Acadian Timber Corp

TSX:ADN

Earnings Call Transcript

[Operator]

Good day, and thank you for standing by. Welcome to the Acadian Timber Fourth Quarter 2024 Analyst Conference Call and Webcast. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to turn the conference over to your speaker today, Susan Wood, Chief Financial Officer. Please go ahead.

[Susan Wood, executive]

Thank you, operator. Good afternoon, everyone, and welcome to Acadian Timber's fourth 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 fourth quarter and full year financial and operating performance, the outlook for 2025 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 the financial and operational highlights for our fourth quarter ended December 31, 2024. Adam will then comment on our results for the year, activities undertaken early in 2025 and our outlook for the remainder of the year.

Acadian experienced steady fourth quarter results with overall timber sales volume, excluding biomass, consistent with the same period of 2023. However, pricing was impacted by changes in product mix and weak end use markets, resulting in lower sales as compared to the same quarter of 2023.

Sales for the fourth quarter were $20.3 million compared to $23.8 million in the prior year period. In New Brunswick, a favorable change in customer mix shifted harvesting volumes from Crown licensed timberlands to our freehold timberland, increasing our freehold sales and decreasing our timber services revenue. New Brunswick experienced improved contractor availability and increased volumes. However, contractor availability remained a significant challenge in Maine. Volumes were also impacted by unfavorable weather conditions stemming from a late start to winter conditions and longer than usual customer shutdowns due to the timing of holidays.

Softwood sawlog pricing decreased 5% as compared to the prior year period due to a lower value product mix and weakness in end use markets. Hardwood sawlog pricing decreased 10% primarily due to weakness in end use markets. Softwood pulpwood pricing decreased 11% as a result of abundant regional sawmill residuals impacting demand and pricing. Hardwood pulpwood pricing increased 3% as compared to the prior year period due to a favorable customer mix.

Biomass sales volumes were relatively consistent with Q4 2023. However, biomass pricing decreased 63% due to more roadside sales versus delivered sales compared to the prior year period. Overall, weighted average selling price, excluding biomass, decreased 5% year-over-year. However, it is also worth noting that the weighted average selling price increased 6% from Q3 2024 demonstrating recent stability.

Operating costs and expenses were $17 million during the fourth quarter compared to $19.5 million during the fourth quarter of 2023. Increased costs related to increased freehold harvesting activity were offset by lower timber services activity and lower land management costs. Weighted average variable costs, excluding biomass, were flat as compared to the prior year period.

Greater hauling distances and increased contractor rates were offset by a higher proportion of softwood products, which carry lower variable costs as well as lower fuel adjustment costs. Also contributing to our fourth quarter results was the sale of 1,800 acres of timberlands. In October 2024, Acadian entered into an agreement to sell approximately 2,100 acres of which 1,800 acres closed in November 2024 for gross proceeds of $1.1 million and a net gain of $300,000. The remainder of the transaction is expected to close in the first half of 2025.

Adjusted EBITDA for the fourth quarter was $3.7 million compared to $4.4 million in the prior year period, and adjusted EBITDA margin for the quarter was 18% compared to 19% in the prior year period. Our net income for the fourth quarter totaled $5.6 million or $0.32 per share compared to $11.6 million or $0.68 per share in the same period of 2023. The decrease in net income was largely due to the impact of lower gains on noncash fair value adjustments in 2024 compared to 2023, partially offset by lower income tax expense.

Acadian generated $3.1 million of free cash flow and declared dividends of $5.1 million to our shareholders during the fourth quarter or $0.29 per share.

I'll now move into the fourth quarter results for our New Brunswick operations. Sales for our New Brunswick timberlands were $19.2 million compared to $19.8 million during the prior year period. Sales volume, excluding biomass, increased 7% compared to the prior year period primarily due to increased contractor availability and a favorable change in customer mix, which shifted harvesting volumes from Crown licensed timberlands to our freehold timberlands, increasing our freehold sales and decreasing our timber services revenue partially offset by unfavorable weather conditions and longer than usual customer shutdowns to the timing of holidays.

With regard to softwood sawlogs, demand remains steady and volumes increased 21% compared to Q4 2023 due to the favorable shift in customer mix previously mentioned. Pricing decreased 7% due to a lower-value product mix combined with weakness in end use markets. Demand and pricing for hardwood sawlogs was negatively impacted by weakness in end use markets. Sales volumes decreased 23% and pricing decreased 9% as compared to the same period in the prior year.

Abundant regional sawmill residuals impacted demand and pricing for softwood pulpwood with sales volumes 19% lower and pricing 11% lower than the prior year period. Hardwood pulpwood volumes increased 10% as compared to Q4 2023 and pricing increased 3% due to a favorable customer mix. Overall for New Brunswick, the weighted average selling price, excluding biomass, decreased 6% as compared to Q4 2023.

Operating costs and expenses were $13.4 million during the fourth quarter compared to $14.9 million in the prior year period. Increased freehold harvesting activity and increased weighted average variable costs were offset by lower timber services activity. Weighted average variable costs, excluding biomass increased 2% as a result of greater hauling distances for sawlogs and higher contractor rates, partially offset by lower fuel adjustment cost.

Brunswick's adjusted EBITDA for the quarter was $4.2 million compared to $4.9 million in the prior year period. Adjusted EBITDA margin was 24% compared to 25% in the prior year period.

Switching over to Maine. Sales during the fourth quarter totaled $3 million compared to $4 million in the same period last year. Sales volume, excluding biomass decreased 29% compared to the same period of 2023 also being impacted by unfavorable weather conditions stemming from a late start to winter conditions and longer than usual customer shutdowns due to the timing of holidays.

Contractor availability issues persisted through the fourth quarter. Softwood sawlog volumes decreased 5%, although pricing increased 2% in U.S. dollar terms. Hardwood sawlog volumes were negligible during the fourth quarter of the year. Softwood pulpwood volumes were also negligible in Maine due to the extended shutdown of a major softwood pulpwood customer.

Hardwood pulpwood volumes decreased 51% although pricing also increased 2% in U.S. dollar terms. The weighted average selling price, excluding biomass in U.S. dollar terms was consistent with the same quarter in the prior year. Operating costs and expenses for the fourth quarter were $3.3 million compared to $4.2 million during the same period in 2023 as a result of lower harvesting activity partially offset by higher variable costs.

Weighted average variable costs, excluding biomass, increased 3%, primarily as a result of greater hauling distances and the impacts of foreign exchange. Adjusted EBITDA for the quarter was negative $200,000 consistent with Q4 2023 and adjusted EBITDA margin was negative 7% compared to negative 4% in the prior year period.

With respect to Acadian's financial position at the end of the quarter remains strong, ending with a net liquidity position of $29.3 million, including a cash balance of $15.3 million and our revolving credit facility, which remain undrawn. A portion of our long-term debt totaling $46 million is scheduled to mature in March of 2025. In December 2024, we signed a term sheet to refinance the maturing debt under essentially the same terms of the existing facilities, but with higher interest rates stemming from the current interest rate environment.

With that, I will now turn the call over to Adam.

[Adam Sheparski, executive]

Thank you, Susan, and good afternoon, everyone. As Susan mentioned, I will first comment on our 2024 results, then move into discussing some activities we have already undertaken in 2025 and finish by discussing our outlook for the rest of the year.

As always, Acadian remains committed to health and safety as our #1 priority. During the fourth quarter, there were 2 recordable safety incidents among our contractors. These are minor incidents that resulted in minimal lost time. As we have said before, we believe that emphasizing and achieving an excellent safety record is a leading indicator of success in the broader business and incident reduction continues to be a primary focus for Acadian.

2024 was a busy year with several notable achievements. In total, Acadian's 2024 sales were $116.2 million compared to $93.5 million in 2023. Adjusted EBITDA totaled $38.9 million compared to $20.6 million in 2023 and adjusted EBITDA margin was 33% compared to 22% in the prior year. We generated record free cash flow of $29.7 million for 2024 compared to $15 million last year and declared dividends of $20.3 million to our shareholders.

Moving into our timber operations. We achieved solid results in 2024 despite the challenges posed to our customers by weakened end use markets. Timber sales and services were $91.6 million in 2024 compared to $93.5 million in 2023. Timber sales volumes, excluding biomass, increased 16% year-over-year, but was offset by a decrease in our weighted average selling price and lower timber services activity.

New Brunswick continued making progress increasing contracted capacity throughout the year. However, limited progress was made in May and contractor availability and elevated costs remained an issue. Although 1 seasonably warm weather prevented the ground from freezing and somewhat hindered operations in both the first quarter and fourth quarter, operating conditions were generally favorable for the rest of the year.

Our weighted average selling price for 2024 was 5% lower than 2023, as the result of changes in product mix and weak end use markets. Softwood sawlog pricing was impacted by changes in product mix and softwood lumber pricing, which remained below historical averages for much of the year. Softwood pulp demand started strong early in the year but was curbed in the second half of the year by abundant regional sawmill residuals and pricing remains stable. Weakness in hardwood lumber markets put downward pressure on hardwood sawlog prices, but demand for Acadian's hardwood sawlogs remained stable. Hardwood pulp demand was steady through 2024, while pricing decreased as a result of shorter hauling distances as compared to the prior year.

Greater softwood sawlog hauling distances and higher contracted rates increased variable costs but were partially offset by changes in product mix and lower fuel adjustment costs. This year, we introduced an Environmental Solutions segment, which currently consists of our carbon credit project in May.

During 2024, we sold nearly all of the first tranche of registered voluntary carbon credits related to the project. The sales were comprised of approximately 752,000 voluntary carbon credits at an average price of approximately USD 24. The sale of carbon credits contributed $24.6 million to total sales. 2024 saw a significant amount of real estate activity for Acadia. In March, we completed the acquisition of approximately 16,000 acres of timberland in New Brunswick at a price of $9 million. The timberlands are closest in proximity to Acadian's existing operations and customer base. The property is well stocked, benefiting from historical fill-to-culture investments, which will allow Acadian to expand its servicing operations.

Property also presents significant potential for revenue diversification through other land use opportunities. During 2025, we expect to begin both harvesting operations and realizing revenue through other land use opportunities, which includes residential lot sales on this property.

As Susan mentioned, we also entered into an agreement to sell approximately 2,100 acres of timberland. The land included in the disposition is composed of smaller parcels of relatively low operational or strategic value to Acadian and demonstrates our focus on maximizing the value derived from our assets.

As we have discussed previously, we have increased our activities surrounding opportunities within the renewable energy sector. In February 2024, the Canadian executed an agreement for the option to lease approximately 10,000 acres of its Maine timberland. The agreement includes multiple leasing terms with escalating fees and progress is made on the project. The incremental cash flows attributable to the initial terms they're modest. However, the project reached the construction term, which will take several years the incremental cash flows may become material to Acadian.

In November 2024, Acadian installed a meteorological tower to collect wind data on our New Brunswick timberlands. This investment will deepen our understanding of the wind power potential on our land base, which we already understand to be considerable and enable further exploration of the opportunities available to Acadian to participate in the renewable energy sector in New Brunswick.

We have already been busy in 2025. As noted in our press release and annual report since year-end, we have established our own harvesting operation in Maine with the goal of expanding our harvesting capacity and reducing operating costs. In January 2025, subsequent to year-end, Acadian completed the purchase of several pieces of new harvesting equipment and hired equipment operators who have already begun harvesting on our Maine timberlands.

And just 3 days ago, on February 10, Acadian signed an agreement to purchase certain logging and related assets of A & A Brochu to further expand its internal harvesting operations. The assets include harvesting, trucking, road working equipment and related real estate, which, combined with an established workforce constitute a turnkey logging operation in Maine. A & A Brochu and its employees have provided contracting services to Acadian for many years. The employees are familiar with our land base, and we are excited to welcome them to the Acadian team. The transaction is expected to close later in the first quarter.

Turning to our outlook for the remainder of 2025, near-term pressures on end-use markets persist and potential tariffs are causing concern among forest product companies in both the U.S. and Canada. We are evaluating the impacts that could be felt by Acadian and its customers and the alternative strategies that may be available should tariffs be imposed.

However, with the many dynamics that come into play, including the greater economic outlook, the ultimate impacts cannot be known at this time. North American interest rates and inflation continue to ease and the consensus forecast for U.S. housing starts is steady at approximately 1.36 million starts in 2025 as compared to 1.35 million in 2024. We, therefore, remain confident that the stability of the Northeastern forestry sector, combined with the long-term necessity for new homes and repair and remodel activity will support the long-term demand for our products as has been demonstrated in recent years.

The sufficient contractor availability achieved in New Brunswick in 2024 through the hard work of our team is expected to continue into 2025. Through the establishment of our own harvesting operations in Maine, we expect the persistent issue of contractor availability to be addressed, and we expect to increase production in Maine in 2025. Production levels are expected to improve throughout the year, and we should start to see variable cost improvements in the back half of 2025.

Near-term hardwood and softwood sawlog demand is expected to remain stable, while pricing may remain challenged until end use markets improve. Demand and pricing for softwood pulpwood is expected to remain at reduced levels in the near term due to abundant regional sawmill residuals and hardwood pulpwood is expected to be steady.

With respect to voluntary carbon credit, demand and pricing are expected to remain stable for credits from quality projects. After selling nearly all of our current registered credits in 2024, our inventories are expected to be replenished in the near term. The registration process for the second and third tranches of carbon credits for the ongoing project is expected to result in approximately 350,000 credits in total and is expected to be completed in the first half of 2025. The protocol for developing compliance carbon credits for managed forest in Canada was finalized during the year. Acadian is evaluating the opportunities to develop eligible carbon credits that the compliance protocol may present in conjunction with the opportunities that exist under the current protocols and is in the process of designing our next projects.

We expect to remain busy with real estate throughout 2025 as we begin to sell some of our residential lots and continue to focus on further investments and partnerships in renewable energy in both Maine and New Brunswick.

In closing, 2025 is off to a good start and mother nature seems to be cooperative. We are energized by the startup of our new -- of our own harvesting operation in Maine and look forward to a productive year ahead. Through 2025, we will remain focused on safety and environmental performance while attaining the highest margins available for our products and making improvements throughout the business to maximize cash flows.

At Acadian, we have a remarkable asset base and outstanding people. Guided by the principles of sustainable forest management, we will continue to advance opportunities to deliver long-term value to our shareholders.

With that, we are now available to take your questions. Operator?

[Operator]

And our first question will come from Matthew McKellar with RBC.

[Matthew McKellar, analyst]

First, I'd like to start out just asking about internalizing our harvesting operations in Maine. Between the equipment you purchased in January and then the further acquisition of assets that came into the workforce from A & A Brochu. Are you now essentially at the scale you expect to be at a sort of your new run rate there? Or are you still sort of scaling up operations? Do you plan to acquire further equipment. What are your plans from here?

[Adam Sheparski, executive]

Yes. We believe the equipment we purchased either on our own or through the acquisition that's supposed to close -- will close in Q1, we're at scale. We believe that through that -- those acquisitions, we're going to be able to harvest the volumes that we need to achieve our plans and our expected cuts in the future.

[Matthew McKellar, analyst]

Okay. And is there a way to think about how much of the harvesting maybe in terms of volumes you'll be doing with your own operations, maybe by the end of the year? And then just to confirm, I heard that you're looking to harvest sort of in line with your longer-term plans in Maine as you sort of ramp up there. Is that correct?

[Adam Sheparski, executive]

That's correct on the second part. And I would say, most, if not all, of the harvesting will be done internally moving forward, Matthew. We may pulse in some contractors, if necessary. But with what we've acquired, we will be able to do most, if not all, of our harvesting; most, if not all, of our road work. And we may need to rely on some trucking contractors, but that hasn't been a significant issue for us in Maine over the last number of years. So we're not too concerned about building up on the trucking side rig, yes.

[Matthew McKellar, analyst]

Great. That's very helpful. If I could just sneak 1 last 1 in. You talked about building out your real estate capabilities. It sounds like you have a fair bit in your pipeline there. Just at a high level, how should we think about what progress you're likely to make on this front in 2025, whether it's across developing those residential lot sales, renewable energy leases or other opportunities?

[Adam Sheparski, executive]

Yes, it's a great question. Real estate takes certain on that over the last year or 2, real estate takes some time to develop out, and we've been working very diligently over the last year or 2. We expect to see some results, as I pointed out on the residential lot side, certainly expect to see some of that.

I would also -- if our plans continue at the current pace, I suspect we'll be in front of you announcing some other plans that we have in the works, either on the renewable side or on the development -- real estate development side in both New Brunswick and Maine, nothing to announce today, but it's really hard to get out in front of it. We need to do a little bit more work, but we're making progress on a fairly good pipeline at this point.

[Matthew McKellar, analyst]

Great. We'll look forward to that.

[Operator]

I show no further questions at this time. I would like to turn the call back over to Adam for any closing remarks.

[Adam Sheparski, executive]

Great. 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're looking forward to you joining us on our Virtual Annual General Meeting and First Quarter of 2025 Conference Call, both on May 8. Goodbye.

[Operator]

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