Conifex Timber Inc.

Well, thank you and good afternoon, everyone and welcome to this call covering our Q1 2021 results. With me today we have Chief Financial Officer, Winny Tang; and Operations VP, Andrew McLellan.

So I'm going to make some opening remarks and then I'll hand the call over to the two of them. And then I'll have some closing comments at which time all three of us will be pleased to respond to your questions.

Before moving ahead, first, we wish to reemphasize that our number one priority continues to be protecting the health and safety of our employees and their families. And the men and women at our harvesting locations our sawmill site, our power plant, they all deserve the credit for ensuring a safe work environment during this unprecedented global pandemic.

Second, 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 statements set out on Pages 1 and 2 of the MD&A document that we released earlier today.

Turning to our first quarter; net earnings were $4.5 million or $0.10 per share and EBITDA was $9.7 million. And I know many of you still acknowledge the forest products when I saw on this call; we're expecting stronger results from us in the first quarter.

One reason our Q1 results came in below consensus was that we expensed 13 weeks of power plant cost but produced electricity for only six weeks. On our last call, we alerted you that the proceeds from our business interruption insurance claim will likely be booked in Q2 or Q3 of this year.

Had we booked what we estimate, the insurance proceeds to be; Q1 EBITDA would have been right in line with consensus. The other reason that our Q1 results came in below consensus was that we only shipped 10 weeks of the lumber we produced in the 13-week reporting period.

Although Q1 lumber production climbed to 51 million board feet, shipments of 37.8 million board feet were much lower. Our ratio of SPF shipments to production was 74%, far below the 90% shipment to production ratio between these two largest SPF producers averaged in Q1 of 2021.

Clearly, CN Railcar delivery shortfalls were more pronounced in the McKenzie region than in other parts of the province. To mitigate the buildup and finish lumber inventories, our sales and logistics team stepped up truck deliveries, and by doing so we incurred extra delivery costs in the quarter.

Thus going to the quarter end, we've shipped the lumber that was built up. The mill net selling prices we realized on these shipments were $200 per 1000 board feet higher than we achieved on our Q1 shipments.

The key point here is that besides lowering revenues, railcar shortages added to our costs at lowered the mill net. Selling price realizations we've recorded in Q1 had we achieved a ratio of shipments to production in line with the two majors; we would have exceeded consensus Q1 EBITDA forecasts.

We are encouraged that to-date in the current quarter, railcar deliveries have improved and weekly segments have consistently exceeded production. Say this continued for the next few weeks, our lumber production and shipments are expected to be imbalanced by the time we report results for Q2 in this year.

I now have the pleasure of turning the meeting over to Andrew McClellan, our Vice President and General Manager, Northern BC operations for Conifex.

Thank you very much, Ken and good afternoon, everyone. Let's start with lumber.

Our Q1 lumber production was 5% higher than Q4 of 2020. However, our shipments were approximately 23% lower.

On my last call with you I explained how we and certain other saw Millers in the northern interior region of BC, experienced challenging weather conditions last winter, which led to log harvest and delivery shortfalls and retarded lumber production in the first half of 2021. We plan to boost lumber production as soon as we have the benefit of summer log delivery starting next month.

And we continue to anticipate our full operating rate will exceed 90% of our to shift rated capacity of 240 million bold feet [ph] in 2021. Any number of pandemic-related or unanticipated production and/or shipment disruptions could hold us back and prevent us from achieving a production target.

However, on a full year basis, 2021 lumber production is anticipated to be 70% higher than our 2020 results. The BC Ministry of Forests has a timber supply review underway for the McKenzie timber supply area.

The Chief Forester expects to release a new harvest level determination sometime around the end of the year. We have two major studies underway at present that are related to this coming announcement, one focusing on the characteristics of the saw log supply we expect to process over the next decade and beyond at our sawmill facility.

In a second study focusing on the potential to boost our lumber production capacity at Mackenzie by approximately 25%, lower cash conversion costs as well as improve our lumber recovering and grade outruns [ph] at our McKenzie facility. We expect to sell our plants for expanding and modernizing our McKenzie sawmill site shortly after the release of the new harvest level determination.

I'll turn now to the power generation business. Our power plant continues to achieve its daily power production targets since the plant restarted in late February.

And at this time, I'll turn the discussion over to my colleague, CFO, Winny Tang. Thank you.

Thank you, Andrew and good afternoon, everyone. And just - we're turning to finance.

Overall debt at our quarter-end totaled approximately $62 million. This was mainly represented by a long-term power loan with limited recourse to our lumber operations; a fixed interest rate and a lengthy amortization period.

After deducting cash balances, we ended quarter four with net debt of $49.9 million, a net debt to realize capitalization realized ratio of 29%, and available liquidity of $16.4 million. The $10 million revolving credit facility we had raised late last year remains undrawn.

In December 2020, we had commenced our normal course issuerbid which allowed us to repurchase and cancel up to 2.9 million shares. To-date, we have repurchasing cancelled 922,800 chairs at an average price of around $1.60 per share.

We view share buybacks as an appropriate use of the excess cash we anticipate generating in Q2 through to the balance of the year. We continue to believe our share price trades well below our estimate of fundamental value.

I will now turn the meeting back to Ken.

Well, thanks, Winny and Andrew. Just as a reminder from the major public SPF produces in the sense that we pay duty deposits on nearly all our lumber shipments, the other public SPF producers do not.

Accordingly, duty deposit expenses impact our pre-tax earnings to a much greater extent than the other public companies. For example, we achieved pre-tax income of $6.3 million in Q1 of this year after expensing $2.5 million from duty deposits.

For us duty deposit expenses represented just under 40% of our pre-tax income while it ranged between 3.5% to 5.2% of pre-tax income for the larger, more diversified SPF producers. It falls that if there is a resolution of the trade dispute, and furthermore, duties are eliminated, it's clear that the impact on cash flow generation in our company will be considerably greater than for the other public companies.

As a corollary to this point, we are building an off balance sheet asset in the form of potential duty refunds, and these duty refunds will likely represent a greater proportion of our equity market capitalization that is true for the larger, more diversified companies. We now have US$12.3 million on deposit that is potentially refundable to us.

Given our expectations for lumber prices and shipments for the balance of 2021, this number will likely exceed US$20 million by the end of the year. This will represent a materially higher percentage of our present equity market capitalization than is true for the other company.

While we appreciate that the timing of a settlement, and the likelihood of a full or partial refund of duties is highly uncertain, history suggests it's highly likely that our balance sheet will be further strengthened at some future date. Before turning the meeting over to your questions, we're pleased that we had the ability to release our inaugural ESG report this afternoon.

All of us at Conifex are very proud of the track record we've compiled in terms of each of the metrics covered in the report. In closing, lumber markets are strong and we expect to report record Q2 and full year earnings for the reasons set out on Slide 11 of the presentation we released an hour ago.

So, thank you for taking the time today to learn more about Conifex. We're pleased to answer any questions you may have.

So, we'll turn the meeting back over to Roxanne, our operator.

Thanks. Hi, Ken.

Can you - you put up a point about your duty burden being higher than some of your peers. I guess I'm just curious in this very strong market, what is even compelling you to sell into the U.S.?

I'm assuming there is no Canadian discount? So why can't - why wouldn't you try to place all the products domestically?

Well, first of all, when we reviewed that this morning at board meeting, we found that the milnap sales price realizations depending on the product we're pretty similar between the two markets. And we're selling roughly 80% in the U.S., the customers that we have in the U.S.

have been loyal to us for a long period of time, effectively lumbers on allocation, and the people that have been supporting us through good and bad lumber markets are being served now. We have about 8% of our lumber going into Japan, it's a definite lower realization on Japanese lumber prices because those prices are set up in advance.

And as you well know, cash lumber prices that have increased $500 per 1000 board feet in the last five weeks, and they will be up again when they are reported tonight. So Japan has low realizations, but it typically has fully competitive realizations; so that's how we're looking at the business.

Okay, thanks. Thanks, Ken.

That's helpful. And Andrew, I wanted to follow-up on the capital projects that you mentioned or potential capital projects that McKenzie which could potentially drive at 25% capacity increase?

What would - you know, if you were to go down that road, what would be the CapEx and timing of when - how quickly that production growth would come up?

So what - at this point Hamir we're engaged with an engineering firm in preliminary design and general arrangements are available, and we're currently working on identifying lead time for equipment. So it would be a bit early for me to give an indication in terms of timing or capital at this point but we have committed the funding to do different engineering work and come up with those answers likely in Q2 or Q3.

Great. And so, last one for me.

Can the premier have made some - a lot of comments about how you want things to evolve in MBC with forestry policy and tenure. And just curious to get your thoughts just to how that potential changes could impact con effects and your fiber basket specifically?

Okay, well, that's a very meaty question that you posed, Hamir. Here is our take on the situation.

There are two important announcements expected later this month; one is the release of the intentions paper which I think will provide more detail on some of the comments that the Premier made at the COVID convention in early April. And the second is the lot of the harvest in the Prince George Timber Supply Area, which is the largest TSA in the interior region of BC.

And about three and a half years ago, the Chief Forester concluded that the harvest level needed to be established at a considerably lower level than it was previously but never spill some pine beetle salvage harvest activity underway. But the Ministry has never disclosed how they intend to divide up the harvest between BC timber sales, between First Nations, and what portion would be remaining for licensees.

So it seems clear to me that certainly, Conifex's expectation is that in order to remain at your present level of fiber self-sufficiency, you're going to have to have some log purchase agreements or arrangements with First Nations. So the effect on BC - in BC, one thing we know for sure is that the harvest levels are going down over the next few years because the salvage programs are close to being exhausted.

And the second conclusion is that for many companies, their degree of fiber self-sufficiency as measured by the [indiscernible] under their control and direction, as a percentage of their total law requirements, that degree of self-sufficiency is going lower and there'll be a heavier reliance on purchases from other tenure holders, namely, BC Timber Sales and First Nations. So that's what we see happening, Hamir.

And that's why we have, as Andrew explained, we're commissioning these reports so we can come up with an ideal optimization plan for our McKenzie site. But it's important to us that we know more about the volume and characteristics of the fiber available to us and Mackenzie before we can finish up our engineering work, so that's why it will be late this year, like you're following the release of the TSR review before we can precisely set the specifications for a modernization and upgrade, and before we can attach the main point of costs.

But we see no reason why we would be out of line with the industry in terms of modernization and upgrades typically have three to five-year payback in terms of EBITDA, and we shouldn't be in that range based on everything I see today.

Great. Thanks, Ken.

That's all I had. I'll turn it over.

Marcus Campo [ph] at RBC Capital Markets. Hey, good afternoon.

Thanks for taking my questions. Just with the mid-year stumpage revision coming up; do you expect that to impact your production costs at all?

And if so, is there anything that you can do to help offset that?

We were - again, describing those numbers this morning, we have estimated that our delivered blog costs in the calendar year 2021 will be about just somewhere between 20% and 25% higher than the previous year. And 2% or 3% of the increase is due to a greener, better lawn mix; so we've got a slightly better quality lot coming into the mill this year.

And a better day increases due to some general inflation in costs, but, you know, something in the high-teens to the - perhaps as much as 20% is due to escalating stumpage costs. That's how the numbers play out for us, and it's consistent with the possibility of a $30 per cubic meter increase in province-wide stoppage [ph] rates taking effect on July 1.

Great, that's helpful. And then just on lumber futures, they take a bit of a dip today and cause some concern.

What are you seeing in the market today? And do you think we've hit a turning point yet?

We had a discussion about that, as well at our Board meeting today. And what we found is that at various points in time, the futures market pulls up cash prices or toilsome down, and our sales desk reports that the cash market is stronger on Tuesday of this week than it was on Thursday of last week when random links reported the last cash prices, even though the future said sold Bob, the last two days; so there is a bit of a divergence there.

We don't know exactly how everything is going to shake out between the balance of the year. but what we've experienced, of course, and experienced now, incredibly beneficial to Conifex.

On January, one of this year backs we had an equity market capitalization of $66 million, and an enterprise value of about $115 million. And you know, looking at where prices are at, you know, I suspect that our EBITDA this year will be greater than the $66 million.

I don't know from making him into triple digits or not but it's a walking number relative to the value that our equity base was accorded at the beginning of the year. So we're feeling very good about how things are shaping up and what the task - the increase in tangible net worth will be in our company.

And that's the reason why we will all back in the market on our buyback programs as soon as the blackout period.

Okay, sounds good. And then just on that share repurchase program, could you just remind us how you think about it?

Do you have a target valuation that you're looking at or just taking the current market prices fair value?

Well, one, one number that is often discussed is looking at book value, because we find that a lot of forecasts have these companies, including us, probably coming in at three times earnings, perhaps even lower, and not a terribly different enterprise value relative to 2021 EBITDA. So we look at book value and our book value is going to be certainly - by the end of the year, it's going to be above the current market trading price.

The other lumber producers are less 60% to 80% premiums over booked value. And so we don't have any trouble tracking or having a repurchase program that tracks our book value increase overtime.

Okay, thanks. I appreciate the details.

Good luck with the current quarter.

Thank you.

Brian Parker [ph]. Hi Ken, congratulations on a great quarter.

Thank you.

So, I'm curious as to - and if you answered this previously, I got on the call late but curious as to whether with these high lumber prices, you're hedging in any of those prices? And if so, could you give us a description of your hedging program?

Okay. Well, it's a matter of public record that I think we are sort of in the middle of the pack in terms of hedging.

We lost approximately $900,000 on our futures positions in Q1 of this year, and we disclosed that. I'm aware of one other company that lost a little over a $1 million per saw mill on hedging and another company that is prior worse than that and I'm also aware of some companies that don't hedge.

We think that will we will pass [ph] - we currently are hedged on a portion of our production. It's way less than 10% of our production.

But I think that we are going to use hedges to achieve a better balance between blog costs and lumber prices. So, earlier you heard that that lawn - that stumpage rates in BC were going up a material amount per cubic meter of logs, effective July 1.

So we don't want to find ourselves paying stumpage rates based on say $1300 lumber and only be getting $700 or $800 for that lumber. So, we think there is a business argument to be made to work to try and achieve a balance between your anticipated stumpage costs and the price prices that are available in the market to be sure you can cover those higher load costs.

Great. Thank you.

Okay. Well, thank you, Roxanne, for your service today.

And Winny, Andrew and I all thank you for your interest in Conifex. And look forward to speaking to you when we release our Q2 results.

Enjoy the rest of your day. Bye now.