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Edited Transcript of IFP.TO earnings conference call or presentation 9-Aug-19 3:00pm GMT

Q2 2019 Interfor Corp Earnings Call

VANCOUVER Aug 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Interfor Corp earnings conference call or presentation Friday, August 9, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Duncan K. Davies

Interfor Corporation - President, CEO & Non-Independent Director

* J. Barton Bender

Interfor Corporation - SVP of Sales & Marketing

* Martin L. Juravsky

Interfor Corporation - Senior VP & CFO

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Conference Call Participants

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* Hamir Patel

CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Paper and Forest Products Analyst

* Ketan Mamtora

BMO Capital Markets Equity Research - Analyst

* Paul C. Quinn

RBC Capital Markets, LLC, Research Division - Analyst

* Sean Steuart

TD Securities Equity Research - Research Analyst

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Presentation

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Operator [1]

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Good morning. My name is Jesse, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Interfor Corporation Second Quarter Analyst Call. (Operator Instructions) Thank you. Duncan Davies, President and CEO, you may begin your conference.

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Duncan K. Davies, Interfor Corporation - President, CEO & Non-Independent Director [2]

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Thank you very much, operator, and good morning, everyone. Thanks for joining us. I'm here as usual with Martin Juravsky, our CFO; and Bart Bender, our Senior Vice President of Sales and Marketing to go over Interfor's second quarter results and our outlook for the balance of the year. I'm going to keep my remarks brief, and I'll turn the session over to you for questions as soon as I can.

To the extent that you've already seen the results of most others in our sector, there won't be any surprises with our results, which were well below levels we consider acceptable as a result primarily of product pricing that continues to languish at levels we haven't seen for a few years. Much of the blame for poor price levels can be placed on lower-than-expected takeaway levels associated with the adverse weather conditions throughout much of North America and a number of other factors that has impacted the pace of new housing starts as well as the slower than ideal supply response, which taken together, has created an overhang on the market. A slowing of the pace of lumber exports in North America has compounded this situation.

Viewed on quarter-over-quarter basis, prices for the main commodity benchmarks were [off] between 6% and 10% in the second quarter, with the Western Species showing both the largest drop and the highest level of volatility. After taking account of order file lags and the like, our sales average per quarter on a pre-duty basis was $603 per thousand board feet in the second quarter, down $10 or 2% from the first quarter. Total duties expense in the quarter amounted to USD 7.8 million or CAD 10.8 million, bringing the total to date to USD 76.5 million.

During the second quarter, we also dealt with the ongoing impact of high log cost in the B.C. Interior that have come about as a result of the timber shortages and a disconnect between lumber prices and the formula for determining stumpage rates in the region. In fairness, log cost in the interior were lower in the second quarter than they were in the first quarter, but they remain very high relative to log cost in competing regions and disproportionately high relative to lumber sales values.

There are a couple of other significant items that had an impact on our results in the second quarter that are worthy of note. First, there was a $10.3 million inventory write-down in the second quarter, triggered by the drop in market prices during the quarter. Significantly, almost 90% of the write-downs were incurred by our B.C. operations. This expense reported in the second quarter compares with the recovery of $4.1 million in the first quarter of the year. And I think as most of you know, inventory adjustments of that nature are reported in production costs.

We also received compensation during the quarter of $7.7 million from the B.C. government as a settlement for the cancellation of 2 timber licenses on the B.C. Coast in 2017. Of this amount, $6.6 million is reported as pretax income, but it is not reported in our adjusted EBITDA.

Taken together, Interfor reported a net loss of $11.2 million in the second quarter of 2019 compared to a loss of $15.3 million in the first quarter of the year. EBITDA in the quarter was $12.6 million versus $16.3 million in the first quarter.

Production in the quarter was 647 million [board feet, reflected] as seen as the prior quarter, with our U.S. operations accounting for 71% of our total volume, made up of the northwest of 22% and the south of 49%. Capacity utilization was flat quarter-over-quarter at 83%, made up of 45% on the B.C. Coast, which continues to be impacted by log supply issues; 81% in the B.C. Interior, which reflects a combination of market curtailment and some other factors; 87% in the Pacific Northwest; and 91% in the U.S. sales, which reflects a series of project related curtailments at our Phase 1 projects.

Shipments during the quarter amounted to 674 million board feet, up almost 9% versus the prior quarter. During the second quarter, Interfor generated $9.9 million of cash from operations before changes in working capital and $32.2 million after changes in working capital are considered.

Capital investments totaled $65 million in the second quarter, including just a little under $52 million on the Phase 1 and 2 discretionary projects in the U.S. South. Net debt closed the quarter at $198.2 million, equivalent of 18% of invested capital, leaving the company with a very strong balance sheet and available liquidity of just up over $390 million.

In terms of our strategic capital initiatives, I'm pleased to say that our Phase 1 projects at Meldrim and Monticello in the South were both completed during the quarter and are in their ramp-up phase and showing very encouraging signs. I should also point out that both mills were negative contributors for the P&L and EBITDA standpoint during the second quarter, as the vast majority of startup costs were expense rather than capitalized, which we expect to reverse in the current quarter.

We're now turning our attention to the Phase 2 projects at Georgetown, Eatonton and Thomaston, which we'll complete in phases over the next 2 to 3 years. And finally, before I turn the session over to Bart for his comments on the lumber market, I just want to touch base briefly on the transaction that we had entered into in early June with Canfor to acquire the cutting rights in the Adams Lake area of the B.C following their decision to permanently close the mill at Vavenby, which is located approximately 100 kilometers from Adams Lake.

The current supply situation in the B.C. Interior, as I mentioned earlier, is particularly challenging. After dealing with the impacts of the mountain pine beetle infestation, there's simply too much milling capacity chasing too few trees, and that equation needs to be rebalanced if the industry is going to remain competitive on a global scale going forward. The good news is that process is well underway. The bad news is it has serious negative consequences for workers' communities and other stakeholders who were affected by the closures. Requiring those licenses will strengthen Adam Lake's long-term timber supply position and support the continuation of this 2 shift operating program in the face of declining allowable cuts in the region.

I'd also note that since our transaction was announced, a number of other permanent closures have been announced in the region, which will also help take pressure off the log markets. The transaction is subject to various consents, including that of the B.C. government, and we're working through process currently.

Bart, I think, what we'd like to do is turn over to you for some comments on what's happening in the other markets, our outlook for the balance of the year. And then we'll come back and take questions from our guests.

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J. Barton Bender, Interfor Corporation - SVP of Sales & Marketing [3]

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Okay. Thanks, Duncan. So difficult weather late in Q1 and into Q2 caused end market inventories throughout North America to increase through the quarter as builders delayed construction. Due to this inventory build at the distribution level, the North American spring building season did not result in any significant sustaining tension with direct mill purchases, as our customers put a greater emphasis on reducing their inventories.

Today, our customers report end market inventories to be average or slightly below. On the positive side, our customers reported activity so far in Q3 to be improving and expect the latter half of 2019 to be stronger than the first half. The recent interest rates reduction from the U.S. Fed reserve is expected to help. That said, from a lumber market point of view, July continued to be a very challenging -- continued to be very challenging, with downward price pressure from June, particularly in the last. So far in August, we have mixed results of price volatility seen both in the southeast and in the West.

For Interfor, on the export side of the business, markets were active in Q2 with quarter-over-quarter volume growth seen in Japan, China and other Asian countries. This demand is expected to remain consistent in Q3. However, the US-China trade dispute ensuing, uncertainty is an area of caution.

Our specialty business, demand for both cedar and reserve pine boards, continues to be steady, and we expect similar results through the balance of the year. From a supply side's point of view, extensive curtailments have been announced so far this year, most significantly from British Columbia. The majority of these are permanent, and we are just now starting to see the impacts as log inventories, work in progress and lumber inventories are processed and shipped. We expect shipments from Canada and into the U.S. to reflect these permanent closures throughout the quarter, which will put pressure on inventories and ultimately bring tension back to the mill sales.

Short-term, as demand and supply shift, price volatility will continue. Long-term, we feel our market -- market fundamental is favorable, and we expect lumber demand to continue to grow.

I think I'll stop there, Duncan.

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Duncan K. Davies, Interfor Corporation - President, CEO & Non-Independent Director [4]

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Great, Bart. Thanks very much. Operator, I think, at this point, it makes the most sense to turn this session over to our guests so we can respond to their questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Ketan Mamtora.

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Ketan Mamtora, BMO Capital Markets Equity Research - Analyst [2]

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Duncan, Marty, Bart. First question, we have seen -- as you talked about in your prepared remarks, we have seen some permanent capacity curtailment announcements, better results that improved more recently, yet lumber pricing remains quite weak and volatile. What in your view are the key issues? Is it really a demand uptake still? Or is it inventories in the channel? Or is it simply that we'll need to see more supply come out of the market?

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Duncan K. Davies, Interfor Corporation - President, CEO & Non-Independent Director [3]

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Well, Ketan, I think it's a combination of all those things. Demand clearly has been weaker through the first half of this year than we would've otherwise expected. And we attribute it, in part at least, to the adverse weather conditions. But there's also a bunch of other factors that are at work there. And to the extent, the weather piece is a bit of an excuse, so I think there's an element of that, that is real. So demand has been weaker than anybody would've expected. The supply response has been slower than ideal, which is what I said during my remarks.

And we've seen a number of curtailments, both market-related curtailments and permanent curtailments. But I think if you look at the piece of shipments, when those close, it just means that, if anything, they've got too much inventory. And they -- well, when the mills curtail, they continue to shift. So there's a fairly significant lag that takes place between an announcement of a curtailment in one form or another and when the actual impact on shipments tends to occur. And so as we monitored volumes over the last number of months, shipment levels haven't declined to the extent that production has come off. But I think that's coming. As these mills render inventories down, there's just less product available for shipment to the market. And that's when you're going to start to see the rebalancing of that overall demand/supply equation. And as Bart indicated, we would expect to see more tension between available supply and demand and better pricing resulting from that.

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Ketan Mamtora, BMO Capital Markets Equity Research - Analyst [4]

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Got it. That's helpful. And Duncan, just on that. Is it fair to say that it takes about 3 to 4 months, typically, to work through kind of inventories at the mill and in the channel? Is that a difficult kind of average?

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Duncan K. Davies, Interfor Corporation - President, CEO & Non-Independent Director [5]

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No. I don't know if that's typical or not. I'd suggest that might be a little longer than I would otherwise expect. It depends what kind of log inventories are in front of the mill when the announcement is made. The mill would normally have a month or a month plus of inventory and a normal operating configuration. It depends what kind of log inventory, and then the decision of whether they're going to actually process those logs, run those log decks out or whether they're going to ship those logs elsewhere. So it depends on future circumstance. But if anything, I would suggest that maybe your number is a bit lock.

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Ketan Mamtora, BMO Capital Markets Equity Research - Analyst [6]

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Got it. Okay. That's helpful. And then while on the topic of demand, can you also touch upon what you guys are seeing in the R&R market?

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Duncan K. Davies, Interfor Corporation - President, CEO & Non-Independent Director [7]

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Well, all the figures that we're seeing now tells us that there's some slowing happening in the R&R market. And quite frankly, we're having some difficulties sort of wrapping our minds around that because the customers that we have that are more actively involved in the R&R market are telling us that their volumes are good. The recent Harvard study that came out indicated that some of their indicators is suggesting a slowing in the R&R market and something that we're watching really carefully to see if that really translates through and begins to impact overall demand levels.

Up to now, I think, Ketan, it's fair to say that the biggest difference has been in the new home construction market where, whether it's labor availability or land availability or financing availability or just weather as we talked about earlier has slowed that piece of activity there as opposed to any particular weakness in the R&R side of things. But it's something that we're keeping an eye on.

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Ketan Mamtora, BMO Capital Markets Equity Research - Analyst [8]

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Got it. That's helpful. And just last question from my side. When you think about capital allocation, Duncan, at this time in the cycle, how do you think about the different tools that you have? More recently, you've been focused on internal investments. But as you look at the stock price today, the tool of share repurchases versus M&A, perhaps seller expectations have come down given what has happened. How do you think about capital allocation?

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Duncan K. Davies, Interfor Corporation - President, CEO & Non-Independent Director [9]

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Well, I could tell you we think about it a lot, Ketan. We haven't seen any evidence that seller expectations have fallen back more in line with what we would consider reasonable price levels from an M&A standpoint. So we're not really wildly motivated to step up and do anything from that standpoint yet. So I think continued weakness in the market tends to bring a bit more of a realistic view to some folks.

We continue to look at the other alternatives for us right now. We're focusing significantly on both our CapEx strategy in the South and on our transaction with Canfor. And so we've backed away somewhat from our NCIB, and we think that's the best approach for us to take from a longer-term strategic positioning standpoint. We're also, I think, very cognizant of managing our balance sheet in a volatile business. It's shared agreement certainly from a broader economic standpoint. There's certainly uncertainty from a housing market standpoint. And so we're being very careful as we manage any spending or allocation of capital to ensure that it's all done within the constraint of a prudent balance sheet and debt structure.

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Operator [10]

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Your next question comes from Hamir Patel.

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Hamir Patel, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Paper and Forest Products Analyst [11]

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Duncan, I wanted to ask you about B.C. log costs. We've seen purchase log costs move higher. I think it's up about 10% through May. I know the stumpage equation is pretty complicated. But does that sort of bidding behavior which seems irrational mean that we probably shouldn't expect much stumpage release at the next July 1 revision?

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Duncan K. Davies, Interfor Corporation - President, CEO & Non-Independent Director [12]

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Our statistics right now indicate that we should see some relief next July. We'll also -- if lumber prices remain weak, we'll also see some release in the quarterly updates as well in there. But our indications now suggest that we could see some softening or realignment of stumpage rates with lumber prices next July.

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Hamir Patel, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Paper and Forest Products Analyst [13]

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That's helpful. And a question for Marty. Based on your log decks, when should we see the higher -- this past July 1 stumpage start to flip through on your cost?

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Martin L. Juravsky, Interfor Corporation - Senior VP & CFO [14]

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The July 1 increase of this year you're talking about Hamir?

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Hamir Patel, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Paper and Forest Products Analyst [15]

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Yes. Exactly.

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Martin L. Juravsky, Interfor Corporation - Senior VP & CFO [16]

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Yes. We'll just start to see that in the third quarter. So -- obviously, Duncan talked about there's a couple of moving pieces. So some of that is going to find its way in the third quarter and the rest will make it in the fourth quarter. But at the same time then, there's also the fourth quarter reset associated with the quarterly reset that's more tied to lumber pricing. So we'll start to see some of that in the third quarter filter in terms of the July 1 increase.

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Hamir Patel, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Paper and Forest Products Analyst [17]

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Okay. Great. And Bart, I was just wondering if you could comment on what you're seeing on the pricing front for lumber in both China and Japan?

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J. Barton Bender, Interfor Corporation - SVP of Sales & Marketing [18]

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Well, I would say that there's weakness in both markets. The Japanese market not -- nowhere near as volatile as any other market, quite frankly. So some mild pressure, downward pressure but still, the business in Japan is favorable and attractive.

In Asia, in particular -- particularly China, they've got heavier-than-normal inventories that they are working with over there. I think they also have some shifts going on in the demand side as well. So working through that is a bit of a challenge. However, for our business, the most recent quarter, we saw an increase in what we did over there. And I think China is an interesting market. They take a number of different species and a number of different products. And by having that breadth of mix that we sell over there, we're able to pick our slots on where we want to participate and don't participate and try to avoid the products that are under significant price pressure.

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Operator [19]

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Your next question comes from Paul Quinn.

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Paul C. Quinn, RBC Capital Markets, LLC, Research Division - Analyst [20]

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Just following up on the Canfor AAC purchase. I know it's going through the government review. Anything that's come up to date that you didn't anticipate?

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Duncan K. Davies, Interfor Corporation - President, CEO & Non-Independent Director [21]

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No. Not really. We obviously put lots of thought into this and understand the sensitivity and the impacts on people when there's closures like this. The Bill 22 review process, I certainly understand what the objectives of that are, and we're working our way through it, I think, in a very professional way with Canfor and ourselves and the ministry and -- are working pretty actively as we go through this thing. So no surprises from my standpoint, Paul.

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Paul C. Quinn, RBC Capital Markets, LLC, Research Division - Analyst [22]

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Okay. And then one of the issues that you and others have faced, especially in the U.S. market is tight labor conditions. We've got a number of shuts in B.C. Any chance of being able to shift some of the workforce in B.C. down south to alleviate some of the problems that are down there?

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Duncan K. Davies, Interfor Corporation - President, CEO & Non-Independent Director [23]

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I think that's a bit of a challenge. It's not something that we have looked at too actively. We find, more often than not, when there's no closures, people tend not to want to leave the communities that they're involved in. There's a few maybe out in the margin.

In the case of the Vavenby situation, we've been able to appraise a couple of former Canfor folks at a couple of our operations in the B.C. Interior. But the likelihood of being able to move South would run into a bunch of immigration issues, I think. And this really wouldn't be the kind of thing that's likely to be much of an opportunity.

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Paul C. Quinn, RBC Capital Markets, LLC, Research Division - Analyst [24]

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Okay. And then just on -- you detailed the cost overrun on Phase 2, which was almost 12%. Was there a contingency on that as well that you went through? And what are we looking at for Phase 2?

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Duncan K. Davies, Interfor Corporation - President, CEO & Non-Independent Director [25]

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Yes. We have a contingency on all projects. So by definition, we did run through that. And there's some lessons learned. The good news for us is that the lessons were learned on a couple of the smaller projects as opposed to the bigger ones. And I think if you think back to when those projects were announced and undertaken, there was quite a lot of activity in the mill construction rebuild market. I think that contributed to some of those costs. For example, escalation in steel prices and some of the things like that. I think we've learned a lot. We've reviewed the Phase 2 projects and the contingencies associated with the Phase 2 projects. The bids we've got coming in on those projects so far are well within our budgeted amount. So we're pretty comfortable that the numbers that we've posted on those projects are valid.

Offsetting all the overrun stuff, Paul, I think, the fact that we're pretty conservative on what we've estimated as the benefits of those projects. So I would tend to think that the additional gains associated with those investments will more than offset the higher costs that we've reported.

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Paul C. Quinn, RBC Capital Markets, LLC, Research Division - Analyst [26]

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Well, can you detail a couple of the learnings that the key controllable's that you would like to fix as you go through Phase 2 that you didn't quite catch in Phase 1?

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Duncan K. Davies, Interfor Corporation - President, CEO & Non-Independent Director [27]

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Well, I'm not going to get into a lot of detail on that. But we spend a lot of time planning our projects. We've got, I think, a pretty good track record of delivering projects well with respect to the sort of budget performance and also the gains that we achieved on these projects. And if anything, what we've learned is -- through this one is working with a number of new suppliers as opposed to some of our traditional suppliers takes a little bit more time and effort. Interesting enough, there are some of our traditional suppliers in the north of the border that are transitioning into the South, which I think gives us some additional comfort going forward.

I think another lesson, and I think a bunch of other folks are learning this lesson as well, is when there's this scramble in the business on capital projects, being able to access the quality of folks from a contracting standpoint and lead times with equipment and things of that nature, tend to be more challenging than people might initially anticipate. So we're looking really carefully, for example, at the pace at which we're planning to take on the new projects and budgeting in more time for a startup than we might have otherwise done on projects of these size.

So there are lessons learned. We're fully cognizant about (inaudible) with our senior operating guy and our capital projects guy and his team have taken those lessons to heart, I think, and are building them into the revised plans for Phase 2 and Phase 3 projects.

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Operator [28]

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(Operator Instructions) Your next question comes from Sean Steuart.

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Sean Steuart, TD Securities Equity Research - Research Analyst [29]

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A couple of questions. You guys took, I think, about 40 million board feet of B.C. Interior downtime in Q2. Are you extending anything into Q3 given that prices haven't lifted much to this point?

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Duncan K. Davies, Interfor Corporation - President, CEO & Non-Independent Director [30]

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Right now, no. Nothing specific. But we're watching it really carefully. I -- we tried to do -- we tried to be proactive in this regard. And I'm a big believer that demand is demand and supply is supply, and if you don't match the 2, you're going to pay the price. And so we talk a lot to our customers and try to balance that equation pretty carefully. And we're watching it. As I said, very carefully right now. And we won't hesitate if more downtime is required.

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Sean Steuart, TD Securities Equity Research - Research Analyst [31]

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Okay. I'm wondering if is it capital allocation and the absence of buyback activity in recent months? Just as I sort of think backwards about this, Phase 2 was well laid out a year ago. You guys knew you were going to be spending this capital. You were still buying back your shares more aggressively late last year and into Q1. Yes, I guess the only difference is the $60 million you're paying to Canfor for the AAC availability. Can I -- I mean can we read some of the more cautious approach to the NCIB's concerns about this market recovery. Am I reading too much into that? I know you want to keep a flexible balance sheet. But the capital light, I would guess, you would have seen coming regardless. So just maybe how your NCIB approach relates to your outlook for lumber prices over the next little while.

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Duncan K. Davies, Interfor Corporation - President, CEO & Non-Independent Director [32]

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I'm going to let Marty answer that one, Shawn.

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Martin L. Juravsky, Interfor Corporation - Senior VP & CFO [33]

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Sure. So Shawn, in some ways, your comment on Vavenby is a perfect example, and your comment about flexibility emphasize the theme as well, which is we're looking at all those various tools all the time, but having enough flexibility in our capital structure allows us to do a variety of things in some cases, in spite of market conditions. So we're able to take a look at a situation like Vavenby, a $60 million 10-year acquisition, in spite of the fact market is not all that terrific right now. And having that ongoing flexibility is really important to us, allowing -- allows us to pick the alternatives that makes sense from a long-term perspective. And the 10-year acquisition is a really interesting piece for us from a very long term perspective.

So we've done a little bit of share buyback activity earlier this year, tail end to last year. Our CapEx program, we think, has a tremendous opportunity in terms of long-term value. We're continuing to reevaluate CapEx plans. And then M&A opportunities are out there, whether it's a 10-year acquisition or other things. Having that flexibility in our balance sheet is really important to us. So I think that's why we're constantly trying to recalibrate the various alternatives out there and making sure that we do have flexibility at all times.

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Sean Steuart, TD Securities Equity Research - Research Analyst [34]

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Okay. One last one, Duncan. The Board appointments yesterday, you've got at least a couple of Board members that have extensive experience in wood products outside lumber. We always think of Interfor as pure-play lumber, and that's all you want to be. Would I be reading too much into that to say that maybe you want to broaden horizons over the long-term? Thoughts on the addition to the Board and broadening the perspective there?

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Duncan K. Davies, Interfor Corporation - President, CEO & Non-Independent Director [35]

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I think you're stretching a bit on that one, Shawn. Chris Griffin, who is -- was the CEO of USG Corporation, who joined the Board yesterday, sold a product into very similar markets to what we do. And it was there -- they're spending lots of time on what's happening in the new housing market, what's happening in the R&R market, and in a bunch of cases, deals with the same customer base that we deal with. And so it was an opportunity to get a guy who may have a slightly different perspective on what's happening in distribution channels involved with our business to bring a different perspective. Because our expectation is going forward, we're going to see changes in the distribution segment of our business that we need to understand and participate in. And having somebody who's got a similar issues and maybe a slightly different perspective than we do, we think will be really helpful addition to our Board.

Similarly, Rhonda Hunter, who joins our Board in May was a former VP, Timberlands of Weyerhaeuser, which I think people know. It brings a really interesting perspective to what's going on both in the Pacific Northwest and in the U.S. sales. She lives in Arkansas where we have an operation and is able to add real value to some of the conversations we have about investment plans or operating plans in the region that's extremely useful. So I think both of those -- those 2 appointments, I think, are bang on the sweet spot for us as we go forward.

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Operator [36]

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Your next question comes from Ketan Mamtora.

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Ketan Mamtora, BMO Capital Markets Equity Research - Analyst [37]

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Just on the log cost in the U.S. South. We had seen some uptick in log prices in the first half of the year. Presumably, some of it was driven by bad weather. Have you seen pricing come down as you look at the back half? Or are they still elevated?

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J. Barton Bender, Interfor Corporation - SVP of Sales & Marketing [38]

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Ketan, you're right in that in Q1, there was a little bit of an uptick in terms of log cost. Not huge but a little bit of an uptick. And most of it was seasonal weather conditions, some -- obviously some challenges in terms of supply at that point. Things improved a little bit in Q2. And in fact, they improved through Q2. So we anticipate that when we look at Q3, the log costs in the South are probably going to be on average to what we saw during much of 2018. Q1 was a little bit of an uptick, which, again, I characterize it more as an aberration and we're back into normal zone, comparable levels to what we saw the back part of 2018.

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Ketan Mamtora, BMO Capital Markets Equity Research - Analyst [39]

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Got it. That's helpful. And then just one other question on the Phase 2 projects. I noticed that you are now talking about investments through 2022, and earlier, it was to the 2021. Am I reading too much into it? Or have you all kind of said that, okay, maybe we need to go a little slower. Any thoughts or perspective?

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Duncan K. Davies, Interfor Corporation - President, CEO & Non-Independent Director [40]

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Well, that -- I can't remember who I was responding to but one of the lessons learned on the Phase 1 project is you're better off to sequence these things in a way that gives you more time in the ramp-up phase, Ketan. And so as we looked at the project schedule that we had originally designed, our conclusion was that we're better off to stretch it out a little bit. And -- so that the tail end of one of those projects is going to be pushed out a few months. And that's really what that reflects.

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Operator [41]

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There are no further questions. I turn the call back to the presenters for any closing remarks.

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Duncan K. Davies, Interfor Corporation - President, CEO & Non-Independent Director [42]

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Okay. Thanks, operator, and thanks, everybody. We very much appreciate your interest in our company. We're happy to respond to any questions that you might have. Marty and I are around for at least the next couple of hours here today if you have any follow-up you'd like on, or we'll be here around next week if you'd like to chat. Anyway, thanks very much. Have a good day, and we'll talk to you again at the end of the next quarter. Thanks, everybody.

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Operator [43]

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This concludes today's conference call. You may now disconnect.