2018 Annual Report CONTENTS pg Financial Highlights 3 Message to Shareholders 4 Management’s Discussion and Analysis 7 Consolidated Financial Statements 30 Annual Information Form 84 3 FINANCIAL HIGHLIGHTS (in millions of dollars, except share and per share amounts) 2018 2017 Financial Summary Sales 2,186.6 1,990.1 Net earnings 111.7 97.2 Adjusted EBITDA(1) 280.4 287.8 Per Share Data Net earnings per share - basic and diluted 1.60 1.39 Price range per share High 27.27 22.43 Low 13.26 13.49 Net book value per share 14.38 12.20 Operating cash flow (before working capital change) per share 3.95 3.91 Weighted average shares outstanding (millions) 69.7 70.0 Financial Position Total assets 1,529.5 1,353.0 Net debt(1) 63.8 119.3 Total shareholders’ equity 974.1 854.2 Invested capital(1) 1,037.9 973.5 Financial Ratios (%) Net debt as a % of invested capital 6.1% 12.3% Return on invested capital(1) 27.9% 28.1% Adjusted EBITDA margin(1) 12.8% 14.5% Notes: 1. See Glossary for definition. “Viewed as a whole, 2018 will go down as one of the best years in Interfor’s history.” Message to Shareholders – February 2019 For further highlights, please see the 2018 Message to Shareholders and Management’s Discussion and Analysis on the following pages. 4 MESSAGE TO SHAREHOLDERS Overview 2018 was a year of extremes. The business environment in the first half of the year was very strong and Interfor set a number of new records on production, sales and profitability. The second half was the opposite. Lumber prices dropped rapidly beginning in early June and ended the year well below the levels of recent years.....and our results followed. Viewed as a whole, 2018 will go down as one of the best in Interfor’s history. Highlights for the year included: Production increased to 2.635 billion board feet; Sales revenue exceeded $2 billion for the first time; Net earnings and cash flow increased to $112 million and $275 million respectively; Net debt was reduced by $56 million; Good progress was made on our Phase I capital projects; US$240 million in Phase II capital upgrades were announced; and We repurchased and cancelled 2.278 million of the Company’s common shares. We are pleased with the results delivered in 2018 and excited about our future. I invite you to review the material covered in the next few pages and later in this report and to form your own views on our progress. Please feel free to forward any comments or questions you might have to me directly at [email protected]. Production Increases; Volatile Pricing Impacts Results Interfor’s production volumes increased 1.5% to 2.635 billion board feet in 2018 in spite of significant market and project related downtime in the second half of the year. Through the first half of the year, production was on track to exceed 2.7 billion board feet for the year, 4% above 2017 levels. Sales volumes, including agency and wholesale activities, came in at 2.680 billion board feet. The year was characterized by an unprecedented level of volatility in product prices. The Random Lengths Composite Index (“RLCI”), which measures the price of a basket of products, rose rapidly through the first five months of the year to record levels, gaining US$149 per thousand board feet or 34% in the first twenty-two weeks of the year. Over the balance of the year, the RLCI dropped US$250 or 43% closing the year at US$332, more than US$100 below the closing price in December 2017. For the year, the RLCI came in at US$460, 11% above the average for 2017. In spite of the volatility in product prices, the Company delivered record earnings of $112 million on sales of $2.187 billion in 2018; EBITDA, reported before non-recurring items and share-based compensation, was $280 million, only slightly less than 2017. Strong Cash Flow Contributes to Reduction in Net Debt and other Value-Creating Initiatives In 2018, Interfor generated $275 million in cash, before changes in working capital, bringing the total for the last three years to more than $740 million. Message to Shareholders 5 ____________________ Net debt was reduced during the year by $56 million and $139 million was invested in capital equipment and roads. An additional $37 million was invested buying back and cancelling more than 2.2 million of the Company’s common shares, taking advantage of the weak market to return cash to shareholders in an advantageous manner. At year-end, Interfor’s net debt to invested capital ratio stood at 6.1% compared with 12.3% at year-end 2017, leaving the Company with more than $500 million in available liquidity and the financial capacity to pursue additional value-creating initiatives in the years ahead. Phase I Capital Projects Underway; Second Phase Announced In late November 2017, we announced plans to move forward with a number of discretionary projects designed to capture the potential within our existing platform of assets. The first phase of the plan pertained to projects at our mills in Monticello, AR and Meldrim, GA involving a capital outlay of approximately US$65 million. In addition to delivering significant improvements in mill level productivity and product quality, the Monticello and Meldrim projects will together add more than 150 million board feet to Interfor’s production capacity. Both projects are scheduled for completion in the 2nd Quarter of 2019. In August 2018 we announced the second phase of our investment plan. These projects involve major upgrades to our mills at Thomaston and Eatonton, GA and at Georgetown, SC at a capital cost of US$240 million. When completed, these projects will add more than 275 million board feet to our production capacity as well as substantially reducing conversion costs, improving lumber recovery and enhancing grade out-turns and product mix. The Phase II projects will be completed in a series of stages over the next three years. In addition to the Phase I and II projects, we have a number of additional machine center upgrades underway at various plants in B.C., the U.S. Northwest and the U.S. South which will complete over the next 12 to 18 months and more on the drawing board. In our view, employing state-of-the-art technology is one of the keys to success in the lumber business. Designing and building these projects is one of Interfor’s strengths. We have a track record of completing major projects on-time and on-budget and exceeding pro forma returns and we are confident the projects currently underway will meet the same standard. I’m personally very pleased to be underway with this stage of our strategy and look forward to realizing the benefits of these investments in the years ahead. Safety Results Encouraging; On-going Vigilance Required I don’t often comment on our safety performance in this Message. Not because our performance isn’t good but rather because I believe, first, that providing a safe work environment is a fundamental obligation of the Company’s management and, second, we have an expectation that our results will be good. And, they are.....and they’re getting better each and every year. Message to Shareholders 6 ____________________ More information on our safety record is available for those who would like to see it in our Corporate Sustainability Report which was published for the first time last year. An updated version of the CSR will be published in March and it will show that we had the best safety results in our history in 2018. In that regard, I’d like to extend my heartfelt thanks to our staff and employees who have built a culture at Interfor where great safety results go hand-in-hand with great operating and financial performance. We never want to rest on our laurels but I can tell you that I’m extremely proud of our achievements in this area. Rhonda Hunter Nominated to Stand for Election I’m delighted as well to tell you that Rhonda Hunter of Newhope, AR has agreed to stand for election to Interfor’s Board of Directors at our upcoming AGM. Rhonda, who is 56, retired about a year ago from Weyerhaeuser Company, where she served most recently as Senior Vice-President, Timberlands. Her knowledge of the industry in both North America and internationally and her expertise in timberlands will, we believe, prove especially valuable as we seek additional opportunities for investment in the years ahead. New-Term Outlook Uncertain; Vision Remains Intact While prices have bounced back to some extent in the first few weeks of 2019, we haven’t yet seen the increases we expected. The reasons for this involve a combination of higher interest rates, declining consumer and builder confidence, and the continuation of colder and wetter weather longer than is often the case. That said, we continue to believe that conditions are ripe for a strong year: in-market inventory levels are lower-than-normal, the repair and remodel market remains strong, there is significant pent-up demand for housing and, in our view, projections of increased supply are overstated. Either way, with well-positioned mills and a strong balance sheet, Interfor is in great shape to deliver on our goal of building long-term value for our shareholders. In closing, I would like to thank our employees, our Board of Directors and especially our shareholders for their on-going support.