Good morning, ladies and gentlemen, and welcome to GreenFirst's second quarter 2023 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 outlooks, and capital plans. These statements may contain forward-looking information or forward-looking statements within the meaning of Canadian securities law. 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, which can be accessed on the company's website or through SEDAR+. After the speaker's remarks, there will be a question-and-answer session. I would now like to turn the conference over to Paul Rivett. Please go ahead, sir.
Thank you very much, Sylvie. Good morning, everyone, thank you for joining our second quarter call. I am Paul Rivett, as Sylvie said, the Chair and Interim CEO of GreenFirst. Joining with me today are Michel Lessard, our President; Alfred Colas, our Chief Financial Officer; and Gwen Webster, our Chief of Staff. By way of quick overview of our company, we are now exclusively based in Canada with our four sawmills, all centrally located in the heart of the province of Ontario, with approximately 2.5 million cubic meters of allowable annual fiber allocation. We directly employ over 1,000 people, now having a smaller, concentrated footprint that allows us to focus on maximizing our production capacity. Last week, our softwood lumber duty rate was reduced from 20.23%- 7.99%.
This was very welcome news for us, bringing us more in line with our competitors, significantly improving our earnings and cash flow profile. We finally have a level playing field with our Canadian competitors who are exporting lumber to the U.S. Since our acquisition of the Rayonier assets in August 2021, we've made an overpayment of duties in comparison to our Canadian, Canadian peers of over $21 million. In today's value, that is approximately CAD 28 million. We will continue to advocate for our shareholders to see a timely return of this overpayment. In addition, we continue to seek a fair settlement of all remaining duty deposits, which has reached an additional $51 million and continues to climb. These duties will be settled with the rest of the Canadian softwood lumber industry, and consequently, the amount of refund remains uncertain.
Last quarter, again this quarter, we have showcased improving results at our paper mill in Kapuskasing, primarily due to us seeing efficiency gains on the second paper machine. We keep a keen eye on this segment of our business as we see pricing and demand pressures, along with a decline in the demand for newsprint. The paper mill is a distinctly different operation from our sawmills, in order to focus on additional efficiencies and in line incentives, the board of directors recently approved the separation of the sawmill and paper mill assets. This corporate reorganization is a positive step towards decentralization, which we believe allows for the building of more middle-level responsibility, accountability, and profitability. It is our experience that this decentralization leads to stronger team culture, faster decision-making, and entrepreneurism.
With respect to our lumber assets, lumber pricing showed a positive trend toward the end of Q2 2023. Based on these levels, coupled with our newly revised duties rate, we are hopeful that our sawmills are positioned for a stronger second half of 2023. This quarter, we incurred less than $500,000 in net finance costs than the same period last year. Over the same period last year, we paid $4 million in financing costs, and we incurred $4 million foreign exchange loss on our U.S.-denominated debt. This, in total, is a reduction of $7.5 million in financing costs. We have significantly reduced our levels of debt and interest, along with reducing the exposure to sensitivities in the Canadian-U.S. dollar exchange rate.
We have a current net debt to invested capital ratio of only approximately 7%, providing us the ability to remain flexible and agile in volatile lumber pricing environments. We remain focused on our balance sheet and the ability to maintain excess liquidity throughout volatile commodity price cycles. We announced last quarter our non-binding agreement to sell 30 acres of our Kenora property for CAD 8 million. We continue to actively pursue the best use for the remaining land, including reviewing further redevelopment versus a potential sale outright. We continue with our overhead and cost reduction projects that we discussed last quarter to ensure we achieve a more streamlined, cost-effective operating platform in recognition of our smaller organizational footprint in Ontario.
For the second quarter, GreenFirst reported a net loss of $9.7 million based on its continuing operations, or a quarterly loss of $0.05 per share on a diluted basis. Adjusted EBITDA was negative $5 million. While being driven by lower lumber prices and higher U.S. duties in the second quarter, these results are a significant improvement over the first quarter, when we reported a net loss of $20.2 million and negative adjusted EBITDA of $15.2 million. This favorable trend in Q2 reflects higher lumber sales this quarter and includes the impact of a $7.5 million credit from the reduction of valuation provisions for lumber and log inventories at the end of the quarter. This will be discussed in further detail by Alfred shortly.
We remain cautiously optimistic that we will see increasing stability in lumber prices in the second half of 2023 and into 2024, based on many factors, including the ongoing U.S. housing shortage and increasing new builds in both the U.S. and Canada. U.S. home builders are showing moderate growth for the balance of 2023, which started to positively impact lumber pricing in June 2023. Homeowners have become increasingly reluctant in the U.S. to sell their homes that are locked in at favorable, longer-term mortgage rates, which is creating higher demand for new builds in the U.S. In Canada, record levels of immigration are expected to continue to drive higher demand for new homes as well.
This quarter, the industry experienced tightened lumber supply, spurred on by curtailment of lumber production, primarily in British Columbia, and the uncertainty around forestry activities due to historically high levels of wildfires seen in Canada this summer. This provided positive pricing support, some of which will moderate, hopefully, going forward. Alfred will now walk you through the financials.
Thanks, Paul. Good morning, everyone. As summarized by Paul, for the second quarter of 2023, GreenFirst reported a net loss of CAD 9.7 million or CAD 0.05 per share on a diluted basis based on its continuing operations. Lumber sales in the second quarter continued to reflect lower lumber prices, although volumes sold were 18% higher than in Q1. The average selling price of lumber during the second quarter was CAD 596 per thousand board feet, slightly below the average unit selling price of CAD 605 realized in the first quarter. Lumber shipments sold in the second quarter were 110.3 million board feet, compared to 93.3 million board feet sold in Q1 of 2023.
The net loss in the second quarter includes the beneficial impact of $7.5 million of credit for the reversal of valuation provisions for log and lumber inventory during Q2. On a year-to-date basis, the net reversal of valuation provisions generated a net credit of $4.3 million in the first half of 2023. This reversal was driven by higher lumber prices seen in the last days of June. Our paper shipments in the second quarter were 49,111 metric tons, which drove revenues of $38.2 million, both modestly higher than the 42,620 metric tons shipped and paper revenues of $37.8 million in the first quarter of 2023.
Cost of sales for the paper products was CAD 35.7 million, for an operating profit of CAD 1.9 million in the second quarter, adding to the CAD 1.3 million in operating profit realized in the first quarter. This is a significant turnaround for our paper mill, with operating profit of CAD 3.2 million in the first half of 2023, compared to operating losses of CAD 6.2 million in the first half of 2022. This is a CAD 9.4 million turnaround year-over-year.
Adjusted EBITDA for the second quarter was negative CAD 5.0 million, which is a significant improvement over the negative CAD 15.2 million reported in the first quarter on higher lumber sales volumes at roughly level lumber prices, including the benefit of the CAD 7.5 million credit from reductions to valuations for log and lumber inventories. During the first quarter, falling lumber prices resulted in a charge of CAD 3.2 million for higher valuation provisions for log and lumber inventories. Finance costs, which are added back in deriving EBITDA, were CAD 478,000 in the second quarter, roughly half of the CAD 896,000 reported in the first quarter, and only a fraction of the CAD 4.1 million in finance costs reported for the second quarter of the prior year.
The reduction from the first to the second quarter of 2023 reflects debt repayments totaling CAD 10 million made during the second quarter. The high prior year comparative finance costs reflect higher debt levels and interest rates before the successful refinancing of the company's debt last September. The company repaid CAD 10 million of debt in the second quarter and CAD 29 million of debt in the first half of 2023. The debt had an outstanding balance of CAD 24.5 million at 1st July 2023, and we have paid down the debt by a further CAD 2 million to date in the third quarter. With the repayment of the term loan under the company's credit facility during the first quarter, GreenFirst no longer has any financial covenant ratios under its credit agreement.
Turning to liquidity, we ended the second quarter with a cash position of CAD 9.8 million and CAD 42.9 million in undrawn availability under our credit facility, for total liquidity of CAD 52.7 million as at 1stJuly , 2023. Debt repayments have been made using part of the proceeds from asset sales, which allows us to further reduce interest costs while maintaining liquidity under the asset-backed revolving credit facility. We will continue to carefully manage liquidity while considering opportunities to reduce interest costs. GreenFirst continues to be motivated by the interests of its shareholders and other stakeholders. This drives our prudent management of debt and interest costs, and more broadly, the initiatives set in motion during the first quarter to reduce operating costs and general and administrative expenses.
We do this while maintaining a sharp focus on our operations, their capital projects, and increasing productivity. Of course, everything we do first considers environmental, health, and safety imperatives. Our risk management policies and procedures underpin our measures to protect assets and manage risk. In early July, we made presentations at Lloyd's of London as part of our property insurance renewal, which is set for later this month. Due to our not having any claims in our almost two years of operating history, GreenFirst is considered best-in-class by underwriters. Wildfires have been in the media all spring and summer, and they were top of mind with our underwriters. When it comes to managing fire risk at our sawmills, this is a strong point for GreenFirst. This map from Natural Resources Canada shows the location of 40 years' worth of forest fires.
The circled area in Northeastern Ontario indicates where GreenFirst's forest licenses are located. This is an area with one of the lowest historical fire occurrences in Canada. There are physical reasons for this low occurrence of forest fires, including the presence of innumerable lakes and large rivers, which act as fire breaks, and the fact that much of our licensed forest is in boggy ground with high humidity. GreenFirst has a proactive forest risk management system, including plans for sustainable forestry, fire suppression, and forest restoration. Our sustainable forest management plan includes elements like harvesting plans that emulate fire disturbance and hourly monitoring of fire weather and rapid response. Our fire suppression plan benefits from world-class predictive fire models and lightning detection, and strong collaboration with the fire program and crews of the Ontario Ministry of Natural Resources and Forestry.
I'd like to now ask Michel to comment on the operational results for the second quarter.
Thank you, Alfred, and good morning, everyone. Our lumber shipments and sales increased in the second quarter versus the first quarter of this year. The increase in the net sales was mainly driven by higher volume shipped as a result of buyers' buildup inventory in response to the uncertainties caused by the historic wildfires in Canada and due to increased levels of home builders' confidence. During the second quarter of 2023, lumber production decreased slightly compared to the first quarter of 2023. This decreased production was mainly driven by plant maintenance shutdowns. That said, we continue to see good improvements in our sawmills processing and cash costs compared to previous quarter, to keep us in a competitive position in the industry. Additionally, with our initiative toward decentralizing our operation and simplifying our operating structure, we expect to see further improvement down the road.
In the second quarter, we continued to see an increase in both our sales and shipments from our paper mill. Higher paper production was mainly due to efficiency gain on the company's paper machines. We keep trending in the right direction. In support of this, we have developed a comprehensive mill reliability plan to improve maintenance and reliability of our equipment at the paper mill. That said, we have seen a slight decrease in our average selling price from the start of the year. We are also looking to save costs related to logistics and warehousing, as the team is in the process of reviewing current agreements and exploring new cost-effective opportunities. Displayed here, you can see the continuous dry kiln under construction at our Hearst sawmill. We expect to complete the kiln by September 2023, with startup expected in October.
The kiln is part of our estimated CAD 25 million worth of equipment we relocated from our shutdown Kenora sawmill. Our annual production capacity at our operating sawmills is 510 million board feet. At our paper mill, it is 205,000 metric tons. We are working towards optimizing our mills to lower costs and increase production capacity. We are proud to be in forestry, a renewable resource. We continue to reinforce our ongoing commitment to environmental sustainability and responsible stewardship of the forest we manage. GreenFirst environmental stewardship is rooted in our sustainable forest management practices, which maximize biodiversity and forest health, and promote efficient energy consumption, striving to use the whole tree. We are committed to maintaining and elevating high standards of sustainability throughout our operation. GreenFirst produces...
quality lumber and paper products in a safe and responsible manner to protect our employees and the environment, create long-term value for our stakeholders, and contribute positively to our collective future. We believe the company's renewable building materials, which sequester carbon, are a natural solution in the fight against climate change. Lumber building materials require less energy to produce and transport than alternatives. Byproducts from lumber production, such as wood chips, can be used to generate energy with net zero carbon emission. 2023 marked the 20th year of continuous FSC certification for the Gordon Cosens Forest, located around Kapuskasing, the first forest to be awarded such certification in Canada's Boreal Forest region. We have an exceptional team that are always pushing the envelope and being pioneers in better practices. Over to you, Paul.
Thank you, Michel, and a special thanks to Alfred as he leaves us for another opportunity. Wish you all the best, Alfred, in your future endeavors.
Thanks, Paul.
Of course, a big congratulations to Ankit, who has participated in these calls in the background from the start, but will now step forward into the CFO role. Looking ahead, we believe lumber demand and supply conditions are such that pricing will stabilize in the near term. We remain committed to our strategy of increased productivity gains at our operations, rigorous expense control and SG&A reduction, and prudent capital allocation through this current low end of the pricing cycle. We may consider returning capital to our shareholders where appropriate. I remind our shareholders to please take stock of where we have come in a relatively short period of time.
Having been birthed as a public company with expensive, restrictive debt, we have now a simple and cheaper pay your interest and pay your principal debt, and a lot less of it, all while previously under a much heavier U.S. duty burden than the entire industry. We now move ahead with much lower duties, lower leverage and interest expense, and more operating focus. With that, we are now open things up for questions. Please submit those questions through the online portal. Okay, our first question is: Can you clarify your comments on a reorganization of the paper and lumber mills? I'll answer that one. We firmly believe, as I said, in the power of decentralization, and what we're seeing is that our business leaders have been hampered by head office organization.
This decentralized, this decentralized plan, as we'll put in place in the fall, will empower our leaders in the business. Next question is: Would this quarter have been profitable if we did not have the softwood lumber duties? I'll take that one. I'll say yes to that, it, if not, it would have been very close. We would have been close to breakeven in the second quarter, if not for the higher duties. The next question: What is the appropriate amount of leverage for GreenFirst? I think I've answered that before, I'll say, you know, because of the volatility in pricing of lumber, that there no leverage is really good leverage.
We're very focused on keeping leverage as low as possible at all times. That's what we've been doing, as I said before, taking that leverage down, and we'll continue to do that. At some point, I think we might determine it's prudent to provide capital back to our shareholders in some form. With that, next question: Could you lay out the cash flow of the business pro forma for the divestitures under different lumber price assumptions? Alfred, you're probably best to take that one.
On this, I, I would say we do expect the lumber pricing to be less volatile in the second half of the year. With, as Paul Rivett said, the lower duty rates on our lumber exports to the U.S., which is 70% of our sales, that is expected to be supportive. We, we do expect the second half of the year to be cash flow positive. As far as different lumber price scenarios, you know, with such volatility, it's hard really to put a, put a, you know, a focus on one price over another.
We're gonna be continue to be preparing, or ready to carry it forward our business with that volatility, but benefited by this lower duty rate, which is a game changer for us.
Okay. The next question is: Given the current state of lumber prices, do we expect Q3 to be positive results? Michel, why don't you take that one?
Yeah. Thanks, Paul. I would say on that, that the good thing first is that we see more stability, as we mentioned, on prices, compared to the first half of 2023. Other good thing, as we mentioned, also about the duties, that went down on August first for GreenFirst from 20.23%- 7.99%. It's very great things for and very welcome also for GreenFirst. That being said, you know, future results based on prices are pretty hard to predict because the market remains pretty volatile.
Thanks, Michel. The next question probably is also for you, but it's... The question is: Last quarter, you announced cost reductions. I'm pleased to see you have enhanced them for this quarter. Can you add color to this? When will we start to see the results of the cost reductions, Michel?
Yeah, we're already seeing some, some good results from the, the cost reduction. It's a plan that we started several months ago, so I would say at the beginning of the year. We already saw some, some good improvement there. We expect to see, more benefits coming in the second half of the year, and also, that with also the, mills optimization effort that is done in each, mills that we're running. Again, more results to come in the back half of, 2023.
Okay. The next question says that $21 million of 2021 duty recovery mentioned in the MD&A, when do you expect that to come back? Maybe, Alfred, you can speak to that.
Yeah. Thanks, Paul. On all of these duties that, that have been, you know, deposited with the U.S. authorities related to our exports, this is something that doesn't only affect GreenFirst, it affects all Canadian lumber exporters, and so we're not alone. However, the timing is absolutely unpredictable. There is precedent based on history, if you go back over the last 10 or 15 years, for some sort of settlement, but at this point, it's unpredictable.
Okay. I guess that, that our experience is that generally speaking, it's difficult to get the U.S. Commerce Department to provide the funds when there's a dispute. Even the funds that we know are immediately repayable to us, we're gonna use all available means to, to pursue those funds.
Yeah.
The next question is: Should we view the move to separate the paper assets as an early step in possibly divesting the business? I'll, I, I guess I'll take that one. No, our, our focus is, is entrepreneurism and decentralization. Along the way, would we consider having a partnership in there? We, we certainly would, we will always hold a large percentage of that operation. Our focus right now is just getting to decentralize so that we can empower management to do what's right for each individual business, as opposed to being concerned about, you know, head office allocations, you know, with, for instance, things like chips and power and, and labor, for instance.
That's where, why we're running towards decentralization, particularly now with the strength we're seeing in that Kapuskasing mill from an earnings and EBITDA perspective. Next question: Can you describe the level of urgency in hiring a full-time CEO and now CFO? It is top priority for me. We've, you know, always said we would prefer to promote internally. That said, the board has put forward a plan that requires us to look for the best possible talent. As I said, internal talent is definitely preferable for us there, but we hope to conclude that in the fall. Next question: Can you provide progress update on the Kenora redevelopment plan?
As I said, we've got a purchaser that we're working through for, roughly 30% of that property, and we've got redevelopment plans for the rest. We're working with local and other government on that property. What we're trying to determine is whether or not we should be putting CapEx into the property ourselves with respect to building out, services such as, you know, sewer, water, that kind of thing, or whether we should look to just find a buyer for it. We're not. We're in the lumber business, we're not in the property development business. We'll look at all options and do what's right for shareholders from a capital allocation perspective. I'll pause for a moment here to see if we have any other questions.
Well, there's no more questions for today. We thank everyone for attending our second quarter earnings call. We're very optimistic for our second half of this year, and please feel free to email us any questions or call us, investors@greenfirst.ca. Thank you for joining us. Have a great day.
Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending, and at this time, we do ask that you please disconnect your lines.