Conifex Timber Inc.

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All participants, please stand by. Your meeting is ready to begin. Good afternoon, ladies and gentlemen. Welcome to the Conifex Timber Inc. 2021 Results Conference Call. I would now like to turn the meeting over to Mr. Ken Shields. Please go ahead.

Well, thank you, Eric, and good afternoon, everyone, and welcome to this call covering our Q4 and full-year 2021 results. Chief Financial Officer Winnie Tang is here with me in Vancouver, while Operating Head Andrew McClellan joins us from northern D.C. The three of us are available to respond to questions that analysts and shareholders may have upon the termination of our call. Before proceeding further, we all wish to we emphasize that our number one priority continues to be protecting the health and safety of employees and their families. All the men and women at our harvesting locations, sawmill, and power plants deserve the credit for ensuring a safe work environment. They've mitigated the risks associated with an upsurge in COVID infection rates through their strict adherence to our robust COVID safety protocols. They allowed us to deliver positive EBITDA in Q4 of 2021 and solid net income in the opening two months of 2022 with no safety violations, workplace transmissions, or downtime. Let's quickly deal with one 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 page 1 and 2 of the ND&A dated March 7th that we released an hour or so ago. Turning to our financial results for the year, we achieved EBITDA of just under $52 million in 2021, which is equivalent to $1 million per week. The net cash we generated in 2021 was employed in two main areas, number one, We spent $14.3 million repurchasing shares. And second, we invested $25 million building inventory. The $17 million we invested in log inventories was planned. We entered 2022 with both a larger and a lower cost inventory than we had one year ago. This investment supports our target to achieve a 90% capacity utilization rate at our sawmill complex this year. Unit cash conversion costs are expected to benefit from our ability to spread fixed costs over a larger production base. The $8 million increase in lumber inventory was unplanned and entirely due to well-publicized disruptions in rail car supplies. Shipments approved for the main reason we and other interior VC number producers reported Q4 E50A that was below analysts' expectations. For the year, we earned $0.50 per share and increased our book value per share by $0.72 from $2.51 to $3.23 per share. The book value increased by an additional 12 cents per share, reflecting the cancellation of shares that we did purchase at a discount to book value. We also deposited around $11.6 million Canadian in duties, and that brought our potential duty refunds up to $19.4 million U.S. dollars, which is equivalent to roughly 60 cents Canadian per Conifex share before any allowance for holdbacks on potential duty refunds or potential tax provisions on duty refunds. Since our last call, many of you on the line have contacted us and asked what's happening in D.C. with respect to SOLOG availability, regulatory development, and cost competitiveness. We intend to use our remaining time to share our views on the first two topics and then to outline what we believe to be the single best opportunity available to us to improve our competitiveness at our McKinsey site. First, dealing with saw log availability. The projections the Ministry of Forest released a couple of weeks ago indicate that the interior BC saw loss harvest is projected to decline from 35.7 million cubic meters in their fiscal year ending March 31, 2022 to 31.4 million cubic meters next year and 30.2 million cubic meters the following year. If the ministry's projections prove accurate, Interior VC lumber production is expected to decline by approximately 1.4 billion board seats. This anticipated contraction in supply offset much of the new capacity coming on stream in the U.S. South. And in our view, it contributes to a near-term supply-demand balance that favors software lumber producers over consumers. We believe we are extremely well positioned in terms of our access to future sell-offs. Our operations are exclusively based in the McKenzie timber supply area. The land base in the McKenzie TSA is about equal to the combined land base in the states of Vermont and New Hampshire. We operate the only sawmill located on this large land base. We believe that the standing timber inventory in the McKenzie TSA is capable of supplying saw logs in perpetuity that are at least double our presence in immediately foreseeable log consumption. Our key point is that Conifex enjoys a degree of regional fiber self-sufficiency that is unique to the interior region of BC. This explains why we got plans underway to modernize and expand our domino complex, provided the conditions are right. Over the past few years, the ministry has imposed several new policies on forest sector operators in the interior region of D.C. Since the key features of many of the new policies remain undefined and unimplemented, it is impossible to assess how forest sector operators may be impacted. With this unprecedented regulatory uncertainty, we have no choice but to put sawmill modernization and expansion plans on hold until a few things happen. Number one, the Office of the Chief Forest releases its public discussion paper informing shareholders of its findings regarding the economically available timber supply, possible future harvest levels, as well as log quality considerations in the McKenzie TSA. We're also waiting until the Ministry advises us of the outcome of the consultations with First Nations whose traditional territory lies in the McKenzie TSA. We need to hear back about what their findings have been with respect to old-growth ecosystem conservation wildlife protection set-asides, and other factors that impact future harvest levels. Another item we're waiting on is some understanding of how the Ministry intends to address its need to restore competitiveness in the McKinsey TSA and therefore meet the requirements set out in legislation, more specifically Section 4 of the Ministry of Forests and Range Act, and I quote, to encourage a vigorous, efficient, and globally competitive timber processing industry in British Columbia, end quote. The last item that we're seeking additional input on is the process that the ministry intends to follow to ensure that future harvests are allocated or apportioned in a just and equitable basis amongst licensees in the McKinsey TSA. So that's a recap of the regulatory and security amount we're waiting for. And in our case, despite major capital expenditures being on hold for a year or perhaps longer, while the preceding topic says that we continue to fund capital expenditures necessary to make compliance compliant with safety and environmental obligations. We also spend money identifying and preparing sites for future harvest. And lastly, we do undertake smaller rapid return quick payback projects designed to improve the durability of our sawmill operations. So with the major capital projects in our traditional business on hold, We're focusing our efforts on a new opportunity we identified to enhance both the level and stability of future cash flow generation at a McKenzie site. If everything comes together as we think it can, we have an opportunity to lower our cash production costs by around $20 per thousand board feet of lumber produced, and thereby position a McKenzie site to generate positive EBITDA over an even wider range of commodity lumber price. We'd like to take the next five minutes of our time to review, one, the key features and strategic rationale for the new business opportunities we're exploring, and two, how revenues and EBITDA are generated in this new and complementary business. The search is on for sources of green power that can run high-performance computing operations to enable global computing requirements to operate in an environmentally and socially responsible manner. A one-time opportunity is available to us at Carnifex to successfully link BC's surplus hydroelectric power with our underutilized power assets in McKenzie and produce a win-win outcome for us and all British Columbians. Power surpluses are anticipated to remain in effect in the sea, reflecting a combination of lower demand from forest vector contractions and activity, coupled with new electrical supply coming on screen when the Site C project is completed. Against this backdrop, we joined forces with the CKDNA First Nations. Our partnership plans to utilize our operating team and power expertise to redeploy power distribution infrastructure presently sitting idle in McKenzie to develop a new business and that's the business of hosting HPC, or high-performing computer customers, at an industrial-scale data center. Our partnership plans to build and operate located adjacent to a power plant in McKenzie. The institutional quality customer we are working with intends to install computer hardware and software it owns to power and data center infrastructure we own. Our power plant team will assist with the installation of the equipment and provide operating and maintenance services to the customers. Initially, we expect our data center customers will primarily install servers servicing the Bitcoin network. Bitcoin has been you all know, has the largest market capitalization of all cryptocurrencies and is being widely adopted by institutional and retail investors. Once we have proven our capabilities at our additional data center site, we have potential to host and support other high-performing computer applications in the future, such as artificial intelligence, machine learning, or other blockchain networks. The way this business operates is that hosts such as Conifers provide a full suite of services to customers to enable them to produce digital currency assets on a reliable and cost-effective basis. It is customary for hosts like us to charge cash fees that more than fully recover the operating costs we incur at a data center site. However, customers wish to ensure that their interests and the host's interests are fully aligned to ensure that both parties work collaboratively to maximize data center productivity and uptime reliability. This mutually beneficial alignment is achieved by having our customers agree to provide us an opportunity There are additional fees tied to the performance and operating margins achieved at the data center. Performance fees are typically paid in the form of digital currency. The performance fees to which we are entitled and which we expect to have in the future will be recorded at fair value on the data perceived. In our case, the trial program brought the 3 megawatts of capacity underway, and the results are encouraging. we should have sufficient information available to us to validate this business model in about six weeks, at which time we will provide shareholders additional information about the potential we have to build a data center with 25 megawatts of reliable electricity supply. Before turning it over to your questions, I'd like to advise that we're off to a good start in 2022. When we release our results for the first and second quarters, we expect to be able to demonstrate that our 2021 runway of $1 million in weekly EBITDA and our power and lumber business is being duplicated in the first half of 2022. We will keep you posted on our revenue and EBITDA diversification initiative as that plan evolves. So we thank you for your interest in our company, and Winnie, Andrew, and I would be pleased to answer any questions you may have. So we'll turn the meeting back over to Eric.