Good afternoon, ladies and gentlemen. Welcome to the Conifex Timber Inc 2022 annual results conference call. I would now like to turn the meeting over to Mr. Ken Shields. Please go ahead.
Well, thank you very much, Patrick, and good afternoon, everyone, and welcome to the Conifex call covering our fourth quarter and full year 2022 results. Let's quickly deal with the housekeeping item. We will be making forward-looking statements and references to non-IFRS measures and therefore call your attention to the warning statement on pages 1 and 2 of the MD&A we distributed earlier today. Our fourth quarter results were exactly in line with the guidance we provided on our November 8th call. Back then, we stated that we anticipated recording business interruption insurance proceeds in our people income statement in an amount that would slightly more than offset potential losses at our sawmill complex. We expected that our full-year EBITDA and net income would be within 10% of the record levels we achieved in 2021.
Q4 2022 EBITDA of CAD 2.3 million brought our full-year EBITDA to CAD 46.7 million, which is 10% lower than the CAD 51.8 million we reported last year. 2022 net income of CAD 24.5 million was also 10% lower than we achieved in 2021. With fewer shares outstanding, earnings per share of CAD 0.61 in 2022 were about CAD 0.01 higher than we achieved in 2021. Because we paid a special dividend of CAD 0.20 earlier in 2022, our year-end book value per share increased by just over CAD 0.40 to CAD 3.68 per share. We ended the year with $31.3 million in potentially refundable duties on lumber, duty imposition that were on deposit.
Of course, in Canadian dollars, that translates into just over CAD 1 per Conifex share before any allowances for potential holdbacks and income taxes. We're very proud of what we achieved in 2022 in terms of our safety and sustainability rankings. We're also proud of the fact that our earnings per share increased slightly when six other lumber-oriented public companies reported declines of 19% to 67% in their per-share results for 2022. You will note that we recognized $9.6 million as other income in our income statement to reflect the proceeds received from our business interruption insurance claim. A manufacturer's defect in the power plant turbine caused power generation to be curtailed for the closing six months of 2022.
The proceeds we received are a testament to the fact that no shortfalls in our maintenance procedures, nor in our maintenance processes were identified by the insurers engaged to examine the cause of the power plant curtailment. It's also a testament to the high uptime reliability our power generation team achieves when they're not held back by factors completely outside of their control. All of us at Conifex, including our entire board of directors, are extremely proud of the performance from our experienced, highly competent power plant team. The results we reported for the closing six months of 2022 provide investors additional insight into the economic sustainability of our integrated and codependent harvesting, sawmilling, and power generation businesses at Mackenzie, BC.
My key point here is that the CAD 100 million we have invested in our power generation business materially enhances and stabilizes our cash flow generation. It also furthers our objective to operate the most economically viable and environmentally sustainable softwood processing site in the interior region of BC. Since our last call, several of you have contacted us and asked what's happening in BC with respect to sawlog availability, cost competitiveness, regulatory developments, et cetera. Permit us to share our views on these topics. We believe Conifex is well-positioned in terms of sawlog supply. As many of you know, our tenures are located in the Mackenzie Timber Supply Area, or TSA. The land base in the TSA is about equal to the combined land base in the states of Vermont and New Hampshire. We operate the only sawmill on this large land bank.
We believe that the standing timber inventory in the Mackenzie TSA is capable of supplying sawlogs in perpetuity that are at least double and perhaps as much as triple our present and foreseeable requirements. We believe our company enjoys the degree of regional fiber self-sufficiency that is not available in any other TSA in the interior region of BC. If you examine our financial reports, you will note that we ended 2022 with record high log inventories of CAD 33 million at a time when others were taking downtime due to fiber shortages. You'll also note that our inventory write-downs were just over CAD 2 million when others were taking write-downs of, say, something like 20x or 50 x the amount we took. These figures suggest that our delivered log costs are competitive compared to other mills operating in the interior region of BC.
Over the past few years, the ministry has imposed several new policies on forest sector operators in the interior of BC. Since many important regulations have yet to be drafted and/or implemented, it's difficult to precisely determine how future sawlog supplies and delivered log costs may be impacted. We expect that fiber supply will remain tight in the interior region of BC through the remainder of 2023. The main reason is that BC Timber Sales is finding it difficult to develop and auction stands to achieve its mandate to provide 20% of the sawlog harvest in the interior of BC. BC Timber Sales' excuse is that it's being held back by the province's old growth retention, First Nations reconciliation, and other emerging land-based management objectives.
Looking at BCTS activity in the Mackenzie and neighboring Prince George timber supply areas over the 2017-2019 period, BCTS auctioned something like 4 million cubic meters annually, and that is 20% of harvest objective. In its fiscal year ended March 31, 2022, BCTS auctioned just over 1 million cubic meters and accounted for considerably less than 10% of the harvest. Over the nine-month period ending December 31, 2022, BCTS auctioned just over 300,000 cubic meters and accounted for a nominal portion of the harvest in Prince George and Mackenzie. Converting the cubic meters into lumber, BCTS went from supplying the fiber requirements for four large interior BC sawmills to supplying the requirements at one small sawmill. These low auction volumes exacerbate fiber shortages.
They directly increase the competition for and the cost of auction wood and contribute to artificially high stumpage rates imposed on timber wood supply. Turning to lumber prices, we get the sense that prices have climbed down the side of the mountain and now crossing the valley bottom and will soon begin their climb up the other side of the valley. We believe sawlog supply constraints coupled with BC cost structure will trigger further announcements and produce a better balance between SPF supply and the lower demand currently being experienced. In our company, we expect our Q1 earnings may lag the results reported by some other public lumber companies for three main reasons.
The first is that our sawmill was offline in the first week of the year, and we were forced to take an additional seven operating days of downtime because railcar shortages prevented us from shipping our lumber. Fortunately, the railcar supply has improved a great deal. The second reason is that our power generation results in February were held back as we progressed through the startup curve associated with a winter restart following eight months of downtime at the power plant. The third reason is that our log costs in Q1 of 2023 will be at normal levels, not at the written down levels available for certain other companies. Given these three factors, we expect we will report negative EBITDA in the opening quarter of 2023.
You know, it looks like we're probably gonna get back something like 10% of the EBITDA we earned in 2022. However, we expect our quarterly results to improve as we progress through the balance of 2023. That concludes my prepared remarks. Andrew McLellan, who heads our Operations, Trevor Pruden, who heads our Corporate Services and Business Planning, and CFO Winny Tang are here with me today. We look forward to responding to questions analysts and shareholders may have. I'll now turn the meeting back to Tabith, our operator.
Thank you. You may now press star one at this time if you have a question. When prompted by the system, please clearly state your name to register your question. There will be a brief pause while the participants register for questions. Thank you for your patience. We'll look at the first question. We have a question from... Please go ahead.
Gabe Nicholson. Hi. Hey, sorry about that. This is Gabe with CIBC. Good afternoon. Hope everyone's doing well.
Yes, we are, Gabe. Thank you.
Okay. First question, I was just wondering, what kind of change do you see in BC stumpage as we move from December into January? Then, where do you think that's gonna go in April here?
Okay. Well, Andrew McLellan is closer to that than I am, he'll answer your question, Gabe. Thank you.
Hi, Gabe. Andrew McLellan here. As we kind of look forward into the remainder of Q1 here and into Q2, you know, we're seeing very, very competitive bidding in the BCTS auctions within the province that are outside of our timber supply area, but influence the estimated winning bids with the pricing model in BC. You know, we expect obviously with lumber prices declining, that we'll see some relief in the stumpage, but hard to tell how much relief we're actually gonna deal with the competitiveness in the bidding within BC. We'll see as the adjustments are made here, but not expecting any material decreases in stumpage.
Okay. Yeah, great. Thank you. Thanks for the color on that. Second, in terms of the letter or statement by the provincial government dated December 21, do you have any idea if the, if your existing customer or, that you started the trial run with back in September, will they be grandfathered in, or is there any kind of details you could provide around that? Just in terms of the 3 potential customers, you guys mentioned, how do you think they will be impacted?
Okay. Well, Trevor Pruden will respond to that question, Gabe.
Hi, it's Trevor here. Yeah, you know, we continue to still like this business. We have a new customer for our 3 MW deployment that we anticipate will be energizing the miners in the coming weeks. We're still exploring how we can best scale up this segment, and we continue to evaluate the potential impact from the BC government's Order in Council to BC Hydro on our Hosting Services business.
Okay, great. Great. Thanks. I'll leave it there.
Okay, thanks.
Thank you. As a reminder, you may press star one if you have a question. The next question is from Paul Quinn. Please go ahead.
Yeah, thank you very much. Afternoon, guys. Just, maybe start with the BCTS, Ken, 'cause you brought it up. What's the fix here?
I beg your pardon. What's the fix here?
Yeah. How do they, how do they fix this system? I mean, this has been going downhill. You know, they're supposed to get the 20% to make the competitive stumpage system, you know, representative and competitive and the undercut, it's, you know, it's getting worse by year. How do you fix this situation?
Well, first of all, I can tell you, Paul, that if Andrew's forest tenure chalked up statistics like that would never happen because we have a much more robust system of management accountability in delivering against business plans and targets. You know, Paul, I don't think there is a quick fix to it. I know that there are representations given by BCTS that they will do better. The BC provincial budget indicated that there would be 6 million cubic meters of volume from BCTS in the year ending March 31. The best figures I have is that they'll be lucky to be at 5 million cubic meters.
I just think that the difficulty they're having to get approval to go into old growth stands or to go into areas that have some control and direction exerted by local First Nations make it very difficult for them to ramp up their volumes to anywhere close to the 20% of the provincial harvest. My guess is that they might be at 10%. As I'm sure, Paul, you've seen some of the work that's been done on the interior BC industry when people have attempted to assess what the impact, you know, in BC, we've got a province-wide reduction in the interior BC harvest level.
Although old growth set asides and wildlife set asides and First Nations reconciliation objectives are having some impact on overall harvest levels, the single biggest cause of the harvest shortfall in BC is BCTS. As an industry, we've been encouraging the province and the ministry to ensure that BCTS does a better job, but there's not a lot of evidence that much progress is being made to date.
Okay. Just looking at, you experienced a couple of shuts in 2022 due to lack of rail car availability, but you know, also mentioned that this is better. What are the alternative transportation arrangements that you can make? Is that a longer term solution to move away from rail, at least, you know, to the next reload, because there's a problem in Mackenzie?
Hi, Paul. It's Andrew here. You know, in terms of our ability to shift to trucking, for example, certainly not something that we want to do. There's obviously some additional costs associated with trucking lumber into a reload and rehandling. You know, our intention is to continue to work with our rail partners and ensure that we have adequate service to support our business. We do occasionally rely on trucking when we get behind on rail cars, but it's not a long-term solution for us.
Just so I understand that component, if you went the trucking route, what's the additional cost of the rail reload and where is that reloaded? Is that a Prince George reload that you get?
Okay. Well, what Paul, given the nature of our core customer base, the trucking option that works best for us is to take the wood from Mackenzie down to the lower mainland and ship it on the Burlington Northern into our key markets in Arizona and Texas. That's the trucking option, and it's probably something like CAD 35 or CAD 40 per 1,000 board feet of additional cost to do that. As you're probably aware, a truckload of lumber contains about as much as one third of a boxcar. If you're trying to replace boxcar shortages with trucks, you need a lot of trucks. What happens is that most of us in the interior BC, we're all looking for trucks at the same time.
The higher cost trucking option can be a bit of an assist, but it's as Andrew mentioned, it's not a permanent solution.
Okay. In a typical year, are you like 10% truck and 90% rail, or is it?
No, probably 95/5 would be my guess.
Okay. That's helpful. Ken, any update on the Mackenzie TSA AAC apportionment?
Well, Paul, that's a good question. you know, we've been promised it by the end of October. We've been promised it before the board meeting that we had earlier this morning. who knows, Paul? If you go back to February of 2019 when the green and salvage harvest partition was modified, the Chief Forester at that time said that they were going to move quickly for a new timber supply review. The data package for the review was issued in October of 2020, the public discussion paper was issued a few months ago. it's an unusually long time, and we're still waiting for it.
While we're waiting for it, you know, the trees are continuing to grow, and there's probably a more inventory in the timber supply area today than when they promised to have the report delivered to us. We're not worried about what the AAC determination is. We think we'll have plenty of wood to keep our mill toward fiber up.
Okay, just last question. You guys are the only operational sawmill in that TSA. Any movement on the other assets in the region as well?
You know, Paul, we have the same information that you have, which is that 55 weeks ago, Canfor announced that they had arranged to sell their tenure to two local First Nations. When Canfor released their results on February 28th, they essentially repeated the same statement that they made a year earlier. Reading that statement, it strikes me that that transaction is still on, but there's no forecast date for when they might have a binding agreement or expect to apply for the approvals for the tenure transfer. We understand that the mill in Mackenzie, that the machine centers have all been taken apart, and they're sitting in crates, ready to be shipped out when the tenure transaction closes.
People in Mackenzie do not believe that there will be any sauna production coming from that vacated site.
Okay. That's all I had. Thanks very much, guys. That's all.
Thank you. We'll take the next question. Please go ahead. [Hugh Cooper].
Morning, Ken. I had the same question as Paul, but maybe I've got a couple other questions too. Firstly, is there any update on the I think you have somewhere near a $1 share of duties that are on hold with the U.S. government? Is there any update at all industry-wide on that? Secondly, your tax loss carry-forward, if I recall, it's something like Might have been CAD 180 million, about four and a half dollars a share. Is that predominantly all in the U.S.? Is there any left in Canada?
Okay. Well, I'll talk about the duties, and Winny Tang will refresh us on our tax loss carry-forward. On the duties, at year-end, we were at $31.3 million in U.S., and that, at $0.725 , which I think we're roughly at today, it's the equivalent of CAD 1.08 per share before any possible holdbacks and before any possible taxes on the amount of the rebate. That answers the duty question, and Winny Tang will talk about our tax loss situation.
Yes, of course. Thank you, Ken. It's Winny here. Thank you for that question about the taxes. I'm always excited to speak about taxes. Just in answer to your question, the majority of those tax loss carry-forwards do relate to our U.S. operations. We do have about 5% or so of our balance does relate to our Canadian operations, and that, of course, is after, you know, deducting losses that we utilized for the 2022 tax year. I think we're in a good position heading into 2023 in terms of Canadian operations and just the ability to shelter our earnings there.
Okay. Just, following up, Ken. The second part of my question on the duties, was there any update industry-wide on that?
Okay. Good question. Yes. My understanding is that the Federal Government, Minister of International Trade is liaising with key executives in various provincial forest associations and that they're having a call in the next couple days. Of course, there's been some speculation that President Biden may be visiting Canada before too long, and of course, the forest industry is working hard to have the resolution of the trade dispute on the short list of topics that the two country heads will discuss if indeed there is a visit.
Okay.
I might have a better feel for it when I'm updated by our industry association in the next couple of days. That's my understanding as to where we're at today.
Okay. Thanks, Ken.
Thank you. There are no further questions at this time. I would like to turn the meeting back over to Mr. Shields.
Okay. Well, thank you, everyone, for your interest in our company. We're gonna get back to work to do everything we possibly can to get rid of the red pencils in terms of our EBITDA and be in black ink in the closing half of 2023. Thank you. Enjoy the rest of your day.
Thank you. The conference has now ended. Please disconnect your lines at this time, and thank you for your participation.