Canfor Reports Second Quarter Profit as Accounting Changes and Other Items Outweigh Losses Due to Poor Markets

Canfor Corporation (TSX: CFP) today reported net income of $64.2 million ($0.45 per share) for the second quarter of 2008, compared to a net loss of $85.4 million ($0.60 per share) for the first quarter of 2008 and a net loss of $38.8 million ($0.27 per share) for the second quarter of 2007. For the six months ended June 30, 2008, the Company's net loss was $21.2 million ($0.15 per share), compared to a net loss of $81.5 million ($0.57 per share) reported for the first six months of 2007.

The net income for the second quarter of 2008 included the following significant items, which together had a net positive impact on net income of $85.0 million ($0.60 per share):

- Reduction of log inventories previously written down from cost to net realizable value in accordance with a new inventory accounting standard implemented in 2008, which positively impacted net income by $35.3 million ($0.25 per share). The majority of the log write-downs took place in the first quarter of 2008, when the Company built normal seasonal inventory ahead of spring break-up.

- Reversal of log inventory write-downs recognized in previous periods, which increased net income by $12.5 million ($0.09 per share). The reversal resulted from lower costs and higher finished product prices in the second quarter.

- Gain of $36.3 million ($0.25 per share) resulting from a fire that destroyed the Company's North Central Plywoods (NCP) mill in Prince George in May. The gain mostly reflects estimated net insurance proceeds in excess of book value.

- Gains of $14.5 million ($0.10 per share) recorded on derivative financial instruments, designed primarily to protect the Company from rising natural gas and diesel prices, and foreign exchange rates.

- Restructuring, severance and mill closure costs of $13.6 million ($0.09 per share) resulting principally from the indefinite closures in June of the Company's Mackenzie sawmill and PolarBoard oriented strand board (OSB) mill.

After taking account of these items, which affected comparability with prior periods, the Company had an adjusted net loss for the second quarter of 2008 of $20.8 million ($0.15 per share), compared to similarly adjusted net losses of $60.5 million ($0.42 per share) for the first quarter of 2008 and $42.8 million ($0.30 per share) for the second quarter of 2007.

Canfor continued to be significantly impacted by the continued downturn in the U.S. housing market, the strong Canadian dollar and a 15% export tax on lumber shipments to the U.S., in the second quarter. Housing starts in the U.S. fell 4% compared to the previous quarter, and were down 30% compared to the second quarter of 2007. Not surprisingly, lumber and panel sales activity was sluggish through most of the quarter, but lower supply resulted in a modest increase in prices. Pulp markets remained relatively balanced, with the result that prices were stable through the quarter. The Canadian dollar hovered around par with the U.S. dollar through the period.

With respect to the second quarter, the Company continued to make progress in its efforts to reduce costs, and conserve cash. In addition to the modest market price increases, and lower log and lumber inventory write-downs, the second quarter's results reflected a number of operational improvements achieved in the face of the additional curtailments. These positives more than offset the effects of rising energy prices on input and distribution costs and scheduled maintenance outages at two of Canfor Pulp Limited Partnership's pulp mills in the quarter.

Commenting on the quarter's results, Canfor's President and CEO, Jim Shepard said he was pleased with the progress being made on several fronts. "The results are skewed by the quarterly change in inventory valuations but they also reflect a very concerted effort by all of our employees to deliver improvements in every area of our business, and conserve cash through this protracted downturn," said Shepard.

In response to depressed market demand, the Company further curtailed its production in the second quarter, and in June indefinitely closed down its Mackenzie sawmill and PolarBoard OSB mill. Commenting on the closures, Shepard said that the Company had been faced with little alternative. "These decisions are never taken lightly," he said, "but the harsh reality is that we have to continue to adjust our production to reflect the significantly lower levels of demand."

Shepard said that the Company fully expected conditions to remain difficult through the balance of 2008, adding that the Company does not anticipate any meaningful recovery of the U.S. housing market before the middle of 2009 at the earliest, particularly given increasing recession and inflationary concerns. He added that the Company's priorities would continue to be cash management and sustainable performance improvement. "We will remain focused on doing everything within our control to weather this storm and position the Company to take full advantage of the market recovery, when it comes," said Shepard.