Interfor Corporation (IFP) Earnings Call Transcript & Summary

Good morning. My name is Sylvie and I will be your conference operator today. Welcome to Interfor Corporation's second quarter 2026 Results Conference call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. Following prepared remarks, there will be an opportunity for analysts to ask questions. During this call, Interforce representatives may make forward-looking statements within the meaning of applicable securities laws. regarding the risks, uncertainties, and assumptions of such statements can be found in Interfor's most recent press release and MDNA. And I would like to turn the call over to Mr. Ian Fillinger, Interfor's President and CEO. Mr. Fillinger, please go ahead.

Thank you, Operator, and thank you, everyone, for joining us this morning. With me on the call, I have Mike McKay, our Executive Vice President and Chief Financial Officer. The second quarter reflected strong execution across our business, supported by stronger lumber markets, continued progress on our cost reduction, improved mill productivity and disciplined inventory management. While uncertainty remains, particularly around the softwood lumber trade dispute, we are encouraged by the progress our teams are making and remain focused on further strengthening our balance sheet. Our previously announced two-year company-wide cost reduction initiative continues to perform well, with results tracking on our annualized $80 million target. In addition, our Thomaston Mill in Georgia delivered a strong quarter and has been transformed into one of our top performing assets in our portfolio. In the second quarter, we generated $92 million of EBITDA, strengthened our financial position, aligned our products mix with market demand, reduced inventories, lowered production costs, and continued to successfully navigate the ongoing uncertainty around the softwood lumber trade dispute. If you look ahead, our priorities remain unchanged. We will continue to focus on operating our mills safely and efficiently, aligning production with market demand, maintaining a relentless focus on costs, and preserving the financial strength and flexibility of our balance sheet. These fundamentals position us to withstand prolonged market volatility while continuing to create long-term value for our shareholders. Consistent with that focus, we recently announced the transition of certain corporate support roles to our Peachtree City office in Georgia, where the majority of our operations are located within the Central Eastern Atlantic time zones. This change is intended to better align our support functions with the needs of our business while maintaining a strong corporate presence in both Canada and the United States. Transition will occur gradually over time, primarily through attrition and future hiring decisions. This will allow us to evolve our organizational footprint in a measured manner. This is not a re-domiciling of the company, nor does it alter our long-standing commitment within our Canadian operations, mills, employees, or communities. The leadership team remains in place, and Burnaby will continue to play an important role as our corporate headquarters. With that, I'll turn the call over to Mike. Thanks, Ian, and good morning, everybody.

From an earnings standpoint, Interfort generated 92 million of adjusted EBITDA in the second quarter, a significant improvement from the first quarter, and one of our best quarterly results in nearly four years. Sequential improvement was driven by stronger realized pricing, higher production volumes, and lower manufacturing costs. From a sales perspective, realized selling prices increased approximately 11% quarter over quarter, with all five of our operating regions benefiting from stronger market conditions. Production cost per unit improved by approximately 1% and we're down 6% compared to full year 2025 levels. These improvements were driven by higher operating rates, the continued ramp up of Thomaston, and ongoing productivity gains driven by our performance improvement initiatives. Production volumes increased by just over 70 million board feet, or 8%, compared to the first quarter. This increase was driven primarily by higher production in the U.S. South, following the ramp-up of Thomaston, along with a more normalized operating posture in the U.S. Northwest. This was partially offset by the indefinite curtailment of two mills in Ontario. Shipments exceeded production, and while logistics remain challenging in certain markets, the Actions taken earlier in the year helped improve our shipment execution and supported inventory reductions. Turning to cash flow and the balance sheet, improved earnings, disciplined working capital management, and lower capital spending all contributed to a strengthening financial position. Net debt declined, or net debt to invested capital ratio improved to 36.7%, down from 38.3% at the end of the first quarter. available liquidity also improved ending the period at just over 440 million. Looking ahead, benchmark lumber prices have maintained positive momentum into the early part of the third quarter, and our order files have remained solid. At the same time, the summer building season can introduce increased volatility in end-use demand and pricing, and we continue to plan cautiously for the back half of the year. At a broader level though, the industry supply rationalization that began in prior years has continued through the first half of 2026. We believe this has contributed to a much more balanced and disciplined market environment despite the ongoing macro trade and geopolitical uncertainty. Also looking ahead over the next several months, we continue to anticipate proceeds from day bestitchers, including the ongoing sale of our BC Coast forest tenures and the anticipated sale of real estate at two of our former facilities in the US South. Turning lastly to capital allocation, total capital expenditures for 2026 are expected to be approximately $90 million. This reflects mostly maintenance spending in the back half of the year as our priority remains focused on reducing leverage.

With that, I'll now turn the call back over to you, Ian. Okay, thanks, Mike. Operator, we're ready to take questions from our analysts at this point.

Thank you, sir. Ladies and gentlemen, as stated, we will now take questions from analysts. If you do have any questions at this time, please press star followed by 1 on your touchtone phone. You will then hear a prompt that your hand has been raised. And should you wish to decline from the polling process, please press star followed by 2. And if you're using a speakerphone, you will need to lift the handset first before pressing any keys. Thank you. And our first question will be from Keetan Mentora at BMU Capital Markets. Please go ahead.

Thank you. Good morning and congrats on a strong quarter. Good morning, Ketan. Thank you. Maybe to start with, on the 80 million cost program that Ian you talked about last quarter, Can you give us just a rough order of magnitude, how much do you expect to capture this year in 2026?.

Well, it's early in the two-year program, K-10, but the first half of this year was very strong, and so, you know, The run rate at this point is showing achieving that fully this year, but again, the first half was a very strong performance by our teams. I would caution that this is a two-year program, and I wouldn't want to adjust our timeline on achieving that any sooner than that.

at this point but but it's off to a good start okay is it fair to say in though we get sort of I don't know like half of it this year and half of it next year or or it's skewed more to next year versus this year?.

Yes, I think K-10, that's probably a good approach to take at this point. And then, obviously, as we go through the next quarters, we'll be able to adjust that depending upon how things are progressing. But from a baseline projection, that might be a fair assumption.

So it's 50-50 split, Ian? Yes. Okay, understood. And then on Thomaston, Ian, I'm just curious, how is the ramp up coming along? What is the current operating rate like and where do you expect to be by end of the year?.

Yes, while we expect to be fully ramped up by the end of the year, I believe we're at around 97% of our production pro forma, and we've had several performance that have been well above our pro forma target. It's a complex mill to start up or any mill of that size and magnitude. It's been done safely and it's just a few percent off of the pro forma target. From an industry perspective, or from Interforce perspective, this will be one of the best startups that we've had in our capital project team and operating team.

Got it. That's helpful. Good luck in the back half. I'll jump back in the queue. Thank you.

Thank you. Next question will be from Ben Isaacson at Scotiabank. Please go ahead.

Great, thank you very much and good morning everyone. You talked about three consecutive quarters of cost reductions. My question is how much additional structural cost reductions remain available or is Q2 really a good run rate as to how we think costs should play out going forward?.

Thank you. Hey Ben, Mike here. I can take that one. I think it's, if you look back the last three quarters, it's been a combination of the, you know, initiatives, performance improvement, some of the portfolio optimization as well. As Ian alluded to at the first question, we're on a run rate basis, captured a lot of that today. I think the key is anchoring it going forward more than anything. So as we said before, a good chunk's in the bag, but we need to be, kind of solidify that from a long term perspective. done a lot, Ben, in the last little while. As I said in my opening comments, our manufacturing costs are down about $41 per 1,000 board feed or about 6% versus 20-25 levels and as Ian can probably attest to, it's pretty hard to push that type of cost out of your system in this business. So we feel really good where we are. I don't know if we take too much structural changes going forward per se. It's just anchoring a lot of what we have.

Perfect. And then, thank you for that. And then my second question is, CAPEX is $90 million. Can you talk about what is maintenance versus discretionary? And with Thomason Complete, what does maintenance CAPEX look like going into 27?.

Yes, I think, Ben, if you look on a go-forward basis, it's effectively all maintenance in the back half of the year. So the $90 million, if you look at what the projection implies there, it's around $15 or $16 million per quarter. We would consider that effectively all maintenance spend. And so that's a run rate of $60, $65 million per year. That's kind of what we're continuing to guide to.

from a pure maintenance perspective. Okay, that's great. Thanks so much.

Next question will be from Matthew McKellar at RBC Capital Markets. Please go ahead.

Good morning. Thanks for taking my questions and congratulations on the strong quarter. First, just wanted to check in on the transportation constraints. It sounds like that is maybe still a bit of a challenge in the Q3. Can you just talk about how that is progressing and how you might be running your business any differently as a result?.

Yes, Matt, Ian here. It's a focus area for us for sure. The teams, particularly in the south, I would kind of point towards that region as the most challenging on the transportation. But the team has done a great job with partnering with our carriers, creating win-win incentives to secure additional truck volume. We have seen it also in the on transportation get into the rail more in the quarter. but at this point in time, um, you know, we're matching our, our production and actually outshift their production last quarter. And, and we're, we're right where we need to be at this quarter so far. So through, um, The initiatives that our logistics team implemented, I would say that at this point, it's it's looking okay for us, but it's definitely something that we need to keep an eye on and adjust. Truck demand across all industries is a problem is tight, which kind of points us towards an economy that's busy. There's products moving, whether it's oil and gas or mining, that's putting constraints on this. But from an Interfor perspective, we're doing pretty well right now. Okay, very helpful, thanks.