Thank you, operator. Welcome to our Q1 2021 Investor Analyst Call. Firstly, I would like to say that 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 strategic priorities and key themes. I will then pass the call on to Rick, who will cover off financial matters, and then I'll pass the call off to Bart, who will cover off the markets. Turning to our strategic focus. We continue to focus on achieving greater results on capital or returns on capital through our unrelenting focus on operational excellence. We continued our CapEx improvement plans in every region.
We have made considerable progress on our multi-year CapEx program since 2017, and we are hitting our stride on it across a number of multiple projects. We continue to work hard on our capital allocation discipline to ensure the best returns for our shareholders, and we are pleased to have welcomed our latest sawmill acquisition at Summerville, South Carolina, to our Interfor family. The integration has been seamless and gone extremely well, and we're very pleased. The transaction closed on March 12th. Our improvement efforts were again balanced across the company as we made progress in all regions. Our operating teams maintained their production volumes quarter-over-quarter, as COVID and capital improvement projects were again addressed and completed. Our conversion and overhead costs both continued to trend positively during our ongoing cost control and capital spending programs. However, log costs in British Columbia continued to climb upwards.
Our capital spending program continues to advance forward as we continue to modernize all of our operations, improving not only our operating costs, but also our value extraction from logs. Last quarter, we spent CAD 29 million to improve our plants across all regions, and yesterday, we announced the additional spending on high payback projects at our Castlegar, BC mill and our Perry, Georgia mill, combined CAD 70 million. Working capital and its impact on cash flow continues to be a key focus area for us. We implemented a new disciplined approach last year by better matching market demand to both our lumber and log inventories and our operating schedules. This means that we don't build excess volume into the supply chain, and we're as lean and mean as possible. We also released our annual ESG report, which has been very well received.
We have received positive rating increases from several agencies so far. I encourage you to look through this fulsome report, which addresses multiple stakeholders such as investors, customers, employees, First Nations, and the communities that we operate in. Turning to our financial results, our Q1 adjusted EBITDA was very strong once again, coming in at CAD 392 million. Our lumber margins were also very strong, and we continue to focus on efficiency and cost across the entire company. Lastly, we have significant financial flexibility to consider several capital deployment options, which Rick will cover off. That concludes my remarks, and I'll now hand the call over to Rick.
Thank you, Ian, and good morning, everyone. Before getting started, I'll refer you to cautionary language regarding forward-looking information in our Q1 MD&A. As Ian mentioned, Interfor generated record adjusted EBITDA of CAD 392 million in the first quarter, representing a margin of 46% on sales of CAD 849 million. This is the third successive quarter of setting records for sales and EBITDA, driven by the exceptional lumber markets. We realized an average price of CAD 1,143 per 1,000 BF in Q1, which is 36% higher quarter-over-quarter and 93% higher year-over-year. This improvement was driven by lumber demand outpacing industry-wide production capacity without a surplus of inventory to act as a buffer. We produced 687 million BF in the quarter and shipped 97% of it.
Our lumber inventory level ended the quarter at approximately the same volume we held one year prior. EBITDA margin per thousand board feet was CAD 589 in Q1, up from CAD 364 in Q4 of last year. On this metric, Interfor continues to rate highly against other publicly traded lumber producers. This reflects our ongoing operational improvements and capital investments, as well as our high concentration of operations in the U.S., where log costs remain attractive. In terms of cash flow, we generated CAD 378 million from operations before working capital, amounting to a record CAD 5.73 per share. There was a CAD 92 million dollar build in working capital during the quarter, most of which was the impact of higher lumber prices on accounts receivable.
Cash flow benefited from a lag in when cash tax installments are due, as we now utilized all historical tax loss carryforwards. We recorded CAD 83 million of current taxes payable for Q1, yet only paid CAD 8 million in installments. Cash tax installments for our U.S. operations will be significantly higher in Q2 as we begin to make regular quarterly installments going forward, while cash tax installments for our Canadian operations will remain minimal for the rest of this year, with payment of 2021 taxes not due until February next year. Our capital allocation in the quarter was true to our previously communicated priorities. We invested CAD 19 million in discretionary capital improvements, focused on the major rebuild of our mill at Eatonton, Georgia, and completion of our new kiln at our mill in Adams Lake, B.C.
We invested CAD 74 million to acquire the sawmill in Summerville, South Carolina, to grow our platform in the U.S. South at an attractive valuation. And last but not least, we purchased CAD 20 million of Interfor shares at an average price of just over CAD 26 per share, which is attractive relative to book value and the current market price. Even with this multifaceted capital allocation, our balance sheet strengthened further, ending the quarter in a net cash position of CAD 236 million, with available liquidity of CAD 944 million. We don't have any significant debt maturities until 2024, and our softwood lumber duties on deposit with the U.S. government totaled $143 million at quarter end, which is mostly off balance sheet.
Our capital allocation priorities going forward remain unchanged as we focus on growing our business while consistently generating attractive returns on capital employed. We'll continue to prioritize investment in our existing operations to grow production and enhance margins. We'll continue to seek out lumber-focused acquisition opportunities with discipline around valuation, and we'll also continue to opportunistically purchase Interfor shares. In addition, we're actively evaluating a further return of any surplus cash to our shareholders, while at the same time retaining enough flexibility to complete our capital plans and execute on M&A opportunities. To wrap up, our first quarter earnings and free cash flow were both exceptional. We also allocated capital successfully on several fronts, enhancing Interfor's path of continued growth and generating attractive returns for our valued investors. That concludes my remarks. I'll now hand the call over to Bart.
Thanks, Rick. Good morning, everyone. I'll provide some comments on the market. The macroeconomic indicators are supporting continued confidence in our markets. Fiscal stimulus, job growth, and diminishing risks of COVID are encouraging spending, particularly in relation to new home construction and repair and remodel. U.S. housing starts are trending positively, repair and remodel spending continues to grow, all supporting an overall increase in the demand for lumber. The North American lumber markets remain extremely active. The sawmills in North America are operating at effective capacity. Imports are forecast to grow in 2021, however, robust traditional markets and logistical challenges will temper that forecasted increase. Either way, at less than 4% of total North American demand, we don't expect imports to be a factor. In terms of exports, overall, our volumes continue to be under pressure. However, we expect improvements as we progress through 2021.
In particular, we're encouraged by the support we are seeing from our Japanese market for our coastal, B.C. Interior, and Southern Yellow Pine lumber products. For China, we are maintaining our presence and look to see this market improve through the year. With increased demand and stable supply, lumber inventories in North America remain at historical lows. Since this time last year, the market has provided limited opportunities to build inventories, and in fact, we continue to see inventories pushed to critical levels. Even if there was an opportunity to build inventories, distribution channels would be reluctant at current market prices. We expect this scenario to exist through 2021 into 2022, as such, expect volatility in pricing with little to no buffer in inventories. Logistics has been a challenge of late. We are managing, however, it seems every week brings new challenges in different regions.
At present, all of our regions are managing to get what they need, whether rail car or truck shipments. It just takes a bit longer. To be clear, we are managing with no significant inventory builds and expect logistics to be challenging through the balance of the year. Overall, we see strong market fundamentals that will elevate lumber demand in Q2 and beyond. We are expecting price volatility as markets adjust to high prices, seasonality, and supply chain risk. I think I'll stop there. With that, I'll turn it back over to you, Ian.
Okay, thanks, Bart. Operator, we're ready to take questions from our analyst group now.
At this time, I'd like to remind everyone, in order to ask a question, press star one on your telephone. To withdraw your question, press the pound key. We'll pause for a moment to compile the Q&A roster. Your first question comes from Hamir Patel from CIBC Capital Markets.
Hi, good morning. Ian, I know we've seen, you know, more M&A for sawmills in Eastern Canada this year. Can you speak to, you know, how maybe robust the M&A pipeline is? And are there certain geographies in North America that are maybe looking more interesting today?
Yeah, Hamir, I think it's, I wouldn't say it's more robust than maybe it normally is. You know, I think there's always, you know, opportunities out there that we're looking at. We're busy looking at those, you know, every day. You know, so I don't see like a big influx of, you know, M&A opportunities that normally probably wouldn't be in the market. And then for us, I mean, you know, we're investing in British Columbia, in our mills that we have there. You know, but our growth is really, you know, targeted beyond B.C . for any new acquisitions like we did in Summerville.
Yeah, there's always stuff in play, Hamir, and there is stuff in play today, and, you know, six months ago there was, and a year ago there was, so. I don't know. I guess that's my best, you know, answer for you there, Hamir.
Fair enough. And, you know, I see you guys doing some more projects in B.C. Just curious how, you know, you think about your willingness to invest in B.C. with the uncertainty, with the fiber situation, and, if you have any thoughts on what, you know, what Interfor may start doing differently to, you know, kind of come in line with what the province is hoping for the industry to achieve in terms of partnerships with First Nations?
Yeah. So the investments in B.C., I mean, as you, as you well know, we, we deinvested of, of Hammond on the coast. But the investments in the interior British Columbia at Adams Lake, that was on the, you know, the tails of the acquisition we did on the additional fiber supply. You know, earlier this year, I think that, that payback, Rick, on that kiln started up mid-February, is like four weeks, so we really, you know, hit the cover off the ball on that one. And that improves, productivity and grade mix. You know, when you're kiln constrained, like Adams Lake was with the new fiber, often that means you have to, you know, look for alternate products in, in a green form or a non-dry form.
And so that's really helped that division out, you know, hugely. Castlegar, you know, there's a phase there in the planer, which there's a slight productivity increase, but a lot on the grade and cost, grade improvement, cost reductions in the planer mill facility there. And you'll recall, all of our B.C. interior mills have a very high quota volume. At times we're not exposed to the open log market when we do have a very, very significant amount of our volume at all three B.C. mills under quota. So, and then on the coast with First Nations partnerships, you know, stay tuned on that. We're working very, very closely with our First Nations group.
We have a team on that, and yeah, they're advancing well, and we're feel positive about some of the business opportunities with our First Nations partners in the coast.
Great. Thanks again. That's, that's all I had. I'll get back. Thank you.
Okay. Thanks, Hamir.
The next question comes from Paul Quinn, from RBC Capital Markets.
Yeah, thanks very much. Morning, guys. Great quarter.
Thanks, Paul.
Thank you.
Hey, just, you know, on, on the share buyback, it looks like, you know, that CAD 26.20 or whatever per share seemed to be about the midpoint of the trading range in Q1. Just if you could, let us know if you, you continue to buy back shares here in Q2 and how you look at share buybacks versus, a special dividend?
Yeah. Thanks, Paul. This is Rick. In terms of parameters around buying back shares, we've got a couple that we look at. You know, in particular, we do look at book value per share and how the shares are trading relative to that. And in terms of a comparison against special dividends, we like the, you know, the opportunistic aspect of buying back shares at attractive values. And certainly, a special dividend would be the next option for us with any surplus cash that we have. And, you know, it's fair to say that we're actively evaluating that option.
Okay. And then, maybe over to you, Bart, on just the sustainable, sustainability of the current pricing, trend. I mean, it seems to be going up, you know, 8%-10% in lumber every week. And, just wondering where you, where you see an end, where you see a pullback, and, you know, what's your crystal ball saying?
Well, you know, it's always tough to forecast pricing, so I'm hesitant to do anything like that. But I will say that, you know, we're really just getting into the spring building season. You know, and I think the new home construction side has been very active all the way through, and so, you know, we've seen sustained demand from that segment. Repair and remodel feels like it's really sort of gaining momentum now, quite frankly. I mean, I think we've dealt with some weather in first quarter, and as we move into second quarter, things like that seem to subside, and people are sort of, you know, starting their projects and whatnot.
And so, you know, if you look at things today, the demand is as high as ever, quite frankly, you know, relative to the supply on the marketplace. So, that momentum feels good for Q2. And certainly the, you know, when you look at all the demand indicators that are out there, the interest rates, the household balance sheets, all those things support continued investment in people's homes, whether it's new homes, or renovations, going forward. So we're expecting that momentum to carry us into Q3. Then, of course, Q4, there's always the seasonality factor, and that's a tough one to predict.
So that's, you know, that's a risk that's out there. But certainly looking at the markets today, they're as good as I've ever seen them.
Okay, fair. Just lastly, if you could give us an update on the sale of the Hammond site. You know, we've got pretty strong housing markets, and I thought this would be concluded now. Just wondering where we're at.
Yeah. You know, Paul, we're continuing to advance on that. Progress has been made in the last quarter, and, you know, we're feeling positive that that could transact before the end of the year.
All right, that's all I had. Best of luck to you two.
Thanks, Paul.
Thanks.
Your next question comes from Sean Steuart, from TD Securities.
Thanks. Good morning, guys. Couple questions. Ian, as you move to the next phase of the CapEx program, which involves smaller scale initiatives versus the Eatonton project anyway, you can speak to changing return expectations over the long run? And further to that, are you starting to see any cost inflation in these types of projects, whether it's steel or other inputs? Is that factoring into your budgets as you move ahead with these projects?
Yeah. Sean, so thanks for the question. Yeah, Eatonton is a big project for us. And in fact, I think we brought you there a few years ago to show you the old mill, but and others. So that's coming, you know, along really nicely. You know, we have Baxley in Georgia, we have another project going on there. Thomaston, Georgia, we have a strategic, you know, capital plan that's being developed for that operation, so that's coming down the pipe. And then, of course, we've got Perry and Castlegar around the deck. And then there are a number of other projects that are, you know, in the planning development phase for other mills, example, in the Northwest.
So we do see good opportunity to deploy cash and capital into, you know, some of our existing assets to obviously move them forward. In some cases, really competitive ones, even making them ultra-competitive. So we're really setting up for that nicely with our CapEx team and our operations team working on that. Cost inflation, for sure. Sean, you know, when you look at steel pricing and or delays in deliveries and equipment, you know, or challenges to, you know, source some electrical components, you know, COVID seemed to, you know, throw a wrench into pretty much every every product out there. And so, you know, we're balancing that.
But the paybacks, you know, on the projects that we already have existing, we've tend to lock them up early on. We've tended to use different index pricing on things like steel to cover off that risk. So we have a different, you know, we have a set of tools that we're applying to all of these projects to make sure that, you know, when they do start, you know, the budget significantly moved. And with that, that we have a contingency built into the budgets that reflect, you know, any risk, whether it be other components that, you know, have price increases or equipment delivery delays, you know, things like that. So yeah, we're looking at things.
Not that we weren't looking at things really close before, but it's kind of ultra-sensitive close now when it comes to planning and budgeting on, on the projects.
Thanks for that detail. And then, a broader question on capital allocation. What we're dealing with now for pricing is clearly unsustainable, but the magnitude and duration of the cycle is different than anything we've seen. Are you guys taking a revised thought process with respect to longer-term pricing assumptions for lumber, that you're building into your models and you're considering CapEx plans going forward?
Hey, Sean, this is Rick. I can take that. Generally, we take some near-term market view into our pricing assumptions when we're evaluating capital allocation. Over the long run, though, we'd use a trend price in evaluating projects, and that has something with a four handle to it. But generally, yes, with this hot market that we're facing here, I mean, we do factor in some upside in evaluating projects, at least in the near term.
Yeah. That's, that's helpful. That's all I have, guys. Thanks.
Thanks, Sean.
As a reminder, to ask a question, press star one. Your next question comes from Mark Wilde, from Bank of Montreal.
Good morning, Ian, Rick, Bart.
Morning.
I wanna just start off by commending you guys on capital allocation to date in your tenure. I think it's very easy to get carried away in markets like this, and you seem to be maintaining a good discipline. Moving from that, I would like to get a sense, Ian, of just so we think about year-over-year, how much do you think you'll be able to flex your production this year? I mean, you clearly, you won't have the outages we had last April, and then you'll have, you know, kind of productivity, debottlenecking gains. Can you give us some sense, in terms of either BF or, percentage-wise, what that might mean this year?
Yeah, Mark, it's not easy to, you know, add, you know, a bunch of capacity as much as we would like to. You know, we're having a number of capital projects that kind of, you know, create little disruptions here and there in our system. And then the people side of it, particularly in the U.S., is, you know, challenging. So I don't see, you know, our major project at Eatonton coming on until, you know, the end of this year and the beginning of, you know, and mid-next year. So I would say it's fairly tight as far as our year-over-year goes. I mean, we'll have some incremental improvement, but I mean, it's on the margin. So, yeah, as we.
You know, I guess the one thing, Mark, is, you know, factoring in Summerville into any models would be positive to what we didn't have at the beginning of this year, so.
Yeah, I mean, it.
Summerville's what, Rick?
About CAD 125 million.
CAD 125 million, Bart, somewhere around there?
Yeah.
At the current moment, then the capital project over the next year or two, you know, moving that up to the CAD 190 million-CAD 200 million range.
Okay. All right, that's helpful. And then, Bart, I'm just curious whether you can give us some color on how you see customers trying to respond to higher prices, you know, either, you know, economizing or, you know, looking at alternatives or perhaps deferring some things.
Yeah. Okay. So I would say, I'd say the customers today, the conversations are more about supply than anything else. There is an ability to pass on the pricing through the distribution channel. I think the risk comes into it when, you know, they just don't want to be carrying inventories, high-priced inventories, if there, if there is gonna be a market shift. So there is that anxiety that's sitting in the background. But for the most part, the momentum is so significant that it becomes more about, more about supply. Yeah, this event is demand-based. There's no question about it. Supply has been fairly stable, you know, quarter-over-quarter. And so the idea of deferment of projects is real.
You know, and I would say that there were a number of projects that were deferred last year to this year, and there's a number of products that will be deferred this year to next year. At the end of the day, from our vantage point, the supply, or sorry, the demand levels are so significant that ultimately, I think that that's gonna be a necessity. It's gonna have-- they're gonna have to be deferred, 'cause there's just not the supply to you know, to cover everybody off. So right now, to sum up, it's all about continued shipments and servicing our customers, and it's less about price.
Yeah. Okay. I just, I remember 15 years ago, there was a lot of chatter about steel studs. Given the steel market right now, we don't seem to be getting any of that.
No, it's fair. I mean, we're keeping our eye open for substitutions. And quite frankly, it just seems like every aspect of manufacturing is busy right now. And so the idea of replacing wood with steel comes with all kinds of complications. There's application, there's lead times even to get those products. There's no pricing relief, and then, of course, there's the labor component of actually installing it. So, you know, I think a lot of folks have figured out that they just need to make sure they continue to get supply and feed their projects accordingly. I don't think there's a lot of room for substitutions right now. It's just not easy to do.
Yeah. And one other question, Bart. We're getting some reports that there's, you know, been an easing in demand out of the big boxes and maybe the do-it-yourselfers are a little more of a price-sensitive area of the market. Are you getting any similar sense of that? I mean, we know new housing and kind of professional repair and remodel are quite strong, but I'm just curious, once you get down to the guy who might be building his own deck or whatever, whether there's any change in behavior there.
Well, there's certainly sticker shock, that's for sure.
Yeah.
We know that. But what I will say about the box stores, there was a fair bit of focus through Q1 in making sure that the pipeline was, you know, amply supplied, I suppose, for the box stores. They just really didn't want to experience what they did last year with shortage of--shortages of product. And so, you know, there was inventory in those stores. And so I think as we came out of Q1, the weather events got behind us, people got more sort of open to the idea of doing the home projects. They started to, you know, to pull from the box stores, and we're now seeing that translate into resupplying. So I think, you know, we're really just starting to see.
The momentum on that side with the box stores, and I can tell you that the last 30 days have been, you know, I wouldn't say crazy strong, but they've been solid consumption that we're seeing from that segment.
Okay. All right, and just one final one for you, Bart. I'm just curious, you know, I have heard in the sort of Intermountain region of the U.S., you know, that you know, rail cars are tight and, you know, there have been delays. Any way to kind of assess how those logistics issues might just be affecting the psychology of the market? I mean, we are in kind of peak season here, and if people are concerned that there are going to be delays, you know, that may just, you know, further kind of act like a little more gas on the fire.
Yeah. Well, I can tell you that there's nothing like what we saw in 2018, where there was substantial volumes of wood unable to get to the marketplace. I think whether it's the Intermountain, the Coast, the Southeast, I mean, everyone, even export vessels, containers, I think that there's some pressure in all regions. But you know, it's not that the cars aren't there, it's how they're flowing and the consistency of that flow, and I think that's causing some volatility in actual on the shipment side. So I think certainly our experience has been that we're getting our wood to market. There's no question.
It's just that we're having to deal with, you know, sort of spot issues in different regions, and it's nothing that's insurmountable. It's just a, you know, a factor of the business right now. And so I, I think there are. I think it's taking longer for people to get their orders, but not that significant. Maybe a week or something like that, where we see some, a week or two, we see some delays, at least, you know, from our vantage point. So not.
Okay, that's really helpful color.
Yeah. Yeah. Oh, for sure.
Okay. I'll turn it over, guys. Thanks.
Thank you.
That was our last question at this time. I will turn the call back over to the presenters.
Okay, thanks, operator. I'd like to thank everyone for dialing in and participating in our update call this morning and your interest in our company. As usual, if you have any further questions, please feel free to reach out to myself, Rick or Bart, and we'd be happy to answer those for you. Thanks, everyone. Have a great day. Be safe. Thank you, operator. Call is over.
This concludes today's conference call. Thank you for participating. You may now disconnect.