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Conifex’s income drops in 2014

Feb. 26, 2015 – Conifex reported a decline in fourth quarter and annual income for 2014 as a result of increased corporate costs

Conifex Timber Inc. reported net income of $nil on sales of $95.2 million for the fourth quarter of 2014 compared to net income of $1.1 million for the third quarter of 2014 and the fourth quarter of 2013. The Company recorded net income of $4.6 million on revenues of $352.9 million for the year ended December 31, 2014 compared to net income of $9.5 million on revenues of $259.6 million in the prior year.

The variation in net income, operating earnings, and EBITDA was largely attributable to operating results in the lumber segment as moderately higher corporate costs during the fourth and third quarters of 2014 compared to the fourth quarter of 2013 were largely offset by increased foreign exchange translation gains. The lumber segment recorded operating income of $1.8 million during the fourth quarter of 2014 compared to $2.9 million in the previous quarter and $3.3 million in the fourth quarter of 2013. Lumber segment EBITDA totaled $4.5 million compared to $5.8 million in the previous quarter and $5.6 million in the fourth quarter of 2013.

The decline in segment operating results over the third quarter of 2014 was largely attributable to a 7% decrease in production volumes, a 7% increase in unit cash conversion costs and a 11% increase in unit log costs which were partially offset by a 3% increase in shipments of Conifex produced lumber and 4% increase in unit mill net realizations. Compared to the fourth quarter of 2013, a 29% increase in unit log costs and 4% increase in unit cash conversion costs more than offset the benefits of a 13% increase in shipments of non-wholesale lumber, 6% increase in unit mill net realizations and 28% increase in by-products revenue.

Fourth quarter 2014 shipments of Conifex produced lumber outpaced production by 15% due to seasonally lower production volumes and to stronger than typical shipment levels. An increase in revenues from Conifex produced lumber of 7% over the previous quarter was attributable almost equally to higher unit gross sales realizations and shipment volumes. The growth in revenues from non-wholesale lumber of 22% over the fourth quarter of 2013 was largely due to higher shipment volumes of 13% and improvements in unit gross sales realizations of 8%. Wholesale lumber revenues and shipments were comparatively flat over the last two quarters of 2014 but increased significantly over the fourth quarter of 2013 due primarily to the acquisition of Lignum Forest Products LLP in February 2014.

Production volumes of approximately 117 million board feet during the fourth quarter of 2014 were similar to the same quarter last year and represented a typical seasonal decline of 7% from the previous quarter. During the fourth quarters of 2014 and 2013, production was held back due to seasonal reductions in operating hours and modest declines in hourly productivity.

Management expects average Canadian dollar-denominated benchmark lumber prices in 2015 will be similar to 2014 levels with further depreciation of the Canadian dollar (from year end rates) offsetting lower average U.S. dollar-denominated WSPF prices. Our outlook on average price levels is primarily based on expectations for reasonable growth in demand from North American markets tempered by near-term softening from the Chinese market. We expect overall shipment patterns to resemble those of 2014 with potential for a modest increase in shipments to Japan. We anticipate reliability of logistics networks will remain challenging from time to time, particularly related to vulnerability from third party labour disputes and seasonal railcar availability. We expect productivity improvements, the realization of benefits from recently installed dust containment systems, lower energy costs and heightened focus on cost management will reduce unit cash conversion costs, although the savings will not likely be sufficient to offset further log cost inflation.

In the near-term, management intends to remain focused on the commissioning and start-up of its Mackenzie power generation facility as well as a number of initiatives to enhance lumber segment operations and cash flow, including heightened cost management and productivity improvements from affordable, high-return capital projects. The Company expects commissioning of the power generation facility's various systems to be substantially completed towards the end of the first quarter of 2015, with commercial operations to commence thereafter, assuming conducive weather conditions.

The Company believes that the recent realignment of management resources, reinforced certainty of longer-term fibre availability in the Mackenzie Timber Supply Area, enhanced marketing and distribution network, and anticipated commencement of commercial operations of the power generation facility to augment lumber segment cash flows, leaves the Company well-positioned to undertake a capital expenditure program designed to improve lumber segment performance. Management intends to further study and prioritize a number of options, including simplification and modernization of the Fort St. James sawmill complex and determination of the optimal long-term configuration for the Mackenzie operations given the recent uplift of allowable annual cut and the potential for additional synergies with the power generation facility.