Canfor Pulp Products Inc. ("CPPI") (TSX:CFX) today reported net income of $14.2
million, or $0.20 per share, for the fourth quarter of 2013, compared to $9.1
million, or $0.13 per share, for the third quarter of 2013 and $5.4 million, or
$0.08 per share, for the fourth quarter of 2012. For the year ended December 31,
2013, the Company's net income was $41.8 million, or $0.59 per share compared to
$13.4 million, or $0.14 per share, for 2012.
The following table summarizes selected financial information for the Company
for the comparative periods (1):
(millions of Canadian dollars, Q4 Q3 YTD Q4 YTD
except per share amounts) 2013 2013 2013 2012 2012
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Sales $ 245.6 $ 196.1 $ 886.8 $ 201.9 $ 810.4
Operating income $ 24.0 $ 11.3 $ 73.8 $ 12.1 $ 25.6
Net income $ 14.2 $ 9.1 $ 41.8 $ 5.4 $ 13.4
Net income per share, basic and
diluted $ 0.20 $ 0.13 $ 0.59 $ 0.08 $ 0.14
Adjusted net income $ 17.3 $ 5.6 $ 50.7 $ 2.6 $ 3.0
Adjusted net income per share, basic
and diluted $ 0.24 $ 0.08 $ 0.71 $ 0.04 $ 0.05
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(1) Certain prior period amounts have been restated due to the adoption of
amended IAS 19, Employee Benefits. Further details can be found in the
Company's unaudited interim consolidated financial statements.
After adjusting for various items affecting comparability with the prior
periods, the Company's adjusted net income for the fourth quarter of 2013 was
$17.3 million, or $0.24 per share, compared to an adjusted net income of $5.6
million, or $0.08 per share, for the third quarter of 2013. CPPI's adjusted net
income for the fourth quarter of 2012 was $2.6 million, or $0.04 per share. For
2013, the Company's adjusted net income was $50.7 million, or $0.71 per share,
compared to $3.0 million, or $0.05 per share, for 2012.
The Company reported operating income of $24.0 million for the fourth quarter of
2013, an increase of $12.7 million compared to the third quarter of 2013, driven
by improved Northern Bleached Softwood Kraft ("NBSK") pulp sales realizations
coupled with higher shipments levels.
Results in the fourth quarter of 2013 benefited from a modest improvement in
global softwood pulp markets, with an increase in demand and a corresponding
increase in prices through the quarter. Global softwood pulp producer inventory
levels were balanced during the quarter, at 27 days' supply in December 2013, in
line with September 2013; market conditions are generally considered balanced
when inventories are in the 27-30 days of supply range. Average NBSK pulp list
prices increased in all regions during the fourth quarter, with the North
American pulp list price up US$36 per tonne from the previous quarter to US$983
and Europe up US$35 per tonne from the previous quarter to US$902 reflecting a
4% gain in both regions. Pulp list prices to China were up US$52 per tonne to
US$737, an increase of 8% in the quarter. List prices to all regions ended the
2013 year at their highest levels for two years, but price gains for the 2013
year as a whole were partly eroded by increased upward pressure on discounts,
particularly in North America. Fourth quarter sales realizations also benefited
slightly from a 1% weakening of the Canadian dollar against the US dollar.
Higher shipment levels for the fourth quarter of 2013, up over 61,000 tonnes
from the prior quarter, were attributable to higher production and a drawdown of
inventories resulting from increased purchasing, principally from China, in part
due to inventory build ahead of the Chinese Lunar New Year. The increased
production levels mainly reflected a reduction in scheduled outages during the
period. Pulp unit manufacturing costs in the fourth quarter of 2013 were down
slightly from the previous quarter, largely due to the favourable impact of the
higher production levels, offset in part by higher energy costs.
The Company's paper segment operating income was down $2.1 million from the
previous quarter, with production and shipment volumes both impacted by a
scheduled maintenance outage of the Prince George Kraft paper machine in the
quarter. Moderately higher unit manufacturing costs in the current quarter
largely were attributable to the lower production volumes, higher slush pulp
costs resulting from higher market pulp prices, and higher maintenance and
operating costs.
The Company continued to preserve its strong financial position, ending the year
with cash and cash equivalents of $14 million, and a net debt to capitalization
of 9.7%. During the fourth quarter of 2013, the Company completed a $50 million
floating interest rate term debt financing, repayable on November 5, 2018 with
no penalty for early repayment and also extended the maturity on its $110
million operating loan facility to January 31, 2018.
Commenting on the fourth quarter's results, CPPI's Chief Executive Officer, Don
Kayne, said, "Overall shipments were strong in the fourth quarter, supported by
better-than-anticipated market conditions." Kayne added that he was encouraged
by the Company's improving operating performance as it entered 2014 and by the
continued growth of its green energy business, with the Company's turbine
upgrades at the Northwood Pulp Mill projected to be commissioned by the end of
the first quarter of 2014.
For the month of January 2014, the Company has announced an increase in the NBSK
pulp list price of US$20 per tonne in North America with list prices to China
and Europe remaining unchanged. There are no maintenance outages planned for the
first quarter of 2014. With significant new hardwood pulp capacity projected to
come online in the coming months, there continues to be a risk that pulp prices
may come under pressure in 2014.
On February 5, 2014, the Board of Directors declared a quarterly dividend of
$0.05 per share with a declaration date of February 5, 2014, payable on February
25, 2014, to the shareholders of record on February 18, 2014. CPPI may, subject
to market conditions, continue to pay a modest level of dividends through 2014.
Additional Information and Conference Call
A conference call to discuss the fourth quarter's financial and operating
results will be held on Thursday, February 6, 2014 at 8:00 AM Pacific time. To
participate in the call, please dial 416-340-8010 or Toll-Free 866-540-8136. For
instant replay access until February 22, 2014, please dial 800-408-3053 and
enter participant pass code 5201618#. The conference call will be webcast live
and will be available at www.canforpulp.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.canforpulp.com/investors/webcasts.
Forward Looking Statements
Certain statements in this press release constitute "forward-looking statements"
which involve known and unknown risks, uncertainties and other factors that may
cause actual results to be materially different from any future results,
performance or achievements expressed or implied by such statements. Words such
as "expects", "anticipates", "projects", "intends", "plans", "will", "believes",
"seeks", "estimates", "should", "may", "could", and variations of such words and
similar expressions are intended to identify such forward-looking statements.
These statements are based on management's current expectations and beliefs and
actual events or results may differ materially. There are many factors that
could cause such actual events or results expressed or implied by such
forward-looking statements to differ materially from any future results
expressed or implied by such statements. Forward-looking statements are based on
current expectations and the Company assumes no obligation to update such
information to reflect later events or developments, except as required by law.
CPPI is a leading global supplier of pulp and paper products with operations
based in the central interior of British Columbia. The Company owns and operates
three mills with annual capacity to produce over one million tonnes of northern
softwood market kraft pulp, 90% of which is bleached to become NBSK pulp for
sale to the market, and approximately 140,000 tonnes of kraft paper. CPPI shares
are traded on the Toronto Stock Exchange under the symbol CFX.
Canfor Pulp Products Inc.
Fourth Quarter 2013
Management's Discussion and Analysis
This interim Management's Discussion and Analysis ("MD&A") provides a review of
Canfor Pulp Products Inc.'s ("CPPI" or "the Company") financial performance for
the quarter ended December 31, 2013 relative to the quarters ended September 30,
2013 and December 31, 2012, and the financial position of the Company at
December 31, 2013. It should be read in conjunction with CPPI's unaudited
interim consolidated financial statements and accompanying notes for the
quarters ended December 31, 2013 and 2012, as well as the 2012 annual MD&A and
the 2012 audited consolidated financial statements and notes thereto, which are
included in CPPI's Annual Report for the year ended December 31, 2012 (available
at www.canforpulp.com). The financial information in this interim MD&A has been
prepared in accordance with International Financial Reporting Standards
("IFRS"), which is the required reporting framework for Canadian publicly
accountable enterprises.
Throughout this discussion, reference is made to Operating Income before
Amortization which CPPI considers to be a relevant indicator for measuring
trends in the Company's performance and its ability to generate funds to meet
its debt service and capital expenditure requirements, and to pay dividends.
Reference is also made to Adjusted Net Income (Loss) (calculated as 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 Net Income (Loss)") and
Adjusted Net Income (Loss) per Share (calculated as Adjusted Net Income (Loss)
divided by weighted average number of shares outstanding during the period).
Operating Income before Amortization, Adjusted Net Income (Loss) and Adjusted
Net Income (Loss) per Share are not a generally accepted earnings measures and
should not be considered as an alternative to net income or cash flows as
determined in accordance with IFRS. As there is no standardized method of
calculating these measures, CPPI's Operating Income before Amortization,
Adjusted Net Income (Loss) and Adjusted Net Income (Loss) per Share may not be
directly comparable with similarly titled measures used by other companies.
Reconciliations of Operating Income before Amortization to operating income
(loss) and Adjusted 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 CPPI.
All financial references are in millions of Canadian dollars unless otherwise
noted. The information in this report is as at February 5, 2014.
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.
CPPI SHARE EXCHANGE AND PARTNERSHIP WIND-UP
On March 2, 2012, Canadian Forest Products Ltd. ("Canfor") acquired 35,776,483
common shares of Canfor Pulp Products, Inc. ("CPPI") in exchange for its
35,776,483 Class B Exchangeable Limited Partnership Units of Canfor Pulp Limited
Partnership ("the Partnership") and 35,776,483 common shares of Canfor Pulp
Holding Inc., pursuant to the terms of an Exchange Agreement made as of January
1, 2011 among Canfor, CPPI, Canfor Pulp Holding Inc. and the Partnership. As a
result of the exchange, CPPI's interest in both the Partnership and Canfor Pulp
Holding Inc. increased from 49.8% to 100% and Canfor acquired a 50.2% interest
in CPPI.
On December 27, 2013, the Partnership was wound up and all of the net assets
were transferred to Canfor Pulp Holding Inc. Subsequent to the transfer, Canfor
Pulp Holding Inc. was renamed Canfor Pulp Ltd.
FOURTH QUARTER 2013 OVERVIEW
Selected Financial Information and Statistics(1)
(millions of Canadian dollars, Q4 Q3 YTD Q4 YTD
except per share amounts) 2013 2013 2013 2012 2012
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Operating income (loss) by
segment:
Pulp $ 24.1 $ 8.3 $ 63.2 $ 7.8 $ 20.0
Paper $ 3.8 $ 5.9 $ 22.7 $ 7.0 $ 19.5
Unallocated $ (3.9) $ (2.9) $ (12.1) $ (2.7) $ (13.9)
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Total operating income $ 24.0 $ 11.3 $ 73.8 $ 12.1 $ 25.6
Add: Amortization $ 15.5 $ 16.5 $ 69.9 $ 20.0 $ 67.1
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Total operating income before
amortization $ 39.5 $ 27.8 $ 143.7 $ 32.1 $ 92.7
Add (deduct):
Working capital movements $ 27.9 $ (10.1) $ 16.1 $ 2.4 $ 12.2
Defined benefit pension plan
contributions $ (2.5) $ (2.3) $ (10.1) $ (2.4) $ (10.1)
Other operating cash flows,
net $ 4.2 $ (0.5) $ 7.2 $ (6.3) $ (6.9)
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Cash from operating activities $ 69.1 $ 14.9 $ 156.9 $ 25.8 $ 87.9
Add (deduct):
Drawdown of long-term debt,
net $ 50.0 $ - $ 50.0 $ - $ -
Repayment of long-term debt,
net $(116.6) $ - $(116.6) $ - $ -
Dividends paid $ (3.5) $ (3.5) $ (14.2) $ - $ (19.2)
Finance expenses paid $ (4.9) $ (0.2) $ (9.1) $ (4.1) $ (8.1)
Capital additions, net(2) $ (19.9) $ (26.5) $ (61.2) $ (11.5) $ (66.8)
Share purchases $ - $ (1.4) $ (2.4) $ - $ -
Acquisition of CPPI cash on
exchange $ - $ - $ - $ - $ 6.8
Other, net $ - $ 0.5 $ 0.7 $ - $ 0.2
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Change in cash / operating
loans $ (25.8) $ (16.2) $ 4.1 $ 10.2 $ 0.8
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ROIC - Consolidated(3) 4.0% 1.5% 12.1% 1.8% 4.0%
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Average exchange rate (US$ per
C$1.00)(4) $ 0.953 $ 0.963 $ 0.971 $ 1.009 $ 1.001
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(1) Certain prior period amounts have been restated due to the adoption of
amended IAS 19, Employee Benefits. Further details can be found in the
Company's unaudited interim consolidated financial statements.
(2) Additions to property, plant and equipment are shown net of amounts
received under Government funding initiatives.
(3) Consolidated Return on Invested Capital ("ROIC") is equal to operating
income/loss, plus realized gains/losses on derivatives and other
income/expense, divided by the average invested capital during the year.
Invested capital is equal to capital assets, plus long-term investments and
net non-cash working capital.
(4) Source - Bank of Canada (average noon rate for the period).
Analysis of Specific Material Items Affecting Comparability of Net Income(1)
After-tax impact, net of non-
controlling interests(5)
(millions of Canadian dollars, Q4 Q3 YTD Q4 YTD
except per share amounts) 2013 2013 2013 2012 2012
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Net Income(5), as reported $ 14.2 $ 9.1 $ 41.8 $ 5.4 $ 9.1
Foreign exchange (gain) loss on
long-term debt $ 3.0 $ (2.0) $ 6.4 $ 1.1 $ (2.2)
(Gain) loss on derivative
financial instruments $ 0.1 $ (1.5) $ 0.1 $ 0.1 $ (1.2)
Change in substantively enacted
tax rate $ - $ - $ 2.4 $ - $ -
Net gain on post retirement plan
amendments $ - $ - $ - $ (4.0) $ (4.0)
Restructuring charges for
management changes $ - $ - $ - $ - $ 1.3
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Net impact of above items $ 3.1 $ (3.5) $ 8.9 $ (2.8) $ (6.1)
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Adjusted Net Income(5) $ 17.3 $ 5.6 $ 50.7 $ 2.6 $ 3.0
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Net Income per share (EPS), as
reported(5) $ 0.20 $ 0.13 $ 0.59 $ 0.08 $ 0.14
Net impact of above items per
share $ 0.04 $ (0.05) $ 0.12 $ (0.04) $ (0.09)
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Adjusted Net Income per share(5) $ 0.24 $ 0.08 $ 0.71 $ 0.04 $ 0.05
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(5) 2012 amounts exclude the impact of non-controlling interest in the
Partnership. Amounts are attributable to controlling interest in the
Partnership.
The Company reported operating income of $24.0 million for the fourth quarter of
2013, an increase of $12.7 million compared to the third quarter of 2013, driven
by improved Northern Bleached Softwood Kraft ("NBSK") pulp sales realizations
coupled with higher shipments levels.
Results in the fourth quarter of 2013 benefited from a modest improvement in
global softwood pulp markets, with an increase in demand and a corresponding
increase in prices through the quarter. Global softwood pulp producer inventory
levels were balanced during the quarter, at 27 days' supply in December 2013, in
line with September 2013; market conditions are generally considered balanced
when inventories are in the 27-30 days of supply range. Average NBSK pulp list
prices increased in all regions during the fourth quarter, with the North
American pulp list price up US$36 per tonne from the previous quarter to US$983
and Europe up US$35 per tonne from the previous quarter to US$902 reflecting a
4% gain in both regions. Pulp list prices to China were up US$52 per tonne to
US$737, an increase of 8% in the quarter. List prices to all regions ended the
2013 year at their highest levels for two years, but price gains for the 2013
year as a whole were partly eroded by increased upward pressure on discounts,
particularly in North America. Fourth quarter sales realizations also benefited
slightly from a 1% weakening of the Canadian dollar against the US dollar.
Higher shipment levels for the fourth quarter of 2013, up over 61,000 tonnes
from the prior quarter, were attributable to higher production and a drawdown of
inventories resulting from increased purchasing, principally from China, in part
due to inventory build ahead of the Chinese Lunar New Year. The increased
production levels mainly reflected a reduction in scheduled outages during the
period. Pulp unit manufacturing costs in the fourth quarter of 2013 were down
slightly from the previous quarter, largely due to the favourable impact of the
higher production levels, offset in part by higher energy costs.
The Company's paper segment operating income was down $2.1 million from the
previous quarter, with production and shipment volumes both impacted by a
scheduled maintenance outage of the Prince George Kraft paper machine in the
quarter. Moderately higher unit manufacturing costs in the current quarter
largely were attributable to the lower production volumes, higher slush pulp
costs resulting from higher market pulp prices, and higher maintenance and
operating costs.
Compared to the fourth quarter of 2012, operating income improved by $11.9
million, principally due to higher pulp segment earnings. Improved pulp segment
results largely reflected improved sales realizations, and to a lesser degree, a
6% weaker Canadian dollar, coupled with higher shipments. Pulp unit
manufacturing costs were up modestly from the fourth quarter of 2012, driven by
the unfavourable impact of lower production volumes and higher fibre costs.
Included in the fourth quarter of 2012 results was $5.3 million of an accounting
gain related to post retirement plan adjustments.
OPERATING RESULTS BY BUSINESS SEGMENT
Pulp
Selected Financial Information and Statistics - Pulp(6)
(millions of Canadian dollars unless Q4 Q3 YTD Q4 YTD
otherwise noted) 2013 2013 2013 2012 2012
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Sales $ 212.3 $ 158.0 $ 738.4 $ 168.2 $ 675.0
Operating income before amortization $ 38.8 $ 23.8 $ 129.3 $ 26.8 $ 83.2
Operating income $ 24.1 $ 8.3 $ 63.2 $ 7.8 $ 20.0
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Average pulp price delivered to U.S.
- US$(7) $ 983 $ 947 $ 941 $ 863 $ 872
Average price in Cdn$ $ 1,032 $ 983 $ 969 $ 855 $ 871
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Production - pulp (000 mt) 246.1 220.6 981.2 260.5 955.7
Shipments - pulp (000 mt) 273.3 212.2 998.4 246.6 961.8
Marketed on behalf of Canfor 56.2 55.3 214.6 51.2 214.8
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(6) Certain prior period amounts have been restated due to the adoption of
amended IAS 19, Employee Benefits. Further details can be found in the
Company's unaudited interim consolidated financial statements.
(7) Per tonne, NBSK pulp list price delivered to U.S. (Resource Information
Systems, Inc.).
Overview
Operating income for the pulp segment was $24.1 million for the fourth quarter
of 2013, up $15.8 million from the previous quarter and up $16.3 million from
the fourth quarter of 2012. Compared to the previous quarter of 2013, results
for the pulp segment reflected significantly higher shipment volumes coupled
with moderate increases in sales realizations resulting from increased NBSK
prices and a further weakening of the Canadian dollar. The increased production
primarily resulted from a reduction in scheduled outages. For the 2013 year as a
whole, operating income was $63.2 million, up $43.2 million from $20.0 million
in 2012.
Improved results for the pulp segment compared to the fourth quarter of 2012
principally reflected higher sales realizations, resulting from a 14% increase
in pulp list prices, a 6% weaker Canadian dollar and higher shipments in the
current quarter, the latter driven by higher shipments into China, partially
offset by reduced volume into the U.S. This shift in the regional sales mix as
well as upward pressure on discounts in North American markets partially offset
the improved NBSK list prices and favourable exchange rates. Unit manufacturing
costs increased modestly quarter-over-quarter, as a result of higher sawmill
residual chip fibre costs (linked to NBSK market pulp sales realizations), and
lower production levels, offset in part by reduced chemical and maintenance
spend. The fourth quarter of 2012 results included an accounting gain of $4.3
million related to post retirement plan adjustments.
Markets
Global softwood pulp markets strengthened in the fourth quarter of 2013, with
increased demand and solid increases in list prices through the quarter. Global
softwood pulp producer inventory levels were balanced during the quarter, at 27
days' supply in December 2013, in line with September 2013(8). Market conditions
are generally considered balanced when inventories are in the 27-30 days of
supply range.
Global shipments of bleached softwood kraft pulp increased 2% in 2013 compared
to 2012(9). The increase in softwood pulp shipments in the year was primarily
due to increased shipments to North America and Europe, while shipments to China
were relatively flat. Global shipments to China were up 2% in the fourth quarter
of 2013 compared to the third quarter of 2013 and up 11% compared to the same
period in 2012(9).
(8) World 20 data is based on twenty producing countries representing 80% of
world chemical market pulp capacity and is based on information compiled and
prepared by the Pulp and Paper Products Council ("PPPC").
(9) As reported PPPC statistics.
Sales
The Company's pulp shipments in the fourth quarter of 2013 were 273,000 tonnes,
an increase of 61,000 tonnes, or 29%, from the previous quarter, reflecting both
higher production volumes and increased demand, principally from China, driven
in part by a build in inventories ahead of the Chinese Lunar New Year. Compared
to the fourth quarter of 2012, shipments were higher by 27,000 tonnes, or 11%,
due largely to increased shipments to China, partially offset by reduced volumes
to the U.S.
The North American pulp list price increased US$36 per tonne to US$983 and the
list price to Europe increased US$35 to US$902 reflecting a 4% gain in both
regions. The NBSK pulp list price to China increased US$52 per tonne, averaging
US$737 in the quarter. List prices to all regions ended the year at their
highest levels over the last two years. The favourable impact of higher NBSK
prices during the quarter was slightly offset by increased volume to China, with
lower average sales realizations. Current quarter sales realizations also
benefited slightly from the 1% weakening of the Canadian dollar against the US
dollar.
Compared to the fourth quarter of 2012, higher pulp sales realizations resulted
from significant improvements in average pulp prices in all regions and the 6%
weakening of the Canadian dollar. The North American NBSK list pulp price
increased US$120 per tonne, or 14%. List prices to Europe and China experienced
similar increases, up 12% and 11%, respectively, compared to the fourth quarter
of 2012. The improved NBSK list prices more than offset the impact of increased
volume to lower-margin regions, principally China, and the impact of increased
discounts in North American markets in 2013.
Operations
Pulp production in the current quarter was 246,000 tonnes, an increase of 26,000
tonnes, or 12%, from the previous quarter, and a decrease of 14,000 tonnes, or
6%, compared to the fourth quarter of 2012.
Increased production in the current quarter was primarily the result of a
reduction in scheduled outages compared to the previous quarter. The current
quarter included a scheduled maintenance outage at the Prince George Pulp Mill
which resulted in reduced market pulp production of 4,000 tonnes. In comparison,
the third quarter of 2013 included a scheduled major maintenance outage at the
Northwood Pulp Mill, which impacted production by 32,000 tonnes. Both the
current and previous quarters' production levels reflected similar impacts from
operational challenges but productivity improved towards the end of the current
quarter. Compared to the fourth quarter of 2012, production levels reflected
lower overall operating rates.
Pulp unit manufacturing costs saw a slight decrease from the previous quarter,
largely due to the favourable impact of higher production and slightly lower
fibre costs, partially offset by higher energy costs. Fibre costs were down
slightly compared to the previous quarter, attributable to lower-cost whole log
chips and seasonal pricing adjustments. The increase in energy costs in the
current quarter was primarily related to reduced power production as upgrades
were completed to the Northwood turbine generators and planned maintenance was
completed on the Prince George Pulp Mill's turbine generator.
Compared to the fourth quarter of 2012, unit manufacturing costs increased
modestly, primarily driven by higher fibre costs, lower production levels and
higher energy costs, offset in part by reduced chemical costs and reduced
maintenance spending. The higher fibre costs in the current quarter resulted
from market-related increases in prices for sawmill residual chips coupled with
increased prices for higher-cost whole log chips, in part related to pressure on
stumpage rates.
Paper
Selected Financial Information and Statistics - Paper(10)
(millions of Canadian dollars unless Q4 Q3 YTD Q4 YTD
otherwise noted) 2013 2013 2013 2012 2012
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Sales $ 33.2 $ 38.1 $ 147.1 $ 33.7 $ 134.6
Operating income before amortization $ 4.6 $ 6.9 $ 26.4 $ 8.0 $ 23.3
Operating income $ 3.8 $ 5.9 $ 22.7 $ 7.0 $ 19.5
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Production - paper (000 mt) 30.8 33.8 134.7 35.4 130.2
Shipments - paper (000 mt) 31.1 35.5 138.8 32.0 129.0
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(10) Certain prior period amounts have been restated due to the adoption of
amended IAS 19, Employee Benefits. Further details can be found in the
Company's unaudited interim consolidated financial statements.
Overview
Operating income for the paper segment was $3.8 million for the fourth quarter
of 2013, down $2.1 million from the third quarter of 2013 and down $3.2 million
from the fourth quarter of 2012. The decrease in earnings compared to the
previous quarter primarily resulted from moderately higher unit manufacturing
costs, coupled with lower production and shipment volumes, with both impacted by
a scheduled maintenance outage of the Prince George Kraft paper machine in the
current quarter. Compared to the fourth quarter of 2012, lower operating income
reflected higher costs for slush pulp and lower production volumes which were
partly offset by higher unit sales realizations. For the 2013 year, operating
income was $22.7 million, an improvement of $3.2 million compared to 2012.
Markets
Global Kraft paper markets remained stable through the fourth quarter as order
files remained steady in both North America and Europe. The Paper Shipping
Manufacturers' Association reported strong operating rates for the U.S. of 83%
in the fourth quarter of 2013, compared to 76% in the same period in 2012.
Sales
The Company's paper shipments in the fourth quarter of 2013 were 31,000 tonnes,
a decrease of 4,400 tonnes, or 12%, from the previous quarter and down 900
tonnes, or 3%, from the fourth quarter of 2012, principally reflecting lower
production levels. Prime bleached shipments, which attract higher prices, were
down 5% from the third quarter of 2013 but up 2% from the fourth quarter of
2012.
Unit sales realizations for paper products were in line with the third quarter
of 2013 and up slightly compared to the fourth quarter of 2012. Sales
realizations in the current quarter benefited from the weaker Canadian dollar
relative to both comparative periods.
Operations
Paper production in the fourth quarter of 2013 was 31,000 tonnes, a decrease of
3,000 tonnes, or 9%, from the previous quarter and down 4,600 tonnes, or 13%,
from the fourth quarter of 2012. The decreased production principally related to
a scheduled maintenance outage at the Company's paper machine in October 2013.
Paper unit manufacturing costs increased moderately from the previous quarter
largely reflecting the impact of lower production volumes on unit costs and
higher maintenance and operating costs, as well as the impact of higher market
pulp prices on slush pulp costs.
Compared to the fourth quarter of 2012, unit manufacturing costs for the current
quarter showed a more marked increase, with higher costs for slush pulp,
principally attributable to an uplift in market pulp prices, coupled with the
impact of the scheduled maintenance outage.
Unallocated Items
Selected Financial Information(11)
Q4 Q3 YTD Q4 YTD
(millions of Canadian dollars) 2013 2013 2013 2012 2012
----------------------------------------------------------------------------
Corporate costs $ (3.9) $ (2.9) $ (12.1) $ (2.7) $ (13.9)
Finance expense, net $ (3.2) $ (3.0) $ (11.8) $ (3.7) $ (13.2)
Foreign exchange gain (loss) on
long-term debt $ (3.4) $ 2.3 $ (7.3) $ (1.3) $ 2.4
Gain (loss) on derivative
financial instruments $ (0.1) $ 1.9 $ (0.1) $ (0.1) $ 1.7
Other income (expense), net $ 2.2 $ (1.5) $ 5.2 $ 0.3 $ (1.2)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(11) Certain prior period amounts have been restated due to the adoption of
amended IAS 19, Employee Benefits. Further details can be found in the
Company's unaudited interim consolidated financial statements.
Corporate costs were $3.9 million for the fourth quarter of 2013, up $1.0
million from the previous quarter and up $1.2 million from the fourth quarter of
2012. The increase in costs in the current quarter were attributable to several
factors including costs associated with the wind-up of Canfor Pulp Limited
Partnership at the end of the current year (see further discussion in the
earlier "CPPI Share Exchange and Partnership Wind-Up" section) and year end
incentive compensation adjustments. The fourth quarter of 2012 also included an
accounting gain of $0.5 million due to amendments to the Company's salaried post
retirement benefit plans.
Net finance expense for the fourth quarter of 2013 was $3.2 million, in line
with the third quarter of 2013 and down slightly from the same quarter in the
prior year. The finance expense for each period principally represents interest
expense on long-term debt and stand-by fees for the Company's operating lines,
as well as the finance expense relating to the Company's defined benefit
post-retirement benefit plans.
The Company recorded a foreign exchange translation loss on its US dollar
denominated debt of $3.4 million for the fourth quarter of 2013, as a result of
a weaker Canadian dollar against the US dollar through the fourth quarter of
2013. In the third quarter of 2013, a strengthening of the Canadian dollar at
the quarter end close dates resulted in a translation gain of $2.3 million,
while the fourth quarter of 2012 showed a loss of $1.3 million due to a
weakening of the Canadian dollar against the US dollar at the respective quarter
ends.
The Company uses a variety of derivative financial instruments as partial
economic hedges against unfavourable changes in foreign exchange rates, energy
costs, interest rates and pulp prices. For the fourth quarter of 2013, the
Company recorded a net loss of $0.1 million related to derivative financial
instruments, due to realized and unrealized losses on pulp futures as a result
of strong NBSK prices at the end of the quarter coupled with unrealized losses
on crude oil collars.
The following table summarizes the gains (losses) on derivative financial
instruments for the comparable periods:
Q4 Q3 YTD Q4 YTD
(millions of Canadian dollars) 2013 2013 2013 2012 2012
----------------------------------------------------------------------------
Foreign exchange collars and
forward contracts $ 0.1 $ 2.0 $ 0.1 $ (0.2) $ 1.7
Crude oil collars $ (0.1) $ 0.1 $ 0.1 $ 0.1 $ -
Interest rate swaps $ - $ (0.2) $ (0.2) $ - $ -
Pulp futures $ (0.1) $ - $ (0.1) $ - $ -
----------------------------------------------------------------------------
$ (0.1) $ 1.9 $ (0.1) $ (0.1) $ 1.7
----------------------------------------------------------------------------
Other expense, net for the fourth quarter of 2013 of $2.2 million included
favourable exchange movements on US dollar denominated cash, receivables and
payables.
Other Comprehensive Income (Loss)
In the fourth quarter of 2013, the Company recorded an after-tax credit to the
statements of other comprehensive income (loss) of $16.0 million in relation to
changes in the valuation of its defined benefit post-employment compensation
plans and other non-pension post-employment benefit plans. The gain associated
with the defined benefit post-employment compensation plans is principally due
to a higher return on plan assets coupled with a higher discount rate used to
value the net defined benefit obligation, offset in part by adjustments to
mortality rate assumptions. The gain related to the other non-pension
post-employment benefits principally reflected a higher discount rate used to
value the post-employment obligation and favourable experience adjustments,
offset in part by adjustments to mortality rate assumptions. In the previous
quarter, the Company recorded a credit of $3.2 million (after-tax), while an
after-tax charge of $1.5 million was recorded in the fourth quarter of 2012.
SUMMARY OF FINANCIAL POSITION
The following table summarizes CPPI's cash flow and selected ratios for and as
at the end of the following periods:
(millions of Canadian Q4 Q3 YTD Q4 YTD
dollars, except for ratios) 2013 2013 2013 2012 2012
----------------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents $ (15.2) $ (16.2) $ 14.7 $ 3.2 $ 0.8
Operating activities $ 69.1 $ 14.9 $ 156.9 $ 25.8 $ 87.9
Financing activities $ (64.5) $ (5.1) $ (81.8) $ (11.1) $ (27.3)
Investing activities $ (19.8) $ (26.0) $ (60.4) $ (11.5) $ (59.8)
Ratio of current assets to
current liabilities 1.8 : 1 1.1 : 1
Net debt to capitalization 9.7% 22.2%
ROIC - Consolidated 4.0% 1.5% 12.1% 1.8% 4.0%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Changes in Financial Position
Cash generated from operating activities was $69.1 million in the fourth quarter
of 2013, up $54.2 million from the previous quarter, resulting from an increase
in operating income and a decrease in non-cash working capital. The cash
generated from non-cash working capital principally reflected a significant
reduction in finished good pulp inventory levels. The previous quarter's cash
inflows included annual property tax and insurance payments. Compared to the
fourth quarter of 2012, cash generated from operating activities increased by
$43.3 million, largely due to the combination of higher cash earnings and a
larger reduction in finished goods inventories in the current quarter.
Cash used for financing activities was $64.5 million in the fourth quarter of
2013, up from $5.1 million used in the third quarter. The current quarter cash
flows included repayment of the Company's US$110 million 6.41% interest rate
debt. In the fourth quarter of 2013, the Company completed a $50.0 million
unsecured non-revolving floating rate term debt financing (see further
discussion of the debt issued in the fourth quarter in the following "Liquidity
and Financial Requirements" section). At the end of the fourth quarter of 2013,
the Company had $10.6 million outstanding on its operating loan facility. CPPI
also paid $4.9 million in finance costs principally relating to the final
interest payment on its US$110 million term debt. Financing cash flows also
included dividend payments of $3.5 million, in line with the previous quarter.
Compared to the fourth quarter of 2012, cash used for financing activities was
up $53.4 million, principally due to the repayment of the US$110 million term
debt less proceeds from the new $50.0 million term debt. There were no shares
purchased under the Company's Normal Course Issuer Bid in the fourth quarter of
2013; in the third quarter of 2013, 97,431 shares were purchased for $1.4
million (see further discussion of the Normal Course Issuer Bid in the following
"Liquidity and Financial Requirements" section).
Cash used in investing activities of $19.8 million in the current quarter
principally related to the Northwood Pulp Mill and Intercontinental turbine
upgrades, work performed on a power boiler precipitator upgrade at the Prince
George Pulp Mill and scheduled major maintenance of business. Construction of
the Northwood Pulp Mill turbines was substantially completed by the end of the
year and the project is targeted for commissioning by the end of the first
quarter of 2014.
Liquidity and Financial Requirements
At December 31, 2013, CPPI had cash of $13.5 million, $10.6 million drawn on its
operating loans, and an additional $12.2 million reserved for standby letters of
credit related to energy sales agreements. Total available undrawn operating
loans were $107.2 million.
In the fourth quarter of 2013, the Company replaced its facility for energy
related letters of credit with a new $20.0 million facility maturing on June 30,
2015. At December 31, 2013, $9.8 million of energy letters of credits were
covered under the new facility. In the fourth quarter of 2013, CPPI also
extended the maturity on its $110.0 million principal operating loan facility
from November 13, 2016 to January 31, 2018. All other terms on the operating
loan facility remain unchanged.
As previously mentioned, in the fourth quarter of 2013, the Company completed a
5-year $50.0 million floating interest rate term debt financing, repayable in
November 2018 with no penalty for early repayment, and also repaid its US$110
million 6.41% term debt.
The Company remained in compliance with the covenants relating to its operating
loans and long-term debt during the quarter, and expects to remain so for the
foreseeable future.
On March 5, 2013, the Company commenced a normal course issuer bid whereby it
can purchase for cancellation up to 3,563,489 common shares or approximately 5%
of its issued and outstanding common shares. The normal course issuer bid is set
to expire on March 4, 2014. There were no share purchases by the Company during
the fourth quarter of 2013. For the year ended December 31, 2013, CPPI purchased
262,449 common shares for $2.4 million. As a result of the total share purchases
during the year, Canfor's interest in CPPI increased to 50.4% by year end.
Dividends
On February 5, 2014, the Board of Directors declared a quarterly dividend of
$0.05 per share with a declaration date of February 5, 2014, payable on February
25, 2014, to the shareholders of record on February 18, 2014. CPPI may, subject
to market conditions, continue to pay a modest level of dividends through 2014.
OUTLOOK
Pulp
For the month of January 2014, the Company announced an increase in the NBSK
pulp list price of US$20 per tonne in North America with list prices to China
and Europe remaining unchanged. There are no maintenance outages planned for the
first quarter of 2014. NBSK pulp markets are projected to remain stable through
the first quarter of 2014 and producer inventories are balanced with steady
demand from North America and Europe. Demand from China is projected to soften
before the end of the first quarter of 2014 following strong buying in the
fourth quarter of 2013 and the traditional Chinese Lunar New Year's holiday in
January 2014.
With significant new hardwood pulp capacity projected to come online in the
coming months, there continues to be a risk that pulp prices may come under
pressure in 2014.
Maintenance outages are currently planned at the Intercontinental and Prince
George Mills in the second quarter of 2014 with a projected 15,000 tonnes of
reduced production and at the Northwood Mill in the third quarter of 2014 with a
projected 10,000 tonnes of reduced production.
Paper
Kraft paper order files are solid heading into 2014 in part reflecting customer
restocking and also challenging weather conditions faced in the U.S. resulting
in longer delivery times. Prices are projected to remain stable through the
first quarter of 2014. New European capacity starting up in the second quarter
of 2014 may put pressure on prices.
Canfor Pulp Products Inc.
Condensed Consolidated Balance Sheets
As at As at
December December
(millions of Canadian dollars, unaudited) 31, 2013 31, 2012
----------------------------------------------------------------------------
ASSETS (Note 1)
Current assets
Cash and cash equivalents $ 13.5 $ -
Accounts receivable - Trade 71.0 61.6
- Other 10.3 22.8
Inventories (Note 2) 128.0 134.1
Prepaid expenses and other assets 7.2 8.3
----------------------------------------------------------------------------
Total current assets 230.0 226.8
----------------------------------------------------------------------------
Property, plant and equipment 528.1 530.8
Retirement benefit surplus (Note 4) 8.2 -
Other long-term assets 2.3 0.4
----------------------------------------------------------------------------
Total assets $ 768.6 $ 758.0
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES
Current liabilities
Cheques issued in excess of cash on hand $ - $ 1.2
Operating loans (Note 3(a)) 10.6 -
Accounts payable and accrued liabilities 118.4 93.4
Current portion of long-term debt (Note 3(b)) - 109.4
----------------------------------------------------------------------------
Total current liabilities 129.0 204.0
----------------------------------------------------------------------------
Long-term debt (Note 3(b)) 50.0 -
Retirement benefit obligations (Note 4) 75.8 103.9
Other long-term provisions 3.0 3.6
Deferred income taxes, net 72.8 59.9
----------------------------------------------------------------------------
Total liabilities $ 330.6 $ 371.4
----------------------------------------------------------------------------
EQUITY
Share capital $ 523.4 $ 525.3
Retained earnings (deficit) (85.4) (138.7)
----------------------------------------------------------------------------
Total equity $ 438.0 $ 386.6
----------------------------------------------------------------------------
Total liabilities and equity $ 768.6 $ 758.0
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Subsequent Event (Note 13)
The accompanying notes are an integral part of these condensed consolidated
financial statements.
APPROVED BY THE BOARD
"S.E. Bracken-Horrocks" "R.L. Cliff"
Director, S.E. Bracken-Horrocks Director, R.L. Cliff
Canfor Pulp Products Inc.
Condensed Consolidated Statements of Income
3 months ended 12 months ended
December 31, December 31,
(millions of Canadian dollars,
except per share data, unaudited) 2013 2012 2013 2012
----------------------------------------------------------------------------
(Note 1) (Note 1)
Sales $ 245.6 $ 201.9 $ 886.8 $ 810.4
Costs and expenses
Manufacturing and product costs 165.0 135.2 595.1 575.0
Freight and other distribution
costs 33.2 28.8 123.3 116.4
Amortization 15.5 20.0 69.9 67.1
Selling and administration costs 7.2 5.8 24.0 24.6
Restructuring and severance
costs 0.7 - 0.7 1.7
----------------------------------------------------------------------------
221.6 189.8 813.0 784.8
----------------------------------------------------------------------------
Operating income 24.0 12.1 73.8 25.6
Finance expense, net (3.2) (3.7) (11.8) (13.2)
Foreign exchange gain (loss) on
long-term debt (3.4) (1.3) (7.3) 2.4
Gain (loss) on derivative
financial instruments (Note 5) (0.1) (0.1) (0.1) 1.7
Other income (expense), net 2.2 0.3 5.2 (1.2)
----------------------------------------------------------------------------
Net income before income taxes 19.5 7.3 59.8 15.3
Income tax expense (Note 6) (5.3) (1.9) (18.0) (1.9)
----------------------------------------------------------------------------
Net income $ 14.2 $ 5.4 $ 41.8 $ 13.4
----------------------------------------------------------------------------
Net income attributable to:
Equity shareholders of the Company $ 14.2 $ 5.4 $ 41.8 $ 9.1
Non-controlling interests (Note
11) - - - 4.3
----------------------------------------------------------------------------
Net income $ 14.2 $ 5.4 $ 41.8 $ 13.4
----------------------------------------------------------------------------
Net income per common share: (in
dollars)
Attributable to equity
shareholders of the Company
- Basic and diluted (Note 7) $ 0.20 $ 0.08 $ 0.59 $ 0.14
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Canfor Pulp Products Inc.
Condensed Consolidated Statements of Other Comprehensive Income (Loss)
3 months ended 12 months ended
December 31, December 31,
(millions of Canadian dollars,
unaudited) 2013 2012 2013 2012
----------------------------------------------------------------------------
(Note 1) (Note 1)
Net income $ 14.2 $ 5.4 $ 41.8 $ 13.4
Other comprehensive income (loss)
Items that will not be recycled through
net income:
Defined benefit plan actuarial gains
(losses) (Note 4) 21.9 (2.0) 35.5 (15.0)
Income tax recovery (expense) on
defined benefit plan actuarial losses
(gains) (Note 6) (5.9) 0.5 (9.3) 3.7
----------------------------------------------------------------------------
Other comprehensive income (loss), net
of tax 16.0 (1.5) 26.2 (11.3)
----------------------------------------------------------------------------
Total comprehensive income $ 30.2 $ 3.9 $ 68.0 $ 2.1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total comprehensive income (loss)
attributable to:
Equity shareholders of the Company $ 30.2 $ 3.9 $ 68.0 $ (2.2)
Non-controlling interests (Note 11) - - - 4.3
----------------------------------------------------------------------------
Total comprehensive income $ 30.2 $ 3.9 $ 68.0 $ 2.1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Condensed Consolidated Statements of Changes in Equity
3 months ended 12 months ended
December 31, December 31,
(millions of Canadian dollars,
unaudited) 2013 2012 2013 2012
----------------------------------------------------------------------------
(Note 1) (Note 1)
Share capital
Balance at beginning of period $ 523.4 $ 525.3 $ 525.3 $ 294.9
Share purchases (Note 7) - - (1.9) -
Exchange transaction (Note 11) - - - 230.4
----------------------------------------------------------------------------
Balance at end of period $ 523.4 $ 525.3 $ 523.4 $ 525.3
----------------------------------------------------------------------------
Retained earnings (deficit)
Balance at beginning of period $ (112.1) $ (142.6) $ (138.7) $ (67.3)
Net income excluding amount
attributable to non-controlling
interests 14.2 5.4 41.8 9.1
Defined benefit plan actuarial gains
(losses), net of tax 16.0 (1.5) 26.2 (11.3)
Dividends declared (3.5) - (14.2) (11.4)
Share purchases (Note 7) - - (0.5) -
Exchange transaction (Note 11) - - - (57.8)
----------------------------------------------------------------------------
Balance at end of period $ (85.4) $ (138.7) $ (85.4) $ (138.7)
----------------------------------------------------------------------------
Total equity attributable to equity
holders of the Company $ 438.0 $ 386.6 $ 438.0 $ 386.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Non-controlling interests
Balance at beginning of period $ - $ - $ - $ 226.1
Net income attributable to non-
controlling interests - - - 4.3
Exchange transaction (Note 11) - - - (230.4)
----------------------------------------------------------------------------
Balance at end of period $ - $ - $ - $ -
----------------------------------------------------------------------------
Total equity $ 438.0 $ 386.6 $ 438.0 $ 386.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Canfor Pulp Products Inc.
Condensed Consolidated Statements of Cash Flows
3 months ended 12 months ended
December 31, December 31,
(millions of Canadian dollars,
unaudited) 2013 2012 2013 2012
----------------------------------------------------------------------------
(Note 1) (Note 1)
Cash generated from (used in):
Operating activities
Net income $ 14.2 $ 5.4 $ 41.8 $ 13.4
Items not affecting cash:
Amortization 15.5 20.0 69.9 67.1
Income tax expense 5.3 1.9 18.0 1.9
Foreign exchange gain (loss) on
long-term debt 3.4 1.3 7.3 (2.4)
Changes in mark-to-market value
of derivative financial
instruments 0.1 (0.2) 0.2 0.4
Employee future benefits 1.0 (4.7) 5.1 (0.4)
Net finance expense 3.2 3.7 11.8 13.2
Other, net 1.3 - (2.8) 0.3
Defined benefit pension plan
contributions (2.5) (2.4) (10.1) (10.1)
Income taxes paid, net (0.3) (1.6) (0.4) (7.7)
----------------------------------------------------------------------------
41.2 23.4 140.8 75.7
Net change in non-cash working
capital (Note 8) 27.9 2.4 16.1 12.2
----------------------------------------------------------------------------
69.1 25.8 156.9 87.9
----------------------------------------------------------------------------
Financing activities
Proceeds from long-term debt (Note
3(b)) 50.0 - 50.0 -
Repayment of long-term debt (Note
3(b)) (116.6) - (116.6) -
Change in operating bank loans 10.6 (7.0) 10.6 -
Finance expenses paid (4.9) (4.1) (9.1) (8.1)
Dividends paid (3.5) - (14.2) (19.2)
Share purchases (Note 7) - - (2.4) -
Other, net (0.1) - (0.1) -
----------------------------------------------------------------------------
(64.5) (11.1) (81.8) (27.3)
----------------------------------------------------------------------------
Investing activities
Additions to property, plant and
equipment (20.0) (12.8) (62.3) (87.6)
Expenditures under Green
Transformation Program - - - (1.1)
Reimbursements under Green
Transformation Program - 0.7 - 19.7
Other government grants received 0.1 0.6 1.1 2.2
Acquisition of CPPI cash on
exchange (Note 11) - - - 6.8
Other, net 0.1 - 0.8 0.2
----------------------------------------------------------------------------
(19.8) (11.5) (60.4) (59.8)
----------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents(i) (15.2) 3.2 14.7 0.8
Cash and cash equivalents at
beginning of period(i) 28.7 (4.4) (1.2) (2.0)
----------------------------------------------------------------------------
Cash and cash equivalents at end of
period(i) $ 13.5 $ (1.2) $ 13.5 $ (1.2)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(i) Cash and cash equivalents include cash on hand less unpresented cheques.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Canfor Pulp Products Inc.
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 (the "financial
statements") have been prepared in accordance with International Accounting
Standard ("IAS") 34 Interim Financial Reporting, and include the accounts of
Canfor Pulp Products Inc. ("CPPI") and its subsidiary entities. The Company's
operations consist of two NBSK pulp mills and one NBSK pulp and paper mill
located in Prince George, British Columbia and a marketing group based in
Vancouver, British Columbia ("the Pulp Business").
On March 2, 2012, Canadian Forest Products Ltd. ("Canfor") exchanged 35,776,483
Class B Exchangeable Limited Partnership Units ("the Exchange"), representing a
50.2% interest in Canfor Pulp Limited Partnership ("the Partnership"), for an
equivalent number of CPPI shares pursuant to the terms of the exchange agreement
dated January 1, 2011 between Canfor, CPPI, the Partnership and Canfor Pulp
Holding Inc., the general partner of the Partnership ("the General Partner"). As
a result of the Exchange, CPPI's interest in both the Partnership and the
General Partner increased from 49.8% to 100% and Canfor acquired a 50.2%
interest in CPPI. The acquisition of the Partnership by CPPI as a result of the
Exchange has been accounted for as a continuity of interests by applying reverse
acquisition accounting (Note 11).
On December 27, 2013, the Partnership was wound up and all of the net assets
were transferred to Canfor Pulp Holding Inc. Subsequent to the transfer, Canfor
Pulp Holding Inc. was renamed Canfor Pulp Ltd.
At December 31, 2013, Canfor held a 50.4% interest in CPPI, an increase of 0.2%
from December 31, 2012 as a result of share purchases during 2013 (Note 7). The
financial statements at December 31, 2013 include the accounts of CPPI and its
subsidiaries (together referred to as "CPPI" or "the Company").
These financial statements do not include all of the disclosures required by
International Financial Reporting Standards ("IFRS") for annual financial
statements. Additional disclosures relevant to the understanding of these
financial statements, including the accounting policies applied, can be found in
the Company's Annual Report for the year ended December 31, 2012, available at
www.canforpulp.com or www.sedar.com.
The currency of presentation for these financial statements is the Canadian dollar.
Changes in Accounting Policy
The Company has adopted the following new and revised standards, along with any
consequential amendments, effective January 1, 2013. These changes were made in
accordance with the applicable transitional provisions.
- The Company adopted amended IAS 19, Employee Benefits, which changes the
recognition and measurement of defined benefit pension expense and
termination benefits and enhances the disclosure of all employee benefits.
Pension benefit cost is split between (i) the cost of benefits accrued in
the current period (service cost) and benefit changes (past-service costs
(including plan amendments, settlements and curtailments)); and (ii)
finance expense or income. Interest cost and expected return on plan
assets, which previously reflected different rates, has been replaced with
a net interest amount that is calculated by applying one discount rate to
the net defined benefit liability (asset).
The effect on the consolidated balance sheet as at December 31, 2012, as a
result of the adoption of amended IAS 19, was a decrease in retirement
benefit obligations of $1.2 million and an increase in deferred tax
liability of $0.3 million.
The effect on the consolidated statements of income for the three months
ended December 31, 2012 was an increase in finance expense of $0.3
million, a decrease in manufacturing and product cost of $1.2 million and
an increase in net income of $0.7 million. For the twelve months ended
December 31, 2012 there was an increase in finance expense of $1.4
million, a decrease in manufacturing and product cost of $1.0 million and
a decrease in net income of $0.3 million due to the adoption of amended
IAS 19.
The effect on the consolidated statements of other comprehensive income
(loss) for the three months ended December 31, 2012 was a decrease in
defined benefit plan actuarial losses of $0.2 million (after tax). The
effect for the twelve months ended December 31, 2012 was a decrease in
defined benefit plan actuarial losses of $1.2 million (after tax).
- The Company also adopted IFRS 10, Consolidated Financial Statements, IFRS
13, Fair Value Measurement, IFRS 11, Joint Arrangements and IAS 1,
Presentation of Financial Statements, effective January 1, 2013. These
Standards did not result in material impacts on the amounts recorded in
the financial statements of CPPI.
Accounting Standards Issued and Not Applied
In May 2011, the International Accounting Standards Board ("IASB") issued IFRS
9, Financial Instruments. The required adoption date for IFRS 9 has been
deferred and is not expected until January 1, 2017, with early adoption
permitted. IFRS 9 is not expected to have a material impact on amounts recorded
in the financial statements of CPPI.
Further details of the new accounting Standard and potential impact on CPPI can
be found in the Company's Annual Report for the year ended December 31, 2012.
2. Inventories
As at As at
December 31, December 31,
(millions of Canadian dollars) 2013 2012
----------------------------------------------------------------------------
Pulp $ 52.8 $ 59.4
Paper 15.7 18.2
Wood chips 14.1 10.9
Materials and supplies 45.4 45.6
----------------------------------------------------------------------------
$ 128.0 $ 134.1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3. Operating Loans and Long-Term Debt
(a) Available Operating Loans
As at As at
December 31, December 31,
(millions of Canadian dollars) 2013 2012
----------------------------------------------------------------------------
Available Operating Loans:
Operating loan facility $ 110.0 $ 110.0
Facility for letters of credit related to
energy agreements 20.0 7.5
----------------------------------------------------------------------------
Total operating loans 130.0 117.5
Drawn (10.6) -
Energy letters of credit (12.2) (9.2)
----------------------------------------------------------------------------
Total available operating loans $ 107.2 $ 108.3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The terms of the Company's operating loan facility include interest payable at
floating rates that vary depending on the ratio of net debt to total
capitalization and is based on the lenders' Canadian prime rate, bankers
acceptances, US dollar base rate or US dollar LIBOR rate, plus a margin. The
facility has certain financial covenants that stipulate maximum net debt to
total capitalization ratios and minimum net worth amounts based on shareholders'
equity. In the fourth quarter of 2013, the Company extended the maturity date of
the operating loan facility from November 13, 2016 to January 31, 2018.
Also, in the fourth quarter of 2013, the Company replaced its facility for
energy-related letters of credit with a new $20.0 million facility maturing on
June 30, 2015. At December 31, 2013, $9.8 million of energy-related letters of
credit were covered under the new facility.
As at December 31, 2013, the Company was in compliance with all covenants
relating to its operating loans.
(b) Long-Term Debt
On November 5, 2013, CPPI completed a $50.0 million unsecured non-revolving term
debt financing, which is repayable on November 5, 2018 with no penalty for early
repayment. The interest rate on the new term debt is based on the lender's
Canadian prime rate, or bankers acceptance rate in the year of payment. On
November 29, 2013, CPPI repaid its $116.6 million (US$110.0 million) 6.41% term
debt.
At December 31, 2013, the fair value of the Company's long-term debt
approximates its amortized cost of $50.0 million (2012 - $113.6 million).
4. Employee Future Benefits
For the three months ended December 31, 2013, an amount of $21.9 million (before
tax) was credited to other comprehensive income. The gain associated with the
defined benefit post-employment compensation plans principally reflected a
higher return on plan assets coupled with a higher discount rate used to value
the net defined benefit obligation, offset in part by adjustments made to
mortality rate assumptions. The gain related to the other non pension
post-employment benefits principally reflected a higher discount rate used to
value the post-employment obligation, and favourable experience adjustments,
offset in part by adjustments to mortality rate assumptions. For the twelve
months ended December 31, 2013, an amount of $35.5 million (before tax) was
credited to other comprehensive income. For the three months ended December 31,
2012, the charge was $2.0 million (before tax). For the twelve months ended
December 31, 2012, an amount of $15.0 million (before tax) was charged to other
comprehensive income.
At December 31, 2013, certain post-employment defined benefit pension plans are
in a surplus position of $8.2 million (2012 - deficit position of $24.0 million)
reflecting the credit to other comprehensive income and employer contributions
to the pension plans during 2013.
For the Company's defined benefit plans, a one percentage point increase in the
discount rate used in calculating the actuarial estimate of future liabilities
would decrease the accrued benefit obligation by an estimated $13.7 million.
The assumptions used to estimate the changes in net accrued benefit liabilities
were as follows:
----------------------------------------------------------------------------
Pension Benefit Plans
Discount rate
December 31, 2013 4.80%
September 30, 2013 4.70%
December 31, 2012 4.20%
September 30, 2012 4.30%
December 31, 2011 5.00%
Rate of return on plan assets
12 months ended December 31, 2013 13.70%
9 months ended September 30, 2013 6.60%
12 months ended December 31, 2012 9.40%
9 months ended September 30, 2012 6.60%
----------------------------------------------------------------------------
Other Benefit Plans
Discount rate
December 31, 2013 4.90%
September 30, 2013 4.80%
December 31, 2012 4.40%
September 30, 2012 4.50%
December 31, 2011 5.30%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
5. Financial Instruments
CPPI's cash and cash equivalents, accounts receivable, loans and advances,
operating loans, accounts payable and accrued liabilities, and long-term debt
are measured at amortized cost subsequent to initial recognition.
Derivative instruments are measured at fair value. IFRS 13, Fair Value
Measurement, requires classification of these items within a hierarchy that
prioritizes the inputs to fair value measurement.
The three levels of the fair value hierarchy are:
Level 1 - Unadjusted quoted prices in active markets for identical assets or
liabilities;
Level 2 - Inputs other than quoted prices that are observable for the asset or
liability, either directly or indirectly;
Level 3 - Inputs that are not based on observable market data.
The Company uses a variety of derivative financial instruments to reduce its
exposure to risks associated with fluctuations in foreign exchange rates, pulp
prices, energy costs, and interest rates.
At December 31, 2013, the fair value of derivative financial instruments was a
net liability of $0.1 million (December 31, 2012 - net asset of $0.1 million).
The fair value of these financial instruments was determined based on prevailing
market rates for instruments with similar characteristics.
The following table summarizes the gain (loss) on derivative financial
instruments for the three and twelve month periods ended December 31, 2013 and
2012:
3 months ended 12 months ended
December 31, December 31,
(millions of Canadian dollars) 2013 2012 2013 2012
----------------------------------------------------------------------------
Foreign exchange collars and forward
contracts $ 0.1 $ (0.2) $ 0.1 $ 1.7
Crude oil collars (0.1) 0.1 0.1 -
Interest rate swaps - - (0.2) -
Pulp futures (0.1) - (0.1) -
----------------------------------------------------------------------------
Gain (loss) on derivative financial
instruments $ (0.1) $ (0.1) $ (0.1) $ 1.7
----------------------------------------------------------------------------
----------------------------------------------------------------------------
These financial instruments are classified as held for trading and as level 2 in
the fair value hierarchy. There were no financial assets transfers between fair
value hierarchy levels during 2013 or 2012.
6. Income Taxes
Income tax expense for the three and twelve months ended December 31, 2012
includes current tax expense on income subsequent to the Exchange on March 2,
2012. Prior to the Exchange, taxes were minimal reflecting the non-taxable
status of the Partnership (Note 11).
3 months ended 12 months ended
December 31, December 31,
(millions of Canadian dollars) 2013 2012 2013 2012
----------------------------------------------------------------------------
Current $ (4.4) $ (2.0) $ (14.4) $ (1.4)
Deferred (0.9) 0.1 (3.6) (0.5)
----------------------------------------------------------------------------
Income tax expense $ (5.3) $ (1.9) $ (18.0) $ (1.9)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The reconciliation of income taxes calculated at the statutory rate to the
actual income tax provision is as follows:
3 months ended 12 months ended
December 31, December 31,
(millions of Canadian dollars) 2013 2012 2013 2012
----------------------------------------------------------------------------
Income tax expense at statutory rate
2013 - 25.75% (2012 - 25.0%)(1) $ (5.0) $ (1.8) $ (15.4) $ (3.8)
Add (deduct):
Permanent difference from capital
gains and other non-deductible items (0.5) (0.2) (1.0) 0.2
Entities with different income tax
rates and other tax adjustments 0.2 0.1 0.8 (0.1)
Change in substantively enacted tax
rate(1) - - (2.4) -
Permanent difference - exchange
transaction - - - 0.9
Tax included in equity - exchange
transaction - - - 0.9
----------------------------------------------------------------------------
Income tax expense $ (5.3) $ (1.9) $ (18.0) $ (1.9)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Effective April 1, 2013, the British Columbia Provincial Government
increased corporate tax rate from 10% to 11%.
In addition to the amounts recorded in net income, a tax expense of $5.9 million
was recorded to other comprehensive income for the three month period ended
December 31, 2013 (three months ended December 31, 2012 - recovery of $0.5
million) in relation to the actuarial gains (losses) on defined benefit employee
compensation plans. For the twelve months ended December 31, 2013, the tax
expense was $9.3 million (twelve months ended December 31, 2012 - tax recovery
of $3.7 million).
7. Earnings per Share and Normal Course Issuer Bid
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. As a result of the Exchange transaction
and the application of reverse acquisition accounting, the CPPI shares relating
to the non-controlling interest shareholders were not included until March 2,
2012. The issuance of the new shares as a result of the exchange was accompanied
by a corresponding increase in CPPI's investment in the Partnership and as a
result there was no dilution of CPPI's net income (loss) per share.
3 months ended 12 months ended
December 31, December 31,
2013 2012 2013 2012
----------------------------------------------------------------------------
Weighted average number of
common shares 71,007,341 71,269,790 71,149,822 65,257,263
----------------------------------------------------------------------------
----------------------------------------------------------------------------
On March 5, 2013, the Company commenced a normal course issuer bid whereby it
can purchase for cancellation up to 3,563,489 common shares or approximately 5%
of its issued and outstanding common shares. The normal course issuer bid is set
to expire on March 4, 2014. There were no share purchases by the Company during
the fourth quarter of 2013. For the twelve months ended December 31, 2013, CPPI
purchased 262,449 common shares for $2.4 million. As a result of the total share
purchases, Canfor's interest in CPPI increased from 50.2% at December 31, 2012
to 50.4% at December 31, 2013.
8. Net Change in Non-Cash Working Capital
3 months ended 12 months ended
December 31, December 31,
(millions of Canadian dollars) 2013 2012 2013 2012
----------------------------------------------------------------------------
Accounts receivable $ (4.0) $ (1.7) $ (0.3) $ 10.9
Inventories 20.0 (1.5) 6.1 7.4
Prepaid expenses and other assets 5.8 6.9 2.7 (2.5)
Accounts payable and accrued liabilities 6.1 (1.3) 7.6 (3.6)
----------------------------------------------------------------------------
Net decrease in non-cash working capital $ 27.9 $ 2.4 $ 16.1 $ 12.2
----------------------------------------------------------------------------
----------------------------------------------------------------------------
9. Segment Information
The Company has two reportable segments which operate as separate business units
and represent separate product lines.
Sales between pulp and paper segments are accounted for at prices that
approximate fair value. These include sales of slush pulp from the pulp segment
to the paper segment.
(millions of Elimination
Canadian dollars) Pulp Paper Unallocated Adjustment Consolidated
----------------------------------------------------------------------------
3 months ended
December 31, 2013
Sales to external
customers $ 212.3 33.2 0.1 - $ 245.6
Sales to other
segments $ 18.7 - - (18.7) $ -
Operating income
(loss) $ 24.1 3.8 (3.9) - $ 24.0
Amortization $ 14.7 0.8 - - $ 15.5
Capital
expenditures(1) $ 19.5 0.4 0.1 - $ 20.0
----------------------------------------------------------------------------
3 months ended
December 31, 2012
Sales to external
customers $ 168.2 33.7 - - $ 201.9
Sales to other
segments $ 18.0 - - (18.0) $ -
Operating income
(loss) $ 7.8 7.0 (2.7) - $ 12.1
Amortization $ 19.0 1.0 - - $ 20.0
Capital
expenditures(1) $ 12.3 0.3 0.2 - $ 12.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------
12 months ended
December 31, 2013
Sales to external
customers $ 738.4 147.1 1.3 - $ 886.8
Sales to other
segments $ 76.2 - - (76.2) $ -
Operating income
(loss) $ 63.2 22.7 (12.1) - $ 73.8
Amortization $ 66.1 3.7 0.1 - $ 69.9
Capital
expenditures(1) $ 61.2 0.9 0.2 - $ 62.3
Identifiable assets $ 674.9 56.7 37.0 - $ 768.6
----------------------------------------------------------------------------
12 months ended
December 31, 2012
Sales to external
customers $ 675.0 134.6 0.8 - $ 810.4
Sales to other
segments $ 67.2 - - (67.2) $ -
Operating income
(loss) $ 20.0 19.5 (13.9) - $ 25.6
Amortization $ 63.2 3.8 0.1 - $ 67.1
Capital
expenditures(1) $ 86.9 1.1 0.7 - $ 88.7
Identifiable assets $ 670.9 64.6 22.5 - $ 758.0
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Capital expenditures represent cash paid for capital assets during the
period. For 2012, capital expenditures includes amounts that were financed
by the federal government-funded Green Transformation Program and other
government grants.
10. Related Party Transactions
The Company depends on Canfor to provide approximately 61% (2012 - 59%) of its
fibre supply as well as to provide certain key business and administrative
services. As a result of these relationships the Company considers its
operations to be dependent on its ongoing relationship with Canfor. The
Company's Fibre Supply Agreement with Canfor was renewed effective November 1,
2013. The current pricing under the agreement expires September 1, 2016 and may
be amended as necessary to ensure that it is reflective of market conditions.
The transactions with Canfor are consistent with the transactions described in
the December 31, 2012 audited consolidated financial statements of CPPI and the
Partnership and are based on agreed upon amounts between the parties.
Transactions and payables to Canfor include purchases of wood chips, pulp and
administrative services. These are summarized below:
3 months ended 12 months ended
December 31, December 31,
(millions of Canadian dollars) 2013 2012 2013 2012
----------------------------------------------------------------------------
Transactions
Canfor - purchase of wood chips and other $ 30.5 $ 25.7 $ 127.5 $ 104.9
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As at As at
December 31, December 31,
(millions of Canadian dollars) 2013 2012
----------------------------------------------------------------------------
Balance Sheet
Included in accounts payable and accrued
liabilities:
Canfor $ 18.9 $ 12.9
Included in trade and other accounts receivable:
Products marketed for Canfor $ 9.0 $ 4.4
Canfor(1) - 3.0
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Market rate of interest is charged on all amounts receivable from
Canfor.
11. Acquisition of Interest in Canfor Pulp Limited Partnership and Partnership
Wind-Up
In the first quarter of 2012, as a result of the Exchange described in Note 1,
CPPI increased its interest in both the Partnership and the General Partner from
49.8% to 100% and Canfor acquired a 50.2% interest in CPPI.
The transaction was accounted for as a reverse acquisition under IFRS, with
Canfor's interest in the Pulp Business being the acquirer for accounting
purposes and CPPI the acquiree for accounting purposes. The Pulp Business is
continuing to operate under CPPI, the legal parent. The financial statements
have been presented from the accounting perspective that Canfor's interest in
the Pulp Business is the continuing entity after the exchange transaction as it
gained control of the Company through a reverse transaction. Prior to March 2,
2012 49.8% of the Pulp Business was held by CPPI and reflected as
non-controlling interest. Net income and comprehensive income attributable to
CPPI's non-controlling interest in the Pulp business was $4.3 million for the
three months ended March 30, 2012. Canfor's interest in the Pulp Business was
deemed to acquire CPPI on March 2, 2012 and the non-controlling interest was
eliminated on that date.
On December 27, 2013, the Partnership was wound up and all of the net assets
were transferred to Canfor Pulp Holding Inc. Subsequent to the transfer, Canfor
Pulp Holding Inc. was renamed Canfor Pulp Ltd.
12. Insurance Claim Receivable
During the second quarter of 2012, an incident at the Northwood Pulp Mill
resulted in an unscheduled shutdown and subsequent repairs of the recovery
boiler. In the second quarter of 2012, the Company filed insurance claims for
property damage and business interruption. The claims were accepted and settled
during the fourth quarter of 2013 for $6.6 million in property damage, and
business interruption of $9.1 million less a deductible of $5.0 million. At
December 31, 2013 the total receivable amount of $0.8 million is included in
other accounts receivable.
13. Subsequent Event
On February 5, 2014, the Board of Directors declared a quarterly dividend of
$0.05 per share with a declaration date of February 5, 2014, payable on February
25, 2014, to shareholders of record on February 18, 2014.
FOR FURTHER INFORMATION PLEASE CONTACT:
Media Contact:
Christine Kennedy
Canfor's Vice President, Public Affairs &
Corporate Communications
(604) 661-5225
Christine.Kennedy@canfor.com
Investor Contact:
Pat Elliott
Canfor's Vice President & Treasurer
(604) 661-5441
Patrick.Elliott@canfor.com
Richard Remesch
Corporate Controller
(604) 661-5221
Rick.Remesch@canforpulp.com
www.canforpulp.com
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