I would now like to turn the conference over to Duncan Davies, President and CEO. Please go ahead, sir.
Thanks very much, Kelly. Good morning, everyone. Thanks for joining us. We're here to discuss Interfor's first quarter results and to provide some comments on the outlook for the next few quarters. Joining me, as usual, are Martin Juravsky, our Chief Financial Officer, and Bart Bender, our Senior Vice President of Sales and Marketing. I'm gonna keep my remarks brief, and I'll turn the meeting over to you for your questions as soon as I can. In the first quarter of 2018, Interfor recorded net earnings of CAD 33 million on sales of CAD 528 million. EBITDA, adjusted to exclude the effects of long-term incentive compensation and other one-time items, was CAD 81.1 million.
This compares with net earnings of CAD 19.7 million and EBITDA of CAD 60.3 million in the same quarter last year, and with net earnings of CAD 36.2 million and EBITDA of CAD 89.5 million in the fourth quarter of 2017. Our results in the first quarter were positively impacted by higher lumber prices, which before duties were CAD 38 per thousand, or 6% higher than the prior quarter.
The gains from higher lumber prices, however, were offset by lower shipments, which came in at 95% of production in the first quarter, compared to 102% in the fourth quarter. Higher duty rates, which totaled CAD 12.9 million in the first quarter versus CAD 1.9 million net in the fourth quarter, and higher unit costs, which were up 6% quarter-over-quarter, partly due to higher log costs, but also due to adverse weather conditions and capital projects-related downtime in the South. Lumber production in the first quarter was 666 million board feet, up 2% versus the fourth quarter.
Production in the South was 302 million board feet, compared with 296 million board feet in the fourth quarter, as additional shifting at our Thomaston and Georgetown plants more than offset lower production at a couple of other facilities. Production in the Northwest totaled 146 million board feet, up 6%—sorry, up 6 million board feet quarter-over-quarter. The Interior came in at 181 million board feet, down 1 million board feet, while the Coast was flat at 37 million board feet in the first quarter. From a capacity utilization standpoint, the Coast came in at 46%, the Interior at 97%, the Northwest at 91%, and the South at 86%.
Like most other producers, our shipments in the first quarter were negatively impacted by logistics challenges, most notably in the South and in the Interior, where adverse weather conditions exacerbated shortages of rail cars and trucks. Shipments of Interfor product were 635 million board feet in Q1 versus 666 million board feet in Q4. As I mentioned earlier, product prices were strong across the board in Q1. The Southern Pine Composite was up $37, the SPF Composite was up $33, and dry Hem-Fir studs were up $63 quarter over quarter. Import duties on Canadian shipments to the US at a combined rate of 20.23% applied for the full quarter, this year and were fully expensed.
The first quarter was another strong quarter from the standpoint of cash flow, with cash from operations before changes in working capital coming in at CAD 75.5 million. After working capital changes were taken into account, the total amount of cash generated in the quarter was CAD 18.5 million. Capital spending totaled CAD 18.1 million on a combination of discretionary, maintenance, and woodlands projects, the most notable being an automatic grading system at our mill in Perry, Georgia. Net debt ended the quarter at CAD 127.1 million, or the equivalent of 12.4% of invested capital. We closed the quarter with CAD 445 million of available liquidity.
We made good progress in the first quarter on our strategic capital plan, which is designed to capture the opportunities within our existing operations and to pursue opportunities for further growth. The previously announced projects at Meldrim and Monticello are on track for completion in the first quarter next year. These projects will materially improve the economics of those mills and will add approximately 150 million board feet of production to our portfolio. We're also well advanced in our planning for the next round of our upgrade strategy and expect to be in a position to announce our plans at some point during the second quarter. The same holds for the greenfield opportunity we are looking at in the central region of the US South.
These projects are central elements of our business strategy and replicate the process of improvement and investment that we employed previously in the Pacific Northwest and the Interior regions, and we're excited to be at this point of moving forward. In terms of the near-term outlook, I can tell you that the second quarter has started off very nicely. Demand for all products is strong, and prices continue to increase. The Southern Yellow Pine Composite was reported yesterday at $511 per thousand versus $453 in the first quarter, and the SPF Composite was at $530 compared to $472 in the first quarter. Also, as weather conditions improve, some of the logistical challenges we faced are beginning to fall back into line, which should permit a catch-up on shipments, at least in part, in the second quarter.
On the other side, log supply issues in the Interior continue to be a challenge, and we are concerned about the potential for flooding in some parts of that region that would impact log availability and/or the potential to ship product. At that point, Kelly, I think I'm going to stop, and I'd like to open the session to questions for our guests. Thank you.
Certainly. At this time, I'd like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. Our first question comes from the line of Sean Steuart. Please go ahead, your line is open.
Thanks. Good morning, guys.
Good morning.
Hey, Duncan. A couple questions on the longer-term capital plan. I guess we can expect to hear something definitive on the greenfield project in the coming months. Just more generally, there's been some industry speculation that due to contractor and equipment availability constraints, the timeline for building these assets, the long list of greenfield projects we have in the South now, there's some speculation that timeline could be pushed out. Are you guys still comfortable that end of 2019 is feasible for your project?
Yes, we are. I think your premise is correct, Sean. I think there's enough projects in the pipeline, whether they're greenfield or upgrade projects or what have you, that you know, vendor availability and contractor availability is a major consideration. We're fortunate enough to be working with some folks that we're very comfortable with. We've talked a lot about timelines and the like, and we're quite comfortable that we can meet our timelines, both for the mill upgrades that we have on the drawing board, but also the greenfield plant that we're giving consideration to.
On the greenfield project specifically, I think I asked this before, but maybe just remind me that the capacity multiple that you guys reference is quite a bit higher than some of your competitors are talking about, and I think it was explained as a fully baked number, including working capital and startup costs. Is there additional contingencies built into that number, though, that.
Well, Sean, one of the reasons why it's taking us the time to complete our plans on this is we're looking to find the sweet spot between size of the project, the amount of capital cost, and the timing of the project itself. And we wanna make sure that we are able to build a facility to not only that will achieve the operating parameters that we think are important, but also will be built to the standard that we're used to in our capital projects. And I think you've been to some of our facilities, and you probably have a pretty good idea what I'm talking about there in terms of standard and operability and reliability.
Yeah, understood.
Yeah. So we've been back to the drawing board. We've been back and forth with, you know, our primary supplier, you know, on that particular project. And I don't wanna say too much yet because we haven't finalized the plans exactly yet. But, you know, we're looking at a whole—we've been looking at a variety of options to find the sweet spot. So there's a strong likelihood that, if we go ahead with that plan, it'll be bigger than what we've been talking about, but fit well with the timber basket in the area that we're looking at, and able to deliver, you know, the right level of economies of scale and productivity and costs, on a go-forward basis.
Okay, great. I have a few more questions, but I'll get back in the queue.
Thank you, Sean.
Sure. Next question comes from the line of Mark Wilde. Please go ahead, your line is open.
Hello, good morning, Duncan.
Hey, Mark, how are you?
I'm good. Duncan, first, just a kind of a detailed question here. Can you just give us a little update on kind of what you're seeing in terms of log costs, kind of across all of your different fiber baskets?
Yeah, sure. The biggest increases that we've experienced, Mark, have been in the BC Interior, and it's a combination of, you know, log availability, impacts from reductions in allowable cut, impacts from fire season last year. So we've seen some fairly significant inflation in the BC Interior region in the last while, exacerbated, of course, by weather conditions, as it always is at this time of the year. We think that the rate of increase in that area will moderate somewhat as we move forward. In the South, there's been some modest increases, but nothing to get excited about. The Northwest, we saw some increases, going back a ways, but that's moderated somewhat.
And on the coast, it's typical weather-related conditions on the coast that impact costs during the first quarter. So all in all, I think we can always expect with lumber prices where they are, you're gonna see some inflation in log costs, but you got to tie it back to the time of the year, weather conditions, and the things of that nature.
Yeah, okay, that's helpful. I wonder next, kind of turning to kind of balance sheet and, capital deployment. If, if markets remain strong, would you be willing to sit on a net cash position and, you know, perhaps wait till slower markets offer some better opportunities?
Well, we're sitting on a significant amount of cash currently.
Right.
You know, the whole question of capital deployment and figuring out the most advantageous time is something that we spend a lot of time, you know, thinking our way through. You know, our conclusion over the last while is that we've moved out of a phase where we grew the platform quite significantly between 2013 and 2015. But then we delevered to the point where we're in, you know, pretty attractive position from a balance sheet standpoint. That gives us the ability to move forward with the internal capital projects that we've got on the drawing board. And you know, the greenfield opportunity that we're looking at, where we think the metrics are better than some other alternatives.
And so it's the typical cycle, where sometimes it's better to buy stuff, and other times it's better to fix stuff or build stuff. And that's what we're looking at too. It's all part and parcel of what we think generates the best return on capital employed over the course of the cycle.
Yeah. Okay. And would you care to comment on just what you're seeing, particularly down in the Southern US, on sort of M&A valuations right now?
I don't want to get too specific, but I think expectations are certainly higher than they have been. And with lumber prices where they are, I think we all need to remember this is a cyclical business, and there's times when opportunities for acquisitions are overpriced relative to their long-term value. And we just think it makes more sense to focus internally at this point in time. It doesn't mean that if there was something particularly attractive that was available to us, that we wouldn't pursue it, because we've got the financial capacity to do that. But I just think that the potential returns from a long-term standpoint are better on the programs that we've got right now, on the upgrading of our existing platform and looking for opportunities for well-positioned greenfield development.
Yeah. All right. Well, I'd actually agree with that. The last one for me right now is just can you give us some sense of sort of the opportunities that you've seen for both yield and efficiency gains as you upgrade these southern sawmills? I guess I'm thinking about just, you know, your ability to take labor out, but also just to get a better yield. I know a lot of southern sawmills have been fairly undercapitalized historically.
Yeah. Well, I think that's a fair comment. I mean, there's obviously some that are, are well positioned, but in a lot of cases, that's, that's not the case. Yeah, so from a, from a technology standpoint, whether it's, you know, primary breakdown systems or auto-grading systems, you can, you can, you can improve the yield both from a volume standpoint and from a grade standpoint, quite significantly, and we think contribute to very attractive paybacks. In addition, you know, with the kind of technology that exists now that you've seen, for example, at Adams Lake, Mark-
Mm-hmm.
The levels of the feed speeds, the levels of productivity in primary breakdown systems are dramatically better than what we've seen in some of the older facilities in the Southeast, which it translates, we think, into opportunities. So as we've, as we've grown our platform there, we've looked specifically for opportunities in attractive timber baskets that have got, you know, a workforce that, you know, we can, we can work with, but also where we think we can apply technology to upgrade those, those systems. And come out the back end with a reasonable amount of capital employed in a facility, but with, you know, modern technology and metrics, you know, generating a significant improvement in the financial performance and operating performance metrics of a facility.
Okay. That's helpful. I'll, I'll turn it over now back in the queue, Duncan.
Yeah, thanks, Rick.
Your next question comes from Hamir Patel from CIBC Capital Markets. Please go ahead, your line is open.
Hi, good morning.
Hi, Hamir.
Duncan, I want to follow up on Sean's question about the capacity. And just, you know, given some of the equipment issues that you mentioned and labor constraints, how much actual production growth do you think we could see in North America this year and into 2019?
Well, I leave that to you guys. You tally up all that stuff. I tend not to. I tend to focus a bit more on, you know, our own situation. What I can tell you, Amir, is, you know, we're seeing demand grow, you know, by something in the 1.5 billion-2 billion foot a year range. And we're seeing supply restrictions in some other areas that make, you know, the net effect even more than that. And so I personally am of the view, and I think most of my colleagues are of the view, that, you know, the industry is gonna have a difficult time meeting growth and demand without reinvestment, and we'll even be challenged to meet the growth and demand with investment.
And I think we're seeing some of those effects now, where we seem to have passed the point where the industry in North America is capable of supplying the demand that exists. And we're seeing, you know, product prices, you know, move to record levels, partly as a result of that. Now, that's not the only factor, but it's certainly a big factor in that equation. And I fully expect as economic activity in the U.S. continues to ramp up, we're gonna see increases in growth and in demand for our product, not only in housing, but also in other industrial and uses in other areas, that I think it's gonna be a challenge for the industry to be able to supply.
So I'm as excited about the future of our business today as I've ever been. At the same time, I'm, you know, fully cognizant that that's a cyclical business, and there could be unforeseen circumstances that arise that impact overall demand. And it's one of the reasons why, you know, we're so focused on, you know, making sure that the assets that we own and operate are really well positioned in the industry from a cost and competitiveness standpoint.
Sure enough, and, Duncan, we're seeing, you know, more talk of, I'd say, innovation in the building products industry to help deal with some of the labor issues, you know, whether it be Ready- Frame products or, you know, longer term, sort of, factory-built homes. What do you think that means for the larger producers, such as yourselves, and, you know, maybe the amount of lumber that actually gets used for a level of, given the level of housing starts?
Well, I think it's a trend that's inevitable. And, you know, for anybody that's been involved in the industry in Japan, they're used to seeing this. This is exactly the same thing in terms of lack of available labor has resulted in a much more mechanized construction system in Japan with the pre-cutting systems. And so, we fully expect that that's going to take place in North America. And we are working with a number of firms that are involved in that area, and I think it's just another area of opportunity for us.
Thanks, Duncan. That's all I had. I'll turn it over.
Okay, thanks, Hamir.
Again, if you would like to ask a question over the phone, please press star and the number 1 on your telephone keypad. Our next question comes from the line of Paul Quinn. Please go ahead, your line is open.
Yeah, thanks very much. Morning.
Hi, Paul.
Hey, I just wanted to ask a question on greenfield sawmill locations, and maybe you could just prioritize, you know, on these three factors, you know, where, what would make the ideal location? And the factors that, you know, that I look at are timber, low-cost timber, one being... Two being labor, and three being just sort of residual offtake. And I'm just curious as to how you prioritize those and where you're gonna locate a new mill.
Well, you know, you've hit the nail on the head. Those are, those are the three factors, and as far as we're concerned, you need to have all of them.
Logistics and markets.
Marty just reminded me. The other thing is you need, you know, the logistics and the ability to serve the market, right? So those are the factors, and as far as we're concerned, you have to have all of them to have a successful project. And we think that we've got a situation that provides all of those for us.
Okay. And then just, you know, we've had robust conditions on the sawmilling side for a while now. Everybody's making a lot of money. You guys have got a pretty broad geographic footprint, so you're seeing, you know, your neighboring sawmillers, you know, across North America. Is everybody reinvesting in their assets, or is there a number of, you know, certain areas that haven't seen a lot of investment? I'm just wondering, you know, if I fast forward five or 10 years, and eventually we see a downturn, whether we're, you know, whether, you know, it's gonna be a flat cost curve across the industry or if it's, or if it's got quite a slope to it.
Our sense is a slope. You know, I think the larger, better capitalized operators are all investing in their business. I think there's a number of others that, you know, do that maybe less so than we do. So our expectation is that, you know, the cost curve is gonna tilt. A lot of it depends, too, on the cost of raw material and the byproduct offtake piece, which is, you know, we all say it's half to two-thirds of our cost structure. And so, whether... It's not just conversion, what we call conversion costs, that determine what your relative competitive position is. It's a combination of your conversion costs and your fiber costs.
So there's gonna continue to be, as there always has been, you know, significant differences in different regions in terms of what fiber costs look like. All I know from our standpoint is, if we're gonna be successful long term in generating the kind of returns on capital employed that are consistent with value to our shareholders, you know, we're gonna need to take advantage of the opportunities to invest in our business that we think will put us in that position. And that's been our business strategy ever since I came to Interfor, and I suspect it'll be our strategy long after I've gone. But we've got this opportunity right now in U.S. South that we captured through some, you know, some pretty good acquisitions that we made in the 2013-2015 period.
We've got, you know, we're, we're five years into that now. We've got a pretty good feel for that business, and we've made really good progress putting in place, you know, our systems and processes for operations. And now we're, we're moving forward with the discretionary investment that we think is gonna really put that business in a great spot going forward. So, I'll let others worry about themselves. We're gonna, we're gonna worry about capturing opportunities in our system and delivering returns for our shareholders.
Okay, last question I had. One of your CEO peers announced his retirement for 2019. Just wondering if you're still having fun there?
Having the time of my life. Yeah.... I'm not going anywhere.
All right, that's all I have. That's all.
Thanks. Thanks, Paul.
Your next question comes from the line of Mark Wilde. Please go ahead. Your line is open.
Thanks, Duncan. Just a couple of follow-ups. I wondered if you could just talk about how you see kind of supply in the BC Interior over the next few years. I don't know whether, you know, kind of salvage from some of the fires is gonna buy, you know, some of the marginal mills some more time before they need to close down. But, you know, just how you see kind of capacity in the Interior evolving over the next few years?
Yeah. You know, I think the fire thing, you know, is maybe overrated a little bit. But I think it's-
Yeah.
I think it's had a short-term impact on available supply. I would be surprised if all of a sudden there's a big bubble of volume that flows through the system just because of salvage efforts on a fire. I fully subscribe to the point of view that there's the industry, you know, hasn't seen the full effects of the pine beetle in this yet. There's still, we think, you know, another 1 billion or 1.5 billion feet of production that's gonna fall by the wayside over the course of the next number of years. So I think that industry is timber constrained. I think that, along with growth and demand, is gonna create tension in the overall demand-supply position in North America.
That's gonna create opportunities for well-positioned operations that are capable of investing in their facilities to grow their production in regions outside of BC Interior.
Yeah, okay. A second follow-on. Just in addition to the capital you're spending internally and what you've done in an M&A front, I just, you know, I wonder, you know, how you think about sort of your overall portfolio over the next few years? You're in a lot of different markets geographically. You're in some niche markets. You know, any likelihood that we see a kind of a repositioning within the portfolio?
Nothing planned right now. I think what you're gonna see with our discretionary capital program, Mark, you're gonna see the percentage of our production represented by the South increase. But we're generating pretty good returns in each of the other regions, too. And, you know, I've got some things that I'd like to be able to do, you know, beyond the existing platform from a growth standpoint. But we haven't seen the opportunities yet available to us at prices that we think make sense from a long-term standpoint. But, you know, like as I said earlier, it's a cyclical business. And one of the things we want to do is make sure that we, you know, maintain our financial capacity, even during a period of fairly aggressive capital spending.
We want to be able to maintain the financial capacity that gives us the ability to jump on opportunities when they come along in a manner that makes sense for us.
Yeah. I think we all know, you know, bigger players, this kind of lack of discipline, and forgetting about cyclicality have, have been burned by over time. Last question for me: You're taking a little different approach in terms of expensing any dumping duties versus some of your peers. Would you put a comment about what you're doing?
We're fully expensing. You know, I do know, because Marty tells me all the time, what others are doing. Others can make their own decisions. Our conclusion is we're better off to fully expense at the time, which is what we're doing. So we have basically an off-balance sheet asset that's developing, and I just can't put a probability on it. I fully believe that our case is strong and that we should get all the money back. And if we do, it'll be a windfall gain for us, and I think that's a better way to handle it than going about it a different way.
And Mark, it's Marty. Just to put a little precision on that, on one element. We're all of the companies are encountering pretty much the same fact set, but there are different perspectives in terms of the accounting treatment that different people have taken. So we've taken a fairly conservative approach. Others have also taken a fairly conservative approach in what we pay is what we expense.
Okay. That's all for Marty. Thanks, Duncan. Good luck in the second quarter. It is getting off to a very good start.
Yeah. Thanks, Mark.
Again, if you would like to ask a question, please press star and the number one on your telephone keypad. There are no further questions at this time. I will now turn the call over to Mr. Davies for closing remarks.
Yeah. Thanks, Kelly. Thanks, everybody. We really appreciate, you know, the interest you have in our company. I'm around the rest of the day. I think Marty's around most of the day. If you've got follow-up questions and, you know, everybody knows how to get ahold of us, so please don't hesitate to call. And, if we do, great, and if not, we will talk to you at the end of the next quarter. Thank you.
This concludes today's conference call. You may now disconnect.