Potlatchdeltic Corp (PCH) 2009 Q1 法說會逐字稿

Good morning. My name is Stephanie and I will be your conference operator today. At this time, I would like to welcome everyone to the Potlatch first-quarter 2009 earnings conference call featuring Eric Cremers, Vice President of Finance and Chief Financial Officer, and Michael Covey, Chairman, President, and Chief Executive Officer for Potlatch Corporation. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

I would now like to turn the call over to Mr. Eric Cremers for opening remarks. Sir, you may proceed.

Thank you and good morning. Welcome to Potlatch's investor teleconference covering our first-quarter 2009 earnings.

Before we begin, let me remind you that this call may contain forward-looking statements within the meaning of the US securities laws. These statements include statements about the Company's future business prospects, anticipated performance in upcoming quarters, harvest levels, and future dividends. 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 please note that segment information as well as a reconciliation of non-GAAP measures can be found on our website, www.potlatchcorp.com, as part of the webcast for this call.

I would now like to discuss our first-quarter results. We reported first-quarter 2009 net income from continuing operations of $28.8 million or $0.72 per fully diluted share, as can be seen on page 3 of the slides accompanying this presentation. This compares to net income of $23.3 million or $0.59 per fully diluted share in the first quarter of last year.

As a reminder, our financial results have Clearwater Paper operations moved to discontinued operations including corporate administrative costs directly associated with Clearwater and interest expense for the debt assumed by Clearwater.

I would now like to review our first-quarter results broken down by segment. Our resource segment results for the first quarter of 2009 were much weaker than the first quarter of 2008. Operating income in the first quarter totaled $10.8 million compared to $17.2 million in the first quarter of last year. The primary driver behind the negative variance was lower selling prices, somewhat offset by lower costs.

Page 4 highlights volume and pricing trends for the northern region. Sawlog fee volumes were down 17% comparing Q1 '09 to Q1 '08 as we began to scale back our harvest to match demand caused by sawmill curtailment in the region. Sawlog pricing in the northern region was down 25% year-over-year and down 21% sequentially. With the decline in pricing occurring quickly between December and January, pulpwood volumes in the northern region were down 27% year-over-year but pricing was actually up 1%.

Page 5 highlights volume and pricing trends in the southern region. Sawlog harvest volumes in the first quarter of 2009 increased 27% over the first quarter of 2008. Several factors drove the increased harvest level including a shift of harvest activity from the north to the south, excellent weather which made logging activity relatively easy, and our desire to harvest and sell logs to a receptive customer base. Sawlog pricing in the southern region held up better than the northern region, with prices down 15% year-over-year and only 5% sequentially.

Pulpwood volumes in the southern region were up 48% year-over-year while pricing fell 12%. Our strong pulpwood harvest volume in the first quarter came as a direct result of the higher sawlog volumes combined with some higher than normal planned commercial thinnings.

As we move into the second quarter, it is important to note that harvest activity in our resource segment slows dramatically due to the Spring break up in the northern region we typically experience this time of year.

I would also like to discuss two other opportunities for our resource business that we are now beginning to capture. First, biomass appears to be a real emerging opportunity for our resource business and while it is too early to discuss the magnitude of the opportunity, we currently have long-term supply discussions going on in all three regions of our resource operations.

Second, we continue to work to lower our supply chain costs and expect savings of $4 million to $5 million this year, some of which is a direct result of lower fuel costs.

Next, I would like to review our real estate business. As shown on page 6, our real estate segment closed sales totaling $48 million during the first quarter resulting in operating earnings of $41.5 million. Included in these results is a relatively large 24,500-acre nonstrategic timberland sale for $43.3 million. Excluding this large nonstrategic timberland sale, we had 37 other real estate transactions in the quarter.

Page 7 highlights our real estate sales by product type and as you can see, we sold over 2000 acres of rural recreational real estate in the quarter.

Page 8 highlights price trends for our real estate business broken down by product type. Our real estate business continues to perform well in this challenging economic environment. And while demand for HBU property is relatively soft, demand for rural recreational real estate remains stable and demand for nonstrategic timberland remains relatively high.

As you would expect, our wood products segment had a challenging first quarter with operating losses of $11.2 million in comparison to an operating loss of $6.5 million in last year's first quarter and an $11.4 million loss in the fourth quarter.

Page 9 highlights price and volume trends in our wood products segment. Although our results only modestly improved over the fourth quarter, the trend is clearly in the right direction as losses have narrowed sharply over the past few months driven primarily by higher selling prices and lower costs. For example, our operating loss in January was almost $5 million compared to a loss of roughly $3 million in March.

Furthermore, we continue to look for ways to improve the business and we have taken $7 million of cash out of wood products inventories over the past three months. During the last conference call, we indicated that we thought we could get the segment to cash flow breakeven in the second quarter and we continue to have this outlook.

Returning to the P&L on page 3, eliminations and adjustments had an $800,000 positive impact on operating income during the first quarter compared to a positive impact of $1.7 million in last year's first quarter and a $900,000 negative impact in the fourth quarter. The main driver for the positive elimination entry in the first quarter compared to the fourth quarter was the seasonal log inventory decrease we typically go through this time of year in our northern region as it gets more challenging to harvest during the winter months. And therefore, we typically begin reducing inventory in the first and second quarters and start building it back up again in the second half of the year.

The lower positive impact in the first quarter of 2009 compared with the first quarter of 2008 was due to a lesser volume decrease in 2009. Corporate administration expense including interest expense totaled $10.8 million for the quarter compared to $8.3 million in the fourth quarter and $13 million in last year's first quarter. Interest expense net of interest income totaled $4.8 million in the first quarter of 2009 compared to $5 million in last year's first quarter and $5.2 million in the fourth quarter.

You will also note that we took a $5.75 million pretax charge in the first quarter for a tentative legal settlement related to the sale of our oriented strand board manufacturing facilities to Ainsworth. As we sold those facilities in 2004, the charge is included in discontinued operations.

EBITDA totaled $47.7 million in the first quarter versus $31.6 million in last year's first quarter and $10.2 million in the fourth quarter of 2008. Funds from continuing operations or FFO for the quarter totaled $40.5 million versus $33.8 million a year ago and $15.3 million in the fourth quarter. The Company paid a normal cash distribution of $20.3 million during the first quarter.

I would now like to turn the discussion over to Mike to provide some additional comments about our outlook.

Thank you, Eric, and good morning. In light of the quarter-over-quarter sawlog price declines that Eric discussed, we are closely monitoring log markets in both Arkansas and Idaho. Due to the Spring break up conditions we mentioned earlier, logging activity will not commence in Idaho for another six weeks. During this period, we will assess whether it makes sense to defer a portion of our remaining sawlog harvest.

As you know, much of our standing timber inventory is financially mature and in some cases older than optimum final harvest age, which is why we've been increasing our harvest levels since 2006. However, these trees are still growing, albeit at slow rates, and any decision to delay harvesting today will result in more volume in future periods.

The critical judgment about deferring harvest is whether the trees will be worth more in the future than they are in the current market and that obviously depends on regional timber supply and demand and the financial health and competitiveness of mills within each region.

A decision to defer some portion of our harvest would result in diminished cash flow for a portion of 2009. During the fourth quarter conference call in February, we acknowledged that our 2009 funds available for distribution -- that is FFO less our capital expenditures -- would likely fall $10 million to $20 million short of our current distribution rate of $0.51 per share per quarter or approximately $80 million annually.

I want to emphasize that we will be making a decision about harvest plans for the remainder of 2009 over the next few weeks. However, we believe it may be helpful to put some bounds around options we are considering. At the upper limit, a harvest deferral of approximately 500,000 tons of sawlogs over the remainder of 2009 would result in year-over-year harvest reduction of about 14% in total, resulting in a harvest level of approximately 3.8 million tons in 2009 compared to 4.4 million tons in 2008.

For the remainder of 2009, such a deferral would represent about a 21% harvest reduction. At the same time we are reviewing alternatives to defer harvest, we continue to pursue non-strategic land sales. The reason to pursue these transactions is twofold. First, there appears to be capital available from private investors seeking exposure to the timber asset class. Second, private investors appear to be looking through the current economic downturn and are willing to pay attractive prices for timberland as evidenced by our sale of 24,500 acres for about $1760 per acre last quarter.

Capturing the value differential between the public market and the private market makes sense for our shareholders whether the proceeds are used to pay down debt, or support the dividend at current levels in anticipation of market improvement next year.

The last point is particularly important in the unique value attribute for Potlatch in that we can substantially increase harvest levels to as much as 5 million tons and hold that level for several years generating substantial incremental cash flow from current levels.

Over the next month, we will be reviewing options with our Board to reduce harvest levels. We will also continue to explore options to execute non-strategic land sales. While we have adequate liquidity to draw on our revolver as well as to fund any [FAD] shortfall, we believe it is prudent to maintain as much financial flexibility as possible.

Our Board believes that a consistent dividend and one that we can grow over time is an important component of value delivery to our shareholders. Maintaining the dividend while we work through an unprecedented downturn in our industry is a top priority especially since we have an attractive and growing harvest profile that can be increased by as much as 25% from current levels.

Stephanie, that concludes our prepared remarks and we will now take questions from the call participants.

(Operator Instructions) Gail Glazerman, UBS.

Good morning. I guess to start can you give a little bit more color in terms of what you are seeing in the land market? Do you think you would be able to execute another sale similar to the size and value that you did in Arkansas given today's market?

Gail, this is Mike. We continue to think that there is capital on the sidelines that can be called particularly by the TIMO managers that is in the range of $50 million to $100,000. I think transactions beyond $100 million are going to be scarcer. But we do think there is an appetite and a demand for transactions that are of the scale that we did in Arkansas, which was $43 million.

Okay and you feel that values are holding up reasonably well?

We haven't -- I think the transaction that we did was one of the last public transactions other than the one in New York. But from what we know, we think values are still holding up.

Okay, and switching gears when you talk about the opportunity for biomass, I understand where you can't really qualify the magnitude, but could you give a sense of timing? Is this something that would impact 2009 or would this be 2010 and beyond?

Yes, Gail, we are seeing some benefit from that currently, but it's really more over the next couple of years where it will start to show up. So I would expect to see it really start to hit, say, out in 2010 and 2011.

Okay. And would that be selling biomass to kind of existing customers or new kind of more energy-focused customers?

Some of both.

Okay, and Eric, can you talk a little bit about tax in the quarter. I was expecting a bit more of a tax hit because of the land sale. Was there any change there or was it just that losses were bigger as an offset?

Well, we will have big taxes on the Waldo sale of about $10 million. And we only pay taxes -- that's the Waldo, Arkansas sale. We only paid big taxes on the gain that happened while the property was owned for reconversion -- the gain that occurred after reconversion, there's no big taxes due. But to answer your question, that tax was offset by losses that we incurred in our TRS business, namely Wood Products business.

Okay, thank you.

Chip Dillon, Credit Suisse.

Good morning. First of all, I would take it from your comments that if you did decide to defer the harvest in Idaho, the southern harvest levels would probably still be maintained at roughly what -- 1.8 million tons for the year?

Chip, this is Mike. That is approximately correct. We will look at both areas, but the markets in Arkansas are relatively stronger than they are in Idaho.

Got you, and are you --? We have gotten some pretty interesting housing numbers especially California the other day where I think the sales year-over-year were up 35% and prices were up sequentially. I know you are way, way down the chain, so to speak, or up the chain. And are you seeing anything in those numbers that might influence how you and the Board will decide to handle the harvest as you think about this in the next couple of months?

Well, certainly any decision about the harvest starts with the underlying demand and an expectation about when we think pricing will rebound and if it's going to. Clearly if we defer harvest it's because we think trees are going to be worth more in some future period. We're beginning to see signs of increased activity. We've been able to add hours to some of our manufacturing facilities because demand is stronger. Pricing is up just a little bit, not much, but take-outs are stronger. And I think that's the first sign of hope that we are going to see improvement in that business.

And as the solid wood business improves, obviously that will flow back to the trees and the forest and we feel strongly the trees will be worth more in the future at this point.

And how much is left on the revolver, or is available right now?

Well, we have a $250 million revolver. We are drawn $96 million at the end of the quarter, so theoretically there is what, $154 million left? We have to set aside $100 million of that revolver in case Clearwater Paper doesn't refinance those credit sensitives which mature December 1 of this year. So under that scenario, we would have $54 million of liquidity.

But once they take care of their maturity, then that $100 million opens up again.

Yes, exactly.

Okay and I guess the last question would be obviously you have -- the dividend as you've stated is your top priority and you have the revolver as one way to pay it. If you defer your harvest and you mentioned land sales, is there sort of a trade-off as to where you would decide maybe it's not worth keeping the dividend if you felt you had to give the land away at prices that you don't think are acceptable?

Well -- this is Mike. Clearly the transaction that we executed in the first quarter for $1760 an acre compares to our public valuation, which is in the neighborhood of $800 or $900 an acre, and we think that's a good trade for shareholders. But we would not take lower land prices just to fund a dividend. That doesn't make any sense.

Got you. Thank you very much.

(Operator Instructions) Mark Weintraub, Buckingham Research.

Thanks, I just wanted to clarify on the dividend, are you saying that you are totally committed to the dividend for the foreseeable future and you will fund it one way or the other? Or were you saying that the dividend you would like to be able to continue the dividend, but the Board has to review the situation as you work out your harvest plans at this point? And presumably what other opportunities might exist on the land sales? I was a little bit confused there.

Well, Mark, this is Mike -- it's really the latter point. We are going to work through with our Board first and foremost who -- it doesn't make sense to execute a significant harvest deferral in light of the sawlog values that have dropped and whether or not we have a strong belief that they're going to rebound. And if the answer to that is yes, then obviously we are going to have a greater shortfall on the dividend on the annual basis. And then we have to make a consideration whether we can fund that shortfall with liquidity from our revolver or separately. And in this market do small nonstrategic land sales continue to make sense at the kind of valuations that we got for the sale in Arkansas?

I think if we think those valuations are going to hold up, we will try to execute additional land sales. But if we can't, we are not going to -- I am sure the Board would agree that we are not going to continue to erode our liquidity just to pay a dividend. But we also feel strongly as you know that we have a harvest profile that can be significantly higher than where it is at today. So it's a matter of getting through this period.

Okay and in terms of the resiliency of the values, I understand that you got the sale to an early this year. Are you actively in the market now and have real time feedback on the values having held up? Because obviously there haven't been a lot of transactions. Or is it that there just hasn't been anything that would tell you to date that the values have fallen as opposed to that you are kind of real-time have a sense that things actually are holding up?

Well, I think it is really the latter. We haven't seen any evidence of the market falling based on transactions that have been completed in the last -- I don't know, six or eight weeks since we did our transaction in Arkansas.

Just to add some color to that, Mark, after we announced -- this is Eric -- after we announced that Arkansas transaction, we had some TIMOs approach us and as you may recall that Waldo, Arkansas transaction, it was not a broad auction. It was kind of a one-off negotiation with one TIMO. Be we had other TIMOs call us up after Waldo was announced and said hey, we would like to have conversations with you as well. We said well, are you prepared to pay prices comparable to Waldo or better? And the answer was yes. So we are in discussions.

Okay and so presumably I guess you said that if you could do transactions that were similar to that, you would be game to do it. And so if these folks are indeed calling you and saying that they are comfortable -- I realize things take time. So why would we not be moving forward with other transactions or is it just it takes time to get things finalized?

Well, I think it takes time to execute transactions and as we said, we continue to explore opportunities.

Okay and then lastly and I don't mean to be nitpicky but just a little confused if I look in the press release and you say that you did the large transaction and then there were another 5500 acres that were sold at an average price of 880 per acre, but then I look in where you break down the transactions by class and I look at the HBU and I look at the rural real estate development and I --- the numbers don't -- I don't get anywhere near 880. It doesn't [fit] unless you were giving away the nonstrategic timberlands beyond the --

There was another large nonstrategic timber land transaction in the quarter. It was about 3000 acres and it was land that was encumbered with a conservation easement so the price for it was relatively low. So that's exactly what happened.

Okay so it must have been quite low. Okay.

Yes, it was like $500 an acre.

Okay, thank you.

Steve Chercover, D. A. Davidson.

Thank you. First question, how much do you think that the private sawmills drive prices for logs in the Pacific Northwest? Because it seems quite a dramatic decline probably more than perhaps anticipated. Have they just said look, we don't -- we are not buying unless it is at X?

Steve, this is Mike. What do you mean by private sawmills just so I --?

I guess family-owned sawmills as opposed to those owned by the larger public companies.

Well, I don't know if we can distinguish between the two from a customer base. I think broadly in the inland area where we participate in markets, I think regardless of ownership class of sawmills although they tend to be largely family and privately owned, I think it really is a matter of what you describe that very kind of quickly at the start of the first quarter, we saw demand and pricing both just fall dramatically -- you know, in the range of 25% or more depending on species and log type in Idaho. There just was no demand and I think people faced decisions that if log prices didn't come off then they were going to have to shut down. And the market responded with price declines.

And now it sounds like you and some of your friends are saying well, we might not log whatsoever in Idaho, Washington, Montana. So do you think that will arrest the erosion in pricing?

I want to be careful here. I don't know what you mean by our friends but Potlatch will independently make a decision about whether or not we are going to continue harvesting going forward. We haven't done that yet.

And with respect to the beneficial weather, how much do you think that accelerated your harvest down south?

Well, the winter/early spring months in Arkansas are always unpredictable in terms of the amount of rain that's going to come. We had fairly dry weather. I think importantly as well we had a receptive customer base and pricing that we thought probably wasn't going to get much better for the next couple of quarters. So we might as well accelerate the harvest under existing contracts and that's what we did.

So was it a couple hundred thousand tons that got moved from later quarters into Q1?

Yes. Is that number right?

It sounds about right.

Okay, thank you.

George Staphos, Bank of America.

Thanks. Hi, guys. Good morning. I jumped on a little bit late, playing conference call pinball today. But maybe a different swag on Steve's question. If -- was there any pressure from the integrated family-owned producers in the Northwest on log prices? Was that one of the factors perhaps as these businesses were going through a challenging period and trying to generate liquidity, they were willing to accept relatively low log prices just to generate cash as a result and then that fed back to the market?

I don't have any concrete evidence to answer your question. You know, I think it's a combination of factors. I think log prices -- in the inland area where Potlatch participates in markets, we probably supply somewhere in the neighborhood of 25% of the logs in the marketplace. The state of Idaho is a large producer. The prices of public timber have come down through the public auction process and then other integrated producers and TIMOs make harvesting decisions as well. But I couldn't speak to the notion about integrated families making decisions.

Okay, I appreciated it, Mike. I figured I would ask the question nonetheless. In terms of -- and obviously you are not putting any guarantees on this nor assuming it. But if we look out over the next few years, do you expect that housing and wood will recover at the same point in the economic cycle as we've seen in the past? Or do you think that perhaps the recovery will occur a little bit later on just because of all of the challenges and headlines that we've seen over the last several years regarding housing?

You know, I don't know that we are going to get back to the 2.2 million starts that we had over the past couple of years. But I could see us getting back up to the 1.2 million to 1.5 million starts per year. There tends to be a lag when log prices respond to lumber prices and with the inventories in the system being as low as they are, with any kind of a bounce back in starts, you will see it in lumber prices first. And then eventually it will work its way to logs. (multiple speakers)

That teed up one of my other questions, which is what kind of market would we need to see from a starts basis for you to really utilize the harvest profile you expect of 5 million tons or more on an annual basis? Do we need to see that kind of market 900,000 starts? How would we frame it?

Well, this is Mike. I don't know if we can point so clearly to the relationship between starts on log prices, but I think if we get back to more normalized levels that are 1.3 million to 1.7 million or something like that, I think you will see by that point in time more value back in the trees and that will prompt us to increase the harvest level.

Last question and not to beat a dead horse, just realizing that your aim is to maintain the dividend and you do have some ability perhaps to manage that through land sales, if in fact you had to adjust the dividend because for whatever reason the market didn't cooperate with you and log prices were sold at a relatively depressed level such that you couldn't -- you chose not to accelerate your harvest, you made the adjustment to dividend. Would there be any reason why when the market came back you couldn't immediately increase the dividend again or would there be some sort of preclusion or limitation in that regard? Thanks, guys. Have a good quarter.

To answer your question, there would be no reason that we couldn't quickly increase the dividend from its current level or some other level if harvest levels and values stepped up. And in fact, we would really have to. The income that we make from the REIT has got to be distributed to our shareholders. So to the extent that harvest levels were bumped up, cash flow increased, we would plan to increase the dividend.

Thanks very much, guys.

(Operator Instructions) At this time there are no further questions in queue. You may proceed with the conference or proceed to closing remarks.

Thank you, Stephanie. We don't have any more comments and we look forward to speaking with everybody next quarter. Thank you.

Thank you. This concludes today's conference call. You may now disconnect.