Acadian Timber Corp. (OTCPK:ACAZF) Q2 2022 Earnings Conference Call July 29, 2022 1:00 PM ET
Company Participants
Susan Wood – Chief Financial Officer
Adam Sheparski – President and CEO
Conference Call Participants
Hamir Patel – CIBC
Andrew Kuske – Credit Suisse
Paul Quinn – RBC Capital
Operator
Good day, ladies and gentlemen. Thank you for standing by. And welcome to Acadian Timber Second Quarter 2022 Analysts Conference Call and Webcast. At this time, all participants are in listen-only mode. After the speakers presentation, there’ll be a question-and-answer session. [Operator Instructions]
Please be advised that today’s conference may be recorded. I would now like to turn the conference over to speaker hosts, 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 second quarter financial and operating performance, the outlook for the remainder of 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 vary 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 by outlining our financial highlights for our second quarter ended June 25, 2022, then Adam will comment on our operations, market conditions and outlook for the remainder of the year.
During the second quarter, Acadian benefited from strong demand for its products and increased prices. However, later startup after the spring thaw and limited contractor availability resulted in lower volumes as compared to the second quarter of 2021.
Sales for the second quarter were $16.5 million, compared to $19.4 million in the prior year period. Sales volume excluding biomass decreased 21% compared to the prior year period. Weighted average selling price excluding biomass increased 18% year-over-year, benefiting from strong sawlog prices and improved pulpwood prices driven by strong demand, as well as the partial recovery of rising fuel costs from our customers.
Operating costs of $13.8 million in the quarter were $1.8 million lower than the prior year, reflecting lower harvesting activity in timber services, partially offset by higher fuel prices. Variable costs per cubic meter increased 33% as a result of higher fuel costs during the second quarter of 2022.
Adjusted EBITDA totaled $2.7 million during the quarter, compared to $3.9 million in the prior period. Adjusted EBITDA margin for the quarter was 17%, compared to 20% in the prior year period.
Our net income for the second quarter was $4.5 million, compared to $6 million in the prior year period. The variance in net income compared to the prior year period was primarily the result of lower sales volumes and the non-cash unrealized foreign exchange gain on long-term debt recorded in the prior year of $2.3 million. As a result of the application of hedge accounting effective January 1, 2022, these adjustments are now recorded in other comprehensive income rather than through profit and loss.
Reflecting the seasonality of the business, we generated $1.9 million of free cash flow and declare 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 our New Brunswick Timberlands were $13.5 million, compared to $15.9 million during the prior year period. Sales volume excluding biomass decreased by 17%, primarily due to the later start to operations and limited contractor availability previously mentioned, which also impacted timber services activity.
Operating costs in the second quarter totaled $10.9 million, compared to $12 million in the prior year period. The decrease in operating costs is a result of lower harvesting activity and timber services activity, partially offset by higher fuel prices. Weighted average variable costs per cubic meter increased 30% as a result of higher fuel costs compared to the prior year period.
New Brunswick adjusted EBITDA in the quarter was $2.7 million, compared to $3.9 million in the prior year period. Adjusted EBITDA margin decreased to 20%, compared to 25% last year.
Switching over to Maine. Sales during the second quarter totaled $2.9 million, compared to $3.5 million in the same period last year. Sales volume excluding biomass decreased 33%, also reflecting a later start to operations compared to the prior year and limited contractor availability at the start of spring operations.
The weighted average selling price including biomass in U.S. dollar terms increased 18% compared to the prior year, with higher sawlog and pulpwood prices, benefiting from favorable market dynamics, as well as fuel cost recovery from customers. In Canadian dollar terms, prices increased 23%.
Operating costs totaled $2.6 million in the quarter, compared to $3.1 million during the same period last year, primarily due to lower harvesting activity. Weighted average variable costs excluding biomass increased 20%, primarily as a result of higher fuel costs.
Adjusted EBITDA for the quarter was $0.4 million and adjusted EBITDA margin was 12%, both consistent with the same period last year.
With respect to Acadian’s financial position, it remains strong, ending the second quarter with a net liquidity position of $19.5 million, including a cash balance of $6.8 million and our revolving credit facilities, which remain undrawn. Our first dividend with a DRIP in place occurred during the quarter and contributed $1.1 million to our liquidity.
As a final note, and as a reminder, in the current rising interest rate environment Acadian’s debt has fixed rate terms expiring in 2025 through 2030.
With that, I’ll turn the call over to Adam.
Adam Sheparski
Thank you, Susan. Acadian remains committed to health and safety as our number one priority. During the quarter, we experienced one recordable safety incident among employees and none among our contractors. The individual has made a full recovery and return to work after two days. As we’ve said before, we believe that emphasizing and achieving an excellent safety record is a leading indicator of success in the broader business.
Sustained demand across all of our main products resulted in significant improvements in pricing during the quarter. In addition, we have worked with our customers and have begun to recover the additional operational costs we have been incurring, which we expect will have a positive impact on results for the remainder of the year.
It is difficult to quantify the dollar impact of this initiative on the second half of the year, as it is tied to the price of fuel, but we do expect to recover the majority of these additional costs going forward.
As Susan mentioned, both harvesting and deliveries were negatively impacted by the later start to operations due to the weather after the spring thaw and limited contractor availability, particularly in Maine.
As a result of this delay, demand for our products is elevated, as customers attempt to replenish inventories and we are actively working with our contractors to increase deliveries for the remainder of the year.
Switching over to our second quarter results, we were very pleased that overall pricing for softwood sawlogs and softwood pulpwood increased 16% and 24%, respectively. Demand for these products is expected to remain stable in the short- to medium-term.
In New Brunswick softwood sawlog sales volumes were consistent with the prior year and softwood pulpwood sales volume increased by 11%, as a result of the stable softwood lumber market and increases in regional demand for softwood pulpwood compared to the prior year period.
In Maine softwood sawlog volumes decreased 26% as compared to the prior year and softwood pulpwood volumes decreased by 35%, although these volumes are relatively modest.
We continue to experience significant demand for our hardwood sawlogs, which combined with our continued merchandising efforts, has resulted in hardwood sawlog pricing increasing 27% overall, compared to the prior year period.
Hardwood sawlog volumes in New Brunswick decreased by 6% being negatively impacted by the later start and the limited contractor availability discussed earlier. Hardwood sawlog volumes in Maine decreased 22%, the same reason, although these volumes were also relatively modest.
Hardwood pulpwood sales volume in New Brunswick decreased by 32% and by 44% in Maine, compared to the prior year period, driven by the late start and limited contractor availability, while prices increased in both New Brunswick and Maine by 10%. As we exited the quarter, demand for hardwood pulpwood appears to be slightly outpacing regional supply.
Pricing on biomass has declined by 41% year-over-year and biomass sales volume decreased by 70% due to unfavorable market dynamics. As a result of info missionary pressures, volumes are limited, as we continue to work with our biomass customers on updating pricing for the remainder of the year.
Turning to our outlook, the North American economic outlook is uncertain, with interest rates rising, and both housing prices and sales are beginning to decline. Although these headwinds may impact the demand for our products, we note that consensus forecast is for approximately 1.62 million U.S. housing starts in 2022, as compared to 1.6 million in 2021. Accordingly, we remain confident that the stability of the Northeast Forestry sector, the long-term demand for new homes, as well as repair and remodel activity will support the pricing of our products.
Inflationary pressures are weighing on our financial results. We have seen modest increases in our contractor rate and then the fuel surcharge we pay our contractors as prices continue to be at historic levels.
As I mentioned earlier, Acadian has worked with its customer base over the last quarter and has begun to recover these costs, which we expect to have a positive impact on our results. Although softwood lumber pricing has decreased from its historic levels, demand for softwood sawlogs remain stable, with our pricing expected to increase over the coming quarters.
As I’m sure you’ve all seen in the news recently, the Province of New Brunswick announced adjustments to the Crown timber royalty rates for the first time since 2015. The new system is expected to allow for adjustments to timber royalty rates when prices for specific commodities such as lumber are above normal ranges.
In a step towards this new system, which requires the development of specific legislation, the current Crown timber royalty rates will be adjusted upwards to account for higher than normal commodity prices.
Immediate impact to Acadian’s net earnings will not be material. However, the new system may impact future market prices and in turn the prices we obtained for products from our freehold timberlands.
End use hardwood markets remain stable throughout the Northeast, with significant demand and elevated pricing for hybrid hardwood sawlogs. As we exit the second quarter, with respect to hardwood markets, it is uncertain how the headwinds from the broader economic outlook may be offset by the reduction of imports from Eastern Europe over the longer term. In regards to hardwood and softwood pulpwood demand remain, sorry, in regards to hardwood and softwood pulpwood demand remains stable and is expected to continue throughout 2022.
Finally, the work to develop the forest carbon inventory has continued with baseline inventory data having been collected and modeling almost completed. Initial estimates of the volumes of credits to be developed are expected in the very near-term from our third-party developer. The timeline for this project has not changed and Acadian expects to begin receiving proceeds from sales of carbon credits in the second half of 2022.
As we stated last quarter, that while this project is small in relation to the entire Acadian land base, and originally expected to contribute modestly to cash flow, the current markets for voluntary carbon credits have strengthened during 2022 and may contribute more than originally expected.
In closing, Acadian has a strong balance sheet, increasingly diverse markets and a highly capable team dedicated to strong financial and operating performance, while actively working with our current and potential new contractors to increase deliveries to our customers for the remainder of the year. While we make improvements throughout the business to maximize cash flow from our existing timberland assets, we continue to explore strategic opportunities to grow for our shareholders.
With that, we’re now available to take your questions. Operator?
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] And our first question coming from the line of Hamir Patel with CIBC. Your line is open.
Hamir Patel
Hi. Good afternoon. Adam with the…
Adam Sheparski
Hi, Hamir.
Hamir Patel
… with the increase in the New Brunswick stumpage rates. When’s the earliest that your customers would start seeing that, and I guess in terms of potentially impact, when would you perhaps be able to increase your own pricing? And maybe you can just recap for us what the percentage increases are across the different categories that the province has done?
Adam Sheparski
Yeah. Sure, Hamir. And so our customers are the folks that are currently incurring these royalty rates that they consuming pulpwood [ph]. It’s actually effective April 1, 2022. So there’s a little bit of a backdating situation that’s going to happen as we progress through the year and as they finalize the current rates. So they’re going to — they are hypothetically experiencing it now, whether they haven’t been officially billed for it yet.
The second part of your question, when will we start to feel it? So I — we don’t know exactly when that’s going to happen, which is why we don’t think it’s going to have an immediate impact on our sales. It has this sort of take a little bit of a progressive stance where Congress rates will come up and then we’ll start to see, I suspect the prices for not only probably lots, but also for us to go up as well. So, we’re thinking, in the next few quarters, we’re going to start seeing prices start to increase as a result of the royalty rates going up.
Hamir Patel
Right. Okay. Thanks. Thanks, Adam. That’s helpful. And just can you give us any color and what you’re seeing out there on M&A — potential M&A opportunities for timberlands in Eastern Canada or the Northeast?
Adam Sheparski
Yeah. I think there’s actually one other parts your earlier question, I apologize. You were asking about some of the rates. And so just from a high level perspective, from — for instance, screws for saw timber, which obviously has a significant impact on our business, the royalty rate is going up approximately 58%, pulpwood is going up approximately 70% and hardwood sawlogs upwards 79% and 40%, respectively. Although, I would caution you, we get fairly good pricing on our hardwood sawlogs already. So I wouldn’t — I — we don’t expect the royalty rates to impact this hardwood sawlog pricing from our perspective.
On the M&A pers — activity in the Northeast. We have seen some properties come — some timberlands come on the market. The — I would say, the market is still quite heated and the pricing is still quite elevated at this point. So, although, we continue to look at them, it’s just — it — the pricing is still quite high at this point. But we will continue to look at it as interest rates rises, and hopefully we can grow.
Hamir Patel
Great. Thanks, Adam. That’s all I had. I will turn over.
Adam Sheparski
Thanks, Hamir.
Operator
Thank you. And our next question coming from the line of Andrew Kuske with Credit Suisse. Your line is open.
Andrew Kuske
Thanks. Good afternoon. Maybe if we could just focus on the contractor issues and just more broadly labor, like obviously, there’s a broader societal issue on a labor standpoint right now. But it’s also been progressively problematic for the forestry industry. I guess when you sort of stand where you are now, what are you trying from a strategy standpoint to secure contractor availability and really encourage new timberland to come into the industry so to speak?
Adam Sheparski
Yeah. There’s no question. Labor and the forestry industry is continued to be challenged. I would say, the market participants up here in the Northeast, lots of conversations about labor and looking at immigration, for instance, is one topic that is becoming more popular in the industry to try and fill those vacancies that we’re seeing.
But it’s something that that our contractors are definitely challenged with. Where we are? Somewhat remote with our timberlands. I don’t think it’s as impactful as other parts of the — of North America, but it still remains a bit of a challenge for us.
Andrew Kuske
Okay. That’s helpful context. And just maybe on the biomass side, given just some of the dynamics we see with global natural gas markets, some of the pellets markets and energy balances in Europe. I guess what’s driving the weakness in your biomass numbers at a local level and could that shift pretty meaningfully just given all the other things I mentioned?
Adam Sheparski
Yeah. So we’re currently discussing that with our biomass customers, as I mentioned in my remarks. We’re seeing the global impacts right now, as you outline them, and obviously, we’re having price increases from our contractors and for biomass, the big piece of that is this trucking it. And so what you saw in Q2 is us more or less ensuring that we’re going to get paid appropriately for that product, which we believe we’ll start here in the next — well, anytime now I suppose.
Andrew Kuske
Okay. That’s helpful color. I was saying something but nothing too much. Maybe just finally on the carbon credit side, you gave some great commentary on that. But do you have any kind of potential for carbon capture and sequestration on your lands? Are you just really too far from industrial hubs to really make that math work or that’s just you’re not exploring that at this stage?
Adam Sheparski
Haven’t spent much time exploring it. We’re using our current carbon project as a training wheels. We are somewhat remote. We’re continuing to look at the markets across North America, including Canada as time progresses, but staying pretty focused and we’ll stay pre-focus for the next quarter or two on our current carbon project.
Andrew Kuske
Okay. Thank you very much. That’s very helpful.
Adam Sheparski
Thank you.
Operator
Thank you. And our next question coming from the line of Atharva Zaveri with RBC Capital. Your line is open.
Paul Quinn
Yeah. Thanks. This is Paul for — I have been here for Atharva.
Adam Sheparski
Hi, Paul.
Paul Quinn
Hey. Just back to this New Brunswick stumpage increase, I find that timing quite interesting now that lumber prices have normalized to raise it. So some it is so much, but do you — that 50% plus increase in softwood sawlog, do you expect that to translate into a similar increase on your sales as well?
Adam Sheparski
So I wouldn’t use that 50% — that 58%? That’s certainly not the number. From $1 perspective for cubic meter, Paul, it’s $13.25 per cubic meter is the blended log stud number. So, yeah, I would focus more on that number if I was you and it’s to be determined. We’re seeing some good price increases, obviously, with softwood sawlogs. As we’ve always said, demand is going to drive a fair bit of this, but with the stumpage rates coming up? I’m not sure we’re going to be able to capture it all, but we’re sure hoping to capture a lot of it in the same quarters.
Paul Quinn
Okay. And that’s stumpage increase, does it also increased the fees that you guys have for managing Crown then?
Adam Sheparski
Not at this point. No.
Paul Quinn
Okay. And then just switching over to the carbon side, I’m just trying to, you can take a stab at what this potential upside is, any help you can give us there?
Adam Sheparski
Yeah. It’s a bit early. I know it sounds crazy saying that after we’ve been at this for a year, but we’ll have a lot more color for you in Q3.
Paul Quinn
Okay. Look forward to that. Thanks, guys.
Adam Sheparski
Okay. Thank you.
Operator
And I’m not showing any further questions at this time. I’ll turn the call back over to Mr. Sheparski for any closing remarks.
Adam Sheparski
Thank you. On behalf of the Board and management of Acadian, I would like to thank you all. 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 third quarter conference call on October 27th. 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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