Acadian Timber : 2023 Q3 Interim Report

ACADIAN TIMBER CORP.

Q3 2023 INTERIM REPORT

SEPTEMBER 30, 2023

Q3 2023 INTERIM REPORT

Letter to Shareholders

Overview

Acadian Timber Corp. ("Acadian" or the "Company") generated solid financial results for the three months ended September 30, 2023 (the "third quarter"), benefiting from continued stable regional demand and pricing for its products. While excessive rainfall impacted operations in Maine, operating conditions were favourable in New Brunswick. Increases in contractor availability have allowed for continued progress in recovering the volume shortfall experienced early in the year.

Acadian generated $4.3 million of Free Cash Flow2 and declared dividends of $5.0 million to our shareholders during the third quarter. Our balance sheet continues to be solid with $15.9 million of net liquidity2 as at September 30, 2023, which includes funds available under our credit facilities.

Results of Operations

Acadian is committed to health and safety as our number one priority. We believe that emphasizing and achieving a good safety record is a leading indicator of success in the broader business. Acadian's operations experienced no recordable safety incidents during the quarter among employees or contractors.

Acadian generated sales of $26.6 million during the third quarter, compared to $23.6 million in the prior year period, with sales volume, excluding biomass, up 13%. The higher volumes were primarily a result of increased contractor availability, partially offset by unfavourable weather in Maine. Weighted average selling price, excluding biomass, increased 1% year- over-year, benefiting from strong softwood sawlog and pulpwood prices driven by solid demand, partially offset by decreased hardwood sawlog prices stemming from weakness in the hardwood lumber pricing.

Adjusted EBITDA2 was $4.9 million during the third quarter compared to $4.5 million in the prior year period and Adjusted EBITDA margin2 for the quarter was 18% compared to 19% in the prior year period.

Net income for the third quarter totaled $6.4 million, or $0.37 per share, compared to $4.8 million, or $0.29 per share, in the same period of 2022. The increase in net income compared to the prior year period was primarily the result of higher operating income and non-cash fair value adjustments, as well as lower income tax expense.

Carbon Credit Project1

On June 8, 2023, 770,071 voluntary carbon credits were registered on the American Carbon Registry and made available for sale under the project name Anew - Katahdin Forestry Project, and are recorded as inventory in our September 30, 2023 interim condensed consolidated financial statements. These carbon credits are associated with our first carbon credit development project on the portion of our Maine Timberlands that is subject to a working forest conservation easement. Our focus has now turned to the marketing and sale of these credits as well as the registration of future tranches.

The total volume of credits expected to be generated from the project over the 10-year crediting period is 1.9 million credits. Actual credit issuances will be adjusted each reporting period based on actual harvesting, natural disturbances, and other factors, as well as periodic updating for inventory and verification activities.

This project has provided valuable experience to the Acadian management team and has formed the foundation for potential further carbon credit developments in the future.

Outlook1

North American interest rates remain elevated and near-term pressure on end use markets persists. However, inflationary pressures have begun to show signs of easing and the consensus forecast for U.S. housing starts has risen to approximately

1.42 million starts in 2023. We remain confident that the stability of the northeastern forestry sector, combined with the long-term demand for new homes and repair and remodel activity, will support the demand for our products.

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Although labour markets remain tight, we continued to experience increased contractor availability during the third quarter. Management will continue to focus on further increasing our harvesting capacity through the remainder of the year and into 2024. In the short to medium term, inflation is expected to continue to impact our financial results through elevated contractor rates and fuel surcharges.

Demand for Acadian's sawlogs is mainly driven by regional supply and demand, meaning that the stable demand experienced during the first three quarters is expected to continue through the balance of 2023. Pricing for softwood sawtimber is expected to remain stable, but pricing for hardwood sawtimber may continue to weaken, reflecting weakness in hardwood lumber pricing. Demand for hardwood pulpwood is expected to remain steady and softwood pulpwood markets are expected to remain at the improved levels experienced to date in 2023.

Looking Ahead

We look forward to finishing the year with solid financial and operating performance. The business is supported by a strong balance sheet, diverse markets, and a dedicated, highly capable team. The progress made increasing contractor availability will benefit Acadian for the rest of 2023 and into the winter harvest season of 2024.

As always, we will remain focused on merchandizing our products to obtain the highest margins available and making improvements throughout the business to maximize cash flows from our existing timberland assets, while exploring other lines of business such as carbon credits as well as evaluating opportunities to grow.

On behalf of the Board of Directors and management of Acadian, I would like to thank all our shareholders for their ongoing support.

Adam Sheparski

President and Chief Executive Officer

November 1, 2023

1. This Letter to Shareholders contains forward-looking information within the meaning of applicable Canadian securities laws that involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Please refer to the section entitled "Cautionary Statement Regarding Forward-Looking Information and Statements" in Management's Discussion and Analysis for further details.
2. Adjusted EBITDA, Adjusted EBITDA margin and Free Cash Flow are key performance measures in evaluating Acadian's operations and are important in enhancing investors' understanding of the Company's operating performance. Adjusted EBITDA and Adjusted EBITDA margin are indicative of the underlying profitability of Acadian's operating segments and are used to evaluate operational performance. Free Cash Flow is used to evaluate Acadian's ability to generate sustainable cash flows from our operations. Acadian's management defines Adjusted EBITDA as net income before interest, income taxes, fair value adjustments, recovery of or impairment of land and roads and depreciation and amortization, and "Adjusted EBITDA margin" as Adjusted EBITDA as a percentage of Acadian's sales. Reference is also made to "Free Cash Flow", which Acadian's management defines as Adjusted EBITDA less interest paid, current income tax expense, and capital expenditures plus net proceeds from the sale of timberlands and other fixed assets (proceeds less gains or losses). Reference is also made to net liquidity which includes cash and funds available under credit facilities less amounts reserved to support the minimum cash balance related to long-term debt. As these measures do not have standardized meanings prescribed by International Financial Reporting Standards ("IFRS"), they may not be comparable to similar measures presented by other companies. Please refer to Management's Discussion and Analysis for further details.

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MANAGEMENT'S DISCUSSION AND ANALYSIS

(All figures in Canadian dollars unless otherwise stated)

November 1, 2023

Introduction

Acadian Timber Corp. ("Acadian", the "Company" or "we") is one of the largest timberland owners in Eastern Canada and the Northeastern U.S. and has a total of approximately 2.4 million acres of land under management. Acadian owns and manages approximately 761,000 acres of freehold timberlands in New Brunswick ("New Brunswick Timberlands" or "NB Timberlands") and approximately 300,000 acres of freehold timberlands in Maine ("Maine Timberlands"), and provides timber services relating to approximately 1.3 million acres of Crown licensed timberlands in New Brunswick. Acadian's timber products include softwood and hardwood sawlogs, pulpwood, and biomass by-products, sold to approximately 90 regional customers. Acadian also develops carbon credits for sale in voluntary carbon credit markets.

Acadian's business strategy is to maximize cash flows from its existing timberland assets through sustainable forest management and other land use activities while growing its business by acquiring assets and actively managing these assets to drive improved performance.

Basis of Presentation

This management's discussion and analysis ("MD&A") discusses the financial condition and results of operations of the Company for the three months and nine months ended September 30, 2023 (herein referred to as the "third quarter") compared to the three months and nine months ended September 24, 2022 and should be read in conjunction with the unaudited interim condensed consolidated financial statements and notes thereto for the third quarter and the audited annual consolidated financial statements and the related MD&A for the fiscal year ended December 31, 2022.

Our third quarter unaudited interim condensed consolidated financial statements have been prepared in accordance with IAS 34 "Interim Financial Reporting" using the accounting policies adopted and disclosed in Note 2 of Acadian's audited 2022 consolidated financial statements and as updated in Note 2 of the third quarter unaudited interim condensed consolidated financial statements, and are expressed in Canadian dollars unless otherwise noted. External economic and industry factors remain unchanged since the previous annual report, unless otherwise noted. This MD&A has been prepared based on information available as at November 1, 2023. Additional information is available on Acadian's website atwww.acadiantimber.comand on SEDAR at www.sedarplus.ca.

Non-IFRS Measures

Throughout this MD&A, reference is made to "Adjusted EBITDA", which Acadian's management defines as net income before interest, income taxes, fair value adjustments, recovery of or impairment of land and roads and depreciation and amortization, and to "Adjusted EBITDA margin", which is Adjusted EBITDA as a percentage of sales. Reference is also made to "Free Cash Flow", which Acadian's management defines as Adjusted EBITDA less interest paid, current income tax expense, and capital expenditures plus net proceeds from the sale of timberlands and other fixed assets (proceeds less gains or losses). Reference made to "Payout Ratio" is defined as dividends declared divided by Free Cash Flow and "Payout Ratio with DRIP" is defined as dividends paid in cash divided by Free Cash Flow. Management believes that Adjusted EBITDA, Adjusted EBITDA margin, Free Cash Flow, and Payout Ratios are key performance measures in evaluating Acadian's operations and are important in enhancing investors' understanding of the Company's operating performance. Adjusted EBITDA and Adjusted EBITDA margin are indicative of the underlying profitability of Acadian's operating segments and are used to evaluate operational performance. Free Cash Flow is used to evaluate Acadian's ability to generate sustainable cash flows from our operations while Payout Ratios are used to evaluate Acadian's ability to fund its distribution using Free Cash Flow. We have provided reconciliations of net income as determined in accordance with IFRS, to Adjusted EBITDA and Free Cash Flow in the "Adjusted EBITDA and Free Cash Flow" section of this MD&A. Reference is also made to net liquidity which includes cash and funds available under credit facilities less amounts reserved to support the minimum cash balance related to long‐term debt.

As these measures do not have a standardized meaning prescribed by IFRS, they may not be comparable to similar measures presented by other companies.

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Assessment and Changes in Disclosure Controls and Internal Controls

Management, including the Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures as at December 31, 2022. There have been no changes in our disclosure controls and procedures during the nine months ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our disclosure controls and procedures.

Management, including the Chief Executive Officer and Chief Financial Officer, have also evaluated the design and effectiveness of our internal controls over financial reporting in accordance with Multilateral Instrument 52-109 using the COSO Framework 2013 as at December 31, 2022. There have been no changes in our internal controls over financial reporting during the nine months ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

REVIEW OF OPERATIONS

Summary of Third Quarter and Year-to-Date Results

The table below summarizes operating and financial data for Acadian:

		Three Months Ended		Nine Months Ended
(CAD thousands, except per share information)	September	September	September	September
	30, 2023		24, 2022		30, 2023		24, 2022
Sales volume (000s m3)		272.9		229.4		662.3		687.3
Sales	$	26,593	$	23,594	$	69,662	$	66,718
Operating income		4,733		4,406		15,254		13,928
Net income		6,408		4,831		17,841		13,505
Adjusted EBITDA1	$	4,916	$	4,480	$	16,168	$	14,136
Adjusted EBITDA margin1		18%		19%		23%		21%
Free Cash Flow1	$	4,312	$	3,260	$	12,188	$	10,151
Dividends declared		4,961		4,876		14,819		14,571
Dividends paid in cash		3,721		3,721		11,166		12,281
Payout Ratio1		115%		150%		122%		144%
Payout Ratio with DRIP1		86%		114%		92%		121%
Per share - basic and diluted
Net income	$	0.37	$	0.29	$	1.05	$	0.81
Free Cash Flow1		0.25		0.19		0.71		0.61
Dividends declared		0.29		0.29		0.87		0.87
Book value		18.15		17.55		18.15		17.55
Common shares outstanding	17,108,241	16,812,357	17,108,241	16,812,357
Weighted average shares outstanding2	17,092,341	16,797,722	17,054,970	16,740,531

1. Non-IFRSMeasure. See "Non-IFRS Measures" on page 3 of this report.
2. As at November 1, 2023 there were 17,182,558 common shares outstanding.

During the third quarter, Acadian generated sales of $26.6 million, compared to $23.6 million in the prior year period. The weighted average selling price, excluding biomass, increased 1% year-over-year, benefiting from strong softwood sawlog and pulpwood prices driven by strong demand, partially offset by decreased hardwood sawlog prices stemming from weakness in hardwood lumber pricing.

Sales volume, excluding biomass, was 13% higher compared to the prior year period as a result of increased contractor availability, partially offset by unfavourable weather in Maine. Biomass sales volume was 67% higher due to favourable market conditions.

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Operating costs and expenses were $21.9 million during the third quarter, compared to $19.2 million during the prior year period, reflecting higher sales volumes. Weighted average variable costs, excluding biomass, were consistent with the prior year period, with increased contractor rates being offset by lower fuel prices.

Net income for the third quarter totaled $6.4 million, or $0.37 per share, compared to $4.8 million, or $0.29 per share, in the same period of 2022. The increase in net income compared to the prior year period was primarily the result of higher operating income and non-cash fair value adjustments, as well as lower income tax expense.

Adjusted EBITDA was $4.9 million during the third quarter compared to $4.5 million in the prior year period, reflecting higher operating income and gain on sale of timberlands. Adjusted EBITDA margin for the quarter was 18% compared to 19% in the prior year period. Free Cash Flow was $4.3 million, or $1.1 million higher than the prior year period, being driven by higher Adjusted EBITDA as per above and lower current income tax expense.

During the first nine months of 2023, Acadian generated sales of $69.7 million, compared to $66.7 million in the prior year period. Sales volume, excluding biomass, was 8% lower than the first nine months of 2022 but was offset by an 8% increase in the weighted average selling price.

Operating costs and expenses of $54.4 million were $1.6 million higher year-over-year due to higher weighted average variable costs, excluding biomass, resulting primarily from higher contractor rates, partially offset by lower fuel prices. Adjusted EBITDA of $16.2 million was $2.1 million higher compared to the prior year period.

For the nine months ended September 30, 2023, net income was $17.8 million, or $1.05 per share, which represents an increase of $4.3 million compared to the prior year period, primarily the result of higher operating income, gain on sale of timberlands and non-cash fair value adjustments.

Adjusted EBITDA and Free Cash Flow

The following table provides a reconciliation of net income, as determined in accordance with IFRS, to Adjusted EBITDA and Free Cash Flow during each respective period:

		Three Months Ended		Nine Months Ended
(CAD thousands)	September	September		September		September
	30, 2023		24, 2022		30, 2023		24, 2022
Net income	$	6,408	$	4,831	$	17,841	$	13,505
Add / (deduct):
Interest expense, net		795		795		2,375		2,295
Income tax expense		1,200		1,807		5,816		5,327
Depreciation and amortization		106		74		262		194
Fair value adjustments and other		(3,593)		(3,027)		(10,126)		(7,185)
Adjusted EBITDA1	$	4,916	$	4,480	$	16,168	$	14,136
Add / (deduct):
Interest paid on debt, net		(764)		(765)		(2,238)		(2,204)
Additions to timber, land, roads, and other fixed assets		(373)		(148)		(550)		(251)
Gain on sale of timberlands and other fixed assets		(77)		-		(652)		(14)
Proceeds from sale of timberlands and other assets		80		-		670		14
Current income tax recovery (expense)		530		(307)		(1,210)		(1,530)
Free Cash Flow1	$	4,312	$	3,260	$	12,188	$	10,151
Dividends declared	$	4,961		4,876		14,819		14,571
Dividends paid in cash	$	3,721		3,721		11,166		12,281
Payout Ratio1		115%		150%		122%		144%
Payout Ratio with DRIP1		86%		114%		92%		121%

1. Non-IFRS Measure. See "Non-IFRS Measures" on page 3 of this report.

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Dividend Policy of the Company

Acadian declares dividends from its available cash to the extent determined prudent by the Board of Directors. Dividends are paid on or about the 15th day following each dividend record date.

Total dividends declared to shareholders during the three months ended September 30, 2023 were $5.0 million, or $0.29 per share, consistent with the same period of 2022.

Acadian has in place a dividend reinvestment plan ("DRIP") effective with eligible shareholders, whereby Canadian resident shareholders may elect to automatically have their dividends reinvested in additional shares issued directly from the treasury of the Company. During the three months and nine months ended September 30, 2023, Acadian issued 74,199 and 222,817 common shares, respectively, in accordance with the DRIP.

Macer Forest Holdings Inc. ("Macer"), which owns approximately 46% of the outstanding common shares of Acadian, participates in the DRIP for 50% of dividends payable to it.

Operating and Market Conditions

During the third quarter, Acadian benefited from continued stable regional demand and pricing for its products. While excessive rainfall impacted operations in Maine, operating conditions were favourable in New Brunswick. Some contractor availability challenges persist, but recent increases in availability resulted in sales volume, excluding biomass, of 231,000 m3, which is 13% higher than the same period in 2022.

The weighted average selling price, excluding biomass, for the third quarter was 1% higher compared to the prior year period. Pricing for softwood sawlogs increased 5% compared to the prior year period driven by stable demand, while hardwood sawlog pricing decreased 12% due to declines in end use markets. Demand was strong for softwood pulpwood, resulting in a pricing increase of 19% year-over-year. Hardwood pulpwood pricing increased 2% over the same period of 2022. Biomass prices were 25% lower due to unfavourable market conditions.

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Segmented Results of Operations

The table below summarizes operating and financial results for NB Timberlands, Maine Timberlands, and Corporate:

Three Months Ended September 30, 2023
(CAD thousands)	NB Timberlands	Maine Timberlands	Corporate	Consolidated
Sales volumes (000s m3)		235.0		37.9		-		272.9
Sales	$	22,836	$	3,757	$	-	$	26,593
Adjusted EBITDA1	$	5,495	$	(149)	$	(430)	$	4,916
Adjusted EBITDA margin1		24%		-4%		n/a		18%
Three Months Ended September 24, 2022
(CAD thousands)	NB Timberlands	Maine Timberlands	Corporate	Consolidated
Sales volumes (000s m3)		191.8		37.6		-		229.4
Sales	$	19,917	$	3,677	$	-	$	23,594
Adjusted EBITDA1	$	4,577	$	234	$	(331)	$	4,480
Adjusted EBITDA margin1		23%		6%		n/a		19%
Nine Months Ended September 30, 2023
(CAD thousands)	NB Timberlands	Maine Timberlands	Corporate	Consolidated
Sales volumes (000s m3)		537.6		124.7		-		662.3
Sales	$	57,311	$	12,351	$	-	$	69,662
Adjusted EBITDA1	$	15,373	$	2,084	$	(1,289)	$	16,168
Adjusted EBITDA margin1		27%		17%		n/a		23%
Nine Months Ended September 24, 2022
(CAD thousands)	NB Timberlands	Maine Timberlands	Corporate	Consolidated
Sales volumes (000s m3)		518.4		168.9		-		687.3
Sales	$	51,470	$	15,248	$	-	$	66,718
Adjusted EBITDA1	$	11,955	$	3,350	$	(1,169)	$	14,136
Adjusted EBITDA margin1		23%		22%		n/a		21%

1. Non-IFRS Measure. See "Non-IFRS Measures" on page 3 of this report.

New Brunswick Timberlands

New Brunswick Timberlands owns and manages approximately 761,000 acres of freehold timberlands and provides harvesting and management services relating to approximately 1.3 million acres of Crown licensed timberlands.

During the third quarter of 2023, Acadian's New Brunswick operations experienced no recordable safety incidents among employees or contractors.

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The table below summarizes operating and financial results for New Brunswick Timberlands:

		Three Months Ended			Nine Months Ended
	September	September	September	September
		30, 2023		24, 2022		30, 2023		24, 2022
Harvest (000s m3)
Softwood		133.3		103.7		278.8		280.1
Hardwood		67.9		64.9		177.3		175.6
Biomass		-		23.0		25.8		52.5
Total		201.2		191.6		481.9		508.2
Sales (000s m3)
Softwood		129.9		105.9		275.2		287.2
Hardwood		63.5		62.9		187.9		178.7
Biomass		41.6		23.0		74.5		52.5
Total		235.0		191.8		537.6		518.4
Sales Mix
Softwood		55%		55%		51%		56%
Hardwood		27%		33%		35%		34%
Biomass		18%		12%		14%		10%
Total		100%		100%		100%		100%
Results ($000s)
Softwood	$	9,701	$	7,231	$	20,185	$	19,428
Hardwood		5,333		5,580		18,093		15,726
Biomass		1,336		1,064		2,966		2,372
Total	$	16,370	$	13,875	$	41,244	$	37,526
Timber services and other		6,466		6,042		16,067		13,944
Sales	$	22,836	$	19,917	$	57,311	$	51,470
Adjusted EBITDA1	$	5,495	$	4,577	$	15,373	$	11,955
Adjusted EBITDA margin1		24%		23%		27%		23%

1. Non-IFRS Measure. See "Non-IFRS Measures" on page 3 of this report.

Sales for New Brunswick Timberlands in the third quarter were $22.8 million compared to $19.9 million during the prior year period. Sales volume, excluding biomass, increased by 15% primarily due to increased contractor availability. Biomass sales volume increased by 81% as compared to the prior year period due to favourable market conditions.

The weighted average selling price, excluding biomass, for the third quarter was $77.74 per m3, or 3% higher than the prior year period, as a result of stable softwood sawlog and pulpwood prices, driven by strong demand, partially offset by lower hardwood sawlog pricing due to unfavourable end use markets. Biomass prices were 25% lower year-over-year due to changes in product and customer mix.

Operating costs and expenses were $17.5 million during the third quarter, compared to $15.4 million in the prior year period, reflecting higher sales volumes. Weighted average variable costs, excluding biomass, were consistent with the prior year period, with increased contractor rates being offset by lower fuel prices.

Adjusted EBITDA for the quarter was $5.5 million compared to $4.6 million in the prior year period and Adjusted EBITDA margin was 24% compared to 23% in the prior year period primarily as a result of higher operating income.

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During the first nine months of 2023, New Brunswick Timberlands' sales of $57.3 million were 11% higher than the prior year period. Sales volume, excluding biomass, was consistent with the prior year period, with increases in contractor availability allowing for continued recovery of the volume shortfall of the first quarter. The weighted average selling price, excluding biomass, increased 10% as a result of increases across all products, as compared to the same period of 2022.

Operating costs and expenses of $42.7 million during the first nine months of 2023 were $3.0 million higher than the prior year period, due primarily to increased volumes. Weighted average variable costs, excluding biomass, increased 3% from the prior year period, with increased contractor rates being partially offset by lower fuel prices. Adjusted EBITDA was $15.4 million compared to $12.0 million in the first nine months of 2022, and Adjusted EBITDA margin increased to 27% from 23%.

Maine Timberlands

Maine Timberlands owns and manages approximately 300,000 acres of freehold timberlands. All harvesting operations are performed by third-party contractors.

There were no recordable safety incidents amongst employees or contractors during the third quarter of 2023. The table below summarizes operating and financial results for Maine Timberlands:

		Three Months Ended			Nine Months Ended
	September	September	September	September
		30, 2023		24, 2022		30, 2023		24, 2022
Harvest (000s m3)
Softwood		20.9		24.6		77.9		121.2
Hardwood		16.1		11.9		42.3		39.6
Biomass		-		2.0		6.5		5.2
Total		37.0		38.5		126.7		166.0
Sales (000s m3)
Softwood		20.6		24.6		72.8		121.2
Hardwood		17.3		11.0		45.4		42.5
Biomass		-		2.0		6.5		5.2
Total		37.9		37.6		124.7		168.9
Sales Mix
Softwood		54%		66%		59%		72%
Hardwood		46%		29%		36%		25%
Biomass		-		5%		5%		3%
Total		100%		100%		100%		100%
Results ($000s)
Softwood	$	2,114	$	2,328	$	7,487	$	10,777
Hardwood		1,415		1,090		4,149		3,943
Biomass		-		3		60		13
Total	$	3,529	$	3,421	$	11,696	$	14,733
Timber services and other		228		256		655		515
Sales	$	3,757	$	3,677	$	12,351	$	15,248
Adjusted EBITDA1	$	(149)	$	234	$	2,084	$	3,350
Adjusted EBITDA margin1		-4%		6%		17%		22%

1. Non-IFRS Measure. See "Non-IFRS Measures" on page 3 of this report.

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