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

Good afternoon, ladies and gentlemen. Welcome to the Conifex Timber Inc. Q2 2024 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, Michael, and good afternoon, everyone, and welcome to this call covering our first and second quarter 2024 results. After briefly reviewing our finances and outlook for the balance of the year, we'd like to talk about our expectations for sawlog supply over the next few years. I'm joined by our President and Chief Operating Officer, Andrew McLellan as well as by Trevor Pruden, our Chief Financial Officer. All three of us will be very pleased to respond to any questions you may have at the end of the call. Let's quickly deal with a housekeeping item. We'll 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. Our number one priority for the second quarter was to successfully refinance our lumber business. On June 12, we completed a $25 million term loan with Pender Corporate Bond Fund and drew down $22.5 million to repay the amounts we owed Wells Fargo, and to position us to end the quarter with just over $10 million in unrestricted cash on our balance sheet. One attractive feature of our new loan is that we are not required to maintain a fixed charge coverage ratio. When lumber markets are oversupplied, as they have been recently, prices weaken, losses are incurred and it's not possible to produce earnings that enable you to cover your interest expense. It follows that a lumber producer's credit default risk increases when there are fixed charge coverage ratio requirements. Our lumber business loan does not have a similar coverage obligation. However, we do have an asset coverage obligation, which requires us to ensure that the value of our tenures and sawmill complex comfortably exceed the amounts we've drawn on the loan. Given the quality and robustness of our tenures, we are highly confident that our asset value will remain sufficiently high, enable us to meet all our financial covenants. Now that 2 shift operations have resumed at our sawmill complex, we've increased our investment in log and lumber inventories. We're working collaboratively with our existing lenders to ensure we retain a liquidity cushion after funding these heightened working capital requirements. For the opening 6 months of the year, we incurred negative EBITDA of $7.6 million, of which $7.1 million was recorded in the second quarter. There were 3 factors that retarded our EBITDA by somewhere between $2 million and $3 million. Number one was the benchmark SPF lumber prices were $60 per thousand board feet lower in Q2 than in Q1. The second reason is that our power plant was off-line for much of June for annual maintenance, and clearly, the plant doesn't produce any EBITDA when it's off-line. Yet we incur significant repair and maintenance costs and this led to negative EBITDA in the power business. And the third factor was the unusual weather conditions, which adversely impacted our ability to deliver sawlogs to our Mackenzie sawmill. Log shortages forced us to operate only one of our two sawlines on numerous occasions, and they eventually forced us to curtail lumber production, which adversely impacted unit costs and shipments in the most recent quarters. Looking ahead through to the end of the current year, we expect lumber prices to gradually increase, mainly due to supply contractions, but coupled with some strengthening in the demand as interest rates moderate. We expect our Q3 EBITDA loss will be slightly lower than in Q2 and we expect our Q4 EBITDA loss to be a lot lower than in Q3. These expectations assume that there's no nationwide [ lower [ price. Turning to duty deposits. We expensed $2.5 million in the first half of 2024, representing the full amount of countervailing and antidumping duties incurred on shipments of lumber to the U.S. at a combined rate of 8.05%. Earlier today, the U.S. Department of Commerce issued its final determination of the combined all-others rate of 14.54%, covering shipments for the year ended December 31, 2022. Beginning in the next few days, increased duty deposits will lead up another 6-plus percent of the sales proceeds we received on U.S. lumber exports. We now have cumulative duties on deposit that are potentially refundable at USD 36.2 million, and these duties on deposit are equivalent to just over CAD 1.20 per Conifex share. We'd like to take a moment and remind you that we continue to believe that our stock is, by far, the most undervalued forest product stock in Canada or perhaps the entire world. The equity market capitalization for the other public lumber producers in Canada, typically exceeds the value of their duty deposits. In our case, our duty deposits of $1.20 per share represents 4x our stock trading price of $0.30 per share. Another example is that the other public lumber producers trade at pricing set typically represent a 50% discount from their book value per share. We trade at an 88% discount from our book value per share of approximately $2.50. And the same is true when you compare our enterprise value to our lumber capacity, our timber tenures, our power production or our potential duty refunds. It's clear we trade at a whopping discount to the companies in our peer groups. While factors such as our smaller scale, our more limited geographic diversification and our financial leverage could account for us trading at some discount to our peers. The fact that we trade at a tiny fraction of our peers' multiples is a matter that our Board of Directors has asked our senior management to review and they wish us to outline initiatives that could be available to us to mitigate our evaluation discrepancy. On May 4, of last year, as I've talked about before, the Chief Forester established a new allowable annual cut or AAC in the Mackenzie Timber Supply Area or TSA. The new AAC was set at 2.39 million cubic meters, and it represented about a 20% reduction from the TSA's historical harvest of 3 million cubic meters. The positive for us, of course, is that our harvest is now sourced from green stands and we are no longer required to source a majority of our log supply from beetle-killed salvage stands. We understand that the Provincial Forest Minister will soon reset our harvest level to align with the new harvest level in the TSA. The main consequence of the Forest Minister's apportionment decision is that our internal timber supply will account for a slightly lower portion of our sawlog consumption and open market sawlog purchases will account for a slightly higher portion. We presently hold a forest license in the TSA with an AAC of 632,500 cubic meters as well as a 50% interest in a tenure with an AAC of 300,000 cubic meters. We expect that this combined harvest level of 782,500 cubic meters will likely be reduced by 18% or 19% to something around, say, 670,000 cubic meters. This suggests that open market purchases of around 130,000 cubic meters will be required to keep our mill fibered up. The harvest level available in the balance of the TSA will exceed 1.7 million cubic meters. So you can see that our sawlog purchase requirement is well under 10% of the available supply. Our key point is that the Mackenzie TSA has the highest sawlog surplus relative to consumption of any TSA in the interior region of B.C., and we do not anticipate any challenges securing our sawlog requirements and furthermore, there may be some opportunistic sawlog purchase opportunities. While the minister is looking at the TSA, we also expect him to put safeguards in place to ensure overharvesting in the Southwestern partition zone is not allowed to continue. This will help ensure that the manufacturing facilities we have in Mackenzie will have assured access to sawlog supply for decades to come. And we also, finally, understand that the minister intends to update its methodology for determining cost allowances and stumpage charge in positions in response to some inequities that have emerged over the past few years. The ministry recognizes that it's in the public interest to strengthen the economic sustainability of the ultra forest-dependent community of Mackenzie and its nearby First Nations communities. The updated approach, in our opinion, also enables BC Timber Sales to better meet its mandated requirement to provide a full range of cost-in-place insurance that can be harvested from public land in British Columbia. Summing up, the Chief Forester's 2023 decision and the Ministry announcements that we expect imminently should enable our Mackenzie site to migrate to a lower and more enviable ranking on the North American lumber industry prosper. Going forward, the EBITDA per thousand board feet of lumber produced that we expect to report in the future will align better with the amounts reported by the other major public lumber companies. Before closing off, I'd like to update you on our legal challenge. The MD&A that we released earlier today provides background on the efforts we've expended over the past 2 years to utilize our power-generation expertise to develop a new business and boost sustainable cash flow. And as we've reported, our plans to scale up this new business were halted in December of 2022, when the provincial cabinet instructed BC Hydro to suspend its obligation to provide electrical interconnection services to us. Our 2 sites that we were pursuing where we moved from the interconnection queue, even though they were focused on high-performance computing and AI use cases, that differed materially from the cryptocurrency mining use cases that were the focus of the provincial moratorium. We continue to believe that the moratorium to discriminate against certain types of customers and our removal from the interconnection queue are unjustified and we therefore filed an appeal of the B.C. Supreme Court's decision. We've also advised BC Hydro of our intention to develop data center infrastructure of interest to customers that focus on HPC and artificial intelligence use cases. We expect to present our case to the B.C. Court of Appeal this fall. That concludes my remarks. Thank you for your interest in Conifex. And Andrew, Trevor and I will be pleased to answer any questions analysts or shareholders may have. So we'll turn the meeting back to Michael.

Thank you, Mr. Shields. [Operator Instructions] There are no questions at the moment, Mr. Shields.

Okay. Well, Michael, thank you for hosting us today. I notice that there have been some other recent calls where the question period has been extremely light, so that's understandable. But for those of you that are on the line and listened to the call, thank you for your interest in our company. And you're welcome to call us if you have further questions or comments. Enjoy the rest of the day.

Thank you. Ladies and gentlemen, your conference has now ended. All callers are asked to disconnect their lines at this time, and thank you for joining today's call.