Potlatchdeltic Corp (PCH) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Potlatch first quarter 2006 conference call. My name is Mike, and I'll be your operator today. [OPERATOR INSTRUCTIONS]. As a reminder, ladies and gentlemen, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your hosts for today's call, Mr. Gerry Zuehlke, chief financial officer; and Mr. Mike Covey, president and chief executive officer. Gentlemen, over to you.

Thanks, Mike. Before we begin let me remind you that 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. Also, before we begin, please note that segment information for shipments and prices per unit can be found on our website as part of the webcast for this call. I would now like to discuss our first quarter results, after which Mike Covey will provide some additional comments including an overview of our markets.

Our first quarter performance, excluding tax effects, which I will talk about later, were $0.35 per share versus $0.13 per share for the first quarter of 2005, and $0.34 in the fourth quarter. The additional 9.1 million shares issued on March 31st as part of our E&P purge has been outstanding for the entire quarter, earnings per share would have been $0.27. Revenues were $402.5 million, up 19% over last year, and 3.8% over the fourth quarter. Our resource segments earnings for the quarter were $14.7 million versus $9.5 million last year. The main drivers were higher-fee timber harvests in both Idaho and Arkansas together with higher sales prices for logs.

Better-than-normal seasonal weather conditions and strong markets, particularly in Idaho, allowed us to increase the harvest levels in the quarter. Our Boardman hybrid poplar operations earnings were less than last year's first quarter due to accounting practices, which require expensing of harvesting and certain reforestation costs that were capitalized one year ago. Our larges expense is depletion, and while that equates to lower reported earnings, it also has a positive effect on the cash flow statement. Mike will discuss both our plans for increased cut in Idaho and our Boardman operations in greater detail later in the call.

Our land sales segment had very little activity in the first quarter as was the case in 2005's first quarter. We did have land sales of $9.3 million and closed easements totaling 6.1 million in the fourth quarter, which added to the resource performance in the fourth quarter of last year. Mike will also discuss this segment later in the call.

The wood products segment had earnings $6.9 million during the quarter versus $8.6 million in last year's first quarter and $300,000 in the fourth quarter of last year. While all our mills ran well during the quarter, its shipments were higher at all operations with the exception of particle board, the combination of lower pricing and higher log costs led to earnings being lower than one year ago. Higher freight expenses from fuel surcharges accounted for most of the remaining variance.

When comparing to the fourth quarter, the main drivers were higher shipments for lumber and plywood and higher pricing for lumber partially offset by lower plywood pricing.

Pulp and paperboard operations experienced a loss of $2.4 million versus a gain of $2.4 million in last year's first quarter. While prices for our paperboard products were higher than last year, and shipments for both paperboard and pulp were higher than a year ago, higher costs for energy, freight, and chemicals -- all oil and gas-related -- combined with higher maintenance costs more than offset the improvement in pricing and shipments. The energy costs were $2 million higher this year than they were in 2005's first quarter. We normally do major maintenance work every other year in this division and have accrued accordingly for 2006. This accounts for $2.3 million of the difference in quarterly earnings. When compared to the fourth quarter's loss of $4.5 million, the main differences are better pricing, higher shipments, and lower energy costs by $2.3 million.

The consumer product segment had another strong quarter with $6.4 million in earnings versus a $1 million loss in the first quarter of 2005. Net selling prices were 12% higher, which is a combination of price increases and sheet count reductions, which were partially offset by higher parent roll sales, while shipments were 6% higher -- excuse me -- lower.

We also had a fire during the quarter at our Las Vegas mill, which interrupted a portion of our converting operation and cost approximately $1 million, primarily in damage to equipment and down time. We did not experience smoke or water damage to our warehouse inventory or the tissue machine. The fire would also be the main driver to the difference in the quarter when compared to the fourth quarter gain of $7.2 million.

During the quarter, we made our first quarterly REIT distribution of approximately $19 million and our earnings and profits distribution of approximately $445 million, which was made up of approximately $89 million in cash and 9.1 million shares. We were able to make the combined cash contribution of $108 million with a combination of cash on hand and very good cash flow during the quarter. FFO for the quarter was $33.2 million.

We also reversed $51.2 million of deferred tax liabilities to equity that were no longer required as a result of a REIT conversion. With these changes to our balance sheet and our E&P purge behind us, our debt-to-capital ratio at March 31 is a comfortable 34%.

I also wanted to provide a further explanation of our tax position. As a REIT, the corporate provision for taxes will only apply to taxable income generated by our taxable REIT subsidiary. Therefore, during the first quarter, we experienced a benefit of $2.4 million. In addition to taxable income generated by our TRS, any land sale activity from REIT assets during the first 10 years after our conversion would also require the corporate level tax.

I would now like to turn it over to Mike Covey for some comments, after which we will open it up for questions. Mike?

Thank you, Gerry, and good morning. I would like to start with an update on four initiatives that will result in additional cash flow for the balance of 2006 and contribute to our ability to grow the dividend, over time, and enhance the value of Potlatch to our owners.

Timber harvests and the associated cash flow from our largest and most valuable asset are $1.5 million acres of timberland were the building blocks that our board used to establish the quarterly dividend of $0.49 a share, or $76 million annually. Going forward, our ability to grow the quantity and quality of our timber harvest is key to growing the value of the company.

Last quarter we mentioned an initiative to increase harvest levels in Idaho. Beginning this year and over the next five years, we will increase harvests in Idaho by 25% or approximately 50 to 70 million board feet. Depending on market conditions, we will vary the harvest amount, and the majority of the volume will be sold as stumpage or log sales to external markets -- customers other than Potlatch.

All of the incremental harvest is financially mature timber with operability conditions and margins similar to our overall harvest mix. Another key component of value creation associated with our timberland asset is further refinement and assessment of those lands that have higher and better use potential. Potlatch has been active for some time selling conservation easements in a variety of small parcels primarily in Idaho and Minnesota for that high recreation value.

Earlier this month, we announced that Bill DeReu will be joining Potlatch to lead our land sales and development program. Bill's experience with Plum Creek, where he helped to identify, develop, and market rural properties in the Lake states and the West will jumpstart our efforts to create additional value of Potlatch. He will lead our effort to assess the potential of every acre for alternative values. By year-end, we will provide more insight on the character of our land base and the potential for additional value creation.

In January, we announced the construction of a new sawmill to process hybrid poplar lumber saw logs from our tree farm in Boardman, Oregon. This was a multi-phase capital investment with an initial $8.1 million investment focused on the construction of a hardwood sawmill. Subsequent phases were to include a boiler, dry kilns, a planer facility, and a significant amount of capital above the initial investment.

After thoroughly redoing the market development [audio break] product and the expertise needed to saw and dry hardwood poplar lumber, we feel that others may be better suited to take on that task while undertaking the inherent difficulties that go with greenfield mill startups. We have canceled this project and will begin to seek a hardwood lumber manufacturer or sponsor to install lumber, veneer, or engineered wood capacity onsite. In turn, we have an opportunity to structure a long-term supply commitment for a unique, renewable resource grown on an 11-year rotation. This arrangement better suits our strengths as a log merchandiser and allows us to allocate a significant amount of capital over the next two to three years and to growing the value of the REIT rather than a taxable REIT subsidiary.

We began harvesting timber at Boardman in the fourth quarter of 2005, and we are currently processing logs from trees that were planted 11 years ago into a variety of lumber products and chips using third-party contractors. We will harvest about 1,600 acres annually in the future, and produce approximately 350,000 tons of logs on an annual basis. Based on the past investment, the depletion and depreciation schedule associated with timber harvesting alone will generate $8 million to $10 million in cash flow annually prior to any additional contribution margin from log sales and marketing activity, going forward.

Shifting gears to our taxable REIT subsidiary and our manufacturing businesses, I'd like to focus on our tissue business for a minute. As Gerry mentioned, we had another strong quarter and believe this business will continue to perform well. We have a substantial market share in the at-home, private label tissue business in the West with a product line of bathroom tissue, towels, napkins, and facial tissue. Our two-year-old Through-Air-Dried tissue machine in Las Vegas, Nevada, is running well, producing tissue for our ultra and premium quality products. Demand for our conventional products has also remained strong, and we are currently short of converting capacity in some locations.

Last month we completed the relocation of a towel line from Benton Harbor, Michigan, to Elwood, Illinois, just outside of Chicago. By December of this year, we will complete the addition of a new bathroom tissue line in Elwood and through, at least, the third quarter, we will continue to sell conventional parent rolls on the open market to draw down finished goods inventory that has built during the relocation of the Benton Harbor converting line. By year-end, these initiatives will reduce inventory by $25 million.

We are optimistic about pricing on our bleached board paper business. Rising pulp prices have little impact on our paperboard business because we buy hardwood pulp, and we sell Northern bleached softwood kraft. However, a $10-per-ton increase in folding carton prices would translate to approximately a $4 million annualized improvement in our business. About half of our paperboard production is folding carton stock with the balance made up of cup and liquid packaging base stock.

Industry-reported backlogs for SBS orders are now at the highest level in more than a decade, since 1994. We expect better results from our paperboard business this quarter, although during April we did take a planned seven-day maintenance outage in Idaho that Gerry commented on earlier.

As anticipated, our wood products markets are weaker than at this time last year, and pricing has slipped since the beginning of 2006. We have adequate log inventory of all of our mills to get through the breakup season in the Lake states and Idaho. We anticipate the pricing may drift down further in the second half of the year in our wood products business.

I've spent the bulk of my time over the last two-and-a-half months visiting each of our businesses to gain an understanding of our strengths, meet the people who lead and work in each business, and to understand our product mix and customer needs. [audio break] message to Potlatch employees and stakeholders that we must use the REIT platform to grow the value of the company. We will continue to invest in the maintenance of our manufacturing businesses that are performing well. Over time, we will opportunistically growth the timberland base when we find assets that are financially attractive and located in markets with strong customers. We will begin to use 1031 exchanges to defer taxable gains from the sale of HBU and non-strategic land parcels as well.

Part of the challenge in converting from a C Corp to a REIT is driving the message to every employee that we need sustainable cash flow increases that demonstrate to our board that the business can support higher distributions to shareholders over time. As a REIT, we will only allocated capital to investments that are immediately accretive to cash flow and meet the objective of creating cash flow that is available for distribution back to shareholders.

And, finally, it's about driving home the message that we are more than an integrated forest products company; we're financial managers of assets, and the REIT structure is perfectly suited for Potlatch to deliver increased value to shareholders, going forward.

Mike, with that, we are now ready to answer any questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] Rich Schneider with UBS.

Mike, I was wondering, as you've gone through the operations, if you could talk about how you're approaching the non-resource part of the business. It sounds like you're going to provide capital to maintain those businesses. Are you going to be doing anything beyond that? Are you comfortable with that portfolio of assets?

Good morning, Rich, a couple of things -- I commented that we will continue to invest in the maintenance of good businesses that we currently are in, and I think that's the message that we've taken to everyone -- that these businesses are performing well under the umbrella of the REIT and the taxable REIT subsidiary. We will continue to invest in those. We will not growth the manufacturing subsidiary in the company. It is of a size currently that sits comfortably under the REIT -- under all of the REIT tests that we have to meet -- but we do not have substantial room to grow it at the current time but, more importantly, I just think strategically the advantage that we have is as a REIT to grow the timberland segment not the taxable REIT subsidiary.

And in terms of the timberland side of the business, could you talk about -- just from -- I know it's very early in your review -- but the kinds of HBU opportunities potentially out there for the company -- what areas would they fall into?

Well, I think if you think about we have 1.5 million acres in four primary states that there's opportunities that fall into virtually the entire suite of baskets in real estate opportunities from parcels that really are non-strategic and don't produce a lot of cash flow from either a timberland standpoint or that have much recreation potential and, clearly, we want to move those out of the ownership and reinvest the capital into better, more productive land.

On the opposite extreme, we have a fair amount of property in North Central Minnesota that's located around a very high-recreation corridor of lakes and golf courses and things that are within a two-hour drive of Minneapolis. Clearly, that has potential on the opposite extreme of property that has high potential for development.

And then we have a lot in the middle that -- and Idaho is probably a prime example of that -- that is just prime recreation property if not next to population corridors, per se, but it has recreation amenities that many people value for rural property. So it's the whole suite of things, and that was one of the reasons to hire Bill DeReu who has got expertise in this area to help identify and stratify that. And then, going forward, after he gets his feet on the ground, and he and I have spent more time with the company, by year-end we'll start to put some more color around the character of that property. It's too early to do that now.

And the 50 to 75 million of additional board feet coming out of Idaho -- is that roughly something, like, 12 million board feet a year of additional harvest? Is that the way to look at it?

No. It's a step up of 50 to 70 million board feet per year.

Okay, okay. And --

And we will -- it's financially mature timber, but we are not going to put it into a market that's saturated. So you'll see some flexibility in how we take that to market over the next few years. Some quarters it may be substantially higher on a run-rate basis than that; in others it may be lower.

And you're starting that this year?

Yes, we are. We started in the first quarter.

Great, and just an accounting question -- the additional shares coming from the REIT conversion -- and I know you showed it on a pro forma basis, and you come out with $0.27 using it. From an accounting standpoint, I was led to believe you go back, and you restate the numbers for the additional shares that are out there. Or is it just that the first quarter is below 30 million shares, and then every subsequent quarter is reflecting it, and you don't go back and restate it?

We will, on a go-forward basis, have -- the per-share amounts are dependent on the average shares outstanding during the quarter, and so I did that $0.27 based on if they were outstanding, but they obviously weren't. In future quarters, they will be. About the time we file our Q for this quarter, we will go back and reclassify certain numbers for the last three quarters of last year so that those are out there, and that will include segment information as well as per-share stuff.

Okay, so does that mean you go back, and you restate it for the almost 39 million shares outstanding?

I think we would, since we've done it pro forma for the first quarter. I don't have my controller here with me that I can [inaudible] the answer.

Okay, but from an accounting standpoint are you required to do that, or are you just doing that as a --?

We will do what's required, that's what we always do -- the SEC requirement will dictate what we do.

Steve Chercover with D.A. Davidson.

Yes, good morning. First of all, the decision not to proceed with the hardwood sawmill at Boardman -- does that in any way change the poplar plantations core element within Potlatch? I mean, is it still a core asset?

Steve, this is Mike. Clearly, it's a core asset. We have invested more than $100 million in Boardman over the last decade to grow the hybrid poplar resource that's there. Our belief is that there are others with deeper manufacturing and market development experience in hardwood lumber than within Potlatch. We have already put $100 million of investment in this fairly new resource. I think we're going to shift the risk and some of the returns on the upside to somebody that comes in and takes a third-party position to build manufacturing capacity either onsite or very close by, either in veneer, hardwood lumber, engineered lumber, whatever the application might be. We will take our share in terms of a log-selling price, and if a manufacturer is wildly successful, that's terrific, we hope they are. I think we can attract some really world-class investments to it, and we will be satisfied with the return on the log-selling price, and if they're successful, we'll gather part of that, going forward.

Well, I hope you'll answer this question then -- if you spent $100 million on the poplar plantation, do you believe that the net present value is at least equal or in excess of what you spent? Because that's probably not reflected in a lot of people's NAVs or perhaps mine, but I couldn't really guess what it's worth.

Well, I guess I'm not sure exactly what your question is. We think, going forward, there is a return that's still attractive to Potlatch by having another company invest onsite or close by to develop the manufacturing technology. If a point comes where we don't think that's the case, we'll reevaluate our position and exit the business but currently we're optimistic about it.

Okay, maybe asking the same question a different way -- would you spend $100 million on the poplar plantation from scratch today?

That's not a choice that's before us.

[OPERATOR INSTRUCTIONS] George Staphos with Banc of America Securities.

In terms of the further update on HBU, I realize it's a ways out -- will that take the form of an analyst presentation, a slideshow on a conference call -- what are you envisioning at this juncture?

I think at that point, when we're -- and that's probably sometime between eight and 12 months away when we have a good handle on the quality and quantity of the recreation and HBU asset that we have -- I think at that point we will conduct either one or the other, whichever is most efficient -- either an analyst presentation in a common location or an individual conference.

Okay, but, Mike, if you're saying eight to 12 months, we're really looking at this as more of an early '07 event as opposed to year-end?

Well, I guess, at this point the person that we've hired starts on May 15, I think, in fairness to him and the effort that he's going to lead, he needs some chance to get his arms around it, I think in the next seven or eight months in the balance of the year we'll make a lot of headway. Hopefully, by year-end, we've got it mostly done but it may take into the first quarter.

Okay, fair point. Two quick questions on the manufacturing side -- in tissue, you've seen now, as an industry, a couple of years, at least, of pricing either through actual price increases or sheet count reduction. There have been periodic announcements of capacity coming into the industry. Do you think at some point prices may start to slip either because of the capacity that's come on or, to some degree, as your retailer customers start to push back from price fatigue? And I had a question on bleachboard as well.

Well, to answer the first one, you know, there's two elements of really net price increases in this business. You mentioned one of the absolute price increases and the other is the sheet count reductions, and you reach a point where sheet count reductions can only go so far, and I think probably we're approaching that where there will be less gain to be had with sheet count reductions, going forward, than there has been, say, in the last two years. So that leaves us with the priceability, and that's a reflection of the capacity in the business and, really, we are a private label business that does not set price. We follow what the branded competitors do, and we try to mimic what their actions are in the marketplace. It's been a good business.

Sure, now, clearly, and that's one of the reasons to ask the question, but sheet count -- that's probably tapped out, to paraphrase, and it will be up to whatever the market dictates in terms of further price hikes. Is that fair?

That's fair.

Okay, two last ones -- bleachboard -- why do you think we're seeing backlogs up as much as they are? You know, we've heard mixed things about the state of the folding carton market. Some pre-buying had further price increases that are suspected to be in the works or is something else going on? And then you made mention already -- what kind of tax rate or benefit should we be expecting over the course of the year? Thanks, guys.

Well, first I'll answer the bleachboard question, and Gerry can talk about the tax rate. The bleachboard/folding card market, in particular, does not have robust growth. There's modest growth of, I think, around 2% of the industry's statistics in paperboard. But I think the reason for the backlogs and some price pressure in this business has to do with plant closures. There has been significant closures MeadWestvaco just shut a machine down in the first quarter of this year in March, and I think those factors coupled with a reasonably strong economy can explain the pressure in this business. Gerry?

The tax question is a fairly difficult one in that it's going to vary and can vary significantly. Since we are now operating as a REIT under REIT rules, our only tax requirement at C Corp rates is within the TRS when it's profitable. Since all the interest expense and, really, a fairly good-size amount of all the other SG&A is represented at the TRS based on either headcount or space they occupy or whatever the measure is, then the TRS quarter-by-quarter's profitability will dictate the tax that we have to pay. And, as you saw in the first quarter, even though certain of the segments' operating income was positive, there's enough interest expense and other corporate admin that goes against that that will provide a tax benefit. So there's really no way to pinpoint a level or even a percentage on an ongoing basis, because it is quite variable.

[OPERATOR INSTRUCTIONS] Frank Dunau with Adage Capital.

I want to follow-up on what George was talking about. Would it be fair then, basically, you know, trying to figure out a tax rate -- or tax -- not tax rate, just the tax or tax benefit to take everything -- you know, you go to the operating income, take everything but the resource segment, add it all up, then subtract corporate as you reported here in the segment, and then multiple by 0.35 or something like that. Would that be a reasonable approximation for what you're going to pay in taxes?

Well, Frank, that really doesn't work, either, because the resource segment does include a fair amount of activity that is TRS-based -- all the log merchandising and those sort of costs are included in the resource segment because it all has to do with our trees. So there are some still over accounts in both resource and land sales that can be either way. So it's very hard to predict it.

Okay, so, at some point in the future, are you going to break out what the TRS income is versus the REIT income so maybe we can figure this stuff out? Or is that not going to happen?

We really had no plans to do that. The segments, the way they're set up, is what we've got.

All right, because if we knew that, then we could figure it out.

I know you could.

I know, I'm just trying to figure something out.

[OPERATOR INSTRUCTIONS] Gentlemen, currently no questions.

All right, well, thank you all for joining us. Thanks, Mike. And we appreciate your taking part in this call, and we look forward to talking to you again next quarter. Thank you.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect. Thank you very much.