Earnings Transcript for CFXTF - Q4 Fiscal Year 2021

Operator: 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.

Ken Shields: Well, thank you, Eric, and good afternoon, everyone, and welcome to the call covering our Q4 and full year 2021 results. Chief Financial Officer, Winny Tang, is here with me in Vancouver. While Operating Head, Andrew McLellan will join us from Northern DC. 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 reemphasize 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 plant deserve the credit for ensuring a safe work environment. They’ve mitigating the risks associated with an upsurge in COVID infection rates, through their strict adherence, to our robust COVID safety protocol. 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 in references to non-IFRS measures and therefore call your attention to the warning statements set out on Pages one and two of the MD&A dated March 7 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 enter 2022 with both the 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 railcar supply. Shipments are thrilled for the main reason we and other interior BC lumber producers reported Q4 EBITDA that was below analyze expectations. For the year we earned $0.60 per share and increase our book value per share by $0.72 from $2.51 to $3.23 per share. The book value increased by an additional process per share reflecting the cancellation of shares that we purchased at a discount to book value. We also deposited around CAD 11.6 million and duty and that broad potential duty refunds up to USD 19.4 million, which is equivalent to roughly CAD 0.60 per Conifex share before any allowance for pullback on potential duty breath refund or potential tests provisions on duty refund. Since our last call, many of you on the line have contacted us and asked what happening in BC was expected sawlog availability, regulatory development and cost competitive. We intend to use that remaining time to share our view on the first few topics and then to outline what we believe to be the single best opportunity available to us to improve our competitiveness at our MacKenzie site. First, dealing with sawlog availability. The projections the Ministry of Forest released a couple of weeks ago indicate that the interior of BC sawlog target 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. At the ministry's projection through asset, interior BC lumber production is expected to decline by approximately 1.4 billion board feet. This anticipated contraction in supply assets much of the new capacity coming on stream in the U.S. and in our view and contribute to a near-term supply demand balance that favors softwood lumber producers over consumers. We believe we are extremely well positioned in terms of our assets to future sawlog. Our operations are provably based in the MacKenzie timber supply area. The land base in the MacKenzie 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 stand in timber inventory in the MacKenzie TSA is capable of supplying sawlog in perpetuity that are at least double our presence and immediately repeatable log consumption. Our key point is that Conifex enjoy a degree of regional fiber self-sufficiency that is unique to the interior region and BC. This explains why we got plans underway to modernize and expand our sawmill complex provided the conditions. Over the past few years, the ministry has imposed several new policy on forest sector operators in the interior region and BC. Since the key features of many of these policies remain undefined and implemented, 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 few things happen. Number one, the Office of the Chief Board released its public discussion paper informing shareholders of their findings regarding the economically available Timber supply, possible future harvest level, as well as law quality considerations in the MacKenzie TSA. We're also waiting until the ministry advisor at the outcome of its consultations with First Nation suits traditional territory lines in the MacKenzie TSA. We need to hear back about what they're findings with respect to also the ecosystem conservation, wildlife protection set asides and other factors that impact future harvest levels. Another item we're waiting on, it is some understanding of how the ministry intends to address its need to restore competitiveness in the MacKenzie 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 vigorous, efficient and globally competitive Timber processing in British Columbia and equivalents. The last item that we're taking additional input arm is the process that the ministry intends to follow to ensure that future harvests are allocated, or a portion in a just an equitable basis amongst licensees in MacKenzie TSA. So that's a recap of the regulatory uncertainty and what we are waiting for and in our case despite major capital expenditures being on hold for a year or perhaps longer, while the preceding topics are there. We continue to fund capital expenditures necessary to maintain compliant with safety and environmental obligation. We also spend money identifying and preparing sites for future harvests. And lastly, we do undertake smaller, rapid return, quick payback projects designed to improve the reliability of our sawmill operation. So with the major capital projects and 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 MacKenzie site. If everything comes together as we think, we have an opportunity to lower our cash projection costs by around $20 per thousand board feet of lumber produced and thereby positioned our MacKenzie site to generate positive EBITDA over an even wider range of commodity lumber prices. We'd like to take the next five minutes of our time to review. One of the key features and strategic rationale for the new business opportunities were exploring. And two, how revenues and EBITDA are generated in this new complementary business. Worldwide, the purchase 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 of at Conifex is successfully linked BC surplus hydroelectric power with our underutilized power assets with MacKenzie and produced the win-win outcome for us and all British Columbia. Power surplus is our anticipated to remain in effect indeed, reflecting a combination of lower demand from Forest sector, contractions and activities, coupled with new electrical supply coming on stream when the site speed project is completed. Against this backdrop, we joined forces with the [indiscernible]. Our partnership plans to utilize our operating team and power expertise to redeploy power distribution infrastructure, presently sitting idle in MacKenzie to develop a new business, and that's the business that host HPC or high performing computer customers at an industrial scale data center, our partnership plans to build at all operate located adjacent to our power plant in MacKenzie. 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 customer. Initially, we expect our data center customers, while primarily install servicing the Bitcoin network. Bitcoin as 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 that our additional data centered sites, we have potential to host and support other each high performing computer applications in the future, such as artificial intelligence, machine learning or other block chain network. The way this business operates is that hosts such as Conifex provide us 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 data center site. However, customers wish to ensure that their interests and the host 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 to earn additional fees tied to the performance and operating margin, achieved at data center. Performance fees that are typically paid in the form of digital currency. The performance fees to which we are entitled and which we expect in the future will be recorded at fair value on the data received. In our case, the trial program for us of 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 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 revise that we're off to a good start in 2022. When we released 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 our plans evolve. So we thank you for your interest in our company and Winny, Andrew and I would be pleased to answer any questions you may have. So, I'll turn the meeting back over to Eric.

Operator: [Operator Instructions] And we have the first question from Gabe Nicholson.

Gabe Nicholson: I am with CIBC Capital Markets. And I was wondering, this question is more for Ken. Ken, what impacts do you see stemming from the sanctions we've seen on Russian exports? Do you see any opportunity for Conifex there? And also, how are you viewing the Japanese market at this point?

Ken Shields: Okay, two good questions. First of all, if you drill into our detailed financial disclosures, you would see that the preponderance of our lumber 80% plus is directed to the U.S. and another 10% or so to Canada and the balance to Japan. So China has not been an important market to us recently. And the way that sanctions work, it appears that there'll be a fair bit of Russian lumber finding its way to China which could very well have a depressing impact on lumber price. So we don't expect the geographic mix of shipments in our case to change it all. And we think that the likely lower level of Russian shipments to some European markets may mean that the less European product available for the North American market which would help pricing in North America. In terms of Japan, we have an important customer base in Japan, that is focused on the construction of retirement communities. They prefer the premium grains of lumber and they're very important optic customers for the cost 5% or 6% of the grayed out turns that we achieve MacKenzie sawmill. And the prices in Japan, as you probably know can delay the prices in North America and then get locked in for three months results. So we're expecting further opportunities to achieve higher price realization in Japan in Q3 of this year, and likely in Q3 as well.

Q –Gabe Nicholson: And then this one's more on the supply chain front if I can ask follow-up. Is that all right?

Ken Shields: Yes.

Q –Gabe Nicholson: Okay, great. So, are you going to expecting any additional inventory builds in Q1 just based on what we're seeing with supply chain so far this year?

Ken Shields: Yes, we are. The de novo reports we get, of course, there's some volatility week to week, but, I'd say a month ago, we were probably able to ship something like 45% of our weekly planner production. And that might have edged up to something like 55% or so now to a combination of about engaging more trucks to deliver lumber and through some modest increase in railcar delivery. So based on the numbers that I see, it is unlikely that the inventory built up in finished products in BC. I don't see getting back to normal by the end of June. And I think it'll be end of Q3 before we get finished lumber inventories to normal levels here in the BC.

Q –Gabe Nicholson: Okay. Great, thank you. So this one is probably can go more to Winny. What I found that your CapEx expenditures are the kind of same in forecasting. But can you break down kind of that capital allocation this year? And then I'll leave it there. Thanks.

Winny Tang: Most of our capital expenditures related to as Ken mentioned, quick payback projects that we have at our sawmill to optimize our production there. For example, we did an edger optimization at our sawmill, which has improved our production capacity. As well, we typically do major maintenance work at our power facility every year. And that captures a big portion of the CapEx that we had completed in 2021, as well too.

Ken Shields: And we're also going to add a bit to preparing harvest for future production, so that in aggregate in 2022, we expect that our capital expenditures will be a lot closer to our non-cash charges. And with our amortization, running at around $10.5 million a year, it's quite possible that our CapEx in 2022 will be roughly in line with non-cash charges.

Operator: [Operator Instructions] There are no questions registered at this time. I would now like to turn the meeting back over to Mr. Shields.

Ken Shields: Okay. Well, Eric, thank you for hosting our call today. And for those of you on the line thank you once again --

Operator: I'm sorry, Mr. Shields, we just had two questions pop up. Are you still ready to take them?

Ken Shields: Okay.

Operator: We have a question from a participant.

A –Ken Shields: Ryan Davis.

Operator: Please go ahead.

Q –Unidentified Analyst: Just a brief follow-up on the capital allocation question. I was curious, if given your solid leveraging strong SIB take up and relatively unique proportion of stable and potentially growing green power revenue. Would you have any consideration to shifting the balance? So in other words, applying some portion of the annuity revenue to something like a base dividends, or perhaps more broadly, adopting something like a more overarching capital allocation framework, like we're paying it to meet your peers? Thank you.

Ken Shields: Well, thank you for that question and the topic of capital allocation is regularly discussed at our board level. And I'll do my best to share with you what I believe that consensus. We believe that our stock price is materially below the fundamental value of our company. We were pleased that we undertook a normal course issuer bid and a substantial issuer of bid last year. And that we believe that we've raised the fundamental value of our company, for the shareholders that remain shareholder by a considerable amount, and we hope to grow up by the same amount this year. We are not prepared to consider relaunching a share buyback program until after we have to do so from a file program in our HPC business, because if that turns out to be promising, we will have some additional capital expenditures above the level that we referenced earlier. And we want to pin that down and we also want to know what our working capital investment is before we reconnect to a buyback program. The advice we get from shareholders and from financial advisors is a buyback program. It's more beneficial for long-term shareholders than a dividend and unless we have powerful reasons why that's not the case where we are a lot more likely to consider, return capital and shareholders through buybacks rather than dividends.

Operator: We have the next question from Paul Quinn, sorry, from [indiscernible] please go ahead.

Unidentified Analyst: Alright. Can you hear me?

Ken Shields: Yes, we can.

Unidentified Analyst: Okay, great. Yes, you've answered my first question about the buybacks. My second question was, I know on previous calls, you have kind of gone through each piece of the business and how much that is per share. And I think you've mentioned, the duties were around $0.50 per share. How can we think about what percent on a base case we would get back from the company? I know that's really hard to project, but we are just thinking we would just low to hear your opinion on the duties.

Ken Shields: Well, on the duties, I think I mentioned that, the refundable duties that have are place today are 19.4 million U.S. The duties increased by CAD 11.6 million last year, and this year, the duty rates are a bit lower, but the Lumber prices, at least in the early going are going to be higher. So it's entirely possible that, we don't rebuild our duties on deposit buying, the same amount as we did last year. And we end up then having something like $0.60 per share of potentially refundable duties today, and we could add another $0.25 or $0.30 per share of that over the next 12 months. And then, when you look at the timing of potential duty refunds, where I'm certain about that, and if there are duty refunds, we don't know what portion of the duty refund deposit will be retained, by U.S. producers and other industries support program. Last time, 80% of the duties were returned to the people that deposit them. And then secondly, we are not sure what our tax position will be at the time duties have returned. Right now, we have plenty of tax shelters that would avoid cash income assets on duty refund, but, if it happens a year or so from now, we could be in a lot closer to paying cash in income tax. So, it's really hard to estimate. I think that, we have got $0.60 a share today. In the next 12 months, we will probably make additional deposits that would cover any hold back and taxes. So, as I look at our company, $0.60 of off-balance sheet cash, that's available. I think that our power plant is worth at least $1 per share. I think our working capital more than I forget what it's at, but it's, our net working capital is higher numbers. So, the reason we like share buybacks is that, we think there is virtually no value reflected in our stock price for either [indiscernible] operation.

Operator: And the last question will be from Paul Quinn. Please go ahead.

Paul Quinn: So you might have answered this. But the sale of Camp Ford assets in MacKenzie, is that going to affect you anyway? And when do you anticipate the restart of that mill given what you know of the group restarting it plus the assets themselves?

Ken Shields: Okay. Well, Paul, I'm going to take about two-minute chance of that question. But, first of all, we are pleased that that sale has gone ahead. We believe that having first Nation as partner tenure holders in the MacKenzie BC will benefit more favorable consideration from the ministry, as opposed to a company that has been taking many steps to lessen exposure to BC. So we think that we've got a greater commonality of interest with this new, likely tenure holders suddenly current tenure holder and MacKenzie. Secondly, I don't know what came for has been saying about the intentions of the purchasing consortium to operate that sawmill complex in McKinsey. But the last time I was in McKinsey, it looked like the large log line was be packaged up for shipment to Louisiana. So that site, it's a large site. And flask was one small, small log line. And I think that the economics to run a single line or small log facility at a large site with high price, it doesn't make economic sense. So based on everything I see, we do not anticipate that cycle theory started. And we suspect that the new tenure holders will well want to harvest in the MacKenzie TSA and find customers for the sawlog in fiber deficit analysis in British George. The bottom line, we think it's this for our local fiber self-sufficiency. And we think it's great that we've got tenure holders that are likely to receive more favorable consideration from the ministry.

Paul Quinn: Okay. And then last year, in the summer prices got really high. And basically, we saw the consumer, especially in the RNR side, really back away from market. What are you hearing for customers right now, any worries about, higher interest rates or inflationary pressures for them?

Ken Shields: You know, Paul, I've liked to be able to report that customers that re addressing most important issues that you mentioned, but the main message we're getting from customers are, look at it. It's not even the 10th of March. And buying lumber from you today that you will ship in late April, and may show up in my yard in early June. And there's just a lot of frustration with the delivery and railcar shortfall. And so Paul the most common customer feedback as that is all focused on their frustration with transportation delays.

Paul Quinn: Okay understood. And then just like a byproduct revenue, why would set out too much this quarter?

Ken Shields: Why was it up so much this quarter? I actually thought wasn't that, I didn't think it was a particularly great quarter. I know that we really built out our chip inventories at MacKenzie as we got into late December. And our chip inventory held at a nominal value. And I know that where the chip pile is going down. So that is a quarter we're in now that our byproduct revenues should be better than they have been recently. But --

Winny Tang: And then add a little bit to that as well, too. Part of it, of course was in the third quarter, we had a few curtailments as a result of law costs and supply issues. And so therefore we have quite as much byproducts that are generated at that time.

Paul Quinn: Yes -- sorry, I made a mistake. I'm not looking quarter-over-quarter, I'm actually looking full year so 2021 versus 2020. I guess that part of that is higher residual pricing because of higher pull pricing?

Ken Shields: Yes, and the planer trim weighs the proceeds that we get from selling that to a finger joint plan. It reflects what's happening to lumber prices so that that would have helped us a lot last year.

Operator: There are no questions registered at this time. I would now like to turn the meeting back over to Mr. Shields.

Ken Shields : Okay. Well, once again, everyone, thanks for your interest for Conifex. Enjoy the rest of your day. Bye now.

Operator: Thank you. The conference has now ended. Please disconnect your lines at this time. Thank you for your participation.