CA - GreenFirst Forest Products Inc. (ICLTF) Q1 2023 Earnings Call Transcript

2023-05-16 11:10:25 ET

GreenFirst Forest Products Inc. (ICLTF)

Q1 2023 Results Conference Call

May 16, 2023 08:30 AM ET

Company Participants

Paul Rivett - Executive Chairman and Interim Chief Executive Officer

Alfred Colas - Chief Financial Officer

Michel Lessard - President

Presentation

Paul Rivett

[Call Starts Abruptly] Joined with me today are Michel Lessard, our President; Alfred Colas, our Chief Financial Officer; and of course, Gwen Webster, our Chief of Staff.

As a quick overview of our company we are now exclusively based in Ontario. With four sawmills located in the heart of the province with approximately 2.5 million cubic meters of annual allowable fiber allocation. We directly employ approximately a thousand people. If you would like to learn more about our corporate vision and strategy, please see the CEO letter filed earlier this year on SEDAR, and on our website at greenfirst.ca.

Now for our first quarter highlights. Despite the currently low lumber price environment, we have several positive highlights to report on this quarter. First, on March 14th, we sold both our Quebec sawmills in Bearn and La Sarre, along with related forestry operations for approximately $94 million subject to final adjustments. This sale allows us to focus our efforts in Ontario and reduce our average cost of production.

Our Ontario Mills continue to make productivity gains. We executed a non-binding letter of intent to sell 30 of our 118 acres Kenora land to a regional institution for $8 million. The sale is subject to conditions including government funding. Given our downsizing from six to four mills, we have initiated cost reduction initiatives which include the streamlining of shared service roles, headcount reductions, repositioning of key roles within the organization, and a critical review of expenditures in order to reduce SG&A.

We also have significantly delivered our balance sheet by paying down $24 million towards our debt in 2023, including full repayment of our term loans with BMO.

Low lumber prices in the first quarter of 2023 led GreenFirst to report a net loss of approximately $20 million based on continuing operations, or reported loss of $0.11 per share on a fully diluted basis. This result for the first quarter includes the impact of a $3.2 million net increase to the valuation provision for lumber and log inventories. Including this impact adjusted EBITDA for the first quarter was negative $15.2 million. This will of course we discussed in further detail by Alfred our CFO shortly.

Last month, our executive and sales teams were in attendance at the Montreal Wood Convention, the consensus from the industry showed optimism in lumber prices increasing in the back half of 2023 and into 2024. This is based on many factors including the estimated U.S. housing shortage. The majority of U.S. builders are projecting growth in the back half 2023 and in 2024.

Residential improvements in U.S. housing starts came in stronger than we predicted in the first quarter. While inflation rapidly increasing interest rates and the threat of a recession are still having a negative impact on lumber markets. We saw some market support due to curtailments in BC and other regions of North America. If the prices continue to remain low, it is anticipated further curtailments or closures will occur. Although we are facing near-term volatility in lumber demand and pricing we continue to believe longer term fundamentals for lumber demand remain more favorable.

Alfred will now walk through our financials.

Alfred Colas

Thanks, Paul. And good morning everyone. As summarized by Paul, GreenFirst navigated another challenging quarter to start 2023 and reported a net loss of $20.2 million on the basis of its continuing operations or a quarterly loss of $0.11 a share on a diluted basis, as just mentioned by Paul.

Lumber sales in the first quarter reflect lower selling prices and lower sales volumes compared to Q4, '22. The average selling price of lumber in the first quarter was $605 per 1000 board feet, compared to $644 in Q4 of '22. Lumber shipped and sold in the first quarter were $93.3 million board feet, compared to 99.7 million board feet sold in Q4 of '22. The net loss for Q1 includes the impact of a $3.2 million net increase to evaluation provision for lumber log inventories, which reflects the further drop in lumber prices through the first quarter and increased volumes.

While our continuing operations excludes the results of the two Quebec sawmills, those discontinued operations, which were sold on March 13th contributed about $6 million of negative adjusted EBITDA to the economics of GreenFirst during the first quarter. This was before the reversal of provisions driven by accounting rules, which created a $1.7 million net earnings for discontinued ops in the first quarter.

Our paper shipments in the first quarter were 43,620 metric tons, which drove revenues of $37.8 million, both higher than the fourth quarter of '22, reflecting increased operating efficiency and production output at the second paper machine. Revenues were also driven by strong sales under key newsprint contracts. Cost of sales for the paper products was $36 million in the first quarter for an operating profit of $1.3 million, something that we've worked hard to achieve.

Adjusted EBITDA for the first quarter was negative $15.2 million compared to a higher EBITDA loss of $27.4 million in the fourth quarter of last year. This was driven by better paper sales, lower SG&A and a lower charge for incremental inventory valuation provision.

Now looking at the elements that are added back in calculating EBITDA finance costs, which include interest and amortize that costs were about $900,000 in the first quarter, significantly lower than the $1.2 million in the fourth quarter of last year and a fraction of a $3.6 million in first quarter last year.

These reductions reflect a lower interest rate under the new credit facility negotiated last September with BMO and debt payments made, which are expected to continue based on opportunities to apply surplus cash to debt. Income taxes are another add back for EBITDA and I'm pleased to say that no cash taxes are expected to be paid this year.

The company repaid $19 million of debt in the first quarter, and $30 million in the fourth quarter of '22. The debt had an outstanding balance of $34.5 million at the end of the first quarter. But before further repayment of $5 million against debt early in the second quarter. As an asset backed facility the borrower and basis partially reduced by outstanding letters of credit. At April 1, 2023, the outstanding letters of credit had been negotiated down to $5.4 million, which is significantly less than $13.7 million outstanding one year earlier at Q1 '22.

Turning to liquidity, we ended the first quarter with a cash position of $24.9 million and $32.3 million and undrawn availability under our credit facility for a total liquidity of $57.2 million as of April 1. Debt repayments have been made from part of the proceeds of the sale of the Quebec sawmills, which allows us to further reduce interest expense by paying down our asset backed credit facility.

As it is a revolving credit facility, we can reduce interest costs, while keeping the flexibility to draw on the available liquidity. Taking stock of where we've come from, we are now thankfully in a position with much lower debt with a lower interest rate and no financial covenant ratios compared to a year ago, when we had over $125 million of high cost term debt.

The credit facilities are no longer subject to a minimum fixed charge coverage ratio covenants with the repayment of the term loan during the first quarter as mentioned earlier. With our prudent finance, with a prudent management the low level of our debt at April 1, 2023 means that our net debt is down to only $9.6 million.

We have responded to low lumber prices by executing several cost reduction measures. These include streamlining the organization to reduce overheads, driving cost reduction projects at the operations, which are reviewed weekly and are bolstered by management moving from the head office to our operating sites, conducting detailed reviews of accounts payable to scrutinize transactions, and focusing our strategic sourcing group, where we seek savings through more competitive bids and selecting alternative contractors and suppliers. Progress on these measures has benefited greatly from excellent collaboration between the finance and operations teams.

I’d now ask Michel to comment on the operational results in the first quarter.

Michel Lessard

Thank you, Alfred and good morning, everyone. We are pleased to report for the fifth quarter in a row, we saw an increase in both our sales and shipments from our paper mill. Higher paper productions was primarily due to efficiency gains on the Company's second paper machine. We keep trending in the right direction. That said we have seen a slight decrease in our average selling price from the start of the year.

During the first quarter of 2023 lumber production increased slightly over the fourth quarter of 2022. This increase production was primarily driven by better equipment reliability and efficiencies in the current period. Our lumber shipments and sales decrease in the first quarter versus the fourth quarter of last year. We saw lower cost of sales in the first quarter versus the fourth quarter of 2022. This was primarily driven by lower shipments and a lower incremental inventory write-down adjustment.

This is the new continuous dry field under construction at our current mill. We expect to complete the kiln by August 2023. With the startup expected in September. We also started preparation for the installation of the Kenora continuous dry kiln patters. This is just a reminder, our annual production capacity at our operating sawmill is 510 million board feet.

I'm proud to be in forestry, renewable resource. We continue to reinforce our ongoing commitment to environmental sustainability and responsible stewardship of the forest we manage. Along with collaborators with academia, government and environmental organization and ongoing partnerships with indigenous communities across Ontario, we work together to continuously improve sustainable forest management practices, protect rights and advance mutual interest.

2023 marks the 20th year of continuous FSC Certification for the Gordon Cosens Forest located around Kapuskasing the first forest to be awarded such certification in Canada's Boreal forest region. We have an exceptional team that are always pushing the envelope and being pioneers in better practices.

Over to you, Paul.

Paul Rivett

Thank you very much, Michel. Looking ahead, we believe lumber demand and supply conditions are such the pricing should begin improving. That said, we are hoping for the best but planning for the worst. We remain committed to our strategy of increased productivity gains at our operations, rigorous expense control and SG&A reduction and prudent capital allocation through this current low end of the lumber pricing cycle. We expect to realize lower U.S. duties and benefit favorably from lower production costs related to facility upgrades in the second half of this year.

We're now open things up for questions, please submit the questions through the online portal.

Question-and-Answer Session

A - Paul Rivett

Okay. So we have a few questions. We'll dive right in. The first question is what is the appropriate amount of leverage for GreenFirst?

So I'll take that question first. What I would say is at the bottom of the cycle, no leverage is good leverage. So good companies run into trouble with bad debt, particularly cyclical commodity businesses. So we here at GreenFirst are very focused on keeping our leverage as low as possible. As Alfred mentioned, we're getting very close to net debt free versus only less than two years ago, we had $125 million a very high cost debt. So we're prudently attacking that debt, and we'll do what we can to keep it as low as possible.

The next question is, given the current state of lumber prices. Have we've been taking downtime? And are there any plans to take downtime in the future? Michel, could you answer them?

Michel Lessard

Yes, sure. So, you know, we constantly monitor lumber prices, as we monitor our production costs, also our inventories. And then after that we see if we should or not take some downtime. About the inflection point it's competitively sensitive. So but for sure, we'll never hesitate to take downtime if we have to.

Paul Rivett

The next question is another question on details about the LOI and with respect to the sale in Kenora. We can't say much more than what we've already stated. But, Michel, if you want to maybe add a little bit?

Michel Lessard

Yes, sure. We mentioned the [Indiscernible], so we're certainly pleased with the [indiscernible] sales price. For the remaining 88 acres that we own. So it is in beautiful waterfront property in Lake of the Woods. So very nice property there.

Paul Rivett

Thanks, Michel. The next question is what average lumber price you become cash flow positive?

I would like to ask answer that question. But as Michel just stated, there is an inflection point at which we would take downtime. But it's obviously competitive sense competitively sensitive that inflection point. So we don't talk openly publicly about when we will take downtime, and what is our cash flow, breakeven cost? I would say that we're roughly in that zone now. But obviously can't specify that for competitive reasons.

The next question, is, the company consumed a significantly higher amount of working capital in Q1? Should that be our expectation going forward?

So the answer to that is absolutely not. The first quarter is an anomaly versus the rest of the year, but the first quarter is always the quarter with the highest investment and working capital, as we build up round with inventory. And that will continue to be the case for this company that the first quarter will always be high investment working capital.

The next question is, you mentioned cost reductions, when will we start seeing the results of this. Alfred, you want to take that one?

Alfred Colas

Sure, Paul. As I mentioned, in my remarks earlier, our cost reductions are targeting various aspects of the company SG&A, operating costs, working capital, and we are already executing on various fronts with these reductions. And we see, for example, our SG&A number for Q1 is just slightly lower than what it was in Q4. That might be considered the leading edge of this, but we think that in Q2, we should expect to see some of these results are benefiting. But clearly, we have urgency and we're focusing on executing and crystallizing these savings in the near-term.

Paul Rivett

Thank you, Alfred. The next question is what drove down paper pricing and what is the outlook for paper pricing? Michel, can you take that one?

Michel Lessard

As you know about the pricing its already to the demand and also the inventory that has been accumulated to our customers. About the outlook, so if we're looking, so with the outlook, that shows that the price should continue to decrease today here. So hoping that it will not happen, but it's what we see actually with this forecast.

Paul Rivett

Okay. Thanks, Michel. The next question is in the proxy, there was a resolution to decrease capitalization by $90 million. Why is that?

We put that resolution in because there's a requirement as an Ontario company for us to make that change if we want to provide dividends to our shareholders.

What I would say is don't read into that we are going to provide a dividend. We want the freedom to be able to provide a dividend. As I said, we are now at this low end of the cycle with respect to lumber pricing, we're very focused on staying as close as we can to no debt or net debt free but we do want to have the option at some point in the future to potentially provide a dividend to our shareholders and return capital to them, it's not something we can deploy favorably inside the company. So that by getting that resolution approved that allows us to provide dividends in the future.

All right. And our last question, there’s any discussion with Interfor?

I'll take that one. I would say as I said in the past, we respect Interfor as a shareholder, but more importantly, as a competitor. It goes without saying that Ian and his team are highly respected operators in the lumber space but beyond that, we of course cannot comment on any discussions we may have from time to time with Interfor.

With that, I think, any more questions? No.

Unidentified Company Representative

Thank you for joining the call today. If you have any more questions, please email us at investors@greenfirst.ca. And we'll answer them accordingly. Thank you and have a great day.

Operator

Thank you. Ladies and gentlemen, this does conclude your conference call for today. Once again, thank you for attending. And we do ask that you please disconnect your lines.

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