Acadian Timber Corp

TSX:ADN

Earnings Call Transcript

[Operator]

Good day, and thank you for standing by. Welcome to the Acadian Timber Corp. Q2 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. Thank you. Please go ahead.

[Adam Sheparski, Chief Financial Officer]

Thank you, operator. Good afternoon, everyone, and welcome to Acadian Timber's Second 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 second 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 www.acadiantimber.com.I'll begin by outlining our financial highlights for our second quarter ended June 26, 2021, then Erika will comment on our operations, market conditions and outlook for the remainder of the year. Sales for the second quarter were $18.4 million, compared to $11.5 million in the prior year period, driven by a 55% increase in sales volume, excluding biomass. Acadian benefited from favorable operating conditions compared to the prior year period and recovered the volume shortfall of the first quarter. Demand remains strong for our sawlogs and hardwood pulpwood, but softwood pulpwood demand remained weak due to elevated roundwood inventories in our region and competition from sawmill residuals. Weighted average selling price, excluding biomass, was flat year-over-year and increased sawlog pricing was offset by weaker pulpwood pricing and a stronger Canadian dollar. Operating costs of $14.7 million in the quarter were $4.5 million higher than the $10.2 million in the prior year, mainly due to harvest volumes and timber services activity. Variable costs per cubic meter decreased 9% due to lower processing costs and a stronger Canadian dollar, compared to the prior year period. Adjusted EBITDA totaled $3.8 million during the quarter, up from $1.4 million in the prior year period. Adjusted EBITDA margin for the quarter was 21%, compared to a prior year period of 12% as a result of increased volumes during the quarter. Our net income for the second quarter was $5.9 million, compared to $5.2 million in the prior year period. The positive variance is primarily due to increased operating earnings, offset by a combination of a lower noncash fair value adjustment and an unrealized foreign exchange gain on long-term debt in 2021 compared to 2020. Reflecting the seasonality of the business, Acadian generated $2.9 million of free cash flow and declared dividends of $4.8 million to our shareholders during the second quarter for $0.29 per share. I will now move into the second quarter results for our New Brunswick operations. Sales were $14.9 million compared to $9.5 million in the same period of 2020. Sales volume, excluding biomass, increased 41% and the weighted average selling price, excluding biomass, increased 4% during the quarter, reflecting a strong sawlog prices and a favorable product mix. Operating costs in the second quarter totaled $11.1 million, compared to $7.7 million in the prior year period. The increase in operating cost is a result of higher harvesting and timber services activity. Weighted average variable cost per cubic meter, excluding biomass, decreased by 7% due to lower processing costs compared to the prior year period. New Brunswick's adjusted EBITDA in the quarter was $3.8 million, compared to $1.8 million in the prior year period as a result of higher sales volume and additional revenues from timber services. Adjusted EBITDA margin decreased to 26 -- sorry, adjusted EBITDA margin increased to 26%, compared to 19% last year. Switching over to Maine. Sales during the second quarter totaled $3.5 million, compared to $2 million in the same period last year. Sales volume, excluding biomass, increased 129% year-over-year as a result of favorable operating conditions and stable demand. The weighted average selling price, excluding biomass, in U.S. dollar terms decreased 7%, compared to the prior year as a result of higher sawlog prices, offset by lower prices for hardwood pulpwood compared to the prior year period. In Canadian dollar terms, prices were up 19% due to a stronger Canadian dollar. Operating costs totaled $3.1 million in the second quarter, compared to $1.9 million during the same period last year as a result of higher sales volumes and lower weighted average variable costs. Variable costs excluding biomass, were 17% lower per cubic meter due to a stronger Canadian dollar and a lower softwood sawlog -- and lower softwood sawlog costs related to a higher proportion of roadside sales. Adjusted EBITDA for the quarter was $0.4 million, compared to $0.1 million during the same period last year. Adjusted EBITDA margin was 12%, compared to 6% in the prior year period, which primarily reflects higher volumes, partially offset by a stronger Canadian dollar. Before I turn the call over to Erika, I would like to take this opportunity to thank her for the leadership and guidance she has provided not only to myself but to the entire management team over the last 2 years. Erika, it has been a pleasure working with you and I am confident in saying that it was because of your guidance, Acadian was successful in transitioning to a stand-alone company. I'm glad you chose to remain on the Acadian Board, and I look forward to working with you in the coming years. With that, I will turn the call over to you.

[Erika Nicole Reilly, President & CEO]

Thank you, Adam. It's been my pleasure, and Acadian will be in great hands into your leadership. To start, health and safety remain a key focus of our business. We are pleased to report that Acadian experienced no safety incidents among employees or contractors during the quarter. We continue to monitor COVID-19 related developments in the regions in which we operate. The province of New Brunswick is expected to move to a green level of its pandemic recovery plan tomorrow, meaning that COVID-19-related restrictions will be lifted throughout the province. As we move into this next phase, Acadian will remain diligent in following health orders and best practices. The reopening will have little direct impact on the business as we have been able to operate seamlessly throughout the pandemic, but we do look forward to resuming in-person interactions. As Adam mentioned, during the second quarter, Acadian experienced favorable operating conditions and steady demand for its products. As expected, we were able to reduce our inventory and recover the volume shortfall of the first quarter. Operations benefited from sufficient trucking capacity and earlier start to operations following the spring thaw and a return to more normal weather conditions compared to the hot and dry conditions that resulted in fire risk-related operating restrictions last year. Demand for Acadian's softwood and hardwood sawlogs remained strong due to favorable end use markets. Demand for hardwood pulpwood was stable throughout the quarter, while softwood pulpwood markets remained weak. Acadian sales volume, excluding biomass, was up 55% compared to the same period in 2020. Acadian's weighted average selling price, excluding biomass, was flat year-over-year with strong solid pricing and a higher value product mix offset by lower pulpwood pricing and a stronger Canadian dollar relative to the second quarter of 2020. Regional softwood lumber producers ran steady through the quarter, resulting in solid demand for our softwood sawlogs. Our softwood sawlog prices increased 6% in New Brunswick and 5% in Maine in U.S. dollar terms. Demand for our hardwood sawlogs was steady as end-use markets for this product remain strong. The weighted average hardwood sawlog price increased 10% in New Brunswick; and 26% in Maine, in U.S. dollar terms, compared to the prior year period, reflecting both price increases and our higher-quality product mix. Demand for hardwood pulpwood was steady during the quarter, but prices decreased 12% compared to the prior year period due to elevated [ wood ] inventories in the region and stronger Canadian dollar. Softwood pulpwood demand remained weak, and prices were up 3% year-over-year. Biomass margins decreased year-over-year due to higher average hauling distances compared to the prior year period. I'll now turn to our market outlook. Acadian expects continued steady demand for its softwood and hardwood sawlogs, hardwood pulpwood and biomass. While North American softwood lumber prices are moderating as supply and demand come into balance, demand for softwood lumber is expected to remain relatively strong given the continued positive outlook for U.S. home construction and improvement. Consensus forecast for U.S. housing starts is $1.55 million for 2021, an increase of 12% from 2020. Regionally, softwood sawmills are running steady and Acadian is continuing to experience a steady demand for its softwood sawlogs as we progress through the summer. Demand for hardwood sawlogs is strong as both appearance and industrial grade lumber is in high demand and round wood inventories at hardwood sawmills are low. We expect strong demand and pricing for this product for the remainder of this year. Regional hardwood pulpwood demand is expected to remain stable as the economy improves. While softwood pulpwood demand is expected to remain weak with continued high roundwood inventories regionally and significant competition from sawmill residuals that limit prospects for near-term improvement. Finally, demand for biomass from Acadian's New Brunswick operation is expected to remain stable with steady demand throughout the region, supplemented by the return of export markets. Before I conclude my remarks, I would like to briefly mention that Acadian executed its first carbon development and marketing agreement to develop voluntary carbon credits on the portion of our Maine Timberlands that is subject to a working forest conservation easement. This project commits Acadian to balancing harvest and growth, and requires long-term planning, annual reporting, periodic carbon inventory verification and maintenance of our existing sustainable forestry certification. While this project is relatively small and expected to contribute modestly to cash flow and have little impact on our operations, it forms a foundation for further carbon credit development. As it takes about 12 to 18 months to develop and sell carbon credits, Acadian expects to begin receiving proceeds from sales in mid- to late 2022. In closing, we believe that Acadian's strong balance sheet, sustainably manage resource, access to diverse markets and highly capable teams position it well for future success. The leadership transition has gone smoothly, and Adam and Susan are well prepared to lead Acadian as CEO and CFO going forward. I wish them and the entire team at Acadian, very best. That concludes our formal remarks, and we are now available to take your questions. Operator?

[Operator]

[Operator Instructions] Your first question comes from Roshni Luthra with CIBC.

[Roshni Luthra, Research Analyst]

I just had a question about your carbon credit for Maine. As you could maybe talk a little about its revenue potential and whether you see yourselves doing something similar in New Brunswick?

[Erika Nicole Reilly, President & CEO]

Sure. So we're still early days in terms of the credit development. So it's a bit early to talk about expected contribution from this product -- project. But what I would say, look, we have been evaluating the opportunity for doing a carbon project over the last 1.5 year, and we work to understand the carbon offset market, evaluated developers, understanding kind of the potential for our projects across our holdings, and really understanding kind of the commitments that we need to make and the potential risks associated with these types of projects. So we did do kind of the feasibility study, again, across our land base, but we thought we would start with this project being the development of ACR credit -- voluntary credit on our Maine Timberlands that are subject to working forest conservation easement, just as a first project. It's relatively modest and low risk, and it really forms the foundation for future development across the lands. We just thought it was kind of the first -- best first step for us.

[Operator]

[Operator Instructions] Your next question is from Andrew Kuske with Crédit Suisse.

[Andrew M. Kuske]

Maybe just following up on the carbon side of things. Is the process you're going through, has it all been just internal? Or have you gone externally? And I asked the question sort of in the context of if we go back a number of years ago with the Forest Stewardship Council certification process that people went through, not everybody, but some went through, I guess, to what degree has this been internal and then really laying the ground work for bigger opportunity in the future to really explore this? Any color would be helpful.

[Erika Nicole Reilly, President & CEO]

Sure. So we have formally engaged -- we've been working with developers over the last 1.5 years to understand, again, these markets and what the opportunities are in the land feasibility study. We have now formally engaged or contracted with a developer to develop credit on this Maine Timberlands property. They are highly experienced in terms of development and selling credit. And they are -- a project takes -- typically takes about 12 to 18 months to develop, and we're doing the work today to register under ACR, et cetera. So we have a developer in place, and we've signed a long-term kind of agreement on this specific project that they will be supporting us in the development and sales going forward over the next 10 years.

[Andrew M. Kuske]

Okay. That's great. That's very helpful. And then maybe just bigger picture kind of perspective, I guess, if we look over the last couple of years, a lot of effort went into effectively reducing the cost structure and really separating out Acadian as a stand-alone entity. And the backdrop is quite positive from the commodity prices, if we take a look at like end-use products, even they're well off of peaks but still robust. And so I guess the question is kind of along the lines of if you're seeing revenue increases on the forest products that you sell, effectively, the standing timber to processors, and that's appreciating, your cost structure is managed down. Do we foresee -- and I know this is a board -- it's a board domain, but what happens with excess cash flow in the future? Like what options do you look at for capital allocation?

[Erika Nicole Reilly, President & CEO]

Adam, would you like to take that one?

[Adam Sheparski, Chief Financial Officer]

Yes, sure. Thanks, Erika. I mean I think as we progress, obviously, as you mentioned, we're coming out of the 2-year period where we became a stand-alone entity. And with the backdrop, I would say we have committed to continuing to grow Acadian. So from capital allocation perspective, we're going to stay diligent on looking for opportunities to grow, obviously, only on a value basis, as -- again, as cash grows, we'll be able to determine what's best at that point in time. But for now, it's continuing to improve our operations and increase our cash flow to meet the current demand.

[Operator]

And we have no further phone questions, and we'll turn it back to Erika Reilly.

[Erika Nicole Reilly, President & CEO]

That's great. Well, on behalf of the Board and management of Acadian, I would like to thank all our shareholders for their ongoing support. Thank you.

[Operator]

Thank you, ladies and gentlemen, for your participation. You may now disconnect.