Interfor posts Q2 net loss of C$5.3M, compared with loss of C$3.5M a year earlier, shipments to China drive majority of growth in lumber sales volume
August 5, 2011
– INTERNATIONAL FOREST PRODUCTS LIMITED ("Interfor" or the "Company") (TSX: IFP.A) reported a net loss of $5.3 million or $0.10 per share for the second quarter of 2011. Included in the Company's accounts for the quarter was the effect of unrecognized tax assets of $2.2 million and other one-time items of $0.2 million.
Excluding these items, Interfor recorded a net loss of $2.9 million or $0.05 per share compared to a net loss of $0.5 million or $0.01 per share in the immediately preceding quarter and a loss of $0.6 million or $0.01 per share in the second quarter of 2010.
Also included in the Company's accounts in the second quarter was a recovery of share-based compensation expense of $3.1 million or $0.06 per share compared with a provision of $3.5 million ($0.07 per share) in the first quarter and a recovery of $0.7 million ($0.01 per share) in the second quarter of 2010.
EBITDA for the quarter (adjusted to exclude one-time items and "other income") was $11.6 million, down $1.1 million from the first quarter and down $1.7 million from the second quarter of 2010.
Lumber production in the second quarter was 325 million board feet, down 7 million board feet versus the first quarter as log availability affected operating rates at a number of the Company's mills in the quarter. Sales volumes, including wholesale activities, increased 21 million board feet to 324 million board feet versus 313 million board feet in the first quarter.
Sales to China increased to 39% of the Company's non-wholesale shipments versus 28% in the first quarter as shipping capacity was added to address the issues which impacted shipments in the first quarter.
In the quarter, SPF 2X4 in the North American market was US$240, down US$56 versus the first quarter and Hem-Fir studs were down US$43. The drop in market price levels was compounded by the rising value of the C$ which averaged US$1.033 in the second quarter versus US$1.015 in the first quarter.
The compression of price spreads between higher grade products, standard framing lumber and utility and economy grades continued in the second quarter. The price of key Japanese grades increased 2-3% in the quarter while the price of certain cedar grades remained under pressure.
In the quarter, Interfor generated $11.9 million in cash from operations after changes in working capital, up $8.0 million versus the immediately preceding quarter. Capital spending in the quarter amounted to $11.6 million including $4.1 million on high return discretionary projects.
On April 8th, Interfor closed the bought deal equity issuance which had been announced March 18th. The transaction resulted in the issuance of 8,222,500 Class A Shares at a price of $7 per share for gross proceeds of $57.6 million (net $54.9 million).
Net debt closed the quarter at $93.1 million or 19% of invested capital versus $147.4 million or 30% of invested capital at the end of the first quarter.
Subsequent to the end of the second quarter Interfor entered into an agreement with the members of its banking syndicate to extend its credit facilities to July 2015. All other terms and conditions remain substantially unchanged except for a reduction in pricing.
Business conditions remain uncertain. Sovereign debt issues in Europe and the U.S. continue to impact financial markets and the value of the C$ while conditions in the U.S. housing market remain stagnant. Offshore activity levels remain strong although the impact of tighter credit conditions in China will need to be monitored going forward. Log prices in the U.S. Pacific Northwest have dropped in recent weeks, as pressure from offshore markets has lessened. Log costs in the B.C. Interior will benefit from increased activity levels over the balance of the year.
In the face of ongoing market uncertainty Interfor will continue to balance production rates against market demand; capital spending will be managed relative to cash flow.
On August 2nd, Interfor was notified by B.C. Hydro ("Hydro") that its proposal under Hydro's Phase 2 Power Call to construct a 20 MW power plant at Grand Forks was not successful. The Company is continuing to review options to upgrade the Grand Forks sawmill. A decision in that regard is expected later this year.
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 2010 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.
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, August 5, 2011 at 8:00 AM (Pacific Time) hosted by INTERNATIONAL FOREST PRODUCTS LIMITED for the purpose of reviewing the Company's release of its Second Quarter, 2011 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 August 19, 2011. The number to call is 1-866-245-6755 Passcode 963552.
International Forest Products Limited
Second Quarter Report
For the three and six months ended June 30, 2011
Management's Discussion and Analysis
Dated as of August 4, 2011
This Management's Discussion and Analysis ("MD&A") provides a review of Interfor's financial performance for the three and six months ended June 30, 2011 relative to 2010, the Company's financial condition and future prospects. The MD&A should be read in conjunction with the interim Condensed Consolidated Financial Statements for the three and six months ended June 30, 2011 and 2010 and for the three months ended March 31, 2011 and 2010, and Interfor's Annual Information Form, Consolidated Financial Statements and Annual MD&A for the years ended December 31, 2010 and 2009 filed on SEDAR at www.sedar.com. The financial information contained in this MD&A has been prepared in accordance with IAS 34 Interim Financial Reporting and International Financial Reporting Standards ("IFRS") except as noted herein. In this MD&A, reference is made to EBITDA and Adjusted EBITDA. EBITDA represents earnings before finance costs, taxes, depreciation, depletion, amortization, restructuring costs, other foreign exchange gains and losses, and write-downs of property, plant, equipment ("asset write-downs"). Adjusted EBITDA represents EBITDA adjusted for other income (expense) and other income of an associate company. 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 not a defined term under IFRS, 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.
This report contains forward-looking statements. Forward-looking statements are statements that address or discuss activities, events or developments that the Company expects or anticipates may occur in the future. Forward-looking statements are included in the description of areas which are likely to be impacted by the description of future cash flows and liquidity under the headings "Overview", "Income Taxes" and "Cash Flow and Financial Position"; changes in accounting policy under the heading "Accounting Policy Changes"; and in the description of economic conditions under the heading "Outlook". These forward-looking statements reflect management's current expectations and beliefs and are based on certain assumptions including assumptions as to general business and economic conditions in the U.S. and Canada, as well as other factors management believes are appropriate in the circumstances including, among others: product selling prices, raw material and operating costs, changes in foreign currency exchange rates, and other factors referenced herein. Such forward-looking statements are subject to risks and uncertainties and no assurance can be given that any of the events anticipated by such statements will occur or, if they do occur, what benefit the Company will derive from them. A number of factors could cause actual results, performance or developments to differ materially from those expressed or implied by such forward-looking statements, including those matters described herein and in Interfor's current Annual Information Form available on www.sedar.com. Accordingly, readers should exercise caution in relying upon forward-looking statements and the Company undertakes no obligation to publicly revise them to reflect subsequent events or circumstance, except as required by law.
Review of Operating Results
Interfor recorded a net loss of $5.3 million, or $0.10 per share for the second quarter of 2011 as compared to a net loss of $3.5 million, or $0.07 per share for the second quarter of 2010. For the first six months, 2011, the Company recorded a net loss of $7.0 million, or $0.14 per share as compared to a net loss of $7.4 million, or $0.16 per share for the first six months, 2010.
EBITDA and Adjusted EBITDA for the second quarter of 2011 were $11.6 million and $11.6 million, respectively, compared to $13.7 million and $13.3 million for the second quarter, 2010. EBITDA and Adjusted EBITDA for the first half of 2011 were $24.4 million and $24.3 million, respectively, compared to $23.7 million and $23.3 million for the same period in 2010.
For the second quarter, 2011 the Company's net loss before restructuring costs, foreign exchange gains (losses), other one-time items and the effect of unrecognized tax assets was $2.9 million, or $0.05 per share as compared to a net loss of $0.6 million, or $0.01 per share for the second quarter of 2010. The Company recorded a recovery of share-based incentive compensation of $3.1 million, or $0.06 per share in the second quarter, 2011 as compared to a recovery of $0.7 million, or $0.01 per share for the same period, 2010.
For the first six months, 2011 the Company's net loss before restructuring costs, foreign exchange gains (losses), other one-time items and the effect of unrecognized tax assets was $3.4 million, or $0.07 per share as compared to a net loss of $2.8 million, or $0.06 per share for the first half, 2010. The Company recorded an expense of share-based incentive compensation of $0.5 million, or $0.01 per share for the first six months, 2011 as compared to a recovery of $0.6 million, or $0.01 per share for the same period, 2010.
North American lumber demand continued to be weak through the first half of 2011 and buyers remained cautious. U.S. housing starts returned to the lowest levels since the downturn began in 2008. In addition, severe weather conditions through the West, Midwest and East coast of North America hampered building starts, transportation and seasonal buying resulting in lower sales volumes through the first six months.
The surge in export markets, particularly China, has helped to offset reductions in domestic demand and provided some stability for pricing. In the second quarter, 2011 North American prices dropped with the average price reported by Random Lengths for Western SPF 2x4 #2&Btr reaching a low of US$227 in May 2011, a decline of US$65 from March 2011. Lower domestic prices impacted export pricing as well, particularly as China's consumption slowed toward the end of the quarter.
Results have also been impacted by a stronger Canadian dollar which, relative to its U.S. counterpart appreciated by 6% on average for both the second quarter, 2011 and for the six months, 2011 as compared to the same periods of 2010.
On April 8, 2011 the Company closed a public offering of 8,222,500 Class A Subordinate Voting shares at a price of $7.00 per share for gross proceeds of $57.6 million. For full details of the Offering see the short form prospectus filed on March 31, 2011 on www.sedar.com.
The Company's results are now being prepared in accordance with International Financial Reporting Standards ("IFRS"). Several of the Company's accounting policies have changed and the presentation, financial statement captions and terminology used in this discussion and the accompanying unaudited financial statements may differ from that used in previously issued financial statements and quarterly and annual reports. The new policies have been consistently applied to all of the quarters presented and comparative information has been restated or reclassified unless otherwise noted. Further details on the conversion to IFRS are provided in the First Quarter Report for the three months ended March 31, 2011 in the Management's Discussion and Analysis under "Accounting Policy Changes" and in the notes to the Condensed Consolidated Unaudited Financial Statements as at and for the three months ended March 31, 2011 filed on www.sedar.com.
Lumber shipments improved by 65 million board feet for the second quarter, 2011, up 24% over the same quarter, 2010 and by 114 million board feet for the first half, 2011, up 21% over the first half, 2010. Increases reflect the impact of strong export demand. Shipments were challenged by weather-related logistical issues during the first quarter, 2011 but delays associated with railcar, truck and container availability did not impact the second quarter, 2011.
In the second quarter, 2011 shipments to China surpassed shipments to the U.S. and for the first half, 2011 shipments to China more than tripled those for the same period, 2010, driving the majority of growth in lumber sales volume. North American shipments declined almost 10% for the first half, 2011 as compared to 2010, as the protracted downturn continued to impact demand.
Relative to the same periods in 2010, unit lumber sales values declined by $58 per mfbm, or 13% for the second quarter, 2011 and by $22 per mfbm, or 5% for the first half, 2011.
2010 saw a rapid surge in lumber prices in the first four months with North American structural lumber prices peaking in April 2010. Industry-wide production curtailments in place through early 2010 resulted in inadequate inventories to meet an uptick in demand caused by government spending incentives and a slight upward movement in U.S. housing starts. As producers ramped up supply, production quickly outpaced demand bringing the market back into a position of excess supply and by the end of the first half, 2010 lumber prices were falling rapidly.
In the first quarter, 2011 high export demand helped bolster North American prices. In the second quarter, with reports of U.S. housing starts returning to the lowest levels since the downturn began in 2008 and an exceptionally long and harsh winter, demand faded and prices dropped. The decline in domestic prices impacted export prices in China as well, particularly as China entered a seasonal slowdown in consumption.
Unit sales values were further impacted, though to a lesser extent, by the change in sales mix away from higher value cedar products and a decline in cedar prices in 2011 as compared to 2010. The stronger Canadian dollar also negatively affected sales returns.
In comparison to the same periods of 2010, pulp chip and other by-product revenues improved by $3.4 million for the second quarter of 2011 and $6.7 million for the first half, 2011, up by over 25% and corresponding to higher lumber production levels. Average chip prices improved by 17% in the second quarter, 2011 and 9% in the first half, 2011 as compared to the same periods, 2010, due to increasing prices in the pulp markets. Increased prices in the U.S. sawmills were offset by the stronger Canadian dollar on translation.
Compared to the same period, 2010, log sales improved by 45% or $8.8 million and by 33% or $12.3 million for the second quarter and first half, 2011 respectively. An increase of 20% in Canadian log sales volume in the second quarter, 2011 and 23% year-to-date relative to the same periods, 2010 reflects the impact of increased domestic demand for fibre, but is driven primarily by the considerable demand for logs from export markets. On the B.C. Coast, export log sales volume increased by 75% in the second quarter, 2011, and more than doubled in the first half, 2011 as compared to 2010.
The increase in export log shipments is reflected as well in the average sale price for log sales in B.C. In the second quarter, 2011 a shift in sales mix towards much higher value export logs as well as an increase of over 40% in sales realizations on export logs over the same period in 2010 resulted in an improvement of 21% to $82 per cubic metre. In the first half, 2011 the impact of the shift in sales mix and increases in sales realizations over 2010 were tempered somewhat by sales in the first quarter, 2011 of smaller, lower value logs in the B.C. Interior as reflected in a smaller 9% increase to $72 per cubic metre.
Production costs for the second quarter of 2011 increased $31.0 million, or 22%, and $62.0 million, or 23%, for the first half of 2011, compared to the same periods in 2010.
Lumber production increased by 48 million board feet, or 17% in the second quarter, 2011 and by 122 million board feet, or 23% in the first half, 2011 as compared to the same periods of 2010. This was driven by increased operating rates in the U.S. Pacific Northwest and B.C. Interior divisions, particularly the Castlegar sawmill, which had been curtailed in the first half, 2010 and operated throughout the first half, 2011. Lumber production on the B.C. Coast was impeded in 2011 by the availability of logs as a result of reduced logging activity on the B.C. Coast in the first quarter, 2011 due in part to access issues caused by storm damage in late 2010.
Compared to the same period in 2010, B.C. log production grew by 27% to 796,000 cubic metres from 624,000 cubic metres in the second quarter, 2011 and by 27% to 1.6 million cubic metres from 1.3 million cubic metres for the first half, 2011. Increased logging activity on the B.C. Coast resulted in a 30% increase in log production in the second quarter, 2011 as compared to 2010 as the Company sought to catch up lost production due to storm related reductions and to take advantage of strong export markets. For the first half, 2011 this was coupled with significant increases in B.C. Interior logging resulting from increased fibre demands to meet increased operating rates and seasonality.
Unit cash conversion costs declined on average by 10%, quarter-over-quarter as compared to 2010 and by 9% for the first half, 2011 as compared to the first half, 2010. Increased per unit conversion costs resulting from reduced activity on the B.C. Coast were offset by improved unit costs in the U.S. sawmills as their increased production volumes drove down the Company's per unit cost of conversion. Unit costs for the U.S. sawmills were further improved by a stronger Canadian dollar on average for 2011 as compared to the periods in 2010.
As a result of strong export markets for logs in the U.S. Pacific Northwest, fibre supply remains tight and resulted in increases in log costs for the U.S. sawmills who source their logs through purchase and timber sale agreements. Competition for logs has increased their U.S.$ log costs by 9%, quarter-over-quarter, and 13%, year-over-year as compared to the second quarter and first half, 2010. The impact of the increased log costs for the U.S. operations was slightly mitigated by the stronger Canadian dollar.
In June, 2011 the Company finalized an insurance claim as compensation for lost profits and reimbursement of costs resulting from storm damage on the B.C. Coast which occurred in the late fall, 2010. The Company recorded $0.5 million in the second quarter, 2011 and $2.7 million for the first half, 2011. The diminished ability to log in storm damaged areas reduced the logs available for external sales and resulted in downtime for the B.C. Coastal sawmills and consequently, the insurance proceeds were netted against production costs.
Export taxes for the second quarter, 2011 increased by $0.4 million, or 31% over the second quarter, 2010 despite the drop in Canadian shipment volumes to the U.S. by almost a third over the same period. For the first half, 2011, export taxes increased $0.9 million, or 30% as compared to the same period, 2010 although there was a slight year-over-year decline in Canadian shipment volumes to the U.S.
Higher commodity lumber prices in the second quarter, 2010 drove export tax rates down from 15% to 10% on May 1, 2010, and from 10% to 0% on June 1, 2010. The decline in export tax rates prompted a surge in Canadian shipments to the U.S. in the second quarter, 2010 to take advantage of the lower or no export taxes. Export tax rates for 2011 remained constant at 15%.
Relative to the same periods of 2010, selling and administrative costs increased by $1.0 million and $1.8 million for the second quarter and first half, 2011 respectively. Increased staffing, particularly in selling and export market administration was the main contributor to the increased costs.
Long-term incentive compensation ("LTIC") expense, which reflects changes in the estimated fair value of the share-based compensation plans was a recovery of $3.1 million for the second quarter, 2011 (Quarter 2, 2010 - $0.7 million recovery) and an expense of $0.5 million for the first half, 2011 (1st Half, 2010 - $0.6 million recovery). Fair value is estimated based on a number of components including current market price of the underlying shares, strike price, expected volatility, vesting periods and the expected life of the awards. The decline in the Company's share price over the second quarters, 2011 and 2010 and the first half, 2010 is the most significant cause of the decreased fair value of the LTIC liability. Similarly, the improvement in the Company's share price is the greatest contributor to the increased fair value of the LTIC liability over the first half, 2011.
Second quarter and first half, 2011 depreciation of plant and equipment was essentially unchanged over the corresponding periods in 2010.
Road amortization and depletion expense increased $1.2 million and $1.1 million for the second quarter and first half, as compared to the same periods in 2010. This corresponds to 30% and 9% respective increases in logging activity on the B.C. Coast as logging plans impacted by 2010 storm damage access issues were modified and the Company moved to take advantage of a strong export log market.
Payments in relation to the buyout of logging contractor's Bill 13 entitlements together with severance costs, primarily for early retirement of hourly workers, resulted in the recognition of $0.2 million and $1.1 million in restructuring costs for the second quarter and first half, 2011 respectively. A revision of an estimate for other accrued restructuring reduced restructuring expenses for both periods by $0.1 million.
Restructuring costs in the comparative periods of 2010 totalled $1.1 million as the Company restructured certain of its manufacturing operations and accrued severance costs.
Finance Costs, Other Foreign Exchange Gain (loss), Other Income (Expense)
Net proceeds of $54.9 million received from a public offering of Class A Subordinate Voting shares on April 8, 2011 reduced the Company's debt levels for the second quarter, 2011. This, together with a decrease in the Company's overall lending rates and the impact of a stronger Canadian dollar on interest on U.S. denominated debt, resulted in a decline of 37% and 23% in interest expenses for the second quarter and first half, 2011 respectively vis-a-vis the same periods, 2010.
Under IFRS finance costs also include accretion expense on decommissioning liabilities and amortization of prepaid financing costs. Prior year figures have been retroactively restated to conform to this presentation.
The Company reported a slight gain in Other income (expense) for the second quarter and first half, 2011 arising from the minor disposals of surplus equipment. This compares to a gain of $0.4 million for the second quarter and first half, 2010 arising primarily from the final settlement of compensation under the Forest Act for timber and other assets resulting from the 2006 legislated takeback of certain logging rights on the B.C. Coast.
Other foreign exchange gains (losses) and Other income (expense) were negligible for both quarters and halves of 2011 and 2010.
Equity income at $1.9 million for the second quarter, 2010 and $3.3 million for the first half, 2010 represented equity participation in the earnings of the Seaboard General Partnership ("the SGP"). The SGP was wound-up on January 7, 2011 and continues operations as Seaboard Shipping Company Limited ("Seaboard") which became a wholly owned subsidiary of Interfor. Seaboard's accounts are included in the consolidated financial statements of the Company from the date of change in control.
In the second quarter of 2011, the Company recorded an income tax expense of $1.2 million (Quarter 2, 2010 - $1.0 million) which excludes the benefit of $2.2 million of certain deferred income tax assets arising from loss carry- forwards available to reduce future taxable income which were not recognized (Quarter 2, 2010 - $2.2 million). For the first six months, 2011, the income tax expense of $0.8 million excluded the benefit of $2.5 million of deferred tax assets (1st Half, 2010 - $3.8 million). Although the Company expects to realize the full benefit of the loss carry-forwards and other deferred tax assets, due to the cyclical nature of the wood products industry and the economic conditions over the last several years, the Company has not recognized the benefit of its deferred tax assets in excess of its deferred tax liabilities.
Cash Flow and Financial Position
The Company generated $11.9 million from operations, before changes in working capital during the second quarter, 2011 and a total of $24.5 million for the first half, 2011. This compares to $11.6 million for the second quarter, 2010 and $21.7 million for the first half, 2010.
Quarter-over-quarter, cash flows remained relatively constant as higher export sales volumes drove cash earnings in the second quarter, 2011 while a spike in North American sales values impacted results in the same quarter, 2010. Year-over-year, the increase in cash flow was due to higher export sales volumes partially offset by lower overall sales realizations.
Cash generated by the Company from operations, after changes in working capital, was $15.5 million for the six months ended June 30, 2011 compared to cash generated of $18.2 million in the first half, 2010. Significant increases in lumber production for export markets resulted in an inventory build-up of $11.0 million. The increase in accounts receivable of $8.9 million, offset by a $10.9 million rise in accounts payable was the result of the higher operating rates and the increase and timing of export shipments through the first half of 2011.
Capital expenditures for the second quarter of 2011 totalled $11.6 million and $19.6 million year-to-date (Quarter 2, 2010 - $6.0 million; 1st Half, 2010 - $25.7 million). For the first half, 2011 spending on high-return discretionary projects totalled $6.2 million, with $3.7 million spent on business maintenance and $9.7 million on road construction. Capital expenditures in the first half, 2010 include the acquisition of a timber tenure in the Kamloops region in the first quarter, 2010.
On January 3, 2011 the SGP declared an income distribution to its partners. Interfor's share was $15.7 million and was paid to the Company by way of setoff against the promissory note payable to the SGP. On January 5, 2011 by virtue of the withdrawal of all other partners in the SGP, Interfor acquired control of its net assets. Cash generated from investments includes cash received on acquisition of the SGP of $4.8 million.
In the second quarter, 2011 the Company also settled an insurance claim in respect of severe storm damage to logging roads and bridges in the fall, 2010. Net cash proceeds of $4.8 million were received in June 2011, with $2.7 million reflected in net earnings, $0.5 million applied against receivables, and the remainder set up as provisions for future remediation.
On April 8, 2011 the Company closed a public offering of 8,222,500 Class A Subordinate Voting shares at a price of $7.00 per share for net proceeds of $54.9 million. The closing of the Offering included the exercise in full of the overallotment option of 1,072,500 shares by the Underwriters. In addition, in the first half, 2011 several stock option holders exercised their options generating $1.4 million in cash.
Funds received from the issuance of shares enabled the Company to reduce its drawings under its Revolving Term Line by $56.0 million over the first half, 2011. As at June 30, 2011, the Revolving Term Line was drawn by US$30.2 million (revalued at the quarter-end exchange rate to $29.1 million) and $70.0 million for total drawings of $99.1 million, leaving an unused available line of $100.9 million. The Company's Operating Line of $65.0 million was drawn by $0.6 million and outstanding letters of credit of $4.9 million, leaving an unused available line of $59.5 million. Including cash of $7.3 million and Seaboard's unutilized lines, the Company had available resources of $167.5 million as at June 30, 2011.
These resources, together with cash generated from operations, will be used to support our working capital requirements, debt servicing commitments, and any capital expenditures.
On July 11, 2011 the Company extended and modified its syndicated credit facilities. The maturity date of the Operating Line was extended from July 28, 2012 to July 28, 2015 and the maturity date of the Revolving Term Line was extended from July 28, 2013 to July 28, 2015. All other terms and conditions of the lines remain substantially unchanged except for a reduction in pricing.
Based on current pricing and cash flow projections and existing credit lines the Company believes it has sufficient resources to meet all of its financial obligations.
At June 30, 2011, the Company had cash of $7.3 million. After deducting the Company's drawings under its Operating Line and Revolving Term Line, the Company ended the second quarter, 2011 with net debt of $93.1 million or 19% of invested capital down from 30% of invested capital at December 31, 2010.
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 closures. Generally, the Company's B.C. Coastal 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. Logging activity in the B.C. Interior is generally higher in the first half of the first quarter, slows during spring thaw and increases in the third and fourth quarters. Sawmill operations are less seasonal than logging operations but are dependent on the availability of logs from logging operations, including those from suppliers. In addition, the market demand for lumber and related products is generally lower in the winter due to reduced construction activity, which increases during the spring, summer and fall.
The impact of the global recession on overall demand and poor lumber sales realizations increased the operating losses through the third quarter, 2009. Operating rates increased in the fourth quarter of 2009 and first quarter, 2010, as lumber prices rose in response to increased North American demand and a temporary supply/demand imbalance. During the same period off-shore demand increased, particularly from China, with rapid export market growth through the remaining quarters of 2010 and the first two quarters, 2011.
The volatility of the Canadian dollar also impacted results, given that historically over 75% of the Canadian operation's lumber sales are to export markets and priced in $US. A strong Canadian dollar reduces the lumber sales realizations in Canada, but reduces the impact of losses in U.S. operations when converted to Canadian dollars. No deferred tax assets arising from loss carry-forwards were recognized during 2010 or 2011. The third quarter of 2009 includes an after-tax gain of $19.0 million from the sale of the former Queensboro sawmill site.
In the first quarter, 2011 the Company acquired complete control of SGP. SGP was wound up on early January, 2011 but continued operations as Seaboard and its accounts were consolidated from the date of change in control on January 5, 2011. Other sales revenues include the ocean freight revenues of Seaboard.
Softwood Lumber Agreement Arbitration
On October 8, 2010, the U.S. Trade Representative's office filed a request for consultations with Canada under the terms of the Softwood Lumber Agreement ("SLA") over its concern that the province of British Columbia is charging too low a price for certain grades of timber harvested on public lands in the B.C. Interior.
Under the terms of the SLA, consultations between the two governments were held but the matter was not resolved and on January 18, 2011 the U.S. Trade Representative filed for arbitration. The arbitration will be conducted by the London Court of International Arbitration ("LCIA"). Decisions by the LCIA are final and binding on both parties. The Company believes that B.C. and Canada are complying with their obligations under the SLA.
As the U.S. arbitration request is still in preliminary stages the existence of any potential claim has not been determined and no provision has been recorded in the financial statements as at June 30, 2011.
Accounting Policy Changes
Adoption of International Financial Reporting Standards
Effective January 1, 2011 Canadian publicly listed entities were required to prepare their financial statements in accordance with IFRS. Due to the requirement to present comparative financial information, the effective transition date was January 1, 2010. The Company's first reporting period under IFRS is the quarter ended March 31, 2011.
While IFRS uses a conceptual framework similar to Canadian Generally Accepted Accounting Principles ("GAAP"), there are significant differences on recognition, measurement, and disclosures. The Company identified a number of key areas impacted by changes in accounting policies, including: property, plant, and equipment; impairment of assets; provisions, including reforestation liabilities and other decommissioning obligations; share-based payments; employee future benefits; and deferred income taxes.
Note 19 to the consolidated interim financial statements provides more detail on key Canadian GAAP to IFRS differences, accounting policy decisions and IFRS 1, First-Time Adoption of International Financial Reporting Standards optional exemptions for significant or potentially significant areas that have had an impact on Interfor's financial statements on transition to IFRS or may have an impact in future periods.
IFRS Transitional Impact on Equity
As a result of the policy choices selected and changes required under IFRS, Interfor has recorded an increase in equity of $3.4 million as at the date of transition, January 1, 2010.
Controls and Procedures
There were no changes in the Company's internal controls over financial reporting ("ICFR") during the quarter ended June 30, 2011 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 June 30, 2011. 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, 2010 and to the First Quarter, 2011 Report for the three months ended March 31, 2011 for the impact of changes on accounting estimates due to the adoption of IFRS. Both documents are filed on SEDAR at www.sedar.com.
The near-term outlook for recovery in the U.S. housing sector remains uncertain as residential construction activity in the U.S. housing market has not moved appreciably from the recessionary lows. There is little expectation of any significant improvement in the U.S. housing market through 2012 and any price movements will likely result from short term supply-demand related imbalances. Canadian housing starts are expected to slow slightly over the balance of 2011.
Strong demand from Asian export markets is expected to continue through 2011 but likely at a slower rate of growth and at lower prices.
Japan continues its clean-up efforts after the effects of the March 2011 earth quake and tsunami, but rebuilding of devastated areas with increased demand for building materials is unlikely to start until 2012.
The Canadian dollar remains strong and is expected to remain above par against its U.S. counterpart through 2011.
With the prospect of continuing challenges in the North American markets, Interfor continues its disciplined approach to production, inventory management and capital spending to help position the Company to deliver above average returns on capital invested as markets improve.
Additional information relating to the Company and its operations can be found on its website at www.interfor.com, in the Annual Information Form 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