CA - GreenFirst Forest Products Inc. (ICLTF) Q4 2022 Earnings Call Transcript

2023-03-15 11:33:06 ET

GreenFirst Forest Products Inc. (ICLTF)

Q4 2022 Results Earnings Conference Call

March 15, 2023, 08:30 AM ET

Company Participants

Paul Rivett - Executive Chairman and Interim Chief Executive Officer

Alfred Colas - Chief Financial Officer

Michel Lessard - President

Conference Call Participants

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to GreenFirst Fourth Quarter and Year-End 2022 Results Conference Call. Please note that all lines are 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 risk factors and assumptions is included both in the accompanying presentation and in our MD&A and Annual Information Form, which can be accessed on our website or through SEDAR.

After the speakers' remarks, there will be a question-and-answer session.

Mr. Rivett, you may begin your conference.

Paul Rivett

Thank you, Michelle. Thank you for joining us for our first earnings call of the year. This morning, we will discuss our fourth quarter and year-end 2022 results. Joined with me today are Michel Lessard, our President; Alfred Colas, our Chief Financial Officer; and Gwen Webster, our Chief of Staff.

2022 was a very busy year for us. Despite only being in existence for approximately a year-and-a-half, we have successfully reached some major milestones. We opened our corporate back office in North Bay, Ontario. This office brings us closer to the forest we manage and the mills and people we work with.

We partnered with Bank of Montreal to provide a credit facility to replace our acquisition debt financing. This has resulted in substantial savings from reduced interest payments. The team did an exceptional job putting this together.

We sold a little over 200,000 acres of excess lands near Kapuskasing, Ontario for net proceeds of CAD 49 million. We entered into a multi-year partnership with a leading commercial printing company that provides longer term contracted revenue for our paper mill. And just yesterday, you would have seen that we officially closed the sale of our La Sarre and Béarn sawmills, along with related operations in Quebec for approximately CAD 94 million.

Despite our recent land and sawmill dispositions, it is important to note that we continue to possess substantial assets with significant value, some of which we believe continues to be unrecognized.

Firstly, we now have four uniquely positioned sawmills in the heart of the Ontario wood fiber basket. With this concentrated production, we believe we can achieve increased productivity both in our mills and in the forest. We have 2.6 million cubic meters of well-located, dedicated annual allowable cut that supports our operations.

Next, it is important to make note of our overfunded pension. We ended the year with a 27% funding surplus. This was a result of us moving GreenFirst defined benefit pension of over CAD 86 million into cash and short-term investments in order to protect us against what we believe would be impending rate hikes.

Thirdly, despite selling over 200,000 acres of property, the company still owns over 40,000 acres of property in Ontario with key developable lots in Kenora, Kapuskasing and Timmins.

And lastly, we've accumulated a staggering CAD 77 million in duties on deposit. These US duties impair our profitability, unfortunately, and are essentially forced savings that have been a significant drag on our free cash flow. Our duty rate is expected to be reduced in August of this year from the current 20.23% to align in the all others category, which was preliminarily calculated to be 8.24%.

The fourth quarter of 2022 continued to be a tough lumber pricing environment, as we also saw in the third quarter of 2022. And for the fourth quarter, GreenFirst reported a net loss of CAD 25.9 million based on its continuing operations, or quarterly loss of CAD 0.15 per share on a diluted basis. This result for the fourth quarter includes the impact of CAD 8.8 million charge for the temporary write-down of inventory for accounting purposes. Including this impact, adjusted EBITDA for the fourth quarter was negative CAD 27.4 million. This will be discussed in further detail by Alfred shortly.

I will now briefly discuss some of the main factors affecting our outlook in 2023. We continue to see near-term volatility in lumber demand and pricing. However, we believe longer term fundamentals for lumber demand remain very favorable. Inflation and rapidly increasing interest rates are having a negative near-term impact on housing construction and, therefore, lumber markets. But there has been some price support due to curtailments in BC and other parts of North America, while tightening supply around the world due to natural disasters and other world events.

While we have seen supply and logistic constraints steadily improving in the fourth quarter of 2022, we continue to see inflationary cost pressures in new equipment and with some contractors. To explain our outlook a little better, I will run through some relevant slides with you, starting with our look at lumber futures price performance.

As this graph that you can see on the web shows, unlike other commodities, lumber has been markedly more volatile, particularly over the last three years. This recent volatility was fueled by temporary factors, we believe, including pandemic-related renovation demand, combined with reduced supply resulting from production shutdowns.

Longer term, there is a growing scarcity of wood fiber supply brought about by a number of factors, including deforestation through insect infestations and fires, increasing conservation and carbon credit for sequestration projects, and trade restrictions.

The insect and fire devastation in Canada, principally in British Columbia, has resulted in the curtailment or closure of a number of sawmills and a gradual decline of Canadian lumber sales into the United States. We are hopeful this decline should eventually lead to a realization that Canadian lumber producers are not a threat to US lumber industry.

While concerns about constrained wood fiber supply will be a moderating factor for at least a generation, in the short term, lumber demand will be dampened by these higher interest rates and the corresponding impact of new home construction in the US. We have seen inflation across the industrial spectrum and construction industry is not immune.

However, despite increasing costs and corresponding increases in lumber prices, as you can see in this pie chart, lumber continues to represent a very small proportion of the construction cost of a new home.

Family formation and immigration continue to outpace new construction in North America, forcing the housing deficit to reach new crisis level heights. The reality is that, from a long term perspective, more homes will need to be built, which will increase demand, while longer term lumber supply will continue to moderate with Western/Canadian wood supply continuing to reduce. In short, we continue to be bullish on the long term supply/demand dynamics for the lumber market in North America.

Now, Alfred will walk us through our financials in further detail.

Alfred Colas

Thanks, Paul. And good morning, everyone. As highlighted by Paul, GreenFirst weathered a challenging fourth quarter and reported a net loss of CAD 25.9 million on the basis on the basis of its continuing operations or a quarterly loss of CAD 0.15 per share on a diluted basis.

First, a short word on this reporting basis, which is seen in our fourth quarter and year-end figures. The operations of the two Quebec sawmills were held-for-sale at the end of 2022 and are presented in a separate category called discontinued operations in our year-end financial statements.

The net loss for the fourth quarter includes the CAD 8.8 million impact of temporary inventory write-downs to their net realizable value, which was below their cost due to the drop in lumber prices by the end of 2022.

Adjusted EBITDA for the fourth quarter was negative CAD 27.4 million, which includes this net realizable value impact.

Lumber sales in the fourth quarter were 99.7 million board feet at an average realized price of CAD 644 per 1000, which compares to a realized lumber price of CAD 800 in the third quarter. Lumber market prices to date in the first quarter have trended slightly lower, still depressed by higher interest rates, including signaling of more rate rises from the US Federal Reserve just last week.

Our paper shipments in the fourth quarter of over 32,000 metric tons drove revenues of CAD 30.6 million. Each of these values is higher than the preceding quarter, and they reflect the ongoing commissioning of the second paper machine at our Kapuskasing paper mill.

Cost of sales for the paper products was CAD 34 million in the fourth quarter for an operating loss of CAD 3.4 million as the second paper machine did not reach full production capacity, although we have seen improvements and expect to turn the corner in the first quarter of 2023.

For the year ended December 31, 2022, GreenFirst reported CAD 492 million in net sales from continuing operations, operating earnings of CAD 23.8 million, which was driven by the lumber business, a CAD 4.1 million net loss from continuing operations and an EBITDA of CAD 39.4 million. This net loss includes a CAD 11.5 million charge for the temporary write-down of inventories to the net realizable value.

Now, on a consolidated basis including all six sawmills, which we own through yesterday essentially, GreenFirst realized an adjusted EBITDA of CAD 45.8 million in 2022. This EBITDA includes the negative impact of a CAD 25.4 million charge for the temporary write-down inventories to the NRV. On a consolidated basis, this NRV write-down represents about 80% of our inventories, and this proportion is in line with what is being reported for Q4 by some of our larger peers in the lumber business.

Selling, general and administrative, or SG&A expenses, were CAD 5.9 million in the fourth quarter, which was roughly in line with the third quarter and reflected higher professional fees related to our corporate development activities in the fourth quarter, which were offset by savings from ongoing rationalizing third-party services and prudently managing headcounts.

Now turning to liquidity. We ended the fourth quarter and the year with a cash position of CAD 25.4 million and CAD 46.9 million in excess availability under our credit facility, for a total liquidity of CAD 72.3 million at the end of 2022. We ended 2022 with a total deposition of CAD 53.4 million, which is half the total deposition we had at the end of the second quarter.

During the fourth quarter, we were able to reduce our debt by CAD 30 million, using part of the proceeds from the sale of our private forest property, which closed in November. The recent sale of our Quebec sawmills for about CAD 94 million, which closed yesterday, will enable us to further reduce interest expense by paying down our asset-backed revolving credit facility. This additional liquidity is a big asset to GreenFirst as we navigate the difficult lumber market for the coming months.

Now, I'd like to pass things to Michel.

Michel Lessard

Thank you, Alfred. And good morning. We saw an increase in both our sales and shipments from our paper mill this quarter. This was primarily driven by higher production in the fourth quarter of 2022. As the second paper machine increased productivity, then we saw higher pricing from the previous year.

We are currently trending in the right direction. We are enroute to reaching full capacity in the next couple of months, although the paper prices have decreased slightly from what we saw at the end of the year.

For lumber, as previously mentioned, 2022 was marked by a strong start from lumber prices, followed by a decline in lumber market prices throughout the second half of 2022, with those levels being maintained in the first quarter of 2023 thus far.

During the fourth quarter of 2022, lumber production increased over the third quarter of 2022. This increased production was primarily driven by better equipment reliability in the current period. The increase was partially offset by labor shortage issues in harsh winter condition, impacting the number of shifts. We are currently producing better in this quarter.

During the fourth quarter, we had some downtime due to the implementation of strategic CapEx in the company's mill. Our project involving the move of the Kenora sawmill is well underway as we identify key areas in our other sawmill that will benefit from this strategic decision. We expect this project to conclude by June this year.

As Paul mentioned, we sold our Quebec assets. These sales have no impact on our Ontario operations as we remain business as usual. We are sad to see many of our colleagues leave as part of the sale. However, for our Ontario operation, this will allow us to spend the necessary capital and focus our time and energy into optimizing them.

Our annual production capacity at our operating sawmill is 510 million board feet. We are making some optimization to our mills, to which we will talk about in the near future, mainly due to the Kenora equipment move.

We had previously indicated a CAD 60 million CapEx budget for 2022 through to 2024. However, COVID impact, inflationary cost pressures and ongoing supply disruption has 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 strategic capital expenditures plan and expects the CapEx and timeframe for deployment to be greater than initial estimates. The execution of this plan will depend on realizing sufficient cash flows from operations and cash proceeds from the recent disposition.

This graph shows we are focused on getting our costs below the industry average. This past year, we maintained our focus on enhancing operational efficiency in our Ontario mills. We are already realizing significant improvement in cash collection costs versus full-year 2022. We expect also to reduce overhead to align with adding an Ontario-only footprint.

We are 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. Through collaboration with academia, government and environmental organization and ongoing partnership with indigenous communities across Northeastern Ontario, we work collaboratively to improve sustainable forest management practices, protect rights and advance mutual interests.

Forest Stewardship Council, so the FSC certification, is in place on all forest where GreenFirst operates. In Kapuskasing, Ontario, 2023 marks the 20 years of continuous FSC certification for the Gordon Cosens forest, the first forest to be awarded such certification in Canada's boreal forest region. We have an exceptional team in place that are always pushing the envelope and being pioneers in best practices.

Over to you, Paul.

Paul Rivett

Thank you, Michel, for this update. Currently, as you can see, we are getting smaller in the short term to allow for sustainable and profitable growth in the longer term. Looking ahead, we remain committed to our strategy of prudent capital allocation and balance sheet strength. We will reduce our debt leverage, while also weighing share buybacks, dividends and productivity enhancing capital projects, while always maintaining our strong commitment to safety, environmental sustainability, and responsible stewardship of our natural resources.

We thank you for joining our call today. Please be reassured we remain focused on creating long-term sustainable value for you, our shareholders. I will now open up the floor for questions. Please submit your questions through our online portal on the web and identify the company you are from.

Question-and-Answer Session

A - Paul Rivett

Let's get started then. I'm going to ask Michel to answer the first few operational questions and then we've divvied up – Alfred will talk through some of the financial questions. So, Michel, if you can go first.

Michel Lessard

First question, was the recent divestiture due to the breakeven cost of the mill?

Just to answer to that, our two Quebec mill were the highest cost mills that we had. So, if we're looking at the total cash cost for the Q4 per 1,000 board feet, the Quebec sawmills were about, let's say, around 20% higher than the Ontario mills. So now, if we exclude the Quebec sawmills, average total cash cost would have been around 7% or so lower in Q4 2022. So, we showed a graph also in our earnings presentation where we outline industry average mill cost. So, for sure, our goal remains to be below this industry average.

Other questions, once you get to your productivity targets for Ontario, what will be the breakeven cost be? On that one, as you can imagine, for the competitive reason, it's not something that we can publicly state, so I'm not going to be able to answer to that question.

Third question. Are you putting in place cost control initiatives? If so, how much will the cost initiatives save you? We're always putting some cost control initiatives in place. We're doing that for many years. We're doing that with the previous companies. So it's something that is important to have in our operation. So it's also important to align our mill managers with some KPIs that they can control with, for sure, in phases on the continuous improvement. We're also doing some benchmarking amongst our operation. So, that's also important to compare an operation to the other. And again, put some, I would say, kind of competitive tension, I would say, between the general manager. So, at the same time also, as we mentioned, we're reevaluating actually the workforce and also the [indiscernible]. We want to be sure that we are aligned with the scale of GreenFirst in the near term. So it's an important thing that we're doing.

So, again, all these elements, that remains very important to be focused to reduce costs because when we have tough market, as we know today, so this cost reduction could make a difference.

Paul Rivett

Alfred, could you answer the next couple of financial questions.

Alfred Colas

One question here. Will CapEx be reduced now that the company is losing money? And what's the outlook for 2023? And we don't give guidance on capital, but we presented our budget for 2023 to the board, and that included kind of a conservative case reflecting the state of the lumber market and an accelerated capital case. And we're definitely steering towards the conservative case, which is really subject to better improvement in the lumber price, hopefully, with the coming spring and summer months. But we have essentially reduced the CapEx, but we're doing the minimum to not impair the plans that we have to improve operations.

Another question here. End-of-year debt is CAD 28 million. It's actually CAD 38 million. But net proceeds [indiscernible] CAD 94 million, how much net cash do you need and what will you do with the rest? This is very close to my heart, obviously, as the guy who's managing all finances. Our plan with this increased liquidity, we have a revolving credit facility, which is asset backed, and that gives us flexibility to draw on it as we need to, and we did draw on it through the first quarter because of the continued low lumber prices. Now, so clearly, part of the priorities is to use some of this CAD 94 million to pay down the revolver and to realize interest savings in the process. And our plan all along is to maintain the high availability on that credit facility, so that we deploy it on our operations or other priorities.

Paul Rivett

I'll answer the next few questions here. Some of them are a little bit difficult to answer, but I'll do the best I can. Is there any discussion ongoing with Interfor? Obviously, that's a tough question to answer. But what I will say is we value Interfor as a shareholder. They're a respected peer in the lumber space. And they are a large shareholder. Beyond that, we can't really comment on any discussions.

The next question, would you consider selling more operations? What I'd say to that is the sale of our two Quebec sawmills really simplifies our operations. Our strategy is to simplify it. As I said, to get smaller so that we can get better. Our plan is to improve our four Ontario mills and to evaluate opportunities for capital allocation, which we will be doing on a very prudent basis, particularly given the lower lumber price environment we're in.

Next question. Is there an update on Kenora and land development ops? We are continuing to make progress is what I can say on Kenora. It's been a little frustrating for us, but we are making process progress and we have hired a third party to help us with this redevelopment of the property there. So we expect to have meaningful progress in 2023.

Question here about plan. Is the current plan to relocate the Kenora sawmill? As we've stated, we've been dismantling that mill and moving key pieces to other mills, so that we can optimize operations that the other mills we have in Ontario. We are, as we've said before, in discussions with Ontario government on receiving the appropriate wood supply, so we can get sustainable annual cut that will allow us to rebuild the new mill and we'll continue those discussions with government.

Last question I have here right now is, are you looking for a new CEO? As I stated, I am in this role on an interim basis, but we are not currently looking. Our preference is always to promote internally, and that's what we're focusing on right now.

Just wait to see if there's any further questions. Yep. There's an additional question here with respect to our strategy. Has it changed with respect to the sale of the Kenora property over the last few months? No, our strategy hasn't changed. We really think that piece of property is very unique in the Lake of the Woods area and needs to be developed. And that's what we're doing. As I said, we've hired a third party to help us build out the development plan.

Paul Rivett

Okay, I'm not seeing any additional questions. So with that, I'll say thank you very much for participating in our call and we look forward to speaking to you again soon.

Operator

Ladies and gentlemen, that does conclude your conference call for this morning. We would like to thank you all for participating and ask you to please disconnect your lines.

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