Acadian Timber Corp

TSX:ADN

Earnings Call Transcript

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Acadian Timber Corp.'s Q3 2020 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] It is now my pleasure to introduce Chief Financial Officer, Adam Sheparski.

[Adam Sheparski, Chief Financial Officer]

Thank you, operator. Good afternoon, everyone, and welcome to Acadian Timber's Third 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 third quarter financial and operating performance, the outlook for the remainder of 2020 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 will begin with some comments on our financial results for the quarter ended September 26, 2020. Then Erika will add some further remarks on the business, market conditions and our outlook for the remainder of the year.Sales for the quarter were $23.2 million, a decrease of $2.2 million when compared to $25.4 million in the prior year period. Sales volume, excluding biomass, decreased 9%, and the weighted average selling price, excluding biomass, decreased 3% year-over-year as a result of hardwood pulpwood markets weakening during the quarter. However, softwood sawlog pricing end demand during the quarter remained strong throughout the region driven by lumber pricing that reached historically high levels.Operating costs of $18.8 million in the quarter were $1.8 million lower than $20.6 million in the prior year period, which was consistent with the decrease in sales volume, combined with lower selling and administrative costs in the quarter. Variable cost per cubic meter decreased 2% year-over-year mainly due to the lower-cost product mix compared to the prior year period.Adjusted EBITDA totaled $4.5 million for the quarter, down from $5.1 million in the prior year period. Adjusted EBITDA margin for the quarter was 19% compared to 20% in the third quarter of 2019. The decrease in EBITDA margin was mainly due to a gain on the sale of timberlands in the prior year period, which, if removed, would have resulted in EBITDA margin being flat year-over-year.Our net income for the third quarter was $5.2 million compared to a net loss of $10.9 million in the prior year period. The variance is primarily due to the termination fee paid to Brookfield in 2019, which after tax reduced net income by $12.8 million.During the quarter, we also recognized a positive unrealized foreign exchange gain on our U.S. dollar-denominated long-term debt compared to an unrealized loss in the prior year period. During the quarter, we generated $3.1 million of free cash flow and declared dividends of $4.8 million to our shareholders. Free cash flow was mainly impacted by decreased operating activity during the quarter compared to the prior year period, and the payout ratio for the third quarter was 154%.I will now move into the results for each of our New Brunswick and Maine operations. During the quarter, sales for our New Brunswick Timberlands were $18 million compared to $19.5 million in the same period of 2019. The weighted average selling price, excluding biomass, during the quarter was $62.70 per cubic meter or 5% lower than the price in the same period last year, reflecting the lower hardwood pulpwood volumes and pricing. Operating costs in the third quarter totaled $13.8 million compared to $14.9 million in the prior year period as a result of lower harvesting activity and an 8% decrease in weighted average variable cost per cubic meter due to previously noted lower hardwood volumes and shorter haul distances to market.New Brunswick's adjusted EBITDA in the quarter was $4.2 million compared to $4.8 million in the prior year period. The decrease is due to the lower hardwood pulpwood volume in the current year and the gain on the sale of timberlands recognized in the third quarter of 2019 of $0.2 million. Adjusted EBITDA margin remained relatively consistent at 24% compared to 23% in the prior year period when adjusting for the sale of timberlands.Switching over to Maine. Sales during the third quarter totaled $5.2 million compared to $5.9 million in the same period last year. Sales volume, excluding biomass, decreased 12% year-over-year as customers continued to be slow to take deliveries due to elevated softwood pulpwood inventories in the region. The weighted average selling price, excluding biomass, in U.S. dollar terms remained relatively stable compared to the prior year as a result of improved product mix, offset by lower-quality softwood and hardwood saw timber compared to the prior year period. Operating costs totaled $4.4 million in the quarter compared to $5.3 million during the same period of 2019 as a result of higher per cubic harvest costs due to higher cost product mix and longer haul distances to market.Adjusted EBITDA for the quarter was $0.8 million compared to $0.7 million during the same period last year. Adjusted EBITDA margin was 15% compared to 12% in the prior year period, which reflects lower sales being more than offset by lower costs during the quarter.Acadian's financial position remains strong, ending the third quarter with a liquidity position of $20.4 million, which includes a cash position of $7.4 million and our undrawn revolving credit facilities. And as previously discussed, our outstanding term loan was refinanced on October 1 as planned, providing a 20 basis point weighted average decrease in annual interest cost and stage maturities moving forward.With that, I will now turn the call over to Erika.

[Erika Nicole Reilly, President & CEO]

Thank you, Adam. I'll start with a few comments related to safety and environment. Acadian's operations experienced no recordable safety incidents among employees and 4 incidents among contractors during the quarter. We continue to be committed to the health and safety of our employees and contractors. Of note, we conducted a comprehensive review of our safety program, which resulted in increased communication, safety audits and visibility of our program among those working for Acadian.I am pleased to report that our pre-commercial thinning team in New Brunswick achieved an important milestone during the quarter by being accident-free for 5 consecutive years. This achievement demonstrates their focus and dedication to safety. Along these lines, we continue to monitor and update our COVID-19 operating protocols to ensure we keep everyone working with us safe. To date, none of our people have contracted the COVID-19 virus.Also during the quarter, the New Brunswick and Maine operations were recertified under SFI with no nonconformances, and the Maine operations renewed its outcome-based forestry agreement with the Maine Forest Service.Now I'll turn to operating and market conditions. Operating conditions were favorable during the quarter, and we had adequate contractor capacity. Market conditions, however, were mixed. We experienced strong demand in market pricing for softwood sawlogs as lumber producers ran at capacity and North American softwood lumber prices reached record highs. Offsetting this was weak demand for hardwood pulpwood. The negative effects of COVID-19 on select end-use markets, such as printing paper and textiles, and reduced regional consumption of hardwood pulpwood due to increased substitution and reduced consumption by the Pixel mill in Jay, Maine led to quotas on deliveries and lower prices. Overall, sales volume, excluding biomass, was 9% lower year-over-year primarily due to lower hardwood pulpwood sales. And Acadian's weighted average selling price, excluding biomass, was down 3% year-over-year.With regards to pricing, softwood sawlog prices decreased slightly year-over-year on a consolidated basis. While we experienced price increases on spot sales, prices in New Brunswick experienced only a 1% increase overall due to customer mix, and Maine experienced an 8% decrease in U.S. dollar terms, reflecting more lower-quality studwood in the mix compared to the prior year period. Hardwood sawlog prices remained stable compared to the prior year period. And hardwood pulpwood prices were down 4% due to the significant decline in demand during the quarter, as discussed previously.Softwood pulpwood average selling price decreased 10%, representing stable pricing in New Brunswick, offset by a significant decrease in Maine due to the decreased demand caused by elevated inventories in the region. The biomass market in New Brunswick remained strong, with margins improving relative to the same period in 2019, benefiting from lower-average hauling distances compared to last year.I'll now make a few remarks about our market outlook. The outlook for softwood sawlogs is positive, with an expected increase in North American softwood lumber consumption in 2021. Consensus estimates are for USD 1.3 million housing starts in 2020, increasing to $1.37 million in 2021, supported by favorable demographics, lower interest rates and old and underbuilt housing stock. Local markets for hardwood sawlogs are expected to strengthen for the remainder of the year as less product is produced in light of a weak hardwood pulpwood market, matched with strengthening demand for hardwood lumber.The regional hardwood pulpwood market is expected to remain weak but improved slightly relative to the third quarter as supplies curtailed and as we begin to see demand recover. Softwood pulpwood demand is expected to remain weak for the remainder of the year as mill inventories continue to be elevated. Meanwhile, biomass markets in New Brunswick are expected to remain stable.In closing, Acadian has a strong balance sheet, diverse markets and a highly capable team that remains committed to continuously improving our financial and operating performance. We will continue to actively monitor and respond to market conditions by staying close to our customers and shifting production, all while aiming to protect our margins.That concludes my formal remarks. We are available to take any questions from the participants on the line. Operator?

[Operator]

[Operator Instructions] And our first question comes from the line of Hamir Patel with CIBC Capital Markets.

[Hamir Patel]

Erika, it looks like New Brunswick is finally going to be updating the Crown timber rates for the first time in 5 years. Do you expect that to have an impact on your own log prices?

[Erika Nicole Reilly, President & CEO]

Yes. So a recent article says that the provinces now have a better system for accurately calculating sales to mills from private woodlots, which is really the benchmark that helps, that royalties paid for timber from publicly owned Crown Land. It's now up to the province to update those rates. Like you said, they haven't been updated since 2015, and we don't know when they will actually update them. So the timing is uncertain.We are certainly monitoring the situation, but have no real good insights at this time to know exactly how that would -- how and if will be -- that will impact our business.

[Hamir Patel]

Fair enough. And I want to ask about your hardwood pulpwood customers. Do you have a sense as to maybe how the operating rates, at least amongst your customer base, might have changed in Q4 versus Q3?

[Erika Nicole Reilly, President & CEO]

I would -- that's a good question, and I don't have the specifics on that. I would say, through Q3, they did -- one of our key customers did take 2 weeks in a planned maintenance downtime, which is not scheduled for Q4, so we expect to have them obviously operating more through Q4 than they did in Q3. But I think, at this time, based on what I know, I expect a fairly consistent operating level relative to what we saw in Q3.

[Operator]

Our next question comes from the line of Paul Quinn with RBC Capital Markets.

[Paul C. Quinn]

Just a clarification here. In New Brunswick, you've got, in your release, the average -- the weighted average selling price was down 5% and as a result of lower hardwood volumes as well as price. And I'm just wondering if you've got lower hardwood volumes, pulpwood volumes, why doesn't that increase mix and why isn't your price going up as a result.

[Erika Nicole Reilly, President & CEO]

So the markets overall were just very weak. So it was a balance between volume and price. It's just a demonstration of what happened to the market during this period. So we did our best to shift away and shift harvest to focus on spruce for softwood timber, quite frankly, because that market was very strong. But there was -- that ultimately led to lower volume, but prices also came off during the quarter.

[Paul C. Quinn]

Okay. And then recognizing -- I think you've only got 1 year left as interim CEO at Acadian. When would we expect a leadership update?

[Erika Nicole Reilly, President & CEO]

Nothing imminent at this time. Nothing to report at this time.

[Paul C. Quinn]

Okay. And then anything happening in the timberland M&A front, OBs that I'm not aware of?

[Erika Nicole Reilly, President & CEO]

No. It's been relatively quiet this year.

[Operator]

[Operator Instructions] Our next question comes from the line of Andrew Kuske with Crédit Suisse.

[Andrew M. Kuske]

I noticed in the -- in your MD&A, you talked pretty openly about the shifting of mix given the -- how the softwood market looked for sawlogs. Could you maybe talk a little bit just about any changes in the cost profile that maybe happened as a result of that? Or were things pretty static from prior periods?

[Erika Nicole Reilly, President & CEO]

The cost profile actually has been pretty consistent. And you can actually see it. And one of the key stories during the quarter was how stable our EBITDA margins were, even though top line is down. And that's just a function of this is largely a variable cost business. So we're able to manage margins accordingly.I think really where costs fluctuate is distance to market. And so to the extent that we can -- our core customer base, that in closer proximity to our operations continue to operate, which they are today, that keeps the cost profile pretty consistent as we work to find alternative markets in areas where there's weakness and to the extent we're not shifting production to focus on products that are -- have a stronger market like we're doing from hardwood to softwood. But to the extent we find other markets, we might be hauling longer distances, which would impact costs.

[Andrew M. Kuske]

Okay. That's helpful. And then maybe a broader question. It's a smaller part of the overall business, but just on the biomass and a longer-term outlook in biomass, how do you think about that business just in the context of you do get green attributes in certain places for biomass. But then there's also solar costs are lower when power costs are generally lower than they have been historically. How do you think about just that tension in the market of the green attributes of biomass and just the competing factors of other renewables?

[Erika Nicole Reilly, President & CEO]

Well, I can talk about what we've been experiencing and what we expect over the medium term. And so regionally, there's been, I would say, the position for our biomass has been quite healthy, and we've had inbound interest certainly throughout this past year that I've been involved with the company again, looking for commitments and biomass volumes more than we can actually -- we would be producing or supplying.Biomass is really a fallout. We don't harvest to specifically generate biomass as a fallout from our core business. So I would say demand is pretty stable to strong today in our domestic market, and we're seeing export markets improve and expect more export opportunities through next year.

[Andrew M. Kuske]

And then just on that latter point, do you see that export market as being more of a market opportunity for increased volumes from Acadian?

[Erika Nicole Reilly, President & CEO]

Yes.

[Operator]

And I'm showing no further questions. So with that, I'll turn the call back over to President and CEO, Erika Reilly, for closing remarks.

[Erika Nicole Reilly, President & CEO]

That's great. Well, thank you for the questions today, and thank you for joining today's call and your continued support. We very much appreciate that. So everyone, stay safe.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.