Welcome to the Interfor quarterly analyst call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Mr. Ian Fillinger. Please go ahead.
Thank you, operator, and good morning, everyone. Welcome to our Q3 2021 analyst call. I hope you and your family are safe, healthy, and doing well during this pandemic. With me today, you have Bart Bender, our Senior Vice President of Sales and Marketing, along with Rick Pozzebon, our Senior Vice President and Chief Financial Officer. Our agenda today will start off with myself providing a recap of our financial results, our strategic focus, and our improvement efforts. I'll then pass the call to Rick, who will cover off financial matters, and then we'll pass the call to Bart, who will cover off the markets. Turning to our financial results, our Q3 adjusted EBITDA was CAD 94 million. By executing our strategic plan, we are generating industry-leading margins and returns on capital.
I encourage you to look through the investor deck that's posted on our website to take note of these metrics. Turning to our strategic focus, we continue to focus on achieving greater returns on capital through our unrelenting focus on operational excellence and capital deployment. We continued on our CapEx improvement plans in every region, spending CAD 44 million in the quarter, on track for CAD 170 million by the end of the year. We continue to work hard on our capital allocation discipline to ensure the best returns for our shareholders, and we're continuing to see strong performances from our internal projects and our recent acquisition. I'm also very pleased to report that our southern team has made solid progress on the restart plan for our DeQuincy Mill in Louisiana.
We anticipate running the mill on a one-shift basis in approximately 3 months and a two-shift basis in Q4 next year. Our improvement efforts were again balanced across the company as we made progress in all regions. Our operating teams achieved higher production volumes, primarily driven by our acquisitions in the South and the Pacific Northwest region. We continued to apply our very disciplined approach to working capital by ensuring we don't build excess volume in the supply chain, and we're lean and mean as possible. Finally, earlier this week, on November second, the BC government announced the proposed deferral of harvesting within 2.6 million hectares of BC forests. The proposal deferral, if implemented, has been identified as temporary and subject to First Nations engagement, which is currently ongoing. We will require additional and more specific information to understand the potential impacts.
However, as most of you know, our operations on the BC Coast and the BC Interior account for 4% and 19% of our total lumber capacity, and our BC operations are very well capitalized and are very highly competitive within our operating regions. Lastly, we continue to have significant financial flexibility to consider a number of further capital deployment options that Rick will cover off. In closing, we are focused on maintaining the health, safety, and well-being of our employees. We continue to drive cost reductions, and we're matching our production rates to our order files. That concludes my opening remarks, and I'll now hand the call over to Rick.
Thank you, Ian, and good morning, all. First off, I'll refer you to cautionary language regarding forward-looking information in our Q3 MD&A.
The third quarter saw Interfor continue its positive operating momentum with strong performance and results delivered from across our portfolio. As Ian spoke to, this was a transformative quarter for our company, as we added 23% to production capacity through the acquisition of 4 U.S. sawmills with a strong strategic fit. In terms of third quarter operating performance, we achieved record results, producing 731 million board feet of lumber and shipping 753 million board feet. These records reflect the ongoing focus and commitment that we bring to operational excellence and demonstrate that our mills continue to operate effectively despite ongoing challenges from the COVID pandemic. From a financial perspective, Interfor generated an adjusted EBITDA of CAD 9.4 million, representing a margin on sales of 14%.
Lower earnings as compared to Q2 mostly reflect the rapid decline of commodity lumber prices early in the quarter, which then began to rebound in the second half. Profitability in the quarter was also impacted by several, mostly external, factors to our business, including elevated stumpage rates in BC, operational disruptions from BC wildfires, some inflationary pressures on wages and supplies, and CAD 15 million of one-time inventory purchase, accounting adjustments, and other acquisition-related costs. In terms of cash flow, we generated CAD 72 million from operations with an additional CAD 124 million of cash released from working capital, all totaling CAD 3.13 per share. This was driven in part by the collection of accounts receivable from higher price sales in Q2 and the drawdown of inventories as we sold more lumber than we produced.
We also completed the sale of the former Hammond sawmill site, generating CAD 40 million of cash, and ended the quarter in a net cash position of CAD 134 million, with ample available liquidity of CAD 836 million. On capital allocation, we continued to take a balanced and disciplined approach in the quarter, in line with our long-standing priorities. We invested CAD 44 million in capital improvements, focused on high return enhancements across our U.S. South portfolio. We invested $372 million U.S. to acquire the four sawmills I mentioned earlier, significantly increasing our lumber production and improving our go-forward profitability.
Last but not least, we returned $83 million to our shareholders through share buybacks, thus completing our 10% NCIB at attractive average price of $26.56 per share, or just 1.03 times book value at quarter end. Looking ahead to our capital allocation for next year, we plan to take the same balanced, disciplined, and growth-oriented approach as we have over the past year. We expect to spend in the range of $220 million-$240 million on capital improvements, largely focused on growing and optimizing our U.S. South platform, and we've also just announced the renewal of our share buyback program to purchase up to 10% of our public float over the next 12 months.
To wrap up, we've exited the third quarter with a significantly stronger and even better positioned business, yet still have ample financial capacity for further growth in line with our fundamental commitment to capital discipline. Our focus looking forward is to continue enhancing shareholder value through disciplined execution of our strategic plan as we grow and optimize our business while generating industry-leading returns on capital. That concludes my remarks. I'll now hand the call over to Bart.
Thanks, Rick. Okay, I'll give my Q3 2021 market outlook comments. After a volatile Q2, lumber markets stabilized in Q3 and entered Q4 with positive momentum. Market fundamentals remain intact. Solid housing starts and permits. Interest rates remain at historical lows. Household balance sheets are strong. Housing stock average age continues to increase. End-use sectors show strong participation this quarter. New home construction continues to be robust, again, with solid housing starts and permits year to date. Repair and remodel has reset, with lower lumber inventories, more attractive pricing, and a reengaged customer. Industrial and non-residential are stable. On the export side, participation has increased. We haven't seen that for some time. Our Japanese business has always been consistent and supportive, and in Asia, with more competitive pricing, shipments increased throughout the quarter.
No markets are without challenges, and looking forward, we see supply chain as an area requiring more attention. Within North America, truck availability remains tight, resulting in slightly longer lead times within some lanes. Rail service has been consistent, and we have great support from our Class I carriers. On the export side, port congestion, container availability has limited our participation to an extent. Over time, all of these areas will settle down. However, we expect the current situation to remain through Q4 and into 2022. In Q4, we expect seasonality to have a slight impact on lumber markets. However, early indications are that our customers' order books are healthy going into Q1 and Q2. Therefore, our expectation is for robust, albeit volatile, lumber markets to continue into 2022. I'll leave it at that and pass it back to you, Ian.
Thanks, Bart. Thanks, Rick. Operator, we're ready to take questions at this time.
Thank you. As a reminder, to ask a question, please press star one on your telephone keypad. Again, that's star one to ask a question. Please stand by while we compile the attendee roster. Your first question comes from Sean Steuart from TD Securities. Your line's open.
Thank you. Good morning, everyone. A few questions. Ian, we've seen recent M&A transactions in U.S. South, arguably at lofty valuation parameters. Can you give us some updated thinking on the opportunity set there, what valuations are looking like in the region, how that affects your bias for continued growth in that region?
Yeah, Sean, I agree with your opening comments there. I would say, Sean, that, you know, the—for us, excuse me, for us, the capital program that we've laid out, especially bolting on our new mills in DeQuincy, really got us internally focused for the next period of time. And so from a timing perspective, I think that the, you know, acquisition pipeline at this point is a little bit too expensive in the South, and I feel good that, you know, we've got our, you know, project charter and all of our capital projects lined up for the next few years. So I really see us concentrating on that and onboarding, you know, the mills that we bought in the, in the, you know, short, midterm, and then getting to DeQuincy up.
So for us, you know, the planning and advance, you know, capital project pipeline, along with the acquisitions we did, I think we're in good shape to kinda, you know, monitor possible acquisitions in the South. But, I think it's an awkward period of time after-... I'd say that, Sean, and that helps you out on, you know, your forecast view from the, you know, short to midterm.
It does. Thanks for that. And following on that, with respect to the discretionary CapEx program, we've seen some of your competitors deferring some of the spending based on equipment backlogs, contractor availability. Any updated thoughts on the 2022 CapEx budget? Presume it's still gonna be a busy year, but has thinking on the pace of spending changed at all in light of some industry headwinds?
No, Sean, the, you know, it was a few years ago, and, you know, you've been covering this with us for, so you'll recall we had, you know, phase one, phase two, phase three. And so I believe it was around 2017-ish when we, you know, implemented that. So we really did have a five-year capital plan until our project team has been able to engineer in advance what you need first before you can order any equipment and then line up the vendor commitment. So from our perspective, it's what we're presenting, we feel is accurate. Now, having said that, you know, there could be something that we don't see, which is, you know, possible. But I would say that we're solid on what you're seeing in our press releases and in our material that we're putting out.
I wouldn't adjust it at this time.
Okay. That's all I have for now. Thanks very much, Ian. I'll get back in the queue.
Thanks, Sean.
Our next question comes from Mark Wilde from Bank of Montreal. Your line's open.
Thanks. Morning, Rick, Ian, Bart. You know, I do wanna just open by saying, you know, I'm really impressed with the thoughtful job you guys have done on capital allocation this year, kind of across the spectrum, whether it's the special dividend or the repurchases and the acquisitions. Moving on from that, though, can you just can you give us a sense for the timing ramp up at DeQuincy? It does seem, first of all, like it's coming a little earlier than you'd initially indicated. And then what's the just cadence from a kind of a financial standpoint in terms of when the mill would turn profitable? And finally, kind of costs and expenses of the restart and the net effect of those after considering any incentives you might be getting from the state of Louisiana.
For sure. So, I just wrote this down. So from a timing, Mark, you're bang on. It is advancing, you know, quicker than we had previously outlined. It was a bit of a, you know, a best estimate on hiring, but, we currently actually have the first shift substantially hired already, even though we haven't turned the mill at this point. So that's, t hat gives us a huge level of confidence. We had very welcoming response in the community and from former employees that wanted to come back to the mill, after we purchased it. So we were very, very surprised that we had that very strong response, and that was, t hat's great. And yeah, we do anticipate, you know, running and testing equipment within the next four weeks at that mill.
So if you can imagine, we've gotta go through a lot of restarting protocols, but our first load of logs actually rolled in earlier this week, so everything's lining up very nicely for a Q1, you know, one shift there. And of course, we'll be hiring a second shift all the way along. I think we're being a bit conservative, you know, on the Q4, but we don't wanna change that at this point, but we're hopeful that the efforts that the southern teams put in may bring that up sooner. But I, I, we don't wanna commit to that at this point. The investment cost to get the mill back operational is under $10 million.
So very low cost, very, you know, investment as part of that acquisition and, you know, for 200 million board feet, that, you know, is the capacity of that mill. So Rick, as far as profitability goes, you know, we can, we can guess, Mark, but, you know, jump in, Rick, if you think I'm off base, but one shift, you know, I would expect, you know, with trend margins, you know, would probably be, you know, a break even on, on a trend basis. And then any incremental hours over the one shift, I would say, just based on past experiences, that starts to add, you know, some value. I don't know if that's fair or-
That's it, Ian, for sure. And then in terms of state incentives, Mark, we don't have it quantified exactly yet, but I would say it's on the same level as a greenfield would receive in the state, so quite significant.
Okay. All right. That's helpful. And then I was just struck when I went through the MD&A, that your southern lumber production in the third quarter was only up about 24 million board feet, which seemed kind of small to me, considering you added 2 sawmills for most of the quarter. Is that because of downtime, or did you have kind of issues with labor and supply chain? Just trying to understand why the relatively small quarter-to-quarter gain when you had such a significant addition to capacity.
Yeah, for sure, Mark. I'll hit it, and then Rick can jump in if I missed anything. But I would say there are two major factors. One was the wet weather that hit the South, and I don't think we're the only ones, but in some of our regions, you know, us and competitors got hammered pretty hard, and that caused some disruptions. COVID definitely took an impact on some hours. You know, it hasn't been behind us. So we're still, you know, kind of handing out on some shifts on that as that works through.
And then the capital deployment, particularly at Eatonton and Baxley, so both two mills in Georgia, took downtime as we had to tie in different components and, you know, decks and flow projects to, you know, bring those projects to their completion. But so that would be the, you know, the top three: weather, COVID-related, and then capital project upgrades.
Okay. Last one for, last one for me, Ian. I'm just, you know, kind of talking with some of the big private timberland asset managers. It does seem that there's a little more of a pickup in southern log prices than is showing up in TimberMart-South or even in some of the public company reporting yet. I think because there's some lags in there, and I'd like to know if you agree with that. And then also just give us a sense of, you know, how you thought about southern log prices, you know, as you've built your southern position over the last 10 years.
I'm sure you looked at these log prices and knew that they were quite low by historic terms, so you probably didn't underwrite at the pricing levels you've had over the last, you know, 10 or 15 years itself, but if you could put a little color on that.
Yeah, for sure, Mark. So we subscribe to all that benchmarking info, and the average log cost increase, we haven't seen that. You know, we're below that increase, so we're, you know, pleased with our log supply, relative to the industry average. But I will note that, you know, there's a couple of things. The log prices on the coastal regions in South Carolina and Georgia, we did see, and we have seen hiccups in those areas. So, you know, when we blend our log costs, you know, we're below the average increase, but we do have a couple of, you know, operations on the coast that have seen, you know, a slight increase through competition or weather on the coast. But, we're pleased with it.
It continues to be, you know, one of, you know, the best regions when it comes to log costs and, you know, just gives us that confidence that it's the right area to invest. And so, that's probably the best I can give you as an answer on that, Mark, at this point.
Okay. All right. I'll turn it over. Thanks, Ian.
You bet.
Again, to ask a question, please press star one on your telephone keypad. Our next question comes from Paul Quinn from RBC Capital Markets. Your line's open.
Yeah, thanks very much. Good morning, guys.
Good morning.
Hey, you made some significant acquisitions, you know, during COVID, which might have compromised your normal due diligence. Just wondering if there's any, you know, some surprises to the positive or negative that you've seen with the GP, the former GP and WestRock sawmills?
So, so Paul, we did not compromise our due diligence at all. We had as intense a focus on that as we have before. And in fact, you know, I would say that we kind of improved with every deal on due diligence. So no, the surprises have been around positive surprises. So these acquisitions were not independent until when we bought the Summerville operation off WestRock. Very well run, great infrastructure, being part of that company, great people. Wasn't any spending that needed to get done that, you know, for safety or other things that, you know, you sometimes have to do when you're maybe taking an independent mill over. Safety was great. People, plants are great. Management, leadership was great.
And I can say the same thing for the GP mills. All of the ones that we've picked up have been. We've been positively, I wouldn't say surprised, but we've just been positive impacts to everything. And again, professionally run organization, great standards, great procedures and policies and teams. And you know, we've been able to retain all key leaders. It hasn't always been the case. When you're bringing you know, two companies together, sometimes you lose good people, and we are just very pleased that we've retained all of the key leaders. They're embedded into our company, and we continue to work very closely with them, and we're sharing best practices. We've picked up best practices. So, Paul, this so far has gone very well for us, and that's been a very pleasant, I wouldn't say surprise, but benefit.
We'd hoped that, and we're realizing it now.
Sounds pretty positive on the labor side. What about, you know, labor's been a consistent problem in the U.S. South and probably other areas as well as things straighten up. Any other issues on the labor side? You know, is that situation getting better or worse or, you know, how do you view that going forward?
Yeah, Paul, I don't think it's changed much, you know, over the last while, but, you know, we haven't had... other than, you know, some COVID related, you know, when one or two people might get it, then you've got to quarantine a few people. You might lose a shift here and there, but, you know, the normal, you know, challenges or, you know, that I think cause turnover in staff still exist. So, you know, no material changes, Paul, that I can think of on labor, Rick , if you've got anything to add to that.
I wouldn't say internally, but externally, obviously some challenges around trucking capacity, and labor there. But, other than that, things have been going well.
Okay. Then just on, you did a great job detailing your log concentration expectations in the U.S. So just, wondering what you're thinking about the Pacific Northwest and B.C. going forward.
Yeah. Well, Pacific Northwest, we have seen some increases as the fire salvage, you know, volume, you know, starts to decrease. But, you know, on a trend basis, looks good. We did have obviously benefits, which is great for diversification in, in our geography to, participate in those, you know, reduced log costs in the Pacific Northwest. But we're, we're seeing them come back to trend. You know, BC obviously, you know, stumpage has really, you know, impacted many people. But we do see as, as I know you, as I know you know, Paul, that, that we, we see that stumpage decreasing coming into 2022 in the first quarter, so.
And then just lastly, just on softwood lumber file, we got the rate doubling towards the end of the year here or well, the expectation anyways. Any movement on that file or, you know, especially in light of, you know, BC government's announcement on old growth?
Hey, good morning, Paul. It's Rick. On that file, we haven't seen any movement. We'd like to see some, but we haven't yet. The timing is unknown at this point.
All right. That's all I had. Best of luck guys.
Thanks, Paul.
Thanks.
There's no further questions at this time. I would now like to turn the call over back to Mr. Ian Fillinger for closing remarks.
Thank you, operator. I'd like to thank everyone for dialing in and participating in our update call this morning and your interest in our company. If you have any further questions, please feel free to reach out to myself, Bart, or Rick at any time. Be safe, take care, and thank you again. Goodbye, operator.
This concludes today's conference call. Thank you all for joining. You may now disconnect.