Interfor Reports Q2'17 Results

Record EBITDA(1) of $77.4 million (or $84.7 million excluding duties);

Record Sales of $511.4 million

Free Cash Flow from Operations of $73.3 Million (or $1.05 per Share)

Net Debt to Invested Capital Ratio of 21.1%

Strong Results Reflect the Full Realization from Phase 1 Margin Improvement Initiatives; Additional Opportunities Identified


VANCOUVER, BRITISH COLUMBIA--(Marketwired - Aug. 3, 2017) - INTERFOR CORPORATION ("Interfor" or "the Company") (TSX:IFP) recorded net earnings in Q2'17 of $24.5 million, or $0.35 per share, compared to $19.7 million, or $0.28 per share in Q1'17 and $23.2 million, or $0.33 per share in Q2'16. Adjusted net earnings1 (which takes into account the effects of share-based compensation expense and non-recurring items) in Q2'17 were $28.7 million or $0.41 per share, compared to $22.7 million, or $0.32 per share in Q1'17 and $17.5 million, or $0.25 per share in Q2'16.

Adjusted EBITDA1 for the second quarter, 2017 was $77.4 million (or $84.7 million excluding the impact from $7.3 million of softwood lumber duties expense), on sales of $511.4 million versus $60.3 million on sales of $456.8 million in Q1'17.

Notable items in the quarter included:

Strong Cash Flow and Substantially Lower Leverage
Interfor generated $73.3 million of cash from operations before changes in working capital, or $1.05 per share, plus a $32.5 million reduction in working capital, for total cash generated from operations of $105.8 million.
Capital spending was $20.4 million.
Net debt ended the quarter at $218.3 million, or 21.1% of invested capital.
Higher Lumber Prices For Western Species
The key Western commodity benchmark prices improved quarter-over-quarter as a result of strong demand in both North American and international markets. The Western SPF Composite and KD H-F Stud 2x4 9' benchmarks were up US$39 to US$378 per mfbm and US$38 to US$398 per mfbm, respectively. Prices in the U.S. South region were less robust, with the SYP Composite benchmark increasing US$1 quarter-over-quarter to US$417 per mfbm.
Interfor's average lumber selling price increased $38 from Q1'17 to $642 per mfbm, due to a combination of the higher benchmark prices, improved grade yields in the U.S. South region and a weaker Canadian Dollar.
Increased Production
Total production increased for the second successive quarter, driven by strong customer demand. 655 million board feet of lumber was produced in Q2'17, up 15 and 48 million board feet over Q1'17 and Q4'16, respectively. Sales of Interfor-produced lumber were 654 million board feet in Q2'17 versus 624 million board feet in Q1'17.
Production in the U.S. South region increased to 294 million board feet from 285 million board feet in the preceding quarter. The B.C. and U.S. Northwest regions accounted for 215 million board feet and 146 million board feet, respectively, compared with 215 million board feet and 140 million board feet in Q1'17, respectively.
Progress on Optimization Initiative and EBITDA Gains
In early 2016, Interfor launched a Business Optimization Initiative to capture additional margin opportunities across the Company's operating platform, with a particular focus on the U.S. South region, where $35 million in annualized EBITDA gains were targeted by year-end 2017.
In Q2'17, the Company realized on 110% of the targeted EBITDA gains, due to a combination of increased operating hours, improvements in productivity, lumber recovery and grade yields, and lower manufacturing costs.
The Company has identified a series of additional opportunities that include both non-capital operating improvements and targeted capital investments. The non-capital operating improvements are currently underway and are expected to be realized over the next 12-18 months. The capital investments, which are expected to generate very attractive returns, will be implemented over the next three years. The specifics of these investments will be released once detailed engineering has been completed and the sequencing of the projects has been finalized.

1 Refer to Adjusted EBITDA and Adjusted net earnings in the Non-GAAP Measures section

Softwood Lumber Duties

During the second quarter, the U.S. Department of Commerce ("DoC") preliminarily ruled on its cases against Canadian softwood lumber producers for both countervailing and anti-dumping duties. As a result, the U.S. Customs and Border Protection Agency began collecting deposits from Interfor on its shipments of softwood lumber from Canada into the U.S. for countervailing duties on April 28, 2017 at a preliminary rate of 19.88% and for anti-dumping duties on June 30, 2017 at a preliminary rate of 6.87%.

In addition, the DoC has taken the unjustified position that most Canadian lumber producers, including Interfor, may be required to submit deposits for retroactive countervailing duties for the 90 days prior to April 28, 2017 and for retroactive anti-dumping duties for the 90 days prior to June 30, 2017. Interfor has not submitted any such deposits, which could total approximately US$8.4 million and US$3.0 million for countervailing and anti-dumping duties, respectively. Interfor does not believe the retroactive application of duties will stand up under final scrutiny which, in turn, should result in a full return of any related deposits to the Company.

In Q2'17, Interfor shipped approximately 100 million board feet from its Canadian operations to the U.S. market, which represented approximately 15% of the Company's total lumber sales. Interfor is of the view that the DoC's positions are without merit and are politically driven. Interfor intends to vigorously defend the Company's and the Canadian industry's positions through various appeal processes, in conjunction with the B.C. and Canadian Governments.

Summary of Quarterly Results(1)

2017 2016 2015
Unit Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
Financial Performance (Unaudited)
Total sales $MM 511.4 456.8 442.3 457.6 458.8 433.9 411.4 430.8
Lumber $MM 433.7 389.6 363.5 374.8 371.1 348.9 325.0 343.3
Logs, residual products and other $MM 77.7 67.2 78.8 82.8 87.7 85.0 86.4 87.5
Operating earnings (loss) $MM 42.7 30.4 22.3 20.1 30.0 3.5 (6.3 ) (11.6 )
Net earnings (loss) $MM 24.5 19.7 26.6 15.1 23.2 0.8 (3.5 ) (6.1 )
Net earnings (loss) per share, basic $/share 0.35 0.28 0.38 0.22 0.33 0.01 (0.05 ) (0.09 )
Adjusted net earnings (loss)(2) $MM 28.7 22.7 17.7 20.7 17.5 2.7 4.5 (16.6 )
Adjusted net earnings (loss) per share, basic(2) $/share 0.41 0.32 0.25 0.30 0.25 0.04 0.06 (0.24 )
Adjusted EBITDA(2) $MM 77.4 60.3 51.3 58.1 56.9 33.4 35.8 11.5
Shares outstanding - end of period million 70.0 70.0 70.0 70.0 70.0 70.0 70.0 70.0
Shares outstanding - weighted average million 70.0 70.0 70.0 70.0 70.0 70.0 70.0 70.0
Operating Performance
Lumber production million fbm 655 640 607 628 637 618 568 618
Total lumber sales million fbm 675 645 619 647 658 637 615 686
Lumber sales - Interfor produced million fbm 654 624 598 627 634 609 586 663
Lumber sales - wholesale and commission million fbm 21 21 21 20 24 28 29 23
Lumber - average selling price(3) $/thousand fbm 642 604 588 580 564 548 529 500
Average USD/CAD exchange rate(4) 1 USD in CAD 1.3449 1.3238 1.3341 1.3050 1.2886 1.3732 1.3354 1.3089
Closing USD/CAD exchange rate(4) 1 USD in CAD 1.2977 1.3322 1.3427 1.3117 1.3009 1.2971 1.3840 1.3394

Notes:

  1. Figures in this table may not add due to rounding.
  2. Refer to the Non-GAAP Measures section of this release for a definition and reconciliation of this measure to figures reported in the Company's consolidated financial statements.
  3. Gross sales before export taxes and duties.
  4. Based on Bank of Canada foreign exchange rates.

Liquidity

Balance Sheet

Net debt at June 30, 2017 was $218.3 million, or 21.1% of invested capital, representing a decrease of $177.7 million from June 30, 2016 and a decrease of $71.3 million from December 31, 2016. A slight strengthening of the Canadian Dollar against the U.S. Dollar reduced net debt by $9.1 million over the first six months of 2017.

For the 3 months ended For the 6 months ended
June 30, June 30,
Thousands of dollars 2017 2016 2017 2016
Net debt
Net debt, period opening, CAD $ 306,676 $ 428,062 $ 289,551 $ 452,303
Net repayment of credit facilities, CAD (59,468 ) (33,619 ) (40,218 ) (33,566 )
Impact on U.S. Dollar denominated debt from (strengthening) weakening CAD (6,359 ) 1,320 (9,063 ) (28,175 )
Decrease (increase) in cash and equivalents, CAD (22,597 ) 196 (22,018 ) 5,397
Net debt, period ending, CAD $ 218,252 $ 395,959 $ 218,252 $ 395,959
Net debt components by currency
U.S. Dollar debt, period opening, USD $ 235,979 $ 338,692 $ 230,000 $ 338,699
Net repayment on credit facilities, USD (35,979 ) (41,192 ) (30,000 ) (41,199 )
U.S. Dollar debt, period ending, USD 200,000 297,500 200,000 297,500
Spot rate, period end 1.2977 1.3009
U.S. Dollar debt expressed in CAD 259,540 387,018
Canadian Dollar debt, including bank indebtedness, CAD - 20,000
Total debt, CAD 259,540 407,018
Cash and cash equivalents, CAD (41,288 ) (11,059 )
Net debt, period ending, CAD $ 218,252 $ 395,959

Capital Resources

The following table summarizes Interfor's credit facilities and availability as of June 30, 2017:

Revolving Senior U.S.
Operating Term Secured Operating
Thousands of Canadian dollars Line Line Notes Line Total
Available line of credit $ 65,000 $ 200,000 $ 259,540 $ 64,885 $ 589,425
Maximum borrowing available $ 65,000 $ 200,000 $ 259,540 $ 64,885 $ 589,425
Less:
Drawings - - 259,540 - 259,540
Outstanding letters of credit included in line utilization 11,038 - - 4,023 15,061
Unused portion of facility $ 53,962 $ 200,000 $ - $ 60,862 $ 314,824
Add cash and cash equivalents 41,288
Available liquidity at Jun. 30, 2017 $ 356,112

As of June 30, 2017, the Company had commitments for capital expenditures totaling $12.1 million, related to both maintenance and discretionary projects.

Interfor continues to maintain its disciplined focus on monitoring discretionary capital expenditures, optimizing inventory levels and matching production with offshore and domestic demand.

As at June 30, 2017, the Company had net working capital of $177.1 million and available capacity on operating and term facilities of $314.8 million. These resources, in addition to cash generated from operations, will be used to support working capital requirements, debt servicing commitments and capital expenditures. We believe that Interfor will have sufficient liquidity to fund operating and capital requirements for the foreseeable future.

Non-GAAP Measures

This release makes reference to the following non-GAAP measures: Adjusted net earnings (loss), Adjusted net earnings (loss) per share, EBITDA, Adjusted EBITDA, Pre-tax return on total assets, Net debt to invested capital and Operating cash flow per share (before working capital changes) 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 to similar measures presented by other issuers. The following table provides a reconciliation of these non-GAAP measures to figures as reported in the Company's unaudited interim consolidated financial statements prepared in accordance with IFRS:

Thousands of Canadian dollars except number of shares and per share amounts For the 3 months ended For the 6 months ended
Jun. 30, Mar. 31, Jun. 30,
2017 2016 2017 2017 2016
Adjusted Net Earnings(1)
Net earnings $ 24,512 $ 23,205 $ 19,667 $ 44,179 $ 24,000
Add:
Restructuring costs and capital asset write-downs 1,457 2,304 345 1,802 3,507
Other foreign exchange loss (gain) 913 (503 ) 181 1,094 396
Long term incentive compensation expense (recovery) 3,270 (4,147 ) 3,593 6,863 (3,969 )
Other expense 456 458 189 645 365
Beaver sawmill post-closure wind-down costs 5 3 7 12 11
Tacoma sawmill post-acquisition losses and closure costs - 311 1 1 683
Income tax effect of above adjustments (1,883 ) (725 ) (1,249 ) (3,132 ) (1,479 )
Recognition of previously unrecognized deferred tax assets - (3,384 ) - - (3,268 )
Adjusted net earnings $ 28,730 $ 17,522 $ 22,734 $ 51,464 $ 20,246
Weighted average number of shares - basic ('000) 70,030 70,030 70,030 70,030 70,030
Adjusted net earnings per share $ 0.41 $ 0.25 $ 0.32 $ 0.73 $ 0.29
Adjusted EBITDA
Net earnings $ 24,512 $ 23,205 $ 19,667 $ 44,179 $ 24,000
Add:
Depreciation of plant and equipment 19,967 18,765 19,603 39,570 38,934
Depletion and amortization of timber, roads and other 10,024 9,652 6,297 16,321 17,621
Restructuring costs and capital asset write-downs 1,457 2,304 345 1,802 3,507
Finance costs 3,535 4,965 4,062 7,597 10,149
Other foreign exchange loss (gain) 913 (503 ) 181 1,094 396
Income tax expense (recovery) 13,289 1,852 6,320 19,609 (1,474 )
EBITDA 73,697 60,240 56,475 130,172 93,133
Add:
Long term incentive compensation expense (recovery) 3,270 (4,147 ) 3,593 6,863 (3,969 )
Other expense 456 458 189 645 365
Beaver sawmill post-closure wind-down costs 5 3 7 12 11
Tacoma sawmill post-acquisition losses and closure costs - 311 1 1 683
Adjusted EBITDA(2) $ 77,428 $ 56,865 $ 60,265 $ 137,693 $ 90,223
Pre-tax return on total assets
Operating earnings before restructuring costs $ 44,162 $ 32,281 $ 30,764 $ 74,926 $ 36,943
Total assets(3) $ 1,318,784 $ 1,323,788 $ 1,301,648 $ 1,298,832 $ 1,363,683
Pre-tax return on total assets(4) 13.4% 9.8% 9.5% 11.5% 5.4%
Net debt to invested capital
Net debt
Total debt $ 259,540 $ 407,018 $ 325,367 $ 259,540 $ 407,018
Cash and cash equivalents (41,288 ) (11,059 ) (18,691 ) (41,288 ) (11,059 )
Total net debt $ 218,252 $ 395,959 $ 306,676 $ 218,252 $ 395,959
Invested capital
Net debt $ 218,252 $ 395,959 $ 306,676 $ 218,252 $ 395,959
Shareholders' equity 816,136 727,470 804,748 816,136 727,470
Total invested capital $ 1,034,388 $ 1,123,429 $ 1,111,424 $ 1,034,388 $ 1,123,429
Net debt to invested capital(5) 21.1% 35.2% 27.6% 21.1% 35.2%
Operating cash flow per share (before working capital changes)
Cash provided by operating activities $ 105,816 $ 62,559 $ 4,682 $ 110,498 $ 82,602
Cash used in (generated from) operating work capital (32,531 ) (6,259 ) 55,033 22,502 4,720
Operating cash flow (before working capital changes) $ 73,285 $ 56,300 $ 59,715 $ 133,000 $ 87,322
Weighted average number of shares - basic ('000) 70,030 70,030 70,030 70,030 70,030
Operating cash flow per share (before working capital changes) $ 1.05 $ 0.80 $ 0.85 $ 1.90 $ 1.25

Notes:

  1. Certain historical periods have been recast to exclude the recognition of previously unrecognized deferred tax assets from Adjusted net earnings.
  2. If countervailing and anti-dumping duties expense of $7.3 million were excluded, Adjusted EBITDA for Q2'17 would be $84.7 million. Other periods presented were not impacted by such duties.
  3. Total assets at period beginning for three month periods; average of opening and closing total assets for six month periods.
  4. Annualized rate.
  5. Net debt to invested capital as of the period end.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the three and six months ended June 30, 2017 and 2016 (unaudited)
(thousands of Canadian dollars except earnings per share) 3 Months 3 Months 6 Months 6 Months
June 30, 2017 June 30, 2016 June 30, 2017 June 30, 2016
Sales $511,376 $458,813 $968,156 $892,757
Costs and expenses:
Production 414,205 390,487 798,282 780,623
Selling and administration 12,435 11,775 24,881 22,605
Long term incentive compensation expense (recovery) 3,270 (4,147) 6,863 (3,969)
U.S. countervailing and anti-dumping duty deposits 7,313 - 7,313 -
Depreciation of plant and equipment 19,967 18,765 39,570 38,934
Depletion and amortization of timber, roads and other 10,024 9,652 16,321 17,621
467,214 426,532 893,230 855,814
Operating earnings before restructuring costs 44,162 32,281 74,926 36,943
Restructuring costs 1,457 2,304 1,802 3,507
Operating earnings 42,705 29,977 73,124 33,436
Finance costs (3,535) (4,965) (7,597) (10,149)
Other foreign exchange gain (loss) (913) 503 (1,094) (396)
Other expense (456) (458) (645) (365)
(4,904) (4,920) (9,336) (10,910)
Earnings before income taxes 37,801 25,057 63,788 22,526
Income tax expense (recovery)
Current 380 330 686 461
Deferred 12,909 1,522 18,923 (1,935)
13,289 1,852 19,609 (1,474)
Net earnings $24,512 $23,205 $44,179 $24,000
Net earnings per share, basic and diluted $0.35 $0.33 $0.63 $0.34

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three and six months ended June 30, 2017 and 2016 (unaudited)
3 Months 3 Months 6 Months 6 Months
June 30, 2017 June 30, 2016 June 30, 2017 June 30, 2016
Net earnings $24,512 $23,205 $44,179 $24,000
Other comprehensive income (loss):
Items that will not be recycled to Net earnings:
Defined benefit plan actuarial loss, net of tax (1,222) (3,580) (398) (2,946)
Items that are or may be recycled to Net earnings:
Foreign currency translation differences for foreign operations, net of tax (12,057) 2,607 (14,562) (18,832)
Loss in fair value of interest rate swaps - (32) (11) (139)
Total items that are or may be recycled to Net earnings (12,057) 2,575 (14,573) (18,971)
Total other comprehensive loss, net of tax (13,279) (1,005) (14,971) (21,917)
Comprehensive income $11,233 $22,200 $29,208 $2,083

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three and six months ended June 30, 2017 and 2016 (unaudited)
(thousands of Canadian dollars) 3 Months 3 Months 6 Months 6 Months
June 30, 2017 June 30, 2016 June 30, 2017 June 30, 2016
Cash provided by (used in):
Operating activities:
Net earnings $24,512 $23,205 $44,179 $24,000
Items not involving cash:
Depreciation of plant and equipment 19,967 18,765 39,570 38,934
Depletion and amortization of timber, roads and other 10,024 9,652 16,321 17,621
Income tax expense (recovery) 13,289 1,852 19,609 (1,474)
Finance costs 3,535 4,965 7,597 10,149
Other assets 231 (83) 182 (284)
Reforestation liability (234) (2,157) 2,309 (543)
Provisions and other liabilities 1,232 (2,120) 2,047 (3,295)
Stock options 155 56 261 133
Write-down of plant and equipment - 1,018 - 1,018
Unrealized foreign exchange (gain) loss (1) 689 (9) 698
Other 575 458 934 365
73,285 56,300 133,000 87,322
Cash generated from (used in) operating working capital:
Trade accounts receivable and other 3,312 (11,134) (12,256) (12,053)
Inventories (432) (8,512) (15,672) (5,768)
Prepayments and other 2,365 2,410 (419) 263
Trade accounts payable and provisions 27,415 23,703 6,265 13,304
Income taxes paid (129) (208) (420) (466)
105,816 62,559 110,498 82,602
Investing activities:
Additions to property, plant and equipment (10,409) (9,446) (23,152) (21,997)
Additions to logging roads and bridges (9,429) (6,148) (16,531) (11,237)
Additions to timber licences and other intangible assets (531) (219) (1,365) (355)
Proceeds on disposal of property, plant and equipment 423 139 398 314
Investments and other assets (35) (8,764) (152) (9,553)
(19,981) (24,438) (40,802) (42,828)
Financing activities:
Interest payments (3,211) (4,354) (6,753) (11,165)
Debt refinancing costs (42) (110) (170) (842)
Change in operating line components of long term debt (40,918) (18,467) (65) (11,733)
Additions to long term debt - 28,000 76,107 28,000
Repayments of long term debt (18,550) (43,154) (116,260) (49,834)
(62,721) (38,085) (47,141) (45,574)
Foreign exchange gain (loss) on cash and cash equivalents held in a foreign currency (517) (232) (537) 403
Increase (decrease) in cash 22,597 (196) 22,018 (5,397)
Cash and cash equivalents, beginning of period 18,691 11,255 19,270 16,456
Cash and cash equivalents, end of period $41,288 $11,059 $41,288 $11,059
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
June 30, 2017 and December 31, 2016 (unaudited)
(thousands of Canadian dollars) Jun. 30, Dec. 31,
2017 2016
Assets
Current assets:
Cash and cash equivalents $ 41,288 $ 19,270
Trade accounts receivable and other 105,307 95,059
Income taxes receivable 19 222
Inventories 167,283 154,535
Prepayments and other 15,055 14,016
Investments and other assets 3,097 2,911
332,049 286,013
Employee future benefits 2,260 2,471
Investments and other assets 1,885 2,341
Property, plant and equipment 697,851 730,981
Logging roads and bridges 25,906 20,739
Timber licences 68,018 69,273
Other intangible assets 16,351 19,017
Goodwill 151,695 156,502
Deferred income taxes - 14,311
$ 1,296,015 $ 1,301,648
Liabilities and Shareholders' Equity
Current liabilities:
Trade accounts payable and provisions $ 143,358 $ 138,029
Reforestation liability 11,194 11,609
Income taxes payable 376 317
154,928 149,955
Reforestation liability 28,468 25,931
Long term debt 259,540 308,821
Employee future benefits 8,541 8,136
Provisions and other liabilities 22,978 21,290
Deferred income taxes 5,424 848
Equity:
Share capital 555,388 555,388
Contributed surplus 8,260 7,999
Translation reserve 55,012 69,574
Hedge reserve - 11
Retained earnings 197,476 153,695
816,136 786,667
$ 1,296,015 $ 1,301,648
Approved on behalf of the Board:
"L. Sauder" "D.W.G. Whitehead"
Director Director

FORWARD-LOOKING STATEMENTS

This release contains information and statements that are forward-looking in nature, including, but not limited to, statements containing the words "believes", "will", "should", "expects", "annualized" and similar expressions. Such statements involve known and unknown risks and uncertainties that may cause Interfor's actual results to be materially different from those expressed or implied by those forward-looking statements. Such risks and uncertainties include, among other things: price volatility, competition, availability and cost of log supply, natural or man-made disasters, currency exchange sensitivity, regulatory changes, allowable annual cut reductions, Aboriginal title and rights claims, potential countervailing and anti-dumping duties, stumpage fee variables and changes, environmental impact and performance, labour disruptions, and other factors referenced herein and in Interfor's Annual Report available on www.sedar.com and www.interfor.com. The forward-looking information and statements contained in this release are based on Interfor's current expectations and beliefs. Readers are cautioned not to place undue reliance on forward-looking information or statements. Interfor undertakes no obligation to update such forward-looking information or statements, except where required by law.

ABOUT INTERFOR

Interfor is a growth-oriented lumber company with operations in Canada and the United States. The Company has annual production capacity of approximately 3 billion board feet and offers one of the most diverse lines of lumber products to customers around the world. For more information about Interfor, visit our website at www.interfor.com.

The Company's unaudited consolidated financial statements and Management's Discussion and Analysis for Q2'17 are available at www.sedar.com and www.interfor.com.

There will be a conference call on Friday, August 4, 2017 at 8:00 a.m. (Pacific Time) hosted by INTERFOR CORPORATION for the purpose of reviewing the Company's release of its second quarter 2017 financial results.

The dial-in number is 1-866-233-4795. The conference call will also be recorded for those unable to join in for the live discussion, and will be available until September 3, 2017. The number to call is
1-888-203-1112, Passcode 1493113.

Contact Information:

John A. Horning
Executive Vice President and Chief Financial Officer
(604) 689-6829

Martin L. Juravsky
Senior Vice President, Corporate Development and Strategy
(604) 689-6873