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 ConEffects Timber 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 ConEffects 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 1 and 2 of the MD&A we distributed earlier today. Our fourth quarter results were exactly in line with the guidance we provided on our November 8 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 that are 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 U.S. in dividends potentially refundable duties on lumber, duty impositions 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 but 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 as other income 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 ConFX, 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 McKenzie, D.C. My key point here is that the $100 million we have invested in our power generation business materially enhances and stabilizes our cash flow generations. It also furthers our objective to operate the most economically viable and environmentally sustainable software processing site in the interior region of B.C. Since our last call, several of you have contacted us and asked what's happening in B.C. with respect to saw log availability, cost competitiveness, regulatory developments, et cetera. Permit us to share our views on these topics. We believe Conifers is well positioned in terms of solar supply. As many of you know, our tenures are located in the McKenzie 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 McKenzie 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 BC. 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 D.C. Over the past few years, the ministry has imposed several new policies on forest sector operators in the interior of D.C. 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 B.C. through the remainder of 2023. The main reason is that B.C. timber sales is finding it difficult to develop an auction stand to achieve its mandate to provide 20% of the saw log harvest in the interior of BC. BC 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 McKenzie and our neighboring Prince George timber supply areas, Over the 2017 to 2019 period, BCTS auctioned something like 4 million cubic meters annually, and that hits 20% of harvest objectives. In its fiscal year ending March 31, 2022, BCTS 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, BCTS auctioned just over 300,000 cubic meters and accounted for a nominal portion of the harvest in Prince George and McKenzie. Converting the cubic meters into lumber, BCTS went from supplying the fiber requirements for four large interior BC 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 their climb up the other side of the valley. We believe SOLOG's supply constraints, coupled with BC's cost structure, will trigger further curtailment announcements and produce a better balance between SPS supply and the lower demand currently being experienced. In our company, we expect our Q1 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 costs in Q1 of 2023 will be at normal levels, 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. You know, it looks like we're probably going to 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 corporate services and business planning, and CFO Winnie Tang are here with me today, and we look forward to responding to questions analysts and shareholders may have. I'll turn the meeting back to Patrick, our operator.