Acadian Timber Corporation (OTC:ACAZF) Q2 2016 Earnings Conference Call August 4, 2016 1:00 PM ET
Mark Bishop - President & CEO
Wyatt Hartley - CFO
Brian Banfill - COO
Andrew Kuske - Credit Suisse
Hamir Patel - CIBC Capital Markets
Paul Quinn - RBC Capital Markets
Thank you for standing by. This is the conference operator. Welcome to the Acadian Timber Corp. Q2 2016 Conference Call and Webcast. As a reminder, all participants are in 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 Mark Bishop, President & CEO. Please go ahead.
Thank you, operator and good morning and good afternoon everyone. Welcome to Acadian's second quarter 2016 conference call. As you will have noted in the announcement included in our second quarter press release effective August 03rd, after three years as Acadian's Chief Financial Officer, Erika Reilly has left Acadian to take on new responsibilities within Brookfield Asset Management. In addition Brian Banfill, a member of the senior management team at Acadian since his initial appointment as CFO in 2010 has also left the position of Chief Operating Officer. He will continue to be involved in the Brookfield Timberlands platform going forward. We've been very fortunate to have had such hard working competent and diligent senior managers in both Brian and Erika and on behalf of the entire Acadian team I want to personally thank them for their dedication and significant contribution to Acadian and wish them all the best going forward.
Effective August 03rd, Wyatt Hartley has replaced Erika Reilly as Acadian's Chief Financial Officer. Mr. Harley has been a key member of Brookfield's infrastructure team for the past six years and has held a number of senior finance roles within the organization, including roles where he's had an opportunity to gain significant exposure to our Timberlands platform. Mr. Hartley is a Chartered Accountant and worked at one of the big four accounting firms prior to joining Brookfield. I'm completely confident that Acadian will remain in very confident hands. Wyatt's transition to the CFO role will be immediate and seamless.
So, with that introduction to Wyatt, I'll pass it over to him to proceed with the initial part of the call. Wyatt?
Thank you, Mark and good afternoon everyone. Before we get started, I would like to remind everyone that in responding to a question and talking about our second quarter financial and operating performance, as well as our outlook for the remainder of 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 30, 2016 and other filings of Acadian which are available on SEDAR at sedar.com and on our Web site. I will start by outlining the financial highlights for the second quarter. Then Mark will provide comments about operations, market conditions, and our outlook for the remainder of 2016.
Acadian's operations performed well for the second quarter and continue to benefit from strong New Brunswick markets. Continued improvement in hardwood markets and favorable mix drove our weighted average log selling price up 11% compared to the prior year. While operating conditions were impacted by an extended annual spring thaw which caused much of our harvest and hauling infrastructure to be inoperable for a longer than normal period, we anticipate a return to more typical harvest levels for the remainder of the year. For the first six months of 2016 our payout ratio was 94%, in line with our long-term target of 95%.
Acadian generated net sales of $13.7 million in the second quarter compared with net sales of $15.4 million in the same period last year. Higher selling prices for our products were more than offset by lower sales volumes as the prior year benefitted from better harvesting conditions due to extended winter weather and a shorter spring thaw. Adjusted EBITDA for the second quarter of $2.3 million was down from $3.8 million in the comparable period due primarily to the aforementioned decrease in sales volume. Our adjusted EBITDA margin of 24% was in line with the same period in 2015 as the benefit of improved pricing was offset by higher costs that were mainly attributable to longer average haul distances.
Moving into segment results, net sales at our New Brunswick operation for the second quarter totaled $11.7 million compared to $13.1 million for the same period last year driven by a 25% decrease in sales volume. Harvest volumes were impacted by an extended spring thaw and were lower than the same period last year, which had favorable winter operating conditions extending into the second quarter. The lower sales volume was partially offset by improved selling prices across all products.
The weighted average log selling price was $71 per meter cube in the second quarter of 2016, a 13% increase from $63 per meter cube in the same period of 2015. Adjusted EBITDA for the second quarter was $3.9 million compared to $3.5 million in the second quarter of 2015 with our adjusted EBITDA margin increasing to 33% from 26% in the prior year to the benefit of higher realized log prices partially offset by a 6% increase in variable costs that were mainly attributable to longer average haul distances.
At the Maine operation, net sales for the second quarter totaled $1.9 million compared to $2.3 million for the same period last year. Reduced sales volumes across all products and weaker U.S. dollar selling prices due to weaker markets for softwood/pulpwood were partially offset by the positive impact of the stronger U.S. dollar. In Canadian dollar terms, the weighted average log selling price was $75 per meter cube in the second quarter of 2016, a 3% decrease from $77 per meter cube in the same period of 2015. In U.S. dollar terms, the weighted average log selling price was $58 per meter cube, a 7% decrease from last year.
Adjusted EBITDA for the second quarter was a loss of $200,000 compared to earnings of $400,000 in the same period in 2015 with adjusted EBITDA margin decreasing to minus 9% from 17% in the prior year reflecting a weaker U.S. dollar log selling price and lower sales volumes. Looking at our balance sheet, Acadian's cash position continues to be strong with $19 million of cash on-hand at the end of the second quarter. This represents a $1 million increase from year-end as our operations generated free cash flows in excess of dividends paid. Furthermore, our financial position is solid with net liquidity of $95 million including funds available under Acadian's revolving facility and our standby equity commitment was fulfilled. During the quarter, we declared a dividend of $0.25 per share consistent with the prior quarter and up 11% from prior year.
I will now turn the call over to Mark.
Thank you, Wyatt. During the quarter Acadian’s operations experienced five recordable incidents; one involving an employee and four involving a contractor, while the incidents resulted in minimal lost time, the resulting injuries were also relatively minor in nature and the individuals are expected to make a full recovery. We continue to focus on maintaining our strong commitment to safety performance.
As Wyatt mentioned, Acadian's weighted average realized log selling price during the second quarter increased 11% year-over-year, as stronger prices and higher hardwood log proportion in New Brunswick as well as a positive impact to the weaker Canadian dollar on U.S. denominated sales more than offset weaker prices for softwood in the Maine market. Softwood sawlog markets remained relatively stable with a 1% increase in softwood sawlog prices relative to the second quarter of last year. Hardwood sawlog markets were strong with weighted average selling prices increased 18% primarily reflecting strong pricing from the New Brunswick operations.
Selling prices for hardwood pulpwood increased 6% year-over-year while softwood/pulpwood decreased 9% year-over-year. Continued strength in hardwood/pulpwood markets was partially offset by weaker softwood/pulpwood markets in Maine. Biomass markets remained strong, with margins increasing 56% year-over-year, primarily reflecting an increase in the proportion of sales to export markets from the New Brunswick operations.
U.S. economic growth has been somewhat uneven over the first half of the year, but the economy continues to expand led principally by consumer spending. Wage growth is accelerating as the labor market continues to move toward full recovery with employment openings remaining close to record highs. Reflecting post-Brexit related volatility, elevated downside risk to the global economies and strengthening U.S. dollar, expectations for the current lower interest rate environment have been extended. These fundamentals continue to support an on-going gradual recovery in U.S. housing starts and strong residential improvement activity. Consensus expectations continue to call for a 10% year-over-year improvement in total housing starts for U.S. for 2016 and over 12% for 2017. Industry forecasters predict the U.S. lumber and sawtimber demand will need to grow above 5% per year over the next couple of years to support expanding domestic construction needs.
Uncertainty over the lumber pricing environment remains heightened with the Canada-U.S. softwood lumber dispute moving towards the end of the cooling-off period in October and paving the way for potential imposition of countervailing duties. While the timing, and ultimately the terms of any settlement of this latest dispute are unclear, there is no evidence to suggest treatment of Canada's maritime lumber producers during the current dispute will be materially different from past experience where the region experienced lower relative countervailing and anti-dumping duties than the rest of Canada during the litigation period, followed by export tax and quota exemption during the 2006 Softwood Lumber Agreement. This differential treatment is due primarily to the significantly greater proportion of their log supply sourced from private lands in the Atlantic region relative to the rest of Canada.
Today almost all regional sawmills continue to operate on full shifts and appear to be carrying inventories at typical seasonal levels. In isolation of any imposed duties, softwood lumber prices are expected to improve modestly on a full year-over-year basis. While softwood sawlog markets for New Brunswick remain steady, Maine sawmills continue to face challenges with demand for softwood sawmill residuals. Hardwood sawlog markets remained strong and steady during the second quarter and are expected to remain near current levels. The strength in hardwood pulpwood pricing has persisted, although Acadian is experiencing longer average haul distances to maintain supply levels, resulting in modest margin impact.
Biomass markets remain stable in New Brunswick, with Acadian able to benefit from ongoing growth in export markets. Maine biomass markets are still in transition following the idled pulp and biomass generation capacity over the past year. However, markets have seen some stabilization following the recent state sponsored assistance which saw the re-start of a portion of the previously idled biomass generation capacity. In conclusion we'd like to take this opportunity to remind our investors that Acadian benefits from a strong balance sheet, diverse markets and a strong operating team that remains committed to continuously improving our financial and operating performance. We thank you for your continued support of Acadian Timber.
That concludes our formal remarks and we’re available to take any questions from participants on the line, operator?
We will now begin the question-and-answer session. [Operator Instructions] The first question is from Andrew Kuske of Credit Suisse. Please go ahead.
I guess the first question, just to you Mark and just on the management shuffle. This is pretty consistent with what you guys have done in the past and so we really shouldn't read anything into that, really beyond just the typical rotations, if I go back say 10 years ago, Bryan Davis was CFO at that point in time and now the CFO of BPY. So, this is fairly typical rotation from how you've done things in the past.
You're exactly right, and I appreciate your comment. I know your coverage of BI Prop. That gives you relative to some of the other analysts a little bit more insight into Brookfield and how the company is operated but you're right. Following Bryan Davis, Joe Cornacchia was CFO, and Joe moved onto other opportunities within Brookfield and clearly that's the case with Brian and Erika. That the infrastructure platform within Brookfield as you're probably aware has broadened into several different segments and the transportation segment is now established in Vancouver and Erika has moved into a role within that Group, and it's a great opportunity and now that that team is established, here was a natural transition. And clearly now we've moved Wyatt in something I'm very excited about. Wyatt is onshore Vancouver boy and now he's obviously based in Toronto but we're very happy to have him part of the team, he's very familiar with Timber. So, it's another natural transition to provide others within Brookfield Public Company experience at a senior level. So that’s exactly what is what happened and I wouldn't read really anything more into it than that.
And then maybe just more specifically on New Brunswick, if you could give us an update on just the general regulatory environment in New Brunswick. I believe a month or two ago we had a group of aberrationals launch a lawsuit against the government? And then just finally if you've had any infestation issues with bug, worm or anything else, I understand?
We on the regulatory front we're really not seeing anything dramatically changing, the government is always looking at tweaking rates under the Crown Services Agreement and those changes move very-very slowly and have a very small impact on us, obviously in how we operate and -- we overtime we will adjust our level of staffing and activities around those rates but really there's not any major impact to us at this time. On the aberrational front again no impact on us clearly the government is seeking opportunities to accommodate in various ways, but I would say there is no visibility on really any impact to our operations at this time all that at least not that I am aware of.
And as this bug, worm, there was some media coverage of a flight in late July that crossed from Quebec into the North Maine and also touched down in Cramlington in the area about 50 to 60 kilometers away from our operations. So it was a somewhat of a spectacular event and an usual event given the sort of a density of the flight. But we continue to monitor it as you are probably aware we participate in the program sponsored by the New Brunswick government as most or all of the producers do and many of the public do in terms of sampling and learning the officials and industry participants as to where it hit the station and deposition activity looks like it's rising.
But we don't have any major impact in our operation at all, we've seen a little bit of the higher defoliation rate, but really the nearest episode or infestation is about 60 kilometers away and the government program is very intensively attacking that with the aerial spray activity. And we continue to build into our expectations our management expectations that the activity around harvesting mature for a spruce in any areas that would be impacted, but at this point we're really not seeing anything to be overly concerned about.
[Operator Instructions] The next question is from Hamir Patel of CIBC Capital Markets. Please go ahead.
Mark it looks like Brazil is soon going to list some of the farmland ownership restrictions that I guess have been in place there for the last 15 years, do you think that might open up some sort of growth opportunities for Acadian?
Well, I guess on the first part of you comment, I guess we were somewhat cautious towards what any of the latest kind of announcements or discussions might indicate, because we've seen iterations of this before. But certainly we are expecting to see at some point some better conditions for foreigners to invest in Brazil whether it makes any easier it really comes down to finding the attractive investment opportunities in Brazil and we’d like to think that there will continue to be attractive opportunities of scale where as you know we're in the market today, we continue to have a good visibility on our pipeline. How Acadian will participate in any of those? It really does depend on several factors including the foreign exchange regulations, but also on the profile of the asset that we're looking at and ultimately the valuation whether it's appropriate for Acadian or not. So as again you're aware, Brazil is not the only median outside of North America that we consider having Acadian participate in investments, but it's certainly the area that we're most active in today outside of North America. So, I hope your optimism is sort of well founded. And if we do see better opportunities but it is too early to really say that we should get excited about Brazil for Acadian yet.
The next question is from Paul Quinn of RBC Capital Markets. Please go ahead.
And it's been a busy one, so, I might have missed some of the stuff. But just on the management shuffle, I can understand this CFO change, that's pretty normal. But Brian's departure from COO level is that -- what's the reason for that? Or is that a belief on your part that you don't need that position and it's just a cost cutting move from Acadian?
I would say it's sort of a mix of both Paul. I mean as you're aware Brian's COO role was added a couple of years ago, at the same time we shifted Erika into the CFO role and he's been involved with Acadian for several years, he continues to be on the Brookfield Timberlands team. So, I wouldn't look at it as a overall, a removal of that resource at this time. But it was and has been for a period of time I would say more than we needed at Acadian at the time but we all work on a team basis and we can draw on the resources whenever we need them. So, it isn't really a significant move in terms of the actual time involved in Brian's contribution to Acadian and with Wyatt coming in as well some of that work is transferred to Toronto with Wyatt and his team. So, there's a few other people behind Wyatt that are now involved. So, it's probably not quite a significant a move as it may appear.
Okay. And not to put down the senior management but it's really that operational management strength that really gives the Acadian its power is there any changes on that side?
Any changes in Acadian's operational management?
Not at all. Luc is still running the New Brunswick operation and Marcia the Maine operations. And I believe you've met them both but we have very strong leadership and very deep capabilities in their teams in both locations.
And just lastly, just as you probably made a comment but I was another call. But just overall North American timberland markets and activity levels we haven't seen that much, but apparently there's lots of deals that they're in the pipeline, that should close in Q3 and Q4, is that your expectation and can you comment on what you're seeing in terms of pricing?
Yes, so you're right Paul. I mean this year is shaping up to be a stronger year transaction wise than last year in the typical or the larger regions vis-à-vis Northwest and U.S. South in particular but some of the other smaller regions as well. We have I think if you read some of the industry reports that follow timberland activity, you'll see that these are several pending transactions in these areas. We'd continue to see the same kind of transaction, market conditions and processes quite frankly. So, a lot more of these processes are one round processes, still quite widely attended is our understanding. It can be difficult to read into actual valuations as you're probably aware based on the lack of visibility that outsiders may have to inventories that are part of typically the significant part of a lot of these transactions, but valuations continue to be I would say wholesome and discount rates continue to be very aggressive.
This concludes the question-and-answer session. I would like to turn the conference back to Mark Bishop for closing remarks.
Thanks operator and again thank you all for attending the call. I know it's a busy time with several other companies reporting, so I appreciate your attention and hopefully you can enjoy the rest of the summer after the reporting season. Thanks again.
This concludes today's conference call. You may now disconnect your lines. Thank you for participating and have a pleasant day.
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