Acadian Timber Corp. (ACAZF) CEO Adam Sheparski on Q1 2022 Results

Acadian Timber Corp. (OTCPK:ACAZF) Q1 2022 Earnings Conference Call May 5, 2022 1:00 PM ET Company Participants Susan Wood – Chief Financial Officer

Adam Sheparski – President & Chief Executive Officer Conference Call Participants Hamir Patel – CIBC Capital Markets

Andrew Kuske – Credit Suisse Operator Ladies and gentlemen, thank you for standing by and welcome to Acadian Timber Corp First Quarter 2022 Conference Call.

At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at the time. [Operator Instructions] As a reminder, this conference call is being recorded. I would like to turn the conference over to your host Ms.

Susan Wood. Please go ahead. Susan Wood

Thank you, operator. Good afternoon, everyone and welcome to Acadian Timber’s First 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 first quarter financial and operating performance, the outlook for the remainder of 2022 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 first quarter ended March 26, 2022 then Adam will comment on our operations, market conditions and outlook for the remainder of the year. Sales for the first quarter were £26.6 million compared to £25.9 million in the prior year period. Sales volume excluding biomass increased 6% primarily as a result of higher softwood sales, partially offset by lower hardwood pulpwood sales caused by reduced trucking capacity.

Weighted average selling price excluding biomass increased 6% year-over-year, benefiting from strong sawlog prices and improved pulpwood prices driven by strong demand.

Operating costs of £19.8 million in the quarter were £0.6 million higher than the £19.2 million in the prior year reflecting higher harvesting activity, fuel prices and land management costs partially offset by decreased timber services in New Brunswick. Variable cost per cubic meter increased 3% as a result of higher fuel costs during the first quarter of 2022. Adjusted EBITDA totaled £6.9 million during the quarter consistent with the prior year period.

Adjusted EBITDA margin for the quarter was in line with the prior period at 26% compared to 27%.

Our net income for the first quarter was £4.2 million compared to £5.8 million in the prior year period. The variance is primarily the result of the application of hedge accounting during the first quarter of 2022, which resulted in the changes in the unrealized foreign exchange gain of £1.4 million on Acadian’s US dollar-denominated debt being recorded in other comprehensive income rather than through profit and loss. We generated £5 million of free cash flow consistent with the prior year period and declared dividends of £4.8 million to our shareholders during the first quarter or £0.29 per share, which resulted in a payout ratio of 97%.

I will now move into the first quarter results for our New Brunswick operations.

Sales for our New Brunswick Timberlands were £18 million compared to £18.3 million in the same period of 2021. Sales volume excluding biomass increased 10%, primarily due to higher softwood sawlog sales, which were offset by lower timber services activity during the quarter. Operating costs in the first quarter totaled £13.4 million compared to £13.3 million in the prior year period.

The slight increase in operating costs as a result of increased harvesting activity, fuel prices and land management costs, partially offset by lower timber services activity.

Weighted average variable cost per cubic meter increased 3% as a result of higher fuel costs compared to the prior year period. New Brunswick’s adjusted EBITDA in the quarter was £4.7 million compared to £5.1 million in the prior year period as a result of lower timber services activity and the cost increases noted previously. Adjusted EBITDA margin decreased to 26% compared to 28% last year.

Switching over to Maine.

Sales during the fourth quarter totaled £8.6 million compared to £7.6 million in the same period last year. Sales volume excluding biomass decreased 2%, reflecting lower hardwood, pulpwood and softwood sawlog deliveries due to reduced trucking capacity. The weighted average selling price excluding biomass in both the US dollar and Canadian dollar terms increased 16%, compared to the prior year with higher sawlog and pulpwood prices, benefiting from favorable market dynamics.

Operating costs totaled £5.9 million in the quarter, compared to £5.6 million during the same period last year, primarily due to higher harvesting and land management costs.

Weighted average variable cost per cubic meter increased 6% as a result of greater hauling distances and higher fuel costs. Adjusted EBITDA for the quarter was £2.8 million, compared to £2 million during the same period last year. Adjusted EBITDA margin was 32%, compared to 27% in the prior year period.

With respect to Acadian’s financial position, it remains strong ending the first quarter with a net liquidity position of £19.5 million including a cash balance of £7.1 million and our revolving credit facilities, which remain undrawn.

With that I will turn the call over to Adam.

Adam Sheparski

Thank you, Susan.

Acadian is committed to health and safety being our number one priority. We believe that emphasizing and achieving a good safety record is a leading indicator of success of broader business. Acadian’s operations experienced one recordable safety incident during the quarter among contractors and none among employees.

The individual has made a full recovery and returned to work after two days. We remain very committed to maintaining a culture across the organization that emphasizes the importance of strong safety performance.

Acadian posted a solid start to the year benefiting from strong pricing and demand for sawlogs, combined with improved pricing and demand for softwood pulpwood. Deliveries were negatively impacted by reduced trucking capacity, but we expect to catch up on this volume through the remainder of the year.

Although, we faced significant inflationary pressures during the quarter, our focus on merchandising our products to obtain the highest margins available and making improvements throughout the business has begun to take hold.

Switching over to our first quarter results. In New Brunswick softwood sawlog and softwood pulpwood sales, volume increased 39% and 84% respectively as a result of strong softwood lumber market and increases in regional demand for softwood pulpwood compared to the prior year period. In Maine, softwood sawlog volumes remained consistent with the previous year, while softwood pulpwood sales volumes increased 36% year-over-year, although these volumes are relatively modest.

Overall pricing for softwood sawlogs and softwood pulpwood increased 9% and 4%, respectively.

Hardwood sawlog volumes in New Brunswick decreased by 27% due to the reduced trucking capacity discussed earlier with hardwood sawlog volumes in Maine being relatively flat compared to the prior year period.

As I noted, as we move through the remainder of the year, we do expect to catch up on these volumes. We are currently experiencing significant demand for our hardwood sawlogs, including the addition of new customers, which has resulted in hardwood sawlog price increases of 19% compared to the prior year period.

Hardwood pulpwood sales volume in New Brunswick decreased by 30% driven by the reduced trucking capacity, while prices increased 6% compared to the prior year. Hardwood pulpwood sales volume in Maine decreased by 16% due to reduced trucking capacity, while prices increased 7%.

Although, pricing on biomass improved 9% year-over-year benefiting from favorable pricing on export sales, volumes decreased by 12% due to lower domestic sales.

Turning to our market outlook. Interest rates have been on the rise, which may have an impact on longer term demand for end-use products. However, there is a large cohort of the US population entering their home-buying years, a low inventory of homes is for sale and repair and remodel activity is steady.

Together these are expected to drive strong demand in the short to medium-term. Consensus forecast is for approximately 1.61 million US housing starts in 2022 as compared to 1.6 million in 2021.

Inflation expected to continue weighing on financial results, as operating costs such as fuel have increased significantly. Acadian is in the process of recovering some of these additional costs from our customers, although there is a delay in the flow through.

Positive end-use market dynamics combined with benefits from new customer relationships, is expected to support demand and pricing for softwood and hardwood sawlogs for the remainder of the year.

Significant demand and pricing for high-grade hardwood and sawlogs, is expected to have positive impact as inventory is merchandised and delivered to customers during the second quarter. Hardwood pulpwood demand is expected to remain stable through 2022, with increasing customer confidence and market demand for hardwood pulp. Meanwhile, markets for softwood pulpwood are beginning to improve although, an abundance of regional inventories for both softwood pulpwood and sawmill residuals may impact demand over the long term.

Finally, an update on our carbon projects.

The work to develop the forest carbon inventory has continued. The baseline inventory data has been collected and modeling now being performed. Initial estimates for the volume of credits to be developed are expected in the very near term.

The time line for the project has not changed, and Acadian expects to begin receiving proceeds from sales of carbon credits in mid- to late 2022.

While this project is small, in relation to the entire Acadian land base, and originally expected to contribute modestly to cash flow, the current markets for voluntary carbon credits have strengthened and may contribute more than originally expected. Acadian has learned a lot from this project and it is being used to form a foundation for potential future carbon credit developments. We will continue to analyze carbon markets in both Canada and the US, as they develop and ensure we capitalize on opportunities while not negatively impacting the operations of our timberland business.

In closing, supported by a strong balance sheet, diverse markets and a highly capable team, Acadian looks forward to continuing our strong operating and financial performance through the remainder of the year.

We are actively working with our contractors to ensure there is adequate trucking capacity to deliver our products to our customers. As we progress through 2022, our focus will remain on merchandising our products to obtain the highest margins available and making improvements throughout the business to maximize cash flows from our existing timberland assets, while exploring opportunities to grow.

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

Question-and-Answer Session

Operator

Thank you.[Operator Instructions] And your first question comes from the line of Hamir Patel from CIBC Capital Markets.

Your line is open.

Hamir Patel

Hi, good afternoon. Adam, I was just wondering, if you’re seeing any signs that the New Brunswick government may be looking to reassess the stumpage rates they charge in the province?

Adam Sheparski

Yes, nothing official, Hamir. I would say that there has been some more quiet conversations ongoing.

I think the continued pressure is there. And so — but nothing official as of, yet.

Hamir Patel

Okay. Fair enough.

And when you think about maybe the path to monetize the value of your fiber in that region. Is it possible that, at some point perhaps actually building your own manufacturing capacity could make sense, if that’s the only way to actually capture the value that is currently being impacted by their flat stumpage rates.

Adam Sheparski

Yes. So maybe I’ll take and I’ll divide that question into two, if it’s okay.

And if I think about monetizing the fiber, I would separate the two buckets hardwood and softwood. Hardwood has been performing quite well. Markets are quite strong.

And frankly, the volume available in the region is coming down. So as you can imagine, pricing is reinforced upwards, which you’re seeing coming through our results obviously, with 19% increase this quarter.

On the softwood side, we historically would say, that demand should drive prices up for softwood and demand usually comes from investments in sawmills. We’re seeing sawmills in the region starting to increase their capacity.

There’s a couple of mills just across the border in Quebec, which are doing some significant developments. We have some great customers down in Maine, which are doing some significant developments. And given that’s close proximity to New Brunswick, starting to see a flow of fiber actually across the border into Maine.

So I think there’s positives there, which is why we’re still seeing increases in our log prices on the softwood side.

Your last question, obviously, historically, Acadian has never been in the manufacturing business.

We’ll continue to evaluate the market. As you know, it takes years in order to even get a line to build a facility.

So we continue to have conversations at Acadian about all kinds of different ways to increase, not only the value of our timber, but just the value to our shareholders. And so, we’re going to continue to do that.

And those are — that’s one of the conversations that we’ll continue to have.

Hamir Patel

Okay. Fair enough. And, Adam, just the last question I had was, if we did get into a — with rising rates and see housing starts come off, more materially in the US, what do you think the potential downside is to the hardwood lumber prices?

It’s maybe a market a lot of investors don’t follow as closely.

But from what I — as far as I could tell, they’ve inflated quite dramatically over the last two, three years. So I don’t know if you have any data points around maybe where prices are today versus where they’ve been historically and where you see them going.

Adam Sheparski

Yes. No specific data points for you today, Hamir, but I can say that over the last — for Acadian in particular, over the last year, we’ve really started to feel the price increases which has been great.

I think it’s — from our perspective, it’s twofold.

One, just the market increases in pricing, but the team at Acadian has been doing a lot of good work on merchandising their products and making sure that we’re achieving as much as we can out of the tree.

If I think about housing starts, we’re pretty confident that they’re going to continue, just because of the demand. And interest rates going up may have an impact, but the world is in a state of adjustment, with the things going on over in Europe, obviously. Interestingly enough, we’re hearing even potentially even more demand for hardwood in North America associated with that, with the Ukraine-Russia issues that are ongoing.

So I don’t think that — we don’t believe that there is much softness coming on the hardwood side in the near term.

And in our neck of the woods I would say, there’s going to be a continued pressure on supply, meaning that there’s a view that there’s going to be less supply available, which will, obviously, help our hardwood pricing going forward.

Hamir Patel

Yes. Fair enough. Thanks, Adam.

That’s all I have. I’ll get back in the queue.

Adam Sheparski

Thank you, Hamir. Thanks.

Operator

Thank you.

And your next question comes from the line of Andrew Kuske from Credit Suisse.

Andrew Kuske

Thanks. Good afternoon. I guess, maybe the first question, just goes on the pricing pressures that you’re seeing at this point in time and favorable pricing pressures just on an upward bias in the prices you receive.

How do you think about, just your ability to increase your harvest?

And where are you relative to your allowable cut? And how much wiggle room do you have? And then, maybe, a second or related question is, what kind of constraints are you seeing on just really labor on whether it’s truck haulage or being able to get guys out into the forest and take down trees?

Adam Sheparski

Yes.

So as far as our allowable cut is concerned, I would say, our hardwood is probably constrained. We’re going to be able to harvest up to our hardwood AAC, which we disclosed, obviously, in our information form and available for everybody to consume.

On the softwood side, we do have a fair bit of room to cut and increase softwood’s harvesting. And, obviously, we continue to try and find markets for that.

And, hopefully, with the investments that are happening in the region, which should increase consumption by our customers, we’ll start to be able to use that up as well.

As far as labor, obviously, we had some trucking during the quarter. The team has done a lot of good work over the last month or two and we’ve engaged a couple of new trucking contractors and increased our capacity. So, we believe as of today, that we’re in pretty good shape to deliver for the rest of the year.

In general labor has been pretty good, knock on wood. We haven’t had any major issues here in the region. But as far as inflationary pressures, it’s there.

Obviously, we’re feeling it and which is why we’re taking steps obviously to work with our customers and ensure that they’re taking their fair share of it.

Andrew Kuske

Okay. That’s helpful color and context. And then maybe just a broader question.

When you look across the portfolio, is there anything at this point in time that you would put in really an HBU bucket like a higher better use value that may be ripe to monetize and maybe better developed as a real estate play across the portfolio with greater yields than you can get just harvesting the trees?

Adam Sheparski

As far as disposing of properties, I don’t think there’s a significant amount of that available to us. I would say, we’re doing a lot of work across both Maine and New Brunswick with teams. It’s a pretty picturesque landscape even though it is remote with a lot of lakes that have historically not been utilized for HBU.

We are going through a project now and continue to go through a project I guess to nearly evaluate what opportunities do exist. I wouldn’t say they’re material, Andrew. A lot of our focus on large — ability is to monetize the great asset that Acadian has in timberlands revolve more around carbon development or potential carbon development and other uses that you would see traditionally from a timberland business.

Andrew Kuske

That’s very helpful.

And then if I can just sneak one last one in and it’s just on the carbon side and you mentioned this a few times. If we think about the carbon side, we’ve seen some others go forth with plans for carbon capture sequestration and that one’s being very geologic specific. So, how are you thinking about it?

Is it really just from a credit standpoint and being able to transact credits into the future, or are you really looking at the full gamut of things, where — in areas where you may have the appropriate geology. And if you — there’s a numerator that you could capture or they would want to capture? Is that possible on the CCS side?

Adam Sheparski

Mostly just in marketing credits at this point in time.

That’s where we’re spending a lot of our focus. That being said, since we talked even back in February on our last call, the carbon credit markets continue to show improvements. I think when we had this call three months ago, carbon credit pricings were in mid-teens.

And now, we’re in the high 20s based on what we’re seeing on our end. So which is why I made the comments in the call is, it’s changing. And it’s — as we said, this is a training exercise for us and a learning experience.

And we’re going to spend the back half of 2022 really analyzing the other 900,000 acres that Acadian Timber has and trying to determine what’s the best use of that land and specifically as it relates to carbon.

Andrew Kuske

Okay. That’s very helpful. Thank you.

Operator

Thank you. [Operator Instructions] And I’m showing no further question at this time.

I would now like to turn the conference back to our CEO, Mr. Adam Sheparski for any closing remarks. Sir?

Adam Sheparski

Thank you.

On behalf of the Board and management of Acadian, I would like to thank all our shareholders for their ongoing support. Thank you and stay safe. Goodbye.

Operator

Thank you.

Ladies and gentlemen, this concludes today’s conference.

Thank you for your participation and have a wonderful day.

You may now disconnect.




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