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

Good afternoon, ladies and gentlemen. Welcome to the Conifex Timber Inc. 2022 Annual Results Conference Call. I would now like to turn the meeting over to Mr. Ken Shields. Please go ahead.

Well, thank you very much, Patrick, and good afternoon, everyone, and welcome to the Conifex call covering our fourth quarter and full year 2022 results. 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 on Pages 1 and 2 of the MD&A we distributed earlier today. Our fourth quarter results were exactly in line with the guidance we provided on our November 8, call. Back then, we stated that we anticipated recording business interruption insurance proceeds in our Q4 income statement in an amount that would slightly more than offset potential losses at our sawmill complex. And we expected that our full year EBITDA and net income would be within 10% of the record levels we achieved in 2021. Q4 2022 EBITDA of $2.3 million brought our full year EBITDA to $46.7 million, which is 10% lower than the $51.8 million we reported last year. 2022 net income of $24.5 million was also 10% lower than we achieved in 2021. With fewer shares outstanding, earnings per share of $0.61 in 2022 were about $0.01 higher than we achieved in 2021. Because we paid a special dividend of $0.20 earlier in 2022, our year-end book value per share increased by just over $0.40 to $3.68 per share. We ended the year with USD 31.3 million in potentially refundable duties on lumber duty impositions that were on deposit. And of course, in Canadian dollars, that translates into just over CAD 1 per Conifex share before any allowances for potential holdbacks and income taxes. We're very proud of what we achieved in 2022 in terms of our safety and sustainability rankings. We're also proud of the fact that our earnings per share increased slightly when 6 other lumber-oriented public companies reported declines of 19% to 67% in net per share results for 2022. You will note that we recognized $9.6 million as other income in our income statement to reflect the proceeds received from our business interruption insurance claim. A manufacturer's defect in the power plant turbine caused power generation to be curtailed for the closing 6 months of 2022. The proceeds we received are a testament to the fact that no shortfalls in our maintenance procedures nor in our maintenance processes were identified by the engineering and accounting experts that the insurers engaged to examine the cause of the power plant curtailment. It's also a testament to the high uptime reliability our power generation team achieves when they're not held back by factors completely outside of their control. All of us at Conifex including our entire Board of Directors are extremely proud of the performance from our experienced highly competent power plant team. The results we reported for the closing 6 months of 2022, provide investors additional insight into the economic sustainability of our integrated and co-dependent harvesting, sawmilling and power generation businesses at Mackenzie, B.C. My key point here is that the $100 million we have invested in our power generation business materially enhances and stabilizes our cash flow generation. It also furthers our objective to operate the most economically viable and environmentally sustainable softwood processing site in the interior region of B.C. Since our last call, several of you have contacted us and asked what's happening in B.C. with respect to sawlog availability, cost competitiveness, regulatory development with sector. Permit us to share our views on these topics. We believe Conifex is well positioned in terms of sawlog supply. As many of you know, our tenures are located in the Mackenzie Timber Supply Area or TSA. The land base and the TSA is about equal to the combined land base in the states of Vermont and New Hampshire. We operate the only sawmill on this site's land base. We believe that the standing timber inventory in the Mackenzie TSA is capable of supplying sawlogs in perpetuity that are at least double and perhaps as much as triple present and foreseeable requirements. We believe our company enjoys the degree of regional fiber cell sufficiency that is not available in any other TSA in the interior region of B.C. Furthermore, if you examine our financial reports, you will note that we ended 2022 with record high log inventories of $33 million at a time when others were taking downtime due to fiber shortages. You will also note that our inventory write-downs were just over $2 million when others were taking write-downs of, say, something like 20x or 50x the amount [ vetoed ]. These figures suggest that our delivered log process is competitive compared to other mills operating in the interior region of B.C. Over the past few years, the ministry has imposed several new policies on forest sector operators in the interior of B.C. Since many important regulations have yet to be drafted and/or implemented, it's difficult to precisely determine how future sawlog supplies and delivered log costs may be impacted. We expect that fiber supply will remain tight in the interior region of B.C. through the remainder of 2023. The main reason is that B.C. timber sales is finding it difficult to develop an auction stance to achieve its mandate to provide 20% of the sawlog products in the interior of B.C. B.C. timber sales' excuse is that it's being held back by the provinces' old growth retention, First Nations reconciliation and other emerging land based management objectives. Looking at BCTS activity in the Mackenzie and our neighboring Prince George Timber Supply Areas, over the 2017 to 2019 period, BCTS auctions something like 4 million cubic meters annually and met its 20% harvest objective. In its fiscal-year ended March 31, 2022, BCTS auctioned just over 1 million cubic meters and accounted for considerably less than 10% of the harvest. Over the 9-month period ending December 31, 2022, BCTS auctioned just over 300,000 cubic meters and accounted for a nominal portion of the harvest in Prince George and Mackenzie. Converting the cubic meters into lumber, BCTS went from supplying the fiber requirements for 4 large interior B.C. sawmill to supplying the requirements at one small sawmill. These low auction volumes exacerbate fiber shortages, they directly increase the competition for and the cost of auction wood and contribute to artificially high stumpage rate in positions intended with wood supply. Turning to lumber prices. We get the sense that prices have climbed down the side of the mountain and our cost in the valley bottoms and will soon begin the time up to the other side of the valley. We believe sawlog supply constraints coupled with B.C.'s cost structure will trigger further curtailment enhancements and produce a better balance between SPS supply and the lower demand currently being experienced. In our company, we expect our Q1 earnings may lag the results reported by some other public lumber companies for 3 main reasons. The first is that our sawmill was offline in the first week of the year and we were forced to take an additional 7 operating days of downtime because railcar shortage has prevented us from shipping our lumber. Fortunately, the railcar supply has improved a great deal. The second reason is that our power generation results in February were held back as we progressed through the start-up curve associated with the winter restart following 8 months of downtime at the power plant. And the third reason is that our log costs in Q1 of 2023 will be at normal length, not at the written down levels available for certain other companies. Given these 3 factors, we expect we will report negative EBITDA in the opening quarter of 2023. It looks like we're probably going to get back something like 10% of the EBITDA we earned in 2022. However, we expect our quarterly results to improve as we progress through the balance of 2023. That concludes my prepared remarks. Andrew McLellan, who heads our operations; Trevor Pruden, who heads our Corporate Services and Business Planning; and CFO, Winny Tang are here with me today, and we look forward to responding to questions analysts and shareholders may have. I'll now turn the meeting back to Patrick, our operator.

[Operator Instructions] We'll take the first question. We have a question from...

Gabe Nicholson. Sorry about that. This is Gabe with CIBC. Hope, everyone is doing well.

Yes, we are, Dave (sic) [ Gabe ]. Thank you.

So first question, I was just wondering what kind of change do you see in B.C. stumpage as we move from December into January. And then where do you think that's going to go in April here?

Okay. Well, Andrew McLellan is closer to that than I am, so he'll answer your question, Gabe. Thank you.

Gabe, Andrew McLellan here. As we kind of look forward into the remainder of Q1 here and into Q2, we're seeing very, very competitive bidding in the BCTS auctions within the province that are outside of our Timber Supply Area, but influence the estimated winning bids with the pricing model in B.C. So we expect the -- obviously, with lumber prices declining that we'll see some relief in stumpage, but hard to tell how much relief we're actually going to see with the competitiveness and the bidding within B.C. So we'll see as the adjustments are made here, but not expecting any material decreases in stumpage.

And then second, in terms of the letter or statement by the provincial government dated December 21, do you have any idea if the -- if your existing customer or that you started the trial run with back in September, will they be grandfathered in? Or is there any kind of details you could provide around that? And then just in terms of the 3 potential customers you guys mentioned, how do you think they will be impacted?

Okay. Well, Trevor Pruden will respond to that question, Gabe.

It's Trevor here. Yes, we continue to still like this business. We have a new customer for a 3-megawatt deployment that we anticipate we'll be energizing the miners in the coming weeks. We're still exploring how we can best scale up this segment and we continue to evaluate the potential impact from the B.C. government's order and counsel to B.C. Hydro on our hosting services business.

[Operator Instructions] The next question is from Paul Quinn.

Just maybe start with the BCTS, Ken, because you brought it up, what's the fix here?

I beg your pardon. What's the fix here?

Yes. How do they fix this system? I mean this has been going downhill, they're supposed to get their 20% to make the competitive stumping system representative and competitive. And the undercarriage is, it's getting worse by a year. How do you fix this situation?

Okay. Well, first of all, I can tell you, Paul, that our [ vendors ] forest routine chalked up specifics like that. That would never happen because we have a much more robust system of management accountability and delivering against business plans and targets. But Paul, I don't think there is a quick fix to it. I know that there are representations given by BCTS that they will do better. The BC provincial budget indicated that there would be 6 million cubic meters of volume from BCTS in the year ending March 31. The best figure I have is that they'll be lucky to be at 5 million cubic meters. I just think that the difficulty they're having to get approvals to go into old growth stance or to go into areas that have some control and then inserted by local First Nations make it very difficult for them to ramp up their volumes to anywhere close to the 20% of the provincial harvest. And my guess is that they might be at 10%. But as I'm sure, Paul, you've seen some of the work that's been done on the interior B.C. industry when people have attempted to assess what the impact in B.C., we've got a province-wide reduction in the interior B.C. harvest level. And although, old growth set aside and wild life set aside and First Nations reconciliation objective of having some impact on overall harvest levels, the single biggest cause of the harvest shortfall in B.C. is BCTS. As an industry, we've been encouraging the products and the ministry to ensure that BCTS does a better job, but there's not a lot of evidence that much progress is being to date.

And then just looking at -- you experienced a couple of shuts in 2022 due to lack of railcar availability that you also mentioned that this is better. What are the alternative transportation arrangements that you can make? And is that a longer-term solution to move away from rail, at least to the next reload because there's a problem in Mackenzie?

Paul, it's Andrew here. So in terms of our ability to shift to trucking, for example, certainly not something that we want to do. There's obviously some additional costs associated with the trucking lumber into a reload and re-handling. So our intention is to continue to, to work with our rail partners and ensure that we have adequate service to support our business. We do occasionally rely on trucking when we get behind on railcars, but it's not a long-term solution for us.

And just so I understand that, that component, if you went to trucking route, what's the additional cost of the reloading? Where is that reloaded? Is it at Prince George reload for you guys?

Okay. Well, what -- Paul, given the nature of our core customer base, the trucking option that works best for us is to take the wood from Mackenzie down to the lower mainland and ship it on the Burlington Northern into our key markets in Arizona and Texas. And so that's the trucking option and it's probably something like $35 or $40 per 1,000 feet of additional cost to do that. As you're probably aware, a truckload of lumber contains about as much as 1/3 of a boxcar. So if you're trying to replace boxcar shortages with trucks, you need a lot of trucks. And what happens is that most of us in the interior B.C. we are all looking for tucks at the same time. So if the trucking -- the higher cost trucking option can be a bit of an assist, but as Andrew mentioned, it's not a permanent solution.

So in a typical year, are you like 10% truck and 90% rail or...

Probably 95%, 5% would be my guess.

And then Ken, any update on the Mackenzie TSA AAC apportionment?

Well, Paul, that's a good question. And we've been promised that by the end of October. We've been promised that before the Board meeting that we had earlier this morning and who knows Paul, if you go back to February of 2019, when the green and salvage harvest partition was modified, the chief forester at that time said that they were going to move quickly for an timber supplier review. The data package for the review was issued in October of 2020 and the public discussion paper was issued a few months ago. So it's an unusually long time, and we're still waiting for it. But while we're waiting for it, the trees are continuing to grow and there's probably more inventory in the timber supply area today than when they promised to have the report delivered to us. So we're not worried about what the AAC determination is. We think we'll have plenty of wood to keep our mills [indiscernible].

And just last question. Any -- you guys are the only operational sawmill in that TSA, any movement on the other assets in the region as well?

Well, Paul, we have the same information that you have, which is that 55 weeks ago, Canfor announced that they had a range to sell their tenure to 2 local First Nations. And when Canfor released their results on February 28, they essentially repeated the same statement that they made a year earlier. So reading that statement, it strikes me that, that transaction is still on, but there's no forecast date for what we might have a binding agreement or expect to apply for the approvals for the tenure transfer. And we understand that the mill in Mackenzie that the machine set has evolved and taken apart and they're sitting in place ready to be shipped out when the tenure time [indiscernible]. So people in Mackenzie do not believe that there will be any sawmill production coming from that vacated site.

We'll take the next question.

[ Hugh Cooper ]. I had the same question as Paul, but maybe I've got a couple of other questions, too. Firstly, any -- is there any update on the -- I think you have somewhere near $1 share of duties that are on hold with the U.S. government. Is there any update at all industry-wide on that? And secondly, your tax loss carryforward, if I recall, it's something like about -- might have been $180 million, about $4.5 a share. Is that predominantly all in the U.S? Is there any left in Canada?

Okay. Well, I'll talk about the duties and Winny Tang will refresh us on our tax loss carryforward. So on the duties, we were at [ USD 31.3 million ] and at [ $0.725 ], which I think we're roughly at today, it's the equivalent of CAD 1.08 per share before any possible holdbacks and before any possible taxes on the amount of the rebate. So that answers the duty question. And Winny Tang will talk about our tax loss situation.

Yes, of course. Thank you, Ken. So Winny here. So thank you for that question about the taxes. I'm always excited to speak about taxes. In answer to your question, the majority of those tax loss carryforwards do relate to our U.S. operations. We do have about 5% or so of our balance does relate to our Canadian operations. And that, of course, is after deducting losses that we utilized for the 2022 tax year. So I think we're in a good position heading into 2023 in terms of Canadian operations and just the ability to shelter our earnings there. Just following up, Ken, the second part of my question on the duty. So is there any update industry-wide on that?

Okay. Good question. Yes. My understanding is that the Federal Government Minister of Trade is liaising with key executives in various provincial forced associations and that they're having a call in the next couple of days. And of course, there's been some speculation that President Biden maybe visiting Canada before too long. And of course, the forest industry is working hard to have the resolution of the trade dispute on the short list of topics that the 2 country heads would discuss if indeed there is a visit. So I might add that I feel for it when I'm updated by our industry association in the next couple of days, but that's my understanding as to where we're at today.

Thank you. There are no further questions at this time. I would like to turn the meeting back over to Mr. Shields.

Okay. Well, thank you, everyone, for your interest in our company, and we're going to get back to work to do everything we possibly can to get rid of the red pencils in terms of our EBITDA and be in black ink in the closing half of 2023. So thank you. Enjoy the rest of your day.

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.