International Forest Products Limited: Queensboro Closure Impacts Interfor's Q2 Results

VANCOUVER, BRITISH COLUMBIA, Jul 24, 2008 (Marketwire via COMTEX) -- IFSPA | Quote | Chart | News | PowerRating -- INTERNATIONAL FOREST PRODUCTS LIMITED ("Interfor" or the "Company") (TSX:IFP.A) reported a net loss of $29.4 million, or $0.62 per share, for the second quarter of 2008, compared to loss of $3.4 million or $0.07 per share for the second quarter of 2007.

The loss for the quarter includes restructuring costs of $33.0 million ($22.9 million or $0.49 per share, after tax) primarily relating to the permanent closure of the Company's Queensboro Sawmill Division, which was announced on July 8, 2008. The site is being actively marketed and proceeds are expected to more than offset the writedown taken for the permanent closure.

Before restructuring costs, Interfor's net loss for the second quarter amounted to $6.5 million or $0.14 per share.

EBITDA, adjusted to exclude one-time items and unrealized foreign exchange gains, was $1.9 million or 1.6% of sales in the second quarter.

Included in the second quarter loss was $0.5 million ($0.4 million or $0.01 per share, after tax) in continuing costs associated with the Queensboro plant over and above the restructuring provision and $2.2 million ($1.6 million or $0.03 per share, after tax) in costs associated with the Grand Forks and Castlegar operations acquired from Pope & Talbot, Inc. ("P&T") on April 30, 2008, but which remained curtailed following the acquisition.

Interfor's loss in the second quarter reflects lower earnings from the Company's B.C. coastal operations, primarily as a result of an increase in inventory levels following the resumption of logging activity in the spring. The difference vis-a-vis the first quarter was magnified by the lagged effect of the 2007 coastal industry work stoppage which resulted in higher-than-normal year-end log inventories and a greater-than-normal earnings' contribution in the first quarter as those inventories were drawn down. Lower prices for some cedar products and reduced activity in Japan, along with higher stumpage rates, further impacted the Company's results in the second quarter.

The performance of the Company's commodity operations improved in the second quarter as prices increased on most product lines.

In the quarter, SPF 2X4 prices increased 14% to US$232 per mfbm compared to US$203 per mfbm in the first quarter, while the Random Lengths Composite Index increased 9% to US$266 compared with US$244 per mfbm in the previous quarter.

Interfor continued to proactively manage production levels in the second quarter in the face of weak market demand. Lumber production amounted to 128 million board feet compared to 104 million board feet in the first quarter of 2008. Sales were 125 million board feet compared with 113 million board feet in the first quarter.

Cash flow from operations in the second quarter was $6.2 million after changes in working capital were considered.

After taking account of capital spending and the P&T acquisition, the Company ended the quarter with net debt of $60.5 million, or 13.0% of invested capital.

Good progress was made on the Adams Lake project in the second quarter. Construction is approximately 60% complete and is on-schedule and on-budget. The mill is expected to commence start-up procedures in the fourth quarter of 2008.

The U.S. housing market is expected to remain soft through the balance of 2008 as the pace of sales remains slow. Commodity prices have weakened in recent weeks and remain below breakeven levels on most items. Prices for cedar in the domestic market have softened and are likely to remain slow through the summer. Offshore markets for high grade items remain steady while the outlook for pine specialties is mixed. The pace of activity in Japan has slowed in recent months as the economy is impacted by the slowdown in the U.S. and by higher prices for most types of commodities.

In spite of the weak market environment, Interfor continues to pursue opportunities to enhance long-term value. Earlier today, the Company entered into an agreement with Portac, Inc. ("Portac") to acquire its operations on the Olympic Peninsula in Washington State for US$28.25 million plus an amount for working capital. Interfor has bank facilities in place to fund the acquisition. The agreement with Portac also provides Interfor with an option to pay a portion of the purchase price in Interfor Class A Subordinate Voting shares, to a maximum of 2.3 million shares. The Portac assets include a sawmill and planer mill with production capacity of approximately 145 million board feet per year.

"The Portac mill is an excellent fit with our operations in the area," said Duncan Davies, Interfor's President and C.E.O. "The mill produces dimension products and small timbers in lengths up to 20 feet which will nicely complement our product mix and presence in the Puget Sound market."

The Portac acquisition is in line with the Company's strategy of building a diversified geographic base of operations and will bring Interfor's production capacity in the U.S. Pacific Northwest to 670 million board feet on an annual basis. The purchase price is equivalent to US$195 per mfbm of annual capacity and represents an enterprise value multiple of 1.7 times peak EBITDA (2004/5).

Interfor has projected annual synergies from the acquisition in the range of US$1 to 2 million per year from a combination of reduced administrative expenses and improved operating efficiency.

The transaction is subject to customary closing conditions and scheduled to close on September 30, 2008.

FORWARD LOOKING STATEMENTS

This press release contains statements that are forward-looking in nature. Such statements involve known and unknown risks and uncertainties that may cause the actual results of the Company 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 the Company's Annual Statutory Report.

ABOUT INTERFOR

Interfor is one of the Pacific Northwest's largest producers of quality wood products. The Company has operations in British Columbia, Washington and Oregon, including two sawmills in the Coastal region of British Columbia, three in the B.C. Interior, one in Washington and two in Oregon. Additional information relating to the Company and its operations, including Interfor's Annual Statutory Information for 2007, can be found on its website at www.interfor.com and or on SEDAR at www.sedar.com.

There will be a conference call on Friday, July 25, 2008 at 8:00 AM (Pacific Time) hosted by INTERNATIONAL FOREST PRODUCTS LIMITED for the purpose of reviewing the Company's release of its Second Quarter, 2008 Financial Results.

The dial-in number is 1-866-400-3310. The conference call will also be recorded for those unable to join in for the live discussion, and will be available until August 8, 2008. The number to call is 1-866-245-6755 Passcode 197169.

For further information regarding the Portac acquisition:

Ric Slaco

Vice President and Chief Forester

(604) 689-6843

International Forest Products Limited

Second Quarter Report

For the three and six months ended June 30, 2008

Management's Discussion and Analysis

Dated as of July 24, 2008

This Management's Discussion and Analysis ("MD&A") provides a review of Interfor's financial performance for the three and six months ended June 30, 2008 relative to 2007, the Company's financial condition and future prospects. The MD&A should be read in conjunction with the interim Consolidated Financial Statements for the three and six months ended June 30, 2008 and 2007, and Interfor's Annual Information Form, Consolidated Financial Statements and Annual MD&A for the years ended December 31, 2007 and 2006 filed on SEDAR at www.sedar.com. The financial information contained in this MD&A has been prepared in accordance with Canadian generally accepted accounting principles ("GAAP"). In this MD&A, reference is made to EBITDA and Adjusted EBITDA. EBITDA represents earnings before interest, taxes, depletion, amortization, restructuring costs, other foreign exchange gains and losses, and write-downs of property, plant, equipment and timber ("asset write-downs"). Adjusted EBITDA represents EBITDA adjusted for U.S. duty refunds, net, and other income. The Company discloses EBITDA as it is a measure used by analysts and Interfor's management to evaluate the Company's performance. As EBITDA is a non-GAAP measure, it may not be comparable to EBITDA calculated by others. In addition, as EBITDA is not a substitute for net earnings, readers should consider net earnings in evaluating the Company's performance.

Unless otherwise noted, all financial references in this MD&A are in Canadian dollars.

References in this MD&A to "Interfor" and the "Company" mean International Forest Products Limited, together with its subsidiaries.

Forward Looking Statements

This report contains statements that are forward looking in nature. Such statements involve known and unknown risks and uncertainties that may cause the actual results of the Company 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 the Company's Annual Report.

Review of Operating Results

Overview

Interfor recorded a net loss of $29.4 million, or $0.62 per share for the second quarter of 2008, and a net loss for the six months ended June 30, 2008 of $30.5 million, or $0.65 per share. This compares to a net loss of $3.4 million, or $0.07 per share, for the same quarter in 2007 and a net loss of $2.8 million, or $0.06 per share, for the six months ended June 30, 2007.

EBITDA and Adjusted EBITDA for the second quarter of 2008 were $2.5 million and $1.9 million, respectively, compared to $14.5 million and $12.6 million, for the second quarter of 2007. EBITDA and adjusted EBITDA for the first half of 2008 were $11.0 million and $10.4 million, respectively, compared to $27.5 million and $23.4 million for the same period in 2007.

Before restructuring costs, foreign exchange gains (losses) and other one-time items, the Company's net loss for the second quarter, 2008, was $7.1 million after-tax, or $0.15 per share, as compared to a loss of $0.3 million after-tax, or $0.01 per share in the second quarter, 2007. The losses for the first half of 2008, adjusted for restructuring costs, foreign exchange gains (losses) and other one-time items totalled $6.4 million after-tax, or $0.14 per share, as compared to $0.1 million after-tax, or $0.00 per share for the first half of 2007.

Included in the second quarter results of 2008 were $0.5 million ($0.4 million after-tax, or $0.01 per share) in continuing costs associated with the Queensboro sawmill in excess of the restructuring provision, and $2.2 million ($1.6 million after-tax, or $0.03 per share) for the first half of 2008. In addition, the second quarter 2008 results included $2.2 million ($1.5 million after-tax, or $0.03 per share) in costs associated with the Grand Forks and Castlegar sawmills purchased from Pope & Talbot, Inc. ("P&T") on April 30, 2008. These mills remain curtailed following the acquisition, and the Queensboro mill is permanently shutdown.

Interfor's loss in the second quarter reflects lower earnings from the Company's B.C. coastal operations, primarily as a result of an increase in inventory levels following resumption of logging activity in the spring. The difference vis-a-vis the first quarter was magnified by the lagged effect of 2007 coastal industry work stoppage which resulted in higher-than-normal year-end log inventories and a greater-than-normal earnings contribution in the first quarter as those inventories were drawn down. Lower prices for some cedar products and reduced activity in Japan, along with higher stumpage rates, further impacted the Company's results in the second quarter.

North American structural lumber prices were depressed through the first quarter of 2008 and strengthened slightly during the second quarter as markets responded to the reduced supply resulting from production curtailments taken by North American mills in the first quarter. In comparison to the same periods of the previous year, depressed prices and a weaker U.S. dollar impacted sales realizations and inventory valuations in the second quarter and first half of 2008. Seasonally adjusted U.S. housing starts in June 2008 were down 26.9% year-over-year.

Production in the Company's commodity operations was proactively curtailed in the first quarter of 2008, and continued into the second quarter, but slight improvements in pricing justified the operation of most mills on a one shift basis throughout the second quarter.

In all areas, the focus is on inventory management.

Sales

Lumber shipments were down 144.6 million board feet, or 53.6%, for the second quarter of 2008 compared to the same quarter of 2007, and down 275.3 million board feet, or 53.6% for the first half of 2008 compared to the first half of 2007, reflecting lower operating rates and the permanent closure of Queensboro. Relative to the same periods in 2007, unit lumber sales values increased by $127 per mfbm, or 24.0%, for the quarter and $138 per mfbm, or 26.2%, for the six months, resulting from a change in the sales mix to higher percentage of higher-value cedar and Japanese hemlock product. The Canadian dollar was up 9 cents on average, or 8.0%, relative to its U.S. counterpart compared to the second quarter of 2007, and 13 cents on average, or 11.3%, compared to the first half of 2007.

In comparison to the same periods of 2007, log sales were down $7.5 million, or 22.7%, for the second quarter, and $4.0 million, or 7.5%, in the first half of 2008, with higher sales volumes of lower quality logs to reduce and manage inventories and meet the demand for pulp logs. The average sales price declined to $79 per cubic metre in the second quarter of 2008, as compared to $101 per cubic metre for the second quarter of 2007 and $77 per cubic metre in the first half of 2008, as compared to $97 per cubic metre for the first half of 2007.

Pulp chip and other by-product revenues for the second quarter of 2008 were down $9.7 million, or 56.8%, compared to the second quarter of 2007, and down $20.2 million, or 61.1%, for the first half of 2008 compared to the first half of 2007, with sales volumes down significantly due to the mill curtailments. Relative to the same periods in 2007, average chip prices were down $7 per mfbm, or 13.0%, for the second quarter of 2008, and $11 per mfbm, or 20.0%, for the first half of 2008.

Operating Costs

Production costs for the second quarter of 2008 were down $62.0 million, or 35.9%, and $105.3 million, or 33.2%, for the first half of 2008, compared to the same periods in 2007, substantially as a result of market curtailments and the permanently closed Queensboro operation - lumber production was down 142 million board feet, or 52.6% for the second quarter, 2008 compared to the second quarter, 2007, and down 286 million board feet, or 55.2% for the first half of 2008 compared to the first half of 2007. Weaker demand for logs in the Pacific Northwest resulted in lower log prices for purchased logs.

Compared to the same periods in 2007, B.C. log production increased by 53,000 cubic metres, or 8.5%, in the second quarter of 2008 and 97,800 cubic metres, or 9.9%, in the first half of 2008, with a substantial portion harvested through heli-logging which resulted in higher logging costs. Also included in production costs were costs related to the acquired Grand Forks and Castlegar mills which have been curtailed since acquisition on April 30, and continuing costs in excess of the restructuring provision for the permanently closed Queensboro mill.

The Canada/U.S. lumber export tax remained at 15% through the first half of 2008. Export taxes totalled $1.2 million for the second quarter, 2008, compared to $3.0 million for the second quarter, 2007, and $2.1 million for the first half of 2008, compared to $6.2 million for the first half of 2007. These declines were due to a drop of 36 million board feet in shipments to the U.S. for the second quarter, 2008, and 78 million board feet for the first half, 2008 compared to the same periods of the previous year. Export taxes were also impacted by the strengthening Canadian dollar.

Selling and administrative costs for the second quarter of 2008 remained constant compared to the second quarter of 2007, as did the costs for the first half of 2008 compared to the first half of 2007. The Company recorded long term incentive compensation ("LTIC") recovery of $0.1 million for the second quarter of 2008, reflecting a decline in the Company's share price over the period. For the first half of 2008, the LTIC recovery totalled $0.4 million, again reflecting a year-to-date decline in the share price. For the second quarter of 2007, the Company recorded a LTIC expense of $2.8 million and $4.8 million for the first half of 2007.

Amortization and depletion expense for the second quarter of 2008 was down $3.1 million, or 18.9% compared to the same quarter of 2007 and down $6.1 million, or 21.6% for the first half of 2008, compared to the same half of 2007, primarily as a result of lower operating rates for the mills. In the second quarter, 2008, reduced amortization and depletion expense was offset in part by increased road amortization in Coastal Woodlands resulting from increased logging activity.

Restructuring costs totalled $33.0 million in the second quarter of 2008, compared to $1.4 million in the second quarter of 2007, and $35.2 million in the first half of 2008, compared to $1.6 million in the first half of 2007. On July 8, 2008, the Company announced the permanent closure of the Queensboro sawmill located in New Westminster, B.C., following more than a year of continuous curtailment. During the curtailment period the majority of the mill's hourly employees accepted the Company's offer of voluntary severance. The remaining employees will receive severance following the effective date of the closure. For the second quarter, 2008, severance costs total $2.1 million, and $3.9 million for the first half of 2008. In addition to severance costs, in the second quarter, 2008, the Company accrued costs of $1.0 million to remediate the mill site in preparation for sale, and took a provision of $29.8 million to adjust the carrying value of plant and equipment at the site to expected recovery amounts. Equipment at the site will be redeployed to other Company sites or sold.

Cushman & Wakefield LePage has been retained to market the Queensboro site, and proceeds are expected to more than offset the writedown taken for the permanent closure. The Queensboro site has been classified as held for sale on the Balance Sheet as the expectation is that the property will sell prior to the end of the year.

Additional severance costs arising from the permanent closure of the Albion remanufacturing operation located in Maple Ridge, B.C. and other restructuring total $0.1 million for the second quarter of 2008, and $0.5 million for the first half of 2008.

Interest, Other Foreign Exchange Gain (Loss), Other Income

For the second quarter of 2008, net interest expense was $0.8 million, compared to the net interest income of $0.5 million in the same quarter of 2007. For the first half of 2008, net interest expense was $1.2 million, compared to the net interest income of $1.4 million for the first half of 2007. Investment of significant cash balances retained from the U.S. duty refunds received in late 2006, generated interest income in the first two quarters of 2007. These cash balances have since been drawn down. Other foreign exchange gains were $0.4 million for the three months ended June 30, 2008 and a negligible loss for the first half of 2008. This compares to a loss of $5.3 million for the second quarter of 2007, and a loss for the first half of 2007 of $6.5 million, which arose from the impact of the stronger CAD$ on $U.S. cash balances held after receipt of the U.S. duty refund.

The Company reported $0.6 million in Other income from net compensation received under the Forest Revitalization Act and gains on disposal of surplus equipment for the second quarter and first half of 2008. This compares with $1.9 million generated from gains on disposal of surplus property, plant and equipment in the second quarter of 2007 and $4.1 million in the first half of 2007 which included disposal of surplus assets and the Company's interest in Tree Farm Licence 54.

Cash Flow and Financial Position

Cash generated by the Company from operations, after changes in working capital, was $6.2 million for the second quarter of 2008, compared to cash used of $6.3 million for the second quarter of 2007. The increase was due to reduced investment in working capital as a result of mill curtailments, offset by lower earnings and the seasonal build-up of inventories over the quarter. In addition, the Company received an income tax refund of $13.3 million on the filing of its 2007 income tax returns. For the six months ended June 30, 2008 the Company generated $30.2 million cash from operations compared to cash used of $34.3 million in the first six months of 2007. The increase was principally the result of the payment in 2007 of the Softwood Lumber Agreement special charge liability of $24.4 million and income tax of $23.3 million offset by lower earnings and less working capital utilization due to curtailments as well as receipt of income tax refunds of $13.3 million in the first half of 2008.

Capital expenditures for the second quarter of 2008 were $21.0 million, excluding changes in amounts accrued, and $34.7 million year-to-date (Quarter 2, 2007 - $16.8 million; first half, 2007 - $33.2 million). Spending in the current quarter consisted of $13.3 million on the new Adams Lake sawmill, $1.4 million on other high-return discretionary projects, $0.6 million on maintenance projects, $0.5 on land development at Queensboro to prepare the site for sale and $5.3 million on roads. Construction of the new sawmill at Adams Lake remains on budget and on schedule for start-up in the fourth quarter of 2008.

On April 25, 2008, the Company renewed its existing Canadian operating line of credit for one year, and increased it from $40.0 million to $100.0 million. The Company's existing Canadian revolving term line of credit ("Revolving Line") increased from $10.0 million to $115.0 million, with $55.0 million of the Revolving Line made available on April 25, 2008, and the remainder of $60.0 million made available on April 30, 2008, when the acquisition of the P&T sawmill and timber assets completed. The Revolving Line matures on April 24, 2011.

The maturity date of the U.S. operating line of credit was extended to August 1, 2008. The Company also received a commitment from its lender to extend the maturity date of the U.S. operating line to April 24, 2009 and Interfor has provided a parent guarantee on the line.

For all lines, the terms and conditions remain unchanged except for an increase in the interest rate margins.

On April 30, 2008, the Company concluded the acquisition of the P&T Castlegar, B.C. and Grand Forks, B.C. sawmills, related timber harvesting rights and other related assets. To acquire these assets, the Company paid $49.4 million. See "Acquisition of P&T's Mills and Woodlands" below for further discussion.

To fund the P&T transaction and the Adams Lake expansion, the Company utilized cash on hand and the Revolving Line and as at June 30, 2008, the Revolving Line was drawn by $28.0 million. At June 30, 2007 there were no drawings under this Revolving Line.

As part of the P&T asset purchase, the Company had paid a US$8.8 million interest-bearing deposit held in escrow in respect of the transaction. With accumulated interest, the deposit totalled US$9.0 million and was used to partially fund the acquisition when it completed on April 30, 2008.

There were no shares purchased under the Company's Normal course Issuer Bid in the second quarter of 2008 or the first half of 2008 (Quarter 2, 2007 - 367,600 Class A shares at a cost of $3.3 million; first half of 2007 - 714,600 Class A shares at a cost of $6.0 million), nor were there any shares issued under the Company's share option plan (Quarter 2, 2007 - 121,340 Class A shares for proceeds of $0.7 million; first half of 2007 - 179,280 Class A shares for proceeds of $0.8 million).

At June 30, 2008, the Company had cash and cash equivalents of $3.6 million. After deducting the Company's US$ Non-Revolving Line of $35.4 (US$35.0) million, the Revolving Line of $28.0 million, and bank indebtedness the Company ended the quarter with net debt of $60.5 million or 13.0% of invested capital. This compares to a net cash balance of $44.5 million or (10.8%) of invested capital at June 30, 2007.

Selected Quarterly Financial Information <table> Quarterly Earnings Summary(4) 2008 2007 2006 ------------------------------------------------------ Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 ------------------------------------------------------ (millions of dollars except share and per share amounts) Sales - Lumber 82.2 76.2 70.7 93.2 143.0 127.5 120.5 153.9 - Logs 25.7 30.9 35.6 30.3 33.2 19.4 32.6 31.4 - Wood chips and other by-products 7.4 5.5 7.2 10.0 17.1 16.0 12.1 11.3 - Other 2.1 1.8 1.9 2.0 2.1 1.7 9.3 12.6 ------------------------------------------------------ Total Sales 117.4 114.4 115.4 135.5 195.4 164.6 174.5 209.2 ------------------------------------------------------ Operating earnings (loss) before U.S. duty refunds, net, restructuring costs and asset write- downs (11.8) (1.3) (15.3) (4.6) (3.5) (1.8) (2.4) - Operating earnings (loss) (44.8) (3.5) (15.7) (4.6) (4.9) (2.1) 94.5 - Net earnings (loss) (29.4) (1.1) (8.9) (1.6) (3.4) 0.6 77.2 1.6 Net earnings (loss) per share - basic (0.62) (0.02) (0.19) (0.03) (0.07) 0.01 1.60 0.03 - diluted (0.62) (0.02) (0.19) (0.03) (0.07) 0.01 1.58 0.03 EBITDA(3) 2.5 8.5 (4.6) 8.9 14.5 13.0 115.0 14.5 Cash flow from operations per share(1) (0.06) 0.22 (0.06) 0.10 0.12 0.37 1.82 0.29 Shares outstanding - end of period (millions)(2) 47.1 47.1 47.1 47.1 47.6 47.8 48.1 48.3 - weighted average (millions) 47.1 47.1 47.1 47.4 47.8 48.0 48.2 48.4 Adjusted EBITDA(3) 1.9 8.5 (4.7) 7.2 12.6 10.8 11.5 13.9 1 Cash generated from operations before taking account of changes in operating working capital. 2 As at July 23, 2008, the number of shares outstanding by class are: Class A Subordinate Voting shares - 46,089,076 Class B Common shares - 1,015,779, Total - 47,104,855. 3 EBITDA represents earnings before interest, taxes, depletion, amortization, restructuring costs, other foreign exchange gains and losses, and asset write-downs. The Company discloses EBITDA as it is a measure used by analysts to evaluate the Company's performance. As EBITDA is a non-GAAP measure, it may not be comparable to EBITDA calculated by others. In addition, as EBITDA is not a substitute for net earnings, readers should consider net earnings in evaluating the Company's performance. Adjusted EBITDA represents EBITDA adjusted for U.S. duty refunds, net, and other income. 4 Amounts may not add due to rounding. EBITDA and Adjusted EBITDA can be calculated from the Statements of Operations as follows: 2008 2007 2006 ------------------------------------------------------ Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 ------------------------------------------------------ (millions of dollars) Net earnings (loss) (29.4) (1.1) (8.9) (1.6) (3.4) 0.6 77.2 1.6 Add: Income taxes (recovery) (14.6) (2.5) (7.1) (1.8) (4.5) (0.3) 38.5 (1.3) Interest expense (income) 0.8 0.4 0.2 (0.1) (0.5) (0.9) 0.5 0.9 Interest income on U.S. duty refund, net of special charge - - - - - - (12.7) - Depletion and amortization 13.1 9.1 10.7 11.7 16.2 12.2 13.6 13.4 Other foreign exchange (gains) losses (0.4) 0.4 0.2 0.7 5.3 1.1 (2.1) - Restructuring costs, asset write-downs and other 33.0 2.2 0.3 - 1.4 0.3 - - ------------------------------------------------------ EBITDA 2.5 8.5 (4.6) 8.9 14.5 13.0 115.0 14.5 Deduct: U.S. duty refunds, net - - - - - - 96.9 - Other income 0.6 - 0.2 1.7 1.9 2.2 6.6 0.6 ------------------------------------------------------ Adjusted EBITDA 1.9 8.5 (4.7) 7.2 12.6 10.8 11.5 13.9 ------------------------------------------------------ Volume and Price Statistics 2008 2007 2006 ------------------------------------------------------- Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 ------------------------------------------------------- Lumber sales (million fbm) 125 113 161 196 270 244 225 299 Lumber production(1) (million fbm) 128 104 150 187 269 249 222 292 Log sales(2) (thousand cubic metres) 312 399 382 315 319 207 381 358 Log production(2) (thousand cubic metres) 679 411 373 401 626 366 616 707 Average selling price - lumber(3) ($/thousand fbm) $658 $672 $441 $476 $530 $522 $534 $515 Average selling price - logs(2) ($/cubic metre) $ 79 $ 75 $ 91 $ 95 $101 $ 91 $ 85 $ 87 Average selling price - pulp chips ($/thousand fbm) $ 47 $ 41 $ 37 $ 43 $ 54 $ 56 $ 49 $ 35 1 Excludes lumber produced on a custom cutting basis for customers who have previously purchased the logs 2 B.C. operations 3 Gross sales before duties and export taxes

</table>

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 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. Sawmill operations are less seasonal than logging operations but do depend on the availability of logs from the logging operations. In addition, the market demand for lumber and related products is generally lower in the first quarter due to reduced construction activity, which increases during the spring, summer and fall.

Excluding the impact of the U.S. duty refunds in the fourth quarter of 2006, the decrease in operating earnings for the seven most recent quarters related primarily to weak U.S. structural lumber markets, and the stronger Canadian dollar. For the third and fourth quarters of 2007, strike action also contributed to lower reported operating earnings. For the second quarter of 2008, the permanent closure of the Queensboro sawmill site had a significant impact on operating results, and the acquisition of the curtailed Grand Forks and Castlegar mills had a lesser impact. These factors contributed to lower operating rates and lumber sales realizations in the applicable periods.

Acquisition of P&T's Mills and Woodlands

On November 19, 2007, the Company and P&T entered into an Asset Purchase Agreement ("P&T APA"), as amended, for the acquisition of two southern B.C. interior sawmills and their related timber tenures and one sawmill in Spearfish, South Dakota. Subsequently, the Company assigned the right to purchase the Spearfish, South Dakota sawmill to Neiman Enterprises, Inc. ("Neiman"), a company based in Wyoming.

On April 30, 2008, the Company concluded the acquisition of the Castlegar, B.C. and Grand Forks, B.C. sawmills, related timber harvesting rights and other related assets and Neiman concluded their acquisition of the Spearfish sawmill and related assets.

To acquire these assets, the Company paid $49.4 million, of which $9.0 million was funded through the deposit held in escrow, $17.7 million was financed through the Revolving Line, and the balance of $22.7 million through cash on hand. Amounts paid in US$ were translated to CAD$ at the April 29, 2008 rate of US$0.9882 : CAD$1.00.

The total consideration and purchase price allocation are preliminary and subject to adjustment in accordance with the P&T APA and further refinement of fair value allocations. A portion of the purchase price paid has been placed in escrow and the Company expects some amount to be returned to the Company upon determination of the adjustment amounts or the obtaining of certain authorization in accordance with the P&T APA. The amount to be returned cannot be determined as it is subject to either the agreement of the Company and P&T, or the determinations of an independent accounting firm. The total consideration and purchase price will be adjusted once these amounts have been determined.

The assets acquired include manufacturing facilities, timber harvesting rights and working capital. The Company assumed certain liabilities of P&T including pension and other employee related liabilities. P&T compensated the Company for the future management of certain of these liabilities, including forestry related obligations, resulting in the transfer of portions of these liabilities to the Company at closing.

Work has been initiated on a number of opportunities which have been identified to improve the financial performance of the mills through improvements in operational efficiency and other non-capital initiatives, and other cost savings that will be realized through high-return capital projects.

Agreement to Purchase Portac, Inc. Assets

On July 24, 2008, the Company entered into an agreement with Portac, Inc. ("Portac"), a subsidiary of Mitsui U.S., Inc., to acquire its operations on the Olympic Peninsula in Washington State. The Portac assets include a sawmill and planer mill with production capacity of 145 million board feet per year. The purchase price is US$28.25 million plus an amount for working capital. Interfor has existing bank facilities in place to fund the acquisition, but has an option to pay up to US$15.25 million of the purchase price in Class A Subordinate Voting shares of Interfor to a maximum of 2.3 million shares. The transaction is subject to customary closing conditions and is scheduled to close on September 30, 2008.

The Portac mill is an excellent fit with existing Interfor operations at Port Angeles, producing dimension products and small timbers in lengths up to 20 feet which complement Interfor's product mix and presence in the Puget Sound market. The Portac acquisition is in line with the Company's strategy of building a diversified geographic base of operations and will bring Interfor's production capacity in the U.S. Pacific Northwest to 670 million board feet on an annual basis.

Agreement to Purchase Kamloops Timber Tenure

On February 18, 2008, the Company reached an agreement to acquire a timber tenure in the Kamloops region currently owned by Weyerhaeuser Company Limited having an Allowable Annual Cut (AAC) of approximately 356,000 cubic metres. The tenure is expected to benefit Interfor's sawmill at Adams Lake by strengthening Interfor's long term timber supply in the region and helping to offset anticipated declines in future supply as a result of the Mountain Pine Beetle infestation.

The transaction is subject to various regulatory reviews and is expected to close before the end of 2008.

Accounting Policy Changes

On December 1, 2006, the Accounting Standards Board of the Canadian Institute of Chartered Accountants ("CICA") issued four new accounting standards, Handbook Section 1535, Capital Disclosures, Handbook Section 3031, Inventories, Handbook Section 3862, Financial Instruments - Disclosures, and Handbook Section 3863, Financial Instruments - Presentation. The Company has adopted these new standards effective January 1, 2008. The adoption of these new standards had no financial impact on the consolidated financial statements.

Section 1535 specifies the disclosure of the Company's objectives, policies and processes for managing capital, including a description of what components of liabilities and shareholders' equity the Company defines as capital and their balances; and the nature of any externally imposed capital restrictions, how those are managed, and the consequence of any non-compliance, if any.

Section 3031 provides significantly more guidance of the measurement of inventories, with an expanded definition of cost, and the requirement that inventory must be measured at the lower of cost and net realizable value. In addition, the section has additional disclosure requirements, including accounting policies, carrying values, and the amount of any inventory writedowns.

Sections 3862 and 3863 replaced Handbook Section 3861, Financial Instruments - Disclosure and Presentation, revising and enhancing its disclosure requirements to provide additional information on the nature and extent of risks arising from financial instruments to which the Company is exposed and how it manages those risks.

Seaboard Shipping Company Limited ("Seaboard"), an equity investment of the Company, recently adopted the deferral method of accounting for dry-dock activities whereby actual costs incurred are deferred and amortized on a straight-line basis over the period until the next scheduled dry-dock activity. Previously, dry-dock activities were accounted for using the accrue-in-advance method. In accordance with CICA Handbook Section 1506, Accounting Changes, Seaboard adopted this policy retrospectively, resulting in the restatement of prior years' results.

As the investment in Seaboard is accounted for using the equity method, the Company has recorded its $2.4 million share of the impact of the restatement as an increase in the carrying value of its investment in Seaboard and an increase in retained earnings. There was no effect on net earnings (loss) previously reported for any of the periods presented.

Future Accounting Policy Changes

In 2007, the Canadian Accounting Standards Board announced that Canadian generally accepted accounting principles ("Canadian GAAP") will cease to exist for all publicly accountable enterprises targeted for fiscal years commencing January 1, 2011. From that date onward, publicly traded companies and certain other publicly accountable enterprises will be required to report under International Financial Reporting Standards ("IFRS"). The impact of the transition to IFRS on the Company's consolidated financial statements has not been determined.

In February, 2008, the CICA issued a new accounting standard, Handbook Section 3064, Goodwill and Intangible Assets. This section replaces CICA Handbook Section 3062, Goodwill and Intangible Assets, and establishes revised standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets. The new standard also provides guidance for the treatment of various preproduction and start-up costs and requires that these costs be expensed as incurred. This standard will be applicable to the Company for annual and interim accounting periods beginning on January 1, 2009.

The Company is still evaluating the impact of this standard on its consolidated financial statements.

Controls and Procedures

There were no changes in the Company's internal controls over financial reporting ("ICFR") during the quarter ended June 30, 2008 that have materially affected, or are reasonably likely to materially affect, the Company's ICFR.

Critical Accounting Estimates

There were no material changes to the Company's critical accounting estimates during the quarter ended June 30, 2008. For a full discussion of critical accounting estimates, please refer to the Company's discussion in its Annual MD&A for the year ended December 31, 2007 as filed on SEDAR at www.sedar.com.

Outlook

The U.S. housing market is expected to remain soft through the balance of 2008 as the pace of home sales remains slow and unsold housing inventory remains high. Commodity prices have weakened in recent weeks and remain below breakeven levels on most items. Prices for cedar in the domestic market have softened and are likely to remain slow through the summer. Offshore markets for high grade items remain steady while the outlook for pine specialties is mixed. The pace of activity in Japan has slowed in recent months as the economy is impacted by the slowdown in the U.S. and by higher prices for most types of commodities.

Concerns over the health of the U.S. economy continues to impact currency markets, and thus the outlook for the CAD$ versus the US$ and Yen for 2008 remains volatile.

Stumpage rates on the B.C. Coast for the third quarter of 2008 are anticipated to decrease and coastal logging operations expect to take fire season shutdowns, but have sufficient inventories to carry the mills through the third quarter.

The Company will continue to regularly monitor the economics of affected operations and curtail production where necessary, with a focus to managing inventory levels.

Additional Information

Additional information relating to the Company and its operations can be found on its website at www.interfor.com and in the Annual Information Form and on SEDAR at www.sedar.com. Interfor's trading symbol on the Toronto Stock Exchange is IFP.A.

E. Lawrence Sauder Duncan K. Davies Chairman President and Chief Executive Officer CONSOLIDATED STATEMENTS OF OPERATIONS For the three and six months ended June 30, 2008 and 2007 (unaudited) -------------------------------------------------------------------------- 3 Months 3 Months 6 Months 6 Months (thousands of Canadian dollars June 30, June 30, June 30, June 30, except earnings per share) 2008 2007 2008 2007 -------------------------------------------------------------------------- Sales $ 117,404 $ 195,412 $ 231,778 $ 360,058 Costs and expenses: Production 110,484 172,487 211,851 317,175 Selling and administration 4,513 4,483 9,004 8,936 Long term incentive compensation expense (recovery) (102) 2,761 (361) 4,753 Export taxes 1,180 3,035 2,116 6,171 Amortization of plant and equipment 5,768 8,340 11,452 15,851 Depletion and amortization of timber, roads and other 7,339 7,828 10,788 12,525 ------------------------------------------------------------------------- 129,182 198,934 244,850 365,411 -------------------------------------------------------------------------- Operating loss before restructuring costs (11,778) (3,522) (13,072) (5,353) Restructuring costs (note 10) (33,009) (1,390) (35,249) (1,640) -------------------------------------------------------------------------- Operating loss (44,787) (4,912) (48,321) (6,993) Interest expense on long-term debt (700) (728) (1,218) (1,524) Other interest income (expense) (120) 1,201 31 2,884 Other foreign exchange gain (loss) 379 (5,328) (6) (6,477) Other income (note 9) 552 1,905 559 4,131 Equity in earnings of investee companies 608 (66) 1,275 367 -------------------------------------------------------------------------- 719 (3,016) 641 (619) -------------------------------------------------------------------------- Loss before income taxes (44,068) (7,928) (47,680) (7,612) Income taxes (recovery): Current (3,090) (1,719) (7,440) (1,625) Future (11,555) (2,780) (9,725) (3,155) -------------------------------------------------------------------------- (14,645) (4,499) (17,165) (4,780) -------------------------------------------------------------------------- Net loss $ (29,423) $ (3,429) $ (30,515) $ (2,832) -------------------------------------------------------------------------- -------------------------------------------------------------------------- Net earnings (loss) per share, basic and diluted (note 11) $ (0.62) $ (0.07) $ (0.65) $ (0.06) -------------------------------------------------------------------------- -------------------------------------------------------------------------- See accompanying notes to consolidated financial statements CONSOLIDATED STATEMENTS OF RETAINED EARNINGS For the six months ended June 30, 2008 and 2007 (unaudited) -------------------------------------------------------------------------- 6 Months 6 Months June 30, June 30, (thousands of Canadian dollars) 2008 2007 -------------------------------------------------------------------------- Retained earnings, beginning of year, as restated (note 2(d)) $ 170,584 $ 183,905 Net loss (30,515) (2,832) -------------------------------------------------------------------------- Retained earnings, end of period $ 140,069 $ 181,073 -------------------------------------------------------------------------- -------------------------------------------------------------------------- See accompanying notes to consolidated financial statements CONSOLIDATED STATEMENTS OF CASH FLOWS For the three and six months ended June 30, 2008 and 2007 (unaudited) -------------------------------------------------------------------------- 3 Months 3 Months 6 Months 6 Months June 30, June 30, June 30, June 30, (thousands of Canadian dollars) 2008 2007 2008 2007 -------------------------------------------------------------------------- Cash provided by (used in): Operating activities: Net earnings (loss) $ (29,423) $ (3,429) $ (30,515) $ (2,832) Items not involving cash: Amortization of plant and equipment 5,768 8,340 11,452 15,851 Depletion and amortization of timber, roads and other 7,339 7,828 10,788 12,525 Future income taxes (recovery) (11,555) (2,780) (9,725) (3,155) Other assets (268) (487) (297) 1,195 Reforestation liability (2,981) 1,123 (2,591) 1,264 Other long-term liabilities (71) (268) (116) 1,707 Share of earnings net (in excess) of cash distributions of investee company (608) 66 (1,275) 4,002 Write-down of plant and equipment 29,750 - 29,750 - Foreign exchange loss (gain) on translation of long term debt (382) (3,122) 675 (3,500) Other (594) (1,925) (622) (4,172) ------------------------------------------------------------------------- (3,025) 5,346 7,524 22,885 Cash generated from (used in) operating working capital: Accounts receivable (3,209) (12,774) 1,193 (9,107) Inventories (10,343) 1,576 3,250 (2,591) Prepaid expenses (1,378) (1,419) (1,168) (2,641) Accounts payable and accrued liabilities 15,130 3,564 14,764 (17,793) Income taxes 9,013 (2,933) 4,627 (25,405) -------------------------------------------------------------------------- 6,188 (6,640) 30,190 (34,652) Investing activities: Additions to property, plant and equipment (15,965) (7,716) (25,611) (18,446) Additions to deferred start-up costs - - - (959) Additions to logging roads and timber (5,257) (9,077) (7,897) (13,819) Proceeds on disposal of property, plant, equipment, timber and roads 837 2,598 865 6,386 Acquisition of Pope and Talbot sawmills and related timber assets (note 5) (49,418) - (49,418) - Deposit held in escrow for acquisition 9,007 - 8,943 - Investments and other assets 435 (103) 63 (566) -------------------------------------------------------------------------- (60,361) (14,298) (73,055) (27,404) Financing activities: Repurchase of share capital (note 8) - (3,310) - (5,997) Issuance of share capital (note 8) - 611 - 849 Increase (decrease) in bank indebtedness 682 - 682 (582) Additions to long-term debt 66,925 - 66,925 - Repayments of long-term debt (38,925) - (38,925) - ------------------------------------------------------------------------- 28,682 (2,699) 28,682 (5,730) Foreign exchange gain (loss) on cash and cash equivalents held in a foreign currency 591 (141) (62) 453 -------------------------------------------------------------------------- Decrease in cash and cash equivalents (24,900) (23,778) (14,245) (67,333) Cash and cash equivalents, beginning of period 28,450 105,616 17,795 149,171 -------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 3,550 $ 81,838 $ 3,550 $ 81,838 -------------------------------------------------------------------------- -------------------------------------------------------------------------- Supplementary disclosures Cash interest paid (received) $ 820 $ (473) $ 1,187 $ (1,360) Cash income taxes paid (received) (13,336) 778 (13,336) 23,250 -------------------------------------------------------------------------- -------------------------------------------------------------------------- See accompanying notes to consolidated financial statements CONSOLIDATED BALANCE SHEETS June 30, 2008 and 2007 (unaudited) and December 31, 2007 (audited) ------------------------------------------------------------------------- June 30, Dec. 31, June 30, (thousands of Canadian dollars) 2008 2007 2007 ------------------------------------------------------------------------- restated - restated - Assets note 2(d) note 2(d) Current assets: Cash and cash equivalents $ 3,550 $ 17,795 $ 81,838 Deposit (note 5) - 8,761 - Accounts receivable 36,091 37,172 58,937 Income taxes recoverable 4,211 8,838 - Inventories (note 6) 82,286 76,429 82,364 Prepaid expenses 7,859 6,267 6,848 Future income taxes 5,367 3,083 3,074 ------------------------------------------------------------------------ 139,364 158,345 233,061 Investments and other assets (note 2(d)) 14,624 12,270 11,065 Property, plant and equipment, net of accumulated amortization 302,131 300,150 295,702 Timber and logging roads, net of accumulated depletion and amortization 95,248 55,050 48,686 Goodwill and other intangible assets 13,078 13,078 13,131 Future income taxes 11,201 7,000 2,630 Long-lived assets held for sale 12,511 3,239 3,233 ------------------------------------------------------------------------- $ 588,157 $ 549,132 $ 607,508 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current liabilities: Bank indebtedness (note 7(a)) $ 682 $ - $ - Accounts payable and accrued liabilities 78,478 49,999 76,737 Income taxes payable - - 2,221 Future income taxes - - 2 ------------------------------------------------------------------------ 79,160 49,999 78,960 Reforestation liability, net of current portion 17,226 11,874 14,474 Long-term debt (note 7(b)) 63,371 34,696 37,289 Other long-term liabilities 13,032 8,859 10,309 Future income taxes 11,021 13,080 9,064 Shareholders' equity: Share capital (note 8) Class A subordinate voting shares 284,444 284,444 287,521 Class B common shares 4,080 4,080 4,080 Contributed surplus 5,408 5,408 6,137 Accumulated other comprehensive income (loss) (29,654) (33,892) (21,399) Retained earnings (note 2(d)) 140,069 170,584 181,073 ------------------------------------------------------------------------ 404,347 430,624 457,412 -------------------------------------------------------------------------- $ 588,157 $ 549,132 $ 607,508 -------------------------------------------------------------------------- -------------------------------------------------------------------------- Commitment and Contingencies (note 16) Purchase agreement (note 17) Subsequent event (notes 7(a) and 18) See accompanying notes to consolidated financial statements On behalf of the Board: E.L. Sauder H.C. Kalke Chairman Director CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) For the three and six months ended June 30, 2008 and 2007 (unaudited) -------------------------------------------------------------------------- 3 Months 3 Months 6 Months 6 Months June 30, June 30, June 30, June 30, (thousands of Canadian dollars) 2008 2007 2008 2007 -------------------------------------------------------------------------- Net loss $ (29,423) $ (3,429) $ (30,515) $ (2,832) Other comprehensive income (loss), net of income taxes (recovery): Net change in unrealized foreign currency translation gains (losses) (1,596) (13,978) 4,238 (15,038) -------------------------------------------------------------------------- Other comprehensive income (loss) (1,596) (13,978) 4,238 (15,038) -------------------------------------------------------------------------- Comprehensive loss $ (31,019) $ (17,407) $ (26,277) $ (17,870) -------------------------------------------------------------------------- -------------------------------------------------------------------------- See accompanying notes to consolidated financial statements CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) For the six months ended June 30, 2008 and 2007 (unaudited) -------------------------------------------------------------------------- 6 Months 6 Months June 30, June 30, (thousands of Canadian dollars) 2008 2007 -------------------------------------------------------------------------- Accumulated other comprehensive loss, beginning of year $ (33,892) $ (6,361) Other comprehensive income (loss) 4,238 (15,038) -------------------------------------------------------------------------- Accumulated other comprehensive loss, end of period $ (29,654) $ (21,399) -------------------------------------------------------------------------- -------------------------------------------------------------------------- See accompanying notes to consolidated financial statements

INTERNATIONAL FOREST PRODUCTS LIMITED

Notes to Unaudited Interim Consolidated Financial Statements

(Tabular amounts expressed in thousands except per share amounts)

Three months ended June 30, 2008 and 2007 (unaudited)

1. Significant accounting policies:

These unaudited interim consolidated financial statements include the accounts of International Forest Products Limited and its subsidiaries (collectively referred to as "Interfor" or the "Company"). These interim consolidated financial statements do not include all disclosures required by Canadian generally accepted accounting principles for annual financial statements, and accordingly, these interim consolidated financial statements should be read in conjunction with Interfor's most recent audited annual consolidated financial statements. These interim consolidated financial statements follow the same accounting policies and methods of application used in the Company's audited annual consolidated financial statements as at and for the year ended December 31, 2007, except for the new accounting policies adopted subsequent to that date, as discussed in Note 2.

2. Adoption of changes in accounting policies:

The Canadian Institute of Chartered Accountants ("CICA") issued four new accounting standards, which have been adopted, together with the change in accounting policy of an investee company, on January 1, 2008. These changes are described as follows:

(a) Capital disclosures:

CICA Handbook Section 1535, Capital Disclosures, specifies the disclosure of the Company's objectives, policies and processes for managing capital, including: a description of what components of liabilities and shareholders' equity the Company defines as capital, and their balances; and the nature of any externally imposed capital restrictions, how those are managed, and the consequence of any non-compliance, if any. Refer to Note 14 for additional disclosures.

(b) Inventories:

CICA Handbook Section 3031, Inventories, provides significantly more guidance on the measurement of inventories, with an expanded definition of cost, and the requirement that inventory must be measured at the lower of cost and net realizable value. In addition, the section has additional disclosure requirements, including accounting policies, carrying values, and the amount of any inventory writedowns.

Lumber inventories are valued at the lower of cost and net realizable value on a specific product basis. Cost is determined as the weighted average of cost of production on a three month rolling average, lagged by one month and adjusted for exceptional costs, as in the case of a curtailment.

Log inventories are valued at the lower of cost and net realizable value on a specific boom basis where logs are in boom form, or in aggregate on a species and sort basis where the logs do not exist in boom form. Cost for internally produced log inventories is determined as the weighted average of cost of logging on a twelve month rolling average, lagged by one month and adjusted for exceptional costs, as in the case of a curtailment. Log inventories purchased from external sources are costed at acquisition cost. Net realizable value of logs is based on either replacement cost or, for logs for which have been committ

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