Acadian Timber Q2 2024 Earnings Report

Acadian Timber EPS Results

• Actual EPS: C$0.46
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

Acadian Timber Revenue Results

• Actual Revenue: $41.19 million
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Acadian Timber Announcement Details

• Quarter: Q2 2024
• Date: 7/31/2024
• Time: N/A
• Conference Call Date: Thursday, August 1, 2024
• Conference Call Time: 1:00PM ET

Acadian Timber (TSE:ADN) Corp is a Canada-based supplier of primary forest products in Eastern Canada and the Northeastern United States. The company's operating segments include NB Timberlands and Maine Timberlands. It generates maximum revenue from the NB Timberlands segment. The company's product includes softwood and hardwood sawlogs, pulpwood and biomass by-products.

Acadian Timber Q2 2024 Earnings Call Transcript

Key Takeaways

• Acadian delivered record Q2 results with sales of $41.2 million (up $20.5 million YoY) and an Adjusted EBITDA of $20.6 million (50% margin), largely driven by the sale of 600,000 voluntary carbon credits.
• Timber sales volumes increased 17% year-over-year (excluding biomass), though average selling prices fell 8% as softwood sawlog prices dropped 10% due to a lower-value mix and hardwood sawlog prices declined 9% amid weak lumber markets.
• Regional operations saw New Brunswick volumes rise 8% with an EBITDA margin of 28%, while Maine volumes jumped 53% but margin slipped to 17% due to higher operating costs and an unfavorable product mix.
• Acadian sold the remaining 600,000 carbon credits under its Maine project in Q2 and plans to register a further 360,000 credits by year-end, with an estimated 1.1 million additional credits over the project’s 10-year period.
• Balance sheet liquidity strengthened to $25.8 million, with a $43.8 million debt maturity in March 2025 slated for refinancing, as management focuses on improving contractor capacity, controlling costs, and monitoring sawtimber price pressures.

Presentation

[Operator]

Good day, thank you for standing by. Welcome to the Acadian Timber's Second Quarter 2024 Analyst Conference Call and Webcast. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automatic message advising your hand is raised. Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Susan Wood, Chief Financial Officer. Please go ahead.

[Susan Wood, CFO at Acadian Timber]

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 2024, and responding to your questions, we may make forward-looking statements. These statements are subject to known and unknown risks, and future results may differ materially. For further information on our known risk factors, I encourage you to review our news release and MD&A, which are available on SEDAR+ and on our website at acadiantimber.com. I'll begin by outlining the financial and operational highlights for our second quarter ended June 29, 2024. Adam will then provide some additional comments and will discuss our outlook for the remainder of 2024.

[Susan Wood, CFO at Acadian Timber]

Acadian delivered very strong financial results for the three months ended June 29, 2024, driven by the sale of 600,000 voluntary carbon credits and steady operational performance. Acadian continued to benefit from stable regional demand and prices for its timber products. Overall, sales for the second quarter were $41.2 million, $20.5 million greater than Q2 2023. Of this increase, $19.7 million relates to the sale of voluntary carbon credits. As initially disclosed in the first quarter of 2024, an agreement was reached to sell approximately 752,000 of Acadian's registered voluntary carbon credits, which relate to the first reporting period of its ongoing carbon credit project in Maine. Acadian delivered 152,000 of these credits in March. The remaining 600,000 credits were delivered in May and are included in our second quarter results.

[Susan Wood, CFO at Acadian Timber]

Additionally, timber sales and services increased $0.8 million year-over-year as a result of a 17% increase in sales volumes, excluding biomass, which was partially offset by lower timber services activity. The higher sales volumes were primarily a result of increased contractor availability and favorable weather conditions, which allowed for an early start to harvesting and trucking operations after the spring thaw. Weighted average selling price, excluding biomass, decreased 8% year-over-year. Softwood sawlog pricing decreased 10%, primarily due to a lower value product mix, and hardwood sawlog pricing decreased 9% due to weakness in hardwood lumber markets. Softwood pulpwood pricing increased 23% as a result of strong demand, while hardwood pulpwood pricing remained relatively flat as compared to the prior year period. Biomass volumes were negligible during the second quarter due to limited processing capacity.

[Susan Wood, CFO at Acadian Timber]

Operating costs and expenses were $32.2 million during the second quarter, compared to $15.5 million during the prior year period. The year-over-year increase reflects the addition of costs related to carbon credit sales, as well as higher timber sales volumes. Weighted average variable harvesting costs, excluding biomass, decreased 4% over the prior year as a result of a higher proportion of softwood products which carry lower variable costs and shorter hauling distances, partially offset by higher contractor rates. Adjusted EBITDA was $20.6 million during the second quarter, compared to $5.7 million in the prior year period as a result of the carbon credit sales. Adjusted EBITDA margin for the quarter was 50%, compared to 27% in the prior year period. Free cash flow was $16.4 million, $12.3 million higher than the same period in the prior year.

[Susan Wood, CFO at Acadian Timber]

Our net income for the second quarter totaled $7.9 million, or $0.46 per share, compared to net income of $5.8 million, or $0.34 per share in the same period of 2023. Higher operating income was partially offset by lower non-cash fair value adjustments and lower gains on sale of timberlands and other fixed assets, as well as higher income tax expense as compared to the prior year period. We declared dividends of $5 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 New Brunswick were $16.2 million, compared to $16.6 million during the prior year period, with increased timber sales volumes offset by a lower weighted average selling price and lower timber services activity. Timber sales volume, excluding biomass, increased 8% due primarily to increased contractor availability.

[Susan Wood, CFO at Acadian Timber]

Softwood sawlog and softwood pulpwood sales volumes increased 57% and 12%, respectively, as a result of increased contractor availability and the recovery of the volume shortfall of the first quarter of the year enabled by favorable operating conditions. Hardwood sawlog and hardwood pulpwood sales volumes decreased 12% and 23%, respectively, due to timing variability across quarters. Biomass sales volume was negligible due to limited processing capacity. Operating costs and expenses were $11.8 million during the second quarter, compared to $11.9 million in the prior year period. Increased harvesting activity was offset by decreased weighted average variable costs and lower timber services activity. Weighted average variable costs, excluding biomass, decreased 6% as a result of a higher proportion of softwood products which carry lower variable costs and shorter hauling distances, partially offset by higher contractor rates.

[Susan Wood, CFO at Acadian Timber]

New Brunswick's Adjusted EBITDA for the quarter was $4.5 million, compared to $5 million in the prior year period. Adjusted EBITDA margin was 28%, compared to 30% in the prior year period. Switching over to Maine. Sales during the second quarter totaled $5.3 million, compared to $4.1 million in the same period last year. Timber sales volume, excluding biomass, increased 53%, reflecting improved contractor availability. Softwood sawlog volumes remained consistent with the prior year. Volumes of hardwood sawlogs were minimal in both periods. Hardwood pulpwood volumes increased 118% due to steady demand and improved contractor availability. Softwood pulpwood volumes remained limited due to the extended shutdown of a major softwood pulpwood customer, which began in 2023. The weighted average selling price, excluding biomass, in U.S. dollar terms, decreased 17% as compared to the prior year.

[Susan Wood, CFO at Acadian Timber]

Increased softwood pulpwood pricing of 9% due to increased demand was offset by a decrease in softwood sawlog pricing of 15% as a result of a lower value product mix. Hardwood pulpwood pricing was consistent with the same period of 2023. Hardwood sawlog volumes were minimal during the quarter. Operating costs and expenses for the second quarter were $4.6 million, compared to $3.1 million during the same period in 2023, primarily due to increased sales volumes and higher land management and silviculture costs. Weighted average variable costs, excluding biomass, decreased 2% in U.S. dollar terms as a result of changes in equipment mix, partially offset by higher contractor rates. Adjusted EBITDA for the quarter was $0.9 million, compared to $1.1 million during the prior year period, and adjusted EBITDA margin was 17%, compared to 27%. And now turning to the results of our Environmental Solutions segment.

[Susan Wood, CFO at Acadian Timber]

As previously disclosed and as I just discussed, during the first quarter, an agreement was reached to sell nearly all of our registered carbon credits. The first delivery under the agreement for approximately 152,000 carbon credits occurred in March and was included in our first quarter results. The remaining 600,000 credits included in the agreement were delivered in May and are included in our second quarter results. Sales for the quarter were $19.7 million, and Adjusted EBITDA for the quarter was $15.7 million. With respect to our financial position, Acadian had net liquidity of $25.8 million as of June 29, 2024, which includes cash and funds available under credit facilities, less amounts reserved to support the minimum cash balance related to long-term debt. The increase in liquidity is primarily attributable to the net cash flows from the sales of carbon credits.

[Susan Wood, CFO at Acadian Timber]

A portion of our long-term debt totaling $43.8 million is scheduled to mature in March of 2025. It is our intention to refinance the debt prior to the maturity date. With that, I will now turn the call over to Adam.

[Adam Sheparski, President and CEO at Acadian Timber]

Thank you, Susan, and good afternoon, everyone. As always, Acadian is committed to health and safety as our number one priority. We believe that emphasizing and achieving an excellent safety record is a leading indicator of success in the broader business. Acadian's operations experienced three minor recordable safety incidents during the quarter among contractors and none among our employees. We remain committed to maintaining a culture across the organization that emphasizes the importance of strong safety performance, and incident reduction will be a primary focus for the remainder of 2024 and beyond. As Susan mentioned, we experienced very strong financial results in the second quarter, including record quarterly Adjusted EBITDA and free cash flow, primarily attributable to the delivery of carbon credits under the sales agreement we disclosed in the first quarter, which contributed $15.7 million to Adjusted EBITDA.

[Adam Sheparski, President and CEO at Acadian Timber]

We are in the process of registering our second and third tranches of credits, which is expected to result in approximately 360,000 additional credits being made available for sale by the end of the year. As a reminder, the model currently estimates a total of 1.1 million additional credits being generated over the remainder of the project's 10-year crediting period, or approximately 700,000 credits over the next seven years, in addition to the 360,000 credits currently being registered. As I have said before, this project has provided valuable experience to Acadian and has formed the foundation for any potential further carbon credit development projects. We are in the process of taking what we have learned from this project in determining what the future opportunities are for Acadian.

[Adam Sheparski, President and CEO at Acadian Timber]

From a harvesting perspective, ongoing efforts from the operations team continue to increase contractor capacity, and combined with early dry conditions in the spring, allowed us to quickly move our winter roadside inventory and catch up on our planned sales volumes. While our weighted average selling price of timber was impacted by a number of factors, including changes in regional supply and in the product mix harvested and sold, we also experienced some general pricing pressure during the quarter, as lumber and other wood product markets overall remain weak. Turning to our balance sheet, as Susan discussed, the sales of carbon credits have significantly increased our liquidity and put us in a solid position if and when growth opportunities arise. However, we will maintain our usual prudent and conservative approach in evaluating potential uses of this additional capital as we move forward.

[Adam Sheparski, President and CEO at Acadian Timber]

As we look forward to the remainder of 2024, North American interest rates remain elevated and near-term pressure on end-use markets persists. However, inflation shows signs of easing. U.S. housing starts for the first half of 2024 were lower than originally expected, but June starts indicated improvement. The consensus forecast for U.S. housing starts is steady at approximately 1.39 million starts in 2024, as compared to 1.42 million in 2023. We remain confident that the stability of the Northeast forestry sector, combined with long-term demand for new homes and repair and remodel activity, will support the long-term demand for our products, as has been demonstrated in recent years. As we have mentioned, we continue to experience increased contractor availability in the second quarter. However, challenges remain, particularly in Maine, and management will continue to focus on further increasing harvesting capacity through the remainder of 2024 while controlling our operating costs.

[Adam Sheparski, President and CEO at Acadian Timber]

In the short to medium term, inflation is expected to continue to impact our financial results through elevated contractor rates and fuel surcharges, offset by the stable pricing of primary forest products like sawlogs and pulpwood. Demand and pricing for Acadian sawlogs is mainly driven by regional supply and demand. Regional sawlog inventories have been replenished following the favorable operating conditions experienced in the spring, which, combined with weak lumber markets, may impact near-term demand. Pricing for softwood sawtimber may experience downward pressure, and some stabilization in hardwood lumber pricing was noted during the quarter. Hardwood sawtimber pricing may remain lower for the foreseeable future. Demand and pricing for softwood and hardwood pulpwood is expected to be steady, mainly impacted by supply in the region.

[Adam Sheparski, President and CEO at Acadian Timber]

As we have previously noted, during 2023, purchasers of voluntary carbon credits increased their focus on carbon credits of high quality and expended greater time and effort performing due diligence on projects. This shift may have delayed some sales. However, underlying demand and pricing for voluntary carbon credits are expected to remain stable. The protocol for developing compliance carbon credits from managed forests in Canada was recently finalized. We have evaluated the protocol, and although the federal protocol appears that it will produce high-quality projects, the demand for these credits is still being determined. As a reminder, a traditional voluntary improved forest management project, similar to the current project in Maine, could be developed on our New Brunswick timberlands if a compliance project is determined to not be attractive.

[Adam Sheparski, President and CEO at Acadian Timber]

In closing, as we enter the second half of the year, we are optimistic that our progress in improving harvesting and trucking capacity will continue and short-term regional demand will remain sufficiently stable to achieve our planned harvesting and sales volumes for the year. Further, with nearly all of our registered carbon credits sold, we are working diligently to register the second and third tranches, totaling approximately 360,000 credits. As always, we will remain focused on merchandising our product to obtain the highest margins available and making improvements throughout the business to maximize cash flows from our existing timberland assets, either through environmental solutions, real estate transactions, or renewable energy leasing opportunities, all while continuing to explore opportunities to grow. With that, we are now available to take your questions. Operator.

[Operator]

Thank you. Ladies and gentlemen, to ask a question, you will need to press star 11 on your touch-tone phone and wait for your name to be announced. Please stand by as we compile the Q&A roster. Now, first question coming from the line of Ariana Miller with CIBC. Your line is open.

[Ariana Miller, Equity Research Associate at CIBC]

Hello. I hope all is well. My first question relates to contractor availability. In the MD&A, you mentioned that labor markets remain tight in Maine, but based on your increase in Maine sales volumes this quarter, have you seen conditions begin to improve in the region, and do you expect this to continue going forward?

[Adam Sheparski, President and CEO at Acadian Timber]

Hi, Ariana. Things are great. Thank you. We did see some increase. I think there's still a fair bit of work to be done in Maine. We have some capacity now, and I would say I would divide it between just pure capacity from a volume perspective. But also, as we talk about costs moving forward, it's going to be very important for us to stay focused and increase capacity in the right forms of equipment and get more efficient equipment on the land base, which means we need our contractors to invest more capital. So we will stay focused. Although we were happy to see some improvements, we still have a lot of work to do.

[Ariana Miller, Equity Research Associate at CIBC]

Okay. Thanks. That's helpful. And then I know you mentioned it briefly, but I was wondering if you could provide any more color on the progress in determining the opportunity to develop carbon credits across your Canadian timberlands?

[Adam Sheparski, President and CEO at Acadian Timber]

Yeah. As I said in my opening remarks, the federal protocol came out, and it seems like it's a reasonable protocol. There is some concern, I would say, in general regarding demand for those credits. We do have to spend some more time evaluating that. And as I also said in my opening remarks, if the federal protocol doesn't work, there is the voluntary market that we currently use for our main project that would avail itself to us in an IFM format similar to Maine.

[Ariana Miller, Equity Research Associate at CIBC]

Okay. Thanks. That's all I have for now. I'll get back in the queue.

[Adam Sheparski, President and CEO at Acadian Timber]

Great. Thank you.

[Operator]

Thank you. Now, next question coming from the line of Matthew McKellar with RBC Capital Markets. Your line is open.

[Matthew McKellar, VP at RBC Capital Markets]

Hi. Good afternoon. Thanks for taking my questions. First, I'd just like to follow up on that last question and ask if you can make that choice between whether you're developing a project for the compliance or the voluntary market relatively late in the project's development process, or is that really something you need to determine from the outset as part of the project's design?

[Adam Sheparski, President and CEO at Acadian Timber]

There is a point in the development. Sorry. Hi, Matt. It's good to get to talk to you. There is a point where you do have to decide, but there is work that can be done early on. There is a lot of heavy lifting associated with inventories that has to get done to develop either project, and those would be similar processes. But eventually, you will have to make a decision to choose a path. So we are looking at the New Brunswick land base through that lens and what work can be done sooner rather than later. At the same time, as I said in my opening remarks, trying to figure out if there is any type of market for these carbon credits or these compliance credits that would be produced under a federal protocol.

[Matthew McKellar, VP at RBC Capital Markets]

Okay. Great. Thanks for that, caller. Next, I'd like to ask, you noted some changes in equipment mix as a driver of year-over-year increases or year-over-year change, sorry, in weighted average variable costs. And you called kind of equipment mix out again in your comments around Maine and the contractor situation. Could you just help us understand exactly what the situation is, what kind of changes in equipment you're looking at, and how material that potentially could be?

[Adam Sheparski, President and CEO at Acadian Timber]

Yeah. Really, what we have in Maine, and that's where most of the comments regarding equipment mix is concerned. I don't want to get into too much detail, but there's a traditional, what's called a tree-length system. A lot of heavy equipment, very expensive equipment to run, requires more units compared to what is traditionally used, specifically as it relates to softwood, which is a cut-to-length processor. They're usually on wheels as opposed to tracks. They're much lighter and much more efficient. We aren't seeing the investment in this new and sometimes more expensive equipment in Maine, and particularly in our region in Maine. So we're trying to work with our contractors now to get that investment made in the hopes that we can be much more efficient in harvesting softwood, in particular, in the state of Maine.

[Adam Sheparski, President and CEO at Acadian Timber]

I think there is also, because there hasn't been as much investment or contractor availability in Maine, just generally, rates in Maine are higher. And obviously, we have a significant land base in New Brunswick, and we do see a significant variance between the two regions. I don't want to get into detailed contractor rates, but it is a material difference between the two land bases because of that lack of availability combined with the incorrect mix of equipment in the state of Maine.

[Matthew McKellar, VP at RBC Capital Markets]

Thanks very much for the color there. One last one from me. SG&A picked up a fair bit in the quarter. Are you able to just quantify or provide any comments around how much of that would have been associated with the carbon credit sales?

[Adam Sheparski, President and CEO at Acadian Timber]

Yeah. That's a great question. How much of it is related to carbon credits? There's a fair bit associated with the selling of it. It's about 15% associated with the 15% of the sales price of carbon credits goes into that. I would also say, to a lesser extent, we have been experiencing some corporate costs associated with the land claim as well. So to a much lesser extent than the carbon credit sales, obviously, but those are starting to show up in our results as well.

[Matthew McKellar, VP at RBC Capital Markets]

Okay. Thanks very much for the help. I'll turn it back.

[Adam Sheparski, President and CEO at Acadian Timber]

Great. Thanks, Matthew.

[Operator]

Thank you. I see another note for the questions in the queue at this time. I'll turn it back to Adam for any closing remarks.

[Adam Sheparski, President and CEO at Acadian Timber]

Great. Thank you. On behalf of the Board and management of Acadian, I would like to thank all of our shareholders for their ongoing support. Thank you. Stay safe, and we look forward to you joining us for our third quarter of 2024 conference call on October 31st. Goodbye.

Participants

Executives

• Adam Sheparski, President and CEO
• Susan Wood, CFO

Analysts

• Ariana Miller, Equity Research Associate at CIBC
• Matthew McKellar, VP at RBC Capital Markets