Strikes characterise difficult trading period for York Timbers

30th September 2019 By: Simone Liedtke - Writer

Integrated forestry company York Timbers on Monday reported that its performance in the financial year ended June 30 had been significantly impacted on by strikes, result in 239 lost production days.

The company also lost plywood export contracts as a result of the strikes, with operational challenges further exacerbated by weak local demand, as well as the dumping in South Africa of uncertified Brazilian plywood by importers, which further reduced local prices.

Demand for lumber during the full-year period was subdued with fierce price competition, the company said on Monday, adding that customer relations were impacted on by York’s inability to deliver lumber during the strikes.

However, following the strikes, the company’s focus was on returning the processing sites to targeted production levels and rebuilding customer relationships.

In turn, this resulted in earnings before interest, taxes, depreciation and amortisation (Ebitda) of R201-million for the second half of the financial year.

Moving forward, the company said its focus was to increase revenue, reduce stock and generate cash.

OPERATIONAL RESULTS

The protracted strike by trade union, the National Union of Metalworkers of South Africa (Numsa) impacted revenue by about R225-million and Ebitda by about R131-million.

Wage staff lost about R52-million owing to the no-work, no-pay-principle being applied to striking workers, York said.

Debt, however, was reduced by R121-million over the financial year and stock increased by R74-million as access to sites was prevented by striking workers, impacting on York’s ability to service customer orders.

The strike ended in January, with operations returning to normal thereafter, resulting in a strong performance over the second half of the financial year. Costs were optimised by strategic capital investment and upgrades to improve efficiencies and the elimination of duplication of cost in the supply chain, York reported.

Total cost, excluding external log purchases, as a percentage of revenue increased over the last seven years at a compound yearly growth rate of 1%, despite significant increases in electricity and labour costs.

Forestry operational results were impacted by lower volumes harvested - 10% less, compared with the prior year.

External log purchases were R261-million, compared with R202-million in the prior year.

York lamented that the sustainable harvestable volumes from its own plantations would be at their lowest levels for the next two to three years as a result of the extensive fires in 2007 and 2008, and said that this would only increase from 2023 onwards.

Operational cost increases in forestry owing to wage rates and silviculture activities will be required at that point in the growth lifecycle of trees.

However, the investment in mechanised operations on the Highveld has substantially reduced harvesting costs and provided additional flexibility in the supply chain, York said.

The company referred to LogTrace, which has also developed into a system that reconciles standing volume to actual volumes delivered to operations and scheduling of log mixes to the designated processing facility.

York acquired an inbound logistics fleet which, together with LogTrace, resulted in a reduction of the delivered log costs and provided the necessary flexibility to meet the log mix demands of the various processing plants.

During the period under review, York also optimised its sales channels and is re-establishing export contracts into markets where York’s product is certified for the targeted market requirements and is achieving a price premium for its quality.

FINANCIAL POSITION

Touching on the company’s financials, capital expenditure was incurred in the construction of the finished goods warehouse at Jessievale, with proceeds received from the Sasria of about R25-million.

Log transport vehicles were purchased to unlock synergies within the supply chain and a new enterprise resource planning system is being installed, York said.

The net fair value increase in the value of the biological assets of R204-million is a result of an improvement in the volume adjustment factor being applied to reduce forecast volumes. The factor was reduced from 10% to 2% on a weighted average basis.

Goodwill assigned to the forestry segment was impaired by R208-million.

This impairment, York said, resulted from a decrease in the long-term revenue inflation forecast, an increase in the volume accuracy adjustment factor, a change in the risk-free rate and an increase in the value of biological assets included in the carrying amount of the segment assets.

Working capital levels have increased from the prior year, and, in anticipation of the higher demand season, strategic stock build has taken place.

International sales volumes and prices are influenced by Brazilian producers flooding the South African market at unsustainable price points, York lamented, adding that local market demand had remained depressed in line with the lack of construction sector activity.

Cash generated from operations of R224-million was applied to reduce borrowings by R121-million, and capital expenditure of R81-million and R22-million was contributed to the self-insurance fund.

The sale of an outlier plantation generated cash of R54-million for the company.

Included in trade payables is an amount due to the State-owned South African Forestry Company of R146-million that relates to the purchase of standing timber. The amount is payable in equal monthly instalments for settlement at March 31, 2020.

OUTLOOK

Looking ahead, York on Monday reported that it had successfully explored new distribution channels at better price points than what was available in the local market and traditional export market.

The company has put an operational plan in place through its warehouse channel to respond to cheap imports and traders dumping product in South Africa.

The consolidation of the sawmilling operations in the escarpment area is also under way to optimise available raw material to service market demand.

Further, detailed feasibility studies are nearing completion for expansion of the Highveld processing operations as York has excess raw material available at a sustainable level.

The company also said that it continued to pursue the construction of a biomass electricity plant with the regulating authorities as the baseload electricity generation and carbon sequestration were key attributes of this technology.

Also, with mass timber production having increased dramatically over the last number of years, this provides expansion opportunities for solid wood processing for York, who said that it is actively engaged in developing this sector in South Africa.

York, meanwhile, continues to pursue the procurement of harvestable volumes and forestry land to supplement the sustainable volumes from own plantations to meet its processing demand.