Financial Reports & Markets
Canfor details Q4 2017 results
Feb. 26, 2018 – Canfor has announced its financial results for the fourth quarter of 2017.
• Q4, 2017 adjusted operating income of $190.8 million, aided by improved lumber unit sales realizations and record-high pulp and paper earnings; operating income of $598.5 million and record-high sales of $4.66 billion in 2017.
• Adjusted net income of $114.8 million, or $0.89 per share; $363.4 million, or $2.77 per share, for 2017.
• CVD/ADD duty deposit rate reduced from 27.98 to 20.52 per cent following final determination by US Department of Commerce; combined duty expense of 14.34 per cent recorded in fourth quarter of 2017 to reflect impact of updated sales and cost data on ADD rate in 2017.
• Net debt of $97.5 million, or 4.6 per cent net debt to total capitalization, at December 31, 2017.
• Construction of a new state-of-the-art US$120 million greenfield sawmill in Georgia approved by Board of Directors: 275 million board feet of high-value dimension Southern Yellow Pine lumber.
The company reported operating income of $214.2 million for the fourth quarter of 2017, up $108.8 million from reported operating income of $105.4 million for the third quarter of 2017, with the increase reflecting higher operating earnings for both the lumber and pulp and paper segments. Lumber segment results reflected significantly higher Western Spruce/Pine/Fir (“Western SPF”) lumber prices, lower duties expensed in the current quarter and modest increases in Southern Yellow Pine (“SYP”) lumber prices. These factors more than offset continued challenges presented by weather which contributed to lower production and shipments through the quarter, as well as upward pressure on purchased wood and unit log costs in Western Canada. Record pulp and paper segment earnings largely reflected a sharp improvement in demand, which resulted in significantly higher Northern Bleached Softwood Kraft (“NBSK”) pulp and Bleached Chemi-Thermo Mechanical Pulp (“BCTMP”) U.S.-dollar pricing.
During the fourth quarter of 2017, the US Department of Commerce (“DOC”) announced its final countervailing duty (“CVD”) and anti-dumping duty (“ADD”) determinations, while the US International Trade Commission issued an affirmative determination of injury. As a result, Canfor was issued a final ADD rate of 7.28 per cent, and was subject to countervailing duties on Canadian lumber exports destined to the U.S. at a reduced rate of 13.24 per cent, effective December 28, 2017. Cash deposits are posted at the published CVD and ADD rates as determined by the DOC. For accounting purposes, however, Canfor recorded the ADD expense at a rate of 1.1 per cent, which was estimated by applying the DOC’s methodology to updated sales and cost data. This resulted in a combined effective CVD and ADD rate of 14.34 per cent for the applicable period in 2017.
Reflecting the aforementioned duty adjustments, reported results for the fourth quarter of 2017 incorporated a net duty recovery of $23.4 million, determined as follows:
• Recovery of $14.0 million to true-up the preliminary countervailing duty to the company’s final countervailing duty rate as published by the DOC for applicable shipments made between April 24, 2017 and August 25, 2017;
• A further $30.9 million recovery to true-up the preliminary anti-dumping duty expense to the lower accrual rate on applicable shipments from June 30, 2017 to December 31, 2017 ($15.9 million of this pertained to the fourth quarter of 2017);
• Cash deposits of $21.5 million made in the current period.
North American lumber demand remained solid in the fourth quarter of 2017, with U.S. housing starts, on a seasonally adjusted basis, averaging 1,251,000 units, up 7 per cent from the previous quarter, and in line with the fourth quarter of 2016. Single-family starts, which consume a higher proportion of lumber compared to multi-family starts, hit a 10-year high in November and were up 5 per cent from the previous quarter, while multi-family starts were up 12 per cent compared to the third quarter of 2017. In Canada, housing starts remained near historical highs, averaging 233,000 units on a seasonally adjusted basis, up 4 per cent from the previous quarter, and up 16 per cent from the same period in 2016. Offshore lumber demand remained steady.
Western SPF lumber unit sales realizations increased significantly compared to the third quarter of 2017 reflecting higher average Western SPF lumber prices, a 1 cent, or 1 per cent, weaker Canadian dollar and a higher-value sales mix. Strong underlying demand and limited available supply contributed to historically high benchmark Western SPF lumber prices, with the benchmark North American Random Lengths Western SPF 2×4 #2&Btr price averaging US$462 per Mfbm, up US$56 per Mfbm, or 14 per cent, from the previous quarter, with similar increases seen across most wider dimensions. SYP lumber unit sales realizations were modestly higher compared to the prior quarter as a highervalue sales mix, a 12 per cent increase in the SYP East 2×4 #2 price and strong 2×6 pricing more than offset seasonally lower pricing in wider dimensions.
Total lumber shipments, at 1.24 billion board feet, were 9 per cent lower than the previous quarter reflecting lower productivity, capital related downtime in the U.S. South, increased statutory holidays, and weather-related transportation challenges in Western Canada, which placed constraints on railcar and truck availability.
Total lumber production, at 1.24 billion board feet, was down 5 per cent from the previous quarter reflecting fewer operating hours as a result of the aforementioned factors. Ongoing weather challenges impacted log deliveries, log profile and drying capacity in Western Canada, which contributed to lower productivity in the current quarter. Severe wet weather, coupled with capital related downtime, accounted for a decrease of 6 per cent in SYP production quarter-overquarter.
Lumber unit manufacturing costs in the fourth quarter of 2017 were moderately higher than the previous quarter, as the severe weather conditions in Western Canada impacted log deliveries, contributing to higher purchase wood and log hauling costs. Cash conversion costs were impacted by seasonally higher energy costs, as well as the unfavourable impact of lower production volumes. Log costs in the U.S. South remained stable.
The strong surge in pulp demand in the current quarter, principally from China, was partly in response to new regulations by the Chinese government restricting the import of recycled mixed paper. This development, in combination with already solid demand, a modest decline in the Canadian dollar and various unforeseen global pulp supply disruptions, paved the way for a significant increase in NBSK pulp unit sales realizations quarter-over-quarter. Average BCTMP unit sales realizations also saw strong gains, reflecting the good market conditions and the favourable foreign exchange movement in the fourth quarter of 2017. Energy revenues also increased, for the most part reflecting strong power generation combined with seasonally higher energy prices.
Pulp shipments and production volumes were broadly in line with the previous quarter. The impact on pulp production of the previously announced unscheduled outage at CPPI’s Northwood NBSK pulp mill in November, was offset in part by improved productivity across all NBSK pulp mills, including the Northwood mill following the outage. After taking account of scheduled and unscheduled outages in each period, total pulp production for the fourth quarter was slightly below that of the third quarter. The anticipated benefit of a slipped vessel shipment from the previous quarter into the fourth quarter was offset by a delayed vessel shipment over the year end due to adverse weather conditions. Pulp unit manufacturing costs were largely consistent with the previous quarter, as increased maintenance spend combined with higher energy usage in the current quarter, primarily due to the aforementioned unplanned outage, was offset by lower chemical costs and improved productivity towards the end of the period.
Commenting on the company’s fourth quarter results, Canfor president and CEO Don Kayne said, “Despite the many operational challenges presented by weather, our lumber business had another strong quarter, driven by steadily improving demand and prices for our products. Similarly, our pulp business had a strong quarter, delivering record financial results and recovering well from the recovery boiler upset at Northwood earlier in the period.”
Subsequent to year-end, Canfor announced it will proceed with construction of a new US$120 million, state-of-the-art 275 million board foot sawmill in Washington, Ga., with a projected start-up in the third quarter of 2019.
Looking ahead, the U.S. housing market is forecast to continue its ongoing gradual recovery through 2018. North American lumber prices are projected to remain at current historical-high levels in the first quarter of 2018, reflecting low inventories, solid demand and weather-related challenges in Western Canada. For the company’s key offshore lumber markets, demand is anticipated to remain solid through the first quarter of 2018, particularly in Japan. The various disruptions presented by weather to-date in 2018 are projected to result in lower production and shipment volumes for the first quarter of 2018.
Global softwood kraft pulp markets are projected to remain well positioned through the first quarter of 2018, with continued strong shipments into Asian markets, particularly China, and sustained demand in other markets. CPPI has announced NBSK pulp list price increases of US$10 per tonne to China for January 2018, and two consecutive price increases to North America, each of US$30 per tonne, for February and March 2018. A balanced kraft pulp market is projected to continue into the second quarter of 2018, when many pulp producers have their traditional spring maintenance outages. The BCTMP market is seeing some reduced demand in the first quarter of 2018, which is resulting in downward price pressure. Early 2018 weather related transportation disruptions are projected to result in delayed shipments and modestly higher costs for the first quarter of 2018. The pulp outlook for the remainder of the year is more uncertain given incremental pulp capacity currently projected to come online and the potential for the reinstatement of some import permits for recovered paper in China through 2018.