Conifex announces 2016 annual results
By Conifex Timber Inc.
Feb. 22, 2017 - Conifex Timber Inc. has reported that adjusted EBITDA in the fourth quarter of 2016 increased to a record $9.3 million from $8.5 million in the previous quarter and $7.3 million in the same quarter of 2015. In 2016, adjusted EBITDA was a record $33.6 million, compared to $7.7 million in 2015. In the fourth quarter of 2016, we had net income of $5.1 million, or $0.24 per diluted share, compared to net income of $1.4 million or $0.07 per diluted share in the previous quarter, and a net loss of $0.3 million or $0.01 per share in the fourth quarter of 2015. Current quarter operating and net income included proceeds from the settlement of our business interruption insurance claim of $2.5 million. In 2016, our net income was a record $70.2 million, or $3.32 per diluted share, compared to a net loss of $17.3 million, or $0.82 per share, in 2015. Net income in 2016 included unusual or non-recurring items totaling $63.8 million.
Fourth Quarter 2016
Revenues were $102.0 million in the fourth quarter of 2016, $104.1 million in the previous quarter and $100.5 million in the fourth quarter of 2015. Compared to the previous quarter, a decline in lumber segment revenues of 5 per cent was partially offset by increased revenues from electricity sales, which accounted for 7 per cent of total revenues for the quarter.
We recorded operating earnings of $6.7 million in the fourth quarter of 2016 compared to $3.3 million in the previous quarter and $1.6 million in the same quarter last year. Compared to the previous quarter, lumber segment operating results were adversely impacted by lower shipment and production volumes and higher unit log costs and cash conversion costs. Bioenergy segment operating earnings increased by $5.7 million and included income from the settlement of our business interruption insurance claim of $2.5 million.
Net income for the current quarter was $5.1 million or $0.24 per diluted share. We recorded net income of $1.4 million or $0.07 per diluted share in the previous quarter and a net loss of $0.3 million or $0.01 per share in the fourth quarter of 2015.
Adjusted EBITDA was $9.3 million for the fourth quarter of 2016, $8.5 million in the previous quarter and $7.3 million for the fourth quarter of 2015.
Compared to the previous quarter, a modest decline in U.S. dollar-denominated WSPF #2 and Btr prices was more than offset by a weaker Canadian currency and resulted in a 1 per cent or $3 per thousand board feet increase in average Canadian dollar-denominated benchmark lumber prices.
Quarter-over-quarter revenues from Conifex produced lumber were 3 per cent lower and largely reflected a reduction in shipment volumes of 6 per cent offset by a 3 per cent increase in unit sales realizations. Although wholesale lumber shipments increased by 4 per cent, wholesale lumber revenues declined by 6 per cent due to shipments of a lower value product mix.
Production volumes of approximately 119 million board feet during the fourth quarter of 2016 were 13 per cent lower than the previous quarter. The lower operating rates were mainly attributable to a reduction in operating hours during the holiday season and additional planned downtime taken at the Mackenzie sawmill for capital upgrades.
An increase in unit log costs of 7 per cent during the current quarter was primarily attributable to higher market based stumpage and purchased log costs.
An increase in unit cash conversion costs of 12 per cent in the current quarter largely reflected lower operating rates.
Compared to the fourth quarter of 2015, U.S. dollar-denominated WSPF #2 and Btr prices increased by 20 per cent, while the Canadian currency was relatively flat. Average Canadian dollar-denominated benchmark lumber prices increased by 19 per cent, or $68 per thousand board feet.
Quarter-over-quarter revenues from Conifex produced lumber were 5 per cent higher, and mostly reflected a 17 per cent increase in unit sales realizations, partially offset by an 11 per cent reduction in shipment volumes. An increase in wholesale lumber revenues of 3 per cent was generally attributable to higher shipment volumes.
Due to our fiscal accounting periods, there were five less operating days in the fourth quarter of 2016 than in the fourth quarter of 2015. Operating rates in the current quarter were lower by 9 per cent as production was further hampered by downtime taken at the Mackenzie sawmill for capital upgrades and, to a lesser extent, weather related production inefficiencies.
Unit log costs increased by 11 per cent and cash conversion costs increased by 9 per cent quarter over quarter.
Lumber segment operating income was $2.9 million in the fourth quarter of 2016 compared to $5.6 million in the previous quarter and $0.5 million in the same quarter last year.
Our power generation plant at Mackenzie, B.C. (the "Mackenzie Plant") commenced commercial operations in May 2015 and its results are reported in our bioenergy segment.
The Mackenzie Plant sold 53.0 GWh of electricity under the EPA in the fourth quarter of 2016, which represented an increase of 41 per cent over the previous quarter and a modest decline from the fourth quarter of 2015. The plant achieved 97 per cent of targeted operating rates in the current quarter compared to 70 per cent and 98 per cent, respectively, in the previous quarter and the fourth quarter of 2015. Production in the third quarter of 2016 was hampered by maintenance downtime taken to effect certain operating improvements. The fourth quarter of 2016 had five fewer operating days than the same quarter last year.
The effective power rate is the highest during the first and fourth quarters of each year. Revenues from electricity sales were $7.6 million in the fourth quarter of 2016, $4.9 million in the previous quarter and $7.8 million in the fourth quarter of 2015. Operating costs in the fourth quarter of 2016 were $4.9 million, including depreciation expense of $1.6 million. Unit cash operating costs improved by approximately 8 per cent compared to the same quarter last year.
Normalized bioenergy segment operating income was $2.7 million in the fourth quarter of 2016 and $2.4 million in the fourth quarter of 2015. Interest on the power project term loan was $1.2 million. Adjusted EBITDA was $4.4 million and the adjusted EBITDA margin was 57 per cent, compared to $4.1 million and 52 per cent, respectively, in the fourth quarter of 2015.
Year Ended December 31, 2016
Revenues were $409.3 million in 2016 compared to $353.5 million in 2015. The 14 per cent growth in lumber segment revenues reflected increased shipment volumes of Conifex produced and wholesale lumber, stronger benchmark lumber prices and a weaker Canadian currency. Bioenergy segment revenues, which commenced in May 2015, increased by 55 per cent and accounted for 6 per cent of our total revenues for the year.
We recorded operating income of $18.2 million in 2016 compared to an operating loss of $11.6 million in 2015. An improvement in year-over-year lumber segment operating results of $23.8 million was primarily due to higher sales realizations, operating rates and shipment volumes, and to a lesser extent, reductions in unit log costs and cash conversion costs. Bioenergy segment operating earnings were $9.0 million in 2016 and included income from settlement of our business interruption insurance claim of $2.5 million. The bioenergy segment contributed operating earnings of $2.1 million last year.
Net income for the year ended December 31, 2016 was a record $70.2 million or $3.32 per diluted share compared to a net loss of $17.3 million or $0.82 per share for the prior year. Unusual or non-recurring items recorded in the current year totaled $63.8 million and were comprised of a gain on sale of assets of $48.0 million, a net gain on revaluation of certain assets of $13.3 million, and income from settlement of our business interruption insurance claim of $2.5 million. Net income was adversely impacted by a negative variance in foreign exchange translation loss of $3.8 million.
There was no income tax expense recorded in 2016 due to the utilization of operating loss carry forwards from prior years.
Adjusted EBITDA, which excludes the unusual or non-recurring items, was $33.6 million for 2016 and $7.7 million in 2015.
Liquidity and Capital Resources
In addition to our continued focus on operational improvements and targeted capital expenditures, we completed a number of initiatives in 2016 to strengthen our balance sheet, lower borrowing costs and improve liquidity.
Our net debt to capitalization ratio was 38 per cent at December 31, 2016 compared to 60 per cent at the end of 2015. Net debt at December 31, 2016 was $49.4 million lower than at December 31, 2015 due primarily to improved cash flow generated from operations and proceeds received from asset disposals and the settlement of our insurance claim.
Our net debt to capitalization ratio, excluding borrowings for our power subsidiary that are non-recourse to our other operations, was 16 per cent at December 31, 2016 compared to 26 per cent at December 31, 2015.
Total liquidity comprised unrestricted cash and available credit under our revolving credit facilities. At December 31, 2016, we had total liquidity of $22.3 million, compared to $22.6 million at the end of 2015.
Subsequent to the year end, in January 2017, we completed our previously announced $130 million secured revolving credit facility (the "Facility") with a syndicate of institutional lenders. The Facility is available for a term of 5 years and is secured by substantially all of Conifex's assets (excluding the bioenergy segment assets). After giving effect to the financing, our total liquidity was approximately $84.5 million.
Looking ahead in 2017, we expect the U.S. market to continue its gradual recovery in both the housing and repair and remodelling sectors. We agree with forecasts calling for an approximate 7 per cent increase in North American lumber consumption, and expect benchmark prices to increase to reflect strengthening softwood lumber demand and to somewhat correlate with the imposition of any countervailing and / or anti-dumping duties or other trade sanctions. The extent to which the anticipated increase in U.S. housing demand translates into higher selling prices will also be influenced by supply side responses from Canadian and other suppliers into the U.S. market. The uncertainty related to the timing and magnitude of anticipated trade sanctions may increase market volatility.
We expect our sales volume to China and Japan will remain steady and intend to continue to develop sales into other export markets.
In the lumber segment, we continue to remain focused on a number of initiatives to enhance operations and cash flow, including cost management and productivity improvements from affordable, high-return capital projects. We expect operating rates to remain somewhat muted in the first quarter of 2017 due to the expected ramp up period associated with the installation of a significant capital upgrade at Mackenzie in December 2016. Accordingly, we also expect shipment volumes to be somewhat hampered by lower production volumes and potential constraints on the external supply chain. Overall in 2017, we expect higher log costs and modest improvements in unit cash conversion costs and grade outturns.
We will continue to work towards optimizing performance of the Mackenzie Plant and expect improved operating results from higher electricity deliveries and further unit cost reductions.