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Edited Transcript of ADN.TO earnings conference call or presentation 31-Jul-19 5:00pm GMT

Q2 2019 Acadian Timber Corp Earnings Call

Vancouver Aug 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Acadian Timber Corp earnings conference call or presentation Wednesday, July 31, 2019 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mark M. Bishop

Acadian Timber Corp. - President & CEO

* Matthew Gross

Acadian Timber Corp. - CFO & VP

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Conference Call Participants

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* Andrew M. Kuske

Crédit Suisse AG, Research Division - MD, Head of Canadian Equity Research, and Global Co-ordinator for Infrastructure Research

* Hamir Patel

CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Paper and Forest Products Analyst

* Paul C. Quinn

RBC Capital Markets, LLC, Research Division - Analyst

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Presentation

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Operator [1]

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Thank you for standing by. This is the conference operator. Welcome to the 2019 second quarter results conference call and webcast for investors and analysts. (Operator Instructions) I'd now like to turn the conference over to Matt Gross, Chief Financial Officer. Please go ahead, Mr. Gross.

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Matthew Gross, Acadian Timber Corp. - CFO & VP [2]

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Thank you, operator, and good afternoon, everyone. Welcome to Acadian's Second Quarter Conference Call. Before we get started, I will first remind everyone that in discussing our second quarter financial and operating performance, our outlook for 2019 and responding to 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 Acadian's annual information form dated March 28, 2019, and other filings of Acadian, which are available on SEDAR at sedar.com and on our website.

Moving into our presentation for today, I'll start by outlining the financial highlights for the quarter ended June 29, 2019. Then Mark Bishop, Acadian's President and CEO, will comment on our operations, market conditions and our outlook for 2019.

Regarding second quarter results. Overall, Acadian benefited from strong demand, reflecting favorable Northeast regional log market dynamics and operating conditions. Acadian traditionally experiences low levels of operating, marketing and selling activity during the second quarter of each year, owing to the spring thaw period that causes much of the infrastructure to be temporarily inoperable.

As a result, there may be year-to-year variations in the second quarter, which are less than equal than over a longer period. Acadian generated adjusted EBITDA of $3 million during the second quarter, up from $2.6 million in the prior year period. This reflects a 5% year-over-year increase in log sales volumes and a 73% improvement in ancillary revenues primarily related to timing of timber services.

In addition, Acadian benefited from stronger, higher and better use land sales. Our net income was $5.8 million during the second quarter compared to $1.9 million in the prior year. The variance from the prior year is largely explained by an unrealized foreign exchange gain on U.S. dollar-denominated long-term debt in 2019 compared to the prior year, which was in an unrealized loss position.

For the 6-month period, Acadian's payout ratio was 105%, which is above our long-term annual target of 95%, but in line with expectations given the seasonality of our operations and the dividend increases approved in May 2018 and February 2019. We anticipate that over the long term, we will revert to a payout ratio consistent with our target level. And in the near term, Acadian's strong cash position supports a payout ratio in excess of the target.

Sales for the quarter were $17.9 million compared to $16.1 million in the prior year, reflecting a 5% increase in log sales volumes and a 73% increase in the ancillary revenues primarily related to timing of timber services. The weighted average log selling price was in line with the prior year period as our products continue to benefit from favorable market dynamics.

The adjusted EBITDA margin for the quarter was 17%, higher than 16% in the prior year period due to improved log sales volumes, ancillary revenues and higher and better use land sales, which were partially offset by the impact of higher relative operating costs.

I will now move into the results for each of our new New Brunswick and Maine operations. During the second quarter, sales for our New Brunswick Timberlands were $14.4 million compared to $12.9 million during the prior year period. Seasonal demand remained strong and conditions were favorable, resulting in a 3% increase in log sales volumes and a 75% increase in ancillary revenues primarily related to timing of timber services, which were impacted by adverse weather conditions during the first quarter.

The weighted average log selling price during the quarter was just under $70 per cubic meter, largely in line with the prior year period. Pricing benefit from a 6% increase in softwood sawlog pricing and higher relative sales of higher valued hardwood sawlogs, reflecting continued strong demand. This benefit was offset by a 4% decrease in average hardwood pulpwood pricing due to changes in the customer mix.

In addition, export markets for New Brunswick's biomass products remained strong as overall contributions per cubic meter were in line with the prior year period. However, sales volumes decreased 40% due to timing of deliveries.

New Brunswick's adjusted EBITDA was $2.8 million during the second quarter of 2019 compared to $2.2 million in the prior year period, while the adjusted EBITDA margin increased to 20% from 17% in the prior year period. These improvements were as a result of the aforementioned factors, which were partially offset by higher variable harvest costs.

Moving on to our Maine Timberlands. Sales during the quarter totaled $3.5 million compared to $3.2 million for the same period last year. Seasonal demand remained strong and operating conditions were favorable as log sales volumes increased 14%. The benefits of which were partially offset by a 5% decrease in the weighted average log selling price. The weighted average log selling price during the quarter in Canadian dollar terms were $76 per cubic meter compared to $80 per cubic meter in the prior year. Log pricing in U.S. dollar terms was 8% lower than the prior year period. This reflects improved demand for hardwood sawlogs and hardwood pulpwood for which prices increased by 23% and 6%, respectively. This benefit was more than offset by a 10% decrease in softwood sawlog prices due to shorter average hauling distances and modest pricing pressure resulting from the recent decline in lumber prices and changes in the sales mix due to higher relative sales of lower valued softwood pulpwood.

As a result of these factors, adjusted EBITDA for the quarter was $0.5 million compared to $0.6 million during the prior year period, while the adjusted EBITDA margin was 16% during the quarter compared to 18% in the prior year period.

And lastly, a few comments on our overall balance sheet financial position. Acadian ended the quarter with a healthy cash balance of approximately $21 million. Acadian has ample cash resources, which is further supported by funds available under our revolving credit facility and a standby equity commitment from Brookfield, overall making up a net liquidity position of approximately $97 million.

In regard to our USD 50 million standby equity commitment from Brookfield, this was set to expire this month. And during the second quarter, Brookfield and Acadian agreed to extend the facility grid an additional 2 years through July 2021.

During the quarter, we declared a dividend of $0.29 per share, which is 3% higher than the prior year, reflecting the dividend increase announced in February 2019.

That concludes my remarks in this quarter's financial results. And I'll now turn the call over to Mark.

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Mark M. Bishop, Acadian Timber Corp. - President & CEO [3]

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Thank you, Matt. During the quarter, Acadian's operations had no recordable safety incidents among employees and 1 amongst contractors. While the incident did result in some lost time, the individual made a full recovery and has since returned to work. Acadian takes safety in the workplace very seriously, and we strive for continuous improvement in our employee and contractor safety performance.

Acadian continues to benefit from solid conditions across the key markets in New Brunswick and Maine. During the quarter, harvesting and tracking activities resumed as expected after the spring thaw.

Due to favorable second quarter operating conditions, Acadian was able to reduce log inventories, which were higher than normal at the beginning of the quarter due to adverse weather -- winter weather conditions during the first quarter as you recall. As a result, log sales volumes, excluding biomass, of 180,000 cubic meters for the quarter were up 5% year-over-year.

Acadian's weighted average log selling price was largely in line with the prior year period, reflecting solid pricing and demand for softwood sawlogs and hardwood pulpwood. Demand for softwood sawlogs in New Brunswick remained strong with prices increasing about 6%, while the average hardwood pulpwood price increased -- sorry, decreased 4% due to changes in the customer mix.

Markets in Maine remained strong, with prices in U.S. dollar terms for softwood pulpwood and hardwood pulpwood improving 9% and 6%, respectively, compared to the prior year.

Softwood sawlog pricing decreased 10% due to shorter average haul distances and modest pricing pressure due to the recent decline in lumber prices. In addition, export markets for biomass products remained strong as New Brunswick's overall contributions per cubic meter were in line with the prior year period, although sales volumes did decrease 40% just to the timing of deliveries.

Acadian's key markets, including softwood sawtimber and hardwood sawtimber and hardwood pulpwood in the Northeast, remained strong. North American softwood dimension sawmills represent over 1/3 of Acadian's end-use market and are the primary market for our softwood sawtimber. Well-balanced regional supply/demand fundamentals for both softwood and hardwood resource segments, combined with deep and diversified end-use markets, continue to support stable log pricing across all our key markets.

A combination of supply-side constraints, including tight construction labor markets and restrictive building regulations and also unseasonably cold and wet first half construction season, weighed on housing activity during the first half of 2019. As you're all aware, recent solid wage growth performance and the prospect for near-term rate reduction, coupled with favorable underlying demographics, continued support longer term household formation growth and would suggest modest momentum in housing start should return over the medium term. Recent construction -- sorry, consensus forecast now anticipate a modest year-over-year contraction of U.S. housing starts for 2019 of about 1% followed by a 2% to 3% increase for 2020. So after a slight anticipated decline for 2019, North American lumber consumption is expected to post modest year-over-year growth, supporting about a 3% to 5% increase in sawtimber demand through 2020.

Average second quarter 2019 quarterly benchmark Eastern Spruce-Pine-Fir and Southern Yellow Pine lumber prices declined about 5% and 7%, respectively, from the prior quarter as lower-than-expected demand resulted in an inventory build during the quarter. With a return to more normal summer weather patterns, forecasters expect improved demand growth, combined with capacity curtailments in Western Canada and the U.S. Pacific Northwest, to support a modest recovery in lumber pricing through the fall building season. There was no notable progress in bilateral U.S. Canadian lumber trade discussions during the quarter, and we continue to expect the current level of duties will apply right through 2020.

We anticipate uncertainties surrounding the trade file will continue to drive a higher-than-normal volatility in lumber prices. As Acadian's regional Northeast sawmill customers continue to run at normal operating rates, we foresee stable sawtimber demand during the second half of this year and well into 2020.

Acadian's hardwood sawtimber and pulpwood markets remained well-balanced with a continued stable outlook for the remainder of the year. Softwood pulpwood markets, Acadian's smallest product segment by volume and margin, continue to gradually improve, which had been recently supported by the restart of the pulp mill in the second half of 2019 in Maine. While the biomass market in Maine remains weak, the New Brunswick biomass market continues to be supported by the export demand at attractive prices.

In closing, I'd like to highlight that with a strong balance sheet, highly capable operating team and a positive market outlook, Acadian is very well positioned to meet our quarterly distributable cash commitment over the coming year. While no shares were repurchased under the normal course issuer bid established during the second quarter of this year, we will continue to re-seek opportunities to do so at the appropriate valuation.

On behalf of the Board and management of Acadian, I'd like to thank you for your ongoing support. And that now concludes our formal remarks, and we're available to take any questions from participants. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Hamir Patel with CIBC Capital Markets.

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Hamir Patel, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Paper and Forest Products Analyst [2]

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Mark, I was curious if you can comment on what you're seeing in hardwood markets? I know in the U.S., there's been a lot of pricing pressure for hardwood lumber given the trade war with China. So is that starting to affect the operating schedules of some of your hardwood lumber customers?

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Mark M. Bishop, Acadian Timber Corp. - President & CEO [3]

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Yes. Hamir, certainly, we've seen that occurring in other regions. We really -- again, given to -- given the sort of supply-demand balance that we see in our markets, we are not seeing any meaningful backing off of operating rates or demand. As I mentioned, conditions are very stable. Our customers, both hardwood and softwood, are continuing to operate, for the most part, on 2 shifts. And clearly, this is a period where they take their normal scheduled summer closures, their summer vacation periods. But we're not seeing any significant pressure from the hardwood segment at all, and that's obviously on the sawtimber side. And as you're aware, hardwood pulpwood markets globally have softened, but again, our demand remains very, very strong for hardwood pulpwood. And this year, we've seen some -- a little bit of incremental positive movement in our prices and certainly not seeing any backing off of demand.

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Hamir Patel, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Paper and Forest Products Analyst [4]

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Fair enough. And Mark, any comments you can share on how the M&A environment looks for potential timberland acquisitions?

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Mark M. Bishop, Acadian Timber Corp. - President & CEO [5]

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The broader market, Hamir, is still very quiet. I would say, this year started off quiet as you're probably familiar with and has continued to be so. We've seen some smaller sales that have started to take place, but nothing of any significant size or -- and certainly not in our regions seeing much in the way of marketed opportunities.

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Operator [6]

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And our next question comes from Paul Quinn with RBC Capital Markets.

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Paul C. Quinn, RBC Capital Markets, LLC, Research Division - Analyst [7]

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Just question on -- trying to understand how material the restart of Old Town pulp mill is to you guys.

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Mark M. Bishop, Acadian Timber Corp. - President & CEO [8]

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It's certainly coming at a good time, and it is -- it's quite important. We were basically seeing couple of -- the last couple of years, pulpwood moving at very, very minimal prices, and certainly Crown pulpwood being left in the woods. But we've seen now a significant amount of activity of that mill building inventory. We understand they've hired a number of individuals for their workforce, and there is now a softwood pulpwood market in that region, and it's got certainly everybody a little bit more excited about our overall markets and the residual markets as well. Now I think the enthusiasm and -- we just finished having a tour of our region, of our operations, and one of our customers. And seeing the capital that this customer is spending at this operation and in another that they're restarting -- sorry, starting a new build, is very encouraging. They talked about their ability to be more excited because of the residual market coming up, and they don't see this mill as anything but complementary to what's happening in the markets. We've got a very strong studwood market now. And so we don't see our studwood market moving down towards pulpwood. It's going to keep pulpwood pricing a little bit higher than otherwise, and so it's a very positive dynamic all around.

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Paul C. Quinn, RBC Capital Markets, LLC, Research Division - Analyst [9]

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Okay. And I know the guys involved in the mill have got some money behind them, but global pulp markets are -- have been off all year and continue to trade down. Do you have any idea what the economics are of that mill? Or do you see that -- the restart being a short-lived thing? Or do you see that as being a long-lived asset into the future?

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Mark M. Bishop, Acadian Timber Corp. - President & CEO [10]

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Yes. I mean, I think, Paul, you probably know them better than I do, but the understanding I have is that they have a very long-term focus. And this is an investment they're making for the long haul. It's not a short term, get it up and running and flip it. It's not a private equity-like investment from what I understand it. So there is a commitment here, and we are certainly taking it that way.

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Paul C. Quinn, RBC Capital Markets, LLC, Research Division - Analyst [11]

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Okay. And then just flipping over to the land sales, maybe you can give us some details on what you sold in the quarter? What the future brings as well?

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Mark M. Bishop, Acadian Timber Corp. - President & CEO [12]

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Actually, this quarter, Paul, the land sale was one that we were not really previously focused on. But it was an opportunistic, about a 300-acre piece of property. And the individual was interested in a portion of it for, I think, a maple operation, and ultimately, acquired the larger piece to do that. But it was one that was isolated and separate from our normal timber operations. And it was a very sort of a win-win opportunity for us at a reasonable valuation. We are not overly focused. We just haven't been -- we don't see a significant amount of opportunity in New Brunswick for follow-on sales like this, but from time to time, we see those opportunities. Our -- the bulk of our land sales is really focused on the Maine assets, the KTL and KFM lots. And that's moving, I would say, slowly but steadily, and we will continue to see smaller parcels, like CyTech parcels sell through the second half of the year. And the market is, I wouldn't say it's super strong, but it's steady, and there remains to be good interest in the area.

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Operator [13]

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And our next question comes from Andrew Kuske with Crédit Suisse.

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Andrew M. Kuske, Crédit Suisse AG, Research Division - MD, Head of Canadian Equity Research, and Global Co-ordinator for Infrastructure Research [14]

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Mark, I think, you mentioned the biomass markets are strong for you and New Brunswick on an export basis. Could you just give some color on just the year-over-year declines you have in the harvests and the sales for the biomass line?

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Mark M. Bishop, Acadian Timber Corp. - President & CEO [15]

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Sorry, the -- so I think the -- some of what we've seen is seasonal volatility. And as you know, the export sales, it's largely volume that has been going to Turkey. And that is -- we have a couple of boatloads every year, sporadically through the year. And so quarter-to-quarter, we may see, depending on the boat -- when the boat departures are and when we're ready to take a full load. So the annual year-over-year, quarter-over-quarter variations can be up and down and are not that meaningful. Although I will say that looking to the second half of this year, we still have a good relationship with the buyers there, but geopolitical conditions may suggest that we could see a bit of a slowdown temporarily, or at least like we saw maybe 1.5 years ago, 2 years ago, we saw similar things happen. That market continues to be there and will certainly be there, we think, for the longer term. But we may see some continued volatility due to some of the geopolitical activity in that region.

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Andrew M. Kuske, Crédit Suisse AG, Research Division - MD, Head of Canadian Equity Research, and Global Co-ordinator for Infrastructure Research [16]

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Okay. That's helpful. And then based on what you see right now from a weather condition standpoint, what you've experienced in the current quarter and then when you look ahead just under your harvest plan, will you be roughly in line with your long-run sustainable harvest rates?

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Mark M. Bishop, Acadian Timber Corp. - President & CEO [17]

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Yes. The second half of the year looks -- I mean, clearly, we don't ever anticipate significant sort of unusual weather patterns, and we certainly are not seeing that this year. And sorry -- currently, this -- in this third quarter seeing unusually dry weather, for instance, it's actually been very, very good. If not, maybe a little cooler and wetter than normal, but fully manageable. We don't expect any sort of disruptions or fire seasons, et cetera. So no, we expect to be very much on track with our ASC and pretty much aligned with what you've seen stated in our AIF. As you know, we are going a little harder on softwood in Maine, and that's really taking advantage of an opportunity to access a little bit of softwood that had accumulated, and effectively we can accelerate that in these current market season. And so expect to see a little more softwood in our mix in Maine through the rest of this year and into next year.

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Operator [18]

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This concludes the question-and-answer session. And I would now like to turn the call back over to Mark Bishop for closing remarks.

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Mark M. Bishop, Acadian Timber Corp. - President & CEO [19]

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Well, thank you all for dialing in. It's -- I know it's a busy earnings season, and there's other calls for you to jump on to. So really appreciate you taking the time to listen in and ask questions. And again, if there's any need for follow-up, Matt and I are both available if you need us. So again, have a good remaining third quarter and summer, and look forward to talking to you at the next call.

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Operator [20]

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Ladies and gentlemen, this concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.