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Interfor reports increased earnings in 2018, despite $13.2M net loss in Q4

Interfor Corp. recorded net earnings of $111.7 million, or $1.60 per share, in 2018, compared to $97.2 million, or $1.39 per share in 2017.  Adjusted EBITDA was $280.4 million on record annual sales of $2.2 billion.

Interfor recorded a net loss in Q4’18 of $13.2 million, or $0.19 per share, compared to net earnings of $28.1 million, or $0.40 per share in Q3’18 and $36.2 million, or $0.52 per share in Q4’17.  Adjusted net loss in Q4’18 was $19.8 million compared to Adjusted net earnings of $28.2 million in Q3’18 and $45.1 million in Q4’17.

Adjusted EBITDA was $6.2 million on sales of $468.5 million in Q4’18 versus $69.4 million on sales of $570.5 million in Q3’18.

Notable items in the quarter

Lumber price volatility:

Key benchmark prices decreased in Q4’18 versus Q3’18. The Western SPF Composite and KD H-F Stud 2×4 9’ benchmarks fell U.S. $117 and U.S. $132 per mfbm, respectively. The SYP Composite decreased U.S. $77 to U.S. $386 per mfbm. Interfor’s average lumber selling price fell $102 to $599 per mfbm, on 647 million board feet of lumber sales.

Lumber production decline due to temporary factors:

Total lumber production was 607 million board feet, down 67 million board feet quarter-over-quarter. This decline reflects Interfor’s previously announced plan to temporarily reduce production across its B.C. Interior operating platform. In addition, project related down-time in the U.S. South and normal holiday-related operating schedules further contributed to the lower lumber production.

Production in the B.C. region declined to 174 million board feet from 224 million board feet in the preceding quarter. The U.S. South and U.S. Northwest regions accounted for 303 million board feet and 130 million board feet, respectively, compared to 313 million board feet and 137 million board feet in Q3’18, respectively. Lumber inventory levels ended at 32 million board feet lower than Q3’18.

Log cost inflation in B.C:

Operating cost increases were driven by B.C. log cost inflation, which was impacted by higher stumpage rates and open market log costs. Interfor’s operating costs were also impacted by an increase in its net realizable value provision for log and lumber inventories by $8.2 million in Q4’18.

Financial flexibility:

Net debt ended the quarter at $63.8 million, or 6.1 per cent of invested capital, resulting in available liquidity of $506.9 million. Interfor generated $6.7 million of cash from operations before changes in working capital, or $0.10 per share, and total cash from operations of $18.0 million. The $11.3 million net cash inflow from working capital was driven by reduced accounts receivable and lumber inventory volumes, partially offset by a seasonal increase in B.C. Interior log volumes.

Capital investments of $59.4 million in Q4’18 included $38.1 million on U.S. South focused high-return discretionary projects, with the remainder related to maintenance capital and woodlands projects.

Softwood lumber duties:

Interfor expensed $9.7 million of duties in the quarter, representing the full amount of countervailing (CV) and anti-dumping (AD) duties incurred on its Canadian shipments of softwood lumber into the U.S. at a combined rate of 20.23 per cent.

Cumulative duties of U.S. $60.4 million have been paid by Interfor since the inception of the current trade dispute and are held in trust by the U.S. With the exception of U.S. $3.3 million recorded as a long-term receivable in respect of overpayments arising from duty rate adjustments, Interfor has recorded the duty deposits as an expense.

Strategic capital plan update

Interfor continues to make progress on previously announced Phase I and II strategic capital projects in the U.S. South.

The Phase I projects total U.S. $65 million at the Meldrim, Georgia and Monticello, Arkansas sawmills, with completion scheduled for Q2’19. The related capital expenditures through Q4’18 total U.S. $34.6 million and expected total costs through completion remain in-line with initial guidance.

The Phase II projects total U.S. $240 million at the Thomaston and Eatonton sawmills in Georgia and the Georgetown sawmill in South Carolina. These projects are on track for completion in various stages over the period of 2019 to 2021. The related capital expenditures through Q4’18 total U.S. $15.3 million and the projects remain on budget.