Good morning. My name is Chloe, 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 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 the pound key. 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 first quarter before passing the call on to Rick and Bart. Adjusted EBITDA was $49 million in Q1, and despite weather challenges and tariff uncertainties, all of our operating regions were EBITDA positive. This result was largely driven by higher sales realizations across all regions. Although the pace of single-family starts remains somewhat resilient year-to-date in the context of interest rate environment and associated affordability challenges, the geopolitical situations remain uncertain, and the aggressive U.S. trade policy has significantly increased the possibility of slowing demand. Therefore, we're maintaining a conservative outlook for 2025.
We have geographically diversified our company to weather these types of uncertain periods. Our U.S. platform represents 60% of our asset base, spanning both the U.S. South and the Pacific Northwest. Approximately 76% of our total production is not subject to duties or U.S. trade actions, and our available liquidity of over $ 300 million is strong. In closing, our outlook is mixed. However, our foundations are strong. We're diversified, and we continue to see opportunities for efficiency, cost, and margin improvements across all of our regions. I'll now pass the call over to Rick.
Thank you, Ian, and good morning, all. Please refer to cautionary language regarding forward-looking information in our Q1 MD&A. Overall, our Q1 results were a significant improvement year over year, reflective of stronger lumber prices across all key products and the steps taken to optimize our sawmill portfolio. With respect to earnings, Interfor generated adjusted EBITDA of $49 million on total revenue of $ 736 million. Total revenue remained relatively flat quarter over quarter, with an 8% increase in the average realized lumber price offset by an 8% reduction in the volume of lumber shipped. Lumber price improvements were supported by the substantial production curtailments across the industry in 2024, as well as seasonal demand. Lumber shipments were slowed by tariff-driven customer uncertainty and constrained truck availability in the U.S. South. Fortunately, we're now seeing more consistent truck availability and expect to catch up on shipments in the second quarter.
On the cost side, reported production costs per unit of lumber increased 9% quarter over quarter, reflective of operational disruptions from harsh winter weather conditions in several regions and the constrained shipment volume. Ultimately, a net loss of $35 million was recorded in the quarter, which includes a $29 million non-cash loss on disposition of our Quebec operations. From an operating cash flow standpoint, the $49 million of Adjusted EBITDA in Q1 was more than offset by a $54 million build in working capital and $12 million of income tax installments. Working capital build was mostly driven by a seasonal build of log inventories in Canada and the tariff-driven delays in lumber shipments, which accounted for $44 million of the total build. On a positive note, these inventory increases are temporary and expected to reverse over the course of Q2 to support cash flow.
Beyond operations, we invested $ 17 million in capital projects and raised $ 19 million from the sale of assets. Sales of assets included $ 3 million of net proceeds from the ongoing wind-down of our B.C. Coast operations. Over the remainder of this year, tenure sales are estimated to generate additional net cash flow in the ballpark of $ 15 million-20 million. Ultimately, our financial leverage, as measured by net debt to invested capital, ticked up to 37% at the end of the first quarter. While we remain focused on closely managing our financial leverage, we are well-positioned with more than sufficient available liquidity at over $ 300 million. To wrap up, Interfor's Q1 financial results were another step in the right direction for our business, despite the various disruptions.
Looking ahead, we anticipate continued lumber market volatility, considering duty rates are set to rise substantially later this year, combined with the looming threat of tariffs. Fortunately, Interfor is well-positioned to navigate successfully through this volatility with its high-quality and geographically diverse operations. That concludes my remarks, and I'll turn the call over to Bart.
Thanks, Rick. I'll provide some market outlook comments. It's hard not to look back at what transpired in Q1 when we think about what Q2 and beyond could look like. This past quarter, we saw a series of events that were impactful to our lumber markets and leave us with a level of uncertainty as we navigate incoming increases in duties on Canadian lumber shipments to the U.S., continued threats of tariffs, and demand that reflects the lack of confidence in the North American economy. All of these have a profound impact on North American lumber markets. This past quarter, the impact of both the prospect and ultimately implementation of tariffs and prompt reversal left our markets without direction. It was very interesting to see the responses that did occur with SPF, Eastern Spruce, and Western Spruce markets quickly increasing prices to reflect the changes in the competitive landscape.
Interestingly, the Southern Yellow Pine markets saw a delayed response, but ultimately that region saw increased demand and higher prices as well, which we believe will continue as our customers address risk in supply. Q2 and Q3, we're expecting volatile pricing environments. The competitive landscape is going to shift as the markets make room for significant duty increases and potentially tariffs on top of that. We expect that markets will ultimately pay for those cost increases. We're just not sure to what degree supply will need to respond to achieve that. There will be winners and losers, with U.S. lumber producers likely winning and consumers footing the bill. The impacts on Canadian producers are less known and will be influenced by operating regions, products produced, and proximity to key markets. All things considered, the volatile markets we saw in Q1 were favorable overall. Pricing was elevated for most of the quarter.
On the demand side, our customers are reporting declines in activity due largely to the uncertain economic backdrop. We still believe strongly in the underlying fundamentals, and we'll look to see deferred projects step back in when confidence increases. This will be an area to watch as manufacturers, builders, and end users navigate negative sentiment and risk. Turning to logistics, this area has not been immune to the impacts of the tariffs. We are seeing U.S. South trucking capacity tighten as other commodities change their patterns and shipping lanes. This will settle down in Q2. Aside from some weather events in Q1, the other regions have been stable on both rail and truck capacity. In summary, we expect volatility in the markets for all operating regions for Interfor. We are well-positioned to take advantage where opportunity presents itself. I'll turn it back to you, Ian.
Thanks, Bart. Operator, we're ready to take questions.
Thank you. Rick is in shadow manner. We'll now conduct a question-and-answer session. If you have a question, please press the star key followed by one on your touch-tone phone. You will hear a one-tone pop acknowledging your request. Your request will be pulled in the order they are received, and if you would like to decline from the polling process, please press the pound key. One moment for your first question. Our first question comes from the line of Matthew McKellar from RBC Capital Markets. Your line is open.
Good morning. Thanks for taking my questions. First, for me, it looks like Southern Yellow Pine prices have been having a decent couple of months here. At an industry level, are you seeing any kind of meaningful production response on that combination of stronger pricing and maybe wanting to position for what the market looks like after higher duties come into effect?
Not that we're aware of. Matt, this is Ian, by the way. Thanks. No, we haven't really seen any moves in Southern Pine production trying to capture that. I think mills are running fairly steady, and as you know, adding hours is a little bit challenging in the South for a variety of reasons. No, we're not seeing anything from our end.
Okay. Thanks for that. What kind of finished good inventories, I guess, are you carrying at your mills today? Would they be above seasonally typical levels? With the comments around tariffs maybe delaying some shipments, do you think channel inventories and maybe SPF in the U.S. in particular are positioned any differently than they typically would be at this time of year?
Yeah. I think on the inventory side, I do not think. I know during the quarter, when tariffs were in and out, there was a bit of a delayed response. Inventory, I think we grew up to a maximum of three days over the previous quarter. During the end, toward the end of the quarter, inventories really came down. Our inventory thresholds, the internal numbers that we manage, are very in line with where we want them. We do not see any inventory in our yards that is concerning. The channel inventories are really hand-to-mouth. Everybody is keeping an eye on the risks and trying to mitigate any kind of downside on that. In short, Matt, our belief is it is extremely tight right now.
Thanks very much for the detail. I'll pass it back.
Thanks, Matt.
Our next question comes from the line of Ketan Mamtora from BMO Capital Markets. Your line is open.
Good morning, and thanks for taking my question. Perhaps to start with, can you talk a little bit about what you are seeing in demand right now, both on the repair and remodeling side and also on the new residential construction side?
Sure. On the repair remodel, the drivers, aging housing stock, rising equity, good employment gains are all there, but softening consumer sentiment is, I think, really kind of mitigating all of those and weighing on the outlook a bit. On the new residential, I mean, as in my comments, and as you know, KTM, the housing starts have actually held in there pretty well, even given the mortgage rate situation. The housing affordability and the new home traffic that the industry is not seeing or declining is concerning, but we're pleasantly surprised with how it's hanging in right now on the new home. I would say that they've done a good job of doing that and keeping that volume up there.
Yeah. No, that's fair. On the R&R side, Ian, are you seeing sort of volume sluggish at this point on a year-over-year basis? Are things a little bit slower? Are things up a little bit? How would you characterize that?
Yeah. I mean, KTM, I mean, another way to look at that would be how is our inventory and our production rates. Our operating rate last, or in Q4, I think, was around 78%. We increased it to 82% in Q1, and we're able to move our product. I think things are tight, but our operating production and our sales numbers are in sync. At this point, we're not seeing a risk. Are we concerned? You bet. For sure, and monitoring every day. Operating rate up 4% in Q1 versus Q4, and inventory is largely in sync with the production levels.
Got it. Just last one from me. We've seen a pretty meaningful pullback in Western SPF prices. We also have duties which are going to go up at some point in the back half of this year pretty meaningfully. I'm curious, Ian, as we look at kind of what's going on in housing, we've seen Western SPF prices come down. You've got duties going higher. What is your sort of philosophy or your approach to production in this backdrop?
Yeah. I mean, I think this plays to the diversity and kind of where we're located. And with 75% plus not subject to duties or U.S. trade action, it gives us comfort that our portfolio is strong to weather this type of storm that may come. I think that when you look across Canada and you think about our operations in the Southern Interior, which cut five different species and are fairly diversified, there's good strength there. And then when you kind of turn to Ontario and New Brunswick and you think about that SPF volume, could it be displaced by Southern Yellow Pine? Possibly, but there's a strong need for SPF stud volume into the market, and that's the majority of our product in Eastern Canada.
I think there's going to be puts and takes, but for our company, we feel good about the growth that we've done and the type of growth and the type of products that we have to weather these types of situations.
Got it. No, that's helpful. I'll jump back in the queue. Good luck.
Thanks, Ketan.
Our next question comes from the line of Ben Isaacson from Scotiabank. Your line is open.
Thank you very much, and good morning, everyone. Three quick questions, if that's okay. Ian, on the last call, which was mid-February, you said that you weren't counting on any support from federal and provincial governments in your business planning. A lot has changed in the last three months on both sides of the border. Can you just give us an update in terms of what is Interfor or the industry looking or hoping for from the federal or provincial governments, or have there been any pivots in the past three months, given all that's happened?
Yeah. Ben, I would say that from our view, and not KTM and others, but we're not facing government support in any kind of incentives or anything like that at all. I would say the industry as a whole, given the trade action by the U.S. against Canadian producers, has really there's an incentive for the Canadian producers to engage at a deeper level with the federal government in Canada around the softwood lumber dispute and resolution on that. At the end of the day, it's President to Prime Minister, and the best that our industry can do and Interfor can do is get aligned with solutions that work for North America.
I would say that there's discussions on that, but really, it comes down to having our Prime Minister in Canada early in his job and making sure that industry is educating him and our President in the U.S. around what a negotiated settlement might look like.
Thank you for that. My second question for you or for Rick. In the current environment, can you just talk about that 37% net debt to capitalization rate? Is it stable at current pricing? If not, can you remind us what non-operational cash flow levers there are to pull to keep that stable? Thank you.
Sure, Ben. Good morning. It's Rick speaking. Yeah. We do view the 37% leverage at the end of Q1 as temporary, just given that inventory build that we've spoken about that caused a slight uptick in our leverage. We're confident, given the progress we've made here in Q2 on inventory shipments and also working through our seasonal build of log inventories, that leverage will come down at the end of Q2. We feel really good and have confidence going forward that we can maintain stable leverage and keep lower covenant levels. Looking out beyond Q2 here, we do have other levers to consider. We've always been prudent in adjusting our operating rates going forward to match demand. That's an important lever for us to adjust to this uncertainty going forward as needed. We obviously have the tenure sales, which I mentioned already.
That's something that will provide cash flow both in 2025 and all the way into 2026 as we work to substantially complete the sale of our tenures. We also have significant value in our duties. There have been several transactions in the marketplace in the $0.30-$0.35 on the dollar range. Just a reminder, we've got over $600 million U.S. of duties on deposit. We view that as a substantial store of value if and when needed. We always have the ability to adjust our CapEx. We've been very prudent in planning our CapEx out to maintain flexibility. That's a lever we always seem to have and can pull.
That's great. Thank you. Just last question is on SPF in particular. Can you just give some color or context in terms of how is the best market doing right now versus the worst market, whether you define that on a regional basis or on an end-use basis? I'm just trying to get an understanding in terms of kind of where SPF has come from and what kind of volatility is it facing right now. Thank you.
Yeah. Ben, that's a tough one to answer on this type of call, I would say.
Sure.
In Q1, in my comments, all of our operating regions were EBITDA positive, and we continue to monitor all those. There's puts and takes, but being diversified, I mean, often I think the Pacific Northwest gets overlooked in the U.S. for us. We do have the South, Eastern Canada, and then Western Canada. Depending upon the market dynamics, we have a lot of levers and a lot of diversification in both species and geographical areas. I would say we always monitor that. We have a three-month rolling outlook that we look at every week, and we're positive at this point that all regions are running at the run rates that we need.
Perfect. Appreciate the comments. Thanks so much.
Our next question comes from the line of Hamir Patel from CIBC Capital Markets. Your line is open.
Hi. Good morning. Bart, I was just wondering with respect to European imports, I know they've been quite volatile. Do you have a sense as to if Section 232 tariffs did come in and they also applied to European supply, at what level would that sort of cut off European imports?
That's a tough question, Hamir, because it really comes down to their cost structure and where that actually goes. I think it's fair to say if you look at any producing region right now for lumber, the margins are pretty tight. If you introduce an additional cost, whether it's a duty or a tariff, I mean, there's really not a capability of any producing region to absorb that. It's either going to be an exercise of prices moving up or supply being rationalized and most likely a combination of the two of them, frankly. What I keep hearing from the European side is that they are challenged with their log costs. As the markets see higher prices, it seems to me that that just transfers right into log cost. The margin for the manufacturer is pretty thin.
I think that Section 232 affects not just the Europeans, and I think the bottom line on that is that prices in North America will increase because of it. The part I said in my opening comment is we just do not know what the supply-side reaction will need to be to make that happen. Yeah, that is the way I see that. Yeah. Hamir, that is probably a question to ask somebody that is producing in Europe. To give you more clarity, we do not, as you know. What we do know is that the European imports have moderated since their peak on a trend basis, and they are stabilizing around 3 billion board feet, which is probably, in our view, a more sustainable run rate.
Fair enough. Thanks, Ian. Just the last question I had for Rick. You highlighted potential opportunity to perhaps monetize duty deposits if you decide to go down that path. From your discussions with the counterparties that might be interested, are they only interested in a transaction involving a portion of your deposits, or do you see a path to potentially monetize the entire bucket?
Good morning, Hamir. It's pretty hard to comment on given a bunch of different factors, but we do see value in the duties to some level, whether it's all or just a portion to be determined if we went down that path or decided to go down that path.
Fair enough. That's all I had. I'll turn it over. Thanks.
Ladies and gentlemen, if there are any additional questions at this time, please press star followed by one. As a reminder, if you are using a speakerphone, please lift the handset before pressing any keys. Our next question comes from the line of Sean Steuart from TD Cowen. Your line is open.
Thanks. Good morning, everyone. Ian, on Section 232, I'd be interested to get your perspective on how fast you think this investigation's moving. The deadline for public comments was pretty quick after the investigation started. Perspective on timing, how soon this might happen before November? Just following up on the previous question, within North America, if there are tariffs applied, perspective on if there's enough tension or how much tension there is in this market with respect to being able to pass incremental tariffs along and what sort of supply response might be needed to balance the market?
Yeah. So hey, Sean, Ian here. Thanks. 232, timing, no idea. Could it be tomorrow or next week or in the fall? We have no clarity on that and no intel that you do not have. We cannot really give you an answer on that story about that, but that is what it is. I think for Interfor, though, this again reinforces the strategic importance of our U.S. platform, both in the South and the Northwest. Any kind of incremental curtailments or supply rationalizations are going to happen in the higher-cost regions, for sure. To the extent of passing on the 232, if demand is where it is at in Q1 and holds in there, and I mean, inventories are tight, and I think that will determine to the level of what we might be able to pass on on cost. I do see higher-cost mills.
You'll recall in 2024, we adjusted our portfolio, and we've divested of six operations that we did in 2024. The portfolio for Interfor is substantially repositioned. At the end of the day, as we get more clarity on how this works, we'll be able to keep you informed on that. We're prepared. We're expecting it, and we're expecting it at any time. We'll see how the industry adjusts, but we're prepared to do what we need to do.
Thanks for that, Ian. The rest of my questions have been answered.
Okay. Thanks, Sean.
There are no further questions at this time. Mr. Fillinger, please continue.
Thank you, everybody, for your interest in our company. Feel free to reach out to Bart, Rick, or myself at any time. This concludes our call. Have a great day. Thank you.
Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. You may now disconnect.