Conifex reports record high earnings in Q2
Aug. 10, 2017 - Conifex Timber Inc.'s has posted second quarter results that show record earnings due to an improved lumber segment in spite of U.S. countervailing duties and seasonally low revenues for its bioenergy segment.
Conifex Timber Inc. reported results for the second quarter ended June 30, 2017. Adjusted EBITDA in the second quarter of 2017, which excludes countervailing duty (CVD) deposits of $4.6 million, was a record $14.8 million, compared to $6.1 million in the first quarter of 2017 and $9.0 million in the second quarter of 2016. Compared to the previous quarter, an improvement in lumber segment adjusted EBITDA of $10.3 million was partially offset by seasonally lower bioenergy segment adjusted EBITDA and foreign exchange translation loss. Compared to the second quarter of 2016, lumber segment adjusted EBITDA improved by $6.7 million and bioenergy segment adjusted EBITDA was lower by $0.6 million.
The company's revenues totalled $116.4 million in the second quarter of 2017, an improvement of 16 per cent over the prior quarter and 12 per cent over the same quarter last year. Our revenue growth over the previous quarter was mainly attributable to a 19 per cent increase in our lumber segment revenues, partially offset by seasonally lower revenues from electricity sales. Our lumber segment revenues increased by 13 per cent and our bioenergy segment revenues declined by 6 per cent compared to the second quarter of 2016.
Operating income, which includes preliminary CVD deposits of $4.6 million on lumber shipments to the U.S., improved to $6.4 million compared to $1.5 million in the previous quarter and $5.1 million in the same quarter last year. Compared to the prior quarter, an increase in lumber segment operating earnings of $5.3 million was partially offset by a modest decline in bioenergy segment operating earnings. Lumber segment operating earnings increased by $1.7 million and bioenergy segment operating earnings were lower by $0.7 million compared to the second quarter of 2016.
Net income for the second quarter of 2017 was $4.2 million, or $0.16 per diluted share, compared to a net loss of $1.4 million or $0.06 per basic share in the previous quarter and a normalized net income of $2.8 million or $0.13 per diluted share in the second quarter of 2016. Net income for the second quarter of 2016 included a net gain of $32.4 million from the sale and revaluations of certain assets and was $35.2 million or $1.67 per basic and $1.54 per diluted share. Year to date net income was $2.8 million, or $0.12 per diluted share, compared to a normalized net income of $2.3 million or $0.11 per diluted share for the same period last year. Including the unusual items above, net income was $63.7 million, or $3.01 per basic and $2.78 per diluted share for the first six months of 2016.
Lumber segment adjusted EBITDA, which excludes CVD deposits, was $15.4 million in the second quarter of 2017 compared to $5.1 million in the previous quarter and $8.7 million in the second quarter of 2016. Lumber segment adjusted EBITDA was $20.5 million for the six months ended June 30, 2017 and $13.2 million for the six months ended June 30, 2016.
Prices for the bell-weather WSPF #2 & Btr product averaged US$388 during the second quarter of 2017, an improvement of 11 per cent over the previous quarter and 25 per cent over the second quarter of 2016.1 The U.S. dollar averaged US$0.744 for each Canadian dollar during the second quarter of 2017, which represented a depreciation of 2 per cent compared to the previous quarter and 4 per cent compared to the same quarter last year.2
Revenue from Conifex produced lumber was $70.8 million in the second quarter of 2017. The 25 per cent increase over the previous quarter was generally attributable to 16% higher shipment volumes and a 7 per cent improvement in unit sales realizations. Lumber shipments, which were somewhat hampered by challenging weather conditions and resulted in some logistical constraints in the prior quarter, returned to more typical levels. The higher sales realizations generally reflected stronger lumber prices coupled with a modestly weaker Canadian currency. The growth in revenue of 11 per cent over the second quarter of 2016 was largely due to a 20 per cent improvement in sales realizations partially offset by a 7 per cent reduction in shipment volumes.
1 As quoted in Random Lengths Publications Inc.
2 Source: Bank of Canada, www.bankofcanada.ca
Wholesale lumber revenues were consistent in the first and second quarters of 2017 and increased by 10 per cent over the second quarter of 2016. The growth in revenue was primarily attributable to improved sales realizations due to shipment of a higher value product mix.
Lumber production totalled approximately 132 million board feet during the second quarter of 2017 and represented an annualized operating rate of 100 per cent compared to 94 per cent in the previous quarter and 103 per cent in the same quarter last year.
Unit log costs increased by 2 per cent over the previous quarter and 18% over the same quarter last year. The higher log costs were mainly attributable to higher market based stumpage and purchased log costs.
An improvement of 13 per cent in unit cash conversion costs over the previous quarter was mainly attributable to higher operating rates and lower energy and weather related maintenance costs. An increase in unit cash conversion costs of 4 per cent over the second quarter of 2016 was primarily due to lower operating rates.
Preliminary CVD deposits of $4.6 million on lumber shipments to the U.S. were expensed in the second quarter of 2017.
Including the preliminary CVD deposits expense, the lumber segment recorded operating income of $7.1 million in the second quarter of 2017 compared to $1.8 million in the previous quarter and $5.4 million in the second quarter of 2016. Compared to the previous quarter, current quarter lumber segment operating results benefited from higher lumber prices, increased shipments of Conifex produced lumber, growth in revenue from residuals, improved productivity and lower unit cash conversion costs, which were partially offset by CVD deposits and a modest increase in unit log costs.
Compared to the second quarter of 2016, current quarter operating results benefited from higher lumber prices, a weaker Canadian currency and increased residuals revenue, partially offset by payment of CVD deposits, lower shipment and production volumes, and higher unit log and cash conversion costs. Year-to-date lumber segment operating earnings were $8.9 million, an improvement of $2.3 million including CVD deposits, and $6.9 million excluding CVD deposits, over the same period last year.
Our Electricity Purchase Agreement ("EPA") with BC Hydro, similar to other electricity purchase agreements, provides BC Hydro with the option to "turn down" electricity purchased from independent power producers during periods of low demand by issuing a "dispatch order" outlining the requested dispatch period. In April 2017, BC Hydro issued a dispatch order with respect to, among others, our power generation plant ("the Mackenzie Plant"), advising of a dispatch period of 122 days, encompassing the months of April, June, July and August. Last year, the Mackenzie Plant, among others, was dispatched for 61 days in the second quarter. During the dispatch period, we only produce electricity to fulfill volume commitments under our Load Displacement Agreement with BC Hydro. We continue to be paid revenues under the EPA based upon a reduced rate and on volumes that are generally reflective of contracted amounts.
The Mackenzie Plant sold 51.0 gigawatt hours of electricity under our EPA in the second quarter of 2017, which represents approximately 94 per cent of targeted operating rates, compared to 85 per cent in the previous quarter and 100 per cent in the second quarter of 2016. Electricity sales and plant operating costs in the first quarter of 2017 were impacted by some unplanned outages and challenging weather conditions earlier in the quarter, which somewhat impacted feedstock quality and deliverability.
Electricity revenues of $4.7 million, generally consistent with the same quarter last year, were $2.1 million lower than the previous quarter mainly due to discounted rates during the dispatch period combined with lower seasonal rates. Cash operating costs improved by $1.1 million over the previous quarter and increased by $0.3 million over the same quarter last year. Amortization expense was lower compared to the previous quarter as idled components are not depreciated during the dispatch period.
Bioenergy segment adjusted EBITDA was $4.6 million for the first six months of 2017 compared to $6.6 million in the first six months of 2016 and reflected adjusted EBITDA margin of 40 per cent compared to 52 per cent in the comparative period last year. Adjusted EBITDA margin is defined as adjusted EBITDA as a percentage of sales.
The Mackenzie Plant achieved hourly production of 105 per cent of our operating target over the first twelve months of commercial operations. We expect the improvements that we made during the planned maintenance days in June 2017 will result in operating rates approaching historic levels when production resumes in September 2017. Although the Mackenzie Plant will be dispatched for two months in the third quarter of 2017, we expect an improvement in year-over-year quarterly operating performance as results in the third quarter of 2016 were hampered by maintenance downtime.
Liquidity and Capital Resources
Our net debt to capitalization ratio was 38 per cent at June 30, 2017 and Dec. 31, 2016. Excluding the borrowings for our wholly-owned power subsidiary that are non-recourse to our other operations, our net debt to capitalization ratio was 23 per cent at June 30, 2017 compared to 16 per cent at Dec. 31, 2016.
At June 30, 2017, we had total liquidity of $63.0 million, compared to $22.3 million at Dec. 31, 2016 and $44.3 million at June 30, 2016.
Through the remainder of 2017, Conifex expects average benchmark lumber prices for Western SPF to be similar to average levels achieved in the first six months of this year. The company expects continued uncertainty around the softwood lumber dispute, including the suspension of preliminary CVD in September 2017, and timing related to the final determination of CVD and antidumping duty ("ADD") rates and the potential resolution of the dispute, will contribute to further volatility in U.S. market conditions and pricing. The company expects prices on the premium grade and lower grade products shipped to Japan and China, respectively, will be primarily determined by traditional supply and demand factors and will not be materially impacted by duties imposed by the U.S. Conifex expects demand and pricing to continue to remain solid in the Japanese and Chinese markets through the balance of the year. They expect their mill net price realizations from the sale of construction grade lumber to the Canadian market will be somewhat discounted as a result of the duty impositions on U.S. exports. Conifex expects that average log costs through the remaining six months of the year will generally remain consistent with those in the first half of 2017.
El Dorado Mill Capital Project
In January 2017, Conifex commenced the construction phase of its capital project to modernize and re-start the El Dorado Mill. Upon completion, the project is planned to incorporate significant capital upgrades to the log processing yard and sawmill and planer and add two continuous dry kilns. The project has been designed to maximize both log recovery and lumber grade yield and quality. Upon completion, the El Dorado Mill is expected to have approximately 180 million board feet of annual lumber capacity on a two-shift basis. Conifex expects to complete the project by or about the end of the third quarter or early in the fourth quarter of this year.
Management currently estimates that the project will require capital expenditures of approximately US$50 million, consisting of approximately US$27 million for equipment and materials, US$16 million in subcontract costs and US$7 million for indirect costs, including engineering, construction management, freight and project contingency. At June 30, 2017, approximately 77 per cent of budgeted expenditures had been committed. The project is currently within management's budgeted amounts and progressing as scheduled.
Conifex believes its planned expansion into the U.S. South will provide an important source of revenue diversification and reduce cash flow volatility in its lumber segment, particularly in light of punitive trade actions on Canadian softwood lumber recently initiated by the U.S.
Update on Softwood Lumber Dispute
On April 24, 2017, the U.S. Department of Commerce (USDOC) announced its preliminary determination on CVD and imposed a preliminary duty rate of 19.88 per cent on a majority of Canadian lumber producers' lumber shipments into the U.S., including Conifex. During the second quarter of 2017, the company recorded an operating expense of $4.6 million related to the CVD deposits. On June 26, 2017, the USDOC announced its preliminary determination on ADD and imposed a preliminary duty rate of 6.87 per cent on Conifex's lumber shipments into the U.S. Conifex did not incur any expense related to the ADD deposits in the second quarter of 2017.
The USDOC also made a preliminary determination that "critical circumstances" existed, which resulted in CVD and ADD deposits applying retroactively for the 90 days prior to April 28, 2017 and June 30, 2017, respectively. Conifex has not paid or accrued any retroactive CVD or ADD deposits, which could total US$5.6 million and US$1.6 million, respectively. Management believes, similar to management of other lumber producers, that the critical circumstances finding by the USDOC will not be upheld by either the USDOC or the U.S. International Trade Commission (USITC) in their final determinations.
Like other Canadian forest product companies, the Federal Government and Canadian provincial governments, Conifex denies the U.S. allegations and disagrees with the preliminary determinations made by the USDOC and USITC, and, collectively continues to aggressively defend the Canadian industry in this trade dispute.
British Columbia Forest Fires
While the severe forest fire season in British Columbia to date has had no material financial impact on Conifex's operations, a continuation of the current hot and dry weather in the B.C. Interior could increase the risks of disruption to our fibre procurement efforts, operations and transportation.
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