International Forest Products Limited
TSX : IFP.A

International Forest Products Limited

October 26, 2006 20:50 ET

Interfor Records Earnings of $1.6 Million in Q3

Exposure to specialty and offshore markets softens impact of U.S. downturn

VANCOUVER, BRITISH COLUMBIA--(CCNMatthews - Oct. 26, 2006) -

OPERATING RESULTS

International Forest Products Limited ("Interfor" or the "Company") (TSX:IFP.A) recorded net earnings of $1.6 million or $0.03 per share in the 3rd Quarter of 2006 compared to $8.0 million or $0.17 per share in the 2nd Quarter of 2006, and $4.7 million or $0.10 per share in the 3rd Quarter of 2005. Through the first 9 months of 2006 Interfor recorded net earnings of $18.3 million or $0.38 per share compared to $24.6 million or $0.51 per share in the first 9 months of 2005.

Included in the Company's 3rd Quarter results were $0.5 million after-tax or $0.01 per share in net gains primarily from the sale of surplus assets. After allowing for these items, net earnings in the 3rd Quarter were $1.1 million or $0.02 per share compared to $6.0 million or $0.12 per share in the 2nd Quarter and a loss of $2.6 million or $0.05 per share in the 3rd Quarter of 2005.

In the 3rd Quarter, benchmark SPF 2X4 prices fell on average by 12% to US$278 per thousand board feet, due to concerns over the level of construction activity in the U.S. and the scheduled implementation of the Softwood Lumber Agreement (see below). Prices for specialty cedar products and the Japanese market remained steady or improved slightly in the quarter.

At 304 million board feet, lumber shipments in the 3rd Quarter declined by 7% compared with the immediately preceding Quarter, and were 1% below shipment levels in the 3rd Quarter of 2005. Lumber production, at 292 million board feet, was 10% below production in the 2nd Quarter of 2006 and 5% below the 3rd Quarter of 2005. The Company's Queensboro sawmill was scaled back to one shift in mid-August to address a number of operating reliability issues, while the Hammond sawmill was curtailed for a total of 12 days in the quarter due to a lack of logs. In the U.S., the Gilchrist mill lost 9 days and the Molalla mill lost 2 days due to log supply and price issues.

Log production in the Company's coastal region totalled 637,200 cubic metres in the 3rd Quarter, 3% lower than the 2nd Quarter, as weather-related curtailments impacted production in the latter half of the quarter.

Sales revenue in the 3rd Quarter decreased by 8% to $206 million compared to $224 million in the 2nd Quarter reflecting the drop in shipments and a reduction in lumber sales returns which declined by 5% compared with the 2nd Quarter. Sales revenue in the 3rd Quarter was 4% below the same period last year.

EBITDA excluding other income (and one-time items) declined by 41% in the 3rd Quarter to $13.9 million compared to $23.6 million the 2nd Quarter, and was flat relative to EBITDA in the 3rd Quarter of 2005.

During the 3rd Quarter Interfor paid $4.2 million ($2.7 million after-tax or $0.06 per share) in deposits for countervailing and anti-dumping duties on shipments of 82 million board feet from Canada to the U.S. At the end of the quarter, Interfor had paid total deposits of US$105.9 million (CAD$118.3 million using September 30, 2006 exchange rates) since the deposit requirement came into effect in May 2002.

CASH FLOW AND BALANCE SHEET

Interfor generated $13.9 million in cash from operations in the 3rd Quarter before working capital changes.

Significant additional progress was made on the Company's restructuring program during the 3rd Quarter, including:

- the sale of additional surplus property and equipment;

- the sale of the MacKenzie Seizai sawmill; and

- the sale of B.W. Creative Wood Industries Ltd.

These transactions generated total cash proceeds of $17.0 million and contributed a gain of $1.0 million after-tax which, as indicated above, is reflected in the Company's 3rd Quarter accounts.

During the quarter, $20 million in cash was used to reduce funding provided under the Company's accounts receivable securitization program.

Capital spending in the 3rd Quarter amounted to $27.4 million including $5.6 million on roads, $4.4 million on maintenance of business projects and $17.4 million on discretionary projects.

As a result of these activities, net debt increased to $24.6 million at September 30th, representing a ratio of net debt to invested capital of 5.8% compared to 3.3% at the end of the 2nd Quarter.

CANADA-U.S. SOFTWOOD LUMBER AGREEMENT ("SLA")

Earlier this year the Canadian and U.S. governments reached a framework agreement to resolve the softwood dispute. Although the SLA is still subject to the passage of legislation by the Canadian parliament, the agreement came into force on October 12, 2006. The SLA will result in Canadian producers paying an export charge on shipments to the U.S. when the price of lumber is at or below US$355 per thousand board feet, as determined by the Random Lengths Framing Lumber Composite Index. The SLA also provides for the return of approximately 81% of the duty deposits paid since May 2002, plus interest.

The timing of the return of the duty refunds is uncertain at this time, but the terms of the SLA contemplate that refunds will occur within six months of October 12, 2006 (the effective date of the SLA). The Company expects to record the recovery of duties in its accounts once substantially all of the conditions of the SLA have been met.

SHARE BUY-BACK PROGRAM

During the 3rd Quarter, Interfor purchased a total of 71,600 shares at an average price of $6.60 per share under the Share Buy-Back Program authorized in November 2005. A total of 497,300 shares have been purchased since the inception of the Program at an average price of $6.87 per share. All of the shares purchased under the Program were cancelled at the time of purchase. The program will end on November 8, 2006. However, Interfor's Board of Directors has authorized, subject to regulatory approval, a new program to purchase up to 2,360,000 or 5% of the Company's outstanding Class A shares. The Company will be in a position to commence buying shares two trading days after receiving approval from the Toronto Stock Exchange.

The Company believes that current market conditions provide an opportunity to acquire shares at attractive prices and that purchases will enhance long-term shareholder value.

OUTLOOK

Structural lumber prices in North America reached their lowest level in five years in early October and will likely remain weak for the remainder of 2006 and into 2007.

Prices in Japan remain firm but the potential for a slowdown in Japan's economic expansion could place downward pressure on current price levels. Strong demand for cedar lumber has carried over into the 4th Quarter. Prices are expected to remain reasonably firm in the coming months due to the lack of available supply.

In the U.S. Pacific Northwest log prices are beginning to moderate, albeit slowly.

The Company plans to operate production for the Japan market at capacity in the 4th Quarter while cedar production will be curtailed to some extent due to log availability. The Queensboro mill is scheduled to remain on one shift throughout the 4th Quarter and the U.S. mills will operate at approximately 75% of capacity. The Adams Lake mill is expected to operate on a normal schedule in the 4th Quarter.

In the 1st Quarter of 2006 the Company announced an agreement to sell its helicopter logging operations for $4.0 million plus an amount for working capital and additional amounts of up to $1.5 million dependent upon future helicopter logging services. The transaction has not yet received Canadian regulatory approval and is now expected to close in the 4th Quarter of 2006. Interfor will continue its program to monetize non-core and non-performing assets in the 4th Quarter of 2006.

NEW DIRECTORS APPOINTED

At its meeting on October 26th, Interfor's Board of Directors appointed J. Eddie McMillan and Peter M. Lynch as directors of the Company.

Mr. McMillan, a private investor and consultant based in Perdido Keys, Florida, retired in 2002 following a 30 year career with Willamette Industries Inc., most recently in the position of Executive Vice President, Wood Products Group, where he had direct responsibility for all of Willamette's timberlands and wood products production, sales and capital projects activity. Mr. Lynch, of Toronto, Ontario, currently serves as Executive Vice President of Grant Forest Products Inc., a privately-owned manufacturer of OSB with operations in Canada and the United States. Prior to joining Grant in 1993, Mr. Lynch practiced law with the firm of Field, Turner, Dunn & Lynch. The appointment of Mr. McMillan and Mr. Lynch raises the number of directors from nine to eleven and was made as part of the Company's Board succession plan conducted under the auspices of its Corporate Governance Committee. Both Mr. McMillan and Mr. Lynch have agreed to stand for election at the Company's Annual General Meeting in April 2007.

FORWARD-LOOKING STATEMENTS

This press release contains statements that are forward-looking in nature. Such statements involve known and unknown risks and uncertainties that may cause the actual results of the Company to be materially different from those expressed or implied by those forward-looking statements. Such risks and uncertainties include, among others: general economic and business conditions, product selling prices, raw material and operating costs, changes in foreign-currency exchange rates and other factors referenced herein and in the Company's Annual Statutory Report.

EBITDA

In this Press Release reference is made to EBITDA and EBITDA excluding Other Income. EBITDA represents earnings before interest, taxes, depletion, amortization and restructuring costs and write-downs of property, plant, equipment and timber. EBITDA excluding Other Income represents EBITDA less other income. The Company discloses EBITDA as it is a measure used by analysts and Interfor's management to evaluate the Company's performance. As EBITDA is a non-GAAP measure, it may not be comparable to EBITDA calculated by others. In addition, as EBITDA is not a substitute for net earnings, readers should consider net earnings in evaluating the Company's performance.

ABOUT INTERFOR

Interfor is one of the Pacific Northwest's largest producers of quality wood products, with a combined annual capacity of 1.3 billion board feet. The Company's operations are located in British Columbia, Washington and Oregon, including three sawmills in the Coastal region of British Columbia, one in the B.C. Interior, one in Washington and two in Oregon. In addition, Interfor operates value-added remanufacturing and specialty products facilities in B.C. and Washington.

Additional information relating to the Company and its operations, including Interfor's Annual Statutory Information for 2005, can be found on its website at www.interfor.com and or on SEDAR at www.sedar.com



SELECTED STATISTICS
-------------------

Three Months Ended Nine Months Ended
September 30 September 30
2006 2005 2006 2005
--------- --------- --------- ---------

Lumber volume (MMfbm)
- Sales 298 308 946 828
- Production(1) 292 308 943 827

Log Volume (000 m3)
- Production 707 712 1,765 1,924

Prices ($/Mfbm)
- Lumber(2) 506 539 526 591
- Pulp Chips 35 25 29 27

Shares Outstanding (millions)
- Total at period end(3) 48.3 48.7 48.3 48.7
- Weighted average 48.4 48.7 48.6 48.7

(1) excluding volumes custom cut for third parties
(2) gross sales before countervailing and antidumping duties
(3) as of October 24, 2006 the number of shares outstanding by class
are as follows:
Class A subordinate voting 47,324,896
Class B common 1,015,779
Total 48,340,67


There will be a conference call on Friday, October 27, 2006 at 8:00 AM (Pacific Time) hosted by INTERNATIONAL FOREST PRODUCTS LIMITED for the purpose of reviewing the Company's release of its Third Quarter 2006 Financial Results. The dial-in number is 1-800-741-7590.

The conference call will also be recorded for those unable to join in for the live discussion. The number to call is 1-800-558-5253 Reservation 21306334# and will be available until November 10, 2006.

William L. Sauder, Chairman

Duncan K. Davies, President and C.E.O.



CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended September 30, 2006 and 2005 (unaudited)
------------------------------------------------------------------------
(thousands of Canadian 3 Months 3 Months 9 Months 9 Months
dollars except earnings Sept. 30, Sept. 30, Sept. 30, Sept. 30,
per share) 2006 2005 2006 2005
------------------------------------------------------------------------

Sales $ 205,932 $ 214,236 $ 643,442 $ 620,570

Costs and expenses:
Production 183,617 188,485 559,756 528,858
Selling and administration 4,700 4,552 14,595 15,142
Long term incentive
compensation 56 200 (785) 806
U.S. countervailing and
antidumping duty deposits
(note 11) 4,151 8,022 14,725 22,921
Amortization of plant and
equipment 7,222 7,409 22,271 19,927
Depletion and amortization
of timber, roads and other 6,171 8,404 16,112 22,077
-----------------------------------------------------------------------
205,917 217,072 626,674 609,731

------------------------------------------------------------------------
Operating earnings (loss)
before restructuring costs 15 (2,836) 16,768 10,839

Restructuring costs and
write-downs of
property, plant, equipment
and timber (note 7) - 1,136 7,577 27,597
------------------------------------------------------------------------
Operating earnings (loss) 15 (3,972) 9,191 (16,758)

Interest expense on
long-term debt (821) (1,035) (2,383) (2,619)
Other interest expense (42) (254) (514) (744)
Other income (note 6) 647 9,771 13,739 38,130
Equity in earnings of
investee companies 442 846 2,001 5,626
------------------------------------------------------------------------
226 9,328 12,843 40,393

------------------------------------------------------------------------
Earnings before income taxes 241 5,356 22,034 23,635
Income tax expense
(recovery):
Current (2,757) 1,366 (2,810) 3,700
Future 1,440 (714) 6,524 (4,650)
------------------------------------------------------------------------
(1,317) 652 3,714 (950)
------------------------------------------------------------------------

Net earnings $ 1,558 $ 4,704 $ 18,320 $ 24,585
------------------------------------------------------------------------
------------------------------------------------------------------------

Net earnings per share
(note 9)
Basic $ 0.03 $ 0.10 $ 0.38 $ 0.51
Diluted $ 0.03 $ 0.10 $ 0.37 $ 0.50
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.


CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
For the nine months ended September 30, 2006 and 2005 (unaudited)
------------------------------------------------------------------------
9 Months 9 Months
Sept. 30, Sept. 30,
(thousands of Canadian dollars) 2006 2005
------------------------------------------------------------------------

Retained earnings, beginning of year $ 85,943 $ 66,218

Net earnings 18,320 24,585
------------------------------------------------------------------------

Retained earnings, end of period $ 104,263 $ 90,803
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.


CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three and nine months ended September 30, 2006 and 2005 (unaudited)
------------------------------------------------------------------------
(thousands of Canadian 3 Months 3 Months 9 Months 9 Months
dollars) Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2006 2005 2006 2005
------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Net earnings $ 1,558 $ 4,704 $ 18,320 $ 24,585
Items not involving cash:
Amortization of plant and
equipment 7,222 7,409 22,271 19,927
Depletion and amortization
of timber, roads and other 6,171 8,404 16,112 22,077
Future income taxes 1,440 (714) 6,524 (4,650)
Reforestation liability (875) (425) 1,201 554
Other long-term
liabilities (538) (107) (1,352) (2,070)
Equity in earnings of
investee companies (442) (846) (2,001) (5,626)
Write-downs of property,
plant, equipment and
timber - - 5,868 30,277
Other (note 6) (647) (10,072) (13,297) (38,414)
------------------------------------------------------------------------
13,889 8,353 53,646 46,660
Cash generated from (used
in) operating working
capital:
Accounts receivable (17,506) 2,553 (25,216) (6,753)
Inventories 10,946 8,948 18,941 14,948
Prepaid expenses (1,357) (2,679) (3,754) (577)
Accounts payable and
accrued liabilities (2,863) 4,117 (3,147) (390)
Income taxes (2,979) 1,427 (4,238) 650
------------------------------------------------------------------------
130 22,719 36,232 54,538

Investing activities:
Additions to property,
plant and equipment (21,764) (11,076) (53,447) (42,564)
Additions to logging roads
and timber (5,608) (5,132) (16,013) (16,120)
Additions to deferred
start-up costs - (2,100) - (3,215)
Proceeds on disposal of
property, plant,
equipment, timber and
roads 17,013 14,174 38,073 38,432
Acquisitions - - - (79,905)
Cash received on
acquisition of subsidiary - - - 2,650
Investments and other
assets (282) (281) 1,494 5,417
------------------------------------------------------------------------
(10,641) (4,415) (29,893) (95,305)

Financing activities:
Issuance of share capital,
net of expenses 25 97 550 287
Repurchase of share capital (474) - (3,169) -
Increase (decrease) in
bank indebtedness 695 (14,150) (7,358) -
Funds from promissory note
payable to investee
company - - - 27,757
Additions to long-term debt - - - 31,405
Repayments of long-term debt - - - (32,910)
------------------------------------------------------------------------
246 (14,053) (9,977) 26,539

Foreign exchange (gain)
loss on cash and cash
equivalents held in a
foreign currency: 63 (1,180) (250) (960)
------------------------------------------------------------------------
Increase (decrease) in cash (10,202) 3,071 (3,888) (15,188)

Cash on deposit, beginning
of period 25,375 - 19,061 18,259
------------------------------------------------------------------------

Cash on deposit, end of
period $ 15,173 $ 3,071 $ 15,173 $ 3,071
------------------------------------------------------------------------
------------------------------------------------------------------------

Supplementary disclosures
Cash interest paid $ 863 $ 1,289 $ 2,897 $ 3,363
Cash income taxes paid $ 8 $ 210 $ 721 $ 3,421
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.


CONSOLIDATED BALANCE SHEETS
September 30, 2006 and 2005 (unaudited) and December 31, 2005 (audited)
------------------------------------------------------------------------
Sept. 30, Dec. 31, Sept. 30,
(thousands of Canadian dollars) 2006 2005 2005
------------------------------------------------------------------------
Assets
Current assets:
Cash $ 15,173 $ 19,061 $ 3,071
Accounts receivable (note 13(c)) 56,834 37,911 53,255
Income taxes recoverable 5,095 625 -
Inventories 79,997 102,960 104,159
Prepaid expenses 8,811 6,439 10,933
Future income taxes 4,154 6,659 6,030
Current assets held for sale (note 3) 1,338 - -
-----------------------------------------------------------------------
171,402 173,655 177,448

Investments and other assets
Investments and advances (note 4) 7,845 62,370 56,833
Deferred financing fee, net of
accumulated amortization 236 377 449
----------------------------------------------------------------------
8,081 62,747 57,282

Property, plant and equipment, net of
accumulated amortization 294,358 289,227 294,350
Timber and logging roads, net of
accumulated depletion and amortization 51,394 52,375 60,286
Goodwill and other intangible assets 13,135 15,694 15,694
Future income taxes - 3,980 -
Long-lived assets held for sale (note 3) 2,265 - -
------------------------------------------------------------------------

$ 540,635 $ 597,678 $ 605,060
------------------------------------------------------------------------
------------------------------------------------------------------------

Liabilities and
Shareholders' Equity
Current liabilities:
Bank indebtedness (note 5(a)) $ 695 $ 8,053 $ -
Accounts payable and
accrued liabilities 77,873 82,685 86,525
Income taxes payable - - 1,115
Promissory note payable to
investee company (note 4) - 54,354 27,757
Future income taxes payable 313 351 -
------------------------------------------------------------------------
78,881 145,443 115,397

Reforestation liability,
net of current portion 16,443 15,242 17,536
Long-term debt (note 5(b)) 39,120 40,705 69,762
Other long-term
liabilities 5,315 6,667 7,103
Future income taxes 2,599 3,100 2,886
Shareholders' equity:
Share capital (note 8)
Class A subordinate voting shares 292,401 294,683 294,868
Class B common shares 4,080 4,080 4,080
Contributed surplus 7,848 8,186 8,201
Cumulative translation
adjustment (10,315) (6,371) (5,576)
Retained earnings 104,263 85,943 90,803
------------------------------------------------------------------------
398,277 386,521 392,376

------------------------------------------------------------------------

$ 540,635 $ 597,678 $ 605,060
------------------------------------------------------------------------
------------------------------------------------------------------------

Contingencies and subsequent event (note 11)

See accompanying notes to consolidated financial statements.

On behalf of the Board:

W. L. Sauder H. C. Kalke
Director Director


INTERNATIONAL FOREST PRODUCTS LIMITED
Notes to Unaudited Interim Consolidated Financial Statements
(Tabular amounts expressed in thousands except per share amounts)
Three and nine months ended September 30, 2006 and 2005 (unaudited)
-------------------------------------------------------------------


1. Significant acounting policies:

These unaudited interim consolidated financial statements include the accounts of International Forest Products Limited and its subsidiaries (collectively referred to as "Interfor" or the "Company"). These interim consolidated financial statements do not include all disclosures required by Canadian generally accepted accounting principles for annual financial statements, and accordingly, these interim consolidated financial statements should be read in conjunction with Interfor's most recent annual consolidated financial statements. These interim consolidated financial statements follow the same accounting policies and methods of application used in the Company's audited annual consolidated financial statements as at and for the year ended December 31, 2005.

2. Seasonality of operating results:

The Company operates in the solid wood business which includes logging and manufacturing operations. Logging activities vary throughout the year due to a number of factors including weather, ground and fire season conditions. Generally, the Company operates its logging divisions in the latter half of the first quarter, throughout the second and third quarters and in the first half of the fourth quarter. Manufacturing operations are less seasonal than logging operations but do depend on the availability of logs from the logging operations and from third party suppliers. In addition, the market demand for lumber and related products is generally lower in the first quarter due to reduced construction activity which increases during the spring, summer and fall.

3. Assets held for sale:

On February 10, 2006, the Company signed an agreement to sell its helicopter logging operations, conducted by its wholly-owned subsidiary, Helifor Industries Limited. The transaction is subject to regulatory approval and is expected to close prior to the year-end. In addition, the Company developed a formal plan to dispose of certain surplus logging equipment over the next year.

As September 30, 2006, the Company has classified these assets as assets held for sale.

4. Payable to investee company:

On April 21, 2005, the Seaboard Limited Partnership ("the Seaboard Partnership"), made an advance to its partners, with the Company's share of the advance being $27,757,000. The Company signed an unsecured promissory note which was payable on demand on or before January 31, 2006 and was non-interest bearing until January 31, 2006 and interest bearing at the rate of 5% per annum thereafter.

On December 29, 2005, the Seaboard Partnership provided a second advance to its partners, with the Company's share of this advance being $26,597,000. The advance was payable on demand and was non-interest bearing.

On January 3, 2006, the Seaboard Partnership declared an income distribution to its partners, of which the Company's share of $54,354,000 was received by way of setoff against the advance and the promissory note payable to the Seaboard Partnership. In accordance with equity accounting, the income distribution was recorded as a reduction of the investment in Seaboard.

5. Bank indebtedness and long-term debt:

(a) Bank indebtedness:



--------------------------------------------------------------------------
--------------------------------------------------------------------------
Canadian Mapri U.S.
Operating and Operating
September 30, 2006 Facility BWC Facility Total
--------------------------------------------------------------------------

Available line
of credit $ 60,000 $ - $ 16,766 $ 76,766
Maximum borrowing
available 60,000 - 14,690 74,690
Unused portion
of line 54,907 - 14,556 69,463
Outstanding letters
of credit included
in line utilization 4,461 - 134 4,595
--------------------------------------------------------------------------
--------------------------------------------------------------------------

September 30, 2005
--------------------------------------------------------------------------

Available line
of credit $ 75,000 $ 4,000 $ 17,441 $ 96,441
Maximum borrowing
available 68,579 2,740 17,441 88,760
Unused portion
of line 63,724 2,740 14,975 81,439
Outstanding letters
of credit included
in line utilization 4,855 - 140 4,995
--------------------------------------------------------------------------
--------------------------------------------------------------------------


In the second quarter of 2006, the Company renewed its existing Canadian operating line of credit. The terms and conditions of the line remain unchanged, except for a reduction in the interest rate premiums, and a reduction in the maximum operating credit available to $60,000,000 (June 30, 2005 - $75,000,000). The line is subject to a borrowing base calculation dependent upon certain accounts receivable and inventories. The loan bears interest at bank prime plus a premium depending upon a financial ratio or, at the Company's option, at rates for Bankers' Acceptances. The line of credit is secured and is subject to certain financial covenants including a minimum working capital requirement and a maximum ratio of total debt to total capitalization.

In the first quarter of 2006, the Company renewed its existing U.S. operating line of credit. The terms and conditions of the line remain unchanged, with a maximum operating line of credit totalling US$15,000,000. The line is subject to a borrowing base calculation dependent upon certain accounts receivable and inventories of the Company's subsidiary, Interfor Pacific Inc. The loan bears interest at U.S. bank prime or, at the Company's option, at LIBOR plus 11/4%. The line of credit is secured by the accounts receivable and inventories of Interfor Pacific Inc. and is subject to certain financial covenants including a maximum ratio of total debt to total capitalization. The line matures on March 1, 2007.

On acquisition of Mapri Developments Ltd. ("Mapri") on May 31, 2005, the Company renewed Mapri's existing revolving line of credit of $4,000,000. On September 30, 2006, this line was cancelled in conjunction with the commencement of the wind-up of Mapri and the subsequent sale of all assets of B.W. Creative Wood Industries Ltd. ("BWC"), a wholly-owned subsidiary of Mapri.

(b) Long-term debt:

In the third quarter of 2006, the Company reduced the maximum borrowing available under the Company's Canadian revolving term line ("Revolving Line") to $40,000,000 (September 30, 2005 - $90,000,000). As at September 30, 2006, the Revolving Line was undrawn (September 30, 2005 - US$25,000,000 revalued to CAD$29,067,000). The Revolving Line bears interest at rates based on bank prime plus a premium, depending upon a financial ratio or, at the Company's option, at rates for Bankers' Acceptances or LIBOR based loans and matures on April 27, 2007.

As at September 30, 2006, the $US non-revolving term line (the "Non-Revolving Line") remains fully drawn at US$35,000,000 (September 30, 2005 - US$35,000,000) and was revalued at the month-end exchange rate to CAD$39,120,000 (September 30, 2005 - CAD$40,695,000). The Non-Revolving Line bears interest at rates based on bank prime plus a premium depending upon a financial ratio or, at the Company's option, at rates for LIBOR based loans and matures on September 1, 2009.

Both lines are secured and are subject to certain financial covenants including a minimum working capital requirement and a maximum ratio of total debt to total capitalization.

Minimum principal amounts due on long-term debt within the next five years are as follows:



---------------------------------------
---------------------------------------
2006 $ -
2007 -
2008 -
2009 39,120
2010 -
---------------------------------------

$ 39,120
---------------------------------------
---------------------------------------


6. Other income:



--------------------------------------------------------------------------
--------------------------------------------------------------------------
3 months 3 months 9 months 9 months
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2006 2005 2006 2005
--------------------------------------------------------------------------

Gain on disposal of
surplus property,
plant and equipment $ 1,499 $ 10,072 $ 14,132 $ 12,557
Gain on settlement
of timber takeback - - - 6,373
Equity income
participation in
gain on disposal of
Western Stevedoring - - - 19,501
Other expense (852) (301) (393) (301)
--------------------------------------------------------------------------
$ 647 $ 9,771 $ 13,739 $ 38,130
--------------------------------------------------------------------------
--------------------------------------------------------------------------


In the third quarter of 2006, the Company commenced the wind up of Mapri and the shares of its wholly-owned subsidiary, BWC, were sold. The land and buildings were retained and will be leased to the purchaser. The Company also has a claim to any refund of duties to which BWC is entitled to under the softwood lumber agreement (see note 11) and will record the recovery as additional proceeds when substantially all of the conditions of the softwood lumber agreement have been met. This transaction, combined with the sale of all inventories, property, plant and equipment of the Mackenzie Sawmill and further sales of surplus logging and other assets generated proceeds of $17,013,000 and a net gain of $1,499,000 in the quarter.

During the second quarter of 2006, the Company completed the sale of surplus properties in Squamish, B.C. for sale proceeds of $10,533,000 and a gain of $8,534,000. In addition, all property, plant and equipment of Saltair Timber Products Limited and surplus equipment of Field Sawmill division on Vancouver Island, B.C. as well as surplus logging and other assets were sold in the quarter for proceeds of $4,730,000 and a gain of $1,574,000.

In the first quarter of 2006, the Company completed the sale of its sawmill located in Marysville, Washington. The Company recorded sale proceeds of $2,542,000 and a gain of $874,000.

7. Restructuring costs and write-downs of property, plant, equipment and timber:


--------------------------------------------------------------------------
--------------------------------------------------------------------------
3 Months 3 Months 9 months 9 months
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2006 2005 2006 2005
--------------------------------------------------------------------------

Property, plant,
equipment and
timber write-downs $ - $ - $ 5,868 $ 30,277
Severance and other
restructuring costs
(recoveries) - 1,136 1,709 (410)
Other (recoveries) - - - (2,270)
--------------------------------------------------------------------------
$ - $ 1,136 $ 7,577 $ 27,597
--------------------------------------------------------------------------
--------------------------------------------------------------------------


In the second quarter, 2006, the Company reviewed the valuation of certain B.C. coastal assets which it did not consider to be part of its future core operations. An impairment charge of $5,868,000 was recorded in the quarter to reduce the carrying values of these assets to estimated fair values. The Company continued its programs to improve its competitive cost structure resulting in additional severance charges of $2,193,000 for the quarter ($3,396,000 for the nine months).

During the first and second quarters, 2006, the Company received recoveries totalling $1,687,000 from the B.C. Forestry Revitalization Trust set up by the Government of British Columbia, as reimbursement for severance costs of workers who were displaced by the reductions in harvesting rights taken under the Forestry Revitalization Act. As the associated costs had been expensed in the current and prior years as restructuring costs, the recovery served to offset additional severance costs for these workers recorded in the current year to date. The Company continues to pursue mitigation of certain restructuring costs which it feels it is entitled to under the terms of the Trust, but the amount of any additional mitigation is not yet determinable and will be recorded when the amounts can be estimated.

In 2005, following an extensive evaluation of its operations, the Company identified certain B.C. coastal assets which it did not consider to be part of its future core operations and reviewed the valuation of these non-core assets. An impairment charge of $30,277,000 was recorded to reduce the carrying values of these assets to estimated fair values.

8. Share capital:

On November 9, 2005, the Company commenced a normal course issuer bid to acquire up to 2,384,000 Class A Subordinate Voting shares ("Class A Shares") (representing approximately 5% of the outstanding Class A Shares) through the facilities of the Toronto Stock Exchange. Purchases are made at market prices with a maximum of two percent of the outstanding Class A Shares being purchased in any 30-day period. During the third quarter of 2006 the Company acquired 71,600 Class A shares at a total cost of $474,000 and the shares were cancelled as purchased. The excess of the cost of the shares over the assigned value totaled $32,000 and has been charged to contributed surplus. Over the first nine months of 2006, the Company acquired a total of 458,200 Class A shares at a total cost of $3,169,000 and an excess of cost over assigned value of $338,000. The normal course issuer bid will terminate no later than November 8, 2006.

9. Net earnings per share:



-----------------------------------------------------------------------
-----------------------------------------------------------------------
3 months Sept. 30, 2006 3 months Sept. 30, 2005
------------------------- -------------------------
Net Per Net Per
earnings Shares share earnings Shares share
-----------------------------------------------------------------------

Basic earnings
per share $ 1,558 48,397 $ 0.03 $ 4,704 48,693 $ 0.10
Share options - 540 - - 530 -
-----------------------------------------------------------------------

Diluted earnings
per share $ 1,558 48,937 $ 0.03 $ 4,704 49,223 $ 0.10
-----------------------------------------------------------------------
-----------------------------------------------------------------------


-----------------------------------------------------------------------
-----------------------------------------------------------------------
9 months Sept. 30, 2006 9 months Sept. 30, 2005
------------------------- -------------------------
Net Per Net Per
earnings Shares share earnings Shares share
-----------------------------------------------------------------------

Basic earnings
per share $ 18,320 48,571 $ 0.38 $ 24,585 48,676 $ 0.51
Share options - 603 - - 611 -
-----------------------------------------------------------------------

Diluted earnings
per share $ 18,320 49,174 $ 0.37 $ 24,585 49,287 $ 0.50
-----------------------------------------------------------------------
-----------------------------------------------------------------------


10. Segmented information:

The Company manages its business as a single operating segment, solid wood. The Company purchases and harvests logs which are then manufactured into lumber products at the Company's sawmills, or sold. Substantially all of the Company's operations are located in British Columbia, Canada and the Pacific Northwest, U.S.A.

The Company sells to both foreign and domestic markets as follows:



------------------------------------------------------------------------
------------------------------------------------------------------------
3 months 3 months 9 months 9 months
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2006 2005 2006 2005
------------------------------------------------------------------------

Canada $ 67,392 $ 56,764 $ 186,015 $ 173,480
United States 100,989 124,314 353,344 329,403
Japan 18,978 17,929 52,135 61,825
Other export 18,573 15,229 51,948 55,862
------------------------------------------------------------------------
$ 205,932 $ 214,236 $ 643,442 $ 620,570
------------------------------------------------------------------------
------------------------------------------------------------------------

Sales by product line are
as follows:
------------------------------------------------------------------------
------------------------------------------------------------------------
3 months 3 months 9 months 9 months
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2006 2005 2006 2005
------------------------------------------------------------------------

Lumber $ 153,893 $ 166,218 $ 505,093 $ 490,124
Logs 28,127 26,707 64,128 74,490
Wood chips and other by
products 11,288 9,052 29,722 25,546
Other 12,624 12,259 44,499 30,410
------------------------------------------------------------------------
$ 205,932 $ 214,236 $ 643,442 $ 620,570
------------------------------------------------------------------------
------------------------------------------------------------------------

The Company has capital
assets, goodwill and other
intangible assets located in:
------------------------------------------------------------------------
------------------------------------------------------------------------
Sept. 30, Dec. 31, Sept. 30,
2006 2005 2005
------------------------------------------------------------------------

Canada $ 207,010 $ 214,211 $ 232,136
United States 154,142 143,085 138,194
------------------------------------------------------------------------
$ 361,152 $ 357,296 $ 370,330
------------------------------------------------------------------------
------------------------------------------------------------------------


11. Contingencies and subsequent event:

On May 16, 2002, the U.S. International Trade Commission ("USITC") published its final written determination on injury in the countervailing duty ("CVD") and antidumping duty ("ADD") investigations and stated that Canadian softwood lumber threatens material injury to the U.S. industry. As a result, effective from May 22, 2002, cash deposits were required for shipments at the rates determined by the U.S. Department of Commerce ("USDOC").

Effective December 12, 2005, the USDOC implemented new deposit rates based on its second Administrative review period (April 1, 2003 to March 31, 2004 for the CVD case; and May 1, 2003 to April 30, 2004 for the ADD case) and reduced the CVD deposit rate to 8.70% and the all others ADD rate to 2.11%. Effective January 23, 2006, the USDOC further amended the ADD rate to 2.10%, reducing the Company's combined CVD and ADD deposit rate to 10.80%. The Company has not recorded any receivable for prior periods related to the change in the cash deposit rate applicable to new shipments.

The Company has expensed $14,725,000 (2005 - $22,921,000) in duties for the nine months ended September 30, 2006. The Company has paid US$105,857,000 in cash deposits since May 22, 2002. These total U.S. deposits translated at the September 30, 2006 exchange rate equate to $118,316,000.

On April 27, 2006 the federal governments of Canada and the United States reached a framework softwood lumber agreement ("SLA") to resolve the softwood lumber dispute. On July 1, 2006 Canada and the United States agreed on the legal text of the SLA. On October 12, 2006 the terms of the SLA were implemented although the SLA requires formal approval by the Canadian Parliament. Also on October 12, 2006, the USDOC revoked the antidumping and countervailing duty orders effective May 22, 2002 without the possibility of reinstatement. In addition, the USDOC indicated that it would instruct U.S. Customs and Border Protection to cease collecting duties effective October 12, 2006 and to refund duties collected since May 22, 2002 together with accrued interest. The timing of receipt of the duty refunds is uncertain at this time, but the terms of the SLA contemplate that the refunds will occur within six months of October 12, 2006 (the effective date of the SLA).

The refunded duties plus interest will be reduced by approximately 19% to fund amounts to be paid to U.S. interests. Interfor estimates that the Company's pre-tax duty recovery will be approximately US$94,978,000 (CAD$106,157,000 at September 30, 2006 exchange rates) after considering interest and the 19% charge. The Company expects to record the recovery of duties once substantially all of the conditions of the SLA have been met.

12. Employee future benefits:

The total benefits cost under the Company's various pension plans (described in the Company's audited annual consolidated financial statements) are as follows:



--------------------------------------------------------------------------
--------------------------------------------------------------------------
3 months 3 months 9 months 9 months
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2006 2005 2006 2005
--------------------------------------------------------------------------

Defined
contribution plan $ 326 $ 403 $ 1,165 $ 1,314
Defined benefit plan 116 116 359 388
Unionized employees'
pension plan 801 1,278 2,923 3,456
U.S. employees
benefit plan 153 110 487 423
Senior management
supplementary
pension plan 90 41 202 276
--------------------------------------------------------------------------
Total pension
expense $ 1,486 $ 1,948 $ 5,136 $ 5,857
--------------------------------------------------------------------------
--------------------------------------------------------------------------


13. Financial instruments:

(a) Fair value of financial instruments:

At September 30, 2006, the fair value of the Company's long-term debt approximated its carrying value of $39,120,000 as the long-term debt bears interest at current market rates. The fair values of other financial instruments approximate their carrying values due to their short-term nature.

(b) Derivative financial instruments:

The Company employs financial instruments, such as interest rate swaps and foreign currency forward and option contracts, to manage exposure to fluctuations in interest rates and foreign exchange rates. The Company does not expect any credit losses in the event of non-performance by counter parties as the counter parties are the Company's bankers.

As at September 30, 2006, the Company has outstanding obligations to sell a maximum of US$6,000,000 at an average rate of CAD$1.1249 and Japanese yens 350,000,000 at an average rate of yens 100.00 to the CAD$1.00 during 2006. All foreign currency gains or losses to September 30, 2006 have been recognized in the Statement of Operations.

In September 2005, the Company entered into a cross currency interest rate swap. The Company swapped a notional $20,000,000 USD denominated debt at an exchange rate of 1.1765 (CAD$23,530,000). The Company will pay 5.84%, including a spread of 200 basis points, on the Canadian dollar equivalent and receive 90 day LIBOR plus a spread of 200 basis points on the US$20,000,000. LIBOR will be recalculated at set interval dates. The swap will mature on September 1, 2009 and has been marked to market with all gains or losses recognized in the Statement of Operations.

(c) Sale of receivables:

During 2000, the Company entered into an agreement to sell designated trade receivables, with limited recourse, to a Trust. As these trade receivables are collected, they are replaced by new receivables to maintain the aggregate outstanding balance. In the first quarter, 2006, the Company renewed this program and extended its termination date to March 31, 2007. On July 17, 2006, the Company reduced securitized receivables to nil (September 30, 2005 - $25,000,000). The program minimum of $20,000,000 must be reinstated by December 31, 2006 or the program will be cancelled on January 15, 2007.


Contact Information

  • International Forest Products Limited
    John Horning
    Senior Vice-President and Chief Financial Officer
    (604) 689-6829 or (604) 689-6800
    (604) 688-0313 (FAX)
    Website: www.interfor.com