Canfor Pulp's Q4 net income down 72.2% year-over-year to C$3M, net sales down 5.1% to C$201.9M; results affected by lower market pulp prices, stronger Canadian dollar

VANCOUVER, British Columbia , February 14, 2013 (press release) – Canfor Pulp Products Inc. ("CPPI") (CFX.TO) today reported net income of $4.7 million, or $0.07 per share, for the fourth quarter of 2012, compared to a net loss of $4.6 million, or $0.06 per share, for the third quarter of 2012 and net income of $15.8 million, or $0.22 per share, for the fourth quarter of 2011. For the year ended December 31, 2012, the Company''s net income was $13.7 million, or $0.14 per share, compared to $138.6 million, or $1.94 per share, for 2011.

The Company reported operating income of $10.9 million for the fourth quarter of 2012, an increase of $19.1 million from an operating loss of $8.2 million reported for the third quarter of 2012, principally as a result of improved pulp segment earnings related to higher shipments and lower unit manufacturing costs, and to a lesser extent the impact of one-time items.

Results in the fourth quarter of 2012 benefited from improved operating rates with total pulp and paper production up over 43,000 tonnes, or 17%, following the extended scheduled outage and subsequent ramp ups experienced in the challenging third quarter. The higher production levels enabled the Company to increase shipment volumes and rebuild inventory levels. Unit manufacturing costs improved 12% from the previous quarter, for the most part reflecting the impact of higher production volumes as well as lower fibre costs. Operating income for the current quarter included an accounting gain of $4.0 million reflecting amendments to the Company''s salaried post retirement benefit plans, while the comparative quarter included one-time costs of $3.2 million associated with new five year collective labour agreements.

Global softwood pulp markets improved slightly through the fourth quarter of 2012 with increased softwood pulp purchases from China helping to offset weaker shipments to North America and Europe. Global softwood pulp demand was up 7% from the previous quarter, mostly reflecting increased purchases from China, with global softwood pulp producer inventory levels up 2 days, to 29 days supply, compared to the end of the third quarter.

Northern Bleached Softwood Kraft ("NBSK") pulp list prices showed a modest improvement in the fourth quarter with all regions seeing increases in the US$10 to US$30 per tonne range. Compared to the previous quarter, the average list price for North America was up US$10 to US$863 per tonne. The Company''s average list price to China and price to Europe were up US$30 and US$23, respectively. Overall, however, pulp sales realizations moved up only marginally in the fourth quarter of 2012 as a result of increased volumes to lower-margin regions, principally China.

The Company''s paper segment results were also improved in the current quarter, reflecting reduced unit manufacturing costs and higher shipment levels, which were partially offset by lower sales realizations.

During the fourth quarter of 2012, the Company obtained a new $110 million operating loan facility replacing its previous $40 million operating loan facility. The Company''s operating loans were undrawn at December 31, 2012, with $108 million available and the balance reserved for standby letters of credit.

Commenting on the fourth quarter''s results, CPPI''s CEO, Don Kayne, said, "After the challenges experienced in the last quarter, it was encouraging to see solid improvements in productivity, as well as some improvement in market conditions this quarter."

NBSK pulp prices are projected to show a modest improvement through the first half of 2013, but the outlook for the balance of the year is more uncertain given the economic challenges in Europe and new hardwood and softwood pulp capacity currently projected to come online the second half of 2013. For the month of January, the Company announced an increase in the North American NBSK pulp list price of US$30 per tonne. There are no maintenance outages scheduled in the first quarter of 2013.

On December 6, 2012, the Company entered into an agreement with BC Hydro under the Integrated Power Offer program to upgrade the turbines at its Northwood Pulp Mill. The project is targeted for completion in the fourth quarter of 2013.

On February 13, 2013, the Board of Directors reinstated the Company''s dividend, declaring a quarterly dividend of $0.05 per share, payable on March 5, 2013 to shareholders of record on February 26, 2013. In addition, reflecting the Company''s current corporate structure and its latest outlook for 2013, the Board projects that it will declare further quarterly dividends of $0.05 per share through the balance of 2013, but will review the issuance of dividends on a quarterly basis.

Additional Information and Conference Call

A conference call to discuss the fourth quarter''s financial and operating results will be held on Friday, February 15, 2013 at 7:30 AM Pacific time. To participate in the call, please dial 416-340-2216 or Toll-Free 866-226-1792. For instant replay access until March 1, 2013, please dial 800-408-3053 and enter participant pass code 7426712#. The conference call will be webcast live and will be available at www.canforpulp.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.canforpulp.com/investors/webcasts.

CPPI SHARE EXCHANGE

On March 2, 2012, Canadian Forest Products Ltd. ("Canfor") acquired 35,776,483 common shares of Canfor Pulp Products, Inc. ("CPPI") in exchange for its 35,776,483 Class B Exchangeable LP Units of Canfor Pulp Limited Partnership ("the Partnership") and 35,776,483 common shares of Canfor Pulp Holding Inc. ("the General Partner"), pursuant to the terms of an Exchange Agreement made as of January 1, 2011 among Canfor, CPPI, the General Partner and the Partnership. As a result of the exchange, CPPI''s interest in both the Partnership and the General Partner increased from 49.8% to 100% and Canfor acquired a 50.2% interest in CPPI.

The discussion which follows refers to the results of the Partnership for the comparative periods prior to the quarter ended March 31, 2012. For the quarter ended March 31, 2012, and all subsequent quarters, the results of CPPI include the results of the Partnership.

FOURTH QUARTER 2012 OVERVIEW

The Company reported operating income of $10.9 million for the fourth quarter of 2012, an increase of $19.1 million from an operating loss of $8.2 million reported for the third quarter of 2012, principally as a result of improved pulp segment earnings related to higher shipments and lower unit manufacturing costs, and to a lesser extent the impact of one-time items.
Results in the fourth quarter of 2012 benefited from improved operating rates with total pulp and paper production up over 43,000 tonnes, or 17%, following the extended scheduled outage and subsequent ramp ups experienced in the challenging third quarter. The higher production levels enabled the Company to increase shipment volumes and rebuild inventory levels. Unit manufacturing costs improved 12% from the previous quarter, for the most part reflecting the impact of higher production volumes as well as lower fibre costs. Operating income for the current quarter included an accounting gain of $4.0 million reflecting amendments to the Company''s salaried post retirement benefit plans, while the comparative quarter included one-time costs of $3.2 million associated with new five year collective labour agreements.

Global softwood pulp markets improved slightly through the fourth quarter of 2012 with increased softwood pulp purchases from China offset by weaker shipment volumes to North America and Europe. Global softwood pulp demand was up 7% from the previous quarter, mostly reflecting increased purchases from China, with global softwood pulp producer inventory levels up 2 days, to 29 days supply, compared to the end of the third quarter.

Northern Bleached Softwood Kraft ("NBSK") pulp list prices showed a modest improvement in the fourth quarter with all regions seeing increases in the US$10 to US$30 per tonne range. Compared to the previous quarter, the average list price for North America was up US$10 to US$863 per tonne. The Company''s average list price to China and price to Europe were up US$30 and US$23, respectively. Overall, however, pulp sales realizations moved up only marginally in the fourth quarter of 2012 as a result of increased volumes to lower-margin regions, principally China.

The Company''s paper segment results were also improved in the current quarter, reflecting reduced unit manufacturing costs and higher shipment levels, which were partially offset by lower sales realizations.

Compared to the fourth quarter of 2011, operating income was down $5.6 million, principally reflecting lower pulp segment results. Lower pulp earnings reflected lower market pulp prices and a 3% stronger Canadian dollar, partially offset by higher shipment volumes and lower unit manufacturing costs. Mitigating the weaker results in the pulp segment were improved earnings from the paper segment.

OPERATING RESULTS BY BUSINESS SEGMENT

Pulp

Overview

Operating income for the pulp segment was $6.8 million for the fourth quarter of 2012, an improvement of $15.2 million from an operating loss of $8.4 million for the previous quarter, but down $9.9 million from the fourth quarter of 2011. Results in the current quarter were impacted by lower unit manufacturing costs and higher shipment volumes, both reflecting improved operations in the quarter. Market pulp production increased approximately 40,000 tonnes in the quarter due to increased operating days and higher overall operating rates following the extended scheduled outage and subsequent ramp ups experienced in the third quarter. Included in both quarters'' results were certain one-time costs: the current quarter results included $3.3 million of an accounting gain related to post retirement plan adjustments, while the third quarter of 2012 included one-time costs of $3.2 million associated with new five year collective labour agreements. For the 2012 year as a whole, the operating income was $19.2 million, down $138.3 million from $157.5 million in 2011.

NBSK pulp list prices showed a small improvement in all regions in the fourth quarter of 2012, with prices to North America up US$10 to US$863 per tonne, but this was largely offset by a lower-value regional sales mix.

Lower operating earnings compared to the fourth quarter of 2011 reflected lower global market pulp prices, as NBSK pulp list prices were down in all regions, with prices to North America declining US$57, or 6%, per tonne and similar decreases seen for Europe and China. Sales realizations were also negatively impacted by a 3% stronger Canadian dollar compared to the fourth quarter of 2011. Higher shipment volumes and a 7% reduction in unit manufacturing costs, reflecting lower fibre costs and the impact of higher production volumes, helped to mitigate the impact of reduced sales realizations. Other contributing factors included the aforementioned post retirement benefit accounting gain in the current quarter.

Markets

Global softwood pulp demand increased 7% compared to the third quarter of 2012 and was up 3% for the full year 2012 compared to 20115. The increase in softwood shipments was primarily due to increased purchasing from China, partially offset by reductions in shipments to North America and Europe, particularly the latter region. At the end of December 2012, World 206 softwood pulp producer inventories increased 2 days from the end of the third quarter, to 29 days of supply, but were down 7 days compared to December 2011 inventories. Global demand for printing and writing papers decreased 2% in 2012 as compared to 20115.

Sales

The Company''s pulp shipments in the fourth quarter of 2012 were 247,000 tonnes, an increase of approximately 32,000 tonnes, or 15%, from the previous quarter. Compared to the fourth quarter of 2011, shipments were up 16,000 tonnes, or 7%. For the most part, the increased shipments relative to both comparative periods reflected higher production volumes coupled with higher levels of purchases by Chinese consumers.

Global softwood pulp pricing saw a small increase through the current quarter. The North America NBSK pulp list price averaged US$863 per tonne for the quarter, up US$10, or 1%, from the third quarter of 2012, while CPPI''s average list price to China and price to Europe were up US$30 and US$23, respectively, over the same period. Overall, however, pulp sales realizations moved up only marginally in the fourth quarter mostly as a result of increased volumes to lower-margin regions, principally China.

Compared to the fourth quarter of 2011, pulp sales realizations decreased 12% reflecting lower NBSK pulp list pricing in all regions and the 3% strengthening of the Canadian dollar. The North America NBSK pulp list price decreased US$57 per tonne, or 6%. NBSK pulp list prices to China and Europe also decreased compared to the same period in 2011, with the average price down US$51 and US$65, respectively. Also contributing to the lower sales realizations in the current quarter were a higher proportion of shipments to China.

Operations

Pulp production in the fourth quarter of 2012 was 261,000 tonnes, up approximately 40,000 tonnes, or 18%, from the previous quarter and up almost 15,000 tonnes, or 6%, compared to the fourth quarter of 2011. The increase in production compared to the third quarter of 2012 reflected a reduction in scheduled outages and improved operating rates following the extended scheduled outage at the Company''s Prince George Pulp Mill in the previous quarter along with improved operating rates at other facilities.

Pulp unit manufacturing costs decreased 8% from the previous quarter of 2012, with higher production volumes coupled with lower fibre costs, in part due to lower-cost sawmill residual chips, and chemical costs, partially offset by higher maintenance expense and a seasonal increase in energy costs. The previous quarter''s costs also included one-time costs associated with the new five year collective labour agreements.

Compared to the fourth quarter of 2011, unit manufacturing costs decreased 7%, principally reflecting the favourable impact of higher production volumes, reduced chemical usage and lower fibre costs, partially offset by timing of maintenance spending. Lower fibre costs in the current quarter reflected lower-cost sawmill residual chips, where prices are linked to NBSK pulp sales realizations, as well as a reduction in higher-cost whole log chips.

5 As reported by Pulp and Paper Products Council ("PPPC") statistics.

6 World 20 data is based on twenty producing countries representing 80% of world chemical market pulp capacity and is based on information compiled and prepared by the PPPC.

Paper

Overview

Operating income for the paper segment was $6.9 million for the fourth quarter of 2012, an increase of $1.9 million from the previous quarter and up $3.5 million from the fourth quarter of 2011. For the 2012 year, operating income was $19.4 million, an improvement of $9.9 million compared to 2011.

Compared to the third quarter of 2012, higher production volumes resulted in lower unit manufacturing costs and increased shipments. Unit sales realizations for paper products were down 2%, primarily related to a lower percentage of prime bleached sales in the current quarter.

Compared to the fourth quarter of 2011, the improved results were primarily the result of lower prices for slush pulp, reflecting lower market pulp prices, which more than offset lower paper unit sales realizations.

Markets

Global kraft paper demand was steady through the fourth quarter. However, demand slowed in December as a number of sack kraft paper producers in North America and Europe scheduled downtime over the holiday period as customers balanced inventories at the end of the year.
Sales
The Company''s paper shipments in the fourth quarter of 2012 were 32,000 tonnes, an increase of almost 1,500 tonnes from the previous quarter and 2,000 tonnes higher than the fourth quarter of 2011, principally reflecting the higher production levels. Prime bleached shipments, which attract higher prices, averaged 75% of total prime shipments during the quarter compared to 85% in the previous quarter, but were relatively unchanged from the fourth quarter of 2011.

Unit sales realizations for paper products were down 2% from the third quarter of 2012 and down 5% from the same period in the prior year. The more significant decrease compared to the fourth quarter of 2011 related primarily to lower bleached paper prices into export markets, principally Europe and China, and the 3% strengthening of the Canadian dollar.

Operations

Paper production in the fourth quarter of 2012 was 35,400 tonnes, up 3,500 tonnes from the previous quarter and up almost 2,000 tonnes compared to the same period in 2011. The increased production primarily reflected higher operating rates in the current period.

Paper unit manufacturing costs were 7% lower than the prior quarter as a result of lower costs for slush pulp and the impact of higher production volumes.

Compared to the fourth quarter of 2011, unit manufacturing costs were significantly lower, principally reflecting lower costs for slush pulp.

Unallocated Items

Corporate costs were $2.8 million for the fourth quarter of 2012, down $2.0 million from the previous quarter and down $0.8 million from the fourth quarter of 2011. The reduction in the current quarter primarily reflected the costs in the previous quarter related to changes in senior management as a result of the integration of CPPI and Canfor Corporation. A portion of the decrease from both comparative periods also reflected part of the aforementioned gain due to amendments to the Company''s salaried post retirement benefit plans.

Net finance expense for the fourth quarter of 2012 was $3.4 million, a $0.6 million increase compared to both the previous quarter and the fourth quarter of 2011, primarily reflecting costs associated with a new operating loan facility entered into in the fourth quarter of 2012. The finance expense for each period principally represents interest expense on long-term debt and stand-by fees for the Company''s operating loans, as well as the finance expense relating to the Company''s defined benefit post-retirement benefit plans.

The Company recorded a foreign exchange translation loss on its US dollar denominated debt of $1.3 million for the fourth quarter of 2012, as a result of the weakening of the Canadian dollar against the US dollar, which fell by just over 1% between the respective quarter ends. In the comparative periods, a strengthening of the Canadian dollar resulted in translation gains of $3.9 million and $2.4 million, respectively.

The Company uses a variety of derivative financial instruments as partial economic hedges against unfavourable changes in foreign exchange rates, energy costs and interest rates. For the fourth quarter of 2012, the Company recorded a net loss of $0.1 million related to its derivative financial instruments, reflecting losses on US dollar forward contracts related to the weakening of the Canadian dollar offset in part by gains on crude oil collars.

Other Comprehensive Income (Loss)

In the fourth quarter of 2012, the Company recorded an after-tax charge to the statements of other comprehensive income (loss) of $1.7 million in relation to changes in the valuation of its defined benefit post-employment compensation plans. The charge reflects a reduction in the discount rate used to value the plans offset in part by a slightly higher than expected rate of return on plan assets for the period. In the previous quarter a charge of $4.7 million was recorded, reflecting a reduction in discount rates offset slightly by a higher than expected rate of return on plan assets for the period. An after-tax loss of $5.0 million was recorded in the fourth quarter of 2011.

SUMMARY OF FINANCIAL POSITION

Changes in Financial Position

Cash generated from operating activities was $25.8 million in the fourth quarter of 2012, up from $1.4 million generated in the third quarter. The increase resulted largely from higher operating earnings. Also contributing to the increase was higher cash generated from working capital movements, principally related to property insurance and taxes paid in the previous quarter, offset in part by higher accounts receivable in part reflecting the improved pricing in the fourth quarter. Compared to the fourth quarter of 2011, cash generated from operating activities was down by $8.3 million, principally reflecting lower operating earnings.

Financing activities used cash of $11.1 million in the current quarter, compared to cash generated of $3.2 million in the previous quarter and cash used of $26.6 million in the fourth quarter of 2011. The current quarter cash flows included repayment of the $7.0 million drawn on the Company''s operating bank loans in the previous quarter. In the immediately preceding quarter, financing cash outflows also included dividends of $3.6 million, representing dividends declared and paid during the quarter. In the fourth quarter of 2011, distributions paid to unitholders was $22.8 million. Finance payments in the current quarter were $4.1 million, principally relating to interest payments on the Company''s debt. Finance payments in the third quarter of 2012 were $0.2 million primarily reflecting standby fees for the Company''s operating loans, while finance payments in the fourth quarter of 2011 were at a similar level to the current quarter.

Cash used in investing activities in the current quarter was comprised of $12.8 million of capital expenditures slightly offset by $1.3 million in cash received from the Green Transformation Program and other government grants. Capital expenditures in the current quarter included equipment received related to the scheduled 2013 upgrades to the Northwood Pulp Mill turbines, as well as maintenance capital related to outages and payments related to previous period projects.

Liquidity and Financial Requirements

At December 31, 2012, CPPI had cheques issued in excess of cash on hand of $1.2 million. During the fourth quarter of 2012, the Company obtained a new $110.0 million operating loan facility replacing its previous $40.0 million operating loan facility. No amounts were drawn on the new bank facility, except for $1.7 million reserved for several standby letters of credit. In addition, the Company has a separate facility with a maturity date of November 30, 2013, to cover the $7.5 million standby letter of credit issued to BC Hydro under a power generation agreement.

CPPI has US$110.0 million of senior debt that is scheduled for repayment on November 30, 2013. This debt is in the form of unsecured US dollar private placement notes and bears interest at 6.41%.

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

Dividends

On February 13, 2013, the Board of Directors reinstated the Company''s dividend, declaring a quarterly dividend of $0.05 per share, payable on March 5, 2013 to shareholders of record on February 26, 2013. In addition, reflecting the Company''s current corporate structure and its latest outlook for 2013, the Board projects that it will declare further quarterly dividends of $0.05 per share through the balance of 2013, but will review the issuance of dividends on a quarterly basis.

OUTLOOK

Pulp

NBSK pulp prices are projected to show a modest improvement through the first half of 2013, but the outlook for the balance of the year is more uncertain given the economic challenges in Europe and new hardwood and softwood pulp capacity currently projected to come online the second half of 2013. For the month of January, the Company announced an increase in the North American NBSK pulp list price of US$30 per tonne to US$900 per tonne.

There are no maintenance outages planned for the first quarter of 2013.

Paper

Kraft paper demand was weak at the end of 2012 but low customer inventories coupled with an anticipated pick up in demand in early 2013 should keep markets balanced through the first half of 2013. As a result, prices in North America and Europe are projected to remain relatively stable in the first quarter of 2013.

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