GreenFirst Forest Products Inc. [ICLTF] Q3 2022 Earnings Conference Call November 9, 2022 8:30 AM ET
Company Participants
Rick Doman – CEO
Alfred Colas – CFO
Michel Lessard – President
Gwen Webster – General Manager
Operator
Good morning, ladies and gentlemen, and welcome to GreenFirst third quarter 2022 results conference call. All lines have been placed on muted to prevent any background noise. During this conference call, GreenFirst representatives will be making certain statements about future financial and operational performance, business outlook, and capital plans. These statements may contain forward-looking information or forward-looking statements within the meaning of Canadian Securities Law. Such statements involve certain risks, uncertainties, and assumptions, which may cause GreenFirst’s actual or future results and performance to be materially different from those expressed or implied in these statements. Additional information about these risks, factors, and assumptions, is included both in the accompanying presentation and in our MD&A and the 2021 Annual Information Form, which can be accessed on the company’s website or through SEDAR. After the speaker’s remarks, there will be a question-and-answer session. This presentation also contains certain non-GAAP measures, which are not intended to replace measures of financial performance and liquidity reported in accordance with IFRS. For additional information regarding these non-GAAP measures, please refer to the company’s MD&A for the first quarter of 2022.
Mr. Doman, you may begin your conference.
Rick Doman
Thank you, operator. Good morning, everyone, and welcome to GreenFirst Forest Products third quarter 2022 earnings call. I am Rick Doman, CEO of GreenFirst. And today, I’m joined by Alfred Colas, our CFO, and Michel Lessard, our President. This is a landmark call for us. This past quarter, we marked the one-year anniversary of GreenFirst running the acquired Forest Products assets, and I’m very proud of all that we have achieved. In particular, as a team, we have been successfully integrated six saw mills and one paper mill, as well as our harvesting into the GreenFirst family. These mills have been serving their respective communities for a long time, and it was important for us to ensure we foster the relationships between our operations and its communities further. The company has a team of approximately 1,500 individuals with a diverse range of skillset and experiences. In addition, we support many direct and indirect jobs in the communities we operate in. We’re particularly proud that we were able to hire top talent over the past year, despite the challenging labor market conditions. COVID, labor shortages, and inflationary issues, have all been challenges for the company that we are managing through. We can proudly say that we have a strong corporate presence in the growing community of North Bay, with our offices in the downtown court. We appreciate the support we have received from the local government, and in particular, the mayor of North Bay, in helping us integrate into the community. We have been hosting our management meetings and some of our Board of Director meetings from this location. We continue to build a sustainable Forest Products business that can withstand the volatility of the lumber markets.
In our first year of operations, we have seen historic highs in lumber prices, followed by downward pressures caused by macro events. I am impressed at our team’s ability to execute and remain agile through such volatility. This is something we’ll continue to build on and focus on the areas of our operations that we can control and improve to remain agile, despite paying higher duties than most of our industry competitors. Other key accomplishments that I wanted to highlight, was our ability to refinance our debt as we entered into a credit facility with a schedule one Canadian bank, which replaces our previous high yield term debt. This helps us with the financial agility we need to deliver on our operational and capital expenditures goal, at lower interest levels, and better terms for the company. Alfred Colas helped us significantly as CFO with his financial team achieve this successful outcome. We wish to thank them.
We restarted the second paper machine at our paper mill in Kapuskasing. This allows us to increase our productivity levels at the paper mill. We expect significant improvements in Q4 due to the second machine operating more stably and at stronger capacity. I wish to thank Michel, and André Ouimette, and our team on this for the improved results we expect in Q4. We have undertaken a project to move our equipment from the idle Kenora sawmill and into other sawmills. This move has given us the operational ability to improve key areas in our other operating saw mills, with the goal to increase productivity and recovery in those saw mills. We continue to seek opportunities for 114 acres of prime lake-of-the-woods land in Kenora, along with the four-acre island adjacent to it. I do wish to say that this movement of equipment has been very positive for our company as we install it at our other mills, because it’s very difficult to buy equipment currently and long lead times to get it, and the costs for it have gone up significantly.
Overall, our third quarter results reflect the volatility that the industry is seeing with lumber pricing, which were challenging in this past quarter. Despite this, our lumber segment still showed a profit. In addition, we continue to see inflationary pressures on our costs, which has also impacted our bottom line. Alfred will further discuss the financial results for the quarter in his presentation. We expect lumber prices to remain volatile, with the recently announced interest rate increases continuing to impact US housing starts and homebuilder confidence. Field inventories are currently low, and this could provide some strength in Q4 for lumber prices. The recent announcements of BC mills to curtail lumber production, will also be a supply side factor that may impact prices to increase. We continue to see logistical challenges. However, we have seen some improvement from issues that the company experienced in prior quarters. We expect to see further logistic improvements by working closely with our transportation partners. Inflationary cost pressures remain a real concern, although we have seen some improvements recently. We continue to challenge the high software lumber duties that were imposed on GreenFirst by the US Department of Commerce. We are appealing this decision.
I will now pass it on to Alfred for his financial update on the Q3.
Alfred Colas
Thank you, Rick. With lumber prices dropping and inflation increasing our operating costs in the third quarter, GreenFirst reported a net loss of $23.3 million or $0.13 per share based on consolidated sales totaling $153.4 million. Lumber prices in the third quarter average $780 per 1,000 board feet. These are in Canadian dollars, by the way, which was below the average price in the second quarter by $475 per 1,000 or 38%. This was our fourth full quarter of forest operations since closing on our six saw mills and one paper mill late in Q3 2021. We recorded a negative EBITDA of $29.7 million for the third quarter. Reconciling items from net earnings include finance expenses, income tax expenses, and depreciation and amortization. Adjusted EBITDA was negative $7.9 million in Q3, and it excluded onetime losses of $11.2 million on extinguishment of debt, and $5.3 million in other non-operating losses, in addition to an unrealized $5.3 million foreign exchange loss on our US dollar debt, which was extinguished on September 23, 2022. We paid $13 million in duties on US shipments during the third quarter. Excluding these duties, third quarter adjusted EBITDA before duties was $5.1 million positive. Our Forest Products segment had net sales of $127.4 million on 146 million board feet shipped, with a cost of sales of $116.3 million. We produced 130 million board feet during the quarter.
Turning to our paper segment, in the third quarter, we had net sales of $26 million, reflecting shipments of 29,300 metric tons, with the cost of sales of $34 0.6 million. During the third quarter, we continue the commissioning of our second paper machine, which contributed to higher paper production. Q3 reflects startup costs related to the restart of this machine and the impact of record high electricity and fuel charges impacting freight costs. These factors made it a challenging quarter for the paper segment. The second machine is expected to reach full production capacity during the fourth quarter of this year. As a result, we are expecting that this will benefit the performance of the paper segment going forward.
Selling, general, and administrative or SG&A expenses, were 5.9 million in the third quarter, and about $1 million less than SG&A expense in Q2. We had savings this quarter from not requiring one-off Q2 setup costs relating mainly to IT, combined with the full quarter benefit of not relying on transaction services support from RYAM, which were terminated in May.
Turning to our balance sheet. During the third quarter, we successfully restructured our long-term debt, and entered into a credit facility with a tier one Canadian bank, as Rick mentioned earlier. And this includes up to $125 million in an asset-backed revolving credit facility, and a $15 million term loan. This new credit facility has simpler compliance and loan covenants compared to our prior US-denominated high yield debt. Our liquidity position at the end of the third quarter was $52.5 million, including $29.9 million in cash on hand, and $22.6 million available under our asset-backed revolving credit facility, which is net of $12.7 million for standby letters of credit. The drawn balance on our revolving credit facility is $69 million.
The sale of our non-core private Boreal forest property announced on September 7, will add $49 million to our liquidity, which will help GreenFirst to succeed through the current challenging lumber market. Based on our cost basis for tax depreciation in relation to 2022, as at Q3, we do not have a liability for income taxes payable based on current estimates.
I’m happy now to pass it on to Michel for his comments on the operations.
Michel Lessard
Again, slides are in English, and I’ll present in French, but also some parts will be presented in both languages. [French spoken]. We indicated previously that we had plans to monetize some of our non-core assets. And as some of you may have seen, we have successfully completed the sale of our 203,000 acres of our private forest land located south of Kapuskasing, Ontario, for proceeds of approximately $49 million. Following a total review, the property was identified as non-core. Consistent with the company’s strategic vision and following a lengthy vetting process, the transaction was concluded in the best interest of the company. Please refer to our news release dated November 7, 2022, for further information on this sale. For Kenora, we continue to work with the Ontario government for a new site for a potential sawmill in the region. [French spoken].
The Kenora equipment move is another step taken towards realizing our annual production capacity, as has been indicated in this graphic, while we continue to seek better ways of operating our sawmills to increase production. We have previously indicated a $60 million CapEx – $60 million, sorry, CapEx budget for 2022 through to 2024. However, COVID impacts, inflationary cost pressure, and ongoing supply disruption, have impacted the cost of operation and equipment, along with the timing for these expenditures. The company continues to assess the impact of these macro changes on its initial strategy capital expenditure, plan, and expects the actual expenditures and timeframe for deployment to be greater than initial estimates. The execution of this plan will depend on realizing sufficient cashflows from operations and cash proceeds from the sales of non-core assets. [French spoken]. I’ll pass it back to Rick.
Rick Doman
Thank you very much all for joining our call and now we ask for any questions.
Question-and-Answer Session
Q – Gwen Webster
So, we’ve already received a bunch of questions, and there’s quite a few for the recently announced land sales. So, we’ll start with those ones. Michel, can you answer this one? Can you shed some light on what the thought process on the company selling the land that was announced earlier this week?
Michel Lessard
Yes, sure. Thanks, Gwen. As I mentioned just earlier in my text and following to review, the property was identified as noncore. So, again, consistent with the company’s strategic vision also and following the lengthy vetting process, so the transaction was concluded in the best interest of the company. So, that’s very important. And I can say also that we are very pleased with the completion of this transaction. So, very good things for the company.
Gwen Webster
Another one for you. How does the sale of the land that was announced yesterday impact the company’s access to wood supply for its mill?
Michel Lessard
Yes. So, you know the property as being a source of SPF supply to the Kapuskasing saw mill from time to time over the last 20 years. Potential future harvest volumes will be at the discretion of the buyer and will be influenced by different factors as the, I would say, ecosystem management objective and their forest carbon and also forest projects market. That said, we still have access to an important wood basket, so it’s important to mention. Just to give you an example of the scale of the land, we currently manage 9.2 million hectares of forest land. And as the close tomorrow, it’ll be minus 82,000 hectares. So, making that we are still going to manage 9.2 million hectares. So, it still remains, again, as I mentioned, very important wood basket for the company.
Gwen Webster
Perfect. And Alfred, can you answer this one? Do the proceeds of the land help with the timing for CapEx plans? What else does the company plan to spend the money on?
Alfred Colas
Thanks, Gwen. So, as has been said by Rick and by myself earlier, we’re in a low lumber price environment. And so, these proceeds are important for us to have more general working capital to advance with our plans and start 2023 with a stronger balance sheet. And the company is always evaluating its plans to execute its vision and strategy, and these funds will really help us to implement that strategy. And as I said it, it’ll also strengthen our balance sheet, coupled with the debt refinancing, which puts us in a much stronger position to start 2023.
Gwen Webster
Perfect. We’ve got a good question here in our paper mill. Can you explain how the company plans to turn around the paper mill, as even the second paper machine starting, we still continue to see the losses in this segment. Alfred, can you explain that one for us?
Alfred Colas
Okay. thanks, Gwen. So, as I had some remarks in my comments earlier, but during the third quarter, we continued with the commissioning of our second paper machine, and that contributed to higher paper production in the third quarter. We had higher costs because of startup costs, including training of new personnel to run the second paper machine, and also the operating cost impact of higher electricity – record high electricity prices, in fact, during the quarter, as well as high fuel costs and freight costs. These factors combined to make it a pretty challenging quarter for the paper segment in Q3. As has been said, this second paper machine is expected to reach full production capacity during the current fourth quarter, and as a result, we’re expecting that this will benefit the performance of the paper segment going forward.
Gwen Webster
Yes. Rick wants to add to that. Go ahead.
Rick Doman
Yes. Thank you, Alfred. The paper segment has been a challenge because we’ve been on one machine, but as you mentioned, we’re ramping up to two machines. We expect a significant turnaround in Q4, both in stability of production, lower cost, and improving margins.
Gwen Webster
Perfect. While we have you, do you want to answer, can you explain some of your strategic CapEx spend, Rick?
Rick Doman
Absolutely. What’s very important to the company is to explain what is going on with cost of equipment. The cost of equipment continues to rise significantly, as you can see from CapEx programs and new saw mills that have been planned or announced by other forest companies. What we have done at GreenFirst to try to mitigate this is, we’ve taken important equipment out of our Kenora sawmill, and moved it, or in the process of moving it and installing it at our other operations. First of all, a dry kiln that is being moved from Kenora, that’s a continuous dry kiln, which is fairly new to our Hearst operation. We expect that to benefit GreenFirst significantly. Secondly, we are moving our planer from Kenora sawmill to our Cochran sawmill, which has had a very old planer, I believe from the 1940s or ‘50s, that has not performed well. We expect to have a significant improvement there, also with bin sorts and other equipment moved from Kenora.
Also, in addition, we have a huge saw small log line that is repurposed, relatively new, that’s being moved from Kenora to Kapuskasing, that we’re planning to do in 2023. We expect a significant improvement in this also for cap sawmill operation. So, just these three items are significant savings for GreenFirst, and we wouldn’t be able to get this equipment for likely one to two, possibly three years, and the cost would be very significant. So, we’re very pleased about this strategic decision for GreenFirst, and we’re also doing some other capital expenditures. We also ordered three (indiscernible) planers that we got a very good deal on, and we’ll be installing those in the next year or so.
Gwen Webster
Oh, well, perfect. Thank you. We did announce earlier an impressive debt refinancing, and we have a question that’s come in on that. So, the question for Alfred is, I noticed the high yield debt was paid back and now you have an ABL facility with a tier one Canadian bank. Can you explain and add some details to this?
Alfred Colas
Thanks, Gwen. So, yes, we’re very pleased with the result of that refinancing that we completed just before the end of the quarter. And as mentioned, this has moved from a high yield debt, which was very expensive debt with relatively more restrictive compliance, to a tier one Canadian bank. In terms of the – we have an interest rate benefit moving from a high yield, which is by definition is a higher cost of credit facility. And so, we’re projecting that this debt refinancing will help the company save between $10 million and $15 million over the term of the agreement. So, that’s over two to three years, and that’s assuming that rates stay relatively stable. And as I said, this refinanced credit facility with a tier one bank also gives us increased product flexibility with the loan and covenant compliance, and this is a positive for the company as we continue to execute our strategy.
Gwen Webster
Perfect. And we have that new blended interest rate on the facility, like you mentioned. This one we’ve answered a few times, but it’s come up again. So, Rick, can you answer this one? What is your view on the Interfor stake?
Rick Doman
Well, we understand Interfor owns a minority stake in our company. We consider this a complement, as Interfor is a very strong forest company.
Gwen Webster
Perfect. I have a really good one here that I’m going to throw into the mix and let you guys choose who to answer. With lower lumber prices in Q4, what is your ability to be flexible on costs? And Rick, you’re going to take it, or? Yes?
Rick Doman
Yes. I’m happy to take this. Lower lumber prices in Q4 certainly are challenging. They’re quite volatile and also, we’re paying a 20.23% lumber duty where most of our competitors are paying 8.59% or less. So, that makes it challenging. So, in Q4, we cannot provide what breakeven costs would be as log markets change, the Canadian dollar changes, and we’re paying higher duties. But certainly, it’s our goal to run our operations as productively as possible to lower costs so we can withstand these low markets. I earlier mentioned the CapEx projects that we’re doing, which are very significant. However, they will not be done until into 2023 and some into 2024. But a lot of these into 2023, we expect will be done to bring down our costs of production. Great Lakes pricing, of course, we get a premium for it, which helps and is more positive. And we currently see random length pricing reasonable as opposed to studs. So, we’re hoping Q4 turns out reasonable.
Gwen Webster
Okay. So. we’ll do our last question here today is back to the paper mill, a little bit getting more specific, but we had a lot of paper losses in the third quarter, and you’re indicating a better fourth quarter. Can you give us some numbers on that, Alfred? Is the question, like forward-looking.
Alfred Colas
We’re into our quarter and we can’t really give any information outside of what we reported for Q3, but it’s fair to say the comments made earlier still hold. We had a lot of startup costs with the commissioning, which commenced in September. I mentioned training duplicate staff because you’ve got new staff and you’ve got existing staff training, the new operators. And again, record high electricity prices in Q3, this was a huge factor for us. It added literally millions of dollars during the quarter. And all I can say is that based on having that third quarter, those high costs are beginning to abate on the electricity front. As the training proceeds, we’re going to realize some efficiencies in operations. And so, we expect Q4 to be a better quarter and possibly positive EBITDA quarter, but that remains to be seen.
Gwen Webster
Okay. Well, perfect. Thank you. Thank you for everyone for joining us. We couldn’t take all the questions today, but please send them to us, investors@greenfirst.ca, and have a great day. Thank you.
Operator
Thank you. Ladies and gentlemen, this does conclude your conference call for today. Once again, thank you for attending. At this time, we do ask that you please disconnect your lines.
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