Published: August 12, 2008
Sino-Forest Diluted EPS Increased 82% to $0.24 in Second Quarter 2008; Gross Margin from Integrated Operations $40 per m(3)
TORONTO, Aug. 12 /PRNewswire-FirstCall/ - Sino-Forest Corporation ("Sino-Forest") (TSX:TRE and TRE.S) announced today outstanding financial results for the three and six month periods ended June 30, 2008. All amounts in this release are expressed in U.S. dollars unless otherwise indicated.
Financial Highlights
- In the second quarter, Revenue increased 45%, EBITDA 72%, and Net
Income 98%
- Diluted earnings per share rose 82% in the quarter, 49% year to date
- Sino-Forest issued an offering of $345 million of convertible senior
notes to fund new tree acquisitions
Three months ended June 30 Six months ended June 30
(US$ millions, 2008 2007(3) Change 2008 2007(3) Change
except margins and (Restated) (Restated)
per share amounts) $ $ % $ $ %
-------------------------------------------------------------------------
Revenue 187.1 128.8 45.3 323.3 241.5 33.8
Gross Profit(1) 67.2 42.1 59.6 114.1 74.2 53.8
Gross Profit Margin 35.9 32.7 3.2%pts 35.3 30.7 4.6%pts
EBITDA(2) 106.2 61.7 72.2 179.9 108.6 65.5
Net Income 43.4 21.9 98.1 57.9 33.4 73.3
Diluted Earnings
Per Share 0.24 0.13 81.6 0.31 0.21 48.9
Cash Flow From
Operating Activities 100.2 18.7 436.2 132.3 65.0 103.5
Note: Footnotes (1), (2) and (3) at end of this release
Allen Chan, Chairman and CEO of Sino-Forest Corporation, said, "Even though the second quarter is usually our second weakest quarter of the year due to seasonality, we are proud to report strong operating and financial results, while maintaining a solid balance sheet. The key contributing factor to this favourable performance is related to the gross margin earned on harvesting and sales of logs from our integrated plantation operations. The cost of harvesting was much lower in the second quarter compared to the first quarter, and the average selling price increased 4% to $107 per m(3). As a result, we recorded a gross profit margin of $40 per m(3) at our integrated plantation operations, which exceeded both our guidance of $20 to $23 per m(3) and our first quarter result of $28 per m(3). As we continue to ramp up our integrated plantation operations this year, we will be on track to begin large-scale replanting inHunan in 2009."
"At our purchased and planted plantations, we recorded a consolidated 7% increase in log prices (excluding currency appreciation) compared to a year ago."
"We are also very pleased to have entered into another long-term master agreement to acquire 200,000 hectares of trees at a cost not to exceed Rmb350 m3 inFujian Province - located along the south-eastern costal area, and underChina's 11th Five-year Plan, designated among the top three provinces to supply wood fibre to the market.Fujian is a province where we have been operating since 2001. This strategic acquisition will further strengthen our position as a leading national supplier of quality wood fibre", added Mr. Chan.
Business Segment Highlights
Revenue
Total revenue increased 45% to $187 million in the second quarter of 2008 due primarily to higher sales of plantation fibre, specifically integrated plantations, and manufacturing and other products, offset by a decrease in the sales of imported wood products.
Wood Fibre Operations
Plantation Fibre
Three months ended Three months ended
June 30, 2008 June 30, 2007
Sales per Total Sales per Total
Hectares hectare revenue Hectares hectare revenue
$ $'000 $ $'000
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Purchased
plantations 14,128 5,927 83,732 15,477 4,461 69,036
Integrated
plantations 3,209 12,811 41,112 - - -
Planted plantations 328 2,277 747 726 2,028 1,472
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Total 17,665 7,110 125,591 16,203 4,352 70,508
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Plantation fibre revenue increased 78% to $126 million in the second quarter 2008. The increase was mainly due to the sale of logs harvested from 3,209 hectares of integrated plantations in 2008 compared to none in 2007.
The total volume of fibre sold during the second quarter was approximately 1.8 million m(3), with approximately 1.4 million m(3) from purchased and planted plantations, and approximately 0.4 million m(3) from integrated plantations. In the same quarter last year, we sold a total of 1.4 million m(3) from purchased and planted plantations, and no trees from our integrated plantations.
The average yield of harvested logs sold under the integrated plantation was 120 m(3) per hectare and it commanded an average selling price of $107 per m(3). Gross margin for logs sold under the integrated plantation operations was 37% or $40 per m(3).
The average yield of standing timber sold under the purchased and planted plantations was 96 m(3) per hectare compared to 84 m(3) per hectare same quarter last year and obtained an average selling price of $61 per m(3) compared to $52 per m(3) last year - an increase of 17.3% (including 10.2% appreciation of Renminbi versus US dollars).
Plantation fibre sales comprised 67% of total revenue in 2008, compared to 55% in 2007.
Other Fibre
Revenue from sales of imported wood products decreased 11%, from $48 million in 2007 to $43 million in 2008. This decrease was primarily due to lower average selling price as a result of a change of product mix from expensive wood logs to lower cost but higher margin wood logs.
Revenue from sales of wood logs decreased 2% to $1 million in 2008 due to limited harvesting of secondary natural forest as our local partner in Inner Mongolia decided to wait for further details on the tariffs to be imposed by the Russian government.
Other fibre sales comprised 24% of total revenue in 2008, compared to 38% of total revenue in 2007.
Manufacturing and Other Operations
Revenue from our manufacturing and other operations increased 93% from $9 million in 2007 to $18 million in 2008 mainly due to higher revenue from sales of engineering wood flooring and relatively new processing facilities inHunan province.
Gross Profit
Gross profit increased 60%, from $42 million in 2007 to $67 million in 2008. Gross profit margin (gross profit as a percentage of total revenue) on average increased from 33% in 2007 to 36% in 2008 mainly due to the higher proportion of sales of plantation fibre, which has a higher gross profit margin compared to other fibre.
Wood Fibre Operations
Gross profit margin from sales of purchased and planted plantations increased from 58% in 2007 to 60% in 2008 due to higher selling prices. The gross profit margin for sales of logs under the integrated plantation operations was 37%.
Gross profit margin from sales of imported wood products increased from 3% in 2007 to 5% in 2008.
Gross profit margin from sales of wood logs increased from 7% in 2007 to 23% in 2008 as a result of more sales of logs from north-eastChina which commanded a higher margin when compared to sales of logs from Inner Mongolia.
Manufacturing and Other Operations
Gross loss margin from our manufacturing and other operations increased from 3% in 2007 to 6% in 2008, primarily due to increased cost of production at our manufacturing plants. Management is not satisfied with the current results realized by the Manufacturing segment. We continue to review and monitor the operations on a quarterly basis for improvements. In the event that these improvements are not realized, further potential write downs to reflect the impairment in value may be required.
Selling, General and Administration Expenses
Our selling, general and administration expenses increased 1%, from $9.9 million in 2007 to $10.0 million in 2008, due primarily to additional staff compliment.
Net Income from Continuing Operations
As a result of the foregoing, net income from continuing operations for 2008 increased 94%, from $23 million in 2007 to $45 million in 2008. Overall net profit margin from continuing operations increased from 18% in 2007 to 24% in 2008.
Cash Flows from Operating Activities of Continuing Operations
Net cash provided by operations increased from $19 million to $100 million in second quarter 2008. The increase was primarily due to the increase in cash provided by working capital mainly resulting from the increase in accounts payable for imported wood products.
Capital Expenditures
--------------------------------------------
Three months ended June 30
--------------------------------------------
2008 2007
--------------------------------------------
(in millions) Hectares $ Hectares $
-------------------------------------------------------------------------
Tree acquisition 14,165 111.0 15,928 76.4
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Re-planting & maintenance of
plantations 4.2 6.4
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Panel manufacturing and others 8.5 1.9
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Total 123.7 84.7
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--------------------------------------------
Six months ended June 30
--------------------------------------------
2008 2007
--------------------------------------------
(in millions) Hectares $ Hectares $
-------------------------------------------------------------------------
Tree acquisition 41,871 188.9 30,344 150.0
-------------------------------------------------------------------------
Re-planting & maintenance of
plantations 8.6 9.8
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Panel manufacturing and others 18.5 2.9
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Total 216.0 162.7
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During the second quarter of 2008, a total of $111 million was invested to acquire 14,165 hectares of trees inGuangxi and other provinces.
Outlook
We will continue to focus on acquiring standing timber and improving our operating practices, given the Central Government's goal to double fast-growing, high-yield plantations from 7 million hectares to 13 million hectares by 2015 and its intention to privatize the operation of several million hectares of state-owned, secondary natural forest in various regions acrossChina.
To help finance the expansion of our tree plantations, we issued convertible senior notes for gross proceeds of US$345 million, which was well received by international investment markets. As previously announced, a majority of the proceeds from the offering will fund the acquisition of 200,000 hectares of plantation trees inFujian Province, over the next 10 years. This successful financing reflects investor confidence in Sino-Forest as a leading plantation operator and wood fibre supplier in many regions ofChina.
In addition to acquiring standing timber, we will lease land for large-scale replanting, which will commence next year as part of our integrated operations. We are confident that we will achieve our target annual wood fibre output of 15 to 20 million cubic meters by the end of 2010.
We expect the prices of wood products inChina to rise approximately 5 to 10% per annum this year as the Russian government continues to sharply increase its tariffs on exported logs, asChina's huge wood fibre deficit continues to grow, and as demand for lumber and wood panel rises with post-earthquake, reconstruction efforts inSichuan Province.
Notice of Conference Call
Sino-Forest will hold an investor conference call to further discuss its second quarter 2008 financial results on August 12, 2008 at 8:30 am EST / 8:30 pm HKT. To participate, please dial +1-416-695-9761 for local and international callers or 877-461-2816 forNorth America toll-free access. Alternatively, to join the live webcast and replay in a listen-only mode, log on to Sino-Forest website under "Earnings Release" or go directly to http://www.sinoforest.com/earningsreleases.asp.
About Sino-Forest Corporation
Sino-Forest Corporation is a leading commercial forestry plantation operator inChina. The Canadian company started its operations in 1994 and was of the first few foreign and privately managed operators involved in forest products inChina. Its principal businesses include the ownership and management of forestry plantation trees and sales of standing timber, wood logs and complementary manufacturing of downstream engineered-wood products. The Corporation's common shares trade 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 and 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.
Note (3) to the Financial Highlights table: Results have been restated to
reflect the classification of wood chips and commission operations as
discontinued operations as disclosed in Note 18 Discontinued Operations
and the adoption of a new accounting policy for uncertainty in income
taxes in the consolidated financial statements for the year ended
December 31, 2007.
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.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Expressed in thousands of Three months ended Six months ended
United States dollars, June 30 June 30
except for earnings per (Restated) (Restated)
share information) 2008 2007 2008 2007
(Unaudited) $ $ $ $
-------------------------------------------------------------------------
Revenue 187,125 128,764 323,262 241,541
Costs and expenses
Cost of sales 119,878 86,636 209,136 167,322
Selling, general and
administration 9,981 9,872 21,303 16,637
Depreciation and
amortization 1,071 1,056 2,072 2,199
-------------------------------------------------------------------------
130,930 97,564 232,511 186,158
-------------------------------------------------------------------------
Income from operations
before the undernoted 56,195 31,200 90,751 55,383
Interest expense (9,850) (11,171) (20,421) (22,285)
Interest income 2,158 3,618 4,753 5,085
Exchange (losses) gains (788) 1,926 (3,627) 1,459
Gains (losses) on changes
in fair value of financial
instruments 1,194 642 (3,341) 328
Other income 869 319 1,551 616
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Income before income taxes 49,778 26,534 69,666 40,586
Provision for income taxes (5,245) (3,554) (9,519) (5,900)
-------------------------------------------------------------------------
Net income from continuing
operations 44,533 22,980 60,147 34,686
Net loss from discontinued
operations (1,132) (1,070) (2,219) (1,266)
-------------------------------------------------------------------------
Net income for the period 43,401 21,910 57,928 33,420
-------------------------------------------------------------------------
Earnings per share
Basic 0.24 0.13 0.32 0.22
Diluted 0.24 0.13 0.31 0.21
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Earnings per share from
continuing operations
Basic 0.24 0.14 0.33 0.22
Diluted 0.24 0.14 0.33 0.22
-------------------------------------------------------------------------
Loss per share from
discontinued operations
Basic (0.01) (0.01) (0.01) (0.01)
Diluted (0.01) (0.01) (0.01) (0.01)
-------------------------------------------------------------------------
Retained earnings
Retained earnings,
beginning of period,
as previously presented 555,491 400,201 540,964 397,380
Cumulative impact of
accounting changes
relating to financial
instruments - - - (8,689)
-------------------------------------------------------------------------
Retained earnings,
beginning of period 555,491 400,201 540,964 388,691
Net income for the period 43,401 21,910 57,928 33,420
-------------------------------------------------------------------------
Retained earnings, end of
period 598,892 422,111 598,892 422,111
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three months ended Six months ended
June 30 June 30
(Expressed in thousands of (Restated) (Restated)
United States dollars) 2008 2007 2008 2007
(Unaudited) $ $ $ $
-------------------------------------------------------------------------
Net income for the period 43,401 21,910 57,928 33,420
Other comprehensive income:
Unrealized loss on
financial assets
designated as available-
for-sale, net of tax
of nil (99) - (1,048) -
Unrealized gains on
foreign currency
translation of self-
sustaining operations 36,737 14,037 99,483 23,127
-------------------------------------------------------------------------
Other comprehensive income 36,638 14,037 98,435 23,127
-------------------------------------------------------------------------
Comprehensive income 80,039 35,947 156,363 56,547
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CONSOLIDATED BALANCE SHEETS
As at As at
(Expressed in thousands of June 30, 2008 December 31, 2007
United States dollars) (Unaudited) $ $
-------------------------------------------------------------------------
ASSETS
Current
Cash and cash equivalents 204,113 328,690
Short-term deposits 37,011 22,163
Accounts receivable 157,406 105,329
Inventories 45,795 46,661
Prepaid expenses and other 31,526 24,185
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Total current assets 475,851 527,028
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Timber holdings 1,369,700 1,174,153
Capital assets, net 100,343 78,608
Other assets 88,616 57,708
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2,034,510 1,837,497
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Bank indebtedness 55,690 55,383
Accounts payable and accrued
liabilities 140,615 107,989
Income taxes payable 2,473 1,615
Liabilities of discontinued operations 36,482 32,016
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Total current liabilities 235,260 197,003
-------------------------------------------------------------------------
Long-term debt 442,926 441,985
Derivative financial instrument 10,198 11,211
-------------------------------------------------------------------------
Total liabilities 688,384 650,199
-------------------------------------------------------------------------
Commitments and Contingencies
Shareholders' equity
Share capital 537,522 537,141
Contributed surplus 5,990 3,906
Accumulated other comprehensive income 203,722 105,287
Retained earnings 598,892 540,964
-------------------------------------------------------------------------
Total shareholders' equity 1,346,126 1,187,298
-------------------------------------------------------------------------
2,034,510 1,837,497
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-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended Six months ended
June 30 June 30
(Expressed in thousands of (Restated) (Restated)
United States dollars) 2008 2007 2008 2007
(Unaudited) $ $ $ $
-------------------------------------------------------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income for the period 43,401 21,910 57,928 33,420
Net loss from discontinued
operations 1,132 1,070 2,219 1,266
Add (deduct) items not
affecting cash
Depletion of timber
holdings included in
cost of sales 48,981 29,441 87,035 51,066
Loss (gain) on changes
in fair value of
financial instruments (1,194) (642) 3,341 (328)
Unrealized exchange
losses 1,794 (1,308) 4,292 (1,155)
Stock-based compensation 1,043 474 2,176 929
Depreciation and
amortization 1,071 1,056 2,072 2,199
Interest income from
Mandra (300) - (600) -
Other 892 361 1,421 808
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96,820 52,362 159,884 88,205
Net change in non-cash
working capital balances 3,434 (33,665) (27,608) (23,208)
-------------------------------------------------------------------------
Cash flows from operating
activities of continuing
operations 100,254 18,697 132,276 64,997
-------------------------------------------------------------------------
Cash flows from operating
activities of discontinued
operations - 71 - 4,109
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CASH FLOWS USED IN INVESTING
ACTIVITIES
Additions to timber
holdings (115,366) (80,103) (199,003) (157,376)
Increase in other assets (688) - (23,099) -
Additions to capital assets (8,464) (1,859) (18,500) (2,890)
Decrease (increase) in
non-pledged short-term
deposits (6,406) 3,113 (10,353) 1,352
Business acquisition - - (1,928) -
Proceeds from disposal of
capital assets - - 1 -
-------------------------------------------------------------------------
Cash flows used in
investing activities (130,924) (78,849) (252,882) (158,914)
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CASH FLOWS (USED IN) FROM
FINANCING ACTIVITIES
(Decrease) increase in
bank indebtedness 3,965 (3,325) (1,937) (2,409)
(Increase) decrease in
pledged short-term
deposits (781) 1,057 (2,719) 2,111
Issuance of shares, net
of issue costs 289 384,779 289 384,779
Payment on derivative
financial instrument - - (2,100) (930)
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Cash flows (used in) from
financing activities 3,473 382,511 (6,467) 383,551
-------------------------------------------------------------------------
Effect of exchange rate
changes on cash and cash
equivalents 1,088 2,465 2,496 2,596
-------------------------------------------------------------------------
Net (decrease) increase
in cash and cash
equivalents (26,109) 324,895 (124,577) 296,339
Cash and cash equivalents,
beginning of period 230,222 124,331 328,690 152,887
-------------------------------------------------------------------------
Cash and cash equivalents,
end of period 204,113 449,226 204,113 449,226
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplemental cash flow
information
Cash payment for interest
charged to income 3,884 4,744 20,342 21,402
Interest received 1,422 3,406 4,017 4,981
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SOURCE Sino-Forest Corporation
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