Conifex Timber Inc.

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All participants, thank you for standing by. The conference is ready to begin. Good afternoon, ladies and gentlemen. Welcome to the Conifx Timbre Inc. 2022 Annual Results Conference Call. I would now like to turn the meeting over to Mr. Ken Shields. Please go ahead.

Well, thank you very much, Patrick, and good afternoon, everyone, and welcome to the Conifx Call, covering our fourth quarter and full year 2022 results. 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 on pages one and two of the MD&A we distributed earlier today. Our fourth quarter results were exactly in line with the guidance we provided on our November 8th call. Back then, we stated that we anticipated recording business interruption insurance proceeds in our Q4 income statement in an amount that would slightly more than offset potential losses at our sawmill complex, and we expected that our full year EBITDA and net income would be within 10% of the record levels we achieved in 2021. Q4 2022 EBITDA of 2.3 million brought our full year EBITDA to 46.7 million, which is 10% lower than the 51.8 million we reported last year. 2022 net income of 24.5 million was also 10% lower than we achieved in 2021. With fewer shares outstanding, earnings per share of 61 cents in 2022 were about a penny higher than we achieved in 2021. Because we paid a special dividend of 20 cents earlier in 2022, our year-end book value per share increased by just over 40 cents to $3.68 per share. We ended the year with $31.3 million US in potentially refundable duties on lumber, duty imposition that were on deposit, and of course, in Canadian dollars, that translates into just over $1 per Conifex share before any allowances for potential holdbacks and income taxes. We're very proud of what we achieved in 2022 in terms of our safety and sustainability rankings. We're also proud of the fact that our earnings per share increased slightly when six other lumber oriented public companies reported declines of 19% to 67% in their per share results for 2022. You will note that we recognize 9.6 million in our income statement to reflect the proceeds received from our business interruption insurance claim. A manufacturer's defect in the power plant turbine caused power generation to be curtailed for the closing six months of 2022. The proceeds we received are a testament to the fact that no shortfalls in our maintenance procedures nor in our maintenance processes were identified by the engineering and accounting experts that the insurers engaged to examine the cause of the power plant curtailment. It's also a testament to the high uptime reliability our power generation team achieves when they're not held back by factors completely outside of their control. All of us at Conifex, including our entire board of directors are extremely proud of the performance from our experienced highly competent power plant team. The results we reported for the closing six months of 2022 provide investors additional insight into the economic sustainability of our integrated and codependent harvesting sawmilling and power generation businesses at McKinsey, DC. My key point here is that the $100 million we have invested in our power generation business materially enhances and stabilizes our cash flow generation. It also furthers our objective to operate the most economically viable and environmentally sustainable softwood processing site in the interior region of DC. Since our last call, several of you have contacted us and asked what's happening in DC with respect to saw log availability, cost competitiveness, regulatory developments, et cetera. Permit us to share our views on these topics. We believe Conifex is well positioned in terms of saw log supply. As many of you know, our tenures are located in the McKinsey timber supply area or TSA. The land base in the TSA is about equal to the combined land base in the states of Vermont and New Hampshire. We operate the only sawmill on this large land base. We believe that the standing timber inventory in the McKinsey TSA is capable of supplying saw logs in perpetuity that are at least double and perhaps as much as triple our present and foreseeable requirements. We believe our company enjoys a degree of regional fiber self-sufficiency that is not available in any other TSA in the interior region of DC. Furthermore, if you examine our financial reports, you will note that we ended 2022 with record high log inventories of $33 million at a time when others were taking downtime due to fiber shortages. You will also note that our inventory write downs were just over $2 million when others were taking write downs of say, something like 20 or 50 times the amount we took. These figures suggest that our delivered log costs are competitive compared to other mills operating in the interior region of DC. Over the past few years, the ministry has imposed several new policy on forest sector operators in the interior of DC. Since many important regulations have yet to be drafted and or implemented, it's difficult to precisely determine how future saw log supplies and delivered log costs may be impacted. We expect that fiber supply will remain tight in the interior region of DC through the remainder of 2023. The main reason is that DC timber sales is finding it difficult to develop an auction stands to achieve its mandate to provide 20% of the saw log harvest in the interior of DC. DC timber sales excuse is that it's being held back by the provinces old growth retention, First Nations reconciliation and other emerging land-based management objectives. Looking at BCTF activity in the McKinsey and our neighboring Prince George timber supply areas, over the 2017 to 2019 period, BCTF auctions something like 4 million cubic meters annually and that it's 20% of harvest objective. In its fiscal year and March 31, 2022, BCTF auctioned just over 1 million cubic meters and accounted for considerably less than 10% of the harvest. Over the nine month period ending December 31, 2022, BCTF auctioned just over 300,000 cubic meters and accounted for a nominal portion of the harvest in Prince George and McKinsey. Converting the cubic meters into lumber, BCTF went from supplying the fiber requirements for four large interior DC sawmills to supplying the requirements at one small sawmill. These low auction volumes exacerbate fiber shortages. They directly increase the competition for and the cost of auction wood and contribute to artificially high stumpage rate in positions on tenured wood supply. Turning to lumber prices, we get the sense that prices have climbed down the side of the mountain, are now crossing the valley bottom and will soon begin to climb up the other side of the valley. We believe saw log supply constraints coupled with DC's cost structure will trigger further detailment announcements and produce a better balance between SPS supply and the lower demand currently being experienced. In our company, we expect our T1 earnings may lag the results reported by some other public lumber companies for three main reasons. The first is that our sawmill was offline in the first week of the year and we were forced to take an additional seven operating days of downtime because rail car shortages prevented us from shipping our lumber. Fortunately, the rail car supply has improved a great deal. The second reason is that our power generation results in February were held back as we progressed through the startup curve associated with a winter restart following eight months of downtime at the power plant. And the third reason is that our log cost in Q1 of 2023 will be at normal level, not at the written down levels available for certain other companies. Given these three factors, we expect we will report negative EBITDA in the opening quarter of 2023. It looks like we're probably gonna get back something like 10% of the EBITDA we earned in 2022. However, we expect our quarterly results to improve as we progress through the balance of 2023. That concludes my prepared remarks. Andrew McClellan, who heads our operations, Trevor Pruden, who heads our corporate services and business planning, and CFO, Rick Winnetang, are here with me today and we look forward to responding to questions analysts and shareholders may have. I'll now turn the meeting back to Patrick, our operator.

Thank you. You may now press star one at this time if you have a question. When prompted by the system, 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'll take the first question. We have a question from... Please go ahead. Gabe Nicholson.

Hi. Hey, sorry about that. This is Gabe with CIBC. Good afternoon. Hope everyone's doing well.

Yes, we are,

Dave. Thank you. Okay, so first question. I was just wondering, what kind of change do you see in the CFO system? We see in BC stumpage as we move from December into January. And then where do you think that's going to go in April here?

Okay, well, Andrew McFarland is closer to that than I am, so he'll answer your question, Dave. Thank you.

Hi, Dave. Andrew McClone here. As we kind of look forward into the remainder of Q1 here and into Q2, you know, we're seeing very, very competitive bidding and the DCTS auctions within the province that are outside of our timber supply area but influence the estimated winning bids with the pricing model in BC. So, you know, we expect, obviously with lumber prices declining, that we'll see some relief in stumpage, but hard to tell how much relief we're actually going to see with the competitiveness and the bidding within BC. So we'll see as the adjustments are made here, but not expecting any material decreases in stumpage.

Okay, yeah, great. Thank you. Thanks for your color on that. And then second, in terms of the letter or statement by the provincial government dated December 21, do you have any idea if your existing customer or that you started the trial run with back in September, will they be grandfathered in or is there any kind of details you could provide around that? And then just in terms of the three potential customers you guys mentioned, how do you think they will be impacted?

Okay, well, Trevor Prutin will respond to that question, David.

Hi, it's Trevor here. Yeah, you know, we continue to still like this business. We have a new customer for a 3-megawatt deployment that we anticipate will be energizing the miners in the coming weeks. We're still exploring how we can best scale up this segment and we continue to evaluate the potential impact from the BC government's order and council to BC Hydro on our hosting services business.

Okay, great. Great, thanks. I'll leave it there.

Great, thanks. Thank you. As a reminder, you may press star 1 if you have a question. The next question is from Paul Quinn. Please go ahead.

Yeah, thanks very much. Afternoon, guys. Just let me start with the BCTS, Ken, because you brought it up. What's the fix here?

I beg your pardon, what's the fix here?

Yeah, how do they fix this system? I mean, this has been going downhill. You know, they're supposed to get the 20% to make the competitive stumps system, you know, representative and competitive and the undercut is, you know, it's getting worse by the year. How do you fix this situation?

Okay, well, first of all, I can tell you, Paul, that if Andrew's forestry team chalked up statistics like that, that would never happen because we have a much more robust system of management accountability and delivering against business plans and targets. But, you know, Paul, I don't think there is a quick fix to it. I know that there are representations given by BCTS that they will do better. The BC Provincial budget indicated that there would be 6 million cubic meters of volume from BCTS in the year ending March 31. The best figures I have is that they'll be lucky to be at 5 million cubic meters. And I just think that the difficulty they're having to get approval to go into old growth stands or to go into areas that have some control and direction inserted by local First Nations make it very difficult for them to ramp up their volumes to anywhere close to the 20% of the provincial harvest. And my guess is that they might be at 10%. As I'm sure Paul, you've seen some of the work that's been done on the interior BC industry when people have attempted to assess what the impact, you know, in BC we've got a province wide reduction in the interior BC harvest level. And although old growth set aside and wildlife set aside and First Nations reconciliation objectives are having some impact on overall harvest levels, the single biggest cause of the harvest shortfall in BC is BCTS as an industry we've been encouraging the province and the ministry to ensure that BCTS does a better job, but there's not a lot of evidence that much progress is being made today.

Okay, and then just looking at, you experienced a couple of shuts in 2022 due to lack of rail car availability, but you also mentioned that this is better. What are the alternative transportation arrangements that you could make? And is that a longer term solution to move away from rail, at least, you know, to the next reload because there's a problem in McKenzie?

Hi Paul, it's Andrew here. So, you know, in terms of our ability to shift to trucking for example, certainly not something that we want to do. There's obviously some additional costs associated with the trucking lumber into a reload and re-handling. So, you know, our intention is to continue to work with our rail partners and ensure that we have adequate service to support our business. We do occasionally rely on trucking when we get behind on rail cars, but it's not a long-term solution for us.

And just so I understand that component, if you went to trucking route, what's the additional cost of the rail reload and where is that reload? Is that a Prince George reload for you guys?

Okay, well, Paul, given the nature of our core customer base, the trucking option that works best for us is to take the wood from McKenzie down to the lower mainland and ship it on the Burlington Northern into our key markets in Arizona and Texas. And so that's the trucking option and it's probably something like $35 or $40 per thousand for a feed of additional costs to do that. As you're probably aware, a truckload of lumber contains about as much as one third of a box car. So if you're trying to replace box car shortages with trucks, you need a lot of trucks. And what happens is that most of us in the interior of DC, we're all looking for trucks at the same time. So the higher cost trucking option can be a bit of an assist, but as Andrew mentioned, it's not a permanent solution.

Okay, so in a typical year, are you like 10% truck and 90% rail? Oh, probably 95.5 would be my guess. Okay, that's helpful. And then can any update on the McKenzie TSA AEC apportionment? Well,

Paul, that's a good question. And we've been promised that by the end of October, we've been promised that before the board meeting that we had earlier this morning. And who knows, Paul, if you go back to February of 2019, when the green and salvage harvest partition was modified, the chief forester at that time said that they were going to move quickly for an in-timber supply review. The data package for the review was issued in October of 2020. And the public discussion paper was issued a few months ago. So it's an unusually long time and we're still waiting for it. But while we're waiting for it, the trees are continuing to grow and there's probably more inventory in the timber supply area today than when they promised to have the report delivered to us. So we're not worried about what the AAC determination is. We think we'll have plenty of work to keep our mills pulling fiber up.

Okay, and just last question, you guys are the only operational sawmill in that TSA. Any movement on the other assets in the region as well?

Well, you know, Paul, we have the same information that you have, which is that 55 weeks ago, Canfor announced that they had arranged to sell their tenure to two local First Nations. And when Canfor released their results on February 28th, they essentially repeated the same statement that they made a year earlier. So reading that statement, it strikes me that that transaction is still on, but there's no forecast date for when they might have a binding agreement or expect to apply for the approvals for the tenure transfer. And we understand that their mill in McKinsey, that the machine centers have all been taken apart and they're sitting in crates ready to be shipped out when the tenure transaction closes. So people in McKinsey do not believe that there will be any sawmill production coming from that vacated site.

Okay,

that's all I had. Thanks very much, guys. That's all.

Thank you. We'll take the next question. Please go ahead. Thank you, Cooper.

Morning, Ken. I had the same question as Paul, but maybe I've got a couple other questions too. Firstly, is there any update on the, I think you have somewhere near a dollar share of duties that are on hold with the US government. Is there any update at all industry-wide on that? And secondly, your tax laws carry forward, if I recall, it's something like about a hundred and, might've been $180 million, about four and a half bucks a share, is that predominantly all in the US? Is there any left in Canada?

Okay, well, I'll talk about the duties and Winnie Tang will refresh us on our tax laws carried forward. So on the duties at year end, we were at 31.3 million US and at a 72 and a half cent dollar, which I think we're roughly at today, it's the equivalent of $1.08 per share Canadian before any possible holdbacks and before any possible taxes on the amount of the rebate. So that's answers to be requested and Winnie Tang will talk about our tax laws situation.

Yes, of course, thank you Ken, Winnie here. So thank you for that question about the taxes. I'm always excited to speak about taxes. So just to answer your question, the majority of those tax laws carried forward do relate to our US operations. We do have about 5% or so of our balance does relate to our Canadian operations. And that of course is after deducting losses that we utilized for the 2022 tax year. So I think we're in a good position heading into 2023 in terms of Canadian operations and just the ability to shelter our earnings there.

Okay, just following up Ken, the second part of the question on the duties, was there any update industry-wide on that?

Okay, good question. Yes, my understanding is that the federal government minister of trade is liaising with key executives in various provincial forest associations and that they're having a call in the next couple of days. And of course there's been some speculation that President Biden may be visiting Canada before too long. And of course the forest industry is working hard to have the resolution of the trade dispute on the short list of topics that the two country heads would discuss if indeed there is a business. So I might have a better feel for it when I'm updated by our industry association in the next couple of days, but that's my understanding as to where we're at today.

Okay, thank you Ken.

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

Okay, well thank you everyone for your interest in our company. And we're gonna get back to work to do everything we possibly can to get rid of the red pencils in terms of our EBITDA and the black ink in the closing half of 2023. So thank you, enjoy the rest of your day.

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