Canfor reports record quarterly operating income for Q1 2021 thanks to high lumber prices
Canfor Corporation today reported its first quarter 2021 results:
- Record quarterly reported operating income of $603 million driven by historically high lumber prices and improved global pulp market conditions; record-high quarterly sales of $1.94 billion
- Shareholder net income of $428 million, or $3.42 per share
- Net debt of $85 million at March 31, 2021; $225 million repayment of term debt in the current quarter
- Cumulative cash deposits of $615 million on countervailing and anti-dumping duties at March 31, 2021
For the first quarter of 2021, the company reported operating income of $602.6 million, $183.0 million higher than operating income of $419.6 million reported for the fourth quarter of 2020, reflecting record results for the lumber segment and improved results in the pulp and paper segment.
In the lumber segment, earnings increased $145.7 million quarter-over-quarter, to an all-time high $606.7 million. These results largely reflected continued strength in global lumber market fundamentals, with demand continuing to outpace available supply and driving global benchmark lumber prices to new historical highs. This unprecedented pricing substantially outweighed the impacts of higher market-related log costs in Western Canada, combined with moderately lower North American shipment volumes stemming from transportation constraints, and a two-cent, or three per cent, stronger Canadian dollar.
Global lumber market fundamentals remained exceptionally strong in the first quarter of 2021, principally driven by sustained high levels of North American demand. The North American market continued to benefit from new home construction activity that reflected the ongoing urban-to-suburban shift, strong demand in the repair and remodeling sector and lean inventory in the supply chain.
For the current quarter overall, U.S. housing starts averaged 1,613,000 units on a seasonally adjusted basis, up two per cent from the previous quarter, and in March approached a fifteen-year high of 1,739,000 units. In Canada, housing starts were up 28 per cent from the previous quarter, averaging 308,000 units on a seasonally adjusted basis in the first quarter of 2021, largely reflecting a significant up-tick in the Western Canadian market, and reaching an all-time record of 335,000 units in March.
Offshore lumber demand in Asia was relatively stable in the current quarter, with increased consumption in the industrial and construction sectors offset by lower imports as Asian-Pacific markets continue to adjust to the record North American pricing environment.
Western Europe and Scandinavian lumber demand strengthened further in the first quarter of 2021 largely due to increased residential construction activity and sustained growth in the repair and remodeling sector.
The average North American Random Lengths Western Spruce/Pine/Fir (SPF) 2×4 #2&Btr price of US$972 per Mfbm was up US$272 per Mfbm, or 39 per cent, from the previous quarter, as downward pricing pressure in January was followed by five consecutive weeks of gains mid-quarter before stabilizing in March, ending the month at an all-time high of US$1,045 per Mfbm. The company’s Western SPF unit sales realizations substantially increased quarter-over-quarter, primarily reflecting the notable uptick in benchmark pricing and, to a lesser extent, a reduction in countervailing (CVD) and anti-dumping (ADD) duties, which more than offset the stronger Canadian dollar and relatively unchanged offshore unit sales realizations.
The Southern Yellow Pine (SYP) East 2×4 #2 price remained above US$1,100 per Mfbm for most of the current quarter, and reached a new record of US$1,200 per Mfbm mid-March. As a result, the North American Random Lengths SYP East 2×4 #2 price averaged US$1,160 per Mfbm, up US$383 per Mfbm, or 49 per cent, compared to the previous quarter. The material increase in the company’s SYP lumber unit sales realizations quarter-over-quarter reflected the uplift in the SYP East 2×4 #2 price, combined with more pronounced pricing increases for wider-width dimension products.
The company’s European lumber unit sales realizations also experienced a substantial uplift compared to the previous quarter, albeit less pronounced than the increases seen in both Western SPF and SYP lumber unit sales realizations to North America. The current quarter’s European lumber unit sales realizations principally reflected strengthening European market demand, combined with a favourable geographic sales mix and the significantly higher North American U.S. dollar benchmark pricing.
Total lumber shipments, at 1.45 billion board feet, were seven per cent lower than the previous quarter principally driven by a decline in North American shipments, while European shipments were comparable quarter-over-quarter. Lower shipments in the U.S. South for the most part reflected reduced trucking availability due to unseasonably cold weather. Reduced shipments in Western Canada reflected transportation constraints, combined with a rebuild of finished lumber inventory significantly drawn down during the fourth quarter of 2020.
Total lumber production, at 1.47 billion board feet, was broadly in line with the prior quarter as modestly higher production at the company’s European operations, tied to fewer statutory holidays in the current period, and slightly higher Western SPF production, was offset by capital-related downtime at the company’s Camden and Estill mills reducing SYP production in the current period.
Lumber unit manufacturing and product costs were moderately higher than the previous quarter, largely reflecting higher log costs in Western Canada and a more modest increase at the company’s European operations. In British Columbia, log costs were up in the current quarter principally as a result of higher market-based stumpage costs stemming from record pricing in the prior quarter (due to the traditional quarterly lag in the stumpage rate reset). A modest uplift in log costs at the company’s European operations primarily reflected market-related increases in the region, correlated in part to the rise in European lumber prices. Log costs in the U.S. South were broadly in line with the prior quarter. Unit manufacturing costs also reflected slightly higher conversion costs in the current quarter, particularly for the company’s European operations, mostly due to seasonally higher energy costs and planned maintenance.
Looking ahead, global lumber market fundamentals are anticipated to remain solid, with ongoing strength in new home construction and steady repair and remodeling activity projected to continue through the second quarter of 2021.
For offshore lumber markets in Asia, demand is anticipated to strengthen, particularly in Japan, as the material pricing pressures and lean inventories experienced in North America impact the region. Demand in Europe is projected to continue to improve through the second quarter of 2021, driven by an anticipated seasonal increase in the residential and construction sector, as well as ongoing strength in the “do-it-yourself” sector. As a result, pricing in Europe in the second quarter of 2021 is forecast to exceed pricing levels seen in the current quarter, reflecting similar trends to the North American market combined with the traditional lag in contract pricing.
Commenting on the company’s first quarter results, Canfor’s president and chief executive officer, Don Kayne, said, “As the world continues to deal with the impacts of the COVID-19 pandemic, we want to thank our employees for their unwavering commitment to safety along with their determination and resilience. They have continued to maintain our standards for producing high quality products for our global customers. Following the significant volatility experienced last year as a result of the pandemic, we are very pleased to see the sustained strength in global lumber markets continuing into 2021, as well as a welcome improvement in pulp market conditions. Our solid operating performance across all our regions enabled us to capitalize on these favourable market fundamentals and set record-high operating earnings. With the pricing outlook in the second quarter looking very positive across all of our businesses, we will be looking to take full advantage of these favourable market conditions.”