VANCOUVER, July 26, 2017 /CNW/ - Canfor Corporation
(TSX: CFP) today reported net income attributable to shareholders
("shareholder net income") of $81.3
million, or $0.61 per share,
for the second quarter of 2017, compared to shareholder net income
of $66.1 million, or $0.50 per share, for the first quarter of 2017
and a net income attributable to shareholders of $36.0 million, or $0.27 per share, for the second quarter of 2016.
For the six months ended June 30,
2017, the Company's shareholder net income was $147.4 million, or $1.11 per share, compared to $62.0 million, or $0.47 per share, for the six months ended
June 30, 2016.
The following table summarizes selected financial information
for the Company for the comparative periods:
(millions of Canadian
dollars, except per share amounts)
|
|
Q2
2017
|
|
Q1
2017
|
|
YTD
2017
|
|
Q2
2016
|
|
YTD
2016
|
Sales
|
$
|
1,185.2
|
$
|
1,126.2
|
$
|
2,311.4
|
$
|
1,022.3
|
$
|
2,090.2
|
Operating income
before amortization, as reported
|
$
|
193.1
|
$
|
169.1
|
$
|
362.2
|
$
|
127.1
|
$
|
252.8
|
Operating income, as
reported
|
$
|
131.0
|
$
|
106.8
|
$
|
237.8
|
$
|
69.6
|
$
|
134.7
|
Adjusted operating
income before amortization1
|
$
|
227.9
|
$
|
169.1
|
$
|
397.0
|
$
|
111.6
|
$
|
237.3
|
Adjusted operating
income1
|
$
|
165.8
|
$
|
106.8
|
$
|
272.6
|
$
|
54.1
|
$
|
119.2
|
Net
income2
|
$
|
81.3
|
$
|
66.1
|
$
|
147.4
|
$
|
36.0
|
$
|
62.0
|
Net income per share,
basic and diluted2
|
$
|
0.61
|
$
|
0.50
|
$
|
1.11
|
$
|
0.27
|
$
|
0.47
|
Adjusted shareholder
net income
|
$
|
104.2
|
$
|
59.3
|
$
|
163.5
|
$
|
26.5
|
$
|
47.4
|
Adjusted shareholder
net income per share, basic and diluted
|
$
|
0.78
|
$
|
0.45
|
$
|
1.23
|
$
|
0.20
|
$
|
0.36
|
1 Adjusted
for countervailing and anti-dumping duty deposits of $34.8 million
expensed in the second quarter of 2017 and a one-time gain of $15.5
million related to a legal settlement in the second quarter of
2016.
|
2
Attributable to equity shareholders of the Company
|
The Company's adjusted shareholder net income for the second
quarter of 2017 was $104.2 million,
or $0.78 per share, compared to an
adjusted shareholder net income of $59.3
million, or $0.45 per share,
for the first quarter of 2017, and adjusted shareholder net income
of $26.5 million, or $0.20 per share, for the second quarter of 2016.
For the six months ended June 30,
2017, the Company's adjusted shareholder net income was
$163.5 million, or $1.23 per share compared to $47.4 million, or $0.36 per share, for the six months ended
June 30, 2016.
The Company reported operating income of $131.0 million for the second quarter of 2017, up
$24.2 million from reported operating
income of $106.8 million for the
first quarter of 2017, as a solid improvement in lumber segment
operating earnings more than offset slightly lower pulp and paper
segment earnings. Improved lumber segment results primarily
reflected higher Western
Spruce/Pine/Fir ("SPF") and Southern Yellow Pine ("SYP")
unit sales realizations and a return to more normal operating
conditions following the challenging weather experienced in the
first quarter of 2017, offset in part by higher market-based
stumpage in Western Canada. For
the pulp and paper segment, solid increases in unit sales
realizations largely offset the impact of scheduled maintenance
outages taken during the quarter at the Northwood Northern Bleached
Softwood Kraft ("NBSK") pulp mill and Taylor Bleached Chemi-Thermo
Mechanical Pulp ("BCTMP") mill.
Reported results in the second quarter of 2017 include
$34.8 million related to the
expensing of the US Department of Commerce's preliminary
countervailing duty ("CVD") rate of 20.26% effective April 28, 2017, and preliminary anti-dumping duty
("ADD") rate of 7.72% effective June 30,
2017, on exports from Canada to the United
States. The expensing of these duties follows the accounting
treatment adopted during the last softwood dispute.
Notwithstanding, Canfor and other Canadian forest product
companies, the Federal Government and Canadian Provincial
Governments continue to totally refute the US allegations and
the preliminary CVD and ADD determinations recently made by the US
Department of Commerce ("DOC"). After adjusting for the duties,
operating income was $165.8 million
for the second quarter of 2017, up $59.0
million from the first quarter of 2017.
Lumber demand in North America
remained relatively stable in the second quarter of 2017, with US
housing starts averaging 1,164,000 units on a seasonally adjusted
basis, down 6% from the previous quarter, and in line with the
second quarter of 2016. Single-family starts, which consume a
higher proportion of lumber, were broadly in line with the previous
quarter, while multi-family starts were down compared to the first
quarter of 2017. In Canada,
housing starts remained solid, averaging 205,000 units on a
seasonally adjusted basis. Offshore lumber demand from China, Japan
and other regions continued to improve through the second quarter,
particularly for the Company's higher-value lumber products.
On a reported basis, Western SPF lumber unit sales realizations
were up from the previous quarter as higher average Western SPF
lumber prices and a 1 cent, or 2%,
weaker Canadian dollar more than offset the impact of the
aforementioned countervailing duty. The average benchmark North
American Random Lengths Western SPF 2x4 #2&Btr price was up
US$40 per Mfbm, or 11%, compared to
the first quarter of 2017, with similar increases seen across
wider-width dimensions. Benchmark lumber prices increased
significantly leading up to the preliminary countervailing duty
announcement on April 24, 2017,
supported by solid underlying North American and offshore demand.
Duties assessed by the DOC and expensed in the quarter equated to
approximately $35 per Mfbm. SYP unit
sales realizations were slightly higher than the prior quarter, as
a US$13 per Mfbm increase in the SYP
East 2x6 #2 price and a higher-value sales mix more than offset a
1% decline in the SYP East 2x4 #2 price, which was down
US$6 per Mfbm from the first quarter
of 2017. Prices for other wider-width SYP products were broadly in
line with the prior quarter.
Total lumber shipments were moderately higher than the previous
quarter reflecting a return to more normal levels following the
weather-related transportation challenges experienced in the first
quarter of 2017. Total lumber production, at 1.3 billion board
feet, was broadly in line with the prior quarter, as overall
improved productivity rates were offset by increased statutory
holidays in the current quarter and capital related downtime in the
US South. Lumber unit manufacturing costs in the second quarter of
2017 were in line with the previous quarter as the positive impact
of productivity gains and stable log costs in the US South offset
higher market-based stumpage and increased purchased wood costs in
Western Canada. The latter was
mostly attributable to unseasonably wet weather conditions which
impacted log deliveries through the second quarter.
NBSK pulp average list prices to China, as published by RISI, moved up by
US$25 per tonne, reflecting the
carry-over of strong demand from the previous quarter well into the
spring maintenance period. Towards the end of the current
quarter, demand started to show weakness in some regions, notably
China. NBSK pulp unit sales realizations materially improved
compared to the previous quarter, reflecting the strong pricing
through most of the quarter, as well as quarter-over-quarter
pricing on shipments of orders taken in the previous quarter, and a
weaker Canadian dollar. BCTMP US-dollar list prices continued
to trend positively through the second quarter of 2017 and sales
realizations were further benefited from the weaker Canadian
dollar. Lower energy revenue in the current quarter reflected
both scheduled maintenance downtime and seasonally lower energy
prices.
Pulp shipment and production volumes were down 18% and 13%,
respectively, from the previous quarter principally reflecting
approximately 40,000 tonnes of lower production available for sale,
largely due to the Company's scheduled maintenance outages and, to
a lesser extent, several operational upsets. Shipments for the
first quarter of 2017 also included a 14,000 tonne vessel shipment
that slipped from December 2016. Pulp unit manufacturing
costs were up from the previous quarter principally as a result of
the aforementioned outages, and, to a lesser extent, market-related
increases in fibre costs, which more than offset seasonally lower
energy prices and usage.
Commenting on the Company's second quarter results, Canfor's
President and Chief Executive Officer, Don
Kayne, said, "Despite the assessment of preliminary duties,
Canfor's lumber business delivered solid financial performance,
aided by increased Western SPF lumber prices and steadily improving
operating performance." Kayne added, "Our pulp business also
benefited from favourable market conditions in the current quarter,
generating solid financial results, despite our seasonally higher
scheduled maintenance downtime."
Looking ahead, the US housing market is forecast to continue its
slow but gradual recovery through the balance of 2017. North
American lumber consumption is projected to improve reflecting
steady demand in the residential construction market and continued
strength from the repair and remodelling sector. Wide-width SYP and
speciality lumber prices are anticipated to improve through the
third quarter of 2017 reflecting stronger seasonal demand. The
Company anticipates continued marketplace volatility as the DOC
investigations progress and final determinations are made. For the
Company's key offshore lumber markets, demand is anticipated to
remain solid through the third quarter of 2017.
In the pulp and paper segment, global pulp markets are currently
anticipated to see lower operating rates in the second half of 2017
with the introduction of significant new pulp capacity in the
latter part of 2017 and into 2018. For the month of
July 2017, Canfor Pulp announced a
decrease of US$10 per tonne for NBSK
pulp list prices to China, while
NBSK pulp list prices to North
America are unchanged from June
2017.
Results in the third quarter of 2017 will reflect a scheduled
maintenance outage at Canfor Pulp's Intercontinental pulp mill,
with a projected 8,000 tonnes of reduced NBSK pulp production, as
well as higher associated maintenance costs and lower projected
shipment volumes.
Notwithstanding the impact to our dedicated employees, the
severe forest fire season in Western
Canada to date has had no material financial impact on
Canfor's operations. A continuation of the current hot and dry
weather in the BC Interior will increase the risks of material
disruption to the Company's fibre procurement efforts, operations
and transportation.
Additional Information and Conference Call
A conference call to discuss the second quarter's financial and
operating results will be held on Thursday,
July 27, 2017 at 8:00 AM Pacific
time. To participate in the call, please dial
Toll-Free 888-390-0546. For instant replay access until
August 10, 2017, please dial
888-390-0541 and enter participant pass code 253091#. 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 54.5% interest
in Canfor Pulp Products Inc., which is one of the largest global
producers of market 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
Second Quarter
2017
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
June 30, 2017 relative to the
quarters ended March 31, 2017 and
June 30, 2016, and the financial
position of the Company at June 30,
2017. It should be read in conjunction with Canfor's
unaudited interim consolidated financial statements and
accompanying notes for the quarters ended June 30, 2017 and 2016, as well as the 2016
annual MD&A and the 2016 audited consolidated financial
statements and notes thereto, which are included in Canfor's Annual
Report for the year ended December 31,
2016 (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 (loss) 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
Shareholder 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
(Loss) 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 second quarter
of 2017.
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.
All financial references are in millions of Canadian dollars
unless otherwise noted. The information in this report is as
at July 25, 2017.
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.
SECOND QUARTER 2017 OVERVIEW
Selected Financial Information and Statistics
(millions of Canadian
dollars, except per share amounts)
|
Q2
2017
|
|
Q1
2017
|
|
YTD
2017
|
|
Q2
2016
|
|
YTD
2016
|
|
|
|
|
Operating income
(loss) by segment:
|
|
|
|
|
|
|
|
|
|
|
|
Lumber
|
$
|
110.4
|
$
|
83.7
|
$
|
194.1
|
$
|
71.5
|
$
|
104.9
|
|
Pulp and
Paper
|
$
|
31.5
|
$
|
35.2
|
$
|
66.7
|
$
|
5.2
|
$
|
44.3
|
|
Unallocated and
Other1
|
$
|
(10.9)
|
$
|
(12.1)
|
$
|
(23.0)
|
$
|
(7.1)
|
$
|
(14.5)
|
Total operating
income
|
$
|
131.0
|
$
|
106.8
|
$
|
237.8
|
$
|
69.6
|
$
|
134.7
|
Add:
Amortization2
|
$
|
62.1
|
$
|
62.3
|
$
|
124.4
|
$
|
57.5
|
$
|
118.1
|
Total operating
income before amortization
|
$
|
193.1
|
$
|
169.1
|
$
|
362.2
|
$
|
127.1
|
$
|
252.8
|
Add
(deduct):
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
movements
|
$
|
89.1
|
$
|
(105.2)
|
$
|
(16.1)
|
$
|
128.8
|
$
|
70.8
|
|
Defined benefit plan
contributions, net
|
$
|
(6.6)
|
$
|
(6.0)
|
$
|
(12.6)
|
$
|
(5.2)
|
$
|
(10.4)
|
|
Income taxes received
(paid), net
|
$
|
(19.3)
|
$
|
1.2
|
$
|
(18.1)
|
$
|
(3.0)
|
$
|
(16.6)
|
|
Gain on sale of
Anthony EACOM Inc.3
|
$
|
-
|
$
|
(4.0)
|
$
|
(4.0)
|
$
|
-
|
$
|
-
|
|
Gain on legal
settlement, net4
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
(15.5)
|
$
|
(15.5)
|
|
Other operating cash
flows, net5
|
$
|
(5.9)
|
$
|
17.7
|
$
|
11.8
|
$
|
(8.9)
|
$
|
(6.9)
|
Cash from
operating activities
|
$
|
250.4
|
$
|
72.8
|
$
|
323.2
|
$
|
223.3
|
$
|
274.2
|
Add
(deduct):
|
|
|
|
|
|
|
|
|
|
|
|
Finance expenses
paid
|
$
|
(3.2)
|
$
|
(3.2)
|
$
|
(6.4)
|
$
|
(6.9)
|
$
|
(11.0)
|
|
Distributions paid to
non-controlling interests
|
$
|
(2.2)
|
$
|
(3.8)
|
$
|
(6.0)
|
$
|
(7.3)
|
$
|
(11.5)
|
|
Capital additions,
net
|
$
|
(61.7)
|
$
|
(38.9)
|
$
|
(100.6)
|
$
|
(66.2)
|
$
|
(113.3)
|
|
Acquisitions
|
$
|
(14.4)
|
$
|
(41.8)
|
$
|
(56.2)
|
$
|
(19.7)
|
$
|
(19.7)
|
|
Proceeds received
from sale of Anthony EACOM Inc.3
|
$
|
1.2
|
$
|
5.4
|
$
|
6.6
|
$
|
-
|
$
|
-
|
|
Proceeds received
from sale of Lakeland Winton6
|
$
|
15.0
|
$
|
-
|
$
|
15.0
|
$
|
-
|
$
|
-
|
|
Repayment of
long-term debt
|
$
|
(0.1)
|
$
|
-
|
$
|
(0.1)
|
$
|
-
|
$
|
-
|
|
Proceeds from
long-term debt
|
$
|
-
|
$
|
1.7
|
$
|
1.7
|
$
|
-
|
$
|
-
|
|
Advances to
Licella
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
(3.5)
|
$
|
(3.5)
|
|
Foreign exchange loss
on cash and cash equivalents
|
$
|
(2.0)
|
$
|
(0.1)
|
$
|
(2.1)
|
$
|
(0.3)
|
$
|
(4.2)
|
|
Other, net
|
$
|
(4.3)
|
$
|
3.5
|
$
|
(0.8)
|
$
|
(18.6)
|
$
|
(22.0)
|
Change in cash /
operating loans
|
$
|
178.6
|
$
|
(4.4)
|
$
|
174.3
|
$
|
100.8
|
$
|
89.0
|
ROIC – Consolidated
period-to-date7
|
|
4.8%
|
|
4.0%
|
|
8.8%
|
|
2.2%
|
|
3.6%
|
Average exchange
rate (US$ per C$1.00)8
|
$
|
0.744
|
$
|
0.756
|
$
|
0.750
|
$
|
0.776
|
$
|
0.752
|
1 Increase
in Unallocated and Other in 2017 largely attributable to higher
legal costs related to the expiry of the Softwood Lumber
Agreement.
|
2
Amortization includes amortization of certain capitalized major
maintenance costs.
|
3 On March
31, 2017, Canfor sold its 50% interest in Anthony EACOM Inc. for
net proceeds of $21.4 million and recognized a $4.0 million gain.
Cash proceeds of $5.4 million was received in the first quarter of
2017, with the balance payable in equal installments over a three
year period.
|
4 Gain
relates to a $16.3 million settlement of a claim with respect to
logistics services, net of a $0.8 million impairment of related
machinery and equipment.
|
5 Further
information on operating cash flows can be found in the Company's
unaudited interim consolidated financial statements.
|
6 On July
1, 2015 Canfor sold its 33.3% interest in Lakeland Mills Ltd. and
Winton Global Lumber Ltd for consideration of $30.0 million. The
first installment of $15.0 million was received on July 1, 2015,
and the second installment for $15.0 million was received in the
second quarter of 2017.
|
7
Consolidated 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.
|
8 Source –
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)
|
|
Q2 2017
|
|
Q1 2017
|
|
YTD
2017
|
|
Q2
2016
|
|
YTD
2016
|
Shareholder net
income, as reported
|
$
|
81.3
|
$
|
66.1
|
$
|
147.4
|
$
|
36.0
|
$
|
62.0
|
Foreign exchange gain
on long-term debt
|
$
|
(2.9)
|
$
|
(1.0)
|
$
|
(3.9)
|
$
|
(0.3)
|
$
|
(7.2)
|
Countervailing and
anti-dumping duty deposits
|
$
|
25.8
|
$
|
-
|
$
|
25.8
|
$
|
-
|
$
|
-
|
Gain on derivative
financial instruments
|
$
|
-
|
$
|
(2.4)
|
$
|
(2.4)
|
$
|
(2.3)
|
$
|
(0.5)
|
Gain on sale of
Anthony EACOM Inc.
|
$
|
-
|
$
|
(3.4)
|
$
|
(3.4)
|
$
|
-
|
$
|
-
|
Gain on legal
settlement, net
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
(6.9)
|
$
|
(6.9)
|
Net impact of above
items
|
$
|
22.9
|
$
|
(6.8)
|
$
|
16.1
|
$
|
(9.5)
|
$
|
(14.6)
|
Adjusted
shareholder net income
|
$
|
104.2
|
$
|
59.3
|
$
|
163.5
|
$
|
26.5
|
$
|
47.4
|
Shareholder net
income per share (EPS), as reported
|
$
|
0.61
|
$
|
0.50
|
$
|
1.11
|
$
|
0.27
|
$
|
0.47
|
Net impact of above
items per share
|
$
|
0.17
|
$
|
(0.05)
|
$
|
0.12
|
$
|
(0.07)
|
$
|
(0.11)
|
Adjusted
shareholder net income per share
|
$
|
0.78
|
$
|
0.45
|
$
|
1.23
|
$
|
0.20
|
$
|
0.36
|
The Company reported operating income of $131.0 million for the second quarter of 2017, up
$24.2 million from reported operating
income of $106.8 million for the
first quarter of 2017, as a solid improvement in lumber segment
operating earnings more than offset slightly lower pulp and paper
segment earnings. Improved lumber segment results primarily
reflected higher Western
Spruce/Pine/Fir ("SPF") and Southern Yellow Pine ("SYP")
unit sales realizations and a return to more normal operating
conditions following the challenging weather experienced in the
first quarter of 2017, offset in part by higher market-based
stumpage in Western Canada. For
the pulp and paper segment, solid increases in unit sales
realizations largely offset the impact of scheduled maintenance
outages taken during the quarter at the Northwood Northern Bleached
Softwood Kraft ("NBSK") pulp mill and Taylor Bleached Chemi-Thermo
Mechanical Pulp ("BCTMP") mill.
Reported results in the second quarter of 2017 include
$34.8 million related to the
expensing of the US Department of Commerce's preliminary
countervailing duty ("CVD") rate of 20.26% effective April 28, 2017, and preliminary anti-dumping duty
("ADD") rate of 7.72% effective June 30,
2017, on exports from Canada to the United
States. The expensing of these duties follows the accounting
treatment adopted during the last softwood dispute.
Notwithstanding, Canfor and other Canadian forest product
companies, the Federal Government and Canadian Provincial
Governments continue to totally refute the US allegations and
the preliminary CVD and ADD determinations recently made by the US
Department of Commerce ("DOC"). After adjusting for the duties,
operating income was $165.8 million
for the second quarter of 2017, up $59.0 million from the first quarter of 2017.
The current quarter's adjusted operating income was up
$111.7 million from adjusted
operating income of $54.1 million for
the second quarter of 2016, reflecting an $89.2 million increase in lumber segment earnings
and a $26.3 million increase in
earnings for the pulp and paper segment. The increase in lumber
segment earnings primarily reflected higher lumber unit sales
realizations as a result of significantly higher US-dollar
benchmark lumber prices and a 4% weaker Canadian dollar, offset in
part by market driven increases in log costs in Western Canada in the current period. Pulp and
paper segment results reflected notable increases in NBSK pulp and
BCTMP unit sales realizations, reflecting higher US-dollar market
prices combined with the weaker Canadian dollar. These
increases were partially offset by increased pulp and paper unit
manufacturing costs principally due to higher fibre costs in the
current quarter, and to a lesser extent, higher chemical pricing
and lower pulp shipments. Similar scheduled maintenance
outages were taken in both periods.
OPERATING RESULTS BY BUSINESS SEGMENT
Lumber
Selected Financial Information and Statistics
– Lumber
(millions of Canadian
dollars, unless otherwise noted)
|
|
Q2
2017
|
|
Q1
2017
|
|
YTD
2017
|
|
Q2
2016
|
|
YTD
2016
|
Sales
|
$
|
904.3
|
$
|
817.1
|
$
|
1,721.4
|
$
|
765.3
|
$
|
1,537.9
|
Operating income
before amortization
|
$
|
154.0
|
$
|
127.2
|
$
|
281.2
|
$
|
110.9
|
$
|
185.1
|
Operating
income
|
$
|
110.4
|
$
|
83.7
|
$
|
194.1
|
$
|
71.5
|
$
|
104.9
|
Countervailing and
anti-dumping duty deposits9
|
$
|
34.8
|
$
|
-
|
$
|
34.8
|
$
|
-
|
$
|
-
|
Gain on legal
settlement, net10
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
(15.5)
|
$
|
(15.5)
|
Adjusted operating
income
|
$
|
145.2
|
$
|
83.7
|
$
|
228.9
|
$
|
56.0
|
$
|
89.4
|
Average SPF 2x4
#2&Btr lumber price in US$11
|
$
|
388
|
$
|
348
|
$
|
368
|
$
|
311
|
$
|
292
|
Average SPF price in
Cdn$11
|
$
|
521
|
$
|
460
|
$
|
491
|
$
|
401
|
$
|
388
|
Average SYP 2x4 #2
lumber price in US$12
|
$
|
476
|
$
|
482
|
$
|
479
|
$
|
437
|
$
|
422
|
U.S. housing starts
(thousand units SAAR)13
|
|
1,164
|
|
1,238
|
|
1,201
|
|
1,158
|
|
1,156
|
Production – SPF
lumber (MMfbm)14
|
|
951.5
|
|
936.4
|
|
1,887.9
|
|
955.1
|
|
1,921.6
|
Production – SYP
lumber (MMfbm)14
|
|
358.3
|
|
361.8
|
|
720.1
|
|
334.5
|
|
670.5
|
Shipments – SPF
lumber (MMfbm)15
|
|
1,002.0
|
|
925.0
|
|
1,927.0
|
|
995.6
|
|
2,001.9
|
Shipments – SYP
lumber (MMfbm)15
|
|
353.3
|
|
345.9
|
|
699.2
|
|
348.3
|
|
697.2
|
9 Adjusted
for preliminary countervailing and anti-dumping duty deposits
expensed for accounting purposes.
|
10
Adjusted for a one-time gain of $15.5 million related to a legal
settlement in the second quarter of 2016.
|
11 Western
Spruce/Pine/Fir, per thousand board feet (Source – Random Lengths
Publications, Inc.).
|
12
Southern Yellow Pine, Eastside, per thousand board feet (Source –
Random Lengths Publications, Inc.).
|
13 Source
– US Census Bureau, seasonally adjusted annual rate
("SAAR").
|
14
Excluding production of trim blocks.
|
15
Canfor-produced lumber, including lumber purchased for
remanufacture, excluding trim blocks and wholesale
shipments.
|
Markets
Lumber demand in North America
remained relatively stable in the second quarter of 2017, with US
housing starts averaging 1,164,000 units on a seasonally adjusted
basis, down 6% from the previous quarter, and in line with the
second quarter of 2016. Single-family starts, which consume a
higher proportion of lumber, were broadly in line with the previous
quarter, while multi-family starts were down compared to the first
quarter of 2017. In Canada,
housing starts remained solid, averaging 205,000 units on a
seasonally adjusted basis. Offshore lumber demand from China, Japan
and other regions continued to improve through the second quarter,
particularly for the Company's higher-value lumber products.
In addition to solid underlying demand, benchmark lumber prices
increased significantly leading up to the preliminary
countervailing duty announcement on April
24, 2017.
Sales
Sales for the lumber segment for the second quarter of 2017 were
$904.3 million, compared to
$817.1 million in the previous
quarter and $765.3 million for the
second quarter of 2016. The 11% increase in sales revenue
compared to the prior quarter largely reflected higher Western SPF
and SYP unit sales realizations, and in part, increased shipment
volumes in the current quarter. Relative to the second quarter of
2016, the 18% increase in sales revenue primarily reflected higher
Western SPF and SYP benchmark lumber prices and the weaker Canadian
dollar.
Total lumber shipments, at 1.36 billion board feet, were
moderately higher than the previous quarter and in line with the
second quarter of 2016, with the increase over the former period
reflecting a return to more normal levels following the
weather-related transportation challenges experienced largely in
the first quarter of 2017.
On a reported basis, Western SPF lumber unit sales realizations
increased compared to the previous quarter as higher average
Western SPF lumber prices and the 2% weaker Canadian dollar more
than offset deposits paid based on the preliminary CVD rate. The
average benchmark North American Random Lengths Western SPF 2x4
#2&Btr price was up US$40 per
Mfbm, or 11%, compared to the first quarter of 2017, with similar
increases seen across wider-width dimensions. Before taking account
of the impact of duties, Western SPF lumber unit sales realizations
increased significantly compared to the previous quarter. SYP unit
sales realizations were slightly higher than the prior quarter, as
a US$13 per Mfbm increase in the SYP
East 2x6 #2 price and a higher-value sales mix more than offset the
1% decline in the SYP East 2x4 #2 price. Prices for other
wider-width SYP products were broadly in line with the prior
quarter.
Compared to the second quarter of 2016, reported lumber unit
sales realizations were up significantly as higher US-dollar
Western SPF and SYP benchmark lumber prices and a 4% weaker
Canadian dollar more than offset the impact of the aforementioned
duties in the current quarter. The average North American Random
Lengths Western SPF 2x4 #2&Btr price was up US$77 per Mfbm, or 25%, while the SYP East 2x4 #2
price was up US$39 per Mfbm, or
9%.
Total residual revenue in the current quarter was slightly
higher than the prior quarter as increased pricing for sawmill
residual chips and a seasonal improvement in chip quality in
Western Canada was reduced in part
by lower chip pricing in the US South. Current quarter results also
reflected seasonally lower log sales compared to the previous
quarter due to reduced timber harvesting during the spring break-up
period in Western Canada. Log
sales were slightly lower than the second quarter of 2016 as wet
weather conditions resulted in lower harvesting volumes in the
current quarter. Pellet sales revenues in the current quarter
were higher than both comparative quarters largely reflecting the
timing of shipments.
Operations
Total lumber production, at 1.31 billion board feet, was broadly
in line with the prior quarter, as overall improved productivity
rates were largely offset by increased statutory holidays in the
current quarter and capital related downtime in the US South. Total
lumber production was slightly higher than the second quarter of
2016, which for the most part reflected improved productivity
rates.
Lumber unit manufacturing costs in the second quarter of 2017
were in line with the previous quarter as the positive impact of
productivity gains and stable log costs in the US South offset
higher market-based stumpage and increased purchased wood costs in
Western Canada resulting from the
wet weather conditions, which disrupted log deliveries through the
current quarter. Compared to the second quarter of 2016, unit
manufacturing costs were moderately higher reflecting market and
weather-driven increases in purchased wood costs and stumpage.
Pulp and Paper
Selected Financial Information and Statistics – Pulp and
Paper16
(millions of Canadian
dollars, unless otherwise noted)
|
|
Q2
2017
|
|
Q1
2017
|
|
YTD
2017
|
|
Q2
2016
|
|
YTD
2016
|
Sales
|
$
|
280.9
|
$
|
309.1
|
$
|
590.0
|
$
|
257.0
|
$
|
552.3
|
Operating income
before amortization17
|
$
|
50.0
|
$
|
54.0
|
$
|
104.0
|
$
|
22.1
|
$
|
79.9
|
Operating
income
|
$
|
31.5
|
$
|
35.2
|
$
|
66.7
|
$
|
5.2
|
$
|
44.3
|
Average NBSK pulp
price delivered to China – US$18
|
$
|
670
|
$
|
645
|
$
|
658
|
$
|
617
|
$
|
603
|
Average NBSK pulp
price delivered to China – Cdn$18
|
$
|
901
|
$
|
853
|
$
|
877
|
$
|
795
|
$
|
802
|
Production – pulp
(000 mt)
|
|
275.2
|
|
317.1
|
|
592.3
|
|
279.6
|
|
601.4
|
Production – paper
(000 mt)
|
|
33.6
|
|
34.6
|
|
68.2
|
|
32.1
|
|
67.4
|
Shipments – pulp (000
mt)
|
|
276.3
|
|
337.1
|
|
613.4
|
|
287.2
|
|
606.3
|
Shipments – paper
(000 mt)
|
|
35.5
|
|
33.7
|
|
69.2
|
|
38.5
|
|
73.4
|
16
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.
|
17
Amortization includes amortization of certain capitalized major
maintenance costs.
|
18 Per
tonne, NBSK pulp list price delivered to China (Resource
Information Systems, Inc.).
|
Markets
After two successive quarters of solid gains, global softwood
pulp markets plateaued in the second quarter of 2017. Pulp
softwood inventories as at the end of May
2017, were in the balanced range at 29 days of supply, a
decrease of one day from February
201719 (market conditions are generally
considered balanced when inventories are in the 27-30 days of
supply range). By the end of the second quarter, however,
demand had weakened in some regions, particularly China.
Global shipments of bleached softwood pulp increased by 2.5%,
for the first five months of 2017 when compared to the first five
months of 2016, driven primarily by increased year-to-date
shipments to North America and
Asian countries, including China20.
19 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").
|
20 As
reported by PPPC statistics.
|
Sales
Total pulp shipments in the second quarter of 2017 were 276,300
tonnes, down 60,800 tonnes, or 18%, from the previous quarter and
down 10,900 tonnes, or 4%, from the second quarter of 2016.
Compared to the previous quarter, the decrease in pulp shipments
for the most part reflected lower pulp production in the current
quarter, combined with the impact of the slippage of a 14,000 tonne
vessel shipment to Asia from
December 2016 into January 2017 recognized in the previous
quarter. The modest reduction in pulp shipments compared to
the second quarter of 2016 primarily reflected a drawdown of
inventory in the second quarter of 2016.
The average China US-dollar NBSK pulp list price of US$670 per tonne, as published by RISI, was up
US$25 per tonne, or 4%, from the
first quarter of 2017. Average NBSK pulp unit sales
realizations materially improved compared to the previous quarter,
reflecting the strong pricing through most of the quarter, as well
as quarter-over-quarter pricing on shipments of orders taken in the
previous quarter. This was combined with the favourable
impact of a 1 cent or 2% weaker
Canadian dollar. The continued positive momentum of BCTMP
markets in the second quarter when compared to the first quarter of
2017, combined with the weaker Canadian dollar, had a notable
favourable impact on average BCTMP unit sales realizations.
Compared to the second quarter of 2016, the average China
US-dollar NBSK pulp list price in the current quarter of 2017 was
up US$53 per tonne, or 9%.
CPPI's average NBSK pulp unit sales realizations were materially
higher than the second quarter of 2016, reflecting higher market
prices to China combined with the
weaker Canadian dollar, offset in part by increases in customer
discounts. BCTMP unit sales realizations were considerably
higher compared to the second quarter of 2016, reflecting the
growth in BCTMP market demand and a weaker Canadian dollar.
Compared to the first quarter of 2017, energy revenues were
down, reflecting the seasonally lower power generation due to the
aforementioned scheduled maintenance outages in the quarter,
combined with seasonally lower energy prices. Energy revenues
in the current quarter were broadly in line with the second quarter
of 2016. Energy revenues are anticipated to return to more
normalized levels in the third quarter of 2017.
Paper unit sales realizations in the second quarter of 2017 were
up slightly from the previous quarter primarily reflecting the 2%
weaker Canadian dollar. Compared to the same quarter of 2016,
paper unit sales realizations were moderately higher, due to the
positive impact of the 4% weaker Canadian dollar as well as a
higher proportion of shipments to the North American market and a
favourable change in sales mix.
Operations
Pulp production in the second quarter of 2017 at 275,200 tonnes
was down 41,900 tonnes, or 13%, from the first quarter of 2017 and
broadly in line with the second quarter of 2016. During the
second quarter of 2017, CPPI completed scheduled maintenance
outages at the Northwood NBSK pulp mill as well as at the BCTMP
Taylor mill, which when combined with several operational upsets,
reduced pulp production by approximately 40,000 tonnes. There
were no maintenance outages in the previous quarter of 2017, while
in the second quarter of 2016, CPPI completed major scheduled
outages at the Northwood and Intercontinental NBSK pulp mills and a
minor scheduled maintenance outage at the Prince George NBSK pulp
mill, which also reduced pulp production by approximately 40,000
tonnes.
Pulp unit manufacturing costs were materially higher in the
current quarter compared to the first quarter of 2017, principally
reflecting costs associated with the aforementioned scheduled
maintenance outages, offset somewhat by seasonally lower energy
prices and usage in the current period. Fibre costs were
higher compared to the previous quarter as increased prices for
sawmill residual chips combined with a seasonal improvement in chip
quality more than offset a lower proportion of higher-cost whole
log chips.
Compared to the second quarter of 2016, pulp unit manufacturing
costs saw a modest increase, principally due to higher fibre costs
and to a lesser extent, higher chemical pricing, marginally offset
by the timing of certain maintenance spend. Increased fibre
costs in the current period largely reflected the higher market
prices for sawmill residual chips, and to a lesser degree, higher
delivered freight costs.
Paper unit manufacturing costs saw moderate increases compared
to both the first quarter of 2017 and the second quarter of
2016. The increases compared to the prior quarter were
primarily driven by significantly higher slush pulp costs and, to a
lesser extent, increases in maintenance spend and higher chemical
costs in the current quarter. Compared to the second quarter
of 2016, the increases in paper unit manufacturing costs,
principally reflected the higher slush pulp costs in the current
quarter.
Unallocated and Other Items
Selected Financial Information
(millions of Canadian
dollars)
|
|
Q2
2017
|
|
Q1
2017
|
|
YTD
2017
|
|
Q2
2016
|
|
YTD
2016
|
Operating loss of
Panels operations21
|
$
|
(0.5)
|
$
|
(0.7)
|
$
|
(1.2)
|
$
|
(0.3)
|
$
|
(1.0)
|
Corporate
costs
|
$
|
(10.4)
|
$
|
(11.4)
|
$
|
(21.8)
|
$
|
(6.8)
|
$
|
(13.5)
|
Finance expense,
net
|
$
|
(7.8)
|
$
|
(8.0)
|
$
|
(15.8)
|
$
|
(8.4)
|
$
|
(16.6)
|
Foreign exchange gain
on long-term debt
|
$
|
3.4
|
$
|
1.1
|
$
|
4.5
|
$
|
0.4
|
$
|
8.3
|
Gain on derivative
financial instruments
|
$
|
-
|
$
|
3.2
|
$
|
3.2
|
$
|
3.1
|
$
|
0.7
|
Other income
(expense), net
|
$
|
(3.2)
|
$
|
2.2
|
$
|
(1.0)
|
$
|
0.4
|
$
|
(9.7)
|
21 The
Panels operations include the Company's PolarBoard oriented strand
board ("OSB") plant, which is currently indefinitely idled and its
Tackama plywood plant, which was closed in January 2012.
|
Corporate costs were $10.4 million
for the second quarter of 2017, $1.0
million lower than the previous quarter and $3.6 million higher than the second quarter of
2016, with the variances being largely attributable to legal costs
related to the expiry of the Softwood Lumber Agreement.
Net finance expense at $7.8
million for the second quarter of 2017 was down slightly
from both comparative quarters. In the second quarter of 2017, the
Company recognized a foreign exchange gain on its US-dollar term
debt held by Canadian entities due to the stronger Canadian dollar
at the end of the quarter as compared to the end of the previous
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. No realized or unrealized gains or losses were recorded on
the Company's derivatives instruments in the second quarter of
2017. In the first quarter of 2017, the Company recorded a
net gain of $3.2 million related to
its derivatives instruments.
Other expense, net of $3.2 million
in the second quarter 2017 largely reflected unfavourable foreign
exchange movements on US-dollar denominated cash, receivables and
payables. Other income, net for the first quarter of 2017 included
a $4.0 million 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)
|
|
Q2
2017
|
|
Q1
2017
|
|
YTD
2017
|
|
Q2
2016
|
|
YTD
2016
|
Foreign exchange
translation differences for foreign operations, net of
tax
|
$
|
(13.3)
|
$
|
(3.2)
|
$
|
(16.5)
|
$
|
(0.8)
|
$
|
(25.3)
|
Defined benefit
actuarial gains (losses), net of tax
|
$
|
(26.0)
|
$
|
2.4
|
$
|
(23.6)
|
$
|
(33.6)
|
$
|
(51.2)
|
Other comprehensive
income (loss), net of tax
|
$
|
(39.3)
|
$
|
(0.8)
|
$
|
(40.1)
|
$
|
(34.4)
|
$
|
(76.5)
|
In the second quarter of 2017, the Company recorded an after-tax
loss of $26.0 million in relation to
changes in the valuation of the Company's employee future benefit
plans. Compared to the first quarter of 2017, the loss principally
reflected a 0.4% decrease in the discount rate used to value the
employee future benefit plans partially offset by the return
generated on plan assets. This compared to an after-tax gain of
$2.4 million in the previous quarter
and an after-tax loss of $33.6
million in the second quarter of 2016.
During the second quarter of 2017, the Company purchased
$90.5 million of annuities through
its defined benefit plans in order to mitigate its exposure to the
future volatility fluctuations in the related pension obligations.
At purchase of these annuities, transaction costs of $4.6 million were recognized in Other
Comprehensive Income principally reflecting the difference in the
annuity rate (which is comparable to solvency rates) as compared to
the discount rate used to value the pension obligations on a going
concern basis. Following the purchase, total annuities
purchased by the Company amounted to $377.1
million, representing approximately 41% of defined benefit
pension plan liabilities. A further 24% was partially hedged
against changes in future discount rates through the plan's
investment in debt securities.
In addition, the Company recorded a loss of $13.3 million in the second quarter of 2017
related to foreign exchange differences for foreign operations due
to the strengthening of the Canadian dollar relative to the US
dollar at the end of the quarter. This compared to a loss of
$3.2 million in the previous quarter
and a loss of $0.8 million in the
second quarter of 2016.
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:
(millions of Canadian
dollars, except for ratios)
|
|
Q2
2017
|
|
Q1
2017
|
|
YTD
2017
|
|
Q2
2016
|
|
YTD
2016
|
Increase in cash and
cash equivalents22
|
$
|
140.7
|
$
|
7.7
|
$
|
148.4
|
$
|
25.1
|
$
|
64.2
|
|
Operating
activities
|
$
|
250.4
|
$
|
72.8
|
$
|
323.2
|
$
|
223.3
|
$
|
274.2
|
|
Financing
activities
|
$
|
(52.9)
|
$
|
3.9
|
$
|
(49.0)
|
$
|
(109.6)
|
$
|
(75.9)
|
|
Investing
activities
|
$
|
(56.8)
|
$
|
(69.0)
|
$
|
(125.8)
|
$
|
(88.6)
|
$
|
(134.1)
|
Ratio of current
assets to current liabilities
|
|
|
|
|
|
2.4:1
|
|
|
|
1.5:1
|
Net debt to
capitalization
|
|
|
|
|
|
6.9%
|
|
|
|
20.3%
|
22
Increase in cash and cash equivalents shown before foreign exchange
translation on cash and cash equivalents.
|
Changes in Financial Position
Cash generated from operating activities was $250.4 million in the second quarter of 2017,
compared to $72.8 million in the
previous quarter and $223.3 million
in the second quarter of 2016. The increase in operating cash
flows from the previous quarter primarily reflected a seasonal
drawdown of log inventories during the spring break-up period in
Western Canada, and to a lesser
extent, higher cash earnings. Compared to the second quarter of
2016, the increase in operating cash flows was primarily
attributable to higher cash earnings, offset in part by higher
non-cash working capital balances and increased income tax
installment payments in the current quarter.
Cash used in financing activities was $52.9 million in the current quarter, compared to
cash generated of $3.9 million in the
previous quarter and cash used of $109.6
million in the same quarter of 2016. During the current
quarter, the Company made cash distributions of $2.2 million to non-controlling shareholders,
down $1.6 million from the previous
quarter and down $5.1 million from
the same quarter in 2016. In the second quarter of 2017, CPPI
purchased 607,900 common shares under its Normal Course Issuer Bid
for $7.5 million, with $7.4 million paid in the second quarter of 2017,
while Canfor did not purchase any common shares under its Normal
Course Issuer Bid (see "Liquidity and Financial Requirements"
section for more details). The Company had no balance outstanding
on its Canadian operating loan facility at the end of the second
quarter of 2017, a decrease of $40.0
million from the prior quarter and down $129.0 million from the end of the second quarter
of 2016.
Cash used for investing activities was $56.8 million in the current quarter, compared to
$69.0 million in the previous quarter
and $88.6 million in the same quarter
of 2016. Capital additions were $61.7
million, up $22.8 million from
the previous quarter and down $4.5
million from the second quarter of 2016. Current quarter
capital expenditures included various smaller high-returning
capital projects aimed at increasing drying capacity and
productivity, with an increasing proportion of capital expenditures
in the US South, including upgrades at the Company's sawmills in
Arkansas and Georgia. In the pulp and paper segment,
capital expenditures primarily related to maintenance-of-business
capital associated with the aforementioned maintenance outages
during the quarter and, to a lesser extent, capital expenditures
associated with various energy and capital improvement projects.
Investing activities in the current quarter also included proceeds
of $15.0 million related to the
July 1, 2015 sale of the Company's
investment in Lakeland Mills Ltd. and Winton Global Lumber Ltd.,
and a $14.4 million payment related
to the Company's April 2016
acquisition of Wynndel Box and
Lumber Ltd.
Subsequent to quarter end, Canfor Pulp announced plans to
undertake two significant energy capital projects at its Northwood
NBSK and Taylor BCTMP mills, at an estimated cost of $105 million.
Liquidity and Financial Requirements
At June 30, 2017, the Company on a
consolidated basis had cash of $302.9
million, no amounts drawn on its operating loans, and an
additional $50.5 million reserved for
several standby letters of credit. During the quarter, the
Company repaid $40.0 million of its
operating loans, and at period end had total available undrawn
operating loans of $459.5
million.
Excluding CPPI, the Company's bank operating loans at
June 30, 2017 totaled $350.0 million, of which no amounts were drawn,
and an additional $41.5 million
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 June 30, 2017, CPPI had an
undrawn $110.0 million bank operating
loan facility and $9.0 million in
letters of credit outstanding under the operating loan facility.
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 second quarter of 2017 was 6.9%. For Canfor,
excluding CPPI, net debt to capitalization at the end of the second
quarter of 2017 was 9.9%.
On March 7, 2017, the Company
renewed its normal course issuer bid whereby it can purchase for
cancellation up to 6,640,227 common shares or approximately 5% of
its issued and outstanding common shares as of March 1, 2017. The renewed normal course issuer
bid is set to expire on March 6,
2018. During the first and second quarters of 2017, Canfor
did not purchase any common shares. As at July 25, 2017, there were 132,804,543 common
shares of the Company outstanding. Under a separate normal course
issuer bid, CPPI purchased 607,900 common shares in the second
quarter of 2017 for $7.5 million (an
average of $12.34 per common share),
of which $7.4 million was paid in the
period, with the balance paid in early July. In the first half of
2017, CPPI purchased 872,103 common shares for $10.5 million (an average of $12.04 per common share). Canfor and CPPI may
purchase more shares through the balance of 2017 subject to the
terms of their normal course issuer bids.
As a result of CPPI's share repurchases in the current quarter,
Canfor's ownership interest in CPPI increased to 54.4% at
June 30, 2017, up 0.5% from the end
of the prior quarter. As at July 25,
2017, Canfor's ownership interest in CPPI was 54.5%
reflecting share repurchases subsequent to June 30, 2017.
Licella Pulp Joint Venture
In March 2017, the Canadian
Federal Government through its Sustainable Development Technology
Canada program announced the funding over several years of
approximately $13.2 million,
contingent on future spending, to allow the Licella Pulp Joint
Venture to further develop and demonstrate a technology that will
economically convert biomass into biofuels and biochemicals.
OUTLOOK
Lumber
Looking ahead, the US housing market is forecast to continue its
slow but gradual recovery through the balance of 2017. North
American lumber consumption is projected to improve reflecting
steady demand in the residential construction market and continued
strength from the repair and remodelling sector. Wide-width SYP and
speciality lumber prices are anticipated to improve through the
third quarter of 2017 reflecting stronger seasonal demand. The
Company anticipates continued marketplace volatility as the DOC
investigations progress and final determinations are made.
For the Company's key offshore lumber markets, demand is
anticipated to remain solid through the third quarter of 2017.
Pulp and Paper
Global pulp markets are currently anticipated to see lower
operating rates in the second half of 2017, with the introduction
of significant new pulp capacity in the latter part of 2017 and
into 2018.
For the month of July 2017, CPPI
announced a decrease of US$10 per
tonne for NBSK pulp list prices to China, while NBSK pulp list prices to
North America are unchanged from
June 2017.
Results in the third quarter of 2017 will reflect a scheduled
maintenance outage at the Intercontinental pulp mill, with a
projected 8,000 tonnes of reduced NBSK pulp production, as well as
higher associated maintenance costs and lower projected shipment
volumes.
OUTSTANDING SHARES
At July 25, 2017, there were
132,804,543 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 and
asset retirement and deferred reforestation obligations 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.
ACCOUNTING STANDARDS ISSUED AND NOT APPLIED
In May 2014, the International
Accounting Standards Board ("IASB") issued IFRS 15, Revenue from
Contracts with Customers, which will supersede IAS 18,
Revenue, IAS 11, Construction Contracts and related
interpretations. The new standard is effective for annual periods
beginning on or after January 1,
2018. The Company has performed a preliminary assessment of
the impact of the new standard, and currently anticipates no
significant impact on its financial statements, with the assessment
to be finalized in the second half of 2017.
In July 2014, the IASB issued IFRS
9, Financial Instruments. The required adoption date for
IFRS 9 is January 1, 2018 and the
Company does not anticipate the new standard to have a significant
impact on its financial statements.
In January 2016, the IASB issued
IFRS 16, Leases, which will supersede IAS 17, Leases
and related interpretations. The required adoption date for IFRS 16
is January 1, 2019 and the Company is
in the process of assessing the impact on the financial statements
of this new standard.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
During the quarter ended June 30,
2017, 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 2016 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 summer 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.
While the severe forest fire season in Western Canada to date has had no material
financial impact on Canfor's operations a continuation of the
current hot and dry weather in the BC Interior will increase the
risks of material disruption to the Company's fibre procurement
efforts, operations and transportation.
The final countervailing and anti-dumping duty determinations
will be aligned for US Department of Commerce administrative
purposes. This alignment could result in the suspension of
preliminary countervailing duty cash deposit requirements after the
initial four month period has expired on August 26, 2017 and until an aligned final
determination decision is established. The final countervailing and
anti-dumping determinations may differ from the preliminary
determinations. Canfor continues to cooperate with the Provincial
and Federal Governments of Canada
who have indicated they will vigorously defend the interests of the
industry.
SELECTED QUARTERLY FINANCIAL INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q2
2017
|
|
Q1
2017
|
|
Q4
2016
|
|
Q3
2016
|
|
Q2
2016
|
|
Q1
2016
|
|
Q4
2015
|
|
Q3
2015
|
Sales and
income
(millions of Canadian
dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
1,185.2
|
$
|
1,126.2
|
$
|
1,043.5
|
$
|
1,101.2
|
$
|
1,022.3
|
$
|
1,067.9
|
$
|
1,053.0
|
$
|
989.9
|
Operating
income
|
$
|
131.0
|
$
|
106.8
|
$
|
74.0
|
$
|
97.4
|
$
|
69.6
|
$
|
65.1
|
$
|
31.8
|
$
|
8.5
|
Net income
|
$
|
90.9
|
$
|
77.5
|
$
|
44.2
|
$
|
66.4
|
$
|
51.0
|
$
|
42.3
|
$
|
19.6
|
$
|
1.4
|
Shareholder net
income (loss)
|
$
|
81.3
|
$
|
66.1
|
$
|
38.0
|
$
|
50.9
|
$
|
36.0
|
$
|
26.0
|
$
|
1.6
|
$
|
(17.3)
|
Per common
share (Canadian dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholder net
income (loss) – basic and diluted
|
$
|
0.61
|
$
|
0.50
|
$
|
0.29
|
$
|
0.38
|
$
|
0.27
|
$
|
0.20
|
$
|
0.01
|
$
|
(0.13)
|
Book
value23
|
$
|
12.14
|
$
|
11.81
|
$
|
11.17
|
$
|
10.70
|
$
|
9.92
|
$
|
9.91
|
$
|
10.02
|
$
|
10.00
|
Common Share
Repurchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share volume
repurchased (000 shares)
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
1,050
|
|
-
|
Shares repurchased
(millions of Canadian dollars)
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
20.0
|
$
|
-
|
Statistics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lumber shipments
(MMfbm) 24
|
|
1,355
|
|
1,271
|
|
1,272
|
|
1,340
|
|
1,344
|
|
1,355
|
|
1,347
|
|
1,337
|
Pulp shipments (000
mt)
|
|
276
|
|
337
|
|
275
|
|
320
|
|
287
|
|
319
|
|
356
|
|
307
|
Average exchange rate
– US$/Cdn$
|
$
|
0.744
|
$
|
0.756
|
$
|
0.750
|
$
|
0.766
|
$
|
0.776
|
$
|
0.728
|
$
|
0.749
|
$
|
0.764
|
Average Western SPF
2x4 #2&Btr lumber price (US$)
|
$
|
388
|
$
|
348
|
$
|
315
|
$
|
322
|
$
|
311
|
$
|
272
|
$
|
263
|
$
|
269
|
Average SYP (East)
2x4 #2 lumber price (US$)
|
$
|
476
|
$
|
482
|
$
|
445
|
$
|
414
|
$
|
437
|
$
|
407
|
$
|
400
|
$
|
331
|
Average NBSK pulp
list price delivered to China (US$)
|
$
|
670
|
$
|
645
|
$
|
595
|
$
|
595
|
$
|
617
|
$
|
590
|
$
|
600
|
$
|
638
|
23 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.
|
24
Canfor-produced lumber, including lumber purchased for
remanufacture and excluding trim blocks and shipments of wholesale
lumber.
|
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 share amounts)
|
|
Q2
2017
|
|
Q1
2017
|
|
Q4
2016
|
|
Q3
2016
|
|
Q2
2016
|
|
Q1
2016
|
|
Q4
2015
|
|
Q3
2015
|
Shareholder net
income (loss), as reported
|
$
|
81.3
|
$
|
66.1
|
$
|
38.0
|
$
|
50.9
|
$
|
36.0
|
$
|
26.0
|
$
|
1.6
|
$
|
(17.3)
|
Foreign exchange
(gain) loss on long-term debt
|
$
|
(2.9)
|
$
|
(1.0)
|
$
|
2.7
|
$
|
0.9
|
$
|
(0.3)
|
$
|
(6.9)
|
$
|
5.1
|
$
|
-
|
Countervailing and
anti-dumping duty deposits25
|
$
|
25.8
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
(Gain) loss on
derivative financial instruments
|
$
|
-
|
$
|
(2.4)
|
$
|
(1.5)
|
$
|
(0.1)
|
$
|
(2.3)
|
$
|
1.8
|
$
|
(1.2)
|
$
|
9.3
|
Gain on sale of
Anthony EACOM Inc.26
|
$
|
-
|
$
|
(3.4)
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
Mill closure
provisions27
|
$
|
-
|
$
|
-
|
$
|
(1.5)
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
14.4
|
Gain on legal
settlement, net28
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
(6.9)
|
$
|
-
|
$
|
-
|
$
|
-
|
Costs associated with
pension plan legislation changes
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
2.4
|
$
|
-
|
Net impact of above
items
|
$
|
22.9
|
$
|
(6.8)
|
$
|
(0.3)
|
$
|
0.8
|
$
|
(9.5)
|
$
|
(5.1)
|
$
|
6.3
|
$
|
23.7
|
Adjusted
shareholder net income
|
$
|
104.2
|
$
|
59.3
|
$
|
37.7
|
$
|
51.7
|
$
|
26.5
|
$
|
20.9
|
$
|
7.9
|
$
|
6.4
|
Shareholder net
income (loss) per share (EPS), as reported
|
$
|
0.61
|
$
|
0.50
|
$
|
0.29
|
$
|
0.38
|
$
|
0.27
|
$
|
0.20
|
$
|
0.01
|
$
|
(0.13)
|
Net impact of above
items per share29
|
$
|
0.17
|
$
|
(0.05)
|
$
|
-
|
$
|
0.01
|
$
|
(0.07)
|
$
|
(0.04)
|
$
|
0.05
|
$
|
0.18
|
Adjusted net
income per share29
|
$
|
0.78
|
$
|
0.45
|
$
|
0.29
|
$
|
0.39
|
$
|
0.20
|
$
|
0.16
|
$
|
0.06
|
$
|
0.05
|
25
Adjusted for preliminary countervailing and anti-dumping duty
deposits expensed for accounting purposes.
|
26 On
March 31, 2017, Canfor sold its 50% interest in Anthony EACOM Inc.
for net proceeds of $21.4 million and recognized a $4.0 million
gain (before-tax).
|
27 During
the third quarter of 2015, the Company recorded costs of $19.4
million (before-tax) associated with the announced closure of the
Canal Flats sawmill. In the fourth quarter of 2016, $2.0 million
(before-tax) of the closure provision was reversed as a result of
lower estimated demolition costs.
|
28 During
the second quarter of 2016, the Company recorded a gain of $15.5
million related to a settlement of a legal claim with respect to
logistics services net of non-controlling interest and related
impairment.
|
29 The
year-to-date net impact of the adjusting items per share and
adjusted net income (loss) per share may not equal the sum of the
quarterly per share amounts due to share purchases and
rounding.
|
Canfor Corporation
Condensed Consolidated Balance
Sheets
(millions of Canadian
dollars, unaudited)
|
|
As
at June 30,
2017
|
As
at
December 31,
2016
|
ASSETS
|
|
|
|
|
Current
assets
|
|
|
|
|
Cash and cash
equivalents
|
$
|
302.9
|
$
|
156.6
|
Accounts
receivable
|
-
Trade
|
|
209.3
|
|
164.2
|
|
-
Other
|
|
39.1
|
|
66.5
|
Inventories (Note
2)
|
|
555.2
|
|
549.0
|
Prepaid expenses and
other
|
|
66.3
|
|
50.6
|
Total current
assets
|
|
1,172.8
|
|
986.9
|
Property, plant
and equipment
|
|
1,423.8
|
|
1,460.8
|
Timber
licenses
|
|
526.1
|
|
532.7
|
Goodwill and other
intangible assets
|
|
233.0
|
|
238.8
|
Long-term
investments and other (Note 3)
|
|
33.7
|
|
50.7
|
Retirement benefit
surplus (Note 5)
|
|
5.8
|
|
5.9
|
Deferred income
taxes, net
|
|
2.7
|
|
1.3
|
Total
assets
|
$
|
3,397.9
|
$
|
3,277.1
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
Current
liabilities
|
|
|
|
|
Operating loans (Note
4(a))
|
$
|
-
|
$
|
28.0
|
Accounts payable and
accrued liabilities
|
|
439.5
|
|
384.1
|
Current portion of
deferred reforestation obligations
|
|
48.5
|
|
48.5
|
Forward purchase
liability (Note 11(a))
|
|
-
|
|
41.7
|
Current portion of
long-term debt (Note
4(b))
|
|
0.3
|
|
-
|
Total current
liabilities
|
|
488.3
|
|
502.3
|
Long-term debt
(Note 4(b))
|
|
440.1
|
|
448.0
|
Retirement benefit
obligations (Note 5)
|
|
333.2
|
|
302.2
|
Deferred
reforestation obligations
|
|
65.8
|
|
56.9
|
Other long-term
liabilities
|
|
22.3
|
|
23.7
|
Deferred income
taxes, net
|
|
196.3
|
|
205.5
|
Total
liabilities
|
$
|
1,546.0
|
$
|
1,538.6
|
|
|
|
|
|
EQUITY
|
|
|
|
|
Share
capital
|
$
|
1,047.7
|
$
|
1,047.7
|
Contributed surplus
and other equity
|
|
31.9
|
|
(4.6)
|
Retained
earnings
|
|
460.4
|
|
351.7
|
Accumulated other
comprehensive income
|
|
72.4
|
|
88.9
|
Total equity
attributable to equity shareholders of the Company
|
|
1,612.4
|
|
1,483.7
|
Non-controlling
interests
|
|
239.5
|
|
254.8
|
Total
equity
|
$
|
1,851.9
|
$
|
1,738.5
|
Total liabilities
and equity
|
$
|
3,397.9
|
$
|
3,277.1
|
|
|
|
|
|
The accompanying
notes are an integral part of these condensed consolidated interim
financial statements.
|
|
APPROVED BY THE
BOARD
|
|
|
|
"R.S.
Smith"
|
"M.J.
Korenberg"
|
Director, R.S.
Smith
|
Director, M.J.
Korenberg
|
Canfor Corporation
Condensed Consolidated
Statements of Income
|
3 months ended June
30,
|
6 months ended June
30,
|
(millions of Canadian
dollars, except per share data, unaudited)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
1,185.2
|
$
|
1,022.3
|
$
|
2,311.4
|
$
|
2,090.2
|
|
|
|
|
|
|
|
|
|
Costs and
expenses
|
|
|
|
|
|
|
|
|
|
Manufacturing and
product costs
|
|
757.8
|
|
714.6
|
|
1,524.6
|
|
1,464.6
|
|
Freight and other
distribution costs
|
|
169.0
|
|
156.4
|
|
330.0
|
|
324.3
|
|
Countervailing and
anti-dumping duties (Note 13)
|
|
34.8
|
|
-
|
|
34.8
|
|
-
|
|
Amortization
|
|
62.1
|
|
57.5
|
|
124.4
|
|
118.1
|
|
Selling and
administration costs
|
|
30.3
|
|
23.8
|
|
58.6
|
|
48.2
|
|
Restructuring, mill
closure and severance costs
|
|
0.2
|
|
1.5
|
|
1.8
|
|
2.5
|
|
$
|
1,054.2
|
$
|
953.8
|
$
|
2,074.2
|
$
|
1,957.7
|
|
|
|
|
|
|
|
|
|
Equity income (Note
3)
|
|
-
|
|
1.1
|
|
0.6
|
|
2.2
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
131.0
|
|
69.6
|
|
237.8
|
|
134.7
|
|
|
|
|
|
|
|
|
|
Finance expense,
net
|
|
(7.8)
|
|
(8.4)
|
|
(15.8)
|
|
(16.6)
|
Foreign exchange gain
on long-term debt
|
|
3.4
|
|
0.4
|
|
4.5
|
|
8.3
|
Gain on derivative
financial instruments (Note 6)
|
|
-
|
|
3.1
|
|
3.2
|
|
0.7
|
Other income
(expense), net
|
|
(3.2)
|
|
0.4
|
|
(1.0)
|
|
(9.7)
|
Net income before
income taxes
|
|
123.4
|
|
65.1
|
|
228.7
|
|
117.4
|
Income tax expense
(Note 7)
|
|
(32.5)
|
|
(14.1)
|
|
(60.3)
|
|
(24.1)
|
Net
income
|
$
|
90.9
|
$
|
51.0
|
$
|
168.4
|
$
|
93.3
|
|
|
|
|
|
|
|
|
|
Net income
attributable to:
|
|
|
|
|
|
|
|
|
Equity shareholders
of the Company
|
$
|
81.3
|
$
|
36.0
|
$
|
147.4
|
$
|
62.0
|
Non-controlling
interests
|
|
9.6
|
|
15.0
|
|
21.0
|
|
31.3
|
Net
income
|
$
|
90.9
|
$
|
51.0
|
$
|
168.4
|
$
|
93.3
|
|
|
|
|
|
|
|
|
|
Net income per
common share: (in Canadian dollars)
|
|
|
|
|
|
|
|
|
Attributable to
equity shareholders of the Company
|
|
|
|
|
|
|
|
|
|
- Basic and diluted
(Note 8)
|
$
|
0.61
|
$
|
0.27
|
$
|
1.11
|
$
|
0.47
|
|
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 June
30,
|
6 months ended June
30,
|
(millions of Canadian
dollars, unaudited)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
Net
income
|
$
|
90.9
|
$
|
51.0
|
$
|
168.4
|
$
|
93.3
|
Other
comprehensive loss
|
|
|
|
|
|
|
|
|
Items that will not
be recycled through net income:
|
|
|
|
|
|
|
|
|
|
Defined benefit plan
actuarial losses (Note 5)
|
|
(35.2)
|
|
(45.4)
|
|
(31.9)
|
|
(69.2)
|
|
Income tax recovery
on defined benefit plan actuarial losses (Note 7)
|
|
9.2
|
|
11.8
|
|
8.3
|
|
18.0
|
|
|
(26.0)
|
|
(33.6)
|
|
(23.6)
|
|
(51.2)
|
Items that may be
recycled through net income:
|
|
|
|
|
|
|
|
|
|
Foreign exchange
translation of foreign operations, net of tax
|
|
(13.3)
|
|
(0.8)
|
|
(16.5)
|
|
(25.3)
|
Other comprehensive
loss, net of tax
|
|
(39.3)
|
|
(34.4)
|
|
(40.1)
|
|
(76.5)
|
Total
comprehensive income
|
$
|
51.6
|
$
|
16.6
|
$
|
128.3
|
$
|
16.8
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income (loss) attributable to:
|
|
|
|
|
|
|
|
|
Equity shareholders
of the Company
|
$
|
45.6
|
$
|
5.9
|
$
|
110.9
|
$
|
(8.5)
|
Non-controlling
interests
|
|
6.0
|
|
10.7
|
|
17.4
|
|
25.3
|
Total
comprehensive income
|
$
|
51.6
|
$
|
16.6
|
$
|
128.3
|
$
|
16.8
|
|
|
|
|
|
|
|
|
|
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 June
30,
|
6 months ended June
30,
|
(millions of Canadian
dollars, unaudited)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
Share
capital
|
|
|
|
|
|
|
|
|
Balance at beginning
and end of period
|
$
|
1,047.7
|
$
|
1,047.7
|
$
|
1,047.7
|
$
|
1,047.7
|
|
|
|
|
|
|
|
|
|
Contributed
surplus and other equity
|
|
|
|
|
|
|
|
|
Balance at beginning
of period
|
$
|
31.9
|
$
|
(74.5)
|
$
|
(4.6)
|
$
|
(74.5)
|
Forward purchase
liability related to acquisition (Note 11(a))
|
|
-
|
|
-
|
|
36.5
|
|
-
|
Balance at end of
period
|
$
|
31.9
|
$
|
(74.5)
|
$
|
31.9
|
$
|
(74.5)
|
|
|
|
|
|
|
|
|
|
Retained
earnings
|
|
|
|
|
|
|
|
|
Balance at beginning
of period
|
$
|
403.0
|
$
|
266.8
|
$
|
351.7
|
$
|
257.7
|
Net income
attributable to equity shareholders of the Company
|
|
81.3
|
|
36.0
|
|
147.4
|
|
62.0
|
Defined benefit plan
actuarial losses, net of tax
|
|
(22.4)
|
|
(29.3)
|
|
(20.0)
|
|
(45.2)
|
Elimination of
non-controlling interests (Note 11(a))
|
|
-
|
|
-
|
|
(16.6)
|
|
-
|
Acquisition of
non-controlling interests (Note 8)
|
|
(1.5)
|
|
(3.5)
|
|
(2.1)
|
|
(4.5)
|
Balance at end of
period
|
$
|
460.4
|
$
|
270.0
|
$
|
460.4
|
$
|
270.0
|
|
|
|
|
|
|
|
|
|
Accumulated other
comprehensive income
|
|
|
|
|
|
|
|
|
Balance at beginning
of period
|
$
|
85.7
|
$
|
75.5
|
$
|
88.9
|
$
|
100.0
|
Foreign exchange
translation of foreign operations, net of tax
|
|
(13.3)
|
|
(0.8)
|
|
(16.5)
|
|
(25.3)
|
Balance at end of
period
|
$
|
72.4
|
$
|
74.7
|
$
|
72.4
|
$
|
74.7
|
|
|
|
|
|
|
|
|
|
Total equity
attributable to equity holders of the
Company
|
$
|
1,612.4
|
$
|
1,317.9
|
$
|
1,612.4
|
$
|
1,317.9
|
|
|
|
|
|
|
|
|
|
Non-controlling
interests
|
|
|
|
|
|
|
|
|
Balance at beginning
of period
|
$
|
241.7
|
$
|
303.3
|
$
|
254.8
|
$
|
296.8
|
Net income
attributable to non-controlling interests
|
|
9.6
|
|
15.0
|
|
21.0
|
|
31.3
|
Defined benefit plan
actuarial losses attributable to non-controlling interests, net of
tax
|
|
(3.6)
|
|
(4.3)
|
|
(3.6)
|
|
(6.0)
|
Distributions to
non-controlling interests
|
|
(2.2)
|
|
(7.3)
|
|
(4.4)
|
|
(11.5)
|
Acquisition of
non-controlling interests (Note 8)
|
|
(6.0)
|
|
(16.0)
|
|
(8.4)
|
|
(19.9)
|
Elimination of
non-controlling interests (Note 11(a))
|
|
-
|
|
-
|
|
(19.9)
|
|
-
|
Balance at end of
period
|
$
|
239.5
|
$
|
290.7
|
$
|
239.5
|
$
|
290.7
|
|
|
|
|
|
|
|
|
|
Total
equity
|
$
|
1,851.9
|
$
|
1,608.6
|
$
|
1,851.9
|
$
|
1,608.6
|
|
|
|
|
|
|
|
|
|
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 June
30,
|
6 months ended June
30,
|
(millions of
Canadian dollars, unaudited)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Cash generated
from (used in):
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
90.9
|
$
|
51.0
|
$
|
168.4
|
$
|
93.3
|
|
Items not affecting
cash:
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
62.1
|
|
57.5
|
|
124.4
|
|
118.1
|
|
|
Income tax
expense
|
|
32.5
|
|
14.1
|
|
60.3
|
|
24.1
|
|
|
Long-term portion of
deferred reforestation obligations
|
|
(7.5)
|
|
(7.6)
|
|
8.6
|
|
4.2
|
|
|
Foreign exchange gain
on long-term debt
|
|
(3.4)
|
|
(0.4)
|
|
(4.5)
|
|
(8.3)
|
|
|
Changes in
mark-to-market value of derivative financial instruments
|
|
-
|
|
(3.6)
|
|
-
|
|
(3.4)
|
|
|
Employee future
benefits
|
|
3.3
|
|
3.2
|
|
6.5
|
|
6.4
|
|
|
Finance expense,
net
|
|
7.8
|
|
8.4
|
|
15.8
|
|
16.6
|
|
|
Gain on sale of
Anthony EACOM Inc. (Note 3)
|
|
-
|
|
-
|
|
(4.0)
|
|
-
|
|
|
Gain on legal
settlement, net (Note 12)
|
|
-
|
|
(15.5)
|
|
-
|
|
(15.5)
|
|
|
Equity
income
|
|
-
|
|
(1.1)
|
|
(0.6)
|
|
(2.2)
|
|
|
Other, net
|
|
1.5
|
|
(3.3)
|
|
(4.9)
|
|
(2.9)
|
|
Defined benefit plan
contributions, net
|
|
(6.6)
|
|
(5.2)
|
|
(12.6)
|
|
(10.4)
|
|
Income taxes paid,
net
|
|
(19.3)
|
|
(3.0)
|
|
(18.1)
|
|
(16.6)
|
|
|
161.3
|
|
94.5
|
|
339.3
|
|
203.4
|
|
Net change in
non-cash working capital (Note 9)
|
|
89.1
|
|
128.8
|
|
(16.1)
|
|
70.8
|
|
|
250.4
|
|
223.3
|
|
323.2
|
|
274.2
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
Change in operating
bank loans (Note 4(a))
|
|
(40.0)
|
|
(76.0)
|
|
(28.0)
|
|
(29.0)
|
|
Proceeds from
long-term debt (Note 4(b))
|
|
-
|
|
-
|
|
1.7
|
|
-
|
|
Repayment of
long-term debt (Note 4(b))
|
|
(0.1)
|
|
-
|
|
(0.1)
|
|
-
|
|
Finance expenses
paid
|
|
(3.2)
|
|
(6.9)
|
|
(6.4)
|
|
(11.0)
|
|
Acquisition of
non-controlling interests (Note 8)
|
|
(7.4)
|
|
(19.4)
|
|
(10.2)
|
|
(24.4)
|
|
Cash distributions
paid to non-controlling interests
|
|
(2.2)
|
|
(7.3)
|
|
(6.0)
|
|
(11.5)
|
|
|
(52.9)
|
|
(109.6)
|
|
(49.0)
|
|
(75.9)
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
Additions to
property, plant and equipment, timber, and intangible assets,
net
|
|
(61.7)
|
|
(66.2)
|
|
(100.6)
|
|
(113.3)
|
|
Proceeds on sale of
Anthony EACOM Inc., net (Note 3)
|
|
1.2
|
|
-
|
|
6.6
|
|
-
|
|
Proceeds on sale of
Lakeland Winton (Note 14)
|
|
15.0
|
|
-
|
|
15.0
|
|
-
|
|
Proceeds on disposal
of property, plant, and equipment
|
|
1.9
|
|
-
|
|
8.3
|
|
-
|
|
Acquisition of
Beadles & Balfour (Note 11(a))
|
|
-
|
|
-
|
|
(41.8)
|
|
-
|
|
Acquisition of
Wynndel (Note 11(b))
|
|
(14.4)
|
|
(19.7)
|
|
(14.4)
|
|
(19.7)
|
|
Other, net
|
|
1.2
|
|
(2.7)
|
|
1.1
|
|
(1.1)
|
|
|
(56.8)
|
|
(88.6)
|
|
(125.8)
|
|
(134.1)
|
Foreign exchange loss
on cash and cash equivalents
|
|
(2.0)
|
|
(0.3)
|
|
(2.1)
|
|
(4.2)
|
Increase in cash
and cash equivalents*
|
|
138.7
|
|
24.8
|
|
146.3
|
|
60.0
|
Cash and cash
equivalents at beginning of period*
|
|
164.2
|
|
132.7
|
|
156.6
|
|
97.5
|
Cash and cash
equivalents at end of period*
|
$
|
302.9
|
$
|
157.5
|
$
|
302.9
|
$
|
157.5
|
|
|
|
|
|
|
|
|
|
*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 and six months ended
June 30, 2017 and 2016
(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,
2016, available at www.canfor.com or www.sedar.com.
Effective January 1, 2017, the
Company has adopted the amendment to IAS 7 Statement of Cash
Flows, which clarified disclosure requirements associated with
cash and non-cash changes in liabilities from financing
activities. The adoption of this amendment has had no impact
on the Company's disclosures in the financial statements.
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 summer months.
Shipment volumes are affected by these factors as well as by global
supply and demand conditions.
Certain comparative amounts for the prior year have been
reclassified to conform to the current year's presentation.
These financial statements were authorized for issue by the
Company's Board of Directors on July 25,
2017.
Accounting Standards Issued and Not Applied
In May 2014, the International
Accounting Standards Board ("IASB") issued IFRS 15, Revenue from
Contracts with Customers, which will supersede IAS 18,
Revenue, IAS 11, Construction Contracts and related
interpretations. The new standard is effective for annual periods
beginning on or after January 1,
2018. The Company has performed a preliminary assessment of
the impact of the new standard, and currently anticipates no
significant impact on its financial statements, with the assessment
to be finalized in the second half of 2017.
In July 2014, the IASB issued IFRS
9, Financial Instruments. The required adoption date for
IFRS 9 is January 1, 2018 and the
Company does not anticipate the new standard to have a significant
impact on its financial statements.
In January 2016, the IASB issued
IFRS 16, Leases, which will supersede IAS 17, Leases
and related interpretations. The required adoption date for IFRS 16
is January 1, 2019 and the Company is
in the process of assessing the impact, if any, on the financial
statements of this new standard.
2. Inventories
(millions of Canadian
dollars, unaudited)
|
As
at
June
30, 2017
|
|
As at
December 31,
2016
|
Logs
|
$
|
81.0
|
$
|
107.3
|
Finished
products
|
|
333.1
|
|
310.6
|
Residual
fibre
|
|
20.3
|
|
13.8
|
Materials and
supplies
|
|
120.8
|
|
117.3
|
|
$
|
555.2
|
$
|
549.0
|
The above inventory balances are stated after inventory
write-downs from cost to net realizable value. There were no
inventory write-downs at June 30,
2017 or December 31, 2016.
3. Long-Term Investments and
Other
(millions of Canadian
dollars, unaudited)
|
As
at June
30, 2017
|
|
As at
December 31,
2016
|
Investments
|
$
|
14.7
|
$
|
14.7
|
Equity investment in
Anthony EACOM Inc.
|
|
-
|
|
16.8
|
Other deposits, loans
and advances
|
|
19.0
|
|
19.2
|
|
$
|
33.7
|
$
|
50.7
|
On March 31, 2017, the Company
sold its 50% investment in Anthony EACOM Inc. to EACOM Timber
Corporation for net proceeds of $21.4
million and recorded a gain of $4.0
million in Other Income in the first quarter of 2017. In the
first half of 2017, instalments of $6.6
million have been received, with the remaining $14.9 million payable in equal instalments by
2020. Of this balance, $5.4 million
is recorded under Accounts Receivable – Other and $9.5 million is recorded as a receivable under
Long-Term Investments and Other. Prior to the sale, the Company's
interest in Anthony EACOM Inc. was classified as a joint venture
and accounted for using the equity method of accounting.
4. Operating Loans and Long-Term
Debt
(a) Available Operating Loans
(millions of Canadian
dollars, unaudited)
|
|
As
at
June
30,
2017
|
|
As at
December 31,
2016
|
Canfor (excluding
CPPI)
|
|
|
|
|
Available Operating
Loans:
|
|
|
|
|
|
Operating loan
facility
|
$
|
350.0
|
$
|
350.0
|
|
Facility for letters
of credit
|
|
50.0
|
|
50.0
|
|
Total operating loan
facility
|
|
400.0
|
|
400.0
|
|
Operating loan
drawn
|
|
-
|
|
(28.0)
|
|
Letters of
credit
|
|
(41.5)
|
|
(41.6)
|
Total available
operating loan facility - Canfor
|
$
|
358.5
|
$
|
330.4
|
CPPI
|
|
|
|
|
Available Operating
Loans:
|
|
|
|
|
|
Operating loan
facility
|
$
|
110.0
|
$
|
110.0
|
|
Letters of
credit
|
|
(9.0)
|
|
(9.3)
|
Total available
operating loan facility - CPPI
|
$
|
101.0
|
$
|
100.7
|
Consolidated:
|
|
|
|
|
Total operating
loan facilities
|
$
|
510.0
|
$
|
510.0
|
Total available
operating loan facilities
|
$
|
459.5
|
$
|
431.1
|
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.
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.
Both Canfor's and CPPI's operating loan facilities have certain
financial covenants, including maximum debt to total capitalization
ratios.
Canfor (excluding CPPI) has a separate facility to cover letters
of credit. At June 30, 2017,
$39.0 million of letters of credit
outstanding are covered under this facility with the balance of
$2.5 million covered under Canfor's
general operating loan facility.
At June 30, 2017, $9.0 million of letters of credit outstanding are
covered under the CPPI general operating loan facility. As at
June 30, 2017, 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
On January 30, 2017, the Company
entered into a new five-year floating interest rate term loan for
US$1.3 million. The debt is repayable
in monthly instalments with the balance due January 30, 2022. Interest payable is based on
LIBOR plus a margin.
All borrowings of the Company feature similar financial
covenants, including a maximum debt to total capitalization
ratio.
As at June 30, 2017, the Company
and CPPI are in compliance with all covenants relating to their
long-term debt.
Fair value of total long-term debt
At June 30, 2017, the fair value
of the Company's long-term debt is $444.3
million (December 31, 2016 -
$447.2 million). The fair value was
determined based on prevailing market rates for long-term debt with
similar characteristics and risk profile.
5. Employee Future
Benefits
For the three months ended June 30,
2017, defined benefit plan actuarial losses of $35.2 million (before tax) were recognized in
other comprehensive income. The losses recorded in the second
quarter of 2017 principally reflect a lower discount rate used to
value the net defined benefit plan obligations offset in part by
the return generated on plan assets. For the six months ended
June 30, 2017, losses of $31.9 million (before tax) were recognized in
other comprehensive income. For the three and six months ended
June 30, 2016, the Company recognized
before tax actuarial losses in other comprehensive income of
$45.4 million and $69.2 million, respectively.
At June 30, 2017, a one percentage
point increase in the discount rate used in calculating the
actuarial estimate of future liabilities for the Company's defined
benefit pension plans would decrease the accrued defined benefit
pension obligation by an estimated $89.8
million, of which 41% (December 31,
2016 – 33%) is fully hedged against changes in discount
rates and longevity risk (potential increases in life expectancy of
plan members) through buy-in annuities, and a further 24%
(December 31, 2016 – 32%) is
partially hedged through the plan's investment in debt securities.
For the Company's other benefit plans, a one percentage point
increase in the discount rate used in calculating the actuarial
estimate of future liabilities would decrease the accrued benefit
obligation by an estimated $22.9
million.
The discount rate assumptions used to estimate the changes in
net retirement benefit obligations were as follows:
|
|
|
|
|
|
|
|
|
Defined
|
|
Other
|
|
|
|
Benefit Pension
|
|
Benefit
|
|
|
Plans
|
Plans
|
June 30,
2017
|
|
|
3.5
%
|
|
3.5
%
|
March 31,
2017
|
|
|
3.9%
|
|
3.9%
|
December 31,
2016
|
|
|
3.9%
|
|
3.9%
|
June 30,
2016
|
|
|
3.5%
|
|
3.5%
|
March 31,
2016
|
|
|
4.0%
|
|
4.0%
|
December 31,
2015
|
|
|
4.1%
|
|
4.1%
|
In the second quarter of 2017, the Company purchased
$90.5 million of buy-in annuities
through its defined benefit pension plans, increasing total
annuities purchased to $377.1
million. Future cash flows from the annuities will match the
amount and timing of benefits payable under the plans,
substantially mitigating the exposure to future volatility in the
related pension obligations. Transaction costs of $4.6 million related to the purchase were
recognized in other comprehensive income in the second quarter of
2017, principally reflecting the difference between the annuity
rate (which is comparable to solvency rates) compared to the
discount rate used to value the obligations on a going concern
basis.
6. Financial
Instruments
Canfor's cash and cash equivalents, accounts receivable, other
deposits, loans and advances, operating loans, accounts payable and
accrued liabilities, and long-term debt are measured at amortized
cost subsequent to initial recognition.
Derivative instruments are measured at fair value. IFRS 13,
Fair Value Measurement, requires classification of financial
instruments within 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 June 30,
2017 and December 31, 2016,
and shows the level within the fair value hierarchy in which the
financial instruments have been classified:
(millions of Canadian
dollars, unaudited)
|
|
Fair Value
Hierarchy
Level
|
|
As
at
June
30,
2017
|
|
As at
December 31,
2016
|
Financial assets
measured at fair value
|
|
|
|
|
|
|
|
Investments - held
for trading
|
|
Level 1
|
$
|
14.3
|
$
|
14.3
|
|
Derivative financial
instruments - held for trading
|
|
Level 2
|
|
-
|
|
0.2
|
|
|
|
$
|
14.3
|
$
|
14.5
|
Financial
liabilities measured at fair value
|
|
|
|
|
|
|
|
Derivative financial
instruments - held for trading
|
|
Level 2
|
$
|
-
|
$
|
0.1
|
|
|
|
$
|
-
|
$
|
0.1
|
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.
At times, 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
costs, and floating interest rates on long-term debt.
At June 30, 2017, the Company had
no derivative financial instruments outstanding (December 31, 2016 - net asset of $0.1 million). 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 and six-month periods ended
June 30, 2017 and 2016:
|
3 months ended June
30,
|
6 months ended June
30,
|
(millions of Canadian
dollars, unaudited)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Energy
derivatives
|
$
|
-
|
$
|
0.9
|
$
|
-
|
$
|
(0.6)
|
Lumber
futures
|
|
-
|
|
2.2
|
|
3.2
|
|
1.2
|
Interest rate
swaps
|
|
-
|
|
-
|
|
-
|
|
0.1
|
Gain on derivative
financial instruments
|
$
|
-
|
$
|
3.1
|
$
|
3.2
|
$
|
0.7
|
7. Income Taxes
|
3 months ended June
30,
|
6 months ended June
30,
|
(millions of Canadian
dollars, unaudited)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Current
|
$
|
(35.5)
|
$
|
(6.1)
|
$
|
(60.6)
|
$
|
(20.2)
|
Deferred
|
|
3.0
|
|
(8.0)
|
|
0.3
|
|
(3.9)
|
Income tax
expense
|
$
|
(32.5)
|
$
|
(14.1)
|
$
|
(60.3)
|
$
|
(24.1)
|
The reconciliation of income taxes calculated at the statutory
rate to the actual income tax provision is as follows:
|
3 months ended June
30,
|
6 months ended June
30,
|
(millions of Canadian
dollars, unaudited)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Income tax expense at
statutory rate of 26.0%
|
$
|
(32.1)
|
$
|
(16.9)
|
$
|
(59.5)
|
$
|
(30.5)
|
Add
(deduct):
|
|
|
|
|
|
|
|
|
|
Entities with
different income tax rates and other tax
adjustments
|
|
(0.7)
|
|
(1.3)
|
|
(1.9)
|
|
(0.2)
|
|
Non-taxable income
related to non-controlling interests
|
|
0.1
|
|
3.7
|
|
0.2
|
|
5.0
|
|
Permanent difference
from capital gains and other non- deductible items
|
|
0.2
|
|
0.4
|
|
0.9
|
|
1.6
|
Income tax
expense
|
$
|
(32.5)
|
$
|
(14.1)
|
$
|
(60.3)
|
$
|
(24.1)
|
In addition to the amounts recorded to net income, a tax
recovery of $9.2 million was recorded
to other comprehensive income for the three months ended
June 30, 2017 in relation to the
actuarial losses on defined benefit plans (three months ended
June 30, 2016 - tax recovery of
$11.8 million). For the six months
ended June 30, 2017, the tax recovery
was $8.3 million (six months ended
June 30, 2016 - tax recovery of
$18.0 million).
Also included in other comprehensive income for the three months
ended June 30, 2017 was a tax
recovery of $1.0 million related to
foreign exchange differences on translation of investments in
foreign operations (three months ended June
30, 2016 - tax recovery of $0.1
million). For the six months ended June 30, 2017, the tax recovery was $1.3 million (six months ended June 30, 2016 - tax recovery of $2.3 million).
8. Earnings Per Share and Normal
Course Issuer Bid
Basic net income per share is calculated by dividing the net
income attributable to common shareholders by the weighted average
number of common shares outstanding during the period.
|
3 months ended June
30,
|
6 months ended June
30,
|
|
2017
|
2016
|
2017
|
2016
|
Weighted average
number of common shares
|
132,804,543
|
132,804,543
|
132,804,543
|
132,804,543
|
On March 7, 2017, the Company
renewed its normal course issuer bid whereby it can purchase for
cancellation up to 6,640,227 common shares or approximately 5% of
its issued and outstanding common shares as of March 1, 2017. The renewed normal course issuer
bid is set to expire on March 6,
2018. During the first half of 2017, Canfor did not purchase
any common shares. As at July 25,
2017, there were 132,804,543 common shares of the Company
outstanding.
Under a separate normal course issuer bid, CPPI purchased
607,900 common shares in the second quarter of 2017 for
$7.5 million (an average of
$12.34 per common share) from
non-controlling shareholders, of which $7.4
million was paid in the period, with the balance paid in
early July. In the first half of 2017, CPPI purchased 872,103
common shares for $10.5 million (an
average of $12.04 per common share).
As at June 30, 2017, Canfor's
ownership interest in CPPI was 54.4%.
Subsequent to quarter end, CPPI purchased 165,925 common shares
for $2.1 million (an average of
$12.66 per common share), increasing
Canfor's ownership interest in CPPI to 54.5% as at July 25, 2017.
9. Net Change in Non-Cash Working
Capital
|
3 months ended June
30,
|
6 months ended June
30,
|
(millions of Canadian
dollars, unaudited)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Accounts
receivable
|
$
|
29.0
|
$
|
14.0
|
$
|
(34.1)
|
$
|
(3.3)
|
Inventories
|
|
100.7
|
|
111.4
|
|
(9.2)
|
|
50.6
|
Prepaid
expenses
|
|
(9.9)
|
|
(12.6)
|
|
(16.6)
|
|
(17.6)
|
Accounts payable,
accrued liabilities and current portion of deferred reforestation
obligations
|
|
(30.7)
|
|
16.0
|
|
43.8
|
|
41.1
|
Net decrease
(increase) in non-cash working capital
|
$
|
89.1
|
$
|
128.8
|
$
|
(16.1)
|
$
|
70.8
|
10. 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
& Other
|
|
Elimination
Adjustment
|
Consolidated
|
3 months ended
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
Sales to external
customers
|
$
|
904.3
|
$
|
280.9
|
$
|
-
|
$
|
-
|
$
|
1,185.2
|
Sales to other
segments
|
|
41.9
|
|
-
|
|
-
|
|
(41.9)
|
|
-
|
Operating income
(loss)
|
|
110.4
|
|
31.5
|
|
(10.9)
|
|
-
|
|
131.0
|
Amortization
|
|
43.6
|
|
18.5
|
|
-
|
|
-
|
|
62.1
|
Capital
expenditures1
|
|
41.3
|
|
19.2
|
|
1.2
|
|
-
|
|
61.7
|
3 months ended June
30, 2016
|
|
|
|
|
|
|
|
|
|
|
Sales to external
customers
|
$
|
765.3
|
$
|
257.0
|
$
|
-
|
$
|
-
|
$
|
1,022.3
|
Sales to other
segments
|
|
36.8
|
|
0.2
|
|
-
|
|
(37.0)
|
|
-
|
Operating income
(loss)
|
|
71.5
|
|
5.2
|
|
(7.1)
|
|
-
|
|
69.6
|
Amortization
|
|
39.4
|
|
16.9
|
|
1.2
|
|
-
|
|
57.5
|
Capital
expenditures1
|
|
45.7
|
|
18.6
|
|
1.9
|
|
-
|
|
66.2
|
6 months ended
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
Sales to external
customers
|
$
|
1,721.4
|
$
|
590.0
|
$
|
-
|
$
|
-
|
$
|
2,311.4
|
Sales to other
segments
|
|
82.8
|
|
0.1
|
|
-
|
|
(82.9)
|
|
-
|
Operating income
(loss)
|
|
194.1
|
|
66.7
|
|
(23.0)
|
|
-
|
|
237.8
|
Amortization
|
|
87.1
|
|
37.3
|
|
-
|
|
-
|
|
124.4
|
Capital
expenditures1
|
|
60.6
|
|
36.0
|
|
4.0
|
|
-
|
|
100.6
|
Identifiable
assets
|
|
2,246.5
|
|
793.2
|
|
358.2
|
|
-
|
|
3,397.9
|
6 months ended June
30, 2016
|
|
|
|
|
|
|
|
|
|
|
Sales to external
customers
|
$
|
1,537.9
|
$
|
552.3
|
$
|
-
|
$
|
-
|
$
|
2,090.2
|
Sales to other
segments
|
|
81.0
|
|
0.2
|
|
-
|
|
(81.2)
|
|
-
|
Operating income
(loss)
|
|
104.9
|
|
44.3
|
|
(14.5)
|
|
-
|
|
134.7
|
Amortization
|
|
80.2
|
|
35.6
|
|
2.3
|
|
-
|
|
118.1
|
Capital
expenditures1
|
|
78.9
|
|
31.7
|
|
2.7
|
|
-
|
|
113.3
|
Identifiable
assets
|
|
2,312.8
|
|
803.0
|
|
227.9
|
|
-
|
|
3,343.7
|
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. Capital
expenditures exclude the assets purchased as part of the
acquisition of Wynndel Box and Lumber Ltd. in 2016 (Note
11(b)).
|
11. Acquisitions
(a) US South
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.
(b) Wynndel Box and Lumber
Ltd.
On April 15, 2016, the Company
completed the acquisition of the assets of Wynndel Box and Lumber Ltd. ("Wynndel") for
total consideration of $40.3 million.
The acquisition has been accounted for in accordance with IFRS 3,
Business Combinations.
The acquisition of Wynndel included a sawmill located in the
Creston Valley of British
Columbia, which produces premium boards and customized
specialty wood products with an annual production capacity of 80
million board feet. Canfor acquired the assets of Wynndel,
including approximately 65,000 cubic meters of annual harvesting
rights in the Kootenay Lake Timber Supply Area.
At the acquisition date, the Company paid $19.7 million, and a working capital true-up
payment of $2.6 million was paid in
early July 2016. On April 5, 2017, the Company paid an instalment of
$14.4 million, with a final
instalment of $3.6 million scheduled
to be paid on October 15,
2017.
12. Houston Pellet Limited Partnership
Settlement
On June 28, 2016, Houston Pellet
Limited Partnership ("HPLP") settled various legal claims with a
logistics terminal located in Northern
British Columbia related to unloading, storage, handling and
shipping services for wood pellets manufactured by HPLP, for
$16.3 million. Certain machinery
and equipment involved in the settlement were impaired resulting in
approximately $0.8 million in
impairment charges recorded by HPLP. The net gain of
$15.5 million was recorded in
Manufacturing and Product Costs in the second quarter of 2016.
Canfor owns a 60% interest in HPLP.
13. 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 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 for a period of four months, in accordance with US
law. On June 23, 2017, the DOC
announced its preliminary anti-dumping duty determination 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. Accordingly, countervailing and
anti-dumping duty deposits of $34.8
million have been expensed as of June
30, 2017 reflecting the duties paid on deposits for sales
recognized in the quarter.
The final countervailing and anti-dumping duty determinations
will be aligned for DOC administrative purposes. This
alignment could result in the suspension of preliminary
countervailing duty cash deposit requirements after the initial
four month period has expired on August 26,
2017 and until an aligned final determination decision is
established, currently anticipated to occur in the fourth quarter
of 2017.
Canfor and other Canadian forest product companies, the Federal
Government and Canadian Provincial Governments categorically deny
the US allegations and vehemently disagree with the preliminary
countervailing and anti-dumping determinations made by the DOC.
14. Sale of Lakeland Mills Ltd. and Winton
Global Lumber Ltd.
Included in other accounts receivable at December 31, 2016 was $15.0 million related to the final instalment for
the July 1, 2015 sale of the
Company's 33.3% investment in Lakeland Mills Ltd. and Winton Global
Lumber Ltd. ("Lakeland Winton") for consideration of $30.0 million. The balance was received
June 30, 2017.
SOURCE Canfor Corporation