Interfor Reports Q3’18 Results

Press Release

EBITDA⁽¹⁾ of $69 million and Net Earnings of $28 million Operating Cash Flow⁽¹⁾ of $1.00 per share Net Debt to Invested Capital⁽¹⁾ of 0% Greenfield Decision Postponed Indefinitely

INTERFOR CORPORATION (“Interfor” or the “Company”) (TSX: IFP) recorded net earnings in Q3’18 of $28.1 million, or $0.40 per share, compared to $63.8 million, or $0.91 per share in Q2’18 and $16.8 million, or $0.24 per share in Q3’17. Adjusted net earnings in Q3’18 were $28.2 million or $0.40 per share, compared to $68.9 million, or $0.98 per share in Q2’18 and $20.0 million, or $0.29 per share in Q3’17.

Adjusted EBITDA was $69.4 million on sales of $570.5 million in Q3’18 versus $123.8 million on sales of $619.9 million in Q2’18.

In comparison to the third quarter of 2017, Interfor posted improved results across most key metrics, including an $8.9 million or 15% improvement in Adjusted EBITDA, an $11.3 million or 67% increase in net earnings and a 29 million board foot rise in lumber production.

Notable items in the quarter included:

• Lower Lumber Prices
• Key benchmark prices decreased quarter-over-quarter, with the SYP Composite, Western SPF Composite and KD H-F Stud 2×4 9’ benchmark dropping by US$63, US$98 and US$94 per mfbm, respectively. Interfor’s average lumber selling price fell $52 from Q2’18 to $701 per mfbm.
• Lumber prices have experienced an unusual level of volatility in 2018. The logistics disruptions that occurred in Q1’18 led to a significant increase in lumber inventories being trapped at producer yards. This supply side constraint, combined with growing demand, contributed to an unprecedented rise in lumber prices during the early part of the year. As shipment levels increased, prices responded, falling in record amounts from late May through the end of September and dropping further in the early part of Q4’18. Notwithstanding the volatility experienced in 2018, Interfor believes that the underlying fundamental drivers of demand for its lumber products remain positive.
• Production Balanced With Shipments
• Total lumber production was 674 million board feet or 14 million board feet lower than the prior quarter. Production in the U.S. South region of 313 million board feet was negatively impacted by several factors including preventative downtime ahead of Hurricane Florence and maintenance/project related downtime, which contributed to a 12 million board feet decrease from the preceding quarter. The B.C. and U.S. Northwest regions accounted for 224 million board feet and 137 million board feet, respectively, compared to 215 million board feet and 148 million board feet in Q2’18, respectively.
• Refer to Adjusted EBITDA, Operating cash flow per share and Net debt to invested capital in the Non-GAAP Measures section
• Total lumber shipments were 685 million board feet, of which 675 million board feet were Interfor produced volumes, with the balance of 10 million board feet being agency and wholesale volumes. Total lumber shipments were 15 million board feet lower than Q2’18, as Q3’18 shipments were negatively impacted by adverse weather in the U.S. South. The Company’s lumber inventory was reduced 2 million board feet quarter-over-quarter.
• Production in Q4’18 from Interfor’s B.C. Interior operations will be impacted by a previously announced temporary curtailment. The curtailment is in response to the combination of declining lumber prices and escalating log costs and is expected to reduce the Company’s production in the region by approximately 20% during the quarter.
• Higher Operating Costs
• Interfor’s production costs increased by $22 per mfbm of lumber sold in Q3’18 versus Q2’18, as a result of several factors, including: (i) higher stumpage and log hauling costs in the B.C. Interior; (ii) higher log and lumber inventory valuation adjustments due to the decline in lumber prices; (iii) higher maintenance spending in the U.S. South; and (iv) lower production due to the downtime from several maintenance projects and adverse weather in the U.S. South.
• Strong Cash Flows and Liquidity
• Interfor generated $69.7 million of cash from operations before changes in working capital, or $1.00 per share. Total cash generated from operations was $85.0 million.
• Net debt ended the quarter at $3.8 million, or 0.4% of invested capital, resulting in available liquidity of $567.2 million. The Company closed on its previously announced agreement to extend US$84 million of its 2021 to 2023 term debt maturities to 2027 to 2029, resulting in a weighted average fixed interest rate on its term debt of 4.47%.
• Capital spending was $38.5 million on a mix of high-return discretionary, maintenance and woodlands projects. In addition, Interfor has US$12.6 million of deposits placed with key suppliers for capital equipment related to Phases I and II of its strategic capital plan.
• Interfor purchased and cancelled 597,245 of its common shares at a total cost of $12.0 million. The Company’s existing normal course issuer bid (“NCIB”) permits the purchase of up to 3,500,000 common shares until its expiry on March 6, 2019.
• Softwood Lumber Duties
• Interfor expensed $15.9 million of duties in the quarter, representing the full amount of countervailing (“CV”) and anti-dumping (“AD”) duties incurred on its Canadian shipments of softwood lumber into the U.S. at a combined rate of 20.23%.
• Cumulative duties of US$52.9 million have been paid by Interfor since the inception of the current trade dispute and are held in trust by the U.S. Of this total, US$3.2 million is recorded as a receivable in respect of overpayments arising from duty rate adjustments and US$49.7 million has been expensed and is not recorded on the balance sheet as a receivable.

Strategic Capital Plan Update

• Interfor continues to make progress on previously announced Phases I and II strategic capital projects in the U.S. South. The Phase I projects total US$65 million at the Meldrim, Georgia and Monticello, Arkansas sawmills. Both of these projects remain on budget, with completion set for the Meldrim project in Q1’19 and the Monticello project by Q2’19. The Phase II projects total US$240 million at the Thomaston and Eatonton sawmills in Georgia and the Georgetown sawmill in South Carolina. These projects are on track for completion in various stages over the period of 2019 to 2021.

Greenfield Decision Postponed Indefinitely

• Over the past year, Interfor has been assessing the feasibility of greenfield sawmill opportunities in the U.S. South. In that regard, the Company has completed a detailed engineering study, secured the rights to a well-located site and negotiated a number of ancillary arrangements in support of the project. However, based on prevailing market conditions for greenfield projects, including equipment lead times, contractor availability and projected capital costs, Interfor has concluded the project does not currently meet its criteria for discretionary investments and has postponed its decision on the project for an indefinite period.
• In the meantime, the Company intends to focus on the previously announced Phase I and II internal capital projects and on other capital investment alternatives. Any future decision on the greenfield project would likely result in that project being scheduled for construction, if at all, subsequent to the Phase I and II capital projects achieving substantial completion.

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