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

Good morning, ladies and gentlemen, and welcome to Green First Fourth Quarter and Fiscal 2023 Results Conference Call. [Operator Instructions] During this conference call, GreenFirst's 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 laws. 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 risks factors and assumptions is included in GreenFirst's MD&A and AIF, which can be accessed on the company's website or through SEDAR+. After the speaker's remarks, there will be a question-and-answer session. I will now pass it over to Paul Rivett to begin the management presentation. Please go ahead.

Thank you very much, Joanne. Good morning, everyone, and welcome to our fourth quarter and fiscal 2023 earnings call. As Joanne said, I'm Paul Rivett, the Executive Chair of GreenFirst. Today, I'm joined by Joel Fournier, our CEO; Terry Skiffington, CEO of Kap Paper; Ankit Kapoor, our interim CFO, and Michel Lessard, our President; and of course, Gwen Webster, our Chief of Staff. The end of 2023 marked a significant year for us. We rightsized our balance sheet and our business, putting a focus on Ontario, decentralized our paper and lumber operations and brought on board a new CEO, Joel, along with a leader for the paper operations, Terry. As we continue in 2024, I'm confident that the steps we took in 2023 position us well, not just for 2024, but for the years to come. We are already starting to witness positive trend in lumber prices, which bodes well for our future prospects. Despite high borrowing rates currently prevailing, there is a shift in momentum with the U.S. Federal Reserve and Bank of Canada indicating potential interest rates cut -- interest rate cuts at the end of this year. This boost is much needed for the lumber markets as the significant rate increases in recent years have negatively impacted U.S. housing starts and of course, buyer sentiment, resulting in a slowdown in housing construction. In the longer term, a lack of available housing inventory, record levels of immigration in the U.S. and Canada as well as the growing demographic driven demand for homes are expected to have a positive impact on lumber markets. We are starting to see analysts and industry experts increasingly mentioning these factors, and we firmly believe that the lumber industry has passed the inflection point. We anticipate positive tailwinds in pricing in the upcoming quarters. Please also keep in mind there is a decrease in the supply of lumber in the market due to numerous closures in British Columbia and other parts of North America that is continuing in 2024. GreenFirst is fortunate to operate in the business-friendly province of Ontario. On a more somber note, we are still facing continued pricing pressures on paper products. but we have tremendous faith in the abilities of Terry and his team to significantly increase productivity at Kap Paper. Our management team will take us through the results of the quarter and the year starting off with Ankit giving us the financial highlights. Over to you, Ankit.

Thanks, Paul, and good morning, everyone. The company's net loss in Q4 was $21.6 million with an adjusted EBITDA of negative $18 million. This compares to a net loss from continuing operations in the third quarter of $2.7 million, where adjusted EBITDA was $8 million positive. The third quarter included a USD 7 million recovery related to the 2021 duties paid following the U.S. Department of Commerce's final determination of its fourth administrative review. Net lumber sales recorded in the fourth quarter were $70.1 million compared to $63.6 million in Q3 or 10% higher. Lumber EBITDA compared to Q3 was impacted by lower pricing in Q4. Pricing lowered in the first half of Q4, however, we began to see a rebound in the back half of Q4. This was primarily due to positive sentiment from the Fed Reserve and Bank of Canada giving clear signs to hold interest rates. We also had higher volumes in Q4 as markets started to recover in the latter half. The Paper segment was negatively impacted in Q4 due to maintenance-related activities that lowered the rate of production at the paper mill. Net sales in the paper segment were relatively flat at $33.1 million in the fourth quarter. Compared to Q4 of last year, net loss improved by approximately $4.3 million and adjusted EBITDA improved by $9.4 million. This is primarily due to a lower cost profile and duties paid in the lumber segment, partially offset by lower lumber prices and unfavorable results from the Paper segment. For the fiscal year 2023, we saw a net loss of $48.8 million with an adjusted EBITDA of negative $30.2 million. This compares to a net loss of $4.1 million and adjusted EBITDA of positive $39.4 million in 2022. For the lumber segment, adjusted EBITDA was substantially lower compared to 2022. Net sales in lumber were $268.4 million versus $398.1 million in 2022. This was primarily due to the significant decline in pricing compared to the high seen in the first half of 2022, driven by monetary tightening. To partially compensate for the decline, our cost profile improved as a result of overall higher volumes produced and lower stumpage fees, which reduced as lumber prices decline. Additionally, the company recorded a USD 7 million of duties recovery in 2023 and paid a lower duty rate on its shipments to the U.S. from August 1 onward. Overall, 2023 volumes were also higher as there were less challenges related to logistics compared to 2022. For the Paper segment, EBITDA was higher compared to 2022. Net sales were $141 million versus $94 million in 2022. This was primarily driven by higher volume from the restarting of the second paper machine. 2023 saw a significant improvement in unit cost from having 2 operational paper machines during the year. This was partially offset by a decline in prices for paper products in 2023. The company saw positive results for the majority of the year in its Paper segment, however, this trend was negatively impacted by maintenance and downtime in Q4. Corporate and SG&A improved due to lower setup related costs and the recovery of a previously written off AR balance in 2023. For 2023, finance costs were $2 million compared to $12.8 million in 2022. This was driven by having a lower debt balance and interest rates on its outstanding debt in 2023. For majority of 2022, the company paid interest on its previously held U.S. denominated high-yield debt. Our debt balance at the end of the year was $23 million as a result of net repayments for the year of $31 million. This included the repayment of the term loan portion of the credit facility, making the company no longer subject to financial covenant ratios under its credit agreement. We continue to manage our liquidity through the volatile lumber markets and harvesting season that requires significant investments in raw materials. We managed this prudently by ensuring tight inventory management at the mill level, supplemented by drawdowns against our asset-based lending facility for the seasonal spend. Our lending facility is supported by borrowings against our inventory as such, higher levels of inventory are supported by the credit facility during the harvesting season. We also leveraged our credit facilities equipment financing portion in order to finance purchases under key strategic projects. This financing was accessed subsequent to year-end. I will now pass it over to Joel first for his commentary on our lumber operations. Joel?

Thank you, Ankit. Good morning, everyone. Good morning, all the shareholders, analysts and my colleague on this call. I'm honored to speak to you today as the newly appointed CEO at GreenFirst. Since I take on this role, I've been impressed by the dedication and the talent of our team. For those who recall during the last call, I mentioned that I had the opportunity to meet with all the employees across the sawmill operation. We are making progress and together, we're actively working towards a common goal to improve the business. After my first few -- after my first 4 months with the company, we had identified short-term opportunity to make the company more profitable. Our focus is on implementing rapid and cost-effective changes that can yield immediate and fast results. Our short-term objective is to drive swift and efficient improvements in our operation, processes and system. In the short term, we continue to be careful with spending and we manage our cost effectively, but we're also working on developing a long-term and midterm strategic plan to grow the business. I will be unveiling a comprehensive strategic plan in the second quarter of 2024 that will outline clearly the vision for the future and the steps we need to take to achieve it. With this plan, I'm confident that we can position the company to be profitable in the long term. We have access to log supply that will support our future growth, and this is very important. It's a unique situation we are in compared to other provinces in Canada who unfortunately are experienced a decline in their wood supplies due to factors such as forest fire, insect infestation and other. Additionally, we also benefit from a favorable political environment and a lower stable log costs compared to our peers in Canada. Our main objectives with this strategic plan are to utilize the wood available to grow our current business in Ontario. As part of the strategic plan, we're also currently looking and evaluating our SG&A costs, and we are expecting to announce a substantial reduction compared to 2023 in the coming weeks. Our goal is to have a cost profile that will be competitive for the long term. Strategic capital expenditure cannot be done without the mindset of continuous improvement. So to continue to drive our culture of continuous improvement across the company, we have identified specific noncapital expenditure-related initiative to drive a saving of approximately $14.5 million compared to our 2023 results. In the last quarter, we saw the completion of the decentralization and the engagement of Terry Skiffington as our new paper mill CEO. Terry will be discussing the details of this change and our plan moving forward for the paper mill very shortly. With the successful splits of our lumber and paper mill operation, we are now able to focus on optimizing each business separately. Our general manager and their team are being in power to make quick decisions and drive the success each of each respective facilities. This decentralization will enable us to add up to market change more quickly and effectively with the ultimate goal in mind to improve the performance and the profitability of each business. Terry's insight on the paper mill will provide future clarity on our strategy moving forward. In the beginning of 2023, the company closed on the sales of the Quebec sawmill and related operation for $94 million. This move allowed the company to focus its managed resources and capital expenditures on its more profitable sawmills. Based on North American industry data coming from FEA, our mills are competitive, and we feel this can be further improved with the short and long-term effort to increase production and continue to lower our production costs. In August 2023, we were pleased to receive news that the duty rate has decreased significantly from around 20% to 8%. To give you color on this, the change resulted in a substantial cost saving of approximately $9 million. As you are probably aware, we are actively pursuing the return of our deposit duty, recognizing that this process may take several years to complete. We currently have USD 80 million of duty on deposit as we speak. As we continue to look at opportunities to monetize our noncore assets, we are in a process to sell and maximize the value of the Kenora land located on the [ lakes of the wood ]. We are working with the planning and design firm. We aim to attract potential buyers and secure the best outcome for the land and for the company. The company is finalizing a new nonbinding letter of intent with a third party now. We are optimistic about the anticipated uptick in the housing, as Paul mentioned. And there is presently housing supply deficit in both United States and Canada. And it was recently announced by the U.S. government that they're going to put the housing strategy in top of their budget for 2024. And presently, they're discussing to put a plan in place to promote building on new houses, and they will try to close the gap with this program they're putting in place as we speak. So it is expected also that the interest rate will begin to decrease later this year, and that will foster a higher price and demand for wood product as long as what the U.S. government is trying to implement to promote building of houses. So we will be prepared for the lumber market response and will capitalize on the increased demand by effectively using our wood resources and aligning our growth strategy with the need of the housing market, we aim to position ourselves for success and long-term sustainability in the industry. On the operational side, we saw an increase in both our sales and shipments from our lumber segment this quarter over the third quarter. This was primarily driven by increased demand as a result of positive trend in the U.S. housing start and Central Bank signaling a halt of future interest rate hike. Additionally, buyer continue to maintain low field inventory level, which helped to increase demand and raise price. During the fourth quarter of 2023, lumber production saw a slight increase over the third quarter. This uptick in production was primarily driven by less maintenance downtime. Overall, lumber production for the entire year of 2023, also showed an increase of 6% from the previous years. In Q1 of 2024, with the initiative we put in place, we are seeing a very positive trend with our production in the month of January and February, our sawmill operations broke several production records. That's it for this section. I will pass this over to Terry Skiffington.

Okay. Thanks, Joel. Good morning, everyone. Today marks my 2-month anniversary at GreenFirst, I have a long history in the pulp and paper industry, including previous roles as COO for Oji Pulp & Paper New Zealand, I was mill manager for Resolute Mill of the Atlas facility in Thunder Bay and previous mill manager and VP for the Kapuskasing Paper Mill. I have clear understanding of these assets, along with paper grades, North American and international markets and the importance of the local community. Last year, I was engaged by GreenFirst to advise on paper operations. During this time, I saw the potential for its future and felt compelled to introduce sustainable long-term solutions based on the models that I have successfully worked on in Canada and around the globe, particularly with respect to being successful and competitive in newsprint markets. I came on board as the CEO of Kap Paper in early January with an objective to quickly return the operation to positive earnings. And from more of a strategic point of view, we are also active with the Ministry of Natural Resources with their biomass strategy, and we are doing a feasibility study for a biomass cogeneration power plant at the Kap Paper Mill. I acknowledge that our shareholders and the team may be disappointed with the results from the last quarter. I'm implementing changes throughout the entire mill, which will start turning operational performance around as early as Q2 of this year. The objective has been and still remains for the paper mill operations to consume the sawmill residuals both biomass and chips in a manner that produces positive cash flow. A couple of points on the fourth quarter of 2023 performance. We continue with the completion of the second paper machine, which is PM4 start-up. We were able to achieve the target operational performance in the fourth quarter and PM5 operational performance was close to target up until the end of the third quarter. The mill made a positive contribution to EBITDA for the first 3 quarters of 2023. However, prices declined and numerous operational issues contributed to the negative EBITDA in the fourth quarter as mentioned by Ankit. The mill experienced a planned capital shutdown in late October that did not go as expected, and there were many operational problems and challenges post that shutdown. As mentioned in my opening remarks, we are aggressively making changes at the paper mill and are underway with the cost reduction plan targeting all levels of the P&L and expecting to return our consumptions to pre-COVID levels with two machines operating at Standard. I will pass back over to Joel to complete the earnings call and a sustainability note, one our entire company is incredibly proud of.

Okay. Thank you very much, Terry. You are right, we are extremely proud of our forestry operation base solely in Ontario, where we focus on sustainable practices. We prioritized environmental stewardship by promoting biodiversity, maintaining forest health and complete utilization of the trees we harvest. Our commitment to sustainability extends to all aspects of our business, ensuring that our lumber and paper products are produced safely. This not only protects our employee and the environment, but also long-term value for our stakeholders. I would like to say and mention that we're proud, our Gordon Cosens forest hear Kapuskasing has been FSC certified for 20 years now and was the first forest to be FSC certified in the Canadian boreal forest, showcasing our dedication to sustainable forestry. Our team is committed to excellence and implementing best practice for a sustainable future.

Thank you very much, Joel. So that ends the formal part of our presentation. I'll turn it back to Joanne to take questions, please. We'll take -- submit your questions into the online portal here. Thank you.

Okay. So our first question is, can you provide any insight on expense reduction initiatives. So I'll turn it over to you, Joel for that one, please.

Okay. Thank you, Paul. I can share with this group that we have been comprehensively reviewing our operation and part of our cost profile improvement is due to finding some savings in the mill. We did improve our costs from last year from 2022 to 2023. And we have a comprehensive plan right now in place to continue to reduce our costs going forward for 2024. In fact, like I mentioned in my script, we did identify a $14.5 million of cost reduction and other productivity improvement for 2024. This plan is supported with clear initiatives, clear action plan, who's going to do what, by when and we're going to continue to track this and make sure we deliver. We do expect our SG&A also an overhead to improve in the first half of this year. Like I mentioned earlier, we did put in place a comprehensive SG&A reduction plan, and we're going to make some announcement in the next coming weeks to unveil what will be the ceiling. In addition, our goal is to increase production. And like I said, we do have initiatives in place to increase production. Every time we can increase production that will reduce our unit cost and will make the company more profitable in the long term. There is many initiatives we do have in place to increase production. One of them is we did implement an initiative program with the employee, and we're very pleased with the results that we see all across the mill so far.

Thanks, Joel. And I would add that we are seeing productivity records being broken at our mills. And when the Board hired Joel, it was this, it was a singular focus on productivity and efficiency and getting us to first quartile and Joel singularly focused on that. We have a follow-up question with respect to -- can you elaborate on the substantial cost reduction program? I think Joel, you just mentioned that, like Joel will be coming back in the second quarter with an announcement on a comprehensive cost reduction plan, and we look forward to giving that to you. As I said, we're -- he's got a singular focus on getting us to first quartile, top quartile, and we'll be giving that to shareholders in the second quarter. Our next question is, when do you expect to receive the $9 million in duty income? And can you provide the overpayments for 2022 and 2023? I think, Ankit, your...

Yes. I think just again to reiterate that CAD 9 million is the difference that we recorded in 2023, which represents the delta between what we paid in 2021 versus the final rate that was determined to be applicable to 2021. We're uncertain on the timing of the settlement and it's subject to the industry-wide settlement, as Joel mentioned. Our total overpayment though, compared to our peers is approximately USD 22 million. But subsequent to August 1, we did align ourselves with peers, which has indeed helped our bottom line and cash flow from operations.

Our next question is with respect to newsprint pricing falling, do you expect to shut the second line down or take downtime? I think that's clearly a Terry question before I hand it over, though, I would emphasize that we have seen our competitors shutting down facilities. It's quite unfortunate for Northern Ontario. We've seen Domtar shut the Espanola mill, and we've seen the Terrace Bay facility shutdown. It's historically been feast or famine on chips and the utilization of chips. And right now, there is an overwhelming supply of chips that can't be consumed. Our mill in Northeastern Ontario is extremely important to the Northern Ontario ecosystem, and we're very focused on doing everything we can under Terry's leadership to make that mill as good as it possibly can be. But with lumber -- sorry, with paper prices as low as they are, it is very challenging. So Terry, I'll hand it over to you to answer specifically.

Yes. Okay. Thanks, Paul. Yes, just to reiterate, the market conditions right now are just -- it's very, very difficult. Pricing has come down significantly through 2023. And is not appearing to rebound anytime soon. At this time, in terms of Kap being able to maneuver, let's say, in these conditions, our focus at this time is all about increasing our operational performance. And as Joel had mentioned, getting our unit costs down. The simple most effective and fastest way to do that is through increasing our plant output. And then secondly, it's every line of the P&L in terms of our cost structure to pull out costs, particularly with our consumption levels. And what I mean by consumption is all of the purchased materials, everything from energy to chemicals to all the supplies that we need to make a ton of newsprint, get those consumption levels back down to where they can be and where they were, let's say, pre-COVID. So that is our particular focus right now. However, the truth is all options remain possible. We'll continue to evaluate other options. But at this time, it's very much to get the mill positioned where it can be competitive in these very difficult market conditions.