Interfor Corporation (IFP) Earnings Call Transcript & Summary

Good morning. My name is Chloe, and I will be your conference operator today. At this time, I would like to welcome everyone to the Interfor analyst conference call. [Operator Instructions] Mr. Fillinger, you may begin your conference.

Thank you, operator, and thank you, everyone, for joining us this morning. With me on the call, I have Rick Pozzebon, Executive Vice President and Chief Financial Officer; and Bart Bender, Senior Vice President of Sales and Marketing. I'll start off by providing a brief recap of our first quarter before passing the call on to Rick and Bart. Adjusted EBITDA was $49 million in Q1, and despite weather challenges and tariff uncertainties, all of our operating regions were EBITDA positive. This result was largely driven by higher sales realizations across all regions. Although the pace of single-family starts remain somewhat resilient year-to-date in the context of interest rate environment and associated affordability challenges, the geopolitical situations remain uncertain, and the aggressive U.S. trade policy has significantly increased the possibility of slowing demand. Therefore, we're maintaining a conservative outlook for 2025. We have geographically diversified our company to weather these type of uncertain periods. Our U.S. platform represents 60% of our asset base, expanding both the U.S. South and the Pacific Northwest. Approximately 76% of our total production is not subject to duties, or U.S. trade actions, and our available liquidity of over $300 million is strong. In closing, our outlook is mixed. However, our foundations are strong. We're diversified, and we continue to see opportunities for efficiency costs and margin improvements across all of our regions. I'll now pass the call over to Rick.

Thank you, Ian, and good morning all. Please refer to cautionary language regarding forward-looking information in our Q1 MD&A. Overall, our Q1 results were a significant improvement year-over-year, reflective of stronger lumber prices across all key products and the steps taken to optimize our sawmill portfolio. With respect to earnings, Interfor generated adjusted EBITDA of $49 million, on total revenue of $736 million. Total revenue remained relatively flat quarter-over-quarter, with an 8% increase in the average realized lumber price, offset by an 8% reduction in the volume of lumber shipped. Lumber price improvements were supported by the substantial production curtailments across the industry in 2024, as well as seasonal demand. Lumber shipments were slowed by tariff-driven customer uncertainty and constrained truck availability in the U.S. South. Fortunately, we're now seeing more consistent truck availability and expect to catch up on shipments in the second quarter. On the cost side, reported production costs per unit of lumber increased 9% quarter-over-quarter, reflective of operational disruptions from harsh winter weather conditions in several regions and the constrained shipment volume. Ultimately, a net loss of $35 million was recorded in the quarter, which includes a $29 million noncash loss on disposition of our Quebec operations. From an operating cash flow standpoint, the $49 million of adjusted EBITDA in Q1 was more than offset by a $54 million build in working capital, and $12 million of income tax installments. The working capital build was mostly driven by seasonal build of log inventories in Canada and the tariff-driven delays in lumber shipments, which accounted for $44 million of the total build. On a positive note, these inventory increases are temporary and expected to reverse over the course of Q2 to support cash flow. Beyond operations, we invested $17 million in capital projects, and raised $19 million from the sale of assets. The sales of assets included $3 million of net proceeds from the ongoing wind-down of our B.C. Coast operations. Over the remainder of this year, tenure sales are estimated to generate additional net cash flow in the ballpark of $15 million to $20 million. Ultimately, our financial leverage, as measured by net debt to invested capital ticked up to 37% at the end of the first quarter. While we remain focused on closely managing our financial leverage, we are well positioned with more than sufficient available liquidity at over $300 million. To wrap up, Interfor's Q1 financial results were another step in the right direction for our business despite the various disruptions. Looking ahead, we anticipate continued lumber market volatility, considering duty rates are set to rise substantially later this year, combined with the looming threat of tariffs. Fortunately, Interfor is well positioned to navigate successfully through this volatility with its high quality and geographically diverse operations. That concludes my remarks. I'll now turn the call over to Bart.

Thanks, Rick. So I'll provide some market outlook comments. It's hard not to look back at what transpired in Q1 when we think about what Q2 and beyond could look like. This past quarter, we saw a series of events that were impactful to our lumber markets and leave us with a level of uncertainty as we navigate incoming increases in duties on Canadian lumber shipments to the U.S., continued threats of tariffs and demand that reflects the lack of confidence in the North American economy. All of these have a profound impact on North American lumber markets. This past quarter, the impact of both the prospect, and ultimately, implementation of tariffs and prompt reversal after markets without direction. It was very interesting to see the responses that did occur with the P&W, Eastern Spruce and Western Spruce markets quickly increasing prices to reflect the changes in competitive landscape. Interestingly, the Southern Yellow Pine markets delayed response, but ultimately, that region saw increased demand and higher prices as well, something we believe will continue as our customers address risk and supply. In Q2 and Q3, we're expecting volatile pricing environments. The competitive landscape is going to shift as the markets make room for significant duty increases and potentially tariffs on top of that. We expect that markets will ultimately pay for those cost increases. We're just not sure to what degree of supply will need to respond to achieve that. There will be winners and losers, with U.S. lumber producers likely winning and consumers footing the bill. The impacts on Canadian producers are less known and will be influenced by operating regions, products produced in proximity to key markets. All things considered, the volatile markets we saw in Q1 were favorable overall. Pricing was elevated for most of the quarter. On the demand side, our customers are reporting declines in activity due largely to the uncertain economic backdrop. We still believe strongly in the underlying fundamentals and we'll love to see deferred projects step back in when confidence increases. This will be an area to watch as manufacturers, builders and end users navigate negative sentiment and risk. Turning to logistics. This area has not been immune to the impacts of the tariffs. We are seeing U.S. South trucking capacity tightened, as other commodities change their patterns and shipping lanes. This will settle down in Q2. Aside from some weather events in Q1, the other regions have been stable on both rail and truck capacity. In summary, we expect volatility in the markets for all operating regions for Interfor. We are well positioned to take advantage where opportunity presents itself. With that, I'll turn it back to you, Ian.

Thanks, Bart. Operator, we're ready to take questions.

[Operator Instructions] Our first question comes from the line of Matthew McKellar from RBC Capital Markets.

First for me, it looks like Southern Yellow Pine prices has been having a decent couple of months here. At an industry level, are you seeing any kind of meaningful production response on a combination of stronger pricing, and maybe wanting to position for what the market looks like after higher duties come into effect?

Not that we're aware of, Matt. This is Ian, by the way. Thanks. No, we haven't really seen any moves in Southern Yellow Pine production trying to capture that. I think mills are running fairly steady. And as you know, adding hours is a little bit challenging in the South for a variety of reasons. But no, we're not seeing anything from our end.

Okay. And then what kind of finished good inventories, I guess, are you carrying in your mills today? Would they be above seasonally typical levels? And then with the comments around tariffs maybe delaying some shipments, do you think channel inventories, maybe SPF in the U.S. in particular, are positioned any differently than they typically would be at this time of the year?

Yes. I think on the inventory side -- I don't think I know, during the quarter when tariffs were in and out, there was a bit of a delayed response to inventory. I think we grew up to a maximum of 3 days over the previous quarter. But during the end -- toward the end of the quarter, inventories really came down. So our inventory thresholds, the internal numbers that we manage are very, very in line with where we want them. So we don't see any inventory on our -- in our yard that's concerning. And then the channel inventories are really hand to mouth. Everybody is keeping an eye on the risks and trying to mitigate any kind of downside on that. But in short, Matt, it's -- our belief is it's extremely tight right now.

Our next question comes from the line of Ketan Mamtora from BMO Capital Markets.

Perhaps to start with, can you talk a little bit about what you are seeing in demand right now, both on the repair and remodeling side, and also on the new residential construction side?

Sure. On the repair remodel, the drivers, aging housing stock, rising equity, good employment gains are all there, but softening consumer sentiment is, I think, really kind of mitigating all of those and weighing on the outlook a bit. And on the new residential, I mean, as in my comments, as you know, Ketan, the housing starts have actually held in there pretty well even given the mortgage rate situation, but the housing affordability and the new home traffic that the industry is not seeing, or declining, is concerning. But we're pleasantly surprised with how it's hanging in right now on the new home.

Yes. Ian, I'm just curious on the...

On the homebuilder incentives, I would say that they've done a good job of of doing that and keeping that volume up there.

Yes. No, that's fair. On the R&R side, Ian, are you seeing sort of volumes flat at this point on a year-over-year basis? Are things a little bit slower? Or things up a little bit? How would you characterize that?

Yes. I mean, Ketan, the -- I mean -- another way to look at that would be how is our inventory and our production rates? So our operating rate last -- or in Q4, I think, was around 78%. We increased it to 82% in Q1, and we're able to move our product. So I think things are tight, but our operating, production and our sales numbers are in sync. So at this point, we're not seeing a risk. Are we concerned? You bet, for sure and monitoring every day. But operating rate up 4% in Q1 versus Q4, and inventories largely in sync with the production levels.

Got it. And then just last one from me. We've seen a pretty meaningful pullback in Western SPF prices. We also have duties, which are going to go up at some point in the back half of this year pretty meaningfully. I'm curious to see, Ian, as we look at kind of what's going on in housing? We've seen Western SPF prices come down. You've got duties going higher. What is your sort of philosophy, or your approach to production in this backdrop?

Yes. I mean I think this plays to the diversity and kind of where we're located. And with 75-plus percent not subject to duties, or U.S. trade action, gives us comfort that our portfolio is strong to weather this type of storm that may come. I think that when you look across Canada and you think about our operations in the Southern interior which cut 5 different species and are fairly diversified that there's good strength there. And then when you kind of turn Ontario and New Brunswick, and you think about that SPF volume could it be displaced by Southern Yellow Pine? Possibly, but there's a strong need for SPF stud volume into the market, and that's the majority of our product in Eastern Canada. So I think there's going to be puts and takes, but for our company, we feel good about the growth that we've done and the type of growth, and the type of products that we have to weather these type of situations.

Our next question comes from the line of Ben Isaacson from Scotiabank.

Three quick questions, if that's okay. Ian, on the last call, which was mid-February, you said that you weren't counting on any support from federal and provincial governments in your business planning. A lot has changed in the last 3 months on both sides of the border. Can you just give us an update in terms of what is Interfor, or the industry looking, or hoping for, from the federal or provincial governments? Or have there been any pivots in the past 3 months, given all that's happened?

Yes, Ben, I would say that the -- from our view, and not -- can't comment on others, but we're not [indiscernible] government support in any kind of incentives or anything like that at all. But the -- I would say the industry as a whole, given the trade action by the U.S. against Canadian producers has really -- there's an incentive for the Canadian producers to engage at a deeper level with the federal government in Canada around the softwood lumber dispute and resolution on that. But at the end of the day, it's President to Prime Minister, and the best that our industry can do, and Interfor can do, is get aligned with solutions that work for North America. And I would say that there's discussions on that, but really, it comes down to having our Prime Minister in Canada early in his job in making sure that industry is educating him and our President in the U.S. around what a negotiated settlement might look like.

My second question for you or for Rick. In the current environment, can you just talk about that 37% net debt to capitalization rate? Is it stable at current pricing? And if not, can you remind us what nonoperational cash flow levers that are to pull to keep that stable?

Sure, Ben. It's Rick speaking. We do view the 37% leverage at the end of Q1 as temporary. Just given that inventory build that we've spoken about, that caused a slight uptick in our leverage. We're confident given the progress we've made here in Q2 on inventory shipments and also working through our seasonal build of log inventories that leverage will come down at the end of Q2. So we feel really good enough confidence going forward that we can maintain stable leverage and keep low our covenant levels. Looking out beyond Q2 here, we do have other levers to consider. We've always been prudent in adjusting our operating rates going forward to match demand. So that's an important lever for us to adjust to this uncertainty going forward as needed. We obviously have the tenure sales, which I mentioned already. That's something that will provide cash flow both in 2025 and all the way into 2026 as we work to substantially complete the sale of our tenures. And we also have significant value in our duties. There's been several transactions in the marketplace in the $0.30 to $0.35 in the dollar range. Just a reminder, we've got over USD 600 million of duties on deposit. We view that as a substantial store of value, if and when needed. And then we always have the ability to adjust our CapEx. We've been very prudent in planning our CapEx out to maintain flexibility. So that's a lever we always seem to have and can pull.

That's great. And then just -- just last question is on SPF in particular. Can you just give some color or context in terms of how is the best market doing right now versus the worst market? Whether you define that on a regional basis or on an end-use basis, I'm just trying to get an understanding in terms of kind of where SPF has come from? And what kind of volatility is it facing right now?

Yes, Ben, that's a tough one to answer on this type of call. I would say that in Q1, in my comments, that all of our operating regions were EBITDA positive, and we continue to monitor all those. There's puts and takes, but being diversified. I mean, often, I think the Pacific Northwest gets overlooked in the U.S. for us. We do have the South, Eastern Canada and Western Canada. So depending upon the market dynamics, we have a lot of levers and a lot of diversification in both species and geographical areas. So I would say we're -- we always monitor that. We have a 3-month rolling outlook that we look at every week, and we're positive at this point that all regions are running at the run rates that we need.

Our next question comes from the line of Hamir Patel from CIBC Capital Markets.

Bart, I was just wondering with respect to European imports. I know they've been quite volatile. Do you have a sense as to, if Section 232 tariffs did come in and they also applied to European supply, at what level would that sort of cut off European imports?

It's a tough question, Hamir, because it really comes down to their cost structure and where that actually goes. I think it's fair to say, if you look at any producing region right now for lumber, the margins are pretty tight. And so if you introduce an additional cost, whether it's a duty or a tariff, I mean there's really not a capability of any producing region to absorb that in. So it's either going to be an exercise of prices moving up, or supply being rationalized, and most likely a combination of the two of them frankly. What I keep hearing from the European side is that they are challenged with their log costs. And that as the markets see higher prices, it seems to me that, that just transfers right into log cost. And so the margin for the manufacturer is pretty thin. So I think that Section 232 affects not just the Europeans and I think the bottom line on that is that prices in North America will increase because of it. And the part I said in my opening comment is we just don't know what the supply side reaction will need to be to make that happen. And so, yes. That's the way I see that.

Yes, Hamir, that's probably a question to ask somebody that's producing in Europe to give you more clarity, we don't, as you know. But what we do know is that the European imports have moderated since their peak on a trend basis, and they're stabilizing around 3 billion board feet, which is probably, in our view, a more sustainable run rate.

Okay. Fair enough. And just last question I had for Rick. You highlighted potential opportunity to perhaps monetize duty deposits if you decide to go down that path. From your discussions with the counterparties that might be interested, are they only interested in a transaction involving a portion of your deposits? Or do you see a path to potentially monetize the entire bucket?

Hamir, its pretty hard to comment on given a bunch of different factors, but we do see value in the duties to some level, whether it's all or just a portion to be determined if we went down that path, or decided to go down that path.

[Operator Instructions] Our next question comes from the line of Sean Steuart from TD Cowen.

Ian, on Section 232, I'd be interested to get your perspective on how fast do you think this investigation is moving? The deadline for public comments was pretty quick after the investigation started. Perspective on timing, how soon this might happen before November? And just following up on the previous question. Within North America, if there are tariffs supplied, perspective on if there's enough tension -- or how much tension there is in this market with respect to being able to pass incremental tariffs along? And what sort of supply response might be needed to balance the market?

Yes. So Sean, Ian here, thanks. 232 timing, no idea. Could it be tomorrow, or next week, or in the fall. We have no clarity on that and no intel to -- that you don't have. So we're -- I can't really give you an answer on that, sorry about that, but that's what it is. I think for Interfor, though, this again reinforces the strategic importance of our U.S. platform, both in the South and the Northwest. Any kind of incremental curtailments or supply rationalization is going to happen in the higher-cost regions for sure. And to the extent of passing on the 232. If demand is where it's at in Q1 and holds in there, and -- I mean inventories are tight. And so I think that will determine to the level of what we might be able to pass on, on costs. But I do see higher cost mills and you'll recall in 2024, we adjusted our portfolio and we've divested of 6 operations that we did in 2024. So the portfolio for Interfor is substantially repositioned. But at the end of the day, as we get more clarity on how this works, we'll be able to keep you informed on that. But we're prepared. We're expecting it, and we're expecting it at any time. And we'll see how the industry adjusts, but we're prepared to do what we need to do.

There are no further questions at this time. Mr. Fillinger, please continue.

Well, thank you, everybody, for your interest in our company, and feel free to reach out to Bart, Rick or myself at any time. And this concludes our call. Have a great day. Thank you.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. You may now disconnect.