Canfor Reports Results for Third Quarter of 2017

VANCOUVER, Oct. 20, 2017 /CNW/ - Canfor Corporation (TSX: CFP) today reported net income attributable to shareholders ("shareholder net income") of $66.2 million, or $0.51 per share, for the third quarter of 2017, compared to shareholder net income of $81.3 million, or $0.61 per share, for the second quarter of 2017 and net income attributable to shareholders of $50.9 million, or $0.38 per share, for the third quarter of 2016.  For the nine months ended September 30, 2017, shareholder net income was $213.6 million, or $1.62 per share, compared to $112.9 million, or $0.85 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's adjusted shareholder net income for the third quarter of 2017 was $84.3 million, or $0.65 per share, compared to an adjusted shareholder net income of $104.2 million, or $0.78 per share, for the second quarter of 2017, and adjusted shareholder net income of $51.7 million, or $0.39 per share, for the third quarter of 2016. For the nine months ended September 30, 2017, the Company's adjusted shareholder net income was $247.8 million, or $1.88 per share, compared to $99.1 million, or $0.75 per share, for the nine months ended September 30, 2016.

The Company reported operating income of $105.4 million for the third quarter of 2017, down $25.6 million from reported operating income of $131.0 million for the second quarter of 2017, with the decline reflecting lower operating earnings in both the lumber and pulp and paper segments. Lumber segment results were impacted by a decline in Southern Yellow Pine ("SYP") lumber prices, a 5 cent, or 7%, stronger Canadian dollar, as well as increased log costs in Western Canada, the latter reflecting continued weather-related challenges and the effects of the worst fire season in recorded history in the BC Interior. These factors outweighed the benefits of higher US-dollar Western Spruce/Pine/Fir ("Western SPF") lumber prices, which showed solid gains as the quarter progressed, in part as a result of fire-related disruption to supply.  For the pulp and paper segment, the stronger Canadian dollar more than offset the benefit of a quarter-over-quarter decline in scheduled maintenance outages, improved unit manufacturing costs, and increased energy revenues. 

Reported results in the third quarter of 2017 include $31.7 million (Q2 2017: $34.8 million) related to the expensing of the preliminary countervailing duty ("CVD") and preliminary anti-dumping duty ("ADD") on exports from Canada to the United States. On August 26, 2017, the US Department of Commerce's preliminary CVD expired.

Lumber demand in North America remained relatively stable in the third quarter of 2017. Notwithstanding the impact of the recent hurricanes in the US South, US housing starts averaged 1,165,000 units on a seasonally adjusted basis, in line with the previous quarter, while the repair and remodeling sector saw seasonally stronger activity. Single-family starts, which consume a higher proportion of lumber, were up 3% from the previous quarter, while multi-family starts were down compared to the second quarter of 2017. In Canada, housing starts remained near historical highs, averaging 223,000 units on a seasonally adjusted basis. Offshore lumber demand from China, Japan and other regions remained strong through the third quarter, particularly for the Company's higher-value lumber products.

On a reported basis, Western SPF lumber unit sales realizations were in line with the second quarter of 2017 as higher average US-dollar Western SPF lumber prices and slightly lower duties expensed in the current quarter offset the impact of the strengthened Canadian dollar. The average benchmark North American Random Lengths Western SPF 2x4 #2&Btr price was up US$18 per Mfbm, or 5%, compared to the second quarter of 2017, with more pronounced increases seen across wider-width dimensions. In addition to solid underlying North American and offshore demand, the severe forest fire season in Western Canada contributed to a significant drop in Western SPF lumber shipments destined to the US from producers in British Columbia. These factors, combined with steady demand and relatively low field inventory, resulted in significant price gains.

SYP unit sales realizations were moderately lower than the prior quarter, reflecting a US$68 per Mfbm, or 14%, decline in the SYP East 2x4 #2 price, with similar declines seen in 2x8 and 2x12 dimensions. Prices for SYP East 2x6 and 2x10 #2 dimensions were in line with the previous quarter. Pricing for higher-value products remained strong, partly offsetting the impacts of lower average benchmark lumber prices. SYP lumber prices picked up towards the end of the quarter primarily reflecting lean inventories throughout the supply chain and increased demand following the recent hurricanes in the US South.

Total lumber shipments, at 1.37 billion board feet, were in line with the previous quarter. SYP shipments were modestly higher than the previous quarter, in part reflecting improved demand in September. Western SPF shipments decreased slightly compared to the second quarter of 2017, with the comparative period reflecting a release of inventory following the severe winter weather experienced at the start of 2017.

Total lumber production, at 1.31 billion board feet, was in line with the previous quarter. In the US South, higher productivity following several capital upgrades offset fewer operating hours as a result of weather-related disruptions and increased statutory holidays. In Western Canada, increased operating hours offset slightly lower productivity, largely reflecting weather and fire-related challenges. Lumber unit manufacturing costs in the third quarter of 2017 were in line with the previous quarter as the positive impact of seasonally lower energy costs in Western Canada and stable log costs in the US South offset higher purchased wood and log hauling costs in Western Canada, and to a lesser extent, increasing market-based stumpage.

Entering the third quarter of 2017, global softwood pulp markets showed signs of weakness; however, as the quarter progressed, demand and pricing rebounded, particularly China, in part due to China's new regulations restricting the import of recycled mix 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 the 7% stronger Canadian dollar.  Bleached Chemi-Thermo Mechanical Pulp ("BCTMP") US-dollar list prices trended positively through the quarter, but were also negatively impacted by the 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 third quarter of 2017, Canfor Pulp Products Inc. ("CPPI") 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 CPPI'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. 

Commenting on the Company's third quarter results, Canfor's President and Chief Executive Officer, Don Kayne, said, "Despite significant weather-related challenges due to the severe forest fires in BC and hurricanes in the US South, combined with significant and unwarranted duties levied on shipments from Canada to the US, Canfor's lumber business had another solid quarter, with the Company's high-value focus, solid demand and supply constraints all contributing to our strong earnings for the period."

On October 20, 2017, the Board of Directors approved, in principle, a $160 million (US$125 million) capital investment program focused on Canfor's US South sawmill operations to increase production capacity by approximately 350 million board feet by the end of 2019.  These investments will be focused on enhancing the Company's high-value product offering by targeting a number of sawmill and planer modernization opportunities along with increased drying capacity. In addition, the Company is currently conducting a detailed viability study of a greenfield opportunity at one of several locations in the US South. The mill capacity currently being considered is 250 million board feet. The study is expected to be completed in the first quarter of 2018, with a final decision to follow thereafter.

Looking ahead, North American lumber prices are forecast to remain steady (and high by historical standards), while there is a risk of continued volatility as the US Department of Commerce investigations progress and final determinations are made. Demand in North America is anticipated to be solid through much of the fourth quarter of 2017, with seasonally slower activity in December. For the Company's key offshore lumber markets, demand is anticipated to remain solid through the fourth quarter of 2017 and into 2018.

For the month of October 2017, CPPI 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.

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 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/webcasts.

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.

Canfor is a leading integrated forest products company based in Vancouver, British Columbia ("BC") with interests in BC, Alberta, North and South Carolina, Alabama, Georgia, Mississippi and Arkansas.  Canfor produces primarily softwood lumber and also owns a 54.8% interest in Canfor Pulp Products Inc., which is one of the largest global producers of market northern bleached softwood kraft pulp and a leading producer of high performance kraft paper.  Canfor shares are traded on The Toronto Stock Exchange under the symbol CFP.

Canfor Corporation
Third Quarter 2017
Management's Discussion and Analysis

This interim Management's Discussion and Analysis ("MD&A") provides a review of Canfor Corporation's ("Canfor" 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 Canfor'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 Canfor'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 before Amortization and Adjusted Operating Income before Amortization which Canfor considers to be a relevant indicator for measuring trends in the performance of each of its operating segments and the Company's ability to generate funds to meet its debt repayment and capital expenditure requirements.  Reference is also made to Adjusted Shareholder Net Income (calculated as Shareholder Net Income less specific items affecting comparability with prior periods – for the full calculation, see the reconciliation included in the section "Analysis of Specific Material Items Affecting Comparability of Shareholder Net Income" and Adjusted Shareholder Net Income per Share (calculated as Adjusted Shareholder Net Income divided by the weighted average number of shares outstanding during the period). Operating Income before Amortization and Adjusted Shareholder Net Income and Adjusted Shareholder Net Income 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, Canfor's Operating Income before Amortization, Adjusted Shareholder Net Income and Adjusted Shareholder Net Income per Share may not be directly comparable with similarly titled measures used by other companies.  Reconciliations of Operating Income before Amortization to Operating Income and Adjusted Shareholder Net Income to Net Income 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 Canfor.

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

Analysis of Specific Material Items Affecting Comparability of Shareholder Net Income

The Company reported operating income of $105.4 million for the third quarter of 2017, down $25.6 million from reported operating income of $131.0 million for the second quarter of 2017 with the decline reflecting lower operating earnings in both the lumber and pulp and paper segments. Lumber segment results were impacted by a decline in Southern Yellow Pine ("SYP") lumber prices, a 5 cent, or 7% stronger Canadian dollar, as well as increased log costs in Western Canada, the latter reflecting continued weather-related challenges and the effects of the worst fire season in recorded history in the BC Interior. These factors outweighed the benefits of higher US-dollar Western Spruce/Pine/Fir ("Western SPF") lumber prices, which showed solid gains as the quarter progressed, in part as a result of the fire-related disruption to supply.  For the pulp and paper segment, the stronger Canadian dollar more than offset the benefit of a quarter-over-quarter decline in scheduled maintenance outages, improved unit manufacturing costs, and increased energy revenues. 

Reported results in the third quarter of 2017 include $31.7 million (Q2: $34.8 million) related to the expensing of the preliminary countervailing duty ("CVD") and preliminary anti-dumping duty ("ADD") on exports from Canada to the United States. On August 26, 2017 the US Department of Commerce's preliminary CVD expired.

The current quarter's adjusted operating income was up $36.5 million from $97.4 million for the third quarter of 2016, reflecting a $46.3 million increase in lumber segment earnings and a $9.9 million decrease in earnings for the pulp and paper segment. The increase in lumber segment earnings primarily reflected higher Western SPF lumber unit sales realizations with significantly higher US-dollar benchmark lumber prices more than offsetting a 3 cent, or 4%, strengthening of the Canadian dollar, modestly lower SYP lumber unit sales realizations and market driven increases in log costs in Western Canada in the current period. In the pulp and paper segment, improvements in average Northern Bleached Softwood Kraft ("NBSK") pulp and Bleached Chemi-Thermo Mechanical Pulp ("BCTMP") unit sales realizations were more than offset by lower shipments and a moderate increase in pulp unit manufacturing costs, largely attributable to higher market-based fibre costs.

OPERATING RESULTS BY BUSINESS SEGMENT
Lumber
Selected Financial Information and Statistics – Lumber

Markets

Lumber demand in North America remained relatively stable in the third quarter of 2017. Notwithstanding the impact of the recent hurricanes in the US South, US housing starts averaged 1,165,000 units on a seasonally adjusted basis, in line with the previous quarter, while the repair and remodeling sector saw seasonally stronger activity. Single-family starts, which consume a higher proportion of lumber, were up 3% from the previous quarter, while multi-family starts were down compared to the second quarter of 2017. In Canada, housing starts remained near historical highs, averaging 223,000 units on a seasonally adjusted basis. Offshore lumber demand from China, Japan and other regions remained strong through the third quarter, particularly for the Company's higher-value lumber products.

Sales

Sales for the lumber segment for the third quarter of 2017 were $880.4 million, compared to $904.3 million in the previous quarter and $809.6 million for the third quarter of 2016.  The 3% decrease in sales revenue compared to the prior quarter largely reflected lower SYP unit sales realizations, while the 9% increase in sales revenue compared to the third quarter of 2016 primarily reflected higher Western SPF unit sales realizations.

Total lumber shipments, at 1.37 billion board feet, were in line with the previous quarter. SYP shipments were modestly higher than the previous quarter, reflecting, in part, improved demand towards the end of the quarter. Western SPF shipments decreased slightly, reflecting a drawdown of inventory in the previous quarter following the severe winter weather experienced at the beginning of 2017. Total lumber shipments were slightly above the third quarter of 2016 principally reflecting improved productivity in the US South following several capital projects in that region.

On a reported basis, Western SPF lumber unit sales realizations were in line with the second quarter of 2017 as higher average Western SPF lumber prices and slightly lower duties expensed in the current quarter offset the impact of the strengthened Canadian dollar. The average benchmark North American Random Lengths Western SPF 2x4 #2&Btr price was up US$18 per Mfbm, or 5%, compared to the second quarter of 2017, with more pronounced increases seen across wider-width dimensions. In addition to solid underlying North American and offshore demand, the severe forest fire season in Western Canada contributed to a significant drop in Western SPF lumber shipments destined to the US from producers in British Columbia. These factors, combined with steady demand and relatively low field inventory, resulted in significant price gains.

SYP unit sales realizations were moderately lower than the prior quarter, reflecting a US$68 per Mfbm, or 14%, decline in the SYP East 2x4 #2 price, with similar declines seen in 2x8 and 2x12 dimensions. Prices for SYP East 2x6 and 2x10 #2 dimensions were in line with the previous quarter. Pricing for higher-value products remained strong, partly offsetting the impacts of lower average benchmark lumber prices. SYP lumber prices picked up towards the end of the quarter primarily reflecting lean inventories throughout the supply chain and increased demand following the recent hurricanes in the US South.

Compared to the third quarter of 2016, Western SPF lumber unit sales realizations were up significantly as higher US-dollar benchmark lumber prices more than offset the impact of the aforementioned duties in the current quarter and the 4% stronger Canadian dollar. The average North American Random Lengths Western SPF 2x4 #2&Btr price was up US$84 per Mfbm, or 26%, with similar increases seen across wider-width dimensions. SYP lumber unit sales realizations were down modestly compared to the third quarter of 2016 as a higher-value sales mix helped to offset lower benchmark prices, particularly across wider-width dimensions.  

Total residual revenue in the current quarter was in line with the prior quarter and slightly higher than the third quarter of 2016 as increased pricing for sawmill residual chips in Western Canada more than offset lower residual chip prices in the US South. Current quarter results also reflected seasonally higher log sales compared to the previous quarter due to increased timber harvesting following the spring break-up period in Western Canada. Log sales were in line with the third quarter of 2016. Pellet sales revenues in the current quarter were higher than both comparative quarters largely as a result of improved productivity rates.

Operations

Total lumber production in the third quarter of 2017, at 1.31 billion board feet, was in line with the previous quarter. In the US South, higher productivity following several capital upgrades more than offset weather-related disruptions and increased statutory holidays. In Western Canada, production was largely unchanged despite the fire-related disruptions to log procurement efforts and operations.

Lumber unit manufacturing costs in the third quarter of 2017 were in line with the previous quarter as seasonally lower energy costs in Western Canada, stable log costs in the US South and the stronger Canadian dollar offset higher purchased wood and log hauling costs in Western Canada, and to a lesser extent, increasing market-based stumpage. Compared to the third quarter of 2016, unit manufacturing costs were modestly higher primarily reflecting market-based increases in purchased wood costs and stumpage in Western Canada.

Pulp and Paper
Selected Financial Information and Statistics – Pulp and Paper¹⁷

Markets

Global softwood 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 China²⁰. 

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

Total 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 the 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 the 4% stronger 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 CPPI's NBSK pulp mills in the current quarter.

Total 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 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

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, CPPI 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, CPPI 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 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 and Other Items

Selected Financial Information

Corporate costs were $8.2 million for the third quarter of 2017, $2.2 million lower than the previous quarter principally reflecting higher legal costs related to the expiry of the Softwood Lumber Agreement recorded in the second quarter of 2017. Corporate costs were in line with the third quarter of 2016.

Net finance expense at $8.1 million for the third quarter of 2017 was up slightly from the previous quarter and in line with the third quarter of 2016. In the third quarter of 2017, the Company recognized a foreign exchange gain on its US-dollar term debt held by Canadian entities due to the stronger Canadian dollar at the end of the quarter as compared to the end of June (see further discussion on the term debt financing in the "Liquidity and Financial Requirements" section).

The Company uses a variety of derivative financial instruments at times as partial economic hedges against unfavourable changes in foreign exchange rates, energy costs, lumber prices, and interest rates. In the third quarter of 2017, the Company recorded a net loss of $1.9 million related to its derivative instruments, principally reflecting unrealized losses on lumber future contracts. In the third quarter of 2016, the Company recorded a net gain of $0.1 million related to its derivatives instruments.

Other expense, net, of $4.3 million in the third quarter of 2017 compared to a net expense of $3.2 million in the second quarter of 2017, primarily reflecting foreign exchange movements on US-dollar denominated cash, receivables and payables.

Other Comprehensive Income (Loss)

The following table summarizes Canfor's Other Comprehensive Income (Loss) for the comparable periods:

In the third quarter of 2017, the Company recorded an after-tax gain of $13.0 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 an after-tax loss of $26.0 million in the previous quarter and an after-tax loss of $1.5 million in the third quarter of 2016, with the losses in both cases largely reflecting lower discount rates.

In addition, the Company recorded an accounting loss of $19.9 million in the third quarter of 2017 related to foreign exchange differences for foreign operations due to the strengthening of the Canadian dollar relative to the US-dollar at the end of the quarter. This compared to a loss of $13.3 million in the previous quarter and a gain of $3.8 million in the third quarter of 2016.

SUMMARY OF FINANCIAL POSITION

The following table summarizes Canfor'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 $127.1 million in the third quarter of 2017, compared to $253.6 million in the previous quarter and $148.6 million in the third quarter of 2016. The decrease in operating cash flows from the previous quarter primarily reflected a seasonal drawdown of log inventories in Western Canada in the second quarter of 2017, and to a lesser extent, lower cash earnings in the current quarter.  Compared to the third quarter of 2016, the decrease in operating cash flows was primarily attributable to increased income tax installment payments in the current quarter as well as cash received from a legal settlement in the comparative period, offset in part by higher cash earnings in the current quarter.

Cash used in financing activities was $89.6 million in the current quarter, compared to cash used of $56.1 million in the previous quarter and cash used of $48.4 million in the same quarter of 2016. During the current quarter, the Company made cash distributions of $2.2 million to non-controlling shareholders, in line with the previous quarter, and down $9.4 million from the same quarter in 2016, largely reflecting completion of the Company's two phased acquisitions in the US South. In the third quarter of 2017, Canfor purchased 3,526,387 common shares under its Normal Course Issuer Bid for $75.0 million, while CPPI purchased 568,425 common shares under its Normal Course Issuer Bid for $7.2 million (see "Liquidity and Financial Requirements" section for more details). The Company had no balance outstanding on its Canadian operating loan facility at the end of the third quarter of 2017, similar to the prior quarter, and down $96.0 million from the end of the third quarter of 2016.

Cash used for investing activities was $59.1 million in the current quarter, compared to $56.8 million in the previous quarter and $116.6 million in the same quarter of 2016. Capital additions were $57.5 million, down $4.2 million from the previous quarter and in line with the third quarter of 2016. Current quarter capital expenditures included various smaller high-returning capital projects aimed at increasing drying capacity and productivity, with an increasing proportion of capital deployed in the US South, including upgrades at the Company's sawmills in Arkansas and Georgia. In the pulp and paper segment, capital expenditures 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. Investing activities in the second quarter of 2017 also included final proceeds of $15.0 million related to the July 1, 2015 sale of the Company's investment in Lakeland Mills Ltd. and Winton Global Lumber Ltd., and a $14.4 million payment related to the Company's April 2016 acquisition of Wynndel Box and Lumber Ltd. Investing activities in the third quarter of 2016 include a $61.6 million payment related to the Company's phased acquisition of Scotch & Gulf Lumber, LLC.

Liquidity and Financial Requirements

At September 30, 2017, the Company on a consolidated basis had cash of $278.8 million, no amounts drawn on its operating loans, and an additional $50.7 million reserved for several standby letters of credit. At period end the Company had total available undrawn operating loans of $459.3 million.

Excluding CPPI, the Company's bank operating loans at September 30, 2017 totaled $350.0 million, of which no amounts were drawn, and an additional $41.7 million reserved for several standby letters of credit, the majority of which related to unregistered pension plans. During the third quarter of 2017, the Company's principal operating loans, excluding CPPI, were extended to September 28, 2022. Interest is payable on these loans at floating rates based on the lenders' Canadian prime rate, bankers acceptances, US-dollar base rate or US-dollar LIBOR rate, plus a margin that varies with the Company's debt to total capitalization ratio.

At September 30, 2017, CPPI had an undrawn $110.0 million bank operating loan facility and $9.0 million in letters of credit outstanding under the operating loan facility. The Company and CPPI remained in compliance with the covenants relating to their operating loans and long-term debt during the quarter, and expect to remain so for the foreseeable future.

The Company has $429.9 million of fixed and floating interest rate term debt. The Company's consolidated net debt to total capitalization at the end the third quarter of 2017 was 7.6%. For Canfor, excluding CPPI, net debt to capitalization at the end of the third quarter of 2017 was 10.2%.

On March 7, 2017, the Company renewed its normal course issuer bid whereby it can purchase for cancellation up to 6,640,227 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 the Company purchased 3,526,387 common shares for $75.0 million (an average of $21.27 per common share). As at October 20, 2017, there were 129,278,136 common shares of the Company outstanding. Under a separate normal course issuer bid, CPPI purchased 568,425 common shares in the third quarter of 2017 for $7.2 million (an average of $12.67 per common share).

As a result of CPPI's share repurchases 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.

Canfor and CPPI may purchase more shares through the balance of 2017 subject to the terms of their normal course issuer bids.  

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

Lumber

Looking ahead, North American lumber prices are forecast to remain steady (and high by historical standards), while there is a risk of continued volatility as the US Department of Commerce investigations progress and final determinations are made. Demand in North America is anticipated to be solid through much of the fourth quarter of 2017, with seasonally slower activity in December.

For the Company's key offshore lumber markets, demand is anticipated to remain solid through the fourth quarter of 2017 and into 2018.

Pulp and Paper

For the month of October 2017, CPPI 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.

OUTSTANDING SHARES

At October 20, 2017, there were 129,278,136 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, certain accounts receivable, pension and other employee future benefit plans and asset retirement and deferred reforestation 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 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 the 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.

In addition to exposure to changes in product prices and foreign exchange, the Company's financial results are impacted by seasonal factors such as weather and building activity.  Adverse weather conditions can cause logging curtailments, which can affect the supply of raw materials to sawmills and pulp mills.  Market demand also varies seasonally to some degree.  For example, building activity and repair and renovation work, which affects demand for lumber products, is generally stronger in the spring and summer months.  Shipment volumes are affected by these factors as well as by global supply and demand conditions.  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, US-dollar denominated debt and revaluation of outstanding derivative financial instruments.

The US Department of Commerce will announce its final CVD and ADD determinations no later than November 14, 2017, followed by a final injury determination by the US International Trade Commission no later than December 21, 2017. In the event of an affirmative injury determination by the US International Trade Commission, final duties would be imposed on or before January 2, 2018. Final countervailing and anti-dumping determinations may differ from the preliminary determinations. Canfor continues to cooperate with the Provincial and Federal Governments of Canada who have indicated they will vigorously defend the interests of the industry. 

SELECTED QUARTERLY FINANCIAL INFORMATION

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

Canfor Corporation
Condensed Consolidated Balance Sheets

Canfor Corporation
Condensed Consolidated Statements of Income

Canfor Corporation
Condensed Consolidated Statements of Other Comprehensive Income (Loss)