Potlatchdeltic Corp (PCH) 2010 Q1 法說會逐字稿

Good morning. My name is Lori and I will be your conference operator. At this time I would like to welcome everyone to the Potlatch first-quarter 2010 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 first-quarter 2010 earnings.

Before we begin let me remind you that this call may contain forward-looking statements with regard to our business and operations. Please review the warning statements in our press release, on the presentation slides, and in our filings with the SEC concerning the risks associated with these forward-looking statements. 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 turn the call over to Mike Covey, our Chairman and CEO, who will make some introductory remarks and then I will drill into our first-quarter results in a little more detail. Mike?

Thanks, Eric. Good morning. By almost every measure our wood products business showed dramatic improvement in the first quarter and both our resource and wood products businesses continue strong as we move through April. Lumber and plywood prices are at the highest level in almost five years.

Our manufacturing facilities, which consume about 25% of our total harvest volume, are running at normal capacity and our customers are also operating on typical two or three shift operating schedules. The robust activity in wood products manufacturing is quickly translating into higher log prices, particularly as mills try to replenish depleted log inventories to capture market opportunities.

As we expected, our wood products business contributed meaningfully to EBITDA after a long period of breakeven results and losses going back to late 2008. We expect our second-quarter results for wood products to be similar to the first quarter due to strong demand and continued strengthening in lumber and plywood prices. Clearly the market is reacting to supply disruptions caused by mill closures, log shortages on the heel of winter weather, the Chilean earthquake, offshore demand, and currency-related issues to name a few factors.

As we expected would happen, the higher lumber prices are working their way into higher log prices. Given the improvement we have already have begun to see in log prices, we are exploring [operating at the higher end] of our harvest guidance for 2010, which was between 4.0 million and 4.4 million tons. Furthermore, if the strength in wood prices continues we may increase the harvest level beyond 4.4 million tons, but we won't make that decision until we get further into the second quarter.

We are experiencing good log demand from our customers in all market areas with log prices for most products currently forecast to be up 10% to 20% over Q1. Moreover, we are not experiencing any logging contractor shortages and see no impediments to increasing harvest levels should we decide to do so. We will make a final determination on harvest levels in June based on market conditions leading into the third-quarter, which is typically when we harvest roughly 35% of our annual volume due to favorable operating conditions.

As noted in our earnings release, demand for rural real estate remains stable. For five consecutive quarters we have closed between 30 and 40 transactions, mostly in the lake states, at prices that are attractive relative to the underlying timberland value. We continue to explore opportunities to sell nonstrategic timberland holdings in each of our three operating regions.

Interest remains firm in transactions that range in size from $25 million to $100 million.

Overall, we are pleased with the trajectory of our business. Although we did not expect lumber and plywood pricing to be as strong as it is today and the near-term outlook remains somewhat uncertain, it is clear we are on a path to higher housing starts over the next several years which at the end of the day is one of the key factors that drive our business and cash flows. Our view is that there is a modest risk of lower lumber prices over the next quarter or two, but if that happens we don't believe they will slide all the way back to the levels experienced in the trough of the market in 2009.

For some time we have stated that higher log prices coupled with increased harvest levels would allow us to sustain and perhaps even increase our dividend over time. Recent market activity gives us added confidence that our dividend is sustainable and can be supported by our core businesses.

Let me now turn the remaining time over to Eric to address our first-quarter results followed by questions from analysts and investors on the call.

Thanks, Mike. As shown on page three of the slides accompanying this presentation, we reported first-quarter 2010 earnings from continuing operations of $1.4 million or $0.03 per diluted share. This compares to earnings from continuing operations of $28.8 million or $0.72 per diluted share in the first quarter of last year.

It is important to note that included in this year's first-quarter tax provision is a $0.07 charge for the recent healthcare legislation signed into law, so excluding that charge earnings would have been $0.10 per share. Also included in last year's first-quarter results is a 24,500-acre nonstrategic timberland sale in Arkansas which generated $0.75 per share of earnings. So excluding that sale we would have had a $0.03 loss per share in last year's first quarter.

I would now like to review our first-quarter results broken down by segment. Slide four [highlights operating] income and margin trends in our resource business. Our resource segment results for the first quarter of 2010 were similar to our first-quarter 2009 results.

Operating income in this year's first quarter totaled $9.9 million compared to $10.8 million in the first quarter of last year. The primary driver behind the modestly negative income variance was lower pulpwood harvest volumes.

Page five highlights volume and pricing trends for the northern region of our resource business. Sawlog fee volumes were slightly higher comparing first quarter of 2010 to the first quarter of 2009. Regarding sawlog pricing in the northern region prices fell 3% from the fourth quarter of 2009 to the first quarter of 2010 as we continue to be impacted by a product mix shift away from cedar as we discussed in last order's conference call.

Importantly, if we exclude the cedar mix impact sawlog prices in the northern region actually improved 5% in the first quarter over the fourth quarter of 2009. And in fact, pricing continues to improve as we move into the second quarter with northern region sawlog pricing forecast to be up 15% to 20% over Q1.

Pulpwood volumes in the northern region were down 24% year-over-year where pricing was actually up 2% compared to the fourth quarter of last year.

Page six highlights volume and pricing trends in the southern region. Sawlog harvest volumes in the first quarter of 2010 increased 12% over the first quarter of 2009, primarily due to stronger customer demand. Sawlog pricing in the southern region improved 3% compared to the fourth quarter and, like the northern region, continues to improve as we move into the second quarter with sawlog pricing forecast to be up around 15% in Q2 versus Q1.

Pulpwood volumes in the southern region were down 28% year-over-year. The primary driver for lower pulpwood volume this year versus last year is that in the first quarter of 2009 we had exceptionally large customer demand and so we accelerated our pulpwood harvest to capitalize on the opportunity.

Pulpwood pricing in the south remains firm as the wet weather has impacted the available supply and pushed pricing up 11% compared to the fourth quarter of last year and is forecast to be up another 10% to 15% in Q2 versus Q1.

As we move into the second quarter it is important to note that harvest activity in our resource segment slows considerably this quarter due to the spring break up in the northern region which we typically experience this time of year. We are estimating our northern region harvest volume to be roughly 20% to 25% below our Q1 level.

Next I would like to review our real estate business. As shown on page seven our real estate segment had $3.4 million of revenues in Q1 which compares to revenues of $48 million in last year's first quarter. However, excluding the $43.3 million nonstrategic timberland sale in Arkansas in last year's first quarter real estate revenues in the year-ago quarter would have been $4.7 million comparable to the $3.4 million in this year's first quarter.

Slide eight highlights operating income trends in our real estate segment. As you can see, our real estate segment produced operating income of $1.9 million during the first quarter which compares to operating income in last year's first quarter of $41.5 million. Again, excluding the nonstrategic timberland sale from last year's first quarter operating income for this segment would have been $800,000 comparable to this year's Q1 results.

Page nine highlights our real estate acres sold by product type. And as you can see, we sold over 2,400 acres of rural real estate in the quarter along with almost 200 acres of HBU type property.

Page 10 highlights price trends for our real estate business broken down by product type and they continue to be consistent with prior results.

Our real estate business continues to perform well in this challenging economic environment. And while demand for HBU property continues to be relatively soft, demand for rural real estate remains firm and, as Mike indicated earlier, demand for nonstrategic timberland remains relatively high as capital continues to flow to the sector as evidenced by the announcement last week that one of the large [TMOs] has raised $250 million in a new timber fund.

As can be seen on page 11, our wood products segment had a stellar first quarter with operating income of $5.2 million in comparison to an operating loss of $11.2 million in last year's first quarter and a loss of $4.8 million last quarter. Page 12 highlights price and volume trends in our wood products segment and as you can see both volume and pricing were up in the quarter.

During the first quarter we sold our Post Falls, Idaho, particleboard facility for an undisclosed amount. The facility, which employed just 24 people and was one of the oldest and smallest particle board plants operating in North America, was not a strategic fit for Potlatch going forward.

Returning to page three of our supplemental materials, corporate administration costs including interest expense totaled $13.1 million for the quarter compared to $16 million in the fourth quarter and $10.8 million in last year's first quarter. Interest expense net of interest income totaled $6.7 million in the first quarter of 2010 compared to $4.8 million in last year's first quarter and $6 million in the fourth quarter.

Our interest expense increased in the first quarter over prior periods due to the high yield offering we completed in the fourth quarter of last year.

EBITDA totaled $18.8 million in the first quarter versus $47.7 million in last year's first quarter and $13 million in the fourth quarter of 2009. Importantly, if we exclude the 24,500-acre nonstrategic timberland sale in Arkansas last year, EBITDA totaled $4.6 million for that quarter. So year-over-year EBITDA improved over $14 million.

The Company continued to pay its normal $0.51 per share dividend distribution in the quarter totaling $20.4 million.

Our balance sheet is in great shape with debt to capital at 52.3% as calculated per our credit agreement, and more importantly debt to enterprise value today stands at just 17%. We have no debt maturities this year and just $5 million next year. We have more than ample liquidity as we finish the quarter with $43 million of cash and short-term investments on the balance sheet and a completely undrawn $250 million revolver.

Mike indicated in his opening remarks that we are solidly positioned for the return to higher levels of housing starts which virtually everyone thinks will happen over the next 12 to 18 months.

Lori, I would now like to open up the call to Q&A.

(Operator Instructions) Chip Dillon, Credit Suisse.

Good morning. I wanted to just make sure I got the guidance correctly, and if we look at the northern segment again you were saying that you expected the pricing to be up I think you said 10% to 20% in the second quarter versus the first. Is that right?

That is correct.

And then when you look at the South is that where you said -- I wasn't sure whether you said -- I think you said pulpwood would be flat and saw timber up. Is that the right way to look at it?

No, from a pricing standpoint both pulpwood and sawlogs are going to be up in the South.

And that is the 10% to 15%?

That is in the roughly 15% kind of range.

Got you, okay. And then as you mentioned the volumes in the northern segment, that is where they fall 20% to 25%, right? Do they also fall in the South very much?

No, they are actually going to increase in the South. So overall harvest volumes should be down 5% to 10% for the quarter versus the first quarter, but in the north they are going to be down 20% to 25%. But they will be up 10% to 15% in the South.

Okay. And then the 35% you mentioned is for the whole company in this third quarter, is that right?

Yes.

Yes --

Of our total harvest volume 35% comes in the third quarter.

Okay. And then you mentioned that a timber fund was raised. Do you mind sharing which [TMO] raised that money?

It was reported to be Hancock.

Got you. Okay, thank you.

Mark Weintraub, Buckingham Research.

You indicated that your sawmills are now operating at full capacity. I guess I am curious as do you have a sense as to where all the lumber is going? Is it actually being consumed now? Is it filling inventory change as well? Because certainly demand has picked up a bit, but it seems pretty amazing that we have gotten to a point where we can be running full out.

Mark, we are operating on normal two- and three-shift capacity levels depending on facilities. So we would have the potential to increase it a bit more if conditions warranted, all the way to three shifts which we have not done everywhere. So I would characterize what we are doing and most of our customers as normal.

Where the wood is going, I think it's in a whole variety of places. I think you are certainly seeing different wood flows in North America than probably we have seen in the past with the strength of the Canadian dollar and demand from offshore, from China and Japan, and the quality of wood from Canada now. I think there is more fiber going offshore then there used to be.

I think there is certainly some -- after great periods of destocking there is some inventory replenishment that is going on. It's not necessarily going up in higher housing starts. Clearly 600,000 starts, give or take, are not enough to completely tip demand over.

Also, I think it's in a whole number of small places, increasingly repair and remodel is a stronger segment. Housing is not clearly as strong as it used to be but repair and remodel is quite strong. I think industrial and public works projects are picking up steam in the country. We make industrial plywood that goes into lots of applications that are stronger than we expected this time of year for such thing as RVs, school buses, different industrial needs.

That is helpful. I realize that wood products isn't the big value driver for your company but I was a little surprised that you wouldn't have thought second quarter would have been even better than the first quarter given that we have continued to see, at least in most regions, lumber prices move higher. Can you provide a little more color on that?

Well, it's possible that it may be stronger. I think one of the things that quickly is happening is log prices are rising. And that quickly begins to erode the exceptional margins that we had in the first quarter of the year. So we are just going to have to wait and see the pace of log price increases against the duration of this rally in lumber and plywood.

Okay, thank you.

Gail Glazerman, UBS.

Carrying on that line of thought a little bit in terms of customer demand and outlook, can you give any sense to what they are doing with their wood decks? Do you think their log decks are kind of full at this point, replenished from the first quarter? Are you seeing signs that your customers are planning on ramping up production further as we look out?

Also, just wondering what level of visibility you have into that second-quarter price outlook?

Gail, we see modest signs of increasing production as we move into the second quarter. We can think of one or two of our customers in the resource business that have added a shift or put on some overtime hours, but we are not seeing a lot of closed mills start up in this environment. So I hope that answers one part of your question.

The other part is with regard to log decks, they were running at very, very low levels. The wet weather in the South kind of pushed log decks down and then we are now into spring break up so log decks continue to be down. So I don't think they are all the way back to normal levels but certainly they are headed in that direction.

Gail, I will add to it a little bit. I think log inventories are closer to being restored to normal levels in the South than they are in the northern regions. We are still just beginning to see signs of spring in the lake states and Idaho where we have a large part of our business. So log inventories are still below normal here.

Regarding our visibility into the second quarter, I think at this point we have certainly -- April business is nearly concluded. We have really good visibility on order files and activity through May. Really what remains is just uncertainty for June so we feel pretty confident about our outlook for the second quarter.

Okay. Your guidance on pricing for the second quarter in the North is that including cedar or is that kind of increase adjusting for cedar?

That includes cedar but we are seeing those kind of price increases across the board for sawlogs.

Okay. Just finally last question on land sales, can you give any sense to the likelihood, given what you are seeing in market today, that we might see another sale on par with either of the two large transactions you did last year?

As we said last quarter and we continue to say now, we think that there still remains strong interest and attractive pricing in transactions that are valued somewhere between $25 million and $100 million. There is a flow of capital from [TMOs] that are still looking to place money in attractive timberlands. We continue to explore those opportunities in each of the regions but I can't handicap our likelihood of success.

Okay, thank you.

Mike Roxland, Bank of America Merrill Lynch.

Thanks very much. Just going back on the Timberland question, you mentioned -- you said it just now that demand and interest for nonstrategic timberland has remained strong. But you had no sales of nonstrategic land I think in 4Q and there weren't any such sales in 1Q. What is happening with nonstrategic land sales and is that more of a timing issue?

Well, certainly for us, Mike, they tend to be transactions that are -- we sold 24,000 acres in the first quarter of 2009. The timber deed that we did in mid-summer 2009 was really kind of a nonstrategic type of a transaction but they tend to be lumpy. They are periodic. We typically don't do more than one or two a year.

And so it's not -- we only have a limited amount of property that we think fits this category and it's just not something that we see as a steady-state kind of activity.

Can you just remind us as to what amount of acreage you would classify as nonstrategic?

More or less 100,000 acres, Mike.

And just last question on that. In terms of the interest you said demand and interest so I guess the expectation is that you will be completing one or two nonstrategic land sales during 2010.

I think, yes, that is -- at the start of the year we had [anticipated] one or two nonstrategic timberland sales. Those are, as you know, very lumpy transactions. They are complex and they take time to put together, but what I can tell you is that we continue to pursue that type of activity.

The only reason that we would complete them, I think, is that we view them as having values that are attractive. We certainly don't feel like we have never sold things at below fair value and we won't do that today.

Got you. And last question just should a nonstrategic land sale not occur in 2010 and given where your dividend is, how comfortable are you with maintaining the dividend if you can't complete a nonstrategic land sale?

Obviously, timber wood markets have improved off the bottom and the trajectory is positive, but if one or two nonstrategic land sales get done doesn't it put a dividend a little bit more at risk? Or are you willing to tap -- use your unfunded revolver?

I think we have said for some time that one of the reasons that we did the high yield offering last year was to improve our liquidity position. We have cash on the balance sheet today. We have a $250 million completely undrawn revolver that is priced with attractive terms.

And kind of adjusting, as Eric mentioned, for one-time unusual items in the past EBITDA was $18.8 million of the first quarter of the year, which is a proxy for our dividend coverage. Our quarterly dividend is at $20 million. So given the strength of markets, our outlook for improved harvest levels, outlook for better pricing, we feel like we are pretty close to covering the dividend from core operations today.

The pressure, if you will, or the urgency to look at nonstrategic timberland transactions has been somewhat diminished.

Got you, thanks. Good luck in the quarter.

Steve Chercover, D.A. Davidson.

Thanks and good morning. I think the answer to that last question was very helpful. So I guess my only real question right now is when you refer to the non-cash cost of your real estate transactions is that basically the land base and that shows up in your DD&A for the year?

Yes, it's land basis, which you know -- generally, it was relatively low in the first quarter. It was only like 16%. That normally would be a little bit higher than that; it's only around 30%.

So you anticipated my next question. So 30% is what we should use as land basis for the full year?

Yes. Those are -- you know the way land sales work. It just depends on which acres you are selling, whether they have a high basis or a low basis. But I think around 30% is a good number to use.

Certainly. So those numbers, the 10.7 and 9.1, etc., are co-mingled in the DD&A for the resource segment, correct?

Not resource.

So maybe it would be helpful for you to show us -- to call it land basis so I will have to look at my model. The only other question then, when you do these sales does it depend if you have a like-kind transaction to offset it what the tax treatment will be in a given year?

Yes, we haven't had a like-kind transaction now for a while given the strength in the timberland market. But to the extent we can pull off a like-kind transaction we will pursue it.

Okay. And do you think it's accurate to say that land values have probably fallen by 10% or 15% since the downturn began and do you think there is much more downside risk?

Yes, I think probably 10% to 15% is a number we have heard quoted and I have seen it in a couple different places now. I think that is a decent number to assume and I don't believe there is more downside risk to it given that markets are improving. So I wouldn't think there is any more downside risk.

That number seems to be well accepted. I guess some people say that part of the reason we haven't seen that much is there really haven't been that many deals.

Yes, I think that is fair. I think the number of transactions has been small and they have been in specific regions of the country. So I think it's hard to make generalizations across the entire country but I think the smattering of transactions in the Pacific Northwest indicate that maybe it's closer to 15% than 10%. I think the transactions in the South so it's probably more in the range of 10% than 15%, but I think it's a close estimate.

Okay, thank you both.

(Operator Instructions) Mike Marburg, Ramsey Asset Management.

Two quick questions, one on the volume. So you were quoting quarter-over-quarter numbers and when you just look at that on a year-over-year basis it's going to mean the totals are up around 40%. Is that what your model shows as well?

That you are going to go from year-over-year down 5% in the first quarter to year-over-year up 40%. And I guess the second quarter of 2009 was maybe weaker than normal. Is that because it's an easy comp?

Well, yes, we had in the second quarter of last year -- yes, our volume should be up considerably this year versus last year.

And part of that, let me just expand on it, is we deferred harvest last year. Our total harvest for our company last year were only 3.8 million tons and this year we are expecting between 4 million and 4.4 million. And we have already indicated we will probably operate closer to 4.4. So the increase in harvest level is due to do the deferral last year certainly is one variance.

And you are going to see it primarily in the northern segment.

And are you at all concerned about the pull-forward of demand due to the end of June government-mandated incentive? What we are hearing from people in the lumber yards is that they are not seeing -- the reason why the mills aren't starting up extra shifts is there is not a lot of confidence that end of summer/fall season from a build perspective is going to be very strong based on the order flow that they are seeing in their conversations. Obviously not in the order books per se because it's a one- to two-month lead time.

But that a lot of orders -- they are trying to get them closed by the end of June to get this incentive in place. Is that -- are you concerned about that and/or do you have any average annual housing start number built into your annual thinkings?

Well, there is several factors. Our outlook at the start of the year was for housing to be somewhere in the range of 750,000 starts this year. That was our outlook at the start of the year. That may feel a little bit high to us right now but longer term we are still very optimistic it returns to one million-plus in the following year and above that after that.

The expiration of the tax credit for first-time homebuyers it has to be in place. That certainly could have some impact but underlying housing demand is low anyway. I don't think that that alone is a factor that is going to drive things. I think there is so many other things at work in the market.

The supply disruptions from Chile have profound impacts in the plywood market and some in lumber. The currency situation in Canada with the Canadian dollar over par with the US dollar certainly is a driver. Expiration or the tariffs on the softwood lumber agreement go down; it's unclear what that is going to mean to the market.

There is a whole lot of moving pieces. I don't think you can pin it on one thing like the expiration of the tax credit for new homebuyers.

And just to put some metrics around them, and I have read research that said that demand would be up for lumber [15% to 20%] this year with out the inventory restocking taking place. And then if you include inventory restocking on top of that demand for lumber would be up in the 30% to 35% kind of range.

And it's not due to any one thing like housing starts. Frankly, the repair remodel segment is bigger than the new home starts and the industrial segment is as large as the new starts. So it's in a whole bunch of different areas where you are seeing that pull-through in demand.

The difference between the two numbers was what? The first one was restocking only?

The 15% to 20% was not for restocking inventories, just fundamental improvement in demand. And then the 30% to 35% was assuming inventory levels go back to where they were kind of a 2008 timeframe.

Got it, okay. Okay, thank you.

At this time there are no further questions. I will now return the call to management for any final remarks.

Thank you. We will speak to you next quarter.

Thank you for participating in today's Potlatch Corporation conference call. You may now disconnect.