Acadian Timber Corp.

the Acadian Timber Corporation's fourth quarter 2021 conference call. 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'll need to press star 1 on your telephone. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Susan Wood, Chief Financial Officer. Please go ahead.

Thank you, Operator. Good afternoon, everyone, and welcome to Acadian Timber's fourth 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'll first remind everyone that in discussing our fourth quarter and 2021 financial and operating performance, the outlook for 2022, 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 with some comments on our financial results for the fourth quarter and year ended December 31st, 2021. Then Adam will add some further remarks on the business market conditions and the outlook for 2022. Sales for the fourth quarter were $25.9 million, an increase of $1 million when compared to $24.9 million in the prior year period. The weighted average selling price, excluding biomass, increased 7% year over year, benefiting from favorable operating conditions and increased saw log pricing. Sales volume, excluding biomass, decreased 7% due to lower hardwood pulpwood sales. Operating costs of $19.8 million in the quarter were $1.7 million higher than the $18.1 million in the prior year due to higher harvesting activity in Maine and increased timber services in New Brunswick. Weighted average variable costs, excluding biomass, increased 10%, reflecting higher log processing and fuel costs, partially offset by a stronger Canadian dollar. Adjusted EBITDA totaled $6.3 million during the quarter as compared to $7.3 million in the prior year period. Adjusted EBITDA margin for the quarter was 24% compared to 29% in the fourth quarter of 2020. The decrease in EBITDA margin was mainly driven by reduced sales volumes in New Brunswick combined with lower gains on timberland sales in Maine. Our net income for the fourth quarter was $6.5 million compared to $15.3 million in the prior year period. The variance is primarily due to a combination of lower gains on non-cash items, such as unrealized foreign exchange on long-term debt and fair value adjustments in 2021 as compared to 2020. We generated $5.1 million of free cash flow and declared dividends of $4.8 million to our shareholders during the fourth quarter, which resulted in a payout ratio of 94%. With respect to our annual results, Acadian performed well throughout 2021, despite several challenges, including unseasonably warm weather in the first quarter, the impact of sawmill residuals on the softwood, pulpwood markets, and increased fuel prices. Acadian's operations benefited from strong demand for softwood and hardwood saw logs driven by favorable end-use markets. Sales for 2021 were $95.7 million compared to $91 million in 2020. Acadian's weighted average selling price, excluding biomass, increased 4% with a higher value product mix and strong saw log prices. Sales volume, excluding biomass, decreased 5% primarily due to lower softwood pulpwood sales due to the competition of sawmill residuals and to a lesser extent, lower hardwood pulpwood sales due to increased regional inventories. Adjusted EBITDA for the year ended December 31st, 2021 with $22.5 million compared to $21.5 million in 2020, while adjusted EBITDA margin was 23% compared to 24%. in the prior year. We generated free cash flow of $16.9 million in 2021 compared to $15.2 million last year. I'll now move into the fourth quarter results for our New Brunswick operations. Sales for our New Brunswick Timberlands were $18 million compared to $19.3 million in the same period of 2020. Sales volume, excluding biomass, decreased 23%, due to reduced softwood saw log and hardwood pulpwood sales, partially offset by an increase in hardwood saw log sales driven by strong demand and increased timber services activity. The weighted average selling price excluding biomass increased 6% as a result of strong hardwood saw log prices and volumes. Operating costs in the fourth quarter totaled $13.2 million compared to $12.9 million in the prior year period. The increase in operating costs is a result of increased timber services activity and higher land management costs partially offset by lower sales volume. New Brunswick suggested EBITDA in the quarter was $4.6 million compared to $6.5 million in the prior year period with adjusted EBITDA margin decreasing to 25% compared to 34% last year. The decrease in EBITDA and EBITDA margin was a result of lower sales volume in the fourth quarter as compared to the prior year period. Switching over to Maine. Sales during the fourth quarter totaled $8 million compared to $5.6 million in the same period last year. Sales volume, excluding biomass, increased 39% year over year, due to higher softwood and hardwood saw log sales driven by favorable operating conditions and strong demand. The weighted average selling price excluding biomass in US dollar terms increased by 8% year over year with higher saw log prices benefiting from favorable market dynamics. Operating costs totaled $6 million in the quarter compared to $4.7 million during the same period of 2020. as a result of higher harvesting activity. Weighted average variable costs, excluding biomass, decreased 4%, benefiting from a higher proportion of softwood in the mix, combined with a stronger Canadian dollar. Adjusted EBITDA for the quarter was $2.1 million, compared to $1.3 million during the same period last year. while adjusted EBITDA margin was 26% compared to 24% in the prior year period. Acadian's financial position remained strong ending the fourth quarter with a liquidity position of $19.8 million, including a cash balance of $7.3 million and our undrawn revolving credit facilities. With that, I'll turn the call over to Adam.

Thank you, Susan. The safety remains the number one priority at Acadian. We're extremely proud to announce that there were no recordable safety incidents among employees and contractors during the year. We believe that emphasizing and achieving a good safety record is a leading indicator of success in the broader business. And I would like to congratulate the entire team on this tremendous achievement. 2021 was once again another transformative year for Acadian. While continuing to operate through the COVID pandemic, The new management team was finalized, and full integration to a standalone company was completed, all while delivering solid operating performance. During the year, market demand for our products remained strong, with a number of new customers beginning to take delivery, which has had a positive impact on pricing. Although Acadian experienced some headwinds in the form of unseasonal weather, challenging pulpwood markets, and significant increases in fuel costs, the financial results for the year demonstrate the stability of the Timberland business. Also during 2021, Acadian executed its first carbon development and marketing agreement to develop voluntary carbon credits on the portion of the main timberland that is subject to a working forests conservation easement. While this project is relatively small and expected to contribute modestly to cash flow and have little impact on operations, it forms the foundation for further carbon credit development. Although we are still a few months away from the development of our first credits, The project remains on track and we should have additional insights at the end of the first quarter. Before I turn to our fourth quarter results, yesterday we announced that Acadian would be implementing both a dividend reinvestment plan and a normal course issuer bid. We believe the DRIP allows Acadian to assist in the facilitation of shareholder support in the company and allows us to remain poised to pursue potential strategic opportunities. Instituting the NCIB enables us to acquire common shares when the market price represents a desirable use of capital to increase shareholder value. However, given the liquidity of Acadian stock, we expect that we will be somewhat limited in our ability to repurchase shares through the life of the program. Now, turning to our fourth quarter results. Operating conditions during the quarter were favorable across both New Brunswick and Maine. As Susan mentioned earlier, Acadian's weighted average selling price, excluding biomass, increased 7%, while sales volume decreased 7% compared to the fourth quarter of 2020. Softwood saw log sales volume remained steady year over year on a consolidated basis, with increases in Maine offset by decreases in volume in New Brunswick. Improvements in Maine were driven by favorable operating conditions, combined with the prior year period being impacted by temporary weather-related road closures. Higher inventory levels in New Brunswick combined with strong prior year period drove most of the declines in volume. Softwood saw log prices increased 9% in Maine, or 13% higher in U.S. dollar terms, and were steady in New Brunswick. Increases in softwood saw log prices to customers were partially offset by a higher proportion of lower-value studwood in the mix. We experienced increased demand for our hardwood saw logs as sales volume increased 13%, and hardwood saw log prices were 18% higher when compared to the prior year period. Hardwood saw log sales and pricing are being driven by strong demand in both appearance and industrial grade lumber markets throughout the region. Demand for hardwood pulpwood decreased as sales volume was down 25%, while prices remained steady year over year. Regional inventories remained high throughout the quarter. With additional capacity coming online at the beginning of 2022, we are starting to see an increase in demand. Softwood pulpwood demand increased, relatively speaking, as sales volume was up 20% and prices were up 11% year over year. Volumes remained significantly lower than historical levels due to the abundance of sawmill residuals, as we discussed on previous calls, but we have seen a slight improvement during the quarter and entering into 2022. The outlook for Acadian softwood and hardwood saw log sales is positive, with end-use markets showing strength as we head into 2022. North American softwood lumber consumption is expected to remain strong with sustained demand from repair and remodeling activity and new home construction. Consensus forecast is for approximately 1.57 million U.S. housing starts in 2022 compared to 1.58 million in 2021. Although interest rates are expected to rise, a large U.S. population entering their home buying years and a low inventory of homes for sale will be key drivers supporting this growth. Demand for our softwood saw logs is expected to remain stable as a result of these positive end-use market dynamics. Acadian also expects continued strong demand and pricing for its hardwood saw logs due to limited regional supply and benefiting from new customer relationships in both the appearance and industrial-grade hardwood lumber markets. We remain cautiously optimistic that hardwood pulp will remain stable through 2022 with increased customer confidence and market demand for hardwood pulp. Meanwhile, as I mentioned previously, although we did see some slight improvements in softwood pulpwood entering 2022, we expect the market to remain somewhat challenged given elevated regional inventories of both softwood pulpwood and sawmill residuals. In closing, with the new management team fully in place, our highly capable team is energized and committed to Cadian's future success. In 2022, we will continue to seek opportunities for growth, both internally and externally, and for improvements to our operating performance. With that, we are now available to take your questions. Operator?