Canfor Corporation (TSX:CFP) today reported net income attributable to
shareholders ("shareholder net income") of $22.2 million, or $0.16 per share,
for the third quarter of 2012, compared to $4.5 million, or $0.03 per share, for
the second quarter of 2012 and a shareholder net loss of $21.6 million, or $0.15
per share, for the third quarter of 2011. For the nine months ended September
30, 2012, the shareholder net income was $10.5 million, or $0.08 per share,
compared to net loss of $12.5 million, or $0.09 per share, for the comparable
period of 2011.
The shareholder net income for the third quarter of 2012 included various items
affecting comparability with prior periods, which had an overall impact of $6.9
million, or $0.05 per share. After adjusting for such items, the Company's
adjusted shareholder net income for the third quarter of 2012 was $15.3 million,
or $0.11 per share, up $4.2 million, or $0.03 per share, from an adjusted
shareholder net income of $11.1 million, or $0.08 per share, for the second
quarter of 2012. Adjusted shareholder net loss for the third quarter of 2011 was
$1.8 million, or $0.01 per share.
The Company reported operating income of $22.3 million for the third quarter of
2012, down $3.7 million from $26.0 million for the second quarter. The negative
variance primarily reflected a significant weakening of Northern Bleached
Softwood Kraft ("NBSK") pulp markets and one-time restructuring costs which were
largely offset by improved results in the lumber and panels segments, where
solid demand supported higher sales realizations.
The following table summarizes selected financial information for the Company
for the comparative periods:
(millions of dollars,
except for per share Q3 Q2 YTD Q3 YTD
amounts) 2012 2012 2012 2011 2011
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Sales $ 683.8 $ 700.9 $1,992.3 $ 602.1 $1,845.2
Operating income $ 22.3 $ 26.0 $ 26.8 $ 15.4 $ 75.1
Net income (loss)
attributable to equity
shareholders of Company $ 22.2 $ 4.5 $ 10.5 $ (21.6) $ (12.5)
Net income (loss) per
share attributable to
equity shareholders of
Company, basic and
diluted $ 0.16 $ 0.03 $ 0.08 $ (0.15) $ (0.09)
Adjusted shareholder net
income (loss) $ 15.3 $ 11.1 $ 4.1 $ (1.8) $ 0.8
Adjusted shareholder net
income (loss) per share $ 0.11 $ 0.08 $ 0.04 $ (0.01) $ 0.01
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Lumber markets improved moderately in the third quarter of 2012, reflecting
further stabilization of underlying demand in both North American and offshore
markets. U.S. housing activity continued the upward trend seen in the prior
quarter, with housing starts for the quarter averaging 786,000 units SAAR
(seasonally adjusted annual rate), up 7% from the previous quarter. Canadian
housing starts were down 3% from the previous quarter, to 223,000 units SAAR,
and up 8% from the third quarter of 2011 when starts were 206,000 units SAAR.
Market conditions in China continued to reflect solid demand. Demand in Japan
also remained solid through the quarter. Global softwood pulp markets weakened
through the summer months, with price erosion occurring for most of the quarter.
The average North American benchmark Western Spruce/Pine/Fir ("SPF") 2x4 #2&Btr
price rose 2% to US$300 per Mfbm, with slightly higher increases seen for most
wider SPF products. The export tax on Canadian shipments to the US averaged 8%
in the third quarter of 2012, down from a 13% average in the previous quarter.
Southern Yellow Pine ("SYP") prices saw similar increases to SPF in 2x4
benchmark pricing but prices for wider products were down over the quarter. For
NBSK pulp US dollar sales realizations fell with the average North America list
price down US$47 to US$853 per tonne, as challenging markets resulted in
downward pressure on prices. Canadian dollar sales realizations across all solid
wood and pulp products were negatively impacted by an average 1.5% strengthening
of the Canadian dollar.
Lumber production and shipments were down 2% from the previous quarter,
principally reflecting less operating time as a result of annual maintenance
shuts at the Company's southern pine operations and the observance of one
additional statutory day in the third quarter. Lumber unit manufacturing costs
were up slightly from the previous quarter, with the positive impact of higher
productivity offset by higher unit log costs resulting from market-related
stumpage increases and wet weather conditions in the US South, the latter
tightening log supply for part of the quarter. Pulp manufacturing costs were up
slightly from the previous quarter due to one-time costs of $3.2 million
associated with new five year collective labour agreements, partially offset by
the impact of higher production volumes.
Pulp shipment and production levels for the third quarter reflected a scheduled
capital and maintenance outage at Canfor Pulp's Prince George Pulp Mill in the
quarter, partly offset by higher production at the Northwood Pulp Mill following
the unscheduled recovery boiler-related outage from late May to early July. Both
mills experienced slower than anticipated ramp ups in the period following the
schedule and unscheduled outages. Inventories subsequently returned to more
normal levels by the end of the quarter.
The Company ended the quarter with cheques issued in excess of cash on hand of
$7.1 million and operating loans of $17.0 million, with a total of $354.3
million still available under its operating lines.
Commenting on the third quarter performance, Canfor's President and CEO, Don
Kayne, said, "The improvement in lumber sales realizations reflected a steady
increase in construction activity in North America and continued solid offshore
demand for Western SPF lumber products." Kayne added that the Company has now
fully integrated its recently acquired operations in the south-east Kootenay
region. "The start-up of our upgraded Radium mill early in the fourth quarter of
2012 will further boost our capacity to provide high quality products to our
valued customers," said Kayne. Regarding the pulp and paper segment's third
quarter results, Kayne said, "It was a tough quarter as our pulp business faced
challenges presented by weaker markets and the Canfor Pulp facilities came out
of an extended period of major maintenance and capital upgrades. The focus now
is on getting these recently upgraded pulp mills achieving targeted operating
rates."
Looking forward, U.S. lumber consumption is projected to slow in the fourth
quarter of 2012 with traditionally lower seasonal homebuilding activity. The
Canadian housing market is forecast to follow a similar trend, with demand
projected to level off towards the end of the year. U.S. home inventories are
projected to remain relatively low aided by low mortgage rates and gradual
appreciation in home prices. Shipments to the U.S. are projected to taper off as
export taxes increase from 5% in October to 10% in November, but offshore lumber
shipments to China, Japan and Korea are anticipated to offset any slowdown in
North American shipments. In the pulp segment, Canfor Pulp has announced an
increase in the NBSK pulp list price of US$20 per tonne in all regions in
October.
Additional Information and Conference Call
A conference call to discuss the third quarter's financial and operating results
will be held on Wednesday, October 24, 2012 at 8:00 AM Pacific time. To
participate in the call, please dial 416-340-2216 or Toll-Free 866-226-1792. For
instant replay access until November 7, 2012, please dial 800-408-3053 and enter
participant pass code 5498580#. 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
Third 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 September 30, 2012 relative to the quarters ended June 30, 2012
and September 30, 2011, and the financial position of the Company at September
30, 2012. It should be read in conjunction with Canfor's unaudited interim
consolidated financial statements and accompanying notes for the quarters ended
September 30, 2012 and 2011, as well as the 2011 annual MD&A and the 2011
audited consolidated financial statements and notes thereto, which are included
in Canfor's Annual Report for the year ended December 31, 2011 (available at
www.canfor.com). The financial information in this interim MD&A has been
prepared in accordance with International Financial Reporting Standards
("IFRS"), which is the required reporting framework for Canadian publicly
accountable enterprises.
Throughout this discussion, reference is made to 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).
Operating Income before Amortization and 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 Operating Income before
Amortization, 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 Operating Income before
Amortization to operating income (loss) 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 October 23, 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.
THIRD QUARTER 2012 OVERVIEW
Selected Financial Information and Statistics(1)
(millions of dollars,
except for per share Q3 Q2 YTD Q3 YTD
amounts) 2012 2012 2012 2011 2011
----------------------------------------------------------------------------
Operating income (loss) by
segment:
Lumber $ 34.9 $ 18.9 $ 33.7 $ (11.9) $ (25.7)
Pulp and Paper $ (7.2) $ 11.7 $ 15.8 $ 38.0 $ 134.7
Unallocated and Other $ (5.4) $ (4.6) $ (22.7) $ (10.7) $ (33.9)
----------------------------------------------------------------------------
Total operating income
(loss) $ 22.3 $ 26.0 $ 26.8 $ 15.4 $ 75.1
Add: Amortization $ 45.7 $ 46.0 $ 136.8 $ 39.9 $ 121.7
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Total operating income
before amortization $ 68.0 $ 72.0 $ 163.6 $ 55.3 $ 196.8
Add (deduct):
Working capital
movements $ (14.0) $ 68.4 $ (24.8) $ 19.2 $ (36.0)
Salary pension plan
contributions $ (9.0) $ (9.0) $ (27.0) $ (9.6) $ (29.2)
Other operating cash
flows, net(2) $ (11.1) $ (12.3) $ (14.0) $ (4.0) $ (6.9)
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Cash from operating
activities $ 33.9 $ 119.1 $ 97.8 $ 60.9 $ 124.7
Add (deduct):
Finance expenses paid $ (1.4) $ (7.4) $ (11.9) $ (3.1) $ (12.7)
Distributions paid to
non-controlling
interests $ (3.0) $ (8.2) $ (15.5) $ (15.7) $ (79.6)
Capital additions,
net(3) $ (44.1) $ (44.0) $(198.7) $ (60.2) $(133.5)
Proceeds from sale of
asset-backed commercial
paper ("ABCP") $ - $ 12.9 $ 12.9 $ - $ 29.8
Drawdown (repayment) of
long-term debt $ - $ - $ 50.1 $ - $ (81.9)
Other, net $ 1.5 $ 1.9 $ 12.3 $ (10.6) $ (5.8)
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Change in cash / operating
loans $ (13.1) $ 74.3 $ (53.0) $ (28.7) $(159.0)
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ROIC - Consolidated(4) 1.6% 1.3% 1.5% 0.1% 0.7%
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Average exchange rate (US$
per C$1.00)(5) $ 1.005 $ 0.990 $ 0.998 $ 1.020 $ 1.023
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(1) Certain prior period amounts have been restated due to a change in
accounting policy for treatment of net interest expense for defined benefit
post-retirement plans. Further details can be found in the "Changes in
Accounting Policy" section later in this document.
(2) Further information on operating cash flows can be found in the
Company's unaudited interim consolidated financial statements.
(3) Additions to property, plant and equipment include the acquisition of
assets from Tembec Industries Ltd. ("Tembec") in the first quarter of 2012,
and are shown net of amount received under Government funding initiatives in
the pulp and paper segment.
(4) Consolidated Return on Invested Capital ("ROIC") is equal to operating
income/loss, plus realized gains/losses on derivatives and other
income/expense, all net of minority interest, divided by the average
invested capital during the year. Invested capital is equal to capital
assets, plus long-term investments and net non-cash working capital, all
excluding minority interest components.
(5) Source - Bank of Canada (average noon rate for the period).
Analysis of Specific Material Items Affecting Comparability of Shareholder Net
Income (Loss)
After-tax impact, net of non-controlling interests
(millions of dollars, except for Q3 Q2 YTD Q3 YTD
per share amounts) 2012 2012 2012 2011 2011
----------------------------------------------------------------------------
Shareholder Net Income (Loss) $ 22.2 $ 4.5 $ 10.5 $(21.6) $(12.5)
Foreign exchange (gain) loss on
long-term debt and investments,
net $ (4.0) $ 2.4 $ (4.3) $ 11.0 $ 6.5
(Gain) loss on derivative
financial instruments $ (4.4) $ 4.2 $ (5.3) $ 7.0 $ 3.4
Restructuring charges for
management changes $ 1.5 $ - $ 1.5 $ - $ 2.6
Increase in fair value of ABCP $ - $ - $ (1.1) $ 1.8 $ 0.8
Costs related to Tembec
acquisition $ - $ - $ 2.8 $ - $ -
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Net impact of above items $ (6.9) $ 6.6 $ (6.4) $ 19.8 $ 13.3
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Adjusted Shareholder Net Income
(Loss) $ 15.3 $ 11.1 $ 4.1 $ (1.8) $ 0.8
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Shareholder Net Income (Loss)
per share (EPS), as reported $ 0.16 $ 0.03 $ 0.08 $(0.15) $(0.09)
Net impact of above items per
share $(0.05) $ 0.05 $(0.04) $ 0.14 $ 0.10
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Adjusted Shareholder Net Income
(Loss) per share $ 0.11 $ 0.08 $ 0.04 $(0.01) $ 0.01
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The Company reported operating income of $22.3 million for the third quarter of
2012, down $3.7 million from $26.0 million for the second quarter. The negative
variance primarily reflected a significant weakening of NBSK pulp markets and
restructuring costs which were largely offset by improved results in the lumber
and panels segments, where solid demand supported higher sales realizations.
Lumber markets improved moderately in the third quarter of 2012, reflecting
further stabilization of underlying demand in both North American and offshore
markets. U.S. housing activity continued the upward trend seen in the prior
quarter, with housing starts for the quarter averaging 786,000 units SAAR
(seasonally adjusted annual rate), up 7% from the previous quarter. Canadian
housing starts were down 3% from the previous quarter, to 223,000 units SAAR,
and up 8% from the third quarter of 2011 when starts were 206,000 units SAAR.
Market conditions in China continued to reflect solid demand. Demand in Japan
also remained solid through the quarter. Global softwood pulp markets weakened
through the summer months, with price erosion occurring for most of the quarter.
The average North American benchmark Western Spruce/Pine/Fir ("SPF") 2x4 #2&Btr
price rose 2% to US$300 per Mfbm, with slightly higher increases seen for most
wider SPF products. The export tax on Canadian shipments to the US averaged 8%
in the third quarter of 2012, down from a 13% average in the previous quarter.
Southern Yellow Pine ("SYP") prices saw similar increases to SPF in 2x4
benchmark pricing but prices for wider products were down over the quarter. For
NBSK pulp US dollar sales realizations fell with the average North America list
price down US$47 to US$853 per tonne, as challenging markets resulted in
downward pressure on prices. Canadian dollar sales realizations across all solid
wood and pulp products were negatively impacted by an average 1.5% strengthening
of the Canadian dollar.
Lumber production and shipments were down 2% from the previous quarter,
principally reflecting less operating time as a result of annual maintenance
shuts at the Company's southern pine operations and the observance of one
additional statutory day in the third quarter. Lumber unit manufacturing costs
were up slightly from the previous quarter, with the positive impact of higher
productivity offset by higher unit log costs resulting from market-related
stumpage increases and wet weather conditions in the US South, the latter
tightening log supply for part of the quarter. Pulp manufacturing costs were up
slightly from the previous quarter due to one-time costs of $3.2 million
associated with new five year collective labour agreements, partially offset by
the impact of higher production volumes.
Pulp shipment and production levels for the third quarter reflected a scheduled
capital and maintenance outage at Canfor Pulp's Prince George Pulp Mill in the
quarter, partly offset by higher production at the Northwood Pulp Mill following
the unscheduled recovery boiler-related outage from late May to early July. Both
mills experienced slower than anticipated ramp ups in the period following the
scheduled and unscheduled outages. Inventories subsequently returned to more
normal levels by the end of the quarter.
Compared to the third quarter of 2011, operating income was up $6.9 million,
with a decrease of $45.2 million in the pulp and paper segment, primarily driven
by significantly lower prices for NBSK pulp products and the impact of the
increased unit manufacturing costs, offset by an increase of $46.8 million in
the lumber segment and $7.0 million in the Company's panel operations,
reflecting the improved lumber and panels markets.
OPERATING RESULTS BY BUSINESS SEGMENT
Lumber
Selected Financial Information and Statistics - Lumber
(millions of dollars
unless otherwise Q3 Q2 YTD Q3 YTD
noted) 2012 2012 2012 2011 2011
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Sales $ 454.7 $ 443.5 $1,241.9 $ 331.4 $ 991.2
Operating income
(loss) before
amortization $ 60.4 $ 45.4 $ 108.9 $ 9.5 $ 36.7
Operating income
(loss) $ 34.9 $ 18.9 $ 33.7 $ (11.9) $ (25.7)
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Negative (positive)
impact of inventory
valuation
adjustments(6) $ - $ (2.9) $ (13.1) $ 1.5 $ 2.7
Costs related to
Tembec acquisition $ - $ - $ 2.5 $ - $ -
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Operating income
(loss) excluding
impact of inventory
valuation adjustments
and unusual items $ 34.9 $ 16.0 $ 23.1 $ (10.4) $ (23.0)
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Average SPF 2x4 #2&Btr
lumber price in
US$(7) $ 300 $ 295 $ 287 $ 246 $ 261
Average SPF price in
Cdn$ $ 299 $ 298 $ 288 $ 241 $ 255
Average SYP 2x4 #2
lumber price in
US$(8) $ 322 $ 325 $ 315 $ 259 $ 270
Average SYP price in
Cdn$ $ 320 $ 328 $ 316 $ 254 $ 264
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U.S. housing starts
(thousand units SAAR)(9) 786 736 745 615 590
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Production - SPF
lumber (MMfbm) 973.9 994.4 2,872.0 813.6 2,373.5
Production - SYP
lumber (MMfbm) 118.6 124.4 357.3 117.3 324.9
Shipments - SPF lumber
(MMfbm)(10) 996.8 1,010.5 2,859.6 812.0 2,348.9
Shipments - SYP lumber
(MMfbm)(10) 127.9 132.8 378.3 122.7 337.2
Shipments - wholesale
lumber (MMfbm) 7.9 14.3 46.7 34.2 113.1
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(6) In accordance with IFRS, Canfor records its log and finished product
inventories at the lower of cost and net realizable value ("NRV"). Changes
in inventory volumes, market prices, foreign exchange rates and costs over
the respective reporting periods can all affect inventory write-downs, if
any, required at each period end.
(7) Western Spruce/Pine/Fir, per thousand board feet (Source - Random
Lengths Publications, Inc.)
(8) Southern Yellow Pine, Eastside, per thousand board feet (Source - Random
Lengths Publications, Inc.)
(9) Source - U.S. Census Bureau, seasonally adjusted annual rate ("SAAR")
(10) Canfor-produced lumber, including lumber purchased for remanufacture.
Overview
Operating income for the lumber segment was $34.9 million for the third quarter
of 2012, an increase of $16.0 million compared to the operating income of $18.9
million in the immediately preceding quarter, and a $46.8 million improvement
from the operating loss reported for the third quarter of 2011.
The stronger results compared to the second quarter of 2012 for the most part
reflected improved sales realizations, with higher prices received for most
products in both North American and offshore markets. Overall operational
productivity improved moderately over the previous quarter partially offsetting
market-related stumpage cost increases.
The improvement in operating income compared to the third quarter of 2011
reflected improved market prices and realizations, increased lumber shipments as
a result of both productivity improvement and the integration of the two
south-east Kootenay region operations acquired at the end of the first quarter
of 2012, and reduced unit manufacturing costs. Offsetting some of these gains
was an increase in log costs, again largely attributable to market-related
stumpage increases. Sawmill residual chip prices were well down compared to the
same quarter of 2011, consistent with the decline in NBSK pulp sales
realizations over the period.
Markets
During the third quarter of 2012, improved U.S. demand and low home inventories
continued to support a gradual housing recovery and improved lumber prices.
Total U.S. housing starts averaged 786,000 units(11) SAAR, an increase of 7%
from the previous quarter and up 28% from the third quarter of 2011.
Single-family starts, which consume a larger proportion of lumber, have steadily
improved to 551,000 SAAR, the highest level since late 2008. The repair and
remodeling activity was steady and trended higher than a year ago.
In Canada, lumber consumption was firm reflecting steady housing demand across
the country. Canadian housing starts were 223,000 units(12) SAAR for the
quarter, down 6,000 units, or 3%, compared to the second quarter of 2012, but
were up 8% from the comparable quarter in 2011 when starts were at 206,000 units
SAAR.
Canfor's offshore lumber shipments decreased by 7% compared to the previous
quarter, but remained at historically high levels and were 6% higher than the
third quarter of 2011. The lower offshore shipments in part reflected some shift
in volume to the U.S. related to the reduced export tax.
(11) U.S. Census Bureau
(12) CMHC - Canada Mortgage and Housing Corporation
Sales
Lumber sales revenue for the third quarter of 2012 was $454.7 million, compared
to $443.5 million in the previous quarter and $331.4 million in the third
quarter of 2011. Increases from both comparative periods reflected the impact of
improved pricing, with the change from the third quarter of 2011 to the third
quarter of 2012 also reflecting increased shipments. Total shipments in the
third quarter of 2012 were just over 1.1 billion board feet, down 2% from the
previous quarter, and up 17% from the third quarter of 2011 reflecting higher
production from various capital upgrades and other efficiency improvements, as
well as from the mill operations acquired at the end of the first quarter of
2012.
Overall sales realizations saw positive gains in the quarter, with North
American sales realizations benefiting from the continued upward trend in
pricing coupled with lower export taxes. For sales to North America, the Random
Lengths Western SPF 2x4 #2&Btr price was up 2% to US$300 per Mfbm, with slightly
higher increases seen in most other widths and dimensions during the quarter.
Sales realizations for SYP products dropped slightly, with the benchmark SYP 2x4
#2 price at US$322 per Mfbm, down 1% from the previous quarter, and wider
dimensions seeing larger reductions. Sales realizations for offshore products
experienced strong gains in the current quarter, particularly in China where
market inventories returned to more normal levels following the inventory build
earlier in the year and contributed to solid increases relative to North America
in the third quarter.
Compared to the third quarter of 2011, the benchmark North American Random
Lengths Western SPF 2x4 #2&Btr price was up US$54 per Mfbm, or 22%, with
increases seen in all widths and dimensions. SYP products followed a similar
trend, with the benchmark SYP 2x4 #2 price up 24%. Increases were seen for
offshore sales realizations for similar products.
The average value of the Canadian dollar compared to the US dollar in the third
quarter was up 1.5% from the previous quarter, partially offsetting the
contribution of improved pricing to increased sales realizations. Compared to
the third quarter of 2011, realizations benefited from a 1.5 cent, or 1.5%,
weaker Canadian dollar.
Under the Softwood Lumber Agreement ("SLA") implemented by the federal
governments of Canada and the U.S. in 2006, Canadian softwood lumber exporters
pay an export tax on lumber shipped to the U.S. when the price of lumber is at
or below US$355 per Mfbm, as determined by the Random Lengths Framing Lumber
Composite Price ("RLCP"). The export tax rate is calculated monthly based on an
average of preceding pricing periods, with the rate being based on the following
trigger prices:
Trigger RLCP Tax Rate
-----------------------------------------------------
Over US$355 0%
US$336-$355 5%
US$316-$335 10%
US$315 and under 15%
Total residual fibre revenue was down from the second quarter of 2012,
reflecting market-driven pulp price reductions which reduced chip prices.
Compared to the third quarter of 2011, net residual fibre realizations were down
14%, again reflecting significant reductions in the pulp market drivers.
Operations
Lumber production, at just under 1.1 billion board feet, was down 2% from the
previous quarter, reflecting annual maintenance shuts at the Company's southern
pine operations and an additional day of statutory downtime in comparison to the
second quarter of 2012. Compared to the third quarter of 2011 production was up
17%, again largely reflecting the recent Kootenay mills acquisition, coupled
with increased productivity following various capital improvement projects in
2011 and early 2012.
Overall lumber unit manufacturing costs were up compared to the previous
quarter, largely the result of market-driven log cost factors and adverse
weather conditions in the US South that constricted log supply. Total unit cash
conversion costs were up slightly, proportionate to the dip in production in the
quarter resulting from less operating hours.
Compared to the third quarter of 2011, unit manufacturing costs showed a slight
increase, again reflecting higher unit log costs partially offset by improved
conversion costs. The increase in unit log costs resulted largely from increased
hauling costs stemming from tight trucker availability and higher diesel costs,
as well as higher market stumpage.
Pulp and Paper
Selected Financial Information and Statistics - Pulp and Paper(13)
(millions of dollars unless Q3 Q2 YTD Q3 YTD
otherwise noted) 2012 2012 2012 2011 2011
----------------------------------------------------------------------------
Sales $ 206.3 $ 239.4 $ 695.1 $ 260.5 $ 820.5
Operating income (loss) before
amortization $ 8.5 $ 26.8 $ 64.3 $ 52.2 $ 181.0
Operating income (loss) $ (7.2) $ 11.7 $ 15.8 $ 38.0 $ 134.7
----------------------------------------------------------------------------
Average pulp price delivered
to U.S. - US$(14) $ 853 $ 900 $ 874 $ 993 $ 996
Average price in Cdn$ $ 849 $ 909 $ 876 $ 974 $ 974
----------------------------------------------------------------------------
Production - pulp (000 mt) 276.8 263.1 855.8 273.9 905.5
Production - paper (000 mt) 31.9 30.0 94.8 36.7 103.0
Shipments -pulp (000 mt) 268.9 282.1 878.8 291.2 913.3
Shipments - paper (000 mt) 30.6 36.8 97.0 32.1 97.4
----------------------------------------------------------------------------
(13) Includes the Taylor pulp mill and 100% of Canfor Pulp Products Inc.,
which is consolidated in Canfor's results. Pulp production and shipment
volumes presented are for both northern bleached softwood kraft ("NBSK") and
bleached chemi-thermo mechanical pulp ("BCTMP").
(14) Per tonne, NBSK pulp list price delivered to U.S. (Resource Information
Systems, Inc.).
Overview
The operating loss for the pulp and paper segment was $7.2 million for the third
quarter of 2012, down $18.9 million from operating income of $11.7 million for
the previous quarter and down $45.2 million from the third quarter of 2011.
Results in the current quarter were impacted by lower market pulp prices and to
a certain extent lower shipment volumes. Unit manufacturing costs were up
slightly, primarily due to one-time costs of $3.2 million associated with new
five year collective labour agreements, partially offset by the impact of higher
production volumes.
NBSK pulp list prices decreased in all regions, with prices to North America
down US$47 to US$853 per tonne. Sales realizations were also negatively impacted
by the 1.5% stronger Canadian dollar compared to the previous quarter.
Lower operating earnings compared to the third quarter of 2011 reflected a
significant reduction in NBSK pulp prices, with North America prices down US$140
per tonne, coupled with Europe and China both down US$200 per tonne. Unit
manufacturing costs were 3% higher, with the one-time costs associated with new
five year collective labour agreements and higher chemical costs, partially
offset by lower fibre costs. Lower quarter-over-quarter shipments for the most
part reflected the scheduled Prince George Pulp Mill outage in the current
period and a return to normal inventory levels.
Markets
Global softwood pulp markets weakened through the summer months, with price
erosion occurring for most of the quarter. While softwood pulp inventories
remained relatively stable, global hardwood pulp producer inventories increased
throughout the quarter. After a weak start to the quarter, global softwood pulp
demand showed signs of picking up in August, as evidenced by an 8.5% increase in
shipments of bleached softwood sulphate pulp compared to the prior year(15). The
increase in softwood shipments was primarily due to increased purchasing from
China, partially offset by reductions in shipments to North America and Europe.
Global demand for printing and writing papers decreased 1.8% for the first eight
months of 2012 as compared to 2011(15).
At the end of August 2012, World 20(16) producers of bleached softwood pulp
inventories were at 30 days of supply. By comparison, June 2012 inventories were
at 29 days of supply.
(15) As reported by Pulp and Paper Products Council ("PPPC") statistics.
(16) World 20 data is based on twenty producing countries representing 80%
of world chemical market pulp capacity and is based on information compiled
and prepared by the PPPC.
Sales
Pulp shipments in the third quarter of 2012 were 269,000 tonnes, down over
13,000 tonnes, from the previous quarter. For the most part, this reflected the
impact of the extended capital and maintenance outage at the Prince George Pulp
Mill in the first part of the quarter. Inventories also returned to more normal
levels after the unscheduled outage at the Northwood Pulp Mill at the end of the
previous quarter. Compared to the third quarter of 2011, shipments were down
22,000 tonnes, or 8%, principally related to the impacts of the extended Prince
George shut as well as the impact from the earlier unscheduled Northwood
shutdown.
Increasing global hardwood pulp producer inventories combined with the seasonal
slowdown through the summer months, resulted in further downward pressure on
global softwood prices. North America NBSK pulp list prices averaged US$853 per
tonne for the quarter, down US$47 from the previous quarter. Canfor Pulp's
average list prices to China and Europe also decreased through the quarter with
China pricing down US$57 to US$650 per tonne, and Europe also down US$57 to
US$780 per tonnes. Sales realizations were also negatively impacted by the 1.5%
stronger average Canadian dollar compared to the prior quarter. The BCTMP market
remained relatively stable through the third quarter of 2012; BCTMP sales
realizations were down 3% from the prior quarter but a 5% improvement in
production contributed to a corresponding improvement in unit manufacturing
costs.
Compared to the third quarter of 2011, pulp sales realizations were well down as
NBSK pulp list prices to all markets decreased. The average NBSK list price for
North America decreased US$140 per tonne, while prices to Europe and China
decreased US$200 per tonne. The price reductions were offset in part by a 1.5%
weaker Canadian dollar.
Operations
Pulp production in the third quarter of 2012 was 277,000 tonnes, up 14,000
tonnes, or 5%, from the previous quarter and in line with the third quarter of
2011. The increase in production compared to the second quarter of 2012
reflected a reduction in outages in the current quarter.
Pulp unit manufacturing costs increased slightly from the previous quarter,
principally reflecting the costs associated with the new five year collective
labour agreements, partially offset by the impact of higher production volumes
and a reduction in maintenance spending.
Compared to the third quarter of 2011, unit manufacturing costs were 3% higher,
with costs associated with the new five year collective labour agreements and
higher chemical costs, more than offsetting lower fibre costs. Lower fibre costs
primarily resulted from lower-cost sawmill residual chips, where prices are
linked to NBSK pulp sales realizations.
Unallocated and Other Items
Q3 Q2 YTD Q3 YTD
(millions of dollars) 2012 2012 2012 2011 2011
----------------------------------------------------------------------------
Operating income (loss) of
Panels operations(17) $ 2.1 $ 2.0 $ (0.7) $ (4.9) $(14.8)
Corporate costs $ (7.5) $ (6.6) $(22.0) $ (5.8) $(19.1)
Finance expense, net $ (5.8) $ (6.2) $(18.2) $ (7.9) $(20.9)
Foreign exchange gain (loss) on
long-term debt and
investments, net $ 6.5 $ (3.8) $ 6.7 $(16.6) $ (9.9)
Gain (loss) on derivative
financial instruments $ 6.8 $ (6.3) $ 7.9 $(12.1) $ (6.1)
Other income (expense), net $ (2.6) $ 2.6 $ (0.2) $ 5.2 $ 4.6
----------------------------------------------------------------------------
(17) The Panels operations include the Peace Valley OSB (Oriented Strand
Board) joint venture, the only facility currently operating, and the
Company's Tackama plywood plant, which was closed in January 2012, and its
PolarBoard OSB plant, which is currently indefinitely idled.
The panels operations reported operating income of $2.1 million for the third
quarter of 2012, compared to $2.0 million for the previous quarter. Excluding
the impact of inventory valuation adjustments, the operating income of panels
operations increased $3.6 million, with the improvement in operating income in
the current period principally reflecting continued improvement in OSB markets,
driven primarily by increased housing activity, as evidenced by a US$77 per
thousand square feet ("msf") increase in the benchmark OSB price to US$312 per
msf(18). Compared to the third quarter of 2011, excluding inventory valuation
adjustments, results for the panel operations improved by $7.5 million, largely
reflecting considerably stronger market prices, with the benchmark OSB price up
by US$128 per msf, or 70% partially offset by a 5% increase in costs driven
largely by log cost increases.
Corporate costs were $7.5 million for the third quarter of 2012, up $0.9 million
from the previous quarter, largely reflecting restructuring costs associated
with the integration of Canfor Pulp. Corporate costs were higher by $1.7 million
compared to the third quarter of 2011, in part reflecting the integration
related costs coupled with higher share-based compensation expense.
Net finance expense for the third quarter of 2012 was $5.8 million, down $0.4
million from the previous quarter, reflecting a lower draw on the Company's
operating lines during the current quarter. Compared to the third quarter of
2011, finance expense was down $2.1 million, primarily due to costs recorded in
the third quarter of 2011 in connection with an extension of the Company's main
operating line of credit.
The Company recorded a foreign exchange translation gain on its US dollar
denominated debt of $6.5 million for the third quarter of 2012, as a result of
the strengthening of the Canadian dollar against the US dollar, which rose over
3% between the respective quarter ends. The $3.8 million loss in the second
quarter of 2012 and $16.6 million loss in the third quarter of 2011, resulted
from a weakening of the Canadian dollar in the previous periods.
The Company uses a variety of derivative financial instruments as partial
economic hedges against unfavourable changes in foreign exchange rates, energy
costs, lumber prices and interest rates. For the third quarter of 2012, the
Company recorded a net gain of $6.8 million related to its derivative financial
instruments, largely reflecting realized and unrealized gains on the US dollar
forward contracts and collars, related to the strengthening of the Canadian
dollar, and gains on energy hedges and lumber futures.
The following table summarizes the gains (losses) on derivative financial
instruments for the comparable periods:
Q3 Q2 YTD Q3 YTD
(millions of dollars) 2012 2012 2012 2011 2011
----------------------------------------------------------------------------
Foreign exchange collars and
forward contracts $ 3.8 $ (2.5) $ 4.2 $(14.9) $(12.0)
Energy derivatives $ 1.5 $ (1.8) $ 0.9 $ (0.9) $ (0.3)
Lumber futures $ 1.3 $ (0.4) $ 3.9 $ 3.7 $ 6.2
Interest rate swaps $ 0.2 $ (1.6) $ (1.1) $ - $ -
----------------------------------------------------------------------------
$ 6.8 $ (6.3) $ 7.9 $(12.1) $ (6.1)
----------------------------------------------------------------------------
Other expense, net of $2.6 million reflected unfavourable exchange movements on
US dollar denominated cash, receivables and payables of Canadian operations of
the same amount, compared to a gain in the previous quarter of $1.7 million and
a gain of $7.2 million in the third quarter of 2011 resulting from the effect of
the weakening of the Canadian dollar during those periods. Other income in the
second quarter of 2012 also included a $0.9 million positive fair value
adjustment related to a royalty agreement associated with the sale of the
operating assets of Howe Sound Pulp and Paper Limited Partnership in late 2010,
while other income in the third quarter of 2011 included a loss of $2.0 million
related to a decrease in fair value of the Company's investment in asset-backed
commercial paper.
(18) Oriented Strand Board, North Central price, 7/16" (Source - Random
Lengths Publications, Inc.)
Other Comprehensive Income (Loss)
The following table summarizes Canfor's Other Comprehensive Income (Loss) for
the comparable periods:
Q3 Q2 YTD Q3 YTD
(millions of dollars) 2012 2012 2012 2011 2011
----------------------------------------------------------------------------
Foreign exchange translation
differences for foreign
operations $ (7.0) $ 4.1 $ (6.5) $ 14.6 $ 8.7
Defined benefit actuarial loss,
net of tax $(16.7) $(22.7) $(44.7) $(56.6) $(61.0)
----------------------------------------------------------------------------
Other comprehensive income
(loss), net of tax $(23.7) $(18.6) $(51.2) $(42.0) $(52.3)
----------------------------------------------------------------------------
In the third quarter of 2012, the Company recorded an after-tax charge to the
statements of other comprehensive income (loss) of $16.7 million in relation to
changes in the valuation of its defined benefit post-employment compensation
plans. The charge reflects a reduction in the discount rate used to value the
plans offset slightly by a higher than expected rate of return for the period.
In the previous quarter, a charge of $22.7 million was recorded, reflecting a
reduction in discount rates and a lower than expected rate of return for the
period. An after-tax loss of $56.6 million was recorded in the third quarter of
2011.
In addition, the Company recorded $7.0 million of other comprehensive loss in
the quarter for foreign exchange differences for foreign operations, reflecting
the strengthening of the Canadian dollar by over 3% over the quarter. This
compared to other comprehensive income of $4.1 million in the previous quarter
and $14.6 million in the third quarter of 2011, when the Canadian dollar
weakened over both comparative 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:
Q3 Q2 YTD Q3 YTD
(millions of dollars) 2012 2012 2012 2011 2011
----------------------------------------------------------------------------
Increase (decrease) in
cash and cash
equivalents $ (13.1) $ (2.7) $ (36.0) $ (28.7) $ (159.0)
Operating activities $ 33.9 $ 119.1 $ 97.8 $ 60.9 $ 124.7
Financing activities $ (4.4) $ (92.6) $ 40.0 $ (18.7) $ (173.8)
Investing activities $ (42.6) $ (29.2) $ (173.8) $ (70.9) $ (109.9)
Ratio of current
assets to current
liabilities 1.4 : 1 1.7 : 1
Net debt to
capitalization 19.2% 9.2%
ROIC - Consolidated 1.6% 1.3% 1.5% 0.1% 0.7%
ROCE - Canfor solid
wood business(19) 2.5% 0.2% 1.1% (3.0)% (4.6)%
----------------------------------------------------------------------------
(19) Return on Capital Employed ("ROCE") for the Canfor solid wood business
represents consolidated ROCE adjusted to remove the Company's interest in
the Peace Valley OSB Joint Venture and pulp and paper operations, including
Canfor Pulp and the Taylor pulp mill. Consolidated ROCE is equal to
shareholder net income for the period plus finance expense, after tax,
divided by the average capital employed during the period (which consists of
current and long-term debt and operating loans, and shareholders' equity,
less cash and temporary investments).
Changes in Financial Position
Cash generated from operating activities was $33.9 million in the third quarter
of 2012, compared to $119.1 million in the previous quarter. The decrease in
cash generated from operating activities principally reflected a seasonal
increase in inventory, in contrast to a significant drawdown in the second
quarter of 2012 (reflecting spring break up). Partially offsetting these
decreases in cash flow were decreased accounts receivable balances, in part
reflecting lower sales volumes in the pulp segment, along with the effect of
property tax payments made at the end of the second quarter. The second quarter
of 2012 also included seasonally higher reforestation-related payments. Compared
to the third quarter of 2011, cash generated from operating activities was down
$27.0 million reflecting higher non-cash working capital balances required to
support the growth in shipments, offset in part by slightly higher cash earnings
in the current quarter.
Financing activities used cash of $4.4 million in the current quarter, compared
to $92.6 million in the previous quarter and $18.7 million in the third quarter
of 2011. The current quarter's cash flows included cash distributions to
non-controlling interests of $3.0 million (Q2 2012: $8.2 million; Q3 2011: $15.7
million). Finance expenses paid in the current quarter were $1.4 million, down
$6.0 million from the previous quarter, principally reflecting timing of
scheduled payments, and down $1.7 million from the third quarter of 2011 which
included fees paid in connection to the extension of the Company's main
operating line of credit. The immediately preceding quarter's cash flows
included a $77.0 million repayment on the Company's outstanding operating lines
of credit.
Investing activities used cash of $42.6 million in the third quarter of 2012,
compared to $29.2 million in the second quarter of 2012 and $70.9 million in the
third quarter of 2011. Cash used for capital additions was $54.1 million, up
$9.7 million from the second quarter of 2012, and down $25.3 million from the
third quarter of 2011. Capital additions for lumber operations in the current
quarter included work carried out at the Company's Radium sawmill in preparation
for its restart in the fourth quarter. In the pulp segment, current quarter
capital expenditures were $30.0 million, principally related to capital and
major maintenance expenditure at the Company's Prince George Pulp Mill. CPPI
received cash of $10.0 million in the current quarter as reimbursement for
capital additions under the Green Transformation Program. Investing cash flows
in the previous quarter included $12.9 million in net proceeds realized on the
sale of the Company's ABCP in early April, while the third quarter of 2011
included $12.2 million paid into escrow in connection with the purchase of a
biomass energy facility in Grande Prairie.
Liquidity and Financial Requirements
At September 30, 2012, the Company on a consolidated basis had cheques issued in
excess of cash on hand of $7.1 million, $17.0 million drawn on its operating
lines of credit, and an additional $29.1 million reserved for several standby
letters of credit. Total remaining available operating lines of credit were
$354.3 million. The Company and Canfor Pulp remained in compliance with the
covenants relating to their operating lines of credit and long-term debt during
the quarter, and expect to remain so for the foreseeable future.
During the first quarter of 2012, the Company issued new term debt of $100.0
million to fund a US$50.0 million term debt repayment on February 1, 2012 and
the acquisition of assets from Tembec. The new debt is in the form of an
unsecured non-revolving term loan, with a maturity date of February 13, 2017.
Interest rates are floating based on the lenders' Canadian prime rate or bankers
acceptances. During the first half of 2012, the Company put in place $100.0
million of floating to fixed interest rate swaps.
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
third quarter of 2012 was 19.2%. For Canfor, excluding Canfor Pulp, net debt to
capitalization at the end of the third quarter was 14.5%.
Softwood Lumber Agreement ("SLA") Update
On January 18, 2011, the U.S. triggered the arbitration provision of the 2006
Softwood Lumber Agreement ("SLA") by delivering a Request for Arbitration. The
U.S. claimed that the province of British Columbia ("BC") had not properly
applied the timber pricing system grandparented in the SLA. The U.S. also
claimed that subsequent to 2006, BC made additional changes to the timber
pricing system which had the effect of reducing timber prices. The claim focused
on substantial increases in Grade 4 (non sawlog or low grade) volumes commencing
in 2007. It was alleged that timber was scaled and graded as Grade 4 that did
not meet the criteria for that grade, and was accordingly priced too low.
As the arbitration is a state-to-state international dispute under the SLA,
Canada prepared a defence to the claim with the assistance of the BC provincial
government and the BC lumber industry. After numerous representations from both
sides, a hearing was held before the arbitration panel in the first quarter of
2012.
On July 18, 2012 the arbitration panel ruled in favour of Canada and dismissed
the claims of the U.S. in their entirety.
Canfor Pulp Collective Agreements with Labour Unions
The Company ratified new five year collective agreements with the CEP
(Communications, Energy and Paperworkers Union) and PPWC (Pulp, Paper and
Woodworkers of Canada) during the third quarter of 2012. Both agreements expire
on April 30, 2017.
CPPI Share Exchange
On March 2, 2012, Canadian Forest Products Ltd. ("CFP"), a wholly owned
subsidiary of Canfor, acquired 35,776,483 common shares of Canfor Pulp Products,
Inc. ("CPPI") in exchange for its 35,776,483 Class B Exchangeable LP Units of
Canfor Pulp Limited Partnership ("CPLP") and 35,776,483 common shares of Canfor
Pulp Holding Inc. ("Canfor Holding"), pursuant to the terms of an Exchange
Agreement made as of January 1, 2011 among CFP, CPPI, Canfor Holding and CPLP.
Prior to the share exchange, CFP and CPPI entered into a one-time dividend
waiver agreement, waiving CFP's right to the first $7.8 million of future
dividends declared by CPPI. The full $7.8 million dividend was paid by CPPI
during the second quarter of 2012.
OUTLOOK
Lumber
For the fourth quarter of 2012, a seasonal slowdown in the North American lumber
market is projected reflecting traditionally slower homebuilding activity. U.S.
home inventories are anticipated to remain relatively low aided by low mortgage
rates and a forecast slow but gradual appreciation in home prices. Shipments to
the U.S. are forecast to taper off as export taxes increase from 5% in October
to 10% in November. The repair and remodeling sector is projected to decrease
slightly through the balance of the year, reflecting normal seasonal slowdown.
Offshore lumber shipments are anticipated to remain robust to ensure products
arrive prior to the Chinese New Year.
Pulp and Paper
For the month of October, Canfor Pulp has announced an increase in the NBSK pulp
list price of US$20 per tonne in all regions. A scheduled maintenance outage is
planned in the fourth quarter at the Northwood Pulp Mill which is projected to
result in a reduction in market pulp production of approximately 6,000 tonnes.
OUTSTANDING SHARES
At October 23, 2012, there were 142,752,431 common shares outstanding.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with International
Financial Reporting Standards requires management to make estimates and
assumptions that affect the amounts recorded in the financial statements. On an
ongoing basis, management reviews its estimates, including those related to
useful lives for amortization, impairment of long-lived assets, certain accounts
receivable, pension and other employee future benefit plans and asset retirement
and deferred reforestation obligations based upon currently available
information. While it is reasonably possible that circumstances may arise which
cause actual results to differ from these estimates, management does not believe
it is likely that any such differences will materially affect the Company's
financial condition.
CHANGES IN ACCOUNTING POLICY
Effective January 1, 2012, the Company retroactively changed its accounting
policy for the presentation of interest expense and expected rate of return on
assets of defined benefit post-retirement plans. The net expense has been
reclassified from operating income, included in manufacturing and product costs
and in selling and administration costs, to net finance expense. Management
considers the classification of net pension interest expense as a finance
expense more accurately reflects the nature of this cost. The effect on the
three months ended September 30, 2011 and nine months ended September 30, 2011
is an increase in operating income and an increase in net finance expense of
$0.9 million and $2.7 million, respectively. There is no impact on amounts
recorded in the consolidated balance sheet or opening equity as at January 1,
2012.
NEW ACCOUNTING PRONOUNCEMENTS
In the first half of 2011, the International Accounting Standards Board ("IASB")
issued a number of new and revised accounting standards which are effective for
annual periods beginning on or after January 1, 2013, with early adoption
permitted. These new and revised accounting standards have not yet been adopted
by Canfor and the Company does not plan to early adopt any of the standards.
The following new or revised standards are not expected to have a material
impact on the amounts recorded in the financial statements of Canfor:
-- IFRS 10, Consolidated Financial Statements;
-- IFRS 12, Disclosure of Interests in Other Entities;
-- IAS 27, Separate Financial Statements; and
-- IFRS 13, Fair Value Measurement.
The Company is still in the process of assessing the full impact, if any, of the
following new or revised standards:
-- IFRS 11, Joint Arrangements;
-- Amended IAS 19, Employee Benefits; and
-- Amended IAS 28, Investments in Associates and Joint Ventures.
In the first half of 2011, the IASB also issued amended IAS 1, Presentation of
Financial Statements, which is effective for annual periods beginning on or
after July 1, 2012 and IFRS 9, Financial Instruments, which is effective for
annual periods beginning on or after January 1, 2015, with early adoption
permitted. IAS 1 and IFRS 9 are not expected to have a material impact on
amounts recorded in the financial statements of Canfor.
Further details of the new or revised accounting standards and potential impact
on Canfor can be found in Canfor's Annual Report for the year ended December 31,
2011.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
During the quarter ended September 30, 2012, there were no changes in the
Company's internal controls over financial reporting that materially affected,
or would be reasonably likely to materially affect, such controls.
RISKS AND UNCERTAINTIES
A comprehensive discussion of risks and uncertainties is included in the
Company's 2011 annual statutory reports which are available on www.canfor.com or
www.sedar.com.
SELECTED QUARTERLY FINANCIAL INFORMATION(20)
----------------------------------------------------------------------------
Q3 Q2 Q1 Q4
2012 2012 2012 2011
----------------------------------------------------------------------------
Sales and income
(millions of dollars)
Sales $ 683.8 $ 700.9 $ 607.6 $ 576.2
Operating income
(loss) $ 22.3 $ 26.0 $ (21.5) $ (63.1)
Net income (loss) $ 20.7 $ 7.0 $ (10.9) $ (38.1)
Shareholder net income
(loss) $ 22.2 $ 4.5 $ (16.2) $ (44.1)
Per common share
(dollars)
Shareholder net income
(loss) - basic and
diluted $ 0.16 $ 0.03 $ (0.11) $ (0.31)
----------------------------------------------------------------------------
Statistics
Lumber shipments
(MMfbm) 1,133 1,158 994 974
OSB shipments (MMsf
3/8") 75 72 65 75
Pulp shipments (000
mt) 269 282 328 275
----------------------------------------------------------------------------
Average exchange rate
- US$/Cdn$ $ 1.005 $ 0.990 $ 0.999 $ 0.977
----------------------------------------------------------------------------
Average Western SPF
2x4 #2&Btr lumber
price (US$) $ 300 $ 295 $ 266 $ 238
Average SYP (East) 2x4
#2 lumber price (US$) $ 322 $ 325 $ 298 $ 260
Average OSB price -
North Central (US$) $ 312 $ 235 $ 202 $ 190
Average NBSK pulp list
price delivered to
U.S. (US$) $ 853 $ 900 $ 870 $ 920
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Q3 Q2 Q1 Q4
2011 2011 2011 2010
----------------------------------------------------------------------------
Sales and income
(millions of dollars)
Sales $ 602.1 $ 619.1 $ 624.0 $ 629.1
Operating income
(loss) $ 15.4 $ 27.4 $ 32.3 $ 43.9
Net income (loss) $ (9.6) $ 26.2 $ 32.3 $ 55.4
Shareholder net income
(loss) $ (21.6) $ 2.1 $ 7.0 $ 31.4
Per common share
(dollars)
Shareholder net income
(loss) - basic and
diluted $ (0.15) $ 0.01 $ 0.05 $ 0.22
----------------------------------------------------------------------------
Statistics
Lumber shipments
(MMfbm) 969 973 857 885
OSB shipments (MMsf
3/8") 62 69 63 57
Pulp shipments (000
mt) 291 303 318 331
----------------------------------------------------------------------------
Average exchange rate
- US$/Cdn$ $ 1.020 $ 1.033 $ 1.014 $ 0.987
----------------------------------------------------------------------------
Average Western SPF
2x4 #2&Btr lumber
price (US$) $ 246 $ 240 $ 296 $ 269
Average SYP (East) 2x4
#2 lumber price (US$) $ 259 $ 251 $ 302 $ 256
Average OSB price -
North Central (US$) $ 184 $ 172 $ 199 $ 191
Average NBSK pulp list
price delivered to
U.S. (US$) $ 993 $ 1,025 $ 970 $ 967
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(20) Certain prior period amounts have been restated due to a change in
accounting policy for treatment of net interest expense for defined benefit
post-retirement plans. Further details can be found in the "Changes in
Accounting Policy" section earlier in this document.
In addition to exposure to changes in product prices and foreign exchange, the
Company's financial results are impacted by seasonal factors such as weather and
building activity. Adverse weather conditions can cause logging curtailments,
which can affect the supply of raw materials to manufacturing facilities. Market
demand also varies seasonally to some degree. For example, building activity and
repair and renovation work, which affects demand for lumber products, is
generally stronger in the spring and summer months. These factors, along with
global supply and demand conditions, affect the Company's shipment volumes.
Other material factors that impact the comparability of the quarters are noted
below:
---------------------------------------------------------------------------
After-tax impact, net of non-controlling interests(21)
(millions of dollars, except Q3 Q2 Q1 Q4
for per share amounts) 2012 2012 2012 2011
---------------------------------------------------------------------------
Shareholder net income
(loss), as reported $ 22.2 $ 4.5 $ (16.2) $ (44.1)
Foreign exchange (gain) loss
on long-term debt and
investments, net $ (4.0) $ 2.4 $ (2.7) $ (3.3)
(Gain) loss on derivative
financial instruments $ (4.4) $ 4.2 $ (5.1) $ (6.7)
Restructuring costs related
to changes in management
group $ 1.5 $ - $ - $ -
Decrease (increase) in fair
value of asset-backed
commercial paper $ - $ - $ (1.1) $ (0.5)
Costs recorded in relation
to Tembec acquisition $ - $ - $ 2.8 $ -
Mill closure provisions $ - $ - $ - $ 17.0
Asset impairment charges $ - $ - $ - $ 5.5
Gain on sale of operating
assets of Howe Sound Pulp
and Paper Limited
Partnership $ - $ - $ - $ -
---------------------------------------------------------------------------
Net impact of above items $ (6.9) $ 6.6 $ (6.1) $ 12.0
---------------------------------------------------------------------------
Adjusted shareholder net
income (loss) $ 15.3 $ 11.1 $ (22.3) $ (32.1)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Shareholder net income
(loss) per share (EPS), as
reported $ 0.16 $ 0.03 $ (0.11) $ (0.31)
Net impact of above items
per share $ (0.05) $ 0.05 $ (0.05) $ 0.09
---------------------------------------------------------------------------
Adjusted net income (loss)
per share $ 0.11 $ 0.08 $ (0.16) $ (0.22)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
----------------------------------------------------------------------------
After-tax impact, net of non-controlling interests(21)
(millions of dollars, except Q3 Q2 Q1 Q4
for per share amounts) 2011 2011 2011 2010
----------------------------------------------------------------------------
Shareholder net income
(loss), as reported $ (21.6) $ 2.1 $ 7.0 $ 32.9
Foreign exchange (gain) loss
on long-term debt and
investments, net $ 11.0 $ (1.4) $ (3.0) $ (6.9)
(Gain) loss on derivative
financial instruments $ 7.0 $ (0.7) $ (2.9) $ (0.5)
Restructuring costs related
to changes in management
group $ - $ 2.6 $ - $ -
Decrease (increase) in fair
value of asset-backed
commercial paper $ 1.8 $ (0.5) $ (1.0) $ (5.5)
Costs recorded in relation
to Tembec acquisition $ - $ - $ - $ -
Mill closure provisions $ - $ - $ - $ -
Asset impairment charges $ - $ - $ - $ -
Gain on sale of operating
assets of Howe Sound Pulp
and Paper Limited
Partnership $ - $ - $ - $ (4.9)
----------------------------------------------------------------------------
Net impact of above items $ 19.8 $ - $ (6.9) $ (17.8)
----------------------------------------------------------------------------
Adjusted shareholder net
income (loss) $ (1.8) $ 2.1 $ 0.1 $ 15.1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Shareholder net income
(loss) per share (EPS), as
reported $ (0.15) $ 0.01 $ 0.05 $ 0.23
Net impact of above items
per share $ 0.14 $ 0.00 $ (0.05) $ (0.12)
----------------------------------------------------------------------------
Adjusted net income (loss)
per share $ (0.01) $ 0.01 $ 0.00 $ 0.11
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(21) Certain prior period amounts have been restated due to a change in
accounting policy for treatment of net interest expense for defined benefit
post-retirement plans. Further details can be found in the "Changes in
Accounting Policy" section earlier in this document.
Canfor Corporation
Condensed Consolidated Balance Sheets
As at As at
September December 31,
(millions of Canadian dollars, unaudited) 30, 2012 2011
----------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ - $ 28.9
Accounts receivable - Trade 116.8 105.1
- Other 57.5 65.7
Inventories (Note 2) 394.0 348.3
Prepaid expenses 33.2 20.4
----------------------------------------------------------------------------
Total current assets 601.5 568.4
----------------------------------------------------------------------------
Property, plant and equipment 1,163.8 1,139.2
Timber licenses 559.0 530.1
Goodwill and other intangible assets 78.0 83.0
Long-term investments and other (Note 3) 46.2 62.8
Deferred income taxes, net 44.6 18.1
----------------------------------------------------------------------------
Total assets $ 2,493.1 $ 2,401.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES
Current liabilities
Cheques issued in excess of cash on hand $ 7.1 $ -
Operating loans (Note 4(a)) 17.0 -
Accounts payable and accrued liabilities 293.2 290.5
Current portion of long-term debt (Note 4(b)) 73.8 50.9
Current portion of deferred reforestation
obligations 37.8 31.6
----------------------------------------------------------------------------
Total current liabilities 428.9 373.0
----------------------------------------------------------------------------
Long-term debt (Note 4(b)) 208.2 188.1
Retirement benefit obligations 329.9 298.3
Deferred reforestation obligations 69.3 65.0
Other long-term liabilities 15.6 13.8
Deferred income taxes, net 151.8 103.3
----------------------------------------------------------------------------
Total liabilities $ 1,203.7 $ 1,041.5
----------------------------------------------------------------------------
EQUITY
Share capital $ 1,126.2 $ 1,125.9
Contributed surplus 31.9 31.9
Retained earnings (53.5) (24.6)
Accumulated foreign exchange translation
differences (12.4) (5.9)
----------------------------------------------------------------------------
Total equity attributable to equity holders of
the Company 1,092.2 1,127.3
Non-controlling interests 197.2 232.8
----------------------------------------------------------------------------
Total equity $ 1,289.4 $ 1,360.1
----------------------------------------------------------------------------
Total liabilities and equity $ 2,493.1 $ 2,401.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
APPROVED BY THE BOARD
"R.S. Smith" "R.L. Cliff"
Director, R.S. Smith Director, R.L. Cliff
Canfor Corporation
Condensed Consolidated Statements of Income (Loss)
3 months ended 9 months ended
(millions of Canadian dollars, September 30, September 30,
unaudited) 2012 2011 2012 2011
----------------------------------------------------------------------------
Sales $683.8 $602.1 $1,992.3 $1,845.2
Costs and expenses
Manufacturing and product costs 459.7 399.6 1,354.5 1,206.5
Freight and other distribution
costs 123.3 117.9 378.7 354.3
Export taxes 10.6 10.1 35.7 30.3
Amortization 45.7 39.9 136.8 121.7
Selling and administration costs 15.2 13.4 46.1 41.8
Restructuring, mill closure and
severance costs 7.0 5.8 13.7 15.5
----------------------------------------------------------------------------
661.5 586.7 1,965.5 1,770.1
----------------------------------------------------------------------------
Operating income 22.3 15.4 26.8 75.1
Finance expense, net (5.8) (7.9) (18.2) (20.9)
Foreign exchange gain (loss) on
long-term debt and investments, net 6.5 (16.6) 6.7 (9.9)
Gain (loss) on derivative financial
instruments (Note 6) 6.8 (12.1) 7.9 (6.1)
Other income (expense), net (2.6) 5.2 (0.2) 4.6
----------------------------------------------------------------------------
Net income (loss) before income
taxes 27.2 (16.0) 23.0 42.8
Income tax recovery (expense)
(Note 7) (6.5) 6.4 (6.2) 6.1
----------------------------------------------------------------------------
Net income (loss) $ 20.7 $ (9.6) $ 16.8 $ 48.9
----------------------------------------------------------------------------
Net income (loss) attributable to:
Equity shareholders of the Company $ 22.2 $(21.6) $ 10.5 $ (12.5)
Non-controlling interests (1.5) 12.0 6.3 61.4
----------------------------------------------------------------------------
Net income (loss) $ 20.7 $ (9.6) $ 16.8 $ 48.9
----------------------------------------------------------------------------
Net income (loss) per common share:
(in dollars)
Attributable to equity shareholders
of the Company
Basic and diluted (Note 8) $ 0.16 $(0.15) $ 0.08 $ (0.09)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 9 months ended
September 30, September 30,
(millions of Canadian dollars, unaudited) 2012 2011 2012 2011
----------------------------------------------------------------------------
Net income (loss) $ 20.7 $ (9.6) $ 16.8 $ 48.9
Other comprehensive income (loss)
Foreign exchange translation differences
for foreign operations (7.0) 14.6 (6.5) 8.7
Defined benefit plan actuarial losses
(Note 5) (22.3) (73.6) (59.8) (79.4)
Income tax recovery on defined benefit
plan actuarial losses (Note 7) 5.6 17.0 15.1 18.4
----------------------------------------------------------------------------
Other comprehensive income (loss), net of
tax (23.7) (42.0) (51.2) (52.3)
----------------------------------------------------------------------------
Total comprehensive income (loss) $ (3.0) $(51.6) $ (34.4) $ (3.4)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total comprehensive income (loss)
attributable to:
Equity shareholders of the Company $ 0.8 $(57.9) $ (35.4) $(58.5)
Non-controlling interests (3.8) 6.3 1.0 55.1
----------------------------------------------------------------------------
Total comprehensive income (loss) $ (3.0) $(51.6) $ (34.4) $ (3.4)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Condensed Consolidated Statements of Changes in Equity
3 months ended 9 months ended
(millions of Canadian dollars, September 30, September 30,
unaudited) 2012 2011 2012 2011
----------------------------------------------------------------------------
Share capital
Balance at beginning of period $1,126.2 $1,125.7 $1,125.9 $1,125.4
Common shares issued on exercise
of stock options - - 0.3 0.3
----------------------------------------------------------------------------
Balance at end of period $1,126.2 $1,125.7 $1,126.2 $1,125.7
----------------------------------------------------------------------------
Contributed surplus
----------------------------------------------------------------------------
Balance at beginning and end of
period $ 31.9 $ 31.9 $ 31.9 $ 31.9
----------------------------------------------------------------------------
Retained earnings
Balance at beginning of period $ (61.3) $ 78.8 $ (24.6) $ 73.5
Net income (loss) attributable to
equity shareholders of the Company 22.2 (21.6) 10.5 (12.5)
Defined benefit plan actuarial
losses, net of tax (14.4) (50.9) (39.4) (54.7)
----------------------------------------------------------------------------
Balance at end of period $ (53.5) $ 6.3 $ (53.5) $ 6.3
----------------------------------------------------------------------------
Accumulated foreign exchange
translation differences
Balance at beginning of period $ (5.4) $ (16.2) $ (5.9) $ (10.3)
Foreign exchange translation
differences for foreign
operations (7.0) 14.6 (6.5) 8.7
----------------------------------------------------------------------------
Balance at end of period $ (12.4) $ (1.6) $ (12.4) $ (1.6)
----------------------------------------------------------------------------
Total equity attributable to
equity holders of the Company $1,092.2 $1,162.3 $1,092.2 $1,162.3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Non-controlling interests
Balance at beginning of period $ 204.0 $ 245.7 $ 232.8 $ 249.5
Net income (loss) attributable
to non-controlling interests (1.5) 12.0 6.3 61.4
Defined benefit plan actuarial
losses attributable to non-
controlling interests (2.3) (5.7) (5.3) (6.3)
Distributions to non-controlling
interests (3.0) (11.0) (11.6) (63.6)
Share exchange (Note 13) - - (25.0) -
----------------------------------------------------------------------------
Balance at end of period $ 197.2 $ 241.0 $ 197.2 $ 241.0
----------------------------------------------------------------------------
Total equity $1,289.4 $1,403.3 $1,289.4 $1,403.3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Canfor Corporation
Condensed Consolidated Statements of Cash Flows
3 months ended 9 months ended
(millions of Canadian dollars, September 30, September 30,
unaudited) 2012 2011 2012 2011
----------------------------------------------------------------------------
Cash generated from (used in):
Operating activities
Net income (loss) $ 20.7 $ (9.6) $ 16.8 $ 48.9
Items not affecting cash:
Amortization 45.7 39.9 136.8 121.7
Income tax (recovery) expense 6.5 (6.4) 6.2 (6.1)
Long-term portion of deferred
reforestation obligations (8.5) (9.3) (6.4) (3.2)
Change in fair value of long-term
investment - 2.0 (1.3) 0.2
Foreign exchange (gain) loss on
long-term debt and investments, net (6.5) 16.6 (6.7) 9.9
Changes in mark-to-market value of
derivative financial instruments (3.6) 11.8 (1.9) 7.2
Employee future benefits (2.6) 0.3 (4.9) (0.7)
Net finance expense 5.8 7.9 18.2 20.9
Other, net 0.2 (1.6) (1.8) (8.6)
Salary pension plan contributions (9.0) (9.6) (27.0) (29.2)
Income taxes recovered (paid), net (0.8) (0.3) (5.4) (0.3)
Net change in non-cash working capital
(Note 9) (14.0) 19.2 (24.8) (36.0)
----------------------------------------------------------------------------
33.9 60.9 97.8 124.7
----------------------------------------------------------------------------
Financing activities
Change in operating bank loans (Note
4(a)) - - 17.0 -
Proceeds from long-term debt (Note
4(b)) - - 100.0 -
Repayment of long-term debt (Note
4(b)) - - (49.9) (81.9)
Finance expenses paid (1.4) (3.1) (11.9) (12.7)
Cash distributions paid to non-
controlling interests (3.0) (15.7) (15.5) (79.6)
Other, net - 0.1 0.3 0.4
----------------------------------------------------------------------------
(4.4) (18.7) 40.0 (173.8)
----------------------------------------------------------------------------
Investing activities
Additions to property, plant and
equipment (54.1) (79.4) (152.1) (183.9)
Reimbursements from Government under
Green Transformation Program 10.0 19.2 19.0 50.4
Acquisition of Tembec assets (Note 12) - - (65.6) -
Share exchange (Note 13) - - 6.8 -
Proceeds from redemption of asset-backed
commercial paper (Note 3) - - 12.9 29.8
Amounts paid to escrow - (12.2) - (12.2)
Other, net 1.5 1.5 5.2 6.0
----------------------------------------------------------------------------
(42.6) (70.9) (173.8) (109.9)
----------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents(i) (13.1) (28.7) (36.0) (159.0)
Cash and cash equivalents at beginning
of period(i) 6.0 130.0 28.9 260.3
----------------------------------------------------------------------------
Cash and cash equivalents at end of
period(i) $ (7.1) $ 101.3 $ (7.1) $ 101.3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(i)Cash and cash equivalents include cash on hand less unpresented cheques.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Canfor 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 September 30, 2011 and nine months ended September 30, 2011
is an increase in operating income and net finance expense of $0.9 million and
$2.7 million, respectively. There is no impact on amounts recorded in the
consolidated balance sheet or opening equity as at January 1, 2012.
Accounting standards issued and not applied
In the first half of 2011, the International Accounting Standards Board ("IASB")
issued a number of new and revised accounting standards which are effective for
annual periods beginning on or after January 1, 2013, with early adoption
permitted. These new and revised accounting standards have not yet been adopted
by Canfor and the Company does not plan to early adopt any of the standards.
The following new or revised standards are not expected to have a material
impact on the amounts recorded in the financial statements of Canfor:
-- IFRS 10, Consolidated Financial Statements;
-- IFRS 12, Disclosure of Interests in Other Entities;
-- IAS 27, Separate Financial Statements; and
-- IFRS 13, Fair Value Measurement.
The Company is still in the process of assessing the full impact, if any, of the
following new or revised standards:
-- IFRS 11, Joint Arrangements;
-- Amended IAS 19, Employee Benefits; and
-- Amended IAS 28, Investments in Associates and Joint Ventures.
In the first half of 2011, the IASB also issued amended IAS 1, Presentation of
Financial Statements, which is effective for annual periods beginning on or
after July 1, 2012 and IFRS 9, Financial Instruments, which is effective for
annual periods beginning on or after January 1, 2015, with early adoption
permitted. IAS 1 and IFRS 9 are not expected to have a material impact on
amounts recorded in the financial statements of Canfor.
Further details of the new or revised accounting standards and potential impact
on Canfor can be found in Canfor's Annual Report for the year ended December 31,
2011.
2. Inventories
As at As at
September 30, December 31,
(millions of Canadian dollars) 2012 2011
----------------------------------------------------------------------------
Logs $ 83.0 $ 55.9
Finished products 196.9 186.3
Residual fibre 19.5 17.3
Processing materials and supplies 94.6 88.8
----------------------------------------------------------------------------
$ 394.0 $ 348.3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The above inventory balances are stated after inventory write-downs from cost to
net realizable value. Write-downs at September 30, 2012 totaled $0.4 million
(December 31, 2011 - $15.5 million).
3. Long-term Investments and Other
As at As at
September 30, December 31,
(millions of Canadian dollars) 2012 2011
----------------------------------------------------------------------------
Asset-backed commercial paper ("ABCP") $ - $ 11.8
Other investments 23.5 24.3
Investment tax credits 8.6 8.6
Defined benefit plan assets 3.2 3.0
Other deposits, loans and advances 10.9 15.1
----------------------------------------------------------------------------
$ 46.2 $ 62.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------
During the second quarter of 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
September 30, December 31,
(millions of Canadian dollars) 2012 2011
----------------------------------------------------------------------------
Canfor (excluding CPLP)
Principal operating lines $ 350.0 $ 350.0
Facility A - 12.9
----------------------------------------------------------------------------
Total operating lines - Canfor (excluding
CPLP) 350.0 362.9
Drawn (10.0) -
Letters of credit (principally
unregistered pension plans) (17.9) (17.2)
----------------------------------------------------------------------------
Total available operating lines - Canfor
(excluding CPLP) $ 322.1 $ 345.7
----------------------------------------------------------------------------
CPLP
Main bank loan facility $ 40.0 $ 40.0
Bridge loan credit facility (maximum $30.0
million) - 19.7
Facility for BC Hydro letter of credit 10.4 10.4
----------------------------------------------------------------------------
Total operating lines - CPLP 50.4 70.1
Drawn (7.0) -
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 $ 32.2 $ 59.2
----------------------------------------------------------------------------
Consolidated:
Total operating lines $ 400.4 $ 433.0
Total available operating lines $ 354.3 $ 404.9
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For Canfor, excluding CPLP, the principal operating lines mature on October 31,
2015. Interest is payable at floating rates based on lenders' Canadian prime
rate, bankers acceptances, US dollar base rate or US dollar LIBOR rate, plus a
margin that varies with the Company's net debt to total capitalization ratio.
Facility A, which was for US$12.7 million at December 31, 2011, expired in
January 2012.
The terms of CPLP's principal bank loan facility include interest payable at
floating rates that vary depending on the ratio of net debt to operating
earnings before interest, taxes, depreciation, amortization and certain other
non-cash items, and is based on lenders' Canadian prime rate, bankers
acceptances, US dollar base rate or US dollar LIBOR rate, plus a margin. The
maturity date of this facility is November 30, 2013.
During the third quarter of 2012, CPLP terminated its $30.0 million bridge loan
credit facility in conjunction with the completion of the Canadian Federal
Government Green Transformation Program ("Program"). The facility was used to
fund timing differences between expenditures and reimbursements for projects
funded by the Program. The Company 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 September 30, 2012, the Company and CPLP were in compliance with all
covenants relating to their operating lines of credit.
Substantially all borrowings of CPLP (operating lines and long-term debt) are
non-recourse to other entities within the Company.
(b) Long-Term Debt
During the first quarter of 2012, the Company repaid $49.9 million (US$50.0
million) of 6.33% interest rate privately placed senior notes.
During the first quarter of 2012, the Company also issued new term debt totaling
$100.0 million which was used to fund the above debt repayment and the
acquisition of assets from Tembec (Note 12). The new debt is in the form of an
unsecured non-revolving term loan, with a maturity date of February 13, 2017.
Interest rates are floating based on the lenders' Canadian prime rate or bankers
acceptances. In addition, during the first half of 2012 the Company put in place
$100.0 million of floating to fixed interest rate swaps.
At September 30, 2012, the fair value of the long-term debt, measured at its
amortized cost of $282.0 million, was $286.4 million. The fair value was
determined based on prevailing market rates for long-term debt with similar
characteristics and risk profile.
5. Employee Future Benefits
Canfor measures its accrued benefit obligations and the fair value of plan
assets for accounting purposes as at December 31 of each year. At the end of
each interim reporting period, the Company estimates movements in its accrued
benefit liabilities based upon movements in discount rates and the rates of
return on plan assets, as well as any significant changes to the plans.
Adjustments are also made for payments made and current service and interest
costs.
For the nine months ended September 30, 2012, $59.8 million (before tax) was
charged to other comprehensive income. The charge reflects a reduction in the
discount rate used to value the plans offset slightly by a higher than expected
rate of return for the period. For the three months ended September 30, 2012,
the charge was $22.3 million (before tax). For the nine months ended September
30, 2011, a pre-tax amount of $79.4 million was charged to other comprehensive
income relating to a lower than expected rate of return on plan assets,
partially offset by a reduction in discount rates. For the three months ended
September 30, 2011 the pre-tax charge was $73.6 million.
For the Company's pension and other retirement benefit obligations, a one
percentage point increase (decrease) in the discount rate would reduce
(increase) the estimated retirement benefit obligations by approximately $90.0
million before tax.
The assumptions used to estimate the changes in net accrued benefit liabilities
were as follows:
----------------------------------------------------------------------------
Pension Benefit Plans
Discount rate
September 30, 2012 4.30%
June 30, 2012 4.65%
December 31, 2011 5.00%
September 30, 2011 5.00%
June 30, 2011 5.50%
December 31, 2010 5.50%
Rate of return on plan assets
9 months ended September 30, 2012 6.60%
6 months ended June 30, 2012 2.60%
9 months ended September 30, 2011 (2.50)%
6 months ended June 30, 2011 1.80%
----------------------------------------------------------------------------
Other Benefit Plans
Discount rate
September 30, 2012 4.50%
June 30, 2012 4.90%
December 31, 2011 5.30%
September 30, 2011 5.40%
June 30, 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 September 30, 2012, the fair value of derivative financial
instruments was a net asset of $1.7 million (December 31, 2011 - net liability
of $0.2 million). The fair value of these financial instruments was determined
based on prevailing market rates for instruments with similar characteristics.
The following table summarizes the gain (loss) on derivative financial
instruments for the three and nine month periods ended September 30, 2012 and
2011:
3 months ended 9 months ended
September 30, September 30,
(millions of Canadian dollars) 2012 2011 2012 2011
----------------------------------------------------------------------------
Foreign exchange collars and
forward contracts $ 3.8 $ (14.9) $ 4.2 $ (12.0)
Energy derivatives 1.5 (0.9) 0.9 (0.3)
Lumber futures 1.3 3.7 3.9 6.2
Interest rate swaps 0.2 - (1.1) -
----------------------------------------------------------------------------
$ 6.8 $ (12.1) $ 7.9 $ (6.1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table summarizes the fair value of the derivative financial
instruments included in the balance sheet at September 30, 2012 and December 31,
2011:
As at As at
September 30, December 31,
(millions of Canadian dollars) 2012 2011
----------------------------------------------------------------------------
Foreign exchange collars and forward contracts $ 1.6 $ (0.4)
Energy derivatives 0.5 (0.2)
Lumber futures 0.5 0.4
Interest rate swaps (0.9) -
----------------------------------------------------------------------------
Total asset (liability), net 1.7 (0.2)
Less: current portion asset (liability), net 2.7 0.2
----------------------------------------------------------------------------
Long-term portion asset (liability) $ (1.0) $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
7. Income Taxes
3 months ended 9 months ended
September 30, September 30,
(millions of Canadian dollars) 2012 2011 2012 2011
----------------------------------------------------------------------------
Current $ 1.5 $ - $ (0.7) $ (0.3)
Deferred (8.0) 6.4 (5.5) 6.4
----------------------------------------------------------------------------
Income tax recovery (expense) $ (6.5) $ 6.4 $ (6.2) $ 6.1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The reconciliation of income taxes calculated at the statutory rate to the
actual income tax provision is as follows:
3 months ended 9 months ended
September 30, September 30,
(millions of Canadian dollars) 2012 2011 2012 2011
----------------------------------------------------------------------------
Income tax recovery (expense) at
statutory rate 2012 - 25.0% (2011 -
26.5%) $ (6.8) $ 4.3 $ (5.7) $ (11.3)
Add (deduct):
Non-taxable income related to non-
controlling interests in limited
partnerships 0.2 3.2 1.5 16.3
Entities with different income tax
rates and other tax adjustments (0.5) 0.5 (2.7) 1.1
Tax recovery at rates other than
statutory rate (0.1) (0.3) 0.1 (0.1)
Permanent difference from capital
gains and losses and other non-
deductible items 0.7 (1.3) 0.6 0.1
----------------------------------------------------------------------------
Income tax recovery (expense) $ (6.5) $ 6.4 $ (6.2) $ 6.1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
In addition to the amounts recorded to net income, a tax recovery of $5.6
million was recorded to other comprehensive income for the three month period
ended September 30, 2012 (three months ended September 30, 2011 - $17.0 million)
in relation to the actuarial losses on defined benefit employee compensation
plans. For the nine months ended September 30, 2012, the tax recovery was $15.1
million (nine months ended September 30, 2011 - $18.4 million).
8. Earnings Per Share
Basic net income (loss) per share is calculated by dividing the net income
(loss) available to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted net income (loss) per share is
calculated by dividing the net income (loss) available to common shareholders by
the weighted average number of common shares during the period using the
treasury stock method. Under this method, proceeds from the potential exercise
of stock options are assumed to be used to purchase the Company's common shares.
When there is a net loss, the exercise of stock options would result in a
calculated diluted net loss per share that is anti-dilutive. As at September 30,
2012, there were no outstanding stock options.
3 months ended September 9 months ended September
30, 30,
2012 2011 2012 2011
----------------------------------------------------------------------------
Weighted average number
of common shares 142,752,431 142,705,764 142,747,976 142,696,217
Incremental shares from
potential exercise of
options - 1,760 - 7,181
----------------------------------------------------------------------------
Diluted number of common
shares 142,752,431 142,707,524 142,747,976 142,703,398
----------------------------------------------------------------------------
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9. Net Change in Non-Cash Working Capital
3 months ended 9 months ended
September 30, September 30,
(millions of Canadian dollars) 2012 2011 2012 2011
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Accounts receivable $ 20.5 $ (3.3) $ (11.8) $ (34.5)
Inventories (35.5) (7.0) (19.5) (0.8)
Prepaid expenses 2.5 (1.1) (11.3) (12.3)
Accounts payable, accrued
liabilities and current portion
of deferred reforestation
obligations (1.5) 30.6 17.8 11.6
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Net increase (decrease) in non-
cash working capital $ (14.0) $ 19.2 $ (24.8) $ (36.0)
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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 September 30, 2012 were $22.8
million (three months ended September 30, 2011 - $10.2 million) and $55.3
million for the nine months ended September 30, 2012 (nine months ended
September 30, 2011 - $33.5 million).
Elimin-
Unallo- ation
Pulp & cated & Adjust- Consoli-
(millions of Canadian dollars) Lumber Paper Other ment dated
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3 months ended September 30,
2012
Sales to external customers $ 454.7 206.3 22.8 - $ 683.8
Sales to other segments $ 27.4 - - (27.4) $ -
Operating income (loss) $ 34.9 (7.2) (5.4) - $ 22.3
Amortization $ 25.5 15.7 4.5 - $ 45.7
Capital expenditures(1) $ 24.1 30.0 - - $ 54.1
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3 months ended September 30,
2011
Sales to external customers $ 331.4 260.5 10.2 - $ 602.1
Sales to other segments $ 34.4 - - (34.4) $ -
Operating income (loss) $ (11.9) 38.0 (10.7) - $ 15.4
Amortization $ 21.4 14.2 4.3 - $ 39.9
Capital expenditures(1) $ 43.8 35.2 0.4 - $ 79.4
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9 months ended September 30,
2012
Sales to external customers $1,241.9 695.1 55.3 - $1,992.3
Sales to other segments $ 85.8 - - (85.8) $ -
Operating income (loss) $ 33.7 15.8 (22.7) - $ 26.8
Amortization $ 75.2 48.5 13.1 - $ 136.8
Capital expenditures(1) $ 76.1 76.0 - - $ 152.1
Identifiable assets $1,527.3 795.0 170.8 - $2,493.1
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9 months ended September 30,
2011
Sales to external customers $ 991.2 820.5 33.5 - $1,845.2
Sales to other segments $ 96.3 - - (96.3) $ -
Operating income (loss) $ (25.7) 134.7 (33.9) - $ 75.1
Amortization $ 62.4 46.3 13.0 - $ 121.7
Capital expenditures(1) $ 93.8 89.3 0.8 - $ 183.9
Identifiable assets $1,390.9 903.5 222.3 - $2,516.7
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(1) Capital expenditures represent cash paid for capital assets, excluding
acquisition of Tembec assets, during the period. Pulp & Paper includes
capital expenditures by CPLP that are financed by the government-funded
Green Transformation Program.
11. Softwood Lumber Agreement ("SLA")
On January 18, 2011, the U.S. triggered the arbitration provision of the 2006
Softwood Lumber Agreement ("SLA") by delivering a Request for Arbitration. The
U.S. claimed that the province of British Columbia ("BC") had not properly
applied the timber pricing system grandparented in the SLA. The U.S. also
claimed that subsequent to 2006, BC made additional changes to the timber
pricing system which had the effect of reducing timber prices. The claim focused
on substantial increases in Grade 4 (non sawlog or low grade) volumes commencing
in 2007. It was alleged that timber was scaled and graded as Grade 4 that did
not meet the criteria for that grade, and was accordingly priced too low.
As the arbitration was a state-to-state international dispute under the SLA,
Canada prepared a defense to the claim with the assistance of the BC provincial
government and the BC lumber industry. After numerous representations from both
sides, a hearing was held before the arbitration panel in the first quarter of
2012.
On July 18, 2012 the arbitration panel ruled in favour of Canada and dismissed
the claims of the U.S. in their entirety.
12. Acquisition of Tembec Assets
On March 23, 2012, the Company completed the acquisition of Tembec Industries
Ltd.'s ("Tembec") southern British Columbia Interior wood products assets for
cash consideration of approximately $65 million, including a payment relating to
net working capital, which excluded certain liabilities retained by Tembec. The
acquisition has been accounted for in accordance with IFRS 3 Business
Combinations.
The acquisition included Tembec's Elko and Canal Flats sawmills and
approximately 1.1 million cubic metres of combined Crown, private land and
contract annual allowable cut. The transaction also included a long-term
agreement to provide residual fibre supply for Tembec's Skookumchuck pulp mill.
The assets acquired increase the Company's fibre availability and production
capacity.
Of the consideration paid, approximately $44 million represented the preliminary
fair value of the timber licenses acquired, with the balance split between the
fair value of the property, plant and equipment and net non-cash working capital
balances.
If the acquisition had occurred on January 1, 2012, consolidated sales would
have increased by approximately $37.0 million, with no material change to
consolidated net loss. In determining these amounts, the fair value adjustments
that arose on the acquisition date have been assumed to be the same as if the
acquisition had occurred on January 1, 2012.
The Company incurred acquisition-related costs of $1.3 million, principally
relating to external legal fees and due diligence costs, which have been
included in selling and administration costs, and severance costs of $2.5
million related to restructuring of the acquired assets. These amounts are
recorded in the Company's consolidated statement of income (loss) for the nine
months ended September 30, 2012.
13. Share Exchange
On March 2, 2012, Canadian Forest Products Ltd. ("CFP"), a wholly owned
subsidiary of Canfor, acquired 35,776,483 common shares of Canfor Pulp Products,
Inc. ("CPPI") in exchange for its 35,776,483 Class B Exchangeable LP Units of
Canfor Pulp Limited Partnership ("CPLP") and 35,776,483 common shares of Canfor
Pulp Holding Inc. ("Canfor Holding"), pursuant to the terms of an Exchange
Agreement made as of January 1, 2011 among CFP, CPPI, Canfor Holding and CPLP.
As of the date of exchange, the Company consolidated the balances of CPPI and
Canfor Holding, including an additional deferred income tax liability of $31.4
million and cash of $6.8 million. The non-controlling interest in consolidated
equity increased by $25.0 million on the date of exchange, representing the
additional non-controlling interest balances in CPPI and Canfor Holding.
Prior to the share exchange, CFP and CPPI entered into a one-time dividend
waiver agreement, waiving CFP's right to the first $7.8 million of future
dividends declared by CPPI. As such, $7.8 million was included in
non-controlling interests to account for future distributions which the Company
had waived its entitlement to. The full $7.8 million dividend was paid by CPPI
during the second quarter of 2012.
FOR FURTHER INFORMATION PLEASE CONTACT:
Canfor Corporation - Media Contact
Christine Kennedy
Vice President, Public Affairs & Corporate Communications
(604) 661-5225
Christine.Kennedy@canfor.com
Canfor Corporation - Investor Contact
Pat Elliott
Vice President & Treasurer
(604) 661-5441
Patrick.Elliott@canfor.com
www.canfor.com
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