IFP Interfor Corporation

INTERFOR CORPORATION (“Interfor” or the “Company”) (TSX: IFP) recorded Net earnings in Q1’22 of $397.0 million, or $6.69 per share, compared to $69.7 million, or $1.15 per share in Q4’21 and $264.5 million, or $4.01 per share in Q1’21. Adjusted net earnings in Q1’22 were $392.5 million compared to $78.2 million in Q4’21 and $270.6 million in Q1’21.

Adjusted EBITDA was $570.1 million on sales of $1.3 billion in Q1’22 versus $149.5 million on sales of $675.9 million in Q4’21.

Notable items in the quarter:

• Acquisition of EACOM Timber Corporation
  • On February 22, 2022, the Company completed the transaction to acquire 100% of the equity interests of EACOM Timber Corporation (“EACOM”) from an affiliate of Kelso & Company. The acquisition includes seven sawmills with a combined lumber production capacity of 985 million board feet, an I-Joist plant with annual production capacity of 70 million linear feet, and a value-added remanufacturing plant with annual production capacity of 60 million board feet (the “Acquired Eastern Canada Operations”). The Company paid total consideration of $731.2 million which was funded from cash on hand and drawings on the Revolving Term Line.
  • The Acquired Eastern Canada Operations contributed $5.1 million of Adjusted EBITDA to Interfor’s first quarter results, which is net of $68.0 million recorded in production costs related to fair value adjustments recognized at the acquisition date.
• Record Lumber Production
  • Total lumber production in Q1’22 was 921 million board feet, representing an increase of 163 million board feet quarter-over-quarter and setting an Interfor production record. The U.S. South and U.S. Northwest regions accounted for 452 million board feet and 173 million board feet, respectively, compared to 409 million board feet and 166 million board feet in Q4’21. Production in the B.C. region increased to 196 million board feet from 183 million board feet in Q4’21. The Acquired Eastern Canada Operations accounted for 100 million board feet in Q1’22.
  • Total lumber shipments were 860 million board feet, or 141 million higher than Q4’21.
  • The 61 million board feet shortfall of lumber shipments compared to production was the result of ongoing logistics constraints across the U.S. and Canada.

• Strengthening Lumber Prices 
  • Interfor’s average selling price was $1,410 per mfbm, up $588 per mfbm versus Q4’21. The SYP Composite, Western SPF Composite and KD H-F Stud 2x4 9’ price benchmarks increased quarter-over-quarter by US$475, US$506 and US$560 per mfbm to US$1,119, US$1,159 and US$1,293 per mfbm, respectively, with the majority of these increases occurring early in the quarter.
• Strong Free Cash Flow Generation
  • Interfor generated $378.8 million of cash flow from operations before changes in working capital, or $6.38 per share. This was partially offset by a $97.6 million investment in working capital, primarily related to higher trade receivables driven by lumber prices and seasonally higher log inventories in B.C.
  • Net debt ended the quarter at $340.2 million, or 15.8% of invested capital, resulting in available liquidity of $483.3 million.
• Strategic Capital Investments 
  • Capital spending was $50.9 million, including $34.8 million on high-return discretionary projects. The majority of this discretionary spending was focused on the ongoing multi-year rebuild of the Eatonton, GA sawmill and a new planer at the Castlegar, BC sawmill.
• Restart of the DeQuincy, LA Sawmill
  • Lumber production at the sawmill in DeQuincy, LA restarted on January 9, 2022, well ahead of schedule. During Q1’22, the sawmill was operating on one shift and increased to two shifts by April 2022. Ramp-up to its 200 million board foot annual capacity is expected by the end of 2022.
• Normal Course Issuer Bid (“NCIB”)
  • During Q1’22, Interfor purchased 5,026,305 common shares under the Company’s NCIB for total consideration of $194.3 million. In April 2022, Interfor purchased 1,015,396 common shares 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 1.15 times book value per share at March 31, 2022.
• Minority Interest in GreenFirst Forest Products Inc. (“GreenFirst”)
  • 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.
• Sale of Acorn Speciality Sawmill in BC
  • On April 12, 2022, the Company announced it had reached an agreement to sell its Acorn specialty sawmill located near Vancouver, British Columbia to an affiliate of San Industries Ltd. The completion of the transaction is subject to customary conditions and is expected to close in the second quarter of 2022.
• Softwood Lumber Duties
  • Interfor expensed $35.8 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%.
  • Interfor has cumulative duties of US$362.1 million held in trust by U.S. Customs and Border Protection as at March 31, 2022, including US$161.2 million of duty deposits related to the Acquired Eastern Canada Operations. Except for US$104.7 million in respect of overpayments arising from duty rate adjustments and the fair value of assumed rights to duties acquired related to the Acquired Eastern Canada Operations, Interfor has recorded the duty deposits as an expense.  

Outlook

North American lumber markets over the near term are expected to remain above historical trends driven by continued strong demand from new housing starts and repair and remodel activity, albeit with volatility as the North American economy adjusts to inflationary pressures, rising interest rates, logistics constraints and labour shortages.

Interfor expects lumber demand to continue to grow over the mid-term, as repair and renovation activities and new housing starts in the U.S. benefit from favourable underlying demand fundamentals. However, the potential for elevated interest rates exists, which may reduce housing affordability and slow the growth in demand for lumber.

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.

Financial and Operating Highlights1  

		For the three months ended
		Mar. 31,	Mar. 31,	Dec. 31,
	Unit	2022	2021	2021
Financial Highlights2
Total sales	$MM	1,349.0	849.3	675.9
Lumber	$MM	1,212.5	762.4	591.5
Logs, residual products and other	$MM	136.5	86.9	84.4
Operating earnings	$MM	512.7	355.6	99.2
Net earnings	$MM	397.0	264.5	69.7
Net earnings per share, basic	$/share	6.69	4.01	1.15
Adjusted net earnings3	$MM	392.5	270.6	78.2
Adjusted net earnings per share, basic3	$/share	6.61	4.11	1.29
Operating cash flow per share (before working capital changes)3	$/share	6.38	5.73	2.19
Adjusted EBITDA3	$MM	570.1	392.1	149.5
Adjusted EBITDA margin3	%	42.3%	46.2%	22.1%
Total assets	$MM	3,081.4	2,159.7	2,603.5
Total debt	$MM	403.1	377.3	375.7
Net debt3	$MM	340.2	(236.0)	(162.9)
Net debt to invested capital3	%	15.8%	(21.7%)	(11.1%)
Annualized return on capital employed3	%	86.8%	79.2%	18.2%
Operating Highlights
Lumber production	million fbm	921	687	758
Lumber sales	million fbm	860	666	719
Lumber - average selling price4	$/thousand fbm	1,410	1,143	822
Average USD/CAD exchange rate5	1 USD in CAD	1.2662	1.2660	1.2603
Closing USD/CAD exchange rate5	1 USD in CAD	1.2496	1.2575	1.2678

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 release is prepared in accordance with IFRS and is unaudited.
3. Refer to the Non-GAAP Measures section of this release for definitions and reconciliations of these measures to figures reported in the Company’s unaudited condensed consolidated interim financial statements.
4. Gross sales before duties.
5. Based on Bank of Canada foreign exchange rates.

Liquidity

Balance Sheet

Interfor’s Net debt at March 31, 2022 was $340.2 million, or 15.8% of invested capital, representing an increase of $503.1 million from the level of Net debt at December 31, 2021.

As at March 31, 2022 the Company had net working capital of $462.4 million and available liquidity of $483.3 million, based on the full borrowing capacity under its $500 million Revolving Term Line.

The Revolving 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 fund operating and capital requirements for the foreseeable future.

	For the three months ended
	Mar. 31,	Dec. 31,	Mar. 31,
Thousands of Dollars	2022	2021	2021
Net debt
Net debt, period opening	$(162,886)	$(133,829)	$(75,432)
Revolving Term Line net drawings	31,150	2,198	-
Impact on U.S. Dollar denominated debt from strengthening CAD	(3,713)	(1,851)	(4,710)
Decrease (increase) in cash and cash equivalents	478,203	(31,623)	(162,167)
Impact on U.S. Dollar denominated cash and cash equivalents from (weakening) strengthening CAD	(2,574)	2,219	6,343
Net debt, period ending	$340,180	$(162,886)	$(235,966)

On December 17, 2021, the Company completed an early renewal and expansion of its Revolving Term Line. The commitment under the facility was increased by $150 million to a total of $500 million, and the term was extended from March 2024 to December 2026.

Capital Resources

The following table summarizes Interfor’s credit facilities and availability as of March 31, 2022:

	Revolving	Senior
	Term	Secured
Thousands of Canadian Dollars	Line	Notes	Total
Available line of credit and maximum borrowing available	$500,000	$368,112	$868,112
Less:
Drawings	35,000	368,112	403,112
Outstanding letters of credit included in line utilization	44,606	-	44,606
Unused portion of facility	$420,394	$         -	420,394
Add:
Cash and cash equivalents			62,932
Available liquidity at March 31, 2022			$483,326

Interfor’s Revolving Term Line matures in December 2026 and its Senior Secured Notes have maturities principally in the years 2024-2030.

As of March 31, 2022, the Company had commitments for capital expenditures totaling $128.9 million for both maintenance and discretionary capital projects.

Non-GAAP Measures

This release makes reference to the following non-GAAP measures: Adjusted net earnings, Adjusted net earnings per share, 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 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 audited consolidated financial statements (unaudited for interim periods) prepared in accordance with IFRS:

	For the three months ended
	Mar. 31,	Mar. 31,	Dec. 31,
Thousands of Canadian Dollars except number of shares and per share amounts	2022	2021	2021
Adjusted Net Earnings
Net earnings	$397,031	$264,487	$69,653
Add:
Asset write-downs and restructuring costs	3,198	142	6,841
Other foreign exchange (gain) loss	(12,823)	2,346	4,468
Long term incentive compensation expense	3,671	7,670	8,058
Other income excluding business interruption insurance	(395)	(1,996)	(7,816)
Post closure wind-down costs	-	224	-
Income tax effect of above adjustments	1,794	(2,229)	(3,036)
Adjusted net earnings	$392,476	$270,644	$78,168
Weighted average number of shares - basic ('000)	59,357	65,927	60,787
Adjusted net earnings per share	$6.61	$4.11	$1.29
Adjusted EBITDA
Net earnings	$397,031	$264,487	$69,653
Add:
Depreciation of plant and equipment	33,113	21,474	27,053
Depletion and amortization of timber, roads and other	9,124	6,968	8,397
Finance costs	5,169	4,524	4,425
Income tax expense	132,026	86,256	28,462
EBITDA	576,463	383,709	137,990
Add:
Long term incentive compensation expense	3,671	7,670	8,058
Other foreign exchange (gain) loss	(12,823)	2,346	4,468
Other income excluding business interruption insurance	(395)	(1,996)	(7,816)
Asset write-downs and restructuring costs	3,198	142	6,841
Post closure wind-down costs	-	224	-
Adjusted EBITDA	$570,114	$392,095	$149,541
Sales	$1,349,038	$849,307	$675,895
Adjusted EBITDA margin	42.3%	46.2%	22.1%
Net debt to invested capital
Net debt
Total debt	$403,112	$377,250	$375,675
Cash and cash equivalents	(62,932)	(613,216)	(538,561)
Total net debt	$340,180	$(235,966)	$(162,886)
Invested capital
Net debt	$340,180	$(235,966)	$(162,886)
Shareholders' equity	1,817,371	1,322,222	1,635,973
Total invested capital	$2,157,551	$1,086,256	$1,473,087
Net debt to invested capital1	15.8%	(21.7%)	(11.1%)
Operating cash flow per share (before working capital changes)
Cash provided by operating activities	$281,214	$285,080	$86,203
Cash used in operating working capital	97,567	92,604	46,852
Operating cash flow (before working capital changes)	$378,781	$377,684	$133,055
Weighted average number of shares - basic ('000)	59,357	65,927	60,787
Operating cash flow per share (before working capital changes)	$6.38	$5.73	$2.19
Annualized return on capital employed
Net earnings	$397,031	$264,487	$69,653
Add:
Finance costs	5,169	4,524	4,425
Income tax expense	132,026	86,256	28,462
Earnings before income taxes and finance costs	$534,226	$355,267	$102,540
Capital employed
Total assets	$3,081,351	$2,159,692	$2,603,510
Current liabilities	(472,686)	(263,526)	(321,642)
Add:
Bank indebtedness	-	-	2,202
Current portion of long term debt	6,769	6,811	6,868
Current portion of lease liabilities	15,014	12,169	12,239
Capital employed, end of period	$2,630,448	$1,915,146	$2,303,177
Capital employed, beginning of period	2,303,177	1,672,103	2,200,165
Average capital employed	$2,466,812	$1,793,624	$2,251,671
Earnings before income taxes and finance costs divided by average capital employed	21.7%	19.8%	4.6%
Annualization factor	4.0	4.0	4.0
Annualized return on capital employed	86.8%	79.2%	18.2%

Note: 1 Net debt to invested capital as of the period end.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the three months ended March 31, 2022 and 2021 (unaudited)
(thousands of Canadian Dollars except earnings per share)	Three Months	Three Months
	Mar. 31, 2022	Mar. 31, 2021
Sales	$1,349,038	$849,307
Costs and expenses:
Production	733,830	432,167
Selling and administration	17,628	12,879
Long term incentive compensation expense	3,671	7,670
U.S. countervailing and anti-dumping duty deposits	35,817	12,390
Depreciation of plant and equipment	33,113	21,474
Depletion and amortization of timber, roads and other	9,124	6,968
	833,183	493,548
Operating earnings before asset write-downs and restructuring costs	515,855	355,759
Asset write-downs and restructuring costs	3,198	142
Operating earnings	512,657	355,617
Finance costs	(5,169)	(4,524)
Other foreign exchange gain (loss)	12,823	(2,346)
Other income	8,746	1,996
	16,400	(4,874)
Earnings before income taxes	529,057	350,743
Income tax expense
Current	122,580	83,173
Deferred	9,446	3,083
	132,026	86,256
Net earnings	$397,031	$264,487
Net earnings per share
Basic	$6.69	$4.01
Diluted	$6.66	$4.00

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended March 31, 2022 and 2021 (unaudited)
(thousands of Canadian Dollars)		Three Months	Three Months
		Mar. 31, 2022	Mar. 31, 2021
Net earnings		$397,031	$264,487
Other comprehensive loss:
Items that will not be recycled to Net earnings:
Defined benefit plan actuarial gain, net of tax		2,786	4,472
Items that are or may be recycled to Net earnings:
Foreign currency translation differences for foreign operations, net of tax		(24,729)	(8,887)
Total other comprehensive loss, net of tax		(21,943)	(4,415)
Comprehensive income		$375,088	$260,072

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2022 and 2021 (unaudited)
(thousands of Canadian Dollars)		Three Months	Three Months
		Mar. 31, 2022	Mar. 31, 2021
Cash provided by (used in):
Operating activities:
Net earnings		$397,031	$264,487
Items not involving cash:
Depreciation of plant and equipment		33,113	21,474
Depletion and amortization of timber, roads and other		9,124	6,968
Deferred income tax expense		9,446	3,083
Current income tax expense		122,580	83,173
Finance costs		5,169	4,524
Other assets		(40)	(431)
Reforestation liability		1,736	496
Provisions and other liabilities		(12,910)	495
Stock options		241	196
Write-down of plant and equipment		1,223	-
Unrealized foreign exchange loss		1,808	3,011
Other income		(8,746)	(1,996)
Income taxes paid	(180,994)		(7,796)
		378,781	377,684
Cash generated from (used in) operating working capital:
Trade accounts receivable and other		(64,651)	(67,859)
Inventories		(24,434)	(24,352)
Prepayments		(162)	(3,348)
Trade accounts payable and provisions		(8,320)	2,955
		281,214	285,080
Investing activities:
Additions to property, plant and equipment		(51,023)	(26,331)
Additions to roads and bridges		155	(2,885)
Acquisitions		(537,679)	(73,630)
Proceeds on disposal of property, plant and equipment		1,190	5,693
Net proceeds from investments and other assets		392	157
		(586,965)	(96,996)
Financing activities:
Issuance of share capital, net of expenses		377	1,945
Share repurchases		(194,308)	(20,303)
Interest payments		(5,012)	(4,258)
Lease liability payments		(4,470)	(3,301)
Debt refinancing costs		(189)	-
Term line net repayments		(2,209)	-
Additions to long term debt		328,720	-
Repayment of long-term debt		(295,361)	-
		(172,452)	(25,917)
Foreign exchange gain (loss) on cash and cash equivalents held in a foreign currency		2,574	(6,343)
(Decrease) increase in cash		(475,629)	155,824
Cash and cash equivalents, beginning of period		538,561	457,392
Cash and cash equivalents, end of period		$62,932	$613,216

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
March 31, 2022 and December 31, 2021 (unaudited)
(thousands of Canadian Dollars)	Mar. 31, 2022	Dec. 31, 2021
Assets
Current assets:
Cash and cash equivalents	$62,932	$538,561
Trade accounts receivable and other	338,946	147,764
Income taxes receivable	-	12,776
Inventories	511,993	250,481
Prepayments	21,215	16,125
	935,086	965,707
Employee future benefits	22,945	8,338
Deposits and other assets	141,026	52,221
Right of use assets	43,510	33,547
Property, plant and equipment	1,398,693	1,067,754
Roads and bridges	34,140	27,101
Timber licences	105,114	106,136
Goodwill and other intangible assets	399,601	342,291
Deferred income taxes	1,236	415
	$3,081,351	$2,603,510
Liabilities and Shareholders’ Equity
Current liabilities:
Bank indebtedness	$         -	$2,202
Trade accounts payable and provisions	308,934	218,825
Current portion of long term debt	6,769	6,868
Reforestation liability	16,749	16,670
Lease liabilities	15,014	12,239
Income taxes payable	125,220	64,838
	472,686	321,642
Reforestation liability	31,091	29,250
Lease liabilities	33,090	26,850
Long term debt	396,343	366,605
Employee future benefits	10,595	9,069
Provisions and other liabilities	35,094	43,686
Deferred income taxes	285,081	170,435
Equity:
Share capital	444,573	484,721
Contributed surplus	4,773	4,694
Translation reserve	33,691	58,420
Retained earnings	1,334,334	1,088,138
	1,817,371	1,635,973
	$3,081,351	$2,603,510

Approved on behalf of the Board:
	“L. Sauder”	“T.V. Milroy”
	Director	Director

FORWARD-LOOKING STATEMENTS

This release 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. 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 release, 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 release are described in Interfor’s first quarter and annual Management’s Discussion and Analysis under the heading “Risks and Uncertainties”, which are available on www.interfor.com and under Interfor’s profile on www.sedar.com. Material factors and assumptions used to develop the forward-looking information in this release 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; the availability of the Company’s allowable annual cut (“AAC”); claims by and treaty settlements with Indigenous peoples; the Company’s ability to export its products; the softwood lumber trade dispute between Canada and the U.S.; stumpage fees payable to the Province of British Columbia (“B.C.”); environmental impacts of the Company’s operations; labour disruptions; information systems security; and the existence of a public health crisis. Unless otherwise indicated, the forward-looking statements in this release are based on the Company’s expectations at the date of this release. Interfor undertakes no obligation to update such forward-looking information or statements, except as required by law.

ABOUT INTERFOR

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 4.9 billion board feet and offers a diverse line of lumber products to customers around the world. For more information about Interfor, visit our website at www.interfor.com.

The Company’s unaudited condensed consolidated interim financial statements and Management’s Discussion and Analysis for Q1’22 are available at www.sedar.com and www.interfor.com.

There will be a conference call on Thursday, May 12, 2022 at 8:00 a.m. (Pacific Time) hosted by INTERFOR CORPORATION for the purpose of reviewing the Company’s release of its first quarter 2022 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 June 12, 2022. The number to call is 1-855-859-2056, Passcode 2455297.

For further information:Richard Pozzebon, Senior Vice President and Chief Financial Officer(604) 422-3400