Acadian Timber Corp

TSX:ADN

Earnings Call Transcript

[Operator]

Good day, and thank you for standing by. Welcome to the Acadian Timber Corp Q1 2021 Conference Call and Webcast. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Adam Sheparski, Chief Financial Officer. Please go ahead.

[Adam Sheparski, Chief Financial Officer]

Thank you, operator. Good afternoon, everyone, and welcome to Acadian Timber's first quarter conference call. With me on the call today is Erika Reilly, Acadian's President and Chief Executive Officer. Before discussing Acadian's results, I will first remind everyone that in discussing our first quarter financial and operating performance, the outlook for the remainder of 2021 and responding to your 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 our known risk factors, I encourage you to review our news release and MD&A, which are available on SEDAR, and on our website at acadiantimber.com. I'll begin by outlining our financial highlights for our first quarter ended March 27, 2021, then Erika will comment on our operations, market conditions and outlook for the remainder of the year. Sales for the first quarter were $25.9 million compared to $31.4 million in the prior year period. Sales volume, excluding biomass, decreased 21%. Although demand for our sawlogs remained strong, sales volume was impacted by temporary road closures caused by unseasonably warm weather at the end of the first quarter and we experienced reduced trucking capacity in Maine. Volumes were also impacted by continued weak demand for softwood pulpwood with high groundwood inventories and sawmill residuals in the region. Weighted average selling price, excluding biomass, was flat year-over-year as increased sawlog pricing was offset by weaker pulpwood pricing and a stronger Canadian dollar. Operating costs of $19.2 million in the quarter were $3.9 million lower than the $23.1 million in the prior year, mainly due to a lower harvest volumes and decreased administrative costs. Variable costs per cubic meter decreased 1% due to a stronger Canadian dollar compared to the prior year period. Adjusted EBITDA totaled $6.9 million during the quarter, down from $8.3 million in the prior year period. Adjusted EBITDA margin for the quarter was consistent with the prior year period at 27% and benefited from lower administrative costs. Net income for the first quarter was $5.8 million compared to a net loss of $3.7 million in the prior year period. The positive variance is primarily due to the unrealized foreign exchange gain on long-term debt of $1.2 million this year compared to an $8.2 million loss in the first quarter of last year. We generated $5 million of free cash flow and declared dividends of $4.8 million to our shareholders during the first quarter or $0.29 per share, which resulted in a payout ratio of 97%. I will now move into the first quarter results for our New Brunswick operations. Sales for New Brunswick Timberlands were $18.3 million, compared to $21.7 million in the same period of 2020. Sales volume, excluding biomass, decreased 23%, and the weighted average selling price, excluding biomass, increased 3% during the quarter, reflecting continued strong demand for our softwood sawlogs and a higher-value product mix, partially offset by lower pulpwood prices. Operating costs in the first quarter totaled $13.3 million compared to $15.9 million in the prior year period. The decrease in operating cost is a result of lower volumes and a decrease in administrative costs. Weighted average variable cost per cubic meter were flat year-over-year. New Brunswick's adjusted EBITDA for the quarter was $5.1 million compared to $5.9 million in the prior year period as a result of lower volumes, offset in part by lower administrative costs as noted previously. Adjusted EBITDA margin increased to 28% compared to 27% last year. Switching over to Maine. Sales during the fourth quarter totaled $7.6 million compared to $9.7 million in the same period last year. Sales volume, excluding biomass, decreased 17% year-over-year as mild weather caused temporary road closures, and we experienced reduced trucking capacity throughout the quarter. Weighted average selling price, excluding biomass, in U.S. dollar terms was flat compared to the prior year as a result of higher sawlog prices, offset by lower prices for pulpwood compared to the prior year period. In Canadian dollar terms, prices were up 6% due to a stronger Canadian dollar. Operating costs totaled $5.6 million in the quarter compared to $6.7 million during the same period last year. As a result of lower sales volume and variable costs, which were 2% lower per cubic meter due to a stronger Canadian dollar compared to the prior year period. Adjusted EBITDA for the quarter was $2 million, compared to $3 million during the same period last year. Adjusted EBITDA margin was 27% compared to 31% in the prior year period, which would primarily reflects lower volumes and a stronger Canadian dollar. With respect to Acadian's financial position, it remains strong ending the first quarter with a net liquidity position of $23.6 million, including cash, a cash balance of $11.2 million and our revolving credit facilities, which remain undrawn. With that, I will now turn the call over to Erika.

[Erika Nicole Reilly, President & CEO]

Thank you, Adam. I'll start by commenting on the announced management team changes before addressing Acadian's first quarter operating performance and market conditions. I'm pleased to announce that Adam will be appointed Acadian's next President and CEO effective July 30, 2021. The Board and I are confident that Adam will be an excellent leader of the company in the years to come. I will be working closely with Adam to transition my responsibilities during the second quarter and then will step down on July 30. Susan Wood, our current Director of Finance, will become Acadian's next CFO replacing Adam. Susan is a Chartered Professional Accountant with over 18 years of public accounting experience. She has been leading Acadian's reporting, taxation and treasury functions to date. Congratulations to both Adam and Susan. Now turning to the operations update. We are pleased to report that during the first quarter, Acadian experienced no safety incidents among employees or contractors. We remain focused on maintaining a culture across our business that emphasizes the importance of strong safety performance. We also continue to monitor COVID-19 related developments in the regions in which we operate and are responding as necessary to keep everyone working with us safe. As Adam mentioned, during the quarter, Acadian's operations were impacted by temporary road closures caused by unseasonably warm weather, reduced trucking capacity in Maine and weak softwood pulpwood markets. Sales volume, excluding biomass, decreased 21% compared to the same period in 2020. To provide a bit more detail, poor weather and limited access to the woods impacted 12% of our operating days during the quarter. The reduced trucking capacity in Maine related to a lack of driver availability and several drivers scheduled to deliver our product fell ill. These drivers have now returned to work. We are working closely with our contractors in Maine to mitigate the issue of trucking availability going forward. Weak softwood pulpwood demand in the regions continued due to elevated groundwood inventories and competition from lower cost sawmill residuals with sawmills running steady. Moving forward, we are working to catch up on a portion of the volume shortfall as road conditions improve. I'll now turn to markets and pricing. Acadian's weighted average selling price, excluding biomass, was flat year-over-year. With increased sawlog pricing, offset by lower pulpwood pricing and a stronger Canadian dollar relative to the first quarter of 2020. Regional lumber producers ran steady through the quarter, resulting in solid demand for our softwood sawlogs. Our softwood sawlog price increased 7% in New Brunswick and 1% in Maine in U.S. dollar terms. While we realized higher prices for all of our softwood sawlog products, a higher proportion of lower value studwood in the mix muted the price increases compared to the prior year period. Demand for our hardwood sawlogs was strong as end-use markets for this product continued to strengthen. The weighted average hardwood sawlog price was flat compared to the prior year period. With price increases offset by a lower quality product mix. Demand for hardwood pulpwood was steady during the quarter, but prices have not yet recovered from the weakness experienced in the second half of last year. A stronger Canadian dollar was also a headwind to overall price improvement. Price was down 8% compared to the first quarter of last year. As noted previously, softwood pulpwood demand remains weak. And prices were off 7% year-over-year. Now I'll turn to our market outlook. The outlook for Acadian softwood and hardwood sawlog sales remains positive with end-use markets showing strength, as we move through 2021. North American softwood lumber consumption is expected to remain strong with sustained demand from repair and remodeling activity and increased demand from new home construction. Consensus forecast is for approximately 1.5 million U.S. housing starts in 2021, up 9% over 2020. Regionally, softwood sawlog inventories are high, but sawmills are running steady. As mills draw down their inventory through the spring, we expect continued stay demand as we restart operations in early summer. Strong end-use markets for hardwood lumber and low hardwood sawlog inventories regionally are expected to support continued strong demand and pricing for our hardwood sawlogs. Demand for Acadian's hardwood pulpwood is expected to remain stable with mills running steady, while markets for softwood pulpwood are expected to remain challenged. Longer term, we expect regional hardwood pulpwood markets to strengthen with Louisiana Pacific's recently announced investment to convert their Houlton mill to manufacture engineered wood siding products. Production of this new product at that facility is slated to begin in 2022. Finally, demand for biomass from Acadian's New Brunswick operation continues to be steady. Before I conclude my remarks, I would like to highlight that we have been focused on Acadian's environmental, social and governance, or ESG disclosure during the quarter. It should come as no surprise that Acadian has responsible ESG practices, given its long history of sustainable forestry and commitment to the communities in which we operate. Having said this, we have been working to improve Acadian's ESG disclosure and will launch a refreshed website later today with further information. Our key ESG highlights include our commitments to sustainable forest management, the well-being of our people and strong and effective corporate governance. Acadian's refreshed website will also highlight our approach to climate change and estimated carbon storage across our lands. In short, Acadian is well positioned from an ESG perspective, and we'll work to better showcase this going forward. In closing, we believe that Acadian's strong balance sheet, sustainable resource, access to diverse markets and highly capable team position it well for future success. That concludes our formal remarks. We are available to take any questions from participants on the line. Operator?

[Operator]

[Operator Instructions] Our first question comes from the line of Marcus Campeau from RBC Capital.

[Marcus Campeau, Associate]

Firstly, I want to say congratulations to both Adam and Susan on the new roles. And good luck to you, Erika, with your next role.

[Erika Nicole Reilly, President & CEO]

Thank you.

[Marcus Campeau, Associate]

Maybe starting on the sawlog side. Have any of your customers been able to significantly increase production or even look at expanding mill capacity?

[Erika Nicole Reilly, President & CEO]

Adam, I'll take that one. So our customers are all running at capacity today. So we have very strong and steady demand for our sawlog products. And they are doing well, and we understand that a number of them are considering investments. And in fact, some of our regional producers have made announcements. In addition to LP, which I referred to in my remarks, Pleasant River Lumber has made an announcement that they will make several investments in their facilities. Any kind of regional investment in facilities that increased the usage of the products we sell is really beneficial to us in the longer term. So we're happy that our customers are doing well in that segment. And yes, we do expect some investment in the facilities in the regions in which we operate.

[Marcus Campeau, Associate]

Great. Are you able to walk us through the net volume impact that the LP Houlton mill could have on your Maine operations? Is the right way to think of it having a positive impact on the hardwood pulpwood demand and negative impact on softwood pulpwood?

[Erika Nicole Reilly, President & CEO]

I don't think it'll have a negative impact on softwood pulpwood. And keeping in mind that softwood pulpwood markets are already quite weak in that region. But LP was consuming hardwood pulpwood already when they were producing OSB at that mill. But my understanding is that the specs that they'll need going forward for the new product that they'll be producing are ultimately results in a better situation or a better market for us, creating a bit more -- just a better market for Acadian going forward. So yes, we see it beneficial for our hardwood pulpwood demand going forward.

[Marcus Campeau, Associate]

All right. That makes sense. It's been a few years since there was any movement on the dividend. In your view, what would need to happen for the company to be able to increase the payout while keeping within sustainable levels?

[Erika Nicole Reilly, President & CEO]

Adam, I'm happy to take that and feel free to jump in. So our Board reviews our dividend on a quarterly basis, and they take into consideration a number of factors. And I think as we stated in our material, very comfortable where we're at today with a very strong liquidity position. And the Board will continue to evaluate the dividend going forward. We're working on a number of organic growth opportunities currently. I referred to on one of the earlier calls. We've been working on other income or other land use opportunities, carbon credit development, et cetera, which are all modest contributors, but do help to the bottom line. And then we continue to be seeking kind of tuck-in and M&A growth opportunities, but those take time as well to develop. So I would say stay tuned. And ultimately, our Board is monitoring our dividend on a quarterly basis.

[Operator]

Our next question comes from the line of Hamir Patel from CIBC Capital Markets.

[Hamir Patel]

Congratulations, Adam, and Susan. And Erika, I know -- I'm sure a lot of shareholders are glad to see you're going to stay on the Board as well. I guess my first question, just trying to get an understanding of, we look at lumber prices year-over-year depending on the benchmark, up 125%, 150%, your sawlog prices in New Brunswick only up 10%. So what gives to that it seems like maybe there's a landlord in the province that doesn't want to collect their rents. And how do you -- as a private timberland owner, why do you sell -- or why sell logs to your customers if they're not willing to pay up, like it almost seems like a better approach repeated just simply refuse to sell at these prices, and just let it grow on the stump, eventually, they're going to have to pay up. So curious to get your thoughts on how you -- what do you think is working or not working in New Brunswick? And what can Acadian do to collect your fair share of the housing cycle? I guess.

[Erika Nicole Reilly, President & CEO]

It sounds good. And you probably noted that in the other kind of major wood baskets within North America, whether it's the Pacific Northwest or the U.S. South. They haven't had the same level of price appreciation for their logs, as you've seen in lumber prices. So this is a common theme. Not just for our region and where we have other dynamics at play, as you alluded to, but this is more of a nature of the timberland asset class and why we're in more stable investment. I would say that log and lumber prices are only kind of loosely correlated to a certain agreement. And we have been working to increase and participate in the strong sawlog market, both on the softwood and hardwood side, and we've been somewhat successful, as we've noted, you've seen an appreciation in our price. And of course, that's a bit of a mix. And so there's always mix considerations as well in terms of proportion of log versus tree length versus studwood. Lumber prices ultimately are driven by North American lumber consumption and the capacity to produce lumber, and we know kind of what's going on there. And so it's been a bit of a perfect storm for lumber producers, whereas log pricing very much relates more to the regional supply and demand. Our region is relatively well balanced. The mills have been operating steady, as I mentioned earlier. And we've had steady demand for our product. The good -- I would say, if there's investments in the mills in a region or if there's a reduction in AAC or regional supply, that will serve as a greater driver for a log price increase. I think the good news, and I commented on it when answering Marcus' question was -- our customers are doing well. They are benefiting from these high lumber prices. And so we are starting to see announcements to make more investments in their facilities, which can only be beneficial to the region and ultimately to us over the longer term. So hopefully, that answers the question.

[Hamir Patel]

No, I guess -- but I guess they are coming and this environment seems like they need the logs a lot more than you need them from -- in terms of where housing could be for the next few years? So what -- like what percent of the lumber production in New Brunswick is serviced by private timberlands? I guess maybe that's the way to think about it. I don't know if that's a figure you have a sense of.

[Erika Nicole Reilly, President & CEO]

I know what you're getting at there. And yes, the trees, as you know, royalty rates, as you referred to, I think, on your note and I think what we call them fair market value rates have not changed since 2015. And I think there were some announcements I think, last year of that being under review, but there really hasn't been any movement or update since that time. So not much new to report there in terms of the government making any changes to the prices that they're charging for the wood. But that is certainly a key supplier in the region, and then there's wood lot owners as well in our region. So there's kind of a big fiber basket. Again, the region is relatively well balanced. But these mills are drawing from both Crown, wood lots and ourselves as they fiber their mills. And as of today, on the softwood sawlog side, mills -- as I mentioned, have high inventories or in good shape from an inventory perspective through the spring breakup. And -- but hardwood sawlog inventories are quite low regionally. So we're seeing quite a bit of -- we have probably a stronger ability there to push pricing at this time.

[Hamir Patel]

Okay. And are any of your softwood sawlog prices -- I'm just curious, like, are there -- or what portion of them are maybe locked in? Or is there somewhere the convention has only been to adjust prices on a certain -- every quarter or every 6 months or something? Like are there dynamics like that where there's just like a lag that's going to play out?

[Erika Nicole Reilly, President & CEO]

So we're subject to a fiber supply agreement in New Brunswick, where the majority of our softwood volume is committed to a customer. That pricing is on a 6-month basis. So it's kind of a 6 months trailing basis, and it's so calculated based on a weighted average prices in the region. So it's supposed to be an indicative market price. Price -- any incremental sales are basically at market negotiated on a quarterly or 6-month basis. And then in Maine it's all on about a 6-month basis.

[Hamir Patel]

Okay. And then your Brunswick piece, is that just pulpwood? Or is that sawlogs as well that are subject to that agreement?

[Erika Nicole Reilly, President & CEO]

All softwood, so sawlogs and pulpwood. And pulpwood through another customer that ultimately services the ultimate holder of that fiber supply agreement.

[Hamir Patel]

Okay. So say current prices just stay where they are, given that sort of lag and what the prices you've observed, do you have like a sense as to where -- what that implies for where sawlog prices would end up going next year for that book of business that has not moved yet because of the lag?

[Erika Nicole Reilly, President & CEO]

I mean, it'd be hard for me to speculate. But what I can say is that we are -- for all of our more market spot pricing, we are continuously working to maximize value and seek highest margin opportunity. So we're very active with all of our customers, and you're seeing that with some of the price increases that we've achieved to date, and we're not going to stop, so hopefully, we'll continue to have some success there. And with respect to the fiber supply agreement, again, that's just -- that's a market formula.

[Hamir Patel]

Okay. Fair enough. And just remind me, when does that fiber supply agreement come up for renewal or renegotiation? When does that expire?

[Erika Nicole Reilly, President & CEO]

Adam, is that 2025 with a 5-year of extension. Is that right? '26. 2026?

[Adam Sheparski, Chief Financial Officer]

That's right.

[Operator]

Our next question comes from the line of Andrew Kuske from Crédit Suisse.

[Andrew M. Kuske]

You outlined effectively the weather impacts on your volumes and a little bit on, effectively, the trucker availability and illness related impacts. Is there any potential for you to play a little bit of catch-up as we head into maybe more favorable weather and how the outlook looks for harvesting and just pulling product out of the forest?

[Erika Nicole Reilly, President & CEO]

Yes. So we are working to catch up on some of that volume. I think we're hoping to catch up about half of what -- where we fell short in Q1, as a result of the temporary road closures and weather, et cetera. And then working -- as I mentioned, working with our contractors very closely, very actively, so that we mitigate the issues that we faced in Q1 through the remainder of this year.

[Andrew M. Kuske]

Okay. Great. And then I think, Adam, you mentioned a number of times in your prepared remarks. Just the lower administrative costs. When we get to the post pandemic world, how do you think costs sort of shake out? Is there any directional movement either upwards or downwards or do we hold pretty much status quo and things don't really change that much?

[Adam Sheparski, Chief Financial Officer]

I think we've done a lot of good work over the last 12 months and reduce the costs, and they will stay down, they will be sustainable. As we -- as you pointed out, as we exit COVID, we're going to probably see some slight increases. Management is going to start to travel. And as we move through the management changes, frankly, there'll be some slight increases as well, but not significant.

[Andrew M. Kuske]

So you're not seeing any signs of inflationary pressures really across your cost profile at this point in time. I guess, maybe other than like diesel on trucking costs?

[Adam Sheparski, Chief Financial Officer]

Yes, nothing significant from what we can see.

[Operator]

Thank you. At this time, I am showing no further questions. I would like to turn the call back over to Erika Reilly, President and Chief Executive Officer, for closing remarks.

[Erika Nicole Reilly, President & CEO]

That's great. Thank you. Just on behalf of the Board and management of Acadian, I'd like to thank all of our shareholders for their ongoing support. Take care of yourselves, and all the best. Thank you.

[Operator]

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