Ainsworth Lumber not out of the woods, but says liquidity will cushion rough times

By Paul Deckelman

New York, Aug. 16 - Ainsworth Lumber Co. Ltd. had a tough quarter and a tough first half, hurt by weak lumber prices, a stronger Canadian dollar - which hurt sales in the United States and other overseas markets - and extensive downtime at its big plant in Grand Rapids, Minn. But the Vancouver B.C.-based forest products company has ample liquidity to ride out any prolonged industry downturn, company executives said on a conference call with analysts Wednesday, during which they discussed Ainsworth's recently released 2006 second-quarter and first-half financial results.

"Our liquidity remains strong," declared the company's chief financial officer, Bob Allen, noting that it totaled more than C$300 million as of June 30. This included C$124 million of cash on hand - although the figure was down from C$209 million at the end of the 2005 fourth quarter and fiscal year on Dec. 31. The company also had C$95 million of short-term liquid investments, C$43 million of restricted cash, set aside to finance new press machinery at its facility in Grande Prairie, Alta. It also had a completely undrawn C$100 million asset-backed loan facility that it could draw upon.

Allen further noted that during the quarter, the company had enhanced its liquidity with the issuance of $75 million of new floating-rate notes due 2013.

"So I think we have quite a little bit of fat on our bones to be able to survive an extended period of downturn," the CFO said.

And if it needs it, Allen and company executive vice president Michael Ainsworth said, the company has the capability for further borrowings. Allen noted that "in our unsecured [debt] covenants, we have an incurrence test of 2 to 1 EBITDA to interest, and as long as we meet those covenant tests, we can attach more [unsecured] debt to it."

As of June 30, Ainsworth's year-to-date ratio of EBITDA-to-interest obligations stood at 2.75 to 1, well above the 2x minimum threshold.

The company is not hindered by any maintenance covenants, Allen said.

He said that the company could also increase its secured borrowing using as collateral new assets that it acquires or accumulates, such as the expansion at Grand Prairie, "so on a limited basis, those assets could be potentially secured against. But it's only new assets that come into the equation."

Michael Ainsworth, when asked by an analyst during the question-and-answer portion of the conference call following the official presentation about how much additional secured borrowing the company might be able to do, opined that "on a practical basis, not everybody wants to lend against real estate and those kind of realty assets. So it's really about equipment -presses, blenders, strainers, what have you. I think that number would probably be $80 million, potentially. "

OSB prices drop

The current hard times in the lumber industry have been characterized by falling market prices for commodity oriented strand board (OSB), a type of lumber that is the company's main product, which fell to an average of $238 per thousand square feet during the quarter from $297 per msf a year earlier.

Ainsworth, when asked by an analyst whether the business founded and controlled by his family might be forced to make asset sales at some point in order to keep going, said "that event horizon is way out there for us, quite frankly."

He asserted that long before that would have to happen, the lumber market would correct itself.

"Invariably when you get in a trough like this, it can't remain at the level it's at - it's unsustainable. So the market will naturally adjust. Some capacity will have to be taken out.

"We'll come to a new level in the market from a pricing standpoint at which, as an OSB producer, you should be able to maintain through the course of the year . . . . so we would see those sort of things happening before you ever reached a point where we were looking at asset sales, etc. We would have options, for certain, but I think we're a long ways away from that event horizon."

While that would be going on, he said, "we're looking at a C$100 million ABL which we could almost completely draw down if it should be necessary. We are going to have C$50 million or C$60 million in cash left on the balance sheet after all this [capital spending] we're talking about," in Grande Prairie and at its Minnesota plants. "So we're talking [of being able to survive] at least two years or more of zero EBITDA before this would ever become an issue."

May shut more facilities

However, Ainsworth and Allen said that with the industry having problems, circumstances could arise that would force the company to shut individual facilities, at least on a temporary basis, if they were no longer EBITDA-positive.

"It is a current topic," Ainsworth admitted. "I don't want to talk about where or when, but reading between the lines, yeah, we're probably there, and probably taking a look. I shouldn't be talking about that sort of thing - if, or when, how long or anything else. But it is a current topic."

He said that the company would not be shuttering facilities as part of any concerted industry effort to support prices by cutting output. Any decision to suspend operations for a time at one of its plants in British Columbia, Alberta, Ontario or Minnesota would instead be "a purely financial thing. We're going to understand what our shut-down costs are and compare that with what our costs are to continue operating [a facility] are going to be and it's going to be a decision that we're better off curtailing a facility or something like this as opposed to that other event."

He said that it would take "a much wider, much more broad, more significant volume for us to think we would be able to impact the market like that. Out of 11 billion square feet [the company's estimated yearly output of OSB and specialty overlaid plywood], us curtailing one facility for some time is not the solution here. So it's a financial decision."

Sales, net income, EBITDA fall

The industry's pricing weakness caused the company's sales in the latest quarter to fall to C$234.3 from C$329 million in the year-earlier quarter. Net income fell to C$27.3 million from C$31.3 million. Adjusted EBITDA plunged to C$13.5 million from C$105 million a year earlier. Interest expense of C$17 million was about in line with the year-earlier figures.

As of June 30, the company had total long-term debt on its balance sheet of C$908.9 million - up sequentially from C$863.7 million at the end of the first quarter on March 31, but not much changed from C$905.6 million a year earlier. The debt included the $75 million of 2013 floaters, as well as $320 million of 6¾% senior notes due 2014, $275 million of 7¼% senior notes due 2012 and $175 million of senior floating-rate notes due 2010.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.