INTERNATIONAL FOREST PRODUCTS LIMITED ("Interfor" or the "Company") (TSX:IFP.A)
reported net earnings of $0.3 million or $0.01 per share in the second quarter
of 2012.
Excluding restructuring costs and other one-time items, the Company's net
earnings in the second quarter were $0.9 million or $0.02 per share compared
with a net loss of $5.2 million or $0.09 per share in the first quarter of 2012
and a net loss of $3.2 million or $0.06 per share in the second quarter of 2011.
Key factors impacting the Company's results in the current quarter were higher
lumber sales volumes and prices which increased 13% and 7% respectively versus
the immediately preceding quarter.
EBITDA for the quarter (adjusted to exclude one-time items and other income) was
$16.5 million, up $10.7 million versus the first quarter of 2012 and $5.2
million higher than the same quarter last year.
Lumber production in the quarter was 333 million board feet, up 10 million board
feet or 3 percent compared to the immediately preceding quarter. Sales volume,
including wholesale activities, was 363 million board feet, compared with 320
million board feet in the first quarter.
Capacity utilization in the second quarter was 80%, up from 78% in the first
quarter, in spite of a week curtailment at Adams Lake to facilitate repairs to
one of that mill's kilns.
In the quarter, SPF 2x4 in the U.S. market averaged US$295 per mfbm, up US$29
per mfbm versus the first quarter, and Hem-Fir studs were $US337 per mfbm, up
US$43 per mfbm. MSR was particularly strong with prices of SPF 1650f up US$58
per mfbm in the quarter. Activity levels in China remained firm in the second
quarter although prices lagged those in North America. In Japan, prices for
traditional products were impacted by changes in currency rates with green
hemlock squares off US$18 per mfbm quarter-over-quarter while J Grade dimension
was flat. Cedar prices were up 2-3% in the quarter.
Export taxes on shipments to the U.S. fell to 10% in June in response to higher
lumber prices resulting in a tax saving of approximately $0.4 million or $0.01
per share in the quarter.
In the quarter, Interfor generated $12.0 million in cash from operations after
changes in working capital were considered. Capital spending amounted to $14.4
million, including $6.2 million on the Grand Forks and Castlegar upgrades that
are now underway.
Net debt closed the quarter at $119.4 million or 24 percent of invested capital.
The near-term outlook for recovery in the U.S. housing sector remains uncertain
and concerns over sustainability continue. Export taxes have declined to 5% for
July but will increase to 10% in August due to recent decreases in the relevant
market benchmark. Canadian housing starts are expected to slow slightly over the
balance of 2012.
Compared to recent years, the economic outlook for China has softened as the
Chinese government scales back economic growth targets and real estate markets
weaken under government restrictions designed to stabilize housing prices.
Activity levels in Japan should improve as the year progresses as reconstruction
in the areas impacted by the March 2011 earthquake and tsunami gains momentum.
The Canadian dollar is projected to trade near parity relative to its U.S.
counterpart through 2012.
Considerable attention continues to be devoted to the capital projects at Grand
Forks and Castlegar with timelines on track for completion in the first quarter,
2013. The Company recently introduced a number of scope changes to the Grand
Forks project including plans to upgrade the mill's log and lumber storage yards
that had originally been planned for the third and fourth quarter, 2013 and for
2014. The additional capital authorized totals $8.9 million and will be funded
from internally-generated cash flow and, if necessary, from the Company's credit
lines.
As always, Interfor will maintain a disciplined approach to managing its
business by focusing on items that will position the Company to deliver above
average returns on capital invested in the years ahead.
FORWARD-LOOKING STATEMENTS
This release contains information and statements that are forward-looking in
nature, including, but not limited to, statements containing the words "will"
and "is expected" and similar expressions. Such statements involve known and
unknown risks and uncertainties that may cause Interfor's actual results to be
materially different from those expressed or implied by those forward-looking
statements. Such risks and uncertainties include, among others: general economic
and business conditions, product selling prices, raw material and operating
costs, changes in foreign-currency exchange rates, and other factors referenced
herein and in Interfor's Annual Report and Management Information Circular
available on www.sedar.com. The forward-looking information and statements
contained in this report are based on Interfor's current expectations and
beliefs. Readers are cautioned not to place undue reliance on forward-looking
information or statements. Interfor undertakes no obligation to update such
forward-looking information or statements, except where required by law.
ABOUT INTERFOR
Interfor is a leading global supplier, with one of the most diverse lines of
lumber products in the world. The Company has operations in British Columbia,
Washington and Oregon, including two sawmills in the Coastal region of British
Columbia, three in the B.C. Interior, two in Washington and two in Oregon. For
more information about Interfor, visit our website at www.interfor.com.
There will be a conference call on Friday, August 3 2012 at 8:00 AM (Pacific
Time) hosted by INTERNATIONAL FOREST PRODUCTS LIMITED for the purpose of
reviewing the Company's release of its Second Quarter, 2012 Financial Results.
The dial-in number is 1-866-323-8540. The conference call will also be recorded
for those unable to join in for the live discussion, and will be available until
August 17, 2012. The number to call is 1-866-245-6755 Passcode 621635.
International Forest Products Limited
Second Quarter Report
For the three and six months ended June 30, 2012
Management's Discussion and Analysis
Dated as of August 2, 2012
This Management's Discussion and Analysis ("MD&A") provides a review of
Interfor's financial performance for the three and six months ended June 30,
2012 relative to 2011, the Company's financial condition and future prospects.
The MD&A should be read in conjunction with the interim Condensed Consolidated
Financial Statements for the three and six months ended June 30, 2012 and 2011,
and Interfor's Annual Information Form, Consolidated Financial Statements and
Annual MD&A for the years ended December 31, 2011 and 2010 filed on SEDAR at
www.sedar.com. The financial information contained in this MD&A has been
prepared in accordance with IAS 34 Interim Financial Reporting and International
Financial Reporting Standards ("IFRS") except as noted herein. In this MD&A,
reference is made to EBITDA and Adjusted EBITDA. EBITDA represents earnings
before finance costs, taxes, depreciation, depletion, amortization,
restructuring costs, other foreign exchange gains and losses, and write-downs of
property, plant, equipment ("asset write-downs"). Adjusted EBITDA represents
EBITDA adjusted for other income (expense) and other income of an associate
company. The Company discloses EBITDA as it is a measure used by analysts and
Interfor's management to evaluate the Company's performance. As EBITDA is not a
defined term under IFRS, it may not be comparable to EBITDA calculated by
others. In addition, as EBITDA is not a substitute for net earnings, readers
should consider net earnings in evaluating the Company's performance.
Unless otherwise noted, all financial references in this MD&A are in Canadian
dollars.
References in this MD&A to "Interfor" and the "Company" mean International
Forest Products Limited, together with its subsidiaries.
Forward-Looking Statements
This report contains forward-looking statements. Forward-looking statements are
statements that address or discuss activities, events or developments that the
Company expects or anticipates may occur in the future. Forward-looking
statements are included in the description of areas which are likely to be
impacted by the description of future cash flows and liquidity under the
headings "Overview", "Income Taxes" and "Cash Flow and Financial Position";
changes in accounting policy under the heading "Accounting Policy Changes"; in
the description of economic conditions under the headings "Sales" and "Outlook";
and in the description of risks and uncertainties under the headings "Softwood
Lumber Agreement Disputes" and "WorkSafeBC Orders Safety Reviews". These
forward-looking statements reflect management's current expectations and beliefs
and are based on certain assumptions including assumptions as to general
business and economic conditions in the U.S. and Canada, as well as other
factors management believes are appropriate in the circumstances including,
among others: product selling prices, raw material and operating costs, changes
in foreign currency exchange rates, and other factors referenced herein. Such
forward-looking statements are subject to risks and uncertainties and no
assurance can be given that any of the events anticipated by such statements
will occur or, if they do occur, what benefit the Company will derive from them.
A number of factors could cause actual results, performance or developments to
differ materially from those expressed or implied by such forward-looking
statements, including those matters described herein and in Interfor's current
Annual Information Form available on www.sedar.com. Accordingly, readers should
exercise caution in relying upon forward-looking statements and the Company
undertakes no obligation to publicly revise them to reflect subsequent events or
circumstance, except as required by law.
Review of Operating Results
Overview
Interfor recorded net earnings of $0.3 million, or $0.01 per share for the
second quarter of 2012 as compared to a net loss of $5.3 million, or $0.10 per
share for the second quarter of 2011. For the first six months, 2012, the
Company recorded a net loss of $6.2 million, or $0.11 per share as compared to a
net loss of $7.0 million, or $0.14 per share for the first six months, 2011.
EBITDA and Adjusted EBITDA for the second quarter of 2012 were $16.5 million,
compared to $11.3 million for the second quarter, 2011. EBITDA and Adjusted
EBITDA for the first half of 2012 were $22.5 million and $22.3 million,
respectively, compared to $22.9 million and $22.9 million for the same period in
2011.
For the second quarter, 2012 the Company's net earnings before restructuring
costs, certain foreign exchange gains (losses), certain other one-time items and
the effect of unrecognized tax assets was $0.9 million, or $0.02 per share as
compared to a net loss of $3.2 million, or $0.06 per share for the second
quarter of 2011. The Company recorded share-based incentive compensation expense
of 0.2 million, or $0.00 per share in the second quarter, 2012 as compared to a
recovery of $3.1 million, or $0.06 per share for the same period, 2011.
For the first six months, 2012 the Company's net loss before restructuring
costs, certain foreign exchange gains (losses), certain other one-time items and
the effect of unrecognized tax assets was $4.4 million, or $0.08 per share as
compared to a net loss of $4.8 million, or $0.09 per share for the first half,
2011. The Company recorded share-based incentive compensation expense of $1.5
million, or $0.03 per share for the first six months, 2012 as compared to $0.5
million, or $0.01 per share for the same period, 2011.
The first quarter of 2012 saw modest increases in domestic demand partially as a
result of milder weather across North America. Industry-wide, domestic lumber
supply was impacted by North American mills destroyed by fire and by several
large competitor mills being exclusively dedicated to export market production
late in the quarter. In the second quarter, 2012 a mill in northern B.C. was
destroyed by fire, further reducing supply. The reduced supply has been a key
factor in the price improvements as production levels have fallen short of
end-use demand, particularly with an increase of 26% in seasonally adjusted U.S.
housing starts, on average for the first half, 2012 as compared to the same
period, 2011. As a result, prices reported by Random Lengths for Western SPF 2x4
#2&Btr in June 2012 averaged US$298 per mfbm, up by US$50 per mfbm over
December, 2011 average prices and US$63 per mfbm over June, 2011 average prices.
As a result of the lift in commodity lumber prices in the second quarter, 2012,
the export tax paid under the Softwood Lumber Agreement ("SLA") declined from
15% to 10% on June 1, 2012, only the fourth time since the SLA was signed in
2006 that it has been less than 15%. The tax rate declined even further from 10%
to 5% on July 1, 2012, but will rise to 10% on August 1, 2012.
Slowing Chinese demand through the second half of 2011 firmed in the first
quarter, 2012, as Chinese distributors reduced the backlog of lumber inventories
that existed in the fourth quarter, 2011. Towards the end of the first quarter,
2012, Chinese lumber demand and prices began to show moderate improvement but
the construction market remains sluggish, impacted by current government fiscal
policies.
Log inventories in China were relatively high through most of the first quarter,
2012, resulting in a decline in log export sales from the Company's B.C. Coastal
logging operations, but also providing less competition for log purchases in the
U.S. Pacific Northwest. Log inventories in China have decreased, but local
sawmills are operating at reduced rates reflecting the slowdown in material
required for concrete forming.
Lumber markets in Japan experienced downward pressure on selling prices as
Japanese purchasers looked to mitigate the impacts of a depreciating yen against
North American currencies.
The mild winter across much of the U.S. resulted in stronger than expected
demand in the cedar markets in the first quarter, 2012 and continued growth in
home improvement sector in the second quarter, 2012 generated higher sales
realizations. Log availability has been tight, limiting the cedar lumber supply
and enabling some price increases.
Results quarter-over-quarter have also been impacted by a weakened Canadian
dollar which, relative to its U.S. counterpart depreciated by four percent on
average for the second quarter, 2012 and by three percent on average for the
first half, 2012, as compared to the same periods of 2011.
Sales
The Company recorded its highest quarterly sales revenue since the third
quarter, 2004.
Lumber shipments improved by 28 million board feet to 363 million board feet for
the second quarter, 2012, up 9% over the same quarter, 2011 and by 35 million
board feet to 682 million board feet for the first half, 2012, up 5% over the
first half, 2011. Reduced North American supply in the first half, 2012 combined
with stronger U.S. housing starts created a supply-demand imbalance with a
resultant lift in lumber shipments and prices. Compared to the same periods in
2011, lumber shipments to the U.S. markets increased 42% for the second quarter,
2012, and 29% for the first half, 2012.
Average unit lumber sales values improved in the second quarter, 2012, climbing
$47 per mfbm, or 12% and $24 per mfbm, or 6% year-to-date, over the respective
periods of 2011. A weaker average Canadian dollar quarter-over-quarter and for
the first half of 2012 had a positive impact on sales returns as compared to the
same periods of 2011.
Compared to the same period, 2011, log sales improved by 24% or $7.0 million and
by 26% or $13.1 million for the second quarter and first half, 2012
respectively. The majority of log sales originate in Interfor's Canadian
operations, which showed a volume increase of 21% for the second quarter, 2012,
and 20% for the first half, 2012 compared to 2011.
Average B.C. Coastal log sales prices declined 5% to $79 per cubic metre in the
second quarter, 2012 and by 9% to $75 per cubic metre year-to-date vis-a-vis the
same periods in 2011. Compared to the same periods in 2011, overall Canadian log
sales prices decreased by 8% to $75 per cubic metre for the second quarter, 2012
and by 3% to $70 per cubic metre for the first half, 2012 partially as a result
of a shift in sales mix to smaller, lower value logs sold in the B.C. Interior.
Increased timber sales activity in the U.S., targeted specifically for domestic
and export log markets, also contributed to the overall improvement in sales for
the first half of 2012, as both volume and per unit sales realizations improved
over 2011.
Pulp chip and other by-product revenues improved by 6% or $1.1 million for the
second quarter of 2012 and $2.8 million or 9% for the first half, 2012, compared
to the respective periods in 2011, largely driven by higher operating rates on
the B.C. Coast and Interior, marginally offset by reduced volume from the U.S.
Pacific Northwest sawmills. Declines in U.S. pulp prices in late 2011 did not
impact chip prices until the second quarter, 2012 when sales contracts
negotiated when pulp markets were stronger came up for renewal. U.S. chip prices
in the U.S. Pacific Northwest were also affected by the decreases in logs
destined for export markets which increased the availability of fibre used in
whole log chipping.
Operating Costs
Production costs for the second quarter of 2012 increased $28.2 million, or 16%,
and $43.8 million, or 13%, for the first half of 2012, compared to the same
periods in 2011.
Lumber production increased by 7.6 million board feet, or 2% in the second
quarter, 2012 vis-a-vis the same period, 2011 and was marginally lower by 1.6
million board feet for the first half, 2012 compared to the first half, 2011.
Modest production gains in B.C. operations, particularly on the B.C. Coast, were
driven by improved log availability compared to the first half of 2011 when
storm damage in late 2010 negatively impacted logging activity. Reduced
operating hours in the U.S. Pacific Northwest sawmills for the second quarter
and first six months, 2012 compared to the same periods in 2011, offset
production gains on the B.C. Coast. Availability of economic fibre supply
challenged the Olympic Peninsula sawmills but supply and pricing improved in the
second quarter, 2012.
Unit cash conversion costs for the second quarter and first half, 2012 were
stable as compared to the same periods of 2011.
Unit costs of logs consumed increased 14% quarter-over-quarter and 9%
year-over-year for 2012 as compared to the same periods, 2011 resulting from a
number of factors including difficult weather conditions in the B.C. Interior;
an increase in heli-logging activity on the B.C. Coast; higher log prices in
parts of the Pacific Northwest and a weaker Canadian dollar.
Compared to the same period in 2011, B.C. log production grew by 6% to 840,000
cubic metres from 796,000 cubic metres in the second quarter, 2012 and by 7% to
1.7 million cubic metres from 1.6 million cubic metres for the first half, 2012.
Difficult harvesting conditions due to harsh weather on the B.C. Coast in the
spring, 2012 contributed to declines in log production of 9% in the second
quarter, 2012 and 5% for the first six months, 2012 as compared to the same
periods in 2011 when the Company sought to take advantage of strong export
markets and to catch up on lost production due to storm related reductions in
late 2010. These reductions were offset by a 25% increase in logging activity in
the B.C. Interior for the first half, 2012 and 63% for the second quarter, 2012
vis-a-vis the same periods, 2011 as extended cold weather prior to spring break
up enabled greater activity.
In the first quarter, 2012, the Company commenced demolition of the remaining
structures of the former Adams Lake sawmill site not previously addressed during
the rebuild of the mill completed in 2009. In addition, in the second quarter,
2012, the Company engaged an environmental consultant to undertake groundwater
and other testing at a landfill at its Castlegar sawmill site in the B.C.
Interior to update its assessment of potential remediation costs. Based on the
results of the testing the Company reduced its estimate of the environmental
provision recorded on acquisition of the site from Pope and Talbot, Inc. in
2008. The resultant net impact on production costs was a recovery of $0.4
million for the second quarter, 2012 and $0.1 million for the first half, 2012.
The Company finalized an insurance claim in the first half, 2011, as
compensation for lost profits and reimbursement of costs resulting from storm
damage on the B.C. Coast which occurred in the late fall, 2010. The Company
recorded insurance proceeds of $0.5 million in the second quarter, 2011 and $2.7
million for the first half, 2011 which were netted against production costs.
Higher commodity lumber prices in the second quarter, 2012 drove export tax
rates from 15% to 10% on June 1, 2012. Export taxes for the second quarter, 2012
increased by $0.7 million, or 43% over the same quarter, 2011, in keeping with a
43% increase in Canadian shipment volumes to the U.S. For the first half, 2012,
export taxes increased $0.9 million, or 22% as compared to the same period,
2011, in line with a 20% increase in Canadian shipment volumes to the U.S.
Relative to the same periods in 2011, selling and administrative costs increased
by $0.1 million and $0.4 million for the second quarter and first half, 2012
respectively. Increases in selling and export market administration in the
latter half of 2011 contributed to the increases.
Long-term incentive compensation ("LTIC") expense of $0.2 million for the second
quarter, 2012 (Quarter 2, 2011 - recovery of $3.1 million), and an expense of
$1.5 million for the first half, 2012 (first half, 2011 - $0.5 million expense)
reflect changes in the estimated fair value of the share-based compensation
plans. Fair value is estimated based on a number of components including current
market price of the underlying shares, strike price, expected volatility,
vesting periods and the expected life of the awards. The movement in the
Company's share price has the greatest impact on expense.
Second quarter and first half, 2012 depreciation of plant and equipment was 4%
higher and 1% lower respectively, over the corresponding periods in 2011. The
increase in the second quarter, 2012 was largely driven by increased operating
rates in the B.C. sawmills, while accelerated depreciation on a number of assets
with shortened useful lives in early 2011 contributed to the overall decrease
year-over-year.
Road amortization and depletion expense decreased $0.3 million and $0.2 million
for the second quarter and first half, 2012 as compared to the same periods in
2011. This corresponds to reduced logging activity on the B.C. Coast combined
with a shift from conventional logging to heli-logging.
Second quarter and year-to-date, 2012 restructuring costs of $0.1 million arose
on cancellation of a cutting permit offset by the related impairment of road
infrastructure and severance costs for early retirement of hourly workers.
Restructuring costs in the comparative periods, 2011 of $0.2 million in the
second quarter and $1.0 million for the first half, comprised primarily of
payments in relation to the buyout of logging contractor's Bill 13 entitlements
and severance costs for early retirement of hourly workers.
Finance Costs, Other Foreign Exchange Gain (loss), Other Income (Expense)
Finance costs decreased by $0.2 million for the second quarter and $1.0 million
for the first half, compared to the same periods, 2011, resulting from an
overall decrease in average debt levels compared to the same period in the prior
year. Debt was reduced in the second quarter, 2011 when net proceeds of $54.9
million received from a public offering of Class A Subordinate Voting shares on
April 8, 2011 were used to repay drawings.
In 2012, the Company changed its accounting policy to recognize realized trading
gains and losses and changes in fair value of its derivative forward foreign
exchange contracts in Other foreign exchange gain (loss). Previously these gains
and losses were recognized as an adjustment to Sales. The policy was adopted in
order to better align the Company's presentation on the Statement of Earnings
with those adopted by Interfor's peer group. The policy was adopted on a
retrospective basis, and had no effect on Net earnings or the Statement of
Financial Position for any of the periods presented.
Other foreign exchange loss at $0.5 million for the second quarter and $0.1
million for the first half, 2012 compared to gains of $0.2 million and $1.3
million for the respective periods, 2011 is impacted by the volatility of the
Canadian dollar and the timing and amount of derivative forward foreign exchange
contracts.
Other income for the second quarter and first half of 2012 and 2011 was
negligible, consisting of sales of minor surplus equipment and scrap.
Income Taxes
In the second quarter of 2012, the Company recorded an income tax expense of
$0.3 million (Quarter 2, 2011 - $1.2 million) which excludes the benefit of $0.0
million of certain deferred income tax assets arising from loss carry-forwards
available to reduce future taxable income which were not recognized (Quarter 2,
2011 - $2.2 million). For the first six months, 2012, the income tax expense of
$0.4 million excluded the benefit of $1.8 million of deferred tax assets (first
half, 2011 - $2.5 million). Although the Company expects to realize the full
benefit of the loss carry-forwards and other deferred tax assets, due to the
cyclical nature of the wood products industry and the economic conditions over
the last several years, the Company has not recognized the benefit of its
deferred tax assets in excess of its deferred tax liabilities.
Cash Flow and Financial Position
The Company generated $22.3 million from operations, before changes in working
capital during the first half, 2012 as compared to $24.5 million for the first
half, 2011.
Year-over-year, cash flows declined slightly as higher costs offset the rise in
North American sales values and improved domestic demand in the first half,
2012; in the same period, 2011, higher export sales volumes partially offset by
lower overall sales realizations drove cash earnings.
Cash generated by the Company from operations, after changes in working capital,
was $8.7 million for the six months ended June 30, 2012 compared to $15.5
million in the first half, 2011.
Improvements in overall sales volumes, North American sales values and the shift
away from export markets were reflected in a cash utilization of $14.8 million
for accounts receivable partially offset by a $4.8 million increase in accounts
payable in the first half, 2012. Cash of $3.6 million utilized for prepayments
reflected increased deposits made in the U.S. operations to secure timber
rights.
In the first half, 2011, significant increases in lumber production to meet
export demand as well as weather-related and other logistical issues causing
shipping delays resulted in an inventory build-up of $11.1 million. The increase
in accounts receivable of $8.9 million, offset by a $10.9 million rise in
accounts payable was the result of the higher operating rates and export
shipments in the first half, 2011.
Cash capital expenditures for the first half of 2012 totalled $25.3 million
(first half, 2011 - $19.6 million) with $8.6 million spent on the capital
upgrades for the Grand Forks and Castlegar mills, $1.5 million on other
high-return discretionary projects, $4.8 million on business maintenance
expenditures and $10.4 million on road construction. These expenditures were
funded by net drawings of $20.0 million on the Company's Revolving Term Line
during the first half, 2012.
On January 3, 2011 the Seaboard General Partnership ("SGP") declared an income
distribution to its partners. Interfor's share was $15.7 million and was settled
with the Company by way of setoff against the promissory note payable to the
SGP. On January 5, 2011 by virtue of the withdrawal of all other partners in
SGP, Interfor acquired control of its net assets. Cash generated from
investments includes cash received on acquisition of SGP of $4.8 million.
In the second quarter, 2011 the Company also settled an insurance claim in
respect of severe storm damage to logging roads and bridges in the fall, 2010.
Net cash proceeds of $4.8 million were received in June 2011.
In the second quarter, 2011, the Company closed a public offering of 8,222,500
Class A Subordinate Voting shares at a price of $7.00 per share for net proceeds
of $54.9 million. In addition, in the first half, 2011 several stock option
holders exercised their options generating $1.4 million in cash.
As at June 30, 2012, the Revolving Term Line was drawn by US$30.2 million
(revalued at the quarter-end exchange rate to $30.7 million) and $100.0 million
for total drawings of $130.7 million, leaving an unused available line of $69.3
million. The Company's Operating Line of $65.0 million had no borrowings other
than outstanding letters of credit of $5.3 million, leaving an unused available
line of $59.7 million. Including cash of $11.3 million, the Company had
available resources of $140.3 million as at June 30, 2012.
These resources, together with cash generated from operations, will be used to
support Interfor's working capital requirements, capital expenditures including
the Kootenay optimization projects, and debt servicing commitments.
Interfor continues to monitor discretionary capital expenditures. Based on
current pricing and cash flow projections and existing credit lines the Company
believes it has sufficient liquidity to meet all of its financial obligations.
At June 30, 2012, the Company had cash of $11.3 million. After deducting the
Company's drawings under its Revolving Term Line, the Company ended the first
half, 2012, with net debt of $119.4 million or 24% of invested capital as
compared to 19% as at June 30, 2011, primarily as a result of the sawmill
rebuild at Grand Forks.
Selected Quarterly Financial Information(1)
Quarterly Earnings 2012 2011
Summary 2010
--------------------------------------------------------
Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
--------------------------------------------------------
(millions of dollars except share and per share amounts)
Sales - Lumber(2) 162.4 133.6 133.6 139.6 133.7 131.4 136.3 112.2
- Logs 35.6 27.0 22.9 36.0 28.6 20.8 20.6 21.9
- Wood chips
and other
residual
products 17.8 18.2 17.5 17.6 16.8 16.4 15.7 14.0
- Other 9.6 7.9 14.6 9.9 8.7 10.0 2.4 2.4
--------------------------------------------------------
Total Sales 225.4 186.7 188.7 203.1 187.9 178.6 175.0 150.6
--------------------------------------------------------
Operating earnings
(loss) before
restructuring
costs(2) 2.9 (5.5) (6.2) 3.9 (2.3) (0.1) 0.3 (3.0)
Operating earnings
(loss)(2) 2.8 (5.5) (6.1) 4.2 (2.4) (1.0) 0.3 (3.4)
Net earnings (loss) 0.3 (6.5) (6.5) 0.0 (5.3) (1.7) 0.8 1.4
Net earnings (loss)
per share - basic
and diluted 0.01 (0.12) (0.12) 0.00 (0.10) (0.04) 0.02 0.03
Net earnings (loss),
adjusted for
certain one-time
and other items
(2),(4),(6) 0.9 (5.2) (3.7) 2.4 (3.2) (1.7) (0.8) (2.0)
Net earnings (loss),
adjusted for
certain one-time
and other items -
per share(2),(4) 0.02 (0.09) (0.07) 0.04 (0.06) (0.03) (0.02) (0.04)
EBITDA7 16.5 6.0 6.7 17.6 11.3 11.6 13.3 14.4
Adjusted EBITDA(7) 16.5 5.8 6.7 17.3 11.3 11.6 13.2 9.7
Cash flow from
operations per
share(5) 0.24 0.15 0.08 0.26 0.22 0.27 0.22 0.18
Shares outstanding -
end of period
(millions)(3) 55.9 55.9 55.9 55.9 55.9 47.5 47.4 47.1
- weighted average
(millions) 55.9 55.9 55.9 55.9 55.2 47.4 47.2 47.1
Average foreign
exchange rate per
US$1.00 1.0104 1.0010 1.0230 0.9808 0.9680 0.9856 1.0131 1.0395
Closing foreign
exchange rate per
US$1.00 1.0181 0.9975 1.0170 1.0482 0.9645 0.9696 0.9946 1.0290
1. Tables may not add due to rounding.
2. The Company uses derivative forward foreign exchange contracts which are
designated as held for trading and are carried on the Statement of
Financial Position at fair value. Previously changes in fair value were
recorded as an adjustment to Sales in Net earnings. Effective January 1,
2012 the Company changed its accounting policy to align with the
presentation adopted by companies in its peer group and changes in fair
value are now recorded in Other foreign exchange gain (loss) in Net
earnings.
The policy has been applied on a retrospective basis and comparative
information has been restated. There is no change to Net earnings as a
result of the adoption of this new policy.
3. As at August 2, 2012, the numbers of shares outstanding by class are:
Class A Subordinate Voting shares - 54,847,176, Class B Common shares -
1,015,779, Total - 55,862,955.
4. Net earnings (loss), adjusted for certain one-time and other items
represents net earnings (loss) before restructuring costs, certain
foreign exchange gains and losses, other income (expense), certain one-
time items and the effect of unrecognized tax assets.
5. Cash generated from operations before taking account of changes in
operating working capital. Net earnings (loss), adjusted for certain
one-time and other items is not a defined term under IFRS, and may not
be comparable to adjusted earnings (loss) calculated by others. Net
earnings (loss), adjusted for certain one-time and other items may be
calculated as follows(3):
2012 2011 2010
--------------------------------------------------------
Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
--------------------------------------------------------
(millions of dollars)
Net earnings (loss) 0.3 (6.5) (6.5) 0.0 (5.3) (1.7) 0.8 1.4
Add (deduct):
Other (income)
expense (0.0) (0.1) - (0.4) (0.0) - 0.3 0.1
Other (income)
expense of
associate company - - - - - - (0.4) (4.8)
Other foreign
exchange (gains)
losses 0.5 (0.4) (1.1) 2.5 (0.2) (1.1) (1.1) (0.8)
Restructuring
costs (recovery) 0.1 - (0.1) (0.3) 0.1 0.8 - 0.5
Deferred tax
assets not
recognized
(recognized) 0.0 1.8 3.9 0.6 2.2 0.3 (0.3) 1.6
--------------------------------------------------------
Net earnings (loss)
adjusted for
certain one-time
and other items(3) 0.9 (5.2) (3.7) 2.4 (3.2) (1.7) (0.8) (2.0)
--------------------------------------------------------
7. EBITDA represents earnings before finance costs, taxes, depreciation,
depletion, amortization, restructuring costs, other foreign exchange
gains and losses, and asset write-downs. The Company discloses EBITDA as
it is a measure used by analysts and Interfor's management to evaluate
the Company's performance. As EBITDA is not a defined term under IFRS,
it may not be comparable to EBITDA calculated by others. In addition, as
EBITDA is not a substitute for net earnings, readers should consider net
earnings in evaluating the Company's performance. Adjusted EBITDA
represents EBITDA adjusted for other income and other income of the
associate company.
EBITDA and Adjusted EBITDA may be calculated from the Statements of
Operations as follows(3):
2012 2011 2010
--------------------------------------------------------
Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
--------------------------------------------------------
(millions of dollars)
Net earnings (loss) 0.3 (6.5) (6.5) 0.0 (5.3) (1.7) 0.8 1.4
Add: Income taxes
(recovery) 0.3 - 0.2 0.5 1.2 (0.4) (0.5) (0.2)
Finance costs 1.7 1.5 1.3 1.7 1.9 2.3 2.5 2.6
Depreciation,
depletion and
amortization 13.6 11.3 13.0 13.3 13.6 11.7 11.7 11.0
Other foreign
exchange (gains)
losses 0.5 (0.4) (1.1) 2.5 (0.2) (1.1) (1.1) (0.8)
Restructuring costs
(recovery) 0.1 - (0.1) (0.3) 0.1 0.8 - 0.5
--------------------------------------------------------
EBITDA 16.5 6.0 6.7 17.6 11.3 11.6 13.3 14.4
Deduct:
Other income
(expense) (0.0) 0.1 - 0.4 - - (0.3) (0.1)
Other income of
associate company - - - - - - 0.4 4.8
--------------------------------------------------------
Adjusted EBITDA(3) 16.5 5.8 6.7 17.3 11.3 11.6 13.2 9.7
--------------------------------------------------------
Volume and Price Statistics 2012 2011 2010
----------------------------------------
Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
----------------------------------------
Lumber sales (million fbm) 363 320 318 336 334 313 321 277
Lumber (million fbm)
production 333 323 294 313 325 332 303 272
Log sales(1) (thousand cubic metres) 379 361 310 430 314 301 292 289
Log (thousand cubic metres)
production(1) 840 892 7951,002 796 816 794 595
Average ($/thousand fbm)
selling
price -
lumber(2) $448 $418 $420 $415 $400 $419 $424 $405
Average ($/cubic metre)
selling
price -
logs(1) $75 $64 $69 $74 $82 $61 $64 $73
Average ($/thousand fbm)
selling
price - pulp
chips $46 $48 $51 $48 $44 $40 $42 $40
1. B.C. operations
2. Gross sales before export taxes
3. Tables may not add due to rounding
Quarterly trends normally reflect the seasonality of the Company's operations.
Logging operations are seasonal due to a number of factors including weather,
ground conditions and fire season closures. Generally, the Company's B.C.
Coastal logging divisions experience higher production levels in the latter half
of the first quarter, throughout the second and third quarters and in the first
half of the fourth quarter. Logging activity in the B.C. Interior is generally
higher in the first half of the first quarter, slows during spring thaw and
increases in the third and fourth quarters. Sawmill operations are less seasonal
than logging operations but are dependent on the availability of logs from
logging operations, including those from suppliers. In addition, the market
demand for lumber and related products is generally lower in the winter due to
reduced construction activity, which increases during the spring, summer and
fall.
Operating rates increased in early 2010, as lumber prices rose in response to
increased North American demand and a temporary supply/demand imbalance. During
the same period off-shore demand increased, particularly from China, with rapid
export market growth through the last half of 2010 and the first half, 2011,
levelling off for the balance of 2011. Export markets slowed further in the
first two quarters, 2012, but were more than offset by strong North American
demand resulting in higher sales prices and a reduction in export tax rates in
the second quarter, 2012.
The volatility of the Canadian dollar also impacted results, given that
historically over 75% of the Canadian operations' lumber sales are to export
markets and priced in U.S. dollars. A strong Canadian dollar reduces the lumber
sales realizations in Canada, but reduces the impact of losses in U.S.
operations when converted to Canadian dollars. No deferred tax assets arising
from loss carry-forwards were recognized during 2010 through the first half of
2012.
In the first quarter, 2011 the Company acquired 100% control of SGP. It was
wound up in early January, 2011 but continued operations as Seaboard and its
accounts were consolidated from the date of change in control on January 5,
2011. Other sales revenues include the ocean freight revenues of Seaboard.
Softwood Lumber Agreement Disputes
On January 18, 2011 the U.S. Trade Representative's ("USTR") office filed for
arbitration under the provisions of the SLA over its concern that the Province
of British Columbia ("B.C.") is charging too low a price for certain timber
harvested on public lands in the B.C. Interior.
On July 18, 2012 the London Court of International Arbitration ("LCIA"), which
has jurisdiction over disputes under the SLA, dismissed the U.S. claim in its
entirety. The ruling of the LCIA is final and not subject to appeal.
In April, 2012 the U.S. Lumber Coalition approached the USTR alleging that the
B.C. government is undercharging B.C. Coastal forest companies for timber
harvested on Crown lands. As this second complaint is in the very preliminary
stages of investigation and the existence of any potential claim has not been
determined, no provision has been recorded in the financial statements as at
June 30, 2012.
WorkSafeBC Orders Safety Reviews
On April 24, 2012, as a result of the explosion and destruction of two sawmills
in the B.C. Interior in 2012, WorkSafeBC, the workers' compensation insurer in
B.C., ordered province-wide sawmill safety reviews, including full hazard
identification and risk assessment with particular focus on combustible dust,
dust accumulation and potential ignition sources. In May, 2012 WorkSafeBC
officers conducted reviews to confirm that the ordered actions had been taken
and sawmills were in compliance with the Workers Compensation Act and
Occupational Health and Safety Regulation in regard to combustible dust and
potential safety hazards. No deficiencies of any significance were identified in
the WorkSafeBC reviews of the Company's Canadian sawmill sites.
In early 2012, the Company engaged a consultant to assist in the evaluation of
safety standards at each of its sawmills and as at May 3, 2012 reviews were
completed at the Canadian sawmill sites. The Company believes that it maintains
high standards of safe work practices and provides a safe work environment.
Accounting Policy Changes
The Company uses derivative forward foreign exchange contracts which are
designated as held for trading and are carried on the Statement of Financial
Position at fair value. Previously, changes in fair value were recorded as an
adjustment to Sales in Net earnings. Effective January 1, 2012 the Company
changed its accounting policy to align with the presentation adopted by
companies in its peer group and changes in fair value are now recorded in Other
foreign exchange gain (loss) in Net earnings. There is no effect on Net earnings
or on the Statement of financial position.
The policy has been applied on a retrospective basis and comparative information
has been restated.
IFRS Future Changes
IFRS 9, Financial Instruments, replaces the multiple classification and
measurement models in IAS 39, Financial Instruments: Recognition and
Measurement, with a single model that has only two classification categories:
amortized cost and fair value. This standard is in effect for accounting periods
beginning on or after January 1, 2015, with earlier adoption permitted.
IAS 19, Employee Benefits, was revised to eliminate the option to defer
recognition of gains and losses, known as the "corridor method", and to enhance
disclosure requirements for defined benefit plans. As the Company did not choose
the corridor method in accounting for its defined benefit plans, there is no
impact on its financial statements as a result of the elimination of this
option. This standard is in effect for accounting periods beginning on or after
January 1, 2013, with earlier adoption permitted.
As at the reporting date, no assessment has been made of the impact of the
standard on the Company's financial statements other than the effect of the
elimination of the corridor method.
The standard-setting bodies that set IFRS have significant ongoing projects that
could impact the IFRS accounting policies selected. Specifically, it is
anticipated that there will be additional new or revised IFRS or IFRIC standards
in relation to financial instruments and leases currently on the International
Accounting Standards Board agenda.
Controls and Procedures
There were no changes in the Company's internal controls over financial
reporting ("ICFR") during the quarter ended June 30, 2012 that have materially
affected, or are reasonably likely to materially affect, the Company's ICFR.
Critical Accounting Estimates
There were no material changes to the Company's critical accounting estimates
during the quarter ended June 30, 2012. For a full discussion of critical
accounting estimates, please refer to the Company's discussion in its MD&A for
the year ended December 31, 2011 as filed on SEDAR at www.sedar.com.
Outlook
The near-term outlook for recovery in the U.S. housing sector remains uncertain
and concerns over sustainability continue. Export taxes have declined to 5% for
July but will increase to 10% in August due to recent decreases in the relevant
benchmark prices. Canadian housing starts are expected to slow slightly over the
balance of 2012.
Compared to recent years, the economic outlook for China has softened, as the
Chinese government scales back economic growth targets, and the real estate
market weakens under government restrictions to stabilize housing prices. We
still expect China to remain an important and growing end market for the
Company's lumber products.
Activity levels in Japan are expected to improve as reconstruction in the areas
impacted by the March 2011 earthquake and tsunami gains momentum.
Expectations are that the Canadian dollar will continue to trade near parity
relative to its U.S. counterpart through 2012.
Considerable attention continues to be devoted to the Grand Forks and Castlegar
capital projects, with project timelines remain on track for completion in the
first quarter, 2013.
With the recent economic turmoil in Europe, slower growth in China, and cautious
optimism over U.S. housing starts, Interfor continues its disciplined approach
to production, inventory management and capital spending to help position the
Company to deliver above average returns on capital invested as markets improve.
Additional Information
Additional information relating to the Company and its operations can be found
on its website at www.interfor.com, in the Annual Information Form and on SEDAR
at www.sedar.com. Interfor's trading symbol on the Toronto Stock Exchange is
IFP.A.
Lawrence Sauder, Chairman
Duncan K. Davies, President and Chief Executive Officer
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
For the three and six months ended June 30, 2012 and 2011 (unaudited)
----------------------------------------------------------------------------
(thousands of Canadian dollars except loss per share)
3 Months 3 Months 6 Months 6 Months
June 30, June 30, June 30, June 30,
2012 2011 2012 2011
----------------------------------------------------------------------------
Sales (note 3(a)) $ 225,424 $ 187,886 $ 412,084 $ 366,468
Costs and expenses:
Production 200,893 172,661 372,563 328,785
Selling and administration 5,327 5,269 10,632 10,240
Long term incentive
compensation expense
(recovery) 205 (3,081) 1,522 460
Export taxes 2,491 1,742 5,024 4,106
Depreciation of plant and
equipment (note 9) 6,923 6,625 13,715 13,911
Depletion and amortization
of timber, roads and other
(note 9) 6,663 6,943 11,188 11,357
---------------------------------------------------------------------------
222,502 190,159 414,644 368,859
----------------------------------------------------------------------------
Operating earnings (loss)
before restructuring costs 2,922 (2,273) (2,560) (2,391)
Restructuring costs (note
10) (146) (139) (146) (989)
----------------------------------------------------------------------------
Operating earnings (loss) 2,776 (2,412) (2,706) (3,380)
Finance costs (note 11) (1,668) (1,895) (3,210) (4,169)
Other foreign exchange gain
(loss) (493) 213 (61) 1,301
Other income (note 12) 6 28 128 57
----------------------------------------------------------------------------
(2,155) (1,654) (3,143) (2,811)
----------------------------------------------------------------------------
Earnings (loss) before
income taxes 621 (4,066) (5,849) (6,191)
Income tax expense:
Current 243 352 357 390
Deferred 78 844 4 411
---------------------------------------------------------------------------
321 1,196 361 801
----------------------------------------------------------------------------
Net earnings (loss) $ 300 $ (5,262) $ (6,210) $ (6,992)
----------------------------------------------------------------------------
Net earnings (loss) per
share, basic and diluted
(note 13) $ 0.01 $ (0.10) $ (0.11) $ (0.14)
----------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the three and six months ended June 30, 2012 and 2011 (unaudited)
----------------------------------------------------------------------------
3 Months 3 Months 6 Months 6 Months
June 30, June 30, June 30, June 30,
2012 2011 2012 2011
----------------------------------------------------------------------------
Net earnings (loss) $ 300 $ (5,262) $ (6,210) $ (6,992)
Other comprehensive income
(loss):
Foreign currency
translation differences -
foreign operations 2,563 (654) 105 (3,857)
Defined benefit plan
actuarial losses (2,810) (782) (3,419) (658)
Gain (loss) in fair value
of interest rate swaps
(note 15) (353) - 213 -
Income tax expense on other
comprehensive income 78 175 4 50
---------------------------------------------------------------------------
(522) (1,261) (3,097) (4,465)
----------------------------------------------------------------------------
Total comprehensive loss for
the period $ (222) $ (6,523) $ (9,307) $ (11,457)
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2012 and 2011 (unaudited)
----------------------------------------------------------------------------
(thousands of Canadian dollars)
6 Months 6 Months
June 30, June 30,
2012 2011
----------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Net loss $ (6,210) $ (6,992)
Items not involving cash:
Depreciation of plant and equipment 13,715 13,911
Depletion and amortization of timber, roads and
other 11,188 11,357
Deferred income tax expense 4 411
Current income tax expense 357 390
Finance costs 3,210 4,169
Other assets - 3
Reforestation liability 1,109 1,789
Other liabilities and provisions (1,231) (623)
Write-down of plant and equipment 128 -
Unrealized foreign exchange losses 85 152
Other (note 12) (102) (57)
--------------------------------------------------------------------------
22,253 24,510
Cash generated from (used in) operating working
capital:
Trade accounts receivable and other (14,754) (8,929)
Inventories 983 (11,074)
Prepayments (3,558) 648
Trade accounts payable and accrued liabilities 4,740 10,923
Income taxes paid (924) (530)
--------------------------------------------------------------------------
8,740 15,548
Investing activities:
Additions to property, plant and equipment (14,862) (9,844)
Additions to logging roads (10,408) (9,726)
Additions to timber and other intangible assets - (50)
Proceeds on disposal of property, plant, and
equipment 179 86
Cash received on acquisition of subsidiary - 4,846
Investments and other assets (122) (954)
--------------------------------------------------------------------------
(25,213) (15,642)
Financing activities:
Issuance of capital stock, net of share issue
expenses - 56,260
Interest payments (2,687) (3,320)
Increase in bank indebtedness (note 6(a)) - 1,295
Additions to long-term debt (note 6(b)) 50,000 40,000
Repayments of long-term debt (note 6(b)) (30,000) (96,000)
--------------------------------------------------------------------------
17,313 (1,765)
Foreign exchange gain (loss) on cash and cash
equivalents
held in a foreign currency 25 (134)
----------------------------------------------------------------------------
Increase (decrease) in cash 865 (1,993)
Cash and cash equivalents, beginning of year 10,435 9,301
----------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 11,300 $ 7,308
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
June 30, 2012 and December 31, 2011 (unaudited)
----------------------------------------------------------------------------
(thousands of Canadian dollars)
June 30, Dec. 31,
2012 2011
----------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 11,300 $ 10,435
Trade accounts receivable and other 58,669 44,000
Inventories (note 5) 96,768 97,645
Prepayments 14,284 10,757
--------------------------------------------------------------------------
181,021 162,837
Investment in associate company - -
Employee future benefits 609 1,256
Other investments and assets 2,566 2,836
Property, plant and equipment 343,687 340,034
Logging roads and bridges 17,806 16,753
Timber licences 75,138 76,792
Other intangible assets 943 1,250
Goodwill 13,078 13,078
----------------------------------------------------------------------------
$ 634,848 $ 614,836
----------------------------------------------------------------------------
Liabilities and Equity
Current liabilities:
Trade accounts payable and accrued liabilities $ 69,275 $ 60,692
Reforestation liability 12,543 14,121
Income taxes payable 491 1,058
--------------------------------------------------------------------------
82,309 75,871
Reforestation liability 19,081 17,777
Long-term debt (note 6(b)) 130,747 110,713
Employee future benefits 9,988 8,186
Other liabilities and provisions (note 7) 11,208 11,467
Equity:
Share capital (note 8)
Class A subordinate voting shares 342,285 342,285
Class B common shares 4,080 4,080
Contributed surplus 7,476 7,476
Reserves (5,110) (5,432)
Retained earnings 32,784 42,413
--------------------------------------------------------------------------
381,515 390,822
----------------------------------------------------------------------------
$ 634,848 $ 614,836
----------------------------------------------------------------------------
Contingencies (note 16)
Subsequent event (note 17)
See accompanying notes to consolidated financial statements
On behalf of the Board:
L. Sauder, Director
D. Whitehead, Director
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the six months ended June 30, 2012 and 2011 (unaudited)
----------------------------------------------------------------------------
(thousands of Canadian dollars)
Class A Class B Contrib- Transl-
Share Share uted ation
Capital Capital Surplus Reserve
----------------------------------------------------------------------------
Balance at December 31, 2011 $ 342,285 $ 4,080 $ 7,476 $ (4,929)
Net loss for the period: - - - -
Other comprehensive loss:
Foreign currency translation
differences, net of tax - - - 109
Defined benefit plan actuarial
losses, net of tax - - - -
Gain in fair value of interest rate
swaps - - - -
----------------------------------------------------------------------------
Balance at June 30, 2012 $ 342,285 $ 4,080 $ 7,476 $ (4,820)
----------------------------------------------------------------------------
Balance at December 31, 2010 $ 285,362 $ 4,080 $ 5,408 $ (7,646)
Net loss for the period: - - - -
Other comprehensive earnings (loss):
Foreign currency translation
differences, net of tax - - - (3,972)
Defined benefit plan actuarial
losses, net of tax - - - -
Contributions:
Share options exercised 1,370 - - -
Share issuance, net of share issue
expenses 55,557 - - -
Changes in ownership interests in
investee:
Acquisition of subsidiary - - 2,068 -
----------------------------------------------------------------------------
Balance at June 30, 2011 $ 342,289 $ 4,080 $ 7,476 $(11,618)
----------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the six months ended June 30, 2012 and 2011 (unaudited)
----------------------------------------------------------------------------
(thousands of Canadian dollars)
Hedging Retained
Reserve Earnings Total
------------------------------------------------------------------
Balance at December 31, 2011 $ (503) $ 42,413 $ 390,822
Net loss for the period: - (6,210) (6,210)
Other comprehensive loss:
Foreign currency translation
differences, net of tax - - 109
Defined benefit plan actuarial
losses, net of tax - (3,419) (3,419)
Gain in fair value of interest rate
swaps 213 213
------------------------------------------------------------------
Balance at June 30, 2012 $ (290) $ 32,784 $ 381,515
------------------------------------------------------------------
Balance at December 31, 2010 $ - $ 60,246 $ 347,450
Net loss for the period: - (6,992) (6,992)
Other comprehensive earnings (loss):
Foreign currency translation
differences, net of tax - - (3,972)
Defined benefit plan actuarial
losses, net of tax - (493) (493)
Contributions:
Share options exercised - - 1,370
Share issuance, net of share issue
expenses - - 55,557
Changes in ownership interests in
investee:
Acquisition of subsidiary - (4) 2,064
------------------------------------------------------------------
Balance at June 30, 2011 $ - $ 52,757 $ 394,984
------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
INTERNATIONAL FOREST PRODUCTS LIMITED
Notes to Unaudited Condensed Consolidated Interim Financial Statements
(Tabular amounts expressed in thousands except number of shares and per share
amounts)
Three and six months ended June 30, 2012 and 2011 (unaudited)
1. Nature of operations:
International Forest Products Limited and its subsidiaries (the "Company" or
"Interfor") is a producer of wood products in British Columbia and the U.S.
Pacific Northwest for sale to markets around the world.
The Company is a publicly listed company incorporated under the Business
Corporations Act (British Columbia) with shares listed on the Toronto Stock
Exchange. Its head office, principal address and records office is located at
Suite 3500, 1055 Dunsmuir Street, Vancouver, British Columbia, V7X 1H7.
The condensed consolidated interim financial statements of the Company as at and
for the three and six months ended June 30, 2012 comprise the Company and its
subsidiaries. The consolidated financial statements of the Company as at and for
the year ended December 31, 2011 are available on www.sedar.com.
2. Statement of Compliance:
a. Statement of compliance:
These condensed consolidated interim financial statements, including
comparatives, have been prepared in accordance with IAS 34 Interim Financial
Reporting using accounting policies consistent with the International Financial
Reporting Standards ("IFRS") issued by the International Accounting Standards
Board ("IASB") and Interpretations of the International Financial Reporting
Interpretations Committee ("IFRIC"). These condensed consolidated interim
financial statements were approved by the Board of Directors on August 2, 2012.
b. Basis of measurement:
The condensed consolidated interim financial statements have been prepared on
the historical cost basis except for the following material items in the
Statement of Financial Position:
i. Derivative financial instruments are measured at fair value;
ii. Long-term debt is measured at fair value at inception and at amortized
cost thereafter;
iii.Liabilities for cash-settled share-based payment arrangements are
measured at fair value; and
iv. The employee benefit assets and liabilities are recognized as the net of
the fair value of the plan assets and the present value of the benefit
obligations on a plan by plan basis.
The functional and presentation currency of the parent company is Canadian dollars.
3. Significant accounting policies:
These condensed consolidated interim financial statements have been prepared
using the significant accounting policies and methods of computation consistent
with those applied in the Company's December 31, 2011 annual consolidated
financial statements, except for the accounting policy adopted subsequent to
that date, as discussed below.
a. Change in accounting policy:
The Company uses derivative forward foreign exchange contracts which are
designated as held for trading and are carried on the Statement of Financial
Position at fair value. Previously, changes in fair value were recorded as an
adjustment to Sales in Net earnings. Effective January 1, 2012, the Company
changed its accounting policy to align with the presentation adopted by
companies in its peer group and changes in fair value are now recorded in Other
foreign exchange gain (loss) in Net earnings.
The policy has been applied on a retrospective basis and comparative information
has been restated. The following changes to historical financial statements have
been made to reflect the new policy:
----------------------------------------------------------------------------
As
previously
reported Adjustment Restated
----------------------------------------------------------------------------
For the three months ended June 30, 2011
Sales $ 188,154 $ (268) $ 187,886
Other foreign exchange gain (loss) (55) 268 213
For the six months ended June 30, 2011
Sales $ 367,899 $ (1,431) $ 366,468
Other foreign exchange gain (loss) (130) 1,431 1,301
----------------------------------------------------------------------------
There are no changes to previously issued Statements of Financial Position as a
result of this change in accounting policy.
b. New standards and interpretations not yet adopted:
The IASB periodically issues new standards and amendments or interpretations to
existing standards. The following new pronouncements are those that the Company
considers most significant and are not intended to be a complete list of new
pronouncements that may affect the financial statements.
IFRS 9, Financial Instruments, replaces the multiple classification and
measurement models in IAS 39, Financial Instruments: Recognition and
Measurement, with a single model that has only two classification categories:
amortized cost and fair value. This standard is in effect for accounting periods
beginning on or after January 1, 2015, with earlier adoption permitted. The
Company does not expect this standard to have a significant effect on its
financial statements.
IAS 19, Employee Benefits, was revised to eliminate the option to defer
recognition of gains and losses, known as the "corridor method", and to enhance
disclosure requirements for defined benefit plans. As the Company did not choose
the corridor method in accounting for its defined benefit plans, there is no
impact on its financial statements as a result of the elimination of this
option. This standard is in effect for accounting periods beginning on or after
January 1, 2013, with earlier adoption permitted.
As at the reporting date, no assessment has been made of the impact of the
standard on the Company's financial statements other than the effect of the
elimination of the corridor method.
4. Seasonality of operating results:
Quarterly trends normally reflect the seasonality of the Company's operations.
Logging operations are seasonal due to a number of factors including weather,
ground conditions and fire season woods closures. Generally, the Company's B.C.
Coastal logging divisions experience higher production levels in the latter half
of the first quarter, throughout the second and third quarters and in the first
half of the fourth quarter. Logging activity in the B.C. Interior is generally
higher in the first half of the first quarter, slows during spring thaw and
increases in the third and fourth quarters. Sawmill operations are less seasonal
than logging operations but are dependent on the availability of logs from
logging operations, including those from suppliers. In addition, the market
demand for lumber and related products is generally lower in the winter due to
reduced construction activity, which increases during the spring, summer and
fall.
5. Inventories:
-----------------------------------
June 30, Dec. 31,
2012 2011
--------------------
Logs $ 52,955 $ 59,412
Lumber 35,702 31,729
Other 8,111 6,504
-----------------------------------
$ 96,768 $ 97,645
-----------------------------------
Inventory expensed in the period includes production costs, amortization of
plant and equipment, and depletion and amortization of timber, roads and other.
The inventory writedown in order to record inventory at the lower of cost and
net realizable value at June 30, 2012 was $9,229,000 (December 31, 2011 -
$10,006,000).
6. Cash and borrowings:
----------------------------------------------------------------------------
Revolving
Operating Term
June 30, 2012 Line Line Total
----------------------------------------------------------------------------
Available line of credit $ 65,000 $ 200,000 $ 265,000
Maximum borrowing available 65,000 200,000 265,000
Drawings - 130,747 130,747
Outstanding letters of credit
included in line utilization 5,276 - 5,276
Unused portion of line 59,724 69,253 128,977
----------------------------------------------------------------------------
December 31, 2011
----------------------------------------------------------------------------
Available line of credit $ 65,000 $ 200,000 $ 265,000
Maximum borrowing available 65,000 200,000 265,000
Drawings - 110,713 110,713
Outstanding letters of credit
included in line utilization 5,062 - 5,062
Unused portion of line 59,938 89,287 149,225
----------------------------------------------------------------------------
a. Operating Line:
The Canadian operating line of credit ("Operating Line") may be drawn in either
CAD$ or US$ advances, and bears interest at bank prime plus a margin or, at the
Company's option, at rates for Bankers' Acceptances or LIBOR based loans plus a
margin, and in all cases dependent upon a financial ratio of total debt divided
by twelve months' trailing EBITDA1. Borrowing levels under the Operating Line
are subject to a borrowing base calculation dependent on certain accounts
receivable and inventories.
The Operating Line is secured by a general security agreement which includes a
security interest in all accounts receivable and inventories, charges against
timber tenures, and mortgage security on sawmills. The Operating Line is subject
to certain financial covenants including a minimum working capital requirement,
a maximum ratio of total debt to total capitalization and a minimum net worth
calculation. As at June 30, 2012 other than outstanding letters of credit
included in the line utilization the Operating Line was undrawn (December 31,
2011 - $nil).
The maturity date of the Operating Line is July 28, 2015.
(1) EBITDA represents earnings before interest, taxes, depreciation, depletion
and amortization.
b. Long-term debt:
The Revolving Term Line may be drawn in either CAD$ or US$ advances, and bears
interest at bank prime plus a margin or, at the Company's option, at rates for
Bankers' Acceptances or LIBOR based loans plus a margin, and in all cases
dependent upon a financial ratio of total debt divided by twelve months'
trailing EBITDA1.
The Revolving Term Line is available to a maximum of $200,000,000 and is secured
by a general security agreement which includes a security interest in all
accounts receivable and inventories, charges against timber tenures, and
mortgage security on sawmills. The line is subject to certain financial
covenants including a minimum working capital requirement and a maximum ratio of
total debt to total capitalization and a minimum net worth calculation. The
maturity date of the Revolving Term Line is July 28, 2015.
As at June 30, 2012, the Revolving Term Line was drawn by US$30,200,000
(December 31, 2011 - US$30,200,000) revalued at the quarter-end exchange rate to
$30,747,000 (December 31, 2011 - $30,713,000), and $100,000,000 (December 31,
2011 - $80,000,000) for total drawings of $130,747,000 (December 31, 2011 -
$110,713,000).
The US$30,200,000 drawing under the Revolving Term Line has been designated as a
hedge against the Company's investment in its U.S. operations and unrealized
foreign exchange loss of $33,000 for the six months ended June 30, 2012 (June
30, 2011 - $909,000 gain) arising on revaluation of the Non-Revolving Term Line
were recognized in Foreign exchange translation differences in Other
comprehensive income. For the second quarter, 2012 the unrealized foreign
exchange loss of $622,000 (Quarter 2, 2011 - $154,000 gain) was recognized in
Other comprehensive income.
Minimum principal amounts due on long-term debt within the next five years are
follows:
----------------------------------------------------------------------------
Twelve months ending
June 30, 2013 $ -
June 30, 2014 -
June 30, 2015 -
June 30, 2016 130,747
June 30, 2017 -
----------------------------------------------------------------------------
$ 130,747
----------------------------------------------------------------------------
(1) EBITDA represents earnings before interest, taxes, depreciation, depletion
and amortization.
7. Other liabilities and provisions:
In the second quarter, 2012, the Company engaged an environmental consultant to
undertake groundwater and other testing at a landfill at its Castlegar sawmill
site in the B.C. Interior to update its assessment of potential remediation
costs. Based on the results of the testing undertaken the Company revised its
estimate of the environmental provision recorded on acquisition of the site from
Pope and Talbot, Inc. in 2008 and recorded a recovery of $1,000,000 in
Production costs, increasing Net earnings. Further testing and monitoring of the
site and a final assessment is expected in the third quarter, 2012.
8. Share capital:
The transactions in share capital are described below:
----------------------------------------------------------------------------
Number
------------------------------------
Class A Class B Total Amount
----------------------------------------------------------------------------
Balance, December 31, 2010 46,337,676 1,015,779 47,353,455 $ 289,442
Shares issued on exercise of
options 287,000 - 287,000 1,370
Share issuance, net of share
issue costs and income tax
benefit 8,222,500 - 8,222,500 55,553
----------------------------------------------------------------------------
Balance, December 31, 2011
and June 30, 2012 54,847,176 1,015,779 55,862,955 $ 346,365
----------------------------------------------------------------------------
On April 8, 2011 the Company closed a public offering of 8,222,500 Class A
Subordinate Voting shares at a price of $7.00 per share for net cash proceeds of
$54,890,000.
9. Depreciation, depletion and amortization:
Depreciation, depletion and amortization can be allocated by function as follows:
----------------------------------------------------------------------------
3 Months 3 Months 6 Months 6 Months
June 30, June 30, June 30, June 30,
2012 2011 2012 2011
----------------------------------------------------------------------------
Production $ 13,359 $ 13,361 $ 24,468 $ 24,814
Selling and administration 227 207 435 454
----------------------------------------------------------------------------
$ 13,586 $ 13,568 $ 24,903 $ 25,268
----------------------------------------------------------------------------
Restructuring costs:
----------------------------------------------------------------------------
3 Months 3 Months 6 Months 6 Months
June 30, June 30, June 30, June 30,
2012 2011 2012 2011
----------------------------------------------------------------------------
Severance costs $ 285 $ 66 $ 285 $ 251
Asset impairments 128 - 128 -
Contractor buyout - 175 - 840
Other recovery (267) (102) (267) (102)
----------------------------------------------------------------------------
$ 146 $ 139 $ 146 $ 989
----------------------------------------------------------------------------
Restructuring costs of $285,000 in the second quarter, 2012 resulted from
severance costs related to early retirement of hourly workers. In addition, the
cancellation of a cutting permit gave rise to a recovery of previously accrued
restructuring of $267,000, partially offsetting a $128,000 impairment of related
road infrastructure.
During the first quarter of 2011 the Company recorded $850,000, resulting from
the buyout of a logging contractor's Bill 13 entitlements and severance costs
related to early retirement of hourly workers.
In the second quarter, 2011, further hourly worker early retirements were
slightly offset by revisions to previously accrued severances resulting in
restructuring costs of $66,000. Additional payments of $175,000 for the buyout
of Bill 13 entitlements and a revision of an estimate for other accrued
restructuring resulting in a recovery of $102,000 were recorded as restructuring
in the second quarter, 2011.
11. Finance costs:
----------------------------------------------------------------------------
3 Months 3 Months 6 Months 6 Months
June 30, June 30, June 30, June 30,
2012 2011 2012 2011
----------------------------------------------------------------------------
Interest on borrowing $ 1,377 $ 1,455 $ 2,653 $ 3,315
Accretion expense 138 203 251 381
Amortization of prepaid
finance costs 153 237 306 473
----------------------------------------------------------------------------
$ 1,668 $ 1,895 $ 3,210 $ 4,169
----------------------------------------------------------------------------
12. Other income:
The trading of lumber futures together with minor disposals of surplus equipment
and scrap resulted in proceeds of $179,000 and a gain of $128,000 in the first
and second quarters, 2012.
In the first and second quarters, 2011, the Company disposed of surplus
equipment which generated $86,000 in proceeds and a gain of $57,000.
13. Net earnings (loss) per share:
----------------------------------------------------------------------------
3 Months June 30, 3 Months June 30,
2012 2011
--------------------------------------------------------
Weighted Average Weighted Average
Net Number Net Number
earnings of earnings of Per
(loss) Shares Per share (loss) Shares share
----------------------------------------------------------------------------
Basic and diluted
earnings (loss) per
share $ 300 55,863 $ 0.01 $ (5,262) 55,212 $ (0.10)
----------------------------------------------------------------------------
6 Months June 30, 6 Months June 30,
2012 2011
--------------------------------------------------------
Weighted Average Weighted Average
Net Number Net Number
earnings of earnings of Per
(loss) Shares Per share (loss) Shares share
----------------------------------------------------------------------------
Basic and diluted
earnings (loss) per
share $ (6,210) 55,863 $ (0.11) $ (6,992) 51,322 $ (0.14)
----------------------------------------------------------------------------
Segmented information:
The Company manages its business as a single operating segment, solid wood. The
Company purchases and harvests logs which are then manufactured into lumber
products at the Company's sawmills, or sold. Substantially all of the Company's
operations are located in British Columbia, Canada and the U.S. Pacific
Northwest, U.S.A.
The Company's sales to both foreign and domestic markets are as follows:
----------------------------------------------------------------------------
3 Months 3 Months 6 Months 6 Months
June 30, June 30, June 30, June 30,
2012 2011 2012 2011
----------------------------------------------------------------------------
Canada $ 64,550 $ 48,981 $ 124,966 $ 100,096
United States 91,756 57,395 162,321 121,114
China/Taiwan 31,280 46,010 51,827 77,334
Japan 27,276 23,443 53,064 44,110
Other export 10,562 12,057 19,906 23,814
----------------------------------------------------------------------------
$ 225,424 $ 187,886 $ 412,084 $ 366,468
----------------------------------------------------------------------------
Sales by product
line are as
follows:
----------------------------------------------------------------------------
3 Months 3 Months 6 Months 6 Months
June 30, June 30, June 30, June 30,
2012 2011 2012 2011
----------------------------------------------------------------------------
Lumber $ 162,369 $ 133,750 $ 295,991 $ 265,115
Logs 35,650 28,645 62,600 49,494
Wood chips and other
by products 17,845 16,780 36,008 33,193
Ocean freight and
other 9,560 8,711 17,485 18,666
----------------------------------------------------------------------------
$ 225,424 $ 187,886 $ 412,084 $ 366,468
----------------------------------------------------------------------------
15. Financial instruments:
The Company employs financial instruments such as foreign currency forward and
option contracts to manage exposure to fluctuations in foreign exchange rates
and interest rate swaps to manage exposure to changes in interest rates. The
Company does not expect any credit losses in the event of non-performance by
counterparties as the counterparties are the Company's Canadian bankers, which
are all highly rated.
As at June 30, 2012, the Company has outstanding obligations to sell a maximum
of US$20,500,000 at an average rate of CAD$1.02783 to the US$1.00 during 2012.
All foreign currency gains or losses to June 30, 2012 have been recognized in
Other foreign exchange gain (loss) in Net earnings and the fair value of these
foreign currency contracts, being an asset of $198,000 (measured based on Level
2 of the fair value hierarchy), has been recorded in Trade accounts receivable
and other (December 31, 2011 - $283,000 asset recorded in Trade accounts
receivable and other measured based on Level 2 of the fair value hierarchy).
On August 25, 2011, the Company entered into two interest rate swaps, each with
notional value of $25,000,000 and maturing July 28, 2015. Under the terms of the
swaps the Company pays an amount based on a fixed annual interest rate of 1.56%
and receives a 90 day BA CDOR which is recalculated at set interval dates. The
intent of these swaps is to convert floating-rate interest expense to fixed-rate
interest expense. As these interest rate swaps have been designated as cash flow
hedges the fair value of these interest rate swaps at June 30, 2012, being a
liability of $290,000 (measured based on Level 2 of the fair value hierarchy),
has been recorded in Trade accounts payable and accrued liabilities (December
31, 2011 - $503,000 liability recorded in Trade accounts payable and accrued
liabilities measured based on Level 2 of the fair value hierarchy) and a gain of
$213,000 (June 30, 2011 - $nil) has been recognized in Other comprehensive
income for the six months ending June 30, 2012. For the second quarter, 2012 a
loss of $353,000 (Quarter 2, 2011 - $nil) was recognized in Other comprehensive
income.
The Company also traded lumber futures to manage price risk and which were
designated as held for trading with changes in fair value recorded in Other
income (expense) in net earnings. At June 30, 2012 there were no outstanding
lumber futures contracts and a gain of $26,000 was recognized in Other income
(expense) on completed contracts for the six months ended June 30, 2012 (June
30, 2011 - $nil). There were no lumber futures traded in the second quarter,
2012 (Quarter 2, 2011 - $nil).
16. Contingencies:
a. Softwood Lumber Agreement:
On January 18, 2011, the U.S. Trade Representative's ("USTR") office filed for
arbitration under the provisions of the Softwood Lumber Agreement ("SLA") over
its concern that the Province of British Columbia ("B.C.") is charging too low a
price for certain timber harvested on public lands in the B.C. Interior. The
arbitration was conducted by the London Court of International Arbitration
("LCIA").
In August, 2011 the USTR filed a detailed statement of claim with the LCIA and
Canada delivered its initial response in November, 2011. Final submissions to
the arbitration panel were submitted on May 24, 2012.
On July 18, 2012, the LCIA ruled that Canada had not circumvented the SLA (see
Subsequent event, note 17).
In April, 2012 the U.S. Lumber Coalition approached the USTR alleging that the
B.C. government is undercharging B.C. Coastal forest companies for timber
harvested on Crown lands. As this second complaint is in the very preliminary
stages of investigation, the existence of any potential claim has not been
determined and no provision has been recorded in the financial statements as at
June 30, 2012.
b. Significant customer in creditor protection:
On January 31, 2012, Catalyst Paper Corporation ("Catalyst") announced that the
company and certain of its subsidiaries had obtained an Initial Order from the
Supreme Court of British Columbia under the Companies' Creditors Arrangement Act
("CCAA"). Catalyst is the primary buyer of Interfor's chips on the B.C. Coast,
under long-term purchase contracts. Catalyst is also a purchaser of Interfor's
pulp logs and other residuals.
The Court has granted Interfor a security interest as a critical supplier on all
current and future products purchased from Interfor. Catalyst continues to meet
its obligations to Interfor during the restructuring process.
In June, 2012, Catalyst trade accounts receivable of $150,000 related to
pre-CCAA filing was written off.
A restructuring plan was approved by Catalyst's creditors in June, 2012 and
approved by the B.C. Supreme Court in July, 2012. Catalyst is expected to emerge
from creditor protection in September, 2012. The final outcome of Catalyst's
restructuring and any potential long term impact to the Company cannot be
determined at this point.
c. WorkSafeBC Orders Safety Reviews:
On April 24, 2012, as a result of a second explosion and destruction of a
sawmill in B.C. in early 2012, WorkSafeBC, the workers' compensation insurer in
B.C., conducted province-wide sawmill safety reviews, including full hazard
identification and risk assessment with particular focus on combustible dust,
dust accumulation and potential ignition sources. No deficiencies of any
significance were identified in the WorkSafeBC reviews of the Company's Canadian
sawmill sites.
In addition, in early 2012, the Company engaged a consultant to assist in the
evaluation of safety standards at each of its sawmills and as at May 3, 2012
reviews have been completed at the Canadian sawmill sites. The Company believes
that it maintains high standards of safe work practices and provides a safe work
environment.
17. Subsequent event:
On July 18, 2012 a tribunal of the LCIA convened under the SLA ruled that Canada
had not circumvented the agreement in the pricing of timber in the B.C.
Interior, as alleged by the United States.
Peruvian Precious Metals Corporation (TSXV:SGP)
Historical Stock Chart
From Apr 2024 to May 2024
Peruvian Precious Metals Corporation (TSXV:SGP)
Historical Stock Chart
From May 2023 to May 2024
