Interfor Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 4, 2023

There are 6 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to Interfor Quarter Analyst Conference Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Friday, 4th August, 2023. I would now like to turn the conference over to Ian Felliger.

Operator

Please go ahead, sir.

Speaker 1

Thank you, operator, and thank you, everyone, for joining us this morning. With me today on the call, I have Rick Posvon, our Executive Vice President and Chief Financial Officer Along with Bart Bender, our Senior Vice President of Sales and Marketing. First off, I'd like to welcome Nicole Butcher to our Board of Directors And we look forward to working with her and her contributions over the years to come. I'll start off by providing a brief recap of our quarter and then I'll pass the call over Rick and Bart. Turning to last quarter, we experienced production cost decreases, price stabilization and record shipment volumes, Which all contributed to an adjusted EBITDA of $41,900,000 an improvement over the previous quarter.

Speaker 1

We also continue to advance in our key multiyear capital projects in the U. S. South, which are focused on delivering significant returns. With respect to our outlook, recent housing data has shown modest improvements, including in the single family sector. It appears that strong underlying demand for housing continues to outweigh the impact of higher interest rates and homebuilding activity has been resilient so far.

Speaker 1

On the supply side, both North American production and European imports are easy, adding tension to the lumber market, while creating a positive supply demand situation. I'll now turn the call over to Rick, who will walk through the financials. Over to you, Rick.

Speaker 2

Thank you, Ian, and good morning all. Please refer to cautionary language regarding forward looking information in our Q2 MD and A. From an overall perspective, Interfor's Q2 results represent Significant and ongoing improvement since the Q4 of last year. In terms of earnings, adjusted EBITDA improved 61% quarter over quarter to $42,000,000 Revenues benefited from an 11% increase in lumber sales volume, combined with a 2% increase in the average realized lumber sales price, to better reflect current lumber prices and a $27,000,000 reduction in the valuation reserve previously recorded against inventories. Q2 results were also positive in terms of cash flow and our balance sheet.

Speaker 2

Cash flow from operations totaled $123,000,000 including $97,000,000 from inventory reductions. These inventory reductions reflect a conscious management effort to reduce working capital investment On a sustained basis going forward, especially at the operations we acquired last year in Eastern and Atlantic Canada, which presented significant opportunity. For context, our total lumber inventory volume at the end of Q2 Represented a 24% reduction year over year on a pro form a basis, including all acquired operations. And we also reduced our total Canadian log inventory volume by 24% over the same period and on the same basis. The positive cash flow from operations led to our net debt to invested capital leverage ratio dropping to 29.6% at quarter end.

Speaker 2

With all else being equal, we expect further leverage reduction over the next few quarters with the collection of pending income tax refunds totaling approximately $100,000,000 In terms of capital allocation over the remainder of this year, our 2 key priorities are to continue reducing balance sheet leverage into our target range And to continue investing in U. S. Sales focused organic growth and optimization. We continue to anticipate total capital of about $210,000,000 for 2023, of which the majority relates to discretionary projects in the U. S.

Speaker 2

South with attractive returns. As our balance sheet continues to delever, we will remain open to evaluating other attractive capital allocation opportunities that fit with our strategic plan. To wrap up, our second quarter results were another step in the right direction. Looking ahead, we will need to focus on generating the best returns on capital in our industry and on maintaining balance sheet flexibility to navigate market volatility That concludes my remarks. I'll now turn the call over to Bart.

Speaker 3

Thanks, Rick. I'll provide some comments on our market outlook for the remainder of 2023. Although some of the macroeconomic factors relevant to our business remain uncertain, There are several reasons to feel optimistic as we work our way through the balance of 2023 and head into 2024. U. S.

Speaker 3

Single family starts for May June are encouraging. Both represent a marked shift from the previous 12 months. The homebuilders in the U. S. Are all reporting encouraging results in their quarterly earnings report and guidance supports a continued trend for the balance of the year.

Speaker 3

With many existing homeowners having relatively competitive mortgage terms, the number of existing homes for sale which supports newly constructed homes taking a larger share of home sales going forward, a benefit for the overall demand for lumber. Builder sentiment remains strong and trending upwards. Our box store comparables remain favorable and point to a steady repair and remodel market going forward. All these factors coupled with the other fundamentals such as underbuilt housing, demographics, age of homes, home equity, etcetera, Leave us feeling optimistic of improved lumber demand going forward. In our Q1 2023 quarterly market we discussed improving I joist demand.

Speaker 3

This trend has continued through Q2 and the outlook Remains favorable for Q3 and Q4. In terms of lumber supply, North American production has tightened in the first half of twenty twenty three. Curtailments and most recently wildfires have impacted operating rates and in turn shipments in both Canada and the U. S. Have declined.

Speaker 3

We expect this trend to continue as the industry works through the longer impacts of the wildfires in both the Canadian East and West. In market inventories remain in the lower end of historical norms. And as Rick mentioned, we have driven all driven our overall inventories down by This will put pressure on distributors of lumber to purchase for immediate needs plus additional volumes to grow inventories needed to offset greater lead times To restock. Overall, we're encouraged with the market direction and look to work our way through Q3 Into Q4 and finished the year with momentum. With that, back to you again.

Speaker 1

Thanks, Bart. Operator, we're at The point to take any questions.

Operator

Thank you. Ladies and gentlemen, we will now conduct a question and answer Your first question comes from the line of Sean Steuart from TD Securities. Your line is now open.

Speaker 4

Thanks. Good morning, everyone. Hi, guys. Bart, I'll start with a question, just following up on your comments on the market. Your positioning your take on channel inventories is still being below normal and maybe I'm paraphrasing, but Just your perspective on market lumber markets stalling the last few weeks and weakening, I guess, a little bit this week.

Speaker 4

Are you attributing this to summer slowdown, given your Perspective that inventory just to lean through the channel, wondering if you can contrast those two things against each other and Help to explain why we've seen things stall a little bit the last few weeks?

Speaker 3

No problem, Sean. Good questions. Definitely, I think volatility is always one of those things that's going to remain. And so we're not going to escape that. But if you sort of step back and you look at Q2, and historically, Q2 has always been a quarter where Supply chain issues seem to be at its lowest.

Speaker 3

So, I think we're pretty fluid in getting demand to market or supply to market. When you look at the summer, I mean, obviously, we've dealt with some adversity on weather Pretty much across North America. If you look at the U. S. South, I mean, right now, we've got people in Phoenix putting up with 110 degree weather.

Speaker 3

You're not going to see the pace of building that you would normally when that kind of thing goes on. And so I do think that that's Probably part of it. And again, I got to highlight the supply chain side. Everyone talks about the improvements, and that's a real thing. They have improved.

Speaker 3

And so getting resupply is pretty quick for our distributors, and I think that Garner's a different approach to the market.

Speaker 5

Okay. That's helpful.

Speaker 4

Question on working capital. You guys gave us good detail on how much log in lumber inventories are down year over year. Are you guys at bare minimums at this stage? Is there any room for further reductions at this point?

Speaker 2

Hey, Sean, good morning. It's Rick speaking. Yes, we're currently in terms of lumber inventories around 18 to 19 days of production. Think on the margin, there's still a little bit to squeeze out there, but we're pretty comfortable where we're at.

Speaker 5

Okay. All

Speaker 4

right. Just one last one. Ian, this process for potentially selling the tenure on the coast, Can you give us a little bit more detail what's involved in this subdividing process and Your conversations with the ministry to get approval, how long are you guys thinking to resolve this?

Speaker 1

Yes. Thanks, Sean. I mean, it is a file that we're working on. We've been on the coast for 60 years, so the complexity of dealing with all kinds of different stakeholders, including the government is Not always on a timeline or pace that we move that. But all conversations with the government have been supportive In British Columbia, our vision of how this could unfold is very consistent with the government mandate.

Speaker 1

And so I would say that we're confident in the partnership and leadership that the government is showing to date and We just continue to work on that. The timeline is just quite hard to predict and I know it's really hard to model, But we have transacted on a couple of tenure sales in the past, And we feel that we've got good counterparties lined up And we'll just continue to work on it. And it'll be a slow trickle in, we believe, over Quarter to quarter, and we would include when we're successful on sales in our quarterly reports.

Speaker 4

Understood. That's all I have. Thanks very much guys.

Speaker 1

Great. Thanks Sean. Thanks Sean.

Operator

Your next question comes from the line of Paul Quinn from RBC Capital Markets. Your line is now open.

Speaker 4

Thanks very much. Good morning, guys. Just trying to determine how much more strength we need to see in The Canadian U. S. Housing market to be able to tighten up this lumber market.

Speaker 4

Is your feeling that prices could move materially higher if we get to And are you going to have $1,500,000 start to next year? How do you guys see the way unfolding going forward?

Speaker 3

Yes. Paul, it's Bart here. I mean, certainly, we've been encouraged with what we're seeing on the housing starts. We've got The single family piece that's creeping up from a low of 60%, getting up into 65% now at the starts, Obviously, that's a boost for lumber demand. And so we think we're going to see more of that as things move along.

Speaker 3

When you look at the big builders and the things that they talk about, it's pretty encouraging And most, if not all, are talking about improvements going forward. So It's hard to put a number on it, but I think it's probably more a percentage of single family to the multifamily that Needs to come up. And yes, we just need to continue on with what we're doing.

Operator

Yes. It

Speaker 1

will come. Sorry, Bert. I would just add on the supply side, Paul, as you well know, I mean, we are seeing a Dramatic reduction in imports from Europe into the U. S, which is super encouraging, Given that it was quite high and now it's a steep drop off. So that with curtailments Some permanent curtailments and we still believe there is more to come out.

Speaker 1

I think just kind of adds to your comment around The 1.5 and Bart's comments around the market and the supply side contracting in a couple of areas is, I think at $1,500,000 that used to be a great number. And just given These dynamics, who knows what the market will do, but I think the fundamentals are lining up pretty nicely.

Speaker 4

Okay. Then just wondering, given the current conditions, are we going to see any change in your production profile in the back half of the year from the front half of the year?

Speaker 1

I would say there given the curtailments that we have taken in the first 6 months, particularly around balancing the inventory that Rick Had talked about and then the market weakness. We probably given everything equal today should see Production increase going forward in the last half of this year.

Speaker 4

All right. That's all I had. Thanks.

Speaker 2

Thanks, Paul. Thanks, Paul.

Operator

Your next question comes from the line of Kieran Mantaura from BMO. Your line is now open.

Speaker 5

Good morning and thank you. Maybe to start with, Bart, can you talk a little bit about How are the inventories from the European imports? Where are they right now? I know the actual volumes have started to come down, But is there still a lot sitting around the eastern seaboard?

Speaker 3

Yes, it's Definitely moderating for sure. I mean, obviously, we saw some fairly significant increases on what Was imported tail end of last year and beginning of this year. And that was all about the correction of the Supply chain constraints that were happening over in Europe. And so a lot of that wood made its way to market. I will say that quite a bit of that wood, it was aged.

Speaker 3

So you could tell it was sitting on the docks, whether in Europe or In the U. S. For some time, and so that's one issue that the industry and the markets are working through. I can tell you the well, you see the stats as well. The imports that are coming in have dropped dramatically.

Speaker 3

And our intel tells us that there's potential for further declines. So it's just a matter of time before everything cleans up. But We're certainly hearing a lot less about imports today than we were, call it, Q1, so definite improvement.

Speaker 5

Got it. That's helpful. And then can you give us a quick update on How you guys are thinking about the multiyear CapEx program that you all have talked about in the past? Is there any Sort of, are you reassessing in terms of kind of how you should approach it given A market backdrop which is quite fluid?

Speaker 1

Kit, Ian here. Thanks for the question. Our adjustments to the CapEx strategic CapEx plan is largely unchanged Since our last call. So, the key projects in the U. S.

Speaker 1

South are moving along, And we continue to stay committed to those and feel that in the long term medium term, long term, those will Obviously, payoff nicely for us. So, no update or changes Expected in the CapEx plan from last quarter.

Speaker 5

Got it. That's helpful. I'll jump back in the queue. Good luck. Thank

Operator

you. Your next question comes from the line of Hamir Patel from CIBC Capital Markets. Your line is now open.

Speaker 4

Hi, good morning. Ian, do you expect Innophore will be selected as a mandatory respondent in the trade case Ongoing review and do you see any risks there just given the approach that the Conners previously took with the other

Speaker 1

Yes, Hamir, I mean, we scenario plan for this. So, Or is InterPro ready to respond and take on the work that is required if you are Selected, so we're in really good shape that way. Obviously, we're continually running models, so we don't see a big risk Coming out as either way, whether reflected or not. And yes, I don't really have much more to comment on that.

Speaker 4

Okay, great. Do you have a sense of the timing as to when maybe a determination would be made there and when would that potentially take effect?

Speaker 1

No, I don't actually. It's not this year. So, it would be I guess it would be next year or the year after, but don't have the exact timing here, Hamir.

Speaker 4

Okay. Fair enough. And so the last question I have is on the fiber cost side. How do you see costs playing out across your different operating regions over the last year?

Speaker 1

Yes. Well, obviously, BC and Rick, you can jump in if I missed anything. BC was the stumpage adjustment It was great for us as it sort of realigned log cost to current market conditions. The BC government's move to a shorter timeline on stumpage adjustments, we think, is positive and Something that we've been working with our partners with and government to make happen for many years. So That's great.

Speaker 1

But, yes, in our other jurisdictions, they're holding or reassessing downwards. So, Yes, we're confident that given the market condition today, we're seeing the right trends in log costs across our system.

Speaker 2

And Henrik, good morning. It's Rick. Exactly what Ian said, the BC Interior really expect stumpage to come down another, say, dollars 10 to $15 a cubic meter in Q3 versus Q2. And we're also going to see some benefit in Quebec From Fire Salvage Timbers, there will be a reduction in stumpage rate likely at the end of Q3 into Q4 and beyond of about $5 to $10 a cubic meter.

Operator

There are no further questions at this time. I will now hand over the call to Mr. Fellinger. Please continue.

Speaker 1

Okay. Just to wrap up, thanks for your interest in the company. And as usual, feel free to reach out to any one of us at any time. It concludes our call and have a great weekend.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

Powered by Quartr

Key Takeaways

  • Adjusted EBITDA improved 61% quarter-over-quarter to $42 million, driven by production cost reductions, price stabilization, record shipment volumes and a $27 million release of inventory valuation reserves.
  • Cash flow from operations totaled $123 million (including $97 million from inventory reductions), helping net debt-to-invested-capital fall to 29.6% with further leverage reduction expected after ~$100 million in tax refunds.
  • Capital expenditure guidance remains at ~$210 million for 2023, prioritizing high-return U.S. South projects and continued balance sheet deleveraging while staying open to other strategic opportunities.
  • Housing demand is resilient, with U.S. single-family starts and builder sentiment on the rise, lean channel inventories and tighter supply from curtailments, wildfires and sharply lower European imports supporting stronger lumber demand.
  • European import volumes have dropped significantly despite some aged stock remaining, and fiber costs are set to decline further with British Columbia stumpage down $10–15/m³ and Quebec fire-salvage rates falling $5–10/m³.
AI Generated. May Contain Errors.
Earnings Conference Call
Interfor Q2 2023
00:00 / 00:00