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Executives

Don Kayne - President & CFO

Alan Nicholl - SVP, Finance & CFO

Analysts

Daryl Swetlishoff - Raymond James

Mark Kennedy - CIBC World Markets

Canfor Corp. (OTCPK:CFPZF) Q2 2012 Earnings Call July 27, 2012 11:00 AM ET

Operator

Good morning, ladies and gentlemen. Welcome to the Canfor Corporation second quarter results 2012 conference call. A recording of the call and a transcript will be available on the Canfor’s website. During this call, Canfor’s Chief Financial Officer will be referring to a slide presentation that is available in the Investor Relations section of their website. Also the company would like to point out that this call will include forward-looking statements, so please refer to the key press release 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. Please go ahead Mr. Kayne.

Don Kayne

Thank you, operator. Good morning everyone and welcome to Canfor’s conference call to discuss the company's second quarter results for 2012. I will speak briefly about our Q2 highlights before passing the discussion to our CFO, Alan Nicholl to discuss our financial results. Wayne Guthrie, our Senior Vice President of Sales and Marketing and [Tom Lewis], our Vice President of Woodlands are available today as well to answer any questions you may have related to their responsibility areas.

We are seeing some strengthening in the lumber segment with strong global markets supporting some higher price levels. Housing starts in the US are continuing to rise at a modest, but steady pace and Canadian starts are up 12% over quarter one. Both these markets have helped to generate some positive, upward movement on North American lumber prices over the quarter.

Lumber shipments were up 18% over quarter one reflecting volume additions from our recently acquired Canal Flats and Elko mills and continued productivity improvements from our capital investment program. Our targeted capital expenditures and strong focus on continuous improvement are generating steady gains in productivity and reductions in conversion costs at our lumber operations.

We’re also encouraged earlier this month with The London Court of International Arbitration ruling in favor of Canada and British Columbia with respect to the United States claim that Grade 4 log pricing in BC breached the Softwood Lumber Agreement.

Although a growing share of our production is now marketed in Asia and the Middle East, the US market will always remain significant for us. We remain committed to the Softwood Lumber Agreement and its dispute settling mechanisms as well as to our US customers.

We initiated capital improvements during the quarter at our Radium Hot Springs and Canal Flats operations in British Columbia. A $39.5 million capital upgrade project is underway at Radium which includes significant sawmill upgrades and a new planer and a biomass energy system that will heat our lumber dry kilns.

At Canal Flats, we’re in the process of implementing kiln improvements and a cut to length conversion in the saw mill. We also continue to evaluate strategic capital investment opportunities at our Elko sawmill near (inaudible).

Overall, Q2 showed steadily improving operating performance and market conditions for lumber and panels. While persistent challenges in Europe continue to create some global economic uncertainty, we’re cautiously optimistic in light of the gradual increase we see in North American construction activity and the continued growth taking place in Asia.

I will now turn things over to Canfor’s Chief Financial Officer, Alan Nicholl to provide more details concerning our Q2 financials.

Alan Nicholl

Thanks Don and good morning everyone. My comments will be principally focused on our financial performance for the second quarter of 2012 referenced to the previous quarter. And in my comments I will be referring to our second quarter overview slide presentation which you will find on our website in the Investor Relations section of the website. Full details and undermines are contained in our news release that was issued yesterday.

For the second quarter of 2012, we reported an equity shareholder net income of $5 million or $0.03 per share. This compares favorably to shareholder net loss of $16 million or $0.11 per share for the first quarter of 2012 and shareholder net income of $2 million or $0.01 per share for the second quarter of 2011.

On slide three of the presentation, we highlighted various non-operating items matter of fact non-controlling interest, which affects variability of the results between the first and second quarters.

The net negative impact of these items in the second quarter was approximately $7 million or $0.05 a share and related to foreign exchange losses on long-term debts as well as losses on various financial derivatives.

After taking a kind of these non-operating items, the second quarter adjusted net income was $11 million or $0.08 a share. This compares to similarly adjusted net loss of $22 million or $0.16 a share for the first quarter of 2012 and improvement of $33 million or $0.24 per share.

With respect to the second quarter operating performance you’ll see on slide four of our presentation, the reported operating income was $26 million, an increase of $48 million from the prior quarter. Excluding quarter-over-quarter inventory value adjustments, adjusted operating income for the second quarter was $19 million compared to negative $26 million in the first quarter comes of $45 million. For the most part this reflected the increase was slightly stronger in some of wood markets and higher lumber shipment volumes. I will speak more on our operating performance in a few minutes when I will discuss the individual segment performances.

Slide five shows us the Western SPF benchmark lumber prices for 2x4 #2&Btr and US housing starts. As you will see the US lumber demand continues to slowly improve historically low mortgage risk and a gradual strengthening in housing markets resulted in improved prices for the second quarter.

Total year US housing starts averaged 739,000 units in Q2, a 3% increase from the previous quarter. At [June] season adjusted US housing starts number of 760,000 and was the highest in almost four years.

Turning to slide six, you will note that the lumber segment reported operating income of $19 million in the second quarter of 2012 and that represented an increase of $39 million from the prior quarter.

After adjusting for unusual items, operating income for the lumber segment was [$16 million] in the second quarter, a $44 million improvement from Q1. Improvement in the second quarter’s results largely reflected through sales realizations in both North American and offshore markets, and a higher proportion of higher value lumber in part from the recently acquired BC sawmills.

In addition, shipments were higher by 16% for the most part reflecting the additional production from those same sawmills as well as continued productivity improvements from our recently completed capital projects. Overall, production was up 10% from the previous quarter.

Turning to the pulp and paper segment on slide seven, you will see that the second quarter operating income was $12 million substantially unchanged from the first quarter. North American US dollar as oil prices up $30 from the previous quarter an average to around $900 per ton in the second quarter.

The pulp production during Q2 were significantly (inaudible) by both schedule and maintenance just and on schedule shutdown of Canfor Pulp mill which reduce production by a total 49,000 tonnes an increased [skew] in manufacturing cost.

More details of Canfor Pulp results we have discussed in the news release and conference call yesterday morning. Capital spending in the second quarter to a total $44 million of which $25 million was for the lumber business and the remainder of $19 million of Canfor Pulp. Canfor Pulp has not completed its transformation outstanding and expect to collect its remaining $11 million receivable from the program during the third quarter.

At the end of the second quarter, Canfor excluding Canfor Pulp has net debt of $198 million with liquidity of $215 million. Net debt to total account excluding Canfor Pulp was [15%] and including Canfor Pulp is closer to 19%.

As Don previously mentioned the [ASIL] case before the London Court of International Arbitration has been settled in Canfor's favor. We have made no provision in our financial statements previously, so no adjustments here in financials in Q3 will be necessary.

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

Don Kayne

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

Question and Answer Session

(Operator Instructions) The first question is from Daryl Swetlishoff with Raymond James. Please go ahead.

Daryl Swetlishoff - Raymond James

Don, we are hearing reports of slowing in China obviously on the macro front; but also with respect to building some of the social housing in it that we've seen in the most recent five year plan. What is Canfor seeing in terms of lumber demand of late?

Don Kayne

Thanks Darly, I think overall, we really haven't seen all that much change there at all. As a matter of fact I think that we have experienced similar volumes in Q2 as we've seen in Q1 and going forward we don’t see any significant difference at all. You know as much as -- and we haven't also seen any real difference in the social housing as well in terms of change and even if there was any we are certainly seeing new opportunities evolve at well at the same time that will more than compensate for that.

Daryl Swetlishoff - Raymond James

In the event the topline housing number in China does slow, what are the other end users that you are pushing more into that that could help offset some of that market demand?

Don Kayne

Probably the key area aside from the obvious one is Daryl that you are aware of in terms of reforming is more on the upper end type market such as remanufacturing that would end up primarily in the furniture industry or used in (inaudible) products and that type of thing with some other rebar and ROE remodeling type products on interior applications for some of these housing projects, those types of things will probably largely more on remanufacturing side.

Daryl Swetlishoff - Raymond James

Okay. Just on the Tembec mills that you acquired what sort of condition were they in, what sort of capital do you think they will need over and above the normal amounts?

Don Kayne

I think the overall we are real in a positive way surprised that it was held well, the mills’ the shape that they were in for sure, you know whether it would be from a quality standpoint of the fiber that's down there, we are certainly surprised at the level of quality there; I mean it is obviously an extremely good.

In terms of the mills, there's going to be some capital needs there for sure, I mean they were no surprises in terms of the conditions that we thought they were in although there is to get them up to the level of a lot of our mills, we probably need a special capital there. So as I mentioned in my comments probably we've done some minor things in Canal Flats already and we are looking as well at Elko and what we may need to do there as well, but there will definitely be some capital needs requirements in probably both of those.

Operator

The next question is from Mark Kennedy with CIBC World Markets. Please go ahead.

Mark Kennedy - CIBC World Markets

Just following up there, looking at your operations now in Southeast DC, can you give us any guidance that once you've completed all your work what you think your ultimate lumber production is going to be in that region?

Don Kayne

I think, just as down the road here, I mean it’s going to have a little bit on when we finally determine what type of capital we would like to put into there. Right now, with all the three mills running that's probably you know you probably see that as a 150 to 200 per mill you know with the three mills that we have down there. That could go up a little bit depending on what we do with capital going forward to increase to 150.

Mark Kennedy - CIBC World Markets

So again it could to be as high or even slightly better than $600 million (inaudible)?

Don Kayne

Yes, it’s probably in that area.

Mark Kennedy - CIBC World Markets

Okay. And then just a question as you look here over the next couple of quarters on cost, where do you see the most pressure coming from, maybe you comment both on things like launch and freight and what not?

Don Kayne

Yeah, I think on the launch side, there will probably be some minor pressure there, and you know, we see probably in Q3 (inaudible) a couple of bucks something like that, you know that sort of level. The other area that we watch carefully and we’re working hard to mitigate is [consultation] and we’ve had some excellent success there and we’ll continue to push hard on that. Those are probably the two key areas.

Operator

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

Don Kayne

Alright, thank you operator and thanks all of you for participating and I look forward to speaking with all of you again at the end of Q3. Thanks again.

Operator

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

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