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Acadian Timber Corp. reports 2017 first quarter results

May 8, 2017 - Acadian Timber Corp. ("Acadian" or the "Company") (TSX:ADN) has reported financial and operating results1 for the three months ended March 25, 2017 (the "first quarter").

"Acadian generated strong free cash flow during the first quarter resulting in a payout ratio down to 62% inclusive of the impact of our recent 10% dividend increase" said Mark Bishop, Chief Executive Officer of Acadian. "Our operations benefited from favorable winter conditions which supported seasonally strong log production".

Acadian maintained its momentum and posted strong performance for the three-month period ending March 25, 2017. For the quarter we generated Adjusted EBITDA1 of $8.0 million up from $7.0 million in the prior year, as our operations benefitted from favourable winter harvest conditions driving a 10% increase in harvest volumes compared to the same quarter of 2016.

Demand for most of our products continues to be solid, with our average log selling price remaining in line with the end of last year.

During the first quarter of 2017, Acadian generated $7.4 million of Free Cash Flow1 and declared dividends of $4.6 million to our shareholders. This represents a payout ratio of 62%, which is comfortably below our long term annual target of 95% but in-line with expectations given the seasonality of our operations.

1 This news release makes reference to Adjusted EBITDA, Adjusted EBITDA margin and Free Cash Flow which are key performance measures in evaluating Acadian's operations and are important in enhancing investors' understanding of Acadian's operating performance. Acadian's management defines Adjusted EBITDA as earnings before interest, taxes, fair value adjustments, recovery of or impairment of land and roads, unrealized exchange gain/loss on debt, depreciation and amortization and Adjusted EBITDA margin as Adjusted EBITDA as a percentage of its total revenue. Free Cash Flow is defined as Adjusted EBITDA less interest paid, current income tax expense, and capital expenditures plus net proceeds from the sale of fixed assets (selling price less gains or losses included in Adjusted EBITDA). As these performance measures do not have standardized meanings prescribed by International Financial Reporting Standards ("IFRS"), they may not be comparable to similar measures presented by other companies. As a result, we have provided in this news release reconciliations of net income, as determined in accordance with IFRS, to Adjusted EBITDA, Adjusted EBITDA margin and Free Cash Flow.

Review of Operations

Financial and Operating Highlights

       
Three Months Ended

(CAD thousands, except per share information)

March 25, 2017

  March 26, 2016

Sales volume (000s m3)

  356.0

    301.6

Net sales

$

23,072

  $

21,447

Net income / (loss)

  4,758

    4,342

Adjusted EBITDA

  8,030

    7,044

Free Cash Flow

  7,388

    6,170

Dividends declared

  4,601

    4,183

Payout ratio

  62%

    68%

Per share (fully diluted)

         
  Net income / (loss)

  0.28

    0.26

  Free Cash Flow

  0.44

    0.37

  Dividends declared

  0.27

    0.25

           
For the first quarter, Acadian generated net sales of $23.1 million compared to $21.4 million in the comparable period of 2016, driven primarily by favourable winter harvest conditions, particularly for spruce and fir stands. Total sales volumes were 18% higher than the same period in the prior year, driven by a 34% increase in softwood sawlog sales volumes. Sales volumes for other non-biomass products were in-line with the same period in the prior year. The increase in sales volumes was partially offset by a 6% decrease in the weighted average log selling price due to a year-on-year decline in the U.S. dollar exchange rate, unfavorable mix and weaker pricing for hardwood products.

Adjusted EBITDA for the first quarter was $8.0 million compared to $7.0 million during the comparable period in 2016. Adjusted EBITDA margin for the quarter was 35%, up from 33% in the same period last year, as the decrease in average selling price was more than offset by operating leverage from higher sales volumes and the benefit of higher and better use (HBU) land sales in Maine. 

Net income totaled $4.8 million, or $0.28 per share, for the first quarter, compared to $4.3 million, or $0.26 per share, for the same period in 2016. The increase is primarily due to the aforementioned sales volumes increase and partially offset by higher fair value adjustments due to higher harvest volumes.

Acadian's balance sheet continues to be solid with $100.5 million of net liquidity as at March 25, 2017, including funds available under Acadian's Revolving Facility and our stand-by equity commitment with Brookfield.

Total dividends declared to shareholders during the three months ended March 25, 2017 were $4.6 million, or $0.275 per share, up from $4.2 million or $0.25 per share, in 2016.

New Brunswick Timberlands

The table below summarizes operating and financial results for New Brunswick Timberlands.

  Three Months Ended March 25, 2017

Three Months Ended March 26, 2016

  Harvest
(000s m
3)

Sales
(000s m
3)

Sales
Mix


Results
($000s)


Harvest
(000s m3)

Sales
(000s m3)

Sales
Mix

Results
($000s)

Softwood

135.3

126.5

47%

$

7,258

111.0

80.5

40%

$

4,359

Hardwood

115.3

94.7

36%

  7,602

109.6

90.0

44%

  7,559

Biomass

45.3

45.3

17%

  965

33.3

33.3

16%

  1,338

  295.9

266.5

100%

  15,825

253.9

203.8

100%

  13,256

Other sales

        488

        675

Net sales

      $

16,313

      $

13,931

Adjusted EBITDA

      $

6,128

      $

4,958

Adjusted EBITDA margin

        38%

        36%

                     
Three months ended March 25, 2017:

Net sales totaled $16.3 million compared to $13.9 million for the same period last year. Log sales volumes excluding biomass increased 30% to 221 thousand m3 from 170 thousand m3 in the prior year, reflecting more favourable harvest conditions for spruce and fir stands and strong demand for softwood sawlogs. Furthermore, in the prior year, sales volumes for the quarter were lower as our operations carried higher than typical inventories at quarter end due to an inventory management program with one of the operation's major customers that was not in place in the current year.

The weighted average log selling price for the quarter was $67.18 per m3, down from $69.87 per m3 in the prior year. Strength in softwood sawlog selling prices, which were up 4% compared to the prior year, was more than offset by the impact of sales mix and weaker pricing for hardwood products.

Strong local demand for biomass products resulted in a 36% increase in sales volumes compared to the same period in the prior year. Overall, the gross margin earned on our biomass products decreased 36% compared to the first quarter of 2016, reflecting lower sales to export markets.

Adjusted EBITDA and costs for the quarter were $6.1 million and $10.2 million, respectively, compared to $5.0 million and $9.0 million, respectively, in the first quarter of 2016 due primarily to the aforementioned increase in log sales volumes. Adjusted EBITDA margin for the quarter increased to 38% from 36% in the same period in the prior year due to the increase in log sales as well as a 13% reduction in variable costs per m3 due to shorter hauling distances.

Safety

There were no recordable safety incidents among employees and one lost time incident among contractors during the first quarter of 2017.

Maine Timberlands

The table below summarizes operating and financial results for Maine Timberlands.

  Three Months Ended March 25, 2017

Three Months Ended March 26, 2016

  Harvest
(000s m
3)

Sales
(000 m
3)

Sales
Mix

Results
($000s)


Harvest
(000s m3)

Sales
(000s m3)

Sales
Mix

Results
($000s)

Softwood

62.8

62.6

70%

$

4,751

65.2

64.9

66%

$

5,142

Hardwood

29.4

25.7

29%

  1,892

29.8

27.4

28%

  2,298

Biomass

1.2

1.2

1%

  2

5.5

5.5

6%

  37

  93.4

89.5

100%

  6,645

100.5

97.8

100%

  7,477

Other sales

        114

        39

Net sales

      $

6,759

      $

7,516

Adjusted EBITDA

      $

2,156

      $

2,281

Adjusted EBITDA margin

        32%

        30%

                     
Three months ended March 25, 2017:

Net sales totaled $6.8 million compared to $7.5 million for the same period last year as log sales volumes decreased to 88 thousand m3 from 92 thousand m3 in the prior year. This decrease is driven primarily by a decrease in the number of operating days in the first quarter of 2017, as compared to the same quarter of 2016. Adjusting for this difference, log sales volumes were in-line with the prior year.

The weighted average log selling price in Canadian dollar terms was $75.26 per m3, down from $80.63 per m3 in the same period of 2016. The weighted average log selling price in U.S. dollar terms was $56.86 per m3, down 3% year-over-year, reflecting a 2% increase in softwood sawlog pricing offset by a 9% decline in hardwood pulp pricing reflecting high customer inventories.

Adjusted EBITDA for the quarter was $2.2 million, compared to $2.3 million in the prior year. Costs for the first quarter were $5.1 million, compared to $5.3 million during the same period in 2016, due to the decrease in sales volumes and a 5% decrease in variable costs per m3 in Canadian dollar terms. Adjusted EBITDA margin for the quarter increased to 32% from 30% due primarily to the benefit of HBU land sales and the above noted decrease in variable costs per m3.

Safety

There were no recordable safety incidents among employees or contractors during the first quarter of 2017.

Market Outlook

The following contains forward-looking statements about Acadian Timber Corp.'s market outlook for the remainder of fiscal 2017. Reference should be made to the "Forward-looking Statements" section of this news release. For a description of material factors that could cause actual results to differ materially from the forward-looking statements in the following, please see the Risk Factors section of our management's discussion and analysis of Acadian's most recent Annual Report and Annual Information Form available on our website at www.acadiantimber.com or filed with SEDAR at www.sedar.com.

Acadian's key markets include softwood sawtimber, hardwood sawtimber and hardwood pulpwood. Northeast North American softwood dimension sawmills represent over one third of Acadian's end-use market and are the primary market for our softwood sawtimber. Economic forecasters continue to call for steady growth in housing starts, with year-over-year improvements averaging over 7% in each of 2017 and 2018. As a result, North American sawtimber demand is expected to grow at over 3% per year over the next few years to support expanding domestic construction needs.

Despite the expectation for steadily improving lumber consumption, the near to medium term outlook for softwood sawtimber pricing remains uncertain in the face of expected punitive duties to be imposed by the U.S. Government on imports of Canadian softwood lumber. Preliminary countervailing duties (CVD) averaging 19.9% were announced last week, and anti-dumping duties (ADD) are scheduled to be announced in late June. Lumber prices jumped significantly through the first quarter in anticipation of high duty levels expected to be applied retroactively. As in past disputes, we have been anticipating relatively high initial combined duties, which are likely to be reduced over time during the litigation period. We anticipate a highly politicized process may obscure visibility on progress towards a negotiated settlement for at least most of 2017.

During past U.S./Canada softwood lumber disputes, Canada's Atlantic lumber producers, along with Québec border mills, experienced lower relative CVD & ADD duties than the rest of Canada and were ultimately exempted in past negotiated settlements due to the significantly greater proportion of private timberlands in the Atlantic region relative to the rest of Canada as well as a long history of active cross-border log exports within the Northeast region. However, there is little current visibility as to where final duty determination will land for the region at the end of this year, and in fact whether the region will be exempted from any final settlement as in the past. 

Hardwood sawtimber markets, typically oriented to millwork and higher value specialty markets, are expected to remain at healthy current levels throughout the upcoming year. While hardwood pulpwood markets remain historically very strong, we expect seasonally high consumer inventories will continue to impact pricing through mid-year, and in any case, remain vulnerable in the current strong U.S. dollar environment. While continued oversupply of softwood sawmill residuals and softwood pulpwood markets remains a concern, we anticipate regional timberland owners will continue to target reduced pulpwood harvest levels through 2017. Biomass is also an important market for Acadian. We anticipate domestic biomass markets will remain stable in New Brunswick and expect a gradual recovery in export volumes during the second half of the year. Maine's biomass market appears positioned for a gradual recovery as state subsidies and higher natural gas pricing have supported the restart of three previously idled biomass generation facilities. 

Additionally, we expect that the Maine recreational real estate market will remain favorable through the year and therefore anticipate conditions will support the sale of additional properties throughout the remainder of 2017.


May 8, 2017
By Acadian Timber Corp.