GreenFirst Forest Products Inc. (GFP) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to GreenFirst Third Quarter 2022 Results Conference Call. [Operator Instructions] During this conference call, GreenFirst representatives will be making certain statements about future financial and operational performance, business outlook and capital plans. These statements may contain forward-looking information or forward-looking statements within the meaning of Canadian securities law. Such statements involve certain risks, uncertainties and assumptions which may cause GreenFirst's actual or future results and performance to be materially different from those expressed or implied in these statements. Additional information about these risk factors and assumptions is included both in the accompanying presentation in our MD&A and the 2021 Annual Information Form, which can be accessed on the company's website or through SEDAR. After those remarks, there will be a question-and-answer session. This presentation also contains certain non-GAAP measures, which are not intended to replace measures of financial performance and liquidity reported in accordance with IFRS. For additional information regarding these non-GAAP measures, please refer to the company's MD&A for the second quarter of 2022. Mr. Doman, you may now begin the conference.

Thank you, operator. Good morning, everyone, and welcome to GreenFirst Forest Products Third Quarter 2022 Earnings Call. I am Rick Doman, CEO of GreenFirst. And today, I'm joined by Alfred Colas, our CFO; and Michel Lessard, our President. This is a landmark call for us. This past quarter, we marked the 1-year anniversary of GreenFirst running the acquired Forest Products assets, and I'm very proud of all that we have achieved. In particular, as a team, we have successfully integrated 6 sawmills and 1 paper mill as well as our harvesting into the GreenFirst family. These mills have been serving their respective communities for a long time, and it was important for us to ensure we foster the relationships between our operations and its communities further. The company has a team of approximately 1,500 individuals with a diverse range of skill set and experiences. In addition, we support many direct and indirect jobs in the communities we operate in. We are particularly proud that we were able to hire top talent over the past year despite the challenging labor market conditions. COVID, labor shortages and inflationary issues have all been challenges for the company that we are managing through. We can proudly say that we have a strong corporate presence in the growing community of North Bay, with our offices in the downtown core. We appreciate the support we have received from the local government and, in particular, the mayor of North Bay in helping us integrate into the community. We have been hosting our management meetings and some of our Board of Director meetings from this location. We continue to build a sustainable Forest Products business that can withstand the volatility of the lumber markets. In our first year of operations, we have seen historic highs in lumber prices followed by downward pressures caused by macro events. I'm impressed that our team's ability to execute and remain agile through such volatility. This is something we will continue to build on and focus on the areas of our operations that we can control and improve to remain agile despite paying higher duties than most of our industry competitors. Other key accomplishments that I wanted to highlight was our ability to refinance our debt as we entered into a credit facility with a Schedule I Canadian bank, which replaces our previous high-yield term debt. This helps us with the financial agility we need to deliver on our operational and capital expenditure goal, at lower interest levels and better terms for the company. Alfred Colas helped us significantly as CFO with his financial team achieved a successful outcome. We wish to thank him. We restarted the second paper machine at our paper mill in Kapuskasing. This allows us to increase our productivity levels at the paper mill. We expect significant improvements in Q4 due to the second machine operating more stably and at stronger capacity. I wish to thank Michel and André Ouimette and our team on this for the improved results we expect in Q4. We have undertaken a project to move our equipment from the idle Kenora sawmill and into other sawmills. This move has given us the operational ability to improve key areas in our other operating sawmills, with the goal to increase productivity and recovery in those sawmills. We continue to seek opportunities for 114 acres of prime Lake of the Woods land in Kenora, along with the 4-acre island adjacent to it. I do wish to say that this movement of equipment has been very positive for our company as we install it at our other mills because it's very difficult to buy equipment currently and long lead times to get it and the cost for it have gone up significantly. Overall, our third quarter results reflect the volatility that the industry is seeing with lumber pricing, which were challenging in this past quarter. Despite this, our lumber segment still showed a profit. In addition, we continue to see inflationary pressures on our costs, which has also impacted our bottom line. Alfred will further discuss the financial results for the quarter in his presentation. We expect lumber prices to remain volatile with the recently announced interest rate increases continuing to impact U.S. housing starts and homebuilder confidence. Field inventories are currently low, and this could provide some strength in Q4 for lumber prices. The recent announcements of BC mills to curtail lumber production will also be a supply side factor that may impact prices to increase. We continue to see logistical challenges. However, we have seen some improvement from issues that the company experienced in prior quarters. We expect to see further logistic improvements by working closely with our transportation partners. Inflationary cost pressures remain a real concern, although we have seen some improvements recently. We continue to challenge the high softwood lumber duties that were imposed on GreenFirst by the U.S. Department of Commerce. We are appealing this decision. I will now pass it on to Alfred for his financial update on the Q3.

Thank you, Rick. With lumber prices dropping and inflation increasing our operating costs in the third quarter, GreenFirst reported a net loss of $23.3 million or $0.13 per share based on consolidated sales totaling $153.4 million. Lumber prices in the third quarter averaged $780 per thousand board feet -- these are in Canadian dollars, by the way -- which was below the average price in the second quarter by $475 per thousand or 38%. This was our fourth full quarter of Forest operations since closing on our 6 sawmills and 1 paper mill late in Q3 2021. We recorded a negative EBITDA of $29.7 million for the third quarter. Reconciling items from net earnings include finance expenses, income tax expenses and depreciation and amortization. Adjusted EBITDA was negative $7.9 million in Q3, and it excluded onetime losses of $11.2 million on extinguishment of debt and $5.3 million in other nonoperating losses, in addition to an unrealized $5.3 million foreign exchange loss on our U.S. dollar debt, which was extinguished on September 23, 2022. We paid $13 million in duties on U.S. shipments during the third quarter. Excluding these duties, third quarter adjusted EBITDA before duties was $5.1 million positive. Our Forest Products segment had net sales of $127.4 million on 146 million board feet shipped, with a cost of sales of $116.3 million. We produced 130 million board feet during the quarter. Turning to our Paper segment. In the third quarter, we had net sales of $26 million, reflecting shipments of 29,300 metric tonnes, with cost of sales of $34.6 million. During the third quarter, we continued the commissioning of our second paper machine, which contributed to higher paper production. Q3 reflects start-up costs related to the restart of this machine and the impact of record high electricity and fuel charges impacting freight costs. These factors made it a challenging quarter for the Paper segment. The second machine is expected to reach full production capacity during the fourth quarter of this year. As a result, we are expecting that this will benefit the performance of the Paper segment going forward. Selling, general and administrative, or SG&A, expenses were $5.9 million in the third quarter and about $1 million less than SG&A expense in Q2. We had savings this quarter from not requiring one-off Q2 setup costs relating mainly to IT, combined with the full quarter benefit of not relying on transaction services support from RYAM, which were terminated in May. Turning to our balance sheet. During the third quarter, we successfully restructured our long-term debt and entered into a credit facility with a Tier 1 Canadian bank, as Rick mentioned earlier. And this includes up to $125 million in an asset-backed revolving credit facility and a $15 million term loan. This new credit facility has simpler compliance and loan covenants compared to our prior U.S.-denominated, high-yield debt. Our liquidity position at the end of the third quarter was $52.5 million, including $29.9 million in cash on hand and $22.6 million available under our asset-backed revolving credit facility, which is net of $12.7 million for standby letters of credit. The drawn balance on our revolving credit facility is $69 million. The sale of our noncore private boreal forest property, announced on September 7, will add $49 million to our liquidity, which will help GreenFirst to succeed through the current challenging lumber market. Based on our cost basis for tax depreciation in relation to 2022, as at Q3, we do not have a liability for income taxes payable based on current estimates. I'm happy now to pass it on to Michel for his comments on the operations.

Yes, Alfred. Again, slides are in English and I'll present in French, but also some part will be presented in both languages. [Foreign Language] We indicated previously that we have plans to monetize some of our noncore assets. And as some of you may have seen, we have successfully completed the sale of our 203,000 acres of our private forest land, located south of Kapuskasing, Ontario, for proceeds of approximately $49 million. Following a thorough review, the property was identified as noncore. Consistent with the company's strategic vision in following a lengthy bidding process, the transaction was concluded in the best interest of the company. Please refer to our news release dated November 7, 2022, for further information on this sale. For Kenora, we continue to work with the Ontario government for a new site for a potential sawmill in the region. [Foreign Language] The Kenora equipment move is another step taken towards realizing our annual production capacity, as has been indicated in this graphic, while we continue to see better ways of operating our sawmills to increase production. We have previously indicated a $60 million CapEx budget for 2022 through to 2024. However, COVID impacts, inflationary cost pressure and ongoing supply disruptions have impacted the cost of operation in equipment, along with the timing for this expenditure. The company continues to assess the impact of these macro changes on its initial strategic capital expenditure plan and expects the actual expenditures and time frame for deployment to be greater than initial estimates. The execution of this plan will depend on realizing sufficient cash flows from operations and cash proceeds from the sales of noncore assets. [Foreign Language] Now back to Rick.

Thank you very much, all, for joining our call. And now we ask for any questions.

So we've already received a bunch of questions, and there's quite a few for the recently announced land sale. So we'll start with those ones. Michel, can you answer this one? Can you shed some light on what the thought process on the company selling the land that was announced earlier this week?

Yes. Sure. Thanks, Gwen. As I mentioned just earlier in my text and following a thorough review, the property was identified as noncore. So again, consistent with the company's strategic vision, also in following the lengthy bidding process, so the transaction was concluded in the best interest of the company. So that's very important. And I can say also that we're very pleased with the conclusion of this transaction. So very good things for the company.

Another one for you. How does the sale of the land that was announced yesterday impact the company's access to wood supply for its sales?

Yes. So the property has been a source of SPF supply to the Kapuskasing sawmill from time to time over the last 20 years. Potential future harvest volumes will be at the discretion of the buyer and would be influenced by different factors as the, I would say, ecosystem management objective and their forest carbon and also Forest Products market. That said, we still have access to an important wood basket. So it's important to mention, just to give you an example of the scale of the land, we currently manage 9.2 million hectares of forest land. And as at close tomorrow, it will be minus 82,000 hectares. So making that we're still going to manage 9.2 million hectares. So it still remain, again, as I mentioned, a very important wood basket for the company.

Perfect. And Alfred, can you answer this one? Do the proceeds of the land held with the timing for CapEx plans? What else does the company plan to spend the money on?

Thanks, Gwen. So as has been said by Rick and by myself earlier, we're in a low lumber price environment. And so these proceeds are important for us to have more general working capital to advance with our plans and start 2023 with a stronger balance sheet. And the company is always evaluating its plans to execute its vision and strategy. And these funds will really help us to implement that strategy. And as I said, it will also strengthen our balance sheet, coupled with the debt refinancing, which puts us in a much stronger position to start 2023.

Perfect. We've got a good question here in our paper mill. Can you explain how the company plans to turn around the paper mill as even the second paper machine starting, we still continue to see the losses in this segment? Alfred, can you explain that one for us?

Okay. Thanks, Gwen. So as I -- I had some remarks in my comments earlier. But during the third quarter, we continued with the commissioning of our second paper machine, and that contributed to higher paper production in the third quarter. We had higher costs because of start-up costs, including training of new personnel to run the second paper machine, and also the operating costs, the impact of higher electricity -- record-high electricity prices, in fact, during the quarter, as well as high fuel costs and freight costs. These factors combine to make it a pretty challenging quarter for the Paper segment in Q3. As has been said, this second paper machine is expected to reach full production capacity during the current fourth quarter. And as a result, we're expecting that this will benefit the performance of the Paper segment going forward.

Yes. Rick wants to add to that.