Good morning, ladies and gentlemen, and welcome to the Interfor quarterly analyst conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. 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, May 5th, 2023. I would now like to turn the conference over to Ian Fillinger. Please go ahead.
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. Our agenda today will start off with myself providing a recap as usual of Q1 2023 and our strategic positioning. I'll then pass the call off to Rick, who will cover off Q1 financial results, and then Rick will pass the call off to Bart, who will cover off markets. First off, I'd like to call out a couple of key milestones for Interfor that we're very proud of. This quarter we marked our 10-year anniversary of one of the most important developments in Interfor's history when we made our first move to the U.S. South.
Before these acquisitions, we were a Western-based company. Over the past decade, we have become a major player in the Southern lumber industry. Today, we have a Southern portfolio of 13 mills across six states. In just a decade, Interfor has become the third-largest lumber producer in the region as part of an evolution that has made us one of the largest lumber producers across the continent. Our vision 10 years ago was about operating in the South and building a business there for the long term. Now the region accounts for approximately 45% of our total lumber production. Tomorrow, May 6th, marks the 60th year of our company's founding. From the beginnings as a single sawmill, we've built a company with more than 30 operations located in all the key fiber and lumber-producing regions across the continent. Our history is one of vision, focus, and discipline.
Reaching our 60th anniversary is a testament to the tenacity and commitment of our people through the years and the ability of the company to weather the tough times as well as identify and seize opportunities. Now turning to this past quarter, we generated an EBITDA of $26 million, significantly up when compared to the previous quarter. Our lumber production increased around 18% quarter-over-quarter due to our curtailments easing to match demand, along with our first full quarter of production from our New Brunswick operations. Quarter-over-quarter, we achieved performance metric improvements in conversion costs, net log costs, and shipment volumes. Our New Brunswick operations contributed positively to our financial results. We continued to advance our key capital projects in the South. We also completed our planer upgrade project at Cassiar, BC.
With respect to the outlook, we remain positive on the medium to long-term outlook for demand as demographic trends and years of under-building will continue to provide strong tailwinds. By focusing on the controllables, the Interfor team has used the recent downturn well to accelerate the integration and the operating techniques in our Eastern Canadian region to ensure we're stronger than we've ever been before. On the supply side, we believe that SPF volume will continue to come out of the BC industry in a meaningful way. To sum things up before I turn it over to Rick and Bart, our guiding principles have always been operational excellence and capital allocation discipline. These principles have ensured that we are well set up to withstand the current markets and are very well-positioned to benefit from the stronger markets we see ahead.
With that, I'll turn the call now over to Rick to run through the financials.
Thank you, Ian. Good morning, all. Please refer to cautionary language regarding forward-looking information in our Q1 MD&A. Before speaking to the Q1 financial results, I'd first like to provide an update on our growth into Eastern Canada through two acquisitions last year. Overall, we continue to be very pleased with the strategic expansion and regional diversification, which has substantially increased our production of SPF lumber. This positions us well to benefit from the ongoing decline in supply of SPF lumber from British Columbia. We continue to make solid progress on the integration of these operations and are on track to fully realize the $30 million of identified annual synergies by the end of this year. These acquisitions contributed to Interfor achieving a record level of lumber production in the first quarter with over 1 billion board feet produced.
This record is despite taking temporary market-related and project-related downtime in the quarter, equating to over 100 million board feet of production. Turning to the financial results, the $26 million of adjusted EBITDA generated in Q1 represents a significant quarter-over-quarter improvement. Despite key benchmark prices being lower on average compared to the prior quarter, Q1 earnings benefited from an increase in sales volume combined with substantially lower unit costs as log costs continued to adjust downward across all regions to better align with the current lumber price environment, while conversion costs improved on a unit basis driven by a substantial reduction in temporary market-related curtailments quarter-over-quarter. These lower costs helped drive a $22 million release of the valuation reserve recorded against log and lumber inventories in the prior quarter.
In terms of cash flows, the typical season, seasonal build and working capital led to a cash outflow of $85 million from operations, while $64 million was invested in capital projects as we continue to make solid progress on our strategic capital program. From a balance sheet perspective, we ended the first quarter in a comfortable position with net debt to invested capital of 31% and available liquidity of $321 million providing ample flexibility. We would expect our leverage position to fall meaningfully over the next few quarters as we draw down the seasonally high working capital balance and collect on pending income tax refunds of nearly $100 million, with all else being equal.
Looking longer term, it's worth noting again that Interfor's lumber duties on deposit totaled $521 million at quarter end, representing about $10 per share on an after-tax basis. Regarding capital allocation looking forward, Interfor's focus on a balanced approach remains unchanged in combination with maintaining conservative leverage on our balance sheet. Ultimately, our capital allocation decisions will be made with the objective of maximizing returns on capital for our shareholders over the long term. We currently anticipate capital expenditures of $210 million for 2023, of which the majority relates to discretionary projects with attractive returns. To wrap up, our significant quarter-over-quarter earnings improvement was a step in the right direction, one that we are well positioned to build upon going forward. That concludes my remarks. I'll now turn the call over to Bart.
Thanks, Rick. I'll provide comments on our market outlook for Q2 2023 and beyond. The fundamentals remain intact and positive for the underlying demand for lumber. North American housing market is underbuilt and needs more supply, especially if you consider the demographic reality that the cohort of first-time homebuyers is increasing. The average age of a home is 41 years in the U.S., the oldest it's ever been. This is driving continued repair and remodel activity, but also an elevated number of replacement construction builds. Home equity remains solid, putting homeowners in a position to invest in their homes. All good things when you think about the demand for lumber. In the near term, high interest rates continue to negatively impact overall affordability, which will continue to suppress the overall housing starts numbers.
This demand for houses is not going away, but rather a deferral to when affordability improves, which we all know it will. On the repair and remodel end-use sector, with homeowners remaining in place, the incentive is to consider home improvement projects. We've seen this with our box store comps, which have been strong year to date, and outlook remains favorable for the balance of the year. While the reality is that lumber demand has adjusted downwards year to date 2023, the situation has stabilized, and the outlook across our end-use sectors is more positive than negative. In particular, I'd like to share a couple of product-specific insights. I-joist demand, often seen as a barometer of new home construction, is improving. Our network of distributors is reporting increased demand and have increased resupply of inventories.
Our number one position in stud production, offered by three of our four producing regions, puts us in a unique position on this product line to see changing market patterns and capture the inevitable demand from the new home sector. An example, we've seen notable increase in stud demand reflecting early improvements in single-family construction. Like studs, we're the largest producer of MSR in the world. MSR is used primarily for truss applications, and like I-joists, are often seen as a barometer of new home construction markets, both single and multifamily. The demand for MSR has improved recently and is an encouraging sign for the broader market. On the supply side, there have been many curtailments, both temporary and permanent, that have brought some balance into the marketplace. Mill-level inventories at this stage of the year are in a really good position.
We've not seen the logistics issues that we did last year at this time. Wood has flowed to the market consistently. In terms of in-market inventories, always a bit more difficult to read. We understand they are adequate to on the low end, depending on the region and the customer type. Recently, I attended the Montréal Wood Convention here in Montreal. With record attendance over 1,100, I was able to connect with our customers, both from the U.S. and Canada. Our recent expansion into Eastern Canada makes Interfor a strategic supplier for almost anyone attending this show. The mood was upbeat and encouraging, with many comments supporting an improving market, especially on new home construction.
Overall, while the near term has been impacted by inflation and interest rate movements, we feel the fundamentals will once again rise to the forefront and set us up for an overall improving trend going forward. With that, I'll turn it back over to you, Ian.
Thanks, Bart. Operator, we're available now for questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the one on your telephone keypad. 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. One moment please for your first question. Your first question comes from the line of Sean Steuart from TD Securities. Your line's now open.
Thanks. Good morning, everyone. A couple questions. First, with respect to the CapEx guidance, which is tempered a little bit, I think the wording was partly being conservative with markets having declined as much as they have, and part of it is equipment delays. With respect to the latter, is that one piece of equipment or more of a generic constraint on delays? If you're breaking it between the two, how much of the more conservative CapEx is just being cautious around the balance sheet and how much is equipment delays?
Hey, Sean. Thanks for the question. I'll tackle that. It's more of a deferral than. Just to be clear, we haven't canceled any projects whatsoever, so there's no, you know, there's no dropping the projects that are important for us. It's more just shifting schedules, and more on that than on equipment delay. It's just shifting it in our project chart, you know, a couple of months here or there and moving the parts around. As you know, we have our own internal CapEx team. We're not tied to turnkey projects, so we have great flexibility with, you know, with our CapEx team to do these type of things. This is what we've worked hard on for almost 17, 18 years to build.
More on that, Sean, I'll say that a major equipment supplier to the industry was indicating recently that they had a two-year backlog of an order file, and they haven't seen any projects canceled. I think that's, you know, an indicator that really shows the confidence of the industry that, you know, the market in the medium to long term is favorable. I took it that way, but we're in good shape. We're just, you know, using our flexibility and nimbleness that we've built more than anything.
Thanks for that detail, Ian. Just follow up for Bart on current lumber market conditions. You know, everything you're saying is consistent with what a lot of your peers are saying with respect to inventories through the channel being normal to maybe slightly below normal. We're seeing at the margin better news from U.S. home builders, housing starts that are coming in maybe a little bit better than expected. I guess just more context on why we're lacking traction here and, you know, European imports continuing, how much of an issue is that? Have you been surprised there haven't been more closure announcements to this point for higher cost capacity? Any issues on the supply side that you think are constraining prices at this point?
Okay, a lot in that question. I guess first I'll start off is that, you know, from the demand side of the equation, we are seeing some improvement. I mean, repair and remodel is always, I think multifamily, although, you know, volatile, it's still very, very decent. It's that single-family home construction that's the one that we wanna keep our eyes on. Certainly from what we hear from the builders and from our customers, you know, things are improving there. We are waiting for that and being patient, you know, for that to translate into more demand for the mills.
I can tell you on the import side, a lot of what we saw in the 1st quarter was a bit of a hangover from, I think, what they were planning on and producing towards in the 4th quarter. A lot of that wood finally made its way to market, I think, in 1st quarter, and the information that I've received is that we can expect a fairly significant decline in what might come our way in 2nd quarter. That will help, but at the end of the day, I mean, imports are, you know, they're relevant, but they're not significant in my view, on, in terms of the total supply. I do believe the inventories in the marketplace are on the lowest end.
I think that the situation is very different in the north from a logistics standpoint compared to this time last year. you know, I would expect that as this demand sees its way through the through the building cycle, that that tension should be received fairly quickly at the mills. I'd say at this stage, patience is is the virtue for sure.
Got it.
I'll stop there.
Okay. thanks for that, Bart. that's all I have for now. Thanks, everyone.
Okay. Thanks, Sean.
Thank you. Your next question comes from the line of Paul Quinn from RBC. Please go ahead.
Yeah, thanks. Morning, guys. Just wondering, we're seeing a big premium on Southern Yellow Pine versus SPF. It seems to be narrowing slightly, but it's still around $150 and, you know, that's way off the typical sort of $60, $70. What do you make of that? You know, how do you think that gap closes? Is that a Western SPF coming up or is that a Southern Yellow Pine coming down?
Well, hey, Paul. Ian here. I'll take a stab at it and Bart maybe you can jump in if I missed anything. Yeah, the gap is definitely unusual. We do see that or our view is that, you know, what the previous call or question was, is that, you know, there was obviously European imports have gone up over, you know, the last few quarters. We do actually see or have been reading that that should taper down pretty significantly is one research firm is providing that view. I also think that the SPF volume that, you know, was announced in Q4 and Q1, both temporary and permanent, I mean, that volume did not come off the market in our view.
The wood still, you know, was processed through the back end of the mill and put on trucks. In the, you know, in the permanent curtailments, our view would be that, you know, that volume gap really isn't gonna start showing up until Q2, Q3. You know, there may have been excess volume on the market in Q1 that's not gonna be there in Q2, Q3. I think it's a combination of European imports still, you know, having a bit of a hangover on it, and then also supply side didn't really, you know, taper down in Q1 and probably forced that gap. I don't know, Bart and Montréal were sort of passing calls back and forth.
Rick and I are in Vancouver, so Bart, is there anything you'd like to add to that?
There's a couple things. You know, I think the differential you have to kind of look at Western SPF and Eastern SPF. There's some differences there. Eastern has held up better than I would say the Western SPF side. Really when I, when I look at that and I see the volatility in the market and the kind of focus that's been put on inventories, you know, understanding that Ponderosa Pine, that market is, you know, 85% serviced by truck shipment. It's fairly quick turnarounds. The lead times before you get the wood is a lot quicker, you know, well within when you would have to pay for that invoice.
Whereas, you know, from the, let's say the BC Interior making its way to market, you're talking about, you know, a 3-5 week sort of lead time. I think in this particular market right now, that's relevant. The other one is on the repair and remodel. I mean, the big trader market in the south. I think that, you know, there has been some decent activity in that end-use sector that perhaps, SPF hasn't quite enjoyed to the same degree. But over time, we'll look at that gap to close and, you know, it's hard to predict which way it'll go, but let's hope the SPF moves up towards the Ponderosa Pine.
Okay. The other thing that's confusing me a little bit is, you know, we're seeing a little bit of a recovery here in OSB prices, which have got, you know, more leverage to new home construction than lumber. You guys signaled that, you know, I-joist demand is starting to pick up in Q1, and warehouse records those comments. Why are those areas growing so much and lumber is still stagnant?
Go ahead, Bart.
Okay. That's a, that's a tough one, Paul. You know, I think that I-joists are directly correlated to new home construction. I mean, it's used for that end use, whereas, you know, dimension lumber is used in so many different things. You know, it certainly is a portion of new home construction, but it's used in all the end-use sectors. I think I think that on the I-joist side, I can tell you from our, from Soucy and Berea and from our vantage point, very responsive to the demand seen from our distributors.
Inventories have been managed well and now we're starting to see those kinda come back. There's a bit of a lead time, you know, with the I-joists to get them into market and ready to respond. Maybe they're at it a little bit quicker and, you know, I think we'll see that activity start to move its way towards dimension lumber as we go through the quarter.
All right. Solid answer, Bart. Thanks, guys. Good recovery. Best of luck.
Okay. Thanks, Paul.
Thank you. Your next question comes from the line of Roshni Athaide from BMO Capital Markets. Your line is now open.
Hi. Good morning.
Morning.
Quick, just a quick question for you first. You know, you mentioned the tax refunds. I was just wondering if you had any idea of timing on that front.
For sure, Roshni. Ultimately, it depends on the tax authorities, but we're pushing hard to get them back as soon as possible. We currently anticipate about 20% of the balance in Q3 being received and the rest in Q4, but certainly could see some acceleration of that timing.
Okay, great. Then also, do you have any update on the monetization of the BC tenures? You know, any way to quantify them? Any updates there?
Yeah. Ian here. You know, it's a work in process. We've got good solid interest, you know, from a number of parties in the tenure. It's a, you know, a work in process as we're getting those. There's term sheets that have been signed and, you know, getting those to the next level takes some time. We don't have a timeline on that, and we really can't provide anything solid from a modeling perspective. You know, we can let you know that this is, you know, right up in our, you know, top five things in our company that we're putting a full court press on.
You know, we'd like it to go sooner but, you know, there's stakeholders, you know, that have to also, you know, follow a timeline and a process. We'll just keep working on it and keep reporting on it every quarter.
Okay. fair enough. That's all I had. good luck next quarter. Thank you.
Thank you.
Thank you.
Thank you. Your next question comes from the line of Hamir Patel from CIBC Capital Markets. Please go ahead.
Hi, good morning.
Yes, good morning.
Ian, I was just wondering with the weakness we're seeing in pulp markets, is that starting to weigh on, you know, maybe some of the chip pricing that you see in Eastern Canada?
No, mir, we're not, we're not seeing that. In fact, you know, in most of our regions, the prices have been solid and in a, in a few cases have actually improved, on residual pricing through the curtailments that the industry has taken. It's put a bit of a stressor in areas that we operate on. So no. To answer your question, no. In some cases, we've seen price appreciation, just given our locations and the mills that we're partnered with for customers.
That's interesting. Ian, with respect to stumpage, I know I think New Brunswick has some large decreases slated to take effect. What kind of level moderation are you expecting, you know, in perhaps New Brunswick, Quebec and Ontario, and then also in the BC Interior as you look towards Q2 and into Q3?
Yeah. I think, Rick, maybe you've got some numbers or data or, at least some information you might wanna share on that.
Sure. Thanks, Ian. Good morning, Amir. Yeah, in terms of the BC Interior, we still expect some moderation of stumpage over the next couple quarters, let's say in the CAD 5-day dollar range per quarter on a cubic meter basis. If you look at New Brunswick, you're right. This new stumpage system is coming to effect this quarter, and we do expect some reduction to bring log costs down more in line with fair market value and based on lumber prices. That could be, let's say anywhere in the CAD 10-15 dollar range on a cubic meter basis in this next quarter versus last quarter.
Great. In Ontario and Quebec, any sort of moderation there?
No, Ontario should be relatively flat. It's stumpage system is very quick to react to lumber prices. Quebec should be relatively flat as well.
Great. That's all I had. I'll turn over. Thanks.
You're welcome. Thanks, Amir.
Thank you, Mr Fillinger. There are no further questions at this time. Please proceed.
Okay, just to wrap up, thanks everybody for your time this morning and the interest in our company. Please feel free to reach out to any one of us if there's any follow-up questions. Thanks. Have a great day.
Thank you. That does conclude our conference for today. Thank you all for participating. You may now disconnect.