GreenFirst Forest Products Inc. (TSX: GFP) has announced a successful third quarter in 2024, with CEO Joel Fournier highlighting the spin-out of Kap (JO:KAPJ) Paper and a significant recovery in net income and adjusted EBITDA. The company reported operational improvements and a positive trend in lumber pricing, along with strategic plans to increase capacity and reduce costs in the upcoming years. GreenFirst also revealed a rights offering aimed at supporting growth initiatives, with a substantial commitment from a key investor, and ongoing efforts to monetize land assets.
Key Takeaways
- GreenFirst's net income for Q3 2024 stood at $14.8 million with an adjusted EBITDA of $15.9 million.
- A new softwood lumber duty rate may lead to a recovery of overpayments approximately worth US$14.2 million.
- The company plans a rights offering in October to raise funds for strategic growth and operational efficiency initiatives.
- Operational savings of about $8 million were reported year-to-date, driven by non-CapEx initiatives.
- Kap Paper has been spun out as an independent entity, with expectations to reach at least break-even by Q4 2023.
- GreenFirst is preparing for potential tariffs and continues to work on monetizing land assets.
Company Outlook
- GreenFirst aims to increase annual capacity by 20% and reduce costs by 10% through a $50 million investment in 2025 and 2026.
- The company is preparing for potential tariffs starting August 2025 and expects to continue paying high duties.
Bearish Highlights
- Despite operational savings, the company faced high inflation and external pressures.
- Pricing pressures persist in the market, and the company anticipates future tariffs.
Bullish Highlights
- GreenFirst saw a recovery in lumber pricing after a low in July and achieved record production levels at certain mills.
- The company expanded its volume with big-box retailers and added a distribution center.
Misses
- Production was lower in Q3 due to a targeted mill curtailment in July.
- The company noted operational performance is expected to improve in Q4 but did not provide specific guidance.
Q&A highlights
- The rights offering aims to raise $97 million, with a key investor, Ravenswood, committing $20 million.
- Discussions are ongoing regarding monetizing properties in Kenora and Kapuskasing.
- Specific shareholder and board member participation in the rights offering is expected but not disclosed.
GreenFirst Forest Products Inc. has demonstrated resilience in the face of market challenges and is actively pursuing strategies to strengthen its financial position and operational efficiency. The successful spin-out of Kap Paper and the rights offering represent significant steps toward focusing on core business areas and funding future growth. With a commitment to safety, cost control, and strategic investments, GreenFirst is poised to navigate the complexities of the lumber industry while seeking to deliver value to its shareholders.
Full transcript - None (ICLTF) Q3 2024:
Operator: Good morning, ladies and gentlemen. And welcome to GreenFirst’s Third Quarter 2024 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 risks, factors, and assumptions is included in GreenFirst’s MD&A and Annual AFI, I am sorry, AIF, which can be accessed in the company website or through SEDAR+. After the speaker’s 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.
Joel Fournier: 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 GreenFirst Forest Products. Today, I’m joined by Peter Ferrante, our new CFO; Terry Skiffington, CEO of Kap Paper; and Michel Lessard, 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 Kap Paper was completed in November as planned. Now, both entities are completely separated and GreenFirst Forest Products is a pure-play lumber company that will focus on the future growth of its sawmill. Kap Corporation will continue to exist as a stand-alone 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’s Final Determination of its Fifth Administrative Review with respect to import of softwood lumber products. This determination assessed a 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 US$14.2 million or C$19.2 million recovery on duty paid in 2022. We will continue to advocate for a shareholder to see a timely return on those overpayments. In addition, we continue to seek a fair supplement of all remaining duty deposits. These duties will be settled with the rest of the Canadian softwood lumber industry, and consequently, the amount of refund remains uncertain at this time. 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 continues to be in a unique situation where we have access to excess wood supply, and through the execution of our strategic plan, we are 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 producers. We firmly believe that executing a strategic CapEx plan off-cycle while market prices are low is key for the long-term profitability when markets rebound. There are many advantages to undertaking such capital projects off-cycle. For example, project costs will be lower, startup time will be quicker for those CapEx projects, and we can maximize the return on every dollar we will spend. These investment opportunities will change the current profitability of GreenFirst. As you can see in the slideshow, we are looking to spend approximately $50 million in 2025 and 2026, with an expected increased EBITDA of approximately $18 million 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. The company is looking to do a total of eight projects for the Phase 1 across the four sawmills in Ontario. Those projects will increase capacity, reduce costs 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 third quarter at a net loss from continuing operations, adjusted for one-time duty recovery. This was primarily due to operations 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 $338 per thousand FDM on a Western basis. Since then, price has steadily increased month-over-month and we’re now sitting at $445 per thousand FDM on a Western base. Under those current prices, our mills are now positive EBITDA. The reduction in capacity recently announced by our competitor and the housing supply shortage in the 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 operations did run smoothly in Q3, while certain locations were breaking production records. GreenFirst continues to promote a culture of continuous improvement and has seen higher levels of efficiency when we compare to fiscal 2023. As you can see in the presentation, our sawmill continues to improve by increasing production, reducing costs overall and our breakeven mill net EBITDA improved by 20% from 2022. Peter will now take us through the financial results of the quarter. Over to you, Peter.
Peter Ferrante: Good morning, everyone. The company’s net income from continuing operations, now excluding Kap Paper, in Q3 2024 was $14.8 million. Adjusted EBITDA from continuing operations for Q3 2024 was positive $15.9 million. This compares to an adjusted EBITDA of negative $6.1 million in Q2 2024. As Joel previously shared, during the third quarter of 2024, the company recorded a recovery of approximately US$14.2 million or C$19.2 million related to duties paid, plus accrued interest of US$2.3 million or C$3.1 million. This recovery has positively impacted our net earnings and adjusted EBITDA in Q3 and on a year-to-date basis. For Q3 2024, we had positive contribution from continuing operations of approximately $1 million. Net sales recorded in the quarter were $70.8 million, closely compared to $69.6 million in Q2 2024. The increase in net sales was due to higher volumes shipped, offset by lower pricing realized for the quarter. 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 determents in North America, continues to impact pricing. There continues to be low levels 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 $69.8 million, compared to $72.5 million in Q2 2024. The decrease in cost of sales in the third quarter was primarily due to lower charges related to inventory net realized value recorded, compared to the second quarter of 2024. In addition to inventory being sold during the third quarter, which was produced primarily in the previous quarter at a lower cost. 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 pricing 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 third quarter 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 volume sold and higher charges related to inventory net realized value recorded in the third quarter of 2024, compared to a recovery in the third 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. Selling, general and administrative expenses of $3.5 million in Q3 2024 were lower, compared to $3.9 million 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 Kap Paper in the second quarter of 2024. The company generated finance income of $1.9 million for Q3 2024 and incurred a finance cost or expense of $0.2 million for the three 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 $4.2 million and $0.7 million related to its equipment term loan with the bank. 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.
Joel Fournier: Thank you, Peter. As mentioned earlier, Q3 was a challenging quarter due to poor market conditions across the industry. The lumber business faced continued pressure with particularly low prices in July. However, recent announcements of capacity reduction by our competitors have contributed to improved pricing since then. Our industry operates within a cyclical market and we are emerging from a difficult phase. Throughout the quarter, we maintained tight cash management to navigate through those conditions. In Q1 and Q2, we had reported on several production records that were achieved by our mills. I am happy to report that we continue to have production records in Q3 2024, primarily related to our Chapleau mill and Kapuskasing sawmill operation. Kapuskasing achieved its highest production level for August and September in the mill history, while Chapleau reached its highest production shift ever. We also continue to see a reduction in our SG&A run rate that is currently at $33 per thousand FDM on a target of $40 per thousand FDM announced previously in Q1 this year. We will continue to monitor our SG&A and we look for future opportunities to reduce costs. We remain committed to reducing costs in other areas of the business. In addition to our SG&A cost reduction, we continue to make improvements on our costing and processing costs year after year. Our costs went down by 6% from 2022 to 2024, despite high inflation and other outside pressure. GreenFirst continues 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. This year so far, we have identified and executed on specific non-CapEx initiatives in order to drive a saving of approximately $8 million in our operation on a year-to-date basis compared to 2023 results. A little bit more on the operations 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 store customers and added an additional distribution center with them. In the open market, inventory remained very low and we are beginning to see positive price momentum following recent mill curtailment announcements. Safety remains our top priority and we must stay focused on executing our plan to improve safety outcomes. 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 Terry Skiffington for his comments on the paper operation.
Terry Skiffington: Thanks, Joel, and good morning, everyone. Firstly, we concluded the restructuring last week that places Kap 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 Kap Paper from Q3 and forward into Q4. To begin, we had no recordable injuries in the quarter and we are tracking on a 12-month trailing basis at a 0.76 injury 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 electrical 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. As I mentioned previously, all North American newsprint manufacturers announced a price increase for September 1 of US$50. There has been considerable pushback from North American customers as demand has softened. 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-2020 operating levels and achieving the lowest cost of manufacturing for the year and this is continuing now through November. 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 will pass over to Joel to complete this call.
Joel Fournier: Thank you, Terry. I would like to thank everyone for joining the call. We will now answer any questions that have come through.
Operator: A reminder to please submit your questions via the web portal.
Joel Fournier: Okay. This is Joel again. We do have a question. With the recent duty rate adjustment announced, what are the future possibilities of collecting on these duty deposits in the future? I will ask Michel Lessard to answer the question.
Michel Lessard: Yeah. 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. Governments. And we saw also with the last election in the U.S., we will see how the Trump administration will want to approach this. That being said, so the Canadian lumber industry and GreenFirst as part of it will continue to work very closely with the Canadian Government also and we will continue to try to find a fair settlement for all the duties that are imposing. It’s something to follow very closely.
Joel Fournier: 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? I can answer this question. We are 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. We are presently paying very high duty and our expectation is we are 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, the rate went from 8% to 14.4% and the lumber price caught up on the duty rate in three weeks. We have another question here. How does the completion of the spin-out impact my share? I will ask Peter Ferrante to answer the question.
Peter Ferrante: Thank you, Joel. We have recently released the management information circular and we have also released multiple price releases outlining this process. Shareholders of GreenFirst will be issued a new class of shares for Kap Corporation, which will not be publicly traded on any of the stock exchanges.
Joel Fournier: 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&A? I can answer this question. Earlier this year, we accelerated maintenance activity while the markets 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 will be able to generate positive EBITDA from our mill going forward. As we made significant reductions in our SG&A on a year-over-year basis, we anticipate to also be in a positive EBITDA position inclusive of SG&A. For more clarity, we are positive -- and today -- with today’s current price, we are positive EBITDA going forward. I have another question here in relation to the capital expenditure plan. So how confident are you 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 our management team and some of them have been completed in the past. Those projects -- to minimize risk, those projects are turnkey in nature and we are looking to install proven technology. Finally, to minimize the risk, our vendors are committed to provide performance guarantee on those projects. So if you think about having a turnkey project that can 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 Kap Paper related. The company announced the completion of its spinout. Does that mean the company has found a buyer for the paper mill? What is the plan for Kap Paper? I will pass this one over to you, Peter.
Peter Ferrante: Okay. Thanks, Joel. As it stands, Kap Paper has been spun out as its own operating entity and is working towards its goal of being a profitable business through the execution of our plan. And to refresh, the plan for Kap announced in Q1 of this year was to return Kap to being at least break even in Q4. That is unchanged. We are on that trajectory, actually slightly ahead of that in terms of Q4 operating performance.
Joel Fournier: Okay. Thank you, Peter. We do have a couple of more questions here. One is about the right offering. With the announcement of the right offering, do you expect to raise the full $97 million and will all of it be used for strategic CapEx? I will pass this one over to you, Peter.
Peter Ferrante: We will not know the final amount raised related to the rights offering until mid-December. However, as we have stated in our press release, we already have $20 million 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, investment in various CapEx projects that we are talking about, as well as any other future potential strategic opportunities. Hopefully that clarifies that question.
Joel Fournier: Thank you, Peter. We do have another question that came up around the right offering. Will offer management and large shareholders be participating in the right offering? I will answer this question. So we have been told by several key shareholders and Board members that they will participate to varying extent. However, no commitments to exact dollar amounts have been disclosed yet. We do have a couple of more questions here. One is about what is the status with Kenora and the other land that we have for sale? I will pass this one over to Michel.
Michel Lessard: Thanks, Joel. About Kenora, as I mentioned in the last quarters, so our interest remains to monetize that land. That is not sold yet. That being said, we will continue to work with the interested parties. So we are hoping to be able to finalize an agreement in the following months. About the other lands, we already mentioned that we have some lands for sale around Kapuskasing and payment. So we sold around 20 -- 2,300 acres on that. So it is a pretty good value. So there are some other lands that we are in discussion with the Town of Kapuskasing. Other than that, I would say, everything has been sold. It is very good for us. Again, we executed as planned on that.
Joel Fournier: 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. Have a good day.
Operator: Thank you, sir. Ladies and gentlemen, this does indeed conclude the 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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