Interfor Corporation (OTC:IFSPF) Q1 2019 Earnings Conference Call May 3, 2019 11:00 AM ET
Duncan Davies - CEO
Marty Juravsky - CFO
Bart Bender - SVP of Sales & Marketing
Conference Call Participants
Sean Steuart - TD Securities
Hamir Patel - CIBC Capital Market
Mark Wilde - Bank of Montreal
Good morning. My name is Mariamma and I will be your conference operator today. At this time, I would like to welcome everyone to the Interfor Corporate First Quarter Analyst Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.
I would now like to turn the call over to Duncan Davies, President and CEO. You may begin your conference.
Thanks very much, operator. Good morning everyone and thanks for joining us. I'm here with our CFO, Marty Juravsky, and our Senior Vice President, Sales and Marketing, Bart Bender, to go over Interfor's first quarter's results and to look at our outlook for the next few months.
I am going to keep my remarks brief and will turn the session over to you for questions as soon as we can. To the extent that you have already seen the results of most of the others in our sector, there won't be any surprises with our results for the first quarter, which at best we would describe as disappointing.
The price recovery that was generally expected in the first quarter simply didn't come to pass. After some encouraging signs in the first six to seven weeks of the year prices reversed course and gave up a significant portion of the gains recorded in the first half of the quarter. Much of that can be attributed to the worst weather that impacted takeaway levels in key markets of North America. But that wasn't the only factor.
Higher mortgage rates and economic uncertainty also impacted demand, especially in the new home segment. On a quarter-over-quarter basis prices for the main commodities were up somewhere between $10 and $40 per thousand board feet in the first quarter, from the levels recorded in the fourth quarter.
After taking account of order file lags and like our sales average for the first quarter was $613 per thousand board feet, before duty charges, up $14 from the fourth quarter. During the first quarter we also dealt with the impacts of high log costs in B.C. Interior, that have come about as a result of timber shortage and the disconnect between the lumber prices and the mechanism used to determine tonnage rates in the region.
In fairness tonnage rates in the interior were lower in the first quarter than they were in the fourth quarter, but they were high compared to the historic rates in across B.C. and regions. Taking together these factors, contributed to a net loss of $15.3 million in the first quarter of 2019. This compares to a loss of $13.5 million in the fourth quarter and to earnings of $32.7 million in the first quarter of 2018.
Our results for the first quarter this year include some noise associated with the redundancy of certain assets affected by the capital projects in the south and the prior period expenses but those items were relatively minor.
EBITDA in the first quarter was $16.3 million compared to $8.9 million in the fourth quarter and to $83.5 million in the first quarter last year. Firstly all of the gain in EBITDA in the first quarter compared with the immediate preceding quarter can be attributed to the increase in sales values described earlier, with the positive and negative effects of items such as increased production, lower shipments, lower log cost and lower SG&A expenses effectively canceling each other out.
Production in the first quarter was 646 million board feet, up 40 million board feet relative to the fourth quarter following the return to normal operating schedules post the holiday season. Capacity utilization was 83% overall versus 78% in the fourth quarter made up of 47% on the B.C. coast, 84% in the interior, 85% in the Northwest and 90% on the South. Shipments amounted to 621 million board feet, down 26 million board feet quarter-over-quarter.
Cash from operations during the quarter totaled $17.1 million, working capital increased by $75 million, reflecting a combination of higher log and lumber inventories and lower payables. Capital spending in the quarter was $43.8 million more than 70% of which was directed to our ongoing projects in the U.S. South. The remainder was directed towards maintenance and woodlands activities.
During the quarter we repurchased and cancelled 515,000 shares with a cost of $7.8 million bringing the total to-date to $2.8 million shares with a cost of $44.7 million. Adding all this together left Interfor's net debt of $173 million at quarter end equivalent to 15.6% of the invested capital and with available liquidity of $425 million.
On March 4th our normal course issuer bid was renewed permitting the purchase of almost 6.7 million of shares over the course of the next 12 months. Activity into the NCIP on the go a forward basis will be ranked against other investment alternatives and balanced against our leverage charges similar to where the 2018 programs managed.
While the first quarter was nothing to write home about from a bottom line standpoint I can tell you that I'm extremely pleased with the progress we made on our strategic capital initiative in the South. The Monticello and Meldrim projects were great and are on track for completion this month. We expect Monticello to be ready in its first log next week and the new kiln at Belgium should be running by the end of the month.
Our most recent estimate show these projects coming in within 10% of the capital budget of U.S. $62.5 million with the overage associated with steel and labor costs. We've also experienced some vendor delays, most notably in Meldrim, which has also contributed to the overrun. The good news is that each of these projects is delivering the results on the already completed phases in excessive pro forma, which provides comfort that the costs overages will be offset by greater than anticipated results when the projects ramp up.
The Phase II projects at Thomaston, Eatonton and Georgetown remain on track for completion in stages over the next two years. To-date, almost $22 million has been capitalized on these projects, and they remain on track from both the timing and the budget standpoint.
At this point, I'm going to ask Bart Bender, our Senior Vice President of Sales and Marketing to provide some comments on the current state of the lumber market and his outlook for the coming months. Bart?
Thanks, Duncan. I'll provide a brief outlook of the lumber market. Anticipation of a spring building season combined with low inventory has prompted increases in pricing mid-quarter. Weather and a continued pause in new home construction tempered this anticipation late quarter, and that continues quarter to to-date. The repair and remodel sector continues to demonstrate quarter-over-quarter increase in growth rates at approximately 40% of the U.S. lumber consumption growth in this sector is meaningful. That said, we are still not seeing full demand from the marketplace as some areas of the country remain under adverse weather conditions.
We expect this to clear up in May, which should give us a better picture of the true demand. In the meantime, as announced Interfor has responded with curtailments in the B.C. interior. In terms of our export business, Japan remains consistent and steady, some pressure on J-grade prices, however [indiscernible], hemlock squares and Doug fir squares are balanced. This should continue through Q2.
For Interfor, China has slowed somewhat this past quarter. This is a reflection of uncertainty in tariffs for U.S. lumber and high end market inventories for Western Canadian SDF and Doug fir dimension products. We expect those to clear through Q2 and market activity to normalize accordingly. Our specialty business, consisting of cedar and reserve pine boards remain steady.
Long-term market fundamentals are favorable, we expect lumber demand to continue to grow. As expected, price volatility will continue as we navigate these short-term market shifts.
I'll stop there Duncan, pass it back over to you.
Great Bart thanks. Late last week as Bart mentioned, we announced plans for series of rotating curtailments at our B.C. interior operations. These curtailments will remove about 20 million board feet of production from our portfolio over the next 20 days or so, that are being taken in response to the combination of weaker than anticipated demand, weaker lumber prices and high log costs in the B.C. interior. Our intention is to continue to monitor the state of the market going forward and we'll adjust our production rates as required.
Operator at this point, I think it would be more productive for our - I guess if we turn the session over to them and for the questions.
[Operator Instructions] Your first question comes from Sean Steuart with TD Securities. Your line is open.
Thanks. Good morning, guys. Two questions, you mentioned the modest inflation to the Phase I budget. And Duncan, I think you suggested that Phase II which is obviously a lot bigger was on track and I'm hoping you can reconcile that. I mean, I - when you initiated the Phase II or started talking about it, I would guess that number would be subject to some inflation as well. Can you help us reconcile those two things?
Yes, we've learned a bunch of things during the Phase 1 projects, Sean, both from an impact of steel price increases or decreases and how that could affect the cost structure of a project. We've been able to build some mechanisms into our arrangements to cover that, which is helpful. So that will affect the Phase II projects as opposed to the Phase I projects. We also learned a lot about labor costs and labor productivity. In the South, we've been able to build some increased costs into the Phase II projects to account for the experiences we have in the Phase I costs.
Got it. Question on the credit facility modernization, can you let us know if there's any change to the borrowing costs there? And, I guess, just more broadly speaking, the rationale for increasing the borrowing base, I would have guessed you would have been comfortable with the liquidity position already just any context you can provide there?
Sure, Marty is the author of this, so I am going to let him comment.
Hey, Sean. So just in terms of last question first. We've got lots of liquidity we've got $425 million liquidity in total, $350 million is in the bank facility. So there is no great element to pass to that $20 million variance other than it was more flexibility available. So we decided to make a nice clean around number in terms of the total availability.
In terms of the costs it's actually - there is a whole variety elements attached to that are enhancements to what we had in place, one, it's always simpler; two, some of the non-financial covenants are always more streamlined, and there is an impact in terms of more preferential cost for us. So it works very well from a variety of perspective including having the turn shifted out to 2024 in terms of its maturity. So it just gives us a lot of flexibility as we pursue our various initiatives.
Got it. And Marty, just a housekeeping question if anything, but the $1.2 million of expenses in Q1 that you referred to as refinements of prior estimates, what exactly is that? And is that a one-off or should we think of that as recurring?
No, it's truly is a one-off there were couple of - there is two specific items, neither of which by themselves are huge, but there were refinement of items that happened a couple years ago. And as we look at them, they had nothing to do with the current quarter. One was associated with when the duties came into place and some timing issues associate with their original introduction of duties and then another pieces associated with some cost that have been occurred related to log determine activities over the last couple years that have nothing to do with the current quarter and neither those issues that we've accrued for have - are ongoing factors.
Okay, thanks very much, guys. That's all I had.
Yes, thanks, Sean.
Your next question comes from Hamir Patel with CIBC Capital Market. Your line is now open.
Hi, good morning. Can you give us your outlook for hybrid costs in B.C. over the balance of this year? And then also would you expect some moderation in the South after sort of weather related increase in Q1?
We expect coverage rates in B.C. Interior to go up quite significantly on the 1st July as a result of the annual update that's taken into the terminal stoppage calculations. To an extent they offset some of the reductions that have occurred over the last couple of months as the quarterly updates have been brought into effect.
But to the extent that log costs in the B.C. Interior are now higher than they are in most of the competing regions in North America, it's going to be difficult pill to swallow in that region. And we think we will force additional curtailments to occur some temporarily and some lately permanently in the interior region as a result.
In the South, we saw some modest cost in the southern region largely because of weather conditions, people talked an awful lot about adverse weather and that's how has affected take away levels to job sites. But it also has an effect on operating rates both particularly in the logging side of things where you get maybe pretty quick in the South and if you get significant rainfall it can impact logging productivity and logging rates and tends to result in somewhat higher costs.
As we move through the spring and summer you'd expect that to moderate that would be our expectation and so far we have seen that coming into effect there.
Thanks, that's helpful. And with your specific region, where your mills are in DC what that July 1st adjustment what does that sort of translate to on a sort of total wood costs? And could you also remind us what is your percent quarter wood in DC.
Our percent of quarter volume varies by different regions, the Adams Lake region versus the operations in the Cootnis [ph]. We have a higher degree of self-sufficiency in the Cootnis than we would at Adams Lake, for example. And the number will be $10 to $15 a cubic meters is our expectation.
Okay, great. Thanks, that's helpful. And just the final one for me for, Bart, can you give us your sense as to where inventories are in North America both at the mill level and in the channel?
Sure, Hamir. My - I think that the inventories at the mill level would be largely a function of some of the inconsistent railcar supply that we saw as due to the weather factors. But I can tell you that the last two to three weeks, the flow there has normalized. And so, I would imagine a lot of that - a lot of the mill inventory is making its way to market or has made its way to market.
The end market inventories are the more, I suppose relevant factor that we're dealing with today. Last quarter, I would have told you that they were at the low end of the average. And, I would say they're in the bottom third of the average today, the fact is that the inventories that have built at the distribution level have been unable to get to the job sites.
So there's higher than normal, but they're earmarked for jobs or they've been pre-sold already. So as the weather cleans up, we think that those inventories will start to flow to the job site, which will make the inventory picture a little bit clearer and perhaps more advantageous for ourselves.
Great. Thanks, Bart. That's all I had. I'll turn it over.
[Operator Instructions] Your next question comes from Mark Wilde with Bank of Montreal. Your line is open.
Thanks. Hey, Bart, I just want to swing back around to that inventory issue. Because I was just hearing from another big West Coast producer the other day who was saying that their read is that inventories in places like Southern California are actually quite high. Are there regional differences here that you might like to call out?
Well, no, that's fair. I think if you look at areas like California, it's kind of hard to look at the weather. I think you probably have to need to look at more of the building activities in that particular area. But if you go around, let's call it North America, the U.S., Canada, I mean, there are areas that that are still getting snow in this - within the last week.
And so, obviously, those areas I don't think are operating at full capacity in terms of the building activity. So you'll see pockets. And, I think that as we've moved into Q2, there are a number of markets that are really picked up in activity. So places like Texas seem to be getting back to business operating on all eight cylinders. So I think as this thing starts - as the market start to normalize, you'll see certain pockets free up on the inventory side sooner than others.
Okay. And Duncan, I'm just curious the first quarter was a tough one. It looks like just based on kind of where lumber prices move, the second it's going to be more of the same. What's it going to take do you think to create a better second half for the lumber industry?
Well, the goodness of the [indiscernible] is misery loves company then we've got lots of that.
You do. No doubt.
We've seen over the course of the last couple of weeks some curtailment announcements. And, one of the things I've learned in this business over the years is when demand is weak, you're not going to sell anymore and you drop prices. And what you really need to do is production rates need to adjust relative to takeaway levels. And I think we're seeing some - we're seeing signs of that happening currently.
And, I think, what you're going to see as we progress through the second quarter and takeaway levels pick up we're going to find out, how much of these doldrums we're in is really weather related and how much of it is underlying economic issues. And I don't know what the percentage make up is. But my sense is we're going to see a combination of increased takeaway levels we'll see some production adjustments, we'll see a rebalancing of the equation. And then, we'll find out what we're really dealing with here in terms of what the overall market situation looks like for North America.
But the thing that gets it the key piece of this puzzle is always been in the market-to-market is how you react to it. And we've always tended to be more proactive than less proactive and in dealing with that if we see a weak takeaway situation and my guess is we're going to get to that either because people begin to wake up to those realities where the costs are forcing to deal with.
Okay. Can you address the Pacific Northwest operations that you got, I talked to a big producer at like, three or four weeks ago and he was cash negative already. And prices went down further from that. So, my sense is that a heck of a lot of capacity in the Pacific Northwest must be cash negative. We've actually seen a couple of permanent closure announcements down in Oregon in the last few weeks. So just assessment of your Pacific Northwest business right now.
Well, Pacific Northwest, people sort of have certain views of the Northwest, we actually do pretty well there. And that business has done pretty good for us, certainly better than the B.C. Interiors been doing for us, because the equation between log costs and sales values is quite a bit better in that region that it is in for example, the B.C. Interior. And so you can't say everybody's in the same circumstance.
We've invested pretty actively in a number of our mills in that area, we've got the benefit of pretty well capitalized operations in our stud mills, and we've got the benefit of a pretty neat product line and good sales values out of our specialty board facility in Southern Oregon.
So I'm not unhappy at all with that business and right now it's not the squeaky wheel in our organization, log cost situation in the B.C. Interiors is a much bigger concern for us than the situation is in Pacific Northwest.
Okay. Just one other issue coming back to kind of B.C. and the B.C. Interior, we've heard an argument that most B.C. Interior wells accumulated really quite healthy log decks this winter, and that nobody is likely to take any decisive action until they've work through those decks. Do you agree with that?
Well, I don't know that. But I obviously know what our inventory situation is. We've announced downtime in the B.C. Interior. I think Canfora has announced downtime in the B.C. Interior, Conifex has announced downtime in the B.C. Interior. I think there's other unannounced downtime that's happening as well.
Part of that strategy is, I mean, the costs are high in that area, and there's no sense. You're taking a high cost log, even if it's in the inventory, and trying to push a product in the marketplace as the market telling you that it doesn't particularly need it at this point in time. And so, for those folks that are well financed, and Interfor certainly is one of those, we've got the luxury of being able to make our decisions of whether we're going to operate or not based on the economics of the business at the time.
We're also fully aware of the fact that we've had some pretty extreme fire seasons the last couple of years in the B.C. Interior, and we haven't missed the fact that so much rates are going up in the B.C. Interior in July. So we're adjusting our overall operating plan on both at the mill level and the woodlands level, given the circumstances that we're dealing with. My presumption is others that can afford to do it are doing the same thing.
Okay. I actually - I have one more question if you could, just on the trade issue. I wonder with weak markets, whether you're seeing any more incremental sense of urgency around this issue, and also whether you think the sort of much talked about U.S. China resolution by toggle some attention back to kind of U.S. and Canadian trade issues.
We're not,-- I'm not seeing anything, Mark. So I'm not aware of anything, and if there was something going on, I would probably know about it. So I've not seen anything. And I think it's just going to play out over time. Our expectation has always been that these things take time, and there's not a lot to be gain by trying to rush.
Yes, okay. And I've been with some U.S. guys who seem to be really insistent yet on a quota based solution here is some kind of a quota based system you think that's a starter or just a complete nonstarter on the Canadian side of the border?
It's a nonstarter.
Okay, that's helpful. I'll turn it over.
There are no further questions at this time. I will now turn the call back over to the presenters.
Okay, thanks very much operator and thanks everybody. We very much appreciate your interest in the company. Marty and I and Bart are available, if you want to follow-up, don't hesitate to call us directly. In the meantime, it's - we're going to deal with the market as they we have in front of us. As I said, we appreciate your interest. Look forward to talking to you over the course of the quarter and very much look forward to talking to you at the end of the second quarter when we announce results. Thanks, take care and have a good day.
This concludes today's conference call. You may now disconnect.