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

Good afternoon, ladies and gentlemen. Welcome to the Annual General Meeting conference call. I would now like to turn the meeting over to Mr. Ken Shields. Please go ahead, Mr. Shields.

Well, good afternoon, everyone. I'm Ken Shields, Chairman and CEO and President of Conifex, and in accordance with our bylaws, I will act as Chairperson. I will now call the meeting to order. Most of our shareholders today are joining us by teleconference instead of attending in person, and I'd like to thank those of you who have called in today. And I wish all of you could be attending in person and we all very much look forward to when our meeting format returns to a more conventional basis next year. I wanted to alert you that we've asked shareholders to submit their questions, and we've received 5 questions that we will address. But our plans are to go through the formal part of the meeting and once the meeting is adjourned, we'll respond to the 5 questions. I wish to appoint Jordan Neeser, our CFO and Secretary; Gary Gill of Sangra Moller as recording secretary; and Anita Basi of Computershare Investor Services as scrutineer. Turning to the notice of meeting, I have a copy of the notice calling this meeting and an affidavit of mailing by a senior representative of Computershare Trust Company of Canada. Such notice of meeting has been circulating and, accordingly, I will dispense with reading of the notice calling this meeting. In accordance with the Canadian Business Corporations Act, the notice of meeting and record date was also published in the Globe and Mail newspaper on May 4, 2020. The scrutineer report that I've been handed indicates that there are 31 shareholders present in person or by proxy, holding 18,785,710 shares, which represents approximately 39.85% of our 47,027,507 shares outstanding at the record date. In accordance with the bylaws, I declare that a quorum of shareholders is present and this meeting is regularly and duly called and constituted and ready for the transaction of business. I now propose to deal with the business described in our notice. The first item is the financial statements, and we've presented these for the financial year ended December 31, 2019, and the accompanying auditor's report. And all of you shareholders on the line will be well aware that these financial statements and auditor's report have been mailed to you. The next item of business is the election of directors. Ken Shields, David Roberts, Michael Costello, Janine North and Charles Miller are prepared to stand for election of directors and are being nominated for election. Each director will serve until the next AGM unless that director resigns or until the director sooner ceases to hold office. Pursuant to the advanced notice provision of our bylaws, there can be no further nominations put forward at this time. Accordingly, I declare nominations to be closed. I now make a motion for the election of the 5 nominees of directors on the following terms. Resolve that, each of the nominees be and are hereby elected directors of Conifex to hold office until the next AGM unless the director's office is earlier vacated in accordance with the articles or bylaws of the CBCA or unless he or she becomes disqualified to act as a director. We will conduct a vote by ballot with respect to this resolution. And I'm just about to receive the scrutineer's report. The ballots have been tallied and the results show that -- of the 18,785,000 shares, that every director received over 17.9 million shares in favor, and there was a range of 0.3% to 2.6% of the votes withheld for each director. So I declare that the motion approving the election of directors as carried. The next item is the appointment and compensation of our auditor. The Board wishes to reappoint PricewaterhouseCoopers for the ensuing year and that firm has consented to its reappointment. I will now make a motion that PricewaterhouseCoopers be appointed as auditor of Conifex for the ensuing year and that the Board be granted the authorization to fix the remuneration. Here, again, we'll conduct a vote by ballot. [Voting]

The ballots have been tallied -- pardon me, and the results show that 18,784,000 votes have been cast for the motion, and 1,700 votes have been withheld. So the auditor's appointment has been approved by 99.99%. Next, we will move on to the amendment to our long-term performance incentive plan. It's proposed that our plan be amended to increase the maximum number of shares available for issuance by 1.5 million shares. As a result, the aggregate number of shares available for issuance, all is set out in our management information circular, it indicates that for future grants we have 2,170,515 shares available. This resolution must be approved by a majority of the votes cast by shareholders present in person or by proxy. I now make a motion that the amendment to the plan be adopted and approved by the following resolution. Be it resolved as an ordinary resolution that, one, the long-term incentive plan be amended to increase the maximum number of shares for future issuance, pursuant to the grant of LTIP awards, by 1.5 million shares as set out in our circular; two, notwithstanding that this resolution has been duly passed by shareholders, the Board may revoke such resolution at any time before it is effective without further action by shareholders; and three, any one director or officer of our company be and is hereby authorized for and on behalf of the company to execute and deliver all documents and instruments and take such other actions as such director or officer may determine to be necessary or desirable to implement this resolution and the matters authorized thereby, such determination to be conclusively evidenced by the execution and delivery of any such documents or instruments and the taking of any such actions. We will conduct a vote by ballot with respect to this resolution. [Voting]

The scrutineer's report that I've just been handed indicates that there were 17.2 million shares in favor of the motion and 1.26 million shares against the motion, so it's approved by a little over 93%. I therefore declare the motion carried. If there is nothing else on the agenda for today's meeting, I now make a motion that the meeting be terminated. All present and in favor, signify by raising their hand. We have the unanimous show of hands here in the Sangra Moller boardroom. I declare the motion carried. This meeting is terminated. Thank you for your attendance. And now we will move on to what I'm sure more of you are interested in, which is the response to the questions that shareholders submitted for us to address at the meeting.

So I'm going to do the -- respond to the first question. And the first question relates to what our plans are for restarting our Mackenzie British Columbia sawmill complex. I think as most of you are aware that around the 6th of April, we discontinued our sawmilling operations at Mackenzie, B.C., and we've just made the decision to resume sawmill production on July 6. When we recommence our operations, we're going to run the mill on a 2-shift basis on a 5 days per week basis. And in Q1 of this year, we ran the mill on a 4 day per week basis. And of course, this has a disadvantage of spreading our fixed costs over a smaller base of production. So when we restart the mill, we will be operating it on the basis that achieves the lowest cash conversion cost per 1,000 board feet of production. Our restart has been justified by some improvements we've made in log affordability. Basically, we've had some positive relief on log cost, and we've got some access to better log quality. And of course, it's been motivated by the rapid improvement in cash lumber prices, which indicate that the site should be EBITDA positive based on our expectations that lumber prices will at least come in, in line with analyst estimates of $350 per 1,000 board feet U.S. plus for the benchmark prices. And somewhere between that low level and the current futures prices of around $425 per 1,000 board feet. So we're restarting on July 6. And in terms of order of magnitude, our lumber production will probably be around 50 million board feet in Q3 of this year and should be a tiny bit better in Q4 of this year. So that's the first question. The second question relates to whether we have any acquisitions or growth opportunities being considered at this time. And where we sit at this time is that we have a -- what we believe is a -- an attractive manufacturing base in Mackenzie, B.C. I doubt that -- I'll bet many of you study the characteristics of the various timber supply areas in British Columbia. But the Mackenzie timber supply area has the second harvest -- rather the second highest harvest level of any timber supply area in the province. It's got the third largest land base. So we think we've got a robust fiber supply, and we think there are opportunities to strengthen our manufacturing base at that site through capital improvements designed to improve our conversion efficiency and lower our converting costs. And some projects are potentially available to improve our log optimization and utilization. So we're not aware of there being any acquisition opportunities that have the same internal rates of return as these internal projects that we're planning to explore here now that we're back up and running. So that is clearly our immediate focus. Our corporate objective is to be a margin-focused lumber producer, and we think we've got considerable upside to improve the margins on the existing business before we look at other opportunities to do things. So that's my response to the second question. We'll now turn it over to Jordan to deal with the third question.

Thank you, Ken. The next question is, does the company use lumber futures in its business? Our response is that, yes, approximately 50% of our overall production is sold at or close to benchmark commodity pricing levels. And we have a corporate policy, which allows for hedging of up to 50% of this amount. And with the recent lumber market strength, we've taken the action to use futures to provide some price protection for our upcoming Q3 and Q4 production.

Well, thank you, Jordan. The next question picks up on some of the press in B.C., whereby British Columbia Hydro has declared a force majeure circumstance on certain independent power production facilities in B.C., and that triggered a question as to whether our facility has been subject to a force majeure initiative by BC Hydro. The short answer is, no, we have not had any force majeure threatened or intimated in any of our discussions with BC Hydro. Our operating history at Mackenzie is that we typically run our facility flat out through the late fall and through to around the middle or end of April. And then that's the time in B.C. when the snow melt kicks in and BC Hydro has a huge amount of water behind the dams it has. And so we're typically curtailed starting in April, running through to July or sometimes August. But during our period of curtailment, BC Hydro is obligated to pay us for the power that we would be otherwise producing, minus the discount for the cash costs we'd incur producing the incremental power. So this year, it's gone exactly as it has in all the previous years. And we think that our power plant will be up in the first of August and -- or the first of September. But there's no reason to anticipate that our revenue and EBITDA contribution from our power business will be materially impacted by these customary curtailments and restarts that we've experienced since we've had the plant up and running in the spring of 2015. So I'll turn the podium back to Jordan for our last question.

Sure. So the question reads, the market capitalization of Conifex is materially below the value of Conifex' working capital, mill value, equity in the biomass facility and forest licenses. Are there any specific plans to close the gap between market capitalization and underlying asset values? And our response is that, certainly, yes, we believe that our Q2 2020 results will provide some indication of how our power business is able to generate reliable earnings and cash flow, providing coverage of our corporate cost and stabilizing the overall results from our lumber operations. And we believe that as we progress through 2020, our results will reflect a clearer picture of the value of our integrated operations in Mackenzie, B.C., and we will certainly work to close that value gap through the execution of strong quarterly operating and financial results. And as management, we recognize that we are undervalued relative to book value, and our compensation committee may utilize the long-term incentive plan to align management with incentives to close that gap. Thank you.

Okay. Well, shareholders, that concludes our questions. And just let me add for emphasis that we think that we are hugely undervalued in the marketplace. And we look forward to reporting our Q2 results in mid-August and illustrating, as Jordan said, what the take-or-pay contract that we have with BC Hydro, the support it provides to cover our fixed costs in lumber and our corporate costs, and we're looking forward to delivering on our Q3 results in mid-November to show you what our Mackenzie Sawmill complex is capable of achieving under more normal lumber market conditions. So thank you very much for your attendance at our meeting today, and we look forward to hearing and speaking to many of you at our conference call in the second week of August of this year. Enjoy the rest of your day, everyone. Thank you.