Sino-Forest Reports First Quarter 2008 Results

TORONTO, May. 13 /PRNewswire/ --

TORONTO, May 13 /PRNewswire-FirstCall/ - Sino-Forest Corporation ("Sino-Forest") announced today its first quarter 2008 financial results, including substantial increases in revenue and EBITDA as compared to prior years' first quarters. Dollar amounts in this news release are in U.S. currency unless otherwise indicated.

Financial Highlights - Revenue increases 21% to $136 million - EBITDA increases 57% to $74 million - Income from operations increases 43% to $35 million - Non-operating charges of $7.4 million (approximately $0.04 EPS) result in Net Income increasing only 26% to $15 million - Non-operating charges combined with the effect of a 30% increase in outstanding common shares resulted in diluted EPS unchanged compared to same quarter last year (US$ millions, except margin and First Quarter per share amounts) ended March 31 2008 2007(3) Change (Restated) $ $ % ------------------------------------------------------------------------- Revenue 136.1 112.8 20.7 Gross Profit(1) 46.9 32.1 46.1 Gross Profit Margin 34.4% 28.5% 5.9% pts EBITDA(2) 73.6 47.0 56.8 Income from operations 34.6 24.2 42.9 Net Income 14.5 11.5 26.2 Diluted Earnings Per Share from Continuing Operations 0.09 0.08 2.3 Diluted Earnings Per Share 0.08 0.08 (3.2) Cash Flow From Operating Activities of Continuing Operations 32.0 46.3 (30.8) Note: See footnotes (1), (2) and (3) at end of this release

Allen Chan, Chairman and CEO of Sino-Forest Corporation, said, "We are very pleased with our first quarter growth and are well positioned to deliver strong full year results. As in the past years, our first quarter operating activities tend to be slower due to the week-long Chinese Lunar New Year holiday. In addition, the worst snowstorm in 50 years swept across China in January. Despite these events, Sino-Forest achieved a 21% increase in revenue, a 57% increase in EBITDA and growth in net income of 26% as compared to the same quarter last year."

Mr Chan continued, "These results demonstrate our ability to execute our integrated plantation model and confirm that the economics of our strategic plan are attractive -- exceeding our expectations and guidance. We continue to ramp up our capabilities and acquire additional fibre under existing agreements at the contracted terms. These agreements will provide a solid foundation of sustainable and prosperous growth for Sino-Forest Corporation."

Business Segment Highlights

Total revenue increased 21% to $136 million in the first quarter of 2008 due primarily to higher sales of plantation fibre (specifically from integrated plantations) and manufactured and other products, offset by a decrease in the sales of other fibre (specifically imported wood products).

------------------------------------------------------------------------- First Quarter 2008 First Quarter 2007 --------------------------------------- $'000 % $'000 % ------------------------------------------------------------------------- Wood Fibre Operations --------------------- ------------------------------------------------------------------------- Plantation Fibre 102,670 75.4 51,316 45.5 ------------------------------------------------------------------------- Other Fibre 24,187 17.8 55,776 49.5 ------------------------------------------------------------------------- Manufacturing and Other Operations 9,280 6.8 5,685 5.0 ------------------------------------------------------------------------- Total Revenue 136,137 100.0 112,777 100.0 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Wood Fibre Operations Revenue Plantation Fibre ------------------------------------------------------------------------- First Quarter ended First Quarter ended March 31, 2008 March 31, 2007 ------------------------------------------------------ Sales Sales per Total per Total Hectares hectare revenue Hectares hectare Revenue ------------------------------------------------------------------------- $ $'000 $ $'000 ------------------------------------------------------------------------- Purchased plantations 9,175 5,476 50,244 11,150 4,430 49,395 ------------------------------------------------------------------------- Integrated plantations 4,254 12,306 52,349 - - - ------------------------------------------------------------------------- Heyuan Pine Undertaking - - - 880 1,667 1,467 ------------------------------------------------------------------------- Planted plantations 64 1,203 77 261 1,739 454 ------------------------------------------------------------------------- Total 13,493 7,609 102,670 12,291 4,175 51,316 ------------------------------------------------------------------------- -------------------------------------------------------------------------

Plantation fibre revenue doubled to $103 million in the first quarter 2008. The increase was mainly due to the sale of logs harvested from 4,254 hectares of integrated plantations in 2008 compared to none in 2007.

The total volume of fibre sold during the first quarter was approximately 1.4 million cubic metres, with approximately 863,000 m(3) from our purchased and planted plantations, and approximately 509,000 m(3) from integrated plantations. In the same quarter last year, we sold a total of 1.0 million m(3) from purchased and planted plantations (which include Heyuan Pine Undertaking), 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 $103 per m(3). Gross margin for logs sold in the south-west region of China was 28% or $28 per m(3). Fibre sold from integrated plantations was recorded under a new, alternate transaction structure, which we anticipate will be finalized and applied to all integrated operations in the second half of 2008.

The average yield of standing timber sold under the purchased and planted plantations was 93 m(3) per hectare during the quarter 2008 (84 m(3) per hectare for Q107), which obtained an average selling price of $58 per m(3) compared to $50 last year - an increase of 16%.

Other Fibre

Revenue from imported wood products decreased 56% from $55 million to $24 million in first quarter 2008, mainly due to lower sales volume from Russia as its government significantly increased log export duties to discourage the exporting of raw logs.

Revenue from the sales of wood logs decreased 83% to $0.1 million in 2008, due to limited harvesting of secondary natural forest in Inner Mongolia; our local partner has decided to wait for further details on the tariffs to be imposed by the Russian government.

Manufacturing and Other Operations Revenue

Revenue from this business segment increased 63% to $9 million in the first quarter of 2008, mainly due to higher sales of engineered-wood flooring products and new sales from processing facilities in Hunan province.

Gross Profit

Gross profit increased 46% from $32 million in Q1 2007 to $47 million in 2008. Overall gross profit margin (gross profit as a percentage of total revenue) increased from 28% in 2007 to 34% in 2008 mainly due to the higher proportion of sales of plantation fibre with higher gross profit margin compared to other fibre segment.

Wood Fibre Operations Gross Profit

Gross profit margin from sales of purchased and planted plantations increased from 58% in Q1 2007 to 63% in 2008 due to higher selling prices. The gross profit margin from sales of logs under the integrated plantation operations was 28%.

Gross profit margin from sales of imported wood products remained similar to last year's 3%.

Gross profit margin from sales of wood logs decreased from 10% in Q1 2007 to 5% in 2008 as a result of no sales of logs from Inner Mongolia.

Manufacturing and Other Operations Gross Profit

Gross margin from our manufacturing and other operations decreased from 12% in Q1 2007 to breakeven in 2008, primarily due to increased cost of production of our manufacturing plants and downtime due to the snowstorms in the first quarter of 2008.

Selling, General and Administration Expenses

SG&A expenses increased 67% to $11 million, due to continuing operations expansion requiring the set-up of new companies and hiring of additional personnel to support growth.

Income from Operations

Income from operations increased 43%, from $24 million in Q1 2007 to $35 million in 2008, due to the factors explained above. Our income from operations as a percentage of revenue increased from 21% in Q1 2007 to 25% in 2008.

Non-Operating Charges

During the quarter, the Company incurred non-operating charges in the amount of approximately $7.4 million related to foreign exchanges losses and losses on changes in fair value of financial instruments, including a non-cash loss of $2 million on the embedded conversion option of the convertible bonds issued by Omnicorp.

Net Income from Continuing Operations

As a result of the foregoing, net income from continuing operations in the first quarter increased 33%, from $12 million in 2007 to $16 million in 2008. Overall net profit margin from continuing operations increased from 10% in Q1 2007 to 11% in 2008.

Cash Flows from Operating Activities of Continuing Operations

Net cash provided by operations increased from $36 million to $63 million in the first quarter of 2008. However, an increase in the cash invested in working capital items, specifically accounts receivable which increased significantly during Q1 2008, resulted in cash flow from operating activities of continuing operations declining 31% to $32 million.

Capital Expenditures ------------------------------------------------------------------------- First Quarter ended First Quarter ended March 31, 2008 March 31, 2007 ----------------------------------------- (in millions) Hectares $ Hectares $ ------------------------------------------------------------------------- Tree acquisition - Purchased plantations 27,706 77.9 14,416 73.6 ------------------------------------------------------------------------- Re-planting and maintenance of plantations 4.4 3.4 ------------------------------------------------------------------------- Panel manufacturing and other operations 10.0 1.0 ------------------------------------------------------------------------- Total 92.3 78.0 ------------------------------------------------------------------------- -------------------------------------------------------------------------

Capital expenditures in the first quarter of 2008 for plantation acquisitions increased 6% to $78 million and were mainly spent in Guangxi and Hunan. CAPEX this year is expected to exceed $700 million for plantation acquisition, re-planting and maintenance, and approximately $30 million for the continued development of our manufacturing operations.

Outlook

The outcome from China's National People's Congress annual meeting remains positive and encouraging for the forestry sector with programs formulated in 2007 that will continue to support increased forest coverage and growth of the forest product industry. In addition, domestic log prices will remain robust given China's fibre deficit and limited supply from domestic and nearby foreign markets, and the export tariff imposed by the Russia government. Therefore, we remain encouraged and focused on our strategic plan to become a regional wood resources developer by strengthening our silviculture expertise and extending our sustainable forestry practices.

Our goal in 2008 is to continue to expand our portfolio of plantation trees and fibre inventory under management, and to build up a large-scale sustainable re-plant program in 2009 after more land in our southern-province plantation base has been harvested and cleared.

Notice of Conference Call

Sino-Forest will hold an investor conference call to further discuss its first quarter 2008 results on Tuesday May 13, 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 for North America toll-free access. Alternatively, to join the live webcast and replay in a listen-only mode, log on to Sino-Forest's website under "Investor Relations - Earnings Releases" or go directly to http://www.sinoforest.com/earningsreleases.asp.

NOTE: The unaudited Interim Consolidated Financial Statements and Notes and Management Discussion and Analysis for the period ended March 31, 2008 will be available on our website http://www.sinoforest.com/earningsreleases.asp today after 7:45 am and on SEDAR .

About Sino-Forest Corporation

Sino-Forest Corporation is a leading commercial forestry plantation operator in China. The Canadian company started its operations in 1994 and was the first foreign and privately managed operator involved in forest products in China. 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 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 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 United States dollars, except for earnings per share information) (Unaudited) (Restated) Three months ended March 31, 2008 2007 $ $ ------------------------------------------------------------------------- Revenue 136,137 112,777 Costs and expenses Cost of sales 89,258 80,686 Selling, general and administration 11,322 6,765 Depreciation and amortization 1,001 1,143 ------------------------------------------------------------------------- 101,581 88,594 ------------------------------------------------------------------------- Income from operations before the undernoted 34,556 24,183 Interest expense (10,571) (11,114) Interest income 2,595 1,467 Exchange losses (2,839) (467) Loss on changes in fair value of financial instruments (4,535) (314) Other income 682 297 ------------------------------------------------------------------------- Income before income taxes 19,888 14,052 Provision for income taxes (4,274) (2,346) ------------------------------------------------------------------------- Net income from continuing operations 15,614 11,706 Net loss from discontinued operations (1,087) (196) ------------------------------------------------------------------------- Net income for the period 14,527 11,510 ------------------------------------------------------------------------- Earnings per share Basic 0.08 0.08 Diluted 0.08 0.08 ------------------------------------------------------------------------- Earnings per share from continuing operations Basic 0.09 0.08 Diluted 0.09 0.08 ------------------------------------------------------------------------- Loss per share from discontinued operations Basic (0.01) - Diluted (0.01) - ------------------------------------------------------------------------- Retained earnings Retained earnings, beginning of year, as previously presented 540,964 397,380 Cumulative impact of accounting changes relating to financial instruments - (8,689) ------------------------------------------------------------------------- Retained earnings, beginning of period 540,964 388,691 Net income for the period 14,527 11,510 ------------------------------------------------------------------------- Retained earnings, end of period 555,491 400,201 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Expressed in thousands of United States dollars) (Unaudited) (Restated) Three months ended March 31, 2008 2007 $ $ ------------------------------------------------------------------------- Net income for the period 14,527 11,510 Other comprehensive income: Unrealized loss on financial assets designated as available-for-sale, net of tax of nil (949) - Unrealized gains on foreign currency translation of self-sustaining operations 62,746 9,090 ------------------------------------------------------------------------- Other comprehensive income 61,797 9,090 ------------------------------------------------------------------------- Comprehensive income 76,324 20,600 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS (Expressed in thousands of United States dollars) (Unaudited) As at As At March 31, December 31, 2008 2007 $ $ ------------------------------------------------------------------------- ASSETS Current Cash and cash equivalents 230,222 328,690 Short-term deposits 29,060 22,163 Accounts receivable 134,560 105,329 Inventories 51,657 46,661 Prepaid expenses and other 27,907 24,185 ------------------------------------------------------------------------- Total current assets 473,406 527,028 ------------------------------------------------------------------------- Timber holdings 1,271,686 1,174,153 Capital assets, net 91,155 78,608 Other assets 78,791 57,708 ------------------------------------------------------------------------- 1,915,038 1,837,497 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Bank indebtedness 49,863 55,383 Accounts payable and accrued liabilities 108,852 107,989 Income taxes payable 2,103 1,615 Liabilities of discontinued operations 34,530 32,016 ------------------------------------------------------------------------- Total current liabilities 195,348 197,003 ------------------------------------------------------------------------- Long-term debt 443,310 441,985 Derivative financial instrument 11,625 11,211 ------------------------------------------------------------------------- Total liabilities 650,283 650,199 ------------------------------------------------------------------------- Commitments and Contingencies Shareholders' equity Share capital 537,141 537,141 Contributed surplus 5,039 3,906 Accumulated other comprehensive income 167,084 105,287 Retained earnings 555,491 540,964 ------------------------------------------------------------------------- Total shareholders' equity 1,264,755 1,187,298 ------------------------------------------------------------------------- 1,915,038 1,837,497 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (Expressed in thousands of United States dollars) (Unaudited) (Restated) Three months ended March 31, 2008 2007 $ $ ------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income for the period 14,527 11,510 Net loss from discontinued operations 1,087 196 Add (deduct) items not affecting cash Depletion of timber holdings included in cost of sales 38,054 21,625 Loss on changes in fair value of financial instruments 4,535 314 Unrealized exchange losses 2,497 153 Stock-based compensation 1,133 455 Depreciation and amortization 1,001 1,143 Interest income from Mandra (300) - Other 529 447 ------------------------------------------------------------------------- 63,063 35,843 Net change in non-cash working capital balances (31,042) 10,457 ------------------------------------------------------------------------- Cash flows from operating activities of continuing operations 32,021 46,300 ------------------------------------------------------------------------- Cash flows from operating activities of discontinued operations 1 4,038 ------------------------------------------------------------------------- CASH FLOWS USED IN INVESTING ACTIVITIES Additions to timber holdings (83,637) (77,273) Increase in other assets (22,411) - Additions to capital assets (10,036) (1,031) Increase in non-pledged short-term deposits (3,947) (1,761) Business acquisition (1,928) - Proceeds from disposal of capital assets 1 - ------------------------------------------------------------------------- Cash flows used in investing activities (121,958) (80,065) ------------------------------------------------------------------------- CASH FLOWS (USED IN) FROM FINANCING ACTIVITIES (Decrease) increase in bank indebtedness (6,757) 916 Increase in long-term debts 855 - (Increase) decrease in pledged short-term deposits (1,938) 1,054 Payment on derivative financial instrument (2,100) (930) ------------------------------------------------------------------------- Cash flows (used in) from financing activities (9,940) 1,040 ------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents 1,408 131 ------------------------------------------------------------------------- Net decrease in cash and cash equivalents (98,468) (28,556) Cash and cash equivalents, beginning of year 328,690 152,887 ------------------------------------------------------------------------- Cash and cash equivalents, end of year 230,222 124,331 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Supplemental cash flow information Cash payment for interest charged to income 16,458 16,658 Interest received 2,595 1,575 ------------------------------------------------------------------------- -------------------------------------------------------------------------