Canfor Corporation (TSX:CFP) today reported net income attributable to
shareholders ("shareholder net income") of $4.5 million, or $0.03 per share, for
the second quarter of 2012, compared to a shareholder net loss of $16.2 million,
or $0.11 per share, for the first quarter of 2012 and shareholder net income of
$2.1 million, or $0.01 per share, for the second quarter of 2011. For the six
months ended June 30, 2012, the shareholder net loss was $11.7 million, or $0.08
per share, compared to net income of $9.1 million, or $0.06 per share, for the
first half of 2011.
The shareholder net income for the second quarter of 2012 included various items
affecting comparability with prior periods, which had an overall net negative
impact of $6.6 million, or $0.05 per share. After adjusting for such items, the
Company's adjusted shareholder net income for the second quarter of 2012 was
$11.1 million, or $0.08 per share, up $33.4 million, or $0.24 per share, from an
adjusted shareholder net loss of $22.3 million, or $0.16 per share, for the
first quarter of 2012. Adjusted shareholder net income for the second quarter of
2011 was $2.6 million, or $0.02 per share.
The Company reported operating income of $26.0 million for the second quarter of
2012, compared to an operating loss of $21.5 million for the first quarter. The
positive variance primarily reflected improved results in the lumber segment,
where stronger markets supported higher prices.
The following table summarizes selected financial information for the Company
for the comparative periods:
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(millions of dollars, except Q2 Q1 YTD Q2 YTD
for per share amounts) 2012 2012 2012 2011 2011
----------------------------------------------------------------------------
Sales $ 700.9 $ 607.6 $1,308.5 $ 619.1 $1,243.1
Operating income (loss) $ 26.0 $ (21.5) $ 4.5 $ 27.4 $ 59.7
Net income (loss)
attributable to equity
shareholders of Company $ 4.5 $ (16.2) $ (11.7) $ 2.1 $ 9.1
Net income (loss) per share
attributable to equity
shareholders of Company,
basic and diluted $ 0.03 $ (0.11) $ (0.08) $ 0.01 $ 0.06
Adjusted shareholder net
income (loss) $ 11.1 $ (22.3) $ (11.2) $ 2.6 $ 2.7
Adjusted shareholder net
income (loss) per share $ 0.08 $ (0.16) $ (0.08) $ 0.02 $ 0.02
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Lumber markets showed signs of improvement in the second quarter of 2012,
reflecting stronger underlying demand in both North American and offshore
markets. U.S. housing activity continued the upward trend seen in the prior
quarter, with housing starts for the quarter averaging 739,000 units SAAR
(seasonally adjusted annual rate), up over 3% from the previous quarter.
Canadian housing starts were also up, increasing 12% from the previous quarter,
to almost 230,000 units SAAR. In China, markets improved as inventories returned
to more normal levels following the inventory build early in the previous
quarter. Japan demand remained solid through the quarter. Pulp markets were
relatively balanced heading into the quarter but saw signs of weakness as the
quarter progressed.
As a result of the improved markets, lumber prices rallied during the second
quarter. The average North American benchmark Western SPF 2x4 #2&Btr price rose
11% to US$295 per Mfbm, with similar increases seen for most other grades, while
the spread between Western SPF structural and utility grade pricing also
narrowed. Strong prices through May triggered a reduction in the export tax to
10% for the first time this year in June. Southern Yellow Pine ("SYP") prices
also saw similar increases over the quarter. As a result, Canfor's lumber sales
realizations saw solid gains, with a higher value sales mix also having a
positive impact. For Northern Bleached Softwood Kraft ("NBSK") pulp, US dollar
sales realizations were up slightly with the average North America list price up
US$30 to US$900 per tonne. Canadian dollar sales realizations across all solid
wood and pulp products were positively impacted by a 1% weakening of the average
Canadian dollar.
Lumber shipments increased significantly from the previous quarter, up 16% to
almost 1.2 billion board feet, reflecting the additional contribution of two
recently acquired mills in the Kootenay region, as well as continued
post-capital project productivity improvements and further operating
efficiencies at other mills in the current quarter. Lumber unit manufacturing
costs were in line with the previous quarter, with reductions in unit cash
conversion costs offset by a small increase in unit log costs. Also,
contributing to improved results in the lumber segment was a moderate increase
in sawmill residual chip prices.
Pulp shipment and production levels were significantly impacted by scheduled
maintenance outages and an unscheduled shutdown at Canfor Pulp, contributing to
higher unit manufacturing costs. A maintenance outage was completed at the
Intercontinental Pulp Mill, and an extended maintenance outage was commenced at
the Prince George Pulp Mill, resulting in approximately 18,000 tonnes of reduced
production overall. In addition, an unscheduled shutdown of a recovery boiler at
the Northwood Pulp Mill and subsequent repairs resulted in the mill operating at
approximately fifty percent of capacity through the period, reducing overall
production by approximately 31,000 tonnes.
The Company ended the quarter with an improved liquidity position, reflecting
both stronger lumber earnings and favourable working capital movements,
resulting principally from a drawdown of log inventory after spring breakup.
Commenting on the second quarter performance, Canfor's President and CEO, Don
Kayne, said, "The improvement in lumber prices and earnings reflected a modest
increase in construction activity in North America and continued solid offshore
demand for Western SPF lumber products." With respect to its recently acquired
operations, Kayne added, "The integration of these operations has gone very
smoothly, and the start-up of our upgraded Radium mill in the same south-east
Kootenay region of B.C. remains on schedule for the fall of this year."
On July 18, 2012, the Softwood Lumber Agreement arbitration panel ruled in
favour of Canada in connection with a claim by the U.S. that the province of
B.C. had misapplied or altered certain components of the timber pricing system.
The arbitration panel dismissed the claims of the U.S. in their entirety.
Looking ahead, the North American lumber market is projected to show a modest
and gradual improvement as housing demand edges higher and U.S. inventories
remain at low levels, notwithstanding the fragility of the U.S. economy. With
respect to shipments to the U.S., export taxes are 5% in July and will be 10% in
August. Offshore lumber shipments are anticipated to remain steady for the rest
of the year. The global softwood pulp market is projected to weaken further
through the remaining summer months, with producer inventories forecast to rise
modestly as there is minimal scheduled maintenance downtime during the summer
months.
Additional Information and Conference Call
A conference call to discuss the second quarter's financial and operating
results will be held on Friday, July 27, 2012 at 8:00 AM Pacific time. To
participate in the call, please dial 416-340-8527 or Toll-Free 877-440-9795. For
instant replay access until July 27, 2013, please dial 905-694-9451 or
800-408-3053 and enter participant pass code 7168261#. 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, Quebec, Washington state,
and North and South Carolina. The Company produces primarily softwood lumber and
also produces oriented strand board (OSB), remanufactured lumber products,
specialized wood products and bleached chemi-thermo mechanical pulp (BCTMP).
Canfor also owns a 50.2% interest in Canfor Pulp Products Inc., which is one of
the largest producers of northern softwood kraft pulp in Canada 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 2012
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, 2012 relative to the quarters ended March 31, 2012 and
June 30, 2011, and the financial position of the Company at June 30, 2012. It
should be read in conjunction with Canfor's unaudited interim consolidated
financial statements and accompanying notes for the quarters ended June 30, 2012
and 2011, as well as the 2011 annual MD&A and the 2011 audited consolidated
financial statements and notes thereto, which are included in Canfor's Annual
Report for the year ended December 31, 2011 (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 Adjusted Shareholder Net Income
(Loss) (calculated as Shareholder Net income (loss) less specific items
affecting comparability with prior periods - for the full calculation, see
reconciliation included in the section "Analysis of Specific Material Items
Affecting Comparability of Shareholder Net Income (Loss)") and Adjusted
Shareholder Net Income (Loss) per Share (calculated as Adjusted Shareholder Net
Income (Loss) divided by the weighted average number of shares outstanding
during the period). Adjusted Shareholder Net Income (Loss) and Adjusted
Shareholder Net Income (Loss) 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 Adjusted Shareholder Net Income (Loss)
and Adjusted Shareholder Net Income (Loss) per Share may not be directly
comparable with similarly titled measures used by other companies.
Reconciliations of Adjusted Shareholder Net Income (Loss) to net income (loss)
reported in accordance with IFRS are included in this MD&A.
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 26, 2012.
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 2012 OVERVIEW
Selected Financial Information and Statistics(1)
----------------------------------------------------------------------------
(millions of dollars,
except for per share Q2 Q1 YTD Q2 YTD
amounts) 2012 2012 2012 2011 2011
----------------------------------------------------------------------------
Operating income (loss)
by segment:
Lumber $ 18.9 $ (20.1) $ (1.2) $ (11.3) $ (13.8)
Pulp and Paper $ 11.7 $ 11.3 $ 23.0 $ 48.8 $ 96.7
Unallocated and Other $ (4.6) $ (12.7) $ (17.3) $ (10.1) $ (23.2)
----------------------------------------------------------------------------
Total operating income
(loss) $ 26.0 $ (21.5) $ 4.5 $ 27.4 $ 59.7
Add (deduct):
Amortization $ 46.0 $ 45.1 $ 91.1 $ 40.3 $ 81.8
Working capital
movements $ 68.4 $ (79.2) $ (10.8) $ 24.0 $ (55.2)
Salary pension plan
contributions $ (9.0) $ (9.0) $ (18.0) $ (9.9) $ (19.6)
Other operating cash
flows, net(2) $ (12.3) $ 9.4 $ (2.9) $ (12.0) $ (2.9)
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Cash from operating
activities $ 119.1 $ (55.2) $ 63.9 $ 69.8 $ 63.8
Add (deduct):
Drawdown (repayment)
of long-term debt $ - $ 50.1 $ 50.1 $ (48.1) $ (81.9)
Finance expenses paid $ (7.4) $ (3.1) $ (10.5) $ (6.1) $ (9.6)
Distributions paid to
non-controlling
interests $ (8.2) $ (4.3) $ (12.5) $ (25.9) $ (63.9)
Capital additions,
net(3) $ (44.0) $ (110.6) $ (154.6) $ (34.0) $ (73.3)
Proceeds from sale of
asset-backed
commercial paper
("ABCP") $ 12.9 $ - $ 12.9 $ 0.1 $ 29.8
Other, net $ 1.9 $ 8.9 $ 10.8 $ 1.7 $ 4.8
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Change in cash /
operating loans $ 74.3 $ (114.2) $ (39.9) $ (42.5) $ (130.3)
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ROIC - Consolidated(4) 1.3% (1.4)% (0.1)% 0.2% 0.6%
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Average exchange rate
(US$ per C$1.00)(5) $ 0.990 $ 0.999 $ 0.994 $ 1.033 $ 1.024
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1. Certain prior period amounts have been restated due to a change in
accounting policy for treatment of net interest expense for defined
benefit post-retirement plans. Further details can be found in the
"Changes in Accounting Policy" section later in this document.
2. Further information on operating cash flows can be found in the
Company's unaudited interim consolidated financial statements.
3. Additions to property, plant and equipment include the acquisition of
assets from Tembec Industries Ltd. ("Tembec") in the first quarter of
2012, and are shown net of amount received under Government funding
initiatives in the pulp and paper segment.
4. Consolidated Return on Invested Capital ("ROIC") is equal to operating
income/loss, plus realized gains/losses on derivatives and other
income/expense, all net of minority interest, divided by the average
invested capital during the year. Invested capital is equal to capital
assets, plus long-term investments and net non-cash working capital, all
excluding minority interest components.
5. Source - Bank of Canada (average noon rate for the period).
Analysis of Specific Material Items Affecting Comparability of Shareholder
Net Income (Loss)
----------------------------------------------------------------------------
After-tax impact, net of non-
controlling interests
(millions of dollars, except for per Q2 Q1 YTD Q2 YTD
share amounts) 2012 2012 2012 2011 2011
----------------------------------------------------------------------------
Shareholder Net Income (Loss) $ 4.5 $(16.2) $(11.7) $ 2.1 $ 9.1
Foreign exchange (gain) loss on long-
term debt and investments, net $ 2.4 $ (2.7) $ (0.3) $ (1.4) $ (4.4)
(Gain) loss on derivative financial
instruments $ 4.2 $ (5.1) $ (0.9) $ (0.7) $ (3.6)
Increase in fair value of ABCP $ - $ (1.1) $ (1.1) $ - $ (1.0)
Costs related to Tembec acquisition $ - $ 2.8 $ 2.8 $ - $ -
Restructuring charges for management
changes $ - $ - $ - $ 2.6 $ 2.6
----------------------------------------------------------------------------
Net impact of above items $ 6.6 $ (6.1) $ 0.5 $ 0.5 $ (6.4)
----------------------------------------------------------------------------
Adjusted Shareholder Net Income
(Loss) $ 11.1 $(22.3) $(11.2) $ 2.6 $ 2.7
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Shareholder Net Income (Loss) per
share (EPS), as reported $ 0.03 $(0.11) $(0.08) $ 0.01 $ 0.06
Net impact of above items per share $ 0.05 $(0.05) $ - $ 0.01 $(0.04)
----------------------------------------------------------------------------
Adjusted Shareholder Net Income
(Loss) per share $ 0.08 $(0.16) $(0.08) $ 0.02 $ 0.02
----------------------------------------------------------------------------
The Company reported operating income of $26.0 million for the second quarter of
2012, compared to an operating loss of $21.5 million for the first quarter. The
positive variance primarily reflected improved results in the lumber segment,
where stronger markets supported higher prices.
Lumber markets showed signs of improvement in the second quarter of 2012,
reflecting stronger underlying demand in both North American and offshore
markets. U.S. housing activity continued the upward trend seen in the prior
quarter, with housing starts for the quarter averaging 739,000 units SAAR
(seasonally adjusted annual rate), up over 3% from the previous quarter.
Canadian housing starts were also up, increasing 12% from the previous quarter,
to almost 230,000 units SAAR. In China, markets improved as inventories returned
to more normal levels following the inventory build early in the previous
quarter. Japan demand remained solid through the quarter. Pulp markets were
relatively balanced heading into the quarter but saw signs of weakness as the
quarter progressed.
As a result of the improved markets, lumber prices rallied during the second
quarter. The average North American benchmark Western SPF 2x4 #2&Btr price rose
11% to US$295 per Mfbm, with similar increases seen for most other grades, while
the spread between Western SPF structural and utility grade pricing also
narrowed. Strong prices through May triggered a reduction in the export tax to
10% for the first time this year in June. Southern Yellow Pine ("SYP") prices
also saw similar increases over the quarter. As a result, Canfor's lumber sales
realizations saw solid gains, with a higher value sales mix also having a
positive impact. For Northern Bleached Softwood Kraft ("NBSK") pulp, US dollar
sales realizations were up slightly with the average North America list price up
US$30 to US$900 per tonne. Canadian dollar sales realizations across all solid
wood and pulp products were positively impacted by a 1% weakening of the average
Canadian dollar.
Lumber shipments increased significantly from the previous quarter, up 16% to
almost 1.2 billion board feet, reflecting the additional contribution of two
recently acquired mills in the Kootenay region, as well as continued
post-capital project productivity improvements and further operating
efficiencies at other mills in the current quarter. Lumber unit manufacturing
costs were in line with the previous quarter, with reductions in unit cash
conversion costs offset by a small increase in unit log costs. Also,
contributing to improved results in the lumber segment was a moderate increase
in sawmill residual chip prices.
Pulp shipment and production levels were significantly impacted by scheduled
maintenance outages and an unscheduled shutdown at Canfor Pulp, contributing to
higher unit manufacturing costs. A maintenance outage was completed at the
Intercontinental Pulp Mill, and an extended maintenance outage was commenced at
the Prince George Pulp Mill, resulting in approximately 18,000 tonnes of reduced
production overall. In addition, an unscheduled shutdown of a recovery boiler at
the Northwood Pulp Mill and subsequent repairs resulted in the mill operating at
approximately fifty percent of capacity through the period, reducing overall
production by approximately 31,000 tonnes.
The Company ended the quarter with an improved liquidity position, reflecting
both stronger lumber earnings and favourable working capital movements,
resulting principally from a drawdown of log inventory after spring breakup.
Compared to the second quarter of 2011, operating income was down $1.4 million,
with a decrease of $37.1 million in the pulp and paper segment, primarily driven
by significantly lower prices for NBSK pulp products and the impact of the
maintenance outages and unscheduled shutdown in the current quarter,
substantially offset by an increase of $30.2 million in the lumber segment,
reflecting the improved markets offset in part by increased unit log costs.
OPERATING RESULTS BY BUSINESS SEGMENT
Lumber
Selected Financial Information and Statistics - Lumber
----------------------------------------------------------------------------
(millions of dollars Q2 Q1 YTD Q2 YTD
unless otherwise noted) 2012 2012 2012 2011 2011
----------------------------------------------------------------------------
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Sales $ 443.5 $ 343.7 $ 787.2 $ 331.2 $ 659.8
Operating income (loss) $ 18.9 $ (20.1) $ (1.2) $ (11.3) $ (13.8)
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Negative (positive) impact
of inventory valuation
adjustments(6) $ (2.9) $ (10.2) $ (13.1) $ 1.1 $ 1.2
Costs related to Tembec
acquisition $ - $ 2.5 $ 2.5 $ - $ -
----------------------------------------------------------------------------
Operating income (loss)
excluding impact of
inventory valuation
adjustments and unusual
items $ 16.0 $ (27.8) $ (11.8) $ (10.2) $ 28.8
----------------------------------------------------------------------------
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Average SPF 2x4 #2&Btr
lumber price in US$(7) $ 295 $ 266 $ 281 $ 240 $ 268
Average SPF price in Cdn$ $ 298 $ 266 $ 283 $ 232 $ 262
Average SYP 2x4 #2 lumber
price in US$(8) $ 325 $ 298 $ 312 $ 251 $ 276
Average SYP price in Cdn$ $ 328 $ 298 $ 314 $ 243 $ 270
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U.S. housing starts
(thousand units SAAR) (9) 739 715 727 573 578
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Production - SPF lumber
(MMfbm) 994.4 903.7 1,898.1 787.6 1,559.9
Production - SYP lumber
(MMfbm) 124.4 114.3 238.7 112.8 207.6
Shipments - SPF lumber
(MMfbm)(10) 1,008.3 852.3 1,860.6 821.6 1,536.9
Shipments - SYP lumber
(MMfbm)(10) 135.0 117.6 252.6 123.6 214.5
Shipments - wholesale
lumber (MMfbm) 14.3 24.5 38.8 27.7 78.9
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6. In accordance with IFRS, Canfor records its log and finished product
inventories at the lower of cost and net realizable value ("NRV").
Changes in inventory volumes, market prices, foreign exchange rates and
costs over the respective reporting periods can all affect inventory
write-downs required at each period end.
7. Western Spruce/Pine/Fir, per thousand board feet (Source - Random
Lengths Publications, Inc.)
8. Southern Yellow Pine, Eastside, per thousand board feet (Source - Random
Lengths Publications, Inc.)
9. Source - U.S. Census Bureau, seasonally adjusted annual rate ("SAAR")
10. Canfor-produced lumber, including lumber purchased for remanufacture.
Overview
Operating income for the lumber segment was $18.9 million for the second quarter
of 2012, an increase of $39.0 million compared to the operating loss of $20.1
million in the previous quarter, and a $30.2 million improvement from the
operating loss reported for the second quarter of 2011. Results in each of the
quarters were impacted by inventory valuation adjustments, principally
reflecting changes in market prices for lumber products, as well as
restructuring costs recorded in the first quarter of 2012. Excluding these
items, operating income was $16.0 million for the second quarter of 2012, an
improvement of $43.8 million from the previous quarter and up $26.2 million from
the second quarter of 2011.
The stronger results compared to the previous quarter were largely the result of
improved sales realizations, with higher prices seen for most products in both
North American and offshore markets. In addition, lumber shipments were well up
from the previous quarter, reflecting the contribution of the two south-east
Kootenay region mill operations acquired at the end of the first quarter of
2012, as well as continued post-capital project productivity and other
efficiency improvements. Lumber unit manufacturing costs were broadly similar to
the previous quarter, with reductions in unit cash conversion costs offset by a
small increase in unit log costs.
The improvement in operating income compared to the second quarter of 2011 in
large part reflected higher market prices and increased lumber shipments.
Partially offsetting these impacts, unit manufacturing costs showed a modest
increase, as higher log costs, due in part to increased hauling costs and higher
market stumpage, more than offset a reduction in unit cash conversion costs
resulting from improved productivity. In addition, sawmill residual chip prices
were well down compared to the same quarter of 2011, reflecting a steep decline
in NBSK pulp sales realizations over the period.
Markets
During the second quarter of 2012, U.S. lumber demand continued to improve as
historical low mortgage rates, seasonal factors and a gradual strengthening in
housing markets helped to keep home construction activity edging upwards. Total
U.S. housing starts averaged 739,000 units(11) SAAR, an increase of over 3% from
the previous quarter and up 29% from the second quarter of 2011. Single-family
starts, which use a higher volume of lumber than multi-family starts, climbed 7%
to 519,000 SAAR, the highest level in more than two years. The repair and
remodeling sector also gained from the overall increase in housing activity.
In Canada, lumber consumption was also strong reflecting improved weather and
housing demand. Canadian housing starts averaged 229,000 units(12) SAAR for the
quarter, up 24,000 units, or 12%, compared to the first quarter of 2012, and up
18% from the comparable quarter in 2011 when starts were at 195,000 units SAAR.
Canfor's offshore lumber shipments increased by 13% compared to the previous
quarter and were 20% higher than the second quarter of 2011. For the first half
of 2012, shipments to China and Japan were in excess of the same period in the
prior year.
11. U.S. Census Bureau
12. CMHC - Canada Mortgage and Housing Corporation
Sales
Sales revenues for the lumber segment for the second quarter of 2012 were $443.5
million, compared to $343.7 million in the previous quarter and $331.2 million
in the second quarter of 2011. The significant increase from both comparative
periods reflected the impact of higher shipment levels and improved pricing.
Compared to the prior quarter this was offset in part by seasonally lower log
sales. Total shipments in the second quarter of 2012 were almost 1.2 billion
board feet, up 16% from the previous quarter, and up 19% from the second quarter
of 2011. The increase reflects higher production from various capital upgrades
and other efficiency improvements, as well as from the mill operations acquired
at the end of the previous quarter.
Sales realizations experienced solid gains in the quarter, with North American
sales realizations benefiting from the continued upward trend in pricing coupled
with a higher value sales mix, in part reflecting the processing of a higher
quality fibre mix. For sales to North America, the Random Lengths Western SPF
2x4 #2&Btr price was up 11% to US$295 per Mfbm, with similar increases seen in
most other widths and dimensions during the quarter. Sales realizations for SYP
products also benefited from solid price gains, with the benchmark SYP 2x4 #2
price at US$325 per Mfbm, up 9% from the previous quarter, and wider dimensions
seeing higher increases. Sales realizations for offshore products experienced
strong gains in the current quarter, particularly in China where market
inventories returned to more normal levels following the inventory build early
in the previous quarter. Offshore prices, which are largely negotiated monthly
or quarterly in advance, caught up to some of the gains seen in North America in
the first quarter.
Compared to the second quarter of 2011, the benchmark North American Random
Lengths Western SPF 2x4 #2&Btr price was up US$55 per Mfbm, or 23%, with marked
increases seen in all widths and dimensions. SYP products followed a similar
trend, with the benchmark SYP 2x4 #2 price up 30%. Increase for offshore sales
realizations for similar products were more modest, in part reflecting the
quarterly and monthly nature of pricing to most offshore markets.
The average value of the Canadian dollar compared to the US dollar in the second
quarter was down just under 1% from the previous quarter, contributing to the
improved sales realizations. Compared to the second quarter of 2011,
realizations benefited from a 4 cent, or 4%, weaker Canadian dollar.
Under the Softwood Lumber Agreement ("SLA") implemented by the federal
governments of Canada and the U.S. in 2006, Canadian softwood lumber exporters
pay an export tax on lumber shipped to the U.S. when the price of lumber is at
or below US$355 per Mfbm, as determined by the Random Lengths Framing Lumber
Composite Price ("RLCP"). The export tax rate is determined monthly, with the
rate being based on the following trigger prices:
Trigger RLCP Tax Rate
----------------------------------------
Over US$355 0%
US$336-$355 5%
US$316-$335 10%
US$315 and under 15%
The RLCP price averaged US$324 per Mfbm for the second quarter of 2012, up
US$36, or 13%, compared to the previous quarter. Strong prices through May
triggered a reduction in the export tax to 10% for the first time this year in
June. The RLCP averaged US$264 per Mfbm for the second quarter of 2011, well
below the trigger price required to reduce the export tax rate from 15%.
Total residual fibre revenue was up from the first quarter of 2012, reflecting
higher production volumes and residual chip prices in the quarter. Compared to
the second quarter of 2011, residual fibre revenue was well up, again reflecting
higher production volumes, partially offset by reduced residual chip prices.
Operations
Lumber production, at just over 1.1 billion board feet, was up 10% from the
previous quarter, reflecting the contribution of the recently acquired mill
operations, as well as continued post-capital project productivity improvements
and improved performance at other mills in the quarter, in part due to improved
weather conditions compared to the first quarter of 2012. Compared to the second
quarter of 2011 production was up 24%, again largely reflecting the recent
acquisition, coupled with increased productivity following various capital
improvement projects in 2011 and the restart of the Vavenby sawmill in the third
quarter of 2011.
Overall lumber unit manufacturing costs were broadly similar to the previous
quarter, with reductions in unit cash conversion costs offset by a small
increase in unit log costs. The improvement in unit cash conversion costs
largely reflected the higher production levels in the current quarter. Log costs
for most operations remained stable, though higher costs associated with the
high value fibre mix processed at the recently acquired south-east Kootenay
mills contributed to a small increase in unit log costs, and adverse weather
hampered log harvesting in some regions during the quarter.
Compared to the second quarter of 2011, unit manufacturing costs showed a small
increase, again reflecting higher unit log costs partially offset by reduced
unit cash conversion costs. The increase in unit log costs resulted largely from
increased hauling costs stemming from tight trucker availability and higher
diesel costs, as well as higher market stumpage. The reduced unit cash
conversion costs principally reflected increased production, in part due to
improved productivity performance from various capital improvement projects
undertaken since the second quarter of 2011 and other efficiency improvements.
Pulp and Paper
Selected Financial Information and Statistics - Pulp and Paper(13)
----------------------------------------------------------------------------
(millions of dollars unless Q2 Q1 YTD Q2 YTD
otherwise noted) 2012 2012 2012 2011 2011
----------------------------------------------------------------------------
Sales $ 239.4 $ 249.4 $ 488.8 $ 277.0 $ 560.0
Operating income $ 11.7 $ 11.3 $ 23.0 $ 48.8 $ 96.7
----------------------------------------------------------------------------
Average pulp price delivered to U.S.
- US$(14) $ 900 $ 870 $ 885 $ 1,025 $ 998
Average price in Cdn$ $ 909 $ 871 $ 890 $ 992 $ 975
----------------------------------------------------------------------------
Production - pulp (000 mt) 263.1 315.9 579.0 314.7 631.6
Production - paper (000 mt) 30.0 32.9 62.9 31.8 66.3
Shipments -pulp (000 mt) 282.1 327.8 609.9 303.7 622.1
Shipments - paper (000 mt) 36.8 29.6 66.4 32.7 65.3
----------------------------------------------------------------------------
13. Includes the Taylor pulp mill and 100% of Canfor Pulp Products Inc.,
which is consolidated in Canfor's results. Pulp production and shipment
volumes presented are for both northern bleached softwood kraft ("NBSK")
and bleached chemi-thermo mechanical pulp ("BCTMP").
14. Per tonne, NBSK pulp list price delivered to U.S. (Resource Information
Systems, Inc.).
Overview
Operating income for the pulp and paper segment was $11.7 million for the second
quarter of 2012, in line with the previous quarter and down $37.1 million from
the second quarter of 2011. Results in the current quarter were significantly
impacted by scheduled maintenance outages and an unscheduled shutdown at the
Company's operations, which resulted in lower production levels and higher unit
manufacturing costs.
US dollar NBSK pulp prices increased slightly from the previous quarter, with
prices to North America up US$30 to US$900 per tonne. Sales realizations were
also positively impacted by the weaker average Canadian dollar compared to the
previous quarter. The significantly lower production levels in the current
quarter led to an increase in unit conversion costs, while unit fibre costs
declined modestly compared to the previous quarter.
Lower operating earnings compared to the second quarter of 2011 reflected a
significant reduction in NBSK pulp prices, with North America prices down US$125
per tonne and larger price reductions in Europe and China. Unit conversion costs
increased, with production levels down almost 17%, though fibre costs decreased
significantly, reflecting a drop in the prices paid for sawmill residual chips
(linked to NBSK market pulp prices).
Markets
Global softwood pulp markets were balanced for the first part of the second
quarter before showing signs of weakness heading into the seasonally slower
summer months. Producer inventories remained in the balanced range through the
quarter as reduced demand was offset by reductions in supply due to spring
maintenance downtime.
PPPC(15) statistics reported an increase in shipments of bleached softwood
sulphate pulp of 1.4% for the first five months of 2012 as compared to the same
period in 2011. However markets weakened as the second quarter progressed, with
reductions in demand from Europe and North America. PPPC reported global demand
for printing and writing papers decreased 1.5% for the first five months of 2012
as compared to 2011.
At the end of May 2012, World 20(16) producers of bleached softwood pulp
inventories were at 30 days of supply. By comparison, March 2012 inventories
were at 29 days of supply. Market conditions are generally considered balanced
when inventories are in the 27-30 days of supply range.
15. Pulp and Paper Products Council ("PPPC").
16. World 20 data is based on twenty producing countries representing 80% of
world chemical market pulp capacity and is based on information compiled
and prepared by the PPPC.
Sales
Pulp shipments in the second quarter of 2012 were just over 280,000 tonnes, down
46,000 tonnes, or 14%, from the previous quarter, reflecting the lower
production levels due to the maintenance outages and unscheduled shutdown, and
decreased 22,000 tonnes, or 7%, from the second quarter of 2011.
Steady demand and reduced supply due to spring maintenance early in the quarter
led to increased prices in some regions in April, but prices came under pressure
thereafter in part reflecting a seasonal slowdown in market demand. North
America NBSK pulp list prices averaged US$900 per tonne for the quarter, up
US$30 from the previous quarter. Canfor Pulp's average list price to China
increased modestly to US$700 per tonne, but fell through May and June, ending
the quarter at US$680 per tonne. The list price to Europe fell through the
quarter, but on average was in line with the first quarter at US$837 per tonne.
Sales realizations were positively impacted by the weaker average Canadian
dollar compared to the prior quarter. BCTMP sales realizations were also
modestly up from the previous quarter, reflecting a slight increase in market
pricing and the weaker Canadian dollar.
Compared to the second quarter of 2011, pulp sales realizations were well down
as NBSK pulp list prices to all markets decreased. The average NSBK pulp list
price for North America decreased US$125 per tonne, while prices to Europe and
China decreased US$180 and US$240 per tonne, respectively. The price reductions
were offset in part by the 4 cent weaker Canadian dollar compared to the US
dollar in the current quarter. In contrast to NBSK products, BCTMP sales
realizations were up compared to the second quarter of 2011, reflecting higher
market pricing.
Operations
Pulp production in the second quarter of 2012 was 263,000 tonnes, down
approximately 53,000 tonnes, or 17%, from the previous quarter and the second
quarter of 2011. The maintenance outage at the Intercontinental pulp mill
reduced market pulp production by 12,000 tonnes, while the maintenance outage at
the Prince George pulp mill, which had an impact of 6,000 tonnes in the second
quarter, was extended into the third quarter to complete the final project under
the Green Transformation Program and a partial rebuild of the recovery boiler.
The unscheduled shutdown at the Northwood pulp mill had on estimated impact on
current quarter production of 31,000 tonnes, though the impact of this shutdown
was partially offset by an accrual for an anticipated business interruption
insurance recovery. The Company's BCTMP Taylor pulp mill also took a five day
scheduled maintenance shutdown in the current quarter.
Pulp unit manufacturing costs increased from the previous quarter, reflecting
the significantly lower production levels in the quarter, as well as higher
maintenance and operating costs relating to the maintenance outages. However,
fibre costs decreased modestly due to the consumption of lower cost chips from
opening inventories and a reduction in usage of higher cost whole log chips,
partially offset by higher prices paid for sawmill residual (linked to NBSK
market pulp prices) and whole log chips.
Compared to the second quarter of 2011, unit cash conversion costs increased,
with the lower production levels again being the main driver for the increase.
Pulp unit manufacturing costs were positively impacted however by a reduction in
fibre costs, principally resulting from lower-cost sawmill residual chips, for
which prices are linked to NBSK pulp sales realizations.
Unallocated and Other Items
----------------------------------------------------------------------------
Q2 Q1 YTD Q2 YTD
(millions of dollars) 2012 2012 2012 2011 2011
----------------------------------------------------------------------------
Operating income (loss) of
Panels operations(17) $ 2.0 $ (4.8) $ (2.8) $ (4.2) $ (9.9)
Corporate costs $ (6.6) $ (7.9) $ (14.5) $ (5.9) $ (13.3)
Finance expense, net $ (6.2) $ (6.2) $ (12.4) $ (5.8) $ (13.0)
Foreign exchange gain (loss) on
long-term debt and
investments, net $ (3.8) $ 4.0 $ 0.2 $ 2.0 $ 6.7
Gain (loss) on derivative
financial instruments $ (6.3) $ 7.4 $ 1.1 $ 1.3 $ 6.0
Other income (expense), net $ 2.6 $ (0.2) $ 2.4 $ 1.1 $ (0.6)
----------------------------------------------------------------------------
17. The Panels operations include the Peace Valley OSB (Oriented Strand
Board) joint venture, the only facility currently operating, and the
Company's Tackama plywood plant, which was closed in January 2012, and
its PolarBoard OSB plant, which is currently indefinitely idled.
The panels operations reported operating income of $2.0 million for the second
quarter of 2012, compared to a loss of $4.8 million for the previous quarter.
Excluding the impact of inventory valuation adjustments, the panels operations
showed an operating loss of $1.7 million in the second quarter of 2012, compared
to $3.1 million in the first quarter of 2012, with the lower loss principally
reflecting an uptick in OSB markets driven by the increased housing activity, as
evidenced by a US$33 per thousand square feet ("msf") increase in the benchmark
OSB price to US$235 per msf(18). Compared to the second quarter of 2011,
excluding inventory valuation adjustments, results for the panel operations
improved by $5.1 million, also largely reflecting the considerably stronger
market prices, with the benchmark OSB price up by US$63 per msf, or 37%.
Corporate costs were $6.6 million for the second quarter of 2012, down $1.3
million from the previous quarter, largely reflecting costs recorded in the
previous quarter related to the acquisition of assets from Tembec. Corporate
costs were higher by $0.7 million compared to the second quarter of 2011, in
part reflecting integration related costs.
Net finance expense for the second quarter of 2012 was $6.2 million, in line
with the previous quarter. Compared to the second quarter of 2011, finance
expense showed a marginal increase, reflecting reduced interest income as a
result of lower cash balances and a higher average debt level through the
quarter, partially offset by a lower accretion expense on the deferred
reforestation obligation.
The Company recorded a foreign exchange translation loss on its US dollar
denominated debt of $3.8 million for the second quarter of 2012, as a result of
the weakening of the Canadian dollar against the US dollar, which fell 2%
between the respective quarter ends. The $4.0 million gain in the first quarter
of 2012 and $2.0 million gain in the second quarter of 2011, resulted from a
strengthening of the Canadian dollar in the previous periods.
The Company uses a variety of derivative financial instruments as partial
economic hedges against unfavourable changes in foreign exchange rates, energy
costs, lumber prices and interest rates. For the second quarter of 2012, the
Company recorded a net loss of $6.3 million related to its derivative financial
instruments, largely reflecting realized and unrealized losses on the US dollar
forward contracts and collars, related to the weakening of the Canadian dollar,
and unrealized losses on energy hedges and interest rate swaps.
The following table summarizes the gains (losses) on derivative financial
instruments for the comparable periods:
----------------------------------------------------------------------------
Q2 Q1 YTD Q2 YTD
(millions of dollars) 2012 2012 2012 2011 2011
----------------------------------------------------------------------------
Foreign exchange collars and
forward contracts $ (2.5) $ 2.9 $ 0.4 $ 1.0 $ 2.9
Energy derivatives $ (1.8) $ 1.2 $ (0.6) $ (0.3) $ 0.6
Lumber futures $ (0.4) $ 3.0 $ 2.6 $ 0.6 $ 2.5
Interest rate swaps $ (1.6) $ 0.3 $ (1.3) $ - $ -
----------------------------------------------------------------------------
$ (6.3) $ 7.4 $ 1.1 $ 1.3 $ 6.0
----------------------------------------------------------------------------
Other expense, net of $2.6 million principally reflected favourable exchange
movements on US dollar denominated cash, receivables and payables of Canadian
operations of $1.7 million, compared to a loss in the previous quarter of $1.2
million and a loss of $0.7 million in the second quarter of 2011 resulting from
the strengthening of the Canadian dollar during those periods. Other income in
the current quarter also includes a $0.9 million positive fair value adjustment
related to a royalty agreement associated with the sale of the operating assets
of Howe Sound Pulp and Paper Limited Partnership in late 2010, while other
income in the first quarter of 2012 and second quarter of 2011 included $1.3
million and $0.6 million, respectively, for a change in fair value of the
Company's investment in ABCP.
18. Oriented Strand Board, North Central price, 7/16" (Source - Random
Lengths Publications, Inc.)
Other Comprehensive Income (Loss)
The following table summarizes Canfor's Other Comprehensive Income (Loss) for
the comparable periods:
----------------------------------------------------------------------------
Q2 Q1 YTD Q2 YTD
(millions of dollars) 2012 2012 2012 2011 2011
----------------------------------------------------------------------------
Foreign exchange translation
differences for foreign
operations $ 4.1 $ (3.6) $ 0.5 $ 0.3 $ (5.9)
Defined benefit actuarial loss,
net of tax $ (22.7) $ (5.3) $ (28.0) $ (6.6) $ (4.4)
----------------------------------------------------------------------------
Other comprehensive income
(loss), net of tax $ (18.6) $ (8.9) $ (27.5) $ (6.3) $ (10.3)
----------------------------------------------------------------------------
In the second quarter of 2012, the Company recorded an after-tax charge to other
comprehensive income of $22.7 million in relation to changes in the valuation of
its defined benefit post-employment compensation plans. The charge reflects a
reduction in the discount rate used to value the plans, and a lower than
expected rate of return for the period. In the previous quarter a charge of $5.3
million was recorded, reflecting a reduction in the discount rate, offset in
part by a gain on plan assets due to a higher than expected gain for the
quarter. An after-tax loss of $6.6 million was recorded in the second quarter of
2011.
In addition, the Company recorded $4.1 million of other comprehensive income in
the quarter for foreign exchange differences for foreign operations, reflecting
the weakening of the Canadian dollar by almost 1% over the quarter. This
compared to a charge of $3.6 million in the previous quarter, with the Canadian
dollar strengthening over the period, and $0.3 million of other comprehensive
income in the second quarter of 2011.
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:
----------------------------------------------------------------------------
Q2 Q1 YTD Q2 YTD
(millions of dollars) 2012 2012 2012 2011 2011
----------------------------------------------------------------------------
Increase (decrease) in
cash and cash
equivalents $ (2.7) $ (20.2) $ (22.9) $ (42.5) $ (130.3)
Operating activities $ 119.1 $ (55.2) $ 63.9 $ 69.8 $ 63.8
Financing activities $ (92.6) $ 137.0 $ 44.4 $ (80.1) $ (155.1)
Investing activities $ (29.2) $(102.0) $ (131.2) $ (32.2) $ (39.0)
Ratio of current assets
to current liabilities 1.4 : 1 2.2 : 1
Net debt to
capitalization 18.8% 6.2%
ROIC - Consolidated 1.3% (1.4)% (0.1)% 0.2% 0.6%
ROCE - Canfor solid wood
business(19) 0.2% (1.6)% (1.4)% (1.3)% (1.6)%
----------------------------------------------------------------------------
19. Return on Capital Employed ("ROCE") for the Canfor solid wood business
represents consolidated ROCE adjusted to remove the Company's interest
in the Peace Valley OSB Joint Venture and pulp and paper operations,
including Canfor Pulp and the Taylor pulp mill. Consolidated ROCE is
equal to shareholder net income for the period plus finance expense,
after tax, divided by the average capital employed during the period
(which consists of current and long-term debt and operating loans, and
shareholders' equity, less cash and temporary investments).
Changes in Financial Position
Cash generated from operating activities was $119.1 million in the second
quarter of 2012, compared to cash used of $55.2 million in the previous quarter.
The significant drawdown of logs during the Canadian spring break-up period had
a significant positive cash flow impact in the second quarter, in contrast to
the cash used in the previous quarter in the related inventory build-up, while
higher cash earnings in the current quarter also had a positive impact.
Partially offsetting these gains were property tax payments made at the end of
the second quarter, and increased accounts receivable balances, reflecting
higher sales levels and prices. The second quarter of 2012 also included
seasonally higher reforestation-related payments. Compared to the second quarter
of 2011, cash generated from operating activities was up by over $49.3 million
reflecting higher cash earnings and improved working capital movements.
Financing activities used cash of $92.6 million in the current quarter, compared
to cash generated of $137.0 million in the previous quarter and cash used of
$80.1 million in the second quarter of 2011. The current quarter's cash flows
included a $77.0 million repayment on the Company's outstanding operating lines
of credit, while $94.0 million was drawn in the previous quarter. The previous
quarter also included $100.0 million of new term debt, partially offset by a
$49.9 million (US$50.0 million) repayment of term debt. A term debt repayment
was also made in the second quarter of 2011, in the amount of $48.1 million
(US$50.0 million). Cash distributions to non-controlling interests were $8.2
million in the second quarter of 2012 (Q1 2012: $4.3 million; Q2 2011: $25.9
million). Finance expenses paid in the current quarter were $7.4 million, up
$4.3 million from the previous quarter, principally reflecting timing of
scheduled payments, and was up slightly from the second quarter of 2011.
Investing activities used cash of $29.2 million in the second quarter of 2012,
compared to $102.0 million in the first quarter of 2012 and $32.2 million in the
second quarter of 2011. Cash used for capital additions was $44.4 million, down
$9.2 million from the first quarter of 2012, and down $11.2 million from the
second quarter of 2011. Capital additions for lumber operations in the current
quarter reflected in part improvement projects at the Kootenay region sawmills.
In the pulp segment, current quarter capital expenditures were $19.3 million,
principally related to capital and major maintenance expenditure at the
Company's Prince George pulp and paper mill. Partially offsetting the cash spent
on capital additions during the quarter was $12.9 million in net proceeds
realized on the sale of the Company's ABCP in early April. Investing activities
in the previous quarter included $65 million for the acquisition of Tembec
Industries Ltd.'s southern British Columbia Interior wood product assets
(including working capital).
Liquidity and Financial Requirements
At June 30, 2012, the Company on a consolidated basis had cash of $6.0 million,
with $17.0 million drawn on its operating lines of credit, and an additional
$28.9 million reserved for several standby letters of credit. Total remaining
available operating lines of credit were $365.2 million. The Company and Canfor
Pulp remained in compliance with the covenants relating to their operating lines
of credit and long-term debt during the quarter, and expect to remain so for the
foreseeable future.
During the first quarter of 2012, the Company issued new term debt of $100.0
million to fund a US$50.0 million term debt repayment on February 1, 2012 and
the acquisition of assets from Tembec. The new debt is in the form of an
unsecured non-revolving term loan, with a maturity date of February 13, 2017.
Interest rates are floating based on the lenders' Canadian prime rate or bankers
acceptances. During the first quarter of 2012, the Company also put in place
$75.0 million of floating to fixed interest rate swaps, with an additional $25.0
million put in place in early April 2012.
Canfor has US$75.0 million of term debt that is scheduled for repayment on April
1, 2013, and Canfor Pulp has US$110.0 million of term debt that is scheduled for
repayment on November 30, 2013.
The Company's consolidated net debt to total capitalization at the end of the
second quarter of 2012 was 18.8%. For Canfor, excluding Canfor Pulp, net debt to
capitalization at the end of the first quarter was 15.3%.
Softwood Lumber Agreement ("SLA") Update
On January 18, 2011, the U.S. triggered the arbitration provision of the 2006
Softwood Lumber Agreement ("SLA") by delivering a Request for Arbitration. The
U.S. claimed that the province of British Columbia ("BC") had not properly
applied the timber pricing system grandparented in the SLA. The U.S. also
claimed that subsequent to 2006, BC made additional changes to the timber
pricing system which had the effect of reducing timber prices. The claim focused
on substantial increases in Grade 4 (non sawlog or low grade) volumes commencing
in 2007. It was alleged that timber was scaled and graded as Grade 4 that did
not meet the criteria for that grade, and was accordingly priced too low.
As the arbitration is a state-to-state international dispute under the SLA,
Canada prepared a defence to the claim with the assistance of the BC provincial
government and the BC lumber industry. After numerous representations from both
sides, a hearing was held before the arbitration panel in the first quarter of
2012.
On July 18, 2012 the arbitration panel ruled in favour of Canada and dismissed
the claims of the U.S. in their entirety.
Canfor Pulp Collective Agreements with Labour Unions
Canfor Pulp's collective labour agreements expired on April 30, 2012. The CEP
(Communications, Energy and Paperworkers Union) has ratified a new five year
collective agreement and Canfor Pulp is continuing discussions with the PPWC
(Pulp, Paper and Woodworkers of Canada).
CPPI Share Exchange
On March 2, 2012, Canadian Forest Products Ltd. ("CFP"), a wholly owned
subsidiary of Canfor, acquired 35,776,483 common shares of Canfor Pulp Products,
Inc. ("CPPI") in exchange for its 35,776,483 Class B Exchangeable LP Units of
Canfor Pulp Limited Partnership ("CPLP") and 35,776,483 common shares of Canfor
Pulp Holding Inc. ("Canfor Holding"), pursuant to the terms of an Exchange
Agreement made as of January 1, 2011 among CFP, CPPI, Canfor Holding and CPLP.
Prior to the share exchange, CFP and CPPI entered into a one-time dividend
waiver agreement, waiving CFP's right to the first $7.8 million of future
dividends declared by CPPI. The full $7.8 million dividend was paid by CPPI
during the second quarter of 2012.
OUTLOOK
Lumber
For the third quarter of 2012, the North American lumber market is projected to
show a modest and gradual improvement as housing demand edges higher and U.S.
inventories remain at low levels, notwithstanding the fragility of the U.S.
economy. With respect to shipments to the U.S., export taxes are 5% in July and
will be 10% in August. Repair and remodeling activity is forecast to be stable
through the next quarter. Offshore lumber shipments are anticipated to be steady
for the rest of the year.
Pulp and Paper
The global softwood pulp market is projected to weaken further through the
remaining summer months. Producer inventories remained in the balanced range
through to the end of May 2012 but are forecast to rise modestly as there is
minimal scheduled maintenance downtime during the summer months. For the month
of July, Canfor Pulp projects NBSK pulp list prices to decrease US$20 per tonne
in all regions with further price reductions projected in the third quarter.
OUTSTANDING SHARES
At July 26, 2012, there were 142,752,431 common shares 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.
CHANGES IN ACCOUNTING POLICY
Effective January 1, 2012, the Company retroactively changed its accounting
policy for the presentation of interest expense and expected rate of return on
assets of defined benefit post-retirement plans. The net expense has been
reclassified from operating income, included in manufacturing and product costs
and in selling and administration costs, to net finance expense. Management
considers the classification of net pension interest expense as a finance
expense more accurately reflects the nature of this cost. The effect on the
three months ended June 30, 2011 and six months ended June 30, 2011 is an
increase in operating income and an increase in net finance expense of $0.9
million and $1.8 million, respectively. There is no impact on amounts recorded
in the consolidated balance sheet or opening equity as at January 1, 2012.
NEW ACCOUNTING PRONOUNCEMENTS
In the first half of 2011, the International Accounting Standards Board ("IASB")
issued a number of new and revised accounting standards which are effective for
annual periods beginning on or after January 1, 2013, with early adoption
permitted. These new and revised accounting standards have not yet been adopted
by Canfor and the Company does not plan to early adopt any of the standards.
The following new or revised standards are not expected to have a material
impact on the amounts recorded in the financial statements of Canfor:
-- IFRS 10, Consolidated Financial Statements;
-- IFRS 12, Disclosure of Interests in Other Entities;
-- IAS 27, Separate Financial Statements; and
-- IFRS 13, Fair Value Measurement.
The Company is still in the process of assessing the full impact, if any, of the
following new or revised standards:
-- IFRS 11, Joint Arrangements;
-- Amended IAS 19, Employee Benefits; and
-- Amended IAS 28, Investments in Associates and Joint Ventures.
In the first half of 2011, the IASB also issued amended IAS 1, Presentation of
Financial Statements, which is effective for annual periods beginning on or
after July 1, 2012 and IFRS 9, Financial Instruments, which is effective for
annual periods beginning on or after January 1, 2015, with early adoption
permitted. IAS 1 and IFRS 9 are not expected to have a material impact on
amounts recorded in the financial statements of Canfor.
Further details of the new or revised accounting standards and potential impact
on Canfor can be found in Canfor's Annual Report for the year ended December 31,
2011.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
During the quarter ended June 30, 2012, 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 2011 annual statutory reports which are available on www.canfor.com or
www.sedar.com.
SELECTED QUARTERLY FINANCIAL INFORMATION(20)
----------------------------------------------------------------------------
Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
2012 2012 2011 2011 2011 2011 2010 2010
----------------------------------------------------------------------------
Sales and income
(millions of
dollars)
Sales $700.9 $607.6 $576.2 $602.1 $619.1 $624.0 $629.1 $588.7
Operating income
(loss) $ 26.0 $(21.5) $(63.1) $ 15.4 $ 27.4 $ 32.3 $ 43.9 $ 34.2
Net income (loss) $ 7.0 $(10.9) $(38.1) $ (9.6) $ 26.2 $ 32.3 $ 55.4 $ 37.2
Shareholder net
income (loss) $ 4.5 $(16.2) $(44.1) $(21.6) $ 2.1 $ 7.0 $ 31.4 $ 9.1
Per common share
(dollars)
Shareholder net
income (loss) -
basic and
diluted $ 0.03 $(0.11) $(0.31) $(0.15) $ 0.01 $ 0.05 $ 0.22 $ 0.06
----------------------------------------------------------------------------
Statistics
Lumber shipments
(MMfbm) 1,158 994 974 969 973 857 885 865
OSB shipments
(MMsf 3/8") 72 65 75 62 69 63 57 58
Pulp shipments
(000 mt) 282 328 275 291 303 318 331 277
----------------------------------------------------------------------------
Average exchange
rate - US$/Cdn$ $0.990 $0.999 $0.977 $1.020 $1.033 $1.014 $0.987 $0.962
----------------------------------------------------------------------------
Average Western
SPF 2x4 #2&Btr
lumber price
(US$) $ 295 $ 266 $ 238 $ 246 $ 240 $ 296 $ 269 $ 223
Average SYP
(East) 2x4 #2
lumber price
(US$) $ 325 $ 298 $ 260 $ 259 $ 251 $ 302 $ 256 $ 243
Average OSB price
- North Central
(US$) $ 235 $ 202 $ 190 $ 184 $ 172 $ 199 $ 191 $ 178
Average NBSK pulp
list price
delivered to
U.S. (US$) $ 900 $ 870 $ 920 $ 993 $1,025 $ 970 $ 967 $1,000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
20. Certain prior period amounts have been restated due to a change in
accounting policy for treatment of net interest expense for defined
benefit post-retirement plans. Further details can be found in the
"Changes in Accounting Policy" section earlier in this document.
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 manufacturing facilities. 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. These factors, along with
global supply and demand conditions, affect the Company's shipment volumes.
Other material factors that impact the comparability of the quarters are noted
below:
----------------------------------------------------------------------------
After-tax impact, net of non-
controlling interests(21)
(millions of dollars, except for per Q2 Q1 Q4 Q3
share amounts) 2012 2012 2011 2011
----------------------------------------------------------------------------
Shareholder net income (loss), as
reported $ 4.5 $ (16.2) $ (44.1) $ (21.6)
Foreign exchange (gain) loss on
long-term debt and investments, net $ 2.4 $ (2.7) $ (3.3) $ 11.0
(Gain) loss on derivative financial
instruments $ 4.2 $ (5.1) $ (6.7) $ 7.0
Decrease (increase) in fair value of
asset-backed commercial paper $ - $ (1.1) $ (0.5) $ 1.8
Costs recorded in relation to Tembec
acquisition $ - $ 2.8 $ - $ -
Mill closure provisions $ - $ - $ 17.0 $ -
Asset impairment charges $ - $ - $ 5.5 $ -
Restructuring costs related to
changes in management group $ - $ - $ - $ -
Gain on sale of operating assets of
Howe Sound Pulp and Paper Limited
Partnership $ - $ - $ - $ -
----------------------------------------------------------------------------
Net impact of above items $ 6.6 $ (6.1) $ 12.0 $ 19.8
----------------------------------------------------------------------------
Adjusted shareholder net income
(loss) $ 11.1 $ (22.3) $ (32.1) $ (1.8)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Shareholder net income (loss) per
share (EPS), as reported $ 0.03 $ (0.11) $ (0.31) $ (0.15)
Net impact of above items per share $ 0.05 $ (0.05) $ 0.09 $ 0.14
----------------------------------------------------------------------------
Adjusted net income (loss) per share $ 0.08 $ (0.16) $ (0.22) $ (0.01)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
After-tax impact, net of non-
controlling interests(21)
(millions of dollars, except for per Q2 Q1 Q4 Q3
share amounts) 2011 2011 2010 2010
----------------------------------------------------------------------------
Shareholder net income (loss), as
reported $ 2.1 $ 7.0 $ 32.9 $ 9.1
Foreign exchange (gain) loss on
long-term debt and investments, net $ (1.4) $ (3.0) $ (6.9) $ (6.3)
(Gain) loss on derivative financial
instruments $ (0.7) $ (2.9) $ (0.5) $ (1.1)
Decrease (increase) in fair value of
asset-backed commercial paper $ (0.5) $ (1.0) $ (5.5) $ -
Costs recorded in relation to Tembec
acquisition $ - $ - $ - $ -
Mill closure provisions $ - $ - $ - $ 13.0
Asset impairment charges $ - $ - $ - $ -
Restructuring costs related to
changes in management group $ 2.6 $ - $ - $ -
Gain on sale of operating assets of
Howe Sound Pulp and Paper Limited
Partnership $ - $ - $ (4.9) $ -
----------------------------------------------------------------------------
Net impact of above items $ - $ (6.9) $ (17.8) $ 5.6
----------------------------------------------------------------------------
Adjusted shareholder net income
(loss) $ 2.1 $ 0.1 $ 15.1 $ 14.7
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Shareholder net income (loss) per
share (EPS), as reported $ 0.01 $ 0.05 $ 0.23 $ 0.06
Net impact of above items per share $ 0.00 $ (0.05) $ (0.12) $ 0.04
----------------------------------------------------------------------------
Adjusted net income (loss) per share $ 0.01 $ 0.00 $ 0.11 $ 0.10
----------------------------------------------------------------------------
----------------------------------------------------------------------------
21. Certain prior period amounts have been restated due to a change in
accounting policy for treatment of net interest expense for defined
benefit post-retirement plans. Further details can be found in the
"Changes in Accounting Policy" section earlier in this document.
Canfor Corporation
Condensed Consolidated Balance Sheets
----------------------------------------------------------------------------
As at As at
June 30, December
(millions of Canadian dollars, unaudited) 2012 31, 2011
----------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 6.0 $ 28.9
Accounts receivable
- Trade 137.3 105.1
- Other 66.6 65.7
Inventories (Note 2) 359.3 348.3
Prepaid expenses 39.3 20.4
----------------------------------------------------------------------------
Total current assets 608.5 568.4
----------------------------------------------------------------------------
Property, plant and equipment 1,148.1 1,139.2
Timber licenses 564.4 530.1
Goodwill and other intangible assets 81.6 83.0
Long-term investments and other (Note 3) 47.2 62.8
Deferred income taxes, net 50.0 18.1
----------------------------------------------------------------------------
Total assets $ 2,499.8 $ 2,401.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES
Current liabilities
Operating loans (Note 4(a)) $ 17.0 $ -
Accounts payable and accrued liabilities 296.0 290.5
Current portion of long-term debt (Note 4(b)) 76.4 50.9
Current portion of deferred reforestation
obligations 37.8 31.6
----------------------------------------------------------------------------
Total current liabilities 427.2 373.0
----------------------------------------------------------------------------
Long-term debt (Note 4(b)) 212.1 188.1
Retirement benefit obligations 317.8 298.3
Deferred reforestation obligations 77.6 65.0
Other long-term liabilities 15.1 13.8
Deferred income taxes, net 154.6 103.3
----------------------------------------------------------------------------
Total liabilities $ 1,204.4 $ 1,041.5
----------------------------------------------------------------------------
EQUITY
Share capital $ 1,126.2 $ 1,125.9
Contributed surplus 31.9 31.9
Retained earnings (61.3) (24.6)
Accumulated foreign exchange translation
differences (5.4) (5.9)
----------------------------------------------------------------------------
Total equity attributable to equity holders of the
Company 1,091.4 1,127.3
Non-controlling interests 204.0 232.8
----------------------------------------------------------------------------
Total equity $ 1,295.4 $ 1,360.1
----------------------------------------------------------------------------
Total liabilities and equity $ 2,499.8 $ 2,401.6
----------------------------------------------------------------------------
Contingency (Note 11)
The accompanying notes are an integral part of these condensed consolidated
financial statements.
APPROVED BY THE BOARD
"R.S. Smith" "R.L. Cliff"
Director, R.S. Smith Director, R.L. Cliff
Canfor Corporation
Condensed Consolidated Statements of Income (Loss)
----------------------------------------------------------------------------
3 months ended June 6 months ended June
30, 30,
(millions of Canadian dollars,
unaudited) 2012 2011 2012 2011
----------------------------------------------------------------------------
Sales $ 700.9 $ 619.1 $1,308.5 $1,243.1
Costs and expenses
Manufacturing and product costs 465.2 398.4 894.8 806.9
Freight and other distribution
costs 133.0 123.8 255.4 236.4
Export taxes 13.9 9.4 25.1 20.2
Amortization 46.0 40.3 91.1 81.8
Selling and administration costs 14.9 12.9 30.9 28.4
Restructuring, mill closure and
severance costs 1.9 6.9 6.7 9.7
----------------------------------------------------------------------------
674.9 591.7 1,304.0 1,183.4
----------------------------------------------------------------------------
Operating income 26.0 27.4 4.5 59.7
Finance expense, net (6.2) (5.8) (12.4) (13.0)
Foreign exchange gain (loss) on
long-term debt and investments,
net (3.8) 2.0 0.2 6.7
Gain (loss) on derivative
financial instruments (Note 6) (6.3) 1.3 1.1 6.0
Other (expense) income, net 2.6 1.1 2.4 (0.6)
----------------------------------------------------------------------------
Net income (loss) before income
taxes 12.3 26.0 (4.2) 58.8
Income tax recovery (expense)
(Note 7) (5.3) 0.2 0.3 (0.3)
----------------------------------------------------------------------------
Net income (loss) $ 7.0 $ 26.2 $ (3.9) $ 58.5
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income (loss) attributable
to:
Equity shareholders of the
Company $ 4.5 $ 2.1 $ (11.7) $ 9.1
Non-controlling interests 2.5 24.1 7.8 49.4
----------------------------------------------------------------------------
Net income (loss) $ 7.0 $ 26.2 $ (3.9) $ 58.5
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income (loss) per common
share: (in dollars)
Attributable to equity
shareholders of the Company
Basic and diluted (Note 8) $ 0.03 $ 0.01 $ (0.08) $ 0.06
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Canfor Corporation
Condensed Consolidated Statements of Other Comprehensive Income (Loss)
----------------------------------------------------------------------------
3 months ended 6 months ended
June 30, June 30,
(millions of Canadian dollars,
unaudited) 2012 2011 2012 2011
----------------------------------------------------------------------------
Net income (loss) $ 7.0 $ 26.2 $ (3.9) $ 58.5
Other comprehensive income (loss)
Foreign exchange translation
differences for foreign operations 4.1 0.3 0.5 (5.9)
Defined benefit plan actuarial losses
(Note 5) (30.6) (8.8) (37.5) (5.8)
Income tax recovery on defined benefit
plan actuarial losses (Note 7) 7.9 2.2 9.5 1.4
----------------------------------------------------------------------------
Other comprehensive income (loss), net
of tax (18.6) (6.3) (27.5) (10.3)
----------------------------------------------------------------------------
Total comprehensive income (loss) $(11.6) $ 19.9 $(31.4) $ 48.2
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total comprehensive income (loss)
attributable to:
Equity shareholders of the Company $(12.3) $ (3.7) $(36.2) $ (0.6)
Non-controlling interests 0.7 23.6 4.8 48.8
----------------------------------------------------------------------------
Total comprehensive income (loss) $(11.6) $ 19.9 $(31.4) $ 48.2
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Condensed Consolidated Statements of Changes in Equity
----------------------------------------------------------------------------
3 months ended 6 months ended
June 30, June 30,
(millions of Canadian dollars,
unaudited) 2012 2011 2012 2011
----------------------------------------------------------------------------
Share capital
Balance at beginning of period $1,126.2 $1,125.7 $1,125.9 $1,125.4
Common shares issued on exercise of
stock options - - 0.3 0.3
----------------------------------------------------------------------------
Balance at end of period $1,126.2 $1,125.7 $1,126.2 $1,125.7
----------------------------------------------------------------------------
Contributed surplus
----------------------------------------------------------------------------
Balance at beginning and end of
period $ 31.9 $ 31.9 $ 31.9 $ 31.9
----------------------------------------------------------------------------
Retained earnings
Balance at beginning of period $ (44.9) $ 82.8 $ (24.6) $ 73.5
Net income (loss) attributable to
equity shareholders of the Company 4.5 2.1 (11.7) 9.1
Defined benefit plan actuarial
losses, net of tax (20.9) (6.1) (25.0) (3.8)
----------------------------------------------------------------------------
Balance at end of period $ (61.3) $ 78.8 $ (61.3) $ 78.8
----------------------------------------------------------------------------
Accumulated foreign exchange
translation differences
Balance at beginning of period $ (9.5) $ (16.5) $ (5.9) $ (10.3)
Foreign exchange translation
differences for foreign operations 4.1 0.3 0.5 (5.9)
----------------------------------------------------------------------------
Balance at end of period $ (5.4) $ (16.2) $ (5.4) $ (16.2)
----------------------------------------------------------------------------
Total equity attributable to equity
holders of the Company $1,091.4 $1,220.2 $1,091.4 $1,220.2
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Non-controlling interests
Balance at beginning of period $ 211.5 $ 247.0 $ 232.8 $ 249.5
Net income attributable to non-
controlling interests 2.5 24.1 7.8 49.4
Defined benefit plan actuarial
losses attributable to non-
controlling interests (1.8) (0.5) (3.0) (0.6)
Distributions to non-controlling
interests (8.2) (24.9) (8.6) (52.6)
Share exchange (Note 13) - - (25.0) -
----------------------------------------------------------------------------
Balance at end of period $ 204.0 $ 245.7 $ 204.0 $ 245.7
----------------------------------------------------------------------------
Total equity $1,295.4 $1,465.9 $1,295.4 $1,465.9
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Canfor Corporation
Condensed Consolidated Statements of Cash Flows
----------------------------------------------------------------------------
3 months ended 6 months ended
June 30, June 30,
(millions of Canadian dollars,
unaudited) 2012 2011 2012 2011
----------------------------------------------------------------------------
Cash generated from (used in):
Operating activities
Net income (loss) $ 7.0 $ 26.2 $ (3.9) $ 58.5
Items not affecting cash:
Amortization 46.0 40.3 91.1 81.8
Income tax (recovery) expense 5.3 (0.2) (0.3) 0.3
Long-term portion of deferred
reforestation obligations (11.3) (6.0) 2.1 6.1
Change in fair value of long-term
investment - (0.6) (1.3) (1.8)
Foreign exchange (gain) loss on
long-term debt and investments, net 3.8 (2.0) (0.2) (6.7)
Changes in mark-to-market value of
derivative financial instruments 7.7 (0.9) 1.7 (4.6)
Employee future benefits (0.4) (0.5) (2.3) (1.0)
Net finance expense 6.2 5.8 12.4 13.0
Other, net (1.3) (7.1) (2.0) (7.0)
Salary pension plan contributions (9.0) (9.9) (18.0) (19.6)
Income taxes recovered (paid), net (3.3) 0.7 (4.6) -
Net change in non-cash working capital
(Note 9) 68.4 24.0 (10.8) (55.2)
----------------------------------------------------------------------------
119.1 69.8 63.9 63.8
----------------------------------------------------------------------------
Financing activities
Change in operating bank loans (Note
4(a)) (77.0) - 17.0 -
Proceeds from long-term debt (Note
4(b)) - - 100.0 -
Repayment of long-term debt (Note
4(b)) - (48.1) (49.9) (81.9)
Finance expenses paid (7.4) (6.1) (10.5) (9.6)
Cash distributions paid to non-
controlling interests (8.2) (25.9) (12.5) (63.9)
Other, net - - 0.3 0.3
----------------------------------------------------------------------------
(92.6) (80.1) 44.4 (155.1)
----------------------------------------------------------------------------
Investing activities
Additions to property, plant and
equipment (44.4) (55.6) (98.0) (104.5)
Reimbursements from Government under
Green Transformation Program 1.1 21.6 9.0 31.2
Acquisition of Tembec assets (Note 12) (0.7) - (65.6) -
Share exchange (Note 13) - - 6.8 -
Proceeds from redemption of asset-
backed commercial paper (Note 3) 12.9 0.1 12.9 29.8
Other, net 1.9 1.7 3.7 4.5
----------------------------------------------------------------------------
(29.2) (32.2) (131.2) (39.0)
----------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents (2.7) (42.5) (22.9) (130.3)
Cash and cash equivalents at beginning
of period 8.7 172.5 28.9 260.3
----------------------------------------------------------------------------
Cash and cash equivalents at end of
period $ 6.0 $ 130.0 $ 6.0 $ 130.0
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Canfor Corporation
Notes to the Condensed Consolidated Financial Statements
(unaudited, millions of Canadian dollars unless otherwise noted)
1. Basis of Preparation
These condensed consolidated interim 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, hereinafter referred to as "Canfor" or "the Company".
These interim 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 interim financial statements, including the accounting policies applied,
can be found in Canfor's Annual Report for the year ended December 31, 2011,
available at www.canfor.com or www.sedar.com.
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 affects 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.
The currency of presentation for these financial statements is the Canadian dollar.
Change in accounting policy
Effective January 1, 2012, the Company retroactively changed its accounting
policy for the presentation of interest expense and expected rate of return on
assets of defined benefit post-retirement plans. The net expense has been
reclassified from operating income, included in manufacturing and product costs
and in selling and administration costs, to net finance expense. Management
considers the classification of net pension interest expense as a finance
expense more accurately reflects the nature of this cost. The effect on the
three months ended June 30, 2011 and six months ended June 30, 2011 is an
increase in operating income and an increase in net finance expense of $0.9
million and $1.8 million, respectively. There is no impact on amounts recorded
in the consolidated balance sheet or opening equity as at January 1, 2012.
Accounting standards issued and not applied
In the first half of 2011, the International Accounting Standards Board ("IASB")
issued a number of new and revised accounting standards which are effective for
annual periods beginning on or after January 1, 2013, with early adoption
permitted. These new and revised accounting standards have not yet been adopted
by Canfor and the Company does not plan to early adopt any of the standards.
The following new or revised standards are not expected to have a material
impact on the amounts recorded in the financial statements of Canfor:
-- IFRS 10, Consolidated Financial Statements;
-- IFRS 12, Disclosure of Interests in Other Entities;
-- IAS 27, Separate Financial Statements; and
-- IFRS 13, Fair Value Measurement.
The Company is still in the process of assessing the full impact, if any, of the
following new or revised standards:
-- IFRS 11, Joint Arrangements;
-- Amended IAS 19, Employee Benefits; and
-- Amended IAS 28, Investments in Associates and Joint Ventures.
In the first half of 2011, the IASB also issued amended IAS 1, Presentation of
Financial Statements, which is effective for annual periods beginning on or
after July 1, 2012 and IFRS 9, Financial Instruments, which is effective for
annual periods beginning on or after January 1, 2015, with early adoption
permitted. IAS 1 and IFRS 9 are not expected to have a material impact on
amounts recorded in the financial statements of Canfor.
Further details of the new or revised accounting standards and potential impact
on Canfor can be found in Canfor's Annual Report for the year ended December 31,
2011.
2. Inventories
As at As at
June 30, December
(millions of Canadian dollars) 2012 31, 2011
----------------------------------------------------------------------------
Logs $ 47.2 $ 55.9
Finished products 197.0 186.3
Residual fibre 22.0 17.3
Processing materials and supplies 93.1 88.8
----------------------------------------------------------------------------
$ 359.3 $ 348.3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The above inventory balances are stated after inventory write-downs from cost to
net realizable value. Write-downs at June 30, 2012 totaled $0.4 million
(December 31, 2011 - $15.5 million).
3. Long-term Investments and Other
As at
As at December
June 30, 31,
(millions of Canadian dollars) 2012 2011
----------------------------------------------------------------------------
Asset-backed commercial paper ("ABCP") $ - $ 11.8
Other investments 23.6 24.3
Investment tax credits 8.6 8.6
Defined benefit plan assets 3.0 3.0
Other deposits, loans and advances 12.0 15.1
----------------------------------------------------------------------------
$ 47.2 $ 62.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------
On April 2, 2012, the Company sold the ABCP assets for net proceeds of $12.9
million.
4. Operating Lines and Long-Term Debt
(a) Available Operating Lines
As at
As at December
June 30, 31,
(millions of Canadian dollars) 2012 2011
----------------------------------------------------------------------------
Canfor (excluding CPLP)
Principal operating lines $ 350.0 $ 350.0
Facility A - 12.9
----------------------------------------------------------------------------
Total operating lines - Canfor (excluding CPLP) 350.0 362.9
Drawn (17.0) -
Letters of credit (principally unregistered pension
plans) (17.7) (17.2)
----------------------------------------------------------------------------
Total available operating lines - Canfor (excluding
CPLP) $ 315.3 $ 345.7
----------------------------------------------------------------------------
CPLP
Main bank loan facility $ 40.0 $ 40.0
Bridge loan credit facility (maximum $30.0 million) 10.7 19.7
Facility for BC Hydro letter of credit 10.4 10.4
----------------------------------------------------------------------------
Total operating lines - CPLP 61.1 70.1
Letters of credit (for general business purposes) (0.8) (0.5)
BC Hydro letter of credit (10.4) (10.4)
----------------------------------------------------------------------------
Total available operating lines - CPLP $ 49.9 $ 59.2
----------------------------------------------------------------------------
Consolidated:
Total operating lines $ 411.1 $ 433.0
Total available operating lines $ 365.2 $ 404.9
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For Canfor, excluding CPLP, the principal operating lines mature on October 31,
2015. Interest is payable at floating rates based on lenders' Canadian prime
rate, bankers acceptances, US dollar base rate or US dollar LIBOR rate, plus a
margin that varies with the Company's net debt to total capitalization ratio.
Facility A, which was for US$12.7 million at December 31, 2011, expired in
January 2012.
The terms of CPLP's principal bank loan facility include interest payable at
floating rates that vary depending on the ratio of net debt to operating
earnings before interest, taxes, depreciation, amortization and certain other
non-cash items, and is based on lenders' Canadian prime rate, bankers
acceptances, US dollar base rate or US dollar LIBOR rate, plus a margin. The
maturity date of this facility is November 30, 2013.
CPLP also has a maximum $30.0 million bridge loan credit facility with a
maturity date of December 31, 2012 to fund timing differences between
expenditures and reimbursements for projects funded under the Canadian Federal
Government Green Transformation Program, with the amount available at a point in
time equal to the outstanding unreimbursed expenditures. The bridge facility
terms are similar to CPLP's main facility, with interest and other costs at
prevailing market rates. CPLP also has a separate facility with a maturity date
of November 30, 2013 to cover a $10.4 million standby letter of credit issued to
BC Hydro.
As at June 30, 2012, the Company and CPLP were in compliance with all covenants
relating to their operating lines of credit.
All borrowings of CPLP (operating lines and long-term debt) are non-recourse to
other entities within the Company.
(b) Long-Term Debt
During the first quarter of 2012, the Company repaid $49.9 million (US$50.0
million) of 6.33% interest rate privately placed senior notes.
During the first quarter of 2012, the Company also issued new term debt totaling
$100.0 million which was used to fund the above debt repayment and the
acquisition of assets from Tembec (Note 12). The new debt is in the form of an
unsecured non-revolving term loan, with a maturity date of February 13, 2017.
Interest rates are floating based on the lenders' Canadian prime rate or bankers
acceptances. In addition, during the first quarter of 2012, the Company put in
place $75.0 million of floating to fixed interest rate swaps, with an additional
$25.0 million put in place in early April 2012.
At June 30, 2012, the fair value of the long-term debt, measured at its
amortized cost of $288.5 million, was $296.0 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
Canfor measures its accrued benefit obligations and the fair value of plan
assets for accounting purposes as at December 31 of each year. At the end of
each interim reporting period, the Company estimates movements in its accrued
benefit liabilities based upon movements in discount rates and the rates of
return on plan assets, as well as any significant changes to the plans.
Adjustments are also made for payments made and current service and interest
costs.
For the six months ended June 30, 2012, $37.5 million (before tax) was charged
to other comprehensive income. The charge reflected losses on retirement benefit
plan liabilities due to a reduction in the discount rate coupled with an actual
return on plan assets which was lower than the expected gain. For three months
ended June 30, 2012, the charge was $30.6 million (before tax). For the six
months ended June 30, 2011 a pre-tax amount of $5.8 million was charged to other
comprehensive income, relating to a rate of return on plan assets which was
lower than the expected rate of return. For the three months ended June 30, 2011
the pre-tax charge was $8.8 million.
For the Company's pension and other retirement benefit obligations, a one
percentage point increase (decrease) in the discount rate would reduce
(increase) the estimated retirement benefit obligations by approximately $90.0
million before tax.
The assumptions used to estimate the changes in net accrued benefit liabilities
were as follows:
----------------------------------------------------------------------------
Pension Benefit Plans
Discount rate
June 30, 2012 4.65%
March 31, 2012 4.80%
December 31, 2011 5.00%
June 30, 2011 5.50%
March 31, 2011 5.50%
December 31, 2010 5.50%
Rate of return on plan assets
6 months ended June 30, 2012 2.60%
3 months ended March 31, 2012 4.30%
6 months ended June 30, 2011 1.80%
3 months ended March 31, 2011 1.65%
----------------------------------------------------------------------------
Other Benefit Plans
Discount rate
June 30, 2012 4.90%
March 31, 2012 5.00%
December 31, 2011 5.30%
June 30, 2011 5.75%
March 31, 2011 5.75%
December 31, 2010 5.75%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
6. Derivative Financial Instruments
The Company uses a variety of derivative financial instruments to reduce its
exposure to risks associated with fluctuations in foreign exchange rates, lumber
prices, energy costs, electricity sales and floating interest rates on certain
long-term debt. At June 30, 2012, the fair value of derivative financial
instruments was a net liability of $1.8 million (December 31, 2011 - net
liability of $0.2 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, 2012 and 2011:
3 months ended 6 months ended
June 30, June 30,
(millions of Canadian dollars) 2012 2011 2012 2011
----------------------------------------------------------------------------
Foreign exchange collars and forward
contracts $ (2.5) $ 1.0 $ 0.4 $ 2.9
Energy derivatives (1.8) (0.3) (0.6) 0.6
Lumber futures (0.4) 0.6 2.6 2.5
Interest rate swaps (1.6) - (1.3) -
----------------------------------------------------------------------------
$ (6.3) $ 1.3 $ 1.1 $ 6.0
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table summarizes the fair value of the derivative financial
instruments included in the balance sheet at June 30, 2012 and December 31,
2011:
As at As at
June 30, December 31,
(millions of Canadian dollars) 2012 2011
----------------------------------------------------------------------------
Foreign exchange collars and forward contracts $ 0.5 $ (0.4)
Energy derivatives (1.1) (0.2)
Lumber futures - 0.4
Interest rate swaps (1.2) -
----------------------------------------------------------------------------
Total asset (liability) (1.8) (0.2)
Less: current portion 0.5 0.2
----------------------------------------------------------------------------
Long-term portion $ (1.3) $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
7. Income Taxes
3 months ended 6 months ended
June 30, June 30,
(millions of Canadian
dollars) 2012 2011 2012 2011
----------------------------------------------------------------------------
Current $ 0.6 $ (0.1) $ (2.2) $ (0.3)
Deferred (5.9) 0.3 2.5 -
----------------------------------------------------------------------------
Income tax (expense)
recovery $ (5.3) $ 0.2 $ 0.3 $ (0.3)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The reconciliation of income taxes calculated at the statutory rate to the
actual income tax provision is as follows:
3 months ended 6 months ended
June 30, June 30,
(millions of Canadian dollars) 2012 2011 2012 2011
----------------------------------------------------------------------------
Income tax expense at statutory rate
2012 - 25.0% (2011 - 26.5%) $ (3.0) $ (6.9) $ 1.1 $ (15.6)
Add (deduct):
Non-taxable income related to non-
controlling interests in limited
partnerships 0.1 6.4 1.3 13.1
Entities with different income tax
rates and other tax adjustments (2.1) 0.5 (2.2) 0.6
Tax recovery at rates other than
statutory rate 0.2 - 0.2 0.2
Permanent difference from capital
gains and losses and other non-
deductible items (0.5) 0.2 (0.1) 1.4
----------------------------------------------------------------------------
Income tax (expense) recovery $ (5.3) $ 0.2 $ 0.3 $ (0.3)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
In addition to the amounts recorded to net income, a tax recovery of $7.9
million was recorded to other comprehensive income for the three month period
ended June 30, 2012 (three months ended June 30, 2011 - $2.2 million) in
relation to the actuarial losses on defined benefit employee compensation plans.
For the six months ended June 30, 2012, the tax recovery was $9.5 million (six
months ended June 30, 2011 - $1.4 million).
8. Earnings Per Share
Basic net income (loss) per share is calculated by dividing the net income
(loss) available to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted net income (loss) per share is
calculated by dividing the net income (loss) available to common shareholders by
the weighted average number of common shares during the period using the
treasury stock method. Under this method, proceeds from the potential exercise
of stock options are assumed to be used to purchase the Company's common shares.
When there is a net loss, the exercise of stock options would result in a
calculated diluted net loss per share that is anti-dilutive. As at June 30,
2012, there were no outstanding stock options.
3 months ended 6 months ended
June 30, June 30,
2012 2011 2012 2011
----------------------------------------------------------------------------
Weighted average number
of common shares 142,751,442 142,705,764 142,745,724 142,691,365
Incremental shares from
potential exercise of
options - 7,495 - 10,124
----------------------------------------------------------------------------
Diluted number of common
shares 142,751,442 142,713,259 142,745,724 142,701,489
----------------------------------------------------------------------------
----------------------------------------------------------------------------
9. Net Change in Non-Cash Working Capital
3 months ended 6 months ended
June 30, June 30,
(millions of Canadian dollars) 2012 2011 2012 2011
----------------------------------------------------------------------------
Accounts receivable $ (24.1) $ (16.8) $ (32.3) $ (31.2)
Inventories 104.5 83.6 16.0 6.2
Prepaid expenses (16.3) (13.5) (13.8) (11.2)
Accounts payable, accrued
liabilities and current portion of
deferred reforestation obligations 4.3 (29.3) 19.3 (19.0)
----------------------------------------------------------------------------
Net increase (decrease) in non-cash
working capital $ 68.4 $ 24.0 $ (10.8) $ (55.2)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
10. Segment Information
Canfor has two reportable segments 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. Sales for
panels operations for the three months ended June 30, 2012 were $18.0 million
(three months ended June 30, 2011 - $10.9 million) and $32.5 million for the six
months ended June 30, 2012 (six months ended June 30, 2011 - $23.3 million).
Elimin-
Unallo- ation
(millions of Canadian Pulp & cated & Adjust- Consoli-
dollars) Lumber Paper Other ment dated
----------------------------------------------------------------------------
3 months ended June 30, 2012
Sales to external customers $ 443.5 239.4 18.0 - $ 700.9
Sales to other segments $ 29.2 - - (29.2) $ -
Operating income (loss) $ 18.9 11.7 (4.6) - $ 26.0
Amortization $ 26.5 15.1 4.4 - $ 46.0
Capital expenditures(1) $ 25.1 19.3 - - $ 44.4
----------------------------------------------------------------------------
3 months ended June 30, 2011
Sales to external customers $ 331.2 277.0 10.9 - $ 619.1
Sales to other segments $ 32.4 - - (32.4) $ -
Operating income (loss) $ (11.3) 48.8 (10.1) - $ 27.4
Amortization $ 20.7 15.3 4.3 - $ 40.3
Capital expenditures(1) $ 24.4 30.8 0.4 - $ 55.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
6 months ended June 30, 2012
Sales to external customers $ 787.2 488.8 32.5 - $ 1,308.5
Sales to other segments $ 58.4 - - (58.4) $ -
Operating income (loss) $ (1.2) 23.0 (17.3) - $ 4.5
Amortization $ 49.7 32.8 8.6 - $ 91.1
Capital expenditures(1) $ 52.0 46.0 - - $ 98.0
Identifiable assets $ 1,519.1 822.2 158.5 - $ 2,499.8
----------------------------------------------------------------------------
6 months ended June 30, 2011
Sales to external customers $ 659.8 560.0 23.3 - $ 1,243.1
Sales to other segments $ 61.9 - - (61.9) $ -
Operating income (loss) $ (13.8) 96.7 (23.2) - $ 59.7
Amortization $ 41.0 32.1 8.7 - $ 81.8
Capital expenditures(1) $ 50.0 54.1 0.4 - $ 104.5
Identifiable assets $ 1,347.0 842.7 256.6 - $ 2,446.3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
1. Capital expenditures represent cash paid for capital assets, excluding
acquisition of Tembec assets, during the period. Pulp & Paper includes
capital expenditures by CPLP that are financed by the government-funded
Green Transformation Program.
11. Contingency
Softwood Lumber Agreement ("SLA")
On January 18, 2011, the U.S. triggered the arbitration provision of the 2006
Softwood Lumber Agreement ("SLA") by delivering a Request for Arbitration. The
U.S. claimed that the province of British Columbia ("BC") had not properly
applied the timber pricing system grandparented in the SLA. The U.S. also
claimed that subsequent to 2006, BC made additional changes to the timber
pricing system which had the effect of reducing timber prices. The claim focused
on substantial increases in Grade 4 (non sawlog or low grade) volumes commencing
in 2007. It was alleged that timber was scaled and graded as Grade 4 that did
not meet the criteria for that grade, and was accordingly priced too low.
As the arbitration is a state-to-state international dispute under the SLA,
Canada prepared a defense to the claim with the assistance of the BC provincial
government and the BC lumber industry. After numerous representations from both
sides, a hearing was held before the arbitration panel in the first quarter of
2012.
On July 18, 2012 the arbitration panel ruled in favour of Canada and dismissed
the claims of the U.S. in their entirety.
12. Acquisition of Tembec Assets
On March 23, 2012, the Company completed the acquisition of Tembec Industries
Ltd.'s ("Tembec") southern British Columbia Interior wood products assets for
cash consideration of approximately $65 million, including a payment relating to
net working capital, which excluded certain liabilities retained by Tembec. The
acquisition has been accounted for in accordance with IFRS 3 Business
Combinations.
The acquisition included Tembec's Elko and Canal Flats sawmills and
approximately 1.1 million cubic metres of combined Crown, private land and
contract annual allowable cut. The transaction also included a long-term
agreement to provide residual fibre supply for Tembec's Skookumchuck pulp mill.
The assets acquired increase the Company's fibre availability and production
capacity.
Of the consideration paid, approximately $44 million represented the preliminary
fair value of the timber licenses acquired, with the balance split between the
fair value of the property, plant and equipment and net non-cash working capital
balances.
If the acquisition had occurred on January 1, 2012, consolidated sales would
have increased by approximately $37.0 million, with no material change to
consolidated net loss. In determining these amounts, the fair value adjustments
that arose on the acquisition date have been assumed to be the same as if the
acquisition had occurred on January 1, 2012.
The Company incurred acquisition-related costs of $1.3 million, principally
relating to external legal fees and due diligence costs, which have been
included in selling and administration costs, and severance costs of $2.5
million related to restructuring of the acquired assets, and these amounts are
recorded in the Company's consolidated statement of income (loss) for the six
months ended June 30, 2012.
13. Share Exchange
On March 2, 2012, Canadian Forest Products Ltd. ("CFP"), a wholly owned
subsidiary of Canfor, acquired 35,776,483 common shares of Canfor Pulp Products,
Inc. ("CPPI") in exchange for its 35,776,483 Class B Exchangeable LP Units of
Canfor Pulp Limited Partnership ("CPLP") and 35,776,483 common shares of Canfor
Pulp Holding Inc. ("Canfor Holding"), pursuant to the terms of an Exchange
Agreement made as of January 1, 2011 among CFP, CPPI, Canfor Holding and CPLP.
As of the date of exchange, the Company consolidated the balances of CPPI and
Canfor Holding, including an additional deferred income tax liability of $31.4
million and cash of $6.8 million. The non-controlling interest in consolidated
equity increased by $25.0 million on the date of exchange, representing the
additional non-controlling interest balances in CPPI and Canfor Holding.
Prior to the share exchange, CFP and CPPI entered into a one-time dividend
waiver agreement, waiving CFP's right to the first $7.8 million of future
dividends declared by CPPI. As such, $7.8 million was included in
non-controlling interests to account for future distributions which the Company
had waived its entitlement to. The full $7.8 million dividend was paid by CPPI
during the second quarter of 2012.
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