VANCOUVER, April 22, 2020 /CNW/ - Canfor Corporation ("The Company" or "Canfor") (TSX: CFP) today reported its first quarter 2020 results:
- First quarter of 2020 reported operating loss of $89 million, including a $63 million inventory write-down in the lumber segment; adjusted operating income of $9 million
- Adjusted shareholder net loss of $26 million, or $0.21 per share
The following table summarizes selected financial information for the Company for the comparative periods:
(millions of Canadian dollars, except per share amounts)
Reported operating income before amortization
Reported operating income (loss)
Adjusted operating income before amortization1
Adjusted operating income (loss)1
Net income (loss)2
Net income (loss) per share, basic and diluted2
Adjusted net income (loss)2
Adjusted net income (loss) per share, basic and diluted2
1 Adjusted for countervailing and anti-dumping duties expense ($44.4 million in Q1 2020, $43.7 million in Q4 2019, $36.3 million in Q1 2019), inventory write-downs and recoveries ($52.3 net write-down in Q1 2020, $19.9 million net recovery in Q4 2019, $38.9 net write-down in Q1 2019), and restructuring costs related to mill closures and curtailments ($1.0 million in Q1 2020, $3.3 million in Q4 2019).
2 Attributable to equity shareholders of the Company.
For the first quarter of 2020, the Company reported an operating loss of $88.8 million, $29.2 million higher than the operating loss of $59.6 million reported for the fourth quarter of 2019. The significant decline reflected materially lower operating earnings in the lumber segment, partially offset by improved operating earnings in the pulp and paper segment.
Reported results in the first quarter of 2020 included a $63.0 million inventory write-down for the lumber operating segment, partly offset by a $10.7 million recovery in the inventory write-down provision for the pulp and paper operating segment. In addition, current quarter results included a net duty expense of $44.4 million, at a current cumulative effective countervailing duty ("CVD") and anti-dumping duty ("ADD") rate of 29.24% (versus a combined cash deposit rate of 20.52%), compared to $43.7 million reported in the fourth quarter of 2019 at the same combined rate. Cumulative cash deposits as at March 31, 2020 total $454.5 million.
Before taking account of inventory write-downs at the end of March, adjusted lumber segment operating income reflected a modest improvement in the quarter-over-quarter results from the Company's Western Spruce/Pine/Fir ("SPF") operations, largely due to a moderate increase in US-dollar Western SPF lumber prices, a modest decline in log costs in British Columbia ("BC"), and a 1 cent, or 2%, weaker Canadian dollar, which more than offset a quarter-over-quarter decline in Western SPF shipments. The Company's Southern Yellow Pine ("SYP") operational results experienced a slight increase quarter-over-quarter, as relatively flat SYP unit sales realizations were offset by a moderate increase in shipments. The Company's European SPF operations continued to contribute strongly to the Company's financial results; compared to the previous quarter, operating earnings showed a modest decrease, as significantly higher European SPF shipments were more than offset by a 5% decline in European SPF benchmark pricing and seasonally higher unit manufacturing costs in the current quarter.
Results in the pulp and paper segment principally reflected a solid operating performance at Canfor Pulp Products Inc.'s ("CPPI") pulp and paper mills, as higher production and a corresponding decline in pulp unit manufacturing costs combined with the weaker Canadian dollar, mitigated the impacts of the coronavirus outbreak ("COVID-19") in the latter half of the quarter.
The moderate up-tick in lumber market fundamentals and favourable macroeconomic conditions experienced at the end of 2019, particularly in North American home construction activity and the repair and remodeling sector, continued through the first part of the current quarter. Global lumber market conditions weakened, however, in late February and March as the effects of COVID-19 spread globally. US housing starts, on a seasonally adjusted basis, averaged 1,592,000 units for January and February, up 10% from the previous quarter; March housing starts experienced a steep decline to 1,216,000 units, a decrease of 22% in one month, the largest monthly decline in over thirty years, with continued downward pressure anticipated in April. In Canada, housing starts averaged 207,000 units on a seasonally adjusted basis in the first quarter of 2020, up 3% from the previous quarter, as slowing activity in major Eastern Canadian cities was offset by an up-tick in the Western Canadian market. Offshore lumber demand was down, particularly in China and other Asian countries, as that region experienced widespread COVID-19 quarantine restrictions and reduced activity during the first quarter of 2020. European lumber demand was solid through most of the current quarter, but modest pricing pressure experienced late in 2019 from an increase in European supply due to the spruce beetle, continued into the first quarter of 2020.
The average benchmark North American Random Lengths Western SPF 2x4 #2&Btr price was up US$19 per Mfbm, or 5%, from the previous quarter, at US$399 per Mfbm, as positive pricing momentum early in the current quarter, particularly from North American markets, more than outweighed the impact of COVID-19. The Western SPF 2x4 #2&Btr price increased significantly in January and February, reaching a high of US$442 per Mfbm, before declining dramatically to US$303 per Mfbm at the end of March, and to a low of US$282 per Mfbm early April, in the wake of the pandemic. Over the same comparative period, Western SPF lumber unit sales realizations showed a moderate increase in first quarter of 2020, reflecting higher benchmark lumber prices for most dimensions combined with the weaker Canadian dollar.
The steep decline in lumber prices through March and into April, combined with the ongoing pressure anticipated on US housing starts, resulted in a lumber inventory write-down related to the Company's Western SPF operations of $63.0 million recorded at the end of the first quarter of 2020.
The Company's SYP lumber unit sales realizations were broadly in line with the prior quarter, as moderate price increases for most wider-width SYP dimensions were offset by a decrease in the SYP East 2x4 #2 price, which fell 5% to US$386 per Mfbm.
The average European indicative SPF lumber benchmark price (an internally generated benchmark based on delivered price to the largest continental market), at 3,352 Swedish Krona ("SEK") per Mfbm, was down SEK 188 per Mfbm, or 5% (equivalent to US$346 per Mfbm, down US$22 per Mfbm, or 6%), from the previous quarter. Similar declines were seen for the Company's European SPF unit sales realizations quarter-over-quarter.
Total lumber shipments, at 1.25 billion board feet, were slightly above the previous quarter, with significantly higher European SPF shipments and a moderate increase in SYP shipments in the current quarter more than offsetting decreased shipments of Western SPF lumber. The latter reflected weather-related transportation constraints and rail line blockades early in the period, combined with vessel disruptions, particularly to Asia, in the second half of the current quarter as a result of the COVID-19 outbreak.
Total lumber production, at 1.29 billion board feet, was up 3% from the prior quarter, primarily reflecting an increase in operating days in all regions due to fewer statutory holidays, combined with higher production in the US South following capital-related downtime at two of the Company's sawmills in the previous quarter, as well as increased Western SPF production in the current quarter after the market-related downtime taken in the comparative period. The Company's European SPF operations continued to perform well in the current quarter.
Lumber unit manufacturing and product costs were broadly in line with the prior quarter, as the benefit of increased Western SPF, SYP and, to a lesser extent, European SPF production, combined with lower market pricing on consumed log costs in Western Canada, more than offset higher seasonal lumber unit manufacturing costs in Europe.
After a modest rebound in Asian pulp markets early in the quarter, global pulp markets weakened in late February and into March reflecting the spread of COVID-19. Demand for tissue, however, remained solid, which helped to offset weakness elsewhere, particularly in the printing and writing segment. Global softwood pulp producer inventories ended February at 37 days of supply, in line with December 2019, but still well above the balanced range. US-dollar Northern Bleached Softwood Kraft ("NBSK") pulp list prices to China averaged US$573 per tonne, up US$10 per tonne, or 2%, from the prior quarter. CPPI's NBSK pulp unit sales realizations were broadly in line with the prior quarter as slight increases in US-dollar unit sales realizations to most regions and the benefit of the aforementioned weaker Canadian dollar, were offset by CPPI's regional grade mix. Bleached Chemi-Thermo Mechanical Pulp ("BCTMP") unit sales realizations showed a moderate increase from the previous quarter reflecting a gradual improvement in BCTMP US-dollar prices through the quarter combined with the weaker Canadian dollar.
Pulp production was 298,000 tonnes for the first quarter of 2020, up 12,000 tonnes, or 4%, from the previous quarter, principally reflecting improved productivity and increased operating days in the current quarter, following a market-related curtailment early in the previous quarter at CPPI's Prince George NBSK pulp mill ("PG Pulp Mill").
Pulp shipments were up 23,000 tonnes, or 9%, from the previous quarter, largely due to the aforementioned increase in pulp production quarter-over-quarter combined with the modest improvement in purchasing from China, which outweighed the impact of transportation challenges in the current quarter.
Pulp unit manufacturing costs were modestly lower than the prior quarter, as the benefit of increased production and lower maintenance spend in the current quarter more than offset seasonally higher energy costs. Fibre costs were slightly lower than the previous period primarily reflecting a lower proportion of higher-cost whole log chips consumed and, to a lesser extent, seasonal pricing adjustments.
In response to the significant global impacts of the COVID-19 pandemic, in late March and early April, Canfor announced a series of significant measures. These included extensive capacity reductions across all three of the Company's sawmill operating regions, most notably, impacting the majority of the Company's BC sawmills, as well as a three-week curtailment of CPPI's Northwood pulp mill in place of the previously scheduled spring maintenance turnaround (postponed until later in 2020). These curtailments are currently anticipated to result in a reduction of approximately 170 million board feet of Western SPF production, 50 million board feet of SYP production, 17 million board feet of European SPF production and 35,000 tonnes of NBSK pulp production in the second quarter of 2020. The Company also announced the immediate reduction of its planned capital expenditures for 2020, which were already modest, by $20.0 million for its lumber segment (principally Canadian and US operations) and by $15.0 million for its pulp and paper segment (in addition to the previously announced $40.0 million cost containment measures for Canfor Pulp), representing a decrease of approximately $100.0 million from 2019 capital expenditures. These reductions will be realized through the deferral of planned projects and suspension of in-progress initiatives that can be paused without significant impact.
In addition to the COVID-19 related temporary downtime, CPPI has maintenance outages currently scheduled at the Northwood NBSK pulp mill and the Taylor BCTMP mill in the third quarter of 2020 with a projected 30,000 tonnes of reduced NBSK pulp production and a projected 5,000 tonnes of reduced BCTMP production, respectively.
Looking forward, the impacts of COVID-19 on global macroeconomics are still unfolding and the Company anticipates lumber market conditions will remain extremely volatile through much of 2020. Global lumber market demand in recent weeks has declined sharply in the wake of closures of non-essential businesses and lockdowns implemented in many parts of North America and Europe. The Company currently anticipates that US home construction activity will remain at depressed levels with demand volatility varying on a regional basis. In North America, following a sharp fall-off in pricing from mid-March through early April, prices have stabilized somewhat in response to a material reduction in supply in recent weeks.
Lumber prices to China are seeing more moderate declines than North America, as that region is gradually returning to more normal business conditions following the early outbreak of the COVID-19 pandemic, while short-term prices to Japan are anticipated to be in line with the current quarter. European lumber markets and pricing are also being materially impacted by the aforementioned global economic downturn, and the Company currently anticipates market conditions will remain very challenging through the second quarter of 2020.
In the pulp and paper segment, global softwood pulp demand is currently projected to be solid through the second quarter of 2020, particularly from China as that region continues to recover from the pandemic, while containment measures across Western Europe and North America are forecast to weigh on market demand for printing and writing paper. While pulp and paper operations are designated as essential services in many regions, it is projected that supply disruptions will continue in various regions as a result of the pronounced effects of COVID-19 on various business sectors, including lumber manufacturers. The current weakness in lumber markets may result in extended sawmill curtailments in the BC Interior, with the risk that lower volumes of sawmill residual chips available to pulp mills may cause additional downtime at CPPI's operations. Bleached kraft paper markets are currently anticipated to be solid through the second quarter of 2020, particularly in North America, as the impact of COVID-19 is projected to lead to increased demand for bleached kraft paper products that meet food grade specifications.
With the impacts of COVID-19 anticipated to weigh heavily on the Company's 2020 financial performance, the Company has implemented corporate-wide initiatives focused on reducing working capital, which includes accelerating receipt of income tax refund receivables, leveraging payment deferral programs, and suspending all non-essential overhead spend. These initiatives, combined with a continued disciplined approach to cash management, materially reduced capital spending and no debt repayments until 2023 at the earliest, will allow the Company to preserve its solid balance sheet position.
Commenting on the Company's first quarter results, Canfor's President and Chief Executive Officer, Don Kayne, said, "In this time of significant uncertainty due to the COVID-19 pandemic, our top priorities continue to be ensuring the health and safety of our employees and implementing the necessary measures to safeguard the business. While we saw a modest improvement in our results at our lumber and pulp and paper operations in the first quarter, these results were significantly overshadowed by the virus outbreak and the extreme market volatility and major economic turmoil it has caused. We are focused on maintaining a strong balance sheet and believe we are well-positioned to weather the impacts of the pandemic. We continue to actively assess the ongoing situation and remain prepared to take further action if necessary."
Additional Information and Conference Call
A conference call to discuss the first quarter's financial and operating results will be held on Friday, April 24, 2020 at 8:00 AM Pacific time. To participate in the call, in North America please dial Toll-Free 888-390-0546. For instant replay access until May 8, 2020, please dial 888-390-0541 and enter participant pass code 839377#. 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.
Non-IFRS Measures and Forward Looking Statements
Operating Income (Loss) before Amortization, Adjusted Operating Income (Loss), Adjusted Net Income (Loss) and Adjusted Net Income (Loss) per Share are not generally accepted earnings measures and should not be considered as an alternative to net income (loss) or cash flows as determined in accordance with IFRS. Refer to the Company's Annual Management's Discussion and Analysis for a reconciliation of Operating Income (Loss) before Amortization and Adjusted Operating Income (Loss) to Operating Income (Loss) and Adjusted Net Income (Loss) to Net Income (Loss) reported in accordance with IFRS.
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 Canfor 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, as well as in Sweden with its recent majority acquisition of the Vida Group. 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. For more information visit canfor.com.
SOURCE Canfor Corporation