Interfor Corporation

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. As a reminder, all participants are in listen-only mode today, 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 risk Uncertainties and assumptions of such statements can be found in Interport's most recent press release and MD&A. I would now like to turn the call over to Mr. Ian Fellinger, Interport's president and CEO. Mr. Fellinger, please go ahead.

Thank you, operator, and good morning, everyone. Joining me today is Mike McKay, 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, the 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, driven by higher lumber prices across all five regions, up 5% to 20%, and lower conversion costs, despite winter weather conditions. This performance came even as duties, tariffs, and logistical constraints, particularly in the US South, remained elevated. Seasonal tightening and industry rationalization has helped rebalance supply and demand to start the year. Turning to Thomaston, our Thomaston, 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 performance across all KPIs within the next four months. Strategically, Thomaston strengthens our US 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 two years, roughly a 5% reduction in total manufacturing costs versus 2025. This program builds on our ongoing productivity and portfolio optimization efforts and will enhance operating leverage as markets recover. Importantly, these benefits are cost-driven and not dependent on market conditions. While still early, we've made good progress. Operationally, we continue to optimize working capital in Canada with log 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 remain challenged, but we saw a seasonal price improvement through Q1 that has continued into early Q2. 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 four times the pace of 2025. At the same time, landed costs for third country imports into the US 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 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 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, Interport posted positive $31 million of adjusted EBITDA in the first quarter, a significant improvement over the past two negative EBITDA quarters. The notable sequential improvement in our results was driven by several factors. From a sales perspective, Interport'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 in 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. 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 US 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. From a cost perspective, we estimate the run rate impact of current oil prices to be approximately Canadian $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 to have any meaningful impact to the bottom line. Turning to cash flows in 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 our 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 Somerville and Meldrum facilities in the US South. Turning lastly to capital allocation, following the completion of several major investments in recent years, including the completion of the Thomaston 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 investor 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.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a prompt that your hand has been raised. If you wish to decline from the polling process, please press star followed by the two. And if you are using a speakerphone, please lift the handset before pressing any keys. The first question comes from Matthew McKellar with RBC Capital Markets. Please go ahead.

Good morning. Thanks for taking my questions. First, I'd just like to ask a little bit about the manufacturing cost reduction targets. 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 in what regions you'd expect the most meaningful improvements And should we think of the Thomaston ramp as part of this program? Thank you.

Yeah. Hey, Matt. Ian here. Great questions. You had to put a little bit of color behind the cost reduction and operational actions in Thomaston. So we're using a discipline 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 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 enhance 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. 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 types of things. 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 Thomaston, absolutely. That's also been under construction for a while, which obviously has a cost attached to that. It's up in

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 thanks very much for all the detail uh just one more for me uh on ontario with um gildema and nairn center indefinitely curtailed Has there been any change to how, I guess, the iJoyce business in Sault Ste. Marie operates or any change in views around how that fits into the portfolio?

Thanks. It fits in very well, Matt, right to the bottom line. Yeah, we're very careful when we're making any kind of operating adjustments on any of the feedstock that we use for the iJoyce plant. At this point, no impacts on the hours that we've reduced. On our portfolio management, again, data-driven, prioritizing the mills that are running well and generate the highest profitability. Sometimes we add hours on those mills. Putting the supply... you know, check into Sault Ste. Marie and our Ijoys plant. I mean, we're very careful of making sure that we've got, you know, a good steady business there right now.

Great. Thanks very much. I'll turn it back.

Thank you.

Next question comes from Sean Stewart with TD Cowan. Please go ahead.

Thanks. Good morning, everyone. Ian, I want to follow up on the Ontario indefinite. um closures i guess the decision to focus on indefinite versus permanent potentially there and you know what beyond just a market recovery might be needed to position those sawmills better over the long run to be a part of the the plan going forward yeah sean thanks um

Following up on the previous questions also, we prioritize running and supporting the mills in regions that generate the highest profitability. We work closely with the teams at the challenge sites, for lack of a better term, to improve performance. We do have plans and ideas for those operations on how to turn those around. Sometimes it's the 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 U.S. will be good with Thomaston ramping well, but broader perspective on operating rates.

Yeah, 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 KUSMA 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?

Yeah, Sean, I mean, the trade follow-up, 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 US governments as they work towards an industry-wide agreement. In broad terms, You know, 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, you know, is this going to be part of KUSMA 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 in Ottawa or Washington. And we're pushing, like many others in our industry, on both sides of the border to have the two governments come together and get softwood on the table. Got it.

Okay. Thanks very much, Ian. That's all I have.

Thank you.

Thank you. The next question comes from Ben Isaacson with Scotiabank. Please go ahead.

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? How is that measured? Is that based on cash cost? Is that overall margin expectation? 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?

Yeah, Ben, so defining the top performer really does come down to the margin side of it. And in the South, log costs are fairly stable, so it does come down to the operating performance and conversion costs at Thomaston. The other unique thing about Thomaston is it's close to you know, 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 you know, 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, you know, near the top of the pack. And I expect it'll be top decile in the industry, no doubt.

That's really helpful. Thank you for that. Next question is just maybe some clarification. I think Ian or maybe it was 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?

Oh, yeah. Hi, Ben. Mike here. So, yeah, 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 would 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 one last one for me, if I may. I think you said, Ian, that you guys have picked up a couple hours and shifts down in the south. 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 FYP prices last month?

Yeah, Ben, I The hours in the south, there's really four mills that were on more of a reduced hour schedule, in addition to Thomaston being down for the majority of Q4. So Thomaston coming up, it's on two shifts right now. So that's fairly significant. The other four operations, I would say, are minimal hours being added. We're cautious with those mills. Those mills are um you know tend to be you know a slightly higher cost than our average mill so we're being careful not to you know add hours or more product to the market where where you know demand may not you know be there so um i would say the other four mills are you know fairly minimal hours being added um and being revisited you know every week and those three 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.

Thank you.

Ladies and gentlemen, as a reminder, if you have any questions, please press star 1. Next question comes from Ketan Mamtora with BMO. Please go ahead.

Good morning, and thanks for taking my question. First one, Mike, can you just remind us in terms of both the VC, forest in yours, 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?

Hi, Ketan. 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, you know, between say 20 to 25 million over the next 12 to 18 months, timing's 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 $40 million Canadian range, back-weighted of the year as those real estate processes take a little bit longer sometimes. But two notable pieces there.

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 the March timeframe. 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 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 the U.S. South? Thank you.

Yeah, Keitana. Ian here.

I would say supply conditions remain tight across North America. You know, there's been weather issues in Q1 and what have you, particularly in the south, seeing stabilization of prices. Our trading floor 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 costs 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 little buffer against any kind of disruption. So overall, supply backdrop, it's constrained. And I think supporting pricing once demand, you know, stabilizes with some of the macro, you know, 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 18 million Canadian over the next couple of years. What are you targeting for this year? And if you can... Give us maybe one or two key buckets that you are really focused on. And I'm just curious sort of how you are tracking it on an ongoing basis.

Yeah, 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, you know, we're pretty excited about it. We're seeing that it's working and the whole organization is clear on their targets and goals. And yeah, stay tuned. We think that this is going to be great and we'll report on it as we go.

That's helpful perspective. Do you have an estimate on how much out of the 80 you expect to realize this year?

Well, it's hard to say for sure.

But, you know, given Q1, that run rate, you know, it could be, you know, significant. But I'd rather not provide that guidance just because it's an ongoing program and we're four months into it now. And, yeah, 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.

Okay. This is helpful. I'll jump back in the queue.

Good luck. Thank you.

Thank you. 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 great weekend and look forward to talking to you on our next quarter.

On 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.