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Acadian Timber reports second quarter results and changes to management team

July 27, 2017 - Acadian Timber Corp. ("Acadian" or the "Company") reported on Tuesday the financial and operating results for the three months ended June 24, 2017 (the "second quarter").

"Acadian's second quarter benefited from favourable winter conditions which supported strong seasonal log production," said Mark Bishop, chief executive officer of Acadian. "Acadian continues to experience strong regional demand for hardwood logs and the outlook for softwood sawtimber continues to be supported by steady growth in U.S. housing starts and residential home improvement." 

Acadian continued to perform well and recorded solid results for the second quarter. In the quarter, we generated Adjusted EBITDA of $2.6 million, benefiting from strong seasonal demand, favorable operating conditions, and higher and better use land sales in Maine. However, this was lower than the $3.3 million generated in the prior year period. While log sales volumes and the weighted average log selling price for the quarter were largely consistent year-over-year, operating costs increased primarily due to an increase in average haul distances.

Total shareholder dividends during the first half of 2017 were $0.55 per share or $9.2 million, representing a 10% increase over the same period of 2016 and a payout ratio of 98% which is relatively consistent with our long term target of 95%.

Management Team Changes

Acadian announced today that Mr. Wyatt Hartley will be leaving the position of chief financial officer effective July 27, 2017 to take on new responsibilities within Brookfield Asset Management. Mr. Hartley has been a member of the senior management of Acadian since his initial appointment as chief financial officer in 2016. "The entire management team would like to thank Mr. Hartley for his hard work, dedication and significant contributions to Acadian and wish him the best in his new endeavors" commented Mr. Bishop. Effective July 27, 2017, Ms. Mabel Wong will replace Mr. Hartley as Acadian's senior vice-president and chief financial officer. Ms. Wong has been a key member of Brookfield's team for the past ten years and has held a number of senior finance roles within the organization. Ms. Wong is a chartered accountant and worked at one of the big four accounting firms prior to joining Brookfield.

Review of Operations

Financial and Operating Highlights

For the second quarter of 2017, Acadian generated net sales of $12.6 million compared to $13.7 million in the prior year primarily due to lower selling prices for biomass products. Total log sales volumes increased 1% compared to the prior year, driven by a 30% increase in hardwood pulpwood sales volumes resulting from favourable spring harvest conditions, which was largely offset by the impact of a softwood sawlog inventory management program at one of the operation's major customers that was not in place in the current year. The weighted average log selling price remained flat as the benefits from a favourable change in mix and foreign currency were offset by weaker pricing for hardwood products. 

Adjusted EBITDA margin decreased to 21% from 24% in the prior year as higher operating costs due to longer average haul distances were only partially offset by the contribution from higher and better use (HBU) land sales in Maine. 

Acadian traditionally 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 for the second quarter totaled $4.0 million, or $0.24 per share, compared to $5.8 million, or $0.35 per share, respectively for the same period in 2016. The decrease is primarily due to lower Adjusted EBITDA as described above and a lower foreign exchange gain from the revaluation of long-term debt.

During the first half of 2017, Acadian's net sales were $35.7 million, reflecting a slight improvement over the same prior year period of $35.1 million, primarily attributed to an 11% increase in log sales volumes from favourable harvest conditions, particularly for spruce and fir stands. The impact of this increase was partially offset by a 4% decrease in the weighted average log selling price driven by a change in product mix and weaker pricing for hardwood products. Adjusted EBITDA improved to $10.7 million from $10.3 million in the first half of 2016 while Adjusted EBITDA margin improved to 30% from 29%. For the six months ended June 24, 2017, net income was $8.8 million, or $0.52 per share, which represents a decrease of $1.4 million over the same period in 2016 primarily due to lower foreign exchange revaluation gains from long-term debt, partially offset by lower deferred tax expense.

Acadian's financial position continues to be solid with $98.0 million of net liquidity as at June 24, 2017, including funds available under the Company's Revolving Facility and the stand-by equity commitment from Brookfield.

Total shareholder dividends during the first half of 2017 were $0.55 per share or $9.2 million, representing a 10% increase over the same period of 2016 ($0.50 per share or $8.4 million).

New Brunswick Timberlands

Three months ended June 24, 2017:

Net sales totaled $9.8 million compared to $11.7 million for the same period last year. Excluding biomass, log sales volumes decreased 7% to 132 thousand m3 from 142 thousand m3 in the prior year, as softwood sawlog sales were impacted by an inventory management program with one of the operation's major customers that was not in place in the current year. This was partially offset by the benefit from increased demand for hardwood pulpwood primarily reflecting the sale of inventory which was at higher than normal levels at the beginning of the quarter due to favourable winter harvest conditions.

The weighted average log selling price for the quarter was $70.13 per m3, compared to $70.84 per m3 in the prior year as strength in softwood sawlog selling prices and the benefit of sales mix was offset by weaker pricing for hardwood products.

Continued strong local demand for biomass products resulted in sales volumes remaining largely in-line with the same period of 2016. Overall, the gross margin earned on our biomass products decreased 55% compared to the second quarter of 2016 reflecting limited export markets for products.

Adjusted EBITDA and costs for the quarter were $2.0 million and $7.8 million, respectively, compared to $3.9 million and $7.8 million, respectively, in the second quarter of 2016 primarily due to the aforementioned absence of the inventory management program, as well as an increase in variable costs per m3 due to longer average haul distances. As a result, Adjusted EBITDA margin for the quarter decreased to 21% from 33% in the prior year.

Six months ended June 24, 2017:

Net sales of $26.1 million, which increased $0.4 million compared to the same period last year, benefited from a 13% increase in log sales volumes, which was partially offset by the impact of lower selling prices. Costs were $17.9 million, or $1.0 million higher than the prior year due to the aforementioned increase in sales volumes. As a result, Adjusted EBITDA was $8.2 million, a decrease of $0.6 million compared to the same period last year, while Adjusted EBITDA margin decreased to 31% from 34%.

Safety

There were no recordable safety incidents among employees and contractors during the second quarter of 2017.

Maine Timberlands

Three months ended June 24, 2017:

Net sales totaled $2.8 million compared to $1.9 million for the same period last year, as log sales volumes increased 54% to 36 thousand m3 from 23 thousand m3. This increase was driven primarily by favourable spring harvest conditions relative to the same quarter of 2016. 

The weighted average log selling price in Canadian dollar terms was $74.84 per m3, compared to $74.97 per m3 in the same period of 2016. The weighted average log selling price in U.S. dollar terms was $55.67 per m3, down 4% year-over-year as softwood sawlog prices declined 9% primarily from weak demand for our customers' softwood residuals while hardwood pulp prices stabilized as demand strengthened with customers replenishing inventories which were higher than normal during the first quarter. 

Costs for the second quarter were $2.9 million, compared to $2.1 million during the same period in 2016, due to higher sales volumes while variable costs per m3 increased due to longer average haul distances. Adjusted EBITDA for the quarter was $0.9 million, compared to a loss of $0.2 million in the prior year while Adjusted EBITDA margin increased to 32% from (9)% due primarily to the benefit of HBU land sales.

Six months ended June 24, 2017:

Net sales were $9.6 million, or $0.2 million higher than the first half of 2016, primarily from a 7% increase in log sales volumes due to favourable spring harvest conditions, while weighted average log selling prices decreased 5% due to high customer inventories earlier in the year. Costs were $8.0 million, or $0.6 million higher than during the same period of 2016 largely due to higher sales volumes and longer average haul distances . Adjusted EBITDA was $3.1 million, an increase of $1.0 million compared to the same period last year, while Adjusted EBITDA margin increased to 32% from 22% primarily driven by the benefit of HBU land sales.

Safety

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

Freehold Timberlands

Maine Timberlands invested $0.5 million during the first six months of 2017 on approximately 1,200 acres of freehold timberlands to eliminate third party common and undivided ownership interests which will strengthen our regional operating position.

Market Outlook

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. While sluggish wage growth, tight construction labor markets and potential further Fed rate increases continue to represent risks to growth in U.S. housing starts, the underlying fundamental driver of pent-up household formation continues to strengthen. Economic forecasters continue to call for steady growth in housing starts, with year-over-year improvements averaging 5% for 2017 and over 8% for 2018. Residential home improvements are also expected to remain strong. As a result, demand growth expectations for North American sawtimber remain in the 3% per year range over the next few years to support expanding domestic construction needs. 

As anticipated, lumber prices continued to be volatile during the second quarter primarily reflecting anticipation and the declaration of preliminary duty levels and producer and wholesaler efforts to manage inventories during this highly uncertain period. Following the announcement in April of preliminary countervailing duties (CVD) averaging 19.9%, average preliminary anti-dumping duties (ADD) of 6.9% were announced at the end of the second quarter. Notably, the U.S. Department of Commerce (DoC) also announced at the end of the quarter that all Atlantic provinces with the exception of New Brunswick would be excluded from duty investigation, a significant departure from past disputes. Historically, Canadian Atlantic lumber producers from all provinces 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 wood supply from private timberland sources.

Subsequent to the DoC ADD announcement, industry press reports revealed that a preliminary framework for a negotiated market share-based 10 year settlement has been agreed to between Canadian and U.S. government officials. At this time, however, there is little visibility on a definitive final agreement being reached and, importantly, how Canadian officials would apportion market share restrictions across Canadian provincial lumber producers, and in fact whether the entire Atlantic region will again be exempted from any final settlement as in the past. 

We highlight that in past cycles during periods of strong U.S. lumber demand, duties imposed against Canadian softwood lumber producers are more easily passed through to U.S. buyers in the form of higher prices. Despite media headlines on the softwood dispute, given the current robust U.S. housing market and positive near term drivers of housing starts and home improvements noted above, we would not anticipate any material negative impact on Acadian's business.

Hardwood sawtimber markets remain strong and stable and are unaffected by U.S. trade initiatives. We remain encouraged that hardwood pulpwood markets remain historically strong, and that Acadian continues to be a preferred partner for hardwood fibre supply to this important market segment. Acadian's domestic biomass markets appear to have stabilized, although the anticipated recovery in export shipments from our New Brunswick operations has been delayed into 2018. Additionally, we expect that the Maine recreational real estate market will remain favourable through the year and therefore anticipate conditions will support the sale of additional properties throughout the remainder of 2017.

Quarterly Dividend

Acadian is pleased to announce a dividend of $0.275 per share, payable on October 13, 2017 to shareholders of record on September 30, 2017.

July 27, 2017  By Acadian Timber Corp.