Earnings Call: Q2 2021

Aug 10, 2021

This conference is being recorded. All participants, thank you for standing by. The conference is ready Good afternoon, ladies and gentlemen. Welcome to the EconFX Timber Inc. Q2 2021 Results Conference Call. I I would now like to turn the meeting over to Mr. Ken Shields. Please go ahead. Well, thank you, Patrick, and good Good afternoon, everyone, and welcome to this call covering our first half twenty twenty one results. I'm joined today by Chief Financial Officer, Winnie Tang and Operating Head, Andrew McCloud. After a few brief opening comments, I will hand the call over to Andrew to review observations and Monique to review our finances. I then We plan to review some important near term developments that we believe will strengthen competitiveness And future cash flow generation at our Mackenzie complex. We will then respond to any questions that shareholders and analysts may have. But first, 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 and A that we released earlier today. For the Q2, our net earnings were $26,100,000 equivalent to $0.56 per share. EBITDA was $37,800,000 This brought our first half results net earnings Up to $30,600,000 or $0.66 a share and First Avenue at DAA up to $47,500,000 The sequential improvement in quarterly earnings was driven by dramatically higher lumber prices, Improved lumber shipments since railcar supply normalized at $2,800,000 in business interruption insurance proceeds. The settlement we reached with our power generation plant insurer verifies the statements Andrew and I made on previous calls To the effect of neither employers nor gas and maintenance procedures triggers the curtailment of the power plant. I'll now turn the meeting over to Andreas, who will update you on our lumber and power business. Thank you, Ken, and good afternoon, everyone. First, I wish to reemphasize our number one priority is protect the health and safety of our employees, their families And community members, towards the end of Q2 and so far in Q3, successfully achieving this objective became more of a challenge to The result of wildfires led to harvest curtailments, due to some shift cancellations at our sawmill in Q2. We also incurred extra cost trucking lumber to service our customer base when railcar supply is sporadic. We owe a debt of gratitude to our employees who helped us maintain a safe workforce in the COVID pandemic and helped mitigate disruptions in oil and railcars. We also thank our contractors who made their equipment and employees and efforts. On my last two calls, I know that the combination of heavy snowpack and wet weather last spring extended the spring breakup period and led to log harvesting and delivery shortfalls at mills in the Northern Ontario region of British Columbia. Consequently, our sawmill operated at 83% of in the first half of twenty twenty one. Now that our log inventories are being replenished through our active summer logging programs, We plan to extend operating hours at a McKinney mail later this month. Our MD and A discloses that we are targeting an operating rate of 90% in Q3 at an even higher rate in Q4. As always, any number of unanticipated pandemic or wildfire related production or shipments disruptions Our power business performed well in the quarter and continues to meet its production targets I will now turn the discussion over to CFO, when we can. Thank you very much. Thank you, Andrew, and good afternoon, everybody. We ended Q2 with cash of $35,800,000 and available liquidity of 40 $5,800,000 The $10,000,000 revolving credit facility we arranged late last year remains undrawn. Gross debt at the end of the quarter totaled approximately $62,000,000 of which $59,000,000 is linked to recourse debt related to our over $100,000,000 investment in green powder production. We also have obligations totaling $2,700,000 for leased office spaces After deducting cash, we ended the 2nd quarter with net debt of $20,100,000 and a net debt to Our lumber business is in an enviable financial position With nominal debt and significant cash balances, we deposited $7,800,000 in duties in the first half of twenty twenty one, And we now have US16.3 million dollars on deposits as potentially refundable. Our capital expense Sure. It's totaled just under $3,000,000 in the first half of twenty twenty one, and we expect to extend similar amounts in the second half of the year. We also expect to pay minimal cash taxes this year and also into the next year as well. In December 2020, we commenced our normal course issuer bid, entitling us to repurchase the cash flow up to 2,940,000 shares. In the Q2, we repurchased or canceled 1,450,000 shares. Since inception, we have repurchased or canceled to 2,380,000 shares at a total cost of $5,500,000 Our average purchase price of $2.31 per share Represent a 20% discount to our June period book value of $3.21 per share. As we said, the quarter end, we amended our credit agreement to allow us to repurchase and cancel up to $9,000,000 of our shares between October 1, 2021 September 30, 2022. For reasons that Ken will discuss, we believe our share trades well below our to take our fundamental value, and we gain the share buyback with an optimal use of excess cash. I will now turn the meeting back to Ken. Well, thanks, Andrew and Lenny. Since delivered log costs account for about 3 quarters of the cash Cost of producing lumber in the interior region of BC. The competitiveness ranking of any sawmill complex is driven by the procurement costs We think it makes sense to use the remaining time today to bring you up to date on our fiber supply We've summarized key information about the Mackenzie Timber Supply Area in Slides 7 and 8 in the deck we distributed. The Chief Forester has indicated that she expects to release an updated harvest levels of termination, And these are commonly referred to as the law of the land use of the cut or AAC determinations. But she plans to release a new determination Under the new AAC determinations, We believe we will have ample access to better quality performance. Here's why. 1st, let's discuss trends in North Poly. As indicated in Slide 7, the Chief Forester Presently, it requires operators in Mackenzie to source the majority of their cell lock requirements from dead and damaged time spent. Last year, the ministry disclosed that 60% of the debt time in the timber inventory in the McKinsey PSA had lost commercial value And we're no longer suitable for lumber production. With this disclosure, it is evident that the shelf life of the remaining beetle damaged And the Mackenzie PSA has expired. This explains why we expect to be able to access a higher quality Our greener log diet provides us Opportunities to materially improve the number of recoveries. Here, of course, we have fewer defects than in the log span. More of each log is available at finished lumber. It also allows us to We have reduced unit cash conversion costs because we have fewer production jam ups than our And probably most important of all, it allows us to boost our lumber grade outturns, Which leads to much higher average lumber selling price realizations. In this latter area, with a green mark, We believe we can move about 10% of the output of the mill from low grade lumber, which Sales for something like a discount of $100 per 1,000 board feet below construction days longer prices. We think we can move about 10% into a premium grade where sales at about $100 premium. So you can see that the effect I have a greener lock guide is for something like USD 20 or say $20 after duty and with 200,000,000 plus And your lumber capacity, that's the swing in cash flow generation of over $4,000,000 a year. So this is why we're excited about this. And we believe that with the redetermination of the harvest We will migrate to a lower position on the global profit lumber industry cost curve. Let me talk a couple of minutes about log availability. Based on our review of the future AACs in the interior region of B. C. In general and in Mackenzie in particular, we believe that the Mackenzie PSA will likely contribute at least 6% of the total harvest in the interior region of BC. Since Canfor chose its Mackenzie Mill in 2019, we operate the undernaming sawmill complex In the maturity TSA, at capacity, Arnaud will consume about 2% At the interior BCAAV, if the Canfor mill refracts at capacity, it could consume about 2.5% So given that the Mackenzie TSA is expected to account For about 6% of the total fiber in the interior of BC that consume only 4.5% of the fiber, it's apparent that surface products are available to us at McKinsey. And this explains the note that we put at the bottom of Slide 6, Which makes the statement that we have one of the highest degrees of timber self sufficiency, a winning thumb and an operator in British Columbia. So in anticipation of having clinical supplies with better quality cell locks, We've got 3 comprehensive studies that are underway. The first study examines the scope and scale of the potential modernization and expansion We believe we have a solid opportunity to boost lumber production capacity by about 25 We do the cash conversion costs and further improve lumber recovery grade outcomes and sales realization. Our objective is to identify a plan that enables us to sustain positive cash flow when Number prices are cyclical lows and the plan that produces attractive returns on investment even under conservative number price assumptions. The second study we have underway focuses on the diameter class quality characteristics and moisture content of the product We expect to access over the next decade and possibly longer. This crucial information will help us specify Machine center and dry kiln attributes and performance requirements for any modernization project. A third study that we have underway focuses on the potential to build and operate a large merchandising facility at our Mackenzie site To process our internal requirements, but also to optimize the potential proceeds from the sale of Circle, Sawlog, We expect to finalize these 3 studies shortly after the new AAC determination is announced. We also expect that any projects We may have proven the future will be phased in over time and funded through a combination of our cash balances, To cancel export duty rebates or refunds and broaddowns under our existing credit facility. While we await the release of updated harvest level and mix determination, We intend to continue to repurchase and cancel share. We have equity in our power plant that we value at over $1 per ConEquEx Share cash on our balance sheet was over $0.80 per share and duty refunds were as much as $0.45 per share. This totals $2.25 per share. Our recent trading price is $0.50 per share lower Then the total of these 3 items, clearly, stock market investors presently accord a negative value to our tenures in to announce conflicts, assets that we believe are valuable and that we are proud to own. Therefore, we continue to believe that our stock is undervalued by a huge amount given the robustness And following the timber inventory in the Mackenzie TSA and given the high return capital investment opportunities available to That's some of the key points we wanted to make. We very much look forward to our next call with you, And we will be pleased to respond to any questions. Shareholders and analysts may have. So we'll turn the meeting back to Patrick. Paul Quinn, RBC. Sure. Okay. I'll ask you a question. Hey, guys. Now that you've got your balance sheet in good shape again, just what are you looking to do? Is it less Are you looking to get back in M and A? Or is it more upgrades on the Sato? Paul, good question. Today, all of our study and analysis has been focused on internal enhancement projects, Optimizing our existing timber and sawmill and power plant base. We have not been looking for external and sufficient opportunity. The rationale is Importantly, driven by the fact that when we remain with internal projects, we can control the And so that's why we're continuing to look internally. Okay. And then maybe we've got a pretty hot summer going here. Just wondering what the update on Our situation is in Mackenzie. Would you expect any shuts to occur in Q3? Good afternoon, Paul. It's Andrew McClellan here. We've been fairly fortunate with the conditions in Mackenzie And somewhat different than we've seen in the segment in 2 weeks. So we're not anticipating that we'll have anything like to be heard in the back half of August or into September. We did have some disruptions in Q2, but it was limited to over 2 weeks of Shortfalls in log group deliveries will be entirely shutdown of deliveries, but we had a 2 pre available impact of our buyers. Okay. And then Ken, you mentioned that log costs, BC Interior, that's 75% of cash costs. You obviously hit got hit with a Huge run up in stumpage on July 1 and poised to see another price increase on October. Are you guys able to make cash at At these levels of subjects, especially given the quality of the fibrosis you're bringing in. Well, let me mention a couple of things about that, Paul, And they're both very good questions. First of all, we found that The heavy snowpack and difficult weather conditions that we had In Q1, forced us to incur extra log costs, buying wood to make up for Some shortfalls that we experienced and spending extra money, but there's enough growth that we could fall good when Ground conditions were very wet. So as a consequence of that, Our non stumpage related sawlog costs in the second half of this year will be lower than they were in the first half, And stumpage will be a bit higher. So all the reviews and spreading of numbers we've done Indicate that we are going to have a modest single digit increase in delivered log costs in the second half of the year Coming back to the question that your second question I think, Paul, that if you look at our operating earnings in the 1st 6 months of this year And divided by 93,300,000 board feet of shipments, you find that we have something like $450 operating income per 1,000 board feet And there's probably $25 or so of depreciation in that. But in any way, your operating income was right around $450 And through to last Friday, our average selling price realization It was about CAD450 lower than it was in the first half of this year. So Right today, we are at approximate breakeven. And in the quarter to date, We would be slightly ahead of our cash costs. But now we're about to experience the sub-five hundred dollars benchmark that will be shipping. So we probably dipped into negative cash flow territory right now. But at this moment, we're continuing to, as Andrew said earlier, We've got a robust summer lodging program that enables us to spread our This caused over a larger number of units. And we are also looking at adding hours We have a softness complex, and we think that will enable us to reduce our cash conversion costs a bit. So quite at this moment, there's not an overwhelmingly powerful argument to take downtime Because it's not clear to us yet that the procurement cost Would be materially different than our operating loss. But who knows what will happen? Our own view And that the direction in lumber prices has largely won its course and that has We've got some seasonal improvement opportunities in shipments coming up. And as you and others have written about, there's going to be some restocking in certain lumber market segments. So We think lumber prices are more likely to go up from here and that Okay. Folsom answer. Maybe just lastly, just I'm quite confused with your hedging strategy. It seems like I've seen quarters where lumber prices are going up and you've had losses and lumber prices are going down or to losses. So maybe you can just remind us what your hedging strategy is and when it's going to start to work for you, I guess. I'm sorry, the monitored line disconnected. Are we still on the conference? Please stay on the line. You are now back in the call. Thank you for your patience. Okay. Well, good afternoon once again, everyone. Ken Shields, we've had an unusual development with the phone system here, and we got dropped from the call. So presumably, you're still on the line. And I was in the midst of answering All Quinn's question about our hedging strategy. And it is the background to our hedging strategy is that We did obtain some price protection, and then we experienced this incredible run up And lumber prices, and we took significant losses in Q2 or pardon me, in Q1. We took further losses in April of Q2 and towards Late May, early June in Q2, we unwound our position, and we did not We ended up covering our position at much higher than the $500, $600 level that they reached at the end of the quarter. And so there's a bit of a loss in Q2 in addition to Q1. We have no positions on the books now, And we don't anticipate doing anything materially in the Patrick, are there other questions? So Mr. Quinn, do you have any more questions? No, I'm good. Thanks very much Patrick. Thank you. I'm sorry about that. So we do have the next question. One moment. We'll take the next question. Hugh Cooper. Ken, Just two quick questions. First of all, how much is your tax loss carry forward in the U. S? And what is left in Canada? I can take that question. This is Winnie Tang. We have losses in excess of CAD 100,000,000 Canadian in the U. S. And in Canada, we had around €50,000,000 at the end of 2020. And so we were able to visualize a large portion of that so far in the year, but we do not expect though to have any cash taxes payable to work for the current year. Okay. And Ken, one just I think I might have missed that, but I think you said you had roughly about $0.80 of cash. The duties were duty refund roughly amounts about $0.45 Your lumber operations were $1 and the biomass plant was $1? No. We said the biomass plant was $1 The $45,000,000 for the biomass only. Yes. Okay. For the equity in the biomass, and then there's $60,000,000 of debt on top of that. So it's roughly $105,000,000 So it's 7 times. 7 times EBITDA roughly. Ken? Yes. And so we said that we infer from that that our tenures of lumber business have a negative value going into the current Okay. And how would you value your cut or whatever your reduced cut will be? What how do you do you see that as an asset? We certainly do see it as an asset in Mackenzie. And we think that Since we sold Kenyres at approximately $120 per cubic meter A while ago, we said tenure values have come down a bit in BC Because of the regulatory uncertainty related to First Nations conciliation with Efforts and some of the objectives that are set out in the intentions paper that the Ministry of Commerce Issued recently gives the province more flexibility to wheel and deal in tenure than to repurchase So I don't know, dollars 90 or $100 might be the going rate and We've got approximately 807,000 cubic meters out of Kenya, 782, 500 So and then sawmills that value that, I don't know, dollars 4 100 You saw almost $400,000,000 for the 1,000 board feet of annual capacity. We're about 240 No, you're in board personnel. So there might be $100,000,000 there or something like that. So And to the nearest total dollar, there might be $3 a share on above some of those other amounts that we discussed. Okay. Okay, thanks. That's it for me. Thanks very much, Ken. Thank you, Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to Mr. Shields. Well, I just want to thank all of you for your support of Conopex and for bearing with us as we have this Telephone interruption debate. So thank you. We look forward to chatting to you in early November. Bye now. Thank you. The conference has now ended. Please disconnect your lines at this time and thank you for your participation.