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.
Well, thank you, Eric, and good afternoon, everyone, and welcome to this call covering our first quarter and full year 2021 results. Our Chief Financial Officer, Winny Tang, is here with me in Vancouver, while Operating Head Andrew McLellan joins us from Northern BC. 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 mitigated 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 fourth quarter 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 and references to non-IFRS measures and therefore call your attention to the warning statement set out on pages one and two of the MD&A dated 7 March 2021 that we released an hour ago. Turning to our financial results for the year, we achieved EBITDA of just under CAD 52 million in 2021, which is equivalent to CAD 1 million per week.
The net cash we generated in 2021 was employed in two main areas. Number one, we spent CAD 14.3 million repurchasing shares, and second, we invested CAD 25 million building inventory. The CAD 17 million we invested in log inventories was planned.
We entered 2022 with both a 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 CAD 8 million increase in lumber inventory was unplanned and entirely due to well-publicized disruptions in rail car supply.
Shipment deferrals were the main reason we and other interior BC lumber producers reported fourth quarter EBITDA that was below analyst expectations. For the year, we earned CAD 0.60 per share and increased our book value per share by CAD 0.72 from CAD 2.51 to CAD 3.23 per share.
The book value increased by an additional CAD 0.12 per share, reflecting the cancellation of shares that we repurchased at a discount to book value. We also deposited around CAD 11.6 million in duties, and that brought our potential duty refunds up to $19.4 million, which is equivalent to roughly CAD 0.60 per Conifex share before any allowance for pullbacks on potential duty refunds or potential tax provisions on duty refunds. Since our last call, many of you on the line have contacted us and asked what's happening in BC with respect to sawlog availability, regulatory developments, and cost competitiveness.
We intend to use our remaining time to share our views on the first two 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 Forests released a couple of weeks ago indicate that the interior BC sawlog harvest is projected to decline from 35.7 million cubic meters in their fiscal year ending 31 March 2022, to 31.4 million cubic meters next year, and 30.2 million cubic meters the following year. If the ministry's projections prove accurate, interior BC lumber production is expected to decline by approximately 1.4 billion board feet.
This anticipated contraction in supply offsets much of the new capacity coming on stream in the US South, and in our view, it contributes 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 access to future sawlogs. Our operations are exclusively based in the Mackenzie Timber Supply area. The land base in the Mackenzie TSA is about equal to the combined land base in the state of Vermont and New Hampshire.
We operate the only sawmill located on this large land base. We believe that the standing timber inventory in the Mackenzie TSA is capable of supplying saw logs in perpetuity that are at least double our presence in immediately foreseeable log consumption.
Our key point is that Conifex enjoys a degree of regional fiber self-sufficiency that is unique to the interior region of BC. This explains why we've got plans underway to modernize and expand our sawmill complex, provided the conditions are right. Over the past few years, the ministry has imposed several new policies on forest sector operators in the interior region of BC.
Since the key features of many of the new policies remain undefined and unimplemented, 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 a few things happen.
Number one, the office of the Chief Forester releases its public discussion paper informing shareholders of its findings regarding the economically available timber supply, possible future harvest levels, as well as log quality considerations in the Mackenzie TSA. We're also waiting until the Ministry advises us of the outcome of its consultations with First Nations whose traditional territory lies in the Mackenzie TSA. We need to hear back about what their findings have been with respect to old growth ecosystem conservation, wildlife protection set-asides, and other factors that impact future harvest levels.
Another item we're waiting on 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 Four of the Ministry of Forests, Lands Act, and I quote, "To encourage a vigorous, efficient, and globally competitive timber processing industry in British Columbia." End quote.
The last item that we're seeking additional input on is the process that the ministry intends to follow to ensure that future harvests are allocated or apportioned in a just and equitable basis amongst licensees in the Mackenzie TSA. That's a recap of the regulatory uncertainty and what we're waiting for.
In our case, despite major capital expenditures being on hold for a year or perhaps longer, while the pre-proceeding topic says that we continue to fund capital expenditures necessary to maintain compliance with safety and environmental obligations. We also spend money in identifying and preparing sites for future harvests. Lastly, we do undertake smaller rapid return quick payback projects designed to improve the reliability of our sawmill operations.
With the major capital projects in 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 our Mackenzie site.
If everything comes together as we think it can, we have an opportunity to lower our cash production costs by around CAD 20 per thousand board feet of lumber produced, and thereby position 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, the key features and strategic rationale for the new business opportunity we're exploring, and two, how revenues and EBITDA are generated in this new and complementary business.
Worldwide, the search is on for sources of green power that can run high-performance computing operations to enable leading global computing requirements to operate in an environmentally and socially responsible manner.
A one-time opportunity is available to us at Conifex to successfully link BC surplus hydroelectric power with our underutilized power assets in Mackenzie and produce a win-win outcome for us in all British Columbia. Power costs are anticipated to remain in effect in BC, reflecting a combination of lower demand from forest sector contractions and activity, coupled with new electrical supply coming on stream when the Site C project is completed. Against this backdrop, we joined forces with the Tsay Keh Dene First Nation.
Our partnership plans to utilize our operating team and power expertise to redeploy power distribution infrastructure presently sitting idle in Mackenzie, develop a new business, and that's the business of hosting HPC or high-performing computer customers at an industrial scale data center our partnership plans to build and 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 a 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 customer will primarily install servers 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 at our additional data center sites, we have potential to host and support other high-performing computer applications in the future, such as artificial intelligence, machine learning, or other blockchain networks.
The way this business operates is that hosts, such as Conifex provide a 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 a 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 an additional fee tied to the performance and operating margins achieved at the data center. Performance fees are typically paid in the form of digital currency.
The performance fees to which we are entitled and which we expect to earn in the future will be recorded at fair value on the date received. In our case, the trial program for up to 3 MW of capacity is 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 the potential we have to build a data center with 25 MW of reliable electricity supply. Before turning it over to your questions, I'd like to advise that we're off to a good start in 2022.
When we release our results for the first and second quarters, we expect to be able to demonstrate that our 2021 run rate of CAD 1 million of weekly EBITDA in 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 initiatives as our plans evolve. We thank you for your interest in our company, and Winnie, Andrew, and I would be pleased to answer any questions you may have, so we'll turn the meeting back over to Eric.
Thank you, Mr. Shields. We have the first question from Gabe Nicholson. Please go ahead.
Hey, can you hear me?
Yes, we can.
Okay, great. Hi. I'm 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?
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 US and another 10% or so to Canada and the balance to Japan. China has not been an important market to us recently. The way the 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 the price. We don't expect the geographic mix of shipments in our case to change at all.
We think that the likely lower level of Russian shipments to some European markets may mean that there's less European product available toward 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 grades of lumber, and they're very important offtake customers for the top 5% or 6% of the grade outturns that we achieve at our Mackenzie sawmill.
The prices in Japan, as you probably know, tend to lag the prices in North America and then get locked in for three-month intervals. We're expecting further opportunities to achieve higher price realizations in Japan in second quarter of this year and likely in third quarter as well.
Okay, great. Thank you. Thank you for that. This one's more on the supply chain front, if I can ask a follow-up. Is that all right?
Yep.
Okay, great. Are you guys expecting any additional inventory builds in first quarter just based on what we're seeing in supply chain so far this year?
Yes, we are. You know, the build reports we get, of course, there's some volatility week to week, but you know, I'd say a month ago we were probably able to ship something like 45% of our weekly planer production, and that might have edged up to something like 55% or so now, through a combination of us engaging more trucks to deliver lumber and through some modest increase in railcar deliveries.
Based on the numbers that I see, it is unlikely that the inventory buildup in finished products in BC. I don't see it getting back to normal by the end of June, and I think it'll be into third quarter before we get finished lumber inventory to normal levels here in BC.
Okay, great. Great. Thank you. So, this one probably can go more to Winnie. I saw that your CapEx expenditures are kind of the same as forecasted, but could you break down kind of that capital allocation this year? Then I'll leave it there. Thanks.
For sure. Yes, I can take that. 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 included into 2021 as well, too.
Right. We're also gonna add a bit to preparing harvest sites 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. With our amortization running at around CAD 10.5 million a year, it's quite possible that our CapEx in 2022 will be roughly in line with non-cash charges.
Okay, great. Thank you.
Thank you. Once again, please press star one on your device's keypad if you have a question. There are no questions registered at this time. I would now like to turn the meeting back over to Mr. Shields.
Okay. Well, Eric, thank you for hosting our call today and for those of you on the line. Thank you once again... [crosstalk]
Oh, I'm sorry, Mr. Shields. We just had two questions pop up. Are you still ready to take them?
Okay.
We have a question from a participant.
Brian Davis.
Please go ahead.
Great. Thanks, folks. Just a quick follow-up on the capital allocation question. I was curious if given your solid deleveraging, 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? In other words, applying some portion of the annuity revenue to something like a base dividend, or perhaps more broadly adopting something like a more overarching capital allocation framework like we are seeing at some of your peers? Thank you.
Okay. Well, thank you for that question. The topic of capital allocation is regularly discussed at a board level, and I'll do my best to share with you what I believe the consensus is. We believe that our stock price is materially below the fundamental value of our company.
We're pleased that we undertook a normal course issuer bid and a substantial issuer bid last year, and that we believe that we've raised the fundamental value of our company for the shareholders that remained shareholders by a considerable amount, and we hope to grow it by the same amount this year. We are not prepared to consider relaunching a share buyback program until after we have the results from the trial program in our HPC business.
Because if that turns out to be promising, we will have some additional capital expenditures above the levels that we referenced earlier. We want to pin that down, and we also want to know what our working capital investment is before we recommit to a buyback program. The advice we get from shareholders and from financial advisors is that a buyback program is more beneficial to long-term shareholders than a dividend is. Unless we have powerful reasons why that's not the case, we are a lot more likely to consider returning capital to shareholders through buybacks rather than dividends.
Appreciated. Thank you.
Thank you. We have the next question from Paul Quinn. Oh, sorry, from Vic Ugole. Please go ahead.
Hi, can you hear me?
Yes, we can.
Okay, great. You answered my first question about the buybacks. My second question was, you know, I know on previous calls you've kind of gone through each piece of the business and how much that is per share, and I think you mentioned the duties were around CAD 0.50 per share. You know, 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 was just thinking, would just love to hear your opinion on the duties.
Well, on the duties, I think I mentioned that the refundable duties that in place today are $19.4 million . The duties increased by CAD 11.6 million last year. This year the duty rates are a bit lower, but the lumber prices, at least in the early going, are gonna be higher. It's entirely possible that we don't rebuild our duties on deposit by the same amount as we did last year.
We end up then having something like CAD 0.60 per share of potentially refundable duties today, and we could add another CAD 0.25 or CAD 0.30 per share to that over the next 12 months. Then when you look at the timing of potential duty refunds, we're uncertain about that.
If there are duty refunds, we don't know what portion of the duties on deposit will be retained by US producers and other industry support programs. Last time, 80% of the duties were returned to the people that deposited them. Then secondly, we're not sure what our tax position will be at the time duties are returned.
Right now, we have plenty of tax shelters that would avoid cash income taxes on duty refunds, but if it happens a year or so from now, we could be a lot closer to paying cash income taxes. It's really hard to estimate. I think that you know, we've got CAD 0.60 per share today. In the next 12 months, we'll probably make additional deposits that would cover any holdback in taxes.
As I look at our company, the CAD 0.60 of off-balance sheet cash that's available, I think that our power plant is worth at least CAD 1 per share. I think our working capital more than I forget what it's at, but our net working capital is a high number. The reason we like to share buybacks is that we think there's virtually no value reflected in our stock price for either a timber or a sawmill operation.
Thank you. That's great.
Thank you. The last question will be from Paul Quinn. Please go ahead.
Yeah, thanks. Morning. No, well, afternoon, Ken. Sorry, I got on the call late, so I might have answered this, but the sale of Canfor's assets in Mackenzie, is that gonna affect you in any way? When do you anticipate the restart of that mill, given, you know, what you know of the group restarting it, plus the assets themselves?
Okay. Well, Paul, I'm gonna take about two minutes to answer that question. First of all, we are pleased that sale has gone ahead. We believe that having First Nations as partner tenure holders in the Mackenzie BC will elicit more favorable consideration from the ministry as opposed to a company that has been taking many steps to lessen its exposure to BC.
We think that we've got a greater commonality of interest with this new likely tenure holders than the current tenure holder in Mackenzie. Secondly, I don't know what Canfor has been saying about the intentions of the purchasing consortium to operate that sawmill complex in Mackenzie. The last time I was in Mackenzie, it looked like the large log line was being packaged up for shipment to Louisiana. That site is a large site, and it's left with one small log line. I think that the economics to run a single line or a small log facility at a large site with high fixed costs, it doesn't make economic sense.
Based on everything I see, we do not anticipate that site will be restarted, and we suspect that the new tenure holders will want to hire us in the Mackenzie TSA and find customers for the saw logs in fiber deficit mills in Prince George. The bottom line, we think it's good 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.
Okay. Last year, you know, in the summer, prices got really high and basically, we saw the consumer, especially in the R&R side, really back off away from the market. What are you hearing from customers right now? Any worries about, you know, higher interest rates or inflationary pressures?
You know, Paul, I'd like to be able to report that customers are addressing those important issues that you mentioned, but the main message we're getting from customers are look, it's not even the 10 March 2021, and I'm buying lumber from you today that you will ship in late April, and it may show up in my yard in early June. There's just a lot of frustration with the delivery and railcar shortages. Paul, the most common customer feedback is all focused on their frustration with transportation delays.
Okay. Understood. Just by-product revenue, why was that up so much this quarter?
Why was it up so much this quarter? I actually thought it wasn't that. Yeah, I didn't think it was a good quarter. I know that we really built up our chip inventory at Mackenzie as we got into late December. You know, our chip inventory held at a nominal value. I know that the chip pile is going down, so that in the quarter we're in now, our by-product revenues should be better than they have been recently.
Yeah. I'll just add a little bit to that as well, too. Part of it, of course, was that in the third quarter, we had a few curtailments as a result of log costs and supply issues. So, we didn't have quite as much by-product generated at that time.
Yeah, 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 pulp pricing.
Yes. The planer trim waste, the proceeds that we get from selling that to a finger joint plant, it reflects what's happening to lumber prices. That would have helped us a lot last year, Paul.
Yeah. Okay. That makes sense. Sir, that's it. Best of luck. Thanks.
Okay. Thanks, Paul.
Thank you. There are no questions registered at this time. I would now like to turn the meeting back over to Mr. Shields.
Okay. Well, once again, everyone, thanks for your interest in Conifex. Enjoy the rest of your day.
Thank you. The conference has now ended. Please disconnect your lines at this time. Thank you for your participation.