Conifex Timber Q2 2023 Earnings Call Transcript

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August 9, 2023

There are 6 speakers on the call.

Operator

Good afternoon, ladies and gentlemen. Welcome to Conifex Timber Inc. Q2 2023 Results Call. I would now like to turn the meeting over to Mr. Ken Shields.

Operator

Please go ahead.

Speaker 1

Well, thank you, Patrick, Good afternoon, everyone, and welcome to this call covering our Q2 2023 results. I'm joined today by Conifex's Chief Financial Officer, Trevor Pruden and Vice President and Chief Operating Officer, Andrew McPhail. We'll be hearing from both of them after some brief opening remarks from me. But 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 statement Set out on Pages 12 of the MD and A report dated August 9 that we released earlier.

Speaker 1

Turning to our results. In the Q2, we reported negative EBITDA of $8,700,000 which Worked out to a net loss of $9,200,000 or $0.23 per Conifex share. This loss lowered our book value per share to 3 point $0.25 After depositing nearly $1,000,000 in duties in the quarter, our potentially refundable duties now $1.10 per Conifex share before, of course, any allowances for potential holdbacks and income taxes. Our Q2 results trailed our Q1 results for two main reasons. Number 1, Canadian dollar denominated benchmark SPF prices were $32 per 1,000 4 feet lower in Q2 than in Q1.

Speaker 1

And secondly, our annual and another special maintenance project that we completed at our power plant meant that we lost 3 weeks of power production. Other than our financial results, we are very pleased with our Q2 achievements I will now turn the Leading over to CFO, Trevor Britton.

Speaker 2

Thank you, Ken, and good afternoon, everybody. As we continue to navigate the volatile lumber markets, We are focused on keeping a strong balance sheet. Our net debt to capitalization is 32% With our power loan and 9% excluding the power loan, which is non recourse to our timber assets, which is an entirely manageable position. Current ratio, which is current assets divided by current liabilities, was 2.2. This indicates that we can manage our obligations over the next 12 months.

Speaker 2

Over the last 2 months since I've been in this role, without being too specific, I've been approached by lenders who have expressed interest in Expanding or building a relationship with Conifex. They are attracted to the fact that our sawmill tenure and duty deposits are all unencumbered. So I'm encouraged that there is additional funding sources out there should we need them. I will now turn it over to Andrew to speak about the operations.

Speaker 3

Thank you very much, Trevor, and welcome to those present on our call today. Throughout the Q2, our focus and commitment to enhancing operational excellence Independability at our sawmill and power plant remained at the forefront of our strategic efforts. During the quarter, we witnessed one of BC's worst fire seasons on record, which added a layer of challenge to our operations. I'm extremely pleased by the remarkable performance and commitment exhibited by our Forrester team, ministry staff and forest firefighting crews during this period. As a result, we were able to effectively navigate through potential disruptions to our fiber supply.

Speaker 3

I'm equally pleased to report a positive shift in fire conditions, Leading us to anticipate a respite from any further fire related fiber supply challenges in Q3. As a result, We are well positioned to utilize the latter half of twenty twenty three to operate at full capacity and achieve an 85% operating rate for the entire year. Although stumpage rates in BC exhibited a general decline in Q2, it's important to note that our 2nd quarter deliveries typically remain modest due to our customary transition of logging contractors from the southern truck haul operations to the northern water deliveries. As we look ahead, we anticipate more favorable stumpage rates will continue to be available in the latter half of the year. I should note, however, And our strategic approach involves a conscious shift from malpractice harvesting practices towards a greener lout diet.

Speaker 3

This shift may moderate some of the cost advantage linked with reduced stumpage rates. Nevertheless, we expect to benefit from heightened hourly production rates, Lower conversion costs, enhanced trade out turns, elevated lumber recovery and improved sales realizations for the remainder of the year. In the latter part of Q2, we also encountered a series of nuisance power disruptions at our power plant, stemming from heightened lightning activity across the region. Much like the fire conditions, the weather has now transitioned to more typical patterns. As a result, We can confidently anticipate full capacity operation of the power plant in the latter half of the year with the advantage of seasonally elevated electricity prices.

Speaker 3

In the upcoming weeks, we anticipate the Ministry of Forest will provide additional clarity on the TSA or the timber supplier portion of the process in relation to the most recent timber supply review. In this regard, our efforts will be focused on ensuring licensees continue

Speaker 1

To

Speaker 3

have access to operating areas within the timber supply area, which provide opportunities to sustainably harvest the timber profile in line with the very clear expectations set out by the Chief Forrester in his most recent AAC determination. With that, I'd like to turn the meeting back to our CEO, Ken Shields.

Speaker 1

Okay. Well, thank you, Andrew. And building on Andrew's comments, We expect significantly improved results in the Q3, but we're still not quite sure whether lumber prices will be strong enough To enable interior BC sawmill operators like us to generate positive EBITDA. I'd like to now bring you up to speed on revenue diversification opportunity that we talked about at our last meeting. At that meeting, I how we were examining the feasibility of leveraging our power sector expertise by developing power infrastructure Designed to support next generation data centers.

Speaker 1

On that call, I also mentioned how the $100,000,000 we invested in Our business materially enhances and stabilizes our cash flow generation and furthers our objective to operate the most economically viable and environmentally sustainable software processing site in the Imperial region of BC. We believe we have a similar value enhancing opportunity available to us through the development of high performance computing data centers. The preliminary numbers we're working with indicate, number 1, that a fully built out HPC data center site can be The EBITDA contribution from a data center would be substantially equivalent to the contribution from our power plant, which means that the returns on investment are materially higher and the payback periods are materially shorter And the data set aside a bit of things. Based on these metrics, you can understand why we are challenging The legal validity of the 18 months deferral imposed on the project as described in our April press release. The Ministry of Energy Mines and Low Carbon Innovation here in BC has reflected feedback by August 18 On the process that has underway to develop a cryptocurrency mining policy in BC, We are well advanced preparing a white paper outlining how Conifex assesses the economic and social consequences of the moratorium imposed by BC, and we plan to publicly release our findings before the August 18 deadline.

Speaker 1

Our white paper is likely to conclude that any moratorium imposes Heavy costs on the residents of BC, including things such as number 1, Unnecessary limitations on value added development opportunities in rural and hard hit core communities, For Vaughan, indigenous reconciliation opportunities, a ChillOn investment in D. C. Reflecting the risk The future arbitrary government policy actions, another one's a general loss of economic efficiency and the stifling of innovation and employment. And probably the last one I'll mention is just an undermining of regulatory integrity and independence. So summing up, Conifex white paper outlines several ways and reasons why The actions of the prudential cabinet contravene the law, interfere with the regulatory system and in fact works Directly against the government's own stated economic and reconciliation goals.

Speaker 1

All of you on the line are most welcome to contact us if you have any questions or comments on the paper when it swings next week. Summing up our discussion today, we believe we're well positioned with a strong safety culture An unparalleled degree of softwood sawlog fiber cell efficiency, Near term opportunities to improve log quality and boost lumber revenues. We have industry leading power generation assets, So as Trevor mentioned, conservative financial leverage coupled with appropriate liquidity. And lastly, exciting future potential to capitalize on our ability And make good use of BP Hydros available green power in our region. Thank you for taking the time today to learn more about Conifac.

Speaker 1

Andrew and Trevor are here with me today, and we each look forward to responding to any questions analysts and shareholders may have. So I'll now turn the meeting back to our operator, Patrick.

Operator

Please clearly state your name to register your question. There will be a brief pause while the participants register for questions. Thank you for your patience. We will take the question. The participant did not leave their information.

Operator

Please state your name. Your line is open.

Speaker 4

Yes. Hopefully, this is me. It's Polko in RBC. Just asking you guys A slight disappointing order, but I understand the reasons for that.

Speaker 1

Now questions I've got is,

Speaker 4

Ken, on the HPC opportunity diversification, It sounds like it's a $50,000,000 tag on kind of $14,000,000 EBITDA, so kind of 3.5 year payback. Is that the way you're characterizing

Speaker 1

That's the way that we characterize it, Paul, with the Those were numbers that we did months ago. And with what's happening in this space, The demand for data center locations that have robust power Why continues to increase and in this sector of the data center industry, the margins have been expanding a little bit. So If we refreshed our numbers for today's industry conditions and it looks like The financial returns might be a little more robust than you've just mentioned.

Speaker 3

Okay. And then what

Speaker 4

are the next steps to actually going forward with that? You have to wait for the outcome of the lawsuit? Can you start raising some capital and when you're like How should we think about the opportunity?

Speaker 1

I think we should think about the opportunity this way, Paul. Number 1, there will probably be some court hearings After the end of our September quarter, so say early in October, If historical precedents are of some value, there could be an outcome released Right towards the end of the calendar year. And if we have everything that goes as planned, We will be liaising with high performance computing operators And coming up with some collaborative arrangements and the Opportunity we have is to build these facilities on a stepped basis Where you do an initial phase and then the cash flow from the initial phase helps fund some follow on phases. The other characteristic of this industry is that the operators in this sector In order to access Green Power, typically pay significant deposits upfront, And they are an important source of the capital we're firm. So we did our power plant Our project on a standalone basis and we have early indications that this business could be financed On a non recourse basis to our sauna sector, just as our power plant was.

Speaker 4

Okay, that's helpful. And then just in terms of outside, besides the diversification opportunity, What else are you guys thinking in terms of strategic direction for Conifex? Are you going to remain at sort of 1 sawmill, 1 power plant And with the potential diversification in HPC, are you going to Would you like to sell the business or look to increase any aspects?

Speaker 1

Well, in terms of The opportunities we have, and I'll talk about some of the strategic considerations because that's My direct area of responsibility. But Paul, at Mackenzie, BC, Going back to day 1, we were subject to a harvest partition That caused us to focus on salvage timber. So we didn't think it made sense to modernize and upgrade our sawmill at that time. And that's why we got into the power business, and we're glad we did because the 40 some people that we have in that business are enabling us to look at some other opportunities in the power sector. So on March 4, we had the new harvest level determination.

Speaker 1

As Andrew mentioned, by the end of this year, we believe that What's called the apportionment process, but it's really just a process by which the pie is divided up Appropriately amongst all the operators, so everyone has access to similar fiber. When that's done, we believe that just changing Certain machine centers that are site that there would be an opportunity To take that sawmill up to approximately 300,000,000 board feet of capacity. And we like that project a lot, Because so much of the return on the investment It's a function of cost savings, both in people. It's also a function Better lumber recovery, so we'd be getting more lumber out of our existing log consumption. And it's a function of some cost savings, say, in kiln drying When you have new modern kiln capacity.

Speaker 1

So because the return on that project is driven by Cost reductions and it's not really dependent on future lumber prices and exchange rates and duty impositions. That's looking attractive to us. And once there is further clarity and certainty about Our fiber supply will have to give that serious consideration. So we're prioritizing that internal project Overlooking externally, Paul. All right.

Speaker 1

That's great. Thanks for the update. Best of luck. Thank you.

Operator

Thank you. One moment please. Hi, Ken.

Speaker 5

It's Hugh. Just two quick questions. Firstly, think you have $11,800,000 that you said you've taken and you classified as income, but does that sit on your balance sheet as receivables currently?

Speaker 1

Well, I have to let Trevor ask that. Are you referring to the Refunded duties?

Speaker 5

Yes. No, I'm referring to yes, so the no, the 2.2 the 9.6 you took in 'twenty two On the business interruption insurance, is that where is that money right now?

Speaker 2

There is currently about $2,200,000 sitting in restricted cash.

Speaker 5

Okay.

Speaker 2

And then that's it. The rest It is sitting in the P and L. It's moved across.

Speaker 5

Sorry, but where is it on the balance sheet?

Speaker 2

Just $2,200,000 sitting in the restricted cash.

Speaker 5

Okay. And the $9,600,000 in 'twenty two, has that already come in then?

Speaker 2

That's correct.

Speaker 5

So you've got the money? Yes. Okay. The other question I have is just on the duties. What If I'm not mistaken, you're somewhere around $1 share of duties.

Speaker 5

Is that what kind of the number is in the U. S?

Speaker 1

Yes. That's, what, dollars 32,500,000 and I think I used the CAD 0.7 CAD0.045 and it works out to CAD1.10 per Conifex share.

Speaker 5

And there's no movement on that. That could be 1 year, 2 years. You never know when that's going to come.

Speaker 1

Yes. The impression we have and there's some meetings being held in BC On this topic, before the end of this month, which I'll be participating in, but The most recent impression I had is that with the election cycle in the U. S. That it's unlikely there'd be any Movement towards the settlement until the election gets over. So A 2 year time frame is probably realistic and possibly even longer.

Speaker 5

Okay. That's it for me. Thank you.

Speaker 1

Okay. Thank you.

Operator

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

Speaker 1

Okay. Well, Patrick, thank you very much Sure, for handling us today, and thank you to all the listeners who participated in the call. We look forward to reporting

Operator

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

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Conifex Timber Q2 2023
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