Canfor Corporation (TSX:CFP) today reported a net loss attributable to
shareholders ("shareholder net loss") of $16.2 million, or $0.11 per share, for
the first quarter of 2012, compared to a shareholder net loss of $44.1 million,
or $0.31 per share, for the fourth quarter of 2011 and shareholder net income of
$7.0 million, or $0.05 per share, for the first quarter of 2011.
The shareholder net loss for the first quarter of 2012 included various items
affecting comparability with prior periods, which had an overall net positive
impact of $6.1 million, or $0.05 per share. After adjusting for such items, the
Company's adjusted shareholder net loss for the first quarter of 2012 was $22.3
million, or $0.16 per share, compared to an adjusted shareholder net loss of
$32.1 million, or $0.22 per share, for the fourth quarter of 2011, and
effectively breakeven on an adjusted basis for the first quarter of 2011.
The Company reported an operating loss of $21.5 million for the first quarter of
2012, compared to an operating loss of $63.1 million in the fourth quarter of
2011. Excluding inventory valuation adjustments and one-time restructuring
costs, as well as impairment costs in the previous quarter, Canfor's operating
loss was $26.2 million in the current quarter compared to $20.5 million in the
prior quarter. The adverse variance of $5.7 million primarily reflected weaker
results in the pulp and paper segment.
The following table summarizes selected financial information for the Company
for the comparative periods:
(millions of dollars, except for per share Q1 Q4 Q1
amounts) 2012 2011 2011
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Sales $ 607.6 $ 576.2 $ 624.0
EBITDA $ 23.6 $ (15.5) $ 73.8
Operating income (loss) $ (21.5) $ (63.1) $ 32.3
Net income (loss) attributable to equity
shareholders of Company $ (16.2) $ (44.1) $ 7.0
Net income (loss) per share attributable to
equity shareholders of Company, basic and
diluted $ (0.11) $ (0.31) $ 0.05
Adjusted shareholder net income (loss) $ (22.3) $ (32.1) $ 0.1
Adjusted shareholder net income (loss) per
share $ (0.16) $ (0.22) $ 0.00
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Lumber markets were mixed in the first quarter of 2012, as a modest improvement
in North American market conditions contrasted with a weaker market for lower
grade products in China, where the effects of a significant inventory build
ahead of the Lunar New Year and slower demand weighed heavily on prices through
much of the quarter. U.S. housing activity saw a small increase, in part due to
unseasonably mild weather, with housing starts for the quarter averaging 687,000
units (seasonally adjusted annual rate), up 3% from the previous quarter.
Canadian housing starts also saw a modest increase from the previous quarter.
Despite an increase in North American prices, overall lumber sales realizations
were largely unchanged from the previous quarter due to lower offshore
realizations, particularly for low grade products. The average North American
benchmark Western SPF 2x4 #2&Btr price increased US$28, or 12%, to US$266 per
Mfbm, although increases for most other widths and dimensions were less marked.
Prices for most SYP products saw solid increases. For Northern Bleached Softwood
Kraft ("NBSK") pulp, weak global demand saw prices fall from the previous
quarter, with U.S. prices down US$50 per tonne. Compounding challenges for
Canadian producers, sales realizations were negatively impacted by a stronger
average Canadian dollar which was up over 2 cents, or 2%, from the previous
quarter.
Lumber shipments were in line with the previous quarter at just under one
billion board feet, while production was up 17%, reflecting continued
improvements in productivity in the current quarter as well as downtime taken
over the Christmas period in the previous quarter. Lumber unit manufacturing
costs saw a decrease compared to the previous quarter, reflecting reductions in
unit cash conversion costs, largely resulting from the increased production
levels, and a reduction in unit log costs. However, results in the lumber
segment were negatively impacted by lower prices for residual fibre products,
reflecting lower prices for sawmill residual chips (related to lower NBSK pulp
sales realizations).
Pulp shipment and production levels were well up from the previous quarter,
mostly reflecting downtime taken in the prior quarter at Canfor Pulp's Northwood
pulp mill for capital upgrades. Improved pulp unit manufacturing costs in the
current quarter reflected the higher production levels as well as lower residual
chip costs.
The Company completed further capital projects in the quarter as part of its
$300 million, three-year strategic capital investment program at its lumber
operations, including a planer upgrade at its Grande Prairie sawmill. This
project was completed on time and on budget and is exceeding pro forma targets.
Looking ahead, the North American lumber market is projected to continue its
modest recovery, while low grade prices to China are projected to see a marked
improvement in the second quarter. The global softwood pulp market is
anticipated to improve modestly through the second quarter.
Commenting on the quarter, Canfor's President and CEO, Don Kayne, said, "While
it was encouraging to see improved lumber prices in North America in the first
quarter, the effect of weak low grade prices in China offset some of these
gains. With inventories in China returning to more normal levels, we are
anticipating an improvement in low grade lumber prices to China in the second
quarter." Mr. Kayne added that progress continued to be made with respect to
improving the Company's cost performance, "We continue to see a trend of
steadily improving productivity and unit conversion costs at our lumber
operations, which reflects both our targeted strategic capital investments and a
strong focus on continuous improvement."
The Company completed the acquisition of Tembec Industries Ltd.'s southern
British Columbia Interior wood products assets late in the first quarter.
Commenting on the purchase, Mr. Kayne said, "This is a key acquisition that
supports our long term strategy, particularly with respect to increasing our
long term supply of high quality green fibre."
Additional Information and Conference Call
A conference call to discuss the first quarter's financial and operating results
will be held on Friday, April 27, 2012 at 8:00 AM Pacific time. To participate
in the call, please dial 416-340-8527 or Toll-Free 877-440-9795. For instant
replay access until May 31, 2013, please dial 905-694-9451 or 800-408-3053 and
enter participant pass code 7168261#. The conference call will be webcast live
and will be available at www.canfor.com. This news release, the attached
financial statements and a presentation used during the conference call can be
accessed via the Company's website at
http://www.canfor.com/investor-relations/webcasts.
Forward Looking Statements
Certain statements in this press release constitute "forward-looking statements"
which involve known and unknown risks, uncertainties and other factors that may
cause actual results to be materially different from any future results,
performance or achievements expressed or implied by such statements. Words such
as "expects", "anticipates", "projects", "intends", "plans", "will", "believes",
"seeks", "estimates", "should", "may", "could", and variations of such words and
similar expressions are intended to identify such forward-looking statements.
These statements are based on management's current expectations and beliefs and
actual events or results may differ materially. There are many factors that
could cause such actual events or results expressed or implied by such
forward-looking statements to differ materially from any future results
expressed or implied by such statements. Forward-looking statements are based on
current expectations and the Company assumes no obligation to update such
information to reflect later events or developments, except as required by law.
Canfor is a leading integrated forest products company based in Vancouver,
British Columbia (BC) with interests in BC, Alberta, Quebec, Washington state,
and North and South Carolina. The Company produces primarily softwood lumber and
also produces oriented strand board (OSB), remanufactured lumber products,
specialized wood products and bleached chemi-thermo mechanical pulp (BCTMP).
Canfor also owns a 50.2% interest in Canfor Pulp Products Inc., which is one of
the largest producers of northern softwood kraft pulp in Canada and a leading
producer of high performance kraft paper. Canfor shares are traded on the
Toronto Stock Exchange under the symbol CFP.
Canfor Corporation
First Quarter 2012
Management's Discussion and Analysis
This interim Management's Discussion and Analysis ("MD&A") provides a review of
Canfor Corporation's ("Canfor" or "the Company") financial performance for the
quarter ended March 31, 2012 relative to the quarters ended December 31, 2011
and March 31, 2011, and the financial position of the Company at March 31, 2012.
It should be read in conjunction with Canfor's unaudited interim consolidated
financial statements and accompanying notes for the quarters ended March 31,
2012 and 2011, as well as the 2011 annual MD&A and the 2011 audited consolidated
financial statements and notes thereto, which are included in Canfor's Annual
Report for the year ended December 31, 2011 (available at www.canfor.com). The
financial information in this interim MD&A has been prepared in accordance with
International Financial Reporting Standards ("IFRS"), which is the required
reporting framework for Canadian publicly accountable enterprises.
Throughout this discussion, reference is made to EBITDA (calculated as operating
income before amortization) which Canfor considers to be a relevant indicator
for measuring trends in the performance of each of its operating segments and
the Company's ability to generate funds to meet its debt repayment and capital
expenditure requirements. Reference is also made to Adjusted Shareholder Net
Income (Loss) (calculated as Shareholder Net income (loss) less specific items
affecting comparability with prior periods - for the full calculation, see
reconciliation included in the section "Analysis of Specific Material Items
Affecting Comparability of Shareholder Net Income (Loss)") and Adjusted
Shareholder Net Income (Loss) per Share (calculated as Adjusted Shareholder Net
Income (Loss) divided by the weighted average number of shares outstanding
during the period). EBITDA, Adjusted Shareholder Net Income (Loss) and Adjusted
Shareholder Net Income (Loss) per Share are not generally accepted earnings
measures and should not be considered as an alternative to net income or cash
flows as determined in accordance with IFRS. As there is no standardized method
of calculating these measures, Canfor's EBITDA, Adjusted Shareholder Net Income
(Loss) and Adjusted Shareholder Net Income (Loss) per Share may not be directly
comparable with similarly titled measures used by other companies.
Reconciliations of EBITDA and Adjusted Shareholder Net Income (Loss) to net
income (loss) reported in accordance with IFRS are included in this MD&A.
Factors that could impact future operations are also discussed. These factors
may be influenced by both known and unknown risks and uncertainties that could
cause the actual results to be materially different from those stated in this
discussion. Factors that could have a material impact on any future oriented
statements made herein include, but are not limited to: general economic, market
and business conditions; product selling prices; raw material and operating
costs; currency exchange rates; interest rates; changes in law and public
policy; the outcome of labour and trade disputes; and opportunities available to
or pursued by Canfor.
All financial references are in millions of Canadian dollars unless otherwise
noted. The information in this report is as at April 25, 2012.
Forward Looking Statements
Certain statements in this MD&A constitute "forward-looking statements" which
involve known and unknown risks, uncertainties and other factors that may cause
actual results to be materially different from any future results, performance
or achievements expressed or implied by such statements. Words such as
"expects", "anticipates", "projects", "intends", "plans", "will", "believes",
"seeks", "estimates", "should", "may", "could", and variations of such words and
similar expressions are intended to identify such forward-looking statements.
These statements are based on management's current expectations and beliefs and
actual events or results may differ materially. There are many factors that
could cause such actual events or results expressed or implied by such
forward-looking statements to differ materially from any future results
expressed or implied by such statements. Forward-looking statements are based on
current expectations and the Company assumes no obligation to update such
information to reflect later events or developments, except as required by law.
FIRST QUARTER 2012 EARNINGS OVERVIEW
Selected Financial Information and Statistics(1)
(millions of dollars, except for per share Q1 Q4 Q1
amounts) 2012 2011 2011
---------------------------------------------------------------------------
Sales $ 607.6 $ 576.2 $ 624.0
EBITDA $ 23.6 $ (15.5) $ 73.8
Operating income (loss) $ (21.5) $ (63.1) $ 32.3
Foreign exchange gain (loss) on long-term
debt and investments, net $ 4.0 $ 4.9 $ 4.7
Gain (loss) on derivative financial
instruments(2) $ 7.4 $ 9.6 $ 4.7
Net income (loss) $ (10.9) $ (38.1) $ 32.3
Net income (loss) attributable to equity
shareholders of Company $ (16.2) $ (44.1) $ 7.0
Net income (loss) per share attributable to
equity shareholders of Company,basic and
diluted $ (0.11) $ (0.31) $ 0.05
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Average exchange rate (US$ per C$1.00)(3) $ 0.999 $ 0.977 $ 1.014
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(1) Certain prior period amounts have been restated due to a change in
accounting policy for treatment of net interest expense for defined
benefit post-retirement plans. Further details can be found in the
"Changes in Accounting Policy" section later in this document.
(2) Includes gains (losses) from foreign exchange, energy, interest rate
and lumber future derivative financial instruments (see "Unallocated
and Other" section for more details).
(3) Source - Bank of Canada (average noon rate for the period).
The Company's shareholder net income (loss) and adjusted shareholder net income
(loss), together with the related adjustments, are detailed in the table below:
Analysis of Specific Material Items Affecting Comparability of Shareholder Net
Income (Loss)
After-tax impact, net of non-controlling
interests
(millions of dollars, except for per share Q1 Q4 Q1
amounts) 2012 2011 2011
---------------------------------------------------------------------------
Shareholder Net Income (Loss) $ (16.2) $ (44.1) $ 7.0
Foreign exchange (gain) loss on long-term
debt and investments, net $ (2.7) $ (3.3) $ (3.0)
(Gain) loss on derivative financial
instruments $ (5.1) $ (6.7) $ (2.9)
Decrease (increase) in fair value of asset-
backed commercial paper $ (1.1) $ (0.5) $ (1.0)
Costs related to Tembec acquisition $ 2.8 $ - $ -
Mill closure provisions $ - $ 17.0 $ -
Asset impairment charges $ - $ 5.5 $ -
---------------------------------------------------------------------------
Net impact of above items $ (6.1) $ 12.0 $ (6.9)
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Adjusted Shareholder Net Income (Loss) $ (22.3) $ (32.1) $ 0.1
---------------------------------------------------------------------------
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Shareholder Net Income (Loss) per share
(EPS), as reported $ (0.11) $ (0.31) $ 0.05
Net impact of above items per share $ (0.05) $ 0.09 $ (0.05)
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Adjusted Shareholder Net Income (Loss) per
share $ (0.16) $ (0.22) $ 0.00
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EBITDA
The following table reconciles the Company's net income (loss), as reported in
accordance with IFRS, to EBITDA:
Q1 Q4 Q1
(millions of dollars) 2012 2011 2011
---------------------------------------------------------------------------
Net income (loss), as reported $ (10.9) $ (38.1) $ 32.3
Add (subtract):
Amortization $ 45.1 $ 47.6 $ 41.5
Finance expense, net $ 6.2 $ 5.2 $ 7.2
Foreign exchange (gain) loss on long-term
debt and investments, net $ (4.0) $ (4.9) $ (4.7)
(Gain) loss on derivative financial
instruments $ (7.4) $ (9.6) $ (4.7)
Other (income) expense $ 0.2 $ (1.3) $ 1.7
Income tax (recovery) expense $ (5.6) $ (14.4) $ 0.5
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EBITDA, as reported $ 23.6 $ (15.5) $ 73.8
Included in above:
Negative (positive) impact of inventory
valuation adjustments(4) $ (8.5) $ 10.9 $ 2.9
Costs related to Tembec acquisition $ 3.8 $ - $ -
Mill closure provisions $ - $ 22.5 $ -
Asset impairment charges $ - $ 9.2 $ -
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EBITDA excluding inventory valuation
adjustments and unusual items $ 18.9 $ 27.1 $ 76.7
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(4) In accordance with IFRS, Canfor records its log and finished product
inventories at the lower of cost and net realizable value ("NRV").
Changes in inventory volumes, market prices, foreign exchange rates and
costs over the respective reporting periods can all affect inventory
write-downs required at each period end.
Reported EBITDA for the first quarter of 2012 was $23.6 million, an improvement
of $39.1 million from the fourth quarter of 2011. Current quarter results were
impacted by positive inventory valuation adjustments and costs related to the
acquisition of assets from Tembec, while prior quarter results included an
inventory valuation expense, as well as mill closure costs of $22.5 million and
asset impairment charges of $9.2 million. Excluding these items, current quarter
EBITDA was $18.9 million compared to $27.1 million in the prior quarter, an
adverse variance of $8.2 million, primarily reflecting weaker results in the
pulp and paper segment.
Lumber markets were mixed in the first quarter of 2012, as a modest improvement
in North American market conditions contrasted with a weaker market for lower
grade products in China, where the effects of a significant inventory build
ahead of the Lunar New Year and slower demand weighed heavily on prices through
much of the quarter. U.S. housing activity saw a small increase, in part due to
unseasonably mild weather, with housing starts for the quarter averaging 687,000
units SAAR (seasonally adjusted annual rate), up 3% from the previous quarter.
Canadian housing starts also saw a modest increase from the previous quarter.
Despite an increase in North American prices, lumber sales realizations were
largely unchanged from the previous quarter due to lower offshore realizations,
particularly for low grade products. The average North American benchmark
Western SPF 2x4 #2&Btr price increased US$28, or 12%, to US$266 per thousand
board feet ("Mfbm"), although increases for most other widths and dimensions
were less marked. Prices for most SYP products saw solid increases. For Northern
Bleached Softwood Kraft ("NBSK") pulp, weak global demand saw prices fall from
the previous quarter, with U.S. prices down US$50 per tonne. Compounding
challenges for Canadian producers, sales realizations were negatively impacted
by a stronger average Canadian dollar which was up over 2 cents, or 2%, from the
previous quarter.
Lumber shipments were in line with the previous quarter at just under one
billion board feet, while production was up 17%, reflecting continued
improvements in productivity in the current quarter as well as downtime taken
over the Christmas period in the previous quarter. Lumber unit manufacturing
costs saw a decrease compared to the previous quarter, reflecting reductions in
unit cash conversion costs, largely resulting from the increased production
levels, and a reduction in unit log costs. However, results in the lumber
segment were negatively impacted by lower prices for residual fibre products,
reflecting lower prices for sawmill residual chips (related to lower NBSK pulp
sales realizations).
Pulp shipment and production levels were well up from the previous quarter,
mostly reflecting downtime taken in the prior quarter at Canfor Pulp's Northwood
pulp mill for capital upgrades. Improved pulp unit manufacturing costs in the
current quarter reflected the higher production levels as well as lower residual
chip costs.
Compared to the first quarter of 2011, EBITDA excluding inventory valuation
adjustments and Tembec acquisition costs was down $57.8 million. Of this, $22.5
million was in the lumber segment where lower prices and higher log costs
accounted for most of the variance. EBITDA in the pulp and paper segment was
down $35.8 million, reflecting lower prices for NBSK pulp products, partially
offset by lower conversion and fibre costs.
OPERATING RESULTS BY BUSINESS SEGMENT
Lumber
Selected Financial Information and Statistics - Lumber
Q1 Q4 Q1
(millions of dollars unless otherwise noted) 2012 2011 2011
---------------------------------------------------------------------------
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Sales $ 343.7 $ 325.9 $ 328.6
Operating income (loss) $ (20.1) $ (55.8) $ (2.5)
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EBITDA, as reported $ 3.1 $ (34.3) $ 17.8
Negative (positive) impact of inventory
valuation adjustments $ (10.2) $ 9.7 $ 0.1
Costs related to Tembec acquisition $ 2.5 $ - $ -
Mill closure provisions $ - $ 11.9 $ -
Asset impairment charges $ - $ 7.2 $ -
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EBITDA excluding impact of inventory
valuation adjustments and unusual items $ (4.6) $ (5.5) $ 17.9
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Average SPF 2x4 #2&Btr lumber price in US$(5) $ 266 $ 238 $ 296
Average SPF price in Cdn$ $ 266 $ 244 $ 292
Average SYP 2x4 #2 lumber price in US$(6) $ 298 $ 260 $ 302
Average SYP price in Cdn$ $ 298 $ 266 $ 298
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U.S. housing starts (thousand units SAAR) (7) 687 670 582
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Production - SPF lumber (MMfbm) 903.7 760.8 772.3
Production - SYP lumber (MMfbm) 114.3 106.4 94.8
Shipments - SPF lumber (MMfbm)(8) 852.3 833.9 715.3
Shipments - SYP lumber (MMfbm)(8) 117.6 112.7 90.9
Shipments - wholesale lumber (MMfbm) 24.5 27.4 51.2
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(5) Western Spruce/Pine/Fir, per thousand board feet (Source - Random
Lengths Publications, Inc.)
(6) Southern Yellow Pine, Eastside, per thousand board feet (Source -
Random Lengths Publications, Inc.)
(7) Source - U.S. Census Bureau, seasonally adjusted annual rate ("SAAR")
(8) Canfor-produced lumber, including lumber purchased for remanufacture.
Overview
The operating loss for the lumber segment was $20.1 million for the first
quarter of 2012, a $35.7 million lower loss than the previous quarter, and a
$17.6 million higher loss than the first quarter of 2011.
Reported EBITDA for the lumber segment was $3.1 million, compared to negative
$34.3 million in the previous quarter and positive $17.8 million in the first
quarter of 2011. However, results in each of the quarters were impacted by
inventory valuation adjustments, principally reflecting changes in market prices
for lumber products, and restructuring costs, while results for the prior
quarter were also impacted by impairment expenses. Excluding these items, EBITDA
was negative $4.6 million for the first quarter of 2012, compared to negative
$5.5 million in the previous quarter and positive $17.9 million in the first
quarter of 2011.
Sales realizations for Western SPF products were largely unchanged compared to
the previous quarter, with improved North American pricing being offset by lower
realizations from offshore markets, principally China. For sales to North
America, the Western SPF 2x4 #2&Btr price was up 12% to US$266 per Mfbm, though
increases for most other grades and dimensions were more modest. Sales
realizations for SYP products benefitted from solid price gains, with most
dimensions seeing increases between 12% and 15%. The reduction in offshore
pricing mostly related to sales of lower grade lumber to China, where much of
the pricing is negotiated quarterly in advance. Canadian dollar sales
realizations were negatively impacted by a 2% stronger average Canadian dollar
compared to the fourth quarter of 2011.
Compared to the previous quarter, operating results in the first quarter of 2012
were also negatively impacted by lower residual fibre prices, with a decline in
NBSK pulp prices leading to lower prices for sawmill residual chips. Partially
offsetting these impacts was a reduction in unit manufacturing costs, reflecting
both lower cash conversion and log costs in the current quarter. The first
quarter of 2012 also included restructuring costs related to the Tembec
acquisition, while the previous quarter included a deferred reforestation
obligation fair value charge.
Compared to the first quarter of 2011, EBITDA for the lumber segment, excluding
inventory valuation adjustments and Tembec acquisition costs, was down $22.5
million. A significant contributing factor to the decrease was lower market
prices, with the benchmark Western SPF 2x4 #2&Btr price down US$30 per Mfbm, and
low grade prices also significantly weaker. In addition, unit manufacturing
costs were up compared to the first quarter of 2011, with lower unit conversion
costs, reflecting improved productivity performance, mitigating higher logging
and hauling costs.
Markets
During the first quarter of 2012, North American lumber demand was positively
impacted by unseasonably mild weather, which provided more favourable building
conditions in many regions. Total U.S. housing starts averaged 687,000 units(9)
SAAR, an increase of 3% from the previous quarter and up 18% from the first
quarter of 2011. Other positive market indicators included a reduction in months
of supply of new and existing home inventory to levels not seen since 2006.
Increased demand in the repair and remodeling sector has also contributed to the
general rise in lumber demand.
In Canada, lumber consumption was encouraging, following stronger than expected
housing activity. Canadian housing starts averaged 205,000 units(10) SAAR for
the quarter, up 5,000 units, or 2%, compared to the fourth quarter of 2011, and
up 17% from the comparable quarter in 2011 when starts were at 175,000 units
SAAR.
Canfor's offshore lumber shipments remained flat compared to the previous
quarter, and were 22% higher than the first quarter of 2011. Shipments to China
leveled off in the current quarter as the market adjusted inventory to balance
slower demand during Lunar New Year season. Sales volumes to Japan and Korea
were also in line with the previous quarter.
(9) U.S. Census Bureau
(10) CMHC - Canada Mortgage and Housing Corporation
Sales
Sales for the lumber segment for the first quarter of 2012 were $343.7 million,
compared to $325.9 million in the previous quarter and $328.6 million in the
first quarter of 2011. Total shipments in the first quarter of 2012 were almost
one billion board feet, up 2% from the previous quarter and up 16% from the
first quarter of 2011.
Sales realizations were largely unchanged from the previous quarter, with
improved pricing in North America being more than offset by lower offshore
realizations. The average North American Random Lengths Western SPF 2x4 #2&Btr
lumber price was US$266 per Mfbm for the quarter, up US$28, or 12%, from the
previous quarter. However, price increases for many other grades and dimensions
were less significant. Sales realizations from offshore markets, where prices
are negotiated monthly or quarterly in advance, were well down from the previous
quarter, mostly attributable to surplus inventory of low grade product in China.
Prices for SYP products were up compared to the previous quarter, with the
benchmark SYP 2x4 price of US$298 per Mfbm up 15% from the previous quarter, and
wider dimension products seeing similar increases.
Compared to the first quarter of 2011, the benchmark North America Random
Lengths Western SPF 2x4 #2&Btr price was down US$30 per Mfbm, or 10%, although
smaller reductions were seen for most wider products and other grades. However,
2x4 #3 prices in particular saw a sharp decline from the comparable period,
which was a major factor in lower sales realizations, primarily to China. SYP
price movements were more mixed, with narrow dimensions seeing modest price
reductions, but wider products benefitting from increased prices.
The average value of the Canadian dollar compared to the US dollar in the first
quarter was up just over 2 cents, or 2%, from the previous quarter, partly
offsetting the improved pricing. Compared to the first quarter of 2011,
realizations benefitted from a 1.5 cent, or 1.5%, weaker Canadian dollar.
The Random Lengths Framing Lumber Composite price averaged US$288 per Mfbm for
the first quarter of 2012, up US$27, or 10%, compared to the previous quarter,
but still below the trigger price of US$315 per Mfbm that is required to reduce
the export tax rate on all U.S. bound shipments below the current rate of 15%.
Total residual fibre revenue was up slightly compared to the previous quarter
with higher production volumes largely offset by lower sawmill chip prices tied
to weaker NBSK pulp sales realizations. Compared to the first quarter of 2011,
residual fibre revenue was up, primarily reflecting the higher production
volumes, offset in part by a reduction in sawmill residual chip prices.
Operations
Lumber production, at just over one billion board feet, was up 17% from the
previous quarter, with the increase reflecting both Christmas shutdowns taken at
the Company's operations in the previous quarter and improved productivity.
Lumber production was also up 17% from the first quarter of 2011, for the most
part reflecting increased productivity following various capital improvement
projects in 2011 and the restart of the Vavenby sawmill.
Overall, the Company's unit lumber manufacturing costs were down from the
previous quarter, reflecting a reduction in both unit conversion and log costs.
The decrease in cash conversion costs largely reflected the higher production
levels in the current quarter. The higher log costs in the previous quarter were
partly the result of the adverse impact from milder than expected weather
conditions on log harvesting levels in that quarter.
Compared to the first quarter of 2011, unit manufacturing costs showed a small
increase, with an increase in unit log costs at Western SPF operations being
mitigated by a reduction in unit conversion costs. The lower unit conversion
costs reflected the impact of productivity improvements in the current quarter,
as well as lower natural gas costs, while higher unit log costs reflected higher
logging and hauling costs, in part driven by a sharp rise in diesel costs.
Total restructuring, mill closure and severance costs for the lumber segment
were $3.5 million for the current quarter, primarily reflecting severance costs
related to the Tembec acquisition. Restructuring costs in the previous quarter
were $10.9 million, largely due to the announced closure of manufacturing
operations at the Rustad sawmill. Restructuring costs in the first quarter of
2011 were $1.5 million, reflecting ongoing idled mill costs at the Radium,
Rustad and Vavenby sawmills.
In the first quarter of 2012 the Company recorded a $10.2 million recovery of
previously recorded inventory write-downs, resulting from the improved market
prices. This compared to an expense of $9.7 million in the previous quarter.
Inventory valuation adjustments were minimal in the first quarter of 2011.
Pulp and Paper
Selected Financial Information and Statistics - Pulp and Paper(11)
Q1 Q4 Q1
(millions of dollars unless otherwise noted) 2012 2011 2011
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Sales $ 249.4 $ 237.0 $ 283.0
Operating income $ 11.3 $ 18.2 $ 47.9
EBITDA $ 29.0 $ 39.9 $ 64.7
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Average pulp price delivered to U.S. -
US$(12) $ 870 $ 920 $ 970
Average price in Cdn$ $ 871 $ 942 $ 957
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Production - pulp (000 mt) 315.9 294.5 316.9
Production - paper (000 mt) 32.9 33.5 34.5
Shipments - pulp (000 mt) 327.8 275.4 318.4
Shipments - paper (000 mt) 29.6 30.2 32.6
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(11) Includes the Taylor pulp mill and 100% of Canfor Pulp Products Inc.,
which is consolidated in Canfor's results. Pulp production and
shipment volumes presented are for both northern bleached softwood
kraft ("NBSK") and bleached chemi-thermo mechanical pulp ("BCTMP").
(12) Per tonne, NBSK pulp list price delivered to U.S. (Resource
Information Systems, Inc.).
Overview
Operating income for the pulp and paper segment was $11.3 million for the first
quarter of 2012, down $6.9 million from the previous quarter and down $36.6
million from the first quarter of 2011. EBITDA for the pulp and paper segment
for the first quarter was $29.0 million, compared to $39.9 million in the fourth
quarter of 2011 and $64.7 million in the first quarter of 2011.
US dollar NBSK pulp prices were well down from the previous quarter, with prices
for U.S. delivery down US$50 per tonne. Sales realizations were also adversely
impacted by the stronger average Canadian dollar compared to the prior quarter.
Pulp production was up 7% from the fourth quarter of 2011, mostly due to
downtime taken in the prior period for the Northwood upgrade, with the increased
production contributing to a reduction in unit cash manufacturing costs. Fibre
costs also saw significant reductions in the current period. In addition,
results in the prior quarter were adversely impacted by accelerated amortization
related to assets replaced during Canfor Pulp's Northwood upgrade.
Lower operating earnings compared to the first quarter of 2011 reflected
significant reductions in NBSK pulp prices. Unit manufacturing costs saw a small
reduction compared to the first quarter of 2011 as an increase in unit
conversion costs was more than offset by lower fibre costs, reflecting a drop in
the costs of sawmill residual chips (linked to the NBSK market pulp price).
Markets
Global softwood pulp markets appear to be recovering with signs of strength
heading into the spring maintenance period. Producer inventory levels decreased
through the quarter resulting in price increases for March and April 2012 in
some regions.
PPPC(13) statistics reported an increase in shipments of bleached softwood
sulphate pulp of 6% for the first two months of 2012 as compared to the same
period in 2011, with continued strong shipments to China offset by reductions in
Europe and North America. PPPC reported global demand for printing and writing
papers remained flat for the first two months of 2012 as compared to 2011.
At the end of February 2012, World 20(14) producers of bleached softwood pulp
inventories were at 31 days of supply. By comparison, December 2011 inventories
were at 36 days of supply. Markets conditions are generally considered balanced
when inventories are in the 27-30 days of supply range.
(13) Pulp and Paper Products Council ("PPPC").
(14) World 20 data is based on twenty producing countries representing 80% of
world chemical market pulp capacity and is based on information compiled and
prepared by the PPPC.
Sales
Shipments of pulp in the first quarter of 2012 were 328,000 tonnes, up 52,000
tonnes, or 19%, from the previous quarter, reflecting increased production
levels at Canfor Pulp, and were up 9,000 tonnes, or 3% from the first quarter of
2011.
Prices to the U.S. were at US$870 per tonne for the quarter for NBSK pulp
products, down US$50 from the previous quarter. The average list price to Europe
was down US$31 at US$837 per tonne, while Canfor Pulp's list price to China fell
US$33 to US$697 per tonne. Sales realizations were also adversely impacted by
the stronger Canadian dollar. BCTMP sales realizations were also down from the
previous quarter, reflecting lower market pricing and the stronger Canadian
dollar, although prices showed some improvement towards the end of the period.
NBSK pulp prices were well down from the first quarter of 2011, with prices to
the U.S. dropping US$100 per tonne and prices to Europe down US$123 per tonne.
Canfor Pulp's China list price was also down significantly, dropping over US$170
per tonne from the comparative period. The slightly weaker Canadian dollar
partly offset these price reductions. BCTMP sales realizations were up compared
to the first quarter of 2011, largely reflecting the impact of the weaker
Canadian dollar.
Operations
Pulp production in the first quarter of 2012 was 316,000 tonnes, up 21,000
tonnes, or 7%, from the previous quarter which included downtime for the capital
upgrades at Canfor Pulp's Northwood pulp mill. Pulp production was in line with
the first quarter of 2011.
Pulp unit manufacturing costs were well down from the previous quarter,
reflecting decreases in both unit conversion costs and fibre costs. The
reduction in unit cash conversion costs principally reflected the higher
production levels in the quarter and lower spending on maintenance, while the
lower fibre costs resulted principally from the reduction in sawmill residual
chip prices. As mentioned above, prior quarter results were also negatively
impacted by accelerated amortization related to assets replaced during the
Northwood upgrade.
Compared to the first quarter of 2011, unit manufacturing costs were down
slightly, with an increase in conversion costs, reflecting higher chemical costs
and higher spending on fixed costs, more than offset by a decrease in fibre
costs resulting principally from lower-cost sawmill residual chips.
Unallocated and Other Items
Q1 Q4 Q1
(millions of dollars) 2012 2011 2011
---------------------------------------------------------------------------
Operating loss of Panels operations(15) $ (4.8) $ (18.9) $ (5.7)
Corporate costs $ (7.9) $ (6.6) $ (7.4)
Finance expense, net $ (6.2) $ (5.2) $ (7.2)
Foreign exchange gain (loss) on long-term
debt and investments, net $ 4.0 $ 4.9 $ 4.7
Gain (loss) on derivative financial
instruments $ 7.4 $ 9.6 $ 4.7
Other income (expense), net $ (0.2) $ 1.3 $ (1.7)
---------------------------------------------------------------------------
(15) The Panels operations include the Peace Valley OSB (Oriented Strand
Board) joint venture, the only facility currently operating, and the
Company's Tackama plywood plant, which was closed in January 2012, and
its PolarBoard OSB plant, which is currently indefinitely idled.
The panels operations reported an operating loss of $4.8 million for the first
quarter of 2012, compared to a loss of $18.9 million for the previous quarter.
Excluding the impact of inventory valuation adjustments, and prior quarter
restructuring and impairment charges, the operating loss of panels operations
was $3.1 million in the first quarter of 2012, compared to $5.1 million in the
previous quarter. This improvement in operating results from the previous
quarter principally reflects improved OSB markets, as evidenced by a US$12 per
thousand square feet ("msf") increase in the benchmark OSB price to US$202 per
msf(16). Excluding inventory valuation adjustments, current quarter results in
the panels segment were in line with the first quarter of 2011.
Corporate costs were $7.9 million for the first quarter of 2012, up $1.3 million
from the previous quarter, largely reflecting costs recorded in the current
quarter related to the acquisition of assets from Tembec. Costs in the first
quarter of 2011 included a higher share-based compensation expense.
Net finance expense for the first quarter of 2012 was $6.2 million, up $1.0
million from the previous quarter, reflecting higher borrowing levels in the
current quarter and costs associated with the issuance of new term debt (more
details in Liquidity and Financial Requirements section below). Compared to the
first quarter of 2011, finance expense was down $1.0 million, reflecting a lower
average debt level through the quarter and a lower accretion expense on the
deferred reforestation obligation.
The Company recorded a foreign exchange translation gain on its US dollar
denominated debt, net of investments, of $4.0 million for the first quarter of
2012, as a result of the strengthening of the Canadian dollar against the US
dollar, which rose almost 2% between the respective quarter ends. In the fourth
quarter of 2011, the Company recorded a translation gain of $4.9 million, while
the first quarter of 2011 showed a gain of $4.7 million.
The Company uses a variety of derivative financial instruments as partial
economic hedges against unfavourable changes in foreign exchange rates, energy
costs, lumber prices and interest rates. For the first quarter of 2012, the
Company recorded a net gain of $7.4 million related to its derivative financial
instruments, reflecting gains on US dollar forward contracts and collars related
to the strengthening of the Canadian dollar, and gains on lumber futures and
diesel derivatives.
The following table summarizes the gains (losses) on derivative financial
instruments for the comparable periods:
Q1 Q4 Q1
(millions of dollars) 2012 2011 2011
---------------------------------------------------------------------------
Foreign exchange collars and forward
contracts $ 2.9 $ 9.3 $ 1.9
Energy derivatives $ 1.2 $ 0.9 $ 0.9
Lumber futures $ 3.0 $ (0.6) $ 1.9
Interest rate swaps $ 0.3 $ - $ -
---------------------------------------------------------------------------
$ 7.4 $ 9.6 $ 4.7
---------------------------------------------------------------------------
Other expense, net of $0.2 million includes a $1.3 million gain relating to the
change in fair value of the Company's investment in asset-backed commercial
paper ("ABCP"). This compares to an ABCP-related gain of $0.5 million in the
previous quarter and a $1.1 million gain in the first quarter of 2011. The
current quarter gain was offset by unfavourable foreign exchange movements on US
dollar denominated cash, receivables and payables of Canadian operations of $1.2
million, compared to a loss in the previous quarter of $2.1 million and a loss
of $2.5 million in the first quarter of 2011.
Other income in the previous quarter also included a $2.2 million positive fair
value adjustment related to a royalty agreement associated with the sale of the
operating assets of Howe Sound Pulp and Paper Limited Partnership in late 2010.
(16) Oriented Strand Board, North Central price, 7/16" (Source - Random Lengths
Publications, Inc.)
Other Comprehensive Income (Loss)
The following table summarizes Canfor's Other Comprehensive Income (Loss) for
the comparable periods:
Q1 Q4 Q1
(millions of dollars) 2012 2011 2011
---------------------------------------------------------------------------
Foreign exchange translation differences for
foreign operations $ (3.6) $ (4.3) $ (6.2)
Defined benefit actuarial gain (loss), net of
tax $ (5.3) $ 10.7 $ 2.2
---------------------------------------------------------------------------
Other comprehensive income (loss), net of tax $ (8.9) $ 6.4 $ (4.0)
---------------------------------------------------------------------------
In the first quarter of 2012, the Company recorded an after-tax charge to other
comprehensive income of $5.3 million in relation to changes in the valuation of
its defined benefit post-employment compensation plans. The charge reflects a
reduction in the discount rate used to value the plans, offset in part by a gain
on plan assets that was higher than the expected gain for the quarter. In the
previous quarter a credit of $10.7 million was recorded, reflecting gains on
plan assets, offset in part by losses on non-pension retirement benefit plan
liabilities due to a reduction in the discount rate and changes to other
assumptions. An after-tax gain of $2.2 million was recorded in the first quarter
of 2011.
In addition, the Company recorded a charge of $3.6 million to other
comprehensive income in the first quarter for foreign exchange differences for
foreign operations, reflecting the strengthening of the Canadian dollar by
almost 2% over the quarter. This compared to charges of $4.3 million in the
previous quarter and $6.2 million in the first quarter of 2011, with the
Canadian dollar also strengthening in those periods.
SUMMARY OF FINANCIAL POSITION
The following table summarizes Canfor's cash flow and selected ratios for and as
at the end of the following periods:
Q1 Q4 Q1
(millions of dollars) 2012 2011 2011
---------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents $ (20.2) $ (72.4) $ (87.8)
Operating activities $ (55.2) $ 38.0 $ (6.0)
Financing activities $ 137.0 $ (17.6) $ (75.0)
Investing activities $ (102.0) $ (92.8) $ (6.8)
Ratio of current assets to current
liabilities 1.6 : 1 1.5 : 1 2.0 : 1
Net debt to capitalization 22.0% 13.4% 6.6%
ROIC - Consolidated(17) (1.4)% (4.1)% 0.4%
ROCE - Canfor solid wood business(18) (1.2)% (5.5)% (0.3)%
---------------------------------------------------------------------------
(17) Consolidated Return on Invested Capital ("ROIC") is equal to operating
income/loss, plus realized gains/losses on derivatives and other
income/expense, all net of minority interest, divided by the average
invested capital during the year. Invested capital is equal to capital
assets, plus long-term investments and net non-cash working capital,
all excluding minority interest components.
(18) Return on Capital Employed ("ROCE") for the Canfor solid wood business
represents consolidated ROCE adjusted to remove the Company's interest
in the Peace Valley OSB Joint Venture and pulp and paper operations,
including Canfor Pulp and the Taylor pulp mill. Consolidated ROCE is
equal to shareholder net income for the period plus finance expense,
after tax, divided by the average capital employed during the period
(which consists of current and long-term debt and operating loans, and
shareholders' equity, less cash and temporary investments).
Changes in Financial Position
Operating activities used cash of $55.2 million in the first quarter of 2012,
compared to cash generated of $38.0 million in the previous quarter. The
variance resulted principally from working capital movements, most significantly
the Company's seasonal build of log inventory ahead of spring break-up and to a
lesser extent a reduction in accounts receivable in the prior quarter. Compared
to the first quarter of 2011, cash earnings were lower, while overall working
capital movements were similar.
Financing activities generated cash of $137.0 million in the current quarter,
compared to $17.6 million used in the previous quarter and $75.0 million used in
the first quarter of 2011. The current quarter's cash flows included $100.0
million of new term debt and $94.0 million drawn on the Company's operating
lines of credit. Partially offsetting these inflows was a $49.9 million (US$50.0
million) repayment of term debt made in the quarter. A term debt repayment was
also made in the first quarter of 2011, in the amount of $33.8 million. Cash
distributions to non-controlling interests were $4.3 million in the first
quarter of 2012 (Q4 2011: $11.4 million; Q1 2011: $38.0 million). Finance
expenses paid in the current quarter were $3.1 million, down from $6.2 million
in the previous quarter, reflecting timing of payments, and in line with the
first quarter of 2011.
Investing activities used cash of $102.0 million in the first quarter of 2012,
compared to $92.8 million in the fourth quarter of 2011 and $6.8 million in the
first quarter of 2011, which included $29.7 million of proceeds received from
the redemption of ABCP. Cash used for capital additions in the current quarter
was $53.6 million, down significantly from the previous quarter but slightly
higher than the first quarter of 2011. In the lumber segment, capital additions
for the current quarter were $26.9 million, including a planer upgrade at the
Company's Grande Prairie sawmill. Capital expenditures for the pulp and paper
segment for the first quarter of 2012 were $26.7 million, with $7.9 million
received under the Green Transformation Program.
Investing activities in the current quarter also included the acquisition of
Tembec Industries Ltd.'s southern British Columbia Interior wood products
assets, for a purchase price including working capital of approximately $65
million, subject to final adjustments. The purchase included Tembec's Elko and
Canal Flats sawmills, approximately 1.1 million cubic metres of combined Crown,
private land and contract allowable cut, and a long term agreement to provide
residual fibre supply for Tembec's Skookumchuck pulp mill.
Liquidity and Financial Requirements
At March 31, 2012, the Company on a consolidated basis had cash of $8.7 million
and $94.0 million drawn on its operating lines of credit, with an additional
$29.0 million reserved for several standby letters of credit. Total remaining
available operating lines of credit were $307.4 million. The Company and Canfor
Pulp remained in compliance with the covenants relating to their operating lines
of credit and long-term debt during the quarter, and expect to remain so for the
foreseeable future.
The new term debt of $100.0 million was used to fund the US$50.0 million term
debt repayment on February 1, 2012 and the acquisition of assets from Tembec.
The new debt is in the form of an unsecured non-revolving term loan, with a
maturity date of February 13, 2017. Interest rates are floating based on the
lenders' Canadian prime rate or bankers acceptances. During the first quarter of
2012 the Company also put in place $75.0 million of floating to fixed interest
rate swaps, with an additional $25.0 million put in place in early April 2012.
Canfor has US$75.0 million of term debt that is scheduled for repayment on April
1, 2013, and Canfor Pulp has US$110.0 million of term debt that is scheduled for
repayment on November 30, 2013.
The Company's consolidated net debt to total capitalization at the end of the
first quarter of 2012 was 22.0%. For Canfor, excluding Canfor Pulp, net debt to
capitalization at the end of the first quarter was 20.2%.
Softwood Lumber Agreement ("SLA") Update
On January 18, 2011, the U.S. triggered the arbitration provision of the 2006
Softwood Lumber Agreement ("SLA") by delivering a Request for Arbitration. The
U.S. claims that the province of British Columbia ("BC") has not properly
applied the timber pricing system grandparented in the SLA. The U.S. also claims
that subsequent to 2006, BC made additional changes to the timber pricing system
which had the effect of reducing timber prices. The claim focuses on substantial
increases in Grade 4 (non sawlog or low grade) volumes commencing in 2007. It is
alleged that timber was scaled and graded as Grade 4 that did not meet the
criteria for that grade, and was accordingly priced too low.
As the arbitration is a state-to-state international dispute under the SLA,
Canada prepared a defence to the claim with the assistance of the BC provincial
government and the BC lumber industry. In August 2011, the U.S. filed a detailed
statement of claim with the arbitration panel, which Canada responded to in
November 2011. The U.S. subsequently filed a reply, to which Canada filed a
response in early February 2012. During the quarter, a hearing was held before
the arbitration panel, which is not expected to render its decision until the
second half of 2012. It is not possible at this time to predict the outcome or
the value of any final claim, and accordingly no provision has been recorded by
the Company.
CPPI Share Exchange
On March 2, 2012, Canadian Forest Products Ltd. ("CFP"), a wholly owned
subsidiary of Canfor, acquired 35,776,483 common shares of Canfor Pulp Products,
Inc. ("CPPI") in exchange for its 35,776,483 Class B Exchangeable LP Units of
Canfor Pulp Limited Partnership ("CPLP") and 35,776,483 common shares of Canfor
Pulp Holding Inc. ("Canfor Holding"), pursuant to the terms of an Exchange
Agreement made as of January 1, 2011 among CFP, CPPI, Canfor Holding and CPLP.
Prior to the share exchange, CFP and CPPI entered into a dividend waiver
agreement, waiving CFP's right to the first $7.8 million of future dividends
declared by CPPI.
OUTLOOK
Lumber
For the second quarter of 2012, North American lumber demand is projected to
continue its modest recovery, driven by a seasonal increase in activity. The
repair and remodeling sector is currently forecast to continue its recovery
through the rest of the year. New and existing home inventories are anticipated
to continue to trend downwards with low mortgage rates attracting prospective
homebuyers. With inventories in China returning to more normal levels, low grade
lumber prices to China are projected to see a marked improvement in the second
quarter.
Pulp and Paper
The global softwood pulp market is projected to improve modestly through the
second quarter of 2012. Producer inventories have steadily declined through the
first quarter and, with a majority of mills heading into the annual spring
maintenance period, prices are projected to rise in the short term. Canfor Pulp
announced NBSK pulp list price increases for April of US$30 in North America, to
US$900 per tonne, and US$20 in Europe to US$870 per tonne. Canfor Pulp's price
for China was announced at US$740 per tonne for April, a US$30 increase from
March.
OUTSTANDING SHARES
At April 25, 2012, there were 142,705,764 common shares outstanding.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with International
Financial Reporting Standards requires management to make estimates and
assumptions that affect the amounts recorded in the financial statements. On an
ongoing basis, management reviews its estimates, including those related to
useful lives for amortization, impairment of long-lived assets, certain accounts
receivable, pension and other employee future benefit plans and asset retirement
and deferred reforestation obligations based upon currently available
information. While it is reasonably possible that circumstances may arise which
cause actual results to differ from these estimates, management does not believe
it is likely that any such differences will materially affect the Company's
financial condition.
CHANGES IN ACCOUNTING POLICY
Effective January 1, 2012, the Company retroactively changed its accounting
policy for the presentation of interest expense and expected rate of return on
assets of defined benefit post-retirement plans. The net expense has been
reclassified from operating income, included in manufacturing and product costs
and in selling and administration costs, to net finance expense. Management
considers the classification of net pension interest expense as a finance
expense more accurately reflects the nature of this cost. The effect on the
three months ended March 31, 2011 is an increase in operating income and an
increase in net finance expense of $0.9 million. There is no impact on amounts
recorded in the consolidated balance sheet or opening equity as at January 1,
2012.
NEW ACCOUNTING PRONOUNCEMENTS
In the first half of 2011, the International Accounting Standards Board ("IASB")
issued a number of new and revised accounting standards which are effective for
annual periods beginning on or after January 1, 2013, with early adoption
permitted. These new and revised accounting standards have not yet been adopted
by Canfor and the Company does not plan to early adopt any of the standards.
The following new or revised standards are not expected to have a material
impact on the amounts recorded in the financial statements of Canfor:
-- IFRS 10, Consolidated Financial Statements;
-- IFRS 12, Disclosure of Interests in Other Entities;
-- IAS 27, Separate Financial Statements; and
-- IFRS 13, Fair Value Measurement.
The Company is still in the process of assessing the full impact, if any, of the
following new or revised standards:
-- IFRS 11, Joint Arrangements;
-- Amended IAS 19, Employee Benefits; and
-- Amended IAS 28, Investments in Associates and Joint Ventures.
In the first half of 2011, the IASB also issued amended IAS 1, Presentation of
Financial Statements, which is effective for annual periods beginning on or
after July 1, 2012 and IFRS 9, Financial Instruments, which is effective for
annual periods beginning on or after January 1, 2015, with early adoption
permitted. IAS 1 and IFRS 9 are not expected to have a material impact on
amounts recorded in the financial statements of Canfor.
Further details of the new or revised accounting standards and potential impact
on Canfor can be found in Canfor's Annual Report for the year ended December 31,
2011.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
During the quarter ended March 31, 2012, there were no changes in the Company's
internal controls over financial reporting that materially affected, or would be
reasonably likely to materially affect, such controls.
RISKS AND UNCERTAINTIES
Canfor Pulp's collective agreements with the CEP (Communications, Energy and
Paperworkers Union) and PPWC (Pulp, Paper and Woodworkers of Canada) have terms
expiring on April 30, 2012.
A comprehensive discussion of risks and uncertainties is included in the
Company's 2011 annual statutory reports which are available on www.canfor.com or
www.sedar.com.
SELECTED QUARTERLY FINANCIAL INFORMATION(19)
---------------------------------------------------------------------------
Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
2012 2011 2011 2011 2011 2010 2010 2010
---------------------------------------------------------------------------
Sales and
income
(millions
of
dollars)
Sales $607.6 $576.2 $602.1 $619.1 $624.0 $629.1 $588.7 $634.7
Operating
income
(loss) $(21.5) $(63.1) $ 15.4 $ 27.4 $ 32.3 $ 43.9 $ 34.2 $ 71.3
Net income
(loss) $(10.9) $(38.1) $ (9.6) $ 26.2 $ 32.3 $ 55.4 $ 37.2 $ 43.7
Shareholder
net income
(loss) $(16.2) $(44.1) $(21.6) $ 2.1 $ 7.0 $ 31.4 $ 9.1 $ 21.1
Per common
share
(dollars)
Shareholder
net income
(loss) -
basic and
diluted $(0.11) $(0.31) $(0.15) $ 0.01 $ 0.05 $ 0.22 $ 0.06 $ 0.15
---------------------------------------------------------------------------
Statistics
Lumber
shipments
(MMfbm) 994 974 969 973 857 885 865 865
OSB
shipments
(MMsf
3/8") 65 75 62 69 63 57 58 72
Pulp
shipments
(000 mt) 328 275 291 303 318 331 277 301
---------------------------------------------------------------------------
Average
exchange
rate -
US$/Cdn$ $0.999 $0.977 $1.020 $1.033 $1.014 $0.987 $0.962 $0.973
---------------------------------------------------------------------------
Average
Western
SPF 2x4
#2&Btr
lumber
price
(US$) $ 266 $ 238 $ 246 $ 240 $ 296 $ 269 $ 223 $ 266
Average SYP
(East) 2x4
#2 lumber
price
(US$) $ 298 $ 260 $ 259 $ 251 $ 302 $ 256 $ 243 $ 379
Average OSB
price -
North
Central
(US$) $ 202 $ 190 $ 184 $ 172 $ 199 $ 191 $ 178 $ 295
Average
NBSK pulp
list price
delivered
to U.S.
(US$) $ 870 $ 920 $ 993 $1,025 $ 970 $ 967 $1,000 $ 993
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(19) Certain prior period amounts have been restated due to a change in
accounting policy for treatment of net interest expense for defined
benefit post-retirement plans. Further details can be found in the
"Changes in Accounting Policy" section earlier in this document.
In addition to exposure to changes in product prices and foreign exchange, the
Company's financial results are impacted by seasonal factors such as weather and
building activity. Adverse weather conditions can cause logging curtailments,
which can affect the supply of raw materials to manufacturing facilities. Market
demand also varies seasonally to some degree. For example, building activity and
repair and renovation work, which affects demand for lumber products, is
generally stronger in the spring and summer months. These factors, along with
global supply and demand conditions, affect the Company's shipment volumes.
Other material factors that impact the comparability of the quarters are noted
below:
---------------------------------------------------------------------------
After-tax
impact,
net of
non-
controlling
interests(20)
(millions
of
dollars,
except for
per share Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
amounts) 2012 2011 2011 2011 2011 2010 2010 2010
---------------------------------------------------------------------------
Shareholder
net income
(loss), as
reported $(16.2) $(44.1) $(21.6) $ 2.1 $ 7.0 $ 32.9 $ 9.1 $ 21.1
Foreign
exchange
(gain)
loss on
long-term
debt and
invest-
ments, net $ (2.7) $ (3.3) $ 11.0 $ (1.4) $ (3.0) $ (6.9) $ (6.3) $ 9.0
(Gain) loss
on
derivative
financial
instru-
ments $ (5.1) $ (6.7) $ 7.0 $ (0.7) $ (2.9) $ (0.5) $ (1.1) $ 1.1
Decrease
(increase)
in fair
value of
asset-
backed
commercial
paper $ (1.1) $ (0.5) $ 1.8 $ (0.5) $ (1.0) $ (5.5) $ - $ -
Costs
recorded
in
relation
to Tembec
acquisi-
tion $ 2.8 $ - $ - $ - $ - $ - $ - $ -
Mill
closure
provisions $ - $ 17.0 $ - $ - $ - $ - $ 13.0 $ -
Asset
impairment
charges $ - $ 5.5 $ - $ - $ - $ - $ - $ -
Restruct-
uring costs
related to
changes in
management
group $ - $ - $ - $ 2.6 $ - $ - $ - $ -
Gain on
sale of
operating
assets of
Howe Sound
Pulp and
Paper
Limited
Partnership $ - $ - $ - $ - $ - $ (4.9) $ - $ -
---------------------------------------------------------------------------
Net impact
of above
items $ (6.1) $ 12.0 $ 19.8 $ - $ (6.9) $(17.8) $ 5.6 $ 10.1
---------------------------------------------------------------------------
Adjusted
shareholder
net
income
(loss) $(22.3) $(32.1) $ (1.8) $ 2.1 $ 0.1 $ 15.1 $ 14.7 $ 31.2
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Shareholder
net income
(loss) per
share
(EPS), as
reported $(0.11) $(0.31) $(0.15) $ 0.01 $ 0.05 $ 0.23 $ 0.06 $ 0.15
Net impact
of above
items per
share $(0.05) $ 0.09 $ 0.14 $ 0.00 $(0.05) $(0.12) $ 0.04 $ 0.07
---------------------------------------------------------------------------
Adjusted
net income
(loss) per
share $(0.16) $(0.22) $(0.01) $ 0.01 $ 0.00 $ 0.11 $ 0.10 $ 0.22
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(20) Certain prior period amounts have been restated due to a change in
accounting policy for treatment of net interest expense for defined
benefit post-retirement plans. Further details can be found in the
"Changes in Accounting Policy" section earlier in this document.
Canfor Corporation
Condensed Consolidated Balance Sheets
As at
As at December
March 31, 31,
(millions of Canadian dollars, unaudited) 2012 2011
---------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 8.7 $ 28.9
Accounts receivable - Trade 130.7 105.1
- Other 53.7 65.7
Inventories (Note 2) 463.9 348.3
Prepaid expenses 19.4 20.4
---------------------------------------------------------------------------
Total current assets 676.4 568.4
---------------------------------------------------------------------------
Property, plant and equipment 1,142.3 1,139.2
Timber licenses 564.6 530.1
Goodwill and other intangible assets 80.8 83.0
Long-term investments and other (Note 3) 62.9 62.8
Deferred income taxes, net 47.2 18.1
---------------------------------------------------------------------------
Total assets $ 2,574.2 $ 2,401.6
---------------------------------------------------------------------------
---------------------------------------------------------------------------
LIABILITIES
Current liabilities
Operating loans (Note 4(a)) $ 94.0 $ -
Accounts payable and accrued liabilities 286.8 290.5
Current portion of long-term debt (Note 4(b)) - 50.9
Current portion of deferred reforestation obligations 37.8 31.6
---------------------------------------------------------------------------
Total current liabilities 418.6 373.0
---------------------------------------------------------------------------
Long-term debt (Note 4(b)) 284.8 188.1
Retirement benefit obligations 295.4 298.3
Deferred reforestation obligations 88.6 65.0
Other long-term liabilities 17.6 13.8
Deferred income taxes, net 154.0 103.3
---------------------------------------------------------------------------
Total liabilities $ 1,259.0 $ 1,041.5
---------------------------------------------------------------------------
EQUITY
Share capital $ 1,126.2 $ 1,125.9
Contributed surplus 31.9 31.9
Retained earnings (44.9) (24.6)
Accumulated foreign exchange translation differences (9.5) (5.9)
---------------------------------------------------------------------------
Total equity attributable to equity holders of the
Company 1,103.7 1,127.3
Non-controlling interests 211.5 232.8
---------------------------------------------------------------------------
Total equity $ 1,315.2 $ 1,360.1
---------------------------------------------------------------------------
Total liabilities and equity $ 2,574.2 $ 2,401.6
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Contingency (Note 11)
The accompanying notes are an integral part of these condensed consolidated
financial statements.
APPROVED BY THE BOARD
R.S. Smith, Director
R.L. Cliff, Director
Canfor Corporation
Condensed Consolidated Statements of Income (Loss)
3 months ended March 31,
(millions of Canadian dollars, unaudited) 2012 2011
---------------------------------------------------------------------------
Sales $ 607.6 $ 624.0
Costs and expenses
Manufacturing and product costs 429.6 408.5
Freight and other distribution costs 122.4 112.6
Export taxes 11.2 10.8
Amortization 45.1 41.5
Selling and administration costs 16.0 15.5
Restructuring, mill closure and severance costs 4.8 2.8
---------------------------------------------------------------------------
629.1 591.7
---------------------------------------------------------------------------
Operating income (loss) (21.5) 32.3
Finance expense, net (6.2) (7.2)
Foreign exchange gain (loss) on long-term debt and
investments, net 4.0 4.7
Gain (loss) on derivative financial instruments (Note
6) 7.4 4.7
Other income (expense), net (0.2) (1.7)
---------------------------------------------------------------------------
Net income (loss) before income taxes (16.5) 32.8
Income tax recovery (expense) (Note 7) 5.6 (0.5)
---------------------------------------------------------------------------
Net income (loss) $ (10.9) $ 32.3
---------------------------------------------------------------------------
Net income (loss) attributable to:
Equity shareholders of the Company $ (16.2) $ 7.0
Non-controlling interests 5.3 25.3
---------------------------------------------------------------------------
Net income (loss) $ (10.9) $ 32.3
---------------------------------------------------------------------------
Net income (loss) per common share: (in dollars)
Attributable to equity shareholders of the Company
- Basic and diluted (Note 8) $ (0.11) $ 0.05
---------------------------------------------------------------------------
---------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Canfor Corporation
Condensed Consolidated Statements of Other Comprehensive Income (Loss)
3 months ended March 31,
(millions of Canadian dollars, unaudited) 2012 2011
---------------------------------------------------------------------------
Net income (loss) $ (10.9) $ 32.3
Other comprehensive income (loss)
Foreign exchange translation differences for foreign
operations (3.6) (6.2)
Defined benefit plan actuarial gains (losses) (Note
5) (6.9) 3.0
Income tax recovery (expense) on defined benefit plan
actuarial gains (losses) (Note 7) 1.6 (0.8)
---------------------------------------------------------------------------
Other comprehensive income (loss), net of tax (8.9) (4.0)
---------------------------------------------------------------------------
Total comprehensive income (loss) $ (19.8) $ 28.3
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total comprehensive income (loss) attributable to:
Equity shareholders of the Company $ (23.9) $ 3.1
Non-controlling interests 4.1 25.2
---------------------------------------------------------------------------
Total comprehensive income (loss) $ (19.8) $ 28.3
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Condensed Consolidated Statements of Changes in Equity
3 months ended March 31,
(millions of Canadian dollars, unaudited) 2012 2011
---------------------------------------------------------------------------
Share capital
Balance at beginning of period $ 1,125.9 $ 1,125.4
Common shares issued on exercise of stock options 0.3 0.3
---------------------------------------------------------------------------
Balance at end of period $ 1,126.2 $ 1,125.7
---------------------------------------------------------------------------
Contributed surplus
---------------------------------------------------------------------------
Balance at beginning and end of period $ 31.9 $ 31.9
---------------------------------------------------------------------------
Retained earnings
Balance at beginning of period $ (24.6) $ 73.5
Net income (loss) attributable to equity shareholders
of the Company (16.2) 7.0
Defined benefit plan actuarial gains (losses), net of
tax (4.1) 2.3
---------------------------------------------------------------------------
Balance at end of period $ (44.9) $ 82.8
---------------------------------------------------------------------------
Accumulated foreign exchange translation differences
Balance at beginning of period $ (5.9) $ (10.3)
Foreign exchange translation differences for foreign
operations (3.6) (6.2)
---------------------------------------------------------------------------
Balance at end of period $ (9.5) $ (16.5)
---------------------------------------------------------------------------
Total equity attributable to equity holders of the
Company $ 1,103.7 $ 1,223.9
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Non-controlling interests
Balance at beginning of period $ 232.8 $ 249.5
Net income attributable to non-controlling interests 5.3 25.3
Defined benefit plan actuarial gains (losses)
attributable to non-controlling interests (1.2) (0.1)
Distributions to non-controlling interests (0.4) (27.7)
Share exchange (Note 13) (25.0) -
---------------------------------------------------------------------------
Balance at end of period $ 211.5 $ 247.0
---------------------------------------------------------------------------
Total equity $ 1,315.2 $ 1,470.9
---------------------------------------------------------------------------
---------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Canfor Corporation
Condensed Consolidated Statements of Cash Flows
3 months ended March 31,
(millions of Canadian dollars, unaudited) 2012 2011
---------------------------------------------------------------------------
Cash generated from (used in):
Operating activities
Net income (loss) $ (10.9) $ 32.3
Items not affecting cash:
Amortization 45.1 41.5
Income tax (recovery) expense (5.6) 0.5
Long-term portion of deferred reforestation
obligations 13.4 12.1
Change in fair value of long-term investment (1.3) (1.2)
Foreign exchange (gain) loss on long-term debt
and investments, net (4.0) (4.7)
Changes in mark-to-market value of derivative
financial instruments (6.0) (3.7)
Employee future benefits (1.9) (0.5)
Net finance expense 6.2 7.2
Other, net (0.7) 0.1
Salary pension plan contributions (9.0) (9.7)
Income taxes recovered (paid), net (1.3) (0.7)
Net change in non-cash working capital (Note 9) (79.2) (79.2)
---------------------------------------------------------------------------
(55.2) (6.0)
---------------------------------------------------------------------------
Financing activities
Change in operating bank loans (Note 4(a)) 94.0 -
Proceeds from long-term debt (Note 4(b)) 100.0 -
Repayment of long-term debt (Note 4(b)) (49.9) (33.8)
Finance expenses paid (3.1) (3.5)
Cash distributions paid to non-controlling
interests (4.3) (38.0)
Other, net 0.3 0.3
---------------------------------------------------------------------------
137.0 (75.0)
---------------------------------------------------------------------------
Investing activities
Additions to property, plant and equipment (53.6) (48.9)
Reimbursements from Government under Green
Transformation Program 7.9 9.6
Acquisition of Tembec assets (Note 12) (64.9) -
Share exchange (Note 13) 6.8 -
Proceeds from redemption of asset-backed commercial
paper - 29.7
Other, net 1.8 2.8
---------------------------------------------------------------------------
(102.0) (6.8)
---------------------------------------------------------------------------
Decrease in cash and cash equivalents (20.2) (87.8)
Cash and cash equivalents at beginning of period 28.9 260.3
---------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 8.7 $ 172.5
---------------------------------------------------------------------------
---------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Canfor Corporation
Notes to the Condensed Consolidated Financial Statements
(unaudited, millions of Canadian dollars unless otherwise noted)
1. Basis of Preparation
These condensed consolidated interim financial statements have been prepared in
accordance with International Accounting Standard ("IAS") 34 Interim financial
reporting, and include the accounts of Canfor Corporation and its subsidiary
entities, hereinafter referred to as "Canfor" or "the Company".
These interim financial statements do not include all of the disclosures
required by International Financial Reporting Standards ("IFRS") for annual
financial statements. Additional disclosures relevant to the understanding of
these interim financial statements, including the accounting policies applied,
can be found in Canfor's Annual Report for the year ended December 31, 2011,
available at www.canfor.com or www.sedar.com.
Canfor's financial results are impacted by seasonal factors such as weather and
building activity. Adverse weather conditions can cause logging curtailments,
which can affect the supply of raw materials to sawmills and pulp mills. Market
demand also varies seasonally to some degree. For example, building activity and
repair and renovation work, which affects demand for solid wood products, are
generally stronger in the spring and summer months. Shipment volumes are
affected by these factors as well as by global supply and demand conditions.
The currency of presentation for these financial statements is the Canadian dollar.
Change in accounting policy
Effective January 1, 2012, the Company retroactively changed its accounting
policy for the presentation of interest expense and expected rate of return on
assets of defined benefit post-retirement plans. The net expense has been
reclassified from operating income, included in manufacturing and product costs
and in selling and administration costs, to net finance expense. Management
considers the classification of net pension interest expense as a finance
expense more accurately reflects the nature of this cost. The effect on the
three months ended March 31, 2011 is an increase in operating income and an
increase in net finance expense of $0.9 million. There is no impact on amounts
recorded in the consolidated balance sheet or opening equity as at January 1,
2012.
Accounting standards issued and not applied
In the first half of 2011, the International Accounting Standards Board ("IASB")
issued a number of new and revised accounting standards which are effective for
annual periods beginning on or after January 1, 2013, with early adoption
permitted. These new and revised accounting standards have not yet been adopted
by Canfor and the Company does not plan to early adopt any of the standards.
The following new or revised standards are not expected to have a material
impact on the amounts recorded in the financial statements of Canfor:
-- IFRS 10, Consolidated Financial Statements;
-- IFRS 12, Disclosure of Interests in Other Entities;
-- IAS 27, Separate Financial Statements; and
-- IFRS 13, Fair Value Measurement.
The Company is still in the process of assessing the full impact, if any, of the
following new or revised standards:
-- IFRS 11, Joint Arrangements;
-- Amended IAS 19, Employee Benefits; and
-- Amended IAS 28, Investments in Associates and Joint Ventures.
In the first half of 2011, the IASB also issued amended IAS 1, Presentation of
Financial Statements, which is effective for annual periods beginning on or
after July 1, 2012 and IFRS 9, Financial Instruments, which is effective for
annual periods beginning on or after January 1, 2015, with early adoption
permitted. IAS 1 and IFRS 9 are not expected to have a material impact on
amounts recorded in the financial statements of Canfor.
Further details of the new or revised accounting standards and potential impact
on Canfor can be found in Canfor's Annual Report for the year ended December 31,
2011.
2. Inventories
As at As at
March 31, December
(millions of Canadian dollars) 2012 31, 2011
---------------------------------------------------------------------------
Logs $ 146.3 $ 55.9
Finished products 210.3 186.3
Residual fibre 15.1 17.3
Processing materials and supplies 92.2 88.8
---------------------------------------------------------------------------
$ 463.9 $ 348.3
---------------------------------------------------------------------------
---------------------------------------------------------------------------
The above inventory balances are stated after inventory write-downs from cost to
net realizable value. Write-downs at March 31, 2012 totaled $7.0 million
(December 31, 2011 - $15.5 million).
3. Long-term Investments and Other
As at As at
March 31, December
(millions of Canadian dollars) 2012 31, 2011
---------------------------------------------------------------------------
Asset-backed commercial paper ("ABCP") $ 12.9 $ 11.8
Other investments 23.7 24.3
Investment tax credits 8.6 8.6
Defined benefit plan assets 3.0 3.0
Other deposits, loans and advances 14.7 15.1
---------------------------------------------------------------------------
$ 62.9 $ 62.8
---------------------------------------------------------------------------
---------------------------------------------------------------------------
During the first quarter of 2012, a pre-tax gain of $1.3 million was recorded to
"Other income, net" due to an increase in the fair value of the ABCP assets. The
remaining movement in this balance over the period relates to foreign exchange
and proceeds from redemption/sale of certain ABCP assets.
On April 2, 2012, the Company sold the ABCP assets for net proceeds of $12.9
million.
4. Operating Lines and Long-Term Debt
(a) Available Operating Lines
As at As at
March 31, December
(millions of Canadian dollars) 2012 31, 2011
---------------------------------------------------------------------------
Canfor (excluding CPLP)
Principal operating lines $ 350.0 $ 350.0
Facility A - 12.9
---------------------------------------------------------------------------
Total operating lines - Canfor (excluding CPLP) 350.0 362.9
Drawn (94.0) -
Letters of credit (principally unregistered pension
plans) (17.8) (17.2)
---------------------------------------------------------------------------
Total available operating lines - Canfor (excluding
CPLP) $ 238.2 $ 345.7
---------------------------------------------------------------------------
CPLP
Main bank loan facility $ 40.0 $ 40.0
Bridge loan credit facility 30.0 30.0
Facility for BC Hydro letter of credit 10.4 10.4
---------------------------------------------------------------------------
Total operating lines - CPLP 80.4 80.4
Letters of credit (for general business purposes) (0.8) (0.5)
BC Hydro letter of credit (10.4) (10.4)
---------------------------------------------------------------------------
Total available operating lines - CPLP $ 69.2 $ 69.5
---------------------------------------------------------------------------
Consolidated:
Total operating lines $ 430.4 $ 443.3
Total available operating lines $ 307.4 $ 415.2
---------------------------------------------------------------------------
---------------------------------------------------------------------------
For Canfor, excluding CPLP, the principal operating lines mature on October 31,
2015. Interest is payable at floating rates based on lenders' Canadian prime
rate, bankers acceptances, US dollar base rate or US dollar LIBOR rate, plus a
margin that varies with the Company's net debt to total capitalization ratio.
Facility A, which was for US$12.7 million at December 31, 2011, expired in
January 2012.
The terms of CPLP's principal bank loan facility include interest payable at
floating rates that vary depending on the ratio of net debt to operating
earnings before interest, taxes, depreciation, amortization and certain other
non-cash items, and is based on lenders' Canadian prime rate, bankers
acceptances, US dollar base rate or US dollar LIBOR rate, plus a margin. The
maturity date of this facility is November 30, 2013.
CPLP also has a $30.0 million bridge loan credit facility with a maturity date
of December 31, 2012 to fund timing differences between expenditures and
reimbursements for projects funded under the Canadian Federal Government Green
Transformation Program. The bridge facility terms are similar to CPLP's main
facility, with interest and other costs at prevailing market rates. CPLP also
has a separate facility with a maturity date of November 30, 2013 to cover a
$10.4 million standby letter of credit issued to BC Hydro.
As at March 31, 2012, the Company and CPLP were in compliance with all covenants
relating to their operating lines of credit.
All borrowings of CPLP (operating lines and long-term debt) are non-recourse to
other entities within the Company.
(b) Long-Term Debt
On February 2, 2012, the Company repaid $49.9 million (US$50.0 million) of 6.33%
interest rate privately placed senior notes.
During the first quarter of 2012, the Company issued new term debt totaling
$100.0 million which was used to fund the above debt repayment and the
acquisition of assets from Tembec (Note 12). The new debt is in the form of an
unsecured non-revolving term loan, with a maturity date of February 13, 2017.
Interest rates are floating based on the lenders' Canadian prime rate or bankers
acceptances. In addition, during the first quarter of 2012, the Company put in
place $75.0 million of floating to fixed interest rate swaps, with an additional
$25.0 million put in place in early April 2012.
At March 31, 2012, the fair value of the Company's long-term debt, which was
measured at its amortized cost of $284.8 million, was $293.8 million. The fair
value of long-term debt was determined based on prevailing market rates for
long-term debt with similar characteristics and risk profile.
5. Employee Future Benefits
Canfor measures its accrued benefit obligations and the fair value of plan
assets for accounting purposes as at December 31 of each year. At the end of
each interim reporting period, the Company estimates movements in its accrued
benefit liabilities based upon movements in discount rates and the rates of
return on plan assets, as well as any significant changes to the plans.
Adjustments are also made for payments made and current service and interest
costs.
For the three months ended March 31, 2012, $6.9 million (before tax) was charged
to other comprehensive income. The charge reflects losses on retirement benefit
plan liabilities due to a reduction in the discount rate, offset in part by a
gain on plan assets that was higher than the expected gain. For the three months
ended March 31, 2011, a pre-tax amount of $3.0 million was credited to other
comprehensive income, primarily reflecting the merging of two of the Company's
smaller defined benefit pension plans.
The assumptions used to estimate the changes in net accrued benefit liabilities
were as follows:
---------------------------------------------------------------------------
Pension Benefit Plans
Discount rate
March 31, 2012 4.80%
December 31, 2011 5.00%
March 31, 2011 5.50%
December 31, 2010 5.50%
Rate of return on plan assets
3 months ended March 31, 2012 4.30%
3 months ended March 31, 2011 1.65%
---------------------------------------------------------------------------
Other Benefit Plans
Discount rate
March 31, 2012 5.00%
December 31, 2011 5.30%
March 31, 2011 5.75%
December 31, 2010 5.75%
---------------------------------------------------------------------------
---------------------------------------------------------------------------
6. Derivative Financial Instruments
The Company uses a variety of derivative financial instruments to reduce its
exposure to risks associated with fluctuations in foreign exchange rates, lumber
prices, energy costs, electricity sales and floating interest rates on certain
long-term debt. At March 31, 2012, the fair value of derivative financial
instruments was a net asset of $5.8 million (December 31, 2011 - net liability
of $0.2 million). The fair value of these financial instruments was determined
based on prevailing market rates for instruments with similar characteristics.
The following table summarizes the gain (loss) on derivative financial
instruments for the three month periods ended March 31, 2012 and 2011:
3 months ended March 31,
(millions of Canadian dollars) 2012 2011
---------------------------------------------------------------------------
Foreign exchange collars and forward contracts $ 2.9 $ 1.9
Energy derivatives 1.2 0.9
Lumber futures 3.0 1.9
Interest rate swaps 0.3 -
---------------------------------------------------------------------------
$ 7.4 $ 4.7
---------------------------------------------------------------------------
---------------------------------------------------------------------------
The following table summarizes the fair value of the derivative financial
instruments included in the balance sheet at March 31, 2012 and December 31,
2011:
As at As at
March 31, December
(millions of Canadian dollars) 2012 31, 2011
---------------------------------------------------------------------------
Foreign exchange collars and forward contracts $ 1.4 $ (0.4)
Energy derivatives 1.1 (0.2)
Lumber futures 3.0 0.4
Interest rate swaps 0.3 -
---------------------------------------------------------------------------
Total asset (liability) 5.8 (0.2)
Less: current portion (5.3) (0.2)
---------------------------------------------------------------------------
Long-term portion $ 0.5 $ -
---------------------------------------------------------------------------
---------------------------------------------------------------------------
7. Income Taxes
3 months ended March 31,
(millions of Canadian dollars) 2012 2011
---------------------------------------------------------------------------
Current $ (2.8) $ (0.2)
Deferred 8.4 (0.3)
---------------------------------------------------------------------------
Income tax recovery (expense) $ 5.6 $ (0.5)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
The reconciliation of income taxes calculated at the statutory rate to the
actual income tax provision is as follows:
3 months ended March 31,
(millions of Canadian dollars) 2012 2011
---------------------------------------------------------------------------
Income tax recovery (expense) at statutory rate
2012 - 25.0% (2011 - 26.5%) $ 4.1 $ (8.7)
Add (deduct):
Non-taxable income related to non-controlling
interests in limited partnerships 1.2 6.7
Entities with different income tax rates and other
tax adjustments (0.1) 0.1
Tax recovery (expense) at rates other than
statutory rate - 0.2
Permanent difference from capital gains and losses
and other non-deductible items 0.4 1.2
---------------------------------------------------------------------------
Income tax recovery (expense) $ 5.6 $ (0.5)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
In addition to the amounts recorded to net income, a tax recovery of $1.6
million was recorded to other comprehensive income for the three month period
ended March 31, 2012 (three months ended March 31, 2011 - expense of $0.8
million) in relation to the actuarial gains on defined benefit employee
compensation plans.
8. Earnings Per Share
Basic net income (loss) per share is calculated by dividing the net income
(loss) available to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted net income (loss) per share is
calculated by dividing the net income (loss) available to common shareholders by
the weighted average number of common shares during the period using the
treasury stock method. Under this method, proceeds from the potential exercise
of stock options are assumed to be used to purchase the Company's common shares.
When there is a net loss, the exercise of stock options would result in a
calculated diluted net loss per share that is anti-dilutive.
3 months ended March 31,
2012 2011
---------------------------------------------------------------------------
Weighted average number of common shares 142,740,006 142,676,805
Incremental shares from potential exercise of
options (a) 381 12,457
Diluted number of common shares (a) 142,740,006 142,689,262
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(a) Where the addition of share options to the total shares outstanding has
an anti-dilutive impact on the diluted net income (loss) per share
calculation, those share options have not been included in the total
common shares outstanding for purposes of the calculation of diluted
net income (loss) per share.
9. Net Change in Non-Cash Working Capital
3 months ended March 31,
(millions of Canadian dollars) 2012 2011
---------------------------------------------------------------------------
Accounts receivable $ (8.2) $ (14.4)
Inventories (88.5) (77.4)
Prepaid expenses 2.5 2.3
Accounts payable, accrued liabilities and current
portion of deferred reforestation obligations 15.0 10.3
---------------------------------------------------------------------------
Net increase in non-cash working capital $ (79.2) $ (79.2)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
10. Segment Information
Canfor has two reportable segments which offer different products and are
managed separately because they require different production processes and
marketing strategies.
Sales between segments are accounted for at prices that approximate fair value.
These include sales of residual fibre from the lumber segment to the pulp and
paper segment for use in the pulp production process.
The Company's panels business does not meet the criteria to be reported fully as
a separate segment and is included in Unallocated & Other below. Sales for
panels operations for the three months ended March 31, 2012 were $14.5 million
(three months ended March 31, 2011 - $12.4 million).
(millions of Canadian Pulp & Unallocated Elimination
dollars) Lumber Paper & Other Adjustment Consolidated
---------------------------------------------------------------------------
3 months ended March
31, 2012
Sales to external
customers $ 343.7 249.4 14.5 - $ 607.6
Sales to other
segments $ 29.2 - - (29.2) $ -
Operating income
(loss) $ (20.1) 11.3 (12.7) - $ (21.5)
Amortization $ 23.2 17.7 4.2 - $ 45.1
Capital
expenditures(1) $ 26.9 26.7 - - $ 53.6
Identifiable assets $ 1,595.6 801.5 177.1 - $ 2,574.2
---------------------------------------------------------------------------
3 months ended March
31, 2011
Sales to external
customers $ 328.6 283.0 12.4 - $ 624.0
Sales to other
segments $ 29.5 - - (29.5) $ -
Operating income
(loss) $ (2.5) 47.9 (13.1) - $ 32.3
Amortization $ 20.3 16.8 4.4 - $ 41.5
Capital
expenditures(1) $ 25.6 23.3 - - $ 48.9
Identifiable assets $ 1,415.0 848.7 282.8 - $ 2,546.5
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) Capital expenditures represent cash paid for capital assets during the
period. Pulp & Paper includes capital expenditures by CPLP that are
financed by the government-funded Green Transformation Program.
11. Contingency
Softwood Lumber Agreement ("SLA")
On January 18, 2011, the U.S. triggered the arbitration provision of the 2006
Softwood Lumber Agreement ("SLA") by delivering a Request for Arbitration. The
U.S. claims that the province of British Columbia ("BC") has not properly
applied the timber pricing system grandparented in the SLA. The U.S. also claims
that subsequent to 2006, BC made additional changes to the timber pricing system
which had the effect of reducing timber prices. The claim focuses on substantial
increases in Grade 4 (non sawlog or low grade) volumes commencing in 2007. It is
alleged that timber was scaled and graded as Grade 4 that did not meet the
criteria for that grade, and was accordingly priced too low.
As the arbitration is a state-to-state international dispute under the SLA,
Canada prepared a defence to the claim with the assistance of the BC provincial
government and the BC lumber industry. In August 2011, the U.S. filed a detailed
statement of claim with the arbitration panel, which Canada responded to in
November 2011. The U.S. subsequently filed a reply, to which Canada filed a
response in early February 2012. During the quarter, a hearing was held before
the arbitration panel, which is not expected to render its decision until the
second half of 2012. It is not possible at this time to predict the outcome or
the value of any final claim, and accordingly no provision has been recorded by
the Company.
12. Acquisition of Tembec Assets
On March 23, 2012, the Company completed the acquisition of Tembec Industries
Ltd.'s ("Tembec") southern British Columbia Interior wood products assets for
cash consideration of approximately $65 million, including a payment on account
of preliminary net working capital, which excluded certain liabilities retained
by Tembec. The working capital is subject to final closing adjustments. The
acquisition has been accounted for in accordance with IFRS 3 Business
Combinations.
The acquisition included Tembec's Elko and Canal Flats sawmills and
approximately 1.1 million cubic metres of combined Crown, private land and
contract annual allowable cut. The transaction also included a long-term
agreement to provide residual fibre supply for Tembec's Skookumchuck pulp mill.
The assets acquired increase the Company's fibre availability and production
capacity.
Of the consideration paid, approximately $40 million represented the preliminary
fair value of the timber licenses acquired, with the balance split between the
fair value of the property, plant and equipment and net non-cash working capital
balances. In accordance with the Asset Purchase Agreement, the final net working
capital payment will be determined no later than 45 days after the closing date,
and any additional payment by the Company or Tembec will be made.
Between the acquisition date and the Company's quarter end, the amount of sales
and profit contributed by the acquired assets was not significant. If the
acquisition had occurred on January 1, 2012, consolidated sales would have
increased by approximately $37.0 million, with no material change to
consolidated net loss. In determining these amounts, the fair value adjustments,
determined provisionally, that arose on the acquisition date have been assumed
to be the same as if the acquisition had occurred on January 1, 2012.
The Company incurred acquisition-related costs of $1.3 million, principally
relating to external legal fees and due diligence costs, which have been
included in selling and administration costs, and severance costs of $2.5
million related to restructuring of the acquired assets, and these amounts are
recorded in the Company's consolidated statement of income (loss) for the three
months ended March 31, 2012.
13. Share Exchange
On March 2, 2012, Canadian Forest Products Ltd. ("CFP"), a wholly owned
subsidiary of Canfor, acquired 35,776,483 common shares of Canfor Pulp Products,
Inc. ("CPPI") in exchange for its 35,776,483 Class B Exchangeable LP Units of
Canfor Pulp Limited Partnership ("CPLP") and 35,776,483 common shares of Canfor
Pulp Holding Inc. ("Canfor Holding"), pursuant to the terms of an Exchange
Agreement made as of January 1, 2011 among CFP, CPPI, Canfor Holding and CPLP.
As of the date of exchange, the Company consolidated the balances of CPPI and
Canfor Holding, including an additional deferred income tax liability of $31.4
million and cash of $6.8 million. The non-controlling interest in consolidated
equity increased by $25.0 million on the date of exchange, representing the
additional non-controlling interest balances in CPPI and Canfor Holding.
Prior to the share exchange, CFP and CPPI entered into a dividend waiver
agreement, waiving CFP's right to the first $7.8 million of future dividends
declared by CPPI. As such, $7.8 million has been included in non-controlling
interests to account for future distributions which the Company has waived its
entitlement to.
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