Potlatchdeltic Corp (PCH) 2011 Q1 法說會逐字稿

Good morning. My name is Chastity, and I will be your conference Operator today. At this time I would like to welcome everyone to the Potlatch Corporation first quarter 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 will now turn the call over to Mr. Eric Cremers for opening remarks. Sir, you may

Thank you, and good morning. Welcome to Potlatch Corporation's investor teleconference covering our first quarter 2011 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 review our first-quarter results in a little more detail. Mike?

Thanks, good morning. Last year at this time, market dynamics were quite different, although some of the causal factors were the same. Recall that product prices were rising quickly last spring, due to a fractured supply chain, an earthquake in Chile, and wet weather across the South. Today, lumber prices, particularly in the South, are under pressure. It's been unusually dry across the central south for months. And China and Japan have created unique market opportunities if the northwestern US and Canada.

Export log demand has put enough pressure on coastal log prices that mills in Oregon and Washington are now looking inland for log supplies to operate their mills. As a result, we've seen log prices and demand strengthen in Idaho, and we plan to tilt our harvest level up a bit in the second half of the year if market conditions hold. Conversely, southern log markets remain weak and continue to deteriorate as lumber and panel prices for southern products languish due to weak housing starts. Without a dramatic change in building activity or a significant change in weather patterns, we believe the market will remain weak. Consequently, we will modestly reduce our planned harvest during the second quarter and evaluate plans for the remainder of 2011 in June. Overall, we still plan to harvest about 4.2 million tons in 2011, but the harvest mix will be more heavily skewed to the northwestern region where we have higher margins, especially for saw logs.

We started the year expecting to see housing starts begin a recovery cycle in the back half of 2011, with perhaps 1 million starts on an annualized basis late in 2012. It now seems more likely that that forecast for 1 million starts will get pushed out six to 12 months as the recovery in housing languishes due to high unemployment and an oversupply of existing homes for sale. That said, we remain optimistic about the underlying fundamentals that will drive our results in the future. Diminished supply from Canada due to the pine beetle and lower allowable cuts in the eastern Canadian provinces. Increased demand for logs and building products from Asia. Energy biomass opportunities. And a healthy pulp and paper industry in our key market areas.

Coupled with our over-mature forest and higher harvest potential of high margin saw logs, we are well-positioned for improved market conference.

I'll now turn the call over to Eric to discuss the quarter and then we'll open it up to Q&A.

Thanks, Mike. As shown as page 3 of the slides accompanying this presentation, we reported first quarter 2011 earnings from continuing operations of $7.7 million, or $0.19 per diluted share. This compares to earnings from continuing operations of $1.4 million, or $0.03 per diluted share in the first quarter of last year. Included in last year's first quarter tax provision is a $0.07 per share charge for the healthcare legislation signed into law. So excluding that charge, earnings in last year's first quarter would have been approximately $0.10 per share.

I would now like to review our first quarter results broken down by segment. Slide 4 highlights operating income and margin trends in our Resource business. Our Resource segment results for the first quarter of 2011 were significantly better than our first quarter 2010 results. Operating income in this year's first quarter totaled $14.1 million, compared to $9.9 million in the first quarter of last year. Both higher harvest volume and generally-improved pricing contributed to the higher earnings.

Page 5 highlights volume and pricing trends for the northern region of our Resource business. Comparing Q1 of 2011 to Q1 of 2010, saw log fee volume and pricing improved 12% and 16%, respectively. Higher demand for saw logs, coupled with excellent logging conditions in Idaho, were the primary drivers behind our improved performance in this region. Although overall pricing for northern region saw logs declined a modest 2% from the fourth quarter of 2010, this was largely driven by a product mix effect from a decline in cedar pricing and volume. In fact, in the first quarter, mixed saw log prices actually moved up in Idaho about 3% from the fourth quarter. So mixed saw log prices remained firm in Idaho, and we expect continued strength in pricing moving into the second quarter.

Comparing Q1 2011 to Q1 2010 for pulpwood in the northern region, volumes were down 14%, but pricing was up 4%, respectively. The decline in pulpwood volume was entirely driven by our Wisconsin Timberland divestiture in Q3 and Q4 of last year. Excluding the impact of the divestiture, volume actually rose 13%.

Page 6 highlights volume and pricing trends in the southern region. Comparing Q1 2011 to Q1 of 2010 saw log harvest volume and pricing improved 4% and 1%, respectively. Primarily due to modestly higher customer demand. Recent price trends have been a bit discouraging as saw log pricing in the southern region declined about 2% compared to the fourth quarter of 2010. And continues to modestly weaken as we move into the second quarter with saw log pricing forecast to be down around 2% to 3% in Q2 versus Q1. pulpwood volumes in the southern region were up 4% year-over-year, but prices slipped 10% versus prior year, and are expected to continue to weaken another 4% or so as we move into Q2. The primary driver for weak saw log and pulpwood pricing in the South is extremely dry weather, making access to the woods relatively easy for logging activity. And, unlike the Pacific and inland northwest, does not have an export opportunity.

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 total harvest volume to be roughly 750,000 tons in Q2, down about 25% from our Q1 level.

Next I would like to review our Real Estate business. As shown on page 7, our Real Estate segment had $13 million of revenues in Q1, which compares to revenues of $3.4 million in last year's first quarter. Included in this year's first quarter results is a first of three phases of our rural recreational and non-strategic timberland sale in Idaho. Slide 8 highlights operating income trends in our Real Estate segment, which produced operating income of $8.4 million during the first quarter, which compares to operating income in last year's first quarter of $1.9 million.

Page 9 highlights our real estate acres sold by product type. We sold over 2,500 acres of rural real estate in the quarter, along with nearly 500 acres of HBU type property, in addition to the non-strategic sale in Idaho.

Page 10 highlights price trends four our Real Estate business broken down by product type. And as you can see, prices continue to be steady and consist with prior results. Our Real Estate business continues to perform well, having closed 30 transactions during the quarter.

Turning to page 11, our Wood Products segment had a solid first quarter, with operating income of $2.9 million, in comparison to operating earnings of $5.2 million in last year's first quarter, and a loss of $3.5 million last quarter. As previously disclosed, we recorded a $2.9 million charge in our fourth quarter 2010 results from lumber hedges we executed in October. In the first quarter of this year, we reversed approximately $600,000 of that charge, which benefited Wood Products' earnings in the quarter.

Page 12 highlights price and volume trends in our Wood Products segment. Comparing Q1 2011 to Q4 2010, lumber prices increased nearly 9% while shipments were down about 1%.

Returning to page 3 of our supplemental materials, corporate administration costs totaled $10.3 million for the quarter, compared to $7.3 million in the fourth quarter, and $6.5 million in last year's first quarter. Our corporate expenses increased in the quarter primarily for two reasons. First, we took a $2.3 million noncash mark-to-market adjustment for our deferred compensation plans. The plan liability is tied to our stock price, and since our stock price increased 24% during the first quarter, the plan liability went up. Second, we took a $1.2 million pretax noncash charge for deferred costs associated with the reduction in our credit facility from $250 million to $150 million. Excluding these two noncash adjustments, corporate expenses would have been approximately $6.8 million for the quarter.

Our balance sheet is in great shape with debt to capital at 54.5%, as calculated per our credit agreement. And more Importantly, net debt to enterprise value today stands at just 15%. Our only debt maturity this year was for $5 million, and that was retired in January with internally-generated funds. We have more than ample liquidity as we finished the quarter with $81 million of cash and short term investments on the balance sheet, and a completely undrawn $150 million revolver, and a $100 million accordion. As Mike indicated in his opening remarks, we are solidly positioned for the return to higher levels of housing starts, which virtually everyone thinks will happen over the next couple of years.

Our general plan for the year remains consistent with what we indicated on our last call. In our Resource segment, we expect to harvest around 4.2 million ton this year. Though, as Mike indicated, we may move a little of that volume from the South to the North where market conditions and pricing are healthier. We now expect higher diesel fuel costs to negatively impact our P&L by about $3 million for the year. We expect our Wood Products segment earnings to come under pressure over the next couple of quarters due to soft lumber prices. But we still expect Wood Products to remain cash flow positive in each quarter. In addition, given where lumber prices are today relative to the lumber hedge we executed, we may well wind up reversing the entire $2 million liability associated with the hedge, and in fact may record a little bit of income.

And although the earthquake in Japan is presenting us with some near-time term opportunities, we now have plywood product certified and suitable for the Japanese market, it is not enough to overcome the weak US lumber market. Furthermore, it is unclear how sustainable Japanese volume will be beyond the next couple of months. Finally, in Real Estate, as we indicated on our last call, we expect to sell about 35,000 acres for the year, about half of which is represented by the non-strategic timberland sale in northern Idaho. However, we now expect land bases to be approximately 30% of Real Estate revenues for the year.

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

(Operator Instructions) Gail Glazerman with UBS.

Good morning. Can you talk a little bit about how you view the dividend? If you're talking about potentially reaching that 1 million start level being pushed out potentially into 2013 or even 2014, how does it change, if at all, how you view the dividend?

Good morning, Gail, it's Mike. I don't think at this juncture we have any change in course from our philosophy. Our view has always been that we can bridge the gap between where our harvest levels are at a deferred level and better housing markets in the future, by relying on non-strategic land sales and cash on hand, and even the revolver, if necessary. With $80 million of cash today in undrawn revolver, we've pretty much got our land sales program in the bank for the year, with the non-strategic land sale in Coeur d'Alene scheduled to close the final two phases over the next couple of quarters. So I think at this point if we see a six to 12-month lag in housing getting back to over 1 million starts, I still think at this juncture we would stay the course on the dividend, but obviously that's up to the board.

Thank you. And can you talk a little bit about how you're seeing market conditions in the west? You've talked about log prices driving some customers to move inland a little bit. Has there been any change in that activity? Is it picking up, is it slowing down, pretty stable?

It was picking in the last 30 to 60 days, especially when lumber prices were a bit stronger in the West, and the Chinese and Asian log export market was pretty robust. We had a number of customers in Oregon/Washington that were looking in Idaho for log supplies. We've been able to secure a couple of those deals for the second quarter. I think it's really now, with the lumber have tipped over a bit, I think it's a wait and see, to see if that interest still remains strong, and if the export market remains where it's at. I expect we'd see continued interest if, in fact, the export market cools off a bit, then we'll see less interest here in Idaho.

That helps, thank you. Eric, the share-based comp expense that you saw in the first quarter, I can certainly appreciate given the magnitude of the share gains, the impact. But can you give us a sense of how much you've been recording on a normal basis relative to the $2.3 million that you saw in the first quarter?

The $2.3 million, Gail,, that really is associated -- it's for deferred compensation plans. It's largely driven by deferred stock for director's fees. And that total is around 250,000 shares that's been deferred. So, our stock price went up something like $7 or $8 in the first quarter. So $7 or $8 times 250,000 shares gives you a number up around $2 million. The directors, their fee normally is half stock, half cash, and so that stock portion is what is getting deferred each year. So it's small on a go-forward basis. Each quarter the additional amount that gets deferred, but it's the magnitude of the deferred that swings from quarter to quarter.

Okay, that definitely helps. And then in terms of the diesel inflation, would you expect the run rate to pick up significantly from where you were in the first quarter, or do you think the first quarter results capture most of that?

I'm sorry, did you say diesel? Is that what you're referring to?

Yes.

There's a little bit of a lag effect with diesel costs impacting the P&L. So we'll negotiate contracts with loggers and haulers, say, in the fourth quarter, for work to be done in the first quarter. So some of our first quarter results don't reflect the full amount of the increase in higher diesel costs. So it will be felt more going forward. However, I have to remind you that given the seasonality in our business, it will vary by volume, as well. So the third quarter will obviously bear the biggest brunt, given our high harvest volume in that quarter versus, say, the second quarter.

And I think, annualized, we gave guidance it would be about a $3 million impact. And obviously we attempt to negotiate as much of that as we can with our customers to pick up at least a portion of it so that our contractors don't get stuck with that. But that remains to be seen how successful we'll be.

And also that's dependent on prices staying where they are. Who knows if they'll roll over or not.

Fair enough. And then just the last question. On the lumber hedge, can you give us a sense of what the second quarter impact would be based on where contracts are today?

Yes, what I would tell you, Gail, is that our hedge, the one we're talking about, it covered a six-month period from April of this year to September of this year. And the volume was around 5,500 thousand-board-feet per month. So a total of about 33 million board-feet. The strike price on the hedge was $350 an MBF. And today, prices for that particular product, which is a Great Lakes 2x4, is around $336 an MBF. So all told, if prices stay where they are, we're in the money about $14 an MBF on 33 million board-feet. Obviously those lumber prices bounce around a lot, as you know.

Joe Stivaletti with Goldman Sachs.

Good morning. I was just looking at slide 9 on your Real Estate segment, and just wanted to try to get a little bit of guidance on your expectations for the year there. I think you said 35,000 acres -- is that your total that you expect to sell this year?

Yes, that's correct, around 35,000 acres.

Okay. So basically should we not be thinking about the possibility of any kind of major transactions, like you saw in the back half of last year then?

Yes, that's correct. We've got this sale in northern Idaho, which if you're looking at page 9, you see it was around 6,300 acres. That transaction was split into three phases, so it's going to be about an equal amount in the second and third quarter. And then we'll have a little bit of rural and HBU acreage on top of that northern Idaho sale.

Okay. So basically when you look at 35,000 acres versus having sold 9,290, or roughly a fourth of that in the first quarter, should the level of profitability or EBITDA contribution be dramatically higher or lower as we look through the remaining three-quarters of the year? Or is it pretty much indicative of what we should expect for the year?

No, I think what you should expect, there is a little bit of seasonality in the business the second and third quarters. Third quarter, in particular, tends to be a little bit stronger than, say, the first quarter. You will, in the fourth quarter, see a drop-off in real estate revenues in results, because we won't have another phase of that northern Idaho sale to complete. So I think the second and third quarters will probably look somewhat comparable to what we saw in the first quarter, maybe a little stronger in the third quarter, and then the fourth quarter will drop off a little bit.

Dan Cooney with KBW.

You talked about increasing your harvest levels in Idaho. Can you remind us where your current harvest levels stand relative to the long-term sustainable pace, and just how much flexibility you have there in terms of contractor capacity and infrastructure needs? Thanks.

Our current guidance for the year is about 4.2 million tons of harvest. And our longer term rate is about 4.6 million tons. The bulk of that increase will happen in Idaho. The bulk of it will be saw logs. And then, again, that's dependent. We've said that when we see housing starts at roughly 1 million units, that would be the key that we look for to increase harvest levels when we'd expect to see stronger prices. So based on our commentary today, I think we're looking at the back half of 2012 to 2013 before we see another step up, from 4.2 million tons on our pathway to 4.6 million tons. And we do not have any concerns about contractor capacity to execute that kind of increase in any of our operating areas.

Okay, great. And then it looks like you put about $9 million into your pension plan during the quarter. Is that all you expect to fund this year?

Yes, that's correct, Dan. We did put $9 million into the pension plan in the first quarter, and that's all we expect this year.

And can you just remind us what the CapEx outlook for 2011 is?

Our latest estimate is it will be around $18 million for the year.

Chip Dillon with Credit Suisse.

I just missed this one number, you mentioned the basis on the land sales for the year. Did you say 37%?

No, it will be 30%, three-zero.

Got you, that's helpful. And then getting back to the long-term harvest, you mentioned the 4.6 million acre level. Is that something that is likely, Mike, to be steady for 10 years, 20 years? Will it change much? I seem to recall that you do get to that level and you can hold it for, like, 10 or 12 years. Is that about right? And then it starts to fade a little bit?

The 4.6 million ton level, depending on how long we execute the harvest deferral and how lumpy we harvest -- we have the capability to go up to 5 million tons in a year or two if we wanted to. But we'd have to drop off more in subsequent years. So 4.6 million acres we view as a sustainable rate for about a decade, and then it will begin to fall off as the age class of the forest works through maturity. And, of course, that assumes no more acquisitions than where we're at today.

Got you. And then I just want to make sure I've got the hedge right. You mentioned 33 million board-feet at about a $14 profit. Maybe I missed something. But that would suggest you have about a $462,000 in-the-money position. And I thought I heard somewhere in the call that you might have $2 million that you could recognize. Maybe I just misheard you.

Yes, let me restate that. We currently have a liability at the end of the first quarter, on the balance sheet, of $2 million to unwind that hedge. And that's based on where lumber prices were at the end of the first quarter. Over the past couple of weeks, prices for Great Lakes 2x4 have dropped considerably to the point where not only would we wind up reversing that $2 million liability, but we also would potentially record that delta, that $400,000 number you mentioned, take that into income.

Okay, that's very helpful. And then the last question is, on the harvest level for the year, you talked about shifting some from the South to the North. I know last year it was around 2.4 in the North, and 1.75 in the South. Could this year be something like 2.6 in the North and 1.4 in the South, or is that too dramatic?

This year we're looking at around 2.5 in the North. Remember, we no longer have Wisconsin harvest volume, and that was about 100,000 tons per year. Mostly low margin pulpwood. But it's roughly 100,000 tons we're talking about moving.

And then lastly, just real fast, the Wisconsin sale, should that flow about evenly as it did in the first quarter through the second and the third?

You're talking about the northern Idaho sale?

I mean northern Idaho, sorry, yes.

Yes, it's going to be a little bit less. Just to give you a sense of it, it was $9.1 million of revenues in the first quarter, it's forecast to be $8.2 million in the second quarter, and then back to $9.1 million in the third quarter. So it will vary a little bit quarter to quarter.

Steve Chercover with DA Davidson.

Good morning, Mike and Eric. Do you guys really benefit directly from China, or is it simply from tightening log markets in the Pacific Northwest?

We do benefit, Steve, to the extent that one of our largest customers here in Idaho is producing lumber for sale to China. And that customer buys about 10% of our saw log harvest volume each year. And we know that meaningful amounts of their lumber is going into China. So we benefit that way, number one. Number two, we have empirical data that shows prices over the last six months or so on the west side have gone up about 30% for Doug Fir and Hem Fir. And if you look at where inland prices are today -- now, this is market data, not our data -- prices for Hem Fir are up about 15% over the past six months. And compare that to the South where prices are basically flat compared to where they were six months ago, maybe even down a little. So it's clear to us that we're benefiting from the China effect, even though we're not directly exporting to China.

Could you do it via the Columbia River, or is that just too far?

No. As I mentioned, Steve, we have customers on the West Coast that are currently purchasing logs from us near the Port of Wilma, Lewiston and Clarkston, Idaho, taking them down the Columbia River to the Portland area, and then consuming them in mills in that area. So that's an active market today. We could pursue the same route for export, but we would be prohibited from purchasing logs from the state of Idaho if we did that, and that's an important component of supply for our manufacturing business. So we do not participate directly in the export business.

Sounds a little bit like the BC situation.

Yes.

And it's probably premature, but there were some pretty nasty storms in Arkansas. Was that north of your land, or do you know if you've had any impact?

The storms have been almost daily, and as of last night, we didn't have any significant impact to any of our timberland that we're aware of.

Okay. And finally, you gave Chip some pretty granular information, which it was helpful. Have you ever considered giving quarterly and annual earnings guidance, to be consistent with some of your peers?

We do talk with the board from time to time about giving guidance. And we've been loathe to give that guidance because we're concerned about having to constantly come back to markets and update things. We try to give enough detailed information to give folks the information they need to accurately build their models. So it's certainly something that we consider from time to time, though.

(Operator Instructions) Mark Weintraub with Buckingham Research.

Thank you. Just wanted to understand, when you talk about the 4.6 million tons longer term, I know in the past, you'd had a higher number than that, I think north of 5 million. And I wasn't sure if the shift is just not stepping it up quite as aggressively for a short period of time, or how much of this is an impact from land that you've sold. If you could just break down how that shift is apportioned.

Hi, Mark, it's Mike. We did reconcile the harvest guidance to the acreage base that the Company currently has. It was as high as 5.1 million tons to 5.2 million tons at one point when we had more acres. We have sold a timber deed in Arkansas, we sold approximately 50,000 acres in Arkansas, and we disposed of our Wisconsin holdings. All of those things caused us to reevaluate the harvest profile going forward, and we now think that 4.6 million tons represents a sustainable level for about a decade. That said, in any given year, we could go a bit higher, but we would have to back off subsequently.

Okay. But the 4.6 million tons, it was comparable to the 5.1 million tons, 5.2 million tons, and you could have, in theory, pushed that more aggressively prior to the land sale. Is that the right way to understand it?

Yes, it is.

Then second, I just want to make sure I understand. So about 33 million board-feet on the hedges. That seems to be a little bit more than 5% of your lumber shipments each year. So first of all, is that the right way to think about it, or do you have other hedges in other regions to be aware of?

No, today we only have one hedge in place, and it's for that six-month period. And you're light, it's about 6% to 7% of our annual volume. But, Mark, we're constantly, I would say weekly we're evaluating potential hedges. Since we executed this last one in October, we haven't found another one we thought was attractive enough to enter into, but we do look at them constantly.

Okay. And regionally, order of magnitude, how much of your lumber would come from Great Lakes versus other regions? And are there big differences going on in pricing region to region?

I don't have the exact number, but probably 40% of our lumber comes from the Great Lakes region and the rest is split is equally between Idaho and the South, approximately.

And are you seeing similar price trends, or are there fairly wide differentials going on from region to region?

It can move around quite a bit. Southern lumber has been particularly weak lately, and think that's because it's tied so closely to construction and housing. So much of it is treated. Those applications start strong. The Great Lakes business has benefited from harvest curtailments and reduced supply from eastern Canada, and we have benefited from that. And the western business is probably a little bit stronger relative to the other two.

And last question, historically, it seems that lumber pricing has tended to lead log pricing. It's not a perfect correlation, far from it. But given that lumber pricing in the Pacific Northwest has weakened some, and presumably margins at the saw mills are very tight, is the bias or the likelihood that log prices are going to come under pressure? Or is the advent of the Asian markets being a bigger factor, does that offset perhaps that we can have different relationships than we've seen in the past? Do you have a perspective on that?

Early to say. I think it's just depends on how active the Asian purchases of logs are, and how long that continues, or if they play the market a bit more. So I don't think enough time has gone by to answer that definitively.

Thank you. At this time, there are no further questions.

Great. Thank you.

Thank you for joining today's conference call. You may now disconnect.