CA - Acadian Timber Corp. (ACAZF) Q2 2023 Earnings Call Transcript

2023-07-29 11:37:09 ET

Acadian Timber Corp. (ACAZF)

Q2 2023 Earnings Conference Call

July 27, 2023, 01:00 PM ET

Company Participants

Susan Wood - CFO

Adam Sheparski - President and CEO

Conference Call Participants

Andrew Kuske - Credit Suisse

Paul Quinn - RBC Capital Markets

Presentation

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Acadian Timber's Second Quarter 2023 Analyst Conference Call and Webcast. [Operator Instructions]. Please note that today’s conference is being recorded.

I would now hand the conference over to your speaker host, Susan Wood, Chief Financial Officer. Please go ahead.

Susan Wood

Thank you, operator. Good afternoon, everyone, and welcome to Acadian Timber's second-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 2023 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 today by outlining the financial and operational highlights for our second quarter ended June 24, 2023. Adam will then provide some additional comments and discuss our outlook for the remainder of 2023.

Acadian experienced strong operational performance during the second quarter, benefiting from favorable weather which allowed harvest to continue later into the winter and to begin earlier after the spring thaw. Contractor availability increased, further enabling us to recoup a portion of the volume shortfall of the first quarter. Sales for the second quarter were $20.7 million, compared to $16.5 million in the same quarter of 2022. Sales volume excluding biomass increased 18% compared to the prior year period.

Weighted average selling price excluding biomass increased 9% year-over-year, benefiting from strong softwood sawlog and hardwood pulp wood pricing driven by strong demand. Pricing for softwood sawlogs increased 14% compared to the prior year period driven by strong demand, while hardwood sawlog pricing decreased 9% due to declines in end use markets.

Demand remain remained stable for softwood pulpwood however, pricing decreased 9% year-over-year, due to changes in customer and product mix. Hardwood pulpwood pricing increased 12% over the same period of 2022. So pricing and demand began to weaken as a result of higher regional supply. Biomass prices were at 88% higher due to favorable market conditions.

Operating costs and expenses were $15.5 million during the second quarter, compared to $13.8 million during the prior year period, reflecting higher sales volumes. Weighted average variable costs excluding biomass were 10% lower as compared to the prior year period, primarily as a result of lower fuel costs and shorter hauling distances partially offset by increased contractor rates.

Adjusted EBITDA totaled $5.7 million during the quarter compared to $2.7 million in the prior period. Adjusted EBITDA margin for the quarter was 27% compared to 17% in the prior year period. Our net income for the second quarter was $5.8 million, compared to $4.5 million in the prior year period.

The increase in net income compared to the prior year period, was primarily the result of higher operating income and the gain on sale of Timberlands partially offset by lower non-cash fair value adjustments. Acadian generated $4.1 million of free cash flow and declared dividends of $4.9 million to our shareholders during the second quarter, or $0.29 per share.

I'll now move into the second quarter results for our New Brunswick operations. Sales for New Brunswick Timberlands were $16.6 million compared to $13.5 million during the prior year period. Sales volume excluding biomass increased by 17%, primarily due to favorable weather conditions and increased contractor availability.

With regards to softwood sawlogs, demand remained stable with volumes relatively consistent with the prior year period. Demand for softwood pulpwood was strong, with volumes twice that of Q2 2022. New Brunswick pricing for softwood sawlogs and softwood pulpwood increased by 3% and 2% respectively, compared to the prior year period.

Hardwood sawlog and hardwood pulpwood volumes in New Brunswick increased 65% and 15% respectively, compared to the prior year period, as a result of stable demand and favorable operating conditions during the quarter. Prices for hardwood sawlogs were 5% lower than the prior year period, due to weakening end use markets, while prices for hardwood pulpwood were 14% higher than the prior year period due to strong demand.

Operating costs in the second quarter totaled $11.9 million, compared to $13.4 million in the prior year period, reflecting higher sales volumes. Weighted average variable costs excluding biomass were 15% lower primarily as a result of lower fuel costs, and shorter hauling distances partially offset by increased contractor rates.

New Brunswick adjusted EBITDA in the quarter was $5 million, compared to $2.7 million in the prior year period. Adjusted EBITDA margin was 30% compared to 20% in the prior year period.

Switching over to Maine. Sales during the second quarter, totaled $4.1 million, compared to $2.9 million in the same period last year. Sales volume excluding biomass increased 20%, also reflecting the improved operating conditions over the prior year. Softwood sawlog volumes in Maine increased 25% as compared to the prior year period due to favorable operating conditions and stable demand. In U.S. dollar terms pricing for softwood sawlogs increased 18% compared to W2 2022.

Softwood pulpwood volumes decreased 89% and pricing decreased 9% in U.S. dollar terms as compared to the prior year period due to reduced demand, so it should be noted that softwood pulpwood volumes are relatively modest.

Hardwood sawlog volumes were consistent with the prior year period, although pricing decreased 19% in U.S. dollar terms for the same reasons as New Brunswick. Hardwood sawlog volumes in Maine are also relatively modest.

Hardwood pulpwood volumes increased 26% and pricing remained consistent compared to Q2 2022, due to stable demand and a favorable customer mix. Operating costs totaled $3.1 million in the quarter, compared to $2.6 million during the same period last year, primarily due to increased harvesting activity. Weighted average variable costs excluding biomass increased 5% in Canadian dollar terms, as compared to the prior year period, primarily as a result of higher contractor rates.

Adjusted EBITDA for the quarter was $1.1 million, compared $0.4 million during the prior year period, and adjusted EBITDA margin was 27% compared to 12% in the prior year period.

With respect to Acadians financial position at the end of the quarter, it remains strong, ending with a net liquidity position of $17 million, including funds available under our revolving credit facilities.

With that, I'll turn the call over to Adam.

Adam Sheparski

Thank you, Susan. And good afternoon everyone. Starting with safety, as always, Acadian remains committed to health and safety as our number one priority. And during the second quarter, there were no recordable safety incidents among our employees or our contractors. We're very proud of all the hard work and dedication towards safety that is shown on a daily basis across the organization.

Moving over to the quarterly results. While the second quarter is traditionally our slowest due to seasonal operating conditions. Weather in the second quarter was much more favorable than we usually experienced. As Susan mentioned, we were able to harvest later into the winter and to begin earlier after the spring thaw. These favorable weather conditions were also complemented by additional flexibility within the contractor workforce that allowed for an increase in volumes during the quarter.

Fortunate late, as a result of a lot of hard work from the operations team over the last few quarters, the difficulties associated with limited contractor availability abated somewhat and combined with the favorable weather conditions allowed us to catch up on much were planned volume for the first half of the year and put us on a path to achieve our annual harvest volumes.

The current dynamics of the northeast forestry sector supported stable pricing and demand during the second quarter, and there remain some tension in the supply chain which supports the stability of our weighted average sales pricing and allows for the recovery of the increased inflationary cost that we have experienced. As I'm sure most of you are aware, we have been working on our first carbon development and marketing project on approximately 190,000 acres of the Maine Timberlands.

We were pleased to report that the first carbon credits associated with this project were registered on the American Carbon Registry on June 8, under the name Anew – Katahdin Forestry Project. These 770,000 credits are now available for sale, but the focus now shifting to marketing and selling these credits. As previously disclosed, the current project is a 10-year crediting period. With the credits from the first crediting period registered, we will now work towards registering the next batch, which is expected to be approximately 215,000 credits.

This project has provided valuable experience to Acadian and has formed the foundation for any potential further carbon credit development projects. As you may have seen, the draft Canadian federal forest carbon offset protocol was released earlier this month. The Acadian team is currently analyzing the draft, which when finalized will also form part of our decision making process.

As we have stated from the beginning, we will take what we have learned from our project in Maine combined with the new protocol is being developed in Canada, in determining what are the future carbon credit opportunities for Acadian.

Financial outlook for the remainder of 2023, North American inflation concerns persist and interest rates continue to increase, which is putting near term pressure on end use markets. However, we remain confident that the stability of the northeastern forestry sector and combined housing shortages and repair and remodel activity will support the demand for our products. Consensus forecast for U.S. housing starts has risen to approximately 1.37 million in 2023.

As we have noted previously, demand for Acadian hardwood and softwood sawlogs is mainly driven by regional supply and demand, meaning that the stable demand experienced in the first half of 2023 is expected to continue. Pricing for softwood sawtimber is expected to remain stable. However, pricing for hardwood sawtimber may weakened, reflecting the recent softness in hardwood lumber pricing.

While regional inventories of hardwood pulpwood has been replenished and demand has begun to slow, this market is expected to remain stable, as our marketing efforts have diversified our customer base. Demand and pricing in softwood pulpwood markets are expected to remain at the improved level of experienced in 2022 and the beginning of 2023. Although there is some uncertainty in Maine as a result of a recent temporary shutdown of a facility.

As we enter the third quarter, we're optimistic that continued stable regional demand and pricing for our products together with the increased contracted capacity we have secured will support our planned harvest volumes, combined with a potential monetization of the first 770,000 carbon credit will produce solid financial results for the remainder of the year.

Acadian continues to benefit from a strong balance sheet, continued diversification of our markets, and the highly capable team focused on strong financial and operating performance. As always, we will remain focused on merchandising our products to attain the highest margins available and making improvements throughout the business to maximize cash flows from our existing Timberland asset.

We continue to explore opportunities to grow as demonstrated by our advancement into the carbon credit market. Opportunistic land sales is evidence during the quarter and exploring additional land use opportunities such as renewable energy and additional land leasing.

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Andrew Kuske with Credit Suisse. Your line is open.

Andrew Kuske

Thanks. Good afternoon. Maybe just on the carbon credits, I think in the MD&A you've registered the 770,000 there abouts. And then I think in the notes that also discusses, you recorded on the inventory at lower cost and net realizable value. And I think you've got a $14 million marker on that. Do I have those numbers right? And then how does the $1.9 million sort of credits, I guess that includes credits that aren't registered, that you upsized in the quarter? Maybe I don't know that's like a bunch of numbers that are just threw at you. But, how should I think about all the numbers that are kind of new in the financials this quarter?

Susan Wood

Andrew, thanks for the questions, I'll do my best to answer them. And then anything – follow-up if I missed anything. So yes, so 770 were registered, there is $14 million in inventory on the balance sheet. That amount was journalized, a non-cash item out of our Timberland asset valuation inventory, which is the current view from an accounting perspective.

You're right, the 1.6 to 1.9 credits, that is an adjustment as we continue to evaluate the project, and it will continue to move as we move forward through the project. The remaining credits haven't been registered in the in my notes, we do have 215,000 that we're hoping to register here shortly. We refer to it as reporting period II which is, in essence, fiscal 2022. And so there will be this lag. And they will credit over a 10-year period of time will pick up the remaining credits. So I think all your numbers are right, that you quoted. And that's sort of how the project is going to play itself out over the next 10 years.

Andrew Kuske

Okay, I appreciate that. And then maybe just one nitpicky clarification. So the $14 million of inventory relates to the 770,000 that’s been registered.

Susan Wood

Yes.

Andrew Kuske

Okay, excellent. And then maybe just a follow up. What I guess what ability do you have to sell to transfer these credits actually realizing crystallized value associated with the credits that you've now carved out on the balance sheet?

Adam Sheparski

Yes, so we are in a marketing agreement with our developer. And realistically, all these projects are bespoke and they go into negotiations with people to buy these credits. And that will determine how many an individual buyer might buy and what they will pay for those credits. Fortunately, our project is viewed as desirable.

So that's great news for us. But in essence, because they've become registered, technically, all 770,000 could be sold in the near term. We don't know how that's going to unfold. I think the team that I knew is working very hard to monetize those credits. And hopefully over the next quarter or two, we'll have a lot more insight as to how that's going to unfold from a cash flow perspective.

Andrew Kuske

Okay, that's excellent. And if I could just sneak in one, and maybe it's a bigger question that should have started off with just really, if we look at the quarter, I mean, obviously, all the things that were bad in the last couple of quarters from a weather standpoint, contractor availability standpoint, inflationary standpoint, kind of all flipped the other way and not to be complacent about it.

But it seems like you've gone from some real negative headwinds to maybe let's not call them tail winds, but it kind of broke the back of the contractor availability, some of the inflationary pressures going away, whether got better, maybe just on the contractor availability, like what was the change in strategy to sort of rectify that? And how sustainable is that on a go forward basis?

Adam Sheparski

It's a great question and love to talk about it, because we did spend a lot of time working on it over the last couple of quarters. I think we got a lot better at analyzing data inside of Acadian over the last six to nine months and understanding, costing for our contractors, and how we can help them be more efficient either with backhauls, or you name it.

And so working closely with them to understand that, obviously, you've seen our costs come up that was part of the equation and we were able to do that in a very confined or restrained manner, to not get into a situation where we overpaid, so we were quite happy with that.

And I think, that openness with our contractors and working with them like that has attracted new contractors to us and we're getting a lot of calls incoming which has been great. We still have a lot of room to grow from a data perspective, but pretty happy with what we've done still looking to increase our contractor capacity in the region as well. So that's good.

You talked about headwinds and tailwinds. It does certainly feel like we have had a lot of tailwind this quarter. Mother Nature is still Mother Nature. So that's always going to be a challenge. And I would say there is some uncertainty in the market. There is a little bit of, I would say traction, I would hesitate to say. But there is that risk moving forward a bit as well, even though it's offset by a fair amount by the northeastern forestry sector.

Andrew Kuske

Okay, appreciate the caller. Thank you.

Operator

Thank you. And our next question coming from the line of Paul Quinn with RBC Capital Markets. Your line is open.

Paul Quinn

Yes, thanks very much. Good morning, guys, or afternoon where you are? Just I got some questions on carbon too, just so I understand the full picture here that. So you've registered the 770,000 credits, you disclosed here that you've got another 215,000 credits, that you expect to report shortly. Is that 215 the exact sort of same bucket as 134,000 credits that you were talking about last quarter?

Adam Sheparski

Good morning, Paul. Yes, it is. It went from 134 for up to 250.

Paul Quinn

Okay, and then the $14 million increase in inventory, is that just that's just to account for the 770,000 credits that order effectively $18 a credit. Right?

Adam Sheparski

It is just the 770,000 credit. That's correct.

Paul Quinn

Okay. And then the 215,000, does that encapsulate all the total of the 10-years’ worth? Or is that a unity any more over the next 10 years? And the combination in the 770 and the 215?

Adam Sheparski

Yes, so to do the simple math, the 215 plus the 770 call it I guess it's a million or so, we will get to do. At this point in time, we expect to get to 1.9 million credits over the life of the project. So there will be another 900,000 credits expected over the next eight years.

Paul Quinn

Okay. That's really helpful. Okay, then, just a question on cash flow. I mean, you guys are generating kind of $20 million in EBITDA a year, you've got $14 million sort of tied up on your balance sheet with these credit. How do you monetize that? Do you take a take, you have to sell that in a block and you sell it in PCL [ph], how are you going to process sales of those?

Adam Sheparski

Yes. So through a new, we will -- it's to be determined how they sell it, there is -- I' am not speaking about our project, specifically, just in general terms, customers can buy anywhere from one to an unlimited number of credits. And, as I mentioned, it's sort of bespoke in that, it's depending on what the customer wants, and the customer is willing to pay for.

So, everything from, like I said, a very small number of credits to you could have someone trying to buy the entire project, if they really liked the story that goes with the project. So I can tell you, this is how it's going to work, because it really depends on the customer base that comes forward to buy it. Also that to say is, we hope to start monetizing it in a very short term, but we'll have to wait and see how the customers come forward.

Paul Quinn

Okay, and then just sort of last high level question on this. I mean, you -- for this carbon project, you looked at 190,000 acres, you've sort of mentioned that, you expect 1.9 million credits over that. Is a simple math there, of a 1.9 million divided by the 190,000 hectares in terms of sort of credits per acre or how variable is that within your Timber base?

Adam Sheparski

Yes, it's a good question. I mean, I think that would be a -- it could be a number, Paul. And I say that not being anyway sarcastic. The problem is, is that that number can fluctuate dramatically based on decision making, as far as how much harvesting we decided to do, if we decided to do another project. Or you have to determine baselines associated with carbon projects. And so that that number could change the amount of available carbon credits on a particular land base.

So there's not a generic, simple math that I can give you because our land base is somewhat different depending on where you're at, I would say they're all high potential for carbon credits, just the type of stands that we have are viewed very highly, which is what you've seen.

And I think recent sales are associated with timberlands in the north value that's been put on them by carbon producers. But if you're just trying to do a high level of math, you could do that. I mean, the assumption is, we've always said is we're not significantly impacting our harvesting with this current project. So I would just take that into consideration and let me try and do this.

Paul Quinn

Okay, so at the end of the day, I mean, just on that last statement, that you're not really impacting harvesting. There's really no material offsets to the extra sort of carbon cash flow that you've got as reduced -- as a function of reduced harvest?

Adam Sheparski

Correct.

Paul Quinn

Sounds interesting. Congratulations, and best of luck.

Adam Sheparski

Thanks, Paul.

Operator

Thank you. I'm not showing any questions are in the queue at this time, I will now turn the call back over to Mr. Sheparski, for any closing remarks,

Adam Sheparski

Thank you, operator. 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 joining us for our third quarter conference call on November 2. Goodbye.

Operator

Ladies and gentlemen, that does conclude our conference for today, thank you for your participation. You may now disconnect.

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