Industry News Markets
Canfor reports second quarter results

Highlights 

• Record adjusted operating income of $334 million driven by historically high lumber prices and record-high pulp and paper earnings; record-high quarterly sales of $1.46 billion
• Adjusted net income of $214 million, or $1.66 per share
• Net cash of $174 million, or 7.9 per cent net cash to total capitalization, at June 30, 2018

The company reported operating income of $282.1 million for the second quarter of 2018, up $78.3 million from reported operating income of $203.8 million for the first quarter of 2018, with the increase reflecting significantly higher lumber segment operating earnings and record-high pulp and paper segment operating earnings. Reported results for the second quarter of 2018 included a net duty expense of $51.7 million, at a current effective countervailing duty (“CVD”) and anti-dumping duty (“ADD”) rate of 14.94 per cent, compared to $34.9 million in the first quarter of 2018 and $35.6 million in the second quarter of 2017. After adjusting for duties, operating income was $333.8 million for the second quarter of 2018, up $95.1 million from similarly adjusted operating income in the first quarter of 2018.

Adjusted lumber segment earnings largely reflected record Western Spruce/Pine/Fir (“Western SPF”) and Southern Yellow Pine (“SYP”) benchmark lumber prices, a two cent, or 2 per cent weaker Canadian dollar and increased shipment and production volumes following the significant weather-related transportation and operational challenges experienced in the first quarter of 2018. These factors more than outweighed the impact of moderately higher unit log costs in Western Canada as a result of increased market-based stumpage and upward pressure on purchased wood costs, as well as higher duties linked to improved shipments and sales realizations in the current quarter. Pulp and paper segment earnings largely reflected favourable Northern Bleached Softwood Kraft (“NBSK”) pulp unit sales realizations, increased shipments following the aforementioned transportation challenges, and to a lesser extent improved NBSK pulp mill productivity, which more than offset the impact of scheduled maintenance outages and market-related fibre cost increases in the quarter.

North American lumber demand was solid across all segments of the market in the second quarter of 2018. U.S., housing starts averaged 1,262,000 units on a seasonally adjusted basis, down four per cent from the previous quarter and up eight per cent from the second quarter of 2017. Single-family starts, which consume a higher proportion of lumber, were up one per cent from the previous quarter, while multi-family starts were down 16% compared to the first quarter of 2018. Canadian housing construction activity remained solid in the current quarter, at an average of 219,000 units on a News Release 2 seasonally adjusted basis. Offshore lumber demand from China, Japan and other regions was stable through the second quarter, particularly for the Company’s increasing percentage of higher-value lumber products.

The average benchmark North American Random Lengths Western SPF 2×4 #2&Btr price was US$598 per Mfbm, up US$85 per Mfbm, or 17 per cent, compared to the first quarter of 2018, with more modest price increases seen across wider-width dimensions. The average benchmark North American Random Lengths SYP East 2×4 #2 price was US$589 per Mfbm, up US$23 per Mfbm, or four per cent, compared to the first quarter of 2018, with more pronounced price increases in 2×6 and 2×10 #2 dimensions, in part reflecting seasonally higher demand. Solid demand coupled with supply constraints contributed to a sharp increase in benchmark lumber prices in April and May, before prices came off their record-high levels through June as transportation availability slowly improved. Offshore lumber realizations saw more modest increases when compared to North America, due in part to the nature of pricing, much of which is negotiated monthly or quarterly in advance.

Total lumber production, at 1.31 billion board feet, was moderately higher than the prior quarter reflecting productivity gains in Western Canada following the extreme winter weather experienced in the first quarter of 2018, as well as the benefit of recent capital expenditures and fewer statutory holidays in the current quarter. Total lumber shipments, at 1.35 billion board feet, were up 13 per cent from the previous quarter aided by solid demand and the drawdown of finished inventory as transportation networks slowly improved. Unit manufacturing costs in the second quarter of 2018 were slightly higher than the previous quarter as the per unit impact of gains in productivity and the benefit of stable log costs in the US South largely offset market-based stumpage increases and higher purchased wood costs in Western Canada.

Global softwood pulp markets remained strong through the second quarter of 2018, with near-record high US-dollar NBSK pulp list prices to China reflecting tighter supply during the traditional spring maintenance period as well as healthy global demand. Average NBSK pulp unit sales realizations were moderately higher than the previous quarter reflecting the weaker Canadian dollar combined with rising US-dollar NBSK pulp list pricing in other regions, particularly North America. Average Bleached Chemi-Thermo Mechanical Pulp (“BCTMP”) unit sales realizations showed a moderate decrease quarter-over-quarter, with lower US-dollar pricing more than offsetting the weaker Canadian dollar.

Pulp shipments were up six per cent from the previous quarter, reflecting strong market demand and an unwinding of inventory resulting from the transportation challenges in the previous quarter. Pulp production was down five per cent from the previous quarter following scheduled maintenance outages at CPPI’s Prince George NBSK pulp mill, as well as at its Taylor BCTMP mill, which reduced NBSK pulp production by approximately 4,000 tonnes and BCTMP production by approximately 17,000 tonnes, offset in part by improved productivity at CPPI’s NBSK pulp mills. The scheduled maintenance outage at the Prince George pulp mill was completed ahead of schedule. The Taylor BCTMP mill’s reduced production included extended downtime in connection with the commissioning of its previously announced energy project, which is now achieving anticipated operating rates. Pulp unit manufacturing costs were moderately higher than the previous quarter, with seasonally lower energy prices and usage partly offsetting market-driven increases in fibre costs and higher unit costs associated with the aforementioned scheduled outages.

Commenting on the company’s second quarter results, Canfor’s president and chief executive officer, Don Kayne, said, “Our lumber and pulp businesses continued to generate strong financial results reflecting both the strength of the lumber and pulp markets and a return to more normal operating conditions in the second quarter. Our solid operational performance enabled us to capitalize on these favourable market fundamentals, and set new record-high operating earnings.”

Looking ahead, the U.S., housing market is forecast to continue its ongoing gradual recovery through the balance of 2018. North American lumber prices are projected to remain solid, and high by historical standards, in the third quarter of 2018 reflecting solid seasonal demand, while transportation networks are anticipated to continue their slow return toward normal service levels through the quarter. For the Company’s key offshore lumber markets, demand is anticipated to remain solid through the third quarter of 2018, particularly in Japan.

Notwithstanding some seasonal weakness in China during the traditionally slower summer months, global softwood kraft pulp markets are projected to be balanced through the third quarter of 2018. For the months of July and August 2018, CPPI announced NBSK pulp list price increases in North America of US$40 per tonne and US$30 per tonne, respectively. Results in the third quarter of 2018 will include a scheduled maintenance outage at Northwood, CPPI’s largest NBSK pulp mill, with a projected 28,000 tonnes of reduced NBSK pulp production, combined with higher associated maintenance costs and lower projected shipment volume. Bleached kraft paper demand is anticipated to remain stable through the third quarter of 2018.