Canfor Corporation

Don Kayne – President and CEO Tom Sitar – CFO Mark Feldinger – VP, Manufacturing

Darrell Switzerloft – Raymond James Chris Damas – BCMI Research Paul Quinn – RBC Capital Markets Sean Steuart – TD Newcrest Pierre Lacroix – Desjardins Securities

Thank you operator and good morning everybody and welcome to Canfor’s conference call to discuss the company’s first quarter results for 2011. As you may be aware I only resumed the role of CEO yesterday.

First of all I would like to thank Jim Shepherd for his leadership and guidance over the last four years. I hope to further expand many of the initiatives that he has led.

I will be speaking the next few; I will probably be spending the next few weeks and months visiting our operations. Today, I will speak to the results of the first quarter with the assistance of Tom Sitar our Chief Financial Officer and Mark Feldinger, our Vice President of Manufacturing are both with me today.

I will begin with the most significant event that occurred in the quarter, the earthquake and subsequent tsunami in Japan and provide a quick update on the current impacts as we see them. Canfor has an office in Japan and all of our employees there are fine, with that said the situation in Japan is still very difficult with 100s of 1000s of peoples affected.

We are still getting our product into the country with so much of the disaster still unfolding we are still trying to determine what the future will hold. With such a huge tragedy we wanted to focus on how we could help from a humanitarian stand point as quickly as possible.

We have so many customers and friends who simply need assistance quickly. Canfor and Canfor Pulp donated $200,000 to the relief efforts with addition funds to follow as both the companies will match additional employee donations.

We were joined by other industry partners as well as British Columbia prudential government together donating $1 million to the relief effort. In China, we continue to see increasing demand volumes in the first quarter of 2011 relative to the same quarter a year ago have increased significantly and we are currently on target for an overall annual increase in volume of 50% over last year.

In the first quarter of this year, China represented approximately 27% of our SPF lumber shipments. This market continues to be extremely important as our largest market the United States continues to struggle.

Although we are starting to see a broader recovery in the U.S. lumber consumption still remains weak and is similar to last year so far.

We are holding numbers but sales are not improving necessarily, consumer confidence, unemployment, GDP growth all seem to be moving in the right direction, which gives us reason for some optimism going forward although we are remaining cautious. With respect to sales realizations we have seen many of our lumber products destined for the U.S.

market being subject to greater discounts than on previous years relative to the benchmark price. This applies to specific (Inaudible).

Transportation was also a key issue and challenging at quarter due to extreme weather conditions which seriously impacted rail cart supply. This caused inventory levels to increase more than we expected.

We will be reducing those inventory levels during the second quarter. We believe weather they also have affected demand from a building perspective as take away in many parts of the United States do not meet our expectations.

Despite this we do feel there will be additional seasonal demand during Q2 and Q3. I would like to now turn the call over to Tom Sitar to discuss Canfor’s financial performance in the quarter.

Thank you, Don. My comments will be focused on our financial results and those items that affect comparability with other quarters and those factors that contributed significantly to our results.

The company is reporting for the first time its financial statements and results in accordance with International Financial Reporting Standards and comparative information has been restated accordingly. A full reconciliation of the closing balance sheet on this previous GAAP (Inaudible) and provisional opening balance sheet under IFRS along with the planetary notes is included in note 14 of our financial statements.

During my comments I will refer to our first quarter overview slide presentation, which is on our website in the investor relations sections. Also note that for your reference I will refer to all value amounts rounded to the nearest million except of course the per share amount.

Full details and exact numbers are shown in our news release. The first quarter of 2011 shareholder net income, which includes just 50.2% share of earnings from Canfor Pulp Limited partnership was $7 million or $0.05 per share.

This compared to a net income of $31 million or $0.22 per share for the fourth quarter of 2010 a net income of $18 million or $0.13 per share in the first quarter of 2010. On slide 3 of our presentation we have highlighted the current quarters non-operating item that affect comparability over results between the quarters and they are a gain of $3 million or $0.02 per share due to the effect of translation of U.S.

denominated debt net of investments as Canadian dollar strengthen more than $0.02 compared to the prior quarter end. Then a gain of $3 million or $0.02 a share on derivative financial instruments from our hedging program covering lumber, diesel and natural gas and foreign exchange.

And finally a gain of $1 million related to mark-to-market increase in the value of asset back commercial paper, which have been written down in 2007. After taking account of these items the first quarter adjusted net income is 0.1, 100,000 essentially at breakeven position, compared to previously adjusted net income of $14 million or $0.10 per share for the fourth quarter of 2010.

A decrease of $14 million. Turning into our operating performance on slide 4 of our presentation, total sales of $624 million or $5 million lower than the prior quarter.

As tighter lumber segment revenues were more than offset by lower revenues in the pulp business. The company generated EBITDA of $73 million a decrease of $11 million from the prior quarter.

If you remove the effect of inventory evaluations reflected in each quarter’s results EBITDA in the first quarter was $76 million a decrease of $7 million from a similarly adjusted EBITDA in the fourth quarter of 2010. Now looking at each business segment on slide five, slide five shows the history of U.S.

housing starts and SPF benchmark price converted into Canadian dollars and shows the North American lumber market continues to reflect trouble in U.S. housing sector in the first quarter.

Now on the lumber segment, we had EBITDA of $18 million in the first quarter of 2011 compared to EBITDA of $22 million in the previous quarter. This result included minimal inventory evaluations in Q1 of 2011 compared to a $1 million recovery in Q4.

When these items are adjusted out EBITDA in Q1 was $18 million, which represented a $3 million quarter-over-quarter decrease. As Don previously mentioned, although the benchmark 2x4 price for Western SPF and also Southern Yellow Pine increased during the quarter, these price increases were not matched by price movements in North American market across most other grades (Inaudible) and the benchmark price increases were also not reflective of the pricing at some of the offshore market.

At the same time price increases were offset by stronger Canadian dollar and the higher transportation costs due to rising fuel prices. The overall effect of this is that realizations only improve slightly despite a large increase in the benchmark price related to the fourth quarter of last year.

Our lumber unit manufacturing costs were down slightly from the previous quarters had lower conversion costs, that partially offset by higher log cost due to higher diesel cost and increased competition for purchase. Now turning to our pulp and paper segment on the slide seven.

The first quarter results reported for the pulp and paper segment include Canfor’s Taylor Pulp mill together with Canfor Pulp Limited partnership. Our first quarter EBITDA was $64 million down $2 million compared to the fourth quarter of 2010 due to lower shipments and stronger Canadian dollars, on the U.S.

dollar basis these prices were essentially unchanged related to the prior quarter for NBSK. Details of results for Canfor Pulp Limited partnership of which we own 50.2% were disclosed in Canfor Pulp product is usually is in conference calls earlier this week.

In the first quarter our capital expenditures were $49 million of which $26 million was in lumber business and $23 million was in Canfor Pulp. For 2011 we are proceeding the capital spending which we expect to be approximately $140 million in the lumber business of which $120 million will be for improvement project in our (Inaudible) facility.

At the end of the quarter, Canfor excluding Canfor Pulp had cash of $122 million non-utilized credit of approximately $346 million, our net debt to total capitalization excluding Canfor Pulp was 4% and on a consolidated basis it was 7%. And now Don with that I will turn the call back to you.

Operator, I would like to now open the call out for questions.

Thanks very much. Good morning guys.

Don just a question on Asian lumber shipments what do you think right now with respect to Asian or then specifically Chinese demand for some of the better grades in the two and better and how do you see that unfolding this year and next.

For sure Darrell, I guess we are seeing sales to China continuing very, very consistent throughout the quarter both in quarter one and also forward sale through quarter two we haven’t seen really any changes it’s been very consistent and remains very solid and in terms of the two and better portion we also see that continuing to increase and we would estimate now probably in the neighborhood of 40% of our business now would be in the two and better or higher grades there off.

So what would be the end usage for currently in China for that two and better standard.

Of course some of albeit probably the small amount still on the construction side new construction side with a lot of that goes into the remanufacturing side and also for some strides for I think for furniture or for flooring or for (Inaudible) or those types of item as well as some of the repair and remodeling type products.

Okay and what about wider west is it strictly still mainly 2X4 or narrower or, are you seeing some demand increase for the widers as well.

Yeah, we are a good percentage of it is 2X4 and continues to be although we are seeing slower demand as well for 2X6 in the wider particularly these 2X6 and some 2X8 and again that the widers are with the more opportunity there is for remanufacturing that will be the primary use for the wider woods.

Okay and then just finally on Japan rebuilding potential, how do you see that incremental lumber demand developing and is there an opportunity for the Western lumber, Western lumber producers there.

And we on that I mean we right now we are still very much focused just on the humanitarian efforts there and we do believe that down the road there will be some and definitely some opportunities there for some other rebuilding and when that occurs into the degree that it will there is still ways off. We probably would estimate Darrell that’s probably before we get a really good feeling on that probably 12 months away.

At this point in time, we really haven’t seen any change in our shipments to Japan and I would make that comment it’s been pretty consistent.

Okay, thanks very much guys. I will turn it over.

Okay, thanks Darrell.

Yes just a question on the EBITDA on the lumber sector. I wasn’t expecting it to be slightly up rather than slightly down.

If your unit manufacturing cost were slightly down but we have much higher pricing on, over the mills and higher operating rate. So could you explain that?

Well sure, on a quarter-to-quarter comparison there are a number of things that fits in especially in the cost side that doesn’t necessarily directly tie just to lumber volumes that lumber segment has other product costs in it such as log trades out there, there is unrealized income and inventory volume, we have lumber that we have purchased for resale. So there is a fair number of items like that flow into us, so especially on the just the quarter-to-quarter, sometimes difficult to make that comparison.

And also I guess prior quarter had some credits in that as well. So I guess you can call it noise but there is some distortion on the revenue comparison quarter-to-quarter.

But our unit manufacturing cost, for that if you look at it at the no other we’re lower quarter-to-quarter.

And is that a total cost or cash cost?

That’s cash cost. And the non-cash items not that different.

Great and the second question if I may, this constantly this problem of lower pricing to wide dimension and different grades. Are those related to poor building season or what’s going on there in the U.S?

Yeah, largely, Chris, it would be related to that I mean clearly the wider woods are used mostly for new home construction particularly in the higher grades and so those are the items that have been impacted the most for sure. And that will probably continue at least until we see some sort of sustained rebound in the United States home building market.

Great. Thanks and good quarter.

Thanks.

Yeah, thanks. Good morning guys.

And welcome aboard Don. Question on just operating rates we are seeing a material drop in U.S.

dollar lumber prices we also see the rise in the Canadian dollar, do you expect to change your operating rate in Q2 and Q3?

I think at this point we are always looking at that, but at this point we have nothing anticipated.

Okay and then, then on just a pulp segment here we saw Canfor Pulp report EBITDA up 4 plus million, your segment is down the only difference really is Taylor. I can’t see Taylor having a $6 million swing.

What’s in that number?

Well, Taylor did this is Tom Sitar, Taylor did have poor results quarter-to-quarter but there is a bit of noise in there Q4 had some one-time items their investment tax credits, that were in there in the fourth quarter later to the entire pulp business. So with a bit of the distortion that way but there is no question the BCTMP pulp business worst quarter-to-quarter and those are two are the things that make it out.

Okay, so what was the size of the investment tax credits in Q4 then?

Well we are not specifically identifying it, but it did make up a portion of that difference tax.

Okay question on just a change to IFRS we are seeing other guys, other companies capitalize major maintenance, is that Canfor’s policy as well but what’s the overall effect on EBITDA in the quarter.

The effect of that is completely in Canfor Pulp and it is something that IFRS requires for anything that stretches over a year. I don’t remember that a number is in there, but it is completely in the pulp business certain effects followed our lumber business at all there is no change in (Inaudible).

Okay and then just a clarity on the increase in number two in better volume sold, is that a function of with respect to China, is that a function of that moving up market in lumber is that just a function of higher shipment volumes and we sort of max it on low grade shipments.

Well, definitely, there is a bit of both Paul, I mean, and there is no question that we probably maxed it on low grade shipments, but what we are encouraged by and we are starting to see more and more of this just the recognition of SPF is a preferred BC in the country. And we worked hard on that as an industry as you know for several years here and we are starting to see that and it is escalating more quickly now and we are seeing it in lot more in some of the more specific remanufacturing opportunities.

As well as new home construction to some degree as well now going forward, so it’s a bit of both.

So I guess just following up on that, if there is any change there in Russian log export tax or additional Russian lumber shipments into China. Do you feel that just your position with SPF lumber that is that it will be the dominant and the growth in the market won’t be as slow as one or the other, otherwise expect.

Paul, I mean, I think I understand your question, I mean, regardless of what happens in Russia now I guess I would firmly believe that we have made some substantial gains there and we were recognized now as a reliable and a quality producer and from an industry point of view as well as Canfor. And so I wouldn’t expect regardless of what happens there that we would suffer at all, I would actually be very optimistic going forward.

We are well established there and we should be able to capitalize even further going forward as the China market improves domestically.

Great, that’s helpful. Thanks guys.

Alright. Thanks Paul.

Thanks. Good morning, just a couple of questions.

Don wondering on the, I guess the discretionary CapEx of $120 million for just on note this year if you can go into the future specifics on certain projects beyond I guess 14, Don which you talked quite a bit about any other. Are there any other projects within that $120 million that you can provide some detail on?

Yes, sure Sean. We’ve marketable $62 million so far this year of a total of $125 million that we are looking to possibly spend this year.

Of the $62 million that’s basically (Inaudible), which were going to be adding some cleaner optimization there a greater list system and also a new hogger and increase storing capacity. We should add about $70 million additional feet on an annualized basis when it’s complete towards the end of September.

Our Polar sawmill we are doing a complete plan a rebuilt there as well as some sort of work optimization et cetera. And that should add about 60 million feet on an annualized basis.

And then at Plato we are doing building an energy system there and a hogger. So that we can remove the tier II gunner and we will also have, it will be the same system as we currently have for St.

John and PG Saw. And that should be complete at some time in the fall, towards November probably.

Sean Steuart – TD Newcrest Okay, that’s helpful detail. And then Don, just following up on one of the previous questions on the saw mill cost, you mentioned lower manufacturing costs offset by higher log cost this quarter.

Can you put in order of magnitude in terms of the sequential change there for both of those just so we can refine the model a little bit better?

I am not sure that I can sort of do it individually in the pieces, but it did add up to a relatively, reasonably possible cost of goods sold to a variance quarter-to-quarter. Log’s unrealized inventory, woods purchased for resale we do buy product that we can sell.

I am not sure I can come up with sort of a number that represents that but it’s a number known as more than 10 anyway.

Okay. Thanks.

Thank you very much. Just one question on China again on the tracking side.

Wanted to get, some kind of an update on how the pricing structure is going on there especially with the growth of the number two. And better that you are having there, just want to ask color, overall.

Okay. Pierre basically in China the returns there are very similar to what we would’ve received in the North America market.

And actually into quarter two here probably would be a little bit better. So it continues to improve there as the two and better market grows in China.

In term of quarterly, monthly and weekly pricing all that its looks like what is the breakdown between the timing of the pricing.

I would estimate that be about 50% of the business that we do there would be monthly and probably 25% quarterly and then we also do make us to remainder a more two week to three week basis.

Okay. Good, excellent.

One, last on China, Don, I don’t know if you can or if you have any kind of information about the outlook for any kind of big milestone coming up on the either on the policy side or structural side to see even more demand coming from China using more wood infrastructure just wanted to ask some color on structurally what could happen in the next couple of years that could boost even further demand.

Yes, that’s a good question, Pierre and I think that we expect, I guess the big change and it’s underway today and we see it in the next two to three four years to be able to impact is. The increase in domestic demand as this urbanization situation continues to increase as you’ve known or heard with the 25 million to 30 million people moving into urban areas.

We see an increase in wealth as a result of that and employment is getting better there, wages are going up. And so we expected as Chinese economy focuses more on the domestic demand that will have a very positive impact.

In addition to the exports they specifically relied on in the past. So we believe China going forward is going to continue to, just get stronger as many parts of Asia will so we are very positive that would be a big structural change and that would benefit our industry and Canfor.

But anything specific to related to the transaction industry using more wood or and should you look at anything coming up in term of incentives by government to built more on wood?

I think along those lines, I mean the biggest change that you are seeing there is the focus on rebuilding and the whole environmental push in terms of focus on carbon reduction and that’s very real it’s across the country we see it on a regular basis. And you are probably aware of the Vice Minister that’s endorse that is the country and he has been handling this whole green building initiative across the country.

So as that takes hold clearly with wood being such an environmentally friendly product of choice. We would expect it we would feel the benefit from that quite a lot going forward.

That’s great. Thank you very much, Don.

Okay. Thanks Pierre.

Okay. Thanks operator and thanks to all of you for participating.

And I look forward to speaking with you again at the end of the quarter two.