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Executives

Don Kayne – President and Chief Executive Officer-Canfor Corporation and Chief Executive Officer-Canfor Pulp Products Inc.

Alan Nicholl – Senior Vice President, Finance and Chief Financial Officer

Wayne Guthrie – Senior Vice President-Sales and Marketing

Analysts

Sean Steuart – TD Securities

David Quezada – Raymond James Ltd.

Mark Kennedy – CIBC World Markets, Inc.

Paul Quinn – RBC Capital Markets

Canfor Corporation (OTCPK:CFPZF) Q4 2013 Earnings Conference Call February 6, 2014 11:00 AM ET

Operator

Good morning, ladies and gentlemen. And welcome to the joint Canfor Corporation and Canfor Pulp Products Inc. Fourth Quarter Results 2013 Conference Call. A recording of the call and a transcript will be available on the Canfor’s and Canfor Pulp’s website.

During this call, Canfor and Canfor Pulp’s Chief Financial Officer will be referring to a slide presentation that is available in the Investor Relation section of each company’s website. Also, the companies would like to point out that this call will include forward-looking statements. So please refer to the press releases for the associated risks of such statements.

I would now like to turn the meeting over to Mr. Don Kayne, President and CEO of Canfor Corporation and CEO of Canfor Pulp Products Inc. Please go ahead, Mr. Kayne.

Don Kayne

Good morning, everyone and thanks operator, and appreciate everybody joining us today. I’ll provide some brief comments on Canfor and Canfor Pulp’s results both for Q4 and for 2013 overall, before turning things over to Alan Nicholl, our CFO for a more detailed overview.

Canfor’s net income for Q4 was $28 million consistent with the previous quarter. Net income for 2013 overall was $229 million, up over $200 million from 2012 for the most part reflecting stronger markets across our businesses. Lumber markets in North America experienced strong gains in Q4 with housing starts reaching five year highs. Offshore shipments remained strong driven in a large part by higher shipments to China.

Canfor Pulp reported net income of $14 million in Q4, compared to $9 million for Q3. Net income for 2013 overall for Canfor Pulp was $42 million, compared to $13 million for 2012.

NBSK prices improved modestly over Q4 in all regions and demand was solid. Pulp shipments were up by over 20% from the previous quarter. As we previously announced, we completed a 10-year swap with West Fraser during the quarter that further strengthened our fibre position at Houston.

However, we also regrettably announce the closer of our Quesnel mill reflecting a long-term impact of the mountain pine beetle in that area. Through the quarter, we have been focusing on placing employees who will be impacted by the closure of our Quesnel Sawmill which will take place in March.

In December, we completed the negotiation of our new five year collective agreement with the United Steelworkers, providing stability for the medium term. We would continue to execute on our capital plans and announce new investments in our Houston, Fort St. John, Grande Prairie and Elko divisions over the last several months.

In November, we also announced a 50:50 joint venture with Tangshan Caofeidian Wood Industry Company to explore the creation of the secondary manufacturing facility at the deep water Caofeidian Port Tangshan City in Hebei Province.

I will now turn things over to Alan Nicholl to provide more details on our fourth quarter financial performance.

Alan Nicholl

Thank you, Don and good morning everyone. My comments this morning will focus principally on our financial performance for the fourth quarter of 2013 by reference to the previous quarter. Full details of our results are contained in the Canfor and Canfor Pulp news releases, both of which were issued yesterday. As always you will find an overview of slide presentation on both the Canfor and Canfor Pulp websites in the Investor Relations section under Webcasts. The presentation highlights consolidated and segmented results along with the key adjusting items and I’ll be referring to this presentation during my comments.

For the fourth quarter of 2013, Canfor reported shareholder net income of $28 million or $0.20 a share, unchanged from the third quarter of 2013 and up from $21 million or $0.15 a share reported for the fourth quarter of 2012.

On Slide 3 of our presentation, we highlight various non-operating incomes, net of tax and non-controlling interest, which affect the comparability of our results between the third and fourth quarters. In the fourth quarter, these items had a net negative impact of approximately $21 million or $0.15 a share.

The largest of these adjusting items, being a $20 million pre-tax charge related to the announced closure of the Quesnel Sawmill. After taking account of these items, the fourth quarter adjusted net income was $49 million or $0.35 a share. This represented a $23 million or $0.17 a share increase from the adjusted net income of $26 million or $0.18 a share for the third quarter of 2013.

With respect to our fourth quarter operating performance, you’ll see on Slide 4 of our presentation that our operating income adjusted for the Quesnel closure provision and other one-time items were $75 million, an increase of $26 million from the prior quarter. The increase mainly reflected strong gains in the lumber markets as well as higher pulp production and shipments.

Results for our lumber segment are highlighted on Slide 6 of our presentation. Improved lumber results in the quarter reflected higher sales realization including an upward trend in pricing, lower export tax and a weaker Canadian dollar, offset in part by lower shipments and higher unit manufacturing costs that reflected higher log costs and lower production. The latter was impacted by major capital projects at our Houston, Elko and Mackenzie sawmills and lower operating hours due principally to statutory holidays and adverse weather conditions in December. Canfor’s pulp and paper segment principally comprised of the results of Canfor Pulp Products Inc.

And as you can see on Slide 7, Canfor Pulp reported net income of $40 million or $0.20 a share, compared to net income of $9 million or $0.13 a share for the third quarter, and net income of $5 million or $0.08 a share for the fourth quarter of 2012. Results in the fourth quarter of 2013 were negatively impacted by various non-operating incomes of $3 million or $0.04 a share. And after taking account of these items Canfor Pulp’s fourth quarter adjusted net come was $70 million or $0.24 a share and this represented a $12 million or $0.16 a share improvement from adjusted net income of $6 million or $0.08 a share for the third quarter of 2013.

Moving to Slide 8, the increase in Canfor’s results was for the most part attributable to higher production and shipment volumes in the pulp segment coupled with moderate increases in sales realizations of reflected increase, and improve NBSK pulp prices and a weaker Canadian dollar. Pulp prices moved up in all regions during the quarter as a result of solid demand against the backdrop of lower producer in entry levels.

Lower paper segment earnings in the fourth quarter were mostly due to reduced production and shipment levels principally as a result of a scheduled maintenance outage at our Prince George Pulp Paper machine.

Capital spending in the fourth quarter of 2013 totaled $68 million of which $44 million was in the lumber business and $20 million in Canfor Pulp. Yesterday, the Canfor Pulp Board announced a dividend payment of $0.05 a share for the quarter. The Board has indicated that the company may continue to pay a similar dividend through 2014 subject to market conditions.

During the quarter Canfor repurchased shares under its existing normal course issuer bid program and over the course of 2013, we repurchased approximately 2.8 million shares at a cost of $60 million. Well a targeted capital spending and a strong balance sheet remain our key priority we will continue to look for possible opportunities to repurchase additional shares for both the companies over 2014.

At the end of the 2013 year Canfor including Canfor Pulp had cash of $60 million with available liquidity of $271 million. Canfor Pulp had cash of $3 million with available liquidity of $107 million. Net debt to capitalization excluding Canfor Pulp is around 6%, for Canfor Pulp it was 10% and on a consolidated basis it approximate at 8%.

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

Don Kayne

Thanks Alan. So looking forward we are remaining cautiously optimistic regarding our lumber business. We are forecasting 1.1 million starts for the year and anticipate improving U.S. demand in all areas. In addition offshore markets are projected to remain solid, supported by continued demand from China, Japan and various other emerging markets.

For Canfor Pulp the current market conditions are better than anticipated several months ago. However, we again remained cautious in our outlook for the balance of the year principally due to the rest from new hardwood pulp coming online later this year.

And with that operator, I’ll now open the lines up for questions?

Question-and-Answer Session

Operator

Thank you, Mr. Kayne. We’ll now take questions from the telephone lines. We’ll first take questions from the financial analysts. (Operator Instructions) The first question is from Sean Steuart with TD Securities. Your line is now open, please go ahead.

Sean Steuart – TD Securities

Thanks, good morning every one. Two questions. Don, I guess I’ll start with one of your last comments there. Are you I guess defined your outlook for offshore lumber markets as solid for 2014? Does that mean you’re expecting volumes to sort of tread water with what we saw on 2013? Or does that reflect and imply the growth rate in volumes for that market, China I guess in particular?

Don Kayne

Okay, Sean, yes, on that one, basically I think for the most part, we will expect that next year our overseas markets will be very similar what we have seen in 2013.

Sean Steuart – TD Securities

Okay. Okay.

Don Kayne

Particularly Japan and China would be the main two markets as you know.

Sean Steuart – TD Securities

Okay, and Don, do you have any view on what sort of lumber price level in North America? Do you start to get worried about European imports picking up and how does that factor into your outlook from markets over the next year or two?

Don Kayne

For sure, I mean I think we definitely keep up to-date on that, I don’t know aware of that possibility going forward. We do believe though that the prices that they maybe interested in a bigger and bigger way to enter into the North American markets probably somewhere in the neighborhood of between $400 and $500 or $1,000 that will be kind of the range, and even at that we probably wouldn’t don’t expect to see the similar types of volumes that we saw last quarter around.

Sean Steuart – TD Securities

Okay, that’s helpful. And I’ll just ask one for now and then get back in the queue. With respect to the Canfor Pulp dividend policy and I guess you guys indicating that the Board might keep the dividend at the current level through this year. I understand the concerns you have about the hardwood capacity ramp up and how that might filter in this softwood markets. But Don or maybe Alan, maybe you can speak to, is there a target liquidity position at Canfor Pulp you guys want to get to before you would consider raising the dividend. How do you think I guess about the dividend in the context of your liquidity base versus payout ratios any sort of context on your thinking there would be helpful?

Don Kayne

Yes, I think on that overall in terms of the dividend decisions we look at that quarterly, with have a discussion ourselves and of course, we discuss with the board and the contact some of the other choices that we have in addition to that, and for now, I couldn’t give you anymore guidance other than where we are at right now – where we see it going forward. Things could change of course, but to the most part, we are heavily focused as you know Sean I think is really making sure we’re investing in our business as much as we possibly can, but also at the same time trying to balance off the outside investments that we have. So it’s just something we would look at every quarter and make those determinations at that time.

Sean Steuart – TD Securities

Okay, got it. I’ll get back in the queue. Thanks guys.

Operator

Thank you. The next question is from David Quezada with Raymond James. Please go ahead.

David Quezada – Raymond James Ltd.

Hi, thanks. Good morning, guys. My first question is on the Southern Yellow Pine pricing, I know that in the release you said that your realizations were flat quarter-over-quarter, whereas the benchmark 2x4 was up, I was just wondering a, if you could tell us about what your break down is between 2x4 and wider width, and b, do you expect that differential can normalize and for the wider width to come inline with the 2x4 going forward?

Don Kayne

So maybe Wayne, if you are on the line, I know you’re remote on this, but if you are and you hear me, maybe you could give some specifics around that?

Wayne Guthrie

Sure, sure, yes, for sure we’ve seen a deterioration in the premiums, historical premiums on the wide width stone in the south. We are trying to address that through manufacturing and trying to produce more four inch and less of the wider widths. Going forward, we are going to try to – I don’t see the kind of the old 2x10 premium coming back. But what we are starting to see in the south is more export business coming in for some of the discounted widths. That’s going to bring those up more inline with 2x4 price. So I don’t know, if we are going to go back to where we were, but we do see some positive trends in terms of some of the mix down there. We don’t made public what our four inch percentage is, but no doubt we are trying to drive it a bit higher, if we can do so and keep our productivity what needs to be because that’s where the premium is and we see that continuing in 2014.

David Quezada – Raymond James Ltd.

That’s helpful thanks. My only other question was you mentioned that poor weather affected shipments a little bit in the quarter. Do you expect that to be a bigger issue in the first quarter or still not a major hindrance?

Don Kayne

Well hopefully as long as the weather improves from here on in, it will be similar to what we just had, but I mean of course it’s been a bit of a tough start, it’s been very inconsistent, we are doing our best to work around that and we are making good progress and at this point we are confident that we can certainly make up some of that ground over the quater and over the year.

David Quezada – Raymond James Ltd.

Okay, thanks. That’s all I had.

Operator

Thank you. The next question is from Mark Kennedy with CIBC. Your line is now open. Please go ahead.

Mark Kennedy – CIBC World Markets, Inc.

Hi, good morning. I guess my question is focused more on Canfor Pulp. Just wondering can you just give us an idea, I guess in your fourth quarter with that EBITDA of about $39 million in Canfor Pulp, how much of that which you classify as sort of being green energy related EBITDA? And then how much delta we can expect on the green energy side, because I know – I think the Northwood turbine is still ramping up and Intercon ties in April, so how much your are expecting growth in that this year? Is there any guidance you can give us on that front?

Don Kayne

Yes, Alan may be you could speak with Mark on that.

Alan Nicholl

Mark, sort of hear your question just a little bit of context to the energy revenue, I mean I think what we’ve indicated in the past is that the two major PB [ph] upgrades we are undertaking in the Northwood one currently will contribute incremental EBITDA close to $10 million once everything is up and running. I think something similar for Intercon, and so they will have the PB, so in total by the time we get to the end of 2015 we’re expecting incremental EBITDA in the region of close to $30 million EBITDA at the end of 2015.

Mark Kennedy – CIBC World Markets, Inc.

Okay, that’s great. Thank you. That’s all I have, thanks.

Don Kayne

All right, thanks Mark.

Operator

Thank you. And the next question is from Paul Quinn with RBC Capital Markets. Please go ahead.

Paul Quinn – RBC Capital Markets

Yes, thanks very much. Good morning. Just following up on the dividend question on Canfor Pulp, I understand the concerns on the hardwood capacity, just looking at the cash flow that you are going to generate in that business, and then just trying to put in the context of that, it seems like the majority of your large CapEx at those mills are behind you. And then the question is what do you do with the cash. So I guess the question I’ve got is, how do you look at decision to either increase dividends or increase share buybacks?

Don Kayne

Alan, do you want to speak to that.

Alan Nicholl

Yes, so good morning, Paul. I think for us as Don mentioned, we typically go through this consideration with the Board regularly and the board with you announced guide on the dividend policy, I think today we still as Don mentioned have a fairly cautious outlook on markets. It’s really hard to make a call on this price bar or not prices may come off here as just new capacity comes online, and that’s – we’re sure now we’ve got a temporary reprieve, but I think we are still of the view that there it is risk of – particularly in the back half of this year and into 2015.

And so for now, we have taken a fairly conservative and cautious approach and are very keen to preserve the balance sheet strength, and at the same time not reprieve our operations of all the capital that you need to retain their top quartile and see this is in fact move into top decile were possible.

Don Kayne

So maybe just to add to that to Paul, I mean because Alan and I were moving around the same office here, but basically I mean as we are on Canfor and Canfor Pulp boards very, very focused on making sure we got a strong sustainable balance sheet, absolutely first and foremost and we’ve evolved in and the industry not just Canfor in different situations in the past and we determine not to be there again.

So, if things turn out to be better than what we think as we go forward then we’ll make those decisions as they arise, but right now, from the knowledge that we have across the knowledge that we certainly our base and everything on, it’s really to make sure that we feel we need to continue to be relatively cautious, and we will be going forward. Right, so that’s we just got a little bit more caution maybe than we would have in past years.

Paul Quinn – RBC Capital Markets

I know, I applaud the cautious nature and but just looking at your balance sheet right now, do you expect the balance sheet to get stronger going forward. I mean it looks like you got cash flow that should be pretty strong in the foreseeable future. And it doesn’t look like you’ve got significant areas to spend it on.

Don Kayne

Well, we hope so. We hope that’s the plan certainly to get stronger and again I mean, I assure you as we go forward, we will be looking at that, but we just like to see more certainty in the marketplace, and just what the dynamics of these additional supply will cause in the market and so forth. And as that materializes we’ll be in probably in a better position to make some of those long-term decisions.

Paul Quinn – RBC Capital Markets

Okay, fair enough. In terms of using some of that cash maybe the other way is growth, do you see growth on both the pulp and the lumber side. And then specifically on the lumber side, maybe you can share some of the valuations or some of the expectations marketplace asset therefore for additional mills in your portfolio?

Don Kayne

Yes, for sure Paul. I mean it clearly we are looking at growth for sure, I think we have talked a little bit about in the past, but certainly we like to start as we’ve spoken about before and we also like Western Canada and particularly in interior, so with the key – probably one of the key criteria being certainly to improve our fibre position always is the first and foremost. As you mentioned accurately certainly the sellers in the marketplace or potential sellers have increasingly higher expectations, so it’s going to be more and more, it’s going to be going to be more and more challenging going forward to do some of those deals and grow like maybe the pace some of us have grown in the past.

Clearly though it’s going to take a bit more innovation and a little bit different types of models, but I still think it can be done. So, we are looking at that the other area as we’ve talk to Board and I think Brett has in the past certainly Alan has as well as there is energy opportunities as well. So those would be probably the three areas that we will be focused on over the next several years.

Paul Quinn – RBC Capital Markets

Okay, great. That’s all I had, thank you.

Don Kayne

Okay, thanks Paul.

Operator

Thank you. And the next question is from Sean Steuart with TD Securities. Please go ahead.

Sean Steuart – TD Securities

Thanks, just a couple of follow up guys. CapEx for 2014, I guess you guys have set the budget more or less by now, is it pretty consistent with the guidance you would have given on the last call, which I think was around $220 million for the whole company?

Alan Nicholl

Yes, Sean, yes it is.

Don Kayne

Basically correct and split between about $175 and the solid wood side and the balance in the pulp side.

Sean Steuart – TD Securities

Okay and wondering Don, if you can speak to I guess expected stumpage inflation into the first quarter here, I guess just given the timing lag relative to lumber prices and prices started to take off in third quarter last year, the expected magnitude of stumpage cost pressure in BC?

Don Kayne

In BC we are probably kind of first indication is probably in the neighborhood of 7% to 10% overall and down in the south, but it hopefully keep it relatively closer to ramp.

Sean Steuart – TD Securities

Okay, that’s all I had, thanks guys.

Don Kayne

All right, thanks Sean.

Operator

Thank you. (Operator Instructions) The next question is a follow-up question from Paul Quinn with RBC Capital Markets. Please go ahead.

Paul Quinn – RBC Capital Markets

Yes, thanks just follow-up on share buyback, just remind me the authorizations of both companies.

Don Kayne

Alan, maybe you can give Paul that info.

Alan Nicholl

Maybe you can.

Don Kayne

Yes, basically I just need – basically it’s 5% per quarter – sorry per year for both companies.

Paul Quinn – RBC Capital Markets

Okay, thanks very much.

Don Kayne

Can you hear me, okay. Yes, I don’t know what happened down at Vancouver but anyway.

Operator

(Operator Instructions) There are no further questions registered at this time. I’d now like to turn the meeting back over to Mr. Kayne.

Don Kayne

Thanks operator and thanks everyone for participating in this mornings call and we again look forward to talking with you at the end of the first quarter. Have a great day, bye, bye.

Operator

Thank you, Mr. Kayne. The conference call has now ended. Please disconnect your lines at this time. Thank you for your participation.

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