Potlatchdeltic Corp (PCH) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter Potlatch earnings conference call. My name is Steven (ph) and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session toward the end of this conference. (OPERATOR INSTRUCTIONS) I would now like to turn the presentation over to your host for today's call, Mr. Jerry Zuehlke, CFO.

Thanks, Stephen. Before we begin, I remind you this call may contain forward-looking statements within the meaning of the U.S. securities 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's 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 will now turn the time over to Pen Siegel, who will discuss second-quarter results and provide an overview of our markets.

Thanks, Jerry. I will go through, as I normally do, on a business segment basis, and then turn it back over to Jerry for some statistics. I will cover each segment in terms of what happened in the quarter and any trends which were underway at the end of the quarter.

In terms of Resource, we had a weaker than expected quarter internally, solely tied to weather. Log pricing has begun to increase in all regions, tied to solid wood, both lumber end panels. We had great wet weather -- unusually wet weather in Arkansas and we had similar conditions in Idaho, which limited our delivery of logs from our own timberlands to mills. Until we deliver them, while we have the timber cut and logs piled on the side of the logging roads, until we deliver them it doesn't constitute Resource income. You could in theory deliver logs in very wet weather, but you would do substantial damage to the road systems, and it would cost you more than it is worth.

As we look at the end of the quarter, conditions had dried out pretty well in both regions, and so log deliveries are back to normal, and we would not anticipate anything that happened during the second quarter having any effects for the full year in terms of our volumes of timber harvested and delivered.

Moving to Wood Products, we had, as all of you know, a very strong quarter in all products. Pricing started off the quarter very high and decreased during the quarter for OSB, which is our largest single-product category, although pricing has bounced here in the last week and we have extended order files there anywhere from out two weeks to out four weeks, depending on the specific thickness in product.

Plywood pricing, we are primarily an industrial plywood manufacturer, although during very strong markets we run extra shifts of sheathing, and have been doing that and continue to. Industrial pricing is quite strong, and our order backlogs are out quite a ways on that. And sheathing markets tend to follow the OSB market. Those markets sank somewhat in price, but still remained quite good.

Lumber markets during the quarter were quite good and really have not had the falloff in pricing that we have seen in OSB. And so those markets as we enter the third quarter remain quite strong. And we have a strong particle board operation. Those prices were gradually rising all during the first half, and we are in a good sales situation on that in terms of backlogs.

Moving to our Pulp and Paperboard segment, the market is turning. We have seen some price increases beginning to filter in from the announcements made earlier this year, although most of our improvement that we have seen to date is mix-related and not tied to actual price per grade of Paperboard, although that began to affect us more in June. The Paperboard market, our order backlogs are strong. We have been able to shift our mix away from lower grade products, which we were selling at this time last year and through the end of last year and into the first quarter.

Both mills also are enjoying improved productivity, especially at Lewiston, Idaho, where that mill is running -- on a quarter-to-quarter basis, continues to improve. And we did have some downtime or a throttle-back to a degree in our pulp production in the second quarter in Lewiston as one of the two recovery boilers there had its normal maintenance downtime. Not as big as what we incurred in the first quarter when the whole mill went down. But we had some loss of pulp production just because of the lack of the ability to burn black liquor in both boilers at the same time. That was over by mid-June.

Pulp prices have improved steadily from the beginning of the year, and our Lewiston operation does sell pulp, with about two-thirds of it sold to our own tissue operation, and we transfer at market, and the other third sold externally. So that has helped the realizations in our Idaho operation and we expect that to continue.

Moving to the Consumer Products segment, it had a small operating loss, less than that of a year ago and less than that of the first quarter. Markets continue to be competitive. We have now seen price announcements, which in the tissue business are a mix of price increases and less product per package, and it varies really depending on the grade of tissue. Those will become effective for us as the third quarter goes on, and we are fairly confident those price increases will stick.

The tissue business was hurt to some degree first quarter to second quarter by rising pulp prices because it pays market prices to our Pulp and Paperboard operation, although Potlatch as a Company is more or less immune to that because we sell almost as much as we buy in total. That market does show signs of improving. We have had a number of inquiries from smaller players in the business looking for parent rolls of tissue, the large roles coming off tissue machines, in the last three months, who have been cut off by their normal suppliers because the normal suppliers needed the product internally for their own products. We are not a current roll seller at most times in the market and have not been during the second quarter, either. Jerry, I will turn it back to you for some statistics.

Thanks, Pen. What I would like to do is go through some shipment and realization numbers. What I do is read the change from first quarter to second quarter sequentially, and I will go down through the main product lines that we have. OSB shipments -- I will do all shipments first -- OSB shipments up 4.5 percent. Lumber shipments up 3.9 percent. Plywood down 3.8 percent. Particle board down 3 percent. Paperboard up 8.8 percent. Pulp up 10.4 percent. Tissue up 10 percent.

On realizations, I will give you again the sequential change in pricing, as well as the trend, meaning the last month's price versus the current quarter's price -- or the second quarter's price. OSB up 19.1 percent; however the trend in the last month was down. Lumber up 16.9 percent; again, the trend down in the last month. Plywood up 7.9 percent; again, the trend down in the last month. Particle board up 11.2 percent and the trend was actually slightly up in the last month. Paperboard up 1.6 percent and the trend was relatively flat. Pulp up 18.7 percent and the trend up. And tissue up 2.2 percent and the trend up in the last month.

We also, just statistically, had interest expense of about 12.5 million in the quarter, up slightly from the first quarter, partly due to not being hedged on our sub-debt for about 1.5 weeks in the first part of the quarter, as well as our interest rate on the hedge when we did put it back on being slightly higher than it was in the first quarter.

CapEx was about 12.7 million in the second quarter, very similar number to the first quarter. DD&A at about 25 million, slightly down from 27 million in the first quarter. We had just over 200 million in cash at the end of the second quarter, and thus net debt went down about 100 million in the quarter, and net debt has declined a little over 200 million in the last 12 months. With that, Steven, we would turn it back over to you to take any questions that we might have.

(OPERATOR INSTRUCTIONS) Rich Schneider of UBS.

I was wondering if you could talk about the Resource segment and what you are expecting in the second half to make up for the volume that you lost in the second quarter due to weather. And could you give us a quantification of how many tons maybe you lost in the same quarter that (indiscernible)?

If you tend to look at our -- by the end of this year, if you looked at our deliveries of wood from fee lands, both to ourselves and to others that we sell logs to, the number will be extremely close to that of last year. So we would anticipate making up all of that volume. We actually in the South had such wet conditions that we, as well as a number of other producers, took some manufacturing downtime in lumber because we ran out of logs -- unable to deliver logs not only from our own lands but everybody else's lands because of the wet conditions.

So the second half will be stronger than a normal seasonal Resource business, if you can ever use the word normal in a weather-related business. For the full year, Rich, we would anticipate no impact at all, but it did hurt the first half and first quarter. In terms of the volumes, volumes delivered on a tonnage basis are off about 20 percent. That is a little misleading because the place where they were off the least was in Minnesota, which is the least impact because of the lower price of wood.

So looking at the second half, do you get an immediate bounce-back in the third quarter and less so in the fourth, or do you see it as being evenly split in Resource makeup from the second quarter?

From a log delivery standpoint, again realizing that weather does have an effect month-to-month, it is probably pretty similar in both quarters. We are also in the business of selling higher and better use lands and/or lands that are not particularly well-suited or as well-suited for timber growth, and we have those transactions when we have those transactions. So we don't attempt to plan them on a monthly or quarterly basis to smooth anything. We merely run that business to generate the maximum cash for the shareholders at the proper time. So that tends to cause the numbers to jump around a little bit. That was also a factor in the second quarter, where we head substantially less than normal of those sales, again using the term normal somewhat loosely.

Okay. And looking at Wood Products, obviously a stellar quarter. And from the realization that Jerry just gave, it looked like you were up something like $60 on OSB quarter-to-quarter, which I think reflects some of the backlog that you had.

As you look into the third quarter, with prices down, that starts to work against you. In that correct? Because Random Lengths was only up about $10 and it looks like you were up 50, which is substantially more than that. Could that reverse itself and you'll be down worse than Random Lengths in the third quarter?

Anything is possible, Rich. It is less of a backlog question than it really is of a backlog management question. In hindsight, we pulled the trigger at the right times to extend backlogs, much more so than the industry, and therefore locked in some higher prices in a falling market, so that our prices were clearly better than Random Lengths or Crow's, I think, although I haven't done the calculation that you have.

Historically, we have had a good track record of anticipating markets and knowing when to really push the backlog and when not to. But that means historically we have been right more than two-thirds of the time, which means sometimes you're wrong. It isn't a backlog issue, though. I would not draw anything into the conclusion other than the fact that to the extent that we did have higher pricing because we extended backlogs, all things being equal, our price will probably drop more than Random Lengths because theirs was tracking more or less on a week-to-week basis.

Okay. And could you give us an update on how things are going with your specialty OSB?

They are actually going quite well. They were slow during the very strong markets when there was an apparent shortage or pure (ph) shortage or difficulty in getting products. It is harder to sell specialties then, because all somebody wanted was OSB in a truck, and they didn't care much what it was. The specialties business really has taken off again in June, and we are having increasing acceptance, very good acceptance with the radiant barrier board and increasing acceptance with the termite- and fungus- and, to some degree, mold-resistant board. So that business will be much better in the second half than it was in the first half, during a period of extreme demand.

And just on tissue, could you give us an idea of how things are going from an operational basis? You didn't get much of an improvement in the quarter, though your volume, you said, was up, I think, about 10 percent from first-quarter levels. Was there anything else -- I know pulp was up, but is that the key thing that really held back (ph)?

The tissue operations ran well. The new machine is running well. The new product is being well accepted. The TAD towel is being well accepted in the marketplace by consumers. But that price that I think Jerry quoted to you, which was almost a 19 percent sequential increase in pulp, is about the only thing that really hurt tissue in the second quarter in relation to the first.

Okay. And last question, you had a big increase in cash, something like 117 million for the quarter. Some of that was, it looked like, working capital reduction. Some of that is, I imagine, a low cash tax rate. Are those two contributors? And then, finally, related to that, what is your plan for all this cash that's now on your books?

Let me take a quick shot at it and Jerry can correct me if I'm wrong. About $20 million, roughly, of the increase in cash and decline in working capital is a function of seasonal aspects related to logs, which actually went down somewhat more than normal because of the wet weather. We had fewer logs in inventory. And if you look at the December 31 wood inventories of all types in the mills, both chips and solid wood logs, that number was about $20 million higher than the number which existed at the end of June, and we would anticipate that to build back.

To the extent that OSB pricing tails off in the second half from the first half, you get a partial offset from receivables. Receivables are clearly tied to the selling prices. So that is the only two unusual things you would look at end of year or end of first quarter to end of second. With regard to the other in terms of patches, you are correct. We have operating NOLs from a carryforward standpoint, and as a result, we're not paying much in the way of cash taxes.

And use of cash that you have -- 204 million on the books?

We're going to continue to look for advantageous ways to retire debt, and we do that day in, day out. To the extent we can do it efficiently, we will do it. Otherwise, we will continue to build cash until we can effectively retire debt. That is our number one priority.

Number one bill (ph) is to get balance sheet back into a shape that we think is prudent and provides flexibility to the company to live through virtually any kind of situation. And we have, I think, publicly stated that from a debt-to-equity standpoint, that is somewhere in a 0.6 to 0.7 range of debt to equity. We are not there yet, although we are approaching it fairly quickly, and that is our number one priority.

So if you look at on a net debt-to-equity basis, obviously including the cash in it and you're pretty close, if you get in that range where you should in the third quarter, would you consider something like dividends?

The Board takes up dividends every quarter and discusses them. Clearly in our opinion, we would not recommend to the Board -- and the Board will do what it believes it should do -- a change in dividend until we are in the proper net debt position. And frankly, we would like to be able to pay down some debt and we are looking for ways to do so. The largest piece of debt we have outstanding is not callable until a little less than two years from now. But the Board will consider that, as well as other things that it believes are beneficial to the shareholders.

Thank you.

Sherman Chao of Impala Asset Management.

Just to clarify, the cash buildup that has occurred for this year is a function of the NOL shielding your earnings, on top of the earnings that you have reported?

That is correct; that is a big impact.

Also in the first quarter, there was a fair amount of option exercised, and I don't remember the exact number, which increased the number of shares outstanding and added to equity.

Second question, just in terms of since you have been very good looking at those key markets, what are you feelings now about the outlook for OSB?

You should all go out and buy some.

The market clearly has weakened somewhat to levels which we would be happy to have in most years. The demand remains strong. We had a pretty good bounce last week. As you know, it is a constant battle between buyers trying to hold off and not buy, hoping the price will go down, and sellers not wanting to cut price and holding off until the buyers need wood. There isn't a lot of wood in the pipeline. We did not see much of an entry last week during the bounce from the intermediaries, from the wholesale group. It was mostly real users who needed wood to deliver.

One of the things which helped the slide in our opinion during the second quarter was the extremely wet weather in the South, where the weather was so wet that you couldn't get in the ground and pour foundations. So it really did have an effect, I think, on movement of wood to the job sites. We expect the market to remain good probably into the fall, for both -- I will say for most structural wood products.

My impression was that we entered the year with fairly low log decks and fairly low inventories of OSB throughout the whole system. And that is why you had just a very, very brief correction in the first quarter and OSB continues strong. What is your sense of where the log decks now are and where the inventories are (indiscernible) the whole system?

It is clearly a qualitative judgment. My view of the inventories in the system are lower than normal, that there is not a great deal of inventory that has been backed up in the system. With regard to log decks, it is really a regional situation and it can change pretty quickly. We are having another hot, dry year in the West, or in much of the West, and as a result, there are already some pretty bad forest fires in places.

The extent to which the forest fires actually affect lumber production or mill production is kind of impossible to forecast. They had played an effect last year as we got later into the third quarter. They may or may not have an effect this year. Our log decks are still low in the South, but building, and we are in good shape because we've got all the logs. It's just been a question of moving them to the mills.

We are in -- we were later by almost a month in Idaho in being able to deliver logs, the fresh logs, and we are now in a hot, dry period out here, the normal summer. So that our log decks are probably slightly lower than normal, but they are building again, so that is not an issue. Beyond that, it really is a question of where individual companies operate and where they get their timber.

Okay. I'm coming to your log situation the way you described it, with what prevented you from moving their logs, I am just kind of curious. I understand what you are saying -- on a full-year basis, the profitability will not be affected. But in terms of how much were you penalized in the first half and how much of a catch-up will occur in the second half, any way of helping me figure out how to do the calculation?

You mentioned that volumes overall were 20 percent lower in the first half and (ph) the second half. I can go through some calculations with you (ph) on that. The second is really sort of the more expensive wood that you had to use in the second quarter from purchase wood, too?

The 20 percent I gave you -- I'm now looking back at the numbers -- that's probably not a great number. It's probably closer to 30, Sherman, as I look at --. Well, it's about 20 percent in second quarter to second quarter and about 30 first to second quarter decline. That's about as close as I can come.

Within that, we can have quarter in which in Idaho, as an example, the volume of logs delivered is identical and profit is half or twice, depending on the species mix. It gets to be pretty complicated. In the South, that really isn't much of an issue. In the South, we're talking southern pine and there isn't a species difference.

And that's where the bulk of the problem was in terms of your --

Both Idaho and Arkansas. The weather was worst in Arkansas, but we get hit in both places.

So there is no simple calculus to go through it and figure out what the impact might be for the full year, second half versus first half?

There's no simple way to do it at all.

(multiple speakers) there's a way we do it which involves a lot of data we don't give out. I don't know of a simple way to do it from the outside, Sherman.

Okay.

The questioner Rich asked is probably a good one, and that is while we would fully expect to make it up and see at least the kind of year we had last year, it is usually, if you look back through the years, more heavily weighted towards the third quarter, although fourth quarter is usually pretty good as well.

The other thing I would point out -- I should have -- with regard to your question. I don't believe it costs us a great deal by having higher priced logs in the second quarter from others. We didn't pay up for logs, and clearly, if it's somebody else's logs, we don't make the fee profit. But as you look at the full year, there isn't much impact of that.

Finally, on the Pulp and Paper side, the pricing on bleachboard, any sense of why the price increases or why it has been slow to have those price increases being reflected in your realizations? And then on the Pulp side, just curious what your outside pulp exposure is now.

With regard to Paperboard, the (indiscernible) in trade prices went in -- refresh my memory, Jerry -- my recollection is by the end of the first quarter. But that, as you know, is the lowest quality segment of the paper bleachboard business generally, although there are some exceptions. And so, we took that opportunity in a strengthening market to raise our prices much more than the price increases which were announced externally as a way of coming closer to equalizing profit margins on grades. So our prices went up much more, but we didn't sell much of it. Most of that business moved to other bleachboard producers. Instead, we shifted our mix into products which made more sense.

The cup price increases, the cup customers are clearly large, and as a result, our business with them is generally on a contract basis where we have contract prices for six to nine months. So the cup increases, while they stuck, we don't see them until the contract runs out and we renegotiate the next contract, so that delays it. And folding carton prices did not go up as much as the initial announcements. They went up by perhaps half as much.

And when is next contract renegotiation for cups?

It is almost monthly. We have got lots of them. (multiple speakers) It is not like -- in the Japanese milk carton business, for example, where we are major players, that is almost an annual contract negotiation with all players. These vary depending on who the customer is.

And then on your pulp exposure, what is your tonnage for outside pulp sales now?

Let me think about that one for a second. We are net buyers now to the tune probably of 15,000 tons a year -- that is off the top of my head. I will now doodle a little bit, and if that's the wrong answer, I will come back and give it to you, unless Jerry or Doug (ph) have a better number.

No, I don't -- not for purchased.

I'm looking at just the net basis. Net purchase. In the tissue business, about a third of the pulp we use is eucalyptuses or other northern hardwoods, but primarily eucalyptus, as is true for all of the branded people who produce high-quality products. And so we sell excess pulp from Lewiston, but were also bringing pulp into Lewiston and bringing some into Las Vegas. And with the new Las Vegas machine, we shifted from being a slight net seller to a slight net buyer, but it's very slight. You lose it in the rounding.

Okay, thank you very much.

Steve Chercover of D.A. Davidson.

Some of my questions have been answered, but I wanted some additional clarification, if possible, on the extent of your order files. Do they stretch out to what -- six weeks or something in April 1, when prices were really high and have you maintained that sort of a duration or --?

Probably at the maximum, Steve, there were about 5.5 weeks, but we have had a couple of periods where the market weakened. When it strengthened at the beginning of the year and prices shot up, we elected to push those order files as far as we could, and I think somewhat further than the industry average, from what I am told from customers.

And then as prices dropped, we sat on those other costs, sold a little bit more product. But when prices were dropping fairly sharply, our order files were dropping about one week per week, so we weren't selling much. And on bounces, we then extended order files again. So we have had order files as long as almost six weeks in the quarter and as low as probably four days.

So you look at your order file, its strategy would be kind of a like Slinky, and just take it out as long as you can when things are getting good?

I've never quite used the Slinky term, but you're correct. It is in part a question -- I said, we have been right more than wrong. Last year, one could argue we were wrong in the third quarter when we pushed order files. Had we kept files shorter with prices continuing to rise, we would have made more money. And it's a calculated gamble at any point in time as to number one, what's the base level of profitability and where do you think markets will go. We were surprised by how long markets were strong in the fall last year, as an example. So we did not -- in hindsight, which is always great, we did not do as good a job of managing order files as we could have, had we known what was going to happen.

Well, I guess if we knew what was going to happen, we wouldn't be doing this job. Now, although some people are ringing their hands over the decline in panel prices, there's clearly still good in historical context. Are you still adding extra shifts to make sheathing in the plywood business?

Yes.

Where would be the kind of threshold where that is no longer economic?

Quite a bit lower.

It is a moving target to some degree, Steve, because it isn't just a plywood price situation; it is a log price situation. And log prices are rising at this point because of the stronger -- as they generally do with the lag to end-product markets. The fact is that most of those logs are ours in Idaho, which is the only place we make plywood. But we are quite a ways away from deciding we'd don't want to run the extra shifts.

There is also a people issue of you don't want to burn your people out. At some point in time -- we didn't go out and hire a bunch of new folks to run extra shifts. This is done on overtime, and at some point in time, you decide you'll take a break or not run as many shifts just because of the drain on your employees. So it isn't in easy question to answer, and -- from a price standpoint, it is still quite profitable to run extra shifts of sheathing.

I guess to the extent that you are buying third-party logs, you want to be careful that you don't bid them up too high because they will be sticky on the way down, right?

They are generally sticky on the way down. In Idaho, we are almost self-sufficient, but not exactly with the right species and all the right size of logs. But if you just looked at our volume of timber harvest and our volume of logs consumed in solid wood, in the plywood plant and the two lumber mills, we could supply almost all of it from our own lands. But we absolutely do, we look at -- we generally buy or trade for different species or different sizes that fit our mills better and sell some that fit others.

Switching gears a bit, if I could, to tissue. The new production down in Las Vegas, is that still building inventories and being tested by your clients, or is that now rolled out and in the stores?

The answer is kind of yes. It's some of each. We've built some additional inventories during the second quarter of that product because it's a customer-by-customer situation. But we have rolled it out to a number of our customers and there are still others who are in the -- it's not so much product testing. Because it is a new product, it's a packaging issue.

We design the packaging to connote a premium product, considering what it is being placed against on the shelf. But each customer's packaging is different because it's their packaging. We do it, we design it and we pay for it, but in essence, it is their brand name, so there is always a longer lag with some customers than others to get the approval on the specific packaging design or should we make the flower an inch larger, etc. That kind of a situation you work through, and so it is an iterative process.

But as they sit there and kind of tweak their marketing and their packaging design, you continue to make the rolls?

Is there a way it could be shrink-wrapped or would that give you an opportunity to sell some parent rolls?

We certainly have the opportunity to sell some parent rolls. We have no desire to do so. If you look at the through-air-dried market, there really hasn't been a parent roll market for through-air-dried product of good quality. There has been occasionally with a couple of very early machines, which didn't produce very good quality. We have no desire to give our competitors a product -- private-label competitors a product which is as good as ours by selling them our parent rolls. And by the end of the year, that will not be an issue in any event.

Because it will be running full blast?

Yes, it will be running full blast and probably slightly more than in terms of customer shipments.

Got it. Okay, thanks.

Chris Knoll (ph) of Prudential.

I have a question about the -- in my model, I have $150 million revolver that went through in June '04. I was just wondering what you did with it.

We closed on a replacement revolver at the end of June, June 29. It is now $125 million. It is totally unsecured, much cleaner and easier to deal with than the last one.

That's it -- you beat me to my next question, was it secured. So that's all I have for you. Thank you.

There are no further questions at this time.

All right. Thank you, Steven, and thank you, everybody for joining us. We look forward to talking next quarter.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.