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Canfor reports record-high operating income in 2020

Canfor Corporation recently reported 2020 and fourth quarter 2020 results:

Overview

• Record-high 2020 reported operating income of $727 million; adjusted operating income of $735 million; shareholder net income of $544 million, or $4.35 per share
• Fourth quarter of 2020 reported operating income of $420 million; adjusted operating income of $321million; shareholder net income of $33 6million, or $2.68 per share
• Net debt of $270 million at Dec. 31, 2020, improvement of $256 million from prior quarter; available liquidity of $1.4 billion; net debt to capitalization of 9.3 per cent at Dec. 31, 2020
• Cumulative cash deposits of $594 million on countervailing and anti-dumping duties at Dec. 31, 2020

Financial results

2020 was an exceptional yet volatile year for Canfor. The unprecedented challenges stemming from the coronavirus outbreak (COVID-19) weighed heavily on results in the first half of 2020. However, through the second half of 2020 there were several positive developments, including an unexpected increase in demand and record global pricing. This, coupled with a solid operating performance, resulted in record-high operating income of $727.3 million and net income per share of $4.35 for the year overall. These results compared to an operating loss of $294.3 million and net loss per share of $2.10 in 2019.

For the fourth quarter of 2020, the company reported operating income of $419.6 million, $120.0 million higher than operating income of $299.6 million in the third quarter of 2020. Reported results for the fourth quarter of 2020 include a net duty recovery of $95.5 million, largely resulting from the finalization of countervailing (CVD) and anti-dumping duty (ADD) rates applicable to the first period of review (POR1), compared to a net duty expense of $50.7 million reported in the third quarter of 2020.

After adjusting for the aforementioned duty recovery and other one-time items, the company’s operating income was $321.1 million for the fourth quarter of 2020, compared to similarly adjusted operating income of $347.3 million for the third quarter of 2020.

Adjusted lumber segment operating income of $365.5 million for the fourth quarter of 2020 decreased $21.9 million from the third quarter of 2020, as record quarterly results for the company’s European Spruce/Pine/Fir (SPF) operations were more than offset by lower quarter-over-quarter earnings for the company’s Southern Yellow Pine (SYP) operations, which notwithstanding continued to generate near record-high results. Operating results for the company’s Western Canadian operations continued to be strong and were in line with the prior quarter.

During the fourth quarter of 2020, global lumber market fundamentals remained strong, with a sustained increase in North American demand over the traditionally slower season, particularly in December, further reducing already low inventory levels. The North American market continued to see strong new home construction activity, particularly single-family homes, which consume approximately three times the volume of lumber compared to multi-family units, and unusually high demand in the repair and remodeling sector in the current quarter. U.S. housing starts, on a seasonally adjusted basis, averaged 1,588,000 units, up 11 per cent from the previous quarter, reflecting an 18 per cent increase in single-family starts and a 10 per cent decline in multi-family starts. In Canada, housing starts averaged 239,000 units on a seasonally adjusted basis, unchanged from the prior quarter.

Offshore lumber demand in Asia improved in the current quarter, particularly in Japan, as building activities in the region returned to more normal levels following quarantine delays earlier in the year. European and Scandinavian lumber demand continued to strengthen in the current quarter largely due to sustained growth in the repair and remodeling sector.

The average benchmark North American Random Lengths Western SPF 2×4 #2&Btr price experienced extreme volatility through the fourth quarter of 2020. From an all-time high of US$955 per Mfbm at the end of September, prices in the current quarter initially fell to a low of US$530 per Mfbm at the end of October, before climbing steadily through November and posting significant gains in December, to end the year at US$920 per Mfbm. As a result of the pricing fluctuations through the current period, the Western SPF 2×4 #2&Btr price averaged US$700 per Mfbm for the fourth quarter of 2020, down US$68 per Mfbm, or nine per cent, from the previous quarter. The company’s Western SPF lumber unit sales realizations; however, increased moderately in the current quarter, as a favourable timing lag in shipments (versus orders) combined with improved offshore unit sales realizations and, to a lesser extent, a reduction in duties, more than offset a two cent, or two per cent, stronger Canadian dollar.

The movement in the North American Random Lengths SYP East 2×4 #2 through the fourth quarter of 2020 was similar to that of Western SPF, dropping from a record-high of US$1,035 per Mfbm in early October 2020 to a low of US$585 per Mfbm in mid-November, before rebounding to US$1,035 per Mfbm at the end of the year and reaching a new all-time high of US$1,180 per Mfbm in early 2021. Notwithstanding the significant pricing volatility in the fourth quarter of 2020, the average SYP East 2×4 #2 was relatively flat quarter-over-quarter at US$777 per Mfbm, with the company’s overall SYP lumber unit sales realizations decreasing in line with pronounced declines for most wider width SYP dimension products compared to the prior quarter, mostly attributable to seasonal factors.

The average European indicative SPF lumber benchmark price at SEK4,115 per Mfbm, was up SEK701 per Mfbm, or 21 per cent, from the previous quarter. The company’s European SPF lumber unit sales realizations for the fourth quarter of 2020 were modestly higher than the previous quarter principally reflecting this increase in European benchmark pricing and, to a lesser extent, a one per cent weaker Canadian dollar (versus the SEK) offset in part by the aforementioned volatility in North American U.S. dollar benchmark pricing on shipments directed to the U.S.

Total lumber shipments of 1.56 billion board feet were up 14 per cent from the previous quarter as a backlog of orders tied to strong demand in North America in the third quarter of 2020 was alleviated in the current period as Western Canada rail constraints eased. A substantial increase in production at the company’s European operations in the current period combined with the incremental benefit of a full quarter of Bergs shipments in the current quarter, following its acquisition in September 2020, also contributed to the higher shipments.

Total lumber production, at 1.46 billion board feet, was up three per cent from the previous quarter largely driven by the company’s European operations where higher production volumes reflected increased operating days following the seasonal downtime taken in the prior period, improved productivity and the benefit of a full quarter of production from the recently acquired Bergs facilities. Production in the U.S. South was in line with the previous quarter, while the company’s Western SPF operations saw a modest decline in production principally reflecting log profile shortages due to unseasonably mild and wet-weather impacts on harvesting and low levels of rough dry inventory.

Lumber unit manufacturing costs in the fourth quarter of 2020 were slightly higher than the previous quarter primarily reflecting the impact of lower production volumes in Western Canada and to a lesser extent, seasonally higher energy costs and increased log costs due to aforementioned wet-weather conditions in B.C. These unfavourable drivers were largely offset by lower European lumber unit manufacturing costs, while U.S. South lumber unit manufacturing costs were comparable quarter-over-quarter. Log costs in Europe and the U.S. South remained broadly in line with the previous period.

Looking ahead, the strong North American lumber demand seen at the end of 2020 has continued into early 2021 and is anticipated to continue through the first half of 2021, supported by improved housing affordability, lean housing inventory, and an aging housing stock. The ongoing effects from the COVID-19 pandemic are forecast to continue to influence consumer spending habits while favourable demographics driven by the millennial generation entering prime home buying years will also facilitate this strong lumber demand. U.S. housing starts in the first quarter of 2021 are estimated to outpace established levels of 2020, tracking closer to long-run historical averages. North American lumber demand is projected to be further supported by sustained high levels of repair and remodel activity as increases in existing home sales are estimated to boost spending in this sector, particularly in the first quarter of 2021. Increased supply into the North American market from a higher volume of European imports and growth in SYP production is not projected to be sufficient to offset the demand/supply gap created in 2020.

Offshore lumber market demand in Asia in the first quarter of 2021, particularly Japan, is anticipated to be steady as the region continues to recover from the impacts of COVID-19. In Europe, pricing in the first quarter of 2021 is anticipated to exceed pricing levels seen in the fourth quarter of 2020, reflecting similar trends to the North American market combined with the traditional lag in contract pricing. Demand throughout Europe in early 2021 is projected to be further supported by increased lumber usage in the construction sector as a result of ongoing green initiatives throughout the region.

Commenting on the Company’s 2020 and fourth quarter of 2020 results, Don Kayne, Canfor’s president and chief executive officer, said, “We want to thank our employees for their resilience, dedication and commitment to safety, despite the COVID-19 challenges we faced in 2020. Despite such a difficult start to the year, which weighed heavily on the results for our pulp business, we were very pleased to see an unprecedented surge in global lumber markets beginning in the second quarter and continuing through the balance of the year. Supported by the strong performance of our operations, we were able to generate new record-high financial results for 2020. As we move into 2021, we expect to see continued strength in global lumber demand and along with improving conditions for global pulp markets, this should ensure another solid financial year for Canfor, despite the ongoing challenges of the global pandemic.

“Thanks to the strong returns we have been experiencing since the middle of 2020, we are investing in a long-term community giving program called Good Things Come from Trees that will allow us to give back consistently through the ups and downs that our industry experiences. This program builds on our long history of giving. We greatly value our communities and believe it is important to invest in initiatives and organizations that align with our priority giving areas of education, health, sustainability and community,” added Kayne.