Acadian Timber Corporation (OTC:ACAZF) Q4 2015 Earnings Conference Call February 11, 2016 1:00 PM ET
Mark Bishop - CEO
Erika Reilly - CFO
Brian Banfill - SVP & COO
Hamir Patel - CIBC Capital Markets
Paul Quinn - RBC Capital Markets
Andrew Kuske - Credit Suisse
Thank you for standing by. This is the conference operator. Welcome to the Acadian Timber Corporation 2015 Fourth Quarter and Year-End Results Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]
I would now like to turn the conference over to Erika Reilly, Chief Financial Officer. Please go ahead.
Thank you operator, and good afternoon everyone. Welcome to Acadian's fourth quarter conference call. Before we get started, I'd like to remind everyone of the following. This conference call is being webcast simultaneously through our website at www.acadiantimber.com, where you can also find a copy of the press release including the financial statements.
Please note, that in responding to questions and talking about our fourth quarter financial and operating performance, as well as our outlook for 2016, 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 24, 2015 and other filings of Acadian with securities regulatory authority which are available on SEDAR at www.sedar.com and on our website.
I will now start by outlining the financial highlights for the quarter, then Mark Bishop, Acadian's Chief Executive Officer, will provide comments about our operations, market conditions, business development activities, and our outlook for 2016. Acadian's operations ran well during the fourth quarter, with some weather related challenges but good overall productivity.
Net sales for the fourth quarter totaled $21.7 million, a $0.8 million or 3% decrease compared to the same period of 2014. The year-over-year decrease in net sales is attributable to a 14% in sales volumes offset by a 9% higher weighted average log selling price. The selling price improvement was spread across almost all of our log products produced by Acadian with softwood and hardwood sawtimber seeing gains at 7% and 11% respectively, and hardwood pulpwood gaining 14%.
Solid top line performance was minimal per unit cost increases kept adjusted EBITDA effectively unchanged at $7.4 million as compared to $7.5 million during the same period of 2014. It also drove an improvement in the adjusted EBITDA margin which climbed 34% from 33% in the same period last year. G&A
Free cash flow was up 1% from the fourth quarter of 2014 to $6.4 million. For the whole year -- year as a whole, free cash flow was up $4.4 million and the payout ratio fell to 70% from 78% in the prior year even with a 12% year-over-year increase in dividends declared.
Acadian's net income totaled $13.8 million or $0.82 per share for the fourth quarter, down from $38.4 million or $2.29 per share from the same period in 2014. The year-over-year decrease primarily reflects a $31.4 million decrease in fair value adjustments and a $6.7 million decrease in the gain on revaluation of roads and land, partially offset by a $14 million decrease in deferred income tax expense.
The unusually large non-cash fair value and revaluation adjustments in 2014 reflected a significant year-over-year decrease in the discount rates Acadian's independent third-party appraiser used in the financial models that are the primary basis used to estimate the value of the timberlands. In 2015, the discount rates were almost unchanged and the changes to fair value primarily reflect updated long-term harvest plan and log price assumptions. I will now briefly review the segmented results for Acadian's New Brunswick and Maine operations.
Net sales from our New Brunswick operation for the fourth quarter totaled $15.2 million compared to $15.6 million for the same period last year. A 6% increase in the average log selling price was more than offset by less than -- was more than offset by the 11% decrease in sales volumes. The volume decrease reflects reduced harvest during the quarter in order to ensure the full year harvest aligns with the target annual allowable levels.
The weighted average selling price across all products was $68.73 per cubic meter in the fourth quarter of 2015, up $4.16 per cubic meter from the same period last year. This year-over-year increase in the average log selling price reflects improved selling prices for all products with a 13% gain in hardwood pulpwood leading the way.
Costs for the fourth quarter of 2015 were $9.7 million as compared to $10.2 million in the comparable quarter of 2014. The decrease in total cost was due to lower harvest volumes. Variable costs per cubic meter increased just 1% from the prior year.
Fourth quarter adjusted EBITDA for the New Brunswick operation was $5.5 million, almost unchanged from $5.4 million compared to the fourth quarter of 2014. Adjusted EBITDA margin increased to 36% from 35% in the prior year. At the Maine operation, sales volumes were down 19% year-over-year, while Canadian dollar based log selling prices were up 16%. The lower sales volumes reflect decreased access to softwood stand due to warmer temperatures in 2015 and 2014, and weaker markets for softwood pulpwood.
The weighted average log selling price in Canadian dollar terms was $81.52 per cubic meter in the fourth quarter, up $11.20 per cubic meter from $70.32 in the same period of 2014. Weighted average log selling prices in U.S. dollar terms decreased 1% year-over-year. With the decreased sales volume almost fully offset by the log selling price improvement, net sales for the fourth quarter of 2015 fell just $24 million from the prior year to $6.5 million.
Costs for the fourth quarter were $4.2 million compared to $4.6 million in the same period of 2014. This reflects lower harvest volumes partially offset by the foreign exchange impact of the weakening Canadian dollar on the main timberland U.S. dollar denominated costs, and 4% higher variable costs per cubic meter because of longer haul distances.
Adjusted EBITDA for the Maine operation for the fourth quarter was $2.3 million compared to $2.4 million for the same period of 2014. Improved log prices increased the adjusted EBITDA margin to 36% from 34% in the prior year.
Now switching over from the operations to our cash position, at the end of the fourth quarter, Acadian had a cash -- cash balance totaling $17.7 million, which is $5.1 million higher than the cash balance at the same time last year. The primary driver of this increased cash balance was the generation of $7.4 million of free cash in excess of dividend payments over the last 12 months offset by an increase in working capital resulting from a decrease in the royalty related amount tabled to the New Brunswick government and lower amounts table to contractors as a result of decreased harvest levels in the fourth quarter compared to the prior year.
The current cash balance is $1.7 million higher than the balance at the end of third quarter of 2015 reflecting the strong free cash flow generation during the quarter. As at December 31, 2015, Acadian had net liquidity of $98.5 million, including funds available under Acadian's revolving facility, and our standby equity commitment with Brookfield. This compares to $79.9 million as at December 31, 2014.
The increased liquidity reflects the higher cash balance along with the benefit of the weak Canadian dollar on the U.S. dollar base revolving facility and equity commitment.
During the quarter we declared a dividend of $0.25 per share to our shareholders, an increase of $0.225 [ph] per share reflecting the strong cash generation during 2015 and expectation of continued strong performance.
I will now turn the call over to Mark.
Thanks, Erika. During the quarter, Acadian's operations experienced two recordable incidence, one involving employee and one involving a contractor. The resulting injuries were minor but one did result in lost time. We continue to work with our contractors and employees to ensure the highest standards of workplace safety are maintained and are pleased to report that the employees at the Maine operations have now completed incredibly impressive 15 years without a recordable incident.
As Erika mentioned earlier, Acadian's weighted average log selling price for the fourth quarter increased 9% year-over-year. Realized Canadian dollar prices assisted by the impact of the weaker Canadian dollar on the results for the Maine Timberlands improved for all log products. Stronger markets and the weaker Canadian dollar resulted in the 7% and 11% increase in softwood and hardwood sawlog prices respectively relatively to 2014. Prices for hardwood pulpwood in New Brunswick remains strong with selling prices increasing by 13% year-over-year, while markets were less robust at the Maine operations with selling prices gaining just 1% year-over-year on a U.S. dollar basis.
Softwood pulpwood continues to be our most challenging product as the number of customers operating in the region continues to decline. But as we've noted many times in the past, this product makes only 6% of our total sales in 2015. Biomass markets were strong, particularly in New Brunswick where the realized margin per ton on this product increased 66% year-over-year.
Acadian's financial outlook for 2016 remains positive while there are growing expectations of moderately slower global growth in 2016, the foundation for its steady U.S. economic growth remains strong improving breadth of job growth across the U.S., a steady increase in household formations and meaningful reductions in excess housing inventories point to a continued steady recovery in housing starks, consensus expectations are currently calling for a 15% year-over-year increase for 2016 and a further 10% for 2017.
Although the whole construction segment is expected to grow meaningful in 2016, as a result, we expect benchmark lumber prices should remain flat reflecting accommodation of weak offshore export markets leading to export volumes being redirected at domestic markets and U.S. lumber mill capacity additions. In addition, the combination of the weak Canadian dollar and removal of the softer lumber duties due to the expiry of the accounted U.S. Softwood Lumber Agreement is expected to drive continued strong mill utilization rates in Canada.
While we anticipated Acadian's regional sawmill customers will continue to operate at current strong utilization levels through 2016, most did start the New Year with high log inventories reflecting seasonally favorable logging conditions through part of -- through the latter half of last year. While we anticipate some ongoing challenges for softwood sawmill residuals in Maine, we expect to see ongoing strong demand for softwood sawlogs in the region, with stable pricing.
Markets for hardwood sawlogs are expected to remain at current favorable levels, while demand and pricing for hardwood pulpwood may experience some moderation, at least in the near term as the region adapts to announce mill closures in Maine and transitions to alternative markets driven by new capital investment. Softwood pulpwood markets are expected to remain Acadian's most challenging in 2016, however, as we noted before, this segment continues to represent a minor proportion of operating earnings.
The long term outlook for biomass markets remains generally positive although near term headwinds are expected due to reduced natural gas pricing and lower regional biomass plant operating rates in Maine.
We have continued to pursue development opportunities in the U.S., Australasia, and South America, in support of Acadian's growth strategy as we've noted on several previous conference calls. With continued aggressive competition for opportunities, many of which have been relatively small with unattractive cash yield profile, our focus has shifted more aggressively to opportunistic proprietary development opportunities.
In an effort to surface value in this market, we announce the February 4, 2016, that a review of strategic alternatives was initiated by Acadian's Board of Directors which may include among other things a merger or other business combination, a sale of all of our parts of its business or other strategic transaction. Regardless of the outcome of this process, Acadian's shareholders can be confident that we've remained focused and disciplined in our efforts to protect and maximize shareholder value.
In closing, we're very pleased with Acadian's exceptionally strong operating performance in 2015. Despite the recent challenges in pulpwood and biomass markets introduced in late 2015, we anticipate that the regions diverse and resilient markets, Acadian's strong operating team and its balance sheet will drive continued strong operating results.
We thank you for your continued support of Acadian. That concludes our formal remarks, we're now available to take any questions. So I'll put it back to you operator.
[Operator Instructions] The first question comes from Hamir Patel of CIBC Capital Markets. Please go ahead.
Hi, good afternoon. Mark, as Acadian works through the strategic review, do you think there is a minimum amount of Timberland that the company needs to own if it ends up remaining in the public market?
That's a good question Hamir. I mean, clearly we're looking at several different alternatives and we believe we need a substantial platform in any event and is always the case in our strategic initiatives we're looking at scaled opportunities and would always want to maintain a scaled platform wherever we operated. So hard to answer that question because we're not able to get into any details of our review but I wouldn't expect we would operate a very small stub of an asset within Acadian if that's your question.
Okay, thanks for that, that's helpful. And just, I guess more of a higher level question of global timber markets, you may not know the answer to this but I thought I'd run it by you. Do you have any sense as to what the real world impact has been for Timberland transaction values in places where we've seen negative interest rates like London and Sweden?
I mean there has not been for lot of transactions in a lot of these areas that are a public or be of any scale that are really sort of indicative, so it's hard to say.
Fair. And just a final question for Erika, in the press release you attributed the positive fair value adjustments, it's been largely driven by changes to the harvest plan and long price assumptions, how much of that uplift came from the harvest plan? And maybe if you could talk a bit through some of the major changes there, both in terms of region and maybe mix and volumes over long term?
I think -- I don't have the numbers right in front of me in terms of the split between the amount attributable to the revised harvest plan and the amount attributable to the log pricing assumptions. But I would say about 60% or so is attributable to the revised purpose planned and the rest I would say -- a lot of it, that factor as well driven. But I would say the majority would be related to the revised harvest plan and that revised harvest plan in details would be provided in our 2016 annual information form which will be made available shortly here. So that should provide a bit more detail.
I mean anything you could speak to with that because we probably won't get that before…
Is that coming out today or…
Hamir, this is Brian, I can jump in a little bit on that. So the revised harvest plan is really driven out of the New Brunswick operations where during 2015 just as part of our really five-year process when we go back and we take a good look at what our Timberlands are yielding and what our plot samples are providing in terms of data, both the growth of the Timberlands. We completed that process in 2015 and found that the silver culture work that was done in the early 80s really has been concurbiting [ph] more to growth on a number of the stands that we had expected. And that's resulting in significantly higher productivity than we had built into our models and that should really start to come in and start to benefit the business more in 15 to 20 year timeframe. So it's not something -- you're not going to see the harvest volumes jump up in the next five years but in longer term projections it does make a difference and they are definitely well within the modeling periods of appraiser.
Okay, thanks Brian, that's helpful. I will turn it over.
The next question is from Paul Quinn of RBC Capital Markets. Please go ahead.
Thanks very much, morning, just a couple of questions. One, when is with respect to the strategic review and the timing of that, I mean we've seen timber markets over the last number of years be quite strong and it seems like we've got a little bit of a softening. So maybe you could just discuss the overall -- what you assess the overall conditions with the market and then address the timing of why now for the strategic review and why isn't it something you guys looked at a couple of years ago when markets were probably stronger?
Paul, its Mark. I assume when you refer to markets you're referring to Timberland markets. And I would say that -- and I think you're right, the Timberland markets continue to be very robust, there are not lot of scaled properties on the market today but there have clearly been several transactions recently completed at very high valuations that has been public, been public through various industry publications. So we continue to see an awful lot of capital focused on the asset class and while we may have seen some tampering of North American softwood lumber markets, the Timberland market continues to be very robust.
In terms of right now, I mean, we have spoken every quarter I guess for several quarters and certainly all of you -- all of the analyst have commented in various space on our initiatives to grow Acadian through missions aligned with the preferred [ph] timber initiatives. And clearly we haven't been successful in finding those value opportunities. And, so the transition is I think a natural month, and that we've broadened our view to encompass a number of potential initiatives and outcomes, and including sales. But we believe the market remains very strong.
Okay. And then just following up, it looks like from a transaction standpoint there is quite a few Timberland transaction for the path and the state of Maine, so I suspect that piece of Acadian would be readily salable, we haven't seen very many transactions at all at News Brunswick, even Eastern Canada. Is there a buyer for those assets in New Brunswick?
I'm not sure that's something I can answer Paul. I mean, I think we are seeing buyers in most markets once we've seen transactions made public, it's hard to know. You're correct, there hasn't been a lot of recent transactions but now-a-days, an interesting -- very strong market as you can see from our results, we continue to perform in a very steady, strong manner. So I'll expect there will be interest in both markets.
Alright, that's all I have. Best of luck with the review.
[Operator Instructions] The next question is from Andrew Kuske of Credit Suisse. Please go ahead.
Hi, good afternoon, I guess good morning for you still. Just on the strategic review, I know the press release said that the Board of Directors initiate the strategic review but maybe some clarification on that. Did the BAM appointees on the Board effectively -- would they refuse from that and was the independent Board or was it just the Board on mass?
I think as you can see from the press release, there was a special committee that had been struck ahead of this review. And that special committee is comprised of independent directors, and they were the group that put forth their support to go ahead with a review.
Okay, I appreciate that. And I guess just looking at this very broadly, arguably you tried to discount to a number of the other players who have come down a different kind of path, whether that works out within a longer term basis or not, so it remains to be seen. But I guess we'll look at -- you're like shareholder, they sold island, they sold Longview, Acadian's been at the portfolio, really the longest of everything and obviously there is a private funds business, so is this really a broader reassessment from their activities in -- that combined with just a valuation disconnect on Acadian shares?
Sorry, when you say there are activities…
You sold products through the BAM lines, like obviously they divested a bunch of things over the years, and that's not island at [ph] Longview, they still have the private funds business, they still have Acadian. They are just trying to reconcile the public-private market divide and service not from Acadian, I mean that's -- I guess that was jist of it but is there something more broader from a BAM standpoint of exiting this class of assets altogether?
That's a good question Andrew. I think as we've noted in all of that sort of previous conference calls, we continue to remain active in our initiatives to grow our platforms, both in North America and in South America, and continue to have private fund capital available to do so. So we're still very active in Latin America, and we're still very pursuing as we characterized in our press release for the quarter, pursuing opportunistic larger transactions that are more proprietary oriented. Participating in smaller auctions is costly, and we don't think so far that it's going to head -- it's going to lead us to where we want to be in the near-to-medium term. We do expect that there will be very interesting opportunities in Timberland and BAM certainly is very supportive of continuing to maintain an active pipeline and continue to look for those opportunities. But clearly we've surfaced value, you've noted that track record and we'll continue to do so on either side of the trade works appropriate.
Okay, that's helpful. And then, maybe just some questions since it relates to News Brunswick and looking at just -- I guess the overall harvest portfolio, the harvest done in Q4, I guess complied New Brunswick and Maine. Was there any changes in what you're harvesting, was there any high grading efforts or was it really just -- you are able to harvest lots and you just had much better pricing at the end of the day and there wasn't really any high grading of the actual of what you were cutting down?
Yes, I know that's right. It's an interesting work. But no, I mean, we're very focused on harvesting our sustainable profile. And very -- obviously, focused on servicing value in any way we can within the year, we have some flexibility to do that but we are always coming back and our teams are always coming back to making sure we're harvesting the profile. So it certainly win suggestors [ph], there is high grading of any sort going on.
Okay. And then just finally, just in New Brunswick, there has been some media reports about the drop in royalties to the government and there is a debate on what that quantum is. And then some people said within that marketplace, I guess what are you seeing on the ground at New Brunswick and how do you look at that region for the next few quarters?
The market as a whole at New Brunswick still remains very strong. I think as we've noted, there is higher than -- inventories then we like for this time of year but we're certainly working through that and we're seeing all of our customers continue to operate at high utilization levels. So we're seeing surprisingly still very strong conditions, given those high inventory levels, and clearly we need to see a pretty robust and active construction season to continue to see that uptick. But that's certainly what we're expecting to see so far. With respect to the royalties, I think you've seen the same information we have and just to remind you that they are actually quite a small part of our overall business. So any minor change there and so far they don't look to be substantial, we don't expect to be impacting us in any significant or material way.
Okay, that's great, thank you.
This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Mark Bishop for closing remarks.
Okay. Well, thank you all again for dialing-in and for your support to Acadian. And we look forward to talking to you next quarter, and enjoy your day.
This concludes today's conference call, you may now disconnect.
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