VANCOUVER, Oct. 24, 2018 /CNW/ - Canfor Pulp Products Inc. ("CPPI") (TSX: CFX) today reported third quarter 2018 results and quarterly and special dividends:

Highlights

• Strong third quarter with operating income of $61 million and sales of $329 million 
• Net income of $43 million, or $0.66 per share
• Net cash of $205 million at September 30, 2018
• Declared quarterly dividend of $0.0625 per share and special dividend of $2.25 per share 

Financial Results

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

The Company reported operating income of $60.5 million for the third quarter of 2018, a decrease of $24.9 million from $85.4 million reported for the second quarter of 2018, which principally reflected a 20% decrease in pulp shipments that was mostly timing-related, and, to a lesser extent, higher market-driven fibre costs.

Global softwood pulp market conditions remained balanced through the third quarter of 2018, with US-dollar NBSK pulp list prices, for the most part, reflecting steady global demand.  Average Northern Bleached Softwood Kraft ("NBSK") pulp unit sales realizations were in line with the previous quarter as a 1 cent, or 1%, weaker Canadian dollar and record high US-dollar NBSK pulp list pricing in North America, offset a slight decrease in the China US-dollar NBSK pulp list price.  Average Bleached Chemi-Thermo Mechanical Pulp ("BCTMP") unit sales realizations showed a modest decrease quarter-over-quarter as a result of lower US-dollar BCTMP prices. 

Pulp shipments were down 66,200 tonnes, or 20%, from the previous quarter, reflecting the combination of a drawdown of inventory in the previous quarter as weather related transportation constraints eased, a 10,000 tonne vessel slippage into October, the impact of early fall maintenance and softer market demand from China in the first part of the quarter.

Pulp production was down 11,200 tonnes, or 4%, from the previous quarter for the most part reflecting scheduled maintenance downtime at the Company's Northwood NBSK pulp mill in late September (spanning quarter-end), which more than offset increased BCTMP production, following the commissioning of the Company's energy reduction project at its Taylor Pulp mill at the end of June.  As previously announced, towards the end of the third quarter, Northwood extended its scheduled maintenance outage on one production line.  The outage is to enable necessary tube replacements to its No. 5 recovery boiler to rectify damage discovered during routine preventative maintenance inspections.  This unscheduled outage is anticipated to result in an additional reduction in NBSK pulp production in the fourth quarter of 60,000-70,000 tonnes.

Pulp unit manufacturing costs were modestly higher than the previous quarter, principally reflecting market-related increases in sawmill and whole log residual chip costs, and an increased proportion of higher-cost whole log chips.

Operating income in the Company's paper segment at $3.1 million was up $1.6 million from the second quarter of 2018, as improved paper unit sales realizations and a weaker Canadian dollar more than offset increased slush pulp costs linked to higher Canadian dollar NBSK market pulp prices.

Commenting on the Company's third quarter of 2018 results, CPPI's Chief Executive Officer, Don Kayne said, "Canfor Pulp recorded another financially solid quarter despite significant scheduled maintenance downtime, ramp-up efforts at Taylor and several operational challenges.  We are very focused on completing our repairs to our No.5 recovery boiler at Northwood and on returning to full operating capacity later this quarter".

Global softwood kraft pulp markets are projected to be balanced through the fourth quarter of 2018.  Results in the fourth quarter of 2018 will include the continuation of the scheduled maintenance outage at the Northwood NBSK pulp mill, the aforementioned extended downtime at Northwood, as well as unscheduled downtime taken in early October at all of the Company's NBSK pulp facilities as a result of a third party natural gas pipeline explosion near Prince George.  Combined, these scheduled and unscheduled outages are anticipated to result in a total of 85,000-90,000 tonnes of reduced NBSK pulp production, as well as higher associated maintenance costs and lower shipment volumes in the fourth quarter of 2018. 

Bleached kraft paper demand is anticipated to remain positive through the fourth quarter of 2018.

On October 24, 2018, the Board of Directors declared a quarterly dividend of $0.0625 per share, and a special dividend of $2.25 per share, both payable on November 13, 2018 to the shareholders of record on November 6, 2018. The special dividend has been declared as a result of strong cash generated by the business over the last year.

Additional Information and Conference Call 
A conference call to discuss the third quarter's financial and operating results will be held on Thursday, October 25, 2018 at 8:00 AM Pacific time. To participate in the call, please dial Toll-Free 1-888-390-0546. For instant replay access until November 8, 2018, please dial Toll-Free 1-888-390-0541 and enter participant pass code 632748#. 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.

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 2018
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, 2018 relative to the quarters ended June 30, 2018 and September 30, 2017, and the financial position of the Company at September 30, 2018. It should be read in conjunction with CPPI's unaudited interim consolidated financial statements and accompanying notes for the quarters ended, September 30, 2018 and 2017, as well as the 2017 annual MD&A and the 2017 audited consolidated financial statements and notes thereto, which are included in CPPI's Annual Report for the year ended December 31, 2017 (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 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 (calculated as Net Income less specific items affecting comparability with prior periods) and Adjusted Net Income per Share (calculated as Adjusted Net Income divided by the weighted average number of shares outstanding during the period). Operating Income before Amortization, Adjusted Net Income and Adjusted 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, CPPI's Operating Income before Amortization, Adjusted Net Income and Adjusted 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 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 2018.  

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 24, 2018. 

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 2018 OVERVIEW
Selected Financial Information and Statistics

The Company reported operating income of $60.5 million for the third quarter of 2018, a decrease of $24.9 million from $85.4 million reported for the second quarter of 2018, which principally reflected a 20% decrease in pulp shipments that was mostly timing-related, and, to a lesser extent, higher market-driven fibre costs.

Compared to the third quarter of 2017, operating income was up $39.4 million reflecting substantially higher average Northern Bleached Softwood Kraft Pulp ("NBSK") and Bleached Chemi-Thermo Mechanical Pulp ("BCTMP") US-dollar pricing and a 3 cent, or 4%, weaker Canadian Dollar, which more than offset higher market-based fibre costs, and to a lesser extent, lower production and shipments quarter-over-quarter.

OPERATING RESULTS BY BUSINESS SEGMENT

Pulp
Selected Financial Information and Statistics – Pulp

Markets

Global softwood pulp market conditions remained balanced through the third quarter of 2018, with US-dollar NBSK pulp list prices, for the most part, reflecting steady global demand. Softwood pulp producer inventories at the end of August 2018 were moderately above the balanced range at 33 days of supply, an increase of five days from June 2018⁶, in part reflecting timing of order placement, particularly from China.  Market conditions are generally considered balanced when inventories are in the 27-30 days of supply range. Global shipments of bleached softwood pulp for the first eight months of 2018 were down 1.1% compared to the first eight months of 2017⁷.

Sales

The Company's pulp shipments for the third quarter of 2018 were 262,400 tonnes, down 66,200 tonnes, or 20%, from the previous quarter and down 40,900 tonnes, or 13%, from the third quarter of 2017. The decline in pulp shipments versus the previous quarter reflected the combination of a drawdown of inventory in the previous quarter as weather related transportation constraints eased, a 10,000 tonne vessel slippage into October, the impact of early fall maintenance and softer market demand from China in the first party of the quarter. Compared to the third quarter of 2017, the 13% decrease in pulp shipments reflected a 6% decrease in pulp production quarter-over-quarter, mostly attributable to more scheduled maintenance and the ramp up of the Taylor BCTMP mill, coupled with the aforementioned timing-related shipment impacts during the current quarter.

The average China US-dollar NBSK pulp list price of US$887 per tonne, as published by RISI, was slightly lower than the previous quarter.  Average NBSK pulp unit sales realizations were in line with the previous quarter reflecting the 1 cent, or 1%, weaker Canadian dollar and rising US-dollar NBSK pulp list pricing in North America, which offset a US$23 per tonne decrease in the average China US-dollar NBSK pulp list price.  Average BCTMP unit sales realizations showed a modest decrease quarter-over-quarter, as US-dollar BCTMP list price decreases more than offset the weaker Canadian dollar.  

Compared to the third quarter of 2017, the average China US-dollar NBSK pulp list price was up US$217 per tonne, or 32%, while US-dollar list prices on shipments to North America were up US$287 per tonne, or 24%, over the same period.  These higher global US-dollar prices resulted in substantially higher average NBSK pulp unit sales realizations, combined with a 3 cent, or 4%, weaker Canadian dollar. Average BCTMP unit sales realizations saw more moderate increases compared to the third quarter of 2017, primarily reflecting the improvement in BCTMP market demand combined with the weaker Canadian dollar.

Energy revenues were in line with the second quarter of 2018, principally due to seasonally higher power prices offset by the higher scheduled maintenance outages in the current period.  Energy revenues were moderately lower than the third quarter of 2017, driven by quarter-over-quarter production impacts on energy generation.

Operations

Pulp production was down 11,200 tonnes, or 4%, from the previous quarter for the most part reflecting scheduled maintenance downtime at the Company's Northwood NBSK pulp mill in late September (spanning quarter-end), which more than offset increased BCTMP production, following the commissioning of the Company's energy reduction project at its Taylor Pulp mill at the end of June.  As previously announced, towards the end of the third quarter, Northwood extended its scheduled maintenance outage on one production line.  The outage is to enable necessary tube replacements to its No. 5 recovery boiler to rectify damage discovered during routine preventative maintenance inspections.  This unscheduled outage is anticipated to result in an additional reduction in NBSK pulp production in the fourth quarter of 60,000-70,000 tonnes.    

Compared to the third quarter of 2017, pulp production was down 19,800 tonnes, or 6%, primarily due to the previously noted scheduled maintenance outage at Northwood in the current quarter and the ramp up at the Taylor mill, which more than offset a scheduled maintenance outage at the Intercontinental NBSK pulp mill in the third quarter of 2017, which reduced pulp production by approximately 10,000 tonnes. 

Pulp unit manufacturing costs were modestly higher than the second quarter, principally reflecting market-related increases in sawmill and whole log residual chip costs, and an increased proportion of whole log chips.  Compared to the third quarter of 2017, higher pulp unit manufacturing costs were mostly attributable to market-related increases to fibre costs and, to a lesser extent, lower productivity.

Paper
Selected Financial Information and Statistics – Paper

Markets

Global kraft paper markets showed continued strength through the third quarter of 2018, supported by solid demand from North American and Asian markets. 

Sales

The Company's paper shipments in the third quarter of 2018 were 33,600 tonnes, a slight increase over the second quarter of 2018, largely reflecting higher production following a scheduled maintenance outage in the prior quarter. Paper shipments were broadly in line with the third quarter of 2017.

Paper unit sales realizations in the third quarter of 2018 saw a moderate increase compared to the previous quarter, reflecting higher market-driven US-dollar pricing and the weaker Canadian dollar.  Compared to the third quarter of 2017, paper unit sales realizations increased significantly primarily due to higher market-driven US-dollar pricing and, to a lesser extent, the weaker Canadian dollar.

Operations

Paper production for the third quarter of 2018 was 34,100 tonnes, up 11% compared to the previous quarter and broadly in line with the third quarter of 2017. The increase, when compared to the second quarter of 2018, principally reflected the scheduled maintenance outage completed in the prior quarter which reduced paper production by approximately 4,000 tonnes.  The previous quarter outage contributed to higher paper unit manufacturing costs compared to the current quarter.  Compared to the third quarter of 2017, paper unit manufacturing costs showed a significant increase largely due to higher slush pulp costs associated with increased NBSK pulp sales realizations in the current quarter.

Unallocated Items 
Selected Financial Information

Corporate costs were $3.3 million for the third quarter of 2018, up $0.6 million from the previous quarter and up $0.5 million from the third quarter of 2017 primarily reflecting an increase in corporate, head office and general administrative expenses in the current quarter.

Net finance expense for the third quarter of 2018 was $0.8 million, down $0.5 million from the second quarter of 2018 and down $1.0 million from the third quarter of 2017.  The decrease when compared to the previous quarter, related to higher interest earned in the current quarter as a result of higher cash balances.  Compared to the third quarter of 2017, the lower interest expense in the current period reflected higher interest earned, combined with savings from the early repayment of the Company's $50.0 million long-term debt towards the end of 2017.

Other expense of $2.1 million in the third quarter of 2018 principally related to unfavourable foreign exchange movements on US-dollar denominated working capital balances. 

Other Comprehensive Income (Loss)

In the third quarter of 2018, the Company recorded an after-tax gain of $0.4 million related to changes in the valuation of the Company's employee future benefits plans, largely reflecting a return on plan assets greater than the discount rate.  This compared to an after-tax gain of $0.1 million in the second quarter of 2018 and an after-tax gain of $4.6 million recorded in the third quarter of 2017, largely reflecting changes in the discount rates used to value the employee future benefit plans offset by the return generated on plan assets.

Subsequent to quarter-end, on October 3, 2018, the Company purchased $8.9 million of buy-in annuities through its defined benefit pension plans, increasing the total purchase price of annuities to $86.0 million.

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 $55.1 million in the third quarter of 2018, down $42.8 million from the second quarter of 2018 and up $34.0 million from the third quarter of 2017. The decrease in operating cash flows compared to the second quarter of 2018 largely reflected lower cash earnings combined with higher tax installment payments, offset by favourable movements in non-cash working capital balances in the current quarter, principally lower accounts receivable balances due to timing of shipments.  Compared to the third quarter of 2017, significantly higher cash earnings more than offset higher income tax payments in the current quarter.

Cash used for financing activities was $4.9 million in the third quarter of 2018, broadly in line with the previous quarter, and down $7.6 million from the third quarter of 2017.  Cash used for financing activities in the third quarter of 2018 included the Company's quarterly dividend payment of $4.1 million ($0.0625 per share).

Cash used for investing activities of $32.7 million in the current quarter primarily related to capital expenditures associated with the Company's previously announced energy projects at its Northwood and Taylor pulp mills as well as the Company's new ERP software system project, combined with maintenance-of-business capital associated with the aforementioned major maintenance outages during the quarter.

Liquidity and Financial Requirements

At September 30, 2018, the Company had a $110 million unsecured operating loan facility which was unused, except for $10.8 million reserved for several standby letters of credit, leaving $99.2 million available and undrawn on the operating facility. During the second quarter of 2018, the maturity date of the Company's principal operating loan facility was extended from January 31, 2020 to April 6, 2022.

The Company remained in compliance with the covenants relating to its operating loans during the quarter, and expects to remain so for the foreseeable future. 

On March 5, 2018, the Company renewed its normal course issuer bid whereby it can purchase for cancellation up to 3,262,941 common shares or approximately 5% of its issued and outstanding common shares as of March 1, 2018.  The renewed normal course issuer bid is set to expire on March 6, 2019.  The Company did not purchase any common shares during the third quarter of 2018; year-to-date, the Company has purchased 500 common shares at an average of $13.01 per common share.  As at September 30, 2018, and October 24, 2018, there were 65,250,759 common shares of the Company outstanding and Canfor's ownership interest in CPPI was 54.8%. The Company may purchase shares through the balance of 2018 subject to the terms of the normal course issuer bid.

Dividends

On October 24, 2018, the Board of Directors declared a quarterly dividend of $0.0625 per share, and a special dividend of $2.25 per share, both payable on November 13, 2018 to the shareholders of record on November 6, 2018. The special dividend has been declared as a result of strong cash generated by the business over the last year. 

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.  The Company, together with its joint venture partner, Licella, has actively continued to advance work associated with the feasibility study and risk reduction process for industrializing this biofuel and biochemical technology. In April 2018, the Company received the first installment of funding in the amount of $1.9 million.

OUTLOOK

Pulp Markets

Global softwood kraft pulp markets are projected to be balanced through the fourth quarter of 2018. Results in the fourth quarter of 2018 will include the continuation of the scheduled maintenance outage at the Northwood NBSK pulp mill, the aforementioned extended downtime at Northwood, as well as unscheduled downtime taken in early October at all of the Company's NBSK pulp facilities as a result of a third party natural gas pipeline explosion near Prince George. Combined, these scheduled and unscheduled outages are anticipated to result in a total of 85,000-90,000 tonnes of reduced NBSK pulp production, as well as higher associated maintenance costs and lower shipment volumes in the fourth quarter of 2018. 

Paper Markets

Bleached kraft paper demand is anticipated to remain positive through the fourth quarter of 2018.

OUTSTANDING SHARES

At October 24, 2018 there were 65,250,759 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. 

ADOPTION OF NEW ACCOUNTING STANDARDS

Effective January 1, 2018, the Company has adopted IFRS 15 Revenue from Contracts with Customers. IFRS 15 supersedes IAS 18 Revenue, IAS 11 Construction Contracts and related interpretations. The standard establishes a framework based on transfer of control for determining how much and when revenue is recognized, and includes expanded disclosure requirements. The adoption of IFRS 15 has had no significant impact on the Company's interim financial statements.

Effective January 1, 2018, the Company has adopted IFRS 9 Financial Instruments. IFRS 9 supersedes IAS 39 Financial Instruments: Recognition and Measurement. The standard includes requirements for recognition, measurement, impairment and derecognition of financial assets and liabilities, as well as general hedge accounting. The adoption of IFRS 9 has had no significant impact on the Company's interim financial statements.

ACCOUNTING STANDARDS ISSUED AND NOT APPLIED

In January 2016, the International Accounting Standards Board issued IFRS 16 Leases, which will supersede IAS 17 Leases and related interpretations. The required adoption date for IFRS 16 is January 1, 2019. IFRS 16 introduces a single, on-balance sheet lease accounting model for lessees.

A lessee recognizes a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. In addition, the nature of expenses related to those leases will change as IFRS 16 replaces straight-line operating lease expense with an amortization expense for right-of-use assets and interest expense on lease liabilities.

IFRS 16 may be applied retrospectively to each prior period presented (full retrospective approach), or with the cumulative effect of adoption recognized at initial application (modified retrospective approach). The Company has elected to apply the modified retrospective approach upon adoption at January 1, 2019, measuring the right-of-use asset at its carrying amount had the standard been applied at commencement of the lease. The short-term and low-value recognition exemptions available under the standard will be utilized, along with certain practical expedients.

The Company continues to evaluate the impact of adopting the new standard, which will be completed and disclosed in the financial statements for the first quarter of 2019. Based on lease information available to date, the financial statement impact at transition is estimated to result in less than a 1% increase in total assets and total liabilities respectively, with no material change to net income.

INTERNAL CONTROLS OVER FINANCIAL REPORTING

During the quarter ended September 30, 2018, 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 2017 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

Subsequent Events (Note 4 and Note 12)

The accompanying notes are an integral part of these condensed consolidated interim financial statements. 

APPROVED BY THE BOARD

Canfor Pulp Products Inc.
Condensed Consolidated Statements of Income

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

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

Condensed Consolidated Statements of Changes in Equity

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

Canfor Pulp Products Inc.
Condensed Consolidated Statements of Cash Flows

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

Canfor Pulp Products Inc.
Notes to the Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2018 and 2017
(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 September 30, 2018 and October 24, 2018, 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, 2017, available at www.canfor.com or www.sedar.com.

Effective January 1, 2018, the Company has adopted IFRS 15 Revenue from Contracts with Customers. IFRS 15 supersedes IAS 18 Revenue, IAS 11 Construction Contracts and related interpretations. The standard establishes a framework based on transfer of control for determining how much and when revenue is recognized, and includes expanded disclosure requirements. The adoption of IFRS 15 has had no significant impact on the Company's interim financial statements.

Effective January 1, 2018, the Company has adopted IFRS 9 Financial Instruments. IFRS 9 supersedes IAS 39 Financial Instruments: Recognition and Measurement. The standard includes requirements for recognition, measurement, impairment and derecognition of financial assets and liabilities, as well as general hedge accounting. The adoption of IFRS 9 has had no significant impact on the Company's interim financial statements.

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

These financial statements were authorized for issue by the Company's Board of Directors on October 24, 2018.

Accounting Standards Issued and Not Applied

In January 2016, the International Accounting Standards Board issued IFRS 16 Leases, which will supersede IAS 17 Leases and related interpretations. The required adoption date for IFRS 16 is January 1, 2019. IFRS 16 introduces a single, on-balance sheet lease accounting model for lessees.

A lessee recognizes a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. In addition, the nature of expenses related to those leases will change as IFRS 16 replaces straight-line operating lease expense with an amortization expense for right-of-use assets and interest expense on lease liabilities.

IFRS 16 may be applied retrospectively to each prior period presented (full retrospective approach), or with the cumulative effect of adoption recognized at initial application (modified retrospective approach). The Company has elected to apply the modified retrospective approach upon adoption at January 1, 2019, measuring the right-of-use asset at its carrying amount had the standard been applied at commencement of the lease. The short-term and low-value recognition exemptions available under the standard will be utilized, along with certain practical expedients.

The Company continues to evaluate the impact of adopting the new standard, which will be completed and disclosed in the financial statements for the first quarter of 2019. Based on lease information available to date, the financial statement impact at transition is estimated to result in less than a 1% increase in total assets and total liabilities respectively, with no material change to net income.

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, 2018 or December 31, 2017.

3.      Operating Loans

On April 6, 2018, the maturity date of the Company's principal operating loan facility was extended from January 31, 2020 to April 6, 2022. 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, 2018 (December 31, 2017 - nil).

As at September 30, 2018 the Company was in compliance with all covenants relating to its operating loans.

4.      Employee Future Benefits

For the three months ended September 30, 2018, defined benefit plan actuarial gains of $0.6 million (before tax) were recognized in other comprehensive income (loss), primarily reflecting a higher return generated on plan assets. For the nine months ended September 30, 2018, defined benefit plan actuarial gains of $4.0 million (before tax) were recognized in other comprehensive income (loss), principally reflecting an increase in the discount rate, offset in part by a lower return generated on plan assets. For the three and nine months ended September 30, 2017, the Company recognized before tax actuarial gains in other comprehensive income (loss) of $6.2 million and losses of $4.6 million, respectively.

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

Subsequent to quarter-end, on October 3, 2018, the Company purchased $8.9 million of buy-in annuities through its defined benefit pension plans, increasing the total purchase price of annuities to $86.0 million.

5.      Financial Instruments

The Company's financial assets are measured at amortized cost. Financial liabilities are measured at amortized cost with the exception of certain derivative instruments, which are measured at fair value through profit and loss.

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, 2018 and December 31, 2017, the Company had no derivative financial instruments outstanding.

6.      Income Taxes

The reconciliation of income taxes calculated at the statutory rate to the actual income tax provision is as follows:

In addition to the amounts recorded to net income, a tax expense of $0.2 million was recorded in other comprehensive income (loss) for the three months ended September 30, 2018 in relation to the actuarial gains on defined benefit plans (three months ended September 30, 2017 – expense of $1.6 million). For the nine months ended September 30, 2018, a tax expense of $1.1 million was recorded in other comprehensive income (loss) (nine months ended September 30, 2017 – recovery of $1.2 million).

7.      Earnings per Share and Normal Course Issuer Bid

Basic net income per share is calculated by dividing the net income available to common shareholders by the weighted average number of common shares outstanding during the period. 

On March 5, 2018, the Company renewed its normal course issuer bid whereby it can purchase for cancellation up to 3,262,941 common shares or approximately 5% of its issued and outstanding common shares as of March 1, 2018. The renewed normal course issuer bid is set to expire on March 6, 2019. During the three months ended September 30, 2018, the Company did not purchase any common shares. During the nine months ended September 30, 2018, the Company purchased 500 common shares at an average of $13.01 per common share. As at September 30, 2018 and October 24, 2018, there were 65,250,759 common shares of the Company outstanding and Canfor's ownership interest in CPPI was 54.8%.

8.      Net Change in Non-Cash Working Capital

9.      Segment Information

The Company has two reportable segments, pulp and paper, which operate as separate business units and represent separate product lines. Sales between the pulp and paper segments are accounted for at prices that approximate fair value. These include sales of slush pulp from the pulp segment to the paper segment.

Information regarding the operations of each reportable segment is included in the following table:

10.    Related Party Transactions

For the nine months ended September 30, 2018, the Company depended on Canfor to provide approximately 62% (nine months ended September 30, 2017 - 63%) of its fibre supply as well as certain key business and administrative services. As a result of these relationships, the Company considers its operations to be dependent on its ongoing relationship with Canfor. The pricing under one of the Company's Fibre Supply Agreements with Canfor expired on September 1, 2018. During the third quarter, the Company and Canfor entered into a new pricing agreement, which includes a market-based chip pricing formula. The new pricing agreement is effective July 1, 2018, for a three year term, to June 30, 2021, with the option to extend for a further two years, if both parties agree. With the exception of the new agreement, the transactions with Canfor are consistent with the transactions described in the December 31, 2017 audited consolidated financial statements of CPPI and are based on agreed upon amounts between the parties.

Transactions and payables to Canfor include purchases of wood chips, logs, hog fuel and administrative services.  These are summarized below:

11.    Licella Pulp Joint Venture

On May 27, 2016, CPPI and Licella Fibre Fuel Pty Ltd. ("Licella") agreed to form a joint venture under the name Licella Pulp Joint Venture to investigate opportunities to integrate Licella's Catalytic Hydrothermal Reactor platform into CPPI's pulp mills to economically convert biomass into next generation biofuels and biochemicals. Licella is a subsidiary of Ignite Energy Resources Ltd. ("IER") an Australian energy technology development company.

Under IFRS 11 Joint Arrangements, the joint venture is classified as a joint operation and CPPI recognizes its assets, liabilities and transactions, including its share of those incurred jointly, in its consolidated financial statements. For the three months ended September 30, 2018, the Company's share of the joint venture's expenses was $0.4 million (three months ended September 30, 2017 - $0.3 million), which have been recognized in manufacturing and product costs. For the nine months ended September 30, 2018, the Company's share of the joint venture's expenses was $1.4 million (nine months ended September 30, 2017 - $0.8 million). The Company is required to contribute the first $20.0 million of any funding requirements, including cash and non-cash contributions, to the joint venture, of which $3.2 million has been contributed as at September 30, 2018.

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. Advance funding of $1.9 million was received in April 2018 for the period October 1, 2017 through to the time at which the terms of funding have been met, which is currently estimated as March 31, 2019. Of this amount, $0.2 million has been recognized as an offset to costs within manufacturing and product costs for the three months ended September 30, 2018. For the nine months ended September 30, 2018, an offset of $0.5 million has been recognized.

12.    Subsequent Event

On October 24, 2018, the Board of Directors declared a quarterly dividend of $0.0625 per share, and a special dividend of $2.25 per share, both payable on November 13, 2018 to the shareholders of record on November 6, 2018. The special dividend has been declared as a result of strong cash generated by the business over the last year. 

SOURCE Canfor Pulp Products Inc.

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