Interfor Corp. recorded a net loss in Q2’19 of $11.2 million, or $0.17 per share, compared to a net loss of $15.3 million, or $0.23 per share in Q1’19 and net earnings of $63.7 million, or $0.91 per share in Q2’18. Adjusted net loss in Q2’19 was $16.2 million compared to an adjusted net loss of $12.7 million in Q1’19 and adjusted net earnings of $68.9 million in Q2’18.
Adjusted EBITDA was $12.6 million on sales of $481.3 million in Q2’19 versus $16.3 million on sales of $451.2 million in Q1’19.
Notable items in the quarter included:
Lower lumber prices
- The key benchmark prices decreased quarter-over-sequential-quarter with the SYP Composite, Western SPF Composite and KD H-F Stud 2×4 9’ falling by U.S. $23, U.S. $36 and U.S. $19 per mfbm, respectively. Interfor’s average lumber selling price dropped $10 from Q1’19 to $603 per mfbm.
Higher shipments and reduced inventories
- Total lumber production was 647 million board feet, consistent with the prior quarter. Production in the U.S. South increased slightly to 320 million board feet from 316 million board feet in the preceding quarter as capital project-related downtime at the Monticello sawmill was more than offset by higher operating rates at most mills in the region. The B.C. and U.S. Northwest regions accounted for 187 million board feet and 140 million board feet, respectively, compared to 195 million board feet and 135 million board feet in Q1’19. Production was influenced by the curtailments taken in the B.C. Interior in response to weak lumber prices and continuing high log costs.
- Total lumber shipments were 674 million board feet, including agency and wholesale volumes, or 53 million board feet higher than Q1’19.
- Lumber inventories at June 30, 2019 were 211 million board feet, down from 229 million board feet at March 31, 2019.
- Interfor’s operating costs were negatively impacted by an increase in its net realizable value provision for log and lumber inventories of $10.3 million in Q2’19.
Continued strong financial position
- Net debt ended the quarter at $198.2 million, or 17.9 per cent of invested capital, resulting in available liquidity of $392.5 million.
- The company generated $9.9 million of cash flow from operations before changes in working capital, or $0.15 per share.
- Capital investments of $64.6 million in Q2’19 included $51.4 million primarily on U.S. South focused high-return discretionary projects, with the remainder related to maintenance capital and woodlands projects.
- On June 28, 2019, the company received compensation of $7.7 million from the government of B.C. as settlement for the 2017 cancellation of two timber licences on the B.C. Coast, which is excluded from Adjusted EBITDA.
Softwood lumber duties
- Interfor expensed $10.8 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. $76.5 million have been paid by Interfor since the inception of the current trade dispute and are held in trust by the U.S. 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.
Acquisition of B.C. Interior cutting rights from Canfor
On June 3, 2019, Interfor entered into a purchase agreement with Canadian Forest Products Ltd. to acquire 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 (the Forestry Assets), and assume certain liabilities relating to the Forestry Assets. The cash purchase price of $60 million will be financed from Interfor’s available cash balance and/or borrowings under its existing bank credit facility.
The transaction is subject to various consents, including that by the government of B.C. and is targeted to close in the third quarter, 2019.
By acquiring the Forestry Assets, Interfor will solidify its long-term log supply at its Adams Lake sawmill, supporting the continuation of a two-shift operating configuration at the mill in the face of declining allowable annual cuts in the region. The Forestry Assets are located adjacent to Adams Lake’s woodlands operations, with log production flowing logically to the sawmill from a transportation and logistics standpoint.
Upon closing the transaction, Interfor will pursue a follow-on, high return investment opportunity by adding a new dry kiln to support additional value-added processing at the Adams Lake mill.