Acadian Timber Corp.

Good day and thank you for standing by. Welcome to the Acadian Timber Corp Q2 2021 conference call and webcast. At this time all participants are in a listen only mode. After this 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. Thank you. Please go ahead.

Thank you, operator. Good afternoon, everyone, and welcome to Acadian Timber's second 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 second quarter financial and operating performance, you'll look for the remainder of 2021 in 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 MV&A, which are available on CDAR and on our website at AcadianTimber.com. I'll begin by outlining our financial highlights for our second quarter ended June 26, 2021. Then Erica will comment on our operations, market conditions, and outlook for the remainder of the year. Sales for the second quarter were $18.4 million compared to $11.5 million in the prior year period, driven by a 55% increase in sales volume, excluding biomass. Acadian benefited from favorable operating conditions compared to the prior year period and recovered the volume shortfall of the first quarter. Demand remained strong for our saw logs and hardwood pulpwood, but softwood pulpwood demand remained weak due to elevated roundwood inventories in our region and competition from sawmill residuals. Weighted average selling price, excluding biomass, was flat year over year, and increased saw log pricing was offset by weaker pulpwood pricing and a stronger Canadian dollar. Operating costs of $14.7 million in the quarter were $4.5 million higher than the $10.2 million in the prior year, mainly due to harvest volumes and timber services activity. Variable costs per cubic meter decreased 9% due to lower processing costs and a stronger Canadian dollar compared to the prior year period. Adjusted EBITDA totaled $3.8 million during the quarter, up from $1.4 million in the prior year period. Adjusted EBITDA margin for the quarter was 21% compared to a prior year period of 12% as a result of increased volumes during the quarter. Our net income for the second quarter was $5.9 million compared to $5.2 million in the prior year period. The positive variance is primarily due to increased operating earnings offset by a combination of a lower non-cash fair value adjustment and an unrealized foreign exchange gain on long-term debt in 2021 compared to 2020. Reflecting the seasonality of the business, Acadian generated $2.9 million of free cash flow and declared dividends of $4.8 million to our shareholders during the second quarter, or 29 cents per share. I will now move into the second quarter results for our New Brunswick operations. Sales were $14.9 million compared to $9.5 million in the same period of 2020. Sales volume, excluding biomass, increased 41%, and the weighted average selling price, excluding biomass, increased 4% during the quarter, reflecting strong saw log prices and a favorable product mix. Operating costs in the second quarter totaled $11.1 million compared to $7.7 million in the prior year period. The increase in operating costs is a result of higher harvesting and timber services activity. Weighted average variable costs per cubic meter, excluding biomass, decreased by 7% due to lower processing costs compared to the prior year period. New Brunswick's adjusted EBITDA in the quarter was $3.8 million compared to $1.8 million in the prior year period, as a result of higher sales volume and additional revenues from timber services. Adjusted EBITDA margin increased to 26% compared to 19% last year. Switching over to Maine, sales during the second quarter totaled $3.5 million compared to $2 million in the same period last year. Sales volume, excluding biomass, increased 129% year-over-year as a result of favorable operating conditions and stable demand. The weighted average selling price, excluding biomass, in U.S. dollar terms decreased 7% compared to the prior year as a result of higher saw log prices offset by lower prices for hardwood pulpwood compared to the prior year period. In Canadian dollar terms, prices were off 19% due to a stronger Canadian dollar. Operating costs totaled $3.1 million in the second quarter compared to $1.9 million during the same period last year as a result of higher sales volumes and lower weighted average variable costs. Variable costs excluding biomass were 17% lower per cubic meter due to a stronger Canadian dollar and lower softwood saw log costs related to a higher proportion of roadside sales. Adjusted EBITDA for the quarter was $0.4 million compared to $0.1 million during the same period last year. Adjusted EBITDA margin was 12% compared to 6% in the prior year period which primarily reflects higher volumes partially offset by a stronger Canadian dollar. Before I turn the call over to Erica, I would like to take this opportunity to thank her for the leadership and guidance she has provided not only to myself, but to the entire management team over the last two years. Erica, it has been a pleasure working with you, and I am confident in saying that it was because of your guidance that Acadium was successful in transitioning to a standalone company. I am glad you chose to remain on the Acadian board, and I look forward to working with you in the coming years. With that, I will turn the call over to you.

Thank you, Adam. It's been my pleasure, and Acadian will be in great hands with your leadership. To start, health and safety remain a key focus of our business. We are pleased to report that Acadian experienced no safety incidents among employees or contractors during the quarter. We continue to monitor COVID-19 related developments in the regions in which we operate. The province of New Brunswick is expected to move to a green level of its pandemic recovery plan tomorrow, meaning that COVID-19 related restrictions will be lifted throughout the province. As we move into this next phase, Acadian will remain diligent in following health orders and best practices. The reopening will have little direct impact on the business as we have been able to operate seamlessly throughout the pandemic but we do look forward to resuming in-person interactions. As Adam mentioned, during the second quarter, Acadian experienced favorable operating conditions and steady demand towards products. As expected, we were able to reduce our inventory and recover the volume shortfall of the first quarter. Operations benefited from sufficient trucking capacity, an earlier start to operations following the spring thaw, and a return to more normal weather conditions compared to the hot and dry conditions that resulted in fire risk-related operating restrictions last year. Demand for Acadian's softwood and hardwood saw logs remained strong due to favorable end-use markets. Demand for hardwood pulpwood was stable throughout the quarter, while softwood pulpwood markets remained weak. Acadian's sales volume, excluding biomass, was up 55% compared to the same period in 2020. Acadian's weighted average selling price, excluding biomass, was flat year over year, with strong solid pricing and a higher value product mix offset by lower pulpit pricing and a stronger Canadian dollar relative to the second quarter of 2020. Regional softwood lumber producers ran steady through the quarter, resulting in solid demand for our softwood saw logs. our softwood saw log prices increased 6% in New Brunswick and 5% in Maine in U.S. dollar terms. Demand for hardwood saw logs was steady as end-use markets for this product remained strong. The weighted average hardwood saw log price increased 10% in New Brunswick and 26% in Maine in U.S. dollar terms compared to the prior year period, reflecting both price increases and a higher quality product mix. Demand for hardwood pulpwood was steady during the quarter, but prices decreased 12% compared to the prior year period due to elevated roundwood inventories in the region and stronger Canadian dollar. Stockwood pulpwood demand remained weak and prices were off 3% year-over-year. Biomass margins decreased year-over-year due to higher average hauling distances compared to the prior year period. I'll now turn to our market outlook. Acadian expects continued steady demand for its softwood and hardwood saw logs, hardwood pulpwood, and biomass. While North American softwood lumber prices are moderating as supply and demand come into balance, demand for softwood lumber is expected to remain relatively strong given the continued positive outlook for U.S. home construction and improvement. Consensus forecast for U.S. housing starts is $1.55 million for 2021, an increase of 12% from 2020. Regionally, softwood sawmills are running steady and Acadian is continuing to experience steady demand for its softwood saw logs as we progress through the summer. Demand for hardwood saw logs is strong as both appearance and industrial grade lumber is in high demand and roundwood inventories at hardwood sawmills are low. We expect strong demand and pricing for this product for the remainder of this year. Regional hardwood pulpwood demand is expected to remain stable as the economy improves while softwood pulpwood demand is expected to remain weak with continued high roundwood inventories regionally and significant competition from sod mill residuals that limit prospects for near-term improvement. Finally, demand for biomass from Acadian's New Brunswick operation is expected to remain stable with steady demand throughout the region supplemented by the return of export markets. Before I conclude my remarks, I would like to briefly mention that Acadian executed its first carbon development and marketing agreement to develop voluntary carbon credits on the portion of our main timberlands that is subject to a working forest conservation easement. This project commits Acadian to balancing harvest and growth and requires long-term planning, annual reporting, periodic carbon inventory verification, and maintenance of our existing sustainable forestry certification. While this project is relatively small and expected to contribute modestly to cash flow and have little impact on our operations, it forms a foundation for further carbon credit development. As it takes about 12 to 18 months to develop and sell carbon credit, Acadian expects to begin receiving proceeds from sales in mid to late 2022. In closing, we believe that Acadian's strong balance sheet, sustainably managed resources, access to diverse markets, and highly capable teams position it well for future success. The leadership transition has gone smoothly, and Adam and Susan are well prepared to lead Acadian as CEO and CFO going forward. I wish them and the entire team at Acadian the very best. That concludes our formal remarks, and we are now available to take your questions.