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Sino-Forest Reports Strong Third Quarter 2009 Results

November 12, 2009

TORONTO, Nov. 12 /PRNewswire-FirstCall/ – Sino-Forest Corporation (“Sino-Forest”) (TSX:TRE) today announced its financial results for the three and nine months ended September 30, 2009. All amounts in this release are expressed in U.S. dollars unless otherwise indicated.

Third Quarter 2009 Highlights

    -   Revenue increased 25% for the quarter ("Q3") and year-to-date ("YTD")
    -   Diluted Earnings Per Share increased 18% (19% YTD)
    -   Wood volume sales increased 18% in Q3; up 33% or approximately
        9 million m(3) YTD
    -   Sold 1.5 million m(3) of logs from integrated plantation model in Q3;
        average price $81/m(3); gross margin $31/m(3)
    -   Successfully completed note exchange offer with approximately 71% of
        the outstanding $300 million 9.125% guaranteed senior notes due 2011
        tendered

    (US$ millions,           Three months ended          Nine months ended
     except margins              September 30               September 30
     and per share         2009     2008   Change     2009     2008   Change
     amounts)                 $        $        %        $        $        %
    -------------------------------------------------------------------------
    Revenue               367.0    293.7     24.9    768.6    614.2     25.1

    Gross Profit(1)       144.3    128.6     12.2    293.6    244.0     20.3

    Gross Profit Margin    39.3     43.8  (4.5pts)    38.2     39.7  (1.5pts)

    EBITDA(2)             282.0    220.9     27.6    542.3    403.0     34.5

    Net Income            105.6     75.2     40.5    173.7    133.1     30.5

    Diluted Earnings Per
     Share                 0.47     0.40     18.2     0.86     0.72     19.4

    Cash Flow From
     Operating
     Activities           234.2    136.6     71.4    558.5    272.2    105.2

    See notes (1) and (2) at end of this news release.

Sino-Forest Chairman and CEO Allen Chan said, “We are very pleased to report another strong quarter despite weak prices in most commodities, including logs, during the global economic downturn. We have sustained profitable financial results due to the positive effects of China’s economic growth and Sino-Forest’s flexible business model, which allows us to sell our wood fibre either as standing timber or as harvested logs from our purchased plantation model or from our integrated plantation model. When log prices are relatively weak, we can defer the sale of harvested logs in favour of the sale of standing timber, which has been generating consistently attractive gross margins per cubic metre.”

Mr. Chan continued, “In the third quarter of 2009, we experienced a steady recovery of log prices, while standing timber prices remained relatively unchanged. As a result, we began harvesting logs from our integrated plantation model and sold 1.5 million m(3) of log fibre in the third quarter. The sales, at an average price of $81 per m(3) with a gross profit of approximately $31 per m(3), were similar to the level of gross profit dollars generated from the sales of standing timber.

Mr. Chan added, “A key part of our integrated plantation model is the replanting programme. Whether we sell standing timber or harvested logs, it does not affect our replanting programme in areas covered by our master agreements. We have continued to ramp up our replanting and focus on improving our plantation yields, planting approximately 7,100 hectares year-to-date with scientifically superior seedlings.”

Business Segment Highlights

Total revenue increased 24.9% to $367.0 million in the third quarter 2009, due primarily to higher revenue from the sales of plantation fibre and imported logs. Total revenue for the nine months ended September 2009 increased 25.1% to $768.6 million.

Wood Fibre Operations

                              3 months ended             3 months ended
                               Sep 30, 2009               Sep 30, 2008
                                Sales per   Total          Sales per   Total
    Plantation Model   Hectares  hectare  revenue Hectares  hectare  revenue
                                       $    $'000                 $    $'000
    -------------------------------------------------------------------------
    Purchased
     plantations         18,258    9,647  176,142   26,968    6,733  181,565
    Integrated
     plantations         10,771   11,040  118,912    6,170    9,844   60,738
    Planted plantations     423    1,837      777    1,284    2,284    2,933
    -------------------------------------------------------------------------
    Total                29,452   10,045  295,831   34,422    7,124  245,236
    -------------------------------------------------------------------------

Plantation fibre revenue increased 20.6% to $295.8 million in the third quarter 2009, mainly due to an increased volume of fibre sold. The total volume of fibre sold, approximately 4.3 million m(3) during Q3 2009, increased 18%, with approximately 2.8 million m(3) from purchased and planted plantations and 1.5 million m(3) from integrated plantations. During the same period last year, we sold approximately 3.6 million m(3), with approximately 3.0 million m(3) from purchased and planted plantations and 0.6 million m(3) from integrated plantations.

The average yield of fibre sold from our purchased and planted plantations in Q3 2009 was 150 m(3) per hectare compared to 106 m(3) per hectare in the same period last year, and generated an average selling price of approximately $63 and $61 per m(3), respectively. The average yield of logs sold from integrated plantations in Q3 2009 was 137 m(3) per hectare and it commanded an average selling price of $81 per m(3). During the same period last year, the average log yield was 100 m(3) per hectare, and the average selling price was $99 per m(3).

Plantation fibre sales comprised 80.6% of total revenue in Q3 2009, compared to 83.5% in the same period in 2008.

Other Fibre

Revenue from sales of imported wood products increased 84.5%, from $31.9 million in Q3 2008 to $58.8 million in the same period in 2009, primarily due to a higher volume of Russian logs sold. Revenue from sales of wood logs increased 8.3% to $1.6 million in Q3 2009 from $1.5 million in the same period in 2008. Other fibre sales comprised 16.5% of total revenue in Q3 2009, compared to 11.4% of total revenue in the same period in 2008.

Manufacturing and Other Operations

Revenue from this business segment decreased 28.9% from $15.1 million in Q3 2008 to $10.7 million in the same period in 2009.

Gross Profit

Gross profit increased 12.2%, from $128.6 million in Q3 2008 to $144.3 million in the same quarter of 2009. Gross profit margin, being gross profit expressed as a percentage of revenue, decreased from 43.8% in Q3 2008 to 39.3% in the same period in 2009, mainly due to the reduced margin from our plantation operations.

Wood Fibre Operations

Gross profit margin from sales from our purchased and planted plantations decreased from 54.2% in Q3 2008 to 52.8% in the same period in 2009, mainly due to the sales of plantation trees with a higher fibre cost per m(3) compared to the same period in 2008. The gross profit margin for sales of logs from our integrated plantation model was 38.3% or $31 per m(3) in Q3 2009, compared to 42.2% or $42 per m(3) in the same period in 2008.

Other Fibre

Gross profit margin from sales of imported wood products increased from 4.1% in Q3 2008 to 6.8% in the same period in 2009. In addition, gross profit margin from sales of wood logs increased from 14.6% in Q3 2008 to 20.7% in the same period this year.

Manufacturing and Other Operations

Gross profit margin decreased from 9.2% in Q3 2008 to 8.9% in the same period in 2009.

Selling, General and Administration Expenses

Our SG&A expenses increased 3.7%, from $13.0 million in Q3 2008 to $13.5 million in the same period in 2009, due primarily to additional staff complement and increased accrued incentive compensation.

Net Income

As a result of higher fibre volume sold and higher selling prices, net income for the period increased 40.5%, from $75.2 million in Q3 2008 to $105.6 million in the same period in 2009. Overall net income as a percentage of revenue increased from 25.6% in Q3 2008 to 28.8% in the same period in 2009.

Cash Flows from Operating Activities of Continuing Operations

Net cash provided from operating activities increased from $136.6 million in Q3 2008 to $234.2 million in the same period in 2009. This was due to the increase in cash provided by operations and cash provided by a reduction of working capital, that resulted from a smaller increase in accounts receivables and an increase in accounts payable and accured liabilities of wood fibre operations.

Capital Expenditures

    -------------------------------------------------------------------------
               3 months ended September 30     9 months ended September 30
             ----------------------------------------------------------------
                   2009            2008            2009            2008
             ----------------------------------------------------------------
                Hec-            Hec-            Hec-            Hec-
               tares  $ in M   tares  $ in M   tares  $ in M   tares  $ in M
    -------------------------------------------------------------------------
    Tree
     acqui-
     sition   61,981   279.7  21,661   186.2 179,072   677.8  63,532   375.1
    -------------------------------------------------------------------------
    Re-planting
     & maintenance
     of plantations     14.5             6.8            28.2            15.4
    -------------------------------------------------------------------------
    Panel
     manufacturing
     and others          3.0             6.6            10.7            25.1
    -------------------------------------------------------------------------
                       297.2           199.6           716.8           415.6
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

During the third quarter of 2009, a total of $279.7 million was invested in the acquisition of 61,981 hectares of plantations mainly in the provinces of Hunan, Guangxi, Yunnan and some in Jiangxi.

Year-to-date 2009, approximately 7,100 hectares of plantations has been planted in the provinces of Hunan and Guangxi.

Total capital expenditures in 2009 are expected to be approximately $900 million for tree plantation acquisitions (including $100 million allocated for Jiangxi), replanting and maintenance, and approximately $30 million for the development of manufacturing facilities integrated with our plantation operations. These acquisition levels will be adjusted as necessary depending on future changes in the economy and our market conditions in the PRC.

Outlook

Over the past few years, we have been increasing our efforts in research and development to further improve the productive yield of our fast-growing eucalyptus species. We have achieved an average standing timber yield of between 120 m(3) and 150 m(3) per hectare for a six-year growing cycle of our eucalyptus trees, which are expected to be ready for harvest in 2010. However, in certain regions, our currently growing eucalyptus trees are expected to have yield of approximately 250 m(3) per hectare at maturity.

Given the increase in demand and pricing of fibre in the third quarter 2009, we are optimistic that log prices will return to 2008 levels by the end of this year. However, we continuously monitor market prices across China before deciding to sell wood fibre as either harvested logs or as standing timber, so as to maximize our return on investment.

As indicated by the Chinese government at a recent UN climate change summit. China is targeting to increase the country’s forest coverage by 40 million hectares and forest stock volume by 1.3 billion m(3) by 2020 to absorb carbon emissions, and increase the proportion of energy generated from non-fossil fuels. We anticipate the government will further advance the reform of collectively-owned plantation rights and commercialise the management of its state-owned forest plantations. We believe that Sino-Forest is very well positioned to provide plantation management expertise and investment capital in cooperation with Chinese forestry authorities to achieve this important and ambitious target.

Notice of Conference Call

Sino-Forest will hold an investor conference call to further discuss its third quarter 2009 operating and financial results on November 12, 2009 at 8:30 am EST / 9:30 pm HKT. To participate, please dial +1-416-644-3428 for local and international callers, or 800-732-6179 for North America toll-free access, +852-3009-5027 for Hong Kong, or +65-6823-2087 for Singapore. Alternatively, to listen to the live webcast and replay in a listen-only mode, go to Sino-Forest’s website under “Investor Relations – Earnings Releases” or click on the following link: http://www.sinoforest.com/earningsreleases.asp.

About Sino-Forest Corporation

Sino-Forest Corporation is a leading commercial forest plantation operator in China. Its principal businesses include the ownership and management of forest plantation trees and sales of standing timber, wood logs, and complementary manufacturing of downstream engineered-wood products. The Corporation’s common shares have traded on the Toronto Stock Exchange under the symbol TRE since 1995.

    Note (1) to the Financial Highlights table: Gross profit for any period
    is defined as total revenue less cost of sales. Gross profit is presented
    as additional information because we believe that it is a useful measure
    for certain investors to determine our operating performance. Gross
    profit is not a recognized term under Canadian GAAP and should not be
    considered as an alternative to net income as an indicator of our
    operating performance or any other measure of performance derived in
    accordance with Canadian GAAP. Because it is not a Canadian GAAP measure,
    gross profit may not be comparable to similar measures presented by other
    companies.

    Note (2) to the Financial Highlights table: EBITDA for any period is
    defined as income from continuing operations for the period after adding
    back depreciation and amortization, impairment of capital assets as well
    as depletion of timber holdings from cost of sales, for the period.
    EBITDA is presented as additional information because we believe that it
    is a useful measure for certain investors to determine our operating cash
    flow and historical ability to meet debt service and capital expenditure
    requirements. EBITDA is not a measure of financial performance under
    Canadian GAAP and should not be considered as an alternative to cash
    flows from operating activities, a measure of liquidity or an alternative
    to net income as indicators of our operating performance or any other
    measures of performance derived in accordance with Canadian GAAP.

    No stock exchange or regulatory authority has approved or disapproved of
    information contained herein. Certain information included in this news
    release is forward-looking and is subject to important risks and
    uncertainties. When used in this news release, the words "believe",
    "intend", "estimate", "expect", "plan" and similar expressions are
    intended to identify forward-looking statements, although not all
    forward-looking statements contain such words. These forward-looking
    statements are based on current expectations. The results or events
    predicted in these statements may differ materially from actual results
    or events and are no guarantees of future performance of Sino-Forest.
    Factors which could cause results or events to differ from current
    expectations include, among other things: our ability to acquire rights
    to additional standing timber, our ability to meet our expected
    plantation yields, the cyclical nature of the forest products industry
    and price fluctuation in and the demand and supply of logs, our reliance
    on joint venture partners, authorized intermediaries, key customers,
    suppliers and third party service providers, our ability to operate our
    production facilities on a profitable basis, changes in currency exchange
    rates and interest rates, and PRC economic, political and social
    conditions and government policy, and stock market volatility, other
    factors not currently viewed as material could cause actual results to
    differ materially from those described in the forwarding-looking
    statements. For additional information with respect to certain of these
    and other factors, see the reports filed by Sino-Forest Corporation with
    applicable Canadian securities administrators. Sino-Forest Corporation
    disclaims any intention or obligation to update or revise any forward-
    looking statements, whether as a result of new information, future events
    or otherwise, except as required by law.

                    CONSOLIDATED STATEMENTS OF INCOME AND
                              RETAINED EARNINGS
       (Expressed in thousands of United States dollars, except for earnings
                           per share information)
                                 (Unaudited)

                                    Three months ended     Nine months ended
                                          September 30,         September 30,
                                       2009       2008       2009       2008
                                          $          $          $          $
    -------------------------------------------------------------------------
    Revenue                         366,962    293,696    768,615    614,172

    Costs and expenses
    Cost of sales                   222,631    165,095    475,034    370,188
    Selling, general and
     administration                  13,453     12,973     46,021     33,236
    Depreciation and amortization     1,160        846      3,450      2,250
    -------------------------------------------------------------------------
                                    237,244    178,914    524,505    405,674
    -------------------------------------------------------------------------
    Income from operations before
     the undernoted                 129,718    114,782    244,110    208,498
    Interest expense                (17,323)   (15,079)   (51,154)   (35,307)
    Interest income                   2,580      3,705      6,760      8,970
    Exchange losses                    (217)      (493)      (580)    (3,606)
    Gain (loss) on changes in fair
     value of financial instruments   1,938      2,229      3,545     (1,112)
    Other income                          -        446      1,272      1,485
    -------------------------------------------------------------------------
    Income before income taxes      116,696    105,590    203,953    178,928
    Provision for income taxes      (10,199)   (10,353)   (22,515)   (19,872)
    -------------------------------------------------------------------------
    Net income from continuing
     operations                     106,497     95,237    181,438    159,056
    Net loss from discontinued
     operations                        (880)   (20,062)    (7,767)   (25,953)
    -------------------------------------------------------------------------
    Net income for the period       105,617     75,175    173,671    133,103
    -------------------------------------------------------------------------

    Earnings per share
    Basic                              0.48       0.41       0.87       0.73
    Diluted                            0.47       0.40       0.86       0.72
    -------------------------------------------------------------------------

    Earnings per share from
     continuing operations
    Basic                              0.48       0.52       0.91       0.87
    Diluted                            0.48       0.50       0.90       0.86
    -------------------------------------------------------------------------

    Loss per share from
     discontinued operations
    Basic                             (0.00)     (0.11)     (0.04)     (0.14)
    Diluted                           (0.00)     (0.10)     (0.04)     (0.14)
    -------------------------------------------------------------------------

    Retained earnings
    Retained earnings, beginning
     of period                      837,611    598,892    769,557    540,964
    Net income for the period       105,617     75,175    173,671    133,103
    -------------------------------------------------------------------------
    Retained earnings, end of
     period                         943,228    674,067    943,228    674,067
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

               CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
        (Expressed in thousands of United States dollars) (Unaudited)

                                    Three months ended     Nine months ended
                                          September 30,         September 30,
                                       2009       2008       2009       2008
                                          $          $          $          $
    -------------------------------------------------------------------------
    Net income for the period       105,617     75,175    173,671    133,103
    Other comprehensive income:
      Unrealized gains (losses)
       on financial assets
       designated as
       available-for-sale, net of
       tax of nil                     6,650       (423)    10,955     (1,471)
      Unrealized gains on foreign
       currency translation of
       self-sustaining operations     1,096     10,784      1,590    110,267
    -------------------------------------------------------------------------
    Other comprehensive income        7,746     10,361     12,545    108,796
    -------------------------------------------------------------------------
    Comprehensive income            113,363     85,536    186,216    241,899
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                         CONSOLIDATED BALANCE SHEETS
        (Expressed in thousands of United States dollars) (Unaudited)

                                                            As at      As at
                                                        September   December
                                                         30, 2009   31, 2008
                                                                $          $
    -------------------------------------------------------------------------
    ASSETS
    Current
    Cash and cash equivalents                             565,200    441,171
    Short-term deposits                                    51,323     45,784
    Accounts receivable                                   167,571    225,753
    Inventories                                            41,800     43,200
    Prepaid expenses and other                             28,252     21,768
    Convertible bonds                                      31,919      2,659
    Assets of discontinued operations                       3,205     31,122
    -------------------------------------------------------------------------
    Total current assets                                  889,270    811,457
    -------------------------------------------------------------------------
    Timber holdings                                     2,065,752  1,653,306
    Capital assets, net                                    70,628     63,704
    Other assets                                          105,236     75,457
    -------------------------------------------------------------------------
                                                        3,130,886  2,603,924
    -------------------------------------------------------------------------

    LIABILITIES AND SHAREHOLDERS' EQUITY
    Current
    Bank indebtedness                                      71,298     67,188
    Accounts payable and accrued liabilities              173,887    179,903
    Income taxes payable                                    6,041      6,383
    Current portion of long-term debt                      37,500          -
    Liabilities of discontinued operations                 33,646     32,004
    Derivative financial instrument                             -      5,214
    -------------------------------------------------------------------------
    Total current liabilities                             322,372    290,692
    -------------------------------------------------------------------------
    Long-term debt                                        674,383    714,468
    -------------------------------------------------------------------------
    Total liabilities                                     996,755  1,005,160
    -------------------------------------------------------------------------
    Commitments and Contingencies

    Shareholders' equity
    Equity portion of convertible senior notes             70,462     70,462
    Share capital                                         884,968    539,315
    Contributed surplus                                    11,097      7,599
    Accumulated other comprehensive income                224,376    211,831
    Retained earnings                                     943,228    769,557
    -------------------------------------------------------------------------
    Total shareholders' equity                          2,134,131  1,598,764
    -------------------------------------------------------------------------
                                                        3,130,886  2,603,924
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                    CONSOLIDATED STATEMENTS OF CASH FLOWS
        (Expressed in thousands of United States dollars) (Unaudited)

                                    Three months ended     Nine months ended
                                          September 30,         September 30,
                                       2009       2008       2009       2008
                                          $          $          $          $
    -------------------------------------------------------------------------
    CASH FLOWS FROM OPERATING
     ACTIVITIES
    Net income for the period       105,617     75,175    173,671    133,103
    Net loss from discontinued
     operations                         880     20,062      7,767     25,953
    Add (deduct) items not
     affecting cash
      Depletion of timber holdings
       included in cost of sales    151,079    105,266    294,716    192,301
      Depreciation and amortization   1,160        846      3,450      2,250
      Accretion of convertible
       senior notes                   3,354      2,214      9,764      2,214
      Stock-based compensation        1,173      1,019      3,498      3,195
      (Gain) loss on changes in fair
       value of financial
       instruments                   (1,937)    (2,229)    (3,545)     1,112
      Unrealized exchange losses
      (gains)                           193       (483)       196      3,809
      Interest income from Mandra      (300)      (300)      (900)      (900)
      Other                            (747)       339       (191)     1,760
    -------------------------------------------------------------------------
                                    260,472    201,909    488,426    364,797
    Net change in non-cash working
     capital balances               (26,308)   (65,274)    70,071    (92,608)
    -------------------------------------------------------------------------
    Cash flows from operating
     activities of continuing
     operations                     234,164    136,635    558,497    272,189
    -------------------------------------------------------------------------
    Cash flows from (used in)
     operating activities of
     discontinued operations            232        506     (2,342)    (2,952)
    -------------------------------------------------------------------------
    CASH FLOWS USED IN INVESTING
     ACTIVITIES
    Additions to timber holdings   (303,930)  (190,118)  (729,703)  (389,121)
    Increase in other assets        (14,457)    (1,274)   (20,065)   (24,373)
    Additions to capital assets      (2,932)    (6,475)    (8,805)   (24,617)
    (Increase) decrease in
     non-pledged short-term
     deposits                        (5,122)     7,848     (6,600)    (2,505)
    Business acquisition                  -          -          -     (1,928)
    Acquisition of convertible bonds      -          -       (200)         -
    Proceeds from disposal of
     capital assets                       -          2        111          3
    -------------------------------------------------------------------------
    Cash flows used in investing
     activities                    (326,441)  (190,017)  (765,262)  (442,541)
    -------------------------------------------------------------------------
    Cash flows from (used in)
     investing activities of
     discontinued operations         14,981       (112)    24,120      (470)
    -------------------------------------------------------------------------
    CASH FLOWS (USED IN) FROM
     FINANCING ACTIVITIES
    Payment on deferred financing
     costs                          (14,027)    (9,135)   (14,027)    (9,135)
    Payment on derivative
     financial instrument            (2,890)    (2,819)    (5,781)    (4,919)
    Increase in bank indebtedness     1,835     13,527      3,860     12,223
    (Increase) decrease in pledged
     short-term deposits               (213)       293      1,089     (2,426)
    Issuance of shares, net of
     issue costs                          -      1,302    323,947      1,591
    Increase in long-term debt            -    345,000          -    345,000
    -------------------------------------------------------------------------
    Cash flows (used in) from
     financing activities           (15,295)   348,168    309,088    342,334
    -------------------------------------------------------------------------
    Cash flows used in financing
     activities of discontinued
     operations                           -         (5)         -       (458)
    -------------------------------------------------------------------------
    Effect of exchange rate changes
     on cash and cash equivalents        21       (278)       (72)     2,218
    -------------------------------------------------------------------------
    Net (decrease) increase in cash
     and cash equivalents           (92,338)   294,897    124,029    170,320
    Cash and cash equivalents,
     beginning of period            657,538    204,113    441,171    328,690
    -------------------------------------------------------------------------
    Cash and cash equivalents,
     end of period                  565,200    499,010    565,200    499,010
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Supplemental cash flow
     information
    Cash payment for interest
     charged to income               22,783     15,451     50,047     35,793
    Interest received                   646      2,811      1,833      6,828
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

SOURCE Sino-Forest Corporation


Source: newswire



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