GreenFirst Forest Products Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 13, 2024

There are 5 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to GreenFirst Third Quarter 20 24 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.

Operator

Additional information about these risks, factors and assumptions is included in GreenFirst MD and A and annual AIF, which can be accessed in the company website or through SEDAR Plus. Please, after the speakers' remarks, there will be a question and answer session. Please submit your questions through the online portal. I will now pass it over to Joel Fournier to begin the management presentation. Please go ahead.

Speaker 1

Thank you very much, Sylvie, and good morning, everyone, and welcome to our Q3 2024 Earnings Call. I'm Joel Fournier, the Chief Executive Officer of Green Forest Forest Products. Today, I'm joined by Peter Ferrante, our new CFO Therese Kefington, CEO of Cap Paper and Michel Lassard, our President. Since our last earnings call, we've continued to make progress on our strategy. I'm pleased to announce that the spin out of Cat Paper was completed in November as planned.

Speaker 1

Now both entities are completely separated and GreenFirst Warriors product is a pure play lumber company that will focus on the future growth of its sawmill. CAP Corporation will continue to exist as a standalone paper mill operation with Terry and newly announced Board of Directors at the helm. On August 12, 2024, a new duty rate went into effect as a result of the U. S. Department of Commerce final determination of its 5th administrative review with respect to import of softwood lumber product.

Speaker 1

This determination assessed our new duty rate at 14.4%, which was lower than the company paid in 2022 at 20.2%. Based on this final rate, the company would stand to benefit from an approximate US14.2 million dollars or CAD19.2 million recovery on duty paid in 2022. We will continue to advocate for our shareholders to see a timely return on those overpayment. In addition, we continue to seek a fair settlement of all remaining duty deposit. These duty will be settled with the rest of the Canadian softwood lumber industry and consequently the amount of refund remain uncertain at this time.

Speaker 1

In addition to the duty receivable recognized in Q3 2024, we also announced the launch of the right offering in October that will allow the company to execute on its strategic plan. GreenFirst continue to be in a unique situation where we have access to excess wood supply and through the execution of our strategic plan, we're aiming to grow our annual capacity by using that wood supply. Our mission is to become a top quartile cost operation and we want to be one of the largest Ontario lumber producer. We firmly believe that executing a strategic CapEx plan off cycle, while market price are low, is key for the long term profitability when market rebound. There are many advantages to undertake such capital project off cycle.

Speaker 1

For example, project costs will be lower, start up time will be quicker for those CapEx projects and we can maximize the return on every dollar we will spend. These investment opportunity will change the current profitability of GreenFirst. As you can see in the slide show, we are looking to spend approximately $50,000,000 in 2025 2026 with an expected increased EBITDA of approximately $18,000,000 per year. This investment will help reduce our costs by roughly 10% and increase our current capacity by 20%. It will also lower our EBITDA breakeven point by approximately 15% after the completion of the Phase 1 of our strategy.

Speaker 1

The company is looking to do a total of 8 projects for the Phase 1 across the 4 sawmill in Ontario. Those projects will increase capacity, reduce cost and improve EBITDA going forward. The company will continue to work with the Board of Directors to obtain approval on these initiatives. More detail will follow in subsequent press releases. The company finished the 3rd quarter at a net loss from continuing operation, adjusted for one time duty recovery.

Speaker 1

This was primarily due to operation in July, where pricing was at its lowest in conjunction with the company taking targeted curtailment in order to manage liquidity tightly. Towards the end of the quarter, we saw market improvement and we believe we hit the bottom for lumber price in July. July was our lowest month with pricing at $3.38 per 1,000 FPM on a Western basis. Since then, price has steadily increased month over month, and we're now sitting at $445,000 FBM on a Western base. Under those current price, per mill are now positive EBITDA.

Speaker 1

The reduction in capacity recently announced by our competitor and the housing supply shortage in United States are expected to continue to put pressure on pricing. Going forward, we believe the fundamentals that drive lumber price are favorable for GreenFirst and for the lumber industry. Aside from the targeted curtailment we had in July, our operation did run smoothly in Q3, while certain locations were breaking production records. Green Forest continued to promote a culture of continuous improvement and has seen higher level of efficiency when we compare to fiscal 2023. As you can see in the presentation, VersaMill continued to improve by increasing production, reducing costs overall and our breakeven mill net EBITDA improved by 20% from 2022.

Speaker 1

Peter will now take us through the financial results of the quarter. Over to you, Peter.

Speaker 2

Good morning, everyone. The company's net income from continuing operations, now excluding Cat Paper, in Q3 2024 was 14,800,000 dollars Adjusted EBITDA from continuing operations for Q3 2024 was positive $15,900,000 This compares to an adjusted EBITDA of negative $6,100,000 in Q2 2024. As Joel previously shared, during the Q3 of 2024, the company recorded a recovery of approximately US14.2 million dollars or CAD19.2 million related to duties paid, but plus accrued interest of US2.3 million dollars or C3.1 million dollars This recovery has positively impacted our net earnings and adjusted EBITDA in Q3 and on a year to date basis 2024. For Q3 2024, we had positive contribution from continuing operation of approximately $1,000,000 Net sales recorded in the quarter were $70,800,000 closely compared to $69,600,000 in Q2 2024. The increase in net sales was due to higher volumes shipped, offset by lower pricing realized for the quarter.

Speaker 2

The industry continues to face lower demand as housing affordability continues to be significantly impacted by increased mortgage rates. In addition, an oversupply of lumber inventory despite the termites in North America, continues to impact pricing. There continues to be low level of field inventory in the industry, and there were lower takeaways following the first half of the year. Cost of sales in the lumber segment were $69,800,000 compared to $72,500,000 in Q2 2024. The decrease in cost of sales in the 3rd quarter was primarily due to lower charges related to inventory net realizable value recorded compared to the Q2 of 2024, in addition to inventory being sold during the Q3, which was produced primarily in the previous quarter at a lower cost.

Speaker 2

Compared to Q3 of last year, the company's net sales increased by about 4%. This was driven by higher production in the quarter, offset by lower pricings realized in the current quarter. Demand in both periods were heavily impacted by weaker buyer sentiment, resulting from sustained interest rate increases, combined with pricing being lower in the Q3 of 2024 compared to the same period last year. Cost of sales in the quarter improved by approximately 16% compared to Q3 of last year, primarily due to significantly higher volumes sold and higher charges related to inventory net realizable value recorded in the Q3 of 2024 compared to a recovery in the 3rd period of 2023. Year over year on a year to date basis, net sales increased by 1% due to higher average selling prices realized combined with higher volumes shipped.

Speaker 2

Selling, general and administrative expenses of $3,500,000 in Q3 2024 were lower compared to $3,900,000 in Q2 of 2024. This was primarily related to the company incurring higher third party fees related to corporate reorganization efforts, including the planned spin off of Cat Paper in the Q2 of 2024. The company generated finance income of $1,900,000 for Q3 2024 and incurred a finance cost or expense of $200,000 for the 3 quarters on a year to date basis. The primary this primarily represents interest income related to duties recovery recorded during the period offset by interest charges on the company's outstanding debt under the credit facility. During Q3 2024, the company made net repayments against its revolving portion of the credit facility of $4,200,000 $700,000 related to its equipment term loan with the bank.

Speaker 2

The company continues to monitor inventory levels and is accelerating initiatives to open up additional liquidity in the short term through the recent announcement of a rights offering. I will now pass it back to Joel for his commentary on the operations of the business.

Speaker 1

Thank you, Peter. As mentioned earlier, Q3 was a challenging quarter due to poor market condition across the industry. The lumber business faced continued pressure with particularly low price in July. However, recent announcement of capacity reduction by our competitor have contributed to improved pricing since then. Our industry operates within a cyclical market, and we are emerging from a difficult phase.

Speaker 1

Throughout the quarter, we maintained tight cash management to navigate through those conditions. In Q1 and Q2, we have reported on several production records that were achieved by our mills. I'm happy to report that we continue to have production records in Q3 2024, primarily related to our Chapleaux mill and capskising sawmill operation. Capskising achieved its highest production level for August September in the mill history, while Chaparral reached its highest production shift ever. We also continue to see reduction in our SG and A run rate that is currently at $33 per 1,000 FDM on a target of $40 per 1,000 FBM announced previously in Q1 this year.

Speaker 1

We will continue to monitor our SG and A, and we look for future opportunity to reduce cost. We remain committed to reducing costs in other areas of the business. In addition to our SG and A cost reduction, we continue to make improvements on our costing and processing costs year after year. Her costs went down by 6% from 2022 to 2024, despite high inflation and other outside pressure. GreenFirst continued to drive a culture of continuous improvement, as we believe this is a key component in maximizing the future return on capital investment within the business.

Speaker 1

This year so far, we had identified and executed on specific non CapEx initiative in order to drive a saving of approximately $8,000,000 in our operation on a year to date basis compared to 2023 results. A little bit more on the operation side. Our sales volume increased from Q2, driven by starting the quarter with a high inventory and ending in a good position in September as the market improved through the quarter. Production was lower in Q3 compared to Q2 due to a targeted mill curtailment that happened in July. On the sales side, we are pleased to report that we increased our volume with our big box customer big box store customer and added an additional distribution center with them.

Speaker 1

In the open market, inventory remained very low, and we are beginning to see positive price momentum following recent mill curtailment announcement. Safety remains our top priority, and we must stay focused on executing our plan to improve safety outcome. As a core value at GreenFirst, safety is incredibly important to our entire team. That's it for this section. I will pass this over to Therese Skefrington for his comment on the paper operation.

Speaker 3

Thanks, Joel, and good morning, everyone. Firstly, we concluded the restructuring last week that places Cat Paper as a standalone entity. Therefore, this will be our last investor call as part of GreenFirst. We are starting a new chapter in the long history of this business and we are looking forward to maintaining a very close working relationship with GreenFirst. I'll give a brief synopsis of Cat Paper for and forward into Q4.

Speaker 3

To begin, we had no recordable injuries in the quarter and we are tracking on a 12 month trailing basis at a 0.76 entry rate, which puts us close to, if not at the top of the list for safest pulp and paper mills in Canada. Mill operational performance remained flat in Q3 versus Q2. Q3 is a difficult quarter for operations as we needed to curtail the mill multiple times to bring the mill electric load down as low as possible to minimize the ISO global adjustment charges for 2025. This impacted operating efficiency by 2% as compared to Q2, offsetting improved daily operating performance through the quarter. As I mentioned previously, all North American newsprint manufacturers announced a price increase for September 1 of US50 dollars There has been considerable pushback from North American customers as demand has softened.

Speaker 3

As such, the effective price increase has been lower. At the same time, we are seeing increased shipments into the global export market from all sources, including increased shipments through the Red Sea. This has caused significant drop in export trading prices. Q4 mill operational performance has stepped up as expected with October seeing the mill return to a standard level of operating efficiency, returning to pre-twenty 20 operating levels and achieving the lowest cost of manufacturing for the year. And this is continuing now through November.

Speaker 3

However, as mentioned, downward pricing pressure in all markets is of concern. Our focus remains on higher operating efficiency and lower manufacturing costs to offset reduced market price. Thank you. And I'll pass over to Joelle to complete this call.

Speaker 1

Thank you, Terry. I would like to thank everyone for joining the call. We will now answer any questions that have Okay. This is Joel again. We do have a question.

Speaker 1

With the recent duty rate adjustment announced, what are the future possibility of collecting on these duty deposit in the future? I will ask Michel Lessard to answer the question.

Speaker 4

Yes. Thanks, Joel. So it's a good question. Regarding the duties, there is currently no imminent settlement being contemplated between the Canadian and U. S.

Speaker 4

Government. And we saw also with the last election in U. S, we'll see how the Trump administration will want to approach this. That being said, so the Canadian lumber industry and GreenFirst as part of it, we continue to work very closely with the Canadian government also, and we will continue to try to find a

Speaker 1

fair settlement for all the duties that are imposed. So it's something to follow very closely. Okay. I just noticed there is another question that came up around the duty. Under the worst case scenario with the Trump tariff, how does this impact GreenFirst?

Speaker 1

I can answer this question. We're already preparing for the 30% potential tariff beginning in August 2025. But we have no clarity on what the new U. S. Administration will do.

Speaker 1

We're presently being very high duty, and our expectation is we're going to continue to pay duty going forward. However, historically, given the amount of lumber that was sold in the U. S, the rising tariff has led to rising lumber price as well. And if people recall, when we had a duty increase this year in 2024, per rate went from 8% to 14.4%, and the lumber price caught up on the duty rate in 3 weeks. We have another question here.

Speaker 1

How does the completion of the spin out will impact my share? I will ask Peter Ferrante to answer the question.

Speaker 2

Thank you, Joel. We have recently released the management information circular, and we have also released multiple press releases outlining this process. Shareholders of GreenFirst will be issued a new class of shares for CAP Corporation, which will now be publicly traded on any of the stock exchanges.

Speaker 1

Thank you, Peter. We have another question here. Do you still expect there will be continued targeted curtailment in Q4 as pricing has increased since July lows? Will the company be able to generate positive EBITDA under this condition? And will this be inclusive of its G and A?

Speaker 1

I can answer this question. Earlier this year, we accelerate maintenance activity while the market were weak in order to allow us to catch up on inventory. We are not currently forecasting any future curtailment. And at today's market price, we are confident that we'll be able to generate positive EBITDA from our mill going forward. As we made significant reductions in our SG and A on a year over year basis, we anticipate to also be in a positive position inclusive of SG and A.

Speaker 1

For more clarity, we are and today with today current price, we have positive EBITDA going forward. I have another question here in relation of the capital expenditure plan. So how confident in the business in executing the strategic CapEx plan in the future? So I will answer that question. These projects that we identify are familiar with their management team, and some of them have been completed in the past.

Speaker 1

Those projects to minimize risk, those projects are turnkey in nature and also it's we're looking to install proven technology. Finally, to minimize the risk, our vendors are committed to provide performance guaranteed on those projects. So if you think about having a 3 key project that kind of reduce the risk on the cost side and having the vendor working to provide performance guarantee, this will provide more certainty on the payback of those projects. We do have another question, but this one is cap paper related. The company announced the completion of spin out.

Speaker 1

Does that mean the company has found a boiler for the paper mill? What is the plan for KAP Paper? I will pass this one over to

Speaker 3

you, Harry. Okay. Thanks, Joel. As it stands, KAP Paper has been spun out as its own operating entity and is working towards this goal of being a standalone profitable business through the execution of our plan. And just to refresh, the plan for KAP announced in Q1 of this year was to return CAP to being at least breakeven in Q4.

Speaker 3

That is unchanged. We are on that trajectory, actually slightly ahead of that in terms of Q4 operating performance.

Speaker 1

Okay. Thank you, Peter. We do have a couple of more questions here. One, it's about the right offering. With the announcement of the right offering, do you expect to raise the full $97,000,000 And will all of it be used for strategic CapEx?

Speaker 1

I will pass this one over to you, Peter.

Speaker 2

We will not know the final amount raised related to the rights offering until mid December. However, as we've stated in our press release, we already have $20,000,000 of that that has been committed to as part of the rights offering by a new key investor, which is Ravenswood. We are prepared for multiple scenarios with regards to the use of funds depending on the final outcome. This will include management of our current working capital, investments in various CapEx projects that we're talking about as well as any other future potential strategic opportunities. Hopefully, that clarifies that question.

Speaker 1

Thank you, Peter. We do have another question that came up around the right offering. Will offer management and large shareholder will be participating in the right offering? I will answer this question. So we have been told by several key shareholder and Board member that they will participate to varying extent.

Speaker 1

However, no commitment to exact dollar amounts have been disclosed yet. Okay. We do have a couple of more questions here. One, it's about what is the status with Canora and the other land that we have for sale. I'll pass this one over to Michel.

Speaker 4

Thanks, Joel. So about Kenora, so as I mentioned the last quarters also, so our interest remains to monetize that land. That is not sold yet. But that being said, we continue to work with the interested parties. So we are hoping to be able to finalize an agreement in the next, I would say, following months.

Speaker 4

About the other lands, we already mentioned that we had some lands for sale around Kapuskasing and Pemens. So we sold around 2,300 acres on that. So pretty good value also. So there's some other land so that we're in discussion with all of Kapski Sinc there around Kapski Sinc. But other than that, I would say everything has been sold.

Speaker 4

So very good for us again, and we executed as planned on that.

Speaker 1

Okay. I would like to thank everyone on this call. I guess we answered most of the questions. So that will conclude the call for today. Thank you very much.

Speaker 1

Have a good day.

Operator

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

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Earnings Conference Call
GreenFirst Forest Products Q3 2024
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