Canfor Pulp Products Inc. ("CPPI") (TSX:CFX) today reported net income of $18.8
million, or $0.27 per share, for the second quarter of 2014, compared to $25.7
million, or $0.36 per share, for the first quarter of 2014 and $7.6 million, or
$0.11 per share, for the second quarter of 2013. For the six months ended June
30, 2014, the Company's net income was $44.5 million, or $0.63 per share,
compared to $18.5 million, or $0.26 per share, for the six months ended June 30,
2013.
The following table summarizes selected financial information for the Company
for the comparative periods:
(millions of Canadian dollars, Q2 Q1 YTD Q2 YTD
except per share amounts) 2014 2014 2014 2013 2013
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Sales $ 252.5 $ 226.4 $ 478.9 $ 227.6 $ 445.1
Operating income $ 29.6 $ 36.4 $ 66.0 $ 19.5 $ 38.5
Net income $ 18.8 $ 25.7 $ 44.5 $ 7.6 $ 18.5
Net income per share, basic and
diluted $ 0.27 $ 0.36 $ 0.63 $ 0.11 $ 0.26
Adjusted net income $ 18.4 $ 26.7 $ 45.1 $ 15.4 $ 27.8
Adjusted net income per share,
basic and diluted $ 0.26 $ 0.37 $ 0.64 $ 0.22 $ 0.39
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After adjusting for items affecting comparability with the prior periods, the
Company's adjusted net income for the second quarter of 2014 was $18.4 million,
or $0.26 per share, compared to an adjusted net income of $26.7 million, or
$0.37 per share, for the first quarter of 2014. CPPI's adjusted net income for
the second quarter of 2013 was $15.4 million, or $0.22 per share.
The Company reported operating income of $29.6 million for the second quarter of
2014, a decrease of $6.8 million from operating income of $36.4 million for the
first quarter of 2014, as the impact of pulp and paper maintenance outages and
higher fibre costs more than offset higher pulp and paper shipments. In
addition, despite slight increases in the average Northern Bleached Softwood
Kraft ("NBSK") pulp prices to North America and Europe, pulp unit sales
realizations experienced a small decrease compared to the previous quarter due
to a combination of weaker prices to China, a slightly stronger Canadian dollar
and a higher proportion of shipments to lower-margin markets, including Asia,
mostly tied to constraints in the previous quarter due to the Vancouver Port
truckers' strike.
Global softwood pulp markets were steady through the second quarter of 2014.
Softwood pulp demand was solid across all regions and global softwood pulp
producer inventory levels tightened through the quarter, decreasing 3 days from
the end of March 2014 to 25 days' supply in June 2014, partly reflecting supply
constraints due to seasonal maintenance downtime (market conditions are
generally considered balanced when inventories are in the 27-30 days of supply
range). The North American NBSK pulp list price was stable over the quarter
averaging US$1,030 per tonne, up US$13 per tonne, or 1%, compared to the first
quarter of 2014. Discount levels were consistent with the previous quarter. The
NBSK pulp list price to Europe also remained largely unchanged, averaging US$925
per tonne, up US$5 per tonne from the previous quarter, while the average NBSK
pulp list price to China was down US$27 per tonne, or 4%, to US$730 per tonne.
Pulp shipments were up 11% from the previous quarter, largely attributable to
improved transportation performance following the challenges experienced in the
prior quarter. Pulp production levels were down 8% from the previous quarter
principally related to the maintenance outages at the Intercontinental and
Prince George Pulp Mills, which reduced market pulp production by 18,000 tonnes.
Pulp unit manufacturing costs were up moderately compared to the previous
quarter, mostly due to the aforementioned maintenance outages and increased
fibre costs, partially offset by seasonally lower energy costs. The higher unit
fibre costs reflected higher delivered sawmill residual and whole log chip costs
and seasonal factors.
The Company's paper segment's operating income was down $0.7 million from the
previous quarter, with the impact of a maintenance outage of the Prince George
Kraft paper machine partially offset by higher shipment levels reflecting the
improved transportation performance.
Commenting on the second quarter's results, CPPI's Chief Executive Officer, Don
Kayne, said, "Market conditions were better than anticipated, allowing us to
generate solid financial performance this quarter. With our largest maintenance
outages behind us, we will be focused on optimizing our production performance
and sales mix through the balance of the year."
NBSK pulp markets are steady heading into the seasonally slower third quarter of
2014. For the month of July 2014, the Company announced NBSK pulp list prices of
US$1,030 per tonne in North America and US$730 per tonne in China, both
unchanged from June 2014. A risk of price weakness remains for the second half
of 2014 due in part to reduced global consumption during the historically slower
summer months and new hardwood pulp capacity projected to flow into markets.
Early in July, the Company's operations experienced some disruptions which
impacted production by approximately 10,000 tonnes; the mills have now returned
to normal operating rates. A maintenance outage originally planned at the
Northwood Pulp Mill in the third quarter of 2014 has been deferred to the fourth
quarter of 2014 and is projected to reduce production by 10,000 tonnes.
On July 23, 2014, the Board of Directors declared a quarterly dividend of
$0.0625 per share with a declaration date of July 23, 2014, payable on August
12, 2014, to the shareholders of record on August 5, 2014.
Additional Information and Conference Call
A conference call to discuss the second quarter's financial and operating
results will be held on Friday, July 25, 2014 at 8:00 AM Pacific time. To
participate in the call, please dial 416-340-9534 or Toll-Free 800-952-6845. For
instant replay access until August 8, 2014, please dial 800-408-3053 and enter
participant pass code 9991781#. 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 in
the central interior of British Columbia ("BC") employing approximately 1,200
people throughout the organization. Canfor Pulp owns and operates three mills in
Prince George, BC with a total capacity of 1.1 million tonnes of Premium
Reinforcing Northern Bleached Softwood Kraft Pulp. Canfor Pulp is the largest
North American and one of the largest global producers of market NBSK Pulp.
Canfor Pulp also markets 210,000 tonnes of bleached chemi-thermo mechanical pulp
("BCTMP") from the Canfor Taylor BCTMP Mill. CPPI shares are traded on the
Toronto Stock Exchange under the symbol CFX.
Canfor Pulp Products Inc.
Second Quarter 2014
Management's Discussion and Analysis
This interim Management's Discussion and Analysis ("MD&A") provides a review of
Canfor Pulp Products Inc.'s ("CPPI" or "the Company") financial performance for
the quarter ended June 30, 2014 relative to the quarters ended March 31, 2014
and June 30, 2013, and the financial position of the Company at June 30, 2014.
It should be read in conjunction with CPPI's unaudited interim consolidated
financial statements and accompanying notes for the quarters ended June 30, 2014
and 2013, as well as the 2013 annual MD&A and the 2013 audited consolidated
financial statements and notes thereto, which are included in CPPI's Annual
Report for the year ended December 31, 2013 (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 July 23, 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.
SECOND QUARTER 2014 OVERVIEW
Selected Financial Information and Statistics
(millions of Canadian dollars, Q2 Q1 YTD Q2 YTD
except per share amounts) 2014 2014 2014 2013 2013
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Operating income (loss) by
segment:
Pulp $ 28.8 $ 35.0 $ 63.8 $ 15.4 $ 30.8
Paper $ 3.8 $ 4.5 $ 8.3 $ 7.1 $ 13.0
Unallocated $ (3.0) $ (3.1) $ (6.1) $ (3.0) $ (5.3)
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Total operating income $ 29.6 $ 36.4 $ 66.0 $ 19.5 $ 38.5
Add: Amortization $ 15.2 $ 16.0 $ 31.2 $ 19.0 $ 37.9
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Total operating income before
amortization $ 44.8 $ 52.4 $ 97.2 $ 38.5 $ 76.4
Add (deduct):
Working capital movements $ 10.7 $ (19.9) $ (9.2) $ 5.5 $ (1.7)
Defined benefit pension plan
contributions $ (1.3) $ (2.5) $ (3.8) $ (2.5) $ (5.3)
Other operating cash flows,
net $ (2.6) $ (6.1) $ (8.7) $ 3.1 $ 3.5
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Cash from operating activities $ 51.6 $ 23.9 $ 75.5 $ 44.6 $ 72.9
Add (deduct):
Dividends paid $ (4.5) $ (3.5) $ (8.0) $ (3.6) $ (7.2)
Finance expenses paid $ (0.6) $ (0.8) $ (1.4) $ (3.8) $ (4.0)
Capital additions, net(1) $ (20.2) $ (10.0) $ (30.2) $ (7.9) $ (14.8)
Share purchases $ - $ - $ - $ (1.0) $ (1.0)
Other, net $ - $ - $ - $ 0.1 $ 0.2
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Change in cash / operating
loans $ 26.3 $ 9.6 $ 35.9 $ 28.4 $ 46.1
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ROIC - Consolidated period-to-
date(2) 4.0% 5.8% 9.8% 3.6% 6.6%
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Average exchange rate (US$ per
C$1.00)(3) $ 0.917 $ 0.906 $ 0.912 $ 0.977 $ 0.984
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(1) Additions to property, plant and equipment are shown net of amounts received
under Government funding initiatives.
(2) Consolidated Return on Invested Capital ("ROIC") is equal to operating
income, plus realized gains/losses on derivatives and other income/expense,
divided by the average invested capital during the period. Invested capital is
equal to capital assets, plus long-term investments and net non-cash working
capital.
(3) Source - Bank of Canada (average noon rate for the period).
Analysis of Specific Material Items Affecting Comparability of Net Income
After-tax impact
(millions of Canadian dollars, Q2 Q1 YTD Q2 YTD
except per share amounts) 2014 2014 2014 2013 2013
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Net income, as reported $ 18.8 $ 25.7 $ 44.5 $ 7.6 $ 18.5
(Gain) loss on derivative
financial instruments $ (0.4) $ 1.0 $ 0.6 $ 2.0 $ 1.5
Foreign exchange loss on long-
term debt $ - $ - $ - $ 3.4 $ 5.4
Change in substantively enacted
tax rate $ - $ - $ - $ 2.4 $ 2.4
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Net impact of above items $ (0.4) $ 1.0 $ 0.6 $ 7.8 $ 9.3
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Adjusted net income $ 18.4 $ 26.7 $ 45.1 $ 15.4 $ 27.8
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Net income per share (EPS), as
reported $ 0.27 $ 0.36 $ 0.63 $ 0.11 $ 0.26
Net impact of above items per
share (4) $ (0.01) $ 0.01 $ 0.01 $ 0.11 $ 0.13
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Adjusted net income per share
(4) $ 0.26 $ 0.37 $ 0.64 $ 0.22 $ 0.39
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(4) The year-to-date net impact of the adjusting items per share and
adjusted net income per share does not equal the sum of the quarterly per
share amounts due to rounding.
The Company reported operating income of $29.6 million for the second quarter of
2014, a decrease of $6.8 million from operating income of $36.4 million for the
first quarter of 2014, as the impact of pulp and paper maintenance outages and
higher fibre costs more than offset higher pulp and paper shipments. In
addition, despite slight increases in the average Northern Bleached Softwood
Kraft ("NBSK") pulp prices to North America and Europe, pulp unit sales
realizations experienced a small decrease compared to the previous quarter due
to a combination of weaker prices to China, a slightly stronger Canadian dollar
and a higher proportion of shipments to lower-margin markets, including Asia,
mostly tied to constraints in the previous quarter due to the Vancouver Port
truckers' strike.
Global softwood pulp markets were steady through the second quarter of 2014.
Softwood pulp demand was solid across all regions and global softwood pulp
producer inventory levels tightened through the quarter, decreasing 3 days from
the end of March 2014 to 25 days' supply in June 2014, partly reflecting supply
constraints due to seasonal maintenance downtime (market conditions are
generally considered balanced when inventories are in the 27-30 days of supply
range). The North American NBSK pulp list price was stable over the quarter
averaging US$1,030 per tonne, up US$13 per tonne, or 1%, compared to the first
quarter of 2014. Discount levels were consistent with the previous quarter. The
NBSK pulp list price to Europe also remained largely unchanged, averaging US$925
per tonne, up US$5 per tonne from the previous quarter, while the average NBSK
pulp list price to China was down US$27 per tonne, or 4%, to US$730 per tonne.
Pulp shipments were up 11% from the previous quarter, largely attributable to
improved transportation performance following the challenges experienced in the
prior quarter. Pulp production levels were down 8% from the previous quarter
principally related to the maintenance outages at the Intercontinental and
Prince George Pulp Mills, which reduced market pulp production by 18,000 tonnes.
Pulp unit manufacturing costs were up moderately compared to the previous
quarter, mostly due to the aforementioned maintenance outages and increased
fibre costs, partially offset by seasonally lower energy costs. The higher unit
fibre costs reflected higher delivered sawmill residual and whole log chip costs
and seasonal factors.
The Company's paper segment's operating income was down $0.7 million from the
previous quarter, with the impact of a maintenance outage of the Prince George
Kraft paper machine partially offset by higher shipment levels reflecting the
improved transportation performance.
Compared to the second quarter of 2013, operating income was up $10.1 million,
reflecting improved sales realizations for pulp and paper products coupled with
higher energy revenue, all of which were partially offset by higher unit
manufacturing costs. The higher sales realizations were principally driven by
increased market pulp prices to all regions and a 6 cent, or 6% weaker Canadian
dollar compared to the US dollar. The higher unit manufacturing costs reflected
market-driven increases in fibre costs, higher energy costs and the impact of
reduced production levels in the current quarter. Solid gains in energy revenue
were principally due to the upgrades to the Northwood Pulp Mill turbines
completed earlier in 2014.
OPERATING RESULTS BY BUSINESS SEGMENT
Pulp
Selected Financial Information and Statistics - Pulp
(millions of Canadian dollars Q2 Q1 YTD Q2 YTD
unless otherwise noted) 2014 2014 2014 2013 2013
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Sales $ 207.8 $ 190.7 $ 398.5 $ 187.7 $ 368.1
Operating income before
amortization $ 43.2 $ 50.1 $ 93.3 $ 33.4 $ 66.7
Operating income $ 28.8 $ 35.0 $ 63.8 $ 15.4 $ 30.8
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Average pulp price delivered to
U.S. - US$(5) $ 1,030 $ 1,017 $ 1,023 $ 937 $ 917
Average price in Cdn$ $ 1,123 $ 1,122 $ 1,122 $ 959 $ 932
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Production - pulp (000 mt) 237.7 258.7 496.4 250.0 514.5
Shipments - pulp (000 mt) 246.9 222.4 469.3 255.0 512.9
Marketed on behalf of Canfor 67.5 33.5 101.0 52.8 103.1
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(5) Per tonne, NBSK pulp list price delivered to U.S. (Resource Information
Systems, Inc.).
Overview
Operating income for the pulp segment was $28.8 million for the second quarter
of 2014, down $6.2 million from the previous quarter and up $13.4 million from
the second quarter of 2013.
Increased shipments in the current quarter reflected the release of inventories
built in the first quarter of 2014 as a result of the transportation related
challenges. While prices to North America and Europe held up well during the
period, a combination of lower prices to China, a slightly stronger Canadian
dollar compared to the US dollar, and a higher proportion of shipments to Asia
resulted in a small decrease in the average unit sales realizations. Results in
the current quarter were also impacted by maintenance outages at the
Intercontinental and Prince George Pulp Mills and, to a lesser extent,
operational challenges encountered following the outages, both of which
contributed to lower production levels in the current quarter. Increased unit
manufacturing costs in the current quarter were largely attributable to higher
delivered fibre costs, which reflected market and seasonal factors, as well as
increased freight costs, coupled with higher costs primarily driven by the
maintenance outages and the lower production levels.
Compared to the second quarter of 2013, improved unit sales realizations,
reflecting strong gains in NBSK pulp prices across all regions coupled with the
benefit of a 6% weaker Canadian dollar, more than offset slightly lower
shipments. Unit manufacturing costs were up compared to the same period in 2013,
principally as the result of higher fibre (linked to NBSK pulp sales
realizations) and energy costs and the unfavourable impact to unit costs of the
reduced production levels, reflecting operational challenges encountered
following the maintenance outages in the current quarter. Increased energy
revenue resulting from the recent turbine generator upgrades also contributed to
the higher quarter-over-quarter earnings.
Markets
Global softwood pulp markets were steady through the second quarter of 2014.
Softwood pulp demand was solid across all regions and global softwood pulp
producer inventory levels tightened through the quarter, decreasing 3 days from
the end of March 2014 to 25 days' supply in June 2014(6), partly reflecting
supply constraints due to seasonal maintenance downtime. Market conditions are
generally considered balanced when inventories are in the 27-30 days of supply
range.
Global shipments of bleached softwood kraft pulp improved modestly in the second
quarter in part reflecting efforts to clear the inventory backlog created by
transportation challenges experienced in the first quarter of 2014. However,
global shipments of bleached softwood kraft pulp were relatively unchanged for
the first half of 2014 when compared to the same period in 2013(7), due in part
to the transportation challenges experienced in North America in the first
quarter of 2014.
(6) World 20 data is based on twenty producing countries representing 80% of
world chemical market pulp capacity and is based on information compiled and
prepared by the Pulp and Paper Products Council ("PPPC").
(7) As reported PPPC statistics.
Sales
The Company's pulp shipments in the second quarter of 2014 were 246,900 tonnes,
an increase of 24,500 tonnes, or 11%, from the previous quarter, and down 8,100
tonnes, or 3%, from the same period in 2013. Increased shipments compared to the
previous quarter largely reflected the aforementioned improved transportation
performance. Shipments to Asia were up relative to both comparable periods, with
the increase relative to the immediately preceding quarter reflecting both the
truckers' strike at the Vancouver Port as well as the traditional Chinese Lunar
New Year Holiday in the previous quarter. Reduced shipments compared to the same
period in 2013 included the impact of the maintenance outages in the current
quarter, while the second quarter of 2013 also included a drawdown in inventory
levels.
Global softwood pulp markets were steady through the current quarter, with the
average North American NBSK pulp list price holding for the quarter at an almost
three-year high of US$1,030 per tonne, up US$13 per tonne, or 1%, compared to
the first quarter of 2014, in part reflecting the spring maintenance period
offset slightly by the release of inventories built due to the transportation
challenges experienced in the previous quarter. Discount levels were consistent
with the previous quarter. The NBSK pulp list price to Europe also remained
largely unchanged, averaging US$925 per tonne, up US$5 per tonne from the
previous quarter, while the average NBSK pulp list price to China saw a modest
decline, down US$27 per tonne, or 4%, to US$730 per tonne. Current quarter sales
realizations were down slightly compared to the previous quarter, mainly
reflecting the lower pulp prices to China, the 1% stronger Canadian dollar and
increased shipments to lower-margin markets, particularly Asia. Current quarter
sales included a modest increase in energy output resulting from the recently
commissioned turbine upgrades at the Northwood Pulp Mill.
Compared to the second quarter of 2013, pulp sales realizations continued to see
strong gains as a result of increases in average pulp list prices in all regions
and the 6% weaker Canadian dollar. The North American NBSK pulp list price
increased US$93 per tonne, or 10%. NBSK pulp list prices to China and Europe
also experienced gains, up 4% and 8%, respectively, from the same period in
2013. These gains were partly offset by increased discounts in North American
markets through the second half of 2013 and increased volumes to lower-margin
regions, principally Asia. Energy revenue also saw solid gains compared to the
second quarter of 2013, principally due to the aforementioned upgrades to the
Northwood Pulp Mill turbines completed earlier in 2014.
Operations
Pulp production in the current quarter was 237,700 tonnes, down 21,000 tonnes,
or 8%, from the previous quarter, and down 12,300 tonnes, or 5%, from the second
quarter of 2013. Production in the current quarter reflected maintenance outages
at the Intercontinental and Prince George Pulp Mills, which reduced market pulp
production by 18,000 tonnes. In the comparative second quarter of 2013,
production levels included maintenance outages at the Northwood and
Intercontinental Pulp Mills, which reduced market pulp production by a similar
level. Operating rates in the current quarter were lower than both comparable
periods as a result of several operational challenges encountered following the
maintenance outages.
Pulp unit manufacturing costs were up moderately compared to the previous
quarter, reflecting higher fibre costs and the maintenance outages in the
quarter. The increased fibre costs compared to the first quarter of 2014
reflected higher prices for sawmill residual and whole log chips, seasonal
pricing adjustments and higher freight costs, all of which were partially offset
by a lower proportion of the higher cost whole log chips. Somewhat mitigating
these factors were seasonally lower energy costs and usage in the current
quarter.
Compared to the second quarter of 2013, unit manufacturing costs were higher
primarily driven by increased fibre costs, largely attributable to market-driven
increases to sawmill residual chip and whole log chip prices and higher freight
costs, offset slightly by a lower proportion of the higher-cost whole log chips.
Also contributing to higher unit manufacturing costs compared to the same period
in 2013 were lower production levels as well as higher natural gas prices and
usage, with the higher usage related to maintenance work performed in the
current quarter.
Paper
Selected Financial Information and Statistics - Paper
(millions of Canadian dollars Q2 Q1 YTD Q2 YTD
unless otherwise noted) 2014 2014 2014 2013 2013
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Sales $ 44.5 $ 34.8 $ 79.3 $ 39.7 $ 75.8
Operating income before
amortization $ 4.6 $ 5.4 $ 10.0 $ 8.0 $ 14.9
Operating income $ 3.8 $ 4.5 $ 8.3 $ 7.1 $ 13.0
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Production - paper (000 mt) 35.4 36.7 72.1 35.3 70.1
Shipments - paper (000 mt) 39.7 31.3 71.0 37.2 72.2
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Overview
Operating income for the paper segment was $3.8 million for the second quarter
of 2014, down $0.7 million from the first quarter of 2014 and down $3.3 million
from the second quarter of 2013. The current quarter results included the impact
of a maintenance outage at the Company's paper machine as well as increased
shipments following the resolution of the Vancouver Port truckers' strike. The
decrease in earnings compared to the previous quarter principally resulted from
increased unit manufacturing costs reflecting the impact of the maintenance
outage, which more than offset a modest improvement in unit sales realizations
and higher shipments.
Compared to the second quarter of 2013, lower operating earnings reflected an
increase in unit manufacturing costs related to higher slush pulp prices, which
are tied to pulp sales realizations, partly offset by improved unit sales
realizations and higher shipment levels.
Markets
Global kraft paper market demand was steady through the second quarter of 2014.
Order files for sales to offshore markets were strong, while North American
demand remained solid throughout the quarter, as end users ran at full capacity
and maintained full order files.
Sales
The Company's paper shipments in the second quarter of 2014 were 39,700 tonnes,
up 8,400 tonnes, or 27%, from the previous quarter and up 2,500 tonnes, or 7%,
from the second quarter of 2013. Compared to the first quarter of 2014,
increased shipments largely reflected a drawdown to normal inventory levels with
improved transportation performance following the challenges in the previous
quater. Prime bleached shipments, which attract higher prices, were up 6% from
the first quarter of 2014 and up 3% from the second quarter of 2013.
Current quarter unit sales realizations for paper products were in line with the
first quarter of 2014, with increased prime bleached product sales offset by the
slightly stronger Canadian dollar and increased shipments to lower-margin
regions. Compared to the same period in 2013, unit sales realizations showed a
modest improvement, mainly due to the weaker Canadian dollar and to a lesser
extent, increased prime bleached product sales.
Operations
Paper production in the second quarter of 2014 was 35,400 tonnes, down 1,300
tonnes, or 4%, from the previous quarter and in line with the second quarter of
2013. The current quarter production reflected a maintenance outage at the
Company's paper machine in May 2014 as well as improved operating rates. The
paper machine set a quarterly production record in the current quarter,
surpassing the recent record achieved in the first quarter of 2013.
Paper unit manufacturing costs increased compared to the first quarter of 2014
principally as a result of lower production volumes as well as higher costs
related to the outage. Further contributing to increased manufacturing costs was
the drawdown of higher cost inventories to more normal levels during the
quarter.
Compared to the second quarter of 2013, higher unit manufacturing costs
reflected market-driven increases in slush pulp costs, the impact of the
maintenance outage in the current quarter and timing of spending on operating
supplies.
Unallocated Items
Selected Financial Information
Q2 Q1 YTD Q2 YTD
(millions of Canadian dollars) 2014 2014 2014 2013 2013
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Corporate costs $ (3.0) $ (3.1) $ (6.1) $ (3.0) $ (5.3)
Finance expense, net $ (1.3) $ (1.5) $ (2.8) $ (2.5) $ (5.6)
Foreign exchange loss on long-
term debt $ - $ - $ - $ (3.9) $ (6.2)
Gain (loss) on derivative
financial instruments $ 0.6 $ (1.4) $ (0.8) $ (2.6) $ (1.9)
Other income (expense), net $ (3.7) $ 0.9 $ (2.8) $ 3.8 $ 4.5
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Corporate costs of $3.0 million for the second quarter of 2014 were in line with
both comparative periods.
Net finance expense for the second quarter of 2014 was $1.3 million, broadly in
line with the first quarter of 2014 and down $1.2 million from the second
quarter of 2013. The decrease from the same quarter in 2013 reflected lower debt
levels in the current quarter coupled with lower employee future benefit net
interest costs, due in part to the improved financial position of the Company's
largest defined benefit plan.
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 second quarter of 2014, the
Company recorded a net gain of $0.6 million reflecting unrealized gains on US
dollar foreign exchange collars as a result of the strengthening of the Canadian
dollar through the quarter, as well as unrealized losses on pulp futures as a
result of improved NBSK pulp list prices through the quarter.
Other expense, net for the second quarter of 2014 of $3.7 million was mostly
comprised of unfavourable exchange movements on US dollar denominated cash,
receivables and payables, resulting from the strengthening of the Canadian
dollar through June.
Other Comprehensive Income (Loss)
In the second quarter of 2014, the Company recorded an after-tax loss to the
Statements of Other Comprehensive Income (Loss) of $1.8 million in relation to
changes in the valuation of the Company's employee future benefit plans. During
the second quarter of 2014, an actuarial funding valuation was completed for the
Company's largest employee future benefit plan resulting in revisions to
actuarial assumptions as well as adjustments for plan member experience. Based
on completion of the actuarial funding valuation, Canfor's overall funded
position on a solvency basis has improved and future pension funding
requirements will decrease. The Company's largest pension plan is now 100%
funded on a solvency basis. On an accounting basis, as at June 30, 2014, the
Company's largest plan was in a net asset position while the Company's other
employee future benefit plans were in net liability positions.
The defined benefit actuarial loss recorded in the second quarter of 2014
reflects a lower discount rate used to value the net retirement benefit
obligations, as well as the actuarial assumption and experience adjustments,
offset in part by a modest return on plan assets. In the previous quarter, a
loss of $6.8 million (after-tax) was recorded, while an after-tax gain of $6.8
million was recorded in the second quarter of 2013.
SUMMARY OF FINANCIAL POSITION
The following table summarizes CPPI's cash flow and selected ratios for and as
at the end of the following periods:
(millions of Canadian dollars, Q2 Q1 YTD Q2 YTD
except for ratios) 2014 2014 2014 2013 2013
----------------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents $ 21.3 $ 3.4 $ 24.7 $ 28.4 $ 46.1
Operating activities $ 51.6 $ 23.9 $ 75.5 $ 44.6 $ 72.9
Financing activities $(10.1) $(10.5) $ (20.6) $ (8.4) $ (12.2)
Investing activities $(20.2) $(10.0) $ (30.2) $ (7.8) $ (14.6)
Ratio of current assets to
current liabilities 2.1 : 1 1.2 : 1
Net debt to capitalization 2.5% 14.9%
ROIC - Consolidated period-to-
date 4.0% 5.8% 9.8% 3.6% 6.6%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Changes in Financial Position
Cash generated from operating activities was $51.6 million in the second quarter
of 2014, up $27.7 million from the previous quarter, with a decrease in non-cash
working capital in the current quarter more than offsetting lower cash earnings.
The decrease in non-cash working capital balances principally reflected the
timing of payments related to the aforementioned maintenance outages and
drawdown in pulp inventories, partially offset by higher trade accounts
receivable balances reflecting the higher pulp shipments through the second
quarter of 2014. Compared to the second quarter of 2013, cash generated from
operating activities increased $7.0 million principally due to the size of the
reduction in pulp inventories in the current period.
Cash used for financing activities was $10.1 million in the second quarter of
2014, in line with the previous quarter and up $1.7 million from the second
quarter of 2013. Cash flows in the current period included a $4.5 million
dividend (6.25 cents per share), up from $3.5 million (5 cents per share) in the
previous quarter and $3.6 million (5 cents per share) in the second quarter of
2013. Finance expenses paid in the second quarter at $0.6 million were broadly
in line with the first quarter of 2014 and down from $3.8 million paid in the
second of 2013 reflecting lower debt levels as a result of the repayment of the
Company's $110 million 6.41% interest rate debt in 2013. CPPI paid $5.0 million
against its operating loan facility in the second quarter of 2014 and had no
amounts drawn on the facility at the end of the quarter.
Cash used for investing activities of $20.2 million in the current quarter
primarily related to the Intercontinental Pulp Mill's turbine upgrade and
maintenance capital related to the aforementioned maintenance outages during the
quarter. The Company anticipates that it will complete the upgrades to the
Intercontinental Pulp Mill turbine and commence selling power under an
Electricity Purchase Agreement early in 2015.
Liquidity and Financial Requirements
At June 30, 2014, CPPI had cash of $38.2 million and operating loan facilities
of $130.0 million which were unused, except for $12.2 million reserved for
several standby letters of credit related to energy sales agreements. Total
available undrawn operating loans were $117.8 million.
CPPI has $50.0 million of floating interest rate term debt, repayable in
November 2018.
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, 2014, the Company renewed its normal course issuer bid whereby it
can purchase for cancellation up to 3,550,367 common shares or approximately 5%
of its issued and outstanding common shares as of February 28, 2014. The renewed
normal course issuer bid is set to expire on March 4, 2015. There were no shares
purchased by the Company during the second quarter of 2014.
Dividends
On July 23, 2014, the Board of Directors declared a quarterly dividend of
$0.0625 per share with a declaration date of July 23, 2014, payable on August
12, 2014, to the shareholders of record on August 5, 2014.
OUTLOOK
Pulp
NBSK pulp markets are steady heading into the seasonally slower third quarter of
2014. For the month of July 2014, the Company announced NBSK pulp list prices of
US$1,030 per tonne in North America and US$730 per tonne in China, both
unchanged from June 2014. A risk of price weakness remains for the second half
of 2014 due in part to reduced global consumption during the historically slower
summer months and new hardwood pulp capacity projected to flow into markets.
Early in July, the Company's operations experienced some disruptions which
impacted production by approximately 10,000 tonnes; the mills have now returned
to normal operating rates. A maintenance outage originally planned at the
Northwood Pulp Mill in the third quarter of 2014 has been deferred to the fourth
quarter of 2014 and is projected to reduce production by 10,000 tonnes.
Paper
Paper markets are stable heading into the third quarter of 2014 with solid order
files and demand. There is some risk that new bleached capacity in Europe may
put pressure on prices. Price increases announced in North America were fully
implemented in the second quarter of 2014.
OUTSTANDING SHARES
At July 23, 2014, there were 71,007,341 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, pension and
other employee future benefit plans and asset retirement obligations based upon
currently available information. While it is reasonably possible that
circumstances may arise which cause actual results to differ from these
estimates, management does not believe it is likely that any such differences
will materially affect the Company's financial condition.
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 from the original date of January 1, 2015 and is currently under review
by the IASB.
In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers,
which will supersede IAS 18, Revenue, IAS 11, Construction Contracts and related
interpretations. The new standard is effective for annual periods beginning on
or after January 1, 2017. The Company is still in the process of assessing the
impact, if any, on the financial statements of this new standard.
Further details of the new accounting Standards and potential impact on CPPI can
be found in the Company's Annual Report for the year ended December 31, 2013.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
During the quarter ended June 30, 2014, 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 2013 annual statutory reports which are available on
www.canforpulp.com or www.sedar.com.
SELECTED QUARTERLY FINANCIAL INFORMATION
----------------------------------------------------------------------------
Q2 2014 Q1 2014 Q4 2013 Q3 2013
----------------------------------------------------------------------------
Sales and income
(millions of Canadian
dollars)
Sales $ 252.5 $ 226.4 $ 245.6 $ 196.1
Operating income (loss) $ 29.6 $ 36.4 $ 24.0 $ 11.3
Net income (loss) $ 18.8 $ 25.7 $ 14.2 $ 9.1
Per common share
(Canadian dollars)
Net income (loss) -
basic and diluted $ 0.27 $ 0.36 $ 0.20 $ 0.13
Book value(8) $ 6.56 $ 6.39 $ 6.17 $ 5.79
Dividends declared $ 0.0625 $ 0.0625 $ 0.0500 $ 0.0500
----------------------------------------------------------------------------
Statistics
Pulp shipments (000 mt) 246.9 222.4 273.3 212.2
Paper shipments (000 mt) 39.7 31.3 31.1 35.5
----------------------------------------------------------------------------
Average exchange rate -
US$/Cdn$ $ 0.917 $ 0.906 $ 0.953 $ 0.963
----------------------------------------------------------------------------
Average NBSK pulp list
price delivered to U.S.
(US$) $ 1,030 $ 1,017 $ 983 $ 947
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Q2 2013 Q1 2013 Q4 2012 Q3 2012
----------------------------------------------------------------------------
Sales and income
(millions of Canadian
dollars)
Sales $ 227.6 $ 217.5 $ 201.9 $ 177.7
Operating income (loss) $ 19.5 $ 19.0 $ 12.1 $ (8.3)
Net income (loss) $ 7.6 $ 10.9 $ 5.4 $ (5.0)
Per common share
(Canadian dollars)
Net income (loss) -
basic and diluted $ 0.11 $ 0.15 $ 0.08 $ (0.07)
Book value(8) $ 5.67 $ 5.53 $ 5.42 $ 5.37
Dividends declared $ 0.0500 $ 0.0500 $ 0.0500 $ -
----------------------------------------------------------------------------
Statistics
Pulp shipments (000 mt) 255.0 257.9 246.6 214.4
Paper shipments (000 mt) 37.2 35.0 32.0 30.6
----------------------------------------------------------------------------
Average exchange rate -
US$/Cdn$ $ 0.977 $ 0.991 $ 1.009 $ 1.005
----------------------------------------------------------------------------
Average NBSK pulp list
price delivered to U.S.
(US$) $ 937 $ 897 $ 863 $ 853
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(8) Book value per common share is equal to shareholders' equity at the end of
the period, divided by the number of common shares outstanding at the end of the
period.
Sales are primarily influenced by changes in market pulp prices, sales volumes
and fluctuations in Canadian dollar exchange rates. Operating income, net income
and operating income before amortization are primarily impacted by: sales
revenue; freight costs; fluctuations of fibre, chemical and energy prices; level
of spending and timing of maintenance downtime; and production curtailments. Net
income is also impacted by fluctuations in Canadian dollar exchange rates, the
revaluation to the period end rate of US dollar denominated working capital
balances and long-term debt, and revaluation of outstanding natural gas swaps
and US dollar forward contracts.
Other material factors that impact the comparability of the quarters are noted
below:
----------------------------------------------------------------------------
After-tax impact
(millions of Canadian
dollars, except for per
share amounts) Q2 2014 Q1 2014 Q4 2013 Q3 2013
----------------------------------------------------------------------------
Net income (loss), as
reported $ 18.8 $ 25.7 $ 14.2 $ 9.1
(Gain) loss on derivative
financial instruments $ (0.4) $ 1.0 $ 0.1 $ (1.5)
Foreign exchange (gain) loss
on long-term debt $ - $ - $ 3.0 $ (2.0)
Change in substantively
enacted tax rate $ - $ - $ - $ -
Net gain on post retirement
plan amendments $ - $ - $ - $ -
Restructuring charges for
management changes $ - $ - $ - $ -
----------------------------------------------------------------------------
Net impact of above items $ (0.4) $ 1.0 $ 3.1 $ (3.5)
----------------------------------------------------------------------------
Adjusted net income (loss) $ 18.4 $ 26.7 $ 17.3 $ 5.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income (loss) per share
(EPS), as reported $ 0.27 $ 0.36 $ 0.20 $ 0.13
Net impact of above items
per share $ (0.01) $ 0.01 $ 0.04 $ (0.05)
----------------------------------------------------------------------------
Adjusted net income (loss)
per share $ 0.26 $ 0.37 $ 0.24 $ 0.08
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
After-tax impact
(millions of Canadian
dollars, except for per
share amounts) Q2 2013 Q1 2013 Q4 2012 Q3 2012
----------------------------------------------------------------------------
Net income (loss), as
reported $ 7.6 $ 10.9 $ 5.4 $ (5.0)
(Gain) loss on derivative
financial instruments $ 2.0 $ (0.5) $ 0.1 $ (1.4)
Foreign exchange (gain) loss
on long-term debt $ 3.4 $ 2.0 $ 1.1 $ (3.4)
Change in substantively
enacted tax rate $ 2.4 $ - $ - $ -
Net gain on post retirement
plan amendments $ - $ - $ (4.0) $ -
Restructuring charges for
management changes $ - $ - $ - $ 1.3
----------------------------------------------------------------------------
Net impact of above items $ 7.8 $ 1.5 $ (2.8) $ (3.5)
----------------------------------------------------------------------------
Adjusted net income (loss) $ 15.4 $ 12.4 $ 2.6 $ (8.5)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income (loss) per share
(EPS), as reported $ 0.11 $ 0.15 $ 0.08 $ (0.07)
Net impact of above items
per share $ 0.11 $ 0.02 $ (0.04) $ (0.05)
----------------------------------------------------------------------------
Adjusted net income (loss)
per share $ 0.22 $ 0.17 $ 0.04 $ (0.12)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Canfor Pulp Products Inc.
Condensed Consolidated Balance Sheets
As at As at
June 30, December 31,
(millions of Canadian dollars, unaudited) 2014 2013
----------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 38.2 $ 13.5
Accounts receivable - Trade 77.3 71.0
- Other 10.0 10.3
Inventories (Note 2) 146.0 128.0
Prepaid expenses and other assets 2.5 7.2
----------------------------------------------------------------------------
Total current assets 274.0 230.0
----------------------------------------------------------------------------
Property, plant and equipment 531.4 528.1
Retirement benefit surplus (Note 4) 5.1 8.2
Other long-term assets 0.7 2.3
----------------------------------------------------------------------------
Total assets $ 811.2 $ 768.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES
Current liabilities
Operating loans (Note 3) $ - $ 10.6
Accounts payable and accrued liabilities 133.0 118.4
----------------------------------------------------------------------------
Total current liabilities 133.0 129.0
----------------------------------------------------------------------------
Long-term debt 50.0 50.0
Retirement benefit obligations (Note 4) 84.5 75.8
Other long-term provisions 3.6 3.0
Deferred income taxes, net 74.2 72.8
----------------------------------------------------------------------------
Total liabilities $ 345.3 $ 330.6
----------------------------------------------------------------------------
EQUITY
Share capital $ 523.4 $ 523.4
Retained earnings (deficit) (57.5) (85.4)
----------------------------------------------------------------------------
Total equity $ 465.9 $ 438.0
----------------------------------------------------------------------------
Total liabilities and equity $ 811.2 $ 768.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Subsequent Event (Note 11)
The accompanying notes are an integral part of these condensed consolidated
financial statements.
APPROVED BY THE BOARD
"S.E. Bracken-Horrocks" "M.J. Korenberg"
Director, S.E. Bracken-Horrocks Director, M.J. Korenberg
Canfor Pulp Products Inc.
Condensed Consolidated Statements of Income
3 months ended 6 months ended
June 30, June 30,
(millions of Canadian dollars,
except per share data,
unaudited) 2014 2013 2014 2013
----------------------------------------------------------------------------
Sales $ 252.5 $ 227.6 $ 478.9 $ 445.1
Costs and expenses
Manufacturing and product
costs 166.4 151.7 304.9 295.0
Freight and other
distribution costs 33.9 31.9 62.8 62.8
Amortization 15.2 19.0 31.2 37.9
Selling and administration
costs 7.4 5.5 14.0 10.9
----------------------------------------------------------------------------
222.9 208.1 412.9 406.6
----------------------------------------------------------------------------
Operating income 29.6 19.5 66.0 38.5
Finance expense, net (1.3) (2.5) (2.8) (5.6)
Foreign exchange loss on long-
term debt - (3.9) - (6.2)
Gain (loss) on derivative
financial instruments (Note
5) 0.6 (2.6) (0.8) (1.9)
Other income (expense), net (3.7) 3.8 (2.8) 4.5
----------------------------------------------------------------------------
Net income before income taxes 25.2 14.3 59.6 29.3
Income tax expense (Note 6) (6.4) (6.7) (15.1) (10.8)
----------------------------------------------------------------------------
Net income $ 18.8 $ 7.6 $ 44.5 $ 18.5
----------------------------------------------------------------------------
Net income per common share:
(in Canadian dollars)
Attributable to equity
shareholders of the Company
- Basic and diluted (Note 7) $ 0.27 $ 0.11 $ 0.63 $ 0.26
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 6 months ended
June 30, June 30,
(millions of Canadian dollars,
unaudited) 2014 2013 2014 2013
----------------------------------------------------------------------------
Net income $ 18.8 $ 7.6 $ 44.5 $ 18.5
Other comprehensive income
(loss)
Items that will not be recycled
through net income:
Defined benefit plan actuarial
gains (losses) (Note 4) (2.4) 9.1 (11.6) 9.4
Income tax recovery (expense)
on defined benefit plan
actuarial gains (losses)
(Note 6) 0.6 (2.3) 3.0 (2.4)
----------------------------------------------------------------------------
Other comprehensive income
(loss), net of tax (1.8) 6.8 (8.6) 7.0
----------------------------------------------------------------------------
Total comprehensive income $ 17.0 $ 14.4 $ 35.9 $ 25.5
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Condensed Consolidated Statements of Changes in Equity
3 months ended 6 months ended
June 30, June 30,
(millions of Canadian dollars,
unaudited) 2014 2013 2014 2013
----------------------------------------------------------------------------
Share capital
Balance at beginning of period $ 523.4 $ 525.3 $ 523.4 $ 525.3
Share purchases (Note 7) - (1.2) - (1.2)
----------------------------------------------------------------------------
Balance at end of period $ 523.4 $ 524.1 $ 523.4 $ 524.1
----------------------------------------------------------------------------
Retained earnings (deficit)
Balance at beginning of period $ (70.0) $ (131.2) $ (85.4) $ (138.7)
Net income 18.8 7.6 44.5 18.5
Defined benefit plan actuarial
gains (losses), net of tax (1.8) 6.8 (8.6) 7.0
Dividends declared (4.5) (3.6) (8.0) (7.2)
Share purchases (Note 7) - (0.3) - (0.3)
----------------------------------------------------------------------------
Balance at end of period $ (57.5) $ (120.7) $ (57.5) $ (120.7)
----------------------------------------------------------------------------
Total equity $ 465.9 $ 403.4 $ 465.9 $ 403.4
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 6 months ended
June 30, June 30,
(millions of Canadian
dollars, unaudited) 2014 2013 2014 2013
----------------------------------------------------------------------------
Cash generated from (used
in):
Operating activities
Net income $ 18.8 $ 7.6 $ 44.5 $ 18.5
Items not affecting cash:
Amortization 15.2 19.0 31.2 37.9
Income tax expense 6.4 6.7 15.1 10.8
Foreign exchange loss on
long-term debt - 3.9 - 6.2
Changes in mark-to-
market value of
derivative financial
instruments (0.9) 2.6 0.3 2.0
Employee future benefits 1.2 1.3 2.4 2.7
Net finance expense 1.3 2.5 2.8 5.6
Other, net 1.5 (2.0) 3.1 (3.8)
Defined benefit pension
plan contributions (1.3) (2.5) (3.8) (5.3)
Income taxes paid, net (1.3) - (10.9) -
----------------------------------------------------------------------------
40.9 39.1 84.7 74.6
Net change in non-cash
working capital (Note 8) 10.7 5.5 (9.2) (1.7)
----------------------------------------------------------------------------
51.6 44.6 75.5 72.9
----------------------------------------------------------------------------
Financing activities
Change in operating bank
loans (5.0) - (11.2) -
Finance expenses paid (0.6) (3.8) (1.4) (4.0)
Dividends paid (4.5) (3.6) (8.0) (7.2)
Share purchases (Note 7) - (1.0) - (1.0)
----------------------------------------------------------------------------
(10.1) (8.4) (20.6) (12.2)
----------------------------------------------------------------------------
Investing activities
Additions to property,
plant and equipment, net (20.2) (7.9) (30.2) (14.8)
Other, net - 0.1 - 0.2
----------------------------------------------------------------------------
(20.2) (7.8) (30.2) (14.6)
----------------------------------------------------------------------------
Increase in cash and cash
equivalents(i) 21.3 28.4 24.7 46.1
Cash and cash equivalents at
beginning of period(i) 16.9 16.5 13.5 (1.2)
----------------------------------------------------------------------------
Cash and cash equivalents at
end of period(i) $ 38.2 $ 44.9 $ 38.2 44.9
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(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, hereinafter
referred to as "CPPI" or "the Company". At June 30, 2014, Canfor Corporation
("Canfor") held a 50.4% interest in CPPI.
These financial statements do not include all of the disclosures required by
International Financial Reporting Standards ("IFRS") for annual financial
statements. Additional disclosures relevant to the understanding of these
financial statements, including the accounting policies applied, can be found in
the Company's Annual Report for the year ended December 31, 2013, available at
www.canforpulp.com or www.sedar.com.
The currency of presentation for these financial statements is the Canadian dollar.
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 from the original date of January 1, 2015 and is currently under review
by the IASB.
In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers,
which will supersede IAS 18, Revenue, IAS 11, Construction Contracts and related
interpretations. The new standard is effective for annual periods beginning on
or after January 1, 2017. The Company is still in the process of assessing the
impact, if any, on the financial statements of this new standard.
Further details of the new accounting Standards and potential impact on CPPI can
be found in the Company's Annual Report for the year ended December 31, 2013.
2. Inventories
As at As at
June 30, December 31,
(millions of Canadian dollars) 2014 2013
----------------------------------------------------------------------------
Pulp $ 72.6$ 52.8
Paper 17.1 15.7
Wood chips 10.5 14.1
Processing materials and supplies 45.8 45.4
----------------------------------------------------------------------------
$ 146.0$ 128.0
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3.Operating Loans
Available Operating Loans
As at As at
June 30, December 31,
(millions of Canadian dollars) 2014 2013
----------------------------------------------------------------------------
Available Operating Loans:
Operating loan facility $ 110.0 $ 110.0
Facility for letters of credit related to
energy agreements 20.0 20.0
----------------------------------------------------------------------------
Total operating loans 130.0 130.0
Drawn - (10.6)
Energy letters of credit (12.2) (12.2)
----------------------------------------------------------------------------
Total available operating loans $ 117.8 $ 107.2
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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. The maturity date of this facility is January 31, 2018.
The Company has a separate facility with a maturity date of June 30, 2015 to
cover energy-related letters of credit. At June 30, 2014, $9.4 million of
energy-related letters of credit were covered under this facility with the
balance of $2.8 million covered under the Company's general operating loan
facility.
As at June 30, 2014 the Company was in compliance with all covenants relating to
its operating loans.
4. Employee Future Benefits
For the three months ended June 30, 2014, a defined benefit actuarial loss of
$2.4 million (before-tax) was recognized in other comprehensive income. During
the second quarter of 2014, an actuarial funding valuation was completed for the
Company's largest employee future benefit plan resulting in revisions to
actuarial assumptions and adjustments for plan member experience. The defined
benefit actuarial loss recorded in the second quarter of 2014 reflects a lower
discount rate used to value the net retirement benefit obligations, as well as
the actuarial assumption and experience adjustments, offset by a return on plan
assets. For the six months ended June 30, 2014, a defined benefit actuarial loss
of $11.6 million (before-tax) was recognized in other comprehensive income. For
the three months ended June 30, 2013, an amount of $9.1 million (before-tax) was
credited to other comprehensive income, and for the six months ended June 30,
2013, the gain was $9.4 million (before-tax).
For the Company's employee future benefit plans, a one percentage point increase
in the discount rate used in calculating the actuarial estimate of future
liabilities would decrease the accrued benefit obligation by an estimated $22.6
million.
The discount rate assumptions used to estimate the changes in net retirement
benefit obligations were as follows:
----------------------------------------------------------------------------
Pension Benefit Plans
Discount rate
June 30, 2014 4.30%
March 31, 2014 4.40%
December 31, 2013 4.80%
June 30, 2013 4.60%
March 31, 2013 4.10%
December 31, 2012 4.20%
----------------------------------------------------------------------------
Other Benefit Plans
Discount rate
June 30, 2014 4.40%
March 31, 2014 4.50%
December 31, 2013 4.90%
June 30, 2013 4.70%
March 31, 2013 4.30%
December 31, 2012 4.40%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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. At June 30,
2014, the fair value of the Company's long-term debt approximates its amortized
cost of $50.0 million (December 31, 2013 - $50.0 million).
Derivative instruments are measured at fair value. IFRS 13, Fair Value
Measurement, requires classification of financial instruments within a hierarchy
that prioritizes the inputs to fair value measurement.
The three levels of the fair value hierarchy are:
Level 1 - Unadjusted quoted prices in active markets for identical assets or
liabilities;
Level 2 - Inputs other than quoted prices that are observable for the asset or
liability, either directly or indirectly;
Level 3 - Inputs that are not based on observable market data.
The Company uses a variety of derivative financial instruments to reduce its
exposure to risks associated with fluctuations in foreign exchange rates, pulp
prices, energy costs, and floating interest rates on long-term debt.
At June 30, 2014, the fair value of derivative financial instruments was a net
liability of $0.4 million (December 31, 2013 - net liability 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 level 2 derivative financial
instruments for the three and six month periods ended June 30, 2014 and 2013:
3 months ended 6 months ended
June 30, June 30,
(millions of Canadian
dollars) 2014 2013 2014 2013
----------------------------------------------------------------------------
Foreign exchange collars and
forward contracts $ 1.0 $ (2.7) $ - $ (2.0)
Crude oil collars - - - 0.1
Interest rate swaps - 0.1 (0.1) -
Pulp futures (0.4) - (0.7) -
----------------------------------------------------------------------------
Gain (loss) on derivative
financial instruments $ 0.6 $ (2.6) $ (0.8) $ (1.9)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
6.Income Taxes
3 months ended 6 months ended
June 30, June 30,
(millions of Canadian dollars) 2014 2013 2014 2013
----------------------------------------------------------------------------
Current $ (5.9) $ (6.4) $ (10.9) $ (11.7)
Deferred (0.5) (0.3) (4.2) 0.9
----------------------------------------------------------------------------
Income tax expense $ (6.4) $ (6.7) $ (15.1) $ (10.8)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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) 2014 2013 2014 2013
----------------------------------------------------------------------------
Income tax expense at statutory
rate 2014 - 26.0% (2013 -
25.75%)(1) $ (6.6) $ (3.7) $ (15.5) $ (7.5)
Add (deduct):
Entities with different income
tax rates and other tax
adjustments 0.2 (0.1) 0.5 (0.1)
Permanent difference from
capital gains and other non-
deductible items - (0.5) (0.1) (0.8)
Change in substantively
enacted tax rate(1) - (2.4) - (2.4)
----------------------------------------------------------------------------
Income tax expense $ (6.4) $ (6.7) $ (15.1) $ (10.8)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) In the second quarter of 2013, the British Columbia Provincial Government
increased the corporate tax rate from 10% to 11%.
In addition to the amounts recorded to net income, a tax recovery of $0.6
million was recorded to other comprehensive income for the three month period
ended June 30, 2014 (three months ended June 30, 2013 - expense of $2.3 million)
in relation to the actuarial gains (losses) on defined benefit employee
compensation plans. For the six month period ended June 30, 2014, a tax recovery
of $3.0 million was recorded to other comprehensive income (six months ended
June 30, 2013 - expense of $2.4 million).
7. Earnings per Share and Normal Course Issuer Bid
Basic net income per share is calculated by dividing the net income available to
common shareholders by the weighted average number of common shares outstanding
during the period.
3 months ended 6 months ended
June 30, June 30,
2014 2013 2014 2013
----------------------------------------------------------------------------
Weighted average number of
common shares 71,007,341 71,252,370 71,007,341 71,261,032
----------------------------------------------------------------------------
----------------------------------------------------------------------------
On March 5, 2014, the Company renewed its normal course issuer bid whereby it
can purchase for cancellation up to 3,550,367 common shares or approximately 5%
of its issued and outstanding common shares as of February 28, 2014. The renewed
normal course issuer bid is set to expire on March 4, 2015. There were no shares
purchased by the Company during the second quarter of 2014. As at July 23, 2014,
there were 71,007,341 common shares outstanding.
8. Net Change in Non-Cash Working Capital
3 months ended 6 months ended
June 30, June 30,
(millions of Canadian dollars) 2014 2013 2014 2013
----------------------------------------------------------------------------
Accounts receivable $ (8.5) $ (2.9) $ (8.0) $ (17.0)
Inventories 3.4 (3.6) (18.0) (3.9)
Prepaid expenses and other
assets 0.8 4.3 3.1 5.5
Accounts payable and accrued
liabilities 15.0 7.7 13.7 13.7
----------------------------------------------------------------------------
Net decrease (increase) in non-
cash working capital $ 10.7 $ 5.5 $ (9.2) $ (1.7)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 June
30, 2014
Sales to external
customers $ 207.8 44.5 0.2 - $ 252.5
Sales to other
segments $ 23.0 - - (23.0) $ -
Operating income
(loss) $ 28.8 3.8 (3.0) - $ 29.6
Amortization $ 14.4 0.8 - - $ 15.2
Capital
expenditures(2) $ 19.9 0.3 - - $ 20.2
----------------------------------------------------------------------------
3 months ended June
30, 2013
Sales to external
customers $ 187.7 39.7 0.2 - $ 227.6
Sales to other
segments $ 19.9 - - (19.9) $ -
Operating income
(loss) $ 15.4 7.1 (3.0) - $ 19.5
Amortization $ 18.0 0.9 0.1 - $ 19.0
Capital
expenditures(2) $ 7.8 0.1 - - $ 7.9
----------------------------------------------------------------------------
----------------------------------------------------------------------------
6 months ended June
30, 2014
Sales to external
customers $ 398.5 79.3 1.1 - $ 478.9
Sales to other
segments $ 47.5 - - (47.5) $ -
Operating income
(loss) $ 63.8 8.3 (6.1) - $ 66.0
Amortization $ 29.5 1.7 - - $ 31.2
Capital
expenditures(2) $ 29.8 0.4 - - $ 30.2
Identifiable assets $ 695.2 60.6 55.4 - $ 811.2
----------------------------------------------------------------------------
6 months ended June
30, 2013
Sales to external
customers $ 368.1 75.8 1.2 - $ 445.1
Sales to other
segments $ 38.0 - - (38.0) $ -
Operating income
(loss) $ 30.8 13.0 (5.3) - $ 38.5
Amortization $ 35.9 1.9 0.1 - $ 37.9
Capital
expenditures(2) $ 14.4 0.3 0.1 - $ 14.8
Identifiable assets $ 681.0 66.9 58.4 - $ 806.3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(2) Capital expenditures represent cash paid for capital assets during the
periods net of capital expenditures that were partially financed by government
grants.
10. Related Party Transactions
The Company relies on Canfor to provide approximately 58% (2013 - 62%) of its
fibre supply as well as certain key business and administrative services. As a
result of these relationships the Company considers its operations to be
dependent on its ongoing relationship with Canfor. The transactions with Canfor
are consistent with the transactions described in the December 31, 2013 audited
consolidated financial statements of CPPI and are based on agreed upon amounts
between the parties.
Transactions and payables to Canfor include purchases of wood chips, pulp and
administrative services. These are summarized below:
3 months ended 6 months ended
June 30, June 30,
(millions of Canadian
dollars) 2014 2013 2014 2013
----------------------------------------------------------------------------
Transactions
Purchase of wood chips and
other $ 32.0 $ 28.5 $ 67.0 $ 59.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As at As at
June 30, December 31,
(millions of Canadian dollars) 2014 2013
----------------------------------------------------------------------------
Balance Sheet
Included in accounts payable and accrued
liabilities: $ 25.3$ 18.9
Included in trade and other accounts
receivable: $ 9.0$ 9.0
----------------------------------------------------------------------------
----------------------------------------------------------------------------
11. Subsequent Event
On July 23, 2014, the Board of Directors declared a quarterly dividend of
$0.0625 per share with a declaration date of July 23, 2014, payable on August
12, 2014, to shareholders of record on August 5, 2014.
FOR FURTHER INFORMATION PLEASE CONTACT:
Media Contact:
Corinne Stavness
Canfor's Director, Public Affairs & Corporate Communications
(604) 661-5225
Corinne.Stavness@canfor.com
Investor Contact:
Pat Elliott
Canfor's Vice President & Treasurer
(604) 661-5441
Patrick.Elliott@canfor.com
Rick Remesch
Corporate Controller
(604) 661-5221
Rick.Remesch@canforpulp.com
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