Canfor Corporation Announces 2019 and Fourth Quarter 2019 Results

• 2019 reported operating loss of $294 million; adjusted operating loss of $92 million; shareholder net loss of $263 million, or $2.10 per share
• Fourth quarter of 2019 reported operating loss of $60 million; adjusted operating loss of $33 million; shareholder net loss of $39 million, or $0.31 per share

In contrast to the record-high lumber and pulp prices seen in 2018, weaker than anticipated global lumber and pulp demand for much of 2019 in combination with excess inventory levels gave rise to a sharp drop in market pricing for both lumber and pulp products in the current year. The deterioration in market conditions, in combination with ongoing fibre supply challenges and significant log cost increases in British Columbia (“BC”) resulted in extensive temporary and permanent sawmill curtailments across BC, as well as summer curtailments at Canfor Pulp. On a more positive note, 2019 marked a year of transformational global diversification for Canfor with the acquisition of 70% of the Vida Group (“Vida”) in early 2019, and the Company’s continuing expansion in the US South, including the acquisition of Elliott Sawmilling Co., LLC (“Elliott”). For the 2019 year, the Company reported an operating loss of $294.3 million and a net loss of $2.10 per share, in sharp contrast to operating income of $608.6 million and net income of $2.78 per share reported for the year ended December 31, 2018.

For the fourth quarter of 2019, the Company reported an operating loss of $59.6 million, halving the operating loss of $120.3 million for the third quarter of 2019. These results reflected improved earnings in the lumber and pulp and paper segments as global lumber and pulp markets showed signs of bottoming out through the current quarter and supply and demand fundamentals improved at the end of the year.

Reported results for the fourth quarter of 2019 include a net duty expense of $43.7 million, at a current cumulative effective countervailing duty (“CVD”) and anti-dumping duty (“ADD”) accrual rate of 29.24% (versus a combined cash deposit rate of 20.52%), compared to $53.5 million reported in the third quarter of 2019 at the same combined rate. Cumulative cash deposits paid to December 31, 2019 were $421.4 million.

In early 2020, the US Department of Commerce (“DOC”) announced the preliminary results for the first period of review, which indicated that the Company’s preliminary CVD cash deposit rate was 2.93% for 2017 and 2.61% for 2018 (versus a cash deposit rate of 13.24%), while the preliminary ADD cash deposit rate was 2.02% for the entire first period of review (versus a cash deposit rate of 7.28% and an estimated accrual rate of 2.6%). Upon finalization of these rates (anticipated in the third quarter of 2020), an additional recovery, estimated at $140.6 million (US$105.7 million), will be recognized in the Company’s consolidated financial statements to reflect the difference between the combined accrual rate of 15.84% and DOC rates for the first period of review. In addition, once final, the Company’s current combined cash deposit rate of 20.52% will be reset to the DOC rates based on the first period of review (currently estimated to be 4.63% based on the preliminary determination). Despite the reduced preliminary rates for the first period of review, no cash duties will be refunded to the Company until such time as the litigation regarding the imposition of CVD and ADD has been settled.

Reported results in the fourth quarter of 2019 also include a net $19.9 million recovery in inventory write-down provisions and restructuring, mill closure and severance costs costs of $3.3 million.

Adjusted operating income for the lumber segment for the fourth quarter of 2019 primarily reflected solid results from the Company’s European Spruce/Pine/Fir (“SPF”) operations, offset in part, by a more challenging quarter for the Company’s US South operations, largely a result of seasonally weaker prices across most grades and the impact of capital related downtime at several of its sawmills. The Company’s Western Canadian operations continued to be impacted by prolonged market-related challenges despite a modest upward trend in Western Spruce/Pine/Fir (“Western SPF”) benchmark lumber prices, taking a further 115 million board feet of temporary production curtailments in that operating region during the current quarter.

Results for the fourth quarter of 2019 in the pulp and paper segment principally reflected higher pulp shipments and lower pulp unit manufacturing costs, both factors largely attributable to increased production at Canfor Pulp Products Inc.’s (“CPPI”) Northern Bleached Softwood Kraft (“NBSK”) pulp and Bleached Chemi-Thermo Mechanical Pulp (“BCTMP”) mills, following market-related pulp mill curtailments throughout the prior quarter. To a lesser degree, results also reflected modestly lower NBSK pulp unit sales realizations in the current quarter.
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