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Edited Transcript of ADN.TO earnings conference call or presentation 13-Feb-20 6:00pm GMT

Q4 2019 Acadian Timber Corp Earnings Call

Vancouver Feb 18, 2020 (Thomson StreetEvents) -- Edited Transcript of Acadian Timber Corp earnings conference call or presentation Thursday, February 13, 2020 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adam Sheparski

Acadian Timber Corp. - CFO

* Brian Banfill

* Erika Nicole Reilly

Acadian Timber Corp. - Interim President & CEO

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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 and Paper & Forest Products Analyst

* Paul C. Quinn

RBC Capital Markets, Research Division - Director of Paper and Forest Products & Paper and Forest Products Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Acadian Timber Q4 2019 Conference Call and Webcast. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Mr. Brian Banfill. Thank you. Please go ahead, sir.

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Brian Banfill, [2]

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Thank you, operator, and good afternoon, everyone. Welcome to Acadian's fourth quarter conference call. Before we get started, I'm pleased to introduce Acadian's new Chief Financial Officer, Adam Sheparski. Adam is a CPA, who most recently worked with one of Canada's largest grocery retailers. Adam brings a wealth of experience in public accounting, reporting and treasury and taxation and has participated in several large M&A transactions during his career. He'll be based in Edmundston, where Acadian's accounting and finance group is located. Welcome, Adam.

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Adam Sheparski, Acadian Timber Corp. - CFO [3]

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Thank you, Brian, and hello, everyone. I just wanted to say that I'm very excited to be joining the Acadian team and look forward to working with you over the coming months to ensure a smooth transition.

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Brian Banfill, [4]

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Thanks, Adam. Before discussing Acadian's results, I will first remind everyone that in discussing our 2019 financial and operating performance and our outlook for 2020 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.

I'll begin with some comments on our financial results for the year ended December 31, 2019. Then Acadian's President and CEO, Erika Reilly, will add some further remarks on the business operations, market conditions and our outlook for the new year.

As we discussed on our third quarter conference call, 2019 was a transformative year for Acadian with Brookfield selling its entire 45% interest in Acadian to Macer Forest Holdings and Acadian internalizing its asset management and corporate functions as the evergreen management contract with Brookfield was terminated. Acadian paid Brookfield $18 million to terminate the agreement and in return Acadian no longer pays management or performance fees. These fees totaled $3 million in 2018.

Acadian continues to benefit from strong and stable market dynamics for softwood sawlogs in New Brunswick. However, softwood sawlog pricing in Maine came under pressure during the latter half of the year due to weakness in prices for saw and timber products in North America. Markets for hardwood continue to be strong at both operations, particularly for hardwood pulpwood and softwood pulpwood markets continued to improve during the year.

Sales for the year ended December 31, 2019, were $100 million, almost unchanged from $99.8 million in the prior year. The results benefited from a 3% increase in sales volume, excluding biomass, with improved demand for softwood pulpwood, partially offset by lower biomass sales and a modest decrease in timber services activity. The weighted average selling price, excluding biomass, was also almost unchanged year-over-year with softwood sawlog and pulpwood price improvements of 2% and 13%, respectively, offset by a greater proportion of relatively lower-valued softwood pulpwood in the mix of products sold.

Operating costs of $77.8 million in 2019 were down 1% from $78.8 million in the prior year due to lower admin costs and harvest volumes. Variable harvest costs per cubic meter were almost unchanged year-over-year, increasing just 1%.

Adjusted EBITDA totaled $23.6 million during the year, up $1.5 million from the prior year and the adjusted EBITDA margin for the year climbed to 24% from 22% in 2018.

Key factors contributing to the year-over-year improvements include lower management and performance fees due to the termination of the management agreement and the benefit of reduced year-end inventory levels compared to the prior year as the inventory management program with one of our customers that was in place during the fourth quarter of 2018 was not in place this year.

Our net income for 2019 was $17.3 million compared to net income of $26.3 million in the prior year. The variance from the prior year is primarily due to the termination fee I discussed earlier. After income tax, the fee reduced net income by $12.8 million or $0.77 per share. This was partially offset by an operating earnings improvement of $1.2 million for the reasons I've mentioned, and lower income tax expense of $2.8 million, after adjusting for the effect of the termination fee.

Additionally, in 2019, we recorded an unrealized foreign exchange gain on the revaluation of our U.S. dollar-denominated long-term debt of $4.7 million compared to an unrealized loss in the prior year of $7.5 million. However, this was almost entirely offset by a smaller fair value revaluation of timber assets compared to the prior year.

Acadian's 2019 payout ratio was 103%, which is above our long-term annual target of 95%, but in line with expectations given the dividend increase approved in February '19. We anticipate that over the long term, we will revert to a payout ratio consistent with our target level.

During the fourth quarter, we declared a dividend of $0.29 per share. And for the year, dividends declared totaled $19.4 million or $1.16 per share.

I will now move into the results for each of our New Brunswick and Maine operations. During the year, sales for our New Brunswick Timberlands were $74.2 million, almost unchanged from $74.8 million in 2018. The sales volume, excluding biomass, increased 2% over the prior year, mostly due to lower inventory levels at the end of 2019 and improved demand for softwood pulpwood. The biomass sales volume fell 34% as a customer who utilized biomass to generate electricity ceased operations during the year and a portion of the harvesting during the year was changed to a system that is more cost-effective but generates less biomass material.

Revenues from timber services and other sales fell 4% due to lower operating activity than in the prior year.

The weighted average selling price, excluding biomass, during 2019 was $66.66 per cubic meter or 1% higher than the 2018 price of $65.74. Prices improved for softwood sawlogs and pulpwood. However, this was offset by a product mix more weighted to softwood pulpwood and a modest decline in hardwood pulpwood prices due to delivery points.

Operating costs in 2019 totaled $56.2 million compared to $58.5 million last year, almost entirely due to lower harvest volumes. Variable harvest cost per cubic meter, excluding biomass, were unchanged year-over-year.

New Brunswick's 2019 adjusted EBITDA was $18.6 million compared to $16.6 million last year, mostly due to lower management and performance fees due to the termination of the management agreement and the benefit of lower year-end inventory levels as the inventory management program with one of the operation's customers that was in place during the fourth quarter of 2018 was not in place this year. Adjusted EBITDA margin for the year increased to 25% from 22% in the prior year.

Switching over to our Maine Timberlands. Sales during the year totaled $25.9 million compared to $25.1 million last year. Improved demand for softwood pulpwood drove a 6% increase in sales volume, excluding biomass; however, this heavier weighting to pulpwood caused the weighted average selling price to fall 2%.

In U.S. dollar terms, the weighted average selling price, excluding biomass, decreased 5% year-over-year to $59.30 per cubic meter. The operations benefited from improved demand for softwood and hardwood pulpwood, with U.S. dollar prices for these products increasing by 8% and 5%, respectively. This benefit was, however, more than offset by a 5% decrease in U.S. dollar softwood sawlog prices due to pricing pressure resulting from weakness in prices for lumber in North America and a greater percentage of softwood pulpwood in the mix of products sold.

Operating costs totaled $19.9 million in 2019 compared to $19 million even during 2018, reflecting the increase in softwood harvest volumes -- sorry, reflecting the increase in softwood harvest volumes. As well, variable harvest cost per cubic meter, excluding biomass, increased 2% due to modest increases in harvesting and hauling contractor rates.

Adjusted EBITDA for the year was $6.7 million, almost unchanged from $6.8 million during the prior year. The benefit of increased sales volume was offset by lower per cubic meter margins that also caused adjusted EBITDA margin to decrease by 1% to 26%.

And lastly, a few comments on our financial position and debt facilities. We ended the year with a cash balance of approximately $7.6 million and liquidity of $10.7 million. The cash balance is down $14.7 million from the balance at the end of 2018, as we used cash on hand plus approximately $8 million drawn from Acadian's revolver to fund the termination fee. Additionally, our year-end working capital balance was higher than in the prior year, but we expect this to return to more typical levels over the course of the year.

Our liquidity position was also impacted by the elimination of the USD 50 million standby equity commitment from Brookfield that was automatically terminated when Brookfield sold its interest in Acadian. You may have noted that our term debt moved up to the current debt section of our balance sheet at year-end. While we are required to report the debt as current, we signed a term sheet with MetLife Investment Management in late November to refinance both the term and revolving facility under essentially the same terms as the existing facilities. We have negotiated slightly more favorable interest rates, and the term debt will be broken into several tranches with maturity dates ranging from 5 to 10 years. We expect the refinancing to close during the first quarter of this year.

I will now turn the call over to Erika for additional comments on the internalization process, operations and outlook for the remainder of 2020.

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Erika Nicole Reilly, Acadian Timber Corp. - Interim President & CEO [5]

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Thank you, Brian. Acadian continued to make good progress internalizing the services Brookfield had provided under the management agreement. Nearly all functions have been fully transitioned and are now handled by Acadian employees. We are also starting to realize the financial benefits of no longer having to pay management and performance fees. As Brian mentioned at the start of the call, Adam has joined our senior management team as CFO and will be based in Edmundston. We believe the entire team will benefit from having regular in-person access to his strong financial reporting, capital markets, financing and M&A experience, and I'm personally looking forward to working with him. While I want to express my thanks to Brian for his help through this transition phase, finding a permanent CFO is an important step in Acadian's internalization process.

Acadian also announced today that after nearly 35 years of loyal service, Luc Ouellet, Senior Vice President of Operations, has retired. Norm Haché, Senior Vice President of Marketing and Operations, who has over 35 years of experience in the Timberland sector and more than 14 years with Acadian, has assumed Luc's responsibilities. Norm is well-respected by the team, and he has a deep operating and marketing background. We are pleased to have Norm stepping into this role and have full confidence in his ability to drive continued strong performance from our business.

Now turning to Acadian's operating performance. Acadian had no recordable safety incidents among employees and one among contractors during the quarter. For the full year 2019, we are pleased to report that the employees based in New Brunswick were accident free throughout the year and the employees based in Maine have now extended their impressive accident-free record to 19 years. We remain focused on maintaining a culture across the organization that emphasizes the importance of strong safety performance and support this by active and regular training and monitoring. Also, we are pleased to remind everyone that both New Brunswick and Maine completed their SFI recertification audit this year, which reaffirms our certificate and is a testament to the sustainability of our business.

The sales volume, excluding biomass, of 1.1 million cubic meters for the year was up 3% from the prior year, reflecting the improved demand for softwood pulpwood. Acadian's weighted average selling price, excluding biomass, was almost unchanged from the prior year, with softwood sawlog and pulpwood price improvements of 2% and 13%, respectively, offset by a greater proportion of relatively lower-valued softwood pulpwood in the mix of products sold.

By region, demand for our softwood sawlog and pulpwood in New Brunswick remained strong with prices increasing 5% and 10%, respectively, from the 2018 level. Pulpwood markets in Maine remained strong with prices in U.S. dollar terms for softwood and hardwood pulpwood climbing 8% and 5%, respectively, compared to the prior year. As previously noted, softwood sawlog prices in Maine weakened in the latter half of the year, resulting in the average price for the full year falling 5% in U.S. dollar terms compared to 2018.

Biomass shipments of -- sorry, shipments of biomass fell 38% compared to the prior year, as Brian mentioned earlier. This product, however, typically only contributes 4% to 7% of Acadian's total adjusted EBITDA.

The outlook for Acadian's products, which includes softwood sawlog and hardwood pulpwood is for demand and pricing to remain stable in the near term. The softwood lumber market is the end-use market for our softwood sawlogs. This market is expected to benefit from slightly stronger U.S. housing starts in 2020, while the U.S. repair and remodeling sector is expected to hold flat at its 2019 level.

Supply side factors, including increased wood from Central Europe and reduced North American exports to China as well as builders' focus on smaller, more affordable homes, which contain less wood may mute some of the benefits of a more positive U.S. housing outlook.

Demand and pricing for our hardwood pulpwood is expected to remain stable, with our largest hardwood pulpwood customers operating at full capacity.

The outlook for our hardwood sawlog, softwood pulpwood and biomass products is mixed with a generally more favorable outlook for our New Brunswick Timberlands.

Acadian's hardwood softwood -- sawlog sales in the U.S. are coming under pressure as an indirect result of Chinese duties on U.S. exports. However, hardwood sawlog sales to Acadian's Canadian customers remain stable as they are focused on species such as hard maple and yellow birch and on industrial lumber products, including rail ties, pallets and flooring that have not been as impacted by the U.S.-China trade war.

Demand for softwood pulpwood from our New Brunswick Timberlands remains steady. However, markets for softwood pulpwood in Maine have recently weakened with high regional softwood pulpwood inventory due to the slower-than-anticipated start-up of a pulp mill in the region. Once this mill reaches full operating capacity, demand for this product is expected to improve.

Finally, while biomass markets in Maine remain weak without significant changes in sight, the New Brunswick biomass market continues to be supported by steady demand at attractive prices. We have been successful in developing relationships with new customers to replace volume to customers that have reduced or closed their operations, which is improving the outlook for 2020.

In closing, I'd like to highlight that Acadian's highly capable and dedicated team is energized and committed to delivering strong financial and operating results for our shareholders. On behalf of the Board and management of Acadian, I would like to thank you for your ongoing support.

That concludes our formal remarks. We are available to take any questions from participants on the line. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) 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 and Paper & Forest Products Analyst [2]

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Erika, I wanted to get your thoughts in the duties or I mean assuming they do come down in mid-August to around 8%. Do you think there's room for your sawmilling customers to increase output?

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Erika Nicole Reilly, Acadian Timber Corp. - Interim President & CEO [3]

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Well, our milling customers today are operating at full capacity. And the outlook for our softwood sawlogs is, I would say, steady to positive. With respect to the duties, we don't think that, that's going to have a material impact on our pricing at this stage. Some of our customers are actually in fact exempt from paying duties. So it'll be a bit of a mixed result amongst our customers.

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

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Okay, great. And I know there's been a few transactions in some of the northern states in the U.S. Anything you could speak to on whether how maybe potential M&A pipeline is looking? And if there are any markets that -- or regions that are looking of interest to you right now?

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Erika Nicole Reilly, Acadian Timber Corp. - Interim President & CEO [5]

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Well, we continue to monitor certainly the activity within a region as well as North America, more generally speaking. We did clearly watch Weyerhaeuser sell its 1.2 million acres of Timberlands in Michigan and Montana and continue to monitor that situation. We also noted Rayonier's acquisition of Pope Resources, clearly, publicly-traded peers of ours. There have been also a couple of notable transactions in Maine that represent about 350,000 acres done on a bilateral basis, but we certainly look into those opportunities as well and are aware of them. We continue to monitor situations, but I think we'll just leave it at that for now.

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Operator [6]

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(Operator Instructions) 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 [7]

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Erika, I think you gave a pretty good description of the process from transitioning from the Brookfield arrangement to really stand-alone. I guess what else needs to be done at this stage? Obviously, the big hire that you've announced and really bulking up the office, the regional office, but what's left in the process? And what inning are we in?

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Erika Nicole Reilly, Acadian Timber Corp. - Interim President & CEO [8]

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I'm very pleased with how, we call it, the internalization process has gone. It's been a very smooth transition and we've transitioned all kind of, let's call it, corporate services or functions away from Brookfield and internalized them at Acadian. I think really the only real outstanding piece is, quite frankly, me. But at this time, I'm here. I'm part of the transition services up to 2 years, and we haven't had conversations as to kind of what's next. But I'm very dedicated and focused to ensuring Acadian continues to perform well.

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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 [9]

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Okay. And then just on the regional wood market dynamics, you had some gives and takes. I think you said, hardwood pulp market is little tight, softwood markets in Maine weakened. And then just your general thoughts on the overall market from a pulp standpoint. Do you see the northern pulp mill come back? And just other dynamics, do you see that market actually getting tighter in the future, and that translates into possibly some upside from the value of your products?

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Erika Nicole Reilly, Acadian Timber Corp. - Interim President & CEO [10]

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And we are monitoring the northern pulp -- northern situation. Just more generally, and as I noted in my remarks, our markets for hardwood pulpwood are incredibly strong with our key customers operating at full capacity. And just regionally, I think we're well positioned to continue to supply our customers.

With respect to softwood pulpwood, we have steady markets, steady demand in New Brunswick. In Maine, as I noted, it's a bit weaker. Inventories are high as the start-up of the Old Town mill has been slower than expected. So there's been a bit of an inventory build, but we expect -- as they start operating at expected capacity, that should normalize the inventory levels and demand should pick up again, helping kind of an outlet for that product.

With respect to the northern pulp situation, we'll see what ultimately happens and transpires over the next 3 to 6, et cetera, months. But I would say, if there is an increase or a ripple effect of increased softwood pulpwood that's in the general regional market, I would note that softwood pulpwood is a low or limiting -- limited contributor to our bottom line. And so while there might be a slightly negative impact, it'd be of very limited consequence to Acadian. On the flip side, there might be actually some opportunities for us to look at as a result of that situation.

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Operator [11]

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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, Research Division - Director of Paper and Forest Products & Paper and Forest Products Analyst [12]

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Just a question maybe to Erika. Just over 40% of your sales are softwood -- softwood sales and, I guess, a big portion of that will be sawlogs. And I'm just curious as your comment that if the duties come down in the summer that they -- you don't expect any effect on pricing because when the duties came in, in 2017, most people thought price response that was seen in the market was partly ineffective, the duties coming in. So just curious as to why you think there won't be a drop in price?

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Erika Nicole Reilly, Acadian Timber Corp. - Interim President & CEO [13]

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And there might be a slight drop in our pricing. As we've seen in our markets, our pricing is not as volatile as lumber prices. We benefit from that being the Timberland owner. And as I mentioned, some of our customers have actually not been subject to the duty to date. But look, like we -- maybe a modest impact, but not -- we do not expect it to be material and we'll continue to monitor the situation.

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Paul C. Quinn, RBC Capital Markets, Research Division - Director of Paper and Forest Products & Paper and Forest Products Analyst [14]

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I know you guys have worked well through the transition away from Brookfield, but any major strategic changes since Brookfield has been out of the picture of Acadia?

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Erika Nicole Reilly, Acadian Timber Corp. - Interim President & CEO [15]

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None. As we mentioned in Q3 and continues to be the case, we're very much operating the business as we always have. So very much focused on maximizing margins and continuing to monitor opportunities regionally.

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Operator [16]

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I'm not showing any further questions at this time. I would now like to turn the call back over to Erika Reilly for any closing remarks.

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Erika Nicole Reilly, Acadian Timber Corp. - Interim President & CEO [17]

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Great. Well, thank you very much, everyone, for joining today's call and enjoy the rest of your day.

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Operator [18]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

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    David Tepper's Top 5 Buys in the 4th Quarter

    David Tepper (Trades, Portfolio), founder of Appaloosa Management, disclosed last week that his fund's top five buys during the fourth quarter of 2019 included a new holding in Intelsat SA (NYSE:I) and position boosts in four companies: Alibaba Group Holding Ltd. (NYSE:BABA), Micron Technology (NASDAQ:MU), Energy Transfer LP (NYSE:ET) and Amazon.com Inc. NASDAQ:AMZN). Warning!

  • Kroger stock soars after Buffett’s investment
    Business
    American City Business Journals

    Kroger stock soars after Buffett’s investment

    Kroger Co.'s stock soared in after-hours trading Friday following the disclosure that famed investor Warren Buffett's Berkshire Hathaway conglomerate has made a huge investment in the supermarket giant's stock. Omaha, Neb.-based conglomerate Berkshire Hathaway bought a new position of 18.9 million shares of Kroger (NYSE: KR) stock during the fourth quarter, according to a Securities and Exchange Commission filing late Friday.

  • U.S. Futures Fall After Apple Warning; Bonds Gain: Markets Wrap
    Business
    Bloomberg

    U.S. Futures Fall After Apple Warning; Bonds Gain: Markets Wrap

    U.S. equity-index futures fell along with European stocks on Tuesday after Apple Inc. said quarterly sales would miss forecasts, spooking investors who had hoped for a limited economic impact from the deadly coronavirus. Treasuries rose as American markets re-opened after a holiday.

  • Business
    Oilprice.com

    The World’s Top LNG Producer Is In Trouble

    Global LNG markets are struggling with a glut of unprecedented levels. International expansion in Australia, Qatar, Mozambique and Egypt, combined with a continuously strong US shale gas export drive, is pushing down prices further. Analysts have warned before that a possible LNG glut could end in tears, but nobody was expecting that the market would also be hit by a demand side shock such as China's coronavirus.

  • Apple’s coronavirus warning wasn’t a total surprise, but magnitude rattles Wall Street
    Business
    MarketWatch

    Apple’s coronavirus warning wasn’t a total surprise, but magnitude rattles Wall Street

    Work is starting to resume around the country, but we are experiencing a slower return to normal conditions than we had anticipated,” said Apple (AAPL) in a statement, alluding to the extended Lunar New Year holiday that was imposed to fight the coronavirus in China, a country that the iPhone maker relies heavily on for production. The company's announcement triggered losses across Asian and European markets, with tech-heavy Nasdaq-100 futures (NQ00) sliding 0.8%, a clear sign that the warning still held shock value. Apple shares fell over 3% in premarket trading.

  • Dow Jones Futures: Walmart Earnings Due, 3 IPOs Near Buys; Warren Buffett Stock Set To Break Out
    Business
    Investor's Business Daily

    Dow Jones Futures: Walmart Earnings Due, 3 IPOs Near Buys; Warren Buffett Stock Set To Break Out

    Dow Jones futures rose modestly Monday afternoon, along with S&P 500 futures and Nasdaq futures, after the stock market rally kept running last week. Walmart, Medtronic and InMode report earnings Tuesday. U.S. stock markets are closed for the Presidents Day holiday.

  • Business
    Barrons.com

    Tennessee’s Treasury Sold GE, GM, and Verizon Stock. Here’s What It Bought.

    The Tennessee Department of Treasury made some big changes in its stock investments in the last quarter of 2019. The department, which manages all of the state's investments, including its pension fund, reduced investments in (GE) (ticker: GE), General Motors (GM) and (VZ) Communications stock (VZ) in the fourth quarter. Tennessee's treasury also bought more (WMT) stock (WMT).

  • Business
    MarketWatch

    Walmart misses on fourth-quarter earnings as guidance shy of forecast

    Walmart (wmt) reported a rise in fourth-quarter net income as the retailing giant issued guidance that didn't meet analyst estimates. Walmart said its fiscal fourth-quarter ending Jan. 31 net income rose 12% to $4.14 billion, or $1.45 a share, as revenue rose 2.1% to $141.67 billion and U.S. comparable-store sales rose 1.9%. Excluding items including unrest in Chile, Walmart said it would've earned $1.38 a share.