Acadian Timber Corp

TSX:ADN

Earnings Call Transcript

[Operator]

Thank you for standing by, and welcome to Acadian Timber Corp.'s First Quarter 2024 Analyst Conference Call and Webcast. [Operator Instructions] I would now like to hand the call over to Susan Wood, Chief Financial Officer. Please go ahead.

[Susan Wood, executive]

Thank you, operator. Good afternoon, everyone, and welcome to Acadian Timber's first quarter conference call. With me on the call today is Adam Sheparski, Acadian's President and Chief Executive Officer.

Before discussing Acadian's results, I'll first remind everyone that in discussing our first quarter financial and operating performance, the outlook for the remainder of 2024 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 the financial and operational highlights for our first quarter ended March 30, 2024. Adam will then provide some additional comments and will discuss our outlook for the remainder of 2024.

Acadian delivered very strong financial results for the 3 months ended March 30, 2024, driven by a significant sale of voluntary carbon credits and stable regional demand and pricing for our timber products. Timber operations were somewhat hindered by unseasonably warm weather conditions. However, improved contractor availability led to a substantial increase in timber sales volumes as compared to the prior year period. Overall, sales for the first quarter were $28.8 million, $6.4 million greater than the prior year period.

Acadian's first significant sale of carbon credits occurred during the first quarter and contributed $4.9 million to sales. Timber sales increased $1.5 million year-over-year as a result of a 35% increase in sales volumes, which was partially offset by lower timber services activity. Weighted average selling price, excluding biomass, decreased 2% year-over-year. Increases in softwood prices were offset by decreases in hardwood sawlog prices due to weakness in hardwood lumber markets and decreases in hardwood pulpwood pricing, which is attributable to elevated pricing in the first quarter of 2023, resulting from a shortage of regional supply in that period.

Pricing for softwood sawlogs increased 2% compared to the prior year period due to stable demand, while hardwood sawlog pricing decreased 17% due to declines in end use markets. Softwood pulpwood pricing increased 17% compared to the prior year period as a result of strong demand in New Brunswick, while hardwood pulpwood prices decreased 9% overall from the same period in the prior year when regional inventories were particularly low, driving increased pricing. Biomass pricing increased 24% compared to the first quarter of 2023. However, sales volume decreased 59% due to limited processing capacity combined with fiber availability.

Operating costs and expenses were $21.2 million during this first quarter compared to $17.1 million during the prior year period. The year-over-year increase reflects the addition of costs related to carbon credit sales as well as higher timber sales volumes, partially offset by lower timber services activity in New Brunswick. Weighted average variable harvesting costs, excluding biomass, increased 5% over the prior year period as a result of higher contractor costs and longer hauling distances during the first quarter of 2024.

Adjusted EBITDA was $10.6 million during the first quarter compared to $5.6 million in the prior year period. Adjusted EBITDA margin for the quarter was 37% compared to 25% in the prior year period. Free cash flow was $7.8 million, $4.1 million higher than the same period in the prior year.

Our net income for the first quarter totaled $6 million or $0.35 per share compared to net income of $5.6 million or $0.33 per share in the same period of 2023. Higher operating income was offset by lower noncash fair value adjustments and lower gains on sale of timberlands and other fixed assets as well as higher income tax expense as compared to the prior year period. We declared dividends of $5 million to our shareholders during the first quarter or $0.29 per share.

I will now move into the first quarter results for our New Brunswick operations. Sales for our New Brunswick Timberlands were $19.1 million compared to $17.9 million during the prior year period, with increased sales volumes partially offset by lower timber services activity. Sales volume, excluding biomass, increased 44% due primarily to increased trucking capacity.

With regards to softwood and hardwood sawlogs, demand remained steady with sales volumes increased as compared to the prior year as a result of improved contractor capacity. Softwood sawlog volume increased 35% and pricing increased 3% as compared to the prior year period. Hardwood sawlog volume increased 28%, while pricing decreased 19% as a result of weakness in hardwood lumber markets. Improved contractor availability drove a volume increase of 29% and 75% for softwood and hardwood pulpwood volumes, respectively, as compared to the first quarter of 2023. Pricing increased 22% for softwood pulpwood, but decreased 8% for hardwood pulpwood from the same period in the prior year when regional inventories were particularly low driving increased pricing.

Operating costs and expenses were $13.2 million during the first quarter compared to $13.3 million in the prior year period. Increased harvesting activity and increased weighted average variable costs were offset by lower timber services activity. Weighted average variable costs, excluding biomass, increased 4% as a result of higher contractor costs compared to the prior year period. New Brunswick's adjusted EBITDA for the quarter was $6 million compared to $4.9 million in the prior year period. Adjusted EBITDA margin was 31% compared to 27% in the prior year period.

Switching over to Maine. Sales during the first quarter totaled $4.8 million compared to $4.5 million in the same period last year. Sales volume, excluding biomass, increased 10%, reflecting improved contractor availability, partially offset by unfavorable weather conditions. Softwood sawlog volume increased 29% and hardwood sawlog volumes remain consistent with the prior year. The volumes were minimal in both periods. Hardwood pulpwood volumes increased 19% due to steady demand and improved contractor availability. Softwood pulpwood volumes were negligible in Maine due to the extended shutdown of a major softwood pulpwood customer, which began in 2023.

The weighted average selling price, excluding biomass, in U.S. dollar terms was flat as compared to the prior year. Stable softwood sawlog prices were offset by decreased hardwood pulpwood prices, which, as I previously mentioned, is attributable to elevated pricing in the first quarter of 2023. Operating costs and expenses for the first quarter were $3.7 million compared to $3.4 million during the same period in 2023, primarily due to higher weighted average variable costs, partially offset by lower land management costs due to mild weather conditions.

Weighted average variable costs, excluding biomass, increased 5% in Canadian dollar terms, as a result of higher contractor costs and increased hauling distances. Adjusted EBITDA for the quarter was $1.2 million compared to $1.1 million during the prior year period, and adjusted EBITDA margin was 24% compared to 25%.

And now for the first time, turning to the results of our Environmental Solutions segment. During the first quarter, an agreement was reached to sell nearly all of our registered carbon credits. The first delivery under this agreement for approximately 152,000 carbon credits occurred in March, and contributed $4.9 million to our sales for the first quarter. Adjusted EBITDA for the quarter was $4.1 million. The remaining 600,000 carbon credits included in the agreement are expected to be delivered prior to the end of the third quarter of 2024.

With respect to our financial position, Acadian had net liquidity of $7 million as at March 30, which includes cash and funds available under credit facilities, less amounts reserved to support the minimum cash balance related to long-term debt. The acquisition of timberlands during the quarter, which Adam will discuss further, was financed through Acadian's existing revolving credit facility and remained outstanding at the end of the quarter.

The sale of voluntary carbon credits that occurred during the quarter for which cash has since been received as well as future expected sales under the same sales agreement will contribute significant amounts of additional liquidity in the near term. A portion of our long-term debt totaling $43.4 million is scheduled to mature in March of 2025. It is our intention to refinance the debt prior to the maturity date.

With that, I'll turn the call over to Adam.

[Adam Sheparski, executive]

Thank you, Susan, and good afternoon, everyone. As always, Acadian is committed to health and safety as our #1 priority. We believe that emphasizing and achieving a good safety record is a leading indicator of success in the broader business. Acadian's operations experienced 2 minor recordable safety incidents during the quarter among contractors, and none among our employees. We remain committed to maintaining the culture across the organization that emphasizes the importance of strong safety performance.

As Susan mentioned, we experienced an exceptional quarter with several notable achievements. First, ongoing efforts from the operations team resulted in increased contractor capacity and we were able to significantly increase our sales volume over the prior year despite unfavorable weather conditions as we exited the quarter. This hard work has put us in a position to achieve our planned volumes for fiscal 2024. Weather can play a significant role in our operations, but has been favorable so far in the second quarter.

Second, as we disclosed as a subsequent event in our annual reporting and discussed on our call in February, Acadian executed an agreement with the option to lease approximately 10,000 acres of its Maine Timberland for the purpose of the development and operation of a solar-powered electric generating facility. The agreement includes multiple leasing terms with escalating fees if progress is made on the project. The incremental cash flows attributable to the initial terms are modest. However, should the project reach the construction term, which will take several years, the incremental cash flow may become material to Acadian.

As I have said previously, the agreement is not only appealing from a business perspective, we are also excited to participate in a project that leverages our timberlands to produce cleaner and greener energy, and we look forward to potential future developments, not only in Maine, but also on our New Brunswick land base, which has a significant renewable energy potential.

Third, during the quarter, we also completed the acquisition of approximately 16,000 acres of timberland in New Brunswick at a price of $9 million. The timberlands are close in proximity to Acadian's existing operations and customer base. The property is well stocked, benefiting from historical silviculture investments, which will allow Acadian to expand its harvesting operations. The property also presents significant potential for revenue diversification through other land use opportunities.

During the second half of 2024, we expect to begin both harvesting operations and realizing revenue through other land use opportunities on newly acquired lands. And finally, as Susan mentioned, during the first quarter, we achieved our first significant sale of carbon credits as part of an agreement to sell nearly all of our remaining registered carbon credits by the end of the third quarter, and we achieved solid pricing at approximately USD 24 per credit.

We're in the process of registering our second and third tranches of credits, which is expected to result in approximately 360,000 additional credits being made available for sale by the end of the year. As a reminder, the model currently estimates a total of 1.1 million additional credits being generated over the remainder of the 10-year crediting period, or approximately 100,000 to 150,000 credits per year for the next 7 years.

As I have said before, this project has provided valuable experience to Acadian and has formed the foundation for any potential future -- further carbon credit development projects. And we'll take what we have learned from this project in determining what the future opportunities are for Acadian.

As we look forward to the remainder of 2024, North American interest rates remain elevated and near-term pressure on end-use markets persist. However, inflation has begun to show signs of easing. The consensus forecast for U.S. housing starts is approximately 1.43 million starts in 2024 as compared to 1.42 million in 2023.

We remain confident that the stability of the Northeastern forestry sector, combined with the long-term demand for new homes and repair and remodel activity will support the demand for our products as has been demonstrated in recent years. Although labor markets remain tight in Maine, we continue to experience increased contractor availability in New Brunswick through the first quarter. Management will continue to focus on further increasing this capacity through the remainder of 2024, while ensuring that operating costs remain reasonable.

In the short to medium term, inflation is expected to continue to impact our financial results through elevated contractor rates and fuel surcharges, offset by the stable pricing of primary forest products like sawlogs and pulpwood. Demand for Acadian sawlogs is mainly driven by regional supply and demand. Low regional inventories as a result of the unfavorable weather conditions during the first quarter are expected to contribute to stable demand as we progress through 2024.

Pricing for softwood sawtimber is expected to remain stable or slightly improved, and pricing for hardwood sawtimber is expected to remain stable. While modest recovery in hardwood lumber pricing was noted during the quarter, it may be a longer period before pricing for hardwood sawtimber improves. Demand and pricing for softwood and hardwood pulpwood is expected to be steady, mainly impacted by supply in the region.

With regards to the outlook for voluntary carbon credits, there was a notable shift in the behavior of purchasers of voluntary carbon credits that is expected to continue. Potential purchasers are spending greater time and effort performing due diligence over projects to ensure that any credits purchased are of high quality. This has slowed market somewhat. However, demand is expected to remain stable and pricing to hold steady.

Management considers Acadian's projects to be of high quality, as evidenced by the significant agreement reached during the quarter and expects continued sales as additional tranches of carbon credits are registered.

In closing, as we progress through the second quarter, we are optimistic that continued stable regional demand and pricing for our products will support solid results for the remainder of the year, and that the increased contractor capacity we have secured will allow us to catch up on much of the volume shortfall of the first quarter. We will continue to actively work with our contractors to meet the delivery demands of our customers.

At Acadian, we have the team, structure and balance sheet to successfully weather challenging operating or market conditions as they arise, and we will continue to explore opportunities to grow and provide long-term value to our shareholders.

With that, we are now available to take your questions. Operator?

[Operator]

[Operator Instructions] Our first question comes from the line of Ariana Milin of CIBC Capital Markets.

[Ariana Milin, analyst]

My first question relates to the opportunity to develop carbon credits across your Canadian timberlands. Are you able to provide us with any color on the revenue potential that it could represent and when you would expect to register the credits?

[Adam Sheparski, executive]

It's a great question. We obviously have 190,000 acres of our land base in the current project. We have another 110,000 in Maine and then we have our, what is now 777,000 acres in New Brunswick. The federal protocol was just released in the last couple of days for Canada, and we're going to use that protocol release, and we're going to study that over the next number of periods to determine what the potential is. We have been waiting for this protocol to be finalized. So we're excited for that to happen, and we'll come back to you with future potential of carbon credits. I think in general, you could probably use what we're producing off of our current project until we get future or further details on the New Brunswick land base specifically.

[Ariana Milin, analyst]

Okay. Great. And then haw has sawlog price has been tracking in New Brunswick so far this year?

[Adam Sheparski, executive]

Sorry, could you say it again?

[Susan Wood, executive]

How has the sawlog price has been tracking in New Brunswick so far this year?

[Adam Sheparski, executive]

Yes. Two different buckets, super softwood sawtimber sawlogs, pretty steady, I would say, and we expect that to continue through the remainder of 2024. We're very fortunate in the Northeast and that demand is very regional. And we have a great customer base that continue to operate. On the hardwood sawlog front, we have this situation where there wasn't enough supply and customers are looking for sawlogs. We can't produce them fast enough in a lot of cases. So we have been impacted a little bit by the -- the hardwood lumber pricing, but we do see that -- we did start to see that ease a little bit in Q1. So as we progress through the remainder of 2024, we're comfortable that we're going to be stable, but we're hoping to see a little bit of an increase in those hardwood sawlog prices.

[Operator]

Our next question comes from the line of Matthew McKellar with RBC Capital Markets.

[Matthew McKellar, analyst]

Maybe first, how would you think about the probability that the [ Belledune ] generating station is converted to burn biomass? And what kind of opportunity would that scenario represent for Acadian?

[Adam Sheparski, executive]

Matthew, great question, one that's it in the news a lot lately here regionally. It's a big -- it would be a big switch for that facility. I understand that they did do some testing and apparently it went fairly well. I'm sure they have a lot of work to do, which I'm not privy to. As far as the impact on the region, the numbers that were in the news that were disclosed are significant. And I can't understate that or overstate that enough. I think they quoted 600,000 to 800,000 tons. That will be very hard to source in the province. So there's probably going to be some sourcing outside of the province. And I think if it was to go through, it would be a very positive development for that low-end biomass market and certainly would stabilize a lot of [ upland ] demand, not just in New Brunswick, but regionally.

[Matthew McKellar, analyst]

That's very helpful. Maybe next, another large landowner in New Brunswick, recently announced a potentially significant wind farm project. Are you able to share if you've seen any uptick in interest by wind project developers as it relates to potential wind farm developments in the land?

[Adam Sheparski, executive]

Yes. As we previously discussed, since the province and NB Power issued their integration plans over the last 12 to 18 months, we've had a significant uptick in inbound calls on -- for wind, and for options to lease property from Acadian. That's it. It was a big project that they announced in some ways. In others, that property that they're developing is very close to our property, which we've had a significant amount of work done all on to determine its ability to produce wind power and very comfortable in saying there's a lot of opportunity on our land base. Very close to where that wind farm is going to be going out. So I would say there's a lot of interest. We are spending a lot of time on it internally here. And we're just going through the process of determining what that might look like for Acadian over the coming quarters.

[Matthew McKellar, analyst]

Great. And then last one for me. Just on the acquisition of the 16,000 acres in New Brunswick in the quarter. I think you mentioned significant potential for revenue diversification through other land-use opportunities. It sounds like some of those could be near term in nature. Just wondering if you could provide any more color on what those opportunities would be? And just more generally, any metrics around the acquisition itself?

[Adam Sheparski, executive]

Yes. It's -- from another land use perspective, when you have as much property as we do and we start talking about real estate, there is just some property that is better used for that higher and best use or land [ sale ] or cottages inside some of those blocks that we've purchased are significant water frontage. And so we're going through that process right now of finalizing our plans. We certainly developed plans to the purchasing process. But going through that finalizing process over the next months to determine exactly what that will be from a land sale perspective, but it's, in general, you're going to see us selling off water frontage in that -- those lands that we just purchased.

As far as metrics, very happy with the purchase. Obviously, a lot of silviculture invested at $560 an acre. If you remove what is a higher value property, we were able to purchase timberlands for a much lower rate than what we paid in general, and much lower than the regional pricing right now. So we're really happy about that. And then as far as the other metrics, I guess the key metrics that we would be looking at is harvesting moving forward. It's not significant if you look at -- if you assume that we're going to harvest approximately 1 million cubic meters a year, it's not significant as it relates to that, but for us and what we've paid, we're looking at maybe the first year might not get to the full 20,000 cubic meters a year, but we're looking in that range moving forward. So very excited, and really excited about the quality of the timber on the property, a lot of hardwood, which is obviously garners a lot higher price than softwood. And just looking forward to really integrating the land into our front land base.

[Matthew McKellar, analyst]

And just one follow-up, if I could. Do you expect to complete the substantial amount of sales of those waterfront properties in 2024? Or are we looking at 2025 and beyond?

[Adam Sheparski, executive]

We're thinking it's going to take us probably a few years to get rid of -- or to sell all of those properties. I would expect it to take 2 or 3 years at least.

[Operator]

Thank you. I would now like to turn the conference back to Adam Sheparski for closing remarks. Sir?

[Adam Sheparski, executive]

Thank you, operator. On behalf of the Board and management of Acadian, I would like to thank all of our shareholders for their ongoing support. Thank you. Stay safe, and we look forward to you joining us for our second quarter of 2024 conference call on October 1. Goodbye.

[Operator]

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