Interfor Corporation ($IFP)

Good morning. My name is Joanna, and I will be your conference operator today. Welcome to Interfor Corporation's First Quarter 2026 Results Conference Call. [Operator Instructions] And the conference is being recorded. Following prepared remarks, there will be an opportunity for analysts to ask questions. During this conference call, Interfor's representatives may make forward-looking statements within the meaning of applicable securities laws. Additional information regarding the risks uncertainties and assumptions of such statements can be found in Interfor's most recent press release and MD&A. I would now like to turn the call over to Mr. Ian Fillinger, Interfor's President and CEO. Mr. Fillinger, please go ahead.

Thank you, operator, and good morning, everyone. Joining me today is Mike MacKay, our Executive Vice President and Chief Financial Officer. We're both calling in from our Peachtree City office in Georgia, where earlier this week, we toured our completed strategic project to fully operational Thomaston mill. . I'll begin with an overview of the quarter, provide an update on Thomaston, outline our cost reduction and operational priorities and share our near-term and medium-term outlook. Mike will then talk you through the quarter in more detail, including segment performance, working capital and capital allocation. Turning to our quarterly overview. Q1 delivered a meaningful improvement compared to the back half of 2025. We reported EBITDA of $31 million, up $60 million from Q4 and driven by higher lumber prices across all 5 regions, up 5% to 20% and lower conversion costs despite weather -- winter weather conditions. This performance came even as duties, tariffs and logistical constraints, particularly in the U.S. South remained elevated. Seasonal tightening and industry rationalization has helped rebalance supply and demand to start the year. Turning to Thomaston, our Thomason Georgia project was completed in Q1, and the mill started up this quarter. The ramp-up is ahead of expectations, reflecting excellent execution by the team. We expect Thomaston to be a top performer in our portfolio and remain on track to achieve full pro forma performance across all KPIs within the next 4 months. Strategically, Thomason strengthens our U.S. footprint and enhances our cost position in key markets. As we entered 2026, we set company-wide manufacturing cost reduction targets aimed at materially improving our cost position without significant capital requirements. These initiatives represent an $80 million earnings improvement over the next 2 years, roughly a 5% reduction in total manufacturing costs versus 2025. This program builds on our ongoing productivity and portfolio optimization. We've made good progress. Operationally, we continue to optimize working capital in Canada, with long inventory carrying values down 36% year-over-year at a time when inventories typically rise. Despite winter conditions, conversion costs improved and we continue to adjust mill operating schedules in real time to response to cost movements and broader macro inputs. Turning to our market outlook. Near-term markets remain volatile. We are closely monitoring elevated interest rates, trade uncertainty, fuel price volatility and geopolitical developments, all of which can influence pricing. Single-family construction and repair/remodel demand were a challenge, but we saw a seasonal price improvement through Q1 that has continued into early Q2. We while pricing in the South has softened somewhat in recent weeks, we remain profitable. On the supply side, industry curtailments this year have been significant, roughly 4x the pace of 2025. At the same time, landed costs for third country imports into the U.S. have risen materially. Combined with industry's willingness to curtail production, these dynamics create the potential for a constructive setup once housing and R&R activity stabilize. For Interfor, the implications are clear, our proactive portfolio management, adjusting operating rates at higher cost bills, and our relative margin performance positions us to remain cash positive even during deep pricing downturns. Our balance sheet and priorities. Our recent balance sheet actions, combined with a strong liquidity position allows us to navigate the potential pricing and demand risks. We remain disciplined in our capital allocation, completing high-return projects while preserving flexibility to respond to market conditions. Our near-term priorities are clear: deliver the Thomason ramp up to full pro forma performance, execute the $80 million manufacturing cost reduction program, maintain operating flexibility and adjust production to market signals, protect the balance sheet and preserve liquidity for volatility and value creation opportunities. With that, I'll turn the call over to Mike for a deeper review of the quarter.

Thanks, Ian, and good morning all. From an earnings standpoint, Interfor posted positive $31 million of adjusted EBITDA in the first quarter, a significant improvement over the past 2 negative EBITDA quarters. The notable sequential improvement in our results was driven by several factors. From a sales perspective, Unipor's realized selling prices after paying duties and tariffs were approximately 8% higher, as higher selling prices in all regions were partially offset by the full quarter of Section 232 tariffs that came into effect last October. From a cost perspective, production cost per unit improved by about 2.5% quarter-over-quarter, continuing the trend and cost improvements that we achieved in Q4. These improvements were driven by higher production volumes due to less market downtime, but also from significant improvements in productivity driven by the company-wide manufacturing cost reduction initiatives that Ian alluded to earlier. As a result, production volumes increased by just over 100 million board feet or 14% over Q4. We A large portion of the increase came from our U.S. Northwest operations, which had taken considerable market downtime in Q4. And inventory valuation adjustments did not have a meaningful impact on our change in cost this quarter. However, despite the increase in production shipments were essentially unchanged from the fourth quarter as logistics constraints, particularly trucking availability in the U.S. South drove higher lumber inventory levels compared to year-end. The logistics constraints have not been unique to Interfor and have impacted most industrial activities across this region. In recent weeks, our teams have been making good progress with our strategic trucking partners while also utilizing our flexibility for increased rail shipments. The situation has stabilized today, and we're making slow but steady progress towards reducing inventory levels. Based on current conditions, we would expect the catch-up in shipments could take the balance of Q2 and possibly into early Q3 to fully unwind. Turning to fuel costs. We've seen relatively small impacts to the bottom line despite the dramatic rise in oil prices. Inflationary pressure in this area for us is driven mostly by fuel surcharges from log hauling activities in Canada as well as minimal amounts of direct consumption at our facilities. So from a cost perspective, we estimate the run rate impact of current oil prices to be approximately CAD 6 per thousand board feet of production impact. And despite these cost headwinds, we were able to reduce our production costs in the quarter, as I mentioned earlier. From a sales perspective, fuel surcharges are incorporated into our daily and weekly price quotes to our customers and have not and are not expected to, going forward, have any meaningful impact to the bottom line. Turning to cash flows on our balance sheet. The first quarter almost always sees a notable building working capital in our business, and this year was no different. The combination of seasonal logging activities, rising lumber prices and the logistics constraints I spoke to earlier, all contributed to a working capital usage of about $23 million in the quarter. This temporary working cap build, combined with the heightened CapEx spend to complete the Thomaston project resulted in a modest increase in net debt. At the end of the quarter, our net debt to capitalization ratio was 38.3%, up slightly from 36.5% at year-end, and we had available liquidity of $386 million. This takes into account several previously announced financing transactions that we completed this quarter, all of which have bolstered liquidity and added flexibility. Looking ahead to Q2 and beyond, we anticipate a release in working capital and a notable wind down in CapEx spending. At the same time, we've seen good market momentum and strong order files extending through April and into May. And based on our current outlook and market conditions, we would expect to see a reduction in both our leverage and our net debt to invested capital ratio in the coming months. In addition to these near-term improvements, we continue to anticipate divestiture proceeds over the remainder of the year that will further support the balance sheet irrespective of market conditions. These divestitures include the ongoing sale of our BC Coast forest tenures as well as sales of real estate at our former Summerville and Melldourn facilities in the U.S. South. Turning lastly to capital allocation. Following the completion of several major investments in recent years, including the completion of the Thomason project this quarter, we are continuing to anticipate lower spending going forward. Total capital spend for full year 2026 remains at approximately $80 million estimate and preliminary estimates for 2027 remain at approximately $60 million, focused almost entirely on maintenance projects. In terms of capital allocation going forward, as I alluded to last quarter, any free cash flow will be directed solely towards leverage reduction with a target net debt to invested capital ratio of 20% or below. Obviously, the timing to achieve this targeted level will depend on the market, but our priorities continue to remain simple and clear in that respect. With that, I'll now turn the call back over to you, Ian.

Okay. Thanks, Mike. Operator, we're ready to take any questions now.

The first question comes from Matthew McKellar with RBC Capital Markets.

First, I'd just like to ask a little bit about the manufacturing cost reduction targets. It sounds like your plans are pretty capital light. Is there any more detail you can share around the key levers for getting your conversion costs down to your targets? Or any color on what regions you expect the most meaningful improvements? And should we think of the Thomeston ramp as part of this program?

Yes. Matt, Ian here. Great questions. Yes, to put a little bit of color behind the cost reduction and operational actions in Thomeston. So we're using a disciplined performance management program. We're targeting the cost reductions across the entire business. Some of the key components are aligning the incoming log profiles, fine-tuning those with some of the optimization and data that we have available to us to make sure we got that right log dialed in for the right line. We've also set really clear and achievable targets based on that data right down to the mill and shift level. We're leveraging our scale and best practices across the regions. We've made some management changes during the quarter that really enhanced communication on benchmarking and KPI -- we've got an initiative around eliminating nonproductive work, which is moving forward. And these actions, we think -- well, we know are already paying dividends and improving our cost position. So there's a lot to it, but it's a very sophisticated, clear, transparent within our company to all of our employees on how they can contribute and where we see those opportunities. It's things like right down to KPIs in the mill on log gaps on machine centers and those type of things. So we have very good visibility on data. We've got very good visibility on which mills are performing well and where other mills can learn from. So all of that tied into our targets. As far as Pomiston, absolutely, that's also been under construction for a while, which obviously has a cost attached to that. It's up and running like a rocket ship right now, and it will definitely help us achieve those cost targets for the company, but particularly in the South.

Great. Just one more for me on Ontario. with Gila and Marin Center indefinitely curtailed, has there been any change to how, I guess, the I-joist business and Sou St. Marie operates or any change in views around how that fits into the portfolio?

It fits in very well, Matt, right to the bottom line. Yes, we've -- we're very careful when we're making any kind of operating adjustments on any of the feedstock that we use for the I-joist plant. At this point, no impacts on the hours that we've reduced. On our portfolio management, again, sort of data-driven, prioritizing the mills that are running well and generate the highest profitability. And sometimes we add hours on that on those mills. And so putting the supply check into S St. Maria and our I-joist plant. I mean, we're very careful of making sure that we've got a good steady business there right now.

Next question comes from Sean Steuart with TD Cowen.

Ian, I want to follow up on the Ontario indefinite closures. I guess the decision to focus on indefinite versus permanent potentially there? And what beyond just the market recovery might be needed to position those sawmills better over the long run to be a part of the plan going forward?

Yes, Sean, thanks. Kind of following up on the previous questions also, we prioritize running and supporting the mills in regions that generate the highest profitability, and we work closely with the teams at the challenged sites for lack of a better term to improve performance. So we do have plans and ideas for those operations on how to turn those around. Sometimes it's a timing. Other times, it's some capital investments that we put under evaluation. But when market conditions are just too challenging, we scale back the hours to protect value and stay disciplined and allocate the resources to the mills that are running and then try to figure out a path for the ones that might be challenged given the market. So market improvement would help, but we do have plans for those operations on how to improve those going forward. At this time, the best option for us is to indefinitely curtail and take the volume out, and that gives us time to continue to evaluate the go-forward plans.

And then following on that, Ian, I guess, for the second quarter production profile across the fleet, obviously, more pronounced curtailments in Eastern Canada. But any thoughts on operating rate profile in the second quarter across your other regions? It sounds like the U.S. will be good with Thomason ramping well, but a broader perspective on operating rates.

Yes, Sean, there are improved operating rates, both on a productivity per hour, which is really great to see, but also some added hours in the South at a few of our mills. But the Pacific Northwest is also running at full capacity right now, whereas in Q4 and earlier in the fall, that region was pretty limited on any hours. And so you will see production in the South and the Pacific Northwest improving in Q2 with, like you say, some hours coming out of Ontario.

Okay. One last one, Ian, for me as you're close to it. as we get closer to the CUSMA USMCA renegotiation, any perspective on lumber potentially fitting into this? I know it's been a priority for the federal government. Are you optimistic that it can be addressed specifically in a broader renegotiation?

Yes, Sean, I mean, the trade file, obviously an important issue for Interfor, even with our limited exposure to tariffs and our scale and geographic footprint. But because we're in BC, Ontario and New Brunswick, we do have to stay in a leadership position on this and stay fully engaged with both Canada and the U.S. governments as they work towards an industry-wide agreement. In broad terms, I believe and we believe that there will be a negotiated agreement between Prime Minister Carney and President Trump. We think that's achievable. We're hopeful that this will come sooner than later, but I don't have any specific insights to share that is this going to be part of Cosma or will it be negotiated separately? I can just let you know that there's a constant communication from both sides that we're involved in Ottawa or Washington. And we're pushing like many others in our industry on both sides of the border to have the 2 governments come together and get softwood on the table.

The next question comes from Ben Isaacson with Scotiabank.

Thank you very much, and good morning, everyone. Ian, you said that Thomaston, you expect to be a top performer in your portfolio. Can you define what that means? What -- how is that measured? Is that based on cash cost, that overall margin expectation is that operates like how do you measure that it's a top performer, number one? And then number two, how much of an outlier is it from the rest of your fleet?

Yes, Ben, so defining the top performer really does come down to the margin side of it. And in the sales log costs are fairly stable. So it does come down to the operating performance and conversion costs at Thomason. The other unique thing about Thomaston is it's close to the Atlanta market. It's the closest mill that we have there. So there's an advantage there to the metro area of Atlanta. And the log quality is outstanding. And so the product quality and the ability to pull high-quality grades from Thomaston, given the size and quality of the log really puts it at a very good -- in a very good position. So to answer your question, mill performance, manufacturing quality the high-quality fiber and also the strong residual market that we have being close to Atlanta does put this mill near the top of the pack and I expect it will be top decile in the industry. No doubt.

That's really helpful. Next question is just maybe some clarification. I think Ian or maybe as Mike said that you expect net debt to invested capital to come down over the coming months. Was that based on operations only? Or does that include asset divestitures, duty refunds as well?

Ben, Mike here. So yes, I was referring to kind of the near term, let's say, Q2 is the perspective, and it's based on what we're seeing today. I'd say it does not include any assumed divestitures. I think it's really based on the order files we're seeing today, the working capital release and some of the momentum that's in play already. So the divestitures would be, in my mind, over and above that and more geared towards, say, the latter half of the year.

Perfect. And then just 1 last 1 for me, if I may. I think you said, Ian, that you guys have picked up a couple of hours and shifts down in the South. Have you -- can you just describe the magnitude of that? And then maybe just more broadly, have you seen a supply response in general in the South as a response to higher SYP prices last month?

Yes, Ben, the hours in the South, there's really 4 mills that were on more of a reduced our scheduled in addition to Thomaston being down for the majority of Q4. So Thomaston coming up, it's on 2 shifts right now. So that's fairly significant. The other 4 operations, I would say, are minimal hours being added. We're cautious with those mills. Those mills are -- tend to be a slightly higher cost than our average mills. So we're being careful not to add hours or more product to the market where demand may not be there. So I would say the other 4 mills are fairly minimal hours being added and being revisited every week. And those 3 of those mills would be on the west side of the Southeast, so closer to the Texas market.

Got it. And are you seeing a general response by the industry in the south?

No, I have not. I haven't seen ramp-up of mills that are adding hours or supply. I think it's been very minimal. I know our numbers, but I'm not sure of our competitors, and I haven't heard of anything significant.

[Operator Instructions] Next question comes from Ketan Mamtora with BMO.

My first one, Mike, can you just remind us in terms of both the B.C, forest in whatever is remaining by way of monetization. And then the real estate divestitures that you talked about for the back half what is left in terms of both of these? And how much should we expect in the back half?

Good question. If you noted in Q1, we completed around $10 million of proceeds that were received for the coast. So for the rest of that file between say, $20 million to $25 million over the next 12 to 18 months. Timing is always a little harder on that file to predict. But as you can see, we've been fairly consistent in bringing those volumes in -- so that's in that magnitude. The real estate piece, I would guide around in the CAD 40 million range back weighted of the year as those real estate processes take a little bit longer sometimes. Two notable things to say. .

Yes. And on real estate, Mike, is that the net proceeds? Or should we expect any tax leakage or anything of that type that we should be mindful of?

Nothing meaningful, I would consider there, Ketan, I think that's a fair number to go with as a net number.

Got it. Okay. And then just switching to the U.S. South. You saw a pretty nice uptick in southern lumber prices in terms of the March time frame. And then over the last few weeks, you've given up quite a bit. Can you talk about sort of what is driving that? How much was for the initial rally, just restocking and now the channel pulling back? And perhaps how do you see channel inventories for this time of the year, particularly in [indiscernible]

Ian here. I would say supply conditions remain tight across North America. There's been weather issues in and what have you, particularly in the South, seeing stabilization of prices are trading for over the last week has had some really strong days, which is great to see. I think the permanent closures and ongoing curtailments of which we're participating and others are continue to limit available production. I think the landed cost from third country imports and some of the logistical friction and freight costs that might be coming on that end of the supply. We'll see how that plays out. But inventory levels, we think, through the value chain have normalized and so leaving kind of a little buffer against any kind of disruption. So overall, supply backdrop, is constrained and I think supporting pricing 1 demand stabilizes with some of the macro things that are happening today.

Okay. That's helpful. And then just coming back to the cost reduction, I thought if I heard you correctly, you said CAD 180 million over the next couple of years. What are you targeting for this year? And if you can give us maybe 1 or 2 key buckets that you are really focused on. And I'm just curious sort of how you are tracking it on an ongoing basis.

Yes. I mean it's on total manufacturing costs. So the big buckets there are really the log cost and then the conversion cost. And so those are where we're targeting the improvements we're tracking it right down to a mill level up to the executive level, and we're tracking it on a weekly basis, monthly and quarterly basis. with scorecards that are visible and very transparent across the organization. So it's a heavy performance management drive that we've implemented at the very beginning of the year. We've made actually really good progress on that in the first quarter, and it's early, but it's encouraging. And as I spoke to, it really given our size and scale and available insights and data around what mills may be outperforming other mills or in certain performance areas, we're able to quickly look at that and then help teams see that and then provide the support to those teams to hit their goals. And so we're pretty excited about it. We're seeing that it's Yes, stay tuned. We think that this is going to be great, and we'll report on it as we go.

And that's helpful perspective. Do you have an estimate on how much out of the you expect to realize this year?

Well, it's hard to say for sure. But given Q1 that run rate, it could be significant, but I'd rather not provide that guidance just because it's an ongoing program in our 4 months into it now. And yes, we'll update you in Q2, but I'm hopeful that the trend that we're on now will continue at the same rate that we're seeing in Q1, which has been fairly impressive.

We have no further questions. I will turn the call back over to Ian Fillinger for closing remarks.

Okay. Well, thank you, everybody, for dialing into the call. We hope you have a great day and a great weekend, and look forward to talking to you on our next quarter. behalf of Mike and I. Thanks again.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.