Potlatchdeltic Corp (PCH) 2002 Q2 法說會逐字稿

Good afternoon my name is and I will be your conference facilitator today. At this time I would like to welcome everyone to the Potlatch Corporation second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer period. If you would like to ask a questions during this time simply press star then the number one on your telephone keypad. If you would like to withdraw your question press the pound key. Thank you Mr Zuehlke you may begin your conference.

Thank you this is Gerry Zuehlke, Chief Financial Officer of Potlatch Corporation joining me on this call is Siegel our Chief Executive Officer. Before we begin I remind you this call may contain forward-looking statements within the meaning of the U.S. Securities (Law). 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 managements expectations today. They are subject to a number of business risks and uncertainties. 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 SEC. I would now like to turn the time over to Siegel who will discuss the second quarter results and provide and overview of our markets ?

I'll go through this on a business segment basis with some comments on anything significant which happened in the segment in the second quarter as well as what the markets in that segment currently look like. And I'll start with resource, resource income was up from the income earned in second quarter last year as well as the income earned in the first quarter of this year, that was is a normal seasonal movement. The first quarter is our lowest quarter of the year and resourced on a normal seasonal basis just because of the ability to deliver wood based on winter conditions and road break up. The second quarter is generally the next lowest quarter of the year with the third quarter being the highest and the fourth quarter being second highest and while that pattern could change due to very unusual weather in a given year we haven't seen the pattern change in the last several years and there's nothing particularly going on at present. Resource operations had a good second quarter we have made a successful transition to moving resource into a profit center where all resources both logs and timber as well as potentially higher uses for land are viewed in an external mode i.e. we will sell the logs to the highest bidder. The resource operation also functions as a procurement arm for our all of our consumption of wood and paper products and delivers wood but its primary earnings come from management of our 1.5 million acres of free timberland.

In the wood products segment income was well below second quarter of a year ago slightly above the first quarter of this year and lumber markets and as you all know the U.S. instituted a tariff against Canadian lumber, which was implemented in late May. There was a window period prior to that in which lumber could move across the border with no tariff or dumping duties and substantially more than normal volumes of Canadian lumber as well as we and other observers can tell were shipped across the border to beat the tariff imposition and as a result lumber prices suffered quite a bit in the last couple of months.

They have begun to recover although the effect of that is not in my opinion not totally gone yet but pricing has being moving up erratically for the last four to six week. In the panels markets, panel markets demand is good as it is for lumber supply is also adequate those prices seem to go some where without showing a trend every couple of days. And they are holding n level around levels that are not practically good in a historical sense and as result if you recall from a year ago pricing had a strong run up in the second quarter which accounts for the drop income this year operations are running better than this years second quarter than they where a year ago.

In the pulp and paper segment of the industry earnings of our business our paper operation where slightly higher in income that they where in the second quarter a year ago. And quite materially higher than they where in the first quarter of this year. And our pulp and paper segment includes two different business it includes the bleached paper board business, it includes consumer tissue, private labels consumer tissue and it also includes a small amount of pulp which we sell externally. On balance in the second quarter if I compare to the first quarter of this year the operations ran better, pricing was a wash the biggest segment there includes bleached paper board and bleached paper board pricing was declining during most of last year and into the first quarter of this year, backlogs picked up a began picking up in January of this year. And as those back logs improve pricing stabilized for that quite low levels. We began to see some improvement in mix for the second quarter but it was minimal and our paper board pricing was actually yellow the first quarter level.

Pulp pricing was up somewhat but we don't sell a great deal of pulp, and on the balance the those net out. The improvement in that segments is sold in the cost side, with cost being driving down and by better energy costs where we got trends on some period of time and that is a significant factor. And the rest is operations running better and therefore seeing lower unit costs in that segment.

We have had price increase announced which will become effective as of the first of this month. For plate, dish and tray which is a very minor factor for us and folding carton and cup which is , and those increases are sticking and we believe so satanically better pricing in the third quarter that we did in any of the first two quarters. The tissue business not a great deal happened the volumes are up slightly, pricing is down slightly and that is a mix between the various grades of tissue we produce. That business remains quite good and with out much change really from business a year ago or first quarter of this year to the second quarter of this year.

Other than that I think that covers the industry segments we're in, we also sold Minnesota coated paper operations to during the second quarter, we announced it in the first quarter it closed during the second quarter, we announced a closure of one small hardwood in , , where we where unable to provide enough to run a two shift basis and that mill right of was taken in the second quarter, that mill is for sale and we have some interesting parties looking at it at this point in time.

That as well as the Minnesota paper operations are shown separately in our statements as result from discontinued operations. With that Gerry I'll turn it back to you.

OK, thanks Ben, what I'd like to do as I traditionally do is run through some statistical numbers on those shipments and realizations, I'll start with our wood product operations, specifically first; relatively flat up about 1/10 of a percent in shipments, lumber up about three point six percent, plywood down about seven point six percent, particle board up about three point nine percent, paper board up five point two percent, tissue up about two point five percent, and pulp out of up about 20 point two percent. Realizations second quarter versus first quarter up 8/10 of a percent, lumber up three point seven percent, plywood up four point two percent, and particle board up half a percent. Paper board pricing down a half a percent, tissue down two point nine percent, and pulp at up 18 point one percent. I would also like to give you a little bit of a trend look comparing the last month of the quarter June versus the second quarter average for pricing on down five point three percent, lumber down five point seven percent, plywood up point four percent, particle board down a half a percent, paper board up two point two percent, tissue down point six percent, and pulp up 18 point nine percent at .

So those are the statistical numbers for shipment s and realizations and a little bit of a trend analysis, I guess I would say also for our resource its' been mentioned quite a bit of drop in the shipments of wood during the second quarter which is starting to pick up know and it's mixed broadly across the regions but the biggest difference being in the Minnesota and Idaho regions where winter hits the hardest, and pricing in wood second quarter over first quarter in total for all of resource up about 10 percent so pricing is getting better in resource.

I have not related anything for the discontinued operations in this because they are for partial periods, and wouldn't really realistically make any sense, so with that information we would like to open it up for any questions anyone might have.

At this time I would like to remind everyone that in order to ask a question please press * then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from .

I was wondering if you could mention whether the Bradley Sawmill was in the numbers in the second quarter or is that part of discontinued operations?

It's been discontinued operations for the second quarter, and year to date.

: OK, and on the 28 million of assets that your held for sales at. Does that include the Bradley Sawmill, and does it also include the ?

It does. It also includes working capital related to those operations, and with Bradley, is still running, and won't formally shut down till August 2nd, and you know there are very substantial inventories for it, so all of the both six assets and working capital ties to those operations with primarily working capital for Bradley, and primarily salvage value of assets at are included in that number.

: OK. Well looking forward how much is you know the reduction in Bradley being out of your business, and can it reduce the amount of production of lumber that your doing on a quarterly basis.

It's very small and in fact it's so small I don't even have.

Bradley is about on a one shift basis is about a 20 million board put operation on an annual basis give or take a million feet.

: OK. What's the status now of , and are you still trying to sort of sell it?

We have a number of actually we have a number of interested parties who are looking at it. They are looking at not as a coated paper facility but they're looking at it to make some other specialty grades, and the grades of paper vary depending on who's looking at it. We have it for sale, we are attempting if we can to sell it as an ongoing operation in place as opposed to liquidating the equipment, and taking salvage value to attempt to provide some jobs for the 600 plus employees who were at that mill, and who we laid off.

: OK. When you look at the resource segment you said I think Gerry that your prices were up 10 percent from the first quarter levels. Is that really a mix situation cause you know we're not really seeing in other areas in fact it's been the other way for a while? .

It's spread among all three areas, and all of them are up some. The biggest impact is in Idaho.

There is some mix there, there is some mix there right because the which is a very high priced we tend to deliver more in the second quarter than the first quarter.

OK

But that moves around a little bit but the trend is interestingly enough not up in all three regions across the board for us. Part of that, part of that may not adequately reflect what's happening in the region, it may reflect the move we've made to selling merchandising laws and selling each segment to the highest bidder and we're finding that the highest bidder in many cases is not a Potlatch facility.

OK. So actually when you look at this and, you know, sort of taking out the seasonality and looking at it year over year, you were up, you know reasonable amount year over year, 12.5 million versus 10. Would you say that's probably more due to the merchandising going on?

I would, but given the timing of the earnings releases and phone calls, that's my perception but we don't still have full analysis of all the underlying data. We know the numbers are correct, but in order to hold up the earnings release until we have full of every species would probably take another seven or eight days and we've elected not to do that, so that's my perception. In the event that that perception proves to be wrong we will, we announced we wouldn't change these, we should do something to change it and I'm not sure of the method.

OK. And just the last question, on getting back to what you said about the pulp and paper business and the, you know, the sharp reversal in the second quarter on the positive side, is, would, when you said, you know, you cost were in part of that, obviously when pricing is flat, is that heavily related to the operation.

Yes.

Could you give an idea of the progress you're making there.

We still have a long way to go, I think, with being satisfied with the way it's running on a day to day basis, but as we look at productivity on quality tons we have made a very substantial progress and actually we're showing progress virtually every month, not, I guess not every month, but if you draw a trend line it's up pretty sharply in terms of ungraded. We tightened all of our grade specifications. We have gone to a much more customer focused method of running that and that cost us a fair amount of money six or nine months ago because it, what it did was generate a lot more off grade as we had tightened the specs. We are now producing more on spec, and so it's making major progress but, the second quarter number does not come close to what we would believe to be a satisfactory performance although it's clearly moving in the right direction.

So, for the second half of the year we should still continue to see further improvement in that operation.

We don't forecast earnings, but everything we see suggests that we will continue to make substantial improvements in operation.

Great. Thanks a lot.

Our next question comes from .

I was wondering if you could help us with the debt breakout and what was paid down in the quarter, and secondly if you had cap ex for the quarter and for '02.

Yeah, firstly the debt pay down in the quarter would have included, very early in the quarter, April 2nd I think, 30 million of medium term notes and that was on the heels of 100 million bond repayment in the middle of March, which obviously is in the first quarter. The next thing after the MTM's would have been 198 and a half million of term loan B notes under the revolver, and then 46.9 million in municipal bonds that were related to the assessed in the .

That was on balance sheet ?

Yes, and that would be the extent of the debt repayments through the quarter. The cap ex number for the quarter was 8.7 million, and then your last question, further question.

For the year cap ex?

For the year?

Yeah, for 02.

We had originally forecast for the year in the 40 million or slightly over the $40 million dollar range. We would expect that right now nothing has changed significantly to make that different. The assets that we have sold or are about to sell, did not have any material amounts in that budget, so the budget really didn't change too much from those sales.

And the cash that's left in the balance is still, I guess, 183 with the plan there, and is there any remaining for 02?

There is no remaining for 02 or for that matter for the next couple of years. Having said that, we, as we had announced earlier in conjunction with the sale, intend to use the bulk of that proceed, which includes what's left in the balance sheet now, in addition to additional cash flow to improve our financial ratios over the not too distant future and to take advantage of whatever opportunities we have to continue to pay down debt. We have not, at this point, made any specific decisions about what to go after or under what kind of an exact time frame, but we will be continuing to analyse that and looking for opportunities to reduce debt further.

And lastly, just on , what are you seeing there in terms of demand and how much supply do you think is out there or what's your take on prices if it ?

It's purely a supply-demand market and demand is very good, given and remodelling and other uses, but for the supply of as well as plywood products used for the same uses at least equal to it at this point in time. We have seen no fall-off in demand. We're in the process of shifting, in our wood products, more of our productions, especially products and we had one specially product in the market place at the end of the first quarter, and it's a radiant barrier or heat barrier product for use in places like South West and Southern California where energy covers a change requiring something like that. We introduced a second one as of early June, near the end of the second quarter, which is a and fungus resistant wood, which also has some properties of resisting the growth of mould. And that's a, both those products are and we are working on others. Because we move more of our product out of the area and I think we will be quite successful with that over time.

Thanks

Your next question comes from Steve

Good morning, at least on this coast. A couple of questions, first of all the Minnesota timber lands, are they still selling a lot of volume to your old facility and if so is going to try and give you guys the haircut that they are the rest of the wood suppliers?

Let me answer most of that question. In terms of Minnesota, before our sales to we only supplied eight to ten percent of the wood from our own timberlands and the rest was acquired from various private stay-in county and a little bit of Federal, although the Federal Government there stopped selling pretty much and so the flow of timber from our own lands in unaffected and again we are selling that to the higher and better use areas.

With regard to the second part, we had a short term contract to supply with some wood through June. A post transaction, that short term contract expired, we have reached agreement to supply them additional wood in the third quarter at terms which we believe are favourable to us, or we wouldn't have entered into a supply contract, so we are not, the loss of supply to that mill were we to lose it totally and we may it really is more or less a non-event to the outside world it is clearly an event internally as we look at the amount of wood we have to procure, but it is not an income related event.

OK, and since you don't do earnings projections I guess I shouldn't ask you if you can return to profitability this quarter. Should I?

You certainly may ask but since we don't do earnings projections we won't comment on it.

OK Then I will keep going. I don't know if I heard the figure for CapEx for this year and next and are they dramatically changed because of you know the closure at Bradley or anything.

No the answer Steve was that our original budget did not include a significant amount for either our Minnesota pulp and paper operations or for Bradley and thus the sale of those do not really impact what we thought we might spend for this year, and we continue to believe that the relative level of spending in the future should be about the same although it will come down in future years, obviously because Minnesota pulp paper obviously was a fairly considerable operation which would have a fair amount of regular maintenance capital attached to it.

Sure if I recall from the April call Ted said around $40 million a year then?

Yes, correct.

OK, and your premium OSB terminator and the , what kind of premiums do they receive in the marketplace?

It is really probably too soon to tell the OSB and in terms of the exterminator it is just going into the market, we have priced both of those to add substantially to the margin on OSB at what we believe average pricing is and are successful in the product and since we only produce the first production run of the exterminator was mid June and it has all been shipped. It is probably too soon to tell, we believe those margins though can be held and the average margin off which we priced the products is better than the margin given today as pricing.

Great, OK and finally did I understand properly that the your expectations that the timberland's resources segment will show a accelerating contribution for the rest of the year.

That is kind of like earnings forecast I think what I did count in was and we believe resource will be a large contributor this year than last year because of the switch to full utilization to the highest market price of all the assets they are in.

Well that is part of the question then in terms of seasonality, the northern resource you can't really get into it in the second quarter because of spring thaw, so do we get better volumes?

Yes.

.

That is why the third quarter is seasonality the largest quarter by resource for us and I won't say all year, but all years I can think of I guess it is conceivable that some thing could happen in weather. It's not so much the enabled to harvests, it's the enabled to deliver over the road systems.

You have some of that is Arkansas also depending wet a winter they have but it is primarily down it Minnesota where during break up the state and county government put a weight restrictions on the road, and you can't move wood.

And do you guys I mean being up in Minnesota do you have a pretty go feel that the have being worked through now?

Not as good a feel, you know we don't have a great feel I mean what we have is lots of evidence talking to our customers and who are looking at reload faculties of volumes. It is clear those volumes are being worked down I don't believe it is total over yet thought there has to be better sources of that information than .

OK that's good and congrat's on some really good progress there.

Thank you.

Your next question come from .

Thank you, can you tell us what the deprecation any remain will be going forward for this year and next year?

Hi

Hi.

Sure we would expect giving the operation that we sold to be about $120 million annualizes level for the foreseeable future obviously declining some what over time when you get further out, but that is the kind of level we would be at right now after those sales.

OK, and can you say anything about additional sales of timberland that you might be contemplating, I mean I know on your website you have these auction for relational property, I don't know if you have added it all up to , I guess that causes it's on your website so?

We are we are as part of the whole change in the resource business is looking at higher and best uses and the land we are selling on the website some of it is pretty poor land for growing timber, and other is pretty good timber growing land but is worth two or three times as much for hutting camps or something else. So we have an active program in Minnesota, we have an active program in Idaho which is a little bit different because your not selling, we don't have the close population center so your not selling 40 acres of somebody from the twin cities of Chicago as we are in Minnesota who wants to build a hunting camp or have to have a place to get away to on the weekends, but we have an active program there, we are developing an active program which isn't quite as far along in Arkansas and that's really hire invest use we go through each year and identify that land in our total inventory which should be worth substantially more to someone else than it is to us then we have a organized process to market that land which really has, we got a little bit last year but its really a program which has just kicked in this year.

OK. An organized program, you mean an addition to the auctions of recreational land?

Well, in addition to what may be on the web site, its, some of it probably the web site is not the best way to sell timberland, but no I would say not in addition to that. It would include land that we might sell to someone else, it may be not so much higher and better use it may be that 2,000 acres of our land is worth more to another company in our industry because of the location of that land in relation to their mill sites. And we're always, and have for years been in the trading business trading one piece of land for another piece of land where there are economic win-win benefits for both sides based primarily on logistics. But at this point in time a majority of the land we are selling is really higher in better use land, as most of that will be advertised.

And in addition if I could just maybe anticipate where you where going with that question, over the course of time we don't in vision having us the ownership I total that is significantly different than the level that we have now.

OK. The, my other question is about the make shift in tissue, and then I guess I will ask you about the dollar a little bit, but the make shift in tissue first, you know said the same thing this morning when they reported that there was a make shift in tissue to those away from home and away from, I guess retail and that that was making their prices go down but your not in retail so, and your not away from home so, I mean, can you give me any more specifics on what happened in tissue prices?

Not a lot, basically what we have are four categories tissue, bathroom tissue, towels, and napkins. Napkins are all what you might call value in economy products with a little bit of premium products, tissue is most all premium product because there's, with a little value in low economy facial and the towel and bathroom tissue lines are composed of three pretty dynamic segments, economy, value and premium. It doesn't take a very big shift, we see shifts every month and every quarter within our mix, which are just based on what our supermarket customers decide what they want to use as a promotional item to get people into the stores every month or every quarter, and one month they'll do advertise, a value, and economy, two for the price of one. Some months it's premium products not just us but all the brands go through the same process so there's nothing that I see that had any affect. Our volume of tissue shipments were up slightly, finished goods, the pricing is now very settled a little bit over two percent but it jumps around every month, and there isn't any trend that we can see from any of those numbers. It's a normal event for us.

I see. OK, and actually I wanted to ask you also if you could look at where your debt was at the end of the quarter you know you'd take all the long and short term and subtract 183 million in cash and you have net debt of about 591 million. Do you think we might see that $591 million lower in the third and fourth quarters from a continued generation of free cash flow either that goes into cash or goes to pay out debt but you know the net number goes down.

In response to your question as Gerry said we expect the non cash charge numbers to learn that our annual rate of around 120, and we expect the capital expenditure number as presently constituted to run at an angle rate of about 40. Clearly net income, and changes in working capital and other thing get into those numbers but we are on a program to reduce debt because even though the debt is down sharply from were it was it is still at a level which we believe is too high going forward, so I wouldn't pin myself down to doing a back of the envelope or a back handed way of forecasting earnings by giving you a number cause working capital jumps around but we expect that number to go down .

OK, and the last thing is if the dollar stays at one Euro what does that mean for you?

It doesn't have a big direct effect on us. I think it's, and the same is true for most people in our industry the effect is primarily secondary, and tertiary to the extent it stays there the, the profits would be, many of the off shore manufacturers have enjoyed, and paper products which are at one level or the other commodities are be under pressure, and ours, and by ours I mean the U.S. industries are going to be pushed up. Cause what you've done is change the economics of paper products, and to some degree solid wood products manufactured in this country versus all other countries, so with all things being equal it will tend to push prices upward for both wood and paper products primarily paper and pulp products, and you will shift were the income is being made worldwide in that industry away from offshore producers, and towards the U.S.

I think it's good for us in that from bleached paper board for example our primary competitors, the primary competitors with the U.S. are Scandinavia, and the change in Euro Dollar relationship clearly will have, al things being equal and they never are will pinch the unusually high profits that they have been enjoying for the last two or three years in relation to the U.S., and will probably stimulate some additional demand. It'll also drive pulp prices up which tends to put an under pinning under all pulp and paper markets. That's it I apologize for the nature of the answer but I think that's kind of the way the dollar or the currency relationships work in relation to our industry.

OK great thank you very much. I appreciate it.

There are no further questions at this time.

One other comment I would like to make that I meant to make earlier and that relates to the specialty wood products where we have talked about a goal of having 25 percent of our sales of wood in specialty products by the fourth quarter of this year. I am not convinced we'll get there that quickly. We have a couple of products especially wood products that we're very excited about that are in the process. The key driver in getting them into the market is in part sorting out the technological aspects of making sure we've got glues and resins and everything working properly. The biggest one though is the intellectual property and we are unwilling to bring something into the market until we're sure we have captured the intellectual property via in a variety of ways and that's going a little bit slower than I had thought on one of those products. Our goal remains the same and we remain just as excited about the products but it may not get there as quickly as 25 percent by fourth quarter and it may. At this point in time it's I think it's uncertain although we're clearly headed in this direction. I meant to make that comment earlier.

if that didn't get any more questions then we would like to thank everybody for joining us on this call and look forward to talking to you next quarter.

Thank you.

Thank you for participating in today's conference call you may now disconnect.