Good morning, my name is Julie and I will be your conference operator today. At this time I would like to welcome everyone to the Interfor 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'd like to ask a question during this time simply press star then the number one on your telephone keypad. If you'd like to withdraw your question please press star two. Thank you, Ian 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, our Executive Vice President and Chief Financial Officer, and Bart Bender, our 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 key initiatives before passing the call on to Rick and Bart. Turning to our Q1 results, our Adjusted EBITDA was a loss of CAD 22 million during another challenging quarter that was impacted by continued weak pricing. To be clear, current pricing is generally below industry break-even levels, which is simply not sustainable for an extended period of time. We've been proactive in addressing the controllables during these market conditions. Last quarter we made the decision to indefinitely curtail our Philomath operation in Oregon.
We've also done a good job reducing working capital and recently we announced the removal of 175 million feet of production across all North American regions to address the oversupply and weak pricing that exists today. We have always been fact-based and disciplined and consistently have been an industry leader when it comes to dealing with adjusting capacity or making tough decisions to strengthen our portfolio of operations. We have a more positive outlook as we head into the back half of 2024 and into 2025. However, we intend to continue to manage the business and our balance sheet conservatively. I'll now turn the call over to Rick and he'll walk you through the financials.
Thank you, Ian, and good morning all. Please refer to cautionary language regarding forward-looking information in our Q1 MD&A. At a high level, Interfor's Q1 results were a slight improvement over the preceding quarter, but lumber markets continued to be challenging. Lumber prices remained unsustainably weak relative to average costs across the industry, resulting in cash margins hovering around break-even levels across North America. As Ian mentioned, our focus continues to be on the controllables within our business. We're using this down market as an opportunity to strengthen the core of our business and set up for success over the long term. Turning to Q1 earnings, Interfor generated an Adjusted EBITDA loss of CAD 22 million on total revenue of CAD 813 million. Compared to the previous quarter, revenue benefited from a 5% increase in lumber shipments and a 2% uplift in the average realized lumber price.
On the cost side, reported production costs on a per unit of lumber basis were 5% lower quarter-over-quarter, benefiting from a CAD 14 million decrease in the provision against inventories. A net loss of CAD 73 million was realized in the quarter, which included CAD 31 million of gains from the ongoing sale of coastal BC forest tenures. In terms of cash flows, there was a CAD 17 million outflow from operating activities in the quarter, as negative operating earnings were partially mitigated by the management of inventories to reduce levels. Capital expenditures were as expected at CAD 26 million in the quarter, while the sale of forest tenures contributed CAD 29 million of cash. Ultimately, our net debt to invested capital leverage ratio ended the quarter at 34.7%.
Looking out over the remainder of 2024, we continue to expect a collection of CAD 64 million in tax refunds and further cash proceeds from the sale of Coastal BC forest tenures. Regarding capital allocation, we will continue to take a conservative approach as we manage through this sustained market weakness. The primary focus is on reducing financial leverage into our target range below 25% net debt to invested capital. Capital expenditures will continue to be restrained in line with previous guidance. To wrap up, Interfor's Q1 results reflect significant ongoing market weakness, which we view as unsustainable for the industry as a whole. Fortunately, Interfor is well positioned to successfully navigate through this period as supply rebalances with demand. That concludes my remarks. I'll now turn it over to Bart.
Okay, thanks Rick. Good morning everyone. Lumber markets have been difficult to forecast for some time now. The near-term market indicators remain mixed. Longer-term fundamentals remain positive. Our expectation was to see an improvement in lumber demand through the spring building season. However, this time remains elusive and less likely as time goes on. We are encouraged with the single-family housing starts, with new homes continuing to take an increased share of home sales. We expect this to continue as we finish out the year. Multi-family construction is less certain as affordability takes a greater toll on this segment. When interest rates start to decline, multifamily is positioned to benefit. With that, builder sentiment has been mostly positive, although most recently it started to decrease. We expect this to stabilize in the coming months. Repair and remodel end-use segments have been mixed, have seen mixed results recently.
The programs we have with box stores continue to meet expectations at this time of year. However, with U.S. household savings largely exhausted, we're expecting borrowing rates to factor into future spending. Lumber markets are highly sensitive to demand and supply levels, and we know that there is a fine line here. We've recently announced curtailments and expect to continue to manage our production to meet our customers' demands. We're seeing a similar response across our industry as it becomes more evident that lumber demand is likely to remain at current levels for longer. As we move into the back half of 2024, we expect a better balance between supply and demand. I'll stop there, Ian. Back to you.
Okay, thanks Bart. Thanks Rick. Operator, we're ready to take any questions.
Thank you . Should you have a question, please press star one on your touch-tone phone. If you're using a speakerphone, please pick up your headset before pressing any keys. If you'd like to withdraw your question, please press star two. One moment please for your first question. Your first question comes from Sean Stewart from TD Cowen. Please go ahead.
Thanks. Good morning everyone. Ian, a question on the downtime plans from May through September. The implication, I guess, is you're taking it across the platform. I'm wondering if you can give a sense of relative weight region to region, and I guess what I'm trying to get at is presumably the US South is quite compromised at these prices in terms of margins. Any more granularity you can give on the relative weighting of where this downtime is going to be taken?
Sean, I don't have the specifics yet because we kind of look at when we look at the downtime, we look at the operations that are performing, I would say, better. So BC is doing okay right now in the northwest. And when we look at Eastern Canada and the South, we look at it on an individual mill basis more than a regional basis. So where a mill is in a situation where it's more positive than a mill that may be in a tougher situation, we're taking the tougher situation in the downtime and continuing to obviously operate the mills that are in a more positive situation. So it really is not more regional, it's more mill-specific.
So we're being smart about, obviously, our portfolio of mills and running the ones that we feel are maybe a little advantaged over other ones at this point in the market. So that's how we're managing that. It really is spread across North America. Each region has different unique situations.
Okay, thanks for that. Second question for Rick on leverage. I guess in the hopefully unlikely event that this price trough extends substantially longer, at what point do you start to think about getting ahead of the covenant on debt to cap? And presumably this isn't a concern the next few quarters, but you likely don't want that ratio to get to 50% before you worry about it. How do you think about available liquidity and covenants at this point?
Good morning, Sean. Yeah, our leverage ratio is at 34.7% at quarter end, and we've got plenty of headroom up to our leverage covenants. We also have ample liquidity today of around CAD 300 million. In here and now, we're not concerned. When we look out, we've got plenty of levers to pull to manage our leverage ratio. First and foremost, it's operational excellence, making sure we're doing the right things at the right time within the business, focusing on maximizing cash flows from operation. As Ian alluded to, we're targeting our underperforming operations when it comes to downtime and those sorts of things. That's the first level we're focused on to sustain ourselves through this market weakness. Then, as I mentioned in my comments, we've got significant non-operational cash flows coming ahead which bolster our liquidity and leverage ratio.
So that would be the tax refunds this year of around CAD 64 million. And when we look out to 2025, we're generating losses this year which will result in cash refunds next year as well on a tax basis. So there's that to look ahead to as well in 2025. And then when we think about our BC coastal tenures, we've got significant progress made already, but looking ahead, there's substantial cash flows we expect this year and into 2025. You can think about that in the range of CAD 65- CAD 70 million in total net cash flows to Interfor to come over the next 12-18 months. You can think about half of that happening in the next nine months of 2024 and then the remainder into 2025. So when we factor all those things in, we feel we've got plenty of headroom.
But certainly, as the market stays down and we progress through this, we're going to be proactive if we need to be. But we're not at that stage yet.
That's great detail. Thanks very much. That's all I have for now. I will follow up if I need anything else.
Okay, thanks, Sean.
Your next question comes from Matthew McKellar from RBC Capital Markets. Please go ahead.
Hi, good morning. Thanks for taking my questions. First, I think you mentioned seeing a supply response in lumber across the industry. Do you think the impact of that response is reflected in the market and current cash pricing today, or should we expect that impact to be increasingly felt more as the quarter progresses?
Yeah, hey Matt, Ian here. I'll jump in, and Bart, you can do the same. But I would say, Matt, we've been underwhelmed by the response from the industry to really kind of rebalance the situation here. Having said that, we are getting intel both from announced curtailments and quiet curtailments that are happening. So we're positive on that, that people are starting to do that. I would say, Matt, that we're probably not going to feel that capacity coming out for 60 or so days, just given that, as you well know, when you do take a sawmill down, you generally continue to run the planer mill and continue to move your inventory, and that takes weeks to work through. So I think there's a lag there before there'll be really any feeling in the supply side in the market.
I don't know, Bart, is that fair or what's your?
Yeah, totally. And the only thing I would add to that is that the distribution channels over the years have kind of introduced a discipline where they're not reacting to announcements, but rather they're reacting to whether they're able to resupply or what the lead times look like or what the demand side of the equation looks like. And so they won't react, I don't think, until they actually see it. So less so on the announcement, more so on an actual constraint in the marketplace. And to Ian's point, that's going to take 60-90 days, in my opinion.
Yeah, Matt, maybe just to close on this question. I mean, we have seen a sizable decrease in our own inventories through some of the levers that we pulled and quite a bit on the lumber side. So it is our check or our opinion is it's pretty lean out there. And so as this works through, it'll be interesting to see how things unfold. But I would use the word sizable decrease for our situation in lumber and log inventories.
Thanks. I appreciate all the color. The last one for me, I think you noted in February that unusually warm weather had impacted log deliveries in BC. Can you provide an update on how things have trended over the past couple of months and how the log decks at your mills in the province are looking at this point?
Yeah, I think in BC, as you know, we've got pretty competitive operations, and we have water storage at a couple of our mills. So I would say that we're comfortable generally in British Columbia. I would say, though, that in Eastern Canada, there's been challenges, particularly in Quebec, when it comes to log inventories with the warm weather and what have you. So yeah, I think it's tight. Our log inventories generally in Canada are down more than double-digit %. If you kind of look from New Brunswick all the way to British Columbia and every region that we operate and kind of use that as an average, we're, again, double-digit % down in Canada.
I wouldn't be surprised, come summertime, the industry, some industry mills, may be taking downtime for log shortages, especially if there's an upset condition like a fire season or something like that that would restrict logging during any kind of summer hours.
Thanks, Sean. That's all from me. I'll turn it back.
Thanks, Matt.
Hey, your next question comes from Ben Isaacson from Scotiabank. Please go ahead.
Good morning. This is Victor jumping on for Ben. I just wanted to ask about the timing of recent curtailment. Supply seems to be acting rationally and with lumber prices up somewhat sequentially, and we are at what is usually the peak construction season. So how do you see the demand side of the supply and demand balance develop for the rest of the year and throughout the summer and into winter?
Okay, you've got a lot to unpack in there, Victor. I would have to say that the demand side as we're coming into the spring building season, we were expecting to see an increase in activity, and frankly, that hasn't taken place. When we're looking at that, we think it comes down to two factors: a decline on the repair and remodel side of it, especially when you talk about treating. That's an area that we've seen some slowdown. The other is multifamily, and especially in the south, multifamily has decreased. So the demand side of the equation has seen a slowdown, and I would say that the supply side has not, from an industry perspective, responded yet.
We're still in a position where we think the markets are oversupplied, and quite frankly, the pricing that's in place is reflecting that. Overall, we think demand is going to be quite similar year to date for the balance of the year.
Hey, Victor, Ian here. I'll just add to Bart's. We see that the spring buying season has essentially failed to take off this year. And so when we look at that and we look at where the US South pricing is, and the US South typically isn't impacted by downtime decisions given the low-cost fiber base there, but prices in the US South are near 50-year lows on an inflation-adjusted basis. So as you start to see these impacts of permanent and temporary curtailments coming into effect with the lean inventories that we talked about throughout the supply chain, I mean, any uptick in demand could provide meaningful tension into pricing. But if they don't recover, obviously, we expect, particularly in the US South at the 50-year lows, continued supply responses.
Thanks for the call, you guys.
Ladies and gentlemen, as a reminder, should you have a question, please press star one. Your next question comes from Ketan Mamtora from BMO Capital Markets. Please go ahead.
Thank you, and thanks for taking my question. Bart, I mean, I think this weaker than expected pickup in R&R and demand is echoed by some of the other peers as well. Can you talk about what you guys are seeing in terms of your volumes in R&R on a percentage year-over-year basis? Any color around that?
Yeah, I won't get into the detail particularly, but the commentary is we have our box store programs that are out there. So we have a pretty good view of the consumption that's taking place there. And I would say it's matched with what we've budgeted so far year to date. Generally, Q1 is a bit slower. Q2 starts to pick up, and that's what we're seeing, quite frankly. It's the treating side of the business that I think has really seen the slowdown. And we see that through the programs that we have in place for that as well. And so really, you almost need to look at it in two ways. So the DIY out-of-the-box store, fairly stable, but there does seem to be a slowdown with any of the treated products. Obviously, that's your exterior-type projects in the backyard and those types of things.
Those have definitely slowed. I would say if I was going to give you a percentage on the treated side, you're looking at in the 20% range decline on that side. Fairly significant.
I see. Okay, no, that's helpful. And then, Rick, on 2024 CapEx, is CAD 90 million still the plan? Do you have any flexibility there?
Hi, Ketan. Yes, CAD 90 million still is the plan, and we're on track for that. There's certainly a little bit of flexibility there as we take some downtime, and maybe that requires less maintenance CapEx. But as it stands right now, we're still on plan for the CAD 90 million.
Got it. And then just coming back to financial leverage, so you called out a couple of items, the tax proceeds, BC tenures. Anything outside of that you can do that could help accelerate bringing down the financial leverage? Rayonier Advanced Materials recently sold their lumber duty rights. Is that something that you guys are considering at all?
For sure. We did see those transactions announced. Without knowing all the terms, though, it's hard for us to comment on the economics. It is nice to see, though, that some value is being ascribed to the duty deposits out in the open market. We certainly believe our CAD560 million in deposits represent significant value to our shareholders. In dollar terms, on a per-share basis, our duty deposits represent about CAD 11 on an after-tax basis. So there's significant value there in our minds. In terms of the leverage piece, as we look out, I mentioned it's the operational excellence piece, making sure we're getting the most out of our operations, out of each individual operation.
We look closely each and every week at each operation and make decisions based on the outlook for those with the mindset of maximizing operational cash flows and minimizing the impacts on our leverage as we work through the down market.
Hey, Rick, I mean, Ketan, when we look at those transactions that happen, I mean, they're not attractive to us to consider, I guess. Is that?
I agree.
Got it. No, that's helpful color.
Yeah, Ketan, one thing that when you talked about R&R and what have you, just to come back to that for a second, I mean, Southern Yellow Pine supplies a lot of that. And I just kind of want to remind folks that we're not as heavily Southern Yellow Pine as maybe some people think we do. With Eastern Canada, about a third of our production is in the SPF. And important is that SPF and Southern Yellow Pine aren't entirely exchangeable or substitutable. So we are benefiting on the SPF side of the business when it comes to pricing when you look at the Southern Yellow Pine. So our diverse geography and the move to Eastern Canada to capture some of the SPF that was available through those acquisitions is we're seeing positive pricing when we look at those gaps.
Thanks, Ian. I appreciate the color. I'll jump back in the queue.
Thanks, Ketan.
Your next question comes from Hamir Patel from CIBC Capital Markets. Please go ahead.
Hi. Good morning. Bart, I wanted to follow up on earlier question about the multifamily weakness. I was just wondering if you had a sense as to perhaps how much more wood-intensive the multifamily starts are in the South versus the rest of the U.S. And is maybe Southern Pine just that much more prevalent in multifamily usage in the South? Because when you look at the actual starts, they're down more in the South, but not necessarily that much more than the whole U.S.
Yeah. I would take a look at the permits side of that equation as well. But I think if you look at the states that are big consumers and builders of multifamily - so this is your Florida, your Georgia, and your Texas - I mean, those three states, I think the activity has decreased fairly significantly on the multifamily side. And in particular, if you look at the permits, I think you'll see a trend there. And obviously, those markets are right in the backyard of Southern Yellow Pine producers and are largely supplied by Southern Yellow Pine. So I think the impact of that is a little bit more heightened in the south. And that really I'm looking at that as one of the main reasons that we're seeing the market that we have in the south.
Okay. No, fair enough. That's helpful. And just the last question I had, Ian, as part of the balance sheet management, would you look at potentially divesting any of your sawmills?
Well, Hamir, that's a good question. I mean, our portfolio of 30-year-old saw operations now, obviously, you've got different stages of each ones. And you've got ones that are in the top and ones that are in the middle and ones that need some work. So we're always looking at those. Philomath is an example. Last quarter, you'll recall we sold Acorn a year or so ago. We shut down our Hammond Cedar mill and then converted that into real estate play. So at the end of the day, I mean, we're always looking at how do we improve the ones that need it? What's the capital investment? What's the timeline? How's the fiber supply and fiber security?
So I would say just, Hamir, I mean, generally, I mean, that's one of the most important things that we're doing all the time and always trying to improve or find a path to improvement for the shareholder and for the company. So it would be a yes. We're always looking at our portfolio on how to improve it.
Fair enough. Thanks, Ian. That's all I had.
Great. Thanks, Hamir.
There are no further questions at this time. I will turn the call back over to Ian for closing remarks.
Okay. Thank you, operator. Thanks, everybody, for your interest in our company. Feel free to reach out to myself, Rick, or Bart anytime. This concludes our call. Have a great day.