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

Good afternoon, ladies and gentlemen. Welcome to the Conifex Timber Inc. Q4 2023 Results Conference Call. I would now like to turn the meeting over to Mr. Ken Shields, the CEO and Chairman of the company. Please go ahead.

Well, thank you, Chris, and good afternoon, everyone. I'm Ken Shields, as Chris mentioned, the Chair and CEO of Conifex. And I'm joined today by our Chief Financial Officer, Trevor Pruden; and by our President and Chief Operating Officer, Andrew McLellan. Today, I thought that I go through some prepared remarks that track the material in an accompanying slide deck that we distributed. So if you wish to follow along, you may wish to start Slide 3 in the deck. And Slide 3, of course, indicates the main topics we wish to cover today, which, first of all, a description of how recent developments have enabled our integrated sawmill and power generation site at Mackenzie to migrate to a much lower and more enviable position on the North American softwood lumber industry cost curve. The second thing we want to cover is a review of the reasons we believe that recent mill closures and shift curtailment announcements in our operating region in the interior BC has the potential to greatly enhance cash flow generation at Mackenzie space. Third, we want to explain why we are confident we'll successfully secure new credit facilities that better align with our business plan. And lastly, we want to update you on our revenue diversification opportunity that we're considering that has the potential to strengthen our company. But before jumping into the details, let's quickly deal with the housekeeping items. We will be making forward-looking statements and references to non-IFRS measures, and therefore, call your attention to the warning statements set out on Pages 1 and 2 of the MD&A that we released earlier today. Turning to our recent financial results. Slide 4 in the investor deck summarizes our Q4 and full year results. Our Q4 results were entirely consistent with the guidance we provided on our November call with you when we disclosed that although most lumber producers were likely to report sequentially weaker results in Q4 '23 than in Q3 of '23, at Conifex, we expected our results to improve. For Q4 '23, we reported negative EBITDA of $3.5 million, which, of course, is 48% better than the negative EBITDA of $6.7 million we reported for Q3. Looking ahead to Q1 of 2024, we expect to show further sequential improvement, of course. And looking beyond Q1 and assuming that our power plant and sawmill operate it as planned and also assuming that the cash SPF prices that are implicit in lumber futures contracts of around USD 500 per thousand board feet, assuming these prices materialize, we expect to report double-digit positive EBITDA in 2024. Slide 5 reminds all of us as to how the sawlog fiber sourcing restrictions that we abided by between 2018 and 2022 damaged our competitiveness. Back then, the Chief Forester mandated that 55% of our sawlog harvest in the Mackenzie timber supply area or TSA had to be sourced from dead and dying beetle-killed stands. This salvage harvest requirement was not relaxed when the 2 Foresters announced in 2020 that's 70% of the fiber volume in salvage stands have lost its commercial value of the sawlog and what's more properly classified as [ pulp wider by energy side ]. So you can imagine how excited we all were in February -- pardon me, on May 4, 2023, when the Chief Forester allowed us to transition to a green log diet. Although our transition to a green log diet is not yet fully complete, many initial benefits such as improved sawmill productivity, higher lumber grade outturns and more lucrative lumber selling price realization build up in Q4 of 2023. And those factors, of course, enabled us to report a sequentially reduced EBITDA loss. Summing up to this point, the Chief Forester's decision to eliminate the salvage harvest requirement in the Mackenzie TSA has enabled us to migrate to a lower and more enviable position on the North American softwood lumber industry cost curve. And as a matter of interest, Slide 6 in the deck we distributed today includes the benchmarking analysis that the Conifex management team shared with the Conifex Board of Directors earlier today. Looking ahead, we sense that SPF supplies are contracting at the same time SPF demand is building, and we, therefore, believe that lumber prices are going higher. As set out in Slide 7 of our deck, you'll see that the log harvest in the interior region of BC, which totaled 47 million cubic meters in 2018, plummeted to 27 million cubic meters in 2023. The Ministry of Forests also discloses in the most recent budget document that it expects the interior BC log harvest to amount to roughly 26 million cubic meters annually for the year that is just about to end and for the ensuing 3 years. This harvest contraction will reduce SPF lumber production from the interior region of BC by about 4.8 billion or 4.9 billion board feet annually. And this supply contraction is huge, is equivalent to something like 8% of North American softwood lumber consumption. And it's also equivalent to offset the incremental softwood lumber supply from something like 20 new industrial scales sawmills that could be brought on stream in the U.S. South. So with mounting evidence that U.S. housing starts are increasing in 2024 and '25, our view of the supply/demand dynamics in SPF is that we're entering a period of rising lumber prices. Besides having a positive effect on lumber prices, one consequence of the recently announced mill closures set out on Slide 7 is the potential for the remaining sawmill operating in the interior region of BC to move to an even lower position on the North American lumber industry cost curve. With fewer mills operating, it follows that there will be fewer bidders for purchased wood at BCTS auction. And this could have the effect of keeping bid prices and, therefore, stumpage rates in BC at more affordable level. The mills that continue to operate should continue to enjoy steady demand and pricing for residual chips and other co-products of the manufacturing process. We also sense that the remaining mills operating will have opportunities to sell greater percentages of their output to the high-value, J-Grade lumber market that's available to us in Japan on a duty-free basis. All these outcomes can combine, in our view, to enable interior BC mills to migrate to an even more enviable position on the North American softwood lumber industry cost curve. As mentioned on Slide 8, we operate the only sawmill complex in the Mackenzie TSA. The Mackenzie TSA is the fourth largest in BC. In terms of geographic footprint, the TSA's equivalent in size to the combined land area of the state of Vermont, New Hampshire and Connecticut. Effective May 4 of last year, the Chief Forester in BC established the allowable annual cut or the AAC for the Mackenzie TSA at 2.39 million cubic meters. Since our sawmill consumption averages out at around 800,000 cubic meters annually, it follows that the harvest level in our fiber catchment area is nearly 3x our consumption requirement. We are not aware of any other TSA in the interior region of BC that has a comparable level of sawlog self-sufficiency. We believe the relative advantages of being in a fiber surplus region will only increase going forward. Those of you on the line know that delivered log costs represent the vast majority of operating costs and that delivered log costs are going to be a key driver of Conifex' ability to achieve best-in-class economics in the interior region of BC lumber sector. Simply put, the log quality cost and availability tailwinds we have in Mackenzie, in our opinion, will enable us to report greatly improved operating results through the balance of 2024 and beyond. Our #1 priority for Q2 of 2024 is to arrange new credit facilities for our sawlog harvesting and lumber manufacturing businesses. Our power business is separately and appropriately financed. Against this backdrop, we've engaged Raymond James to advise and assist us to secure approximately $40 million in credit facilities supported by a strong collateral base, including working capital, the fixed assets in our lumber business, our tenures and other assets. Considering the security we have available to support the credit facilities and our conservative financial leverage, we believe we will meet all reasonable requirements with respect to debt capital providers put on the table for our consideration. Looking at our stock for a moment. We trade at less than 25% of book value per share and continue to believe that our stock is undervalued on an absolute basis and acutely, so relative to our lumber peers, some of whom trade at much lower discounts. In fact, all of them traded at much lower discounts than we do. We also wish to draw your attention to the fact that potentially refundable export duties that we have on deposit with the U.S. Department of Commerce amounted to approximately CAD 46 million, which exceeds our $26 million equity market capitalization by 75%. Turning to revenue diversification opportunities. On previous calls, we disclosed how we intend to leverage our power expertise to develop industrial scale power infrastructure that customers and operators of next-generation data centers require. We believe many data center customers are interested in locating in BC because of our provinces affordable green power. Regrettably, the provincial cabinet issued an order in council denying us the electricity interconnection services at 2 locations where we were intending to develop multipurpose next-generation data centers. We challenged the order in council in the Supreme Court of BC. The Supreme Court judge agreed with us that the provincial cabinet does not have the power to impose a permanent moratorium on interconnection service. But the judge agreed with the province of a temporary moratorium could be applied. We disagree with that decision and are therefore appealing the decision. We intend to use the EBITDA we're currently generating from the trial program we have underway to fund the cost of the appeal. The stake of this case are immense for everybody in BC. Next-generation data center development can drive economic growth, it can spur job creation and achieve those outcomes, especially in rural areas, providing power to Conifex enabled BC Hydro to: number one, lower the rate it charges with other customers; number two, strengthen the resiliency of the provincial energy grid; number three, reduce global greenhouse gas emissions; and number four, propel the adoption of First Nations' sponsored solar and wind energy projects. This is why we believe the provincial cabinet unauthorized action jeopardizes all these benefits being made available to British Columbian and this explains why we believe we have little choice but to challenge the [ legality ] of the moratorium. In conclusion, thank you for your interest in Conifex. Andrew, Trevor and I look forward to responding to any questions that analysts and shareholders may have. And I look forward to turning the meeting back to Chris, our operator.

[Operator Instructions] We will take the first question.

So considering that the stock is undervalued, have you considered to sell the business and thus, returning the money to shareholders?

Okay. Well, I'm sorry, I didn't catch your name. But -- our view is that this is not an appropriate time to consider a prospective change of control transaction. And there are 2 main reasons that lead us to that conclusion. The first conclusion and reason is that we talked about the Chief Forester setting a new harvest level determination. But it's customary after the harvest levels are determined that there is what's called an apportionment decision, whereby the Ministry of Forests decide how all the licensees in an area will have access to the annual harvest. And any party that wanted to do a detailed due diligence examination of Conifex Timber would want to have the benefit of an apportionment decision before they started work in that area. So the first reason, your suggestion is inappropriate is that there's more work to be done. The second reason is that we understand that the last 2 initiatives that were launched for marketing sawlog harvesting and lumber companies in North America despite extensive canvasses by qualified financial agents and advisers, both of them ended up unsuccessfully and there were no transactions. So we don't think that the market conditions are right. So it's against that backdrop that we believe that with the passage of time that the incredibly robust fiber baskets supporting our lumber manufacturing business are going to pay big dividends going forward and that this ability we have to further leverage our power -- electric power infrastructure management that also provide additional revenue streams and cash flow streams to that. So we're very comfortable building out our existing asset base. So that's the long answer to the question you posed, but thank you for posing them.

The next question, please go ahead. [ Ryan Webber ]?

Just a question on sort of the refinancing. I guess you were talking about being optimistic sort of with the Raymond James being able to refinance it. But is there any more details you can provide? I mean is this just like another line of credit you're looking for with Raymond James to replace the Wells Fargo facility? Or you look like -- I'm guessing you don't need to raise equity at these prices. Like I'm just curious sort of like how you're thinking about...

Okay. Well, obviously, we're in the very early stages and it's just today that respective debt capital providers will have access to our December 31, 2023, financial statements. But our credit facility was Wells Fargo was a $25 million ABL facility. But of course, there were limits on the amount of -- on the value of the inventories and receivables. And so effectively, we had assets to probably 1/2 of the face amount. So that facility we'd like to refinance. But on the other hand, we are very unique in the sense that our timber tenures and the fixed assets supporting our lumber manufacturing business and timber tenures, those are not pledged to any blender. And we think those assets are worth $60 million to $80 million somewhere in that range. And so we'd like to get a term loan possibly in the amount of, say, $20 million. So if you wanted to keep it to the nearest $10 million a package of roughly $20 million in term loans or coupled with $20 million in ABL facilities, we believe will put us in a very solid ongoing financial position. And if one of the facilities was modified by it's either $10 million and the other one was adjusted to compensate for the modification we think we'd be in a very viable ongoing financial position.

Okay. And then I guess in the original press release when you were talking about the financing like a few weeks ago, you really having to refinance the power term loan at some point. Is that still on the table? Or do you feel confident with the financing for that?

Well, the understanding we have with our power lender is that they are very interested in becoming acquainted to the primary lenders to our harvesting and lumber business. And if they're uncomfortable with that, they would like us to consider refinancing our power plant. At the same time that, that's going on, we have some opportunities to further leverage our electric power industry expertise and consider some add-on businesses in that area. So we're looking forward to -- our plan simply put is to settle the financing for our harvesting and lumber business and then enter into discussions with our power plant lender to talk about what our multiyear plans are to build out that business and see what sort of there is with our power lender and our lumber business and take a look at some options, I supposed, in 2025.

Okay. And my last question. If you're not successful on the appeal with the power business that you're trying to do with the data warehouse or whatever, what's the plan, I guess, after that?

Well, we've done a trial basis and on a trial basis, it's been successful. We invested less than $0.5 million in the trial, and we've generated EBITDA equal to our initial investment. So we've achieved payout on that. We think that there's a whole series of common law precedent for a monopoly provider having an obligation to service customers. So we think we have an entitlement to power here in BC and plan to build that business. And we think that with the passage of time, the courts will agree with us, and we'll have a chance to build out that business. But there's always a chance that there'll be impediments to it, and we won't be able to do it. But I shared our thinking with you on that, and we plan to be unrelenting in our development of this business opportunity.

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

Okay. Well, Chris, thanks for doing a good job coordinating our call today. We covered a lot of material in my prepared remarks, and I thought those were very thoughtful questions. So thanks all of you for listening, and enjoy the rest of your afternoon.

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