Interfor Corporation

Thank you, Operator, and welcome everyone to our Q4 2021 Analyst Call. With me today you have Rick Pozzebon, our Senior Vice President and Chief Financial Officer, and Bart Bender, our Senior Vice President of Sales and Marketing.

Our agenda today will start off with buy-sell, providing a recap of our financial results, our strategic focus, and our improvement efforts. I'll then pass the call to Rick who will cover off financial matters, and then Rick will pass the call to Bart, who will cover off the markets.

Turning to our financial results, our Q4 adjusted EBITDA was $150 million, approximately 60% higher than in Q3. During the quarter, benchmark lumber prices weaken slightly in November before increasing significantly through December.

We're executing on our strategic plan and we are generating industry-leading margins and returns on capital, and encourage you to look through the investor deck on our website. Our improvement efforts were again balanced across the company as we made progress in all regions.

Our production volumes were an all-time high quarterly record, reaching over 750 million feet. Our production costs decreased quarter-over-quarter.

We continued our CapEx improvement plans in every region, spending $63 million in the quarter, up from the previous quarter, and on-track and on-target for the year at $177 million, of which $111 million was discretionary high-payback projects. We continue to apply our very disciplined approach to our working capital by ensuring we don't build excess volume into the supply chain, as we are as lean and mean as possible.

Turning to our financial capacity, we continue to have significant financial flexibility to consider several further capital deployment options, which Rick will cover off shortly. We had some questions about the B.C.

government policy changes. So I want to provide a quick update on that front.

You recall on November 2nd, 2021, the B.C. government announced their intention to work in partnership with First Nations, to defer harvest of up to 2.6 million hectares of old growth forests.

Representing the potential for 4 million cubic meters or over a billion board feet of production. By implementing our diversification strategy, and with the completion of EACOM soon, we have right-sized our exposure to BC with 88% of our production capacity soon to be outside of BC.

The provinces signal their preference for companies to work directly with First Nations and Interfor has been doing this for years, and recently completed another 2 10-year sale projects with bands in both the interior and coastal regions of British Columbia. Turning to our strategic focus, we continue to achieve greater returns on capital through our unrelenting focus on operation, all excellence and capital deployment.

At such, I want to outline a few key initiatives that are nearing completion. Our DeQuincy mill restart in Louisiana is progressing well.

In fact, our first shift started on January 10, and we're expecting this mill to provide a meaningful contribution this year. In Georgia, our largest capital project at our Eatonton mill is on-track and on-budget.

The sawmill phase is scheduled to be completed by the end of Q1 this year with the official site-wide startup date at the beginning of April. We fully expect this project to set a new standard for our U.S.

South operations in terms of volume, conversion costs, and earnings. Turning to Eastern Canada, our EACOM acquisition is going well.

We are very pleased with how the integration planning is going, and we expect to close on this deal within the next 4 to 6 weeks, adding another 985 million feet to our annual capacity, bringing our company to just under 5 billion board feet of annual capacity, which it equates to 2 billion board feet added in the last 12 months. In summary, our returns on capital were exceptionally strong in 2021, generating a 56% return on capital employed.

We continue to work hard on our capital allocation discipline, to ensure the best returns for our shareholders, or continuing to see strong performances from our internal projects and our recent acquisitions. That concludes my opening remarks, I'll now hand the call over to Rick.

Thank you, Ian. And good morning, all.

First off, I will refer you to cautionary language regarding forward-looking information in our Q4 MD&A. The fourth quarter saw Interfor continue its positive operating momentum across a growing portfolio of sawmills, resulting in the most lumber production in our history.

As Ian mentioned, 758 million board feet. During the past quarter, we also made significant progress on positioning our portfolio for even greater production and earnings capacity going forward.

We advanced on several strategic capital projects in the south, we accelerated the restart of our DeQuincy, Louisiana sawmill acquired in Q3, and we reached agreement to acquire EACOM, moving us into a new operating region with attractive fundamentals that provides enhanced growth potential. These positives build on the other initiatives we have discussed with you throughout the year that have transformed our company and set us up to thrive and create value going forward throughout market cycles.

Taken together, we have repositioned Interfor as a major producer in the lumber industry. And this repositioning, it's not simply about pure production growth, but it's from a foundation of capital discipline, which has delivered top-tier returns on capital.

This disciplined and balanced approach to capital allocation will continue to guide our decision-making. Combined with our core and ongoing focus on operational excellence.

From a financial perspective, Interfor generated adjusted EBITDA of $150 million in the fourth quarter, representing a margin on sales of 22%. Profitability benefited from stronger operating performance and quickly rising lumber prices in the second half of this quarter, partly offset by several mostly external factors to our business, including elevated stumpage rates in BC, an increase in duty rates, and ongoing inflationary pressures.

In addition, weather and flooding events had some impact on shipments from our western operations. Overall, we shipped 95% of our production in the fourth quarter.

Though we're now seeing improved logistics availability in Q1. In terms of cash flow, we generated $133 million from operations, of this $47 million is reflected in the build of working capital, mostly in the form of lumber and seasonal log inventories, while $63 million was reinvested into capital projects as we continue optimizing our portfolio and enhancing its earnings potential.

We ended the quarter with a very strong balance sheet and ample liquidity, with cash on hand of $539 million and over $1 billion of available liquidity. [Indiscernible] positions us very well financially to close on EACOM acquisition in the near term, and to continue executing on our strategic initiatives, including consideration of further growth opportunities that [Indiscernible] within our criteria.

Looking ahead to our capital allocation for 2022, we tend to take the same balanced, disciplined, and growth-oriented approach as we did in 2021, anchored on maintaining a conservative balance sheet. We now expect to spend in the range of $250 million to $275 million on capital improvements in the year, with about two-thirds of this representing discretionary investments to continue growing and optimizing our existing platform.

We'll also look to buy back shares under our normal course issuer bid when Interfor's share prices attractive relative to underlying intrinsic value. To wrap up in 2021, Interfor delivered both tremendous operating and financial results across all of its regions.

And looking ahead, we're very well-positioned to continue our momentum. Our balance sheet is strong and provides financial flexibility to invest in our business and pursue growth.

We are adding significant near-term growth and diversification with the expected closing of the EACOM acquisition this quarter, and our growing track record of top-tier returns on capital demonstrates that our team and our approach are delivering results that are repeatable and translate into growing value for shareholders. That concludes my remarks.

I'll now hand the call over to Bart.

Thanks, Rick. Good morning, everyone.

I will make a few comments on our lumber market. Strength in the lumber markets increased as we progress through Q4 2021 into Q1 2022.

From a pricing perspective, the patterns we're seeing so far this year are very similar to how we entered Q1 last year. How we're getting there is slightly different.

However, clearly, we have strong lumber markets as we move towards the 2022 building season. The fundamentals supporting this market remain unchanged.

New home construction, both single and multi-family continued to grow. Housing inventories, whether new or used, remained low.

Builder confidence is high. Household balance sheets are strong.

Housing stock, average age remains greater than 40 years. A tailwind for repair and remodel lumber market.

Rising home equity is supporting continued investment in their homes, Millennial demographics port increased entry into housing markets, of course, historically low interest rates are holding in the near-term. Supply chain challenges remain across North America, some regions more challenging than others.

Shipping from British Columbia whether overseas, within the province, or south into the USA has been exceptionally difficult. Weather, COVID activity, new regulations on crossing borders, but even greater strain on an already fragile supply chain network.

The work that's been done by our logistics employees, our shipping partners in our operations to keep lumber moving was nothing short of exceptional. We expect this to normalize in Q1 2022.

Overall, we're very encouraged of what we see as we enter Q1 and we look for that momentum to make 2022 another good year. With that, Ian, I'll pass back to you.

Okay. Thanks, Bart.

Operator, we are ready to take analyst calls now.

Hi. Good morning.

Ian, I want to get your thoughts on, to what extent does some of the Omicron related absenteeism has affected the industry at large, and if you had any different experience at Interfor.

Thanks, Hamir. I would say a couple of weeks ago, it was probably at the peak within the numbers that we track for both COVID positive cases or exposure.

So we had a significant number of employees and [Indiscernible]. I mean they -- I guess Hamir, but probably about 2 weeks ago, 10 days ago, when we were doing the call with you and then over the last couple of weeks, we've seen that drop by about 1/3 for our internal lumbers, so it's definitely impacted us through December, better part of January, most of January, but we're seeing some stabilization now.

From a production standpoint, I would say somewhere in the neighborhood of maybe 5% impact a little bit more on labor costs, just because of employees having to fill in or run equipment that they normally hadn't. But the teams on the frontline have done a great job, and so nothing significantly material, but it looks like it's stabilizing now and dropping slightly, so very positive from that point.

Great. Thank you, Ian.

That's helpful. And then I was just curious where across the business -- where are you seeing the most cost inflation and is freight essentially always a pass through across how you sell lumber in the different markets?

Yeah, for sure. I'll take the first part and then hand it to Bart on the freight side.

But yeah, Hamir, we're seeing it on pretty much all of the consumable materials that we use every day in the mills. And it's significant, but from watching what -- how we're doing within the peer group, I would say we're very competitive, at controlling most costs.

And from a capital standpoint, in projects, one of the largest costs are steel, roughly 30% of projects within our industry are manufactured with steel where the cost is. So we're -- we try to mitigate that by lead times, and planning, and those types of things.

And then also I would say that the labor side of it, particularly in the U.S. I believe there's going to be cost pressures on the wage side as we continue to implement our recruitment and retaining strategy for employees, it's just something that I don't think any of us can avoid.

But at this point, our cost inflations, and I might get a little bit wrong, but are under 10% in total. Or I would say the south.

I can't remember the Northwest or B.C.. but generally, we're below that threshold, which I think is probably really well within our peer group.

As far as a level goes.

Thanks, Ian, that's helpful. And so last question I had for Rick, in the 250 million to 275 million CapEx guidance for the year, are there any larger projects planned at the EACOM mills this year?

Hi, Hamir, good morning. There's not so within that number we've got about $15 million of CapEx for general maintenance spend as we evaluate the platform.

And once we take ownership, we'll see where the projects are best fits and we'll draft the most valuable going forward, but it's too early to tell on that front.

But, fair, Rick. Hamir, we don't see any major strategic projects coming at us from the EACOM acquisition.

Great, thanks. That's all I had.

I'll turn it over.

Thanks. Good morning, Ian.

Good morning, Rick, Bart. I want to just make two observations first.

I do want to compliment the whole team on how you've managed capital over the last couple of years. I've been impressed.

And the second thing, I want to make the observation that I think once EACOM closes, Ian, that you will be essentially at per with Weyerhaeuser in terms of lumber capacity, which is something none of us would have imagined even a decade ago. But my questions, first I want to talk just a little more about logistics and we've had some people down in the U.S.

talking about like rail car availability. And so, Bart, any color you can give us around well rail and trucking and whether you've seen any relative improvement recently.

Sure, Mark. Well, as I think everyone knows, on the logistic side, it's been somewhat difficult I think battling weather and COVID restrictions and all those things.

So depending on the region, you see fluctuations in capacity. But I always refer to it as clunky.

We can get the capacity, sometimes it doesn't come exactly when you want it, but it eventually comes. So in particular in the south, I think that's what your question was, we've had great capacity on the truck side, quite frankly.

We've got -- we've been working hard on our partnerships from that standpoint, and we've managed to make sure that we've got consistent capacity for that portion of our sales. On the rail side, it's less -- I mean, it's a much smaller percentage of the volume that goes by rail and working with our partners down there, it's not perfect, but we're managing to get what we need eventually.

And it seems like we'll see improvements, and then we'll see regression to that, and then we'll see improvements, and I think, overall, we're figuring out how to get our wood to market and service our customers appropriately. So we're getting through it.

Yes. Okay.

Bart, any sense that you can give us just in terms of your order files region by region.

Well, they're fairly consistent across the region and we tend to -- especially when we get into these types of markets, we tend to seek and order file. And I can tell you going into the end of January, we were in that 3 to 4-week range across the platform.

So we're very happy with the participation that we've seen from our distribution partners. And we think we've got ourselves in a very good position as we look towards the spring building season.

Okay. I want to turn next to just to log costs.

Yesterday, Rayonier was pretty upbeat about their sawlog pricing in the south in the fourth-quarter. I know -- I think for your sawmills or former Rayonier sawmills, I assume that you're buying some logs from Rayonier.

Maybe you could talk with us a bit about what you're seeing in the southern market, what you might expect over the next 2 or 3 years. And also just an update on what you're seeing in the Northwest and BC over the next couple of quarters in terms of log pricing.

Yeah. For sure, Mark.

BC had a pretty big run-up with the stumpage numbers this last quarter. That's come down pretty dramatically, so we're seeing a very nice reduction here.

Although we expect later this year that that will go back up. But it's double-digit type drops in percentage on the BC.

The Northwest is, I would say much more stable. We had the advantage of some lower log costs in the Northwest with the fires that we're in Oregon and Washington and the state governments that wanted to get that fiber out, and so us and others benefited from that.

That's now back to traditional levels, so that advantage is kind of gone away, I would say, but still stable, which is great. The south we had a run-up of log costs in the later part of 2021, I would say Rick I can remember like Jay a few dollars per ton, something like that.

Mark, so as a percentage, it might sound like a lot, but I mean, the log costs are very attractive. As you well know, down there.

But we are seeing now that those log costs are starting to come down again. We just spent a couple of days together as a senior team and the thinking on the South log costs is really weather-related issues that drove that up and also some COVID impact along with some start-ups from some of our competitors.

But we are seeing that saw log costs are now -- we're predicting that over the next several months it will come back to its traditional level from where it has been. But we did see definitely a few dollars put on the log costs in the last part of last year, but we do anticipate that coming back down, shortly.

Okay. All right.

And then, is it also possible to get some sense with the newer southern sawmill, Summerville, GP mills and DeQuincy? Sort of where the production rates are right now and how you might expect that to kind of cadence as we move through the year?

Yes. So the production rates are very similar to the GP rates that we're running, so we're actually pleased with that, Mark, because often, and as you know when we do acquisitions, and you come in as a new order, and you implement changes, what have you, often, it takes several months of adjustments being made before the levels are back, but we haven't missed a beat the team down there just integrated really well.

I can't remember the exact capacity numbers of those mills at this point, Mark. But I would say that we've had no setback whatsoever and in some cases we're trending very nicely with or above where GP was running those mills.

Okay. All right, and the last one for me, Ian, I'm just curious.

You read the whole management team. We've come through probably the most extraordinary lumber market that I've ever seen.

It's kind of ongoing, but what are you watching for in terms of signals that might suggest to you kind of need to pull back from a cyclical perspective at all?

Well, I think the macro economy, I mean, we're always like everyone watching that. The fundamentals on the demand side, big box store takeaway, repair, remodel market, the demand, oh sorry, the supply side, anticipation of potential volume coming out of British Columbia, the order file and the price in that order file, and then where there's a daily reports that we get from Bart's team in every region.

And it's kind of neat for us and will be neat for us to have not only line to site in the south, Washington, Oregon, B.C., but soon to be Ontario and Quebec. And really getting that full North American continent coverage and data on which markets and how they're performing and what the issues are both positively and negatively.

But I would say that those would be the ones that I think I'd look at. The housing starts permits, obviously, all that data is in our model and we use that every week to evaluate our decisions and just check in.

Rick, anything else that you'd add on that?

I think you've captured well in.

Okay. That sounds good.

I appreciate it Ian and Rick, and I'll turn it over.

Thanks, Mark.

Thanks. Good morning, everyone.

Just one question for me. And EACOM, I appreciate you'll close that acquisition shortly.

It will be a period of integration and you'll see where the dust settles with respect to this market and what your balance sheet looks like. But as you guys are still growth focused, can you give us a sense of what you see the Eastern Canada M&A pipeline looking like versus the other regions you have a footprint in?

How does that compare and contrast? Do you see further opportunity to expand in Ontario and Quebec?

Yes, sure, Sean. Our strategy is beyond British Columbia.

So are we – we’re active in all the regions for seeking good opportunities that meet the thresholds or meet our expectations. I would say that whether it's Eastern Canada or the others, we're taking every opportunity to look at growth opportunity the same way, a lot of

the same criteria, and I think our job number one right now is to integrate EACOM, and that's going very, very well. It's a professionally-run organization.

The values in EACOM line up very well with Interfor, and the team, I believe, is very excited to be owned by a company like Interfor versus a private equity out of out of New York and nothing wrong with that at all. But for the employee on the front line or the mill manager or the sales person being part of a company that's got a long future is great and we're seeing unbelievable enthusiasm coming from everyone in EACOM, and we're just pretty pumped on that.

But Sean, there are opportunities out in every region, and we're just quietly looking at or anything that makes sense and we say no more than we say yes, I will tell you that, like there's always something for sale in North America in the lumber business, but very few get beyond stage one, and that includes Ontario and Quebec, and other areas in Canada.

Okay. And I think the story you're still trying to tell us, is you lead with lumber and that's the focus.

You're getting an I-joist plant with EACOM. Any broader thoughts on engineered wood being of incremental interest going forward for the Company.

Sean, I mean, we had our strategic plan review in November as a team for the last year, one of the projects that Bart was commissioned with was to evaluate all the different engineered wood products and come back to us with a view of what could fit, what doesn't, the reasons why. So we do have a view on engineered wood products that's been well researched.

And as we look to grow, the engineered wood product I would say we're interested in, but we do really feel that lumber's the heart and soul of our company, ad to the extent that we acquire non lumber component, it would have to have to come with some lumber associated businesses and it's just what we do in it, what it drives our results, and it's kind of who we are and we know how to run mills and we know how to deploy capital in those mills. We need to stay true to who we are, but at the same time if it means an I-joist plant, or a plywood plant, or other adjacent product lines, we would definitely look at it.

But it does have to check the lumber box for us to move it up to the top tier of projects we're looking at.

Thanks for that detail. That's all I have.

Thanks, Sean.

Thank you, Operator. In closing, we are focused on maintaining the health safety and well-being of our employees.

We continue to drive cost reductions across our company and we are matching our production rates with our order files. I'd like to thank you for dialing in and participating in our update call this morning, and your interest in our company.

And if you have any questions or follow-up, please reach out to myself or Rick or Bart at any time. Thank you, Operator.

That will conclude the call.