CANFOR REPORTS RESULTS FOR SECOND QUARTER OF 2019
Canfor Corporation (TSX: CFP) reported its second quarter of 2019 results:
* Second quarter of 2019 reported operating loss of $50 million
* Operating loss of $5 million after adjusting for duties, restructuring
costs and reversal of inventory provision
* Adjusted shareholder net loss of $12 million, or $0.10 per share
* Completed first phase purchase of 49% of Elliott Sawmilling Co., LLC
Photo: Don Kayne, Canfor's President and Chief Executive Officer
For the second quarter of 2019, the Company reported an operating loss of
$49.7 million, an improvement of $20.2 million from the operating loss of
$69.9 million reported for the first quarter of 2019. The improvement
reflected higher lumber segment earnings that included a full quarter of the Vida Group of Sweden's ("Vida" or "European SPF lumber operations") results following completion of the acquisition in the first quarter of 2019. Pulp and paper segment earnings were similar to the previous quarter after taking account of inventory write-downs.
Reported results for the second quarter of 2019 included a net duty expense of $45.2 million, at a combined countervailing duty ("CVD") and anti-dumping duty ("ADD") accrual rate of 26.24%, compared to $36.3 million reported in the first quarter of 2019 at the same cumulative combined rate. Reported results in the second quarter of 2019 also included a $25.0 million recovery in the lumber and log inventory write-down provision, partly offset by a $13.4 million finished pulp and raw material inventory write-down. Reflecting the decision to permanently close the Company's Vavenby sawmill in British Columbia ("BC"), reported results in the second quarter included estimated restructuring costs of $11.5 million. After adjusting for the aforementioned items, the Company's operating loss was $4.6 million for the second quarter of 2019, down $9.6 million from similarly adjusted operating income in the first quarter of 2019, with weaker lumber segment results more than offsetting improved results for the pulp and paper segment.
Adjusted lumber segment operating income included a full quarter of the
Company's solid European Spruce/Pine/Fir ("SPF") operations' results, which
partly offset the continued declines in Western Spruce/Pine/Fir ("Western
SPF") and Southern Yellow Pine ("SYP") benchmark lumber prices through much of the quarter, driven both by tepid demand and market oversupply. As a result of the lumber market weakness, as well as log supply constraints and growing cost pressure in BC, the Company took production curtailments of 150 million board feet in the current quarter (in addition to the 95 million board feet in the first quarter of 2019), and also announced the permanent closure of its Vavenby sawmill and sale of the associated forest tenure. The sawmill will close in July and the sale is currently anticipated to close in the third quarter of 2019, upon completion of customary closing conditions, including approval from the Minister of Forests. The Vavenby sawmill had an annual production capacity of 250 million board feet.
Subsequent to quarter-end, the Company announced further capacity reductions at two of its BC sawmills. The Mackenzie sawmill has been indefinitely curtailed effective July 18, 2019. The Isle Pierre sawmill will be permanently reduced from two shifts to one shift effective September 20, 2019, to enable the mill to better align its production capacity with sustainable fibre supply in the region. Combined, these curtailments will further reduce Canfor's annual production output by approximately 400 million board feet.
The Company successfully completed the first phase purchase of 49% of Elliott at the end of May, with the remaining 51% being acquired in one year. The acquisition adds 210 million board feet of high-value SYP lumber production capacity.
Results in the pulp and paper segment reflected a solid operating performance at Canfor Pulp Product Inc.'s ("CPPI") pulp and paper mills, which more than offset the effects of pricing deadlines due to continued elevated global market pulp inventory levels and weaker demand, particularly in China and Europe.
North American home construction and repair and remodeling activity was muted in the second quarter of 2019. US housing starts, on a seasonally adjusted basis, averaged 1,263,000 units, up 4% from the previous quarter and slightly higher than the second quarter of 2018; multi-family starts were up 19% from the previous quarter, while single-family starts, which consume a higher proportion of lumber, were down 2% compared to the same period. The slower than anticipated recovery in US housing starts in part reflected record year-to-date precipitation levels and severe flooding across the US South early in the quarter, which delayed the start of the typically busy spring construction season. Demand was also tempered while the market continued to absorb surplus inventory. In Canada, housing starts averaged 224,000 units on a seasonally adjusted basis, up 20% from the previous quarter as multi-family starts surged in several major cities. Offshore lumber demand was down, particularly in China and Japan, due primarily to a slow unwind of high inventory levels in the supply chain. European lumber demand remained solid through most of the current quarter, with weakness in other global markets having a marginal impact on the region.
The average benchmark North American Random Lengths Western SPF 2x4 #2&Btr
price was down US$39 per Mfbm, or 10%, from the previous quarter, at US$333
per Mfbm and similar declines were also seen across most Western SPF
wider-width dimensions. The Company's Western SPF lumber unit sales
realizations reflected more modest declines quarter-over-quarter reflecting
its higher-value sales mix.
SYP lumber unit sales realizations were moderately lower than the prior
quarter as a US$23 per Mfbm, or 6%, decrease in the SYP East 2x4 #2 price to US$393 per Mfbm, was partially offset by more stable prices for wider-width dimension products.
The average European indicative SPF lumber benchmark price (an internally
generated benchmark based on delivered price to the largest continental
market), at 4,003 Swedish Krona ("SEK") per Mfbm, was down SEK 108 per Mfbm, or 3%, from the previous quarter, principally reflecting the relatively stable demand in the region, particularly when compared to North American and other global markets, combined with the higher-value products produced by the Company's European SPF operations. The Company's European SPF lumber unit sales realizations for the second quarter of 2019 were down slightly when compared to the previous quarter reflecting a decline in the European benchmark pricing and a 2% strengthening of the Canadian dollar against the SEK.
Total lumber shipments, at 1.47 billion board feet, were 24% higher than the previous quarter reflecting higher Western SPF shipments, despite BC
production curtailments, following the alleviation of weather-related
transportation challenges in the prior quarter, combined with a full quarter of European SPF shipments.
Total lumber production, at 1.38 billion board feet, was 11% above the prior quarter, largely reflecting the benefit of one full quarter of European SPF lumber production, combined with fewer North American statutory holidays in the current quarter, which more than offset the impact of the aforementioned BC production curtailments, which reduced Western SPF lumber production by 17%, and, to a lesser extent, capital related downtime in the US South.
European SPF lumber productivity was steady quarter-over-quarter, with solid operating rates at its operations.
Lumber unit manufacturing and product costs were lower than the previous
quarter largely as a result of higher weather-related operating and energy
costs in the comparative period, and, to a lesser extent, lower market-related log costs in both Western Canada and the US South in the current quarter. In Europe, lumber unit manufacturing and product costs were broadly in line with the previous quarter.
After showing a modest recovery in March, Northern Bleached Softwood Kraft
("NBSK") pulp prices to China, the world's largest pulp consumer, fell
sharply, declining US$130 per tonne, or 18%, to end the quarter at US$600 per tonne. The average US-dollar NBSK pulp list price to China for the second quarter of 2019 was US$653 per tonne, down US$57 per tonne, or 8%, from the previous quarter. Prices to other global regions, including North America and Europe, also came under significant pressure as the quarter progressed, but quarter-over-quarter showed more modest declines. Notwithstanding the significant decline in global pulp list prices, CPPI's average NBSK pulp unit sales realizations showed a more moderate decrease compared to the previous quarter, primarily reflecting CPPI's geographic sales mix and the timing of shipments (versus orders).
Energy revenues increased in the current quarter as seasonally lower energy
prices were more than offset by increased power generation, driven by improved productivity and a full quarter with Northwood's new Turbo Generator Condensing turbine in operation.
Pulp production was 300,000 tonnes, up 26,000 tonnes, or 9%, from the previous quarter reflecting improved operating rates at all pulp mills throughout most of the current quarter. During the second quarter, CPPI completed scheduled maintenance outages at its Intercontinental NBSK pulp and Taylor Bleached Chemi-Thermo Mechanical Pulp ("BCTMP") mills, which reduced pulp production by 11,000 tonnes and 6,000 tonnes, respectively. Pulp shipments were up 29,000 tonnes, or 11%, from the previous quarter reflecting the increase in pulp production.
Pulp unit manufacturing costs were moderately lower than the previous quarter, principally reflecting improved productivity and seasonally lower energy usage. Fibre costs showed a modest decline, with lower market-based prices for sawmill residual chips (linked to Canadian dollar NBSK pulp sales realizations) offsetting increased seasonal pricing adjustments and a higher proportion of higher-cost whole log chips. The latter reflected the impact of curtailments on the supply of sawmill residual chips, which will continue into the third quarter.
"This was another difficult quarter for our Western SPF business with the
ongoing challenging market conditions, combined with high log costs, which
have resulted in the announcement to close of our Vavenby mill and curtail
other BC operations. We deeply regret the impact these decisions are having on our employees and local communities," said Don Kayne, Canfor's President and Chief Executive Officer. "Our SYP business delivered solid results in the second quarter and we expect that to continue through the balance of the year.
Our European business continued to deliver strong financial results. Our pulp business also delivered solid results in the second quarter but in the latter part of the quarter, we began to see significant erosion of NBSK pulp and BCTMP prices, which in combination with the reduced fibre supply in BC due to the industry-wide sawmill curtailments, resulted in the decision to curtail operations in the third quarter. We expect to see a modest increase in pulp prices towards the end of 2019 and into 2020 as the global inventory levels come back into balance."
Looking ahead to the second half of 2019, demand in the US housing sector is anticipated to remain steady, reflecting a gradual pick-up in construction activity into the fall, combined with solid demand in the repair and remodeling sector. Market-based stumpage in BC increased materially on July 1, 2019. Given the high cost of fibre and ongoing weak lumber prices, additional curtailments and mill closures in this region are expected. As a result, lumber prices are forecast to gradually improve, as supply becomes more in balance with demand. Lumber prices in Asia are also expected to improve as inventory levels throughout the supply chain stabilize. Through the balance of 2019, European SPF lumber prices are anticipated to experience some pricing pressure driven principally by weakness experienced in other regions in the second quarter, mitigated in part by a moderate decline in log costs. The Company's European lumber business will take its traditional seasonal production downtime in the third quarter of 2019, reducing European SPF lumber production by approximately 70 million board feet.
Global softwood pulp markets are projected to remain challenging through the third quarter of 2019 given the current oversupply in global pulp markets and typically seasonally slower demand in the summer months. Reflecting the difficult market conditions, in combination with fibre supply constraints and higher fibre costs resulting from recent sawmill curtailments, CPPI is taking phased summer curtailments at its Intercontinental and Northwood NBSK pulp mills in Prince George, BC, as well as at its BCTMP mill in Taylor, BC. In addition, CPPI announced today that it will be extending the curtailment at its BCTMP mill by a further five weeks to September 9, 2019. Combined, the summer curtailments will reduce third quarter pulp production by an estimated 75,000 tonnes of NBSK pulp and 50,000 tonnes of BCTMP, respectively.
Maintenance outages are also scheduled at the Prince George NBSK pulp mill and at CPPI's paper mill in September 2019, with a projected 6,000 tonnes of reduced NBSK pulp production and 4,000 tonnes of reduced paper production, respectively.
Towards the end of 2019 and into 2020, global pulp inventory levels are
forecast to move towards a more balanced range reflecting a gradual drawdown of inventory that will include the anticipated impact of the conversion of two large NBSK pulp mills outside of North America to dissolving pulp by the end of 2019, as well as production curtailments. Given the impacts of recently announced sawmill curtailments and closures in the BC Interior, fibre costs are projected to remain under pressure as a result of an increased proportion of higher-cost whole log chips, which are in tight supply. Bleached kraft paper demand is anticipated to decline slightly through the balance of the year.
(Canfor Pulp Limited)