Q3 2024 Interfor Corp Earnings Call
Kelvin: Good morning, my name is Kelvin and I will be your conference operator today. At this time, I would like to welcome everyone to the Inter4Analyst conference call. All lines have been placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star button followed by the number 1 on your telephone keypad. If you would like to withdraw your question, please press the pound key. Thank you. Mr. Fillinger, you may begin your conference.
Mr. Fillinger: Okay, thank you operator and thank you everyone for joining us this morning. With me on the call I have Rick Pozzebon, 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 before passing the call on to Rick and Bart.
Turning to our Q3 results, our adjusted EBITDA was negative $22 million during yet another challenging quarter that was impacted by continued weak pricing.
Mr. Fillinger: During the quarter, we reduced production across our platform, including indefinite closures at two mills in our U.S. South region.
Mr. Fillinger: During the quarter, we also announced plans to exit our Quebec region, selling our three manufacturing facilities and closing our regional office in Montreal.
These decisions have strengthened our portfolio by lowering both our production and overhead costs.
We did see additional industry supply reductions made by other manufacturers and believe about 10% of the industry capacity has been removed.
Mr. Fillinger: The full impact of these supply reductions will come to light over the next two to three months.
Speaker Change: Thank you, Ian, and good morning all. Please refer to cautionary language regarding forward-looking information in our Q3MDNA.
Mr. Fillinger: Interfor continued to face weak lumber markets in Q3, and our earnings for the quarter reflect this.
Despite the earnings weakness, we were able to generate positive cash flow from operations in the quarter, as we collected on tax refunds and further reduced our working capital, while continuing to realize proceeds from the sale of non-core assets.
Mr. Fillinger: As a result, financial leverage has remained relatively flat quarter over quarter at 36%, while available liquidity grew to over $350 million.
Looking through the third quarter, we are encouraged by the significant and mostly permanent lumber capacity cuts across the industry this year.
Mr. Fillinger: as well as the U.S. Fed beginning to cut interest rates.
Mr. Fillinger: These factors have contributed to steadily improving lumber prices since early July, which are now up over 20% since that time.
Mr. Fillinger: With respect to Q3 earnings, Interfor generated an adjusted EBITDA loss of $22 million on total revenue of $693 million.
Mr. Fillinger: Revenue declined by 10% quarter over quarter, driven mostly by a 10% decrease in lumber shipment volume, combined with a 5% drop in the average realized lumber price.
Mr. Fillinger: On the cost side, reported production costs per unit of lumber sold were flat quarter over quarter, despite the lower volume.
Mr. Fillinger: Ultimately, a net loss of $106 million was realized in the quarter, which included non-cash impairments totaling $91 million associated with the previously announced sale of our Quebec operations and indefinite curtailment of our mill in Somerville, South Carolina.
The company's financial position was supported by $38 million of operating cash flows in the quarter, driven by the receipt of tax refunds totaling $55 million and release of working capital amounting to $7 million.
Mr. Fillinger: Looking ahead to Q4, we are seeing improved operating cash flows from the higher lumber prices. We have incremental tax refunds of $13 million already in hand and we expect over $30 million of cash to be realized from selling our Quebec operations and ongoing disposition of coastal BC forest tenures.
Mr. Fillinger: Regarding capital allocation, we will continue to take a conservative approach focused on reducing our financial leverage.
Mr. Fillinger: As part of this, we continue to expect capital expenditures for 2024 to be approximately $70 million, while our preliminary guidance for capital expenditures in 2025 is approximately $75 million.
Mr. Fillinger: To wrap up, Inter4's Q3 earnings reflected a weak but improving lumber market.
Mr. Fillinger: Interfor is well positioned to benefit financially from the rebalancing of supply with demand that is taking place across the industry.
Mr. Fillinger: That concludes my remarks, and I'll turn the call over to Bart.
Bart Bender: Thanks Rick. I'll make some Market Outlook comments. We're at an interesting inflection point in the lumber market, which are now starting to show signals that we're leaving the trough markets behind and beginning the journey to a better supply-demand balance and ultimately higher prices.
Bart Bender: Timing really is of the essence with this. On the demand side of the equation we know that there is pent-up demand with new home construction, particularly in multifamily, and additionally we believe so in repair and remodel.
Bart Bender: Given the challenges in affordability, frankly we're impressed with the resilience of Housing Starts. Clearly a signal that despite this affordability challenge there continues to be decent demand for new homes, especially single family.
Bart Bender: On the repair and remodel side, rate lock on existing home sales is a constraint on move up sales and the repair and remodel that comes along with that. This too will only improve as industry rates decline.
Mr. Fillinger: Turning to the supply side of the equation, the amount of lumber curtailments has been significant, particularly in the back half of 2024. Both the U.S. South and British Columbia have shouldered a lion's share of these reductions.
Mr. Fillinger: It is our opinion that the full impacts have not reached the markets, however the expectation of reduced supply in 2025 is resonating with our customer base.
Mr. Fillinger: Logistics capacity has been excellent and for the most part consistent which continues to allow shorter restocking lead times to our customers which in turn means they can continue to lower their inventories.
Mr. Fillinger: We think the industry is operating at the low end of historical inventory averages.
Mr. Fillinger: As supply tightens and demand increases, you will see a multiplier effect in the market, with not only more demand to satisfy but also a supply chain that will require more robust inventories to meet this demand.
We expect this multiplier impact at some point in 2025.
Mr. Fillinger: Looking into 2025, we are seeing more interest in secured supply in the form of volume contracts from our customer base.
Mr. Fillinger: This is widespread across all customer types and supports our view that supply is balanced at a time when demand is expected to increase.
I'll stop there and hand it back to you, Ian.
Speaker Change: Okay, thanks Bart, thanks Rick. So operator, over to our Q&A period.
Speaker Change: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star button followed by the number one on your touchtone phone. You will hear a prompt indicating your hand has been raised.
Speaker Change: Should you wish to decline from the polling process, please press the star button followed by the number 2. If you are using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question.
Speaker Change: Your first question comes from the line of Matthew McCullough of RBC Capital Markets. Please go ahead.
Matthew McCullough: Hi, good morning. Thanks for taking my question. I'd like to start just by following up, excuse me, on the comment Bart made
Speaker Change: around reduced supply resonating with your customer base and customers looking to secure more volumes for 2025. Can you give us a directional sense of just how significant that change has been and how much more volume your customers are looking to secure year-over-year?
Thank you.
Speaker Change: Yeah, I'll be careful with that. I don't want to get into too much detail, but I will say that, you know, with the, I suppose, significant curtailments of late that have come up, it's prompted a number of customers to express concern on supply of some products for next year.
Speaker Change: And obviously, entering into programs and secured volume contracts is a way to mitigate
Speaker Change: mitigate that risk. I can tell you that that we we have entertained new inquiries and new programs and secured new programs in areas that we haven't been active in the past. So how that
Speaker Change: metres out I suppose across the across the business is a bit hard to say because I can imagine our competitors are getting the same kind of same kind of inquiries and same kind of calls
Speaker Change: But for me what it does is it it really shows that
Speaker Change: You know, as we go into 2025, there is a, I suppose, an understanding with a good portion, not everyone, but a good portion of our customer base, that at the current supply levels, there will be some challenges for some products in some markets.
which is obviously a good thing.
Thanks very much for the color.
Speaker Change: Last one for me, Ian, I think you said you're estimating that about 10% of industry capacity has been removed.
Speaker Change: What is your sense of what share of that capacity could come back up over either the short term or long term if markets improve?
Yeah, hey Matt.
Speaker Change: A good question. I would say, you know, in our view
Speaker Change: You know it's probably somewhere around that 50% ish somewhere around there
Speaker Change: I think in the permanent sort of indefinite category, you know, we're north of three billion feet as far as our tractor goes.
Speaker Change: It's not perfect science, as you know, and it's hard to...
Speaker Change: I would say it's probably in that neighborhood between 3 and 4 that would be indefinite.
impermanent. You know what's significant is
Speaker Change: Of that, I think it's over 40% in the U.S. South, which is...
Speaker Change: Unprecedented, as you know, I think BC is probably number two, somewhere around 35% from an indefinite permanent, so.
Definitely some...
Speaker Change: you know, positive signs from, you know, the supply side, you know, finally reacting to, you know, two years of pretty tough slugging on the lumber prices.
Great. Thanks for the help. I'll turn it back.
Thanks, Beth.
Speaker Change: Thank you. Your next question comes from the line of Ben Isaacson of Scotiabank. Please go ahead.
Speaker Change: It has changed since the e-comm purchase which is outside of the current market weakness
Speaker Change: So Victor, on our end, you cut out and we just heard EECOM and that was it.
Sorry, my bad.
Speaker Change: My question was, could you perhaps give another rationale for the Quebec transaction, specifically what had changed since the Ecom purchase, which is kind of outside of the current market weakness?
Speaker Change: yeah I mean you know we we did put out a press release on that so just to kind of give you the key points but I mean the fiber supply dynamic definitely changed
Speaker Change: for two reasons. One was, you know, the government outlook on environmental protection of some of the
Speaker Change: Quebec 10 years but also the record forest fires after the EECOM purchase.
Speaker Change: The Quebec fiber supply, in our opinion, is shrinking not just for us but for competitors and we've seen competitors having to curtail also in Quebec.
Speaker Change: And so, you know, the deal and the sale with the counterparty, I think, strengthens the counterparty's footprint, which is extensive in Quebec.
Speaker Change: versus, you know, our two mills and our one remand plant, so...
Got it. Thank you.
Speaker Change: Your next question comes from the line of Sean Stewart of TD Cowen. Please go ahead.
Sean Stewart: Thanks, good morning everyone. Ian, a question on your Georgetown sawmill.
sold chips to that asset.
Speaker Change: Early days, Sean, when a pulp mill drops, obviously it does have ripple effects.
Sean Stewart: There are some positives on it also. It does release highly skilled workers, which is
Sean Stewart: always nice to to see if you're if you're trying to
Sean Stewart: deal with that. You know, the pulp log, you know, also tends to grow into saw logs and so from a fiber supply it tends to grow in that area.
Sean Stewart: But the real outlet is, where does that chip go to?
Sean Stewart: We've already landed a supply agreement with another competitor mill in that region, and so I would say immaterial impact at this point, but we'll continue to monitor that.
Sean Stewart: more solid position Than having three mils, you know along the coast and getting down to one so
Speaker Change: I think that was a good move for us, but we are paying attention to the recent announcement there with the pulp mill in Georgetown, but at this point, no material impact.
Speaker Change: Okay, thanks for that and a question on the U.S. election followed, Ian, that...
Any internal views or from your your legal counsel on
Speaker Change: The potential, if Trump proceeds with a blanket import tax of 10 to 20%, is the internal view that lumber would be exempted from that given the ongoing
Speaker Change: countervailing anti-dumping duties that are already being paid. Do you guys have do you guys have a view on
potential
fall out from from his win.
Speaker Change: Early days, Sean, as you know, and there's all kinds of opinions, whether it was Harris or Trump as the president, I would say probably Q2 next year would be maybe a better time for us to give you a view of that. Right now, we're focused in on...
Speaker Change: What we've got, I would say that the platform we have, Sean, being in all regions, including Washington and Oregon and in the South, and then across Canada with a footprint.
You know, we're taking a view that...
You know generally
Speaker Change: You know could be positive for us relative to some of these tariffs
Speaker Change: that are in place today and coming in the future, just given A, where we're located, and B, the type of products that we produce.
Speaker Change: a little bit different from what we see some of our other competitors doing.
Speaker Change: That's great detail. I much appreciate it. That's all I have.
Great. Thanks, Sean.
Speaker Change: Thank you. Once again, ladies and gentlemen, should you have a question, please press the start button, followed by the number 1 on your touch-tone phone. You will hear a prompt indicating your hand has been raised.
Speaker Change: For your final question, we have Nikolai Gorbachev of CIBC Capital Markets. Please go ahead.
Nikolai Gorbachev: Hi, hope you're doing well. My question here is, sort of given the recent capacity rationalization and your current capital plans for 2025, could you provide an idea of what level of lumber production you're targeting next year?
Speaker Change: Well, I don't have it right in front of me yet, but I mean, we've been, you know.
Speaker Change: I think four plus, somewhere around there, billion board feet. So I would, I would say it's somewhere, you know, on that four to, you know, four to four or five.
Speaker Change: I was just hoping, hey this is Nick Lye, this is Rick speaking. It'll likely be around four billion board features given where we're seeing lumber prices, but that'll be determined based on ultimately the markets at that time.
Speaker Change: If they're strong, we'll be in that $4 billion bore point range. If their lumber prices are weaker, it could be less, or similar to what we're seeing this quarter.
Speaker Change: Okay, great. Thanks very much and could you provide any more color on sort of the pace of monetization of the BC coastal operations and what you're expecting there?
More detail there.
Speaker Change: Definitely I can take that. We're seeing roughly 55 million dollars of net proceeds.
over the course of...
this quarter and through 2025 in terms of the split.
Speaker Change: It will be about roughly $5 million of net proceeds this quarter and then the remainder being $50 million.
Great, thanks. And my last one here.
Speaker Change: Hoping you could provide some more detail on the R&R side. You mentioned things could be improving. Are you seeing anything incremental this quarter that gives you confidence?
Speaker Change: Yeah, thanks, Nicolay. To me, it comes down to the interest rates and what we'll see from that side. I mean, we know that there's a significant rate lock in place that's preventing a lot of the existing home sales from happening.
Speaker Change: We know that when existing homes are prepared for sale or have been sold, that there's usually an R&R component to that that follows. And so, as that side of the market picks back up, we think that there's...
Speaker Change: There'll be some unlocking of demand there. And then of course there's just simply the interest rates on what people, if they're going to take on debt at all for an improvement project.
Speaker Change: you know, there's just the industry that's associated with that. I think that it's important to highlight, you know, we haven't been producing
Speaker Change: You know the the the household formation rates And so the deficit of homes continues to rise and the average age of the home continues to to get older I think we're at 44 years now
Speaker Change: And so, you know, as that number continues to rise, so does the need of repair and remodeling and maintenance of those homes, and so we think of those factors all blended together and if we get ourselves into an environment where we're all expecting a decrease in interest rates, we could see some improvement.
some interesting
increases on repair and model demand.
Speaker Change: Just to jump in, Nikolai, the U.S. South, if you think about that region just for a bit, I mean, that's heavy to the R&R market. And one of the opening questions was around curtailment.
Speaker Change: It's around 40% of the permanent or indefinite curtailments in the industry have come from that region. I think that's going to put us north of a billion, maybe a billion three of production that's come out.
Speaker Change: definitely will provide some, you know, tension in the R&R market with that volume out. So I would kind of point you in that direction also.
Okay, great, thank you very much, that's very helpful.
Thank you.
Speaker Change: Thank you very much. There are no further questions at this time. I'd now like to turn the call back over to Ian for final closing remarks. Please go ahead. Okay, thank you, operator, and thanks everybody for your time and interest this morning and feel free to reach out to Rick, Bart, or myself anytime.
Thank you. Have a great day.
Speaker Change: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.