Canfor Pulp Products Inc. Announces Third Quarter 2017 Results and Quarterly Dividend

VANCOUVER, Oct. 20, 2017 /CNW/ - Canfor Pulp Products Inc. ("CPPI") (TSX: CFX) today reported net income of $12.6 million, or $0.19 per share, for the third quarter of 2017, compared to $20.2 million, or $0.31 per share, for the second quarter of 2017 and $22.4 million, or $0.34 per share, for the third quarter of 2016.  For the nine months ended September 30, 2017, the Company's net income was $56.9 million, or $0.86 per share, compared to $47.7 million, or $0.70 per share, for the nine months ended September 30, 2016.

The following table summarizes selected financial information for the Company for the comparative periods:

The Company reported operating income of $21.1 million for the third quarter of 2017, down $10.4 million from the $31.5 million reported for the second quarter of 2017.  While pulp shipments and production were both up quarter-over-quarter, the related increase in operating income was more than offset by the impact on unit pulp and paper sales realizations of a significantly stronger Canadian dollar. 

Entering the third quarter of 2017, global pulp markets showed signs of weakness; however, as the quarter progressed, demand and pricing rebounded particularly in China, in part due to China's new regulations restricting the import of recycled mixed paper.  The resulting positive price momentum will largely be realized in the fourth quarter of 2017, reflecting the timing of shipments (versus orders).  As a result average Northern Bleached Softwood Kraft ("NBSK") pulp US-dollar list prices to China were consistent quarter-over-quarter; however, NBSK pulp unit sales realizations experienced a moderate decrease, due to a 5 cent or 7% stronger Canadian dollar.  Bleached Chemi-Thermo Mechanical Pulp ("BCTMP") US-dollar list prices trended positively through the third quarter of 2017, but BCTMP unit sales realizations were also negatively impacted by a stronger Canadian dollar.  Energy revenues were well up in the current quarter reflecting a return to more normalized power generation levels.

Pulp shipments and production volumes were up 10% and 11%, respectively, from the previous quarter, principally reflecting a decline in scheduled maintenance outages.  In the current quarter, the Company completed a scheduled maintenance outage at the Intercontinental NBSK pulp mill which reduced pulp production by approximately 10,000 tonnes.  In the second quarter, a scheduled maintenance outage at the Company's larger Northwood NBSK pulp mill resulted in approximately 33,000 tonnes of reduced production.  Shipments for the third quarter of 2017 were also impacted by a 14,000 tonne vessel slippage into early October.  Pulp unit manufacturing costs improved from the previous quarter, largely reflecting the lower quarter-over-quarter scheduled maintenance outages coupled with seasonally lower energy prices and usage. 

Operating income in the Company's paper segment at $4.9 million was down $1.7 million from the second quarter of 2017, largely reflecting a modest decline in paper unit sales realizations, due to higher market-driven US-dollar paper pricing being more than offset by the stronger Canadian dollar.  Partially offsetting this decline in paper unit sales realizations was a moderate improvement in paper unit manufacturing costs, primarily driven by lower slush pulp costs, combined with a decline in maintenance spend. 

Commenting on the Company's third quarter of 2017 results, CPPI's Chief Executive Officer, Don Kayne said, "Despite the stronger Canadian dollar, market conditions were somewhat better than anticipated, allowing us to generate solid results for the quarter.  With global pulp markets strong as we head into the fourth quarter, and our major NBSK pulp maintenance shutdowns now behind us, we are very focused on optimizing our production performance and sales mix through the balance of the year." 

For the month of October 2017, the Company announced increases of US$105 per tonne and US$30 per tonne for NBSK pulp list prices to China and North America, respectively, reflecting a surge in demand, principally from China, as well as supply disruptions. Global pulp markets are anticipated to remain strong through the fourth quarter of 2017.

Results in the fourth quarter of 2017 will reflect a scheduled outage at the Taylor pulp mill to complete preliminary work associated with the previously announced energy project, with a projected 3,000 tonnes of reduced BCTMP production as well as lower projected shipment volumes.

On October 20, 2017, the Board of Directors declared a quarterly dividend of $0.0625 per share, payable on November 9, 2017 to the shareholders of record on November 2, 2017.

Additional Information and Conference Call 
A conference call to discuss the third quarter's financial and operating results will be held on Monday, October 23, 2017 at 8:00 AM Pacific time.  To participate in the call, please dial Toll-Free 888-390-0546.  For instant replay access until November 6, 2017, please dial Toll-Free 888-390-0541 and enter participant pass code 919920#.  The conference call will be webcast live and will be available at www.canfor.com.  This news release, the attached financial statements and a presentation used during the conference call can be accessed via the Company's website at http://www.canfor.com/investor-relations/overview. 

Forward Looking Statements
Certain statements in this press release constitute "forward-looking statements" which involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from any future results, performance or achievements expressed or implied by such statements.  Words such as "expects", "anticipates", "projects", "intends", "plans", "will", "believes", "seeks", "estimates", "should", "may", "could", and variations of such words and similar expressions are intended to identify such forward-looking statements.  These statements are based on management's current expectations and beliefs and actual events or results may differ materially.  There are many factors that could cause such actual events or results expressed or implied by such forward-looking statements to differ materially from any future results expressed or implied by such statements.  Forward-looking statements are based on current expectations and the Company assumes no obligation to update such information to reflect later events or developments, except as required by law.

CPPI is a leading global supplier of pulp and paper products with operations in the central interior of British Columbia ("BC") employing approximately 1,300 people throughout the organization.  Canfor Pulp owns and operates three mills in Prince George, BC with a total capacity of 1.1 million tonnes of Premium Reinforcing Northern Bleached Softwood Kraft Pulp and 140,000 tonnes of kraft paper, as well as one mill in Taylor, BC with an annual production capacity of 220,000 tonnes of Bleached Chemi-Thermo Mechanical Pulp ("BCTMP").  Canfor Pulp is the largest North American, and one of the largest global producers of market NBSK pulp.  CPPI shares are traded on the Toronto Stock Exchange under the symbol CFX.

Canfor Pulp Products Inc.
Third Quarter 2017
Management's Discussion and Analysis

This interim Management's Discussion and Analysis ("MD&A") provides a review of Canfor Pulp Products Inc.'s ("CPPI" or "the Company") financial performance for the quarter ended September 30, 2017 relative to the quarters ended June 30, 2017 and September 30, 2016, and the financial position of the Company at September 30, 2017.  It should be read in conjunction with CPPI's unaudited interim consolidated financial statements and accompanying notes for the quarters ended, September 30, 2017 and 2016, as well as the 2016 annual MD&A and the 2016 audited consolidated financial statements and notes thereto, which are included in CPPI's Annual Report for the year ended December 31, 2016 (available at www.canfor.com).  The financial information in this interim MD&A has been prepared in accordance with International Financial Reporting Standards ("IFRS"), which is the required reporting framework for Canadian publicly accountable enterprises.

Throughout this discussion, reference is made to Operating Income (Loss) before Amortization which CPPI considers to be a relevant indicator for measuring trends in the Company's performance and its ability to generate funds to meet its debt service and capital expenditure requirements, and to pay dividends.  Reference is also made to Adjusted Net Income (Loss) (calculated as Net Income (Loss) less specific items affecting comparability with prior periods) and Adjusted Net Income (Loss) per Share (calculated as Adjusted Net Income (Loss) divided by the weighted average number of shares outstanding during the period).  Operating Income (Loss) before Amortization, Adjusted Net Income (Loss) and Adjusted Net Income (Loss) per Share are not generally accepted earnings measures and should not be considered as an alternative to net income or cash flows as determined in accordance with IFRS.  As there is no standardized method of calculating these measures, CPPI's Operating Income (Loss) before Amortization, Adjusted Net Income (Loss) and Adjusted Net Income (Loss) per Share may not be directly comparable with similarly titled measures used by other companies.  Reconciliations of Operating Income (Loss) before Amortization to Operating Income (Loss) and Adjusted Net Income (Loss) to Net Income (Loss) reported in accordance with IFRS are included in this MD&A.  Throughout this discussion reference is made to the current quarter which refers to the results for the third quarter of 2017. 

Factors that could impact future operations are also discussed.  These factors may be influenced by both known and unknown risks and uncertainties that could cause the actual results to be materially different from those stated in this discussion.  Factors that could have a material impact on any future oriented statements made herein include, but are not limited to: general economic, market and business conditions; product selling prices; raw material and operating costs; currency exchange rates; interest rates; changes in law and public policy; the outcome of labour and trade disputes; and opportunities available to or pursued by CPPI.

All financial references are in millions of Canadian dollars unless otherwise noted.  The information in this report is as at October 20, 2017. 

Forward Looking Statements

Certain statements in this MD&A constitute "forward-looking statements" which involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from any future results, performance or achievements expressed or implied by such statements.  Words such as "expects", "anticipates", "projects", "intends", "plans", "will", "believes", "seeks", "estimates", "should", "may", "could", and variations of such words and similar expressions are intended to identify such forward-looking statements.  These statements are based on management's current expectations and beliefs and actual events or results may differ materially.  There are many factors that could cause such actual events or results expressed or implied by such forward-looking statements to differ materially from any future results expressed or implied by such statements.  Forward-looking statements are based on current expectations and the Company assumes no obligation to update such information to reflect later events or developments, except as required by law.

THIRD QUARTER 2017 OVERVIEW

Selected Financial Information and Statistics

The Company reported operating income of $21.1 million for the third quarter of 2017, down $10.4 million from the $31.5 million reported for the second quarter of 2017.  Results reflect the significant impact of a 5 cent or 7% stronger Canadian dollar on average pulp and paper unit sales realizations in the current quarter.  This Canadian dollar impact more than offset the benefit of a quarter-over-quarter decline in scheduled maintenance outages, which resulted in higher pulp shipments and pulp production, coupled with improved pulp and paper unit manufacturing costs and increased energy revenues.  Despite average NBSK US-dollar list prices to China being in line with the previous quarter, NBSK pulp unit sales realizations experienced a moderate decrease, largely due to the stronger Canadian dollar.  BCTMP unit sales realizations were also negatively impacted by a stronger Canadian dollar.  Pulp shipments and production volumes were up 10% and 11%, respectively, from the previous quarter, principally reflecting a decline in scheduled maintenance outages.  In the current quarter, the Company completed a scheduled maintenance outage at the Intercontinental NBSK pulp mill which reduced pulp production by approximately 10,000 tonnes; in the second quarter, a scheduled maintenance outage at the Company's larger Northwood NBSK pulp mill resulted in approximately 33,000 tonnes of reduced production.  Shipments for the third quarter of 2017 were also impacted by a 14,000 tonne vessel slippage into early October.  Pulp unit manufacturing costs improved from the previous quarter, largely reflecting the aforementioned lower quarter-over-quarter scheduled maintenance outages coupled with seasonally lower energy prices and usage. 

Compared to the third quarter of 2016, operating income in the current quarter was down $9.9 million, with improvements in both average NBSK pulp and BCTMP unit sales realizations reflecting higher US-dollar market prices, offset in part by a 4% stronger Canadian dollar, outweighed by lower shipments and a moderate increase in pulp unit manufacturing costs, largely attributable to higher market-based fibre costs.  Pulp shipments and pulp production declined 5% and 2%, respectively, when compared to the third quarter of 2016, with shipments reflecting more scheduled downtime and the aforementioned vessel shipment slippage in the current quarter.

OPERATING RESULTS BY BUSINESS SEGMENT

Pulp
Selected Financial Information and Statistics – Pulp

Markets

Global pulp markets weakened slightly in July primarily following the end of spring maintenance season.  By the end of August and through September, however, demand had rebounded, particularly in China, in part due to China's new regulations restricting the import of recycled mixed paper.  The resulting positive price momentum will largely be realized in the fourth quarter of 2017, reflecting the timing of shipments (versus orders).    

Global shipments of bleached softwood pulp increased by 3.1% for the first eight months of 2017 when compared to the first eight months of 2016, driven primarily by increased year-to-date shipments to North America and Asian countries, including China⁶.

Sales

The Company's pulp shipments for the third quarter of 2017 were 303,300 tonnes, up 27,000 tonnes, or 10%, from the previous quarter and down 16,500 tonnes, or 5%, from the third quarter of 2016.  When compared to the previous quarter, the increase in pulp shipments was primarily due to increased pulp production in the current quarter combined with an increase in shipments to North America and Asia, offset in part by the slippage of a 14,000 tonne vessel shipment to Asia into October 2017.  The reduction in pulp shipments when compared to the third quarter of 2016, for the most part reflected the delayed vessel shipment and, to a lesser extent, lower pulp production in the current quarter. 

The average China US-dollar NBSK pulp list price (as published by RISI), at US$670 per tonne, was in line with the second quarter of 2017.  The weakening of the global pulp markets and US-dollar pricing in the early part of the current quarter, combined with the unfavourable impact of a 5 cent or 7% stronger Canadian dollar, more than offset the improved prices later in the quarter, leading to a moderate decrease in average NBSK pulp unit sales realizations compared to the previous quarter.  Average BCTMP unit sales realizations also experienced a moderate decline when compared to the second quarter of 2017, largely as a result of the stronger Canadian dollar. 

Compared to the third quarter of 2016, the average China US-dollar NBSK pulp list price in the current quarter was up US$75 per tonne, or 13%.  Average NBSK pulp unit sales realizations were only slightly higher than the third quarter of 2016, however, as higher market list prices were largely offset by a 3 cent, or 4%, strengthening of the Canadian dollar combined with the impact of timing of shipments (versus orders) and increases in customer discounts.  BCTMP unit sales realizations were notably higher compared to the third quarter of 2016, reflecting the significant strength in BCTMP market demand year-over-year, which more than offset the stronger Canadian dollar.

Compared to the previous quarter, energy revenues in the third quarter of 2017 returned to more normalized levels, reflecting an increase in turbine operating days quarter-over-quarter (related to less scheduled maintenance outages), combined with higher energy prices in the current quarter.  Energy revenues in the current quarter were marginally lower when compared to the third quarter of 2016, primarily a result of lower power generation, due to the larger scheduled outage at the Company's NBSK pulp mills in the current quarter. 

Operations

Pulp production in the third quarter of 2017 at 305,100 tonnes was up 29,900 tonnes, or 11%, from the second quarter of 2017 and down 7,400 tonnes, or 2%, from the third quarter of 2016.  Pulp production in the current quarter primarily increased as a result of a decline in scheduled maintenance outages quarter-over-quarter.  During the third quarter of 2017, the Company completed a scheduled maintenance outage at the Intercontinental NBSK pulp mill, which reduced pulp production by approximately 10,000 tonnes.  This compared to the second quarter of 2017, which included scheduled maintenance outages at the Northwood NBSK pulp mill as well as at the Taylor BCTMP mill, which when combined with other operational upsets, reduced pulp production by approximately 40,000 tonnes. 

When compared to the third quarter of 2016, pulp production decreased primarily due to the larger scheduled maintenance outage in the current quarter, and lower operating rates.  In the third quarter of 2016, the Company completed scheduled maintenance outages at the Prince George NBSK pulp mill and the Taylor BCTMP mill, reducing pulp production by 3,700 tonnes of NBSK pulp and 3,100 tonnes of BCTMP, respectively.    

Pulp unit manufacturing costs saw a modest decrease from the previous quarter, largely reflecting the quarter-over-quarter impacts of the aforementioned scheduled maintenance outages coupled with seasonally lower energy prices and usage in the current quarter, offsetting a slight increase in fibre costs.  Higher fibre costs principally reflected a larger proportion of higher-cost whole log chips, mitigated slightly by a decline in prices for sawmill residual chips in the current quarter.

Compared to the third quarter of 2016, pulp unit manufacturing costs moderately increased, principally due to higher fibre costs and to a lesser extent, higher chemical pricing, marginally offset by the timing of certain maintenance spend.  Increased fibre costs in the current period largely reflected the higher market prices for sawmill residual chips combined with a larger proportion of higher-cost whole log chips.

Paper
Selected Financial Information and Statistics – Paper

Markets

Global kraft paper markets were healthy through the third quarter of 2017.  The positive pricing momentum and demand from North American markets experienced in the first half of 2017 continued through the current quarter, while certain offshore markets, particularly Asia, saw increasing demand as a result of a tightening of supply. 

Sales

The Company's paper shipments in the third quarter of 2017 at 34,000 tonnes, were down 1,500 tonnes when compared to both the previous quarter and the same quarter in 2016.  The reduction in paper shipments from the second quarter of 2017 largely reflected a decline in shipments into the North American market, as the previous quarter experienced higher-than-normal shipments into this market.  The decrease in paper shipments from the third quarter of 2016 was principally the result of a drawdown of inventory in the third quarter of 2016.        

Paper unit sales realizations in the third quarter of 2017 saw a modest decrease when compared to the previous quarter as higher market-driven US-dollar pricing was more than offset by the 7% stronger Canadian dollar and a lower proportion of shipments to the North American market.  Compared to the same quarter of 2016, paper unit sales realizations experienced a slight decline, as a 4% stronger Canadian dollar offset more favorable pricing, particularly in North America.

Operations

Paper production for the third quarter of 2017 was 34,800 tonnes, up 1,200 tonnes from the second quarter of 2017 and up 2,400 tonnes when compared to the same quarter of 2016.  Compared to the previous quarter, the higher paper production primarily reflected stronger operating rates in the current quarter.  The increase in paper production from the third quarter of 2016 was largely due to a nine-day scheduled maintenance outage in the comparative period.  No maintenance outages occurred in the current quarter or in the second quarter of 2017.

Paper unit manufacturing costs moderately decreased when compared to the second quarter of 2017, mostly due to lower slush pulp costs, principally reflecting lower average NBSK sales realizations, combined with decreases in maintenance spend in the current quarter.  Paper unit manufacturing costs were substantially in line with the third quarter of 2016, as the impact of the scheduled maintenance outage in the comparative period was offset by higher slush pulp costs, driven by higher average NBSK sales realizations, in the current quarter.

Unallocated Items

Selected Financial Information

Corporate costs at $2.8 million for the third quarter of 2017 were down $0.3 million when compared with the second quarter of 2017 and in line with the third quarter of 2016. 

Net finance expense for the third quarter of 2017 at $1.8 million was broadly in line with both comparative periods and related primarily to interest expense associated with the Company's employee future benefit plans and term debt as well as fees associated with the Company's outstanding letters of credit. 

Other expenses, net of $3.0 million in the third quarter of 2017 principally related to unfavourable foreign exchange movements on US-dollar denominated working capital balances, and were consistent with foreign exchange movements experienced in the second quarter of 2017.  In the third quarter of 2016, foreign exchange movements were more modest.

Other Comprehensive Income (Loss)

In the third quarter of 2017, the Company recorded an after-tax gain of $4.6 million in relation to changes in the valuation of the Company's employee future benefit plans.  The gain in the current quarter principally reflected a 0.3% increase in the discount rate used to value the employee future benefit plans partially offset by a return on plan assets lower than the discount rate.  This compared to after-tax losses of $8.0 million and $1.1 million, in the previous quarter and in the third quarter of 2016, respectively. 

SUMMARY OF FINANCIAL POSITION

The following table summarizes CPPI's cash flow and selected ratios for and as at the end of the following periods:

Changes in Financial Position

Cash generated from operating activities was $21.1 million in the third quarter of 2017, down $23.4 million from the previous quarter and down $5.0 million from the third quarter of 2016.  The decrease in operating cash flows compared to the immediately preceding quarter principally related to lower cash earnings in the current quarter.  Further contributing to the lower operating cash in the current quarter was higher income tax payments.  Compared to the third quarter of 2016, lower cash earnings were partially offset by favourable movements in non-cash working capital balances in the current quarter, with lower accounts receivable and higher accounts payable and accrued liabilities in the current quarter.  

Cash used for financing activities was $12.5 million in the third quarter of 2017, up $0.3 million from the previous quarter and $7.3 million higher compared to the third quarter of 2016.  Cash used for financing activities in the current quarter included the Company's quarterly dividend payment of $4.1 million ($0.0625 per share) as well as $7.5 million for shares repurchased under the Company's normal course issuer bid.  This compared to $7.4 million paid for shares repurchased in the second quarter of 2017.  In the third quarter of 2016, the Company did not repurchase common shares under its normal course issuer bid; however, $0.3 million was paid in that period for common shares that were repurchased at the end of the second quarter of 2016 (see further discussion of the shares purchased under the normal course issuer bid in the following "Liquidity and Financial Requirements" section).    

Cash used for investing activities of $18.8 million in the current quarter was primarily related to maintenance-of-business capital associated with the Intercontinental NBSK pulp mill's scheduled maintenance outage during the quarter as well as capital expenditures associated with the previously announced energy projects.

Liquidity and Financial Requirements

At September 30, 2017, the Company had a $110.0 million unsecured operating loan facility which was unused, except for $9.0 million reserved for several standby letters of credit, leaving $101.0 million available and undrawn on the operating facility.    

CPPI has $50.0 million of floating interest rate term debt.   

The Company remained in compliance with the covenants relating to its operating loan and long-term debt during the quarter, and expects to remain so for the foreseeable future. 

On March 7, 2017, the Company renewed its normal course issuer bid whereby it can purchase for cancellation up to 3,332,038 common shares or approximately 5% of its issued and outstanding common shares as of March 1, 2017.  The renewed normal course issuer bid is set to expire on March 6, 2018.  During the third quarter of 2017, CPPI purchased 568,425 common shares for $7.2 million (an average of $12.67 per common share).  For the nine months ended September 30, 2017, CPPI purchased 1,440,528 common shares for $17.7 million (an average of $12.29 per common share).  

As a result of the Company's share purchases in the current quarter, Canfor's ownership interest in CPPI increased to 54.8% at September 30, 2017, up 0.4% from the end of the prior quarter. The Company may purchase more shares through the balance of 2017 subject to the terms of the normal course issuer bid.

Dividends

On October 20, 2017, the Board of Directors declared a quarterly dividend of $0.0625 per share, payable on November 9, 2017 to the shareholders of record on November 2, 2017.

Collective Agreements with Labour Unions

The Company ratified new four-year collective agreements with Unifor and PPWC (Public and Private Workers of Canada) during the second quarter of 2017.  Both agreements expire on April 30, 2021. 

Licella Pulp Joint Venture

In March 2017, the Canadian Federal Government through its Sustainable Development Technology Canada program announced the funding over several years of approximately $13.2 million, contingent on future spending, to allow the Licella Pulp Joint Venture to further develop and demonstrate a technology that will economically convert biomass into biofuels and biochemicals.

OUTLOOK

Pulp Markets

For the month of October 2017, the Company announced increases of US$105 per tonne and US$30 per tonne for NBSK pulp list prices to China and North America, respectively, reflecting a surge in demand, principally from China, as well as supply disruptions.  Global pulp markets are currently anticipated to remain strong in the fourth quarter of 2017.

Results in the fourth quarter of 2017 will reflect a scheduled outage at the Taylor pulp mill to complete preliminary work associated with the previously announced energy project, with a projected 3,000 tonnes of reduced BCTMP production as well as lower projected shipment volumes.

Paper Markets

Bleached kraft paper markets and prices are projected to remain relatively unchanged in the fourth quarter of 2017.

OUTSTANDING SHARES

At October 20, 2017, there were 65,258,834 common shares of the Company outstanding.

CRITICAL ACCOUNTING ESTIMATES 

The preparation of financial statements in conformity with International Financial Reporting Standards requires management to make estimates and assumptions that affect the amounts recorded in the financial statements.  On an ongoing basis, management reviews its estimates, including those related to useful lives for amortization, impairment of long-lived assets, pension and other employee future benefit plans and asset retirement obligations based upon currently available information.  While it is reasonably possible that circumstances may arise which cause actual results to differ from these estimates, management does not believe it is likely that any such differences will materially affect the Company's financial condition.  

ACCOUNTING STANDARDS ISSUED AND NOT APPLIED

In May 2014, the International Accounting Standards Board ("IASB") issued IFRS 15, Revenue from Contracts with Customers, which will supersede IAS 18, Revenue, IAS 11, Construction Contracts and related interpretations.  The new standard is effective for annual periods beginning on or after January 1, 2018.  The Company has performed an assessment of the impact of the new standard, and has determined that adoption of this standard will have no significant impact on the Company's financial statements.

In July 2014, the IASB issued IFRS 9, Financial Instruments.  The required adoption date for IFRS 9 is January 1, 2018 and the Company has determined that the adoption of this new standard will have no significant impact on its financial statements.

In January 2016, the IASB issued IFRS 16, Leases, which will supersede IAS 17, Leases and related interpretations. The required adoption date for IFRS 16 is January 1, 2019 and the Company is in the process of assessing the impact on its financial statements of this new standard.

INTERNAL CONTROLS OVER FINANCIAL REPORTING

During the quarter ended September 30, 2017, there were no changes in the Company's internal controls over financial reporting that materially affected, or would be reasonably likely to materially affect, such controls.

RISKS AND UNCERTAINTIES

A comprehensive discussion of risks and uncertainties is included in the Company's 2016 annual statutory reports which are available on www.canfor.com or www.sedar.com.

Sales are primarily influenced by changes in market pulp prices, sales volumes and fluctuations in Canadian dollar exchange rates. Operating income, net income and operating income before amortization are primarily impacted by: sales revenue; freight costs; fluctuations of fibre, chemical and energy prices; level of spending and timing of maintenance downtime; and production curtailments.  Net income is also impacted by fluctuations in Canadian dollar exchange rates, the revaluation to the period end rate of US dollar denominated working capital balances and revaluation of outstanding derivative financial instruments.

SELECTED QUARTERLY FINANCIAL INFORMATION

Other material factors that impact the comparability of the quarters are noted below:

Canfor Pulp Products Inc.
Condensed Consolidated Balance Sheets

Canfor Pulp Products Inc.
Condensed Consolidated Statements of Income

Canfor Pulp Products Inc.
Condensed Consolidated Statements of Other Comprehensive Income (Loss)

Condensed Consolidated Statements of Changes in Equity

Canfor Pulp Products Inc.
Condensed Consolidated Statements of Cash Flows

Canfor Pulp Products Inc.
Notes to the Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2017 and 2016
(millions of Canadian dollars unless otherwise noted, unaudited)

1.        Basis of Preparation

These condensed consolidated interim financial statements (the "financial statements") have been prepared in accordance with International Accounting Standard ("IAS") 34, Interim Financial Reporting, and include the accounts of Canfor Pulp Products Inc. ("CPPI") and its subsidiary entities, hereinafter referred to as "CPPI" or "the Company." At October 20, 2017, Canfor Corporation ("Canfor") held a 54.8% interest in CPPI.

These financial statements do not include all of the disclosures required by International Financial Reporting Standards ("IFRS") for annual financial statements. Additional disclosures relevant to the understanding of these financial statements, including the accounting policies applied, can be found in the Company's Annual Report for the year ended December 31, 2016, available at www.canfor.com or www.sedar.com.

Effective January 1, 2017, the Company has adopted the amendment to IAS 7, Statement of Cash Flows, which clarified disclosure requirements associated with cash and non-cash changes in liabilities from financing activities. The adoption of this amendment has had no impact on the Company's disclosures in the financial statements.

Certain comparative amounts for the prior year have been reclassified to conform to the current year's presentation.

These financial statements were authorized for issue by the Company's Board of Directors on October 20, 2017.

Accounting Standards Issued and Not Applied

In May 2014, the International Accounting Standards Board ("IASB") issued IFRS 15, Revenue from Contracts with Customers, which will supersede IAS 18, Revenue, IAS 11, Construction Contracts and related interpretations. The new standard is effective for annual periods beginning on or after January 1, 2018. The Company has performed an assessment of the impact of the new standard, and has determined that adoption of this standard will have no significant impact on the Company's financial statements.

In July 2014, the IASB issued IFRS 9, Financial Instruments. The required adoption date for IFRS 9 is January 1, 2018 and the Company has determined that adoption of this standard will have no significant impact on its financial statements.

In January 2016, the IASB issued IFRS 16, Leases, which will supersede IAS 17, Leases and related interpretations. The required adoption date for IFRS 16 is January 1, 2019 and the Company is in the process of assessing the impact on its financial statements of this new standard.

2.      Inventories

Inventory balances are stated after inventory write-downs from cost to net realizable value. There were no inventory write-downs at September 30, 2017 or December 31, 2016.

3.      Operating Loans

The terms of the Company's operating loan facility include interest payable at floating rates that vary depending on the ratio of debt to total capitalization, and is based on the lenders' Canadian prime rate, bankers acceptances, US dollar base rate or US dollar LIBOR rate, plus a margin. The facility has certain financial covenants including a covenant based on maximum debt to total capitalization of the Company. No amounts were drawn on the operating loan facility as at September 30, 2017 (December 31, 2016 - nil).

At September 30, 2017, $9.0 million of letters of credit outstanding are covered under the general operating loan facility, and the Company was in compliance with all covenants relating to its operating loans.

4.       Employee Future Benefits

For the three months ended September 30, 2017, defined benefit plan actuarial gains of $6.2 million (before tax) were recognized in other comprehensive income (loss), principally reflecting a higher discount rate used to value the net defined benefit plan obligations partially offset by a return on plan assets lower than discount rate. For the nine months ended September 30, 2017, defined benefit plan actuarial losses of $4.6 million (before tax) were recognized in other comprehensive income (loss). For the three and nine months ended September 30, 2016, the Company recognized before tax actuarial losses in other comprehensive income (loss) of $1.5 million and $19.0 million, respectively.

For the Company's defined benefit pension plans, a one percentage point increase in the discount rate used in calculating the actuarial estimate of future liabilities would decrease the accrued defined benefit pension obligation by an estimated $16.6 million, of which 34% (December 31, 2016 – 24%) is fully hedged against changes in discount rates and longevity risk (potential increases in life expectancy of plan members) through buy-in annuities, and a further 36% (December 31, 2016 – 46%) is partially hedged through the plan's investment in debt securities. For the Company's other benefit plans, a one percentage point increase in the discount rate used in calculating the actuarial estimate of future liabilities would decrease the accrued benefit obligation by an estimated $12.0 million.

The discount rate assumptions used to estimate the changes in net retirement benefit obligations were as follows:

In the second quarter of 2017, the Company purchased $18.0 million of buy-in annuities through its defined benefit pension plans, increasing total annuities purchased to $57.8 million. Future cash flows from the annuities will match the amount and timing of benefits payable under the plans, substantially mitigating the exposure to future volatility in the related pension obligations. Transaction costs of $1.1 million related to the purchase were recognized in other comprehensive income (loss) in the second quarter of 2017, principally reflecting the difference between the annuity rate (which is comparable to solvency rates) compared to the discount rate used to value the obligations on a going concern basis.

5.      Financial Instruments

CPPI's cash and cash equivalents, accounts receivable, loans and advances, operating loans, accounts payable and accrued liabilities, and long-term debt are measured at amortized cost subsequent to initial recognition. At September 30, 2017, the fair value of the Company's long-term debt approximates its amortized cost of $50.0 million (December 31, 2016 - $50.0 million). 

Derivative instruments are measured at fair value. IFRS 13, Fair Value Measurement, requires classification of financial instruments within a hierarchy that prioritizes the inputs to fair value measurement.

The three levels of the fair value hierarchy are:

Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities;

Level 2 – Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly;

Level 3 – Inputs that are not based on observable market data.

At times, the Company uses a variety of derivative financial instruments to reduce its exposure to risks associated with fluctuations in foreign exchange rates, pulp prices, energy costs, and floating interest rates on long-term debt. As at September 30, 2017 and December 31, 2016, the Company had no derivative financial instruments outstanding.

6.         Income Taxes