Interfor : Q3 2023 MD&A

Interfor Corporation

Third Quarter Report

For the three and nine months ended September 30, 2023

Management's Discussion and Analysis

This Management's Discussion and Analysis ("MD&A") provides a review of financial condition and results of operations as at and for the three and nine months ended September 30, 2023 ("Q3'23" and "YTD'23", 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, 2023, and the notes thereto which have been prepared in accordance with International Financial Reporting Standards Accounting Standards ("IFRS"). This MD&A contains certain non- generally accepted accounting principles ("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 2, 2023.

All figures are stated in Canadian Dollars, unless otherwise noted, and references to US$/USD are to the United States Dollar.

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, 2023", "Outlook", "Liquidity", "Capital Resources", "Off-Balance Sheet Arrangements", "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 2022 annual Management's Discussion and Analysis, which is available on www.sedarplus.caand www.interfor.com. Material factors and assumptions used to develop the forward-looking information in this report include the timing and value of proceeds received from the disposition of Coast B.C. forest tenures; 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; Indigenous reconciliation; the softwood lumber trade dispute between Canada and the United States; environmental impacts of the Company's operations; labour availability; information systems security; and the assumptions described under the heading "Critical Accounting Estimates" herein and in Interfor's 2022 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 forward- looking information or statements, except as required by law.

Overview of Third Quarter, 2023

Interfor recorded a Net loss in Q3'23 of $42.4 million, or $0.82 per share, compared to a Net loss of $14.1 million, or $0.27 per share in Q2'23 and Net earnings of $3.5 million, or $0.06 per share in Q3'22.

Adjusted EBITDA was $31.9 million on sales of $828.1 million in Q3'23 versus $41.9 million on sales of $871.8 million in Q2'23 and $129.5 million on sales of $1.0 billion in Q3'22.

Notable items in the quarter:

• Lumber Production Balanced with Demand
  o Lumber production totaled 1.0 billion board feet, representing a decrease of 26 million board
  feet quarter-over-quarter. The decrease was primarily due to the temporary closure of a sawmill in B.C. as a result of wildfires.
  o Lumber shipments were 1.0 billion board feet, or 108 million board feet lower than Q2'23.
• Weak Lumber Prices
  o Lumber prices continued to reflect softened demand driven by the elevated interest rate environment and ongoing economic uncertainty. Lumber prices strengthened at the beginning of Q3'23 from the effects of industry production curtailments and reduced European imports combined with increased new home construction demand but began to weaken near the end of
  Q3'23 as increased economic uncertainty drove interest rates higher. Interfor's average selling price was $661 per mfbm, up $12 per mfbm versus Q2'23.
• Financial Flexibility Improved
  o Net debt at quarter-end was $777.7 million, or 28.7% of invested capital, with available liquidity of $417.9 million.
  o The net debt to invested capital leverage ratio improved compared to the end of Q2'23, driven by $107.2 million of cash flow from operations, including $70.5 million from income tax refunds.
  o Collection of an additional US$24.9 million of income tax refunds related to 2022 is expected in
  Q4'23.
• Strategic Capital Investments
  o Capital spending was $38.5 million, including $20.1 million of discretionary investment focused on multi-year projects in the U.S. South region.
  o Total capital expenditures planned for 2023 remains unchanged from prior guidance at approximately $210.0 million, while total preliminary capital expenditures for 2024 are estimated to be approximately $140.0 million.
• Ongoing Monetization of Coastal B.C. Operations
  o Over the course of Q3'23, Interfor advanced on its plans to monetize its Coastal B.C. operations, which consist primarily of forest tenure rights from the province of B.C. and related log harvesting activities.
  o On October 3, 2023, the Company entered into an agreement to settle certain contractual obligations in order to facilitate monetization of its Coastal B.C. operations. The settlement will result in an $85.0 million provision being recognized in the fourth quarter, 2023, the payment of which Interfor expects to be fully funded by net proceeds from the disposition of Coast B.C. forest tenures over the next several years.
  o On October 27, 2023, the Company reached an agreement for the disposition of Coastal B.C. forest tenures totalling approximately 162,000 cubic metres of allowable annual cut ("AAC") for net proceeds of $21.0 million. The completion of the disposition has received Ministry of Forests approval and is expected to close in the fourth quarter of 2023, subject to customary conditions for a transaction of this kind.

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• 1. Following this, Interfor held Coastal B.C. forest tenures totalling approximately 1,411,000 cubic metres of AAC available for disposition subject to approvals from the Ministry of Forests.
• Softwood Lumber Duties
• 1. On August 1, 2023, the U.S. Department of Commerce ("DoC") published the final rates for countervailing ("CV") and anti-dumping ("AD") duties based on the results of its fourth administrative review ("AR4") covering shipments for the year ended December 31, 2021. The final combined rate for 2021 was 8.05% compared to the cash deposit rate of 8.99% from January to November 2021 and 17.90% for December 2021. The combined rate of 8.05% applied to new shipments effective September 13, 2023. To reflect the lower amended final rates for 2021, Interfor recorded a $6.3 million reduction to duties expense in Q3'23 and a corresponding receivable on its balance sheet.

1. Interfor has cumulative duties of US$540.0 million, or approximately $10.36 per share on an after-tax basis, held in trust by U.S. Customs and Border Protection as at September 30, 2023. Except for US$161.8 million recorded as a receivable in respect of overpayments arising from duty rate adjustments and the fair value of rights to duties acquired, Interfor has recorded the duty deposits as an expense.

Outlook

North American lumber markets over the near term are expected to remain volatile as the economy continues to adjust to inflationary pressures, elevated interest rates, labour shortages and geo-political uncertainty.

Interfor expects that over the mid-term, lumber markets will continue to benefit from favourable underlying supply and demand fundamentals. Positive demand factors include the advanced age of the U.S. housing stock, a shortage of available housing and various demographic factors, while growth in lumber supply is expected to be limited by extended capital project completion and ramp-up timelines, labour availability and constrained global fibre availability.

Interfor's strategy of maintaining a diversified portfolio of operations in multiple regions allows the Company to both reduce risk and maximize returns on capital over the business cycle. Interfor is well positioned with its strong balance sheet and available liquidity to continue pursuing its strategic plans despite ongoing economic and geo-political uncertainty globally. In the event of a sustained lumber market downturn, Interfor maintains flexibility to significantly reduce capital expenditures and working capital levels, and to proactively adjust its lumber production to match demand.

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Financial and Operating Highlights1

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 including duties and freight.
5. Based on Random Lengths Benchmark Lumber Pricing.
6. Based on Bank of Canada foreign exchange rates.

Summary of Third Quarter 2023 Financial Performance

Sales

Interfor recorded $828.1 million of total sales, down 20.0% from $1.0 billion in the third quarter of 2022, driven by the sale of 1.0 billion board feet of lumber at an average price of $661 per mfbm. Average selling price decreased $139 per mfbm, or 17.4%, and lumber sales volume decreased 56 million board feet, or 5.3%, as compared to the same quarter of 2022.

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The decrease in the average selling price of lumber reflects lower prices across all key benchmarks in Q3'23 as compared to Q3'22. This was partially offset by realized lumber prices increasing in Canadian Dollar terms due to the weakening of the Canadian Dollar against the U.S. Dollar in Q3'23 by 2.7% as compared to Q3'22.

Sales generated from logs, residual products and other decreased by $36.8 million or 18.6% in Q3'23 compared to Q3'22 due mainly to a decrease in I-joist sales from the Eastern Canada operations and a decrease in volume of chips produced and sold.

Operations

Production costs decreased by $124.8 million, or 13.8%, compared to Q3'22, explained primarily by a 5.3% decrease in lumber sales volume, lower stumpage rates in B.C. and Eastern Canada, decreased logging in the B.C. Coastal operations, and a net $23.8 million decrease in the net realizable value provision for log and lumber inventories recorded in Q3'23 versus Q3'22. The decrease is partially offset by inflationary impacts on costs and a weaker Canadian Dollar on average.

Lumber production of 1.0 billion board feet in Q3'23 was 11 million board feet higher than Q3'22. The increase in production was primarily driven by the acquisition of two sawmills in Q4'22, partially offset by a temporary closure of a B.C. sawmill in Q3'23 due to wildfires.

Interfor recorded duties expense of $0.9 million in Q3'23 compared to a net recovery of $12.4 million in Q3'22. During Q3'23, the Company expensed the full amount of CV and AD duty deposits levied on its Canadian shipments of softwood lumber into the U.S, which was partially offset by a $6.3 million recovery related to the finalization of the CV and AD rates by the U.S. DoC for AR4. The change is primarily due to the $26.1 million recovery in Q3'22 related to the finalization of the CV and AD rates by the U.S. DoC for the third administrative review ("AR3") in comparison to the recovery for AR4, partially offset by lower lumber sales prices, lower cash deposit rates and lower shipments to the U.S. from Canadian sawmills as compared to Q3'22.

Depreciation of plant and equipment was $46.7 million in Q3'23, up $6.1 million from Q3'22, due primarily to the operations acquired in Eastern Canada in Q4'22 and the start-up of completed capital projects primarily in the U.S. South. Depletion and amortization of timber, roads and other was $7.6 million, down $2.2 million from Q3'22, primarily due to decreased conventional logging on the B.C. Coast, partially offset by the operations acquired in Eastern Canada in Q4'22.

Corporate and Other

Selling and administration expenses were $17.2 million, up $1.6 million from Q3'22 primarily related to expanded general corporate activities.

Long-term incentive compensation recovery was $1.3 million in Q3'23, compared to an expense of $2.5 million in Q3'22, primarily as a result of the impact of a 16.6% decrease in the price of Interfor common shares used to value share-based awards during Q3'23 compared to a 3.9% decrease during Q3'22.

Finance costs increased to $10.2 million in Q3'23 from $1.5 million in Q3'22, primarily due to interest expense on higher borrowings to fund the acquisition of the Eastern Canada operations in 2022, partially offset by higher interest income accrued on the long-term duties receivable.

Other foreign exchange loss of $14.0 million in Q3'23 and $46.9 million in Q3'22 resulted 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 foreign exchange loss of $15.9 million recorded in the quarter on intercompany funding remains unrealized, and there was an offsetting loss recorded in Other comprehensive income (loss) for a net nil impact on Equity.

Other expense of $2.2 million in Q3'23 primarily relates to the change in the fair value of the minority interest in GreenFirst Forest Products Inc. ("GreenFirst"). Other income of $11.9 million in Q3'22 primarily related to the gain on the sale of a forest license, partially offset by the change in the fair value of the minority interest in GreenFirst.

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Income Taxes

The Company recorded an income tax recovery of $5.1 million in Q3'23 at an effective tax rate of 11%, comprised of $5.9 million current income tax recovery and a $0.8 million deferred tax expense. The effective tax rate is lower than the statutory tax rate due to the tax effect of the appreciation of the U.S. Dollar on U.S. Dollar denominated short-term intercompany funding. The Company recorded income tax expense of $35.8 million in Q3'22 at an effective tax rate of 91%, comprised of $27.5 million current income tax expense and $8.3 million deferred tax expense.

Net Earnings

The Company recorded a Net loss of $42.4 million, or $0.82 per share, compared to Net earnings of $3.5 million, or $0.06 per share in Q3'22. Operating margins and Net earnings were impacted by lower lumber prices and lower sales volumes partially offset by a lower unrealized foreign exchange loss on intercompany funding.

Summary of Year-to-Date 2023 Financial Performance

Sales

Interfor recorded $2.5 billion of total sales, down 33% from $3.8 billion in the first nine months of 2022, driven by the sale of 3.1 billion board feet of lumber at an average price of $650 per mfbm. Average selling price decreased $434 per mfbm, or 40.0%, and lumber sales volume increased 139 million board feet, or 4.7%, as compared to the first nine months of 2022.

The decrease in the average selling price of lumber reflects lower prices across all key benchmarks in YTD'23 as compared to YTD'22. This was partially offset by realized lumber prices increasing in Canadian Dollar terms by the 4.9% weakening of the Canadian Dollar against the U.S. Dollar in YTD'23 as compared to YTD'22.

Sales generated from logs, residual products and other decreased by $35.6 million or 6.7% as compared to the same period of 2022 due mainly to a decrease in I-joist sales from the Eastern Canada operations.

Operations

Production costs decreased by $182.6 million, or 7.2% over the first nine months of 2023, explained primarily by a net $81.1 million decrease in the net realizable value provision for log and lumber inventories recorded YTD'23 versus YTD'22, inventory purchase accounting adjustments recorded in YTD'22 related to the Eastern Canada operations acquired in Q1'22, lower stumpage rates and decreased logging in the B.C. Coastal operations. The decrease is partially offset by inflationary impacts on costs, a weaker Canadian Dollar on average and a 4.7% increase in lumber sales volume in YTD'23 versus YTD'22.

Lumber production of 3.0 billion board feet in YTD'23 was 132 million board feet higher than YTD'22. The increased production is primarily the result of the acquisition of two sawmills in Eastern Canada during Q2'22 and ramp-ups of completed capital projects at several sawmills in the U.S. South. Partially offsetting this was a temporary closure of a B.C. sawmill due to wildfires in Q3'23 amongst certain other factors.

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 $28.6 million for YTD'23, down $41.2 million from YTD'22. The decrease is due to lower lumber sales prices and lower cash deposit rates as compared to YTD'22. The decrease is partially offset by a $6.3 million recovery related to the finalization of the CV and AD rates by the U.S. DoC for AR4 in YTD'23 compared to a $26.1 million recovery related to the finalization of AR3 in YTD'22. In addition, the decrease is partially offset by higher shipments to the U.S. from Canadian sawmills as compared to YTD'22.

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Depreciation of plant and equipment was $138.5 million, up 20.1% from the first nine months of 2022, due primarily to the operations acquired in Eastern Canada in 2022 and the start-up of completed capital projects primarily in the U.S. South. Depletion and amortization of timber, roads and other was $29.7 million, up $1.7 million from YTD'22, primarily due to the operations acquired in Eastern Canada in 2022, partially offset by decreased conventional logging on the B.C. Coast.

Corporate and Other

Selling and administration expenses were $52.0 million, up $2.6 million from the first nine months of 2022, primarily related to expanded general corporate activities, partially offset by lower accruals for short term incentive compensation.

Long-term incentive compensation expense was $4.1 million YTD'23, versus a $4.2 million recovery in YTD'22, primarily as a result of the impact of a 3.7% decrease in the price of Interfor common shares used to value share-based awards during YTD'23 compared to a 37.0% decrease during YTD'22.

Finance costs increased to $34.4 million from $11.0 million in the first nine months of 2022 primarily due to interest expense on higher borrowings to fund the acquisition of the Eastern Canada operations in 2022, partially offset by higher interest income accrued on the long-term duties receivable.

Other foreign exchange loss of $0.3 million in YTD'23 and $54.4 million in YTD'22 result primarily from the period-end revaluation of U.S. Dollar denominated short-term intercompany funding and U.S. Dollar cash held by Canadian operations. The foreign exchange gain of $0.9 million recorded in YTD'23 on intercompany funding remains unrealized, and there was an offsetting loss recorded in Other comprehensive income (loss) for a net nil impact on Equity.

Other expense of $9.6 million in YTD'23 primarily relates to the change in the fair value of the minority interest in GreenFirst, partially offset by insurance proceeds for a business interruption claim related to fire damage at a sawmill and net gains on the disposal of surplus property, plant and equipment and other assets. Other income of $18.7 million in YTD'22 primarily related to the gain on the sale of a forest license, the gain on the sale of the Acorn speciality sawmill and insurance proceeds for a business interruption claim related to fire damage at a sawmill, partially offset by the change in the fair value of the minority interest in GreenFirst.

Income Taxes

The Company recorded an income tax recovery of $24.7 million in YTD'23 at an effective tax rate of 20%, comprised of a $24.0 million current income tax recovery and a $0.7 million deferred tax recovery. The Company recorded income tax expense of $257.3 million in YTD'22 at an effective tax rate of 28%, comprised of $242.9 million in current income tax expense and $14.4 million in deferred tax expense.

Net Earnings

The Company recorded a Net loss of $97.8 million, or $1.90 per share, compared to Net earnings of $670.4 million, or $11.95 per share, in the same period of 2022. Operating margins and Net earnings were impacted by lower lumber prices partially offset by higher sales volumes and a lower unrealized foreign exchange loss on intercompany funding.

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Summary of Quarterly Results1

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 including duties and freight.
5. Financial information has been adjusted for a reclassification in the presentation of unrealized foreign exchange loss (gain) within cashflow from operations resulting in a $/share change of $0.45 - Q2 2022; $(0.20) - Q1 2022 and $0.06 - Q4 2021.
6. Based on Random Lengths Benchmark Lumber Pricing.
7. Based on Bank of Canada foreign exchange rates.

The Company's quarterly financial trends are most impacted by volatility in market prices for lumber, seasonality in lumber demand, disruptions in the availability of freight, variability in log costs driven by stumpage rates, fluctuations in the USD/CAD foreign currency exchange rate, temporary production curtailments and sawmill acquisitions, disposals and/or closures.

Lumber production and sales increased in Q1'22 with the acquisition of operations in Eastern Canada and the restart of the sawmill in DeQuincy, LA and in Q4'22 with the acquisition of sawmills in Belledune, NB and Bathurst, NB. These production and sales increases were partially offset from Q2'22 with the sale of the Acorn specialty sawmill, in Q4'22 and Q1'23 due to the temporary market-related curtailments announced in October 2022 and January 2023, respectively and in Q3'23 due to the temporary curtailment of a B.C. sawmill due to wildfires.

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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. A stronger Canadian Dollar has the opposite impacts.

Liquidity

Balance Sheet

Interfor's Net debt at September 30, 2023 was $777.7 million, or 28.7% of invested capital, representing an increase of $57.3 million from the level of Net debt at December 31, 2022.

As at September 30, 2023 the Company had net working capital of $400.0 million and available liquidity of $417.9 million, based on the available borrowing capacity under its $600.0 million Revolving Term Line ("Term Line").

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

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

On December 16, 2022, the Company completed an expansion of its Term Line. The commitment under the Term Line was increased by $100.0 million to a total of $600.0 million.

On December 1, 2022, the Company issued US$200.0 million of Series H Senior Secured Notes, bearing interest at 7.06% with principal payments of US$66.7 million due on December 26, 2031, 2032 and on final maturity in 2033.

Cash Flow from Operating Activities

The Company generated $150.5 million of cash flow from operations before changes in working capital in YTD'23, for a decrease of $458.4 million over YTD'22. There was a net cash inflow from operations after changes in working capital of $145.7 million in YTD'23, with $4.8 million of cash invested in operating working capital.

Increased lumber shipments contributed to the $39.3 million outflow related to trade receivables, while a focused effort to reduce log and lumber inventories contributed to the $57.6 million inflow from inventories. Timing of payments contributed to the $18.9 million outflow from trade accounts payable and provisions.

In YTD'22, $722.0 million of cash was generated from operations, with $113.1 million of cash released from operating working capital.

Cash Flow from Investing Activities

Investing activities totaled $152.3 million in YTD'23, with $152.2 million for property, plant and equipment, $7.6 million for development of roads and bridges, partially offset by $4.9 million in proceeds on disposal of property, plant and equipment and other assets and $2.1 million for deposits and other assets.

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Discretionary mill improvements of $105.6 million in YTD'23 were mainly focused on the multi-year rebuild of the Thomaston, GA sawmill, a new kiln at the Eatonton, GA sawmill, a new planer at the Castlegar, B.C. sawmill, a kiln rebuild at the Bay Springs, MS sawmill and upgrades to the Perry, GA and Summerville, SC sawmills.

Maintenance capital investments excluding roads totaled $46.6 million in YTD'23.

In YTD'22, investing activities were $765.0 million, with $536.1 million for the acquisition of the Eastern Canada operations, $194.4 million for property, plant and equipment, $55.6 million for the investment in GreenFirst, $7.7 million for development of roads and bridges, $3.2 million for deposits and other assets, partially offset by $32.0 million in proceeds on disposal of property, plant and equipment.

Discretionary and maintenance mill improvements totalled $126.2 million and $68.2 million, respectively, in YTD'22, of which the majority was invested in the multi-year rebuilds of the Eatonton, GA and Thomaston, GA sawmills, a new planer at the Castlegar, B.C. sawmill and upgrades to the Perry, GA sawmill.

Cash Flow from Financing Activities

The net cash inflow of $30.2 million in YTD'23 resulted from $88.3 million in Term Line net drawings, partially offset by interest payments of $37.5 million, lease liability payments of $13.4 million and $7.1 million in repayments of Senior Secured Notes.

The net cash outflow of $363.5 million in YTD'22 resulted from $327.6 million used to purchase shares under the Company's normal course issuer bid ("NCIB") and substantial issuer bid ("SIB"), $7.0 million in repayments of Senior Secured Notes, interest payments of $13.1 million, lease liability payments of $12.0 million and $3.9 million of Term Line net repayments.

Capital Resources

The following table summarizes Interfor's credit facilities and availability as of September 30, 2023:

Interfor's Term Line matures in December 2026 and its Senior Secured Notes have maturities in the years 2024-2033.

As of September 30, 2023, the Company had commitments for capital expenditures totaling $114.2 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, 2023.

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