For the first quarter of 2019, Canfor reported an operating loss of $69.9 million, an improvement of $9.2 million from the operating loss of $79.1 million reported for the fourth quarter of 2018. The modest increase in financial performance reflected improved operating earnings for the pulp and paper segment and one month of Vida earnings following the closing of this acquisition on Feb. 28, 2019.
Reported results for the first quarter of 2019 included a net duty expense of $36.3 million, at a combined countervailing duty (CVD) and anti-dumping duty (ADD) rate of 26.24 per cent, compared to $39.9 million reported in the fourth quarter of 2018 at a cumulative combined duty deposit rate of 16.14 per cent (for the 18-month administrative review period ended Dec. 31, 2018). Reported results in the first quarter of 2019 also included a $38.6 million lumber and log inventory write-down, in addition to the $36.7 million write-down reported in the fourth quarter of 2018. After adjusting for the aforementioned items, the company’s operating income was $5.0 million for the first quarter of 2019, up $7.5 million from similarly adjusted operating income in the fourth quarter of 2018.
As mentioned, the company successfully closed its acquisition of 70 per cent of Vida at the end of February. The preliminary purchase price was 4,136 million Swedish Krona (SEK) (CAD $590.2 million), including estimated working capital. Vida’s results are consolidated with those of Canfor and one month of Vida’s earnings (subsequently referenced as the company’s European Spruce/Pine/Fir lumber operations) are reflected in the company’s current quarter results within the lumber operating segment.
Adjusted lumber segment operating income included the company’s new European SPF operations results, which, combined with a modest increase in average Western Spruce/Pine/Fir (Western SPF) benchmark lumber prices and increased production in the U.S. South, offset various weather, operational and market-related challenges in Western Canada. In response to the continued weak market conditions, log supply constraints and cost pressures in British Columbia, Canfor took production curtailments of 95 million board feet in the current quarter, in addition to 100 million board feet of curtailment taken late in the fourth quarter of 2018.
Home construction activity
North American home construction activity was subdued in the first quarter of 2019, in contrast to the repair and remodelling sector, which saw strong demand through the period. U.S. housing starts, on a seasonally adjusted basis, averaged 1,193,000 units, broadly in line with the previous quarter; single-family starts, which consume a higher proportion of lumber, were up two per cent from the previous quarter, while multi-family starts dropped two per cent compared to the same period. Severe winter weather across much of North America disrupted transportation networks and delayed the start of the spring construction season in many regions. In Canada, housing starts averaged 187,000 units on a seasonally adjusted basis, down 14 per cent from the previous quarter, largely reflecting slowing activity in several major cities. Offshore lumber demand was down, particularly in China, as a result of higher inventory levels in the supply chain.
Lumber prices and sales
Average Western SPF lumber prices edged upwards in the current quarter, in part in response to industry-wide sawmill production curtailments taken in late 2018 and during the first quarter of 2019. The delay in the usual pick-up of demand from the spring building season contributed to a decline in Western SPF benchmark lumber prices towards the end of the quarter, with prices ending March at U.S. $350 per Mfbm, and slipping further in April. The average benchmark North American Random Lengths Western SPF 2×4 #2&Btr price was up U.S. $45 per Mfbm, or 14 per cent, from the previous quarter, at U.S. $372 per Mfbm, with similar increases also seen across most Western SPF wider-width dimensions. The uplift in Western SPF lumber pricing was offset by lower offshore unit sales realizations, increased CVD and ADD expenses in the current quarter, and, to a lesser extent, the slow-down in market demand, all of which resulted in a small increase in Western SPF lumber unit sales realizations quarter-over-quarter.
Southern Yellow Pine (SYP) lumber unit sales realizations were in line with the prior quarter as price increases for most wider-width SYP dimensions more than offset a nine per cent decrease in the SYP East 2×4 #2 price. The average European indicative SPF lumber benchmark price (an internally generated benchmark based on delivered price to the largest continental market), at SEK 4,111 per Mfbm, was down SEK 124 per Mfbm, or three per cent, from the previous quarter, but remained at near-historical high levels. The company’s European SPF lumber unit sales realizations for March 2019 were slightly ahead of this benchmark.
Total lumber shipments, at 1.19 billion board feet, were seven per cent higher than the previous quarter, mostly as a result of moderately higher SYP shipments combined with the addition of European SPF shipments in March, which more than offset the effects of weaker demand in several markets and severe winter weather in Western Canada impacting transportation networks.
Operations
Total lumber production, at 1.25 billion board feet, was 11 per cent above the prior quarter, primarily reflecting improved productivity and increased operating hours in the U.S. South, following completion of the major upgrade of the company’s Moultrie, Georgia sawmill at the end of 2018, combined with fewer statutory holidays in the current quarter, and the addition of European SPF lumber production in March. Western SPF lumber production was broadly in line with the prior quarter, as temporary production curtailments across B.C. in January combined with a six-week curtailment at the company’s Vavenby sawmill and one week curtailments at the company’s sawmills in Houston and Mackenzie reduced production by approximately 95 million board feet. Western SPF lumber production was reduced by approximately 100 million board feet in the fourth quarter of 2018, reflecting extended curtailments of B.C. sawmill operations in December. Total lumber production was largely consistent with the first quarter of 2018, primarily reflecting the additional European SPF lumber production in March 2019 offsetting the impacts of the aforementioned production curtailments in Western Canada.
Lumber unit manufacturing and product costs were largely unchanged quarter-over-quarter as lower market-based stumpage offset the effects of cold weather in Western Canada early in the first quarter of 2019, which resulted in lower log recoveries and reduced sawmill productivity, while in the U.S. South, log costs saw a modest increase due to the prolonged wet weather conditions, which resulted in increased competition for available purchased wood. Compared to the first quarter of 2018, unit manufacturing and product costs were up significantly, largely reflecting higher purchased wood costs and market-based stumpage, as well as reduced sawmill productivity, principally due to curtailments, and, to a lesser extent, increased logging and hauling costs in Western Canada.
Future outlook
Commenting on the company’s first quarter results, Canfor’s President and Chief Executive Officer, Don Kayne, said, “While our B.C.-based lumber business experienced significant challenges due to lower than anticipated market prices and difficult operating conditions, our U.S. South and European operations generated solid financial returns. We look forward to adding a further 200 million board feet to our U.S. South operations during the second quarter with the upcoming close of the Elliott acquisition, which will help offset the escalating log cost and fibre supply issues impacting our B.C. operations.”
Lumber prices are anticipated to show a modest increase over the next several months in response to improving demand in the U.S. housing sector, continued strength in the repair and remodelling sector and inventory balances in the supply chain returning to more normalized levels. In addition, recently announced curtailments will help balance supply with demand, and support improved prices. Looking ahead to the second half of 2019, a projected material increase in B.C. market-based stumpage rates set for July 1, 2019 will place even more pressure on that region’s operating rates absent a commensurate increase in Western SPF lumber prices. Lumber prices in Asia are projected to show more moderate declines until inventory levels stabilize. The company’s European SPF business is projected to deliver solid financial results through the balance of 2019. Canfor will continue to closely monitor the market conditions through the second quarter and take appropriate steps should market conditions not improve as anticipated.
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