Interfor reports Q2 2015 results
July 31, 2015 - Interfor Corporation (Interfor) recorded a net loss of $20.6 million, or $0.29 per share, on sales of $429.7 million in Q2'15 compared with a net loss of $0.2 million in Q1'15 and net earnings of $7.4 million in Q2'14.
Included in the company's results for Q2'15 is a pre-tax loss of $7.7 million(1) associated with the operations of the Tacoma sawmill which was acquired from Simpson Lumber Company, LLC (Simpson) earlier this year as part of a larger transaction involving a total of four mills.
Excluding the Tacoma loss and certain other items, the company reported an adjusted net loss(2) of $14.7 million, or $0.21 per share, in Q2'15 versus adjusted net earnings(2) of $4.5 million in Q1'15 and $21.1 million in Q2'14.
Adjusted EBITDA(2), which excludes the results associated with Tacoma and certain other items, was $12.7 million in Q2'15 versus $31.8 million in Q1'15 and $47.3 million in Q2'14.
The company's operations in all regions were impacted by the significant drop in product prices experienced in Q2'15.
Benchmark prices for Western SPF 2x4, SYP East 2x4 and HF Studs 2x4 9' declined US$38, US$30 and US$46 per mfbm, respectively, compared to the prior quarter. Prices for SPF 2x4 and HF Studs 9' began to strengthen in the final month of Q2'15 as increased takeaway levels and production curtailments helped to rebalance in-market inventories. SYP lagged SPF and HF prices on the decline and remained soft through quarter-end, with discounts from list prevalent on most items.
Beyond the benchmarks, prices for low-grade products were particularly weak in Q2'15, with SPF 2x4 #3 off US$55 and SYP 2x4 #3 off US$59 versus Q1'15.
The Canadian dollar strengthened by 0.9% against the US dollar during the quarter, averaging US$0.8132 in Q2'15 versus US$0.8057 in Q1'15.
In addition, the reintroduction of export duties on April 1, 2015 on lumber shipments from Canada into the U.S. resulted in $2.5 million of duties paid in Q2'15 compared with $0 in Q1'15 and Q2'14.
The company's Q2'15 results were further impacted by an EBITDA loss of $1.5 million related to its Castlegar sawmill which was curtailed for 13 days during the quarter as part of a $50 million modernization project at that facility. The Castlegar Project is proceeding on-time and on-budget with construction expected to be completed in Q4'15 and full operating performance targeted for Q1'16.
Lumber production increased to 672 million board feet in Q2'15, up 33 million board feet or 5.2% compared to Q1'15 and up 90 million board feet or 15.5% compared to Q2'14.
Production from the company's U.S. Southeast and U.S. Northwest regions totalled 288 million board feet and 190 million board feet, respectively, in Q2'15 versus 239 million board feet and 176 million board feet, respectively, in Q1'15. The growth in production in the U.S. Southeast and U.S. Northwest regions versus the preceding quarter reflects primarily the inclusion of the former Simpson mills and another mill in Arkansas acquired from The Price Companies, Inc. (Price) in June, offset in part by a reduction in operating hours at the Company's other mills in the U.S. Northwest.
Canadian production totalled 194 million board feet in Q2'15 versus 224 million board feet in the immediately preceding quarter. The drop in Canadian production reflects the curtailment at Castlegar and a reduction in operating hours at the Company's other B.C. Interior mills.
In the second quarter, Interfor generated $20.1 million in cash from operations after considering working capital changes. Capital spending amounted to $38.6 million during the quarter.
On June 19th, Interfor closed the previously announced acquisition of the Price sawmill in Monticello, Ark. The Monticello mill produced 75 million board feet in 2014 and 2 million board feet in Q2'15 following its acquisition.
Net debt increased during the quarter to $430.9 million, or 38.0% of invested capital, leaving the company with $120.8 million of available liquidity as of June 30, 2015.
Commodity lumber prices are expected to remain volatile in the near term as the market responds to shifts in currency values and changes in export duty rates. Interfor expects demand for lumber to continue to grow over the mid-term as the US housing market recovers and market promotion efforts in North America and offshore take full effect. Demand in China is also expected to grow in the years ahead, albeit at a slower pace than in recent years.
As a result of challenging lumber and log market conditions, Interfor curtailed operations at its Tacoma sawmill on May 22, 2015. Following a comprehensive strategic review, the company has decided to exit the mill.
Interfor's upfront investment at Tacoma was limited to working capital, with the remaining consideration contingent upon earnings over the first three years of ownership. The minimum total contingent payment payable to Simpson is US$10 million, US$9.5 million of which the company has recorded as a liability at June 30, 2015.
The Tacoma sawmill accounted for 26 million board feet of production in Q2'15 and 47 million board feet since acquisition.
"The decision to exit the Tacoma sawmill was taken after much analysis and deliberation," said Duncan Davies, Interfor's president and CEO. "We understood at the time the mill was acquired that a turnaround was required at Tacoma. While good progress has been made from an operating standpoint, the drop in product prices experienced in Q2'15 resulted in operating losses greater than expected when the mill was acquired. In the face of continued uncertainty, we have concluded that we would be better served to exit the mill and to redeploy the capital associated with the facility elsewhere within our system. We understand the uncertainty this decision brings to the mill's employees and to others associated with the operation and will do everything we can to bring matters to conclusion as soon as possible."
(1) Including negative adjustments to log and lumber carrying values
(2) Adjusted to exclude the effects of long-term incentive compensation, foreign exchange gain (loss), other income (expense), restructuring costs and operating losses of the Tacoma sawmill. Refer to Interfor's MD&A prepared as of July 30, 2015 for the full definition.
This release contains information and statements that are forward-looking in nature, including, but not limited to, statements containing the words "will" and "is expected" and similar expressions. Such statements involve known and unknown risks and uncertainties that may cause Interfor's actual results to be materially different from those expressed or implied by those forward-looking statements. Such risks and uncertainties include, among others: general economic and business conditions, product selling prices, raw material availability and costs, operating costs, changes in foreign-currency exchange rates, and other factors referenced herein and in Interfor's Annual Report and Management Information Circular available on www.sedar.com. The forward-looking information and statements contained in this release are based on Interfor's current expectations and beliefs. Readers are cautioned not to place undue reliance on forward-looking information or statements. Interfor undertakes no obligation to update such forward-looking information or statements, except where required by law.
Interfor is a growth-oriented lumber company with operations in Canada and the United States. The company has annual production capacity of 3.2 billion board feet and offers one of the most diverse lines of lumber products to customers around the world. For more information about Interfor, visit our website at www.interfor.com.