Interfor Corporation (IFP) Earnings Call Transcript

[Operator Instructions] The conference is being recorded. During this conference call, Interfor representatives may make forward-looking statements within the meaning of applicable securities laws. Information regarding the risks, uncertainties, and assumptions of such statements can be found in Interfor's most recent press release and MD&A. I would now like to turn the call over to Mr. Ian Fillinger, Interfor's President and CEO. Mr. Fillinger, please go ahead.

Thank you, Operator, and good morning, everyone. Joining me today is Mike Mackay, our Executive Vice President and Chief Financial Officer. The third quarter reflected strong execution across our business, supported by modestly improved lumber markets, continued cost focus, higher mill productivity, and disciplined inventory management. While uncertainty remains elevated, we're making solid progress strengthening our business and our balance sheet. Our two-year company-wide cost reduction program remains on track to achieve our $80 million annualized target. Thomaston delivered another strong quarter, reaching full pro forma production ahead of schedule. The transformation at that mill is now complete, and Thomaston has become one of the top-performing assets in our portfolio. Looking ahead, we expect a gradual market recovery rather than a significant near-term improvement. Demand remains subdued while ongoing curtailments and closures continue to rationalize supply. Against this backdrop, our priorities are clear: operate safely and efficiently, align production with demand, relentlessly reduce costs, and preserve the balance sheet strength and flexibility. With that, I'll turn the call over to Mike.

Thank you, and good morning, everyone. From an earnings standpoint, Interfor generated $77 million of adjusted EBITDA in the third quarter, continuing the strong results delivered in the second quarter. From a sales perspective, realized selling prices were up 2%, with slight improvements across most regions. Production volumes increased by 25 million board feet, or 3%. The increase was driven primarily by higher production in the U.S. South, following the ramp-up of Thomaston, along with more normalized operating schedules in the B.C. interior. This was partially offset by lower production in Ontario. Shipments were essentially in line with production. Production costs per unit remained below full-year 2025 levels, with year-to-date costs down 4%. These improvements were driven by higher operating rates, the ramp-up of Thomaston, and ongoing productivity gains from our company-wide cost reduction program. With that being said, fuel and other cost inflation has been notable this year and is expected to be an ongoing headwind in the fourth quarter and potentially into 2027. Turning to the cash flow and balance sheet, improved earnings along with non-core asset sales contributed to a further strengthening of our financial position. Debt declined, and our net debt-to-invested capital ratio improved to 35.5%. This represents a 120 basis point improvement from the second quarter and a 330 basis point improvement from the first quarter. And we ended September with available liquidity of over $460 million. We continue to anticipate proceeds from divestitures over the next several months, including the ongoing sale of our B.C. Coast forest tenures, as well as the sale of real estate in the U.S. South. Looking ahead to the fourth quarter, benchmark lumber prices have moderated in recent weeks, with demand continuing to be constrained by housing affordability, consumer and builder confidence, and broader economic uncertainty, all in addition to normal seasonal softness. At the same time, supply rationalization has continued through much of 2026, building on the actions taken across the industry in the prior years. We believe this has contributed to a more balanced market environment. This ongoing supply discipline, combined with the recent 10% reduction in duty rates on Canadian imports to the U.S., does provide some optimism heading into 2027. Lastly, turning to capital allocation, our priority remains on debt reduction, the pace of which will depend on lumber prices and market conditions. Preliminary 2027 capital expenditures are expected to range between $75 million and $100 million. Spending will be primarily maintenance-focused, but supplemented with a number of smaller-scale, high-return, quick-payback discretionary projects that will be advanced and flexed based on market conditions as appropriate. With that, I'll now turn the call back over to you, Ian.

Thanks, Mike. Operator, we're ready to take questions from analysts at this point.

[Operator Instructions] First question will be from Sean Steuart at TD Cowen. Please go ahead.

Mike, I'll start with you. Can you give us a sense of, I guess, the cadence and the overall dollar amount you're anticipating from non-core asset sales, whether it's real estate or Stillwater?

Hey, good morning, Sean. Absolutely. From a B.C. Coast tenure perspective, we're looking at the next several months, most likely into early 2027, in the range of $20 million to $25 million, largely some of the timing delays around the B.C. election. So just letting the government settle in, in that sense. Real estate, similar type of timing. We did close on one of the sales in Q3, and looking at probably late Q4 or early Q1. And dollar amount for the real estate piece of it, that's in the same range as the B.C. Coast tenures, I'd say between $20 million and $25 million.