Acadian Timber Corp

TSX:ADN

Earnings Call Transcript

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Acadian Timber Corp Q4 2020 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 Finance Officer. Thank you. Please go ahead, sir.

[Adam Sheparski, Chief Financial Officer]

Thank you, operator. Good afternoon, everyone, and welcome to Acadian Timber's fourth 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 fourth quarter financial and operating performance, the outlook for 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 with some comments on our financial results for our fourth quarter and year ended December 31, 2020. And Erika will add some further remarks on the business, market conditions and our outlook for 2021.Sales for the fourth quarter were $24.9 million, a decrease of $0.9 million when compared to $25.8 million in the prior year period. Sales volume, excluding biomass, decreased 4%, and the weighted average selling price, excluding biomass, was flat year-over-year.Volume was primarily impacted by lower demand for pulpwood compared to the fourth quarter of 2019.Operating costs of $18.1 million in the quarter were $1.4 million lower than the $19.5 million in the prior year due to lower harvest volume and lower costs.Variable cost per cubic meter decreased 4% year-over-year, mainly due to a lower cost product mix, combined with lower log processing costs compared to the prior year period.Adjusted EBITDA totaled $7.3 million during the quarter, up from $6.6 million in the prior year period. Adjusted EBITDA margin for the quarter was 29% compared to 25% in the fourth quarter of 2019. Increase in EBITDA margin was mainly due to strong softwood sawlog sales, lower cost and a $0.2 million higher gain on the sale of timberlands compared to the prior year period.Our net income for the fourth quarter was $15.3 million compared to $16.2 million in 2019. The variance is primarily due to higher operating earnings, as discussed previously, combined with a higher unrealized foreign exchange gain on long-term debt, which was offset by lower fair value adjustments compared to the fourth quarter of 2019.We generated $5.6 million of free cash flow and declared dividends of $4.8 million to our shareholders during the fourth quarter, and the strong operating earnings resulted in a payout ratio of 86%.With respect to our annual results, Acadian performed well during 2020 despite many challenges, including the COVID-19 pandemic, elevated regional pulpwood inventories and adverse weather conditions that occurred during the year.Sales for 2020 were $91 million compared to $100 million in 2019 as a result of a 10% decrease in volume. Weighted average selling prices and variable costs remain flat year-over-year.SG&A was down $1.5 million year-over-year, reflecting savings primarily resulting from the termination of the management agreement and the associated fees. Adjusted EBITDA for the year ending December 31, 2020, was $21.5 million compared to $23.6 million in 2019, while adjusted EBITDA margin was consistent at 24%, which reflects the predominantly variable cost nature of our business and focus on cost savings.Free cash flow for 2020 was $15.2 million compared to $18.7 million last year, mainly as a result of decreased operating income, less proceeds on the sale of timberlands and increased tax expense in the current year as a result of the tax legislation change that impacted our second quarter.Moving to the fourth quarter results for our New Brunswick operations. Sales for our New Brunswick Timberlands were $19.3 million compared to $18.8 million in the same period of 2019.Sales volume, excluding biomass, increased 2% and the weighted average selling price, excluding biomass, also increased 2% during the quarter, reflecting strong demand for our softwood sawlogs, partially offset by lower pulpwood and biomass sales.Operating costs in the third quarter totaled $12.9 million compared to $13.6 million in the prior year period. The decrease in operating cost is a result of lower pulpwood and biomass deliveries and a 7% decrease in weighted average variable cost per cubic meter due to the lower transport and log prices and costs compared to 2019.New Brunswick's adjusted EBITDA in the quarter was $6.5 million compared to $5.2 million in the prior year period with adjusted EBITDA margin increasing to 34% compared to 28% last year. The increase in EBITDA and EBITDA margin was a result of strong softwood sales and lower costs.Switching over to Maine. Sales during the fourth quarter totaled $5.6 million compared to $7 million in the same period last year. Sales volume, excluding biomass, decreased 20% year-over-year as softwood sawlog deliveries were impacted by temporary weather-related closures -- sorry, temporary weather-related road closures, and demand for softwood pulpwood remained low due to elevated inventories in the region.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 pulpwood prices compared to the prior year period.Operating costs totaled $4.7 million in the quarter compared to $5.2 million during the same period of 2019 as a result of lower sales volumes. Variable harvest cost per cubic meter were 6% higher due primarily to longer hauling distances to market.Adjusted EBITDA for the quarter was $1.3 million compared to $2.1 million in the same period last year. Adjusted EBITDA margin was 24% compared to 30% in the prior year period, which reflects lower sales, including lower prices on pulpwood throughout the quarter.And lastly, a few comments on our debt facilities and financial position. During the quarter, Acadian's debt matured and was refinanced as planned by the delayed funding mechanism arranged on March 6, 2020. With this financing complete, Acadian's debt now has staggered maturities, maturing in 5, 7 and 10 years, bearing interest rates that make -- bearing interest at rates ranging from 2.7% to 3% and resulting in a 20 basis point weighted average decrease in interest cost on an annual basis.Acadian's financial position remain strong during the -- remain strong ending the fourth quarter with a liquidity position of $22.8 million. This includes a cash balance of $10.3 million and our undrawn revolving credit facilities.With that, I will now turn the call over to Erika.

[Erika Nicole Reilly, President & CEO]

Thank you, Adam. Reflecting on 2020, Acadian performed well despite the global pandemic, elevated regional pulpwood inventories and adverse weather events experienced throughout the year. Acadian's employees were able to seamlessly transition to and from a remote working environment with little disruption to our business, and we implemented a comprehensive COVID-19 operating plan. Our customers continue to operate through the year as the industry was deemed an essential service. And while our customers continue to operate, the market environment was dynamic. Acadian was able to benefit from strong softwood sawlog demand driven by an unexpectedly hot lumber market, which mitigated some of the impact of weak pulpwood markets. Meanwhile, our business advanced a number of growth cost savings and risk management initiatives, including growing our customer base, pursuing more active other land use program, evaluating carbon credit development opportunities moving to regionally based service providers, refinancing and derisking our balance sheet and increasing our use of technology across the business.During the fourth quarter, Acadian had 1 recordable safety incident among employees and no incidents among contractors. This employee has since recovered and is back to work. We remain focused on maintaining a culture across our business that emphasizes the importance of strong safety performance and support this by active and regular training and monitoring. We have also continued to monitor and update our COVID-19 operating plan to ensure we keep everyone working with us safe.New Brunswick has recently seen an increase in cases and restrictions. But most of our customers have not experienced any significant downtime, and we have been able to continue to operate.Operating conditions during the quarter were favorable in New Brunswick, but wet weather in Maine caused temporary road closures, which impacted softwood sawlog deliveries.Overall, sales volume, excluding biomass, was 4% lower and Acadian's weighted average selling price, excluding biomass, was flat compared to the fourth quarter of 2019. We experienced strong demand for our softwood sawlogs as regional lumber producers ran at capacity. Softwood sawlog sales volume increased 11% year-over-year. Prices increased 2% in New Brunswick, but were 5% lower in Maine or 4% lower in U.S. dollar terms, reflecting a greater proportion of lower quality studwood in the mix compared to the prior year period.We experienced increased demand for our hardwood sawlogs as regional harvest shifted from hardwood to softwood, resulting in lower hardwood sawlog inventories at mill, while end use markets for this product improves.Hardwood sawlog sales volume increased 12% year-over-year. Hardwood sawlog prices were 4% higher compared to the prior year period. Demand for hardwood pulpwood started to recover during the quarter as customers gain confidence in the outlook for hardwood pulp and in turn increased consumption.Sales volume was down 7% and prices were down 3% year-over-year, but improved 11% and 3%, respectively, relative to the third quarter of 2020.Softwood pulpwood demand remains weak due to elevated regional inventories and competition from sawmill residuals. Sales volume was down 51% and prices were down 9% year-over-year.The outlook for Acadian softwood and hardwood sawlog sales is positive, with end use markets showing strength as we head into 2021.North American softwood lumber consumption is expected to remain strong with sustained demand from repair and remodeling activity and increased demand from new home construction. Consensus forecast is for approximately 1.44 million U.S. housing starts in 2021, up 4% over 2020. Low interest rate, a large U.S. population entering their home buying years and a low inventory of homes for sale are key drivers supporting this expected growth. With this backdrop, Acadian's softwood sawmill customers are expected to continue to operate at capacity, providing steady demand for our softwood sawlogs. And these markets for hardwood lumber are strengthening, while hardwood sawlog availability regionally is limited given heavy focus on cutting softwoods instead of hardwoods, as I mentioned earlier.Acadian expects to realize continued strong demand for its hardwood sawlog and to benefit from new customer relationships developed in 2020.We see demand for Acadian's hardwood pulpwood improving with increased customer confidence and market demand for hardwood pulp. We remain cautiously optimistic that this improvement will be sustained through 2021. Meanwhile markets for softwood pulpwood are expected to remain challenged given elevated regional inventories of both softwood pulpwood and sawmill residuals.And finally, demand for biomass from Acadian's New Brunswick operation, which is mostly hardwood, continues to be steady with several new customer relationships developed in 2020.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.As we enter the new year, Acadian priorities will continue to be strong safety in operating performance, environmental stewardship and seeking opportunities for further cost savings and growth.That concludes our formal remarks. We are available to take any questions from participants on the line. Operator?

[Operator]

[Operator Instructions] Our first question comes from the line of Paul Quinn from RBC Capital Markets.

[Paul C. Quinn]

Good results. Just wondering where we are with the transition from Brookfield to Acadian management here? And I know, Erika, you're still there, but is your 10-year wind down at the end of this year or?

[Erika Nicole Reilly, President & CEO]

Yes. So just with respect to the internalization of Acadian. So we've -- Acadian is completely separate from Brookfield today other than for me. All -- no other services are being provided other than the CEO at this stage. The board is undergoing a process regarding the CEO position currently. Nothing to announce at this time. But as you know, pursuant to that transition services agreement, I am here or available for a 2-year period, which ends September 9.

[Paul C. Quinn]

Okay. September 9, great. And then in terms of what we can expect on harvest in each of the areas in '21, given the strong softwood markets, do we expect a shift to more of that volume?

[Erika Nicole Reilly, President & CEO]

And a shift to -- can you just clarify your question?

[Paul C. Quinn]

Shift to higher leading, I guess, softwood leading stands as opposed to more balanced softwood hardwood stands?

[Erika Nicole Reilly, President & CEO]

Yes. So we have -- we generally harvest the profile before us, but market conditions that are a bit unique. We -- there is some capability to shift focus to more spruce first sawlog dominant kind of stand, higher quality stand. And so that's what we've been doing through last year, and we'll continue to look to do this year. And we've done it through strong hardwood markets as well, where we've shifted more of our focus to hardwood. So yes, we do have that capability. We -- overall, over 5-, 10-year period, we need to harvest the profile of our forest in a sustainable manner. But during these interim periods, where there are periods of strength, we try to capitalize on that. So yes, that's what we're doing.

[Paul C. Quinn]

Okay. And then just lastly, you guys cited sort of a pickup in New Brunswick biomass and with some customer wins. What's driving that?

[Erika Nicole Reilly, President & CEO]

We made a concerted effort at beginning of 2020 to really focus on customer -- continued development of customer relationships and customer services. So the gentleman leading that effort has done a fantastic job in the course of 2020 in strengthening our relationships and looking to develop new markets. It was a priority for us through last year. And we were successful in getting a number of new customers across both our New Brunswick and Maine operations or area. I would say also that with the dynamic markets, we actually experienced a bit more flexibility in terms of having some volume available from current customers or existing customers that gave us some freedom to reach out to new customers and secure new business. So we use that as an opportunity to develop those new markets for us. Again, our core customers have remained constant or pretty stable year-over-year-over-year, but this is really just continuing to grow our customer base and diversify that area of our business for if and when markets are dynamic like we have today, we have that opportunity of selling products to alternative customers.

[Operator]

[Operator Instructions] At this time, I'm showing no further questions. I would like to turn the call back over to Ms. Reilly for closing remarks.

[Erika Nicole Reilly, President & CEO]

That's great. Thank you, operator. And look, on behalf of the shareholders and management, I want to thank the shareholders for their ongoing support. And with that, just stay safe and stay healthy.

[Operator]

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