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Interfor Reports Q3’19 Results

Interfor Reports Q3’19 Results

EBITDA1 of $17 million on Sales of $486 million
Net Debt to Invested Capital1 of 19%; Liquidity of $381 million
Reconfiguration of B.C. Coastal Business is Underway

VANCOUVER, British Columbia, Nov. 07, 2019 (GLOBE NEWSWIRE) -- INTERFOR CORPORATION (“Interfor” or the “Company”) (IFP.TO) recorded a net loss in Q3’19 of $35.6 million, or $0.53 per share, compared to a net loss of $11.2 million, or $0.17 per share in Q2’19 and net earnings of $28.2 million, or $0.40 per share in Q3’18. 

Adjusted net loss in Q3’19 was $11.8 million compared to an Adjusted net loss of $16.2 million in Q2’19 and Adjusted net earnings of $28.3 million in Q3’18.

Adjusted EBITDA was $16.8 million on sales of $486.5 million in Q3’19 versus $12.6 million on sales of $481.3 million in Q2’19. 

Included in the Company’s results for Q3’19 are $23.2 million (after-tax) for capital asset write-downs and restructuring costs, or $31.8 million on a pre-tax basis.  This includes $14.0 million of non-cash impairments for capital asset write-downs on buildings, equipment and other assets related to the permanent closure of Interfor’s Hammond sawmill and $17.8 million of accruals for the settlement of various human resource matters related to the reconfiguration of the Company’s B.C. Coastal business and succession arrangements related to the announced retirement of Interfor’s CEO.

Other notable items in the quarter included:

•  Mixed Lumber Price Movements

  • Movements in key benchmark prices were mixed quarter-over-quarter with the SYP Composite dropping by US$18 to US$355 per mfbm while the Western SPF Composite benchmark rose by US$15 to US$338 per mfbm and the KD H-F Stud 2x4 9’ benchmark remained relatively flat at US$337 per mfbm.  Interfor’s average lumber selling price fell $20 from Q2’19 to $583 per mfbm.   

•  Production Increased; Balanced with Shipments

  • Total lumber production was 685 million board feet, up 38 million board feet from the prior quarter.  Production in the U.S. South region increased to 348 million board feet from 320 million board feet in the preceding quarter as the Monticello and Meldrim sawmills ramped up production after completion of the Phase I capital projects at these locations.  The B.C. and U.S. Northwest regions accounted for 205 million board feet and 131 million board feet, respectively, compared to 187 million board feet and 140 million board feet in Q2’19.  Production in Q2’19 was affected by the curtailments taken in the B.C. Interior in response to weak lumber prices and continuing high log costs.

  • Total lumber shipments were 692 million board feet, including agency and wholesale volumes, or 18 million board feet higher than Q2’19.

  • Lumber inventories at September 30, 2019 were 215 million board feet, up 4 million board feet quarter-over-quarter.

 •  Continued Strong Financial Position

  • Net debt ended the quarter at $212.7 million, or 19.4% of invested capital, resulting in available liquidity of $380.9 million. 
  • Interfor generated $2.3 million of cash flow from operations before changes in working capital, or $0.03 per share.  Total cash generated from operations was $29.7 million, primarily the result of reduced log inventories in B.C. 

  • Capital spending was $35.7 million in Q3’19, including $25.5 million on high-return discretionary projects, primarily in the U.S. South and the remainder related to maintenance capital and woodlands projects.

 •  Softwood Lumber Duties

  • Interfor expensed $12.1 million of duties in the quarter, representing the full amount of countervailing (“CV”) and anti-dumping (“AD”) duties incurred on its Canadian shipments of softwood lumber into the U.S. at a combined rate of 20.23%.

  • Cumulative duties of US$85.8 million have been paid by Interfor since the inception of the current trade dispute and are held in trust by the U.S.  Except for US$3.3 million in respect of overpayments arising from duty rate adjustments, Interfor has recorded the duty deposits as an expense.

1 Refer to Adjusted EBITDA and Net debt to invested capital in the Non-GAAP Measures section

Reconfiguration of B.C. Coastal Business

On September 3, 2019, Interfor announced a plan to reconfigure its B.C. Coastal business, including the permanent closure of its Hammond sawmill, located in Maple Ridge, B.C., and the reorganization of its forestry and woodlands operations. 

This plan is expected to result in the repatriation of working capital tied up at Hammond, the monetization of related real estate and improved results in the years ahead.  In addition, the Company’s B.C. Coastal forestry and woodlands operations will be reorganized to focus on value realization rather than operational integration with Hammond.

The closure is expected to be completed in the fourth quarter, after the mill’s remaining log and lumber inventories are processed and shipped.

Strategic Capital Plan Update

Interfor’s previously announced Phase I strategic capital projects at the Meldrim, Georgia and Monticello, Arkansas sawmills were substantially completed at the end of the prior quarter and are now in the ramp-up phase.  Total project costs are expected to be US$70.9 million.  As of September 30, 2019, US$69.9 million has been capitalized.

The Phase II projects at the Thomaston and Eatonton sawmills in Georgia and the Georgetown sawmill in South Carolina, with a budget of US$240 million, are on track for completion in various stages over the period of 2019 to 2022.  As of September 30, 2019, US$43.9 million has been capitalized and the projects remain on budget.

Acquisition of B.C. Interior Cutting Rights from Canfor

On June 3, 2019, Interfor entered into a purchase agreement with Canadian Forest Products Ltd. to acquire two replaceable timber licences with annual cutting rights of approximately 349,000 cubic metres, an interest in a non-replaceable forest licence and other related forestry assets in the Adams Lake area of the B.C. Interior and assume certain liabilities for total cash compensation of $60 million.

The transaction remains subject to various consents, including that by the Government of B.C. and is currently targeted to close in the fourth quarter, 2019 as consultation with stakeholders continues.     

Senior Leadership Transition

On August 26, 2019, Interfor announced that long-time President & CEO Duncan Davies will step down on December 31, 2019 and Ian Fillinger, currently the Company’s Senior Vice President & COO, has been appointed President & CEO effective January 1, 2020.  Mr. Fillinger will also serve on the Company's Board of Directors following this date. 

Mr. Davies will also step down from his role as a director of the Company and has agreed to remain with the Company in an advisory capacity through the end of 2020.


 
Financial and Operating Highlights1
 
    For the 3 months ended
    For the 9 months ended
 
    Sept. 30   Sept. 30   Jun. 30     Sept. 30   Sept. 30  
  Unit 2019   2018   2019     2019   2018  
    (restated)2   (restated)2
Financial Highlights3              
Total sales $MM 486.5   570.5   481.3     1,419.0   1,718.0  
Lumber $MM 403.5   480.3   406.9     1,190.9   1,453.2  
Logs, residual products and other $MM 83.0   90.2   74.4     228.1   264.8  
Operating earnings (loss) $MM (44.8)   41.8   (18.2)     (79.8)   174.8  
Net earnings (loss) $MM (35.6)   28.2   (11.2)     (62.1)   124.6  
Net earnings (loss) per share, basic $/share (0.53)   0.40   (0.17)     (0.92)   1.78  
Adjusted net earnings (loss)4 $MM (11.8)   28.3   (16.2)     (40.7)   133.7  
Adjusted net earnings (loss) per share, basic4 $/share (0.17)   0.40   (0.24)     (0.60)   1.91  
Operating cash flow per share (before working capital changes)4 $/share 0.03   1.04   0.15     0.43   3.96  
Adjusted EBITDA4 $MM 16.8   72.5   12.6     45.8   282.7  
Adjusted EBITDA margin4 % 3.5%   12.7%   2.6%     3.2%   16.5%  
               
Total assets $MM 1,421.0   1,575.7   1,459.8     1,421.0   1,575.7  
Total debt $MM 264.9   258.9   261.7     264.9   258.9  
Net debt $MM 212.7   3.8   198.2     212.7   3.8  
Net debt to invested capital4 % 19.4%   0.4%   17.9%     19.4%   0.4%  
Annualized return on invested capital4 % 6.1%   29.1%   4.6%     5.7%   38.6%  
               
Operating Highlights              
Lumber production million fbm 685   674   647     1,978   2,029  
Total lumber sales million fbm 692   685   674     1,987   2,033  
Lumber sales - Interfor produced million fbm 681   675   664     1,955   1,999  
Lumber sales - wholesale and commission million fbm 11   10   10     32   34  
Lumber - average selling price5 $/thousand fbm 583   701   603     599   715  
               
Average USD/CAD exchange rate6 1 USD in CAD 1.3204   1.3070   1.3377     1.3292   1.2876  
Closing USD/CAD exchange rate6 1 USD in CAD 1.3243   1.2945   1.3087     1.3243   1.2945  
               

Notes:

  1. Figures in this table may not equal or sum to figures presented elsewhere due to rounding.
  2. Financial information has been restated for implementation of IFRS 16, Leases.
  3. Financial information presented for interim periods in this release is prepared in accordance with IFRS and is unaudited.
  4. Refer to the Non-GAAP Measures section of this release for definitions and reconciliations of these measures to figures reported in the Company’s consolidated financial statements. 
  5. Gross sales before duties.
  6. Based on Bank of Canada foreign exchange rates.

Liquidity

Balance Sheet

Interfor’s net debt at September 30, 2019 was $212.7 million, or 19.4% of invested capital, for an increase of $208.9 million from the level at September 30, 2018 and an increase of $148.8 million from December 31, 2018. 

YTD’19 net debt was positively impacted by a stronger Canadian Dollar against the U.S. Dollar as all debt held was denominated in U.S. Dollars; this was partially offset by the Company’s U.S. Dollar cash balances.

  For the 3 months ended
Sept. 30,

    For the 9 months ended
Sept. 30,

 
Thousands of Dollars 2019   2018       2019     2018  
           
Net debt          
Net debt, period opening $198,209   $34,415     $63,825   $119,300  
Net drawing on credit facilities -   112       755     111  
Impact on U.S. Dollar denominated debt from (strengthening) weakening CAD 3,120   (4,572)       (8,735)     7,889  
Decrease (increase) in cash and cash equivalents 11,747   61,248       110,665     (31,254)  
Decrease (increase) in marketable securities -   (91,011)       41,766     (91,011)  
Impact on U.S. Dollar denominated cash and cash equivalents and marketable securities from strengthening (weakening) CAD (402)   3,608       4,398     (1,235)  
Net debt, period ending, CAD $212,674   $3,800     $212,674   $3,800  

On March 28, 2019, the Company completed a modernization of its credit facilities.  The new facility replaced the U.S. Operating Line, Canadian Operating Line, and Revolving Term Line with one consolidated facility.  The new facility increased credit availability to $350 million and matures in March 2024.

As at September 30, 2019, the Company had net working capital of $216.2 million and available liquidity of $380.9 million, including cash and borrowing capacity on its term line facility.

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 enough liquidity to fund operating and capital requirements for the foreseeable future. 

Capital Resources

The following table summarizes Interfor’s credit facilities and availability as of September 30, 2019:

  Revolving Senior  
  Term Secured  
Thousands of Canadian Dollars Line Notes Total
 
Available line of credit $350,000 $264,860 $614,860  
Maximum borrowing available $350,000 $264,860 $614,860  
Less:          
Drawings   -   264,860   264,860  
Outstanding letters of credit included in line utilization   21,246   -   21,246  
Unused portion of facility $328,754 $            -   328,754  
           
Add:          
Cash and cash equivalents       52,186  
Available liquidity at September 30, 2019     $380,940  

As of September 30, 2019, the Company had commitments for capital expenditures totaling $104.9 million for both maintenance and discretionary capital projects. 

Non-GAAP Measures

This release makes reference to the following non-GAAP measures: Adjusted net earnings (loss), Adjusted net earnings (loss) per share, EBITDA, Adjusted EBITDA, Net debt to invested capital and Operating cash flow per share (before working capital changes) which are used by the Company and certain investors to evaluate operating performance and financial position.  These non-GAAP measures do not have any standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other issuers.

The following table provides a reconciliation of these non-GAAP measures to figures as reported in the Company’s audited consolidated financial statements (unaudited for interim periods) prepared in accordance with IFRS:

  For the 3 months ended
    For the 9 months ended
 
  Sept. 30
  Sept. 30
  Jun. 30
    Sept. 30
  Sept. 30
 
Thousands of Canadian Dollars except number of shares and per share amounts   2019     2018     2019       2019     2018  
  (restated)¹   (restated)¹
Adjusted Net Earnings (Loss)            
Net earnings (loss) $(35,648)   $28,173   $(11,159)     $(62,109)   $124,570  
Add:            
Capital asset write-downs and restructuring costs   31,814     5,848     87       33,566     10,753  
Other foreign exchange loss (gain)   (216)     1,847     321       (235)     (144)  
Long term incentive compensation expense (recovery)   1,049     (7,503)     (851)       2,181     1,351  
Other (income) expense   100     (192)     (6,487)       (6,223)     66  
Post closure wind-down costs and losses   -     -     -       -     4  
Income tax effect of above adjustments   (8,867)     149     1,866       (7,876)     (2,926)  
Adjusted net earnings (loss) $(11,768)   $28,322   $(16,223)     $(40,696)   $133,674  
Weighted average number of shares - basic ('000)   67,253     69,908     67,252       67,284     69,993  
Adjusted net earnings (loss) per share $(0.17)   $0.40   $(0.24)     $(0.60)   $1.91  
             
Adjusted EBITDA            
Net earnings (loss) $(35,648)   $28,173   $(11,159)     $(62,109)   $124,570  
Add:            
Depreciation of plant and equipment   20,595     20,022     19,410       59,727     60,824  
Depletion and amortization of timber, roads and other   8,142     12,301     12,201       30,080     34,919  
Capital asset write-downs and restructuring costs   31,814     5,848     87       33,566     10,753  
Finance costs   3,784     2,980     3,324       11,284     9,694  
Other foreign exchange loss (gain)   (216)     1,847     321       (235)     (144)  
Income tax expense (recovery)   (12,804)     9,028     (4,196)       (22,508)     40,645  
EBITDA   15,667     80,199     19,988       49,805     281,261  
Add:            
Long term incentive compensation expense (recovery)   1,049     (7,503)     (851)       2,181     1,351  
Other (income) expense   100     (192)     (6,487)       (6,223)     66  
Post closure wind-down costs and losses   -     -     -       -     4  
Adjusted EBITDA $16,816   $72,504   $12,650     $45,763   $282,682  
Sales $486,494   $570,486   $481,345     $1,419,002   $1,718,023  
Adjusted EBITDA margin   3.5%     12.7%     2.6%       3.2%     16.5%  
             
Net debt to invested capital            
Net debt            
Total debt $264,860   $258,900   $261,740     $264,860   $258,900  
Cash and cash equivalents   (52,186)     (165,553)     (63,531)       (52,186)     (165,553)  
Marketable Securities   -     (89,547)     -       -     (89,547)  
Total net debt $212,674   $3,800   $198,209     $212,674   $3,800  
Invested capital            
Net debt $212,674   $3,800   $198,209     $212,674   $3,800  
Shareholders' equity   880,854     980,389     911,409       880,854     980,389  
Total invested capital $1,093,528   $984,189   $1,109,618     $1,093,528   $984,189  
Net debt to invested capital2   19.4%     0.4%     17.9%       19.4%     0.4%  
             
Operating cash flow per share (before working capital changes)            
Cash provided by operating activities $29,658   $86,719   $32,302     $3,610   $244,516  
Cash used in (generated from) operating working capital   (27,336)     (13,926)     (22,443)       25,656     32,710  
Operating cash flow (before working capital changes) $2,322   $72,793   $9,859     $29,266   $277,226  
Weighted average number of shares - basic ('000)   67,253     69,908     67,252       67,284     69,993  
Operating cash flow per share (before working capital changes) $0.03   $1.04   $0.15     $0.43   $3.96  
             
Annualized return on invested capital            
Adjusted EBITDA $16,816   $72,504   $12,650     $45,763   $282,682  
Invested capital, beginning of period $1,109,618   $1,006,696   $1,106,255     $1,032,591   $968,852  
Invested capital, end of period   1,093,528     984,189     1,109,618       1,093,528     984,189  
Average invested capital $1,101,573   $995,443   $1,107,937     $1,063,060   $976,521  
Adjusted EBITDA divided by average invested capital   1.5%     7.3%     1.1%       4.3%     28.9%  
Annualization factor   4.0     4.0     4.0       1.3     1.3  
Annualized return on invested capital   6.1%     29.1%     4.6%       5.7%     38.6%  

Notes:

  1. Financial information has been restated for implementation of IFRS 16, Leases.
  2. Net debt to invested capital as of the period end.


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CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
For the three and nine months ended September 30, 2019 and 2018 (unaudited)
(thousands of Canadian Dollars except earnings per share) Three Months
  Three Months
  Nine Months
  Nine Months
 
    Sept. 30, 2019
  Sept. 30, 2018
  Sept. 30, 2019
  Sept. 30, 2018
 
      (restated)¹     (restated)¹  
           
Sales $486,494   $570,486   $1,419,002   $1,718,023  
Costs and expenses:        
  Production   448,214     469,482     1,309,440     1,351,554  
  Selling and administration   9,383     12,580     29,756     40,115  
  Long term incentive compensation expense (recovery)