GreenFirst Forest Products Q3 2024 Earnings Report

GreenFirst Forest Products EPS Results

• Actual EPS: C$0.08
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

GreenFirst Forest Products Revenue Results

• Actual Revenue: N/A
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

GreenFirst Forest Products Announcement Details

• Quarter: Q3 2024
• Date: 11/12/2024
• Time: After Market Closes
• Conference Call Date: Wednesday, November 13, 2024
• Conference Call Time: 9:00AM ET

GreenFirst Forest Products (TSE:GFP) is a forest-first business, focused on sustainable forest management and lumber production. The Company owns four sawmills located in rich wood baskets proudly operating over six million hectares of FSC® certified public Ontario forest lands (FSC®-C167905). The Company believes that responsible forest practices, coupled with the long-term green advantage of lumber, provide GreenFirst with significant cyclical and secular advantages in building products.

GreenFirst Forest Products Q3 2024 Earnings Call Transcript

Key Takeaways

• The spinout of CAP Paper was completed in November as planned, separating GreenFirst into a pure-play lumber company and CAP Corporation as a standalone paper mill.
• The U.S. Department of Commerce’s new 14.4% duty rate on softwood lumber imports yields an approximate US$14.2 million recovery on 2022 duties paid, with negotiations ongoing for the remaining deposits.
• GreenFirst launched a rights offering in October to fund its strategic plan and has secured a C$20 million commitment from Ravenswood, preparing to deploy proceeds for working capital, CapEx projects, and potential acquisitions.
• The company plans to invest ~C$50 million in 2025–26 across eight off-cycle CapEx projects to boost annual capacity by 20%, cut costs by 10%, increase EBITDA by C$18 million, and lower its breakeven by 15%.
• Q3 results showed a positive Adjusted EBITDA of US$15.9 million (vs. –US$6.1 million in Q2) and C$1 million contribution from operations, driven by duty recovery, improved lumber prices from July lows, and record mill production.

Presentation

[Operator]

Good morning, ladies and gentlemen, and welcome to GreenFirst's Q3 2024 Results Conference Call. Please note that all lines are muted to prevent any background noise. During this conference call, GreenFirst representatives will be making certain statements about future financial and operational performance, business outlook, and capital plans. These statements may contain forward-looking information or forward-looking statements within the meaning of Canadian securities law.

[Operator]

Such statements involve certain risks, uncertainties, and assumptions which may cause GreenFirst's actual or future results and performance to be materially different from those expressed or implied in these statements. Additional information about these risks, factors, and assumptions is included in GreenFirst's MD&A and annual AIF, which can be accessed on the company's website or through SEDAR+. Please, after the speaker's remark, there will be a question-and-answer session. Please submit your questions through the online portal.

[Operator]

I will now pass it over to Joel Fournier to begin the management presentation. Please go ahead.

[Joel Fournier, CEO at GreenFirst Forest Products]

Thank you very much, Sylvie. And good morning, everyone, and welcome to our Q3 2024 earnings call. I'm Joel Fournier, the Chief Executive Officer of GreenFirst Forest Products. Today, I'm joined by Peter Ferrante, our new CFO; Terry Skiffington, CEO of Kap Paper; and Michel Lessard, our President. Since our last earnings call, we've continued to make progress on our strategy. I'm pleased to announce that the spin-out of Kap Paper was completed in November, as planned.

[Joel Fournier, CEO at GreenFirst Forest Products]

Now, both entities are completely separated, and GreenFirst Forest Products is a pure-play lumber company that will focus on the future growth of its sawmill. Kap Corporation will continue to exist as a standalone paper mill operation, with Terry and newly announced board of directors at the helm. On August 12, 2024, a new duty rate went into effect as a result of the U.S.

[Joel Fournier, CEO at GreenFirst Forest Products]

Department of Commerce final determination of its fifth administrative review with respect to import of softwood lumber product. This determination assessed a new duty rate at 14.4%, which was lower than the company paid in 2022 at 20.2%. Based on this final rate, the company would stand to benefit from an approximate $14.2 million USD or CAD 19.2 million recovery on duty paid in 2022. We will continue to advocate for our shareholders to see a timely return on those overpayments. In addition, we continue to seek a fair settlement of all remaining duty deposits. This duty will be settled with the rest of the Canadian softwood lumber industry, and consequently, the amount of refund remains uncertain at this time.

[Joel Fournier, CEO at GreenFirst Forest Products]

In addition to the duty receivable recognized in Q3 2024, we also announced the launch of the rights offering in October that will allow the company to execute on its strategic plan. GreenFirst continues to be in a unique situation where we have access to excess wood supply, and through the execution of our strategic plan, we're aiming to grow our annual capacity by using that wood supply.

[Joel Fournier, CEO at GreenFirst Forest Products]

Our mission is to become a top quartile cost operation, and we want to be one of the largest Ontario lumber producers. We firmly believe that executing a strategic CapEx plan off-cycle while market prices are low is key for the long-term profitability when markets rebound. There are many advantages to undertaking such a capital project off-cycle.

[Joel Fournier, CEO at GreenFirst Forest Products]

For example, project costs will be lower, startup time will be quicker for those CapEx projects, and we can maximize the return on every dollar we will spend. These investment opportunities will change the current profitability of GreenFirst. As you can see in the slideshow, we are looking to spend approximately CAD 50 million in 2025 and 2026, with an expected increased EBITDA of approximately CAD 18 million per year.

[Joel Fournier, CEO at GreenFirst Forest Products]

This investment will help reduce our costs by roughly 10% and increase our current capacity by 20%. It will also lower our EBITDA break-even point by approximately 15% after the completion of Phase One of our strategy. The company is looking to do a total of eight projects for Phase One across the four sawmills in Ontario. Those projects will increase capacity, reduce costs, and improve EBITDA going forward.

[Joel Fournier, CEO at GreenFirst Forest Products]

The company will continue to work with the board of directors to obtain approval on these initiatives. More details will follow in subsequent press releases. The company finished the third quarter at a net loss from continuing operations, adjusted for one-time duty recovery. This was primarily due to operations in July, where pricing was at its lowest in conjunction with the company taking targeted curtailments in order to manage liquidity tightly.

[Joel Fournier, CEO at GreenFirst Forest Products]

Towards the end of the quarter, we saw market improvement, and we believe we hit the bottom for lumber prices in July. July was our lowest month, with pricing at $338 per 1,000 FBM on a Western basis. Since then, prices have steadily increased month over month, and we're now sitting at $445 per 1,000 FBM on a Western basis. Under those current prices, our mills are now positive EBITDA.

[Joel Fournier, CEO at GreenFirst Forest Products]

The reduction in capacity recently announced by our competitor and the housing supply shortage in the United States are expected to continue to put pressure on pricing. Going forward, we believe the fundamentals that drive lumber prices are favorable for GreenFirst and for the lumber industry. Aside from the targeted curtailment we had in July, our operation did run smoothly in Q3, while certain locations were breaking production records.

[Joel Fournier, CEO at GreenFirst Forest Products]

GreenFirst continued to promote a culture of continuous improvement and has seen a higher level of efficiency when we compare to fiscal 2023. As you can see in the presentation, our sawmill continued to improve by increasing production, reducing costs overall, and our break-even mill net EBITDA improved by 20% from 2022. Peter will now take us through the financial results of the quarter. Over to you, Peter.

[Peter Ferrante, CFO at GreenFirst Forest Products]

Good morning, everyone. The company's net income from continuing operations, now excluding Kap Paper in Q3 2024, was $14.8 million. Adjusted EBITDA from continuing operations for Q3 2024 was positive $15.9 million. This compares to an adjusted EBITDA of negative $6.1 million in Q2 2024. As Joel previously shared, during the third quarter of 2024, the company recorded a recovery of approximately $14.2 million USD or CAD 19.2 million related to duties paid, plus accrued interest of $2.3 million USD or CAD 3.1 million.

[Peter Ferrante, CFO at GreenFirst Forest Products]

This recovery has positively impacted our net earnings and adjusted EBITDA in Q3 and on a year-to-date basis for 2024. For Q3 2024, we had positive contribution from continuing operations of approximately $1 million. Net sales recorded in the quarter were $70.8 million, closely compared to $69.6 million in Q2 2024.

[Peter Ferrante, CFO at GreenFirst Forest Products]

The increase in net sales was due to higher volume shift, offset by lower pricing realized for the quarter. The industry continues to face lower demand as housing affordability continues to be significantly impacted by increased mortgage rates. In addition, an oversupply of lumber inventory, despite deterrent in North America, continues to impact pricing. There continues to be low level of field inventory in the industry, and there were lower takeaways following the first half of the year.

[Peter Ferrante, CFO at GreenFirst Forest Products]

Cost of sales in the lumber segment were $69.8 million compared to $72.5 million in Q2 2024. The decrease in cost of sales in the third quarter was primarily due to lower charges related to inventory net realizable value recorded compared to the second quarter of 2024, in addition to inventory being sold during the third quarter, which was produced primarily in the previous quarter at a lower cost.

[Peter Ferrante, CFO at GreenFirst Forest Products]

Compared to Q3 of last year, the company's net sales increased by about 4%. This was driven by higher production in the quarter, offset by lower pricing realized in the current quarter. Demand in both periods was heavily impacted by weaker buyer sentiment resulting from sustained interest rate increases, combined with pricing being lower in the third quarter of 2024 compared to the same period last year.

[Peter Ferrante, CFO at GreenFirst Forest Products]

Cost of sales in the quarter improved by approximately 16% compared to Q3 of last year, primarily due to significantly higher volume sold and higher charges related to inventory net realizable value recorded in the third quarter of 2024 compared to a recovery in the third quarter of 2023. Year over year, on a year-to-date basis, net sales increased by 1% due to higher average selling prices realized, combined with higher volumes shipped.

[Peter Ferrante, CFO at GreenFirst Forest Products]

Selling, general and administrative expenses of CAD 3.5 million in Q3 2024 were lower compared to CAD 3.9 million in Q2 of 2024. This was primarily related to the company incurring higher third-party fees related to corporate reorganization efforts, including the planned spin-off of Kap Paper in the second quarter of 2024. The company generated finance income of CAD 1.9 million for Q3 2024 and incurred a finance cost or expense of CAD 0.2 million for the three quarters on a year-to-date basis.

[Peter Ferrante, CFO at GreenFirst Forest Products]

This primarily represents interest income related to duties recovery recorded during the period, offset by interest charges on the company's outstanding debt under the credit facility. During Q3 2024, the company made net repayments against its revolving portion of the credit facility of CAD 4.2 million and CAD 0.7 million related to its equipment term loan with the bank.

[Peter Ferrante, CFO at GreenFirst Forest Products]

The company continues to monitor inventory levels and is accelerating initiatives to open up additional liquidity in the short term through the recent announcement of a rights offering. I will now pass it back to Joel for his commentary on the operations of the business.

[Joel Fournier, CEO at GreenFirst Forest Products]

Thank you, Peter. As mentioned earlier, Q3 was a challenging quarter due to poor market conditions across the industry. The lumber business faced continued pressure with particularly low prices in July. However, recent announcements of capacity reduction by our competitor have contributed to improved pricing since then. Our industry operates within a cyclical market, and we are emerging from a difficult phase.

[Joel Fournier, CEO at GreenFirst Forest Products]

Throughout the quarter, we maintained tight cash management to navigate through those conditions. In Q1 and Q2, we had reported on several production records that were achieved by our mills. I'm happy to report that we continue to have production records in Q3 2024, primarily related to our Chapleau mill and Kapuskasing sawmill operation. Kapuskasing achieved its highest production level for August and September in the mill history, while Chapleau reached its highest production shift ever.

[Joel Fournier, CEO at GreenFirst Forest Products]

We also continue to see a reduction in our SG&A run rate that is currently at $33 per 1,000 FBM on a target of $40 per 1,000 FBM announced previously in Q1 this year. We will continue to monitor our SG&A, and we look for future opportunities to reduce costs. We remain committed to reducing costs in other areas of the business. In addition to our SG&E cost reduction, we continue to make improvements on our costing and processing costs year after year. Our costs went down by 6% from 2022 to 2024, despite high inflation and other outside pressure. GreenFirst continues to drive a culture of continuous improvement, as we believe this is a key component in maximizing the future return on capital investment within the business.

[Joel Fournier, CEO at GreenFirst Forest Products]

This year, so far, we had identified and executed on specific non-CapEx initiatives in order to drive a saving of approximately CAD eight million in our operation on a year-to-date basis compared to 2023 results. A little bit more on the operations side, our sales volume increased from Q2, driven by starting the quarter with a high inventory and ending in a good position in September as the market improved through the quarter. Production was lower in Q3 compared to Q2 due to a targeted mill curtailment that happened in July.

[Joel Fournier, CEO at GreenFirst Forest Products]

On the sales side, we are pleased to report that we increased our volume with our big box store customer and added an additional distribution center with them. In the open market, inventory remained very low, and we are beginning to see positive price momentum following recent mill curtailment announcements.

[Joel Fournier, CEO at GreenFirst Forest Products]

Safety remains our top priority, and we must stay focused on executing our plan to improve safety outcomes. As a core value at GreenFirst, safety is incredibly important to our entire team. That's it for this section. I will pass this over to Terry Skiffington for his comment on the paper operation.

[Terry Skiffington, CEO at Kap Paper]

Thanks, Joel, and good morning, everyone. Firstly, we concluded the restructuring last week that places Kap Paper as a standalone entity. Therefore, this will be our last investor call as part of GreenFirst. We are starting a new chapter in the long history of this business, and we are looking forward to maintaining a very close working relationship with GreenFirst. I'll give a brief synopsis of Kap Paper for Q3 and forward into Q4.

[Terry Skiffington, CEO at Kap Paper]

To begin, we had no recordable injuries in the quarter, and we are tracking on a 12-month trailing basis at a 0.76 injury rate, which puts us close to, if not at the top of the list for safest pulp and paper mills in Canada. Mill operational performance remained flat in Q3 versus Q2.

[Terry Skiffington, CEO at Kap Paper]

Q3 is a difficult quarter for operations as we needed to curtail the mill multiple times to bring the mill electrical load down as low as possible to minimize the IESO Global Adjustment charges for 2025. This impacted operating efficiency by 2% as compared to Q2, offsetting improved daily operating performance through the quarter. As I mentioned previously, all North American newsprint manufacturers announced a price increase for September 1 of $50.

[Terry Skiffington, CEO at Kap Paper]

There has been considerable pushback from North American customers as demand has softened. As such, the effective price increase has been lower. At the same time, we are seeing increased shipments into the global export market from all sources, including increased shipments through the Red Sea. This has caused a significant drop in export trading prices.

[Terry Skiffington, CEO at Kap Paper]

Q4 mill operational performance has stepped up as expected, with October seeing the mill return to a standard level of operating efficiency, returning to pre-2020 operating levels and achieving the lowest cost of manufacturing for the year. And this is continuing now through November. However, as mentioned, downward pricing pressure in all markets is of concern. Our focus remains on higher operating efficiency and lower manufacturing costs to offset reduced market pricing. Thank you, and I'll pass over to Joel to complete this call.

[Joel Fournier, CEO at GreenFirst Forest Products]

Thank you, Terry. I would like to thank everyone for joining the call. We will now answer any questions that have come through.

[Operator]

A reminder to please submit your question via the web portal.

[Joel Fournier, CEO at GreenFirst Forest Products]

Okay, this is Joel again. We do have a question. With the recent duty rate adjustment announced, what are the future possibilities of collecting on these duty deposits in the future? I will ask Michel Lessard to answer the question.

[Michel Lessard, President at GreenFirst Forest Products]

Yeah, thanks, Joel. So it's a good question. Regarding the duties, there's currently no imminent settlement being contemplated between the Canadian and the U.S. government. And we saw, so with the last election in the U.S., we'll see how the Trump administration will want to approach this. That being said, so the Canadian lumber industry and GreenFirst as part of it will continue to work very closely with the Canadian government also, and we will continue to try to find a fair settlement for all the duties that are imposed. So it's something to follow very closely.

[Joel Fournier, CEO at GreenFirst Forest Products]

Okay, I just noticed there's another question that came up around the duty. Under the worst-case scenario with the Trump tariff, how does this impact GreenFirst?

[Joel Fournier, CEO at GreenFirst Forest Products]

I can answer this question. We are already preparing for the 30% potential tariff beginning in August 2025, but we have no clarity on what the new U.S. administration will do. We're presently paying very high duty, and our expectation is we're going to continue to pay duty going forward. However, historically, given the amount of lumber that was sold in the U.S., the rising tariff has led to rising lumber prices as well. And if people recall when we had a duty increase this year in 2024, our rate went from 8% to 14.4%, and the lumber price caught up on the duty rate in three weeks.

[Joel Fournier, CEO at GreenFirst Forest Products]

We have another question here. How does the completion of the spin-off will impact my share?

[Joel Fournier, CEO at GreenFirst Forest Products]

I will ask Peter Ferrante to answer the question.

[Peter Ferrante, CFO at GreenFirst Forest Products]

Thank you, Joel. We have recently released the management information circular, and we have also released multiple press releases outlining this process. Shareholders of GreenFirst will be issued a new class of shares for Kap Paper, which will now be publicly traded on any of the stock exchanges.

[Joel Fournier, CEO at GreenFirst Forest Products]

Thank you, Peter. We have another question here. Do you still expect there will be continued targeted curtailment in Q4 as pricing has increased since July lows? Will the company be able to generate positive EBITDA under this condition, and will this be inclusive of SG&A?

[Joel Fournier, CEO at GreenFirst Forest Products]

I can answer this question. Earlier this year, we accelerated maintenance activity while the market was weak in order to allow us to catch up on inventory. We are not currently forecasting any future curtailment, and at today's market price, we are confident that we'll be able to generate positive EBITDA from our mill going forward. As we made significant reductions in our SG&A on a year-over-year basis, we anticipate to also be in a positive EBITDA position inclusive of SG&A. For more clarity, we are positive, and today, with today's current price, we're positive EBITDA going forward.

[Joel Fournier, CEO at GreenFirst Forest Products]

I have another question here in relation to the capital expenditure plan, so how confident are you in the business in executing the strategic CapEx plan in the future,

[Joel Fournier, CEO at GreenFirst Forest Products]

so I will answer that question. These projects that we identify are familiar with our management team, and some of them have been completed in the past. To minimize risk, those projects are turnkey in nature, and also we're looking to install proven technology. Finally, to minimize the risk, our vendors are committed to provide performance guarantees on those projects, so if you think about having a turnkey project that kind of reduces the risk on the cost side and having the vendor working to provide performance guarantees, this will provide more certainty on the payback of those projects.

[Joel Fournier, CEO at GreenFirst Forest Products]

We do have another question, but this one is Kap Paper related. The company announced the completion of the spin-off. Does that mean the company has found a buyer for the paper mill? What is the plan for Kap Paper? I will pass this one over to you, Terry.

[Terry Skiffington, CEO at Kap Paper]

Okay, thanks, Joel. As it stands, Kap Paper has been spun out as its own operating entity and is working towards its goal of being a standalone profitable business through the execution of our plan, and just to refresh, the plan for Kap announced in Q1 of this year was to return Kap to being at least break-even in Q4. That is unchanged. We are on that trajectory, actually slightly ahead of that in terms of Q4 operating performance.

[Joel Fournier, CEO at GreenFirst Forest Products]

Okay, thank you, Peter. We do have a couple of more questions here. One, it's about the rights offering. With the announcement of the rights offering, do you expect to raise the full CAD 97 million? And will all of it be used for strategic CapEx? I will pass this one over to you, Peter.

[Peter Ferrante, CFO at GreenFirst Forest Products]

We will not know the final amount raised related to the rights offering until mid-December. However, as we've stated in our press release, we already have $20 million of that has been committed to as part of the rights offering by a new key investor, which is Ravenswood. We are prepared for multiple scenarios with regards to the use of funds depending on the final outcome. This will include management of our current working capital, investment in various CapEx projects that we're talking about, as well as any other future potential strategic opportunities. Hopefully, that clarifies that question.

[Joel Fournier, CEO at GreenFirst Forest Products]

Thank you, Peter. We do have another question that came up around the rights offering. Will upper management and large shareholders be participating in the rights offering? I will answer this question. So we have been told by several key shareholders and board members that they will participate to varying extents. However, no commitments to exact dollar amounts have been disclosed yet. Okay, we do have a couple of more questions here. One, it's about what is the status with Kenora and the other land that we have for sale. I'll pass this one over to Michel.

[Michel Lessard, President at GreenFirst Forest Products]

Thanks, Joel. So about Kenora, so as I mentioned the last quarter also, so our interest remains to monetize that land. That is not solved yet, but that being said, we continue to work with the interested parties. So we're hoping to be able to finalize an agreement in the next, I would say, following months. About the other lands, we already mentioned that we had some lands for sale around Kapuskasing and Tennant. So we sold around 2,300 acres on that. So pretty good value also. So there's some other lands that we're in discussion with the town of Kapuskasing, around Kapuskasing. But other than that, I would say everything has been sold. So very good for us again, and we executed as planned on that.

[Joel Fournier, CEO at GreenFirst Forest Products]

Okay, I would like to thank everyone on this call. I guess we answered most of the questions, so that will conclude the call for today. Thank you very much. Have a good day.

[Operator]

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending, and at this time, we ask that you please disconnect your lines.

Participants

Executives

• Peter Ferrante, CFO
• Michel Lessard, President
• Joel Fournier, CEO

Analysts

• Terry Skiffington, CEO at Kap Paper