Acadian Timber Corp.

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.

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.

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?