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Interfor Reports $47.3 million of EBITDA(1) on Record Sales in Q2'14

VANCOUVER, BRITISH COLUMBIA -- (Marketwired) -- 07/31/14 -- INTERFOR CORPORATION ("Interfor" or the "Company") (TSX: IFP) reported second quarter net earnings of $21.6 million or $0.32 per share and EBITDA(1) of $47.3 million, excluding the impact of one-time items including the restructuring and impairment charges related to the permanent closure of its Beaver-Forks operation announced today. Inclusive of these charges, net earnings in the quarter were $7.4 million or $0.11 per share.

Lumber production in the second quarter was a record 582 million board feet, up 18% from the prior quarter. This growth reflects the addition of the Perry and Preston sawmills in March 2014, and higher operating rates at the Company's BC Interior and US Southeast operations.

Record lumber sales of 628 million board feet, including wholesale and agency volumes, were driven primarily by the increase in sales from the Company's US Southeast operations and by the draw-down of lumber inventories from the first quarter.

On June 27, 2014, the Company announced a curtailment of its Beaver-Forks operation on the Olympic Peninsula in Washington State. Following a comprehensive strategic review, the Company has decided to consolidate production at its Port Angeles facility and to close the Beaver-Forks operation. By consolidating operations on the Peninsula, the Company believes it can enhance operations in the area and improve its overall financial results. Interfor recorded asset impairment and restructuring charges in the second quarter totalling $14.2 million relating to the Beaver-Forks operation, net of an $8.5 million deferred tax recovery. For the quarter, Beaver-Forks contributed $9.7 million of sales and negative EBITDA(1) of $0.4 million on production and sales of 21 million and 20 million board feet, respectively.

Average commodity lumber prices were mixed in the second quarter. Western SPF 2x4 and HF Stud 2x4 prices dropped to US$335 and US$409, down US$32 and US$23, respectively, in part due to the impact of lumber inventories from the first quarter working their way through the distribution channel. The SYP Eastside 2x4 #2Btr benchmark price strengthened US$2 quarter-over-quarter to US$405 as transportation issues impacted the ability to move product to market. Demand for lumber in China was relatively stable with some tightening of credit apparent. Activity in Japan continued to reflect post-VAT impacts.

A long-term incentive compensation recovery of $0.4 million, or less than $0.01 per share, was recorded in the quarter.

In the second quarter, Interfor generated $45.7 million in cash from operations before working capital changes and $41.7 million after working capital changes. Capital spending amounted to $15.9 million during the quarter.

In April, the Company's Gilchrist mill completed the installation of a high-speed European moulder as part of its strategy to convert the mill into a producer of high quality boards. Although the mill's financial results were impacted by the start-up of the new equipment, the quality of product is excellent and has been positively received by the market. The mill is expected to make a positive contribution to the Company's results in the third quarter.

The Company reduced its net debt during the quarter to $237.3 million or 28.1% of invested capital, leaving $145.4 million of available credit.

Commodity lumber prices have stabilized since mid-June although some ongoing volatility is expected as the U.S. housing recovery seeks traction throughout the remainder of this year. Business activity in China is expected to be reasonably stable in the near term as the market adjusts to tightening credit policies and recent changes in currency values. The Japanese economy has indicated signs of recovery, aided by government stimulus packages including a tax rebate program for new home buyers to counter the VAT increase.

Interfor will continue its disciplined approach to production, cost control, inventory management, and capital spending to help position the Company to deliver above average returns on invested capital as conditions improve. At the same time, Interfor will remain alert to opportunities to position the Company for long-term success.

(1) Adjusted to exclude long-term incentive compensation, foreign exchange gains (losses), other income (expense) and restructuring costs (refer to our MD&A prepared as of July 31, 2014, for the full definition)

FORWARD-LOOKING STATEMENTS

This release contains information and statements that are forward-looking in nature, including, but not limited to, statements containing the words "will" and "is expected" and similar expressions. Such statements involve known and unknown risks and uncertainties that may cause Interfor's actual results to be materially different from those expressed or implied by those forward-looking statements. Such risks and uncertainties include, among others: general economic and business conditions, product selling prices, raw material and operating costs, changes in foreign-currency exchange rates, and other factors referenced herein and in Interfor's Annual Report and Management Information Circular available on www.sedar.com. The forward-looking information and statements contained in this report are based on Interfor's current expectations and beliefs. Readers are cautioned not to place undue reliance on forward-looking information or statements. Interfor undertakes no obligation to update such forward-looking information or statements, except where required by law.

ABOUT INTERFOR

Interfor is a growth-oriented lumber company with operations in Canada and the United States. Our Company has annual production capacity of more than 2.6 billion board feet and offers one of the most diverse lines of lumber products to customers around the world. For more information about Interfor, visit our website at www.interfor.com.

There will be a conference call on Friday, August 01, 2014 at 8:00 a.m. (Pacific Time) hosted by INTERFOR CORPORATION for the purpose of reviewing the Company's release of its second quarter 2014 financial results.

The dial-in number is 1-866-233-4795. The conference call will also be recorded for those unable to join in for the live discussion, and will be available until August 14, 2014. The number to call is 1-866-245-6755, Passcode 32478.

Financial and Operating Highlights (1)


                                       For the 3 months    For the 6 months
                                         ended June 30,      ended June 30,
                                    ----------------------------------------
                          Unit           2014      2013      2014      2013
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Financial Highlights(2)
Total sales               $mm           390.2     274.7     685.1     517.2
  Lumber                  $mm           325.2     219.5     555.6     410.9
  Logs                    $mm            35.4      32.6      73.0      58.8
  Wood chips and other    $mm
   residual products                     25.8      17.4      48.2      34.0
  Ocean freight and other $mm             3.8       5.2       8.3      13.5
Operating earnings        $mm             3.8      19.3      17.1      36.6
Net earnings              $mm             7.4      15.8      34.9      30.9
Net earnings per share,   $/share
 basic and diluted                       0.11      0.28      0.53      0.55
EBITDA(3)                 $mm            47.8      35.3      80.1      65.9
Adjusted EBITDA(3)        $mm            47.3      36.1      86.5      73.2
Adjusted EBITDA margin(3) %              12.1%     13.1%     12.6%     14.2%

Total assets              $mm         1,036.0     794.3   1,036.0     794.3
Total long-term debt      $mm           244.5     238.5     244.5     238.5
Pre-tax return on total   %
 assets(3)                                9.3%      8.6%      7.0%      8.2%
Net debt to invested      %
 capital(3)                              28.1%     36.0%     28.1%     36.0%

Operating Highlights
Lumber production         million
                           fbm            582       418     1,077       808
Lumber sales              million
                           fbm            628       433     1,067       816
Lumber - average selling  $/thousand
 price(4)                  fbm            518       507       521       504
Log sales(5)              thousand
                           cubic
                           metres         305       301       703       590
Logs - average selling    $/cubic
 price(5)                  metre          103        90        91        83
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Notes:
(1) Figures in this table may not add due to rounding.
(2) Financial information presented for quarterly periods in this MD&A is
    prepared in accordance with IFRS but is unaudited.
(3) Refer to the Non-GAAP Measures section of this MD&A for definitions and
    reconciliations of these measures to figures reported in the Company's
    consolidated financial statements.
(4) Gross sales before export taxes.
(5) For B.C. operations only.

Summary of Second Quarter 2014 Financial Performance

Sales

Interfor realized $390.2 million of total sales, up 42.0% from $274.7 million in the second quarter of 2013, driven by the sale of 628 million board feet of lumber at an average price of $518 per mfbm. Lumber sales volume and average selling price increased 195 million board feet and 2.2%, respectively, over the same quarter of 2013.

The growth in lumber sales volume was primarily in the U.S. market, where sales increased by 156 million board feet or 59.7% over the second quarter of 2013. This growth is mostly attributable to three sawmills acquired in the U.S. Southeast since July 1, 2013, higher operating rates and the draw-down of lumber inventories.

The increase in the average selling price of lumber is primarily related to the strengthening of the U.S. dollar against the Canadian dollar by 6.6% and higher prices realized in non-U.S. markets as compared to the first quarter of 2013, partially offset by an increased proportion of Southern Yellow Pine sales.

Log sales of $35.4 million represent an increase of $2.8 million or 8.6% compared to the same quarter of 2013. This sales growth is mostly related to a 14.3% increase in the average selling price on B.C. log sales, which accounted for 88.6% of log sales revenue in the quarter.

Sales of wood chips and other residual products increased to $25.8 million, up $8.4 million over the comparable quarter of 2013. This increase mainly reflects the 39.2% increase in lumber production from Q2'13.

Operations

Production costs increased by $102.5 million or 44.3% over the second quarter of 2013, explained primarily by the 45.0% increase in lumber sales volume.

Depreciation of plant and equipment was $14.0 million, up 49.0% from the second quarter of 2013. The majority of this increase is explained by the inclusion of depreciation on the three sawmills in the U.S. Southeast acquired since July 1, 2013, and higher operating rates.

Depletion and amortization of timber, roads and other was $7.0 million, up 11.7% from the comparable quarter of 2013. This increase is mostly related to amortization of a non-competition agreement associated with the acquisition of Tolleson Ilim Lumber Company ("Tolleson").

Corporate and Other

Selling and administration expenses were $9.0 million, up $1.8 million from the second quarter of 2013. This increase reflects the growth of our operations into the U.S. Southeast and includes $0.2 million of non -recurring expenses related to the Tolleson acquisition.

The recovery of $0.4 million on long term incentive compensation reflects the impact of a lower market price for Interfor Common Shares during the quarter on the Company's share-based incentive compensation plans.

The increase of finance costs by $0.1 million over the comparable quarter of 2013 to $2.5 million is consistent with a slightly higher average level of debt outstanding during the period.

Income Taxes

The Company recorded an income tax recovery of $5.7 million, comprised of $0.5 million of current tax expense net of a $6.3 million deferred tax recovery. The deferred tax recovery includes $8.5 million related to the Beaver-Forks restructuring and impairment charges recorded in Q2'14.

Net Earnings

The Company recorded net earnings of $7.4 million or $0.11 per share, lower compared to net earnings of $15.8 million or $0.28 per share in the second quarter of 2013. Excluding the impact of the restructuring and impairment charges associated with curtailment of the Beaver-Forks operation, net earnings in Q2'14 would have been $21.6 million, or $5.8 million higher than Q2'13 on improved profit from operations.

Summary of First Half 2014 Financial Performance

Sales

Interfor realized $685.1 million of total sales, up 32.5% from $517.2 million in the first half of 2014, driven by the sale of 1.1 billion board feet of lumber at an average price of $521 per mfbm. Lumber sales volume and average selling price increased 251 million board feet and 3.4%, respectively, over the same period of 2013.

The growth in lumber sales volume was primarily in the U.S. market, where sales increased by 220 million board feet or 44.2% over the first half of 2013. This growth is mostly attributable to our six sawmills in Georgia acquired since March of 2013.

The increase in the average selling price of lumber is primarily related to the strengthening of the U.S. dollar against the Canadian dollar by 8.0% and higher prices realized in Canada, China and Japan as compared to the first half of 2013, partially offset by a change in species sales mix with a higher proportion of Southern Yellow Pine.

Log sales of $73.0 million represent an increase of $14.2 million or 24.2% compared to the same period of 2013. Increases of 19.1% and 9.2% in B.C. log sales volume and average selling price, respectively, contributed to this sales growth.

Sales of wood chips and other residual products increased to $48.2 million, up $14.2 million over the comparable period of 2013. This increase mainly reflects the 33.3% increase in lumber production from H1'13.

Operations

Production costs increased by $151.0 million or 35.1% over the first half of 2013, explained primarily by the 30.8% and 19.1% increases in lumber and B.C. log sales volumes, respectively.

Depreciation of plant and equipment was $26.3 million, up 46.6% from the first half of 2013. The majority of this increase is explained by the inclusion of depreciation on the six mills in the U.S. Southeast acquired since March 2013, and higher operating rates at our Canadian mills.

Depletion and amortization of timber, roads and other was $13.3 million, up 22.5% from the similar period of 2013. This increase is mostly related to the non-competition agreement associated with the Tolleson acquisition.

Corporate and Other

Selling and administration expenses were $17.9 million, up $3.6 million from the first half of 2013. This increase reflects the growth of our operations into the U.S. Southeast and includes $1.3 million of non-recurring expenses related to the Tolleson acquisition.

Long term incentive compensation expense was $6.5 million, down $1.0 million from the comparable 2013 period, reflecting changes in the fair value of the Company's share-based incentive compensation plans.

The increase of finance costs by $0.1 million over the comparable period of 2013 to $4.3 million is consistent with an increased average level of debt outstanding during the period.

Income Taxes

The Company recorded an income tax recovery of $21.9 million, comprised of $0.9 million of current tax expense net of a $22.9 million deferred tax recovery. The deferred tax recovery includes two notable items: i) recognition of $19.3 million of previously unrecognized deferred tax assets related to its U.S. operations and associated with accounting for the acquisition of Tolleson; and ii) an $8.5 million recovery related to the Beaver-Forks restructuring and impairment charges.

Net Earnings

The Company recorded net earnings of $34.9 million or $0.53 per share, higher compared to net earnings of $30.9 million or $0.55 per share in the first half of 2013. Excluding the impact of the restructuring and impairment charges associated with curtailment of the Beaver-Forks operation in Q2'14 and recognition of $19.3 million of previously unrecognized deferred tax assets related to U.S. operations in Q1'14, net earnings in H1'14 would have been $29.8 million and relatively in-line with H1'13.


Summary of Quarterly Results (1)
                                            2014                2013
                                    ----------------------------------------
                          Unit             Q2        Q1        Q4        Q3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Financial Performance
 (Unaudited)
Total sales               $mm           390.2     294.8     315.3     272.7
  Lumber                  $mm           325.2     230.4     249.2     212.2
  Logs                    $mm            35.4      37.6      41.3      36.6
  Wood chips and other    $mm
   residual products                     25.8      22.4      20.0      18.4
  Ocean freight and       $mm
   other                                  3.8       4.4       4.9       5.4
Operating earnings        $mm
 (loss)                                   3.8      13.3      13.7       2.3
Net earnings (loss)       $mm             7.4      27.5      11.4      (0.1)
Net earnings (loss) per   $/share
 share, basic and
 diluted                                 0.11      0.43      0.18      0.00
EBITDA(2)                 $mm            47.8      32.3      31.4      18.4
Adjusted EBITDA(2)        $mm            47.3      39.2      36.2      24.6
Shares outstanding - end  million
 of period                               66.7      66.7      63.1      63.1
Shares outstanding -      million
 weighted average                        66.7      63.8      63.1      55.9

Operating Performance
Lumber production         million
                           fbm            582       495       470       447
Lumber sales              million
                           fbm            628       439       500       446
Lumber - average selling  $/thousand
 price(3)                  fbm            518       525       498       476
Log sales(4)              thousand
                           cubic
                           metres         305       398       397       353
Logs - average selling    $/cubic
 price(4)                  metre          103        82        92        93
Average US$/CAD$          1 US$ in
 exchange rate(5)          CAD$        1.0905    1.1033    1.0491    1.0385
Closing US$/CAD$          1 US$ in
 exchange rate(5)          CAD$        1.0676    1.1053    1.0636    1.0303
----------------------------------------------------------------------------
----------------------------------------------------------------------------

                                            2013                2012
                                    ----------------------------------------
                          Unit             Q2        Q1        Q4        Q3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Financial Performance
 (Unaudited)
Total sales               $mm           274.7     242.5     222.4     214.7
  Lumber                  $mm           219.5     191.4     173.3     161.9
  Logs                    $mm            32.6      26.1      24.5      26.8
  Wood chips and other    $mm
   residual products                     17.4      16.6      15.9      17.5
  Ocean freight and       $mm
   other                                  5.2       8.4       8.7       8.5
Operating earnings        $mm
 (loss)                                  19.3      17.2      (2.4)      2.3
Net earnings (loss)       $mm            15.8      15.2      (3.8)      0.9
Net earnings (loss) per   $/share
 share, basic and
 diluted                                 0.28      0.27     (0.07)     0.02
EBITDA(2)                 $mm            35.3      30.6      13.0      15.0
Adjusted EBITDA(2)        $mm            36.1      37.1      19.3      17.1
Shares outstanding - end  million
 of period                               55.9      55.9      55.9      55.9
Shares outstanding -      million
 weighted average                        55.9      55.9      55.9      55.9

Operating Performance
Lumber production         million
                           fbm            418       390       347       350
Lumber sales              million
                           fbm            433       383       384       366
Lumber - average selling  $/thousand
 price(3)                  fbm            507       500       452       442
Log sales(4)              thousand
                           cubic
                           metres         301       289       267       345
Logs - average selling    $/cubic
 price(4)                  metre           90        76        76        75
Average US$/CAD$          1 US$ in
 exchange rate(5)          CAD$        1.0233    1.0080    0.9914    0.9954
Closing US$/CAD$          1 US$ in
 exchange rate(5)          CAD$        1.0518    1.0160    0.9949    0.9832
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Notes:
(1) Figures in this table may not add due to rounding.
(2) Refer to the Non-GAAP Measures section of this MD&A.
(3) Gross sales before export taxes.
(4) For B.C. operations.
(5) Based on Bank of Canada foreign exchange rates.

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

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

Steady recoveries in the U.S. housing market helped drive up domestic demand and pricing through the end of 2012. Building on the positive momentum of 2012, U.S. housing starts surged, supporting higher lumber prices and positive net earnings in the first quarter of 2013. Mid-way through the second quarter of 2013, supply outstripped demand, and lumber prices dropped, ending the quarter at levels close to those of early 2012. Late in the third quarter of 2013, lumber prices started to rise in response to demand from China and improving U.S. housing starts. The North American lumber market was affected by both supply and demand factors in the first half of 2014, with commodity lumber prices remaining at relatively strong levels. Three sawmills acquired on March 1, 2013, and one sawmill acquired on July 1, 2013, contributed to growth in production, sales and earnings from 2012. Production, sales and earnings have also benefited since the acquisition of two sawmills on March 14, 2014.

The volatility of the Canadian dollar against the U.S. dollar also impacted results, given that historically over 75% of the Canadian operation's lumber sales are to the U.S. and export markets priced in U.S. dollars. A weaker Canadian dollar increases the lumber sales realizations in Canada, and increases net earnings of U.S. operations when converted to Canadian dollars.

Liquidity

Balance Sheet

Interfor completed the second quarter of 2014 in a strong financial position, with $237.3 million of net debt representing 28.1% of invested capital. Net debt increased $96.5 million from December 31, 2013, primarily due to borrowings for the acquisition of Tolleson.

As at June 30, 2014, the Company had net working capital of $134.9 million and available capacity on operating and term facilities of $145.4 million. These resources, in addition to cash generated from operations, will be used to support our working capital requirements, debt servicing commitments and capital expenditures. We believe that Interfor will have sufficient liquidity to fund operating and capital requirements for the foreseeable future.

Cash Flow from Operating Activities

In the first six months of 2014, the Company generated $77.9 million of cash flow from operations before changes in working capital, up $9.4 million from the comparable period of 2013. Higher sales were partially offset by small reduction in profit margin on production and a $3.6 million increase in selling and administration costs. The increase in selling and administration costs includes $1.3 million of a non-recurring nature related to the Tolleson acquisition.

Total cash generated from operations after changes in working capital was $57.7 million, with $20.2 million of cash used in operating working capital. In the comparable period of 2013, $19.6 million of cash was used in operating working capital, resulting in $48.9 million of total cash generated from operations.

Cash Flow from Investing Activities

Investing activities totaled $153.7 million in H1'14, including $124.4 million related to the Tolleson acquisition, $17.7 million for mill improvements and $11.6 million for development of logging roads. Discretionary mill improvements of $8.7 million during the period included work on a new kiln and crane at the Thomaston sawmill and a Weinig moulder at the Gilchrist sawmill.

Investing activities totaled $153.9 million in H1'13, including $86.6 million related to the acquisition of Rayonier's Wood Products Business, $33.2 million held in escrow for the acquisition of the Thomaston mill, and $34.0 million on capital expenditures. Capital expenditures included $6.9 million on upgrades at the Grand Forks and Castlegar sawmills, $3.2 million on other high-return discretionary projects, $4.7 million on business maintenance expenditures and $19.2 million on road construction and timber tenures.

Cash Flow from Financing Activities

Net drawings on the Company's long-term debt facilities were $102.5 million over the first six months of 2014, leading to total cash used in financing activities of $102.9 million. This includes US$112.5 million drawn from the Company's Revolving Term Line and Operating Line to fund the acquisition of Tolleson.

In the comparable period of 2013, net drawings on the Company's long-term debt facilities were $98.8 million resulting in total cash used in financing activities of $94.1 million. This includes $79.4 million drawn from the Company's Revolving Term Line and Operating Line to fund the acquisition of Rayonier's Wood Products Business.

Capital Resources

The following table summarizes Interfor's credit facilities and availability as of June 30, 2014:



                                     Revolving    Senior      U.S.
Thousands of Canadian      Operating      Term   Secured Operating
 dollars                        Line      Line     Notes      Line     Total
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Available line of credit
 and maximum borrowing
 available                    65,000   250,000    53,380    32,028   400,408
Less:
  Drawings                     4,657   186,492    53,380         -   244,529
  Outstanding letters of
   credit included in line
   utilization                 9,896         -         -       597    10,493
----------------------------------------------------------------------------
Unused portion of facility    50,447    63,508         0    31,431   145,386
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Interfor continues to maintain its disciplined focus on monitoring discretionary capital expenditures, optimizing inventory levels and matching production with offshore and domestic demand. Based on projections and existing credit lines, current pricing, cash flow the Company believes it has sufficient liquidity to meet all of its financial obligations.

Transactions Between Related Parties

The Company did not have any transactions between related parties in the six months ended June 30, 2014.

Off-Balance Sheet Arrangements

The Company has off-balance sheet arrangements which include letters of credit and surety performance bonds, primarily for timber sales. At June 30, 2014, such instruments aggregated $29.7 million (December 31, 2013 - $26.7 million). Off-balance sheet arrangements have not had, and are not reasonably likely to have, any material impact on the Company's current or future financial condition, results of operations or cash flows.

Financial Instruments and Other Instruments

From time to time, the Company employs financial instruments, such as interest rate swaps and foreign currency forward and option contracts, to manage exposure to fluctuations in interest rates and foreign exchange rates. The Company also trades lumber futures to manage price risk. The Company's policy is not to use derivatives for trading or speculative purposes. Risk management strategies and relationships are formally documented and assessed on a regular, ongoing basis to ensure derivatives are effective in offsetting changes in fair values or cash flows of hedged items. The counter-parties for all derivative contracts, except lumber futures, are the Company's Canadian bankers who are highly-rated and, hence, the risk of credit loss on such instruments is mitigated.

On April 14, 2014, the Company entered into two additional interest rate swaps, each with a notional value of US$25 million and maturing on April 14, 2016. Under the terms of these swaps, the Company pays an amount based on a fixed annual interest rate of 0.58% and receives a 90 day LIBOR which is recalculated at set interval dates.

Outstanding Shares

As of July 31, 2014, Interfor had 66,730,455 Common Shares issued and outstanding. These shares are listed on the Toronto Stock Exchange under the symbol IFP.

Controls and Procedures

There have been no changes in the Company's internal controls over financial reporting ("ICFR") during the three months ended June 30, 2014, that have materially affected, or are reasonably likely to materially affect, its ICFR.

Critical Accounting Estimates

There were no significant changes to the Company's critical accounting estimates during the quarter ended June 30, 2014. Interfor's critical accounting estimates are described in its MD&A for the year ended December 31, 2013, filed under the Company's profile on www.sedar.com.

Accounting Policy Changes

A number of new standards, and amendments to existing standards and interpretations, were not yet effective for the quarter ended June 30, 2014, and have not been applied in preparing the Company's unaudited interim condensed consolidated financial statements. The following pronouncement is considered by the Company to be the most significant of several pronouncements that may affect the financial statements.

IFRS 9, Financial Instruments, replaces the multiple classification and measurement models in IAS 39, Financial Instruments: Recognition and Measurement, with a single model that has only two classification categories: amortized cost and fair value. This standard will be in effect for accounting periods beginning on or after January 1, 2015, with earlier adoption permitted. The Company does not expect this standard to have a significant effect on its financial statements.

Non-GAAP Measures

This MD&A makes reference to the following non-GAAP measures: EBITDA, Adjusted EBITDA, Pre-tax return on total assets and Net debt to invested capital, which are used by the Company and certain investors to evaluate operating performance and financial position. These non-GAAP measures do not have any standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other issuers. The following table provides a reconciliation of these non-GAAP measures to figures as reported in the Company's unaudited interim condensed consolidated financial statements prepared in accordance with IFRS:


                                       For the 3 months    For the 6 months
                                         ended June 30,      ended June 30,
                                    ----------------------------------------
Thousands of Canadian dollars            2014      2013      2014      2013
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Adjusted EBITDA
Net earnings                            7,395    15,759    34,883    30,938
Add:
  Depreciation of plant and
   equipment                           13,978     9,382    26,309    17,946
  Depletion and amortization of
   timber, roads and other              7,016     6,279    13,325    10,878
  Restructuring costs, capital asset
   and timber write-downs              22,917       219    23,246       322
  Finance costs                         2,537     2,422     4,300     4,210
  Other foreign exchange loss (gain)     (284)      848       (10)    1,563
  Income tax expense (recovery)        (5,717)      406   (21,914)       51
----------------------------------------------------------------------------
EBITDA                                 47,842    35,315    80,139    65,908
Add:
  Long term incentive compensation       (427)      878     6,490     7,496
  Other income                           (117)     (119)     (173)     (208)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Adjusted EBITDA                        47,298    36,074    86,456    73,196
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Pre-tax return on total assets
Earnings before income taxes            1,678    16,165    12,969    30,989
Add:
  Restructuring costs                  22,917       219    23,246       322
  Other foreign exchange loss (gain)     (284)      848       (10)    1,563
  Other income                           (117)     (119)     (173)     (208)
----------------------------------------------------------------------------
                                       24,194    17,113    36,032    32,666
Total assets, period end            1,036,343   794,316 1,036,343   794,316
----------------------------------------------------------------------------
Pre-tax return on total assets(1)         9.3%      8.6%      7.0%      8.2%
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Net debt to invested capital
Net debt
  Long term debt                      244,529   238,507   244,529   238,507
  Cash and cash equivalents           (11,639)   (4,526)  (11,639)   (4,526)
  Current bank indebtedness             4,400         -     4,400         -
----------------------------------------------------------------------------
Total net debt                        237,290   233,981   237,290   233,981
----------------------------------------------------------------------------
Invested capital
  Net debt                            237,290   233,981   237,290   233,981
  Shareholders' equity                607,713   416,697   607,713   416,697
----------------------------------------------------------------------------
Total invested capital                845,003   650,678   845,003   650,678
----------------------------------------------------------------------------
Net debt to invested capital             28.1%     36.0%     28.1%     36.0%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Note: (1) Annualized rate.

Risks and Uncertainties

The Company is exposed to many risks and uncertainties in conducting its business including, but not limited to: price volatility; availability of log supply; competition; government regulation; foreign currency exchange fluctuations; environmental matters; and labour disruption. These risks and uncertainties are described in the Company's MD&A for the year ended December 31, 2013, filed under the Company's profile on www.sedar.com. Except as noted below, there have been no significant changes to the Company's risks and uncertainties during the six month period ended June 30, 2014.

On June 26, 2014 the Supreme Court of Canada ("SCC") released its ruling on the Tsilhqot'in vs. British Columbia. To the extent that this defines for the first time the criteria upon which Aboriginal title rests is a positive development. It is also an important motivation for the federal and provincial governments to move forward on the treaty process in British Columbia.

The SCC ruling applies to two percent of the Tsilhqot'in traditional territory in a remote area of Central B.C. - far removed from Interfor's operations. To date, Aboriginal title has not been established in any of Interfor's tenures; and doing so will likely be a lengthy and complex process. The Company will continue to manage its operations within the existing legal framework while paying close attention to the direction provided by the Province and First Nations regarding the application of this ruling. Therefore, risks and uncertainties remain consistent with those referenced above.

The Company's operations in B.C. account for approximately 40% of its total lumber production. Interfor has a number of agreements and initiatives with First Nations in B.C., and as such, remains committed to working with First Nations to develop economic opportunities of mutual benefit.

Additional Information

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


CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the three and six months ended June 30, 2014 and 2013 (unaudited)
----------------------------------------------------------------------------
(thousands of Canadian dollars
 except earnings per share)          3 Months  3 Months  6 Months  6 Months
                                     June 30,  June 30,  June 30,  June 30,
                                         2014      2013      2014      2013
----------------------------------------------------------------------------

Sales                                $390,219  $274,698  $685,059  $517,197
Costs and expenses:
  Production                          333,885   231,368   580,685   429,670
  Selling and administration            9,036     7,256    17,918    14,331
  Long term incentive compensation
   expense (recovery)                    (427)      878     6,490     7,496
  Depreciation of plant and
   equipment (note 9)                  13,978     9,382    26,309    17,946
  Depletion and amortization of
   timber, roads and other (note 9)     7,016     6,279    13,325    10,878
  --------------------------------------------------------------------------
                                      363,488   255,163   644,727   480,321
----------------------------------------------------------------------------

Operating earnings before
 restructuring costs                   26,731    19,535    40,332    36,876

Restructuring costs (note 10)         (22,917)     (219)  (23,246)     (322)
----------------------------------------------------------------------------
Operating earnings                      3,814    19,316    17,086    36,554

Finance costs (note 11)                (2,537)   (2,422)   (4,300)   (4,210)
Other foreign exchange gain (loss)        284      (848)       10    (1,563)
Other income                              117       119       173       208
----------------------------------------------------------------------------
                                       (2,136)   (3,151)   (4,117)   (5,565)
----------------------------------------------------------------------------

Earnings before income taxes            1,678    16,165    12,969    30,989
Income tax expense (recovery):
  Current                                 542       148       936      (121)
  Deferred (note 4)                    (6,259)      258   (22,850)      172
  --------------------------------------------------------------------------
                                       (5,717)      406   (21,914)       51

----------------------------------------------------------------------------
Net earnings                         $  7,395  $ 15,759  $ 34,883  $ 30,938
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Net earnings per share, basic and
 diluted (note 12)                   $   0.11  $   0.28  $   0.53  $   0.55
----------------------------------------------------------------------------
----------------------------------------------------------------------------

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the three and six months ended June 30, 2014 and 2013 (unaudited)
----------------------------------------------------------------------------
                                     3 Months  3 Months  6 Months  6 Months
                                     June 30,  June 30,  June 30,  June 30,
                                         2014      2013      2014      2013
----------------------------------------------------------------------------


Net earnings                         $  7,395  $ 15,759  $ 34,883  $ 30,938

Other comprehensive income (loss):
Items that will not be reclassified
 subsequently to Net earnings:
  Defined benefit plan actuarial
   gains (losses)                        (168)    2,901      (309)    2,507
  --------------------------------------------------------------------------

Items that are or may be
 reclassified subsequently to Net
 earnings:
  Foreign currency translation
   differences - foreign operations    (8,662)    3,678    (3,421)    6,430
  Gain (loss) in fair value of
   interest rate swaps (note 14)         (249)      955      (217)      580
  Income tax recovery on other
   comprehensive income                     -       267         -       212
  --------------------------------------------------------------------------
  Total items that are or may be
   reclassified subsequently to Net
   earnings                            (8,911)    4,900    (3,638)    7,222
----------------------------------------------------------------------------
Total other comprehensive income,
 net of tax                            (9,079)    7,801    (3,947)    9,729
----------------------------------------------------------------------------

Total comprehensive income (loss)    $ (1,684) $ 23,560  $ 30,936  $ 40,667
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes to consolidated financial statements

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2014 and 2013 (unaudited)
----------------------------------------------------------------------------
(thousands of Canadian dollars)                     6 Months       6 Months
                                               June 30, 2014  June 30, 2013
----------------------------------------------------------------------------

Cash provided by (used in):
Operating activities:
  Net earnings                                     $  34,883      $  30,938
  Items not involving cash:
    Depreciation of plant and equipment               26,309         17,946
    Depletion and amortization of timber,
     roads and other                                  13,325         10,878
    Income tax expense (recovery)                    (21,914)            51
    Finance costs (note 11)                            4,300          4,210
    Reforestation liability                            1,854          2,778
    Other assets                                         465             45
    Provisions and other liabilities                  (1,628)           710
    Write-down of plant and equipment (note
     10)                                              20,468              -
    Unrealized foreign exchange (gains) losses           (34)           977
    Other                                               (163)          (117)
  --------------------------------------------------------------------------
                                                      77,865         68,416
  Cash generated from (used in) operating
   working capital:
    Trade accounts receivable and other               (7,315)        (6,927)
    Inventories                                       (2,797)       (27,817)
    Prepayments                                       (3,477)        (2,404)
    Trade accounts payable and provisions             (3,862)        18,004
    Income taxes paid                                 (2,708)          (419)
  --------------------------------------------------------------------------
                                                      57,706         48,853

Investing activities:
  Additions to property, plant and equipment         (17,692)       (14,194)
  Additions to logging roads                         (11,603)        (7,175)
  Additions to timber and other intangible
   assets                                             (1,966)       (12,643)
  Proceeds on disposal of property, plant, and
   equipment                                           2,087            152
  Acquisition (note 4)                              (124,421)       (86,641)
  Deposit held in escrow for acquisition                   -        (33,150)
  Investments and other assets                           (56)          (244)
  --------------------------------------------------------------------------
                                                    (153,651)      (153,895)
Financing activities:
  Bank indebtedness                                    4,400              -
  Interest payments                                   (3,264)        (3,237)
  Financing transaction costs                           (736)        (1,394)
  Additions to long-term debt (notes 4 and 7)        299,931        199,104
  Repayments of long-term debt (note 7)             (197,467)      (100,334)
  --------------------------------------------------------------------------
                                                     102,864         94,139
Foreign exchange gain on cash and cash
 equivalents
  held in a foreign currency                               3            435
----------------------------------------------------------------------------
Increase (decrease) in cash                            6,922        (10,468)

Cash and cash equivalents, beginning of period         4,717         14,994
----------------------------------------------------------------------------

Cash and cash equivalents, end of period           $  11,639      $   4,526
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes to consolidated financial statements

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
June 30, 2014 and December 31, 2013 (unaudited)
----------------------------------------------------------------------------
(thousands of Canadian dollars)                      June 30,       Dec. 31,
                                                         2014           2013
----------------------------------------------------------------------------

Assets
Current assets:
  Cash and cash equivalents                        $   11,639     $    4,717
  Trade accounts receivable and other                  75,647         62,735
  Inventories (note 6)                                161,652        149,509
  Prepayments                                          16,134         11,374
  --------------------------------------------------------------------------
                                                      265,072        228,335

Employee future benefits                                3,812          3,980
Other investments and assets                            3,872          3,960
Property, plant and equipment (note 4, 10)            513,318        460,930
Logging roads and bridges                              17,047         16,224
Timber licences                                        81,705         84,344
Other intangible assets (note 4)                       24,400          2,420
Goodwill (note 4)                                     127,117         23,715
Deferred income taxes                                       -            218
----------------------------------------------------------------------------

                                                   $1,036,343     $  824,126
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Liabilities and Equity
Current liabilities:
  Bank indebtedness                                $    4,400     $        -
  Trade accounts payable and provisions               113,096         98,017
  Reforestation liability                              12,108         11,754
  Income taxes payable                                    554            395
  --------------------------------------------------------------------------
                                                      130,158        110,166

Reforestation liability                                22,803         20,662
Long-term debt (note 7)                               244,529        145,479
Employee future benefits                                7,303          7,006
Provisions and other liabilities                       22,917         25,676
Deferred income taxes (note 4, 10)                        920              -
Equity:
  Share capital (note 8)                              490,363        428,723
  Contributed surplus                                   7,476          7,476
  Translation reserve                                  (2,860)           561
  Hedge reserve                                           (50)           167
  Retained earnings                                   112,784         78,210
  --------------------------------------------------------------------------

                                                      607,713        515,137
----------------------------------------------------------------------------

                                                   $1,036,343     $  824,126
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Commitment (note 15)

See accompanying notes to consolidated financial statements
On behalf of the Board:

      L. Sauder                          D. Whitehead
      Director                           Director

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the six months ended June 30, 2014 and 2013 (unaudited)
----------------------------------------------------------------------------

                                            Class B
                                     Common   Share Contributed Translation
(thousands of Canadian dollars)      Shares Capital     Surplus     Reserve
----------------------------------------------------------------------------
Balance at December 31, 2013       $428,723 $     -  $    7,476   $     561
Net earnings for the period:              -       -           -           -
Other comprehensive loss:
Foreign currency translation
 differences, net of tax                  -       -           -      (3,421)
Defined benefit plan actuarial
 losses                                   -       -           -           -
Loss in fair value of interest
 rate swaps                               -       -           -           -
Contributions:
Shares issued in business
 combination (notes 4 and 8)         61,640       -           -           -
----------------------------------------------------------------------------


Balance at June 30, 2014           $490,363 $     -  $    7,476   $  (2,860)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Balance at December 31, 2012       $342,285 $ 4,080  $    7,476   $  (7,818)

Net earnings for the period:              -       -           -           -
Other comprehensive earnings:
Foreign currency translation
 differences, net of tax                  -       -           -       6,642
Defined benefit plan actuarial
 gain                                     -       -           -           -
Gain in fair value of interest
 rate swaps                               -       -           -           -
----------------------------------------------------------------------------


Balance at June 30, 2013           $342,285 $ 4,080  $    7,476   $  (1,176)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


                                                Hedging  Retained
(thousands of Canadian dollars)                 Reserve  Earnings     Total
----------------------------------------------------------------------------
Balance at December 31, 2013                   $    167  $ 78,210  $515,137
Net earnings for the period:                          -    34,883    34,883
Other comprehensive loss:
Foreign currency translation
 differences, net of tax                              -         -    (3,421)
Defined benefit plan actuarial
 losses                                               -      (309)     (309)
Loss in fair value of interest
 rate swaps                                        (217)        -      (217)
Contributions:
Shares issued in business
 combination (notes 4 and 8)                          -         -    61,640
----------------------------------------------------------------------------


Balance at June 30, 2014                       $    (50) $112,784  $607,713
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Balance at December 31, 2012                   $   (132) $ 30,139  $376,030

Net earnings for the period:                          -    30,938    30,938
Other comprehensive earnings:
Foreign currency translation
 differences, net of tax                              -         -     6,642
Defined benefit plan actuarial
 gain                                                 -     2,507     2,507
Gain in fair value of interest
 rate swaps                                         580         -       580
----------------------------------------------------------------------------


Balance at June 30, 2013                       $    448  $ 63,584  $416,697
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes to consolidated financial statements

INTERFOR CORPORATION

Notes to Unaudited Condensed Consolidated Interim Financial Statements

(Tabular amounts expressed in thousands except number of shares and per share amounts)

Three and six months ended June 30, 2014 and 2013 (unaudited)

1. Nature of operations:

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

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

These condensed consolidated interim financial statements as at and for the three and six months ended June 30, 2014, comprise the Company and its subsidiaries.

2. Basis of Preparation:

(a) Statement of compliance:

These condensed consolidated interim financial statements, including comparatives, have been prepared in accordance with IAS 34 Interim Financial Reporting using accounting policies consistent with the International Financial Reporting Standards ("IFRS") issued by the International Accounting Standards Board ("IASB") and Interpretations of the International Financial Reporting Interpretations Committee ("IFRIC"). These condensed consolidated interim financial statements were approved by the Board of Directors on July 31, 2014.

(b) Basis of measurement:

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


i.   Derivative financial instruments are measured at fair value;
ii.  Liabilities for cash-settled share-based payment arrangements are
     measured at fair value; and
iii. Employee benefit plan assets and liabilities are recognized as the net
     of the fair value of the plan assets and the present value of the
     benefit obligations on a plan by plan basis.

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

3. Significant accounting policies:

These condensed consolidated interim financial statements have been prepared using the significant accounting policies and methods of computation consistent with those applied in the Company's December 31, 2013, annual consolidated financial statements, which are available on www.sedar.com.

4. Acquisition:

On March 14, 2014, a wholly-owned subsidiary of Interfor acquired all of the outstanding common shares of Tolleson Ilim Lumber Company ("Tolleson") from Ilim Timber Continental, S.A. ("Ilim"), pursuant to a Share Purchase Agreement for total consideration estimated to value $188,545,000. Tolleson, through its wholly-owned subsidiary, owns and operates two sawmills in Perry and Preston, Georgia, and a remanufacturing facility in Perry, Georgia. This acquisition is consistent with Interfor's strategy of adding capacity in attractive regional markets.

The acquisition has been accounted for as a business combination and the estimated value of consideration transferred is allocated on a preliminary basis as follows:


----------------------------------------------------------------------------
----------------------------------------------------------------------------
Assets acquired:
  Cash and cash equivalents                                       $   2,484
  Other current assets                                               16,790
  Property, plant and equipment                                      86,561
  Other intangible assets                                            22,190
  Goodwill                                                          107,419
----------------------------------------------------------------------------
                                                                    235,444
Liabilities assumed:
  Current liabilities                                               (15,929)
  Long term provisions and other liabilities                         (6,697)
  Deferred income taxes                                             (24,273)
----------------------------------------------------------------------------

                                                                  $ 188,545
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Consideration funded by:
  Current liabilities                                             $   2,086
  Operating Line                                                     24,964
  Revolving Term Line                                                99,855
  Share capital (3,680,000 Class A Subordinate Shares)               61,640
----------------------------------------------------------------------------

                                                                  $ 188,545
----------------------------------------------------------------------------
----------------------------------------------------------------------------

As part of the acquisition, the Company entered into a non-competition agreement with Ilim under which Ilim and its associates are prohibited from carrying on various activities within Canada and the U.S. that would be in competition with the Company's operating activities for a period of five years from the acquisition date. An intangible asset of $22,190,000 was recognized in respect of this non-competition agreement, which will be amortized to expense over its five year term.

The goodwill of $107,419,000 recognized in the transaction is calculated as the excess of the estimated purchase consideration transferred over the preliminary fair values of the identifiable assets acquired and liabilities assumed. The factors that contribute to the recognition of goodwill include Tolleson's historical cash flows and income levels, reputation in its markets, management team strength, efficiency of operations, and future cash flows and income growth projections. None of the goodwill is expected to be tax deductible.

In conjunction with recognizing a $24,273,000 deferred tax liability in accounting for the acquisition of Tolleson, the Company recognized $19,253,000 of previously unrecognized deferred tax assets related to its U.S. operations. The recognition of these deferred income tax assets is included within the $16,591,000 deferred income tax recovery in the Company's Consolidated Statements of Earnings in the first quarter, 2014.

The Company incurred acquisition related costs of $180,000 during the second quarter, 2014, and $1,304,000 for the first six months, 2014, which are included in Selling and administration expenses in the Company's Consolidated Statements of Earnings.

5. Seasonality of operating results:

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

6. Inventories:


----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                 June 30, 2014 Dec. 31, 2013
----------------------------------------------------------------------------

Logs                                                 $  72,246     $  89,170
Lumber                                                  78,601        51,449
Other                                                   10,805         8,890
----------------------------------------------------------------------------
                                                     $ 161,652     $ 149,509
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Inventory expensed in the period includes production costs, depreciation of plant and equipment, and depletion and amortization of timber, roads and other. The inventory write-down in order to record inventory at the lower of cost and net realizable value at June 30, 2014 was $9,298,000 (December 31, 2013 - $7,926,000).

7. Cash and borrowings:



                                                  Senior      U.S.
                           Operating Revolving   Secured Operating
June 30, 2014                   Line Term Line     Notes      Line     Total
----------------------------------------------------------------------------
Available line of credit    $ 65,000 $ 250,000  $ 53,380  $ 32,028 $ 400,408
Drawings                       4,657   186,492    53,380         -   244,529
Outstanding letters of
 credit included in line
 utilization                   9,896         -         -       597    10,493
----------------------------------------------------------------------------
Unused portion of line      $ 50,447 $  63,508  $      -  $ 31,431 $ 145,386
----------------------------------------------------------------------------
----------------------------------------------------------------------------
December 31, 2013
----------------------------------------------------------------------------
Available line of credit    $ 65,000 $ 200,000  $ 53,180  $ 21,272 $ 339,452
Drawings                         936    90,619    53,180       744   145,479
Outstanding letters of
 credit included in line
 utilization                   7,529         -         -         -     7,529
----------------------------------------------------------------------------
Unused portion of line      $ 56,535 $ 109,381  $      -  $ 20,528 $ 186,444
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(a) Operating Line:

The Canadian operating line of credit ("Operating Line") may be drawn in either CAD$ or US$ advances, and bears interest at bank prime plus a margin or, at the Company's option, at rates for Bankers' Acceptances or LIBOR based loans plus a margin, and in all cases dependent upon a financial ratio of total debt divided by twelve months' trailing EBITDA(1). Borrowing levels under the Operating Line are subject to a borrowing base calculation dependent on certain accounts receivable and inventories.

The Operating Line is secured by a general security agreement which includes a security interest in all accounts receivable and inventories, charges against timber tenures, and mortgage security on sawmills. The Operating Line is subject to certain financial covenants including a minimum working capital requirement, a maximum ratio of total debt to total capitalization and a minimum net worth calculation. The Operating Line matures on February 27, 2017.

As at June 30, 2014, the Operating Line was drawn by $14,553,000, including outstanding letters of credit (December 31, 2013 - drawings of $8,465,000).

During the first quarter, 2014, the Company drew US$22,500,000 under its Operating Line to fund its acquisition in the U.S. (see note 4), which it designated as a hedge against the Company's investment in its U.S. operations and recognized unrealized foreign exchange gains of $72,000 in Other comprehensive income for the first quarter, 2014 (2013 - $nil), after which this borrowing was transferred to the Revolving Term Line facility.


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

(b) Revolving Term Line:

The Revolving Term Line may be drawn in either CAD$ or US$ advances, and bears interest at bank prime plus a margin or, at the Company's option, at rates for Bankers' Acceptances or LIBOR based loans plus a margin, and in all cases dependent upon a financial rat io of total debt divided by twelve months' trailing EBITDA(1). The Revolving Term Line matures on February 27, 2017.

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

On March 31, 2014, the Company increased the credit available under its Revolving Term Line from $200,000,000 to $250,000,000. All other terms and conditions of this line remained unchanged.

As at June 30, 2014, the Revolving Term Line was drawn by CAD$5,000,000 and by US$170,000,000 (December 31, 2013 - US$85,200,000), revalued at the quarter-end exchange rate to $181,492,000 (December 31, 2013 - $90,619,000), for a total of $186,492,000.

During the first quarter, 2014, the Company drew US$90,000,000 under its Revolving Term Line to fund its acquisition in the U.S. (see note 4), which it designated as a hedge against the Company's investment in its U.S. operations. As at June 30, 2014, total drawings under the Revolving Term Line designated as hedges against the Company's investment in its U.S. operations totalled US$170,000,000. Unrealized foreign exchange gains of $3,724,000 for the six months ended June 30, 2014, (June 30, 2013 - $4,641,000 loss) arising on revaluation of the Revolving Term Line were recognized in Foreign currency translation differences in Other comprehensive income. For the second quarter, 2014, unrealized exchange gains of $6,952,000 (Quarter 2, 2013 - $5,082,000 loss) were recognized in Other comprehensive income.

(c) Senior Secured Notes:

The Series A Senior Secured Notes ("Senior Secured Notes") bear interest at 4.33% and are subject to certain financial covenants including a minimum working capital requirement, a maximum ratio of total debt to total capitalization and a minimum net worth calculation. Payments of US$16,667,000 are required on each of June 26, 2021 and 2022, with the balance due on June 26, 2023.

As at June 30, 2014, Senior Secured Notes of US$50,000,000 were outstanding (December 31, 2013 - US$50,000,000) and revalued at the quarter-end exchange rate to $53,380,000 (December 31, 2013 - $53,180,000).

The Senior Secured Notes have been designated as a hedge against the Company's investment in its U.S. operations and unrealized foreign exchange losses of $200,000 (June 30, 2013 - $45,000) arising on their revaluation were recognized in Foreign currency translation differences in Other comprehensive income for the six months ended June 30, 2014. For the second quarter, 2014, an unrealized exchange gain of $1,885,000 (Quarter 2, 2013 - $45,000 loss) was recognized in Other comprehensive income.

(d) U.S. Operating Line

The U.S. Operating Line is secured by accounts receivable and inventories of wholly-owned subsidiary, Interfor U.S. Inc., and matures on April 28, 2015. The U.S. Operating Line is subject to a minimum net worth calculation, with borrowing levels subject to a collateral calculation dependent upon certain accounts receivable and inventories.

On March 21, 2014, the Company increased the credit available under this agreement from US$20,000,000 to US$30,000,000.

As at June 30, 2014, the U.S. Operating Line was drawn by US$560,000 representing outstanding letters of credit, revalued at the quarter-end exchange rate to $597,000 (December 31, 2013 - $744,000).

Minimum principal amounts due on long-term debt within the next five years are follows:


----------------------------------------------------------------------------
----------------------------------------------------------------------------
Twelve months ending
  June 30, 2015                                                    $       -
  June 30, 2016                                                            -
  June 30, 2017                                                      191,149
  June 30, 2018                                                            -
  June 30, 2019                                                            -
----------------------------------------------------------------------------
                                                                   $ 191,149
----------------------------------------------------------------------------
----------------------------------------------------------------------------

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

8. Share capital:

The transactions in share capital are described below:


----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                             Number
                              ------------------------------------
                                   Common     Class B       Total     Amount
----------------------------------------------------------------------------
Balance, December 31, 2012     54,847,176   1,015,779  55,862,955  $ 346,365
Share exchange                  1,015,779  (1,015,779)          -          -
Shares issued for cash, net of
 share issue costs              7,187,500           -   7,187,500     82,358
----------------------------------------------------------------------------
Balance, December 31, 2013     63,050,455           -  63,050,455    428,723
Shares issued in business
 combination (see Note 4)       3,680,000           -   3,680,000     61,640
----------------------------------------------------------------------------
Balance, June 30, 2014         66,730,455           -  66,730,455  $ 490,363
----------------------------------------------------------------------------
----------------------------------------------------------------------------

On August 23, 2013, the Company's controlling shareholder, Sauder Industries Limited ("SIL") exercised its right under the Company's Articles to exchange its Class B Common Shares for Class A Subordinate Voting Shares on a share for share basis without any cash or non-cash consideration. As a result of the exchange by SIL, all remaining Class B Shares were automatically converted to Class A Shares.

On June 30, 2013, the Company closed a public offering of 7,187,500 Class A Subordinate Voting shares at a price of $12.00 per share for net cash proceeds of $82,358,000.

On March 14, 2014, the Company issued 3,680,000 Class A Subordinate Voting shares as a result of the acquisition of Tolleson Lumber Company (see note 4) at the listed share price of $16.75 per share as at March 14, 2014.

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

9. Depreciation, depletion and amortization:

Depreciation, depletion and amortization can be allocated by function as follows:


----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                      3 Months  3 Months  6 Months  6 Months
                                      June 30,  June 30,  June 30,  June 30,
                                          2014      2013      2014      2013
----------------------------------------------------------------------------

Production                            $ 19,749  $ 15,400  $ 38,024  $ 28,303
Selling and administration               1,245       261     1,610       521
----------------------------------------------------------------------------
                                      $ 20,994  $ 15,661  $ 39,634  $ 28,824
----------------------------------------------------------------------------
----------------------------------------------------------------------------

10. Restructuring costs:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                      3 Months  3 Months  6 Months  6 Months
                                      June 30,  June 30,  June 30,  June 30,
                                          2014      2013      2014      2013
----------------------------------------------------------------------------

Write-down of plant and equipment     $ 20,468  $      -  $ 20,468  $      -
Severance                                  776       219     1,105       322
Other                                    1,673         -     1,673         -
----------------------------------------------------------------------------
                                      $ 22,917  $    219  $ 23,246  $    322
----------------------------------------------------------------------------
----------------------------------------------------------------------------

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

During the first six months, 2014, the Company also recorded other severance costs of $536,000 (June 30, 2013 - $322,000), and $207,000 for the second quarter, 2014 (Quarter 2, 2013 - $219,000).


11. Finance costs:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                       3 Months  3 Months 6 Months  6 Months
                                       June 30,  June 30, June 30,  June 30,
                                           2014      2013     2014      2013
----------------------------------------------------------------------------

Interest on borrowing                  $  2,178  $  1,903 $  3,629  $  3,416
Interest (income) on defined benefit
 obligations                                (16)       48      (34)       96
Accretion expense                           169       107      339       203
Amortization of prepaid finance costs       206       364      366       495
----------------------------------------------------------------------------
                                       $  2,537  $  2,422 $  4,300  $  4,210
----------------------------------------------------------------------------
----------------------------------------------------------------------------

12. Net earnings per share:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                       3 Months June 30, 2014      3 Months June 30, 2013
                     -------------------------------------------------------
                                Weighted                    Weighted
                                 Average                     Average
                          Net  Number of     Per      Net  Number of     Per
                     earnings     Shares   share earnings     Shares   share
----------------------------------------------------------------------------

Issued shares at
 April 1, 2014                   66,730                      55,863
----------------------------------------------------------------------------
Basic and diluted
 earnings per share  $ 7,395     66,730  $ 0.11  $ 15,759    55,863  $ 0.28
----------------------------------------------------------------------------
----------------------------------------------------------------------------

                       6 Months June 30, 2014      6 Months June 30, 2013
                     -------------------------------------------------------
                                Weighted                    Weighted
                                 Average                     Average
                          Net  Number of     Per      Net  Number of     Per
                     earnings     Shares   share earnings     Shares   share
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Issued shares at
 January 1                       63,050                      55,863
Effect of shares
 issued on March 14,
 2014                             2,217                           -
----------------------------------------------------------------------------
Basic and diluted
 earnings per share  $ 34,883    65,267  $ 0.53  $ 30,938    55,863  $ 0.55
----------------------------------------------------------------------------
----------------------------------------------------------------------------

The Company has no dilutive securities.

13. Segmented information:

The Company manages its business as a single operating segment, solid wood. The Company purchases and harvests logs which are then manufactured into lumber products at the Company's sawmills, or sold. Substantially all of the Company's operations are located in British Columbia, Canada, and the U.S. Pacific Northwest and Southeast, U.S.A.

The Company's sales to both foreign and domestic markets are as follows:


----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                      3 Months  3 Months  6 Months  6 Months
                                      June 30,  June 30,  June 30,  June 30,
                                          2014      2013      2014      2013
----------------------------------------------------------------------------

United States                        $ 220,835 $ 137,862 $ 388,412 $ 263,654
Canada                                  57,452    55,763   110,966   110,915
China/Taiwan                            50,104    30,776    83,585    54,336
Japan                                   39,147    32,424    68,358    58,592
Other export                            22,681    17,873    33,738    29,700
----------------------------------------------------------------------------
                                     $ 390,219 $ 274,698 $ 685,059 $ 517,197
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Sales by product line are as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                      3 Months  3 Months  6 Months  6 Months
                                      June 30,  June 30,  June 30,  June 30,
                                          2014      2013      2014      2013
----------------------------------------------------------------------------

Lumber                               $ 325,152 $ 219,479 $ 555,616 $ 410,885
Logs                                    35,407    32,625    72,995    58,753
Wood chips and other by-products        25,779    17,421    48,179    34,018
Ocean freight and other                  3,881     5,173     8,269    13,541
----------------------------------------------------------------------------
                                     $ 390,219 $ 274,698 $ 685,059 $ 517,197
----------------------------------------------------------------------------
----------------------------------------------------------------------------

14. Financial instruments:

At June 30, 2014, the fair value of the Company's long-term debt and bank indebtedness approximated its carrying value of $244,529,000 (December 31, 2013 - $145,479,000) measured based on Level 2 of the fair value hierarchy.

As at June 30, 2014, the Company has outstanding obligations to sell a maximum of US$9,300,000 at an average rate of CAD$1.0805 to US$1.00 during 2014 and yen 253,880,000 at an average rate of yen 101.55 to US$1.00 during 2014. All foreign currency gains or losses to June 30, 2014, have been recognized in Other foreign exchange gain (loss) in Net earnings and the fair value of these foreign currency contracts, being an asset of $118,000 (measured based on Level 2 of the fair value hierarchy), has been recorded in Trade accounts receivable and other (December 31, 2013 - $136,000 asset).

On April 14, 2014, the Company entered into two new interest rate swaps, each with a notional value of US$25 million and maturing on April 14, 2016. Under the terms of these swaps, the Company pays an amount based on a fixed annual interest rate of 0.58% and receives a 90 day LIBOR which is recalculated at set interval dates. The intent of the interest rate swaps is to convert floating-rate interest expense to fixed-rate interest expense.

At June 30, 2014, the fair value of the Company's four interest rate swaps, designated as cash flow hedges, being a liability of $51,000 (measured based on Level 2 of the fair value hierarchy), has been recorded in Trade accounts payable and provisions (December 31, 2013 - $166,000 asset) and a loss of $217,000 (June 30, 2013 - $580,000 gain) has been recognized in Other comprehensive income for the first six months of 2014. For the second quarter, 2014, a loss of $249,000 (Quarter 2, 2013 - $955,000 gain) was recognized in Other comprehensive income.

15. Commitment:

On acquisition of the Thomaston sawmill operations from Keadle Lumber Enterprises, Inc., the Company agreed to pay an additional US$7,000,000, contingent upon receipt of an upgrade to the air permit which will allow the Company to operate a second shift. Receipt of this approval was received on February, 28, 2014, with the payment to be made February 27, 2015. The liability, revalued at the quarter-end exchange rate to $7,473,000, is included in Trade accounts payable and provisions as at June 30, 2014.

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

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