Acadian Timber Corp.

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Acadian Timber's second quarter 2023 Annals Conference Call and Webcast. At this time, all participants are on 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 1-1 on your telephone. You will then hear an automated message advising your hand is raised. Please note that today's conference is being recorded. I will now hand the conference over to speaker host, Susan Wood, Chief Financial Officer, 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 Adam Szyparski, Acadian's president and chief executive officer. Before discussing Acadian's results, I'll first remind everyone that in discussing our second 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 AcadianTimber.com. I'll begin today by outlining the financial and operational highlights for our second quarter ended June 24th, 2023. Adam will then provide some additional comments and discuss our outlook for the remainder of 2023. Acadian experienced strong operational performance during the second quarter, benefiting from favorable weather, which allowed harvest to continue later into the winter and to begin earlier after the spring thaw. Contractor availability increased, further enabling us to recoup a portion of the volume shortfall of the first quarter. Sales for the second quarter were $20.7 million, compared to $16.5 million in the same quarter of 2022. Sales volume, excluding biomass, increased 18% compared to the prior year period. Weighted average selling price, excluding biomass, increased 9% year over year, benefiting from strong softwood saw log and hardwood pulpwood pricing driven by strong demand. Pricing for softwood saw logs increased 14% compared to the prior year period driven by strong demand, while hardwood saw log pricing decreased 9% due to declines in end-use markets. Demand remained stable for softwood pulpwood, however, pricing decreased 9% year over year due to changes in customer and product mix. Hardwood pulpwood pricing increased 12% over the same period of 2022, though pricing and demand began to weaken as a result of higher regional supply. Biomass prices were 88% higher due to favorable market conditions. Operating costs and expenses were $15.5 million during the second quarter compared to $13.8 million during the prior year period reflecting higher sales volumes. Weighted average variable costs, excluding biomass, were 10% lower as compared to the prior year period primarily as a result of lower fuel costs and shorter hauling distances, partially offset by increased contractor rates. Adjusted EBITDA totaled $5.7 million during the quarter compared to $2.7 million in the prior period. Adjusted EBITDA margin for the quarter was 27% compared to 17% in the prior year period. Our net income for the second quarter was $5.8 million compared to $4.5 million in the prior year period. The increase in net income compared to the prior year period was primarily the result of higher operating income and the gain on sale of Timberlands, partially offset by lower non-cash fair value adjustments. Acadian generated $4.1 million of free cash flow and declared dividends of $4.9 million to our shareholders during the second quarter, or 29 cents per share. I'll now move into the second quarter results for our New Brunswick operations. Sales for our New Brunswick timberlands were $16.6 million compared to $13.5 million during the prior year period. Sales volume excluding biomass increased by 17%, primarily due to favorable weather conditions and increased contractor availability. With regards to softwood saw logs, demand remained stable with volumes relatively consistent with the prior year period. Demand for softwood pulpwood was strong with volumes twice that of Q2 2022. New Brunswick pricing for softwood saw logs and softwood pulpwood increased by 3% and 2% respectively compared to the prior year period. Hardwood saw log and hardwood pulpwood volumes in New Brunswick increased 65% and 15% respectively compared to the prior year period as a result of stable demand and favorable operating conditions during the quarter. Prices for hardwood saw logs were 5% lower than the prior year period due to weakening end-use markets, while prices for hardwood pulpwood were 14% higher than the prior year period due to strong demand. Operating costs in the second quarter totaled $11.9 million compared to $13.4 million in the prior year period, reflecting higher sales volumes. Weighted average variable costs, excluding biomass, were 15% lower, primarily as a result of lower fuel costs and shorter hauling distances, partially offset by increased contractor rates. New Brunswick's adjusted EBITDA in the quarter was $5 million compared to $2.7 million in the prior year period. Adjusted EBITDA margin was 30% compared to 20% in the prior year period. Switching over to Maine. Sales during the second quarter totaled $4.1 million compared to $2.9 million in the same period last year. Sales volume, excluding biomass, increased 20%, also reflecting the improved operating conditions over the prior year. Softwood saw log volumes in Maine increased 25% as compared to the prior year period due to favorable operating conditions and stable demand. In US dollar terms, pricing for softwood saw logs increased 18% compared to Q2 2022. Softwood pulpwood volumes decreased 89% and pricing decreased 9% in U.S. dollar terms as compared to the prior year period due to reduced demand, though it should be noted that softwood pulpwood volumes are relatively modest. Hardwood saw log volumes were consistent with the prior year period, although pricing decreased 19% in U.S. dollar terms for the same reasons as New Brunswick. Hardwood saw log volumes in Maine are also relatively modest. Hardwood pulpwood volumes increased 26% and pricing remained consistent compared to Q2 2022 due to stable demand and a favorable customer mix. Operating costs totaled $3.1 million in the quarter compared to $2.6 million during the same period last year, primarily due to increased harvesting activity. Weighted average variable costs excluding biomass increased 5% in Canadian dollar terms as compared to the prior year period, primarily as a result of higher contractor rates. Adjusted EBITDA for the quarter was $1.1 million compared to $0.4 million during the prior year period, and adjusted EBITDA margin was 27% compared to 12% 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 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. Starting with safety, as always, Acadian remains committed to health and safety as our number one priority, and during the second quarter, there were no recordable safety incidents among our employees or our contractors. We are very proud of all the hard work and dedication towards safety that is shown on a daily basis across the organization. Moving over to the quarterly results, while the second quarter is traditionally our slowest due to seasonal operating conditions, weather in the second quarter was much more favorable than we usually experience. As Susan mentioned, we were able to harvest later into the winter and to begin earlier after the spring thaw. These favorable weather conditions were also complemented by additional flexibility within the contractor workforce that allowed for an increase in volumes during the quarter. Fortunately, as a result of a lot of hard work from the operations team over the last few quarters, the difficulties associated with limited contractor availability abated somewhat and combined with the favorable weather conditions allowed us to catch up on much of our planned volume for the first half of the year and put us on a path to achieve our annual harvest volumes. The current dynamics of the Northeast forestry sector supported stable pricing and demand during the second quarter, and there remains some tension in the supply chain, which supports the stability of our weighted average sales pricing and allows for the recovery of the increased inflationary cost that we have experienced. As I am sure most of you are aware, we have been working on our first carbon development and marketing project on approximately 190,000 acres of the main timberlands. We are pleased to report that the first carbon credits associated with this project were registered on the American Carbon Registry on June 8th under the name Anew Katahdin Forestry Project. These 770,000 credits are now available for sale with the focus now shifting to marketing and selling these credits. As previously disclosed, the current project is a 10-year crediting period. With the credits from the first crediting period registered, we will now work towards registering the next batch, which is expected to be approximately 215,000 credits. This project has provided valuable experience to Acadian and has formed the foundation for any potential further carbon credit development projects. As you may have seen, the draft Canadian Federal Forest Carbon Offset Protocol was released earlier this month. The Acadian team is currently analyzing the draft, which, when finalized, will also form part of our decision-making process. As we have stated from the beginning, we will take what we have learned from our project in Maine, combined with the new protocols being developed in Canada, in determining what are the future carbon credit opportunities for Acadian. Turning to our outlook for the remainder of 2023, North American inflation concerns persist. and interest rates continue to increase, which has put near-term pressure on end-use markets. However, we remain confident that the stability of the northeastern forestry sector and combined housing shortages and repair and remodel activity will support the demand for our products. Consensus forecast for U.S. housing starts has risen to approximately 1.37 million in 2023. As we have noted previously, demand for Acadian's hardwood and softwood saw logs is mainly driven by regional supply and demand, meaning that the stable demand experience in the first half of 2023 is expected to continue. Pricing for softwood saw timber is expected to remain stable. However, pricing for hardwood saw timber may weaken, reflecting the recent softness in hardwood lumber pricing. While regional inventories of hardwood pulpwood have been replenished and demand has begun to slow, This market is expected to remain stable as our marketing efforts have diversified our customer base. Demand and pricing in softwood pulpwood markets are expected to remain at the improved levels experienced in 2022 and the beginning of 2023, although there is some uncertainty in Maine as a result of a recent temporary shutdown of a facility. As we enter the third quarter, we are optimistic that continued stable regional demand and pricing for our products together with the increased contractor capacity we have secured, will support our planned harvest volumes. Combined with the potential monetization of the first 770,000 carbon credits, we'll produce solid financial results for the remainder of the year. Acadian continues to benefit from a strong balance sheet, continued diversification of our markets, and a highly capable team focused on strong financial and operating performance. As always, we will remain focused on merchandising our products to attain the highest margins available and making improvements throughout the business to maximize cash flows from our existing timberland assets. We continue to explore opportunities to grow as demonstrated by our advancement into the carbon credit market, opportunistic land sales as evidenced during the quarter, and exploring additional land use opportunities such as renewable energy and additional land leasing. With that, we are now available to take your questions. Operator.