Interfor Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 3, 2023

There are 8 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to the Interfer Quarterly Analyst Call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Friday, November 3, 2023.

Speaker 1

I would now like to turn

Operator

the conference over to Mr. Filinger. Please go ahead.

Speaker 2

Thank you, operator, and thank you, everyone, for joining us This morning. With me today on the call, I've got Rick Posiban, Executive Vice President and Chief Financial Officer And Bart Bender, 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 Call on to Rick and Bart.

Speaker 2

Turning to our quarter, we generated a positive $32,000,000 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 and during the quarter, we reduced our leverage and improve their liquidity.

Speaker 2

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. And combined with this slower time of year Has resulted in buyers being extremely cautious and limiting purchasing to 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. And 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.

Speaker 2

I'll now turn the call over to Rick, who will run you through the financials. Thank you, Ian, and

Speaker 1

good morning, all. Please refer to cautionary language regarding forward looking information in our Q3 MD and A. From a high level perspective, Interfor's Q3 results The ongoing lumber market uncertainty, driven by the higher interest rate environment and delayed supply side responsiveness. Regardless, Interfor remains well positioned to successfully navigate through this environment with its high quality and regionally diverse portfolio of operations. In terms of Q3 earnings, Interfor generated adjusted EBITDA of $32,000,000 on total sales of 828,000,000 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.

Speaker 1

The lower lumber shipments were mainly due to temporary operational disruption caused by wildfires in BC. Production costs on a per unit basis were higher quarter over quarter due mostly to Q2 costs benefiting from a $28,000,000 reduction in the reserve against inventories, whereas Q3 only benefited from a $3,000,000 reduction of the same. The operational disruption in BC caused by wildfires Also contributed to higher costs in the 3rd quarter. From a balance sheet perspective, financial flexibility improved in Q3 with the net debt to invested capital ratio dropping to below 29%. This improvement was driven by cash flow from operations totaling $107,000,000 including $71,000,000 of income tax refunds related to the prior year.

Speaker 1

A portion of this cash flow was used to Fund capital expenditures totaling $39,000,000 of which the majority was on strategic mill improvements in the U. S. South. Looking ahead, we still expect to receive an additional US25 $1,000,000 of income tax refunds before the end of this year. And we'll continue to execute on monetization of our Coastal BC operations to further bolster the balance sheet.

Speaker 1

In terms of capital allocation, our key priority is to continue managing our balance sheet leverage towards our target range, while also continuing to invest in select U. S. Sales operations where attractive opportunities exist to optimize returns. We continue to anticipate capital expenditures for 2023 to total about $210,000,000 For 2024, We estimate capital expenditures will total about $140,000,000 To wrap up, we will continue to focus on operational excellence Maximize margin on each shipment, while conservatively managing through the ongoing market uncertainty. That concludes my remarks.

Speaker 1

I'll now turn the call over to Bart.

Speaker 3

Thanks, Rick. As usual, I'll provide comments on our market outlook. In general, the outlook varies whether you're focusing on the medium term or the short term. In the medium term, the market fundamentals remain encouraging, buoyed by tailwinds on Several key factors such as underbuilt housing, demographics, Asia housing inventory, household formation rates, etcetera. All of these indicators support increased lumber demand in the future.

Speaker 3

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 build our 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 3 times that 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 percent of single family starts Stabilizing closer to 70% of total U.

Speaker 3

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 homeowners remaining in place, remodeling opportunities have increased.

Speaker 3

This is helping to keep repair and remodel lumber demand steady. When you combine all the lumber demand sectors in 1 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 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 demand as we work through the short term headwinds and move closer to medium term tailwinds. With that, back to you, Ian.

Speaker 2

Okay. Thanks, Bart. Operator, we're ready for questions.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer Your first question comes from Roshley Luthra from BMO Capital. Please go ahead.

Speaker 4

Hi, good morning. Could you talk about some demand trends that you're seeing in New Resi and R and R just towards the end of Q3 And also just what you're seeing in the channel like in terms of inventory?

Speaker 3

Sure. I'll answer that. It's Bart here. Our best indicator on the repair and remodel side comes through our actual programs that we have with the customer base that services predominantly that End use sector. And so we've got 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 indication based on Actual business done that's that anything is going to change from where it's been at.

Speaker 3

So we've been actually encouraged 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 where the sort of the in market industry levels are. Three levels are, however, the intelligence that we have through conversations with customers, through some reporting that is available suggests that The inventory levels are sort of in that bottom third of, I would say, historical norms. Those are the end market levels. I can tell you on the inventory levels on our side of the equation, we continue to be very diligent in how we manage those.

Speaker 3

We work very hard to make sure that our in process and finished goods inventories are kept at strategic levels, which that is the case for us.

Speaker 4

Martin, you need to ask sorry, go ahead.

Speaker 2

No, go ahead.

Speaker 4

I was just going to add, just on top of that, speaking of inventories, probably do you have a better sense of what's going on with European lumber imports? What's sitting at the U. S. Ports or what you're expecting for the next 3 months?

Speaker 3

Yes. I mean, obviously, the year started out A bit differently, I think, than historical trends. We saw quite a volume come in from the European importers. But I would say from February on, we've just seen a steady ratcheting down of those numbers. And I think we'll end up in 2023, we'll end the year at fairly similar to 2022.

Speaker 3

However, the pace of the last, Call it 6 to 8 months has been at a lower level, which would suggest that 2024 overall inventories will be coming down to kind of more historical levels of what we saw maybe in, I think 2020 is a good indication, maybe even 2021. So in around that high 2,000,000,000 to low 3,000,000,000 board feet annually.

Speaker 4

And then just a last Question for me, probably for Rick. I saw your preliminary CapEx program for next year, dollars 140,000,000 I believe. Just where is the pullback coming from? Is there like a rethink on the multiyear CapEx program or just any color you can provide there?

Speaker 2

This is Ian. I'll take that. Yes, our CapEx program is we've Continually advertised is flexible. We have a CapEx team in place. We're, I think, Distinctly different than some others in our industry where our capital projects are Managed, engineered, supervised and executed on with an internal Team, largely based out of the South.

Speaker 2

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 or 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. And I think that's a strength of Interfor that we're not 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.

Speaker 2

The other thing that also changes when you lay out a plan from 2018 and then you lay it out for 5 or 6 years is cost. And in some projects, It's valid and prudent to look at how costs have changed over the last 24, 36 months. So some of that factors into possibly delaying or pushing out a project to allow The right threshold paybacks to be achieved, etcetera. So what you're seeing in our plan going into 2024 is really A combination of all of those factors.

Speaker 4

Thanks, Ian. That's all I had. I'll turn it over to Littmann's quarter. Thank you.

Speaker 2

Okay. Thanks for the questions. Thanks, Roshni.

Operator

Thank you. Your next question comes from Kasia Kopitek from TD. Please go ahead.

Speaker 5

Hi, everyone. It's Kasia on the line. Just sticking with Rashi's question, Ian, can Can you provide some context around the nature of the projects that are being deferred in 2024?

Speaker 2

I would say that there's one project that we're doing in Thomaston. It's a large multiyear project. And our goal is to finish that in 2024. Other than that, there's a multitude of Smaller projects in 2025 at a couple of mills. Those are not big projects, but have great paybacks.

Speaker 2

And then there's 1 or 2 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.

Speaker 5

Okay. And for the projects where you've indicated it's more prudent just from a cost perspective to hold back, what's the magnitude of the return compression that you've been seeing Or the expected return compression?

Speaker 2

Yes. I mean, we're always shooting for that hurdle rate 20%. So when they go north of that, we take a hard look at it and then decide With an appropriate risk level, whether to continue or like I said, we have flexibility When prices and equipment prices get too expensive to back off. So as soon as it trips that threshold, it really gets Our intention at the senior level and then we talk about it and make the right decision. So I would kind of leave it at that.

Speaker 5

Great. Okay. Thanks for that. And maybe taking it back to market, you gave some context in your prepared remarks around order files. Can you comment maybe on certain areas that are stronger on a relative basis than others, some preliminary discussions that you're having for 2024, what that's looking like and whether Generally things are trending normally from a seasonal perspective?

Speaker 3

Yes, all good questions. It's interesting. We've got a fairly unique perspective on the markets with The regions that we operate on and I can tell you that markets Each region has its own sort of dynamics that are involved and it's not always one consistent region that's 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 partnerships and programs And working with our customers and getting set up for next year.

Speaker 3

And the interest to partner with Interfor remains high. We've got A very strong customer base that's been we've been servicing them for years. And a lot of them is just a bolt on from what we acquired in the East. So we feel like we're in a pretty solid position there. And then we just have to just see how the market goes.

Speaker 3

I mean, it's it really is a bit uncertain right now. And Yes, we'll just react to the demand that we see from the market given our sort of network of outreach to by region to the different customers. Yes. I would just add to Bart's comments And

Speaker 2

this is I'm putting words in Bart's mouth, but he spoke about this. But the advantage that we have, We often get asked around growth and our last acquisition was about a year ago today almost with Shulure in New Brunswick. But we are seeing significant customers starting to recognize the breadth and depth of our Company and customers are now that would be traditionally buying one species in one area 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 A nice synergy that we're getting.

Speaker 2

The other one is that we are the largest Producer in the world and very heavy to MSR. So as single family Homes start to improve, which if you look at FEA 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's opening comments, medium term, some nice trends That we're expecting.

Speaker 5

Okay. Thanks to you both for that thoughtful commentary. Last one for me. Maybe just speak to your overall framework for thinking about where share buybacks fit into your broader capital allocation program?

Speaker 1

Good morning, Kash. 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. It's certainly high on our priority list in terms of capital allocation, so we'll be Keeping a close eye on that going forward.

Speaker 5

Thanks, Rick. Okay, thanks everyone. That's all for me. I'll get back in the queue.

Operator

Thank you. Thanks, Kashy. Thank you. Your next question comes from Paul Quinn from RBC Capital Markets. Please go ahead.

Speaker 6

Good morning, guys. Thanks very much. Maybe just a follow-up on that targeted range, if you Remind us what that is and when you expect to get there?

Speaker 1

Sure. Paul, good morning. It's Rick. Target range for us is 5% to 25%. We're just slightly above that today at around 29%.

Speaker 1

And there's no real time line that 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 cash flow opportunities in terms of monetizing the coast that will certainly benefit us over the next 12 to 24 months that will help bolster the balance sheet. We still have some additional tax refunds coming in, dollars 25,000,000 that will also help. But certainly, the market weakness today is something we'll 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.

Speaker 6

Okay. Thanks. And yes, congratulations on the VC coastal 10 Just wondering if we can put the timeline for the remaining balances and whether we can use those sale metrics as a Indicator for what your eventual net proceeds will be from it?

Speaker 2

Yes. I'll take the other policy. And Yes, we're very pleased to be moving forward on that, kind of unencumbered, if you will. And The interest we've been working on for, as you know, probably 2 years now, extremely high Advanced conversations with a multitude of people interested in the tenures. We've had lots of support from the BC government, who is behind the strategy.

Speaker 2

And so as these things progress, which we expect will be on a regular basis, Yes, we'll keep you and The Street informed, but we expect these to be rolling in over the next 24 months.

Speaker 1

And Paul, if I could just add, the economics on the transaction that we announced with our press release yesterday, that's in line with what we would To be able to realize on average over the course of the next 24 months or so on the remaining 10 year sales.

Speaker 6

Okay, great. And then just lastly, if you could give us a high level sort of update 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 and If we're talking 24 months out, settle the coast, what's the timeline on Centylene and Salford Lumber?

Speaker 2

Yes. 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 What a pan Canadian view would look like, at the end of the day, it's the 2 governments have to come together if there's 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 are getting the panel set for The review of the legal case, which is probably in 2025 best Case scenario, so if there was a refund Through the court system, it would probably be in that in and around that range.

Speaker 2

And if there is a negotiated settlement, it would probably be slightly before that.

Operator

Thank you. Your next question comes from Arianna Milin from CIBC Capital Markets. Please go ahead.

Speaker 7

Hello, good morning. I know you spoke a bit of the R R and R trends that you're seeing, but I was wondering if you could provide some color on your R and R demand expectations for 2024. Do you see volume growth there?

Speaker 3

Yes, thanks. I think I did mention that we expect the Repair and remodel sector to be fairly steady. We've seen that throughout 2023. And as we look at our own results plus what we're hearing from our customer base, we're expecting A similar trend through 2024.

Speaker 7

Okay, great. Thanks. And then given your ongoing capital project, What level of production are you targeting next year?

Speaker 1

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 2, we expect some uplift in production from where we are this year at a current

Speaker 4

Okay. Thanks. That's helpful. That's all I

Speaker 7

have for now. I'll turn it over. Thank you.

Speaker 2

Thank you. Thank you. Thank you. There are

Operator

no further questions at this time. Mr. Filinger, please proceed with the closing remarks.

Speaker 2

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. And this concludes our call. Thanks again. Goodbye.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Thank you.

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Earnings Conference Call
Interfor Q3 2023
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