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Interfor profits slip slightly in first quarter

April 29, 2016 – Interfor saw a slight dip in profits despite an uptick in lumber production in the first quarter of 2016.


April 29, 2016
By Andrew Macklin

Interfor Corporation recorded Adjusted EBITDA of $33.4 million on sales of $433.9 million in Q1’16 versus Adjusted EBITDA of $35.8 million on sales of $411.4 million in Q4’15. Adjusted net earnings in Q1’16 were $2.6 million compared to $5.5 million in the previous quarter. Net earnings were $0.8 million compared with net losses of $3.5 million in the previous quarter.

Highlights for the quarter include:

Higher Lumber Prices
Product prices were higher in Q1’16 versus Q4’15, with the Western SPF Composite and the Southern Pine (“SP”) Composite up over the prior quarter by US$6 and US$20 per mfbm, respectively.

Weaker Canadian Dollar
The Canadian Dollar was weaker on average against the U.S. Dollar as compared to the prior quarter, averaging 1.3732 in Q1’16 versus 1.3354 in Q4’15. However, the Canadian Dollar strengthened significantly against the U.S. Dollar in the latter half of Q1’16 to close the period up 6.3% over the rate at December 31, 2015.

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Higher Lumber Production
The Company produced an additional 50 million board feet in Q1’16 versus Q4’15. The production increase is a result of: (i) the return to a normal operating schedule at the Castlegar mill in Q1’16 versus the mill restart during Q4’15; (ii) the improvement in weather conditions near the Georgetown mill that negatively impacted operations in Q4’15; and (iii) incremental operating days in Q1’16 versus the holiday-impacted schedule in Q4’15.

Free Cash Flow Generation

Adjusted EBITDA was impacted by: (i) reduced profitability in the B.C. Coastal business due to seasonally lower log production, an increase in the percentage of helicopter logging, and lumber product mix changes; and (ii) variances in quarter end log and lumber inventory reserve adjustments.

Interfor generated $31.0 million of cash from operations before working capital changes. In the quarter, working capital increased by $11.0 million, primarily as a result of reductions in payables outstanding. Capital spending amounted to $17.8 million during the quarter.

The Company’s net debt decreased by $24.2 million during the quarter to $428.1 million, or 37.8% of invested capital, providing the Company with $148.2 million of available liquidity as at March 31, 2016.

Tacoma Sawmill Monetization

The monetization process for the Tacoma sawmill property is proceeding on track, with the sale expected to close in the second half of 2016.

Business Optimization Initiative

Over the past several years, Interfor has completed a series of growth initiatives, including five acquisitions and two major capital projects. The expanded platform has created a significant number of additional margin expansion opportunities. The Company is focused on capturing these opportunities and has taken a number of steps to advance this initiative over the past several months.

Production

Lumber production in Q1’16 was 618 million board feet versus 568 million board feet in Q4’15.

Production from the Company’s nine U.S. South sawmills totaled 265 million board feet, up 22 million board feet compared to Q4’15. In addition to the increase in operating days in Q1’16, the production at the Georgetown sawmill increased by 9 million board feet following the impact of severe weather events in Q4’15.

Production from Canadian operations totaled 210 million board feet in Q1’16, up 24 million board feet compared to Q4’15. Production increased most significantly at Castlegar, which produced an additional 12 million board feet as the sawmill resumed more normal operations following the start-up curve in Q4’15. In Q1’16, Interfor shipped approximately 105 million board feet of lumber to U.S. markets from its B.C. sawmills, which represents approximately 17% of Interfor’s total current quarterly production. The 12-month standstill period of the Softwood Lumber Agreement, which precludes trade action by the U.S., continues through October 11, 2016. Preliminary discussions on lumber trade between the Canadian and U.S. governments have been held, however uncertainty remains regarding resolution of the matter.

Production from Northwest operations totaled 143 million board feet in Q1’16, an increase of 4 million board feet over the preceding quarter driven by improved productivity at the Company’s three stud mills in the region.

Lumber Markets and Pricing

Beginning this quarter, Interfor changed its references to market benchmark prices for Western SPF and SYP from 2×4’s to the respective Composites. The change is due to 2×4 references being for a specific product, whereas the Composites include a mix of dimensions and grades that better reflect our product mix, particularly for Southern Yellow Pine.

The Western SPF Composite improved over the course of the first quarter of 2016 as dealers expanded inventories for the spring building season following a mild winter. The Western SPF Composite benchmark took a step down to US$251 per mfbm in January before rebounding to US$281 per mfbm in March. The SP Composite also improved during Q1’16, increasing to US$374 per mfbm in March compared to US$353 per mfbm in December 2015.

Interfor expects demand for lumber to continue to grow over the mid-term as the U.S. housing market recovers and market promotion efforts in North America and offshore take full effect.

Interfor’s strategy of maintaining a diversified portfolio of lumber operations allows the Company to both reduce risk and maximize returns on invested capital over the business cycle. Interfor will continue its disciplined approach to production, cost control, inventory management and capital spending. At the same time, Interfor will remain alert to growth opportunities to position the Company for long-term success.


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