Mr. Richard Pozzebon reports

INTERFOR REPORTS Q2'23 RESULTS

Interfor Corp. recorded a net loss in Q2 2023 of $14.1-million or 27 cents per share, compared with $41.3-million or 80 cents per share in Q1 2023 and net earnings of $269.9-million or $4.92 per share in Q2 2022.

Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $41.9-million on sales of $871.8-million in Q2 2023, versus $26.1-million on sales of $829.9-million in Q1 2023 and $428.6-million on sales of $1.4-billion in Q2 2022.

Notable items in the quarter:

• Record lumber shipments outpaced production:
  • Lumber shipments were a record 1.1 billion board feet or 112 million board feet higher than Q1 2023, which outpaced production resulting in a 16-per-cent reduction in lumber inventories.
  • Lumber production totalled 1.0 billion board feet, representing a decrease of eight million board feet quarter over quarter.
  • The United States South and U.S. Northwest regions accounted for 468 million board feet and 165 million board feet, respectively, compared with 473 million board feet and 142 million board feet in Q1 2023. The Eastern Canada region produced 249 million board feet, versus 250 million board feet in Q1 2023. Production in the British Columbia region decreased to 141 million board feet from 166 million board feet in Q1 2023.
• Stabilizing lumber prices:
  • Lumber prices continued to reflect softened demand driven by the elevated interest rate environment and several supply-side factors. However, lumber prices began to strengthen near the end of Q2 2023 from the effects of industry production curtailments and reduced European imports combined with increased new home construction demand. Interfor's average selling price was $649 per thousand board feet (mfbm), up $10 per mfbm versus Q1 2023.
  • The SYP composite and KD H-F stud two-by-four nine-foot increased quarter over quarter by $4 (U.S.) and $24 (U.S.) per mfbm to $446 (U.S.) and $452 (U.S.) per mfbm, respectively, while the western SPF composite decreased quarter over quarter by $27 (U.S.) per mfbm to $372 (U.S.) per mfbm. The ESPF composite remained at $474 (U.S.) per mfbm quarter over quarter.
• Financial flexibility improved:
  • Net debt at quarter-end was $815.7-million or 29.6 per cent of invested capital, with available liquidity of $366.1-million.
  • The net debt to invested capital leverage ratio improved compared with the end of Q1 2023, driven by $123.0-million of cash flow from operations, including $97.4-million from inventory reductions.
  • Liquidity is expected to be further strengthened during the remainder of 2023 by income tax refunds totalling approximately $100.0-million related to overinstalments for the 2022 tax year.
• Strategic capital investments:
  • Capital spending was $57.7-million, including $40.2-million of discretionary investment focused on multiyear projects in the U.S. South region.
  • Total capital expenditures planned for 2023 remains unchanged from prior guidance at approximately $210.0-million, with continued flexibility to adjust this based on various factors including market conditions.
• Continuing monetization of coastal B.C. operations:
  • The company is continuing to work with the Ministry of Forests to subdivide and transfer a number of forest tenures from its 1.57 million cubic metres of annual harvesting rights. The timing remains uncertain as to when ministry approval will be received and certain contractual matters are finalized.
• Softwood lumber duties:
  • Interfor expensed $17.0-million of duties in the quarter, representing the full amount of countervailing (CV) and anti-dumping (AD) duties incurred on shipments of softwood lumber from its Canadian operations to the U.S. at a combined rate of 8.59 per cent.
  • On Aug. 1, 2023, the U.S. Department of Commerce (DoC) published the final rates for CV and AD duties based on the results of its fourth administrative review covering shipments for the year ended Dec. 31, 2021. The final combined rate for 2021 was 7.99 per cent, compared with the cash deposit rate of 8.99 per cent from January to November, 2021, and 17.90 per cent for December, 2021. The finalization of the fourth administrative review rates indicated an overpayment of duty deposits in 2021 of $18.6-million. The combined rate of 7.99 per cent applied to new shipments effective Aug. 1, 2023.
  • Interfor has cumulative duties of $530.9-million (U.S.) or approximately $9.97 per share on an after-tax basis, held in trust by U.S. Customs and Border Protection as at June 30, 2023. Except for $156.8-million (U.S.) recorded as a receivable in respect of overpayments arising from duty rate adjustments and the fair value of rights to duties acquired, Interfor has recorded the duty deposits as an expense.

Interfor appoints new director

On May 19, 2023, the Interfor board appointed Nicolle Butcher, of Toronto, Ont., as a director of the company. Ms. Butcher is the chief operating officer of Ontario Power Generation, where she has held a wide range of roles with increasing responsibility over the past 22 years. Ms. Butcher's appointment increased the number of directors to 11 and was in line with the company's board succession plan.

Outlook

North American lumber markets over the near term are expected to remain volatile as the economy continues to adjust to inflationary pressures, elevated interest rates, labour shortages and geo-political uncertainty. Additionally, potential remains for supply-side disruption in the near term from the record wildfire season in progress in Canada as well as impacts from the protracted port strike in B.C.

Interfor expects that over the midterm, lumber markets will continue to benefit from favourable underlying supply and demand fundamentals. Positive demand factors include the advanced age of the U.S. housing stock, a shortage of available housing and various demographic factors, while growth in lumber supply is expected to be limited by extended capital project completion and ramp-up timelines, labour availability, and constrained global fibre availability.

Interfor's strategy of maintaining a diversified portfolio of operations in multiple regions allows the company to both reduce risk and maximize returns on capital over the business cycle. Interfor is well positioned with its strong balance sheet and available liquidity to continue pursuing its strategic plans despite continuing economic and geo-political uncertainty globally. In the event of a sustained lumber market downturn, Interfor maintains flexibility to significantly reduce capital expenditures and working capital levels, and to pro-actively adjust its lumber production to match demand.

Liquidity

Balance sheet

Interfor's net debt at June 30, 2023, was $815.7-million or 29.6 per cent of invested capital, representing an increase of $95.4-million from the level of net debt at Dec. 31, 2022.

As at June 30, 2023, the company had net working capital of $482.6-million and available liquidity of $366.1-million, based on the available borrowing capacity under its $600.0-million revolving term line.

The term line and senior secured notes are subject to financial covenants, including a net debt to total capitalization ratio and an EBITDA interest coverage ratio.

Management believes, based on circumstances known today, that Interfor has sufficient working capital and liquidity to finance operating and capital requirements for the foreseeable future.

On Dec. 16, 2022, the company completed an expansion of its term line. The commitment under the term line was increased by $100.0-million to a total of $600.0-million.

On Dec. 1, 2022, the company issued $200.0-million (U.S.) of Series H senior secured notes, bearing interest at 7.06 per cent with principal payments of $66.7-million (U.S.) due on Dec. 26, 2031, 2032 and on final maturity in 2033.

Capital resources

The attached table summarizes Interfor's credit facilities and availability as of June 30, 2023.

Interfor's term line matures in December, 2026, and its senior secured notes have maturities in the years 2024 to 2033.

As of June 30, 2023, the company had commitments for capital expenditures totalling $135.5-million for both maintenance and discretionary capital projects.

Non-GAAP (generally accepted accounting principles) measures

This management's discussion and analysis (MD&A) makes reference to the following non-GAAP measures: EBITDA, adjusted EBITDA, adjusted EBITDA margin, net debt to invested capital, operating cash flow per share (before working capital changes) and annualized return on capital employed, which are used by the company and certain investors to evaluate operating performance and financial position. These non-GAAP measures do not have any standardized meaning prescribed by IFRS and are therefore unlikely to be comparable with similar measures presented by other issuers.

About Interfor Corp.

Interfor is a growth-oriented forest products company with operations in Canada and the United States. The company has annual lumber production capacity of approximately 5.2 billion board feet and offers a diverse line of lumber products to customers around the world.

The company's unaudited condensed consolidated interim financial statements and management's discussion and analysis for Q2 2023 are available on SEDAR and on the company's website.

There will be a conference call on Friday, Aug. 4, 2023, at 8 a.m. Pacific Time, hosted by Interfor for the purpose of reviewing the company's release of its second quarter 2023 financial results.

The dial-in number is 1-888-396-8049. The conference call will also be recorded for those unable to join in for the live discussion and will be available until Sept. 4, 2023. The number to call is 1-877-674-7070, passcode 138247 followed by the pound key.

We seek Safe Harbor.