Acadian Timber Corp

TSX:ADN

Earnings Call Transcript

[Operator]

Good morning, thank you for standing by.This is the conference operator. I'd like to welcome everyone to Acadian Timber Corp's First Quarter 2017 Conference Call and Webcast. [Operator Instructions] And the conference is being recorded. [Operator Instructions]I would now like to turn the conference over to Miss Mabel Wong, Chief Financial Officer. Please go ahead.

[Mabel Wong, Senior VP & CFO]

Thank you, operator, and good morning, everyone. Welcome to Acadian's fourth quarter conference call. Before we get started, I would like to remind everyone that in discussing our 2017 financial and operating performance as well as outlook for 2018 and 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 known risk factors, I encourage you to review Acadian's annual information form dated March 29, 2017, and the other filings of Acadian, which are available on SEDAR at sedar.com and on our website.So I'll start by outlining the financial highlights for the year ended December 31, 2017. And then Mark Bishop, CEO, will provide comments about our operations, market conditions and our outlook for 2018.Overall, Acadian continued to perform well and recorded solid results for the year ended December 31, 2017. This reflects strong seasonal demand and favorable operating conditions.During the year, Acadian generated adjusted EBITDA of $23.3 million compared to $22.5 million during 2016. This increase was driven by the benefit of higher log sales volume as well as larger gains recorded from sales of higher and better use lands in Maine.Acadian paid a dividend to shareholders of $1.10 per share during 2017 that represents a payout ratio of 94%, which is in line with our long-term target of 95%.Net sales for the year were $77.8 million. This represents a year-over-year increase of $0.6 million as the company benefited from a 6% percent increase in log sales volume from strong seasonal demand and favorable operating conditions.Compared to prior year, harvest conditions improved as there were fewer severe winter storms as well as dry conditions throughout summer.Our weighted average log selling price decreased slightly, by 2%, driven by hardwood pulpwood prices that were lower on average due to changes in customer mix, whereas softwood sawlog prices remained in line with the prior year.Contributions from biomass product decreased 50%, reflecting limited export markets as we've described in our previous quarters while regional demand remains solid.Additionally, in the year, Acadian benefited from strong sales of higher and better use land in Maine. As a result of the aforementioned factors, adjusted EBITDA margin increased to 30% during 2017, and that compares to 29% in the prior period -- prior year.Moving into segment results. New Brunswick recorded net -- New Brunswick's operations recorded net sales during 2017 of $54.1 million, which compares to $56.5 million in 2016. This decrease primarily reflects the impact of limited export markets for biomass products and largely in lower weighted average log selling prices, partially offset by the impact of slightly higher log sales volume.Log sales volumes for New Brunswick increased 2% to 735,000 cubic meters in 2017. That's up from 721,000 cubic meters in 2017.This increase is driven by favorable harvest conditions throughout the year and the continued strength of softwood sawlog margin.As for pricing, New Brunswick's weighted average log selling prices was $66 per cubic meter in 2017. That was a decrease marginally from $67 per cubic meter in the prior year as the benefit of higher softwood sawlog prices of 2% due to strong demand were offset by the decrease in hardwood pulpwood prices of 4% as a result of changes in customer mix.As a result of the aforementioned decrease in contribution from biomass, adjusted EBITDA in 2017 from New Brunswick was $18.1 million, compared to $19.3 million in 2016 while adjusted EBITDA margin was 33% compared to 34% in the prior year.Our Maine operation generated net sales in 2017 of $23.7 million compared to $20.6 million during the prior year, driven primarily by a 19% increase in log sales volume. And this overall increase in sales volume was from a meaningful 63% increase in hardwood pulpwood sales volume as a result of favorable harvest conditions and demand relative to 2016.Additionally, we believe that Acadian has been able to capture additional market share in part because of its strong track record of supply reliability and also due to its Sustainable Forestry Initiative certification, which is a requirement of certain customers.Maine's weighted average log selling prices during 2017 in Canadian dollars terms decreased to CAD 76 per cubic meter from CAD 79 per cubic meter during the prior year. However, pricing in U.S. dollars terms, $59 per cubic meter during the year, was in line with prior year.Softwood sawlog prices, which have been impacted in 2016 and in early 2017 by higher customer inventory levels and limited markets for sawmill residuals, increased 2% over the prior year. However, this benefit was offset by the impact of higher relative sales volume of hardwood pulpwood, which experienced a slight decline in average pricing over the prior year.Maine's adjusted EBITDA for 2017 was $6.8 million compared to $4.3 million in the prior year, driven by the benefit of increased higher and better use land sales as well as the increase in sales volume that I previously described. And so as a result, adjusted EBITDA margin in 2017 increased to 28% from 21% in the prior year.Turning to our balance sheet. Acadian's cash position continues to be strong with $24 million of cash on hand at the end of the fourth quarter. This represents a $4 million increase during 2017, primarily driven by the timing of payments related to the management of our crown lands in New Brunswick.When normalizing for this timing difference, our cash balance was largely in line with the prior year-end balance of $20 million as strong cash flows generated by our operations were largely offset by dividends paid. We believe Acadian has sufficient cash resources to cover short-term obligations and potential working capital needs. And furthermore, our net liquidity stands at $97 million at the end of the year, which includes funds available under our revolving facility as well as, again, by equity commitment from Brookfield.During the year, we declared a quarter -- sorry, we declared a dividend of $0.275 per share, consistent with prior quarter and up 10% from the prior year Q1.So that concludes my remarks on this year's financial results. And I will now turn the call over to Mark.

[Mark Bishop, President & CEO]

Thank you, Mabel. During the quarter, Acadian's operations had no recordable safety incidents among employees and 2 among contractors. While the incidents resulted in lost time, the injuries were relatively minor in nature. Acadian takes safety in the workplace very seriously, and we continue to strive for continuous improvement in our employee and contractor safety performance.As mentioned by Mabel, Acadian's operations benefitted from strong seasonal demand and favorable operating conditions throughout the year, resulting in log sales volumes just over 1 million cubic meters, a 6% increase from 978,000 cubic meters in 2016.In New Brunswick, softwood sawlog markets continued to remain strong while demand for softwood pulpwoodproducts were impacted by limited markets for sawmill residuals. Regional sawlog markets in Maine, which had been impacted during 2016 and early 2017 by higher customer inventories and limited markets for sawmill residuals, have recently strengthened.In addition, our Maine operation benefited from strong market conditions for hardwood pulpwood and captured additional regional market share. As a result, hardwood pulpwood harvest volumes during 2017 were higher than Maine's average long-run sustainable yield target.Maine's forest management plan and Sustainable Forestry Initiatives certification provide sufficient flexibility to allow the company to respond to market conditions to maximize cash flows over an economic cycle.We remain comfortably within the SFI certification requirements for average annual harvest over the management cycle relative to our management plan long-term sustainable yield.Going forward, our Maine operations continue to target longer-term average harvest levels, in line with our 2013 to 2022 forest management plan levels as reflected in our AIF.Selling prices for our products continued to be solid with weighted average log sale prices decreasing 2% as softwood sawlog prices remained in line with prior year, while hardwood pulpwood prices decreased as a results in changes in customer mix.In New Brunswick, the weighted average log selling decreased 2% year-over-year as softwood sawlog prices increased 2% due to strong demand while hardwood pulpwood prices decreased 4% as a result of changes in mix, as we mentioned earlier.The weighted average log selling prices in Canadian dollar terms in Maine decreased by 4% percent relative to the prior year. However, it was consistent on a U.S. dollars basis.Maine benefited from strengthening regional sawlog markets. However, this benefit was offset by an impact of higher relative sales volumes in hardwood pulpwood, which experienced a slight decline in average pricing over the prior year.Turning to U.S. economy, we expect it to continue to grow at above-average pace in 2018, which should contribute to continued positive wage growth. Tight construction labor markets and additional interest rate hikes remain as headwinds, but the underlying fundamental driver of pent-up household formation remains very strong.While economic forecasters continue to revise the outlook for U.S. housing starts, reflecting near-term supply-side headwinds, all are predicting steady growth in the 6% to 8% range for 2018, up from 2.5% growth in 2017.A higher proportion of single-family starts and strong repair and renovation activity in 2018 will continue to increase demand and boost softwood lumber and wood product pricing. Industry forecasters predict that North American sawtimber demand will grow over 5% period in the next 2 years to support expanding domestic construction needs.During the second half of 2017, as you're all aware, a number of supply-side factors, including wildfires in the BC Interior, severe hurricane activity in the Caribbean and the U.S. South and severe cold in December throughout North America had a negative impact on lumber production.These events help push lumber prices to multiyear highs, but average year-to-date, we ended year 2017 sitting 26% above year-ago levels. With inventory remain -- inventories remaining well as the typical seasonal purchasing ramps up for the spring building season, we anticipate lumber pricing to remain elevated well into 2018. Northeast North American softwood demands in sawmills represent over 1/3 of Acadian's end-use market, another primary market for our softwood sawtimber. Regional mills continue to operate on full shifts and appear to be carrying inventories consistent with historical practices -- seasonal practices.In the quarter, the U.S. Department of Commerce announced final countervailing duty and antidumping rates, lower -- lowering the combined duty from preliminary rates set early in the year from 26.7% to 20.2% for most Canadian producers. In response, Canada launched initiatives with the North American Free Trade Act and World Trade Organization to review the U.S. duties on softwood lumber imports.With U.S.-Canadian NAFTA negotiations continuing, there's little visibility on any negotiated softwood dispute resolution. Strength in lumber markets combined with supply-side factors are broadly expected to continue to support a pass-through of duties to the market in 2018.Acadian's hardwood sawtimber markets, which focus on industrial millwork end uses, remain strong and stable and are unaffected by U.S. trade initiatives. The supply-demand balance for Northeast hardwood pulpwood market also remains tight, supporting an ongoing stable price environment, Acadian continues to be a preferred partner for hardwood fiber supply to this important market segment. Demand for Acadian's smallest segment by margin, softwood pulpwood and biomass, remains at historical low level. However, we do anticipate biomass exports from New Brunswick will resume by mid-2018.Before I sign off, I just want to step back and thank you all for your coverage of Acadian Timber. We recognize timberland's coverage is not in your mainstream wheelhouse. I know from experience as 8 years as a sell-side paper and forest analyst, it wasn't in mine either. Timberland is a challenging asset class, short on transparency and long on spin. RISI recently reported appraisals are going down and several large-scale tail processes in the U.S. are going no bid. Think about why and how this is happening. An understanding of the broader alternative asset sector is also imperative in understanding the timberland asset class.Reliable data is hard to come by, even more so for the Northeast region. The fact that pricing for Northeast mixed -- for the Northeast mixed resource over the last decade has tracked amongst the most successful across the global universe of investable regions is not why they recognize, nor is the fact that the gap of value per operating cash flow per acre for the regional -- for the Northeast region or, at least, for Acadian relative to Pacific Northwest in the U.S. South are at a record high.Some of you continue to have some difficulty with our strategy, and I'll just make a few points here. Harvesting beyond our long-term sustainable yield is not our strategy. Overstating merchantable inventory is not our strategy. Overstating the potential growth and yield on our timberlands is not our strategy. Using a 3% discount rate in the U.S., as recently noted by a large-scale competitor of ours, is not our strategy. Acquiring timberlands with a 1% long-term cash-on-cash yield is not our strategy. Sustainable management and discipline growth is the underpinning of our strategy.We'd like to take this opportunity to remind our investors that Acadian benefits from a strong balance sheet, diverse and resilient markets and a highly capable operating team that remains committed to continuously improving our financial and operating performance.We thank you for your continued support of Acadian, and that concludes our formal remarks. And we're open for questions. Operator?

[Operator]

[Operator Instructions] Your first question comes from Hamir Patel from CIBC Capital Markets.

[Hamir Patel]

Mark, just curious, you referenced the RISI TMR reports. And they're pointing to certain instances of appraisals coming down. Just curious what you're seeing maybe within the regions in North America in terms of appraisal values in the South versus the Northwest. And then I don't think you filed your AIF yet, but how are your appraisals trending in 2018?

[Mark Bishop, President & CEO]

Well, we haven't filed them yet. But all I would say with is -- in terms of our appraisals, they're steady and there's no surprises. And I can't count on the universe of appraisals. Those are typically private. I'm just picking up on what the TMR report did say. And certainly we're aware anecdotally and through our own discussions and the regions we operate of what may be happening with the appraisals, it's not something I can specifically comment on a trend. But really what I was suggesting is, this is something we've been talking about would happen and have been waiting to see happen for some time. But understanding the drivers that now are putting these assets in the position to see write-downs and lower appraisals, just -- I just encourage you all to dig a little more and understand that dynamic behind that, both on the public and the private side why that might be happening. All I would say is, our appraisal for Acadian continues to be steady and there's no surprises.

[Operator]

[Operator Instructions] Your next question comes from Paul Quinn from RBC Capital Markets.

[Paul C. Quinn, Analyst]

Just a question on cash flows. Could you bring up a good point, because when I take a look at your cash flow by any metric, it seems relatively high to other public timber investments that are there. Maybe you can detail some of the stuff that you're seeing on the cash flow side of the business as opposed to other jurisdictions that we might have -- that we might look at?

[Mark Bishop, President & CEO]

Look, Paul, sure. Thanks for the question. In a broad sense, if you look at the last more than a decade and look at where the U.S. South and the Pacific Northwest were trading on a -- on operating cash -- on a valuation, so an average transaction value per acre and divide that into the operating cash flow per acre that those regions were generating, there was a period in the, kind of, '05 to 2012 period where there were trading equally around a 16x multiple, both regions. And those regions now in, sort of, 2012 to 2017, '18 period have jumped dramatically to trading around a multiple of about 30x for Pacific Northwest and about 36x on average for the U.S. South. So obviously, now a premium on that basis in the U.S. South. If you compare that to Acadian, we've in the last 2012 to 2017 period continued to trade at 16x. So a big gap in -- when you look at it on that basis on a value for cash flow basis. The U.S. sells in the Pacific Northwest, there's a lot of work that goes into understanding how to calculate that from public [indiscernible] and RISI and FEA data trying to build up an operating cash flow represented of a region. So it's a little bit of an apples-to-oranges comparison because I'm comparing regional transaction data and operating cash flow data against Acadian-specific data using our appraisal values. But it really demonstrates that we're still trading at 16x where a decade ago these other regions were trading at 16x and they've doubled or more. But our view is it speaks to the lack of real understanding of what's going on in the Northeast. It's a small asset class. We get it. There's not a lot data, and we haven't necessarily been as aggressive in trying to provide some of this data to the analysts. But at the end of the line, it's just -- it takes just a little more digging in the Northeast region to understand what's happening with resource, and my comment on pricing is same. If you look at the average mixed-resource pricing over the last decade, it's not in New Zealand, it's not in Pacific Northwest, but it's a very strong performing time series over the last decades relative to most of the other global regions.

[Paul C. Quinn, Analyst]

Okay, and then given that disparity in valuation, if we look at Acadian's future growth or potential growth, does that limit you from -- it sounds like it very much -- given the valuations in the U.S. South and Pacific Northwest, it sounds like you wouldn't be interested in growing there and might be outside of North America.

[Mark Bishop, President & CEO]

I'm not quite sure I get the end -- tail-end of the question. I mean we're still, obviously, focused on finding accretive growth ideally in proprietary regions that fit with our criteria. But I guess in line with what I've said, I'm not sure how many of our competitors, large-cap U.S. REIT competitors are able to grow accretively when they're finding large-scale transactions that have a 1% cash-on-cash yield and they're using a 3% discount rate. Not very exciting for them either.

[Paul C. Quinn, Analyst]

Yes, point taken. Okay, and then just back on, I guess, softwood lumber-related, it sounds like you're saying your area of log inventory at sawmills that you'll sell into are normal for this time of the year. Seems like lumber prices are very high right now, I mean, we're seeing 20-year plus highs in lumber markets, irrespective of the tax. It seems like the tax has all been pushed on the consumer. Do you see any change in that for '18 or '19?

[Mark Bishop, President & CEO]

Well, we're going to see some volatility, for sure. Less so on the sawtimber side than, obviously, lumber. But we're seeing some good, solid support and an uptick in our sawtimber prices for now. Well -- have you -- you've got a better crystal ball on what's going to happen with lumber consumption and demand and therefore pricing than I do. But the underlying sawtimber markets are tight in the region. And we clearly are as anxious as you are to see what happens with the lumber price cycle. But I think for the foreseeable future in 2018, the markets look very strong and stable.

[Operator]

There are no further questions queued up at this time Mr. Bishop, I turn the call back over to you for closing remarks.

[Mark Bishop, President & CEO]

Okay, again, thank you all for your flexibility and the change in the call time. And look forward to talking to you next quarter. Have a great day.

[Operator]

This concludes today's conference call. You may now disconnect.