Canfor Pulp announces Q1 2018 results and quarterly dividend

Canfor Pulp
April 25, 2018
By Canfor Pulp
Apr. 25, 2018 - Canfor Pulp Products Inc. (CPPI) reported first quarter 2018 results and quarterly dividend.

The company reported operating income of $85.1 million for the first quarter of 2018, an increase of $18.3 million from the $66.8 million reported in the fourth quarter of 2017 as the benefit of near-record high US-dollar pricing for Northern Bleached Softwood Kraft (NBSK) pulp and improved productivity in the latter part of the quarter more than offset challenges presented by severe winter weather in Western Canada earlier in the period, and the effects of major transportation disruptions to all the company’s operations through the quarter.

Global softwood pulp markets remained favourable through the first quarter of 2018, resulting in US-dollar NBSK pulp list prices holding at near-record high prices, and a significant increase in average NBSK pulp unit sales realizations. Average Bleached Chemi-Thermo Mechanical Pulp (BCTMP) unit sales realizations showed a more moderate increase in the quarter, with increased demand towards the end of 2017 translating into higher average prices for product shipped in the current quarter.

Pulp shipments were up 3 per cent from the previous quarter, as a 14,000 tonne vessel slippage from December into January more than offset transportation constraints which reflected challenging weather conditions in Western Canada. Pulp production was broadly in line with the fourth quarter of 2017, as strong productivity in March combined with increased operating days following the unscheduled outage at the company’s Northwood pulp mill in the previous quarter largely offset the impacts of various weather-related disruptions in January and February. Pulp unit manufacturing costs were moderately higher than the previous quarter, largely reflecting market-driven increases in fibre costs and weather-related increases in energy costs.

Operating income in the company’s paper segment at $2.9 million was down $4.5 million from the fourth quarter of 2017, as improved paper unit sales realizations were more than offset by increased slush pulp costs linked to higher Canadian dollar NBSK market pulp prices.

Commenting on the company’s first quarter of 2018 results, CPPI CEO Don Kayne said, “Notwithstanding the various disruptions caused by severe weather conditions in January and February, we had a solid operating performance in the quarter that enabled us to capitalize on the current favourable pulp market conditions and deliver new record-high sales, operating income and net income.”

Global softwood kraft pulp markets are projected to remain well positioned through the second quarter of 2018, reflecting both continued solid demand and tighter supply arising from the current transportation challenges as well as the traditional spring maintenance period. The outlook for the latter part of 2018 remains more uncertain given incremental pulp capacity currently projected to come online. For the month of April 2018, the company announced an increase of US$30 per tonne for NBSK pulp list prices to North America. The ongoing transportation disruptions and associated impact on shipments are projected to continue for several months as transportation networks slowly return to normal service levels.

Results in the second quarter of 2018 will reflect scheduled maintenance outages at the Prince George NBSK pulp mill and paper machine, as well as at the Taylor BCTMP mill, with a projected 5,000 tonnes of reduced NBSK pulp production, 4,000 tonnes of reduced paper production and 11,000 tonnes of reduced BCTMP production, respectively, combined with higher associated maintenance costs and lower projected shipment volume. The scheduled outage at the Taylor BCTMP mill will include work associated with the previously announced energy project. The Northwood NBSK pulp mill has a maintenance outage scheduled for the third quarter of 2018, with a projected 22,000 tonnes of reduced NBSK pulp production.

On April 24, 2018, the Board of Directors declared a quarterly dividend of $0.0625 per share, payable on May 14, 2018 to the shareholders of record on May 7, 2018.

First quarter 2018 overview
The company reported operating income of $85.1 million for the first quarter of 2018, an increase of $18.3 million from the $66.8 million reported in the fourth quarter of 2017 as the benefit of near-record high US-dollar pricing for Northern Bleached Softwood Kraft (NBSK) pulp and improved productivity in the latter part of the quarter more than offset challenges presented by severe winter weather in Western Canada earlier in the period, and the effects of major transportation disruptions to all the Company's operations through the quarter.

Compared to the first quarter of 2017, operating income was up $49.9 million reflecting substantially higher average NBSK pulp and Bleached Chemi-Thermo Mechanical Pulp (BCTMP) US-dollar pricing, which significantly outweighed a 5 per cent stronger Canadian dollar, lower shipments and a notable increase in pulp unit manufacturing costs, largely attributable to higher market-based fibre costs, and to a lesser extent, higher chemical costs in the current quarter.

Operating results by business segment

Pulp
Global softwood pulp markets remained favourable through the first quarter of 2018. Transportation constraints contributed to a build of softwood pulp inventories in Western Canada, and with the industry historically taking minimal maintenance downtime during the first quarter of the year, global softwood pulp inventories ended slightly above the balanced range as at the end of February 2018 at 31 days of supply, an increase of 1 day from December 2017, and an increase of 1 day from March 20176. Market conditions are generally considered balanced when inventories are in the 27-30 days of supply range.

Global shipments of bleached softwood pulp decreased by 4.1 per cent, for the first two months of 2018 compared to the first two months of 2017, driven primarily by decreased shipments to China7.

The company’s pulp shipments for the first quarter of 2018 were 310,000 tonnes, up 10,300 tonnes, or 3 per cent, from the previous quarter and down 27,100 tonnes, or 8 per cent, from the first quarter of 2017. Pulp shipments in the current quarter included the benefit of a 14,000 tonne vessel slippage over year-end that offset transportation delays mostly related to the severe winter weather in Western Canada. Compared to the first quarter of 2017, the 8 per cent decrease in NBSK pulp shipments was largely a function of the more adverse weather in the current quarter.

The average China US-dollar NBSK pulp list price of US$910 per tonne, as published by RISI, was up US$47 per tonne, or 5 per cent, from the fourth quarter of 2017. Average NBSK pulp unit sales realizations were significantly higher than the previous quarter, which for the most part reflected higher pricing and, to a lesser extent, the timing of shipments (versus orders). Despite lower US-dollar list prices towards the end of the current quarter, average BCTMP unit sales realizations showed a moderate increase quarter-over-quarter, due in part to the strong demand experienced towards the end of 2017 being realized in the current quarter.

Compared to the first quarter of 2017, the average China US-dollar NBSK pulp list price was up US$265 per tonne, or 41%. Prices on shipments to North America showed more modest gains over the same period. The higher global US-dollar prices resulted in substantially higher average NBSK pulp unit sales realizations, even after taking account of a 4 cent, or 5%, stronger Canadian dollar. Average BCTMP unit sales realizations also increased significantly when compared to the first quarter of 2017 primarily reflecting the improvement in BCTMP market demand, which more than offset the stronger Canadian dollar in the first quarter of 2018.

Energy revenues were slightly higher than the fourth quarter of 2017, primarily reflecting seasonally higher energy prices. Compared to the first quarter of 2017, lower energy revenue reflected the adverse winter weather conditions in the first part of the current quarter.

Operations
Pulp production in the first quarter of 2018 at 311,700 tonnes was broadly in line with the previous quarter, as strong productivity in March combined with an increase in operating days quarter-over-quarter was partly offset by several weather-related operational challenges in January and February. Results in the fourth quarter of 2017 included an unscheduled maintenance outage at the company’s Northwood NBSK pulp mill and a scheduled maintenance outage at the company’s Taylor BCTMP mill, reducing pulp production by approximately 11,000 tonnes and 3,000 tonnes, respectively. Pulp production in the current quarter was down slightly compared with the first quarter of 2017, with improved productivity in March partly offsetting weather-related effects on operations in the first two months of 2018.

Pulp unit manufacturing costs saw a moderate increase compared to the previous quarter reflecting increased fibre costs, weather-related impacts to energy and operational costs, and to a lesser extent, higher chemical costs. The higher fibre costs largely reflected increased market prices for delivered sawmill residual chips (linked to Canadian dollar NBSK pulp sales realizations). Compared to the first quarter of 2017, higher pulp unit manufacturing costs reflected the significant market-related increases in fibre costs, and to a lesser extent, higher chemical costs in the current quarter.

Paper
Global kraft paper markets remained solid through the first quarter of 2018, reflecting healthy demand from North American and Asian markets.

The company’s paper shipments in the first quarter of 2018 of 32,000 tonnes, were down 3,800 tonnes from the fourth quarter of 2017, and down 1,700 tonnes from the first quarter of 2017, largely reflecting timing of shipments due in part to the adverse weather conditions in the current quarter.

Paper unit sales realizations in the first quarter of 2018 saw a modest increase compared to the previous quarter, largely reflecting higher market-driven US-dollar pricing. Compared to the first quarter of 2017, paper unit sales realizations saw a moderate improvement, as favourable US-dollar pricing more than offset the 5 per cent stronger Canadian dollar.

Operations
Paper production for the first quarter of 2018 at 34,300 tonnes was down 2 per cent compared to the previous quarter largely reflecting a slightly lower operating rate in the current quarter. Paper production was in line with the first quarter of 2017.   

Higher paper unit manufacturing costs, compared to both the fourth quarter of 2017 and first quarter of 2017, reflected higher slush pulp costs associated with higher average NBSK pulp sales realizations in the current quarter.

Corporate costs were $4.2 million for the first quarter of 2018, up $1.2 million from both comparative periods primarily reflecting costs associated with organizational reductions in senior management.  

Net finance expense for the first quarter of 2018 at $1.2 million was down from both comparative quarters reflecting the early repayment of the company’s $50.0 million long-term debt towards the end of 2017, and lower interest expense associated with the company’s employee future benefit plans.

Other income of $3.8 million in the first quarter of 2018 principally related to favourable foreign exchange movements on US-dollar denominated working capital balances.

In the first quarter of 2018, the company recorded an after-tax gain of $2.4 million related to changes in the valuation of the company’s employee future benefits plans. The gain in the current quarter principally reflected a 0.2 per cent 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 gain of $22.3 million recorded in the fourth quarter of 2017, largely reflecting a 50 per cent reduction in MSP premiums following a change in legislation in British Columbia, offset in part by a 0.4 per cent decrease in the discount rate used to value the obligation.

During the fourth quarter of 2017, the company purchased $19.3 million of annuities through its defined benefit plans in order to mitigate its exposure to the future volatility fluctuations in the related pension obligations. At purchase of these annuities, transaction costs of $0.5 million were recognized in Other Comprehensive Income principally reflecting the difference in the annuity rate as compared to the discount rate used to value the pension obligations on a going concern basis.

Summary of financial position
Cash generated from operating activities was $67.1 million in the first quarter of 2018, down $11.3 million from the previous quarter and up $16.4 million from the first quarter of 2017. The decrease in operating cash flows compared to the previous quarter reflected unfavourable movements in non-cash working capital balances as well as higher tax installment payments, which were offset in part by higher cash earnings in the current quarter. The increase in non-cash working capital largely reflected higher accounts receivable balances due to higher pulp market prices. Compared to the first quarter of 2017, significantly higher cash earnings in the current quarter more than offset higher tax installment payments and unfavourable movements in non-cash working capital.

Cash used for financing activities was $4.9 million in the first quarter of 2018, down $50.2 million from the previous quarter, principally reflecting the early repayment of the company’s $50.0 million long-term debt in the fourth quarter of 2017, and down $2.8 million from the first quarter of 2017. Cash used for financing activities in the first quarter of 2018 included the Company's quarterly dividend payment of $4.1 million ($0.0625 per share).

Cash used for investing activities of $19.5 million in the current quarter primarily related to capital expenditures associated with the company’s previously announced energy projects at its Northwood and Taylor pulp mills.

Liquidity and Financial Requirements
At March 31, 2018, the company had a $110.0 million unsecured operating loan facility which was unused, except for $10.8 million reserved for several standby letters of credit, leaving $99.2 million available and undrawn on the operating facility. On April 6, 2018, the maturity date of the company’s principal operating loan facility was extended from January 31, 2020 to April 6, 2022, and the terms of certain financial covenants were updated.

The company remained in compliance with the covenants relating to its operating loans during the quarter, and expects to remain so for the foreseeable future.

On March 5, 2018, the company renewed its normal course issuer bid whereby it can purchase for cancellation up to 3,262,941 common shares or approximately 5 per cent of its issued and outstanding common shares as of March 1, 2018. The renewed normal course issuer bid is set to expire on March 6, 2019. During the first quarter of 2018 the company purchased 500 common shares at an average price of $13.01 per common shares, and paid an additional $0.1 million in relation to shares purchased in the fourth quarter of 2017. As at March 31, 2018 and April 24, 2018, Canfor’s ownership interest in CPPI was 54.8 per cent. The Company may purchase more shares through the balance of 2018 subject to the terms of the normal course issuer bid.

Dividends
On April 24, 2018, the Board of Directors declared a quarterly dividend of $0.0625 per share, payable on May 14, 2018 to the shareholders of record on May 7, 2018.

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. The Company, together with its joint venture partner, Licella, has actively continued to advance work associated with the feasibility study and risk reduction process for industrializing this biofuel and biochemical technology. In April 2018, the Company received the first installment of funding in the amount of $1.9 million.

Outlook

Pulp markets
Global softwood kraft pulp markets are projected to remain well positioned through the second quarter of 2018, reflecting both continued solid demand and tighter supply arising from the current transportation challenges as well as the traditional spring maintenance period. The outlook for the latter part of 2018 remains more uncertain given incremental pulp capacity currently projected to come online. For the month of April 2018, the Company announced an increase of US$30 per tonne for NBSK pulp list prices to North America. The ongoing transportation disruptions and associated impact on shipments are projected to continue for several months as transportation networks slowly return to normal service levels.

Results in the second quarter of 2018 will reflect scheduled maintenance outages at the Prince George NBSK pulp mill, as well as at the Taylor BCTMP mill, with a projected 5,000 tonnes of reduced NBSK pulp production and 11,000 tonnes of reduced BCTMP production, respectively, combined with higher associated maintenance costs and lower projected shipment volume. The scheduled outage at the Taylor BCTMP mill will include work associated with the previously announced energy project. The Northwood NBSK pulp mill has a maintenance outage scheduled for the third quarter of 2018, with a projected 22,000 tonnes of reduced NBSK pulp production.

Paper markets
Bleached kraft paper demand is anticipated to remain solid through the second quarter of 2018. A maintenance outage is currently planned at the company’s paper machine during the second quarter with a projected 4,000 tonnes of reduced paper production.

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