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VANCOUVER, BRITISH COLUMBIA -- (MARKET WIRE) -- 10/22/09 -- INTERNATIONAL FOREST PRODUCTS LIMITED ("Interfor" or the "Company") (TSX: IFP.A) reported net earnings of $9.7 million ($0.21 per share) for the third quarter of 2009, compared to a loss of $15.0 million ($0.32 per share) in the second quarter of 2009 and a loss of $8.1 million ($0.17 per share) in the third quarter of 2008.
Included in the results for the third quarter was a gain on the sale of the Company's former Queensboro site of $19.0 million ($0.40 per share) after-tax.
The gain on the Queensboro property was offset in part by $2.5 million in restructuring costs and other one-time items, including $2.3 million in asset write-downs and $0.2 million in severance costs, all figures in after-tax amounts.
Excluding one-time items, the Company's net loss for the third quarter of 2009 was $7.4 million ($0.16 per share), significantly better than the results of the preceding quarter.
EBITDA for the quarter was positive at $3.6 million ($25.3 million if Other Income is included), a $10.9 million improvement over the second quarter and $3.5 million better than the third quarter last year.
"The improvement in our results was attributable to a number of factors including the ramp up of activity at the new Adams Lake sawmill and higher operating rates and lower costs at our U.S. mills," said Duncan Davies, Interfor's President and CEO. "The investments we have made over the last few years are beginning to pay off in spite of the challenges we continue to face in the marketplace," said Davies. "The Adams Lake mill is performing well above expectations and by the end of September had increased its operating schedule to 64 hours per week. And, our U.S. mills are running very well."
The trends in product pricing were mixed in the quarter. SPF 2X4 gained US$17 or 10% quarter-over-quarter as seasonal buying activity and production curtailments impacted supply/demand balances. By September, however, production of most items began to outpace demand and prices softened. By quarter-end, SPF 2X4 had fallen to US$186 per thousand. Pine industrials continued to perform well in the quarter and demand from China and other offshore markets remained strong.
Cedar on the other hand continues to adjust. Substantial pressure on knotty grades was evident and was only partially offset by stronger prices in the upper and lower grades.
Adding to the challenge was the rising value of the C$, which averaged US$0.912 in the third quarter compared with US$0.855 in the second quarter.
Lumber production totalled 180 million board feet in the quarter (or the equivalent of 46% of rated capacity) compared to 115 million board feet in the second quarter, with the increase split between Adams Lake and the four U.S. mills.
Log production at the Company's Canadian operations was 333,000 m3, up from 312,000 m3 in the second quarter, but down from 501,000 m3 in the third quarter of 2008. In the U.S., log procurement was matched against mill consumption. Some firming in U.S. log prices was evident in the quarter.
Lumber sales, including wholesale volumes, totalled 181 million board feet compared to 131 million board feet in the second quarter and 132 million board feet in the third quarter last year.
In the quarter, Interfor used $0.5 million in cash for operations after working capital changes; capital spending amounted to $3.3 million, including $0.5 million at Adams Lake. Net debt ended the quarter at $128.6 million or 26% of invested capital versus $162.8 million or 31% at the end of the second quarter.
While economic conditions remain uncertain, some positive signs are beginning to emerge in both the U.S. and offshore, laying a foundation for increased consumption and better market conditions beginning in 2010. In the U.S., the pace of housing sales has improved and the inventory of unsold homes has dropped. And, housing prices have started to recover. Housing starts have also improved, trending steadily upwards since April, albeit at historically depressed levels.
In other markets, the level of activity continues to improve. Opportunities in China, in particular, are expected to continue to grow as efforts are made to promote North American building standards and products in that market.
In spite of the improving trend, there is little reason to believe business conditions will improve in any significant way through the balance of 2009 and currency rates are expected to remain volatile.
As a result, Interfor will continue to balance its operating schedule against sales activity, with a clear priority on managing for cash and realizing on the benefits of recent strategic activities and investments. In that regard, the Company's Grand Forks sawmill, which was acquired in April 2008, resumed operations on October 19th after being curtailed since January. Significant changes in the mill's cost structure have been achieved which should allow it to generate a positive economic contribution in the current market environment. The Castlegar sawmill, which was acquired at the same time as the Grand Forks mill, will remain curtailed. All discretionary capital spending will remain curtailed as well.
At September 30, the Company had unused credit available in excess of $100 million under its various syndicated credit facilities which it considers sufficient to meet is foreseeable requirements.
FORWARD-LOOKING STATEMENTS
This release contains information and statements that are forward-looking in nature, including, but not limited to, statements containing the words "will" and "is expected" and similar expressions. Such statements involve known and unknown risks and uncertainties that may cause Interfor's actual results to be materially different from those expressed or implied by those forward-looking statements. Such risks and uncertainties include, among others: general economic and business conditions, product selling prices, raw material and operating costs, changes in foreign-currency exchange rates, and other factors referenced herein and in Interfor's 2008 Annual Report and management information circular available on www.sedar.com. The forward-looking information and statements contained in this report are based on Interfor's current expectations and beliefs. Readers are cautioned not to place undue reliance on forward-looking information or statements. Interfor undertakes no obligation to update such forward-looking information or statements, except where required by law.
ABOUT INTERFOR
Interfor is one of the Pacific Northwest's largest producers of quality wood products. The Company has operations in British Columbia, Washington and Oregon, including two sawmills in the Coastal region of British Columbia, three in the B.C. Interior, two in Washington and two in Oregon. For more information about Interfor, visit our website at www.interfor.com.
There will be a conference call on Friday, October 23, 2009 at 8:00 AM (Pacific Time) hosted by INTERNATIONAL FOREST PRODUCTS LIMITED for the purpose of reviewing the Company's release of its Third Quarter, 2009 Financial Results.
The dial-in number is 1-866-323-8540. The conference call will also be recorded for those unable to join in for the live discussion, and will be available until November 6, 2009. The number to call is 1-866-245-6755 Passcode 570222.
International Forest Products Limited
Third Quarter Report
For the three and nine months ended September 30, 2009
Management's Discussion and Analysis
Dated as of October 22, 2009
This Management's Discussion and Analysis ("MD&A") provides a review of Interfor's financial performance for the three and nine months ended September 30, 2009 relative to 2008, the Company's financial condition and future prospects. The MD&A should be read in conjunction with the interim Consolidated Financial Statements for the three and nine months ended September 30, 2009 and 2008, and Interfor's Annual Information Form, Consolidated Financial Statements and Annual MD&A for the years ended December 31, 2008 and 2007 filed on SEDAR at www.sedar.com. The financial information contained in this MD&A has been prepared in accordance with Canadian generally accepted accounting principles ("GAAP"). In this MD&A, reference is made to EBITDA and Adjusted EBITDA. EBITDA represents earnings before interest, taxes, depletion, amortization, restructuring costs, other foreign exchange gains and losses, and write-downs of property, plant, equipment and timber ("asset write-downs"). Adjusted EBITDA represents EBITDA adjusted for other income. The Company discloses EBITDA as it is a measure used by analysts and Interfor's management to evaluate the Company's performance. As EBITDA is a non-GAAP measure, it may not be comparable to EBITDA calculated by others. In addition, as EBITDA is not a substitute for net earnings, readers should consider net earnings in evaluating the Company's performance.
Unless otherwise noted, all financial references in this MD&A are in Canadian dollars.
References in this MD&A to "Interfor" and the "Company" mean International Forest Products Limited, together with its subsidiaries.
Forward-Looking Statements
This report contains information and statements that are forward-looking in nature, including, but not limited to, statements containing the words "believe", "may", "will", "expects", "estimates", "projects", "continue", "anticipates", "intends", and similar expressions. Such statements involve known and unknown risks and uncertainties that may cause Interfor's actual results to be materially different from those expressed or implied by those forward-looking statements. Such risks and uncertainties include, among others: general economic and business conditions, product selling prices, raw material and operating costs, changes in foreign currency exchange rates, and other factors referenced herein and in Interfor's 2008 Annual Report available on www.sedar.com. The forward-looking information and statements contained in this report are based on Interfor's current expectations and beliefs. Readers are cautioned not to place undue reliance on forward-looking information or statements. Interfor undertakes no obligation to update such forward-looking information or statements, except where required by law.
Review of Operating Results
Overview
Interfor reported net earnings of $9.7 million for the third quarter of 2009, or $0.21 per share, and a net loss for the nine months ended September 30, 2009 of $18.9 million, or $0.40 per share. This compares to a net loss of $8.1 million, or $0.17 per share, for the third quarter of 2008, and a net loss of $36.7 million, or $0.78 per share, for the first nine months of 2008.
Included in the third quarter, 2009, results is a gain on the sale of the former Queensboro sawmill site for gross proceeds of $30.1 million and an after-tax gain of $19.0 million, or $0.40 per share, with the net proceeds of $29.9 million used to pay down debt.
Before restructuring costs, foreign exchange gains and other income, the Company's net loss for the third quarter of 2009 amounted to $7.4 million or $0.16 per share as compared to a net loss of $7.7 million, or $0.16 per share for the third quarter of 2008, and a net loss of $35.8 million, or $0.76 per share for the first nine months of 2009 as compared to a net loss of $13.8 million, or $0.29 per share in the corresponding period in 2008.
EBITDA for the third quarter of 2009 and the first nine months of 2009 was $25.3 million and $10.3 million, respectively, compared to $0.7 million and $11.7 million for the corresponding periods in 2008. Adjusted EBITDA for the third quarter and first nine months of 2009 was $3.6 million and negative $12.1 million, respectively, compared to $0.1 million and $10.6 million for the same periods in 2008.
Demand for softwood lumber continued to be weak through the third quarter of 2009, as U.S. housing starts remained at historically low levels. Average U.S. housing starts year-to-date for September 2009 were 553,000 units, only marginally above half of the September 2008 housing starts of 981,000. The inventory of new and existing homes for sale fell to 8.4 months supply in August, 2009, compared to a peak of 11.2 months supply in April, 2008, but is still at historically high levels. The negative effects of the U.S. housing downturn have been magnified by the global recession and a volatile Canadian dollar.
Extensive industry curtailments in all regions generated some price stability, with year-to-date highs in lumber prices reached in August, 2009, but still significantly lower than lumber prices in the corresponding period of 2008. The average price of SPF #2&Btr 2x4 for August, 2009 reached a high for 2009 at US$200 per mfbm, still well below the 2008 high of US$280 per mfbm price reached in August, 2008.
Sales realizations and closing inventory valuations were significantly impacted by low product demand and weak product pricing for the third quarter of 2009, and the first nine months of 2009. The Company has responded to decreased product demand by adjusting production levels in all operations.
On a positive note, the new Adams Lake sawmill, which had its start-up on April 20, 2009, continues its impressive ramp-up, averaging in excess of 110% of pro forma on a per hour basis. The mill's operating schedule was recently increased from 54 hours to 64 hours per week, with a goal of moving to 80 hours per week in the near future, log supply and markets permitting.
Sales
Additional sales volumes from the Beaver sawmill acquired in late 2008 and new wholesale programs in 2009 more than offset lower operating rates as compared to 2008. Additional volumes resulting from the start-up of the new Adams Lake sawmill impacted results in the third quarter, 2009, as compared to the third quarter, 2008. Compared to the same periods in 2008, lumber shipments were up 48.7 million board feet, or 36.8%, for the third quarter of 2009, and up 63.0 million board feet, or 17.0%, for the first nine months of 2009.
Unit lumber sales values were lower by $131 per mfbm, or 23.6%, for the quarter and $175 per mfbm, or 27.9%, for the first nine months, relative to the same periods in 2008, reflecting weaker lumber prices overall and a shift in sales mix away from higher-value cedar products. Prices for dimension and industrial products strengthened slightly in the third quarter, 2009, primarily due to industry-wide curtailments, but were still significantly lower than comparable periods in 2008. In comparison to corresponding periods in 2008, the Canadian dollar weakened on average by 5.8% vis-a-vis its U.S. counterpart in the third quarter, 2009, and by 15.0% vis-a-vis its U.S. counterpart, for the first nine months, 2009, but any positive impact from foreign exchange was more than offset by lower lumber prices.
In comparison to the same periods of 2008, log sales were down $11.5 million, or 39.9%, for the third quarter, and $42.2 million, or 49.4%, in the first nine months of 2009, as the demand for logs fell in conjunction with the reduction in lumber demand and the resultant reduction in logging activity. On the B.C. Coast, the average sales price was virtually unchanged at $69 per cubic metre in the third quarter of 2009, as compared to $71 per cubic metre in the same quarter, 2008. This reflects a higher sales volume of lower quality logs in both quarters. For the first nine months of 2009, the average sales value declined by $15 per cubic metre, as compared to the same period for 2008, due to lower operating rates, a change in sales mix to lower grade and pulp logs, and lower cedar sales values.
Pulp chip and other by-product revenues for the third quarter and first nine months of 2009 were virtually unchanged in comparison to the third quarter and first nine months of 2008. The 2009 impact of reduced sawmill operating rates on chip volumes was mitigated by the additional volumes generated from the Beaver sawmill acquired in 2008. Average chip prices were down $10 per mfbm, or 20.8%, for the third quarter, 2009 and $5 per mfbm, or 10.9%, for the first nine months, 2009, as compared to same periods of 2008, reflecting reduced global demand for pulp.
Operating Costs
Production costs for the third quarter of 2009 were down $12.4 million, or 11.3%, and $60.2 million, or 18.8%, for the first nine months of 2009, compared to the same periods in 2008. The decreases are primarily as a result of market related curtailments in manufacturing and logging, partially offset by an increase in lumber production for the first nine months of 2009 generated by the Beaver sawmill acquired in late 2008 and, to a lesser extent, the new Adams Lake sawmill. Lumber production increased by 32 million board feet, or 21.7%, for the third quarter, 2009 compared to the third quarter, 2008, and by 36 million board feet, or 9.5%, for the first nine months, 2009, compared to the same period in 2008. Unit cash conversion costs declined by 22.0%, for the third quarter, 2009 and 13.8%, for the first nine months of 2009, vis-a-vis the same periods for 2008, primarily as a result of increased operating efficiencies, lower log costs in the U.S. and the start-up of the new Adams Lake sawmill.
Compared to the same periods in 2008, B.C. log production was reduced by 168,200 cubic meters, or 33.6%, for the third quarter of 2009, and 874,800 cubic metres, or 55.0%, for the first nine months of 2009, with a substantial volume of logs in 2008 harvested through heli-logging, resulting in significantly higher costs for the comparative period. To match production to consumption and reduce inventories, log production has been dramatically curtailed in 2009 to date. Stumpage rates were lower by $11 per cubic metre for the third quarter and $12 per cubic metre for first nine months, 2009, as compared to the prior year, as stumpage rates for high cost coastal timber fell in response to depressed log prices.
The Canada/U.S. lumber export tax remained at 15% through the first nine months of 2009. Export taxes were virtually unchanged for the third quarter, 2009, compared to same quarter, 2008, and decreased by $0.7 million for the first nine months of 2009, as compared to the first nine months of 2008.
Despite the addition of three sawmills in mid and late 2008, selling and administrative costs have decreased by $0.3 million for the third quarter, 2009, and by $0.6 million for the first nine months of 2009, as compared to the corresponding periods of 2008, reflecting continued rigor in controlling costs through 2009.
Long term incentive compensation expense of $0.7 million for the third quarter, 2009, and $1.7 million for the first nine months of 2009, reflect increases in the Company's share price of 33.2% and 84.1% respectively. Recoveries of $0.7 million and $1.1 million were recorded for corresponding periods in 2008, as the Company's share price declined by 15.3% and 27.2% respectively.
Amortization and depletion expense for the third quarter of 2009 was down $1.4 million, or 12.1%, compared to the same quarter of 2008 and down $7.5 million, or 22.5%, for the first nine months of 2009, compared to the same nine months of 2008, primarily as a result of lower operating rates for coastal logging operations.
In the third quarter, 2009, the Company recorded $3.1 million in asset write-downs as it determined certain assets were impaired in the current operating environment. In addition, the downsizing of the Company's workforce in response to reduced operating rates resulted in severance costs of $0.3 million for the third quarter, 2009, and $1.5 million for the first nine months of 2009. These restructuring costs, combined with a recovery of $0.3 million related to successful defence of a legal dispute previously accrued as restructuring expenses, net to $4.3 million expense for the first nine months of 2009.
Restructuring costs in the third quarter of 2008 totalled $1.3 million, related to an impairment charge taken on the assets of the old Adams Lake sawmill. Restructuring costs in the first nine months of 2008 totalled $34.1 million, arising primarily from the permanent closure of the Queensboro sawmill and were comprised of severance, site remediation and impairment charges.
Interest, Other Foreign Exchange Gain, Other Income and Income Taxes
Increases in interest expense for the third quarter and first nine months of 2009 were $0.8 million and $3.2 million respectively as compared to the corresponding periods of 2008. The acquisition of several sawmills and related assets in mid and late 2008, the construction of the Adams Lake sawmill and continued operating losses increased the Company's debt level. This, coupled with higher borrowing rates, all contributed to the increased interest expense in 2009.
Other foreign exchange gains were negligible for the third quarter of 2009 and 2008 and the first nine months of 2009 and 2008.
On August 31, 2009, the Company completed the sale of its former Queensboro mill site to Port Metro Vancouver for net proceeds of $29.9 million. In addition, the Company received $2.5 million as an advance of compensation under the Forest Act for timber and other assets, and forestry and engineering costs resulting from the 2006 legislated takeback of certain logging rights on the B.C. Central Coast. $2.0 million of the advance compensation received was recorded as proceeds on the disposal of the related timber, roads and bridges. Combined with other minor sales of surplus equipment in the third quarter, 2009, these activities generated a gain of $21.7 million, reported as Other income.
The asset disposals in the third quarter combined with the disposals of surplus property and buildings in Maple Ridge, B.C. and other minor sales of surplus equipment in the first half of 2009 generated total Other income of $22.4 million for the first nine months of 2009. This compares to $1.2 million reported in Other income from net compensation received under the Forest Revitalization Act and gains on disposal of surplus equipment and a timber licence for the first nine months of 2008.
Reduced shipment volumes and the volatility of the Canadian dollar resulted in a decline in equity income of $0.9 million in the third quarter, 2009, as compared to the third quarter, 2008 and $2.0 million for the first nine months, 2009, as compared to the same period, 2008.
The Company continued to provide a tax valuation allowance in respect of certain loss carry-forwards for the third quarter, 2009, and first nine months, 2009, as compared to the same periods in 2008. In addition, the gain on the sale of the former Queensboro sawmill site is subject to tax at the lower capital gains rates, which also served to reduce the third quarter, 2009, income tax provision.
Cash Flow and Financial Position
During the third quarter, 2009, the Company used $0.5 million to fund operations, after changes in working capital, compared to 13.9 million cash used for the third quarter of 2008, which was impacted by working capital required by the addition of the Kootenay operations.
For the nine months ended September 30, 2009 the Company generated $17.4 million cash from operations, after changes in working capital, compared to $16.3 million cash generated in the first nine months of 2008. Significant production curtailments caused a drawdown of inventories by $25.0 million and the carry back of 2008 tax losses resulted in the receipt of $16.2 million in cash tax refunds in the first nine months of 2009.
Capital expenditures for the third quarter of 2009 were $2.8 million, excluding changes in amounts accrued, and $20.2 million year-to-date (Quarter 3, 2008 - $28.3 million; first nine months, 2008 - $63.0 million). Spending in the current quarter was primarily related to $2.1 million on road construction. For the first nine months of 2009, spending related primarily to the construction of the new Adams Lake sawmill totalled $15.4 million and $3.2 million on road construction. Construction of the new sawmill at Adams Lake is substantially complete and the mill had an extremely successful start-up which commenced on April 20, 2009 on a one-shift basis and has steadily increased operating hours and productivity since.
All discretionary capital expenditures remain curtailed until market indicators show significant and sustained improvement.
Completion of the sale of the former Queensboro mill site for net proceeds of $29.9 million and receipt of an advance of $2.5 million against compensation for timber and related forestry and engineering combined with the sales of other surplus assets generated a total of $32.1 million in cash proceeds for the third quarter, 2009, and were used to pay down debt.
The proceeds generated in the third quarter combined with proceeds received from the disposals of surplus property and equipment in the first half of 2009 resulted in total proceeds of $36.7 million and a gain of $22.4 million for the first nine months of 2009.
On January 2, 2009, the Seaboard Limited Partnership declared an income distribution to its partners. Interfor's share was $3.7 million and was paid to the Company by way of setoff against the promissory note payable to the Seaboard Limited Partnership in the first quarter of 2009.
The Company drew $4.6 million against its bank indebtedness and Revolving Term Line during the third quarter of 2009, primarily to fund capital expenditures. Utilizing proceeds from the sale of the former Queensboro mill site and compensation from the Crown for timber takeback settlements, the Company was able to make cash payments of $32.4 million against its bank indebtedness and Revolving Term Line during the third quarter, 2009.
For the first nine months of 2009, the proceeds from the sale of surplus assets, cash tax refunds and the release of cash from working capital allowed the Company to make total cash payments of $51.1 million against its bank indebtedness and Revolving Term Line. This was offset by drawings of $23.6 million to fund the remaining construction costs of the new Adams Lake sawmill and other capital asset additions. The Company's total net debt has been reduced by $39.2 million over this period. The impacts of the stronger Canadian dollar offset by the settlement of US$ derivative contracts accounted for $4.4 million of this reduction.
On April 21, 2009, the Company amended and extended its existing syndicated credit facilities. The existing Canadian Operating Line decreased from $100.0 million to $65.0 million and the maturity date was extended to April 23, 2010. As part of the amendment, margining availability was extended to include inventory domiciled in the United States. The Company's Revolving Term Line was increased from $115.0 million to $150.0 million, with no change to its maturity date of April 24, 2011. Except for an increase in pricing and the margining amendment, all other terms and conditions of the lines remained substantially unchanged. The net impact of these amendments is effectively to increase available liquidity by $35.0 million.
As a result of the extension of margining coverage, all U.S. working capital is included in the Company's syndicated operating facility and the US$10.0 million U.S. Operating Line was not extended when it matured on April 24, 2009.
On September 1, 2009, the Non-Revolving Term Line of US$35.0 million ($37.5 million) was fully drawn and classified as current as it matures on September 1, 2010. The Revolving Term Line was drawn at US$30.2 million ($32.3 million) and $61.0 million for an aggregate of $93.3 million at September 30, 2009 and matures on April 24, 2011, leaving an unused available line of $56.7 million as at September 30, 2009. The Operating Line was drawn at $23,000 with an unused available line of $44.6 million at September 30, 2009 and matures on April 23, 2010. The combined unused bank facilities available at September 30, 2009 are in excess of $100 million.
Based on current pricing projections and the expected renewal of the Operating Line and refinancing of the Non-Revolving Term Line, the Company believes it will have sufficient resources through 2010 to fund any shortfall from operations, interest payments, essential capital expenditures, and the acquisition of the timber tenure from Weyerhaeuser. The Company expects to be able to extend all existing credit facilities as they become due.
At September 30, 2009, the Company had cash of $2.2 million. After deducting the Company's bank indebtedness and drawings under its Revolving Term Line and Non-Revolving Term, the Company ended the quarter with net debt of $128.6 million or 26.0% of invested capital.
Selected Quarterly Financial Information
Quarterly Earnings
Summary 2009 2008 2007
------------------------------------------------------
Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
------------------------------------------------------
(millions of dollars except share and per share amounts)
Sales - Lumber 76.8 62.3 56.5 65.6 73.4 82.2 76.2 70.7
- Logs 17.3 13.0 12.8 18.3 28.8 25.7 30.9 35.6
- Wood chips
and other
by-products 8.9 5.9 7.4 8.8 8.9 7.4 5.5 7.2
- Other 2.2 0.6 0.6 0.8 0.9 2.1 1.8 1.9
------------------------------------------------------
Total Sales 105.2 81.8 77.3 93.5 112.0 117.4 114.4 115.4
------------------------------------------------------
Operating loss
before
restructuring
costs
and asset
write-downs (7.0) (16.4) (15.2) (8.1) (12.8) (11.7) (1.0) (15.1)
Operating loss (10.4) (16.3) (16.3) (8.9) (14.1) (42.2) (3.2) (15.4)
Net earnings
(loss) 9.7 (15.0) (13.6) (18.7) (8.1) (27.7) (0.9) (8.8)
Net earnings
(loss) per share
- basic and
diluted 0.21 (0.32) (0.29) (0.40) (0.17) (0.59) (0.02) (0.19)
EBITDA(3) 25.3 (7.3) (7.7) 2.0 0.7 2.5 8.5 (4.6)
Cash flow from
operations per
share(1) (0.07) (0.23) (0.22) 0.12 0.06 (0.06) 0.22 (0.05)
Shares outstanding
- end of period
(millions)(2) 47.1 47.1 47.1 47.1 47.1 47.1 47.1 47.1
- weighted average
(millions) 47.1 47.1 47.1 47.1 47.1 47.1 47.1 47.1
Adjusted EBITDA(3) 3.6 (7.3) (8.4) 1.7 0.1 1.9 8.5 (4.7)
(1) Cash generated from operations before taking account of changes in
operating working capital.
(2) As at October 22, 2009, the number of shares outstanding by class are:
Class A Subordinate Voting shares - 46,101,476 Class B Common shares
- 1,015,779, Total - 47,117,255.
(3) EBITDA represents earnings before interest, taxes, depletion,
amortization, restructuring costs, other foreign exchange gains and
losses, and asset write-downs. The Company discloses EBITDA as it is a
measure used by analysts to evaluate the Company's performance. As
EBITDA is a non-GAAP measure, it may not be comparable to EBITDA
calculated by others. In addition, as EBITDA is not a substitute for
net earnings, readers should consider net earnings in evaluating the
Company's performance. Adjusted EBITDA represents EBITDA adjusted for
other income.
EBITDA and Adjusted EBITDA can be calculated from the Statements of
Operations as follows:
2009 2008 2007
------------------------------------------------------
Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
------------------------------------------------------
(millions of dollars)
Net earnings (loss) 9.7 (15.0) (13.6) (18.7) (8.1) (27.7) (0.9) (8.8)
Add: Income taxes
(recovery) 0.1 (3.6) (3.1) 10.4 (5.2) (13.9) (2.4) (7.0)
Interest expense 2.2 2.0 1.6 2.5 1.5 0.8 0.4 0.2
Depletion and
amortization 9.9 9.5 6.3 7.8 11.3 13.0 8.8 10.5
Other foreign
exchange (gains)
losses - (0.1) - (0.9) - (0.4) 0.4 0.2
Restructuring
costs, asset
write-downs and
other 3.3 (0.1) 1.1 0.8 1.3 30.6 2.2 0.3
------------------------------------------------------
EBITDA 25.3 (7.3) (7.7) 2.0 0.7 2.5 8.5 (4.6)
Deduct:
Other income
(expense) (21.7) - (0.6) (0.3) 0.6 0.6 - (0.2)
------------------------------------------------------
Adjusted EBITDA 3.6 (7.3) (8.4) 1.7 0.1 1.9 8.5 (4.7)
------------------------------------------------------
Volume and Price
Statistics 2009 2008 2007
------------------------------------------------------
Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
Lumber sales
(million fbm) 181 131 122 133 132 125 113 161
Lumber production
(million fbm) 180 115 121 118 148 128 104 150
Log sales(1)
(thousand cubic
metres) 242 216 200 236 372 312 399 382
Log production(1)
(thousand cubic
metres) 333 312 72 290 501 679 411 373
Average selling
price - lumber(2)
($/thousand fbm) $424 $477 $462 $494 $555 $658 $672 $441
Average selling
price - logs(1)
($/cubic metre) $ 69 $ 56 $ 54 $ 69 $ 70 $ 79 $ 75 $ 91
Average selling
price - pulp chips
($/thousand fbm) $ 38 $ 40 $ 46 $ 58 $ 48 $ 47 $ 41 $ 37
(1) B.C. operations
(2) Gross sales before export taxes
Quarterly trends normally reflect the seasonality of the Company's operations. Logging operations are seasonal due to a number of factors including weather, ground conditions and fire season woods closures. Generally, the Company's logging divisions experience higher production levels in the latter half of the first quarter, throughout the second and third quarters and in the first half of the fourth quarter. Sawmill operations are less seasonal than logging operations but do depend on the availability of logs from the logging operations. In addition, the market demand for lumber and related products is generally lower in the first quarter due to reduced construction activity, which increases during the spring, summer and fall.
The impact of the global recession on overall demand and lower lumber prices increased the operating losses in the fourth quarter of 2008 and the first two quarters of 2009. Demand continued to be depressed in the third quarter of 2009, and the Canadian dollar strengthened significantly. The decrease in operating earnings for the fourth quarter in 2007 and the first three quarters in 2008 related primarily to weak U.S. structural lumber markets, and the stronger Canadian dollar. For the fourth quarter of 2007, strike action also contributed to lower reported operating earnings. All of these factors contributed to lower operating rates and lumber sales realizations in the applicable periods.
Agreement to Purchase Timber Assets from Weyerhaeuser
On July 3, 2009, the Company finalized a revised agreement to acquire a timber tenure and related reforestation liabilities in the Kamloops region from Weyerhaeuser Company Limited. The transfer of the tenure requires regulatory approval. Subject to receiving the required approval, the Company expects to conclude this transaction in late 2009 or early 2010. This agreement replaces the agreement dated February 18, 2008 which was previously disclosed.
Accounting Policy Changes
Effective January 1, 2009, the Company adopted the new Canadian Institute of Chartered Accountants ("CICA") Handbook Section 3064, Goodwill and Intangible Assets on a retrospective basis. This section replaces CICA Handbook Section 3062, Goodwill and Intangible Assets, and establishes revised standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets. The new standard also provides guidance for the treatment of various preproduction and start-up costs and requires that these costs be expensed as incurred, with the concurrent withdrawal of CICA Emerging Issues Committee Abstract 27 ("EIC 27").
The Company previously deferred start-up costs on major plant construction to the extent these costs met the criteria under EIC 27 and the site met sustainable production levels defined as the earlier of:
(a) Seventy percent of production capacity for two consecutive months; or
(b) Six months
and to a maximum of twenty percent of the total project.
Start-up costs were amortized over five years on a straight-line basis.
The Financial Statements have been restated on a retrospective basis to reflect the requirements of the new standard.
Future Accounting Policy Changes
In February 2008, the Canadian Accounting Standards Board confirmed that Canadian generally accepted accounting principles ("Canadian GAAP") will be converged with International Financial Reporting Standards ("IFRS") for fiscal years commencing January 1, 2011. The transition from Canadian GAAP to IFRS will be applicable for the Company for the first quarter of 2011 when the Company will prepare both the current and comparative financial information using IFRS.
While IFRS uses a conceptual framework similar to Canadian GAAP, there are significant differences on recognition, measurement, and disclosures. The Company commenced its IFRS conversion project in 2008 with the provision of training to key employees. Early in 2009, the Company developed an implementation plan, assembled a cross functional team, provided additional technical training to team members and commenced a high level review of its financial statement elements to identify major differences between Canadian GAAP and IFRS. Additional team members were engaged in the second quarter and subject matter specialists were identified.
An initial diagnostic has been completed, and significant progress has been made on a detailed review of the impact of IFRS on Interfor's consolidated financial statements, expected to be complete by the end of 2009. As required, the Company is engaging outside consultants to provide expertise and assistance. As subject areas reach completion, recommendations are being brought forward to the Company Executive for discussion and approval prior to implementation.
Any changes required to systems and controls, including information technology systems, are being identified as the project progresses. Currently, it is not anticipated that significant changes to computer systems will be required.
An opening balance sheet prepared under IFRS at the date of transition, January 1, 2010, is currently planned to be completed in the first half of 2010. Financial statements and notes will be prepared for each quarter of 2010 to be used for comparative purposes in 2011.
While the effects of IFRS have not yet been fully determined, the Company has identified a number of key areas which are likely to be impacted by changes in accounting policy, including: property, plant, and equipment; logging roads and bridges; impairment of assets; provisions, including reforestation liabilities and asset retirement obligations; and employee future benefits.
Progress is on schedule.
Controls and Procedures
There were no changes in the Company's internal controls over financial reporting ("ICFR") during the quarter ended September 30, 2009 that have materially affected, or are reasonably likely to materially affect, the Company's ICFR.
Critical Accounting Estimates
There were no material changes to the Company's critical accounting estimates during the quarter ended September 30, 2009. For a full discussion of critical accounting estimates, please refer to the Company's discussion in its MD&A for the year ended December 31, 2008 as filed on SEDAR at www.sedar.com.
Outlook
World-wide financial markets have shown appreciable improvement over the last quarter, reflecting more encouraging economic news. The Dow Jones Industrial Average Index gained 15% over the quarter, while the TSX Index improved almost 10%. The quick rebound of late is partly a reflection of such temporary factors as government stimulus and the extent of the fall that has occurred over the past year. Most expect the pace of growth to start slowing.
Low mortgage rates, relatively attractive home prices and various tax incentives to spur housing activity are working to stabilize the downturn in existing home sales. Despite recent progress in financial markets, consumer confidence remains fairly low and unemployment high, leading consumers to proceed with caution. While financial market conditions have improved, credit availability will be constrained for some time to come, and will serve to limit the pace of recovery.
As a result, activity in the housing market remains well below normal with little prospect of any sustained or meaningful improvement in lumber demand in the near-term. Until there is sufficient improvement in the U.S. housing market, widespread capacity reductions are likely to continue in the industry to reduce oversupply of lumber. The volatility of the Canadian dollar also remains a concern.
In the face of weak demand and volatile currency, the Company will continue to maintain its disciplined approach to production, focus on managing the business for cash, ensure adequate liquidity is maintained and realize on the benefits of recent strategic activities and investments. All discretionary capital spending remains curtailed.
Additional Information
Additional information relating to the Company and its operations can be found on its website at www.interfor.com, in the 2008 Annual Report and on SEDAR at www.sedar.com. Interfor's trading symbol on the Toronto Stock Exchange is IFP.A.
E. Lawrence Sauder, Chairman
Duncan K. Davies, President and Chief Executive Officer
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended Sept. 30, 2009 and 2008 (unaudited)
---------------------------------------------------------------------------
(thousands of Canadian dollars 3 Months 3 Months 9 Months 9 Months
except earnings Sept.30, Sept.30, Sept.30, Sept.30,
per share) 2009 2008 2009 2008
---------------------------------------------------------------------------
(restated- (restated-
note 2) note 2)
Sales $ 105,169 $ 111,953 $ 264,271 $ 343,731
Costs and expenses:
Production 96,530 108,882 260,490 320,733
Selling and administration 3,984 4,309 12,683 13,313
Long term incentive compensation
expense (recovery) 716 (720) 1,707 (1,081)
Export taxes 1,047 998 2,418 3,114
Amortization of plant and equipment 6,128 5,868 17,289 16,901
Depletion and amortization of
timber, roads and other 3,789 5,419 8,363 16,207
---------------------------------------------------------------------------
112,194 124,756 302,950 369,187
---------------------------------------------------------------------------
Operating loss before restructuring
costs (7,025) (12,803) (38,679) (25,456)
Restructuring costs and asset
write-downs (note 10) (3,325) (1,269) (4,312) (34,101)
---------------------------------------------------------------------------
Operating loss (10,350) (14,072) (42,991) (59,557)
Interest expense on long-term debt (1,809) (1,324) (4,673) (2,542)
Other interest expense (431) (156) (1,169) (125)
Other foreign exchange gain 11 34 114 28
Other income (note 9) 21,723 604 22,352 1,163
Equity in earnings of investee
company 700 1,625 938 2,900
---------------------------------------------------------------------------
20,194 783 17,562 1,424
---------------------------------------------------------------------------
Earnings (loss) before income taxes 9,844 (13,289) (25,429) (58,133)
Income taxes (recovery):
Current 24 (5,416) 24 (12,856)
Future 100 245 (6,600) (8,582)
---------------------------------------------------------------------------
124 (5,171) (6,576) (21,438)
---------------------------------------------------------------------------
Net earnings (loss) $ 9,720 $ (8,118)$ (18,853) $ (36,695)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Net earnings (loss) per share,
basic and diluted (note 11) $ 0.21 $ (0.17)$ (0.40) $ (0.78)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
For the three and nine months ended Sept. 30, 2009 and 2008 (unaudited)
---------------------------------------------------------------------------
3 Months 3 Months 9 Months 9 Months
Sept.30, Sept.30, Sept.30, Sept.30,
(thousands of Canadian dollars) 2009 2008 2009 2008
---------------------------------------------------------------------------
(restated- (restated-
note 2) note 2)
Retained earnings, beginning of
period $ 84,175 $ 139,562 $ 112,748 $ 168,139
Net earnings (loss) 9,720 (8,118) (18,853) (36,695)
---------------------------------------------------------------------------
Retained earnings, end of period $ 93,895 $ 131,444 $ 93,895 $ 131,444
---------------------------------------------------------------------------
---------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three and nine months ended Sept. 30, 2009 and 2008 (unaudited)
---------------------------------------------------------------------------
3 Months 3 Months 9 Months 9 Months
Sept.30, Sept.30, Sept.30, Sept.30,
(thousands of Canadian dollars) 2009 2008 2009 2008
---------------------------------------------------------------------------
(restated- (restated-
note 2) note 2)
Cash provided by (used in):
Operating activities:
Net earnings (loss) $ 9,720 $ (8,118)$ (18,853) $ (36,695)
Items not involving cash:
Amortization of plant and
equipment 6,128 5,868 17,289 16,901
Depletion and amortization of
timber, roads and other 3,789 5,419 8,363 16,207
Future income taxes (recovery) 100 245 (6,600) (8,582)
Other assets 598 339 77 42
Reforestation liability 202 (1,161) 613 (3,752)
Other long-term liabilities 62 (576) 726 (692)
Share of earnings in excess of
cash distributions of investee
company (700) (1,625) (938) (2,900)
Write-down of plant and equipment
(note 10) 3,067 1,243 3,067 28,576
Unrealized foreign exchange
loss (gain) and other non-cash
items (4,644) 1,876 (5,764) 2,551
Other (note 9) (21,723) (627) (22,357) (1,249)
---------------------------------------------------------------------------
(3,401) 2,883 (24,377) 10,407
Cash generated from (used in)
operating working capital:
Accounts receivable (1,895) 4,808 1,828 6,001
Inventories 699 (3,531) 25,044 (281)
Prepaid expenses (2,449) (140) (368) (1,308)
Accounts payable and accrued
liabilities 6,523 (12,394) (867) 2,370
Income taxes - (5,481) 16,183 (854)
---------------------------------------------------------------------------
(523) (13,855) 17,443 16,335
Investing activities:
Additions to property, plant and
equipment (1,126) (20,199) (20,320) (45,810)
Additions to logging roads and
timber (2,125) (6,167) (3,238) (14,064)
Proceeds on disposal of
property, equipment, timber
and roads 32,075 1,110 36,659 1,975
Acquisitions - (34,511) - (83,929)
Deposit held in escrow for
acquisition - - - 8,943
Investments and other assets (126) (1,795) (866) (1,732)
---------------------------------------------------------------------------
28,698 (61,562) 12,235 (134,617)
Financing activities:
Issuance of share capital - 56 - 56
Increase (decrease) in bank
indebtedness, net (28,754) 4,716 (30,566) 5,398
Additions to long-term debt
(note 7(b)) 34,000 67,139 44,000 134,064
Repayments of long-term debt
(note 7(b)) (33,000) - (41,000) (38,925)
---------------------------------------------------------------------------
(27,754) 71,911 (27,566) 100,593
Foreign exchange loss on cash
and cash equivalents
held in a foreign currency (64) (44) (111) (106)
---------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents 357 (3,550) 2,001 (17,795)
Cash and cash equivalents,
beginning of period 1,828 3,550 184 17,795
---------------------------------------------------------------------------
Cash and cash equivalents, end
of period $ 2,185 $ - $ 2,185 $ -
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Supplementary disclosures
Cash interest paid $ 2,240 $ 1,480 $ 5,842 $ 2,667
Cash income taxes paid
(received) 24 1,129 (16,155) (12,207)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
CONSOLIDATED BALANCE SHEETS
September 30, 2009 (unaudited) and December 31, 2008 (audited)
---------------------------------------------------------------------------
(thousands of Canadian dollars) Sept 30, Dec. 31,
2009 2008
---------------------------------------------------------------------------
(restated -
note 2)
Assets
Current assets:
Cash and cash equivalents $ 2,185 $ 184
Accounts receivable 22,196 25,441
Income taxes recoverable 41 16,225
Inventories (note 6) 52,305 78,991
Prepaid expenses 7,645 7,779
Future income taxes 2,944 2,890
---------------------------------------------------------------------------
87,316 131,510
Investments and other assets (note 5) 16,859 19,372
Property, plant and equipment, net of accumulated
amortization 367,147 395,727
Timber tenures, net of accumulated depletion 67,490 69,827
Logging roads and bridges, net of accumulated
amortization 17,239 20,598
Goodwill and other intangible assets 13,078 13,078
Long-lived assets held for sale 3,424 15,138
---------------------------------------------------------------------------
$ 572,553 $ 665,250
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Bank indebtedness (note 7(a)) $ 23 $ 30,589
Accounts payable and accrued liabilities 40,207 45,163
Payable to investee company (note 5) - 3,651
Principal due within one year on long-term debt
(note 7(b)) 37,475 -
---------------------------------------------------------------------------
77,705 79,403
Reforestation liability, net of current portion 16,298 15,685
Long-term debt (note 7(b)) 93,335 137,414
Other long-term liabilities 13,133 12,407
Future income taxes 6,461 14,159
Shareholders' equity:
Share capital (note 8)
Class A subordinate voting shares 284,500 284,500
Class B common shares 4,080 4,080
Contributed surplus 5,408 5,408
Accumulated other comprehensive income (loss) (22,262) (554)
Retained earnings (note 2) 93,895 112,748
---------------------------------------------------------------------------
365,621 406,182
---------------------------------------------------------------------------
$ 572,553 $ 665,250
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Commitment and contingency (note 15)
See accompanying notes to consolidated financial statements
On behalf of the Board:
E.L. Sauder, Director
G.H. MacDougall, Director
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the three and nine months ended Sept. 30, 2009 and 2008 (unaudited)
---------------------------------------------------------------------------
3 Months 3 Months 9 Months 9 Months
Sept.30, Sept.30, Sept.30, Sept.30,
(thousands of Canadian dollars) 2009 2008 2009 2008
---------------------------------------------------------------------------
(restated- (restated-
note 2) note 2)
Net earnings (loss) $ 9,720 $ (8,118)$ (18,853) $ (36,695)
Other comprehensive income (loss):
Net change in unrealized foreign
currency translation gains
(losses) on translation of
self-sustaining foreign
subsidiaries (13,471) 8,251 (21,708) 12,480
---------------------------------------------------------------------------
Other comprehensive income (loss) (13,471) 8,251 (21,708) 12,480
---------------------------------------------------------------------------
Comprehensive income (loss) $ (3,751) $ 133 $ (40,561) $ (24,215)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
For the three and nine months ended Sept. 30, 2009 and 2008 (unaudited)
---------------------------------------------------------------------------
3 Months 3 Months 9 Months 9 Months
Sept.30, Sept.30, Sept.30, Sept.30,
(thousands of Canadian dollars) 2009 2008 2009 2008
---------------------------------------------------------------------------
(restated- (restated-
note 2) note 2)
Accumulated other comprehensive
income (loss) beginning of period $ (8,791)$ (29,543)$ (554) $ (33,772)
Other comprehensive income (loss) (13,471) 8,251 (21,708) 12,480
---------------------------------------------------------------------------
Accumulated other comprehensive
loss, end of period $ (22,262)$ (21,292)$ (22,262) $ (21,292)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
INTERNATIONAL FOREST PRODUCTS LIMITED
Notes to Unaudited Interim Consolidated Financial Statements
(Tabular amounts expressed in thousands except per share amounts)
Three and nine months ended September 30, 2009 and 2008 (unaudited)
1. Significant accounting policies:
These unaudited interim consolidated financial statements include the accounts of International Forest Products Limited and its subsidiaries (collectively referred to as "Interfor" or the "Company"). These interim consolidated financial statements do not include all disclosures required by Canadian generally accepted accounting principles for annual financial statements, and accordingly, these interim consolidated financial statements should be read in conjunction with Interfor's most recent annual consolidated financial statements. These interim consolidated financial statements follow the same accounting policies and methods of application used in the Company's audited annual consolidated financial statements as at and for the year ended December 31, 2008, except for the new accounting policy adopted subsequent to that date, as discussed in Note 2.
2. Adoption of changes in accounting policies:
Effective January 1, 2009, the Company adopted the new Canadian Institute of Chartered Accountants ("CICA") Handbook Section 3064, Goodwill and Intangible Assets on a retrospective basis. This section replaces CICA Handbook Section 3062, Goodwill and Intangible Assets, and establishes revised standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets. The new standard also provides guidance for the treatment of various preproduction and start-up costs and requires that these costs be expensed as incurred, with the concurrent withdrawal of CICA Emerging Issues Committee Abstract 27 ("EIC 27").
The Company previously deferred start-up costs on major plant construction to the extent these costs met the criteria under EIC 27 and the site met sustainable production levels defined as the earlier of:
(a) Seventy percent of production capacity for two consecutive months; or
(b) Six months
and to a maximum of twenty percent of the total project.
Start-up costs were amortized over five years on a straight-line basis.
The following changes to historical financial statements have been made to reflect the new policy:
---------------------------------------------------------------------------
As
previously Adjust- As
reported ment adjusted
---------------------------------------------------------------------------
Consolidated Statement of Operations for
the three months ended September 30, 2008:
Amortization of plant and equipment $ 5,910 $ (42) $ 5,868
Restructuring costs 1,269 - 1,269
Future income tax expense (recovery) 231 14 245
Net loss 8,146 (28) 8,118
Net loss per share, basic and diluted (0.17) - (0.17)
Consolidated Statement of Operations for
the nine months ended September 30, 2008:
Amortization of plant and equipment $ 17,362 $ (461) $ 16,901
Restructuring costs 36,518 (2,417) 34,101
Future income tax expense (recovery) (9,494) 912 (8,582)
Net loss 38,661 (1,966) 36,695
Net loss per share, basic and diluted (0.82) 0.04 (0.78)
Consolidated Statement of Retained Earnings
for the three months ended September 30, 2008:
Retained earnings, beginning 140,069 (507) 139,562
Retained earnings, ending 131,923 (479) 131,444
Consolidated Statement of Retained Earnings
for the nine months ended September 30, 2008:
Retained earnings, beginning 170,584 (2,445) 168,139
Retained earnings, ending 131,923 (479) 131,444
Consolidated Balance Sheet as at
December 31, 2008:
Property, plant and equipment, net of
accumulated amortization 396,387 (660) 395,727
Accumulated other comprehensive loss 539 15
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