Acadian Timber Corp.

Good day and thank you for standing by. Welcome to the Acadian Timber Corp Q1 2021 conference call and webcast. At this time, all participants are in 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 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Adam Schaparsky, Chief Financial Officer, please go ahead.

Thank you, Operator. Good afternoon, everyone, and welcome to Acadian Timber's first quarter conference call. With me on the call today is Erica Riley, Acadian's President and Chief Executive Officer. Before discussing Acadian's results, I will first remind everyone that in discussing our first quarter financial and operating performance, the outlook for the remainder of 2021, 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 CDAR and on our website at AcadianTimber.com. I'll begin by outlining our financial highlights for our first quarter ended March 27, 2021. Then Erica will comment on our operations, market conditions, and outlook for the remainder of the year. Sales for the first quarter were $25.9 million, compared to $31.4 million in the prior year period. Sales volume, excluding biomass, decreased 21%. Although demand for our saw logs remained strong, sales volume was impacted by temporary road closures caused by unseasonably warm weather at the end of the first quarter, and we experienced reduced trucking capacity in Maine. Volumes were also impacted by continued weak demand for softwood pulpwood, with high roundwood inventories and sawmill residuals in the region. Weighted average selling price, excluding biomass, was flat year over year as increased saw log pricing was offset by weaker pulpwood pricing and a stronger Canadian dollar. Operating costs of $19.2 million in the quarter were $3.9 million lower than the $23.1 million in the prior year, mainly due to a lower harvest volumes and decreased administrative costs. Variable costs per cubic meter decreased 1%. due to a stronger Canadian dollar compared to the prior year period. Adjusted EBITDA totaled $6.9 million during the quarter, down from $8.3 million in a prior year period. Adjusted EBITDA margin for the quarter was consistent with the prior year period at 27% and benefited from lower administrative costs. Our net income for the first quarter was $5.8 million compared to a net loss of $3.7 million in the prior year period. The positive variance is primarily due to the unrealized foreign exchange gain on long-term debt of $1.2 million this year compared to an $8.2 million loss in the first quarter of last year. We generated $5 million of free cash flow and declared dividends of $4.8 million to our shareholders during the first quarter, or 29 cents per share, which resulted in a payout ratio of 97%. I will now move into the first quarter results for our New Brunswick operations. Sales for our New Brunswick timberlands were $18.3 million compared to $21.7 million in the same period of 2020. Sales volume, excluding biomass, decreased 23%, and the weighted average selling price, excluding biomass, increased 3% during the quarter, reflecting continued strong demand for our softwood saw logs and a higher value product mix, partially offset by lower bulkwood prices. Operating costs in the first quarter totaled $13.3 million, compared to $15.9 million in the prior year period. The decrease in operating costs is a result of lower volumes and a decrease in administrative costs. Weighted average variable costs per cubic meter were flat year over year. New Brunswick's adjusted EBITDA for the quarter was $5.1 million, compared to $5.9 million in the prior year period as a result of lower volumes, offset in part by lower administrative costs as noted previously. Adjusted EBITDA margin increased to 28% compared to 27% last year. Switching over to Maine, sales during the fourth quarter totaled $7.6 million compared to $9.7 million in the same period last year. Sales volume, excluding biomass, decreased 17% year-over-year as mild weather caused temporary road closures and we experienced reduced trucking capacity throughout the quarter. The weighted average selling price, excluding biomass, in U.S. dollar terms was flat compared to the prior year as a result of higher saw lab prices offset by lower prices for pulpwood compared to the prior year period. In Canadian dollar terms, prices were off 6% due to a stronger Canadian dollar. Operating costs totaled $5.6 million in the quarter compared to $6.7 million during the same period last year as a result of lower sales volumes. and variable costs, which were 2% lower per cubic meter due to a stronger Canadian dollar compared to the prior year period. Adjusted EBITDA for the quarter was $2 million compared to $3 million during the same period last year. Adjusted EBITDA margin was 27% compared to 31% in the prior year period, which would primarily reflect lower volumes and a stronger Canadian dollar. With respect to Acadian's financial position, it remains strong, ending the first quarter with a net liquidity position of $23.6 million, including cash, a cash balance of $11.2 million, and a revolving credit facilities, which remain undrawn. With that, I will now turn the call over to Erica.

Thank you, Adam. I'll start by commenting on the announced management team changes before addressing Acadian's first quarter operating performance and market conditions. I'm pleased to announce that Adam will be appointed Acadian's next president and CEO effective July 30th, 2021. The board and I are confident that Adam will be an excellent leader of the company in the years to come. I'll be working closely with Adam to transition my responsibilities during the second quarter, and then we'll step down on July 30th. Susan Wood, our current director of finance, will become Acadian's next CFO, replacing Adam. Susan is a chartered professional accountant with over 18 years of public accounting experience. She has been leading Acadian's reporting, taxation, and treasury functions to date. Congratulations to both Adam and Susan. Now turning to the operations update. We are pleased to report that during the first quarter, Acadian experienced no safety incidents among employees or contractors. We remain focused on maintaining a culture across our business that emphasizes the importance of strong safety performance. We also continue to monitor COVID-19-related developments in the regions in which we operate and are responding as necessary to keep everyone working with us safe. As Adam mentioned earlier, Acadian's operations were impacted by temporary road closures caused by unseasonably warm weather, reduced trucking capacity in Maine, and weak software public markets. Sales volume, excluding biomass, decreased 21% compared to the same period in 2020. To provide a bit more detail, poor weather and limited access to the woods impacted 12% of our operating days during the quarter. The reduced trucking capacity in Maine related to a lack of driver availability as several drivers scheduled to deliver our product fell ill. These drivers have now returned to work. We are working closely with our contractors in Maine to mitigate the issue of trucking availability going forward. Weak softwood pulpwood demand in the regions continued due to elevated roundwood inventories and competition from lower-cost sawmill residuals, with sawmills running steady. Moving forward, we are working to catch up on a portion of the volume shortfall as row conditions improve. I'll now turn to markets and pricing. Acadian's weighted average selling price, excluding biomass, was flat year over year, with increased saw log pricing offset by lower pulpwood pricing and a stronger Canadian dollar relative to the first quarter of 2020. Regional lumber producers ran steady through the quarter, resulting in solid demand for our softwood saw logs. Our softwood saw log price increased 7% in New Brunswick and 1% in Maine in U.S. dollar terms. While we realized higher prices for all of our softwood saw log products, A higher proportion of lower-value studwood in the mix muted the price increases compared to the prior year period. Demand for hardwood saw logs was strong as end-use markets for this product continued to strengthen. The weighted average hardwood saw log price was flat compared to the prior year period, with price increases offset by a lower-quality product mix. Demand for hardwood pulpwood was steady during the quarter. but prices have not yet recovered from the weakness experienced in the second half of last year. A stronger Canadian dollar was also a headwind to overall price improvement. Price was down 8% compared to the first quarter of last year. As noted previously, softwood pulpwood demand remains weak, and prices were off 7% year-over-year. Now I'll turn to our market outlook. the outlook for Acadian softwood and hardwood saw log sales remains positive, with end-use markets showing strength as we move through 2021. North American softwood lumber consumption is expected to remain strong, with sustained demand from repair and remodeling activity and increased demand from new home construction. Consensus forecast is for approximately 1.5 million U.S. housing starts in 2021, up 9% over 2020. Regionally, Softwood saw log inventories are high, but sawmills are running steady. As mills draw down their inventory through the spring, we expect continued steady demand as we restart operations in early summer. Strong end-use markets for hardwood lumber and low hardwood saw log inventories regionally are expected to support continued strong demand and pricing for our hardwood saw logs. Demand for Acadian's hardwood pulpwood is expected to remain stable with mills running steady, while markets for softwood pulpwood are expected to remain challenged. Longer term, we expect regional hardwood pulpwood markets to strengthen with Louisiana Pacific's recently announced investment to convert their Holton mill to manufacture engineered wood siding products. Production of this new product at that facility is slated to begin in 2022. Finally, demand for biomass from Acadian's New Brunswick operation continues to be steady. Before I conclude my remarks, I would like to highlight that we have been focused on Acadian's environmental, social and governance or ESG disclosure during the quarter. It should come as no surprise that Acadian has responsible ESG practices given its long history of sustainable forestry and commitment to the communities in which we operate. Having said this, we have been working to improve Acadian's ESG disclosure and will launch a refreshed website later today with further information. Our key ESG highlights include our commitments to sustainable forest management, the well-being of our people, and strong and effective corporate governance. Acadian's refreshed website will also highlight our approach to climate change and estimated carbon storage across our land. In short, Acadian is well positioned from an ESG perspective and will work to better showcase this going forward. In closing, We believe that Acadian's strong balance sheet, sustainable resource, access to diverse markets, and highly capable team position it well for future success. That concludes our formal remarks. We are available to take any questions from participants on the line. Operator?