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

Good morning, ladies and gentlemen. Welcome to the Conifex Timber Inc. Fourth Quarter 2024 Results Conference Call. I would now like to turn the meeting over to Mr. Ken Shields. Please go ahead.

Well, thank you, Chris, and good morning, everyone, and welcome to the call covering our Q4 and full year 2024 results. I'm Ken Shields, as many of you know, the Chairman of Conifex, and I'm joined today by our CFO, Trevor Pruden; and our President, Andrew McLellan. 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 dated March 12, 2025, that we released yesterday. Looking back on 2024 in many respects, it was a transition year for all of us at Conifex. Our first main objective was to refinance our lumber manufacturing business, which we successfully completed in June. Our second main objective was to conserve cash by minimizing the scope and scale of our operations until more attractive lumber market conditions emerged. The combination of slightly higher lumber prices, slightly lower log costs and shift curtailments, enabled us to reduce our EBITDA loss from $25.8 million in 2023 to $13.6 million in 2024. During the fourth quarter of 2024, it became clear to us that lumber prices had improved sufficiently to enable us to generate positive EBITDA. In Q4, we reported negative EBITDA of $2.1 million, roughly one half the EBITDA loss we recorded in Q3. However, if you dig more deeply into our numbers, you will see that we booked a onetime charge in Q4 of $3.8 million to adjust the balance sheet carrying value on a portion of our Mackenzie Timber tenders. Without this onetime charge, we would have been EBITDA positive in Q4 even with the higher per-unit manufacturing costs we incur operating in our sawmill complex on a 1 shift basis. Looking ahead to 2025, we appreciate the tremendous uncertainty that surrounds the outlook for lumber tariffs and duties, but let me quickly outline the reasons we believe and expect that our EBITDA will be positive in each of the first and second quarters of 2025. Starting with Q1. Since January 6, 2025, we've been operating our sawmill complex on a 2-shift basis and we are capturing the dual benefits of higher shipments and lower unit costs that a 2-shift operation provides over a single shift operating configuration. Benchmark Western Spruce/Pine/Fir prices have averaged USD 471 per thousand board feet so far in 2025. That compares to $435 in Q4. So you can see that the prices have increased by USD 36 or CAD 52 per thousand board feet. So this combination of higher lumber prices and increased shipments, coupled with lower per-unit manufacturing costs, supports solid EBITDA generation for us in Q1 of 2025 even after expensing duty deposits that are at a 14.4% rate. Looking ahead to Q2, the lumber futures prices for March, May and July suggests that the benchmark SPF cash price would be expected to average around $550 per thousand board feet in the second quarter of 2025. This is a price increase of USD 79 per thousand over the Q1 to-date prices. If these higher Q2 prices hold and if all-others duty rate remains at 14.4%, we expect interior BC sawmills will further improve EBITDA in Q2. On the other hand, if the 25% Trump tariff kicks in on April 2, interior BC sawmills will be subject to a combined duty and tariff burden of 39.4%. Absorbing duties and tariffs at a rate of 39.4%, it's reasonable to expect Q2 EBITDA will be in line with Q1 EBITDA. The reason is that the $79 of quarter-over-quarter price relief suggested by today's futures prices will be about exactly offset by the 25% imposition of new tariffs. We recognize that some of you on this call who are familiar with the EBITDA we've reported over the past several years may have difficulty accepting our view that Conifex will generate positive EBITDA in the current lumber industry environment. Our competitive position improved a great deal subsequent to May 4, 2023, when the Chief Forester ended the salvage harvest in our operating area and allowed us to transition over to a green log diet. The benefits of a green log diet include improved sawmill productivity, higher lumber grade outturns, and of course, richer selling price realizations. Simply put, the Chief Forester's decision to eliminate the salvage harvest requirement in the Mackenzie TSA has enabled Conifex to migrate to a lower and more enviable position on the North American softwood lumber industry cost curve. Turning to duty deposits. We expensed $4.4 million of duty deposits in 2024, representing the full amount of countervailing and antidumping duties incurred on shipments of softwood lumber to the U.S. You will recall that our rate was just over 8% through August of 2024 and mainly 14.4% thereafter. The amount of duties we have on deposit are significant relative to our equity market capitalization. We have cumulative duties on deposit of USD 38.3 million held in trust by U.S. Customs and Border Protection as at December 31, 2024. These deposits exceed CAD 50 million, which is equivalent to over $1.20 per Conifex share, which is roughly 4x our recent share trading price. Looking at another valuation consideration, our most recent book value per share is $2.10 versus our recent trading price of $0.30. This means that we trade at a whopping 85% discount to book value. We continue to believe that our stock is undervalued on an absolute basis and acutely -- so -- and especially so relative to our lumber industry peers who trade at lower discounts to book value. That sums up the main points that we wanted to cover on our call today with the exception of a legal update. Our MD&A that we've released over the past several quarters disclosed the efforts that we've expended to leverage our power generation expertise to develop a complementary business that will boost our sustainable cash flow generation. Simply put, our power generation team has the expertise to design, construct and operate large-scale electric power infrastructure associated with next-generation data centers in the interior region of BC. In June 2022, after working collaboratively with BC Hydro to identify 2 suitable data center locations in Northern BC, we entered into agreements on interconnection studies with BC Hydro. As you know, our plans to scale this new business were halted in December of 2022 after BC Hydro teamed up with the provincial cabinet to suspend its obligation to deliver interconnection services to us. Our 2 sites were removed from the interconnection queue even though they were focused on high-performance computing and artificial intelligence use cases, not cryptocurrency mining use cases that were targeted by the moratorium on interconnections. Against this backdrop, we've recently filed an amended notice of civil claim against BC Hydro. BC Hydro played an active role in the development and promulgation of an order in council, suspending work on our interconnections without informing us what they had been up to. This explains why we are seeking damages from BC Hydro for breach of contract as well as breaching BC Hydro's duty of good faith. We believe we've suffered and continue to suffer damages, which we intend to fully recoup. Thank you for your interest in Conifex. Andrew, Trevor and I look forward to responding to any questions shareholders may have. We will now turn the meeting back to Chris, the operator.

[Operator Instructions] The first question is from Daryl Swetlishoff from Raymond James.

Ken, it's interesting looking at your comments about the rise in lumber prices we've seen. If you had to guess, like what portion of the -- would be a function of just the duties? And how much do you think is supply driven with some of the shuts we've experienced in BC?

Well, Daryl, that's a very good question. I think that the supply-demand balance in SPF is materially different than the supply-demand balance in Southern Yellow Pine. And I was just looking at some figures the other day and I was reminded that back in, I think, it was 2018 that the interior region of BC, the sawlog harvest was 47 million cubic meters. And in 2023 and recently, it's been at about 27 million cubic meters. So we've lost 20 million cubic meters of harvest in the last 7 years. And that's enough wood to make not quite 5 billion board feet of lumber on an annual basis. But this supply contraction in BC alone, it was equivalent to 8% of the North American softwood lumber consumption. And it's -- the supply contraction is significant enough to set the incremental supply from more than 20 new industrial scale sawmills through the U.S. South. So as we look at it, the recent trends and prices have been mainly supply crunch driven. And given there appears to be consensus views that single-family starts and repair and remodeling activity should pick up a bit in the second half of 2025, these current futures prices suggest that we're in for a very favorable pricing environment in SPF. That's a long-winded answer to your question, but that's how we see it.

The next question is from [ Igor Malchyonov ], a private investor.

I have a couple of questions. First about your debt, since June 2024, Banks of Canada significantly reduced their policy interest rates. So is there any chance you can reduce the interest rate paying on your term loan with Pender?

Okay. You broke up a little bit, but I think you observed that the 14% interest rate that we have on our Pender fund loans is pretty rich. From our point of view, loans to sawmillers in the BC forest sector, most banks and near-banks require borrowers to maintain a coverage ratio of financial charges or they have to essentially have positive EBITDA, and that positive EBITDA needs to at least cover and cover by some margins their interest expense. And we know that there are times it's the normal functioning of a lumber market cycle for us to over earn during the periods and have very wide EBITDA margins. But then when the market gets oversupplied, the way it comes back into balance is by having the industry incur negative EBITDA margins. And in the period of negative EBITDA margins, there are times when a lot of the control and direction of your operations shifts out of the hands of management into the hands of the debt capital provider. So we felt that we had more operational flexibility and control and direction over our business if we accepted the 14% interest rate, but we did not have to accept a financial charge coverage ratio. And so I trust you find that context and trade-off helpful, [ Igor ]. Thank you.

Okay. And another question about your crypto mining. Do you have any like time line where we can understand how it's going to play out, when we're going to know the results of all the -- you're trying to file a notice with BC Hydro. So when is it going to be -- when will we know the results?

Okay. Well, the process that we're involved in is that in a couple of months or so, there will be materials filed with the Supreme Court here in BC that the public will be able to view, and that will disclose essentially what we've been up to in this field over the past 2 or 3 years. And it will enable people such as yourself, if you read that, to determine what the prospects are for a successful outcome for Conifex. So regrettably, there's not a lot we can say about it at this time, but once the court filings have been made, there will be a clear picture as to the nature of the dispute between us and BC Hydro.

[Operator Instructions] There are no further questions registered at this time. I would now like to transfer the meeting back over to Mr. Shields.

Okay. Well, listen, Andrew, Trevor and I are thankful and appreciate your interest in Conifex, and we look forward to sharing our EBITDA achievement with you when we report our first quarter results. So enjoy the rest of the day, everyone. Thank you.

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