Conifex reports 2015 financial results
February 25, 2016. – Conifex Timber has reported a loss of $17.3 million for 2015 as a result in a decline in lumber revenues.
By Andrew Macklin
2015, EBITDA was $7.7 million, compared to $21.3 million in 2014. In the fourth quarter of 2015, the company had a net loss of $0.3 million compared to net income of $nil for the fourth quarter of 2014. In 2015, the net loss was $17.3 million compared to net income of $4.6 million in 2014.
Fourth Quarter 2015
In the fourth quarter of 2015, revenues increased to $100.5 million from $95.2 million in the fourth quarter of 2014. Electricity sales, which commenced in May 2015, contributed $7.8 million in revenues in the fourth quarter of 2015, which more than offset a 3% decline in lumber revenues.
As lumber is primarily priced and sold in U.S. dollars, a stronger U.S. dollar versus the dollar generally increases revenues and our operating margins. However, a strengthening U.S. dollar generally puts downward pressure on lumber prices, which adversely impacts revenues. The electricity sales are made in Canadian dollars and are largely unaffected by changes in currency rates.
In the fourth quarter of 2015, WSPF #2 & Btr prices denominated in U.S. dollars declined by 22 per cent compared to the same quarter last year. The U.S. dollar strengthened by 15 per cent over the Canadian dollar, resulting in a 9 per cent effective decline in average Canadian dollar-denominated benchmark lumber prices.
Quarter-over-quarter, revenues from Conifex produced lumber were five per cent lower and largely reflected lower sales realizations due to weaker benchmark lumber prices, partially offset by a four per cent increase in shipment volumes. Wholesale lumber revenues increased modestly as higher sales realizations from a more valuable product mix more than offset a four per cent decline in shipment volumes.
Operating income increased to $1.6 million in the fourth quarter of 2015 from $0.6 million in the same quarter last year, as the inclusion of the results of the bioenergy segment more than offset a decline in operating income from the lumber segment.
Lumber segment operating income was $0.5 million in the fourth quarter of 2015 compared to $1.8 million in the same quarter last year. Lumber segment operating results were adversely impacted by a 11 per cent decline in unit sales realizations which outweighed the benefits of higher shipment and production volumes, lower unit log costs of 12 per cent and unit cash conversion costs of 11 per cent, and favorable variance in inventory valuation.
The power generation plant commenced commercial operations in May 2015 and its results are reported in our bioenergy segment. This segment contributed operating income of $2.4 million in the fourth quarter of 2015.
Revenues were $353.5 million in 2015 and $352.9 million in 2014. The contribution of revenues from electricity sales of $16.3 million more than offset a decline in lumber segment revenues of four per cent.
The operating loss was $11.6 million in 2015 compared to operating income of $9.3 million in 2014, including an operating loss in the lumber segment of $8.7 million in 2015 compared to operating earnings of $14.5 million in the prior year. Lumber segment operating results were most adversely impacted by lower unit sales realizations of seven per cent and higher unit log costs of eight per cent, but benefited from improvements in unit cash conversion costs of six per cent. The lower unit sales realizations resulted from the decline in benchmark lumber prices denominated in U.S. dollars of 21 per cent partially offset by the strengthening of the U.S. dollar against the dollar of 14 per cent over the period. The bioenergy segment contributed operating earnings of $2.1 million.
Net loss for the year ended December 31, 2015 was $17.3 million compared to net income of $4.6 million for the prior year. The year-over-year variance in net income was primarily attributable to the $23.2 million variance in lumber segment operating results. Net loss was also adversely impacted by an increase in finance costs of $2.7 million, but benefited from a positive variance in foreign exchange translation gain of $1.7 million.
Looking ahead to 2016, Conifex expects the U.S. market to continue its gradual recovery in both the housing and repair and remodelling sectors. It agrees with forecasts calling for an approximate six per cent increase in North American lumber consumption. The company expects a modest increase in sales realizations in 2016 from a small improvement in benchmark lumber prices and anticipated continued strength in the U.S. currency.
The uncertainty related to the recent expiry of the Softwood Lumber Agreement may increase market volatility. Although Chinese demand for lumber is currently forecast to weaken in 2016, Conifex expects sales volume to China will remain steady and anticipate a slight improvement in pricing after the annual holiday period in February. The company expects limited growth in the Japanese lumber market through the first half of 2016 and modest volume improvements in the second half, ahead of the anticipated increase in consumption tax in 2017.
In the lumber segment, Conifex intends to remain focused on a number of initiatives to enhance operations and cash flow, including continued heightened cost management and productivity improvements from affordable, high-return capital projects. In 2016, the company expects further improvements in unit cash conversion costs from these initiatives and to achieve a modest improvement in logs costs.
The company will continue to work towards optimizing performance of the Mackenzie power generation plant and should benefit from a full year of plant operations and resultant cash flow generation in 2016.
Strategic Capital Expenditures
Pursuant to the 20-year EPA with BC Hydro, the company is considering an increase to its electricity deliveries by 10 per cent provided the company notifies BC Hydro prior to the date agreed to in the EPA. The Mackenzie Plant has demonstrated its potential to produce electricity at levels that would enable Conifex to increase its future deliveries by such an amount.
Prior to making such a commitment, Conifex is undertaking due diligence related to, among other things, sufficiency of affordable feedstock volumes to support higher power production over the remaining 19-year term of our contract. The company may consider certain capital expenditures to modify and strengthen its fibre procurement operations at Mackenzie. The company currently believes such capital expenditures could be funded without requiring additional borrowings.
Beyond the short-term, the company plans to continue to invest in its assets and is evaluating a number of larger scale capital projects. Once the company completes its evaluation, it intends to prioritize the projects based on perceived risks and the attractiveness of potential returns.