Interfor Corporation — Interim / Quarterly Report 2020

Nov 6, 2020

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Interfor Corporation Third Quarter Report For the three and nine months ended September 30, 2020

Management’s Discussion and Analysis

This Management’s Discussion and Analysis (“MD&A”) provides a review of the financial condition and results of operations as at and for the three and nine months ended September 30, 2020 (“Q3’20” and “YTD’20”, respectively). It should be read in conjunction with the unaudited condensed consolidated interim financial statements of Interfor Corporation and its subsidiaries (“Interfor” or the “Company”) for the three and nine months ended September 30, 2020, and the notes thereto which have been prepared in accordance with International Financial Reporting Standards (“IFRS”). This MD&A contains certain non-GAAP measures which, within the Non-GAAP Measures section, are discussed, defined and reconciled to figures reported in the Company’s unaudited condensed consolidated interim financial statements. This MD&A has been prepared as of November 5, 2020.

All figures are stated in Canadian Dollars, unless otherwise noted, and references to US$/USD are to the United States Dollar. For definitions of technical terms and abbreviations used within this MD&A, refer to the Glossary in the Company’s 2019 Annual Report.

Forward-Looking Information

This MD&A contains forward-looking information about the Company’s business outlook, objectives, plans, strategic priorities and other information that is not historical fact. A statement contains forward-looking information when the Company uses what it knows and expects today, to make a statement about the future. Forward-looking information is included under the headings “Overview of Third Quarter, 2020”, “Outlook”, “Liquidity”, “Capital Resources”, “Off-Balance Sheet Arrangements”, “Financial Instruments and Other Instruments”, “Accounting Policy Changes” and “Risks and Uncertainties”. Statements containing forward-looking information may include words such as: will, could, should, believe, expect, anticipate, intend, forecast, projection, target, outlook, opportunity, risk or strategy.

Readers are cautioned that actual results may vary from the forward-looking information in this report, and undue reliance should not be placed on such forward-looking information. Risk factors that could cause actual results to differ materially from the forward-looking information in this report are described under the heading “Risks and Uncertainties” herein, and in Interfor’s 2019 annual Management’s Discussion and Analysis, which is available on www.sedar.com and www.interfor.com. Material factors and assumptions used to develop the forward-looking information in this report include volatility in the selling prices for lumber, logs and wood chips; the Company’s ability to compete on a global basis; the availability and cost of log supply; natural or man-made disasters; currency exchange rates; changes in government regulations; the availability of the Company’s allowable annual cut (“AAC”); claims by and treaty settlements with Indigenous peoples; the Company’s ability to export its products; the softwood lumber trade dispute between Canada and the U.S.; stumpage fees payable to the Province of British Columbia (“B.C.”); environmental impacts of the Company’s operations; labour disruptions; information systems security; the existence of a public health crisis (such as the current COVID-19 pandemic); and the assumptions described under the heading “Critical Accounting Estimates” herein and in Interfor’s 2019 annual Management’s Discussion and Analysis.

Unless otherwise indicated, the forward-looking statements in this report are based on the Company’s expectations at the date of this report. Interfor undertakes no obligation to update such forwardlooking information or statements, except as required by law.

Overview of Third Quarter, 2020

Interfor recorded net earnings in Q3’20 of $121.6 million, or $1.81 per share, compared to $3.2 million, or $0.05 per share in Q2’20 and a net loss of $35.6 million, or $0.53 per share in Q3’19. Adjusted net earnings in Q3’20 were $140.0 million compared to $10.6 million in Q2’20 and an Adjusted net loss of $11.8 million in Q3’19.

Adjusted EBITDA was a record $221.7 million on sales of $644.9 million in Q3’20 versus $42.8 million on sales of $396.8 million in Q2’20.

Notable items in the quarter:

• Higher Lumber Prices

• Interfor’s average lumber selling price increased $264 per mfbm from Q2’20 to $910 per mfbm. The key benchmark prices rose significantly quarter-over-quarter with the SYP Composite, Western SPF Composite and KD H-F Stud 2x4 9’ benchmarks increasing by US$320, US$361 and US$349 per mfbm to US$748, US$711 and US$764 per mfbm, respectively. Interfor’s average selling price lags the key benchmark price changes due to timing differences between orders and shipments.

• While lumber prices fell sharply in the initial stages of COVID-19, industry-wide production curtailments in Q2’20 and growing demand from repair and renovation activities and U.S. housing starts contributed to the robust price environment during Q3’20.

• Strengthened Financial Position

• Net debt ended the quarter at $88.7 million, or 8.3% of invested capital, resulting in available liquidity of $636.7 million.

• Interfor generated $214.8 million of cash flow from operations before changes in working capital, or $3.19 per share.

• Capital spending was $23.4 million, including $16.2 million on high-return discretionary projects, primarily in the U.S. South. US$84.6 million has been spent on the Company’s Phase II strategic capital plan through September 30, 2020.

• Reflecting its strengthened financial position and available internal investment opportunities with attractive returns, Interfor has revised its planned capital expenditures for 2020 and 2021 to now total approximately $115.0 million and $150.0 million, respectively.

• Production Increased to Meet Demand

• Total lumber production in Q3’20 was 642 million board feet, representing an increase of 221 million board feet quarter-over-quarter. Production in the B.C. region increased to 193 million board feet from 115 million board feet in the preceding quarter. The U.S. South and U.S. Northwest regions accounted for 331 million board feet and 118 million board feet, respectively, compared to 230 million board feet and 76 million board feet in Q2’20.

• Total lumber shipments were 618 million board feet, including agency and wholesale volumes, or 120 million board feet higher than Q2’20.

• Asset Write-downs and Restructuring Costs

• Asset write-downs and restructuring costs in Q3’20 are $9.8 million (after-tax), or $13.0 million on a pre-tax basis. This includes $10.8 million of non-cash impairments for asset writedowns on buildings, equipment and parts inventory related to the sale of the sawmill in Gilchrist, Oregon. The sale was completed on October 29, 2020.

• Softwood Lumber Duties

• Interfor expensed $19.7 million of duties in the quarter, representing the full amount of countervailing and anti-dumping duties incurred on its Canadian shipments of softwood lumber into the U.S. at a combined rate of 20.23%. Cumulative duties of US$121.1 million have been paid by Interfor since the inception of the current trade dispute and are held in trust by U.S. Customs and Border Protection.

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• On February 3, 2020 the U.S. Department of Commerce issued preliminary revised combined rates of 8.37% for 2017 and 8.21% for 2018. These rates remain preliminary, with final rate determinations not expected until November 2020. At such time, the final rates will be applied to new lumber shipments. No adjustments have been recorded in the financial statements as of September 30, 2020 to reflect the preliminary revised duty rates.

Normal Course Issuer Bid (“NCIB”)

On November 5, 2020, the Company announced a NCIB commencing on November 11, 2020 and ending on November 10, 2021, for the purchase of up to 5,981,751 Common Shares. No Common Shares were purchased under the Company’s prior NCIB that expired on March 6, 2020.

The Company believes that, from time to time, the market price of its Common Shares may be attractive and their purchase would represent a prudent allocation of capital.

Outlook

Near term lumber demand is expected to be impacted by uncertainties related to COVID-19 within the North American economy as well as a traditional fall/winter seasonal slowdown that can be weather dependent.

Interfor expects lumber demand to continue to grow over the mid-term, as repair and renovation activities and U.S. housing starts benefit from favourable underlying economic fundamentals and trends.

Interfor’s strategy of maintaining a diversified portfolio of operations allows the Company to both reduce risk and maximize returns on invested capital over the business cycle.

While uncertainty remains as to the duration and extent of the economic impact from the COVID-19 pandemic, Interfor is well positioned with its strong balance sheet and significant available liquidity.

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Financial and Operating Highlights[1]

Unit	For the 3 months ended Sept. 30 Sept. 30 Jun. 30 2020 2019 2020	For the 9 months ended
		Sept. 30 Sept. 30 2020 2019
Financial Highlights2 Total sales $MM Lumber $MM Logs, residual products and other $MM Operating earnings (loss) $MM Net earnings (loss) $MM Net earnings (loss) per share, basic $/share Adjusted net earnings (loss)3 $MM Adjusted net earnings (loss) per share, basic3 $/share Operating cash flow per share (before working capital changes)3 $/share Adjusted EBITDA3 $MM Adjusted EBITDA margin3 % Total assets $MM Total debt $MM Net debt3 $MM Net debt to invested capital3 % Annualized return on invested capital3 % Operating Highlights Lumber production million fbm Total lumber sales million fbm Lumber sales - Interfor produced million fbm Lumber sales - wholesale and commission million fbm Lumber - average selling price4 $/thousand fbm Average USD/CAD exchange rate5 1 USD in CAD Closing USD/CAD exchange rate5 1 USD in CAD	644.9 486.5 396.8 562.4 403.5 322.1 82.5 83.0 74.7 171.4 (44.8) 13.3 121.6 (35.6) 3.2 1.81 (0.53) 0.05 140.0 (11.8) 10.6 2.08 (0.17) 0.16 3.19 0.03 0.56 221.7 16.8 42.8 34.4% 3.5% 10.8% 1,731.9 1,421.0 1,538.8 400.2 264.9 408.8 88.7 212.7 239.1 8.3% 19.4% 21.6% 81.3% 6.1% 14.8% 642 685 421 618 692 499 609 681 488 9 11 11 910 583 646 1.3321 1.3204 1.3862 1.3339 1.3243 1.3628	1,521.3 1,419.0 1,263.8 1,190.9 257.5 228.1 199.3 (79.8) 131.1 (62.1) 1.95 (0.92) 151.4 (40.7) 2.25 (0.60) 4.32 0.43 301.1 45.8 19.8% 3.2% 1,731.9 1,421.0 400.2 264.9 88.7 212.7 8.3% 19.4% 37.7% 5.7% 1,690 1,978 1,758 1,987 1,729 1,955 29 32 719 599 1.3541 1.3292 1.3339 1.3243

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 and 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 unaudited condensed consolidated interim financial statements.

4 Gross sales before duties.

• 5 Based on Bank of Canada foreign exchange rates.

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Summary of Third Quarter 2020 Financial Performance

Sales

Interfor recorded $644.9 million of total sales, up 32.6% from $486.5 million in the third quarter of 2019, driven by the sale of 618 million board feet of lumber at an average price of $910 per mfbm. Average selling price increased $327 per mfbm, or 56.0%, while lumber sales volume decreased 74 million board feet, or 10.7%, as compared to the same quarter of 2019.

Increases in the average selling price of lumber reflect higher prices for Southern Yellow Pine, Western SPF and Hem-Fir in Q3’20 as compared to Q3’19. The SYP Composite benchmark increased by US$393 to US$748 per mfbm while the Western SPF Composite and the KD HF Stud 2x4 9’ benchmarks increased by US$373 and US$427 to US$711 and US$764 per mfbm, respectively. Realized lumber prices in Canadian Dollar terms were also positively impacted by the weakening of the Canadian Dollar against the U.S. Dollar by 0.9% on average in Q3’20 as compared to Q3’19.

Sales generated from logs, residual products and other decreased by $0.5 million or 0.6% in Q3’20 compared to Q3’19 mainly due to a decrease in the average selling price of logs and a decrease in the sale of chips.

Operations

Production costs decreased by $53.8 million, or 12.0%, compared to Q3’19, explained primarily by a 10.7% decrease in lumber sales volume and a reduction in the net realizable value provision against log and lumber inventories.

Lumber production of 642 million board feet in Q3’20 was 43 million board feet lower than Q3’19. This decline is explained by the closure of the Hammond sawmill in Q4’19, project-related downtime in the U.S. South and the curtailment of the Gilchrist sawmill during the quarter.

Production from the Canadian operations decreased by 12 million board feet to 193 million board feet in Q3’20, compared to Q3’19. Production from the Company’s U.S. South and Pacific Northwest operations totaled 331 million and 118 million board feet in Q3’20, down 17 million and 13 million board feet compared to Q3’19, respectively.

Interfor expensed the full amount of CV and AD duty deposits levied on its Canadian shipments of softwood lumber into the U.S., which totaled $19.7 million for Q3’20, up $7.6 million from Q3’19. The increase is due to higher lumber sales prices to the U.S. from Canadian sawmills as compared to Q3’19.

Depreciation of plant and equipment was $20.9 million in Q3’20, up $0.3 million from Q3’19. Depletion and amortization of timber, roads and other was $7.9 million, down $0.2 million from Q3’19.

Corporate and Other

Selling and administration expenses were $12.0 million, up $2.6 million from Q3’19 primarily as a result of accruals for short term incentive compensation partially offset by cost efficiencies realized during the COVID-19 pandemic.

The $5.6 million long term incentive compensation expense mostly reflects the impact of a 38.2% increase in the market price for Interfor Common Shares during the quarter, which is used to value incentives. The long term incentive compensation expense of $1.0 million in Q3’19 resulted primarily from a 2.6% increase in the market price for Interfor Common Shares.

Asset write-downs and restructuring costs in Q3’20 were $13.0 million. This includes $10.8 million of non-cash impairments for asset write-downs on buildings, equipment and parts inventory related to the sale of the sawmill in Gilchrist, Oregon. The sale was completed on October 29, 2020. The asset write-downs and restructuring costs in Q3’19 were $31.8 million. This included $14.0 million of noncash impairments for asset write-downs on buildings, equipment and other assets related to the permanent closure of the Hammond sawmill and $17.8 million of accruals for the settlement of various human resource matters.

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Finance costs increased to $4.9 million in Q3’20 from $3.8 million in Q3’19 due to the completion of the additional US$100 million Senior Secured Note financing with Prudential Private Capital on March 26, 2020. Q3’20 finance costs were also impacted by lower interest income rates as compared to Q3’19.

Other foreign exchange loss of $2.9 million in Q3’20 and other foreign exchange gain of $0.2 million in Q3’19 result primarily from the quarter-end revaluation of U.S. Dollar denominated short-term intercompany funding and U.S. Dollar cash held by Canadian operations. The Company held higher U.S. Dollar cash balances in Q3’20 compared to Q3’19 primarily due to the US$100 million Prudential Senior Secured Note issuance in Q1’20 and strong cash flow from operations during the quarter. The closing Canadian Dollar strengthened by 2.1% in Q3’20 compared to weakened by 1.2% in Q3’19.

Other expense in Q3’20 and Q3’19 was negligible.

Income Taxes

The Company recorded income tax expense of $41.9 million in Q3’20 at an effective tax rate of 26%, comprised of $1.5 million current income tax expense and $40.4 million deferred tax expense. The Company recorded an income tax recovery of $12.8 million in Q3’19 at an effective tax rate of 26%, comprised of $0.4 million in current income tax expense offset by a $13.2 million deferred tax recovery. Current income tax expense for Q3’20 was limited by the use of non-capital tax loss carryforwards in both Canada and the U.S. Substantial non-capital tax loss carry-forward balances remain for both Canada and the U.S. as at September 30, 2020.

Net Earnings

The Company recorded net earnings of $121.6 million, or $1.81 per share, compared to a net loss of $35.6 million, or $0.53 per share in Q3’19. Operating margins and net earnings were positively impacted by higher lumber prices.

Summary of Year-to-Date 2020 Financial Performance

Sales

Interfor recorded $1.5 billion of total sales, up 7.2% from $1.4 billion in the first nine months of 2019, driven by the sale of 1.8 billion board feet of lumber at an average price of $719 per mfbm. Lumber sales volume decreased 229 million board feet, or 11.5%, while average selling prices increased $120 per mfbm, or 20.0%, as compared to the first nine months of 2019.

The increase in the average selling price of lumber reflects higher prices across all benchmark products in YTD’20 as compared to YTD’19. The Western SPF Composite and SYP Composite benchmarks increased US$140 to US$480 per mfbm and US$134 to US$509 per mfbm, respectively. The KD HF Stud 2x4 9’ benchmark increased US$193 to US$537 per mfbm for YTD’20 as compared to YTD’19. Realized lumber prices also increased in Canadian Dollar terms by the 1.9% weakening of the Canadian Dollar against the U.S. Dollar in YTD’20 as compared to YTD’19.

Sales generated from logs, residual products and other increased by $29.4 million or 12.9% as compared to the same period of 2019 due mainly to the reconfiguration of the B.C. Coastal business resulting in increased availability of logs for sale partially offset by a decrease in the sale of chips.

Operations

Production costs decreased by $154.6 million or 11.8% over the first nine months of 2020, explained primarily by a decline of 11.5% in lumber sales volume.

Lumber production of 1.7 billion board feet in YTD’20 was 288 million board feet lower than YTD’19. This decline is explained by the closure of the Hammond sawmill in Q4’19, project-related downtime in the U.S. South, curtailment of the Gilchrist sawmill and the temporary COVID-19 related curtailments announced in March 2020.

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Production from the Canadian operations decreased by 94 million board feet to 494 million in YTD’20, compared to YTD’19. Production from the Company’s U.S. South and Pacific Northwest operations totaled 873 million and 323 million board feet in YTD’20, down 111 million and 83 million board feet compared to YTD’19, respectively.

Interfor expensed $37.7 million of U.S. CV and AD duty deposits in YTD’20, representing the full amount of U.S. CV and AD duty deposits levied on its Canadian shipments of softwood lumber into the U.S. This expense increased by $3.7 million over the first nine months of 2020, attributable to higher lumber sales prices and higher shipment volume to the U.S. from Canadian sawmills as compared to YTD’19.

Depreciation of plant and equipment was $56.5 million, down 5.4% from the first nine months of 2019. This decrease is attributable to downtime related to capital projects at several of the U.S. South mills, COVID-19 related curtailments and the closure of the Hammond sawmill in Q4’19.

Depletion and amortization of timber, roads and other was $26.6 million, down $3.5 million from YTD’19 due to lower amortization rates of B.C. Coastal logging due to a lower depletable cost base associated with the cut blocks that were harvested during 2020, as well the absence of amortization on an intangible asset recognized on acquisition of certain sawmills in the U.S. South that became fully amortized in Q1’19.

Corporate and Other

Selling and administration expenses were $30.7 million, up $0.9 million from the first nine months of 2019, as a result of accruals for short term incentive compensation partially offset by cost efficiencies realized during the COVID-19 pandemic.

The $2.3 million long term incentive compensation expense reflects the impact of a 1.0% increase during YTD’20 in the price of Interfor Common Shares used to value share-based awards, partially offset by incentive awards maturing. The $2.2 million long term incentive compensation expense in YTD’19 mostly reflects the impact of a 2.6% year-to-date increase in the market price of Interfor Common Shares used to value share-based awards and incentive awards maturing.

Asset write-downs and restructuring costs in YTD’20 totalled $13.5 million. This includes $10.8 million of non-cash impairments for asset write-downs on buildings, equipment and parts inventory related to the sale of the sawmill in Gilchrist, Oregon. The sale was completed on October 29, 2020. The YTD’19 restructuring charges were $33.6 million. This included $15.8 million of non-cash impairments for asset write-downs on buildings, equipment and other assets primarily related to the permanent closure of Interfor’s Hammond sawmill and $17.8 million of accruals for the settlement of various human resource matters.

Finance costs increased to $14.2 million from $11.3 million in the first nine months of 2019 primarily due to the completion of the additional US$100 million Senior Secured Note financing with Prudential Private Capital on March 26, 2020, partially offset by the write-off of unamortized deferred financing fees associated with extinguished credit facilities in Q1’19. Other foreign exchange losses of $8.7 million in YTD’20 and other foreign exchange gains of $0.2 million in YTD’19 result primarily from the period-end revaluations of U.S. Dollar denominated short-term intercompany funding, and cash held by Canadian operations. Interfor held higher U.S. Dollar cash balances on average in YTD’20 as compared to YTD’19 primarily due to the issuance of the US$100 million Prudential Senior Secured Notes in Q1’20 and higher U.S. Dollar sales during the year.

Other income of $0.4 million in YTD’20 and $6.2 million in YTD’19 relate primarily to gains recognized as a result of compensation received on the extinguishment of timber licenses on the BC. Coast.

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Income Taxes

The Company recorded an income tax expense of $45.7 million in YTD’20 at an effective tax rate of 26%, comprised of a $1.7 million current tax expense and a $44.0 million deferred tax expense. The YTD’19 income tax recovery of $22.5 million, representing an effective tax rate of 27%, is comprised of a $0.8 million current tax expense offset by a $23.3 million deferred tax recovery. Substantial noncapital tax loss carry-forward balances remain for both Canada and the U.S. as at September 30, 2020.

Net Earnings (Loss)

The Company recorded net earnings of $131.1 million, or $1.95 per share, compared to net loss of $62.1 million, or $0.92 per share, in the same period of 2019. Operating margins and net earnings were positively impacted by higher lumber prices.

Summary of Quarterly Results[1]

Summary of Quarterly Results1
Unit	2020 Q3 Q2 Q1	2019 Q4 Q3 Q2 Q1	**20182 **
			Q4
Financial Performance3 Total sales $MM Lumber $MM Logs, residual products and other $MM Operating earnings (loss) $MM Net earnings (loss) $MM Net earnings (loss) per share, basic $/share Adjusted net earnings (loss)4 $MM Adjusted net earnings (loss) per share, basic4 $/share Operating cash flow per share (before working capital changes)4 $/share Adjusted EBITDA4 $MM Adjusted EBITDA margin4 % Annualized return on invested capital4 % Shares outstanding - end of period million Shares outstanding - weighted average million Operating Performance Lumber production million fbm Total lumber sales million fbm Lumber sales - Interfor produced million fbm Lumber sales - wholesale and commission million fbm Lumber - average selling price5 $/thousand fbm Average USD/CAD exchange rate6 1 USD in CAD Closing USD/CAD exchange rate6 1 USD in CAD	644.9 396.8 479.6 562.4 322.1 379.3 82.5 74.7 100.3 171.4 13.3 14.6 121.6 3.2 6.3 1.81 0.05 0.09 140.0 10.6 0.7 2.08 0.16 0.01 3.19 0.56 0.57 221.7 42.8 36.6 34.4% 10.8% 7.6% 81.3% 14.8% 12.9% 67.3 67.3 67.3 67.3 67.3 67.3 642 421 627 618 499 641 609 488 632 9 11 9 910 646 592 1.3321 1.3862 1.3449 1.3339 1.3628 1.4187	456.8 486.5 481.3 451.2 385.2 403.5 406.9 380.5 71.6 83.0 74.4 70.7 (49.0) (44.8) (18.2) (16.8) (41.7) (35.6) (11.2) (15.3) (0.62) (0.53) (0.17) (0.23) (17.4) (11.8) (16.2) (12.7) (0.26) (0.17) (0.24) (0.19) 0.24 0.03 0.15 0.25 17.6 16.8 12.6 16.3 3.9% 3.5% 2.6% 3.6% 6.6% 6.1% 4.6% 6.1% 67.3 67.3 67.3 67.3 67.3 67.3 67.3 67.3 668 685 647 646 681 692 674 621 671 681 664 610 10 11 10 11 566 583 603 613 1.3200 1.3204 1.3377 1.3295 1.2988 1.3243 1.3087 1.3363	468.5 387.7 80.8 (16.9) (13.5) (0.20) (20.2) (0.29) 0.14 8.9 1.9% 3.6% 67.8 68.9 607 647 639 8 599 1.3204 1.3642

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 MD&A is prepared in accordance with IFRS and is unaudited.

4 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 unaudited condensed consolidated interim financial statements.

• 5 Gross sales before duties.

• 6 Based on Bank of Canada foreign exchange rates.

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The Company’s quarterly financial trends are most impacted by seasonality, levels of lumber production, log costs, market prices for lumber, the USD/CAD foreign currency exchange rate and long-term asset impairments and restructuring charges.

Logging operations are seasonal due to several factors including weather, ground conditions and fire season closures. Generally, production from the Company’s B.C. Coastal logging operations is relatively low in the second half of the fourth quarter and the first half of the first quarter due to the impact of winter storms. Logging activity in the B.C. Interior is typically reduced during the annual spring break-up. 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 lowest in the winter season due to reduced construction and renovation activities.

Severe weather conditions impacted B.C. Coastal log production and lumber production at certain sawmills in B.C. and the U.S. Pacific Northwest in Q1’19 and in the U.S. South in Q1’19. Market driven curtailments in the B.C. Interior impacted lumber production in Q4’18. The Hammond sawmill closure reduced lumber production and sales commencing in Q4’19.

Asset and goodwill impairments and other costs resulting from the B.C. Coastal reorganization and other restructuring activities affected results in Q3’19 and Q4’19.

In the latter part of Q1’20 and majority of Q2’20, operations were impacted by the pandemic outbreak of COVID-19.

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, all else equal, and increases net earnings of U.S. operations when translated to Canadian Dollars.

Liquidity

Balance Sheet

Interfor’s net debt at September 30, 2020 was $88.7 million, or 8.3% of invested capital, representing a decrease of $136.2 million since December 31, 2019.

As at September 30, 2020 the Company had net working capital of $452.8 million and available liquidity of $636.7 million, based on the full borrowing capacity under its $350 million Revolving Term Line.

The Revolving Term Line and Senior Secured Notes are subject to financial covenants, including net debt to total capitalization ratios, and an EBITDA interest coverage ratio.

Management believes, based on circumstances known today, that Interfor has sufficient working capital and liquidity to fund operating and capital requirements for the foreseeable future.

Thousands of Dollars	For the 3 months ended Sept. 30, 2020 2019	For the 9 months ended Sept. 30,
		2020 2019
Net debt Net debt, period opening Issuance of Senior Secure Notes Term Line net drawings (repayments) Impact on U.S. Dollar denominated debt from (strengthening) weakening CAD Decrease (increase) in cash and cash equivalents Decrease in marketable securities Impact on U.S. Dollar denominated cash and cash equivalents and marketable securities from strengthening (weakening) CAD Net debt, period ending	$239,114 $198,209 - - (23) - (8,647) 3,120 (144,849) 11,747 - - 3,110 (402) $88,705 $212,674	$224,860 $63,825 140,770 - (82) 755 (278) (8,735) (285,473) 110,665 - 41,766 8,908 4,398
		$88,705 $212,674

On March 26, 2020, the Company issued US$50,000,000 of Series F Senior Secured Notes, bearing interest at 3.34%, and US$50,000,000 of Series G Senior Secured Notes, bearing interest at 3.25%. Each series of these Senior Secured Notes have equal payments of US$16,667,000 due on each of March 26, 2028, 2029 and on maturity in 2030.

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Cash Flow from Operating Activities

The Company generated $290.8 million of cash flow from operations before changes in working capital in YTD’20, for an increase of $261.6 million over YTD’19. There was a net cash inflow from operations after changes in working capital of $296.8 million in YTD’20, with $6.0 million of cash generated from operating working capital.

A focused effort to reduce log and lumber inventories contributed to the $57.4 million inflow from inventories and higher accruals for short-term incentive compensation contributed to the $46.7 million inflow from trade accounts payable and provisions. Increased sales contributed to the $100.5 million outflow related to trade receivables.

In YTD’19, $29.3 million of cash was generated from operations before changes in working capital, with $25.7 million of cash invested in operating working capital.

Cash Flow from Investing Activities

Investing activities totaled $129.9 million in YTD’20, with $56.6 million for the acquisition from Canfor of timber licences and other assets, net of assumed liabilities, $65.7 million for plant and equipment and $8.8 million for development of roads and bridges partially offset by $1.1 million in proceeds on disposal of plant, equipment, and other.

Discretionary mill improvements of $56.3 million in YTD’20 include several projects in the U.S., the most significant of which relate to the modernization of the Eatonton sawmill in Georgia, the upgrade of the Georgetown sawmill in South Carolina and the installation of a twin infeed at the Molalla sawmill in Oregon.

Maintenance capital investments excluding roads totaled $9.4 million in YTD’20.

In YTD’19, investing activities were $88.6 million, with capital spending of $126.9 million for plant and equipment, timber licenses and other intangibles and $17.3 million for development of roads offsetting $47.1 million in net proceeds from maturing Marketable securities and deposits and $8.4 million in proceeds on disposal of plant, equipment, and other. Discretionary and maintenance mill improvements totaled $108.5 million and $18.3 million, respectively, in YTD’19, of which the majority was spent on U.S. South operations.

Cash Flow from Financing Activities

The net cash inflow of $118.6 million in YTD’20 resulted from the US$100 million Senior Secured Note financing with Prudential Private Capital, partly offset by interest and lease liability payments of $13.1 million and $9.1 million, respectively.

The net cash outflow of $25.7 million in YTD’19 included $7.8 million used to purchase Common Shares under the Company’s NCIB, interest payments of $8.8 million, lease liability payments of $8.7 million and debt refinancing costs of $1.2 million slightly offset by $0.8 million in short term funding activities under the Revolving Term Line.

Capital Resources

The following table summarizes Interfor’s credit facilities and availability as of September 30, 2020:

	Revolving	Senior
	Term	Secured
Thousands of Canadian Dollars	Line	Notes	Total
Available line of credit and maximum borrowing available	$350,000	$400,170	$750,170
Less:
Drawings	-	400,170	400,170
Outstanding letters of credit included in line utilization	24,773	-	24,773
Unusedportion of facility	$325,227	$-	325,227
Add:
Cash and cash equivalents			311,465
Available liquidityat September 30,2020			$636,692

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

As of September 30, 2020, the Company had commitments for capital expenditures totaling $37.8 million for 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 three and nine months ended September 30, 2020.

Off-Balance Sheet Arrangements

The Company has off-balance sheet arrangements which include letters of credit and surety performance and payment bonds, primarily for timber purchases and AD and CV duty deposits. At September 30, 2020, such instruments aggregated $71.5 million (December 31, 2019 - $67.1 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

The Company did not enter into any foreign exchange contracts, interest rate derivatives contracts or lumber futures contracts in Q3’20 or Q3’19.

Outstanding Shares

As of November 5, 2020, Interfor had 67,274,878 Common Shares issued and outstanding. These Common Shares are listed on the Toronto Stock Exchange under the symbol IFP.

On November 5, 2020, the Company announced a NCIB whereby it can purchase for cancellation up to 5,981,751 Common Shares. No Common Shares were purchased under the Company’s prior NCIB that expired on March 6, 2020.

Controls and Procedures

There have been no changes in the Company’s internal controls over financial reporting (“ICFR”) during the three and nine months ended September 30, 2020, that have materially affected, or are reasonably likely to materially affect, its ICFR.

Interfor has adopted work-from-home measures in accordance with public health authority directives driven by the COVID-19 pandemic and certain ICFR which were performed manually onsite are now being performed remotely by electronic means. The effectiveness of these changes in ICFR has been aided by the deployment of enhanced technology to allow for productive and secure remote access to IT systems by employees.

Critical Accounting Estimates

Potential impacts of the COVID-19 outbreak on the Company’s critical accounting estimates are being monitored on a regular basis. However, there were no significant identified changes during the quarter ended September 30, 2020. Interfor’s critical accounting estimates are described in its MD&A for the year ended December 31, 2019, filed under the Company’s profile on www.sedar.com.

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Accounting Policy Changes

Several new standards, and amendments to existing standards and interpretations, were not yet effective for the quarter ended September 30, 2020, and have not been applied in preparing the Company’s unaudited condensed consolidated interim financial statements. None of these are expected to have a significant effect on future 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, Adjusted EBITDA margin, Net debt to invested capital, Operating cash flow per share (before working capital changes), and Return on 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 condensed consolidated interim financial statements prepared in accordance with IFRS:

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Thousands of Canadian Dollars except number of shares andper share amounts	For the 3 months ended Sept. 30 Sept. 30 Jun. 30 2020 2019 2020	For the 9 months ended
		Sept. 30 Sept. 30 2020 2019
Adjusted Net Earnings (Loss) Net earnings (loss) Add: Asset write-downs and restructuring costs Other foreign exchange loss (gain) Long term incentive compensation expense Other (income) expense Post closure wind-down costs Income tax effect of above adjustments	$121,604 $(35,648) $3,235 12,985 31,814 115 2,907 (216) 4,963 5,576 1,049 5,629 43 100 (586) 3,085 - - (6,206) (8,867) (2,712)	$131,148 $(62,109) 13,471 33,566 8,719 (235) 2,259 2,181 (428) (6,223) 3,085 - (6,875) (7,876)
Adjusted net earnings (loss) Weighted average number of shares - basic ('000) Adjusted net earnings(loss) per share	$139,994 $(11,768) $10,644 67,270 67,253 67,260 $2.08 $(0.17) $0.16	$151,379 $(40,696) 67,263 67,284 $2.25 $(0.60)
Adjusted EBITDA Net earnings (loss) Add: Depreciation of plant and equipment Depletion and amortization of timber, roads and other Asset write-downs and restructuring costs Finance costs Other foreign exchange loss (gain) Income tax expense (recovery)	$121,604 $(35,648) $3,235 20,850 20,595 15,601 7,922 8,142 8,108 12,985 31,814 115 4,907 3,784 5,185 2,907 (216) 4,963 41,916 (12,804) 563	$131,148 $(62,109) 56,512 59,727 26,560 30,080 13,471 33,566 14,188 11,284 8,719 (235) 45,684 (22,508)
EBITDA Add: Long term incentive compensation expense Other (income) expense Post closure wind-down costs	213,091 15,667 37,770 5,576 1,049 5,629 43 100 (586) 2,967 - -	296,282 49,805 2,259 2,181 (428) (6,223) 2,967 -
Adjusted EBITDA	$221,677 $16,816 $42,813	$301,080 $45,763
Sales	$644,884 $486,494 $396,778	$1,521,308 $1,419,002
Adjusted EBITDA margin	34.4% 3.5% 10.8%	19.8% 3.2%
Net debt to invested capital Net debt Total debt Cash and cash equivalents	$400,170 $264,860 $408,840 (311,465) (52,186) (169,726)	$400,170 $264,860 (311,465) (52,186)
Total net debt	$88,705 $212,674 $239,114	$88,705 $212,674
Invested capital Net debt Shareholders'equity	$88,705 $212,674 $239,114 983,225 880,854 869,443	$88,705 $212,674 983,225 880,854
Total invested capital	$1,071,930 $1,093,528 $1,108,557	$1,071,930 $1,093,528
Net debt to invested capital1	8.3% 19.4% 21.6%	8.3% 19.4%
Operating cash flow per share (before working capital changes) Cash provided by operating activities Cash used in (generated from) operating working capital	$175,492 $29,658 $103,003 39,346 (27,336) (65,439)	$296,837 $3,610 (6,013) 25,656
Operating cash flow (before working capital changes) Weighted average number of shares-basic ('000)	$214,838 $2,322 $37,564 67,270 67,253 67,260	$290,824 $29,266 67,263 67,284
Operatingcash flowper share(before workingcapital changes)	$3.19 $0.03 $0.56	$4.32 $0.43
Annualized return on invested capital Adjusted EBITDA	$221,677 $16,816 $42,813	$301,080 $45,763
Invested capital, beginning of period Invested capital, end of period	$1,108,557 $1,109,618 $1,204,953 1,071,930 1,093,528 1,108,557	$1,055,842 $1,032,591 1,071,930 1,093,528
Average invested capital	$1,090,244 $1,101,573 $1,156,755	$1,063,886 $1,063,060
Adjusted EBITDA divided by average invested capital Annualization factor	20.3% 1.5% 3.7% 4.0 4.0 4.0	28.3% 4.3% 1.3 1.3
Annualized return on invested capital	81.3% 6.1% 14.8%	37.7% 5.7%

Notes:

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

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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; barriers to lumber trade between Canada and the U.S.; environmental matters; labour disruptions; and information systems security. These risks and uncertainties are described in the Company’s MD&A for the year ended December 31, 2019, filed under the Company’s profile on www.sedar.com.

In Q1’20, the Company identified a previously undisclosed risk of the existence of a public health crisis (such as the current global COVID-19 pandemic). The future emergence and spread of pathogens similar to COVID-19 could have an adverse impact on global economic conditions. In turn, such a public health crisis could have adverse consequences on Interfor’s operations, financial results and liquidity. Areas of potential impact include the health and safety of its employees and contractors, product demand and pricing, availability of logs and operating supplies, availability of logistics and increased cyber-security risk. Given the ongoing and dynamic nature of the COVID-19 outbreak, it is difficult to accurately predict the severity of its impact on the Company. The extent of such impact will depend upon future developments, which are highly uncertain, including the rate of spread and severity of COVID-19 and government actions taken to mitigate its impact, among others.

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.

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Interfor Corporation Metrotown II 1600 – 4720 Kingsway Bunaby, BC, Canada V5H 4N2 Telephone: (604) 689-6800 Fax: (604) 688-0313

Contact: Richard Pozzebon, Senior Vice President and Chief Financial Officer Web Site: www.interfor.com

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