Canfor to enhance operational performance
Oct. 31, 2013, Vancouver - Canfor Corporation reported net income attributable to shareholders of $28.4 million, or $0.20 per share, for the third quarter of 2013, compared to $110.3 million, or $0.77 per share, for the second quarter of 2013 and $20.5 million, or $0.14 per share, for the third quarter of 2012. For the nine months ended September 30, 2013, the company's shareholder net income was $200.6 million, or $1.41 per share, compared to $5.1 million, or $0.03 per share, reported for the comparable period of 2012.
The shareholder net income for the third quarter of 2013 included various items affecting comparability with prior periods, which had an overall net positive impact on the Company's results of $2.2 million, or $0.02 per share. After adjusting for such items, the Company's adjusted shareholder net income for the third quarter of 2013 was $26.2 million, or $0.18 per share, down $61.5 million, or $0.43 per share, from an adjusted shareholder net income of $87.7 million, or $0.61 per share, for the second quarter of 2013. Adjusted shareholder net income for the third quarter of 2012 was $13.6 million, or $0.09 per share.
The Company reported operating income of $49.3 million for the third quarter of 2013, compared to operating income of $128.2 million for the second quarter. The decline in operating income largely reflected lower lumber sales realizations, increased market stumpage costs and lower lumber and pulp production volumes, partly offset by improved sales realizations for the pulp and paper segment.
In a reversal of the trend experienced in the previous quarter, when North American lumber prices saw a sharp correction after peaking in early April, lumber prices in the third quarter showed a gradual improvement, supported by relatively solid global demand that, in part, reflected improving home prices and low home inventory levels in the U.S. Based on July and August 2013 data (latest data available), total U.S. housing starts were up 2% from the second quarter of 2013, averaging 887,000 units SAAR (seasonally adjusted annual rate). Canadian housing starts rose 4% from the second quarter of 2013 to 194,000 units SAAR, contributing to a marginal increase in lumber consumption. Continued solid demand from offshore markets supported steady offshore lumber shipments in the third quarter.
The average North American benchmark Western Spruce/Pine/Fir ("SPF") 2x4 #2&Btr price for the third quarter of 2013 was US$328 per Mfbm, down US$7 per Mfbm, or 2%, from the previous quarter, while several other grades saw more significant declines. Overall average sales realizations were well down compared to the previous quarter, reflecting lower average prices in both North American and offshore markets and, to a lesser extent, an average export tax of 5% on shipments from Canada to the U.S., partly offset by a slightly weaker Canadian dollar. Price realizations from all markets reflected a carry-over of weaker market conditions experienced in June into the third quarter. In offshore markets, where the majority of pricing is negotiated monthly or quarterly in advance, the carry-over effect on realizations was more marked. Average sales realizations for Southern Yellow Pine ("SYP") products saw a moderate decrease from the previous quarter; while the benchmark SYP 2x4 #2 price of US$393 per Mfbm was down slightly from the second quarter, larger decreases were seen in wider dimension product prices.
Lumber shipments and production were down 56.5 million board feet (5%) and 79.5 million board feet (6%), respectively, from the previous quarter, principally reflecting capital-related downtime and subsequent ramp-ups related to upgrades at the Company's Elko and Mackenzie sawmills, semi-annual maintenance shuts at the Company's southern pine operations, as well as an additional day of statutory downtime in the third quarter. Lumber unit manufacturing costs increased compared to the previous quarter, principally reflecting market-driven stumpage increases in unit log costs as well as increased costs associated with severe flooding in the southeast area of British Columbia in the previous quarter. Unit manufacturing costs were further impacted by the aforementioned lower production levels in the current quarter.
The company continued to preserve its strong financial position, ending the quarter with cash and cash equivalents of $90 million, and a net debt to capitalization of 7.5%. For Canfor, excluding Canfor Pulp, net debt to capitalization at the end of the third quarter was 3.0%.
During the quarter, the Company completed the first phase of the previously announced purchase of Scotch & Gulf Lumber, LLC ("Scotch Gulf") for $29 million, representing an initial 25% interest in Scotch Gulf, plus transaction closing costs and a proportionate share of working capital. Canfor's interest will increase to 100% by August 2016.
Canfor's collective agreement with the USW expired on June 30, 2013. The Company and the USW have been actively pursuing negotiations for a new collective agreement. The USW has served strike notice for certain mills, however, negotiations are at the mediation stage and as such no strikes or lockouts can occur. Mediation talks are currently being held in abeyance to allow the USW to pursue negotiations with other parties.
Commenting on the third quarter performance, Canfor's President and Chief Executive Officer, Don Kayne, said, "As expected, lumber prices staged a gradual recovery after reaching their low point in June. We continue to be encouraged by solid demand for our lumber products in all of our major markets." Kayne added that additional production volume arising from the Company's recent Elko and Mackenzie sawmill upgrades will further enhance Canfor's ability to take advantage of improving market conditions. Regarding the pulp and paper segment's third quarter results, Kayne said, "With our scheduled maintenance shutdowns now behind us and our next outage not planned until the second quarter of next year, we will be focused on enhancing our operational performance in the coming quarters."
As announced last week, the Company will permanently close its sawmill located in Quesnel, British Columbia. The Company anticipates that the closure will occur in March 2014. Canfor also entered into an agreement with West Fraser Mills Ltd. for an exchange in forest tenure rights, a non-replaceable license and undercut volumes. Commenting on the recent announcements, Kayne said, "The timber availability in the Quesnel region following the mountain pine beetle infestation unfortunately leaves us unable to continue operation of our Quesnel sawmill." Kayne added "The additional fibre we have been able to secure in the exchange agreement with West Fraser enhances the fibre requirements for our Houston facility. We are committed to minimizing the impacts of this closure on our Quesnel employees."
With respect to the fourth quarter of 2013, North American lumber consumption is forecast to show a modest improvement before an anticipated seasonal slowdown late in the period. The repair and remodeling sector is projected to benefit from a continued appreciation in home value, which encourages home improvement projects. Offshore markets are projected to remain fairly stable. Export taxes on shipments to the U.S. remained at 5% for October and will be 0% for November. NBSK pulp markets are projected to improve modestly in the fourth quarter of 2013, while a risk of price weakness continues to exist from further hardwood pulp capacity projected to come online in early 2014.