Potlatchdeltic Corp (PCH) 2002 Q3 法說會逐字稿

Before we begin, let me remind you that this announcement may contain some forward looking statements as defined in the U.S. Security laws. Investors are cautioned that such forward-looking statements with respect to revenues, earnings, performance, strategies, prospects, and other aspects of the business of First Energy Corp. are based on current expectations that are subject to risks and uncertainties. A number of factors could cause actual results or outcomes to differ materially from those indicated by such forward-looking statements. Please see our management discussion and analysis of financial conditions and results of operations included in our most recent annual and quarterly reports filed with the Securities and Exchange Commission for a detailed description of these factors.

I will start with the resource segment. I will go through this by business segment. Resource, there was nothing particularly unusual in the quarter. Operating income rose to $19.7 from 17.9 in the same quarter a year ago.

There is some seasonality in the resource business, so the third quarter is normally our highest earnings quarter and is higher than first and second. But from a log delivery standpoint and harvesting stand point it was a normal quarter. There were some slightly higher prices for logs in Arkansas.

The wood products segment -- let me just one more comment on resource -- there is nothing that we see happening there particularly in a forward- looking sense. The business doesn't seem to be changing in any direction at this point in time.

With regard to wood products, we had an operating loss of 1. 9 million in the third quarter versus a break even in the third quarter one year ago. And this was a combination of lower net sales realizations for O.S.B. and lumber. A fairly substantial decline in lumber shipments and a decline in plywood. In addition we had a 23- day strike at our large pine sawmill in Warren, Arkansas. We continued to run that plant with management personnel during the strike which was quite expensive. But that was a contributing factor not only to the reduction in shipments of lumber in the quarter lineup were in the quarter but also to the quarter's loss. The mill resumeed normal operations after we reached a settlement in early September and we are right now in process of expanding it to one of the third shifts.

In the wood product segments, those markets while strong all year in terms of demand have been at least as strong in terms of supply. There is a substantial over capacity in the solid wood business that we have seen both lumber and panels. While prices continue to go up and down, they have been substantially lower than in most prior years for the year to date numbers. And we don't see that situation changing in the short term. In the pulp and paper segment operating income was 2.9 million. Compared to 10 million in the quarter a year ago . The unfavorable comparison there is a result of a couple factors. We had lower net sales realizations of 5% for paperboard and consumer tissue products versus a year ago and consumer shipments were down roughly 6% and paperboard shipments were roughly flat. And we did have quite a substantial increase in inventories in the paperboard business and in the tissue business tied to our desire to be sure we have adequate and proper customer service going forward. We have a labor negotiation underway in Lewiston, Idaho for the paperboard and tissue operations that has been underway for a substantial amount of time. It continues and we have part of that inventory building was in anticipation that we needed to have substantially higher inventories to prevent customer disruptions in the event of labor difficulties.

With regard to markets, the tissue market remains fairly stable. We had decline in realization, which was not a price change per grade. But was instead

a mix change of the mix of the products we shipped. And that happen s from quarter to quarter either positive or negative. It is not unusual.

In the paperwork market our backlogs remain good. The market began picking up early this year. Our average realizations in paperboard increased in the third quarter versus earlier this year both first and second quarters, and we are seeing pretty good market positions there. We did have a decline in shipments in paperboard in part related to the fact that we had a major maintenance down time this year in Arkansas. And we did not have one at all in the year 2001 in Arkansas. And that major maintenance down time occurred in September. And that reduced production and shipments to a degree.

I'll turn it back to Gerry for financial numbers. We have a discontinued segment before I do which at a loss of 2. 1 million. These costs relate to winding down manufacturing operations at our Bradley lumber mill and at the printing papers mill in Brainerd Minnesota, both of which we closed this year. The Bradley mill was sold in August. And we continue seeking a buyer for the Brainerd, Minnesota mill.

Thanks Ken. I would like to go through some shipments and realizations detail from the third to second quarter and then maybe just a couple comments on financial matters . I will start through first on the shipment side . Again third quarter versus second quarter of 02 . O.S.B. shipments up 5. 7% . Lumber down 17.1%. Plywood down 1.7%. Particle board up 2%. Paperboard down 3%. Tissue down 5.4%. And pulp out of our Lewiston Idaho mill down 22.4% .

On the realization side O.S.B. down 5.3%. Lumber down 3.3%. Plywood down .7%. Particle board up 3.2%. Paperboard up 3.4%. Tissue down 3.2%. And pulp out of Lewiston up 2.1%.

What I'll do is give you some trend indications of September -- the move September versus the quarter averages. On realizations. O.S.B. up 2.4%. Lumber up .8%. Plywood down 1.1%. Particle board up 2.1%. Paperboard up a half%. Tissue down 1. 9%. And pulp out of Lewiston down 8.7%.

I would like to point out our major thrust with proceeds from our printing paper sale earlier this year earlier has been to reduce debt and I would like to clarify the progress we made here to date. From the end of the year we thus far paid down 4 94 million and change . And in addition have escrowed 15 million dollars towards the total M.T.N. payment due at the end of the first quarter next year. So to date effectively have retire 509 million and change of debt at the end of the year, which has been our major thrust. We continue to look for opportunities to reduce our leverage. As But we're pleased -- 118 million of that came in the third quarter. Those are the main points we thought we wanted to touch on. We would now like to open it up for any questions that anyone might have.

I would like to remind everyone in order to ask a question please press star and the number one on your telephone keypad.

The first question comes from Joe Stiveletti of Goldman Sachs.

I'm wondering if you could talk in terms of the softness you saw in the tissue business on the mixed side and explain why prices were down. Maybe you could expand on that and the volume decline year over year at 6% was also sort of significant relative to what we have seen in the market and I wondered if you could give us more color on that.

Jerry, I'll take a shot at it. With regard to the mix, Joe, it was a mix change primarily with less facial tissue shipped. Facial tissue is by far the highest priced product per ton and therefore a less proportion of facial and a greater proportion of everything else. That's really, that accounts for most of the realization change in the quarter. With regard to the decline in shipments, we have -- we're the sole supplier for a number of customers. And we have warranted to them that we'll basically supply them what they need when they need it. And where they need it.

Because of the labor negotiations in Lewiston, we have had a fairly substantial increase in finish goods inventory to be sure that in the event we're unable to come to a conclusion of the labor negotiations, and that's only in the event, that's not a forecast -- that we'll not have difficulty supplying our customers and not cause customer problems. So if you look at the inventories corporate wide while we don't break them out, the inventory build that you see corporate wide is primarily in paperboard and in tissue.

Jerry?

That's right. You hit them all.

But in terms of the volume decline of six percent year over year is more significant than the overall market. Did you have a particular reason why you thought that occurred?

Joe, it's a function of -- it's a function of our desire to build inventories and as a result in the tissue business for all-producers branded and private label half of all tissue at the retail grocery chain is sold under promotion s. It's a rare grocery store you can walk into without seeing promotions on some type of tissue products at all times. It may be end of the isle, it may be two for the price of one or two for three dollars instead of 1.90 each. But promotional expenses sell half of all tissue. And the other half is sold at normal retail price without promotions. The way in which you build inventory if you desire to do so, is to alter the promotions so that less product is sold promotionally. And so you can in a fairly short period of time have a substantial effect on the amount of product sold and the amount of inventory on hand just by altering the normal mix or promotions you go through every quarter .

The other question I had, I was wondering if you could bring us -- update us on your bank facility, what you had done there. You talked a lot in your latest filing about wanting to rework that facility. I know it's unused in terms of covenants and whatnot given the progress you made with asset sales and debt reduction.

Sure, Joe. We completed our amended revolver during the quarter and essentially left the same 200 million revolver in place, change the amount of L.C. capability under it, but not of it is drawn and we're not using any of it currently. It's simply available.

As far as other things that took place, I think the main thing we were looking to do was take the collateral out of it which we took the timberlands out as collateral which are no longer in there, and changed it to just a borrowing based collateral on working capital so if we draw under it we would provide working capital collateral. But that's it. Other than that some of the tests were changed a little bit but we still have basically the same test. I can't think of anything else of real significance. We loosened up on ability to spend capital dollars, lease dollars, that sort of thing. But basically it's still the same agreement that we had.

But you loosened it up and made some changes where you think it's something that will be good for you in terms of operating with this facility for a while?

Yes.

And the maturity is the same?

It's three -year maturity.

Ok. Thank you.

Our next question comes from Andy Fineman Meridian Asset Management.

Can you please just give us your version of what you think is going on with the price of wood, or the price of plywood and O.S.B. and lumber in general? And what you think the outlook might be? You said you didn't think -- you don't expect any improvement in the near future, but what do you think is happening.

I'll give you my take then Gerry can jump in. Clearly demand has been quite good tied to housing and overall uses in the economy. With regard to lumber, what we have seen, we had a tariff on Canadian lumber which was imposed in May and contrary to what most people thought, including what I thought, the pricing has dropped since then as virtually all-producers in both U.S. and Canada have tried to run at a greater production rate. So the overhang of product has been greater than the market demand, which has driven prices down.

There is probably as much down side in lumber at this point looking at cost structures within the industry. But, until we see some permanent closure in the industry, or some rationalization, we're probably not likely to see a major uptick in lumber, in my opinion, looking forward to the next few months. I think there is just overcapacity.

In the O.S.B. and plywood situation I think the supply and demand is a little tighter, but is close to being in balance. But, there clearly has been enough product.

But, both of these markets you should think of like the commodities markets because they really are commodities and they trade that way. You have a constant battle between buyers who have gone to just-in-time-inventory and when the thousands of buyers think there is a decent chance that prices may drop they withhold orders as long as they can hoping to make prices drop. And you have the same thing on the sellers' side who attempt to keep order files and not cut prices and hope the buyers have to come back in. There is a constant battle that's always been true in the lumber and plywood panel markets.

But there has been sufficient production in O.S.B. and plywood to keep that balance probably tilted slightly to the buyers so every time there has been an uptick, buyers withhold orders and prices have come back down again. That's been true even in spite of a strong housing period.

That will clearly change at some point. The way in which it has changed in prior cycles has been a combination of just basic growth in the economy which gradually increases the usage, but in the last couple of cycles it has been tide more to the permanent closure of some outdated facilities that just can't compete. Many of those closures have come in plywood, some of the closures in this cycle have come in overall O.S. B. plants.

But I think that's the situation. We don't have a lot of new capacity under construction at present. But we have had sufficient production to -- without a lot of acts of God in terms of unusual events which pushed -- which increased demand in the short term period so that supply and demand have been in pretty tight balance but the buyers' have won that constant battle.

Jerry, anything you have to add to that?

No, that's it.

With the lumber tariff, I know that everybody increased production. But the question is why as a response to the tariff are the producers trying to produce as much as possible.

No run wants to be the person to shut down their operations. And to the extent that you can increase production, you lower your average production costs. And therefore, you help your cost situation that way. It isn't particularly logical, to me, that what we have seen - that what's happened is what's has occurred. It's not what I would have forecasted and it's not what most people were forecasting and it can't continue for an extended period.

You have a number of people running fairly heavily in the red. You have an additional situation in Canada where some of the Canadian producers probably feel they will get the tariff back as this process wends its way through the appeals process between the U.S. and Canada and the W.T.O. process. There is a substantial chance the Canadians will win and the tariff will be abrogated. There is substantial chance the Canadians will lose and the tariff will become permanent. But if you are a Canadian producer or many of the Canadian producers believe it will not last and therefore tend to overlook the "short term loss," because they think they will get the tariff money back.

You mean there's a refund?

Yes.

Ok . I appreciate that explanation. First of all what I think I heard you say to the last guy was the reason tissue volume was down 5.4% was because you offered less promotions. I guess the promotions that the supermarkets have are in response to promotion s they are offered by you.

That's correct.

So, it was kind of intentional.

Yes .

Then the last thing, what about pulp down 22.4% in volume?

We don't ship a lot of pulp out of Lewiston and the customer mix can change considerably from one month to the next . And that's essentially what has happened. We really don't have much of a change at all in gross realization but the freight to various customers can be quite a bit higher and that's what essentially has happened in the third quarter as we got near the end of the quarter last month we were shipping to customers with much higher freight costs attached to them. So that trend analysis there isn't maybe as accurate as some of the others might be because of that one issue.

So, in other words , it's volume but it's measured in dollars? I don't understand --

It's a gross price which hasn't changed but higher freight in September than in the prior two months of the quarter . Net realizations were down quite a bit in September but it doesn't have anything to do with the gross price of pulp.

So the higher freight caused volume to decline .

It didn't cause volume to decline, it just caused a net realization and the price of that volume to be lower.

Let me take a slightly different tact on it. Jerry is right on the pricing. On the volume side, we're in the pulp business in Lewiston, Idaho to keep the mill lined out and producing at a constant rate on pulp. But our real desire is to use as much of that pulp internally as possible across the paperboard machines and the tissue machines. And what happens in pulp, frequently we see some fairly good-sized volume swings. Generally a drop in volume is good if the pulp mill is continued to run at a steady state. What that means is that we have been able to run more of the volume across our own machines and that is, from a financial standpoint, far better for Potlatch than selling the pulp and drying it than selling it as a residual. The volume change is coming from a small base. We sell externally something only on the order of -- I'm going to say roughly 15% of our volume annually is sold externally out of that pulp mill and 85 per is consumed internally. So a small change in the 85% in the ability to produce more tons across the paperboard machines or the tissue machines can have a fairly large percentage effect on the volume of effect on the volume much pulp physically sold.

I appreciate that. Can I ask one last question?

Sure.

I asked Jerry this. But basically you sold off some assets, you paid down debt and I guess what I'm getting at is how do we -- are there still strategic opportunities or do we just have to wait for the cycle now? I know you are going to pay down debt some more. I'm trying to figure out where my upside is going to come from other than waiting for the cycle. Are there things you are still trying to do to really improve this company. And what kinds of things might they be.

We have stated a number of times publicly with regard to operations that the one that's still running the way we think it should be is Lewiston, Idaho in the pulp and paperboard segment and we are making substantial progress there and have made a lot of progress the last 12 months. So other than cycle from running what we have now, getting Lewiston to the point where it is running day in and day out at its potential remains our largest operational issue.

The progress we made makes clearly more excited. We still have a ways to go on that. But that is different with regard to other strategic alternatives we don't forecast those but we continue to look at what we think may be in the best interest of the shareholders. That's kind of a -- I know that's a non answer but that's the on kind of answer I can give .

Thank you .

The next question comes from Richard Schneider of UBS Warburg.

I was wondering if you could discuss maybe looking at it a different way of the sequential change in profitability in the pulp and paper segment. There was a decline going from the second quarter where you earned 5.2 million to just earning 2.9 million in the third quarter. I'm trying to reconcile that with... I know tissue prices were lower but that was a mix situation . And we talked about the volume issues. And you are saying that you are making progress on turning around Lewiston but it didn't look like progress was being made in the third quarter and I'm trying to understand that. Was that partly due to this problem with the labor negotiations in the third quarter?

I would say it isn't so much the labor negotiations but certainly if you look at the amount of volume which we produced which went into inventory, that has a pretty substantial effect on the con super business and the net effect but probably lesser in the paperboard business. The other thing with regards to the mix and realization. Facial is the most profitable product generally if you look at broad categories. So a reduction in facial volume in the third quarter has a little bit bigger effect. Some of that realization while it is tied to a mixed question does affect profitability.

Looking out to the 4th quarter, is facial tissue going to be -- a higher percentage of facial tissue should be evident in the fourth quarter?

It certainly won't be any lower. I would expect it to be higher. But it does jump around somewhat on a month to month basis depending on specifically what products are being promoted by customers. There is probably less promotion in the facial area than for all of the others combined. But I would expect it to be a higher percentage of the volume in tissue.

Jerry, do you have anything different on that?

No , I don't. No predictions .

In terms of the improvements that you are effecting at Lewiston, in the paperboard area, did you see progress in the third quarter or is that just occurring slowly -- improvement from the second quarter?

I would say yes we did see improvement in the third quarter. The pulp mill is running very consistently at what it should be. On a day to day and month to month basis. The paperboard machines while not where I would like to have them, are doing better and have a better quarter in the third quarter than the second. So there is noticeable improvement, has been noticeable improvement there also. But it's been somewhat erratic Rich.

What is the cloud of the labor negotiations doing? I'm not asking you to debate or settle the labor issue on the phone here, but what is -- how do you think it's going to take to get some kind of resolution and obviously it's having some impact on operations one way or the other?

I would hope that we have a resolution of that within four to 6 weeks -- four to six weeks. If I could solve it on the phone I would, but I can't. We have basically gone and taken a look at all our competitors in paperboard and in tissue, and have gone back in negotiations to attempt to come up with a competitive package which includes some givebacks in areas where our contract was richer noncompetitive in relation to those people we're competing with. And that is always a difficult situation for employees and unions to deal with. Having said that, I don't think there has been -- there isn't the kind of long shore man union situation in Lewiston that we have people working to slowdowns, et cetera, so I don't think that has had a substantial effect on operations. I'm sure there are some individuals, but it would be hard to see in the overall numbers. But clearly it doesn't help morale and people are nervous when they are working without a contract and are not sure what's going to happen. But we're working cooperatively with the union. The union is working and understands that we're noncompetitive in a number of areas and will work with us to get to that competitive level.

Looking to the 40's quarter say there is no resolution four to six weeks and you got a deal trying to reduce what has been a built up inventory, so is that going to be the case so you'll have some effect to that?

I think we'll have effect to that, if I'm right and it's four to six weeks. That's the end of November. Then in all probability, much of that excess inventory will be carried over year end. And we'll go out in sales in the first half next year, probably the first two to four months, depending on the product grade. But so I would doubt assuming we have that agreement, rich, I doubt if we can have a substantial effect in reducing those inventories in sales in December.

Ok. Then any other impact, there has pen some press clippings out there online that indicate that you may be affected by the west coast situation, shipping out of Lewiston, and you know, it's ok, but getting to the ports to get board out has been problematic.

To date, I think there's been some effect, but I don't think we have seen much of an effect to date. There's been some delay in shipments clearly, but the customers we deal with overseas we attempted to ship some extras starting early this year because of this impending labor situation with the dock workers union. So I don't believe we have seen much disruption in shipments, Frankly. We may still because that situation isn't over and clearly the docks are not working as efficiently in part because of all the volumes of stuff that's piled up.

Just a couple other ones. The Warren strike how much did that cost you in the quarter?

The question was, how much the Warren strike cost us.

We have not put a dollar figure on it.

It cost us somewhat more than you might guess from the lost volume because our desire to run the mill to keep the facility running was maybe not the right decisions but financially the easiest decision. We wanted to have to the extent that employees are not members of that union or wanted to cross the picket line, we wanted to have a place for them to go. So we ran the mill pretty inefficiently for almost four weeks, three inch weeks. So the cost was fairly substantial.

Just fine two strategic questions. Why are you going to put a third shift on Warren in a market that's heavily supplied. Then the other question is during the quarter you announced you'll be putting in a small tissue mill in the west. I thought it was going to be in more the southeast just to expand your geographic ability to service customers like Safeway. Could you comment on that also?

Sure. I'll take the second one first. The tissue mill, we do have plans and are looking at moving east, Rich. But as we looked at the mix of product, this is a product which is a high end towel, a through air dried towel using proctor and gamble technology and is licensed under P and G. As we looked at where the volume of where our towels go 75% of it is in the west. Had we put this product in the Midwest, for example, which might be more likely than the southeast, most of the product would have been shipped back to the west. So the freight costs said that as you look at where the customer mix is, the best place to have it is in the west. Las Vegas is an efficient converting operation and as we look at Lewiston or Las Vegas was the best place to put it for high end towels. Just to make sure that's clear we can't -- we don't believe we can offer the high end towels in some places and not others. When we offer it, we must offer it to all of Safeway or all of Albertson's not just the place s closest to the mill. So the freight economics dictated where this machine went.

With regard to the third shift, I said there is an overcapacity in lumber and we are part of the problem as are all other producers. As you produce more product, you substantially lower your unit costs. And we have the ability to add a third shift and substantially lower our unit costs. And I'm aware that makes an oversupplied market somewhat more oversupplied, but that's really the best economic decision for Potlatch .

Thanks.

At this there are no further questions.

Marian, if there are no further questions we would like to thank everyone for joining us on this call and look forward to the next one. Thank you.