Conifex Announces Third Quarter 2022 Results
Conifex Timber Inc. (“Conifex”, “we” or “us”) reported results for the third quarter ended September 30, 2022. EBITDA1 was $4.2 million for the quarter compared to EBITDA of $3.3 million in the third quarter of 2021. Net income was $0.9 million or $0.02 per share for the quarter versus net loss of $0.9 million or $0.02 per share in the year-earlier quarter.
Summary of Third Quarter 2022 Results
Consolidated Net Earnings
During the third quarter of 2022, we generated net income of $0.9 million or $0.02 per share compared to net income of $12.3 million or $0.31 per share in the previous quarter and a net loss of $0.9 million or $0.02 per share in the third quarter of 2021. While our power plant was not operational during the current quarter, our net earnings realized the benefit of a recovery of softwood lumber duties reflecting the difference between the cash deposit rates and the published final rates for lumber shipments to the U.S. in 2019 and 2020.
North American lumber market prices continued to decline through the third quarter of 2022 following the elevated lumber prices seen in the first quarter of the year. Canadian dollar-denominated benchmark Western Spruce / Pine / Fir (“WSPF”) prices 2, which averaged $742 in the third quarter of 2022, decreased by 30% or $314 from the previous quarter but increased by 23% or $140 from the third quarter of 2021. Market prices experienced a slide from recent record-high levels driven largely by a slowdown in new home construction demand in the U.S. due to higher mortgage rates and reduced affordability. U.S. housing starts on a seasonally adjusted annual basis declined, averaging 1,502,000 in the third quarter of 2022, down 9% from the previous quarter and 4% from the third quarter of 2021 3.
Our lumber production in the third quarter of 2022 totalled approximately 39.5 million board feet, representing operating rates of approximately 66% of annualized capacity. In the previous quarter, 51.4 million board feet of lumber was produced. The decrease in lumber production for the third quarter was largely due to a reduction in lumber operations to a one-shift basis since the end of August 2022. In the third quarter of 2021, 40.1 million board feet was produced, representing operating rates of approximately 67% of annualized capacity, reflecting the temporary curtailment of lumber operations for two weeks in August 2021.
Shipments of Conifex produced lumber totaled 44.7 million board feet in the third quarter of 2022, representing a decrease of 19% from the 55.5 million board feet shipped in the previous quarter and an increase of 31% from the 34.1 million board feet of lumber shipped in the third quarter of 2021. Shipments of Conifex produced lumber in the third quarter of 2022 were impacted by the reduced operating schedule implemented to manage the ongoing railcar supply challenges. Our wholesale lumber program shipped 3.0 million board feet in the third quarter of 2022, representing an increase of 150% from the 1.2 million board feet shipped in the second quarter of 2022 and a decrease of 50% from the 6.0 million board feet shipped in the third quarter of 2021.
Revenues from lumber products were $39.3 million in the third quarter of 2022 representing a decrease of 43% from the previous quarter and an increase of 2% from the third quarter of 2021. Compared to the previous quarter, the lower revenues in the current quarter were driven by reduced shipment volumes, combined with the effects of lower realized lumber prices. The revenue increase in the current quarter over the same period in the prior year was largely the result of higher volumes of Conifex produced lumber shipped, offset by more modest volumes shipped under our wholesale lumber program.
Cost of goods sold in the third quarter of 2022 decreased by 18% from the previous quarter and was largely unchanged from the third quarter of 2021. The decrease in cost of goods sold from the prior quarter reflects the reduced volume of Conifex produced lumber shipped in the current quarter. Unit manufacturing costs increased in comparison to the previous quarter as a result of the one-shift operating format which resulted in lower lumber production and higher fixed costs absorption.
We recognized a recovery of countervailing (“CV”) and anti-dumping (“AD”) duty deposits of $3.6 million in the third quarter of 2022, an expense of $7.2 million in the previous quarter and $1.3 million in the third quarter of 2021. The duty deposits were based on a combined rate of 8.99% until December 1, 2021, 17.91% until August 8, 2022 and 8.59% thereafter.
Cash deposits paid during the third quarter of 2022 decreased compared to the previous quarter due to lower lumber shipment volumes in the current quarter and reduced cash deposit rates in effect from August 2022 onwards. Cash deposits paid were higher than the third quarter of 2021 largely due to the greater volume of lumber shipments.
In the current quarter, we recognized a recovery of $5.7 million pertaining to the difference between the cash deposit rates in effect at the time of shipment and the final published rates of 17.91% and 8.59%, respectively, for shipments made to U.S. markets in the years ended December 31, 2019 and 2020. The net duty recoverable has been included as a long-term asset on our balance sheet.
Our Mackenzie power plant did not operate for most of the current quarter as a result of damage discovered to the plant’s turbine during the course of scheduled annual maintenance work in July 2022, resulting in a total of 1.2 gigawatt hours of electricity being sold under our Electricity Purchase Agreement (“EPA”) with BC Hydro and Power Authority (“BC Hydro”). Our Mackenzie power plant sold 54.6 and 53.7 gigawatt hours of electricity in the previous quarter and third quarter of 2021, respectively.
Electricity production contributed revenues of $0.4 million in the third quarter of 2022, a decrease of 92% from the previous quarter and 94% from the third quarter of 2021. In comparison to the previous and prior year comparative quarters, revenues were lower due to the power plant being mostly inoperable during the quarter.
We have submitted an insurance claim for physical damage to our equipment and for the loss of revenues from the interruption of operations. We expect the property damage and business interruption will be covered by our insurance, subject to applicable deductibles and limits.
The insurance claim submitted in 2021 arising from the previous failure of the power plant’s generator which impacted operations from December 2020 to February 2021 was settled and recognized as other income on our statement of net income and comprehensive income in 2021 to reflect the settlement for lost income under our business interruption policy. The final portion of the settlement for the physical damage and business interruption claim was received in July 2022.
Our EPA with BC Hydro, similar to other electricity purchase agreements, provides BC Hydro with the option to “turn down” electricity purchased from us during periods of low demand by issuing a “dispatch order”. In April 2022, BC Hydro issued a dispatch order for 61 days, from May 5 to July 4, 2022. In 2021, our power plant was dispatched for 61 days, from May 1 to June 30, 2021. We continued to be paid revenues under the EPA based upon a reduced rate and on volumes that are generally reflective of contracted amounts. During any dispatch period, we continued to produce electricity to fulfill volume commitments under our Load Displacement Agreement with BC Hydro.
Selling, General and Administrative Costs
Selling, general and administrative (“SG&A”) costs were $3.2 million in the third quarter of 2022, $3.1 million in the previous quarter and $2.3 million in the third quarter of 2021. Additional selling costs associated with the wholesale lumber program on higher shipment volumes relative to the previous quarter resulted in the modest increase in SG&A costs compared to the previous quarter. Increased SG&A costs in the current quarter than the comparative quarter in the preceding year were primarily attributable to stock-based compensation costs.
Finance Costs and Accretion
Finance costs and accretion totaled $1.1 million in the third quarter of 2022 and in each comparative quarter. Finance costs and accretion relate primarily to our term loan supporting our bioenergy operations (the “Power Term Loan”).
Gain or Loss on Derivative Financial Instruments
We enter into lumber future contracts at times to manage our commodity lumber price exposures. Gains or losses on lumber derivative instruments are recognized as they are settled or as they are marked to market for each reporting period.
We had no outstanding futures contracts in place as at September 30, 2022.
Foreign Exchange Translation Gain or Loss
The foreign exchange translation gain or loss recorded for each period on our statement of net income results from the revaluation of U.S. dollar-denominated cash and working capital balances to reflect the change in the value of the Canadian dollar relative to the value of the U.S. dollar. U.S. dollar-denominated monetary assets and liabilities are translated using the period end rate.
The U.S. dollar averaged US$0.766 for each Canadian dollar during the third quarter of 2022, a level which represented a weakening of the Canadian dollar over the previous quarter 4.
The foreign exchange translation impacts arising from the variability in exchange rates at each measurement period on cash and working capital balances resulted in a foreign exchange translation gain of $1.1 million in the third quarter of 2022, compared to $0.5 million in the previous quarter and $0.6 million in the third quarter of 2021.
The current quarter results include a current income tax recovery of $0.7 million, compared to an expense of $1.5 million in the previous quarter and nil in the third quarter of 2021.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities on our balance sheet and the amounts used for income tax purposes. We recorded a deferred income tax expense of $1.1 million in the third quarter of 2022, $3.3 million in the previous quarter and a recovery of $0.3 million in the third quarter of 2021. As at September 30, 2022, we have recognized a deferred income tax liability of $8.1 million.
Our effective tax rate was 28% in the current and previous quarters and 30% in the third quarter of 2021.
Financial Position and Liquidity
Overall debt was $57.8 million at September 30, 2022 compared to $59.4 million at December 31, 2021. The reduction of $1.6 million in debt comprised net lease proceeds of $0.6 million and Power Term Loan payments of $2.2 million. Our Power Term Loan, which is largely non-recourse to our lumber operations, represents substantially all of our outstanding long-term debt. At September 30, 2022, we had $55.0 million outstanding on our Power Term Loan, while our remaining long-term debt, consisting of leases, was $2.8 million.
At September 30, 2022, we had total liquidity of $36.0 million, compared to $16.4 million at December 31, 2021 and $33.4 million at September 30, 2021. Liquidity at September 30, 2022 was comprised of unrestricted cash of $21.0 million and unused availability of $15.0 million under the $15.0 million secured revolving credit facility with Wells Fargo Capital Finance Corporation Canada.
Like other Canadian lumber producers, we began depositing cash on account of softwood lumber duties imposed by the United States government in April 2017. Cumulative duties of US$30.6 million paid by us, net of our sales of certain refunds, since the inception of the current trade dispute remain held in trust by the U.S. pending administrative reviews and the conclusion of all appeals of U.S. decisions. We expect future cash flow will continue to be adversely impacted by the CV and AD duty deposits to the extent additional costs on U.S. destined shipments are not mitigated by higher lumber prices.
We anticipate prevailing external factors, including higher interest rates, contraction in new home construction and reduced repair and remodelling activities, have created an environment for weaker lumber prices in the fourth quarter of 2022 relative to prices in the third quarter. The transportation challenges that we faced through much of 2022 have recently eased, and we anticipate lumber shipments in the fourth quarter of 2022 to be in line with our sawmill production.
We anticipate results for the fourth quarter to be comparable to the results achieved in the third quarter as expected business interruption proceeds related to the disruption of power plant operations are expected to offset weaker lumber operations contribution.
Looking ahead to 2023, we expect to maintain robust sawlog inventories to support continuous operations at our sawmill. We have completed several key improvements to our sawmilling and finishing lines, which combined with the benefits of an expected green log diet, are expected to improve our production performance, achieve better lumber recovery and reduce conversion and fibre costs. While we continue to evaluate the effect of a green log diet on our 2023 operations, we anticipate that this will enable us to migrate to a lower and more enviable ranking on the lumber industry cost curve.
Our Mackenzie power plant is forecasted to resume operations at full capacity in or about January 2023 and to generate a steady and diversified source of cash flow, with seasonally stronger EBITDA contributions expected upon resumption.
Our liquidity and financial position are forecasted to continue to remain strong through the remainder of 2022. We continue to prioritize funding quick payback sawmill upgrades and exploring potential allocations of capital to enhance shareholder value as we continue to believe that the market price of our common shares does not reflect the underlying value of our business and future prospects. We believe that our strong liquidity position will allow us to manage the delayed resumption of power plant operations and market volatility, if any, that may arise heading into 2023.
Normal Course Issuer Bid
On August 29, 2022, the Toronto Stock Exchange accepted our notice of intention to make a normal course issued bid (“NCIB”) for our common shares. Under the NCIB, we may purchase up to a maximum of 2,461,754 of our outstanding common shares. Any common shares acquired under the NCIB will be purchased at the market price up to a daily maximum of 5,705 common shares, subject to certain exemptions. All common shares acquired by us under the NCIB will be cancelled following purchase. The NCIB commenced in September 2022 and will terminate on August 31, 2023 or earlier if we have acquired all of the common shares available under the NCIB or if we otherwise determine that it is appropriate to suspend or terminate the bid. In September 2022, we purchased and cancelled 194,300 shares under the NCIB.
Sawmill Operating Schedule Changes
Our sawmill operating schedule was reduced to a one-shift basis commencing August 29, 2022 as a result of acute transportation challenges that have affected the overall industry since about November 2021 and which continued to persist through to the end of the third quarter 2022. BC Ministry of Forests policies and practices that position sawmills in the BC Interior region at the high end of the industry cost curve, combined with a steep decline in lumber prices during a period of softer global demand, necessitated a temporary curtailment of sawmill operations for two weeks between October 11, 2022 and October 24, 2022. The temporary curtailment impacted production capacity by approximately 7 million board feet in the fourth quarter.
Power Plant Delayed Restart
In July 2022, during a scheduled outage for annual major maintenance, we discovered damage to our power plant’s turbine which delayed the restart of the plant. We continue to work with our engineers, contractors and the original equipment manufacturer to resume operations. The necessary repairs have been faced with global supply chain issues impacting replacement parts. We currently expect the power plant will recommence operations in or about January 2023.
We maintain property and business interruption insurance for the power plant and expect the property damage and business interruption will be covered by such insurance, subject to applicable deductibles and limits.
Special Cash Dividend
We paid a one-time special dividend of $0.20 per common share on August 8, 2022 from cash on hand to shareholders of record on July 15, 2022. Based on the 40,194,111 common shares outstanding on the record date, the special dividend resulted in an aggregate distribution of approximately $8.0 million.
Investigating Diversification Opportunities
Our board of directors and leadership team remain committed to pursuing affordable investment opportunities with attractive potential returns on investment to stabilize and enhance cash flow generation while concurrently maintaining strong ESG credentials. In furtherance of these objectives, we are examining the feasibility of developing data center hosting operations in northern BC to consume surplus power supply that BC Hydro expects to have available in our operating region through 2030 and beyond.
We completed hosting a 3 megawatt trial at the end of September 2022 through which we gained valuable first-hand experience, validating our belief that our power and corporate service teams have the expertise required to successfully develop and operate sites serving high-performance computing (“HPC”) customers.
We are pleased to announce that we will be hosting a new customer at our 3 megawatt site in Mackenzie. Greenidge Generation Holdings Inc. (“Greenidge”) is a NASDAQ listed public company with approximately 25,000 servers located at sites in New York State and South Carolina. Greenidge intends to deploy their servers at our Mackenzie location in late November 2022.
We are continuing to investigate the feasibility of building a hosting service business at potential sites in northern BC, while developing relationships with potential HPC customers. We are also evaluating the opportunity to develop a hosting business in phases, utilizing cash flow generated from initial phases to fund the development of subsequent phases. [Update on HPC customer to follow]
There is no assurance that we will establish a data center hosting business as contemplated or at all.
For the complete press release, click here.
About Conifex Timber Inc.
Conifex and its subsidiaries’ primary business currently includes timber harvesting, reforestation, forest management, sawmilling logs into lumber and wood chips, and value added lumber finishing and distribution. Conifex’s lumber products are sold in the United States, Canadian and Japanese markets. Conifex also produces bioenergy at its power generation facility at Mackenzie, BC.
Winny Tang – Chief Financial Officer – (604) 216-2949
Source: Conifex Timber Inc.