders are multifamily. So this is your Florida, Georgia and your taxes I mean.
Those those three states I think.
The activity.
Has decreased fairly significantly.
On the multifamily side and in particular, if you look at the permits I think youll see.
Trend there and obviously those those markets are right in the backyard of.
Keith Janet: Upsetting yellow pipe producers and are largely.
Supplied by southern yellow pine so.
I think the impact of that is a little bit more heightened in the south and that really.
I'm looking at that as one of the one of the main reasons that where we're seeing the market that we have.
In the south.
Okay, No fair enough.
That's helpful. And then just last question I had as part of the balance sheet.
Management.
You look at potentially divesting any of your saw mills.
Well mirror.
A good question I mean, our portfolio.
Third year, so operations now.
Obviously.
<unk> got different stages of each ones and you have got ones that are in the top ones that are in the middle and ones that need some work. So we're always looking at those.
As an example last quarter, you'll recall, we sold Acorn.
A year or so ago.
We shut down our Hammond Cedar Bill and converted data in your real estate play.
So at the end of the day I mean, we're always looking at how do we improve the.
The ones that need it what's the capital investment whats the timeline, how is the fiber supply and fiber security.
Just him here I mean Jed.
Generally yes.
I mean, that's one of the most important things that we're doing all the time and always trying to improve or are <unk>.
Quite a path to improvement.
For the shareholder for the company so.
It would be it would be yes, we're always looking at our portfolio on how to improve it.
Okay Fair enough. Thank you and Thats all I had.
Great. Thanks Amir.
There are no further questions at this time I will turn the call back over to Ian for closing remarks.
Okay. Thank you operator, and thanks, everybody for your interest in our company and.
Feel free to reach out to myself recur Bart anytime in this concludes our call have a great day.
Speaker Change: Ladies and gentlemen. This concludes today's conference call you may now disconnect. Thank you.
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Yes.
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