GreenFirst Forest Products Inc.

Good morning. Bonjour.

Thank you for joining our Q1 2022 earnings call. I am Rick Doman, CEO of GreenFirst, and I am pleased to be joined today by Michel Lessard, our President; and Alfred Colas, our CFO.

Alfred recently joined us, and we welcome him to our team. Alfred has a strong background in commodities, and in the short time since he started, he has had a very positive impact on the company, and we're very appreciative.

I will now touch on some key highlights for the company. We successfully completed our first quarter of 2022 with an adjusted EBITDA of $45 million.

I will allow Alfred to further expand on this in his part of the presentation. Lumber markets were stable in Q1 and continue to be above historical trends to date.

Accordingly, Q2 will likely be another very positive quarter for the company. We recently announced the potential relocation of our Kenora sawmill.

Some equipment will be relocated to our other sawmills to help increase production and improve recovery. We also announced that we will restart our second paper machine at our paper mill in Kapuskasing.

We're looking forward to this. The operation can run better on two machines than it can on one, lowering operating costs.

As a company, we continue to consciously integrate ESG into all aspects of our operations, and we expect to issue a full sustainability report in the second half of 2022. For those who may not know us, GreenFirst is already one of Canada's top lumber producers, and we are working towards becoming a global leader through five strategies.

First, integrating ESG into all aspects of our business. Second, we are committed to being an employer of choice, focused on creative hiring strategies.

Third, low cost of production and operational excellence, I cannot express the importance of this enough. We are driven to maintain a sustainable and viable company and ensure long-term stable employment for our workforce.

Fourth, accretive acquisitions, we are true value buyers as demonstrated by the Rayonier and Kenora acquisitions. Lastly, rational capital allocation, we first look to optimize operations with little or no capital outlay, and then as cash flow from operations provides, we plan to make select capital investments that generate cost savings.

We believe our strategies will lead to enhanced value for our stakeholders. Our current annual lumber production capacity is estimated at 905 million board feet a year, which includes Kenora operations.

And we will look -- we will work towards both maximizing our capacity and also expanding that. We have started our capital expenditures plan, which involves spending approximately $60 million over the next three years, excluding Kenora.

As mentioned, we will also be using some of the parts and equipment from our Kenora sawmill operation, which should help make improvements to our lumber production capacity. COVID-19 was a factor in Q1.

Production was down 12% from planned and 10% lower compared to Q4, mainly due to COVID-19. At some points during the quarter, we had over 11% of our workforce unavailable.

Shipments were substantially lower in Q1, declining approximately 34% compared to Q4 and 22% compared to plan. Logistics disruptions was our biggest challenge in Q1.

These challenges led to lower sales volume and higher inventory levels. However, we are announcing a significant improvement in shipments in Q2, and we hope that the railways improved also their ability to get us more railcars and improve our shipments.

Our goal is to monetize the 114 acre plans to sell the prime Lake of the Front Woods property in Kenora. In addition, the company owns a four acre island adjacent to this land.

This land is very prime property, and we look to monetize it in the future. With the planned restart of our second paper machine in Kapuskasing, in Q2 we expect to significantly reduce operating costs.

Paper markets remain strong. We have successfully hired additional personnel for Phase 1 of this machine free start .

The outlook for lumber prices remain favorable. Strong demand and lower supply are keeping prices elevated.

US housing starts forecast is encouraging for 2022. North American lumber prices are expected to be volatile, but to remain above historical levels.

In our operations, supply chain transportation and delivery services are currently experiencing a wide range of inflationary cost pressures and operational challenges. Many of these inflationary factors are beyond our control and are not unique to GreenFirst.

I'm confident we have taken proactive measures to mitigate the impact and continue to drive production as much as possible. We continue to provide opportunities for employment and communities we operate in -- at our sawmill and paper operations.

Housing prices can be substantially lower in these communities where we operate as opposed to cities like Toronto. So we think that will continue to allow us to attract people in these communities.

I will now pass it over to our CFO, Alfred Colas to go over the financial highlights.

Thank you, Rick. I'm happy to report that our second successive quarter of operations generated net income of $34 million or $0.18 per share, driven by net sales totaling $173 million.

Now just a short note about how GreenFirst's first quarter was cut off. The company operates on a 13-week fiscal quarter and the first quarter of 2022 includes results of operations from January 1 to March 26.

By contrast, Q4 of 2021 included results from September 26 to December 31, which represented approximately a 14-week fiscal quarter. So this is something to be borne in mind, when comparing Q1 versus Q4.

We continue to benefit from strong lumber prices in the first quarter, which was more – which more than made up for a harsh winter and lower rail capacity and volumes shipped in the quarter. Our Forest Products segment had sales of $158 million on 115 million board feet shipped, with a cost of sales of $90 million.

We produced 134 million board feet during the quarter. Turning to our Paper segment.

For the first quarter, we had net sales of $14.7 million, reflecting shipments of 18,400 metric tons with cost of sales of $20.6 million. The company increased orders in the first quarter for delivery in Q2 and beyond, reflecting higher demand for all products.

Along with higher demand, pricing has increased by US$50 per metric ton from January to March. Another increase totaling a further US$50 or CAD64 per metric ton has been announced for May.

We've been progressing with the commissioning of the second paper machine, as Rick said earlier, which will be online during the second quarter and is expected to reach full production capacity during the second half of 2022. Selling, general and administrative expenses were $6 million for the quarter, mainly reflecting personnel costs related to the transitional services provided by Rayonier, office-related and IT infrastructure costs and costs incurred at Kenora.

SG&A expense did increase by $1 million compared to Q4, and this mainly reflects the ramp-up of hiring's. So speaking of hiring, starting in the fourth quarter of 2021 and continued in the first quarter, we were successful in hiring many of the corporate personnel required to transfer Head Office functions from Rayonier to GreenFirst.

We were able to terminate most of the transitional services from Rayonier at the end of February, with the balance expected to conclude by the end of May. Most of our new hires are located at our office in North Bay, Ontario, which is – which we opened in the fourth quarter of 2021, and where we had our Board and committee meetings just yesterday.

Our Northway office has over 30 full-time employees in IT, Accounting and Human Resources and is strategically located close to our operating sites. We recorded EBITDA of $46.4 million in the first quarter.

Reconciling – from net earnings include finance expenses, income tax expenses and depreciation and amortization. Finished goods inventory in transit at the end of the first quarter led to a sales cutoff adjustment of a net $10 million, and an associated estimated EBITDA impact of $5.6 million, which would have otherwise been added to EBITDA in the first quarter.

Adjusted EBITDA was $44.9 million as it excluded an unrealized $1.5 million foreign exchange gain on our US denominated long-term debt. After the first quarter in early April, we made a voluntary principal payment of US$8.9 million against the US term debt, and the outstanding principal balance currently stands at about US$88 million.

With shipments of lumber accelerating in Q2 and the drawdown of inventories, strong cash flows are projected for the remainder of the year, and we will continue to take opportunities to further reduce the long-term debt. Turning to the highlights from our balance sheet.

Our liquidity position at the end of Q1 was $89.1 million, composed of $39.1 million in cash on hand and $50 million available under our $65 million asset-backed loan, net of standby letters of credit. Our asset-backed loan has remained undrawn since acquisition to-date.

Almost $40 million of log inventory was built up during the first quarter, and this was fully funded from cash flows from operations. Log inventory buildup happens mostly during the frozen winter months in the first quarter, which also explains the high level of inventories at March 26.

We also have loss carryforwards. We have $26 million in non-capital loss pools and $15 million in capital loss pools that will be available to reduce future taxable income.

During the first quarter, we recognized a deferred tax asset of $7 million on the basis of the profits reported for Q1 and expected for the remainder of 2022. As Bring Advanced rising interest rates in response to higher inflation represented a headwind to lumber demand.

However, lumber market prices rebounded in late April, partly due to tightening lumber supply. While the pandemic seems to be abating, we expect COVID-19 to remain a concern through the remainder of 2022.

And finally, management and the Board's investment in GreenFirst shares aligns their interest with those of all shareholders. And this final slide shows that share ownership by management and directors comprises about 13% of the company, which is an important alignment of interest, as I said.

Merci Alfred. Thanks, Alfred.

It's important to recognize that the success of our business is largely contingent on the availability of indirect access to raw material as well as our ability to operate in a timely and cost-efficient basis. GreenFirst is commented to robust environmental, social and governance practices, and we believe our long-term growth is closely tied to these practices.

Being green now comes with added value to our shareholders. We take our corporate responsibility seriously.

Rick for closing comments. Rick?

Merci. Thank you, Alfred and Michel.

It is great that Q1 was our second consecutive profitable quarter. It is exciting and very busy time at GreenFirst.

And we are proud of our accomplishments and focused on delivering more. Before closing, I did not -- I did want to recognize the advice and counsel that have been given by Paul Rivett, our Chairman and the rest of the GreenFirst Board.

Their business experience and acumen have been invaluable to me, as we build a leading global forest products company. I would also like to thank all of our approximately 1,500 colleagues that work with me all the way from sales, operations, throughout the company in IT and accounting and so on.

Without their hard work, we would not be where we are at. So we very much appreciate their efforts and dedication.

We will now respond to your questions submitted online. Alfred?

Thanks, Rick. So we've received some initial questions here.

I'll read the first one here. What are your thoughts on the Interfor transaction?

Do you have a plan to work with them? And what would that look like?

We cannot speak for Interfor. We think their investment in us validates that Eastern Canada is a good place to do business.

We are continuing on our current path, which has exciting growth prospects for the benefit of all GreenFirst shareholders.

Okay. Second question that I have here.

What is the update on Kenora? How much will this cost?

Are you still looking for commitments from the government? And you mentioned, you may want to sell the land in Kenora.

How much is it worth?

Yes. So I see that we're getting a few questions also from Kenora.

So I'll try to answer to maximum of them. And also, Rick, you could help me also on these.

So first, that I see how much will it cost to move. The company is working on the best options for Kenora.

That includes monetizing the property, as Rick mentioned earlier, and also the potential to move the Sawmill to another site. On this specific, we are working with the government of Ontario and reviewing different opportunity to move the mill to other sites.

In the meantime, we're currently planning to move some equipment from Kenora, again, as Rick mentioned earlier, to other Sawmills. So that will help also other mills to get access to good equipment that as we know, there are some dealers to get access to it actually.

So that would be a very good outcome also for the Sawmills. And then after that, we could order some new equipment eventually for the restart of Kenora.

So on the specific, we're currently reviewing the cost and also the timing to do so. I don't know, Rick, if you would like to add on this one.

You did a great job, Michel, but I'll add a little more. The Kenora property is the prime site on the lake of the wood.

The town of Kenora would like to see it further developed in the higher end uses. We think there is a significant value there to that property.

So we worked hard with the government of Ontario and wish to thank them for the potential opportunity to move the Sawmill to another site in Kenora. The key for us is, of course, wood supply, and we're working with the government on that as we develop plans to look at that opportunity further in the coming months.

The Kenora equipment, as Michel said, is a very key important item. The Kenora equipment that we are moving to our other sites as we reinvigorate and add capacity to our Ontario sawmills would normally cost about $30 million to $40 million estimated if we had to get that equipment brand new.

And rather, we're taking newer and refurbished equipment from Kenora and moving it to their sites with the opportunity to buy new equipment in the future for Kenora and our plans to the potential to rebuild the mill. So, essentially, we're taking equipment immediately that would take up to two years to get delivery on because the markets are very strong for the equipment companies and the timing takes a lot of time.

So, we're very excited to move this equipment into our key Ontario sawmills and improved production and improved recovery.

Thanks Rick. So, another question that we got on Kenora is there -- are there any more loans or any other funds coming outside of what previously announced.

So, there was an announcement that has been made in Kenora a few weeks ago. So, there's no other updates on that.

Do we need more -- if we need more wood fiber commitment from Ontario to make the mill viable? Yes, on that, yes, we need more wood supply, and we are in discussion actually with the government to get access to it.

So, more decision to come. Can we get to 200 million board feet of production with new fiber?

We can rebuild the sawmills for capacity of up to 150 million, 200 million board feet. However, it depends also on the government of Ontario ability to provide the fiber, I just mentioned.

So again, we're in discussion on that, and we should have more news in the following, I would say, months. How much is the land worth?

So, it's something. So, Rick mentioned also that this land, it's a prime property in Kenora.

So, we're not able to give you an estimate, but again, like the fact that it's a prime property, we see a lot of our -- a lot of opportunity for the company and shareholders.

Thanks, Michel. Yes, I think there's another question that came in here, and I think it might be mine.

Why was there such a buildup in inventory? And how does the company plan to monetize it?

So as I mentioned in my remarks, first quarter winter months, frozen land is typically the time of the year when we do the most log harvesting. And we built up increased raw materials inventory by almost $40 million in the quarter.

And that will be monetized, obviously, through being processed by our sawmills and then sold as lumber. But also, there was a -- we had logistics disruptions during the first quarter, which we've been commented on.

And this, in particular, reduced our volume of lumber shift. And the lumber in transit actually represented a $10 million increase in our finished goods inventory, which rolls into that inventory.

And this has actually already been sold based on the stronger resurgence of shipments that we've seen in April. And so monetizing all these inventories is all going to come out through our shipments, which are accelerating during the second quarter.

So, another question came in, and it is how -- can you provide any updates or commentary on your mill optimization plans? You've mentioned the ability to increase utilization with limited CapEx over the next 18 months.

Based on Q1 production of 134 million board feet, you appear to have run approximately 70% utilization, excluding Kenora. Where can we expect utilization rates to get into -- to get to in 2022 and onwards.

I can maybe a stark and Rick, you could add on that. So, what we're doing actually is putting investments that will improve our recovery that will also improve productions and also that will decrease our processing costs.

So, there's different projects actually to different sawmills in Quebec and Ontario. I'm not going to go too into the details there.

But again, it's all related to these goals that I mentioned. So, as per you, we're looking for, if I can give some examples.

So, we're talking -- Rick was mentioning also some equipment that we're looking to move and there is a possibility, for example, with a planner that we could bring to Cochrane and also improve the one that we have there. There are some other equipment units with consumer scale.

There's also like, we're looking to do more cut to land also and maybe modify certain federatively to that. And again, some scales upgrade, et cetera.

So again, the main goals is very important, is to improve the recovery, improve also the production, decrease processing costs and all that for sure in a safely manner because that remains also the priority for the company, Rick, something to add?

Yeah, Michel, that's great. Just to add a little bit, just to give you a little history here.

In 2010, when I was CEO of, EACOM and we purchased the Domtar lumber assets also in, Eastern Canada, we immediately in an average $250. Western SPF markets, started to do CapEx at all our, sawmills and substantially increased over three years, their production capabilities and reduce our costs significantly again, in $250 Western SPF market.

We are planning to do the same thing here. It will take time.

Equipment orders do take time now, because of the strong order files these equipment companies have. So having the Kenora assets and equipment to move into our other mills is a significant positive for our company.

On top of that, we've ordered some equipment in addition, planners and working on other equipment that we expect to come in over the next one to two years that with the goal of significantly increasing our production capacity, to maximize our very strong AAC that we have. Noting, we have 3.7 million cubic meters, approximately of AAC, about $3 million in Ontario, $700,000 in Quebec, and we intend to fully utilize this AAC by improving our sawmills and increasing our production, improving recovery and lowering our sawmill operating costs, which is key.

We're very excited about this. And Michel and the team are doing a great job, working hard on getting all this started and in process.

Okay. Another question here, assuming the current lumber prices, what's an estimated range for free cash flow for fiscal year 2022?

We don't really give public guidance on our cash flow, but it can be acknowledged that the strong lumber price environment that we have has seen. Our cash position up-tick from $36 million to $39 million in Q1, while we invested $40 million in raw material and balance mill inventories.

And -- but I can say that, we also paid $8.9 million against our term loan and repaying debt is going to be a priority. So as far as free cash flow, it's going to be utilized on debt repayment opportunities and on strategic CapEx.

And we can't really give any guidance as far as a range at this point. But we're very encouraged by the lumber price.

And what it means for our business right now.

We have another question. Can you give us a sense of the volume needed at the paper mills to reach breakeven.

That mill is running better on two machines. So that's why also that we're looking to restart a paper machine number four.

So with the two machine, we'll have a production of 205,000 tonnes. So to be able also to produce that, we need to get access to 225,000 dry metric tonne of chips.

And on this specific also, we have the opportunity to have the chips or raw materials from our sawmills that are close to the paper mill. So it's a great advantage that we have to have the facility that can again supply that paper mill and a very short also distance.

So again, we're looking to reopen the PM4 and that's pretty critical for that mill to open with the two machines.

Okay. Thanks, Michel.

Another question here. What are capital allocation priorities?

As I mentioned earlier, our priority is moving the equipment from Kenora to our other operations, Hearst, Cochran and Kapuskasing. We're very excited about this because it allows us to utilize that equipment in the near term, which could have taken about two years to order new and at a cost new and installed of up to $30 million to $40 million.

It will cost us substantially less doing it the way we have planned. In addition, we have ordered new planers for some of our sawmills, which will be delivered in the next year or two, which is very encouraging.

These are our priorities currently, while markets are very strong, and we're generating good cash flow we are still being very conservative with our CapEx and careful and doing it prudently.

Great. Another question here.

Please repeat the amounts of the tax loss carry-forwards. So I'm happy to do so.

We have $26 million in non-capital losses available to offset future taxable income as well as $15 million of capital losses carried forward. That was an easy one.

Another question here. Will there be less inventory available for sale than planned after working through excess inventories discussed earlier due to less workers on site or due to COVID in Q1?

Is a question again.

Okay. Sorry about that.

Will there be less inventory for sale debt plan after working through excess inventory discussed earlier? No, it's -- we do not have less inventory to -- there's no issue there.

I would say that in the first quarter with the issue that we had in the shipping. So we built up a bit of inventory, lumber inventory there.

So -- but what we're looking also with Q2, we see some good improvement on the shipping. So then we're catching up also in the surplus of inventory that we had.

So that's looking good also. Less workers, it did not really -- it affects yes, for sure, a bit the operation, but we were able to maintain the operation.

So, that's really a good thing. I was talking about safety a bit earlier, and we were able to show during that COVID period of time that the safest place to be was in our sawmills.

So we didn't have any close contacts or something happened or people that catch the COVID in our mill. So it's something we put a task force together.

We wanted to have safety first and be sure again that the safest place was in our mills, and that was accomplished. Yes, we were affected by COVID, as everybody in all type of industry.

But again, we were able to run, run all time, maintain operation. And again, we had some issues on shipping, but we're catching on that.

So now we're able to ship our production, and we're able also to catch up on what has not been shipped in the previous quarter.

Okay. Question here.

What would EBITDA have been if you ended Q1 at the end of March versus when you did? And here, we've commented a few times about the ending finished goods inventory, which we couldn't sell in Q1, because of the sales cutoff.

And this was about $10 million of inventory, or sales representing about $5.6 million of EBITDA. Now it's hard to say whether those incremental sort of five days would have allowed us -- and by the way, that's 2 million board feet that are associated with that.

I don't know whether those five days would have allowed us to ship and sell those 2 million board feet. But let's say, it's -- the impact would have been something less than 5.6 million, but something north of maybe 2 million, I'm going to say.

I'm -- this is a rough estimate. But shipping disruptions -- logistics disruptions were a big factor for us in Q1.

And so that was a bigger factor. But we did mention the cutoff on the 26th was also a factor really when comparing to Q4.

But I think it's safe to say it would be at least a couple of million in EBITDA that might have been realized if we -- if the month had cut off on 31st. A question also is what is the plan to turn around in newsprint?

In newsprint, it's continued to decrease and decreasing for years and it's going to continue to decrease. But I would say that in our paper mill in Canada, and that's why we don't call that anymore a newsprint mill, call that as a paper mill, because we're doing also some food service bag.

So we're producing a lot of that. There's more and more demand for that.

We're also doing some bulky. We're doing also some 65 grades.

So again, we are pretty diversified, and we'll continue to do. We have some other projects that we're looking at to develop.

There's a lot of research and technical work that is done on this. And again, we want to continue to diversify, knowing again that the newsprint will continue to decrease.

But again, we're producing products actually as a paper bags, for example, that we call also under Envirosmart that the demand has continued to increase. So it's a very bright future for these products.

So, the question here. Where does the RYAM dispute over transferred inventory stands?

Any progress there? And on this front, we can say that we do have a difference of opinion with Rayonier regarding some of the valuation factors behind that inventory that was part of the opening balance.

And so that has been moved to an arbitrator to help us find common ground. And that process is really starting, starting-off.

It's in the early stages, so it's really difficult to judge what the outcome will be, but that is where it stands right now. It's in arbitration.

I have a quick question also that – about how Q2 is looking at an operation perspective. So we spoke about things about Q1, but what we're looking also in Q2, so things are improving.

So if we're looking also on a COVID point of view, so the things are improving a lot, so the number of cases are decreasing. And I would say that the hiring also is getting better.

So we have put in place our internal recruiting group. So they're doing a fantastic job to recruit locally originally, but also we're looking to recruit internationally.

We're in touch with many organizations, with also the municipal days, and then it's something that we're pushing on. Production also is getting better, as we said.

So for COVID also, we had a tough winter. So now the temperature is getting better.

So we see very interesting improvement in the production. And I just mentioned also earlier about the shipping that is also improving and that we're catching up.

Well, thank you for joining us on our call. That concludes our call for today.

We really appreciate all the questions, and hope we were able to answer them.

You can also send your questions to [email protected], and have a great day.