Conifex shipments down 20%
May 13, 2014 - Conifex Timber reported net income of $1.6 million or $0.08 per diluted share for the first quarter of 2014 compared to net income of $1.1 million or $0.05 per diluted share for the previous quarter and net income of $6.2 million or $0.29 per diluted share for the first quarter of 2013.
The variation in consolidated net income, operating income, and EBITDA was largely attributable to operating results in the lumber segment as fluctuations in corporate costs, other items and bioenergy segment expenses between the comparative quarters were modest and did not have a material effect on overall operating results. The lumber segment recorded operating income of $4.4 million during the first quarter of 2014, which represented an improvement of $1.1 million over the previous quarter and a decline of $4.0 million from the first quarter of 2013. First quarter 2014 EBITDA of $6.1 million was comprised of lumber segment EBITDA of $7.1 million offset by corporate costs and other items of $1.0 million. Lumber segment EBITDA improved by $1.6 million over the previous quarter and declined by $3.4 million from the first quarter of 2013.
According to data published by the U.S. Census Bureau, U.S. housing starts averaged a seasonally adjusted annualized rate of 923,000 over the first quarter of 2014, which represented a decline of 8% from the fourth quarter of 2013 and 4% from the first quarter 2013. Industry analysts largely attributed the subdued level of new home construction activity during the first quarter of 2014 to the unusually severe winter weather conditions experienced across many regions in North America. In Western Canada, seasonal railcar shortages were heightened by the adverse winter conditions and the shipping environment was further exacerbated in March 2014 by a truckers' strike at the main container port in Vancouver, British Columbia. As a result of the logistics related challenges, shipments of Conifex produced lumber totalled 96 million board feet during the first quarter of 2014 which represented a decline of approximately 20% from the previous quarter and the first quarter of 2013. Production volumes, also somewhat hampered by weather related operational challenges, totalled 128 million board feet and reflected an increase of 10% over the previous quarter and 3% over the first quarter of 2013.
The benchmark lumber price expressed in Canadian dollars averaged $405 during the first quarter of 2014, an increase of $17 per thousand board feet or 4% over the previous quarter and $12 per thousand board feet or 3% over the first quarter of 2013. The export tax rate on shipments to the U.S. was zero per cent during the first quarters of 2014 and 2013 and averaged 2% during the fourth quarter of 2013.
Compared to the previous quarter, although gross lumber revenues from Conifex produced lumber declined by 12%, unit gross sales realizations and unit mill net realizations improved by 9% and compare favourably to Canadian equivalent benchmark prices, which increased by 4% quarter over quarter. The better than trend improvement in unit mill net realizations is partly attributable to shipments of a higher value product mix, because shipments to the U.S. increased while shipments to China, which generally consumes lower grade lumber products, decreased. Compared to the first quarter of 2013, gross lumber revenues from Conifex produced lumber declined by 14% while unit gross sales realizations increased by 8% and unit mill net realizations increased by 4%.
Compared to the fourth quarter of 2013, the main factors contributing to the increase of $1.1 million in lumber segment operating income included a 9% improvement in unit mill net realizations and a modest increase in revenue from by-products which more than offset a 19% decline in shipment volume of Conifex produced lumber, a 5% increase in unit log costs and a 4% increase in unit cash conversion costs. Compared to the first quarter of 2013, the decline of $4.0 million in lumber segment operating income was primarily attributable to the adverse impact of a 13% increase in unit log costs, a 21% increase in unit cash conversion costs and a 20% decline in shipment volumes, partially offset by a 4% improvement in unit mill net realizations and a 33% increase in by-product revenue.
Management expects that anticipated solid demand in each of the company's markets in North America, China and Japan for the balance of the year will result in average U.S. benchmark lumber prices approximating levels similar to those of 2013, and higher year over year unit mill nets to be realized if the Canadian currency remains at relatively weaker ranges. Management expects improvement in unit cash conversion costs, which were higher than usual in the current quarter due partly to seasonal and weather related factors and non-recurring events, to result from further productivity gains and a return to a more typical cost environment. These gains are expected to more than offset higher log and labour costs and contribute to further growth in lumber segment profitability.
On February 3, 2014, the Company completed the acquisition of Lignum Forest Products LLP, a private partnership which operates a lumber marketing and distribution business. The aggregate purchase price of approximately $4.8 million was funded from the Company's existing available cash.
In the first quarter of 2014, the Company generated cash of $7.5 million from operations before working capital changes and used cash of $18.8 million in net working capital increases. The Company ended the first quarter of 2014 with consolidated net debt of $87.1 million (December 31, 2013 - $44.0 million) and net debt to capitalization ratio of 42% (December 31, 2013 - 27%). Excluding borrowings under the project financing facility related to the construction of 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 $48.2 million (December 31, 2013 - $21.2 million) and the net debt to capitalization ratio was 29% (December 31, 2013 - 15%). The Company expects this ratio to revert to a more conservative level over the next several months concurrent with the normalization of higher than usual working capital levels.
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 Mackenzie mill 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.