Summary Comments on the First Quarter Results
VANCOUVER, May 5 /PRNewswire-FirstCall/ - TimberWest's first quarter results for 2010 show improvement in distributable cash over the same quarter last year and the fourth quarter of 2009. With log prices in all Asian markets improving through the quarter, the Company was able to ship higher volumes into those markets. Q1, 2010 log sales revenue was $49.4 million, up from $29.3 million in the same quarter last year, and showing steady improvement over the fourth quarter of 2009 when log sales revenue was $40.1 million. As indicated at the end of the fourth quarter, TimberWest anticipated real estate sales to be weak for Q1 and in fact only generated revenue of $1.0 million. However, subsequent to quarter end the Company generated an additional $6.8 million of real estate sales at approximately $3,000/acre.
EBITDA for the quarter was positive at $3.4 million, compared to an EBITDA loss for the first quarter of 2009 of $2.4 million. The Company generated negative distributable cash of $2.9 million in Q1, 2010 compared to negative $15.3 million, or negative$6.4 million after adjusting for the financing costs in the first quarter of 2009. Excluding $3.5 million of interest on the convertible debentures that the Company paid in kind for the first quarter, distributable cash was positive $0.6 million. In spite of the fact that TimberWest is paying the interest on the convertible debentures in kind, the Company has decided to maintain consistency with its definition of distributable cash and continue to deduct all of its interest obligations from the distributable cash calculation. EBITDA and distributable cash improved due to higher log sales volumes and improvements in production costs, which declined $6/m(3) due to higher volumes logged at competitive contract rates.
Equity Offering
On April 27, 2010 the Company announced its intention to raise additional equity through a stapled unit bought deal offering. The public offering is 12,000,000 Stapled Units at a price of $5.00 per Stapled Unit for gross proceeds of $60 million plus a 15% over allotment option. The offering is scheduled to close on May 18, 2010.
In conjunction with this offering, the Company has amended its credit agreement to allow for the payment of interest on the convertible debentures to be made in cash and it is the Company's intention to begin paying in cash on July 15, 2010. The new equity will enable TimberWest to reduce its revolving credit facility, giving the Company an estimated $110 million of liquidity upon closing, and enable it to pay the convertible debenture interest in cash, instead of continuing the current level of dilution by paying these in kind.
The lack of visibility on a recovery in US housing, the uncertain timing of non-core land sales and the resulting uncertainty in the Company's near term earnings prospects continue to cause the Company concern. "Therefore we believe taking this opportunity to bolster our liquidity is a prudent course of action. Continuing to pay the convertible debenture interest in kind resulted in considerable dilution with the conversion price of the debentures at $3.50 per Stapled Unit," said Paul McElligott, President and Chief Executive Officer, TimberWest Forest Corp.
TimberWest had a BC Forest Safety Council SAFE Re-Certification audit during the first quarter and achieved an overall score of 96%. This achievement is a strong reflection of the safety culture at TimberWest. The successful completion of this audit has renewed the Company's SAFE certification status for another three year period. TimberWest's 2010 score of 96% compares favourably to its 2007 score of 94%.
During the quarter there were three reportable incidents, generating a Medical Incident Rate (MIR) of 0.51 for production contractors. This compares to two reportable incidents and an MIR of 0.64 for the first quarter of 2009.
Timberlands
Over the past few years, the Company has been indicating that there would be opportunities created in Asian log markets as a result of declining export volumes from Russia due, in part, to escalating Russian log export taxes. The 2010 first quarter results confirm the optimism that the Company had for these markets. Due to reduced supply from Russia, volumes and prices in US dollars increased significantly.
Log sales revenue of $49.4 million in Q1, 2010 was dominated by Asia where the Company generated $31.7 million. Strong markets in Japan, China and Korea all contributed to TimberWest's sales success this quarter. Sales into the US continue to be weak and only totaled $0.6 million for the quarter. Total sales volumes for the quarter totaled 683,600 m(3), with 370,700 m(3) shipped to Asia. This more than doubles the Company's Asian sales volumes over Q1 2009. Sales to Korea and China were at a record pace with both of those economies showing considerable growth in the quarter. Sales to Korea were 76,400 m(3) and sales to China were 69,600 m(3). For all of 2009, TimberWest sold 103,600 m(3) to Korea and 106,400 m(3) to China. The Company is anticipating selling record volumes to both of those markets this year and finding alternative markets to the US is a priority for TimberWest at this time. Wood based housing in Japan has begun to recover slowly and is anticipated to be up about 7.5% by the end of this year.
While volumes were higher, sales realizations were down compared to the first quarter of 2009, primarily as a result of currency and a significant change in species mix compared to the same quarter in 2009. This quarter TimberWest focused more on hemlock markets in Korea and China and in spite of a 17% increase in the value of the Canadian dollar against the US dollar, the Company achieved an average sales realization of $86 per m(3) for its sales to Asia. Average sales realizations for the quarter for all markets were $72 per m(3) with production costs of $62 per m(3) compared to sales realizations of $77 per m(3) and production costs of $68 per m(3) for the same period last year. As a result timberland margins improved from 3% in Q1 2009 to 11% in Q1 2010, an 8% improvement in costs over the same quarter in 2009. Lower costs are a result of higher volume over fixed costs, lower road construction spending as well as competitive contract rates on the Company's public and private land operations, resulting in higher margins compared to the first quarter of 2009. The savings from the sub-division of the Company's harvesting and road building contracts are more apparent at these volume levels.
ISO 14001 and SFI environmental certifications require TimberWest to undertake an annual internal audit. This year's audit was completed during the first quarter. Due to the high number of contractors new to TimberWest's public and private land operations, this internal audit was the most complete undertaken in the Company's history. The Timberlands portion included auditor visits to 18 contractors, 33 audit points and interviews with 82 crew members. The Audit findings identified a total of nine minor non conformances, all easily remedied.
Couverdon
As indicated last quarter, TimberWest did not anticipate sales activity picking up until the second quarter, and so far in Q2 the Company has closed $6.8 million in sales. The Company also has work underway on a number of other conditional offers at this time. While the real estate market has picked up on Vancouver Island, the large acreage lot market, which is what all of TimberWest's product at the moment represents, is a relatively small market. As a result, sales in this market are challenging to predict.
TimberWest continues to work on planning and rezoning at many locations across the Company's portfolio and are pleased with the progress the Company is making. The more significant work on the core development land will take a number of years to successfully complete. In the meantime TimberWest will continue to deliver large acreage lots and non-core land sales to the market.
Carbon Sequestration Proposal to Pacific Carbon Trust and Other Initiatives
TimberWest engaged Carbon Credit Corp. to develop a carbon credit proposal which was submitted to the Pacific Carbon Trust (PCT) at the end of the first quarter. PCT is a provincial Crown corporation established in 2008 to deliver BC-based greenhouse gas offsets to help clients meet their carbon reduction goals and to support the growth of BC's low-carbon economy. TimberWest's project is specific to the conservation of old growth timber on the Company's private timberlands.
Due to the rapidly evolving nature of carbon offset protocol development in BC, BC currently does not have an approved forest conservation protocol and consequently the project will be developed with the intent of being compliant with two separate protocols. The first, the Voluntary Carbon Standard (VCS) is an existing protocol which allows projects to be sold on the voluntary market. The second, Climate Action Reserve (CAR) is a protocol developed for California which PCT is considering for adaptation for use in BC. PCT has indicated it will accept projects developed under protocols from other jurisdictions as long as they can be adapted to comply with BC regulatory requirements. TimberWest anticipates being able to share the results of this with the public later in the year.
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