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| Share Name | Share Symbol | Market | Type |
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| Powerstar Intl | TSXV:SLA | TSX Venture | Common Stock |
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Canfor Corporation (TSX:CFP) today reported net income of $26.2 million for the
second quarter of 2011, compared to $32.3 million for the first quarter of 2011
and $43.7 million for the second quarter of 2010. For the six months ended June
30, 2011, the Company's net income was $58.5 million, compared to $79.2 million
for the comparable period in 2010.
The Company's net income attributable to shareholders ("shareholder net income")
for the second quarter of 2011 was $2.1 million, or $0.01 per share, down from
$7.0 million, or $0.05 per share, for the first quarter of 2011, and $21.1
million, or $0.15 per share, for the second quarter of 2010. For the first six
months of 2011, shareholder net income was $9.1 million, or $0.06 per share,
compared to $39.4 million, or $0.28 per share, for the first half of 2010.
Shareholder net income for the second quarter of 2011 included several items
affecting comparability with prior periods, which had an overall net negative
impact of $0.5 million, or $0.01 per share. After adjusting for material items
affecting comparability, the Company's adjusted shareholder net income in the
second quarter of 2011 was $2.6 million, or $0.02 per share, compared to break
even for the first quarter and $31.2 million, or $0.22 per share for the second
quarter of 2010.
Reported EBITDA for the second quarter of 2011 was $66.8 million, down $6.1
million from the first quarter. Lower EBITDA in the lumber segment, which was
down $8.4 million to $9.6 million, was partially offset by a lower reported loss
for panels operations and lower corporate costs. EBITDA in the pulp and paper
segment was in line with the previous quarter.
The second quarter of 2011 saw little change in the underlying factors
constraining the recovery of North American lumber markets. The U.S. economy
continued its painfully slow recovery, with no significant improvement in the
housing sector. In addition to poor demand levels, increased lumber market
inventories, in part due to weather-related overhang from the first quarter,
contributed to a steep drop in North American lumber prices early in the second
quarter. Prices bottomed out in May and were followed by a modest recovery
before the end of the quarter in response to more balanced inventory levels. The
average Western SPF 2x4 #2&Btr benchmark price for the quarter was US$240 per
Mfbm, down US$56, or 19%, from the previous quarter, although decreases for
wider dimensions were less significant. Lumber sales realizations from offshore
markets, where prices are negotiated monthly or quarterly in advance, saw
relatively minor decreases. Northern Bleached Softwood Kraft ("NBSK") pulp
markets remained strong in the second quarter, with list prices continuing their
upward trend, averaging over US$1,000 per tonne for the quarter in both North
America and Europe. Canadian dollar sales realizations for all products were
negatively impacted by the stronger average Canadian dollar compared to the US
dollar, up 2% over the previous quarter and 6% over the second quarter of 2010.
Canfor's lumber shipment volumes rebounded after weather-related transportation
constraints in the first quarter, increasing by 14% to just under a billion
board feet for the quarter, with increased demand from China also a major
contributing factor. Lumber production levels were up 4% from the previous
quarter, with second quarter productivity improvements at various mills having a
positive impact. Shipments of pulp declined as inventory levels were increased
in advance of an extended scheduled maintenance shut at Canfor Pulp's Northwood
pulp mill in the third quarter.
Lumber unit manufacturing costs were down 3% from the previous quarter, in part
due to the productivity improvements, as well as seasonally lower energy costs.
Unit manufacturing costs for pulp products were up slightly reflecting higher
maintenance, fibre and chemical fibre costs, offset in part by seasonally lower
energy costs.
Commenting on the quarter, Canfor's President and CEO, Don Kayne, said, "We are
seeing several positive indicators in lumber markets, especially Asia where we
shipped record high volumes in the quarter. That said, a sustained recovery of
lumber markets and prices will not begin until there is a turnaround in the U.S.
economy, and particularly the housing sector."
The Company's $300 million, three-year strategic capital investment program at
its lumber operations saw the completion of several significant capital projects
during the quarter, and solid progress on numerous other projects scheduled for
completion in the second half of the year. Ongoing projects include upgrades at
the Vavenby sawmill in advance of its reopening in the fall and a major planer
rebuild at the Polar sawmill, as well as energy systems at the Plateau and
Chetwynd sawmills. "We are very pleased with the results we are seeing from
recently completed capital upgrades," said Kayne. He added that Canfor would be
commencing several additional high return major upgrades in the second half of
the year, which will enhance the Company's cost competitiveness and improve
product profiles for the Company's customers.
Looking forward, U.S. lumber demand is forecast to show a modest recovery in the
third quarter of 2011 as home building and renovation markets see a seasonal
increase in activity. However, no significant recovery is projected through the
balance of the year. The Canadian housing market is projected to level off,
despite a stronger first half of 2011. Strong offshore demand is forecast to
continue through the balance of the year. From an operational point of view,
unseasonably extreme wet weather conditions in many parts of the BC Interior in
recent months have been hampering log harvesting activities. Should the adverse
weather conditions persist, some mill operations may be forced to take downtime
in the coming weeks.
The global softwood pulp market is projected to soften during the third quarter
of 2011, with demand in North America and Europe anticipated to weaken slightly
over the seasonally slow summer months. China's demand for pulp is forecast to
slow in the third quarter of 2011 due to an overhang of inventories after higher
than normal shipments in the second quarter of 2011.
Additional Information and Conference Call
A conference call to discuss the second quarter's financial and operating
results will be held on Friday, July 29, 2011 at 8:00 AM Pacific time. To
participate in the call, please dial 416-340-2216 or Toll-Free 866-226-1792. For
instant replay access until August 23, 2011, please dial 905-694-9451 or
800-408-3053 and enter participant pass code 4268830#. 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.ca/investors/webcasts.asp.
Forward Looking Statements
Certain statements in this press release constitute "forward-looking statements"
which involve known and unknown risks, uncertainties and other factors that may
cause actual results to be materially different from any future results,
performance or achievements expressed or implied by such statements. Words such
as "expects", "anticipates", "projects", "intends", "plans", "will", "believes",
"seeks", "estimates", "should", "may", "could", and variations of such words and
similar expressions are intended to identify such forward-looking statements.
These statements are based on management's current expectations and beliefs and
actual events or results may differ materially. There are many factors that
could cause such actual events or results expressed or implied by such
forward-looking statements to differ materially from any future results
expressed or implied by such statements. Forward-looking statements are based on
current expectations and the Company assumes no obligation to update such
information to reflect later events or developments, except as required by law.
Canfor is a leading integrated forest products company based in Vancouver,
British Columbia (BC) with interests in BC, Alberta, Quebec, Washington state,
and North and South Carolina. The Company produces primarily softwood lumber and
also produces oriented strand board (OSB), remanufactured lumber products and
specialized wood products. Canfor also owns a 50.2% interest in Canfor Pulp
Limited Partnership, which is one of the largest producers of northern softwood
kraft pulp in Canada and a leading producer of high performance kraft paper.
Canfor shares are traded on the Toronto Stock Exchange under the symbol CFP.
Canfor Corporation
Second Quarter 2011
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, 2011 relative to the quarters ended March 31, 2011 and
June 30, 2010, and the financial position of the Company at June 30, 2011. It
should be read in conjunction with Canfor's unaudited interim consolidated
financial statements and accompanying notes for the quarters ended June 30, 2011
and 2010, as well as the 2010 annual MD&A and the 2010 audited consolidated
financial statements and notes thereto, which are included in Canfor's Annual
Report for the year ended December 31, 2010 (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 as of January 1,
2011 is the required reporting framework for Canadian publicly accountable
enterprises.
Throughout this discussion, reference is made to EBITDA (calculated as operating
income before amortization) which Canfor considers to be a relevant indicator
for measuring trends in the performance of each of its operating segments and
the Company's ability to generate funds to meet its debt repayment and capital
expenditure requirements. Reference is also made to Adjusted Shareholder Net
Income (Loss) (calculated as Shareholder Net income (loss) less specific items
affecting comparability with prior periods - for the full calculation, see
reconciliation included in the section "Analysis of Specific Items Affecting
Comparability of Shareholder Net Income") and Adjusted Shareholder Net Income
(Loss) per Share (calculated as Adjusted Shareholder Net Income (Loss) divided
by the weighted average number of shares outstanding during the period). EBITDA,
Adjusted Shareholder Net Income (Loss) and Adjusted Shareholder Net Income
(Loss) per Share are not generally accepted earnings measures and should not be
considered as an alternative to net income or cash flows as determined in
accordance with IFRS. As there is no standardized method of calculating these
measures, Canfor's EBITDA, Adjusted Shareholder Net Income (Loss) and Adjusted
Shareholder Net Income (Loss) per Share may not be directly comparable with
similarly titled measures used by other companies. Reconciliations of EBITDA and
Adjusted Shareholder Net Income (Loss) to net income (loss) reported in
accordance with IFRS are included in this MD&A.
Factors that could impact future operations are also discussed. These factors
may be influenced by both known and unknown risks and uncertainties that could
cause the actual results to be materially different from those stated in this
discussion. Factors that could have a material impact on any future oriented
statements made herein include, but are not limited to: general economic, market
and business conditions; product selling prices; raw material and operating
costs; currency exchange rates; interest rates; changes in law and public
policy; the outcome of labour and trade disputes; and opportunities available to
or pursued by Canfor.
2010 prior period comparative financial information throughout this report has
been restated, and is shown in accordance with IFRS. All financial references
are in millions of Canadian dollars unless otherwise noted. The information in
this report is as at July 28, 2011.
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 2011 EARNINGS OVERVIEW
Selected Financial Information and Statistics(1)
(millions of dollars,
except for per share Q2 Q1 YTD Q2 YTD
amounts) 2011 2011 2011 2010 2010
---------------------------------------------------------------------------
Sales $ 619.1 $ 624.0 $ 1,243.1 $ 634.7 $1,212.6
EBITDA $ 66.8 $ 72.9 $ 139.7 $ 111.0 $ 196.7
Operating income $ 26.5 $ 31.4 $ 57.9 $ 69.1 $ 113.0
Foreign exchange gain
(loss) on long-term
debt and
investments, net $ 2.0 $ 4.7 $ 6.7 $ (12.8) $ (4.0)
Gain (loss) on
derivative financial
instruments(2) $ 1.3 $ 4.7 $ 6.0 $ (3.3) $ (4.5)
Net income $ 26.2 $ 32.3 $ 58.5 $ 43.7 $ 79.2
Net income
attributable to
equity shareholders
of Company $ 2.1 $ 7.0 $ 9.1 $ 21.1 $ 39.4
Net income per share
attributable to
equity shareholders
of Company,
basic and diluted $ 0.01 $ 0.05 $ 0.06 $ 0.15 $ 0.28
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Average exchange rate
(US$/CDN$)(3) $ 1.033 $ 1.014 $ 1.024 $ 0.973 $ 0.967
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) Prior period amounts have been restated, and are shown in accordance
with International Financial Reporting Standards ("IFRS").
(2) Includes gains (losses) from natural gas, diesel, foreign exchange and
lumber future derivative financial instruments (see "Unallocated and
Other" section for more details).
(3) Source - Bank of Canada (average noon rate for the period)
The Company's shareholder net income and adjusted shareholder net income,
together with the related adjustments, are detailed in the table below:
Analysis of Specific Material Items Affecting Comparability of Shareholder Net
Income
After-tax impact, net
of non-controlling
interests
(millions of dollars,
except for per share Q2 Q1 YTD Q2 YTD
amounts) 2011 2011 2011 2010 2010
---------------------------------------------------------------------------
Shareholder Net
Income $ 2.1 $ 7.0 $ 9.1 $ 21.1 $ 39.4
Foreign exchange
(gain) loss on long-
term debt and
investments, net $ (1.4) $ (3.0) $ (4.4) $ 9.0 $ 2.8
(Gain) loss on
derivative financial
instruments $ (0.7) $ (2.9) $ (3.6) $ 1.1 $ 2.1
Restructuring costs
related to changes
in management group $ 2.6 $ - $ 2.6 $ - $ -
Increase in fair
value of asset-
backed commercial
paper $ - $ (1.0) $ (1.0) $ - $ -
---------------------------------------------------------------------------
Net impact of above
items $ 0.5 $ (6.9) $ (6.4) $ 10.1 $ 4.9
---------------------------------------------------------------------------
Adjusted Shareholder
Net Income $ 2.6 $ 0.1 $ 2.7 $ 31.2 $ 44.3
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Shareholder net
income per share
(EPS), as reported $ 0.01 $ 0.05 $ 0.06 $ 0.15 $ 0.28
Net impact of above
items per share $ 0.01 $ (0.05) $ (0.04) $ 0.07 $ 0.03
---------------------------------------------------------------------------
Adjusted Shareholder
Net Income per share $ 0.02 $ 0.00 $ 0.02 $ 0.22 $ 0.31
---------------------------------------------------------------------------
---------------------------------------------------------------------------
EBITDA
The following table reconciles the Company's net income, as reported in
accordance with IFRS, to EBITDA:
Q2 Q1 YTD Q2 YTD
(millions of dollars) 2011 2011 2011 2010 2010
---------------------------------------------------------------------------
Net income, as
reported $ 26.2 $ 32.3 $ 58.5 $ 43.7 $ 79.2
Add (subtract):
Amortization $ 40.3 $ 41.5 $ 81.8 $ 41.9 $ 83.7
Finance expense, net $ 4.9 $ 6.3 $ 11.2 $ 7.6 $ 15.3
Foreign exchange
(gain) loss on long-
term debt and
investments, net $ (2.0) $ (4.7) $ (6.7) $ 12.8 $ 4.0
(Gain) loss on
derivative financial
instruments $ (1.3) $ (4.7) $ (6.0) $ 3.3 $ 4.5
Other expense
(income) $ (1.1) $ 1.7 $ 0.6 $ (3.3) $ (0.4)
Income tax expense
(recovery) $ (0.2) $ 0.5 $ 0.3 $ 5.0 $ 10.4
---------------------------------------------------------------------------
EBITDA, as reported $ 66.8 $ 72.9 $ 139.7 $ 111.0 $ 196.7
Included in above:
Negative (positive)
impact of inventory
valuation
adjustments(4) $ (1.6) $ 2.9 $ 1.3 $ 5.5 $ (17.5)
---------------------------------------------------------------------------
EBITDA excluding
impact of inventory
valuation
adjustments $ 65.2 $ 75.8 $ 141.0 $ 116.5 $ 179.2
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(4) In accordance with IFRS, Canfor records its log and finished product
inventories at the lower of cost and net realizable value ("NRV").
Significant movements in inventory volumes occur due to the seasonal
build and drawdown of logs in the first and second quarters each year,
respectively. In periods where market prices are depressed and NRVs are
below cost, this movement in log inventory volumes can result in large
swings in inventory write-down amounts recorded in those periods. In
addition, changes in market prices, foreign exchange rates, and costs
over the respective reporting periods affect inventory write-downs.
Reported EBITDA for the second quarter of 2011 was $66.8 million, down $6.1
million from the first quarter. Lower EBITDA in the lumber segment, which was
down $8.4 million to $9.6 million, was partially offset by a lower reported loss
for panels operations and lower corporate costs. EBITDA in the pulp and paper
segment was in line with the previous quarter.
The second quarter of 2011 saw little change in the underlying factors
constraining the recovery of North American lumber markets. The U.S. economy
continued its painfully slow recovery, with no significant improvement in the
housing sector. In addition to poor demand levels, increased lumber market
inventories, in part due to weather-related overhang from the first quarter,
contributed to a steep drop in North American lumber prices early in the second
quarter. Prices bottomed out in May and were followed by a modest recovery
before the end of the quarter in response to more balanced inventory levels. The
average Western SPF (Spruce / Pine / Fir) 2x4 #2&Btr benchmark price for the
quarter was US$240 per thousand board feet ("Mfbm"), down US$56, or 19%, from
the previous quarter, although decreases for wider dimensions were less
significant. Lumber sales realizations from offshore markets, where prices are
negotiated monthly or quarterly in advance, saw relatively minor decreases.
Northern Bleached Softwood Kraft ("NBSK") pulp markets remained strong in the
second quarter, with list prices continuing their upward trend, averaging over
US$1,000 per tonne for the quarter in both North America and Europe. Sales
realizations for all products were negatively impacted by the stronger average
Canadian dollar compared to the US dollar, up 2% over the previous quarter.
Canfor's lumber shipment volumes rebounded after weather-related transportation
constraints in the first quarter, increasing by 14% to just under a billion
board feet for the quarter, with increased demand from China also a major
contributing factor. Lumber production levels were up 4% from the previous
quarter, with second quarter productivity improvements at various mills having a
positive impact. Shipments of pulp declined as inventory levels were increased
in advance of an extended scheduled maintenance shut at Canfor Pulp's Northwood
pulp mill in the third quarter.
Lumber unit manufacturing costs were down 3% from the previous quarter, in part
due to the productivity improvements, as well as seasonally lower energy costs.
Unit manufacturing costs for pulp products were up slightly reflecting higher
maintenance, fibre and chemical fibre costs, offset in part by seasonally lower
energy costs.
Compared to the second quarter of 2010, EBITDA was down $44.2 million,
reflecting in large part lower lumber market prices and the impact of a 6%
stronger Canadian dollar on sales realizations across all products. In addition,
results in the lumber segment in the second quarter of 2010 included the benefit
of a lower average export tax rate on shipments to the U.S. related to higher
market prices in the early part of 2010. Lumber production in the second quarter
of 2011 was up compared to the same quarter in 2010 when the Chetwynd and
Quesnel sawmills operated for part of the quarter (restarting in May and June of
2010, respectively), which more than offset the closure of the Clear Lake
operations and higher capital project related downtime in the current period.
Lower shipments of NBSK pulp and higher pulp unit manufacturing costs were also
a contributing factor to the lower EBITDA.
OPERATING RESULTS BY BUSINESS SEGMENT
Lumber
Selected Financial Information and Statistics - Lumber
(millions of dollars
unless otherwise Q2 Q1 YTD Q2 YTD
noted) 2011 2011 2011 2010 2010
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Sales $ 331.2 $ 328.6 $ 659.8 $ 336.9 $ 628.9
Operating income
(loss) $ (11.1) $ (2.3) $ (13.4) $ 21.0 $ 36.8
---------------------------------------------------------------------------
---------------------------------------------------------------------------
EBITDA, as reported $ 9.6 $ 18.0 27.6 $ 41.1 $ 77.4
Negative (positive)
impact of inventory
valuation
adjustments $ 1.1 $ 0.1 1.2 $ 2.2 $ (20.2)
---------------------------------------------------------------------------
EBITDA excluding
impact of inventory
valuation
adjustments $ 10.7 $ 18.1 28.8 $ 43.3 $ 57.2
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Average SPF 2x4
#2&Btr lumber price
in US$(5) $ 240 $ 296 $ 268 $ 266 $ 267
Average SPF price in
Cdn$ $ 232 $ 292 $ 262 $ 273 $ 276
Average SYP 2x4 #2
lumber price in
US$(6) $ 251 $ 302 $ 276 $ 379 $ 354
Average SYP price in
Cdn$ $ 243 $ 298 $ 270 $ 390 $ 366
---------------------------------------------------------------------------
U.S. housing starts
(million units SAAR)
(7) 0.576 0.582 0.579 0.602 0.610
---------------------------------------------------------------------------
Production - SPF
lumber (MMfbm) 787.6 772.3 1,559.9 724.7 1,420.7
Production - SYP
lumber (MMfbm) 112.8 94.8 207.6 92.8 177.8
Shipments - SPF
lumber (MMfbm)(8) 821.6 715.3 1,536.9 736.9 1,409.6
Shipments - SYP
lumber (MMfbm)(8) 123.6 90.9 214.5 98.3 183.9
Shipments - wholesale
lumber (MMfbm) 39.5 59.2 98.7 39.9 78.7
---------------------------------------------------------------------------
(5) Western Spruce/Pine/Fir, per thousand board feet (Source - Random
Lengths Publications, Inc.)
(6) Southern Yellow Pine, Eastside, per thousand board feet (Source - Random
Lengths Publications, Inc.)
(7) Source - U.S. Census Bureau, seasonally adjusted annual rate ("SAAR")
(8) Canfor-produced lumber, including lumber purchased for remanufacture.
Overview
Reported EBITDA for the lumber segment was $9.6 million for the second quarter
of 2011, down from $18.0 million in the previous quarter and $41.1 million in
the second quarter of 2010. For the six months ended June 30, 2011, EBITDA was
$27.6 million, down $49.8 million from the same period in 2010. Excluding the
impact of inventory write-down adjustments, which were significant in the first
quarter of 2010, EBITDA was $28.8 million for the first half of 2011, down $28.4
million from the first half of 2010.
Compared to the previous quarter, sales revenues in the lumber segment increased
slightly to $331.2 million, with higher revenues from shipments of
Canfor-produced lumber being partially offset by seasonally lower log sales and
lower wholesale lumber sales. Overall shipments of Canfor-produced lumber for
the second quarter of 2011 were up 17% from the previous quarter, for the most
part reflecting the improvement in transportation networks after weather-related
constraints in the first quarter and increased demand from China.
Significant reductions were seen in North American US dollar benchmark 2x4
prices for Western SPF and SYP products which were both down by approximately
18% quarter over quarter, though reductions for other grades and dimensions were
less marked. Lumber sales realizations from offshore markets, which are
negotiated monthly or quarterly in advance, saw relatively minor decreases.
Canadian dollar sales realizations were negatively impacted by the 2%
strengthening of the Canadian dollar.
Unit conversion costs were down from the previous quarter, reflecting improved
sawmill and planer productivity and lumber recoveries and seasonally lower
energy costs.
Compared to the second quarter of 2010, reported EBITDA for the lumber segment
was down $31.5 million. This reflected in large part lower market prices and the
stronger Canadian dollar in the current period. Benchmark prices were down US$26
per Mfbm for 2x4 Western SPF products and down US$128 for 2x4 SYP products.
Total unit manufacturing costs were comparable between the periods as lower cash
conversion costs in the current period were largely offset by higher log costs,
which in part reflected higher diesel costs.
Markets
During the second quarter of 2011, the U.S. housing market continued to be
pressured by the large inventory of foreclosed homes and delinquent mortgages.
In addition, the struggling job market weighed heavily on consumer confidence.
U.S. housing starts averaged 576,000 units(9) SAAR for the second quarter, down
slightly from the first quarter. Single family starts were 426,000 units SAAR,
up 3% from the first quarter, while multi-family starts were down 11% at 150,000
units SAAR. Compared to the second quarter of 2010, total housing starts were 4%
lower, with single family starts down 13% and multi-family starts up 36%.
In addition to the struggling markets, the overhang of high market inventory
levels from weather-related transportation disruption in the first quarter
contributed to falling lumber prices through the early part of the second
quarter. Prices bottomed out in May but saw a modest increase towards the end of
the quarter as inventories returned to more normal levels.
In Canada, lumber consumption increased slightly as seasonal improvement in
housing activity pushed starts higher than the previous quarter. Housing starts
in Canada averaged 195,000 units(10) SAAR, up 12% compared to the first quarter
but down slightly from the second quarter of 2010.
Offshore markets remained strong. In China, the concrete forming, remanufacture
and wood frame construction sectors continued to increase their consumption of
BC lumber. In Japan, rebuilding efforts in the aftermath of the March 11, 2011
earthquake and tsunami are progressing slowly as a result of the sheer scale of
the damage caused. However, Japanese lumber demand has remained quite resilient,
with housing starts in the first half of 2011 ahead of last year's levels.
(9) U.S. Census Bureau
(10) CMHC - Canada Mortgage and Housing Corporation
Sales
Sales for the lumber segment in the second quarter of 2011 were $331.2 million,
in line with both the previous quarter and the second quarter of 2010.
Total shipments for the second quarter of 2011 were 985 million board feet, up
14% from the previous quarter reflecting higher seasonal demand, increased
demand from China and a return to normal transportation operations after severe
winter weather conditions in the first quarter. Shipments to Asia experienced a
14% increase over the previous quarter and were 71% higher than for the same
quarter in 2010; China continued to lead all offshore shipment volumes. Compared
to the same quarter in 2010, lumber shipments were up almost 13%, with lower
shipments into North America being more than offset by significantly larger
volumes to China.
With U.S. housing markets remaining stagnant and excess North American supply
well into the second quarter, North American benchmark prices retreated from the
peaks seen in the first quarter. The benchmark Random Lengths prices for Western
SPF 2x4 #2&Btr and SYP 2x4 products were both down by approximately 18%,
averaging US$240 per Mfbm and US$251 per Mfbm, respectively, in the second
quarter. Benchmark prices were down for all wider dimensions as well, though
less significantly than 2x4 for most dimensions. Sales realizations from
offshore markets, where prices are negotiated monthly or quarterly in advance,
saw relatively minor decreases.
As well as the lower market prices, Canadian dollar sales realizations were also
negatively impacted by the higher average value of the Canadian dollar compared
to the US dollar in the second quarter (up almost 2 cents, or 2%, from the
previous quarter), and higher freight costs, reflecting increased fuel
surcharges and tight container availability.
Compared to the second quarter of 2010, prices were also well down, with
benchmark Western SPF 2x4 #2&Btr and SYP 2X4 prices down 10% and 34%,
respectively, from the previous quarter. Similar price movements were seen
across most other widths of lumber. The fall in market prices was compounded by
a higher Canadian dollar and higher freight costs in the second quarter of 2011.
Under the Softwood Lumber Agreement ("SLA") implemented by the federal
governments of Canada and the U.S. in 2006, Canadian softwood lumber exporters
pay an export tax on lumber shipped to the U.S. when the price of lumber is at
or below US$355 per Mfbm, as determined by the Random Lengths Framing Lumber
Composite Price ("RLCP"). The export tax rate is determined monthly, with the
rate being based on the following trigger prices:
Trigger RLCP Tax Rate
-----------------------------
Over US$355 0 %
US$336-$355 5 %
US$316-$335 10 %
US$315 and under 15 %
The RLCP averaged US$264 per Mfbm for the second quarter of 2011, well below the
trigger price required to reduce the export tax rate from 15%. During the second
quarter of 2010, however, the RLCP exceeded certain trigger levels, resulting in
the export tax rate on all U.S. bound shipments for May 2010 and June 2010
dropping from 15% to 10% and 0%, respectively.
Total residual fibre revenue was up from the first quarter of 2011, reflecting
higher production volumes and residual chip prices related to improved NBSK pulp
sales realizations in the quarter. Compared to the second quarter of 2010,
residual fibre revenue was well up, again reflecting higher production volumes
and residual chip prices.
Operations
The Company operated at 72% of lumber capacity in the second quarter, with
production of approximately 900 million board feet, up 4% from the previous
quarter. The increase principally reflected productivity improvements and less
capital downtime taken in the current quarter. Compared to the second quarter of
2010, lumber production was up 10%, reflecting improved productivity in the
current period, and market curtailment at the Chetwynd and Quesnel sawmills
during the second quarter of 2010, with these sawmills reopening in May and June
of 2010 respectively. This was offset in part by the Clear Lake closure in early
2011.
Overall, the Company's lumber unit manufacturing costs were down 3% from the
previous quarter, reflecting decreases in both unit cash conversion and consumed
log costs. The improvement in unit cash conversion costs reflected the improved
productivity levels, as well as seasonally lower energy usage. Log costs were
down principally as a result of improving log-to-lumber recoveries, reflecting
the impact of various recent capital improvements.
Compared to the second quarter of 2010, unit manufacturing costs were at similar
levels, with lower cash conversion costs being offset by increased log costs.
The improved conversion costs again reflected the improved productivity levels,
as well as the closure of the higher-cost Clear Lake sawmill and the fact that
Chetwynd and Quesnel re-started part way through the second quarter of 2010. The
higher log costs reflected higher diesel costs.
Restructuring, mill closure and severance costs in the current quarter were $3.7
million, up $2.2 million from the previous quarter, with the majority of the
increase relating to severance expenses following the change in Company
management announced in early May. Restructuring costs were down $1.1 million
from the second quarter of 2010, when the Quesnel and Chetwynd sawmills were
curtailed for part of the quarter.
Pulp and Paper
Selected Financial Information and Statistics - Pulp and Paper(11)
(millions of dollars
unless otherwise Q2 Q1 YTD Q2 YTD
noted) 2011 2011 2011 2010 2010
---------------------------------------------------------------------------
Sales $ 277.0 $ 283.0 $ 560.0 $ 280.1 $ 549.8
Operating income $ 48.1 $ 47.2 $ 95.3 $ 55.0 $ 89.4
EBITDA $ 63.4 $ 64.0 $ 127.4 $ 72.5 $ 123.5
---------------------------------------------------------------------------
Average pulp price
delivered to U.S. -
US$(12) $ 1,025 $ 970 $ 998 $ 993 $ 937
Average price in Cdn$ $ 992 $ 957 $ 975 $ 1,021 $ 969
---------------------------------------------------------------------------
Production - pulp
(000 mt) 314.7 316.9 631.6 315.6 622.7
Production - paper
(000 mt) 31.8 34.5 66.3 36.3 67.3
Shipments - Canfor-
produced pulp (000
mt) 303.7 318.4 622.1 301.4 617.0
Pulp marketed on
behalf of HSLP (000
mt)(13) - - - 95.2 186.7
Shipments - paper
(000 mt) 32.7 32.6 65.3 34.4 72.1
---------------------------------------------------------------------------
(11) Includes the Taylor pulp mill and 100% of Canfor Pulp Limited
Partnership ("CPLP"), which is consolidated in Canfor's results. Pulp
production and shipment volumes presented are for both northern
bleached softwood kraft ("NBSK") and bleached chemi-thermo mechanical
pulp ("BCTMP").
(12) Per tonne, NBSK pulp list price delivered to U.S. (Resource Information
Systems, Inc.).
(13) Howe Sound Pulp and Paper Limited Partnership pulp mill.
Overview
EBITDA for the pulp and paper segment for the second quarter of 2011 was $63.4
million, in line with the prior quarter and down $9.1 million from the second
quarter of 2010. For the six months ended June 30, 2011 EBITDA was $127.4
million, a slight improvement from the comparable period in 2010.
Compared to the previous quarter, US dollar pulp prices saw solid increases from
the previous quarter, though this was tempered by the impact of the stronger
Canadian dollar. The positive impact of the higher sales realizations was mostly
offset by lower shipment volumes in the quarter and higher unit manufacturing
costs, the latter reflecting an increase in both conversion and fibre costs.
The lower EBITDA compared to the second quarter of 2010 principally reflected
lower shipments of NBSK pulp, higher unit manufacturing costs and lower BCTMP
prices. The higher unit manufacturing costs reflected higher fibre and
maintenance costs, as well as increased chemical prices. Realized NBSK pulp
Canadian dollar sales realizations increased slightly as a 3% increase in US
dollar list prices and a higher proportion of sales into higher margin business,
were partially offset by a strengthening of the Canadian dollar.
Markets
Global softwood pulp markets remained balanced through the second quarter of
2011 led by continued strong demand in China. According to the latest published
World 20(14) report, global bleached softwood pulp shipments for June were 2%
higher when compared to the same period in 2010, and for June year-to-date 2011
were 7% higher than the same period in 2010. PPPC(15) statistics reported an
increase in global demand for printing and writing papers of 1% for May 2011
year-to-date as compared to the same period in 2010.
Global softwood pulp producer inventories remained balanced due to steady global
demand and reduced supply as the industry completed annual spring maintenance in
the second quarter of 2011. World 20 Producers' bleached softwood pulp
inventories increased 4 days during the quarter to 28 days of supply, with a
balanced market generally considered to be in the 27-30 day range.
(14) World 20 data is based on twenty producing countries representing 80%
of world chemical market pulp capacity and is based on information
compiled and prepared by the PPPC.
(15) Pulp and Paper Products Council ("PPPC").
Sales
Shipments of Canfor-produced pulp in the second quarter of 2011 were 304,000
tonnes, down 15,000, or 5%, from the previous quarter as Canfor Pulp Limited
Partnership ("CPLP") increased its inventory levels in advance of an extended
scheduled maintenance shut at the Northwood pulp mill in the third quarter.
Shipments were up marginally compared to the second quarter of 2010.
As a result of continued tight market conditions, average NBSK pulp list prices
saw solid increases compared to the previous quarter, up US$55 per tonne for
North America to US$1,025 and US$57 per tonne for Europe to US$1,017. CPLP's
NBSK pulp list price for China increased from an average of US$870 per tonne in
the previous quarter to US$930 in the second quarter, driven by continued strong
demand from that region. These price improvements were partially offset by a 2%
strengthening of the Canadian dollar. BCTMP sales realizations were down
slightly from the previous quarter.
Compared to the second quarter of 2010, NBSK pulp list prices to the U.S. were
up US$32 per tonne, reflecting the tight markets in the current quarter. Average
NBSK pulp list prices to Europe were up US$60 per tonne, with the China price up
US$67. Sales realizations were also positively impacted by a higher proportion
of sales into higher margin business. However, a 6% increase in the value of the
Canadian dollar partially offset these benefits. BCTMP Canadian dollar sales
realizations were well down from the comparative quarter in 2010 reflecting both
weaker market conditions and prices, as well as the stronger Canadian dollar.
Operations
Pulp production in the second quarter of 2011 was 315,000 tonnes, in line with
the previous quarter and the second quarter of 2010, with the impact of
scheduled maintenance shuts being largely offset by improved productivity as
CPLP's facilities set a record for average daily production during the second
quarter of 2011. Annual scheduled maintenance was carried out at CPLP's Prince
George and Intercontinental NBSK pulp mills in the quarter, as well as at the
Taylor BCTMP mill.
Unit manufacturing costs were up compared to the previous quarter, reflecting
increased cash conversion and fibre costs. The increased conversion costs
reflected higher maintenance spending and increased prices for chemicals,
partially offset by seasonally lower energy usage. Higher fibre costs reflected
an increase in the price of sawmill residual chips, which are linked to NBSK
pulp market prices.
Compared to the second quarter of 2010, unit manufacturing costs were up
slightly. Higher conversion costs were the result of increased maintenance costs
and higher chemical prices; fibre costs were also up due to higher sawmill
residual chip costs, partially offset by a reduction in the cost of whole log
chips.
Unallocated and Other Items
Q2 Q1 YTD Q2 YTD
(millions of dollars) 2011 2011 2011 2010 2010
---------------------------------------------------------------------------
Operating loss of
Panels
operations(16) $ (4.2) $ (5.7) $ (9.9) $ (2.7) $ (3.2)
Corporate costs $ (6.3) $ (7.8) $ (14.1) $ (4.2) $ (10.0)
Finance expense, net $ (4.9) $ (6.3) $ (11.2) $ (7.6) $ (15.3)
Foreign exchange gain
(loss) on long-term
debt and
investments, net $ 2.0 $ 4.7 $ 6.7 $ (12.8) $ (4.0)
Gain (loss) on
derivative financial
instruments $ 1.3 $ 4.7 $ 6.0 $ (3.3) $ (4.5)
Other income
(expense), net $ 1.1 $ (1.7) $ (0.6) $ 3.3 $ 0.4
---------------------------------------------------------------------------
(16) The Panels operations include the Peace Valley OSB (Oriented Strand
Board) joint venture, the only facility currently operating, and the
Company's Tackama plywood and PolarBoard OSB plants, both of which are
currently indefinitely idled.
The panels operations reported an operating loss of $4.2 million for the second
quarter of 2011, compared to a loss of $5.7 million for the previous quarter.
Excluding the impact of inventory valuation adjustments, which were significant
in both quarters, the operating loss of panels operations increased by $3.1
million in the second quarter compared to the first quarter. The higher loss
principally related to depressed market conditions. Compared to the second
quarter of 2010, excluding inventory valuation adjustments, the operating loss
worsened by $7.3 million, largely reflecting the considerably weaker market
prices, as evidenced by a decline of US$125 per thousand square feet(17), or
42%, in OSB prices. Prices are expected to remain weak through the next quarter.
(17) Oriented Strand Board, North Central price, 7/16" (Source - Random
Lengths Publications, Inc.)
Corporate costs were $6.3 million for the second quarter of 2011, down $1.5
million from the previous quarter, with a significant positive adjustment
relating to share-based compensation being partially offset by severance costs
following changes to the Company's management team announced in May. Compared to
the second quarter of 2010, corporate costs were up $2.1 million, reflecting the
severance costs in the current quarter and the reclassification of certain
pension and other costs, offset in part by lower share based compensation costs.
Net finance expense of $4.9 million for the second quarter of 2011 was down $1.4
million from the previous quarter and $2.7 million from the second quarter of
2010, largely as a result of lower long-term debt balances and the positive
impact from the stronger Canadian dollar on US dollar interest.
The Company recorded a foreign exchange translation gain on its US dollar
denominated debt, net of investments, of $2.0 million for the second quarter of
2011 as a result of the strengthening of the Canadian dollar against the US
dollar by almost 1% at the respective quarter ends. The $4.7 million gain in the
first quarter of 2011 reflected a 2% increase in the value of the Canadian
dollar over the period, and the $12.8 million loss in the second quarter of 2010
resulted from a 4% decrease in its value.
The Company uses a variety of derivative financial instruments as partial
economic hedges against unfavourable changes in natural gas and diesel costs,
foreign exchange rates and lumber prices. For the second quarter of 2011, the
Company recorded a net gain of $1.3 million on its derivative instruments,
principally reflecting gains attributable to the stronger Canadian dollar and
falling lumber market prices. The following table summarizes the gains (losses)
on derivative financial instruments for the comparable periods.
Q2 Q1 YTD Q2 YTD
(millions of dollars) 2011 2011 2011 2010 2010
---------------------------------------------------------------------------
Foreign exchange
collars and forward
contracts $ 1.0 $ 1.9 $ 2.9 $ (9.5) $ (3.7)
Natural gas swaps $ (0.1) $ (0.1) $ (0.2) $ 0.2 $ (3.5)
Diesel options and
swaps $ (0.2) $ 1.0 $ 0.8 $ (1.0) $ (0.6)
Lumber futures $ 0.6 $ 1.9 $ 2.5 $ 7.0 $ 3.3
---------------------------------------------------------------------------
$ 1.3 $ 4.7 $ 6.0 $ (3.3) $ (4.5)
---------------------------------------------------------------------------
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:
Q2 Q1 YTD Q2 YTD
(millions of dollars) 2011 2011 2011 2010 2010
---------------------------------------------------------------------------
Increase (decrease)
in cash and cash
equivalents $ (42.5) $ (87.8) $ (130.3) $ 132.8 $ 93.5
Operating activities $ 69.8 $ (5.7) $ 64.1 $ 186.6 $ 214.4
Financing activities $ (80.1) $ (75.0) $ (155.1) $ (21.9) $ (74.5)
Investing activities $ (32.2) $ (6.8) $ (39.0) $ (32.2) $ (46.5)
Ratio of current
assets to current
liabilities 2.2:1 2.2:1
Net debt to
capitalization 6.2% 7.3%
ROCE -
Consolidated(18) 0.3% 0.9% 1.2% 1.9% 3.6%
ROCE - Canfor solid
wood business(19) (1.3)% (0.3)% (1.6)% 0.5% 1.5%
---------------------------------------------------------------------------
(18) Consolidated Return on Capital Employed ("ROCE") is equal to
shareholder net income for the period plus finance expense, after tax,
divided by the average capital employed during the period. Capital
employed consists of current bank loans, current portion of long-term
debt, long-term debt and shareholders' equity, less cash and cash
equivalents and temporary investments.
(19) ROCE for the Canfor solid wood business represents consolidated ROCE
adjusted to remove the results and capital employed of the Company's
interest in the Peace Valley OSB Joint Venture and pulp and paper
operations, including CPLP and the Taylor pulp mill.
Changes in Financial Position
Cash generated from operating activities was $69.8 million in the second quarter
of 2011, compared to cash used of $5.7 million in the previous quarter. 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. This
positive impact was partially offset by reduced accounts payable balances over
the period, as well as lower cash earnings compared to the first quarter.
Compared to the second quarter of 2010, cash generated from operating activities
was down by over $115 million reflecting lower cash earnings, a less positive
swing in working capital balances, a $16.9 million income tax refund in the
second quarter of 2010 and higher pension contributions in the current quarter.
Financing activities used cash of $80.1 million in the second quarter of 2011,
compared to $75.0 million in the previous quarter and $21.9 million in the
second quarter of 2010. The current quarter's cash flows included the repayment
of long term debt of $48.1 million (Q1 2011: $33.8 million; Q2 2010: nil) and
cash distributions to non-controlling interests of $25.9 million (Q1 2011: $38.0
million; Q2 2010: $16.1 million). Interest payments in the current quarter were
$6.1 million up $2.6 million from the previous quarter, due to timing of
payments, and were in line with the second quarter of 2010.
Investing activities used net cash of $32.2 million in the second quarter of
2011, compared to $6.8 million in the first quarter (when the Company received
cash of $29.7 million from the redemption/sale of its certain asset backed
commercial paper assets) and $32.2 million in the second quarter of 2010. Cash
used for capital additions was $55.6 million in the current quarter, up $6.7
million from the previous quarter. Capital additions for lumber operations in
the current quarter included payments related to a major planer upgrade at the
Company's Polar sawmill, an upgrade of the Vavenby sawmill in advance of its
restart in the fall, two new energy systems and two planer optimization
installations.
Capital expenditures for the second quarter of 2011 for the pulp and paper
segment were $30.8 million, with $20.2 million of this for projects related to
the government funded Green Transformation Program (the "Program"). CPLP
received cash of $21.6 million in the second quarter as reimbursement for
capital additions under the Program. CPLP has received Program approval to
proceed with four projects totaling $157.4 million, of which $122.2 million will
be funded under the Program. As of June 30, 2011 CPLP had incurred expenditures
of $79.0 million and received reimbursements totaling $51.4 million.
Liquidity and Financial Requirements
At June 30, 2011, the Company on a consolidated basis had cash and cash
equivalents of $130.0 million and $446.6 million of bank operating lines of
credit, which were undrawn, with $30.8 million reserved for several standby
letters of credit. The Company and CPLP remained in compliance with the
covenants relating to their operating lines of credit and long-term debt during
the quarter, and expect to remain so for the foreseeable future.
The Company's consolidated net debt to total capitalization at the end of the
second quarter of 2011 was 6.2%. Scheduled debt repayments in the first half of
2011 included US$32.3 million, which was paid on March 1, and US$50.0 million,
which was paid on April 1. There are no further long-term debt repayments due
over the balance of 2011.
Softwood Lumber Agreement ("SLA") Update
On January 18, 2011, the U.S. triggered the arbitration provision of the 2006
SLA by delivering a Request for Arbitration. The U.S. claims that BC has not
properly applied the timber pricing system grandparented in the SLA. The U.S.
also claims that subsequent to 2006, BC made additional changes to the timber
pricing system which had the effect of reducing timber prices. The claim focuses
on substantial increases in Grade 4 (non sawlog or low grade) volumes commencing
in 2007. It is alleged that timber was scaled and graded as Grade 4 that did not
meet the criteria for that grade, and was accordingly priced too low.
As the arbitration is a state-to-state international dispute under the SLA,
Canada is preparing a defence to the claim with the assistance of the BC
provincial government and the BC lumber industry. The U.S. is anticipated to
file a detailed statement of claim with the arbitration panel in August 2011. It
is not possible at this time to predict the outcome or the value of the claim,
and accordingly no provision has been recorded by the Company.
OUTLOOK
Lumber
Looking forward, U.S. lumber demand is forecast to show a modest recovery in the
third quarter of 2011 as home building and renovation markets see a seasonal
increase in activity. However, no significant recovery is projected through the
balance of the year. The Canadian housing market is projected to level off,
despite a stronger first half of 2011. Strong offshore demand is forecast to
continue through the balance of the year.
From an operational point of view, unseasonably extreme wet weather conditions
in many parts of the BC Interior in recent months have been hampering log
harvesting activities. Should the adverse weather conditions persist, several
mill operations may be forced to take downtime in the coming weeks.
Pulp and Paper
The global softwood pulp market is projected to soften during the third quarter
of 2011. Price decreases were announced in July of US$20 per tonne for North
America and US$60 per tonne for China. Demand is projected to weaken slightly as
may typically occur in North America and Europe during the summer months.
China's demand for pulp is forecast to slow in the third quarter of 2011 due to
higher than normal shipments in the second quarter of 2011 resulting in higher
consumer inventories entering the third quarter of 2011.
OUTSTANDING SHARES
At July 28, 2011, there were 142,705,764 common shares outstanding.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with International
Financial Reporting Standards requires management to make estimates and
assumptions that affect the amounts recorded in the financial statements. On an
ongoing basis, management reviews its estimates, including those related to
useful lives for amortization, impairment of long-lived assets, certain accounts
receivable, pension and other employee future benefit plans and asset retirement
and deferred reforestation obligations based upon currently available
information. While it is reasonably possible that circumstances may arise which
cause actual results to differ from these estimates, management does not believe
it is likely that any such differences will materially affect the Company's
financial condition.
CONVERSION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS
For interim and annual periods in 2011 and beyond, Canfor is required to prepare
financial statements in accordance with International Financial Reporting
Standards ("IFRS"). The Company's financial statements for the first quarter of
2011 were the first to be prepared in accordance with IFRS, and a number of
additional disclosures were included in those financial statements in relation
to the impact of transition. Certain disclosures have been included in the
financial statements for the current period to reconcile comparative financial
information for the second quarter of 2010 under IFRS to the information
presented under previous Canadian generally accepted accounting principles
("GAAP"). These disclosures are included in note 12 to the financial statements.
Reporting in accordance with IFRS has now been embedded into the Company's
systems and procedures.
NEW ACCOUNTING PRONOUNCEMENTS
In the first half of 2011, the International Accounting Standards Board ("IASB")
issued a number of new and revised accounting standards which are effective for
annual periods beginning on or after January 1, 2013, with early adoption
permitted. These standards include the following:
-- IFRS 9, Financial Instruments;
-- IFRS 10, Consolidated Financial Statements;
-- IFRS 11, Joint Arrangements;
-- IFRS 12, Disclosure of Interests in Other Entities;
-- IAS 27, Separate Financial Statements;
-- IFRS 13, Fair Value Measurement;
-- Amended IAS 19, Employee Benefits; and
-- Amended IAS 28, Investments in Associates and Joint Ventures.
In June 2011, the IASB also issued amended IAS 1, Presentation of Financial
Statements, which is effective for annual periods beginning on or after July 1,
2012.
These new and revised accounting standards have not yet been adopted by Canfor,
and the Company has not yet completed the process of assessing the impact that
they will have on its financial statements or whether to early adopt any of the
new requirements.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
During the quarter ended June 30, 2011, 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 2010 annual statutory reports which are available on www.canfor.com or
www.sedar.com.
SELECTED QUARTERLY FINANCIAL INFORMATION
-----------------------------------------------------------------------
Previous
Canadian
International Financial Reporting Standards(19) GAAP(19)
---------------------------------------------------------------------------
Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
2011 2011 2010 2010 2010 2010 2009 2009
---------------------------------------------------------------------------
Sales and
income
(millions
of dollars)
Sales $ 619.1 $ 624.0 $ 629.1 $ 588.7 $ 634.7 $ 577.9 $ 549.6 $ 521.3
Operating
income
(loss) $ 26.5 $ 31.4 $ 41.7 $ 32.0 $ 69.1 $ 43.9 $ (23.6)$ (31.4)
Net income
(loss) $ 26.2 $ 32.3 $ 55.4 $ 37.2 $ 43.7 $ 35.5 $ (9.1)$ 4.1
Shareholder
net
income
(loss) $ 2.1 $ 7.0 $ 31.4 $ 9.1 $ 21.1 $ 18.3 $ (17.0)$ (5.2)
Per
common
share
(dollars)
Shareholder
net
income
(loss)
- basic
and
diluted $ 0.01 $ 0.05 $ 0.22 $ 0.06 $ 0.15 $ 0.13 $ (0.12) $(0.04)
---------------------------------------------------------------------------
Statistics
Lumber
shipments
(MMfbm) 985 865 895 877 875 797 887 837
OSB
shipments
(MMsf 3/8") 69 63 57 58 72 72 63 69
Pulp
shipments
(000 mt) 303 318 331 277 301 316 315 307
---------------------------------------------------------------------------
Average
exchange
rate
- US$/Cdn$ $ 1.033 $ 1.014 $ 0.987 $ 0.962 $ 0.973 $ 0.961 $ 0.947 $ 0.912
---------------------------------------------------------------------------
Average
Western
SPF 2x4
#2&Btr
lumber
price
(US$) $ 240 $ 296 $ 269 $ 223 $ 266 $ 268 $ 205 $ 191
Average
SYP
(East)
2x4 #2
lumber
price
(US$) $ 251 $ 302 $ 256 $ 243 $ 379 $ 329 $ 231 $ 230
Average
OSB
price
- North
Central
(US$) $ 172 $ 199 $ 191 $ 178 $ 295 $ 214 $ 172 $ 178
Average
NBSK
pulp
list
price
delivered
to U.S.
(US$) $ 1,025 $ 970 $ 967 $ 1,000 $ 993 $ 880 $ 820 $ 733
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(19) Financial information for 2010 has been restated to be shown in
accordance with IFRS. Financial information for 2009 has not been
restated, and is shown above in accordance with previous Canadian GAAP.
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.
Also, operating losses for the quarters in 2009 reflect the impact of a global
economic slowdown.
Other material factors that impact the comparability of the quarters are noted
below:
---------------------------------------------------------------
After-tax
impact, net
of non- Previous
controlling International Canadian
interests Financial Reporting Standards(20) GAAP(20)
---------------------------------------------------------------
(millions of
dollars,
except for
per share Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
amounts) 2011 2011 2010 2010 2010 2010 2009 2009
---------------------------------------------------------------------------
Shareholder
net income
(loss), as
reported $ 2.1 $ 7.0 $ 31.4 $ 9.1 $ 21.1 $ 18.3 $(17.0) $ (5.2)
Foreign
exchange
(gain) loss
on long-
term debt
and
investments
, net $ (1.4) $ (3.0) $ (6.9) $ (6.3) $ 9.0 $ (6.2) $ (5.8) $(19.6)
(Gain) loss
on
derivative
financial
instru-
ments $ (0.7) $ (2.9) $ (0.5) $ (1.1) $ 1.1 $ 1.0 $ (1.4) $(12.7)
Restructuring
costs
related to
changes in
management
group $ 2.6 $ - $ - $ - $ - $ - $ - $ -
Gain on sale
of
operating
assets of
Howe Sound
Pulp and
Paper
Limited
Partner-
ship $ - $ - $ (4.9) $ - $ - $ - $ - $ -
Increase in
fair value
of asset-
backed
commercial
paper $ - $ (1.0) $ (5.5) $ - $ - $ - $ - $ -
Clear Lake
permanent
closure
provision $ - $ - $ - $ 13.4 $ - $ - $ - $ -
---------------------------------------------------------------------------
Net impact
of above
items $ 0.5 $ (6.9) $(17.8) $ 6.0 $ 10.1 $ (5.2) $ (7.2) $(32.3)
---------------------------------------------------------------------------
Adjusted
shareholder
net income
(loss) $ 2.6 $ 0.1 $ 13.6 $ 15.1 $ 31.2 $ 13.1 $(24.2) $(37.5)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Shareholder
net income
(loss) per
share
(EPS), as
reported $ 0.01 $ 0.05 $ 0.22 $ 0.06 $ 0.15 $ 0.13 $(0.12) $(0.04)
Net impact
of above
items per
share $ 0.01 $(0.05) $(0.12) $ 0.04 $ 0.07 $(0.04) $(0.05) $(0.22)
---------------------------------------------------------------------------
Adjusted
shareholder
net income
(loss) per
share $ 0.02 $ 0.00 $ 0.10 $ 0.10 $ 0.22 $ 0.09 $(0.17) $(0.26)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(20) Financial information for 2010 has been restated to be shown in
accordance with IFRS. Financial information for 2009 has not been
restated, and is shown above in accordance with previous Canadian GAAP.
Canfor Corporation
Condensed Consolidated Balance Sheets
As at As at
June 30, December 31,
(millions of dollars, unaudited) 2011 2010
---------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 130.0 $ 260.3
Accounts receivable - Trade 177.6 146.9
- Other 61.1 54.2
Inventories (Note 2) 318.8 325.8
Prepaid expenses 39.2 28.1
---------------------------------------------------------------------------
Total current assets 726.7 815.3
---------------------------------------------------------------------------
Property, plant and equipment 1,040.0 1,049.1
Timber licenses 538.3 546.7
Goodwill and other intangible assets 80.6 84.5
Long-term investments and other (Note 3) 60.7 89.1
---------------------------------------------------------------------------
Total assets $ 2,446.3 $ 2,584.7
---------------------------------------------------------------------------
---------------------------------------------------------------------------
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities $ 257.2 $ 292.9
Current portion of long-term debt (Note
(4(b)) 48.2 82.5
Current portion of deferred reforestation
obligation 31.5 31.6
---------------------------------------------------------------------------
Total current liabilities 336.9 407.0
---------------------------------------------------------------------------
Long-term debt (Note 4(b)) 178.5 235.6
Retirement benefit obligations 260.8 272.2
Deferred reforestation obligation 61.6 54.3
Other long-term liabilities 14.6 16.4
Deferred income taxes, net 122.5 123.7
---------------------------------------------------------------------------
Total liabilities $ 974.9 $ 1,109.2
---------------------------------------------------------------------------
EQUITY
Share capital $ 1,125.7 $ 1,125.4
Contributed surplus 31.9 31.9
Retained earnings 84.3 79.0
Accumulated foreign exchange translation
differences (16.2) (10.3)
---------------------------------------------------------------------------
Total equity attributable to equity
holders of the Company 1,225.7 1,226.0
Non-controlling interests 245.7 249.5
---------------------------------------------------------------------------
Total equity $ 1,471.4 $ 1,475.5
---------------------------------------------------------------------------
Total liabilities and equity $ 2,446.3 $ 2,584.7
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Contingency (Note 11)
The accompanying notes are an integral part of these condensed consolidated
financial statements.
APPROVED BY THE BOARD
"R.S. Smith", Director, R.S. Smith
"R.L. Cliff", Director, R.L. Cliff
Canfor Corporation
Condensed Consolidated Statements of Income
3 months ended 6 months ended
June 30, June 30,
(millions of dollars, unaudited) 2011 2010 2011 2010
---------------------------------------------------------------------------
Sales $ 619.1 $ 634.7 $ 1,243.1 $ 1,212.6
Costs and expenses
Manufacturing and product
costs 399.0 384.1 808.1 742.3
Freight and other
distribution costs 123.8 109.3 236.4 210.5
Export taxes 9.4 8.4 20.2 20.0
Amortization 40.3 41.9 81.8 83.7
Selling and administration
costs 13.2 16.1 29.0 31.7
Restructuring, mill closure
and severance costs 6.9 5.8 9.7 11.4
---------------------------------------------------------------------------
592.6 565.6 1,185.2 1,099.6
---------------------------------------------------------------------------
Operating income 26.5 69.1 57.9 113.0
Finance expense, net (4.9) (7.6) (11.2) (15.3)
Foreign exchange gain (loss) on
long-term debt and investments,
net 2.0 (12.8) 6.7 (4.0)
Gain (loss) on derivative
financial instruments (Note 6) 1.3 (3.3) 6.0 (4.5)
Other income (expense), net 1.1 3.3 (0.6) 0.4
---------------------------------------------------------------------------
Net income before income taxes 26.0 48.7 58.8 89.6
Income tax (expense) recovery
(Note 7) 0.2 (5.0) (0.3) (10.4)
---------------------------------------------------------------------------
Net income $ 26.2 $ 43.7 $ 58.5 $ 79.2
---------------------------------------------------------------------------
Net income attributable to:
Equity shareholders of Company $ 2.1 $ 21.1 $ 9.1 $ 39.4
Non-controlling interests 24.1 22.6 49.4 39.8
---------------------------------------------------------------------------
Net income $ 26.2 $ 43.7 $ 58.5 $ 79.2
---------------------------------------------------------------------------
Net income per common share: (in
dollars)
Attributable to equity
shareholders of Company
- Basic and diluted (Note 8) $ 0.01 $ 0.15 $ 0.06 $ 0.28
---------------------------------------------------------------------------
---------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Canfor Corporation
Condensed Consolidated Statements of Other Comprehensive Income (Loss)
3 months ended 6 months ended
June 30, June 30,
(millions of dollars, unaudited) 2011 2010 2011 2010
---------------------------------------------------------------------------
Net income $ 26.2 $ 43.7 $ 58.5 $ 79.2
Other comprehensive income
(loss)
Foreign exchange translation
differences for foreign
operations 0.3 11.7 (5.9) 3.7
Defined benefit plan actuarial
losses (Note 5) (8.8) (47.6) (5.8) (94.9)
Income tax recovery on defined
benefit plan actuarial losses
(Note 7) 2.2 10.9 1.4 21.5
---------------------------------------------------------------------------
Other comprehensive income
(loss), net of tax (6.3) (25.0) (10.3) (69.7)
---------------------------------------------------------------------------
Total comprehensive income $ 19.9 $ 18.7 $ 48.2 $ 9.5
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total comprehensive income
(loss) attributable to:
Equity shareholders of Company $ (3.7) $ 0.1 $ (0.6) $ (21.6)
Non-controlling interests 23.6 18.6 48.8 31.1
---------------------------------------------------------------------------
Total comprehensive income $ 19.9 $ 18.7 $ 48.2 $ 9.5
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Condensed Consolidated Statements of Changes in Equity
3 months ended 6 months ended
June 30, June 30,
(millions of dollars, unaudited) 2011 2010 2011 2010
---------------------------------------------------------------------------
Share capital
Balance at beginning of
period $1,125.7 $1,124.7 $ 1,125.4 $ 1,124.7
Common shares issued on
exercise of stock
options - 0.3 0.3 0.3
---------------------------------------------------------------------------
Balance at end of period $1,125.7 $1,125.0 $ 1,125.7 $ 1,125.0
---------------------------------------------------------------------------
Contributed surplus
---------------------------------------------------------------------------
Balance at beginning and
end of period $ 31.9 $ 31.9 $ 31.9 $ 31.9
---------------------------------------------------------------------------
Retained earnings
Balance at beginning of
period $ 88.3 $ 26.5 $ 79.0 $ 40.2
Net income attributable to
equity shareholders of Company 2.1 21.1 9.1 39.4
Defined benefit plan actuarial
gains (losses), net of tax (6.1) (32.7) (3.8) (64.7)
---------------------------------------------------------------------------
Balance at end of period $ 84.3 $ 14.9 $ 84.3 $ 14.9
---------------------------------------------------------------------------
Accumulated foreign exchange
translation differences
Balance at beginning of
period $ (16.5) $ (8.0) $ (10.3) $ -
Foreign exchange translation
differences for foreign
operations 0.3 11.7 (5.9) 3.7
---------------------------------------------------------------------------
Balance at end of period $ (16.2) $ 3.7 $ (16.2) $ 3.7
---------------------------------------------------------------------------
Total equity attributable to
equity holders of Company $1,225.7 $1,175.5 $ 1,225.7 $ 1,175.5
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Non-controlling interests
Balance at beginning of
period $ 247.0 $ 260.1 $ 249.5 $ 259.3
Net income attributable to
non-controlling interests 24.1 22.6 49.4 39.8
Defined benefit plan actuarial
losses attributable to
non-controlling interests (0.5) (4.0) (0.6) (8.7)
Distributions to non-controlling
interests (24.9) (18.9) (52.6) (30.6)
---------------------------------------------------------------------------
Balance at end of period $ 245.7 $ 259.8 $ 245.7 $ 259.8
---------------------------------------------------------------------------
Total equity $1,471.4 $1,435.3 $ 1,471.4 $ 1,435.3
---------------------------------------------------------------------------
---------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Canfor Corporation
Condensed Consolidated Statements of Cash Flows
3 months ended 6 months ended
June 30, June 30,
(millions of dollars, unaudited) 2011 2010 2011 2010
---------------------------------------------------------------------------
Cash generated from (used in)
Operating activities
Net income $ 26.2 $ 43.7 $ 58.5 $ 79.2
Items not affecting cash:
Amortization 40.3 41.9 81.8 83.7
Income tax expense (recovery) (0.2) 5.0 0.3 10.4
Long-term portion of deferred
reforestation obligation (6.0) (10.4) 6.1 (1.8)
Foreign exchange (gain) loss
on long-term debt and
investments, net (2.0) 12.8 (6.7) 4.0
Changes in mark-to-market
value of derivative financial
instruments (0.9) 5.6 (4.6) 6.2
Employee future benefits 0.4 2.1 0.8 3.7
Net finance expense 4.9 7.6 11.2 15.3
Other, net (7.7) 0.4 (8.5) 0.4
Salary pension plan
contributions (9.9) (1.5) (19.6) (3.2)
Income taxes recovered (paid),
net 0.7 16.9 - 45.6
Net change in non-cash working
capital (Note 9) 24.0 62.5 (55.2) (29.1)
---------------------------------------------------------------------------
69.8 186.6 64.1 214.4
---------------------------------------------------------------------------
Financing activities
Repayment of long-term debt
(Note 4(b)) (48.1) - (81.9) (33.7)
Finance expenses paid (6.1) (5.4) (9.6) (13.2)
Cash distributions paid to
non-controlling interests (25.9) (16.1) (63.9) (27.3)
Other, net - (0.4) 0.3 (0.3)
---------------------------------------------------------------------------
(80.1) (21.9) (155.1) (74.5)
---------------------------------------------------------------------------
Investing activities
Additions to property, plant
and equipment (55.6) (33.0) (104.5) (50.2)
Reimbursements from Government
under Green Transformation
Program 21.6 - 31.2 -
Proceeds from redemption of
asset-backed commercial paper
(Note 3) 0.1 0.9 29.8 2.6
Other, net 1.7 (0.1) 4.5 1.1
---------------------------------------------------------------------------
(32.2) (32.2) (39.0) (46.5)
---------------------------------------------------------------------------
Foreign exchange gain (loss) on
cash and cash equivalents of
subsidiaries with different
functional currency - 0.3 (0.3) 0.1
---------------------------------------------------------------------------
Increase (decrease) in cash and
cash equivalents (42.5) 132.8 (130.3) 93.5
Cash and cash equivalents at
beginning of period 172.5 94.1 260.3 133.4
---------------------------------------------------------------------------
Cash and cash equivalents at
end of period $ 130.0 $ 226.9 $ 130.0 $ 226.9
---------------------------------------------------------------------------
---------------------------------------------------------------------------
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 dollars unless otherwise noted)
1. Basis of preparation and transition to International Financial Reporting
Standards ("IFRS")
These condensed consolidated interim financial statements have been prepared in
accordance with International Accounting Standard 34 Interim financial
reporting, and include the accounts of Canfor Corporation and its subsidiary
entities, hereinafter referred to as "Canfor" or "the Company".
Canfor's transition date to IFRS was January 1, 2010. Various reconciliations
between previous Canadian generally accepted accounting principles ("previous
GAAP") and IFRS related to the transition and subsequent reporting periods are
set out in note 12, together with explanatory notes.
These interim financial statements do not include all of the disclosures
required by IFRS for annual financial statements. Additional disclosures
relevant to the understanding of these interim financial statements, including
the accounting policies applied, can be found in Canfor's first quarter 2011
interim financial statements and notes, as well as in the Company's Annual
Report for the year ended December 31, 2010, prepared in accordance with
previous GAAP, 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, is
generally stronger in the spring and summer months. Shipment volumes are
affected by these factors as well as by global supply and demand conditions.
The currency of presentation for these financial statements is the Canadian dollar.
Accounting standards issued and not applied
In the first half of 2011, the International Accounting Standards Board ("IASB")
issued a number of new and revised accounting standards which are effective for
annual periods beginning on or after January 1, 2013, with early adoption
permitted. These standards include the following:
-- IFRS 9, Financial Instruments;
-- IFRS 10, Consolidated Financial Statements;
-- IFRS 11, Joint Arrangements;
-- IFRS 12, Disclosure of Interests in Other Entities;
-- IAS 27, Separate Financial Statements;
-- IFRS 13, Fair Value Measurement;
-- Amended IAS 19, Employee Benefits; and
-- Amended IAS 28, Investments in Associates and Joint Ventures.
In June 2011, the IASB also issued amended IAS 1, Presentation of Financial
Statements, which is effective for annual periods beginning on or after July 1,
2012.
These new and revised accounting standards have not yet been adopted by Canfor,
and the Company has not yet completed the process of assessing the impact that
they will have on its financial statements, or whether to early adopt any of the
new requirements.
2. Inventories
As at As at
June 30, December 31,
(millions of dollars) 2011 2010
---------------------------------------------------------------------------
Logs $ 31.2 $ 53.9
Finished products 193.3 169.7
Residual fibre 8.9 17.4
Processing materials and supplies 85.4 84.8
---------------------------------------------------------------------------
$ 318.8 $ 325.8
---------------------------------------------------------------------------
---------------------------------------------------------------------------
The above inventory balances are stated after inventory write-downs from cost to
net realizable value. Write-downs at June 30, 2011 totaled $4.5 million
(December 31, 2010 - $3.2 million).
3. Long-term Investments and Other
As at As at
June 30, December 31,
(millions of dollars) 2011 2010
---------------------------------------------------------------------------
Asset-backed commercial paper ("ABCP") $ 12.6 $ 40.9
Other investments 24.7 26.5
Investment tax credits 6.8 6.4
Defined benefit plan assets 5.1 3.4
Other deposits, loans and advances 11.5 11.9
---------------------------------------------------------------------------
$ 60.7 $ 89.1
---------------------------------------------------------------------------
---------------------------------------------------------------------------
During the first quarter of 2011, net proceeds of $29.7 million were received
from the redemption/sale of certain ABCP assets. The remaining movement in this
balance over the period relates to foreign exchange and fair value adjustments.
4. Operating Lines and Long-Term Debt
(a) Available Operating Lines
As at As at
June 30, December 31,
(millions of dollars) 2011 2010
---------------------------------------------------------------------------
Canfor (excluding CPLP)
Principal operating lines $ 350.0 $ 350.0
Facility A 12.3 12.7
Facility B - 29.7
Other 1.1 1.1
---------------------------------------------------------------------------
Total operating lines - Canfor (excluding
CPLP) 363.4 393.5
Letters of credit (principally
unregistered pension plans) (17.1) (17.3)
---------------------------------------------------------------------------
Total available operating lines - Canfor
(excluding CPLP) $ 346.3 $ 376.2
---------------------------------------------------------------------------
CPLP
Main bank loan facility $ 40.0 $ 40.0
Bridge loan credit facility 30.0 -
Facility for BC Hydro letter of credit 13.0 13.2
---------------------------------------------------------------------------
Total operating lines - CPLP 83.0 53.2
Letters of credit (for general business
purposes) (0.5) (0.5)
BC Hydro letter of credit (13.0) (13.2)
---------------------------------------------------------------------------
Total available operating lines - CPLP $ 69.5 $ 39.5
---------------------------------------------------------------------------
Consolidated
Total operating lines $ 446.4 $ 446.7
Total available operating lines $ 415.8 $ 415.7
---------------------------------------------------------------------------
---------------------------------------------------------------------------
For Canfor, excluding CPLP, the principal operating lines mature on October 31,
2013 with interest payable at floating rates based on lenders' Canadian prime
rate, bankers acceptances, US dollar base rate or US dollar LIBOR rate, plus a
margin that varies with the Company's net debt to total capitalization ratio.
Facility A, which was for US$12.8 million at June 30, 2011, expires in January
2012, and is non-recourse to the Company under normal circumstances, except for
an amount of US$6.7 million. The ABCP assets of the Company have been pledged as
security to support this credit facility. Facility A has similar terms to the
other operating lines, except that the interest rate is plus or minus a margin.
The terms of CPLP's principal bank loan facility include interest payable at
floating rates that vary depending on the ratio of net debt to operating
earnings before interest, taxes, depreciation, amortization and certain other
non-cash items, and is based on lenders' Canadian prime rate, bankers
acceptances, US dollar base rate or US dollar LIBOR rate, plus a margin. The
maturity date of this facility is November 30, 2013.
CPLP also has a $30.0 million bridge loan credit facility to fund capital
projects that are being funded by the Canadian Federal Government Green
Transformation Program. The bridge facility terms are similar to CPLP's main
facility, with interest and other costs at prevailing market rates. CPLP also
has a separate facility with a maturity date of November 30, 2013 to cover a
$13.0 million standby letter of credit issued to BC Hydro.
As at June 30, 2011, the Company and CPLP were in compliance with all covenants
relating to their operating lines of credit and no significant amounts were
drawn on the Company or CPLP's available operating lines.
All borrowings of CPLP (operating lines and long-term debt) are non-recourse to
other entities within the Company.
(b) Long-Term Debt
On April 1, 2011, the Company repaid $48.1 million (US$50.0 million) of 6.18%
interest rate privately placed senior notes. In the first quarter of 2011, the
Company repaid $31.5 million (US$32.3 million) of 8.03% interest rate privately
placed senior notes, as well as $2.3 million of other long-term debt
obligations.
At June 30, 2011, the fair value of the Company's long-term debt, which was
measured at its amortized cost of $226.7 million, was $239.4 million. The fair
value of long-term debt was determined based on prevailing market rates for
long-term debt with similar characteristics and risk profile.
5. Employee Future Benefits
Canfor measures its accrued benefit obligations and the fair value of plan
assets for accounting purposes as at December 31 of each year. At the end of
each interim reporting period, the Company estimates movements in its accrued
benefit liabilities based upon movements in discount rates and the rates of
return on plan assets, as well as any significant changes to the plans.
Adjustments are also made for payments made and current service and interest
costs.
For the six months ended June 30, 2011, $5.8 million (before tax) was charged to
other comprehensive income relating to a rate of return on plan assets of 1.80%,
which is 1.95% lower than the expected rate of 3.75%, partially offset by the
impact of the merging of two of the Company's smaller defined benefit pension
plans in the first quarter. For the three months ended June 30, 2011, the amount
was $8.8 million (before tax). For the six months ended June 30, 2010 a pre-tax
amount of $94.9 million was charged to other comprehensive income, reflecting a
0.75% reduction in the discount rate used to value the accrued benefit
obligations during the period, and a loss on plan assets for the period. For the
three months ended June 30, 2010 the pre-tax charge was $47.6 million.
The assumptions used to estimate the changes in net accrued benefit liabilities
were as follows:
(weighted average assumptions)
----------------------------------------------------------------------------
Pension Benefit Plans
Discount rate
June 30, 2011 5.50%
March 31, 2011 5.50%
December 31, 2010 5.50%
June 30, 2010 5.50%
March 31, 2010 5.75%
January 1, 2010 6.25%
Rate of return on plan assets
6 months ended June 30, 2011 1.80%
3 months ended March 31, 2011 1.65%
6 months ended June 30, 2010 (2.20)%
3 months ended March 31, 2010 1.50%
----------------------------------------------------------------------------
Other Benefit Plans
Discount rate
June 30, 2011 5.75%
March 31, 2011 5.75%
December 31, 2010 5.75%
June 30, 2010 5.75%
March 31, 2010 6.00%
January 1, 2010 6.75%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
6. Derivative Financial Instruments
The Company uses a variety of derivative financial instruments to reduce its
exposure to risks associated with fluctuations in foreign exchange rates, lumber
prices and energy costs. At June 30, 2011, the fair value of derivative
financial instruments was a net asset of $0.4 million (December 31, 2010 - 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, 2011 and 2010:
3 months ended 6 months ended
June 30, June 30,
(millions of dollars) 2011 2010 2011 2010
---------------------------------------------------------------------------
Foreign exchange collars and
forward contracts $ 1.0 $ (9.5) $ 2.9 $ (3.7)
Natural gas swaps (0.1) 0.2 (0.2) (3.5)
Diesel options and swaps (0.2) (1.0) 0.8 (0.6)
Lumber futures 0.6 7.0 2.5 3.3
---------------------------------------------------------------------------
$ 1.3 $ (3.3) $ 6.0 $ (4.5)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
The following table summarizes the fair value of the derivative financial
instruments included in the balance sheet at June 30, 2011 and December 31,
2010:
As at As at
June 30, December 31,
(millions of dollars) 2011 2010
---------------------------------------------------------------------------
Foreign exchange collars and forward
contracts $ 1.3 $ 1.6
Natural gas swaps (1.6) (4.7)
Diesel options and swaps 0.5 1.0
Lumber futures 0.2 (2.0)
---------------------------------------------------------------------------
Total current asset (liability) $ 0.4 $ (4.1)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
7. Income taxes
3 months ended 6 months ended
June 30, June 30,
(millions of dollars) 2011 2010 2011 2010
---------------------------------------------------------------------------
Current $ (0.1) $ - $ (0.3) $ 0.2
Deferred 0.3 (5.0) - (10.6)
---------------------------------------------------------------------------
Income tax recovery (expense) $ 0.2 $ (5.0) $ (0.3) $ (10.4)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
The reconciliation of income taxes calculated at the statutory rate to the
actual income tax provision is as follows:
3 months ended 6 months ended
June 30, June 30,
(millions of dollars) 2011 2010 2011 2010
---------------------------------------------------------------------------
Income tax expense at statutory
rate 2011 - 26.5% (2010 -
28.5%) $ (6.9) $ (13.8) $ (15.6) $ (25.5)
Add (deduct):
Non-taxable income related to
non-controlling interests in
limited partnerships 6.4 6.4 13.1 11.3
Entities with different income
tax rates and other tax
adjustments 0.5 (0.2) 0.6 (0.5)
Tax recovery at rates other
than statutory rate - 1.1 0.2 1.8
Permanent difference from
capital gains and losses and
other non-deductible items 0.2 1.5 1.4 2.5
---------------------------------------------------------------------------
Income tax expense $ 0.2 $ (5.0) $ (0.3) $ (10.4)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
In addition to the amounts recorded to net income, a tax recovery of $2.2
million was recorded to other comprehensive income for the three month period
ended June 30, 2011 (three months ended June 30, 2010 - $10.9 million) in
relation to the actuarial losses on defined benefit employee compensation plans.
For the six months ended June 30, 2011 the tax recovery was $1.4 million (six
months ended June 30, 2010 - $21.5 million).
8. Earnings per share
Basic net income (loss) per share is calculated by dividing the net income
(loss) available to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted net income (loss) per share is
calculated by dividing the net income (loss) available to common shareholders by
the weighted average number of common shares during the period using the
treasury stock method. Under this method, proceeds from the potential exercise
of stock options are assumed to be used to purchase the Company's common shares.
When there is a net loss, the exercise of stock options would result in a
calculated diluted net loss per share that is anti-dilutive.
3 months ended 6 months ended
June 30, June 30,
2011 2010 2011 2010
---------------------------------------------------------------------------
Weighted average number
of common shares 142,705,764 142,605,632 142,691,365 142,597,510
Incremental shares
from potential
exercise of options 7,495 5,021 10,124 3,146
---------------------------------------------------------------------------
Diluted number of common
shares 142,713,259 142,610,653 142,701,489 142,600,656
---------------------------------------------------------------------------
---------------------------------------------------------------------------
9. Net Change in Non-Cash Working Capital
3 months ended 6 months ended
June 30, June 30,
(millions of dollars) 2011 2010 2011 2010
---------------------------------------------------------------------------
Accounts receivable $ (16.8) $ (2.4) $ (31.2) $ (40.4)
Inventories 83.6 78.1 6.2 (10.9)
Prepaid expenses (13.5) (6.8) (11.2) (5.9)
Accounts payable, accrued
liabilities and current portion
of deferred reforestation
obligation (29.3) (6.4) (19.0) 28.1
---------------------------------------------------------------------------
Net increase (decrease) in non-
cash working capital $ 24.0 $ 62.5 $ (55.2) $ (29.1)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
10. Segment information
Canfor has two reportable segments, as described below, which offer different
products and are managed separately because they require different production
processes and marketing strategies. The following summary describes the
operations of each of the Company's reportable segments:
-- Lumber - Includes logging operations, and manufacture and sale of
various grades, widths and lengths of lumber products.
-- Pulp and paper - Includes purchase of residual fibre, and production and
sale of pulp and paper products, including northern bleached softwood
kraft ("NBSK") and bleached chemi-thermo mechanical pulp ("BCTMP"). This
segment includes 100% of Canfor Pulp Limited Partnership and the Taylor
Pulp mill.
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. Sales for panels operations for the three months ended June
30, 2011 were $10.9 million (three months ended June 30, 2010 - $17.7 million)
and $23.3 million for the six months ended June 30, 3011 (six months ended June
30, 2010 - $33.9 million).
(millions of Pulp & Unallocated Elimination
dollars) Lumber Paper & Other Adjustment Consolidated
---------------------------------------------------------------------------
3 months ended
June 30, 2011
Sales to external
customers $ 331.2 277.0 10.9 - $ 619.1
Sales to other
segments $ 32.4 - - (32.4) $ -
Operating income
(loss) $ (11.1) 48.1 (10.5) - $ 26.5
Amortization $ 20.7 15.3 4.3 - $ 40.3
Capital
expenditures(i) $ 24.4 30.8 0.4 - $ 55.6
---------------------------------------------------------------------------
3 months ended
June 30, 2010
Sales to external
customers $ 336.9 280.1 17.7 - $ 634.7
Sales to other
segments $ 34.3 - - (34.3) $ -
Operating income
(loss) $ 21.0 55.0 (6.9) - $ 69.1
Amortization $ 20.1 17.5 4.3 - $ 41.9
Capital
expenditures $ 18.7 14.3 - - $ 33.0
---------------------------------------------------------------------------
---------------------------------------------------------------------------
6 months ended
June 30, 2011
Sales to external
customers $ 659.8 560.0 23.3 - $ 1,243.1
Sales to other
segments $ 61.9 - - (61.9) $ -
Operating income
(loss) $ (13.4) 95.3 (24.0) - $ 57.9
Amortization $ 41.0 32.1 8.7 - $ 81.8
Capital
expenditures(i) $ 50.0 54.1 0.4 - $ 104.5
Identifiable
assets $ 1,347.0 842.7 256.6 - $ 2,446.3
---------------------------------------------------------------------------
6 months ended
June 30, 2010
Sales to external
customers $ 628.9 549.8 33.9 - $ 1,212.6
Sales to other
segments $ 69.8 - - (69.8) $ -
Operating income
(loss) $ 36.8 89.4 (13.2) - $ 113.0
Amortization $ 40.6 34.1 9.0 - $ 83.7
Capital
expenditures $ 29.5 20.7 - - $ 50.2
Identifiable
assets $ 1,329.4 900.4 348.4 - $ 2,578.2
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(i) Includes capital expenditures made by CPLP that are financed by the
government-funded Green Transformation Program.
11. Contingency
On January 18, 2011, the U.S. triggered the arbitration provision of the 2006
Softwood Lumber Agreement ("SLA") by delivering a Request for Arbitration. The
U.S. claims that BC has not properly applied the timber pricing system
grandparented in the SLA. The U.S. also claims that subsequent to 2006, BC made
additional changes to the timber pricing system which had the effect of reducing
timber prices. The claim focuses on substantial increases in Grade 4 (non sawlog
or low grade) volumes commencing in 2007. It is alleged that timber was scaled
and graded as Grade 4 that did not meet the criteria for that grade, and was
accordingly priced too low.
As the arbitration is a state-to-state international dispute under the SLA,
Canada is preparing a defence to the claim with the assistance of the BC
provincial government and the BC lumber industry. The U.S. is anticipated to
file a detailed statement of claim with the arbitration panel in August 2011. It
is not possible at this time to predict the outcome or the value of the claim,
and accordingly no provision has been recorded by the Company.
12. Transition to International Financial Reporting Standards ("IFRS")
For 2011, the Company is preparing its financial statements in accordance with
IFRS for the first time. In preparing comparative information for 2010, the
Company has adjusted amounts previously reported in financial statements
prepared in accordance with previous Canadian GAAP ("previous GAAP").
The Company's transition date to IFRS was January 1, 2010 and a provisional
opening IFRS balance sheet was prepared as at that date. A full reconciliation
of the opening balance sheet to amounts reported under previous GAAP can be
found in the Company's condensed consolidated interim financial statements for
the first quarter of 2011, along with the balance sheet as at December 31, 2010.
Certain of the differences are also summarized in the following sections, which
include reconciliations of total comprehensive income from previous GAAP to IFRS
for the three month and six month periods ending June 30, 2010, and a
reconciliation of equity as at June 30, 2010.
The accounting changes resulting from the transition to IFRS do not impact the
Company's compliance with any of its financial covenants with respect to its
debt obligations.
(i) Reconciliation of comprehensive income for three and six month periods ended
June 30, 2010
(millions of Canadian Note 3 months ended 6 months ended
dollars, unaudited) (section iii) June 30, 2010 June 30, 2010
---------------------------------------------------------------------------
Net income
Previous Canadian GAAP $ 40.4 $ 72.9
Lower amortization of
property, plant and
equipment and timber
licenses in period, net of
tax a 1.3 2.4
Lower pension expense for
period, net of tax b 2.0 3.9
---------------------------------------------------------------------------
Net income under IFRS $ 43.7 $ 79.2
---------------------------------------------------------------------------
Other comprehensive income
(loss)
Previous Canadian GAAP $ 11.7 $ 3.7
Actuarial gains (losses) on
defined benefit plans
during the period, net of
tax b (36.7) (73.4)
---------------------------------------------------------------------------
Other comprehensive income
(loss) under IFRS $ (25.0) $ (69.7)
---------------------------------------------------------------------------
(ii) Reconciliation of equity at June 30, 2010
Note As at June
(millions of Canadian dollars, unaudited) (section iii) 30, 2010
---------------------------------------------------------------------------
Previous Canadian GAAP - Total equity $ 1,706.4
Recognition of impairment provisions at date
of transition a (42.6)
Lower amortization of property, plant and
equipment and timber licenses for six months
ended June 30, 2010, net of tax a 2.4
Recognition of unamortized actuarial losses at
date of transition b (162.4)
Lower pension expense for six month ended June
30, 2010, net of tax b 3.9
Actuarial gains (losses) on defined benefit
plans for six months ended June 30, 2010, net
of tax b (73.4)
Effect of change in discount rate for deferred
reforestation obligation recognized on
transition c 1.0
---------------------------------------------------------------------------
IFRS - Total equity $ 1,435.3
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(iii) Explanatory notes for reconciliations
The following explanations are referenced in the reconciliations in sections (i)
and (ii) of this note:
a. Recognition of impairment provisions against property, plant and
equipment and timber licenses
There are differences in the methodology used to determine if an asset
should be impaired under IFRS compared to that under previous GAAP. The
previous GAAP rules provided for a two-step test, with no impairment
being required if the undiscounted future expected cash flows relating
to an asset exceeded the carrying value of that asset. Under IFRS, the
undiscounted cash flows are not considered and an impairment is recorded
where the recoverable amount (defined as the higher of 'value in use'
and 'fair value less costs to sell') is below the asset's carrying
value. As a result, impairments were required for certain assets under
IFRS that were not recorded under previous GAAP.
The effect at the date of transition was to decrease the book value of
certain sawmill assets included within property, plant and equipment by
$9.4 million and timber licenses by $46.6 million. An impairment of $0.8
million was also recorded against capital spares inventory. A
corresponding adjustment to deferred income taxes of $14.2 million was
also recorded, with the net amount of $42.6 million being charged to
opening equity.
These impairments had the impact of reducing the overall amortization
expense by $1.3 million for the three months ended June 30, 2010, and
$2.4 million for the six months ended June 30, 2010.
b. Recognition of unamortized actuarial losses at date of transition to
IFRS into equity
Under IFRS, the Company's accounting policy is to recognize all
actuarial gains and losses, arising on its defined benefit pension and
other non-pension post retirement plans, immediately in other
comprehensive income. At the date of transition, all previously
unrecognized cumulative actuarial gains and losses were recognized in
retained earnings.
This resulted in a charge to retained earnings in the opening balance
sheet of $148.4 million, and a charge to non-controlling interests of
$14.0 million reflecting non-controlling interests in CPLP. Pension
assets recorded under previous GAAP of $110.6 million were removed, and
liabilities of $101.3 million were recorded to reflect the actual
funding position of the defined benefit pension plans. The long-term
deferred income tax liability was reduced by $49.5 million as a result
of these adjustments.
Under previous GAAP, actuarial gains and losses were deferred and taken
through the income statement over a number of years. As Canfor has
elected to recognize these immediately through other comprehensive
income under IFRS, the defined benefit expense in the income statement
is reduced by $2.0 million for the second quarter of 2010 and $3.9
million for the year to date. The after-tax charge through other
comprehensive income was $36.7 million in the second quarter of 2010,
and $73.4 million for the year to date.
c. Change in discount rate for deferred reforestation obligation
The amount of this provision of $60.3 million at January 1, 2010 was
reduced in the opening balance sheet by $1.3 million (pre-tax) due to a
change in discount rate required to value the obligation under IFRS as
compared to previous GAAP.
(iv) Explanation of material adjustments to the statement of cash flows
The impact of the transition to IFRS on the statement of cash flows is to
reclassify certain items between cash flow categories. One of the main
reclassifications relates to interest payments and receipts which were
classified as operating activities under previous GAAP, but are shown as
financing and investing activities, respectively, under IFRS.
In addition, the reclassification of certain of CPLP's major maintenance costs
to property, plant and equipment under IFRS has an impact on the statement of
cash flows. Under previous GAAP these costs were shown under operating
activities as deferred maintenance spending, whereas under IFRS they are
included in additions to property, plant and equipment under investing
activities.
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