Interfor Corporation

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. Note that all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. And if you would like to ask a question during this time, simply press star then number one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. Thank you. 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 Pazabon, 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 continued 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 Thomason, 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 eight tenure sales for gross proceeds of $67 million. Number six, we streamlined our admin functions and closed our offices in both Montreal and Japan. Number seven, we addressed higher cost non-core mills by selling a mill in Oregon, two sawmills and one remand plant in Quebec, and indefinitely curtailing two 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. The pace of single-family starts has been solid with four of the last five 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 costs 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. Pass the call now over to Rick.

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 cost 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. 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 BC forest hens to continue generating net cash flow, estimated to be in the range of $20 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 I'll turn the call over to Bart.

Thanks, Rick. Reflecting on 2024, the diversity strategy is paying off. iJoyce, SPF in the East, New Brunswick, that coupled with our PNW and Suny 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, a 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 toll. Lumber demand is hard to read. Three months back it felt different, somewhat predictable, and on an improving trend. 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. From an inventory standpoint, 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 historical lows 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 2025. Back to you, Ian.

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

Thank you, sir. Ladies and gentlemen, as stated, if you would like to ask a question, please press star followed by one on your touch-tone phone. You should then hear a prompt that your hand has been raised. And again, to decline from the process, please press star followed by two. And if you're using a speakerphone, you will need to lift the handset first before pressing any keys. Please go ahead and press star one now if you have a question. First, we will hear from Ben Isaac at Scotiabank. Please go ahead, Ben.

Good morning, everyone. So just on the net debt to capitalization, it's been very stable at 35, 36 percent 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 non-operational levers to prevent net debt or to prevent your net debt ratio from rising? The reason why I'm asking is you have this AAC available for sale. Does risk of tariffs make that make the market value less, and does it make sense to defer that if you're stable on your leverage ratio? Thank you.

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 non-operational lever of coast tenure sales is not impacted with the tariff ratio. threats that are out there now. The sales largely follow the BC government's mandate towards First Nations 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 and 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. You know, we're talking cedar and hemlock and fir that's on the coast, which really are high value type products.

Got it. Thank you for that. And then just as a follow up, in advance of the threat of tariffs, we had heard about home builders stockpiling various items in advance of that. But I just want to clarify, Bart, did you see that Customers are buying less and they're not stockpiling. I just want to understand that dynamic. Thank you.

Yeah, so leading up, I guess if you go back into January, leading up to when the first threat of tariffs were coming on, we weren't seeing very much 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. 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'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 they 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.

Great, thanks so much.

Thanks, Ben.

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

Good morning. Thanks for taking my questions, and I appreciate all the comments so far on demand and inventory. Maybe just following on that last one, and I wouldn't think the weather's been too favorable through most of the U.S. so far in Q1, but framing lumber composite is about as high now as it was pretty much any point last year. I guess I'd be curious to hear what your sense of, you know, how tight the market could get if we see, you know, demand pick up a little bit here into the busier season. What flexibility might have to respond to 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?

Yeah. Hey, Matt. Ian here. I'll take it and then Mark can jump in if I've missed anything. But, yeah, good question. Yeah, for sure. You know, the winter storms in, you know, mid-January across the whole, you know, south was pretty tough and obviously in the northeast with what's been going on. So, you know, weather has not been that favorable. The way that I think I or we think about this also is, you know, if you, you know, kind of accepted that maybe 2024, which was, you know, 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 hit traction. Most of that happened between August and December. And so if you kind of accepted that 2025, even at a 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 you know, move one way or torque the other way. And it doesn't take much, which I think Q4, you know, proved out that, you know, a little bit of a tick in lumber price, you know, I think the way that Inter4 is now positioned from where it was a number of years ago really does have, you know, a good impact on us when, you know, there's a slight improvement in lumber prices. enjoy the diversity that we have with all the different regions we operate in.

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, Sun Yellow Pine represents value. And I think that people are feeling comfortable that buying now is a good idea.

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

Thanks. Yeah, Matt, good question. We did, but it was very localized. You know, so, you know, we are the largest lumber producer in the state of Georgia, and, you know, when Helene went through, obviously, you know, impacted a few of our mills. 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. 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.

Thanks very much. I'll turn it back.

Thank you. Next question will be from Ketan Mentora at BMO Capital Markets. Please go ahead.

Good morning, and thank you for taking my question. 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, it's showing some signs of decline to start the year. I understand sort of 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? Thank you.

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 a decline on the kind of business that they're seeing from the builders. Um, and we, we saw that at the beginning of the year. I mean, January was a bit slower year, uh, or sorry, slower month. Um, but we thought that that was perhaps more due to the uncertainties than anything. And I think in my opening comments, I was, um, I wanted to make that point that, you know, the, the, the, uh, 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 own comps 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, you know, 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 think we still have it. I mean, obviously, we've got the potential of tariffs coming in beginning of March, and so, you know, that's going to have a material impact on the market. pauses everyone, I think.

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 you know, our customers aren't willing to take risk or even build inventory if they think that, you know, even prices will be lower now than the potential tariff. Everybody's just, you know, treating it that way. So, you know, we'll get, you know, days where, you know, a couple of days where I think, Bart, you know, things are a little bit slow on the demand and then, you know, they'll pop. So it's a real week-to-week fluid situation right now. But, you know... 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.

Thanks, Ian, but that's a helpful perspective.

And then one more, as we think about SPF prices and Southern Yellow Pines, 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 SYP 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 SYP in new residential or does it kind of open the door to more European imports?

We strongly believe that SPF is going to be and continues to be the preferred species 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 specie, and we see it as a preferred product for the home builder.

That's very helpful. I'll jump back in the queue. Good luck.

Once again, ladies and gentlemen, as a reminder, if you do have any questions, please press star followed by one on your touchtone phone. Next question will be from Humir Patel at CIBC Capital Markets. Please go ahead.

Hi, good morning. Ian, when you think about the potential for, you know, and maybe the U.S. South industry as a whole to increase output over the near term? You know, I know we've often in the past talked about labor constraints, but, you know, what do you think is your own ability and maybe for the industry more broadly to turn up supply out of the South?

Well, thanks, Amir. We always kind of look back to, you know, what did the industry do in COVID? where lumber prices were through the roof. And so the best the industry did was, I think it was around 3%, somewhere around there. So the ability to throttle up in the US south is 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 stud production out of the Washington and Oregon areas of which we were part of. If you throw tariffs onto northern BC, I think the Pacific Northwest would look at throttling up production, given that they'll have the pass-through and lower costs. But it's hard to do, Hamir. Our turnover rates in the US 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, 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.

Okay, great. Thanks, Ian. That's helpful. And then when we think about maybe the potential for offshore imports to go up, you know, what's your sense as to, you know, European suppliers have obviously got domestic customers too, and their equipment's not, you know, sort of the portion that they service North America, maybe they're perhaps mixed in strength. 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 Canadian supply? And then also, you know, 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?

Yeah, 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. I would say that we're probably going to see where we're at today. If there was an opportunity to sell into the U.S. today, you know, they would be. And we're seeing a pretty big, you know, drop year over year in European imports. So maybe back to that traditional level, you know, 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., well, sure as heck domestic, you know, mills are going to try to capture that before the European imports.

Great. Thanks, Ian.

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. In that environment, their total shipments are off 21%. 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 they'll send to North America.

Great. Thanks. That's all I had. I'll turn it over.

Thank you. Next question will be from Sean Stewart at TD Cowan. Please go ahead.

Thanks. Good morning, everyone. Thanks for all the thoughtful commentary on markets. Ian, question on the CapEx budget of $85 million. I'm trying to gauge how locked in that is and if steel tariffs potentially add pressure to that budget. Can you give us some perspective on that?

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

Thanks for that. And 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 affects countervailing duties? Broader thoughts on what the industry in Canada could expect in terms of support from the governments?

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, you know, agreement or the new administrative threat of tariffs. You know, if, you know, there's an executive order that does imply or put tariffs on our industry, we see it as a non-subsidy, you know, that would be our view and so low risk to, you know, the government, you know, saying this is somehow a subsidy by the Canadian government if there were some backstop measures that were put in place. But, you know, Sean, we're, you know, I don't really have much more than that other than we're at the table having regular conversations and strategy discussions with, you know, provincial and federal, you know, governments. I would say, you know, when you look at Inter4, we've got BC, Ontario, and New Brunswick. So our view on that, we have three 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.

Understood. Okay, guys, that's all I have for now. Thanks very much.

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

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

Thank you, sir. Ladies and gentlemen, that 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.