VANCOUVER, April 24, 2018 /CNW/ - Canfor Corporation (TSX: CFP) today reported first quarter 2018 results:
Highlights
- Q1, 2018 adjusted operating income of $238.7 million driven by historically high lumber prices and record-high pulp and paper earnings; record-high sales of $1.23 billion
- Adjusted net income of $145.4 million, or $1.13 per share
- Net debt of $96.8 million, or 4.3% net debt to total capitalization, at March 31, 2018
Financial Results
The following table summarizes selected financial information for the Company for the comparative periods:
(millions of Canadian dollars, except per share amounts) |
Q1 2018 |
Q4 2017 |
Q1 2017 |
|||
Sales |
$ |
1,233.5 |
$ |
1,156.0 |
$ |
1,105.2 |
Reported operating income before amortization |
$ |
268.6 |
$ |
278.2 |
$ |
169.1 |
Reported operating income |
$ |
203.8 |
$ |
214.2 |
$ |
106.8 |
Adjusted operating income before amortization1 |
$ |
303.5 |
$ |
254.8 |
$ |
169.1 |
Adjusted operating income1 |
$ |
238.7 |
$ |
190.8 |
$ |
106.8 |
Net income2 |
$ |
112.2 |
$ |
131.8 |
$ |
66.1 |
Net income per share, basic and diluted2 |
$ |
0.87 |
$ |
1.02 |
$ |
0.50 |
Adjusted net income2 |
$ |
145.4 |
$ |
114.8 |
$ |
59.3 |
Adjusted net income per share, basic and diluted2 |
$ |
1.13 |
$ |
0.89 |
$ |
0.45 |
1 |
Adjusted for countervailing and anti-dumping duty deposits expensed for accounting purposes (net expense of $34.9 million in the first quarter of 2018 and net recovery of $23.4 million in the fourth quarter of 2017). |
2 |
Attributable to equity shareholders of the Company. |
The Company reported operating income of $203.8 million for the first quarter of 2018, down $10.4 million from reported operating income of $214.2 million for the fourth quarter of 2017, as lower operating earnings for the lumber segment were offset in part by record-high operating earnings for the pulp and paper segment. Reported results in the first quarter of 2018 include a net duty expense of $34.9 million, at a combined effective countervailing duty ("CVD") and anti-dumping duty ("ADD") rate of 14.34%. This compares to a net duty recovery of $23.4 million in the fourth quarter of 2017 reflecting the year-to-date true-up of preliminary CVD and ADD rates to current rates following final determinations announced by the US Department of Commerce ("DOC") and US International Trade Commission ("ITC"). After adjusting for the duties, operating income was $238.7 million for the first quarter of 2018, up $47.9 million from similarly adjusted operating income in the fourth quarter of 2017.
Adjusted lumber segment earnings largely reflected higher Western Spruce/Pine/Fir ("Western SPF") and Southern Yellow Pine ("SYP") benchmark lumber prices, more than offsetting the impact of adverse winter weather conditions which resulted in significant transportation delays and contributed to increased unit log costs and lower production volumes through the quarter. Unit log costs in Western Canada also increased reflecting higher market-based stumpage and continued upward pressure on purchased wood costs. Record pulp and paper segment earnings largely reflected continued strong demand that resulted in significantly higher Northern Bleached Softwood Kraft ("NBSK") pulp unit sales realizations.
North American lumber demand remained solid in the first quarter of 2018. US housing starts averaged 1,314,000 units on a seasonally adjusted basis, up 5% from the previous quarter and up 6% from the first quarter of 2017. Canadian housing construction activity in the first quarter of 2018 was in line with the previous quarter, at an average of 227,000 units on a seasonally adjusted basis. Offshore lumber demand from China, Japan and other regions remained solid through the first quarter, particularly for the Company's higher-value lumber products.
The average benchmark North American Random Lengths Western SPF 2x4 #2&Btr price was up US$51 per Mfbm, or 11%, compared to the fourth quarter of 2017, with more pronounced price increases across wider-width dimensions. Improved Western SPF lumber pricing was offset in part by increased duty deposits, as both CVD and ADD were in effect for the full quarter following the re-introduction of CVD in late December 2017. Overall, Western SPF lumber unit sales realizations showed a modest improvement compared to the previous quarter. The average benchmark North American Random Lengths SYP East 2x4 #2 price was up US$111 per Mfbm, or 24%, compared to the fourth quarter of 2017, while prices for 2x6 and 2x10 #2 dimensions were stable. Overall, SYP lumber unit sales realizations showed a modest increase quarter-over-quarter.
Total lumber production, at 1.24 billion board feet, was in line with the prior quarter, as fewer statutory holidays and productivity gains in the US South offset lower productivity in Western Canada as a result of the aforementioned severe winter weather. Total lumber shipments, at 1.20 billion board feet, were also in line with the previous quarter as modestly higher SYP shipments offset the weather-related transportation disruptions in Western Canada which placed a significant strain on railcar and truck availability through the first quarter. As a result of the aforementioned challenges, lumber unit manufacturing costs in the first quarter of 2018 were slightly higher than the previous quarter.
Global softwood pulp markets remained favourable through the first quarter of 2018, resulting in US-dollar NBSK pulp list prices holding at near-record high prices, and a significant increase in average NBSK pulp unit sales realizations. Average Bleached Chemi-Thermo Mechanical Pulp ("BCTMP") unit sales realizations showed a more moderate increase in the quarter, with increased demand towards the end of 2017 translating into higher average prices for product shipped in the current quarter.
Pulp shipments were up 3% from the previous quarter, as a 14,000 tonne vessel slippage from December into January more than offset transportation constraints in the current quarter. Pulp production was broadly in line with the fourth quarter of 2017, as strong productivity in March combined with increased operating days following the unscheduled outage at CPPI's Northwood pulp mill in the previous quarter largely offset the impacts of various weather-related disruptions in January and February. Pulp unit manufacturing costs were moderately higher than the previous quarter, largely reflecting market-driven increases in fibre costs and weather-related increases in energy costs.
Commenting on the Company's first quarter results, Canfor's President and Chief Executive Officer, Don Kayne, said, "Despite the unprecedented challenges caused by severe weather and railcar availability, both our lumber and pulp businesses recorded solid financial results for the first quarter of 2018. This reflected strong market demand and the commitment of our sales, transportation and operations teams to ensure we minimized any disruption to our customers."
The Company remains committed to the previously announced greenfield sawmill and is working on finalizing the construction schedule for project completion.
Looking ahead, the US housing market is forecast to continue its ongoing gradual recovery through the balance of 2018. North American lumber prices are projected to remain solid (and high by historical standards) in the second quarter of 2018 reflecting solid seasonal demand and the transportation network's slow return to normal service levels. For the Company's key offshore lumber markets, demand is anticipated to remain solid through the second quarter of 2018, particularly in Japan.
In the pulp and paper segment, global softwood kraft pulp markets are projected to remain well positioned through the second quarter of 2018, reflecting both continued solid demand and tighter supply arising from the current transportation challenges as well as the traditional spring maintenance period. The outlook for the latter part of 2018 remains more uncertain given incremental pulp capacity currently projected to come online. For the month of April 2018, CPPI announced an increase of US$30 per tonne for NBSK pulp list prices to North America.
Pulp and paper segment results in the second quarter of 2018 will reflect scheduled maintenance outages at the Prince George NBSK pulp mill and paper machine, as well as at the Taylor BCTMP mill, with a projected 5,000 tonnes of reduced NBSK pulp production, 4,000 tonnes of reduced paper production and 11,000 tonnes of reduced BCTMP production, respectively, combined with higher associated maintenance costs and lower projected shipment volume. The scheduled outage at the Taylor BCTMP mill will include work associated with the previously announced energy project. The Northwood NBSK pulp mill has a maintenance outage scheduled for the third quarter of 2018, with a projected 22,000 tonnes of reduced NBSK pulp production.
Additional Information and Conference Call
A conference call to discuss the first quarter's financial and operating results will be held on Thursday, April 26, 2018 at 7:30 AM Pacific time. To participate in the call, please dial Toll-Free 1-888-390-0546. For instant replay access until May 10, 2018, please dial Toll-Free 1-888-390-0541 and enter participant pass code 150025#. The conference call will be webcast live and will be available at www.canfor.com. This news release, the attached financial statements and a presentation used during the conference call can be accessed via the Company's website at http://www.canfor.com/investor-relations/webcasts.
Forward Looking Statements
Certain statements in this press release constitute "forward-looking statements" which involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from any future results, performance or achievements expressed or implied by such statements. Words such as "expects", "anticipates", "projects", "intends", "plans", "will", "believes", "seeks", "estimates", "should", "may", "could", and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are based on management's current expectations and beliefs and actual events or results may differ materially. There are many factors that could cause such actual events or results expressed or implied by such forward-looking statements to differ materially from any future results expressed or implied by such statements. Forward-looking statements are based on current expectations and the Company assumes no obligation to update such information to reflect later events or developments, except as required by law.
Canfor is a leading integrated forest products company based in Vancouver, British Columbia ("BC") with interests in BC, Alberta, North and South Carolina, Alabama, Georgia, Mississippi and Arkansas. Canfor produces primarily softwood lumber and also owns a 54.8% interest in Canfor Pulp Products Inc., which is one of the largest global producers of Premium Reinforcing Northern Bleached Softwood Kraft Pulp and a leading producer of high performance kraft paper. Canfor shares are traded on The Toronto Stock Exchange under the symbol CFP.
Canfor Corporation
First Quarter 2018
Management's Discussion and Analysis
This interim Management's Discussion and Analysis ("MD&A") provides a review of Canfor Corporation's ("Canfor" or "the Company") financial performance for the quarter ended March 31, 2018 relative to the quarters ended December 31, 2017 and March 31, 2017, and the financial position of the Company at March 31, 2018. It should be read in conjunction with Canfor's unaudited interim consolidated financial statements and accompanying notes for the quarters ended March 31, 2018 and 2017, as well as the 2017 annual MD&A and the 2017 audited consolidated financial statements and notes thereto, which are included in Canfor's Annual Report for the year ended December 31, 2017 (available at www.canfor.com). The financial information in this interim MD&A has been prepared in accordance with International Financial Reporting Standards ("IFRS"), which is the required reporting framework for Canadian publicly accountable enterprises.
Throughout this discussion, reference is made to Operating Income before Amortization and Adjusted Operating Income before Amortization which Canfor considers to be a relevant indicator for measuring trends in the performance of each of its operating segments and the Company's ability to generate funds to meet its debt repayment and capital expenditure requirements. Reference is also made to Adjusted Shareholder Net Income (calculated as Shareholder Net income less specific items affecting comparability with prior periods – for the full calculation, see the reconciliation included in the section "Analysis of Specific Material Items Affecting Comparability of Net Income") and Adjusted Shareholder Net Income per Share (calculated as Adjusted Shareholder Net Income divided by the weighted average number of shares outstanding during the period). Operating Income before Amortization and Adjusted Shareholder Net Income and Adjusted Shareholder Net Income per Share are not generally accepted earnings measures and should not be considered as an alternative to net income or cash flows as determined in accordance with IFRS. As there is no standardized method of calculating these measures, Canfor's Operating Income before Amortization, Adjusted Shareholder Net Income and Adjusted Shareholder Net Income per Share may not be directly comparable with similarly titled measures used by other companies. Reconciliations of Operating Income before Amortization to Operating Income and Adjusted Shareholder Net Income to Net Income reported in accordance with IFRS are included in this MD&A. Throughout this discussion, reference is made to the current quarter, which refers to the results for the first quarter of 2018.
Factors that could impact future operations are also discussed. These factors may be influenced by both known and unknown risks and uncertainties that could cause the actual results to be materially different from those stated in this discussion. Factors that could have a material impact on any future oriented statements made herein include, but are not limited to: general economic, market and business conditions; product selling prices; raw material and operating costs; currency exchange rates; interest rates; changes in law and public policy; the outcome of labour and trade disputes; and opportunities available to or pursued by Canfor.
Certain comparative amounts for the prior period have been reclassified to conform to the current year's presentation.
All financial references are in millions of Canadian dollars unless otherwise noted. The information in this report is as at April 24, 2018.
Forward Looking Statements
Certain statements in this MD&A constitute "forward-looking statements" which involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from any future results, performance or achievements expressed or implied by such statements. Words such as "expects", "anticipates", "projects", "intends", "plans", "will", "believes", "seeks", "estimates", "should", "may", "could", and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are based on management's current expectations and beliefs and actual events or results may differ materially. There are many factors that could cause such actual events or results expressed or implied by such forward-looking statements to differ materially from any future results expressed or implied by such statements. Forward-looking statements are based on current expectations and the Company assumes no obligation to update such information to reflect later events or developments, except as required by law.
FIRST QUARTER 2018 OVERVIEW
Selected Financial Information and Statistics
(millions of Canadian dollars, except per share amounts) |
Q1 |
Q4 2017 |
Q1 2017 |
||||
Operating income (loss) by segment: |
|||||||
Lumber |
$ |
125.9 |
$ |
154.9 |
$ |
83.7 |
|
Pulp and Paper |
$ |
85.1 |
$ |
66.8 |
$ |
35.2 |
|
Unallocated and Other1 |
$ |
(7.2) |
$ |
(7.5) |
$ |
(12.1) |
|
Total operating income |
$ |
203.8 |
$ |
214.2 |
$ |
106.8 |
|
Add: Amortization2 |
$ |
64.8 |
$ |
64.0 |
$ |
62.3 |
|
Total operating income before amortization |
$ |
268.6 |
$ |
278.2 |
$ |
169.1 |
|
Add (deduct): |
|||||||
Working capital movements |
$ |
(152.1) |
$ |
(63.9) |
$ |
(105.2) |
|
Defined benefit plan contributions, net |
$ |
(7.3) |
$ |
(10.4) |
$ |
(6.0) |
|
Income taxes received (paid), net |
$ |
(46.8) |
$ |
(4.2) |
$ |
1.2 |
|
Adjustment to accrued duties3 |
$ |
(12.9) |
$ |
(44.9) |
$ |
- |
|
Gain on sale of Anthony EACOM Inc. |
$ |
- |
$ |
- |
$ |
(4.0) |
|
Other operating cash flows, net4 |
$ |
22.7 |
$ |
1.8 |
$ |
17.7 |
|
Cash from operating activities |
$ |
72.2 |
$ |
156.6 |
$ |
72.8 |
|
Add (deduct): |
|||||||
Capital additions |
$ |
(56.4) |
$ |
(94.0) |
$ |
(38.9) |
|
Share purchases |
$ |
(4.2) |
$ |
(12.0) |
$ |
- |
|
Finance expenses paid |
$ |
(3.7) |
$ |
(6.7) |
$ |
(3.2) |
|
Distributions paid to non-controlling interests |
$ |
(1.8) |
$ |
(1.8) |
$ |
(3.8) |
|
Repayment of long-term debt |
$ |
(0.1) |
$ |
(50.1) |
$ |
- |
|
Proceeds received from sale of Anthony EACOM Inc. |
$ |
- |
$ |
13.1 |
$ |
5.4 |
|
Acquisitions |
$ |
- |
$ |
(3.6) |
$ |
(41.8) |
|
Proceeds from long-term debt, net |
$ |
- |
$ |
4.3 |
$ |
1.7 |
|
Foreign exchange gain (loss) on cash and cash equivalents |
$ |
1.4 |
$ |
0.1 |
$ |
(0.1) |
|
Other, net4 |
$ |
0.5 |
$ |
3.5 |
$ |
3.5 |
|
Change in cash / operating loans |
$ |
7.9 |
$ |
9.4 |
$ |
(4.4) |
|
ROIC – Consolidated period-to-date5 |
6.6% |
7.8% |
4.0% |
||||
Average exchange rate (US$ per C$1.00)6 |
$ |
0.791 |
$ |
0.786 |
$ |
0.756 |
1Higher Unallocated and Other in the first quarter of 2017 largely attributable to higher legal costs related to the expiry of the Softwood Lumber Agreement. |
2Amortization includes amortization of certain capitalized major maintenance costs. |
3Adjusted to true-up countervailing and anti-dumping duty deposits expensed for accounting purposes to current accrual rates. |
4Further information on cash flows can be found in the Company's unaudited interim consolidated financial statements. |
5Consolidated Return on Invested Capital ("ROIC") is equal to operating income/loss plus realized gains/losses on derivatives, equity income/loss from joint venture and other income/expense, all net of minority interest, divided by the average invested capital during the period. Invested capital is equal to capital assets, plus long-term investments and net non-cash working capital, all excluding minority interest components. |
6Source – Bank of Canada (monthly average rate for the period). |
Analysis of Specific Material Items Affecting Comparability of Shareholder Net Income
After-tax impact, net of non-controlling interests (millions of Canadian dollars, except per share amounts) |
Q1 |
Q4 |
Q1 |
|||
Shareholder net income, as reported |
$ |
112.2 |
$ |
131.8 |
$ |
66.1 |
Foreign exchange (gain) loss on long-term debt and duties receivable |
$ |
1.9 |
$ |
0.6 |
$ |
(1.0) |
Countervailing and anti-dumping duty deposit expense (recovery), net |
$ |
25.5 |
$ |
(17.3) |
$ |
- |
(Gain) loss on derivative financial instruments |
$ |
5.8 |
$ |
4.8 |
$ |
(2.4) |
Change in substantively enacted tax rates |
$ |
- |
$ |
(5.1) |
$ |
- |
Gain on sale of Anthony EACOM Inc. |
$ |
- |
$ |
- |
$ |
(3.4) |
Net impact of above items |
$ |
33.2 |
$ |
(17.0) |
$ |
(6.8) |
Adjusted shareholder net income |
$ |
145.4 |
$ |
114.8 |
$ |
59.3 |
Shareholder net income per share (EPS), as reported |
$ |
0.87 |
$ |
1.02 |
$ |
0.50 |
Net impact of above items per share |
$ |
0.26 |
$ |
(0.13) |
$ |
(0.05) |
Adjusted shareholder net income per share |
$ |
1.13 |
$ |
0.89 |
$ |
0.45 |
The Company reported operating income of $203.8 million for the first quarter of 2018, down $10.4 million from reported operating income of $214.2 million for the fourth quarter of 2017, as lower operating earnings for the lumber segment were offset in part by record-high operating earnings for the pulp and paper segment. Reported results in the first quarter of 2018 include a net duty expense of $34.9 million, at a combined effective countervailing duty ("CVD") and anti-dumping duty ("ADD") rate of 14.34%. This compares to a net duty recovery of $23.4 million in the fourth quarter of 2017 reflecting the year-to-date true-up of preliminary CVD and ADD rates to current rates following final determinations announced by the US Department of Commerce ("DOC") and US International Trade Commission ("ITC"). After adjusting for the duties, operating income was $238.7 million for the first quarter of 2018, up $47.9 million from similarly adjusted operating income in the fourth quarter of 2017.
Adjusted lumber segment earnings largely reflected higher Western Spruce/Pine/Fir ("Western SPF") and Southern Yellow Pine ("SYP") benchmark lumber prices, more than offsetting the impact of adverse winter weather conditions which resulted in significant transportation delays and contributed to increased unit log costs and lower production volumes through the quarter. Unit log costs in Western Canada also increased reflecting higher market-based stumpage and continued upward pressure on purchased wood costs. Record pulp and paper segment earnings largely reflected continued strong demand that resulted in significantly higher Northern Bleached Softwood Kraft ("NBSK") pulp unit sales realizations.
The current quarter's reported operating income was up $97.0 million from operating income of $106.8 million reported for the first quarter of 2017, reflecting a $42.2 million increase in lumber segment earnings and a $49.9 million increase in earnings for the pulp and paper segment. Lumber segment results reflected the benefit of significantly higher US-dollar benchmark lumber prices, which more than offset the introduction of CVD and ADD; a 4 cent, or 5%, stronger Canadian dollar; market-related increases in log costs in Western Canada; and to a lesser extent, weather-related operational disruptions in the current quarter. Pulp and paper segment results reflected significantly higher average NBSK pulp and Bleached Chemi-Thermo Mechanical Pulp ("BCTMP") US-dollar pricing, which significantly outweighed the aforementioned stronger Canadian dollar, lower shipments and increased pulp unit manufacturing costs, which were largely attributable to higher market-based fibre costs.
OPERATING RESULTS BY BUSINESS SEGMENT
Lumber
Selected Financial Information and Statistics – Lumber
(millions of Canadian dollars, unless otherwise noted) |
Q1 |
Q4 |
Q1 |
|||
Sales |
$ |
873.9 |
$ |
833.1 |
$ |
796.1 |
Operating income before amortization |
$ |
171.5 |
$ |
200.1 |
$ |
127.2 |
Operating income |
$ |
125.9 |
$ |
154.9 |
$ |
83.7 |
Countervailing and anti-dumping duty deposits, net7 |
$ |
34.9 |
$ |
(23.4) |
$ |
- |
Adjusted operating income |
$ |
160.8 |
$ |
131.5 |
$ |
83.7 |
Average SPF 2x4 #2&Btr lumber price in US$8 |
$ |
513 |
$ |
462 |
$ |
348 |
Average SPF price in Cdn$ |
$ |
649 |
$ |
588 |
$ |
460 |
Average SYP East 2x4 #2 lumber price in US$9 |
$ |
566 |
$ |
455 |
$ |
482 |
US housing starts (thousand units SAAR)10 |
1,314 |
1,256 |
1,238 |
|||
Production – SPF lumber (MMfbm)11 |
888.7 |
903.4 |
936.4 |
|||
Production – SYP lumber (MMfbm)11 |
351.4 |
335.4 |
361.8 |
|||
Shipments – SPF lumber (MMfbm)12 |
851.2 |
875.4 |
890.5 |
|||
Shipments – SYP lumber (MMfbm)12 |
344.6 |
329.5 |
346.9 |
7 |
Adjusted for countervailing and anti-dumping duty deposits expensed for accounting purposes in the first quarter of 2018 and a recovery recorded in the fourth quarter of 2017 to true-up the preliminary countervailing and anti-dumping duty deposits expensed for accounting purposes to current accrual rates. |
8 |
Western Spruce/Pine/Fir, per thousand board feet (Source – Random Lengths Publications, Inc.). |
9 |
Southern Yellow Pine, Eastside, per thousand board feet (Source – Random Lengths Publications, Inc.). |
10 |
Source – US Census Bureau, seasonally adjusted annual rate ("SAAR"). |
11 |
Excluding production of trim blocks. |
12 |
Canfor-produced lumber, including lumber purchased for remanufacture and engineered wood, excluding trim blocks, wholesale shipments and lumber sold on behalf of third parties. |
Markets
North American lumber demand remained solid in the first quarter of 2018, with US housing starts averaging 1,314,000 units on a seasonally adjusted basis, up 5% from the previous quarter and up 6% from the first quarter of 2017. Canadian housing construction activity in the first quarter of 2018 was in line with the previous quarter, at an average of 227,000 units on a seasonally adjusted basis. Offshore lumber demand from China, Japan and other regions remained solid through the first quarter, particularly for the Company's higher-value lumber products.
Sales
Sales for the lumber segment for the first quarter of 2018 were $873.9 million, compared to $833.1 million in the previous quarter and $796.1 million for the first quarter of 2017. The 5% increase in sales revenue compared to the prior quarter and 10% increase compared to the first quarter of 2017 principally reflected higher Western SPF and SYP lumber unit sales realizations, driven by historically high pricing.
Total lumber shipments in the first quarter of 2018 were 1.20 billion board feet, in line with the previous quarter, as increased production and steady demand in the US South offset the aforementioned transportation constraints in Western Canada. Total lumber shipments were down modestly compared to the first quarter of 2017, reflecting the transportation constraints and moderately lower production.
The average benchmark North American Random Lengths Western SPF 2x4 #2&Btr price was up US$51 per Mfbm, or 11%, compared to the fourth quarter of 2017, with more pronounced price increases across wider-width dimensions. Improved Western SPF lumber pricing was offset in part by increased duty deposits, as both CVD and ADD were in effect for the full quarter following the re-introduction of CVD in late December 2017. Overall, Western SPF lumber unit sales realizations showed a modest improvement compared to the previous quarter. The average benchmark North American Random Lengths SYP East 2x4 #2 price was up US$111 per Mfbm, or 24%, compared to the fourth quarter of 2017, while prices for 2x6 and 2x10 #2 dimensions were stable. Overall, SYP lumber unit sales realizations showed a modest increase quarter-over-quarter.
Compared to the first quarter of 2017, lumber unit sales realizations were well up as higher US-dollar Western SPF and SYP benchmark lumber prices significantly outweighed the impact of duties and a 5% stronger Canadian dollar. The average North American Random Lengths Western SPF 2x4 #2&Btr price was up US$165 per Mfbm, or 47%, while the SYP East 2x4 #2 price was up US$84 per Mfbm, or 17%, while prices for wider-width dimensions were stable.
Total residual fibre revenue in the current quarter was moderately higher than the prior quarter and the first quarter of 2017, largely reflecting higher market-based pricing.
Operations
Total lumber production, at 1.24 billion board feet, was in line with the prior quarter, as productivity gains in the US South and fewer statutory holidays in the current quarter offset lower productivity in Western Canada as a result of the challenging operating conditions in the current quarter. Compared to the first quarter in 2017, total lumber production was down 5% primarily reflecting the lower productivity.
Unit manufacturing costs in the first quarter of 2018 were slightly higher than the previous quarter largely reflecting increased market-based stumpage and weather challenges through the first quarter which contributed to lower productivity and increased log hauling costs in Western Canada. These factors more than offset the positive impact of productivity gains and stable log costs in the US South. Compared to the first quarter of 2017, unit manufacturing costs were moderately higher, largely reflecting market-driven increases in purchased wood costs and stumpage, as well as increased hauling costs in Western Canada.
Pulp and Paper
Selected Financial Information and Statistics – Pulp and Paper13
Q1 2018 |
Q4 2017 |
Q1 2017 |
||||
(millions of Canadian dollars, unless otherwise noted) |
||||||
Sales |
$ |
359.6 |
$ |
322.9 |
$ |
309.1 |
Operating income before amortization14 |
$ |
104.3 |
$ |
85.6 |
$ |
54.0 |
Operating income |
$ |
85.1 |
$ |
66.8 |
$ |
35.2 |
Average NBSK pulp price delivered to China – US$15 |
$ |
910 |
$ |
863 |
$ |
645 |
Average NBSK pulp price delivered to China – Cdn$15 |
$ |
1,150 |
$ |
1,098 |
$ |
853 |
Production – pulp (000 mt) |
311.7 |
307.6 |
317.1 |
|||
Production – paper (000 mt) |
34.3 |
35.0 |
34.6 |
|||
Shipments – pulp (000 mt) |
310.0 |
299.7 |
337.1 |
|||
Shipments – paper (000 mt) |
32.0 |
35.8 |
33.7 |
13 |
Includes 100% of Canfor Pulp Products Inc., which is consolidated in Canfor's operating results. Pulp production and shipment volumes presented are for both NBSK pulp and BCTMP. |
14 |
Amortization includes amortization of certain capitalized major maintenance costs. |
15 |
Per tonne, NBSK pulp list price delivered to China (Resource Information Systems, Inc.). |
Markets
Global softwood pulp markets remained favourable through the first quarter of 2018. Transportation constraints contributed to a build of softwood pulp inventories in Western Canada, and with the industry historically taking minimal maintenance downtime during the first quarter of the year, global softwood pulp inventories ended slightly above the balanced range as at the end of February 2018 at 31 days of supply, an increase of 1 day from December 2017, and an increase of 1 day from March 201716. Market conditions are generally considered balanced when inventories are in the 27-30 days of supply range. Global kraft paper markets remained solid through the first quarter of 2018, reflecting healthy demand from North American and Asian markets.
Global shipments of bleached softwood pulp decreased by 4.1%, for the first two months of 2018 compared to the first two months of 2017, driven primarily by decreased shipments to China17.
16 World 20 data is based on twenty producing countries representing 80% of world chemical market pulp capacity and is based on information compiled and prepared by the Pulp and Paper Products Council ("PPPC"). |
17 As reported by PPPC statistics. |
Sales
Total pulp shipments in the first quarter of 2018 were 310,000 tonnes, up 10,300 tonnes, or 3%, from the previous quarter and down 27,100 tonnes, or 8%, from the first quarter of 2017. Pulp shipments in the current quarter included the benefit of a 14,000 tonne vessel slippage over year-end that offset the aforementioned transportation delays. Compared to the first quarter of 2017, the 8% decrease in NBSK pulp shipments was largely a function of the more adverse weather in the current quarter.
The average China US-dollar NBSK pulp list price of US$910 per tonne, as published by RISI, was up US$47 per tonne, or 5%, from the fourth quarter of 2017. Average NBSK pulp unit sales realizations were significantly higher than the previous quarter, which for the most part reflected higher pricing and, to a lesser extent, the timing of shipments (versus orders). Despite lower US-dollar list prices towards the end of the current quarter, average BCTMP unit sales realizations showed a moderate increase quarter-over-quarter, due in part to the strong demand experienced towards the end of 2017 being realized in the current quarter.
Compared to the first quarter of 2017, the average China US-dollar NBSK pulp list price was up US$265 per tonne, or 41%. Prices on shipments to North America showed more modest gains over the same period. The higher global US-dollar prices resulted in substantially higher average NBSK pulp unit sales realizations, even after taking account of a 4 cent, or 5%, stronger Canadian dollar. Average BCTMP unit sales realizations also increased significantly when compared to the first quarter of 2017 primarily reflecting the improvement in BCTMP market demand, which more than offset the stronger Canadian dollar in the first quarter of 2018.
Energy revenues were slightly higher than the fourth quarter of 2017, primarily reflecting seasonally higher energy prices. Compared to the first quarter of 2017, lower energy revenue reflected the adverse winter weather conditions in the first part of the current quarter.
Paper shipments in the first quarter of 2018 of 32,000 tonnes, were down 3,800 tonnes from the fourth quarter of 2017, and down 1,700 tonnes from the first quarter of 2017, largely reflecting the timing of shipments. Paper unit sales realizations in the first quarter of 2018 saw a modest increase compared to the previous quarter, largely reflecting higher market-driven US-dollar pricing. Compared to the first quarter of 2017, paper unit sales realizations saw a moderate improvement, as favourable US-dollar pricing more than offset the 5% stronger Canadian dollar.
Operations
Pulp production in the first quarter of 2018 at 311,700 tonnes was broadly in line with the previous quarter, as strong productivity in March combined with an increase in operating days quarter-over-quarter was partly offset by several weather-related operational challenges in January and February. Results in the fourth quarter of 2017 included an unscheduled maintenance outage at CPPI's Northwood NBSK pulp mill and a scheduled maintenance outage at CPPI's Taylor BCTMP mill, reducing pulp production by approximately 11,000 tonnes and 3,000 tonnes, respectively. Pulp production in the current quarter was down slightly compared with the first quarter of 2017.
Pulp unit manufacturing costs saw a moderate increase compared to the previous quarter reflecting increased fibre costs, weather-related impacts to energy and operational costs, and to a lesser extent, higher chemical costs. The higher fibre costs largely reflected increased market prices for delivered sawmill residual chips (linked to Canadian dollar NBSK pulp sales realizations). Compared to the first quarter of 2017, higher pulp unit manufacturing costs reflected the significant market-related increases in fibre costs, and to a lesser extent, higher chemical costs in the current quarter.
Paper production for the first quarter of 2018 at 34,300 tonnes was down 2% compared to the previous quarter largely reflecting a slightly lower operating rate in the current quarter. Paper production was in line with the first quarter of 2017.
Higher paper unit manufacturing costs, compared to both the fourth quarter of 2017 and first quarter of 2017, reflected higher slush pulp costs associated with higher average NBSK pulp sales realizations in the current quarter.
Unallocated and Other Items
Selected Financial Information
Q1 2018 |
Q4 2017 |
Q1 2017 |
||||
(millions of Canadian dollars) |
||||||
Operating loss of Panels operations18 |
$ |
(0.6) |
$ |
(0.8) |
$ |
(0.7) |
Corporate costs |
$ |
(6.6) |
$ |
(6.7) |
$ |
(11.4) |
Finance expense, net |
$ |
(6.7) |
$ |
(6.9) |
$ |
(8.0) |
Foreign exchange gain (loss) on long-term debt and duties receivable |
$ |
(2.2) |
$ |
(0.7) |
$ |
1.1 |
Gain (loss) on derivative financial instruments |
$ |
(8.0) |
$ |
(6.5) |
$ |
3.2 |
Other income, net |
$ |
5.3 |
$ |
1.5 |
$ |
2.2 |
18 The Panels operations include the Company's PolarBoard oriented strand board ("OSB") plant, which is currently indefinitely idled and its Tackama plywood plant, which has been permanently closed. |
Corporate costs were $6.6 million for the first quarter of 2018, in line with the previous quarter and down $4.8 million from the first quarter of 2017 largely as a result of lower costs associated with the Softwood Lumber dispute.
Net finance expense at $6.7 million for the first quarter of 2018 was down from both comparative periods, reflecting lower interest expense associated with the Company's employee future benefit plans and the early repayment of CPPI's $50.0 million long-term debt towards the end of 2017. In the first quarter of 2018, the Company recognized a foreign exchange loss on its US-dollar term debt held by Canadian entities and a gain on US-denominated duties receivable due to the weaker Canadian dollar at the end of the quarter (see further discussion on the term debt financing in the "Liquidity and Financial Requirements" section).
The Company uses a variety of derivative financial instruments at times as partial economic hedges against unfavourable changes in foreign exchange rates, energy costs, lumber prices, and interest rates. In the first quarter of 2018, the Company recorded a net loss of $8.0 million related to its derivatives instruments, largely reflecting realized losses on lumber future contracts as a result of higher lumber prices.
Other income, net, of $5.3 million and $1.5 million in the first quarter of 2018 and fourth quarter of 2017, respectively, relates primarily to foreign exchange movements on US-dollar denominated cash, receivables and payables. Other income, net for the first quarter of 2017 included a gain related to the Company's sale of its 50% interest in Anthony EACOM Inc. on March 31, 2017, offset in part by foreign exchange movements on US-dollar denominated cash, receivables, and payables.
Other Comprehensive Income (Loss)
The following table summarizes Canfor's Other Comprehensive Income (Loss) for the comparable periods:
(millions of Canadian dollars) |
Q1 2018 |
Q4 |
Q1 |
|||
Defined benefit actuarial gains, net of tax |
$ |
9.6 |
$ |
29.7 |
$ |
2.4 |
Foreign exchange translation differences for foreign operations, net of tax |
$ |
15.1 |
$ |
2.6 |
$ |
(3.2) |
Other comprehensive income (loss), net of tax |
$ |
24.7 |
$ |
32.3 |
$ |
(0.8) |
In the first quarter of 2018, the Company recorded an after-tax gain of $9.6 million in relation to changes in the valuation of the Company's employee future benefit plans. The gain in the current quarter principally reflected a 0.2% increase in the discount rate used to value the employee future benefit plans, partially offset by a return on plan assets lower than the discount rate. This compared to an after-tax gain of $29.7 million recorded in the fourth quarter of 2017, largely reflecting a 50% reduction in MSP premiums following a change in legislation in British Columbia, offset in part by a 0.4% decrease in the discount rate used to value the obligation, and to an after-tax gain of $2.4 million recorded in the first quarter of 2017, largely reflecting the return generated on plan assets.
During the fourth quarter of 2017, the Company purchased $45.8 million of annuities through its defined benefit plans to mitigate its exposure to the future volatility fluctuations in the related pension obligations. At purchase of these annuities, transaction costs of $1.3 million were recognized in Other Comprehensive Income principally reflecting the difference in the annuity rate as compared to the discount rate used to value the pension obligations on a going concern basis.
In addition, the Company recorded a gain of $15.1 million in the first quarter of 2018 related to foreign exchange differences for foreign operations, resulting from the weakening of the Canadian dollar relative to the US dollar at the end of the quarter. This compared to a gain of $2.6 million in the previous quarter and a loss of $3.2 million in the first quarter of 2017.
SUMMARY OF FINANCIAL POSITION
The following table summarizes Canfor's cash flow and selected ratios for and as at the end of the following periods:
Q1 2018 |
Q4 2017 |
Q1 2017 |
|||||
(millions of Canadian dollars, except for ratios) |
|||||||
Increase in cash and cash equivalents19 |
$ |
6.5 |
$ |
9.3 |
$ |
7.7 |
|
Operating activities |
$ |
72.2 |
$ |
156.6 |
$ |
72.8 |
|
Financing activities |
$ |
(9.9) |
$ |
(65.8) |
$ |
3.9 |
|
Investing activities |
$ |
(55.8) |
$ |
(81.5) |
$ |
(69.0) |
|
Ratio of current assets to current liabilities |
2.5 : 1 |
2.3 : 1 |
2.1 : 1 |
||||
Net debt to capitalization |
4.3% |
4.6% |
15.2% |
19Increase in cash and cash equivalents shown before foreign exchange translation on cash and cash equivalents. |
The changes in the components of these cash flows are discussed in the following sections:
Operating Activities
Cash generated from operating activities was $72.2 million in the first quarter of 2018, compared to $156.6 million in the previous quarter and $72.8 million in the first quarter of 2017. The decrease in operating cash flows from the previous quarter principally reflected a seasonal log inventory build and market-driven increases in log costs in Western Canada, higher lumber inventories as a result of the aforementioned transportation constraints, as well as increased income tax payments. Operating cash flows were in line with the first quarter of 2017 as higher cash earnings offset higher lumber inventories and higher income taxes paid in the current quarter.
Financing Activities
Cash used in financing activities was $9.9 million in the current quarter, down $55.9 million from the previous quarter, principally reflecting the early repayment of CPPI's $50.0 million long-term debt in the fourth quarter of 2017, and up $13.8 million from the first quarter of 2017. During the current quarter, the Company made cash distributions of $1.8 million to non-controlling shareholders, in line with the previous quarter and down $2.0 million from the same quarter in 2017. The Company had no balance outstanding on its operating loan facility at the end of the first quarter of 2018, similar to the prior quarter and a decrease of $40.0 million from the end of the first quarter of 2017.
Investing Activities
Cash used for investing activities was $55.8 million in the current quarter, compared to $81.5 million in the previous quarter and $69.0 million in the same quarter of 2017. Capital additions were $56.4 million, down $37.6 million from the previous quarter and up $17.5 million from the first quarter of 2017. Current quarter capital expenditures included costs related to upgrades at the Company's sawmills in Arkansas, Georgia and Alabama. In the pulp and paper segment, capital expenditures primarily related to previously announced energy projects at its Northwood and Taylor pulp mills.
Liquidity and Financial Requirements
At March 31, 2018, the Company on a consolidated basis had cash of $296.1 million, no amounts drawn on its operating loans, and $63.3 million was reserved for several standby letters of credit. At period end the Company had total available undrawn operating loans of $456.7 million.
Excluding CPPI, the Company's bank operating loans at March 31, 2018 totaled $350.0 million, of which no amounts were drawn, and $52.5 million was reserved for several standby letters of credit, the majority of which related to unregistered pension plans. Interest is payable on the operating loans at floating rates based on the lenders' Canadian prime rate, bankers acceptances, US dollar base rate or US dollar LIBOR rate, plus a margin that varies with the Company's debt to total capitalization ratio.
At March 31, 2018, CPPI had an undrawn $110.0 million bank operating loan facility and $10.8 million in letters of credit outstanding under the operating loan facility. On April 6, 2018, the maturity date of CPPI's principal operating loan facility was extended from January 31, 2020 to April 6, 2022, and the terms of certain financial covenants were updated.
The Company and CPPI remained in compliance with the covenants relating to their operating loans and long-term debt during the quarter, and expect to remain so for the foreseeable future.
The Company's consolidated net debt to total capitalization at the end the first quarter of 2018 was 4.3%. For Canfor, excluding CPPI, net debt to capitalization at the end of the first quarter of 2018 was 10.3%.
On March 5, 2018, the Company renewed its normal course issuer bid whereby it can purchase for cancellation up to 6,439,764 common shares or approximately 5% of its issued and outstanding common shares as of March 1, 2018. The renewed normal course issuer bid is set to expire on March 6, 2019. During the first quarter of 2018, Canfor purchased 19,500 common shares under its normal course issuer bid for $0.5 million (average price of $25.64 per common share), and paid $3.7 million related to share purchases in the fourth quarter of 2017. During the first quarter of 2018, CPPI purchased 500 common shares under its normal course issuer bid at an average price of $13.01 per common share, and paid an additional $0.1 million related to share purchases in the fourth quarter of 2017. Canfor and CPPI may purchase more shares through the balance of 2018 subject to the terms of their normal course issuer bids.
As at March 31, 2018 and April 24, 2018, Canfor's ownership interest in CPPI remained unchanged from the end of the prior quarter at 54.8%.
OUTLOOK
Lumber
Looking ahead, the US housing market is forecast to continue its ongoing gradual recovery through the balance of 2018. North American lumber prices are projected to remain solid (and high by historical standards) in the second quarter of 2018 reflecting low inventories, solid seasonal demand and limited available supply as transportation networks slowly return to normal service levels.
For the Company's key offshore lumber markets, demand is anticipated to remain solid through the second quarter of 2018, particularly in Japan.
Pulp and Paper
Global softwood kraft pulp markets are projected to remain well positioned through the second quarter of 2018, reflecting both continued solid demand and tighter supply arising from the current transportation challenges as well as the traditional spring maintenance period. The outlook for the latter part of 2018 remains more uncertain given incremental pulp capacity currently projected to come online. For the month of April 2018, CPPI announced an increase of US$30 per tonne for NBSK pulp list prices to North America.
Results in the second quarter of 2018 will reflect scheduled maintenance outages at the Prince George NBSK pulp mill and paper machine, as well as at the Taylor BCTMP mill, with a projected 5,000 tonnes of reduced NBSK pulp production, 4,000 tonnes of reduced paper production and 11,000 tonnes of reduced BCTMP production, respectively, combined with higher associated maintenance costs and lower projected shipment volume. The scheduled outage at the Taylor BCTMP mill will include work associated with the previously announced energy project. The Northwood NBSK pulp mill has a maintenance outage scheduled for the third quarter of 2018, with a projected 22,000 tonnes of reduced NBSK pulp production.
Bleached kraft paper demand is anticipated to remain solid through the second quarter of 2018. A maintenance outage is currently planned at CPPI's paper machine during the second quarter with a projected 4,000 tonnes of reduced paper production.
OUTSTANDING SHARES
At April 24, 2018, there were 128,625,480 common shares of the Company outstanding.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with International Financial Reporting Standards requires management to make estimates and assumptions that affect the amounts recorded in the financial statements. On an ongoing basis, management reviews its estimates, including those related to useful lives for amortization, impairment of long-lived assets, certain accounts receivable, pension and other employee future benefit plans, asset retirement and deferred reforestation obligations, and the determination of ADD expensed and recorded as recoverable based upon currently available information. While it is reasonably possible that circumstances may arise which cause actual results to differ from these estimates, management does not believe it is likely that any such differences will materially affect the Company's financial condition, other than the possibility of material effects to the income statement from the Company's estimated ADD duty receivable as discussed in Note 14 in the interim financial statements.
ADOPTION OF NEW ACCOUNTING STANDARDS
Effective January 1, 2018, the Company has adopted IFRS 15 Revenue from Contracts with Customers. IFRS 15 supersedes IAS 18 Revenue, IAS 11 Construction Contracts and related interpretations. The standard establishes a framework based on transfer of control for determining how much and when revenue is recognized, and includes expanded disclosure requirements for annual financial statements. Adoption of IFRS 15 has had no significant impact on the Company's interim financial statements.
Effective January 1, 2018, the Company has adopted IFRS 9 Financial Instruments. IFRS 9 supersedes IAS 39 Financial Instruments: Recognition and Measurement. The standard includes requirements for recognition, measurement, impairment and derecognition of financial assets and liabilities, as well as general hedge accounting. The adoption of IFRS 9 has had no significant impact on the Company's interim financial statements.
ACCOUNTING STANDARDS ISSUED AND NOT APPLIED
In January 2016, the International Accounting Standards Board issued IFRS 16 Leases, which will supersede IAS 17 Leases and related interpretations. The required adoption date for IFRS 16 is January 1, 2019. IFRS 16 introduces a single, on-balance sheet lease accounting model for lessees. A lessee recognizes a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. In addition, the nature of expenses related to those leases will change as IFRS 16 replaces straight-line operating lease expense with a depreciation expense for right-of-use assets and interest expense on lease liabilities.
It is expected that IFRS 16 will have an impact on the Company's financial statements with recognition of new assets and liabilities for its operating leases. The Company is still in the process of assessing the quantitative impact on its financial statements of this new standard. The Company's future minimum lease payments, on an undiscounted basis, under non-cancellable operating leases at December 31, 2017 were $42.5 million.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
During the quarter ended March 31, 2018, there were no changes in the Company's internal controls over financial reporting that materially affected, or would be reasonably likely to materially affect, such controls.
RISKS AND UNCERTAINTIES
A comprehensive discussion of risks and uncertainties is included in the Company's 2017 annual statutory reports which are available on www.canfor.com or www.sedar.com.
In addition to exposure to changes in product prices and foreign exchange, the Company's financial results are impacted by seasonal factors such as weather and building activity. Adverse weather conditions can cause logging curtailments, which can affect the supply of raw materials to sawmills and pulp mills. Market demand also varies seasonally to some degree. For example, building activity and repair and renovation work, which affects demand for lumber products, is generally stronger in the spring and fall months. Shipment volumes are affected by these factors as well as by global supply and demand conditions. Net income is also impacted by fluctuations in Canadian dollar exchange rates, the revaluation to the period end rate of US dollar denominated working capital balances, US dollar denominated debt and revaluation of outstanding derivative financial instruments.
SELECTED QUARTERLY FINANCIAL INFORMATION
Q1 |
Q4 |
Q3 |
Q2 |
Q1 |
Q4 |
Q3 |
Q2 |
|||||||||
Sales and income (millions of Canadian dollars) |
||||||||||||||||
Sales |
$ |
1,233.5 |
$ |
1,182.2 |
$ |
1,165.2 |
$ |
1,185.2 |
$ |
1,126.2 |
$ |
1,043.5 |
$ |
1,101.2 |
$ |
1,022.3 |
Operating income |
$ |
203.8 |
$ |
214.2 |
$ |
105.4 |
$ |
131.0 |
$ |
106.8 |
$ |
74.0 |
$ |
97.4 |
$ |
69.6 |
Net income |
$ |
141.5 |
$ |
152.6 |
$ |
72.6 |
$ |
90.9 |
$ |
77.5 |
$ |
44.2 |
$ |
66.4 |
$ |
51.0 |
Shareholder net income |
$ |
112.2 |
$ |
131.8 |
$ |
66.2 |
$ |
81.3 |
$ |
66.1 |
$ |
38.0 |
$ |
50.9 |
$ |
36.0 |
Per common share (Canadian dollars) |
||||||||||||||||
Shareholder net income – basic and diluted |
$ |
0.87 |
$ |
1.02 |
$ |
0.51 |
$ |
0.61 |
$ |
0.50 |
$ |
0.29 |
$ |
0.38 |
$ |
0.27 |
Book value20 |
$ |
14.52 |
$ |
13.46 |
$ |
12.32 |
$ |
12.14 |
$ |
11.81 |
$ |
11.17 |
$ |
10.70 |
$ |
9.92 |
Common Share Repurchases |
||||||||||||||||
Share volume repurchased (000 shares) |
20 |
633 |
3,526 |
- |
- |
- |
- |
- |
||||||||
Shares repurchased (millions of Canadian dollars) |
$ |
0.5 |
$ |
15.7 |
$ |
75.0 |
$ |
- |
$ |
- |
$ |
- |
$ |
- |
$ |
- |
Statistics |
||||||||||||||||
Lumber shipments (MMfbm) 21 |
1,196 |
1,205 |
1,334 |
1,333 |
1,237 |
1,278 |
1,343 |
1,351 |
||||||||
Pulp shipments (000 mt) |
310 |
300 |
303 |
276 |
337 |
275 |
320 |
287 |
||||||||
Average exchange rate – US$/Cdn$ |
$ |
0.791 |
$ |
0.786 |
$ |
0.798 |
$ |
0.744 |
$ |
0.756 |
$ |
0.750 |
$ |
0.766 |
$ |
0.776 |
Average Western SPF 2x4 #2&Btr lumber price (US$) |
$ |
513 |
$ |
462 |
$ |
406 |
$ |
388 |
$ |
348 |
$ |
315 |
$ |
322 |
$ |
311 |
Average SYP (East) 2x4 #2 lumber price (US$) |
$ |
566 |
$ |
455 |
$ |
408 |
$ |
476 |
$ |
482 |
$ |
445 |
$ |
414 |
$ |
437 |
Average NBSK pulp list price delivered to China (US$) |
$ |
910 |
$ |
863 |
$ |
670 |
$ |
670 |
$ |
645 |
$ |
595 |
$ |
595 |
$ |
617 |
20 |
Book value per common share is equal to shareholders' equity at the end of the period, divided by the number of common shares outstanding at the end of the period. |
21 |
Canfor-produced lumber, including lumber purchased for remanufacture and engineered wood, excluding trim blocks, wholesale shipments and lumber sold on behalf of third parties. |
Other material factors that impact the comparability of the quarters are noted below:
After-tax impact, net of non-controlling interests |
||||||||||||||||
(millions of Canadian dollars, except for per |
Q1 |
Q4 |
Q3 |
Q2 |
Q1 |
Q4 |
Q3 |
Q2 |
||||||||
Shareholder net income, as reported |
$ |
112.2 |
$ |
131.8 |
$ |
66.2 |
$ |
81.3 |
$ |
66.1 |
$ |
38.0 |
$ |
50.9 |
$ |
36.0 |
Foreign exchange (gain) loss on long-term |
$ |
1.9 |
$ |
0.6 |
$ |
(4.4) |
$ |
(2.9) |
$ |
(1.0) |
$ |
2.7 |
$ |
0.9 |
$ |
(0.3) |
Countervailing and anti-dumping duty |
$ |
25.5 |
$ |
(17.3) |
$ |
23.8 |
$ |
26.3 |
$ |
- |
$ |
- |
$ |
- |
$ |
- |
(Gain) loss on derivative financial |
$ |
5.8 |
$ |
4.8 |
$ |
1.4 |
$ |
- |
$ |
(2.4) |
$ |
(1.5) |
$ |
(0.1) |
$ |
(2.3) |
Change in substantively enacted tax rates23 |
$ |
- |
$ |
(5.1) |
$ |
- |
$ |
- |
$ |
- |
$ |
- |
$ |
- |
$ |
- |
Mill closure provisions24 |
$ |
- |
$ |
- |
$ |
(2.4) |
$ |
- |
$ |
- |
$ |
(1.5) |
$ |
- |
$ |
- |
Gain on sale of Anthony EACOM Inc.25 |
$ |
- |
$ |
- |
$ |
- |
$ |
- |
$ |
(3.4) |
$ |
- |
$ |
- |
$ |
- |
Gain on legal settlement, net26 |
$ |
- |
$ |
- |
$ |
- |
$ |
- |
$ |
- |
$ |
- |
$ |
- |
$ |
(6.9) |
Net impact of above items |
$ |
33.2 |
$ |
(17.0) |
$ |
18.4 |
$ |
23.4 |
$ |
(6.8) |
$ |
(0.3) |
$ |
0.8 |
$ |
(9.5) |
Adjusted shareholder net income |
$ |
145.4 |
$ |
114.8 |
$ |
84.6 |
$ |
104.7 |
$ |
59.3 |
$ |
37.7 |
$ |
51.7 |
$ |
26.5 |
Shareholder net income per share |
$ |
0.87 |
$ |
1.02 |
$ |
0.51 |
$ |
0.61 |
$ |
0.50 |
$ |
0.29 |
$ |
0.38 |
$ |
0.27 |
Net impact of above items per share27 |
$ |
0.26 |
$ |
(0.13) |
$ |
0.14 |
$ |
0.18 |
$ |
(0.05) |
$ |
- |
$ |
0.01 |
$ |
(0.07) |
Adjusted net income per share27 |
$ |
1.13 |
$ |
0.89 |
$ |
0.65 |
$ |
0.78 |
$ |
0.45 |
$ |
0.29 |
$ |
0.39 |
$ |
0.20 |
22 |
Adjusted for countervailing and anti-dumping duty deposits expensed for accounting purposes. Results in the fourth quarter of 2017 included an accrued recovery to true-up the preliminary duties to current countervailing and anti-dumping duty rates. |
23 |
During the fourth quarter of 2017, the Company recorded a $5.1 million decrease, net of minority interest, in deferred tax balances as a result of legislative changes in both Canada and the US. |
24 |
During the third quarter of 2015, the Company recorded one-time costs of $19.4 million (before-tax) associated with the announced closure of the Canal Flats sawmill. In the third quarter of 2017, $3.2 million (before-tax) of the closure provision was reversed, and in the fourth quarter of 2016, $2.0 million (before-tax) of the closure provision was reversed as a result of lower estimated costs. |
25 |
On March 31, 2017, Canfor sold its 50% interest in Anthony EACOM Inc. for net proceeds of $21.1 million and recognized a $3.7 million net gain (before-tax). |
26 |
Gain relates to a $16.3 million settlement of a legal claim with respect to logistics services, net of a $0.8 million impairment of related machinery and equipment and minority interest. |
27 |
The year-to-date net impact of the adjusting items per share and adjusted net income per share may not equal the sum of the quarterly per share amounts due to rounding. |
Canfor Corporation
Condensed Consolidated Balance Sheets
(millions of Canadian dollars, unaudited) |
As at |
As at |
|||
ASSETS |
|||||
Current assets |
|||||
Cash and cash equivalents |
$ |
296.1 |
$ |
288.2 |
|
Accounts receivable |
- Trade |
247.3 |
193.0 |
||
- Other |
40.8 |
40.0 |
|||
Inventories (Note 3) |
770.7 |
628.9 |
|||
Prepaid expenses and other |
74.6 |
56.9 |
|||
Total current assets |
1,429.5 |
1,207.0 |
|||
Property, plant and equipment |
1,431.6 |
1,438.1 |
|||
Timber licenses |
515.8 |
518.3 |
|||
Goodwill and other intangible assets |
236.5 |
228.1 |
|||
Long-term investments and other (Note 4) |
96.8 |
83.3 |
|||
Retirement benefit surplus (Note 6) |
10.2 |
7.9 |
|||
Deferred income taxes, net |
4.7 |
5.6 |
|||
Total assets |
$ |
3,725.1 |
$ |
3,488.3 |
|
LIABILITIES |
|||||
Current liabilities |
|||||
Accounts payable and accrued liabilities |
$ |
532.2 |
$ |
470.0 |
|
Current portion of deferred reforestation obligations |
49.5 |
49.5 |
|||
Current portion of long-term debt (Note 5(b)) |
0.3 |
0.3 |
|||
Total current liabilities |
582.0 |
519.8 |
|||
Long-term debt (Note 5(b)) |
392.6 |
385.4 |
|||
Retirement benefit obligations (Note 6) |
259.0 |
272.0 |
|||
Deferred reforestation obligations |
80.2 |
63.0 |
|||
Other long-term liabilities |
22.1 |
23.7 |
|||
Deferred income taxes, net |
220.5 |
223.4 |
|||
Total liabilities |
$ |
1,556.4 |
$ |
1,487.3 |
|
EQUITY |
|||||
Share capital |
$ |
1,014.7 |
$ |
1,014.9 |
|
Contributed surplus |
31.9 |
31.9 |
|||
Retained earnings |
751.2 |
629.5 |
|||
Accumulated other comprehensive income |
70.2 |
55.1 |
|||
Total equity attributable to equity shareholders of the Company |
1,868.0 |
1,731.4 |
|||
Non-controlling interests |
300.7 |
269.6 |
|||
Total equity |
$ |
2,168.7 |
$ |
2,001.0 |
|
Total liabilities and equity |
$ |
3,725.1 |
$ |
3,488.3 |
Subsequent Event (Note 5(a))
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
APPROVED BY THE BOARD
"R.S. Smith" |
"C.A. Pinette" |
Director, R.S. Smith |
Director, C.A. Pinette |
Canfor Corporation
Condensed Consolidated Statements of Income
3 months ended March 31, |
|||||
(millions of Canadian dollars, except per share data, unaudited) |
2018 |
2017 |
|||
Sales |
$ |
1,233.5 |
$ |
1,105.2 |
|
Costs and expenses |
|||||
Manufacturing and product costs |
751.0 |
749.4 |
|||
Freight and other distribution costs |
152.4 |
157.4 |
|||
Countervailing and anti-dumping duty expense, net (Note 14) |
34.9 |
- |
|||
Amortization |
64.8 |
62.3 |
|||
Selling and administration costs |
26.1 |
28.3 |
|||
Restructuring, mill closure and severance costs, net of recovery |
0.5 |
1.6 |
|||
1,029.7 |
999.0 |
||||
Equity income |
- |
0.6 |
|||
Operating income |
203.8 |
106.8 |
|||
Finance expense, net |
(6.7) |
(8.0) |
|||
Foreign exchange gain (loss) on long-term debt |
(3.5) |
1.1 |
|||
Foreign exchange gain on duties receivable (Note 4) |
1.3 |
- |
|||
Gain (loss) on derivative financial instruments (Note 7) |
(8.0) |
3.2 |
|||
Other income, net |
5.3 |
2.2 |
|||
Net income before income taxes |
192.2 |
105.3 |
|||
Income tax expense (Note 8) |
(50.7) |
(27.8) |
|||
Net income |
$ |
141.5 |
$ |
77.5 |
|
Net income attributable to: |
|||||
Equity shareholders of the Company |
$ |
112.2 |
$ |
66.1 |
|
Non-controlling interests |
29.3 |
11.4 |
|||
Net income |
$ |
141.5 |
$ |
77.5 |
|
Net income per common share: (in Canadian dollars) |
|||||
Attributable to equity shareholders of the Company |
|||||
- Basic and diluted (Note 9) |
$ |
0.87 |
$ |
0.50 |
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
Canfor Corporation
Condensed Consolidated Statements of Other Comprehensive Income (Loss)
3 months ended March 31, |
|||||
(millions of Canadian dollars, unaudited) |
2018 |
2017 |
|||
Net income |
$ |
141.5 |
$ |
77.5 |
|
Other comprehensive income (loss) |
|||||
Items that will not be recycled through net income: |
|||||
Defined benefit plan actuarial gains (Note 6) |
13.2 |
3.3 |
|||
Income tax expense on defined benefit plan actuarial gains (Note 8) |
(3.6) |
(0.9) |
|||
9.6 |
2.4 |
||||
Items that may be recycled through net income: |
|||||
Foreign exchange translation of foreign operations, net of tax |
15.1 |
(3.2) |
|||
Other comprehensive income (loss), net of tax |
24.7 |
(0.8) |
|||
Total comprehensive income |
$ |
166.2 |
$ |
76.7 |
|
Total comprehensive income attributable to: |
|||||
Equity shareholders of the Company |
$ |
135.8 |
$ |
65.3 |
|
Non-controlling interests |
30.4 |
11.4 |
|||
Total comprehensive income |
$ |
166.2 |
$ |
76.7 |
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
Canfor Corporation
Condensed Consolidated Statements of Changes in Equity
3 months ended March 31, |
||||
(millions of Canadian dollars, unaudited) |
2018 |
2017 |
||
Share capital |
||||
Balance at beginning of period |
$ |
1,014.9 |
$ |
1,047.7 |
Share purchases (Note 9) |
(0.2) |
- |
||
Balance at end of period |
$ |
1,014.7 |
$ |
1,047.7 |
Contributed surplus |
||||
Balance at beginning of period |
$ |
31.9 |
$ |
(4.6) |
Forward purchase liability related to acquisition of Beadles & Balfour (Note 12) |
- |
36.5 |
||
Balance at end of period |
$ |
31.9 |
$ |
31.9 |
Retained earnings |
||||
Balance at beginning of period |
$ |
629.5 |
$ |
351.7 |
Net income attributable to equity shareholders of the Company |
112.2 |
66.1 |
||
Defined benefit plan actuarial gains, net of tax |
8.5 |
2.4 |
||
Share purchases (Note 9) |
(0.3) |
- |
||
Elimination of non-controlling interests (Note 12) |
- |
(16.6) |
||
Acquisition of non-controlling interests (Note 9) |
- |
(0.6) |
||
Non-controlling interests arising from change in partnership interest in pellet plants (Note 13) |
1.3 |
- |
||
Balance at end of period |
$ |
751.2 |
$ |
403.0 |
Accumulated other comprehensive income |
||||
Balance at beginning of period |
$ |
55.1 |
$ |
88.9 |
Foreign exchange translation of foreign operations, net of tax |
15.1 |
(3.2) |
||
Balance at end of period |
$ |
70.2 |
$ |
85.7 |
Total equity attributable to equity shareholders of the Company |
$ |
1,868.0 |
$ |
1,568.3 |
Non-controlling interests |
||||
Balance at beginning of period |
$ |
269.6 |
$ |
254.8 |
Net income attributable to non-controlling interests |
29.3 |
11.4 |
||
Defined benefit plan actuarial gains attributable to non-controlling interests, net of tax |
1.1 |
- |
||
Distributions to non-controlling interests |
(1.8) |
(2.2) |
||
Elimination of non-controlling interests (Note 12) |
- |
(19.9) |
||
Acquisition of non-controlling interests (Note 9) |
- |
(2.4) |
||
Non-controlling interests arising from change in partnership interest in pellet plants (Note 13) |
2.5 |
- |
||
Balance at end of period |
$ |
300.7 |
$ |
241.7 |
Total equity |
$ |
2,168.7 |
$ |
1,810.0 |
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
Canfor Corporation
Condensed Consolidated Statements of Cash Flows
3 months ended March 31, |
||||||
(millions of Canadian dollars, unaudited) |
2018 |
2017 |
||||
Cash generated from (used in): |
||||||
Operating activities |
||||||
Net income |
$ |
141.5 |
$ |
77.5 |
||
Items not affecting cash: |
||||||
Amortization |
64.8 |
62.3 |
||||
Income tax expense |
50.7 |
27.8 |
||||
Long-term portion of deferred reforestation obligations |
16.9 |
16.1 |
||||
Foreign exchange (gain) loss on long-term debt |
3.5 |
(1.1) |
||||
Foreign exchange gain on duties receivable (Note 4) |
(1.3) |
- |
||||
Adjustment to accrued duties (Note 14) |
(12.9) |
- |
||||
Changes in mark-to-market value of derivative financial instruments |
2.9 |
- |
||||
Employee future benefits expense |
3.0 |
3.2 |
||||
Finance expense, net |
6.7 |
8.0 |
||||
Gain on sale of Anthony EACOM Inc., net |
- |
(4.0) |
||||
Equity income |
- |
(0.6) |
||||
Other, net |
2.6 |
(6.4) |
||||
Defined benefit plan contributions, net |
(7.3) |
(6.0) |
||||
Income taxes received (paid), net |
(46.8) |
1.2 |
||||
224.3 |
178.0 |
|||||
Net change in non-cash working capital (Note 10) |
(152.1) |
(105.2) |
||||
72.2 |
72.8 |
|||||
Financing activities |
||||||
Change in operating bank loans (Note 5(a)) |
- |
12.0 |
||||
Proceeds from long-term debt |
- |
1.7 |
||||
Repayment of long-term debt |
(0.1) |
- |
||||
Finance expenses paid |
(3.7) |
(3.2) |
||||
Share purchases (Note 9) |
(4.2) |
- |
||||
Acquisition of non-controlling interests (Note 9) |
(0.1) |
(2.8) |
||||
Cash distributions paid to non-controlling interests |
(1.8) |
(3.8) |
||||
(9.9) |
3.9 |
|||||
Investing activities |
||||||
Additions to property, plant and equipment, timber and intangible assets, net |
(56.4) |
(38.9) |
||||
Proceeds on disposal of property, plant and equipment |
0.8 |
6.4 |
||||
Proceeds on sale of Anthony EACOM Inc., net |
- |
5.4 |
||||
Acquisition of Beadles & Balfour (Note 12) |
- |
(41.8) |
||||
Other, net |
(0.2) |
(0.1) |
||||
(55.8) |
(69.0) |
|||||
Foreign exchange (gain) loss on cash and cash equivalents |
1.4 |
(0.1) |
||||
Increase in cash and cash equivalents* |
7.9 |
7.6 |
||||
Cash and cash equivalents at beginning of period* |
288.2 |
156.6 |
||||
Cash and cash equivalents at end of period* |
$ |
296.1 |
$ |
164.2 |
*Cash and cash equivalents include cash on hand less unpresented cheques. |
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
Canfor Corporation
Notes to the Condensed Consolidated Financial Statements
Three months ended March 31, 2018 and March 31, 2017
(millions of Canadian dollars unless otherwise noted, unaudited)
1. Basis of Preparation
These condensed consolidated interim financial statements (the "financial statements") have been prepared in accordance with International Accounting Standard ("IAS") 34 Interim Financial Reporting, and include the accounts of Canfor Corporation and its subsidiary entities, including Canfor Pulp Products Inc. ("CPPI"), hereinafter referred to as "Canfor" or "the Company."
These financial statements do not include all of the disclosures required by International Financial Reporting Standards ("IFRS") for annual financial statements. Additional disclosures relevant to the understanding of these financial statements, including the accounting policies applied, can be found in the Company's Annual Report for the year ended December 31, 2017, available at www.canfor.com or www.sedar.com.
Effective January 1, 2018, the Company has adopted IFRS 15 Revenue from Contracts with Customers. IFRS 15 supersedes IAS 18 Revenue, IAS 11 Construction Contracts and related interpretations. The standard establishes a framework based on transfer of control for determining how much and when revenue is recognized, and includes expanded disclosure requirements for annual financial statements. Adoption of IFRS 15 has had no significant impact on the Company's interim financial statements.
Effective January 1, 2018, the Company has adopted IFRS 9 Financial Instruments. IFRS 9 supersedes IAS 39 Financial Instruments: Recognition and Measurement. The standard includes requirements for recognition, measurement, impairment and derecognition of financial assets and liabilities, as well as general hedge accounting. The adoption of IFRS 9 has had no significant impact on the Company's interim financial statements.
Certain comparative amounts for the prior period have been reclassified to conform to the current period's presentation.
These financial statements were authorized for issue by the Company's Board of Directors on April 24, 2018.
Accounting Standards Issued and Not Applied
In January 2016, the International Accounting Standards Board issued IFRS 16 Leases, which will supersede IAS 17 Leases and related interpretations. The required adoption date for IFRS 16 is January 1, 2019. IFRS 16 introduces a single, on-balance sheet lease accounting model for lessees. A lessee recognizes a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. In addition, the nature of expenses related to those leases will change as IFRS 16 replaces straight-line operating lease expense with a depreciation expense for right-of-use assets and interest expense on lease liabilities.
It is expected that IFRS 16 will have an impact on the Company's financial statements with recognition of new assets and liabilities for its operating leases. The Company is still in the process of assessing the quantitative impact on its financial statements of this new standard. The Company's future minimum lease payments, on an undiscounted basis, under non-cancellable operating leases at December 31, 2017 were $42.5 million.
2. Seasonality of Operations
Canfor's financial results are impacted by seasonal factors such as weather and building activity. Adverse weather conditions can cause logging curtailments, which can affect the supply of raw materials to sawmills and pulp mills. Market demand also varies seasonally to some degree. For example, building activity and repair and renovation work, which affect demand for solid wood products, are generally stronger in the spring and fall months. Shipment volumes are affected by these factors as well as by global supply and demand conditions.
3. Inventories
(millions of Canadian dollars, unaudited) |
As at March 31, 2018 |
As at December 31, |
||
Logs |
$ |
236.2 |
$ |
132.1 |
Finished products |
395.5 |
354.6 |
||
Residual fibre |
16.0 |
20.8 |
||
Materials and supplies |
123.0 |
121.4 |
||
$ |
770.7 |
$ |
628.9 |
Inventory balances are stated after inventory write-downs from cost to net realizable value. There were no inventory write-downs at March 31, 2018 or December 31, 2017.
4. Long-Term Investments and Other
(millions of Canadian dollars, unaudited) |
As at 2018 |
As at |
||
Investments |
$ |
22.9 |
$ |
22.5 |
Duties receivable |
59.8 |
44.9 |
||
Other deposits, loans and advances |
14.1 |
15.9 |
||
$ |
96.8 |
$ |
83.3 |
The duties receivable balance represents US dollar anti-dumping and countervailing duty cash deposits paid in excess of the calculated expense accrued at March 31, 2018 (Note 14).
5. Operating Loans and Long-Term Debt
(a) Available Operating Loans
(millions of Canadian dollars, unaudited) |
As at March 31, |
As at December 31, |
|||
Canfor (excluding CPPI) |
|||||
Available operating loans: |
|||||
Operating loan facility |
$ |
350.0 |
$ |
350.0 |
|
Facilities for letters of credit |
60.0 |
50.0 |
|||
Total operating loan facility |
410.0 |
400.0 |
|||
Letters of credit |
(52.5) |
(44.0) |
|||
Total available operating loan facility - Canfor |
$ |
357.5 |
$ |
356.0 |
|
CPPI |
|||||
Available operating loans: |
|||||
Operating loan facility |
$ |
110.0 |
$ |
110.0 |
|
Letters of credit |
(10.8) |
(9.2) |
|||
Total available operating loan facility - CPPI |
$ |
99.2 |
$ |
100.8 |
|
Consolidated: |
|||||
Total operating loan facilities |
$ |
520.0 |
$ |
510.0 |
|
Total available operating loan facilities |
$ |
456.7 |
$ |
456.8 |
Interest is payable on Canfor's operating loans at floating rates based on the lenders' Canadian prime rate, bankers acceptances, US dollar base rate or US dollar LIBOR rate, plus a margin that varies with the Company's debt to total capitalization ratio.
On April 6, 2018, the maturity date of CPPI's principal operating loan facility was extended from January 31, 2020 to April 6, 2022, and the terms of certain financial covenants were updated. The terms of CPPI's operating loan facility include interest payable at floating rates that vary depending on the ratio of debt to total capitalization and is based on lenders' Canadian prime rate, bankers acceptances, US dollar base rate or US dollar LIBOR rate, plus a margin. Canfor's principal operating loan facility has a maturity date of September 28, 2022.
Both Canfor's and CPPI's operating loan facilities have certain financial covenants, including maximum debt to total capitalization ratios.
Canfor (excluding CPPI) has separate facilities to cover letters of credit. At March 31, 2018, $50.0 million of letters of credit outstanding are covered under these facilities with the balance of $2.5 million covered under Canfor's general operating loan facility.
On February 28, 2018, the Company increased one of its letter of credit facilities by $10.0 million, which can be drawn in either Canadian or US dollars.
As at March 31, 2018, the Company and CPPI are in compliance with all covenants relating to their operating loans. Substantially all borrowings of CPPI are non-recourse to other entities within the Company.
(b) Long-Term Debt
All borrowings of the Company feature similar financial covenants, including a maximum debt to total capitalization ratio.
As at March 31, 2018, the Company is in compliance with all covenants relating to its long-term debt.
Fair value of total long-term debt
At March 31, 2018, the fair value of the Company's long-term debt is $391.4 million (December 31, 2017 - $389.1 million). The fair value was determined based on prevailing market rates for long-term debt with similar characteristics and risk profile.
6. Employee Future Benefits
For the three months ended March 31, 2018, defined benefit pension plan actuarial gains of $13.2 million (before tax) were recognized in other comprehensive income. The gains recorded in the first quarter of 2018 principally reflect a higher discount rate used to value the net defined benefit obligation offset in part by the return generated on plan assets. For the three months ended March 31, 2017, the Company recognized before tax actuarial gains in other comprehensive income of $3.3 million, principally reflecting the return generated on plan assets and membership experience gains.
The discount rate assumptions used to estimate the changes in net retirement benefit obligations were as follows:
Defined Benefit Pension Plans |
Other Benefit Plans |
||
March 31, 2018 |
3.6% |
3.6% |
|
December 31, 2017 |
3.4% |
3.4% |
|
March 31, 2017 |
3.9% |
3.9% |
|
December 31, 2016 |
3.9% |
3.9% |
7. Financial Instruments
The Company's financial assets are measured at amortized cost with the exception of certain investments in equity interests, which are measured at fair value through profit and loss. Financial liabilities are measured at amortized cost with the exception of certain derivative instruments, which are measured at fair value through profit and loss.
IFRS 13, Fair Value Measurement, requires classification of financial instruments a hierarchy that prioritizes the inputs to fair value measurement.
The three levels of the fair value hierarchy are:
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 – Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly;
Level 3 – Inputs that are not based on observable market data.
The following table summarizes Canfor's financial instruments measured at fair value at March 31, 2018 and December 31, 2017, and shows the level within the fair value hierarchy in which the financial instruments have been classified:
(millions of Canadian dollars, unaudited) |
Fair Value |
As at March 31, 2018 |
As at |
||||
Financial assets measured at fair value |
|||||||
Investments |
Level 1 |
$ |
22.4 |
$ |
21.8 |
||
Financial liabilities measured at fair value |
|||||||
Derivative financial instruments |
Level 2 |
$ |
3.7 |
$ |
0.8 |
Canfor invests in equity and debt securities, which are traded in an active market and valued using closing prices on the measurement date with gains or losses recognized through comprehensive income.
The Company uses a variety of derivative financial instruments, which are included in Level 2 of the fair value hierarchy, to reduce its exposure to risks associated with fluctuations in foreign exchange rates, lumber prices, energy prices, and floating interest rates on long-term debt.
The fair value of these financial instruments was determined based on prevailing market rates for instruments with similar characteristics.
The following table summarizes the gain (loss) on derivative financial instruments for the three month periods ended March 31, 2018 and March 31, 2017:
3 months ended March 31, |
||||
(millions of Canadian dollars, unaudited) |
2018 |
2017 |
||
Lumber futures |
$ |
(7.9) |
$ |
3.2 |
Energy derivatives |
(0.1) |
- |
||
Gain (loss) on derivative financial instruments |
$ |
(8.0) |
$ |
3.2 |
8. Income Taxes
3 months ended March 31, |
||||
(millions of Canadian dollars, unaudited) |
2018 |
2017 |
||
Current |
$ |
(56.8) |
$ |
(25.1) |
Deferred |
6.1 |
(2.7) |
||
Income tax expense |
$ |
(50.7) |
$ |
(27.8) |
The reconciliation of income taxes calculated at the statutory rate to the actual income tax provision is as follows:
3 months ended March 31, |
|||||
(millions of Canadian dollars, unaudited) |
2018 |
2017 |
|||
Income tax expense at statutory rate – 27% (2017 – 26%) |
$ |
(51.9) |
$ |
(27.4) |
|
Add (deduct): |
|||||
Non-taxable income related to non-controlling interests |
0.1 |
0.1 |
|||
Entities with different income tax rates and other tax adjustments |
1.6 |
(1.2) |
|||
Permanent difference from capital gains and losses and other non-deductible items |
(0.5) |
0.7 |
|||
Income tax expense |
$ |
(50.7) |
$ |
(27.8) |
In addition to the amounts recorded to net income, a tax expense of $3.6 million was recorded in other comprehensive income for the three months ended March 31, 2018 in relation to the actuarial gains on the defined benefit plans (three months ended March 31, 2017 - expense of $0.9 million on actuarial gains).
Also included in other comprehensive income for the three months ended March 31, 2018 was a tax expense of $1.0 million related to foreign exchange differences on translation of investments in foreign operations (three months ended March 31, 2017 – recovery of $0.3 million).
9. Earnings Per Share and Normal Course Issuer Bid
Basic net income per share is calculated by dividing the net income attributable to common equity shareholders by the weighted average number of common shares outstanding during the period.
3 months ended March 31, |
|||
2018 |
2017 |
||
Weighted average number of common shares |
128,625,909 |
132,804,543 |
On March 5, 2018, the Company renewed its normal course issuer bid whereby it can purchase for cancellation up to 6,439,764 common shares or approximately 5% of its issued and outstanding common shares as of March 1, 2018. The renewed normal course issuer bid is set to expire on March 6, 2019. During the first quarter of 2018, the Company purchased 19,500 shares for $0.5 million (an average of $25.64 per common share), and paid an additional $3.7 million in relation to shares purchased in the prior year. As at March 31, 2018 and April 24, 2018 there were 128,625,480 common shares of the Company outstanding.
Under a separate normal course issuer bid, CPPI purchased 500 common shares in the first quarter of 2018 at an average of $13.01 per common share from non-controlling shareholders, and paid an additional $0.1 million in relation to shares purchased in the prior year. As at March 31, 2018 and April 24, 2018, Canfor's ownership interest in CPPI was 54.8%.
10. Net Change in Non-Cash Working Capital
3 months ended March 31, |
||||
(millions of Canadian dollars, unaudited) |
2018 |
2017 |
||
Accounts receivable |
$ |
(51.7) |
$ |
(64.0) |
Inventories |
(139.7) |
(109.9) |
||
Prepaid expenses and other |
(17.2) |
(5.8) |
||
Accounts payable, accrued liabilities and current portion of deferred reforestation obligations |
56.5 |
74.5 |
||
Net increase in non-cash working capital |
$ |
(152.1) |
$ |
(105.2) |
11. Segment Information
Canfor has two reportable segments (lumber segment and pulp and paper segment), which offer different products and are managed separately because they require different production processes and marketing strategies.
Sales between segments are accounted for at prices that approximate fair value. These include sales of residual fibre from the lumber segment to the pulp and paper segment for use in the pulp production process.
The Company's panels business does not meet the criteria to be reported fully as a separate segment and is included in Unallocated & Other below.
(millions of Canadian dollars, unaudited) |
Lumber |
Pulp & Paper |
Unallocated |
Elimination |
Consolidated |
|||||
3 months ended March, 2018 |
||||||||||
Sales to external customers |
$ |
873.9 |
$ |
359.6 |
$ |
- |
$ |
- |
$ |
1,233.5 |
Sales to other segments |
50.1 |
0.1 |
- |
(50.2) |
- |
|||||
Operating income (loss) |
125.9 |
85.1 |
(7.2) |
- |
203.8 |
|||||
Amortization |
45.6 |
19.2 |
- |
- |
64.8 |
|||||
Capital expenditures1 |
33.1 |
19.8 |
3.5 |
- |
56.4 |
|||||
Identifiable assets |
2,465.6 |
843.1 |
416.4 |
- |
3,725.1 |
|||||
3 months ended March 31, 2017 |
||||||||||
Sales to external customers |
$ |
796.1 |
$ |
309.1 |
$ |
- |
$ |
- |
$ |
1,105.2 |
Sales to other segments |
40.9 |
0.1 |
- |
(41.0) |
- |
|||||
Operating income (loss) |
83.7 |
35.2 |
(12.1) |
- |
106.8 |
|||||
Amortization |
43.5 |
18.8 |
- |
- |
62.3 |
|||||
Capital expenditures1 |
19.9 |
16.8 |
2.2 |
- |
38.9 |
|||||
Identifiable assets |
2,385.9 |
788.3 |
246.1 |
- |
3,420.3 |
1Capital expenditures represent cash paid for capital assets during the periods. Pulp & Paper includes capital expenditures by CPPI that were partially financed by government grants. |
12. Acquisitions
On January 2, 2015, the Company completed the first phase of the acquisition of Beadles Lumber Company & Balfour Lumber Company Inc. ("Beadles & Balfour") for total consideration of $51.6 million (US$44.0 million), representing an initial 55% interest.
On January 2, 2017, the Company completed the final phase of the acquisition of Beadles & Balfour for $41.8 million (US$31.1 million) bringing Canfor's interest in Beadles & Balfour to 100%. Upon completion of the final phase of the acquisition, the forward purchase liability of $41.8 million and non-controlling interest of $19.9 million were derecognized, and $36.5 million was recorded in other equity. In addition, $16.6 million was charged to retained earnings reflecting Canfor's election to account for the non-controlling interest related to Beadles & Balfour as the non-controlling share of the fair value of the net identifiable assets at the acquisition date.
The acquisition was accounted for in accordance with IFRS 3, Business Combinations.
13. Change in Ownership Interest in Canfor Energy North Limited Partnership
On January 1, 2018, Pacific BioEnergy Corporation ("PBEC") exercised its option to purchase from Canfor an additional 10% of the outstanding shares of Canfor Energy North Limited Partnership ("CENLP") for consideration of $3.5 million, which was received in December 2017, thereby increasing their ownership from approximately 5% to 15%.
Accordingly, the non-controlling interest of CENLP was increased by $2.5 million to reflect PBEC's 15% total ownership from January 1, 2018 onwards. A net gain of $1.3 million was recorded as a credit to equity representing the difference between the adjustment to Canfor's investment in CENLP and the consideration paid, and the associated tax effects.
14. Countervailing and Anti-Dumping Duties
On November 25, 2016, a petition was filed by the US Lumber Coalition to the US Department of Commerce ("DOC") and the US International Trade Commission ("ITC") alleging certain subsidies and administered fees below the fair market value of timber that favour Canadian lumber producers, an assertion the Canadian industry and Provincial and Federal Governments strongly deny and have successfully disproven in international courts in the past. Canfor was selected by the DOC as a "mandatory respondent" to the countervailing and anti-dumping investigations and is subject to company specific countervailing and anti-dumping duties.
On April 24, 2017, the DOC announced its preliminary countervailing duty ("CVD") of 20.26% specific to Canfor, to be posted by cash deposits or bonds on the exports of softwood lumber to the US effective April 28, 2017 to August 25, 2017. Following this period, CVD duties were not applicable on lumber shipments destined to the US from August 26, 2017 to December 27, 2017. On June 23, 2017, the DOC announced its preliminary anti-dumping duty determination ("ADD") of 7.72% specific to Canfor, to be posted by cash deposits or bonds on the exports of softwood lumber to the US effective June 30, 2017.
Final countervailing and anti-dumping duty determinations were announced by the DOC on November 2, 2017, while the ITC issued an affirmative determination of injury on December 7, 2017. As a result, Canfor was issued a final ADD rate of 7.28% effective November 8, 2017, and was subject to countervailing duties on Canadian lumber exports destined to the US at a reduced rate of 13.24%, effective December 28, 2017. Notwithstanding the final rates established in the DOC's investigation, the final liability for the assessment of CVD and ADD will not be determined until an official administrative review of the respective period is complete. For the CVD rate, the first period of review will be based on sales and cost data through 2017 and 2018, with the ADD rate based off data from July 2017 to December 2018. The first period of review is currently anticipated to be completed in 2020.
In the first quarter of 2018, cash deposits were posted reflecting the final published ADD rate of 7.28% and CVD rate of 13.24% as determined by the DOC, however for accounting purposes, the ADD expense is being accrued at 1.1% reflecting Canfor's best estimate of the ADD rate applicable to its product shipment profile, as determined by applying the DOC's methodology to current sales and cost data. Canfor will continue to reassess its estimate of the ADD rate at the end of each quarter in 2018 by applying the DOC's methodology to updated sales and cost data as this becomes available. These estimates may result in a material adjustment to the Income Statement on a quarterly basis during the first period of review. Accordingly, for the three months ended March 31, 2018, the Company reduced its duty expense by $12.9 million reflecting the difference in the DOC's final published rate for ADD and the Company's estimated ADD accrual rate for the first quarter of 2018.
The cumulative countervailing and anti-dumping duty cash deposits in excess of the calculated expense accrued at March 31, 2018 is $59.8 million (Note 4). These balances are being carried as receivables under 'long-term investments and other'.
Canfor and other Canadian forest product companies, the Federal Government and Canadian Provincial Governments categorically deny the US allegations and strongly disagree with the current countervailing and anti-dumping determinations made by the DOC. Canada has proceeded with legal challenges under NAFTA and through the World Trade Organization, where Canadian litigation has proven successful in the past.
SOURCE Canfor Corporation
Media Contact: Corinne Stavness, Senior Director, Corporate Affairs, (604) 661-5225, [email protected]; Investor Contact: Pat Elliott, Vice President, Corporate Finance and Strategy, (604) 661-5441, [email protected]
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