Wood Business

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Conifex regains momentum

Aug. 6, 2014 - Conifex Timber Inc. reported net income of $2.0 million or $0.10 per iluted share for the second quarter of 2014 compared to net income of $1.6 million or $0.08 per diluted share for the previous quarter and net income of $2.4 million or $0.12 per diluted share for the second quarter of 2013. Net income for the first six months of 2014 was $3.6 million or $0.17 per diluted share compared to net income of $8.6 million or $0.42 per diluted share over the same period last year.

The company recorded consolidated operating income of $4.4 million for the second quarter of 2014 compared to $2.8 million in the previous quarter, and $3.3 million in the second quarter of 2013. Lumber segment operating income improved by $1.0 million over the previous quarter and $0.7 million over the same quarter last year. The company recorded a foreign exchange translation loss of $0.8 million for the second quarter of 2014 and $0.2 million in the second quarter of 2013 compared to a translation gain of $0.2 million in the previous quarter. Second quarter 2014 EBITDA of $5.9 million was comprised of lumber segment EBITDA of $8.0 million offset by corporate costs and other items of $2.1 million. Lumber segment EBITDA improved by $1.0 million over the previous quarter and $1.2 million over the second quarter of 2013.

WSPF #2 & Btr ("WSPF") prices averaged US$335 during the second quarter of 2014, a decline of US$32 per thousand board feet or 9% from the previous quarter. Conifex believes that the quarter over quarter decline in prices was largely attributable to slower than expected pace of recovery in U.S. housing markets and a significant increase in shipment volumes to North American and export markets as the transportation disruptions which held back shipments during the previous quarter eased. Benchmark prices were largely flat compared to the second quarter of 2013. The Canadian currency strengthened by 1% over the previous quarter and weakened by 6% compared to the second quarter of 2013.

Shipments of Conifex produced lumber increased by 53% over the previous quarter, during which shipments were constrained by seasonal rail car shortages and a truckers' strike at the main container port in Vancouver, British Columbia, and by 23% over the second quarter of 2013. The company continued to experience steady demand from its key markets, and the proportion of year-to-date shipment volumes of Conifex produced lumber that went to export markets was relatively consistent with volumes shipped during the first six months of 2013. The export tax rate on shipments to the U.S. was zero per cent during the first six months of 2014 and 2013.

On February 3, 2014, the Company completed the acquisition of Lignum Forest Products LLP ("Lignum"), a private partnership which operated a lumber marketing and distribution business. Lignum serves customers and distributes products that the company believes are complementary to those of Conifex. The addition of Lignum contributed towards a quarter over quarter increase in wholesale lumber revenues of 86% and wholesale lumber shipments of 74%.

Compared to the previous quarter, gross revenues from shipments of Conifex produced lumber increased by 42% as a result of higher shipment volumes, which were partially offset by a 7% decline in unit gross sales realizations. Quarter over quarter unit mill net realizations declined by 9% and largely mirrored the 10% downward movement in Canadian equivalent benchmark prices. Compared to the second quarter of 2013, gross revenues from shipments of Conifex produced lumber increased by 29% and reflected a 23% increase in shipment volumes and a 6% increase in unit gross sales realization. Unit mill net realizations, dampened by an increase in freight and distribution costs and less favourable product mix, increased by 1% and did not fully reflect the 7% improvement in Canadian equivalent benchmark prices. The balance of the increase in total gross revenues from lumber shipments of 52% over the previous quarter and 61% over the second quarter of 2013 was due to the growth in wholesale lumber revenues with the addition of Lignum in February 2014. On a year-to-date basis, gross revenues from shipments of Conifex produced lumber increased by 7% over the same period last year with the improvement primarily attributable to higher average lumber prices.

Lumber production volumes of approximately 135 million board feet reflected an increase of 5% over the previous quarter and were similar to volumes recorded in the second quarter of 2013.

The improvement in lumber segment operating income of $1.0 million over the previous quarter was largely attributable to a 53% increase in shipments of Conifex produced lumber, 40% increase in revenue from residuals, and 10% improvement in unit cash conversion costs, partially offset by average unit mill net realizations that were lower by 9%. Compared to the second quarter of 2013, the benefits of a 6% weaker Canadian dollar, 23% increase in shipments of Conifex produced lumber, 40% increase in revenue from residuals and slight improvement in unit mill net realizations were largely offset by a 6% increase in unit log costs and 11% increase in unit cash conversion costs and resulted in a modest improvement of $0.7 million in lumber segment operating income.

Management expects steady demand from the North American market to continue during the third quarter of 2014 and a moderate seasonal tapering in the fourth quarter. Management views the recent improvement in WSPF lumber prices as sustainable, with demand and production now in alignment since the remaining excess inventory created by earlier transportation disruptions appears to have largely cleared. Demand from the Chinese market is expected to remain solid for the remainder of the year while Japanese market demand is expected to remain at the softer levels experienced during the first half of 2014. With production now reaching an annualized rate of close to 100% of current operating capacity of 525 million board feet, increased focus will be placed on initiatives to further improve unit cash conversion costs. These gains are expected to more than offset slightly higher log and labour costs and contribute to further growth in lumber segment profitability.

The Company's power generation project, which is under construction at Mackenzie, B.C., is currently on budget and proceeding as scheduled, with an expected commercial operation date late in the third quarter of 2014.

At June 30, 2014, the Company had cash on hand of $15.4 million compared to $18.6 million at December 31, 2013. During the second quarter of 2014, net non-cash working capital was reduced by $17.6 million as the seasonal build of log inventories in the preceding quarters was drawn down and finished goods inventory was reduced as industry wide transportation challenges eased. The company ended the second quarter of 2014 with consolidated net debt of $86.6 million (December 31, 2013 - $44.0 million) and net debt to capitalization ratio of 42% (December 31, 2013 - 27%). As at June 30, 2014, excluding borrowings under the project financing facility 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., net debt was $30.4 million (December 31, 2013 - $21.2 million) and the net debt to capitalization ratio was 20% (December 31, 2013 - 15%).

Outlook and Strategy

The company is executing a strategy to grow and add value to its business. Management has been executing against this plan since the company's management restructuring late in 2012. The momentum established in 2013 in terms of increasing production volumes and expanding profit margins is expected to continue through the balance of 2014.

Through the balance of the year, the company expects to complete its power generation project on budget, and to commence deliveries of electricity late in the third quarter of 2014. The company also expects to establish a long-term plan for its idled and operating Mackenzie mills following the release of information regarding future sawlog harvest levels in the Mackenzie Timber Supply Area by the Ministry of Forests, Lands and Natural Resources Operations.