Conifex reports $13.2M drop in Adjusted EBITDA in Q2 2019
Conifex Timber Inc. today reported results for the second quarter ended June 30, 2019. Adjusted EBITDA from continuing operations was negative $13.2 million for the quarter, which represented a decrease of $10.5 million over the first quarter of 2019, primarily attributable to reduced operating earnings. An increase in EBITDA from continuing operations of $2.0 million compared to the previous quarter was primarily attributable to improved net earnings. Compared to the first quarter of 2019, adjusted EBITDA for the lumber segment declined by $6.8 million, for the bioenergy segment declined by $3.2 million and for corporate and other unallocated items declined by $0.5 million. Lumber segment adjusted EBITDA included softwood lumber duties expense of $2.5 million in the second quarter of 2019, $3.8 million in the first quarter of 2019 and $8.2 million in the second quarter of 2018.
Consolidated net earnings
During the second quarter of 2019, Conifex incurred a net loss of $9.1 million, or $0.19 per share, compared to a net loss of $11.9 million, or $0.25 per share, in the previous quarter and net income of $9.2 million, or $0.35 per share, in the second quarter of 2018.
Lumber segment – continuing operations
Operating rates at Conifex’s mills
Conifex’s lumber segment operating results were hampered by lower operating rates, which resulted in higher unit cash conversion costs at the company’s Fort St. James sawmill complex (the FSJ Mill) and the company’s El Dorado and Glenwood, Ark., mills in the first half of 2019 and the company’s Mackenzie, B.C. mill (the Mackenzie Mill) in the second quarter of 2019.
In response to market conditions characterized by lower lumber prices, continued imposition of softwood lumber duties, and elevated log costs in the northern interior of B.C., the company implemented a temporary change in operating format at its FSJ Mill in January 2019, which reduced investment in working capital and overall operating costs. Additionally, similar to a number of other B.C. Interior lumber producers, Conifex undertook temporary production curtailments at its B.C. mills. Production at the FSJ Mill was curtailed for a three-week period in February 2019 and has been largely curtailed since May 2019. Production at the Mackenzie Mill was curtailed for four weeks in May 2019 and resumed in early June on a modified four-day, two-shift configuration. Subsequent to quarter end, Conifex announced further temporary curtailments of the Mackenzie Mill for a five-week period.
The company’s U.S. mills produced Southern Yellow Pine (SYP) lumber at an annualized run rate of approximately 348 million board feet in the second quarter of 2019, 418 million board feet in the first quarter of 2019 and 100 million board feet in the second quarter of 2018. Production levels in the first half of 2019, on an annualized basis, represented approximately 82 per cent of targeted levels for 2019 and 70 per cent of two-shift dimension lumber production capacity of 550 million board feet.
The El Dorado and Glenwood mills were converted to single-shift operating configurations on June 4 and June 17, 2019, respectively. Conifex plans to extend operating hours at the Glenwood mill over the next several months. The lower operating rates at the company’s Arkansas mills are expected to improve hourly productivity and reduce overall operating costs and investment in working capital. Conifex’s Cross City mill continues to contribute positively to operating results.
Lumber segment operating results
Prices for the bell-weather WSPF #2 & Btr product averaged U.S. $333 during the second quarter of 2019, a decline of 10 per cent from the previous quarter and 44 per cent from the second quarter of 2018. Benchmark prices for SYP Westside averaged U.S. $371 during the second quarter of 2019, a decline of 8 per cent from the previous quarter and 35 per cent from the second quarter of 2018.
The U.S. dollar averaged U.S. $0.748 for each Canadian dollar during the second quarter of 2019, a level generally consistent with the previous quarter and represented a weakening of the Canadian dollar of 3 per cent compared to the same quarter last year. Canadian dollar-denominated benchmark WSPF prices, which averaged $445 in the second quarter of 2019, declined by 10 per cent or $50 from the previous quarter and 42 per cent or $327 from the second quarter of 2018.
Shipments of Conifex produced lumber, which totaled approximately 149 million board feet in the second quarter of 2019, outpaced total production by over 14 million board feet in the current quarter and by 20 million board feet in the first half of 2019. Shipments of Conifex produced lumber declined by 19 per cent from the previous quarter and by 5 per cent from the second quarter of 2018.
Revenues from Conifex produced lumber were $73.6 million in the second quarter of 2019 and represented declines of 24 per cent from the previous quarter and 31 per cent from the second quarter of 2018. Compared to the prior quarter, lower revenues were mainly attributable to reductions in shipment volumes of Conifex produced lumber of 19 per cent and in unit sales realizations of 6 per cent. Compared to the second quarter of 2018, the lower revenues were primarily due to decreases in unit sales realization of 27 per cent and in shipment volumes of 5 per cent.
Wholesale lumber revenues and shipments varied in the comparative quarters but were generally consistent on a year-to-date basis. Our wholesale lumber shipments and revenues can fluctuate widely from time to time depending on market conditions and opportunities for profitable trades.
Unit log costs increased by 6 per cent over the previous quarter and 19 per cent over the same quarter last year at Conifex’s B.C. mills. The higher log costs were mainly attributable to higher market based stumpage and purchased log costs. Unit log costs at Conifex’s El Dorado and Cross City mills were generally consistent with the prior quarter. The company experienced higher unit log costs and periodic production disruptions at its Glenwood mill due to extremely wet weather conditions, particularly in the first quarter of 2019, which constrained log availability and heightened local competition for logs.
An increase in depreciation and amortization expense of $6.5 million in the first six months of 2019 compared to the same period last year was largely attributable to the company’s expanded operations in the U.S. South.
Conifex recorded an inventory write-down of $0.4 million in the second quarter of 2019 compared to positive valuation adjustments of $1.6 million in the previous quarter and $0.6 million in the second quarter of 2018.
The company expensed countervailing and anti-dumping duty deposits of $2.5 million in the second quarter of 2019, $3.8 million in the previous quarter and $8.2 million in the second quarter of 2018. The duty deposits were based on a combined rate of 20.23 per cent.
The lumber segment recorded operating losses of $19.1 million in the second quarter of 2019 and $13.5 million in the previous quarter and operating income of $14.9 million in the second quarter of 2018. Compared to the previous quarter, lumber segment operating results were hampered by lower shipment volumes, sales realizations and operating rates, higher unit log and cash conversion costs and unfavourable quarter-over-quarter variance in inventory valuations. Compared to the second quarter of 2018, lumber segment operating results were challenged by significantly weaker lumber prices resulting in lower sales realizations, reduced shipment volumes and operating rates, and higher unit log and cash conversion costs. These factors were partially offset by a lower duty deposit expense.
Lumber segment EBITDA was negative $12.8 million in the second quarter of 2019 compared to negative $6.0 million in the previous quarter and $18.1 million in the second quarter of 2018. Lumber segment EBITDA was negative $18.9 million for the six months ended June 30, 2019 and $24.7 million for the six months ended June 30, 2018.
Conifex expects the reduction in lumber shipments to follow from the recent announcements of production curtailments from a number of B.C. lumber producers, coupled with more normal demand will result in better balanced lumber markets and higher prices. The company expects lumber prices to gradually increase through the remainder of this year and 2020, and for pricing to stabilize in the mid-term at levels that are reasonably high by historic standards. Conifex continues to believe that the factors that shape mid-term demand for lumber are solid.