Potlatchdeltic Corp (PCH) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2004 Potlatch earnings conference call. My name is Kristy, and I will be your call coordinator for today. (Operator Instructions). As a reminder, this conference call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Gerald Zuehlke, Chief Financial Officer. Please proceed, sir.

Thank you, Kristy. Joining me today is Penn Siegel, our CEO, and Douglas Spedden, our Treasurer. 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'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 would now like to turn the time over to Penn Siegel, who will discuss fourth-quarter results and provide an overview of our operations and markets. Penn?

Thanks, Jerry. I will first go through the release that went out, and presumably, listeners have that. So I will not cover the financial details. We will answer questions only if you would like. I will go through on a product-line basis, starting with resource -- resources earned 20.9 million in the fourth quarter, up from 17.3 in the fourth quarter last year. That was primarily due to strong markets for logs in Idaho and higher log pricing. Log pricing is also up substantially in the South in Arkansas for us, but our shipments or deliveries of logs were down fairly substantially in the fourth quarter, based on unusually wet weather and inability to bring logs out of the woods without really tearing up roads, which we don't do. So, those shipments were down substantially.

In terms of the markets, at this point in time, because of the next segment wood products, log markets are strong in all areas where we operate at present.

Moving to wood products, we earned 6.4 million, up from 4.8 a year ago. Lumber markets did have a seasonal sell-off -- fairly substantial sell-off fourth quarter versus the third but remained quite good during the quarter in relation to what we normally see in fourth quarters. Those markets have remained good and have actually improved in the last 5 weeks, and we anticipate going forward. Those markets may remain pretty good. It looks as if we will have a strong housing year again, although we don't get into forecasting housing. Those markets, though, are tied to the log markets I mentioned earlier in resource because one drives the other, and the lumber and plywood markets are quite strong today.

Moving to pulp and paperboard, pulp and paperboard earned a little less than $1 million, versus a loss of slightly more than a million a year ago. We had increased shipments and higher sales prices relative to a year ago. Paperboard markets are quite strong, but our fourth quarter was hurt by a couple of events. We had a normal scheduled maintenance downtime at our big mill in Arkansas for 5 or 6 days. It's a once-every-24-month major mill downtime that takes the pulp mill down totally -- takes the board machine down for a while. And that downtime -- while we budget for it -- it was extended based on things we found when we got into the mill. Maintenance expenses were somewhat higher than planned, but the mill was down for longer than planned.

In Idaho, we had a somewhat similar situation. We had a budgeted waterwash of the big recovery boiler, and that is something we don't do accrue for. But again, we found things during the waterwash which caused that downtime to last longer than planned -- again, by a couple days. In addition, we had -- on our #1 paperboard machine in Lewiston, we had that machine down for an extended period to install new equipment aimed at both quality and productivity. And we had a somewhat rocky start-up in that new equipment. It is now running quite well. It was the first installation of equipment of this type in the U.S., and we, as a result, had not run it before. It took us a while to get on top of it. All of those things hampered the pulp and paperboard division in the fourth quarter.

Moving to consumer products, we had a slight loss of $100,000 roughly, compared to a loss of 700,000 in the fourth quarter a year ago. The consumer markets have remained competitive, although they are improving, and we have made some gains on our service levels and now are converting during the fourth quarter, relative to earlier this year. We still have a greater demand that we can service adequately with our current converting lines, although we are improving our productivity there. We have a new towel line starting up in April, and a couple of months after that start-up, I think all of our service-related issues and cost issues tied to them will be behind us -- probably by the end of the second quarter.

That market is improving as we look at, although it is still quite competitive. Jerry, I will turn it back to you for some specific details on shipments and pricing.

Thanks, Penn. What I will do is -- as I normally do -- go through the shipments and realizations by segment, by product line. I will start with shipments. Lumber shipments were down 10.1 percent, plywood down 6.2 percent, particle board down 25.6 percent, paperboard down 15 percent. Pulp was up 93.1 percent, and tissue shipments were down 6.3 percent. These are all sequential quarter-over-quarter changes. Realizations -- lumber was down 12.8 percent plywood down 12.9 percent, particle down 10.4 percent. Paperboard up 3 percent, pulp down 12.2 percent and tissue up 4.4 percent.

I will also give you a feel for trend, December versus the quarter average for the fourth quarter. And in that case, lumber was basically flat. Plywood was down. Particle board was down. Paperboard was flat. Pulp was up, and tissue was up.

Additionally, I would like to give a couple of little statistics here. Interest expense in the quarter was 9 million. Going forward on an annualized basis, we would expect about $29 million, barring any further reductions of debt, which at this point, we don't have any specifically planned.

CapEx for the quarter was 12.9 million. Year-to-date -- or through the year was 48.9 million on continuing operations. We actually spent 55.1 million when you consider the OSB operations, which are now gone. DD&A for the quarter was 26.4 million. That included a fairly sizable amount for amortization of deferred loan costs, which we wrote off, having paid down 282 million worth of debt. So on an ongoing basis, we would expect quarterly DD&A to be approximately 22 million on a quarterly basis. With that, Kristy, I think we can turn it over for questions.

(Operator Instructions). Richard Schneider, UBS.

Jerry, you mentioned CapEx numbers. Could you give us now what your view is on '05 in terms of capital spent?

Yes. We anticipate a capital budget for '05 of around 90 million. That's up somewhat from what we've done over past years. We felt that we've had a number of years where we've covered everything that we had to cover absolutely but didn't take opportunities for high-yield projects that will keep us up with what we need to do to stay competitive in the industry. So, the budget is up slightly and would be a little bit more than DD&A going forward.

Could you give us an idea on how much you are spending in the tissue- related areas, since that's where you're having some of the issues with capacity?

It's a fairly small number, Rich. As you look at our capital budget, there are -- I think the largest item may be a $7 million item, and there are a lot of small items. The line we are -- the new converting line we're putting into Illinois -- we spent some of that money in the fourth quarter of last year. And the rest of it will be spent this year, but tissue is a fairly small part of the total expenditures.

Pan, if you look at the tissue situation and your limitation on capacity on the converting lines, roughly, could you give us an idea how much all this is costing you because pricing is going up, as you clearly indicated. Sequentially, I think you are up 4.4 percent. So you should be benefiting from that standpoint, yet you're still sort of at a breakeven level. When you start to get these issues behind you, I'm just trying to figure out what this has been costing you and what things could possibly look like going forward?

We -- I don't believe we have commented on the specific costs, Rich, other than the fact that they are expensive. Frankly, even internally, a number is not that easy to derive because it's -- it is an attempt to estimate -- to look at what costs actually are versus what they would be if we were not converting things in strange things on short lines and then shipping them further. But it's a substantial number. Prices -- part of what you are seeing in terms of our realizations going up is just the increasing acceptance of the pad (ph) towel, which is a more expensive product to make but is also a much higher-priced item per ton. It's -- the numbers are quite large, in terms of the cost effect, but I don't believe I want to try to quantify them.

Are you seeing price increases out in the marketplace in terms of your realizations because probably your competitors have reported. And I think Kimberly was up something like 8 percent year over year in your North American consumer tissue prices, and GP was up 12, and some of that was mixed. Could you give us an idea why you may not be seeing -- maybe not quite that kind of an increase but a fairly large increase in that area?

Actually, our average realizations, fourth quarter to fourth quarter, in tissue are up a little bit more than 10 percent. Again, some of that is mix. We're seeing, I think, the same increases but probably with a lag. The largest increases we're seeing, Rich, are in sheet count reductions as opposed to actual price increases, although the effect is the same. And because we are a private-label producer as opposed to branded, we match what the brands do. But there is a lag because we have to work with our customers to get them to accept the sheet count reduction. And they all do, but it takes some time. Then, we have to change the packaging for those sheet count reductions.

So, when Kimberly-Clark, for example, does a sheet count reduction, they basically do all of their packaging because they own it. It is their label, and they can have it ready to roll out as soon as they announce it. It takes us probably six months for that to roll through the system.

So, one way to look at this going forward is, theoretically, the second half of 2005, we should see some strong improvement in the results, everything else being equal?

I think that would be a logical forecast. I think we will see sequential improvement going forward quarter to quarter as we move through and see more of the price increases come through and as we're gaining on the converting side as well, because we are.

And then on pulp -- the paperboard side. Could you give us an idea how much the all this downtime cost you and do you have any downtime in the first quarter in that segment?

We have a -- I believe we have a downtime scheduled in March in our Idaho mill, which would be budgeted. What hurt us here was the length of time which we did not budget in both of these. And in terms of the third quarter to fourth quarter -- if you take a look at the income in the third quarter and you take out the $3 million that we had from a deloitte (ph) settlement -- because that was clearly a onetime event. More than half of the decline from third quarter to fourth quarter is a result of downtime.

So, in other words, some of that will come back in the first quarter, despite the March issue?

Yes, we also have -- as we look at the market, the market is quite strong for this time of the year. We have announced a $40 increase in our cup stock, which is effective in about 2 weeks, and we have announced a $40 increase on folding carton, which is effective in mid-March. And we expect both of those increases to primarily stick. There is always some -- as you deal with each customer, we may elect not to raise the price fully across the board in competitive situations. But most of those increases will also go through, Rich.

Well, there were 2 price increases in '04. Is there still some legacy from those? My understanding is if you have long-term contracts, then it's tough to obviously push this through at a rapid pace.

The long-term contract which is probably the biggest is -- would be as it refers to offshore liquid packaging paperboard, where almost all of that is priced on an annual basis, and those prices rollover in the first quarter. So those did not go up last year but are going up now -- or have gone up now. With regard to the cup market, that is when you are correct. There's still some prior increase rolling in on the cup stock because each one of those customers has a different contract length.

Okay. This is the last question. Could you give us an idea or any update on your study of rate conversion potential?

We are spending a lot of time working on it, Rich. Our Board has not yet reached a definitive conclusion. When we do, we will announce it one way or the other. And I would anticipate that our work looking at that will be done before the end of the third quarter of this year.

Before the end of the third quarter? Okay. Thank you.

John Master (ph), Intrinsic Investors

My question has been answered. Thanks.

That's the easiest one I've had, John. Thanks.

(Operator Instructions). Steve Chercover, D. A. Davidson.

I don't know if it was touched on in the earlier question, but what are the prospects for higher pricing in tissue going forward? I know there's a commercial increase that's in the works. Is that something that you can piggyback on or --?

I think that is such a different market that what happens in the C&I generally doesn't have any spillover effect, except that as that market is stronger overall, it tends to pull some volume, which can go either commercial or the retail level at home. So, there may be a modest secondary effect. The market seems to be improving as we look at it. It's still competitive. It is always a market where promotions are fairly heavy, even in a strong market. Perhaps 50 percent of the tonnage sold by both private-label and branded producers is sold under some kind of a promotion in the supermarket. And supermarkets use -- as do Cosco and others -- use it as something of a traffic builder. So there's always something going on. But that market seems to be improving, and the level of promotions is no longer rising and may be falling somewhat.

So, in the absence of any new pricing initiatives, it's just seeing the competitiveness go away and that raises margins?

It raises margins. I believe, Steve, my recollection is that the tissues sold under some kind of a discount in the retail chain speak at something more than 70 percent of the total volume, whereas 50 to 55 percent is more normal. As that level goes down, in essence, pricing goes up.

So, would a return to profitability in the current quarter be likely, or is it going to take a little bit longer?

We don't forecast income, but I expect to see sequential improvement.

(Operator Instructions). Heather McPherson, T. Rowe Price.

Two questions. Can you give us some insight on what your pension assumptions are for 2005 in terms of contribution and year-over-year changes. And then, your thoughts on what we could think about for SG&A going forward?

First attention. We will show in our 10-K this year for our assumptions a 590 discount rate, a 9.5 percent long-term assumption for return, and I think it's 5-percent salary change which -- excuse me, 4 -- which is consistent on that end with what we've had in the past. We turned the corner during the year, based on asset performance and a $58 million pension contribution in the fourth quarter, we are now overfunded on all the major plans. And thus, we won't be required to make a contribution this year at all. We will probably look at what the minimum contribution is and take a look at that, but it's going to be quite small for sure.

And so, the pension -- I think there was probably a pension expense in 2004 (multiple speakers).

It was pension income in '04.

Pension income -- (multiple speakers).

In '04. I think it was -- Doug will look it up for me, but it's in the low teens and will probably go down about 2 million.

Down 2 million.

Pension income will go down about 2 million, I think -- forecast for '05.

Okay.

As far as SG&A goes, we are running normal admin without interest expenses in the low $20 million range. We would expect that to be pretty consistent. We've done a number of things over the last several years to cut back any excesses out of our admin. So, I think that's pretty normalized now.

Okay. So, the normalized SG&A, you think, for 2005 would be what?

Around the low 20s -- around 21, I think.

Is that just per quarter?

Yes.

Okay.

I'm sorry.

Okay. I think that's it.

Richard Schneider, UBS.

Just a follow-up on the resource segment. Could you give us an idea of what the volume was off? You said it was off substantially in both Idaho and Arkansas.

I meant not to say Idaho. If I did, I apologize. It was off substantially in Arkansas -- third quarter to fourth quarter by almost 30 percent.

And year over year?

Year over year was, again, 28 percent.

And that's just in Arkansas, right?

That's in Arkansas. Idaho was up year over year but down third quarter to fourth quarter.

Okay. So, if you look at it in total, is there a way you can give us what the large volume was in total year over year?

Looks like, year over year, about 10 percent.

10 percent down?

Yes.

Okay. And was that in sequentially?

Sequentially, less than 30.

And do you get any of this volume back in the first quarter, or is it sort of gone because the season is over -- or the weak season is over?

Good question. I don't know the answer, Rich. We will get it all back in '05, but the quarter in which it comes back again is a function of weather and the ability to deliver logs over road systems.

And you talked about pricing trends. Could you give us an idea of what log prices did both sequentially and year over year?

Log pricing year over year was more than 25 percent higher -- sequentially, around 8 percent higher.

That is a weighted average for all regions (multiple speakers).

Yes. All regions, all species. So, it can fluctuate greatly, which is why we don't normally give it out -- because it can be a little misleading. We have a waiting on a certain specie in a certain region that -- .

And that's mostly an Idaho issue. But Idaho is a substantial part of the harvest -- is close to half of the harvest volume normally. In Idaho, the price per species from cedar down to something else can be very, very large.

And what is your view on pricing in '05? Is it more from the fourth-quarter levels? Is it stable or do you think it could still be going up?

We don't -- again, that kind of gets into a forecast mode. If housing and, therefore, wood products pricing is strong, log pricing tends to follow that -- those prices with a lag of 6 to 12 months. And so, given the strength that we've seen, we enter the year with better pricing than the average for last year and probably some upward pressure still underway on log pricing.

Just a couple of last ones. Average share count at the end of the quarter, since you were buying back shares during the fourth quarter?

Well, we had -- what to know the end of the period shares -- total shares?

Right.

About 29.3.

That's the average.

That's the average, though.

I believe it's 28.54 or 28.6 (multiple speakers).

Okay. So that reflects the full 1.5 million that you brought back?

Yes.

And, just on the study you're doing on REITs -- why (technical difficulty) take until as late as the end of the third quarter to complete?

It takes until the board elects to make a decision, and we have a very active engaged board -- 10 people of whom I am the only insider. The others are all outside directors. And so, it is to the extent that we were to elect to move to a REIT that's clearly a very major decision long-term. The board is looking at all ramifications, and they will reach a decision when they reach a decision.

Heather McPherson, T. Rowe Price.

I'm sorry if I missed this. What was the average share price for your share repurchase this quarter?

4930. I could give you that get back to you specifically with that, Heather.

Okay.

But it is also -- given the way we did this on accelerated basis, there will be some adjustment at the end of the time when our agent has finished actually purchasing shares in the market -- some adjustment either up or down, based on what the average price is of the actual shares purchase. Half of the shares purchased roughly are hedged. Half are unhedged.

Correct.

Okay. I'm sorry if I missed this. Did you say given the amount that you thought you would do for 2005?

No. Given the program size.

Okay. But for 2005, under the existing program, is there any remaining amount that you (multiple speakers)?

No. It was an accelerated stock purchase, and we did it all at the time we announced it. Then, our agent will be covering that off over the course of most of this year. As that takes place, then we will have a settlement, and that's what Penn is referring to. We have half of the volume collared.

And there is no current authorization from the board, Heather, to purchase additional shares because we had an older authorization which we canceled at the time we did the accelerated purchase. The board clearly has the ability, if it so desires, to authorize something in the future, but there's nothing presently authorized.

(Operator Instructions). You have no questions at this time.

Alright. Thank you very much, Kristy, and thank you all for joining us. And we will talk to you next quarter.

Thanks.

Thank you for your participation in today's conference. This concludes the presentation.