Mr. Trevor Pruden reports

CONIFEX ANNOUNCES SECOND QUARTER 2023 RESULTS

Conifex Timber Inc. today released its results for the second quarter ended June 30, 2023. EBITDA (earnings before interest, taxes, depreciation and amortization) was negative $8.7-million for the quarter compared with EBITDA of $20.1-million in the second quarter of 2022. Net loss was $9.2-million or 23 cents per share for the quarter versus net income of $12.3-million or 31 cents per share in the year-earlier quarter. The results reflect reduced operating earnings on lower lumber prices and reduced shipments reflecting a curtailment of the company's Mackenzie sawmill for June.

Selected financial highlights

The attached table summarizes the company's selected financial information for the comparative periods. The financial information reflects results of operations from the company's Mackenzie sawmill and power plant.

Summary of second quarter 2023 results

Consolidated net earnings

During the second quarter of 2023, the company incurred a net loss of $9.2-million or 23 cents per share compared with a net loss of $8.1-million or 20 cents per share in the previous quarter and net income of $12.3-million or 31 cents per share in the second quarter of 2022.

Lumber operations

North American lumber market prices continued to experience weakness in the second quarter of 2023. Canadian dollar-denominated benchmark Western Spruce/Pine/Fir (WSPF) prices, which averaged $487 in the second quarter of 2023, decreased by 6 per cent or $32 from the previous quarter and by 54 per cent or $569 from the second quarter of 2022.1 The market price decline in the second quarter of 2023 was primarily fuelled by the continued overall reduced demand for lumber. United States housing starts on a seasonally adjusted annual basis averaged 1,451,000 in the second quarter of 2023, up 2 per cent from the previous quarter and down 13 per cent from the second quarter of 2022.

The company's lumber production in the second quarter of 2023 totalled approximately 32.5 million board feet, representing operating rates of approximately 54 per cent of annualized capacity. Lumber production in the quarter reflected 20 days of unscheduled downtime to address low reservoir levels forecasted in the Williston reservoir and an overall reduced demand for lumber amid challenging economic conditions. In the previous quarter, 41.2 million board feet of lumber was produced, which reflected a 10-day curtailment of the company's Mackenzie mill, as well as production being affected by overall depressed operating rates. Lumber production in the second quarter of 2022, which was not impacted by shift reductions, was 51.4 million board feet or approximately 86 per cent of annualized capacity.

Shipments of Conifex-produced lumber totalled 31.1 million board feet in the second quarter of 2023, representing a decrease of 23 per cent from the 40.6 million board feet shipped in the previous quarter and a decrease of 44 per cent from the 55.5 million board feet of lumber shipped in the second quarter of 2022. Shipments of Conifex-produced lumber in the second quarter of 2023 decreased relative to the previous quarter as a result of the aforementioned unscheduled downtime, and decreased relative to the second quarter of 2022, which period was not impacted by shift reductions and benefited from a buildup of dressed lumber that was drawn down during the quarter.

The company's wholesale lumber shipments were generally consistent in the current quarter compared with each comparative period. The company's wholesale lumber program shipped 1.1 million board feet in the second quarter of 2023, 1.0 million board feet in the previous quarter and 1.2 million board feet in the second quarter of 2022.

Revenues from lumber products were $19.8-million in the second quarter of 2023 representing a decrease of 27 per cent from the previous quarter and a decrease of 71 per cent from the second quarter of 2022. Compared with the previous quarter, lower shipment volumes and softer mill net realizations on lower lumber market prices contributed to the lower revenue. The revenue decrease in the current quarter over the same period in the prior year was largely the result of both weaker benchmark lumber prices and decreased lumber shipments.

Cost of goods sold in the second quarter of 2023 decreased by 29 per cent from the previous quarter and by 40 per cent from the second quarter of 2022. The decrease in cost of goods sold from the prior quarter and the second quarter of 2022 is mainly due to lower shipment volumes in the current quarter. Unit manufacturing costs increased in comparison to each of the comparative quarters as a result of lower operating rates from the June downtime. The company recorded inventory valuation reserves of negative $700,000 and $200,000 in the current and previous quarters, respectively, compared with nil in the second quarter of 2022. Inventory valuation reserves decreased in comparison with the previous quarter due to a reduction in dressed lumber coupled with increased lumber prices.

The company expensed countervailing (CV) and anti-dumping (AD) duty deposits of $1.0-million in the second quarter of 2023, $1.2-million in the previous quarter and $7.2-million in the second quarter of 2022. The duty deposits were based on a combined rate of 17.91 per cent until Aug. 8, 2022, and 8.59 per cent thereafter. The export taxes during the second quarter of 2023 were lower than the previous quarter due to decreased lumber shipment volumes made to the United States market in the current quarter, and were significantly lower than the second quarter of 2022 largely due to the decreased lumber market price and lower cash deposit rate in effect in the current quarter.

Bioenergy operations

The company's power plant sold 43.5 GWh (gigawatt-hours) of electricity under the company's electricity purchase agreement with B.C. Hydro in the second quarter of 2023 representing approximately 79 per cent of targeted operating rates. The company's power plant sold 34.6 and 54.6 GWh of electricity in the previous quarter and second quarter of 2022, respectively. Production in the second quarter of 2023 was higher than the first quarter of 2023 due to an increased number of operating days in the second quarter of 2023, and lower than the second quarter of 2022 due to annual maintenance scheduled in the second quarter of 2023.

Electricity production contributed revenues of $4.8-million in the second quarter of 2023, $4.5-million in the previous quarter and $4.8-million in the second quarter of 2022.

The power plant was temporarily shutdown in July, 2022 due, to the discovery of damage to its turbine, and successfully recommissioned on Jan. 31, 2023. The company submitted an insurance claim for physical damage to its equipment and for loss of revenues from the interruption of operations as a result of the turbine damage. The company expects to be fully reimbursed for capital expenditures related to the repair of the turbine, subject to customary deductible amounts, and for lost income for the period covered under its business interruption policy, being the period between the expiry of the waiting period and the recommencement of the power plant. The company recognized $2.2-million as other income on its statement of net income and comprehensive income in the first quarter of 2023 and $9.6-million in 2022 to reflect the estimated settlement for lost income under its business interruption policy. Final settlements of the physical damage and business interruption claims are anticipated to be completed in the third quarter of 2023.

Selling, general and administrative costs

Selling, general and administrative costs were comparable between the current quarter and each comparative period. Selling, general and administrative costs were $3.3-million in the second quarter of 2023, $3.2-million in the previous quarter, and $3.1-million in the second quarter of 2022.

Finance costs and accretion

Finance costs and accretion totalled $1.3-million in the second quarter of 2023, $1.2-million in the previous quarter and $1.1-million in the second quarter of 2022. Finance costs and accretion relate primarily to the company's term loan supporting its bioenergy operations (the power term loan).

Other income

The company did not recognize any other income in the second quarter of 2023 or in the second quarter of 2022. The company recognized other income of $2.2-million in the first quarter of 2023 which primarily consisted of its business interruption claim in respect of the turbine failure at the power plant.

Foreign exchange translation gain or loss

The foreign exchange translation gain or loss recorded for each period on the company's statement of net income results from the revaluation of United States-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 74.5 U.S. cents for each Canadian dollar during the second quarter of 2023, a level which represented a modest strengthening of the Canadian dollar over the previous quarter.

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 $300,000 in the second quarter of 2023, compared with a foreign exchange translation loss of nil in the previous quarter and a gain of $500,000 in the second quarter of 2022.

Income tax

The company recorded income tax recovery of $3.2-million in the second quarter of 2023, and income tax recovery of $2.5-million in the previous quarter and income tax expense of $4.7-million in the second quarter of 2022.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities on the company's balance sheet and the amounts used for income tax purposes. As at June 30, 2023, the company has recognized a deferred income tax liability of $3.2-million.

Financial position and liquidity

Overall debt was $65.8-million at June 30, 2023, compared with $67.4-million at March 31, 2023, and $57.5-million at June 30, 2022. The decrease in overall debt between the second and first quarters of 2023 was mainly driven by the payment of $1.0-million against the company's revolving credit facility in the second quarter of 2023. The increase in overall debt at June 30, 2023, relative to June 30, 2022, was due to an increase in the amount drawn against the company's revolving credit facility of $11.5-million, partially offset by payments against the company's power term loan and monthly lease payments. The company's power term loan, which is largely non-recourse to its lumber operations, represents substantially all of the company's outstanding long-term debt. At June 30, 2023, the company had $52.2-million outstanding on the company's power term loan, while its remaining long-term debt, consisting of leases, was $2.1-million.

At June 30, 2023, the company had total liquidity of $18.1-million, compared with $17.7-million at March 31, 2023, and $55.4-million at June 30, 2022. Liquidity at June 30, 2023, comprised unrestricted cash of $4.6-million and unused availability of $13.5-million under the revolving credit facility.

Like other Canadian lumber producers, the company was required to begin depositing cash on account of softwood lumber duties imposed by the United States government in April, 2017. Cumulative duties of $32.6-million (U.S.) paid by the company, net of sales of the right to certain refunds, since the inception of the trade dispute remain held in trust by the U.S. pending administrative reviews and the conclusion of all appeals of U.S. decisions. The company expects future cash flows 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.

Outlook

The company expects lumber markets to continue to experience weakness through the remainder of 2023 as global market conditions continue to evolve. The effect of inflationary pressures and higher interest rates affecting consumer spending in the housing and repairs and remodeling markets has resulted in weaker lumber market prices than seen in recent years and is expected to persist through the remainder of the year. While lagging U.S. housing completions and tempered repair and remodelling activity, as well as elevated levels of offshore lumber imports have affected market demand for lumber products, demand and market prices are expected to see a gradual increase in the second half of 2023.

At the company's Mackenzie Mill, the company expects to see an overall increase in lumber production over 2022, with the expectation of achieving annualized operating rates of approximately 85 per cent for the remaining six months of 2023 on improved sawmill operating rates. The company anticipates an overall improvement in operating costs in 2023 as a result of decreased unit fixed costs on higher lumber production volumes and availability of sufficient logs for continuous operations at the company's sawmill. Additionally, early in June, 2023, stumpage rates decreased in British Columbia due to the monthly market-based adjustments related to lumber prices, the benefit of which was partially offset by higher fuel costs and inflationary pressures. Given the current commodity price environment, stumpage rates are expected to continue to decrease moderately through the third quarter of 2023 before increasing early in the fourth quarter of 2023 given the recent rise in commodity prices.

The company expects that the volume of lumber shipments in 2023 will match the company's sawmill production as the transportation challenges faced in 2022 have largely been resolved. However, the labour dispute at the ports of Vancouver and Prince Rupert that commenced on July 1, 2023, may have a negative impact on the already constrained logistics network in British Columbia.

The company's power plant is forecasted to generate a steady and diversified source of cash flow throughout 2023 following its restart on Jan. 31, 2023. The company expects its power plant to average uptime in excess of 90 per cent for the remainder of 2023. The company anticipates that its power plant will largely be generating electricity continuously through the balance of 2023.

The company anticipates maintaining high levels of working capital through the balance of 2023 and anticipate that operating cash flow levels and available liquidity will be supported by the company's working capital levels as it progresses through the year. The company continues to prioritize financing quick payback sawmill upgrades and continue exploring the potential development of its high-performance computing business.

AR4 final duty rates

Subsequent to the end of the second quarter, the U.S. Department of Commerce released the final duty rates related to the fourth administrative review. The combined duty rate applicable to Conifex was 7.99 per cent as compared with the recent rate of 8.59 per cent. Softwood lumber duty rates will now accrue at 7.99 per cent until the completion of the next administrative review, which is scheduled to be completed in 2024. The company estimates it will record an export duty recovery of approximately $1.8-million in the third quarter of 2023 related to the finalization of the fourth administrative review.

Conference call

The company has scheduled a conference call on Wednesday, Aug. 9, at 2 p.m. Pacific Time/5 p.m. Eastern Time to discuss the second quarter 2023 financial and operating results. To participate in the call, please dial 416-340-2217 or toll-free 1-800-806-5484 and enter the participant pass code 6020746 followed by the pound key. The call will also be available on instant replay access until Sept. 9, 2023, by calling 1-800-408-3053 and entering the participant pass code 5198832 followed by the pound key.

The company's management's discussion and analysis and financial statements for the quarter ended June 30, 2023, are available under our profile on SEDAR+.

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, B.C.

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