Conifex announces net earnings of $26.1M in Q2 2021
Conifex Timber Inc. today reported results for the second quarter ended June 30, 2021. EBITDA from continuing operations was $37.8 million versus negative EBITDA of $1.2 million in the second quarter of 2020. Net earnings were $26.1 million or $0.56 per share in the quarter versus a loss in the year-earlier quarter of $0.06 per share. The results reflect record-high lumber prices, increased shipments with the easing of railcar supply challenges, and strong results at our power plant.
Summary of second quarter 2021 results
Consolidated net earnings
During the second quarter of 2021, Conifex recognized net income from continuing operations of $26.1 million, or $0.56 per share compared to $4.5 million or $0.10 per share in the previous quarter and a net loss of $2.7 million or $0.05 per share in the second quarter of 2020.
North American lumber market prices climbed considerably through most of the quarter, reaching a record high of US$1,630 in May 2021. In June, market prices began a continued slide from the historically elevated levels driven by a slowdown in North American repair and remodelling activities and elevated lumber inventory supply in the market. U.S. housing starts on a seasonally adjusted annual basis averaged 1,550,000 in the second quarter of 2021, down four per cent from the previous quarter and up 44 per cent from the second quarter of 2020. During the quarter, home construction activity for the single-family housing market remained strong, while multi-family housing starts declined. Lumber consumption per unit in single-family housing starts is generally considered to be two to three times greater than in multi-family housing starts.
The U.S. dollar averaged US$0.814 for each Canadian dollar during the second quarter of 2021, a level which represented a strengthening of the Canadian dollar over the previous quarter. Canadian dollar-denominated benchmark Western Spruce/Pine/Fir (WSPF) prices, which averaged $1,584 in the second quarter of 2021, increased by 27 per cent or $340 from the previous quarter and by 221 per cent or $1,090 from the second quarter of 2020. The sustained lumber demand, coupled with the impact of supply disruptions caused by railcar supply challenges, resulted in an overall increase to the benchmark WSPF lumber price during the quarter.
Conifex’s lumber production in the second quarter of 2021 totalled approximately 49.0 million board feet, representing operating rates of approximately 82 per cent of annualized capacity. In the previous quarter, 51.0 million board feet of lumber was produced. The decrease in lumber production for the second quarter primarily reflected challenging logging conditions characterized by unseasonal wet weather through the quarter, combined with high wildfire risk late in the last two weeks of the quarter. The wildfires in the B.C. Interior and the related provincial state of emergency led to a government mandated curtailment of all forest harvesting activities and impacted log availability at Conifex’s sawmill late in the quarter and through July. In the second quarter of 2020, 2.4 million board feet of lumber was produced due to the curtailment of the company’s Mackenzie sawmill for most of the quarter.
Shipments of Conifex produced lumber totalled 55.5 million board feet in the second quarter of 2021, representing an increase of 47 per cent from the 37.8 million board feet shipped in the previous quarter and an increase of 553 per cent from the 8.5 million board feet of lumber shipped in the second quarter of 2020. As railcar supply challenges eased in the quarter, shipments of Conifex produced lumber increased significantly. Conifex’s wholesale lumber program shipped 5.8 million board feet in the second quarter of 2021, representing an increase of 729 per cent from the 0.7 million board feet shipped in the first quarter of 2021 and an increase of 263 per cent from the 1.6 million board feet shipped in the second quarter of 2020.
Revenues from lumber products were $89.1 million in the first quarter of 2021 representing an increase of 120 per cent from the previous quarter and an increase of 1,410 per cent from the second quarter of 2020. Compared to the previous quarter, the higher revenues in the current quarter were driven by higher shipment volumes and higher realized lumber prices. Decreased revenues during the second quarter of 2020 were primarily the result of the curtailment of Conifex’s Mackenzie sawmill. Conifex’s lumber is typically sold two to four weeks in advance of its shipment date, resulting in a lag in the company’s realized lumber prices when compared to concurrent reported lumber prices. As a result, the sharp decline in lumber prices since June 2021 will be realized in the third quarter of 2021.
Cost of goods sold in the second quarter of 2021 increased by 65 per cent from the previous quarter and increased by 428 per cent from the second quarter of 2020. The increase in cost of goods sold from the prior quarter is due to higher overall shipments in the current quarter, including higher volumes of wholesale shipments, and higher log costs. Unit manufacturing costs remained steady in comparison to the previous quarter and were significantly below the second quarter of 2020 as a result of the curtailment of Conifex’s sawmill in the prior year.
Conifex expensed countervailing (CV) and anti-dumping (AD) duty deposits of $5.3 million in the second quarter of 2021, $2.5 million in the previous quarter and $0.3 million in the second quarter of 2020. The duty deposits were based on a combined rate of 20.23 per cent until December 1, 2020 and 8.99 per cent thereafter. The export taxes during the second quarter of 2021 were significantly greater than the previous quarter due to the higher lumber shipment volumes made to the U.S. market.
Conifex’s Mackenzie power plant sold 50.9 gigawatt hours of electricity under our Electricity Purchase Agreement (EPA) with BC Hydro and Power Authority (BC Hydro) in the second quarter of 2021 representing approximately 90 per cent of targeted operating rates. The company’s Mackenzie power plant sold 25.0 and 51.2 gigawatt hours of electricity in the previous quarter and second quarter of 2020, respectively. The increase in production in the second quarter of 2021 over the prior quarter is mainly attributable to the successful recommissioning of the power plant on February 21, 2021 following a disruption beginning in December 2020 caused by damage to the plant’s generator. The disruption resulted in 49 days of unplanned downtime during the first quarter of 2021.
Conifex has submitted an insurance claim for physical damage to its equipment and for the loss of revenues from the interruption of operations. The company expects to be fully reimbursed for capital expenditures related to the replacement of our generator, subject to deductible amounts, and for lost income for the period covered under our business interruption policy, being the period between the expiry of the waiting period and the recommencement of the power plant. Conifex has recognized $2.8 million as other income in the second quarter of 2021 to reflect our best estimate of the expected settlement for lost income under our business interruption policy.
The company’s EPA with BC Hydro, similar to other electricity purchase agreements, provides BC Hydro with the option to “turn down” electricity purchased from the company during periods of low demand by issuing a “dispatch order”. In April 2021, BC Hydro issued a dispatch order for 61 days, from May 1 to June 30, 2021. In 2020, Conifex’s power plant was dispatched for 117 days, from April 24 to August 19, 2020. Conifex continues to be paid revenues under the EPA based upon a reduced rate and on volumes that are generally reflective of contracted amounts. During any dispatch period, Conifex continues to produce electricity to fulfill volume commitments under our Load Displacement Agreement with BC Hydro.
Conifex expects a reduction in lumber shipments to follow from the recent announcements of production curtailments from a number of B.C. lumber producers, sustained robust demand from U.S. housing starts and a recovery of repair and remodelling activities will result in better balanced lumber markets and a gradual recovery of lumber prices through the remainder of the year. At Conifex’s Mackenzie sawmill, the company expects to achieve annualized operating rates of approximately 90 per cent in the third quarter, ramping up to annualized operating rates approaching 100 per cent through the fourth quarter of 2021. Conifex’s Mackenzie power plant is forecasted to operate at full capacity and continue to generate a steady and diversified source of cash flow, with seasonally stronger EBITDA contributions expected in the closing quarter of 2021.
As Conifex’s liquidity and financial position are forecasted to continue to remain strong in the second half of 2021, funding quick payback sawmill upgrades and the company’s NCIB program remain key priorities. The company believes that its strengthened liquidity position will allow it to manage any further market volatility that may arise in the coming months.