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Edited Transcript of ADN.TO earnings conference call or presentation 9-May-19 1:00pm GMT

Q1 2019 Acadian Timber Corp Earnings Call

Vancouver Jun 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Acadian Timber Corp earnings conference call or presentation Thursday, May 9, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Luc Ouellet

Acadian Timber Corp. - SVP of Operations

* 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

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Acadian Timber Corporation's First Quarter 2019 Conference Call and Webcast. (Operator Instructions) As a reminder, today's program is being recorded.

And now I'd like to introduce your host for today's program, Mr. Mark Bishop, CEO. Please go ahead sir.

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Mark M. Bishop, Acadian Timber Corp. - President & CEO [2]

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Thank you, operator. And good morning, everyone. Welcome to Acadian's first quarter conference call.

As always, we realize it's a busy earnings season, and we appreciate your participation on our call.

Before we get started, I'd like to note as we communicated in our first quarter press release that effective May 9, after 2 years as Chief Financial Officer, Mabel Wong has transitioned away from her role at Acadian, taking on additional responsibilities elsewhere within Brookfield Asset Management. We've been very fortunate to have such a hard working, competent, and diligent Senior Manager in Mabel. On behalf of the entire Acadian team, I want to personally thank her for her dedication and significant contribution to Acadian, and wish you all the best going forward.

Effective today, Matthew Gross has replaced Mabel as Acadian's Chief Financial Officer. Mr. Gross has been a key member of Brookfield's infrastructure team for over 6 years and has held a number of senior financial roles within the organization including supporting Mabel during her tenure with Acadian.

Mr. Gross is a certified public accountant and worked at one of the big 4 accounting firms prior to joining Brookfield. Having worked alongside Matt for the past few years, I'm completely confident that Matt's transition to the CFO role will be seamless. Matt's here with me today. And also with us here, led by Senior Vice President Luc Ouellet are the Acadian management team.

Shifting now to the quarter, I'll first remind everyone that in discussing our first 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 on our website -- and on our website.

I'll begin with a few comments on the business operations, market conditions and outlook, and then Matt will provide an overview of our financial results for the quarter ended March 30, 2019, before turning it over to questions.

During the quarter, Acadian's operations had no recordable safety incidents among employees and 3 amongst contractors. While the incidents did result in some lost time, the individuals have made full recoveries and have 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's operations during the first quarter were impacted by adverse atypically cold weather conditions, resulting in periods of inoperability, which impacted both harvest activities and trucking operations, pushing some customer deliveries to the current second quarter. Partially offsetting these impacts was the benefit of an inventory management program with one of the operations customers. As noted in the prior quarter, the program was implemented in the fourth quarter 2018. The program ended during the first quarter of 2019. As a result to the effects described above log sales volumes, excluding biomass, of 337,000 cubic meters were down 7% year-over-year.

Despite weather conditions, Acadian continued to benefit from favorable dynamics of the Northeast regional log markets. Acadian's weighted average log selling price increased 4% over the prior year period, benefiting from increases in softwood sawlog and softwood pulpwood prices of 7% and 20%, respectively, which was partially offset by the impact of changes in sales mix.

Demands for softwood sawlogs and softwood pulpwood in New Brunswick remained strong with prices increasing 7% and 19%, respectively. Markets in Maine continued to strengthen with prices in U.S. dollar terms for softwood sawlogs increasing 3% and hardwood sawlogs improving 20% compared to the prior year period.

Acadian's key markets include softwood sawtimber, hardwood sawtimber and hardwood pulpwood. Northeast North American softwood dimension sawmills represent over 1/3 of Acadian's end use market in our primary market for our softwood sawtimber. Our mixed softwood and hardwood resource combined with diversified end-use markets underpin Acadian's best in class long term performance. Well-balanced regional supply/demand fundamentals continue to support attractive and stable log pricing across all key markets.

The U.S. economy has continued to perform well through early 2019 and the forecasters expect a continued steady performance supported by job growth and wage increases. However, first quarter new home construction activity was well below expectation due to several factors, including increased mortgage rates, U.S. federal government shut down, uncertainty regarding the Chinese economic outlook and fallout from U.S. trade policy decisions; and, importantly, the severe -- the impact of severe weather in much of North America and heavy rainfall in the U.S. South.

While the headwinds of light -- of tight construction labor markets and restrictive building regulations will continue, factors including favorable demographics for growth and household performance -- household formation, low home inventories and moderating rates suggest upward momentum in housing construction should resume in the near term. Recent consensus forecasts anticipate average year-over-year growth in U.S. housing starts for 2019 and 2020 of about 2% and 3% respectively.

Forecasters continue to expect the proportion of single family starts, the larger -- the largest lumber consuming segment of U.S. housing starts, to improve modestly through 2019 and '20. Additionally, home-repair and remodeling are also projected to grow modestly over the next couple of years. North American sawtimber consumption therefore is expected to post year-over-year growth.

As you're all aware, average Q1 2019 quarterly benchmark Eastern Spruce-Fir lumber prices increased 8%, while Southern Yellow Pine lumber prices declined 4% compared to the prior quarter. We continue to expect volatility in lumber prices in the near term dictated by the pace of regional inventory drawdown and spring building conditions.

But forecasters expect steady demand combined with log supply constraints in western Canada to support robust recovery in lumber pricing in mid-2019, albeit well below the levels achieved in 2018. And this is, of course, before factoring in any potential significant fire season in Western North America, which would further tighten supply conditions. By extension, we anticipate continued stable softwood sawtimber pricing in Acadian's regional markets.

Acadian's hardwood sawtimber and pulpwood markets remain well-balanced with continued positive outlook for the foreseeable future. Softwood pulpwood markets, Acadian's smallest product segment, have improved modestly and the expected pulp mill restart during the second half of 2019 in Maine is expected to be a catalyst for further recovery in demand and pricing for softwood pulpwood. While the biomass market in Maine remains weak, the New Brunswick biomass market continues to be supported by steady export demand at attractive prices.

As you're all aware by now Acadian typically experiences low levels of operating, marketing, and selling activity during the second quarter of the year, while it is spring saw period that causes much of the infrastructure to be temporarily inoperable. However, as we look forward to the balance of 2019, we anticipate meeting our target harvest sales and sales volumes for the full year.

I'll now pass it over to Matt to provide a summary of Acadian's financial performance for the first quarter ended March 30, 2019.

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Matthew Gross, Acadian Timber Corp. - CFO & VP [3]

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Thank you, Mark, and good morning, everyone. Overall Acadian continues to benefit from strong demand and generated adjusted EBITDA of $8.9 million during the quarter, which is in line with the prior year period. As Mark mentioned, Northeast regional log market dynamics remain favorable, resulting in a 4% increase in our weighted average log selling price.

Operations were, however, impacted by adverse weather conditions throughout the quarter. As a result, Acadian's log sales volumes decreased 7%. Our net income was $6.2 million during the first quarter compared to $2 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 (technical difficulty) loss position.

Acadian's payout ratio during the quarter was 75%, which is below our long term target of 95% but in line with expectations given the seasonality of our operations.

Sales for the quarter were $30.9 million compared to $32.9 million in the prior year reflecting a 7% decrease in log sales volumes, as well as the 20% decrease in ancillary revenues, which are primarily related to timber services. These impacts were partially offset by a 4% increase in the weighted average log selling price as demand for our products remained strong.

The adjusted EBITDA margin for the first quarter was 29% relative to 27% in the prior year period, reflecting improved log selling prices and lower relative operating costs, which are partially offset by the impact of lower log sales volumes.

I will now move into the results for each of our New Brunswick and Maine operations. During the first quarter, sales for our New Brunswick Timberlands were $21.4 million compared to $23.1 million in the prior year period. This reflects a 7% decrease in log sales volumes compared to the prior year period, despite the benefit of an inventory management program with one of our operations customers, which was implemented in the fourth quarter of 2018 and ended during the current quarter. In addition, ancillary revenues declined 19%.

The weighted average log selling price for the quarter was $67 per cubic meter compared to $64 per cubic meter in the prior year. The increase of approximately 4% was driven by a 7% increase in softwood sawlog pricing and partially offset by changes in sales mix during the period, due to higher relative sales volumes of lower valued softwood pulpwood.

In addition, New Brunswick's export markets for biomass products remained strong as selling prices increased 20% versus the prior year period, while sales volumes decreased 18%, as deliveries were impacted by weather conditions. As a result of these factors New Brunswick adjusted EBITDA was $5.8 million during the first quarter compared to $5.9 million in the prior year period, while the adjusted EBITDA margin was 27% for the quarter, which is higher than the 25% in the prior year period reflecting the benefit of lower variable harvest cost per cubic meter.

Moving on to our Maine Timberlands. Sales for the quarter totaled $9.5 million compared to $9.8 million for the same period last year. While market dynamics remained strong for all products, adverse weather conditions impacted operations resulting in a 7% decrease in log sales volumes.

The weighted average log selling price during the quarter in Canadian dollar terms was CAD 82 per cubic meter, an increase from CAD 79 per cubic meter in the prior year. Log pricing in U.S. dollar terms was in line with the prior year. This reflects continued strong demand for softwood sawlogs and hardwood pulpwood, which was offset by changes in the sales mix during the period due to higher relative sales volumes of lower valued softwood pulpwood.

As a result of these factors, adjusted EBITDA for the quarter was $3.3 million compared to $3.5 million during the prior year period, while the adjusted EBITDA margin of 35% was in line with 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 $23 million. Acadian has ample cash resources, which is further supported by funds available under our revolving credit facility and the stand-by equity commitment with Brookfield, overall making up a net liquidity position of $101 million.

During the quarter, we declared a dividend of $0.29 per share, which is 5% higher than the prior year reflecting the dividend increases announced in May 2018 and February 2019. With a strong balance sheet, well-diversified markets and highly capable operating team, Acadian is well-positioned to meet its ongoing quarterly distributable cash commitments. That concludes my remarks on 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 [4]

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Thanks, Matt. So that concludes our formal remarks, and we're available to take any questions. So I'll pass it over to you, 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 the line of Andrew Kuske from 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 [2]

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Probably a question for Mark, and it's just on the weather impacting the quarter, obviously he said it's just challenging conditions which affected your harvest rates. Maybe just a bit more color around that and the magnitude of the impact, and then what about the weather impact you're seeing in Q2 right now, and in particular in New Brunswick?

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

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Sure, Andrew. As I said, I've got Luc Ouellet here with me, and so I'll pass it over to him to also address the question.

But I think as I mentioned in my opening comments, it certainly was a difficult quarter from a delivery perspective, and we're starting to see clearly much better weather in the second quarter and delivery is picking up. So the volume harvested that we didn't get delivered actually will flow into the second quarter. And so that -- we'll see somewhat of a favorable benefit from the impact from the first quarter.

But I'll pass it over to Luc to elaborate a little bit more on what we did experience from both harvesting and transportation and what we're seeing now.

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Luc Ouellet, Acadian Timber Corp. - SVP of Operations [4]

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Yes we -- as it was mentioned by Matt and Mark, we lost several -- potential days of harvesting or trucking on both sides of the border in Q1, due to weather condition, which was mainly a cold weather, windy, a lot of snow on the -- in Northwest New Brunswick and also in Northern Maine. So, but the spring condition, as it was mentioned by Mark recently were very favorable to us. And we harvested later than usual. And we had -- we also gained quite a bit of fiber in our inventory. So a lot of that volume will be processed through Q2.

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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 [5]

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Okay, that's helpful. And then, when you think about just the increase you saw in log pricing in the quarter, is that just a function of underlying strength from demand or is that partly a function of you and others had less logs to sell into the market?

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Luc Ouellet, Acadian Timber Corp. - SVP of Operations [6]

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No, it's basically a general comment that Matt and Mark were saying. It's really the domain. And as you know with the fiber supply agreement that we have with Twin Rivers, one of our customers were trailing 6 months on the effect of the sales price. So there the -- for Acadian there was a little bit of that, that did show up in Q1, so -- but we're expecting normal conditions going forward.

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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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Okay, that's helpful. And one final one, if I may. Just on the SG&A, you had $2.5 million last year, $2.2 million this year, is that a structural or cyclical change?

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Luc Ouellet, Acadian Timber Corp. - SVP of Operations [8]

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No, it's basically the same thing as what I just -- we discussed, I should say, earlier. Weather condition in Q1 affected the underlying, if we call it this way, there also, so -- and we're facing the same condition in Q2 as what we discussed earlier.

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Mark M. Bishop, Acadian Timber Corp. - President & CEO [9]

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But Andrew, I think, related to G&A, we -- I think we noted last year, through the year, that we have spent an awful lot of time -- Luc and his team -- on both the Maine and the New Brunswick operations, spent a lot of time working on integration of several aspects of the admin side of the business, accounting, marketing, and we are starting to see some of those benefits flow through.

I wouldn't quite suggest that the variance you just cited will be the run rate, quarterly, going forward. But we do see some significant benefits that are now flowing through from that integration activity. And we continue to focus on pushing more. This year we'll be focused on further alignment of our force management planning and we should see some benefits of that, going forward, over the long term, not nearly the magnitude that we've seen on the other aspects, but we'll see some good benefits there.

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Operator [10]

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(Operator Instructions)

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Mark M. Bishop, Acadian Timber Corp. - President & CEO [11]

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Okay. Well, again I appreciate, I know it's a busy earnings season. And I know there's conflicting calls out there, but Matt and I are both available if any of you have any follow-up questions, that you want to contact us and talk directly. But otherwise, I look forward to speaking with you next quarter. And again on behalf of management and the board of Acadian, thanks for your support. Talk to you next quarter. Thanks, operator.

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Operator [12]

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Thank you. And thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.