Conifex Timber Inc. (CFF.TO) Earnings Call Transcript & Summary

Greetings, and welcome to the Conifex Timber Inc. Third Quarter 2025 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ken Shields, Chairman and CEO. Thank you, you may begin.

Okay. Well, good morning, everyone, and welcome to our call covering our third quarter and 9 months results for 2025. Our President and Chief Operating Officer, Andrew McLellan, on a lumber trade mission, and he's in Korea and with the difference in time zones and schedules, he's unable to join us. But Chief Financial Officer, Trevor Pruden, is here with me, and both of us look forward to responding to any questions shareholders and analysts may have after we run through these prepared remarks. Let's quickly deal with a housekeeping item. We will be making forward-looking statements and references to non-IFRS measures, and therefore, call your attention to the warning statement that are disclosed on Pages 1 and 2 of the MD&A that we released earlier this morning. In the third quarter of 2025, the negative EBITDA we reported of $16.5 million (sic) [ $16.6 million ] was impacted by a onetime noncash charge of $12 million for duty deposit underpayments on 2023 lumber exports to the U.S. Excluding this onetime item, our regular EBITDA was negative by just over $4.5 million after writing down our quarter end inventories by $1.2 million. After deducting the positive EBITDA we achieved in the opening 6 months of 2025, our regular EBITDA was negative by $2.8 million for the 9-month period. That year-to-date EBITDA loss represents a major improvement from the loss of $11.5 million we reported in the year earlier 9-month period. As many of you know, partway through the third quarter, most lumber producers in Canada were required to increase duty deposit rates on exports of lumber to the U.S. from 14.4% to 35.16%. In mid-October, an additional tariff of 10% was imposed, bringing the all-in rate for most companies to 45.16%. Through the first 6 months of 2025, our softwood lumber duty expenses totaled $4.8 million, which was equivalent to something like $63 per thousand board feet of lumber that we shipped in that first half of the year. In Q3, we moved a lot more money -- lumber into non-U.S. markets and contained our duty expenses to $3.3 million, which was $83 per thousand board feet. However, looking into Q4, it is quite possible that our duty and tariff expenses per thousand board feet of lumber produced and shipped could be about double the amount that we paid in the first half of the year. I'm sure all of you recognize that these increases in duties and tariffs represent daunting financial challenges for Canadian sawmillers. In the notes to our financial statements and our accompanying management's discussion and analysis document, you will note that we have been candid about the liquidity challenges our lumber business faces due to a much more punishing duty and tariff burden. Paying out additional cash to fund duty deposit increases at the same time, we have less cash coming in because lumber prices have softened means that cash losses in our industry are significant and adversely impacting liquidity. Against that backdrop, you would understand why we were pleased with the Prime Minister's August 5 announcement of a program to provide liquidity support to Canadian softwood lumber businesses impacted by current economic conditions. Over the past few weeks, we've learned more about the details on eligibility and funding time lines, we're convinced that the program has been specifically designed to help companies like Conifex fund operational cash flow deficit until lumber supply and demand are in better balance and lumber prices recover. When this occurs, SPF lumber price increases will enable us to recover a meaningful portion of the duties and tariffs that we're presently absorbing. Although we are encouraged by the discussions and progress we've had to date with financial advisers representing the Federal government, there's no guarantee that we will be successful attracting funds from the Federal government's $700 million softwood lumber guarantee program or any other program for that matter. Naturally, to mitigate cash losses and to preserve liquidity, we've implemented cost savings measures and have been deferring nonessential capital expenditures. The one capital project that we completed in the past few days was upgrading our sawmill capability to now produce 2x12 lumber compared to our previous maximum of 2x10. Historically, 2x12 lumber is less exposed to U.S. duties because more of the markets are in -- more of the customers are in duty-free locations. And 2x12 often trades at premiums of $100 and as much as $200 per thousand board feet for the prices paid for other dimensions of SPF lumber. So we now face highly unusual lumber market conditions. Subdued demand from the U.S. residential construction and repair and remodeling sectors has resulted in weaker lumber prices when duties and tariff costs have increased. As would be expected, we've been working collaboratively with our lenders to provide additional flexibility under our existing credit facility, including amending payment terms and amortization period. As we work with our lenders to identify our best path forward, there may be merit to temporarily adjust the scope and scale of certain activities when operating losses are significantly greater than shutdown costs. Our objective is to identify steps that we will take in the short term to ensure that we have sufficient funding available to us to sustain a two-shift operation once lumber prices return to more normal levels in 2026 and beyond. We wish to assure our employees and our stakeholders and shareholders that any actions that may be taken in the near term should be viewed as a measured strategic response to the current unsustainably high operating losses in our industry. They should not be viewed as a panicky reaction. Simply put, we plan to work with our current and future lenders to ensure that we have the financial capacity to support two-shift operations in the future as soon as lumber prices have normalized. Summing up to this point in our discussion, since the duty increase and tariff imposition were announced, lumber prices have fallen and many Canadian sawmills are presently incurring unaffordable cash operating losses. Additional production curtailments in our industry appear inevitable. When further curtailments take effect, we believe the forward-looking supply-demand balance for SPF lumber will favor SPF producers over customers and thereby support higher lumber prices. With the passage of time, we believe that the major portion of the duties and tariffs the U.S. Treasury collects will have been paid for by U.S. customers, not Canadian sawmillers. Since the U.S. accounts for 27% of global softwood lumber demand, but only 20% of global supply over the next decade and beyond, the U.S. demand will continue to be met by significant imports of SPF lumber from Canada and other countries. For Conifex to survive and thrive, it will be crucially important for us to demonstrate our ability to be a fully cost competitive lumber producer. At our Board meeting yesterday, we had a fulsome discussion about how our EBITDA per thousand board feet of lumber produced compares to other Canadian producers. We do not agree with published reports asserting that sawmills in the interior region of B.C. incur cash costs that are 20% or 25% higher than the cost incurred at sawmills in Ontario and Quebec. We are confident that our integrated sawmill complex in Mackenzie, B.C. is fully cost competitive with mills in Eastern Canada. We compared our Q3 results against a peer group company operating 4 sawmills in Ontario. Adjusting the peer group and our EBITDA losses for the onetime noncash duty underpayment indicate that the EBITDA losses at the Ontario mills were higher than ours by a bit more than $25 per thousand board feet of lumber produced and shipped. Based on this recent information and numerous other reasons that Trevor and I can review with you in the question period if you're interested, we believe that our integrated sawmill complex in Northern B.C. is fully competitive with other low-cost mills in Canada, and we further believe that our Mackenzie site is a favorable consideration for funding provided under government support program. So despite the immediate operational headwinds, we believe that our midterm outlook remains structurally positive. So against that backdrop, Trevor and I look forward to taking questions from people on the call, and we'll turn the call back to the operator. Thank you for your interest in Conifex.

[Operator Instructions] And it looks like there are no questions at this time. Therefore, I'll hand it back over to Ken Shields.

Okay. Well, thank you, and we thought that we put together a pretty comprehensive review of where we're at and where we're headed. And I know that some of you prefer to call directly with your questions, and we will definitely respond to them. So thank you for your interest in Conifex, and enjoy the rest of the day.

Thank you. And this concludes today's conference, and you may disconnect your lines at this time. Thank you for joining.