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Conifex reports 43% increase in revenues compared to Q1 2018

Conifex Timber Inc. today reported results for the first quarter ended March 31, 2019. The company’s revenues totalled $133.7 million in the first quarter of 2019, a two per cent decline from the prior quarter and an improvement of 43 per cent over the same quarter last year. Compared to the first quarter of 2018, revenue growth was largely derived from the addition of Conifex’s U.S. mills and partially offset by lower shipments and unit sales realizations from our B.C. mills. Bioenergy segment revenues were generally consistent with the previous quarter and improved by nine per cent over the first quarter of 2018.

Adjusted EBITDA was negative $2.7 million for the quarter, which represented an improvement of $4.5 million over the fourth quarter of 2018, attributable to an improvement in lumber segment EBITDA of $1.9 million and in corporate and unallocated items EBITDA of $2.6 million. Compared to the first quarter of 2018, bioenergy segment EBITDA improved by $1.1 million and lumber segment EBITDA declined by $12.6 million. Lumber segment EBITDA included softwood lumber duties expense of $3.8 million in the first quarter of 2019, $3.7 million in the fourth quarter of 2018 and $6.2 million in the first quarter of 2018.

Consolidated net earnings

During the first quarter of 2019, Conifex incurred a net loss of $11.9 million, or $0.25 per share, compared to a net loss of $23.0 million or $0.49 per share in the previous quarter and net income of $2.5 million or $0.10 per share in the first quarter of 2018.

Conifex recorded operating losses of $13.5 million in the lumber segment in the first quarter of 2019 and $15.8 million in the previous quarter and operating earnings of $6.0 million in the first quarter of 2018. Lumber segment operating results included countervailing and anti-dumping duty expense of $3.8 million in the first quarter of 2019, $3.7 million in the fourth quarter of 2018 and $6.2 million in the first quarter of 2018. The bioenergy segment contributed operating earnings of $3.0 million in the first quarter of 2019 and in the previous quarter, an improvement of 50 per cent over the first quarter of 2018. Corporate costs of $1.9 million represented a reduction of $0.6 million from the previous quarter and an increase of $0.2 million over first quarter of 2018.

Lumber segment – continuing operations

Conifex’s lumber segment operating results were hampered by lower operating rates, which resulted in higher unit cash conversion costs at its Fort St. James, B.C., mill (the FSJ Mill) and our El Dorado and Glenwood, Arkansas mills in the first quarter of 2019 and the fourth quarter of 2018.

In the fourth quarter of 2018, Conifex curtailed sawmill operations at the FSJ Mill for a total of approximately four weeks due primarily to market conditions reflecting lower lumber prices and elevated log costs, exacerbated by the ongoing imposition of softwood lumber duties. The lower operating rates at the FSJ Mill resulted in approximately 23 million board feet of reduced production in the fourth quarter of 2018.

The previously announced temporary reduction of operating capacity at the FSJ Mill commenced on Jan. 1, 2019, with the reduced operating format expected to continue until about mid-2019. In addition, sawmill operations at the FSJ Mill were temporarily curtailed for three weeks in February. The company expects the curtailments to result in an estimated 28 per cent reduction in lumber production from its B.C. mills for the first six months of 2019. Lumber production at the company’s B.C. mills totalled approximately 74 million board feet during the first quarter of 2019, which represented an annualized operating rate of 54 per cent compared to 69 per cent in the previous quarter and 92 per cent in the first quarter of 2018.

Conifex’s U.S. mills produced Southern Yellow Pine (SYP) lumber at an annualized run rate of approximately 418 million board feet in the first quarter of 2019 and 380 million board feet in the fourth quarter of 2018. Production levels in the first quarter of 2019, on an annualized basis, represented approximately 89 per cent of targeted levels for 2019 and 76 per cent of two-shift dimension lumber production capacity of 550 million board feet. Production at the company’s U.S. mills of approximately 105 million board feet represented growth of 10 per cent over the previous quarter and contributed 60 per cent of overall production.

Overall operating results from Conifex’s Arkansas mills continue to be hampered by higher operating costs related to the additional costs and ramp up of second shifts, which commenced in August 2018, without the attendant benefit of full two-shift productivity. The company expects unit cash conversion costs to normalize in the second half of 2019 as operating rates approach targeted levels.

Lumber segment operating results

Prices for the bell-weather WSPF 2×4 #2 & Btr product averaged U.S. $372 during the first quarter of 2019, an improvement of 14 per cent over the previous quarter and a decline of 28 per cent over the first quarter of 2018. Benchmark prices for SYP Westside averaged U.S. $402 during the first quarter of 2019, a decline of four per cent from the previous quarter and 26 per cent from the first quarter of 2018.

The U.S. dollar averaged U.S. $0.752 for each Canadian dollar during the first quarter of 2019, which represented a modest weakening of the Canadian dollar compared to the previous quarter and weakening of five per cent compared to the same quarter last year. Canadian dollar-denominated benchmark WSPF prices, which averaged $495 in the first quarter of 2019, improved by 15 per cent or $63 from the previous quarter and declined by 24 per cent or $155 from the first quarter of 2018.

Revenues from Conifex produced lumber were $96.5 million in the first quarter of 2019 and represented a two per cent decline from the previous quarter. Compared to the previous quarter, a decline in shipment volumes of five per cent outweighed an improvement in sales realization of four per cent. Shipments from the company’s B.C. mills declined by 21 per cent and mirrored lower production levels resulting from the change in operating format and temporary curtailment at the FSJ Mill. Shipments from the U.S. mills increased by 11 per cent and reflected similar improvements in production volumes. Compared to the first quarter of 2018, revenue growth of 37 per cent was primarily attributable to the addition of shipments from the U.S. mills, partially offset by 30 per cent lower shipment volumes from Conifex’s B.C. mills and a decline in sales realizations due to weaker lumber prices.

Wholesale lumber revenues increased by 15 per cent over the previous quarter and more than doubled compared to the same quarter last year.

Unit log costs were relatively flat quarter-over quarter and increased by 14 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 the company’s El Dorado and Cross City mills were generally consistent with the prior quarter. Conifex experienced higher unit log costs and periodic production disruptions at its Glenwood mill due to extreme wet weather conditions, which constrained log availability and heightened local competition for logs in the first quarter of 2019 and the previous quarter.

An increase in depreciation and amortization expense of $4.7 million over the first quarter of 2018 was largely attributable to the company’s expanded operations in the U.S. South.

Conifex recorded a positive inventory valuation adjustment of $1.6 million in the first quarter of 2019 and inventory write downs of $1.4 million in the previous quarter and $0.6 million in the first quarter of 2018.

The company expensed countervailing and anti-dumping duty deposits of $3.8 million in the first quarter of 2019, $3.7 million in the previous quarter and $6.2 million in the first quarter of 2018. The duty deposits were based on a combined rate of 20.23 per cent.

The lumber segment recorded operating losses of $13.5 million in the first quarter of 2019 and $15.8 million in the previous quarter and operating income of $6.0 million in the first quarter of 2018. Compared to the previous quarter, lumber segment operating results were hampered by lower overall lumber shipments and operating rates, and higher unit operating costs at the company’s B.C. mills, which outweighed the benefits of improved sales realization and a positive quarter-over-quarter variance in inventory valuation adjustments. Compared to the first quarter of 2018, lumber segment operating results were challenged by lower operating rates and higher unit operating and log costs at Conifex’s B.C. mills, elevated operating costs at its Arkansas mills due to the ongoing ramp up of production, higher depreciation expense and lower sales realizations from its B.C. mills due to weaker lumber prices. These factors were partially offset by overall revenue growth from increased lumber and residual shipments, lower duty deposit expense and a positive inventory valuation adjustment.

Lumber segment EBITDA was negative $6.0 million in the first quarter of 2019, an improvement of $1.9 million over the previous quarter. Lumber segment EBITDA was $6.6 million in the first quarter of 2018.

Outlook

Conifex continues to believe that current lumber prices do not properly reflect fundamental supply and demand factors that are expected to drive lumber pricing through the remainder of 2019 and 2020.

Regarding lumber supply, the interior region of B.C. is the second largest source of softwood lumber supply to the North American market. Permitted sawtimber harvest levels in the region are in the process of being reduced to long-term sustainable levels to adjust for the mountain pine beetle (MPB) epidemic. In terms of lumber demand, the company expects lumber consumption will continue to grow over the next two years, driven by a continuation of gradual increases in new residential construction and more substantial increases in repair and remodeling demand. Conifex expects the growth in lumber demand will outpace the growth in net new supply, capacity utilization rates will remain elevated, and lumber prices, while remaining volatile, will improve.