Acadian Timber Corp

TSX:ADN

Earnings Call Transcript

[Operator]

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

[Susan Wood, CFO & Director of Finance]

Thank you, operator. Good afternoon, everyone, and welcome to Acadian Timber's Third 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 will first remind everyone that in discussing our third 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 third quarter ended September 25, 2021. Then Adam will comment on our operations, market conditions and outlook for the remainder of the year. Sales for the third quarter were $22.7 million compared to $23.2 million in the prior year period. Weighted average selling price, excluding biomass, increased by 8% year-over-year, benefiting from increased sawlog pricing driven by favorable market dynamics. Demand remains strong for our sawlogs, while demand for our softwood pulpwood remained challenged due to the regional availability of sawmill residuals, resulting in a 9% decrease in sales volume, excluding biomass. Operating costs of $17.9 million in the quarter were $0.9 million lower than the $18.8 million in the prior year period mainly due to lower harvesting and timber services activity. Variable cost per cubic meter increased 1% due to higher fuel costs partially offset by a stronger Canadian dollar. Adjusted EBITDA totaled $5.1 million during the quarter up from $4.5 million in the prior year period. Adjusted EBITDA margin for the quarter was 23% compared to the prior year period of 19%. Our net income for the third quarter was $0.1 million compared to $5.2 million in the prior year period. The negative variance is primarily due to a noncash unrealized foreign exchange loss on long-term debt of $3.1 million compared to a gain of $2.2 million in the prior year period. Acadian generated $3.6 million of free cash flow and declared dividends of $4.8 million to our shareholders during the third quarter or $0.29 per share. I'll now move to the third quarter results for our New Brunswick operations. Sales for New Brunswick were $17.5 million compared to $18 million in the same period of 2020. The weighted average selling price, excluding biomass, increased 9% from the prior period quarter, reflecting strong sawlog prices and a lower proportion of softwood pulpwood in the mix. Sales volume, excluding biomass, decreased by 10%, which was mainly driven by the decrease in softwood pulpwood. Operating costs in the third quarter totaled $13.4 million compared to $13.8 million in the prior year period. The decrease in operating costs is a result of lower harvesting and timber services activity combined with lower land management costs. Weighted average variable cost per cubic meter, excluding biomass, increased by 8%, reflecting higher fuel costs compared to the prior year period. New Brunswick's adjusted EBITDA in the quarter was $4.2 million, consistent with the prior year period, and adjusted EBITDA margin was flat year-over-year at 24%. I'll now switch over to Maine. Sales during the third quarter totaled $5.2 million, flat with the prior year period. Sales volume, excluding biomass, decreased 6% year-over-year as a result of lower hardwood pulpwood deliveries partially offset by stronger softwood sawlog sales. The weighted average selling price, excluding biomass, in U.S. dollar terms increased 11% compared to the prior year with higher sawlog prices benefiting from favorable market dynamics. In Canadian dollar terms, prices increased 5% year-over-year. Operating costs totaled $4.2 million in the quarter compared to $4.4 million during the same period last year as a result of lower harvest activity and a lower cost product mix. Variable costs, excluding biomass, were 11% lower per cubic meter due to a higher proportion of softwood with lower average costing compared to hardwood combined with a stronger Canadian dollar. Adjusted EBITDA for the quarter was $1.3 million compared to $0.8 million during the same period last year. Adjusted EBITDA margin was 26% compared to 15% in the prior year period. The third quarter results include $0.3 million of gains recorded on timberland sales compared to no timberland sales during the same quarter in 2020. With respect to Acadian's financial position, it remains strong, ending the third quarter with a net liquidity position of $23 million, including a cash balance of $10.5 million and our revolving credit facilities, which remain undrawn. With that, I'll now turn the call over to Adam.

[Adam Sheparski, President, CEO & Director]

Thank you, Susan. Health and safety remain a key focus of our business. And as such, we are proud to report that through continued attention and hard work of our employees and contractors, Acadian experienced no safety incidents again this quarter. That makes it 3 straight quarters since we had an incident, a true sign that safety is our top priority. Regarding COVID, we continue to monitor developments in the regions in which we operate, and our teams remain diligent in following health orders and best practices. And although the fourth wave has come to our region, to this point, it has not had a significant impact on Acadian's operations or the operations of our customers. Switching over to our results. As Susan mentioned, during the third quarter, Acadian benefited from strong pricing and demand. Regional softwood lumber producers ran steady through the quarter, resulting in solid demand for our softwood sawlogs. Our softwood sawlog prices increased 2% in New Brunswick and 18% in Maine in U.S. dollar terms. As expected, demand for Acadian softwood pulpwood remained challenged due to the regional availability of sawmill residuals, which has had an impact on our overall volumes. Demand for our hardwood sawlogs was steady as end-use markets for this product remains strong. The weighted average hardwood sawlog price increased 12% to New Brunswick and 25% in Maine in U.S. dollar terms compared to the prior year period, reflecting both price increases and a higher quality product mix. Hardwood pulpwood volume decreased during the quarter and prices declined 5% compared to the prior year period due to elevated roundwood inventories in the region, a change in the harvesting mix towards softwood during the quarter and a stronger Canadian dollar. Biomass volumes decreased year-over-year. And although we experienced increased pricing, higher average hauling distances and fuel costs compared to the prior year period impacted biomass margins during the quarter. Turning to our market outlook. Acadian expects North American softwood lumber demand to remain steady as we progress through the remainder of 2021 and into 2022, supported by the sustained positive outlook for U.S. home construction and improvement. Housing fundamentals continue to be supported by lower interest rates, income and job growth, aging and underbuilt housing stock and favorable homebuyer demographics. Consensus forecast for U.S. housing starts is $1.57 million for 2021, an increase of 14% from 2020. The dynamics of the softwood lumber market are expected to support steady demand for our softwood sawlog as our sawmill customers continue to invest in their facilities and operate at steady levels. However, the strong regional production of lumber will continue to challenge the softwood pulpwood market as sawmill residuals are abundant in the region. Demand for hardwood sawlogs is strong as both appearance grade and industrial grade lumber is in high demand and roundwood inventory at hardwood sawmills are low. We expect strong demand and pricing for this product for the remainder of this year and into 2022. Hardwood pulpwood demand is expected to remain steady as the economy improves. Demand for biomass from Acadian's New Brunswick operation is expected to remain stable through the remainder of the year and into 2022 with steady demand throughout the region supplemented by the return of export markets. Finally, as we disclosed last quarter, Acadian executed its first quarter development -- sorry, its first carbon development and marketing agreement to develop carbon credits on the portion of our Maine timberlands that is subject to a working forest conservation easement. As we've previously discussed, while the project is relatively small and expected to contribute modestly to cash flow and have little impact on operations, it forms the foundation for further carbon credit development. The project remains on track as we enter the inventory phase, and we expect to begin receiving proceeds from sales in mid- to late 2022. In closing, we believe that Acadian's strong balance sheet, sustainably managed resource, access to diverse and growing customer base and highly capable team position it well for future growth and success. With that, we are now available to take questions. Operator?

[Operator]

[Operator Instructions] And our first question comes from Roshni Luthra from CIBC Capital Markets.

[Roshni Luthra, Research Analyst]

Adam, can you talk about your expectations on harvest levels for 2022?

[Adam Sheparski, President, CEO & Director]

For harvest levels, obviously, we disclosed our allowable cut in our information form. I think that would be a good spot for you to start, Roshni. I would say, over the last year, when we issued our new AAC, we did see an increase in allowable cut for our softwood sawtimber. And not all of that has been, I would say, sold at this point in time. But I think key information form and our AAC is a good place to start for volumes.

[Roshni Luthra, Research Analyst]

Okay. And then I think you were just mentioning at the end that your project for carbon credits remains on track. Just wanted to confirm, did you say we would see further updates in like mid-2022? Or I wasn't sure if I heard that right.

[Adam Sheparski, President, CEO & Director]

Yes. So the project is on track. We're in the inventory phase at this point. Mid-2022 to late 2022 is only we're actually expecting to receive proceeds from sales of carbon credit. So we'll continue through the process over the next 6 to 9 months and then hopefully start seeing the proceeds after that.

[Operator]

And our next question comes from Paul Quinn with RBC Capital Markets.

[Paul C. Quinn]

Just maybe start with New Brunswick. I just keep reading -- I'm on the West Coast, and I keep reading these articles on New Brunswick stumpage and why it's held low and the effect and just despite, obviously, in 2020 and 2021, lumber prices doubled and tripled but New Brunswick stumpage is held in check. Does that affect the price that you're able to get for your softwood sawlogs in New Brunswick as well as affects market in Maine?

[Adam Sheparski, President, CEO & Director]

Hi, Paul, yes, the FMV rate here, stumpage ratio in New Brunswick has gotten a lot of press over the last year or 2. I think suffice to say, it does have an impact on the market -- on the marketplace, absolutely. A lot of volume comes off of Crown, and our customers are buying Crown lumber -- or Crown timber, sorry, just as they're buying from us. So there is an impact in the region, not so much on Maine. There is a difference between the 2 regions, obviously.

[Paul C. Quinn]

How do you go about changing that system, that there if it's a little bit market more market responsive? Or what are some of the things that people are saying out there to make it more fair?

[Adam Sheparski, President, CEO & Director]

Yes. I mean I think that's a question for the New Brunswick government. We are focused on our customers and selling our product. It's -- like I say, it's in the news regularly. I'm sure it will be in the news again tomorrow. But yes, it's -- like I say, we're focused on our customers and our products.

[Paul C. Quinn]

So it's not something that you're actively trying to change?

[Adam Sheparski, President, CEO & Director]

No.

[Paul C. Quinn]

Okay. And then just on that carbon agreement, what was the price that you're getting for the carbon? And I suspect it's a deferral mechanism or methodology? Or...

[Adam Sheparski, President, CEO & Director]

So we haven't disclosed any of the pricing mechanisms. But in general, in the voluntary market, we will receive, call it, market rates when we sell those credits in the future.

[Paul C. Quinn]

Yes. And just because I'm not so familiar with the voluntary market, what's the typical span right now or -- of those rates, just as an idea?

[Adam Sheparski, President, CEO & Director]

Yes. To be honest with you, Paul, there's all kinds of numbers floating out there. I think the last numbers we heard, and again, it's day-to-day, but $10 to $15, it's where we're -- we see the -- what we heard the current price.

[Operator]

[Operator Instructions] Our next question comes from Andrew Kuske with Credit Suisse.

[Andrew M. Kuske]

A few questions. And if we look at your sales profile and just the harvest that you had in the quarter and, obviously, there's always quarterly variability, but are you facing any kind of constraints? It seems like, overall, a few things we can put aside, but overall, pretty robust demand. Are you seeing any kind of constraints to supply that, demand that we see in the marketplace?

[Adam Sheparski, President, CEO & Director]

No, not at this point in time. I think I would separate softwood and hardwood. No constraints on the hardwood side. I would say we're focusing on trying to ensure that we continue the good work that the guys have done and ensuring that we deliver on our expectations in our AAC on the hardwood side. On the softwood side, as I mentioned earlier, our AAC did come up this year, and we're still in the process of selling all of that product, Andrew, but no constraints on as far as producing it.

[Andrew M. Kuske]

Okay. Are you seeing any signs of inflationary pressures at all? I mean I know fuel costs are mentioned. But beyond that, is there anything else that's happening on the inflationary side?

[Adam Sheparski, President, CEO & Director]

No, not significant inflation in the region. Fuel, like we mentioned, it is definitely having an impact on us, and the team is working hard to start to try and move that -- those costs into the customers. But that's really the only thing that we're feeling at this point in time in the region.

[Andrew M. Kuske]

Okay. And then just maybe one final one. And really how do you think about the outlook for wood products demand? Should Northern pulp mill come back up and running? How do you sort of just think about the regional dynamics?

[Adam Sheparski, President, CEO & Director]

That's a good question. I mean they're a distance away from a lot of our holdings, but I think we didn't feel a lot of change when it went down. I think some of the residuals started to migrate North, I would say, a little bit. So that may change if Northern pulp comes back on. But like I said, I don't think it's a huge, huge change from our perspective.

[Operator]

And I'm showing no further questions in the queue. I'd like to turn the call back over to Adam Sheparski for any closing remarks.

[Adam Sheparski, President, CEO & Director]

Thank you. 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 our fourth quarter conference call on February 10. Goodbye.

[Operator]

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