The company recorded net earnings in Q2'17 of $24.5 million, or $0.35 per share, compared to $19.7 million, or $0.28 per share in Q1'17 and $23.2 million, or $0.33 per share in Q2'16. Adjusted net earnings (which takes into account the effects of share-based compensation expense and non-recurring items) in Q2'17 were $28.7 million or $0.41 per share, compared to $22.7 million, or $0.32 per share in Q1'17 and $17.5 million, or $0.25 per share in Q2'16.
Adjusted EBITDA1 for the second quarter, 2017 was $77.4 million (or $84.7 million excluding the impact from $7.3 million of softwood lumber duties expense), on sales of $511.4 million versus $60.3 million on sales of $456.8 million in Q1'17.
Notable items in the quarter included:
- Strong Cash Flow and Substantially Lower Leverage
- Interfor generated $73.3 million of cash from operations before changes in working capital, or $1.05 per share, plus a $32.5 million reduction in working capital, for total cash generated from operations of $105.8 million.
- Capital spending was $20.4 million.
- Net debt ended the quarter at $218.3 million, or 21.1% of invested capital.
- Higher Lumber Prices For Western Species
- The key Western commodity benchmark prices improved quarter-over-quarter as a result of strong demand in both North American and international markets. The Western SPF Composite and KD H-F Stud 2x4 9' benchmarks were up US$39 to US$378 per mfbm and US$38 to US$398 per mfbm, respectively. Prices in the U.S. South region were less robust, with the SYP Composite benchmark increasing US$1 quarter-over-quarter to US$417 per mfbm.
- Interfor's average lumber selling price increased $38 from Q1'17 to $642 per mfbm, due to a combination of the higher benchmark prices, improved grade yields in the U.S. South region and a weaker Canadian Dollar.
- Increased Production
- Total production increased for the second successive quarter, driven by strong customer demand. 655 million board feet of lumber was produced in Q2'17, up 15 and 48 million board feet over Q1'17 and Q4'16, respectively. Sales of Interfor-produced lumber were 654 million board feet in Q2'17 versus 624 million board feet in Q1'17.
- Production in the U.S. South region increased to 294 million board feet from 285 million board feet in the preceding quarter. The B.C. and U.S. Northwest regions accounted for 215 million board feet and 146 million board feet, respectively, compared with 215 million board feet and 140 million board feet in Q1'17, respectively.
- Progress on Optimization Initiative and EBITDA Gains
- In early 2016, Interfor launched a Business Optimization Initiative to capture additional margin opportunities across the Company's operating platform, with a particular focus on the U.S. South region, where $35 million in annualized EBITDA gains were targeted by year-end 2017.
- In Q2'17, the Company realized on 110% of the targeted EBITDA gains, due to a combination of increased operating hours, improvements in productivity, lumber recovery and grade yields, and lower manufacturing costs.
- The Company has identified a series of additional opportunities that include both non-capital operating improvements and targeted capital investments. The non-capital operating improvements are currently underway and are expected to be realized over the next 12-18 months. The capital investments, which are expected to generate very attractive returns, will be implemented over the next three years. The specifics of these investments will be released once detailed engineering has been completed and the sequencing of the projects has been finalized.
Softwood lumber duties
During the second quarter, the U.S. Department of Commerce (DoC) preliminarily ruled on its cases against Canadian softwood lumber producers for both countervailing and anti-dumping duties. As a result, the U.S. Customs and Border Protection Agency began collecting deposits from Interfor on its shipments of softwood lumber from Canada into the U.S. for countervailing duties on April 28, 2017 at a preliminary rate of 19.88 per cent and for anti-dumping duties on June 30, 2017 at a preliminary rate of 6.87 per cent.
In addition, the DoC has taken the unjustified position that most Canadian lumber producers, including Interfor, may be required to submit deposits for retroactive countervailing duties for the 90 days prior to April 28, 2017 and for retroactive anti-dumping duties for the 90 days prior to June 30, 2017. Interfor has not submitted any such deposits, which could total approximately US$8.4 million and US$3.0 million for countervailing and anti-dumping duties, respectively. Interfor does not believe the retroactive application of duties will stand up under final scrutiny which, in turn, should result in a full return of any related deposits to the Company.
In Q2'17, Interfor shipped approximately 100 million board feet from its Canadian operations to the U.S. market, which represented approximately 15 per cent of the company's total lumber sales. Interfor is of the view that the DoC's positions are without merit and are politically driven. Interfor intends to vigorously defend the Company's and the Canadian industry's positions through various appeal processes, in conjunction with the B.C. and Canadian Governments.