Canfor reports results for first quarter of 2017
April 28, 2017 - Canfor Corporation reported net income attributable to shareholders (“shareholder net income”) of $66.1 million, or $0.50 per share, for the first quarter of 2017, compared to shareholder net income of $38.0 million, or $0.29 per share, for the fourth quarter of 2016 and a net income attributable to shareholders of $26.0 million, or $0.20 per share, for the first quarter of 2016.
The company’s adjusted shareholder net income for the first quarter of 2017 was $59.3 million, or $0.45 per share, compared to an adjusted shareholder net income of $37.7 million, or $0.29 per share, for the fourth quarter of 2016, and adjusted shareholder net income of $20.9 million, or $0.16 per share for the first quarter of 2016.
The company reported operating income of $106.8 million for the first quarter of 2017, up $34.8 million from adjusted operating income of $72.0 million for the fourth quarter of 2016. Higher earnings in the first quarter of 2017 reflected improved operating income in both the lumber and pulp and paper segments. Lumber segment results primarily reflected higher Western Spruce/Pine/Fir (“SPF”) and Southern Yellow Pine (“SYP”) sales realizations, offset in part by higher market-based stumpage and increased log costs resulting from extreme weather conditions in Western Canada towards the end of 2016 and into early 2017. Pulp and paper segment results were mostly attributable to higher pulp shipment volumes during the current quarter.
North American lumber demand was solid in the first quarter of 2017, with US housing starts in line with the previous quarter, averaging 1,253,000 units on a seasonally adjusted basis. Canadian housing construction activity was strong in the first quarter of 2017, up 13% compared to the previous quarter, at an average of 225,000 units on a seasonally adjusted basis. Offshore lumber demand from China, Japan and other regions also improved through the first quarter, particularly for the Company’s higher-value lumber products.
Western SPF lumber unit sales realizations increased compared to the previous quarter reflecting higher average Western SPF lumber prices, offset in part by a 1% stronger Canadian dollar. The average benchmark North American Random Lengths Western SPF 2x4 #2&Btr price was up US$33 per Mfbm, or 10%, compared to the fourth quarter of 2016, with more pronounced price increases in the Western SPF 2x6 #2&Btr price, and more modest price increases across wider-width dimensions. The improving benchmark prices were supported by strong underlying North American and offshore demand, in addition to uncertainty surrounding possible countervailing duties being imposed on Canadian lumber shipments destined to the US. SYP unit sales realizations also showed a modest improvement compared to the prior quarter as improved benchmark SYP lumber prices were supported by seasonally stronger demand and concerns around the effects of potential duties on Western SPF supply.
Total lumber production, at 1.3 billion board feet, was up 5% compared to the prior quarter, largely reflecting improved productivity and additional operating days in the current quarter. Total lumber shipments were in line with the previous quarter, as a tightening supply of railcars and trucks in North America, largely due to challenging weather conditions, placed constraints on shipments from Western Canada. Lumber unit manufacturing costs in the first quarter of 2017 were in line with the previous quarter as gains in productivity were offset by higher marketbased stumpage and increased log costs resulting from the challenging weather conditions.
Northern Bleached Softwood Kraft (“NBSK”) pulp average list prices to China, as published by RISI, moved up by US$50 per tonne as a result of successive price increases implemented through the first quarter, however, the Company’s overall NBSK pulp unit sales realizations were relatively unchanged from the previous quarter, reflecting shipments of a higher proportion of orders taken in late 2016 and early in 2017, as well as further pressure on customer discounts and a stronger Canadian dollar. Higher Bleached Chemi-Thermo Mechanical Pulp (“BCTMP”) unit sales realizations in the first quarter of 2017 reflected a continued improvement in BCTMP demand and prices in the current quarter. Energy revenues were up in the current quarter reflecting slightly higher energy prices combined with seasonally higher power generation.
Pulp shipment and production volumes were up 22% and 4%, respectively, from the previous quarter, with the increase in the former primarily reflecting increased shipments to China and North America, combined with the impact of the delayed vessel to Asia over the year end, and, to a lesser extent, improved productivity. Pulp unit manufacturing costs saw a modest decrease in the current quarter, largely reflecting improved productivity, offset in part by seasonally higher energy consumption.
Commenting on the company’s first quarter results, Canfor’s President and Chief Executive Officer, Don Kayne, said, “Despite the weather-related challenges in Western Canada, our lumber and pulp businesses recorded solid financial and operating performances in the first quarter of 2017, with operating income for both segments well up from the last quarter of 2016.”
On November 25, 2016, a petition was filed by the US Lumber Coalition to the US Department of Commerce (“DOC”) and the US International Trade Commission (“ITC”) alleging certain subsidies and administered fees below the fair market value of timber that favour Canadian lumber producers, an assertion the Canadian industry and Provincial and Federal Governments strongly deny and have successfully disproven in international courts in the past. Canfor was selected by the DOC as a “mandatory respondent” to the countervailing and anti-dumping investigations and is subject to company specific countervailing and anti-dumping duties. On April 24, 2017, the DOC announced its preliminary countervailing duty of 20.26% specific to Canfor, and an industry average of 19.88%, to be posted by cash deposits or bonds on the exports of softwood lumber to the US on or after approximately May 1, 2017 for a period of 120 days, in accordance with US law.
The DOC is expected to announce its preliminary anti-dumping duty determination on June 23, 2017. The final countervailing and anti-dumping duty determinations will be aligned for DOC administrative purposes. This alignment could result in the suspension of preliminary countervailing duty cash deposit requirements after the initial four month period has expired and until an aligned final determination decision is established. Canfor continues to cooperate with the Provincial and Federal Governments of Canada who have indicated they will vigorously defend the interests of the industry.
Looking ahead, the US housing market is forecast to continue its gradual recovery through the balance of 2017. North American lumber consumption is forecast to improve reflecting steady demand in the residential construction market and continued strength from the repair and remodelling sector. Wide-width SYP and speciality lumber prices are anticipated to improve through the second and third quarter of 2017 reflecting stronger seasonal demand. Absent a new Softwood Lumber Agreement, there remains a risk of material anti-dumping duties being imposed on Canadian lumber shipments destined to the US in addition to the preliminary countervailing duty rate. The Company anticipates marketplace volatility as investigations progress and determinations are made.
For the company’s key offshore lumber markets, demand is anticipated to show a solid improvement through the second quarter of 2017. In the pulp and paper segment, global softwood markets are projected to remain relatively strong during the second quarter. Reduced capacity over the traditional spring maintenance period may support further price increases in the second quarter of 2017. With the commissioning of new pulp capacity in the latter part of 2017 and into 2018, there is risk of downward pressure on pricing in the second half of this year. For the month of April 2017, CPPI announced an increase of US$20 per tonne for NBSK pulp list price to China and North America.
Results in the second quarter of 2017 will reflect the positive impact of recent price gains, particularly in Asia, and scheduled maintenance outages at CPPI’s Northwood and Taylor pulp mills, with a projected 33,000 tonnes of reduced NBSK pulp and 4,000 tonnes of reduced BCTMP production, respectively, as well as higher associated maintenance costs and lower projected shipment volumes. For the third quarter of 2017, CPPI’s Intercontinental pulp mill has a maintenance outage scheduled, with a projected 8,000 tonnes of reduced NBSK pulp production.