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

Good morning, ladies and gentlemen. Welcome to the Conifex Timber Inc. Q1 2025 Results Conference Call. I would now like to turn the meeting over to Mr. Ken Shields. Please go ahead.

Good morning, everyone, and welcome to our call covering our Q1 2025 results. I'm in our Vancouver office today, but our Chief Operating Officer, Andrew McLellan; and our Chief Financial Officer, Trevor Pruden, are participating on this call from our regional office in Prince George. 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 statements set out on Pages 1 and 2 of the management discussion and analysis that we released this morning. Turning to our Q1 results. All of us at Conifex are most pleased that our Q1 2025 net income allowed us to join West Fraser as the second member of the club of public SPF producers operating facilities in Western Canada that managed to achieve positive net income after tax in Q1. We barely made it. We reported net income of $600,000 or just under $0.02 per fully diluted Conifex share. But we generated EBITDA in Q1 of $4.9 million, which incidentally is equivalent to roughly 30% of our present equity market capitalization. Two years ago, we alerted our shareholders that the Chief Forest's May 2023 harvest determination, coupled with some other forest ministry initiatives we were pursuing, would enable our Mackenzie site to migrate to a lower and more enviable ranking on the North American lumber industry cost curve. Our Q1 results illustrate the EBITDA we are capable of achieving when we access an affordable supply of quality sawlogs to support a 2-shift sawmill operation. Our Q1 results, as you'd be aware, are fully consistent with the guidance we provided you on our March call when we explained how transitioning to a 2-shift sawmill operation would substantially boost EBITDA. We would like to take about 5 minutes or so of your time now to provide our perspective on where we rank on the North American softwood lumber industry cost curve and the thoughts we have about our ability to continue to generate positive EBITDA after duty deposit rates increase in the second half of 2025. The simple fact is that our Q1 2025 EBITDA per 1,000 board feet of lumber produced and sold from our integrated Mackenzie sawmill and power complex has not been matched by any other public forest products company in North America. We achieved EBITDA of CAD 4.9 million on shipments of 38 million board feet, and this translates into EBITDA of CAD 129 per thousand board feet of lumber produced and sold in the quarter. This is equivalent to approximately $90 per thousand board feet. In the opening quarter of 2025, traditional low-cost SPF producers, Weyerhaeuser, Potlatch, Sheltic and West Timber earned between USD 35 and USD 53 per thousand board feet of the lumber they produced and sold. I think Canfor's North American lumber business earned something like CAD 48 per thousand board feet and Interfor appears to have earned around $56. So our Q1 results reflect seasonally strong EBITDA margins for 2 main reasons. The first is that in Q1, we benefit from relatively low log costs because our winter harvest is sourced from relatively closed end, low-cost truck delivery van. Our delivered log costs are higher in the summer and fall because our harvesting activity takes place in the northern half of the Mackenzie timber supply area. And in the North, the harvesting the delivery costs are greater than they are in the South. And the second reason we typically do well in the opening quarter of the year is that the prices we received for the electricity we well to the [indiscernible] hydro grid under our energy purchase agreement are higher in the opening and closing months of each calendar year, but lower in the middle month. And, typically, our Q2 EBITDA contribution from power generation is held back by the annual maintenance downtime that we take at our plant. So, against that backdrop, we'’ve looked at a variety of scenarios to project our results over the remainder of 2025. Our mid pay projection assumes higher duty deposit rates, but it assumes that there are no additional tariffs. Our pricing assumptions for the year align with the price assumptions made by the leading forest product analysts in Canada. Our mid case projected indicates that a full year EBITDA per 1,000 board feet of lumber produced and sold in 2025, is expected to be in line with or a bit higher than what [indiscernible] ’product analysts presently expect Canfor, Interfor, and Max Fraser to achieve in 2025 from their North American operation. On our recent calls with you, we discussed the [indiscernible] release by D.C.T. Forrester of a new harvest level determination for the Mackenzie timber supply, included in the release was the removal of the previous requirement to secure 55% of our sawlog supply from dead pine salvage stands, most of which had already lost their commercial value to sawlog. The current annual allowable cut for the Mackenzie TSA is [indiscernible] cubic meters. We operate the only sawmill. Our annual fiber requirements are roughly [indiscernible] cubic meters. So you can see that the new AAC is roughly 2.9 x our present requirement. And this confirms our view that we do not face supply constraints in MacKenzie, similar to those that are presently challenging many sawmill operations in DC and in certain other regions. We are fortunate to operate in a private supply region that has a degree of sawlog self sufficiency that is unparalleled in the interior region of DC and perhaps in any other major [indiscernible] supply region in Canada. As a company, we’'ve gone through a transition period over the past two years, and our current harvest is now primarily sourced from green, commercially viable sawlogs there. This shift in log quality is the main reason our EBITDA loss fell in half in 2024 from what we incurred in 2023, and the main reason we are capable of achieving, in our opinion, low double digit EBITDA in 2025 with further improvement in 2026. So summing up on this point, after funding some minor projects that will improve the reliability and consistency of our [indiscernible] shift operation, we are confident that the EBITDA per 1,000 board feet of lumber we produce and sell will be in line with or slightly higher than the EBITDA reported by the other major public lumber companies whose diversified operations are viewed as being fully cost competitive and economically sustainable by knowledgeable industry of service. Turning to duty deposits. You’'ll note that we expensed [indiscernible] of duties in the quarter, representing the full amount of countervailing and antidumping duties incurred on shipments of softwood lumber from Mackenzie to the U.S. at a combined duty deposit rate of 14.4%. As of March 31, we had cumulative duties of USD 40.3 million. Kelvin trucks by U.S. customs and Border Protection. On a pretax basis, these deposits are equivalent to approximately CAD [indiscernible] Conifex share. Except for roughly [indiscernible] recorded as recoverable and respectable for payment, [indiscernible] has recorded the duty deposit as an expense. With the cumulative duty for the $1.38 per share and recent trading prices of [indiscernible] per share and the plenty of tax shelter that we have. Conifex shareholders should benefit by more than the shareholders of any other publicly traded lumber company if an eventual trade settlement includes the provision for partial repayments of duties held on deposits. As everyone on the line that covers our industry knows is that some preliminary duty rates have been announced regarding duty deposit rates that are projected to increase from 14.4% presently. And in our case, if the preliminary rates hold, we expect to pay something like 26.81% in September and perhaps 34.45% in November and beyond. Turning to our book value. Our book value per share exceeds $2 per share. And as you know, that it exceeds our share trading price by 5 or more times. In closing, and before taking your questions, on behalf of our Board of Directors, I wish to express gratitude and deep appreciation first, to our employees for their continued hard work, helping strengthen the economic sustainability of our company in an environmentally responsible and safe manner. And secondly, to our lenders who continue to demonstrate their confidence and trust in the economic sustainability of our integrated site at Mackenzie as well as the asset values underpinning our fiber procurement, lumber manufacturing and power production platform. This employee and lender support is crucially important given present cross currents in the British Columbia Lumber Industry and the broader North American economy. Our differentiated and high-quality fiber supply coupled with the contribution from $100 million we've invested in power generation, provide us the foundation we require to sustain a profitable lumber business at our site in Mackenzie, B.C. All of us at Conifex, thank you for your interest in our company. And Andrew, Trevor and I look forward to responding to any questions analysts and shareholders may have. And so we'll turn our discussion back to the operator.

First question is from Kirk Lumkey from Imperial Capital.

So I just wanted to -- with respect to the guidance, I heard fiscal '25 adjusted EBITDA in the low double digits. Is that -- did I hear that correctly?

Yes, very low double digits. And if you look at what the general forecasts are for the major companies. The forecasts are generally coming in around $40 or $50 per 1,000 board feet of SPF that's produced and sold. And so if we do $170 million or $180 million, and we get $60 or $70 per thousand board feet over the 12-month period. We would be in the low double digits for EBITDA for the calendar year.

Okay. That's helpful. And so that assumes no additional tariffs, but it does assume...

It assumes the ramp-up of duties to 34.45% in the second half of 2025.

Okay. And can you characterize the pricing assumption there? Is it roughly in line with today's pricing? Or is it -- are you assuming some ramp?

No, we are assuming a ramp. We are -- we monitor what the major analysts on the street have been forecasting. And the latest number I have is that one bank dealer is at benchmark prices of $528 in '25 and $548 in 2026. Others are generally $475 to $550 and one analyst is at $485 and $490. So our pricing assumptions as we get towards the end of the year are -- represent an improvement from today's price. They probably aren't materially different from the Q1 average price that we had in the benchmark of $488. And the November futures are 18% higher than the current cash market prices. So we expect that some of the costs of the incremental tariffs will be borne by lumber consumers, not producers. And so we expect to have some price relief that partially offset the higher duties that we will be incurring.

Got it. I appreciate it. And on the last call, you mentioned positive EBITDA in the second quarter. Are you still thinking it will be positive?

Yes. But it will be quite a bit lower. And the main reason for that is that our power plant is down for maintenance for at least 4 weeks. So the power plant goes from a source of EBITDA to consume EBITDA for repairs. And so that knocks our EBITDA back in the quarter. And secondly, that our team did a great job transitioning from a single shift to a 2-shift operation early in the new year, but the weather didn't cooperate with us enough. And so we didn't get enough logs in the yard to sustain a full 2-shift operation. So we're running our mill 4 days a week now on 2 shifts rather than 5 days. And we're hoping we can maintain that rate going through the balance of the year, but we might have to take a few extra days of downtime. So we're not going to have capacity utilization rates that are at what we expect to be able to achieve on a 2-shift basis on a go-forward basis. And that's because we had a relatively late start to shifting our harvest activities and boosting them up to support a 2-shift operation. So we don't plan to use the [indiscernible] for the EBITDA in Q2, but it's going to be more significantly reduced from Q1.

Got it. Okay. I appreciate it. And then my last topic would be liquidity. How do you -- how would you -- how do you feel about it? Do you need to borrow additional monies to fund the ramp in working capital or not?

Yes. Well, that is the subject. We have a very close relationship with our main lenders, one for the power plant and one for our sawmill business. They're separately financed businesses. And we really appreciate the efforts that the lenders have taken to understand the competitiveness of our facilities. But the fact of the matter is that in the sawmill side of things, we have a 14% interest rate. And we accepted a higher interest rate because we did not want to be burdened by a fixed charge coverage ratio. So -- and in the current year, there are going to be some onetime charges once the duty rates are finalized and there will be some accounting adjustments taken against EBITDA probably in Q3 of this year. But the terms of our loan agreement are such that, that will not create any challenges for us. So the second point I'd make is that 14% is expensive. So we don't like keeping a whole bunch of cash around and paying 14% interest on it. So we don't have much surplus liquidity at all, but we'll be spending some time with our lenders in the next 4 weeks or so reviewing our second half plans in more detail and looking at factors such as several small capital projects that we have that have very rapid paybacks on them. And then secondly, we want to spend some money developing sands for our winter harvest season and next summer's summer harvest. And so we're going to be putting some capital to work developing sands for future harvest.

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

Well, thank you for that very comprehensive questions. And thanks to everyone on the call for monitoring our progress and showing interest in our company. It's much appreciated by all of us. Enjoy the rest of your day. Thank you.

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