Canfor logistics challenges eased
July 24, 2014, Vancouver - Canfor Corporation reported net income attributable to shareholders of $54.3 million, or $0.39 per share, for the second quarter of 2014, compared to $45.5 million, or $0.33 per share, for the first quarter of 2014 and $110.3 million, or $0.77 per share, for the second quarter of 2013. For the six months ended June 30, 2014, the Company's shareholder net income was $99.8 million, or $0.72 per share, compared to shareholder net income of $172.2 million, or $1.21 per share, reported for the first half of 2013.
The company reported operating income of $97.3 million for the second quarter of 2014, compared to operating income of $84.4 million for the first quarter of 2014. The positive variance largely reflected improved shipments across all segments in the current quarter resulting from improved railcar availability and resolution of the truckers' strike at the Vancouver port in the first quarter of 2014, mitigated somewhat by lower sales realizations in both the lumber and pulp and paper segments and maintenance outages at the Company's pulp and paper facilities.
Reflecting the overhang of lumber inventories in British Columbia resulting from the transportation challenges experienced in the previous quarter, Western Spruce/Pine/Fir ("SPF") lumber prices saw a gradual decline through most of the second quarter of 2014. Towards the end of quarter, however, prices picked up in response to improved demand and as inventories reached more balanced levels. The U.S. housing market continued its recovery, albeit at a slower pace than anticipated as home construction activities continued to be hampered by a shortage of building lots and skilled construction workers across the country, as well as tight credit availability. U.S. housing starts averaged 980,000 units SAAR (seasonally adjusted annual rate), up 6% from the previous quarter. In Canada, lumber consumption was higher than the previous quarter, with Canadian housing starts up 11% from the first quarter of 2014, to 196,000 units SAAR. Offshore demand was steady, with higher shipments reflecting the improved transportation performance.
The company's lumber sales realizations decreased moderately compared to the previous quarter, as a 9% decline in the average North American Western SPF 2x4 #2&Btr price (down US$32 per Mfbm to US$335 per Mfbm) was mitigated by less pronounced decreases on most wider dimension products as well as improved pricing on several other grades and more stable offshore prices. The latter largely reflected the nature of offshore pricing, much of which is negotiated monthly or quarterly in advance. Current quarter sales realizations also reflected the favourable impact of a higher percentage of prime products, in part reflecting the closure of the company's Quesnel Sawmill in the first quarter of 2014, and the unfavourable impact of a 1% stronger Canadian dollar compared to the US dollar. Overall sales realizations for Southern Yellow Pine ("SYP") products were up modestly compared to the previous quarter; while the benchmark SYP 2x4 #2 price was relatively unchanged, moderate increases were seen for several wider dimension products, which more than offset a decline in the 2x6 #2 price.
Lumber shipments, at over 1.2 billion board feet, were up 33% from the previous quarter, reflecting the aforementioned improved railcar availability and increased offshore shipments. Lumber production, at just under 1.1 billion board feet, was down 2% from the first quarter of 2014, largely as a result of the closure of the Company's Quesnel Sawmill and the sale of the Company's Daaquam Sawmill in the previous quarter. Excluding the impact of the Quesnel and Daaquam Sawmills, the Company's lumber production was up 6% from the previous quarter, principally due to improved productivity following completion of several major capital projects as well as improved weather. Production in the current quarter was impacted by capital related downtime and continued ramp-ups at several sawmills following major capital upgrades in previous quarters. Lumber unit manufacturing costs were down slightly from the previous quarter, driven in part by the continued productivity improvements as well as other seasonal factors. Log costs remained relatively stable, mainly due to seasonally lower logging activity in the current quarter, ahead of an anticipated increase in log costs in the third quarter of 2014.
Global softwood pulp markets were steady through the second quarter of 2014. Softwood pulp demand was solid across all regions and global softwood pulp producer inventory levels tightened through the quarter, decreasing 3 days from the end of March 2014 to 25 days' supply in June 2014, partly reflecting supply constraints due to seasonal maintenance downtime. The North American NBSK pulp list price was stable over the quarter averaging US$1,030 per tonne, up US$13 per tonne, or 1%, compared to the first quarter of 2014. Discount levels were consistent with the previous quarter. The NBSK pulp list price to Europe also remained largely unchanged, averaging US$925 per tonne, up US$5 per tonne from the previous quarter, while the average NBSK pulp list price to China was down US$27 per tonne, or 4%, to US$730 per tonne. Despite the average NBSK pulp prices to North America and Europe increasing slightly compared to the previous quarter, the combination of the weaker prices to China, the 1% stronger Canadian dollar and a higher proportion of shipments to lower-margin markets, including Asia (mostly tied to constraints in the previous quarter due to the Vancouver Port truckers' strike), resulted in a small decrease in pulp unit sales realizations.
Pulp shipments were up 23% from the previous quarter, largely attributable to improved transportation performance following the challenges experienced in the prior quarter. Pulp production levels were down 7% from the previous quarter principally related to the maintenance outages at the Intercontinental and Prince George Pulp Mills, which reduced market pulp production by 18,000 tonnes. Pulp unit manufacturing costs were up moderately compared to the previous quarter, mostly due to the aforementioned maintenance outages and increased fibre costs, partially offset by seasonally lower energy costs. The higher unit fibre costs reflected higher delivered sawmill residual and whole log chip costs and seasonal factors.
Commenting on the second quarter performance, Canfor's President and Chief Executive Officer, Don Kayne, said, "After the various logistical challenges experienced in the first quarter, we were pleased to see the transportation pressures across our lumber and pulp businesses ease somewhat in some regions in the second quarter. We continue to make good headway with our capital upgrades at our lumber business and anticipate a steady increase in production over the balance of the year and into 2015."
Looking ahead, North American lumber consumption is forecast to improve with steady demand in the residential construction market and continued strength from the repair and remodeling sector. The build of lumber inventories from the shortage of railcars in the first quarter of 2014 is projected to be cleared before the end of the third quarter. Offshore shipments are forecast to remain stable reflecting steady demand from China and other emerging markets, while shipments to Japan are projected to ease and prices soften from lower lumber demand. NBSK pulp markets are steady heading into the seasonally slower third quarter of 2014. A risk of pulp price weakness remains for the second half of 2014 due in part to reduced global consumption during the historically slower summer months and new hardwood pulp capacity projected to flow into markets.