Interfor Corp

TSX:IFP

Earnings Call Transcript

[Operator]

Good morning. My name is Sylvie, 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]. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Mr. Fillinger, you may begin your conference.

[Ian Fillinger, executive]

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 2024 and our Q4 quarter before passing the call to Rick and Bart.

2024 was a year where we again strengthened our company and our portfolio. During another down market year, which saw persistent low lumber prices, we continue delivering on the controllables, achieving positive operating cash flow of $144 million. I thought a few notables were worth mentioning.

Number one, solid synergy achievements were made with our log and lumber inventory targets, achieving year-over-year reductions of 25% and 16% on a value basis, respectively. Number two, we completed a new planer project at our Thomaston, Georgia mill which met all KPI targets within 30 operating days.

Number three, we achieved mill conversion cost reductions across most regions even with significant market-related curtailments. Number four, our employee turnover rates improved across our platform.

Number five, we continued the divestiture of our BC Coast tenures and executed on 8 tenure sales for gross proceeds of $67 million. Number six, we streamlined our [indiscernible] functions and closed our offices in both Montreal and Japan. Number seven, we addressed higher-cost noncore mills by selling a mill in Oregon, 2 sawmills and one [ reman ] plant in Quebec and indefinitely curtailing 2 mills in the U.S. South.

Turning to our Q4 results. All of our operating regions in Canada and the U.S. were EBITDA positive, resulting in adjusted EBITDA of $80 million for Q4. 2025 will be hard to predict. However, we're well positioned to deal with uncertainty with only 25% of our lumber subject to duties or tariffs.

We expect more B.C. Coast tenure sales this year. We have approximately 900,000 cubic meters to sell, and the majority of the remaining sales are expected to transact in 2025.

We are maintaining our conservative capital spending plan for 2025. Pace of single-family starts has been solid with 4 of the last 5 months above 1 million starts. We see homebuilders continued use of incentives likely to continue given where rates are currently at.

European imports have dropped considerably with 21% year-over-year reduction and log cost reportedly increasing heading into 2025. As the political situations, both in the U.S. and Canada unfold and until we know the impacts to the economy, we will continue to be careful with our capital allocation. Our foundations are strong, we're diversified, and we continue to see great opportunities to improve operations without spending major capital. I'll pass the call now over to Rick.

[Richard Pozzebon, executive]

Thank you, Ian, and good morning all. Please refer to cautionary language regarding forward-looking information in our Q4 MD&A. From a financial standpoint, fourth quarter was a step in the right direction for our business.

Average lumber prices improved notably driven by the substantial production curtailments across the industry in 2024 and supported by relatively strong demand from single-family home construction.

The higher lumber prices drove positive cash flow from operations in the quarter, as Ian just mentioned. As a result, financial leverage remained flat quarter-over-quarter at 36%, while available liquidity grew to over $380 million.

Looking through the fourth quarter, we expect ongoing volatility in our industry with uncertain economic and political environments raising the potential for impacts on both lumber supply and demand over the near term. With respect to Q4 earnings, Interfor generated adjusted EBITDA of $80 million on total revenue of $747 million.

Revenue increased by 8% quarter-over-quarter, driven by a 16% increase in the average realized price of lumber. Volume of lumber sold was relatively flat over the same period. On the cost side, reported production costs per unit of lumber sold fell 5% quarter-over-quarter, reflective of a more normal operating cadence and an incremental $9 million reduction in the reserve against inventories.

The significant strengthening of the U.S. dollar against the Canadian dollar was also a notable factor in the quarter. This drove a positive effect on EBITDA as the large majority of our sales are priced in U.S. dollars, combined with the revaluation of U.S. dollar-denominated working capital and duty deposit balances.

Ultimately, a net loss of $50 million was recorded in the quarter, which includes a $42 million foreign exchange loss, mostly unrealized in relation to cross-border intercompany funding denominated in U.S. dollars.

Turning to cash flows. $75 million of operating cash flow in the quarter helped fund $11 million of CapEx and a $35 million debt repayment. Looking ahead to Q1 of this year, the divestiture of the Quebec operation closed in January and improved our net cash position by $16 million.

We expect the sale of coastal B.C. Forest tenures to continue generating net cash flow estimated to be in the range of $20 million to $25 million for the current year. Regarding capital allocation, we will continue our conservative approach focused on reducing financial leverage. As part of this, we've refined our guidance for capital expenditures in 2025 to be approximately $85 million.

To wrap up, Interfor's Q4 earnings were a significant improvement over the prior quarter, driven by improved lumber prices reflective of tightened supply. Interfor is well positioned with its high quality and geographically diverse operations to navigate successfully through the current economic and political uncertainty. That concludes my remarks, and now I'll turn the call over to Bart.

[Barton Bender, executive]

Thanks, Rick. Reflecting on 2024, the diversity strategy is paying off. I-joist SPF in the East, New Brunswick. That coupled with our P&W and Southern Yellow Pine production allows us a level of customer diversity, business diversity, which puts us in a great position to service our customers and realize higher margins.

In the near term, lumber markets in North America remain uncertain. Canadian lumber is facing headwinds for shipments to the U.S. markets, with all other softwood lumber duties expected to double the potential tariff of 25% on top of that, the U.S. lumber market will need to absorb significant cost increases. With Canada representing 24% of the U.S. market supply, this will come in the form of either increased lumber prices reduced lumber supply or most likely both.

We expect the price of lumber to be volatile for the balance of 2025, however, with an inflationary tone. Lumber demand is hard to read. Three months back, it felt different, somewhat predictable and on an improving trend. Today, we feel demand is showing signs of decline, however, mostly due to the economic uncertainties. We feel this is short term and look for markets to settle in 2025.

We are well diversified with approximately 60% of our production in the U.S., putting us in a position to be a reliable, consistent supplier to our customers. Inventory, when markets are uncertain, we see our customers take risk off the table by buying less and driving down their existing inventories.

We feel that we are at a historical low in the distribution channel. And as Ian mentioned, Interfor has been proactive in reducing our own inventory levels. Logistics capacity remains consistent and stable, allowing for shorter lead times for restocking. Longer term, we continue to feel very good about the need for housing, demographics, household balance sheets, repair and remodel opportunities.

We expect affordability to continue to drive the demand side of the equation and once the economy settles, we expect demand to improve. As always, we'll focus on aligning our production to market demand, and we'll look for markets to settle through of 2025. Back to you, Ian.

[Ian Fillinger, executive]

Thanks, Mark. Operator, we're ready to take questions from analysts.

[Operator]

[Operator Instructions]. First, we will hear from Ben Isaac at Scotia Bank.

[Ben Isaacson, analyst]

So just on the net debt to capitalization, it's been very stable at 35%, 36% for a number of quarters. And Ian, you mentioned that all plants are EBITDA positive. So the question is, do you need to pull on nonoperational levers to prevent net debt or to prevent your net debt ratio from rising?

And the reason why I'm asking is you have this AAC available for sale is -- does the tariffs make that make the market value less and does it make sense to defer that if you're stable on your leverage ratio?

[Ian Fillinger, executive]

That's a good question, Ben, and one that we've talked about and viewed. But our view is that the impact of pulling that nonoperational labor of coast tenure sales is not impacted with the tariff threats that are out there now. The sales largely follow the BC government's mandate towards First Nation's ownership or value-added ownership, which really is off the dimensional market.

So at this point, a number of those sales in 2025 that we have lined up are already fairly advanced in different stages. So no, we feel good about selling in this environment, and we don't see a value hit because of the tariff threat on that.

And on the coast, Ben, the species really isn't tied to necessarily the U.S. housing market as closely as SPF or SYP volumes. We're talking [ sera ] Hemlock and Fir that's on the coast, which really are high-value type products.

[Ben Isaacson, analyst]

Got it. And then just as a follow-up, in advance of the threat of tariffs, we had heard about homebuilders stockpiling various items in advance of that. And -- but I just want to clarify, Bart, did you say that customers are buying less and they're not stockpiling? I just want to understand that dynamic.

[Barton Bender, executive]

Yes. We -- so leading up, I guess, if you go back into January, leading up to when the first threat of tariffs were coming on, we didn't -- we weren't seeing varied activity out of the marketplace. In fact, there was a level of complacency, I think, at the distribution side of things.

That now has changed slightly. But we think that some of the activity that we're seeing today is filling in what they didn't buy in January. Plus, you've got some seasonality factors to think about. So yes, no, I think that there have -- it's our position that the inventories remain low in the marketplace. They remain low at the operating levels.

And I just don't see -- I don't -- I'm not seeing the stockpiling certainly at the distribution level, and it would be news to me that, that's taking place at the actual builder level, where it's, frankly, a little bit harder to do because we don't have the infrastructure in place to store inventory. So no, I think the market has got a degree of tension to it. It's got some uncertainty, and it's going to be interesting to navigate this in the next couple of months.

[Operator]

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

[Matthew McKellar, analyst]

I appreciate all the comments so far on demand and inventory. Maybe just following on that last one, and I wouldn't think of whether it's been too favorable through most of the U.S. so far in Q1, but turning on the composite is about as high now as it was pretty much any point last year.

So I guess I'd be curious to hear what your sense of how tight the market could get if we see demand pick up a little bit here into the busier season. What flexibility might have to respond with higher production levels over the next quarter to maybe the South and the Pacific Northwest in particular, should you get the right demand and pricing?

[Ian Fillinger, executive]

Matt, Ian here. I'll take it and then Bart can jump in if I've missed anything. But good question. Yes, for sure, the winter storms in mid-January across the whole South was pretty tough and obviously in the Northeast with what's been going on. So weather has not been that favorable.

The way -- the way that I think I or we think about this also is if you kind of accepted that maybe 2024, which was not a great year from lumber pricing, standpoint was even the same for 2025. What I don't think has been realized is the 10% permanent capacity or semi-permanent capacity that's been removed. That really hasn't really hit traction.

Most of that happened between August and December. And so if you kind of accepted that 2025, even at 2024 price, that capacity that's been removed really hasn't come to light yet. And then you throw on, I think, what you're referring to some tough weather conditions and heading into the spring. Those are all factors that we're keeping an eye on.

Our ability to respond to demand, either positive or negative. I think we've proven that over the last several years, we can move one way or torque the other way. And it doesn't take much, which I think proved out that a little bit of a tick in lumber price, I think the way that Air Force is now positioned from where it was a number of years ago, really does have a good impact on us when there's a slight improvement in lumber prices. We really enjoy the diversity that we have with all different regions we operate in.

[Barton Bender, executive]

The only other thing I could add to that is that I think the market has realized that the pine prices that we're seeing today could represent the lows of the year. We've got some cost additions that are coming into the Canadian shipments and so when you look at all the regions together and you look at the pricing that we have today, Souther Yellow Pine represents value. And I think that people are feeling comfortable that buying now is a good idea.

[Matthew McKellar, analyst]

That's really helpful. Just one more for me. How have you seen your log cost trend in the U.S. Southeast here following hurricane season? Did you get much help from lower log prices on the back of salvage activity in Q4? And do you have any sense of how things trend over the next couple of quarters?

[Ian Fillinger, executive]

Yes, Matt, good question. We did, but it was very localized. So we are the largest lumber producer in the state of Georgia. And when the Helene went through obviously impacted a few of our mills. And so in that area -- in those areas, the salvage wood cost was favorable. Now it's a small part of the overall platform of 28 operations across both countries.

But there were a few mills that were able to have lower costs, but very short lived. And I believe most of it's probably been worked through here now. But -- that's a good question, and we did see some log cost decrease because of that in those areas.

[Operator]

Next question will be from at Ketan Mamtora at BMO Capital Markets.

[Ketan Mamtora, analyst]

Maybe to start with, Bart, I want to come back to your comments around kind of demand where you said, if I heard you correctly, is showing some signs of decline to start of the year. I understand the seasonal element, but could you talk to how your demand is trending on a year-over-year basis both on the new residential side of the business and also on the repair and remodeling side of the business?

[Barton Bender, executive]

Okay. No problem. I think -- those comments are largely informed by conversations with our customers and what they're seeing from their side of things. And I think that there has been decline on the kind of business that they're seeing from their -- from the builders. And we saw that at the beginning of the year. I mean January was a bit of a slower year -- or sorry, slower month.

But we thought that, that was perhaps more due to the uncertainties than anything. And I think in my opening comments, I was -- I wanted to make that point that the decline in demand is -- I don't think it's fundamental. I think it's more based on just the economic uncertainties of what's going to happen over the next couple of months. So that's largely on the builder side, so call that the new home construction.

On the repair and remodel side, very hard to put your finger on exactly what's happening there other than we can just look at our own business and our lumps month-over-month. And I would say that side of the business has been steady. And I think that if affordability remains in check and the uncertainty settled down, we expect that both on the new home construction side and the repair and remodel side will improve as we go through the year.

I just think -- I really want to make the point that those comments are based on a very short-term outlook. I mean it's a fair amount of uncertainty as we started the year. And I still -- and I think we still have it. I mean, obviously, we've got the potential of tariffs coming in and beginning of March. And so that's going to have a material impact on the market and it pauses everyone, I think.

[Ian Fillinger, executive]

Ketan, I'll just jump in with Bart here, too. The way that I think we're seeing demand is -- you get a threat of a tariff people kind of pause for a few days, something changes, then they load up and then they pause and then they load up. And so right now, it's almost a week to week.

People just our customers are willing to take risk or even build inventory if they think that even prices will be lower now than a potential tariff, everybody is just treating it that way. So we'll get days where a couple of days where I think things are a little bit slow on the demand, and then they'll pop. So it's a real week-to-week fluid situation right now.

But overall, we're very positive that there's less supply on the market. Our inventories are super lean, and it appears that the supply chain is lean.

[Ketan Mamtora, analyst]

That's helpful perspective. And then one more, as we think about SPF prices and Southern Yellow Pine, and to the extent that this uncertainty and duties and potential tariffs pushes SPF prices higher. I'm just curious from a practical standpoint, how much substitution could happen into SIP because we know that builders generally tend to prefer SPF grade. So is it possible that we see incrementally buyers kind of open to taking SIP in new residential? Or does it kind of open the door to more European imports?

[Ian Fillinger, executive]

We strongly believe that SPF is going to be and continues to be the preferred specs for builders, and we're very well positioned with our Eastern Canadian operations in Ontario and New Brunswick. There could be obviously some substitution with SYP into that.

But SYP, I think, is largely into repair remodel, treating those type of products but builders do prefer SPF, and there probably will be some substitution on the margin. But if you're building a home the view is SPF is really the preferred product, easier to deal with, much lighter in weight as a species, and we see it as a preferred product for the homebuilder.

[Operator]

[Operator Instructions] Next question will be from Hamir Patel at CIBC Capital Markets.

[Hamir Patel, analyst]

Ian, when you think about the potential for Interfor and maybe the U.S. south industry as a whole to increase output over the near term. I know we've in the past talked about labor constraints. But what do you think is your only and maybe for the industry more broadly to turn up supply out of the South?

[Ian Fillinger, executive]

Well thanks, Hamir. We always kind of look back to what did the industry do in COVID where lumber prices were through the roof until the best the industry did was, I think it was around 3%, somewhere around there. So the ability to throttle up in the U.S. so it's probably you add an hour here or there to your shift or run a Saturday or something like that.

But incrementally, it's pretty small. Pacific Northwest is interesting. If you think about Northern British Columbia, which would be the stud producers, there's a lot of production out of the Washington and Oregon areas, which we were part of. And if you throw tariffs on to Northern BC, I think the Pacific Northwest would look at throttling up production, given that they'll have the pass-through and lower cost.

So -- but it's hard to do, Hamir. Our turnover rates are in the U.S. South are improving in a number of our mills, which is great to see. The ability to quickly bring sawmills, new sawmills online, et cetera, is hard to do. And if you do it quick, you tend to compromise operating metrics in the long term. So we think that the best the industry could do is incremental percentages.

[Hamir Patel, analyst]

Okay. Great. And that's helpful. And then when we think about maybe the potential for offshore imports to go up, what's your sense as to European suppliers have obviously got domestic customers too and their equipment is not sort of the portion that they service North America, maybe they're perhaps mix constraint.

Do you have a sense as to maybe what's the maximum uplift we could see in terms of offshore imports from Europe if we did have tariffs on paying supply? And then also with the war in Ukraine, if that comes to an end, do you think we'd see more of that European volume staying closer to home?

[Ian Fillinger, executive]

Yes. It's interesting to think about, Hamir. Our info is that log cost increases in Europe are going up significantly. So that's a headwind for sure. You're right on the European mills to be able to convert to dimension products. Our understanding is that's not easy to do. You've got to reconfigure your sawmill setups and equipment to do that. So I would say that we're probably going to see where we're at today.

I mean if there was an opportunity to sell into the U.S. today, they would be, and we're seeing a pretty big drop year-over-year in European imports. So maybe back to that traditional level, 3%, 4%, 5% max, but generally around 3% is what we've seen on a trend basis. And during COVID, I think it was around there also. So if prices do increase in the U.S., sure as heck domestic mills are going to try to capture that before the European imports.

[Barton Bender, executive]

The only thing I would add to that is that if you look at 2024 for the European producers, the North American market would have been one of their better markets, relatively speaking. And in that environment, their total shipments are off 21%. And so it tells you that the log side of the equation is just as much as that demand is going up, the log costs are following it. And so the margins are under pressure. And I think that, that's the big constraint on how much wood to send to North America.

[Operator]

Next question will be from Sean Steuart at TD Cowen.

[Sean Steuart, analyst]

Thoughtful commentary on markets. Ian, a question on the CapEx budget of $85 million. I'm trying to gauge how luck in that is and if steel tariffs potentially add pressure to that budget? Can you give us some perspective on that?

[Ian Fillinger, executive]

Yes, no problem, Sean. It's an easy question. The discretionary component, all the equipment was bought over the last 2 years it's sitting on ground now, no risk. The rest of it is maintenance basically. So the equipment is undercover, purchase, paid for and in the install mode now. And that's largely a Thomaston at the sawmill. So very, very, very little risk.

[Sean Steuart, analyst]

Good to here. Ian, another tariff question here. If tariffs proceed, what are your thoughts on the federal or provincial governments stepping up with local support programs? Any expectations there? And any concerns that, that sort of bolsters the U.S. subsidization argument and potentially fixed countervailing duties, broader thoughts on what the industry in Canada could expect in terms of support from the governments?

[Ian Fillinger, executive]

We're not counting on any support in our business planning at all from provincial or federal government. However, we're obviously participating and I would say, Interfor is probably a lead participator in discussions with both provincial and federal governments on the file, whether it's standing SLA agreement or the new administrative threat of tariffs.

If there's an executive order that does imply or put tariffs on our industry, we see it as a nonsubsidy that would be our view and to low risk to the government saying this is somehow a subsidy by the Canadian government, if there were some backstop measures that were put in place.

But Sean, we're I don't really have much more than that other than we're at the table, having regular conversations and strategy discussions with provincial and federal governments. I would say you don't -- when you look at Interfor, we've got BC, Ontario and New Brunswick. So our view on that, we have 3 jurisdictions from across Canada. I would say that I think that we have a strong voice at the table when it comes to talking through some of these scenarios.

[Operator]

And at this time, Mr. Fillinger, we have no further questions. Please proceed with closing remarks.

[Ian Fillinger, executive]

Okay. Thank you, operator, and thank you, everybody, for spending time with us this morning. I have any questions, feel free to reach out to Rick, Bart or myself. Thank you, and have a great day. Bye.

[Operator]

Ladies and gentlemen, this does indeed conclude the conference call for today. Once again, thank you for attending. And at this time, we ask that you please disconnect your lines. Have a good weekend.