Market Data 
GreenFirst, a lumber producer known by its ticker symbol, has announced a strategic move to spin out its paper operations into a separate entity named Kap Corporation. This decision comes as the company seeks to concentrate on its core lumber production business.
Despite facing low pricing in the lumber market and reporting a net loss of $14.5 million for the second quarter of 2024, GreenFirst is implementing cost reduction measures and managing inventory levels to navigate the challenging environment. The company has secured a $24 million financing agreement from the province of Ontario to support the operations of Kap Corporation, which is expected to stabilize and potentially enhance the value of the paper business.
Key Takeaways
- GreenFirst is spinning out its paper operations to focus on lumber production.
- The company reported a Q2 net loss of $14.5 million and negative adjusted EBITDA of $12.1 million.
- Lumber sales reached $66 million, while paper sales were at $28 million in Q2.
- The Bank of Canada’s interest rate cuts could support a rebound in lumber pricing.
- GreenFirst has secured a $24 million financing agreement from Ontario for Kap Corporation.
- The company is pursuing cost reduction initiatives and asset monetization to improve liquidity.
Company Outlook
- GreenFirst is optimistic about the long-term prospects of the lumber market.
- The spin-out of Kap Corporation is aimed at creating a pure-play lumber producer.
- Shareholders are to receive stakes in the future development of Kap Corporation.
Bearish Highlights
- The company is currently experiencing low lumber pricing.
- There is a focus on managing liquidity due to the negative financial results.
- Slow-moving inventory has led to accelerated shutdown and maintenance schedules.
Bullish Highlights
- Lumber production in Q2 increased, leading to lower production costs.
- Improved market conditions for paper operations with increased demand and shipments.
- North American newsprint producers have announced a $50 price increase.
Misses
- GreenFirst faced a significant net loss and negative adjusted EBITDA in Q2.
- The company is dealing with weak market conditions affecting inventory turnover.
Q&A highlights
- The company discussed standard newsprint price increases in various regions.
- There is an observed increase in export demand and pricing beyond initial forecasts.
- GreenFirst is in talks to monetize land assets in Kenora, Timmins, and Kap.
- The company expressed appreciation to team members and looks forward to future calls.
GreenFirst’s strategic move to spin out its paper operations as Kap Corporation reflects a sharpened focus on its core lumber business. The company’s financial performance in the second quarter was challenged by low lumber pricing and a net loss, but GreenFirst is taking steps to improve its financial health. These include cost-cutting measures, inventory management, and asset monetization.
With the Bank of Canada’s interest rate cuts potentially aiding a rebound in lumber pricing and the company’s sustainable forestry operations, GreenFirst remains confident in the lumber market’s future. The company’s next quarterly call will introduce new leadership, with Peter Ferrante joining and Joel taking the helm, while the current speaker transitions to a Chairman role.
Full transcript – GreenFirst (GFP) Q2 2024:
Operator: Good morning, ladies and gentlemen and welcome to GreenFirst Second Quarter 2024 Results Conference Call. Please note that all lines have 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. 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 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 MD&A, which can be accessed on the company’s website or through SEDAR+. [Operator Instructions] Mr. Rivett, you may begin your conference.
Paul Rivett: Thank you very much. Good morning, everyone, and welcome to our second quarter 2024 earnings call. I am Paul Rivett, the Chair of GreenFirst. Today, I’m joined by Joel Fournier, our CEO; Terry Skiffington, our CEO of Kap Paper; Michel Lessard, our President; and Ankit Kapoor, our Interim CFO. Since our last earnings call, we have made some significant strides in line with our strategy. We recently announced the planned spin-out of Kap Corporation, which would effectively deconsolidate the paper operations from GreenFirst. The spin-out of the paper operations is part of the natural progression of the decentralization efforts we have been working on since 2023. The spin-out will enable GreenFirst to focus on its core business of being a pure-play lumber producer. At the same time, the transaction will offer shareholders a stake in any future upside from the development of Kap by Terry and in of course of its assets. As a separate company, Kap will consider independent financing alternatives and partnerships for the future. We want to thank the province of Ontario for the support of Kap, as we announced a $24 million financing agreement, the province provided for Kap Corporation. It gives Kap the ability to and affords the opportunity to focus on its long-term strategy as a stand-alone operation. Kap Paper is the only pulp and paper mill operating in Northeastern Ontario. And as operations are imperative to mitigate challenges related to diminishing chip consumption, which is jeopardizing some sawmill operations in Northern Ontario. We are happy to have Kap in our ecosystem, which helps us to find a guaranteed home for chips from our sawmills. We continue to see the paper mill stabilize its operations and turning a corner from the challenges based at the end of last year, in Q1 of this year. On the lumber side, we continue to fight through the prolonged bottom that we are now seeing in pricing. It has been a tough goal for the industry but we remain encouraged by long-term fundamentals for the lumber industry as a whole. Our goal in the short term is to manage our liquidity rigorously and to help sustain these lows in lumber pricing. The Bank of Canada has changed course on its interest rate policy as we have seen two interest rate cuts this summer. We have yet to see that in the United States, but there are strong indications that a cut may be coming soon. This is much needed for the rebound in lumber pricing. We recently also purchased a buy-out group annuity that transfer is approximately $26.5 million of defined benefit pension obligations to a Canadian insurance company and there’ll be more for us on those pension plans in the future to discuss. Our management team will take us through the results of the quarter and the year, starting off with Ankit giving us the financial highlights. Over to you, Ankit, please.
Ankit Kapoor: Thank you, Paul, and good morning, everyone. The company’s net loss in Q2 was $14.5 million. Adjusted EBITDA for Q2 was negative $12.1 million, this compares to an adjusted EBITDA of negative $3.5 million in Q1 2024. For Q2, we had negative contribution from both our lumber and paper segments. Net lumber sales recorded in the quarter were $66 million compared to $69 million in Q1. This was due to lower volumes and lower pricing in Q2. Lumber demand continues to be impacted by housing affordability challenges driven by high interest rates. In addition, there remains an oversupply of lumber inventory despite curtailments in North America. Cost of sales in the lumber segment were $70 million compared to $62 million in Q1. This was primarily due to a $6 million swing in net realizable value adjustment as Q1 had a decrease to NRV provisions while Q2 had an expense [ph]. Compared to Q2 of last year, the company’s net sales in the Forest Products segment declined by about 10%. This was driven by decreased field takeaways impacting volumes and due to an unexpectedly wet spring season in 2024. Cost of sales in the lumber segment improved by 6% compared to Q2 of last year, primarily due to significantly lower volumes sold and gained efficiencies compared to the same period last year. This was partially offset by charges related to inventory net realizable value recorded in the current year compared to a recovery in the second quarter of 2023. Year-to-date sales were flat compared to the same period last year as lower volumes were offset by higher realized prices in 2024. The paper segment saw net sales of $28 million in Q2 versus $24 million in Q1. This was driven by volume increases as the paper mill had fewer production-related challenges compared to a tough Q1. By the same token, cost of sales for paper segment remained flat even with these higher volumes as there was less maintenance cost in Q2. Compared to Q2 of last year, the company’s net sales in the paper segment decreased by 26%. This was primarily driven by the lower volume due to production-related disruptions carried over from Q1 of this year and continued pricing pressure seen during the course of 2023 and into 2024. Cost of sales in the paper segment compared to Q2 of last year decreased by 7%. The decrease in cost of sales was primarily due to lower paper production and sales, offset by higher costs driven by external events from Q1 of this year. SG&A expenses of $4.5 million in Q2 were higher compared to $2.5 million in Q1. However, Q1 had a recovery of $1.3 million related to the difference between accrued and actual incentive payout for 2023 and credits related to fringe benefits. Excluding the impact of these onetime items in Q1, SG&A expenses were relatively flat in the second quarter of 2024 as lower salaries and benefits were offset by costs related to corporate reorganization efforts, including the planned spin-off of Kap. For Q2, finance costs were $1.1 million, primarily reflecting interest charges on the company’s outstanding debt under the credit facility. During Q2 2024, the company received proceeds of $9 million from the Kap term loan. The company utilized $6 million to repay the revolving portion of its credit facility. Additionally, the company received proceeds up $10.3 million related to its equipment-based term loan, of which it effectively repaid approximately $7.5 million to the revolving portion of the credit facility. As such, net proceeds from financing activities, including the Kap term loan, was about $5 million. Subsequent to Q2, the company received the balance of the Kap term loan, of which $4 million was utilized to repay the revolving portion of the credit facility, netting the company an additional $11 million since Q2. The repayments of the credit facility from the Kap term loan essentially offsets the loss in borrowing base due to removal of Kap’s assets from the credit facility as they are now pledged under the loan agreement with the province of Ontario. The company also continues to monitor inventory levels and it is accelerating certain initiatives to open up added liquidity. I will pass it over to Joel for his commentary on this and operations in general. Joel?
Joel Fournier: Okay. Thank you very much, Ankit. Good morning, all shareholders, analysts and my colleagues on this call. Q2 was a very challenging quarter with poor market condition all across the industry. There were continued pressure on the lumber business with price lagging in the quarter as demand failed to recover with high mortgage rate. As a result of this, we did take steps to accelerate scheduled downtime for maintenance to offset the market condition and ensure tight inventory management going forward. This was all focused to our ensuring the company is laser-focused on its liquidity profile as the industry navigates through this difficult time. Beyond the operational level of liquidity, we have already made strides under our credit facility program and the loan from the province of Ontario provide us good support for Kap Paper operation. In addition, we strongly believe we will have a positive update on Kenora by the end of this year. And the most recent announcement related to the annuitization of a portion of our pension plan give us a pathway to unlock the surplus relates into 2025. In Q1, we have reported on several production records as we announced last time, but that were achieved by our lumber mills. I’m happy to report that we did see some additional one in Q2, primarily related to Chapleau and Kapuskasing sawmill operation. We are also starting to see a sustained reduction on our SG&A run rate since the report made earlier this year. We are on track to achieve a targeted run rate as previously announced in the last quarter especially as spend on corporate restructuring projects are phasing out. To continue to drive a culture of continuous improvement across the company, we had identified specific non-CapEx initiatives to drive savings of approximately $14 million compared to the 2023 results. We have positioned mill incentive in line with this goal, and they remain a top priority for the team. These incentive program aim [ph] at continued improvement as – aim at continuous improvement has been a key driver for the mills in achieving those production records that we had in Q2. We have seen significant improvement in manufacturing costs in Q2 as a result of those initiatives. On top of this, we are tightly monitoring CapEx spend with strategic projects deferred until we see support from the lumber market going forward. We ensure that any maintenance CapEx necessary for the safe functioning of our mill is still executed on. We are confident of our long-term CapEx plan once market enabled us to execute on them. This will lead to additional throughput at our mill and a cost-efficient manner. We also remain confident on the long-term prospect of lumber markets and have recently seen an uptick since mid-July and futures. We think we have hit the bottom and hope that market now continue to rebound from it. The Bank of Canada interest rate cuts puts the economic environment on the right path for recovery in lumber price. The undersupply housing market and record level of immigration in North America remain key fundamental driver for the rebound in lumber price. Our sales saw a decrease from Q1 due to concern around persistent high mortgage rates and impacted affordability of home. Earlier already maintaining low field inventory level continued to do so in Q2. We see this as an additional catalysis for lumber rebound as low inventory creates supply side pressure. During the second quarter of 2024, lumber production saw an increase over the first quarter. The production momentum that the mill gained in the first quarter carried into the second quarter, as a results of which production was higher. This results in lower cost of production as well, the benefit of which we expect to see in cost of sale in the following quarter. Going into Q3, however, we did accelerate some shutdown and maintenance schedule to offset the impact of slow-moving inventory as a results of weak market condition. That’s it for this section. I’ll pass it over to Terry Skiffington for his comment on the paper operations. Thank you.
Terry Skiffington: Thanks, Joel, and good morning, everyone. I’ll give a brief synopsis of Kap Paper for Q2 and a bit of a look forward. To begin, we had no recordable injuries in the quarter and are tracking at a 1.0 incident rate, which puts us close to if not at the top of the list for safest mills in Canada. Our market conditions have improved slightly, particularly in the export world with the Middle East and Asia continuing to see restrictions in transport and reduced shipments out of Europe. North America for the first time in recent memory showed an uptick in demand and shipments in June, and I’ll speak about pricing impacts in just a few minutes. Mill operational and cost performance did improve from Q1. Mill efficiency increased by 5%, and the mill level cost of manufacturing decreased by 16% from Q1, about third of that reduction in costs came from active cost reductions in variable fixed costs and about two-thirds of that were as a result of the improved mill performance. As a result, Q2 EBITDA improved significantly, and although still in a negative position, we are on track both from an operational and a cost perspective to be EBITDA positive shortly. In terms of pricing, all North American newsprint producers along with Japan, South America and Europe have announced a US$50 increase for standard newsprint effective September 1. At the same time, we are seeing an increase in export demand and pricing in excess of our recent forecast. These moves in the market helped to reinforce my positive EBITDA plan communicated on our last call and again today. As Paul mentioned earlier, we are very pleased to have finalized the $24 million term loan from the province of Ontario for Kap Paper. This level of confidence and support from Ontario is very appreciated. This gives us the opportunity to continue to work to improve our core business and at the same time, work on our biomass energy strategy, which includes a significant increase in electricity and steam generation from sawmill and forest residues as well as other forms of bioenergy. Thank you, and I’ll pass it back to Joel to complete the call.
Joel Fournier: Thank you, Terry. We’re extremely proud of our forestry operation based solely in Ontario, where we focus on sustainable practice. We priorized environmental stewardship by promoting biodiversity, maintaining forest health and complete utilization of the tree we harvest. I will pass it Paul Rivett for the final words for this call.
Paul Rivett: Thank you, Joel, and thanks, everyone, for joining the call. So we’ll now go on mute while we wait to see if there are any questions that we can answer. Okay. Well, for the first time since we started as a public company, there are – I just see one question coming through up here. There’s a few coming through now. Actually, I was going to say we don’t have any questions, but we have a few. So the first one, any updates on the land sale. So Michel, if you could answer that one for us.
Michel Lessard: Yes, for sure. So Yes. So if we’re looking for Kenora, so our interest remains to monetize that land that is not sold yet, but we are in discussion with different interested parties. And we hope that we’re going to be able to get an agreement in the following months. Regarding also the other lands that we have around Timmins and Kap, we were able to monetize, I would say, the big majority of these lands also. So it’s good news for us. So they’re remaining a bit of length that we are also in discussion with interested parties.
Joel Fournier: And I would just add that we have talked about the land, the pension, the duties is all things that are monetizable. And we are deep into doing that on behalf of shareholders. And so hopefully, there’ll be more to report on that in the next quarter. But seem there’s no further questions. Before signing off, I’d like to say thanks very much on behalf of everybody at GreenFirst to Ankit for all of his hard work and commitment. We wish him the very best in all of his future endeavors. With that, we do look forward to having Peter Ferrante join us for the next quarterly call. And then one last note, I’ve been assisting on these calls, while Joel has been a climatizing to leadership of the team and leadership of these calls. But in the future, I will be stepping back from the quarterly calls and taking a more traditional role of Chairman and turning these calls over to Joel and the team, who have been doing a fantastic job. So thank you very much, everyone, and we look forward to talking to you next quarter.
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