Good morning, ladies and gentlemen, and welcome to GreenFirst's third 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 outlook, and capital plans. These statements may contain forward-looking information or forward-looking statements within the meaning of the 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 and AIF, 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, and welcome to our Q3 2023 Earnings Call. I am Paul Rivett, as Sylvie mentioned, the Executive Chair of GreenFirst. Today, I am joined by Michel Lessard, our President, Ankit Kapoor, our Interim CFO, and Gwen Webster, our Chief of Staff. This, of course, is Ankit's first earnings call as our Interim CFO. Thank you, Ankit, for accepting this role. We have a ton of faith in you and your abilities, especially considering the work you have done behind the scenes, managing the reporting documents for the past two years. It has been a seamless transition for us and you. We are also pleased to welcome our new CEO, Joel Fournier, who joined us last week. Joel is steeped in forestry, especially lumber, experience, and is moving to live in the area of our mills.
He is a competitive and energetic leader, and he has already been in the field, meeting every one of our employees one-on-one, and that's continuing. Myself, as well as Michel, Gwen, and Ankit, have committed to stand side by side with Joel for at least the next six months, so that he can devote as much time and attention as possible to getting his arms around our lumber mills and getting to short- and mid-term productivity gains there. Welcome to GreenFirst, Joel. Please give our shareholders a few minutes about yourself.
Okay. Thank you very much for the introduction, Paul, and good morning, everyone. Like Paul said, you know what? I've been working in the lumber industry for over 25 years, and I'm really excited to embrace this new challenge with GreenFirst. And I'm also confident that together, we can make a positive impact on the operation. During my career, I had the opportunity to work in different regions of the country within the forest industry. And I believe there's insight to be gained from both Western and Eastern mills, as they each possess their own unique strengths and opportunity. I'm really passionate about this industry, and my motivation come from working with others to develop and execute strategic plan to make the business better. I ensure during my first week in the position, that I visited all the operation and introduced myself to the employees.
By the end of the second week, my goal is to have met with nearly all members of the team. I strongly believe that meeting with your employee is crucial in order to understand them, the company, and also to foster the right culture in the workplace. By going forward, I plan to concentrate my efforts on sawmill and dedicate my time to working alongside different teams in the operation to improve our performance. I'm confident that being present and providing the support to leadership, that we can significantly increase employee engagement and achieve better outcome overall. To finish, I look forward to share with you updates on our company progress in the future earnings calls. Additionally, I'm looking forward to meet some of you next year in person. Thank you very much.
Thanks, Joel. Hopefully, as everyone on this call can sense, we and the entire company are very excited to have you with us and to lead us to a culture of excellence. And I must say, in the two-plus years that I've been involved with this company, having co-founded this company, I have never been quite as excited as I am now. As I said, looking around the table, we have Michel Lessard, who's been involved with these assets and this forest, these forests for over 30 years, and an energetic young team in Ankit and Gwen, and now we finally have the lumber mill expertise that we've been looking for in Joel. So, with that, I will now go to the third quarter highlights. In the third quarter, our theme was continued refocus on our operations exclusively in the province of Ontario.
The message to our operational leaders has been clear: We want to ensure that they have increased autonomy to make decisions that are in the best interest of the mills without unnecessary red tape. We are in the midst of decentralizing the paper business from the lumber side at our Kapuskasing site, and that process is well underway and expected to be mainly finalized this winter, with an official separation date in Q1 2024. We will, of course, continue to ensure that this does not have any material impact on our key stakeholders. On the lumber side, we have made strides in improving operational efficiency this year, particularly in our Chapleau mill. We've increased our production level and minimized the instances of unplanned downtime.... However, we continue to be in an environment of volatile lumber prices, with macroeconomic conditions causing downward pressure on prices.
We are seeing cautious buyers, which has negatively impacted our volumes in the third quarter. We expect lumber demand to remain relatively soft in the short term. However, there are positive indications of the current prices bottoming out, and there is a growing belief that the U.S. Federal Reserve and Bank of Canada might halt any further interest rate increases for the foreseeable future. On August 1, our lower duty rates went into effect, reducing our rate from 20.23% to 8.05%, which was directly benefited our earnings and cash flow. Since our acquisition of the Rayonier assets late in August 2021, we've made an overpayment of duties in comparison to our Canadian peers of over $22 million, leading up to August of 2023. This is approximately CAD 30 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 $54 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. Our paper segment experienced a turnaround from last year when we were only operating one paper machine. With the second paper machine fully operational throughout the year, our production cost per unit of paper has decreased due to the economies of scale that we have achieved. However, we continue to see a decline in newsprint and paper pricing and expect the segment to remain challenged. The third quarter of 2023 was also impacted by unplanned downtime due to equipment reliability.
Our team at the paper mill continues to work hard to resolve these issues and has put significant effort into improving our equipment performance. However, as a result of these enhancements, we will be seeing lower production in Q4 2023 in the paper segment. With respect to U.S. housing starts, despite the short-term volatility in these starts, we expect long-term trends to be positive for lumber markets as demographics in the U.S. become more favorable for the housing market. We continue to be bullish on the lumber industry in the long term, with permanent shutdowns in B.C.'s interior, record levels of immigration in Canada, and promising U.S. demographics that will drive demand. Lumber prices have continued to average higher over the last decade due to these factors, and we can think they will continue to do so.
I will now pass it over to Ankit, who will take you through more detailed financial information.
Thanks, Paul, and good morning, everyone. The company's net earnings from continuing operations for the third quarter of 2023 was CAD 2.7 million, compared to a net loss of CAD 9.7 million in the second quarter of 2023, and a net loss of CAD 5.4 million in the third quarter of the prior year. Adjusted EBITDA for the third quarter was CAD +8 million, compared to CAD -5 million in Q2 2023 and CAD -2 million in Q3 2022. During the third quarter of 2023, the company recorded a $6.9 million or CAD 9.2 million recovery related to 2021 duties paid, following the U.S. Department of Commerce's final determination of its fourth administrative review.
With a final duty rate of 8.05%, the company has benefited from the difference between this new rate and its previous rate of 20.23%, resulting in a recovery related to 2021 duties paid. This recovery has positively impacted our net earnings and Adjusted EBITDA in Q3 and year-to-date 2023. Additionally, this new rate, prospectively applied from August 1st, 2023, has improved the company's earnings and cash flow profile. In the third quarter, we achieved net sales of CAD 95.7 million, with declines in both lumber and paper sales compared to Q2 of 13% and 16% respectively. Despite average pricing improvements in Q3 for the lumber segment, sales volume declined due to lower lumber demand, resulting from increased economic uncertainty and buyers keeping tight inventory levels.
Paper volumes declined as a result of lower production, and we were also impacted by lower pricing in Q3 compared to Q2 of this year. The pricing decline in the paper segment has been gradual over the course of this year. Year-to-date, Q3 sales were approximately CAD 306 million, compared to CAD 392 million in 2022 year-to-date. This includes a 40% decline in lumber sales, partially offset by a 70% increase in paper sales. Lumber sales decline is due to the decrease in year-over-year pricing, partially offset by better shipments due to fewer logistics-related challenges this year. Paper sales increase is resulting from the added production from the second paper machine in the current year, driving volumes.
Cost of sales in the third quarter was approximately CAD 90 million compared to CAD 110 million in the second quarter of 2023. This is due to lower shipments, coupled with lower lumber production in Q3 due to scheduled maintenance. Partially offsetting the decrease was a lower recovery related to inventory Net Realizable Value in Q3 compared to Q2.... Compared to Q3 of last year, cost of sales decreased by approximately 15%, primarily attributed to better efficiencies and lower cost of inputs, specifically in wood costs. For year-to-date Q3, compared to the same period last year, cost of sales increased by 8% due to higher volume of lumber and paper sold and produced. This is offset by gained efficiencies and lower wood costs compared to the prior year.
Notwithstanding the duties recovery related to 2021 shipments recorded in Q3, the current quarter also saw lower duties expense resulting from the lower duty rate of 8.05% applied from August 1 st onward. Q3 SG&A was CAD 5.2 million, higher from the CAD 4.9 million in Q2. However, Q2 had a one-time recovery of a previously written-off AR amount related to discontinued operations. Excluding the impact of this, the current quarter saw decreased costs related to salaried employees. Compared to the third quarter and three quarters ended last year, there was a decline of 9% and 17% respectively to SG&A due to lower employee-related costs. Finance expense for the third quarter was CAD 0.1 million, which included a benefit of CAD 0.7 million related to accrued interest on the CAD 9.2 million duties recovery recorded in Q3.
Compared to Q3 of last year, finance costs were CAD 3.9 million lower, primarily driven by lower interest and financing expense, as the prior period had higher debt balance on the company's previous high-yield debt. For the three quarters ended, finance expense was CAD 1.5 million, which is approximately CAD 10 million lower than the same period last year, also driven by lower interest and financing expense due to lower debt levels and interest rates on its outstanding debt. Our debt balance at the end of the quarter was CAD 18 million, and with the repayment of the term loan earlier this year, GreenFirst is not subject to financial covenant ratios under its credit agreement. We continue to manage our liquidity through the volatile lumber markets. We're committed to maintaining low debt levels and managing our cash responsibly.
As we navigate the volatile lumber markets, we're enforcing prudent cash management throughout the organization. This includes looking for savings at all levels, do things efficiently but safely, and ensuring that each dollar put into our operations is done so with purpose. Our sawmills have become more efficient year -over -year, which has led to a reduction in unit costs. Along with benefits from lower stumpage rates, this has improved our overall cost profile. We strongly believe by further empowering our mill management, there are efficiencies and cost savings we can tap into. I will now pass it over to Michel for his comments on our operations.
Thank you, Ankit. In Q3 2023, two of our four sawmills took scheduled downtimes. As a result of this, our production in Q3 was lower than the Q2. On the paper side, we encountered some operational challenges that led to lower productivity in the period. As a result, our production and shipments for Q3 were lower than Q2 for our paper segment. We believe that our mill reliability plan will help with such challenges. This plan focuses on the work management, shutdown management, operator basic care management, and root cause elimination processes. This plan is near completion and will form part of employee training in Q4. This will be the foundation for strengthening our current operational and maintenance practices to improve equipment reliability in the months ahead.
Currently, we have several employees, new to their roles at the paper mill, who continue to gain hands-on experience. As their experience builds, it will help us achieve the efficiency targets we are striving for. We are nearing the completion of two kilns in our Hearst and Cochrane sawmill. The Hearst kiln was relocated from Kenora. Both kilns are expected to become operational very soon, which would help increase throughput at the respective mills with an improved cost profile. These projects are part of the CapEx plan we had laid out at the start of 2022. Despite equipment delays due to supply chain challenges and despite inflationary pressures, our team has put great effort into seeing the completion of these projects. Sale of other non-core assets are ongoing.
We have up for sale certain private lands around Kapuskasing, about 1,500 acres, and Timmins , about 1,100 acres. We also continue to work on the monetization opportunities of our Kenora property. To extract the most value from the potential sale of all or part of the Kenora property, the company has engaged a planning and design firm to prepare a master plan for developing the land and rezoning for non-industrial use. A non-binding letter of intent has been executed for the sale of approximately 30 of the 118 acres with an institution, which requires Ontario government funding approval. This funding was not obtained in Q3, but we continue to believe there is a high degree of likelihood the funding will occur in 2024. 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. By-products from lumber production, such as wood chip, 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 very much, Michel. Like our message last quarter, with volatile lumber prices, we are hoping for the best, but continuing to plan for the worst. We remain committed to our strategy of increased productivity gains at our operations, reduction of costs, and prudent capital allocation. We are looking forward to the next stage of our journey as a young company, with the hands-on leadership of Joel at the helm. We'll now take some time to answer some of your questions, so please submit them through the online portal. Okay, we have a few questions, so I'm gonna start off. I'll read the questions, and then, you know, we'll try and get everybody from the team here to answer. The first question is: Can you provide some insight on expense reduction initiatives?
We, as we've been saying for quite some time, we've been comprehensively reviewing our operations, and part of our cost profile improvements is due to finding some savings in the mills, and of course, the reduced duties. It is still challenged with our lack of availability of labor, and that is the toughest thing for us, so which Gwen has been working on. But of course, also inflation and delays for key parts, some of which is still probably related to COVID supply chain issues. We do expect in the coming quarters that our SG&A and overheads will continue to improve, particularly in Q1, as some of our corporate projects, the biggest of which is the decentralization of the paper mill and sawmill operations.
As they reach a conclusion, we hope to be able to reduce our reliance on consultants, and that'll have an impact on SG&A. And in addition, our goal is to increase production, as we continue to say, under the guidance of Joel, and this will, of course, improve our cost per unit profile next year. All right, next question: When do we expect to receive the $9 million in duty income? And can you provide the overage payments for 2022 and 2023? Maybe, Ankit, you can take that.
Yeah. So, we can't, we can't really determine the difference for 2022 and 2023, as the U.S. Department of Commerce has not made its determination on those years yet. However, the difference related to 2021, which we disclose as CAD 9.2 million, will be recoverable to the company. Now, the timing of this is not known, and as such, it has been presented as a long-term asset on our balance sheet.
Okay. Thanks, Ankit. We have a number of questions with respect to newsprint, and pricing, and the newsprint mill, and whether we expect to shut down the mill if pricing declines or the second line, or take downtime. You know, the short answer to that is we don't have any intention to shut down any machine. However, as I said before, as a broader perspective and guideline, we'll take careful look at our operations from time to time, particularly as we go into the budget season. And when we anticipate prolonged losses, you know, we will reevaluate. It's important for our small company to always focus on profitability and free cash flow.
We have a question on Kenora: Can you provide an update on the Kenora LOI and the rest of the land? We talked a bit about that, but Michel, maybe you can take that one.
Yeah, sure. Thanks, Paul. Yeah, so we continue to have an LOI for Kenora. We expected the third party with whom we signed the LOI to receive government funding this year, but that has not materialized yet, so. But that being said, we anticipate more news from the potential buyer later this year.
Thanks, Michel. We have a few questions with respect to CapEx, both in Q3 and ongoing, and into Q4 and next year CapEx. You know, maybe, Ankit, you can talk a little bit about CapEx for us.
Sure, Paul. So we're still committed to executing on our original CapEx plan, as Michel had outlined in his prepared remarks. And we've communicated in the past that this has been impacted by supply chain constraints and inflation. This year, we're, as Michel pointed out, we're nearing the completion of our two kilns at Cochrane and Hearst, which were impacted by supply chain-related issues. But the team has pushed through, and we expect these kilns to be operational very soon. For next year, a lot of it will depend on lumber pricing, the speed at which we execute that CapEx plan, but we are looking at significant upgrades at some of our planers in the different mills.
So we'll probably have a better pin to point at as we complete the budgeting exercise, which is ongoing right now.
Great, Ankit. We have a number of questions with respect to, you know, economic downturn or recession and survival. You know, which for us... Listen, you know, we don't want to take anything lightly, but what I'd say is that we have taken tremendous steps over the last year and a half to ensure that, as Ankit mentioned, we no longer have debt that has any covenants. So we... And as you know, we paid off our acquisition debt through the sale of non-core assets, in particular, the land we had in Northern Ontario. We continue, as was discussed, look for opportunities to sell non-core asset, in particular, property.
But we are in a very good position with respect to having, you know, a non-covenant debt, and Ankit's always looking for ways to actually reduce that debt with the free cash flow we're generating, to keep interest expense low. And you know, you can never be entirely sure what the future will bring, but we feel more confident than ever with this management team and the balance sheet we have and the non-covenant debt, that we can ride through recession, which none of us hopes happens. The last question is, you know, there's some congratulations with respect to the hiring of Joel. At, can you give us more about his background?
You know, we did give quite a bit in our press release and in our intro. You know, listen, as I said at the beginning of this call, we are extremely pleased to have hired a seasoned sawmill operator. It's the last piece of the puzzle for us. You know, what I've seen already in the few short weeks that Joel's been involved, he's moving to Timmins, he's seeing everybody in the mills one-on-one. He's doing the types of things you just don't see in a corporate culture. It's more like a family culture. Actually meeting every single employee, which is unheard of. And so that's allowing us to build the culture that we, that we've been wanting to build as a new company, and we're finally getting to it, so extremely excited about that.
But maybe, Joel, I'll give you the last words before we sign off here.
No, thank you very much, Paul, and I'm looking forward to start working with the mill to improve them. Really, it's. I'm very excited about that, and I'm up for the challenge. Thank you, Paul.
Very good. So that concludes our Q3 call, and we look forward to speaking to you about our year-end results. Thank you very much, everybody, for attending, and we'll talk to you soon.
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.