Canfor 2019 Annual Report
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2019 ANNUAL REPORT CANFOR CORPORATION IN THIS REPORT MESSAGE TO SHAREHOLDERS 03 2019 Management’s Discussion and Analysis 02 04 2019 Highlights 06 Company Overview 08 Overview of 2019 17 Overview of Consolidated Results - 2019 Compared to 2018 20 Operating Results by Business Segment - 2019 Compared to 2018 26 Summary of Financial Position 27 Changes in Financial Position 28 Liquidity and Financial Requirements 32 Transactions with Related Parties 33 Non-Binding Proposal from Great Pacific Capital Corp. 33 Selected Quarterly Financial Information 35 Three-Year Comparative Review 36 Fourth Quarter Results 42 Changes in Financial Position 43 Specific Items Affecting Comparability 43 Outlook 44 Critical Accounting Estimates 46 Risks and Uncertainties 56 Outstanding Share Data 56 Disclosure Controls and Internal Controls Over Financial Reporting CONSOLIDATED FINANCIAL STATEMENTS 58 Management’s Responsibility 57 59 Independent Auditors’ Report 63 Consolidated Balance Sheets 64 Consolidated Statements of Income (Loss) 65 Consolidated Statements of Other Comprehensive Income (Loss) 66 Consolidated Statements of Changes in Equity 67 Consolidated Statements of Cash Flows 68 Notes to the Consolidated Financial Statements ADDITIONAL INFORMATION 101 Directors and Officers 100 102 Corporate and Shareholder Information MESSAGE TO SHAREHOLDERS FROM THE PRESIDENT AND CEO While 2019 was a challenging year for the Company, we continue to biocrude has the potential to play a significant role in that transition. be encouraged by the growing recognition of the important role that Today, buildings are responsible for 39% of global carbon emissions. wood, pulp and paper products have to play as part of the solution to the Building with wood is a sustainable alternative that is now being more changing climate. widely embraced and can help reduce construction emissions. Canfor The year began with the closing of the agreement to purchase 70% of is pleased to have had the opportunity to participate in every major Sweden’s largest privately-owned sawmill company, Vida Group (“Vida”). mass timber project in North America. Mass timber uses one-third the This acquisition represents transformational global diversification for energy consumption of steel and one-fifth the energy consumption of Canfor outside of North America. Marketing and customer synergies concrete. We believe the opportunities for mass timber construction developed between Canfor and Vida over the course of the year and we are going to continue to increase. believe these will continue to be realized in future years, strengthening Throughout 2019 Canfor continued to pay combined punitive duties the Canfor and Vida brands around the globe. of 20.52% on softwood lumber exports to the US. In early 2020 the In May 2019, the company also closed the first phase of the agreement US Department of Commerce announced the preliminary results of to acquire 49% of Elliott Sawmilling Co., LLC (“Elliott”). The remaining the first administrative review period, which will significantly reduce 51% will be acquired in May 2020. Elliott is a key part of our continuing the company’s rates starting in August. However, until a negotiated expansion to reach a total production capacity of 2 billion board feet per settlement can be reached, the dispute will continue to wind its way year by 2021 in the United States. through the courts and the Company will continue to pay duties. In British Columbia (“BC”), 2019 was a very difficult year for our Developing lasting, mutually beneficial partnerships with Indigenous lumber and pulp operations. Nations continues to be a priority for Canfor. In the fall of 2019, the The BC forest industry faced a confluence of challenges that included Government of BC passed legislation in support of the United Nation’s low lumber prices, weak markets and high fibre costs. As a result, the Declaration on the Rights of Indigenous Peoples, which is founded Company had to make a series of difficult decisions, including multiple on the principle of free, prior and informed consent. We support the curtailments, permanently closing the Vavenby sawmill and indefinitely legislation and believe we have a responsibility to work in partnership curtailing the Mackenzie sawmill. with Indigenous Nations to better understand each Nation’s priorities With the declining annual allowable cut in BC following the Mountain and to develop opportunities to support their priorities. We believe this Pine Beetle epidemic and the catastrophic wildfires in 2017 and 2018, is the best path for us to achieve greater certainty for our business. the fibre basket in the province is shrinking. As a result, the industry is Another strategic priority for Canfor is building a more inclusive going through a process to right-size its production capacity to a level culture and diverse workplace. Our goal is that by 2030, the diversity that aligns with the fibre supply and is sustainable for the long term. of our people is reflective of the communities we operate in. In support The operating challenges in BC have reinforced to us why it was so of this goal, we created our Inclusion and Diversity Blueprint in 2019 important to diversify our operating footprint beyond North America. – an action plan to engage, educate and act differently. Some of the Following record high prices and heightened buying levels in 2018, changes we have made include using more inclusive language in job there was an oversupply of lumber in the marketplace throughout much descriptions, launching the MentorMe program that matches women of 2019. Lumber pricing started 2019 at dramatically low levels and mentors and mentees, and training our employees on identifying bias slowly improved over the course of the year. and the importance of creating an inclusive workplace. We have had Lumber demand in North America was tepid throughout much of a very positive response to the changes we are making across the the year, largely due to excess inventory levels heading into the year. company and we will be continuing to implement more changes. Demand began to increase towards the end of the year. Offshore lumber We continue to make progress on reducing our medical incident demand was down, particularly in China, due to high levels of inventory rates with the goal of everyone returning home safely every day. We and the ongoing trade dispute between the US and China. European celebrated a significant achievement in early 2020 with one of our lumber demand was strong through the first half of the year, followed by US sawmills celebrating five years with no recordable injuries. This some weakness in the second half of the year due to the spruce beetle achievement is an inspiration to all of our facilities. infestation and overall weakness in the global markets. Now more than ever, given the COVID-19 pandemic sweeping the Canfor Pulp was also impacted by the challenging operating conditions globe in 2020, ensuring the health and safety of our employees, in BC. The sawmill curtailments impacted the available supply of contractors, customers, suppliers and communities is our top priority. chip residuals and as result our pulp mills also experienced material We have implemented an action plan across the company to ensure we curtailments in 2019. We are working to reinforce our fibre supply by are following the recommendations of the World Health Organization securing cost-competitive fibre agreements over the long term. and the federal and provincial/state government recommendations in In addition, global pulp prices were weak throughout 2019, largely due each country where we operate to combat the spread of the virus. to high global pulp inventory levels. The weak pulp market conditions The full impact of COVID-19 on our employees, our company and the were most impactful in China, which is our largest pulp market. In economy remains to be seen, but undoubtedly it will have a significant addition, demand in Europe for printing and writing papers fell sharply. impact. Our top priorities are protecting the health and well-being of Recognizing the challenging market and operating conditions, in early our employees and taking the necessary measures to safeguard the 2020 Canfor Pulp implemented a $40 million cost reduction initiative for business to ensure its ongoing sustainability. our pulp and paper business. I want to take this opportunity to thank our employees across the As a producer of sustainable wood products, pulp, paper and green Company for their contributions and to thank my outstanding Executive energy, we believe we have a role to play as part of the solution to and Management team for their leadership and support. I would also our changing climate. In 2019 we started a process to assess our like to extend my appreciation to our Board of Directors for their sustainability reporting, look for opportunities to improve our business continued support and guidance. practices and continue to identify opportunities to participate in the growing circular economy. This work will continue into 2020. Canfor continues to work on the technology to produce a low carbon biocrude from woody biomass, which would support the movement towards a circular economy. Many fossil fuel producers, particularly Don Kayne major petrochemical companies, are moving quickly to tap into potential President and Chief Executive Officer new streams of renewable energy and fuels and our low carbon 2 2019 MANAGEMENT’S DISCUSSION AND ANALYSIS This Management’s Discussion and Analysis (“MD&A”) provides a review of Canfor Corporation’s (“Canfor” or “the Company”) financial performance for the year ended December 31, 2019 relative to the year ended December 31, 2018, and the financial position of the Company at December 31, 2019. It should be read in conjunction with Canfor’s Annual Information Form and its audited consolidated financial statements and accompanying notes for the years ended December 31, 2019 and 2018 (available at www.canfor.com). The financial information contained in this MD&A has been prepared in accordance with International Financial Reporting Standards (“IFRS”), which is the required reporting framework for Canadian publicly accountable enterprises.