Q2 2025 Interfor Corp Earnings Call
Speaker #3: Good morning. My name is Annis, and I'll be your conference staff writer today. At this time, I'd like to welcome everyone to the Interfor Analyst Conference call.
Speaker #3: All lines have been placed on mute to prevent any background noise. After this meeting is reminded, there will be a question and answer session. If you'd like to ask a question during this time, simply press star and then the number one on our telephone keypad.
Speaker #3: If you'd like to withdraw your estion, please press star and then the number two. Thank you. Mr. Fillinger, you may begin your conference.
Speaker #2: 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.
Speaker #2: And Bart Bender, Senior Vice President of Sales and Marketing. I'll start off by providing a brief recap of our second quarter before passing the call to Rick and Bart.
Speaker #2: Positive EBITDA was generated. With Q2 adjusted EBITDA at $17 million, down from the previous quarter. The quarter-over-quarter decline was driven by a combination of lower sales prices, foreign exchange impacts, and inventory adjustments.
Speaker #2: Conversion costs were lower in several regions, production improved by 4%, and shipment volumes improved compared to Q1. Despite a decline in lumber prices, cash flows were positive in the quarter due to working capital release and proceeds from the continued sale of BC Coast tenures.
Speaker #2: Although the pace of housing starts has remained somewhat resilient year-to-date in the context of the interest rate environment and the associated affordability challenges, the political and trade situations in both the U.S. and Canada remain uncertain. Until we know the impacts on the economy, we will continue to be very careful managing our inventories and order files.
Speaker #2: While some economic indicators continue to show positive signals, the aggressive US trade policy has heightened the risk of prolonged demand weakness, and we are maintaining a very conservative outlook for 2025.
Speaker #2: We have diversified our company to weather these types periods of uncertainty. Our US platform represents 60% of our asset base spanning both the US South and the Pacific Northwest.
Speaker #2: Approximately 75% of our total production is not subject to duties or U.S. trade actions, and our available liquidity of over $330 million is strong.
Speaker #2: In closing, our outlook is mixed. However, our foundations are strong. We're diversified, and we continue to see opportunities to improve efficiencies, costs, and margins across all of our regions.
Speaker #2: And with that, I'll now pass the call over to Rick.
Speaker #4: Thank you, Ian. And good morning, all. Please refer to cautionary language regarding forward-looking information in our Q2 MDNA. Overall, financial results for quarter were a significant improvement year over year.
Speaker #4: Reflective of stronger lumber prices and the steps we've taken to optimize our portfolio of sawmills, earnings continue to be constrained by a general oversupply of lumber in the market.
Speaker #4: Despite this significant production curtailments across the industry since the beginning of 2024, with respect to earnings, Interfor generated adjusted EBITDA of $17 million on total revenue of $781 million.
Speaker #4: Total revenue increased 6% quarter over quarter, driven by a 13% increase in the volume of lumber shipped. This was partly offset by a 4% drop in the average realized lumber price and a weaker US dollar.
Speaker #4: The stronger increase in volume reflects a catch-up on shipments delayed in the first quarter by tariff-driven uncertainty by the customer base and constrained truck availability.
Speaker #4: On the cost side, reported production cost per unit of lumber decreased 3% quarter over quarter, reflective of fewer operational disruptions, and the increased shipment volume.
Speaker #4: Ultimately, net income of $11 million was recorded in the quarter. Which includes an realized foreign exchange gain of $19 million driven by a weaker US dollar.
Speaker #4: From an operating cash flow standpoint, $85 million was generated in the quarter, with $61 million of this attributable to a reduction in working capital.
Speaker #4: This working capital improvement was driven by reductions in both log and lumber inventories. Beyond operations, we invested $24 million in capital projects and raised $7 million from the sale of assets.
Speaker #4: The asset sales included $6 million of net proceeds from the ongoing wind-down of our BC Coast operations. Over the remainder of this year, we anticipate generating cash flow in excess of $20 million from the ongoing sale of the BC Coast Forest tenures.
Speaker #4: Ultimately, financial leverage as measured by net debt to investment capital improved to under 36% at the end of the second quarter. And we are well positioned with available liquidity of over $330 million on a pro forma basis.
Speaker #4: Considering the credit facility renewal announced last month, this credit facility renewal has provided Interfor with enhanced financial flexibility to navigate through the ongoing market volatility.
Speaker #4: To wrap up, Interfor's financial results for the second quarter reflect ongoing demand weakness, mostly driven by housing affordability concerns and economic uncertainty. Looking ahead, we anticipate continued lumber market volatility in part due to significantly higher duty rates on shipments from Canada to the US, and the ongoing threat of tariffs.
Speaker #4: Fortunately, Interfor is well positioned to navigate successfully through this volatility with its high-quality and geographically diverse operations. That concludes my remarks. I'll now turn the call over to Bart.
Speaker #5: Thanks, Rick. Lumber markets continue to reflect the uncertainty we are seeing on several fronts in our business. Affordability remains the primary issue at the macroeconomic level, but geopolitical events, in particular the Canada-US trade file, are contributing to the uncertainty on the industry level.
Speaker #5: On the demand side, seasonality mixed with declining new home construction makes it difficult to gauge the true demand for lumber. As we leave August, we are expecting to see demand stabilize for the balance of the year, however, at this stage, do not believe that overall demand for lumber will increase materially for the balance of 2025.
Speaker #5: On the supply side, with AR6 duties partially finalized, the markets are just beginning the process of reestablishing market prices given the change in the competitive landscape.
Speaker #5: And obviously, more to follow once we find out the final CBD rates. From a species perspective, the markets continue to show support for SPF.
Speaker #5: The price differences in the market highlight a clear preference in some markets for some applications over Sun Yellow Pine. Interfor's strategically well-positioned with 30% of our production being SPF, we expect that if availability of SPF remains fluid, substitution of Sun Yellow Pine will remain muted.
Speaker #5: Considering in-market inventories, we support the notion that inventories are in balance. However, context is important. The volatility in pricing that we saw through Q1 and Q2 was fueled primarily by supply concerns as opposed to actual curtailments.
Speaker #5: Which suggests tension is right below the surface of the current supply-demand balance. And doesn't take much to move. Inventories reflect this balance, which in our view means that they are on the lower end of historical levels.
Speaker #5: Our outlook for Q3 and Q4 is one that will be characterized by change. Interfor is well-positioned to navigate the uncertainty, and as such will continue to approach the markets with discipline.
Speaker #5: With that, I'll the call back over to you.
Speaker #2: Okay. Thanks, Rick. Thanks, Bart. Operator, we're ready to take any questions.
Speaker #6: Thank you, sir. Ladies and gentlemen, we now begin the question-and-answer session. Should you have a question, please press star followed by 1 on your touch-tone phone.
Speaker #6: You'll hear a prompt that your hand has been raised. Should you wish to decline from the bowling process, please press star followed by 2.
Speaker #6: If you are using a speakerphone, please lift the hands up before pressing any keys. One moment, please, your first question. Your first question comes from Amir Patel with JBC Capital Markets.
Speaker #6: Please go head.
Speaker #7: Hi. Good morning. Ian, the Canadian federal government recently announced plans for up to $1.2 billion in industry supports, including loan guarantees. Are there any programs in that announcement that Interfor could be tapping?
Speaker #2: Hi, Amir. You know, there's not a lot of detail yet on that. Some of the trade associations are trying , you ow, get more details.
Speaker #2: But our review for Interfor is no, not really in the in the, ou know, immediate term. You know, the idea of, you know, creating more demand in Canada, obviously, we support that.
Speaker #2: You know, the idea of using Canadian lumber, I think there's not a lot of the US lumber coming into Canada already. So I really don't see too much of an uplift on that.
Speaker #2: But on the trade file overall, Amir, I an, it's a, you know, the signal that we're getting from the Canadian government, it's it's a top priority right up there with autos and steel.
Speaker #2: So, I got to believe—or our belief is that, you know, this is a conversation that is happening between Canada and the U.S.
Speaker #2: Obviously, Interfor supports a negotiated settlement. You know, sooner than than later. And really, you ow, anything that can bring stability to the to the markets and improve housing affordability with a trade agreement, it's obviously something we think is important.
Speaker #2: But we do believe that it's on the on the radar as a as a top priority for Canada to get this resolved. And yeah, we're we're supportive and, on standby to assist in any way possible.
Speaker #6: Okay. Thanks, thanks lady. And that's that's helpful. And, Bart, I wanted to get your views on, European lumber imports to the US. how do you how do you see those trending in in coming months, just given the, escalating duties on Canadian lumber?
Speaker #2: Well, I suppose there's been a been a a bit of volatility quite frankly. I mean, some months are up, some months are down. and I think a lot of that is fueled by the uncertainty as they try to thread the needle around any potential tariffs.
Speaker #2: that might, that might come their way. I think that, you know, my perspective on on the European lumber side is, ou know, it's a they have a number of choices for different markets.
Speaker #2: They compete for each other. And where the North American market fits in with them is a combination obviously, you know, what that market's doing, what the relative risks on on tariffs are, but also what their other markets are doing.
Speaker #2: And, and so as those things move move around, you'll see different differing rates of participation from from Europe. Overall, but I would expect that the trend that we've seen of latest likely going to continue.
Speaker #2: And, you know, for the year-end, it'll be somewhat similar to the previous year overall. Amir, I would just, you know, tying into Bart's comments and your previous question around trade file and support mechanisms, you know, if there is a negotiated settlement that would be reached between Canada and the U.S. and there's some division or some discussion around the duties on deposit, what would be important for Canada is, you know, some restrictive means that we would want from the U.S. on third country imports.
Speaker #2: For any kind of, give on on, you know, a settlement on duties on deposit. So there's something to keep in mind.
Speaker #6: Okay. Fair enough. that's, that's all I had. I'll I'll turn over. Thanks.
Speaker #3: Thank you. Your next question comes from Matthew McKeeler with RBC Capital Markets. Please go head.
Speaker #8: Good morning. Thanks for taking my questions. I'd like to start just by asking about log costs. Can I ask what your expectations are for how stumpage evolves in Canada through the second half of the year?
Speaker #8: With, lumber prices pushing higher on the increase in duties, and then in the US, I think the Pacific Northwest is quite a tension market.
Speaker #8: And I also wonder about costs in the South, potentially less salvage activity there. So could you maybe just walk through how you're thinking about log costs and how they'll impact your operating costs over the next couple of quarters?
Speaker #8: Thanks.
Speaker #2: Yeah. For sure. Matt, Ian here. yeah, on on Canada, you know, with the stumpage calculation adjustment and and reducing the the time period that the BC government, would assess stumpage on has more closely tied, you know, the the stumpage rates or log costs to the market.
Speaker #2: So, you know, we applaud that and support that, and are happy the BC government did that. But, you know, my point here is that our log costs will move up and down with, you know, lumber prices.
Speaker #2: but we don't see a material impact in Canada or in the US South, relative to log costs. And in the Pacific Northwest, there's tension there for sure.
Speaker #2: But, but again, I don't think from a ratio standpoint of log costs to sales net, which, you know, we track, you know, it's not really moving in any kind material way.
Speaker #8: Thanks very much for that color. you also mentioned that you continue to see opportunities to improve efficiencies, costs, and margins across your platform. Can you provide bit more detail on where your areas of focus are for the balance of year?
Speaker #8: Thanks.
Speaker #2: Yeah. For sure. you know, we've launched internally at the beginning of the year a, an initiative, to chase a certain target, on on a margin, and so there's a several projects that are going on, with sales and marketing, operations in both Canada and the US.
Speaker #2: That are focusing in on cost reductions, product mix improvements, inventory adjustments, etc. And year to date, you ow, we're pleased with where that's at relative to our targets.
Speaker #2: But, it really comes down to, product mix, mill efficiencies, uptimes, costs, and inventories. But, but we do have an internal project that is running, and a matrix of KPIs that we're cking, and, and they're tracking in the right way.
Speaker #2: More work to do, but, happy the focus. And the countability that's being driven through the organization.
Speaker #8: Thanks very much for the detail. I'll pass it back.
Speaker #3: Thank ou. Your next question comes from Ben Isaacson with Scotiabank. Please go head.
Speaker #9: Thank ou very much. And, good morning, everyone. just one question from me. It's a multi-part question. And it's related to the 25% volume exposure that you have going, cross-border.
Speaker #9: Given a new level of uncertainty in Canada's trade relationship with the U.S., Ian, when you sit with the board and discuss strategy, where do you want that 25% number to be in 2030?
Speaker #9: And assuming you want it lower, would that be through redirecting trade to domestic or Asian markets, would it come through dilution of capacity, through growth elsewhere, could you consume it by investing downstream, and then forgive me for being naive, but is it possible for that to eventually go to single digits?
Speaker #9: Thank ou.
Speaker #2: Yeah. That's, a big question. And I appreciate it. well, I would say that, you ow, if we look at our regions and and end uses, our BC platform is very diverse.
Speaker #2: And so our two largest operations out of the three cut five different species and we have multiple markets other than the US that we we push to.
Speaker #2: And our third mill, in the BC interior, is also working on diversification plans by doing test runs of other species which generate other markets other than the traditional market that it's for.
Speaker #2: When we look at the Canadian side of the business, you know, we do have a lot of stud production in, or sorry, the eastern Canadian.
Speaker #2: we have a lot of stud production in, Ontario and New Brunswick. And to to Bart's point, Ben, the, you know, if you talk to our major customers and and particularly, the ones in, you ow, the tech Texas area, I an, they they do not want to use Southern Yellow Pine for their construction, of new homes.
Speaker #2: They want SPF volume. And the real reasons are, you know, using Texas as an example, you know, the Southern Yellow Pine is heavier.
Speaker #2: So, you’ve got higher transportation costs. You’ve got workers that have to handle heavier wood. It’s hard to nail; the nails pop. Afterwards, the Southern Yellow Pine will twist and degrade in the heat.
Speaker #2: And that SPF is, you know, the clear winner in those types of applications. So I think what you're asking is, you know, what the Canadian product mix and future look like?
Speaker #2: I would say we're very strong in BC to be diversified and and in Ontario and New Brunswick when we think about the stud volume, you know, we think that's got a SPF stud volume has got a bright future.
Speaker #2: and then obviously, we're diversified in in, Ontario with our iJoice plant. so our engineered wood product line there is a, strong performer. month over month, quarter over quarter.
Speaker #2: And, you know, it sells out at different strategy and a different cadence than, you know, traditional stud or dimension lumber. So you know, I think we will continue to fine-tune our Canadian platforms, but pretty happy with the way it's positioned right now.
Speaker #6: That's perfect. Thank you so much.
Speaker #3: Thank you. Your next question comes from Keaton Mentor with BMO Capital Markets. Please go ahead.
Speaker #10: Good morning and thanks for taking my question. Ian, on your earlier comment on, you know, having a preference for SPF and new residential construction, I'm curious as we are seeing more of these factory-built processes, is that kind changing the dynamic around using more Southern Yellow Pine?
Speaker #10: Because essentially, it's machines that are doing kind of a lot of the cross-building? Are you seeing kind in that application more Southern Yellow Pine being used?
Speaker #2: Yeah. And I would say Bart can jump in if I'm, you know, wrong here. But, you know, we're not seeing a lot of that type of construction happening today.
Speaker #2: you ow, Bart and I, a while ago toured a, plant in and generated a new customer out of that on what you're talking .
Speaker #2: But their preference to us was SPF or Fer. There was no Southern Yellow Pine being used in the factory that we visited.
Speaker #2: And I'm not saying that that's not an opportunity for Southern Yellow Pine, but we're just not seeing a, you know, a huge demand or anything material coming with that type of construction.
Speaker #2: And I think the principles of, you know, a more stable SPF species is going to be the priority for anybody.
Speaker #2: You know, I think the still still the same disadvantages when it comes to construction, you ow, qualities will exist for prefab. They're most interested in stable, you know, nailability, don't stop the factory line, for any upset conditions.
Speaker #2: And we think that SPF is is a is the clear winner in those.
Speaker #10: Got it. No, that's helpful. And then, another question, you know, with kind of duties, you know, moving higher here. Do you think there is kind of increased risk, at least here in the short term, until we get to know what is happening on Section 232?
Speaker #10: Do you think there's increased risk on more SPF imports from Europe?
Speaker #2: Well, I I think Europe would be sending every stick they can today if it's profitable into the into the US. so I you know, I I'm not sure I would, you ow, think that a bunch more from Europe would be hitting the US that's that's not already doing that today.
Speaker #2: you know, I I think that, you ow, the the uncertainty with the higher tariffs that we're facing today as Bart referenced in his comments and, you know, countervailing duty, which should be announced you know shortly, is probably put a bit of a pause on the order order files.
Speaker #2: I think people are digesting how this will work. but at at some point, you ow, that will change and and discussions will be happening around, you know, the tariff and and pricing to reflect those additional costs.
Speaker #2: But right now, I I I think it's kind of in a wait-and-see mode a little bit. so there's there's definitely transactions happening. But I think it's a little bit slower here for which we anticipated.
Speaker #2: You know, this last week or so, but that will correct itself.
Speaker #10: Got it. And then just one for Rick. Rick, any updated thoughts on on the, you ow, on on the duty deposits that cumulative, you know, amount that you have, are you sort of, you ow, any any thoughts around potentially monetizing it in in some way?
Speaker #10: you know, how are ou thinking about that?
Speaker #2: Hey, good morning, Kate. And Rick speaking. Yeah, we continue to think about that. As I've noted on previous calls, we do have duty deposits exceeding $620 million.
Speaker #2: Today, we think that does represent significant value. That's locked up or trapped right now. there have been several transactions in the marketplace in the 30 to 35 cents on the dollar range for duties.
Speaker #2: Similar to the deposits we have. So we know there's value there. we're just not at the point of needing to do that. As far as we can see, we've done a really good job over the last couple of years, reshaping our portfolio, managing our our cash flows, selling off other non-core assets.
Speaker #2: So such as the forest tenures that we have on the coast of BC that we continue to monetize. So we're not quite at that stage yet where we we think it makes sense.
Speaker #10: Got it. So, Rick, is it that, you know, you think that 30, 35 cents is is too low a number and it's not something that you're willing to do?
Speaker #10: Is that how I should read it?
Speaker #2: I wouldn't necessarily say that. there's a there's a whole bunch of factors that go into a decision like that. Price is just one of them.
Speaker #10: Understood. Okay. that's helpful. good luck in the back half. Thank you.
Speaker #2: Thanks, Kate.
Speaker #3: Thank you. Ladies and gentlemen, as a reminder, if you have any questions, please press star, 1. Your next question comes from CASEC OPTEC with TD Cowan.
Speaker #3: Please ahead.
Speaker #11: Hi. Good morning, Yone. I wanted to ask about the revised credit facility terms. Can you give us a sense of how much net debt to cap relief you're getting on the covenant?
Speaker #11: And is there thing around the minimum liquidity considerations?
Speaker #2: Hey, good morning, CASEC. This is Rick speaking. Yeah, you're you're referring to the renewal of our facility that we reported out last month? That was quite a positive step for us.
Speaker #2: We're quite fortunate to have a lender group that really understands the volatility in the forest product sector and supports Interfor. In terms of the flexibility on our covenants, we still have the same maximum leverage ratio of 50% net debt to invested capital.
Speaker #2: The change is that we now have the flexibility to increase the leverage level at which that minimum interest coverage ratio test applies. Normally, that leverage level is 42 and a half cent, as you ow.
Speaker #2: But over the next nearly two years, it can be raised much closer to the 50% maximum. So that's the flexibility we have. It's worth noting today that as of, well, as of June 30th, we had an interest coverage ratio greater than two times.
Speaker #2: So that means we've got plenty headroom up to our 50% maximum leverage covenant. There will be more details provided on the facility when it gets filed in due course here.
Speaker #2: In terms of the minimum liquidity, there is a threshold there. We're well above it. We don't ink that is a concern for us going forward.
Speaker #11: All right. Thanks for that, Rick. I'll I know we'll get more details when you guys file, but I'll just log in one other one.
Speaker #11: Can you give us a sense of the implied change in your borrowing cost due to the added flexibility?
Speaker #2: There may be an increase in our borrowing costs only if we if we go into that flexible period, which we're not in today. So as of today, there's there's no increase in ur borrowing costs related to obtaining that flexibility.
Speaker #11: And if you were to go into that flexibility period, we looking at maybe, I don't ow, 100 basis points, something like ?
Speaker #2: It depends, but probably something a little less than that.
Speaker #11: Okay. Switching gears a bit, I understand April held up okay from a volume standpoint. May and June fell off pretty hard. How did that trend into July, and what are your curtailment plans for Q3?
Speaker #2: Sorry, our curtailment plans for Q3?
Speaker #11: Yep.
Speaker #2: We don't have any curtailment plans for Q3.
Speaker #11: Okay. So presumably maybe just regular summer shutdown?
Speaker #2: We don't take regular summer shutdowns ither.
Speaker #11: Okay. Fair ough. so maybe, a question about your, list prices. for US customers, presumably you're putting out including the higher duties at this point.
Speaker #11: What has been the customer response to that? And is your sense that nothing will really happen in the near term, that customers are just going to sit on their hands for the rest of the summer?
Speaker #2: Yeah. On a on a call like this, we really won't get into that question. I did signal in a previous response that, you know, given the, you know, the new higher rates that have recently been announced in the countervailing duty, which still, you know, could come out today, that customers are, you know, slowing a bit in these last, you know, week or so, but we think that, you know, that's just to digest how the producers and how the market and how the customers are going to act.
Speaker #2: But we think that will get back on track here once, you know, the countervailing duties announced and there's a few days of discussions between customers and producers.
Speaker #11: Right. Okay. Thanks for that context. And, one last one for me. The USMCA Binational Panel issued a decision on AR1 in late July. Do you think the outstanding duty cases pose any challenge to getting a broader lumber trade deal done more from a legal standpoint?
Speaker #11: I'm inking.
Speaker #2: Well, I mean, yeah, I think when there's pressure on either country, given any kind of legal, you ow, outcome is is, you know, will work in one one or the the other's favor.
Speaker #2: But, you know, keep in mind, if you look at the Southern Yellow Pine pricing today, and let's say it's around $350, the average Southern Yellow Pine mill is probably losing cash today.
Speaker #2: So when you think about the duties on deposits and the timing of the government's ability to discuss a negotiated trade deal, I think things are lining up well for both Canada and the U.S. to potentially come to discussions on this.
Speaker #11: Okay. Thanks for the thought. those are all the questions I had. Thank you.
Speaker #3: Thank you. There are no further questions at this time. I will now turn the call back to Mr. Fillinger for closing remarks.
Speaker #2: Okay. Thank ou, operator. I guess one final point that that I want , reinforce, which, you ow, Rick had talked about, is the portfolio adjustments that we made in 2024, you know, we're we're tough, you ow, decisions and and impacted people and businesses.
Speaker #2: But, you know, as we are in this period in 2025 and looking forward, you know, it's a much, stronger position that that we feel we're in to navigate, you ow, these uncertain, times.
Speaker #2: And with that, operator, thank you, ybody, for dialing in and have yourself a great day and reach out to any one of us if you have any follow-up questions.
Speaker #2: Thank you.
Speaker #3: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.