Canfor Corporation

Don Kayne - Chief Executive Officer Alan Nicholl - SVP of Finance and Chief Financial Officer Brett Robinson - President, Canfor Pulp Wayne Guthrie - SVP, Sales and Marketing Peter Hart - VP, Pulp and Paper Sales and Marketing Stephen Mackie - SVP, Canadian Operations

Mark Wilde - BMO Capital Markets Sean Stewart - TD Securities Paul Quinn - RBC Capital Markets Hamir Patel - CIBC Capital Markets

Thank you, operator and good morning everyone and thank you for joining the Canfor and Canfor Pulp Q3 2016 results conference call this morning. Thanks for being on a bit earlier than normal.

We are here in Mobile this morning where we hosted our quarterly Board Meetings for the first time. I'll make a few comments about the quarter, and our outlook before I turn things over to Alan Nicholl, our Chief Financial Officer for both Canfor Corporation and Canfor Pulp.

Alan will provide a more detailed overview of our performance in Q3, after which we will take questions. In addition to Alan on the line with me today are Brett Robinson, President of Canfor Pulp; Peter Hart, Vice President of Pulp Sales; Wayne Guthrie our Senior VP of Lumber Sales and Marketing; and Stephen Mackie, our Senior VP of Operations for Canada.

Starting with Canfor Pulp, we were pleased to see a return to normal operating levels in the third quarter after significant scheduled shuts in Q2. The outages behind us in the mills ramped back up to full rates, we saw more normal productivity levels in shipments in the quarter.

Markets for pulp were relatively stable, but our results were materially improved reflecting the higher production rates. We expect Q4 to hold relatively steady owing to the fall maintenance season and the low - slower ramp up of new capacity which has delayed the increase of supply into the market.

Turning to the lumber side of our business, in the third quarter, we continued to see the benefits of our U.S. South and our specialty product mix.

While southern yellow pine 2x4 pricing was down in the quarter our revenues were up reflecting our significant exposure to high-value specialty products. The U.S.

South mills continued to perform well with improvements in productivity and steady log costs. Our Canadian mills ran well in the quarter and production was back to expected levels with increased planer wood production at our Houston mill after the kiln fire in Q2 and progressing through the startup period at Polar.

Canadian revenues were higher due to improved pricing and a weaker dollar, but that was partially offset by the moderately higher log cost that we highlighted on the last quarterly call. In our key offshore markets of Japan and China, pricing is gradually moving higher and inventory levels are in good shape.

We anticipate to see the normal seasonal pickup in demand in both these markets in the fourth quarter. Demand in the North American – in North America remains solid, but we do expect to see the normal seasonal slowdown in consumption as we head into winter.

Looking to 2017, we are seeing optimism from customers in all sectors in the U.S., particularly when it comes to new single-family home construction and repair remodel. Earlier in the third quarter, we completed the final phase of our purchase of Scotch Gulf Lumber where we acquired the remaining 50% of that business.

We have one final phased acquisition to complete on the Balfour and Beadles Mills in Southern Georgia, which will occur in January. And finally, I will end with comments on the softwood lumber agreement.

While we were disappointed that an agreement could not be reached before the expiration of the standstill period, discussions continue between Canada and the U.S. government with strong support from industry.

We are encouraged by the commitment we see and remain hopeful that a new deal will be reached. That being said, we are prepared for all outcomes.

I am sure there will be several questions on this, most of which I likely won’t be able to answer in any detail, but I will leave it at that for now. So with that, I will turn the call over to Alan to provide an overview of our financial results.

Thanks, Don and good morning to everyone. As usual, my comments this morning will focus principally on our financial performance for the third quarter of 2016 by reference to the previous quarter.

Full details of our results are contained in the Canfor Pulp and Canfor news releases which were issued yesterday. As always, you will find an overview slide presentation on both the Canfor and Canfor Pulp websites in the Investor Relations section under Webcasts.

The presentation highlights consolidated and segmented results that I will be referring to this presentation during my comments. For the third quarter of 2016, Canfor reported shareholder net income of $51 million or $0.38 a share, up from net income of $36 million or $0.27 a share reported for the second quarter and a net loss of $17 million or $0.15 a share reported for the third quarter of 2015.

On Slide 3 of our presentation, we highlight various non-operating items net of tax and non-controlling interest, which affects the comparability of our results between the quarters. In the third quarter of 2016, the most significant adjustment was a foreign exchange loss on long-term debt of $1 million or $0.01 a share.

After taking account of these adjustments, the third quarter adjusted shareholder net income was $52 million or $0.39 a share, compared to similarly adjusted net income of $27 million or $0.20 a share for the second quarter. Results for the Lumber segment are highlighted on Slide 5, of our presentation.

The Lumber business recorded operating income of $75 million in Q3, a $19 million increase from adjusted operating income in the previous quarter, which included a one-time gain of $15.5 million related to a legal settlement. The higher adjusted operating income primarily reflected increased sales realizations in both Western SPF and Southern Yellow Pine.

Overall unit manufacturing costs were up slightly, compared to previous quarter with productivity gains and stable log cost in the U.S. sites largely offsetting moderate log increases in Western Canada, the latter reflecting increased market-based stumpage and higher hauling costs.

Shipments and production volumes remained in line with the prior quarter. The higher unit sales realizations for the most part reflected improved prices and a 1% weaker Canadian dollar.

U.S. dollar benchmark Western SPF lumber prices trended higher in the current quarter and while the southern yellow pine east 2x4 price, benchmark price was lower quarter-over-quarter.

Our southern pine realizations benefited from improved spreads in 2x6 and 2x8 and strong pricing for our specialty products. Canfor’s Pulp and Paper segment comprises the results of Canfor Pulp Products Inc.

The company reported net income of $22 million or $0.34 a share, compared to net income of $2 million or $0.03 a share for the previous quarter and net income of $31 million or $0.45 a share for the third quarter of 2015. And as you can see on the summary of Canfor Pulp’s operating results on Slide 7, the improved operating income in Q3 was primarily attributable to less scheduled maintenance downtime, as well as higher pulp shipment volumes and increased energy revenues, as well as a modest pickup in unit sales realizations.

Global softwood pulp markets remain fairly stable through the quarter and the higher unit sales realizations largely reflected the benefit of the slightly weaker Canadian dollar, which more than offset a modest decline in NBSK pulp prices to China. BCTMP prices improved during the quarter also.

Unit manufacturing costs were well done in the quarter reflecting the 33,000 less tons of scheduled downtime in the period. The higher energy revenues reflected higher power generation levels and seasonally higher pricing.

Shipments were up 11% from the previous quarter, again mostly reflecting the reduced scheduled maintenance downtime. Operating income in the Paper segment was up $2 million from the previous quarter, mostly as a result of the higher value sales mix and the weaker Canadian dollar, partly offset by lower paper shipment volumes.

Unit manufacturing cost remains flat despite higher scheduled maintenance outages in the current quarter. Capital spending in the third quarter totaled $57 million, of which $40 million was for the Lumber business and $14 million for Canfor Pulp.

The 2016 capital spend is projected to be around $170 million for Canfor and $70 million for Canfor Pulp with similar amounts currently anticipated for 2017. As Don mentioned, during the quarter, Canfor completed the final phase of its Scotch & Gulf acquisition for $62 million increasing its ownership stake from 50% to 100%.

Consistent with previous quarters, Canfor Pulp’s Board of Directors yesterday approved the continuance of its quarterly dividend of six and a quarter cents per share. At the end of Q3, Canfor, excluding Canfor Pulp had net debt of $378 million with a saleable liquidity of $255 million.

Canfor Pulp had net debt of $80 million with a saleable liquidity of just over $100 million. Net debt to total capitalization excluding Canfor Pulp was around 21% for Canfor Pulp with a 4% and on a consolidated basis, it was 19%.

And with that Don, I will turn the call back to you.

All right. Thanks, Alan.

Operator, we can now take questions.

Good morning, Don.

Good morning, Mark.

First question, I will get an SLA question out of the way right quickly here. Just in the trade discussions, is a quota still kind of a no go in a general sense for the Canadian producers?

Or are there kind of quota structures that you think might work for you and might work for the Canadian industry?

Yes, I mean, thanks, Mark. I mean, we get that question a fair bit.

I mean, I think that, we’ve had some real good solid support or some real good conversations with Canada and BC both who have been a real, real, support of here of engaging with U.S. and from our standpoint, that’s been occurring.

There has been several different variations of what might work going forward. And so, we are continuing to work through that and I mean, really at the end of the day, as you know, it’s really the governments of Government of Canada is the most involved in that.

And so, we are – we know for one thing, we are trying to – while we, of course would like to see free trade we do recognize it, manage trades probably were going to end up with. So there is possibilities of some different hybrid type systems potentially.

But at the end of the day, we are still trying to work through to get some sort of a deal that will work from both the U.S. standpoint and also from Canada’s standpoint.

And we made many efforts to, I think, Canada has made many efforts to reach out to try to get something in place here and we are still waiting to get something solid back.

As it stands today, Don, are you optimistic about kind of a solution over the next, say, six months or do you think we are headed back in the litigation here of kind of all while last time around?

Yes, that’s a difficult one to answer. I mean, I think that, we try to maintain, I think that really goes for everybody.

It’s a difficult negotiation. We know that it always has been typically and traditionally.

So, there is always some optimism that we can get something that’s going to work. But I can tell you one thing, we are – it has to be something that we can really accept in Canada.

We are not going to – it’s not going to be any deal that’s got to be a deal that we actually absolutely believe will be solid for Canada and for British Columbia and for Canfor going forward. So, try to remain somewhat optimistic, but we also recognize the challenges that we got in front of us here.

Okay, all right. Let’s turn to the business.

I was just kind of curious your Lumber volumes were flat on a year-over-year basis and the Lumber market has continued to improve. So, I would have thought that you might have had a little better, just year-over-year comparison on the volume side.

Can you talk about that?

Yes, maybe, Stephen, do you want to talk about the volume at all, just overall?

Sure, so,

But that was the startups and so forth.

Yes, for sure. Thanks, Don and Mark.

So, our volumes are relatively flat, but we did have the – in the quarter, we did have a couple of major capital projects that we completed at Fulton and Polar Sawmill. And we are pleased with the progress on those that both ramping up well and it will see the benefits of those volume gains and we’ve previously guided to about 200 million increased total volume by the end of 2017, which would include our WynnWood operation and growth there as well.

So, I think aligned with our focus on value and specialty, we are making progress on the volume side and expect to see it by the end of 2017.

Okay.

That’s right. I think one thing Mark, you might, we should also mention as we did shut the Canal Flats Mill down too and that’s about 150 million feet something like that.

Yes, it’s a little more than.

Little more than, maybe 175 million feet if you recall back in last February 2015. So that’s probably be another comment you may want to have in the backlog at there.

Okay. And then, can you talk at all about what you are seeing in the Chinese market or in the Asian markets generally?

I think your initial comments were, I would say, kind of fairly encouraging, cautiously encouraging?

Yes, I got our resident expert here at the table, Mr. Wayne Guthrie and he will talk – maybe give you some detail on that.

But just overall, I was over there recently myself and I think, in terms of our view, and the important – both our view and our importance that we put on Asia hasn’t changed at all. And a matter of fact, I mean, despite the fact what you hear about China, it’s still very, very resilient and we still see some robust business going forward there.

But, it is maybe little bit off this year compared to last year, but nothing material, but I’ll let Wayne talk about it. So he has spent quite a bit of time over there.

Sure, thanks, Don. I am not sure about resident expert here, but I will take a shot here.

But, the most encouraging thing about the SPF business in China, Canadian lumber business in China right now is the inventory level. So, they are the lowest I’ve seen in years and the opportunity to increase volume there is quite good.

You will see, I think a pickup in Q4 volume going into China, which is seasonally normal. Pricing has come together here now between America and China.

So I think you will see a little pick up there. Certainly, the demand is there.

I think when people look at the export numbers and see Canada off 12% this year, they interpret that as a slowdown in China and in fact, just the Canadians have chosen this year to sell their wood some place else. Lumber consumption in China is actually up and so we are selling into an improving market still.

The other thing to keep in mind, as we move out of the pine and get better log, we are just making less – low grade. So that business, that we will not be participating any going forward, because we essentially won’t be making that on a low grade that we did.

So the overall number might be down, but the value of what we are selling into China and the importance of the company, as Don has alluded, is as is great as ever.

Yes, okay, good point. The last question I’ve got for right now, is just, Alan, I was a little surprised, no share repurchase activity in the quarter just given the weakness that we have seen in most of the lumber stocks over the last several months.

Yes, good morning, Mark. This is a totally fair question there.

I think as we guided in previous quarters, our primary two areas of focus today are really the capital sustaining our mill at the top quartile and including the projects that Stephen just alluded to as well, as well as step reduction I think we talked at the last call around wanting our debt to capital levels, typically they are running at the 10% to 20%. So our target, we’re probably guiding a little bit more to the lower end of that range given some of the uncertainties that Don has highlighted, Mark.

So, totally a fair question, but our priorities are just those at this guideline. So, not ruling out the possibilities doing some of that in the future, but certainly our focus areas are as I say, as I mentioned.

All right, fair enough. Thanks, I’ll get back in the queue.

All right. Thanks, Mark.

Thanks, good morning everyone. Couple questions.

Alan, I want to follow-up on share repurchases and I appreciate what you are saying with respect to Canfor Corp. But on the Canfor Pulp side, you guys had been very busy in recent quarters.

You didn’t do anything in Q3. Canfor Pulp has strong balance sheet, just your thoughts around the lack of activity on the NCIB at Canfor Pulp this quarter?

Yes, well, good morning, Sean, yes, no. As you noted, we took a pause.

I think, you used that word this morning from share buyback. We have – to your point been very active this year and very pleased with the activity that’s been generally there.

Right now, Don, as I think we mentioned just earlier in the call and Don’s formal notes, clearly there is a lot of capacity that’s scheduled to come online. Some of that is being delayed a little bit.

But there is potentially, fairly significant headwinds as we move into 2017. So we are adopting a fairly conservative with and fee sense [ph] there.

Clearly, very keen to buyback shares where we can, but for now we’re taking a more conservative stance.

Okay, thanks. And a question on your Southern Pine Lumber business.

Can you give us an idea of what percentage of your shipments roughly with the premium grades be? You noted better pricing there and we thought we reflected in our forecast, but you still did better than we thought you would.

Any guidance you can give on the mix there and how much of the shipments will be premium grades?

Yes, I prefer not to comment on exactly the percentages at all, but I will see as that we are continuing to focus hard on that and we think we are in a pretty good position from a standpoint of fiber that allows to do more of that and maybe what we expected to do when we got into this deal. But it’s certainly in our view, it’s something that we are focused on, not only now, but even going forward, we see even more opportunities, but, to give you an order of magnitude, it’s certainly a more than half.

Okay, and then, last question, to follow-up on Chinese lumber markets for Wayne. Is there a sense that Canada is calling back any of the market share that we’ve lost to Russia over the last couple of years?

Do you have that sense and what you are seeing for volumes right now?

That’s a good question. I guess, and you can look at any one spot in time, but I guess, what we expect is another good year of consumption in China next year and it will be up.

That’s – most of that’s going to be filled by Russia. So it’s an absolute market share number.

I am not sure, Sean that we’ll gain any going into next year. I think, so, it will bottom out with where we are at.

I think you’ll see it kind of stabilize where we are at now. I am not sure we are going to be able to gain, just because I think we’ve got a limited amount of volume or relatively limited amount of volume that we want to send over there and I think the market is going to grow faster than what we can with it.

So, and the other thing too is, we are really focusing on value versus volume there. So, the market share can be a little misleading.

Okay, understood. That’s all I had.

Thanks guys.

All right. Thanks, Sean.

Yes, thanks very much. Just a couple easy questions here.

Maybe, to start, to start on SLA, one of your competitors recently said, no deal was better than a bad deal. Would you characterize the quota with volume less than current market share as a bad deal?

I think that, we’ve – for sure, it’d be, we need to be real, real close to where it’s been historically and we think we certainly, yes, I think so, just absolutely. And we wouldn’t want to be much less than where we are at today in terms of market share and of course it comes down to how that’s all allocated.

At the end of the day, we – again, Paul, we don’t get involved in that too much other than we think the deal, we’ve said this in the start, I think our competitors have said the same thing, the deal that we had in place from a market share point of view and even the structure of it worked before. And it’s all the kind of behavior change that saw the kind of it worked quite well across the industry.

So, we are certainly, it’s pretty solid around the fact that where the market share was, it still represents it where we need to be. Now there is potentially a little bit of flexibility there may be and due to the down the road here in British Columbia from a log point of view, but overall, we think we need to be pretty firm around that.

Well, thanks for that. And then maybe, just trying to keep it – trying to look all the parts here with all the things that you are purchasing.

Just trying to understand the Lumber geographic mix that you’ve got between Canada and the U.S. now.

I know you’ve still got a piece of beetles in Balfour to going, but post that, what’s your split between Canada and the U.S.?

Yes, we are about 26%, 27% into the U.S. and pro forma would be closer to 30%.

Okay, and then, just switching over to pulp, if you could – is there any maintenance in Q4 and what’s the schedule like in 2017?

Brett, why don’t you just take that?

No maintenance in Q4. We’ve got all behind us and then into next year, we would have about 37,000 tons mostly at the Northwood Mill in Q2 2017.

Okay, and then, while I got you Brett, what are you thinking about for NBSK and BCTMP pricing coming forward? I mean, you’ve referenced the capacity additions coming in at mostly on the softwood side, but are you seeing a lot of capacity additions on the BCTMP side and expecting prices to weaken in 2017?

I am going to pass it over to Peter, but we are seeing any BCTMP capacity coming in. Peter, are you there?

I am here. On the NBSK side, we are taking a conservative approach, not all mills have started up, but that are going to start up.

When they do start-up, we expect to see some downward pressure. On the BCTMP side, the downward pressure at some point could come from the hardwood side.

All right. That’s all I had.

Good results. Thanks guys.

Okay, thanks very much.

Hi, good morning. I just had a couple follow-up questions on the Chinese lumber markets.

Wayne, you mentioned, I guess, the BC data is tracking like you said 12% down year-to-date. Can you maybe speak to where Canfor’s volumes are?

I know, in 2015, you sort of bucked the trend you were actually up when everybody else was down?

We are down, nearing that, little bit less than that.

And, just sort of an SLA-related question I guess, either for Don or Wayne, Curious to get your thoughts as to duties did come in, what you think the spread would be between SPF and selling yellow pine? And then also, maybe how that might play off for the premium products that you sell?

Yes, why don’t you give little less on that one Wayne?

So, we looked at that last 30 years of all the trade deals and we looked at the spread between the two species and really despite the short-term shock that will happen when things come into play longer-term, if one species goes up, all species move go up. So, we expect spreads to be kind of near where they’ve been.

I don’t think that the SLA, other than again that when it first comes out we might see a shock in SPF pricing. Spreads will likely end up near normal.

Okay, fair enough and just a final question for Alan. Could you speak to maybe any changes on the pension finding side going into 2017?

Not, there is not too much, there is - we are starting to make some self-fee payments and we started actually in September and we intend to do so for the next few years. So, but nothing on toward there, clearly aware of the low interest rate environment and clearly keen to manage and related liabilities, but that’s probably the only notable change that we are seeing or doing right now, Hamir.

Okay, and then, Alan, any sense you had on CapEx for 2017?

Yes, I guided a little bit earlier to numbers that are probably pretty similar to what you are going to see for 2016, both for lumber and for pulp and those numbers will be fairly close to the depreciation numbers you will see as well, so.

Okay, fair enough. That’s all I had, thanks all.

Thanks, Hamir.

Thanks, and good morning guys. Just a follow-up on the spread question.

Wayne, was there anything out of the ordinary, with respect to U.S. South pricing at East West in the spreads?

Right, currently you mean, Daryl?

Yes, in the quarter especially.

Yes, I don’t think so. There is – Texas remains the best markets in America.

So that’s going to benefit the west side a little bit. We did have some weather events in the east side.

The hurricane and flooding that had slowed down consumption there for few weeks. So, other than things we deal with every quarter, I didn’t see anything else out of the ordinary.

On the wides it’s coming off a little bit, particularly in the west side, again I think we – I have talked about that in the previous calls, that’s normal, going into the fourth quarter we tend to see that, we’ll gain that back first part of the next year.

Okay, thank you. The rest of my questions have been answered.

Thanks.

All right. Thanks, Daryl.

Thanks, I’ve got a few follow-ups. Don, first just to on that hurricane, you’ve got operations in the Carolinas there.

Is this likely to have a fourth quarter impact?

No, not material. I mean, we had a little bit, I think, compared to floods a couple years ago, this time we are around, all we really had was less a little bit here.

They are real small, not even material due to some flooding deal, but other than that, no wind damage or anything like that and we never had anybody get hurt or any safety issues either.

Okay, all right. Second thing.

Can you talk about any impact that’s Tolko closure up in Manitoba would have on your Kraft Paper business?

Yes, maybe, Brett, you’ve been doing some work on that. Why don’t you answer?

Yes, so the, Tolko , they are a partner obviously in premium one papers and we would – while we are watching closely to see what might happen, as I am sure you’ve seen in the press, there is questions about whether it would actually be closed perhaps.

Right, yes.

For us, we will continue to support our customers and there is some good brown business that the Tolko has and we would try to make sure we take care of our customers. We do have the flexibility to go back and forth and reaching around and we don’t see there would be any negative impact stuff.

Okay. All right, and then, Don, I wondered if you could just give us a little update on sort of your early progress with Anthony.

And I am also just kind of curious, I think Anthony has taken you into some new engineered wood markets and just sort of your initial read on those?

Yes, I know for sure. I mean, first of all, Anthony, we are really pleased with the acquisition and to just – at the outset here and again, it gets us into another region, high quality fiber region, which as you know, we’ve spoke about before, Mark, when we’ve been together is it’s a key focus continues to be and in addition at Anthony, as you mentioned what really provides us with some vertical integration that we haven’t had before into in engineered wood products, which is of course been high value opportunity and it’s been surprisingly positive for us.

And so, the mill has been good. The integration has been solid there.

So, overall, I mean, that operation has really been a solid one right from the get go for us. And going forward, we are looking at where we can expand there from a product mix standpoint, so forth.

But it definitely supports our high value strategy that we’ve really been pushing hard on and trying to capitalize on across the whole south region.

Yes, okay. And then the final question I had is just maybe you could talk a little bit about your appetite for kind of additional acquisitions in the U.S.

and if you’ve got that appetite sort of what the kind of location and sort of business focus might be?

Yes, we’ve got the appetite and we’ve always had that in the context to what Alan mentioned at the beginning there, just around our capital allocation and so forth. But, assuming that’s all in place there, certainly the south isn’t a region that we’ve been extremely pleased with for some time now.

In terms of the focus, I think we’ve been pretty clear in the fact that whatever we do, do down there in the future here and there will be opportunities I am sure coming up here or next year hopefully, has been any attractive ones here recently. But it will be based on fiber for sure and in terms of trying to make sure that we’ve got some real solid fiber, not only competitive, but also some of the higher value type fiber.

And also, so that it will help us fulfill what we are trying to do here around continue to add in the high value specialty side of the business. So where that’s going to be?

Hard to say. There is lots of choices down in the south as you know and so, but clearly, as you roll the clock forward here, we’d certainly see the south as a key part of our investments going forward, whatever that – whenever the time is right.

And I just, kind of on that, I noticed when I look at the Timber Mart prices every quarter log pricing is a lot lower when you get kind of a little further west in the south and I wonder whether that’s a big consideration for you guys.

I mean, certainly the competitiveness of the fiber is, but again, it just depends on the individual opportunity and you never really know there is – there will be and has been opportunities right across the south, particularly down in the deeper south. And so, but what you articulated there has been true, whether that continues, I am not sure.

There has been some new announcements of a mill or two that we are also paying attention to. But, overall, we will look at that on an individual basis as those opportunities arise.

Okay, fair enough. Good luck in the fourth quarter and as we move into next year.

Yes for sure, Mark. Thanks very much.

All right. Thank you operator and thanks everyone for joining our call and look forward to talking to you at the end of the year.