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Canfor Pulp Products Inc. — Interim / Quarterly Report 2021
Jul 30, 2021
46691_rns_2021-07-29_07cf7e10-fbac-4e70-a994-0954a8ea0f9e.pdf
Interim / Quarterly Report
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2021 QUARTER TWO FINANCIAL STATEMENTS
CANFOR PULP PRODUCTS INC.
Canfor Pulp Products Inc. Condensed Consolidated Balance Sheets
| As at | As at | ||||
|---|---|---|---|---|---|
| June 30, | December 31, | ||||
| (millions ofCanadiandollars, unaudited) | 2021 | 2020 | |||
| ASSETS | |||||
| Current assets | |||||
| Cash and cash equivalents | $ | 36.1 | $ | 6.8 | |
| Accounts receivable | - Trade | 93.9 | 64.3 | ||
| - Other | 12.1 | 13.6 | |||
| Income taxes receivable | 23.9 | 26.0 | |||
| Inventories (Note 2) | 227.3 | 188.5 | |||
| Prepaid expenses and | other | 11.0 | 18.6 | ||
| Total current assets | 404.3 | 317.8 | |||
| Property, plant and | equipment and intangible assets | 571.7 | 594.5 | ||
| Right-of-use assets | 2.3 | 2.0 | |||
| Other long-term assets | 3.1 | 6.5 | |||
| Total assets | $ | 981.4 | $ | 920.8 | |
| LIABILITIES | |||||
| Current liabilities | |||||
| Accounts payable and | accrued liabilities | $ | 165.8 | $ | 161.6 |
| Currentportion of lease obligations | 1.1 | 1.0 | |||
| Total current liabilities | 166.9 | 162.6 | |||
| Term debt(Note 3(b)) | 50.0 | 50.0 | |||
| Retirement benefit | obligations(Note 4) | 67.1 | 70.4 | ||
| Lease obligations | 1.8 | 1.5 | |||
| Other long-term provisions | 8.2 | 8.7 | |||
| Deferred income taxes, net | 107.6 | 95.1 | |||
| Total liabilities | $ | 401.6 | $ | 388.3 | |
| EQUITY | |||||
| Share capital | $ | 480.8 | $ | 480.8 | |
| Retained earnings | 99.0 | 51.7 | |||
| Total equity | $ | 579.8 | $ | 532.5 | |
| Total liabilities and | equity | $ | 981.4 | $ | 920.8 |
Contingencies (Note 11)
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
APPROVED BY THE BOARD
“S.E. Bracken-Horrocks”
Director, S.E. Bracken-Horrocks
“The Hon. J.R. Baird”
Director, The Hon. J.R. Baird
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Canfor Pulp Products Inc. Condensed Consolidated Statements of Income (Loss)
| 3 months ended | 3 months ended | June 30, | 6 months | ended | June 30, | |||
|---|---|---|---|---|---|---|---|---|
| (millions of Canadian dollars, except per share data, unaudited) | 2021 | 2020 | 2021 | 2020 | ||||
| Sales | $ | 334.3 | $ | 250.7 | $ | 596.7 | $ | 526.3 |
| Costs and expenses | ||||||||
| Manufacturing and product costs | 217.7 | 199.4 | 413.4 | 403.5 | ||||
| Freight and other distribution costs | 36.6 | 33.0 | 71.1 | 71.3 | ||||
| Amortization | 21.9 | 19.6 | 42.7 | 41.2 | ||||
| Sellingand administration costs | 7.1 | 5.0 | 13.6 | 10.5 | ||||
| 283.3 | 257.0 | 540.8 | 526.5 | |||||
| Operating income (loss) | 51.0 | (6.3) | 55.9 | (0.2) | ||||
| Finance expense, net | (1.2) | (1.3) | (2.4) | (2.9) | ||||
| Other income(expense),net(Note 10) | (0.1) | 6.2 | 7.6 | 11.1 | ||||
| Net income (loss) before income taxes | 49.7 | (1.4) | 61.1 | 8.0 | ||||
| Income tax recovery (expense) (Note 5) | (13.5) | 0.3 | (16.5) | (2.1) | ||||
| Net income (loss) | $ | 36.2 | $ | (1.1) | $ | 44.6 | $ | 5.9 |
| Net income (loss) per common share:(in Canadian dollars) | ||||||||
| Attributable to equity shareholders of the Company | ||||||||
| - Basic and diluted(Note 6) |
$ | 0.55 | $ | (0.02) | $ | 0.68 | $ | 0.09 |
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
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Canfor Pulp Products Inc.
Condensed Consolidated Statements of Other Comprehensive Income (Loss)
| 3 months | ended | June 30, | 6 months | ended | June 30, | |||
|---|---|---|---|---|---|---|---|---|
| (millions of Canadian dollars, unaudited) | 2021 | 2020 | 2021 | 2020 | ||||
| Net income (loss) | $ | 36.2 | $ | (1.1) | $ | 44.6 | $ | 5.9 |
| Other comprehensive income (loss) | ||||||||
| Items that will not be reclassified subsequently to net income (loss): | ||||||||
| Defined benefit plan actuarial gains (losses), net (Note 4) | (2.9) | (6.5) | 3.7 | (1.2) | ||||
| Income tax recovery (expense) on defined benefit plan | ||||||||
| actuarialgains(losses),net(Note 5) | 0.8 | 1.7 | (1.0) | 0.3 | ||||
| Other comprehensive income(loss),net of tax | (2.1) | (4.8) | 2.7 | (0.9) | ||||
| Total comprehensive income(loss) | $ | 34.1 | $ | (5.9) | $ | 47.3 | $ | 5.0 |
Condensed Consolidated Statements of Changes in Equity
| 3 months | ended | June 30, | 6 months | ended | June 30, | |||
|---|---|---|---|---|---|---|---|---|
| (millions of Canadian dollars, unaudited) | 2021 | 2020 | 2021 | 2020 | ||||
| Share capital | ||||||||
| Balance at beginningand end ofperiod | $ | 480.8 | $ | 480.8 | $ | 480.8 | $ | 480.8 |
| Retained earnings | ||||||||
| Balance at beginning of period | $ | 64.9 | $ | 84.3 | $ | 51.7 | $ | 77.5 |
| Net income (loss) | 36.2 | (1.1) | 44.6 | 5.9 | ||||
| Defined benefit plan actuarial gains (losses), net of tax | (2.1) | (4.8) | 2.7 | (0.9) | ||||
| Dividends declared | - | - | - | (4.1) | ||||
| Balance at end ofperiod | $ | 99.0 | $ | 78.4 | $ | 99.0 | $ | 78.4 |
| Total equity | $ | 579.8 | $ | 559.2 | $ | 579.8 | $ | 559.2 |
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
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Canfor Pulp Products Inc. Condensed Consolidated Statements of Cash Flows
| 3 months ended | 3 months ended | June 30, | 6 months | ended | June 30, | |||
|---|---|---|---|---|---|---|---|---|
| (millions of Canadian dollars, unaudited) | 2021 | 2020 | 2021 | 2020 | ||||
| Cash generated from (used in): | ||||||||
| Operating activities | ||||||||
| Net income (loss) | $ | 36.2 | $ | (1.1) | $ | 44.6 | $ | 5.9 |
| Items not affecting cash: | ||||||||
| Amortization | 21.9 | 19.6 | 42.7 | 41.2 | ||||
| Income tax expense (recovery) (Note 5) | 13.5 | (0.3) | 16.5 | 2.1 | ||||
| Employee future benefits expense | 0.9 | 1.0 | 1.7 | 1.9 | ||||
| Finance expense, net | 1.2 | 1.3 | 2.4 | 2.9 | ||||
| Other, net | 0.1 | (0.4) | (0.2) | 0.3 | ||||
| Defined benefit plan contributions, net | (0.9) | (1.0) | (2.0) | (2.4) | ||||
| Income taxesreceived,net | 0.3 | - | - | 29.3 | ||||
| 73.2 | 19.1 | 105.7 | 81.2 | |||||
| Net change in non-cash working capital (Note 7) | (11.0) | 42.8 | (26.2) | 20.2 | ||||
| 62.2 | 61.9 | 79.5 | 101.4 | |||||
| Financing activities | ||||||||
| Payment of lease obligations | (0.2) | (0.1) | (0.4) | (0.4) | ||||
| Operating loan repayments, net (Note 3(a)) | (15.0) | (11.0) | - | (14.0) | ||||
| Finance expenses paid | (0.7) | (0.7) | (1.4) | (2.1) | ||||
| Dividends paid | - | - | - | (4.1) | ||||
| (15.9) | (11.8) | (1.8) | (20.6) | |||||
| Investing activities | ||||||||
| Additions to property, plant and equipment and intangible assets, net | (15.4) | (12.2) | (48.4) | (31.0) | ||||
| Other,net | - | 0.1 | - | 0.2 | ||||
| (15.4) | (12.1) | (48.4) | (30.8) | |||||
| Increase in cash and cash equivalents* | 30.9 | 38.0 | 29.3 | 50.0 | ||||
| Cash and cash equivalents at beginningofperiod* | 5.2 | 18.0 | 6.8 | 6.0 | ||||
| Cash and cash equivalents at end ofperiod* | $ | 36.1 | $ | 56.0 | $ | 36.1 | $ | 56.0 |
*Cash and cash equivalents include cash on hand less unpresented cheques.
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
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Canfor Pulp Products Inc. Notes to the Condensed Consolidated Financial Statements
Three and six months ended June 30, 2021 and 2020
(millions of Canadian dollars unless otherwise noted, unaudited)
1. Basis of Preparation
These condensed consolidated interim financial statements (the “financial statements”) have been prepared in accordance with International Accounting Standards (“IAS”) 34 Interim Financial Reporting, and include the accounts of Canfor Pulp Products Inc. and its subsidiaries, hereinafter referred to as “CPPI” or “the Company.” At June 30, 2021 and July 29, 2021, Canfor Corporation (“Canfor”) held a 54.8% interest in CPPI.
These financial statements do not include all of the disclosures required by International Financial Reporting Standards (“IFRS”) for annual financial statements. Additional disclosures relevant to the understanding of these financial statements, including the accounting policies applied, can be found in the Company’s Annual Report for the year ended December 31, 2020, available at www.canfor.com or www.sedar.com.
Certain comparative amounts for the prior period have been reclassified to conform to the current period’s presentation.
These financial statements were authorized for issue by the Company’s Board of Directors on July 29, 2021.
Change in Accounting Policy
Effective January 1, 2021, the Company has adopted amendments to IFRS 9 Financial Instruments, IAS 39 Financial Instruments: Recognition and Measurement, IFRS 7 Financial Instruments: Disclosures, and IFRS 16 Leases, Interest Rate Benchmark Reform – Phase 2 (“Phase 2”) as issued in August 2020. Phase 2 of the amendments required financial instruments measured using amortized cost to be adjusted to reflect changes to the effective interest rate. For the Company, the adoption of Phase 2 is applicable to its non-revolving term debt and its committed operating loan facility, both of which have yet to transition to an alternative benchmark interest rate at June 30, 2021. As a result, there was no impact to the Company’s financial results upon adoption of Phase 2.
2. Inventories
| 2. Inventories |
||||
|---|---|---|---|---|
| As at | As at | |||
| June 30, | December 31, | |||
| (millions of Canadian dollars, unaudited) | 2021 | 2020 | ||
| Pulp | $ | 87.6 | $ | 55.4 |
| Paper | 19.3 | 20.9 | ||
| Wood chips and logs | 65.1 | 57.2 | ||
| Materials and supplies | 55.3 | 55.0 | ||
| $ | 227.3 | $ | 188.5 |
The above inventory balances are stated at the lower of cost and net realizable value. For the three months ended June 30, 2021, no inventory valuation adjustment was recognized (six months ended June 30, 2021 – $2.2 million write-down recovery). For the three months ended June 30, 2020, an $8.2 million inventory write-down expense was recognized (six months ended June 30, 2020 – $2.5 million write-down recovery). At June 30, 2021, there is no inventory provision remaining for finished pulp and raw materials (December 31, 2020 – $2.2 million).
3. Operating Loan and Term Debt
(a) Available Operating Loan
| (a) Available Operating Loan |
||||
|---|---|---|---|---|
| As at | As at | |||
| June 30, | December 31, | |||
| (millions ofCanadiandollars, unaudited) | 2021 | 2020 | ||
| Operating loan facility | $ | 110.0 | $ | 110.0 |
| Letters of credit | (12.9) | (12.9) | ||
| Total available operatingloan facility | $ | 97.1 | $ | 97.1 |
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The terms of the Company’s operating loan facility include interest payable at floating rates that vary depending on the ratio of debt to total capitalization and is based on the lenders’ Canadian prime rate, bankers’ acceptances, USdollar base rate or US-dollar LIBOR rate, plus a margin.
The facility has certain financial covenants, including a maximum debt to total capitalization ratio. At June 30, 2021, the Company was fully in compliance with all covenants relating to its operating loan facility.
(b) Term Debt
The Company’s $50.0 million non-revolving term loan features similar financial covenants to the operating loan facility, including a maximum debt to total capitalization ratio. As at June 30, 2021, the Company was fully in compliance with all covenants relating to its term debt. The loan is repayable on September 30, 2022, with interest based on the lenders’ Canadian prime rate, bankers’ acceptances, US-dollar base rate or US-dollar LIBOR rate, plus a margin.
4. Employee Future Benefits
For the three months ended June 30, 2021, actuarial losses of $2.9 million (before tax) were recognized in other comprehensive income (loss), reflecting a lower discount rate used to value the net defined benefit obligations (comprised of defined benefit pension plans as well as other benefit plans), offset in part by a higher than anticipated return on plan assets. For the six months ended June 30, 2021, actuarial gains of $3.7 million (before tax) were recognized in other comprehensive income (loss).
For the three months ended June 30, 2020, actuarial losses of $6.5 million (before tax) were recognized in other comprehensive income (loss), reflecting a lower discount rate used to value the net defined benefit obligations, offset in part by a higher than anticipated return on plan assets. For the six months ended June 30, 2020, actuarial losses of $1.2 million (before tax) were recognized in other comprehensive income (loss).
The discount rate assumptions used to estimate the changes in net retirement benefit obligations were as follows:
| Defined Benefit | Other Benefit | |
|---|---|---|
| Pension Plans | Plans | |
| June 30, 2021 | 3.0% | 3.0% |
| March 31, 2021 | 3.2% | 3.2% |
| December 31, 2020 | 2.7% | 2.7% |
| June 30, 2020 | 3.0% | 3.0% |
| March 31, 2020 | 3.7% | 3.7% |
| December 31,2019 | 3.0% | 3.0% |
5. Income Taxes
The components of income tax recovery (expense) are as follows:
| The components of income tax recovery (expense) are as follows: | ||||||||
|---|---|---|---|---|---|---|---|---|
| 3 | months ended June 30, | 6 months ended June 30, | ||||||
| (millions ofCanadiandollars, unaudited) | 2021 | 2020 | 2021 | 2020 | ||||
| Current | $ | (6.8) | $ | 1.4 | $ | (5.0) | $ | - |
| Deferred | (6.7) | (1.1) | (11.5) | (2.1) | ||||
| Income tax recovery (expense) | $ | (13.5) | $ | 0.3 | $ | (16.5) | $ | (2.1) |
| The reconciliation of income taxes calculated at the statutory rate to the actual income tax provision is as follows: | ||||||||
| 3 | months ended June 30, | 6 months ended June 30, | ||||||
| (millions ofCanadiandollars, unaudited) | 2021 | 2020 | 2021 | 2020 | ||||
| Income tax recovery (expense) at statutory rate of 27% (2020 – 27%) | $ | (13.4) | $ | 0.3 | $ | (16.5) | $ | (2.2) |
| Add: Entities with different income tax rates and other tax adjustments | (0.1) | - | - | 0.1 | ||||
| Income tax recovery (expense) | $ | (13.5) | $ | 0.3 | $ | (16.5) | $ | (2.1) |
In addition to the amounts recorded to net income (loss), a tax recovery of $0.8 million was recorded to other comprehensive income (loss) in relation to actuarial losses on the Company’s defined benefit plans for the three months ended June 30, 2021 (three months ended June 30, 2020 – recovery of $1.7 million). For the six months
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ended June 30, 2021, a tax expense of $1.0 million related to actuarial gains on the Company’s defined benefit plans was recorded to other comprehensive income (loss) (six months ended June 30, 2020 – recovery of $0.3 million related to actuarial losses).
6. Earnings (Loss) Per Common Share
Basic net income (loss) per common share is calculated by dividing the net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period.
| 3 months | ended June 30, | 6 months | ended June 30, | |
|---|---|---|---|---|
| 2021 | 2020 | 2021 | 2020 | |
| Weighted average number of common shares | 65,233,559 | 65,233,559 | 65,233,559 | 65,233,559 |
As at June 30, 2021 and July 29, 2021, there were 65,233,559 common shares of the Company outstanding and Canfor’s ownership interest in CPPI was 54.8%.
7. Net Change in Non-Cash Working Capital
| 3 months | ended | June 30, | 6 months | ended | June 30, | |||
|---|---|---|---|---|---|---|---|---|
| (millions of Canadian dollars,unaudited) | 2021 | 2020 | 2021 | 2020 | ||||
| Accounts receivable | $ | (14.3) | $ | 25.4 | $ | (25.7) | $ | 17.4 |
| Inventories | (20.7) | 6.7 | (38.8) | 1.3 | ||||
| Prepaid expenses and other | 6.2 | 8.3 | 8.1 | 3.6 | ||||
| Accountspayable and accrued liabilities | 17.8 | 2.4 | 30.2 | (2.1) | ||||
| Net change in non-cash workingcapital | $ | (11.0) | $ | 42.8 | $ | (26.2) | $ | 20.2 |
8. Segment Information
The Company has two reportable segments (pulp and paper), which operate as separate business units and represent separate product lines. Sales between the pulp and paper segments are accounted for at prices that approximate fair value. These include sales of slush pulp from the pulp segment to the paper segment.
| Elimination | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (millions of Canadian dollars,unaudited) | Pulp | Paper | Unallocated | Adjustment | Consolidated | |||||
| 3 months ended June 30, 2021 | ||||||||||
| Sales from contracts with customers | $ | 296.9 | $ | 37.4 | $ | - | $ | - | $ | 334.3 |
| Sales to other segments | 29.8 | - | - | (29.8) | - | |||||
| Operating income (loss) | 53.6 | 0.9 | (3.5) | - | 51.0 | |||||
| Amortization | 21.2 | 0.7 | - | - | 21.9 | |||||
| Capital expenditures1 | 15.1 | - | 0.3 | - | 15.4 | |||||
| 3 months ended June 30, 2020 | ||||||||||
| Sales from contracts with customers | $ | 205.8 | $ | 44.9 | $ | - | $ | - | $ | 250.7 |
| Sales to other segments | 21.3 | - | - | (21.3) | - | |||||
| Operating income (loss) | (12.0) | 7.4 | (1.7) | - | (6.3) | |||||
| Amortization | 18.9 | 0.7 | - | - | 19.6 | |||||
| Capital expenditures1 | 11.6 | 0.4 | 0.2 | - | 12.2 | |||||
| 6 months ended June 30, 2021 | ||||||||||
| Sales from contracts with customers | $ | 516.7 | $ | 80.0 | $ | - | $ | - | $ | 596.7 |
| Sales to other segments | 49.6 | - | - | (49.6) | - | |||||
| Operating income (loss) | 57.3 | 5.1 | (6.5) | - | 55.9 | |||||
| Amortization | 41.3 | 1.4 | - | - | 42.7 | |||||
| Capital expenditures1 | 47.6 | - | 0.8 | - | 48.4 | |||||
| Identifiable assets | 851.7 | 55.0 | 74.7 | - | 981.4 |
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| Elimination | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| (millions of Canadian dollars,unaudited) | Pulp | Paper | Unallocated | Adjustment | Consolidated | ||||
| 6 months ended June 30, 2020 | |||||||||
| Sales from contracts with customers | $ | 438.9 $ | 87.4 | $ | - | $ | - | $ | 526.3 |
| Sales to other segments | 38.9 |
- | - | (38.9) | - | ||||
| Operating income (loss) | (10.9) | 14.2 | (3.5) | - | (0.2) | ||||
| Amortization | 39.8 | 1.4 | - | - | 41.2 | ||||
| Capital expenditures1 | 29.3 | 1.3 | 0.4 | - | 31.0 | ||||
| Identifiable assets | 767.6 | 64.4 | 67.0 | - | 899.0 |
1Capital expenditures represent cash paid for capital assets during the periods and include capital expenditures that were partially financed by government grants.
Geographic Information
CPPI’s products are marketed worldwide, with sales made to customers in a number of different countries. In presenting information on the basis of geographical location, sales are based on the geographical location of customers.
| (millions ofCanadiandollars, unaudited) | 3 months ended June 30, 2021 2020 |
3 months ended June 30, 2021 2020 |
6 months ended June 30, 2021 2020 |
|---|---|---|---|
| Sales by location of customer Canada 4% $ Asia 73% United States 18% Europe 3% Other 2% |
15.3 8% $ 242.7 61% 58.8 24% 9.1 4% 8.4 3% |
19.3 6% $ 152.3 70% 61.1 18% 9.8 3% 8.2 3% |
36.7 8% $ 43.9 417.1 60% 315.2 108.4 25% 129.0 19.5 4% 20.7 15.0 3% 17.5 |
| 100% $ |
334.3 100% $ |
250.7 100% **$ ** |
596.7 100% $ 526.3 |
9. Related Party Transactions
For the six months ended June 30, 2021, the Company depended on Canfor to provide approximately 62% (six months ended June 30, 2020 – 67%) of its fibre supply as well as certain key business and administrative services. As a result of these relationships, the Company considers its operations to be dependent on its ongoing relationship with Canfor. The transactions with Canfor are consistent with the transactions described in the December 31, 2020 audited consolidated financial statements of CPPI and are based on agreed-upon amounts between the parties.
Transactions with and amounts payable to Canfor include purchases of wood chips, logs, hog fuel and administrative services. These are summarized below:
| services. These are summarized below: | ||||||||
|---|---|---|---|---|---|---|---|---|
| 3 months | ended | June 30, | 6 months | ended | June 30, | |||
| (millions of Canadian dollars,unaudited) | 2021 | 2020 | 2021 | 2020 | ||||
| Transactions | ||||||||
| Purchase of wood chips and other | $ | 61.9 | $ | 54.2 | $ | 112.9 | $ |
118.4 |
| As at | As at | |||||||
| June 30, | December31, |
|||||||
| (millions of Canadian dollars, unaudited) | 2021 | 2020 | ||||||
| Balance Sheet | ||||||||
| Included in accountspayable and accrued liabilities | $ | 25.7 | $ | 16.7 |
10. Other Income (Expense), Net
During the three and six months ended June 30, 2021, the Company received insurance proceeds of $0.5 million and – $8.8 million, respectively (three and six months ended June 30, 2020 $8.9 million and $10.0 million, respectively) related to Northwood pulp mill’s number five recovery boiler (“RB5”) outage in 2018, included as a component of ‘Other income (expense), net’ on the condensed consolidated statement of income (loss).
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11. Contingencies
On March 11, 2020, the World Health Organization declared the coronavirus (“COVID-19”) outbreak a pandemic. Although there have been no adverse impacts of COVID-19 on the Company in the second quarter of 2021, Management continues to closely monitor its effects on the Company’s operating plan, liquidity, cash flows, and the valuation of its long-lived assets.
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