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Interfor sees net earnings of $6.3 million in Q1 2020 amid COVID-19

Interfor Corporation has recorded net earnings in the first quarter of 2020 of $6.3 million, or $0.09 per share, compared to net losses of $41.7 million, or $0.62 per share in Q4 of 2019 and $15.3 million, or $0.23 per share in Q1 of 2019.

Adjusted EBITDA was $36.6 million on sales of $479.6 million in Q1 2o20 versus $17.6 million on sales of $456.8 million in Q4 2019.

Net debt ended the quarter at $322.0 million, or 26.7 per cent of invested capital, resulting in available liquidity of $430.9 million.

Highlights of First Quarter, 2020

•  Strengthened liquidity

• Available liquidity increased to $430.9 million, up $67.8 million from December 31, 2019.
• On March 26, 2020 the company completed the previously announced U.S. $100 million of long-term debt financing with Prudential Private Capital. As a result, Interfor’s long-term debt now totals U.S. $300 million, with a weighted average interest rate of 4.08 per cent and maturities principally in the years 2024-2030.
• Interfor generated $38.4 million of cash flow from operations before changes in working capital, or $0.57 per share.  Working capital investment increased by $19.1 million as a result of a seasonal increase in trade receivables.
• Capital spending was $84.2 million, including $56.6 million for the acquisition of timber licences, roads and other assets, net of assumed liabilities from Canadian Forest Products Ltd. (Canfor).

•  Acquisition of B.C. Interior cutting rights from Canfor

• On March 9, 2020, Interfor completed its acquisition from Canfor of two replaceable timber licences with annual cutting rights of approximately 349,000 cubic metres, an interest in a non-replaceable forest licence and other related forestry assets in the Adams Lake area of the B.C. Interior.

•  Production balanced with shipments

• Total lumber production in Q1’20 was 627 million board feet, down 41 million board feet from Q4’19. Production in the B.C. region declined to 186 million board feet from 187 million board feet in the preceding quarter. The U.S. South and U.S. Northwest regions accounted for 311 million board feet and 130 million board feet, respectively, compared to 342 million board feet and 139 million board feet in Q4’19.
• Total lumber shipments were 641 million board feet, including Interfor produced volume of 632 million board feet and agency and wholesale volumes of 9 million board feet, or 40 million board feet lower than Q4’19.
• Lumber inventory levels decreased 4 million board feet over the course of Q1’20.

•  Higher overall lumber prices in Q1’20

• The key benchmark prices improved quarter-over-quarter with the SYP Composite, Western SPF Composite and KD H-F Stud 2×4 9’ increasing by U.S. $11, U.S. $26 and U.S. $84 per mfbm to U.S. $351, U.S. $380 and U.S. $431 per mfbm, respectively. Interfor’s average lumber selling price increased $26 from Q4’19 to $592 per mfbm.

•  Softwood lumber duties

• On Feb. 3, 2020 the U.S. Department of Commerce issued preliminary revised combined rates of 8.37 per cent for 2017 and 8.21 per cent for 2018. These rates remain preliminary, with final rate determinations not expected until September 2020.  At such time, the final rates will be applied to new lumber shipments.  No adjustments have been recorded in the financial statements as of March 31, 2020 to reflect the preliminary revised duty rates.
• Interfor expensed $10.6 million of duties in the quarter, representing the full amount of countervailing and anti-dumping 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. $101.7 million have been paid by Interfor since the inception of the current trade dispute and are held in trust by U.S. Customs and Border Protection.  Except for U.S. $3.3 million in respect of overpayments arising from duty rate adjustments, Interfor has recorded the duty deposits as an expense.

Effects of COVID-19 and Interfor’s response

On March 11, 2020 the World Health Organization declared the COVID-19 outbreak a pandemic and to date, the pandemic and related government-imposed restrictions and quarantines have had an unprecedented impact on the global economy.

As a result, industry-wide demand for lumber products has declined substantially. Benchmark lumber prices weakened significantly through early April and have since found a level of support from industry-wide production curtailments that began in the second half of March.

Considerable uncertainty remains as to the duration and extent of the economic impact and in turn, the magnitude of impact on Interfor’s operations, demand for its products and financial outlook. However, Interfor is well positioned for this uncertainty with a strong balance sheet and significant available liquidity.

The company has taken the following proactive measures to protect the health of its employees, balance its lumber production with reduced demand and safeguard its financial position in response to COVID-19:

• Interfor has modified its operational procedures, suspended all non-essential travel and adopted work-from-home measures in accordance with public health authority directives.
• On March 18, 2020 Interfor announced a temporary reduction in lumber production by approximately 35 million board feet per week across its operations in British Columbia, the U.S. Northwest and the U.S. South for an initial two-week period, representing approximately 60 per cent of Interfor’s production capacity.  On March 26, 2020 the company announced a further production curtailment, resulting in a total reduction of approximately 50 million board feet for the week of March 30, 2020. The company will continue to evaluate and adjust its operating schedule on a regular basis with consideration given to employee safety, market pricing and demand, and inventory levels.
• Cash conservation actions have been implemented to significantly reduce non-essential operating expenses and discretionary capital expenditures. On March 18, 2020 the company announced a reduction of approximately $140 million of its capital expenditures planned for 2020 and 2021. With this reduction, Interfor’s capital expenditures are expected to be approximately $100 million in 2020 and substantially below $100 million in 2021.
• Interfor has modified components of its previously announced U.S. $240 million Phase II strategic capital plan. The rebuild of the sawmill operation at Thomaston, Ga., has been postponed while the sawmill portion of the rebuild at the Eatonton, Ga., operation has been deferred with completion now planned for 2022. U.S. $66.1 million has been spent on the Phase II plan through March 31, 2020. Interfor will re-evaluate its capital expenditures as market conditions continue to evolve and maintains significant flexibility to modify the rate of spending.

The company will continue to be proactive in taking measures to safeguard the company’s financial position, while remaining alert to opportunities that may become available.

Read the full report here.