Interfor Corporation (IFSPF) CEO Ian Fillinger on Q1 2022 Results - Earnings Call Transcript

May 13, 2022 8:40 PM ETInterfor Corporation (IFSPF), IFP:CA
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Interfor Corporation (OTCPK:IFSPF) Q1 2022 Earnings Conference Call May 12, 2022 11:00 AM ET

Company Participants

Ian Fillinger - President and Chief Executive Officer

Rick Pozzebon - Senior Vice President and Chief Financial Officer

Bart Bender - Senior Vice President of Sales and Marketing

Conference Call Participants

Sean Steuart - TD Securites

Hamir Patel - CIBC Capital Markets

Paul Quinn - RBC Capital Markets

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Interfor's Quarterly Analyst Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your first speaker today, Mr. Ian Fillinger. Thank you. Please go ahead.

Ian Fillinger

Thank you, RJ. Welcome to our Q1 2022 analyst call. With me today, you have Rick Pozzebon, our Senior Vice President and Chief Financial Officer; and Bart Bender, our Senior Vice President of Sales and Marketing. Our agenda today will start off with myself providing a recap of our financial results, our focus and our improvement efforts. I'll then pass the call to Rick, who will cover our financial matters. And then Rick will pass the call to Bart, who will cover market.

Turning to our financial results, our Q1 adjusted EBITDA was $570 million, approximately four times higher than Q4. All lumber benchmark prices increased significantly throughout most of the quarter before peaking in mid-March. We are executing on our strategic plan, and we're generating industry-leading lumber margins and returns on capital. I encourage you to look through our investor deck on our Web site at these metrics.

Our improvement efforts were again balanced across the company as we made progress in all regions. Production volumes were again an all-time high quarterly record, which included the addition of our Eastern Canadian region and the ramp up of our DeQuincy, Louisiana mill, and strong operational portfolios across most of our other operations.

Our total unit production costs increased slightly due to higher log costs in the U.S. and conversion costs in all regions, driven largely by the ongoing inflationary pressures. We continued on our CapEx improvement plans in every region, spending $51 million in the quarter, down slightly from the previous quarter, but on track and on target for the $275 million for the full-year, of which approximately $200 million will be on discretionary high-payback projects.

Turning to our financial capacity, we continue to have significant financial capacity to consider several further capital deployments, which Rick will cover shortly. I'd also like to provide an update on the early integration of our Eastern Canadian platform. You'll recall the acquisition of EACOM was completed on February 22. And since then, we've been onboarding and have had several welcome events with our new teammates [indiscernible].

Our key focus areas in the near term are to enhance the historical performance, operation performance, identify further opportunities for easy improvements in synergy realization, planning for back office, corporate and system integrations, and assessing the potential long-term strategic investments. Since the acquisition of our Eastern team, we performed well. And in many areas, we've had productivity at best ever performances, in fact, at five of seven mills in the last eight weeks. While still early and more work to do, we have already realized almost half of our $25 million synergy targets within the first eight weeks, and we expect more operational synergies to be tracked and tackled over the next sort of coming months.

Turning to our strategic focus, we continue to push forward on achieving greater returns on capital through our unrelenting focus on operational excellence and capital deployment. As such, I want to outline a few key initiatives. Our DeQuincy mill in Louisiana continues to progress well, and we now have moved to a two-shift operation several months ahead of schedule.

In Georgia, our largest capital project at our Eatonton mill continues on track and will be fully completed in the next month. We expect a new standard to be set for our U.S. held operations in terms of volume, conversion costs, and earnings. In DC, we are nearing completion on the sale of our EACOM mill to the Sand Group. And in Eastern Canada, we recently announced our purchase of 16% of Green first shares from Ray.

In summary, our capital returns are again exceptional for Q1, generating a year-to-date 87% return on capital. We continue to work hard on our capital allocation discipline to ensure the best return for our shareholders and we continue to see strong performances from our internal projects and recent acquisitions.

That concludes my opening remarks, and I'll now pass the call over to Rick.

Rick Pozzebon

Thank you, Ian, and good morning. First off, I'll refer you to cautionary language regarding forward-looking information in our Q1 MD&A. The first quarter is for continued its rapid transformation into one of the largest and most profitable lumber producers in the world. We added nearly 1 billion board feet of annual lumber capacity upon closing the EACOM acquisition and further diversified into a new region with attractive fiber fundamentals.

Closing on EACOM, capped an eight month span in which we grew our total lumber capacity by over 60%. This rapid growth drove our lumber production and shipments in Q1 to record levels. The exciting part is that the most positive impacts of our growth are just now starting to be reflected in our results. Growth through acquisition has been just one facet of our disciplined and balanced approach to capital allocation in the quarter. We continue to make great progress in our multiyear strategic capital program. We saw significant value in buying back our own shares and completed our 10% normal course issuer bid program shortly after quarter end, and we further rationalized our with the sale of the EACOM Specialty Mill.

Collectively, these actions have positioned our balance sheet conservative leverage and further optimize our portfolio to continue generating best-in-class returns on capital. In terms of the first quarter financial results, Interfor generated adjusted EBITDA of $570 million. Included in this figure is $68 million of nonrecurring purchase accounting expense driven by having to record the acquired inventories at fair value. Adjusting for this, EBITDA would have been a quarterly record of $638 million. We expect a further $17 million of similar fair value adjustments to impact our second quarter results as we sell through the remaining acquired inventory.

First quarter earnings benefited from the strong operating performance and elevated lumber prices, while we continue to face inflationary pressures on the cost side and the challenging logistics environment. In terms of cash flow, we generated $379 million from operations. Of this, $98 million was invested in working capital with seasonal inventory build and increased receivable was driven by lumber prices.

Working capital reductions are anticipated in the second quarter. We also invested $51 million in capital projects and returned $194 million to shareholders through share buybacks at an attractive average price. We ended the quarter with our balance sheet in a conservative leverage position and ample liquidity and to continue advancing on our strategic plans. These plans include spending about $275 million on capital improvements for the full-year 2022, which is similar to prior guidance. We continue to see significant opportunity enhance our returns through capital reinvestments. At the same time, we will continue looking for attractive opportunities to deploy capital on lumber focused growth and to return additional capital to shareholders.

To wrap up, Q1 was a transformational record-setting quarter for Interfor, and we are well positioned financially and operationally to continue our momentum and growing value for our shareholders.

That concludes my remarks. I'll now turn the call over to Bart.

Bart Bender

Thank you, Rick. Good morning, everyone. I'll provide a few comments on our lumber markets. First off, we are very pleased to welcome the Eastern Canadian operations to the Interfor team. With that, comes virtually 1 billion feet of pure SPF production in the East, both dimension and stats. In addition, we now have a regional office in Montreal servicing our customers. Further, we increased our product offerings to include [indiscernible] and remanufactured number. We're excited about this diversification of a strategic customer base and the group of professionals we now get to work alongside in Eastern Canada.

Now, to the markets, the fundamentals remain consistent quarter-over-quarter, however, not without some areas of uncertainty. Specifically, tailwinds remain strong when it comes to household balance sheets, demographics, rising home equity, age of housing, stock, all encouraging on considering demand for lumber in North America.

In terms of uncertainty, inflation, interest rates and ultimately, affordability come into question. New home construction seems to have such a degree of pent-up demand that growth in this area still feels very strong. Preparing a model, which is perhaps a bit more sensitive is showing a level of volatility as we work through Q1 into Q2.

Lastly, the Russia-Ukraine war will bring shifts to supply lines globally. We expect full deepening Europe and agent from cessation of Russian softwood lumber imports and drop the European imports to North America and also add to exports from North America to some parts of Asia. Specifically speaking about repair or model a new sector, we started Q1 on very strong, both from an inventory and consumption perspective. In the latter part of the quarter, starting to see consumption temper, and so far in Q2, consumption has started to increase.

It's important to point out that the inventory position of the box stores this year is very different from the circumstance in one year ago. From our perspective, the inventories are well managed. The new won construction end-use sector continues to show encouraging demand, starts at close to $1.8 million. It's encouraging, but borrow-basing the completions, which are running at $1.3 million. We see this situation positively as we expect supply chain issues to supply in all products, which should increase the rate of completions, which translates to more to that for lumber in this sector.

Supply chain is a word we are using considerably more these days and remains an interesting dynamic in our business. We are expecting constraints to continue in almost right through Q2 into Q3 and can't quite possibly Q4. At Interfor, our operations are well diversified not only geographically but also in terms of transportation modes and carriers. Overall, our markets for Q2 remained resilient, and we're encouraged in what we see for the balance of the year.

With that, Ian, I'll turn it back over to you.

Ian Fillinger

Thanks. Okay. Thanks, Bart. Operator, we're ready to take questions from the analysts now.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from the line of Sean Steuart from TD Securites. Your line is open.

Sean Steuart

Thanks. Good morning, everyone. A couple of questions, I want to start with the Green First investment. And can you give us some of the context behind the motivation there? Is it cybersecurity potential for the sawmills, synergies, maybe all of the above, but any context on the motivation and appetite for consolidation on that front? And further to that is more M&A potentially temper your appetite for further returns of capital to shareholders.

Ian Fillinger

Yes, for sure, Sean. I would kind of just refer to the press release that we put out. It was an investment opportunity that we saw, and that's really about it. There was a seller and we were a buyer, done last Monday and not much more to comment on that, Sean. We're concentrating on what we're doing at Interfor when it comes to sales and marketing and operations and capital investment, but if you saw that as a good opportunity to make that investment and we talk greener attractive opportunity for the company to pick up those shares.

Sean Steuart

Okay, understood.

Rick Pozzebon

No, I think that covers it, Ian.

Sean Steuart

Okay. Question for Ian or Bart. Any sense that transportation headwinds are starting to another point. I'm looking for some guidance on the inventory that you built up over the last couple of quarters that 100 million board feet increase to your finished goods inventory. How long do you expect it will take to work through that surplus at the no level?

Bart Bender

Okay. Sean, it's Bart here. I'll tackle that question. First off, I think our inventory build in excess the shortfall in production versus shipments was $61 million. I think one you're referring to is perhaps some of the eastern operations course volumes. So we'll have to get used to carrying a bit more inventory than we usually do from that perspective. I would say, pre-COVID days, we would have been in that 18 days production would be our normal range. And I'd say most the e-com acquisition, that's probably bumped down to more like 20 days. That we would normally carry in inventory. And today, we're at roughly 23%. So we actually feel pretty good about where we're at with inventories. And consider we'll continue to work hard and keeping those well managed as we go forward.

When it comes to transportation capacity, I think I think it's been one of those volatile sort of files for everyone, quite frankly. And I think some months are good and some months are, it depends on and what region. So we still think we're dealing with quite a bit of congestion and disruption from that standpoint. And we expect that to continue through balance of Q2. And we have been given some ideas that we'll see improvements in Q3 and further improvements in Q4. So, I think this situation with -- on the logistics side isn't going to fix itself overnight. I don't believe it's going to fix itself within Q2, it will take a bit longer. But when it comes to Interfor, we feel very comfortable with where we're at from an ambulatory perspective, and we'll continue to manage those accordingly.

Sean Steuart

Okay, thanks for that part. That's all I have for now. Thanks, everyone.

Ian Fillinger

Thanks, Sean.

Rick Pozzebon

Thanks, Sean.

Operator

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

Hamir Patel

Hi, good morning. Bart, I was wondering if you could give us a sense as to what you're seeing in some of the other end markets like R&R and industrial.

Bart Bender

Well, repair/remodel, I think I commented that on our opening our opening comments. Repair/remodel started off the quarter very strong, quite frankly. It was a decent momentum lister way through that we saw some pause, but really, when I talked about the inventory position this year versus a year. And I was in a position to really manage that shift in demand, and I would obviously that this year wasn't that dramatic. And since then, we've seen things pick back up. So, repair/remodel as we go into Q2, seems fairly stable, I think, is the best way I'd put that. And I think importantly, the inventories that have been allocated to that end use segment are well managed. And I think that's the difference this year versus what we saw last year.

From an industrial standpoint, our customers are very active. We have -- that's kind of an end-use sector that's been quite stable and has been stable. So we're not seeing anything that would give us any different opinion on that. So overall, both of those items are in a good spot.

Hamir Patel

Okay, great. That's helpful. And I want to get your sense as to Ontario and Quebec, obviously, a new region for you. How do you see log costs there evolving over the next year or 2?

Ian Fillinger

Yes. Hamir, I mean, we are very positive on the log cost dynamics in Ontario, Quebec. And especially when you compare to British Columbia, there's definitely an advantage that the Eastern Canadian region has. And so we feel very good about it in here. And we've got good low cost and low lot of costs in South. Obviously, some creep up there depending upon where the mill might be located, but we're very pleased with that. And the full time for our Eastern Canadian new region and we have a very favorable outlook on the lot cost.

Hamir Patel

Great. Thanks, Ian. That's helpful. I will get back in queue.

Ian Fillinger

Thank you.

Operator

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

Paul Quinn

Yes, thanks very much. Good morning, guys.

Ian Fillinger

Good morning.

Rick Pozzebon

Hey, Paul.

Paul Quinn

Just if you could outline EACOM's Q1 contributions, what do they generate in EBITDA in Q1?

Ian Fillinger

Well, we completed it on February 22, so not a lot of track history there, but Rick, maybe you can kind of give a context around that.

Rick Pozzebon

Yes, for sure. So we disclosed they produced around 100 million board feet and sold through just like we the max and we commented on the purchase accounting adjustment. So if you back out that purchase accounting adjustment to be north of $70 million of EBITDA for the six weeks of ownership.

Paul Quinn

Pretty impressive. Maybe you could just remind me what are the residuals of the EACOM going to?

Rick Pozzebon

Yes, various takers in the region, well-capitalized facilities. Paul, we've got no real concerns around the residual offtake from the operation.

Paul Quinn

Okay. So, do you think residuals is a concern for other countries, right?

Ian Fillinger

No, we don't think so, Paul. I mean, the takeaway, as Rick alluded to, a strong -- we have arrangements and agreements and contracts in place in that year and strong customers that are taking away the residual. So no, we're pretty good about it.

Paul Quinn

Okay. And then just on the cost side, you've got a couple of mills or up in Q2. Do you expect your cost to move up materially as a result?

Ian Fillinger

With the start-up, like DeQuincy going to two shifts, and Eatonton, yes -

Paul Quinn

No, plus more contribution from the EACOM, right?

Ian Fillinger

Yes. No, we think our cost will be reduced on a unit basis with that added production coming in and being while helping the individual mills, but also spread out across the company, we should see cost reductions going forward.

Paul Quinn

Okay. That's all I had. And a great quarter, thanks.

Ian Fillinger

Thanks, Paul.

Rick Pozzebon

Thank you.

Operator

And there are no other questions over the phone line at this time. I would now like to turn the call back to Ian.

Ian Fillinger

Okay, great. Thank you, Operator. Just concluding remarks in closing, we are focused on maintaining the health and safety and well-being of our employees, we continue to drive cost reduction across the company and we're matching our production rates to our order files, and we're continuing with the balance approach to our capital allocation. We'd like to thank everybody for dialing in and participating in our update call this morning and your interest in our company. If you have any further questions, feel free to reach out to myself, Rick or Bart at any time. Thank you, Operator.

Operator

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

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