Conifex Timber Inc.

All participants, thank you for standing by. The conference is ready to begin. Good morning, ladies and gentlemen. Welcome to the Reconnaissance Chamber, Inc. Q1 2025 results conference call. I would now like to turn the meeting over to Mr. Ken Shields. Please go ahead.

Good morning, everyone, and welcome to our call covering our Q1 2025 results. I'm in our Vancouver office today, but our Chief Operating Officer, Andrew McClellan, and our Chief Financial Officer, Trevor Frugge, are participating on this call from our regional office in Prince George. Let's quickly deal with the 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 1 and 2 of the management discussion and analysis that we released this morning. Turning to our Q1 results, all of us at Conifex are most pleased that our Q1 2025 net income allowed us to join Russ Fraser as the second member of the Club of Public SPF Producers operating facilities in Western Canada that managed to achieve positive net income after taxing Q1. We barely made it. We reported net income of $600,000, or just under two cents for fully diluted Conifers shares. But we generated EBITDA in Q1 of $4.9 million, which incidentally is equivalent to roughly 30% of our present equity market capitalization. Two years ago, we alerted our shareholders that the Chief Forrester's May 2023 harvest determination, coupled with some other forest ministry initiatives we were pursuing, would enable our McKenzie site to migrate to a lower and more enviable ranking on the North American lumber industry cost curve. Our Q1 results illustrate the ecosystem we are capable of achieving when we access an affordable supply of quality saw logs to support a T-shift sawmill operation. Our T1 results, as you'd be aware, are fully consistent with the guidance we provided you on our March call when we explained how transitioning to a T-shift sawmill operation would substantially boost VFDA. We would like to take about five minutes to or so of your time now to provide our perspective on where we rank on the North American software lumber industry cost curve and the thoughts we have about our ability to continue to generate positive EBITDA after duty deposit rates increase in the second half of 2025. The simple fact is that our Q1 2025 EBITDA for 1,000 board feet of lumber produced in schools from our integrated McKinsey sawmill and power complex has not been matched by any other public forest products company in North America. We achieved EBITDA of Canadian $4.9 million on shipments of 38 million board feet. and this translates into EBITDA of Canadian $129 for 1,000 board seats of lumber produced in golden quarters. This is equivalent to approximately $90 for 1,000 board seats. In the opening quarter of 2025, traditional low-cost SPF producers, Weyerhaeuser, Potlatch Celtic, and West Timber, earned between U.S. $35 and U.S. $53 per thousand board sheets of the lumber they produced and sold. I think Canfor's North American lumber business earned something like Canadian $48 per thousand board sheets, and Interfor appears to have earned around $56. So our Q1 results show reflect reasonably strong EBITDA margins for two main reasons. The first is that in Q1 we benefit from relatively low log costs because our winter harvest is sourced from relatively close-end, low-cost truck delivery stands. Our delivered log costs are higher in the summer and fall because our harvesting activity takes place in the northern half of the McKenzie timber supply area. And in the north, the harvesting and delivery costs are greater than they are in the south. And the second reason we typically do well in the opening quarter of the year is that the prices we receive for the electricity who sell to the BC Hydro grid under our energy purchase agreement are higher in the opening and closing months of each calendar year, but lower in the middle months. And typically, our G2, G8 contributions from power generation is held back by the annual maintenance downtime that we take at our plant. So, against that backdrop, we've looked at a variety of scenarios to project our results over the remainder of 2025. Our mid-case projection assumes higher duty deposit rates, but it assumes that there are no additional tariffs. Our pricing assumptions for the year align with the price assumptions made by the leading forest product analysts in Canada. Our mid-case objective indicates that a full-year EBITDA for 1,000 board feet of lumber produced and sold in 2025 is expected to be in line with, or a bit higher than, what board product analysts presently expect Canfor, Interfor, and LexRaiser to achieve in 2025 from their North American operations. On our recent calls with you, we discussed the May 4th, 2023 release by D.C.' 's Chief Forester of a new harvest level determination for the McKenzie timber supply area. Included in the release was the removal of the previous requirement to secure 55% of our stall-off supply from dead pine salvage stands most of which have already lost their commercial value. The current annual allowable cut for the McKenzie TSA is 2.32 million cubic meters. We operate the only sawmill. Our annual fiber requirements are roughly 800,000 cubic meters. So you can see that the new AAC is roughly 2.9 times our present requirements And this confirms our view that we do not face supply constraints in McKenzie, similar to those that are presently challenging many sawmill operations in D.C. and in certain other regions. We are fortunate to operate in a fiber supply region that has a degree of saw log self-sufficiency that is unparalleled in the interior region of D.C., and perhaps in any other major saw loss supply region in Canada. As a company, we've gone through a transition period over the past few years, and our current harvest is now primarily sourced from green, commercially viable saw loss stands. This shift in raw quality is the main reason our E50A loss fell in half in 2024 from what we incurred in 2023, and the main reason we are capable of achieving, in our opinion, low double-digit EBITDA in 2025 with further improvement in 2026. So summing up on this point, after funding some minor projects that will improve the reliability and consistency of our C-SHIFT operations, We are confident that the EBITDA for 1,000 board feet of lumber we produce and sell will be in line with or slightly higher than the EBITDA reported by the other major public lumber companies whose diversified operations are viewed as being fully cost competitive and economically sustainable by knowledgeable industry observers. Turning to duty deposits, You'll note that we have spent $2.8 million of duties in this quarter, representing the full amount of countervailing and anti-dumping duties incurred on shipments of softwood lumber from McKenzie to the U.S. at a combined duty deposit rate of 14.4%. As of March 31, we had two of those duties of $40.3 million U.S. held in trust by U.S. Customs and Border Protection. On a pre-hatch basis, these deposits are equivalent to approximately Canadian $56 million, or $1.38 for Tronifex shares. Except for roughly $11 million recorded as recoverable and respective overpayments, Tronifex has recorded the duty deposits as an expense. With two months of duty for the $1.38 per share and recent trading prices of $0.30 to $0.40 per share and the plenty of tax shelter that we have, contract shareholders should benefit by more than the shareholders of any other publicly traded lumber company if an eventual trade settlement to increase the provision for partial repayments of duty held on deposit. As everyone on the line that covers our industry knows is that some preliminary duty rates have been announced regarding duty deposit rates that are projected to increase from 14.4% presently And in our case, if the preliminary rate holds, we expect to pay something like 26.81% in September and perhaps 34.45% in November and beyond. Turning to our book value, our book value per share is $2 per share. And as you know, that's... It exceeds our share price by five or more times. In closing, and before taking your questions, on behalf of our board of directors, I wish to express gratitude and deep appreciation first to our employees for their continued hard work helping strengthen the economic sustainability of our company. in an environmentally responsible and safe manner. And secondly, to our lenders, who continue to demonstrate their confidence and trust in the economic sustainability of our integrated site at McKenzie, as well as the asset values underpinning our fiber procurement, lumber manufacturing, and power production platforms. This employee and lender support is crucially important given the present cost in the British Columbia lumber industry and the broader North American economy. I differentiate it in high-quality fiber supply coupled with the contribution from $100 million we've invested in power generation. provide us the foundation we require to sustain a profitable lumber business at our site in Trinity, D.C. All of us at Conifers thank you for your interest in our company, and Andrew, Trevor, and I look forward to responding to any questions analysts and shareholders may have, and so we'll turn our discussion back to the operators.

Thank you. You may press star 1 if you have a question. First question from Kirk from Imperial Capital. Please go ahead. Hello, Ken. Appreciate the call.

Hi, Kirk. So I just wondered, with respect to the guidance, I heard physical 25, it's yesterday that's on the low double digits. Did I hear that correctly? Yeah, very low double digits. And... If you look at what the general forecasts are for the major companies, the forecasts are generally coming in around $40 or $50 per thousand board seat of STF that's produced and sold. And so, you know, we do $170 or $180 million in we get $50 or $70 per thousand for it to be over the 12-month period, we would be in the low-level position for EBITDA for the calendar year. Okay. Thank you. That's helpful. And so that assumes no additional tariffs, but it does assume... It assumes the ramp up exceeding 34.45% in the second half of 2025. Okay. And can you characterize the pricing assumption there? Is it roughly in line with today's pricing? Or is it maybe assuming some ramp? No, we are assuming a ramp. We are, you know, we monitor what the major analysts on the street have been forecasting. And, you know, the latest number I have is that one bank dealer is just – Benchmark prices of 528 and 25 and 548 and 2026. Others are generally 475 to 550. And one analyst is at 485 and 490. So our pricing assumptions as we get towards the end of the year represent an improvement from today's price they probably are materially different from the Q1 average price that we had on the benchmark of $4.88. And, you know, the November futures are 18% higher than the current cash market prices. So we expect that some of the costs of the incremental tariffs will be borne by lumber consumers, not producers, and so we expect to have some place relief that partially offsets the higher duty that we will be incurring. Got it. I appreciate it. Thank you. And On the last call, you mentioned positive EBITDA in the second quarter. Are you still thinking it will be positive? Yes, but it will be quite a bit lower. And the main reason for that is that our power plant is down for maintenance for at least four weeks. So the power plant goes from a source of EVA-CA to consume EVA-CA for repairs. And so that knocked our EVA-CA back in the quarter. And secondly, that... Our team did a great job transitioning from a single shift to a two-shift operation early in the new year, but the weather didn't cooperate with us enough, and so we didn't get enough logs in the yard to sustain a full two-shift operation. So we're running our mill four days a week now on two shifts rather than five days, and we're hoping we can maintain that rate going through the balance of the year, but we might have to take a few extra days of downtime. So we're not going to have capacity utilization rates that are what we expect to be able to achieve on a two-shift basis, not on a go-forward basis. And that's because we had a relatively late start to shifting our harvest activity and boosting them up to support a two-shift operation. So we don't plan to use the REST 10 for the EFDA in the future, but it's going to be more significantly reduced than the E one. Got it. Okay. I appreciate it. And then my last topic would be liquidity. How do you, how would you, how do you feel about it? Do you need to borrow additional money to, to um to fund you know the ramp and working capital or or not yes um well that is um you know the subject we have a very close uh relationship with uh i mean uh members one for the power plant and one for a sawmill business there's definitely finance businesses And we really appreciate the efforts that the lenders have taken to understand the competitiveness of our facilities. But the fact of the matter is that in the nominal side of things, we have a 14% interest rate. And we... we accepted a higher interest rate because we did not want to be burdened by a fixed charge coverage ratio. So, and, you know, in the current year, there are going to be some one-time charges once the duty rates are finalized. and there will be some accounting adjustments taken. I think he's at VA probably in Q3 of this year, but the terms of our loan agreement are such that that will not create any challenges for us. So the second point I'd make is that 14% is expensive, so we don't like keeping a whole bunch of cash around and paying 14% interest on it. So we don't have much surplus liquidity at all, but we'll be spending some time with our lenders in the next four weeks or so reviewing our second half plans in more detail and looking at You know, factors such as several small capital projects that we have that have very rapid paybacks on them. And then secondly, we want to spend some money developing stands for our winter harvest season and next summer harvest. And so we're going to be putting some capital to work developing stands for future harvest. Okay. I appreciate it. Thank you.

Thank you. As a reminder, you may press Psalm 1 if you have a question.

Thank you for that very comprehensive question, and thanks to everyone on the call for monitoring our progress and showing interest in our company. It's much appreciated by all of us. Enjoy the rest of your day.

Thank you. Thank you. The conference has now ended. Please click the lecture lines at this time and thank you for your participation. This conference is no longer being recorded.