Interfor Corporation
TSX : IFP

Interfor Corporation

July 30, 2015 18:55 ET

Interfor Reports Q2'15 Results

Decision to Exit the Tacoma Sawmill Announced

VANCOUVER, BRITISH COLUMBIA--(Marketwired - July 30, 2015) - INTERFOR CORPORATION ("Interfor" or the "Company") (TSX:IFP) recorded a net loss of $20.6 million, or $0.29 per share, on sales of $429.7 million in Q2'15 compared with a net loss of $0.2 million in Q1'15 and net earnings of $7.4 million in Q2'14.

Included in the Company's results for Q2'15 is a pre-tax loss of $7.7 million(1) associated with the operations of the Tacoma sawmill which was acquired from Simpson Lumber Company, LLC ("Simpson") earlier this year as part of a larger transaction involving a total of four mills.

Excluding the Tacoma loss and certain other items, the Company reported an adjusted net loss(2) of $14.7 million, or $0.21 per share, in Q2'15 versus adjusted net earnings(2) of $4.5 million in Q1'15 and $21.1 million in Q2'14.

Adjusted EBITDA(2), which excludes the results associated with Tacoma and certain other items, was $12.7 million in Q2'15 versus $31.8 million in Q1'15 and $47.3 million in Q2'14.

The Company's operations in all regions were impacted by the significant drop in product prices experienced in Q2'15.

Benchmark prices for Western SPF 2x4, SYP East 2x4 and HF Studs 2x4 9' declined US$38, US$30 and US$46 per mfbm, respectively, compared to the prior quarter. Prices for SPF 2x4 and HF Studs 9' began to strengthen in the final month of Q2'15 as increased takeaway levels and production curtailments helped to rebalance in-market inventories. SYP lagged SPF and HF prices on the decline and remained soft through quarter-end, with discounts from list prevalent on most items.

Beyond the benchmarks, prices for low-grade products were particularly weak in Q2'15, with SPF 2x4 #3 off US$55 and SYP 2x4 #3 off US$59 versus Q1'15.

The Canadian dollar strengthened by 0.9% against the US dollar during the quarter, averaging US$0.8132 in Q2'15 versus US$0.8057 in Q1'15.

In addition, the reintroduction of export duties on April 1, 2015 on lumber shipments from Canada into the US resulted in $2.5 million of duties paid in Q2'15 compared with $0 in Q1'15 and Q2'14.

The Company's Q2'15 results were further impacted by an EBITDA loss of $1.5 million related to its Castlegar sawmill which was curtailed for 13 days during the quarter as part of a $50 million modernization project at that facility. The Castlegar Project is proceeding on-time and on-budget with construction expected to be completed in Q4'15 and full operating performance targeted for Q1'16.

Lumber production increased to 672 million board feet in Q2'15, up 33 million board feet or 5.2% compared to Q1'15 and up 90 million board feet or 15.5% compared to Q2'14.

Production from the Company's US Southeast and US Northwest regions totaled 288 million board feet and 190 million board feet, respectively, in Q2'15 versus 239 million board feet and 176 million board feet, respectively, in Q1'15. The growth in production in the US Southeast and US Northwest regions versus the preceding quarter reflects primarily the inclusion of the former Simpson mills and another mill in Arkansas acquired from The Price Companies, Inc. ("Price") in June, offset in part by a reduction in operating hours at the Company's other mills in the US Northwest.

Canadian production totaled 194 million board feet in Q2'15 versus 224 million board feet in the immediately preceding quarter. The drop in Canadian production reflects the curtailment at Castlegar and a reduction in operating hours at the Company's other BC Interior mills.

In the second quarter, Interfor generated $20.1 million in cash from operations after considering working capital changes. Capital spending amounted to $38.6 million during the quarter.

On June 19th, Interfor closed the previously announced acquisition of the Price sawmill in Monticello, Arkansas. The Monticello mill produced 75 million board feet in 2014 and 2 million board feet in Q2'15 following its acquisition.

Net debt increased during the quarter to $430.9 million, or 38.0% of invested capital, leaving the Company with $120.8 million of available liquidity as of June 30, 2015.

Commodity lumber prices are expected to remain volatile in the near term as the market responds to shifts in currency values and changes in export duty rates. Interfor expects demand for lumber to continue to grow over the mid-term as the US housing market recovers and market promotion efforts in North America and offshore take full effect. Demand in China is also expected to grow in the years ahead, albeit at a slower pace than in recent years.

Tacoma Sawmill

As a result of challenging lumber and log market conditions, Interfor curtailed operations at its Tacoma sawmill on May 22, 2015. Following a comprehensive strategic review, the Company has decided to exit the mill.

Interfor's upfront investment at Tacoma was limited to working capital, with the remaining consideration contingent upon earnings over the first three years of ownership. The minimum total contingent payment payable to Simpson is US$10 million, US$9.5 million of which the Company has recorded as a liability at June 30, 2015.

The Tacoma sawmill accounted for 26 million board feet of production in Q2'15 and 47 million board feet since acquisition.

"The decision to exit the Tacoma sawmill was taken after much analysis and deliberation," said Duncan Davies, Interfor's President and CEO. "We understood at the time the mill was acquired that a turnaround was required at Tacoma. While good progress has been made from an operating standpoint, the drop in product prices experienced in Q2'15 resulted in operating losses greater than expected when the mill was acquired. In the face of continued uncertainty, we have concluded that we would be better served to exit the mill and to redeploy the capital associated with the facility elsewhere within our system. We understand the uncertainty this decision brings to the mill's employees and to others associated with the operation and will do everything we can to bring matters to conclusion as soon as possible."

(1) Including negative adjustments to log and lumber carrying values
(2) Adjusted to exclude the effects of long-term incentive compensation, foreign exchange gain (loss), other income (expense), restructuring costs and operating losses of the Tacoma sawmill. Refer to Interfor's MD&A prepared as of July 30, 2015 for the full definition.

FORWARD-LOOKING STATEMENTS

This release contains information and statements that are forward-looking in nature, including, but not limited to, statements containing the words "will" and "is expected" 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 others: general economic and business conditions, product selling prices, raw material availability and costs, operating costs, changes in foreign-currency exchange rates, and other factors referenced herein and in Interfor's Annual Report and Management Information Circular available on www.sedar.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 3.2 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.

There will be a conference call on Friday, July 31, 2015 at 8:00 a.m. (Pacific Time) hosted by INTERFOR CORPORATION for the purpose of reviewing the Company's release of its second quarter 2015 financial results.

The dial-in number is 1-866-233-4795. The conference call will also be recorded for those unable to join in for the live discussion, and will be available until August 14, 2015. The number to call is 1-866-245-6755, Passcode 292559.

Financial and Operating Highlights(1)
For the 3 months For the 6 months
ended June 30, ended June 30,
Unit 2015 2014 2015 2014
Financial Highlights(2)
Total sales $mm 429.7 390.2 845.1 685.1
Lumber $mm 352.2 325.2 692.9 555.6
Logs, residual products and other $mm 77.5 65.0 152.2 129.5
Operating earnings (loss) $mm (25.8) 3.8 (18.0) 17.1
Net earnings (loss) $mm (20.6) 7.4 (20.7) 34.9
Net earnings (loss) per share, basic and diluted $/share (0.29) 0.11 (0.30) 0.53
Adjusted net earnings (loss)(3) $mm (14.7) 21.1 (10.2) 36.1
Adjusted net earnings (loss) per share, basic and diluted (3) $/share (0.21) 0.32 (0.15) 0.55
EBITDA(3) $mm 1.0 47.8 33.3 80.1
Adjusted EBITDA(3) $mm 12.7 47.3 44.5 86.5
Adjusted EBITDA margin(3) % 3.0% 12.1% 5.3% 12.6%
Total assets $mm 1,364.6 1,036.0 1,364.6 1,036.0
Total debt $mm 445.0 244.5 445.0 244.5
Pre-tax return on total assets (3) % -7.7% 9.9% -3.0% 8.7%
Net debt to invested capital(3) % 38.0% 28.1% 38.0% 28.1%
Operating Highlights
Lumber production million fbm 672 582 1311 1077
Lumber sales million fbm 719 628 1351 1067
Lumber - average selling price (4) $/thousand fbm 490 518 513 521
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 but 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 consolidated financial statements.
(4) Gross sales before export taxes.

Summary of Second Quarter 2015 Financial Performance

Sales

Interfor recorded $429.7 million of total sales, up 10.1% from $390.2 million in the second quarter of 2014, driven by the sale of 719 million board feet of lumber at an average price of $490 per mfbm. Lumber sales volume increased 91 million board feet, or 14.5%, while average selling price declined $28 per thousand board feet, or 5.4%, as compared to the same quarter of 2014.

The growth in lumber sales volume was primarily in the U.S. market, where sales increased by 141 million board feet or 33.8% over the second quarter of 2014. This growth is mostly attributable to sales from four U.S. located sawmills acquired from Simpson on March 1, 2015. Partially offsetting this growth in U.S. sales was a 36 million board foot, or 38.2%, reduction in volume sold to the China/Taiwan markets.

The decline in the average selling price of lumber reflects lower benchmark prices in USD terms across all key species as compared to the second quarter of 2014, partially offset by the strengthening of the U.S. Dollar against the Canadian Dollar by 12.8% on average.

Sales generated from logs, residual products and other increased by $12.5 million or 19.2% compared to the same quarter of 2014. $10.3 million of this increase related to wood chips and other residual products and was the result of higher lumber production as compared to Q2'14.

Operations

Production costs increased by $76.1 million or 22.8% over the second quarter of 2014, explained primarily by the 14.5% increase in lumber sales volume, higher costs at the Company's Canadian operations and the impact of a weaker Canadian Dollar as noted above.

Depreciation of plant and equipment was $18.1 million, up 29.7% from the second quarter of 2014. The majority of this increase is explained by the inclusion of depreciation on four sawmills acquired on March 1, 2015.

Depletion and amortization of timber, roads and other was $8.9 million, up 27.0% from the comparable quarter of 2014. The majority of this increase reflects higher rates of road amortization within the Company's B.C. Coastal logging division, due to production from camps with higher road costs.

Corporate and Other

Selling and administration expenses were $12.2 million, up $3.1 million from the second quarter of 2014. This increase reflects the growth of Interfor's operations through the acquisition of five sawmills in year-to-date 2015. The Company incurred $0.6 million of non-recurring acquisition and integration costs, which represents an increase of $0.4 million over similar costs incurred in the same period of 2014.

The $3.9 million long term incentive compensation expense mostly reflects the impact of incentive awards maturing and a 7.0% increase in the market price for Interfor Common Shares during the quarter.

Export taxes of $2.5 million were incurred in Q2'15 in respect of lumber shipments from the Company's Canadian operations to the U.S. under the Softwood Lumber Agreement. The duty rates were set at 5% in each of April and May and then 10% in June. The duty rate was 0% throughout the comparable quarter of 2014.

Finance costs increased to $4.1 million from $2.5 million in the second quarter of 2014. Financing the acquisition of five sawmills in the year-to-date 2015 period and capital improvements through borrowings during the quarter contributed to a higher average level of debt outstanding in Q2'15 as compared to Q2'14.

Other foreign exchange gain of $2.3 million includes a $2.4 million gain on an intercompany loan denominated in U.S. Dollars. This foreign exchange gain is offset by a decrease in the equity translation reserve upon consolidation, for a net nil impact on equity.

Income Taxes

The Company recorded an income tax recovery of $7.2 million in Q2'15, comprised of $0.3 million of current taxes net of a $7.5 million deferred tax recovery, mainly in respect of its U.S. operations.

Net Earnings (Loss)

The Company recorded a net loss of $20.6 million or $0.29 per share, compared to net earnings of $7.4 million or $0.11 per share in the comparable period of 2014. Adjusted Net Earnings were $(14.7) million or $(0.21) per share compared with $21.1 million or $0.32 per share in Q2'14.

Summary of Year-to-Date 2015 Financial Performance

Sales

Interfor recorded $845.1 million of total sales, up 23.4% from $685.1 million in the first half of 2014, driven by the sale of 1.4 billion board feet of lumber at an average price of $513 per mfbm. Lumber sales volume increased 284 million board feet, or 26.6%, while average selling price declined $8 per thousand board feet, or 1.5%, as compared to the same period of 2014.

The growth in lumber sales volume was primarily in the U.S., where sales increased by 323 million board feet or 45.1% over the first half of 2014. This growth is mostly attributable to the impact of seven sawmills acquired since March 14, 2014. Partially offsetting this growth in U.S. sales was a 44 million board foot, or 29.6%, reduction in volume sold to the China/Taiwan markets.

The decline in the average selling price of lumber reflects lower benchmark prices in USD terms across all key species as compared to the first half of 2014, partially offset by the strengthening of the U.S. Dollar against the Canadian Dollar by 12.6% on average.

Sales generated from logs, residual products and other increased by $22.7 million or 17.5% compared to the first half of 2014. Nearly all of this increase is related to wood chips and other residual products as a result of higher lumber production.

Operations

Production costs increased by $202.4 million or 34.8% as compared to the first half of 2014, explained primarily by the 26.6% increase in lumber sales volume, higher costs at the Company's Canadian operations and the stronger U.S. Dollar as noted above.

Depreciation of plant and equipment was $34.6 million, up 31.7% from the first six months of 2014. The majority of this increase is explained by the inclusion of depreciation on seven sawmills acquired since March 14, 2014 and higher operating rates.

Depletion and amortization of timber, roads and other was $16.9 million, up 26.5% as compared with the first half of 2014. The majority of this increase reflects higher rates of road amortization within the Company's B.C. Coastal logging division, due to production from camps with higher road costs, and a full period of amortization of a non-competition agreement associated with the acquisition of two sawmills on March 14, 2014.

Corporate and Other

Selling and administration expenses were $24.1 million, up $6.2 million from the first half of 2014. This increase reflects the growth of Interfor's operations with the acquisition of seven sawmills since March 14, 2014. The Company incurred $1.9 million of non-recurring acquisition and integration costs, which represents an increase of $0.6 million over similar costs incurred in the same period of 2014.

The $2.2 million long term incentive compensation expense in the first six months of 2015 mainly reflects the impact of incentive awards maturing, partially offset by a 6.7% decrease in the market price of Interfor Common Shares over the same period.

Export taxes of $2.5 million were incurred in respect of lumber shipments from the Company's Canadian operations to the U.S. under the Softwood Lumber Agreement. The duty rates were set at 0% in Q1'15, 5% in each of April and May and then 10% in June. The duty rate was 0% throughout the first half of 2014.

Finance costs increased to $7.2 million from $4.3 million in year-to-date period of 2014. Financing the acquisition of seven sawmills since March 14, 2014, and capital improvements through borrowings contributed to a higher average level of debt outstanding in the current year.

Other foreign exchange loss of $3.1 million includes a $1.9 million loss on an intercompany loan denominated in U.S. Dollars. This foreign exchange loss is offset by an increase in the equity translation reserve upon consolidation, for a net nil impact on equity.

Income Taxes

The Company recorded an income tax recovery of $7.6 million in the first half of 2015, comprised of $0.5 million of current taxes net of an $8.1 million deferred tax recovery, mainly in respect of its U.S. operations.

Net Earnings (Loss)

The Company recorded a net loss of $20.7 million or $0.30 per share, compared to net earnings of $34.9 million or $0.53 per share in the comparable period of 2014. Adjusted Net Earnings were $(10.2) million or $(0.15) per share compared with $36.1 million or $0.55 per share in the first half of 2014.

Summary of Quarterly Results(1)
2015 2014 2013
Unit Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
Financial Performance (Unaudited)
Total sales $mm 429.7 415.4 389.0 373.1 390.2 294.8 315.3 272.7
Lumber $mm 352.2 340.7 318.6 303.0 325.2 230.4 249.2 212.2
Logs, residual products and other $mm 77.5 74.7 70.4 70.1 65.0 64.4 66.2 60.4
Operating earnings (loss) $mm (25.8) 7.8 (1.1) 20.1 3.8 13.3 13.7 2.3
Net earnings (loss) $mm (20.6) (0.2) (5.2) 11.0 7.4 27.5 11.4 (0.1)
Net earnings (loss) per share, basic and diluted $/share (0.29) (0.00) (0.08) 0.16 0.11 0.43 0.18 (0.00)
Adjusted net earnings (loss)(2) $mm (14.7) 4.5 10.2 16.1 21.1 15.0 16.5 5.4
Adjusted net earnings (loss) per share, basic and diluted (2) $/share (0.21) 0.07 0.15 0.24 0.32 0.24 0.26 0.10
EBITDA(2) $mm 1.0 32.3 23.2 40.9 47.8 32.3 31.4 18.4
Adjusted EBITDA(2) $mm 12.7 31.8 37.4 45.4 47.3 39.2 36.2 24.6
Shares outstanding - end of period million 70.0 70.0 66.7 66.7 66.7 66.7 63.1 63.1
Shares outstanding - weighted average million 70.0 67.8 66.7 66.7 66.7 63.8 63.1 55.9
Operating Performance
Lumber production million fbm 672 639 578 567 582 495 470 447
Lumber sales million fbm 719 632 620 595 628 439 500 446
Lumber - average selling price (3) $/thousand fbm 490 539 514 509 518 525 498 476
Average USD/CAD exchange rate (4) 1 USD in CAD 1.2297 1.2412 1.1350 1.0890 1.0905 1.1033 1.0491 1.0385
Closing USD/CAD exchange rate (4) 1 USD in CAD 1.2474 1.2683 1.1601 1.1208 1.0676 1.1053 1.0636 1.0303
Notes:
(1) Figures in this table may not add due to rounding.
(2) Refer to the Non-GAAP Measures section of this MD&A.
(3) Gross sales before export taxes.
(4) Based on Bank of Canada foreign exchange rates.

The Company's quarterly financial trends are most impacted by seasonality, levels of lumber production, log costs, market prices for lumber and the USD/CAD foreign currency exchange rate.

Logging operations are seasonal due to a number of factors including weather, ground conditions and fire season closures. Generally, the Company's B.C. Coastal logging division experiences higher production levels in the latter half of the first quarter, throughout the second and third quarters and in the first half of the fourth quarter. Logging activity in the B.C. Interior is generally higher in the first half of the first quarter, slows during spring break-up and increases in the third and fourth quarters. Sawmill operations are dependent on the availability of logs from our logging operations and our suppliers. In addition, the market demand for lumber and related products is generally lower in the winter due to reduced construction activity, which increases during the spring, summer and fall.

Two sawmills acquired on March 14, 2014, four sawmills acquired on March 1, 2015, and one sawmill acquired on June 19, 2015, have all contributed to the growth in production and sales. The permanent closure of the Beaver sawmill and curtailment of the Tacoma sawmill impacted production and sales subsequent to June 30, 2014, and May 22, 2015, respectively.

The volatility of the Canadian Dollar against the U.S. Dollar also impacted results. A weaker Canadian Dollar increases the lumber sales realizations of Canadian operations and increases net earnings of U.S. operations when translated to Canadian Dollars.

Liquidity

Balance Sheet

Net debt at June 30, 2015 was $430.9 million, or 38.0% of invested capital, representing an increase of $228.3 million over the level at December 31, 2014. This increase includes $151.4 million of borrowings for the Simpson and Monticello acquisitions and $21.0 million invested to date for the Castlegar sawmill upgrade.

As at June 30, 2015, the Company had net working capital of $185.2 million and available capacity on operating and term facilities of $120.8 million. These resources, in addition to cash generated from operations, will be used to support working capital requirements, debt servicing commitments and capital expenditures. We believe that Interfor will have sufficient liquidity to fund operating and capital requirements for the foreseeable future.

Cash Flow from Operating Activities

The Company generated $25.1 million of cash flow from operations before changes in working capital in the first six months of 2015, down $52.7 million over the same period of 2014. Incremental cash flow generated from increased sales was offset by reduced sales margin and increases of $6.2 million and $2.5 million to selling and administration costs and export taxes, respectively.

There was a net cash inflow from operations after changes in working capital of $19.5 million in YTD'15, with $5.6 million of cash invested in operating working capital. In the first half of 2014, $20.2 million of cash was consumed by operating working capital, leading to $57.7 million of total cash generated from operations.

Cash Flow from Investing Activities

Investing activities totaled $285.5 million in YTD'15, including $170.8 million for the Simpson acquisition, $43.8 million for the Monticello acquisition, $8.7 million for payment of the contingent purchase price to Keadle Lumber Enterprises Inc., $52.1 million for property, plant and equipment and $12.9 million for development of logging roads. Discretionary mill improvements of $22.6 million during the period were focused primarily on the Castlegar sawmill rebuild.

In the first half of 2014, total investing activities of $153.7 million included $124.4 million for the acquisition of Tolleson Ilim Lumber Company and $31.3 million of capital expenditures.

Cash Flow from Financing Activities

Net drawings on the Company's credit facilities were $205.8 million and net proceeds from issuance of 3.3 million shares were $63.2 million, leading to total cash from financing activities of $262.1 million in the first half of 2015. This includes $151.4 million drawn on the Company's credit facilities to fund the Simpson and Monticello acquisitions.

In the first half of 2014, net drawings on the Company's credit facilities were $106.9 million with total cash from financing activities of $102.9 million.

Capital Resources

The following table summarizes Interfor's credit facilities and availability as of June 30, 2015:

Thousands of Canadian dollars Operating
Line
Revolving
Term
Line
Senior
Secured
Notes
U.S.
Operating
Line
Total
Available line of credit and maximum borrowing available $65,000 $200,000 $249,480 $62,370 $576,850
Less:
Drawings 1,972 162,162 249,480 31,337 444,951
Outstanding letters of credit included in line utilization 9,038 - - 2,083 11,121
Unused portion of facility $53,990 $37,838 - $28,950 $120,778

As of June 30, 2015, the Company had commitments for capital expenditures totaling $42.2 million, related to both maintenance and discretionary capital projects.

Transactions between Related Parties

Other than transactions in the normal course of business with key management personnel, the Company had no transactions between related parties in the six months ended June 30, 2015.

Off-Balance Sheet Arrangements

The Company has off-balance sheet arrangements which include letters of credit and surety performance bonds, primarily for timber purchases. At June 30, 2015, such instruments aggregated $39.1 million (December 31, 2014 - $30.9 million). Off-balance sheet arrangements have not had, and are not reasonably likely to have, any material impact on the Company's current or future financial condition, results of operations or cash flows.

Financial Instruments and Other Instruments

From time to time, 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's policy is not to use derivatives for trading or speculative purposes. Risk management strategies and relationships are formally documented and assessed on a regular, ongoing basis to ensure derivatives are effective in offsetting changes in fair values or cash flows of hedged items. The counter-parties for all derivative contracts are the Company's Canadian bankers who are highly-rated, thereby mitigating the risk of credit loss on such instruments.

Outstanding Shares

As of July 30, 2015, Interfor had 70,030,455 Common Shares issued and outstanding. These shares are listed on the Toronto Stock Exchange under the symbol IFP.

Controls and Procedures

There have been no changes in the Company's internal controls over financial reporting ("ICFR") during the three months ended June 30, 2015, that have materially affected, or are reasonably likely to materially affect, its ICFR.

As of June 30, 2015, the scope of design and disclosure controls and procedures ("DC&P") and ICFR has been limited to exclude controls, policies and procedures of the Monticello sawmill operation acquired from Price on June 19, 2015, as we have not yet completed an evaluation of these controls and procedures nor designed and implemented any necessary changes. The Company intends to include such controls, policies and procedures within the design of DC&P and ICFR during 2015. The Monticello sawmill accounted for less than 1% of the Company's total consolidated sales for the second quarter of 2015. Additional information about this acquisition is provided in Note 4 to Interfor's unaudited consolidated financial statements for the three and six months ended June 30, 2015.

Critical Accounting Estimates

There were no significant changes to the Company's critical accounting estimates during the quarter ended June 30, 2015, other than estimates associated with allocating the Monticello sawmill purchase price to the assets acquired and liabilities assumed as described in Note 4 to its unaudited interim consolidated financial statements. Interfor's critical accounting estimates are described in its MD&A for the year ended December 31, 2014, filed under the Company's profile on www.sedar.com.

Accounting Policy Changes

A number of new standards, and amendments to existing standards and interpretations, were not yet effective for the quarter ended June 30, 2015, and have not been applied in preparing the Company's unaudited interim consolidated financial statements. The following pronouncements are considered by the Company to be the most significant of several pronouncements that may affect the financial statements:

IFRS 9, Financial Instruments, will replace the multiple classification and measurement models in IAS 39, Financial Instruments: Recognition and Measurement, with a single model that has only two classification categories: amortized cost and fair value. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with earlier adoption permitted. The Company does not expect this standard to have a significant effect on its financial statements.

IFRS 15, Revenue from Contracts with Customers, will replace all existing IFRS revenue requirements. On April 28, 2015, the International Accounting Standards Board voted to publish an Exposure Draft proposing a one-year deferral of the effective date of this standard to January 1, 2018, with earlier adoption still permitted. The Company has not yet completed an assessment of the impact, if any, of this standard on its financial statements.

Non-GAAP Measures

This MD&A makes reference to the following non-GAAP measures: Adjusted net earnings (loss), Adjusted net earnings (loss) per share, EBITDA, Adjusted EBITDA, Pre-tax return on total assets and Net debt to invested capital, 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:

For the 3 months ended For the 6 months ended
March 31,(1) June 30, June 30,
Thousands of Canadian dollars 2015 2015 2014 2015 2014
Adjusted Net Earnings
Net earnings (loss) (163) (20,583) 7,395 (20,746) 34,883
Add:
Restructuring (recovery) costs, capital asset and timber write-downs (122) (12) 22,917 (134) 23,246
Other foreign exchange loss (gain) 5,413 (2,303) (284) 3,110 (10)
Long term incentive compensation expense (recovery) (1,709) 3,908 (427) 2,199 6,490
Other (income) expense (133) 162 (117) 29 (173)
Beaver sawmill post-closure wind-down costs 341 11 - 352 -
Tacoma sawmill post-acquisition losses 1,008 7,651 - 8,659 -
Income tax effect of above adjustments (142) (3,505) (8,418) (3,647) (9,098)
Recognition of previously unrecognized deferred tax assets - - - - (19,253)
Adjusted net earnings (loss)(1) 4,493 (14,671) 21,066 (10,178) 36,085
Weighted average number of shares - basic and diluted ('000) 67,830 70,030 66,730 68,937 65,267
Adjusted net earnings (loss) per share (1) 0.07 (0.21) 0.32 (0.15) 0.55
Adjusted EBITDA
Net earnings (loss) (163) (20,583) 7,395 (20,746) 34,883
Add:
Depreciation of plant and equipment 16,515 18,130 13,978 34,645 26,309
Depletion and amortization of timber, roads and other 7,944 8,909 7,016 16,853 13,325
Restructuring (recovery) costs, capital asset and timber write-downs (122) (12) 22,917 (134) 23,246
Finance costs 3,074 4,088 2,537 7,162 4,300
Other foreign exchange loss (gain) 5,413 (2,303) (284) 3,110 (10)
Income tax recovery (383) (7,199) (5,717) (7,582) (21,914)
EBITDA 32,278 1,030 47,842 33,308 80,139
Add:
Long term incentive compensation expense (recovery) (1,709) 3,908 (427) 2,199 6,490
Other (income) expense (133) 162 (117) 29 (173)
Beaver sawmill post-closure wind-down costs 340 10 - 350 -
Tacoma sawmill post-acquisition losses 981 7,604 - 8,585 -
Adjusted EBITDA 31,757 12,714 47,298 44,471 86,456
Pre-tax return on total assets
Operating earnings (loss) before restructuring and capital asset write-downs 7,686 (25,847) 26,731 (18,161) 40,332
Total assets(2) 1,068,523 1,343,211 1,079,282 1,216,542 930,235
Pre-tax return on total assets (3) 2.9% -7.7% 9.9% -3.0% 8.7%
Net debt to invested capital
Net debt
Total debt 389,787 444,951 244,529 444,951 244,529
Cash and cash equivalents (20,104) (14,081) (11,639) (14,081) (11,639)
Current bank indebtedness - - 4,400 - 4,400
Total net debt 369,683 430,870 237,290 430,870 237,290
Invested capital
Net debt 369,683 430,870 237,290 430,870 237,290
Shareholders' equity 729,839 703,695 607,713 703,695 607,713
Total invested capital 1,099,522 1,134,565 845,003 1,134,565 845,003
Net debt to invested capital(4) 33.6% 38.0% 28.1% 38.0% 28.1%
Notes:
(1) Q1'15 adjusted net earnings, adjusted net earnings per share and adjusted EBITDA have been revised for inclusion of Tacoma sawmill post-acquisition losses.
(2) Total assets at period beginning for three month periods; average of opening and closing total assets for six month periods.
(3) Annualized rate.
(4) Net debt to invested capital as of the period end.

Risks and Uncertainties

The Company is exposed to many risks and uncertainties in conducting its business including, but not limited to: price volatility; competition; availability and cost of log supply; natural or man-made disasters; foreign currency exchange fluctuations; government regulation; environmental matters; and labour disruptions. These risks and uncertainties are described in the Company's MD&A for the year ended December 31, 2014, filed under the Company's profile on www.sedar.com. There have been no significant changes to the Company's risks and uncertainties during the six month period ended June 30, 2015.

Additional Information

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

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
For the three and six months ended June 30, 2015 and 2014 (unaudited)
(thousands of Canadian dollars except earnings per share)
3 Months
June 30, 2015
3 Months
June 30, 2014
6 Months
June 30, 2015
6 Months
June 30, 2014
Sales$429,683 $390,219 $845,129 $685,059
Costs and expenses:
Production 409,949 333,885 783,045 580,685
Selling and administration 12,155 9,036 24,069 17,918
Long term incentive compensation (recovery) expense 3,908 (427) 2,199 6,490
Export taxes 2,479 - 2,479 -
Depreciation of plant and equipment (note 9) 18,130 13,978 34,645 26,309
Depletion and amortization of timber, roads and other (note 9) 8,909 7,016 16,853 13,325
455,530 363,488 863,290 644,727
Operating earnings (loss) before restructuring costs (25,847) 26,731 (18,161) 40,332
Restructuring recovery (costs) (note 10) 12 (22,917) 134 (23,246)
Operating earnings (loss) (25,835) 3,814 (18,027) 17,086
Finance costs (note 11) (4,088) (2,537) (7,162) (4,300)
Other foreign exchange gain (loss) 2,303 284 (3,110) 10
Other income (expense) (162) 117 (29) 173
(1,947) (2,136) (10,301) (4,117)
Earnings (loss) before income taxes (27,782) 1,678 (28,328) 12,969
Income tax expense (recovery)
Current 308 542 472 936
Deferred (7,507) (6,259) (8,054) (22,850)
(7,199) (5,717) (7,582) (21,914)
Net earnings (loss)$(20,583)$7,395 $(20,746)$34,883
Net earnings (loss) per share, basic and diluted (note 12)$(0.29)$0.11 $(0.30)$0.53
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the three and six months ended June 30, 2015 and 2014 (unaudited)
3 Months
June 30, 2015
3 Months
June 30,
2014
6 Months
June 30, 2015
6 Months
June 30, 2014
Net earnings (loss)$(20,583)$7,395 $(20,746)$34,883
Other comprehensive income (loss):
Items that will not be recycled to Net earnings (loss):
Defined benefit plan actuarial gain (loss) 1,158 (168) 1,440 (309)
Income tax recovery 376 - 376 -
Total items that will not be recycled to Net earnings (loss) 1,534 (168) 1,816 (309)
Items that are or may be recycled to Net earnings (loss):
Foreign currency translation differences - foreign operations (7,184) (8,662) 23,138 (3,421)
Loss in fair value of interest rate swaps (note 14) (10) (249) (288) (217)
Total items that are or may be recycled to Net earnings (loss) (7,194) (8,911) 22,850 (3,638)
Total other comprehensive income (loss), net of tax (5,660) (9,079) 24,666 (3,947)
Total comprehensive income (loss)$(26,243)$(1,684)$3,920 $30,936

Subsequent event (note 15)

See accompanying notes to consolidated financial statements

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three and six months ended June 30, 2015 and 2014 (unaudited)
(thousands of Canadian dollars)3 Months
June 30, 2015
3 Months
June 30, 2014
6 Months
June 30, 2015
6 Months
June 30, 2014
Cash provided by (used in):
Operating activities:
Net earnings (loss)$(20,583)$7,395 $ (20,746)$34,883
Items not involving cash:
Depreciation of plant and equipment (note 9) 18,130 13,978 34,645 26,309
Depletion and amortization of timber, roads and other (note 9) 8,909 7,016 16,853 13,325
Income tax recovery (7,199) (5,717)(7,582) (21,914)
Finance costs (note 11) 4,088 2,537 7,162 4,300
Other assets 26 184 372 465
Reforestation liability (1,931) (885)(692) 1,854
Provisions and other liabilities 2,951 829 (3,470) (1,628)
Stock options (note 8) 99 - 99 -
Reversal of write-down of plant and equipment (note 10) - - (1,195) -
Write-down of plant and equipment (note 10) - 20,468 - 20,468
Unrealized foreign exchange loss (gain) (2,355) 56 (328) (34)
Other 162 (117)29 (163)
2,297 45,744 25,147 77,865
Cash generated from (used in) operating working capital:
Trade accounts receivable and other 6,170 (23,501)(9,421) (7,315)
Inventories 13,348 21,460 9,572 (2,797)
Prepayments 1,312 893 (2,848) (3,477)
Trade accounts payable and provisions (2,666) (489)(2,483) (3,862)
Income taxes paid (319) (2,444)(455) (2,708)
20,142 41,663 19,512 57,706
Investing activities:
Additions to property, plant and equipment (30,543) (7,584)(52,118) (17,692)
Additions to logging roads (7,765) (7,180)(12,903) (11,603)
Additions to timber and other intangible assets (297) (1,167)(1,137) (1,966)
Proceeds on disposal of property, plant and equipment 587 1,734 3,790 2,087
Acquisitions (note 4) (46,568) (2,086)(223,361) (124,421)
Investments and other assets 74 13 180 (56)
(84,512) (16,270)(285,549) (153,651)
Financing activities:
Issuance of capital stock, net of share issue expenses (notes 4 and 8) - - 63,196 -
Bank indebtedness - 1,636 - 4,400
Interest payments (3,679) (1,955)(6,630) (3,264)
Financing transaction costs (95) 73 (254) (736)
Additions to long term debt (notes 4 and 7) 275,297 91,020 755,408 299,931
Repayments of long term debt (note 7) (215,236) (112,313)(549,596) (197,467)
56,287 (21,539)262,124 102,864
Foreign exchange gain (loss) on cash and cash equivalents held in a foreign currency

2,060



(266

)

128



3

Increase (decrease) in cash (6,023) 3,588 (3,785) 6,922
Cash and cash equivalents, beginning of period 20,104 8,051 17,866 4,717
Cash and cash equivalents, end of period$14,081 $11,639 $ 14,081 $11,639

See accompanying notes to consolidated financial statements

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
June 30, 2015 and December 31, 2014 (unaudited)
(thousands of Canadian dollars) June 30,
2015
Dec. 31,
2014
Assets
Current assets:
Cash and cash equivalents$14,081 $17,866
Trade accounts receivable and other 110,188 80,283
Inventories (note 6) 189,865 148,668
Prepayments 20,513 12,175
334,647 258,992
Employee future benefits 3,564 2,520
Other investments and assets 2,439 2,972
Property, plant and equipment (notes 4 and 10) 750,829 541,378
Logging roads and bridges 23,412 22,244
Timber licences 77,608 79,024
Other intangible assets 24,448 24,397
Goodwill 146,322 136,996
Deferred income taxes 1,291 -
$1,364,560 $1,068,523
Liabilities and Shareholders' Equity
Current liabilities:
Trade accounts payable and provisions$136,700 $139,153
Reforestation liability 12,427 9,797
Income taxes payable 310 365
149,437 149,315
Reforestation liability 22,593 23,099
Long term debt (note 7) 444,951 220,419
Employee future benefits 7,366 7,361
Provisions and other liabilities 36,518 25,190
Deferred income taxes - 6,659
Equity:
Share capital (note 8) 553,559 490,363
Contributed surplus 7,575 7,476
Translation reserve 44,088 20,950
Hedge reserve (155) 133
Retained earnings 98,628 117,558
703,695 636,480
$1,364,560 $1,068,523
See accompanying notes to consolidated financial statements
Approved on behalf of the Board:
L. SauderD.W.G. Whitehead
DirectorDirector
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the six months ended June 30, 2015 and 2014 (unaudited)
(thousands of Canadian dollars)
Common
Shares
Contributed
Surplus
Translation
Reserve
Hedging
Reserve
Retained
Earnings

Total
Balance at December 31, 2014$490,363$7,476$20,950 $133 $117,558 $636,480
Net loss: - - - - (20,746) (20,746)
Other comprehensive earnings (loss):
Foreign currency translation differences, net of tax - - 23,138 - - 23,138
Defined benefit plan actuarial gain, net of tax - - - - 1,816 1,816
Loss in fair value of interest rate swaps (note 14) - - - (288) - (288)
Contributions:
Share issuance, net of share issue expenses (notes 4 and 8(a)) 63,196 - - - - 63,196
Stock options (note 8(b)) - 99 - - - 99
Balance at June 30, 2015$553,559$7,575$44,088 $(155)$98,628 $703,695
Balance at December 31, 2013$428,723$7,476$561 $167 $78,210 $515,137
Net earnings: - - - - 34,883 34,883
Other comprehensive earnings (loss):
Foreign currency translation differences, net of tax - - (3,421) - - (3,421)
Defined benefit plan actuarial loss - - - - (309) (309)
Loss in fair value of interest rate swaps (note 14) - - - (217) - (217)
Contributions:
Shares issued in business combination (notes 4 and 8(a)) 61,640 - - - - 61,640
Balance at June 30, 2014$490,363$7,476$(2,860)$(50)$112,784 $607,713

See accompanying notes to consolidated financial statements

INTERFOR CORPORATION
Notes to Unaudited Condensed Consolidated Interim Financial Statements
(Tabular amounts expressed in thousands except number of shares and per share amounts)
Three and six months ended June 30, 2015 and 2014 (unaudited)

1. Nature of operations:

Interfor Corporation and its subsidiaries (the "Company" or "Interfor") produce wood products in British Columbia, the U.S. Northwest and the U.S. Southeast for sale to markets around the world.

Interfor Corporation is incorporated under the Business Corporations Act (British Columbia) with shares listed on the Toronto Stock Exchange. Its head office, principal address and records office are located at Suite 3500, 1055 Dunsmuir Street, Vancouver, British Columbia, Canada, V7X 1H7.

These unaudited condensed consolidated interim financial statements as at and for the three and six months ended June 30, 2015 and 2014, comprise the accounts of Interfor Corporation and its subsidiaries.

2. Basis of preparation:

(a) Statement of compliance:

These unaudited condensed consolidated interim financial statements, including comparatives, have been prepared in accordance with IAS 34 Interim Financial Reporting using accounting policies consistent with the International Financial Reporting Standards ("IFRS") issued by the International Accounting Standards Board ("IASB") and Interpretations of the International Financial Reporting Interpretations Committee ("IFRIC"). These unaudited condensed consolidated interim financial statements were approved by the Board of Directors on July 30, 2015.

(b) Basis of measurement:

These unaudited condensed consolidated interim financial statements have been prepared on the historical cost basis except for the following items in the Statements of Financial Position:

(i) Derivative financial instruments are measured at fair value;

(ii) Liabilities for cash-settled share-based payment arrangements are measured at fair value; and

(iii) Employee benefit plan assets and liabilities are recognized as the net of the fair value of the plan assets and the present value of the benefit obligations on a plan by plan basis.

The functional and presentation currency of the parent company is the Canadian Dollar.

3. Significant accounting policies:

These unaudited condensed consolidated interim financial statements have been prepared using the significant accounting policies and methods of computation consistent with those applied in the Company's audited December 31, 2014, annual consolidated financial statements, which are available on www.sedar.com. The adoption of new accounting standards or interpretations under IFRS effective January 1, 2015 had no effect on these financial statements.

New standards and interpretations not yet adopted:

A number of new standards, and amendments to standards and interpretations, are not yet effective for the quarter ended June 30, 2015, and have not been applied in preparing these unaudited consolidated interim financial statements. The following pronouncements are considered by the Company to be the most significant of several pronouncements that may affect the financial statements.

IFRS 9, Financial Instruments, will replace the multiple classification and measurement models in IAS 39, Financial Instruments: Recognition and Measurement, with a single model that has only two classification categories: amortized cost and fair value. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with earlier adoption permitted. The Company does not expect this standard to have a significant effect on its financial statements.

IFRS 15, Revenue from Contracts with Customers, will replace all existing IFRS revenue requirements. On April 28, 2015, the International Accounting Standards Board voted to publish an Exposure Draft proposing a one-year deferral of the effective date of this standard to January 1, 2018, with earlier adoption still permitted. The Company has not yet completed an assessment of the impact, if any, of this standard on its financial statements.

4. Acquisitions:

On March 1, 2015, Interfor concluded the acquisition of sawmill operations in Meldrim, Georgia; Georgetown, South Carolina; Longview, Washington; and Tacoma, Washington from Simpson Lumber Company, LLC ("the Simpson Acquisition"), pursuant to an Asset Purchase Agreement ("APA") for total consideration of US$146,088,000 ($182,654,000).

Consideration per the APA included a series of future payments tied to the financial performance of the Tacoma sawmill. The contingent future payments are calculated and payable over three years as follows:

(a) An annual payment equal to half of the Tacoma sawmill's EBITDA for each of the three years post closing; and

(b) A final payment at the end of the third year equal to 2.5 times the Tacoma sawmill's average annual EBITDA over the three year period.

The minimum total contingent future payments as outlined in (a) and (b) combined are US$10,000,000 and the Company recorded a discounted provision of US$9,464,000 ($11,833,000) in Provisions and other liabilities in the Consolidated Statements of Financial Position as part of the acquisition. At June 30, 2015, this provision was revalued at the quarter-end exchange rate to $11,805,000. On July 30, 2015, the Company announced a plan to exit its sawmilling operation located in Tacoma, Washington (see note 15).

On June 19, 2015, Interfor concluded the acquisition of sawmill operations in Monticello, Arkansas from The Price Companies, Inc. ("the Monticello Acquisition"), for total consideration of US$35,706,000 ($43,797,000).

These acquisitions have been accounted for as a business combination and the estimated value of the consideration transferred is allocated on a preliminary basis as follows:

Simpson
Acquisition
Monticello
Acquisition

Total
Net assets acquired:
Current assets$57,661 $2,898 $60,559
Property, plant and equipment 129,227 40,946 170,173
186,888 43,844 230,732
Current liabilities assumed: (4,234) (47) (4,281)
$182,654 $43,797 $226,451
Cash consideration funded by:
Revolving Term Loan$107,625 $43,773 $151,398
Current liabilities for settlement of working capital - 24 24
Contingent future payments 11,833 - 11,833
Common share issuance 63,196 - 63,196
$182,654 $43,797 $226,451

The Company incurred acquisition related costs of approximately $578,000 and $1,945,000 for the second quarter and first six months, 2015, which are included in Selling and administration in the Company's Consolidated Statements of Earnings.

On March 14, 2014, a wholly-owned subsidiary of Interfor acquired all of the outstanding common shares of Tolleson Ilim Lumber Company ("Tolleson") from Ilim Timber Continental, S.A., pursuant to a Share Purchase Agreement for total consideration of $188,545,000 which resulted in the recognition of $107,419,000 in goodwill.

In 2013, the Company acquired the Thomaston sawmill operations from Keadle Lumber Enterprises, Inc. Upon acquisition, the Company agreed to pay additional consideration of US$7,000,000, contingent upon receipt of an upgrade to the air permit which allows the Company to operate a second shift. Approval was received on February 28, 2014, and a payment of $8,743,000 was made on February 27, 2015.

5. Seasonality of operating results:

Quarterly trends normally reflect the seasonality of the Company's operations. Logging operations are seasonal due to a number of factors including weather, ground conditions and fire season woods closures. Generally, the Company's B.C. Coastal logging division experiences higher production levels in the latter half of the first quarter, throughout the second and third quarters and in the first half of the fourth quarter. Logging activity in the B.C. Interior is generally higher in the first half of the first quarter, slows during spring break- up and increases in the third and fourth quarters. Sawmill operations are less seasonal than logging operations but are dependent on the availability of logs. In addition, the market demand for lumber and related products is generally lower in the winter due to reduced construction activity, which increases during the spring, summer and fall.

6. Inventories:

June 30, 2015Dec. 31, 2014
Logs$83,734$71,841
Lumber 87,259 66,798
Other 18,872 10,029
$189,865$148,668

Inventory expensed in the period includes production costs, depreciation of plant and equipment, and depletion and amortization of timber, roads and other. The inventory write-down in order to record inventory at the lower of cost and net realizable value at June 30, 2015 was $13,930,000 (December 31, 2014 - $9,774,000).

7. Cash and borrowings:



June 30, 2015

Operating
Line
Revolving
Term
Line

Senior
Secured Notes
U.S.
Operating
Line


Total
Available line of credit$65,000$200,000 $249,480 $62,370 $576,850
Drawings 1,972 162,162 249,480 31,337 444,951
Outstanding letters of credit included in line utilization 9,038 - - 2,083 11,121
Unused portion of line$53,990$37,838 $- $28,950 $120,778
December 31, 2014
Available line of credit$65,000$250,000 $116,010 $34,803 $465,813
Drawings - 104,409 116,010 - 220,419
Outstanding letters of credit included in line utilization 8,637 - - 1,183 9,820
Unused portion of line$56,363$145,591 $- $33,620 $235,574

(a) Operating Line:

The Canadian operating line of credit ("Operating Line") may be drawn in either CAD$ or US$ advances, and bears interest at bank prime plus a margin or, at the Company's option, at rates for Bankers' Acceptances or LIBOR based loans plus a margin, and in all cases dependent upon a financial ratio of total debt divided by twelve months' trailing EBITDA1. Borrowing levels under the Operating Line are subject to a borrowing base calculation dependent on certain accounts receivable and inventories.

The Operating Line matures on February 27, 2017.

The Operating Line is secured by a general security agreement which includes a security interest in all accounts receivable and inventories, charges against timber tenures, and mortgage security on sawmills. The Operating Line is subject to certain financial covenants including a minimum working capital requirement, a maximum ratio of total debt to total capitalization and a minimum net worth calculation.

As at June 30, 2015, the Operating Line was drawn by $11,010,000 (December 31, 2014 - $8,637,000), including outstanding letters of credit.

(1) EBITDA represents earnings before interest, taxes, depreciation, depletion and amortization.

(b) Revolving Term Line:

The Revolving Term Line may be drawn in either CAD$ or US$ advances, and bears interest at bank prime plus a margin or, at the Company's option, at rates for Bankers' Acceptances or LIBOR based loans plus a margin, and in all cases dependent upon a financial ratio of total debt divided by twelve months' trailing EBITDA1.

The Revolving Term Line is secured by a general security agreement which includes a security interest in all accounts receivable and inventories, charges against timber tenures, and mortgage security on certain sawmills. The Revolving Term Line is subject to certain financial covenants including a minimum working capital requirement, a maximum ratio of total debt to total capitalization and a minimum net worth calculation.

The Revolving Term Line matures on February 27, 2017.

On March 16, 2015, the Company decreased the credit available under its Revolving Term Line from $250,000,000 to $200,000,000. All other terms and conditions remained unchanged.

As at June 30, 2015, the Revolving Term Line was drawn by US$130,000,000 (December 31, 2014 - US$90,000,000) revalued at the quarter-end exchange rate to $162,162,000 (December 31, 2014 - $104,409,000), leaving $37,838,000 (December 31, 2014 - $145,591,000) of the line unused.

All outstanding U.S. dollar drawings under the Revolving Term Line have been designated as a hedge against the Company's investment in its U.S. operations and foreign exchange losses of $12,892,000 for the first six months, 2015 (first six months, 2014 - $3,724,000 gain) arising on revaluation of the Revolving Term Line were recognized in Foreign currency translation differences in Other comprehensive income. For the second quarter, 2015, a foreign exchange gain of $694,000 (Quarter 2, 2014 - $6,952,000 gain) was recognized in Other comprehensive income.

(1) EBITDA represents earnings before interest, taxes, depreciation, depletion and amortization.

(c) Senior Secured Notes:

On March 16, 2015, the Company issued US$100,000,000 of Series C Senior Secured Notes, bearing interest at 4.17%. Together with the Series A Senior Secured Notes (US$50,000,000, bearing interest at 4.33%) and Series B Senior Secured Notes (US$50,000,000, bearing interest at 4.02%), US$200,000,000 of Senior Secured Notes were outstanding as at June 30, 2015 (December 31, 2014 - US$100,000,000) and revalued at the quarter-end exchange rate to $249,480,000 (December 31, 2014 - $116,010,000).

The notes are subject to certain financial covenants including a minimum working capital requirement, a maximum ratio of total debt to total capitalization and a minimum net worth calculation. Payments of US$33,333,000 are required on each of June 26, 2021 and 2022, with the balance due on June 26, 2023 for the Series A and B Senior Secured Notes. Payments of US$33,333,000 are required on each of March 26, 2024 and 2025, with the balance due on March 26, 2026 for the Series C Senior Secured Notes.

The Senior Secured Notes have been designated as a hedge against the Company's investment in its U.S. operations and unrealized foreign exchange losses of $5,440,000 (first six months, 2014 - $200,000 loss) arising on their revaluation were recognized in Foreign currency translation differences in Other comprehensive income for the first six months, 2015. For the second quarter, 2015, an unrealized foreign exchange gain of $4,180,000 (Quarter 2, 2014 - $1,885,000 gain) was recognized in Other comprehensive income.

(d) U.S. Operating Line:

On April 27, 2015, the Company extended the maturity of its U.S. Operating Line from April 28, 2015 to May 1, 2017 and increased the credit available from US$30,000,000 to US$50,000,000. All other terms and conditions remain substantially unchanged. The U.S. Operating Line is secured by accounts receivable and inventories of wholly-owned subsidiary, Interfor U.S. Inc. The U.S. Operating Line is subject to a minimum net worth calculation, with borrowing levels subject to a collateral calculation dependent upon certain accounts receivable and inventories.

As at June 30, 2015, the U.S. Operating Line was drawn by US$26,792,000, including outstanding letters of credit, revalued at the quarter-end exchange rate to $33,420,000 (December 31, 2014 - US$1,020,000 revalued at the year-end exchange rate to $1,183,000), with cumulative foreign exchange losses of $453,000 (first six months, 2014 - $115,000 loss) recognized in Foreign currency translation differences in Other comprehensive income for the first six months, 2015. For the second quarter, 2015, a cumulative foreign exchange gain of $22,000 (Quarter 2, 2014 - $233,000) was recognized in Other comprehensive income.

Minimum principal amounts due on long term debt are as follows:
Twelve months ending
June 30, 2016$-
June 30, 2017 195,471
June 30, 2018 -
June 30, 2019 -
June 30, 2020 -
Thereafter 249,480
$444,951

8. Share capital:

The transactions in share capital are described below:
NumberAmount
Balance, December 31, 201363,050,455$428,723
Shares issued in business combination3,680,000 61,640
Balance, December 31, 201466,730,455 490,363
Shares issued for cash, net of share issue costs3,300,000 63,196
Balance, June 30, 201570,030,455$553,559

(a) Share transactions:

On January 27, 2015, the Company closed a bought deal public offering of subscription receipts (the "Subscription Receipts") through a syndicate of underwriters. The Company issued an aggregate of 3,300,000 (including 300,000 Subscription Receipts issued pursuant to the exercise of the over-allotment option) Subscription Receipts at a price of $20.10 per Subscription Receipt, for cash proceeds, net of share issue costs, of $63,196,000. In connection with the completion of the Simpson Acquisition (see note 4), each Subscription Receipt was exchanged, for no additional consideration, for one Common Share of the Company. The shares were issued on March 2, 2015 (see note 4).

On March 14, 2014, the Company issued 3,680,000 Common Shares at a share price of $16.75 per share to partially fund the Tolleson Acquisition.

On May 6, 2014, the Company eliminated its Class B Common shares, known as Multiple Voting Shares, and designated its Class A Subordinate Voting Shares as Common Shares.

(b) Stock option plan:

The Company has an employee stock option plan for its key employees and directors. The vesting of the options occurs at a rate of 40% two years after granting and 20% per annum thereafter. Options expire ten years after the date of the grant. In the first six months, 2015, the Company granted 73,048 options, of which 69,534 remained outstanding at June 30, 2015 (December 31, 2014 - no options outstanding). No options were issued in the second quarter, 2015 (Quarter 2, 2014 - nil). The Company recognized an expense of $99,000 for the first six months, 2015 (first six months, 2014 - $nil) and $66,000 for the second quarter, 2015 (Quarter 2, 2014 - $nil) in Net earnings.

9. Depreciation, depletion and amortization:

Depreciation, depletion and amortization can be allocated by function as follows:
3 Months
June 30, 2015
3 Months
June 30, 2014
6 Months
June 30, 2015
6 Months
June 30, 2014
Production$24,998$19,749$47,726$38,024
Selling and administration 2,041 1,245 3,772 1,610
$27,039$20,994$51,498$39,634

10. Restructuring (recovery) costs:


3 Months
June 30, 2015
3 Months
June 30, 2014
6 Months
June 30, 2015
6 Months
June 30, 2014
Reversal of write-down of plant and equipment$- $-$(1,195)$-
Write-down of plant and equipment - 20,468 - 20,468
Severance 24 776 886 1,105
Onerous contract (36) - 175 -
Other - 1,673 - 1,673
$(12)$22,917$(134)$23,246

In the first quarter, 2015, in conjunction with the sale of assets at the Company's Beaver-Forks operation, the Company recognized a reversal of an asset impairment of $1,195,000.

The Company also recorded provisions for severance of $886,000 for the first six months, 2015 (first six months, 2014 - $536,000), and $24,000 for the second quarter, 2015 (Quarter 2, 2014 - $207,000). The Company also increased its provision for an onerous contract related to the Beaver-Forks operations by $175,000 in the first six months, 2015 and reduced it by $36,000 in the second quarter, 2015.

During the second quarter, 2014, the Company curtailed its Beaver-Forks operation, located on the Olympic Peninsula in Washington, indefinitely. As a result, the Company recorded provisions for severance, remediation, and an onerous contract totaling $2,242,000, and an impairment charge of $20,468,000 on the plant and equipment to reduce the carrying value of these assets to estimated fair values, partially offset by a deferred tax recovery of $8,487,000.

11. Finance costs:

3 Months
June 30, 2015
3 Months
June 30, 2014
6 Months
June 30, 2015
6 Months
June 30, 2014
Interest on borrowings$3,777$2,178 $6,516$3,629
Interest (income) expense on defined benefit obligations 4 (16) 3 (34)
Accretion expense 94 169 217 339
Amortization of deferred finance costs 213 206 426 366
$4,088$2,537 $7,162$4,300

12. Net earnings (loss) per share:

Net earnings (loss) per share is calculated utilizing the treasury stock method approach for determining the dilutive effect of options issued. The reconciliation of the numerator and denominator is determined as follows:

3 Months June 30, 2015 3 Months June 30, 2014
Weighted Average
Number of

Weighted Average
Number of
Net loss SharesPer share Net
earnings
Shares Per share
Issued shares at April 1 70,030 66,730
Basic and diluted earnings (loss) per share$(20,583)70,030$ (0.29)$7,39566,730$0.11
6 Months June 30, 2015 6 Months June 30, 2014
Weighted Average
Number of

Weighted Average
Number of
Net loss Shares Per share Net earningsShares Per share
Issued shares at December 31 66,730 63,050
Effect of shares issued on March 14, 2014 - 2,217
Effect of shares issued on March 2, 2015 2,207 -
Basic and diluted earnings (loss) per share$(20,746)68,937*$ (0.30)$34,88365,267$0.53

*As the addition of stock options to the total shares outstanding has an anti-dilutive impact on the diluted earnings (loss) per share calculation, those stock options have not been included in the total shares outstanding for purposes of the calculation of diluted earnings (loss) per share.

13. 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 Northwest and Southeast regions of the U.S.A.

Sales to both foreign and domestic markets are as follows:

3 Months
June 30, 2015
3 Months
June 30, 2014
6 Months
June 30, 2015
6 Months
June 30, 2014
United States$291,621$220,835$566,289$388,412
Canada 55,272 57,452 119,623 110,966
China/Taiwan 30,790 50,104 54,928 83,585
Japan 37,053 39,147 71,700 68,358
Other export 14,947 22,681 32,589 33,738
$429,683$390,219$845,129$685,059
Sales by product line are as follows:
3 Months
June 30, 2015
3 Months
June 30, 2014
6 Months
June 30, 2015
6 Months
June 30, 2014
Lumber$352,139$325,152$692,867$555,616
Logs 39,820 35,407 76,040 72,995
Wood chips and other by-products 36,034 25,779 70,905 48,179
Ocean freight and other 1,690 3,881 5,317 8,269
$429,683$390,219$845,129$685,059

14. Financial instruments:

At June 30, 2015, the fair value of the Company's long term debt approximated its carrying value of $444,951,000 (December 31, 2014 - $220,419,000) measured based on Level 2 of the fair value hierarchy. The fair values of other financial instruments approximate their carrying values due to their short-term nature.

The Company uses a variety of derivative financial instruments from time to time to reduce its exposures to risks associated with fluctuations in foreign exchange rates, lumber prices, and floating interest rates on long term debt including foreign currency forward, collar and option contracts, interest rate swaps and lumber futures.

As at June 30, 2015, the Company has outstanding obligations to sell US$4,000,000 at an average rate of CAD$1.2487 to US$1.00 during 2015.

The Company also has four interest rate swaps outstanding, each with a notional value of US$25,000,000. Under two of the interest rate swaps, maturing February 17, 2017, the Company pays an amount based on a fixed annual interest rate of 0.84% and receives a 90 day LIBOR which is recalculated at set interval dates. Under the other two interest rate swaps, maturing April 14, 2016, the Company pays an amount based on a fixed annual interest rate of 0.58% and receives a 90 day LIBOR which is recalculated at set interval dates. The intent of the interest rate swaps is to convert floating-rate interest expense to fixed-rate interest expense.

Fair value of the Company's derivative financial instruments is measured based on Level 2 of the fair value hierarchy as defined under IFRS 13, Fair Value Measurement and summarized in the following table.

June 30, 2015 Dec. 31, 2014
Foreign exchange forward contracts$(1)$(177)
Interest rate swaps, designated as cash flow hedges (156) 132
Total liability, net$(157)$(45)

Financial instruments in an asset position are classified as Trade accounts receivable and other in the Statements of Financial Position, while financial instruments in a liability position are classified as Trade accounts payable and provisions. Assets and liabilities are not netted, for purposes of presentation on the Statements of Financial Position.

The following table summarizes the gain (loss) on derivative financial instruments:

3 Months
June 30, 2015
3 Months
June 30, 2014
6 Months
June 30, 2015
6 Months
June 30, 2014
Foreign exchange forward contracts1$116 $353 $(1,721)$37
Interest rate swaps2 (10) (249) (288) (217)
Total gain (loss), net$106 $104 $(2,009)$(180)

1 Recognized in Other foreign exchange gain (loss) in Net earnings.

2 Recognized in Other comprehensive income (loss).

15. Subsequent event:

On July 30, 2015, the Company announced a plan to exit its sawmilling operation located in Tacoma, Washington. The Tacoma sawmill was acquired on March 1, 2015, as part of the Simpson Acquisition and its operations were curtailed on May 22, 2015.

As at June 30, 2015, the Tacoma sawmill comprised the following assets and liabilities:

June 30, 2015
Current assets$22,489
Property, plant and equipment 28,655
Deferred tax asset 36
51,180
Current liabilities 1,114
Provisions and other liabilities (note 4) 11,805
Net assets$38,261

There are cumulative expenses of $56,000 included in Other comprehensive income relating to the Tacoma sawmill.

The Company does not expect to recognize any impairment losses on the remeasurement of the Tacoma sawmill net assets to the lower of their carrying amount and the fair value less costs to sell. A sale of substantially all assets of the Tacoma sawmill could accelerate the payment due date of the contingent liability described in note 4 to within 45 days of disposal, with the payout expected to equal the US$10,000,000 minimum. The plan to exit did not result in adjustment to the contingent liability recorded as of June 30, 2015.

Monetization of the Tacoma sawmill assets is expected by June 30, 2016.

Contact Information

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