VANCOUVER, Oct. 20, 2017 /CNW/ - Canfor Corporation
(TSX: CFP) today reported net income attributable to shareholders
("shareholder net income") of $66.2
million, or $0.51 per share,
for the third quarter of 2017, compared to shareholder net income
of $81.3 million, or $0.61 per share, for the second quarter of 2017
and net income attributable to shareholders of $50.9 million, or $0.38 per share, for the third quarter of
2016. For the nine months ended September 30, 2017, shareholder net income was
$213.6 million, or $1.62 per share, compared to $112.9 million, or $0.85 per share, for the nine months ended
September 30, 2016.
The following table summarizes selected financial information
for the Company for the comparative periods:
|
|
Q3
|
|
Q2
|
|
YTD
|
|
Q3
|
|
YTD
|
(millions of Canadian
dollars, except per share amounts)
|
|
2017
|
|
2017
|
|
2017
|
|
2016
|
|
2016
|
Sales
|
$
|
1,165.2
|
$
|
1,185.2
|
$
|
3,476.6
|
$
|
1,101.2
|
$
|
3,191.4
|
Operating income
before amortization, as reported
|
$
|
166.9
|
$
|
193.1
|
$
|
529.1
|
$
|
158.0
|
$
|
410.8
|
Operating income, as
reported
|
$
|
105.4
|
$
|
131.0
|
$
|
343.2
|
$
|
97.4
|
$
|
232.1
|
Adjusted operating
income before amortization1
|
$
|
195.4
|
$
|
227.9
|
$
|
592.4
|
$
|
158.0
|
$
|
395.3
|
Adjusted operating
income1
|
$
|
133.9
|
$
|
165.8
|
$
|
406.5
|
$
|
97.4
|
$
|
216.6
|
Net
income2
|
$
|
66.2
|
$
|
81.3
|
$
|
213.6
|
$
|
50.9
|
$
|
112.9
|
Net income per share,
basic and diluted2
|
$
|
0.51
|
$
|
0.61
|
$
|
1.62
|
$
|
0.38
|
$
|
0.85
|
Adjusted shareholder
net income
|
$
|
84.3
|
$
|
104.2
|
$
|
247.8
|
$
|
51.7
|
$
|
99.1
|
Adjusted shareholder
net income per share, basic and diluted
|
$
|
0.65
|
$
|
0.78
|
$
|
1.88
|
$
|
0.39
|
$
|
0.75
|
1
Adjusted for a recovery of $3.2 million
related to lower estimated Canal Flats closure costs recorded in
the third quarter of 2017 following a sale of the land;
countervailing and anti-dumping duty deposits of $31.7 million and
$34.8 million expensed for accounting purposes in the third and
second quarters of 2017,
respectively; and a one-time gain of $15.5 million related to a
legal settlement in the second quarter of 2016.
|
2
Attributable to equity shareholders of
the Company
|
The Company's adjusted shareholder net income for the third
quarter of 2017 was $84.3 million, or
$0.65 per share, compared to an
adjusted shareholder net income of $104.2
million, or $0.78 per share,
for the second quarter of 2017, and adjusted shareholder net income
of $51.7 million, or $0.39 per share, for the third quarter of 2016.
For the nine months ended September 30,
2017, the Company's adjusted shareholder net income was
$247.8 million, or $1.88 per share, compared to $99.1 million, or $0.75 per share, for the nine months ended
September 30, 2016.
The Company reported operating income of $105.4 million for the third quarter of 2017,
down $25.6 million from reported
operating income of $131.0 million
for the second quarter of 2017, with the decline reflecting lower
operating earnings in both the lumber and pulp and paper segments.
Lumber segment results were impacted by a decline in Southern
Yellow Pine ("SYP") lumber prices, a 5
cent, or 7%, stronger Canadian dollar, as well as increased
log costs in Western Canada, the
latter reflecting continued weather-related challenges and the
effects of the worst fire season in recorded history in the BC
Interior. These factors outweighed the benefits of higher US-dollar
Western Spruce/Pine/Fir ("Western
SPF") lumber prices, which showed solid gains as the quarter
progressed, in part as a result of fire-related disruption to
supply. For the pulp and paper segment, the stronger Canadian
dollar more than offset the benefit of a quarter-over-quarter
decline in scheduled maintenance outages, improved unit
manufacturing costs, and increased energy revenues.
Reported results in the third quarter of 2017 include
$31.7 million (Q2 2017: $34.8 million) related to the expensing of the
preliminary countervailing duty ("CVD") and preliminary
anti-dumping duty ("ADD") on exports from Canada to the United
States. On August 26, 2017,
the US Department of Commerce's preliminary CVD expired.
Lumber demand in North America
remained relatively stable in the third quarter of 2017.
Notwithstanding the impact of the recent hurricanes in the US
South, US housing starts averaged 1,165,000 units on a seasonally
adjusted basis, in line with the previous quarter, while the repair
and remodeling sector saw seasonally stronger activity.
Single-family starts, which consume a higher proportion of lumber,
were up 3% from the previous quarter, while multi-family starts
were down compared to the second quarter of 2017. In Canada, housing starts remained near
historical highs, averaging 223,000 units on a seasonally adjusted
basis. Offshore lumber demand from China, Japan
and other regions remained strong through the third quarter,
particularly for the Company's higher-value lumber products.
On a reported basis, Western SPF lumber unit sales realizations
were in line with the second quarter of 2017 as higher average
US-dollar Western SPF lumber prices and slightly lower duties
expensed in the current quarter offset the impact of the
strengthened Canadian dollar. The average benchmark North American
Random Lengths Western SPF 2x4 #2&Btr price was up US$18 per Mfbm, or 5%, compared to the second
quarter of 2017, with more pronounced increases seen across
wider-width dimensions. In addition to solid underlying North
American and offshore demand, the severe forest fire season in
Western Canada contributed to a
significant drop in Western SPF lumber shipments destined to the US
from producers in British
Columbia. These factors, combined with steady demand and
relatively low field inventory, resulted in significant price
gains.
SYP unit sales realizations were moderately lower than the prior
quarter, reflecting a US$68 per Mfbm,
or 14%, decline in the SYP East 2x4 #2 price, with similar declines
seen in 2x8 and 2x12 dimensions. Prices for SYP East 2x6 and 2x10
#2 dimensions were in line with the previous quarter. Pricing for
higher-value products remained strong, partly offsetting the
impacts of lower average benchmark lumber prices. SYP lumber prices
picked up towards the end of the quarter primarily reflecting lean
inventories throughout the supply chain and increased demand
following the recent hurricanes in the US South.
Total lumber shipments, at 1.37 billion board feet, were in line
with the previous quarter. SYP shipments were modestly higher than
the previous quarter, in part reflecting improved demand in
September. Western SPF shipments decreased slightly compared to the
second quarter of 2017, with the comparative period reflecting a
release of inventory following the severe winter weather
experienced at the start of 2017.
Total lumber production, at 1.31 billion board feet, was in line
with the previous quarter. In the US South, higher productivity
following several capital upgrades offset fewer operating hours as
a result of weather-related disruptions and increased statutory
holidays. In Western Canada,
increased operating hours offset slightly lower productivity,
largely reflecting weather and fire-related challenges. Lumber unit
manufacturing costs in the third quarter of 2017 were in line with
the previous quarter as the positive impact of seasonally lower
energy costs in Western Canada and
stable log costs in the US South offset higher purchased wood and
log hauling costs in Western
Canada, and to a lesser extent, increasing market-based
stumpage.
Entering the third quarter of 2017, global softwood pulp markets
showed signs of weakness; however, as the quarter progressed,
demand and pricing rebounded, particularly China, in part due to China's new regulations restricting the import
of recycled mix paper. The resulting positive price momentum will
largely be realized in the fourth quarter of 2017, reflecting the
timing of shipments (versus orders). As a result, average Northern
Bleached Softwood Kraft ("NBSK") pulp US-dollar list prices to
China were consistent
quarter-over-quarter; however, NBSK pulp unit sales realizations
experienced a moderate decrease due to the 7% stronger Canadian
dollar. Bleached Chemi-Thermo Mechanical Pulp ("BCTMP")
US-dollar list prices trended positively through the quarter, but
were also negatively impacted by the stronger Canadian dollar.
Pulp shipments and production volumes were up 10% and 11%,
respectively, from the previous quarter, principally reflecting a
decline in scheduled maintenance outages. In the third
quarter of 2017, Canfor Pulp Products Inc. ("CPPI") completed a
scheduled maintenance outage at the Intercontinental NBSK pulp mill
which reduced pulp production by approximately 10,000 tonnes. In
the second quarter, a scheduled maintenance outage at CPPI's larger
Northwood NBSK pulp mill resulted in approximately 33,000 tonnes of
reduced production. Shipments for the third quarter of 2017
were also impacted by a 14,000 tonne vessel slippage into early
October. Pulp unit manufacturing costs improved from the
previous quarter, largely reflecting the lower quarter-over-quarter
scheduled maintenance outages coupled with seasonally lower energy
prices and usage.
Commenting on the Company's third quarter results, Canfor's
President and Chief Executive Officer, Don
Kayne, said, "Despite significant weather-related challenges
due to the severe forest fires in BC and hurricanes in the US
South, combined with significant and unwarranted duties levied on
shipments from Canada to the US,
Canfor's lumber business had another solid quarter, with the
Company's high-value focus, solid demand and supply constraints all
contributing to our strong earnings for the period."
On October 20, 2017, the Board of
Directors approved, in principle, a $160
million (US$125 million)
capital investment program focused on Canfor's US South sawmill
operations to increase production capacity by approximately 350
million board feet by the end of 2019. These investments will
be focused on enhancing the Company's high-value product offering
by targeting a number of sawmill and planer modernization
opportunities along with increased drying capacity. In addition,
the Company is currently conducting a detailed viability study of a
greenfield opportunity at one of several locations in the US South.
The mill capacity currently being considered is 250 million board
feet. The study is expected to be completed in the first quarter of
2018, with a final decision to follow thereafter.
Looking ahead, North American lumber prices are forecast to
remain steady (and high by historical standards), while there is a
risk of continued volatility as the US Department of Commerce
investigations progress and final determinations are made. Demand
in North America is anticipated to
be solid through much of the fourth quarter of 2017, with
seasonally slower activity in December. For the Company's key
offshore lumber markets, demand is anticipated to remain solid
through the fourth quarter of 2017 and into 2018.
For the month of October 2017,
CPPI announced increases of US$105
per tonne and US$30 per tonne for
NBSK pulp list prices to China and
North America, respectively,
reflecting a surge in demand, principally from China, as well as supply disruptions. Global
pulp markets are anticipated to remain strong through the fourth
quarter of 2017.
Additional Information and Conference Call
A conference call to discuss the third quarter's financial and
operating results will be held on Monday,
October 23, 2017 at 8:00 AM Pacific
time. To participate in the call, please dial
Toll-Free 888-390-0546. For instant replay access until
November 6, 2017, please dial
888-390-0541 and enter participant pass code 919920#. The
conference call will be webcast live and will be available at
www.canfor.com. This news release, the attached financial
statements and a presentation used during the conference call can
be accessed via the Company's website at
http://www.canfor.com/investor-relations/webcasts.
Forward Looking Statements
Certain statements in this press release constitute
"forward-looking statements" which involve known and unknown risks,
uncertainties and other factors that may cause actual results to be
materially different from any future results, performance or
achievements expressed or implied by such statements. Words
such as "expects", "anticipates", "projects", "intends", "plans",
"will", "believes", "seeks", "estimates", "should", "may", "could",
and variations of such words and similar expressions are intended
to identify such forward-looking statements. These statements
are based on management's current expectations and beliefs and
actual events or results may differ materially. There are
many factors that could cause such actual events or results
expressed or implied by such forward-looking statements to differ
materially from any future results expressed or implied by such
statements. Forward-looking statements are based on current
expectations and the Company assumes no obligation to update such
information to reflect later events or developments, except as
required by law.
Canfor is a leading integrated forest products company based
in Vancouver, British Columbia
("BC") with interests in BC, Alberta, North and South Carolina, Alabama, Georgia, Mississippi and Arkansas. Canfor
produces primarily softwood lumber and also owns a 54.8% interest
in Canfor Pulp Products Inc., which is one of the largest global
producers of market northern bleached softwood kraft pulp and a
leading producer of high performance kraft paper. Canfor
shares are traded on The Toronto Stock Exchange under the symbol
CFP.
Canfor Corporation
Third Quarter
2017
Management's Discussion and Analysis
This interim Management's Discussion and Analysis
("MD&A") provides a review of Canfor Corporation's ("Canfor" or
"the Company") financial performance for the quarter ended
September 30, 2017 relative to the
quarters ended June 30, 2017 and
September 30, 2016, and the financial
position of the Company at September
30, 2017. It should be read in conjunction with
Canfor's unaudited interim consolidated financial statements and
accompanying notes for the quarters ended September 30, 2017 and 2016, as well as the 2016
annual MD&A and the 2016 audited consolidated financial
statements and notes thereto, which are included in Canfor's Annual
Report for the year ended December 31,
2016 (available at www.canfor.com). The
financial information in this interim MD&A has been prepared in
accordance with International Financial Reporting Standards
("IFRS"), which is the required reporting framework for Canadian
publicly accountable enterprises.
Throughout this discussion, reference is made to Operating
Income before Amortization and Adjusted 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
(calculated as Shareholder Net Income less specific items affecting
comparability with prior periods – for the full calculation, see
the reconciliation included in the section "Analysis of Specific
Material Items Affecting Comparability of Shareholder Net Income"
and Adjusted Shareholder Net Income per Share (calculated as
Adjusted Shareholder Net Income divided by the weighted average
number of shares outstanding during the period). Operating Income
before Amortization and Adjusted Shareholder Net Income and
Adjusted Shareholder Net Income per Share are not generally
accepted earnings measures and should not be considered as an
alternative to net income or cash flows as determined in accordance
with IFRS. As there is no standardized method of calculating
these measures, Canfor's Operating Income before Amortization,
Adjusted Shareholder Net Income and Adjusted Shareholder Net Income
per Share may not be directly comparable with similarly titled
measures used by other companies. Reconciliations of
Operating Income before Amortization to Operating Income and
Adjusted Shareholder Net Income to Net Income reported in
accordance with IFRS are included in this MD&A. Throughout this
discussion, reference is made to the current quarter, which refers
to the results for the third quarter of 2017.
Factors that could impact future operations are also
discussed. These factors may be influenced by both known and
unknown risks and uncertainties that could cause the actual results
to be materially different from those stated in this discussion.
Factors that could have a material impact on any future oriented
statements made herein include, but are not limited to: general
economic, market and business conditions; product selling prices;
raw material and operating costs; currency exchange rates; interest
rates; changes in law and public policy; the outcome of labour and
trade disputes; and opportunities available to or pursued by
Canfor.
All financial references are in millions of Canadian dollars
unless otherwise noted. The information in this report is as
at October 20, 2017.
Forward Looking Statements
Certain statements in this MD&A constitute
"forward-looking statements" which involve known and unknown risks,
uncertainties and other factors that may cause actual results to be
materially different from any future results, performance or
achievements expressed or implied by such statements. Words
such as "expects", "anticipates", "projects", "intends", "plans",
"will", "believes", "seeks", "estimates", "should", "may", "could",
and variations of such words and similar expressions are intended
to identify such forward-looking statements. These statements
are based on management's current expectations and beliefs and
actual events or results may differ materially. There are
many factors that could cause such actual events or results
expressed or implied by such forward-looking statements to differ
materially from any future results expressed or implied by such
statements. Forward-looking statements are based on current
expectations and the Company assumes no obligation to update such
information to reflect later events or developments, except as
required by law.
THIRD QUARTER 2017 OVERVIEW
Selected Financial Information and Statistics
|
|
Q3
|
|
Q2
|
|
YTD
|
|
Q3
|
|
YTD
|
(millions of Canadian
dollars, except per share amounts)
|
|
2017
|
|
2017
|
|
2017
|
|
2016
|
|
2016
|
Operating income
(loss) by segment:
|
|
|
|
|
|
|
|
|
|
|
|
Lumber
|
$
|
92.9
|
$
|
110.4
|
$
|
287.0
|
$
|
75.1
|
$
|
180.0
|
|
Pulp and
Paper
|
$
|
21.1
|
$
|
31.5
|
$
|
87.8
|
$
|
31.0
|
$
|
75.3
|
|
Unallocated and
Other1
|
$
|
(8.6)
|
$
|
(10.9)
|
$
|
(31.6)
|
$
|
(8.7)
|
$
|
(23.2)
|
Total operating
income
|
$
|
105.4
|
$
|
131.0
|
$
|
343.2
|
$
|
97.4
|
$
|
232.1
|
Add:
Amortization2
|
$
|
61.5
|
$
|
62.1
|
$
|
185.9
|
$
|
60.6
|
$
|
178.7
|
Total operating
income before amortization
|
$
|
166.9
|
$
|
193.1
|
$
|
529.1
|
$
|
158.0
|
$
|
410.8
|
Add
(deduct):
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
movements
|
$
|
4.7
|
$
|
92.3
|
$
|
(8.2)
|
$
|
2.1
|
$
|
72.9
|
|
Defined benefit plan
contributions, net
|
$
|
(5.8)
|
$
|
(6.6)
|
$
|
(18.4)
|
$
|
(15.2)
|
$
|
(25.6)
|
|
Income taxes paid,
net
|
$
|
(21.6)
|
$
|
(19.3)
|
$
|
(39.7)
|
$
|
(13.5)
|
$
|
(30.1)
|
|
Cash received from
legal settlement
|
$
|
-
|
|
-
|
$
|
-
|
$
|
16.3
|
$
|
16.3
|
|
Gain on sale of
Anthony EACOM Inc.3
|
$
|
-
|
$
|
-
|
$
|
(4.0)
|
$
|
-
|
$
|
-
|
|
Gain on legal
settlement, net4
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
(15.5)
|
|
Other operating cash
flows, net5
|
$
|
(17.1)
|
$
|
(5.9)
|
$
|
(5.3)
|
$
|
0.9
|
$
|
(6.0)
|
Cash from
operating activities
|
$
|
127.1
|
$
|
253.6
|
$
|
453.5
|
$
|
148.6
|
$
|
422.8
|
Add
(deduct):
|
|
|
|
|
|
|
|
|
|
|
|
Finance expenses
paid
|
$
|
(4.8)
|
$
|
(6.4)
|
$
|
(14.4)
|
$
|
(3.5)
|
$
|
(14.5)
|
|
Distributions paid to
non-controlling interests
|
$
|
(2.2)
|
$
|
(2.2)
|
$
|
(8.2)
|
$
|
(11.6)
|
$
|
(23.1)
|
|
Capital additions,
net
|
$
|
(57.5)
|
$
|
(61.7)
|
$
|
(158.1)
|
$
|
(57.1)
|
$
|
(170.4)
|
|
Proceeds received
from sale of Anthony EACOM Inc. 3
|
$
|
1.4
|
$
|
1.2
|
$
|
8.0
|
$
|
-
|
$
|
-
|
|
Repayment of
long-term debt
|
$
|
(0.1)
|
$
|
(0.1)
|
$
|
(0.2)
|
$
|
-
|
$
|
-
|
|
Share
purchases
|
$
|
(75.0)
|
$
|
-
|
$
|
(75.0)
|
$
|
-
|
$
|
-
|
|
Proceeds received
from sale of Lakeland Winton6
|
$
|
-
|
$
|
15.0
|
$
|
15.0
|
$
|
-
|
$
|
-
|
|
Acquisitions
|
$
|
-
|
$
|
(14.4)
|
$
|
(56.2)
|
$
|
(64.2)
|
$
|
(83.9)
|
|
Proceeds from
long-term debt
|
$
|
-
|
$
|
-
|
$
|
1.7
|
$
|
-
|
$
|
-
|
|
Advances to
Licella
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
(3.5)
|
|
Foreign exchange gain
(loss) on cash and cash equivalents
|
$
|
(2.5)
|
$
|
(2.0)
|
$
|
(4.6)
|
$
|
0.7
|
$
|
(3.5)
|
|
Other, net
|
$
|
(10.5)
|
$
|
(4.3)
|
$
|
(11.3)
|
$
|
4.4
|
$
|
(17.6)
|
Change in cash /
operating loans
|
$
|
(24.1)
|
$
|
178.7
|
$
|
150.2
|
$
|
17.3
|
$
|
106.3
|
ROIC – Consolidated
period-to-date7
|
|
4.0%
|
|
4.8%
|
|
12.9%
|
|
3.3%
|
|
6.9%
|
Average exchange
rate (US$ per C$1.00)8
|
$
|
0.798
|
$
|
0.744
|
$
|
0.765
|
$
|
0.766
|
$
|
0.756
|
1
Increase in YTD 2017 Unallocated and
Other largely attributable to higher legal costs related to the
expiry of the Softwood Lumber Agreement.
|
2
Amortization includes amortization of
certain capitalized major maintenance costs.
|
3
On March 31, 2017, Canfor sold its 50%
interest in Anthony EACOM Inc. for net proceeds of $21.4 million
and recognized a $4.0 million gain. A total
of $8.0 million in proceeds has been received to date in
2017.
|
4
Gain relates to a $16.3 million
settlement of a claim with respect to logistics services, net of a
$0.8 million impairment of related machinery and
equipment.
|
5
Further information on operating cash
flows can be found in the Company's unaudited interim consolidated
financial statements.
|
6
On July 1, 2015 Canfor sold its 33.3%
interest in Lakeland Mills Ltd. and Winton Global Lumber Ltd for
consideration of $30.0 million. The first installment of
$15.0 million was received on July 1, 2015, and the second
installment for $15.0 million was received in the second quarter of
2017.
|
7
Consolidated Return on Invested Capital
("ROIC") is equal to operating income/loss plus realized
gains/losses on derivatives, equity income/loss from
joint venture and other income/expense, all net of minority
interest, divided by the average invested capital during the
period. Invested capital is equal to
capital assets, plus long-term investments and net non-cash working
capital, all excluding minority interest components.
|
8
Source – Bank of Canada (monthly average
rate for the period).
|
Analysis of Specific Material Items Affecting Comparability of
Shareholder Net Income
After-tax impact, net
of non-controlling interests
(millions of Canadian dollars, except per share amounts)
|
|
Q3 2017
|
|
Q2 2017
|
|
YTD 2017
|
|
Q3 2016
|
|
YTD 2016
|
Shareholder net
income, as reported
|
$
|
66.2
|
$
|
81.3
|
$
|
213.6
|
$
|
50.9
|
$
|
112.9
|
Foreign exchange
(gain) loss on long-term debt
|
$
|
(4.4)
|
$
|
(2.9)
|
$
|
(8.3)
|
$
|
0.9
|
$
|
(6.3)
|
Countervailing and
anti-dumping duty deposits
|
$
|
23.5
|
$
|
25.8
|
$
|
49.3
|
$
|
-
|
$
|
-
|
Mill closure
provision recovery
|
$
|
(2.4)
|
$
|
-
|
$
|
(2.4)
|
$
|
-
|
$
|
-
|
(Gain) loss on
derivative financial instruments
|
$
|
1.4
|
$
|
-
|
$
|
(1.0)
|
$
|
(0.1)
|
$
|
(0.6)
|
Gain on sale of
Anthony EACOM Inc.
|
$
|
-
|
$
|
-
|
$
|
(3.4)
|
$
|
-
|
$
|
-
|
Gain on legal
settlement, net
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
(6.9)
|
Net impact of above
items
|
$
|
18.1
|
$
|
22.9
|
$
|
34.2
|
$
|
0.8
|
$
|
(13.8)
|
Adjusted
shareholder net income
|
$
|
84.3
|
$
|
104.2
|
$
|
247.8
|
$
|
51.7
|
$
|
99.1
|
Shareholder net
income per share (EPS), as reported
|
$
|
0.51
|
$
|
0.61
|
$
|
1.62
|
$
|
0.38
|
$
|
0.85
|
Net impact of above
items per share
|
$
|
0.14
|
$
|
0.17
|
$
|
0.26
|
$
|
0.01
|
$
|
(0.10)
|
Adjusted
shareholder net income per share
|
$
|
0.65
|
$
|
0.78
|
$
|
1.88
|
$
|
0.39
|
$
|
0.75
|
The Company reported operating income of $105.4 million for the third quarter of 2017,
down $25.6 million from reported
operating income of $131.0 million
for the second quarter of 2017 with the decline reflecting lower
operating earnings in both the lumber and pulp and paper segments.
Lumber segment results were impacted by a decline in Southern
Yellow Pine ("SYP") lumber prices, a 5
cent, or 7% stronger Canadian dollar, as well as increased
log costs in Western Canada, the
latter reflecting continued weather-related challenges and the
effects of the worst fire season in recorded history in the BC
Interior. These factors outweighed the benefits of higher US-dollar
Western Spruce/Pine/Fir ("Western
SPF") lumber prices, which showed solid gains as the quarter
progressed, in part as a result of the fire-related disruption to
supply. For the pulp and paper segment, the stronger Canadian
dollar more than offset the benefit of a quarter-over-quarter
decline in scheduled maintenance outages, improved unit
manufacturing costs, and increased energy revenues.
Reported results in the third quarter of 2017 include
$31.7 million (Q2: $34.8 million) related to the expensing of the
preliminary countervailing duty ("CVD") and preliminary
anti-dumping duty ("ADD") on exports from Canada to the United
States. On August 26, 2017 the
US Department of Commerce's preliminary CVD expired.
The current quarter's adjusted operating income was up
$36.5 million from $97.4 million for the third quarter of 2016,
reflecting a $46.3 million increase
in lumber segment earnings and a $9.9
million decrease in earnings for the pulp and paper segment.
The increase in lumber segment earnings primarily reflected higher
Western SPF lumber unit sales realizations with significantly
higher US-dollar benchmark lumber prices more than offsetting a
3 cent, or 4%, strengthening of the
Canadian dollar, modestly lower SYP lumber unit sales realizations
and market driven increases in log costs in Western Canada in the current period. In the
pulp and paper segment, improvements in average Northern Bleached
Softwood Kraft ("NBSK") pulp and Bleached Chemi-Thermo Mechanical
Pulp ("BCTMP") unit sales realizations were more than offset by
lower shipments and a moderate increase in pulp unit manufacturing
costs, largely attributable to higher market-based fibre costs.
OPERATING RESULTS BY BUSINESS SEGMENT
Lumber
Selected Financial Information and Statistics
– Lumber
(millions of Canadian
dollars, unless otherwise noted)
|
|
Q3
2017
|
|
Q2
2017
|
|
YTD
2017
|
|
Q3
2016
|
|
YTD
2016
|
Sales
|
$
|
880.4
|
$
|
904.3
|
$
|
2,601.8
|
$
|
809.6
|
$
|
2,347.5
|
Operating income
before amortization, as reported
|
$
|
136.1
|
$
|
154.0
|
$
|
417.3
|
$
|
115.7
|
$
|
300.8
|
Operating income, as
reported
|
$
|
92.9
|
$
|
110.4
|
$
|
287.0
|
$
|
75.1
|
$
|
180.0
|
Countervailing and
anti-dumping duty deposits9
|
$
|
31.7
|
$
|
34.8
|
$
|
66.5
|
$
|
-
|
$
|
-
|
Mill closure
provision recovery10
|
$
|
(3.2)
|
$
|
-
|
$
|
(3.2)
|
$
|
-
|
$
|
-
|
Gain on legal
settlement, net11
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
(15.5)
|
Adjusted operating
income
|
$
|
121.4
|
$
|
145.2
|
$
|
350.3
|
$
|
75.1
|
$
|
164.5
|
Average SPF 2x4
#2&Btr lumber price in US$12
|
$
|
406
|
$
|
388
|
$
|
381
|
$
|
322
|
$
|
302
|
Average SPF price in
Cdn$12
|
$
|
509
|
$
|
521
|
$
|
498
|
$
|
420
|
$
|
399
|
Average SYP 2x4 #2
lumber price in US$13
|
$
|
408
|
$
|
476
|
$
|
455
|
$
|
414
|
$
|
419
|
U.S. housing starts
(thousand units SAAR)14
|
|
1,165
|
|
1,167
|
|
1,190
|
|
1,138
|
|
1,150
|
Production – SPF
lumber (MMfbm)15
|
|
952.9
|
|
951.5
|
|
2,840.8
|
|
953.0
|
|
2,874.6
|
Production – SYP
lumber (MMfbm)15
|
|
355.4
|
|
358.3
|
|
1,075.5
|
|
341.2
|
|
1,011.7
|
Shipments – SPF
lumber (MMfbm)16
|
|
993.6
|
|
1,002.0
|
|
2,920.6
|
|
990.4
|
|
2,992.3
|
Shipments – SYP
lumber (MMfbm)16
|
|
373.0
|
|
353.3
|
|
1,072.2
|
|
348.1
|
|
1,045.3
|
9
Adjusted for preliminary countervailing
and anti-dumping duty deposits expensed for accounting
purposes.
|
10 Adjusted for a recovery related to lower estimated
Canal Flats closure costs following the sale of the
land.
|
11
Adjusted for a one-time gain of $15.5
million related to a legal settlement in the second quarter of
2016.
|
12
Western Spruce/Pine/Fir, per thousand
board feet (Source – Random Lengths Publications, Inc.).
|
13
Southern Yellow Pine, Eastside, per
thousand board feet (Source – Random Lengths Publications,
Inc.).
|
14
Source – US Census Bureau, seasonally
adjusted annual rate ("SAAR").
|
15
Excluding production of trim
blocks.
|
16
Canfor-produced lumber, including lumber
purchased for remanufacture, excluding trim blocks and wholesale
shipments.
|
Markets
Lumber demand in North America
remained relatively stable in the third quarter of 2017.
Notwithstanding the impact of the recent hurricanes in the US
South, US housing starts averaged 1,165,000 units on a seasonally
adjusted basis, in line with the previous quarter, while the repair
and remodeling sector saw seasonally stronger activity.
Single-family starts, which consume a higher proportion of lumber,
were up 3% from the previous quarter, while multi-family starts
were down compared to the second quarter of 2017. In Canada, housing starts remained near
historical highs, averaging 223,000 units on a seasonally adjusted
basis. Offshore lumber demand from China, Japan
and other regions remained strong through the third quarter,
particularly for the Company's higher-value lumber products.
Sales
Sales for the lumber segment for the third quarter of 2017 were
$880.4 million, compared to
$904.3 million in the previous
quarter and $809.6 million for the
third quarter of 2016. The 3% decrease in sales revenue
compared to the prior quarter largely reflected lower SYP unit
sales realizations, while the 9% increase in sales revenue compared
to the third quarter of 2016 primarily reflected higher Western SPF
unit sales realizations.
Total lumber shipments, at 1.37 billion board feet, were in line
with the previous quarter. SYP shipments were modestly higher than
the previous quarter, reflecting, in part, improved demand towards
the end of the quarter. Western SPF shipments decreased slightly,
reflecting a drawdown of inventory in the previous quarter
following the severe winter weather experienced at the beginning of
2017. Total lumber shipments were slightly above the third quarter
of 2016 principally reflecting improved productivity in the US
South following several capital projects in that region.
On a reported basis, Western SPF lumber unit sales realizations
were in line with the second quarter of 2017 as higher average
Western SPF lumber prices and slightly lower duties expensed in the
current quarter offset the impact of the strengthened Canadian
dollar. The average benchmark North American Random Lengths Western
SPF 2x4 #2&Btr price was up US$18
per Mfbm, or 5%, compared to the second quarter of 2017, with more
pronounced increases seen across wider-width dimensions. In
addition to solid underlying North American and offshore demand,
the severe forest fire season in Western
Canada contributed to a significant drop in Western SPF
lumber shipments destined to the US from producers in British Columbia. These factors, combined with
steady demand and relatively low field inventory, resulted in
significant price gains.
SYP unit sales realizations were moderately lower than the prior
quarter, reflecting a US$68 per Mfbm,
or 14%, decline in the SYP East 2x4 #2 price, with similar declines
seen in 2x8 and 2x12 dimensions. Prices for SYP East 2x6 and 2x10
#2 dimensions were in line with the previous quarter. Pricing for
higher-value products remained strong, partly offsetting the
impacts of lower average benchmark lumber prices. SYP lumber prices
picked up towards the end of the quarter primarily reflecting lean
inventories throughout the supply chain and increased demand
following the recent hurricanes in the US South.
Compared to the third quarter of 2016, Western SPF lumber unit
sales realizations were up significantly as higher US-dollar
benchmark lumber prices more than offset the impact of the
aforementioned duties in the current quarter and the 4% stronger
Canadian dollar. The average North American Random Lengths Western
SPF 2x4 #2&Btr price was up US$84
per Mfbm, or 26%, with similar increases seen across wider-width
dimensions. SYP lumber unit sales realizations were down modestly
compared to the third quarter of 2016 as a higher-value sales mix
helped to offset lower benchmark prices, particularly across
wider-width dimensions.
Total residual revenue in the current quarter was in line with
the prior quarter and slightly higher than the third quarter of
2016 as increased pricing for sawmill residual chips in
Western Canada more than offset
lower residual chip prices in the US South. Current quarter results
also reflected seasonally higher log sales compared to the previous
quarter due to increased timber harvesting following the spring
break-up period in Western Canada.
Log sales were in line with the third quarter of 2016. Pellet sales
revenues in the current quarter were higher than both comparative
quarters largely as a result of improved productivity rates.
Operations
Total lumber production in the third quarter of 2017, at 1.31
billion board feet, was in line with the previous quarter. In the
US South, higher productivity following several capital upgrades
more than offset weather-related disruptions and increased
statutory holidays. In Western
Canada, production was largely unchanged despite the
fire-related disruptions to log procurement efforts and
operations.
Lumber unit manufacturing costs in the third quarter of 2017
were in line with the previous quarter as seasonally lower energy
costs in Western Canada, stable
log costs in the US South and the stronger Canadian dollar offset
higher purchased wood and log hauling costs in Western Canada, and to a lesser extent,
increasing market-based stumpage. Compared to the third quarter of
2016, unit manufacturing costs were modestly higher primarily
reflecting market-based increases in purchased wood costs and
stumpage in Western Canada.
Pulp and Paper
Selected Financial Information and
Statistics – Pulp and Paper17
(millions of Canadian
dollars, unless otherwise noted)
|
|
Q3
2017
|
|
Q2
2017
|
|
YTD
2017
|
|
Q3
2016
|
|
YTD
2016
|
Sales
|
$
|
284.8
|
$
|
280.9
|
$
|
874.8
|
$
|
291.6
|
$
|
843.9
|
Operating income
before amortization18
|
$
|
39.4
|
$
|
50.0
|
$
|
143.4
|
$
|
50.0
|
$
|
129.9
|
Operating
income
|
$
|
21.1
|
$
|
31.5
|
$
|
87.8
|
$
|
31.0
|
$
|
75.3
|
Average NBSK pulp
price delivered to China – US$19
|
$
|
670
|
$
|
670
|
$
|
662
|
$
|
595
|
$
|
601
|
Average NBSK pulp
price delivered to China – Cdn$19
|
$
|
839
|
$
|
901
|
$
|
865
|
$
|
777
|
$
|
795
|
Production – pulp
(000 mt)
|
|
305.1
|
|
275.2
|
|
897.4
|
|
312.5
|
|
913.9
|
Production – paper
(000 mt)
|
|
34.8
|
|
33.6
|
|
103.0
|
|
32.4
|
|
99.8
|
Shipments – pulp (000
mt)
|
|
303.3
|
|
276.3
|
|
916.7
|
|
319.8
|
|
926.1
|
Shipments – paper
(000 mt)
|
|
34.0
|
|
35.5
|
|
103.2
|
|
35.5
|
|
108.9
|
17 Includes 100% of Canfor Pulp Products Inc., which is
consolidated in Canfor's operating results. Pulp production and
shipment volumes presented
are for both NBSK pulp and BCTMP.
|
18
Amortization includes amortization of
certain capitalized major maintenance costs.
|
19
Per tonne, NBSK pulp list price delivered
to China (Resource Information Systems, Inc.).
|
Markets
Global softwood pulp markets weakened slightly in July primarily
following the end of spring maintenance season. By the end of
August and through September, however, demand had rebounded,
particularly in China, in part due
to China's new regulations
restricting the import of recycled mixed paper. The resulting
positive price momentum will largely be realized in the fourth
quarter of 2017, reflecting the timing of shipments (versus
orders).
Global shipments of bleached softwood pulp increased by 3.1% for
the first eight months of 2017 when compared to the first eight
months of 2016, driven primarily by increased year-to-date
shipments to North America and
Asian countries, including China20.
20 As
reported by PPPC statistics.
|
Global kraft paper markets were healthy through the third
quarter of 2017. The positive pricing momentum and demand
from North American markets experienced in the first half of 2017
continued through the current quarter, while certain offshore
markets, particularly Asia, saw
increasing demand as a result of a tightening of supply.
Sales
Total pulp shipments for the third quarter of 2017 were 303,300
tonnes, up 27,000 tonnes, or 10%, from the previous quarter and
down 16,500 tonnes, or 5%, from the third quarter of 2016.
When compared to the previous quarter, the increase in pulp
shipments was primarily due to increased pulp production in the
current quarter combined with an increase in shipments to
North America and Asia, offset in part by the slippage of a
14,000 tonne vessel shipment to Asia into October 2017. The reduction in
pulp shipments when compared to the third quarter of 2016 for the
most part reflected the delayed vessel shipment, and to a lesser
extent, lower pulp production in the current quarter.
The average China US-dollar NBSK pulp list price (as published
by RISI), at US$670 per tonne, was in
line with the second quarter of 2017. The weakening of the
global pulp markets and US-dollar pricing in the early part of the
current quarter, combined with the unfavourable impact of the
stronger Canadian dollar, more than offset the improved prices
later in the quarter, leading to a moderate decrease in average
NBSK pulp unit sales realizations compared to the previous
quarter. Average BCTMP unit sales realizations also
experienced a moderate decline when compared to the second quarter
of 2017, largely as a result of the stronger Canadian dollar.
Compared to the third quarter of 2016, the average China
US-dollar NBSK pulp list price in the current quarter was up
US$75 per tonne, or 13%.
Average NBSK pulp unit sales realizations were only slightly higher
than the third quarter of 2016, however, as higher market list
prices were largely offset by the 4% stronger Canadian dollar
combined with the impact of timing of shipments (versus orders) and
increases in customer discounts. BCTMP unit sales
realizations were notably higher compared to the third quarter of
2016, reflecting the significant strength in BCTMP market demand
year-over-year, which more than offset the stronger Canadian
dollar.
Compared to the previous quarter, energy revenues in the third
quarter of 2017 returned to more normalized levels, reflecting an
increase in turbine operating days quarter-over-quarter (related to
less scheduled maintenance outages), combined with higher energy
prices in the current quarter. Energy revenues in the current
quarter were marginally lower when compared to the third quarter of
2016, primarily a result of lower power generation, due to the
larger scheduled outage at CPPI's NBSK pulp mills in the current
quarter.
Total paper shipments in the third quarter of 2017 at 34,000
tonnes, were down 1,500 tonnes when compared to both the previous
quarter and the same quarter in 2016. The reduction in paper
shipments from the second quarter of 2017 largely reflected a
decline in shipments into the North American market, as the
previous quarter experienced higher-than-normal shipments into this
market. The decrease in paper shipments from the third
quarter of 2016 was principally the result of a drawdown of
inventory in the third quarter of 2016.
Paper unit sales realizations in the third quarter of 2017 saw a
modest decrease when compared to the previous quarter as higher
market-driven US-dollar pricing was more than offset by the
stronger Canadian dollar and a lower proportion of shipments to the
North American market. Compared to the same quarter of 2016,
paper unit sales realizations experienced a slight decline, as a 4%
stronger Canadian dollar offset more favorable pricing,
particularly in North America.
Operations
Pulp production in the third quarter of 2017 at 305,100 tonnes
was up 29,900 tonnes, or 11%, from the second quarter of 2017 and
down 7,400 tonnes, or 2%, from the third quarter of 2016.
Pulp production in the current quarter primarily increased as a
result of a decline in scheduled maintenance outages
quarter-over-quarter. During the third quarter of 2017, CPPI
completed a scheduled maintenance outage at the Intercontinental
NBSK pulp mill, which reduced pulp production by approximately
10,000 tonnes. This compared to the second quarter of 2017, which
included scheduled maintenance outages at the Northwood NBSK pulp
mill as well as at the Taylor BCTMP mill, which when combined with
other operational upsets, reduced pulp production by approximately
40,000 tonnes.
When compared to the third quarter of 2016, pulp production
decreased primarily due to the larger scheduled maintenance outage
in the current quarter, and lower operating rates. In the
third quarter of 2016, CPPI completed scheduled maintenance outages
at the Prince George NBSK pulp mill and the Taylor BCTMP mill,
reducing pulp production by 3,700 tonnes of NBSK pulp and 3,100
tonnes of BCTMP, respectively.
Pulp unit manufacturing costs saw a modest decrease from the
previous quarter, largely reflecting the quarter-over-quarter
impacts of the aforementioned scheduled maintenance outages coupled
with seasonally lower energy prices and usage in the current
quarter, offsetting a slight increase in fibre costs. Higher
fibre costs principally reflected a larger proportion of
higher-cost whole log chips, mitigated slightly by a decline in
prices for sawmill residual chips in the current quarter.
Compared to the third quarter of 2016, pulp unit manufacturing
costs moderately increased, principally due to higher fibre costs
and to a lesser extent, higher chemical pricing, marginally offset
by the timing of certain maintenance spend. Increased fibre
costs in the current period largely reflected the higher market
prices for sawmill residual chips combined with a larger proportion
of higher-cost whole log chips.
Paper production for the third quarter of 2017 was 34,800
tonnes, up 1,200 tonnes from the second quarter of 2017 and up
2,400 tonnes when compared to the same quarter of 2016.
Compared to the previous quarter, the higher paper production
primarily reflected stronger operating rates in the current
quarter. The increase in paper production from the third
quarter of 2016 was largely due to a nine-day scheduled maintenance
outage in the comparative period. No maintenance outages
occurred in the current quarter or in the second quarter of
2017.
Paper unit manufacturing costs moderately decreased when
compared to the second quarter of 2017, mostly due to lower slush
pulp costs, principally reflecting lower average NBSK sales
realizations, combined with decreases in maintenance spend in the
current quarter. Paper unit manufacturing costs were
substantially in line with the third quarter of 2016, as the impact
of the scheduled maintenance outage in the comparative period was
offset by higher slush pulp costs, driven by higher average NBSK
sales realizations, in the current quarter.
Unallocated and Other Items
Selected Financial Information
(millions of Canadian
dollars)
|
|
Q3
2017
|
|
Q2
2017
|
|
YTD
2017
|
|
Q3
2016
|
|
YTD
2016
|
Operating loss of
Panels operations21
|
$
|
(0.4)
|
$
|
(0.5)
|
$
|
(1.6)
|
$
|
(0.4)
|
$
|
(1.4)
|
Corporate
costs
|
$
|
(8.2)
|
$
|
(10.4)
|
$
|
(30.0)
|
$
|
(8.3)
|
$
|
(21.8)
|
Finance expense,
net
|
$
|
(8.1)
|
$
|
(7.8)
|
$
|
(23.9)
|
$
|
(8.2)
|
$
|
(24.8)
|
Foreign exchange gain
(loss) on long-term debt
|
$
|
5.0
|
$
|
3.4
|
$
|
9.5
|
$
|
(1.1)
|
$
|
7.2
|
Gain (loss) on
derivative financial instruments
|
$
|
(1.9)
|
$
|
-
|
$
|
1.3
|
$
|
0.1
|
$
|
0.8
|
Other income
(expense), net
|
$
|
(4.3)
|
$
|
(3.2)
|
$
|
(5.3)
|
$
|
1.3
|
$
|
(8.4)
|
21
The Panels operations include the
Company's PolarBoard oriented strand board ("OSB") plant, which is
currently indefinitely idled and its Tackama
plywood plant, which has been permanently closed.
|
Corporate costs were $8.2 million
for the third quarter of 2017, $2.2
million lower than the previous quarter principally
reflecting higher legal costs related to the expiry of the Softwood
Lumber Agreement recorded in the second quarter of 2017. Corporate
costs were in line with the third quarter of 2016.
Net finance expense at $8.1
million for the third quarter of 2017 was up slightly from
the previous quarter and in line with the third quarter of 2016. In
the third quarter of 2017, the Company recognized a foreign
exchange gain on its US-dollar term debt held by Canadian entities
due to the stronger Canadian dollar at the end of the quarter as
compared to the end of June (see further discussion on the term
debt financing in the "Liquidity and Financial Requirements"
section).
The Company uses a variety of derivative financial instruments
at times as partial economic hedges against unfavourable changes in
foreign exchange rates, energy costs, lumber prices, and interest
rates. In the third quarter of 2017, the Company recorded a net
loss of $1.9 million related to its
derivative instruments, principally reflecting unrealized losses on
lumber future contracts. In the third quarter of 2016, the Company
recorded a net gain of $0.1 million
related to its derivatives instruments.
Other expense, net, of $4.3
million in the third quarter of 2017 compared to a net
expense of $3.2 million in the second
quarter of 2017, primarily reflecting foreign exchange movements on
US-dollar denominated cash, receivables and payables.
Other Comprehensive Income (Loss)
The following table summarizes Canfor's Other Comprehensive
Income (Loss) for the comparable periods:
(millions of Canadian
dollars)
|
|
Q3
2017
|
|
Q2
2017
|
|
YTD
2017
|
|
Q3
2016
|
|
YTD
2016
|
Foreign exchange
translation differences for foreign operations, net of
tax
|
$
|
(19.9)
|
$
|
(13.3)
|
$
|
(36.4)
|
$
|
3.8
|
$
|
(21.5)
|
Defined benefit
actuarial gains (losses), net of tax
|
$
|
13.0
|
$
|
(26.0)
|
$
|
(10.6)
|
$
|
(1.5)
|
$
|
(52.7)
|
Change in fair value
of available-for-sale financial assets, net of tax
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
0.2
|
$
|
0.2
|
Other comprehensive
income (loss), net of tax
|
$
|
(6.9)
|
$
|
(39.3)
|
$
|
(47.0)
|
$
|
2.5
|
$
|
(74.0)
|
In the third quarter of 2017, the Company recorded an after-tax
gain of $13.0 million in relation to
changes in the valuation of the Company's employee future benefit
plans. The gain in the current quarter principally reflected a 0.3%
increase in the discount rate used to value the employee future
benefit plans partially offset by a return on plan assets lower
than the discount rate. This compared to an after-tax loss of
$26.0 million in the previous quarter
and an after-tax loss of $1.5 million
in the third quarter of 2016, with the losses in both cases largely
reflecting lower discount rates.
In addition, the Company recorded an accounting loss of
$19.9 million in the third quarter of
2017 related to foreign exchange differences for foreign operations
due to the strengthening of the Canadian dollar relative to the
US-dollar at the end of the quarter. This compared to a loss of
$13.3 million in the previous quarter
and a gain of $3.8 million in the
third quarter of 2016.
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:
(millions of
Canadian
|
Q3
|
Q2
|
YTD
|
Q3
|
YTD
|
dollars, except for
ratios)
|
2017
|
2017
|
2017
|
2016
|
2016
|
Increase in cash and
cash equivalents22
|
$
|
21.6
|
$
|
140.7
|
$
|
126.8
|
$
|
(16.4)
|
$
|
47.8
|
|
Operating
activities
|
$
|
127.1
|
$
|
253.6
|
$
|
453.5
|
$
|
148.6
|
$
|
422.8
|
|
Financing
activities
|
$
|
(89.6)
|
$
|
(56.1)
|
$
|
(141.8)
|
$
|
(48.4)
|
$
|
(124.3)
|
|
Investing
activities
|
$
|
(59.1)
|
$
|
(56.8)
|
$
|
(184.9)
|
$
|
(116.6)
|
$
|
(250.7)
|
Ratio of current
assets to current liabilities
|
|
|
|
|
|
2.3:1
|
|
|
|
1.7:1
|
Net debt to
capitalization
|
|
|
|
|
7.6%
|
|
|
|
19.1%
|
22
Increase in cash and cash equivalents
shown before foreign exchange translation on cash and cash
equivalents.
|
Changes in Financial Position
Cash generated from operating activities was $127.1 million in the third quarter of 2017,
compared to $253.6 million in the
previous quarter and $148.6 million
in the third quarter of 2016. The decrease in operating cash flows
from the previous quarter primarily reflected a seasonal drawdown
of log inventories in Western
Canada in the second quarter of 2017, and to a lesser
extent, lower cash earnings in the current quarter. Compared
to the third quarter of 2016, the decrease in operating cash flows
was primarily attributable to increased income tax installment
payments in the current quarter as well as cash received from a
legal settlement in the comparative period, offset in part by
higher cash earnings in the current quarter.
Cash used in financing activities was $89.6 million in the current quarter, compared to
cash used of $56.1 million in the
previous quarter and cash used of $48.4
million in the same quarter of 2016. During the current
quarter, the Company made cash distributions of $2.2 million to non-controlling shareholders, in
line with the previous quarter, and down $9.4 million from the same quarter in 2016,
largely reflecting completion of the Company's two phased
acquisitions in the US South. In the third quarter of 2017, Canfor
purchased 3,526,387 common shares under its Normal Course Issuer
Bid for $75.0 million, while CPPI
purchased 568,425 common shares under its Normal Course Issuer Bid
for $7.2 million (see "Liquidity and
Financial Requirements" section for more details). The Company had
no balance outstanding on its Canadian operating loan facility at
the end of the third quarter of 2017, similar to the prior quarter,
and down $96.0 million from the end
of the third quarter of 2016.
Cash used for investing activities was $59.1 million in the current quarter, compared to
$56.8 million in the previous quarter
and $116.6 million in the same
quarter of 2016. Capital additions were $57.5 million, down $4.2
million from the previous quarter and in line with the third
quarter of 2016. Current quarter capital expenditures included
various smaller high-returning capital projects aimed at increasing
drying capacity and productivity, with an increasing proportion of
capital deployed in the US South, including upgrades at the
Company's sawmills in Arkansas and
Georgia. In the pulp and paper
segment, capital expenditures primarily related to
maintenance-of-business capital associated with the
Intercontinental NBSK pulp mill's scheduled maintenance outage
during the quarter as well as capital expenditures associated with
the previously announced energy projects. Investing activities in
the second quarter of 2017 also included final proceeds of
$15.0 million related to the
July 1, 2015 sale of the Company's
investment in Lakeland Mills Ltd. and Winton Global Lumber Ltd.,
and a $14.4 million payment related
to the Company's April 2016
acquisition of Wynndel Box and
Lumber Ltd. Investing activities in the third quarter of 2016
include a $61.6 million payment
related to the Company's phased acquisition of Scotch & Gulf
Lumber, LLC.
Liquidity and Financial Requirements
At September 30, 2017, the Company
on a consolidated basis had cash of $278.8
million, no amounts drawn on its operating loans, and an
additional $50.7 million reserved for
several standby letters of credit. At period end the Company had
total available undrawn operating loans of $459.3 million.
Excluding CPPI, the Company's bank operating loans at
September 30, 2017 totaled
$350.0 million, of which no amounts
were drawn, and an additional $41.7
million reserved for several standby letters of credit, the
majority of which related to unregistered pension plans. During the
third quarter of 2017, the Company's principal operating loans,
excluding CPPI, were extended to September
28, 2022. Interest is payable on these loans at floating
rates based on the lenders' Canadian prime rate, bankers
acceptances, US-dollar base rate or US-dollar LIBOR rate, plus a
margin that varies with the Company's debt to total capitalization
ratio.
At September 30, 2017, CPPI had an
undrawn $110.0 million bank operating
loan facility and $9.0 million in
letters of credit outstanding under the operating loan facility.
The Company and CPPI remained in compliance with the covenants
relating to their operating loans and long-term debt during the
quarter, and expect to remain so for the foreseeable future.
The Company has $429.9 million of
fixed and floating interest rate term debt. The Company's
consolidated net debt to total capitalization at the end the third
quarter of 2017 was 7.6%. For Canfor, excluding CPPI, net debt to
capitalization at the end of the third quarter of 2017 was
10.2%.
On March 7, 2017, the Company
renewed its normal course issuer bid whereby it can purchase for
cancellation up to 6,640,227 common shares or approximately 5% of
its issued and outstanding common shares as of March 1, 2017. The renewed normal course issuer
bid is set to expire on March 6,
2018. During the third quarter of 2017 the Company purchased
3,526,387 common shares for $75.0
million (an average of $21.27
per common share). As at October 20,
2017, there were 129,278,136 common shares of the Company
outstanding. Under a separate normal course issuer bid, CPPI
purchased 568,425 common shares in the third quarter of 2017 for
$7.2 million (an average of
$12.67 per common share).
As a result of CPPI's share repurchases in the current quarter,
Canfor's ownership interest in CPPI increased to 54.8% at
September 30, 2017, up 0.4% from the
end of the prior quarter.
Canfor and CPPI may purchase more shares through the balance of
2017 subject to the terms of their normal course issuer
bids.
Licella Pulp Joint Venture
In March 2017, the Canadian
Federal Government through its Sustainable Development Technology
Canada program announced the funding over several years of
approximately $13.2 million,
contingent on future spending, to allow the Licella Pulp Joint
Venture to further develop and demonstrate a technology that will
economically convert biomass into biofuels and biochemicals.
OUTLOOK
Lumber
Looking ahead, North American lumber prices are forecast to
remain steady (and high by historical standards), while there is a
risk of continued volatility as the US Department of Commerce
investigations progress and final determinations are made. Demand
in North America is anticipated to
be solid through much of the fourth quarter of 2017, with
seasonally slower activity in December.
For the Company's key offshore lumber markets, demand is
anticipated to remain solid through the fourth quarter of 2017 and
into 2018.
Pulp and Paper
For the month of October 2017,
CPPI announced increases of US$105
per tonne and US$30 per tonne for
NBSK pulp list prices to China and
North America, respectively,
reflecting a surge in demand, principally from China, as well as supply disruptions. Global
pulp markets are currently anticipated to remain strong in the
fourth quarter of 2017.
OUTSTANDING SHARES
At October 20, 2017, there were
129,278,136 common shares of the Company 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.
ACCOUNTING STANDARDS ISSUED AND NOT APPLIED
In May 2014, the International
Accounting Standards Board ("IASB") issued IFRS 15, Revenue from
Contracts with Customers, which will supersede IAS 18,
Revenue, IAS 11, Construction Contracts and related
interpretations. The new standard is effective for annual periods
beginning on or after January 1,
2018. The Company has performed an assessment of the impact
of the new standard, and has determined that adoption of this
standard will have no significant impact on the Company's financial
statements.
In July 2014, the IASB issued IFRS
9, Financial Instruments. The required adoption date for
IFRS 9 is January 1, 2018 and the
Company has determined that the adoption of this standard will have
no significant impact on its financial statements.
In January 2016, the IASB issued
IFRS 16, Leases, which will supersede IAS 17, Leases
and related interpretations. The required adoption date for IFRS 16
is January 1, 2019 and the Company is
in the process of assessing the impact on the financial statements
of this new standard.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
During the quarter ended September 30,
2017, 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 2016 annual statutory reports which
are available on www.canfor.com or www.sedar.com.
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 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 lumber 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. Net income is also impacted by fluctuations in
Canadian dollar exchange rates, the revaluation to the period end
rate of US-dollar denominated working capital balances, US-dollar
denominated debt and revaluation of outstanding derivative
financial instruments.
The US Department of Commerce will announce its final CVD and
ADD determinations no later than November
14, 2017, followed by a final injury determination by the US
International Trade Commission no later than December 21, 2017. In the event of an affirmative
injury determination by the US International Trade Commission,
final duties would be imposed on or before January 2, 2018. Final countervailing and
anti-dumping determinations may differ from the preliminary
determinations. Canfor continues to cooperate with the Provincial
and Federal Governments of Canada
who have indicated they will vigorously defend the interests of the
industry.
SELECTED QUARTERLY FINANCIAL INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q3
2017
|
|
Q2
2017
|
|
Q1
2017
|
|
Q4
2016
|
|
Q3
2016
|
|
Q2
2016
|
|
Q1
2016
|
|
Q4
2015
|
Sales and
income
(millions of Canadian
dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
1,165.2
|
$
|
1,185.2
|
$
|
1,126.2
|
$
|
1,043.5
|
$
|
1,101.2
|
$
|
1,022.3
|
$
|
1,067.9
|
$
|
1,053.0
|
Operating
income
|
$
|
105.4
|
$
|
131.0
|
$
|
106.8
|
$
|
74.0
|
$
|
97.4
|
$
|
69.6
|
$
|
65.1
|
$
|
31.8
|
Net income
|
$
|
72.6
|
$
|
90.9
|
$
|
77.5
|
$
|
44.2
|
$
|
66.4
|
$
|
51.0
|
$
|
42.3
|
$
|
19.6
|
Shareholder net
income
|
$
|
66.2
|
$
|
81.3
|
$
|
66.1
|
$
|
38.0
|
$
|
50.9
|
$
|
36.0
|
$
|
26.0
|
$
|
1.6
|
Per common
share (Canadian dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholder net
income – basic and diluted
|
$
|
0.51
|
$
|
0.61
|
$
|
0.50
|
$
|
0.29
|
$
|
0.38
|
$
|
0.27
|
$
|
0.20
|
$
|
0.01
|
Book
value23
|
$
|
12.32
|
$
|
12.14
|
$
|
11.81
|
$
|
11.17
|
$
|
10.70
|
$
|
9.92
|
$
|
9.91
|
$
|
10.02
|
Common Share
Repurchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share volume
repurchased (000 shares)
|
|
3,526
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
1,050
|
Shares repurchased
(millions of Canadian dollars)
|
$
|
75.0
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
20.0
|
Statistics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lumber shipments
(MMfbm) 24
|
|
1,367
|
|
1,355
|
|
1,271
|
|
1,272
|
|
1,340
|
|
1,344
|
|
1,355
|
|
1,347
|
Pulp shipments (000
mt)
|
|
303
|
|
276
|
|
337
|
|
275
|
|
320
|
|
287
|
|
319
|
|
356
|
Average exchange rate
– US$/Cdn$
|
$
|
0.798
|
$
|
0.744
|
$
|
0.756
|
$
|
0.750
|
$
|
0.766
|
$
|
0.776
|
$
|
0.728
|
$
|
0.749
|
Average Western SPF
2x4 #2&Btr lumber
price (US$)
|
$
|
406
|
$
|
388
|
$
|
348
|
$
|
315
|
$
|
322
|
$
|
311
|
$
|
272
|
$
|
263
|
Average SYP (East)
2x4 #2 lumber price
(US$)
|
$
|
408
|
$
|
476
|
$
|
482
|
$
|
445
|
$
|
414
|
$
|
437
|
$
|
407
|
$
|
400
|
Average NBSK pulp
list price delivered to
China (US$)
|
$
|
670
|
$
|
670
|
$
|
645
|
$
|
595
|
$
|
595
|
$
|
617
|
$
|
590
|
$
|
600
|
23
Book value per common share is equal to
shareholders' equity at the end of the period, divided by the
number of common shares outstanding at the end of the
period.
|
24
Canfor-produced lumber, including lumber
purchased for remanufacture and excluding trim blocks and shipments
of wholesale lumber.
|
Other material factors that impact the comparability of the
quarters are noted below:
|
After-tax impact, net
of non-controlling interests
|
(millions of Canadian
dollars, except for per share amounts)
|
Q3
2017
|
Q2
2017
|
Q1
2017
|
Q4
2016
|
Q3
2016
|
Q2
2016
|
Q1
2016
|
Q4
2015
|
Shareholder net
income, as reported
|
$
|
66.2
|
$
|
81.3
|
$
|
66.1
|
$
|
38.0
|
$
|
50.9
|
$
|
36.0
|
$
|
26.0
|
$
|
1.6
|
Foreign exchange
(gain) loss on long-term debt
|
$
|
(4.4)
|
$
|
(2.9)
|
$
|
(1.0)
|
$
|
2.7
|
$
|
0.9
|
$
|
(0.3)
|
$
|
(6.9)
|
$
|
5.1
|
Countervailing and
anti-dumping duty deposits25
|
$
|
23.5
|
$
|
25.8
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
Mill closure
provisions26
|
$
|
(2.4)
|
$
|
-
|
$
|
-
|
$
|
(1.5)
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
(Gain) loss on
derivative financial instruments
|
$
|
1.4
|
$
|
-
|
$
|
(2.4)
|
$
|
(1.5)
|
$
|
(0.1)
|
$
|
(2.3)
|
$
|
1.8
|
$
|
(1.2)
|
Gain on sale of
Anthony EACOM Inc.27
|
$
|
-
|
$
|
-
|
$
|
(3.4)
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
Gain on legal
settlement, net28
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
(6.9)
|
$
|
-
|
$
|
-
|
Costs associated with
pension plan legislation changes
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
2.4
|
Net impact of above
items
|
$
|
18.1
|
$
|
22.9
|
$
|
(6.8)
|
$
|
(0.3)
|
$
|
0.8
|
$
|
(9.5)
|
$
|
(5.1)
|
$
|
6.3
|
Adjusted
shareholder net income
|
$
|
84.3
|
$
|
104.2
|
$
|
59.3
|
$
|
37.7
|
$
|
51.7
|
$
|
26.5
|
$
|
20.9
|
$
|
7.9
|
Shareholder net
income per share (EPS), as reported
|
$
|
0.51
|
$
|
0.61
|
$
|
0.50
|
$
|
0.29
|
$
|
0.38
|
$
|
0.27
|
$
|
0.20
|
$
|
0.01
|
Net impact of above
items per share29
|
$
|
0.14
|
$
|
0.17
|
$
|
(0.05)
|
$
|
-
|
$
|
0.01
|
$
|
(0.07)
|
$
|
(0.04)
|
$
|
0.05
|
Adjusted net
income per share29
|
$
|
0.65
|
$
|
0.78
|
$
|
0.45
|
$
|
0.29
|
$
|
0.39
|
$
|
0.20
|
$
|
0.16
|
$
|
0.06
|
25 Adjusted for preliminary countervailing and
anti-dumping duty deposits expensed for accounting
purposes.
|
26
During the third quarter of 2015, the
Company recorded costs of $19.4 million (before-tax) associated
with the announced closure of the Canal Flats sawmill. In the third
quarter
of 2017, $3.2 million (before-tax) of the closure provision was
reversed, and in the fourth quarter of 2016, $2.0 million
(before-tax) of the closure provision was reversed as a result
of lower estimated costs.
|
27
On March 31, 2017, Canfor sold its 50%
interest in Anthony EACOM Inc. for net proceeds of $21.4 million
and recognized a $4.0 million gain (before-tax).
|
28
During the second quarter of 2016, the
Company recorded a gain of $15.5 million related to a settlement of
a legal claim with respect to logistics services net of
non-controlling
interest and related impairment.
|
29
The year-to-date net impact of the
adjusting items per share and adjusted net income (loss) per share
may not equal the sum of the quarterly per share amounts due to
share
purchases and rounding.
|
Canfor Corporation
Condensed Consolidated Balance
Sheets
(millions of Canadian
dollars, unaudited)
|
|
As at
September 30,
2017
|
|
As at
December 31,
2016
|
ASSETS
|
|
|
|
|
Current
assets
|
|
|
|
|
Cash and cash
equivalents
|
$
|
278.8
|
$
|
156.6
|
Accounts
receivable
|
-
Trade
|
|
210.3
|
|
164.2
|
|
-
Other
|
|
40.7
|
|
66.5
|
Inventories (Note
3)
|
|
552.9
|
|
549.0
|
Prepaid
expenses
|
|
61.3
|
|
50.6
|
Total current
assets
|
|
1,144.0
|
|
986.9
|
Property, plant
and equipment
|
|
1,420.2
|
|
1,460.8
|
Timber
licenses
|
|
522.2
|
|
532.7
|
Goodwill and other
intangible assets
|
|
225.8
|
|
238.8
|
Long-term
investments and other (Note 4)
|
|
37.2
|
|
50.7
|
Retirement benefit
surplus (Note 6)
|
|
7.1
|
|
5.9
|
Deferred income
taxes, net
|
|
3.5
|
|
1.3
|
Total
assets
|
$
|
3,360.0
|
$
|
3,277.1
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
Current
liabilities
|
|
|
|
|
Operating loans (Note
5(a))
|
$
|
-
|
$
|
28.0
|
Accounts payable and
accrued liabilities
|
|
450.6
|
|
384.1
|
Current portion of
deferred reforestation obligations
|
|
48.5
|
|
48.5
|
Forward purchase
liability (Note 12(a))
|
|
-
|
|
41.7
|
Current portion of
long-term debt (Note 5(b))
|
|
0.3
|
|
-
|
Total current
liabilities
|
|
499.4
|
|
502.3
|
Long-term debt
(Note 5(b))
|
|
429.9
|
|
448.0
|
Retirement benefit
obligations (Note 6)
|
|
317.0
|
|
302.2
|
Deferred
reforestation obligations
|
|
53.5
|
|
56.9
|
Other long-term
liabilities
|
|
23.4
|
|
23.7
|
Deferred income
taxes, net
|
|
203.6
|
|
205.5
|
Total
liabilities
|
$
|
1,526.8
|
$
|
1,538.6
|
|
|
|
|
|
EQUITY
|
|
|
|
|
Share
capital
|
$
|
1,019.9
|
$
|
1,047.7
|
Contributed surplus
and other equity
|
|
31.9
|
|
(4.6)
|
Retained
earnings
|
|
488.8
|
|
351.7
|
Accumulated other
comprehensive income
|
|
52.5
|
|
88.9
|
Total equity
attributable to equity shareholders of the Company
|
|
1,593.1
|
|
1,483.7
|
Non-controlling
interests
|
|
240.1
|
|
254.8
|
Total
equity
|
$
|
1,833.2
|
$
|
1,738.5
|
Total liabilities
and equity
|
$
|
3,360.0
|
$
|
3,277.1
|
|
Subsequent
Event (Note 12(b))
|
|
The accompanying
notes are an integral part of these condensed consolidated interim
financial statements.
|
|
APPROVED BY THE
BOARD
|
|
"R.S.
Smith"
|
"C.A.
Pinette"
|
Director, R.S.
Smith
|
Director, C.A.
Pinette
|
Canfor Corporation
Condensed Consolidated
Statements of Income
|
3 months ended
September 30,
|
9 months ended
September 30,
|
(millions of Canadian
dollars, except per share data, unaudited)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
1,165.2
|
$
|
1,101.2
|
$
|
3,476.6
|
$
|
3,191.4
|
|
|
|
|
|
|
|
|
|
Costs and
expenses
|
|
|
|
|
|
|
|
|
|
Manufacturing and
product costs
|
|
784.9
|
|
753.6
|
|
2,309.5
|
|
2,218.2
|
|
Freight and other
distribution costs
|
|
157.4
|
|
161.0
|
|
487.4
|
|
485.3
|
|
Countervailing and
anti-dumping duties (Note 15)
|
|
31.7
|
|
-
|
|
66.5
|
|
-
|
|
Amortization
|
|
61.5
|
|
60.6
|
|
185.9
|
|
178.7
|
|
Selling and
administration costs
|
|
26.9
|
|
28.8
|
|
85.5
|
|
77.0
|
|
Restructuring, mill
closure and severance costs, net of recovery
|
|
(2.6)
|
|
0.6
|
|
(0.8)
|
|
3.1
|
|
$
|
1,059.8
|
$
|
1,004.6
|
$
|
3,134.0
|
$
|
2,962.3
|
|
|
|
|
|
|
|
|
|
Equity income (Note
4)
|
|
-
|
|
0.8
|
|
0.6
|
|
3.0
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
105.4
|
|
97.4
|
|
343.2
|
|
232.1
|
|
|
|
|
|
|
|
|
|
Finance expense,
net
|
|
(8.1)
|
|
(8.2)
|
|
(23.9)
|
|
(24.8)
|
Foreign exchange gain
(loss) on long-term debt
|
|
5.0
|
|
(1.1)
|
|
9.5
|
|
7.2
|
Gain (loss) on
derivative financial instruments (Note 7)
|
|
(1.9)
|
|
0.1
|
|
1.3
|
|
0.8
|
Other income
(expense), net
|
|
(4.3)
|
|
1.3
|
|
(5.3)
|
|
(8.4)
|
Net income before
income taxes
|
|
96.1
|
|
89.5
|
|
324.8
|
|
206.9
|
Income tax expense
(Note 8)
|
|
(23.5)
|
|
(23.1)
|
|
(83.8)
|
|
(47.2)
|
Net
income
|
$
|
72.6
|
$
|
66.4
|
$
|
241.0
|
$
|
159.7
|
|
|
|
|
|
|
|
|
|
Net income
attributable to:
|
|
|
|
|
|
|
|
|
Equity shareholders
of the Company
|
$
|
66.2
|
$
|
50.9
|
$
|
213.6
|
$
|
112.9
|
Non-controlling
interests
|
|
6.4
|
|
15.5
|
|
27.4
|
|
46.8
|
Net
income
|
$
|
72.6
|
$
|
66.4
|
$
|
241.0
|
$
|
159.7
|
|
|
|
|
|
|
|
|
|
Net income per
common share: (in Canadian dollars)
|
|
|
|
|
|
|
|
|
Attributable to
equity shareholders of the Company
|
|
|
|
|
|
|
|
|
|
- Basic
and diluted (Note 9)
|
$
|
0.51
|
$
|
0.38
|
$
|
1.62
|
$
|
0.85
|
|
The accompanying
notes are an integral part of these condensed consolidated interim
financial statements.
|
Canfor Corporation
Condensed Consolidated
Statements of Other Comprehensive Income (Loss)
|
3 months ended
September 30,
|
9 months ended
September 30,
|
(millions of Canadian
dollars, unaudited)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
Net
income
|
$
|
72.6
|
$
|
66.4
|
$
|
241.0
|
$
|
159.7
|
Other
comprehensive income (loss)
|
|
|
|
|
|
|
|
|
Items that will not
be recycled through net income:
|
|
|
|
|
|
|
|
|
|
Defined benefit plan
actuarial gains (losses) (Note 6)
|
|
17.6
|
|
(2.0)
|
|
(14.3)
|
|
(71.2)
|
|
Income tax recovery
(expense) on defined benefit plan
|
|
|
|
|
|
|
|
|
|
|
actuarial
losses/gains (Note
8)
|
|
(4.6)
|
|
0.5
|
|
3.7
|
|
18.5
|
|
|
13.0
|
|
(1.5)
|
|
(10.6)
|
|
(52.7)
|
Items that may be
recycled through net income:
|
|
|
|
|
|
|
|
|
|
Foreign exchange
translation of foreign operations, net of tax
|
|
(19.9)
|
|
3.8
|
|
(36.4)
|
|
(21.5)
|
|
Change in fair value
of available-for-sale financial instruments, net of tax
|
|
-
|
|
0.2
|
|
-
|
|
0.2
|
Other comprehensive
income (loss), net of tax
|
|
(6.9)
|
|
2.5
|
|
(47.0)
|
|
(74.0)
|
Total
comprehensive income
|
$
|
65.7
|
$
|
68.9
|
$
|
194.0
|
$
|
85.7
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income attributable to:
|
|
|
|
|
|
|
|
|
Equity shareholders
of the Company
|
$
|
57.3
|
$
|
53.8
|
$
|
168.2
|
$
|
45.3
|
Non-controlling
interests
|
|
8.4
|
|
15.1
|
|
25.8
|
|
40.4
|
Total
comprehensive income
|
$
|
65.7
|
$
|
68.9
|
$
|
194.0
|
$
|
85.7
|
|
The accompanying
notes are an integral part of these condensed consolidated interim
financial statements.
|
Canfor Corporation
Condensed Consolidated
Statements of Changes in Equity
|
3 months ended
September 30,
|
9 months ended
September 30,
|
(millions of Canadian
dollars, unaudited)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
Share
capital
|
|
|
|
|
|
|
|
|
Balance at beginning
of period
|
$
|
1,047.7
|
$
|
1,047.7
|
$
|
1,047.7
|
$
|
1,047.7
|
Share purchases (Note
9)
|
|
(27.8)
|
|
-
|
|
(27.8)
|
|
-
|
Balance at end of
period
|
$
|
1,019.9
|
$
|
1,047.7
|
$
|
1,019.9
|
$
|
1,047.7
|
|
|
|
|
|
|
|
|
|
Contributed
surplus and other equity
|
|
|
|
|
|
|
|
|
Balance at beginning
of period
|
$
|
31.9
|
$
|
(74.5)
|
$
|
(4.6)
|
$
|
(74.5)
|
Forward purchase
liability related to acquisition (Note 12(a))
|
|
-
|
|
69.9
|
|
36.5
|
|
69.9
|
Balance at end of
period
|
$
|
31.9
|
$
|
(4.6)
|
$
|
31.9
|
$
|
(4.6)
|
|
|
|
|
|
|
|
|
|
Retained
earnings
|
|
|
|
|
|
|
|
|
Balance at beginning
of period
|
$
|
460.4
|
$
|
270.0
|
$
|
351.7
|
$
|
257.7
|
Net income
attributable to equity shareholders of the Company
|
|
66.2
|
|
50.9
|
|
213.6
|
|
112.9
|
Defined benefit plan
actuarial gains (losses), net of tax
|
|
11.0
|
|
(1.0)
|
|
(9.0)
|
|
(46.2)
|
Share purchases (Note
9)
|
|
(47.2)
|
|
-
|
|
(47.2)
|
|
-
|
Elimination of
non-controlling interests (Note 12(a))
|
|
-
|
|
(20.0)
|
|
(16.6)
|
|
(20.0)
|
Acquisition of
non-controlling interests (Note 9)
|
|
(1.6)
|
|
-
|
|
(3.7)
|
|
(4.5)
|
Balance at end of
period
|
$
|
488.8
|
$
|
299.9
|
$
|
488.8
|
$
|
299.9
|
|
|
|
|
|
|
|
|
|
Accumulated other
comprehensive income
|
|
|
|
|
|
|
|
|
Balance at beginning
of period
|
$
|
72.4
|
$
|
74.7
|
$
|
88.9
|
$
|
100.0
|
Foreign exchange
translation of foreign operations, net of tax
|
|
(19.9)
|
|
3.8
|
|
(36.4)
|
|
(21.5)
|
Change in fair value
of available-for-sale financial instruments, net of tax
|
|
-
|
|
0.1
|
|
-
|
|
0.1
|
Balance at end of
period
|
$
|
52.5
|
$
|
78.6
|
$
|
52.5
|
$
|
78.6
|
|
|
|
|
|
|
|
|
|
Total equity
attributable to equity holders of the
Company
|
$
|
1,593.1
|
$
|
1,421.6
|
$
|
1,593.1
|
$
|
1,421.6
|
|
|
|
|
|
|
|
|
|
Non-controlling
interests
|
|
|
|
|
|
|
|
|
Balance at beginning
of period
|
$
|
239.5
|
$
|
290.7
|
$
|
254.8
|
$
|
296.8
|
Net income
attributable to non-controlling interests
|
|
6.4
|
|
15.5
|
|
27.4
|
|
46.8
|
Defined benefit
pension plan actuarial gains (losses) attributable to
|
|
|
|
|
|
|
|
|
|
non-controlling
interests, net of
tax
|
|
2.0
|
|
(0.5)
|
|
(1.6)
|
|
(6.5)
|
Change in fair value
of available-for-sale financial instruments, net of tax
|
|
-
|
|
0.1
|
|
-
|
|
0.1
|
Distributions to
non-controlling interests
|
|
(2.2)
|
|
(11.6)
|
|
(6.6)
|
|
(23.1)
|
Acquisition of
non-controlling interests (Note 9)
|
|
(5.6)
|
|
-
|
|
(14.0)
|
|
(19.9)
|
Elimination of
non-controlling interests (Note 12(a))
|
|
-
|
|
(39.7)
|
|
(19.9)
|
|
(39.7)
|
Balance at end of
period
|
$
|
240.1
|
$
|
254.5
|
$
|
240.1
|
$
|
254.5
|
|
|
|
|
|
|
|
|
|
Total
equity
|
$
|
1,833.2
|
$
|
1,676.1
|
$
|
1,833.2
|
$
|
1,676.1
|
|
|
|
|
|
|
|
|
|
The accompanying
notes are an integral part of these condensed consolidated interim
financial statements.
|
Canfor Corporation
Condensed Consolidated
Statements of Cash Flows
|
3 months ended
September 30,
|
9 months ended
September 30,
|
(millions of Canadian
dollars, unaudited)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Cash generated
from (used in):
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
72.6
|
$
|
66.4
|
$
|
241.0
|
$
|
159.7
|
|
Items not affecting
cash:
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
61.5
|
|
60.6
|
|
185.9
|
178.7
|
|
|
Income tax
expense
|
|
23.5
|
|
23.1
|
|
83.8
|
47.2
|
|
|
Long-term portion of
deferred reforestation obligations
|
|
(12.5)
|
|
(5.3)
|
|
(3.9)
|
(1.1)
|
|
|
Foreign exchange
(gain) loss on long-term debt
|
|
(5.0)
|
|
1.1
|
|
(9.5)
|
(7.2)
|
|
|
Changes in
mark-to-market value of derivative financial instruments
|
|
1.8
|
|
(1.0)
|
|
1.8
|
(4.4)
|
|
|
Employee future
benefits
|
|
3.2
|
|
3.3
|
|
9.7
|
9.7
|
|
|
Finance expense,
net
|
|
8.1
|
|
8.2
|
|
23.9
|
24.8
|
|
|
Gain on sale of
Anthony EACOM Inc. (Note 4)
|
|
-
|
|
-
|
|
(4.0)
|
-
|
|
|
Gain on legal
settlement, net (Note 13)
|
|
-
|
|
-
|
|
-
|
(15.5)
|
|
|
Equity
income
|
|
-
|
|
(0.8)
|
|
(0.6)
|
(3.0)
|
|
|
Operations closure
provisions
|
|
(3.2)
|
|
-
|
|
(3.2)
|
-
|
|
|
Other, net
|
|
(0.2)
|
|
3.3
|
|
(5.1)
|
0.4
|
|
Defined benefit plan
contributions, net
|
|
(5.8)
|
|
(15.2)
|
|
(18.4)
|
|
(25.6)
|
|
Cash received from
legal settlement (Note 13)
|
|
-
|
|
16.3
|
|
-
|
|
16.3
|
|
Income taxes paid,
net
|
|
(21.6)
|
|
(13.5)
|
|
(39.7)
|
|
(30.1)
|
|
|
|
122.4
|
|
146.5
|
|
461.7
|
|
349.9
|
|
Net change in
non-cash working capital (Note 10)
|
|
4.7
|
|
2.1
|
|
(8.2)
|
|
72.9
|
|
|
127.1
|
|
148.6
|
|
453.5
|
|
422.8
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
Change in operating
bank loans (Note 5(a))
|
|
-
|
|
(33.0)
|
|
(28.0)
|
|
(62.0)
|
|
Proceeds from
long-term debt (Note 5(b))
|
|
-
|
|
-
|
|
1.7
|
|
-
|
|
Repayment of
long-term debt (Note 5(b))
|
|
(0.1)
|
|
-
|
|
(0.2)
|
|
-
|
|
Finance expenses
paid
|
|
(4.8)
|
|
(3.5)
|
|
(14.4)
|
|
(14.5)
|
|
Share purchases (Note
9)
|
|
(75.0)
|
|
-
|
|
(75.0)
|
|
-
|
|
Acquisition of
non-controlling interests (Note 9)
|
|
(7.5)
|
|
(0.3)
|
|
(17.7)
|
|
(24.7)
|
|
Cash distributions
paid to non-controlling interests
|
|
(2.2)
|
|
(11.6)
|
|
(8.2)
|
|
(23.1)
|
|
|
(89.6)
|
|
(48.4)
|
|
(141.8)
|
|
(124.3)
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
Additions to
property, plant and equipment, timber, and intangible assets,
net
|
|
(57.5)
|
|
(57.1)
|
|
(158.1)
|
|
(170.4)
|
|
Proceeds on sale of
Anthony EACOM Inc., net (Note 4)
|
|
1.4
|
|
-
|
|
8.0
|
|
-
|
|
Proceeds on sale of
Lakeland Winton (Note 14)
|
|
-
|
|
-
|
|
15.0
|
|
-
|
|
Proceeds on disposal
of property, plant, and equipment
|
|
2.0
|
|
-
|
|
10.3
|
|
-
|
|
Acquisition of
Beadles & Balfour (Note 12(a))
|
|
-
|
|
-
|
|
(41.8)
|
|
-
|
|
Acquisition of Scotch
Gulf (Note 12(a))
|
|
-
|
|
(61.6)
|
|
-
|
|
(61.6)
|
|
Acquisition of
Wynndel (Note 12(b))
|
|
-
|
|
(2.6)
|
|
(14.4)
|
|
(22.3)
|
|
Other, net
|
|
(5.0)
|
|
4.7
|
|
(3.9)
|
|
3.6
|
|
|
(59.1)
|
|
(116.6)
|
|
(184.9)
|
|
(250.7)
|
Foreign exchange gain
(loss) on cash and cash equivalents
|
|
(2.5)
|
|
0.7
|
|
(4.6)
|
|
(3.5)
|
Increase
(decrease) in cash and cash equivalents*
|
|
(24.1)
|
|
(15.7)
|
|
122.2
|
|
44.3
|
Cash and cash
equivalents at beginning of period*
|
|
302.9
|
|
157.5
|
|
156.6
|
|
97.5
|
Cash and cash
equivalents at end of period*
|
$
|
278.8
|
$
|
141.8
|
$
|
278.8
|
$
|
141.8
|
|
*Cash and
cash equivalents include cash on hand less unpresented
cheques.
|
|
The accompanying
notes are an integral part of these condensed consolidated interim
financial statements.
|
Canfor Corporation
Notes to the Condensed
Consolidated Financial Statements
Three and nine months
ended September 30, 2017 and 2016
(millions of Canadian dollars unless otherwise noted,
unaudited)
1. Basis of Preparation
These condensed consolidated interim financial statements (the
"financial statements") have been prepared in accordance with
International Accounting Standard ("IAS") 34, Interim Financial
Reporting, and include the accounts of Canfor Corporation and
its subsidiary entities, including Canfor Pulp Products Inc.
("CPPI"), hereinafter referred to as "Canfor" or "the
Company."
These financial statements do not include all of the disclosures
required by International Financial Reporting Standards ("IFRS")
for annual financial statements. Additional disclosures relevant to
the understanding of these financial statements, including the
accounting policies applied, can be found in the Company's Annual
Report for the year ended December 31,
2016, available at www.canfor.com or www.sedar.com.
Effective January 1, 2017, the
Company has adopted the amendment to IAS 7, Statement of Cash
Flows, which clarified disclosure requirements associated with
cash and non-cash changes in liabilities from financing
activities. The adoption of this amendment has had no impact
on the Company's disclosures in the financial statements.
Certain comparative amounts for the prior year have been
reclassified to conform to the current year's presentation.
These financial statements were authorized for issue by the
Company's Board of Directors on October 20,
2017.
Accounting Standards Issued and Not Applied
In May 2014, the International
Accounting Standards Board ("IASB") issued IFRS 15, Revenue from
Contracts with Customers, which will supersede IAS 18,
Revenue, IAS 11, Construction Contracts and related
interpretations. The new standard is effective for annual periods
beginning on or after January 1,
2018. The Company has performed an assessment of the impact
of the new standard, and has determined that adoption of this
standard will have no significant impact on the Company's financial
statements.
In July 2014, the IASB issued IFRS
9, Financial Instruments. The required adoption date for
IFRS 9 is January 1, 2018 and the
Company has determined that adoption of this standard will have no
significant impact on its financial statements.
In January 2016, the IASB issued
IFRS 16, Leases, which will supersede IAS 17, Leases
and related interpretations. The required adoption date for IFRS 16
is January 1, 2019 and the Company is
in the process of assessing the impact on its financial statements
of this new standard.
2. Seasonality of Operations
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 affect demand for solid wood
products, are generally stronger in the spring and summer months.
Shipment volumes are affected by these factors as well as by global
supply and demand conditions.
3. Inventories
(millions of Canadian
dollars, unaudited)
|
As
at September
30, 2017
|
As at
December 31,
2016
|
Logs
|
$
|
98.5
|
$
|
107.3
|
Finished
products
|
|
313.2
|
|
310.6
|
Residual
fibre
|
|
20.3
|
|
13.8
|
Materials and
supplies
|
|
120.9
|
|
117.3
|
|
$
|
552.9
|
$
|
549.0
|
The above inventory balances are stated after inventory
write-downs from cost to net realizable value. There were no
inventory write-downs at September 30,
2017 or December 31, 2016.
4. Long-Term Investments and
Other
(millions of Canadian
dollars, unaudited)
|
As
at September
30, 2017
|
|
As at
December 31, 2016
|
Investments
|
$
|
21.6
|
$
|
14.7
|
Equity investment in
Anthony EACOM Inc.
|
|
-
|
|
16.8
|
Other deposits, loans
and advances
|
|
15.6
|
|
19.2
|
|
$
|
37.2
|
$
|
50.7
|
On March 31, 2017, the Company
sold its 50% investment in Anthony EACOM Inc. to EACOM Timber
Corporation for net proceeds of $21.4
million and recorded a gain of $4.0
million in Other Income in the first quarter of 2017. For
the nine months ended September 30,
2017, instalments of $8.0
million have been received, with the remaining $13.5 million due under a secured promissory note
payable in equal instalments by March 31,
2020. Of this balance, $5.4
million is recorded under Accounts Receivable – Other and
$8.1 million is recorded as a
receivable under Other deposits, loans and advances. Prior to the
sale, the Company's interest in Anthony EACOM Inc. was classified
as a joint venture and accounted for using the equity method of
accounting.
5. Operating Loans and Long-Term
Debt
(a) Available Operating Loans
(millions of Canadian
dollars, unaudited)
|
|
As
at September
30, 2017
|
|
As at
December 31,
2016
|
Canfor (excluding
CPPI)
|
|
|
|
|
Available Operating
Loans:
|
|
|
|
|
|
Operating loan
facility
|
$
|
350.0
|
$
|
350.0
|
|
Facility for letters
of credit
|
|
50.0
|
|
50.0
|
|
Total operating loan
facility
|
|
400.0
|
|
400.0
|
|
Operating loan
drawn
|
|
-
|
|
(28.0)
|
|
Letters of
credit
|
|
(41.7)
|
|
(41.6)
|
Total available
operating loan facility - Canfor
|
$
|
358.3
|
$
|
330.4
|
CPPI
|
|
|
|
|
Available Operating
Loans:
|
|
|
|
|
|
Operating loan
facility
|
$
|
110.0
|
$
|
110.0
|
|
Letters of
credit
|
|
(9.0)
|
|
(9.3)
|
Total available
operating loan facility - CPPI
|
$
|
101.0
|
$
|
100.7
|
Consolidated:
|
|
|
|
|
Total operating
loan facilities
|
$
|
510.0
|
$
|
510.0
|
Total available
operating loan facilities
|
$
|
459.3
|
$
|
431.1
|
Interest is payable on Canfor's operating loans at floating
rates based on the lenders' Canadian prime rate, bankers
acceptances, US dollar base rate or US dollar LIBOR rate, plus a
margin that varies with the Company's debt to total capitalization
ratio.
The terms of CPPI's operating loan facility include interest
payable at floating rates that vary depending on the ratio of debt
to total capitalization and is based on lenders' Canadian prime
rate, bankers acceptances, US dollar base rate or US dollar LIBOR
rate, plus a margin.
Both Canfor's and CPPI's operating loan facilities have certain
financial covenants, including maximum debt to total capitalization
ratios.
During the third quarter of 2017, the Company's principal
operating loans, excluding those of CPPI, were extended to
September 28, 2022.
Canfor (excluding CPPI) has a separate facility to cover letters
of credit. At September 30, 2017,
$39.2 million of letters of credit
outstanding are covered under this facility with the balance of
$2.5 million covered under Canfor's
general operating loan facility.
At September 30, 2017,
$9.0 million of letters of credit
outstanding are covered under the CPPI general operating loan
facility. As at September 30, 2017,
the Company and CPPI are in compliance with all covenants relating
to their operating loans. Substantially all borrowings of CPPI are
non-recourse to other entities within the Company.
(b) Long-Term Debt
On January 30, 2017, the Company
entered into a new five-year floating interest rate term loan for
US$1.3 million. The debt is repayable
in monthly instalments with the balance due January 30, 2022. Interest payable is based on
LIBOR plus a margin.
All borrowings of the Company feature similar financial
covenants, including a maximum debt to total capitalization
ratio.
As at September 30, 2017, the
Company and CPPI are in compliance with all covenants relating to
their long-term debt.
Fair value of total long-term debt
At September 30, 2017, the fair
value of the Company's long-term debt is $434.4 million (December
31, 2016 - $447.2 million).
The fair value was determined based on prevailing market rates for
long-term debt with similar characteristics and risk profile.
6. Employee Future
Benefits
For the three months ended September 30,
2017, defined benefit plan actuarial gains of $17.6 million (before tax) were recognized in
other comprehensive income (loss). The gains recorded in the
third quarter of 2017 principally reflect a higher discount rate
used to value the net defined benefit plan obligations partially
offset by a return on plan assets lower than discount rate. For the
nine months ended September 30, 2017,
losses of $14.3 million (before tax)
were recognized in other comprehensive income (loss). For the three
and nine months ended September 30,
2016, the Company recognized before tax actuarial losses in
other comprehensive income (loss) of $2.0
million and $71.2 million,
respectively.
For the Company's defined benefit pension plans, a one
percentage point increase in the discount rate used in calculating
the actuarial estimate of future liabilities would decrease the
accrued defined benefit pension obligation by an estimated
$89.8 million, of which 42%
(December 31, 2016 – 33%) is fully
hedged against changes in discount rates and longevity risk
(potential increases in life expectancy of plan members) through
buy-in annuities, and a further 24% (December 31, 2016 – 32%) is partially hedged
through the plan's investment in debt securities. For the Company's
other benefit plans, a one percentage point increase in the
discount rate used in calculating the actuarial estimate of future
liabilities would decrease the accrued benefit obligation by an
estimated $22.9 million.
The discount rate assumptions used to estimate the changes in
net retirement benefit obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
Defined
Benefit
|
|
Other
Benefit
|
|
|
|
|
Pension
Plans
|
|
Plans
|
|
September 30,
2017
|
|
|
3.8%
|
|
3.8%
|
|
June 30,
2017
|
|
|
3.5%
|
|
3.5%
|
|
December 31,
2016
|
|
|
3.9%
|
|
3.9%
|
|
September 30,
2016
|
|
|
3.4%
|
|
3.4%
|
|
June 30,
2016
|
|
|
3.5%
|
|
3.5%
|
|
December 31,
2015
|
|
|
4.1%
|
|
4.1%
|
In the second quarter of 2017, the Company purchased
$90.5 million of buy-in annuities
through its defined benefit pension plans, increasing total
annuities purchased to $377.1
million. Future cash flows from the annuities will match the
amount and timing of benefits payable under the plans,
substantially mitigating the exposure to future volatility in the
related pension obligations. Transaction costs of $4.6 million related to the purchase were
recognized in other comprehensive income (loss) in the second
quarter of 2017, principally reflecting the difference between the
annuity rate (which is comparable to solvency rates) compared to
the discount rate used to value the obligations on a going concern
basis.
7. Financial
Instruments
Canfor's cash and cash equivalents, accounts receivable, other
deposits, loans and advances, operating loans, accounts payable and
accrued liabilities, and long-term debt are measured at amortized
cost subsequent to initial recognition.
Derivative instruments are measured at fair value. IFRS 13,
Fair Value Measurement, requires classification of financial
instruments within a hierarchy that prioritizes the inputs to fair
value measurement.
The three levels of the fair value hierarchy are:
Level 1 – Unadjusted quoted prices
in active markets for identical assets or liabilities;
Level 2 – Inputs other than quoted
prices that are observable for the asset or liability, either
directly or indirectly;
Level 3 – Inputs that are not
based on observable market data.
The following table summarizes Canfor's financial instruments
measured at fair value at September 30,
2017 and December 31, 2016,
and shows the level within the fair value hierarchy in which the
financial instruments have been classified:
(millions of Canadian
dollars, unaudited)
|
|
Fair Value
Hierarchy
Level
|
As
at
September
30, 2017
|
As at
December 31,
2016
|
Financial assets
measured at fair value
|
|
|
|
|
|
|
|
Investments - held
for trading
|
|
Level 1
|
$
|
21.1
|
$
|
14.3
|
|
Derivative financial
instruments - held for trading
|
|
Level 2
|
|
-
|
|
0.2
|
|
|
|
$
|
21.1
|
$
|
14.5
|
Financial
liabilities measured at fair value
|
|
|
|
|
|
|
|
Derivative financial
instruments - held for trading
|
|
Level 2
|
$
|
(1.8)
|
$
|
0.1
|
|
|
|
$
|
(1.8)
|
$
|
0.1
|
Canfor invests in equity and debt securities, which are traded
in an active market and valued using closing prices on the
measurement date with gains or losses recognized through
comprehensive income.
At times, the Company uses a variety of derivative financial
instruments, which are included in Level 2 of the fair value
hierarchy, to reduce its exposure to risks associated with
fluctuations in foreign exchange rates, lumber prices, energy
costs, and floating interest rates on long-term debt.
At September 30, 2017, the fair
value of derivative financial instruments is a net liability of
$1.8 million (December 31, 2016 - net asset of $0.1 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 nine-month periods ended
September 30, 2017 and 2016:
|
3 months ended September
30,
|
9 months ended
September 30,
|
(millions of Canadian
dollars, unaudited)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Lumber
futures
|
$
|
(1.9)
|
$
|
0.4
|
$
|
1.3
|
$
|
1.6
|
Energy
derivatives
|
|
-
|
|
(0.3)
|
|
-
|
|
(0.9)
|
Foreign exchange
collars and forward contracts
|
|
-
|
|
-
|
|
-
|
|
0.1
|
Gain (loss) on
derivative financial instruments
|
$
|
(1.9)
|
$
|
0.1
|
$
|
1.3
|
$
|
0.8
|
8. Income Taxes
|
3 months ended
September 30,
|
9 months ended
September 30,
|
(millions of Canadian
dollars, unaudited)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Current
|
$
|
(19.5)
|
$
|
(14.9)
|
$
|
(80.1)
|
$
|
(35.1)
|
Deferred
|
|
(4.0)
|
|
(8.2)
|
|
(3.7)
|
|
(12.1)
|
Income tax
expense
|
$
|
(23.5)
|
$
|
(23.1)
|
$
|
(83.8)
|
$
|
(47.2)
|
The reconciliation of income taxes calculated at the statutory
rate to the actual income tax provision is as follows:
|
3
months ended September 30,
|
9 months ended
September 30,
|
(millions of Canadian
dollars, unaudited)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Income tax expense at
statutory rate of 26.0%
|
$
|
(24.9)
|
$
|
(23.3)
|
$
|
(84.4)
|
$
|
(53.8)
|
Add
(deduct):
|
|
|
|
|
|
|
|
|
|
Entities with
different income tax rates and other tax adjustments
|
|
0.5
|
|
(1.1)
|
|
(1.4)
|
|
(1.3)
|
|
Non-taxable income
related to non-controlling interests
|
|
0.1
|
|
1.3
|
|
0.3
|
|
6.3
|
|
Permanent difference
from capital gains and other non-deductible items
|
|
0.8
|
|
-
|
|
1.7
|
|
1.6
|
Income tax
expense
|
$
|
(23.5)
|
$
|
(23.1)
|
$
|
(83.8)
|
$
|
(47.2)
|
In addition to the amounts recorded to net income, a tax expense
of $4.6 million was recorded to other
comprehensive income (loss) for the three months ended September 30, 2017 in relation to the actuarial
gains on defined benefit plans (three months ended September 30, 2016 - tax recovery of $0.5 million). For the nine months ended
September 30, 2017, the tax recovery
in relation to actuarial losses was $3.7
million (nine months ended September
30, 2016 - tax recovery of $18.5
million).
Also included in other comprehensive income (loss) for the three
months ended September 30, 2017 was a
tax recovery of $1.3 million related
to foreign exchange differences on translation of investments in
foreign operations (three months ended September 30, 2016 - tax expense of $0.3 million). For the nine months ended
September 30, 2017, the tax recovery
was $2.6 million (nine months ended
September 30, 2016 - tax recovery of
$2.0 million).
9. Earnings per Share and Normal
Course Issuer Bid
Basic net income per share is calculated by dividing the net
income attributable to common shareholders by the weighted average
number of common shares outstanding during the period.
|
3 months ended September
30,
|
9 months ended
September 30,
|
|
2017
|
2016
|
2017
|
2016
|
Weighted average
number of common shares
|
130,986,807
|
132,804,543
|
132,200,842
|
132,804,543
|
On March 7, 2017, the Company
renewed its normal course issuer bid whereby it can purchase for
cancellation up to 6,640,227 common shares or approximately 5% of
its issued and outstanding common shares as of March 1, 2017. The renewed normal course issuer
bid is set to expire on March 6,
2018. During the third quarter of 2017, Canfor purchased
3,526,387 common shares for $75.0
million (an average of $21.27
per common share). During the first half of 2017, Canfor did not
purchase any common shares. As at October
20, 2017, there were 129,278,136 common shares of the
Company outstanding.
Under a separate normal course issuer bid, CPPI purchased
568,425 common shares in the third quarter of 2017 for $7.2 million (an average of $12.67 per common share) from non-controlling
shareholders, and paid an additional $0.3
million in relation to shares purchased earlier in the year.
For the nine months ended September 30,
2017, CPPI purchased 1,440,528 common shares for
$17.7 million (an average of
$12.29 per common share). As at
October 20, 2017, Canfor's ownership
interest in CPPI was 54.8%.
10. Net Change in Non-Cash Working
Capital
|
3 months
ended September 30,
|
9 months ended
September 30,
|
(millions of Canadian
dollars, unaudited)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Accounts
receivable
|
$
|
(3.5)
|
$
|
0.9
|
$
|
(37.6)
|
$
|
(2.4)
|
Inventories
|
|
(0.7)
|
|
8.3
|
|
(9.9)
|
|
58.9
|
Prepaid
expenses
|
|
4.6
|
|
(7.4)
|
|
(12.0)
|
|
(25.0)
|
Accounts payable,
accrued liabilities and current portion of
deferred reforestation obligations
|
|
|
|
|
|
|
|
|
|
4.3
|
|
0.3
|
|
51.3
|
|
41.4
|
Net decrease
(increase) in non-cash working capital
|
$
|
4.7
|
$
|
2.1
|
$
|
(8.2)
|
$
|
72.9
|
11. Segment Information
Canfor has two reportable segments (lumber segment and pulp and
paper segment) which offer different products and are managed
separately because they require different production processes and
marketing strategies.
Sales between segments are accounted for at prices that
approximate fair value. These include sales of residual fibre
from the lumber segment to the pulp and paper segment for use in
the pulp production process.
The Company's panels business does not meet the criteria to be
reported fully as a separate segment and is included in Unallocated
& Other below.
(millions of Canadian
dollars, unaudited)
|
|
Lumber
|
|
Pulp &
Paper
|
|
Unallocated
& Other
|
|
Elimination
Adjustment
|
|
Consolidated
|
3 months ended
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
Sales to external
customers
|
$
|
880.4
|
$
|
284.8
|
$
|
-
|
$
|
-
|
$
|
1,165.2
|
Sales to other
segments
|
|
46.3
|
|
0.1
|
|
-
|
|
(46.4)
|
|
-
|
Operating income
(loss)
|
|
92.9
|
|
21.1
|
|
(8.6)
|
|
-
|
|
105.4
|
Amortization
|
|
43.2
|
|
18.3
|
|
-
|
|
-
|
|
61.5
|
Capital
expenditures1
|
|
37.4
|
|
19.0
|
|
1.1
|
|
-
|
|
57.5
|
3 months ended
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
Sales to external
customers
|
$
|
809.6
|
$
|
291.6
|
$
|
-
|
$
|
-
|
$
|
1,101.2
|
Sales to other
segments
|
|
33.8
|
|
-
|
|
-
|
|
(33.8)
|
|
-
|
Operating income
(loss)
|
|
75.1
|
|
31.0
|
|
(8.7)
|
|
-
|
|
97.4
|
Amortization
|
|
40.6
|
|
19.0
|
|
1.0
|
|
-
|
|
60.6
|
Capital
expenditures1
|
|
39.8
|
|
14.0
|
|
3.3
|
|
-
|
|
57.1
|
9 months ended
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
Sales to external
customers
|
$
|
2,601.8
|
$
|
874.8
|
$
|
-
|
$
|
-
|
$
|
3,476.6
|
Sales to other
segments
|
|
129.1
|
|
0.2
|
|
-
|
|
(129.3)
|
|
-
|
Operating income
(loss)
|
|
287.0
|
|
87.8
|
|
(31.6)
|
|
-
|
|
343.2
|
Amortization
|
|
130.3
|
|
55.6
|
|
-
|
|
-
|
|
185.9
|
Capital
expenditures1
|
|
98.0
|
|
55.0
|
|
5.1
|
|
-
|
|
158.1
|
Identifiable
assets
|
|
2,219.0
|
|
793.4
|
|
347.6
|
|
-
|
|
3,360.0
|
9 months ended
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
Sales to external
customers
|
$
|
2,347.5
|
$
|
843.9
|
$
|
-
|
$
|
-
|
$
|
3,191.4
|
Sales to other
segments
|
|
114.8
|
|
0.2
|
|
-
|
|
(115.0)
|
|
-
|
Operating income
(loss)
|
|
180.0
|
|
75.3
|
|
(23.2)
|
|
-
|
|
232.1
|
Amortization
|
|
120.8
|
|
54.6
|
|
3.3
|
|
-
|
|
178.7
|
Capital
expenditures1
|
|
118.8
|
|
45.7
|
|
5.9
|
|
-
|
|
170.4
|
Identifiable
assets
|
|
2,295.7
|
|
796.6
|
|
212.1
|
|
-
|
|
3,304.4
|
1 Capital
expenditures represent cash paid for capital assets during the
periods. Pulp & Paper includes capital expenditures by CPPI
that were partially
financed by government grants. Capital expenditures exclude the
assets purchased as part of the acquisition of Wynndel Box and
Lumber Ltd. in 2016
(Note 12(b)).
|
12. Acquisitions
(a) US South
On January 2, 2015, the Company
completed the first phase of the acquisition of Beadles Lumber
Company & Balfour Lumber Company Inc. ("Beadles & Balfour")
for total consideration of $51.6
million (US$44.0 million),
representing an initial 55% interest.
On January 2, 2017, the Company
completed the final phase of the acquisition of Beadles &
Balfour for $41.8 million
(US$31.1 million) bringing Canfor's
interest in Beadles & Balfour to 100%. Upon completion of the
final phase of the acquisition, the forward purchase liability of
$41.8 million and non-controlling
interest of $19.9 million were
derecognized, and $36.5 million was
recorded in other equity. In addition, $16.6
million was charged to retained earnings reflecting Canfor's
election to account for the non-controlling interest related to
Beadles & Balfour as the non-controlling share of the fair
value of the net identifiable assets at the acquisition date.
On July 29, 2016, Canfor completed
the final phase of the acquisition of Scotch Gulf for $61.6 million (US$54.9
million) bringing Canfor's interest in Scotch Gulf to 100%.
Upon completion of the final phase of the acquisition, the forward
purchase liability of $71.8 million
and non-controlling interest of $39.7
million were derecognized, and $69.9
million was credited to other equity. In addition,
$20.0 million was charged to retained
earnings reflecting Canfor's election to account for the
non-controlling interest related to Scotch Gulf as the
non-controlling share of the fair value of the net identifiable
assets at the acquisition date.
(b) Wynndel Box and Lumber
Ltd.
On April 15, 2016, the Company
completed the acquisition of the assets of Wynndel Box and Lumber Ltd. ("Wynndel") for
total consideration of $40.3 million.
The acquisition has been accounted for in accordance with IFRS 3,
Business Combinations.
The acquisition of Wynndel included a sawmill located in the
Creston Valley of British
Columbia, which produces premium boards and customized
specialty wood products with an annual production capacity of 80
million board feet. Canfor acquired the assets of Wynndel,
including approximately 65,000 cubic meters of annual harvesting
rights in the Kootenay Lake Timber Supply Area.
At the acquisition date, the Company paid $19.7 million, and a working capital true-up
payment of $2.6 million was paid in
early July 2016. On April 5, 2017, the Company paid an instalment of
$14.4 million. The final instalment
of $3.6 million was paid on
October 13, 2017.
13. Houston Pellet Limited Partnership
Settlement
On June 28, 2016, Houston Pellet
Limited Partnership ("HPLP") settled various legal claims with a
logistics terminal located in Northern
British Columbia related to unloading, storage, handling and
shipping services for wood pellets manufactured by HPLP, for
$16.3 million. Certain machinery
and equipment involved in the settlement were impaired resulting in
approximately $0.8 million in
impairment charges recorded by HPLP. The net gain of
$15.5 million was recorded in
Manufacturing and Product Costs in the second quarter of 2016.
Canfor owns a 60% interest in HPLP.
14. Sale of Lakeland Mills Ltd. and Winton
Global Lumber Ltd.
Included in other accounts receivable at December 31, 2016 was $15.0 million related to the final instalment for
the July 1, 2015 sale of the
Company's 33.3% investment in Lakeland Mills Ltd. and Winton Global
Lumber Ltd. ("Lakeland Winton") for consideration of $30.0 million. The balance was received on
June 30, 2017.
15. Countervailing and Anti-Dumping
Duties
On November 25, 2016, a petition
was filed by the US Lumber Coalition to the US Department of
Commerce ("DOC") and the US International Trade Commission ("ITC")
alleging certain subsidies and administered fees below the fair
market value of timber that favour Canadian lumber producers, an
assertion the Canadian industry and Provincial and Federal
Governments strongly deny and have successfully disproven in
international courts in the past. Canfor was selected by the DOC as
a "mandatory respondent" to the countervailing and anti-dumping
investigations and is subject to company specific countervailing
and anti-dumping duties.
On April 24, 2017, the DOC
announced its preliminary countervailing duty of 20.26% specific to
Canfor, to be posted by cash deposits or bonds on the exports of
softwood lumber to the US effective April
28, 2017 to August 26, 2017.
On June 23, 2017, the DOC announced
its preliminary anti-dumping duty determination of 7.72% specific
to Canfor, to be posted by cash deposits or bonds on the exports of
softwood lumber to the US effective June 30,
2017. Accordingly, for the three and nine months ended
September 30, 2017, countervailing
and anti-dumping duty deposits of $31.7
million, and $66.5 million
respectively, have been expensed reflecting the duties paid on
deposits for sales recognized in the period.
The final countervailing and anti-dumping duty determinations
will be aligned for DOC administrative purposes. The US Department
of Commerce will announce its final CVD and ADD determinations no
later than November 14, 2017,
followed by a final injury determination by the US International
Trade Commission no later than December 21,
2017. In the event of an affirmative injury determination by
the US International Trade Commission, final duties would be
imposed on or before January 2, 2018.
Final countervailing and anti-dumping determinations may differ
from the preliminary determinations.
Canfor and other Canadian forest product companies, the Federal
Government and Canadian Provincial Governments categorically deny
the US allegations and vehemently disagree with the preliminary
countervailing and anti-dumping determinations made by the DOC.
SOURCE Canfor Corporation