By: The Working Forest Staff
For the first quarter of 2019, the Company reported an operating loss of $69.9 million, an improvement of $9.2 million from the operating loss of $79.1 million reported for the fourth quarter of 2018. The modest increase in financial performance reflected improved operating earnings for the pulp and paper segment and one month of Vida earnings following the closing of this acquisition on February 28. Reported results for the first quarter of 2019 included a net duty expense of $36.3 million, at a combined countervailing duty (“CVD”) and anti-dumping duty (“ADD”) rate of 26.24%, compared to $39.9 million reported in the fourth quarter of 2018 at a cumulative combined duty deposit rate of 16.14% (for the 18-month administrative review period ended December 31, 2018). Reported results in the first quarter of 2019 also included a $38.6 million lumber and log inventory write-down, in addition to the $36.7 million write-down reported in the fourth quarter of 2018. After adjusting for the aforementioned items, the Company’s operating income was $5.0 million for the first quarter of 2019, up $7.5 million from similarly adjusted operating income in the fourth quarter of 2018. As mentioned, the Company successfully closed its acquisition of 70% of Vida at the end of February. The preliminary purchase price was 4,136 million Swedish Krona (“SEK”) (CAD$590.2 million), including estimated working capital. Vida’s results are consolidated with those of Canfor and one month of Vida’s earnings (subsequently referenced as the Company’s European Spruce/Pine/Fir (“SPF”) lumber operations) are reflected in the Company’s current quarter results within the lumber operating segment. Adjusted lumber segment operating income included the Company’s new European SPF operations results, which combined with a modest increase in average Western Spruce/Pine/Fir (“Western SPF”) benchmark lumber prices and increased production in the US South, offset various weather, operational and market-related challenges in Western Canada. In response to the continued weak market conditions, log supply constraints and cost pressures in British Columbia (“BC”), the Company took production curtailments of 95 million board feet in the current quarter, in addition to 100 million board feet 2 Results in the pulp and paper segment reflected improved production and shipments, which more than offset the impact of lower US-dollar pulp prices to China. Notwithstanding previously announced kiln-related operational disruptions at two of Canfor Pulp Product Inc.’s (“CPPI”) Northern Bleach Softwood Kraft (“NBSK”) pulp mills in January and challenges associated with severe winter weather, pulp production was up 22% from the previous quarter, largely as a result of significant downtime taken at CPPI’s Northwood pulp mill in the comparative period to perform repairs to one of its two recovery boilers. North American home construction activity was subdued in the first quarter of 2019, in contrast to the repair and remodeling sector which saw strong demand through the period. US housing starts, on a seasonally adjusted basis, averaged 1,193,000 units, broadly in line with the previous quarter; single-family starts, which consume a higher proportion of lumber, were up 2% from the previous quarter, while multi-family starts dropped 2% compared to the same period. Severe winter weather across much of North America disrupted transportation networks and delayed the start of the spring construction season in many regions. In Canada, housing starts averaged 187,000 units on a seasonally adjusted basis, down 14% from the previous quarter, largely reflecting slowing activity in several major cities. Offshore lumber demand was down, particularly in China, as a result of higher inventory levels in the supply chain. Average Western SPF lumber prices edged upwards in the current quarter, partly in response to industry-wide sawmill production curtailments taken in late 2018 and during the first quarter of 2019. The delay in the usual pickup of demand from the spring building season contributed to a decline in Western SPF benchmark lumber prices towards the end of the quarter, with prices ending March at US$350 per Mfbm, and slipping further in April. The average benchmark North American Random Lengths Western SPF 2×4 #2&Btr price was up US$45 per Mfbm, or 14%, from the previous quarter, at US$372 per Mfbm, with similar increases also seen across most Western SPF wider-width dimensions. The uplift in Western SPF lumber pricing was offset by lower offshore unit sales realizations, increased CVD and ADD expenses in the current quarter, and, to a lesser extent, the slow-down in market demand, all of which resulted in a small increase in Western SPF lumber unit sales realizations quarter-over-quarter. Southern Yellow Pine (“SYP”) lumber unit sales realizations were in line with the prior quarter as price increases for most wider-width SYP dimensions more than offset a 9% decrease in the SYP East 2×4 #2 price. The average European indicative SPF lumber benchmark price (an internally generated benchmark based on delivered price to the largest continental market), at SEK 4,111 per Mfbm, was down SEK 124 per Mfbm, or 3%, from the previous quarter, but remained at near-historical high levels. The Company’s European SPF lumber unit sales realizations for March 2019 were slightly ahead of this benchmark. Total lumber shipments, at 1.19 billion board feet, were 7% higher than the previous quarter, mostly as a result of moderately higher SYP shipments combined with the addition of European SPF shipments in March, which more than offset the effects of weaker demand in several markets and severe winter weather in Western Canada impacting transportation networks. Total lumber production, at 1.25 billion board feet, was 11% above the prior quarter, primarily reflecting improved productivity and increased operating hours in the US South, following completion of the major upgrade of the Company’s Moultrie, Georgia sawmill at the end of 2018, combined with fewer statutory holidays in the current quarter, and the addition of European SPF lumber production in March. Lumber unit manufacturing and product costs were largely unchanged quarter-over-quarter as lower market-based stumpage offset the effects of cold weather in Western Canada early in the first quarter of 2019, which resulted in lower log recoveries and reduced sawmill productivity, while in the US South, log costs saw a modest increase due to the prolonged wet weather conditions, which resulted in increased competition for available purchased wood. The weaker pulp market conditions experienced towards the end of 2018 extended into early 2019, and as a result global softwood pulp producer inventory levels remained well above the balanced range through the first quarter. After declining in January, NBSK pulp prices to China, the world’s largest pulp consumer, showed a modest recovery to end the quarter at US$730 per tonne. The average US-dollar NBSK pulp list price to China for the first quarter of 2019 was US$710 per tonne, down US$95, or 12%, from the fourth quarter of 2018, and down US$200 per tonne compared to the first quarter of 2018. Prices to other global regions, including North America and Europe, experienced more modest declines when compared to the same comparative periods. Despite the significantly lower US-dollar pricing to China, CPPI’s geographic sales mix, combined with a 1 cent, or 1%, weaker Canadian dollar, resulted in average NBSK pulp unit sales realizations moderately declining quarter-overquarter. Average Bleached Chemi-Thermo Mechanical Pulp (“BCTMP”) sales unit realizations were well down over the 3 same period reflecting an 11% decline in average US-dollar prices. Higher energy revenues in the current quarter reflected increased energy production, seasonally higher power prices, as well as the successful commercialization ramp-up in March of the previously announced Turbo Generator Condensing turbine at the Northwood pulp mill. Pulp production was 274,000 tonnes for the first quarter of 2019, up 50,000 tonnes, or 22%, from the previous quarter, with improved productivity and increased operating days in the current quarter more than offsetting the aforementioned kiln-related operational disruptions at CPPI’s Northwood and Intercontinental pulp mills in January, and, to a lesser extent, cold weather-related production challenges at all mills in February and early March. Pulp shipments were up 28,000 tonnes, or 12%, from the previous quarter mostly reflecting the higher production offset in part by the replenishment of inventory levels significantly drawn down during the fourth quarter of 2018 due the Northwood outage. Pulp unit manufacturing costs were moderately lower in the current quarter compared to the fourth quarter of 2018, as the benefit of increased production volumes, lower maintenance spend and reduced chemical costs in the current quarter, more than offset higher energy costs related to the aforementioned winter weather conditions, and the continued disruptive impact on natural gas supply and pricing resulting from a third-party natural gas pipeline explosion near Prince George in the fourth quarter. Fibre costs were slightly lower than the previous quarter, as seasonal pricing adjustments combined with lower market-based prices for sawmill residual chips (linked to Canadian dollar NBSK pulp sales realizations) offset an increased proportion of higher-cost whole log chips. Commenting on the Company’s first quarter results, Canfor’s President and Chief Executive Officer, Don Kayne, said, “While our BC based lumber business experienced significant challenges due to lower than anticipated market prices and difficult operating conditions, our US South and European operations generated solid financial returns. We look forward to adding a further 200 million board feet to our US South operations during the second quarter with the upcoming close of the Elliott acquisition, which will help offset the escalating log cost and fibre supply issues impacting our BC operations.” Lumber prices are anticipated to show a modest increase over the next several months in response to improving demand in the US housing sector, continued strength in the repair and remodeling sector and inventory balances in the supply chain returning to more normalized levels. In addition, recently announced curtailments will help balance supply with demand, and support improved prices. Looking ahead to the second half of 2019, a projected material increase in BC market-based stumpage rates set for July 1, 2019 will place even more pressure on that region’s operating rates absent a commensurate increase in Western SPF lumber prices. Lumber prices in Asia are projected to show more moderate declines until inventory levels stabilize. The Company’s European SPF business is projected to deliver solid financial results through the balance of 2019. Canfor will continue to closely monitor the market conditions through the second quarter and take appropriate steps should market conditions not improve as anticipated. In the pulp and paper segment, global softwood pulp markets are projected to remain steady through the second quarter, with inventory levels forecast to move towards a more balanced range in the latter half of 2019 reflecting a gradual drawdown of inventory following the traditional spring maintenance period, as well as the anticipated benefit of the conversion of two large NBSK pulp mills outside of North America to dissolving pulp towards the end of 2019. Fibre costs are anticipated to remain relatively stable in the second quarter; however, the current weakness in lumber markets may result in further temporary or permanent sawmill curtailments which could result in reduced availability of residual chips and an increased proportion of whole log chips. Bleached kraft paper demand is anticipated to hold relatively stable through the second quarter.