Interfor Corporation (IFP) has announced a first-quarter adjusted EBITDA loss of $22 million, reflecting the impact of weak lumber pricing on its operations. The company reported a net loss of $73 million on revenues of $813 million, with a net debt to invested capital leverage ratio of 34.7%. In response to the challenging market conditions, Interfor has indefinitely curtailed its Philomath operation in Oregon and has announced the removal of 175 million feet of production. Despite the current market difficulties, Interfor anticipates a more optimistic outlook for the latter half of 2024 and into 2025.
Key Takeaways
- Interfor reports a Q1 adjusted EBITDA loss of $22 million and a net loss of $73 million.
- The company's revenue for the quarter stood at $813 million.
- In response to market conditions, Interfor has curtailed operations and reduced production.
- A more positive market outlook is expected in the second half of 2024 and into 2025.
- The net debt to invested capital leverage ratio was 34.7% at quarter's end.
Company Outlook
- Interfor plans to manage its business conservatively while reducing financial leverage.
- The company forecasts an improvement in lumber demand, particularly for single-family housing starts, while the outlook for multi-family construction remains uncertain.
Bearish Highlights
- Lumber markets are difficult to forecast with mixed near-term indicators.
- Spring buying season has not met expectations, with a slowdown in repair and remodel activities.
- The market is currently oversupplied, and demand is expected to remain flat for the rest of the year.
Bullish Highlights
- Announced and quiet curtailments in the industry are expected to rebalance the supply side within 60 days.
- Log inventories in Canada have decreased by double-digit percentages, indicating a potential shortage in the summer.
Misses
- The weak lumber market has led to significant losses for Interfor in Q1.
- Multi-family construction demand, especially for Southern Yellow (OTC:YELLQ) Pine, has declined notably.
Q&A Highlights
- Executives discussed the lag in the impact of industry curtailments on the supply side of the market.
- The company is evaluating its portfolio for potential improvements, including the possibility of divesting sawmills.
In the wake of a challenging quarter, Interfor executives have provided insights into the current state of the lumber industry and the company's strategic responses. While the near-term outlook remains mixed, with significant challenges in forecasting and demand for multi-family housing construction, Interfor remains focused on managing production and financial leverage to navigate through the market's uncertainties. The company's expectation of a better balance between supply and demand in the upcoming months, alongside a more positive outlook for single-family housing starts, provides a glimmer of hope for recovery in the latter part of the year.
Full transcript - None (IFSPF) Q1 2024:
Operator: Good morning. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Interfor Analyst Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Ian Fillinger, you may begin your conference.
Ian Fillinger: Thank you, operator, and thank you everyone for joining us this morning. With me on the call, I have Rick Pozzebon, our Executive Vice President and Chief Financial Officer; and Bart Bender, our Senior Vice President of Sales and Marketing. I'll start off by providing a brief recap of our quarter, provide some comments on the market outlook and several key initiatives before passing the call on to Rick and Bart. Turning to our Q1 results, our adjusted EBITDA was a loss of $22 million during another challenging quarter that, was impacted by continued weak pricing. To be clear, current pricing is generally below industry breakeven levels, which is simply not sustainable for an extended period of time. We've been proactive in addressing the controllables, during these market conditions. Last quarter we made the decision, to indefinitely curtail our Philomath operation in Oregon. We've also done a good job reducing working capital, and recently we announced the removal of 175 million feet of production across all North American regions, to address the oversupply and weak pricing that exists today. We've always been fact-based and disciplined and consistently have been an industry leader, when it comes to dealing with adjusting capacity, or making tough decisions to strengthen our portfolio of operations. We have a more positive outlook as we head into the back half of 2024, and into 2025. However, we intend to continue to manage the business, and our balance sheet conservatively. I'll now turn the call over to Rick, and he'll walk you through the financials.
Rick Pozzebon: Thank you, Ian, and good morning all. Please refer to cautionary language regarding forward-looking information in our Q1, MD&A. At a high level, Interfor's Q1 results were a slight improvement over the preceding quarter, but lumber markets continue to be challenging. Lumber prices remained unsustainably weak, relative to average costs across the industry, resulting in cash margins hovering around breakeven levels across North America. As Ian mentioned, our focus continues to be on the controllables within our business. We're using this down market as an opportunity, to strengthen the core of our business, and set up for success over the long-term. Turning to Q1 earnings, Interfor generated an adjusted EBITDA loss of $22 million. On total revenue of $813 million. Compared to the previous quarter, revenue benefited from a 5% increase in lumber shipments, and a 2% uplift in the average realized lumber price. On the cost side, reported production costs on a, per unit of lumber basis, were 5% lower quarter-over-quarter, benefiting from a $14 million decrease in the provision against inventories. A net loss of $73 million was realized in the quarter, which included $31 million of gains from the ongoing sale of coastal BC forest tenures. In terms of cash flows, there was a $17 million outflow from operating activities in the quarter, as negative operating earnings were partially mitigated by the management of inventories, to reduce levels. Capital expenditures were as expected at $26 million in the quarter, while the sale of forest tenures contributed $29 million of cash. Ultimately, our net debt to invested capital leverage ratio ended the quarter at 34.7%. Looking out over the remainder of 2024, we continue to expect a collection of $64 million in tax refunds, and further cash proceeds from the sale of coastal BC forest tenures. Regarding capital allocation, we will continue to take a conservative approach as we manage through this sustained market weakness. The primary focus is on reducing financial leverage into our target range, below 25% net debt to invested capital. Capital expenditures will continue to be restrained in line with previous guidance. To wrap up, Interfor's Q1 results reflect significant ongoing market weakness, which we view as unsustainable for the industry as a whole. Fortunately, Interfor is well positioned to successfully navigate through this period, as supply rebalances with demand. That concludes my remarks. I'll now turn it over to Bart.
Bart Bender: Okay. Thanks, Rick. Good morning everyone. Lumber markets have been difficult to forecast for some time now. The near-term market indicators remain mixed. Longer-term fundamentals remain positive. Our expectation was to see an improvement in lumber demand, through the spring building season. However, at this time, it remains elusive and less likely as time goes on. We are encouraged with the single-family housing starts, with new homes continuing to take an increased share of home sales. We expect this to continue as we finish out the year. Multi-family construction is less certain, as affordability takes a greater toll on this segment. When interest rates start to decline, multi-family is positioned to benefit. With that, builder sentiment has been mostly positive, although most recently it's started to decrease. We expect this to stabilize in the coming months. Repair and remodel end use segments have been mixed - have seen mixed results recently. The programs we have with box stores continue to meet expectations, at this time of year. However, with U.S. household savings largely exhausted, we are expecting borrowing rates to factor into future spending. Lumber markets are highly sensitive to demand and supply levels, and we know that there is a fine line here. We've recently announced curtailments and expect to continue to manage our production to meet our customers' demands. We are seeing a similar response across our industry, as it becomes more evident that lumber demand is likely to remain at current levels for longer. As we move - into the back half of 2024, we expect a better balance between supply and demand. I'll stop there, Ian. Back to you.
Ian Fillinger: Okay. Thanks, Bart. Thanks, Rick. Operator, we're ready to take any questions.
Operator: Thank you. [Operator Instructions] Your first question comes from Sean Steuart from TD Cowen. Please go ahead.
Sean Steuart: Thanks. Good morning, everyone. Ian, a question on the downtime plans from May through September. The implication, I guess, is you're taking it across the platform. I'm wondering if you can give a sense of relative weight, region-to-region. And I guess what I'm trying to get at is, presumably the U.S. South is quite compromised at these prices in terms of margins. Any more granularity you can give on the relative weighting, of where this downtime is going to be taken?
Ian Fillinger: You know Sean, I don't have the - like specifics yet, because we kind of look at, when we look at the downtime we look at the operations that are - performing, I would say, better. So BC is doing okay right now in the Northwest. And when we look at Eastern Canada in the South, we look at it on an individual mill basis more than a regional basis. So where a mill is in a situation where it's more positive, than a mill that may be in a tougher situation. We're taking the tougher situation in the downtime, and continuing to obviously operate the mills that are in a more positive situation. So it really is, not more regional. It's more mill specific. And so, we're being smart about obviously our portfolio of mills and running the ones that we feel are maybe a little advantaged over other ones at this point in the market. And so that's how we're managing that. And it really is spread across North America. Each region has different, unique situations.
Sean Steuart: Thanks for that. Second question for Rick on leverage. I guess in the hopefully unlikely event that this price trough, extends substantially longer. At what point, do you start to think about getting ahead of the covenant on debt to cap? And presumably this isn't a concern the next few quarters, but you likely don't want that ratio to get to 50%, before you worry about it. How do you think about available liquidity, and covenants at this point?
Rick Pozzebon: Good morning, Sean. Yes - our leverage ratio is at 34.7% at quarter end. And we've got plenty of headroom up to our leverage covenants. We also have ample liquidity today of around $300 million. So in here now, we're not concerned. And when we look out, we've got plenty of levers to pull, to manage our leverage ratio. First and foremost, it's operational excellence, making sure we're doing the right things at the right time within the business, focusing on maximizing cash flows from operation. As Ian alluded to, we're targeting our underperforming operations when it comes to downtime, and those sorts of things. So that's the first level we're focused on to sustain ourselves through this market weakness. And as I mentioned in my comments, we've got significant non-operational cash flows coming ahead, which bolster our liquidity and leverage ratio. So that would be the tax refunds this year of around $64 million. And when we look out to 2025, we're generating losses this year, which will result in cash refunds next year as well, on a tax basis. So, there's that to look ahead to as well in 2025. And then, when we think about our BC coastal 10 years, we've got significant progress made already. But looking ahead, there's substantial cash flows we expect this year and into 2025. You can think about that in the range of $65 million to $70 million in total net cash flows to Interfor, to come over the next 12 to 18 months. You can think about half of that happening in the next nine months of 2024, and then the remainder into 2025. So when you factor all those things in, we feel we've got plenty of headroom. But certainly as the market stays down, and we progress through this. We're going to be proactive if we need to be, but we're not at that stage yet.
Sean Steuart: That's great detail. Thanks very much. That's all I have for now. I will follow-up if I need anything else.
Ian Fillinger: Okay. Thanks, Sean.
Operator: Your next question comes from Matthew McKellar from RBC Capital Markets. Please go ahead.
Matthew McKellar: Hi, good morning. Thanks for taking my questions. First, I think you mentioned seeing a supply response in lumber across the industry. Do you think the impact of that response, is reflected in the market and current cash pricing today? Or should we expect that impact to be increasingly felt more as the quarter progresses?
Ian Fillinger: Yes. Hi, Matt, Ian here. I'll jump in and Bart, you can do the same. But I would say, Matt, we've been underwhelmed by the response, from the industry to really kind of rebalance the situation here. Having said that, we are getting intel both from announced curtailments and quiet curtailments that are happening. So we're positive that - on that, that people are starting to do that. I would say, Matt, that we're probably not going to feel that capacity, you know, coming out for 60 or so days. Just given that, as you well know, when you do take, you know a sawmill down, you generally continue to run the planer mill and continue to, move your inventory. And that takes, weeks to work through. So I think there's a lag there before there'll be really any feeling in the supply side in the market. I don't know, Bart, is that fair?
Bart Bender: Yes, totally. And the only thing I would add to that is, that the distribution channels, over the years have kind of, introduced a discipline where they're not reacting to announcements. But rather they're reacting to, whether they're able to resupply or what the lead times look like, or what the demand side of the equation looks like. And so, they won't react, I don't think, until they actually see it. So less so on the announcement, more so on an actual constraint in the market. And to Ian's point, that's going to take 60 to 90 days, in my opinion.
Rick Pozzebon: Yes, Matt, maybe just to close on this question, I mean, we have seen a sizable decrease in our own inventories, through some of the levers that we pulled, and quite a bit on the lumber side. So it is, our check or our opinion is its pretty lean out there. And so, as this works through, it'll be interesting to see how things unfold. But I would use the word sizable decrease for our situation in lumber and log inventories.
Matthew McKellar: Thanks. I appreciate all the color. And the last one from me, I think you noted in February that NC's will be warm weather and impacted log deliveries in BC. Can you provide an update on how things have trended over the past couple of months, and how the log decks at your mills in the province are looking at this point?
Ian Fillinger: Yes, I think in BC, as you know, we've got pretty competitive operations and we have water storage at a couple of our mills. So I would say that we're comfortable generally in British Columbia. I would say, though, that in Eastern Canada, there's been challenges, in particularly in Quebec when it comes to log inventories with the warm weather and what have you. So, yes, I think it's tight. Our log inventories generally are in Canada or down, more than double-digit percentages. If you kind of look from New Brunswick (NYSE:BC), all the way to British Columbia and every region that we operate, and kind of use that as an average, we're again, double-digit percentages down in Canada. I wouldn't be surprised, come summertime the industry, some industry mills may be taking downtime for log shortages, especially if there's an upset condition like a fire season, or something like that that would restrict logging during, any kind of summer hours.
Matthew McKellar: Thanks for all the help. That's all from me. I'll turn it back.
Ian Fillinger: Thanks, Matt.
Operator: Your next question comes from Ben Isaacson from Scotiabank. Please go ahead.
Unidentified Analyst: Good morning. This is Victor jumping on for Ben. I just wanted to ask about the timing of recent curtailment. Supply seems to be acting rationally, and with lumber prices up somewhat sequentially, and we are at what is usually the peak construction season. So, how do you see the demand side of the supply and demand balance, develop for the rest of the year and throughout the summer and into winter?
Bart Bender: Okay. You've got a lot to unpack in there, Victor. I would have to say that the demand side as we're coming into the spring building season, we're expecting, we were expecting to see, an increase in activity and frankly, that hasn't taken place. And so, it seems like this year we're going to miss that part of it, and when we're looking at that, we think it comes down to two factors. A decline on the repair and remodel side of it, especially when you talk about treating. That's an area that we've seen some slowdown. And the other is multifamily and especially in the South, multifamily has decreased. And so, the demand side of the equation has seen a slowdown and I would say that the supply side has not, from an industry perspective, has not responded yet. So, we're still in a position where we think the markets are oversupplied and quite frankly, the pricing that's in place is reflecting that. So overall, we think demand is going to be quite similar year-to-date for the balance of the year.
Ian Fillinger: Victor, Ian here. I'll just add to Bart's, we see that the spring buying season has essentially failed to take off this year. And so, when we look at that and we look at where the U.S. South, pricing is, in the U.S. South, typically isn't impacted by downtime decisions, given the low cost, fiber base there. But prices in the U.S. South are near 50-year lows on an inflation-adjusted basis. As you start to see these impacts of permanent and temporary curtailments coming into effect, with the lean inventories that we talked about throughout the supply chain, I mean, any uptick in demand could, provide meaningful tension into pricing. But if they don't recover, obviously, we expect, given particularly in the U.S. South at the 50-year lows, continued supply responses.
Unidentified Analyst: Thanks for the color guys.
Operator: [Operator Instructions] Your next question comes from Ketan Mamtora from BMO Capital Markets. Please go ahead.
Ketan Mamtora: Thank you. And thanks for taking my question. Bart I mean, I think this, weaker than expected pickup in R&R demand, is echoed by some of the other peers as well. Can you talk about, what you guys are seeing in terms of your volumes in R&R, on a percentage year-over-year basis? Any color around that?
Bart Bender: Yes, I won't get into the detail particularly, but I will, the commentary is, we have our box store programs that are out there. So, we have a pretty good view of the consumption that's taking place there. And I would say it's matched with what we've budgeted so far year-to-date. Generally, Q1 is a bit slower. Q2 starts to pick up, and that's what we're seeing, quite frankly. It's the treating side of the business that, I think has really seen the slowdown. And we see that through the programs that, we have in place for that as well. And so, really almost need to look at it in two ways. So, the DIY out-of-the-box store fairly stable, but there does seem to be a slowdown with any of the treated products. Obviously, that's your exterior type projects in the backyard and those types of things. Those have definitely slowed. And I would say if I was going to give you a percentage on the treated side, you're looking at in the 20% range decline on that side. So, fairly significant.
Ketan Mamtora: I see. Okay. Now, that's helpful. And then, Rick, on 2024 CapEx is $90 million. Till the plan - do you have any flexibility there?
Rick Pozzebon: Hi, Ketan. Yes, $90 million still is the plan, and we're on track for that. There's certainly a little bit of flexibility there, as we take some downtime and maybe that requires less maintenance CapEx. But as it stands right now, we're still on plan for the $90 million.
Ketan Mamtora: Got it. And then, just coming back to financial leverage, so you called out a couple of items, the tax proceeds, BC tenures. Anything outside of that you can do that could help accelerate, bringing down the financial leverage? Rayonier Advanced Materials (NYSE:RYAM) recently sold their lumber duty rights. Is that something that you guys are considering at all?
Rick Pozzebon: For sure. We did see those transactions announced. Without knowing all the terms, though, it's hard for us to comment on the economics. It is nice to see though, that some value is being ascribed to the duty deposits out in the open market. We certainly believe our $560 million U.S. deposits represent significant value to our shareholders. And in dollar terms, on a per share basis, our duty deposits represent about $11 Canadian on an after-tax basis. So there's significant value there in our minds. In terms of the leverage piece, as we look out, I mentioned it's the operational excellence piece, making sure we're getting the most out of our operations, out of each individual operation. So, we look closely each and every week at each operation and make decisions based on the outlook for those. And with the mindset of maximizing operational cash flows, and minimizing the impacts on our leverage as we work through the down market.
Ian Fillinger: Maybe Rick, I mean, you know, Ketan, when we look at, those transactions that happen, I mean, they're not attractive to us to consider I guess.
Bart Bender: I agree.
Ketan Mamtora: Sorry, that's helpful color.
Ian Fillinger: Yes, Ketan, one thing that, when you talked about R&R and what have you, just to come back to that for a second, I mean, Southern Yellow Pine, supplies a lot of that. And I just kind of want to remind, folks that, we're not, as heavily Southern Yellow Pine as maybe some people think we do. With Eastern Canada, about a third of our production is in the SPF. And important, is that SPF and Southern Yellow Pine aren't, entirely exchangeable or substitutable. So, we are benefiting on the SPF side of the business, when it comes to pricing on when you look at the Southern Yellow Pine. So, our diverse geography and the move to Eastern Canada to capture some of the SPF that was available, through those acquisitions is, we're seeing positive pricing when we look at those gaps.
Ketan Mamtora: Thanks, Ian. I appreciate the color. I'll jump back in the queue.
Ian Fillinger: Thanks, Ketan.
Operator: Your next question comes from Hamir Patel from CIBC Capital Markets. Please go ahead.
Hamir Patel: Hi, good morning. Bart, I wanted to follow-up on the earlier question about the multifamily weakness. I was just wondering if you had a sense as to, perhaps how much more wood intensive the multi-starts are in the South, versus the rest of the U.S. And is maybe Southern Pine just that much more prevalent in multifamily usage in the South? Because when you look at the actual starts, they're down more in the South, but not necessarily that much more than the whole U.S.?
Bart Bender: Yes. I would take a look at the permits side of that equation as well. But I think if you look at the big - the states that are big consumers and builders of multifamily. So let's say your Florida, your Georgia, and your Texas, I mean, those three states, I think the activity has decreased fairly significantly on the multifamily side. And in particular, if you look at the permits, I think you'll see a trend there. And obviously, those markets are right in the backyard of Southern Yellow Pine producers and are largely supplied by Southern Yellow Pine. So I think the impact of that, is a little bit more heightened in the South. And that really, I'm looking at that as one of the main reasons that we're seeing the market that we have in the South.
Hamir Patel: Okay. No, fair enough. That's helpful. And just the last question I had, Ian, as part of the balance sheet management, would you look at potentially divesting any of your sawmills?
Ian Fillinger: Well, Hamir, that's a good question. I mean, our portfolio of, 30 or so operations now, obviously you've got different stages of each one. And we've got ones that are in the top and ones that are in the middle and ones that need some work. So, we're always looking at those. Philomath is an example, last quarter, you'll recall, we sold Acorn, a year or so ago. We shut down our Hammond Cedar bill and then converted that into a real estate play. So at the end of the day, I mean, we're always looking at how do we improve, the ones that need it? What's the capital investment? What's the timeline? How's the fiber supply and fiber security? So I would say just, Hamir I mean, generally, I mean, that's one of the most important things that we're doing all the time, and always trying to improve, or find a path to improvement for the shareholder and for the company. So it would be yes, we're always looking at our portfolio, on how to improve it.
Hamir Patel: Fair enough. Thanks, Ian. That's all I have.
Ian Fillinger: Great. Thanks, Hamir.
Operator: And there are no further questions at this time. I will turn the call back over to Ian for closing remarks.
Ian Fillinger: Okay. Thank you, operator, and thanks, everybody, for your interest in our company, and feel free to reach out to myself, Rick, or Bart any time. And this concludes our call. Have a great day.
Operator: Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.