Acadian Timber Q2 2023 Earnings Call Transcript

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Provided by Quartr
July 27, 2023

There are 5 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Cadence Timber's Second Quarter 2023 Annual Conference Call and Webcast. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please note that today's conference is being recorded.

Operator

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

Speaker 1

Thank you, operator. Good afternoon, everyone, and welcome to Acadian Timber's 2nd quarter conference call. With me on the call today is Adam Schiparski, Acadian's President and Chief Executive Officer. Before discussing Acadian's results, I'll first remind everyone that in discussing our Q2 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.

Speaker 1

For further information on our known risk factors, I encourage you to review our news release and MD and A, which are available on SEDAR and on our website atacadiantimber. Com. I'll begin today by outlining the financial and operational highlights for our Q2 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 Q2, benefiting from favorable weather, which allowed Harvest to continue later into the winter and to begin earlier after the spring thaw.

Speaker 1

Contractor availability increased, further enabling us to recoup a portion of the volume shortfall of the Q1. Sales for the Q2 were $20,700,000 compared to $16,500,000 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 pulpwood 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.

Speaker 1

Demand 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, though pricing and demand began to weaken as a result of higher regional supply. Biomass prices were 88% higher due to favorable market conditions. Operating costs and expenses were $15,500,000 during the 2nd quarter compared to $13,800,000 during the prior year period, reflecting higher sales volumes.

Speaker 1

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 $5,700,000 during the quarter, compared to $2,700,000 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 Q2 was $5,800,000 compared to $4,500,000 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.

Speaker 1

Acadian generated $4,100,000 of free cash flow and declared dividends of $4,900,000 to our shareholders during the 2nd quarter were $0.29 per share. I'll now move into the 2nd quarter results for our New Brunswick operations. Sales for New Brunswick Timberlands were $16,600,000 compared to $13,500,000 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.

Speaker 1

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% 2%, respectively, compared to the prior year period. Hardwood sawlog and hardwood pulpwood volumes in New Brunswick increased 65% 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 Q2 totaled $11,900,000 compared to $13,400,000 in the prior year period, reflecting higher sales volumes.

Speaker 1

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's adjusted EBITDA in the quarter was $5,000,000 compared to $2,700,000 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 Q2 totaled $4,100,000 compared to $2,900,000 in the same period last year.

Speaker 1

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 Q2 2022.

Speaker 1

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, though 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.

Speaker 1

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 $3,100,000 in the quarter compared to $2,600,000 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.

Speaker 1

Adjusted EBITDA for the quarter was $1,100,000 compared to $400,000 during the prior year period and adjusted EBITDA margin was 27% compared to 12% in the prior year period. With respect to Acadian's financial position at the end of the quarter, it remains strong, ending with a net liquidity position of $17,000,000 including funds available under our revolving credit facilities. With that, I'll turn the call over to Adam.

Speaker 2

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 Q2, there were no recordable safety incidents among our employees or our contractors. We are 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.

Speaker 2

While the Q2 is traditionally our slowest due to seasonal operating conditions, Weather in the Q2 was much more favorable than we usually experience. 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. Fortunately, 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 of our 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 Q2 and there remains 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 costs that we have experienced.

Speaker 2

As I am sure most of you are aware, we have been working on our 1st carbon development and marketing project on approximately 190,000 acres of the main timberlands. We are 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, a new Katahdin Forestry Project. These 770,000 credits are now available for sale, with 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 1st crediting period registered, we will now work towards registering the next batch, which is expected to be approximately 215,000 credits.

Speaker 2

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 protocols being developed in Canada and in determining what are the future carbon credit opportunities for Acadian. Turning to our outlook for the remainder of 2023, North American inflation concerns persist and interest rates continue to increase, which has put near term pressure on end use markets.

Speaker 2

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 $1,370,000 in 2023. As we have noted previously, demand for Acadian's hardwood and softwood sawlogs is mainly driven by regional supply and demand, meaning that the stable demand experienced in the first half of twenty twenty three is expected to continue.

Speaker 2

Pricing for softwood sawtimber is expected to remain stable. However, pricing for hardwood sawtimber may weaken, reflecting the recent softness in hardwood lumber pricing. While regional inventories of hardwood pulpwood have 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 levels 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 Q3, we are 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.

Speaker 2

Combined with the potential monetization of the first 770,000 carbon credits 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 a 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 assets. We continue to explore opportunities to grow as demonstrated by our advancement into the carbon credit market, opportunistic land sales as evidenced 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.

Speaker 2

Operator?

Operator

Thank you. One moment. And our first question coming from the line of Andrew Kuske with Credit Suisse. Your line is open.

Speaker 3

Thanks. Good afternoon. Maybe just on the carbon credits. I think in the MD and A you've registered the 770,000 thereabouts. And then I think in the notes it also discusses You recorded on the inventory at lower cost and net realizable value, and I think you've got the $14,000,000 marker on that.

Speaker 3

Do I have those numbers right? And then how does the $1,900,000 sort of credits, I guess that includes credits that aren't registered, that you upsized in the quarter. I know that's like a bunch of numbers that I just threw at you, but how should I think about all the numbers that are kind of new in the financials this quarter?

Speaker 2

Hi, Andrew. Thanks for the questions. I'll do my best to answer them and then you can Follow-up if I missed anything. So yes, so 770 were registered. There is $14,000,000 in inventory on the balance sheet.

Speaker 2

That amount was Journalized non cash item out of our Timberland asset valuation into 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 my notes. We do have 200 and 15,000 that we're hoping to register here shortly. We refer to it as reporting period 2, which is, in essence fiscal 2022.

Speaker 2

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.

Speaker 3

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

Speaker 3

And then maybe just a follow-up. I guess, what ability do you have To sell to transfer these credits to actually realize and crystallize some value associated with the credits that you've now carved out on the balance sheet?

Speaker 2

Yes. So we are in a marketing agreement with our developer. And realistically, these are 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 is desirable.

Speaker 2

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 at Anew is working very hard to monetize those credits. And hopefully over the next quarter or 2, we'll have a lot more

Speaker 3

And then if I could just Maybe it's a bigger question that should have started off with. 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 tailwinds, but You kind of broke the back of the contractor availability, some of the inflationary pressures going away, weather 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?

Speaker 2

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 6 to 9 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 And we were able to do that in a very confined or restrained manner to not get into a situation where we overpaid.

Speaker 2

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.

Speaker 2

You talked about headwinds and tailwinds. It does certainly feel like we have had a lot of tailwinds this quarter. Mother Nature is still Mother Nature, so that's always going to be a challenge. And I would say that 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

Operator

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

Speaker 2

Yes. Thanks very much. Good morning, guys, or afternoon where you are. Just, yes, I

Speaker 4

know I got some questions on Carbon 2, 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 200 and 1,000 credits that you expect to report shortly. Is that $215,000,000 the exact sort of same bucket as 130 4,000 credits that you were talking about last quarter.

Speaker 2

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

Speaker 4

Okay. And then the $14,000,000 increase in inventory, is that just to account for the 770,000 credits or effectively $18 of Right.

Speaker 2

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

Speaker 4

Okay. And then the 215,000 does that encapsulate all the total of the 10 years' worth or is that are you going to see any more over the next 10 years in the combination of the $770,000,000 and the $215,000,000

Speaker 2

Yes. So to do the simple math, The $215,000,000 plus the $770,000,000 call it, I guess it's $1,000,000 or so. We will get to at this point in time, we expect to get to 1,900,000 credits over the life of the project. So there will be another 900,000 credits expected over the next 8 years.

Speaker 4

Okay. Okay. That's really helpful. Okay. Then just a question on cash flow.

Speaker 4

I mean, you guys are generating kind of $20,000,000 in EBITDA a year. You've got $14,000,000 sort of tied up on your balance sheet with these credits. How do you monetize that? To take, do you have to sell that in a block and you sell it in piecemeal? How are you going to process sales about?

Speaker 2

Yes. So through Anu, we will it's to be determined how they sell it. There is I'm not speaking about our project specifically, just in general terms, customers can buy anywhere from 1 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 like the story that goes with the project.

Speaker 2

So, I can't tell you this is how it's going to work because it really depends on the customer base that comes forward to buy it. All 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.

Speaker 4

Okay. And then just sort of last high level question on this. I mean, for this carbon project, you looked at 190,000 acres. You've sort of mentioned that you expect 1,900,000 credits over that. Is a simple math there kind of the 1.9 1,000,000 divided by the 190,000 hectares in terms of sort of credits per acre or how variable is that within your timber Cymbra, please.

Speaker 2

Yes, it's a good question. I mean, I think that would be It could be a number, Paul, and I say that not being in any way sarcastic. The problem is that That number can fluctuate dramatically based on decision making as far as how much harvesting we decide to do, if we decided to do another project or You have to determine baselines associated with carbon projects. And so that number could change the amount of available carbon credits on a particular Land based. 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.

Speaker 2

I would say they're all high potential for carbon credits. The type of stands that we have are viewed very highly, which is what you've I think recent sales associated with timberlands in the North and the value that's been put on them by carbon producers. But if you're just trying to do a high level 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 when you try and do the estimates.

Speaker 4

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 a function of reduced harvest?

Speaker 2

Correct. Sounds interesting. Congratulations and best of luck. Thanks, Paul.

Operator

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

Speaker 2

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 Q3 conference call on November 2. Goodbye.

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Earnings Conference Call
Acadian Timber Q2 2023
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