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spk00: Good day and thank you for standing by. Welcome to the Q1 2023 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 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. 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.
spk01: Good afternoon, everyone, and welcome to Acadian Timber's first 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 first quarter financial and operating performance, the outlook for the remainder of 2023, 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 acadianpibber.com. I'll begin by outlining the financial and operational highlights for our first quarter ended March 25th, 2023. Adam will then provide some additional comments and discuss our outlook for the remainder of 2023. The first quarter of 2023 was another challenging quarter for operations, with continued impacts from limited contractor availability and unfavorable weather conditions, including a warm winter in Maine. Though harvest levels were below our targets, Acadian experienced strong demand and pricing for its key products. Sales for the first quarter were $22.4 million compared to $26.6 million in the prior year period. Sales volume, excluding biomass, decreased 37% compared to the prior year period primarily as a result of limited contractor availability combined with unfavorable weather conditions, which impacted both harvesting and hauling activities. Weighted average selling price, excluding biomass, increased 15% year over year, benefiting from strong prices across all products, driven by strong demand, as well as the recovery of elevated fuel costs from our customers. Overall pricing for softwood saw logs and softwood pulpwood increased 9% and 22%, respectively, compared to the prior year period due to strong demand. We also continued to experience solid demand for hardwood saw logs, which, combined with our continued merchandising efforts, has resulted in hardwood saw log pricing increasing 19% overall compared to the prior year period. Decreased inventories during the quarter due to the lack of harvesting throughout the region contributed to an increase in hardwood pulpwood pricing of 24% over the prior year period. Biomass sales volumes were up 23% compared to the prior year period as a result of improved market conditions. Operating costs were $17.1 million in the quarter compared to $19.8 million during the prior year period as a result of the reduced harvesting activity partially offset by increased timber services revenue in New Brunswick. Weighted average variable costs, excluding biomass, increased by 14% as a result of higher contractor rates and fuel cost adjustments paid to contractors as compared to the prior year period. Adjusted EBITDA totaled $5.6 million during the quarter compared to $6.9 million in the prior period. Adjusted EBITDA margin for the quarter was 25% compared to 26% in the prior year period. Our net income for the first quarter was $5.6 million compared to $4.2 million in the prior year period. The increase in net income was largely due to the impact of higher gains on non-cash fair value adjustments in the first quarter of 2023 compared to the same period of 2022 and higher gains on sale of timberlands, partially offset by lower operating income due to decreased harvesting activity as compared to the prior year period. Acadian generated $3.7 million of free cash flow and declared dividends of $4.9 million to our shareholders during the first quarter, or 29 cents per share. I will now move into the first quarter results for our New Brunswick operations. Sales for our New Brunswick timberlands were $17.9 million compared to $18 million during the prior year period. Sales volume, excluding biomass, decreased by 27%, primarily due to limited trucking capacity in the quarter. With regards to softwood saw logs and softwood pulpwood, Demand remained strong, however, sales volume decreased by 38% and 8% respectively due to limited trucking contractor availability. New Brunswick pricing for softwood saw logs and softwood pulpwood increased 15% and 23% respectively compared to the prior year period due to strong demand. Hardwood saw log volumes in New Brunswick increased 3% compared to the prior year period as a result of merchandising improvements. Hardwood pulpwood sales volume decreased by 20%, being negatively impacted by limited contractor availability. However, demand was strong. Prices were 21% and 23% higher than the prior year period for hardwood saw logs and hardwood pulpwood, respectively. Operating costs in the first quarter totaled $13.3 million compared to $13.4 million in the prior year period, reflecting lower harvesting activity and land management costs, offset by higher timber services activity. Weighted average variable costs, excluding biomass, increased 19% as a result of higher contractor rates and fuel adjustment costs paid to contractors compared to the prior year period. New Brunswick's adjusted EBITDA in the quarter was $4.9 million compared to $4.7 million in the prior year period. Adjusted EBITDA margin was 27% compared to 26% in the prior year period. Switching over to Maine. Sales during the first quarter totaled $4.5 million compared to $8.6 million in the same period last year. Sales volume, excluding biomass, decreased 55%, also reflecting limited contractor availability, but was also impacted by a warm winter, causing unfavorable operating conditions. These factors resulted in softwood saw log volumes in Maine decreasing by 67% as compared to the prior year period and softwood pulpwood volumes decreasing by 39%. Hardwood saw log volumes decreased by 66% for the same reasons. It should be noted that softwood pulpwood and hardwood saw log volumes are both relatively modest. Hardwood pulpwood sales volume decreased by 23% compared to the prior year period. However, with strength in demand due to the continued shortfall of supply in the region, prices increased by 20% in U.S. dollar terms over the prior year period. The weighted average selling price, excluding biomass, in US dollar terms increased 3% compared to the prior year, with higher prices across all products benefiting from favorable market dynamics, as well as fuel cost recovery from customers. In Canadian dollar terms, prices increased 10%. Operating costs totaled $3.4 million in the quarter, compared to $5.9 million during the same period last year, primarily due to lower harvesting activity. Weighted average variable costs, excluding biomass, increased 10% in Canadian dollar terms as compared to the prior year period, primarily as a result of higher contractor rates and fuel adjustment costs paid to contractors, combined with a weaker Canadian dollar. Adjusted EBITDA for the quarter was $1.1 million compared to $2.8 million during the prior year period. and adjusted EBITDA margin was 25% compared to 32% in the prior year period. With respect to Acadian's financial position at the end of the quarter, it remains strong, ending with a net liquidity position of $17.2 million, including funds available under our revolving credit facilities. With that, I'll turn the call over to Adam.
spk04: Thank you, Susan, and good afternoon, everyone. As Susan mentioned, I will first provide some comments on the quarter and then discuss our outlook for the remainder of 2023. As always, Acadian remains committed to health and safety as our number one priority. During the first quarter, there was one recordable safety incident among our employees and none among our contractors. The incident resulted in minimal lost time and the individual has fully recovered and returned to work. As we have said before, we believe that emphasizing and achieving an excellent safety record a leading indicator of success in the broader business. As Susan outlined, the difficulties experienced during the fourth quarter of 2022 with contractor availability continued into the first quarter of 2023 throughout the Northeast. These challenges were compounded with unseasonably warm weather in May, resulting in a difficult operating environment, which has resulted in our customers having very low inventory. Fortunately, At this point, weather conditions have been favorable, and we have begun to slowly start off operations, which is earlier than we would normally. And, as a result of a lot of hard work from the operations team, as we exit the first quarter, we believe that we have secured sufficient contractor capacity to deliver on our annual harvest plans. As we explained before, the current dynamics of the Northeast forestry sector have supported stable pricing and demand across all of our products. Acadian continued to experience price increases and all of our markets continued to request deliveries as we exited the quarter and entered into the month season. Acadian advanced its first carbon development and marketing project on the approximate 190,000 acres of the main timberlands that are subject to a working forest conservation easement. As mentioned on our February call, we are currently at the registration stage and although the timing is somewhat later than we had originally expected, we are nonetheless pleased with the expected outcomes of the project. The registration process is substantially complete, and the registration of the first 713,000 credits is expected very shortly. Following registration, the credits will be immediately available for sale. The focus will then be on marketing and selling these credits. As previously disclosed, the current project has a 10-year crediting period. Once the credits from the first crediting period are registered, We will then work towards registering the next batch of credits, which is expected to be approximately 134,000 credits. This project has provided valuable experience to Acadian and has formed the foundation for any potential further carbon credit development projects. We will continue the process of taking what we have learned and determining if there are any future opportunities for Acadian. Turning to our outlook for the remainder of 2023, Economic uncertainty and inflation concerns persist. Although recent reports indicate that inflation is slowing significantly in Canada, U.S. interest rates have increased in an effort to further curb inflation. While expected U.S. housing starts are lower than the previous year, they are still consistent with pre-pandemic historical levels, with consensus forecasts at approximately 1.24 million starts in 2023. Accordingly, we remain confident that the stability of the northeastern forestry sector combined with the long-term demand for new homes and repair and remodel activity, will support the demand for and pricing of our products. However, given the short-term compressions from end-use markets, we may experience pricing pressure. Inflation is expected to remain a challenge in the near term and to continue to exert pressure on our financial results through elevated contractor rates and fuel surcharges that we pay our contractors. It was encouraging, however, to experience a slight decrease in fuel prices during the quarter, though they remain at elevated levels. The region has continued to experience labor shortages, which has negatively impacted our contractor capacity in recent quarters. Our management team has been focused on increasing our contractor capacity, whether through existing or new contractors, and we have made positive progress going into the second quarter. And as I previously mentioned, At this point, we are comfortable that we will be able to deliver our planned harvest volumes. Because demand for Acadian saw logs is mainly driven by regional supply and demand, the stable saw log demand and prices experienced in the first quarter of 2023 is largely expected to continue as we progress through the year. Despite weaknesses in softwood lumber, we continue to see stability in our softwood log prices. There is currently a fair amount of uncertainty in the hardwood lumber markets, and lumber inventories are high, which may result in softening of the hardwood log markets. However, prices are expected to remain above historical norms. And, as we have discussed before, a significant amount of work has gone into our hardwood merchandising efforts, which will also benefit us in the coming quarters. We are seeing indications that regional inventories of hardwood pulpwood, which were very low due to a shortage of supply in recent months, are beginning to be replenished. However, markets are expected to remain stable in the near term. Softwood pulpwood markets into 2023 are expected to remain at the improved levels experienced in 2022 and which continued into the most recent quarter. As we enter the second quarter, we are optimistic that continued stable regional demand and pricing for our products will support solid results for the remainder of the year and that the increased contractor capacity we have secured will allow us to catch up on much of the volume shortfall of the first quarter. We will continue to actively work with our contractors to meet the delivery demands of our customers. As always, we will remain focused on merchandising our products to obtain the highest margins available and making improvements throughout the business to maximize cash flows from our existing Timberland assets, while exploring opportunities to grow as demonstrated by our advancement into the carbon credit market, opportunistic land sales, and exploring additional land use opportunities. At Acadian, we have the team, the assets, and the balance sheet to successfully weather challenging operating and market conditions as they arise, and we are dedicated to providing long-term value for our shareholders. With that, we are now available to take your questions. Operator?
spk00: As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Gabriel Nicholson from CIBC.
spk05: I hope all is well. My first question relates to the New Brunswick government's proposed reduction in Crown land royalty rates. That would bring them to about 30% below the level that they were before the increases last fall. I was just wondering how you were thinking about this from a competitive standpoint, and would you care to quantify any headwinds if you can in terms of log pricing? Thanks.
spk04: Hi, Gabriel. Thanks for the question. It was a bit surprising to us when the announcement came out over the last couple of days. You know, it's still very early. Like I said, we just received the information over the last couple of days, so we are in the process of understanding the methodology and the results of the survey, mainly because it doesn't seem to align with the current markets that we're experiencing. So the comment period has opened up, and I'm sure they will be receiving comments from a number of individuals over the coming weeks, and Acadian will review the process as we normally would. As it relates to Acadian specifically, I'll try and simplify it as best as I possibly can and divide it into two large buckets, being hardwood and softwood. On the hardwood side, Gabriel, there's always been, I would say, a lack of supply in the region of hardwood, especially the high-grade saw logs, which there hasn't really been any direct correlation to, I would say, the FMV rates. for a number of reasons, like I said, supply and then also significant demand outside of the province of New Brunswick by mills in either Quebec or Maine or further than that. On the softwood side, it's a little bit more complex. We have an interesting customer base, again, some of which are outside of the province of New Brunswick and aren't impacted by the FMV rates. Again, I said it earlier, sort of disconnect in what we're seeing in the markets from what came out of their survey. And if you think about our customer base being outside of the province, again, they're not going to be impacted by FMV rates. And then we do have, you know, obviously our first fiber supply agreement with Plaster Rock, which is a unique pricing mechanism. The last point I would say on it is you're starting to see, because of the lack of supply, because of the impacts of contractors or the availability of contractors. You're seeing mills with low inventories, as we said, and don't really see an immediate impact, to be honest. I know that's hard to believe given the rates, but that's where we are today. In the long run, we'll keep an eye on it, but in the short term, we don't really see it having a drastic impact on our pricing.
spk05: Right. Okay. Yeah. Thanks. They did, they did come down pretty, or are proposed to come down a lot faster than they went up. So I appreciate that. It's kind of tough to quantify at the moment. Also on the contractor availability, do you think there's like an inherent max capacity that you could, or there's a ceiling on capacity now just because of the contractor availability issues that you've had over the last year? over the last, I guess, while now. And this is even in a market of phenomenal conditions. And I'll leave it there.
spk04: Yeah. No, thanks for that, Gabriel. I would say that the regional contractor capacity will have its limits at some point. At this point, given the really hard work and success of the operating team, we have capacity both on the harvesting and the trucking At this point, we're confident we're going to keep them to achieve what we would say is our annual harvest volumes. Obviously, we have restrictions due to sustainable forestry. In our AIF, our annual cut is about a million cubic meters. That's our target. We believe we have the contractors to achieve that at this point in time.
spk05: Great. Thanks.
spk00: Thank you. One moment for our next question. Our next question comes from the line of Andrew Cusk from Credit Suisse.
spk02: Thanks. Good afternoon. You've obviously put a lot of effort into the carbon project, and that's been quite a bit of work and effort along with that, but a good prize at the end of it. Do you see some market dislocations you know, when you look at other assets in the market with people that maybe are not as far down the path of figuring out what the carbon value is that, you know, could be interesting from either M&A or, you know, effectively helping some others get to that process and being able to surface some of that value for yourselves?
spk04: Yeah, that's a good question, Andrew. You know, I think there's probably a fair bit of dislocation right now in the market on a number of fronts as people are start to understand the carbon market a little bit more, I think that there will be some changes in valuations. We are seeing a valuation change. It seems as though the northern Timberlands are viewed as more attractive for carbon developers at this point in time, and so we're starting to see that coming into valuations. We are absolutely laser focused to see if there is any opportunities out there from an M&A perspective. Looking hard, haven't found anything at this point in time, but it's possible, absolutely.
spk02: Okay, that's helpful. And then was there anything in the federal budget or even provincially or in the state side, I guess we can look at all the places you touched, that was really helpful you know, for whether carbon market development or other incentives that you feel you could, you know, lean on to extract more value from a company standpoint?
spk04: Yeah, I would say, you know, the latest Canadian budget, federal budget was very supportive of the industry, which was great, just from a base timberlands, sustainability, silviculture. So we were really excited to see that and what that might, you know, do going forward. In addition to the timberland value and benefits that they've set forth in Canada, they also in the US, sorry, both governments have outlined some very interesting incentives as it relates to renewable energy and sustainable energy, which we've been spending some time looking at and understanding a little bit better. Obviously, as a large landowner in the north, no different than any of our peers, we're looking at that as an opportunity for potential development going forward in that other land use space.
spk02: Okay, helpful. And then one final one, if I may, and this is a tricky question, but more pertinent on the corridor. Given the issues on contractual availability, there's lower harvests, lower volume in the market. I guess to what degree do you think the lower volume effectively boosted pricing? This is not just you that you're affected by this, others are affected also. So I guess it's a tricky kind of dynamic, but what's your gut feel?
spk04: I think it definitely had an impact. I would say lesser on the high-grade, the saw logs on both sawfoot and hardwood. I think If I was to look at our business, you know, the hardwood pulpwood market was significantly impacted by lack of volume. You know, and I think as we'll see when we come out of month season, I think there's, I would say, just a general misunderstanding as to what volume is going to show up when people start harvesting again from a hardwood pulpwood perspective. So that could drive some, let's say, uncertainty and some some variability in pricing. But if I just go back to the saw logs perspective, I kind of outlined a bit. Hardwood markets are a little bit chaotic because of the end use, but there's still a shortage of volume. Probably going to have to continue for some time, which will stabilize our pricing going forward. And similar on the softwood saw logs, I'm not sure that there's a a really end in sight for that end of the volume shortfalls. I would say, obviously, contractor capacity has had an impact on that, Andrew, but we've also seen increased demand. We're starting, we believe. We have talked to a few folks and certainly had conversations. There's a lot more leaving the province of New Brunswick both from private and from industrial freeholds as a result of mills increasing capacity. So I think there might be, and we don't know yet for sure, but there might be a little bit of a disconnect between supply and demand in the northwest New Brunswick area for the next little while.
spk02: Okay, that's very good. Thank you. Thank you.
spk00: Thank you. One moment for our next question. Our next question comes from the line of Paul Quinn from RBC Capital Markets.
spk03: Hi, Paul. Hi. Thanks very much, and good morning, or I guess it's afternoon for you guys. Just on the carbon credit side, can you put that into monetary terms? I mean, You know, $134,000 next batch of credit sounds great. Sounds like a lot. What does that mean in terms of money?
spk04: Yeah, it's a good question. We haven't put the dollar out. We don't give guidance. Maybe a couple of points that would allow you to do some math. You know, we believe that the current pricing for carbon credits right now would need to be improved forest management credits. voluntary market in the high 20s, mid to high $20 US per credit. We obviously have a carbon development agreement in place with a third party, which we've mentioned before. And there is, as we said in our news release back in September, we'll get about 85% of the proceeds associated with those sales into our, to us. And then And then obviously we have taxes that we'll have to pay associated with that. So you can probably come to the math associated with those targets.
spk03: Hey, switching over to weather issues in Maine. Can you sort of quantify how many operating days you lost and what is typical in Maine in Q1?
spk04: Yeah, we don't usually get a lot of lost time in Maine. It was, and there's lots of publications in Maine that were complaining about the weather and how warm it was. We never got, you know, what we rely on is a deep turn frost. And so we did lose some days. We, you know, it's hard to quantify and it was, it would be sort of irrelevant from the days that we lost because we had a lot of We did a lot of work of moving contractors around to try and get them out of what would have been historically viewed as a winter block, maybe a little bit wetter ground and we had to move them and so we were losing productivity because of that as well, even though they kept harvesting. I would say certainly wasn't all of the lost volume in Maine, but there's a good portion, 25% probably of that volume that was lost was associated with weather.
spk03: And just lastly, you mentioned carbon optionality coming into Timberland valuations. What is the specific evidence that you've seen of that in your region that you operate in?
spk04: Yeah, it's a good question. You know, we're seeing transactions on property in the northeast, you know, which would have historically transacted in, you know, 400 U.S. dollars an acre, maybe a bit more depending on the unique circumstances. And that transactional value is now, you know, getting closer to 700, 800, 900 an acre. And it's just who's acquiring the land. It's not the timber plays anymore that are acquiring land, it's carbon credit folks that are doing that. So I think that's probably the number one factor. We have looked at some properties and just frankly, the timber valuation, if you just take a pure timber play valuation on some of these properties that are transacting, you have to assume carbon credit sales in order to make the valuation that's been paid work. And obviously, there's been a number of carbon credit players acquiring property over the last number of quarters.
spk03: Thanks for the help. Best of luck.
spk04: Thank you. You're welcome.
spk00: Thank you. At this time, I would now like to turn the conference back over to Adam Schaparsky for closing remarks.
spk04: 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 joining us for our second quarter conference call in July. Goodbye.
spk00: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
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