Good day, ladies and gentlemen, and welcome to the Interfor Quarterly Analyst Call. At this time, all lines are in listen-only mode. Following the presentation, we'll conduct a question-and-answer session. If you want to ask a question at that time, please press star one. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Friday, November 3, 2023. I will now like to turn the conference over to Mr. Fillinger. Please go ahead.
Thank you, operator, and thank you everyone for joining us this morning. With me today on the call, I've got Rick Pozzebon, Executive Vice President and Chief Financial Officer, and Bart Bender, Senior Vice President of Sales and Marketing. Before we get into our normal course call, I'd like to welcome Geoffrey Evans to our board of directors. We look forward to working with Geoffrey and his contributions over the years to come. I'll start off by providing a brief recap of our quarter, and then I'll pass the call on to Rick and Bart. Turning to our quarter, we generated a positive CAD 32 million of Adjusted EBITDA during a very challenging quarter that was impacted by both wildfires and lumber price movements. We advanced our capital projects in the US South and remained flexible to adjust our plans in line with market conditions.
Our balance sheet remains well-positioned, and during the quarter, we reduced our leverage and improved our liquidity. With respect to our outlook, we feel housing demand has been relatively strong in the face of rising interest rates, but the most recent round of hikes appears to be having an impact, and combined with this lower time or slower time of year, has resulted in buyers being extremely cautious and limiting purchasing to immediate needs only.
On the supply side, inventories at both the producer and supply chain level are low and operating on a just-in-time basis for shipments, and production curtailments are anticipated from the industry if the current prices continue. In closing, barring any winter transportation issues or unforeseen events, lumber prices are expected to remain at or near industry break-even levels for the remainder of the year. I'll now turn the call over to Rick, who will run you through the financials.
Thank you, Ian, and good morning, all. Please refer to cautionary language regarding forward-looking information in our Q3 MD&A. From a high-level perspective, Interfor's Q3 results reflect the ongoing lumber market uncertainty, driven by the higher interest rate environment and delayed supply-side responsiveness. Regardless, Interfor remains well positioned to successfully navigate through this environment with its high quality and regionally diverse portfolio of operations. In terms of Q3 earnings, Interfor generated Adjusted EBITDA of CAD 32 million on total sales of CAD 828 million. Compared to Q2, revenue benefited from a slight 2% increase in the average realized price on lumber sales, which was more than offset by a 10% decrease in shipments. The lower lumber shipments were mainly due to temporary operational disruption caused by wildfires in BC.
Production costs on a per-unit basis were higher quarter-over-quarter, due mostly to Q2 costs benefiting from a $28 million reduction in the reserve against inventories, whereas Q3 only benefited from a $3 million reduction of the same. The operational disruption in BC caused by wildfires also contributed to higher costs in the third quarter. From a balance sheet perspective, financial flexibility improved in Q3, with the net debt to invested capital ratio dropping to below 29%. This improvement was driven by cash flow from operations totaling $107 million, including $71 million of income tax refunds related to the prior year. A portion of this cash flow was used to fund capital expenditures totaling $39 million, of which the majority was on strategic mill improvements in the US South.
Looking ahead, we still expect to receive an additional $25 million of income tax refunds before the end of this year, and we'll continue to execute on monetization of our coastal BC operations to further bolster the balance sheet. In terms of capital allocation, our key priority is to continue managing our balance sheet leverage towards our target range, while also continuing to invest in select US South operations where attractive opportunities exist to optimize returns. We continue to anticipate capital expenditures for 2023 to total about $210 million. For 2024, we estimate capital expenditures will total about $140 million. To wrap up, we will continue to focus on operational excellence to maximize margin on each shipment, while conservatively managing through the ongoing market uncertainty. That concludes my remarks. I'll now turn the call over to Bart.
Thanks, Rick. As usual, I'll provide comments on our market outlook. In general, the outlook varies whether you're focusing on the medium term or the short term. In the medium term, the market fundamentals remain encouraging, buoyed by tailwinds on several key factors, such as underbuilt housing, demographics, age of housing inventory, household formation rates, et cetera. All of these indicators support increased lumber demand in the future. In the short term, the market outlook is less certain. Affordability, a combination of both the price of a house and mortgage rates, is impacting the demand for homes and consequently, builder confidence. This is causing some volatility in the housing starts, and within housing starts, the percentage of multifamily versus single-family.
With new home construction accounting for approximately 30% of lumber demand and Single-family construction consuming three times that of Multifamily construction, this volatility is impacting lumber demand. With that being said, recent data in the last few months has been encouraging, with the percent of Single-family starts stabilizing closer to 70% of total U.S. starts. This will be a key item to focus on going forward. On the Repair and Remodel component of end use, which accounts for approximately 40% of lumber demand, our takeaway remains stable. With many existing homeowners remaining in place, remodeling opportunities have increased. This is helping to keep Repair and Remodel lumber demand steady.
When you combine all the lumber demand sectors in one, and consider current supply dynamics, including the impact of European imports, the short-term outlook for 2023 and into early 2024 shows few signs of improvements from current levels. Our market intelligence suggests in-market lumber inventories are stable on the low end of the spectrum. It's important to recognize that the lumber market is very sensitive to demand and supply dynamics. As you work through these short-term uncertainties, we know that markets can improve quickly. We will continue to manage our business accordingly, matching our production to demand as we work through the short-term headwinds and move closer to medium-term tailwinds. With that, back to you, Ian.
Okay, thanks, Bart. Operator, we're ready for questions.
Thank you. Ladies and gentlemen, we'll now begin the question- and- answer session. Should you have a question, please press star one. If you want to withdraw your question, please press star two. Your questions will be polled in the order they are received. If you are using a speakerphone, please leave the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Roshni Luthra from BMO Capital Markets. Please go ahead.
Hi, good morning. Could you talk about some demand trends that you're seeing in new resi and R&R, you know, just since the end of Q3, and also just what you're seeing in the channel, like, in terms of inventory?
Sure. I'll answer that. It's Bart here. You know, our best indicator on the repair and remodel side comes through our actual programs that we have with the customer base that services predominantly that end-use sector. So we get, you know, weekly indications of the kind of demand that we're seeing. I can tell you that the consumption that we're seeing through that portion of our customer base has been steady, and it's been steady for some time, actually. So, you know, we're not seeing any indication, you know, based on actual business done, that that's anything's gonna change from where it's been at. We've been actually encouraged by the amount of business that we're getting on that side of it.
Moving over to inventory levels, you know, it's always difficult to put your finger exactly on, on where the, where the sort of the in-market industry levels are. You know, however, the intelligence that we have through conversations with customers, through some reporting that is available, suggests that, you know, the, the inventory levels are sort of in that, that bottom third of, of, I would say, historical norms. You know, those are the end market levels. I can tell you on the, on the inventory levels on our side of the equation, we continue to be very, diligent in how we manage those. We work very hard to make sure that, our in-process and finished goods inventories are kept, you know at, at strategic levels, which that is the case for us.
I would
Bart, can me and o h, sorry, go ahead.
Nope, go ahead.
I was just gonna add, just on top of that, you know, speaking of inventories, probably, do you have a better sense of what's going on with the European lumber imports? You know, what's sitting at the U.S. ports or, you know, what you're expecting for the next three months?
Yeah, I mean, obviously, the year started out a bit differently, I think, than historical trends. We saw quite a volume come in from the European importers. But I would say from February on, we've just seen a steady ratcheting down of those numbers. And, you know, I think we'll end up... In 2023, we'll end the year at fairly similar to 2022. However, the pace of the last, call it six to eight months, has been at a lower level, which would suggest that 2024 overall inventories will be coming down to kind of more historical levels of what we saw maybe in, I think 2020 is a good indication, maybe even 2021. So in around that high two to low three billion board feet annually.
Thank you. And then just the last question for me, probably for Rick. You know, I saw your preliminary CapEx program for next year, you know, CAD 140 million, I believe. Just where's the pullback coming from? Is there, like, a rethink on the multi-year CapEx program, or just any color you can provide there?
This is Ian. I'll take that. Yeah, our CapEx program is, we've, you know, continually advertised it's flexible. We have a CapEx team in place. We're, I think, distinctly different than some others in our industry, where our capital projects are, you know, managed, engineered, supervised, and executed on with an internal team, largely based out of the South. That gives us the ability at different points in times for a multitude of different reasons, which could be market conditions, could be labor availability, it could be scheduling, you know, or moving projects to support startups of other projects.
So, the genesis behind us moving those around has a little bit to do with all of those, and I think that's a strength of Interfor, that we're not tied to long-term contracts that demand projects to be done at, you know, times where, you know, the market doesn't need any extra wood coming on the market. So, really it's that more than anything. The other thing that you know also changes when you lay out a plan from 2018, and then, you know, you lay it out for five or six years, is cost.
And in some projects, you know, it's valid and prudent to look at, you know, how costs have changed over the last 24, 36 months. So some of that factors into, you know, possibly, you know, delaying or pushing out a project to, you know, allow, you know, the right threshold paybacks to be achieved, et cetera. So what you're seeing in our plan going into 2024 is really a combination of all of those factors.
Thanks, Ian. That's all I had. I'll turn it over to Litman Porter. Thank you.
Okay, thanks for the questions.
Thanks, Roshni.
Thank you. Your next question comes from Kasia Kopytek from TD. Please go ahead.
Hi, everyone. It's Kasia on the line. Just sticking with Roshni's question, Ian, can you provide some context around the nature of the capital projects that are being deferred in 2024?
You know, I would say that there's one project that we're doing in Thomaston. It's a large multiyear project, and our goal is to finish that in 2024. Other than that, there's a multitude of smaller projects in 2025 at a couple of mills. Those are, you know, not big projects, but have great paybacks. And then, there's a, you know, one or two in Ontario that we're looking at for 2025, 2026. So, that's the high level, you know, Gantt chart of what our projects look like over the next few years.
Okay. For the projects where you've indicated it's more prudent, just from a cost perspective, to hold back, what's the magnitude of the return compression that you've been seeing or the expected return compression?
Yeah, I mean, you know, we're always shooting for, you know, that, that hurdle rate, 20%. So when they go north of that, we take a hard look at it and then decide, you know, with an appropriate risk level, whether to continue or like I said, you know, we have flexibility when prices and equipment prices get too expensive, to back off. So as soon as it trips that, you know, threshold, it really gets our attention at the senior level, and then we talk about it and make the right decision. So I would kind of leave it at that.
Great. Okay, thanks for that. And maybe taking it back to markets, you gave some context in your prepared remarks around order files. Can you comment maybe on certain areas that are stronger on a relative basis than others, some preliminary discussions that you're having for 2024, what that's looking like, and whether generally things are trending normally from a seasonal perspective?
Yeah, all good questions. You know, it's, it's, it's interesting. We've got a fairly unique perspective on the markets with, you know, the regions that we operate on. And I can tell you that, you know, each region has its own sort of dynamics that are involved, and, and it's not always one consistent region that's showing increased activity versus another. It does move around. The market is fairly dynamic that way. The businesses we get into 2024 right now is the time that you talk about, you know, partnerships and programs and working with our customers and getting set up for next year. And the interest to partner with Interfor remains high.
We've got a, you know, a very strong customer base, that's been. You know, we've been servicing them for years. And a lot of them, you know, is just a bolt-on from what we acquired in the East. So we feel like we're in a pretty solid position there. And, you know, and then we just have to see how the market goes. I mean, it's. It really is a bit uncertain right now. And, yeah, we'll just react to the demand that we see from the market, given our sort of network of outreach to, you know, by region, to the different customers.
Yeah, I would, I would just add to, to Bart's comment, and, you know, and this is, you know, I'm putting words in Bart's mouth, but he spoke about this. But, you know, the, the advantage that we have, you know, we often get asked around, you know, growth, and our last acquisition was about a year ago today, almost, with Chaleur in New Brunswick. But we are seeing significant customers starting to recognize, you know, the, the breadth and, and depth of our company. And customers are now that would be traditionally buying one species in one area are now buying from all areas in our company. And so we are getting great traction with a number of very important customers that are now, you know, buying from us in different regions.
So I would say that that's a, you know, a nice, you know, synergy that we're getting. The other one is that, you know, we are the largest producer in the world and very heavy to MSR. So as single-family homes start to improve, which, you know, if you look at FEA forecast and accept that as a trend, we should be benefiting from that going forward, given that there was some depression in single-family homes over the last, you know, 18 months or so. So we do see, as part of opening comments, medium term, some nice trends that we're expecting.
Okay, thanks to you both for that thoughtful commentary. Last one for me. Maybe just speak to your overall framework for thinking about where share buybacks fit into your broader capital allocation program.
Hey, good morning, Kasia. It's Rick. Certainly, we think where we're trading today represents a significant value opportunity. As we look at our balance sheet, we'd like to be back into our target range before we start thinking about share buybacks. It's certainly high on our priority list in terms of capital allocation, so we'll be keeping a close eye on that going forward.
Thanks, Rick. Okay, thanks everyone. That's all for me. I'll get back in the queue.
Thank you.
Thanks, Kasia.
Thank you. Your next question comes from Paul Quinn, from RBC Capital Markets. Please go ahead.
Morning, guys. Thanks very much. Maybe just follow up on that targeted range, if you could remind us what that is and when you expect to get there?
Sure, Paul. Good morning. It's Rick. Target range for us is 5%-25%. We're just slightly above that today at around 29%. And there's no real timelines on that we can give you on guidance to get back down to 25%, but we're certainly comfortable where we're at. We've got some cash flow opportunities in terms of monetizing the coast. That'll certainly benefit us over the next 12-24 months. That will help bolster the balance sheet. We still have some additional tax refunds coming in, $25 million, that'll also help. But certainly the market weakness today is something we'll keep an eye on, and that'll be the largest driver of when we'll be able to recover back down into our target range.
Okay, thanks. And, yeah, congratulations on the BC coastal tenure sale. Just wondering what the timeline for the remaining balance is, and whether we can use those sale metrics as an indicator for what your eventual net proceeds will be from it?
Yeah, I'll take, yeah, the policy. And yeah, we're very pleased to be moving forward on that, you know, kind of unencumbered, if you will. And the interest, you know, we've been working on for, as you know, probably two years now, extremely high, advanced conversations with a multitude of people interested in the tenures. We've had lots of support from the BC government, who's behind the strategy. And so, as these things progress, which we expect will be on a regular basis, yeah, we'll keep you and the street informed, but we expect these to be rolling in over the next 24 months.
Paul, if I could just add, you know, the economics on the transaction that we announced with our press release yesterday, that's in line with what we would expect to be able to realize on average over the course of the next 24 months or so on the remaining 10-year sales.
Okay, great. And then, just lastly, if you give us a high-level sort of update, as what's happening on that Softwood Lumber file. Do you see any movement forward? I mean, some of your competitors have talked about an increase in discussions and, you know, if we're talking, you know, 24 months out, settle the coast, you know, what's the timeline on settling Softwood Lumber?
Yeah. Paul, I'll take a shot at that. You know, I've listened to the responses from others. I don't think I can add much more, other than on the Canadian side, the cooperation from coast to coast is extremely high on, you know, what a Pan-Canadian view would look like. At the end of the day, it's the two governments have to come together if there's gonna be a negotiated settlement, which, you know, given the political environment in both countries, might be a while. And on the courts, really the roadblock is getting the panel set for the review of the legal case, which is probably in 2025, best case scenario. So if there was a, you know, a refund through the court system, it would probably be in and around that range, and if there was a negotiated settlement, it would probably be slightly before that.
All right. That's helpful. Thanks a lot. Best of luck.
Thanks, Paul.
Thanks, Paul.
Thank you. Ladies and gentlemen, as a reminder, should you have a question, please press star one. Your next question comes from Arianna Milling from CIBC Capital Markets. Please go ahead.
Hello, good morning. I know you spoke a bit of the R&R trends that you're seeing, but I was wondering if you could provide some color on your R&R demand expectations for 2024. Do you see volume growth there?
Yeah, thanks. I think I did mention that we expect the repair and remodel sector to be fairly steady. We've seen that throughout 2023. And, you know, as we look at our own results, plus, you know, what we're hearing from our customer base, we're expecting a similar trend through 2024.
Okay, great. Thanks. And then, given your ongoing capital project, what level of production are you targeting next year?
Hey, good morning. We don't provide forward-looking production guidance, but certainly, given some of the projects that are ramping up today and over the next quarter or two, we expect some uplift in production from where we are this year at a current rate basis.
Okay, thanks. That's helpful. That's all I have for now. I'll turn it over. Thank you.
Thank you.
Thank you. Thank you. There are no further questions at this time. Mr. Fillinger, please proceed with the closing remarks.
Okay. Thank you, everyone, for your interest in our company, and if you have any further questions, feel free to give us a call or drop us an email at any time. This concludes our call. Thanks again. Goodbye.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Thank you.