Acadian Timber Corp. (ACAZF) CEO Adam Sheparski on Q4 2021 Results - Earnings Call Transcript

Feb. 10, 2022 4:54 PM ETAcadian Timber Corp. (ACAZF), ADN:CA
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Acadian Timber Corp. (OTCPK:ACAZF) Q4 2021 Earnings Conference Call February 10, 2022 1:00 PM ET

Company Participants

Susan Wood - Chief Financial Officer

Adam Sheparski - President and Chief Executive Officer

Conference Call Participants

Andrew Kuske - Credit Suisse

Paul Quinn - RBC Capital Markets

Operator

Thank you for standing by. Welcome to the Acadian Timber Corporation’s Fourth Quarter 2021 Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, today’s program is being recorded. And now, I would like to introduce your host for today’s program, Susan Wood, Chief Financial Officer. Please go ahead.

Susan Wood

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 2021 financial and operating performance, the outlook for 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 will begin with some comments on our financial results for the fourth quarter and year ended December 31, 2021. Then Adam will add some further remarks on the business, market conditions and the outlook for 2022.

Sales for the fourth quarter were $25.9 million, an increase of $1 million when compared to $24.9 million in the prior year period. The weighted average selling price excluding biomass increased 7% year-over-year, benefiting from favorable operating conditions and increased sawlog pricing. Sales volume, excluding biomass decreased 7% due to lower hardwood pulpwood sales. Operating costs of $19.8 million in the quarter were $1.7 million higher than the $18.1 million in the prior year due to higher harvesting activity in Maine and increased timber services in New Brunswick. Weighted average variable costs, excluding biomass, increased 10%, reflecting higher log processing and fuel costs, partially offset by a stronger Canadian dollar.

Adjusted EBITDA totaled $6.3 million during the quarter as compared to $7.3 million in the prior year period. Adjusted EBITDA margin for the quarter was 24% compared to 29% in the fourth quarter of 2020. The decrease in EBITDA margin was mainly driven by reduced sales volumes in New Brunswick, combined with lower gains on Timberland sales in Maine.

Our net income for the fourth quarter was $6.5 million compared to $15.3 million in the prior year period. The variance is primarily due to a combination of lower gains on non-cash items, such as unrealized foreign exchange on long-term debt and fair value adjustments in 2021 as compared to 2020. We generated $5.1 million of free cash flow and declared dividends of $4.8 million to our shareholders during the fourth quarter, which resulted in a payout ratio of 94%.

With respect to our annual results, Acadian performed well throughout 2021 despite several challenges, including unseasonably warm weather in the first quarter, the impact of sawmill residuals on the softwood pulpwood markets and increased fuel prices. Acadian’s operations benefited from strong demand for softwood and hardwood sawlogs driven by favorable end use markets.

Sales for 2021 were $95.7 million compared to $91 million in 2020. Acadian’s weighted average selling price, excluding biomass, increased 4% with a higher value product mix and strong sawlog prices. Sales volume, excluding biomass, decreased 5%, primarily due to lower softwood pulpwood sales due to the competition of sawmill residuals, and to a lesser extent, lower hardwood pulpwood sales due to increased regional inventories. Adjusted EBITDA for the year ended December 31 2021 was $22.5 million compared to $21.5 million in 2020, while adjusted EBITDA margin was 23% compared to 24% in the prior year. We generated free cash flow of $16.9 million in 2021 compared to $15.2 million last year.

I will now move into the fourth quarter results for our New Brunswick operations. Sales for our New Brunswick Timberlands were $18 million compared to $19.3 million in the same period of 2020. Sales volume, excluding biomass, decreased 23% due to reduced softwood sawlog and hardwood pulpwood sales partially offset by an increase in hardwood sawlog sales driven by strong demand and increased timber services activity. The weighted average selling price, excluding biomass, increased 6% as a result of strong hardwood sawlog prices and volumes. Operating cost in the fourth quarter totaled $13.2 million compared to $12.9 million in the prior year period. The increase in operating cost is a result of increased timber services activity and higher land management costs partially offset by lower sales volume.

New Brunswick’s adjusted EBITDA in the quarter was $4.6 million compared to $6.5 million in the prior year period, with adjusted EBITDA margin decreasing to 25% compared to 34% last year. The decrease in EBITDA and EBITDA margin was a result of lower sales volume in the fourth quarter as compared to the prior year period.

Switching over to Maine, sales during the fourth quarter totaled $8 million compared to $5.6 million in the same period last year. Sales volume, excluding biomass, increased 39% year-over-year due to higher softwood and hardwood sawlog sales driven by favorable operating conditions and strong demand. The weighted average selling price, excluding biomass, in U.S. dollar terms increased by 8% year-over-year with higher sawlog prices benefiting from favorable market dynamics. Operating costs totaled $6 million in the quarter compared to $4.7 million during the same period of 2020 as a result of higher harvesting activity. Weighted average variable cost, excluding biomass, decreased 4%, benefiting from a higher proportion of softwood in the mix, combined with a stronger Canadian dollar. Adjusted EBITDA for the quarter was $2.1 million compared to $1.3 million during the same period last year, while adjusted EBITDA margin was 26% compared to 24% in the prior year period.

Acadian’s financial position remains strong ending the fourth quarter with a liquidity position of $19.8 million, including a cash balance of $7.3 million and our undrawn revolving credit facilities.

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

Adam Sheparski

Thank you, Susan. The safety remains the number one priority at Acadian. We are extremely proud to announce that there were no recordable safety incidents among employees and contractors during the year. We believe that emphasizing and achieving a good safety record is a leading indicator of success in the broader business. And I would like to congratulate the entire team on this tremendous achievement.

2021 was once again another transformative year for Acadian. While continuing to operate through the COVID pandemic, the new management team was finalized and full integration to a standalone company was completed, all while delivering solid operating performance. During the year, market demand for our products remained strong, with the number of new customers beginning to take delivery, which has had a positive impact on pricing. Although Acadian experienced some headwinds in the form of unseasonal weather challenging pulpwood markets, with significant increases in fuel costs, the financial results for the year demonstrate the stability of the Timberland business.

Also during 2021, Acadian executed its first carbon development and marketing agreement to develop voluntary carbon credits on the portion of the Maine Timberland that is subject to a working forest conservation easement. While this project is relatively small and expected to contribute modestly to cash flow and have little impact on operations, it forms the foundation for further carbon credit development. Although we are still a few months away from the development of our first credits, the project remains on track and we should have additional insights at the end of the first quarter.

Before I turn to our fourth quarter results, yesterday, we announced that Acadian would be implementing both a dividend reinvestment plan and the normal course issuer bid. We believe the DRIP allows Acadian to assist in the facilitation of shareholder support in the company and allows us to remain poised to pursue potential strategic opportunities. Instituting the NCIB enables us to acquire common shares when the market price represents a desirable use of capital to increase shareholder value. However, given the liquidity of Acadian stock, we expect that we will be somewhat limited in our ability to repurchase shares through the life of the program.

Now, turning to our fourth quarter results, operating conditions during the quarter were favorable across both New Brunswick and Maine. As Susan mentioned earlier, Acadian’s weighted average selling price, excluding biomass, increased 7%, while sales volume decreased 7% compared to the fourth quarter of 2020. Softwood sawlog sales volume remained steady year-over-year on a consolidated basis, with increases in Maine offset by decreases in volume in New Brunswick. Improvements in Maine were driven by favorable operating conditions combined with the prior year period being impacted by temporary weather-related road closures. Higher inventory levels in New Brunswick, combined with strong prior year period drove most of the declines in volume.

Softwood sawlog prices increased 9% in Maine or 13% higher in U.S. dollar terms and were steady in New Brunswick. Increases in softwood sawlog prices to customers were partially offset by a higher proportion of lower value softwood in the mix. We experienced increased demand for our hardwood sawlog as sales volume increased 13% and hardwood sawlog prices were 18% higher when compared to the prior year period. Hardwood sawlog sales and pricing are being driven by strong demand in both appearance and industrial grade lumber markets throughout the region.

Demand for hardwood pulpwood decreased. The sales volume was down 25%, while prices remained steady year-over-year. Regional inventories remained high throughout the quarter. With additional capacity coming online at the beginning of 2022, we are starting to see an increase in demand. Softwood pulpwood demand increased relatively speaking as sales volume was up 20% and prices were up 11% year-over-year. Volumes remained significantly lower than historical levels due to the abundance of sawmill residuals as we discussed on previous calls, but we have seen a slight improvement during the quarter and entering into 2022.

The outlook for Acadian softwood and hardwood sawlog sales is positive within used markets showing strength as we head into 2022. North American softwood lumber consumption is expected to remain strong, with sustained demand from repair and remodeling activity and new home construction. Consensus forecast is for approximately 1.57 million U.S. housing starts in 2022 compared to 1.58 million in 2021. Although interest rates are expected to rise, a large U.S. population entering their home buying years and a low inventory of homes for sale will be key drivers supporting this growth. Demand for our softwood sawlog is expected to remain stable as a result of these positive end use market dynamics.

Acadian also expects continued strong demand in pricing for its hardwood sawlog due to limited regional supply and benefiting from new customer relationships in both the appearance and industrial grade hardwood lumber markets. We remain cautiously optimistic that hardwood pulp will remain stable through 2022, with increased customer confidence and market demand for hardwood pulp. Meanwhile, as I mentioned previously, although we did see some slight improvements in softwood pulpwood entering 2022, we expect the market to remain somewhat challenged given elevated regional inventories of both softwood pulpwood and sawmill residuals.

In closing, with the new management team fully in place, our highly capable team is energized and committed to Acadian’s future success. In 2022, we will continue to seek opportunities for growth both internally and externally and for improvements to our operating performance.

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

Question-and-Answer Session

Operator

Certainly. [Operator Instructions] Our first question comes from the line of Andrew Kuske from Credit Suisse. Your question, please.

Andrew Kuske

Thanks. Good afternoon. Appreciate the time on the call. Maybe the starting question is just on the buyback announcements. And if we go back many years, it’s been done in the past at times to allocate capital, but I guess just looking at it now, how do you think about the right times to allocate capital on a buyback? And just how does it fit into your evaluation framework for the overall company?

Adam Sheparski

Yes, thanks. We spent a lot of time thinking with the NCIB obviously and we wanted to ensure that we were prepared for what may come about in 2022. Obviously, markets are a little bit volatile. We have been fortunate that our share price hasn’t gone north or south dramatically. But as we go into 2022, we could see some variability in our cash flows. And so we wanted to make sure that we were ready to address any potential excess capital that we have, and to reward our shareholders as such.

Andrew Kuske

Okay, that’s – Adam, that’s helpful. And then maybe just a question on what you are seeing in the markets. And I think you laid out a good outlook in the release, and then also on this call. But I guess maybe one area that goes forgotten at times, you talked about the U.S. housing market dynamics and how robust they can be. But Atlantic Canada itself is going through quite a resurgence and migration, real estate, all of those things, what opportunities do you see in the local market to really benefit Acadian’s positioning?

Adam Sheparski

That’s a good question. It’s in the news, Atlantic Canada has been seeing a lot of a growth, which is frankly, it’s been a rare for Atlantic Canada for some time. Now, if I think about our customer base, I suspect there will be more demand from them coming into Atlantic Canada. I see as we mentioned before, Andrew, we need more processing to come online. And I think there is opportunities for that in Atlantic Canada. And maybe that growth locally may, based on that, to be honest, the price of lumber as it stands today, and what we have seen, I think people are operating pretty steady. And we wouldn’t expect that to change. But we never know if it could stem some more investment in the region, which would absolutely help with our sales.

Andrew Kuske

Okay, that’s great. Thank you very much.

Adam Sheparski

Thank you.

Operator

Thank you. Our next question comes from line of Paul Quinn from RBC Capital Markets. Your question, please.

Paul Quinn

Yes. Thanks very much. Good morning, guys. As you referenced new customers in your press release, I am just wondering how significant that is, what the new customers would make up of sales in ‘21?

Adam Sheparski

It’s not a big number in 2021. I would say that going into 2020, I am still not sure it will be a big percentage of sales. As you know, we are a softwood – most of our sales are softwood. And we have a couple of large customers, including, obviously, Twin Rivers under Fiber Supply Agreement. We are seeing customers coming in on the hardwood side, which has been positive from our perspective. Although those customers may improve or increase a little bit of 2022, I think the key to remember is in the hardwood side, it’s also sales volumes might be not significantly impacted. We expect margins to just start to improve associated with that.

Paul Quinn

Okay, so it sounds like the new customers are more on the hardwood side than the softwood side, is that right?

Adam Sheparski

Yes. That’s safe to say.

Paul Quinn

Okay. Then just sticking with the softwood customers, what are your customers saying about the outlook, their outlook for 2022 and where their inventory is on a relative basis?

Adam Sheparski

Yes. I think it depends on who you ask. We have different customers on different sides of the border, obviously, different products, even on softwood. I would say that a couple of customers probably seen inventories come down as we entered into the end of the year. But I would say there is sufficient supply in New Brunswick. We are seeing some opportunities in Maine for softwood obviously, which you have seen in our Q4 results and we would expect continued demand in Maine.

Paul Quinn

Okay. And then – and just lastly, I am really curious on your carbon – your carbon plan here. So, maybe you could give us some specifics of how this is working and what you are selling into the market?

Adam Sheparski

So, not showing anything yet, but with the agreement in place this year, we are currently in the process or finalizing inventory amount, which – and beginning to start to calculate what carbon credits will be available to us for sale. As we previously disclosed, we are expecting to probably start selling those credits mid to late-2022. The timeline has not changed. It’s still on track. And then again, that’s on just the east portion in Maine, which is about 190,000 acres. We haven’t really spent a lot of time working on the other pieces of our property. I could say we spent a lot of time thinking about it, but we are taking 2022 to really understand the carbon market, the process, and how it evolves. And specifically as it relates to New Brunswick, we are going to take those learnings in Maine. We are going to wait to see what the compliance market in Canada looks like. And we expect that to happen in 2023 and 2024. So, I would say 2022 is the year of understanding the process, understanding Maine, start to receive some revenue associated with the carbon credits in Maine and then 2023, if we choose to move forward with future projects done, that’s probably one [indiscernible].

Paul Quinn

Okay. So, just so I understand that the – what you got the agreement honored, is that they credits themselves? They are resulting from deferred harvests? Are they resulting from something you are doing to increase the growth of the course?

Adam Sheparski

I would say they are being developed based on market norms is how they calculate it in Maine, so comparing our growth rates and our harvesting to the markets in Maine, in the general markets in Maine.

Paul Quinn

Okay. And just lastly, just because that voluntary carbon value might be different in East Coast, what is that market currently sitting at? I mean what do you hope to monetize it at price per ton?

Adam Sheparski

I would never guess what the market is going to be at when we go to sell, Paul. I would say we understand that the market is about mid-teens. We understand is, it hasn’t really changed much since we talked back in October. But I would never try and estimate what that’s going to be, mid to late 2022.

Paul Quinn

Alright. Hey, that’s helpful. Thanks very much.

Adam Sheparski

Great, thanks.

Operator

[Operator Instructions] And this does conclude the question-and-answer session of today’s program. I would like to hand the program back to Adam Sheparski for any further remarks.

Adam Sheparski

Thank you. 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 look forward to our first quarter conference call on May 5th. Goodbye.

Operator

Thank you, ladies and gentlemen, for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.

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