Acadian Timber Corp.

Good day and thank you for standing by. Welcome to the Acadian Timber Corp third quarter 2021 conference call and webcast. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Susan Wood, Chief Financial Officer. Please go ahead.

Thank you, Operator. Good afternoon, everyone, and welcome to Acadian Timber's third quarter conference call. With me on the call today is Adam Schaparsky, Acadian's President and Chief Executive Officer. Before discussing Acadian's results, I will first remind everyone that in discussing our third 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 risk 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 third quarter ended September 25th, 2021. Then Adam will comment on our operations, market conditions, and outlook for the remainder of the year. Sales for the third quarter were $22.7 million compared to $23.2 million in the prior year period. Weighted average selling price, excluding biomass, increased by 8% year over year, benefiting from increased saw log pricing driven by favorable market dynamics. Demand remained strong for our saw log, while demand for our softwood pulpwood remained challenged due to the regional availability of sawmill residuals. resulting in a 9% decrease in sales volume, excluding biomass. Operating costs of $17.9 million in the quarter were $0.9 million lower than the $18.8 million in the prior year period, mainly due to lower harvesting and timber services activity. Variable costs per cubic meter increased 1% due to higher fuel costs, partially offset by a stronger Canadian dollar. Adjusted EBITDA totaled $5.1 million during the quarter, up from $4.5 million in the prior year period. Adjusted EBITDA margin for the quarter was 23%, compared to the prior year period of 19%. Our NIT income for the third quarter was $0.1 million, compared to $5.2 million in the prior year period. The negative variance is primarily due to a non-cash unrealized foreign exchange loss on long-term debt of $3.1 million compared to a gain of $2.2 million in the prior year period. Acadian generated $3.6 million of free cash flow and declared dividends of $4.8 million to our shareholders during the third quarter or 29 cents per share. I'll now move to the third quarter results for our New Brunswick operations. Sales for New Brunswick were $17.5 million compared to $18 million in the same period of 2020. The weighted average selling price, excluding biomass, increased 9% from the prior period quarter, reflecting strong saw log prices and a lower proportion of softwood pulpwood in the mix. Sales volume, excluding biomass, decreased by 10%, which was mainly driven by the decrease in softwood pulpwood. Operating costs in the third quarter totaled $13.4 million compared to $13.8 million in the prior year period. The decrease in operating costs is a result of lower harvesting and timber services activity combined with lower land management costs. Weighted average variable costs per cubic meter excluding biomass increased by 8%, reflecting higher fuel costs compared to the prior year period. New Brunswick's Adjusted EBITDA in the quarter was $4.2 million, consistent with the prior year period, and adjusted EBITDA margin was flat year-over-year at 24%. I'll now switch over to Maine. Sales during the third quarter totaled $5.2 million, flat with the prior year period. Sales volume, excluding biomass, decreased 6% year-over-year as a result of lower hardwood pulpwood deliveries. partially offset by stronger softwood saw log sales. The weighted average selling price excluding biomass in US dollar terms increased 11% compared to the prior year with higher saw log prices benefiting from favorable market dynamics. In Canadian dollar terms, prices increased 5% year over year. Operating costs totaled $4.2 million in the quarter compared to $4.4 million during the same period last year as a result of lower harvest activity and a lower cost product mix. Variable costs excluding biomass were 11% lower per cubic meter due to a higher proportion of softwood with lower average costing compared to hardwood combined with a stronger Canadian dollar. Adjusted EBITDA for the quarter was $1.3 million compared to $0.8 million during the same period last year Adjusted EBITDA margin was 26% compared to 15% in the prior year period. The third quarter results include $0.3 million of gains recorded on timberland sales compared to no timberland sales during the same quarter in 2020. With respect to Acadian's financial position, it remained strong, ending the third quarter with a net liquidity position of $23 million, including a cash balance of $10.5 million and our revolving credit facilities, which remain undrawn. With that, I'll now turn the call over to Adam.

Thank you, Susan. Health and safety remain a key focus of our business, and as such, we are proud to report that through continued attention and hard work of our employees and contractors, Acadian experienced no safety incidents again this quarter. That makes it three straight quarters since we had an incident, a true sign that safety is our top priority. Regarding COVID, we continue to monitor developments in the regions in which we operate, and our teams remain diligent in following health orders and best practices. And although the fourth wave has come to our region, to this point, it has not had a significant impact on Acadian's operations or the operations of our customers. Switching over to our results, as Susan mentioned, during the third quarter, Acadian benefited from strong pricing and demand. Regional softwood lumber producers ran steady through the quarter, resulting in solid demand for our softwood saw log. Our softwood saw log prices increased 2% in New Brunswick and 18% in Maine in U.S. dollar terms. As expected, demand for Acadian softwood pulp would remain challenged due to the regional availability of saw mill residuals, which has had an impact on our overall volumes. Demand for our hardwood saw logs was steady as end-use markets for this product remained strong. The weighted average hardwood saw log price increased 12% in New Brunswick and 25% in Maine in U.S. dollar terms compared to the prior year period, reflecting both price increases and a higher quality product mix. Hardwood pulpwood volume decreased during the quarter and prices declined 5% compared to the prior year period due to elevated roundwood inventories in the region, a change in the harvesting mix towards softwood during the quarter, and a stronger Canadian dollar. Biomass volumes decreased year-over-year, and although we experienced increased pricing, higher average hauling distances and fuel costs compared to the prior year period impacted biomass margins during the quarter. Turning to our market outlook, Acadian expects North American softwood lumber demand to remain steady as we progress through the remainder of 2021 and into 2022, supported by the sustained positive outlooks for U.S. home construction and improvements. Housing fundamentals continue to be supported by lower interest rates, income and job growth, aging and underbuilt housing stock, and favorable home buyer demographics. Consensus forecast for U.S. housing starts is $1.57 million for 2021, an increase of 14% from 2020. The dynamics of the softwood lumber market are expected to support steady demand for our softwood saw log as our sawmill customers continue to invest in their facilities and operate at steady levels. However, the strong regional production of lumber will continue to challenge the softwood pulpwood market as sawmill residuals are abundant in the region. Demand for hardwood saw logs is strong as both appearance grade and industrial grade lumber is in high demand and roundwood inventories as hardwood sawmills are low. We expect strong demand and pricing for this product for the remainder of this year and into 2022. Hardwood pulpwood demand is expected to remain steady as the economy improves. Demand for biomass from Acadian's New Brunswick operation is expected to remain stable through the remainder of the year and into 2022, with steady demand throughout the region supplemented by the return of export markets. Finally, as we disclosed last quarter, Acadian executed its first carbon development and marketing agreement to develop carbon credits on the portion of our main timberlands that is subject to a working forest conservation easement. As we previously discussed, While the project is relatively small and expected to contribute modestly to cash flow and have little impact on operations, it forms a foundation for further carbon credit development. The project remains on track as we enter the inventory phase, and we expect to begin receiving proceeds from sales in mid to late 2022. In closing, we believe that Acadian's strong balance sheet, sustainably managed resource, access to diverse and growing customer base, and highly capable team position it well for future growth and success. With that, we are now available to take your questions. Operator?