VANCOUVER, July 25, 2018 /CNW/ - Canfor Pulp Products
Inc. ("CPPI") (TSX: CFX) today reported second quarter 2018 results
and quarterly dividend:
Highlights
- Third consecutive record-high quarterly operating income of
$85 million
- Record-high Q2, 2018 sales of $396
million, reflecting strong shipments and sales
realizations
- Net income of $63 million, or
$0.97 per share
Financial Results
The following table summarizes selected financial information
for the Company for the comparative periods:
|
|
Q2
|
|
Q1
|
|
YTD
|
|
Q2
|
|
YTD
|
(millions of Canadian
dollars, except per share amounts)
|
|
2018
|
|
2018
|
|
2018
|
|
2017
|
|
2017
|
Sales
|
$
|
396.4
|
$
|
359.7
|
$
|
756.1
|
$
|
280.9
|
$
|
590.1
|
Operating income
before amortization
|
$
|
105.1
|
$
|
104.3
|
$
|
209.4
|
$
|
50.0
|
$
|
104.0
|
Operating
income
|
$
|
85.4
|
$
|
85.1
|
$
|
170.5
|
$
|
31.5
|
$
|
66.7
|
Net income
|
$
|
63.0
|
$
|
64.3
|
$
|
127.3
|
$
|
20.2
|
$
|
44.3
|
Net income per share,
basic and diluted
|
$
|
0.97
|
$
|
0.99
|
$
|
1.95
|
$
|
0.31
|
$
|
0.67
|
The Company reported operating income of $85.4 million for the second quarter of 2018, an
increase of $0.3 million from the
$85.1 million reported for the first
quarter of 2018 reflecting favourable Northern Bleached Softwood
Kraft ("NBSK") pulp unit sales realizations, increased shipments
following major weather-related transportation disruptions
experienced in the first quarter of 2018 and to a lesser extent,
improved NBSK pulp mill productivity. These factors more than
offset the impact of scheduled maintenance outages and
market-related fibre cost increases in the quarter.
Global softwood pulp markets remained strong through the second
quarter of 2018, with near-record high US-dollar NBSK pulp list
prices to China reflecting tighter
supply during the traditional spring maintenance period as well as
healthy global demand. Average NBSK pulp unit sales realizations
were moderately higher than the previous quarter reflecting a
2 cent, or 2%, weaker Canadian dollar
combined with rising US-dollar NBSK pulp list pricing in other
regions, particularly North
America. Average Bleached Chemi-Thermo Mechanical Pulp
("BCTMP") unit sales realizations showed a moderate decrease
quarter-over-quarter, with lower US-dollar pricing more than
offsetting the weaker Canadian dollar.
Pulp shipments were up 6% from the previous quarter, reflecting
strong market demand and an unwinding of inventory resulting from
the transportation challenges in the previous quarter. Pulp
production was down 5% from the previous quarter following
scheduled maintenance outages at the Company's Prince George NBSK
pulp mill, as well as at its Taylor BCTMP mill, which reduced NBSK
pulp production by approximately 4,000 tonnes and BCTMP production
by approximately 17,000 tonnes, offset in part by improved
productivity at the Company's NBSK pulp mills. The scheduled
maintenance outage at the Prince
George pulp mill was completed ahead of schedule. The Taylor
BCTMP mill's reduced production included extended downtime in
connection with the commissioning of its previously announced
energy project, which is now achieving anticipated operating
rates.
Pulp unit manufacturing costs were moderately higher than the
previous quarter, with seasonally lower energy prices and usage
partly offsetting market-driven increases in fibre costs and higher
unit costs associated with the aforementioned scheduled
outages.
Operating income in the Company's paper segment at $1.5 million was down $1.4
million from the first quarter of 2018, as increased slush
pulp costs linked to higher Canadian dollar NBSK market pulp prices
more than offset improved paper unit sales realizations and a
weaker Canadian dollar.
Commenting on the Company's second quarter of 2018 results,
CPPI's Chief Executive Officer, Don
Kayne said, "We continue to be encouraged by the strength of
the global pulp markets. Our solid operating performance in the
second quarter enabled us to capitalize on these favourable market
fundamentals, and set new record-high operating earnings".
Notwithstanding some seasonal weakness in China during the traditionally slower summer
months, global softwood kraft pulp markets are projected to be
balanced through the third quarter of 2018. For the months of July
and August 2018, the Company
announced NBSK pulp list price increases in North America of US$40 per tonne and US$30 per tonne, respectively. Results in the
third quarter of 2018 will include a scheduled maintenance outage
at Northwood, the Company's largest NBSK pulp mill, with a
projected 28,000 tonnes of reduced NBSK pulp production, combined
with higher associated maintenance costs and lower projected
shipment volume. Bleached kraft paper demand is anticipated to
remain stable through the third quarter of 2018.
On July 25, 2018, the Board of
Directors declared a quarterly dividend of $0.0625 per share, payable on August 14, 2018 to the shareholders of record on
August 7, 2018.
Additional Information and Conference Call
A
conference call to discuss the second quarter's financial and
operating results will be held on Thursday,
July 26, 2018 at 8:00 AM Pacific
time. To participate in the call, please dial
Toll-Free 1-888-390-0546. For instant replay access until
August 9, 2018, please dial Toll-Free
1-888-390-0541 and enter participant pass code 063665#. 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.
CPPI is a leading global supplier of pulp and paper products
with operations in the central interior of British Columbia ("BC") employing
approximately 1,300 people throughout the organization.
Canfor Pulp owns and operates three mills in Prince George, BC with a total capacity of 1.1
million tonnes of Premium Reinforcing Northern Bleached Softwood
Kraft Pulp and 140,000 tonnes of kraft paper, as well as one mill
in Taylor, BC with an annual
production capacity of 220,000 tonnes of Bleached Chemi-Thermo
Mechanical Pulp ("BCTMP"). Canfor Pulp is the largest North
American, and one of the largest global producers of market NBSK
pulp. CPPI shares are traded on the Toronto Stock Exchange
under the symbol CFX.
Canfor Pulp Products Inc.
Second Quarter
2018
Management's Discussion and Analysis
This interim Management's Discussion and Analysis
("MD&A") provides a review of Canfor Pulp Products Inc.'s
("CPPI" or "the Company") financial performance for the quarter
ended June 30, 2018 relative to the
quarters ended March 31, 2018 and
June 30, 2017, and the financial
position of the Company at June 30,
2018. It should be read in conjunction with CPPI's unaudited
interim consolidated financial statements and accompanying notes
for the quarters ended, June 30, 2018
and 2017, as well as the 2017 annual MD&A and the 2017 audited
consolidated financial statements and notes thereto, which are
included in CPPI's Annual Report for the year ended December 31, 2017 (available at www.canfor.com).
The financial information in this interim MD&A has been
prepared in accordance with International Financial Reporting
Standards ("IFRS"), which is the required reporting framework for
Canadian publicly accountable enterprises.
Throughout this discussion, reference is made to Operating
Income before Amortization which CPPI considers to be a relevant
indicator for measuring trends in the Company's performance and its
ability to generate funds to meet its debt service and capital
expenditure requirements, and to pay dividends. Reference is
also made to Adjusted Net Income (calculated as Net Income less
specific items affecting comparability with prior periods) and
Adjusted Net Income per Share (calculated as Adjusted Net Income
divided by the weighted average number of shares outstanding during
the period). Operating Income before Amortization, Adjusted
Net Income and Adjusted 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, CPPI's Operating Income before Amortization,
Adjusted Net Income and Adjusted 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 Net Income to Net
Income reported in accordance with IFRS are included in this
MD&A. Throughout this discussion reference is made to the
current quarter which refers to the results for the second quarter
of 2018.
Factors that could impact future operations are also
discussed. These factors may be influenced by both known and
unknown risks and uncertainties that could cause the actual results
to be materially different from those stated in this
discussion. Factors that could have a material impact on any
future oriented statements made herein include, but are not limited
to: general economic, market and business conditions; product
selling prices; raw material and operating costs; currency exchange
rates; interest rates; changes in law and public policy; the
outcome of labour and trade disputes; and opportunities available
to or pursued by CPPI.
All financial references are in millions of Canadian dollars
unless otherwise noted. The information in this report is as
at July 25, 2018.
Forward Looking Statements
Certain statements in this MD&A constitute
"forward-looking statements" which involve known and unknown risks,
uncertainties and other factors that may cause actual results to be
materially different from any future results, performance or
achievements expressed or implied by such statements. Words
such as "expects", "anticipates", "projects", "intends", "plans",
"will", "believes", "seeks", "estimates", "should", "may", "could",
and variations of such words and similar expressions are intended
to identify such forward-looking statements. These statements
are based on management's current expectations and beliefs and
actual events or results may differ materially. There are
many factors that could cause such actual events or results
expressed or implied by such forward-looking statements to differ
materially from any future results expressed or implied by such
statements. Forward-looking statements are based on current
expectations and the Company assumes no obligation to update such
information to reflect later events or developments, except as
required by law.
SECOND QUARTER 2018 OVERVIEW
Selected Financial
Information and Statistics
(millions of Canadian
dollars, except per share amounts)
|
|
Q2
2018
|
|
Q1
2018
|
|
YTD
2018
|
|
Q2
2017
|
|
YTD
2017
|
Operating income
(loss) by segment:
|
|
|
|
|
|
|
|
|
|
|
|
Pulp
|
$
|
86.6
|
$
|
86.4
|
$
|
173.0
|
$
|
28.0
|
$
|
59.1
|
|
Paper
|
$
|
1.5
|
$
|
2.9
|
$
|
4.4
|
$
|
6.6
|
$
|
13.7
|
|
Unallocated
|
$
|
(2.7)
|
$
|
(4.2)
|
$
|
(6.9)
|
$
|
(3.1)
|
$
|
(6.1)
|
Total operating
income
|
$
|
85.4
|
$
|
85.1
|
$
|
170.5
|
$
|
31.5
|
$
|
66.7
|
Add:
Amortization1
|
$
|
19.7
|
$
|
19.2
|
$
|
38.9
|
$
|
18.5
|
$
|
37.3
|
Total operating
income before amortization
|
$
|
105.1
|
$
|
104.3
|
$
|
209.4
|
$
|
50.0
|
$
|
104.0
|
Add
(deduct):
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
movements
|
$
|
(7.7)
|
$
|
(22.2)
|
$
|
(29.9)
|
$
|
(2.0)
|
$
|
(2.2)
|
|
Defined benefit
pension plan contributions, net
|
$
|
(1.7)
|
$
|
(1.7)
|
$
|
(3.4)
|
$
|
(1.7)
|
$
|
(3.2)
|
|
Income taxes received
(paid)
|
$
|
0.2
|
$
|
(19.1)
|
$
|
(18.9)
|
$
|
(0.9)
|
$
|
(1.1)
|
|
Other operating cash
flows, net
|
$
|
2.0
|
$
|
5.8
|
$
|
7.8
|
$
|
(0.9)
|
$
|
(2.3)
|
Cash from
operating activities
|
$
|
97.9
|
$
|
67.1
|
$
|
165.0
|
$
|
44.5
|
$
|
95.2
|
Add
(deduct):
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
paid
|
$
|
(4.1)
|
$
|
(4.1)
|
$
|
(8.2)
|
$
|
(4.1)
|
$
|
(8.3)
|
|
Finance expenses
paid
|
$
|
(1.0)
|
$
|
(0.7)
|
$
|
(1.7)
|
$
|
(0.7)
|
$
|
(1.4)
|
|
Capital additions,
net
|
$
|
(24.8)
|
$
|
(19.8)
|
$
|
(44.6)
|
$
|
(19.2)
|
$
|
(36.0)
|
|
Share
purchases
|
$
|
-
|
$
|
(0.1)
|
$
|
(0.1)
|
$
|
(7.4)
|
$
|
(10.2)
|
|
Other, net
|
$
|
0.5
|
$
|
0.3
|
$
|
0.8
|
$
|
0.1
|
$
|
0.3
|
Change in cash /
operating loans
|
$
|
68.5
|
$
|
42.7
|
$
|
111.2
|
$
|
13.2
|
$
|
39.6
|
Net income
|
$
|
63.0
|
$
|
64.3
|
$
|
127.3
|
$
|
20.2
|
$
|
44.3
|
Net income per share
(EPS)
|
$
|
0.97
|
$
|
0.99
|
$
|
1.95
|
$
|
0.31
|
$
|
0.67
|
ROIC – Consolidated
period-to-date2
|
|
12.9%
|
|
12.9%
|
|
25.8%
|
|
4.5%
|
|
9.8%
|
Average exchange
rate (US$ per C$1.00)3
|
$
|
0.774
|
$
|
0.791
|
$
|
0.782
|
$
|
0.744
|
|
0.750
|
1
Amortization includes amortization of certain capitalized major
maintenance costs.
|
2
Consolidated Return on Invested Capital ("ROIC") is equal to
operating income/loss, plus realized gains/losses on derivatives
and other income/expense, 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.
|
3 Source –
Bank of Canada (monthly average rate for the period).
|
The Company reported operating income of $85.4 million for the second quarter of 2018, an
increase of $0.3 million from the
$85.1 million reported for the first
quarter of 2018 reflecting favourable Northern Bleached Softwood
Kraft ("NBSK") pulp unit sales realizations, increased shipments
following major weather-related transportation disruptions
experienced in the first quarter of 2018 and to a lesser extent,
improved NBSK pulp mill productivity. These factors more than
offset the impact of scheduled maintenance outages and
market-related fibre cost increases in the quarter.
Compared to the second quarter of 2017, operating income was up
$53.9 million reflecting
substantially higher average NBSK pulp and Bleached Chemi-Thermo
Mechanical Pulp ("BCTMP") US-dollar pricing combined with increased
shipments and pulp production. These factors significantly
outweighed a 4% stronger Canadian dollar and higher unit
manufacturing costs, largely attributable to higher market-based
fibre costs.
OPERATING RESULTS BY BUSINESS SEGMENT
Pulp
Selected Financial Information and Statistics
– Pulp
|
|
Q2
|
|
Q1
|
|
YTD
|
|
Q2
|
|
YTD
|
(millions of Canadian
dollars, unless otherwise noted)
|
|
2018
|
|
2018
|
|
2018
|
|
2017
|
|
2017
|
Sales
|
$
|
351.5
|
$
|
317.5
|
$
|
669.0
|
$
|
236.2
|
$
|
503.6
|
Operating income
before amortization4
|
$
|
105.2
|
$
|
104.5
|
$
|
209.7
|
$
|
45.5
|
$
|
94.5
|
Operating
income
|
$
|
86.6
|
$
|
86.4
|
$
|
173.0
|
$
|
28.0
|
$
|
59.1
|
Average NBSK pulp
price delivered to China – US$5
|
$
|
910
|
$
|
910
|
$
|
910
|
$
|
670
|
$
|
658
|
Average NBSK pulp
price delivered to China – Cdn$5
|
$
|
1,176
|
$
|
1,150
|
$
|
1,164
|
$
|
901
|
$
|
877
|
Production – pulp
(000 mt)
|
|
296.5
|
|
311.7
|
|
608.2
|
|
275.2
|
|
592.3
|
Shipments – pulp (000
mt)
|
|
328.6
|
|
310.0
|
|
638.6
|
|
276.3
|
|
613.4
|
4
Amortization includes amortization of certain capitalized major
maintenance costs.
|
5 Per
tonne, NBSK pulp list price delivered to China (as published by
Resource Information Systems, Inc.); Average NBSK pulp price
delivered to China in Cdn$ calculated as average NBSK pulp price
delivered to China – US$ multiplied by the average exchange rate –
Cdn$ per US$1.00 according to Bank of Canada monthly average rate
for the period.
|
Markets
Global softwood pulp market conditions remained favourable
through the second quarter of 2018, with near-record high US-dollar
NBSK pulp list prices reflecting both the traditional spring
maintenance period and healthy global demand. Softwood pulp
inventories at the end of June 2018
were in the balanced range at 28 days of supply, a decrease of
three days from March
20186, in part reflecting improved transportation
networks in Western Canada,
combined with industry maintenance downtime in the second quarter.
Market conditions are generally considered balanced when
inventories are in the 27-30 days of supply range.
6 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").
|
Global shipments of bleached softwood pulp for the first six
months of 2018 were in line with the first six months of
20177.
7 As
reported PPPC statistics.
|
Sales
The Company's pulp shipments for the second quarter of 2018 were
328,600 tonnes, up 18,600 tonnes, or 6%, from the previous quarter
and up 52,300 tonnes, or 19%, from the second quarter of 2017. Pulp
shipments in the current quarter benefitted from sustained strong
market demand through the quarter combined with an unwinding of
inventory resulting from the transportation challenges in the
previous quarter. Compared to the second quarter of 2017, the 19%
increase in pulp shipments reflected an 8% increase in pulp
production quarter-over-quarter coupled with solid market demand
and the aforementioned unwinding of transportation constraints in
the current quarter.
The average China US-dollar NBSK pulp list price of US$910 per tonne, as published by RISI, was in
line with the previous quarter. Average NBSK pulp unit sales
realizations were moderately higher than the previous quarter
reflecting the 2 cent, or 2%, weaker
Canadian dollar combined with rising US-dollar NBSK pulp list
pricing in other regions, particularly North America, and to a lesser extent, the
timing of shipments in the previous quarter (versus orders).
Average BCTMP unit sales realizations showed a moderate decrease
quarter-over-quarter, as a surge in demand and pricing towards the
end of 2017 was largely realized in the first quarter of
2018. Although BCTMP demand remained steady, lower US-dollar
pricing more than offset the weaker Canadian dollar.
Compared to the second quarter of 2017, the average China
US-dollar NBSK pulp list price was up US$240 per tonne, or 36%, while US-dollar list
prices on shipments to North
America showed more modest gains over the same period.
These higher global US-dollar prices resulted in substantially
higher average NBSK pulp unit sales realizations, net of a
3 cent, or 4%, stronger Canadian
dollar. Average BCTMP unit sales realizations also increased
significantly when compared to the second quarter of 2017,
primarily reflecting the improvement in BCTMP market demand which
more than offset the stronger Canadian dollar in the second quarter
of 2018.
Energy revenues were lower than the first quarter of 2018,
primarily reflecting seasonally lower power prices combined with a
decrease in power generation related to the aforementioned
scheduled maintenance outages in the current period. Energy
revenues were modestly higher than the second quarter of 2017,
driven by less maintenance outages combined with higher power
prices in the current quarter.
Operations
Pulp production in the second quarter of 2018 was 296,500
tonnes, down 15,200 tonnes, or 5% from the first quarter of 2018.
During the second quarter of 2018, the Company completed its
scheduled maintenance outage ahead of target at its Prince George
NBSK pulp mill, which reduced NBSK pulp production by approximately
4,000 tonnes. The Company also completed a scheduled maintenance
outage at its Taylor BCTMP mill, including the completion of the
previously announced energy project. Extended downtime associated
with the commissioning and start-up of the Taylor mill resulted in reduced BCTMP
production of approximately 17,000 tonnes. This was offset in part
by improved operating rates at the Company's NBSK pulp mills
following the challenging weather conditions in the first quarter
of 2018.
Pulp production in the current quarter showed a modest increase
compared to the second quarter of 2017 after taking account of
scheduled maintenance outages at the Company's Northwood NBSK pulp
mill and Taylor BCTMP mill in the comparative quarter (which
reduced pulp production by approximately 40,000 tonnes).
Pulp unit manufacturing costs saw a moderate increase compared
to the previous quarter of 2018 as increased fibre costs, and costs
associated with the aforementioned scheduled maintenance outages
more than offset seasonally lower energy prices and usage in the
current quarter. The higher fibre costs reflected increased market
prices for delivered sawmill residual chips (linked to Canadian
dollar NBSK pulp sales realizations) combined with a seasonal
improvement in chip quality, offset by a lower proportion of
higher-cost whole log chips. Compared to the second quarter of
2017, higher pulp unit manufacturing costs were mostly attributable
to market-related increases to fibre costs offset in part by
improved productivity quarter-over-quarter.
Paper
Selected Financial Information and
Statistics – Paper
|
|
Q2 2018
|
|
Q1 2018
|
|
YTD 2018
|
|
Q2 2017
|
|
YTD 2017
|
(millions of Canadian
dollars unless otherwise noted)
|
|
|
|
|
|
Sales
|
$
|
44.7
|
$
|
42.0
|
$
|
86.7
|
$
|
44.6
|
$
|
86.2
|
Operating income
before amortization8
|
$
|
2.6
|
$
|
4.0
|
$
|
6.6
|
$
|
7.6
|
$
|
15.6
|
Operating
income
|
$
|
1.5
|
$
|
2.9
|
$
|
4.4
|
$
|
6.6
|
$
|
13.7
|
Production – paper
(000 mt)
|
|
30.6
|
|
34.3
|
|
64.9
|
|
33.6
|
|
68.2
|
Shipments – paper
(000 mt)
|
|
32.6
|
|
32.0
|
|
64.6
|
|
35.5
|
|
69.2
|
8
Amortization includes amortization of certain capitalized major
maintenance costs.
|
Markets
Global kraft paper markets showed continued strength through the
second quarter of 2018, supported by solid demand from North
American and Asian markets.
Sales
The Company's paper shipments in the second quarter of 2018 were
32,600 tonnes, in line with the first quarter of 2018 as the
benefit of improving transportation networks throughout the quarter
was offset by lower production following a scheduled maintenance
outage in the current quarter. Paper shipments were down 2,900
tonnes from the second quarter of 2017, largely a result of the
scheduled maintenance outage at the Company's Prince George paper machine in the current
quarter.
Paper unit sales realizations in the second quarter of 2018 saw
a modest increase compared to the previous quarter, reflecting
higher market-driven US-dollar pricing and the weaker Canadian
dollar. Compared to the second quarter of 2017, improved
paper unit sales realizations, reflecting favourable US-dollar
pricing, more than offset the 4% stronger Canadian dollar.
Operations
Paper production for the second quarter of 2018 was 30,600
tonnes, down 11% compared to the previous quarter and 9% compared
to the second quarter of 2017, principally reflecting the scheduled
maintenance outage completed in the current quarter which reduced
paper production by approximately 4,000 tonnes. The outage
contributed to higher paper unit manufacturing costs compared to
both comparative quarters, which also reflected increased slush
pulp costs associated with higher average NBSK pulp sales
realizations in the current quarter.
Unallocated Items
Selected Financial
Information
|
|
Q2 2018
|
|
Q1 2018
|
|
YTD 2018
|
|
Q2 2017
|
|
YTD 2017
|
(millions of Canadian
dollars)
|
|
|
|
|
|
Corporate
costs
|
$
|
(2.7)
|
$
|
(4.2)
|
$
|
(6.9)
|
$
|
(3.1)
|
$
|
(6.1)
|
Finance expense,
net
|
$
|
(1.3)
|
$
|
(1.2)
|
$
|
(2.5)
|
$
|
(1.7)
|
$
|
(3.5)
|
Other income
(expense), net
|
$
|
2.2
|
$
|
3.8
|
$
|
6.0
|
$
|
(2.5)
|
$
|
(3.5)
|
Corporate costs were $2.7 million
for the second quarter of 2018, down $1.5
million from the first quarter of 2018 primarily reflecting
costs associated with organizational reductions in senior
management recorded in the previous quarter. Corporate costs were
down $0.4 million from the second
quarter of 2017 as a result of lower overhead spend, following the
aforementioned changes.
Net finance expense for the second quarter of 2018 at
$1.3 million was in line with the
first quarter of 2018 and modestly lower than the second quarter of
2017, in part reflecting the early repayment of the Company's
$50.0 million long-term debt towards
the end of 2017.
Other income of $2.2 million in
the second quarter of 2018 principally related to favourable
foreign exchange movements on US-dollar denominated working capital
balances.
Other Comprehensive Income (Loss)
In the second quarter of 2018, the Company recorded an after-tax
gain of $0.1 million related to
changes in the valuation of the Company's employee future benefits
plans, largely reflecting a return on plan assets greater than the
discount rate. This compared to an after-tax gain of $2.4 million in the first quarter of 2018 and an
after-tax loss of $8.0 million
recorded in the second quarter of 2017, largely reflecting changes
in the discount rates used to value the employee future benefit
plans and the return generated on plan assets.
In the second quarter of 2017, the Company purchased
$18.0 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 $1.1 million were recognized
in Other Comprehensive Income principally reflecting the difference
in the annuity rate as compared to the discount rate used to value
the pension obligations on a going concern basis.
SUMMARY OF FINANCIAL POSITION
The following table
summarizes CPPI's cash flow and selected ratios for and as at the
end of the following periods:
(millions of Canadian
dollars, except for ratios)
|
|
Q2
2018
|
|
Q1
2018
|
|
YTD
2018
|
|
Q2
2017
|
|
YTD
2017
|
Increase (decrease)
in cash and cash equivalents
|
$
|
68.5
|
$
|
42.7
|
$
|
111.2
|
$
|
13.2
|
$
|
39.6
|
|
Operating
activities
|
$
|
97.9
|
$
|
67.1
|
$
|
165.0
|
$
|
44.5
|
$
|
95.2
|
|
Financing
activities
|
$
|
(5.1)
|
$
|
(4.9)
|
$
|
(10.0)
|
$
|
(12.2)
|
$
|
(19.9)
|
|
Investing
activities
|
$
|
(24.3)
|
$
|
(19.5)
|
$
|
(43.8)
|
$
|
(19.1)
|
$
|
(35.7)
|
Ratio of current
assets to current liabilities
|
|
|
|
|
|
2.4 :
1
|
|
|
|
2.5 : 1
|
Net debt (cash) to
capitalization9
|
|
|
|
|
|
(37.2)%
|
|
|
|
(9.0)%
|
ROIC – Consolidated
period-to-date
|
|
12.9%
|
|
12.9%
|
|
25.8%
|
|
4.5%
|
|
9.8%
|
9 Net debt
(cash) to capitalization is equal to net debt (cash) divided
by net capitalization. Net debt (cash) is equal to interest-bearing
debt less cash and cash equivalents on hand. Net capitalization is
equal to net debt (cash) plus total equity.
|
Changes in Financial Position
Cash generated from operating activities was $97.9 million in the second quarter of 2018, up
$30.8 million and $53.4 million from the first quarter of 2018 and
second quarter of 2017, respectively. The increase in operating
cash flows compared to the first quarter of 2018 largely reflected
lower tax installment payments and a release of finished inventory
in the current quarter which contributed to favourable movements in
non-cash working capital balances. Compared to the second quarter
of 2017, significantly higher cash earnings in the current quarter
more than offset a slight increase in non-cash working capital
balances.
Cash used for financing activities was $5.1 million in the second quarter of 2018,
broadly in line with the previous quarter, and down $7.1 million from the second quarter of 2017.
Cash used for financing activities in the second quarter of 2018
included the Company's quarterly dividend payment of $4.1 million ($0.0625 per share).
Cash used for investing activities of $24.3 million in the current quarter primarily
related to capital expenditures associated with the Company's
previously announced energy projects at its Northwood and
Taylor pulp mills as well as the
Company's new ERP software system project, combined with
maintenance-of-business capital associated with the aforementioned
maintenance outages during the quarter.
Liquidity and Financial Requirements
At June 30, 2018, the Company had
a $110.0 million unsecured operating
loan facility which was unused, except for $10.8 million reserved for several standby
letters of credit, leaving $99.2
million available and undrawn on the operating facility. On
April 6, 2018, the maturity date of
the Company's principal operating loan facility was extended from
January 31, 2020 to April 6, 2022.
The Company remained in compliance with the covenants relating
to its operating loans during the quarter, and expects to remain so
for the foreseeable future.
On March 5, 2018, the Company
renewed its normal course issuer bid whereby it can purchase for
cancellation up to 3,262,941 common shares or approximately 5% of
its issued and outstanding common shares as of March 1, 2018. The renewed normal course issuer
bid is set to expire on March 6,
2019. The Company did not purchase any common shares during
the second quarter of 2018, and purchased 500 common shares at an
average of $13.01 per common share in
the first quarter of 2018. As at June 30,
2018 and July 25, 2018, there
were 65,250,759 common shares of the Company outstanding and
Canfor's ownership interest in CPPI was 54.8%. The Company may
purchase shares through the balance of 2018 subject to the terms of
the normal course issuer bid.
Dividends
On July 25, 2018, the Board of
Directors declared a quarterly dividend of $0.0625 per share, payable on August 14, 2018 to the shareholders of record on
August 7, 2018.
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.
The Company, together with its joint venture partner, Licella, has
actively continued to advance work associated with the feasibility
study and risk reduction process for industrializing this biofuel
and biochemical technology. In April
2018, the Company received the first installment of funding
in the amount of $1.9 million.
OUTLOOK
Pulp Markets
Notwithstanding some seasonal weakness in China during the traditionally slower summer
months, global softwood kraft pulp markets are projected to be
balanced through the third quarter of 2018. For the months of July
and August 2018, the Company
announced NBSK pulp list price increases in North America of US$40 per tonne and US$30 per tonne, respectively. Results in the
third quarter of 2018 will include a scheduled maintenance outage
at Northwood, the Company's largest NBSK pulp mill, with a
projected 28,000 tonnes of reduced NBSK pulp production, combined
with higher associated maintenance costs and lower projected
shipment volume.
Paper Markets
Bleached kraft paper demand is anticipated to remain stable
through the third quarter of 2018.
OUTSTANDING SHARES
At July 25, 2018 there were
65,250,759 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, pension and other
employee future benefit plans and asset retirement 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.
ADOPTION OF NEW ACCOUNTING STANDARDS
Effective January 1, 2018, the
Company has adopted IFRS 15 Revenue from Contracts with
Customers. IFRS 15 supersedes IAS 18 Revenue,
IAS 11 Construction Contracts and related
interpretations. The standard establishes a framework based on
transfer of control for determining how much and when revenue is
recognized, and includes expanded disclosure requirements. The
adoption of IFRS 15 has had no significant impact on the Company's
interim financial statements.
Effective January 1, 2018, the
Company has adopted IFRS 9 Financial Instruments.
IFRS 9 supersedes IAS 39 Financial Instruments: Recognition
and Measurement. The standard includes requirements for
recognition, measurement, impairment and derecognition of financial
assets and liabilities, as well as general hedge accounting. The
adoption of IFRS 9 has had no significant impact on the Company's
interim financial statements.
ACCOUNTING STANDARDS ISSUED AND NOT APPLIED
In January 2016, the International
Accounting Standards Board issued IFRS 16 Leases, which will
supersede IAS 17 Leases and related interpretations. The
required adoption date for IFRS 16 is January 1, 2019. IFRS 16 introduces a single,
on-balance sheet lease accounting model for lessees. A lessee
recognizes a right-of-use asset representing its right to use the
underlying asset and a lease liability representing its obligation
to make lease payments. In addition, the nature of expenses related
to those leases will change as IFRS 16 replaces straight-line
operating lease expense with a depreciation expense for
right-of-use assets and interest expense on lease liabilities.
It is expected that IFRS 16 will have an impact on the Company's
financial statements with recognition of new assets and liabilities
for its operating leases. The Company is still in the process of
assessing the quantitative impact on its financial statements of
this new standard. The Company's future minimum lease payments, on
an undiscounted basis, under non-cancellable operating leases at
December 31, 2017 were $1.2 million.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
During the quarter ended June 30,
2018, there were no changes in the Company's internal
controls over financial reporting that materially affected, or
would be reasonably likely to materially affect, such controls.
RISKS AND UNCERTAINTIES
A comprehensive discussion of risks and uncertainties is
included in the Company's 2017 annual statutory reports which are
available on www.canfor.com or www.sedar.com.
Sales are primarily influenced by changes in market pulp prices,
sales volumes and fluctuations in Canadian dollar exchange rates.
Operating income, net income and operating income before
amortization are primarily impacted by: sales revenue; freight
costs; fluctuations of fibre, chemical and energy prices; level of
spending and timing of maintenance downtime; and production
curtailments. 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 and
revaluation of outstanding derivative financial instruments.
SELECTED QUARTERLY FINANCIAL INFORMATION
|
|
Q2
2018
|
|
Q1
2018
|
|
Q4
2017
|
|
Q3 2017
|
|
Q2
2017
|
|
Q1
2017
|
|
Q4
2016
|
|
Q3
2016
|
Sales and
income
(millions of Canadian
dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
396.4
|
$
|
359.7
|
$
|
322.9
|
$
|
284.9
|
$
|
280.9
|
$
|
309.2
|
$
|
257.8
|
$
|
291.6
|
Operating
income
|
$
|
85.4
|
$
|
85.1
|
$
|
66.8
|
$
|
21.1
|
$
|
31.5
|
$
|
35.2
|
$
|
22.9
|
$
|
31.0
|
Net income
|
$
|
63.0
|
$
|
64.3
|
$
|
45.2
|
$
|
12.6
|
$
|
20.2
|
$
|
24.1
|
$
|
10.1
|
$
|
22.4
|
Per common
share (Canadian dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income – basic
and diluted
|
$
|
0.97
|
$
|
0.99
|
$
|
0.69
|
$
|
0.19
|
$
|
0.31
|
$
|
0.36
|
$
|
0.15
|
$
|
0.34
|
Book
value10
|
$
|
10.62
|
$
|
9.72
|
$
|
8.76
|
$
|
7.78
|
$
|
7.63
|
$
|
7.55
|
$
|
7.27
|
$
|
7.14
|
Dividends
declared
|
$
|
0.0625
|
$
|
0.0625
|
$
|
0.0625
|
$
|
0.0625
|
$
|
0.0625
|
$
|
0.0625
|
$
|
0.0625
|
$
|
0.0625
|
Common Share
Repurchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share volume
repurchased (000 shares)
|
|
-
|
|
-
|
|
8
|
|
568
|
|
608
|
|
264
|
|
-
|
|
-
|
Shares repurchased
(millions of Canadian dollars)
|
$
|
-
|
$
|
-
|
$
|
0.1
|
$
|
7.2
|
$
|
7.5
|
$
|
3.0
|
$
|
-
|
$
|
-
|
Statistics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pulp shipments (000
mt)
|
|
328.6
|
|
310.0
|
|
299.7
|
|
303.3
|
|
276.3
|
|
337.1
|
|
275.4
|
|
319.8
|
Paper shipments (000
mt)
|
|
32.6
|
|
32.0
|
|
35.8
|
|
34.0
|
|
35.5
|
|
33.7
|
|
33.6
|
|
35.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average exchange rate
– US$/Cdn$
|
$
|
0.774
|
$
|
0.791
|
$
|
0.786
|
$
|
0.798
|
$
|
0.744
|
$
|
0.756
|
$
|
0.750
|
$
|
0.766
|
Average NBSK pulp
list price delivered to China (US$)
|
$
|
910
|
$
|
910
|
$
|
863
|
$
|
670
|
$
|
670
|
$
|
645
|
$
|
595
|
$
|
595
|
10 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.
|
Other material factors that impact the comparability of the
quarters are noted below:
After-tax
impact
|
|
|
(millions of Canadian
dollars, except for per share amounts)
|
|
Q2
2018
|
|
Q1
2018
|
|
Q4
2017
|
|
Q3
2017
|
|
Q2
2017
|
|
Q1
2017
|
|
Q4
2016
|
|
Q3
2016
|
Net income, as
reported
|
$
|
63.0
|
$
|
64.3
|
$
|
45.2
|
$
|
12.6
|
$
|
20.2
|
$
|
24.1
|
$
|
10.1
|
$
|
22.4
|
Change in
substantively enacted tax legislation
|
$
|
-
|
$
|
-
|
$
|
2.8
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
Net impact of above
items
|
$
|
-
|
$
|
-
|
$
|
2.8
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
Adjusted net
income
|
$
|
63.0
|
$
|
64.3
|
$
|
48.0
|
$
|
12.6
|
$
|
20.2
|
$
|
24.1
|
$
|
10.1
|
$
|
22.4
|
Net income per
share (EPS), as reported
|
$
|
0.97
|
$
|
0.99
|
$
|
0.69
|
$
|
0.19
|
$
|
0.31
|
$
|
0.36
|
$
|
0.15
|
$
|
0.34
|
Net impact of above
items per share
|
$
|
-
|
$
|
-
|
$
|
0.04
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
Adjusted net
income per share
|
$
|
0.97
|
$
|
0.99
|
$
|
0.73
|
$
|
0.19
|
$
|
0.31
|
$
|
0.36
|
$
|
0.15
|
$
|
0.34
|
Canfor Pulp Products Inc.
Condensed Consolidated Balance Sheets
(millions of Canadian
dollars, unaudited)
|
|
As
at June
30, 2018
|
|
As at
December 31,
2017
|
ASSETS
|
|
|
|
|
Current
assets
|
|
|
|
|
Cash and cash
equivalents
|
$
|
187.9
|
$
|
76.7
|
Accounts
receivable
|
-
Trade
|
|
153.3
|
|
101.5
|
|
- Other
|
|
11.1
|
|
14.3
|
Inventories (Note
2)
|
|
159.9
|
|
165.5
|
Prepaid expenses and
other
|
|
7.2
|
|
7.0
|
Total current
assets
|
|
519.4
|
|
365.0
|
Property, plant
and equipment and intangible assets
|
|
540.4
|
|
526.7
|
Other long-term
assets
|
|
0.6
|
|
0.5
|
Total
assets
|
$
|
1,060.4
|
$
|
892.2
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
Current
liabilities
|
|
|
|
|
Accounts payable and
accrued liabilities
|
$
|
212.5
|
$
|
161.5
|
Total current
liabilities
|
|
212.5
|
|
161.5
|
Retirement benefit
obligations (Note 4)
|
|
82.0
|
|
85.2
|
Other long-term
provisions
|
|
6.3
|
|
6.5
|
Deferred income
taxes, net
|
|
66.6
|
|
67.6
|
Total
liabilities
|
$
|
367.4
|
$
|
320.8
|
|
|
|
|
|
EQUITY
|
|
|
|
|
Share
capital
|
$
|
480.9
|
$
|
480.9
|
Retained
earnings
|
|
212.1
|
|
90.5
|
Total
equity
|
$
|
693.0
|
$
|
571.4
|
Total liabilities
and equity
|
$
|
1,060.4
|
$
|
892.2
|
Subsequent Events (Note 6 and Note 12)
The accompanying notes are an integral part of these condensed
consolidated interim financial statements.
APPROVED BY THE BOARD
"S.E.
Bracken-Horrocks"
|
"C.A.
Pinette"
|
Director, S.E.
Bracken-Horrocks
|
Director,
C.A.Pinette
|
Canfor Pulp Products Inc.
Condensed Consolidated
Statements of Income
|
3 months ended June
30,
|
6 months ended June
30,
|
(millions of Canadian
dollars, except per share data, unaudited)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
396.4
|
$
|
280.9
|
$
|
756.1
|
$
|
590.1
|
|
|
|
|
|
|
|
|
|
Costs and
expenses
|
|
|
|
|
|
|
|
|
|
Manufacturing and
product costs
|
|
243.9
|
|
187.5
|
|
452.7
|
|
393.6
|
|
Freight and other
distribution costs
|
|
40.0
|
|
36.8
|
|
78.1
|
|
78.8
|
|
Amortization
|
|
19.7
|
|
18.5
|
|
38.9
|
|
37.3
|
|
Selling and
administration costs
|
|
7.4
|
|
6.6
|
|
15.9
|
|
13.7
|
|
|
311.0
|
|
249.4
|
|
585.6
|
|
523.4
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
85.4
|
|
31.5
|
|
170.5
|
|
66.7
|
|
|
|
|
|
|
|
|
|
Finance expense,
net
|
|
(1.3)
|
|
(1.7)
|
|
(2.5)
|
|
(3.5)
|
Other income
(expense), net
|
|
2.2
|
|
(2.5)
|
|
6.0
|
|
(3.5)
|
Net income before
income taxes
|
|
86.3
|
|
27.3
|
|
174.0
|
|
59.7
|
Income tax expense
(Note 6)
|
|
(23.3)
|
|
(7.1)
|
|
(46.7)
|
|
(15.4)
|
Net
income
|
$
|
63.0
|
$
|
20.2
|
$
|
127.3
|
$
|
44.3
|
|
|
|
|
|
|
|
|
|
Net income per
common share: (in Canadian dollars)
|
|
|
|
|
|
|
|
|
Attributable to
equity shareholders of the Company
|
|
|
|
|
|
|
|
|
|
- Basic and
diluted (Note 7)
|
$
|
0.97
|
$
|
0.31
|
$
|
1.95
|
$
|
0.67
|
The accompanying notes are an integral part of these condensed
consolidated interim financial statements.
Canfor Pulp Products Inc.
Condensed Consolidated
Statements of Other Comprehensive Income (Loss)
|
3 months ended June
30,
|
6 months ended June
30,
|
(millions of Canadian
dollars, unaudited)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
Net
income
|
$
|
63.0
|
$
|
20.2
|
$
|
127.3
|
$
|
44.3
|
Other
comprehensive income (loss)
|
|
|
|
|
|
|
|
|
Items that will not
be recycled through net income:
|
|
|
|
|
|
|
|
|
|
Defined benefit plan
actuarial gains (losses) (Note 4)
|
|
0.1
|
|
(10.8)
|
|
3.4
|
|
(10.8)
|
|
Income tax recovery
(expense) on defined benefit plan actuarial losses/gains (Note
6)
|
|
-
|
|
2.8
|
|
(0.9)
|
|
2.8
|
Other comprehensive
income (loss), net of tax
|
|
0.1
|
|
(8.0)
|
|
2.5
|
|
(8.0)
|
Total
comprehensive income
|
$
|
63.1
|
$
|
12.2
|
$
|
129.8
|
$
|
36.3
|
Condensed Consolidated Statements of Changes in
Equity
|
3 months ended June
30,
|
6 months ended June
30,
|
(millions of Canadian
dollars, unaudited)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
Share
capital
|
|
|
|
|
|
|
|
|
Balance at beginning
of period
|
$
|
480.9
|
$
|
489.7
|
$
|
480.9
|
$
|
491.6
|
Share purchases (Note
7)
|
|
-
|
|
(4.5)
|
|
-
|
|
(6.4)
|
Balance at end of
period
|
$
|
480.9
|
$
|
485.2
|
$
|
480.9
|
$
|
485.2
|
|
|
|
|
|
|
|
|
|
Retained earnings
(deficit)
|
|
|
|
|
|
|
|
|
Balance at beginning
of period
|
$
|
153.1
|
$
|
11.9
|
$
|
90.5
|
$
|
(6.9)
|
Net income
|
63.0
|
|
20.2
|
|
127.3
|
|
44.3
|
Defined benefit plan
actuarial gains (losses), net of tax
|
|
0.1
|
|
(8.0)
|
|
2.5
|
|
(8.0)
|
Dividends
declared
|
|
(4.1)
|
|
(4.1)
|
|
(8.2)
|
|
(8.3)
|
Share purchases (Note
7)
|
|
-
|
|
(3.0)
|
|
-
|
|
(4.1)
|
Balance at end of
period
|
$
|
212.1
|
$
|
17.0
|
$
|
212.1
|
$
|
17.0
|
Total
equity
|
$
|
693.0
|
$
|
502.2
|
$
|
693.0
|
$
|
502.2
|
The accompanying notes are an integral part of these condensed
consolidated interim financial statements.
Canfor Pulp Products Inc.
Condensed Consolidated
Statements of Cash Flows
|
3 months ended June
30,
|
6 months
ended June 30,
|
(millions of
Canadian dollars, unaudited)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
Cash generated
from (used in):
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
63.0
|
$
|
20.2
|
$
|
127.3
|
$
|
44.3
|
|
Items not affecting
cash:
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
19.7
|
|
18.5
|
|
38.9
|
|
37.3
|
|
|
Income tax
expense
|
|
23.3
|
|
7.1
|
|
46.7
|
|
15.4
|
|
|
Employee future
benefits expense
|
|
1.1
|
|
1.3
|
|
2.2
|
|
2.6
|
|
|
Finance expense,
net
|
|
1.3
|
|
1.7
|
|
2.5
|
|
3.5
|
|
|
Other, net
|
|
(1.3)
|
|
0.3
|
|
(0.4)
|
|
(1.4)
|
|
Defined benefit plan
contributions, net
|
|
(1.7)
|
|
(1.7)
|
|
(3.4)
|
|
(3.2)
|
|
Income taxes received
(paid), net
|
|
0.2
|
|
(0.9)
|
|
(18.9)
|
|
(1.1)
|
|
|
105.6
|
|
46.5
|
|
194.9
|
|
97.4
|
|
Net change in
non-cash working capital (Note 8)
|
|
(7.7)
|
|
(2.0)
|
|
(29.9)
|
|
(2.2)
|
|
|
97.9
|
|
44.5
|
|
165.0
|
|
95.2
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
Finance expenses
paid
|
|
(1.0)
|
|
(0.7)
|
|
(1.7)
|
|
(1.4)
|
|
Dividends
paid
|
|
(4.1)
|
|
(4.1)
|
|
(8.2)
|
|
(8.3)
|
|
Share purchases (Note
7)
|
|
-
|
|
(7.4)
|
|
(0.1)
|
|
(10.2)
|
|
|
(5.1)
|
|
(12.2)
|
|
(10.0)
|
|
(19.9)
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
Additions to
property, plant and equipment and intangible assets, net
|
|
(24.8)
|
|
(19.2)
|
|
(44.6)
|
|
(36.0)
|
|
Other, net
|
|
0.5
|
|
0.1
|
|
0.8
|
|
0.3
|
|
|
(24.3)
|
|
(19.1)
|
|
(43.8)
|
|
(35.7)
|
Increase in cash
and cash equivalents*
|
|
68.5
|
|
13.2
|
|
111.2
|
|
39.6
|
Cash and cash
equivalents at beginning of period*
|
|
119.4
|
|
78.3
|
|
76.7
|
|
51.9
|
Cash and cash
equivalents at end of period*
|
$
|
187.9
|
$
|
91.5
|
$
|
187.9
|
$
|
91.5
|
|
|
*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 Pulp Products Inc.
Notes to the Condensed
Consolidated Financial Statements
Three and six months ended
June 30, 2018 and 2017
(millions of Canadian dollars unless otherwise noted,
unaudited)
1. Basis of Preparation
These condensed consolidated interim financial statements (the
"financial statements") have been prepared in accordance with
International Accounting Standard ("IAS") 34 Interim Financial
Reporting, and include the accounts of Canfor Pulp Products
Inc. ("CPPI") and its subsidiary entities, hereinafter referred to
as "CPPI" or "the Company." At June
30, 2018 and July 25, 2018,
Canfor Corporation ("Canfor") held a 54.8% interest in CPPI.
These financial statements do not include all of the disclosures
required by International Financial Reporting Standards ("IFRS")
for annual financial statements. Additional disclosures relevant to
the understanding of these financial statements, including the
accounting policies applied, can be found in the Company's Annual
Report for the year ended December 31,
2017, available at www.canfor.com or www.sedar.com.
Effective January 1, 2018, the
Company has adopted IFRS 15 Revenue from Contracts with
Customers. IFRS 15 supersedes IAS 18 Revenue, IAS 11
Construction Contracts and related interpretations. The
standard establishes a framework based on transfer of control for
determining how much and when revenue is recognized, and includes
expanded disclosure requirements. The adoption of IFRS 15 has had
no significant impact on the Company's interim financial
statements.
Effective January 1, 2018, the
Company has adopted IFRS 9 Financial Instruments. IFRS 9
supersedes IAS 39 Financial Instruments: Recognition and
Measurement. The standard includes requirements for
recognition, measurement, impairment and derecognition of financial
assets and liabilities, as well as general hedge accounting. The
adoption of IFRS 9 has had no significant impact on the Company's
interim financial statements.
Certain comparative amounts for the prior period have been
reclassified to conform to the current period's presentation.
These financial statements were authorized for issue by the
Company's Board of Directors on July 25,
2018.
Accounting Standards Issued and Not Applied
In January 2016, the International
Accounting Standards Board issued IFRS 16 Leases,
which will supersede IAS 17 Leases and related
interpretations. The required adoption date for IFRS 16 is
January 1, 2019. IFRS 16 introduces a
single, on-balance sheet lease accounting model for lessees. A
lessee recognizes a right-of-use asset representing its right to
use the underlying asset and a lease liability representing its
obligation to make lease payments. In addition, the nature of
expenses related to those leases will change as IFRS 16 replaces
straight-line operating lease expense with a depreciation expense
for right-of-use assets and interest expense on lease
liabilities.
It is expected that IFRS 16 will have an impact on the Company's
financial statements with recognition of new assets and liabilities
for its operating leases. The Company is still in the process of
assessing the quantitative impact on its financial statements of
this new standard. The Company's future minimum lease payments, on
an undiscounted basis, under non-cancellable operating leases at
December 31, 2017 were $1.2 million.
2. Inventories
(millions of Canadian
dollars, unaudited)
|
|
As
at
June 30,
2018
|
|
As at
December 31,
2017
|
Pulp
|
$
|
64.1
|
$
|
78.5
|
Paper
|
|
17.5
|
|
14.9
|
Wood chips and
logs
|
|
24.1
|
|
19.9
|
Materials and
supplies
|
|
54.2
|
|
52.2
|
|
$
|
159.9
|
$
|
165.5
|
Inventory balances are stated after inventory write-downs from
cost to net realizable value. There were no inventory write-downs
at June 30, 2018 or December 31, 2017.
3. Operating Loans
(millions of Canadian
dollars, unaudited)
|
|
As
at
June
30,
2018
|
|
As at
December 31,
2017
|
Operating loan
facility
|
$
|
110.0
|
$
|
110.0
|
Letters of
credit
|
|
(10.8)
|
|
(9.2)
|
Total available
operating loan facility
|
$
|
99.2
|
$
|
100.8
|
On April 6, 2018, the maturity
date of the Company's principal operating loan facility was
extended from January 31, 2020 to
April 6, 2022. The terms of the
Company'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 the lenders' Canadian prime rate,
bankers acceptances, US dollar base rate or US dollar LIBOR rate,
plus a margin. The facility has certain financial covenants
including a covenant based on maximum debt to total capitalization
of the Company. No amounts were drawn on the operating loan
facility as at June 30, 2018
(December 31, 2017 - nil).
As at June 30, 2018 the Company
was in compliance with all covenants relating to its operating
loans.
4. Employee Future Benefits
For the three months ended June 30,
2018, defined benefit plan actuarial gains of $0.1 million (before tax) were recognized in
other comprehensive income (loss), principally reflecting the
return generated on plan assets. For the six months ended
June 30, 2018, defined benefit plan
actuarial gains of $3.4 million
(before tax) were recognized in other comprehensive income (loss).
For the three and six months ended June 30,
2017, the Company recognized before tax actuarial losses in
other comprehensive income (loss) of $10.8
million.
The discount rate assumptions used to estimate the changes in
net retirement benefit obligations were as follows:
|
|
|
|
|
Defined
Benefit
Pension Plans
|
|
Other
Benefit
Plans
|
June 30,
2018
|
3.6%
|
|
3.6%
|
March 31,
2018
|
3.6%
|
|
3.6%
|
December 31,
2017
|
3.4%
|
|
3.4%
|
June 30,
2017
|
3.5%
|
|
3.5%
|
March 31,
2017
|
3.9%
|
|
3.9%
|
December 31,
2016
|
3.9%
|
|
3.9%
|
5. Financial
Instruments
The Company's financial assets are measured at amortized cost.
Financial liabilities are measured at amortized cost with the
exception of certain derivative instruments, which are measured at
fair value through profit and loss.
IFRS 13 Fair Value Measurement, requires classification
of financial instruments 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.
At times, the Company uses a variety of derivative financial
instruments to reduce its exposure to risks associated with
fluctuations in foreign exchange rates, pulp prices, energy costs,
and floating interest rates on long-term debt. As at June 30, 2018 and December
31, 2017, the Company had no derivative financial
instruments outstanding.
6. Income Taxes
|
3 months ended June
30,
|
6 months ended June
30,
|
(millions of Canadian
dollars, unaudited)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Current
|
$
|
(23.1)
|
$
|
(5.3)
|
$
|
(48.7)
|
$
|
(16.3)
|
Deferred
|
|
(0.2)
|
|
(1.8)
|
|
2.0
|
|
0.9
|
Income tax
expense
|
$
|
(23.3)
|
$
|
(7.1)
|
$
|
(46.7)
|
$
|
(15.4)
|
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)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Income tax expense at
statutory rate – 27% (2017 – 26.0%)
|
$
|
(23.3)
|
$
|
(7.1)
|
$
|
(47.0)
|
$
|
(15.5)
|
Add:
|
|
|
|
|
|
|
|
|
Entities with
different income tax rates and other tax adjustments
|
|
-
|
|
-
|
|
0.3
|
|
0.1
|
Income tax
expense
|
$
|
(23.3)
|
$
|
(7.1)
|
$
|
(46.7)
|
$
|
(15.4)
|
In addition to the amounts recorded to net income, a tax expense
of $0.9 million was recorded in other
comprehensive income (loss) for the six months ended June 30, 2018 in relation to the actuarial gains
on defined benefit plans (three and six months ended June 30, 2017 – recovery of $2.8 million). For the three months ended
June 30, 2018, no tax expense on
actuarial gains on defined benefit plans was recorded in other
comprehensive income (loss).
Subsequent to quarter-end, the Company made 2018 income tax
instalment payments of $31.0
million.
7. Earnings per Share and Normal
Course Issuer Bid
Basic net income per share is calculated by dividing the net
income available 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,
|
|
2018
|
2017
|
2018
|
2017
|
Weighted average
number of common shares
|
65,250,759
|
66,181,210
|
65,250,767
|
66,404,529
|
On March 5, 2018, the Company
renewed its normal course issuer bid whereby it can purchase for
cancellation up to 3,262,941 common shares or approximately 5% of
its issued and outstanding common shares as of March 1, 2018. The renewed normal course issuer
bid is set to expire on March 6,
2019. During the three months ended June 30, 2018, the Company did not purchase any
common shares. During the six months ended June 30, 2018, the Company purchased 500 common
shares at an average of $13.01 per
common share. As at June 30, 2018 and
July 25, 2018, there
were 65,250,759 common shares of the Company outstanding and
Canfor's ownership interest in CPPI was 54.8%.
8. Net Change in Non-Cash Working
Capital
|
3 months ended June
30,
|
6 months ended June
30,
|
(millions of Canadian
dollars, unaudited)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Accounts
receivable
|
$
|
(29.2)
|
$
|
11.4
|
$
|
(50.4)
|
$
|
(16.9)
|
Inventories
|
|
10.2
|
|
(10.9)
|
|
5.6
|
|
2.1
|
Prepaid expenses and
other
|
|
2.5
|
|
(0.7)
|
|
(0.2)
|
|
2.8
|
Accounts payable and
accrued liabilities
|
|
8.8
|
|
(1.8)
|
|
15.1
|
|
9.8
|
Net increase in
non-cash working capital
|
$
|
(7.7)
|
$
|
(2.0)
|
$
|
(29.9)
|
$
|
(2.2)
|
9. Segment Information
The Company has two reportable segments, pulp and paper, which
operate as separate business units and represent separate product
lines.
Sales between the pulp and paper segments are accounted for at
prices that approximate fair value. These include sales of slush
pulp from the pulp segment to the paper segment.
Information regarding the operations of each reportable segment
is included in the following table:
(millions of Canadian
dollars, unaudited)
|
|
Pulp
|
|
Paper
|
|
Unallocated
|
|
Elimination
Adjustment
|
|
Consolidated
|
3 months ended
June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
Sales to external
customers
|
$
|
351.5
|
$
|
44.7
|
$
|
0.2
|
$
|
-
|
$
|
396.4
|
Sales to other
segments
|
|
27.5
|
|
-
|
|
-
|
|
(27.5)
|
|
-
|
Operating income
(loss)
|
|
86.6
|
|
1.5
|
|
(2.7)
|
|
-
|
|
85.4
|
Amortization
|
|
18.6
|
|
1.1
|
|
-
|
|
-
|
|
19.7
|
Capital
expenditures1
|
|
23.2
|
|
1.6
|
|
-
|
|
-
|
|
24.8
|
3 months ended June
30, 2017
|
|
|
|
|
|
|
|
|
|
|
Sales to external
customers
|
$
|
236.2
|
$
|
44.6
|
$
|
0.1
|
$
|
-
|
$
|
280.9
|
Sales to other
segments
|
|
22.9
|
|
-
|
|
-
|
|
(22.9)
|
|
-
|
Operating income
(loss)
|
|
28.0
|
|
6.6
|
|
(3.1)
|
|
-
|
|
31.5
|
Amortization
|
|
17.5
|
|
1.0
|
|
-
|
|
-
|
|
18.5
|
Capital
expenditures1
|
|
19.1
|
|
0.1
|
|
-
|
|
-
|
|
19.2
|
6 months ended
June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
Sales to external
customers
|
$
|
669.0
|
$
|
86.7
|
$
|
0.4
|
$
|
-
|
$
|
756.1
|
Sales to other
segments
|
|
56.4
|
|
-
|
|
-
|
|
(56.4)
|
|
-
|
Operating income
(loss)
|
|
173.0
|
|
4.4
|
|
(6.9)
|
|
-
|
|
170.5
|
Amortization
|
|
36.7
|
|
2.2
|
|
-
|
|
-
|
|
38.9
|
Capital
expenditures1
|
|
41.7
|
|
2.9
|
|
-
|
|
-
|
|
44.6
|
Identifiable
assets
|
|
803.4
|
|
58.2
|
|
198.8
|
|
-
|
|
1,060.4
|
6 months ended June
30, 2017
|
|
|
|
|
|
|
|
|
|
|
Sales to external
customers
|
$
|
503.6
|
$
|
86.2
|
$
|
0.3
|
$
|
-
|
$
|
590.1
|
Sales to other
segments
|
|
44.2
|
|
-
|
|
-
|
|
(44.2)
|
|
-
|
Operating income
(loss)
|
|
59.1
|
|
13.7
|
|
(6.1)
|
|
-
|
|
66.7
|
Amortization
|
|
35.4
|
|
1.9
|
|
-
|
|
-
|
|
37.3
|
Capital
expenditures1
|
|
35.7
|
|
0.3
|
|
-
|
|
-
|
|
36.0
|
Identifiable
assets
|
|
732.0
|
|
51.6
|
|
101.0
|
|
-
|
|
884.6
|
1Capital
expenditures represent cash paid for capital assets during the
periods and include capital expenditures that were partially
financed by government grants.
|
10. Related Party Transactions
For the six months ended June 30,
2018, the Company depended on Canfor to provide
approximately 63% (six months ended June 30,
2017 - 62%) of its fibre supply as well as certain key
business and administrative services. As a result of these
relationships the Company considers its operations to be dependent
on its ongoing relationship with Canfor. The transactions with
Canfor are consistent with the transactions described in the
December 31, 2017 audited
consolidated financial statements of CPPI and are based on agreed
upon amounts between the parties.
Transactions and payables to Canfor include purchases of wood
chips, logs, hog fuel and administrative services. These are
summarized below:
|
3 months ended June
30,
|
6 months ended June
30,
|
(millions of Canadian
dollars, unaudited)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Transactions
|
|
|
|
|
|
|
|
|
Purchase of wood
chips and other
|
$
|
64.0
|
$
|
45.9
|
$
|
117.1
|
$
|
87.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions of Canadian
dollars, unaudited)
|
|
|
|
|
As
at June 30,
2018
|
As at
December
31,
2017
|
Balance
Sheet
|
|
|
|
|
|
|
|
|
Included in accounts
payable and accrued liabilities
|
|
|
|
|
$
|
18.1
|
$
|
13.1
|
11. Licella Pulp Joint
Venture
On May 27, 2016, CPPI and Licella
Fibre Fuel Pty Ltd. ("Licella") agreed to form a joint venture
under the name Licella Pulp Joint Venture to investigate
opportunities to integrate Licella's Catalytic Hydrothermal Reactor
platform into CPPI's pulp mills to economically convert biomass
into next generation biofuels and biochemicals. Licella is a
subsidiary of Ignite Energy Resources Ltd. ("IER") an Australian
energy technology development company.
Under IFRS 11 Joint Arrangements, the joint venture
is classified as a joint operation and CPPI recognizes its assets,
liabilities and transactions, including its share of those incurred
jointly, in its consolidated financial statements. For the three
months ended June 30, 2018, the
Company's share of the joint venture's expenses was $0.5 million (three months ended June 30, 2017 - $0.2
million), which have been recognized in manufacturing and
product costs. For the six months ended June
30, 2018, the Company's share of the joint venture's
expenses was $1.0 million (six months
ended June 30, 2017 - $0.5 million). The Company is required to
contribute the first $20.0 million of
any funding requirements, including cash and non-cash
contributions, to the joint venture, of which $2.8 million has been contributed as at
June 30, 2018.
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. Advance funding of $1.9 million was received in April 2018 for the period October 1, 2017 through September 30, 2018. Of this amount, $0.3 million has been recognized as an offset to
costs within Manufacturing and product costs for the three and six
months ended June 30, 2018.
12. Subsequent Event
On July 25, 2018, the Board of
Directors declared a quarterly dividend of $0.0625 per share, payable on August 14, 2018 to the shareholders of record on
August 7, 2018.
SOURCE Canfor Pulp Products Inc.