Canfor Corporation (TSX:CFP) today reported a net loss of $229.8 million ($1.61
per share) for the fourth quarter of 2008, compared to a net loss of $94.2
million ($0.66 per share) for the third quarter of 2008 and a net loss of $237.0
million ($1.66 per share) for the fourth quarter of 2007. For the year ended
December 31, 2008, the Company's net loss was $345.2 million ($2.42 per share),
compared to a net loss of $360.6 million ($2.53 per share) reported for 2007.
The net loss for the fourth quarter of 2008 included one-time items affecting
comparability with prior periods, which had a negative impact on net income of
$186.3 million ($1.31 per share). The more significant one-time items related to
non-cash charges totaling $176.6 million ($1.24 per share), and were comprised
of the following:
- Asset impairment charges totaling $74.1 million ($0.52 per share), of which
the significant majority relates to the Company's indefinitely idled Tackama
plywood and PolarBoard oriented strand board plants. The balance relates to the
Company's non-bank asset-backed commercial paper ("ABCP") and other long-term
investments. Asset impairments of $189.1 million ($1.32 per share) were recorded
in the last quarter of 2007.
- Losses recorded on derivative financial instruments totaling $50.3 million
($0.35 per share), reflecting a rapid decline in the value of the Canadian
dollar versus the US dollar and falling energy prices during the fourth quarter.
- A foreign exchange loss of $52.2 million ($0.37 per share) relating to the
Company's US dollar denominated long-term debt, net of investments, as a result
of the significantly weaker Canadian dollar.
After taking account of all one-time items affecting comparability, the Company
reported an adjusted net loss for the fourth quarter of 2008 of $43.5 million
($0.30 per share), compared to similarly adjusted net losses of $3.5 million
($0.02 per share) for the third quarter of 2008 and $69.6 million ($0.49 per
share) for the fourth quarter of 2007. For the year ended December 31, 2008, the
Company's adjusted net loss was $128.3 million ($0.90 per share), compared to an
adjusted net loss of $199.0 million ($1.40 per share) reported for 2007.
The last quarter of 2008 saw a significant deterioration in market conditions
for the Company's solid wood and pulp products, as a result of the global
economic slowdown and further weakness in the U.S. economy. U.S. housing starts,
which were already at historically low levels, dropped a further 25% in the
fourth quarter to the lowest level since records began in 1959, and lumber and
panel prices fell sharply in response. Pulp prices also fell in the quarter as
demand waned and global inventory levels mounted.
In response to the slowing demand, Canfor took extended curtailments at all of
its lumber operations over the Christmas period, and indefinitely closed its
Tackama plywood plant in October. Market-related downtime was also taken at the
Company's Taylor Pulp mill and at Canfor Pulp Limited Partnership ("CPLP"), in
which Canfor holds a 50.2% interest.
Operating earnings were down $87.0 million from the previous quarter, which for
the most part reflected the impact of lower commodity prices both on sales
realizations and inventories, weaker pulp shipments as well as scheduled
maintenance outages at CPLP. These were partially offset by a sharp decline in
the Canadian dollar in the quarter. Canfor continued to benefit from its cost
reduction initiatives and cash conservation efforts in the quarter, delivering
another solid operational performance despite the challenges, and ended the year
with a cash balance of $362.4 million.
Commenting on the fourth quarter's results, Jim Shepard, Canfor's President and
CEO, said: "Despite the deepening of the global economic downturn and its impact
on our bottom line, we've taken significant actions to reduce operating costs
and maintain the strength of our balance sheet. Over the last 18 months, we've
reduced our logging and hauling costs, increased productivity despite
curtailments, disposed of non-core assets and enacted salary rollbacks and staff
reductions." He added that the Company remains focused on realizing further cost
reductions and productivity improvements, and lowering working capital.
"Clearly, our industry is facing unprecedented challenges at this time, and
responsiveness is key. We will continue to ensure that our production matches
the demand in the marketplace," said Shepard.
Shepard said that he fully expected conditions to be even more challenging
through 2009 for all of the Company's products, adding that management will
remain focused on costs, inventory and cash conservation. In January, the
Company took a further 29 million board feet of market curtailments and
subsequently announced a further curtailment of 83 million board feet to occur
in February, in addition to elimination of shifts at two of its sawmills for an
indefinite period. Curtailment was also announced in February at the joint
venture Peace Valley OSB mill.
Additional Information and Conference Call
A conference call to discuss the fourth quarter's financial and operating
results will be held on Friday, February 20, 2009 at 7:30 AM Pacific time. To
participate in the call, please dial 416-641-6126 or Toll-Free 1-866-542-4236.
For instant replay access until March 20, 2009, please dial 416-695-5800 or
1-800-408-3053 and enter participant pass code 3281623#. The conference call
will be webcast live and will be available at www.canfor.com. This news release,
the attached financial statements and presentation used during the conference
call can be accessed via the Company's website at
http://www.canfor.ca/investors/webcasts.asp.
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", "intends", "projects", "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 is the largest producer of softwood
lumber in British Columbia while also producing oriented strand board (OSB),
remanufactured lumber products and specialized wood products. Canfor also owns a
50.2% interest in Canfor Pulp Limited Partnership, 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
FOURTH QUARTER 2008 EARNINGS OVERVIEW
Selected Financial Information and Statistics
--------------------------------------------------------------------------
(millions of
dollars,
except for per Q4 Q3 Year Q4 Year
share amounts) 2008 2008 2008 2007 2007
--------------------------------------------------------------------------
Sales $ 588.7 $ 668.0 $ 2,611.6 $ 711.0 $ 3,275.6
EBITDA(1) $ (30.2) $ 55.0 $ 13.1 $ (77.5) $ (88.9)
Operating (loss)
income(1) $ (74.2) $ 12.8 $ (158.1) $ (124.7) $ (273.0)
Foreign exchange
(loss) gain on
long-term debt and
investments, net $ (72.0) $ (16.2) $ (100.3) $ (4.1) $ 16.2
(Loss) gain on
derivative financial
instruments(2) $ (81.7) $ (38.8) $ (88.5) $ 6.2 $ 16.0
Asset impairments $ (99.6) $ (70.0) $ (169.6) $ (256.0) $ (268.0)
Prince George Pulp &
Paper mill fire, net $ (0.3) $ - $ 8.2 $ - $ -
North Central Plywoods
mill fire, net $ - $ - $ 57.9 $ - $ -
Net loss(1) $ (229.8) $ (94.2) $ (345.2) $ (237.0) $ (360.6)
Net loss per share,
basic and diluted(1) $ (1.61) $ (0.66) $ (2.42) $ (1.66) $ (2.53)
--------------------------------------------------------------------------
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Average exchange rate
(US$/CDN$)(3) $ 0.825 $ 0.960 $ 0.938 $ 1.019 $ 0.930
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U.S. housing starts
(million units SAAR)(4) 0.656 0.876 0.902 1.151 1.341
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1 Results for 2008 reflect the Company's retrospective adoption (without
prior period restatement) on January 1, 2008 of CICA Handbook Section
3031, Inventories, which requires all inventories, including logs, to be
valued at the lower of cost or net realizable value. Details of related
write-downs and reversals are contained in the following pages. The
adjustments affect comparability with prior periods.
2 Includes gains (losses) from natural gas, diesel and foreign exchange
derivative financial instruments (see "Non-Segmented Items" section for
more details).
3 Source - Bank of Canada (average noon rate for the period).
4 Source - U.S. Census Bureau, seasonally adjusted annual rate ("SAAR").
5 Certain amounts in prior periods have been reclassified to conform to
the presentation in the current period.
Overview
The Company recorded a net loss of $229.8 million ($1.61 per share) for the
fourth quarter of 2008, an increase of $135.6 million compared to a net loss of
$94.2 million ($0.66 per share) reported for the third quarter of 2008, and $7.2
million lower than the net loss of $237.0 million ($1.66 per share) reported for
the fourth quarter of 2007. After adjusting for significant items affecting
comparability with prior periods, the Company's adjusted net loss was $43.5
million ($0.30 per share) for the fourth quarter of 2008, compared to a
similarly adjusted loss of $3.5 million ($0.02 per share) for the third quarter
of 2008, and an adjusted loss of $69.6 million ($0.49 per share) for the fourth
quarter of 2007.
The quarterly results in 2008 reflect the Company's retrospective adoption
without prior restatement of the Canadian Institute of Chartered Accountants
("CICA") Handbook Section 3031, Inventories, on January 1, 2008, which requires
inventories, including logs, to be valued at the lower of cost or net realizable
value (previously, the Company valued logs at the higher of net realizable value
and replacement cost, if lower than average cost). The adoption of the new
accounting standard decreased the fourth quarter's operating income and net
income by $3.9 million and $2.6 million ($0.02 per share), respectively, in
contrast to the third quarter's results where operating income and net income
were increased by $3.9 million and $2.5 million ($0.02 per share) respectively.
For the year ended December 31, 2008, the new accounting standard has resulted
in an increase in operating income and net income of $30.4 million and $18.7
million ($0.13 per share), respectively.
Analysis of Specific Items Affecting Comparability of Net Loss
After-tax impact, net of
non-controlling interests
(millions of dollars,
except for per Q4 Q3 Year Q4 Year
share amounts) 2008 2008 2008 2007 2007
--------------------------------------------------------------------------
Net loss, as reported $ (229.8) $ (94.2) $ (345.2) $ (237.0) $ (360.6)
Loss (gain) on
derivative financial
instruments $ 50.3 $ 21.4 $ 54.5 $ (3.5) $ (11.6)
New inventory
accounting standard $ 2.6 $ (2.5) $ (18.7) $ - $ -
Foreign exchange loss
(gain) on long-term debt
and investments, net $ 52.2 $ 11.3 $ 72.2 $ 3.5 $ (6.5)
Prince George Pulp &
Paper mill fire, net $ 0.2 $ - $ (3.4) $ - $ -
North Central Plywoods
mill fire, net $ - $ - $ (45.0) $ - $ -
Restructuring, mill
closure and severance
costs $ 6.8 $ 3.6 $ 35.3 $ 14.2 $ 27.3
Corporate income
tax rate reductions $ - $ - $ (9.1) $ (35.8) $ (37.7)
Asset impairments $ 74.1 $ 56.9 $ 131.0 $ 189.1 $ 199.2
Other items $ 0.1 $ - $ 0.1 $ (0.1) $ (9.1)
--------------------------------------------------------------------------
Net impact of
above items $ 186.3 $ 90.7 $ 216.9 $ 167.4 $ 161.6
--------------------------------------------------------------------------
Adjusted net loss $ (43.5) $ (3.5) $ (128.3) $ (69.6) $ (199.0)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Net loss per share
(EPS), as reported $ (1.61) $ (0.66) $ (2.42) $ (1.66) $ (2.53)
Net impact of above
items per share $ 1.31 $ 0.64 $ 1.52 $ 1.17 $ 1.13
--------------------------------------------------------------------------
Adjusted net loss
per share $ (0.30) $ (0.02) $ (0.90) $ (0.49) $ (1.40)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
EBITDA
The following table reconciles the Company's net loss, as reported in accordance
with GAAP, to EBITDA:
Q4 Q3 Year Q4 Year
(millions of dollars) 2008 2008 2008 2007 2007
--------------------------------------------------------------------------
Net loss, as reported $ (229.8) $ (94.2) $ (345.2) $ (237.0) $ (360.6)
Add (subtract):
Non-controlling
interests $ (12.6) $ 5.4 $ 24.0 $ 6.1 $ 65.4
Income tax recovery $ (80.2) $ (30.0) $ (141.9) $ (155.3) $ (234.1)
Other (income) expense $ (12.9) $ (0.1) $ (12.7) $ 3.3 $ 11.1
Loss (gain) on
derivative financial
instruments $ 81.7 $ 38.8 $ 88.5 $ (6.2) $ (16.0)
Asset impairments $ 99.6 $ 70.0 $ 169.6 $ 256.0 $ 268.0
Foreign exchange
loss (gain) on
long-term debt and
investments, net $ 72.0 $ 16.2 $ 100.3 $ 4.1 $ (16.2)
Prince George Pulp &
Paper mill fire, net $ 0.3 $ - $ (8.2) $ - $ -
North Central Plywoods
mill fire, net $ - $ - $ (57.9) $ - $ -
Interest expense, net $ 7.7 $ 6.7 $ 25.4 $ 4.3 $ 9.4
Amortization $ 44.0 $ 42.2 $ 171.2 $ 47.2 $ 184.1
--------------------------------------------------------------------------
EBITDA, as reported $ (30.2) $ 55.0 $ 13.1 $ (77.5) $ (88.9)
Restructuring, mill
closure and severance
costs $ 10.3 $ 5.4 $ 53.5 $ 21.5 $ 41.3
--------------------------------------------------------------------------
Adjusted EBITDA $ (19.9) $ 60.4 $ 66.6 $ (56.0) $ (47.6)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Log inventory (expense)
recovery resulting
from new inventory
accounting standard,
included in EBITDA $ (3.9) $ 3.9 $ 30.4 $ - $ -
--------------------------------------------------------------------------
The U.S. and global financial and credit market crisis intensified in the fourth
quarter of 2008 resulting in an unprecedented decline in demand for solid wood
products, with U.S. housing starts plunging to 550,000 (Seasonally Adjusted
Annual Rates - SAAR) in December, the lowest level since the U.S. Bureau of the
Census began recording in 1959, and prices plummeting to the lowest level in
decades.
The quarterly average benchmark Western Spruce/Pine/Fir ("SPF") 2x4 #2&Btr
lumber price fell to US$190 per thousand board feet ("Mfbm") which was US$73 per
Mfbm, or 28%, lower than the previous quarter, and US$40 per Mfbm, or 17%, lower
compared to the fourth quarter of 2007. Western SPF 2x4 #2&Btr prices ended the
year at US$168 per Mfbm, which was US$115 per Mfbm, or 41%, lower than the 2008
peak in August. Prices for Southern Yellow Pine ("SYP") fared little better,
with the average benchmark SYP 2x4 #2&Btr price for the fourth quarter at US$258
per Mfbm, US$31 per Mfbm, or 11%, lower than the previous quarter and US$19 per
Mfbm, or 7%, lower than the fourth quarter of 2007. Prices ended the year at
US$236 per Mfbm, US$78 per Mfbm, or 25%, lower than the 2008 peak in May.
Significant reductions were also seen in premiums for wider widths such as
2x10's.
Pulp prices also fell sharply in the fourth quarter of 2008. The average NBSK
pulp list price for U.S. delivery was US$787 per tonne, US$93 per tonne lower
than the previous quarter and US$70 per tonne lower than the fourth quarter of
2007. Pulp price declines were even steeper in Asian markets.
A rapid weakening of the Canadian dollar compared to the third quarter helped to
offset some of the negative impact of the fall in solid wood and pulp prices.
The Canadian dollar average of $0.825 for the fourth quarter was 13.5 cents
lower than the third quarter, and 19.4 cents lower than the average rate for the
final quarter of 2007.
Sales volumes continued to reflect depressed market demand, with shipments down
17% in the Lumber segment, 67% in the Panels segment and 28% in the Pulp and
Paper segment compared to the fourth quarter of 2007. The Company continued to
significantly curtail its operations to adjust production to this lower market
demand, including taking extended shuts in December at all of its operations.
Further reductions in production in the Panels segment also occurred due to the
indefinite closure in October of the Tackama plywood facility in Fort Nelson,
B.C. The Company recorded restructuring, severance and closure costs of $10.3
million in the fourth quarter of 2008, the majority of which related to the
indefinite Tackama closure.
Despite the difficult market conditions and low operating rates, the Company's
efforts to drive down costs continued to produce results, with the average unit
manufacturing cost in the Lumber segment down 12% compared to the same quarter
of the previous year, and in line with costs in the third quarter. The major
factors accounting for the improved performance were reduced unit log costs,
achieved through reduced operating and overhead costs, and lower unit conversion
costs that for the most part reflected improved sawmill and planer productivity
and reduced overhead.
EBITDA for the fourth quarter of 2008 was negative $30.2 million, down $85.2
million compared to the third quarter of 2008, but up $47.3 million compared to
the fourth quarter of 2007. The decline in EBITDA compared to the third quarter
reflected the factors noted above, with the impact of the weaker commodity
prices both on actual sales realizations and inventory valuations, lower pulp
shipments and scheduled maintenance outages at CPLP being the major contributing
factors. These were partially offset by a significant decline in the value of
the Canadian dollar and an export tax refund receivable recorded in the fourth
quarter of 2008. Compared to the fourth quarter of 2007, the improvement in
EBITDA was principally due to reductions in the Lumber segment's unit
manufacturing costs and the significant weakening of the Canadian dollar, and to
a lesser extent the export tax refund recorded in the current period. These more
than offset the impact of lower prices, decreased sales volumes, and higher
scheduled maintenance outages and fibre costs at CPLP's operations in the
current period.
Other significant items affecting comparability with prior periods included the
following:
- Asset impairment charges of $99.6 million ($74.1 million, after tax), of which
the significant majority related to the indefinitely idled Tackama and
PolarBoard plants. The remainder of the impairment related to the Company's
non-bank asset-backed commercial paper ("ABCP"), and certain other long-term
investments.
- Losses recorded on derivative financial instruments of $81.7 million ($50.3
million, after tax), reflecting a significant drop in value of the Canadian
dollar against the US dollar for the fourth quarter, as well as a decline in
energy prices. See additional commentary in "Non-Segmented Items" section.
- A net foreign exchange loss of $72.0 million ($52.2 million, after tax)
relating to the Company's US-dollar denominated long-term debt and investments,
as a result of the sharp decline in the Canadian dollar.
OPERATING RESULTS BY BUSINESS SEGMENT
Lumber
Selected Financial Information and Statistics - Lumber
(millions of dollars Q4 Q3 Year Q4 Year
unless otherwise noted) 2008 2008 2008 2007 2007
--------------------------------------------------------------------------
Sales $ 363.9 $ 378.8 $ 1,490.5 $ 395.3 $ 1,942.7
EBITDA(6) $ (24.1) $ 15.3 $ (55.5) $ (73.9) $ (198.4)
Adjusted EBITDA $ (20.4) $ 18.4 $ (36.9) $ (66.9) $ (176.8)
EBITDA margin(6) (7)% 4% (4)% (19)% (10)%
Adjusted EBITDA margin (6)% 5% (2)% (17)% (9)%
Operating loss(6) $ (50.8) $ (8.2) $ (155.0) $ (99.5) $ (301.2)
--------------------------------------------------------------------------
Average SPF 2x4 #2&Btr
lumber price in US$(7) $ 190 $ 263 $ 222 $ 230 $ 250
Average SPF price
in Cdn$ $ 230 $ 274 $ 237 $ 226 $ 269
Average SYP 2x4 #2
lumber price in US$(8) $ 258 $ 289 $ 281 $ 277 $ 280
Average SYP price
in Cdn$ $ 313 $ 301 $ 300 $ 272 $ 301
--------------------------------------------------------------------------
Production - SPF
lumber (MMfbm) 791.6 747.1 3,299.4 866.8 4,111.6
Production - SYP
lumber (MMfbm) 78.6 99.6 388.6 93.3 389.2
Shipments - SPF
lumber (MMfbm)(9) 834.3 755.9 3,388.2 988.4 4,233.5
Shipments - SYP
lumber (MMfbm)(9) 86.2 110.3 432.7 103.3 448.7
Shipments - wholesale
lumber (MMfbm) 35.7 39.8 171.0 57.2 325.2
--------------------------------------------------------------------------
6 EBITDA and Operating loss for the fourth quarter of 2008 include a log
inventory write-down expense of $1.5 million (Q3 - $0.9 million
recovery), which resulted primarily from lower prices.
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 Canfor-produced lumber, includes shipments of lumber purchased for
remanufacture.
Overview
The Lumber segment reported an operating loss of $50.8 million for the fourth
quarter of 2008, up $42.6 million compared to the third quarter of 2008, but an
improvement of $48.7 million compared to the fourth quarter of 2007. Over those
same periods, Adjusted EBITDA was down $38.8 million and up $46.5 million,
respectively.
The decrease in Adjusted EBITDA relative to the third quarter was primarily
attributable to a sharp decline in prices, as evidenced by a 28% fall in average
Western SPF 2x4#2&Btr prices and an 11% drop in average SYP 2x4#2 prices, both
of which were reflective of worsening market conditions. The falling prices also
had a significant impact on log and lumber inventory devaluations, with a $16
million expense in the fourth quarter being $9 million higher than the expense
recorded in the third quarter. The effect of these movements was partially
offset by a sharp decline in the value of the Canadian dollar, which fell
approximately 16% against the US dollar, and by a $10.8 million Softwood Lumber
Agreement ("SLA") Third Country Adjustment export tax refund receivable which
was recorded in the quarter (see "Sales" for more details). Log and conversion
costs were held at similar levels to the previous quarter.
Compared to the fourth quarter of 2007, the improvement in Adjusted EBITDA
reflected significantly lower log and manufacturing costs, achieved in the face
of significant downtime in the current period. The fall in US dollar lumber
prices between both quarters was offset by the decrease in the value of the
Canadian dollar compared to the US dollar in the fourth quarter of 2008.
Adjusted EBITDA was also positively impacted by the $10.8 million export tax
refund noted above.
Markets
Demand for lumber in the U.S. continued to decline during the fourth quarter of
2008, with total U.S. housing starts dropping to 550,000 units SAAR(10) in
December, the lowest level since the U.S. Bureau of the Census began recording
in 1959. U.S. housing starts were down 220,000 units SAAR, or 25%, compared to
the previous quarter, and down 495,000 units SAAR, or 43%, compared to the
fourth quarter of 2007. Single family starts continued to fall sharply during
the quarter, down 23% compared to the previous quarter and 44% compared to the
same quarter of 2007.
Inventories of new homes for sale at the end of the fourth quarter of 2008 were
12.9 months(10), up 1.4 months compared to the previous quarter, and up 3.1
months compared to the fourth quarter of 2007. Inventories of existing homes at
the end of 2008 were at 9.3 months(11), down slightly compared to both the end
of the third quarter and the end of 2007.
Canadian housing starts steadily declined throughout the quarter, averaging
190,000 units(12) SAAR, down 21,000 units, or 10%, compared to the previous
quarter, and down 24,000 units, or 11%, compared to the fourth quarter of 2007.
Offshore demand remained relatively stable throughout the quarter. In Japan, a
modest increase in 2x4 housing starts helped to offset an overall decline in
construction activity.
Sales
Lumber sales for the fourth quarter of 2008 were down by $14.9 million, or 4%,
compared to the third quarter of 2008, and down $31.4 million, or 8%, compared
to the fourth quarter of 2007.
The average price for all grades and widths of SPF and SYP lumber fell sharply
compared to the prior quarter and fourth quarter of 2007. Lumber SPF prices, as
measured by Western SPF 2x4 #2&Btr, were down US$73 per Mfbm, or 28%, compared
to the previous quarter, and down US$40 per Mfbm, or 17%, compared to the fourth
quarter of 2007. Average prices for SYP lumber, as measured by 2x4 #2&Btr, were
down US$31 per Mfbm, or 11%, compared to the previous quarter and down US$19 per
Mfbm, or 7%, versus the comparative quarter last year. Similar declines were
recorded for wider widths. Canadian dollar sales realizations were positively
impacted by a 16% increase in the value of the US dollar relative to the
previous quarter, and an increase of 24% compared to the same quarter a year
ago.
The Random Lengths Framing Lumber Composite price averaged US$223 per Mfbm for
the fourth quarter of 2008 (down US$50 per Mfbm compared to the previous
quarter), remaining well below the trigger price of US$315 per Mfbm required to
reduce the export tax rate on all U.S. bound shipments below the current rate of
15%. In December of 2008, the Company received information from the Canada
Revenue Agency indicating it was eligible to claim a Third Country Adjustment
refund under the SLA of a third of the 15% export charges paid for the quarters
ended December 31, 2007 and March 31, 2008. The claim arises from year-over-year
movements in the Canadian and U.S. market share of total U.S. consumption of
softwood lumber products, and the share of U.S. consumption from imports not
originating in Canada. The Company has filed for a refund of $10.8 million.
Shipments for the fourth quarter of 2008 were up 50 million board feet, or 6%,
compared to the previous quarter as the Company took measures to reduce its
inventories. Compared to the fourth quarter of 2007, shipments were down 193
million board feet, or 17%, reflecting significant additional market-related
curtailment.
Total residual fibre sales revenue was in line with both comparable periods.
Compared to the third quarter, a small increase in sales volumes reflecting the
slightly higher production was offset by lower residual chip prices resulting
from falling pulp prices. Compared to the fourth quarter of 2007, a decrease in
sales volumes was offset by an increase in chip prices.
10 U.S. Bureau of the Census
11 National Association of Realtors
12 CMHC
Operations
Lumber production for the fourth quarter was 870 million board feet, 24 million
board feet, or 3%, higher than for the previous quarter and 90 million board
feet, or 9%, lower than for the same quarter in 2007. Compared to the same
quarter of 2007, lower production for the current period reflected the
indefinite closures of the Mackenzie and Chetwynd sawmills, as well as a reduced
number of shifts. Production in the fourth quarter of 2008 included the
Darlington sawmill in South Carolina, which was acquired in late 2007.
Conversion costs were in line with the previous quarter, and 7% lower than the
same quarter of 2007, mainly due to increased productivity and cost reduction
initiatives carried out in 2008. Log costs were also comparable to the previous
quarter, but were down significantly compared to the final quarter of 2007,
primarily due to lower operating and overhead costs. Overall, the Company's unit
cash manufacturing costs were comparable to the third quarter of 2008, and down
12% relative to the fourth quarter of 2007.
Panels
Selected Financial Information and Statistics - Panels
(millions of dollars Q4 Q3 Year Q4 Year
unless otherwise noted) 2008 2008 2008 2007 2007
--------------------------------------------------------------------------
Sales $ 20.5 $ 36.0 $ 170.3 $ 70.5 $ 297.7
EBITDA(13) $ (10.9) $ (0.1) $ (40.8) $ (28.8) $ (53.5)
Adjusted EBITDA $ (4.2) $ 2.2 $ (6.3) $ (14.4) $ (39.0)
EBITDA margin(13) (53)% 0% (24)% (41)% (18)%
Adjusted EBITDA margin (20)% 6% (4)% (20)% (13)%
Operating loss(13) $ (15.2) $ (3.4) $ (56.9) $ (34.2) $ (76.5)
--------------------------------------------------------------------------
Average plywood price
in Cdn$(14) $ 336 $ 333 $ 338 $ 374 $ 376
Average OSB price
in US$(15) $ 172 $ 202 $ 172 $ 165 $ 161
Average OSB price
in Cdn$ $ 209 $ 210 $ 183 $ 162 $ 173
--------------------------------------------------------------------------
Production - plywood
(MMsf 3/8") 13.8 44.1 233.4 93.1 385.0
Production - OSB
(MMsf 3/8") 56.8 85.3 434.8 167.6 673.2
Shipments - plywood
(MMsf 3/8") 28.2 54.2 264.1 90.3 385.4
Shipments - OSB
(MMsf 3/8") 55.7 90.5 462.9 166.3 669.9
--------------------------------------------------------------------------
13 EBITDA and Operating loss for the fourth quarter of 2008 include a log
inventory write-down expense of $2.4 million (Q3 - recovery of $3.0
million), which resulted primarily from higher log inventory volumes at
the PV OSB mill at the end of the year.
14 Canadian softwood plywood, per Msf 3/8" basis, delivered to Toronto
(Source - C.C. Crowe Publications, Inc.)
15 OSB, per Msf 7/16" North Central (Source - Random Lengths
Publications, Inc.)
Overview
The Panels segment recorded an operating loss of $15.2 million for the fourth
quarter, an increase of $11.8 million from the previous quarter, but an
improvement of $19.0 million compared to the fourth quarter of 2007.
Adjusted EBITDA was down $6.4 million compared to the previous quarter, mainly
due to a $2.4 million expense in relation to log inventory devaluations in the
fourth quarter, compared to a $3.0 million recovery in the prior quarter.
Shipments were down 42% compared to the previous quarter, reflecting the
indefinite idling of the Tackama plywood operation in October and significant
curtailment at the joint venture Peace Valley ("PV") OSB facility in the last
quarter of 2008.
Compared to the same quarter of 2007, Adjusted EBITDA was up $10.2 million
primarily as a result of lower losses due to the indefinite idling of the
PolarBoard and Tackama operations, as well as higher OSB prices in Canadian
dollar terms, which were up 29% compared to the fourth quarter of 2007.
Restructuring, mill closure and severance costs of $6.7 million were recorded in
the Panels segment in the fourth quarter, principally as a result of the
indefinite closure of Tackama. The fourth quarter of 2007's results reflected
restructuring costs of $14.4 million related to the permanent closure of the
Company's Panel and Fibre mill in New Westminster, B.C.
Markets
Panel markets were weak in the fourth quarter of 2008, with sluggish activity
reflecting the falloff in demand. OSB prices declined through the fourth
quarter, ending the year at US$153 per Msf(16), while plywood prices remained at
historically low prices through the quarter.
Sales
OSB prices averaged US$172 per Msf for the fourth quarter of 2008, down US$30
per Msf, or 15%, from the previous quarter, but up 4% from the fourth quarter of
2007. The Canadian softwood plywood 3/8" delivered Toronto price was largely
unchanged from the previous quarter, but was down $38 per Msf, or 10%, from the
fourth quarter of 2007. Total shipment volumes were down 42% compared to the
previous quarter, and down 67% compared to the fourth quarter of 2007,
principally as a result of the fire that destroyed the North Central Plywoods
("NCP") facility at Prince George, B.C. in May, the permanent closure of the
Panel and Fibre operations in January, the indefinite closures of PolarBoard in
June and Tackama in October, and curtailments at the PV OSB mill.
Operations
Production in the fourth quarter reflected the significantly lower operating
rates resulting from curtailment, with volumes down 45% and 73% versus the
previous quarter and fourth quarter of 2007, respectively. Unit cash
manufacturing costs were up compared to the previous quarter and the fourth
quarter of 2007, reflecting the much lower operating rates. Increases in wax and
resin costs in 2008 also had a significant impact on the results when compared
to the fourth quarter of 2007.
16 Random Lengths
Pulp and Paper(17)
Selected Financial Information and Statistics - Pulp and Paper
(millions of dollars Q4 Q3 Year Q4 Year
unless otherwise noted) 2008 2008 2008 2007 2007
--------------------------------------------------------------------------
Sales $ 204.3 $ 253.2 $ 950.8 $ 245.2 $ 1,035.2
EBITDA $ 8.9 $ 45.1 $ 125.6 $ 27.7 $ 190.5
EBITDA margin 4% 18% 13% 11% 18%
Operating (loss) income $ (2.2) $ 31.5 $ 76.8 $ 12.9 $ 137.2
--------------------------------------------------------------------------
Average pulp price
delivered to U.S.-
US$(18) $ 787 $ 880 $ 857 $ 857 $ 823
Average price in Cdn$ $ 954 $ 917 $ 914 $ 841 $ 885
--------------------------------------------------------------------------
Production - pulp
(000 mt) 256.1 307.8 1,124.6 313.2 1,244.5
Production - paper
(000 mt) 30.1 35.9 132.6 33.1 131.6
Shipments - Canfor-
produced pulp (000 mt) 235.6 284.0 1,088.0 308.3 1,228.9
Pulp marketed on behalf
of HSLP (000 mt)(19) 52.6 86.0 313.1 93.3 366.6
Shipments - paper
(000 mt) 24.3 31.7 124.8 32.4 129.5
--------------------------------------------------------------------------
17 Includes the Taylor Pulp mill and 100% of Canfor Pulp Limited
Partnership ("CPLP"), which is consolidated in Canfor's operating
results. Pulp production and shipment volumes presented are for both
northern bleached softwood kraft ("NBSK") and bleached chemi-thermo
mechanical pulp ("BCTMP").
18 Per tonne, NBSK pulp list price delivered to U.S. (RISI)
19 Howe Sound Pulp and Paper Limited Partnership Pulp mill
Overview
Operating income and EBITDA in the Pulp and Paper segment in the fourth quarter
of 2008 were down $33.7 million and $36.2 million, respectively, from the
previous quarter. The decrease mostly resulted from lower pulp sales volumes and
prices (reflecting significantly weaker demand) and scheduled maintenance
outages taken in the current period. These were partially offset by the
favourable impact on realized prices from the weaker Canadian dollar. As a
result of the falling demand, both CPLP and Taylor Pulp took curtailments
towards the end of the quarter.
Compared to the same quarter of 2007, operating income and EBITDA were down
$15.1 million and $18.8 million respectively. The significantly weaker Canadian
dollar resulted in higher Canadian dollar sales realizations, but this benefit
was more than offset by lower sales volumes, weaker global prices, increased
scheduled maintenance outage costs, and higher freight and fibre costs in the
current quarter.
Markets
World pulp markets continued to weaken through the fourth quarter. PPPC(20)
reported total Global 100 chemical market pulp shipments in December of 2008
were at a rate of 88% of capacity compared to 94% for December of 2007. For NBSK
market pulp, the shipment rate in December of 2008 was 83% of capacity compared
to 95% for the same month in 2007.
As a result of the lower shipments, producer market pulp inventories increased
during the fourth quarter of 2008, from 44 days to 46 days of supply for total
chemical market pulp and from 36 days to 40 days of supply for softwood market
pulp. By comparison, producer inventories at the end of 2007 were 29 days for
total chemical pulp and 27 days of supply for softwood market pulp.
The decline in market pulp shipments was mainly caused by decreased demand for
printing and writing papers, the largest consuming segment of market pulp. In
particular, demand for printing and writing papers in North America declined by
11% compared to the third quarter of 2008 and by 19% compared to the fourth
quarter of 2007.
As a result of the rapid decline in pulp demand, list prices in North American
and European markets declined from US$870 per tonne and US$860 per tonne,
respectively, at the beginning of the fourth quarter, to US$730 per tonne and
US$635 per tonne at the end of the quarter.
Sales
Shipments of Canfor-produced pulp were down 17% compared to the previous
quarter, reflecting the sharp fall off in demand in the fourth quarter. Overall
realized pulp prices in Canadian dollar terms were down slightly compared to the
third quarter of 2008, as the decline in pulp prices and a higher proportion of
sales into lower priced Asian and spot markets offset the favourable impact of
the weaker Canadian dollar.
Compared to the fourth quarter of 2007, shipments of Canfor-produced pulp were
down 24%, for the most part reflecting significantly weaker demand in the fourth
quarter of 2008. Realized Canadian dollar NBSK and BCTMP pulp prices showed a
modest increase compared to the fourth quarter of 2007, primarily due to the
impact of the weaker Canadian dollar which more than offset lower global prices,
in US dollars.
Operations
Pulp production for the fourth quarter was 52,000 tonnes lower than the third
quarter of 2008, and 57,000 tonnes less than the fourth quarter of 2007. The
reduced production primarily resulted from scheduled maintenance outages at
CPLP, and market curtailment taken at CPLP and Taylor Pulp in the current
quarter.
Unit manufacturing costs were higher compared to the previous quarter,
principally due to reduced operating rates and costs associated with scheduled
maintenance outages. Fibre costs were down slightly, reflecting lower prices for
sawmill residual chips and the elimination of higher cost whole log chipping.
Compared to the same quarter of 2007, unit manufacturing costs were up
significantly primarily due to lower production volumes, scheduled maintenance
outage costs and higher fibre costs. The higher fibre costs resulted from
increased prices for sawmill residual chips and a higher percentage of whole log
chipping. Freight costs were also up over the fourth quarter of 2007.
20 Pulp and Paper Products Council
Non-Segmented Items
Q4 Q3 Year Q4 Year
(millions of dollars) 2008 2008 2008 2007 2007
--------------------------------------------------------------------------
Corporate costs $ (6.0) $ (7.1) $ (23.0) $ (3.9) $ (32.5)
Interest expense, net $ (7.7) $ (6.7) $ (25.4) $ (4.3) $ (9.4)
Foreign exchange (loss)
gain on long-term debt
and investments, net $ (72.0) $ (16.2) $ (100.3) $ (4.1) $ 16.2
(Loss) gain on
derivative financial
instruments $ (81.7) $ (38.8) $ (88.5) $ 6.2 $ 16.0
Asset impairments $ (99.6) $ (70.0) $ (169.6) $ (256.0) $ (268.0)
Prince George Pulp &
Paper mill fire, net $ (0.3) $ - $ 8.2 $ - $ -
North Central Plywoods
mill fire, net $ - $ - $ 57.9 $ - $ -
Other income
(expense), net $ 12.9 $ 0.1 $ 12.7 $ (3.5) $ (11.1)
--------------------------------------------------------------------------
Corporate costs for the fourth quarter of 2008 were down $1.1 million compared
to the third quarter of 2008, mostly due to the reversal of incentive
compensation expense in the fourth quarter, and $2.1 million higher than for the
fourth quarter of 2007 due mainly to a reversal of $2.3 million of incentive
compensation expense at the end of 2007.
Net interest expense for the fourth quarter was $7.7 million, similar to the net
expense in the third quarter. For the year as a whole, the net interest expense
was $16.0 million higher than for 2007, reflecting higher net indebtedness in
2008.
In the fourth quarter of 2008, the Company recorded a foreign exchange
translation loss on its US dollar denominated debt, net of investments, of $72.0
million, as a result of a 16.5 cent, or 16%, decline in the value of the
Canadian dollar against the US dollar over the quarter.
The Company uses a variety of derivative financial instruments as partial
economic hedges against unfavourable changes in natural gas and diesel costs,
foreign exchange rates and lumber prices. In the fourth quarter of 2008, the
Company recorded a loss of $81.7 million related to its derivative instruments.
For the most part, this was due to the significant weakening of the Canadian
dollar, but losses were also recorded on natural gas and diesel derivatives. The
following table summarizes the gain (loss) on derivative financial instruments
for the comparable periods.
Gain (loss) on derivative financial instruments:
3 months ended Year ended
December 31, December 31,
(millions of dollars) 2008 2007 2008 2007
--------------------------------------------------------------------------
Foreign exchange collars
and forward contracts $ (65.6) $ (0.1) $ (86.1) $ 14.3
Natural gas swaps $ (4.8) $ 3.3 $ 1.0 $ (9.1)
Diesel options and swaps $ (11.3) $ 3.0 $ (3.4) $ 9.1
Commodity futures $ - $ - $ - $ 1.7
--------------------------------------------------------------------------
$ (81.7) $ 6.2 $ (88.5) $ 16.0
--------------------------------------------------------------------------
The Company also recorded an asset impairment charge of $99.6 million in the
fourth quarter of 2008. Of this amount, $83.4 million related substantially to
impairment charges on the indefinitely idled Tackama plywood and PolarBoard OSB
mills. The balance related to long-term investments, including a $10.2 million
charge for the Company's ABCP.
Other income amounted to $12.9 million in the fourth quarter of 2008, and $12.7
million for the 2008 year compared to an expense of $11.1 million in 2007. The
significant majority of these amounts reflected foreign exchange movements on US
dollar denominated cash, receivables and payables of Canadian operations.
SUMMARY OF FINANCIAL POSITION
The following table summarizes Canfor's cash flow and financial position for and
as at the end of the following periods:
Q4 Q3 Year Q4 Year
(millions of dollars) 2008 2008 2008 2007 2007
--------------------------------------------------------------------------
Increase (decrease) in
cash and cash
equivalents $ 28.2 $ 36.6 $ 66.9 $ (108.3) $ (728.3)
Operating activities $ 20.9 $ 63.3 $ 157.7 $ (50.9) $ (483.1)
Financing activities $ 8.1 $ (14.0) $ (42.4) $ (25.8) $ (174.3)
Investing activities $ (0.8) $ (12.7) $ (48.4) $ (31.6) $ (70.9)
Ratio of current assets
to current liabilities 2.0 : 1 3.0 : 1
Ratio of net debt
to capitalization 15% 10%
--------------------------------------------------------------------------
Changes in Financial Position
Operating activities generated $20.9 million of cash in the fourth quarter of
2008, compared to $63.3 million in the previous quarter, and using $50.9 million
in the fourth quarter of 2007. The reduction compared to the previous quarter
was due primarily to increased operating losses compared to the previous period,
offset partially by a favourable movement in non-cash working capital, including
lower trade receivables and reduced inventory levels. Compared to the fourth
quarter of 2007, the improvement reflected reduced cash operating losses for the
period, as well as favourable working capital movements in the fourth quarter of
2008.
Financing activities generated $8.1 million of cash in the fourth quarter of
2008, with CPLP's draw-down on its operating bank loan of $21.1 million more
than offsetting cash distributions paid to non-controlling interests of $12.8
million in the quarter.
Net cash used in investing activities was $0.8 million in the fourth quarter of
2008, with $21.9 million of capital expenditures in the period mostly offset by
$20.0 million of advances received relating to the NCP mill fire. The capital
spending included work on the energy optimization project at the Fort St John
sawmill and the curve saw project at the Conway sawmill, as well as the
completion of the replacement chip screening and in-feed system at CPLP's Prince
George Pulp & Paper mill.
Changes in Equity
In addition to the $229.8 million net loss for the quarter which was charged to
retained earnings, the Company recorded a credit to other comprehensive income
of $43.7 million related to the foreign exchange translation adjustment on
self-sustaining foreign subsidiaries, due substantially to the sharp decline in
the value of the Canadian dollar between the end of the third and fourth
quarters.
Liquidity and Financial Requirements
At December 31, 2008, the Company, on a consolidated basis, had cash and cash
equivalents of $362.4 million and $430.0 million of bank operating lines of
credit available, of which $41.4 million was reserved for several standby
letters of credit. Of CPLP's $75.0 million share of these operating lines
available, $25.2 million was drawn down at December 31, 2008. The Company's net
debt to capitalization ratio at the end of 2008 was 15%.
At December 31, 2008, the Company had in place foreign exchange collar and
forward contracts for US$397.0 million and US$95.8 million, covering the period
to December 2009. The collar contracts fix the Company's exchange rate between a
minimum of CDN$0.98 to US$1.00 and a maximum of CDN$1.13 to US$1.00, while the
forward contract rates average between CDN$1.1963 to US$1.00 and CDN$1.2618 to
US$1.00.
On January 30, 2009, Canfor entered into two new operating loan facilities in
the amounts of US$16.7 million ("Facility A") and US$43.7 million ("Facility
B"). Facility A expires in January of 2012, with the option of four one-year
extensions, and is non-recourse to Canfor, except for US$6.7 million. Facility B
expires in January of 2011, with the option of five one-year extensions, and is
non-recourse to Canfor under normal circumstances. The ABCP assets of the
Company have been pledged as security to support these credit facilities.
Asset-Backed Commercial Paper
Since August of 2007, there has been no active market for non-bank asset-backed
commercial paper ("ABCP"). Canfor's funds are invested in the ABCP of four
different Canadian trusts, which failed to make payment at maturity and, along
with 16 other ABCP conduits, were subject to restructuring under the
Pan-Canadian Investors Committee for Third Party structured Asset-Backed
Commercial Paper ("the Pan-Canadian Investors Committee"). On March 17, 2008 the
Pan-Canadian Investors Committee filed with the Ontario Superior Court of
Justice a comprehensive arrangement pursuant to the Companies' Creditors
Arrangement Act to restructure the affected trusts. The final restructuring plan
was approved on January 12, 2009 and completed on January 21, 2009.
At December 31, 2008 an additional impairment of $10.2 million (US$8.4 million)
was recorded on ABCP based on the estimated fair value at year end, which took
into account information available to Canfor related to its specific holdings of
ABCP, and assumed a high likelihood of success for the proposed ABCP
restructuring plan. The book value at December 31, 2008 reflected the impact of
a weaker Canadian dollar on the US dollar denominated ABCP. No changes to fair
value resulted from the completion of the restructuring plan after year-end.
Sale of Panel and Fibre Mill Property
On February 13, 2009, Canfor completed the sale of a property located at New
Westminster, British Columbia, for gross proceeds of $47.5 million. The property
is the site of Canfor's former Panel and Fibre operation, which was permanently
closed at the beginning of 2008. The transaction will result in a pre-tax gain
of approximately $44 million.
OUTLOOK
Lumber and Panel Markets
A turnaround in housing starts will remain the key indicator for improved demand
for wood products. Although Canfor's business was initially impacted by the fall
in U.S. housing starts, the global economic slowdown has started to affect
lumber demand in all of Canfor's other major markets. A slow recovery of the
U.S. housing industry is not projected before 2010, as homebuilders struggle to
reduce their inventory of new homes. Housing prices must stabilize in order for
consumer confidence to be restored. Canadian housing starts began to be affected
by the global economic downturn towards the end of 2008, and starts below
185,000 are projected for 2009, compared to 211,000 for 2008.
The Repair and Remodeling and Do-It-Yourself sector is projected to be more
negatively impacted in 2009 than it was in 2008 as home prices continue to fall
and credit remains inaccessible to many homeowners or prospective buyers.
In Japan, housing starts are projected to decline in 2009. Demand from other
offshore markets is also anticipated to slow down in the coming year. The
Company anticipates its percentage of sales to China to continue to increase in
2009.
Similar to lumber, the panels market is projected to remain under pressure for
2009 due to the low housing start forecast and ongoing global economic declines.
In January, the Company took a further 29 million board feet of market
curtailment and subsequently announced a further curtailment of 83 million board
feet to occur in February, in addition to elimination of shifts at two of its
sawmills for an indefinite period. Curtailment was also announced in February at
the joint venture Peace Valley OSB mill.
Pulp and Paper Markets
Weak pulp and paper markets are projected to continue through the first quarter
of 2009 and to remain challenging for at least the first half of 2009.
Canfor Corporation
Consolidated Balance Sheets
As at As at
December 31, December 31,
(millions of dollars, unaudited) 2008 2007
--------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 362.4 $ 295.5
Accounts receivable
Trade 105.9 199.5
Other (Note 2) 93.7 74.3
Income taxes recoverable 47.1 136.7
Future income taxes, net 31.2 -
Inventories (Note 1(b)) 404.9 472.0
Prepaid expenses 35.1 40.8
--------------------------------------------------------------------------
Total current assets 1,080.3 1,218.8
--------------------------------------------------------------------------
Long-term investments and other (Note 3) 125.7 170.4
Property, plant, equipment and timber 1,798.5 1,959.4
Goodwill 85.7 69.2
Deferred charges 110.2 90.0
--------------------------------------------------------------------------
$ 3,200.4 $ 3,507.8
--------------------------------------------------------------------------
--------------------------------------------------------------------------
LIABILITIES
Current Liabilities
Operating loans (Note 4) $ 25.2 $ -
Accounts payable and accrued liabilities 322.9 335.0
Current portion of long-term debt (Note 4) 168.3 15.2
Current portion of deferred reforestation
obligation 32.5 34.4
Future income taxes, net - 19.0
--------------------------------------------------------------------------
Total current liabilities 548.9 403.6
--------------------------------------------------------------------------
Long-term debt (Note 4) 428.7 481.6
Long-term accrued liabilities and obligations
(Note 5) 208.8 203.5
Future income taxes, net 242.4 299.5
Non-controlling interests 276.8 302.5
--------------------------------------------------------------------------
$ 1,705.6 $ 1,690.7
--------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital - 142,589,312 common shares
outstanding $ 1,124.7 $ 1,124.7
Contributed surplus 31.9 31.9
Retained earnings 316.7 692.5
Accumulated other comprehensive income (loss) 21.5 (32.0)
--------------------------------------------------------------------------
$ 1,494.8 $ 1,817.1
--------------------------------------------------------------------------
$ 3,200.4 $ 3,507.8
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Subsequent Event (Note 15)
The accompanying notes are an integral part of the consolidated financial
statements.
APPROVED BY THE BOARD
"R.L. Cliff" "J.F. Shepard"
Director, R.L. Cliff Director, J.F. Shepard
Canfor Corporation
Consolidated Statements of Loss
3 months ended 12 months ended
December 31, December 31,
(millions of dollars, unaudited) 2008 2007 2008 2007
--------------------------------------------------------------------------
Sales $ 588.7 $ 711.0 $2,611.6 $3,275.6
Costs and expenses
Manufacturing and product costs 472.5 610.5 1,953.1 2,583.6
Freight and other distribution
costs 117.1 127.5 476.2 565.0
Export taxes (Note 2 (c)) 6.0 17.4 55.1 101.8
Amortization 44.0 47.2 171.2 184.1
Selling and administration costs 13.0 11.6 60.6 72.8
Restructuring, mill closure and
severance costs (Note 6) 10.3 21.5 53.5 41.3
--------------------------------------------------------------------------
662.9 835.7 2,769.7 3,548.6
--------------------------------------------------------------------------
Operating loss (74.2) (124.7) (158.1) (273.0)
Interest expense, net (7.7) (4.3) (25.4) (9.4)
Foreign exchange (loss) gain on
translation of long-term debt
and investments, net (72.0) (4.1) (100.3) 16.2
(Loss) gain on derivative financial
instruments (Note 12) (81.7) 6.2 (88.5) 16.0
North Central Plywoods mill fire,
net (Note 2 (a)) - - 57.9 -
Prince George Pulp & Paper mill
fire, net (Note 2 (b)) (0.3) - 8.2 -
Asset impairments (Note 8) (99.6) (256.0) (169.6) (268.0)
Other income (expense), net 12.9 (3.3) 12.7 (11.1)
--------------------------------------------------------------------------
Net loss before income taxes and
non-controlling interests (322.6) (386.2) (463.1) (529.3)
Income tax recovery (Note 9) 80.2 155.3 141.9 234.1
Non-controlling interests 12.6 (6.1) (24.0) (65.4)
--------------------------------------------------------------------------
Net loss $ (229.8) $ (237.0) $ (345.2) $ (360.6)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Per common share (in dollars)
(Note 10)
Net loss - Basic and Diluted $ (1.61) $ (1.66) $ (2.42) $ (2.53)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
Canfor Corporation
Consolidated Statements of Changes in Shareholders' Equity and
Comprehensive Loss
3 months ended 12 months ended
December 31, December 31,
(millions of dollars, unaudited) 2008 2007 2008 2007
--------------------------------------------------------------------------
Consolidated Statements of Changes
in Shareholders' Equity
Share capital
Balance at beginning of period $1,124.7 $1,124.7 $1,124.7 $1,124.3
Common shares issued on exercise of
stock options - - - 0.4
--------------------------------------------------------------------------
Balance at end of period $1,124.7 $1,124.7 $1,124.7 $1,124.7
--------------------------------------------------------------------------
Contributed surplus
--------------------------------------------------------------------------
Balance at beginning and end of
period $ 31.9 $ 31.9 $ 31.9 $ 31.9
--------------------------------------------------------------------------
Retained earnings
Balance at beginning of period $ 546.5 $ 929.5 $ 692.5 $1,068.5
Implementation of financial
instruments standards (Note 1 (b)) - - - (13.2)
Change in accounting for Canfor Pulp
Limited Partnership's pension
liability - - - (2.2)
Change in accounting for inventories
(Note 1 (b)) - - (30.6) -
Net loss for the period (229.8) (237.0) (345.2) (360.6)
--------------------------------------------------------------------------
Balance at end of period $ 316.7 $ 692.5 $ 316.7 $ 692.5
--------------------------------------------------------------------------
Accumulated other comprehensive loss
Balance at beginning of period $ (22.2) $ (30.1) $ (32.0) $ -
Implementation of financial
instruments standards (Note 1 (b)) - - - (1.9)
Reclassification of foreign exchange
translation adjustment - - - 3.0
Net change in foreign exchange
translation adjustment on self-
sustaining foreign subsidiaries 43.7 (1.9) 54.2 (35.7)
Reclassification to income of
(losses) gains on derivative
instruments designated as cash flow
hedges in prior periods - - (0.7) 2.6
--------------------------------------------------------------------------
Balance at end of period $ 21.5 $ (32.0) $ 21.5 $ (32.0)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Total shareholders' equity - Balance
at end of period $1,494.8 $1,817.1 $1,494.8 $1,817.1
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Consolidated Statement of
Comprehensive Loss
Net loss for the period $ (229.8) $ (237.0) $ (345.2) $ (360.6)
Other comprehensive income (loss)
Net change in foreign exchange
translation adjustment on self-
sustaining foreign subsidiaries 43.7 (1.9) 54.2 (35.7)
Reclassification to income of
(losses) gains on derivative
instruments designated as cash flow
hedges in prior periods - - (0.7) 2.6
--------------------------------------------------------------------------
Other comprehensive income (loss) 43.7 (1.9) 53.5 (33.1)
--------------------------------------------------------------------------
Total comprehensive loss $ (186.1) $ (238.9) $ (291.7) $ (393.7)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
Canfor Corporation
Consolidated Cash Flow Statements
3 months ended 12 months ended
December 31, December 31,
(millions of dollars, unaudited) 2008 2007 2008 2007
--------------------------------------------------------------------------
Cash generated from (used in)
Operating activities
Net loss for the period $ (229.8) $ (237.0) $ (345.2) $ (360.6)
Items not affecting cash:
Amortization 44.0 47.2 171.2 184.1
Income taxes (39.1) (109.1) (43.5) (111.9)
Long-term portion of deferred
reforestation 7.2 (2.9) (2.5) (5.3)
North Central Plywoods mill fire,
net (Note 2 (a)) - - (57.9) -
Prince George Pulp & Paper mill
fire, net (Note 2 (b)) 0.3 - (8.2) -
Foreign exchange loss (gain) on
translation of long-term debt 80.2 (4.1) 115.2 (92.5)
Loss (gain) on derivative
financial instruments (Note 12) 81.7 (6.2) 88.5 (16.0)
Asset impairments (Note 8) 99.6 256.0 169.6 268.0
Non-controlling interests (12.6) 6.1 24.0 65.4
Other (13.7) 15.2 3.9 40.6
Net proceeds from replacement of
derivative financial instruments - - 11.0 -
Salary pension plan contributions (4.3) (4.0) (15.9) (21.7)
Deferred scheduled maintenance
spending (2.9) (2.4) (8.7) (4.7)
Net change in non-cash working
capital (Note 11) 10.3 (9.7) 56.2 (428.5)
--------------------------------------------------------------------------
20.9 (50.9) 157.7 (483.1)
--------------------------------------------------------------------------
Financing activities
Proceeds from long-term debt - - - 0.3
Repayment of long-term debt - (8.3) (14.8) (99.4)
Increase (decrease) in operating
bank loans 21.1 (1.8) 25.2 (1.1)
Cash distributions paid to non-
controlling interests (12.8) (15.6) (52.3) (74.2)
Other (0.2) (0.1) (0.5) 0.1
--------------------------------------------------------------------------
8.1 (25.8) (42.4) (174.3)
--------------------------------------------------------------------------
Investing activities
Decrease in temporary investments - - - 124.5
Reclassification of non-bank asset-
backed commercial paper - - - (85.9)
Business acquisitions (0.8) (16.8) (0.8) (16.8)
Additions to property, plant,
equipment and timber (21.9) (27.5) (80.2) (90.6)
Proceeds from disposal of property,
plant and equipment 1.3 1.2 5.6 4.0
Partial proceeds from North Central
Plywoods fire claim (Note 2 (a)) 20.0 - 30.0 -
Partial proceeds from Prince George
Pulp & Paper mill fire damage
claim (Note 2 (b)) 1.5 - 9.5 -
Advances to affiliated companies - - (11.5) -
Other (0.9) 11.5 (1.0) (6.1)
--------------------------------------------------------------------------
(0.8) (31.6) (48.4) (70.9)
--------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents 28.2 (108.3) 66.9 (728.3)
Cash and cash equivalents at
beginning of period 334.2 403.8 295.5 1,023.8
--------------------------------------------------------------------------
Cash and cash equivalents at end of
period $ 362.4 $ 295.5 $ 362.4 $ 295.5
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Cash payments (receipts) in the
period
Interest, net $ 7.9 $ 14.1 $ 26.6 $ 25.3
Income taxes $ (1.8) $ (0.9) $ (137.5) $ 230.5
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
Notes to the Consolidated Interim Financial Statements
(unaudited, in millions of dollars unless otherwise noted)
1. Significant Accounting Policies and Changes in Accounting Policies
(a) Basis of Presentation
These interim financial statements do not include all of the disclosures
required by Canadian generally accepted accounting principles for annual
financial statements and, accordingly, should be read in conjunction with the
financial statements and notes included in Canfor's Annual Report for the year
ended December 31, 2007 available at www.canfor.com or www.sedar.com. These
interim financial statements follow the same accounting policies and methods of
computation as used in the 2007 consolidated financial statements, except as
noted below.
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, OSB plants, and pulp
mills. Market demand also varies seasonally to some degree. For example,
building activity and repair and renovation work, which affects demand for
lumber and panel products, is generally stronger in the spring and summer
months. Shipment volumes are affected by these factors as well as by global
supply and demand conditions.
(b) Changes in Accounting Policies
Effective January 1, 2008, the Company adopted the Canadian Institute of
Chartered Accountants' new Handbook Sections: 1535 "Capital Disclosures", 3031
"Inventories", 3862 "Financial Instruments - Disclosures" and 3863 "Financial
Instruments - Presentation". Handbook sections 3862 and 3863 replace section
3861 "Financial Instruments - Disclosure and Presentation". These requirements
have been incorporated into the unaudited interim consolidated financial
statements.
Section 1535 - Capital Disclosures
This Section establishes standards for disclosures about an entity's capital and
how it is managed. Under this standard, the Company is required to disclose
qualitative information about its objectives, policies and processes for
managing capital, quantitative data about what it regards as capital, and
whether it has complied with any externally imposed capital requirements and, if
not, the consequences of such non-compliance.
Section 3031 - Inventories
This Section replaced Section 3030 - "Inventories" and provides significantly
more guidance on the measurement of inventories, with an expanded definition of
cost, and the requirement that inventories must be measured at the lower of cost
and net realizable value. In addition, the section sets out additional
disclosure requirements, including accounting policies, carrying values, and the
amount of any inventory write-downs or reversal of write-downs. In conjunction
with Section 3061 "Property Plant and Equipment", it also provides guidance on
the classification of major spare parts and stand-by equipment.
On January 1, 2008, the Company adopted the new recommendations retrospectively,
without prior period restatement. As a result of implementing these standards,
inventories decreased by $60.6 million (log inventories by $46.5 million,
processing materials and supplies by $14.1 million), property, plant and
equipment increased by $14.1 million, future income tax liabilities decreased by
$15.9 million and opening retained earnings were reduced by $30.6 million.
Total inventory write-downs at December 31, 2008 were $46.2 million.
Section 3862 - Financial Instruments - Disclosures
This Section requires entities to provide disclosure of quantitative and
qualitative information in their financial statements that enable users to
evaluate: (a) the significance of financial instruments for the entity's
financial position and performance; and (b) the nature and extent of risks
arising from financial instruments to which the entity is exposed during the
period and at the balance sheet date, and management's objectives, policies and
procedures for managing such risks.
Section 3863 - Financial Instruments - Presentation
This Section establishes standards for presentation of financial instruments and
non-financial derivatives.
On January 1, 2007, the Company adopted Sections 3855, 3861, 3865, "Financial
Instruments", "Financial Instruments - Disclosure and Presentation", "Financial
Instruments - Hedges" and Section 1530, "Comprehensive Income". Opening retained
earnings were reduced by $13.2 million as a result of the implementation of
these new standards. This amount was comprised of a $14.2 million deferred
unrealized foreign exchange loss on long-term debt arising from a previous
hedging relationship and $2.8 million of deferred financing costs that were
written off, partially offset by a $3.8 million adjustment to the associated
liabilities for future income taxes and non-controlling interests.
(c) Future Accounting Policy Changes
In February 2008, the CICA issued a new accounting standard, Handbook Section
3064 - "Goodwill and Intangible Assets". This Section replaces CICA Handbook
Section 3062 - "Goodwill and Intangible Assets" and Section 3450 - "Research and
Development Costs", and establishes revised standards for the recognition,
measurement, presentation and disclosure of goodwill and intangible assets. On
adoption of this new Standard, EIC 27 - "Revenues and Expenditures During the
Pre-operating Period" is withdrawn and so various pre-production and start-up
costs are required to be expensed as incurred. This Standard will be applicable
to the Company for annual and interim accounting periods beginning on January 1,
2009. The Company does not expect that this Standard will have a material impact
on its consolidated financial statements.
In 2008, the Canadian Accounting Standards Board announced that 2011 is the
changeover date for publicly listed companies to use International Financial
Reporting Standards ("IFRS"), replacing Canadian GAAP. The effective date is for
interim and annual financial statements relating to fiscal years beginning on or
after January 1, 2011. From that date onwards, publicly traded companies and
certain other publicly accountable enterprises will be required to report under
IFRS. The Company is currently evaluating the impact of these new standards on
its consolidated financial statements.
2. Other Receivables
(a) North Central Plywoods Mill Fire
Other receivables include $41.4 million in relation to a fire at the Company's
North Central Plywoods ("NCP") facility in Prince George, British Columbia on
May 26, 2008, which completely destroyed the mill. The mill is insured for
equivalent replacement value. At the end of the year, the Company had not
reached final settlement with its insurer, and accordingly estimated the
insurance property damage amount receivable using preliminary engineering
estimates and other information available. By December 31, 2008, the Company had
received advances of $30.0 million from the insurer which were offset against
the total property damage and business interruption receivable of $71.4 million.
The insurance property damage receivable was estimated on the basis that the
insurance proceeds will be applied towards capital improvements at the Company's
other operations.
Based on estimated insurance proceeds, net of an aggregate policy deductible and
costs related to the fire, the Company recorded a pre-tax gain of $57.9 million.
The estimates are subject to adjustments in future periods.
(b) Prince George Pulp & Paper Mill Fire
Other receivables include $7.2 million in relation to a fire at Canfor Pulp
Limited Partnership's ("CPLP") Prince George Pulp & Paper mill in January 2008,
which destroyed the chip screening and in-feed system. CPLP recorded a related
pre-tax gain on disposal of capital assets of $8.2 million. In connection with
claims arising from the fire, CPLP recorded the following receivables during
2008:
- a property damage insurance receivable of $12.2 million, net of a $3.3 million
policy deductible; and
- a business interruption insurance receivable of $19.1 million, net of a $1.0
million policy deductible, plus a $3.0 million receivable in temporary chip
in-feed system costs.
By December 31, 2008, CPLP had received total advances of $27.1 million in
connection with these claims, of which $15.9 million related to the business
interruption claim, and $11.2 million to property damage. Of the latter amount,
$9.5 million has been classified as an investing activity in the Consolidated
Cash Flow Statements; the balance of $1.7 million represents demolition costs.
Subsequent to December 31, 2008, a further $2.7 million has been received as
partial payment against the accrued insurance receivable.
(c) Export Tax Receivable, Net
As at December 31, 2008, the Company had a net export tax receivable of $3.3
million (2007 - payable of $5.2 million) as a result of a Third Country
Adjustment export tax refund of $10.8 million related to the quarters ended
December 31, 2007 and March 31, 2008. This refund was based on information
received from the Canada Revenue Agency in December 2008.
3. Long-Term Investments and Other
As at As at
December 31, December 31,
(millions of dollars) 2008 2007
--------------------------------------------------------------------------
Non-bank asset-backed
commercial paper (Note 8) $ 69.3 $ 64.0
Coastal Fibre Limited Partnership
long-term fibre agreement (Note 8) - 37.1
Other Investments 28.9 35.0
Customer agreements 22.9 21.1
Derivative instruments - 4.4
Other deposits, loans and advances 4.6 8.8
--------------------------------------------------------------------------
$ 125.7 $ 170.4
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The non-bank asset-backed commercial paper ("ABCP") of $69.3 million (US$56.6
million) is measured at the estimated fair value of combined investments in
asset-backed commercial paper of four different Canadian trusts with total
original principal amount of US$81.2 million and original maturities between
August and September 2007.
4. Operating Loans and Long-Term Debt
At December 31, 2008, the Company, on a consolidated basis, had $430.0 million
of unsecured operating lines available (2007 - $409.0 million), of which $25.2
million was drawn down (2007 - nil) and an additional $41.4 million was reserved
for several standby letters of credit (2007 - $40.1 million).
The Company's available operating line excluding CPLP was $355.0 million (2007 -
$325.0 million) of which $17.3 million (2007 - $12.7 million) was reserved for
several standby letters of credit, the majority of which relates to unregistered
pension plans. 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. The operating loan expires in June 2011.
CPLP's available operating line at December 31, 2008 was $75.0 million (2007 -
$75.0 million) of which $25.2 million was drawn down (2007 - nil) and $24.1
million (2007 - $27.4 million) was reserved for a standby letter of credit
issued to BC Hydro in connection with a 15 year electrical cogeneration
agreement. Interest is payable at floating rates that vary depending on the
ratio of net debt to operating earnings before interest, taxes, depreciation and
amortization and is based on lenders' Canadian prime rate, bankers acceptances,
US dollar base rate or US dollar LIBOR rate, plus a margin. The operating loan
expires in November 2009.
At December 31, 2008, the fair value of the Company's long-term debt, which was
measured at its amortized cost of $597.0 million, was $578.1 million. The fair
value of long-term debt was determined based on prevailing market rates for
long-term debt with similar characteristics and risk profiles.
5. Long-term Accrued Liabilities and Obligations
As at As at
December 31, December 31,
(millions of dollars) 2008 2007
--------------------------------------------------------------------------
Deferred reforestation obligation $ 63.1 $ 65.6
Accrued pension obligations 20.0 19.1
Accrued pension bridge benefit obligations 8.7 7.9
Other post-employment benefits 98.3 87.0
Asset retirement obligations 4.7 11.1
Other 14.0 12.8
--------------------------------------------------------------------------
$ 208.8 $ 203.5
--------------------------------------------------------------------------
--------------------------------------------------------------------------
6. Restructuring, Mill Closure and Severance Costs
Restructuring, mill closure and severance costs represent costs associated with
the indefinite or permanent closures of facilities and staff reductions. The
expense for the fourth quarter of 2008 amounted to $10.3 million and
substantially resulted from the indefinite closure of the Tackama panel
operation in October 2008, and the other indefinitely idled PolarBoard,
Mackenzie and Chetwynd operations.
The following table provides a breakdown of the restructuring, mill closure and
severance costs by business segment:
3 months ended 12 months ended
December 31, December 31,
(millions of dollars) 2008 2007 2008 2007
--------------------------------------------------------------------------
Lumber $ 3.7 $ 7.1 $ 18.7 $ 21.7
Panels 6.7 14.4 34.5 14.4
Corporate and other (0.1) - 0.3 5.2
--------------------------------------------------------------------------
$ 10.3 $ 21.5 $ 53.5 $ 41.3
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The following table provides a reconciliation of the restructuring, mill closure
and severance liability for the 2007 and 2008 years:
As at As at
December 31, December 31,
(millions of dollars) 2008 2007
--------------------------------------------------------------------------
Accrued liability at beginning of period $ 29.8 $ 4.9
Costs in the period(a) 39.8 33.3
Paid during the period (46.3) (8.4)
--------------------------------------------------------------------------
Accrued liability at end of period $ 23.3 $ 29.8
--------------------------------------------------------------------------
--------------------------------------------------------------------------
a Excluding non-cash expenses, which include provisions for capital
asset and inventory write-downs resulting from indefinite and permanent
mill closures, in both years.
7. Employee Future Benefits
The Company's total benefit costs were as follows:
3 months ended 12 months ended
December 31, December 31,
(millions of dollars) 2008 2007 2008 2007
--------------------------------------------------------------------------
Defined benefit pension plans $ 0.8 $ 4.4 $ 3.3 $ 17.5
Other employee future
benefit plans 4.3 4.3 17.2 17.2
Defined contribution pension
plans and 401(k) plans 0.9 0.2 3.6 1.6
Contributions to forest
industry union plans 3.8 4.6 18.4 22.8
--------------------------------------------------------------------------
$ 9.8 $ 13.5 $ 42.5 $ 59.1
--------------------------------------------------------------------------
--------------------------------------------------------------------------
8. Asset Impairments
3 months ended 12 months ended
December 31, December 31,
(millions of dollars) 2008 2007 2008 2007
--------------------------------------------------------------------------
Capital assets $ 77.2 $ 231.4 $ 77.2 $ 231.4
Assets related to Howe Sound
Pulp and Paper Limited
Partnership and Coastal Fibre
Limited Partnership - - 70.0 14.0
Non-bank asset-backed
commercial paper (Note 3) 10.2 10.6 10.2 16.2
Other 12.2 14.0 12.2 6.4
--------------------------------------------------------------------------
$ 99.6 $ 256.0 $ 169.6 $ 268.0
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Capital Assets
The Company reviews the carrying values of its long-lived assets on a regular
basis as events or changes in circumstances may warrant. Where the carrying
value of assets is not expected to be recoverable from future cash flows, they
are written down to fair value. A review of the carrying values of the Company's
sawmill and panelboard operations and various other assets was undertaken in
2007 and 2008 as a result of operating losses in both years and the difficult
market conditions.
The first step in this process was to determine for each operation whether
projected undiscounted future cash flows from operations exceeded the net
carrying amount of the assets as of the assessment date. For those operations
where an impairment was indicated, the second step was to calculate fair values
using discounted future cash flows expected from their use and eventual
disposition.
Estimates of future cash flows used to test the recoverability of the Company's
long-lived assets generally include key assumptions related to forecast prices
and exchange rates. Other significant assumptions are the estimated useful life
of the long-lived assets, and the impacts of both the Softwood Lumber Agreement
with the U.S. and the Mountain Pine Beetle epidemic. Price forecasts beyond 2009
were determined with reference to Resource Information Systems, Inc.
publications, and forecast exchange rates were based on forecasts from various
recognized authorities. Given the importance of the US$/Cdn$ exchange rate in
the Company's business, where most sales are denominated in US dollars and most
costs incurred in Canadian dollars, probabilities were assigned to the
likelihood of occurrence of several exchange rate scenarios, and a weighted
average of these was used in determining the impairments to be recorded.
As a result of its review, the Company recorded a capital asset impairment
charge of $77.2 million in the fourth quarter of 2008 (fourth quarter of 2007 -
$231.4 million).
Non-bank Asset-backed Commercial Paper
Since August 2007, there has been no active market for non-bank asset-backed
commercial paper ("ABCP"). The Company's funds are invested in the ABCP of four
different Canadian Trusts, which failed to make payment at maturity and, along
with 16 other ABCP conduits were subject to restructuring under the Pan-Canadian
Investors Committee for Third Party structured Asset-Backed Commercial Paper
("the Pan-Canadian Investors Committee"). On March 17, 2008 the Pan-Canadian
Investors Committee filed with the Ontario Superior Court of Justice a
comprehensive arrangement pursuant to the Companies' Creditors Arrangement Act
to restructure the affected trusts. The final restructuring plan was approved on
January 12, 2009 and completed on January 21, 2009.
At December 31, 2008, an additional impairment of $10.2 million (US$8.4 million)
was recorded on the ABCP based on the estimated fair value at year end, which
took into account information available to the Company related to its specific
holdings of ABCP, and assumed a high likelihood of success for the ABCP
restructuring plan. The book value at December 31, 2008 reflected the impact of
a weaker Canadian dollar on the US dollar denominated ABCP. No changes to fair
value resulted from the completion of the restructuring plan after year-end
2008.
Other
For the fourth quarter of 2008, other asset impairments of $12.2 million were
recognized for certain other investments and spare parts inventory at
indefinitely idled operations.
9. Income Taxes
3 months ended 12 months ended
December 31, December 31,
(millions of dollars) 2008 2007 2008 2007
--------------------------------------------------------------------------
Current $ 18.1 $ 64.2 $ 47.9 $ 140.8
Future 62.1 91.1 94.0 93.3
--------------------------------------------------------------------------
$ 80.2 $ 155.3 $ 141.9 $ 234.1
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The reconciliation of income taxes calculated at the statutory rate to the
actual income tax provision is as follows:
3 months ended 12 months ended
December 31, December 31,
(millions of dollars) 2008 2007 2008 2007
--------------------------------------------------------------------------
Income tax recovery at
statutory tax rate $ 100.1 $ 131.7 $ 143.6 $ 180.5
Add (deduct):
Non-controlling interests (3.9) 2.1 7.4 22.3
Change in corporate income
tax rates - 19.6 9.1 21.5
Entities with different
income tax rates and other
tax adjustments 0.9 6.6 4.4 12.4
Tax recovery at rates other
than statutory rate 0.9 - 3.5 -
Permanent difference from
capital gains and losses and
other non-deductible items (17.8) (4.7) (26.1) (2.6)
--------------------------------------------------------------------------
Income tax recovery $ 80.2 $ 155.3 $ 141.9 $ 234.1
--------------------------------------------------------------------------
--------------------------------------------------------------------------
10. Net Loss Per Share
Basic net income (loss) per share is calculated by dividing the net income
(loss) available to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted net income (loss) per share is
calculated by dividing the net income (loss) available to common shareholders by
the weighted average number of common shares during the period using the
treasury stock method. Under this method, proceeds from the potential exercise
of stock options are assumed to be used to purchase the Company's common shares.
When there is a net loss, the exercise of stock options would result in a
calculated diluted net loss per share that is anti-dilutive.
3 months ended 12 months ended
December 31, December 31,
2008 2007 2008 2007
--------------------------------------------------------------------------
Weighted average number
of common shares 142,589,312 142,589,312 142,589,312 142,576,271
Incremental shares from
potential exercise of
options(a) - 3,350 1,778 41,254
Diluted number of common
shares(a) 142,589,312 142,589,312 142,589,312 142,576,271
--------------------------------------------------------------------------
--------------------------------------------------------------------------
a Where the addition of share options to the total shares outstanding has
an anti-dilutive impact on the diluted net income (loss) per share
calculation, those share options have not been included in the total
common shares outstanding for purposes of the calculation of diluted
net income (loss) per share.
11. Net Change in Non-Cash Working Capital
3 months ended 12 months ended
December 31, December 31,
(millions of dollars) 2008 2007 2008 2007
--------------------------------------------------------------------------
Accounts receivable $ 81.0 $ 34.4 $ 78.1 $ 38.0
Income taxes recoverable/payable (18.1) (63.7) 89.6 (371.9)
Future income taxes, net (22.5) 17.6 (49.9) 14.0
Inventories 13.9 45.9 2.9 166.8
Prepaid expenses 14.8 11.3 (0.1) 1.9
Accounts payable, accrued
liabilities and current
portion of deferred
reforestation obligation (58.8) (55.2) (64.4) (277.3)
--------------------------------------------------------------------------
$ 10.3 $ (9.7) $ 56.2 $ (428.5)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
12. Financial Instruments
All financial instruments and derivatives are measured at fair value on initial
recognition except for certain related party transactions. Unless otherwise
stated, book value approximates fair value.
Classification of Financial Instruments
The Company has classified its cash and cash equivalents and ABCP as
held-for-trading. Accounts receivable are classified as loans and receivables.
Operating loans, accounts payable and accrued liabilities, and long-term debt,
including interest payable, are classified as other liabilities, all of which
are measured at amortized cost. Derivative instruments are recorded at fair
value, including those derivatives that are embedded in financial or
non-financial contracts that are not closely related to the host contract.
The Company reviews all assets, including financial instruments, for impairment
when events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable.
Financial Risk Management
The Company is exposed to a number of risks as a result of holding financial
instruments. These risks include credit risk, liquidity risk and market price
risk.
The Company's Risk Management Committee manages risk in accordance with a Board
approved Price Risk Management Controls Policy. This policy provides the
framework for risk management related to commodity price, foreign exchange,
interest rate and counterparty credit risk of the Company.
(a) Credit risk:
Credit risk is the risk of financial loss to the Company if a customer or third
party to a derivative instrument fails to meet its contractual obligations.
Financial instruments that are subject to credit risk include cash and cash
equivalents, accounts receivable and long-term investments and other. Cash and
cash equivalents includes cash held through major Canadian and international
financial institutions and temporary investments with an original maturity date
of three months or less. The cash and cash equivalents balance at December 31,
2008 is $362.4 million.
The Company utilizes a combination of credit insurance and self-insurance to
manage the risk associated with trade receivables. Approximately 50% of the
outstanding trade receivables are covered by credit insurance. The Company's
trade receivable balance at December 31, 2008 is $105.9 million, net of an
allowance for doubtful accounts of $3.0 million. At December 31, 2008
approximately 98% of the trade accounts balance was within the Company's
established credit terms.
(b) Liquidity risk:
Liquidity risk is the risk that the Company will be unable to meet its financial
obligations on a current basis. The Company manages liquidity risk through
regular cash-flow forecasting in conjunction with an adequate committed
operating bank loan facility.
At December 31, 2008, the Company has operating loans of $25.2 million, accounts
payable and accrued liabilities of $322.9 million and current debt obligations
of $168.3 million (US$137.3 million), all of which fall due for payment within
one year of the balance sheet date.
(c) Market risk:
Market risk is the risk that the fair value or future cash flows of a financial
instrument will fluctuate because of changes in interest rates, foreign currency
and commodity prices.
(i) Interest Rate risk:
The Company is exposed to interest rate risk through its current financial
assets and financial obligations bearing variable interest rates. The Company's
cash and cash equivalents include term deposits with original maturity dates of
three months or less.
Changes in the market interest rates do not have a significant impact on the
Company's results of operations due to the short-term nature of the respective
financial assets and obligations and because all long-term debt is based on
fixed rates of interest.
The Company currently does not use derivative instruments to reduce its exposure
to interest rate risk.
(ii) Currency risk:
The Company is exposed to foreign exchange risk primarily related to the US
dollar, as the Company's products are sold principally in US dollars and all
long-term debt is denominated in US dollars. In addition, the Company holds
financial assets and liabilities primarily related to New South Companies Inc.
based in South Carolina, in US dollars.
A portion of the currency risk associated with US dollar denominated sales is
naturally offset by US dollar denominated expenses and the US dollar denominated
debt. The majority of the remaining exposure is covered by option contracts
(foreign exchange collars) that effectively limit the minimum and maximum
Canadian dollar recovery related to the sale of those US dollars.
(iii) Energy Price risk:
The Company is exposed to energy price risk relating to purchases of natural gas
and diesel oil for use in its operations.
The exposure is hedged up to 100% through the use of floating to fixed swap
contracts or option contracts with maturity dates up to a maximum of three
years. In the case of diesel, the Company uses heating oil contracts to hedge
its exposure.
(iv) Commodity Price risk:
The Company is exposed to commodity price risk related to sale of lumber, pulp,
paper and oriented strand board. From time to time, the Company enters into
futures contracts on the Chicago Mercantile Exchange for lumber and forward
contracts direct with customers for pulp. Under the Price Risk Management
Controls Policy, up to 15% of lumber sales and 5% of pulp sales may be sold in
this way.
Derivative 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 and energy costs. At December 31, 2008, the fair value of outstanding
commodity and exchange financial instruments was a net liability of $69.3
million (2007 - net asset of $17.2 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 months ended and years ended December 31, 2008 and
2007:
3 months ended 12 months ended
December 31, December 31,
(millions of dollars) 2008 2007 2008 2007
--------------------------------------------------------------------------
Foreign exchange collars
and contracts $ (65.6) $ (0.1) $ (86.1) $ 14.3
Natural gas swaps (4.8) 3.3 1.0 (9.1)
Diesel options and swaps (11.3) 3.0 (3.4) 9.1
Commodity futures - - - 1.7
--------------------------------------------------------------------------
$ (81.7) $ 6.2 $ (88.5) $ 16.0
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The following table summarizes the fair market value of the derivative financial
instruments included in the balance sheet at December 31, 2008 and 2007:
As at As at
December 31, December 31,
(millions of dollars) 2008 2007
--------------------------------------------------------------------------
Foreign exchange collars and contracts $ (53.2) $ 15.0
Natural gas swaps (6.5) (5.7)
Diesel options and swaps (9.6) 7.9
--------------------------------------------------------------------------
(69.3) 17.2
Less: current portion (67.5) 14.4
--------------------------------------------------------------------------
Long-term portion $ (1.8) $ 2.8
--------------------------------------------------------------------------
--------------------------------------------------------------------------
13. Segmented Information(a)
Business Segment Information
Corp- Elimin-
(millions Pulp & orate ation
of Lumber Paper & Adjust- Consoli-
dollars) (b) Panels (d) Other ment dated
--------------------------------------------------------------------------
3 months ended
December 31, 2008
Sales to external
customers $ 363.9 20.5 204.3 - - $ 588.7
Sales to other
segments(c) $ 22.7 0.4 - - (23.1) $ -
Operating loss $ (50.8) (15.2) (2.2) (6.0) - $ (74.2)
Amortization $ 26.8 4.3 11.1 1.8 - $ 44.0
Capital
expenditures $ 8.8 0.1 13.0 - - $ 21.9
--------------------------------------------------------------------------
3 months ended
December 31, 2007
Sales to external
customers $ 395.3 70.5 245.2 - - $ 711.0
Sales to other
segments(c) $ 22.4 1.4 - - (23.8) $ -
Operating income
(loss) $ (99.5) (34.2) 12.9 (3.9) - $ (124.7)
Amortization $ 25.6 5.4 14.8 1.4 - $ 47.2
Capital
expenditures $ 5.7 10.0 11.3 0.5 - $ 27.5
--------------------------------------------------------------------------
12 months ended
December 31, 2008
Sales to external
customers $ 1,490.5 170.3 950.8 - - $ 2,611.6
Sales to other
segments(c) $ 96.0 3.6 - - (99.6) $ -
Operating income
(loss) $ (155.0) (56.9) 76.8 (23.0) - $ (158.1)
Amortization $ 99.5 16.1 48.8 6.8 - $ 171.2
Capital
expenditures $ 39.5 0.8 39.9 - - $ 80.2
Identifiable
assets(e) $ 1,434.4 248.2 906.6 611.2 - $ 3,200.4
--------------------------------------------------------------------------
12 months ended
December 31, 2007
Sales to external
customers $ 1,942.7 297.7 1,035.2 - - $ 3,275.6
Sales to other
segments(c) $ 111.2 5.0 - - (116.2) $ -
Operating income
(loss) $ (301.2) (76.5) 137.2 (32.5) - $ (273.0)
Amortization $ 102.8 23.0 53.3 5.0 - $ 184.1
Capital
expenditures $ 47.6 15.7 24.2 3.1 - $ 90.6
Identifiable
assets(e) $ 1,537.4 335.1 937.1 698.2 - $ 3,507.8
--------------------------------------------------------------------------
(a) Operations are presented by product line.
(b) Sales for the fourth quarter include sales of Canfor-produced lumber
of $298.0 million (three months ended December 31, 2007 - $326.6
million) and $1,214.3 million for the year-to-date (year ended December
31, 2007 - $1,631.8 million).
(c) Sales to other segments are accounted for at prices that approximate
market value.
(d) Includes 100% of Canfor Pulp Limited Partnership and the Taylor
Pulp Mill.
(e) Identifiable assets for the fourth quarter of 2008 are presented net of
an impairment charge of $99.6 million (three months ended December 31,
2007 - $256.0 million), of which $2.2 million relates to the Lumber
segment (three months ended December 31, 2007 - $159.2 million),
$81.2 million relates to the Panels segment (three months ended
December 31, 2007 - $72.2 million) and $16.2 million relates to the
Corporate and Other segment (three months ended December 31, 2007 -
$24.6 million). Identifiable assets for the year ended December 31,
2008 are presented net of an impairment charge of $169.6 million (2007
- $268.0 million), of which $2.2 million relates to the Lumber segment
(2007 - $90.0 million), $81.2 million to the Panels segment (2007 -
$141.4 million) and $86.2 million to Corporate and Other (2007 -
$36.6 million).
Geographic Information
3 months ended 12 months ended
December 31, December 31,
(millions of dollars) 2008 2007 2008 2007
--------------------------------------------------------------------------
Sales by location of customer
Canada $ 109.3 $ 149.3 $ 505.3 $ 615.6
United States 317.6 366.0 1,378.3 1,855.0
Europe 37.3 50.0 174.5 190.3
Far East and Other 124.5 145.7 553.5 614.7
--------------------------------------------------------------------------
$ 588.7 $ 711.0 $2,611.6 $3,275.6
--------------------------------------------------------------------------
--------------------------------------------------------------------------
As at As at
December 31, December 31,
(millions of dollars) 2008 2007
--------------------------------------------------------------------------
Capital assets and goodwill by location
Canada $ 1,697.9 $ 1,868.9
United States 186.1 159.5
Far East and Other 0.2 0.2
--------------------------------------------------------------------------
$ 1,884.2 $ 2,028.6
--------------------------------------------------------------------------
--------------------------------------------------------------------------
14. Capital Disclosures
The Company's objectives when managing capital are to maintain a strong balance
sheet and a globally competitive cost structure that ensures adequate liquidity
to maintain and develop the business throughout the commodity price cycle.
The Company's capital is comprised of net debt and shareholders' equity:
As at As at
December 31, December 31,
(millions of dollars) 2008 2007
--------------------------------------------------------------------------
Total debt (including operating loans) $ 622.2 $ 496.8
Less: Cash and cash equivalents (362.4) (295.5)
--------------------------------------------------------------------------
Net debt 259.8 201.3
Total shareholders' equity 1,494.8 1,817.1
--------------------------------------------------------------------------
$ 1,754.6 $ 2,018.4
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The Company has certain financial covenants in its debt obligations that
stipulate maximum net debt to total capitalization ratios and minimum net worth
amounts based on total shareholders' equity. The net debt to total
capitalization is calculated by dividing total debt, less cash and cash
equivalents, by shareholders' equity plus total debt less cash and cash
equivalents. Debt obligations are held by various entities within the Canfor
group and the individual debt agreements specify the entities within the group
that are to be included in the covenant calculations.
Separately, CPLP has leverage and interest coverage ratios calculated by
reference to operating earnings before interest, taxes, depreciation and
amortization.
The Company's strategy is to ensure it remains in compliance with all of its
existing covenants, so as to ensure continuous access to capital, and management
reviews results and forecasts to monitor the Company's compliance. The Company
was in compliance with all its debt covenants for the three and twelve months
ended December 31, 2008 and 2007.
15. Subsequent Events
New Operating Loans
On January 30, 2009, the Company entered into two new operating loan facilities
in the amounts of US$16.7 million ("Facility A") and US$43.7 million ("Facility
B"). Facility A expires in January 2012, with the option of four one-year
extensions, and is non-recourse to the Company under normal circumstances,
except for US$6.7 million. Facility B expires in January 2011, with the option
of five one-year extensions, and is non-recourse to the Company under normal
circumstances. Both facilities can be drawn in Canadian or US dollars and
interest is payable at floating rates based on lenders' Canadian prime rate,
bankers acceptances, US dollar base rate or US dollar LIBOR rate, plus or minus
a margin. The ABCP assets of the Company have been pledged as security to
support these credit facilities.
Sale of Panel and Fibre Mill Property
On February 13, 2009, the Company completed the sale of a property located at
New Westminster, British Columbia, for gross proceeds of $47.5 million. The
property was the site of the Company's former Panel and Fibre operation, which
was permanently closed at the beginning of 2008. The transaction will result in
a pre-tax gain of approximately $44 million.
16. Comparative Figures
Certain comparative information has been reclassified to conform to the
presentation in the current period.
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