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Press release from Marketwire

Canfor Reports Results for First Quarter of 2011

Wednesday, May 04, 2011

Canfor Reports Results for First Quarter of 201122:29 EDT Wednesday, May 04, 2011VANCOUVER, BRITISH COLUMBIA--(Marketwire - May 4, 2011) - Canfor Corporation(TSX:CFP) today reported net income of $32.3 million for the first quarter of2011, compared to $55.4 million for the fourth quarter of 2010 and $35.5million for the first quarter of 2010. The Company's net income attributableto shareholders ("shareholder net income") for the first quarter of 2011 was$7.0 million, or $0.05 per share, down from $31.4 million, or $0.22 per share,for the fourth quarter of 2010 and down from $18.3 million, or $0.13 pershare, reported for the first quarter of 2010.The Company's results for the first quarter of 2011 are presented inaccordance with International Financial Reporting Standards ("IFRS") for thefirst time, and comparative information in 2010 has been restated accordingly.Full details of the adjustments resulting from the Company's conversion toIFRS, including reconciliations to amounts previously recorded for 2010comparative periods under previous Canadian generally accepted accountingprinciples, are presented in the Company's interim financial statements forthe first quarter of 2011.Shareholder net income for the first quarter of 2011 included several itemsaffecting comparability with prior periods, which had an overall positiveimpact of $6.9 million, or $0.05 per share. After adjusting for all itemsaffecting comparability, the Company effectively broke even in the firstquarter of 2011. Similarly adjusted shareholder net income for the fourthquarter of 2010 was $13.6 million, or $0.10 per share, and adjustedshareholder net income for the first quarter of 2010 of $13.1 million, or$0.09 per share.Reported EBITDA for the first quarter of 2011 was $72.9 million, down $10.6million from the fourth quarter of 2010. EBITDA for the lumber segment was$18.0 million, down $3.7 million from the previous quarter, while EBITDA forthe pulp and paper segment decreased $2.4 million to $64.0 million. Weakerpanels results accounted for the majority of the remaining shortfall.In the first quarter of 2011, a stagnant U.S. housing sector and severe winterweather conditions across much of North America weighed heavily on homeconstruction activity and the Company's ability to deliver lumber tocustomers. While the Company's lumber production in the current quarter was up7%, shipments of lumber were down 3% reflecting the major disruption totransportation networks caused by the adverse winter conditions. For offshoremarkets, lumber demand remained at high levels and continued to support higherprices for narrower dimensions in North America, with the average benchmarkWestern SPF (Spruce/Pine/Fir) 2x4 #2&Btr price up US$27, or 10%, from theprevious quarter. As was the case in the previous quarter, however, theseprice increases were not replicated across wider dimensions and all highergrades. Northern Bleached Softwood Kraft ("NBSK") pulp market conditionsremained favourable in the first quarter, with list prices to North Americaand Europe approaching US$1,000 per tonne towards the end of the period. Salesrealizations across all products were negatively impacted by the strengtheningof the Canadian dollar through the quarter.Lumber unit manufacturing costs were down slightly from the previous quartermostly reflecting more operating days (with Christmas shuts taken in the priorquarter) and productivity gains, which offset increased log costs thatreflected higher diesel and purchased wood costs. Pulp unit manufacturingcosts in the current quarter were also down, mostly as a result of lower wholelog chip costs.Commenting on the quarter, Canfor's President and CEO, Jim Shepard, said, "Wecontinue to believe that the road to recovery for the U.S. housing market islikely to be a long one, but we are clearly seeing the benefits of the work wehave done in developing our Asian markets, particularly China."Canfor's strategic capital spending focus continued in the quarter. Inaddition to further work on the Company's Fort St. John sawmill and planerrebuild, the Company commenced several new high-return projects which formpart of a three year, $300 million capital investment program for its lumberoperations. "We are very pleased with the progress being made on our Fort St.John rebuild, which remains on schedule for completion in the second quarter,"commented Shepard.Despite a projected seasonal uplift in home construction and repair andrenovation activity over the remaining spring months, the U.S. housing marketis not forecast to show any significant recovery through the balance of theyear given the current high levels of mortgage delinquencies, homeforeclosures and home inventories. The Canadian housing market, although flatin the first quarter, is forecast to show moderate improvement in the secondquarter. The strength of demand from China is projected to continue throughthe balance of the year, while the near-term outlook for Japan is moreuncertain in the aftermath of the devastating earthquake and tsunami in March.The global softwood pulp market is forecast to remain tight through the secondquarter of 2011 as demand remains solid with continued strong shipments toChina. In addition, annual maintenance downtime coupled with extended outagesin Canada due to several large capital projects funded under the CanadianFederal Government Green Transformation Program, are projected to curtailsupply."The past four years have shown that Canfor has the strength to endure theworst markets in many decades. That's why I can confidently say that Canfor isready to take advantage of the opportunities and respond to the challengesthat lie ahead," said Shepard, who will retire at the Company's annual generalmeeting later today. "I am very confident that this Company will continue toprosper under the very able direction of the incoming President and CEO, DonKayne, and the management team. The future of Canfor is in very capablehands."Additional Information and Conference CallA conference call to discuss the first quarter's financial and operatingresults will be held on Friday, May 6, 2011 at 8:00 AM Pacific time. Toparticipate in the call, please dial 416-340-8530 or Toll-Free 877-240-9772.For instant replay access until May 31, 2011, please dial 905-694-9451 or 800-408-3053 and enter participant pass code 5672504#. The conference call will bewebcast live and will be available at www.canfor.com. This news release, theattached financial statements and a presentation used during the conferencecall can be accessed via the Company's website at http://www.canfor.ca/investors/webcasts.asp.Forward Looking StatementsCertain statements in this press release constitute "forward-lookingstatements" which involve known and unknown risks, uncertainties and otherfactors that may cause actual results to be materially different from anyfuture results, performance or achievements expressed or implied by suchstatements. 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 identifysuch forward-looking statements. These statements are based on management'scurrent expectations and beliefs and actual events or results may differmaterially. There are many factors that could cause such actual events orresults expressed or implied by such forward-looking statements to differmaterially from any future results expressed or implied by such statements.Forward-looking statements are based on current expectations and the Companyassumes no obligation to update such information to reflect later events ordevelopments, except as required by law.Canfor is a leading integrated forest products company based in Vancouver,British Columbia (BC) with interests in BC, Alberta, Quebec, Washington state,and North and South Carolina. The Company produces primarily softwood lumberand also produces oriented strand board (OSB), remanufactured lumber productsand specialized wood products. Canfor also owns a 50.2% interest in CanforPulp Limited Partnership, which is one of the largest producers of northernsoftwood kraft pulp in Canada and a leading producer of high performance kraftpaper. Canfor shares are traded on the Toronto Stock Exchange under the symbolCFP.Canfor CorporationFirst Quarter 2011Management's Discussion and AnalysisThis interim Management's Discussion and Analysis ("MD&A") provides a reviewof Canfor Corporation's ("Canfor" or "the Company") financial performance forthe quarter ended March 31, 2011 relative to the quarters ended December 31,2010 and March 31, 2010, and the financial position of the Company at March31, 2011. It should be read in conjunction with Canfor's unaudited interimconsolidated financial statements and accompanying notes for the quartersended March 31, 2011 and 2010, as well as the 2010 annual MD&A and the 2010audited consolidated financial statements and notes thereto, which areincluded in Canfor's Annual Report for the year ended December 31, 2010(available at www.canfor.com). The financial information in this interim MD&Ahas been prepared in accordance with International Financial ReportingStandards ("IFRS"), which as of January 1, 2011 is the required reportingframework for Canadian publicly accountable enterprises.Throughout this discussion, reference is made to EBITDA (calculated asoperating income before amortization) which Canfor considers to be a relevantindicator for measuring trends in the performance of each of its operatingsegments and the Company's ability to generate funds to meet its debtrepayment and capital expenditure requirements. Reference is also made toAdjusted Shareholder Net Income (Loss) (calculated as Shareholder Net income(loss) less specific items affecting comparability with prior periods - forthe full calculation, see reconciliation included in the section "Analysis ofSpecific Items Affecting Comparability of Shareholder Net Income") andAdjusted Shareholder Net Income (Loss) per Share (calculated as AdjustedShareholder Net Income (Loss) divided by the weighted average number of sharesoutstanding during the period). EBITDA, Adjusted Shareholder Net Income (Loss)and Adjusted Shareholder Net Income (Loss) per Share are not generallyaccepted earnings measures and should not be considered as an alternative tonet income or cash flows as determined in accordance with IFRS. As there is nostandardized method of calculating these measures, Canfor's EBITDA, AdjustedShareholder Net Income (Loss) and Adjusted Shareholder Net Income (Loss) perShare may not be directly comparable with similarly titled measures used byother companies. Reconciliations of EBITDA and Adjusted Shareholder Net Income(Loss) to net income (loss) reported in accordance with IFRS are included inthis MD&A.Factors that could impact future operations are also discussed. These factorsmay be influenced by both known and unknown risks and uncertainties that couldcause the actual results to be materially different from those stated in thisdiscussion. Factors that could have a material impact on any future orientedstatements made herein include, but are not limited to: general economic,market and business conditions; product selling prices; raw material andoperating costs; currency exchange rates; interest rates; changes in law andpublic policy; the outcome of labour and trade disputes; and opportunitiesavailable to or pursued by Canfor.2010 prior period comparative financial information throughout this report hasbeen restated, and is shown in accordance with IFRS. All financial referencesare in millions of Canadian dollars unless otherwise noted. The information inthis report is as at May 4, 2011.Forward Looking StatementsCertain statements in this MD&A constitute "forward-looking statements" whichinvolve known and unknown risks, uncertainties and other factors that maycause actual results to be materially different from any future results,performance or achievements expressed or implied by such statements. Wordssuch as "expects", "anticipates", "projects", "intends", "plans", "will","believes", "seeks", "estimates", "should", "may", "could", and variations ofsuch words and similar expressions are intended to identify such forward-looking statements. These statements are based on management's currentexpectations and beliefs and actual events or results may differ materially.There are many factors that could cause such actual events or resultsexpressed or implied by such forward-looking statements to differ materiallyfrom any future results expressed or implied by such statements. Forward-looking statements are based on current expectations and the Company assumesno obligation to update such information to reflect later events ordevelopments, except as required by law.FIRST QUARTER 2011 EARNINGS OVERVIEWSelected Financial Information and Statistics(1) Q1 Q4 Q1(millions of dollars, except for per share amounts) 2011 2010 2010----------------------------------------------------------------------------Sales $ 624.0 $ 629.1 $ 577.9EBITDA $ 72.9 $ 83.5 $ 85.7Operating income $ 31.4 $ 41.7 $ 43.9Foreign exchange gain on long-term debt and $ 4.7 $ 9.8 $ 8.8 investments, netGain (loss) on derivative financial instruments(2) $ 4.7 $ 1.8 $ (1.2)Net income $ 32.3 $ 55.4 $ 35.5Net income attributable to equity shareholders of $ 7.0 $ 31.4 $ 18.3 CompanyNet income per share attributable to equity $ 0.05 $ 0.22 $ 0.13 shareholders of Company, basic and diluted--------------------------------------------------------------------------------------------------------------------------------------------------------Average exchange rate (US$/CDN$)(3) $ 1.014 $ 0.987 $ 0.961--------------------------------------------------------------------------------------------------------------------------------------------------------(1) Prior period amounts have been restated, and are shown in accordancewith International Financial Reporting Standards ("IFRS").(2) Includes gains (losses) from natural gas, diesel, foreign exchange andlumber future derivative financial instruments (see "Unallocated and Other"section for more details).(3) Source - Bank of Canada (average noon rate for the period).The Company's shareholder net income and adjusted shareholder net income,together with the related adjustments, are detailed in the table below:Analysis of Specific Items Affecting Comparability of Shareholder Net IncomeAfter-tax impact, net of non-controlling interests(millions of dollars, except for per share Q1 Q4 Q1 amounts) 2011 2010 2010----------------------------------------------------------------------------Shareholder Net Income $ 7.0 $ 31.4 $ 18.3Foreign exchange gain on long-term debt and investments, net $ (3.0) $ (6.9) $ (6.2)(Gain) loss on derivative financial instruments $ (2.9) $ (0.5) $ 1.0Gain on sale of operating assets of Howe Sound $ - $ (4.9) $ - Pulp and Paper Limited PartnershipIncrease in fair value of asset-backed commercial paper $ (1.0) $ (5.5) $ -----------------------------------------------------------------------------Net impact of above items $ (6.9) $ (17.8) $ (5.2)----------------------------------------------------------------------------Adjusted Shareholder Net Income $ 0.1 $ 13.6 $ 13.1--------------------------------------------------------------------------------------------------------------------------------------------------------Shareholder net income per share (EPS), as $ 0.05 $ 0.22 $ 0.13 reportedNet impact of above items per share $ (0.05) $ (0.12) $ (0.04)----------------------------------------------------------------------------Adjusted Shareholder Net Income per share $ 0.00 $ 0.10 $ 0.09--------------------------------------------------------------------------------------------------------------------------------------------------------EBITDAThe following table reconciles the Company's net income, as reported inaccordance with IFRS, to EBITDA: Q1 Q4 Q1(millions of dollars) 2011 2010 2010----------------------------------------------------------------------------Net income, as reported $ 32.3 $ 55.4 $ 35.5Add (subtract):Amortization $ 41.5 $ 41.8 $ 41.8Finance expense, net $ 6.3 $ 6.6 $ 7.7Foreign exchange gain on long-term debt and investments, net $ (4.7) $ (9.8) $ (8.8)(Gain) loss on derivative financial instruments $ (4.7) $ (1.8) $ 1.2Other expense (income) $ (1.7) $ (11.0) $ 2.9Income tax expense $ 0.5 $ 2.3 $ 5.4----------------------------------------------------------------------------EBITDA, as reported $ 72.9 $ 83.5 $ 85.7Included in above:Negative (positive) impact of inventory valuation adjustments(4) $ 2.9 $ (0.1) $ (23.0)----------------------------------------------------------------------------EBITDA excluding impact of inventory valuation adjustments $ 75.8 $ 83.4 $ 62.7--------------------------------------------------------------------------------------------------------------------------------------------------------(4) In accordance with IFRS, Canfor records its log and finished productinventories at the lower of cost and net realizable value ("NRV").Significant movements in inventory volumes occur due to the seasonal buildand drawdown of logs in the first and second quarters each year,respectively. In periods where market prices are depressed and NRVs arebelow cost, this movement in log inventory volumes can result in largeswings in inventory write-down amounts recorded in those periods. Inaddition, changes in market prices, foreign exchange rates, and costs overthe respective reporting periods affect inventory write-downs.Reported EBITDA for the first quarter of 2011 was $72.9 million, down $10.6million from the fourth quarter of 2010. EBITDA for the lumber segment was$18.0 million, down $3.7 million from the previous quarter, while EBITDA forthe pulp and paper segment decreased $2.4 million to $64.0 million. Weakerpanels results accounted for the majority of the remaining shortfall.In the first quarter of 2011, a stagnant U.S. housing sector and severe winterweather conditions across much of North America weighed heavily on homeconstruction activity and the Company's ability to deliver lumber tocustomers. While the Company's lumber production in the current quarter was up7%, shipments of lumber were down 3% reflecting the major disruption totransportation networks caused by the adverse winter conditions. For offshoremarkets, lumber demand remained at high levels and continued to support higherprices for narrower dimensions in North America, with the average benchmarkWestern SPF (Spruce/Pine/Fir) 2x4 #2&Btr price up US$27, or 10%, from theprevious quarter. As was the case in the previous quarter, however, theseprice increases were not replicated across wider dimensions and all highergrades. Northern Bleached Softwood Kraft ("NBSK") pulp market conditionsremained favourable in the first quarter, with list prices to North Americaand Europe approaching US$1,000 per tonne towards the end of the period. Salesrealizations across all products were negatively impacted by the strengtheningof the Canadian dollar through the quarter.Lumber unit manufacturing costs were down slightly from the previous quartermostly reflecting more operating days (with Christmas shuts taken in the priorquarter) and productivity gains, which offset increased log costs thatreflected higher diesel and purchased wood costs. Pulp unit manufacturingcosts in the current quarter were also down, mostly as a result of lower wholelog chip costs.Compared to the first quarter of 2010, EBITDA was down $12.8 million, butexcluding the impact of inventory valuation adjustments, which weresignificant in the 2010 comparative period, EBITDA was up $13.1 million. Theimproved results compared to the first quarter of 2010 reflect improved salesrealizations for Western SPF lumber and NBSK pulp products, offset in part byweaker southern yellow pine ("SYP") lumber and bleached chemi-thermomechanical pulp ("BCTMP") sales realizations, as well as higher fibre costs.OPERATING RESULTS BY BUSINESS SEGMENTLumberSelected Financial Information and Statistics - Lumber Q1 Q4 Q1(millions of dollars unless otherwise noted) 2011 2010 2010--------------------------------------------------------------------------------------------------------------------------------------------------------Sales $ 328.6 $ 318.0 $ 292.0Operating income (loss) $ (2.3) $ 0.7 $ 15.8--------------------------------------------------------------------------------------------------------------------------------------------------------EBITDA, as reported $ 18.0 $ 21.7 $ 36.3Negative (positive) impact of inventory valuation adjustments $ 0.1 $ (0.7) $ (22.4)----------------------------------------------------------------------------EBITDA excluding impact of inventory valuation adjustments $ 18.1 $ 21.0 $ 13.9--------------------------------------------------------------------------------------------------------------------------------------------------------Average SPF 2x4 #2&Btr lumber price in US$(5) $ 296 $ 269 $ 268Average SPF price in Cdn$ $ 292 $ 273 $ 279Average SYP 2x4 #2 lumber price in US$(6) $ 302 $ 256 $ 329Average SYP price in Cdn$ $ 298 $ 259 $ 342----------------------------------------------------------------------------U.S. housing starts (million units SAAR) (6) 0.563 0.534 0.617----------------------------------------------------------------------------Production - SPF lumber (MMfbm) 772.3 725.1 696.0Production - SYP lumber (MMfbm) 94.8 82.9 85.0Shipments - SPF lumber (MMfbm)(8) 715.3 760.1 672.7Shipments - SYP lumber (MMfbm)(8) 90.9 93.4 85.6Shipments - wholesale lumber (MMfbm) 59.2 41.6 38.8----------------------------------------------------------------------------(5) Western Spruce/Pine/Fir, per thousand board feet (Source - RandomLengths Publications, Inc.)(6) Southern Yellow Pine, Eastside, per thousand board feet (Source - RandomLengths Publications, Inc.)(7) Source - U.S. Census Bureau, seasonally adjusted annual rate ("SAAR")(8) Canfor-produced lumber, including lumber purchased for remanufacture.OverviewReported EBITDA for the lumber segment was $18.0 million for the first quarterof 2011, down $3.7 million from the fourth quarter of 2010. Total shipments ofCanfor-produced lumber of 806 million board feet for the first quarter weredown 6% from the previous quarter as severe winter weather conditions acrossmuch of North America disrupted home construction activity and transportationnetworks, adding to the existing challenges presented by the continued weakU.S. housing sector. Revenues in the lumber segment were up $10.6 million fromthe previous quarter, with lower sales of Canfor-produced lumber being morethan offset by higher wholesale lumber and log sales.Benchmark 2x4 prices for Western SPF and SYP lumber saw solid increases duringthe quarter. However, as in the previous quarter, these price movements werenot matched across most other grades and dimensions in North America and inoffshore markets, where prices in some cases rose by no more than a fewdollars. In addition, price increases were partially offset by the strongerCanadian dollar and higher freight costs. Unit lumber conversion costs weredown from the previous quarter and helped to offset increased log costs.Compared to the first quarter of 2010, reported EBITDA for the lumber segmentwas down $18.3 million but results for the first quarter of 2010 werepositively impacted by an inventory valuation adjustment related to increasingmarket prices in that quarter. Excluding the impact of the inventory valuationadjustment, EBITDA in the first quarter of 2011 was up $4.2 million. Improvedsales realizations for most Western SPF products, particularly to offshoremarkets, and higher shipment levels more than offset weaker SYP prices andhigher log costs.MarketsThe underlying structural challenges affecting the U.S. housing market, asevidenced by elevated housing inventory levels, high foreclosure rates andfalling home prices, continued to overshadow the lumber market during thefirst quarter of 2011. In addition, the adverse weather conditions delayed thedelivery of finished lumber products to market and adversely impacted new homeconstruction. As a result, U.S housing starts in February fell to one of thelowest levels on record, at 512,000 units(9) (seasonally adjusted annual rate- SAAR) before recording a 7% increase in March.For the first quarter as a whole, U.S housing starts averaged 563,000 unitsSAAR, an increase of 5% from the previous quarter. Single family starts, whichconsume a higher proportion of lumber, were 415,000 units SAAR, down 5%compared to the previous quarter, while multi-family starts were up 50% at148,000 units SAAR. Compared to the same quarter last year, total housingstarts were 9% lower, with single family starts down 21% and multi-familystarts up almost 60%.In Canada, lumber consumption eased in the first quarter of 2011, resultingfrom a seasonal slowdown and concern over housing affordability in someregions. Housing starts averaged 178,000 units SAAR(10), comparable with theprevious quarter, and down 17,000, or 9%, compared to the first quarter of2010.Canfor's offshore lumber shipments remained at high levels, but were downslightly from the record setting performance from the previous quarter, mostlyas a result of transportation constraints. Strong lumber demand from Asia sawa 50% rise in Canfor's offshore shipments from the same quarter of 2010. Chinacontinued to lead all offshore shipment volumes.(9) U.S. Census Bureau(10) CMHC - Canada Mortgage and Housing CorporationSalesSales for the lumber segment in the first quarter of 2011 were $328.6 million,up $10.6 million, or 3%, from the previous quarter, and up $36.6 million, or13%, compared to the first quarter of 2010.Total shipments for the first quarter of 2011 were 865 million board feet,down 3% compared to the previous quarter, largely reflecting the impact of thesevere winter weather conditions. Shipments to China represented 23% of totalshipments, down slightly from 26% in the previous quarter. Compared to thefirst quarter of 2010, total shipment levels were up 9%, mostly reflecting theincreased China demand, a significant amount of which has been supplied fromthe Company's Quesnel mill which re-opened in June 2010 after a five monthcurtailment.Despite the struggling U.S. housing sector, the continued strong demand for2x4 lumber product from China supported higher 2x4 prices in the quarter. Thebenchmark Random Lengths Western SPF 2x4 #2&Btr price averaged US$296 perMfbm, up 10% from the fourth quarter of 2010. However, this level of increasewas not seen across all other dimensions, as evidenced by the 2x6, 2x8 and2x10 benchmark prices which moved up 5%, 1% and 4% respectively. For SYP, thebenchmark 2x4 price was up 18% to US$302 per Mfbm but this was more thandouble price increases for most wider dimensions. Overall, offshore prices sawmodest increases compared to the previous quarter, with improved marketpricing more than offsetting the impact of the stronger Canadian dollar.Rising freight costs for all markets, reflecting tight truck availability andhigher diesel costs, also eroded some of the market price gains.Compared to the first quarter of 2010, price movements were mixed, withnarrower Western SPF dimensions seeing moderate gains while wider Western SPFand all SYP dimensions saw price declines. Overall, sales realizations forWestern SPF products in North America showed a modest increase, but moresubstantial increases were seen in offshore markets despite a strongerCanadian dollar. Increased freight costs also offset some of the pricinggains.The average value of the Canadian dollar compared to the US dollar in thefirst quarter was up 2.7 cents, or 3%, from the previous quarter, and up 5.3cents, or 6% compared to the first quarter of 2010, offsetting some of theimprovements in US dollar pricing for SPF lumber products.The Random Lengths Framing Lumber Composite price averaged US$297 per Mfbm forthe first quarter of 2011, up US$26, or 10%, compared to the previous quarter,but was still below the trigger price of US$315 required to reduce the exporttax rate on all U.S. bound shipments below the current rate of 15%.Total residual fibre revenue was up compared to the previous quarterreflecting higher production volumes in the quarter, offset in part by lowersawmill chip prices, partially related to a modest decline in pulp salesrealizations. Compared to the first quarter of 2010, residual fibre revenuewas up reflecting higher sawmill residual chip prices linked to higher averageNBSK pulp prices, as well as higher operating rates.OperationsThe Company's lumber production was 867 million board feet for the quarter, or72% of capacity, up 7% from the fourth quarter of 2010. The increase reflectedthe Christmas downtime taken at most mills in the previous quarter, offset inpart by the permanent closure of the Clear Lake sawmill in January 2011.Compared to the first quarter of 2010, production was up 86 million boardfeet, or 11%, mostly reflecting market curtailment taken at the Chetwynd andQuesnel sawmills in the first quarter of 2010, offset in part by the ClearLake closure in the current quarter. The Company's Mackenzie sawmill alsomoved from one to two shifts during the first quarter of 2010.Overall, the Company's lumber unit manufacturing costs were down marginallyfrom the previous quarter, with decreases in unit cash conversion costs morethan offsetting increases in unit log costs. The improvement in unit cashconversion costs principally reflected the higher number of operating days andincreased productivity, as well as the closure of the higher-cost Clear Lakesawmill. Increased log costs reflected higher diesel costs and increasedcompetition for purchased wood.Compared to the first quarter of 2010, unit manufacturing costs were up 2%,mostly as a result of higher logging and hauling costs, in part driven by thesharp rise in diesel costs as well as increased purchased wood prices.Restructuring, mill closure and severance costs in the current quarter were$1.5 million, similar to those for the previous quarter, and $2.7 millionlower than the first quarter of 2010 when the Quesnel and Chetwynd mills werealso curtailed.In the first quarter of 2010 the Company recorded a $22.4 million recovery ofpreviously recorded write-downs, resulting from the improved market prices inthe first quarter of 2010 compared to the end of 2009. Inventory valuationadjustments were minimal in the current period.Pulp and PaperSelected Financial Information and Statistics - Pulp and Paper(11) Q1 Q4 Q1(millions of dollars unless otherwise noted) 2011 2010 2010----------------------------------------------------------------------------Sales $ 283.0 $ 300.8 $ 269.7Operating income $ 47.2 $ 50.0 $ 34.4EBITDA $ 64.0 $ 66.4 $ 51.0----------------------------------------------------------------------------Average pulp price delivered to U.S. - US$(12) $ 970 $ 967 $ 880Average price in Cdn$ $ 957 $ 980 $ 916----------------------------------------------------------------------------Production - pulp (000 mt) 316.9 320.6 307.1Production - paper (000 mt) 34.5 34.7 31.0Shipments - Canfor-produced pulp (000 mt) 318.4 331.1 315.6 Pulp marketed on behalf of HSLP (000 mt)(13) - - 91.5Shipments - paper (000 mt) 32.6 39.0 37.7----------------------------------------------------------------------------(11) Includes the Taylor pulp mill and 100% of Canfor Pulp LimitedPartnership ("CPLP"), which is consolidated in Canfor's results. Pulpproduction and shipment volumes presented are for both northern bleachedsoftwood kraft ("NBSK") and bleached chemi-thermo mechanical pulp ("BCTMP").(12) Per tonne, NBSK pulp list price delivered to U.S. (Resource InformationSystems, Inc.).(13) Howe Sound Pulp and Paper Limited Partnership pulp mill.OverviewEBITDA for the pulp and paper segment for the first quarter of 2011 was $64.0million, slightly less than EBITDA of $66.4 million reported for the previousquarter. US dollar pulp market prices remained in line with the previousquarter, but the stronger Canadian dollar led to lower sales realizations.Lower pulp shipments and higher chemical costs also contributed to thedecrease in EBITDA but were offset by lower fibre costs and reduced operatingcosts. Investment tax credits totalling $3.4 million were also recorded in thefourth quarter of 2010.Compared to the first quarter of 2010, EBITDA was up $13.0 million principallyas a result of higher NBSK pulp US dollar prices, partially offset by lowerBCTMP market prices and the stronger Canadian dollar, as well as higher fibreand chemical costs. The increase in fibre costs reflected higher prices paidfor sawmill residual chips, partially offset by reduced whole log chip costs.MarketsGlobal softwood pulp demand remained very strong in the first quarter of 2011with record shipments in March 2011 led by demand from China. According to theWorld 20 report(14), global bleached softwood pulp shipments for March were20% higher when compared to the same period in 2010 and for the first quarterin 2011 were 10% higher than in the same period in 2010. PPPC(15) statisticsreported an increase in global demand for printing and writing papers of 1%for February 2011 year-to-date as compared to the same period in 2010.Global softwood producer inventories remained tight as the strong globalshipments in the first quarter of 2011 were partially offset by seasonallystrong supply. At the end of March 2011, World 20 producers of bleachedsoftwood pulp inventories were at 24 days of supply, a drop of one day fromDecember 2010. Market conditions are generally considered balanced wheninventories fall in the 27-30 days of supply range.(14)World 20 data is based on twenty producing countries representing 80% ofworld chemical market pulp capacity and is based on information compiled andprepared by the PPPC.(15)Pulp and Paper Products Council ("PPPC").SalesShipments of Canfor-produced pulp in the first quarter of 2011 were 318,000tonnes, down 13,000 tonnes, or 4%, from the previous quarter. Shipments wereup marginally compared to the first quarter of 2010.NBSK markets remained tight in the first quarter of 2011, with pricesincreasing towards the end of the quarter. U.S. and Europe NBSK pulp listprices averaged US$970 and US$960 per tonne, respectively, up slightly fromthe previous quarter. CPLP's NBSK pulp list prices to China showed solidgains, moving up US$37 to US$870 per tonne. The stronger Canadian dollar,however, more than offset these gains, resulting in lower sales realizations.BCTMP realizations were also down compared to the fourth quarter of 2010, withflat US dollar pricing and the stronger Canadian dollar.Compared to the first quarter of 2010, NBSK pulp list prices to the U.S. wereup US$90 per tonne, or 10%, reflecting the overall improvement in the marketsover the year. However, a 6% increase in the value of the Canadian dollarreduced the net benefit of this increase for Canadian producers toapproximately $40 per tonne. Prices to Europe and China were up US$100 pertonne and US$120 per tonne, respectively.OperationsPulp production in the first quarter of 2011 was 317,000 tonnes, downmarginally from the previous quarter and up 3% from the first quarter of 2010.The increase compared to the first quarter of 2010 largely related to amaintenance outage at the Prince George pulp mill which extended into thecomparative period.Unit manufacturing costs were down in the first quarter of 2011 compared tothe fourth quarter of 2010. Lower fibre costs and reduced spending onoperating supplies and services contributed to the lower unit costs. Thereduced fibre costs were largely attributable to lower prices paid for wholelog and sawmill residual chips. Higher chemical prices offset some of theseimprovements. In addition, non-manufacturing costs in the previous quarterreflected increased short-term incentive compensation costs and expensesrelated to the conversion of Canfor Pulp Income Fund to a corporation (CanforPulp Products Inc.) on January 1, 2011.Unit manufacturing costs were up slightly from the first quarter of 2010 withincreased fibre and chemical costs offsetting the impact of higher productionvolumes. The increase in fibre costs reflected higher prices for sawmillresidual chips, for the most part due to higher NBSK pulp prices, partiallyoffset by reductions in the cost and volume of whole log chips.Unallocated and Other Items Q1 Q4 Q1(millions of dollars) 2011 2010 2010----------------------------------------------------------------------------Operating loss of Panels operations(16) $ (5.7) $ (2.8) $ (0.5)Corporate costs $ (7.8) $ (6.2) $ (5.8)Finance expense, net $ (6.3) $ (6.6) $ (7.7)Foreign exchange gain on long-term debt and investments, net $ 4.7 $ 9.8 $ 8.8Gain (loss) on derivative financial instruments $ 4.7 $ 1.8 $ (1.2)Other income (expense), net $ (1.7) $ 11.0 $ (2.9)----------------------------------------------------------------------------(16) The Panels operations include the Peace Valley OSB (Oriented StrandBoard) joint venture, the only facility currently operating, and theCompany's Tackama plywood and PolarBoard OSB plants, both of which arecurrently indefinitely idled.The panels operations reported an operating loss of $5.7 million for the firstquarter, compared to a loss of $2.8 million for the previous quarter. Thefirst quarter results included a $2.0 million expense for inventory valuationadjustments, reflecting continued low market prices for OSB product and theseasonal build up of log inventories in advance of spring break up. Excludingthe impact of inventory valuation adjustments, as well as certain non-recurring items in the previous quarter, the operating loss for the firstquarter was down $0.9 million reflecting improved sales realizations and lowerconversion costs in the period. The higher loss compared to the first quarterof 2010 reflected weaker prices and the stronger Canadian dollar, as well asthe inventory devaluation adjustment in the current quarter.Corporate costs were $7.8 million in the first quarter of 2011, up $1.6million from the previous quarter and $2.0 million from the first quarter of2010. The increased costs compared to both periods primarily reflected highershare-based compensation and short-term incentive compensation costs recordedin the current quarter, as well as a non-recurring pension credit adjustmentin the fourth quarter of 2010.Net finance expense of $6.3 million for the first quarter of 2011 was downslightly from the previous quarter, and down $1.4 million from the firstquarter of 2010, largely as a result of lower long-term debt balances and thepositive impact from the stronger Canadian dollar.The Company recorded a foreign exchange translation gain on its US dollardenominated debt, net of investments, of $4.7 million for the first quarter of2011 as a result of a 2% increase in the value of the Canadian dollar againstthe US dollar at the respective quarter ends. This gain was lower than gainsrecorded in both comparable periods, which saw the Canadian dollar strengthenfurther against its U.S. counterpart.The Company uses a variety of derivative financial instruments as partialeconomic hedges against unfavourable changes in natural gas and diesel costs,foreign exchange rates and lumber prices. For the first quarter of 2011, theCompany recorded a net gain of $4.7 million on its derivative instruments,principally reflecting gains attributable to the stronger Canadian dollar andhigher market diesel prices, as well as gains on lumber futures due to fallingmarket prices. The following table summarizes the gains (losses) on derivativefinancial instruments for the comparable periods. Q1 Q4 Q1(millions of dollars) 2011 2010 2010----------------------------------------------------------------------------Foreign exchange collars and forward contracts $ 1.9 $ 3.3 $ 5.8Natural gas swaps $ (0.1) $ - $ (3.7)Diesel options and swaps $ 1.0 $ 0.6 $ 0.4Lumber futures $ 1.9 $ (2.1) $ (3.7)---------------------------------------------------------------------------- $ 4.7 $ 1.8 $ (1.2)----------------------------------------------------------------------------Other expense, net of $1.7 million for the first quarter of 2011 included anet foreign exchange loss of $2.5 million on working capital balances,compared to $3.7 million in the previous quarter and $2.8 million in the firstquarter of 2010. This expense was partially offset in the current quarter by a$1.1 million increase in the fair value of the Company's investment in asset-backed commercial paper ("ABCP"). Other income in the fourth quarter of 2010included $6.3 million in relation to the ABCP and a $5.5 million gain on thesale of the operating assets of Howe Sound Pulp and Paper Limited Partnership.SUMMARY OF FINANCIAL POSITIONThe following table summarizes Canfor's cash flow and selected ratios for andas at the end of the following periods: Q1 Q4 Q1(millions of dollars) 2011 2010 2010----------------------------------------------------------------------------Increase (decrease) in cash and cash equivalents $ (87.8) $ 37.2 $ (39.3) Operating activities $ (5.7) $ 100.7 $ 27.8 Financing activities $ (75.0) $ (37.1) $ (52.6) Investing activities $ (6.8) $ (25.9) $ (14.3)Ratio of current assets to current liabilities 2.0 : 1 2.0 : 1 2.4 : 1Net debt to capitalization 6.6% 3.8% 13.8%ROCE - Consolidated(17) 0.9% 2.3% 1.6%ROCE - Canfor solid wood business(18) (0.3)% 1.3% 1.0%----------------------------------------------------------------------------(17) Consolidated Return on Capital Employed ("ROCE") is equal toshareholder net income for the period plus finance expense, after tax,divided by the average capital employed during the period. Capital employedconsists of current bank loans, current portion of long-term debt,long-term debt and shareholders' equity, less cash and cash equivalents andtemporary investments.(18) ROCE for the Canfor solid wood business represents consolidated ROCEadjusted to remove the results and capital employed of the Company'sinterest in the Peace Valley OSB Joint Venture and pulp and paperoperations, including CPLP and the Taylor pulp mill.Changes in Financial PositionOperating activities used cash of $5.7 million in the first quarter of 2011,compared to cash generated of $100.7 million in the previous quarter. Thevariance resulted principally from working capital movements, mostsignificantly the Company's seasonal build of log inventory ahead of springbreak-up. Working capital movements in the prior quarter also included cashreceived in relation to the sale of the operating assets of Howe Sound Pulpand Paper Limited Partnership. Cash generated from operating activities in thefirst quarter of 2010 included $28.7 million of income taxes received, whichrelated to tax loss carry-backs.Financing activities used cash of $75.0 million in the first quarter of 2011,compared to $37.1 million in the previous quarter and $52.6 million in thefirst quarter of 2010. The current quarter's outflows included the repaymentof long-term debt of $33.8 million (Q4 2010: $1.4 million; Q1 2010: $33.7million) and cash distributions to non-controlling interests of $38.0 million(Q4 2010: $28.2 million; Q1 2010: $11.2 million). Interest payments of $3.5million in the current quarter were down by just under $4.5 million from boththe fourth and first quarters of 2010, reflecting lower debt levels and timingof payments.Investing activities used $6.8 million in the first quarter of 2011, comparedto $25.9 million in the previous quarter and $14.3 million in the firstquarter of 2010. The Company received cash of $29.7 million from theredemption of certain ABCP in the current quarter. Cash used for capitaladditions was $48.9 million in the current quarter, slightly higher than theprevious quarter, and included further work on the Company's Fort St. Johnsawmill and planer rebuild, and various other lumber mill upgrade projects,including new energy systems at the Prince George and Plateau sawmilloperations.Capital expenditures at CPLP principally reflected projects relating to thegovernment funded Green Transformation Program (the "Program"). CPLP receivedcash of $9.6 million in the first quarter as reimbursement for capitaladditions under the Program, compared to $19.1 million in the previousquarter. CPLP has received Program approval to proceed with four projectstotaling $157.4 million, of which $122.2 million will be funded under theProgram. As of March 31, 2011 CPLP had incurred $55.8 million and receivedreimbursements totaling $29.8 million, with the majority of the outstandingbalance expected to be received during the second quarter.Liquidity and Financial RequirementsAt March 31, 2011, the Company on a consolidated basis had cash and cashequivalents of $172.5 million and $446.7 million of bank operating lines ofcredit, which were undrawn, with $30.8 million reserved for several standbyletters of credit. Included in these operating lines is a $30 million bridgeloan credit facility negotiated in the period by CPLP to temporarily fundcapital projects that are being reimbursed by the Program. The Company andCPLP remained in compliance with the covenants relating to its operating linesof credit and long-term debt during the quarter, and expect to remain so forthe foreseeable future.The Company's consolidated net debt to total capitalization at the end of thefirst quarter of 2011 was 6.6%.Scheduled debt repayments in the second quarter of 2011 include US$50.0million, which was paid on April 1. There are no further long-term debtrepayments due over the balance of 2011.Softwood Lumber Agreement ("SLA") UpdateOn January 18, 2011, the U.S. triggered the arbitration provision of the 2006SLA by delivering a Request for Arbitration. The U.S. claims that BC has notproperly applied the timber pricing system grandparented in the SLA. The U.S.also claims that subsequent to 2006, BC made additional changes to the timberpricing system which had the effect of reducing timber prices. The claimfocuses on substantial increases in Grade 4 (non sawlog or low grade) volumescommencing in 2007. It is alleged that timber was scaled and graded as Grade 4that did not meet the criteria for that grade, and was accordingly priced toolow.As the arbitration is a state-to-state international dispute under the SLA,Canada is preparing a defence to the claim with the assistance of the BCprovincial government and the BC lumber industry. To date, the U.S. has notfiled a detailed statement of claim with the arbitration panel. It is notpossible at this time to predict the outcome or the value of the claim, andaccordingly no provision has been recorded by the Company.OUTLOOKLumberDespite a projected seasonal uplift in home construction and repair andrenovation activity over the remaining spring months, the U.S. housing marketis not forecast to show any significant recovery through the balance of theyear given the current high levels of mortgage delinquencies, homeforeclosures and home inventories. The Canadian housing market, although flatin the first quarter, is forecast to show moderate improvement in the secondquarter.The strength of China demand is projected to continue through the balance ofthe year, and should help to support higher North American 2x4 SPF prices. TheCompany's sales volumes to China are forecast to surpass the record shipmentlevels in 2010 as the two primary segments, remanufacturing and concreteforming, remain strong. In addition, further development of the wood frameconstruction market is anticipated to lead to increased use of higher gradelumber.After the tragic earthquake and tsunami, the Japanese market near-term outlookis more uncertain as the country focuses on clean-up efforts and providingtemporary shelter to its citizens. The rebuilding of the devastated areas isprojected to lead to increased Western SPF lumber demand in time, but this iscurrently not anticipated to begin for at least 12 months.Pulp and PaperThe global softwood pulp market is forecast to remain tight through the secondquarter of 2011. A price increase of US$30 per tonne was announced for allmarkets effective April 1, 2011. Demand remains solid with continued strongshipments to China. In the second quarter of 2011, annual maintenance downtimecoupled with extended outages in Canada due to several large capital projectsfunded under the Canadian Federal Government Green Transformation Program, areprojected to curtail supply.OUTSTANDING SHARESAt May 4, 2011, there were 142,705,764 common shares outstanding.CRITICAL ACCOUNTING ESTIMATESThe preparation of financial statements in conformity with InternationalFinancial Reporting Standards requires management to make estimates andassumptions that affect the amounts recorded in the financial statements. Onan ongoing basis, management reviews its estimates, including those related touseful lives for amortization, impairment of long-lived assets, certainaccounts receivable, pension and other employee future benefit plans and assetretirement obligations based upon currently available information. While it isreasonably possible that circumstances may arise which cause actual results todiffer from these estimates, management does not believe it is likely that anysuch differences will materially affect the Company's financial condition.CONVERSION TO INTERNATIONAL FINANCIAL REPORTING STANDARDSFor interim and annual periods in 2011 and beyond, Canfor is required toprepare financial statements in accordance with International FinancialReporting Standards ("IFRS"). The Company's financial statements for the firstquarter of 2011 are the first to be prepared in accordance with IFRS.The principal impacts of the transition to IFRS on the net income of theCompany are the reduction in employee future benefit and amortization expenseswhich substantially result from opening balance sheet adjustments recorded toequity at January 1, 2010. In addition, certain costs of CPLP have beenreclassified from manufacturing and product costs to amortization, therebyincreasing EBITDA. The impacts of the transition to IFRS are set out in Note14 to the Condensed Consolidated Interim Financial Statements for the firstquarter of 2011.To ensure accurate and efficient reporting under IFRS, the Company developed aconversion implementation plan in 2008, which was designed to identifydifferences between previous Canadian GAAP and IFRS that affect Canfor and anyrequired changes to accounting processes and controls (including informationtechnology systems). No significant impacts were identified in relation to theCompany's information systems or day-to-day accounting processes and controls.Canfor reviewed its disclosure controls and procedures and updated these asrequired to ensure that they are appropriate for reporting under IFRS.Reporting in accordance with IFRS has now been embedded into the Company'ssystems and procedures.INTERNAL CONTROLS OVER FINANCIAL REPORTINGDuring the quarter ended March 31, 2011, there were no changes in theCompany's internal controls over financial reporting that materially affected,or would be reasonably likely to materially affect, such controls.RISKS AND UNCERTAINTIESA comprehensive discussion of risks and uncertainties is included in theCompany's 2010 annual statutory reports which are available on www.canfor.comor www.sedar.com.SELECTED QUARTERLY FINANCIAL INFORMATION ------------------------------------------------------------ International Financial Reporting Previous Canadian Standards(19) GAAP(19)---------------------------------------------------------------------------- Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 2011 2010 2010 2010 2010 2009 2009 2009----------------------------------------------------------------------------Sales and income (millions of dollars)Sales $624.0 $629.1 $588.7 $634.7 $577.9 $ 549.6 $521.3 $530.3Operating income (loss) $ 31.4 $ 41.7 $ 32.0 $ 69.1 $ 43.9 $ (23.6) $(31.4) $(31.2)Net income (loss) $ 32.3 $ 55.4 $ 37.2 $ 43.7 $ 35.5 $ (9.1) $ 4.1 $ 12.1Shareholder net income (loss) $ 7.0 $ 31.4 $ 9.1 $ 21.1 $ 18.3 $ (17.0) $ (5.2) $ 10.5Per common share (dollars)Shareholder net income (loss) - basic and diluted $ 0.05 $ 0.22 $ 0.06 $ 0.15 $ 0.13 $ (0.12) $(0.04) $ 0.07----------------------------------------------------------------------------StatisticsLumber shipments (MMfbm) 865 895 877 875 797 887 837 884OSB shipments (MMsf 3/8") 63 57 58 72 72 63 69 61Pulp shipments (000 mt) 318 331 277 301 316 315 307 344----------------------------------------------------------------------------Average exchange rate - US$/Cdn$ $1.014 $0.987 $0.962 $0.973 $0.961 $ 0.947 $0.912 $0.858----------------------------------------------------------------------------Average Western SPF 2x4 #2&Btr lumber price (US$) $ 296 $ 269 $ 223 $ 266 $ 268 $ 205 $ 191 $ 174Average SYP (East) 2x4 #2 lumber price (US$) $ 302 $ 256 $ 243 $ 379 $ 329 $ 231 $ 230 $ 236Average OSB price - North Central (US$) $ 199 $ 191 $ 178 $ 295 $ 214 $ 172 $ 178 $ 145Average NBSK pulp list price delivered to U.S. (US$) $ 970 $ 967 $1,000 $ 993 $ 880 $ 820 $ 733 $ 645--------------------------------------------------------------------------------------------------------------------------------------------------------(19) Financial information for 2010 has been restated to be shown inaccordance with IFRS. Financial information for 2009 has not been restated,and is shown above in accordance with previous Canadian GAAP.In addition to exposure to changes in product prices and foreign exchange, theCompany's financial results are impacted by seasonal factors such as weatherand building activity. Adverse weather conditions can cause loggingcurtailments, which can affect the supply of raw materials to manufacturingfacilities. Market demand also varies seasonally to some degree. For example,building activity and repair and renovation work, which affects demand forlumber products, is generally stronger in the spring and summer months. Thesefactors, along with global supply and demand conditions, affect the Company'sshipment volumes. Also, operating losses for the quarters in 2009 reflect theimpact of a global economic slowdown.Other factors that impact the comparability of the quarters are noted below:----------------------------------------------------------------------------After-tax impact, net of non- controlling International Financial Reporting Previous Canadian interests Standards(20) GAAP(20) ---------------------------------------------------------------(millions of dollars, except for per share Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 amounts) 2011 2010 2010 2010 2010 2009 2009 2009--------------------------------------------------- ------------------------Shareholder net income (loss), as reported $ 7.0 $ 31.4 $ 9.1 $ 21.1 $ 18.3 $(17.0) $ (5.2) $ 10.5 Foreign exchange (gain) loss on long-term debt and investments, net $ (3.0) $ (6.9) $ (6.3) $ 9.0 $ (6.2) $ (5.8) $(19.6) $(19.7)(Gain) loss on derivative financial instruments $ (2.9) $ (0.5) $ (1.1) $ 1.1 $ 1.0 $ (1.4) $(12.7) $(17.3)Gain on sale of operating assets of Howe Sound Pulp and Paper Limited Partnership $ - $ (4.9) $ - $ - $ - $ - $ - $ -Increase in fair value of asset- backed commercial paper $ (1.0) $ (5.5) $ - $ - $ - $ - $ - $ -Clear Lake permanent closure provision $ - $ - $ 13.4 $ - $ - $ - $ - $ -North Central Plywoods mill fire, net $ - $ - $ - $ - $ - $ - $ - $ 2.0----------------------------------------------------------------------------Net impact of above items $ (6.9) $(17.8) $ 6.0 $ 10.1 $ (5.2) $ (7.2) $(32.3) $(35.0)----------------------------------------------------------------------------Adjusted shareholder net income (loss) $ 0.1 $ 13.6 $ 15.1 $ 31.2 $ 13.1 $(24.2) $(37.5) $(24.5)--------------------------------------------------------------------------------------------------------------------------------------------------------Shareholder net income (loss) per share (EPS), as reported $ 0.05 $ 0.22 $ 0.06 $ 0.15 $ 0.13 $(0.12) $(0.04) $ 0.07Net impact of above items per share $(0.05) $(0.12) $ 0.04 $ 0.07 $(0.04) $(0.05) $(0.22) $(0.24)----------------------------------------------------------------------------Adjusted shareholder net income (loss) per share $ 0.00 $ 0.10 $ 0.10 $ 0.22 $ 0.09 $(0.17) $(0.26) $(0.17)--------------------------------------------------------------------------------------------------------------------------------------------------------(20) Financial information for 2010 has been restated to be shown inaccordance with IFRS. Financial information for 2009 has not been restated,and is shown above in accordance with previous Canadian GAAP.Canfor CorporationCondensed Consolidated Balance Sheets As at As at As at March December January(millions of dollars, unaudited) 31, 2011 31, 2010 1, 2010----------------------------------------------------------------------------ASSETS (Note 14)Current assetsCash and cash equivalents $ 172.5 $ 260.3 $ 133.4Accounts receivable - Trade 166.7 146.9 137.2 - Other 56.4 54.2 41.9Income taxes recoverable - - 45.5Inventories (Note 4) 402.4 325.8 310.5Prepaid expenses 25.7 28.1 21.0----------------------------------------------------------------------------Total current assets 823.7 815.3 689.5----------------------------------------------------------------------------Property, plant and equipment 1,039.6 1,049.1 1,077.7Timber licenses 542.4 546.7 563.7Goodwill and other intangible assets 81.0 84.5 92.4Long-term investments and other (Note 5) 59.8 89.1 75.7----------------------------------------------------------------------------Total assets $ 2,546.5 $ 2,584.7 $ 2,499.0--------------------------------------------------------------------------------------------------------------------------------------------------------LIABILITIESCurrent liabilitiesOperating bank loans (Note 6(a)) $ - $ - $ 0.6Accounts payable and accrued liabilities 290.8 292.9 211.4Current portion of long-term debt (Note (6(b)) 97.2 82.5 34.0Current portion of deferred reforestation obligation 31.5 31.6 27.8----------------------------------------------------------------------------Total current liabilities 419.5 407.0 273.8----------------------------------------------------------------------------Long-term debt (Note 6(b)) 179.9 235.6 333.3Retirement benefit obligations 261.1 272.2 233.5Deferred reforestation obligation 66.4 54.3 59.0Other long-term liabilities 18.3 16.4 17.3Deferred income taxes, net 124.9 123.7 126.0----------------------------------------------------------------------------Total liabilities $ 1,070.1 $ 1,109.2 $ 1,042.9----------------------------------------------------------------------------EQUITYShare capital $ 1,125.7 $ 1,125.4 $ 1,124.7Contributed surplus 31.9 31.9 31.9Retained earnings 88.3 79.0 40.2Accumulated foreign exchange translation differences (16.5) (10.3) -----------------------------------------------------------------------------Total equity attributable to equity holders of the Company 1,229.4 1,226.0 1,196.8Non-controlling interests 247.0 249.5 259.3----------------------------------------------------------------------------Total equity $ 1,476.4 $ 1,475.5 $ 1,456.1----------------------------------------------------------------------------Total liabilities and equity $ 2,546.5 $ 2,584.7 $ 2,499.0--------------------------------------------------------------------------------------------------------------------------------------------------------Contingency (Note 13)The accompanying notes are an integral part of these condensed consolidatedfinancial statements.APPROVED BY THE BOARD"R.S. Smith"Director, R.S. Smith"J.F. Shepard"Director, J.F. ShepardCanfor CorporationCondensed Consolidated Statements of Income Three months ended March 31,(millions of dollars, unaudited) 2011 2010----------------------------------------------------------------------------Sales $624.0 $577.9Costs and expenses Manufacturing and product costs 409.1 358.2 Freight and other distribution costs 112.6 101.2 Export taxes 10.8 11.6 Amortization 41.5 41.8 Selling and administration costs 15.8 15.6 Restructuring, mill closure and severance costs 2.8 5.6---------------------------------------------------------------------------- 592.6 534.0----------------------------------------------------------------------------Operating income 31.4 43.9Finance expense, net (6.3) (7.7)Foreign exchange gain on long-term debt and investments, net 4.7 8.8Gain (loss) on derivative financial instruments (Note 8) 4.7 (1.2)Other expense, net (1.7) (2.9)----------------------------------------------------------------------------Net income (loss) before income taxes 32.8 40.9Income tax expense (Note 9) (0.5) (5.4)----------------------------------------------------------------------------Net income $ 32.3 $ 35.5----------------------------------------------------------------------------Net income attributable to:Equity shareholders of Company $ 7.0 $ 18.3Non-controlling interests 25.3 17.2----------------------------------------------------------------------------Net income $ 32.3 $ 35.5----------------------------------------------------------------------------Net income per common share: (in dollars)Attributable to equity shareholders of Company - Basic and diluted (Note 10) $ 0.05 $ 0.13--------------------------------------------------------------------------------------------------------------------------------------------------------The accompanying notes are an integral part of these condensed consolidatedfinancial statements.Canfor CorporationCondensed Consolidated Statements of Other Comprehensive Income (Loss) 3 months ended March 31,(millions of dollars, unaudited) 2011 2010----------------------------------------------------------------------------Net income $ 32.3 $ 35.5Other comprehensive income (loss) Foreign exchange translation differences for foreign operations (6.2) (8.0) Defined benefit plan actuarial gains (losses) 3.0 (47.3) Income tax (expense) recovery on defined benefit plan actuarial losses (0.8) 10.6----------------------------------------------------------------------------Other comprehensive income (loss), net of tax (4.0) (44.7)----------------------------------------------------------------------------Total comprehensive income (loss) $ 28.3 $ (9.2)--------------------------------------------------------------------------------------------------------------------------------------------------------Total comprehensive income (loss) attributable to:Equity shareholders of Company $ 3.1 $ (21.7)Non-controlling interests 25.2 12.5----------------------------------------------------------------------------Total comprehensive income (loss) $ 28.3 $ (9.2)--------------------------------------------------------------------------------------------------------------------------------------------------------Condensed Consolidated Statements of Changes in Equity 3 months ended March 31,(millions of dollars, unaudited) 2011 2010----------------------------------------------------------------------------Share capitalBalance at beginning of period $ 1,125.4 $ 1,124.7Common shares issued on exercise of stock options 0.3 -----------------------------------------------------------------------------Balance at end of period $ 1,125.7 $ 1,124.7----------------------------------------------------------------------------Contributed surplus----------------------------------------------------------------------------Balance at beginning and end of period $ 31.9 $ 31.9----------------------------------------------------------------------------Retained earningsBalance at beginning of period $ 79.0 $ 40.2Net income attributable to equity shareholders of Company 7.0 18.3Defined benefit plan actuarial gains (losses), net of tax 2.3 (32.0)----------------------------------------------------------------------------Balance at end of period $ 88.3 $ 26.5----------------------------------------------------------------------------Accumulated foreign exchange translation differencesBalance at beginning of period $ (10.3) $ -Foreign exchange translation differences for foreign operations (6.2) (8.0)----------------------------------------------------------------------------Balance at end of period $ (16.5) $ (8.0)----------------------------------------------------------------------------Total equity attributable to equity holders of Company $ 1,229.4 $ 1,175.1--------------------------------------------------------------------------------------------------------------------------------------------------------Non-controlling interestsBalance at beginning of period $ 249.5 $ 259.3Net income attributable to non-controlling interests 25.3 17.2Defined benefit plan actuarial losses attributable to non-controlling interests (0.1) (4.7)Distributions to non-controlling interests (27.7) (11.7)----------------------------------------------------------------------------Balance at end of period $ 247.0 $ 260.1----------------------------------------------------------------------------Total equity $ 1,476.4 $ 1,435.2--------------------------------------------------------------------------------------------------------------------------------------------------------The accompanying notes are an integral part of these condensed consolidatedfinancial statements.Canfor CorporationCondensed Consolidated Statements of Cash Flows 3 months ended March 31,(millions of dollars, unaudited) 2011 2010----------------------------------------------------------------------------Cash generated from (used in)Operating activities Net income $ 32.3 $ 35.5 Items not affecting cash: Amortization 41.5 41.8 Income tax expense 0.5 5.4 Long-term portion of deferred reforestation obligation 12.1 8.6 Foreign exchange (gain) loss on long-term debt and investments, net (4.7) (8.8) Changes in mark-to-market value of derivative financial instruments (3.7) 0.6 Employee future benefits 0.4 1.6 Net finance expense 6.3 7.7 Other, net (0.8) - Salary pension plan contributions (9.7) (1.7) Income taxes recovered (paid), net (0.7) 28.7 Net change in non-cash working capital (Note 11) (79.2) (91.6)---------------------------------------------------------------------------- (5.7) 27.8----------------------------------------------------------------------------Financing activities Repayment of long-term debt (Note 6(b)) (33.8) (33.7) Finance expenses paid (3.5) (7.8) Cash distributions paid to non-controlling interests (38.0) (11.2) Other, net 0.3 0.1---------------------------------------------------------------------------- (75.0) (52.6)----------------------------------------------------------------------------Investing activities Additions to property, plant and equipment (48.9) (17.2) Reimbursements from Government under Green Transformation Program 9.6 - Proceeds from redemption of asset-backed commercial paper (Note 5) 29.7 1.7 Other, net 2.8 1.2---------------------------------------------------------------------------- (6.8) (14.3)---------------------------------------------------------------------------- Foreign exchange gain (loss) on cash and cash equivalents of subsidiaries with different functional currency (0.3) (0.2)----------------------------------------------------------------------------Increase (decrease) in cash and cash equivalents (87.8) (39.3)Cash and cash equivalents at beginning of period 260.3 133.4----------------------------------------------------------------------------Cash and cash equivalents at end of period $ 172.5 $ 94.1--------------------------------------------------------------------------------------------------------------------------------------------------------The accompanying notes are an integral part of these condensed consolidatedfinancial statements.Canfor CorporationNotes to the Condensed Consolidated Financial Statements(unaudited, millions of dollars unless otherwise noted)1. Basis of preparation and transition to International Financial ReportingStandards ("IFRS")These condensed consolidated interim financial statements have been preparedin accordance with International Accounting Standard 34 Interim financialreporting, and include the accounts of Canfor Corporation and its subsidiaryentities, hereinafter referred to as "Canfor" or "the Company".These financial statements are the first interim condensed consolidatedfinancial statements prepared by the Company under International FinancialReporting Standards ("IFRS"), which is the required reporting framework forCanadian publicly accountable enterprises. The financial statements have beenprepared using accounting policies determined in accordance with IFRS that theCompany expects to apply in its annual financial statements for the year endedDecember 31, 2011, as disclosed in note 3.Canfor's transition date to IFRS was January 1, 2010. Various reconciliationsbetween previous Canadian generally acceptable accounting principles ("GAAP")and IFRS related to the transition and subsequent reporting periods are setout in note 14, together with explanatory notes. Additional disclosuresrelating to these first interim financial statements under IFRS are containedin notes 2, 3 and 15 of these statements.The currency of presentation for these financial statements is the Canadiandollar.2. Reporting entityCanfor Corporation is a company incorporated and domiciled in Canada andlisted on the Toronto Stock Exchange. The address of the Company's registeredoffice is 100-1700 West 75th Avenue, Vancouver, British Columbia, Canada V6P6G2.Canfor is an integrated forest products company with facilities in Canada andthe United States. The Company produces softwood lumber, pulp and paperproducts, oriented strand board, plywood, remanufactured lumber products andspecialized wood products.3. Significant accounting policiesThe following accounting policies have been applied to the financialinformation presented.Basis of consolidationSubsidiaries are entities controlled by the Company. Control exists whenCanfor is able to govern the financial and operating activities of those otherentities to generate returns for the Company. Inter-company transactions,balances and unrealized gains and losses on transactions between differententities within the Company are eliminated. Significant subsidiaries includeCanadian Forest Products Ltd., New South Companies Inc., and Canfor PulpLimited Partnership ("CPLP"), which is 50.2% owned. There were no changes tothe percentage ownership interest during 2011 or 2010 for these entities.Joint ventures are those entities over whose activities Canfor has jointcontrol, established by contractual agreement and requiring unanimous consentfor strategic financial and operating decisions. Joint ventures areproportionally consolidated. Canfor's joint ventures include a 50% interest inCanfor-LP OSB Limited Partnership.Associates are those entities in which Canfor exercises significant influence,but not control, over financial and operating policies. Unless circumstancesindicate otherwise, significant influence is presumed to exist when Canforholds between 20 and 50 percent of the voting power of another entity.Associates are accounted for using the equity method and are recognizedinitially at cost. The consolidated financial statements include Canfor'sshare of the post-acquisition income and expenses and equity movement of theseequity accounted investees.Use of estimatesThe preparation of financial statements in conformity with IFRS requiresmanagement to make estimates and assumptions that affect the amounts reportedin the financial statements and accompanying notes. Canfor regularly reviewsits estimates and assumptions; however, it is possible that circumstances mayarise which cause actual results to differ from management estimates, andthese differences could be material.Significant areas requiring the use of management estimates include theallowance for doubtful accounts, income tax provisions, inventory valuations,amortization rates, deferred reforestation obligations, asset retirementobligations, environmental remediation obligations, provisions for insuranceclaims, pension and other benefit plan assumptions, and the valuation ofgoodwill, long-lived assets, and financial instruments, including asset-backedcommercial paper ("ABCP") and other investments.Financial instrumentsNon-derivative financial instrumentsNon-derivative financial instruments comprise investments in equitysecurities, trade and other receivables, cash and cash equivalents, loans andborrowings, and trade and other payables. Non-derivative financial instrumentsare recognized initially at fair value plus, for instruments not at fair valuethrough net income, any directly attributable transaction costs. Subsequent toinitial recognition non-derivative financial instruments are measured asdescribed below:Financial assets at fair value through net income - An instrument isclassified at fair value through net income if it is held for trading or isdesignated as such upon initial recognition. Financial instruments at fairvalue through net income are measured at fair value, and changes therein arerecognized in net income, with attributable transaction costs being recognizedin net income when incurred. Included within this category are cash and cashequivalents and ABCP. Cash and cash equivalents include cash in bank accountsand highly liquid money market instruments with maturities of three months orless from the date of acquisitionAvailable-for-sale financial assets - Canfor's investments in equitysecurities are classified as available-for-sale financial assets where it doesnot have control or significant influence over the investee. These instrumentsdo not have a quoted market price in an active market, and are thereforemeasured at cost subsequent to initial recognition. Any impairment loss onthese investments is recorded through net income.Loans and receivables - Loans and receivables are non-derivative financialassets with fixed or determinable payments that are not quoted in an activemarket. These are measured at amortized cost using the effective interestmethod, less any impairment losses. The effective interest method is used tospread the total costs of or income from a financial instrument over the lifeof the instrument. Financial assets included within this category for Canforare trade and other receivables.Other liabilities - All of Canfor's financial liabilities are measured atamortized cost using the effective interest method.Derivative financial instrumentsCanfor uses derivative financial instruments in the normal course of itsoperations as a means to manage its foreign exchange, energy and commodityprice risk. Canfor's policy is not to utilize derivative financial instrumentsfor trading or speculative purposes.Canfor's derivative financial instruments are not designated as hedges foraccounting purposes. Consequently, such derivatives for which hedge accountingis not applied are carried on the Consolidated Balance Sheet at fair value,with changes in fair value (realized and unrealized) being recognized in theConsolidated Statements of Income outside of operating income as 'Gain (loss)on derivative financial instruments'.The fair value of the derivatives is determined with reference to period endmarket trading prices for derivatives with comparable characteristics.InventoriesInventories include logs, lumber, panels, pulp, kraft paper, chips andprocessing materials and supplies. These are measured at the lower of cost andnet realizable value. The cost of inventories is based on the weighted averagecost principle, and includes raw materials, direct labour, other direct costsand related production overheads (based on normal operating capacity). Netrealizable value is the estimated selling price in the ordinary course ofbusiness, less estimated costs of completion and selling expenses.Property, plant and equipmentItems of property, plant and equipment are measured at cost less accumulatedamortization and impairment losses.Cost includes expenditure that is directly attributable to the acquisition ofthe asset. The cost of self-constructed assets includes the cost of materialsand direct labour, borrowing costs, any other costs directly attributable tobringing assets to be used in the manner intended by management.The cost of replacing a major component of an item of property, plant andequipment is recognized in the carrying amount of the item if it is probablethat the future economic benefits embodied within the part will flow to Canforand its cost can be measured reliably. The carrying amount of the replacedcomponent is removed. The costs of the day-to-day servicing of property, plantand equipment are recognized in net income as incurred.Amortization is recognized in net income on a straight-line basis over theestimated useful lives of each part of an item of property, plant andequipment, as set out in the table below. Land is not amortized. Thesignificant majority of Canfor's amortization expense relates to manufacturingand product costs.Amortization methods, useful lives and residual values are reviewed, andadjusted if appropriate, each reporting date. The following rates have beenapplied to Canfor's capital assets:----------------------------------------------------------------------------Buildings 5 to 50 yearsPulp and kraft paper machinery and equipment 20 yearsSawmill machinery and equipment 5 to 15 yearsOriented strand board machinery and equipment 10 to 20 yearsLogging machinery and equipment 4 to 20 yearsLogging roads and bridges 5 to 25 yearsMobile and other equipment 5 years----------------------------------------------------------------------------Timber licensesTimber licenses include tree farm licenses, forest licenses and timberlicenses that are renewable with the Province of British Columbia when therelevant conditions are met. Timber licenses are carried at cost lessaccumulated amortization. Renewable licenses are amortized using the straight-line method over 50 years, while non-renewable licenses are amortized over theperiod of the license.Other intangible assetsGoodwillGoodwill represents the excess of the cost of an acquisition over the fairvalue of Canfor's share of the net identifiable assets of the acquiredsubsidiary at the date of acquisition. Goodwill is tested annually forimpairment and carried at cost less any accumulated impairment losses.On transition to IFRS, Canfor elected not to restate any business combinationsunder IFRS that occurred before the transition date of January 1, 2010. Inrespect of acquisitions prior to January 1, 2010, goodwill represents theamount recognized under previous Canadian GAAP.Customer agreementsCanfor's customer agreements were acquired as part of the purchase of NewSouth Companies Inc., and were recognized at fair value at the acquisitiondate. The customer agreements have a finite useful life and are carried atcost less accumulated amortization, which is recorded on a straight-line basisover 10 years.Computer softwareSoftware development costs relate to major software systems purchased ordeveloped by the Company. These costs are amortized on a straight-line basisover a period not exceeding five years.Government assistanceGovernment assistance relating to the acquisition of property, plant andequipment is recorded as a reduction of the cost of the asset to which itrelates, with any amortization calculated on the net amount. Governmentassistance related to non-capital projects is recorded as a reduction of therelated expenses.Asset impairmentCanfor's property, plant and equipment, timber licenses and other intangibleassets are reviewed for impairment whenever events or circumstances indicatethat the carrying amount may not be recoverable, except for goodwill which isreviewed annually.An impairment loss is recognized in net income at the amount the asset'scarrying amount exceeds its recoverable amount. The recoverable amount is thehigher of an asset's fair value less costs to sell and value in use. For thepurposes of assessing impairment, assets are grouped at the lowest levels forwhich there are separately identifiable cash inflows that are largelyindependent of cash inflows from other assets or groups of assets (cash-generating units).Non-financial assets, other than goodwill, for which an impairment wasrecorded in a prior period are reviewed for possible reversal of theimpairment at each reporting date. When an impairment loss is reversed, theincreased carrying amount of the asset cannot exceed the carrying amount thatwould have been determined (net of amortization) had no impairment loss beenrecognized in prior years.For the purpose of impairment testing, goodwill is allocated to the Company'soperating divisions which represent the lowest level within the Company atwhich the goodwill is monitored for internal management purposes.Financial assets are reviewed at each reporting date to determine whetherthere is evidence indicating they are impaired. A financial asset isconsidered to be impaired if objective evidence indicates that one or moreevents have had a negative impact on estimated future cash flows from thatasset. An impairment loss in respect of a financial asset measured atamortized cost is calculated as the difference between its carrying amount andthe present value of the estimated future cash flows discounted at theoriginal effective interest rate. All impairment losses are recognized in netincome.Employee benefitsDefined Contribution PlansA defined contribution plan is a post-employment benefit plan under which anentity makes contributions to a separate entity and has no legal orconstructive obligation to pay further amounts. Obligations for contributionsto defined contribution pension plans are recognized as an employee benefitexpense in net income when they are due.Defined Benefit PlansA defined benefit plan is a post-employment benefit plan other than a definedcontribution plan. Canfor has various defined benefit plans that provide bothpension and other retirement benefits to most of its salaried employees andcertain hourly employees not covered by forest industry union plans. Canforalso provides certain health care benefits and pension bridging benefits toeligible retired employees.The liability recognized in the balance sheet in respect of a defined benefitpension plan is the net of the accrued benefit obligation and the fair valueof the plan assets. The accrued benefit obligation is calculated separatelyfor each plan by estimating the amount of future benefit earned by employeesin respect of their service in the current and prior periods; that benefit isdiscounted to determine its present value. The discount rate used to determinethe present value of the obligation is the yield at the reporting date on highquality corporate bonds that have maturity dates approximating the terms ofCanfor's obligations. The calculation is performed annually by a qualifiedactuary using the projected unit credit method and a measurement date ofDecember 31. The pension deficit or surplus is adjusted on a quarterly basisfor any material changes in underlying assumptions.Canfor recognizes all actuarial gains and losses arising from defined benefitplans in other comprehensive income in the year in which they occur.ProvisionsCanfor recognizes a provision if, as a result of a past event, it has apresent legal or constructive obligation that can be estimated reliably, andit is probable that an outflow of economic benefits will be required to settlethe obligation. The provision recorded is management's best estimate of theexpenditure required to settle the present obligation at the end of thereporting period. Provisions are determined by discounting the expected futurecash flows at a pre-tax rate that reflects current market assessments of thetime value of money and the risks specific to the liability. The expensearising from the unwinding of the discount due to the passage of time isrecorded as a finance cost. The main classes of provision recognized by Canforare as follows:Asset retirement obligationsCanfor recognizes a liability for asset retirement obligations in the periodin which they are incurred. The site restoration costs are capitalized as partof the cost of the related item of property, plant and equipment and amortizedon a basis consistent with the expected useful life of the related asset.Deferred reforestation obligationForestry legislation in British Columbia and Alberta requires Canfor to incurthe cost of reforestation of its forest, timber and tree farm licenses andforest management agreements. Accordingly, Canfor records a liability for thecosts of reforestation in the period in which the timber is harvested. Inperiods subsequent to the initial measurement, changes in the liabilityresulting from the passage of time and revisions to management's estimates arerecognized in net income as they occur.RestructuringA provision for restructuring is recognized when Canfor has approved adetailed and formal restructuring plan, which may include the indefinite orpermanent closure of one of its operations, and the restructuring either hascommenced or has been announced publicly. Provisions are not recognized forfuture operating costs.Share-based compensationCanfor has three share-based compensation plans, as described in the Company'sfinancial statements for the year ended December 31, 2010.Compensation expense is recognized for Canfor's Deferred Share Unit ("DSU")Plans when the DSUs are granted, with a corresponding increase to liabilities.The liability is remeasured at each reporting date and at settlement date,with any changes in the fair value of the liability recognized as compensationexpense in net income. The fair value of the DSUs is determined with referenceto the market price of Canfor's shares as at the date of valuation.Compensation expense is recognized for Canfor's contributions to the EmployeeShare or Unit Purchase Plans when the related payments are made.The Company has a Stock Option Performance Plan, under which no stock optionshave been granted since 2002. As discussed in note 14, the Company has adoptedthe IFRS 1 exemption in relation to share-based payment transactions and hasnot restated any amount recorded in relation to its Stock Option PerformancePlan on transition to IFRS, as all grants are fully vested at the date oftransition. Cash consideration received from employees when they exercise theoptions is credited to share capital.Revenue recognitionCanfor's revenues are derived from the sale of the following major productlines: lumber, oriented strand board, pulp, kraft paper, residual fibre andlogs. Revenue is measured at the fair value of the consideration received orreceivable net of applicable sales taxes, returns, rebates and discounts andafter eliminating sales within the Company. Revenue is recognized when thesignificant risks and rewards of ownership have been transferred to the buyer,recovery of the consideration is probable, the associated costs and possiblereturns of the goods can be estimated reliably, there is no continuingmanagement involvement with the goods, and the amounts of revenue can bemeasured reliably.Amounts charged to customers for shipping and handling are recognized asrevenue, and shipping and handling costs incurred by Canfor are reported as acomponent of cost of sales. Lumber export taxes are recorded as a component ofcost of sales.Income taxesIncome tax expense comprises current and deferred tax. Current and deferredtax are recognized in net income except to the extent that they relate toitems recognized directly in equity or in other comprehensive income.Current tax is the expected tax payable or receivable on the taxable income orloss for the period, using the tax rates enacted or substantively enacted atthe reporting date, and any adjustment to tax payable in respect of previousperiods.Canfor recognizes deferred income tax in respect of temporary differencesbetween the carrying amounts of assets and liabilities for financial reportingpurposes and the amounts used for taxation purposes. Deferred income tax ismeasured at tax rates expected to be applied to the temporary differences whenthey reverse, based on the laws that have been enacted or substantivelyenacted by the reporting date.A deferred income tax asset is recognized for unused tax losses, tax creditsand deductible temporary differences, to the extent that it is probable thatfuture taxable profits will be available against which they can be utilized.Deferred income tax assets are reviewed at each reporting date and are reducedto the extent that it is no longer probable that the related tax benefit willbe realized.Investment tax credits are credited to manufacturing and product costs in theperiod in which it becomes reasonably assured that the Company is entitled tothem. Unused investment tax credits are recorded as other current or long termassets in the Company's balance sheet, depending upon when the benefit isexpected to be received.Foreign currency translationItems included in the financial statements of each of the Company's entitiesare measured using the currency of the primary economic environment in whichthe entity operates (the "functional currency"). The consolidated financialstatements are presented in Canadian dollars, which is the Company'sfunctional currency.The majority of Canfor's sales and long-term debt is denominated in foreigncurrencies, principally the US dollar. Transactions in foreign currencies aretranslated to the functional currencies of the respective entities at exchangerates at the dates of transactions. Monetary assets and liabilitiesdenominated in foreign currencies at the reporting date are re-translated tothe functional currency at the exchange rate on that date. Foreign currencydifferences arising on re-translation are recognized in net income.The assets and liabilities of foreign operations, including goodwill and fairvalue adjustments arising on acquisition, are translated to the Canadiandollar at exchange rates at the reporting date. The income and expenses offoreign operations are translated to the Canadian dollar at exchange rates atthe transaction dates. Foreign exchange differences are recognized in othercomprehensive income, and recorded to the accumulated foreign exchangetranslation account. Canfor's foreign operations include New South Companies,Inc. and Canfor USA, both of which are wholly-owned subsidiaries based in theU.S.Accounting standards issued and not appliedThe following International Financial Reporting Standards ("IFRS") have beenissued by the International Accounting Standards Board, and adopted for use inCanada by the Accounting Standards Board, but have not been applied by theCompany as their use is not yet mandatory.IFRS 9 - Financial InstrumentsThis Standard will be mandatory for years commencing on or after January 1,2013. The new Standard changes the categories for classification of financialinstruments and, in certain cases, their measurement. IFRS 9 is not expectedto have a material impact on the financial statements of Canfor.4. Inventories As at As at As at December 31, January 1,(millions of dollars) March 31, 2011 2010 2010----------------------------------------------------------------------------Logs $ 112.5 $ 53.9 $ 39.9Finished products 193.2 169.7 164.7Residual fibre 11.7 17.4 22.3Processing materials and supplies 85.0 84.8 83.6---------------------------------------------------------------------------- $ 402.4 $ 325.8 $ 310.5--------------------------------------------------------------------------------------------------------------------------------------------------------The above inventory balances are stated after inventory write-downs from costto net realizable value. Write-downs at March 31, 2011 totaled $6.1 million(December 31, 2010 - $3.2 million; January 1, 2010 - $25.7 million).5. Long-term Investments and Other As at As at As at December 31, January 1,(millions of dollars) March 31, 2011 2010 2010----------------------------------------------------------------------------Asset-backed commercial paper ("ABCP") $ 12.1 $ 40.9 $ 41.1Other investments 24.5 26.5 27.3Investment tax credits 6.8 6.4 -Defined benefit plan assets 4.6 3.4 4.2Other deposits, loans and advances 11.8 11.9 3.1---------------------------------------------------------------------------- $ 59.8 $ 89.1 $ 75.7--------------------------------------------------------------------------------------------------------------------------------------------------------During the first quarter of 2011, net proceeds of $29.7 million were receivedfrom the redemption of certain ABCP assets. In addition, a pre-tax gain of$1.2 million was recorded due to an increase in the fair value of theremaining ABCP during the quarter.6. Operating Loans and Long-Term Debt(a) Operating Loans As at As at As at March 31, December 31, January 1,(millions of dollars) 2011 2010 2010----------------------------------------------------------------------------Canfor (excluding CPLP)Principal operating lines $ 350.0 $ 350.0 $ 355.0Facility A 12.4 12.7 13.5Facility B - 29.7 35.7Other 1.1 1.1 1.4----------------------------------------------------------------------------Total operating lines - Canfor (excluding CPLP) 363.5 393.5 405.6Drawn - - (0.6)Letters of credit (principally unregistered pension plans) (17.1) (17.3) (18.1)----------------------------------------------------------------------------Total available operating lines - Canfor (excluding CPLP) $ 346.4 $ 376.2 $ 386.9----------------------------------------------------------------------------CPLPMain bank loan facility $ 40.0 $ 40.0 $ 40.0Bridge loan credit facility 30.0 - -Facility for BC Hydro letter of credit 13.2 13.2 16.0----------------------------------------------------------------------------Total operating lines - CPLP 83.2 53.2 56.0Letters of credit for general business purposes (0.5) (0.5) (0.5)BC Hydro letter of credit (13.2) (13.2) (16.0)----------------------------------------------------------------------------Total available operating lines - CPLP $ 69.5 $ 39.5 $ 39.5----------------------------------------------------------------------------ConsolidatedTotal operating lines $ 446.7 $ 446.7 $ 461.6Total available operating lines $ 415.9 $ 415.7 $ 426.4--------------------------------------------------------------------------------------------------------------------------------------------------------For Canfor, excluding CPLP, the principal operating lines mature on October31, 2013 with interest payable at floating rates based on lenders' Canadianprime rate, bankers acceptances, US dollar base rate or US dollar LIBOR rate,plus a margin that varies with the Company's net debt to total capitalizationratio.Facility A, which was for US$12.8 million at March 31, 2011, expires inJanuary 2012, and is non-recourse to the Company under normal circumstances,except for an amount of US$6.7 million. The ABCP assets of the Company havebeen pledged as security to support this credit facility. Facility A hassimilar terms to the other operating lines, except that the interest rate isplus or minus a margin.The maturity date of CPLP's principal bank loan facility was extended toNovember 30, 2013 during the quarter. The terms of this financing includeinterest payable at floating rates that vary depending on the ratio of netdebt to operating earnings before interest, taxes, depreciation, amortizationand certain other non-cash items, and is based on lenders' Canadian primerate, bankers acceptances, US dollar base rate or US dollar LIBOR rate, plus amargin.During the quarter, CPLP arranged a new $30.0 million bridge loan creditfacility to fund capital projects that are being funded by the CanadianFederal Government Green Transformation Program. The bridge facility terms aresimilar to CPLP's main facility, with interest and other costs at prevailingmarket rates. CPLP also has a separate facility with a maturity date ofNovember 30, 2011 to cover a $13.2 million standby letter of credit issued toBC Hydro.As at March 31, 2011, the Company and CPLP were in compliance with allcovenants relating to their operating lines of credit.All borrowings of CPLP (operating loans and long-term debt) are non-recourseto other entities within the Company.(b) Long-Term DebtOn March 1, 2011, the Company repaid $31.5 million (US$32.3 million) of 8.03%interest rate privately placed senior notes. The Company also repaid $2.3million of other long-term debt obligations during the quarter.At March 31, 2011, the fair value of the Company's long-term debt, which wasmeasured at its amortized cost of $277.1 million, was $290.3 million. The fairvalue of long-term debt was determined based on prevailing market rates forlong-term debt with similar characteristics and risk profile.Subsequent to quarter end, on April 1, 2011, the Company repaid $48.1 million(US$50.0 million) of 6.18% interest rate privately placed senior notes.7. Employee Future BenefitsActuarial valuations of Canfor's defined benefit plans are obtained annuallyfor accounting purposes with a measurement date of December 31. At the end ofeach interim reporting period, the Company estimates movements in its accruedbenefit liabilities based upon movements in discount rates and the rates ofreturn on plan assets, as well as any significant changes to the plans.Adjustments are also made for payments made and current service and interestcosts.For the quarter ended March 31, 2011, an amount of $3.0 million, before tax,was credited to other comprehensive income in relation to defined benefitplans. This relates principally to the merging of two of the Company's smallerdefined benefit pension plans. For the quarter ended March 31, 2010 a pre-taxamount of $47.3 million was charged to other comprehensive income, principallyreflecting a 0.5% reduction in the discount rate used to value the accruedbenefit obligations during the quarter.The assumptions used to estimate the changes in net accrued benefitliabilities were as follows:(weighted average assumptions)----------------------------------------------------------------------------Pension Benefit PlansDiscount rate March 31, 2011 5.50% December 31, 2010 5.50% March 31, 2010 5.75% January 1, 2010 6.25%Rate of return on plan assets 3 months ended March 31, 2011 1.65% 3 months ended March 31, 2010 1.50%----------------------------------------------------------------------------Other Benefit PlansDiscount rate March 31, 2011 5.75% December 31, 2010 5.75% March 31, 2010 6.00% January 1, 2010 6.75%--------------------------------------------------------------------------------------------------------------------------------------------------------8. Derivative Financial InstrumentsThe Company uses a variety of derivative financial instruments to reduce itsexposure to risks associated with fluctuations in foreign exchange rates,lumber prices and energy costs. At March 31, 2011, the fair value ofderivative financial instruments was a net liability of $0.5 million (December31, 2010 - net liability of $4.1 million; January 1, 2010 - net liability of$5.8 million). The fair value of these financial instruments was determinedbased on prevailing market rates for instruments with similar characteristics.The following table summarizes the gain (loss) on derivative financialinstruments for the three month periods ended March 31, 2011 and 2010: 3 months ended March 31,(millions of dollars) 2011 2010----------------------------------------------------------------------------Foreign exchange collars and forward contracts $ 1.9 $ 5.8Natural gas swaps (0.1) (3.7)Diesel options and swaps 1.0 0.4Lumber futures 1.9 (3.7)---------------------------------------------------------------------------- $ 4.7 $ (1.2)--------------------------------------------------------------------------------------------------------------------------------------------------------The following table summarizes the fair value of the derivative financialinstruments included in the balance sheet at March 31, 2011, December 31, 2010and January 1, 2010: As at As at As at March 31, December 31, January 1,(millions of dollars) 2011 2010 2010----------------------------------------------------------------------------Foreign exchange collars and forward contracts $ 0.6 $ 1.6 $ 1.6Natural gas swaps (2.7) (4.7) (6.8)Diesel options and swaps 1.5 1.0 (0.9)Lumber futures 0.1 (2.0) 0.3----------------------------------------------------------------------------Total asset (liability) (0.5) (4.1) (5.8)Less: current portion (0.5) (4.1) (3.5)----------------------------------------------------------------------------Long-term portion $ - $ - $ (2.3)--------------------------------------------------------------------------------------------------------------------------------------------------------9. Income taxes 3 months ended March 31,(millions of dollars) 2011 2010----------------------------------------------------------------------------Current $ (0.2) $ 0.2Deferred (0.3) (5.6)----------------------------------------------------------------------------Income tax expense $ (0.5) $ (5.4)--------------------------------------------------------------------------------------------------------------------------------------------------------The reconciliation of income taxes calculated at the statutory rate to theactual income tax provision is as follows: 3 months ended March 31,(millions of dollars) 2011 2010----------------------------------------------------------------------------Income tax expense at statutory rate 2011 - 26.5% (2010 - 28.5%) $ (8.7) $ (11.7)Add (deduct): Non-taxable income related to non-controlling interests in limited partnerships 6.7 4.9 Entities with different income tax rates and other tax adjustments 0.1 (0.3) Tax recovery at rates other than statutory rate 0.2 0.7 Permanent difference from capital gains and losses and other non-deductible items 1.2 1.0----------------------------------------------------------------------------Income tax expense $ (0.5) $ (5.4)--------------------------------------------------------------------------------------------------------------------------------------------------------In addition to the amounts recorded to net income, a tax expense of $0.8million was recorded to other comprehensive income in relation to theactuarial gains on defined benefit employee compensation plans (three monthsended March 31, 2010 - recovery of $10.6 million).10. Earnings per shareBasic net income (loss) per share is calculated by dividing the net income(loss) available to common shareholders by the weighted average number ofcommon shares outstanding during the period. Diluted net income (loss) pershare is calculated by dividing the net income (loss) available to commonshareholders by the weighted average number of common shares during the periodusing the treasury stock method. Under this method, proceeds from thepotential exercise of stock options are assumed to be used to purchase theCompany's common shares. When there is a net loss, the exercise of stockoptions would result in a calculated diluted net loss per share that is anti-dilutive. 3 months ended March 31, 2011 2010----------------------------------------------------------------------------Weighted average number of common shares 142,676,805 142,589,297Incremental shares from potential exercise of options 12,457 1,720----------------------------------------------------------------------------Diluted number of common shares 142,689,262 142,591,017--------------------------------------------------------------------------------------------------------------------------------------------------------11. Net Change in Non-Cash Working Capital 3 months ended March 31,(millions of dollars) 2011 2010----------------------------------------------------------------------------Accounts receivable $ (14.4) $ (38.0)Inventories (77.4) (89.0)Prepaid expenses 2.3 0.9Accounts payable, accrued liabilities and current portion of deferred reforestation obligation 10.3 34.5----------------------------------------------------------------------------Net increase in working capital $ (79.2) $ (91.6)--------------------------------------------------------------------------------------------------------------------------------------------------------12. Segment informationCanfor has two reportable segments, as described below, which offer differentproducts and are managed separately because they require different productionprocesses and marketing strategies. The following summary describes theoperations of each of the Company's reportable segments:-- Lumber - Includes logging operations, and manufacture and sale of various grades, widths and lengths of lumber products.-- Pulp and paper - Includes purchase of residual fibre, and production and sale of pulp and paper products, including northern bleached softwood kraft ("NBSK") and bleached chemi-thermo mechanical pulp ("BCTMP"). This segment includes 100% of Canfor Pulp Limited Partnership and the Taylor Pulp mill.Sales between segments are accounted for at prices that approximate fairvalue. These include sales of residual fibre from the lumber segment to thepulp and paper segment for use in the pulp production process.Sales in the panels business (which does not meet the criteria to be aseparate reportable segment) for the three months ended March 31, 2011 were$12.4 million (three months ended March 31, 2010 - $16.2 million). Pulp & Unallocated Elimination(millions of dollars) Lumber Paper & Other Adjustment Consolidated----------------------------------------------------------------------------3 months ended March 31, 2011Sales to external customers $ 328.6 283.0 12.4 - $ 624.0Sales to other segments $ 29.5 - - (29.5) $ -Operating income (loss) $ (2.3) 47.2 (13.5) - $ 31.4Amortization $ 20.3 16.8 4.4 - $ 41.5Capital expenditures(i) $ 25.6 23.3 - - $ 48.9Identifiable assets $1,415.0 848.7 282.8 - $ 2,546.5----------------------------------------------------------------------------3 months ended March 31, 2010Sales to external customers $ 292.0 269.7 16.2 - $ 577.9Sales to other segments $ 35.5 - - (35.5) $ -Operating income (loss) $ 15.8 34.4 (6.3) - $ 43.9Amortization $ 20.5 16.6 4.7 - $ 41.8Capital expenditures $ 10.8 6.4 - - $ 17.2Identifiable assets $1,380.8 872.8 278.7 - $ 2,532.3--------------------------------------------------------------------------------------------------------------------------------------------------------(i) Includes capital expenditures made by CPLP that are financed by thegovernment-funded Green Transformation Program.13. ContingencyOn January 18, 2011, the U.S. triggered the arbitration provision of the 2006Softwood Lumber Agreement ("SLA") by delivering a Request for Arbitration. TheU.S. claims that BC has not properly applied the timber pricing systemgrandparented in the SLA. The U.S. also claims that subsequent to 2006, BCmade additional changes to the timber pricing system which had the effect ofreducing timber prices. The claim focuses on substantial increases in Grade 4(non sawlog or low grade) volumes commencing in 2007. It is alleged thattimber was scaled and graded as Grade 4 that did not meet the criteria forthat grade, and was accordingly priced too low.As the arbitration is a state-to-state international dispute under the SLA,Canada is preparing a defence to the claim with the assistance of the BCprovincial government and the BC lumber industry. To date, the U.S. has notfiled a detailed statement of claim with the arbitration panel. It is notpossible at this time to predict the outcome or the value of the claim, andaccordingly no provision has been recorded by the Company.14. Transition to International Financial Reporting Standards ("IFRS")These financial statements are the first interim condensed consolidatedfinancial statements prepared by the Company under IFRS. The Company'stransition date to IFRS was January 1, 2010 and accordingly the Company hasprepared its provisional opening IFRS balance sheet as at that date. Inpreparing its opening IFRS balance sheet and comparative information for 2010,the Company has adjusted amounts previously reported in financial statementsprepared in accordance with previous Canadian GAAP ("previous GAAP").The differences identified are detailed in the following sections, whichinclude a reconciliation of the Company's closing balance sheet at the end of2009 under previous GAAP with its provisional opening balance sheet under IFRSon January 1, 2010. Reconciliations of total comprehensive income and equityfrom previous GAAP to IFRS for the quarter ending March 31, 2010 and the yearending December 31, 2010 then follow.The accounting changes resulting from the transition to IFRS do not impact theCompany's compliance with any of its financial covenants with respect to itsdebt obligations.14.1 Optional exemptions from full retrospective application followed by theCompanyThe Company has applied IFRS 1 First-time adoption of IFRS in preparing thesecondensed consolidated interim financial statements. Canfor has elected toapply the following optional exemptions from full retrospective applicationunder IFRS.a. Business combinations exemptionCanfor has applied the business combinations exemption and accordingly has notrestated business combinations that took place prior to the January 1, 2010transition date.b. Employee benefits exemptionCanfor has elected to recognize all cumulative actuarial gains and losses onits various defined benefit pension and post-retirement non-pension plans asat January 1, 2010.c. Accumulated foreign currency translation differences exemptionCanfor has elected to set its cumulative foreign exchange translation amountto zero at January 1, 2010. Under previous GAAP, this amount was included inAccumulated Other Comprehensive Income (Loss). This exemption has been appliedto all foreign subsidiaries with functional currency other than Canadiandollars.d. Share-based payments exemptionThe Company has elected to apply the share-based payment exemption. IFRS 2Share-based Payment has not been applied to the options granted under theStock Option Performance Plan as these were all fully vested as at January 1,2010.In addition to these optional exemptions, Canfor has also ensured that allestimates at January 1, 2010 are consistent with estimates made at the samedate under previous GAAP, as required by IFRS 1.14.2 Presentation of non-controlling interestsUnder previous GAAP, the Company adopted, as of January 1, 2010, three newinter-related accounting standards issued by the Canadian Institute ofChartered Accountants ("CICA"). These were Handbook Sections 1582 BusinessCombinations, 1601 Consolidated Financial Statements, and 1602 Non-controllingInterests.The adoption of Section 1602 resulted in the reclassification of non-controlling interests on Canfor's balance sheet from long-term liabilitiesinto equity. As this adjustment was made under previous GAAP as of January 1,2010, it is not included in the opening balance sheet reconciliation includedbelow, but should be taken into account when comparing the December 31, 2009financial statements to the opening IFRS balance sheet as at January 1, 2010.14.3 Reconciliations between IFRS and previous Canadian GAAPThis section consists of a number of reconciliations between IFRS and previousCanadian GAAP which quantify the effect of the Company's transition to IFRS.The reconciliations include balance sheets as at January 1, 2010 and December31, 2010, and equity as at March 31, 2010. Reconciliations of totalcomprehensive income under previous GAAP to IFRS for the three months endedMarch 31, 2010 and the year ended December 31, 2010, and an explanation of thematerial adjustments to the statement of cash flows, are also provided.i. Reconciliation of opening balance sheet as at January 1, 2010 Previous Note Effect ofAs at January 1, 2010 (millions Canadian (section transitionof dollars, unaudited) GAAP vi) to IFRS IFRS---------------------------------------------------------------------------ASSETS Current assetsCash and cash equivalents $ 133.4 $ - $ 133.4---------------------------------------------------------------------------Accounts receivable - Trade 137.2 - 137.2--------------------------------------------------------------------------- - Other 41.9 - 41.9---------------------------------------------------------------------------Income taxes recoverable 45.5 - 45.5---------------------------------------------------------------------------Deferred income taxes, net 11.4 a (11.4) ----------------------------------------------------------------------------Inventories 311.3 c (0.8) 310.5---------------------------------------------------------------------------Prepaid expenses 36.4 b (15.4) 21.0---------------------------------------------------------------------------Total current assets 717.1 (27.6) 689.5---------------------------------------------------------------------------Property, plant and equipment b 20.8 c (9.4) d (610.3) ---------- 1,676.6 (598.9) 1,077.7---------------------------------------------------------------------------Timber licenses c (46.6) d 610.3 ---------- - 563.7 563.7---------------------------------------------------------------------------Goodwill and other intangibleassets e (114.8) d 16.8 ---------- 190.4 (98.0) 92.4---------------------------------------------------------------------------Long term investments and other b (5.4) d (16.8) e 4.2 ---------- 93.7 (18.0) 75.7--------------------------------------------------------------------------- $ 2,677.8 $ (178.8) $ 2,499.0---------------------------------------------------------------------------LIABILITIESCurrent liabilitiesOperating bank loans $ 0.6 $ - $ 0.6---------------------------------------------------------------------------Accounts payable and accrued liabilities 211.4 - 211.4---------------------------------------------------------------------------Current portion of long-term debt 34.0 - 34.0---------------------------------------------------------------------------Current portion of deferred reforestation obligation 27.8 - 27.8---------------------------------------------------------------------------Total current liabilities 273.8 - 273.8---------------------------------------------------------------------------Long-term debt 333.3 - 333.3---------------------------------------------------------------------------Retirement benefit obligations e 101.3 e 132.2 ---------- - 233.5 233.5---------------------------------------------------------------------------Deferred reforestation obligation f 60.3 f (1.3) ---------- - 59.0 59.0---------------------------------------------------------------------------Other long-term liabilities f (60.3) e (132.2) ---------- 209.8 (192.5) 17.3---------------------------------------------------------------------------Deferred income taxes, net a (11.4) c (14.2) e (49.5) f 0.3 ---------- 200.8 (74.8) 126.0--------------------------------------------------------------------------- $ 1,017.7 $ 25.2 $ 1,042.9---------------------------------------------------------------------------EQUITYShare capital $ 1,124.7 $ - $ 1,124.7---------------------------------------------------------------------------Contributed surplus 31.9 - 31.9---------------------------------------------------------------------------Retained earnings c (42.6) e (148.4) f 1.0 g (16.0) ---------- 246.2 (206.0) 40.2---------------------------------------------------------------------------Accumulated foreign exchange translation differences (16.0) g 16.0 ----------------------------------------------------------------------------Total equity attributable to equity holders of the Company 1,386.8 (190.0) 1,196.8Non-controlling interests 273.3 e (14.0) 259.3---------------------------------------------------------------------------Total equity $ 1,660.1 $ (204.0) $1,456.1------------------------------------------------------------------------------------------------------------------------------------------------------ $ 2,677.8 $ (178.8) $2,499.0------------------------------------------------------------------------------------------------------------------------------------------------------(ii) Reconciliation of comprehensive income for three months ended March 31,2010 3 months Note ended (section March 31,(millions of Canadian dollars, unaudited) vi) 2010---------------------------------------------------------------------------Net incomePrevious Canadian GAAP $ 32.5Lower amortization of property, plant and equipment and timber licenses in period, net of tax c 1.1Lower pension expense for period, net of tax e 1.9---------------------------------------------------------------------------Net income under IFRS $ 35.5---------------------------------------------------------------------------Other comprehensive income (loss)Previous Canadian GAAP $ (8.0)Actuarial gains (losses) on defined benefit plans during the period, net of tax e (36.7)---------------------------------------------------------------------------Other comprehensive income (loss) under IFRS $ (44.7)---------------------------------------------------------------------------(iii) Reconciliation of equity at March 31, 2010 Note As at (section March 31,(millions of Canadian dollars, unaudited) vi) 2010---------------------------------------------------------------------------Previous Canadian GAAP - Total equity $ 1,672.9Recognition of unamortized actuarial losses at date of transition e (162.4)Lower pension expense for quarter ended March 31, 2010, net of tax e 1.9Actuarial gains (losses) on defined benefit plans for quarter ended March 31, 2010, net of tax e (36.7)Recognition of impairment provisions at date of transition c (42.6)Lower amortization of timber licenses and property, plant and equipment for quarter ended March 31, 2010, net of tax c 1.1Effect of change in discount rate for deferred reforestation obligation recognized on transition f 1.0---------------------------------------------------------------------------IFRS - Total equity $ 1,435.2------------------------------------------------------------------------------------------------------------------------------------------------------(iv) Reconciliation of comprehensive income for year ended December 31, 2010 Note Year ended (section December(millions of Canadian dollars, unaudited) vi) 31, 2010---------------------------------------------------------------------------Net incomePrevious Canadian GAAP $161.3Lower amortization of property, plant and equipment and timber licenses in period, net of tax c 5.2Lower pension expense for period, net of tax e 7.3Effect of change in discount rate for deferred reforestation obligation recognized on transition f (2.0)---------------------------------------------------------------------------Net income under IFRS $171.8---------------------------------------------------------------------------Other comprehensive income (loss)Previous Canadian GAAP $(10.3)Actuarial losses on defined benefit plans during the period, net of tax e (48.0)---------------------------------------------------------------------------Other comprehensive income (loss) under IFRS $(58.3)---------------------------------------------------------------------------(v) Reconciliation of balance sheet at December 31, 2010 Previous Note Effect ofAs at December 31, 2010 Canadian (section transition(millions of dollars, unaudited) GAAP vi) to IFRS IFRS---------------------------------------------------------------------------ASSETSCurrent assetsCash and cash equivalents $ 260.3 $ -$ 260.3---------------------------------------------------------------------------Accounts receivable - Trade 146.9 - 146.9--------------------------------------------------------------------------- - Other 54.2 - 54.2---------------------------------------------------------------------------Deferred income taxes, net 12.4 a (12.4) ----------------------------------------------------------------------------Inventories 326.6 c (0.8) 325.8---------------------------------------------------------------------------Prepaid expenses 38.8 b (10.7) 28.1---------------------------------------------------------------------------Total current assets 839.2 (23.9) 815.3---------------------------------------------------------------------------Property, plant and equipment b 13.8 c (7.6) d (588.1) ---------- 1,631.0 (581.9) 1,049.1---------------------------------------------------------------------------Timber licenses c (41.4) d 588.1 ---------- - 546.7 546.7---------------------------------------------------------------------------Goodwill and other intangibleassets e (134.8) d 13.4 ---------- 205.9 (121.4) 84.5---------------------------------------------------------------------------Long term investments and other b (3.1) d (13.4) e 3.4 ---------- 102.2 (13.1) 89.1--------------------------------------------------------------------------- $ 2,778.3 $ (193.6) $ 2,584.7---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------LIABILITIESCurrent liabilities---------------------------------------------------------------------------Accounts payable and accrued liabilities $ 292.9 $ - $ 292.9---------------------------------------------------------------------------Current portion of long-term debt 82.5 - 82.5---------------------------------------------------------------------------Current portion of deferred reforestation obligation 31.6 - 31.6---------------------------------------------------------------------------Total current liabilities 407.0 - 407.0---------------------------------------------------------------------------Long-term debt 235.6 - 235.6---------------------------------------------------------------------------Retirement benefit obligations e 132.3 e 139.9 ---------- - 272.2 272.2---------------------------------------------------------------------------Deferred reforestation obligation f 53.0 f 1.3 ---------- - 54.3 54.3---------------------------------------------------------------------------Other long-term liabilities f (53.0) e (139.9) ---------- 209.3 (192.9) 16.4---------------------------------------------------------------------------Deferred income taxes, net a (12.4) c (12.3) e (60.6) f (0.3) ---------- 209.3 (85.6) 123.7--------------------------------------------------------------------------- $ 1,061.2 $ 48.0 $ 1,109.2---------------------------------------------------------------------------EQUITYShare capital $ 1,125.4 $ - $ 1,125.4---------------------------------------------------------------------------Contributed surplus 31.9 - 31.9---------------------------------------------------------------------------Retained earnings c (37.5) e (182.7) f (1.0) g (16.0) ---------- 316.2 (237.2) 79.0---------------------------------------------------------------------------Accumulated foreign exchange translation differences (26.3) g 16.0 (10.3)---------------------------------------------------------------------------Total equity attributable to equity holders of the Company 1,447.2 (221.2) 1,226.0Non-controlling interests 269.9 e (20.4) 249.5---------------------------------------------------------------------------Total equity $ 1,717.1 $ (241.6) $ 1,475.5------------------------------------------------------------------------------------------------------------------------------------------------------ $ 2,778.3 $ (193.6) $ 2,584.7------------------------------------------------------------------------------------------------------------------------------------------------------(vi) Explanatory notes for reconciliationsThe following explanations are referenced in the reconciliations in sections(i) to (v) of this note:a. Classification of all deferred income taxes as non-current assets(liabilities)International Accounting Standard 1 ("IAS 1") requires that all deferredincome tax balances be presented as non-current assets or liabilities on thebalance sheet under IFRS. Previous GAAP required amounts to be shown ascurrent assets or liabilities depending on the classification of the assetsand liabilities to which the deferred income tax balances relate.The effect of this reclassification on the Company's opening balance sheet wasto move $11.4 million of deferred income taxes included within current assetsto be offset against deferred income taxes in non-current liabilities. AtDecember 31, 2010, the amount reclassified was $12.4 million.b. Reclassification of deferred maintenance costs to property, plant andequipmentCPLP carries out scheduled major maintenance shutdowns at its mills at regularintervals where the period between shuts can be longer than 12 months. Underprevious GAAP, the costs of such shutdowns were initially recorded as aprepaid expense (with current and long term components) and amortized over theperiod until the next scheduled major shutdown. Under IFRS, these costs areconsidered to be a part of property, plant and equipment, and are alsoamortized over the period between shutdowns.The effect of this on the Company's opening balance sheet was to reclassify$20.8 million into property, plant and equipment, with $15.4 million beingremoved from prepaids, and $5.4 million from long-term investments and other(reflecting the long-term portion). At December 31, 2010, $13.8 million wasreclassified into property, plant and equipment with $10.7 million fromprepaids and $3.1 million from long-term investments and other.The reclassification of these maintenance costs results in the related expensebeing moved from manufacturing and product costs to amortization. In the firstquarter of 2010 the amount of the reclassification on the income statement was$4.7 million, and the full year 2010 amount was $18.7 million.c. Recognition of impairment provisions against property, plant and equipmentand timber licensesThere are differences in the methodology used to determine if an asset shouldbe impaired under IFRS compared to that under previous GAAP. The previous GAAPrules provided for a two-step test, with no impairment being required if theundiscounted future expected cash flows relating to an asset exceeded thecarrying value of that asset. Under IFRS, the undiscounted cash flows are notconsidered and an impairment is recorded where the recoverable amount (definedas the higher of 'value in use' and 'fair value less costs to sell') is belowthe asset's carrying value. As a result, impairments were required for certainassets under IFRS that were not recorded under previous GAAP.The effect at the date of transition was to decrease the book value of certainsawmill assets included within property, plant and equipment by $9.4 millionand timber licenses by $46.6 million. An impairment of $0.8 million was alsorecorded against capital spares inventory. A corresponding adjustment todeferred income taxes of $14.2 million was also recorded, with the net amountof $42.6 million being charged to opening equity.These impairments had the impact of reducing the overall amortization expenseby $1.1 million for the first quarter of 2010, and $5.2 million for the 2010year.At December 31, 2010 the impact of these opening balance sheet impairments,after amortization, was to reduce property, plant and equipment by $7.6million, timber licenses by $41.4 million and capital spares inventory by $0.8million. The deferred income tax adjustment was $12.3 million, with the netamount of $37.5 million being charged to equity. No additional impairmentswere required at December 31, 2010 under IFRS.d. Reclassification of timber licenses and customer agreementsUnder previous GAAP, the Company reported its timber licenses as a componentof property, plant, equipment and timber. This is inconsistent with IFRS, andaccordingly these balances have been reclassified to intangible assets. As aresult of this reclassification, $610.3 million (before the above impairment)has been moved from property, plant, equipment and timber to timber licensesin the opening balance sheet, and $588.1 million at December 31, 2010.In addition, customer agreements of $16.8 million in the opening balance sheet(December 31, 2010 - $13.4 million) have been reclassified from long-terminvestments and other to intangible assets.e. Recognition of unamortized actuarial losses at date of transition to IFRSinto equityUnder IFRS, the Company's accounting policy is to recognize all actuarialgains and losses, arising on its defined benefit pension and other non-pensionpost retirement plans, immediately in other comprehensive income. At the dateof transition, all previously unrecognized cumulative actuarial gains andlosses were recognized in retained earnings.This resulted in a charge to retained earnings in the opening balance sheet of$148.4 million, and a charge to non-controlling interests of $14.0 millionreflecting non-controlling interests in CPLP. Pension assets recorded underprevious GAAP of $110.6 million were removed, and liabilities of $101.3million were recorded to reflect the actual funding position of the definedbenefit pension plans. Remaining pension assets of $4.2 million weretransferred from deferred charges to long-term investments and other. Thelong-term deferred income tax liability was reduced by $49.5 million as resultof these adjustments. In addition, $132.2 million was reclassified from otherlong-term liabilities into the retirement benefit obligations line item on thebalance sheet, reflecting liabilities in relation to non-pension post-retirement plans.Under previous GAAP, actuarial gains and losses were deferred and takenthrough the income statement over a number of years. As Canfor has elected torecognize these immediately through other comprehensive income under IFRS, thedefined benefit expense in the income statement is reduced by $1.9 million forthe first quarter of 2010 and $7.3 million for the full year. The after-taxcharge through other comprehensive income was $36.7 million in the firstquarter of 2010, and $48.0 million for the full year.At December 31, 2010 the differences in retained earnings and non-controllinginterests under IFRS compared to previous GAAP were $182.7 million and $20.4million, respectively. Pension assets of $131.4 million were removed and aliability of $132.3 million was recorded, with remaining pension assets of$3.4 million reclassified to long-term investments and other. The long-termdeferred income tax liability was reduced by $60.6 million as a result ofthese adjustments. $139.9 million was reclassified in relation to non-pensionpost-retirement plans.f. Reclassification of long-term deferred reforestation obligation to separatebalance sheet line itemThe Company has elected to present the long-term deferred reforestationprovision as a separate item on the balance sheet in the current year.Previously, this was included in other long-term liabilities. In addition, theamount of this provision of $60.3 million at January 1, 2010 was reduced inthe opening balance sheet by $1.3 million due to a change in discount raterequired to value the obligation under IFRS as compared to previous GAAP.During 2010, the difference in discount rates used resulted in an after-taxexpense that was $2.0 million higher under IFRS than under previous GAAP. Inaddition, the expense related to the unwinding over time of the discount onthe Company's deferred reforestation obligation was reclassified frommanufacturing and product costs into finance expense.At December 31, 2010, the provision under previous GAAP of $53.0 million wasreclassified, and was increased by $1.3 million due to different discountrates being used.g. Reset of the accumulated foreign translation account to zero at transitionIn accordance with IFRS 1, the Company has elected to deem all foreigncurrency translation differences that arose prior to the date of transition inrespect of entities with functional currencies other than the Canadian dollarto be nil at the date of transition. This resulted in a credit of $16.0million to accumulated foreign translation differences and a charge of thesame amount to retained earnings.(vii) Explanation of material adjustments to the statement of cash flowsThe impact of the transition to IFRS on the statement of cash flows is toreclassify certain items between cash flow categories. One of the mainreclassifications relates to interest payments and receipts which wereclassified as operating activities under previous GAAP, but are shown asfinancing and investing activities, respectively, under IFRS.In addition, the reclassification of certain of CPLP's major maintenance coststo property, plant and equipment under IFRS has an impact on the statement ofcash flows. Under previous GAAP these costs were shown under operatingactivities as deferred maintenance spending, whereas under IFRS they areincluded in additions to property, plant and equipment under investingactivities.15. Supplemental IFRS disclosures for the year ended December 31, 2010The following disclosures provide further information relating to Canfor'sfinancial statements as at, and for the year ended, December 31, 2010. Thisadditional disclosure is provided as a reference to aid the understanding ofthese first interim condensed consolidated financial statements prepared underIFRS.15.1 Impairment of capital assets and timber licensesIn its opening balance sheet as at January 1, 2010, the Company recordedimpairments of $46.6 million in relation to timber licenses and $9.4 millionin relation to property, plant and equipment. These impairments all relate tothe lumber segment. No impairment was recorded in connection with goodwill of$73.3 million at January 1, 2010 (December 31, 2010 - $69.6 million) resultingfrom the Company's acquisition of operations in the U.S. in 2006.The opening balance sheet impairments principally reflect the impact of theMountain Pine Beetle epidemic on the Company's B.C. Interior operations. Therecoverable amounts of capital assets, timber licenses and goodwill forimpairment assessment purposes have been determined using a discounted cashflow calculation to estimate their fair value less costs to sell, using cashflows forecast for periods up to 10 years. Key assumptions used in these cashflow forecasts include forecast prices and foreign exchange rates whichCanfor's management determined with reference to external publications. A pre-tax discount rate of 11.0% was also used for the purposes of this calculation.15.2 Employee Future BenefitsCanfor has several funded and unfunded defined benefit plans, as well asdefined contribution plans, that provide pension, other retirement and post-employment benefits to substantially all salaried employees and certain hourlyemployees. The defined benefit plans are based on years of service and finalaverage salary. Canfor's other post-retirement benefit plans are non-contributory and include a range of health care and other benefits. Canforalso provides pension bridge benefits to certain eligible former employees.Defined Benefit PlansCanfor obtains actuarial valuations for its accrued benefit obligations andthe fair value of plan assets for accounting purposes under IFRS as atDecember 31 of each year. In addition, the Company estimates movements in itsaccrued benefit liabilities at the end of each interim reporting period, basedupon movements in discount rates and the rates of return on plan assets, aswell as any significant changes to the plans. Adjustments are also made forpayments made and benefits earned.In 2010, Canfor had six registered defined benefit plans, for which actuarialvaluations are performed every three years. The most recent actuarialvaluation for funding purposes of Canfor's single largest pension plan was asof December 31, 2009, and the next required plan valuation is currentlyscheduled for December 31, 2012.Information about Canfor's defined benefit plans, in aggregate, is as follows: 2010--------------------------------------------------------------------------- Pension Other Benefit Benefit(millions of dollars) Plans Plans---------------------------------------------------------------------------Defined Benefit Plan AssetsFair market value of plan assetsBeginning of year $ 466.8 $ -Actual return on plan assets 45.6 -Canfor contributions 38.7 5.1Employee contributions 0.9 -Benefit payments (38.5) (5.1)---------------------------------------------------------------------------End of year $ 513.5 $ ------------------------------------------------------------------------------------------------------------------------------------------------------- 2010--------------------------------------------------------------------------- Pension Other Benefit Benefit(millions of dollars) Plans Plans---------------------------------------------------------------------------Defined Benefit Plan ObligationsAccrued benefit obligationBeginning of year $ 553.6 $ 123.7Current service cost 8.8 1.7Interest cost 33.7 8.0Employee Contributions 0.9 -Benefit payments (38.5) (5.1)Actuarial loss (gain) 49.5 22.0Other - 0.5---------------------------------------------------------------------------End of year $ 608.0 $ 150.8------------------------------------------------------------------------------------------------------------------------------------------------------Of the defined benefit plan obligation of $608.0 million (January 1, 2010 -$553.6 million), $12.3 million relates to plans that are wholly unfunded and$595.7 million relates to plans that are wholly or partly funded (January 1,2010 - $11.7 million and $541.9 million, respectively). At December 31, 2010,certain liabilities for wholly unfunded pension plans were secured by a letterof credit in the amount of $12.2 million (January 1, 2010 - $12.9 million).The total obligation for the other benefit plans of $150.8 million (January 1,2010 - $123.7 million) is unfunded.Reconciliation of Funded Status of Benefit Plans to Amounts Recorded in theFinancial Statements December 31, 2010 January 1, 2010--------------------------------------------------------------------------- Pension Other Pension Other Benefit Benefit Benefit Benefit(millions of dollars) Plans Plans Plans Plans---------------------------------------------------------------------------Fair market value of plans assets $ 513.5 $ - $ 466.8 $ -Accrued benefit obligation (608.0) (150.8) (553.6) (123.7)---------------------------------------------------------------------------Funded status of plans - surplus (deficit) (94.5) (150.8) (86.8) (123.7)Unamortized past service costs - - - 0.1Effect of limit on recognition of asset (4.1) - (3.8) ----------------------------------------------------------------------------Accrued benefit liability (98.6) (150.8) (90.6) (123.6)Pension bridge benefits (18.4) - (15.9) -Other pension plans (1.0) - 0.8 ----------------------------------------------------------------------------Total accrued benefitliability, net $ (118.0) $ (150.8) $ (105.7) $ (123.6)---------------------------------------------------------------------------The net accrued benefit liability is included inCanfor's balance sheet as follows:Long-term investments and other $ 3.4 $ - $ 4.2 $ -Retirement benefit obligations (121.4) (150.8) (109.9) (123.6)---------------------------------------------------------------------------Total accrued benefit liability, net $ (118.0) $ (150.8) $ (105.7) $ (123.6)------------------------------------------------------------------------------------------------------------------------------------------------------Components of pension costThe following table shows the before tax impact on net income and othercomprehensive income of the Company's pension and other defined benefit plans. 2010--------------------------------------------------------------------------- Pension Other Benefit Benefit(millions of dollars) Plans Plans---------------------------------------------------------------------------Recognized in net incomeCurrent service cost $ 8.8 $ 1.7Interest cost 33.7 8.0Expected return on plan assets (33.9) -Other - 0.5---------------------------------------------------------------------------Total pension cost recognized in net income $ 8.6 $ 10.2------------------------------------------------------------------------------------------------------------------------------------------------------Recognized in other comprehensive incomeActuarial loss (gain) immediately recognized $ 33.7 $ 22.0Effect of limit on recognition of asset 0.4 -Curtailment loss (gain) 4.0 ----------------------------------------------------------------------------Total pension cost recognized in other comprehensive income $ 38.1 $ 22.0------------------------------------------------------------------------------------------------------------------------------------------------------In addition to the amounts shown above, the expense recorded in net income forthe bridge benefits in 2010 was $2.6 million, and $1.4 million was charged toother comprehensive income.The expected return on plan assets is determined by taking into account theexpected returns on the assets based on the Company's current investmentpolicy.Significant assumptionsThe actuarial assumptions used in measuring Canfor's benefit plan provisionsare as follows: December 31, 2010 January 1, 2010--------------------------------------------------------------------------- Pension Other Pension Other Benefit Benefit Benefit Benefit(weighted average assumptions) Plans Plans Plans Plans---------------------------------------------------------------------------Accrued benefit obligation at reporting date:Discount rate 5.50% 5.75% 6.25% 6.75%Rate of compensation increase 3.00% n/a 3.00% n/aBenefit costs for year ended December 31:Discount rate 6.25% 6.75% n/a n/aExpected rate of return on plan assets 7.50% n/a n/a n/aFuture salary increases 3.00% n/a n/a n/a------------------------------------------------------------------------------------------------------------------------------------------------------Assumed health care cost trend rates(weighted average assumptions) December 31, 2010 January 1, 2010---------------------------------------------------------------------------Initial health care cost trend rate 6.95% 7.15%Ultimate health care trend rate 4.20% 4.20%Year ultimate rate is reached 2029 2029------------------------------------------------------------------------------------------------------------------------------------------------------Sensitivity analysisAssumed health care cost trend rates have a significant effect on the amountsreported for the other benefit plans. A one percentage-point change in assumedhealth care cost trend rates would have the following effects for 2010:(millions of dollars) 1% Increase 1% Decrease---------------------------------------------------------------------------Effect on defined benefit obligation $ 23.7 $ (19.3)Effect on the aggregate service and interest cost $ 2.0 $ (1.6)------------------------------------------------------------------------------------------------------------------------------------------------------FOR FURTHER INFORMATION PLEASE CONTACT: Dave LefebvreMedia Contact:Director, Public Affairs & Corporate Communications(604) 661-5225Dave.Lefebvre@canfor.comORPat ElliottInvestor Contact:Treasurer(604) 661-5441Patrick.Elliott@canfor.comwww.canfor.com