Acadian Timber Corp

TSX:ADN

Earnings Call Transcript

[Operator]

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

[Mabel Wong, Senior VP & CFO]

Thank you, Operator. And good afternoon everyone. Welcome to Acadia's Second Quarter Conference Call. Before we get started, I would like to remind everyone that in discussing our second quarter financial and operating performance our outlook for the remainder of 2018, and also in 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 these known risk factors, I encourage you to review Acadian's Annual Information Form dated March 28 of 2018. And the other filings of Acadian which are available on sedar.com and as well as on our website.So moving into our presentation for today, I'll start by outlining the financial highlights for the quarter ended June 30, 2018. And then Mark Bishop, Acadian's President and CEO, will comment on our operations, market conditions, and our outlook for 2018.As a reminder, you may recall from last quarter's conference call that starting in January 1, 2018, as a result of a new accounting standard relating to revenue contracts there has been a change in net presentation to gross presentation relating to timber services. This change results in an increase in net sales with a corresponding and offsetting increase in operating costs and expenses.Consequently you'll note that the prior year net sales and um adjusted EBITDA margins have been revised to conform with this new presentation. However, it's important to note that adjusted EBITDA and net income are not affected by this change. And please refer to the second quarter interim report for more detail.So as for the second quarter results, overall Acadian continued to perform well with results reflecting strong demand and favorable operating conditions. Acadian traditionally experiences low levels of operating, marketing, and selling activity during the second quarter of each year owing to the timing of the spring thaw period that causes much of the infrastructure to be temporarily inoperable. As a result, there may be year-to-year variations in the second quarter which are less meaningful.For the quarter, we generated adjusted EBITDA of $2.6 million which is in line with the prior period. This reflects a 4% increase in log sale volume during the period. The benefits of which were offset by lower sales of higher and better [ use land ] in Maine. In addition, log selling prices for most of our products benefited from improved demand while our weighted average log selling price per cubic meter remained in line with the prior year period due to a change in the sales mix.For the six-month period, our payout ratio was 101%, just slightly above our long-term annual target of 95%. We anticipate that over the long-term we will maintain our 95% target payout ratio.For the second quarter, Acadian's net sales rose to $16.1 million from $14.3 million in the comparable period of 2017. As favorable operating conditions and strong demand, as I noted, result in a 4% increase in total log sale volume. Acadian's weighted average log selling price was in line with prior period. As the benefit from a 6% increase in softwood sawlog prices and a 3% increase in hardwood pulpwood prices was offset by changes in the sales mix.Additionally, contributions from biomass products increased meaningfully on a year over year basis reflecting stronger export markets that drove an increase in sale volumes of 16%.Despite the aforementioned increase in overall sales volumes, our adjusted EBITDA margin did decrease slightly from 18% in the prior year to 16% in the second quarter due to lower sales of higher and better use lands in Maine and the timing of operating costs.Moving into our segment results, net sales for our New Brunswick Timberland during the second quarter increased to $12.9 million from $11.5 million during the prior year. Uh excluding biomass, log sale volumes increased 3% to 135,000 cubic meters from 132,000 cubic meters in the second quarter last year. This increase reflects favorable operating conditions, continued strong demand for softwood sawlogs and improved demand for softwood pulpwood.And in addition, timber sales services and other sales increased 37% compared to the prior year period primarily due to the timing of harvest activities. As for pricing, New Brunswick's weighted average log selling price during the quarter of $69 per cubic meter was slightly down from $70 per cubic meter in the prior year. Demand for softwood sawlogs and hardwood pulpwood in New Brunswick remained strong with prices increasing 4%. However, the benefit of this was more than offset by lower volumes of higher valued hardwood sawlogs and higher volumes of lower value softwood pulpwood that's relative to the prior year period. Prices for these products though were favorable compared to the prior year period.In addition, contributions from biomass products for New Brunswick increased meaningfully on a year-over-year basis reflecting 30% higher volumes due to the improvements in the export markets.So as a result, New Brunswick's adjusted EBITDA was $2.2 million during the quarter compared to $2 million during the prior year. While adjusted EBITDA margin of 17% during the quarter was slightly lower than the 18% in the prior year. Now moving onto our Maine Timberland net sales during the quarter totaled $3.2 million compared to $2.8 million for the same period of last year as log sale volumes increased 7% from 36,000 cubic meters in 2017 to 38,000 cubic meters during the second quarter of this year.This increase was primarily driven by strong seasonable demand particularly for softwood sawlogs which in the prior year period had been impacted by high customer inventories and limited markets for sawmill residuals. Maine's weighted average log selling price in Canadian dollar terms increased to $80 per cubic meter during the second quarter from $75 per cubic meter during the prior year period.In U. S. dollar terms, the weighted average log selling price increased 11% year over year to $60 U. S. per cubic meter. This increase reflects meaningfully improved demand and prices for softwood sawlogs and hardwood pulpwood. Maine's adjusted EBITDA for the quarter was $0.6 million compared to $0.9 million in the prior year period. Adjusted EBITDA margin decreased to 18% from 32% due to the impact of lower sales of higher and better use land on a relative basis. However, excluding this, adjusted EBITDA margin improved reflecting the benefit of increased log sale volumes and weighted average log selling prices which I mentioned earlier.Now turning to our balance sheet, Acadian's cash position continues to be strong with approximately $23 million of cash on hand at the end of the second quarter. Our cash balances decreased by $1 million since the beginning of the year primarily driven by timing of working capital. We believe that Acadian has ample cash resources to cover its obligations and potential working capital needs. And furthermore, our net liquidity position at the end of the period is very strong at approximately $100 million. And this includes funds available under our revolving facility as well as our standby equity commitment with Brookfield. That concludes my remarks on this quarter's financial results, and I will now turn the call over to Mark.

[Mark Bishop, President & CEO]

Thanks, Mabel, and good afternoon. During the quarter, Acadian's operations had no recordable safety incidents among employees, and two minor incidents among contractors. As always, we remain very committed to maintaining a culture across the organization that emphasizes the importance of strong safety performance.Acadian's operations performed well during the second quarter and continued to benefit from strong market dynamics in New Brunswick and improve markets in Maine compared to the prior year. Excluding biomass, log harvest volumes of 174,000 cubic meters for the quarter were up 4% year over year as Mabel noted. Reflecting favorable operating conditions and strong seasonal demand.Acadian's weighted average log selling price remained in line with the prior year period as a benefit from a 6% increase in softwood sawlogs prices, and a 3% increase in hardwood pulpwood prices were offset by changes in sale mix. Demand for softwood sawlogs and hardwood pulpwood in New Brunswick remain strong with prices increasing 4%. Markets in Maine continue to strengthen with prices in U. S. dollar terms for softwood sawlogs increasing 14% and hardwood pulpwood prices improving 9% compared to the prior year.Stronger export markets for biomass products resulted in a 16% increase in sales volumes compared to the same period in the prior year and overall the gross margin earned on Acadian's biomass products increased meaningfully by 121% compared to the second quarter of 2017.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 increases averaging over 10% in 2018 and about 4% in 2019.The underlying fundamental driver of pent-up household formation remains highly compelling and forecasters continue to expect attractive growth in housing starts in future years despite weakening affordability and ongoing supply-side constraints of tight construction, labor markets, and more restrictive building regulations.North American sawtimber demand is expected to grow at over 3% per year for the next few years to support expanding domestic construction needs. Benchmark western spruce pine fir and southern yellow pine lumber prices were up over the sequential quarter by 17% and 16% respectively. Allowing producers to continue to pass on the full application of average export duties on U. S. bound shipments to consumers.Reduced inventories in the supply chain at the beginning of the spring construction season due to severe winter conditions and tight rail and truck transport availability during the first quarter were replenished through the quarter as these constraints were largely alleviated. While lumber pricing volatility should be expected due to supply chain seasonality and the uncertainty of ongoing application and pass through duties [ for our ] potential future softwood lumber dispute settlement including quotas. Forecasters continue to expect the underlying supply-demand drivers will continue to support strength in lumber pricing through 2019.By extension, Acadian anticipates continued strong support in [ our new ] markets for softwood sawtimber pricing through this period. Since the final determination of combined export duties averaging 20% was announced by the U. S. Department of Commerce and finalized by the International Trade Commission in late Q4 of 2014, industry officials indicate there have been no material software negotiations between the U. S. and Canada. As there's little expectation that a softwood settlement will factor into the current broader North American Free Trade Agreement Trade Negotiations. There remains very little visibility on relief from duties in the near to medium term.Hardwood sawtimber markets typically oriented to millwork and higher valued specialty markets are expected to remain healthy at current levels throughout the remainder of the year. Hardwood pulpwood demand in regions remain stable with tight supply conditions continuing to support historically strong pricing. In New Brunswick, biomass markets have benefited from the recovery and export volumes, as we have discussed. And we anticipate continued strength in this market in the quarters ahead.In the past, we have remarked on our expectation of continued resilience in Maine's timber market. It's clearly important to highlight some notable recent developments in Maine's pulp and paper industry to reinforce this view. Following last year's announcement from [ SYP ] to expand its [ Skaviegan ] operations which came online during the first half of 2018, we have now seen Nine Dragon's acquire Catalyst's U. S. operations with a commitment to invest in the Rumford, Maine Mill to improve its competitiveness. And very recently, I've heard that [ Verso ] will make strategic investments in its Androscoggin Maine Mill over the next 18 months and increasing lineup capacity and improving the mill competitiveness. Each of these portray a strong commitment to the Maine region and maintenance of continued healthy regional fiber demand in the pulp and paper segment.Further, while Maine's biomass market remains under pressure from low-cost natural gas as a more competitive feedstock for electricity generation. Investments in wood-based liquid fuels and new wood pellet capacity in the state while in early-stage development are encouraging.Finally, I'll also note that we expect Maine recreational real estate market will remain active and therefore anticipate conditions will support the sale of additional properties throughout the remainder of 2018.In closing, I'd like to highlight that with a strong balance sheet, highly capable operating team and a positive market outlook Acadian is very well positioned to meet our 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 ] evaluation.On behalf of the board and management of Acadian, I'd like to thank you for your ongoing support.Operator, I'd now like to uh open the line for questions.

[Operator]

[Operator Instructions] [Operator Instructions] And there are no questions at this time. Mr. Bishop, I will turn the call back over to you.

[Mark Bishop, President & CEO]

Thank you, operator. And as always, we know it's a busy reporting day and week. But if any of you want to get ahold of us when you may have questions, please feel free to call Mabel or I. And otherwise, enjoy the rest of the reporting period, and enjoy the rest of your summer. That's it. Talk to you next quarter.

[Operator]

Thank you, everyone. This concludes today's conference call. Thank you for participating, and you may now disconnect.