Conifex Announces 2023 Year-End and Fourth Quarter 2023 Results

VANCOUVER, British Columbia, March 27, 2024 (GLOBE NEWSWIRE) -- Conifex Timber Inc. (“Conifex”, “we” or “us”) (TSX: CFF) today reported results for the fourth quarter and year ended December 31, 2023. EBITDA* from continuing operations was negative $3.5 million for the quarter and negative $25.8 million for the year, compared to EBITDA of $2.3 million in the fourth quarter of 2022 and $46.7 million for the year. Net loss was $30.6 million or negative $0.77 per share for the year versus net income in the preceding year of $0.61 per share.

Selected Financial Highlights

The following table summarizes our selected financial information for the comparative periods. Unless otherwise noted, financial information reflects results of continuing operations from our Mackenzie sawmill and power plant.

Selected Financial Information(1)

*Conifex’s EBITDA calculation represents earnings before finance costs, taxes, depreciation and amortization. We disclose EBITDA as it is a measure used by analysts and by our management to evaluate our performance. As EBITDA is a non-GAAP measure that does not have any standardized meaning prescribed by International Financial Reporting Standards, it may not be comparable to EBITDA calculated by others and is not a substitute for net earnings or cash flows, and therefore readers should consider those measures in evaluating our performance.

Selected Operating Information

(1) Reflects results of continuing operations.

(2) Conifex's EBITDA calculation represents earnings before finance costs, taxes, depreciation and amortization.

(3) Cash dividends of $0.20 per share were declared and paid in August 2022.

(4) MMfbm represents million board feet.

(5) Bank of Canada, www.bankofcanada.ca.

(6) Random Lengths Publications Inc.

(7) Average SPF 2x4 #2 & Btr lumber prices (US$) divided by average exchange rate.

Summary of 2023 Results

Consolidated Net Earnings
We generated net income of ($30.6) million or ($0.77) per share in 2023. Net income was $24.5 million or $0.61 per share in 2022. Our Power Plant resumed operations in late January 2023 after approximately 7 months of continuous maintenance related downtime starting in July 2022.

Lumber Operations

Our lumber production was 155.8 million board feet in 2023, reflecting an annualized operating rate of 65%. Lumber production was impacted by a reduction in our operating schedule to a one-shift basis for a twelve-week period beginning in October to address unsustainable lumber inventory levels. In addition, a month long curtailment of the Mackenzie mill in June, combined with a one week curtailment in February was necessitated by a combination of a steep decline in lumber prices on softer global market demand and government policies and practices impacting our operations. Lumber production in 2022 was 165.9 million board feet, reflecting an annualized operating rate of 69%. Similarly to 2023, the 2022 fiscal year’s production was materially impacted by curtailments driven by softened market conditions and imbalanced inventory levels.

Shipments of Conifex produced lumber totaled 152.6 million board feet in 2023. Shipments of Conifex produced lumber decreased by 12% from 2022 as a result of lower production volume and carrying a much higher level of dressed inventory into 2022 then was the case with 2023. Our wholesale lumber program shipped 4.1 million board feet in 2023 compared to 10.6 million board feet in 2022. Our wholesale lumber shipments decreased 61% as the industry fundamentals didn’t incentivize as robust of a wholesale program.

Revenues from lumber products were $98.9 million in 2023 and represented a decrease of 49% from 2022. Lower revenues were primarily driven by lower mill net realizations resulting from greatly lower overall benchmark lumber prices in 2023, combined with lower lumber shipments from reduced production levels.

The market slide in the second half of 2022 persisted into 2023, with inflationary pressures causing a reduction in new home construction. US housing starts on a seasonally adjusted annual basis declined, averaging 1.41 million starts in 2023, down 8.8% from 2022. The reduced housing demand resulted in a 47% decrease in the average Canadian dollar-denominated Western Spruce/Pine/Fir (“WSPF”) lumber price, falling from $994 in 2022 to $528 in 2023.

Cost of goods sold in 2023 was 12% lower than 2022 largely as a result of reduced production and shipment volumes. Overall production costs in 2023 were modestly higher from 2022 as higher stumpage rates resulted in an increased log cost. Unit manufacturing costs were elevated by low operating rates and disruptions from production curtailments which negatively impacted productivity and resulted in higher fixed cost per unit. We reduced the inventory valuation adjustment to $1.3 million in 2023 as lower benchmark lumber prices were offset by lower cost of inventory. An inventory valuation adjustment of $2.2 million was recorded in 2022.

We expensed countervailing ("CV") and anti-dumping ("AD") duty deposits of $3.0 million in 2023, a decrease of 69% from 2022. The duty deposits were based on a combined rate of 8.99% until December 1, 2021, 17.91% until August 8, 2022, 8.59% until July 31, 2023, and 8.05% thereafter.

The following table reconciles cash deposits paid during the year to the amount recognized in our statement of net income and comprehensive income.

Cash deposits paid during 2023 decreased compared to the previous year due to the combined effect of lower lumber shipment volumes and lower cash deposit rates in effect during the first eight months of 2022.

We recognized a recovery of $8.3 million including the prescribed interest rates to the overpayments in 2023 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 the US market 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.

Cumulative duties of US$34.3 million paid by Conifex net of sales since inception of the current trade dispute remain held in trust by the US pending the conclusion of all appeals of US decisions. In 2019, we sold our right to refunds of cumulative duties to June 30, 2019 of US$32.7 million for proceeds of US$13.9 million. We have recorded the duty deposits as an expense, except for US$8.3 million, which are recorded as a long-term receivable.

Bioenergy Operations

Our Power Plant sold 177.6 GWh of electricity under our EPA with BC Hydro in 2023, representing approximately 80% of targeted operating rates. In 2022, our Power Plant sold 109.7 GWh of electricity, representing 50% of targeted operating rates. The increase in 2023 production was driven by more operating days and higher production rates. Production in 2022 was impacted by damage to the power plant's turbine discovered in July 2022 and not re-commissioned until February 2023.

Electricity production contributed revenues of $24.1 million in 2023, an increase of $10.7 million, or 80% over 2022. Total revenue for 2022 was $13.4 million, down significantly from planned revenues as a result of the plant being inoperable in the second half of the year due to the turbine damage. We recognized $2.1 million as other income in our statement of net income and comprehensive income in 2023 to reflect the remaining portion of the insurance claim on the turbine failure for lost income under our business interruption policy.

Selling, General and Administrative Costs

Selling, general and administrative ("SG&A") costs of $9.1 million in 2023 reflected a decrease of 17% from $11.0 million in 2022. The year-over-year decrease is primarily attributable to lower, variable compensation costs, including non-cash equity-based compensation, and the vesting of long-term incentive awards that were below the accrued amount.

Finance Costs and Accretion

Finance costs and accretion relate primarily to our term loan supporting our bioenergy operations (the “Power Term Loan”). Finance costs and accretion of $5.0 million in 2023 were 16% higher than finance costs of $4.3 million in 2022, primarily as a result of additional costs related to an operating line on the lumber segment.

Gain or Loss on Derivative Financial Instruments

From time to time, we may enter into lumber future contracts to manage our commodity lumber price exposures. We do not use derivatives for trading or speculative purposes. Gains or losses on lumber derivative instruments are recognized as they are settled or as they are marked to market for each reporting period.

During 2023, we did not enter into any lumber futures contracts.

We had no outstanding futures contracts in place as at December 31, 2023.

Other Income

We recognized other income of $2.1 million in 2023 and $9.6 million in 2022 from our business interruption insurance claims related to the Power Plant.

Foreign Exchange Translation Gain or Loss

Foreign exchange translation gain or loss on our statement of net income results from the revaluation of US dollar-denominated cash and working capital balances to reflect the change in the value of the Canadian dollar relative to the value of the US dollar. US dollar-denominated monetary assets and liabilities are translated using the period end rate.

The US dollar averaged US$0.741 for each Canadian dollar during 2023, a level which represented a weakening of the Canadian dollar over the previous year.

The foreign exchange translation impacts arising from the variability in exchange rates at each measurement period on cash, duties on deposit, and working capital balances resulted in a foreign exchange translation loss of $0.5 million in 2023, compared to a foreign exchange gain of $1.2 million in 2022.

Income Tax

We recorded income tax recovery in 2023 of $11.9 million, compared to income tax expense of $9.6 million in 2022. Our effective tax rate was 27% in the current year and 28% in 2022. See note 20 of our consolidated financial statements for the years ended December 31, 2023 and 2022 for a reconciliation of income taxes calculated at the statutory rate to the income tax expense.

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. As at December 31, 2023, we have recognized a deferred income tax liability of nil and a deferred tax asset of $2.9 million.

Summary of Fourth Quarter 2023 Results

Consolidated Net Earnings
During the fourth quarter of 2023, we incurred a net loss from continuing operations of $5.3 million or $0.14 per share compared to a net loss of $8.0 million or $0.20 per share in the previous quarter and net loss of $0.2 million or nil per share in the fourth quarter of 2022. The net loss in the fourth quarter of 2023 was primarily the result of the lower lumber sales prices, partially offset by a strong quarter of power generation.

North American lumber market prices continued to be below breakeven in the fourth quarter of 2023. Canadian dollar-denominated benchmark WSPF prices, which averaged $547 in the fourth quarter, decreased by 2% or $12 from the previous quarter and were virtually identical to the fourth quarter of 2022. The ongoing period of lower market prices were attributed to lower demand from reduced new home construction activity in the US, elevated offshore lumber import levels to US markets, and inflationary pressures negatively impacting repair and remodeling activities. US housing starts on a seasonally adjusted annual basis averaged 1.45 million in the fourth quarter of 2023, up 6% from the previous quarter and 6% from the fourth quarter of 2022.

Lumber Operations

We produced 33.2 million board feet of lumber in the fourth quarter of 2023, representing approximately 55% of annualized capacity. Lumber production was affected by a 12 week temporary curtailment that had the Mackenzie Mill operating on a 4 day basis, as well as a week off over the holiday season. In the previous quarter, lumber production totaled 48.9 million board feet. Lumber production of 27.9 million board feet or approximately 47% of operating capacity in the fourth quarter of 2022 was impacted by two-week curtailment of the Mackenzie Mill and lower operating rates.

Shipments of Conifex produced lumber totaled 39.1 million board feet in the fourth quarter of 2023, representing a decrease of 7% from the 41.9 million board feet of lumber shipped in the previous quarter. Shipments in the fourth quarter of 2022 totalled 31.6 million board feet. Lumber shipments were constrained by lower lumber production from the temporary curtailment of our Mackenzie Mill during the quarter. Our wholesale lumber program shipped 0.9 million board feet in the fourth quarter of 2023, representing a 13% increase from the 0.8 million board feet shipped in the third quarter of 2023 and a 44% decrease from the 1.5 million board feet shipped in the fourth quarter of 2022. Wholesale lumber shipments were negatively impacted by a slowdown in construction activity in Japan.

Revenues from lumber products were $24.8 million in the fourth quarter of 2023 representing a decline of 9% from the previous quarter and a 5% increase from the fourth quarter of 2022. Compared to the previous quarter, decreased revenues in the current quarter were driven by lower shipment volumes, combined with a reduction in mill net realizations. The revenue increase in the current quarter over the same period in the prior year was also driven by higher shipped volume.

Cost of goods sold in the fourth quarter of 2023 decreased by 20% from the previous quarter. The decrease from the prior quarter was mainly due to lower shipment volumes in the current quarter. However, unit log and manufacturing costs also increased in comparison to the previous quarter as a result of higher fixed cost absorption partially offset by a reversal of inventory write-downs, based on volume reductions, of $2.7 million. We recorded inventory valuation reserves in the fourth quarter of 2023 as a result of the decline in lumber pricing at the end of the year which adversely impacted cost of goods sold.

Our investment in capital expenditures related to our lumber operations in 2023 decreased substantially from 2022.

We recorded CV and AD duty deposits expense of $1.1 million in the fourth quarter of 2023, a recovery of $0.3 million in the previous quarter and expense of $1.1 million in the fourth quarter of 2022.

Bioenergy Operations

Our Power Plant sold 43.5 GWh of electricity in the fourth quarter of 2023 compared to 56 GWh in the previous quarter. The decrease quarter over quarter reflects reduced operating days in the fourth quarter due to operational upsets resulting in minor lost time. Electricity production in the fourth quarter of 2022 was nil due to the Power Plant being non-operational from the turbine damage discovered during our 2022 maintenance shut down.

Electricity production contributed revenues of $7.7 million in the fourth quarter of 2023, an increase of 9% from the previous quarter and 100% from the fourth quarter of 2022, due to the power plant being inoperable during the quarter.

Selling, General and Administrative Costs

SG&A costs were $0.6 million in the fourth quarter of 2023, $1.9 million in the previous quarter and $1.4 million in the fourth quarter of 2022. The reduction in SG&A costs compared to the previous quarter was largely due to the revaluation of long-term incentive awards. Reduced SG&A costs in the current quarter compared to the comparative quarter in the preceding year were primarily related to the valuation of long term incentive awards.

Finance Costs and Accretion

Finance costs and accretion totaled $1.3 million in the fourth quarter of 2023, $1.2 million in the previous quarter and $1.0 million in the fourth quarter of 2022. Finance costs in the current quarter were higher than the fourth quarter of 2022 due to a higher balance drawn on the operating line, partially offset by lower long term power debt.

Other Income

Other income totaled $2.2 million in the fourth quarter of 2023 compared to $9.6 million in the fourth quarter of 2022. Other income primarily consists of the business interruption claim proceeds in respect to the turbine failure during 2022.

Foreign Exchange Translation Gain or Loss

The US dollar averaged US$0.734 for each Canadian dollar during the fourth quarter of 2023, a level which represented a weakening of the Canadian dollar over the previous quarter and the fourth quarter of 2022.

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 loss of $0.3 million in the fourth quarter of 2023, compared to a foreign exchange gain of $0.2 million in the third quarter of 2023 and a loss of $0.2 million in the fourth quarter of 2022.

Income Tax

The fourth and third quarter 2023 results include nil current tax recovery, compared to a current tax recovery of $0.8 million in the fourth quarter of 2022. We recorded deferred income tax recovery of $2.5 million in the fourth quarter of 2023, $3.7 million recovery in the previous quarter and deferred income tax expense of $0.9 million in the fourth quarter of 2022.

Financial Position and Liquidity

Overall debt was $63.8 million at December 31, 2023 compared to $62.8 million at December 31, 2022, with the change mainly driven by an additional $5.0 million drawn against our secured revolving credit facility with Wells Fargo (the “Revolving Credit Facility”) to bolster operating working capital. The increase in debt was partially offset by Power Term Loan repayments of $3.5 million during the year. Our Power Term Loan, which is largely non-recourse to our lumber operations, represents substantially all of our outstanding long-term debt. At December 31, 2023, we had $50.3 million outstanding on our Power Term Loan, while our remaining long-term debt, consisting of leases, totalled $2.0 million.

On March 7, 2024, we announced that we had completed the Amendment with Wells Fargo in respect of the Revolving Credit Facility. Wells Fargo agreed, subject to certain terms and conditions, to amend Conifex’s existing lumber business credit facility and provide certain accommodations thereunder. Following the Amendment, the Revolving Credit Facility is secured by substantially all Conifex’s lumber business assets.

Pursuant to the Amendment, Wells Fargo agreed to provide additional short-term liquidity, continue funding revolving loans and refrain from exercising certain of its rights under the Facility until May 31, 2024, subject to certain terms and conditions. The Amendment follows Conifex's non-maintenance of the minimum excess availability and fixed charge coverage ratio required by the terms of the Facility. Among other conditions, Conifex shall commence a process to secure replacement funding in an amount sufficient to repay in full the Facility. Conifex has engaged Raymond James Ltd. to assist in the process.

Like other Canadian lumber producers, we were required to begin depositing cash on account of softwood lumber duties imposed by the United States government in April 2017. Cumulative duties of US$34.3 million paid by Conifex, net of certain prior sales of such refunds, since the inception of the current trade dispute remain held in trust by the US pending the administrative reviews and conclusion of all appeals of US 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 US destined shipments are not mitigated by higher lumber prices.

Outlook

We believe SPF supplies are contracting at the same time demand is increasing, and lumber prices will move higher.

The BC Ministry of Forests discloses that the log harvest in the interior region of BC, which totalled 47 million cubic metres in 2018, plummeted to 27 million cubic metres in 2023. The Ministry also discloses in the most recent provincial budget that the interior region of BC log harvest is forecast to come in at 26 million cubic metres annually in the current and following three years. This harvest contraction will reduce SPF lumber production from the interior region of BC by 4.8 or 4.9 billion board feet annually. This supply contraction is huge – it is equivalent to approximately 8% of North American softwood lumber consumption and sufficient to offset the incremental lumber supply from more than 20 new industrial scale sawmills brought on stream in the US South over the past five years. With mounting evidence that US housing starts will increase in 2024 and 2025, these supply/demand dynamics support our expectations for rising prices for SPF lumber.

Revenue Diversification Opportunity

In December 2022, the Lieutenant-Governor in Council for the Province of British Columbia (“LGIC”) issued an order in council (the “OIC”) directing the British Columbia Utilities Commission to, among other things, accept BC Hydro's request to suspend its obligation to supply service to certain new cryptocurrency mining projects in British Columbia for a period of 18 months, which OIC impacted two of our proposed high performance computing ("HPC") projects.

As a result, in April 2023, we filed a petition in the Supreme Court of British Columbia (the "BCSC") seeking judicial review of the OIC and an order quashing and setting aside the OIC as unauthorized or otherwise invalid. Arguments were made before the BCSC in October 2023. On February 2, 2024, we received notice that our petition was dismissed. We continue to believe that the moratorium to discriminate against a certain class of customers is unjustified and we have filed on appeal of the BCSC's decision.

Concurrently with the filing of the petition, we filed a notice of civil claim against BC Hydro in the Supreme Court of British Columbia seeking an order requiring BC Hydro to supply service to our HPC projects.

Conference Call

We have scheduled a conference call on Wednesday, March 27 at 2:00 PM Pacific time / 5:00 PM Eastern time to discuss the fourth quarter and 2023 financial and operating results. To participate in the call, please dial 416-340-2217 or toll free 1-800-806-5484 and entering participant passcode 7741593#. The call will also be available on instant replay access until April 3, 2024 by dialling 1-800-408-3053 and entering participant passcode 3265407#.

Our management's discussion and analysis and financial statements for the year ended December 31, 2023 are available under Conifex's profile on SEDAR+ at www.sedarplus.ca.

For further information, please contact:

Trevor Pruden
Chief Financial Officer
(604) 216-2949

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.

Forward-Looking Statements

Certain statements in this news release may constitute “forward-looking statements”. Forward-looking statements are statements that address or discuss activities, events or developments that Conifex expects or anticipates may occur in the future. When used in this news release, words such as “estimates”, “expects”, “plans”, “anticipates”, “projects”, “will”, “believes”, “intends” “should”, “could”, “may” and other similar terminology are intended to identify such forward-looking statements. Forward-looking statements reflect the current expectations and beliefs of Conifex’s management. Because forward-looking statements involve known and unknown risks, uncertainties and other factors, actual results, performance or achievements of Conifex or the industry may be materially different from those implied by such forward-looking statements. Examples of such forward-looking information that may be contained in this news release include statements regarding: the realization of expected benefits of completed, current and any contemplated capital projects and the expected timing and budgets for such projects, including the build-out of electrical and other support infrastructure required at high-performance computing or data center locations; the growth and future prospects of our business; our expectations regarding our results of operations and performance; our planned operating format and expected operating rates; our perception of the industries or markets in which we operate and anticipated trends in such markets and in the countries in which we do business; our ability to supply our manufacturing operations with wood fibre and our expected cost for wood fibre; our expectation for market volatility associated with, among other things, the softwood lumber dispute with the United States of America; that we could be negatively impacted by the duties or other protective measures on our products, such as antidumping duties or countervailing duties on softwood lumber; continued positive relations with Indigenous groups; the development of a longer-term capital plan and the expected benefits therefrom; demand and prices for our products; our ability to develop new revenue streams; the availability and use of credit facilities or proceeds therefrom; future capital expenditures; expectations regarding our liquidity levels; and our expectations for U.S. dollar benchmark prices. Material factors or assumptions that were applied in drawing a conclusion or making an estimate set out in the forward-looking statements may include, but are not limited to, our future debt levels; that we will complete our projects in the expected timeframes and as budgeted; that we will effectively market our products; that capital expenditure levels will be consistent with those estimated by our management; our ability to ship our products in a timely manner; that there will be no additional unforeseen disruptions affecting the operation of our power generation plant and that we will be able to continue to deliver power therefrom; our ability to obtain financing on acceptable terms, or at all; that interest and foreign exchange rates will not vary materially from current levels; the general health of the capital markets and the lumber industry; and the general stability of the economic environments within the countries in which we operate or do business. Forward-looking statements involve significant uncertainties, should not be read as a guarantee of future performance or results, and will not necessarily be an accurate indication of whether or not such results will be achieved. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements, including, without limitation: those relating to potential disruptions to production and delivery, including as a result of equipment failures, labour issues, the complex integration of processes and equipment and other similar factors; labour relations; failure to meet regulatory requirements; changes in the market; potential downturns in economic conditions; fluctuations in the price and supply of required materials, including log costs; fluctuations in the market price for products sold; foreign exchange fluctuations; trade restrictions or import duties imposed by foreign governments; availability of financing (as necessary); and other risk factors detailed in our filings with the Canadian Securities Regulatory Authorities available on SEDAR+ at www.sedarplus.ca. These risks, as well as others, could cause actual results and events to vary significantly. Accordingly, readers should exercise caution in relying upon forward-looking statements and Conifex undertakes no obligation to publicly revise them to reflect subsequent events or circumstances, except as required by law.