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Conifex reports adjusted EBITDA of negative $1.1M in Q2 2020


August 12, 2020
By Conifex Timber Inc.

Conifex Timber Inc. today reported results for the second quarter ended June 30, 2020. Adjusted EBITDA* from continuing operations was negative $1.1 million for the quarter, which reflected the curtailment of the Mackenzie sawmill for most of the period, offset partially by steady and positive results from bioenergy operations.

“Even though the economic disruptions caused by the unprecedented global pandemic resulted in our core sawmill business being curtailed for 12 weeks in the quarter, we are pleased that our quarter end cash balance of $11.5 million was only $0.6 million lower than at the beginning of the quarter,” said Ken Shields, CEO. “With the recent surge in lumber prices and our July 6, 2020 sawmill re-start, we expect to achieve profitable operations during the closing six months of 2020.”

Selected Financial Highlights

Continuing operations for the comparative periods discussed in this news release primarily comprise operating results from our Mackenzie sawmill and power plant, our previously owned sawmill in Fort St. James, British Columbia, which was largely curtailed in May 2019 and sold in November 2019, and corporate costs and other unallocated items.

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Operating and financial results in the second quarter of 2020 were materially impacted by the curtailment of our Mackenzie sawmill for most of the quarter, extending from April 6 to July 6, 2020.

Consolidated Net Earnings
During the second quarter of 2020, we incurred a net loss from continuing operations of $2.7 million, or $0.05 per share, compared to a net loss from continuing operations of $8.2 million or $0.18 per share in the previous quarter and $1.1 million or $0.02 per share in the second quarter of 2019.

Continuing Operations
Our revenues totaled $10.8 million in the second quarter of 2020, a decrease of 65 per cent from the prior quarter and a decrease of 73 per cent from the second quarter of 2019.  The lower revenues were primarily attributable to the curtailment of our Mackenzie sawmill operations for most of the second quarter of 2020. Revenues from the second quarter of 2019 also included sales from our previously owned Fort St. James sawmill which we sold in November 2019.

We recorded operating losses of $1.4 million in the second quarter of 2020, $6.8 million in the previous quarter and $11.7 million in the second quarter of 2019.  Operating results included countervailing (CV) and anti-dumping (AD) duties expense of $0.2 million in the second quarter of 2020, $2.0 million in the first quarter of 2020 and $2.5 million in the second quarter of 2019. Due to the significant reduction in revenues during the second quarter, we accessed the Canadian Emergency Wage Subsidy (CEWS)  established by the federal government which resulted in approximately $2.0 million of employee wage cost subsidies during the second quarter of 2020.

Selling, general and administrative (SG&A) costs of $1.9 million in the second quarter of 2020 reflected an increase of seven per cent from the prior quarter and a decrease of 48 per cent from the second quarter of last year.  We significantly reduced SG&A costs by reducing management personnel and overhead costs to better align our corporate support functions with our operating footprint. We incurred restructuring costs of $0.1 million and $1.9 million in the second quarter of 2020 and the first quarter of 2020, respectively, in relation to these cost reduction initiatives.

Net income from continuing operations included a foreign exchange loss on long-term debt of $nil in the second quarter of 2020 compared to foreign exchange loss on long-term debt of $2.1 million in the previous quarter and a gain of $4.4 million in the second quarter of 2019.  Finance costs were $1.2 million in the second quarter of 2020, $3.5 million in the previous quarter and $7.4 million in the second quarter of 2019.

Adjusted EBITDA was negative $1.1 million in the second quarter of 2020, positive $0.5 million in the previous quarter and negative $9.1 million in the second quarter of 2019. Adjusted EBITDA in the second quarter of 2020 reflected the curtailment of the Mackenzie sawmill for most of the period, offset partially by steady and positive results from bioenergy operations.

Lumber Operations
Lumber markets were significantly impacted by the COVID-19 pandemic towards the end of the first quarter and into the second quarter of 2020. Reflecting the impacts from the pandemic, US housing starts, on a seasonally adjusted annual rate basis, dropped to 934,000 in April before recovering to 974,000 and 1,186,000 in May and June, respectively. The second quarter of 2020 averaged 1,044,000 US housing starts, down 30% from the previous quarter. Partially offsetting the lower US housing starts was an uptick in lumber demand from repair and remodeling activity in the quarter. With improving demand, and lumber supply disruptions caused by COVID-19 response measures, the benchmark Western SPF lumber price recovered through the quarter, improving from an average of US$317 in April 2020 to US$392 in June 2020.

The US dollar averaged US$0.722 for each Canadian dollar during the second quarter of 2020, a level which represented a weakening of the Canadian dollar over the previous quarter and the second quarter of last year. Canadian dollar-denominated benchmark Western SPF prices, which averaged $494 in the second quarter of 2020, decreased by eight per cent or $42 from the previous quarter and decreased one per cent or $3 from the second quarter of 2019.

Our lumber operating results in the second quarter of 2020 were materially impacted by the curtailment of our Mackenzie sawmill for most of the quarter. Lumber was produced during the first week of April, followed by a curtailment which was extended to July 6, 2020. Our Mackenzie sawmill produced 2.4 million board feet during this single-shift operating week. In the previous quarter, lumber production from our Mackenzie sawmill was 38.2 million board feet, representing an annualized operating rate of 64 per cent. In the second quarter of 2019, lumber production included volume from our previously owned sawmill in Fort St. James, British Columbia.

Shipments of Conifex produced lumber totaled 8.5 million board feet in the second quarter of 2020. Shipments of lumber declined by 77 per cent from the previous quarter and by 86 per cent from the second quarter of 2019 as a result of reduced production volumes, offset partially by shipments of finished inventory from the previous quarter. Our wholesale lumber program shipped 1.6 million board feet in the second quarter of 2020.

Revenues from lumber products were $5.9 million in the second quarter of 2020 and represented a  decrease of 72 per cent from the previous quarter and a decrease of 80 per cent from the second quarter of 2019. Decreased revenues were primarily the result of the curtailment of our Mackenzie sawmill and results from the second quarter of 2019 also included sales from our previously owned Fort St. James sawmill which we sold in November 2019.

Overall operating costs in the second quarter of 2020 were significantly lower than in previous quarters as a result of the curtailment of our Mackenzie sawmill. Cost of goods sold included fibre and manufacturing costs attributed to lumber shipments early in the second quarter and fixed costs incurred during the curtailment. Due to the significant reduction in revenues during the second quarter, we accessed the CEWS established by the federal government which resulted in approximately $2.0 million of employee wage cost subsidies during the second quarter of 2020.

We recorded a positive inventory valuation adjustment of $0.4 million in the second quarter of 2020 compared to a negative $0.7 million adjustment in the previous quarter and $0.4 million in the second quarter of 2019.

We expensed CV and AD duty deposits of $0.2 million in the second quarter of 2020, $2.0 million in the previous quarter and $2.5 million in the second quarter of 2019. The duty deposits were based on a combined rate of 20.23 per cent. The results of the US Department of Commerce’s second administrative review for 2019 are not expected to be finalized until 2021.

Lumber derivative instruments generated a loss of $0.7 in the second quarter of 2020, reflecting the mark-to-market loss on futures contracts placed for downside price protection purposes on a small percentage of our estimated second-half production. We recorded $nil in the prior quarter and a loss of $0.2 million in the second quarter of 2019 on our lumber derivatives.

Selling, General and Administrative Costs

SG&A costs were $1.9 million in the second quarter of 2020, $1.7 million in the previous quarter and $3.4 million in the second quarter of 2019. We significantly reduced SG&A costs in comparison to prior year periods by reducing management personnel and overhead costs to better align our corporate support functions with our operating footprint in 2020. We incurred restructuring costs of $0.1 million and $1.9 million in the second and first quarters of 2020, respectively, in relation to such initiatives.

Financial Position and Liquidity

Overall debt was $65.7 million at June 30, 2020 compared to $257.2 million at December 31, 2019.  The net reduction of $191.5 million in debt comprised repayment in full of our previous senior secured credit facility of $189.4 million, lease repayments of $0.8 million and payments on our Conifex term loan supporting our bioenergy operations (the “Power Term Loan”) of $1.3 million. Our Power Term Loan, which is largely non-recourse to our lumber operations, represents substantially all of our long-term debt. At June 30, 2020, we had $62.0 million outstanding on our Power Term Loan, while our remaining long-term debt, consisting of leases, was $3.7 million.

At June 30, 2020, we had total liquidity of $11.5 million, compared to $5.2 million at December 31, 2019 and $4.3 million at June 30, 2019.  Liquidity at June 30, 2020 was comprised of unrestricted cash of $11.5 million.

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