Conifex Timber Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 7, 2023

There are 5 speakers on the call.

Operator

This conference is being recorded. Good afternoon, ladies and gentlemen. Welcome to the Conifex Timber Inc. 3rd Quarter 2023 Results Conference Call. I would now like to turn the meeting over to Mr.

Operator

Ken Shields, the Chief Executive Officer and Chairman of the company. Please go ahead.

Speaker 1

Well, thank you, Retka, and good afternoon, everyone, and welcome to our call covering our Q3 2023 results. Here with me, I have Our CFO, Trevor Pruden and our President, Andrew McClellan. And we're going to hear from both of them very shortly after I go statements and references to non IFRS measures and therefore call your attention to the warning statements set out on pages 12 of The MD and A dated November 7 that we released a short while ago. Turning to our results, in the 3rd quarter, we reported negative EBITDA of $6,700,000 which was similar to what we reported in Q1, But represented an improvement of around $2,000,000 from what we reported for the Q2. On our Previous call, we indicated that we expected improved lumber millnet sales realizations And that this would lead to improved results in Q3, although we caution that Q3 was expected to have negative EBITDA.

Speaker 1

Our Q3 results were favorably impacted by $1,700,000 in recoveries duty deposit overpayments, but this recovery was more than offset by A $2,400,000 inventory write down that was taken in response to the lower lumber prices That came into effect as we progress through Q3. And it was also impacted by $600,000 And write off that we took at a logging camp that was destroyed by a forest fire. Fortunately for all of us, no employees or contractors were impacted by the fire. And we were not using the camp Lower fire risk locations. We presently have $33,500,000 in potentially refundable duties, which translates into something like CAD46 1,000,000 Which is $1.14 per Conifex share.

Speaker 1

And many of you on the phone will recognize that these potential Duty refunds exceed our current trading price by at least 2 thirds and that this is unusual because The other public lumber companies share trading prices are well above their potential duty deposit refund. So I'm now going to turn it over to Andrew McClellan, who's got an important update on our outlook For our operations for the balance of 2023 and some preliminary comments on the outlook for 2024. Over to you, Andrew. Thank you very much, Ken, and good afternoon to those on

Speaker 2

the line, and welcome to our Q3 call. We're very pleased with our year to date accomplishments, particularly in terms of our safety performance, Environmental Compliance and Harvest Sustainability. I'd also like to take the opportunity to recognize our employees for their ongoing dedication and commitment Our sawmill is performing in line with our expectations. As we've mentioned previously, in May of 2023, The Chief Forester concluded that the remaining dead pine stands in the Mackenzie Timber supply area have lost their commercial value as sawlogs. And as a result, our shift to a greener log diet has improved sawmill performance, resulted in higher grade outturns and stronger selling As we continue to see incremental improvements in log quality, we anticipate even better grade out turns and further improvements These operational successes are further bolstered by lower delivered log costs, which will continue to positively impact our overall results In 2024, our power plant is operating well, and we anticipate will exceed 90% uptime through the front half of the year, extending into our annual maintenance window in 2024.

Speaker 2

Looking ahead Q4, we expect our 4th quarter EBITDA loss will be lower than our Q3 EBITDA loss, even if prices For lumber and exchange rates remain unchanged. In the coming weeks, we'll be diligently working on our 2024 budget and business plan, aiming to develop a realistic and achievable strategy that will enable us to report high single digit or low double digit positive EBITDA in 2024. We base this outlook on current exchange and duty rates assuming that 2024 benchmark lumber prices average out at US450 dollars per 1,000 board feet. For the remainder of 2023, we anticipate lumber prices to remain consistent with year to date levels, and we also our lumber production and shipments in the closing quarter of 2023 to modestly surpass those of the 3rd quarter With seasonally higher power prices recorded in our power business. As we look forward to 2024, we agree with an analyst estimate Forecasting a low double digit percentage improvement in benchmark lumber prices.

Speaker 2

This optimism stems from what we perceive to be an improved supply demand balance emerging For lumber producers in North America. For context, in the Northern Interior region of BC where we operate, Trailing 12 month lumber production has decreased by 1 third from 4,500,000,000 board feet in early 2021, 3,000,000,000 board feet currently. Additionally, it's worth noting there has been a further 1,000,000,000 board foot reduction in the Southern Interior region. Combining these 2 together, the interior BC lumber production has declined by 2,500,000,000 board feet since early 2021. On the demand side, we anticipate a boost from potential moderation in key interest rates, a critical driver of residential construction activity and lever prices.

Speaker 2

Additionally, we expect to benefit from lower stumpage charges and lower delivered well cost in Q4 of 2023 and into 2024. These improvements in the supply demand balance, coupled with our move to a lower ranking on the lumber industry cost curve, position us favorably to improve our EBITDA in 2024, even if lumber prices, exchange rate and duty and positions remain at 2023 levels. I will now turn the call over to our CFO, Trevor Prutten.

Speaker 3

Thank you, Andrew, and good afternoon, everyone. Our quarter end liquidity was unchanged at approximately $16,000,000 However, the loss we incurred in Q3 Caused our net debt to capitalization ratio to increase slightly from 32% at the end of Q2 to 34% at the end of Q3. Some of you on this call have advised us that 32% leverage ratio is higher than the ratios reported by many other public Lumber Company. I'd like to take the next few minutes to talk about our financial leverage. We have $122,000,000 of shareholders' equity at book value.

Speaker 3

About $50,000,000 of our equity is utilized in our Power business to support just over $50,000,000 of limited recourse borrowings owed by our Power subsidiary. Our Power business has established a decade long track record of generating 12 plus 1,000,000 in annual EBITDA. This means that annual debt service obligations of just over $6,000,000 are well covered. With 11 years remaining on our power contract, we are confident that this loan will be fully repaid prior to the expiry of our power contract. Our remaining $72,000,000 of shareholders' equity is used in our lumber business to support just under $2,000,000 in capitalized leases And $12,000,000 drawn down on our ABL.

Speaker 3

It follows that our lumber business presently has a net debt to Capitalization ratio of about 16%. If our ABL facility was fully drawn, our debt to capitalization ratio would arise approximately to 27%. Consequently, it is unlikely our net debt to capitalization ratio in lumber will exceed 25%. I trust you agree with us that our lumber business is appropriately and conservatively financed. I will now turn the discussion back to Ken.

Speaker 1

Well, thanks very much, Trevor. And for the people on the call, You will be mindful of the fact that on our recent calls, we disclosed that we intend to leverage our power sector expertise to develop industrial scale power infrastructure to serve next generation data center customers. And we believe that many North American operators are interested in locating in BC because of our Affordable Green Power. In August, we released our white paper that outlined both the opportunities and Legal challenges associated with this initiative. And a short while ago, we distributed an update to our white paper That brings people up to date on recent developments.

Speaker 1

But our sense is that the province continues to be unaware Our technological advancements, innovation and changing user preferences have catapulted e commerce to the forefront of the financial sector. The province also appears to be unaware of the emergence of a new technology based on artificial intelligence, machine learning and other high performance computing or HPC applications. The most well known artificial intelligence application, STAT GPT, was launched 1 month before The provincial cabinet imposed its moratorium on providing interconnection services to 2 sites That we have under development. Chat GPT reached 100,000,000 users in just 2 months And many of you would be aware this is by far the fastest adoption of any app in history. And I seem to recall it took Something like 16 years for mobile phones to reach 100,000,000 users and probably 6 or 7 or 8 years for the Internet to reach But clearly, these new artificial intelligence and machine learning applications are gaining momentum and they're leading to skyrocketing demand for data center power infrastructure that our power team is very capable of designing, building and operating reliably.

Speaker 1

Our legal challenge to the moratorium that prevents us from moving ahead on this diversification initiative was heard in the Supreme Court of BC last month. And obviously, we'll advise you on the outcome of the hearing as soon as we hear what the outcome is and we're expecting to hear something towards the end of this calendar year. So summing up our presentation, clearly, Andrew and Trevor, In my opinion, demonstrated that our finances are solid And operationally, we have log cost and log quality tailwinds that will enable us And so against that backdrop, I think we'll

Operator

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

Speaker 1

Okay. Well, Bratka, thank you very much for handling our call today.

Operator

I do apologize The first question is

Speaker 4

Ken, I just want to get your thoughts on how you see stumpage prices playing out in British Columbia As we progress through 2024.

Speaker 1

Well, Hamir, as you know, What was previously a multi month lag has been shortened considerably. And I can tell you what's happening in our case is that our stumpage rates have Declined considerably in the recent months, and we're not expecting Any material change going forward in 2024. And We are shifting over to a slightly greener log diet. So, it's quite possible that operators that had a consistent harvest profile will end up Experiencing more stumpage relief than we experienced, but the fact of the matter is moving to a better log means that We don't have the same opportunity for lower stumpage prices because log quality is improving. So, we factored in our best assessment of stumpage costs in 2024 when we set our targets.

Speaker 1

And As Andrew mentioned, we think that we will have positive EBITDA if we have benchmark prices stabilized in the 4.45 4.50 range and that's a very significant change due primarily to log diet And improving grade outturns. So those are the targets we've set. Andrew and his team are Hard at work identifying the specific harvest locations and the grade out turns that we will as we move into the greener harvest, but certainly 2024 looks much more promising for us In 2023 was when we were obligated to comply with a salvage harvest Partition for a majority of our wood. And of course, since we started our summer logging program, We've been hard at work transitioning to a greener log diet.

Speaker 4

Great. Thanks, Ken. That's helpful. And just the last question I had was, as you Think about 2024 just based on your current sort of pricing view, what level of production would you be targeting and Where do you expect CapEx to land?

Speaker 1

I can answer The first question easily and part of the second question. But the last numbers that I've Dean indicate that we're going to come in at around 200,000,000 board feet of production in 2024 And that's up from $155,000,000 or $160,000,000 in 2023 is our best guess as to where we might And at the moment, our Capital expenditure forecast is for 2024 CapEx, certainly not to exceed Our depreciation and amortization, which runs about $12,000,000 a year, so it will be below that from the latest numbers that I've seen. But of course, if we end up being Cash flow positive and generating some cash. Andrew's got an inventory of high return, quick payback, Smaller projects on the shelf that we'll be pursuing. And so if the results are better in 2024, Our CapEx is likely to end up being a bit higher.

Speaker 4

Fair enough. Thanks, Ken. That's all I had.

Operator

Thank you. There are no further questions registered at this time. I would now like to return the meeting back over to Mr. Shields. You may proceed, sir.

Speaker 1

Okay. Well, thank you, Weta. And once again, everyone, Thank you for your interest in Conapex, and we look forward to talking to you early in 2024 as we report our full year results

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Conifex Timber Q3 2023
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