Mr. Paul Rivett reports

GREENFIRST REPORTS FINANCIAL RESULTS FOR THE SECOND QUARTER OF 2023

Greenfirst Forest Products Inc. has released its results for the second quarter and two quarters ended July 1, 2023. The company's interim financial statements and related management discussion and analysis for the second quarter and two quarters ended July 1, 2023, are available on Greenfirst's website and on SEDAR+.

Highlights

• Second quarter 2023 net loss from continuing operations was $9.7-million or a loss of five cents per share (diluted), compared with net loss of $20.2-million or a loss of 11 cents per share (diluted) in the first quarter of 2023 on the same basis.
• Average lumber prices for Q2 2023 were slightly lower than Q1 2023, with an average selling price of $596/mfbm compared with $605/mfbm (thousand board feet) in Q1 2023. There was strong pricing momentum toward the latter half of the second quarter, with volumes also seeing an increase compared with Q1 2023. The valuation provision for lumber and logs inventory was decreased to $4.3-million from $8.7-million at the end of Q4 2022, generating a $4.4-million credit to cost of sales in the two quarters ended July 1, 2023.
• Greenfirst's softwood lumber duty rate dropped to 7.99 per cent on Aug. 1, 2023, from the previous rate of 20.23 per cent. The lower duty rate will directly improve the company's earnings and free cash flow.
• Greenfirst is expecting reimbursement of an overpayment of duties of $21-million (U.S.), since August, 2021, due to the difference between the company's prior duty rate of 20.23 per cent and the duty rate charged to its Canadian peers. However, at this time the company cannot be certain about when this reimbursement may occur. Beyond this overpayment, Greenfirst has an additional $51-million (U.S.) of duties on deposit (which continues to grow) pending a broader industry settlement.
• The turnaround of the Kapuskasing paper mill continues with an increase in operating earnings of $9.4-million in the first two quarters of 2023 compared with the same period last year.
• A corporate reorganization will begin in the fall of this year to separate the lumber mill assets from the paper mill assets in order to provide for increased alignment of incentives and focus on the unique performance parameters of each business.
• Emphasis on decentralizing operations to reduce overhead and operating costs while increasing production efficiencies. The company has performed a series of operational reviews to better align with its smaller footprint and strategic direction.
• Greenfirst announced the departure of chief financial officer Alfred Colas and appointed vice-president of finance, Ankit Kapoor, as interim CFO. This transition will be completed by Sept. 15, 2023.
• Signed a non-binding letter of intent earlier this year to sell approximately 30 of 118 acres of the land in Kenora for approximately $8-million.
• As of Aug. 9, the company has reduced its outstanding net debt to $23-million.

"We continue to systematically review all aspects of our business. Our paper mill increased operating earnings by $9.4-million in the first six months of 2023 compared with last year, and our lumber mills are positioned for a stronger second half of the year with stabilized pricing and the recently reduced duty rate," said Paul Rivett, Greenfirst's chairman and interim chief executive officer. "We have come to appreciate the unique characteristics of our lumber mills and paper mill, with distinct operational drivers and key performance indicators. We are taking steps to decentralize these businesses in separate corporate entities with distinct management teams."

Financial highlights

The attached table's selected financial information is from the company's financial statements and MD&A (management's discussion and analysis).

The company reported net sales for continuing operations of $111.6-million during Q2 2023, an increase of $12.5-million or 13 per cent, compared with Q1 2023. This increase was primarily driven by higher volume of lumber sold as a result of buyers building up inventory in response to uncertainties around the historic wildfires and some positive signs for United States housing starts.

The company reported cost of sales of $109.8-million during Q2 2023, lower by $3.0-million or 3 per cent, compared with Q1 2023. This decrease reflects the impact of lower cost per unit of shipments in the lumber and paper segment and due to a recovery related to inventory net realizable value recorded in the second quarter of 2023.

The company's softwood lumber sales to U.S. customers are subject to countervailing and anti-dumping duties as determined by the U.S. Department of Commerce. The initial duty deposit rate, totalling 20.23 per cent, has remained in effect since the company's acquisition of its sawmill and paper mill assets and has resulted in an overpayment in relation to its Canadian peers as at July 1, 2023, of $21-million (U.S.). The company became eligible for the rate applied to all other lumber exporters from Aug. 1, 2023, onward, calculated by the U.S. Department of Commerce to be 7.99 per cent, following the results of the U.S. DOC Administrative Review.

The company reported selling, general and administration expenses for continuing operations of $4.9-million during Q2 2023 which was a decrease of $300,000 compared with Q1 2023. The second quarter benefited from the company recording a recovery on a previously written-off accounts receivable balance related to its discontinued operations, which was partially offset by higher corporate development costs and higher fringe benefits in the current period.

Turnaround of the paper mill and move for operational decentralization

Greenfirst has benefited from improving results at its paper mill during the first and second quarters of 2023, compared with the prior year in which the mill's contribution remained negative for all four quarters. For the two quarters ended July 1, 2023, the operating income from the paper products segment was $3.2-million compared with an operating loss of $6.2-million in the prior-year two quarters ended June 25, 2022. This turnaround is primarily driven by the restart and efficiency gains of the second paper machine, which continues to trend positively. However, the paper mill is faced with continued headwinds, including pricing pressures, related to its secularly declining paper products along with input supply pressure related to wood chips, which is key to continuing productivity levels.

Greenfirst's paper mill operation has key operational and performance metrics that are very different from the lumber mill operations. With the paper mill now a contributing financial and operational performer within Greenfirst, after considerable consultation, the board of directors has determined to separate the lumber mill assets from the paper mill assets. It is believed that this separation of businesses and decentralization of management will provide for more expedient decision making, alignment of incentives and entrepreneurialism. This corporate decentralization will begin in the fall of this year and will also include some further reductions of overhead and operating costs.

Chief financial officer change

Greenfirst's CFO, Alfred Colas, will be leaving the company, effective Sept. 15, 2023. The company's vice-president of finance, Ankit Kapoor, will become the interim CFO.

"We thank Alfred for his contributions to the company and we wish him well with his new career opportunity," said Mr. Rivett, Greenfirst's chairman. "Ankit has excelled in the accounting and finance function at Greenfirst and we are excited to elevate him into this senior role."

Liquidity and borrowings

At July 1, 2023, the company has $48.2-million, less $5.3-million for standby letters of credit, of excess availability under the revolving portion of the credit facility. The company has made net repayments of $29.0-million against the credit facility during the first half of 2023 and the company is no longer subject a minimum fixed-charge coverage ratio. Subsequent to Q2 2023 the company made an additional repayment of $2.0-million against the credit facility.

Outlook

The impact of higher interest rates, in response to rising inflation, has resulted in softened lumber demand since the midpoint of 2022. This led to a decline in lumber market prices throughout the second half of 2022, with those levels persisting in the first half of 2023. Further monetary tightening and interest rate increases could continue to put downward pressure on lumber market prices, which are expected to remain volatile over the near term. However, there is optimism amongst U.S. homebuilders for growth during the balance of 2023, which started to positively impact lumber pricing from June, 2023, onward.

The industry is also experiencing tightening lumber supply, spurred on by the curtailment of lumber production in the province of British Columbia. Additionally, there have been several disruptions and uncertainty around forestry activities due to historic levels of wildfires seen in Canada this summer. These supply constraints have provided positive pricing support.

Earnings conference call

Greenfirst will host a conference call to review the second quarter 2023 financial results on Thursday, Aug. 10, 2023, at 8:30 a.m. Eastern Time. The live webcast of the earnings conference call can be accessed via Web and via phone: 1-416 764 8658 or 1-888 886 7786. A replay of the webcast and presentation slides will be available on Greenfirst's website following the conference call.

About Greenfirst Forest Products Inc.

Greenfirst Forest Products is a forest-first business, focused on sustainable forest management and lumber production. The company owns four sawmills located in rich wood baskets proudly operating over 6.1 million hectares of FSC-certified public Ontario forestlands. The company believes that responsible forest practices, coupled with the long-term green advantage of lumber, provide Greenfirst with significant cyclical and secular advantages in building products.

We seek Safe Harbor.