Sino-Forest Reports First Quarter 2010 Results

TORONTO, May 12, 2010 /CNW/ - Sino-Forest Corporation ("Sino-Forest") (TSX:TRE) announced its financial results today for the three months ended March 31, 2010. All amounts in this release are expressed in U.S. dollars unless otherwise indicated.

Financial Highlights

    
    -   Revenue increased 42%, with $70 million of sales of harvested log and
        120% increased in sales from trading of wood logs
    -   Gross margin averaged $48 per m(3) as sales of standing timber in
        Yunnan generated higher gross margins
    -   Net income rose 86%
    -   Diluted EPS from continuing operations increased 18% to $0.18 per
        share

                                               Three months ended March 31
    (US$ millions, except margins and         2010         2009       Change
     per share amounts)                          $            $            %
    -------------------------------------------------------------------------
    Revenue                                  251.0        177.2         41.6
    Gross Profit(1)                           95.2         65.5         45.3
    Gross Profit Margin                      37.9%        37.0%     0.9% pts
    EBITDA(2)                                146.0        114.9         27.1
    Net Income                                42.8         23.0         86.0
    Diluted Earnings Per Share from
     Continuing Operations                    0.18         0.15         17.8
    Cash Flow From Operating Activities       51.4        167.6        (69.3)

    Notes (1) and (2) are at the end of this release
    

During the first quarter of 2010, we signed our sixth long-term master agreement to acquire fibre in Guizhou Province, and added approximately 155,600 hectares of plantation trees to our portfolio by acquiring Mandra Forestry. The acquisition of HOMIX Limited in the first quarter will strengthen our research and development capabilities, thereby increasing our wood fibre usability and the versatility of our small-diameter plantation logs. We continue to transition toward our integrated plantations model by acquiring trees under our long-term fibre purchase agreements. As at March 31, 2010, approximately 447,700 hectares of trees have been acquired under our long-term agreements. Our aim is to build a strong plantation base for long-term sustainable plantation management.

Allen Chan, Chairman and CEO of Sino-Forest, said, "At the macro-economic level, the Chinese Central Government launched some measures in the beginning of the year to tighten credit lending in order to reduce the risks of speculation and over-heating of property prices, and to slow down new infrastructure investment. However, the Chinese government still intends to build 5.2 million affordable housing units by 2011."

Mr Chan continued, "We are pleased to report strong profits for the first three months of 2010 as we see domestic demand for wood fibre remains for household products and the construction sector. We anticipate that log prices will continue to rebound, especially with the Chinese government's commitment to construct low-income housing."

Business Segment Highlights

Total revenue breakdown for the three months ended March 31, 2010 and 2009:

    
                                     First Quarter             First Quarter
                              ended March 31, 2010      ended March 31, 2009
                                $'000            %        $'000            %
    -------------------------------------------------------------------------
    Wood Fibre Operations
    Plantation Fibre          156,789         62.5      127,968         72.2
    Trading of Wood Logs       82,938         33.0       37,758         21.3
    Manufacturing and Other
     Operations                11,288          4.5       11,508          6.5
    -------------------------------------------------------------------------
    Total                     251,015        100.0      177,234        100.0
    -------------------------------------------------------------------------
    

Our revenue increased 41.6% from $177.2 million in the three months ended March 31, 2009 to $251.0 million in the same period in 2010. The increase in revenue was mainly due to the increase in sales from our wood fibre operations.

Wood Fibre Operations

Plantation Fibre

    
    -------------------------------------------------------------------------
                                   First Quarter ended March 31, 2010
                          ---------------------------------------------------
                                           Vol. of    Av. price        Total
                             Hectares   fibre sold      per m(3)     revenue
                                          '000 m(3)           $        $'000
    -------------------------------------------------------------------------
    Standing timber             5,391          971           90       86,931
    Harvested logs              7,010          890           79       69,858
    -------------------------------------------------------------------------
    Total                      12,401        1,861           84      156,789
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                   First Quarter ended March 31, 2009
                          ---------------------------------------------------
                                           Vol. of    Av. price        Total
                             Hectares   fibre sold      per m(3)     revenue
                                          '000 m(3)           $        $'000
    -------------------------------------------------------------------------
    Standing timber            15,478        2,125           60      127,968
    Harvested logs                  -            -            -            -
    -------------------------------------------------------------------------
    Total                      15,478        2,125           60      127,968
    -------------------------------------------------------------------------
    

Revenue from sales of plantation fibre increased 22.5% from $128.0 million in Q1 2009 to $156.8 million in the same period in 2010, mainly due to an increase in the average selling price of standing timber.

The increase in average selling price of standing timber was mainly due to a difference in sales mix. The average selling price of pine and Chinese fir was $61 per m(3) for Q1 2009 while the average selling price for Q1 2010 was $64 per m(3). In addition, we sold fibre in Yunnan as standing timber at an average selling price of $101 per m(3) in Q1 2010 compared to no sales in the same period in 2009. The standing timber plantation sales in Yunnan comprised 84.5% of revenue from standing timber sales in Q1 2010. Standing timber sales comprised 55.4% of total plantation fibre revenue in Q1 2010.

The average sales per hectare increased 52.9% from $8,268 per hectare in Q1 2009 to $12,643 per hectare in the same period in 2010.

Plantation fibre sales comprised 62.5% of total revenue in Q1 2010, compared to 72.2% in the same period in 2009.

Trading of Wood Logs

Revenue from trading of imported and domestic wood products and logs increased 119.7%, from $37.8 million in Q1 2009 to $82.9 million in the same period in 2010. This increase was primarily due to higher volume of Russian wood logs sold.

Sales of trading of wood logs comprised 33.0% of total revenue in Q1 2010, compared to 21.3% of total revenue in the same period in 2009.

Manufacturing and Other Operations Revenue

Revenue from manufacturing and other operations decreased 1.9% from $11.5 million in Q1 2009 to $11.3 million in the same period in 2010.

Gross Profit

Gross profit increased 45.3%, from $65.5 million in Q1 2009 to $95.2 million in the same period in 2010. Gross profit margin, being gross profit expressed as a percentage of revenue, increased from 37.0% in the three months ended March 31, 2009 to 37.9% in the same period in 2010, mainly due to improved gross profit margin from plantation fibre operations.

Wood Fibre Operations Gross Profit

Plantation Fibre

Gross profit margin from sales of standing timber increased from 49.8% or $30 per m(3) in Q1 2009 to 63.8% or $57 per m(3) in the same period in 2010, mainly due to the increase in average selling price of standing timber. The gross profit margin from sales of harvested logs was 47.4% or $37 per m(3) in Q1 2010 compared to zero sales in the same period last year.

Trading of Wood Logs

Gross profit margin from trading of imported wood and domestic wood products and logs increased from 3.9% in Q1 2009 to 6.3% in the same period in 2010.

Manufacturing and Other Operations Gross Profit

Gross profit margin from our manufacturing and other operations increased from 2.4% in Q1 2009 to 12.8% in the same period in 2010. The increase was mainly due to improvement in the engineered flooring segment.

Selling, General and Administration Expenses

Our selling, general and administration expenses increased 17.6%, from $14.8 million in Q1 2009 to $17.4 million in the same period in 2010. The increase was in line with our growth of the Company.

Net Income

As a result of the foregoing, net income for the period increased 86.0%, from $23.0 million in Q1 2009 to $42.8 million in Q1 2010. Overall net income for the period as a percentage of revenue increased from 13.0% in Q1 2009 to 17.0% in the same period in 2010.

Cash Flows from Operating Activities of Continuing Operations

Net cash provided from operating activities decreased from $167.6 million in the first quarter of 2009 to $51.4 million in the same period in 2010. The decrease was due to the increase in cash provided by operations, offset by cash used in working capital that mainly resulted from a decrease in accounts payables and accrued liabilities and an increase in inventories and prepaid expenses and others related to the plantation fibre operations.

Capital Expenditures

    
                          ---------------------------------------------------
                            First Quarter of 2010     First Quarter of 2009
                             Hectares    $'million     Hectares    $'million
    -------------------------------------------------------------------------
    Tree acquisition           37,778        183.3       75,977        245.6
    Tree acquisition -
     acquisition of
     subsidiaries              86,786        283.1            -            -
    Re-planting and
     maintenance of
     plantations                               7.1                       5.8
    Panel manufacturing
     and others                                2.2                       5.2
    Panel manufacturing
     and others -
     acquisition of
     subsidiaries                              6.6                         -
    -------------------------------------------------------------------------
    Total                                    482.3                     256.6
    -------------------------------------------------------------------------
    

For fiscal 2010, capital expenditures are expected to be around $1,300 million for plantation acquisitions, replanting and maintenance, and approximately $30 million for the development of manufacturing facilities integrated with plantation operations.

Outlook

Our outlook for China's economy remains positive for 2010, with strong impetus coming from domestic consumption. We anticipate demand for wood fibre will remain strong, as industrialization and urbanization continue to drive infrastructure and housing demands. And with the Central Government's intention to construct low-income housing and the development of new towns in inland regions, we foresee wood fibre prices continuing to firm up as demand continues to exceed domestic supply.

Notice of Conference Call

Sino-Forest will hold a conference call for analysts and investors to further discuss its first quarter results on Wednesday, May 12, 2010 at 8:30 am EST / 8:30 pm HKT. To participate, please dial +1-647-427-7450 for local and international callers, or 1-888-231-8191 for North America toll-free access. 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, the sales of standing timber and wood logs and the complementary manufacturing of downstream engineered-wood products. The company'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 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.

Cautionary note: 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 March 31,                           2010         2009
                                                              $            $
    -------------------------------------------------------------------------
    Revenue                                             251,015      177,234

    Costs and expenses
    Cost of sales                                       155,811      111,709
    Selling, general and administration                  17,416       14,804
    Depreciation and amortization                         1,223        1,129
    -------------------------------------------------------------------------
                                                        174,450      127,642
    -------------------------------------------------------------------------
    Income from operations before the undernoted         76,565       49,592
    Interest expense                                    (27,694)     (16,795)
    Interest income                                       3,425        1,904
    Exchange gains (losses)                                  72          (93)
    Loss on changes in fair value of financial
     instruments                                           (709)        (981)
    Other income                                            318          221
    -------------------------------------------------------------------------
    Income before income taxes and non-controlling
     interests                                           51,977       33,848
    Provision for income taxes                           (8,784)      (5,926)
    -------------------------------------------------------------------------
    Net income from continuing operations                43,193       27,922
    Net loss from discontinued operations                  (419)      (4,917)
    -------------------------------------------------------------------------
    Net income before non-controlling interests          42,774       23,005
    Non-controlling interests                                24            -
    -------------------------------------------------------------------------
    Net income for the period                            42,798       23,005
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Earnings per share
    Basic, for net income for the period                   0.18         0.12
    Diluted, for net income for the period                 0.18         0.12
    -------------------------------------------------------------------------

    Earnings per share from continuing operations
    Basic, for net income for the period                   0.18         0.15
    Diluted, for net income for the period                 0.18         0.15
    -------------------------------------------------------------------------

    Losses per share from discontinued operations
    Basic, for net loss for the period                    (0.00)       (0.03)
    Diluted, for net loss for the period                  (0.00)       (0.03)
    -------------------------------------------------------------------------

    Retained earnings
    Retained earnings, beginning of period            1,054,257      769,557
    Net income for the period                            42,798       23,005
    Transfer to statutory reserve                            (2)           -
    -------------------------------------------------------------------------
    Retained earnings, end of period                  1,097,053      792,562
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



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

    Three months ended March 31,                           2010         2009
                                                              $            $
    -------------------------------------------------------------------------
    Net income for the period                            42,798       23,005
    Other comprehensive income:
      Unrealized losses on foreign currency
       translation of self-sustaining operations           (212)        (736)
      Unrealized gains (losses) on financial assets
       designated as available-for-sale, net of tax
       of $nil                                            1,539       (1,210)
    -------------------------------------------------------------------------
    Other comprehensive income (losses)                   1,327       (1,946)
    -------------------------------------------------------------------------
    Comprehensive income                                 44,125       21,059
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



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

                                                          As at        As at
                                                       March 31, December 31,
                                                           2010         2009
                                                              $            $
    -------------------------------------------------------------------------
    ASSETS
    Current
    Cash and cash equivalents                           980,373    1,102,366
    Short-term deposits                                  63,070       70,387
    Accounts receivable                                 273,666      282,306
    Inventories                                          66,422       45,978
    Prepaid expenses and other                           64,397       54,747
    Convertible bonds                                    30,566       29,446
    Assets of discontinued operations                         9        1,531
    -------------------------------------------------------------------------
    Total current assets                              1,478,503    1,586,761
    -------------------------------------------------------------------------
    Timber holdings                                   2,589,362    2,183,489
    Capital assets, net                                  83,760       77,377
    Intangible assets                                     8,647          636
    Other assets                                        108,243      115,636
    -------------------------------------------------------------------------
                                                      4,268,515    3,963,899
    -------------------------------------------------------------------------

    LIABILITIES AND SHAREHOLDERS' EQUITY
    Current
    Bank indebtedness                                   124,906      103,991
    Current portion of long-term debt                       530            -
    Accounts payable and accrued liabilities            257,432      250,287
    Income taxes payable                                  7,225        7,346
    Liabilities of discontinued operations               12,300       12,156
    -------------------------------------------------------------------------
    Total current liabilities                           402,393      373,780
    -------------------------------------------------------------------------
    Long-term debt                                    1,113,927      925,466
    Future income tax liabilities                        39,222            -
    -------------------------------------------------------------------------
    Total liabilities                                 1,555,542    1,299,246
    -------------------------------------------------------------------------

    Non-controlling interests                             1,209            -
    -------------------------------------------------------------------------

    Shareholders' equity
    Equity portion of convertible senior notes          158,883      158,883
    Share capital                                     1,216,178    1,213,495
    Contributed surplus                                  12,503       12,200
    Accumulated other comprehensive income              225,475      224,148
    Statutory reserve                                     1,672        1,670
    Retained earnings                                 1,097,053    1,054,257
    -------------------------------------------------------------------------
    Total shareholders' equity                        2,711,764    2,664,653
    -------------------------------------------------------------------------
                                                      4,268,515    3,963,899
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Commitments and Contingencies



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

    Three months ended March 31,                           2010         2009
                                                              $            $
    -------------------------------------------------------------------------
    CASH FLOWS FROM OPERATING ACTIVITIES
    Net income for the period                            42,798       23,005
    Net loss from discontinued operations                   419        4,917
    Add (deduct) items not affecting cash
      Depletion of timber holdings included in cost
       of sales                                          68,256       64,205
      Depreciation and amortization                       1,819        1,129
      Accretion of convertible senior notes               6,204        2,859
      Stock-based compensation                            1,172        1,086
      Loss on changes in fair value of financial
       instruments                                          709          981
      Unrealized exchange gains                          (1,201)         (19)
      Interest income from Mandra                          (117)        (300)
      Non-controlling interests                             (24)           -
      Other                                                (629)       1,294
    -------------------------------------------------------------------------
                                                        119,406       99,157
    Net change in non-cash working capital balances     (67,971)      68,428
    -------------------------------------------------------------------------
    Cash flows from operating activities of
     continuing operations                               51,435      167,585
    -------------------------------------------------------------------------
    Cash flows used in operating activities
    of discontinued operations                             (235)      (2,789)
    -------------------------------------------------------------------------
    CASH FLOWS USED IN INVESTING ACTIVITIES
    Additions to timber holdings                       (189,767)    (233,861)
    Increase in other assets                            (10,093)      (5,257)
    Additions to capital assets                          (2,299)      (3,263)
    Decrease (increase) in non-pledged short-term
     deposits                                             7,189         (864)
    Business acquisitions                                 4,151            -
    Acquisition of convertible bonds                          -         (200)
    Proceeds from disposal of capital assets                 37            -
    -------------------------------------------------------------------------
    Cash flows used in investing activities            (190,782)    (243,445)
    -------------------------------------------------------------------------
    Cash flows from (used in) investing activities of
     discontinued operations                              1,478         (929)
    -------------------------------------------------------------------------
    CASH FLOWS FROM FINANCING ACTIVITIES
    Payment on deferred financing costs                  (5,893)           -
    Payment on derivative financial instrument                -       (2,891)
    Increase in bank indebtedness                        19,726        8,311
    Decrease in pledged short-term deposits                 137          228
    Issuance of shares, net of issue costs                1,882            -
    -------------------------------------------------------------------------
    Cash flows from financing activities                 15,852        5,648
    -------------------------------------------------------------------------
    Cash flows used in financing activities of
     discontinued operations                                  -           (1)
    -------------------------------------------------------------------------
    Effect of exchange rate changes on cash and
     cash equivalents                                       259         (238)
    -------------------------------------------------------------------------
    Net decrease in cash and cash equivalents          (121,993)     (74,169)
    Cash and cash equivalents, beginning of period    1,102,366      441,171
    -------------------------------------------------------------------------
    Cash and cash equivalents, end of period            980,373      367,002
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Supplemental cash flow information
    Cash payment for interest charged to income          24,793       24,569
    Interest received                                     1,000          681
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

SOURCE Sino-Forest Corporation

For further information: For further information: DAVE HORSLEY, Senior Vice President and Chief Financial Officer, Tel: (905) 281-8889, Email: davehorsley@sinoforest.com; LOUISA WONG, Senior Manager, Investor Communications & Relations, Tel: +852 2514 2109, Email: louisa-wong@sinoforest.com

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