Canfor Corporation (TSX:CFP) today reported net income attributable to
shareholders ("shareholder net income") of $110.3 million, or $0.77 per share,
for the second quarter of 2013, compared to $61.9 million, or $0.43 per share,
for the first quarter of 2013 and $2.6 million, or $0.02 per share, for the
second quarter of 2012. For the six months ended June 30, 2013, the Company's
shareholder net income was $172.2 million, or $1.21 per share, compared to a
shareholder net loss of $15.4 million, or $0.11 per share, reported for the
first half of 2012.
The shareholder net income for the second quarter of 2013 included various items
affecting comparability with prior periods, which had an overall net positive
impact on the Company's results of $22.6 million, or $0.16 per share. After
adjusting for such items, the Company's adjusted shareholder net income for the
second quarter of 2013 was $87.7 million, or $0.61 per share, up $17.4 million,
or $0.12 per share, from an adjusted shareholder net income of $70.3 million, or
$0.49 per share, for the first quarter of 2013. Adjusted shareholder net income
for the second quarter of 2012 was $9.2 million, or $0.07 per share.
The Company reported operating income of $128.2 million for the second quarter
of 2013, compared to operating income of $100.0 million for the first quarter.
The positive variance reflected improved results in the lumber segment mostly as
a result of increased shipments and, to a lesser extent, lower manufacturing
costs.
The following table summarizes selected financial information for the Company
for the comparative periods(1):
(millions of Canadian
dollars, except for per Q2 Q1 YTD Q2 YTD
share amounts) 2013 2013 2013 2012 2012
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Sales $ 843.2 $ 786.3 $ 1,629.5 $ 685.0 $ 1,278.8
Operating income $ 128.2 $ 100.0 $ 228.2 $ 22.6 $ 4.2
Net income (loss)
attributable to equity
shareholders of Company $ 110.3 $ 61.9 $ 172.2 $ 2.6 $ (15.4)
Net income (loss) per
share attributable to
equity shareholders of
Company, basic and
diluted $ 0.77 $ 0.43 $ 1.21 $ 0.02 $ (0.11)
Adjusted shareholder net
income (loss) $ 87.7 $ 70.3 $ 158.0 $ 9.2 $ (14.9)
Adjusted shareholder net
income (loss) per share $ 0.61 $ 0.49 $ 1.11 $ 0.07 $ (0.11)
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After reaching an eight-year high in late March 2013, North American lumber
prices corrected sharply through the second quarter of 2013, mostly due to
supply-related factors including higher operating rates and improved railcar
availability. Unseasonably wet weather in parts of the U.S. tempered residential
construction activity in the second quarter and this was reflected in U.S.
housing starts, down 9% from the first quarter of 2013, averaging 872,000 units
SAAR (seasonally adjusted annual rate). Contributing to the decline in U.S.
housing starts was also a sharp drop in the more volatile multi-family starts,
down 27% in June. Underlying housing demand remains strong with many housing
market indicators continuing to show positive trends. In Canada, steady lumber
consumption in the quarter resulted from Canadian housing starts moving up 6%
from the first quarter of 2013 to 186,000 units SAAR. Offshore demand for
Canfor's lumber remained solid, consistent with the previous quarter.
The average North American benchmark Western Spruce/Pine/Fir ("SPF") 2x4 #2&Btr
price was US$335 per Mfbm, down US$56, or 14%. Despite this and similar declines
in other narrow dimension grades, Canfor's average sales realizations were
largely unchanged from the previous quarter. This reflected more stable offshore
pricing, as well as a higher proportion of North American shipments earlier in
the quarter before a sharp price correction through May and June. Western SPF
lumber sales realizations were also positively impacted by a stronger US dollar,
which moved up 1 cent from the previous quarter. Prices for narrow Southern
Yellow Pine ("SYP") lumber products experienced a similar decline from the
previous quarter, with the benchmark SYP 2x4 #2 average price declining US$60,
or 13%, to US$392 per Mfbm, reversing most of the gain seen in the previous
quarter.
(1) Certain prior period amounts have been restated due to the adoption of
amended IAS 19, Employee Benefits and IFRS 11, Joint Arrangements. Further
details can be found in the Company's unaudited interim consolidated financial
statements.
Lumber shipments increased 12%, or 133 million board feet, from the previous
quarter, reflecting higher production as well as the impact of improved railcar
availability following a shortage experienced in the previous quarter. Lumber
production, at just over 1.2 billion board feet, was up 5%, or 55 million board
feet, from the previous quarter, reflecting recently completed capital upgrades
as well as more operating days and additional overtime shifts in the current
quarter. Lumber unit manufacturing costs showed a modest decrease compared to
the previous quarter, reflecting higher production and seasonally lower unit
conversion costs. Log costs remained relatively stable, ahead of an increase in
stumpage anticipated in the third quarter of 2013.
Global softwood pulp markets were slightly improved through the second quarter
of 2013, principally the result of reductions in supply due to spring
maintenance downtime, while shipments were steady in the quarter. Northern
Bleached Softwood Kraft ("NBSK") pulp list prices experienced moderate increases
with the average list price to North America up US$40, or 4%, to US$937 per
tonne. List prices to China and Europe saw slightly lower gains through the
quarter, with pricing to China up US$22 per tonne and pricing to Europe up US$25
per tonne from the first quarter of 2013. Average pulp sales realizations were
up moderately reflecting the improved prices and, to a lesser extent, the
stronger US dollar.
The Company's pulp shipments were broadly in line with the previous quarter,
with the impact of scheduled maintenance outages at the Company's Northwood and
Intercontinental pulp mills offset by a drawdown of inventories. The impact on
costs of the scheduled maintenance outages as well as higher fibre costs,
contributed to higher unit manufacturing costs in the current quarter.
The Company continued to preserve its strong financial position, ending the
quarter with cash and cash equivalents of $172 million, and a net debt to
capitalization of 3.0%.
Commenting on the second quarter performance, Canfor's President and Chief
Executive Officer, Don Kayne, said, "While North American prices showed a sharp
correction after their highs earlier in the year, the second quarter's lumber
results were encouraging and reflect our continued commitment to being a
top-quartile customer-focused supplier of lumber products in global markets. Our
pulp segment again delivered solid results in fairly challenging markets; the
scheduled outages were completed on schedule and set us up well for the balance
of the year."
Looking forward, Kayne said that the Company's Elko and Mackenzie sawmill
upgrades remain on target for completion during the third quarter, and will
allow the Company to continue to capitalize on the improving housing market. He
added that the recent flooding in the south-east area of British Columbia would
adversely impact the profile and costs of logs harvested in this region in the
third quarter. The previously announced phased purchase agreement with Scotch &
Gulf Lumber, LLC is projected to close in August 2013.
North American softwood lumber demand is forecast to continue to increase over
the balance of 2013 as the U.S. housing recovery progresses, driving higher
consumption in both the new home and the repair and remodeling sectors.
Reflecting the decline in North American pricing, export taxes on U.S. shipments
will be 10% in August, with potential for export taxes in September as well.
Offshore shipments are projected to remain strong, reflecting solid construction
activity forecast over the balance of the year. The Canadian market is
anticipated to show modest gains over the same period. NBSK pulp markets are
projected to soften during the seasonally slower third quarter and there exists
a risk of price weakness from new hardwood pulp capacity scheduled to come
online in the second half of the year.
Additional Information and Conference Call
A conference call to discuss the first quarter's financial and operating results
will be held on Friday, July 26, 2013 at 8:00 AM Pacific time. To participate in
the call, please dial 416-340-8018 or Toll-Free 866-223-7781. For instant replay
access until August 9, 2013, please dial 800-408-3053 and enter participant pass
code 5201618#. The conference call will be webcast live and will be available at
www.canfor.com. This news release, the attached financial statements and a
presentation used during the conference call can be accessed via the Company's
website at http://www.canfor.com/investor-relations/webcasts.
Forward Looking Statements
Certain statements in this press release constitute "forward-looking statements"
which involve known and unknown risks, uncertainties and other factors that may
cause actual results to be materially different from any future results,
performance or achievements expressed or implied by such statements. Words such
as "expects", "anticipates", "projects", "intends", "plans", "will", "believes",
"seeks", "estimates", "should", "may", "could", and variations of such words and
similar expressions are intended to identify such forward-looking statements.
These statements are based on management's current expectations and beliefs and
actual events or results may differ materially. There are many factors that
could cause such actual events or results expressed or implied by such
forward-looking statements to differ materially from any future results
expressed or implied by such statements. Forward-looking statements are based on
current expectations and the Company assumes no obligation to update such
information to reflect later events or developments, except as required by law.
Canfor is a leading integrated forest products company based in Vancouver,
British Columbia (BC) with interests in BC, Alberta, Quebec, and North and South
Carolina. The Company produces primarily softwood lumber and also produces
specialized wood products and bleached chemi-thermo mechanical pulp (BCTMP).
Canfor also owns a 50.3% interest in Canfor Pulp Products Inc., which is one of
the largest producers of northern softwood kraft pulp in Canada and a leading
producer of high performance kraft paper. Canfor shares are traded on the
Toronto Stock Exchange under the symbol CFP.
Canfor Corporation
Second Quarter 2013
Management's Discussion and Analysis
This interim Management's Discussion and Analysis ("MD&A") provides a review of
Canfor Corporation's ("Canfor" or "the Company") financial performance for the
quarter ended June 30, 2013 relative to the quarters ended March 31, 2013 and
June 30, 2012, and the financial position of the Company at June 30, 2013. It
should be read in conjunction with Canfor's unaudited interim consolidated
financial statements and accompanying notes for the quarters ended June 30, 2013
and 2012, as well as the 2012 annual MD&A and the 2012 audited consolidated
financial statements and notes thereto, which are included in Canfor's Annual
Report for the year ended December 31, 2012 (available at www.canfor.com). The
financial information in this interim MD&A has been prepared in accordance with
International Financial Reporting Standards ("IFRS"), which is the required
reporting framework for Canadian publicly accountable enterprises.
Throughout this discussion, reference is made to Operating Income before
Amortization which Canfor considers to be a relevant indicator for measuring
trends in the performance of each of its operating segments and the Company's
ability to generate funds to meet its debt repayment and capital expenditure
requirements. Reference is also made to Adjusted Shareholder Net Income (Loss)
(calculated as Shareholder Net Income (Loss) less specific items affecting
comparability with prior periods - for the full calculation, see reconciliation
included in the section "Analysis of Specific Material Items Affecting
Comparability of Shareholder Net Income (Loss)") and Adjusted Shareholder Net
Income (Loss) per Share (calculated as Adjusted Shareholder Net Income (Loss)
divided by the weighted average number of shares outstanding during the period).
Operating Income before Amortization and Adjusted Shareholder Net Income (Loss)
and Adjusted Shareholder Net Income (Loss) per Share are not generally accepted
earnings measures and should not be considered as an alternative to net income
or cash flows as determined in accordance with IFRS. As there is no standardized
method of calculating these measures, Canfor's Operating Income before
Amortization, Adjusted Shareholder Net Income (Loss) and Adjusted Shareholder
Net Income (Loss) per Share may not be directly comparable with similarly titled
measures used by other companies. Reconciliations of Operating Income before
Amortization to operating income (loss) and Adjusted Shareholder Net Income
(Loss) to Net Income (Loss) reported in accordance with IFRS are included in
this MD&A.
Factors that could impact future operations are also discussed. These factors
may be influenced by both known and unknown risks and uncertainties that could
cause the actual results to be materially different from those stated in this
discussion. Factors that could have a material impact on any future oriented
statements made herein include, but are not limited to: general economic, market
and business conditions; product selling prices; raw material and operating
costs; currency exchange rates; interest rates; changes in law and public
policy; the outcome of labour and trade disputes; and opportunities available to
or pursued by Canfor.
All financial references are in millions of Canadian dollars unless otherwise
noted. The information in this report is as at July 25, 2013.
Forward Looking Statements
Certain statements in this MD&A constitute "forward-looking statements" which
involve known and unknown risks, uncertainties and other factors that may cause
actual results to be materially different from any future results, performance
or achievements expressed or implied by such statements. Words such as
"expects", "anticipates", "projects", "intends", "plans", "will", "believes",
"seeks", "estimates", "should", "may", "could", and variations of such words and
similar expressions are intended to identify such forward-looking statements.
These statements are based on management's current expectations and beliefs and
actual events or results may differ materially. There are many factors that
could cause such actual events or results expressed or implied by such
forward-looking statements to differ materially from any future results
expressed or implied by such statements. Forward-looking statements are based on
current expectations and the Company assumes no obligation to update such
information to reflect later events or developments, except as required by law.
SECOND QUARTER 2013 OVERVIEW
Selected Financial Information and Statistics(1)
(millions of Canadian dollars, Q2 Q1 YTD Q2 YTD
except per share amounts) 2013 2013 2013 2012 2012
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Operating income (loss) by
segment:
Lumber $ 115.5 $ 88.4 $ 203.9 $ 18.6 $ (1.7)
Pulp and Paper $ 18.6 $ 18.9 $ 37.5 $ 11.6 $ 22.9
Unallocated and Other(6) $ (5.9) $ (7.3) $ (13.2) $ (7.6) $ (17.0)
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Total operating income $ 128.2 $ 100.0 $ 228.2 $ 22.6 $ 4.2
Add: Amortization $ 49.6 $ 46.9 $ 96.5 $ 43.5 $ 86.1
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Total operating income before
amortization $ 177.8 $ 146.9 $ 324.7 $ 66.1 $ 90.3
Add (deduct):
Working capital movements $ 96.9 $ (94.5) $ 2.4 $ 72.1 $ (4.7)
Defined benefit pension plan
contributions $ (12.6) $ (13.5) $ (26.1) $ (12.7) $ (26.7)
Other operating cash flows,
net(2) $ (1.9) $ 17.1 $ 15.2 $ (8.3) $ 6.5
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Cash from (used in) operating
activities $ 260.2 $ 56.0 $ 316.2 $ 117.2 $ 65.4
Add (deduct):
Finance expenses paid $ (7.5) $ (2.5) $ (10.0) $ (7.4) $ (10.5)
Distributions paid to non-
controlling interests $ (2.1) $ (2.4) $ (4.5) $ (8.2) $ (12.5)
Capital additions, net(3) $ (48.8) $ (46.4) $ (95.2) $ (44.0) $(154.6)
Proceeds from sale of Canfor-
LP OSB(6) $ 76.6 $ - $ 76.6 $ - $ -
Drawdown (repayment) of long-
term debt $ (73.2) $ - $ (73.2) $ - $ 50.1
Other, net $ 0.3 $ 5.6 $ 5.9 $ 16.8 $ 22.7
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Change in cash / operating
loans $ 205.5 $ 10.3 $ 215.8 $ 74.4 $ (39.4)
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ROIC - Consolidated(4) 8.8% 4.8% 13.6% 1.3% (0.1)%
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Average exchange rate (US$ per
C$1.00)(5) $ 0.977 $ 0.991 $ 0.984 $ 0.990 $ 0.994
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Analysis of Specific Material Items Affecting Comparability of Shareholder
Net Income (Loss)(1)
After-tax impact, net of non- Q2 Q1 YTD Q2 YTD
controlling interests 2013 2013 2013 2012 2012
(millions of Canadian dollars,
except per share amounts)
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Shareholder Net Income (Loss) $ 110.3 $ 61.9 $ 172.2 $ 2.6 $ (15.4)
Foreign exchange (gain) loss on
long-term debt and investments,
net $ 1.8 $ 2.3 $ 4.1 $ 2.4 $ (0.3)
(Gain) loss on derivative
financial instruments $ 1.0 $ (2.2) $ (1.2) $ 4.2 $ (0.9)
Canfor's 50% interest in Canfor-
LP OSB's income, net of tax(6) $ 3.8 $ 8.3 $ 12.1 $ - $ -
Gain on completion of sale of
Canfor-LP OSB $ (33.4) $ - $ (33.4) $ - $ -
Change in substantively enacted
tax rate $ 4.2 $ - $ 4.2 $ - $ -
Increase in fair value of ABCP $ - $ - $ - $ - $ (1.1)
Costs related to Tembec
acquisition $ - $ - $ - $ - $ 2.8
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Net impact of above items $ (22.6) $ 8.4 $ (14.2) $ 6.6 $ 0.5
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Adjusted Shareholder Net Income
(Loss) $ 87.7 $ 70.3 $ 158.0 $ 9.2 $ (14.9)
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Shareholder Net Income (Loss)
per share (EPS), as reported $ 0.77 $ 0.43 $ 1.21 $ 0.02 $ (0.11)
Net impact of above items per
share $ (0.16) $ 0.06 $ (0.10) $ 0.05 $ -
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Adjusted Shareholder Net Income
(Loss) per share $ 0.61 $ 0.49 $ 1.11 $ 0.07 $ (0.11)
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(1) Certain prior period amounts have been restated due to the adoption of
amended IAS 19, Employee Benefits and IFRS 11, Joint Arrangements. Further
details can be found in the Company's unaudited interim consolidated
financial statements.
(2) Further information on operating cash flows can be found in the
Company's unaudited interim consolidated financial statements.
(3) Additions to property, plant and equipment include the acquisition of
assets from Tembec Industries Ltd. ("Tembec") in the first quarter of 2012,
and are shown net of amount received under Government funding initiatives in
the pulp and paper segment.
(4) Consolidated Return on Invested Capital ("ROIC") is equal to operating
income/loss, plus realized gains/losses on derivatives, equity income/loss
from joint venture and other income/expense, all net of minority interest,
divided by the average invested capital during the year. Invested capital is
equal to capital assets, plus long-term investments and net non-cash working
capital, all excluding minority interest components.
(5) Source - Bank of Canada (average noon rate for the period).
(6) In accordance with held for sale accounting, the Company did not record
its 50% share of the Canfor-LP OSB Limited Partnership's ("Canfor-LP OSB")
income subsequent to classification as held for sale on December 31, 2012.
The impact on operating income for the second quarter of 2013 was $5.1
million (before tax). The impact on operating income for the six months
ended June 30, 2013 was $16.1 million (before tax). The Company completed
the sale of Canfor-LP OSB on May 31, 2013.
The Company reported operating income of $128.2 million for the second quarter
of 2013, compared to operating income of $100.0 million for the first quarter.
The positive variance reflected improved results in the lumber segment mostly as
a result of increased shipments and, to a lesser extent, lower manufacturing
costs.
After reaching an eight-year high in late March 2013, North American lumber
prices corrected sharply through the second quarter of 2013, mostly due to
supply-related factors including higher operating rates and improved railcar
availability. Unseasonably wet weather in parts of the U.S. tempered residential
construction activity in the second quarter and this was reflected in U.S.
housing starts, down 9% from the first quarter of 2013, averaging 872,000 units
SAAR (seasonally adjusted annual rate). Contributing to the decline in U.S.
housing starts was also a sharp drop in the more volatile multi-family starts,
down 27% in June. Underlying housing demand remains strong with many housing
market indicators continuing to show positive trends. In Canada, steady lumber
consumption in the quarter resulted from Canadian housing starts moving up 6%
from the first quarter of 2013 to 186,000 units SAAR. Offshore demand for
Canfor's lumber remained solid, consistent with the previous quarter.
The average North American benchmark Western Spruce/Pine/Fir ("SPF") 2x4 #2&Btr
price was US$335 per Mfbm, down US$56, or 14%. Despite this and similar declines
in other narrow dimension grades, Canfor's average sales realizations were
largely unchanged from the previous quarter. This reflected more stable offshore
pricing, as well as a higher proportion of North American shipments earlier in
the quarter before a sharp price correction through May and June. Western SPF
lumber sales realizations were also positively impacted by a stronger US dollar,
which moved up 1 cent from the previous quarter. Prices for narrow Southern
Yellow Pine ("SYP") lumber products experienced a similar decline from the
previous quarter, with the benchmark SYP 2x4 #2 average price declining US$60,
or 13%, to US$392 per Mfbm, reversing most of the gain seen in the previous
quarter.
Lumber shipments increased 12%, or 133 million board feet, from the previous
quarter, reflecting higher production as well as the impact of improved railcar
availability following a shortage experienced in the previous quarter. Lumber
production, at just over 1.2 billion board feet, was up 5%, or 55 million board
feet, from the previous quarter, reflecting recently completed capital upgrades
as well as more operating days and additional overtime shifts in the current
quarter. Lumber unit manufacturing costs showed a modest decrease compared to
the previous quarter, reflecting higher production and seasonally lower unit
conversion costs. Log costs remained relatively stable, ahead of an increase in
stumpage anticipated in the third quarter of 2013.
Global softwood pulp markets were slightly improved through the second quarter
of 2013, principally the result of reductions in supply due to spring
maintenance downtime, while shipments were steady in the quarter. Northern
Bleached Softwood Kraft ("NBSK") pulp list prices experienced moderate increases
with the average list price to North America up US$40, or 4%, to US$937 per
tonne. List prices to China and Europe saw slightly lower gains through the
quarter, with pricing to China up US$22 per tonne and pricing to Europe up US$25
per tonne from the first quarter of 2013. Average pulp sales realizations were
up moderately reflecting the improved prices and, to a lesser extent, the
stronger US dollar.
The Company's pulp shipments were broadly in line with the previous quarter,
with the impact of scheduled maintenance outages at the Company's Northwood and
Intercontinental pulp mills offset by a drawdown of inventories. The impact on
costs of the scheduled maintenance outages as well as higher fibre costs,
contributed to higher unit manufacturing costs in the current quarter.
Compared to the second quarter of 2012, operating income was up $105.6 million,
with an increase of $96.9 million in the lumber segment reflecting higher market
prices and increased shipments partially offset by increased unit manufacturing
costs. Contributing to improved results was a positive variance for the pulp and
paper segment, due to increased pulp shipments and lower unit manufacturing
costs, primarily the result of less scheduled and unscheduled downtime.
OPERATING RESULTS BY BUSINESS SEGMENT
Lumber
Selected Financial Information and Statistics - Lumber(7)
(millions of Canadian dollars Q2 Q1 YTD Q2 YTD
unless otherwise noted) 2013 2013 2013 2012 2012
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Sales $ 586.8 $ 542.3 $1,129.1 $ 443.5 $ 787.2
Operating income before
amortization $ 145.4 $ 115.7 $ 261.1 $ 45.1 $ 48.0
Operating income (loss) $ 115.5 $ 88.4 $ 203.9 $ 18.6 $ (1.7)
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Negative (positive) impact of
inventory valuation
adjustments(8) $ - $ - $ - $ (2.9) $ (13.1)
Costs related to Tembec
acquisition $ - $ - $ - $ - $ 2.5
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Operating income (loss)
excluding impact of
inventory valuation
adjustments and unusual
items $ 115.5 $ 88.4 $ 203.9 $ 15.7 $ (12.3)
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Average SPF 2x4 #2&Btr lumber
price in US$(9) $ 335 $ 391 $ 363 $ 295 $ 281
Average SPF price in Cdn$ $ 343 $ 395 $ 369 $ 298 $ 283
Average SYP 2x4 #2 lumber
price in US$(10) $ 392 $ 452 $ 422 $ 325 $ 312
Average SYP price in Cdn$ $ 401 $ 456 $ 429 $ 328 $ 314
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U.S. housing starts (thousand
units SAAR)(11) 872 957 915 741 728
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Production - SPF lumber
(MMfbm) 1,119.1 1,065.1 2,184.2 994.4 1,898.1
Production - SYP lumber
(MMfbm) 135.2 134.7 269.9 124.4 238.7
Shipments - SPF lumber
(MMfbm)(12) 1,118.2 1,004.2 2,122.4 1,008.3 1,860.6
Shipments - SYP lumber
(MMfbm)(12) 142.6 123.3 265.9 135.0 252.6
Shipments - wholesale lumber
(MMfbm) 6.8 7.1 13.9 14.3 38.8
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(7) Certain prior period amounts have been restated due to the adoption of
amended IAS 19, Employee Benefits and IFRS 11, Joint Arrangements. Further
details can be found in the Company's unaudited interim consolidated
financial statements.
(8) In accordance with IFRS, Canfor records its log and finished product
inventories at the lower of cost and net realizable value ("NRV"). Changes
in inventory volumes, market prices, foreign exchange rates and costs over
the respective reporting periods can all affect inventory valuation
adjustments, if any, required at each period end.
(9) Western Spruce/Pine/Fir, per thousand board feet (Source - Random
Lengths Publications, Inc.).
(10) Southern Yellow Pine, Eastside, per thousand board feet (Source -
Random Lengths Publications, Inc.).
(11) Source - U.S. Census Bureau, seasonally adjusted annual rate ("SAAR").
(12) Canfor-produced lumber, including lumber purchased for remanufacture.
Overview
Operating income for the lumber segment was $115.5 million for the second
quarter of 2013, an increase of $27.1 million compared to operating income of
$88.4 million in the previous quarter, and a $96.9 million improvement from
operating income of $18.6 million reported for the second quarter of 2012.
The stronger results compared to the previous quarter were largely the result of
a 12% increase in shipments reflecting both higher production and improved
railcar availability. Sales realizations were broadly in line with the first
quarter of 2013. Overall unit manufacturing costs were down slightly compared to
the first quarter of 2013.
The improvement in operating income compared to the second quarter of 2012
reflected higher market prices, no export tax and increased shipments. These
gains were partially offset by a significant increase in unit log costs
resulting from market-driven stumpage and, to a lesser degree, increased unit
cash conversion costs reflecting the Company's re-started Radium mill coupled
with ongoing dust control initiatives in the current quarter.
Markets
During the second quarter of 2013, lumber prices receded after reaching an
eight-year high in late March 2013. The decline in prices principally reflected
an increase in North American production output, coupled with increased supply
resulting from railcar availability following a shortage in the first quarter of
2013, while demand was constrained by the adverse spring weather which delayed
residential construction activities in the U.S. Housing data reflected the
delays, with U.S. housing starts averaging 872,000 units(13) SAAR, down 9% from
the first quarter, but well up (18%) from the same period last year.
Contributing to the decline in U.S. housing starts was also a sharp drop in the
more volatile multi-family starts, down 27% in June. Single-family starts, which
consume a larger proportion of lumber, were 593,000 units(13) SAAR in the second
quarter of 2013, a 6% decrease from the previous quarter. Underlining housing
demand remains strong, with improving new home sales and rising housing prices,
indicating home buyers' renewed interest and confidence in the housing market.
In Canada, steady lumber consumption throughout the quarter resulted from a 6%
increase in Canadian housing starts from the first quarter of 2013, to 186,000
units(14) SAAR in the second quarter of 2013. Compared to the same quarter in
2012, housing starts were lower by 19% reflecting a slowdown in construction
activity in several regions of the country.
The Company's offshore lumber shipments were relatively unchanged from the
previous quarter and similar to the second quarter of 2012, but prices were up
in both China and Japan markets.
Sales
Sales for the lumber segment for the second quarter of 2013 were $586.8 million,
compared to $542.3 million in the previous quarter and $443.5 million in the
second quarter of 2012. The increase from the previous period reflected
increased production as well as the impact of improved railcar availability
following a shortage in the first quarter of 2013. Current sales also reflected
seasonally lower log sales compared to the previous quarter.
Total shipments in the second quarter of 2013 were over 1.2 billion board feet,
up 12% from the previous quarter, and up 10% from the second quarter of 2012.
The increase reflects higher production from various capital upgrades and other
efficiency improvements, as well as the effect of the restart of the Radium mill
at the end of 2012.
Sales realizations were largely unchanged from the previous quarter, with
reduced pricing in North America being offset by the impact of more stable
offshore pricing as well as less marked quarter-over-quarter decreases in other
grades such as machine stress rated ("MSR") and stud grades. For sales to North
America, the average Random Lengths Western SPF 2x4 #2&Btr lumber price moved
down US$56 per Mfbm (or 14%) to US$335 per Mfbm. Also contributing to sales
realizations was a higher proportion of shipments earlier in the quarter before
a sharp price correction through May and June. Prices for narrow SYP products
experienced a similar drop from the first quarter of 2013, with the benchmark
SYP 2x4 #2 average price down US$60, or 13%, to US$392 per Mfbm, reversing most
of the gain seen in the previous quarter.
(13) U.S. Census Bureau
(14) CMHC - Canada Mortgage and Housing Corporation
Compared to the second quarter of 2012, the benchmark North American Random
Lengths Western SPF 2x4 #2&Btr price was up US$40 per Mfbm, or 14%, with solid
pricing gains also seen in most other products. Current quarter sales
realizations also benefitted from a higher-value sales mix. More notable
increases were seen for offshore sales realizations, reflecting solid demand.
SYP products realized stronger gains, with the benchmark SYP 2X4 #2 price up
US$67 per Mfbm, or 21%. Sales realizations also benefited significantly from
zero export tax in the current quarter compared to 13% in the comparative
period.
The average value of the Canadian dollar compared to the US dollar in the second
quarter was down 1 cent, or 1%, from both comparative periods, benefitting
current quarter sales realizations.
Total residual fibre revenue was up from the first quarter of 2013, primarily
reflecting higher shipments of sawmill residual chips coupled with a moderate
increase in sawmill residual chip prices tied to higher NBSK pulp sales
realizations and other seasonal factors. Compared to the second quarter of 2012,
total residual fibre revenue was also up, with higher shipments of sawmill
residual chips, partially offset by reduced residual chip prices due to chip
price reductions in certain regions.
Operations
Lumber production, at over 1.2 billion board feet, was up 5% from the previous
quarter, reflecting capital project ramp-ups in the previous periods as well as
more operating days and additional overtime shifts in the current quarter.
Lumber production was also up 12% from the second quarter of 2012. The increase
compared to the same period in 2012 largely reflected the restart of the Radium
mill in late 2012 as well as continued productivity improvements from various
capital projects undertaken in 2012.
Overall, the Company's unit lumber manufacturing costs were down slightly
compared to the previous quarter, with reductions in unit cash conversions costs
more than offsetting a small increase in unit log costs. The improvement in cash
conversion costs largely reflected the higher production levels in the current
quarter and seasonally lower energy costs. Log costs remained relatively stable
in the current quarter, reflecting seasonally lower logging activity, ahead of
an increase in stumpage for the third quarter of 2013.
Compared to the second quarter of 2012, unit manufacturing costs were well up,
principally the result of significant increases in unit log costs largely
impacted by market-price related stumpage increases, and to a lesser degree, a
small increase in unit cash conversion costs attributable to the re-start of the
Radium mill and ongoing dust control initiatives in the current quarter.
Pulp and Paper
Selected Financial Information and Statistics - Pulp and Paper(15, 16)
(millions of Canadian dollars unless Q2 Q1 YTD Q2 YTD
otherwise noted) 2013 2013 2013 2012 2012
----------------------------------------------------------------------------
Sales $ 255.5 $ 243.5 $ 499.0 $ 239.4 $ 488.8
Operating income before amortization $ 38.0 $ 38.3 $ 76.3 $ 26.7 $ 55.7
Operating income $ 18.6 $ 18.9 $ 37.5 $ 11.6 $ 22.9
----------------------------------------------------------------------------
Average pulp price delivered to U.S.
- US$(17) $ 937 $ 897 $ 917 $ 900 $ 885
Average price in Cdn$ $ 959 $ 905 $ 932 $ 909 $ 890
----------------------------------------------------------------------------
Production - pulp (000 mt) 301.6 317.0 618.6 263.1 579.0
Production - paper (000 mt) 35.3 34.8 70.1 30.0 62.9
Shipments -pulp (000 mt) 307.8 308.2 616.0 282.1 609.9
Shipments - paper (000 mt) 37.2 35.0 72.2 36.8 66.4
----------------------------------------------------------------------------
(15) Certain prior period amounts have been restated due to the adoption of
amended IAS 19, Employee Benefits. Further details can be found in the
Company's unaudited interim consolidated financial statements.
(16) Includes the Taylor pulp mill and 100% of Canfor Pulp Products Inc.,
which is consolidated in Canfor's results. Pulp production and shipment
volumes presented are for both NBSK and bleached chemi-thermo mechanical
pulp ("BCTMP").
(17) Per tonne, NBSK pulp list price delivered to U.S. (Resource Information
Systems, Inc.).
Overview
Operating income for the pulp and paper segment was $18.6 million for the second
quarter of 2013, in line with the previous quarter, and $7.0 million up from the
second quarter of 2012.
Improved pulp and paper segment results compared to the previous quarter
reflected improved sales realizations, offset in part by higher unit
manufacturing costs. NBSK pulp sales realizations increased moderately from the
first quarter of 2013 reflecting the previously mentioned price increases and
the benefit of a further weakening of the Canadian dollar against the US dollar,
which was down 1%. Contributing to improved sales realizations was also
decreased volumes into lower-margin regions, principally China. Results in the
current quarter were impacted by the scheduled maintenance outages at the
Northwood and Intercontinental Pulp Mills, which resulted in lower production
levels and higher unit manufacturing costs compared to the previous quarter.
Included in the previous quarters' results was a $1.5 million non-cash benefit
from scientific research and development tax credits.
Compared to the second quarter of 2012, higher operating earnings in the current
period reflected increased shipments coupled with lower unit manufacturing
costs. NBSK pulp sales realizations were broadly in line with the same period in
2012, with increased volume to lower-margin regions, principally China, offset
in part by an increase in NBSK pulp list prices to all regions and a weaker
average Canadian dollar. Production levels in the current quarter were up 15%
compared to the same period in 2012 largely due to an unscheduled shutdown at
the Northwood Pulp Mill in the comparative period. Lower unit manufacturing
costs for the most part reflected the absence of unscheduled outages in the
current quarter and to a lesser extent improved productivity. Partially
offsetting the reduced manufacturing costs were higher fibre costs, reflecting
the increase in sawmill residual chips market prices (linked to NBSK market pulp
prices). Other contributing factors included an accrual of $3.7 million recorded
in the second quarter of 2012 for an anticipated business interruption insurance
recovery related to the Northwood Pulp Mill shutdown.
Markets
Global softwood pulp markets improved slightly through the second quarter of
2013, principally the result of industry reductions in supply due to annual
spring maintenance downtime, while shipments were steady in the quarter. Global
softwood pulp producer inventory levels were balanced during the current quarter
decreasing to 28 days supply in June 2013, from 29 days in March 2013(18).
Market conditions are generally considered balanced when inventories are in the
27-30 days of supply range.
PPPC(19) statistics reported an increase in bleached softwood sulphate pulp
shipments of 2.1% for the first half of 2013 compared to the same period in
2012. Improved shipments to North America and Europe were partially offset by
moderated demand from China. Looking ahead, global softwood pulp markets are
projected to soften heading into the seasonally slow summer months as producers
ramp-up production after the spring maintenance period.
Sales
The Company's pulp shipments in the second quarter of 2013 were 308,000 tonnes,
in line with the previous quarter, mostly due to the scheduled maintenance
outages which were offset by reductions in inventory levels. Compared to the
second quarter of 2012, shipments were up 26,000 tonnes, or 9%, mostly
reflecting the unscheduled shutdown at the Northwood Pulp Mill in the
comparative period. In the second quarter of 2013, a scheduled maintenance
outage was completed at the Intercontinental Pulp Mill, and an extended
maintenance outage was commenced at the Northwood Pulp Mill.
Average NBSK pulp list prices increased in all regions moving up US$20 to US$40
per tonne reflecting reduced supply due to spring maintenance and to a lesser
extent, improving demand. The NBSK pulp list price to North America averaged
US$937 per tonne for the quarter, up US$40, or 4%, from the previous quarter.
The North American market continued to experience increased pressure on
discounts during the second quarter of 2013. List prices to China and Europe saw
more modest price increases in the quarter, with list prices to China up US$22
per tonne and to Europe up US$25 per tonne. Current quarter NBSK sales
realizations increased moderately as a result of the previously mentioned price
increases and a weakening of the Canadian dollar against the US dollar, which
was down 1% compared to the previous quarter. Contributing to improved sales
realizations was also decreased volumes into lower-margin regions, principally
China. Bleached chemi-thermo mechanical pulp ("BCTMP") average sales
realizations showed a marginal increase compared to the previous quarter, but
prices came under pressure as the quarter progressed.
(18) World 20 data is based on twenty producing countries representing 80% of
world chemical market pulp capacity and is based on information compiled and
prepared by the PPPC.
(19) As reported by Pulp and Paper Products Council ("PPPC") statistics.
Compared to the second quarter of 2012, pulp sales realizations were relatively
unchanged, with a 4% gain in the average NBSK pulp list price to North America
offset by increased volume to lower-margin regions, principally China. The North
America average NBSK pulp list price increased US$37 per tonne from the previous
quarter, while NBSK pulp list price movements to China and Europe were more
modest, increasing US$10 and $US20 per tonne, respectively. Realizations were
favourably impacted by the 1% weaker average Canadian dollar compared to the
second quarter of 2012. Sales realizations in the second quarter of 2012 also
included the accrual of $3.7 million for anticipated business interruption
insurance recovery related to the Northwood Pulp Mill shutdown. BCTMP sales
realizations experienced modest decreases compared to the second quarter of
2012, principally reflecting lower market pricing, offset in part by the weaker
Canadian dollar.
Operations
Pulp production in the current quarter was 301,600 tonnes, down 15,400 tonnes,
or 5%, from the previous quarter, and up 38,500 tonnes, or 15%, compared to the
second quarter of 2012.
Production in the current quarter reflected scheduled maintenance outages at the
Northwood and Intercontinental Pulp Mills and overall improved operating rates
compared to both prior periods. The maintenance outage at the Intercontinental
Pulp Mill reduced market pulp production by 6,000 tonnes, while the maintenance
outage at the Northwood Pulp Mill reduced market pulp production by 11,500
tonnes in the second quarter. The outage at the Northwood Pulp Mill was
completed early in the third quarter and included upgrades to the Mill's largest
recovery boiler. The Company's BCTMP Taylor Pulp Mill also took a six day
scheduled maintenance shutdown in the current quarter. In the second quarter of
2012, production levels included the scheduled maintenance outages at the
Intercontinental Pulp Mill and the Prince George Pulp Mill, which reduced market
pulp production by 18,000 tonnes and the unscheduled shutdown at the Northwood
Pulp Mill which reduced market pulp production by 31,000 tonnes. Excluding the
impact of scheduled and unscheduled outages, production was up 3,000 tonnes
reflecting improved productivity.
Pulp unit manufacturing costs increased moderately from the previous quarter,
reflecting the lower production levels in the quarter, as well as higher costs
relating to the scheduled maintenance outages. Fibre costs showed a moderate
increase compared to the previous quarter, as a result of higher-cost sawmill
residual chips, where prices are linked to NBSK pulp sales realizations and
other seasonal factors. Partially offsetting these increased costs were lower
energy costs due to seasonally lower usage in the current quarter.
Compared to the second quarter of 2012, unit manufacturing costs decreased
moderately, primarily reflecting the impact of higher production levels in the
current quarter and reduced chemical costs, partially offset by an increase in
energy costs. Fibre costs saw a moderate increase, largely as a result of an
increase in usage and prices of higher-cost whole log chips and to a lesser
extent, increased prices for sawmill residual chips (linked to NBSK market pulp
prices).
Unallocated and Other Items
Selected Financial Information(20)
Q2 Q1 YTD Q2 YTD
(millions of Canadian dollars) 2013 2013 2013 2012 2012
----------------------------------------------------------------------------
Operating income (loss) of
Panels operations(21) $ (0.6) $ (0.7) $ (1.3) $ (0.9) $ (2.4)
Corporate costs $ (5.3) $ (6.6) $ (11.9) $ (6.7) $ (14.6)
Finance expense, net $ (6.3) $ (8.8) $ (15.1) $ (8.4) $ (17.0)
Foreign exchange gain (loss) on
long-term debt and
investments, net $ (4.0) $ (3.8) $ (7.8) $ (3.8) $ 0.2
Gain (loss) on derivative
financial instruments $ (2.7) $ 3.3 $ 0.6 $ (6.3) $ 1.1
Gain on sale of Canfor-LP OSB
joint venture $ 38.3 $ - $ 38.3 $ - $ -
Other income (expense), net $ 6.8 $ 1.7 $ 8.5 $ 5.5 $ 2.0
----------------------------------------------------------------------------
(20) Certain prior period amounts have been restated due to the adoption of
amended IAS 19, Employee Benefits and IFRS 11, Joint Arrangements. Further
details can be found in the Company's unaudited interim consolidated
financial statements.
(21) The Panels operations include the Company's PolarBoard OSB plant, which
is currently indefinitely idled and its Tackama plywood plant, which was
closed in January 2012.
Corporate costs were $5.3 million for the second quarter of 2013, down $1.3
million from the previous quarter and down $1.4 million from the second quarter
of 2012, in part reflecting lower share-based and incentive compensation
expense. The reduction compared to the same quarter of 2012 also reflected
continued synergies from the integration of certain operating functions with
those of Canfor Pulp.
Net finance expense for the second quarter of 2013 was $6.3 million, down $2.5
million from the previous quarter, reflecting lower borrowing levels in the
current quarter. The previous quarter finance expenses also included refinancing
costs incurred to extend the maturity of the Company's principal operating loan
facility. Compared to the second quarter of 2012, finance expense was down $2.1
million, reflecting the lower debt level through the quarter and lower accretion
expense on the asset retirement obligations due to increased interest rates. Net
finance expense for the 2012 periods has been restated for adoption of amended
IAS 19, Employee Benefits, as further discussed in the "Changes in Accounting
Policies" section later in this document.
The Company recorded a foreign exchange translation loss on its US dollar
denominated debt of $4.0 million for the second quarter of 2013, as a result of
the weakening of the Canadian dollar against the US dollar, with the closing
quarter end exchange rate falling 4% from the rate at the end of the first
quarter. In the first quarter of 2013 and the second quarter of 2012, the
Company recorded a translation loss of $3.8 million, also reflecting the
weakening of the Canadian dollar over those periods.
The Company uses a variety of derivative financial instruments as partial
economic hedges against unfavourable changes in foreign exchange rates, energy
costs, lumber prices and interest rates. For the second quarter of 2013, the
Company recorded a net loss of $2.7 million related to derivative financial
instruments, largely reflecting unrealized losses on the US dollar collars
related to the weakening of the Canadian dollar, offset in part by gains on
lumber futures and interest rate swaps.
The following table summarizes the gains (losses) on derivative financial
instruments for the comparable periods:
(millions of Canadian Q2 Q1 YTD Q2 YTD
dollars) 2013 2013 2013 2012 2012
----------------------------------------------------------------------------
Foreign exchange collars
and forward contracts $ (5.4) $ 1.4 $ (4.0) $ (2.5) $ 0.4
Energy derivatives $ (0.3) $ 0.1 $ (0.2) $ (1.8) $ (0.6)
Lumber futures $ 1.4 $ 2.2 $ 3.6 $ (0.4) $ 2.6
Interest rate swaps $ 1.6 $ (0.4) $ 1.2 $ (1.6) $ (1.3)
----------------------------------------------------------------------------
$ (2.7) $ 3.3 $ 0.6 $ (6.3) $ 1.1
----------------------------------------------------------------------------
Other income, net for the second quarter of 2013 included a $1.2 million
positive fair value adjustment related to a royalty agreement associated with
the 2010 sale of the operating assets of Howe Sound Pulp and Paper Limited
Partnership compared to smaller fair value adjustments in the comparative
periods. Contributing to other income in the second quarter of 2013 were
favourable exchange movements on US dollar denominated cash, receivables and
payables of Canadian operations of $3.2 million, compared to $1.4 million in the
previous quarter and $1.7 million in the second quarter of 2012.
Effective January 1, 2013, the Company adopted IFRS 11, Joint Arrangements,
which impacted the accounting for the Company's 50% interest in Canfor-LP OSB
Limited Partnership ("Canfor-LP OSB"). Canfor-LP OSB was previously accounted
for using the proportionate consolidation method and under the new Standard was
accounted for using the equity method. The comparative periods have been
restated to reflect the change. For the 2012 periods, Canfor-LP OSB's results
are included below operating income as Other Income, with equity income of $3.1
million for the second quarter of 2012. Due to held for sale IFRS accounting
requirements, equity income (comprising operating income) from the joint venture
of $5.1 million and $16.1 million for the three months and six months ended June
30, 2013, respectively, has not been recognized in the Company's operating
income. The sale was completed during the quarter and is further discussed in
the "Sale of Peace Valley OSB Joint Venture" section later in this document.
Other Comprehensive Income (Loss)
The following table summarizes Canfor's Other Comprehensive Income (Loss)
for the comparable periods(22):
Q2 Q1 YTD Q2 YTD
(millions of Canadian dollars) 2013 2013 2013 2012 2012
----------------------------------------------------------------------------
Foreign exchange translation
differences for foreign
operations $ 9.1 $ 3.5 $ 12.6 $ 4.1 $ 0.5
Defined benefit actuarial gains
(losses), net of tax $ 28.4 $ 5.8 $ 34.2 $ (20.7) $ (24.0)
----------------------------------------------------------------------------
Other comprehensive income (loss),
net of tax $ 37.5 $ 9.3 $ 46.8 $ (16.6) $ (23.5)
----------------------------------------------------------------------------
(22) Certain prior period amounts have been restated due to the adoption of
amended IAS 19, Employee Benefits. Further details can be found in the
Company's unaudited interim consolidated financial statements.
In the second quarter of 2013, the Company recorded an after-tax credit to the
statements of other comprehensive income (loss) of $28.4 million in relation to
changes in the valuation of its defined benefit post-employment compensation
plans. The gain principally reflects a higher discount rate used to value the
net defined benefit obligation offset slightly by a lower year-to-date return on
plan assets than the prior quarter. In the previous quarter, a credit of $5.8
million (after-tax) was recorded, while an after-tax charge of $20.7 million was
recorded in the second quarter of 2012.
In addition, the Company recorded $9.1 million of other comprehensive income in
the quarter for foreign exchange differences for foreign operations, reflecting
the weakening of the Canadian dollar by 4% over the quarter. The Canadian dollar
also weakened over the comparative periods, resulting in other comprehensive
income of $3.5 million and $4.1 million, related to foreign exchange differences
for foreign operations in the first quarter of 2013 and second quarter of 2012,
respectively.
SUMMARY OF FINANCIAL POSITION
The following table summarizes Canfor's cash flow and selected ratios for
and as at the end of the following periods(23):
(millions of Canadian dollars, Q2 Q1 YTD Q2 YTD
except for ratios) 2013 2013 2013 2012 2012
----------------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents $ 165.5 $ 23.3 $ 188.8 $ (2.6) $ (22.4)
Operating activities $ 260.2 $ 56.0 $ 316.2 $ 117.2 $ 65.4
Financing activities $(122.8) $ 8.1 $(114.7) $ (92.6) $ 44.4
Investing activities $ 28.1 $ (40.8) $ (12.7) $ (27.2) $(132.2)
Ratio of current assets to
current liabilities 1.8:1 1.4:1
Net debt to capitalization 3.0% 18.9%
ROIC - Consolidated 8.8% 4.8% 13.6% 1.4% (0.1)%
ROCE - Canfor solid wood
business(24) 7.0% 5.6% 12.6% 0.2% (1.4)%
----------------------------------------------------------------------------
(23) Certain prior period amounts have been restated due to the adoption of
IFRS 11, Joint Arrangements. Further details can be found in the Company's
unaudited interim consolidated financial statements.
(24) Return on Capital Employed ("ROCE") for the Canfor solid wood business
represents consolidated ROCE adjusted to remove the Company's interest in
Canfor-LP OSB and pulp and paper operations, including Canfor Pulp and the
Taylor pulp mill. Consolidated ROCE is equal to shareholder net income for
the period plus finance expense, after tax, divided by the average capital
employed during the period (which consists of current and long-term debt and
operating loans, and shareholders' equity, less cash and temporary
investments).
Changes in Financial Position
Cash generated from operating activities was $260.2 million in the second
quarter of 2013, compared to cash generated of $56.0 million in the previous
quarter and $117.2 million in the same quarter of 2012. The significant drawdown
of logs during the Canadian spring break-up period had a significant positive
cash flow impact in the second quarter, in contrast to the cash used in the
previous quarter in the related inventory build-up, while higher cash earnings
in the current quarter also had a positive impact. Partially offsetting these
gains was an increase in prepaids in part due to property tax payments made at
the end of the second quarter and seasonally higher reforestation-related
payments. Compared to the second quarter of 2012, the increase in cash generated
from operating activities reflects higher cash earnings and improved working
capital movements.
Financing activities used cash of $122.8 million in the current quarter,
compared to cash generated of $8.1 million in the previous quarter and cash used
of $92.6 million in the second quarter of 2012. During the quarter, the Company
repaid its US$75 million 5.42% term debt and repaid its $40.0 million
outstanding operating loans, while the first quarter included a draw of $13.0
million on the Company's operating loan. Included in the current quarter
financing activities was net proceeds of $3.1 million from new long-term debt
(see further discussion in the "Liquidity and Financial Requirements" section
later in this document). Finance expenses paid in the current quarter were $7.5
million, up $5.0 million from the previous quarter and down slightly from the
second quarter of 2012, principally reflecting the timing of scheduled interest
payments on long-term debt. Cash distributions to non-controlling interests were
$2.1 million, in line with the previous quarter and down $6.1 million from the
second quarter of 2012.
Investing activities generated cash of $28.1 million in the second quarter of
2013, compared to cash used of $40.8 million in the previous quarter and $27.2
million in the same quarter in 2012. The largest contributor to cash generated
from investing activities in the quarter was $76.6 million in proceeds from the
sale of the Company's 50% share in Canfor-LP OSB joint venture (see further
discussion in the "Sale of Peace Valley OSB Joint Venture" section later in this
document). Cash used for capital additions was $48.8 million, up $2.4 million
from the previous quarter, and up $4.4 million from the second quarter of 2012.
Capital additions for lumber operations in the current quarter included upgrades
at the Company's Elko, Mackenzie and Conway sawmills. In the pulp segment,
current quarter capital expenditures of $8.7 million largely related to the
turbine upgrades at the Company's Northwood Pulp Mill planned for later in 2013,
upgrades to the recovery boiler at the Northwood Pulp Mill and the
turbo-generator at the Intercontinental Pulp Mill, as well as maintenance
capital related to the outages.
Investing cash flows in the current quarter included $9.5 million in
distributions received from the Canfor-LP OSB joint venture, compared to $7.0
million received in the previous quarter and $2.0 million received in the same
quarter of the previous year. Cash used for investing activities in the current
quarter also included share repurchases of $11.3 million (see further discussion
of the shares repurchased under the Normal Course Issuer Bid in the "Liquidity
and Financial Requirements" section later in this document). The second quarter
of 2012 cash flows included $12.9 million in net proceeds realized on the sale
of the Company's asset-backed commercial paper.
Liquidity and Financial Requirements
At June 30, 2013, the Company on a consolidated basis had cash of $171.7 million
and operating loan facilities of $467.5 million which were unused, except for
$27.1 million reserved for several standby letters of credit.
During the second quarter of 2013, the Company obtained $3.1 million in net
financing with interest rates between 1.0% and 2.0% related to specific capital
projects at its U.S. sawmills.
The Company and Canfor Pulp remained in compliance with the covenants relating
to their operating loans and long-term debt during the quarter, and expect to
remain so for the foreseeable future.
Canfor Pulp has US$110.0 million of term debt that is scheduled for repayment on
November 30, 2013. Canfor's $100.0 million term debt is scheduled for repayment
on February 13, 2017.
The Company's consolidated net debt to total capitalization at the end of the
second quarter of 2013 was 3.0%. For Canfor, excluding Canfor Pulp, net debt to
capitalization at the end of the second quarter was (1.8)%, reflecting the net
positive cash position.
On March 5, 2013, the Company commenced a normal course issuer bid whereby it
can purchase for cancellation up to 7,137,621 common shares or approximately 5%
of its issued and outstanding common shares. The normal course issuer bid may
continue until March 4, 2014. During the second quarter of 2013, Canfor
purchased 763,538 common shares for $14.4 million, of which $10.3 million was
paid in cash in the period. Also during the quarter, CPPI repurchased shares
from non-controlling shareholders increasing Canfor's ownership of CPPI from
50.2% to 50.3%.
Sale of Canfor-LP OSB Joint Venture
On May 31, 2013, the Company completed the sale of its 50% share in Canfor-LP
OSB, which owns the Peace Valley OSB mill, to Louisiana-Pacific Corporation
("LP") for cash proceeds of $77.9 million including working capital, of which
$1.3 million was received subsequent to June 30, 2013. On completion of the
sale, LP became the sole owner of the Peace Valley OSB mill. As part of the
sale, Canfor may receive additional annual consideration over a 3 year period,
starting June 1, 2013, based on Peace Valley OSB's annual adjusted earnings
before interest, tax, depreciation and amortization. An asset in the amount of
$19.0 million has been recorded based on the fair value of the estimated
additional annual consideration, based on the forecast future adjusted earnings
before interest, tax, depreciation and amortization of the Peace Valley OSB
mill. The asset will be adjusted each reporting period with gains and losses
recorded to Other Income.
In accordance with IFRS 5, Non-current Assets Held for Sale and Discontinued
Operations, upon classification of the investment as held for sale at December
31, 2012, the Company ceased the equity method of accounting. As such, Canfor's
$5.1 million and $16.1 million share of Canfor-LP OSB's operating income for the
three and six months ended June 30, 2013, respectively, was not recognized in
operating income in those periods.
A pre-tax gain on sale of $38.3 million was recorded in the current quarter
which includes recognition of Canfor's share of the operating income for the
first half of 2013. The Company recorded a tax expense of $4.8 million related
to the sale.
Agreement with Scotch & Gulf Lumber, LLC
In May 2013, the Company entered into a phased purchase agreement with Scotch &
Gulf Lumber, LLC ("Scotch Gulf"). The transaction will involve the phased
purchase by Canfor of Scotch Gulf over a 3 year period, at an aggregate purchase
price, excluding working capital, of $80 million. Canfor's initial 25% interest
will increase over the 3 year period to 50% after eighteen months and 100% at
the end of the term. The transaction is subject to standard closing conditions
and is currently scheduled to close in the third quarter of 2013.
Canfor's Collective Agreement with the United Steelworkers (USW)
Canfor's collective labour agreement with the USW expired on June 30, 2013. The
Company is currently in discussions with the USW.
OUTLOOK
Lumber
North American softwood lumber demand is forecast to continue to increase over
the balance of 2013 as the U.S. housing recovery progresses, driving higher
consumption in both the new home and the repair and remodeling sectors.
Reflecting the decline in North American pricing, export taxes on U.S. shipments
will be 10% in August, with potential for export taxes in September as well.
Offshore shipments are projected to remain strong, reflecting solid construction
activity forecast over the balance of the year. The Canadian market is
anticipated to show modest gains over the same period.
Pulp and Paper
NBSK pulp markets are projected to soften during the seasonally slower third
quarter of 2013 and there exists a risk of price weakness from new hardwood pulp
capacity scheduled to come online in the second half of the year. Producer
inventories are forecast to rise modestly given minimal scheduled maintenance
downtime historically taken by producers during the summer months.
OUTSTANDING SHARES
At July 25, 2013, there were 141,988,893 common shares outstanding.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with International
Financial Reporting Standards requires management to make estimates and
assumptions that affect the amounts recorded in the financial statements. On an
ongoing basis, management reviews its estimates, including those related to
useful lives for amortization, impairment of long-lived assets, certain accounts
receivable, pension and other employee future benefit plans and asset retirement
and deferred reforestation obligations based upon currently available
information. While it is reasonably possible that circumstances may arise which
cause actual results to differ from these estimates, management does not believe
it is likely that any such differences will materially affect the Company's
financial condition.
CHANGES IN ACCOUNTING POLICIES
The Company has adopted the following new and revised standards, along with any
consequential amendments, effective January 1, 2013. These changes were made in
accordance with the applicable transitional provisions.
-- The Company adopted IFRS 11, Joint Arrangements, which redefines joint
operations and joint ventures with a focus on the rights and obligations
of an arrangement, rather than its legal form. Under the new Standard,
joint ventures are accounted for using the equity method accounting as
set out in IAS 28, Investments in Associates and Joint Ventures, whereas
for a joint operation the venturer will recognize its share of the
assets, liabilities, revenue and expenses of the joint operations.
Canfor's 50% interest in the Canfor-LP OSB Limited Partnership ("Canfor-
LP OSB") was classified as a joint venture and accounted for using the
equity method. The Company has restated its comparative period results
for adoption of IFRS 11. Further details can be found in Note 13 to the
Company's unaudited interim consolidated financial statements.
-- The Company adopted the amended IAS 19, Employee Benefits which changes
the recognition and measurement of defined benefit pension expense and
termination benefits and enhances the disclosure of all employee
benefits. Pension benefit cost is split between (i) the cost of benefits
accrued in the current period (service cost) and benefit changes (past-
service costs (including plan amendments, settlements and
curtailments)); and (ii) finance expense or income. Interest cost and
expected return on plan assets, which previously reflected different
rates, has been replaced with a net interest amount that is calculated
by applying one discount rate to the net defined benefit liability
(asset). The Company has restated its comparative period results for
adoption of amended IAS 19. Further details can be found in Note 13 to
the Company's unaudited interim consolidated financial statements.
-- The Company also adopted IFRS 10, Consolidated Financial Statements,
IFRS 13, Fair Value Measurement, and IAS 1, Presentation of Financial
Statements, effective January 1, 2013. These Standards did not result in
material impacts on the amounts recorded in the financial statements of
Canfor.
ACCOUNTING STANDARDS ISSUED AND NOT APPLIED
In May 2011, the International Accounting Standards Board ("IASB") issued IFRS
9, Financial Instruments, which is effective for annual periods beginning on or
after January 1, 2015, with early adoption permitted. IFRS 9 is not expected to
have a material impact on amounts recorded in the financial statements of
Canfor.
Further details of the new accounting Standard and the potential impact on
Canfor can be found in the Company's Annual Report for the year ended December
31, 2012.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
During the quarter ended June 30, 2013, there were no changes in the Company's
internal controls over financial reporting that materially affected, or would be
reasonably likely to materially affect, such controls.
RISKS AND UNCERTAINTIES
A comprehensive discussion of risks and uncertainties is included in the
Company's 2012 annual statutory reports which are available on www.canfor.com or
www.sedar.com.
SELECTED QUARTERLY FINANCIAL INFORMATION(25)
-------------------------------------------------------------------------
Q2 Q1 Q4 Q3
2013 2013 2012 2012
-------------------------------------------------------------------------
Sales and income
(millions of Canadian dollars)
Sales $ 843.2 $ 786.3 $ 700.3 $ 663.7
Operating income (loss) $ 128.2 $ 100.0 $ 49.0 $ 18.1
Net income (loss) $ 114.3 $ 67.5 $ 24.7 $ 18.8
Shareholder net income (loss) $ 110.3 $ 61.9 $ 21.3 $ 20.5
Per common share (dollars)
Shareholder net income (loss) - basic and
diluted $ 0.77 $ 0.43 $ 0.15 $ 0.14
-------------------------------------------------------------------------
Statistics
Lumber shipments (MMfbm) 1,268 1,135 1,149 1,133
Pulp shipments (000 mt) 308 308 298 269
-------------------------------------------------------------------------
Average exchange rate - US$/Cdn$ $ 0.977 $ 0.991 $ 1.009 $ 1.005
-------------------------------------------------------------------------
Average Western SPF 2x4 #2&Btr lumber
price (US$) $ 335 $ 391 $ 335 $ 300
Average SYP (East) 2x4 #2 lumber price
(US$) $ 392 $ 452 $ 386 $ 322
Average OSB price - North Central (US$) $ 345 $ 418 $ 332 $ 312
Average NBSK pulp list price delivered to
U.S. (US$) $ 937 $ 897 $ 863 $ 853
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SELECTED QUARTERLY FINANCIAL INFORMATION(25)
----------------------------------------------------------------------------
Q2 Q1 Q4 Q3
2012 2012 2011 2011
----------------------------------------------------------------------------
Sales and income
(millions of Canadian dollars)
Sales $ 685.0 $ 593.8 $ 576.2 $ 602.1
Operating income (loss) $ 22.6 $ (18.4) $ (63.1) $ 15.4
Net income (loss) $ 5.0 $ (12.9) $ (38.1) $ (9.6)
Shareholder net income (loss) $ 2.6 $ (18.0) $ (44.1) $ (21.6)
Per common share (dollars)
Shareholder net income (loss) - basic and
diluted $ 0.02 $ (0.13) $ (0.31) $ (0.15)
----------------------------------------------------------------------------
Statistics
Lumber shipments (MMfbm) 1,158 994 974 969
Pulp shipments (000 mt) 282 328 275 291
----------------------------------------------------------------------------
Average exchange rate - US$/Cdn$ $ 0.990 $ 0.999 $ 0.977 $ 1.020
----------------------------------------------------------------------------
Average Western SPF 2x4 #2&Btr lumber
price (US$) $ 295 $ 266 $ 238 $ 246
Average SYP (East) 2x4 #2 lumber price
(US$) $ 325 $ 298 $ 260 $ 259
Average OSB price - North Central (US$) $ 235 $ 202 $ 190 $ 184
Average NBSK pulp list price delivered to
U.S. (US$) $ 900 $ 870 $ 920 $ 993
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(25) Certain 2012 amounts have been restated due to the adoption of amended
IAS 19, Employee Benefits and IFRS 11, Joint Arrangements. 2011 amounts have
not been restated. Further details can be found in the Company's unaudited
interim consolidated financial statements.
In addition to exposure to changes in product prices and foreign exchange, the
Company's financial results are impacted by seasonal factors such as weather and
building activity. Adverse weather conditions can cause logging curtailments,
which can affect the supply of raw materials to manufacturing facilities. Market
demand also varies seasonally to some degree. For example, building activity and
repair and renovation work, which affects demand for lumber products, is
generally stronger in the spring and summer months. These factors, along with
global supply and demand conditions, affect the Company's shipment volumes.
Other material factors that impact the comparability of the quarters are
noted below(26):
----------------------------------------------------------------------------
After-tax impact, net of non-controlling
interests
(millions of dollars, except for per Q2 Q1 Q4 Q3
share amounts) 2013 2013 2012 2012
----------------------------------------------------------------------------
Shareholder net income (loss), as
reported $ 110.3 $ 61.9 $ 21.3 $ 20.5
Foreign exchange (gain) loss on long-
term debt and investments, net $ 1.8 $ 2.3 $ 1.2 $ (4.0)
(Gain) loss on derivative financial
instruments $ 1.0 $ (2.2) $ 6.5 $ (4.4)
Canfor's 50% interest in Canfor-LP OSB's
income, net of tax $ 3.8 $ 8.3 $ - $ -
Gain on completion of sale of Canfor-LP
OSB $ (33.4) $ - $ - $ -
Change in substantively enacted tax rate $ 4.2 $ - $ - $ -
Net gain on post retirement and pension
plan amendments $ - $ - $ (8.7) $ -
Restructuring costs related to changes
in management group $ - $ - $ - $ 1.5
Decrease (increase) in fair value of
asset-backed commercial paper $ - $ - $ - $ -
Costs recorded in relation to Tembec
acquisition $ - $ - $ - $ -
Mill closure provisions $ - $ - $ - $ -
Asset impairment charges $ - $ - $ - $ -
----------------------------------------------------------------------------
Net impact of above items $ (22.6) $ 8.4 $ (1.0) $ (6.9)
----------------------------------------------------------------------------
Adjusted shareholder net income (loss) $ 87.7 $ 70.3 $ 20.3 $ 13.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Shareholder net income (loss) per share
(EPS), as reported $ 0.77 $ 0.43 $ 0.15 $ 0.14
Net impact of above items per share $ (0.16) $ 0.06 $ (0.01) $ (0.05)
----------------------------------------------------------------------------
Adjusted net income (loss) per share $ 0.61 $ 0.49 $ 0.14 $ 0.09
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Other material factors that impact the comparability of the quarters are
noted below(26):
---------------------------------------------------------------------------
After-tax impact, net of non-controlling
interests
(millions of dollars, except for per Q2 Q1 Q4 Q3
share amounts) 2012 2012 2011 2011
---------------------------------------------------------------------------
Shareholder net income (loss), as
reported $ 2.6 $ (18.0) $ (44.1) $ (21.6)
Foreign exchange (gain) loss on long-
term debt and investments, net $ 2.4 $ (2.7) $ (3.3) $ 11.0
(Gain) loss on derivative financial
instruments $ 4.2 $ (5.1) $ (6.7) $ 7.0
Canfor's 50% interest in Canfor-LP OSB's
income, net of tax $ - $ - $ - $ -
Gain on completion of sale of Canfor-LP
OSB $ - $ - $ - $ -
Change in substantively enacted tax rate $ - $ - $ - $ -
Net gain on post retirement and pension
plan amendments $ - $ - $ - $ -
Restructuring costs related to changes
in management group $ - $ - $ - $ -
Decrease (increase) in fair value of
asset-backed commercial paper $ - $ (1.1) $ (0.5) $ 1.8
Costs recorded in relation to Tembec
acquisition $ - $ 2.8 $ - $ -
Mill closure provisions $ - $ - $ 17.0 $ -
Asset impairment charges $ - $ - $ 5.5 $ -
---------------------------------------------------------------------------
Net impact of above items $ 6.6 $ (6.1) $ 12.0 $ 19.8
---------------------------------------------------------------------------
Adjusted shareholder net income (loss) $ 9.2 $ (24.1) $ (32.1) $ (1.8)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Shareholder net income (loss) per share
(EPS), as reported $ 0.02 $ (0.13) $ (0.31) $ (0.15)
Net impact of above items per share $ 0.05 $ (0.05) $ 0.09 $ 0.14
---------------------------------------------------------------------------
Adjusted net income (loss) per share $ 0.07 $ (0.18) $ (0.22) $ (0.01)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(26) Certain 2012 amounts have been restated due to the adoption of amended
IAS 19, Employee Benefits and IFRS 11, Joint Arrangements. 2011 amounts have
not been restated. Further details can be found in the Company's unaudited
interim consolidated financial statements.
Canfor Corporation
Condensed Consolidated Balance Sheets
As at June 30, As at December
(millions of Canadian dollars, unaudited) 2013 31, 2012
----------------------------------------------------------------------------
(Note 13)
ASSETS
Current assets
Cash and cash equivalents $ 171.7 $ -
Accounts receivable - Trade 152.3 102.7
- Other 56.6 57.5
Inventories (Note 2) 407.7 431.3
Prepaid expenses and other assets 42.3 23.4
Investment in joint venture held for sale
(Note 3) - 75.1
----------------------------------------------------------------------------
Total current assets 830.6 690.0
----------------------------------------------------------------------------
Property, plant and equipment 1,108.4 1,081.7
Timber licenses 546.3 554.6
Goodwill and other intangible assets 88.1 80.4
Long-term investments and other (Note 4) 51.0 44.6
Deferred income taxes, net 6.6 39.3
----------------------------------------------------------------------------
Total assets $ 2,631.0 $ 2,490.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES
Current liabilities
Cheques issued in excess of cash on hand $ - $ 17.1
Operating loans (Note 5(a)) - 27.0
Accounts payable and accrued liabilities 321.6 258.4
Current portion of long-term debt (Note
5(b)) 115.6 184.1
Current portion of deferred reforestation
obligations 37.3 37.3
----------------------------------------------------------------------------
Total current liabilities 474.5 523.9
----------------------------------------------------------------------------
Long-term debt (Note 5(b)) 103.1 100.0
Retirement benefit obligations 252.4 311.7
Deferred reforestation obligations 80.1 78.4
Other long-term liabilities 12.7 13.6
Deferred income taxes, net 187.8 151.1
----------------------------------------------------------------------------
Total liabilities $ 1,110.6 $ 1,178.7
----------------------------------------------------------------------------
EQUITY
Share capital $ 1,120.2 $ 1,126.2
Contributed surplus 31.9 31.9
Retained earnings (deficit) 159.5 (35.1)
Accumulated foreign exchange translation
differences 2.1 (10.5)
----------------------------------------------------------------------------
Total equity attributable to equity
holders of the Company 1,313.7 1,112.5
Non-controlling interests 206.7 199.4
----------------------------------------------------------------------------
Total equity $ 1,520.4 $ 1,311.9
----------------------------------------------------------------------------
Total liabilities and equity $ 2,631.0 $ 2,490.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these
condensed consolidated financial statements.
APPROVED BY THE
BOARD
"R.S. Smith" "R.L. Cliff"
Director, R.S. Smith Director, R.L. Cliff
Canfor Corporation
Condensed Consolidated Statements of Income (Loss)
(millions of Canadian
dollars, unaudited) 3 months ended June 30, 6 months ended June 30,
2013 2012 2013 2012
----------------------------------------------------------------------------
(Note 13) (Note 13)
Sales $ 843.2 $ 685.0 $ 1,629.5 $ 1,278.8
Costs and expenses
Manufacturing and product
costs 508.2 458.3 1,000.4 876.3
Freight and other
distribution costs 141.5 129.9 270.9 249.5
Export taxes - 13.9 - 25.1
Amortization 49.6 43.5 96.5 86.1
Selling and administration
costs 14.8 14.9 31.1 30.9
Restructuring, mill closure
and severance costs 0.9 1.9 2.4 6.7
----------------------------------------------------------------------------
715.0 662.4 1,401.3 1,274.6
----------------------------------------------------------------------------
Operating income 128.2 22.6 228.2 4.2
Finance expense, net (6.3) (8.4) (15.1) (17.0)
Foreign exchange gain (loss)
on long-term debt and
investments, net (4.0) (3.8) (7.8) 0.2
Gain (loss) on derivative
financial instruments (Note
7) (2.7) (6.3) 0.6 1.1
Gain on sale of Canfor-LP
OSB joint venture
(Note 3) 38.3 - 38.3 -
Other income, net 6.8 5.5 8.5 2.0
----------------------------------------------------------------------------
Net income (loss) before
income taxes 160.3 9.6 252.7 (9.5)
Income tax recovery
(expense) (Note 8) (46.0) (4.6) (70.9) 1.6
----------------------------------------------------------------------------
Net income (loss) $ 114.3 $ 5.0 $ 181.8 $ (7.9)
----------------------------------------------------------------------------
Net income (loss)
attributable to:
Equity shareholders of the
Company $ 110.3 $ 2.6 $ 172.2 $ (15.4)
Non-controlling interests 4.0 2.4 9.6 7.5
----------------------------------------------------------------------------
Net income (loss) $ 114.3 $ 5.0 $ 181.8 $ (7.9)
----------------------------------------------------------------------------
Net income (loss) per common
share:
(in dollars)
Attributable to equity
shareholders of the Company
- Basic and diluted (Note
9) $ 0.77 $ 0.02 $ 1.21 $ (0.11)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Canfor Corporation
Condensed Consolidated Statements of Other Comprehensive Income (Loss)
(millions of Canadian dollars, 3 months ended June 6 months ended June
unaudited) 30, 30,
2013 2012 2013 2012
----------------------------------------------------------------------------
(Note (Note
13) 13)
Net income (loss) $ 114.3 $ 5.0 $ 181.8 $ (7.9)
Other comprehensive income (loss)
Items that will not be recycled
through net income (loss):
Defined benefit plan actuarial
gains (losses) (Note 6) 38.5 (27.9) 46.2 (32.2)
Income tax recovery (expense) on
defined benefit actuarial gains
(losses) (Note 8) (10.1) 7.2 (12.0) 8.2
----------------------------------------------------------------------------
28.4 (20.7) 34.2 (24.0)
Items that may be recycled through
net income (loss):
Foreign exchange translation
differences for foreign operations 9.1 4.1 12.6 0.5
----------------------------------------------------------------------------
Other comprehensive income (loss),
net of tax 37.5 (16.6) 46.8 (23.5)
----------------------------------------------------------------------------
Total comprehensive income (loss) $ 151.8 $ (11.6) $ 228.6 $ (31.4)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total comprehensive income (loss)
attributable to:
Equity shareholders of the Company $ 144.5 $ (12.3) $ 215.6 $ (36.2)
Non-controlling interests 7.3 0.7 13.0 4.8
----------------------------------------------------------------------------
Total comprehensive income (loss) $ 151.8 $ (11.6) $ 228.6 $ (31.4)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Canfor Corporation
Condensed Consolidated Statements of Changes in Equity
(millions of Canadian
dollars, unaudited) 3 months ended June 30, 6 months ended June 30,
2013 2012 2013 2012
----------------------------------------------------------------------------
(Note 13) (Note 13)
Share capital
Balance at beginning of
period $ 1,126.2 $ 1,126.2 $ 1,126.2 $ 1,125.9
Common shares issued on
exercise of stock options - - - 0.3
Share repurchases (Note 9) (6.0) - (6.0) -
----------------------------------------------------------------------------
Balance at end of period $ 1,120.2 $ 1,126.2 $ 1,120.2 $ 1,126.2
----------------------------------------------------------------------------
Contributed surplus
----------------------------------------------------------------------------
Balance at beginning and end
of period $ 31.9 $ 31.9 $ 31.9 $ 31.9
----------------------------------------------------------------------------
Retained earnings (deficit)
Balance at beginning of
period $ 32.5 $ (45.0) $ (35.1) $ (24.7)
Net income (loss)
attributable to equity
shareholders of the Company 110.3 2.6 172.2 (15.4)
Defined benefit plan
actuarial gains (losses),
net of tax 25.1 (19.0) 30.8 (21.3)
Share repurchases (Note 9) (8.4) - (8.4) -
----------------------------------------------------------------------------
Balance at end of period $ 159.5 $ (61.4) $ 159.5 $ (61.4)
----------------------------------------------------------------------------
Accumulated foreign exchange
translation differences
Balance at beginning of
period $ (7.0) $ (9.5) $ (10.5) $ (5.9)
Foreign exchange translation
differences for foreign
operations 9.1 4.1 12.6 0.5
----------------------------------------------------------------------------
Balance at end of period $ 2.1 $ (5.4) $ 2.1 $ (5.4)
----------------------------------------------------------------------------
Total equity attributable to
equity holders of the
Company $ 1,313.7 $ 1,091.3 $ 1,313.7 $ 1,091.3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Non-controlling interests
Balance at beginning of
period $ 202.7 $ 211.5 $ 199.4 $ 232.8
Net income attributable to
non-controlling interests 4.0 2.4 9.6 7.5
Defined benefit plan
actuarial gains (losses)
attributable to non-
controlling interests, net
of taxes 3.3 (1.7) 3.4 (2.7)
Distributions to non-
controlling interests (2.1) (8.2) (4.5) (8.6)
Acquisition of non-
controlling interests (Note
9) (1.2) - (1.2) -
Share exchange - - - (25.0)
----------------------------------------------------------------------------
Balance at end of period $ 206.7 $ 204.0 $ 206.7 $ 204.0
----------------------------------------------------------------------------
Total equity $ 1,520.4 $ 1,295.3 $ 1,520.4 $ 1,295.3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Canfor Corporation
Condensed Consolidated Statements of Cash Flows
(millions of Canadian
dollars, unaudited) 3 months ended June 30, 6 months ended June 30,
2013 2012 2013 2012
----------------------------------------------------------------------------
(Note 13) (Note 13)
Cash generated from (used
in):
Operating activities
Net income (loss) $ 114.3 $ 5.0 $ 181.8 $ (7.9)
Items not affecting cash:
Amortization 49.6 43.5 96.5 86.1
Income tax (recovery)
expense 46.0 4.6 70.9 (1.6)
Long-term portion of
deferred reforestation
obligations (12.9) (11.3) 1.2 2.1
Foreign exchange (gain)
loss on long-term debt
and investments, net 4.0 3.8 7.8 (0.2)
Changes in mark-to-market
value of derivative
financial instruments 3.9 7.7 (1.4) 1.7
Employee future benefits 3.2 3.8 6.7 7.1
Net finance expense 6.3 8.4 15.1 17.0
Gain on sale of joint
venture (Note 3) (38.3) - (38.3) -
Other, net (0.2) (4.4) (0.9) (2.9)
Defined benefit pension
plan contributions (12.6) (12.7) (26.1) (26.7)
Income taxes recovered
(paid), net - (3.3) 0.5 (4.6)
Net change in non-cash
working capital (Note 10) 96.9 72.1 2.4 (4.7)
----------------------------------------------------------------------------
260.2 117.2 316.2 65.4
----------------------------------------------------------------------------
Financing activities
Change in operating bank
loans (Note 5(a)) (40.0) (77.0) (27.0) 17.0
Proceeds from long-term
debt (Note 5(b)) 3.1 - 3.1 100.0
Repayment of long-term debt
(Note 5(b)) (76.3) - (76.3) (49.9)
Finance expenses paid (7.5) (7.4) (10.0) (10.5)
Cash distributions paid to
non-controlling interests (2.1) (8.2) (4.5) (12.5)
Other, net - - - 0.3
----------------------------------------------------------------------------
(122.8) (92.6) (114.7) 44.4
----------------------------------------------------------------------------
Investing activities
Proceeds on sale of joint
venture (Note 3) 76.6 - 76.6 -
Distributions from
(advances to) joint
venture (Note 3) 9.5 2.0 16.5 (1.0)
Additions to property,
plant and equipment (48.8) (44.4) (95.2) (98.0)
Reimbursements from
Government under Green
Transformation Program - 1.1 - 9.0
Share repurchases (Note 9) (10.3) - (10.3) -
Acquisition of non-
controlling interests
(Note 9) (1.0) - (1.0) -
Acquisition of Tembec
assets - (0.7) - (65.6)
Share exchange - - - 6.8
Proceeds from redemption of
asset-backed commercial
paper - 12.9 - 12.9
Other, net 2.1 1.9 0.7 3.7
----------------------------------------------------------------------------
28.1 (27.2) (12.7) (132.2)
----------------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents(i) 165.5 (2.6) 188.8 (22.4)
Cash and cash equivalents at
beginning of period(i) 6.2 6.8 (17.1) 26.6
----------------------------------------------------------------------------
Cash and cash equivalents at
end of period(i) $ 171.7 $ 4.2 $ 171.7 $ 4.2
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(i) Cash and cash equivalents include cash on hand less unpresented cheques.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Canfor Corporation
Notes to the Condensed Consolidated Financial Statements
(unaudited, millions of Canadian dollars unless otherwise noted)
1. Basis of Preparation
These condensed consolidated interim financial statements (the "financial
statements") have been prepared in accordance with International Accounting
Standard ("IAS") 34 Interim Financial Reporting, and include the accounts of
Canfor Corporation and its subsidiary entities, hereinafter referred to as
"Canfor" or "the Company".
These financial statements do not include all of the disclosures required by
International Financial Reporting Standards ("IFRS") for annual financial
statements. Additional disclosures relevant to the understanding of these
financial statements, including the accounting policies applied, can be found in
Canfor's Annual Report for the year ended December 31, 2012, available at
www.canfor.com or www.sedar.com.
Canfor's financial results are impacted by seasonal factors such as weather and
building activity. Adverse weather conditions can cause logging curtailments,
which can affect the supply of raw materials to sawmills and pulp mills. Market
demand also varies seasonally to some degree. For example, building activity and
repair and renovation work, which affects demand for solid wood products, are
generally stronger in the spring and summer months. Shipment volumes are
affected by these factors as well as by global supply and demand conditions.
The currency of presentation for these financial statements is the Canadian dollar.
Changes in Accounting Policies
The Company has adopted the following new and revised standards, along with any
consequential amendments, effective January 1, 2013. These changes were made in
accordance with the applicable transitional provisions.
-- The Company adopted IFRS 11, Joint Arrangements, which redefines joint
operations and joint ventures with a focus on the rights and obligations
of an arrangement, rather than its legal form. Under the new Standard,
joint ventures are accounted for using the equity method accounting as
set out in IAS 28, Investments in Associates and Joint Ventures, whereas
for a joint operation the venturer will recognize its share of the
assets, liabilities, revenue and expenses of the joint operations.
Canfor's 50% interest in the Canfor-LP OSB Limited Partnership ("Canfor-
LP OSB") was classified as a joint venture and accounted for using the
equity method. The Company has restated its comparative period results
for adoption of IFRS 11 (Note 13). Canfor sold its 50% interest in the
Canfor-LP OSB to Louisiana Pacific Corporation ("LP") on May 31, 2013
(Note 3).
-- The Company adopted the amended IAS 19, Employee Benefits, which changes
the recognition and measurement of defined benefit pension expense and
termination benefits and enhances the disclosure of all employee
benefits. Pension benefit cost is split between (i) the cost of benefits
accrued in the current period (service cost) and benefit changes (past-
service costs (including plan amendments, settlements and
curtailments)); and (ii) finance expense or income. Interest cost and
expected return on plan assets, which previously reflected different
rates, has been replaced with a net interest amount that is calculated
by applying one discount rate to the net defined benefit liability
(asset). The Company has restated its comparative period results for
adoption of amended IAS 19 (Note 13).
-- The Company also adopted IFRS 10, Consolidated Financial Statements,
IFRS 13, Fair Value Measurement, and IAS 1, Presentation of Financial
Statements, effective January 1, 2013. These Standards did not result in
material impacts on the amounts recorded in the financial statements of
Canfor.
Accounting Standards Issued and Not Applied
In May 2011, the International Accounting Standards Board ("IASB") issued IFRS
9, Financial Instruments, which is effective for annual periods beginning on or
after January 1, 2015, with early adoption permitted. IFRS 9 is not expected to
have a material impact on amounts recorded in the financial statements of
Canfor.
Further details of the new accounting Standard and the potential impact on
Canfor can be found in the Company's Annual Report for the year ended December
31, 2012.
2. Inventories
As at As at
June 30, December 31,
(millions of Canadian dollars) 2013 2012
----------------------------------------------------------------------------
Logs $ 66.1 $ 119.4
Finished products 231.2 205.8
Residual fibre 13.3 11.5
Processing materials and supplies 97.1 94.6
----------------------------------------------------------------------------
$ 407.7 $ 431.3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3. Sale of Canfor-LP OSB Joint Venture
On May 31, 2013, the Company completed the sale of its 50% share in Canfor-LP
OSB, which owns the Peace Valley OSB mill, to LP for cash proceeds of $77.9
million including working capital, of which $1.3 million was received subsequent
to June 30, 2013. On completion of the sale, LP became the sole owner of the
Peace Valley OSB mill. As part of the sale, Canfor may receive additional annual
consideration over a 3 year period, starting June 1, 2013, based on Peace Valley
OSB's annual adjusted earnings before interest, tax, depreciation and
amortization. An asset in the amount of $19.0 million has been recorded based on
the fair value of the estimated additional annual consideration, based on the
forecast future adjusted earnings before interest, tax, depreciation and
amortization of the Peace Valley OSB mill. The asset will be adjusted each
reporting period with gains and losses recorded to Other Income.
In accordance with IFRS 5, Non-current Assets Held for Sale and Discontinued
Operations, upon classification of the investment as held for sale at December
31, 2012, the Company ceased the equity method of accounting. As such, Canfor's
$5.1 million and $16.1 million share of Canfor-LP OSB's operating income for the
three and six months ended June 30, 2013, respectively, was not recognized in
operating income in those periods.
A pre-tax gain on sale of $38.3 million was recorded in the current quarter
which includes recognition of Canfor's share of the operating income for the
first half of 2013. The Company recorded a tax expense of $4.8 million related
to the sale.
4. Long-term Investments and Other
As at As at
June 30, December 31,
(millions of Canadian dollars) 2013 2012
----------------------------------------------------------------------------
Other investments $ 23.6 $ 23.7
Investment tax credits 1.6 8.6
Defined benefit plan assets 1.6 1.4
Contingent consideration (Note 3) 10.2 -
Other deposits, loans and advances 14.0 10.9
----------------------------------------------------------------------------
$ 51.0 $ 44.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
In the first quarter of 2013, $9.3 million in investment tax credits were
reclassified to prepaid expenses and other assets. As discussed in Note 3, the
total fair value of the contingent consideration relating to the sale of
Canfor-LP OSB at June 30, 2013 is $19.0 million. The current portion of the
contingent consideration ($8.8 million) is recorded in Other Accounts
Receivable.
5. Operating Loans and Long-Term Debt
(a) Available Operating Loans
As at As at
June 30, December 31,
(millions of Canadian dollars) 2013 2012
----------------------------------------------------------------------------
Canfor (excluding CPPI)
Total operating loans - Canfor
(excluding CPPI) $ 350.0 $ 350.0
Drawn - (27.0)
Letters of credit (principally
unregistered pension plans) (16.0) (18.0)
----------------------------------------------------------------------------
Total available operating loans - Canfor
(excluding CPPI) $ 334.0 $ 305.0
----------------------------------------------------------------------------
CPPI
Operating loan facility $ 110.0 $ 110.0
Facility for BC Hydro letter of credit 7.5 7.5
----------------------------------------------------------------------------
Total operating loans - CPPI 117.5 117.5
Drawn - -
Letters of credit (for general business
purposes) (3.6) (1.7)
BC Hydro letter of credit (7.5) (7.5)
----------------------------------------------------------------------------
Total available operating loans - CPPI $ 106.4 $ 108.3
----------------------------------------------------------------------------
Consolidated:
Total operating loans $ 467.5 $ 467.5
Total available operating loans $ 440.4 $ 413.3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
In the first quarter of 2013, the maturity on Canfor's principal operating
loans, excluding Canfor Pulp Products Inc. ("CPPI"), was extended from October
31, 2015 to February 28, 2018. All other terms remain the same with interest
payable at floating rates based on the 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 terms of CPPI's operating loan facility include interest payable at floating
rates that vary depending on the ratio of net debt to operating earnings before
interest, taxes, depreciation, amortization and certain other non-cash items,
and is based on lenders' Canadian prime rate, bankers acceptances, US dollar
base rate or US dollar LIBOR rate, plus a margin. The facility has certain
financial covenants that stipulate maximum net debt to total capitalization
ratios and minimum net worth amounts based on shareholders' equity. The maturity
date of the facility is November 13, 2016.
CPPI has a separate facility with a maturity date of November 30, 2013 to cover
a $7.5 million standby letter of credit issued to BC Hydro.
As at June 30, 2013, the Company and CPPI were in compliance with all covenants
relating to their operating loans.
Substantially all borrowings of CPPI (operating lines and long-term debt) are
non-recourse to other entities within the Company.
(b) Long-Term Debt
On April 1, 2013, the Company repaid $76.3 million (US$75.0 million) of 5.42%
term debt. During the second quarter of 2013, the Company obtained $3.1 million
in net financing with interest rates between 1.0% and 2.0% related to specific
capital projects at its U.S. sawmills.
At June 30, 2013, the fair value of the long-term debt, measured at its
amortized cost of $218.7 million, was $220.5 million. The fair value was
determined based on prevailing market rates for long-term debt with similar
characteristics and risk profile.
6. Employee Future Benefits
Canfor measures its accrued benefit obligations and the fair value of plan
assets for accounting purposes as at December 31 of each year. At the end of
each interim reporting period, the Company estimates movements in its accrued
benefit liabilities based upon movements in discount rates and the rates of
return on plan assets, as well as any significant changes to the plans.
Adjustments are also made for payments made and current service and interest
costs.
For the six months ended June 30, 2013, an amount of $46.2 million (before tax)
was credited to other comprehensive income. The gain reflects the return on plan
assets coupled with a higher discount rate used to value the net defined benefit
obligation at June 30, 2013. For the three months ended June 30, 2013, the gain
was $38.5 million (before tax). For the six months ended June 30, 2012, an
amount of $32.2 million (before tax) was charged to other comprehensive income.
For the three months ended June 30, 2012, the charge was $27.9 million (before
tax).
For the Company's single largest pension plan, a one percentage point increase
in the discount rate used in calculating the actuarial estimate of future
liabilities would reduce the funded deficit by an estimated $58.3 million.
The assumptions used to estimate the changes in net accrued benefit liabilities
were as follows:
----------------------------------------------------------------------------
Pension Benefit Plans
Discount rate
June 30, 2013 4.60%
March 31, 2013 4.10%
December 31, 2012 4.20%
June 30, 2012 4.65%
March 31, 2012 4.80%
December 31, 2011 5.00%
Rate of return on plan assets
6 months ended June 30, 2013 3.20%
3 months ended March 31, 2013 4.00%
6 months ended June, 2012 2.60%
3 months ended March 31, 2012 4.30%
----------------------------------------------------------------------------
Other Benefit Plans
Discount rate
June 30, 2013 4.70%
March 31, 2013 4.30%
December 31, 2012 4.40%
June 30, 2012 4.90%
March 31, 2012 5.00%
December 31, 2011 5.30%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
7. Financial Instruments
Canfor's cash and cash equivalents, accounts receivable, other deposits, loans
and advances, operating loans, accounts payable and accrued liabilities, and
long-term debt are measured at amortized cost subsequent to initial recognition.
Derivative instruments are measured at fair value. IFRS 13, Fair Value
Measurement, requires classification of financial instruments within a hierarchy
that prioritizes the inputs to fair value measurement.
The three levels of the fair value hierarchy are:
Level 1 - Unadjusted quoted prices in active markets for identical assets or
liabilities;
Level 2 - Inputs other than quoted prices that are observable for the asset or
liability, either directly or indirectly;
Level 3 - Inputs that are not based on observable market data.
The following table summarizes Canfor's financial instruments at June 30, 2013
and December 31, 2012, and shows the level within the fair value hierarchy in
which they have been classified (for financial instruments measured at fair
value):
Fair Value As at As at
Hierarchy June 30, December 31,
(millions of Canadian dollars) Level 2013 2012
----------------------------------------------------------------------------
Financial assets
Held for trading
Derivative financial
instruments Level 2 $ 1.3 $ 0.7
Loans and receivables
Cash and cash equivalents n/a 171.7 -
Accounts receivable n/a 197.0 157.4
Other deposits, loans and
advances n/a 10.0 4.2
Royalty receivable Level 3 6.6 6.5
Contingent consideration Level 3 19.0 -
Available for sale
Investments in other
entities n/a 23.6 23.7
----------------------------------------------------------------------------
$ 429.2 $ 192.5
----------------------------------------------------------------------------
Financial liabilities
Held for trading
Derivative financial
instruments Level 2 $ 4.1 $ 4.8
Other liabilities
Cheques issued in excess of
cash on hand n/a - 17.1
Operating loans n/a - 27.0
Accounts payable and accrued
liabilities (excluding
derivatives) n/a 317.5 254.2
Long-term debt (including
current portion) n/a 218.7 284.1
----------------------------------------------
$ 540.3 $ 587.2
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The royalty receivable and contingent consideration are measured at fair value
at each reporting period and are presented in Other Accounts Receivable and
Long-term Investments on the consolidated balance sheet. The fair value of the
royalty receivable is determined by discounting future expected cash flows based
on energy price assumptions and future sales volume assumptions until the
termination of the royalty agreement in September 2015. The fair value of the
contingent consideration is determined by discounting future expected cash flows
based on forecast OSB prices, sales volumes and margins for the Peace Valley OSB
mill.
The Company uses a variety of derivative financial instruments to reduce its
exposure to risks associated with fluctuations in foreign exchange rates, lumber
prices, energy costs, electricity sales and floating interest rates on certain
long-term debt. At June 30, 2013, the fair value of derivative financial
instruments was a net liability of $2.8 million (December 31, 2012 - net
liability of $4.1 million). The fair value of these financial instruments was
determined based on prevailing market rates for instruments with similar
characteristics.
The following table summarizes the gain (loss) on derivative financial
instruments for the three and six month periods ended June 30, 2013 and 2012:
(millions of Canadian
dollars) 3 months ended June 30, 6 months ended June 30,
2013 2012 2013 2012
----------------------------------------------------------------------------
Foreign exchange collars and
forward contracts $ (5.4) $ (2.5) $ (4.0) $ 0.4
Energy derivatives (0.3) (1.8) (0.2) (0.6)
Lumber futures 1.4 (0.4) 3.6 2.6
Interest rate swaps 1.6 (1.6) 1.2 (1.3)
----------------------------------------------------------------------------
$ (2.7) $ (6.3) $ 0.6 $ 1.1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table summarizes the fair value of the derivative financial
instruments included in the balance sheet at June 30, 2013 and December 31,
2012:
As at As at
June 30, December 31,
(millions of Canadian dollars) 2013 2012
----------------------------------------------------------------------------
Foreign exchange collars and forward
contracts $ (4.0) $ 0.3
Energy derivatives - 0.3
Lumber futures 0.3 (4.1)
Interest rate swaps 0.9 (0.6)
----------------------------------------------------------------------------
Total asset (liability), net (2.8) (4.1)
Less: current portion asset (liability),
net (3.6) (3.5)
----------------------------------------------------------------------------
Long-term portion (liability), net $ 0.8 $ (0.6)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
8. Income Taxes
3 months ended June 30, 6 months ended June 30,
(millions of Canadian
dollars) 2013 2012 2013 2012
----------------------------------------------------------------------------
Current $ (8.3) $ 0.6 $ (13.5) $ (2.2)
Deferred (37.7) (5.2) (57.4) 3.8
----------------------------------------------------------------------------
Income tax (expense)
recovery $ (46.0) $ (4.6) $ (70.9) $ 1.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The reconciliation of income taxes calculated at the statutory rate to the
actual income tax provision is as follows:
3 months ended June 30, 6 months ended June 30,
(millions of Canadian
dollars) 2013 2012 2013 2012
----------------------------------------------------------------------------
Income tax expense at
statutory rate 2013 -
25.75% (2012 - 25.0%)(1) $ (41.9) $ (2.4) $ (65.0) $ 2.4
Add (deduct):
Non-taxable income related
to non-controlling
interests in limited
partnerships 0.1 0.2 0.1 1.3
Entities with different
income tax rates and other
tax adjustments (3.2) (2.1) (4.5) (2.2)
Permanent difference from
capital gains and losses
and other non-deductible
items 4.4 (0.5) 3.9 (0.1)
Change in substantively
enacted tax rate(1) (5.4) - (5.4) -
Tax recovery at rates other
than statutory rate - 0.2 - 0.2
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Income tax (expense)
recovery $ (46.0) $ (4.6) $ (70.9) $ 1.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1)In the second quarter of 2013, the British Columbia Provincial Government
increased the corporate tax rate from 10% to 11%. A $0.6 million increase in
tax expense was recorded in the second quarter for earnings recognized in
the first quarter.
In addition to the amounts recorded to net income, a tax expense of $10.1
million was recorded to other comprehensive income for the three month period
ended June 30, 2013 (three months ended June 30, 2012 - tax recovery of $7.2
million) in relation to the actuarial gains (losses) on defined benefit employee
compensation plans. For the six months ended June 30, 2013, the tax expense was
$12.0 million (six months ended June 30, 2012 - tax recovery of $8.2 million).
9. Earnings Per Share
Basic net income (loss) per share is calculated by dividing the net income
(loss) available to common shareholders by the weighted average number of common
shares outstanding during the period. As at June 30, 2013 and 2012, there were
no outstanding stock options.
3 months ended June 30, 6 months ended June 30,
2013 2012 2013 2012
----------------------------------------------------------------------------
Weighted average number of
common shares 142,675,539 142,751,442 142,713,773 142,745,724
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Normal Course Issuer Bid
On March 5, 2013, the Company commenced a normal course issuer bid whereby it
can purchase for cancellation up to 7,137,621 common shares or approximately 5%
of its issued and outstanding common shares. The normal course issuer bid may
continue until March 4, 2014. During the second quarter of 2013, Canfor
purchased 763,538 common shares for $14.4 million, of which $10.3 million was
paid in cash in the period. Also during the quarter, CPPI repurchased shares
from non-controlling shareholders increasing Canfor's ownership of CPPI from
50.2% to 50.3%.
10. Net Change in Non-Cash Working Capital
(millions of Canadian
dollars) 3 months ended June 30, 6 months ended June 30,
2013 2012 2013 2012
----------------------------------------------------------------------------
Accounts receivable $ 7.4 $ (18.3) $ (40.7) $ (26.9)
Inventories 124.5 104.2 25.0 18.4
Prepaid expenses (12.9) (15.8) (11.4) (13.4)
Accounts payable, accrued
liabilities and current
portion of deferred
reforestation obligations (22.1) 2.0 29.5 17.2
----------------------------------------------------------------------------
Net decrease (increase) in
non-cash working capital $ 96.9 $ 72.1 $ 2.4 $ (4.7)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
11. Segment Information
Canfor has two reportable segments (lumber segment and pulp and paper segment)
which offer different products and are managed separately because they require
different production processes and marketing strategies.
Sales between segments are accounted for at prices that approximate fair value.
These include sales of residual fibre from the lumber segment to the pulp and
paper segment for use in the pulp production process.
The Company's panels business does not meet the criteria to be reported fully as
a separate segment and is included in Unallocated & Other below. For the three
and six months ended June 30, 2013, the Company's share of Canfor-LP OSB's sales
was $16.9 million and $43.5 million, respectively, and operating income was $5.1
million and $16.1 million, respectively. As a result of the classification of
Canfor's investment in Canfor-LP OSB as held for sale, these amounts were not
included in the segment or consolidated results of the Company. For the three
and six months ended June 30, 2012, the results of Canfor-LP OSB were presented
in equity income (loss). On May 31, 2013, Canfor sold its 50% share of Canfor-LP
OSB (Note 3).
(millions of Pulp & Unallocated Elimination
Canadian dollars) Lumber Paper & Other Adjustment Consolidated
----------------------------------------------------------------------------
3 months ended June
30, 2013
Sales to external
customers $ 586.8 255.5 0.9 - $ 843.2
Sales to other
segments $ 35.4 - - (35.4) $ -
Operating income
(loss) $ 115.5 18.6 (5.9) - $ 128.2
Amortization $ 29.9 19.4 0.3 - $ 49.6
Capital
expenditures(1 ) $ 37.7 8.7 2.4 - $ 48.8
----------------------------------------------------------------------------
3 months ended June
30, 2012
Sales to external
customers $ 443.5 239.4 2.1 - $ 685.0
Sales to other
segments $ 29.2 - - (29.2) $ -
Operating income
(loss) $ 18.6 11.6 (7.6) - $ 22.6
Amortization $ 26.5 15.1 1.9 - $ 43.5
Capital
expenditures(1) $ 25.1 19.3 - - $ 44.4
----------------------------------------------------------------------------
----------------------------------------------------------------------------
6 months ended June
30, 2013
Sales to external
customers $ 1,129.1 499.0 1.4 - $ 1,629.5
Sales to other
segments $ 66.6 - - (66.6) $ -
Operating income
(loss) $ 203.9 37.5 (13.2) - $ 228.2
Amortization $ 57.2 38.8 0.5 - $ 96.5
Capital
expenditures(1) $ 75.7 15.7 3.8 - $ 95.2
Identifiable assets $ 1,602.3 782.2 246.5 - $ 2,631.0
----------------------------------------------------------------------------
6 months ended June
30, 2012
Sales to external
customers $ 787.2 488.8 2.8 - $ 1,278.8
Sales to other
segments $ 58.4 - - (58.4) $ -
Operating income
(loss) $ (1.7) 22.9 (17.0) - $ 4.2
Amortization $ 49.7 32.8 3.6 - $ 86.1
Capital
expenditures(1) $ 52.0 46.0 - - $ 98.0
Identifiable assets $ 1,505.2 811.3 182.6 - $ 2,499.1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Capital expenditures represent cash paid for capital assets, excluding
acquisition of Tembec assets, during the 2012 period. Pulp & Paper includes
capital expenditures by CPPI in 2012 that were financed by the federal
government-funded Green Transformation Program.
12. Commitments
Agreement with Scotch & Gulf Lumber, LLC
In May 2013, the Company entered into a phased purchase agreement with Scotch &
Gulf Lumber, LLC ("Scotch Gulf"). The transaction will involve the phased
purchase by Canfor of Scotch Gulf over a 3 year period, at an aggregate purchase
price, excluding working capital, of $80 million. Canfor's initial 25% interest
will increase over the 3 year period to 50% after eighteen months and 100% at
the end of the term. The transaction is subject to standard closing conditions
and is currently scheduled to close in the third quarter of 2013.
13. Transition to New Accounting Standards
Effective January 1, 2013, the Company adopted IFRS 11, Joint Arrangements, and
as a result reclassified its 50% interest in Canfor-LP OSB from a jointly
controlled entity to a joint venture. The Company's interest in Canfor-LP OSB
was previously accounted for using the proportionate consolidation method
accounting and upon adoption of the new Standard was accounted for using the
equity method of accounting. The comparative period financial statements have
been restated for adoption of IFRS 11 with impacts to the financial statements
outlined in the tables below.
Also effective January 1, 2013, the Company adopted amended IAS 19, Employee
Benefits, which amends certain requirements for defined benefit plans and
termination benefits. Under the revised Standard, expected returns on plan
assets are no longer included in post-employment benefits expense. Instead,
post-employment benefits expense includes net interest on the defined benefit
liability calculated using a discount rate. Remeasurements consisting of
actuarial gains and losses and the actual return on plan assets (excluding the
net interest component) are recognized in other comprehensive income. Further,
the deferral of past service costs is no longer permitted and these are
recognized in net income when incurred. Any deferred past service cost at
January 1, 2013 is recognized through retained earnings on the opening balance
sheet. The comparative period financial statements have been restated for
adoption of revised IAS 19 with impacts to the financial statements outlined in
the tables below.
Summarized impact on the opening condensed consolidated balance sheets:
(millions of Canadian dollars,
unaudited) As at January 1, 2012
Before Adjustments for
Accounting Accounting Restated
Changes Policy Changes Results
IFRS 11 IAS 19
----------------------------------------------------------------------------
Current assets $ 568.4 $ (0.7) $ - $ 567.7
Long-term assets(1) 1,833.2 2.2 - 1,835.4
----------------------------------------------------------------------------
Total assets $ 2,401.6 $ 1.5 $ - $ 2,403.1
----------------------------------------------------------------------------
Current liabilities $ 373.0 $ 1.5 $ - $ 374.5
Long-term liabilities 668.5 - (0.1) 668.4
----------------------------------------------------------------------------
Total liabilities $ 1,041.5 $ 1.5 $ (0.1) $ 1,042.9
----------------------------------------------------------------------------
Equity attributable to equity
holders of the Company $ 1,127.3 $ - $ 0.1 $ 1,127.4
Non-controlling interests 232.8 - - 232.8
----------------------------------------------------------------------------
Total equity $ 1,360.1 $ - $ 0.1 $ 1,360.2
----------------------------------------------------------------------------
Total liabilities and equity $ 2,401.6 $ 1.5 $ - $ 2,403.1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) At January 1, 2012, $79.5 million was reclassified from property, plant
and equipment to investment in joint venture as a result of the adoption of
IFRS 11. The reclassification was within long-term assets and had no impact
on the line items disclosed above.
Summarized impact on the comparative period condensed consolidated balance sheets:
(millions of Canadian dollars,
unaudited) As at December 31, 2012
Before Adjustments for
Accounting Accounting Restated
Changes Policy Changes Results
IFRS 11 IAS 19
----------------------------------------------------------------------------
Current assets $ 686.9 $ 3.1 $ - $ 690.0
Long-term assets 1,801.0 - (0.4) 1,800.6
----------------------------------------------------------------------------
Total assets $ 2,487.9 $ 3.1 $ (0.4) $ 2,490.6
----------------------------------------------------------------------------
Current liabilities $ 520.8 $ 3.1 $ - $ 523.9
Long-term liabilities 657.3 - (2.5) 654.8
----------------------------------------------------------------------------
Total liabilities $ 1,178.1 $ 3.1 $ (2.5) $ 1,178.7
----------------------------------------------------------------------------
Equity attributable to equity
holders of the Company $ 1,110.9 $ - $ 1.6 $ 1,112.5
Non-controlling interests 198.9 - 0.5 199.4
----------------------------------------------------------------------------
Total equity $ 1,309.8 $ - $ 2.1 $ 1,311.9
----------------------------------------------------------------------------
Total liabilities and equity $ 2,487.9 $ 3.1 $ (0.4) $ 2,490.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The adoption of IFRS 11 resulted in a decrease in sales of $29.7 million and an
increase in operating income of $0.4 million for the six months ended June 30,
2012 (for the three months ended June 30, 2012, a decrease of $15.9 million and
a decrease of $2.9 million, respectively). IFRS 11 had no impact on net income
or other comprehensive income in the comparative periods. Further, adoption of
IFRS 11 resulted in an increase in cash flow from operating activities of $1.5
million and decrease in cash flow from investing activities of $1.0 million for
the six months ended June 30, 2012 (for the three months ended June 30, 2012, a
decrease in operating activities of $1.9 million and an increase in cash flow
from investing activities of $2.0 million).
The adoption of amended IAS 19 resulted in a decrease in operating income of
$0.7 million, an increase of finance expense of $4.6 million and increase in
income tax recovery of $1.3 million for the six months ended June 30, 2012 (for
the three months ended June 30, 2012, a decrease of $0.5 million, an increase of
$2.3 million and an increase of $0.7 million, respectively). Amended IAS 19
increased the net loss and increased other comprehensive income by $4.0 million
(after-tax) for the six months ended June 30, 2013 (for the three months ended
June 30, 2012, a decrease to net income of $2.0 million and an increase to other
comprehensive income of $2.0 million (after-tax)). The impact on earnings per
share for the six months ended June 30, 2012 was a decrease of $0.03 per share
(three months ended June 30, 2012 - decrease of $0.01 per share).
The impacts to the current period condensed consolidated statement of income
(loss) and the current period condensed consolidated statement of other
comprehensive income (loss) as a result of amended IAS 19, Employee Benefits,
are comparable to the impacts in the 20
FOR FURTHER INFORMATION PLEASE CONTACT:
Canfor Corporation - Media Contact
Christine Kennedy
Vice President, Public Affairs & Corporate Communications
(604) 661-5225
Christine.Kennedy@canfor.com
Canfor Corporation - Investor Contact
Pat Elliott
Vice President & Treasurer
(604) 661-5441
Patrick.Elliott@canfor.com
www.canfor.com
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