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Acadian Timber reports second quarter results

“Acadian’s second quarter benefited from favourable operating conditions and strong seasonal demand”, said Mark Bishop, chief executive officer of Acadian. “As the outlook for softwood sawtimber demand and pricing continues to be supported by steady growth in U.S. housing starts and residential home improvement, Acadian is well positioned to continue its favourable momentum for the remainder of the year.”

Acadian continued to perform well during the three-month period ended June 30, 2018, posting Adjusted EBITDA1 of $2.6 million, in-line with the prior year period. Acadian benefited from a four per cent increase in log sales volumes during the period, resulting from favourable operating conditions and strong seasonal demand, the benefits of which were offset by a decline in higher and better use (HBU) land sales in Maine. Log selling prices for most of our products benefited from improved demand while our weighted average log selling price per cubic metre remained in-line with the prior year period due to a change in the sales mix. During the quarter we generated $2.0 million of Free Cash Flow consistent with the same period of 2017. 

During the first half of 2018, we have declared dividends of $0.5575 per share to our shareholders or $9.3 million compared to $9.2 million during the same period of 2017, reflecting a three per cent increase in our quarterly dividend as approved by our Board of Directors in April 2018. This represents a payout ratio of 101 per cent, which is slightly above our long-term annual target of 95 per cent but in-line with expectations given the seasonality of our operations. We anticipate that over the long-term we will maintain the 95 per cent target payout ratio.

Review of Operations

Financial and Operating Highlights
Certain prior year amounts have been reclassified to conform to the current year presentation as a result of adoption of IFRS 15, Revenue From Contracts with Customers, on Jan. 1, 2018

During the second quarter, Acadian’s net sales rose to $16.1 million from $14.3 million in the comparable period of 2017, driven by favourable operating conditions and strong seasonal demand which resulted in a four per cent increase in total log sales volumes. Acadian’s weighted average log selling price remained in-line with the prior year period as the benefit from increases in softwood sawlog and hardwood pulpwood prices of six per cent and three per cent, respectively, was offset by changes in the sales mix.

The impact of the increase in log sales volumes was offset by lower sales of HBU land in Maine, resulting in Adjusted EBITDA of $2.6 million, consistent with the prior year period. The Adjusted EBITDA margin for the quarter was 16 per cent, down from 18 per cent in the prior year period.  

Acadian typically experiences low levels of operating, marketing and selling activity during the second quarter of each year owing to the spring thaw period that causes much of the infrastructure to be temporarily inoperable. As a result, year to year variations in sales volumes and operating costs are less meaningful.

Net income was $1.9 million, or $0.11 per share, for the second quarter, compared to $4.0 million, or $0.24 per share, for the same period in 2017 due to the impact of foreign exchange revaluation of U.S. dollar denominated long-term debt.

During the first half of 2018 Acadian’s net sales improved to $49.0 million from $42.3 million during the prior year period, primarily attributable to a 12 per cent increase in log sales volumes driven by favourable harvest conditions, particularly for spruce and fir stands. The weighted average log selling price remained in-line with the prior year period as improvements in the selling prices for most products were offset by changes in the sales mix. As a result, Adjusted EBITDA improved to $11.5 million from $10.7 million during the first half of 2017, despite HBU sales decreasing $1.0 million from the prior year period. The Adjusted EBITDA margin of 23 per cent is down from 25 per cent in the prior year period as the  increase in log sales volumes was more than offset by lower HBU land sales in Maine. For the six months ended June 30, 2018, net income was $3.9 million, or $0.23 per share, which represents a decrease of $4.9 million over the same period of 2017 primarily due to the impact of foreign exchange revaluation of U.S. dollar denominated long-term debt.

Segment Performance

New Brunswick Timberlands
Certain prior year amounts have been reclassified to conform to the current year presentation as a result of adoption of IFRS 15, Revenue From Contracts with Customers, on Jan. 1, 2018

Net sales for our New Brunswick Timberlands increased to $12.9 million from $11.5 million during the prior year period. Log sales volumes, excluding biomass, increased three per cent to 135 thousand m3 from 132 thousand m3 in the second quarter of 2017 reflecting favourable operating conditions and strong seasonal demand for softwood sawlogs and improved demand for softwood pulpwood. In addition, timber services and other sales increased 37 per cent compared to the prior year period primarily due to the timing of harvest activities.

The weighted average log selling price during the quarter was $69.47 per m3, down from $70.13 per m3 in the prior year period. Demand for softwood sawlogs and hardwood pulpwood in New Brunswick remained strong with prices increasing four per cent, however, the benefit of this was more than offset by lower volumes of higher-valued hardwood sawlogs and higher volumes of lower-valued softwood pulpwood, relative to the prior year period. Prices for these products were favourable compared to the prior year period. 

Biomass product sales volumes increased by 30 per cent year-over-year as shipments to export markets resumed in early 2018. The return of the export markets also resulted in a meaningful 135 per cent increase in gross margin earned compared to the second quarter of 2017.

Operating costs for the quarter were $10.8 million, compared to $9.5 million in the second quarter of 2017 primarily due to higher harvest volumes and timing of operating activities. Variable log harvest costs per m3 decreased five per cent primarily due to a change in the harvest mix.

Adjusted EBITDA was $2.2 million during the second quarter of 2018, compared to $2.0 million in the prior year period, due to the impact of the increase in log sales volumes and higher margins for biomass products. The Adjusted EBITDA margin of 17 per cent for the quarter was slightly lower than the prior year period reflecting timing of operating activities.

During the six-month period ended June 30, 2018, net sales totaled $36.0 million which represents a $3.3 million increase compared to the same period last year.  New Brunswick benefited from a six per cent increase in log sales volumes and a 23 per cent increase in biomass sales volumes, which were partially offset by the impact of lower weighted average log selling prices due to changes in the sales mix. Costs were $28.0 million, or $3.5 million higher than the prior year due to the increase in sales volumes and higher transportation costs. As a result, Adjusted EBITDA was $8.0 million, a decrease of $0.2 million compared to the same period last year, while Adjusted EBITDA margin decreased to 22 per cent from 25 per cent.

There were no recordable safety incidents among employees and two minor lost time incidents among contractors during the second quarter of 2018.

Maine Timberlands
Net sales totaled $3.2 million compared to $2.8 million for the same period last year as log sales volumes increased seven per cent to 38 thousand m3 from 36 thousand m3 in the prior year period. This increase was primarily driven by strong seasonal demand for softwood sawlogs which had been impacted in the prior year period by high customer inventories and limited markets for sawmill residuals.

The weighted average log selling price in Canadian dollar terms was $79.82 per m3, up from $74.84 per m3 in the same period of 2017. The weighted average log selling price in U.S. dollar terms was $61.85 per m3, up 11 per cent year-over-year, reflecting meaningfully improved demand and prices for softwood sawlogs and hardwood pulpwood.

Costs for the second quarter of $2.9 million were in-line with the same period in 2017 as longer hauling distances resulted in higher transportation costs which were offset by the impact of foreign exchange.

Adjusted EBITDA for the quarter was $0.6 million compared to $0.9 million in the prior year period as lower HBU land sales more than offset the increase in log sales volumes and prices. As a result, the Adjusted EBITDA margin decreased to 18 per cent, relative to 32 per cent in 2017.

During the six month period ended June 30, 2018, net sales totaled $13.0 million, or $3.4 million higher than the first half of 2017, primarily due to a 29 per cent increase in log sales volumes due to favourable winter harvest conditions and a five per cent increase in the weighted average log selling price which was lower in the prior year due to high customer inventories. Costs were $9.3 million, or $1.3 million higher than the same period of 2017 largely due to higher sales volumes, partially offset by the benefit of shorter hauling distances. Adjusted EBITDA was $4.0 million, an increase of $1.0 million compared to the prior year period due to the aforementioned factors, partially offset by lower HBU land sales.  As a result, the Adjusted EBITDA margin decreased slightly to 31 per cent from 32 per cent in the prior year period.

There were no recordable safety incidents among employees or contractors during the second quarter of 2018 at our Maine Timberlands.

Adoption of IFRS 15, Revenue from contracts with customers
IFRS 15 supersedes previous revenue standards (IAS 18, Revenue) and related interpretations and it applies to all revenue arising from contracts with customers. On January 1, 2018, the Company adopted IFRS 15 using the full retrospective approach. The adoption of this standard on January 1, 2018 resulted in a change in presentation from net to gross for timber services, which does not impact the Company’s operating earnings or net income. As a result of this change in presentation, net sales for the three-month and six-month period ended June 24, 2017 increased by $1.7 million and $6.6 million, respectively, with a corresponding increase in operating costs and expenses. Net sales are net of discounts and rebates to customers. Revenue is recognized when control passes to the customer, which is generally when timber is delivered to the customer and actual quantities delivered are determined. Sales are governed primarily by contract and in some cases by standard industry terms. Pursuant to the Crown Lands Services Agreement, Acadian provides harvesting, transportation and other services to Crown licensees and sub-licensees. Acadian receives payment for these services which are recognized upon delivery of the timber and when actual quantities delivered are determined.

Market Outlook
The following contains forward-looking statements about Acadian Timber Corp.’s market outlook for the remainder of fiscal 2018. 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 increases averaging over 10 per cent in 2018 and four per cent in 2019. The underlying fundamental driver of pent-up household formation remains highly compelling and forecasters continue to expect attractive growth in housing starts in future years despite weakening affordability and ongoing supply-side constraints of tight construction labour markets and more restrictive building regulations. North American sawtimber demand is expected to grow at over three per cent per year over the next few years to support expanding domestic construction needs.

Benchmark Western Spruce-Pine-Fir and Southern Yellow Pine lumber prices were up over the sequential quarter by 17 per cent and six per cent, respectively, allowing producers to continue to pass on the full application of average export duties on U.S.-bound shipments to consumers. Reduced inventories in the supply chain at the beginning of the spring construction season due to severe winter conditions and tight rail and truck transport availability during the first quarter were replenished through the quarter as these constraints were largely alleviated. While lumber pricing volatility should be expected due to uncertainty of ongoing application and pass through of duties or a potential future softwood lumber dispute settlement including quotas, forecasters continue to expect the underlying supply demand drivers will support strength in lumber pricing through 2019. By extension, Acadian anticipates continued strong support in end use markets for softwood sawtimber pricing through this period.   

Since the final determination of combined export duties averaging 20.2 per cent was announced by the U.S. Department of Commerce and finalized by the International Trade Commission in late Q4 2017, industry officials indicate there have been no material softwood negotiations between the U.S. and Canada. As there is little expectation that a softwood settlement will factor into the current broader North American Free Trade Agreement (NAFTA) trade negotiations, there remains little visibility on relief from duties in the near to medium term.   

Hardwood sawtimber markets, typically oriented to millwork and higher value specialty markets, are expected to remain at healthy current levels throughout the remainder of the year. Hardwood pulpwood demand in the region remains stable with tight supply conditions continuing to support historically strong pricing. In New Brunswick, biomass markets have benefited from the expected recovery in export volumes, while Maine’s biomass market remains under pressure from low cost natural gas as a more competitive feed stock for electricity generation. While investments in wood-based liquid biofuels and new wood pellet capacity in the state are encouraging, the projects are in early-stage development. We expect that the Maine recreational real estate market will remain active and therefore anticipate conditions will support the sale of additional properties throughout the remainder of 2018.       

Quarterly Dividend
Acadian is pleased to announce a dividend of $0.2825 per share, payable on Oct. 15, 2018 to shareholders of record on Sept. 30, 2018.

Acadian Timber Corp. is a leading supplier of primary forest products in Eastern Canada and the Northeastern U.S. With a total of 2.4 million acres of land under management, Acadian is the third largest timberland operator in New Brunswick and Maine.

Acadian owns and manages approximately 1.1 million acres of freehold timberlands in New Brunswick and Maine, and provides timber services relating to approximately 1.3 million acres of Crown licensed timberlands in New Brunswick. Acadian also owns and operates a forest nursery in Second Falls, New Brunswick. Acadian’s products include softwood and hardwood sawlogs, pulpwood and biomass by-products, sold to approximately 85 regional customers.

Acadian’s business strategy is to maximize cash flows from its existing timberland assets while growing our business by acquiring assets on a value basis and utilizing our operations-oriented approach to drive improved performance.

Acadian’s shares are listed for trading on the Toronto Stock Exchange under the symbol ADN.