Good morning, my name is Jenny, and I will be your conference operator today. At this time, I would like to welcome everyone to the Interfor quarterly analyst conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star, then the number two. Thank you. Mr. Fillinger, you may begin your conference.
Thank you, operator, and thank you everyone for joining us this morning. With me on the call I have Rick Pozzebon, Executive Vice President and Chief Financial Officer, and Bart Bender, Senior Vice President of Sales and Marketing. I'll start off by providing a brief recap of our quarter, provide some comments on the market outlook, and several strategic initiatives before passing the call to Rick and Bart. Turning to our quarter, our adjusted EBITDA was a loss of $51.4 million during a very challenging quarter that was impacted by weak pricing. To be clear, current pricing is generally below industry break-even levels, which is simply not sustainable for any extended period of time. With that being said, we have a more positive outlook for the year ahead than we did a year ago. We feel housing demand has been relatively strong in the face of rising interest rates.
Rates appear to have peaked, and builder sentiment is improving and R&R remains steady. 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. Continued production curtailments are anticipated from the industry, especially if current prices continue. Despite our positive outlook, we intend to manage and continue to manage the business and our balance sheet conservatively. We have reduced our 2024 capital spending from our preliminary guidance set in November to $90 million. We think this is a disciplined move. With our internal CapEx team, we're able to quickly make adjustments, providing us with flexibility and control. At the same time, we continue to make good progress on the monetization of our B.C. Coast tenures.
These and other notable cash inflows, such as tax refunds that Rick will discuss, are expected to help bolster our financial position over the next year, even without any meaningful operating earnings. I'll turn the call over to Rick, who will walk you through the financials.
Thank you, Ian, and good morning, all. Please refer to cautionary language regarding forward-looking information in our Q4 MD&A. From a high-level perspective, Interfor's Q4 financial results reflect further weakening of lumber markets as supply continued to outweigh demand. This weakening is evidenced by the Framing Lumber Composite price dropping 12% quarter-over-quarter. Lumber prices are currently at an unsustainable level, as a significant portion of the North American lumber industry is likely generating negative EBITDA margins. I'll leave it to Bart to discuss the supply-demand fundamentals in some detail, but speaking from a macroeconomic perspective, there are encouraging signs that haven't yet translated into increased demand and higher lumber prices. Notably, the trend of moderating inflation across the North American economy now has central banks contemplating interest rate cuts in the near term. We've seen this reflected in significantly lower 30-year U.S. m ortgage rates over the past three months.
Lower mortgage rates will benefit housing affordability, not only in terms of reduced interest costs but also in terms of supporting an increased supply of existing homes for sale. Turning to Q4 earnings, Interfor generated an adjusted EBITDA loss of $51 million on total revenue of $786 million. Compared to the previous quarter, revenue benefited from a slight 4% increase in lumber shipments, which was more than offset by a 9% decline in the average realized lumber price. On the cost side, reported production costs on the unit of lumber basis were essentially flat quarter-over-quarter. However, Q4 costs included a $14 million increase in the provision against inventories, whereas the prior quarter included a $3 million reduction.
The net loss of $ 169 million in Q4 reflects several non-recurring charges, including an $ 85 million provision to facilitate the ongoing monetization of our coastal BC operations and a $ 56 million charge to impair certain operating assets in the Pacific Northwest, which was driven by higher log costs and ongoing market weakness. In terms of cash flows, there was a $ 22 million outflow from operating activities in the quarter, as negative operating earnings were partially offset by the collection of tax refunds totaling $ 30 million. Combined with capital expenditures of $ 40 million in the quarter, our net debt-to-invested capital leverage ratio ended the quarter at 32.8%. Looking ahead regarding capital allocation, we're taking a conservative approach in light of the current lumber market weakness. Our primary focus over the course of 2024 will be on managing our balance sheet conservatively.
In line with this focus, we have revised our expected capital expenditures for 2024 down to $ 90 million from $ 140 million previously budgeted. Additionally, we expect the collection of tax refunds totaling $ 68 million and the ongoing monetization of our coastal BC forest tenures over the course of 2024 to benefit our financial leverage. To wrap up, Interfor's Q4 results reflect significant lumber market weakness, which we view as unsustainable for the industry as a whole. Fortunately, Interfor has a high-quality, diversified portfolio of operations and is well-positioned to successfully navigate through this period of supply and demand adjusting towards a sustainable balance. That concludes my remarks. I'll now turn the call over to Bart.
Thanks, Rick. Turning to our lumber markets, the outlook remains uncertain for the short term and encouraging for the medium to long term. Rick covered the macroeconomic factors, which bode well for lumber markets. Certainly, we feel better today about the economic situation than we did at this point in the last four or five quarters. Confidence and optimism exist with our customers and those ultimately using our products. When you look at the end-use sectors of our business, really, it comes down to new home construction. Repair and remodel, industrial, and non-residential sectors have shown steady lumber demand, whereas new home construction has been variable. Encouragingly, housing starts are showing an improvement trend, especially in single-family construction. We are optimistic that the spring building season will bring greater demand for lumber. However, the exact timing of this is less certain.
All last year, the spring building season was less evident until later in the spring, early in the summer. At this time, the volume of European imports were more significant, which is not as relevant this year as those volumes have tapered off significantly. Overall, in-market inventories remain balanced on the low end of the spectrum at today's level of consumption. Looking at the supply side of the equation, we're expecting more capacity to be idled, some of it permanently. Medium- to long-term, the dynamics around housing age and inventory, household formation rates, household balance sheets will support robust markets for lumber. I'll stop there and pass it back to you, Ian.
Okay, thanks, Bart. So, operator, we're ready to take any questions.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press the star followed by the one on your touch-tone phone. You will hear a three-tone prompt acknowledging your request. Questions will be taken in the order received. Should you wish to cancel your request, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question is from Ketan Mamtora from BMO Capital Markets. Please ask your question.
Thank you. Good morning, Ian, Rick, and Bart. Maybe first question, you talked about pricing is at an unsustainable level and that there's more curtailments that would be needed. I'm curious, can you talk about sort of your approach to production given market conditions right now in terms of sort of how are you managing the rate at which you all are producing?
Yeah, morning, Ketan. So, Ian here. So, Ketan, we look regionally and mill-specific on how each mill and region is operating. We have a scorecard that we look at every week that tracks P&L performance. And then if it's below cash cost, there's another threshold where you kind of look at what the shutdown cost would be. And then there's a lot of other factors that go into that regionally with things like full employment in the U.S. and risks to employees or contractors. So we have a pretty robust scorecard that we review as an executive team weekly. And we've been doing this for years and years, so it's nothing new for us, but a very disciplined approach to run, don't run type situations.
Understood. And so, Ian, at this point, are kind of all of the mills running across your different regions? Are they running? Are any of the mills running on reduced shifts, or just can you give any sort of additional color?
Yeah, I would say, Ketan, that like our competitors, we're not different to the pricing environment and demand environment. So we've been running through the Christmas period, through January, fairly steady at most or all of our operations. Having said that, we're in a period where if there's a weakness or an extended pricing environment like we have now, we'll look at those every week. And if it's a material event, we will for sure be putting that out. But like we said in our opening comments, most of the industry is having a pretty tough time. And if you even look at some of the decisions, the U.S. South isn't even safe in these situations. And there's been some competitors that have made some very prudent moves. And I think that's just a reminder that not all U.S. South mills are of the same quality.
And so I think regarding our 13 mills down there, we're very confident in them. And as you know, you've been on our tours down there, pretty solid assets. So I think my point here is whether it's in British Columbia or Eastern Canada, Pacific Northwest, or the South, it's a situation that the industry's been in in 2023 hasn't been great, as you well know. Now, going forward, if you asked us a year ago how we feel about the outlook, we feel better today than we did a year ago, for sure.
Got it. No, that's helpful context, Ian. And then one for Bart. Bart, can you talk a little bit about what you are seeing on the repair and remodeling side in terms of kind of pull-through and demand? We had existing sort of home sale data, as you see, they are at sort of multi-year lows. What are you kind of seeing in your demand, and what is your expectation for the year?
Yeah. Okay. So on the repair and remodel side, I mean, obviously, we've got a fairly significant view through the business that we're doing with various customers that are targeting that segment of the marketplace. And I'd almost look at it in two lights. One is the box stores. And what we're seeing from those folks has been incredibly steady business, frankly. Our programs have maintained their pace, maintained their pace throughout the year. And I can tell you, so far this year, they've been the same. The other side of it is the customer base that's more focused on perhaps some of the seasonal product lines like treated wood and those types of things that would flow through the repair and remodel side of the equation.
And I would say that typically, you'll see a slowdown in late Q4 and early Q1 and sort of a buildup in what ends up being a fairly robust spring season. And what we're seeing so far of that, I would just say, is typical in that we're expecting those markets to behave very similar to what they did last year. So really, when you think of all the end-use sectors, repair and remodel is kind of the good news story. That's the one that's been very steady for us. It's the new home construction side that you see some variability.
Ketan, maybe I'll just kind of to build on Bart's comments, I mean, one metric that we look at in the R&R market is what's the status of the household balance sheets. That tends to give us an indication on the R&R market. Very supportive of that end market given the strong balance sheets that exist today. So I think, in summary, our expectations should be fairly consistent, Bart, with 2023, absent of some major event happening.
Yeah. Okay. No, that's helpful color. I'll jump back in the queue. Good luck.
Thank you.
Thanks, Ketan.
Thank you. Your next question is from Matthew McKellar from RBC Capital Markets. Please ask your question.
Hi. Good morning. Thanks for taking my questions. First, I'd like to ask, if you could just talk through how you'd expect fiber costs to trend by operating region over the next couple of quarters, and with that, whether you're expecting any significant impacts from fire salvage activity as we progress through the year?
Yeah. So I'll take a kick at it. Rick, jump in if you think I've missed anything. But thanks for the questions, Matt. So if we kind of go by region, we're seeing, in the short term, some stumpage relief in British Columbia, which is very good. And as you know, we have 3 mills in BC. That's our total exposure in the southern part of British Columbia that are very, very competitive. So that's great there. The next region, Pacific Northwest, we don't see any major swings up or down, so I think pretty steady. Eastern Canada, particularly in Quebec, we and others are enjoying a lower log cost at this point as a result of the fire salvage going on. Our expectation, Matt, is that's probably run its course sometime in the summertime. So just keep that in mind. And in the U.S.
South, we're very pleased with the log cost trend and our competitive benchmarking against the average log cost in those regions. So that would pretty much cover, I guess, the puts and takes through our platforms across North America.
Great. Thanks for that. Maybe next, are you able to provide any color on what the moving parts are between the preliminary $140 million CapEx budget and the new revised $90 million budget and maybe what your flexibility is like to bring some of those projects back if the outlook improves? I know you called out some ongoing cost inflation there. So just wanted to get your thoughts.
Yeah, for sure, Matt. And you were on our tour a year or so ago down in the South also. So I'll get a little specific. Our major focus on our capital is to complete our Thomaston project in Georgia. That's the largest project we'll have done in the history of Interfor. And the major phase that we're working on now should be commissioning shortly, going through testing, and some startup over the next few months. So we're very excited to kind of get that one behind us. The other projects, the strategic projects that we developed in 2018 for a couple of the other operations down there, we have seen labor costs go up as far as contractors go. Equipment costs have gone up. Lumber markets have toned down. And so we have the engineering largely done on all of those, which is the first thing.
We have those shelf-ready. But I would say that we have a target range internally on our balance sheet, and we're slightly above that now. We've decided to be disciplined and make sure that we're not doing projects for the sake of doing projects and focusing more on the quality of the project and the quantity of the project. I think it's important too, Matt, to really also point out on our CapEx, Interfor generally over the last handful of years has outspent on a per-unit basis, so a production unit, FBM, more than our core competitors. We've been accelerating capital for several years now. I don't see any strategic compromise by throttling this back a bit and being prudent given the market conditions and also finishing off our largest project.
We have, like others, experienced longer startups and longer to get to pro forma than some of the other regions. However, our internal CapEx team, which you're aware of, this allows us to put more people on these startups than rushing off to do another big project. So our expectations are very high for our Thomaston operation this year.
Great. Thanks for all the detail there. One last one from me, and this might be for Bart. I know you talked about European volumes being pretty steady into North America at a fairly manageable level. Would you expect any change there with some of the shipping issues in the Red Sea, in particular, just increased cost of shipping European volumes into Asia? Do you expect that to be a factor for the North American market or not particularly material?
Well, I think it's always when you consider the options that the Europeans have and where they can ship their wood. I think what's happening in any of their other more traditional markets is relevant. And so, yeah, the freight has gone up significantly for their Asian business. And so when they compare markets and where they want to ship their products to, that'll be a consideration. I will say, though, that 2023, I mean, we saw a pretty significant volume of the imports come in early in the year. I think this was just kind of clearing out the supply chain issues that they had late in 2022. And so we're not seeing that so far this year and don't expect to see it this year.
We believe that once things kind of shake out and the volumes become more steady, more typical of what they are today, the delta between 2023 and 2024 is going to be more like in the range of, say, the volumes that might have been imported in 2020 and 2021. That's about a 20% decline year-over-year when you do those comparisons. That's kind of what we expect going forward.
Great. Thanks for the help. That's all from me. I'll turn it back.
Thanks, Matt.
Thank you. Your next question is from Hamir Patel from CIBC Capital Markets. Please ask your question.
Hi. Good morning. Ian, could you speak to what impact you think the proposed B.C. Lands Act changes may have on existing tenures for the industry and also if you see that potentially delaying your coastal tenure sale process?
Yeah, for sure. Good question, Hamir. I know it's been in the news, particularly in BC, over the last period of time. But in many respects, the proposed changes are aligned with legislation that's already in practice. And sometimes that doesn't really get the, as you know, the news headlines. So if enacted, we think that there won't be really any impact on the cutting permit approval process as we've been working under this framework for a number of years. So I would kind of start off with that. Our operational plans, permits, are really been operating under this sort of environment for a number of years. I would think that the Minister of Forests has obviously got to take consideration of public interest in mind with First Nations and shared decision-making. But the industry has been working with First Nations and building relationships for many years.
A lot of effort's gone into building those between government, us, others that operate in the space. We don't see any negative drawback on that. I know, for citizens and foreshores and all the folks that probably haven't had the exposure or the partnerships that we have as an industry, might be a bit more sensitive to it. Our foresters have gone through this very diligently and have really provided us with comfort that it's business as usual for us.
Great. Thanks, Ian. Just the last question I had for Bart. Bart, can you give us a sense as to where you think inventories are for lumber across the channel?
Yeah. I would say I often think of them as balanced, but I think you have to frame that up in the context of what that means. I would say, based on sort of historical levels, we see them in sort of the lower-end range. I think what's kind of happened here is that supply has been available. Our customers have gotten pretty comfortable with the lead times that are in place today. Based on the consumption that they see, they're able to drive down their working capital and inventories because they've always gotten restocked fairly quickly. I think that that's where the comment of being balanced comes in. Where the comment of being on the low end comes is when that's not the case.
And so a little uptick in demand, perhaps some supply-side dynamics that might come into the equation, that's when those inventories will become a little bit more critical, I think, in the channel.
Great. Thanks, Bart. That's all I had. I'll turn it over.
Thank you. Once again, ladies and gentlemen, please press star one should you wish to ask a question. Your next question is from Sean Steuart from TD Securities. Please ask your question.
Thanks. Good morning. A couple of questions. Ian, I wanted to follow up on the CapEx budget reduction. And you're positioning it as capital cost inflation, which is understandable and not hitting your return hurdles. Is there any line of sight on this inflation peaking at this point? When I look at some broader indices for steel or other, I guess, major component pieces, it would look like that started to crest. Are you getting any sense that you're going to see potential relief on those cost inputs for capital projects?
I hope so, Sean. I mean, I think a lot of the pricing that our suppliers do is they often look at what the last transaction price was on a mill and then kind of value their equipment based on that. So there were some high points on transactions that have happened over the last couple of years that have given equipment suppliers confidence to raise prices in addition to their material costs going up. So I would think that that's going to get tapered. The labor costs are not going down. And so when you hire a mechanical or structural steel contractor or civil contractors to come in, those prices are not coming down. They're often driven by labor and per-hour rates. So I don't see a lot of that.
Yeah, I would say, though, Sean, like I've pointed out, we have outspent on our capital program against a couple of our core competitors over the last several years. So it's a natural tapering down that we'll see in Interfor going forward. But also, the balance sheet at Interfor, when we set internal targets and we have one on that, and we'll make decisions in addition to whether it's completing a project, that is a factor also. So I would say it's a combination of both, and we don't take it lightly. But we definitely want to drive down our net debt to invested capital, and we'll pull the levers to do that. And once we get it back into our target range, we have a lot of flexibility to deploy capital in more ways than we have today. So we want to get there.
And part of that is looking at the projects, making sure the paybacks and the startup curves and expectations are realistic. And we always look back at our last project and kind of go, "Okay, well, let's use that as the startup for the next one." And so I feel really good about what we're doing. And the benefit is we're also taking action on the balance sheet because of this. So I'll leave it at that.
Okay. No, that's useful context. Thanks. Second question on the remaining coastal tenure sales, the remaining 1.4 million cubic meters of AAC, any reason that valuation on those potential sales would differ materially from what you were able to secure for the November sale? I appreciate it was a smaller tenure, but any differences in species mix, yields for that chunk versus what you're going to be targeting selling over the next couple of years?
Hey, good morning, Sean. It's Rick speaking. On that, we don't expect any material change in terms of the valuation. There's several transactions we're working on at the moment, and we're comfortable with where those valuations are turning out. Our expectation is over the next 12 months-24 months, we'll realize the full benefit of those tenure sales in line with the recent valuations you've seen.
Thanks for that, Rick. That's all I have. Thanks, guys.
Thanks, Sean.
Thanks.
Thank you. Your next question is from Ben Isaacson from Scotiabank. Please ask your question.
Good morning. Thanks. I'm good to be on the call. You mentioned that we're below industry breakeven levels. I'm curious how much of the American lumber cost curve is out of water. How much more capacity cuts do we need to see? And in your experience, do you think the rationalization response you're seeing is normal to what you've seen past falls?
Hey, Ben, we got about half of that. We're cutting out. So I'll just kind of.
I'm sorry. Can you hear me now?
I'll read back what I heard, which was what kind of rationalization or curtailments are we seeing or expecting? When we go through the data from 2023, we see somewhere in the neighborhood of north of 2 billion board feet that actually was curtailed during 2023, which is not insignificant. I think so far in the first five or six weeks of 2024, it's somewhere in the neighborhood of 800 million board feet. We applaud those decisions. We think that more will come out sooner than later. We expect that we'll be looking at that closely also over the next month or so. If prices continue to show no appreciation, then I would expect capacity to be curtailed throughout the industry. At this point, we don't have anything material to discuss on that.
But if we get to that point, then we'll definitely let our folks know and the street. But we're not at that. We don't have anything today. But I would caution that, saying that I think there's more to come. Sooner than later.
That's helpful. That's helpful. And sorry if you couldn't hear me before. You had previously talked about lumber capacity, your growth plan of about seven BBF by 2027. Is that timing still on the table? And if so, how does the scaling back on CapEx impact the cadence of that capacity ramp? And maybe as part of that, with the move to $90 million on CapEx, how much of that is growth versus sustaining?
Yeah. So our 7 billion by 2027 is really an internal target that we were shooting for.
I would say that those targets move a little bit here and there, but we are a growth company. We've been the most aggressive on growth over the last few years in the lumber space. We tend to see ourselves as being able to pick up assets that are mid-quartile and spending time on them to make them top-quartile. So that strategy hasn't changed. I would say that consolidation and the number of potential deals that are on the table today versus where they were two years ago is slim to none. And so I think we just have to be responsive to what's out there, making sure that we're disciplined in our growth. But we're not holding ourselves. There's nothing in our performance reviews that say we're going to get to 7 billion board feet.
It's more, can we pick up an asset, own it for a period of time, and then get the return and the margin out of it? So I would taper down the $7 billion for sure and just probably look at it as we'll be opportunistic. But there's nothing on the table today. And as far as our CapEx growth goes, our major project really is the Thomaston, which is I forget how much the capacity is, but it's essentially doubling that one mill. But Rick, did you have anything?
Yeah. Hey, Ben, it's Rick Pozzebon. Just in terms of the $90 million, it breaks down to about $50 million for sustaining CapEx and $40 million for growth CapEx. And as Ian mentioned, the $40 million of growth CapEx is primarily weighted to our Thomaston project to get that across the finish line.
That's great. Thanks so much, guys.
Thanks, Ben.
Thank you. There are no further questions at this time. I will now hand the call back to Mr. Fillinger for the closing remarks.
Okay. Just to wrap up, thanks, everybody, for your interest in our company. Feel free to reach out to myself, Rick, or Bart at any time. Operator, this concludes our call.
Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect.