Interfor : Q2 2022 – Opens application/pdf in new tab

Interfor Corporation

Second Quarter Report

For the three and six months ended June 30, 2022

Management's Discussion and Analysis

This Management's Discussion and Analysis ("MD&A") provides a review of financial condition and results of operations as at and for the three and six months ended June 30, 2022 ("Q2'22" and "YTD'22", respectively). It should be read in conjunction with the unaudited condensed consolidated interim financial statements of Interfor Corporation and its subsidiaries ("Interfor" or the "Company") for the three and six months ended June 30, 2022, and the notes thereto which have been prepared in accordance with International Financial Reporting Standards ("IFRS"). This MD&A contains certain non-GAAP measures which, within the Non-GAAP Measures section, are discussed, defined and reconciled to figures reported in the Company's unaudited condensed consolidated interim financial statements. This MD&A has been prepared as of August 4, 2022.

All figures are stated in Canadian Dollars, unless otherwise noted, and references to US$/USD are to the United States Dollar.

Forward-Looking Information

This MD&A contains forward-looking information about the Company's business outlook, objectives, plans, strategic priorities and other information that is not historical fact. A statement contains forward-looking information when the Company uses what it knows and expects today, to make a statement about the future. Forward-looking information is included under the headings "Overview of Second Quarter, 2022", "Outlook", "Liquidity", "Capital Resources", "Off-Balance Sheet Arrangements", "Accounting Policy Changes" and "Risks and Uncertainties". Statements containing forward-looking information may include words such as: will, could, should, believe, expect, anticipate, intend, forecast, projection, target, outlook, opportunity, risk or strategy.

Readers are cautioned that actual results may vary from the forward-looking information in this report, and undue reliance should not be placed on such forward-looking information. Risk factors that could cause actual results to differ materially from the forward-looking information in this report are described under the heading "Risks and Uncertainties" herein, and in Interfor's 2021 annual Management's Discussion and Analysis, which is available on www.sedar.comand www.interfor.com. Material factors and assumptions used to develop the forward-looking information in this report include volatility in the selling prices for lumber, logs and wood chips; the Company's ability to compete on a global basis; the availability and cost of log supply; natural or man-made disasters; currency exchange rates; changes in government regulations; Indigenous reconciliation; the Company's ability to export its products; the softwood lumber trade dispute between Canada and the U.S.; environmental impacts of the Company's operations; labour disruptions; information systems security; the existence of a public health crisis; and the assumptions described under the heading "Critical Accounting Estimates" herein and in Interfor's 2021 annual Management's Discussion and Analysis.

Unless otherwise indicated, the forward-looking statements in this report are based on the Company's expectations at the date of this report. Interfor undertakes no obligation to update such forward- looking information or statements, except as required by law.

Overview of Second Quarter, 2022

Interfor recorded Net earnings in Q2'22 of $269.9 million, or $4.92 per share, compared to $397.0 million, or $6.69 per share in Q1'22 and $419.2 million, or $6.45 per share in Q2'21. Adjusted net earnings in Q2'22 were $280.2 million compared to $392.5 million in Q1'22 and $433.5 million in Q2'21.

Adjusted EBITDA was $428.6 million on record sales of $1.4 billion in Q2'22 versus $570.1 million on sales of $1.3 billion in Q1'22.

Notable items in the quarter:

• Record Lumber Production and Shipments
  o Lumber production totaled a record 1.0 billion board feet, representing an increase of 99 million
  board feet quarter-over-quarter and the fifth consecutive quarter of record production. This growth was mostly driven by the first full quarter of contribution from the Eastern Canada Operations; these operations produced 211 million board feet versus 96 million board feet in the preceding quarter. The U.S. South and U.S. Northwest regions accounted for 467 million board feet and 163 million board feet, respectively, compared to 452 million board feet and 173 million board feet in Q1'22. Production in the B.C. region decreased to 174 million board feet from 196 million board feet in Q1'22, in part due to the sale of the Acorn sawmill during the quarter.
  o Lumber shipments were a record 1.1 billion board feet, or 239 million higher than Q1'22.
  o Ongoing improvement in the availability of logistics contributed to a reduction of lumber inventories by 46 million board feet during the quarter. Further reductions following quarter- end have now positioned total lumber inventory volume within the Company's targeted range.
• Moderating Lumber Prices
  o Interfor's average selling price was $1,104 per mfbm, down $306 per mfbm versus Q1'22. The
  SYP Composite, Western SPF Composite, KD H-F Stud 2x4 9' and ESPF Composite price benchmarks decreased quarter-over-quarter by US$437, US$322, US$402 and US$313 per mfbm to US$682, US$837, US$891, and US$938 per mfbm, respectively, with the majority of these decreases occurring in the second half of the quarter.
• Strong Free Cash Flow Generation
  o Interfor generated $218.2 million of cash flow from operations before changes in working capital, or $3.98 per share. A reduction in working capital investment added $175.6 million of cash flow, primarily related to the collection of trade receivables recorded at higher lumber prices and a reduction in log and lumber inventories.
  o Net debt ended the quarter at $102.0 million, or 4.6% of invested capital, resulting in ample available liquidity of $726.5 million.
• Strong results from Eastern Canada Operations
  o The Eastern Canada Operations contributed $115.7 million of Adjusted EBITDA to Interfor's second quarter results, which is net of $17.3 million recorded in production costs related to fair value adjustments recognized at the acquisition date.
  o Since being acquired on February 22, 2022, the Eastern Canada Operations have generated $120.8 million of Adjusted EBITDA, which is net of $85.3 million recorded in production costs related to fair value adjustments recognized at the acquisition date.
• Ramp-upof DeQuincy, LA Sawmill
  o The DeQuincy, LA sawmill, with an annual two-shift capacity of 200 million board feet, has continued to ramp up ahead of schedule following its July 2021 acquisition in an idled state. Its operating schedule increased from one shift to two shifts during the quarter and the mill is expected to reach its full production run-rate in Q3 2022.

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• Strategic Capital Investments
  o Capital spending was $65.1 million, including $40.6 million on discretionary projects. The majority of this discretionary spending was focused on the multi-year rebuild of the Eatonton, GA sawmill, a new planer at the Castlegar, B.C. sawmill and upgrades to the Perry, GA sawmill.
• Minority Interest in GreenFirst Forest Products Inc. ("GreenFirst")
  o On May 2, 2022, a wholly-owned subsidiary of Interfor acquired a total of 28,684,433 common shares in the capital of GreenFirst from Rayonier A.M. Canada G.P., which represents approximately 16.2% of GreenFirst's issued and outstanding common shares. The Company paid total cash consideration of $55.6 million.
• Ongoing Monetization of Coastal B.C. Operations
  o On May 13, 2022, the Company completed the sale of its Acorn specialty sawmill located near Vancouver, British Columbia and related working capital to an affiliate of San Industries Ltd. for cash consideration of $25.2 million, and recorded a gain of $6.2 million. With this sawmill sale completed, Interfor no longer has any lumber manufacturing assets within the Coastal B.C. region.
  o Interfor is currently undertaking a strategic review of its remaining Coastal B.C. operations, which consist solely of timber harvesting and sales related to its 1.67 million cubic meters of annual harvesting rights. Any alternatives, including disposition of harvesting rights, would be subject to consultation with First Nations and consent from the Government of B.C.
• Share Repurchases
  o During Q2'22, Interfor purchased 1,015,396 common shares under the Company's Normal
  Course Issuer Bid ("NCIB") for total consideration of $32.9 million. This completed the purchase of all 6,041,701 common shares allowable under the NCIB for total consideration of $227.2 million, representing an average price of $37.60 per share or 0.98 times book value per share at June 30, 2022.
  o On July 26, 2022, the Company announced its intention to commence a substantial issuer bid ("SIB") pursuant to which the Company will offer to purchase up to $100,000,000 in value of its outstanding common shares for cancellation from holders of common shares for cash. The SIB will proceed by way of a "modified Dutch auction" procedure with a tender price range from $29.00 to $34.00 per common share.
• Softwood Lumber Duties
  o Interfor expensed $46.3 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 17.91%.
  o Interfor has cumulative duties of US$401.0 million held in trust by U.S. Customs and Border Protection as at June 30, 2022. Except for US$105.0 million 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

At its meeting today, the Interfor Board appointed Tom Temple of Kingston, Washington as a director of the Company. Mr. Temple, who is 65, is the former VP, Wood Products and Southern Resources of PotlatchDeltic, a diversified forest products company. Mr. Temple's appointment increased the number of directors from ten to eleven, while deepening the Board's operations and sales expertise in the U.S. in line with the Company's Board succession plan.

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Sustainability Performance

On April 22, 2022, Interfor released its fifth annual Sustainability Report, which provides detailed information on the Company's commitments and actions, including a number of new targets and enhanced metrics. Sustainability is at the core of Interfor's culture and integrated within its strategy, and the targets set represent an ongoing commitment to take strong action to enhance performance. Interfor's Sustainability Report can be found at www.interfor.com.

Outlook

North American lumber markets over the near term are expected to be volatile as the economy continues to adjust to inflationary pressures, higher interest rates, supply chain constraints and labour shortages.

Interfor expects that over the mid-term, 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 and constrained overall 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 significant available liquidity to continue pursuing its strategic plans despite ongoing economic and geo-political uncertainty globally.

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Financial and Operating Highlights1

			For the 3 months ended		For the 6 months ended
		Jun. 30	Jun. 30	Mar. 31		Jun. 30	Jun. 30
	Unit	2022	2021	2022	2022	2021
Financial Highlights2
Total sales	$MM	1,389.1	1,099.7	1,349.0	2,738.1	1,949.0
Lumber	$MM	1,190.8	1,012.9	1,212.5	2,403.3	1,775.3
Logs, residual products and other	$MM	198.3	86.8	136.5	334.8	173.7
Operating earnings	$MM	385.9	568.3	512.7	898.5	923.9
Net earnings	$MM	269.9	419.2	397.0	666.9	683.7
Net earnings per share, basic	$/share	4.92	6.45	6.69	11.68	10.45
Adjusted net earnings3	$MM	280.2	433.5	392.5	672.6	704.2
Adjusted net earnings per share, basic3	$/share	5.11	6.67	6.61	11.78	10.76
Operating cash flow per share (before working
capital changes)3	$/share	3.98	7.46	6.38	10.45	13.17
Adjusted EBITDA3	$MM	428.6	611.3	570.1	998.7	1,003.4
Adjusted EBITDA margin3	%	30.9%	55.6%	42.3%	36.5%	51.5%
Total assets	$MM	3,269.5	2,409.4	3,081.4	3,269.5	2,409.4
Total debt	$MM	372.6	365.1	403.1	372.6	365.1
Net debt3	$MM	102.0	(490.7)	340.2	102.0	(490.7)
Net debt to invested capital3	%	4.6%	(46.1%)	15.8%	4.6%	(46.1%)
Annualized return on capital employed3	%	52.9%	110.8%	86.6%	69.4%	96.2%
Operating Highlights
Lumber production	million fbm	1,016	716	917	1,933	1,402
Lumber sales	million fbm	1,082	714	843	1,925	1,380
Lumber - average selling price4	$/thousand fbm	1,104	1,419	1,410	1,240	1,286
Average USD/CAD exchange rate5	1 USD in CAD	1.2768	1.2282	1.2662	1.2715	1.2470
Closing USD/CAD exchange rate5	1 USD in CAD	1.2886	1.2394	1.2496	1.2886	1.2394

Notes:

1. Figures in this table may not equal or sum to figures presented elsewhere due to rounding.
2. Financial information presented for interim periods in this MD&A is prepared in accordance with IFRS and is unaudited.
3. Refer to the Non-GAAP Measures section of this MD&A for definitions and reconciliations of these measures to figures reported in the Company's unaudited condensed consolidated interim financial statements.
4. Gross sales including duties.
5. Based on Bank of Canada foreign exchange rates.

Summary of Second Quarter 2022 Financial Performance

Sales

Interfor recorded $1.4 billion of total sales, up 26.3% from $1.1 billion in the second quarter of 2021, driven by the sale of 1.1 billion board feet of lumber at an average price of $1,104 per mfbm. Lumber sales volume increased 368 million board feet, or 51.5%, while average selling price decreased $315 per mfbm, or 22.2%, as compared to the same quarter of 2021.

Decreases in the average selling price of lumber reflect lower prices for Western SPF, Southern Yellow Pine, and Hem-Fir in Q2'22 as compared to Q2'21. The Western SPF Composite, SYP Composite, and KD H-F Stud 2x4 9' benchmarks decreased by US$482, US$346, and US$718 per mfbm to US$837, US$682, and US$891 per mfbm, respectively.

Sales generated from logs, residual products and other increased by $111.5 million or 128.5% in Q2'22 compared to Q2'21 due mainly to the Eastern Canada Operations I-Joist plant sales and an increase in volume of chips produced and sold.

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