Acadian Timber Corp. (ADN) Earnings Call Transcript & Summary

Ladies and gentlemen. Thank you for standing by and welcome to the Acadian Timber annual and special meeting of shareholders call. [Operator Instructions] Please be advised that this conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker, Malcolm Cockwell, Chairman [indiscernible]. Please go ahead.

Thank you, operator. My apologies for that. Good morning, ladies and gentlemen. It is my pleasure to welcome everyone to the Acadian Timber Corp. AGM. It's now 11:00 a.m. and time to start the 2020 annual and special meeting of Acadian Timber Corp. My name is Malcolm Cockwell, and as Chairman of the corporation, I will chair the meeting. With me on the phone today are the directors of Acadian, Phil Brown, Reed Carter, Heather Fitzpatrick; Karen Oldfield, Bruce Robertson; and Peter Schleifenbaum. Also on the phone are Erika Reilly, President and Chief Executive Officer; and Adam Sheparski, Chief Financial Officer. The format for the meeting this year is unique given the extraordinary circumstances we find ourselves in. COVID-19 has limited travel and our ability to attend this meeting in person, which is why we have chosen to broadcast the AGM over conference call and webinar. We are committed to open communication with our shareholders, and we believe this year's format is the most effective means of communication given the circumstances. With that, I now call the meeting to order and ask Mr. Sheparski to act as secretary and scrutineer of the meeting. Before we turn to the business before us, I would like to deal with a few procedural matters. To expedite matters today, Ms. Reilly and I will move and second all motions with respect to the business of the meeting. This is designed to facilitate the progression of the meeting and not intended to discourage comments. The notice calling this meeting and the management information circular were sent to shareholders. A copy of these materials, together with an affidavit of AST Trust Company Canada confirming such materials, were properly mailed to shareholders and will be kept by the secretary with the records of the meeting. The minutes of last year's annual meeting held on May 9, 2019, are available, should any shareholder wish to review them. The transfer agent has provided the preliminary report on attendance. Based on this report, the Secretary has confirmed that there is a quorum present. I, therefore, declare the meeting properly constituted for the transaction of business for which it has been called. I will now table the corporation's 2019 annual report to shareholders, which includes the 2019 financial statements, together with the auditor's report. Copies of our annual report were mailed to registered shareholders and are accessible on the corporation's website and profile on SEDAR. We will now proceed with the election of 5 directors. Each of whom is to be elected at this meeting to hold office until the next annual meeting. Particulars of the 5 director nominees are set out in the management information circular, which accompanied the Notice of Meeting sent to shareholders. As stated in the Notice of Meeting, it is the intention of the persons named in the form of proxy to vote in favor of the election of each of the 5 director nominees, subject to contrary instructions given in the form of proxy. I will now call for nominations for the election of 5 directors of the corporation.

Mr. Chairman, I nominate the following persons: Reid Carter, Malcolm Cockwell, Heather Fitzpatrick, Karen Oldfield and Bruce Robertson to -- and move that they be elected directors of the corporation to hold office until the next annual meeting.

Thank you, Ms. Reilly. I declare the nominations closed. Management has received proxies representing over 97% of the votes cast in favor of each of the directors nominated. Since the votes withheld for each nominee are minimal, I will take the voting results from the proxy tabulation report and declare the motion carried. As there are 5 persons nominated for the same number of positions, I now declare that those nominated have been duly elected directors of the corporation. The next item of business is the appointment of auditors. As stated in the Notice of Meeting, it is the intention of the persons named in the form of proxy to vote in favor of a resolution appointing Ernst & Young LLP as auditors of the corporation to hold office until the next annual meeting and authorizing the Board to fix their remuneration, subject to contrary instructions given in the form of proxy.

Mr. Chairman, I will move that Ernst & Young LLP be appointed auditors of the corporation until the next annual meeting and that the directors be authorized to fix the remuneration.

Thank you, Ms. Reilly. I, Malcolm Cockwell, second the motion. Adoption of this ordinary resolution requires the favorable vote of at least a majority of the votes cast by shareholders. Management has received proxies, representing over 98% of the votes cast in favor of this resolution. Since the votes withheld for this resolution are minimal, I will take the voting results from the proxy tabulation report and declare the motion carried. As the last item of business, as stated in the Notice of Meeting, it is the intention of the persons named in the form of proxy to vote in favor of a resolution to amend the articles of arrangement of the corporation to change the province in which the corporation's registered office is situated from the province of British Columbia to the province of New Brunswick, subject to contrary instructions given in the form of proxy.

Mr. Chairman, I move that the registered office of the corporation change from the province of British Columbia to the province of New Brunswick.

Thank you, Ms. Reilly. I, Malcolm Cockwell, second the motion. Adoption of this special resolution requires the favorable vote of at least 2/3 of the votes cast by shareholders. Management has received proxies representing over 99% of the votes cast in favor of this resolution. Since the votes withheld for this resolution are minimal, I will take the voting results from the proxy tabulation report and declare the motion carried. Thank you, ladies and gentlemen. This concludes the formal part of today's meeting. Now before I turn the meeting over to Ms. Reilly, on behalf of the Board and management team, I would like to thank Phil Brown and Peter Schleifenbaum for their service to Acadian. Phil has been a director of Acadian since 2015 and has made significant contributions as Lead Director of the Board and as Chair of the compensation, nominating and Corporate Governance Committee. Phil, we wish you all the very best. Peter joined Acadian last summer and supported us with Acadian's transition to an internally managed company. Peter, thank you. I would now like to ask Ms. Reilly to make some remarks on the business.

Thank you, Mr. Cockwell, and good morning, everyone. Before I start my comments, I'll highlight the following forward-looking statement: please note that during the course of our presentation and in responding to questions about our financial and operating performance, 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 risk factors, I encourage you to review Acadian's annual report and annual information form, which are posted on the website. This morning, I'd like to provide you with an overview of our operations and briefly discuss the company's achievements and performance during 2019. I would also like to provide an update on our performance so far in 2020 and a brief comment on the outlook for the remainder of the year. At the end of my presentation, we would be happy to take questions. Let's begin with a look at our operation for today. Acadian is a leading sustainable force management company in Eastern North America. We own approximately 1.1 million acres of private timberlands and manage a total of almost 2.4 million acres, including New Brunswick Crown Lands. Our business includes all aspects of forest management, so that's everything from the planting, growing and managing of trees to the harvesting, sales and marketing of our products. Acadian timberlands has been -- have been under active management for over 100 years, and we have a very complete and comprehensive infrastructure in place and long-standing relationships with a large and diversified base of customers. We flow the majority of our cash flows to our shareholders. I will now turn to a review of Acadian's performance through 2019, beginning with a few highlights. 2019 was a transformative year. Brookfield sold all of its interest in Acadian to Macer Forest Holdings, and the management agreement between Brookfield and Acadian was terminated. This resulted in the elimination of the management and performance fees Acadian was paying Brookfield. Acadian quickly and successfully internalized the asset management and administrative functions Brookfield had been performing. While this was taking place, I'm pleased to report that Acadian maintained its strong record of safety performance during the year, with no reportable incidents among employees and 3 relatively minor incidents among contractors. Acadian also successfully recertified its operations under the widely recognized sustainable forestry initiatives. We continue to focus on maximizing shareholder value and increased our quarterly dividend during 2019 by 3% to $0.29 per share. Now summarizing the financial highlights. Acadian generated net sales of $100 million in 2019 compared to $99.8 million in 2018. The company benefited from a 3% increase in log sales volume due to the improved demand for softwood pulpwood offset by lower biomass sales and a modest decrease in timber services activity. Acadian generated adjusted EBITDA of $23.6 million during 2019 compared to $22.1 million in the prior year due in part to lower management and performance fees as a result of the termination of the management agreement. Acadian's 2019 free cash flow per share at $1.12 was up from $1.06 last year due to a higher adjusted EBITDA. Total dividends declared to shareholders during the year ended December 31, 2019, were $19.4 million or $1.16 per share, slightly higher than 2018 due to the first quarter dividend increase. The payout ratio of Acadian, which represents the amount of dividends declared as a percentage of the free cash flow generated was 103% for 2019, above our long-term target of 95% but lower than 106% in 2018. We anticipate that over the long term, we will revert to a payout ratio consistent with target levels. I'll now turn to the performance during the first quarter of 2020. As reported on May 6, for the first quarter, Acadian generated net sales of $31.4 million compared to $30.9 million in the comparable period of 2019. Acadian benefited from favorable winter operating conditions, a 1% increase in weighted average log selling prices and increased timber services activity during the quarter. Adjusted EBITDA of $8.3 million during the first quarter compared to $8.9 million in the prior year. Adjusted EBITDA margin for the quarter was 27%, a decrease from 29% in the prior year, mainly due to lower margins from the operations in Maine. Free cash flow generated during the first quarter improved slightly relative to the prior year and resulted in a payout ratio of 74%, also a slight improvement relative to last year. During the quarter, we completed the refinancing of Acadian's debt at favorable terms, which eliminates the October 1, 2020, refinancing risk. Acadian's liquidity position as at March 28, 2020, was $22.4 million, including funds available under its revolving facility. At this point in the presentation, we typically present Acadian's outlook for the coming year. However, the market outlook for the remainder of 2020 is highly uncertain as it's dependent on several noneconomic factors, including COVID-19-related containment measures across North America. As the initial market disruption caused by COVID-19 took place as Acadian entered its seasonally slow period, we have been using this time to assess market conditions while planning and preparing for operation start-up, which typically occurs late may through early June. The forest products industry in the regions in which we operate has been deemed essential, and commercial trucks continue to be permitted to cross borders. Our employees have adapted well to performing office work from home, and there has been limited disruption to fieldwork as this work is conducted outdoors and, for the most part, in a manner that naturally allows for social distancing. Our largest customers continue to operate and are experiencing steady demand for their products, such as specialty paper and tissue products. This demand supports upstream activities, such as chipping and the value of sawmill residuals. Having said this, our softwood sawlog customers are facing a challenging market environment with reduced demand for North American lumber. We are focused on continuing to stay close to our customers and ready to adjust operations as markets evolve through the remainder of the year. While no company is immune to issues in this type of market environment, we believe Acadian is relatively well positioned to weather this storm. Our balance sheet is strong. We have a large and well-diversified customer base, and our team is experienced and resilient, having not missed a beat through the changes resulting from COVID-19 protocols. As we work through this challenging environment, we are grounded by our vision, which is our commitment to long-term sustainable land management for the benefit of our stakeholders. This means we continue to operate safely and manage our forests in a manner that is consistent with the principles of sustainable forestry. We retain strong relationships with our diversified base of customers and contractors, working closely with them through this downturn to ensure long-term success. We recognize the importance of making positive contributions to the communities in which we live and work and have kept our lands open to the public during this pandemic. And we continue to innovate in order to steadily improve cash flow and provide attractive and sustainable distributions to our shareholders with a focus on making market-led decisions. Before I conclude, on behalf of the management team, I would like to thank our employees and our contractors for their resilience, hard work and continued dedication to Acadian during this unusual time. This concludes my presentation, and I would now welcome any questions.

[Operator Instructions] And I'm not showing any questions at this time.

Okay. That's great. I think that concludes my remarks. I'll turn the meeting back over to Mr. Cockwell.

Thank you, Ms. Reilly. Ladies and gentlemen, I would like to thank you for your participation and attendance. I hope you have found the meeting informative, and that brings us to the end of today's meeting. As there is no other business, I declare the meeting terminated. Thank you.