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

Good afternoon, ladies and gentlemen, and welcome to the Acadian Timber Corp. 2021 Annual General Meeting. [Operator Instructions] This meeting is being recorded on Thursday, May 6, 2021. I would now like to turn the conference over to Malcolm Cockwell, Chairman of Acadian. Please go ahead.

Thank you, operator, and good afternoon, ladies and gentlemen. It is my pleasure to welcome everyone to the Acadian Timber Corp. AGM. It's now 3:00 p.m. Atlantic Time and time to start the 2021 Annual Meeting of Acadian Timber Corp. My name is Malcolm Cockwell, and as Chairman of the corporation, I will chair this meeting. With me on the phone today are the directors of Acadian, Reid Carter, Heather Fitzpatrick, Karen Oldfield and Bruce Robertson. 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 consistent with last year. Given the COVID-19 travel restrictions limiting our ability to attend this meeting in person, we have, therefore, chosen to once again broadcast the AGM over conference call and webinar. We are committed to open communication with our shareholders, and we believe that this 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, will be kept by the secretary with the records of the meeting. The minutes of last year's annual meeting held on May 7, 2020 are available should any shareholder wish to review them. The transfer agent has provided a preliminary report on attendance. And 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 2020 annual report to shareholders, which includes the 2020 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 on its 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 Managed Information Circular, which accompanies 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: Malcolm Cockwell, Heather Fitzpatrick, Karen Oldfield, Erika Reilly and Bruce Robertson 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 98% 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 PricewaterhouseCoopers 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 PricewaterhouseCoopers LLP be appointed auditors of the corporation until the next annual meeting and that the directors be authorized to fix their remuneration.

Thank you, Ms. Reilly. I second the motion. Adoption of this ordinary resolution requires a favorable vote of at least a majority 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 for an overview of the results, on behalf of the Board and management team, I would like to thank Reid Carter for his long service to Acadian. Mr. Carter has been a Director of Acadian since its inception in 2006. His significant contributions over the years as founding CEO from 2006 to 2015 and as director have been instrumental in creating what Acadian is today and its success to date. Mr. Carter, I speak on behalf of management and the Board in wishing you the very best. As noted in our press release last night, we have begun the CEO transition process. I would like to take this opportunity to thank Ms. Reilly for everything she has done for Acadian. Acadian achieved a significant milestone of internalizing the corporate functions under her leadership, and I look forward to her joining us on the Board. Finally, I would like to congratulate Mr. Sheparski on his promotion to President and Chief Executive Officer of Acadian, and Susan Wood on her promotion from Director of Finance to Chief Financial Officer. Mr. Sheparski brings a wealth of capital markets, mergers and acquisitions and leadership experience to the team, and I look forward to working more closely with him going forward. He will be working with Ms. Reilly over the next 3 months to ensure a smooth transition of duties. Ms. Wood is a CPA with over 18 years of public accounting experience. As Acadian's Director of Finance, she has led Acadian's financial reporting, taxation and treasury functions and is well respected by the team. With that, I would now like to ask Ms. Reilly to make some remarks on the business.

Thank you, Mr. Cockwell. And good afternoon, everyone. Before I start my comments, I'll highlight the following forward-looking statements. 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 our website. Today, I'd like to provide you with an overview of our business and briefly discuss the company's achievements and performance during 2020. I would also like to provide an update on our performance so far in 2021, briefly comment on the outlook for the remainder of the year and touch on work we've been doing to improve our ESG disclosure. I would be happy to take questions at the end of my presentation. Let's begin with an overview of our business. Acadian is a leading sustainable forest management company in Eastern North America. We own and manage approximately 1.1 million acres of private timberlands located in New Brunswick and Maine and manage an additional 1.3 million acres of Crown land in New Brunswick. Our business includes all aspects of forest management, from planting, growing and managing trees, to harvesting, marketing and selling logs and biomass byproducts. Our operations are SFI-certified. Acadian's timberlands 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. Our strategy is to maximize cash flows from our timberland assets through sustainable forest management and other land use activities and then flow through the majority of our cash flows to our shareholders. I will now turn to a review of Acadian's performance through 2020. Acadian performed well and generated solid financial results in 2020 despite challenges resulting from the COVID-19 pandemic, elevated regional pulpwood inventories and adverse weather events experienced throughout the year. Acadian generated sales of $91 million, adjusted EBITDA of $21.5 million and free cash flow of $15.2 million. Markets were dynamic, so we focused on our customers and sought the best margin opportunities. We also pursued various value-added cost-saving initiatives. Through these efforts, we were able to strengthen relationships and grow our customer base, while protecting our adjusted EBITDA margin despite market disruptions and abnormal weather events. During the year, we recertified Acadian's operations under the widely recognized Sustainable Forestry Initiative and renewed our outcome-based forestry agreement in Maine. We also took steps to increase shareholder alignment by implementing a minimum share ownership guideline and DSU program for our directors. Finally, Acadian strengthened its balance sheet by refinancing the term facility with low-cost debt and staggered maturities. Acadian declared dividends to shareholders of $19.4 million in 2020 or $1.16 per share. With the steps taken over the past 12 to 18 months, the team is well positioned to successfully operate and grow the company. Now turning to Acadian's financial performance in more detail. Acadian generated sales of $91 million in 2020 compared to $100 million in 2019, due primarily to lower pulpwood sales that offset the benefit of a strong softwood sawlogs market. Acadian's adjusted EBITDA of $21.5 million during 2020 compared to $23.6 million in 2019, reflecting lower sales volume, while adjusted EBITDA margin held constant at 24%, benefiting from lower administrative costs. Acadian generated free cash flow per share of $0.91 in 2020 compared to $1.12 last year due to lower earnings. Total dividends declared to shareholders during the year ended December 31, 2020 were $19.4 million or $1.16 per share, consistent with 2019. The payout ratio of Acadian, which represents the amount of dividends declared as a percentage of the free cash flow generated, was 128% for 2020. Acadian ended the year with a solid net liquidity position of $22.8 million, which includes cash and funds available under the revolving credit facilities. Turning to our performance during the first quarter of 2021. As reported on May 5, Acadian generated sales of $25.9 million compared to $31.4 million in the comparable period of 2020. Sales volume, excluding biomass, decreased 21%, primarily due to temporary road closures caused by unusually mild weather, reduced trucking capacity in Maine and lower pulpwood sales. These factors offset strong demand for our softwood and hardwood sawlogs. Weighted average selling price, excluding biomass, was flat year-over-year as increased sawlog pricing was offset by weaker pulpwood pricing and a stronger Canadian dollar. Adjusted EBITDA was $6.9 million during the first quarter compared to $8.3 million in the prior year period. Adjusted EBITDA margin for the quarter was 27%, consistent with the prior year period, benefiting from lower administrative costs. Acadian generated $5 million of free cash flow compared to $6.6 million in the prior year period and ended the quarter with $23.6 million of net liquidity. I'll now briefly review our outlook for 2021. The outlook for softwood and hardwood sawlogs remained positive, supported by the favorable outlook for both softwood and hardwood lumber. We expect strong and steady demand for our sawlog products. Turning to our pulpwood products. Hardwood pulpwood is expected to remain stable with mills running steady. Softwood pulpwood demand is likely to remain weak. Continued high inventories regionally and significant competition from sawmill residuals limit prospects for near-term improvement. Longer term, we expect regional hardwood pulpwood markets to strengthen with Louisiana Pacific's recently announced investment to convert their Houlton mill to manufacture engineered wood siding products. Production of this new product at that facility is slated to begin in 2022. Finally, we expect continued steady demand for our biomass byproducts in New Brunswick. Looking ahead, with a strong balance sheet, diverse markets and a highly capable team, we will continue to focus on maximizing value by working closely with our customers and contractors. As we continue to work through an unprecedented environment, we are grounded by our vision, which is our commitment to long-term sustainable land management for the benefit of our stakeholders. We are committed to operating safely and managing our forests in a manner that is consistent with the principles of sustainable foresters. We are focused on retaining strong relationships with our diversified base of customers and contractors to ensure the long-term success of our business. We recognize the importance of making positive contributions to the communities in which we live and work and continue to keep our lands open to the public during the pandemic. And we continue to innovate in order to improve cash flow and provide attractive and sustainable distributions to our shareholders. With this and a long performance track record, it should come as no surprise that Acadian has responsible environmental, social and governance, or ESG practices. We have been working to improve Acadian's ESG disclosure and we'll launch a refreshed website later today with further information. Our key ESG highlights include commitments to sustainable forest management, the well-being of our people and strong and effective corporate governance. Our website will also highlight our approach to climate change and estimated carbon storage across our lands. In short, Acadian is well positioned from an ESG perspective and we'll work to better showcase this going forward. Before I conclude, on behalf of the management team, I would like to thank our employees and contractors for their hard work, contributions and commitment to Acadian. This concludes my presentation, and I would now welcome any questions.

[Operator Instructions] At this time, I'm showing no questions. I would like to turn the call back over to Erika Reilly, President and Chief Executive Officer, for closing remarks.

Thanks, operator. I think that concludes today's meeting. I will now turn the meeting back to Mr. Cockwell.

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

This concludes today's conference call. Thank you for participating. You may now disconnect.