Conifex Timber Q2 2024 Earnings Report

Conifex Timber EPS Results

• Actual EPS: -C$0.22
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

Conifex Timber Revenue Results

• Actual Revenue: $31.80 million
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Conifex Timber Announcement Details

• Quarter: Q2 2024
• Date: 8/13/2024
• Time: N/A
• Conference Call Date: Tuesday, August 13, 2024
• Conference Call Time: 5:00PM ET

Conifex Timber (TSE:CFF) Inc is a Canada based forestry company. It operates through two segments: Lumber and Bioenergy. The main activities of the lumbar segment include timber harvesting, reforestation, forest management, sawmilling logs into lumber and wood chips, and value-added lumber finishing. The firm's primary activities of the bioenergy segment are the generation of electrical power and the development of other opportunities in bioenergy and bioproducts which are complementary to the company's harvesting and manufacturing operations. The firm's main activities areas are the United States, Chinese, Canadian and Japanese markets. Most of the revenues are generated from the lumber in the United States of America.

Conifex Timber Q2 2024 Earnings Call Transcript

Key Takeaways

• Refinancing completed: Conifex secured a $25 million term loan, repaid Wells Fargo, and now holds over $10 million in cash with no fixed charge coverage ratio covenant, improving liquidity flexibility.
• Negative EBITDA of $7.1 million in Q2 was driven by a $60/MBF drop in lumber prices, power plant downtime for maintenance, and weather-related log shortages that curtailed production.
• Management forecasts gradual lumber price recovery, expecting Q3 EBITDA losses to be slightly lower than Q2 and Q4 losses to be substantially reduced as supply contracts and demand strengthens.
• U.S. countervailing and antidumping duties rose to a combined rate of 14.54%, increasing duty deposits to $36.2 million (≈CAD 1.20/share), which now exceed the stock price of CAD 0.30.
• A 20% cut in the Mackenzie TSA allowable annual cut and anticipated stumpage reforms should secure log supply from greener stands and lower production costs, improving Conifex’s ranking on the North American cost curve.

Presentation

[Operator]

Good afternoon, ladies and gentlemen. Welcome to the Conifex Timber Incorporated Q2 2024 Results Conference Call. I would now like to turn the meeting over to Mr. Ken Shields, the CEO and Chairman of the company. Please go ahead.

[Kenneth A. Shields, Chairman and CEO at Conifex Timber Inc.]

Well, thank you, Michael, and good afternoon, everyone, and welcome to this call covering our first and second quarter 2024 results. After briefly reviewing our finances and outlook for the balance of the year, we'd like to talk about our expectations for sawlog supply over the next few years. I'm joined by our President and Chief Operating Officer, Andrew MacLellan, as well as by Trevor Pruden, our Chief Financial Officer. All three of us will be very pleased to respond to any questions you may have at the end of the call. Let's quickly deal with a housekeeping item. We'll 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 that we released earlier today.

[Kenneth A. Shields, Chairman and CEO at Conifex Timber Inc.]

Our number 1 priority for the second quarter was to successfully refinance our lumber business. On June twelfth, we completed a CAD 25 million term loan with Pender Corporate Bond Fund and drew down CAD 22.5 million to repay the amounts we owed Wells Fargo and to position us to end the quarter with just over CAD 10 million in unrestricted cash on our balance sheet. One attractive feature of our new loan is that we are not required to maintain a fixed charge coverage ratio. When lumber markets are oversupplied, as they have been recently, prices weaken, losses are incurred, and it's not possible to produce earnings that enable you to cover your interest expense. It follows that a lumber producer's credit default risk increases when there are fixed charge coverage ratio requirements. Our lumber business loan does not have a similar coverage obligation.

[Kenneth A. Shields, Chairman and CEO at Conifex Timber Inc.]

However, we do have an asset coverage obligation, which requires us to ensure that the value of our tenures and sawmill complex comfortably exceed the amounts we've drawn on the loan. Given the quality and robustness of our tenures, we are highly confident that our asset value will remain sufficiently high, enable us to meet all our financial covenants. Now that two-shift operations have resumed at our sawmill complex, we've increased our investment in log and lumber inventories. We're working collaboratively with our existing lenders to ensure we retain a liquidity cushion after funding the tightened working capital requirements. Through the opening six months of the year, we incurred negative EBITDA of CAD 7.6 million, of which CAD 7.1 million was recorded in the second quarter. There were three factors that retarded our EBITDA by somewhere between CAD 2 million and CAD 3 million.

[Kenneth A. Shields, Chairman and CEO at Conifex Timber Inc.]

Number one was that benchmark SPF lumber prices were $60 per thousand board feet lower in Q2 than in Q1. The second reason is that our power plant was offline for much of June for annual maintenance, and clearly, the plant doesn't produce any EBITDA when it's offline. Yet we incur significant repair and maintenance costs, and this led to negative EBITDA in the power business. And the third factor was the unusual weather conditions, which adversely impacted our ability to deliver sawlogs to our Mackenzie sawmill. Log shortages forced us to operate only one of our two saw lines on numerous occasions, and they eventually forced us to curtail lumber production. This adversely impacted unit costs and shipments in the most recent quarter.

[Kenneth A. Shields, Chairman and CEO at Conifex Timber Inc.]

Looking ahead through to the end of the current year, we expect lumber prices to gradually increase, mainly due to supply contractions, but coupled with some strengthening in the demand as interest rates moderate. We expect our Q3 EBITDA loss will be slightly lower than in Q2, and we expect our Q4 EBITDA loss to be a lot lower than in Q2. These expectations assume that there's no nationwide rail strike. Turning to duty deposits, we expensed CAD 2.5 million in the first half of 2024, representing the full amount of countervailing and antidumping duties incurred on shipments of lumber to the U.S. at a combined rate of 8.05%. Earlier today, the U.S. Department of Commerce issued its final determination of the combined all others rate of 14.54%, covering shipments for the year ended December 31, 2022.

[Kenneth A. Shields, Chairman and CEO at Conifex Timber Inc.]

Beginning in the next few days, increased duty deposits will eat up another 6%+ of the sales proceeds we receive on U.S. lumber exports.... We now have cumulative duties on deposit that are potentially refundable of $36.2 million, and these duties on deposit are equivalent to just over CAD 1.20 per Conifex share. We'd like to take a moment and remind you that we continue to believe that our stock is by far the most undervalued forest product stock in Canada or perhaps the entire world. The equity market capitalizations of the other public lumber producers in Canada typically exceed the value of their duty deposits. In our case, our duty deposits of CAD 1.20 per share represent 4 times our stock trading price of CAD 0.30 per share.

[Kenneth A. Shields, Chairman and CEO at Conifex Timber Inc.]

Another example is that the other public lumber producers trade at prices that typically represent a 50% discount from their book value per share. We trade at an 88% discount from our book value per share of approximately CAD 2.50. The same is true when you compare our enterprise value to our lumber capacity, our timber tenures, our power production, or our potential duty refunds. It's clear we trade at a whopping discount to the companies in our peer groups.

[Kenneth A. Shields, Chairman and CEO at Conifex Timber Inc.]

While factors such as our smaller scale, our more limited geographic diversification, and our financial leverage could account for us trading at some discount to our peers, the fact that we trade at a tiny fraction of our peers' multiples is a matter that our board of directors has asked our senior management to review, and they wish us to outline initiatives that could be available to us to mitigate our valuation discrepancy. On May fourth of last year, as I've talked about before, the Chief Forester established a new allowable annual cut, or AAC, in the Mackenzie Timber Supply Area, or TSA. The new AAC was set at 2.39 million cubic meters, and it represented about a 20% reduction from the TSA's historical harvest of 3 million cubic meters.

[Kenneth A. Shields, Chairman and CEO at Conifex Timber Inc.]

The positive for us, of course, is that our harvest is now sourced from green stands, and we are no longer required to source a majority of our log supply from beetle kill salvage stands. We understand that the provincial forest minister will soon reset our harvest level to align with the new harvest level in the TSA. The main consequence of the forest minister's apportionment decision is that our internal timber supply will account for a slightly lower portion of our sawlog consumption, and open market sawlog purchases will account for a slightly higher portion. We presently hold a forest licence in the TSA with an AAC of 632,500 cubic meters, as well as a 50% interest in a tenure with an AAC of 300,000 cubic meters.

[Kenneth A. Shields, Chairman and CEO at Conifex Timber Inc.]

We expect that this combined harvest level of 782,500 cubic meters will likely be reduced by 18% or 19% to something around, say, 670,000 cubic meters. This suggests that open market purchases of around 130,000 cubic meters will be required to keep our mill fired up. The harvest level available in the balance of the TSA will exceed 1.7 million cubic meters, so you can see that our sawlog purchase requirement is well under 10% of the available supply. Our key point is that the Mackenzie TSA has the highest sawlog surplus relative to consumption of any TSA in the interior region of BC, and we do not anticipate any challenges securing our sawlog supply requirements, and furthermore, there may be some opportunistic sawlog purchase opportunities.

[Kenneth A. Shields, Chairman and CEO at Conifex Timber Inc.]

While the minister is looking at the TSA, we also expect him to put safeguards in place to ensure over-harvesting in the southwestern partition zone is not allowed to continue. This will help ensure that the manufacturing facilities we have in Mackenzie will have assured access to sawlog supply for decades to come. And we also, finally, understand that the minister intends to update its methodology for determining cost allowances and stumpage charge impositions in response to some inequities that have emerged over the past few years. The ministry recognizes that it's in the public interest to strengthen the economic sustainability of the ultra forest-dependent community of Mackenzie and its nearby First Nations communities.

[Kenneth A. Shields, Chairman and CEO at Conifex Timber Inc.]

The updated approach, in our opinion, also enables BC Timber Sales to better meet its mandated requirement to provide a full range of cost in place contracts for timber harvested from public land in British Columbia. Summing up, the Chief Forester's 2023 decision... and the ministry announcements that we expect imminently should enable our Mackenzie site to migrate to a lower and more enviable ranking on the North American lumber industry cost curve. Going forward, the EBITDA per thousand board feet of lumber produced that we expect to report in the future will align better with the amounts reported by the other major public lumber companies. Before closing off, I'd like to update you on our legal challenge.

[Kenneth A. Shields, Chairman and CEO at Conifex Timber Inc.]

The MD&A that we released earlier today provides background on the efforts we've expended over the past two years to utilize our power generation expertise to develop a new business and boost sustainable cash flow. As we've reported, our plans to scale up this new business were halted in December 2022, when the provincial cabinet instructed BC Hydro to suspend its obligation to provide electrical interconnection services to us. Our two sites that we were pursuing were removed from the interconnection queue, even though they were focused on high-performance computing and AI use cases that differ materially from the cryptocurrency mining use cases that were the focus of the provincial moratorium.

[Kenneth A. Shields, Chairman and CEO at Conifex Timber Inc.]

We continue to believe that the moratorium to discriminate against a certain class of customers and our removal from the interconnection queue are unjustified, and we therefore filed an appeal of the B.C. Supreme Court's decision. We've also advised BC Hydro of our intention to develop data center infrastructure of interest to customers that focus on HPC and artificial intelligence use cases. We expect to present our case to the B.C. Court of Appeal this fall. That concludes my remarks. Thank you for your interest in Conifex. And Andrew, Trevor, and I will be pleased to answer any questions analysts or shareholders may have, so we'll turn the meeting back to Michael.

[Operator]

Thank you, Mr. Shields. Ladies and gentlemen, please dial star one at this time if you have a question. Once again, ladies and gentlemen, please dial star one on your device keypad if you have a question at this time. There are no questions at the moment, Mr. Shields.

[Kenneth A. Shields, Chairman and CEO at Conifex Timber Inc.]

Okay. Well, Michael, thank you for hosting us today. I noticed that there have been some other recent calls where the question period has been extremely light, so, that's understandable. But, for those of you that are on the line and listening to the call, thank you for your interest in our company, and you're welcome to call us if you have further questions or comments. Enjoy the rest of the day.

[Operator]

Thank you. Ladies and gentlemen, your conference has now ended. All callers are asked to disconnect their lines at this time, and thank you for joining today's call.

Participants

Executives

• Kenneth A. Shields, Chairman and CEO