Conifex Timber Inc.

Thank you for standing by. This is the conference operator. Welcome to the ConFX Timber Inc. Fourth Quarter 2025 Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may reach an operator by pressing star then zero. I would now like to turn the conference over to Ken Shields, CEO. Please go ahead.

Yes. Well, thank you, and good morning, everyone, and welcome to this call covering our Q4 and full year 2025 results. I'm Ken Shields, the chairman and CEO of our company, and I'm joined today by our CFO, Trevor Pruden, and our president, Andrew McClellan. 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 set out on pages one and two of our management discussion and analysis document dated March 21, 2025 that we released this morning. In our MD&A, we described the support Tender Fund provided us late last year, and early this year, as well as the support the Business Development Bank of Canada more recently provided us. Their combined support enabled us to overcome liquidity challenges following punishing duty and tariff impositions on lumber exports to the U.S. last fall. On our call this morning, we wish to provide you some background on an International Financial Reporting Standards, or IFRS, accounting protocol that resulted in our long-term debt being temporarily reclassified as short-term debt as of December 31, 2025. The reclassification is expected to be reversed when we release our Q1 results. As a matter of interest, if we followed U.S. GAAP accounting rules, there would have been no need for a temporary reclassification. Turning to our 2025 financial results, at the beginning of last year, the consensus view was that interest rates would moderate, residential construction activity would increase, and lumber prices would strengthen as we progressed through the year. We got off to a reasonable start, generating positive EBITDA in the first six months. In the second half, duty deposit rates on U.S. lumber exports increased from 14.4% the 35.16%, while an additional 10% tariff came into effect in Q4, which brought the total burden to 45.16%. Regrettably, lumber prices softened at the same time duties increased, which caused many Canadian lumber exporters, including Conifex, to reduce operating costs to mitigate heavy cash losses incurred in the final quarter of 2025. For the full year, after expensing duty deposits and tariff charges of $26.1 million, we reported a net loss of $35.7 million. This loss includes a one-time non-cash charge of $15.3 million for duty underpayments in the 2023 calendar year. Let's quickly recap our recent financing. In June of 2024, we entered into a $25 million secured term loan with Pender Fund for our lumber business. Pender Fund provided us an additional $8.5 million in Q1 of 2025, as well as an additional $5 million in September and October of 2025. On our last call with you, we told you we were pleased with the Prime Minister's August 5th 2025 announcement that funding from Canadian government agencies would be made available to lumber exporters facing liquidity challenges to help Canadian lumber producers sustain operations. Late in 2025, Penderfund and BDC reached an understanding of how the two lenders could jointly provide additional funds to Carnifex. Pender Fund subsequently advanced us an additional $8 million to support our operations until the BDC funding was in place. Earlier this month, we were pleased to announce that our wholly owned lumber business subsidiary entered into a $19 million secured term loan with BDC under the Softwood Lumber Guarantee Program. The BDC loan matures in 2033. fares interest at BDC's floating base rate minus 60 basis points, and calls for principal repayments to commence in August of 2028. Besides improving our liquidity, the BDC loan includes the feature that reduces the risk of noncompliance with financial covenants over the next year. Eight million dollars of the BDC proceeds were used to retire the short-term advances Pender Fund provided. that I referenced earlier. The Pender Fund advances and the BDC funding demonstrate the support our two lumber business lenders have provided us to enable sustainment of our log harvesting and lumber manufacturing operations. Despite this, because the BDC funding was not formalized until early in 2026, our long-term debt was required to be reclassified as current as at December 31, 2025. As I noted at the outset, the reclassification is expected to be reversed when we release our Q1 results. We view 2026 as a transition year for ConFX. Our plans call for us to move through a period of curtailment and single-shift operations in the first half of the year towards steady two-shift operations in the second half of the year. Those of you on our call today would be aware that weather and road conditions typically prevent harvesting and log deliveries between mid-March and mid-June of each year. The timing of the closing of the BDC loan had the effect of shortening our logging season, which means our current and foreseeable log inventories are not quite adequate to maintain the equivalent of a full single-shift operation in the first half of 2026. When our summer logging resumes, we expect to build log inventories to a level that enables us to achieve a consistent two-shift operation at our McKenzie sawmill complex and at our power plant through the second half of 2026. Based on analysts' consensus estimates for SPF prices in 2026, we do not expect to be EBITDA positive operating on a single shift. With the lower unit costs associated with spreading our fixed costs over a larger production base, coupled with the expectation that duty deposit rates will decrease late in the year, we expect our two-shift operation will be capable of being EBITDA positive in the closing months of 2026. Over the past several months, we've learned more about the details on eligibility and funding timelines for other government programs that appear to have been specifically designed to help companies like Conifex. The intention of these programs is to fund operational cash flow deficits as well as facilities upgrades to reduce costs and support the production of additional value-added lumber products. Part of the study and analysis the finance professionals at the government funding agencies undertake includes an assessment of the competitive position and economic sustainability of various Canadian sawmill complexes. It is well understood that since log costs generally represent two-thirds of the total cost of producing lumber, log costs are the single most important determinant of mid- and long-term competitiveness. Since we operate in a timber supply area where the annual saw log harvest greatly exceeds local saw log consumption, we have access to plentiful supplies of quality saw logs at affordable cost. With respect to conversion costs, over the next two years, we intend to complete several high return rapid payback capital projects designed to improve sawmill and planer mill reliability and boost planer mill output. We are satisfied that our current cost structure, coupled with the revenue generation enhancements we intend to have in place at our McKenzie site next year, position our mill in the bottom half of the SPF cost curve for Canadian producers. Our priority for 2026 is to secure additional capital to ensure we maintain robust saw log inventories sufficient to sustain two shift operations, as well as to fund quick payback capital projects, both of which move us to a lower, more enviable position on the SPF lumber industry cost curve. We continue to believe that the mid- and long-term demand fundamentals for SPF remain strong and will contribute to an improved pricing environment, reinforced by the contractions in Canadian SPF supply that have occurred over the past several years. time remaining i'd like to briefly update all of you on another topic namely our legal challenge with bc hydro conifex's revenue diversification through biomass power production helped us sustain operations at mckenzie during a period when commodity focused companies such as paper excellence and can for curtailed operations at mckenzie you may recall that in 2022 we moved forward on another diversification initiative. We planned to develop two high-performance computing data centers in the interior region of BC. The new business was structured to capitalize on our successful record designing, constructing, and operating large-scale electric power infrastructure in northern BC. We believe we have an agile and multidisciplinary team of experienced professionals with demonstrated capability to leverage their deep backgrounds in power, technology, and capital project design and execution to support new next-generation data centers. And these data centers would be targeting national and international high-performance computing customers. Developing a new complementary business underpinned by stable, long-duration cash flows and long-term leases with investment-grade customers underscored ConFX's commitment to support and sustain its existing businesses and thereby maintain McKinsey's employment and tax bases. BC Hydro's business practices require that new requests for transmission voltage be placed in an interconnection queue to be processed in the order in which requests are received. In June 2022, after receiving encouragement from BC Hydro and working collaboratively with them, we entered into two system impact study agreements at locations BC Hydro identified for us. The system impact study is the first step in the interconnection process through which BC Hydro determines what additional infrastructure may be required to serve the request. On January 23, 2023, in a sharp reversal, BC Hydro wrote and informed us that interconnection activities at our two sites would not be advanced and that we would be removed from the interconnection queue. This shocked us because we understood that monopoly service providers such as VC Hydro must provide service to all who request service. In August of 2024, the Ministry of Energy Mines and Low Carbon Innovation once again validated our view when it stated, and I quote, currently as a regulated utility, BC Hydro cannot refuse to provide electricity to any customer. For large industrial customers, the allocation of interconnection costs and rates are regulated. BC Hydro has an interconnection queue that is based on first come, first serve. End of quote. While BC Hydro said it relied on an order in council issued by cabinet pausing cryptocurrency projects, This was a surprise to us because the system impact study agreements we executed referenced HPC data centers and the order in council did not tell BC Hydro to kick such projects out of the queue. BC Hydro's sudden reversal of support for our projects and refusal to conduct the system impact studies it had contracted to provide us, in our view, are a clear breach of contract. As a result of these breaches, it is our view that ConEffects has suffered and continues to suffer damages, including but not limited to the opportunity to obtain power for HPC centers and to drive associated revenues and profits from such centers. In terms of concluding our discussion today, let me make two comments. First, a cautionary note. Although we are encouraged by the positive discussions and progress we have had to date with financial specialists representing government funding organizations, there is no guarantee that Conifex will be successful obtaining additional funding from any government program. For this reason, we plan to continue working collaboratively with our existing lenders to provide additional flexibility under our existing credit facilities, including potentially amending certain repayment terms and amortization periods. Second, and more importantly in my opinion, I sense that the options Conifex has to create value are underappreciated by many of you on the line. We believe we have numerous drivers that will assist us in generating incremental cash flow over the next few years. For this reason, we believe the economic sustainability of a two-shift operation at our McKinsey site is sufficiently compelling for Conifex to receive favorable consideration from government funding agencies. Thank you for your interest in Conifex. Andrew, Trevor, and I look forward to responding to any questions analysts and shareholders may have And on that basis, we'll turn the meeting back to our operator.

Thank you. To join the question queue, you may press star then 1 on the telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then 2. The first question comes from with Raymond James. Please go ahead.

I can. It's Christian on the line. Thanks for taking my questions. Yes. Thank you, Christian. So can you make some comments about the SPF lumber cost curve? I was just wondering at current duties and tariffs, how should we think about McKenzie's position on the cost curve relative to peers today? And maybe you could quantify the cost improvements going from a single shift basis to a two shift basis.

Well, On going from a single-shift basis to a two-shift basis, I will have Andrew McClellan and Trevor Pruden address that specifically. The work that I have done on the SBF cost curve for North America indicates that, and And I don't know about other facilities costs in northern BC, but obviously we know what our log costs are in McKenzie. And our costs are currently and increasingly becoming more competitive as we move forward. In the McKenzie region, as northern BC in our catchment area, We believe that there's approximately 10 million cubic meters of supply and the maximum local demand of 8 million cubic meters. So we think that there is a supply demand balance that puts logs in surplus and that has the effect of really taking a lot of the tension out of I would have bidding behavior at BCTS auctions and it's that bidding behavior at auctions that determines what stumpage rates are. So we think they supply demand balance in our region will. Produce much more affordable stumpage rates going forward. So we we think that. Our. log costs on a net delivered basis are slightly higher than Ontario and Quebec. We have a higher lumber recovery factor in BC, which offsets some of the higher log costs, and it appears that we have higher residual values, which lowers our net delivered log costs. But when you look at the work that's been done on cost curves, is that we have a richer lumber mix at a BC mill. So a BC mill could be slightly higher on the cost curve, but the recent FEA materials that we've reviewed indicate that the BC mill has approximately $50 U.S. pricing that's not available to the eastern Canadian mills who have a much more important portion of their output commanding lower stud prices compared to the more lucrative random length prices. So our conclusion on where we rank on the competitiveness, part of it is that we think we have very affordable log costs compared to other mills in BC. And we think that BC mills have superior revenue generation compared to Eastern Canadian mills. And so that's why we think that if you were looking at EBITDA margins, that our McKenzie site's capable of having EBITDA margins that are very attractive relative to average mills in BC. That's the long answer to your question. I'll turn it over to Andrew and Trevor to talk about the benefits of a two-shift operation.

Good morning, Christian. It's Andrew McClellan here. Thanks for the question. So, you know, I guess just starting where we are today, we restarted two-shift operations in February following the year-end curtailment. And, you know, I've been very encouraged by the results so far. With respect to our operations in the planer and the sawmill, we've been running, you know, about well above our targets on many of our shifts in both pieces of the manufacturing unit. You know, in terms of the operating rate, we're targeting two shift operations in the second half of 2026, as Ken mentioned, subject to fiber supply. And at two shifts, our per unit manufacturing cost is materially better than what we experienced in Q4 when we're running at about 46% of capacity. So the fixed cost solution that we expect to benefit from going forward is significant relative to our Q4 results. And, you know, it's in the order of magnitude of $50 to $70 per thousand on our conversion costs would be what I would estimate.

Great. That's helpful. Thanks, Ken and Andrew. And how much additional funding do you believe is required to build up adequate for a two-shift basis and also to fund some of the quick payback capital projects you referenced?

Well, let me comment on that. First of all, the quick payback projects that we've identified add up to just over $11 million of expenditure. And we think the EBITDA potential from successful completion of the projects is something like over $4 million. So it's less than a three-year payback period. So what we have is, because of our tight cash position, a lot of these quick payback opportunities that mills have been taking advantage of as new technology is available to improve throughput and reliability, we haven't had a chance to fund those yet. In terms of strengthening our balance sheet, I believe that one of the organizations that we're dealing with has a minimum loan amount of $30 million. And so that's publicly available information. And so, we're in that range and possibly a bit more because we'd like to go through this cycle with some surplus cash on our balance sheet in case there are unanticipated challenges.

That's great, Colin. I'll turn it over to our panelists to ask questions here. Thanks so much.

Once again, if you have a question, please press star, then 1. Since there are no more questions, this concludes the question and answer session. I would like to turn the conference back over to Ken Shields for any closing remarks. Please go ahead.

Okay. Well, I thank you all for your interest. We had a fair bit of detailed discussion today, and thank you very, very much for your interest in ConEffects, and we look forward to continuing to report our progress to you with our next call around the middle of May. Thank you, and enjoy the rest of your week.

This has been still closed. Today's conference call. You may disconnect your line. Thank you for participating and have a pleasant day.