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

Thank you for standing by. This is the conference operator. Welcome to the Conifex Timber Inc.'s Second Quarter 2026 Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Ken Shields, CEO. Please go ahead.

Well, thank you very much, and good morning, everyone, and welcome to our call covering our second quarter and 6 months results. I'm Ken Shields, the Chair and CEO of Conifex, and I'm joined today by our CFO, Trevor Pruden; and our President and Chief Operating Officer, Andrew McLellan. Let's quickly set aside 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 our management discussion and analysis document dated August 14, 2026, that we released this morning. On our previous calls with you in March and May of this year, we expressed our belief that 2026 will be a transition year for Conifex. Curtailments in single shift operations in the first half of 2026 would help us reserved cash and would limit EBITDA losses during a period of high duties and low lumber prices. We also disclosed that management with advancing initiatives with the aim of securing additional funding recognizing that the resumption of operations in the back half of 2026 is contingent on securing additional funds. The Mackenzie timber supply area supports 2 distinct harvesting season. the winter logging season is our next available operating window. We will assess the near-term timing of our restart based on lumber market conditions prevailing at the time our financing closes. We remain focused on returning our employees and contractors to work as operations resume with the goal of posting 2-shift steady-state operations before the end of 2026. We continue to believe this year-end objective is achievable and it would support positive EBITDA generation. As a result of curtailments in our lumber and power business, we incurred a net loss of $9.5 million in Q2 versus $9.4 million in Q1. Our per share loss was $0.23 in both periods. Our EBITDA loss in Q2 was $6.3 million, $1.4 million less than our Q1 EBITDA loss of $7.7 million. Lumber production in the first half of 2026 of 35.8 million board feet was equivalent to a capacity utilization rate of approximately 30%. Turning to financing considerations. We are grateful for the continued support of our existing lenders through this period. PenderFund has supported our lumber business through bridge financing and credit facility amendments and Fiera has similarly supported our power generation business through deferrals and credit facility amendment. The Business Development Bank of Canada has also provided additional liquidity. This combined support has provided much needed liquidity while we pursue additional financing currently through other government entities. It's well known that the Government of Canada has programs in place to provide financing to Canadian enterprises that have been materially affected by tariffs and are unable to access other funding. The loan programs are designed to preserve Canadian jobs and operations and bridge otherwise viable businesses through periods of trade-related disruptions. On effect circumstances aligned closely with the intent of the government program, we are the largest employer in the Mackenzie region and our operations have been directly and materially affected by cumulative softwood lumber duty and tariff payments, which aggregate USD 49.4 million. The scale of these duties and tariff payments puts our financing need in context. As I just mentioned, cumulative duties and tariffs on deposits with the U.S. Customs and Border Protection amount to $49.4 million, which is equivalent to approximately CAD 68 million. Coincidentally, our lumber business borrowings and working capital deficit also totaled $68 million. In other words, absent the requirement to fund cash deposits in the U.S., Conifex would have a very manageable financial position. We believe this alignment between the challenges the government programs are designed to help overcome and our current liquidity and funding pressures, that combination positions in our opinion, our funding application to receive favorable consideration. Competitiveness in the lumber industry is importantly driven by delivered log costs, which generally represent approximately 2/3 of the total cost of producing lumber, the Mackenzie timber supply area carries a structural sawlog surplus with an annual harvest of 2.3 million cubic meters of sawlogs against our annual consumption requirements of approximately 800,000 cubic meters. Consequently, we have high fiber availabilities at delivered costs that are amongst the most affordable in the entire interior region of B.C. The next step in advancing our competitiveness is completing the financing required to execute several high-return rapid payback capital projects, none of which can be assured. These projects are designed to reduce conversion costs, improve sawmill reliability, boost planer capacity and lessen our dependence on the U.S. export market. In aggregate, the projects represent approximately $15.3 million of investments with 2- to 3-year payback periods forecast for the individual projects. The projects include equipment upgrades in our planer, improvements to our dry kiln and lumber grade optimization improvements. Taken together, our competitive delivered log costs and targeted capital program if successfully completed as currently planned are expected to move our Mackenzie site well down the SPF lumber industry cost curve. We believe our position on the cost curve, coupled with the fiber advantages available to us in Mackenzie provide a durable foundation for sustained cash flow positive operations through future lumber price cycle. We're presently involved in negotiations to determine how additional credit facilities we expect to receive will be integrated with the credit facilities presently in place with our lumber business and power plant lenders. Our immediate priorities are to, number one, secure additional capital to ensure we're in a position to launch a winter logging programs; number two, build sawlog inventories to levels sufficient to commence and sustain 2 shifts sawmill operations before the end of the calendar year; and three, restart our power plant and operate it on a 7x24 basis and additionally, complete the series of quick payback capital projects I referenced earlier. Based on analyst consensus estimate for SPF prices in 2027, the lower unit costs associated with spreading our fixed harvesting and manufacturing costs over our entire production base and the expectation that duty deposit rates decrease later this year and again the following year. With those assumptions, we currently expect our integrated lumber and power production site at Mackenzie will be EBITDA positive in 2026. We continue to believe the mid- and long-term supply and demand fundamentals for SPF remains strong and will contribute to an improved pricing environment, reinforced by structural contractions in Canadian and European SPF exports to the U.S. that have occurred over the past 3 years. Prior to closing, permit me to mention a cautionary note. Although we are most encouraged by the progress we've made and the positive feedback we've received from government funding organizations, there's no guarantees that Conifex will successfully obtain additional funding from any government program. For this reason, we plan to continue working collaboratively with our existing lenders to provide additional flexibility under our existing credit facilities, including potentially amending certain repayment terms and amortization period. Thank you for your interest in Conifex. Andrew, Trevor and I look forward to responding to any questions analysts and shareholders may have. So we'll turn the meeting back to the operator.

[Operator Instructions] The first question comes from Christian Reiter with Raymond James.

Ken, a couple of questions from me here. Maybe first off, where do you see BC Interior cash costs at the mill right now before any duties? And then as a follow-on, to what levels do you think could Conifex move to if you complete your capital projects?

Well, Christian, I answered the question that in 2027, once we're ramped up on a 2-shift basis, that we expect to be EBITDA positive based on the consensus SPF price from analysts. And the last time I added up what 6 or 7 of you were expecting for prices in 2027, it was USD 522. So implicit in that is that our cash cost once we have 10 percentage points and lower duties would be fairly close to USD 522.