Acadian Timber Corp

TSX:ADN

Earnings Call Transcript

[Operator]

Good morning. Thank you for standing by. This is the conference operator. I would like to welcome, everyone, to the Acadian Timber Corp's First Quarter 2018 Conference Call and Webcast. [Operator Instructions] I would now like to turn the conference over to Miss Mabel Wong, Chief Financial Officer.

[Mabel Wong, Senior VP & CFO]

Thank you, operator, and good morning, everyone. Welcome to Acadian's First Quarter Conference Call.Before we get started, I would like to remind everyone that in discussing our first quarter financial and operating performance, our outlook for the remainder of 2018 and responding to questions, we may make forward-looking statements.These statements are subject to known and unknown risks, and future results may differ materially. For further information on known risk factors, I encourage you to review Acadian's annual information form dated March 28, 2018, and other filings of Acadian, which are available on SEDAR at sedar.com and on our website.Today, in addition to Mark Bishop, our President and CEO, I'm joined by Luc Ouellet and Marcia McKeague, our Senior Operations Executives in our New Brunswick and Maine operations.I'll start by outlining financial highlights for the quarter ended March 31, 2018. And then Mark Bishop will provide comments about our operations, market conditions and our outlook for 2018.But before I begin speaking on the financial highlights, please note that starting in January 1, 2018, as a result of the new accounting standard relating to revenue contracts, there has been a change in the net presentation to gross presentation relating to certain timber service arrangements. We have been increased to net sales and in corresponding and offsetting increase in operating costs and expenses.Consequently, you'll note that prior year net sales and therefore, adjusted EBITDA margin have been revised to conform with this new presentation. However, it is important to note that adjusted EBITDA and net income are unaffected by this change. Please refer to our first quarter documents for more detail.So with that, I'll turn to our results. Overall, Acadian had a solid start to the year and posted strong performance for the 3-month period ended March 31, 2018. This reflects strong seasonal demand and favorable operating conditions.For the quarter, we generated adjusted EBITDA of $8.9 million, up from $8 million during the prior year period. This improvement was driven by a 17% increase in log sales volumes. In addition, demand for most of our products continues to be solid as our weighted average log selling price per cubic meter remained in line with the first quarter of 2017.During the quarter, our payout ratio was 63%, which is comfortably below our long-term annual target of 95%, but in line with expectations given the seasonality of our operation.Based on our expectations of continued strong performance, further supported by our strong liquidity position, we are pleased to announce that our Board of Directors have approved a 3% increase in Acadian's quarterly dividend from $0.275 per share to $0.2825 cents per share effective in the second quarter of 2018.For the first quarter, Acadian generated net sales of $32.9 million compared to $28 million in the comparable period of 2017.Favorable winter harvest conditions and strong demand for softwood sawlogs contributed to a 17% increase in total log sales volumes, as I had mentioned.Our weighted average log selling price remained in line with the prior year, as the benefit from a demand-driven 5% increase in softwood sawlog prices was offset by changes in sales mix.Additionally, contributions from biomass products increased 28%, reflecting stronger export market.However, despite the aforementioned increase in sales volume, our adjusted EBITDA margin decreased slightly from 29% in the prior year to 27% in the first quarter due to a decline in higher and better use land sales in Maine as well as timing of operating costs.Moving into segment results. New Brunswick recorded net sales during the first quarter of $23.1 million compared to $21.3 million during the prior year.Excluding biomass, log sales volumes increased 9% to 240,000 cubic meters from 221,000 cubic meters in the first quarter of 2017.This increase in sales volumes reflects favorable harvest conditions, particularly for spruce and fir stands, strong seasonal demand for softwood sawlogs and improved demand for softwood pulpwood.In addition, timber services and other sales increased 15% over the prior year, primarily due to the timing of harvest activities.As for pricing, New Brunswick's weighted average log selling price during the quarter of $64 per cubic meter was down from $67 per cubic meter in the prior year.Demand for softwood sawlogs remained strong with prices increasing 2%.However, the benefit from higher pricing for softwood sawlogs was more than offset by the impact of lower relative volume of higher-valued hardwood pulpwood and higher relative volume of lower-valued softwood pulpwood.Prices for these products remained in line with the prior year period. And then contributions from biomass products increased 26%, reflecting stronger export market.Adjusted EBITDA was $5.9 million during the quarter compared to $6.1 million during the prior year, as the increase in log sales volumes, which I described earlier, was more than offset by lower weighted average log selling prices and higher variable harvest cost per cubic meter.New Brunswick's adjusted EBITDA margin decreased to 25% during the quarter from 29% during the prior year period.Now moving on to our Maine operation. Net sales during the quarter totaled $9.8 million compared to $6.8 million for the same period of last year. As log sales volumes increased meaningfully from 88,000 cubic meters during the prior year to 122,000 cubic meters during the first quarter this year.This increase was primarily driven by strong seasonal demand, particularly for softwood sawlogs, which has been impacted in the prior year period by higher customer inventory levels and limited markets for sawmill residuals.In addition, log sales volumes benefited from an increase in the number of operating days in the first quarter of 2018 as compared to the prior year period.Maine's weighted average log selling price in Canadian dollar terms increased to CAD 79 per cubic meter during the first quarter from CAD 75 per cubic meter during the prior year period.In US dollars terms, the weighted average log selling price increased 9% year-over-year to $62 per cubic meter.This increase reflects improved demand for softwood sawlogs and hardwood pulpwood as well as favorable changes in sales mix.As a result of the factors I just described, Maine's adjusted EBITDA for the quarter was $3.5 million compared to $2.2 million in the prior year period and adjusted EBITDA margin improved to 35% from 32% in 2017.And then turning now to our balance sheet. Acadian's cash position continues to be strong with $22 million of cash on hand at the end of the first quarter. Compared to the cash position at the start of the period, cash has decreased by $2 million, primarily driven by the timing of payments made in -- earlier in the year. We believe that Acadian has ample cash resources to cover obligations and potential working capital needs. And furthermore, our net liquidity position at the end of the year is very strong at $98 million, which includes funds available under our revolving facility and a standby equity commitment from Brookfield.And so that concludes my remarks on this quarter's financial results.And I'll now turn the call over to Mark.

[Mark Bishop, President & CEO]

Thank you, Mabel. During the quarter, Acadian's operations reported 1 minor reportable safety incident among employees and none among contractors. As you're all aware, we remain very committed to maintaining a culture across the organization that emphasizes the importance of strong safety performance.Acadian operations performed well during the first quarter and continued to benefit from strong market dynamics in New Brunswick and improved markets in Maine compared to the prior year.Excluding biomass, log harvest volumes of 362,000 cubic meters for the quarter were up 17% year-over-year, reflecting favorable winter harvest conditions particularly for spruce and fir stands and strong seasonable demand -- seasonal demand.As Mabel mentioned, Acadian's weighted average log selling price remained in line with the prior year as the benefit from a demand-driven 5% increase in softwood sawlog prices was offset by changes in the sales mix.Demand for softwood sawlogs in New Brunswick remained strong with price increasing 2%, while prices for hardwood pulpwood remained in line with the prior year period.Markets continued to strengthen in Maine compared to the prior year period, but prices in U.S. dollar terms for softwood sawlogs increasing 7%, and hardwood pulpwood prices improving 6%.Stronger export markets for biomass products resulted in a 23% increase in sales volumes compared to the same period in 2017.Overall, the gross margin earned on Acadian's biomass products increased 28% year-over-year. Acadian's key markets include softwood sawtimber, hardwood sawtimber and hardwood pulpwood. Northeast North American softwood dimension sawmills represent over 1/3 of Acadian's end-use market, and are the primary market for our softwood sawtimber.Economic forecasters continue to call for steady growth in housing starts with year-over-year improvements averaging 7% in 2018, and about 5% in 2019.While tight construction labor markets and declining housing affordability may present headwinds, the underlying fundamental driver of pent-up household formation remains highly compelling. Further encouraging is the transitioning mix to a higher and more typical single-family home proportion of starts, which consume significantly greater wood -- volumes of wood per start.As a result, North American sawtimber demand is expected to grow at over 4% year-over-year over the next few years to support expanding domestic and construction needs.Benchmark SPF and southern yellow pine prices were up, over the sequential quarter by 11% and 24%, respectively, passing on the full application -- respectively, passing on the full 20% of average export duties on U.S.-bound shipments to consumers.However, while the duties were a factor in higher prices, the combination of robust demand and supply constraints including severe winter conditions and tight rail and truck transport availability were important factors driving pricing gains. While lumber pricing volatility should be expected due to the uncertainty of ongoing applications and pass through of duties or a potential future softwood lumber dispute settlement including quotas, forecasters anticipate the underlying supply demand drivers will continue to support strength in lumber pricing well through 2019. By extension, Acadian anticipates continued strong support in end-use markets for softwood sawtimber pricing through this period.Since the final determination of combined duties were announced by the U.S. Department of Commerce and finalized by the International Trade Commission late in the fourth quarter of 2017, industry officials indicate there have been no material negotiations between the U.S. and Canada. There's little expectation that a softwood settlement will factor into the current broader NAFTA trade negotiations. As a result, there remains little visibility on relief from duties in the near to medium term.Hardwood soft timber markets, typically oriented to millwork and higher-valued specialty markets are expected to remain at healthy current levels throughout the remainder of the year.Hardwood pulpwood markets remained historically very strong with steady demand and well-balanced supply.While continued oversupply of softwood sawmill residuals and softwood pulpwood markets remains a concern, regional timberland owners have continued to operate with reduced pulpwood harvest, and we expect that will continue through the remainder of the year.In New Brunswick, biomass markets have benefited from the gradual recovery in export volumes, which we expect will continue through the second half of the year.As noted in our press release yesterday, Acadian announced the start a retirement transition for Marcia McKeague, Vice President of Operations for Acadian's Maine Timberlands since Acadian's inception. Marcia will retire at the end of 2018, and in the interim period will continue to work with the Acadian team supporting the leadership transition, while also working on various strategic initiatives. Marcia's had a long and accomplished career spanning over 35 years and is a well-recognized professional for us during the state of the Maine -- in state of Maine.On behalf of the entire management team, I'd like to thank Miss McKeague for her passion and dedication and significant contributions to Acadian.I'm also pleased to announce that Luc Ouellet has been promoted to Senior Vice President of Operations, assuming responsibility for the Maine operations in addition to his current New Brunswick responsibilities.Luc has served as Vice President of Acadian's New Brunswick operations since the company's inception. He's a Registered Professional Forester in both New Brunswick and Maine, a member of Professional Engineer Association in New Brunswick and has been involved in managing timberlands for over 30 years.I fully anticipate that the Maine and Brunswick teams, under Luc's leadership, will continue to apply their long-demonstrated spirit of innovation to secure Acadian's safety, sustainable forest management and financial performance as best-in-class.In closing, I just want to highlight that with a strong balance sheet and highly capable operating team and positive outlook, Acadian is very well positioned to meet our recently increased quarterly distributable cash commitments over the coming year. While no shares were repurchased under our normal course issuer bid established during the first quarter of this year, we will continue to seek opportunities to do so at the appropriate share valuation.On behalf of the board and management of Acadian, I'd like to thank you for your ongoing support.And that concludes our formal remarks, and we're available to take any questions from participants on the line. Operator?

[Operator]

[Operator Instructions] The first question comes from Paul Quinn, RBC Capital Markets.

[Paul C. Quinn, Analyst]

Just a question on overall timberland markets. Cover couple of the U.S. REITs and it seems like it's -- some are describing it as very few transactions out in the market place and that's majority of the opinion. And then I've got one smaller REIT that says there's plentiful deals out there. Maybe you could give some color on what you're seeing in both -- because I know, Mark, you've been in this space for well over a decade. What you're seeing in North America in terms of deal flow and values?

[Mark Bishop, President & CEO]

Yes, I guess, I'm not sure how you pose the question to others. There's plenty of deals out there that could be interpreted as plenty of deals that haven't closed since last year that are continuing to drag into this year, which is the case. But also, as you probably read in the industry coverage, this has been a slower start than typical to the year. There is an anticipation of several timberland states coming to market. Again, this is mostly fund maturities, selling assets -- long-anticipated assets. And in some cases, those assets are being split into small parcels we're aware off, which is probably taking longer to come to market. But it has been -- as you saw, 2017 was a substantially slower year than 2016, even if you take out the Plum Creek/Weyerhaeuser transaction. 2018 is likely to be somewhat better than 2017, but back-end loaded, I think, in terms of where the actual activities occur in the year. But it has been a slower start to the year. And I think there are properties that are being marketed off market. And that, I think, will be more active in the second half of the year as well. So I guess, on the whole Paul, I think, it's going to be a busier year than 2017, with probably a few larger transactions than we saw in '17. I think there was only 3 transactions in 2017 that were over $100 million. So I think, internationally, there's also been fewer transactions, certainly that we're aware of. But again, I think, we will see the second half being a little busier than the first.

[Paul C. Quinn, Analyst]

All right. Then what do you see on valuation with the rising interest rates?

[Mark Bishop, President & CEO]

Valuation of timberlands?

[Paul C. Quinn, Analyst]

Yes.

[Mark Bishop, President & CEO]

Paul, I think, we've always seen valuations respond very slowly to changes in interest rates. And I think, you're going to see that, again, as we see interest rates rise slowly. There's an awful lot of capital out there, still looking at the timberlands, a lot of interest in timberlands. Yes, it will be interesting to see regionally what happens, or internationally what happens to discount rates. We've seen a fairly significant compression of the, sort of, core international destinations, particularly in New Zealand. But I don't expect we'll see a significant reversal of discount rates. I think, you're also aware that there has been some discussions around, certainly in the U.S. South, appraisal starting to recognize, I think, a new reality in timberland -- sorry in log pricing. So I think you may see valuations ease somewhat there, but not as a result of discount rates, more so of I think, accepting a bit more of a gradual recovery in southern timberland log prices.

[Paul C. Quinn, Analyst]

Okay. And then just a question on capital allocation. How you guys look at the -- or how the board looks at increasing the dividend versus share buyback?

[Mark Bishop, President & CEO]

Well, as you know, we've had a -- for Acadian, a significant amount of cash on our balance sheet. And we continue to look at the best use for that cash. As you know, we've been actively looking for several years now for additional growth opportunities. But really, in terms of the capital that we have available, unless that we see a opportunity that's highly accretive to Acadian, we will continue to see that cash as being more useful in the hands of our investors and dividend that out over time. But we do believe that whatever we -- whenever we increase our dividend, we want to make sure it's sustainable and that we can continue to have foreseeable cash flow generation that will support that dividend.

[Operator]

[Operator Instructions] The next question comes from Andrew Kuske with Crédit Suisse.

[Andrew M. Kuske]

I guess, the question is just on the floods in New Brunswick right now. And maybe, if you could just give us any color on impact to your existing operations, and then potential impacts or existing impacts on your customers?

[Mark Bishop, President & CEO]

Thanks, Andrew. Actually, we have Luc Ouellet here this morning, who leads -- well, now leads both New Brunswick and Maine operations. But he's probably closest to the flood situation and probably best to respond to that. So Luc, I'll pass it to you.

[Luc Ouellet, Senior Vice President of Operations]

Yes, the floods are mainly -- well, not mainly, they're all around Southern New Brunswick and it didn't affect any of our customer at all. It's all down in -- the worse location would be around Saint John, New Brunswick and we're -- as you know, we're way up north in Northwest, New Brunswick and Northern Maine. So a lot of the snow melting up north is ending up down the Saint John river, which is a large water shed. But there's no affect to our customer as of today anyway.

[Andrew M. Kuske]

Yes, that's good to know. And then maybe just on the quarter. The quarter's quite strong from a harvest standpoint, a sales standpoint. And I know there was commentary on the MD&A on just the conditions that you had were very favorable for harvesting in the quarter. How do you see the -- just the current conditions right now for harvesting? Should we expect to see a bit of a pullback in activity or are thing's a bit sloppy out on the forest?

[Mark Bishop, President & CEO]

Yes, Drew, I think, we're seeing a normal, typical mud season for the second quarter. So I don't think we're seeing anything unusual. We were, I would say, given the strong quarter in the first quarter due to the conditions being so favorable. We still would suggest that we expect the balance of the year to play out and other than pricing, which remains potentially stronger as we go through the year. We would see last -- this year looking a lot like last year in terms of how the annual volumes would play out for -- other than the main hardwood volumes that we saw last year.

[Andrew M. Kuske]

That's helpful. And then maybe just one final question. When you look at -- your commentary on REITs from early on, when you look at markets like Brazil, where rates have actually come down. And that market is more financeable than the past and maybe perceived to be less risky than the past. How do you think about that market because, let's just say, your asset evaluations have gone up slightly but the overall feeling of risk towards that market has declined. So maybe if you view that as more favorably, is that something that Acadian would look at and contemplate on doing from an acquisition standpoint, something in that market on a hypothetical basis?

[Mark Bishop, President & CEO]

Specifically the Brazil market, Andrew?

[Andrew M. Kuske]

I think that's probably the most notable in South America for declining rates, and there's others. But that would be the one that's turned around quite dramatically in the last 12 to 18 months.

[Mark Bishop, President & CEO]

Yes. . As you know, we're there and continue to be active and participating in discussions on a very regular basis. The thing that we continue to be challenged with as, I think all financial investors outside of Brazil, our challenge with is really the foreign ownership landscape. And so that makes it more difficult, particularly for Acadian to participate in -- pursue any transactions in Brazil. As you know, we are present and we have executed transactions during this AGU law change since August 2010. But for a public company -- for Acadian, it would be much more challenging to pursue a transaction in Brazil. We have seen pockets of, I guess, improved value in Brazil. But the core timberland or the more interesting timberlands, particularly in the southern Brazil areas Santa Catarina and Paraná, valuations actually remain still very strong. And particularly now with the strength in the export markets from Brazil, those valuations continue to see some upward pressure interestingly, even though we haven't seen a lot of international demand in those markets. So if we, over the year, post-election in late 2018, if we see a change in that ownership restriction, then I would say things could be a little more interesting for Acadian to start considering potential for looking at Brazil transactions. But I wouldn't expect anything at least until the end of 2018 to occur on that change of law.

[Operator]

There are no further questions at this time. Mr. Bishop, I will turn the call back over to you.

[Mark Bishop, President & CEO]

Okay. Well, again, thank you all for participating this morning and look forward to talking to you next quarter. Have a good day.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.