Conifex announces Q2 2015 results
August 6, 2015 - Conifex Timber Inc. today reported a net loss of $13.0 million or $0.62 per share for the second quarter of 2015 compared to net income of $1.6 million or $0.08 per diluted share for the previous quarter and net income of $2.0 million or $0.10 per diluted share for the second quarter of 2014. Net loss for the first six months of 2015 was $11.4 million or $0.55 per share compared to net income of $3.6 million or $0.17 per diluted share over the same period last year.
Summarized operating results and statistics for each of the comparison periods are provided below.
(1) EBITDA represents earnings before interest, taxes, depreciation and amortization. The company discloses EBITDA as it is a measure used by analysts and by Conifex's management to evaluate the company's performance. As EBITDA is a non-GAAP measure, it may not be comparable to EBITDA calculated by others and is not a substitute for net earnings.
(2) The calculation of diluted net income per share excludes the assumed conversion of convertible notes and/or the assumed exercise of outstanding warrants if the resulting effect on net income per share is anti-dilutive. (3) Source: Bank of Canada website www.bankofcanada.ca
(4) Source: Random Lengths Publications Inc.
(5) Average WSPF 2x4 #2&Btr lumber price (US$) divided by average exchange rate
Compared to the first quarter of 2015, the negative variance in net income of $14.6 million was largely attributable to a sequential decline in lumber segment operating income of $10.1 million, an operating loss in the bioenergy segment of $0.5 million, increased interest expense related to the power project construction loan of $0.8 million and an adverse quarter over quarter change of $3.0 million from currency rate fluctuations.
EBITDA was negative $6.8 million in the second quarter of 2015 and represented declines of $12.5 million from the previous quarter and $13.0 million from the second quarter of 2014.
According to data published by the U.S. Census Bureau, U.S. privately-owned housing starts averaged a seasonally adjusted annualized rate of approximately 1.14 million over the second quarter of 2015, which represented an improvement of approximately 16% over the previous quarter and the second quarter of 2014. Seasonally adjusted single-family housing starts increased by 9% over the previous quarter and 13% over the second quarter of 2015. Although a number of recent economic indicators collectively point towards an underlying strength in the U.S. housing market recovery, this positive trend was not evident in benchmark lumber prices during the quarter. The lumber price for the bellwether WSPF 2x4 #2 & Btr ("WSPF") averaged US$271 during the second quarter of 2015, the lowest quarterly average price since early 2012. Canadian dollar denominated benchmark prices declined by 12%, or $45 per thousand board feet, from the previous quarter due to a weakening in WSPF prices of 11% and the marginal strengthening of the Canadian dollar of 1%. Compared to the second quarter of 2014, Canadian dollar denominated benchmark prices declined by 9% as a decline in WSPF prices of 19% was partially offset by a 10% weaker Canadian currency against the U.S. dollar.
Weaker WSPF prices during the second quarter of 2015 were generally attributed by industry analysts to increased supply in North America due to fewer offshore shipments and mild weather conditions in North America which alleviated supply chain constraints, and to the weaker Canadian currency which tends to erode U.S. dollar denominated lumber prices.
Shipments of Conifex produced lumber totaled 116 million board feet during the quarter, an increase of 3% over the previous quarter, and a decline of 21% over the same quarter last year when record shipment volumes for the Company were reported due to the clearing of shipment backlogs from significant industry wide transportation disruptions in the first quarter of 2014. Shipments of Conifex produced lumber totaled 229 million board feet for the first six months of 2015, a decline of 6% from the same period last year. Production volumes of 118 million board feet were similar to the previous quarter and 12% lower than the second quarter of 2014.
The export tax rate on shipments to the U.S. reflected lower average Random Lengths Framing Lumber Composite Prices and averaged 7% during the second quarter of 2015 compared to zero percent during the previous quarter and the second quarter of 2014.
The lumber segment recorded an operating loss of $8.1 million for the second quarter of 2015 compared to operating income of $2.0 million in the first quarter of 2015 and $5.4 million in the second quarter of 2014. Lumber segment EBITDA for the second quarter of 2015 was negative $5.0 million compared to positive $4.7 million for the previous quarter and $8.0 million for the second quarter of 2014.
Compared to the previous quarter, the variance in lumber segment operating results was due primarily to lower mill net realizations from a 12% decline in Canadian dollar denominated benchmark prices and, to a lesser extent, the imposition of export taxes and shipment of a weaker product mix. An increase in unit cash conversion costs of 5% was partially offset by improvement in unit log costs of 2%.
The primary factors contributing to the decrease in lumber segment operating results of $13.5 million compared to the second quarter of 2014 included significantly lower shipment and production volumes, a decline in mill net realizations due to 9% lower Canadian dollar denominated benchmark prices and higher export tax rates, and higher unit log costs.
On a year-to-date comparative basis, current year net income was adversely impacted mostly by lower shipment volumes, operating rates and mill net realizations and significantly higher log costs.
The commencement of commercial operations at the Mackenzie power generation plant in May 2015, reported in the bioenergy segment, contributed $2.6 million in revenues from external sources in the second quarter of 2015. Operating loss for the two months was $0.5 million and included depreciation of $1.0 million. Bioenergy segment EBITDA was $0.5 million and included interest expense of $0.8 million.
Although electricity revenues from BC Hydro under the Electricity Purchase Agreement are based upon a fixed base price per MWh, the application of a "time of delivery factor" ("TDF") to the base unit price adds a seasonal effect to quarterly revenues. The TDF is expected to produce considerable variability in quarterly revenues with the lowest revenues generated in the second quarter and the highest in the first and fourth quarters of each year.
In May 2015, the power plant achieved 69% of targeted operating rates, with performance hampered by downtime associated with boiler cleaning, reduced output associated with post commissioning boiler tuning and preparation of the unit for performance testing. In June 2015, the first full month of operations post performance testing and final boiler tuning, the power plant achieved 98% of targeted operating rates. Operating costs for the second quarter of 2015 were higher than budgeted due primarily to costs related to the use of outside services contractors. Operating costs are expected to normalize in the third quarter of 2015.
Management expects that general economic activity and the residential construction sector in the U.S. will continue its gradual recovery. We expect sustainable lumber price improvements will remain vulnerable to the strength of the U.S. housing market, supply side response to varying demand, and the volatility and magnitude of offshore demand and of fluctuating currency rates. We expect overall shipment levels to the Canadian and Japanese markets to remain relatively constant, while shipments to the U.S. and Chinese markets will fluctuate depending on market and pricing dynamics. Export taxes on U.S. shipments are expected to average 6% to 8% for the third quarter of 2015. We expect operating rates in the upcoming quarter to remain largely consistent with the first six months of the year despite the two week downtime taken at the Fort St. James mill in July 2015. Production was temporarily curtailed to accommodate a capital project, consolidate seasonal vacation time, and to lessen exposure to the punitive 15% export tax applicable to U.S. shipments in July 2015. We expect the ongoing focus on cost management and mill uptime and reliability, and the benefits of further capital upgrades, will result in sustainably lower unit cash conversion costs. We expect log costs will remain stable or slightly decline over the last half of the year.
The company had unrestricted cash balances of $10.2 million at June 30, 2015, $10.1 million at December 31, 2014, and $12.4 million at June 30, 2014. At June 30, 2015, the Company had operating working capital of $33.7 million invested primarily in its lumber segment operations. Net debt increased by $15.1 million during the first six months of 2015 due primarily to additional drawings of $5.3 million on the Company's asset backed revolving credit facility and demand revolving loan and $9.6 million on the construction loan for the power generation project. Excluding borrowings related to the power generation project, which is largely structured on a non-recourse basis to the lumber segment assets and to the parent company, Conifex Timber Inc., the Company ended the second quarter of 2015 with a net debt to capitalization ratio of 30% compared to 25% at December 31, 2014.
Subsequent to the end of the second quarter of 2015, the company received approximately $4.5 million of interim insurance proceeds and the balance of $6.6 million of incentive funding related to the power generation project.
As previously announced, on July 30, 2015, Conifex Power Limited Partnership completed the term conversion of the project financing facility. As a result of the term conversion, the construction loan portion of the project financing has matured and been converted into a term loan that matures on December 1, 2019 (the "Term Loan") and has an 18 year amortization schedule. The project financing continues to include a letter of credit facility and a $1.75 million revolving operating facility until the maturity date of the Term Loan.
On August 4, 2015, our wholly-owned subsidiary, Conifex Inc., completed its previously announced investment agreement with Canfor Corporation ("Canfor"), pursuant to which Conifex Inc. issued a $30 million senior secured note (the "Note").
The Note has a term of five years, bears no interest for the first two years with interest of 5% per annum thereafter until maturity and is secured by, among other things, a first lien on a forest licence with 200,000 m3 of annual cut held indirectly by a subsidiary of Conifex Inc. (the "Subsidiary"). Conifex Inc. can elect after 17 months to pay the principal amount of the Note by the transfer of all of the issued common shares of the Subsidiary. Additionally, Canfor has the option, exercisable after 12 months, to convert the Note into an ownership interest in the forest licence. The proceeds of the Note are planned to be used for general corporate purposes.
Outlook and strategy
In the near-term, management continues to remain focused on a number of initiatives to enhance lumber segment operations and cash flow, including continued heightened cost management and productivity improvements from affordable, high-return capital projects at Fort St. James and Mackenzie.
The company is currently completing its review to evaluate the optimal capital upgrade for its recently acquired El Dorado Mill, following which management expects to determine the priority in which to rebuild its currently idled Mackenzie Site I mill or the El Dorado Mill. Over the longer term, the company expects to undertake the capital upgrades to rebuild both of these mills.
There will be a conference call held by the Company on Thursday, August 6, 2015 at 8:00 AM Pacific time / 11:00 AM Eastern Time to discuss the second quarter financial and operating results. To participate in the call, please dial 416-340-2218 or toll free 866-223-7781. The call will also be available on instant replay access until September 6, 2015 by dialling 905-694-9451 or 800-408-3053 and entering participant pass code 5228266#.
The company's management's discussion and analysis and financial statements for the three months ended June 30, 2015 will be available under the Company's profile on SEDAR at www.sedar.com.
About Conifex Timber Inc.
Conifex and its subsidiaries' primary business currently includes timber harvesting, reforestation, forest management, sawmilling logs into lumber and wood chips, and value added lumber finishing and distribution. Conifex's lumber products are sold in the United States, Chinese, Canadian and Japanese markets. Conifex has expanded its operations to include bioenergy production following the commencement of commercial operations of its power generation facility at Mackenzie, British Columbia.
Certain statements in this news release may constitute "forward-looking statements". Forward-looking statements are statements that address or discuss activities, events or developments that the Company expects or anticipates may occur in the future. When used in this news release, words such as "estimates", "expects", "plans", "anticipates", "projects", "will", "believes", "intends" "should", "could", "may" and other similar terminology are intended to identify such forward-looking statements. Forward-looking statements reflect the current expectations and beliefs of the Company's management. Because forward-looking statements involve known and unknown risks, uncertainties and other factors, actual results, performance or achievements of the Company or industry may be materially different from those implied by such forward-looking statements. Examples of such forward-looking information that may be contained in this news release include statements regarding: growth and future prospects of our business; our perceptions of the industry and markets in which we operate and anticipated trends in such markets and in the countries in which we do business; benefits that may accrue to the Company as a result of certain capital expenditure programs; U.S. benchmark lumber prices; unit cash conversion costs; the Company's net debt to capitalization ratio; that the Mackenzie mills will incorporate the recently determined harvest levels for the Mackenzie Timber Supply Area; and the anticipated benefits, cost, timing and completion dates for projects and the recording of any revenues therefrom. Assumptions underlying the Company's expectations regarding forward-looking information contained in this news release include, among others: that the Company will be able to effectively market its products; that the U.S. housing market will continue to improve; that there will be no disruptions affecting the operations of the power generation project at the Company's Mackenzie facility and that the Company will be able to achieve timely delivery of power therefrom; that softwood lumber will experience sustained demand in the marketplace; the general stability of the economic, political and regulatory environments within the countries where the Company conducts operations; the ability of the Company to obtain financing (if necessary) on acceptable terms or at all; that interest and foreign exchange rates will not vary materially from current levels; and that the equipment at our mills and power generation facility will operate at expected levels.
Forward-looking statements involve significant uncertainties, should not be read as a guarantee of future performance or results, and will not necessarily be an accurate indication of whether or not such results will be achieved. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements, including, without limitation: those relating to potential disruptions to production and delivery, including as a result of equipment failures, labour issues, the complex integration of processes and equipment and other factors; labour relations; failure to meet regulatory requirements; changes in the market; potential downturns in economic conditions; fluctuations in the price and supply of required materials, including log costs; fluctuations in the market price for products sold; foreign exchange fluctuations; trade restrictions or import duties imposed by foreign governments; availability of financing (as necessary); shipping or logging disruptions; and other risk factors described in the Company's 2014 annual information form, available on SEDAR at www.sedar.com. These risks, as well as others, could cause actual results and events to vary significantly. Accordingly, readers should exercise caution in relying upon forward-looking statements and the Company undertakes no obligation to publicly revise them to reflect subsequent events or circumstances, except as required by law.
August 6, 2015 By Marketwired/Conifex Timber Inc.
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