Mr. Mark Bishop reports
ACADIAN TIMBER CORP. REPORTS THIRD QUARTER RESULTS
Acadian Timber Corp. has released its financial and operating results for the three months ended Sept. 29, 2018.
"Acadian performed well in the third quarter, notably supported by improved sawtimber demand and pricing in Maine," said Mark Bishop, chief executive officer of Acadian. Mr. Bishop further noted, "Operating rates for Acadian's primary sawmill and pulp and paper customers remained stable, suggesting demand and log pricing should remain firm into next year."
Acadian generated adjusted EBITDA (earnings before interest, taxes, fair value adjustments, recovery of or impairment of land and roads, realized gain/loss on sale of roads and other fixed assets, unrealized exchange gain/loss on debt, and depreciation and amortization) of $6.1-million for the three-month period ended Sept. 29, 2018, compared with $6.7-million in the prior-year period. The company benefited from favourable operating conditions and strong seasonal demand, however, log sales volumes decreased 11 per cent over the prior year due to timing of harvest activity. Acadian's weighted average log selling price increased 6 per cent as prices for most of its products benefited from improved demand. Third quarter net income of $5.9-million was $3.8-million lower than the prior-year period total of $9.7-million primarily due to the impact of changes in the foreign exchange revaluation of U.S.-dollar-denominated long-term debt as well as lower log sales volumes. During the quarter, free cash flow was $5.1-million versus $5.3-million in the same period of 2017.
During the first nine months of 2018, Acadian had declared dividends of 84 cents per share or $14.1-million compared with $13.8-million during the same period of 2017, reflecting a 3-per-cent increase in its quarterly dividend. This represents a payout ratio of 98 per cent, which is slightly above the company's long-term annual target of 95 per cent but in line with expectations given the seasonality of its operations. Acadian anticipates that over the long term, it will maintain a payout ratio consistent with target levels.
Review of operations
FINANCIAL AND OPERATING HIGHLIGHTS
(in thousands of Canadian dollars, except per-share information and as indicated)
Three months ended Nine months ended
Sept. 29, 2018 Sept. 30, 2017 Sept. 29, 2018 Sept. 30, 2017
Sales volume (000s m3) 332 381 983.3 954.4
Net sales (1) $ 26,634 $ 27,238 $ 75,681 $ 69,578
Net income 5,949 9,702 9,823 18,471
Adjusted EBITDA 6,059 6,687 17,511 17,339
Adjusted EBITDA margin 23% 25% 23% 25%
Free cash flow 5,133 5,302 14,388 14,724
Dividends declared 4,726 4,601 14,054 13,803
Payout ratio 92% 87% 98% 94%
Per share -- basic and diluted
Net income $ 0.36 $ 0.58 $ 0.59 $ 1.10
Free cash flow $ 0.31 $ 0.32 $ 0.86 $ 0.88
Dividends declared $ 0.2825 $ 0.275 $ 0.84 $ 0.825
(1) Certain prior-year amounts have been reclassified to conform to the current-year
presentation as a result of adoption of IFRS 15 (international financial reporting standards),
Revenue From Contracts with Customers, on Jan. 1, 2018.
During the third quarter of 2018, Acadian generated net sales of $26.6-million compared with $27.2-million in the prior-year period. Acadian benefited from favourable operating conditions and strong seasonal demand, however, log sales volumes decreased 11 per cent due to timing of harvest activity. The decrease in log sales volumes was partially offset by a 6-per-cent increase in weighted average log selling prices, as prices for most of Acadian's products benefited from improved demand and a meaningful improvement in biomass revenues due to stronger export markets. Adjusted EBITDA was $6.1-million, down from $6.7-million in the prior-year period, and the adjusted EBITDA margin decreased to 23 per cent from 25 per cent as improved log selling prices were more than offset by the impact of lower sales volumes and higher variable log harvest costs per cubic metre.
Net income was $5.9-million, or 36 cents per share, for the third quarter, compared with $9.7-million, or 58 cents per share, for the same period in 2017, due to the impact of changes in the foreign exchange revaluation of U.S.-dollar-denominated long-term debt as well as lower log sales volumes.
For the nine-month period ended Sept. 29, 2018, Acadian's net sales improved to $75.7-million from $69.6-million during the prior-year period, primarily attributable to a 3-per-cent increase in log sales volumes driven by favourable harvest conditions, particularly for spruce and fir stands. The weighted average log selling price increased 2 per cent compared with the prior-year period, driven by higher selling prices for Acadian's products, partially offset by changes in the sales mix. In addition, gross margin earned from biomass products increased 59 per cent due to stronger export markets. As a result, adjusted EBITDA improved to $17.5-million from $17.3-million during the first nine months of 2017, despite a $1.1-million decrease in HBU land sales in Maine. Adjusted EBITDA margin decreased to 23 per cent from 25 per cent in the prior-year period as the increase in log sales volumes was more than offset by changes in the sales mix and lower HBU land sales in Maine. For the nine months ended Sept. 29, 2018, net income was $9.8-million, or 59 cents per share, which represents a decrease of $8.6-million over the same period of 2017, primarily due to the impact of changes in the foreign exchange revaluation of U.S.-dollar-denominated long-term debt.
Segment performance
New Brunswick timberlands
Net sales for Acadian's New Brunswick timberlands were $20.1-million compared with $20.6-million during the prior-year period. Despite continued favourable harvest and demand conditions, year-over-year third quarter log sales volumes declined by 11 per cent due to timing of Acadian's harvest activities, which reflects strong markets during the first half of 2018 and Acadian's commitment to manage New Brunswick timberlands' annual harvest volumes at sustainable levels. In addition, timber services and other sales decreased 5 per cent compared with the prior-year period primarily due to timing of harvest activities.
The weighted average log selling price during the quarter was $63.93 per cubic metre, versus $62.55 per cubic metre in the prior-year period. Demand for softwood sawlogs and hardwood pulpwood in New Brunswick remained strong with prices increasing 5 per cent and 3 per cent, respectively, however, this was partially offset by changes in the sales mix during the period due to higher relative sales volumes of lower-valued softwood pulpwood. Pricing for this product was, however, favourable compared with the prior-year period.
Export markets for biomass products strengthened year over year, resulting in a 50-per-cent increase in the gross margin earned compared with the third quarter of 2017, driven by a 157-per-cent increase in sales prices, partially offset by a 17-per-cent decrease in sales volumes.
Operating costs for the quarter were $15.8-million, compared with $15.3-million in the third quarter of 2017, primarily due to a 7-per-cent increase in variable log harvest costs per cubic metre, attributable to longer average haul distances and higher fuel costs, partially offset by lower harvest volumes.
Adjusted EBITDA was $4.5-million during the third quarter of 2018, compared with $5.5-million in the prior-year period, due to lower log sales volumes and higher variable log harvest costs per cubic metre. As a result, the adjusted EBITDA margin for the quarter decreased to 22 per cent from 26 per cent in the prior-year period.
During the nine-month period ended Sept. 29, 2018, net sales totalled $56.2-million, a $2.8-million increase compared with the same period last year, reflecting stronger biomass export markets and the timing of timber services. The operations benefited from increases in softwood sawlog and hardwood pulpwood prices of 3 per cent and 2 per cent, respectively, but these gains were offset by the impact of changes in the sales mix. Costs of $43.9-million were $4.1-million higher than the prior year due to higher harvest volumes and higher fuel costs. As a result, adjusted EBITDA was $12.5-million, a decrease of $1.1-million compared with adjusted EBITDA of $13.6-million in the same period last year, while the adjusted EBITDA margin decreased to 22 per cent from 26 per cent.
There were no recordable safety incidents among employees and one minor lost-time incident among contractors during the third quarter of 2018.
Maine timberlands
Net sales totalled $6.5-million compared with $6.6-million for the same period last year as a 14-per-cent increase in the weighted average log selling price fully offset the 13-per-cent decrease in log sales volumes. While harvest and market conditions continued to be favourable during the quarter, harvest activities were adjusted to reflect Acadian's commitment to manage Maine timberlands' annual harvest volumes to sustainable levels.
The weighted average log selling price in Canadian-dollar terms was $85.78 per cubic metre, up from $75.29 per cubic metre in the same period of 2017. The weighted average log selling price in U.S.-dollar terms was up 9 per cent year over year to $65.64 per cubic metre, reflecting meaningfully improved demand for softwood sawlogs and hardwood pulpwood for which prices increased by 15 per cent and 5 per cent, respectively.
Costs for the third quarter of $5.0-million were $400,000 lower compared with the same period in 2017, due to lower log sales volumes and shorter hauling distances, the impacts of which were partially offset by foreign exchange and higher fuel costs.
Adjusted EBITDA for the quarter was $1.9-million compared with $1.6-million in the prior-year period as the higher weighted average log selling price resulted in the adjusted EBITDA margin increasing to 29 per cent, from 23 per cent in 2017.
During the nine-month period ended Sept. 29, 2018, net sales totalled $19.5-million, $3.3-million higher than the first nine months of 2017, driven by a 12-per-cent increase in log sales volumes due to favourable operating conditions and strong demand for softwood sawlogs compared with the previous year. Year-to-date softwood and hardwood harvest levels are in line with expected harvest levels through the end of 2020 and consistent with the company's annual harvest profile as per its Sustainable Forestry Initiative certification. Net sales for the Maine timberlands also benefited from a 7-per-cent increase in the weighted average log selling price, reflecting meaningfully improved demand and prices for softwood sawlogs and hardwood pulpwood. Costs were $14.3-million or $900,000 higher than the same period of 2017, largely due to higher log sales volumes, partially offset by the benefit of shorter hauling distances. Although HBU land sales fell $1.1-million year over year, adjusted EBITDA increased $1.3-million compared with the prior-year period to $5.9-million due to the aforementioned factors. Those factors also caused the adjusted EBITDA margin to increase to 30 per cent from 28 per cent in the prior-year period.
There were no recordable safety incidents among employees or contractors during the third quarter of 2018 at Acadian's Maine timberlands.
Adoption of IFRS 15, Revenue From Contracts with Customers
IFRS 15 supersedes previous revenue standards (IAS 18 (international accounting standards), Revenue) and related interpretations, and it applies to all revenue arising from contracts with customers. On Jan. 1, 2018, the company adopted IFRS 15 using the full retrospective approach. The adoption of this standard on Jan. 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 nine-month periods ended Sept. 30, 2017, increased by $5.1-million and $11.7-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 sublicensees. Acadian receives payment for these services which are recognized upon delivery of the timber and when actual quantities delivered are determined.
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 its softwood sawtimber.
Despite current very strong U.S. economic performance, key indicators suggest momentum in the U.S. housing market has slowed over the past few months. Tight construction labour markets and restrictive building regulations have continued to weigh on residential construction growth expectations. However, the primary catalysts to more conservative consensus housing start forecasts compared with the prior quarter have been persistent weak wage growth combined with rising interest rates and escalating negative sentiment on the impact of U.S. trade policy. The most recent forecasts anticipate year-over-year growth in starts ranging from flat to 5 per cent for 2019. As single-family starts, the largest lumber consuming segment of U.S. housing starts, are forecast to continue to recover from recent historically low levels, North American sawtimber demand is still expected to post modest year-over-year growth even under more conservative forecasts. The backdrop for housing demand over the medium term remains very positive, reflecting continued pent-up demand for housing and improving demographics.
Average Q3 2018 quarterly benchmark western spruce-pine-fir and southern yellow pine lumber prices declined 20 per cent and 18 per cent, respectively, from the prior quarter, with prices sliding toward average cash cost levels by early Q4 2018. The significant swing in pricing, which has been well beyond seasonal norms, has been exacerbated by severe weather in the U.S. South that has reduced market demand. Forecasters anticipate that extensive announced market downtime, principally in the high log cost regions of British Columbia and the U.S. Pacific Northwest, coupled with continuing demand growth, will support continued historically strong lumber pricing through 2019. By extension, Acadian anticipates continued strong support in end use markets for softwood sawtimber pricing through this period.
Hardwood sawtimber markets, typically oriented to millwork and higher-value specialty markets, remain well balanced with a continued positive outlook for the foreseeable future. The outlook for global pulp markets remains strong, supported by encouraging demand and pricing dynamics, particularly in the containerboard and tissue segments. Hardwood pulpwood demand in Acadian's operating region remains stable, with well balanced supply conditions continuing to support historically strong pricing. While softwood pulpwood markets, Acadian's smallest product segment by volume and margin, remain under pressure, the recently announced restart of a pulp mill in Maine during 2019 is expected to be a catalyst for a recovery in softwood pulpwood demand and pricing. In New Brunswick, biomass markets continue to be supported by strong export demand. While the biomass market in Maine remains weak, early-stage initiatives in wood-based liquid biofuels and pellets are progressing as are efforts to tap into biomass export markets.
Quarterly dividend
Acadian is pleased to announce a dividend of 28.25 cents per share, payable on Jan. 15, 2019, to shareholders of record on Dec. 31, 2018.
Acadian Timber is a leading supplier of primary forest products in Eastern Canada and the Northeastern United States. 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's business strategy is to maximize cash flows from its existing timberland assets while growing its business by acquiring assets on a value basis and utilizing its operations-oriented approach to drive improved performance.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF NET INCOME
(in thousands of Canadian dollars, except per-share amounts)
Three months ended Nine months ended
Sept. 29, 2018 Sept. 30, 2017 (1) Sept. 29, 2018 Sept. 30, 2017 (1)
Net sales $ 26,634 $ 27,238 $ 75,681 $ 69,578
Operating costs and expenses
Cost of sales 18,694 18,287 51,362 46,395
Selling, administration and other 2,392 2,530 7,112 7,167
Reforestation 31 96 453 494
Depreciation and amortization 69 78 230 233
21,186 20,991 59,157 54,289
Operating earnings 5,448 6,247 16,524 15,289
Interest expense, net (936) (698) (2,897) (2,189)
Other items
Fair value adjustments 822 (269) 2,088 1,020
Unrealized exchange gain/(loss)
on long-term debt 1,568 5,799 (2,371) 7,054
Gain on sale of timberlands 387 362 850 1,817
Gain/(loss) on disposal of roads and
other fixed assets 155 - (93) -
Earnings before income taxes 7,444 11,441 14,101 22,991
Current income tax expense (575) (549) (1,844) (816)
Deferred income tax expense (920) (1,190) (2,434) (3,704)
Net income 5,949 9,702 9,823 18,471
Net income per share --
basic and diluted $ 0.36 $ 0.58 $ 0.59 $ 1.10
(1) 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.We seek Safe Harbor.
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