I would now like to turn the call over to Duncan Davies, President and CEO. You may begin your conference.
Thanks very much, operator. Good morning, everyone, and thanks for joining us. I'm here with our CFO, Marty Juravsky, and our Senior Vice President of Sales and Marketing, Bart Bender, to go over Interfor's first quarter results and to look at our outlook for the next few months. I'm gonna keep my remarks brief, and we'll turn the session over to you for questions as soon as we can. To the extent that you've already seen the results of most of the others in our sector, there won't be any surprises about our results for the first quarter, which at best we would describe as disappointing. The price recovery that was generally expected in the first quarter simply didn't come to pass.
After some encouraging signs in the first six to seven weeks of the year, prices reversed course and gave up a significant portion of the gains recorded in the first half of the quarter. Much of the blame for this can be attributed to adverse weather that impacted takeaway levels in key markets throughout North America, but that wasn't the only factor. Higher mortgage rates and economic uncertainty also impacted demand, especially in the new home segment. Viewed on a quarter-over-quarter basis, prices for the main commodities were up somewhere between $10 and $40 per thousand board feet in the first quarter from the levels recorded in the fourth quarter. After taking account of order file lags and the like, our sales average for the first quarter was $613 per thousand board feet before duty charges, up $14 from the fourth quarter.
During the first quarter, we also dealt with the impacts of high log costs in BC Interior, that come about as a result of timber shortage and a disconnect between the lumber prices and the mechanism used to determine stumpage rates in the region. In fairness, stumpage rates in the Interior were lower in the first quarter than they were in the fourth quarter, but they were high compared to historic rates and the costs we see in other regions. Taken together, these factors contributed to a net loss of $15.3 million in the first quarter of 2019. This compares to a loss of $13.5 million in the fourth quarter and to earnings of $32.7 million in the first quarter of 2018.
Our results for the first quarter of this year include some noise associated with the redundancy of certain assets affected by the capital projects in the South and the prior period expenses, but those items were relatively minor. EBITDA in the first quarter was $16.3 million, compared to $8.9 million in the fourth quarter and to $83.5 million in the first quarter last year. Virtually all of the gain in EBITDA in the first quarter, compared with the EBITDA preceding quarter, can be attributed to the increase in sales values described earlier, with the positive and negative effects of items such as increased production, lower shipments, lower log costs, and lower SG&A expenses canceling each other out.
Production in the first quarter was 646 million board feet, up 40 million board feet relative to the fourth quarter, following the return to normal operating schedules post the holiday season. Capacity utilization was 83% overall versus 78% in the fourth quarter, made up of 47% on the BC coast, 84% in the Interior, 85% in the Northwest, and 90% in the South. Shipments amounted to 621 million board feet, down 26 million board feet quarter-over-quarter. Cash from operations during the quarter totaled $17.1 million. Working capital increased by $75 million, reflecting a combination of higher log and lumber inventories and lower payables. Capital spending in the quarter was $43.8 million, more than 70% of which was directed to our ongoing projects in the US South.
The remainder was directed towards maintenance and woodlands activities. During the quarter, we repurchased and canceled 515,000 shares at a cost of $7.8 million, bringing the total to date to 2.8 million shares at a cost of $44.7 million. Adding all this together left Interfor with net debt of $173 million at quarter end, the equivalent of 15.6% of invested capital, and with available liquidity of $425 million. On March fourth, our normal course issuer bid was renewed, permitting the purchase of almost 6.7 million shares over the course of the next twelve months. Activity under the NCIB on a go-forward basis will be ranked against other investment alternatives and balanced against our leverage targets, similar to the way the 2018 program was managed.
Well, the first quarter was nothing to write home about from a bottom-line standpoint. I can tell you that I'm extremely pleased with the progress being made on our strategic capital initiatives in the South. The Monticello and Meldrim projects look great and are on track for completion this month. We expect Monticello to be, to be running its first log next week, and the new kiln at Meldrim should be running by the end of the month. Our most recent estimates show these projects coming in within 10% of their capital budget of $62.5 million, with the overage associated with steel and labor costs. We've also experienced some vendor delays, most notably at Meldrim, which has also contributed to the overrun.
The good news is that each of these projects is delivering the results on the already completed phases in excess of pro forma, which provides comfort that the cost overages will be offset by greater than anticipated results when the project ramp up. The phase II projects at Thomaston, Eatonton, and Georgetown remain on track for completion in stages over the next two years. To date, almost $22 million has been capitalized on these projects, and they remain on track from both a timing and a budget standpoint. At this point, I'm going to ask Bart Bender, our Senior Vice President of Sales and Marketing, to provide some comments on the current state of the lumber market in the South with our timing. Bart?
... Thanks, Duncan. I'll provide a brief outlook of the lumber market. Anticipation of a spring building season, combined with low inventories, prompted increases in pricing mid-quarter. Weather and the continued pause in new home construction tempered this anticipation late quarter, and that continues quarter two to date. The repair and remodel sector continues to demonstrate quarter-over-quarter increase in growth rates. At approximately 40% of the U.S. lumber consumption, growth in this sector is meaningful. That said, we are still not seeing full demand from the marketplace, as some areas of the country remain under adverse weather conditions. We expect this to clear up in May, which should give us a better picture of the true demand. In the meantime, as announced, Interfor has responded with curtailments in the BC Interior. In terms of our export business, Japan remains consistent and steady.
Some pressure on J Grade prices, however, Genban and Hemlock squares and Doug Fir squares are balanced. This should continue through Q2. For Interfor, China has slowed somewhat this past quarter. This is a reflection of uncertainty in tariffs for US lumber and high-end market inventories for Western Canadian SPF and Doug Fir dimension products. We expect those to clear through Q2 and market activity to normalize accordingly. Our specialty business, consisting of Cedar and Reserve Pine boards, remains steady. Long-term market fundamentals are favorable. We expect lumber demand to continue to grow. As expected, price volatility will continue as we navigate these short-term market shifts. I'll stop there, Duncan. Pass it back over to you.
Great, Bart. Thanks. Late last week, as Bart mentioned, we announced plans for a series of rotating curtailments at our BC Interior operations. These curtailments will remove about 20 million board feet of production from our portfolio over the next 20 days or so. They're being taken in response to the combination of weaker than anticipated demand, weaker lumber prices, and high log costs in the BC Interior. Our intention is to continue to monitor the state of the market going forward, and we'll adjust our production rates as required. Operator, at this point, I think it'd be more productive for our guests if we turn the session over to them and take questions.
At this time, I would like to remind everyone, in order to ask a question, please press star and one on your telephone keypad. I'll pause for a brief moment to compile the Q&A roster. Your first question comes from Sean Steuart with TD Securities. Your line is open.
Thanks. Good morning, guys. A few questions. You mentioned the modest inflation to the phase I budget, and Duncan, I think you suggested that phase II, which is obviously a lot bigger, was on track. I'm hoping you can reconcile that. I mean, when you initiated the phase II or started talking about it, I would guess that number would be subject to some inflation as well. Can you help us reconcile those two things?
Yeah. We learned a bunch of things during the phase I project, Sean, both from an impact of steel price increases or decreases and how that could affect the cost structure of a project. We've been able to build some mechanisms into our arrangements to cover that, which is helpful. So that will affect the phase II projects as opposed to the phase I projects. We also learned a lot about labor costs and labor productivity. In the South, we've been able to build some increased costs into the phase II projects to account for the experiences we had in the phase I costs.
Got it. A question on the credit facility modernization. Can you let us know if there's any change to the borrowing cost there? And I guess, just more broadly speaking, the rationale for increasing the borrowing base. I would have guessed you would have been comfortable with the liquidity position already. Just any context you could provide there?
Sure. Marty's the author of this, so I'm going to let him comment.
Hey, Sean. So just in terms of the last question first, yeah, we've got lots of liquidity. We've got $425 million of liquidity in total, 350 in the bank facility. So there's no great elements attached to that $20 million variance other than there was more flexibility available, so we decided to make it a nice, clean, round number in terms of the total availability. In terms of the cost, it's actually, there's a whole variety of elements attached to it that are enhancements to what we had in place. One, it's always similar. Two, some of the non-financial covenants are way more streamlined. And, yeah, there is an impact in terms of more preferential costs for us.
So it works very well from a variety of perspectives, including having the term shifted out to 2024 in terms of the maturity. So it just gives us an awful lot of flexibility as we pursue our various initiatives.
Got it. And Martin, maybe just a housekeeping question, if anything, but the $1.2 million of expenses in Q1 that you referred to as refinements of prior estimates, what exactly is that? And is that a one-off or should we think of that as recurring?
No, it truly is a one-off. There were a couple of, there's two specific items, neither of which by themselves are huge, but, they were refinements of items that happened a couple years ago. And as we looked at them, they had nothing to do with the current quarter.
... Yeah, they had nothing to do with the current quarter. One was associated with when duties came into place and some timing issues associated with their original introduction of duties, and another piece associated with some costs that had been incurred related to log procurement activities over the last couple of years, but nothing to do with the current quarter. And neither of those issues that we've accrued for are ongoing factors.
Okay. Thanks very much, guys. That's all I had.
Yeah, thanks, Tom.
Your next question comes from Hamir Patel with CIBC Capital Markets. Your line is open.
Hi, good morning. Could you give us your outlook for fiber costs in BC over the balance of this year? And then also, when would you expect some moderation in the Southwest over some weather related increase in Q1?
We expect stoppage rates in the BC Interior to go up quite significantly on the first of July as a result of the annual update that's taken into the current stoppage calculations. To an extent, they offset some of the reductions that have occurred over the last couple of months as the quarterly updates have been brought into effect. But to the extent that log costs in the BC Interior are now higher than they are in most of the competing regions in North America, it's going to be a difficult pill to swallow in that region. And we think will force additional curtailments to occur, you know, some temporarily and some likely permanently in the Interior region as a result.
In the south, we've seen—we saw some modest cost inflation in the southern region, largely because of weather conditions. People have talked an awful lot about adverse weather and, you know, that's and how it's affected takeaway levels to job sites. But it also has an effect on operating rates, particularly on the logging side of things, where it gets pretty muddy, pretty quick in the south. And if you get significant rainfall, it can impact logging productivity and logging rates, and tends to result in somewhat higher costs. As we move through it, through the spring and into the summer, you'd expect that to moderate, and that would be our expectation, and so far, we've seen that coming into effect from there.
Thanks. That's helpful. And I think for, with, you know, your specific region and where your mills are in BC, what that July first adjustment, what does that sort of translate to on a sort of total wood costs? And can you just remind us, what is your percent quota wood in BC?
Well, our percent of quota volume varies by different regions, in the Adams Lake region, versus the operations in the Kootenays. We have a higher degree of self-sufficiency in the Kootenays than we would at Adams Lake, for example. You know, the number will be, I don't know, $10-$15 a cubic meter is our expectation.
Okay, great. Thanks. That's, that's helpful. And just a final one from me for, for Bart. Can you give us your sense as to where inventories are in, in North America, both at the mill level and in the channel?
Sure, Hamir. My, my, I think that the inventories at the mill level would be largely a function of, you know, some of the inconsistent railcar supply that we saw as due to the weather factors. But I can tell you that the last 2-3 weeks, the flow there has normalized, and so I would imagine that a lot of that, a lot of the mill inventory is making its way to market or has made its way to market. The in-market inventories are the more, I suppose, relevant factor that we're dealing with today. Last quarter, I would have told you that they were at the low end of the average. And, you know, I would say they're in the bottom third of the average today.
But the fact is that the inventories that have built at the distribution level have been unable to get to the job sites. So there's higher than normal, but they're earmarked for jobs or they've been pre-sold already. So as the weather cleans up, we think that those inventories will start to flow to the job site, which will make the inventory picture a little bit clearer and perhaps more advantageous for ourselves.
Good. Thanks, Bart. That's, that's all I had. I'll, I'll turn it over.
Thanks, Hamir.
As a reminder, it is star one on your telephone keypad to ask a question. Your next question comes from Mark Wilde with Bank of Montreal. Your line is open.
Thanks. Hey, Bart, I just wanna swing back around to that inventory issue, because I was just hearing from another big West Coast producer the other day who was saying that their read is that inventories in places like Southern California are actually quite high. Are there regional differences here that you might like to call out?
Well, no, that's fair. You know, I think if you look at areas like California, it's kind of hard to look at the weather. I think you probably have to need to look at more of the building activities in that particular area. But if you go around, let's call it North America or the U.S., Canada, I mean, there are areas that are still getting snow. You know, within the last week. And so obviously, those areas I don't think are operating at full capacity in terms of the building activity. So you'll see pockets. And, you know, I think that as we've moved into Q2, there are a number of markets that have really picked up in activity.
So places like Texas seem to be getting back to business, you know, operating on all eight cylinders. So I think as this thing starts, as the markets start to normalize, you'll see certain pockets free up on the inventory side, you know, sooner than others.
Okay. And Duncan, I'm just curious, you know, the first quarter was a tough one. It looks like just based on kind of where lumber prices have moved, and second is gonna be more of the same. What's it gonna take, do you think, to create a better second half for the lumber industry?
Well, the good news about the quarter market is misery loves company, and we've got lots of it.
You do.
You know, we've seen over the course of the last couple of weeks some curtailment announcements. And, you know, one of the things I've learned in this business over the years is when demand is weak, you're not gonna sell any more if you drop prices. And what you really need to do is production rates need to adjust relative to takeaway levels. And we're I think we're seeing some we're seeing signs of that happening currently. And I think what you're gonna see as we progress through the second quarter and takeaway levels pick up, we're gonna find out, you know, how much of this these doldrums we're in is really weather related and how much of it is underlying economic issues.
I don't know what the percentage makeup is, but my sense is we're gonna see a combination of increased takeaway levels. We'll see some production adjustments. We'll see a rebalancing of the equation, and then we'll find out what we're really dealing with here in terms of what the overall market situation looks like for North America. But you know, the thing I guess, the key piece of this puzzle has always been, I mean, the market's the market. It's how you react to it. And we've always tended to be the more proactive than less proactive in dealing with that if we see a weak takeaway situation. My guess is we're gonna get to that, either because people begin to wake up to those realities or the customers force them to deal with it.
Okay. Can you address the Pacific Northwest operations that you've got? I talked to a big producer, like, a couple of weeks ago, and he was cash negative already, and prices went down further from that. So, you know, my sense is that a heck of a lot of capacity in the Pacific Northwest must be cash negative. We've actually seen a couple of permanent closure announcements out in Oregon in the last few weeks. So just assessment of your Pacific Northwest business right now.
Well, you know, Mark, the Pacific Northwest, people certainly have certain views of the Northwest. We actually do pretty well there. And, that business has done, pretty good for us, certainly, better than the BC Interior has been doing for us. Because, the equation between, log costs and sales values is quite a bit better in that region than it is, in, for example, the BC Interior. And so, you can't say everybody's in the same circumstance. We've invested pretty actively in a number of our mills in that area, and we've got the benefit of, you know, pretty well-capitalized operations, in our stud mills. And we've got the benefit of a pretty neat product line in sales values out of our specialty board facility, in Southern Oregon.
I'm not unhappy at all with that business. Right now, it's not the squeaky wheel in our organization. The log cost situation in the BC Interior is a much bigger concern for us than the situation is in the Pacific Northwest.
Okay. Well, just one other issue, coming back to kind of BC and the BC Interior. We've heard an argument that most BC Interior mills accumulated, you know, really quite healthy log decks this winter, and that nobody is likely to take any decisive action until they've worked through those decks. Do you agree with that?
Well, I don't, I don't know that. I obviously know what our inventory situation is. We've announced downtime in the BC Interior. I think Canfor has announced downtime in the BC Interior. Conifex has announced downtime in the BC Interior, and I think there's other unannounced downtime that's happening as well. Part of that strategy is, I mean, the costs are high in that area, and there's no sense in taking a high-cost log, even if it's in inventory, and trying to push a product into the marketplace that the market's telling you that it doesn't think they need at this point in time.
So for those folks that are well-financed, and Interfor certainly is one of those, we've got the luxury of being able to make a decision of whether we're gonna operate or not based on the economics of the business at the time. We're also fully aware of, you know, the fact that we've had some pretty extreme fire seasons the last couple of years in the BC Interior. We haven't missed the fact that stumpage rates are going up in the BC Interior in July. So we're adjusting our overall operating plan both at the mill level and the woodland level, given the circumstances that we're dealing with. My presumption is others that can afford to do it are doing the same thing.
... Okay. I actually have one more question, if you could. Just on the trade issue, I wonder with the peak markets whether you're seeing any more incremental sense of urgency around this issue, and also, you know, whether you think the sort of bush talk about U.S., China resolution might toggle some attention back to kind of U.S. and Canadian trade issues?
We're not seeing anything, Mark. You know, I'm not aware of anything, and if there was something going on, I would probably know about it. So I've not seen anything. I think it's just gonna play out over time. You know, our expectation has always been that these things take time, and there's not a lot to be gained by trying to rush.
Yeah. Okay. And I heard it with some U.S. guys who seem to be really insistent on a quota-based solution here. Is it some kind of a quota-based system, you think that's a starter or just a complete non-starter on the Canadian side of the border?
It's a non-starter.
Okay, that's helpful. I'll turn it over.
Thanks, Mark.
There are no further questions at this time. I will now turn the call back over to the presenters.
Okay, thanks very much, operator, and thanks, everybody. We very much appreciate your interest in the company. Marty and I and Bart are available if you want to follow up, don't hesitate to call us directly. In the meantime, we're gonna deal with the markets as we have in front of us. As I said, we appreciate your interest. Look forward to talking to you over the course of the quarter, and very much look forward to talking to you at the end of the second quarter when we announce our results. Thanks, take care, and have a good day.
This concludes today's conference call. You may now disconnect.