Canfor reports results for 2Q/2018

Canfor Corporation recently reported their second quarter 2018 results, with an operating income of US$282.1 million for the second quarter of 2018, up US$78.3 million from reported operating income of US$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 US$51.7 million, at a current effective countervailing duty and anti-dumping duty rate of 14.94 per cent, as compared to US$34.9 million in the first quarter of 2018 and US$35.6 million in the second quarter of 2017.

After adjusting for duties, operating income was US$333.8 million for the second quarter of 2018, up US$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 and Southern Yellow Pine benchmark lumber prices, a two cent, or two 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 realisations in the current quarter.

North American lumber demand was solid across all segments of the market in the second quarter of 2018. US 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 per cent 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 seasonally adjusted basis.

Offshore lumber demand from China, Japan and other regions remained 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’s 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 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 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 realisations 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 United States (U.S.) South largely offset market-based stumpage increases and higher purchased wood costs in Western Canada.

Commenting on the Company’s second quarter results, Canfor’s President and CEO, Don Kayne, said, “Our lumber business 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 capitalise on these favourable market fundamentals, and set new record-high operating earnings.”

Looking ahead, the US 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.