Potlatchdeltic Corp (PCH) 2002 Q1 法說會逐字稿

I will be your conference facilitator. At this time I would like to welcome everyone to the Potlatch Corporation First Quarter Earnings Result Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad and questions will be taken in the order they are received. If you would like to withdraw your question, press the pound key. Thank you Mr. Zuehlke you may begin your conference.

Thank you, Holly. Before we begin I remind you this call may contain forward looking statements within the meaning of the U.S. Security Laws. These statements include statements about the company's future business prospects and anticipated performance in upcoming quarters. These statements are not guarantees of future performance and the company undertakes no duty to update them.

Although these statements reflect management expectations today, they are subject to a number of business risks and uncertainty. Actual results may differ materially from those expressed or implied in this call. For a discussion of certain factors that may cause actual results to differ from the results anticipated, please refer to Potlatch's recent filings with the FEC. I will now turn the time over to Pen Siegel, our CEO, who will discuss the first quarter results and provide some overview on the market.

Thanks, Jerry, you've all seen the release hopefully, so I will not go back through and re-read it, what I will do is go through by segment, business segment, and discuss briefly the results and any trends which we see at present in the market and I'll start with resource, there really isn't much I see in the way of a trend there, markets have not changed a great deal from last fall. Markets remain pretty good, demand for logs and in all sizes and materials is pretty decent in the U.S. at this point in time.

The only thing I would point out with regard to resource is that it is a seasonal business and the first quarter is always the seasonally weakest quarter of the four quarters of the year based on, solely on weather, and you don't need to move wood from timberlands to the mill sites. And as a result the earnings that you see in the first quarter should not be viewed as indicative of what the year will be, i.e., do not multiply by four. It is a low quarter for the year for resources.

Moving to wood products, we have a small loss there, substantially better than a year ago from a manufacturing and shipment standpoint. The plants are running well, demand is pretty strong, and pricing as far as the year, are quite low and has gradually moved up in which is normal as you know in the solid wood business. The trend, markets remain pretty good. They go somewhere daily and weekly, but current markets are well above the average of the first quarter and demand remains quite strong.

In wood products, we have made a conscious decision and have been working for the last three to four years to ship more of our product into specialty products and it's taken that long to begin that process in terms of actually having products which, on which we had some intellectual property protection to move into the market.

The first such product we introduced last fall, which was a foil laminated, LSB, and probably now plywood. The LSB product has some patents, which I believe are not particularly strong, but they do cover the use, the lamination of foil in an online process as opposed to having to do it offline. This is a product, which is being used increasingly in Southern California and the Southwest as a heat barrier to reduce the energy consumption for air conditioning primarily. We also, last fall, introduced the first, - excuse me, a product, which is a very solid edge seals product for sub flooring. It is not patent protected, but it is something of a specialty product.

At present, we are installing equipment at one of our three LSB plants to enter the market for and insect termite resistance to on which we do believe we have a good patent protection, and that product will be in the market for the first time during the second quarter, we believe it's a quite interesting product. We have two other products in wood products, which we are fairly far down the line working on which we expect to introduce this year. However neither one currently has final patents and as a result, other than saying we are working on them, that's about all we're saying at this point in time. We're not discussing the nature of the products.

Our goal by the fourth quarter of this year is to have at least 25 percent of our unit output in wood products across everything, lumber, OSB, plywood and particle board, in specialty products in which we believe we have a niche with a substantially higher goal or years and we believe that's an achievable goal. But, we still have a fair amount of work to do on the two products underway and we'll have to see whether market acceptance for these products is as high as we believe it will be.

Moving to the pulp and paper segment, markets there are variable. The pulp market doesn't seem to get any worse, but it also we don't see any signs of it getting better at this point. We are a fairly small player in the pulp market, so that may not be a great indication, but we don't see much signs of a market turn there. Pricing moves up and down for us a little bit, sometimes more than a little bit month-to-month, just based on where the product was shipped, but the basic trend seems to be a cross at close to what we would think as a bottoming in product pricing.

In paperboard markets, prices continue to sink last year. Around the turn of the year we began to see substantial increases in our auto back logs. And that's usually the first sign of a market turn. Those back logs now are in better shape than they have been for several quarters, and the plants are running pretty well, so it's not increased back logs, we usually can't produce the product. And our pricing and net realizations, excuse me, have begun to rise slightly January over December, February over January, and March over February. But it's not so much price increase there in terms of changing the price of a grade as the ability and a stronger market to improve the mix. We have yet to see price increases and wouldn't anticipate any for some period of time. But that market appears to have turned and demand, for us at least, is pretty good.

As we move, I'll move then to the printing paper's business, I'm sorry, Jerry reminds me I left out a very important business with the tissue which is part of pulp and paper. Those markets remain strong for us without much of a trend I think I would say. The markets have been good for an extended period of time. Our shipments will continue to grow this year although a fair amount of that will probably be with purchased rolls that we buy from others to grow, as we grow with our customers and we are gradually expanding East in that business as some of our customers such as Safeway and Albertson's expand East in a variable fashion, i.e. base, they make acquisition of the chains and if they do that, we have agreed to supply them and we do supply them with all of their private label tissue products. So that market is good and it's a market that we are very excited about, about both intermediate and long-term.

I'll move now to printing papers. As you know, we announced the sale roughly a month ago of the majority of the assets of the printing paper's business to southeast North America. That we filed filings, with the government, that process is underway. We anticipate that transaction to close during the second quarter of the year, although clearly there are never any guarantees until you are done, but the process is ongoing. At the end of that, we will also shut down, close our facility. The, is it FAS 144, Jerry?

Right.

Which is a fairly recent accounting rule that requires us in the first quarter to take an estimated write-down of the difference between the price we will get for it and its book value as of right now. And as a result, the write-off we took in the first quarter ties to those assets as well as the closure of and the cessation of our participation in the printing paper's business. Jerry, I'll turn it back over to you now for some details on prices and volumes.

Yeah, I would like to go through some percentage changes in shipments and realizations sequentially for the first quarter versus the fourth quarter of last year and then after that I will also give some percentage changes in pricing for March versus the first quarter to give us somewhat of a feel for a trend. So I'll start first with shipment. OSB was up 6.3 percent, lumber was up nine percent, plywood 30.7 percent, up, particleboard up 20.7 percent, printing papers down 4.2 percent, pulp out of up 38 percent, paper board down 1.7 percent, pulp out of Idaho up 26.5 percent, and tissue up 11.7 percent.

Realization, beginning again with OSC, up 15.9 percent, lumber up 9.5 percent, plywood up 2.7 percent, particle board up 2.2 percent, printing papers up five percent, pulp out of down 2.5 percent, paper board up 3/10 of a percent, pulp out of Idaho down 7 percent, and tissue up 2/10 of a percent.

Now March realization versus the average of the first quarter OSC up 13.7 percent, lumber higher by 7.3 percent, plywood higher by 3.8 percent, particleboard flat, printing papers down 2.6 percent, pulp out of down 1.5 percent, paper board up 1.5 percent, and pulp out of Lewiston down 11.3 percent, and tissue up 8/10 of a percent. With that, what we would like to do is open it up for any questions, anyone might have. Holly?

At this time, I would like to remind everyone if you would like to ask a question, press star, then the number one on your telephone key pad.

We'll pause for just a moment to compile the Q and A roster.

Your first question comes from Steve Chercover with D.A. Davidson.

Good morning gentlemen, I'm sorry there's no way I can write that fast with the volume, it's like - can you, can you fax that to us or make it on line or something?

Steve, I'll give, I'll give you a call afterwards, and we'll, we'll go through the ones you missed.

Great, I appreciate that.

Is there a way, is there a way, Mike to put the percentages on--

Sure.

on, on the Web?

Yeah, we can put them on the Web.

Ok. We'll do that,

why don't we do that so that everybody, everybody on line would like to see it.

I think that would be great.

Yeah, so one week like the conference call will be held.

I'll still phone Jerry off-line, but my other question is can you give us, you know, what the performance was in the discontinued operations for the first quarter?

Pre-tax, $3.8 million loss in the first quarter just from operations.

And what was the sales revenue?

Sales, for the discontinued operations in the first quarter, was $107,917,000.

And therefore, do you know what, if you had of included the discontinued operations, but excluded the write-downs, where would your earnings have come in?

62 cents instead of 54.

Ok, and the proceeds from the sales and and it's going to be $480 million will go straight to your cash so to speak?

It will be an all cash transaction.

So will be - what clearly are adjustments in any transaction like this Steve, but basically - and there's some closure costs which will be cash-related at , but that's a pretty decent number.

Thanks, Pen.

your next question comes from Joe with Goldman Sachs.

Oh hi, good morning, I just was wondering if you could talk a little bit obviously in the first quarter you completed a major strategic move in selling your paper's business. I was wondering in addition to debt reduction which I know is a focus, if you could just talk about other things you might want to do with some of those proceeds, possibly expanding in the tissue business which you've had a lot of success in, and also if there are any other assets that you have that you particularly think that might be not the right fit at your company, that you would look to possibly sell.

Thanks Joe, the, with regard to use of proceeds, it really is a debt, debt payment, and we will, it'll take some time, there is clearly some debt we can access instantaneously upon receipt of proceeds to pay down. There's other, that takes, there's some land involved, but the goal is to use the proceeds almost entirely to reduce debt in the absence of the printed papers business, our ongoing depreciation depletion, amortization learned something in the $120 million or slightly north of their range on an annual basis and capital expenditures which we expect this year will probably run something in the $40 million range again in the absence of printing papers, and as we look at our business going forward, we believe we will generate excess cash and the use of excess cash clearly will be, we still do not have our debt where we would like it to be and so we even using these proceeds, we will want to pay debt down further and it's a, we will look at expanding any kind of assets as a, on a return basis as to what makes the most sense for shareholders.

But, that's maybe a little amorphous, but it's probably the best I can give you at this point in time. With regard to other assets, as we look at our business, we identified when we announced the sale, resource, wood products, and tissue as core businesses and we also announced that paperboard is a business where we believe we have the size to be a viable market player and a successful business. We have one very successful mill in Arkansas at this point in time. We have a mill in Lewiston which has not been historically and which is our number one operating focus and we're making progress there to improve that mill to the point that it is a mill which can be a good cash generator at long-term.

Ok, so no immediate plans to do anything on the tissue side, but I mean what are your thoughts on expanding that business so you can better serve some of your customers on the East, Eastern part of the U.S.?

We, we clearly are looking and have been for awhile, Joe at various ways to expand that business. We currently supply a fair amount of product, of the product we produce, about four million cases gets shipped from either Lewiston or Las Vegas where we have a major converting facility to the East, and adding facilities in the East, ultimately will allow us to substantially reduce freight on that as well as other product as we grow in the East. Our growth in the West will probably be fairly limited, in private label, because we supply the vast majority of private label in the West at this point in time. But, we have nothing to announce now and won't until we have something to announce.

Ok, great, thank you.

Your next question comes from Rich Schneider with UBS Warburg.

Pen, I was wondering if you could talk a little more about the pulp and paper segment, you lost $5.7 million and that was on our numbers, down from the fourth quarter level, if you do the adjustment that they had for you know charges for defective equipment, etc. so I'm just trying to understand why that business would have slipped in profitability from the fourth quarter level when you know it appears that your buying in bleach board has been improving and your tissue business has remained strong.

The, in the, in the Lewiston Mill we have a, we've got a situation there where we have a substantial amount of that output goes out as pulp. And it is sold at the, it's sold at market to third parties, and it's sold at the lower of cost or market to our own tissue operation as it goes across in slush form. So the pulp market has a, does have an effect in that, in that business. Other than that, the markets, the markets in paperboard were, I would say probably slightly worse in the first quarter than they were in the fourth. They appeared to have bottomed as we look at it which around the turn of the year and while they have been heading upwards somewhat, they were heading downward still in the fourth quarter of last year. So, there isn't much change there and in tissue, there is not a big change in those products. Jerry, maybe you've got something else?

No, I think that as you look at a slightly lesser volume of paperboard in the first quarter and while price, average price was up a hair in the first quarter, you have a fair amount more volume of pulp out of Lewiston at quite a bit lower price. So the combination of those two things make that part of the business slightly worse than it was in the fourth quarter, than heading out the write-off, it pretty much ties those numbers out.

Well I think the other thing you've got in there too, is that--

Yeah, on outside of the fourth quarter.

Yes, but you have, but you have volume of pulp, the pulp that Jerry has given you, are numbers in terms of percentage changes are percentage changes for pulp sold externally. In addition, to the extent you've got more pulp going internally to tissue, that's, that's nice for tissue, and it may, may replace some pulp we purchase outside, but it doesn't, it's not a thriller in terms of the profitability of the Lewiston paperboard operation.

Your, your comments on the pulp market you know, are, maybe slightly different than what we're hearing with others who are trying to just start to get some pricing pieces out there, but at this point are you, now I know you're, this is a small part of your business, but have you seen any signs of any ability to move up from your very low prices on pulp?

We are a small player there, and with the sale of we're in essence in balance, we'll sell pulp in some places and buy it in others. So we probably are not the first person to see that ridge realistically. The folks who see that would normally be the larger contract sellers so if they're seeing improvement, I think I would pay more attention to them than I would to us, because we usually see it a little bit later. But having said that, we really haven't seen much ability to increase prices in various areas, to our pulp customers at this point in time.

You mention the focus on Lewiston, you talked about some of the things you're doing, I'm assuming there's very little capital spending in progress.

Correct.

To improve bleach board.

Yes, they're all, they're really all people-related operational issues and aiming, tightening specs, very substantially on quality, adding substantially to what we have done historically and I think what others have in customer service, and that initially is excessive, because when you tighten specs you end up with, you end up with more product which is out of spec, and so you have trained people from an operational standpoint to be on grade and to have very tight specifications for each product you're making. And there is a whole laundry list of things, but they are not, they're not capital based, they're operational issues, to the extent that there are small capital fixes that we see along the way. They're kind of ordinary course of business in GR type expenses or even some of those that would be maintenance-type capital expenses and you on the outside will not see them.

Ok, if, if you get the quality and the profitability that you're looking for out of Lewiston, does that, is that the key criteria to raise the bleach board business to a core business for you?

It's the key to having it be a viable business for us. It doesn't guarantee that the business, like any other business, Rich, might, might not be worth more to someone else than it is to and so that's something we wrestle with in all of our product lines as we look at what do we do for the best interest of our shareholders, but it is critical for that operation to be viable to get the things behind us that we are working on and we'll get there.

Right, did, if, if you're a core business whether it's tissue or, wood products, that there is much less booking whether it's worth more for somebody else than keeping it yourself, is that the way you look at, you know, how you define core?

No it, that is how we define core, but if you want to come in this afternoon with an offer we can't refuse for one of our core businesses, we would consider it. I mean, clearly, we are in the business of trying to maximize shareholder values over the long-term, Rich, and those are businesses where we believe, the three we've identified as cores, or businesses where we believe we can return substantially more than the cost of the capital, and generate very good long-term cash flows, increasing cash flows for our shareholders. Those businesses are not for sale, but we have a fiduciary duty and our board has a fiduciary duty to look at alternatives, and so we do look at alternatives from time to time.

Great, and just one last question, you know with pay down of interest expense and you know, I know they're some limitations on how much you can pay down because of prepayment penalties, etc., you know, is there a way, you know, you could help us with giving us an idea of what interest expense would be looking like in, you know, and then maybe even looking at the third quarter?

Second quarter probably won't change much, I'll jump in just because if this deal closes at some point in the second quarter, by the time the dust settles, interest expense probably won't be a whole lot different. And I leave the tough one to Jerry.

Yeah, after, that, I mean we have to pick and choose and as Ken said you know, we have to find certain things that we can do to get to the market effectively to calling debts, or pay down debt, so there's really no way to detail that at this stage without, actually being in the marketplace. Having said that he might use a proxy of maybe eight percent on average for the debt that we might be able to eliminate.

Ok.

And then make your own assumptions about how quickly we can get it.

Ok, great, thanks.

Thank you Rich.

Your next question comes from Bruce Klein with Credit Suisse.

Hi, just can you help us with, we are seeing in terms of OSB demand and inventory level you think are in the system, and secondly with regard to the, the paper sale, what if you could help us with how many tons, I though it was four, 50,000 tons of pulp were actually had gone out into the market what you guys consider market pulp?

Let me take the first one, then I'm not sure, I'll give you a shot at the second and see if I understand the question right. Demand we've seen for LSB is good if you read any of the weekly reporters such as Random Likes or Crows, you will see that each week or each hour there is a constant battle between buyers and sellers with the buyers trying to hold off, hoping prices will go down and the sellers trying to hold off, hoping prices will go up and so demand comes in starts and that's normal in the wood business.

What we're seeing is pretty good demand. But prices do go up some weeks and down other weeks. However, they're doing that now Bruce, at a level which is a quite a good level for us in profitability. Pricing is better, the other thing that happens in OSC, for us at least, is that our per quarter costs of the high cost that we have in producing OSC because we do it all in Northern Minnesota, and it's colder there in the winter, so we use a lot more energy just seasonally in every year for heating wood to get it into the plants and heating plants, etc. We don't see much of a trend at this point in time demand is quite good. We will be removing some of our OSC from the "normal market" as we move more of it into specialty, into products with specialty uses, but again I don't think that'll have a big affect either. Market demand is good, supply is also good, and so it's a, relatively balanced market I would say at this point in time.

Ok.

Let me go back, let me go to pulp for a second. The 450,000 tons we have in I assume you are referring to our pulp mill, which is part of our pending sale with .

Yeah.

That is a mill, that's the production of pulp, but that amount of pulp was never on the market because we use, ourselves, substantial amounts of that pulp, partly in and partly shipped to our facility which will be closed to make coated fine printing paper. So the amount of pulp on the market I think, the goal was to reach roughly 200,000 tons a year and while we're not, didn't quite get there, we were getting fairly close to that annual rate in the first quarter shipment.

I'm sorry, in terms of market?

In terms of the pulp which was sold to parties other than Potlatch.

Ok, ok. So the 200, so 200 of the 450 would be considered market?

Probably one, if you look at last years, and I'm not looking at the number and Jerry may not have it with him, probably the number's more like 150 or 160 trending towards 200, and we were getting close to that trend in the first quarter.

Ok, my last question was just, I think you guys had some bank covenant or if you needed, and I'm wondering where you stood with that, whether you need relief anytime for the rest of 02?

We will need to renegotiate our bank agreement with the sale and that's part of, part of what we would anticipate doing. The term B part of the bank agreement will be paid off, that's $200 million, so we'll also renegotiate the agreement in addition, there's about $50 million of floating rate or fixed rate municipal debt which will have to be paid off because it's tied to the facilities we're selling and it cannot be transferred by us. So, we'll go back and renegotiate and as you may recall of the $200 million revolver, we had about $100 million was there as a back stop for municipal debt. And so, we need to renegotiate that, other than that renegotiation, we don't anticipate, unless I'm misspeaking, Jerry will correct me, anything we need to do other than have a different revolving credit agreement.

No, that's exactly right.

Ok, and the Term B is required to be paid off?

Yes.

Pursuant to asset sales or?

Yes.

Ok. Thanks guys.

Uh-hmm.

You're welcome.

at this time, I would like to remind everyone once again, in order to ask a question please press star and then the number 1 on your telephone key pad.

Your next question comes from Matt Berler with Morgan Stanley.

Ken I think you partially answered the question I was going to ask about your wood loss - loss in the quarter, and the question was, other companies that have reported so far and ones that are likely to report in the next couple of weeks are going to report profits in their wood division. Do you think your loss reflects that Northern mix and your increased energy costs, or is there something else structural about your wood business that makes it a little less profitable on a reported basis?

Good question, Matt, and I clearly haven't seen other companies yet and nor have we had a chance to analyze them. As we look at the business there is nothing that we think makes it structurally less profitable, but if others are all in the black and we're in the red, I'll have to go back and re-look at it. I don't have a good answer for you.

So I assume it's part of your strategic assessment or reassessment or whatever you want to call it over the last couple of years, you've done some benchmarking work and, you've determined that your wood business is as competitive and likely to be as profitable as your competitors.

That's correct, we are eating some costs right now, I don't know what competitors are eating. We're eating a fair amount of costs right now, Matt, involved in the development of specialty products without getting much on the revenue side. So there is that, but other than that, I can't think of any, our plants are running are running pretty well.

We've done lots of benchmarking studies and as you know there are, there are a number of, unlike the paper side of the business, there are a number of studies that are done on a blind basis where you can -- you submit your actual results from a plant and then can compare that against a series of other plants making similar products, although you don't know which plant is which, and we do -- we go through that process at least every other year and sometimes every year and we believe our plants are quite competitive.

And could you just remind us what the cash cost will be to you of closing the Mill including all severance and actual closure costs?

We're estimating about 10 percent of the loss that we're booking would be cash costs related to those items.

Ok, just 10 percent?

Right.

Ok, and--

We are -- we are, Matt, working to see whether we can find a buyer for that facility producing other products, so Jerry's numbers, I think a -- it's a pretty decent number. We'll see, but certainly the 10 percent number is our best shot at this point in time.

And so that $15 million assumes that you do sell it, or that you--

No .

--or that you close it?

don't.

That you don't sell it, ok.

assuming we do not close it, it is a closure.

Ok, and then lastly, on the assets held or the discontinued operations, the balance was 500 -- as it's held for sale, $549 million, $480 of that is , right? What else is in there? Or does that also capitalize the $15 million of ?

What else is in there is, is a railroad, a shortline railroad that is there and some other ancillary things right around and that's really it. I -- I guess I missed the first part of your question on the numbers?

Oh well--

numbers again?

I mean you've got a $549 million balance for assets held for sale, but the only thing that I know of is the $480 million sale that you've announced to--

Oh.

-- .

Yeah, the -- yeah, there's working capital involved, other balance sheet items, so that -- that brings it to the net loss.

So should we assume that the much of the $50 million differential actually is closer to $70 million differential is going to be cash? The difference being 548 minus 480?

No, no, I -- I'm going to have to go through your math, I'm not -- I've not in the -- I've not looked at it that way.

Oh.

What we, what we believe we've got is a $480 million cash -- $480 million cash sale amount which will generate no additional, that is our best estimate, no additional gain or loss.

Right, there is no .

As the assets are removed.

Ok, and so that's, that's part of the 549, right, 548?

Yeah, the 5 -- the 548 would be the taking a look at all of the assets that are tied to and the railroad--

Um-hmm.

Essentially, including the book value of the assets as well as the working capital involved.

Ok.

That's 549 .

So I guess how much of that difference do you think converts to cash, can you monetize and convert to cash, or you think ultimately just--

Well, virtually, the entire 480, if that's the amount that we adjust to in the final sale and it should be close to that amount, virtually that whole amount should be cash and then less than expense.

Right, I got that. Ok, maybe I'll -- I'll call you later, Jerry and--

Ok, yeah.

It's the other $70 million that I'm asking about.

.

Yeah, ok, thank you.

Your next question comes from Joe Licursi with BMO.

Yes, gentlemen, I had a question on the lumber duty, if they come to pass, as the DOC and the ICC are going to be making a ruling, will this affect the net profits of in any way?

If the -- it's a market-related question, if the duty comes to pass, as it appears they will, unless there is a negotiated settlement prior to those duties being imposed, it will have an effect on the market, but I -- the absolute effect on the market, I can't or would not be willing to speculate on.

What like if you take your resources, like I guess your prices of logs would feel the impact?

I think to the extent that it impacts end product prices for lumber, it would also impact the prices of those logs which go into lumber.

Ok, and if you've got your operations like in their entirety, on a net-net basis, this would be positive to . Can we assume that?

We are part of the coalition which has been fighting for these duties based on what we think is fair traded, so I think that's a safe assumption.

Ok, thank you very much.

At this time, there are no further questions.

All right, well we would like to thank everyone for joining us on this call and we look forward to talking to you next quarter, thank you very much.

Thank you for attending today's conference call. You may now all disconnect.

END