Potlatchdeltic Corp (PCH) 2009 Q3 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 Third 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.)

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 third quarter 2009 earnings.

Before we begin, let me remind you that this call may contain forward-looking statements within the meanings of 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 in the supplemental materials on our website, www.potlatchcorp.com, as part of the webcast for this call.

I would now like to discuss our third quarter results.

Despite a difficult economy in the third quarter, we continued to make progress in several areas. First, we closed the previously-announced timber deed transaction in the third quarter and used the nearly $49 million of cash proceeds to pay down drawings we had on our revolver.

As I will discuss later, our balance sheet continues to strengthen, and we have more than ample liquidity.

Second, our Wood Products division had positive EBITDDA in the third quarter, overcoming the very challenging conditions facing virtually all wood products manufacturers.

Finally, sawlog and pulpwood prices appear to have bottomed, and we continue to be optimistic about future log prices, as we are forecasting significantly higher housing starts over the next several years.

Now let's turn to the numbers.

As shown on slide three of the slides accompanying this presentation, we reported third quarter 2009 earnings from continuing operations of $46 million, or $1.15 per fully-diluted share. This compares to earnings from continuing operations of $24.9 million, or $0.62 per fully-diluted share, in the third quarter of last year. As a reminder, our comparative 2008 financial results have Clearwater Paper operations moved to discontinued operations, including corporate administrative costs directly associated with Clearwater and interest expense for the debt retained by Clearwater.

I'd now like to review our third quarter results broken down by segment.

Our Resource segment results for the third quarter of 2009 were significantly better than the third quarter of 2008. Operating income in the third quarter totaled $55.4 million, compared to $30.7 million in the third quarter of last year. Of course, the primary driver behind the positive earnings variance was the timber deed transaction, which provided almost $42 million of operating earnings for our Resource segment.

Slide four highlights harvest volume and pricing trends for the Northern region. Sawlog fee volumes were down 24% comparing Q3 2009 to Q3 2008, as we continued to defer harvest levels to match the lower demand caused by sawmill curtailments in the Northern region. Sawlog pricing in the Northern region was down 29% year-over-year but actually increased 8% sequentially. Pulpwood volumes in the Northern region were down 20% year-over-year, and pricing was lower by 10%. Sequentially, pulpwood pricing in the Northern region was up 1% as compared to the second quarter of this year.

Slide five highlights harvest volume and pricing trends in the Southern region. Sawlog fee volumes in the third quarter of 2009 decreased 16% from the third quarter of 2008 but increased nearly 2% sequentially. Sawlog pricing in the Southern region is holding up better than the Northern region, with prices down 7% year-over-year and is flat sequentially. Pulpwood volumes in the Southern region were up 7% year-over-year and up 11% sequentially. Pulpwood pricing in the Southern region fell 12% year-over-year but was flat sequentially.

As Mike will discuss in a moment, we are cautiously optimistic that log prices in both the Northern and the Southern regions have reached a bottom.

Next, I'd like to review our Real Estate business. As shown on slide six, our Real Estate segment closed sales totaling $5.6 million during the third quarter, resulting in segment operating earnings of $1.5 million. This is down from $3.2 million in operating earnings in Q3 2008 due to a higher cost basis for land sold in 2009 versus 2008. In total, we had 38 real estate transactions in the quarter, coincidentally the same as in Q1 and in Q2.

Slide seven highlights our real estate sales by product type and, as you can see, we sold over 2,100 acres of rural recreational real estate in the quarter, down from the 2,900 acres we sold in Q2 but consistent with the 2,000 acres we sold in Q1.

We also sold over 800 acres of HBU land and 2,600 acres of non-strategic timberland, both ahead of 2Q sales volumes.

Slide eight highlights price trends for our Real Estate business, broken down by product type. As you can see, rural recreational land pricing is stable and continues to sell for just over $1,100 an acre. HBU land pricing is also stable at around $2,300 an acre. We had one non-strategic timberland sale in the third quarter which included over 2,600 acres at an average price of $500 an acre. This non-strategic timberland was located in central Wisconsin.

While our HBU land sale program continues to be relatively soft, our Rural Recreational segment continues to produce solid results, and interest in non-strategic timberland remains relatively firm.

Our Wood Products business continued to make solid progress in the third quarter with an operating loss of just $1.5 million compared to a $3 million loss in the second quarter and an $11.2 million operating loss in the first quarter. Importantly, EBITDDA improved over $1.4 million in comparing Q3 to Q2 and has now improved three consecutive quarters in a row.

Slide nine highlights price and volume trends in the lumber part of our Wood Products business and, as you can see, both lumber prices and volumes improved quarter over quarter. Some of our improvement in the quarter is no doubt seasonal in nature, but also helping our Wood Products business is a fact that the US dollar continues to depreciate relative to the Canadian dollar, increasing the competitiveness of our Wood Products business. We continue to carefully monitor key input costs in our Wood Products business.

Returning to slide three of the presentation, corporate administration including interest expense totaled $14.8 million for the third quarter, compared to $11.6 million in the second quarter and $12.9 million in last year's third quarter. Interest expense net of interest income totaled $5.1 million in the third quarter, compared to $4.9 million last quarter and $4.8 million in last year's third quarter. The increase in our third-quarter corporate administration expense is driven primarily by higher retiree health care expenses, otherwise referred to as OPEB expense. We are planning to modify our OPEB programs to lower the liability and expense, and we'll discuss this in more detail when we discuss and release fourth quarter earnings next year.

We booked a $6.3 million tax benefit in the quarter, largely due to losses in our taxable REIT subsidiary.

EBITDDA totaled $63 million in the third quarter versus $35.5 million in last year's third quarter and $7.2 million in the second quarter of 2009. Funds from continuing operations for the third quarter totaled $64.3 million versus $36.4 million a year ago and $10.3 million in the second quarter. The Company paid a cash distribution of $0.51 per share during the third quarter for a total of $20.3 million.

Next, I'd like to make a few comments about our balance sheet and liquidity.

As I indicated earlier, we used the proceeds from the timber deed sale to pay down some of our revolver, and that balance now stands at $72.5 million. Per the terms of our revolving credit agreement, our last 12 months' interest coverage ratio, or EBITDDA divided by interest expense, now stands at 6.4 times, significantly higher than the covenant requirement of 2.5 times. Further, our debt-to-capital ratio per our credit agreement now stands at just 46%, also well below the covenant requirement which now stands at 55%.

Finally, we announced yesterday that we are pursuing a $150-million offering of senior notes to be used to refinance our existing revolver debt and for other general corporate purposes. Because the offering is a 144A private placement of securities, we are restricted to making any comments or answering any questions regarding the offering.

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.

As we mentioned last quarter, we are cautiously optimistic that log prices reached a low point during the second quarter and have since flattened out with slight improvements in demand and price in some regional markets. Over the next few months, we don't see a meaningful catalyst that will cause sawlog prices to rise in either the fourth quarter or the first quarter of next year.

However, the returns from the Biomass Crop Assistance Program, or BCAP, may enhance the value of pulpwood and biomass going forward. We are working with a number of our pulpwood customers who may qualify for BCAP. It's too early to estimate returns from this renewable energy revenue source, but it may be meaningful for landowners and our customers next year.

As we move towards spring, we expect to see stronger annualized housing starts, which may be the catalyst for stronger wood products pricing, stronger demand for logs and modest price increases off of the cyclical low prices we've seen in the last few months. Accordingly, we plan to continue the harvest deferral of 500,000 tons of sawlogs through the balance of 2009 and at least through the first quarter of 2010. We expect our 2009 total harvest to be approximately 3.7 tons, compared to 4.3 million tons in 2008. We will provide information on our 2010 harvest plans on the next conference call in February.

As Eric discussed, we've been able to manage our Wood Products business to cash break-even for the last few months. As we enter the winter months, we expect weaker demand and lower wood product prices despite significant industry-wide curtailments and shutdowns.

Offsetting this is the weak US dollar, which makes our Wood Products business more competitive and should provide a little tailwind.

Because we expect weaker prices for lumber during the next few quarters, we don't expect stronger log prices from our customers, who primarily manufacturer framing lumber for home construction. And while we don't expect to see the losses in wood products that we experienced in either the first quarter of 2008 or the first quarter of this year, we do expect to operate modestly below cash break-even for the next two quarters. We'll provide more information in February about our 2010 outlook for our Wood Products business, but we don't expect it to be cash flow-positive -- we DO expect it to be cash flow-positive over the course of next year.

Our Real Estate business continues on a remarkably steady pace as we've closed almost 40 transactions in each of the last three quarters. We don't expect that trend to change, nor do we see material weakness in the demand or price of our rural recreational real estate or HBU. Through the very small number of acres that we sell in any quarter, we can see large variation in average prices due to the quality of a particular tract or two. For this reason, it's difficult to provide an outlook for prices on a per-acre basis.

As we indicated last quarter, interest in our non-strategic timberland remains relatively firm and, setting aside large transactions such as the sale of 24,000 acres in Arkansas earlier this year for $43 million, our Real Estate segment should have revenue between $20 million and $25 million in 2009, which is very similar to our 2008 performance.

Although there has been no fundamental change in our overall business outlook over the last quarter, we need to see improvement in log prices if we're going to reach our potential harvest level of approximately 5 million tons a year. We've been fortunate to execute a couple of large transactions during 2009 at attractive prices that have helped boost cash flow. The timber asset class is still attractive to many investor groups while there is no question that return expectations have crept up slightly from previous levels.

Although our FFO and FAD metrics will likely fall short of covering the $20 million quarterly dividend over the next few quarters, we have ample liquidity to pay our dividend over the near term. As we've stated before, our board is comfortable leaving the dividend at its current level of $0.51 per share per quarter, with the expectation that we can support the dividend from operating cash flows as markets improve and harvest levels rise in late 2010 and 2011.

Stephanie, we will now take questions from participants on the call.

(OPERATOR INSTRUCTIONS.) Your first question comes from the line of Gail Glazerman with UBS.

Hi. Good morning.

Good morning.

Can you talk a little bit about the southern pulpwood market? We've heard a lot of talk about the stress caused by the wet weather. Has that impacted your land and your customer base?

Good morning, Gail. It's Mike. Well, our -- as you know, our operations are concentrated in southern -- south central Arkansas. It has -- the weather, the rain has had an impact on the supply chain. It certainly has restricted our ability to harvest log supplies. Pulpwood supplies are low to many of our customers, and there's no question that I think pricing is under stress. Due to that, our ability to capture better pricing is limited by our ability to access the forest and operate in wet weather conditions. So so far, we have not seen a meaningful improvement due to the rain. We'll see how things shake out in the fourth quarter.

Okay. And looking at the north, are you comfortable that the recent improvement in sawlog pricing is something that's sustainable -- that harvests have been curtailed enough to kind of (inaudible)?

Well, absent another leg down on the economy -- if that were to happen, clearly that would change our outlook -- but given the current state of housing starts and where we see things slightly improving as we go into next year, we're confident that log pricing will hold.

Okay. And just in terms of large transactions, could you envision doing another deal like what you did in Arkansas or another timber deed deal? Has interest -- have you been receiving interest in transactions that size or is that kind of out of the question at this point?

Well, the transaction that we did, I think, was viewed as fairly creative. It was certainly very tax-efficient and we've received a number of inquiries about it and I think that's as much as we'll say about that.

Okay. Thank you.

Your next question comes from the line of Mike Roxland with Banc of America/Merrill Lynch.

Good morning, guys. Just a quick question to start regarding the balance sheet. Can you remind us what the maturity schedule looks like over the next few years?

Yes, Mike. It's Eric. It's very limited. Virtually nothing coming due next year and then I think is $5 million the year after. I think total over the next five years is just over $50 million. So very limited amount of near-term maturities.

Gotcha. And the $150 million that you're looking to raise -- I know that, as you mentioned in the press release, $73 million would be targeted toward paying down your senior secured credit facility. Any specific -- any more color you could provide us with when you say general corporate purposes? Would that be something you would consider using possibly to fund your dividend if markets remain weak?

Well, the cash -- what's left over after the offering will go cash onto the balance sheet, and then, as we stated, it'll be used for just general corporate purposes.

Okay. And then last question. Just wondering if you could provide some color on the energy policy and the BCAP program? And then how you're thinking about all of that with respect to your pulpwood harvest?

This is Mike. Well, as we've said, the BCAP program is in the very early innings. The funding for the program in 2009 appears to be quite small. It's very uncertain as to the magnitude of the funding in 2010. But I think it's fair to say that whatever's there should benefit our customers -- the ones that qualify -- and certainly should benefit the landowner. Our expectation is there'll have to be some sharing of the BCAP benefit between the landowner and the customer. Those negotiations are underway with a variety of customers. I think the most important thing is this asset class, over time, has transitioned to a number of revenue streams and I think this -- we're in the early stages of renewable energy, whether it's for electricity production, ethanol production or other things -- beginning to get traction. And I think we'll -- in 2010 and beyond, we'll begin to see more money from it.

Thanks.

You're welcome.

Your next question comes from the line of Steve Chercover with D.A. Davidson.

Good morning, Mike and Eric. Just wanted to discuss your housing outlook a wee bit more. Sorry. I need some caffeine. And I don't want to quibble with you. I certainly hope you're right, but there are those who say that there's still a lot of foreclosures and mortgages that are not being serviced and things could get worse before they get better. So how confident are you and -- just give us a little perspective.

Yes, Steve, when I talked about significantly higher housing starts -- we're at a real low bottom right now, as you know, down in the 500 -- 600,000 unit level. Our view is it could move up to 700 to 800 next year and then up over a million starts in 2011. And I think that's pretty consistent from most forecasting firms. Everybody's got a different point of view, of course, but most people point to those kinds of numbers. And there are going to be a lot of additional foreclosures coming. Fortunately, there's not a lot of new starts right now helping keep inventories down. Harvard University -- their Joint Center for Housing Studies just released a report a few months ago and it talked about household formation over the coming decade in the 10 to 15 million range. And so, dividing that over the 10-year period, you get to a million to 1.4 million kind of starts a year required to support that household formation. So we're optimistic. The industry goes through ups and downs like it always has and will continue to do so, and we're cautiously optimistic that we've hit a bottom here.

Okay. So we're really -- we're referring back to the (inaudible) and Harvard-type data. Okay. That's fair. Thanks very much.

Your next question comes from the line of Mark Weintraub with Buckingham Research.

Thank you. Two questions related to the comment you made on the OPEB. Can you just remind us where the OPEB funding status is at this juncture and when -- and I recognize you don't want to get overly specific, I'm sure, but is it possible though there could be a fairly significant change to that number or is it kind of more just a minor change and it stops -- or changes how the trajectory of the OPEB would be going forward?

Yes. Good morning, Mark. It's Eric. Our OPEB plan is -- it's an unfunded plan, and that liability today sits on our balance sheet at $120 million. We are making considerable changes to the plan, likely to be implemented in the fourth quarter, and it could significantly lower that liability.

Okay. And then on the -- I'll ask -- can you give us a sense as to where you think that possibly would go to at this juncture?

No. We'll give guidance on that as we get into next year, as we release fourth quarter results.

Okay. And then on the corporate expense, you mentioned that that had picked up for the reasons enumerated. Does that -- do you expect that to go back to the $6, $6.5-million dollar range or this is kind of a one-time thing, or what should we look on a go-forward basis for corporate?

Yes. We're not done with our budgets for next year, but I do envision it to come back down.

Okay. Thank you.

(OPERATOR INSTRUCTIONS.) Your next question comes from the line of Mike Marburg with Ramsey Asset Management.

Hi, guys. Two questions. First, I understand that the private landowners, mainly the [TMOs], have constrained their harvest by 60% to 80% versus a lot of the public companies more around the 25%, 30% range like you guys. How concerned are you that a flood of new supply will push prices back down and demand incrementally recovers next year?

Good morning. Well, certainly that is a risk, but I think that you have to take it in the framework of [TMOs] and public landowners like ourselves don't own land everywhere, and so regional markets matter. Logs can only move 100 or 150 miles economically in distance, and so the behavior of a [TMO] in one part of Arkansas that may have deferred harvest may be different than an area in another part of Arkansas, Idaho or wherever the case may be. So it's -- I don't think it's easy -- I don't think it's possible to broadly answer the question. There can be certain markets where that's a factor, just as certain sawmills and plywood plants and pulp mills have curtailed operations in some places. They may start back up much stronger than we anticipated to absorb that harvest. So we're just going to have to see how it plays out.

Are your -- is the competitive set in Idaho primarily one segment? Is it primarily [TMO]? Is it primarily independent landowners? I know there's not a lot of other public players there.

It's primarily Potlatch. We're the largest landowner by a factor of 3 or 4.

Oh okay. And then secondly, just on the BCAP program that you mentioned earlier -- this might be apples and oranges -- but we have an expectation that the black liquor tax loophole will be -- won't move forward and pass this year. Maybe you have a different view on this, but the demand that that's created on the pulp side -- is the BCAP program enough to offset that or am I not understanding it properly?

Well, I don't know if black liquor tax credits will be extended. It's certainly had an impact on the profitability of our customers that are paper -- in the paper business. I think BCAP, to a lesser extent, may provide similar kinds of benefits, depending on if the program is funded, and that remains very unclear at this point.

Okay. Thank you.

You're welcome.

(OPERATOR INSTRUCTIONS.) Your next question comes from the line of Joshua Zaret with Longbow Research.

Thank you. A couple quick questions. First, in terms of wood products prices -- lumber, plywood, particle board -- can you just tell us where prices are relative to the third Q average? And then also just give a little discussion on what's gone on in the particle board market over the last couple of weeks?

Josh, this is Mike. I can't speak specifically to trends in the particle board market. We're a very small player and I just don't -- I'm just not aware of any trends that may have happened in the last couple weeks. In the lumber question, could you repeat your question again on lumber?

Yes. I just want to know for your products -- where your prices are today relative to the third quarter average?

I guess, off the top of my head, without doing some calculations, I couldn't say. My intuition would be that they're slightly below the third quarter average. Pricing has dipped down just a little bit in the last, say, three to five weeks. We would've seen stronger pricing in July and August than what we have today.

Okay. And then quickly, on the balance sheet, why is the restricted cash and the current installment on the long-term debt -- why is that still on the balance sheet? Does that come off next quarter?

Yes it does. Those credit-sensitive debentures -- they mature December 1, so this will thankfully be the last time we ever talk about credit-sensitive debentures again.

Okay. Great. And then I'm just curious on this one. It may not be a great question, but in the south, wouldn't it -- why is it that you don't have lands you hold in reserve that you could access in wet weather to take advantage of spikes that are created by harvest constraints? Or do you?

Well, the answer to that is solely dependent on topography and having land that has the appropriate soil type or (inaudible) elevation that allows it to drain quickly and provide wet weather access. We have some of that in the western portion of Arkansas, over near Prescott and Hope, Arkansas, but that's too far from markets that are in the southeastern side near, say, Crossett, Arkansas. It's just too far away. So the opportunities are just very limited by topography and soil type.

Gotcha. Okay. Thank you very much.

You're welcome.

Thanks.

(OPERATOR INSTRUCTIONS.) At this time, there are no questions in queue.

Thank you for your participation and I will look forward to talking to you in 2010.

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