Interfor Reports Q3'17 Results

VANCOUVER, BRITISH COLUMBIA--(Marketwired - Nov. 2, 2017) - INTERFOR CORPORATION ("Interfor" or "the Company") (TSX:IFP) recorded net earnings in Q3'17 of $16.8 million, or $0.24 per share, compared to $24.5 million, or $0.35 per share in Q2'17 and $15.1 million, or $0.22 per share in Q3'16.  Adjusted net earnings¹ (which takes into account the effects of share-based compensation expense and non-recurring items) in Q3'17 were $20.0 million or $0.29 per share, compared to $28.7 million, or $0.41 per share in Q2'17 and $20.7 million, or $0.30 per share in Q3'16.

Adjusted EBITDA¹ for Q3'17 was $60.5 million (or $70.0 million excluding the impact from $9.4 million of softwood lumber duties expense), on sales of $489.2 million versus $77.4 million on sales of $511.4 million in Q2'17. 

Notable items in the quarter included:

• Mixed Benchmark Lumber Prices and Stronger Canadian Dollar
  • Total lumber production was 645 million board feet, or 10 million board feet fewer than the prior quarter.  Accordingly, sales of Interfor–produced lumber were 650 million board feet versus 654 million board feet in Q2'17.  Production in the U.S. South region decreased to 281 million board feet from 294 million board feet in the preceding quarter, as the Company took precautionary measures and temporarily suspended operations at most of its U.S. South sawmills for several days in advance of and during Hurricane Irma.  Fortunately, the Company's sawmills did not sustain any material damage and have since been operating in a normal manner.  The B.C. and U.S. Northwest regions, in spite of facing fire-related log harvest constraints, produced at levels comparable to Q2'17.  The B.C. and U.S. Northwest regions accounted for 225 million board feet and 139 million board feet, respectively, compared to 215 million board feet and 146 million board feet in Q2'17, respectively. 
  • Interfor's average lumber selling price decreased $31 from Q2'17 to $611 per mfbm, due to a combination of factors, including a US$31 per mfbm decline in the SYP Composite benchmark price and a strengthening of the Canadian Dollar by 6.8% on average, partially offset by a US$26 per mfbm increase in the Western SPF Composite benchmark price. 
• Significant Cash Flow and Lower Leverage
  • Interfor generated $57.5 million of cash from operations before changes in working capital, or $0.82 per share, plus a $3.5 million reduction in working capital, for total cash generated from operations of $61.0 million.
  • Capital spending was $28.9 million on a mix of high-return discretionary, maintenance and woodlands projects.
  • Net debt ended the quarter at $177.8 million, or 17.9% of invested capital.

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

Strategic Capital Plan

• Interfor has been working on a multi-year strategic capital plan (the "Plan") that will involve a number of discretionary projects designed to capture the opportunities within its current operating platform and to pursue opportunities for further growth.   
• The Company has received Board approval to proceed with the Plan, the key elements of which include:
  • An increase in discretionary spending on existing assets over the next five years.
    • The Plan includes both large scale projects that involve the rebuilding of a number of machine centres, plus a series of smaller debottlenecking and optimization projects, with attractive paybacks.  For 2018, discretionary spending is expected to be in the range of $100 million, representing approximately two-thirds of the Company's total annual capital program. 
    • As part of the 2018 phase, Interfor is proceeding with projects at two of its sawmills in the U.S. South that involve spending of approximately US$65 million which are designed to increase production by approximately 150 million board feet per year, lower cash conversion costs, improve lumber recovery and enhance grade outturns and product mix.  These projects are expected to be completed in Q4'18 and Q1'19, respectively.
    • Other large capital projects are continuing to be advanced from an engineering and feasibility standpoint and will be sequenced as appropriate.  These projects will be subject to Board approval in the normal course.
  • Interfor has completed a detailed feasibility study and business case for a greenfield sawmill capable of producing in excess of 200 million board feet of lumber on an annualized basis.  Interfor is now proceeding with the next stage of its process and has identified a potential location in the Central Region of the U.S. South.  Interfor has estimated the total capital cost to be approximately US$115 million, including pre-start-up costs and working capital. A decision on the project is expected in early 2018.

Softwood Lumber Duties

Interfor recorded $9.4 million of expense in respect of countervailing and anti-dumping duties imposed by the U.S. on its lumber shipments from Canada into the U.S. during Q3'17.   Anti-dumping duties were incurred at a preliminary rate of 6.87% throughout the third quarter while countervailing duties, at a preliminary rate of 19.88%, were only applicable on shipments through August 13^th.  The countervailing duty ceased in August in accordance with U.S. law and is not expected to resume until late December 2017 or early January 2018, pending final rulings by the U.S. International Trade Commission.  In Q3'17, Interfor shipped approximately 115 million board feet from its Canadian operations to the U.S. market, which represented approximately 17% of the Company's total lumber sales.     

On November 2, 2017, the U.S. Department of Commerce announced its final determinations.  As part of its determinations, the final countervailing duty rate was lowered from 19.88% to 14.25%, while the anti-dumping duty rate was lowered from 6.87% to 6.58%.  In addition, the U.S. Department of Commerce concluded that critical circumstances did not exist for countervailing duties, but did exist for anti-dumping duties. 

Interfor has not yet submitted any deposits in respect of retroactive duties relating to critical circumstances, which could total approximately US$3.0 million in respect of anti-dumping.  Interfor does not believe the retroactive application of such duties will stand up under final scrutiny which, in turn, should result in a full return to the Company of any related deposits. 

Interfor is of the view that these duties imposed by the U.S. 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.

Notice of CFO Retirement Plans

John Horning, Interfor's Chief Financial Officer, has notified the Company's Board of his intention to retire on December 31, 2018.  Mr. Horning, 62, who has been with Interfor since 1997, has been instrumental in the Company's repositioning and growth initiatives over the last two decades.  A successor will be named in due course. 

Liquidity

Balance Sheet

Net debt at September 30, 2017 was $177.8 million, or 17.9% of invested capital, representing a decrease of $169.1 million from September 30, 2016 and a decrease of $111.8 million from December 31, 2016. A strengthened Canadian Dollar against the U.S. Dollar reduced debt by $19.0 million over the first nine months of 2017.

Capital Resources

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

As of September 30, 2017, the Company had commitments for capital expenditures totaling $12.6 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 September 30, 2017, the Company had net working capital of $201.7 million and available capacity on operating and term facilities of $312.3 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, Adjusted net earnings 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:

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 Q3'17 are available at www.sedar.com and www.interfor.com.

There will be a conference call on Friday, November 3, 2017 at 8:00 a.m. (Pacific Time) hosted by INTERFOR CORPORATION for the purpose of reviewing the Company's release of its third quarter 2017 financial results.

The dial-in number is 1-833-297-9919 . The conference call will also be recorded for those unable to join in for the live discussion, and will be available until December 3, 2017. The number to call is 1-855-859-2056, Passcode 88589331.