Acadian Timber Q4 2023 Earnings Call Transcript

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February 8, 2024

There are 5 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Acadian Timber Q4 2023 Analyst 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 be advised that this conference is being recorded.

Operator

I would now like to hand the conference over to your speaker today, Susan Wood. Please go ahead.

Speaker 1

Thank you, operator. Good afternoon, everyone, and welcome to Acadian Timber's 4th With me on the call today is Adam Shaparski, Acadian's President and Chief Executive Officer. Before discussing Acadian's results, I'll first remind everyone that in discussing our Q4 and full year financial and operating performance, The outlook for 2024 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 and A, which are available on SEDAR and on our website atacadiantimber.com.

Speaker 1

I'll begin by outlining the financial and operational highlights for our Q4 ended December 31, 2023. Adam will then comment on our results for the year and our outlook for 2024. Acadian experienced solid 4th quarter results as a result of improved contractor availability and increased volumes in New Brunswick. However, contractor availability remained a significant challenge in Maine and resulted in decreased volumes in that region. Overall, sales for the Q4 were $23,800,000 consistent with the prior year period.

Speaker 1

Sales volume excluding biomass increased 4% over the prior year. Weighted average selling price excluding biomass decreased 3% year over year mainly due to decreased softwood sawlog prices in Maine as a result of changes in product mix and decreased hardwood sawlog prices in both regions caused by weak hardwood lumber markets. Overall pricing for softwood sawlogs decreased 4% and hardwood sawlog pricing decreased 12% as compared to the prior year period. Softwood pulpwood pricing increased 18% compared to the prior year period as a result of strong demand in New Brunswick, While hardwood pulpwood prices decreased 5% overall from the same period in the prior year, when regional inventories were particularly low, driving increased pricing. Biomass pricing increased 4% compared to the Q4 of 2022.

Speaker 1

However, sales volume decreased 17% due to limited processing capacity combined with fiber availability as biomass represents a byproduct of our harvesting operations. Operating costs and expenses were $19,500,000 during the Q4 compared to $19,800,000 during the Q4 of 2022 as a result of lower weighted average variable costs. Weighted average variable costs excluding biomass decreased 3% due to lower hauling and fuel costs, partially offset by higher contractor rates compared to the prior year period. Adjusted EBITDA was $4,400,000 during the 4th quarter compared to $4,100,000 in the prior year period. And adjusted EBITDA margin for the quarter was 19% compared to 17% in the prior year period as a result of these lower variable costs.

Speaker 1

Our net income for the Q4 was $11,600,000 compared to $22,000,000 in the prior year period. The decrease in net income was largely due to the impact of lower gains on non cash fair value adjustments in 2023 compared to 2022. Cadian generated $2,800,000 of free cash flow and declared dividend of $5,000,000 to our shareholders during the Q4 or $0.29 per share. I'll now move into the Q4 results for our New Brunswick operations. Sales for our New Brunswick Timberlands were $19,800,000 compared to $18,600,000 during the prior year period.

Speaker 1

Sales volume excluding biomass increased 10%, primarily attributable to increased pulpwood volumes resulting from increased market demand and contractor availability. With regards to softwood and hardwood sawlogs, demand remains steady with similar sales volumes as compared to the prior year. Softwood sawlog pricing increased 8% as compared to the prior year period. However, hardwood sawlog pricing decreased 13% as a result of weakness in hardwood lumber markets. Increased regional demand and improved Contractor availability drove a volume increase of 20% 22% for softwood and hardwood pulpwood volumes respectively, as compared to the Q4 of 2022.

Speaker 1

Pricing increased 26% for softwood pulpwood and remained steady for hardwood pulpwood. Operating costs and expenses were $14,900,000 during the Q4 consistent with the prior year period with increased volumes offset by lower variable costs. Weighted average variable costs excluding biomass decreased 5%, reflecting lower hauling and fuel costs, partially offset by higher contractor rates compared to the prior year period. New Brunswick's adjusted EBITDA for the quarter was $4,900,000 compared to $3,700,000 in the prior year period. Adjusted EBITDA margin was 25% compared to 20% in the prior year period.

Speaker 1

Switching over to Maine. Sales during the Q4 totaled $4,000,000 compared to $5,200,000 in the same period last year. Sales volume excluding biomass decreased 13%, reflecting continued limited contractor availability. Softwood and Hardwood sawlog volumes decreased by 16% and 9% respectively as compared to the prior year. Softwood pulpwood volumes were negligible in Maine due to the extended shutdown of a major softwood pulpwood customer.

Speaker 1

Hardwood pulpwood volumes increased 25% due to steady demand. The weighted average selling price Excluding biomass in U. S. Dollar terms decreased 18% compared to the prior year due to a combination of changes in product mix and decreased prices due to unfavorable markets. Operating costs totaled $4,200,000 in the quarter compared to $4,500,000 during the same period last year as a result of lower harvesting activity offset by higher variable costs.

Speaker 1

Weighted average variable costs excluding biomass increased 5%, primarily as a result of higher contractor rates and longer hauling distances, partially offset by lower fuel costs. Adjusted EBITDA for the quarter was negative $100,000 compared to $800,000 during the prior year period and adjusted EBITDA margin was negative 3% compared to 15% in the prior year period. With respect to Acadian's financial position at the end of the quarter, it remained strong, ending with a net liquidity position $14,800,000 including a cash balance of $1,800,000 and our revolving credit facilities, which remain undrawn. As we enter our busiest season, we expect cash reserves to be replenished. With that, I'll turn the call over to Adam.

Speaker 2

Thank you, Susan, and good afternoon, everyone. As Susan mentioned, I will first comment on our 2023 results and then move into our outlook for 2024. As always, Acadian remains committed to health and safety as our number one priority. We are very pleased with our results for 2023, included only one recordable safety incident among employees, which was a minor slip and fall and none among our contractors. As we have said before, we believe that emphasizing and achieving an excellent safety record is a leading indicator of success in the broader business.

Speaker 2

With respect to fiscal 2023, it was an operationally challenging year, particularly for our Maine operations. While weather conditions were generally favorable in New Brunswick, Maine experienced difficulties caused by weather at various times throughout the year. The Q1 brought unseasonably warm and wet weather, which prevented the ground from freezing and excessive rainfall in the 3rd quarter made for extremely muddy conditions, which continued into the Q4. Similarly, while New Brunswick was able to make considerable progress increasing contractor availability and finished the year in an improved position in this regard. Harvest volumes in Maine continued to be hindered.

Speaker 2

And although capacity increased as we exited the quarter, Management remains focused on expanding our contractor base and decreasing our variable costs. As we have discussed previously, The favorable attributes of the Northeast region continues to provide stability on demand and pricing of our products. Sales were $93,500,000 in 2023, compared to $90,500,000 in the prior year and our weighted average selling price excluding biomass increased 5%. Softwood lumber pricing returned to more typical historical ranges and demand and pricing for softwood sawlogs remained stable in the regions in which Acadian operates. Demand for softwood pulpwood continued with steady volumes and increased pricing over the prior year.

Speaker 2

Weakness in hardwood lumber markets put downward pressure on hardwood sawlog prices, But demand for Acadian's hardwood sawlogs remained stable. Decreased regional roundwood inventories early in the year led to increased volumes and pricing for hardwood pulpwood compared to the prior year. Variable costs remain at elevated levels due to inflationary pressures on harvesting and hauling rates. However, Acadian experienced an increase of only 2% compared to 2022 due to the continued efforts of the management team in controlling these costs. As I mentioned in Q3, we do not usually spend much time talking about our land sales.

Speaker 2

However, during 2023, We accumulated more than what has been experienced in recent years with total proceeds of $675,000 on the sale of 21 acres of land. We will continue to evaluate the land base in both New Brunswick and Maine. And although we do not expect it to become a significant generator of cash flows for the business in the short term, We do believe that we will be able to continue to unlock potential in the future. In 2023, the company's adjusted EBITDA totaled $20,600,000 compared to $18,200,000 during 2022 and adjusted EBITDA margin was 22% compared to 20% in the prior year. We generated free cash flow of $15,000,000 for 2023 compared to $12,200,000 last year and declared dividends of CAD19.8 million to our shareholders.

Speaker 2

Turning to our carbon credit project, as we have previously noted, first 770,000 carbon credits associated with this project were registered on the American Carbon Registry in June under the name Anew Katahdin Forestry Project. Our focus is now on the marketing and sale of these credits, as well as the registration of future tranches. We completed our first sale at the end of December 2023 and while the volume sold was modest at 1500 credits, The sale demonstrated solid pricing of just under US25 dollars per credit. The team is currently working on the second and third reporting periods, which is expected to produce approximately 215,000 and 144,000 credits respectively. We are in regular contact with our 3rd party developer and understand that the volumes of carbon credit sales have slowed somewhat over the last few quarters as a result of a number of factors.

Speaker 2

However, pricing for voluntary improved forest management credits appears to be stable as evidenced by our first sale. And as buyers gravitate toward quality, we remain optimistic with regards to the monetization of our credits. As included in our press release, since year end, we have entered into our first long term agreement related to renewable energy. On February 6, Acadian executed an agreement for the option to lease approximately 10,000 acres of its main timberlands for the purpose of the development and operation of a solar powered electric generating facility. The agreement includes multiple leasing terms with escalating fees if progress is made on the project.

Speaker 2

The incremental cash flows attributable to the initial terms are modest. However, Should the project reach the construction term, which will take several years, the incremental cash flows may become material to Acadia. The agreement is not only appealing from a business perspective, we are also excited to participate in a project that leverages our timberlands to produce cleaner and greener energy. As we look forward to 2024, North American interest rates remain elevated near term pressure on end use markets persists. Inflation has begun to show signs of easing.

Speaker 2

The consensus forecast for U. S. Housing starts is approximately 1,370,000 starts in 2024 as compared to 1,400,000 in 2023. We remain confident that the stability of the northeastern forestry sector, combined with the long term demand for new homes and repair and remodel activity, will support the demand for our products. Although labor markets remain tight, we continue to experience increased contractor availability in New Brunswick as we close out the year.

Speaker 2

Management will continue to focus on further increasing our harvesting capacity through 2024, most importantly in Maine, while at the same time continuing our focus on variable costs to improve our margins. In the short to medium term, inflation is expected to continue to impact our financial results through elevated contractor rates and fuel surcharges, offset by pricing of primary forest products like sawlog and pulpwood. The stable demand experienced during 2023 is expected to continue into 2024. Pricing for softwood sawtimber is expected to remain stable, Pricing for hardwood sawtimber may be challenged, reflecting weaknesses in hardwood lumber pricing. However, we have seen some stability of pricing as we exited the quarter.

Speaker 2

Demand for hardwood pulpwood is expected to be steady and selfwood pulpwood markets are expected to remain at the improved levels experienced in 20 23 for the foreseeable future. In closing, as we enter our busiest season with favorable weather conditions, Our priority will remain on actively working with our contractors and finding innovative solutions to meet the delivery demands of our customers. The solar land lease agreement demonstrates our focus on growth and through 2024, we will continue to explore and advance other opportunities to grow, following a disciplined and prudent approach in both Maine and New Brunswick. With both the province of New Brunswick and NB Power declaring their support to increase renewable energy In the province, we are encouraged by potential opportunities that this might present. At Acadian, we have the team, structure and balance sheet to successfully weather challenging operating and market conditions as they arise and our incredible timberlands provide a wealth of possibilities.

Speaker 2

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

Operator

Thank Our first question comes from Arianna Millan with CIBC Capital Markets. Your line is open.

Speaker 3

Hello, good afternoon. So my first question relates to your solar land lease agreement. Are you able to provide us with an estimate of the potential incremental cash flows if the project reaches the construction term? And when you would expect these cash flows to be realized?

Speaker 2

It's a bit early for us to do that Arianna at this point in time. We are there's still a lot to be determined as far as the project It's concerned. The first few phases of the project are going to take several years as we mentioned. But as we progress through that time, we'll be sure to give you updates as we feel comfortable.

Speaker 3

Okay, great. Thank you. And then in your commentary, you had mentioned a few times that main harvest is still limited due to Regional contractor capacity, is there a reason why your contractor availability efforts have been more successful in New Brunswick than Maine so far?

Speaker 2

Yes, we look at that. We have been looking at it significantly. And I think it's Less about Maine and more about New Brunswick. The New Brunswick Forest Industry is really advanced on a lot of fronts and most importantly on the investment it is making into the forestry sector. We have a lot of contractors investing in new equipment, new contractors getting into the business because of that overarching, I would say stability of the New Brunswick Forestry Sector.

Speaker 2

So think it's more of a if you think about New Brunswick, it's on a very high level from a professional perspective. And at Maine, We're continuing to work through it and hopefully we'll get some more traction here in 2024.

Speaker 3

Okay, thanks. That's helpful. That's all I have for now. So I'll get back in the queue.

Speaker 2

Great. Thank you.

Operator

One moment for our next question. The next question comes from Matthew McElroy with RBC. Your line is open.

Speaker 4

Hi, good afternoon. Thanks for taking my questions. First, are you able to disclose who the buyer was for the carbon credits you sold in the quarter? At least give us a sense of the profile of the buyer? And then is there any color that you're able to provide on that buyer's approach for procuring carbon credits?

Speaker 4

For example, if they're in the market for the 1500 they purchased from you or if they may be purchased a modest amount of credits from several different sellers?

Speaker 2

We don't have much, Matthew, on the buyer. It was a small purchase. We don't expect it to be a large purchaser of credits. We're constantly working with the 3rd party developer and hoping to see more credits monetized here in the not too distant future.

Speaker 4

Okay. Thank you. I think just sticking with the carbon credits, now that you're at least through monetizing Small first batch. Just thinking a broader kind of perspective on it, could you share any sort of key lessons that you've learned through undertaking this project and maybe talk about how those lessons will influence your approach to developing any future projects you undertake?

Speaker 2

Yes, thanks. It's a great question. As we worked our way through the last 2 or 3 years, I think we went through a market that was sort of developing It continues to develop in some ways and we got we went through labor shortages across the North America to be frank, but certainly in the sector. So I think there is something to be learned from as far as making sure you are well planned and well strategized get ahead of impacts such as that. I think we've more recently over the last 6 to 9 months certainly learned that The future is bright for these credits that we have, voluntary improved forest management credits.

Speaker 2

As we talked about before, the buyers are going to start gravitating to quality And these projects are going to be viewed as quality into the future. So I think that's another lesson that we learned is that This is going to be a market that's going to be around forever and volumes are probably going to increase as we move forward.

Speaker 4

Great. Thanks for that. And last one for me. Just saw you renew your NCIB. Any change in how you're thinking about buybacks, particularly, I mean, given your significant shareholder intending to increase its participation in the DRIP and then potentially cash flow stepping up a bit with some carbon credit sales?

Speaker 2

Yes, we haven't obviously we put the NCIB in place for a particular reason, especially as it relates to potential large influxes of cash. I would say there is no new thinking associated with it. It is there as a tool from a capital and we'll use it as we see fit, when we see fit.

Speaker 4

Thanks. That's all for me. I'll turn it back.

Speaker 2

Great. Thanks.

Operator

And I'm not showing any further questions at this time. I'd like to turn the call back over to Adam for any closing remarks.

Speaker 2

Great. 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 you joining us for our virtual Annual General Meeting and Q1 of 2024 Conference Call, Both on May 8.

Speaker 2

Goodbye.

Operator

Ladies and gentlemen, that concludes today's presentation. You may now disconnect and have a wonderful day.

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Earnings Conference Call
Acadian Timber Q4 2023
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