Potlatchdeltic Corp (PCH) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Q2 2005 Potlatch Earnings Conference Call. [Operator Instructions]

And now I would like to turn the presentation over to your host for today’s call, Mr. Gerry Zuehlke, CFO and Mr. Penn Siegel, CEO. Please proceed, gentlemen.

Thanks, Angela. Sorry for the delay - we had a little bit of technical difficulties here.

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 would now like to turn the time over to Penn Siegel, who will discuss second quarter results and provide an overview of our operations and markets. Penn?

Thanks, Gerry and good morning.

I will run through the current status of each of our divisions, each of the four divisions, in terms of what the current business conditions are and what happened, if anything unusual, in the second quarter.

I’ll start with Resource. The Resource business for us is a seasonal business every year and we always have some unusual year-to-year, from a quarter standpoint, changes just based on weather.

The first half of the year is seasonally weak for us in Resource and that was true again this year and the second half of the year is strong, seasonally, and it has nothing to do with pricing. It is really the ability to harvest and deliver logs. So we are following that same pattern this year. Log pricing is quite a bit better than it was a year ago, which accounted, really, for the improvement in income in the Resource segment.

In our Wood Products business, which is Lumber Mills, one Plywood plant and one Particleboard plant, that business was weaker than it was a year ago but still remains quite strong.

We did add a lumber mill, which we purchased from Louisiana Pacific, effective May 2nd. Which is in that segment for two months, or maybe a little less than that since we didn’t -- we purchased it May 2nd, but we didn’t purchase any finished goods inventory. So the results reflect two months of production but maybe only a month and a half or a little less of shipments as a result of that.

The Wood Products markets have gone up and down this year. They’re lower at present than they were earlier in the year, but remain at levels which we consider to be quite good. And we don’t see much changing there in the short-term in those markets, other than prices day-to-day, which is a normal event.

In Pulp and Paperboard we had an unusual quarter. We ended up with a substantial amount of maintenance, which was not planned, in our Idaho mill in a very large power boiler. Not the recovery boilers, but a power boiler.

And during routine inspection and maintenance we determined that we had some tube leaks and thin tubes and so we took that down for an extended period to work on it. As a result, our maintenance costs are quite a bit higher. It affects labor as well.

It also affects Energy, because that’s a boiler which produces 600-plus PSI steam, which is used first for generation of electricity and then for process, as we use the byproduct, lower pressure steam.

So we had to use additional external energy sources, both gas and electricity, and that hurt the second quarter in relation to a year ago and in relation to the first quarter. The additional maintenance expenses were greater than the change in income, both from second-quarter-to second-quarter and first-quarter-to-second quarter. So that was a somewhat unusual event.

Moving to the markets there, pulp markets have weakened from where they were earlier in the year and continued to slide somewhat and may now be stabilizing, although that’s usually hard to tell until 3 months later, but our demand has remained pretty good. We’re a small seller of pulp externally. We do sell pulp internally to our consumer operation and we sell it at market price, so, as the market goes down, the price drops to the consumer operation.

The Paperboard markets have remained pretty good; not as good as we had thought they might be at this time of the year. But they have improved both year-over-year and improved from where they were in the first quarter and we’re continuing to make progress there, in part, really, because of the change in product mix, as we’re upgrading our product mix in Paperboard.

In Consumer, we swung back to a profit in the second quarter. As we had commented in prior quarterly releases, we had a service problem when we brought on our Through-Air-Dried (TAD) machine in Las Vegas 18 months ago.

And we had continued strong demand for our premium towel - which, we thought, would go away - and get displaced by TAD towels. As a result, we had insufficient converting capacity and we’ve used quite a bit of outside converting, which is quite expensive and ran down Finished Goods inventory, so we were having unusual freight issues.

We were able to purchase a new converting line, which started up April 27th in Chicago or in the Chicago area. That line was in startup in May and June. As we went through and checked all of the various pack sizes that we make and made sure all of the equipment integrates, both baggers and case packers in the converting line itself and a number of other pieces of ancillary equipment.

We had a very good start up on that line. We are effectively out of outside converting in Towels and we are building Finished Goods inventory, which will allow us other fairly substantial price savings. So, May and June, even though there were start up and checkout marks on that line, for the division were quite a bit better than April, as a result of that new line and so that business is improving.

From a supply and standpoint, its improving as well and pricing is moving up without considering any changes in mix. Because the TAD towel that we make in Las Vegas, and that this line primarily is converting, is a very high-priced product, we’re also seeing realizations climb in the absence of price increases. But we’re seeing prices as well, on a differential basis, customer to customer, so that business is improving.

Other than that, nothing unusual in the quarter. Gerry, I’ll turn it back to you for some financial data.

Thanks, Penn. What I’d like to do, as I normally do, is go through some shipments and sales price per unit statistics.

I’ll do shipments first. Lumber was up 22.7%; Plywood up 21.4%; Particleboard down 6.8%; Paperboard up 10%; Pulp up 48% and Tissue down 6.3%.

On sales prices per unit, Lumber pricing was flat second quarter versus first quarter; Plywood pricing down six-tenths of a percent; Particleboard up 1.5%; Paperboard was up 1.0%; Pulp was up 7.8% and Tissue pricing up 3.8%.

What I’ve also done in the past is give you last month of the quarter versus the quarter to give you as sense of trend. Lumber trend was down, Plywood was down, Particleboard was up slightly, Paperboard was up, Pulp pricing was down, and Tissue pricing was up.

I will also point out our interest expense during the quarter was $7.2 million. We are at a consistent level now until we have anymore pay-downs, which won’t be until ’09, as scheduled. We have CapEx during the quarter of $43.1 million, which included $27 million for the Gwen Sawmill and we had depreciation of $20.7 million, which is a pretty consistent rate, quarterly, now.

The other note I might make before we take questions is that corporate expense was slightly higher than it has been and has been trending, which has been down, normally. Due to additional consultant-type expense that we’ve had over the last several months, even a couple quarters now, for our research that we’re doing into a potential REIT conversion. So we have booked some expense in to this quarter in particular that wouldn’t normally be there, but we would expect to have it throughout the rest of the year.

So, with that, I would like to open it up to questions, Angela.

[Operator Instructions] Joseph [Naya], UBS.

Hi, this is Joe Naya for Rich Schneider. I was just wondering if you guys might have any comments regarding IP’s announcement, specifically if you see any assets there that you might be interested in and how that might play into your conversion to a REIT, or a potential conversion.

Thanks. Generally, when people sell assets, we have taken a look at them. However, as you can tell from our history, we have acquired very little and frankly, the valuation of the potential REIT conversion, leading to a decision by our Board during this quarter as to what we’ll do, is our first priority.

So, while we will probably look -- we make look at something. I would think the probability of us doing something is pretty low and it is also conceivable that, when we see the packages, that we will elect not to even take a fairly cursory look.

Okay, great, thanks.

Kuni Chen with Banc of America Securities.

Hey, good morning.

Good morning.

Can you give us a sense as to kind of the working capital impact in the quarter? It looks like working capital was the use of cash, as inventories were up in the quarter. And can you also give us some more color behind what’s going on in inventories and which segments are contributing to the build there?

We had inventories rising, particularly in Tissue, as Ken noted earlier. We’ve had, over the last more than a year now, a build in parent rolls as we have the new Las Vegas line come on and produce TAD towel parent rolls and couldn’t convert them as fast as our customers would like us to.

At the same time, our inventory of Finished Goods was declining, which led us into some service problems. So over the last couple months we’ve been able to start building back our inventories of Finished Goods to a more appropriate level, to provide good service, and have yet to cut in too significantly into those parent rolls. So inventory has been building, in particular in Tissue, which we need for service levels.

As we get further down the line and line things out better with our new converting, we will continue to cut into the parent rolls and get them back into a better level. We also had some other inventory growth as well across some of the other areas, probably Paperboard most significantly of the rest of the segments. That would be mostly to supply and demand, as we continue to run well.

Yes, there’s one other. A year ago we were facing very wet conditions throughout the South and so our wood inventories, both at our paperboard mill and at the two large sawmills we have down there, were quite low in terms of the raw material inventories.

And the cost of that, especially for the paperboard mill, was very high, to be able to find fiber and keep that mill running, so the inventories are up, but prices are coming down. In the Fiber side, for paperboard, the log market is different. That’s not really effected very much by it.

Okay and as far as Lewiston goes, how long was the maintenance outage?

It was down -- the machines continued to run, but the power boiler was down for on the order of 8 or 9 days.

Okay.

I might go back to the Tissue inventory, just one other thing. We have been paying a lot for freight in Tissue and it’s related to service. As your finished goods inventories drop, we are shipping products to customers from wherever we could make it, adding substantially to freight. And the worst part of that is, firstly, all of those shipments were by truck, because you can guarantee a truck delivery in a couple of days and rail may take 10 to 14 days and be somewhat uncertain.

In order to really cut the freight costs, which we haven’t been able to do yet very much by using rail, we need the Finished Goods inventories higher. And we will start using much more rail between our distribution centers between, for example, Lewiston and Elwood, Illinois and between Las Vegas and Elwood, Illinois.

And the rail freight is much lower-cost than truck freight, even given the difference in time. You just need a somewhat higher inventory level. We’re not quite there, but we’re almost there.

Okay. I mean, again, digging back into Tissue, can you give me a sense as to -- if you try to normalize for the startup costs and the excess freights in the quarter and kind of normalize that going forward, what the I guess quarterly savings would be or some of --?

Well, the startup costs -- I didn’t mean to imply that they were bad startup costs, because we had a good startup.

Right.

It was 2 months of check out for various package sizes. But even with that and running at less than 50% of weighted capacity we were able to substantially cut our costs. With regard to freight, the freight number is one we haven’t quantified but it is quite large.

Okay. I mean, would you say that’s more than $5.0 million in the quarter or are you saying--?

No, that’s one we haven’t quantified and probably won’t. It is a moving target, because lots of things go on, on the freight side - fuel surcharges, etc - but it’s quite a large number.

Okay, thanks. I’ll circle back.

Follow up question from the line of Kuni Chen with Banc of America Securities.

Okay, thanks. I guess everyone is busy on the IP call. As far as Paperboard, can you give me a sense as to the run rate? Early on in the third quarter here it seems like the seasonal pick up in the second quarter was lower than normal, so I just wanted to get a sense as to what you’re seeing in some of the end markets there.

The cup market is pretty strong but it the season for cups. Liquid packaging is reasonably strong. The place we did not see as fast a seasonal pick up and still haven’t seen as much as we have anticipated is in Folding Carton. And that business is good but it’s not as strong, seasonally, really normally starting around sometime in May, maybe late April, as we would have seen in prior years.

And our customers seem to be fairly busy and we’re getting good order flow. So we’re not, at this point in time, building inventories. But we would have expected more, probably, inventory rundown late in the second quarter and we haven’t seen a big surge, so far, in the third quarter.

Okay and can you remind us again what the status is with some of the capacity investments on the Paperboard side? Is that going to go through in the third quarter? Just give us some sense on timing.

We have nothing large. We’ve got -- this year we have a much greater capital spending, absent Gwen, but the largest single item there was $7.0 million to totally replace kilns at the large sawmill in Lewiston.

Almost all of the projects we have are small and most of them were high return projects, which we had deferred from prior years because of capital constraints. There’s nothing large in the Paperboard side. There are a lot of small ones. Some of those are completed. A number of others get completed in September and October.

Okay and one final question just on the Tissue side of the business. Can you give us an update on where you are with sheet count reductions and also, talk about the market’s discipline on pricing with pulp prices coming down in the last couple of months?

To date -- I’ll take the second one first. The pulp pricing coming down to date has had no impact that we can see on market pricing and part of that market pricing is purely sheet counts. We’ve seen some actual price increases on a customer-by-customer basis. But we’ve also seen sheet count reductions where we’re following.

There is another sheet count reduction, which is in play now, a fairly large sheet count reduction in premium and ultra bath tissue, which is a large category for us. And in one case it caused us to defer the prior sheet count reduction with one large customer and instead, put both of them in at the same time.

All of ours, with the second round of bathroom tissue, will be in place October 1st. All customers have accepted it. We’re already producing it now. We have the packaging approved for most of it and we’ll have all of it approved by mid-August. So we will be in a position to roll that out.

We elected, with one customer, not to reduce the sheet counts because, from an earlier -- we had a longer negotiation with that customer and by the time we got approval, the packaging costs and changeover costs would have been greater than making it all at one time, in October.

But we’ve seen really nothing on the -- we continue to see somewhat competitive activity in private label, from what we saw one or two years ago, and that hasn’t changed at all. We have gained some private label business from other suppliers, in a couple of cases, and we’re looking at some additional that we may or may not elect to serve, just depending on really location and price.

Okay, great. Thanks again and good luck in the quarter.

Thanks, Kuni.

Leo Larkin with Standard Imports.

Good morning. This is Leo from Standard & Poor’s substituting for [Brian Carts]. Could you just give some guidance for CapEx and DD&A for this year and net of the acquisition?

Net of the acquisition, we have $108 million, which also included some carry-overs from last year that was money unspent at the end of the year. DD&A should run in the low $80 million range, about $80 or $82 million, depending on how rapidly things get closed up and we start depreciating new projects.

And it would be normal for our Cap spending to fall short. We usually have some projects, which carry over into the following year, and while we will spend money on the projects ultimately, some of that spending falls into the following calendar year. We never know what that is until we get close to the end of the year.

Okay. In 2004 working capital, a fairly large use of working capital, should that come down this year? Should that be a little bit less of a drag on your operating cash flow?

I would think, from an inventory standpoint, inventories will be coming down. Receivables track pretty well what’s happening to sales and pricing and receivables will be going up, I think, at a smaller rate than inventories will decline. And with regard to cash, we’re probably around the low point of our cash cycle this year.

Okay. It looks to me as though your payables were also a fairly large component of the use last year. Should that we coming down? I’m just trying to get a sense of what the change might be, making of let’s say if the inventories and receivables sort of net out one another. It just looks like it should come down and going back, it just looks like it was awfully large compared to your recent history.

Well, payables would be hard to peg. I mean, they’re certainly going to grow with larger CapEx [inaudible - multiple speakers] --

Right. Okay.

They would also grow relative to the increased sales and shipments, because you’re using more chemicals and everything else to make a product. So as we grow sales and have CapEx, payables would grow somewhat.

Okay. All right. Thank you.

Gentlemen, at this time, we have no further questions in queue.

Okay. Thank you very much for joining us, everyone, and we’ll talk to you next quarter. Thanks, Angela.

My pleasure, gentlemen. And thank you for participating in today’s conference. This does conclude your presentation and you may now disconnect. Everyone have a wonderful day.

Thank you. 5