Potlatchdeltic Corp (PCH) 2012 Q1 法說會逐字稿

Good morning. My name is Christy and I will be your conference operator today. At this time, I would like to welcome everyone to the Potlatch first Quarter 2012 earnings conference call featuring Eric Cremers, Executive Vice President and Chief Financial Officer, and Michael Covey, Chairman, President, and Chief Executive Officer for Potlatch Corporation. (Operator Instructions) I would now like to turn the call over to Mr. Eric Cremers for opening remarks. Sir, you may proceed.

Well, thank you and good morning. Welcome to Potlatch's investor teleconference covering our first quarter 2012 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 in 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'll drill into our first quarter results in a little more detail. Mike?

Thanks, Eric. Good morning. On the one hand, we're off to a solid start in 2012 as first quarter consolidated results have exceeded our own expectations on our outlook for the remainder of the year has modestly improved from our last call. Although our Resource business experienced lower sawlog prices in Q1, we expect prices to improve as we move through Q2 and Q3. In wood products, stronger lumber and plywood prices, with continued relatively low log input costs, justified running some of our mills with overtime during the first quarter, and as a result we experienced strong operating income from this segment.

In our Real Estate segment, we had one of our strongest HBU and rural recreational Real Estate quarters on record. All told, we're off to a solid start in 2012 and our outlook has improved from the last quarter. However, on the other hand, the key driver for cash flows for the Company, the harvest level of higher margin sawlogs will remain suppressed over the near term as we continue to defer harvest. Our view is that log prices will move higher over the next year or two as the housing market continues to improve. In the meantime, our forests will continue to grow providing even more cash flow when the timber is eventually harvested.

We continue to be optimistic about the underlying fundamentals that will drive our results in the future, an improved US housing market, diminished supply from Canada due to the pine beetle, and lower allowable cuts in the eastern Canadian provinces, and increased demand for logs and building products from Asia. Coupled with our over-mature forests and higher harvest potential of high margin sawlogs, we are well positioned for the future.

I'll now turn it over to Eric to discuss the quarter and then we'll take questions in a couple minutes.

Thanks, Mike.

As shown on page 3 of the slides accompanying this presentation, we reported first quarter 2012 net income of $5.1 million or $0.13 per diluted share. This compares to net income of $7.7 million or $0.19 per diluted share in the first quarter of last year. I'd now like to review our first quarter results broken down by segment.

Slide 4 highlights operating income and margin trends in our Resource business. Operating income came in at $8.7 million in Q1, lower than the $12.6 million we earned in the prior quarter and lower than the $14.1 million we earned in Q1 of last year. The primary driver of the income variance was lower harvest volume, as we announced in fourth quarter we were lowering our harvest level due to the weak pricing environment.

Page 5 highlights volume and pricing trends for the northern region of our Resource business. Comparing the first quarter of this year to the first quarter of last year, northern region sawlog volume declined 18% while pricing improved 2%. Comparing Q1 of this year to Q4 of last year, sawlog harvest volume dropped 22% and pricing slipped 6%. Volume is lower in Q1 this year due to the previously announced reduced harvest plan for the year, as well as the fact that logging conditions were excellent in Idaho in both the first and fourth quarters last year, which facilitated aggressive harvesting activity.

Regarding pulpwood in the northern region, harvest volume was flat compared to Q4 but was down 9% compared to Q1 of last year driven by our harvest deferral decision. Pulpwood pricing in the northern region was up 1% compared to the fourth quarter and was up 11% compared to Q1 of last year. A general lack of sawmill residuals in the pacific northwest is helping support pulpwood prices in the region. Page 6 highlights volume and pricing trends in the southern region. Comparing Q1 of 2012 to Q1 of 2011, sawlog harvest volume and pricing declined 41% and 10% respectively, and comparing Q1 this year to Q4 of last year, sawlog volume and pricing declined 28% and 3% respectively.

The lower harvest volume is also directly attributable to our harvest deferral decision, and the lower pricing is due to relatively weak sawlog demand in the region. Pulpwood harvest volume in the first quarter was down 12% compared to the prior year, and was down 35% compared to the fourth quarter. Again, due to our decision to lower our harvest level. Pulpwood prices slipped 2% versus the prior year but were up 1% compared to the fourth quarter.

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 snow melts in the northern region which we typically experience this time of year. We are estimating our total harvest volume to be roughly 670,000 tons in the second quarter, down about 14% from the first quarter, but consistent with last year's second quarter harvest level.

Next I'd like to review our Real Estate business. As shown on page 7, our Real Estate segment had $8.2 million of revenue in the first quarter, which compares to revenue of $13 million in last year's first quarter, and $3.2 million in the fourth quarter of last year. Included in last year's first quarter results is a first of three phases of a non-strategic land sale in Idaho which accounted for over $9 million of revenues in that quarter.

Slide 8 highlights operating income trends in our Real Estate segment, which produced operating income of $6.3 million during the first quarter, which compares to operating income in last year's first quarter of $8.4 million and the $2.1 million in the fourth quarter.

Page 9 highlights our real estate acres sold by product type. We closed 41 real estate transactions in the first quarter, a bit above our expectation of roughly 30-40 transactions a quarter. Further, we sold over 3000 acres of HBU in the first quarter, which is the highest quarterly amount we've sold in several years.

Page 10 highlights price trends for our Real Estate business, broken down by product type. Prices continue to be relatively steady and consistent with prior results. Our Real Estate business continues to perform well.

Turning to page 11, our wood products segment had a solid first quarter and exceeded our expectations with operating income of $5 million in comparison to operating earnings of $2.9 million in last year's first quarter and a loss of $1.3 million last quarter.

Page 12 highlights price and volume trends in our wood products segment. Comparing Q1 of this year to Q4 of last year, lumber prices increased 6%, while shipments were also up about 6%, as we ran overtime at some of our mills to capture incremental profit. Returning to page 3 of our supplemental materials, corporate administration costs totaled $8.3 million for the quarter compared to $9 million in the fourth quarter and $10.3 million in last year's first quarter.

On a year-over-year basis, our corporate expenses decreased as we had two adjustments in the year-ago period. First, we took a $2.3 million non-cash mark-to-market adjustment in our deferred compensation plans. The planned liability is tied to our stock price, and since our stock price increased 24% during the first quarter of 2011, the planned liability went up. Second, we took a $1.2 million pre-tax non-cash charge for deferred costs associated with the reduction in our credit facility from $250 million to $150 million last year. Excluding those two non-cash adjustments, corporate expenses would have been approximately $6.8 million for that quarter.

Corporate expenses were about $1.5 million higher in Q1 of 2012, driven by higher pension expense. Our balance sheet is in great shape, with debt-to-capital at 56% as calculated per our credit agreement, and, more importantly, net debt to enterprise value today stands at just 19%. We had $16 million of debt maturities in the first quarter and another $5 million in early April, all of which was retired with cash on hand. Our next debt maturity is not until August of next year and is only $8 million. We have more than ample liquidity as we finish the quarter with $59 million of cash and short-term investments on the balance sheet and a completely undrawn $150 million revolver with a $100 million accordion.

As Mike indicated in his opening remarks, we are solidly positioned for the return for 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 about 3.5 million tons this year, as we patiently wait for demand and pricing to improve before we increase harvest levels.

In fact, as we look out into Q2 and Q3 we expect sawlog prices in both the Northern and Southern regions to improve about 3-4% per quarter. As outlined in our investor materials, we have the ability to increase harvest levels roughly 30% from today's level, which at modestly higher prices should provide around $65 million of incremental cash flow to the Company. Also, as roughly 50% of our sawlog harvest volume is now indexed to the price of lumber, high lumber prices will quickly translate into high sawlog prices, and thus cash flow for our Business.

In our wood products segment, we expect continued strength over the next few quarters due to higher than expected lumber and plywood prices. Of course, wood product prices are volatile and can change quickly, but early indications are for continued strength for the remainder of the year. Finally, in Real Estate, as we indicated on our last call, we expect to sell about 20,000 to 25,000 acres for the year and we continue to feel confident about this outlook.

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

(Operator Instructions) James Armstrong, Vertical Research.

Good morning.

(multiple speakers) Good morning.

First question is on your commentary in the Press Release. You've mentioned that China -- demand from China has fallen off. Could you give us any insight into this? When it happened, if you're still seeing it, what's going on there?

Well James, as you know, we don't directly participate in the export market for Chinese logs. We do have a large customer that we sell logs to here in Idaho that produces lumber that sells to China so we get information kind of anecdotally on what is going on in China. And what we see, what we hear is that things slowed in the fourth quarter of last year and into the first quarter of this year, and a lot of that was driven by inflation concerns the Chinese government had, particularly around food. So interest rates went up, bank reserve requirements went up, and the Chinese economy slowed.

And what we're seeing, what we're hearing now is that things are starting to turn around again. Inflation has eased. Interest rates are coming down. Reserve requirements are coming down. And what we're hearing is that construction activity should start to pick up again as we get out into the -- further into the second and third quarter. And also something people don't talk a lot about was that China had one of the coldest winters over the last several decades and that really cold winter slowed construction activity. So again, our information is anecdotal but what we hear is that things should get back on track as we move through the year.

Perfect. That helps. Shifting topics, given what's currently happening in the market, do you see any major changes to where your -- the volume will be coming from northern segment versus southern segment? Would you be harvesting a little more in the south than you previously anticipated or is the mix about the same as you forecasted?

This is Mike, James. No. Our outlook hasn't changed. Most of our harvest deferral occurred in the south where we think prices are the weakest and we have no reason to change that at this point.

Okay. Lastly, you saw timber realizations. You expect them to pick back up, and so far in the second quarter have you seen them move around a whole lot or are they roughly flat from the first quarter thus far?

No, I think they've moved up a little bit from where they were in the first quarter, James. These are not huge changes we're talking about. They are measured in the low single digits on a percentage basis but I think they are up a little bit from where they were and that's driven by these higher lumber prices.

Perfect. Thank you very much.

Gail Glazerman, UBS.

Hi, good morning.

Good morning.

I guess just sticking to things for one quick second, you talked about sawlog prices moving up. Did you expect pulpwood to be stable, up, down?

Yes, no I think we're expecting pulpwood prices to be relatively stable here, Gail. We've seen a nice run here lately and they've firmed up and we don't expect them to continue to move higher nor do we expect them to decline.

Okay, and just in terms of harvest mix between sawlog and pulpwood, would you expect the first quarter to be a guide or how should we think about that kind of in the second quarter?

Well, I think if you look at the second quarter of this year compared to the second quarter of last year, it will look reasonably similar to what happened last year. It will be pretty comparable at the end. There may be a little bit less sawlog in the northern region and in the southern region and a little more pulpwood but not a lot.

Okay, and in the release there was a comment about customer inventories having built up a little bit. Is that something that's been worked off or do you still think customers have fairly high inventory?

No. Go ahead, Mike.

Well, to be clear, it's log inventories we're speaking of, not lumber or plywood and I think by and large throughout our operating areas, the winter operating season was pretty favorable. Mills were able to put in substantial inventories of logs for typical seasonal breakup purposes and particularly in the west and we still see high inventories throughout the west due to that build up of logs and so that's really what our comment refers to.

Okay, and just one last question. Last quarter, there was talk about harvest costs being up because of just a particular properties you were going to be harvesting in Idaho and it sounded like perhaps you had a little bit of a mix with more Minnesota pulpwood than Idaho sawlog. Should we expect to see the harvest costs kind of move up more in the second quarter?

You'll see costs in our Resource segment move up a little bit in the second quarter, Gail, but that's going to be driven as much as seasonal factors than anything else, road expense for example, forest management expense, that sort of thing. Fuel prices ran up in the first quarter as well and they started to rollover a little bit here so we'll see what happens with that, but it's really a combination of the characters.

And most of the increase that we indicated in our Idaho logging cost was related to steeper terrain and more expensive logging systems, the bulk of that will hit in the third and fourth quarter.

Oh, okay.

Joshua Barber, Stifel Nicolaus.

Hi, good morning.

Good morning.

I was wondering if you could talk a little bit more about the wood product business. I know you had comments there about mills running but overtime and you obviously had a very strong quarter. Can you expand a little bit more on that? How much of that was lumber versus plywood and is that something that you're just seeing specifically in Idaho or would you characterize that as being pretty equal across the south and north?

I'll make a few general comments. We're seeing it across all of the facilities that we operate throughout the United States and that's from Michigan through the south and the lake states and here to the west. All of our mills had a really strong quarters and I think it's a reflection of very low customer inventories in the field, unlike the log situation. Whether it's home centers or pro builders or others due to credit situations and lack of an appetite to take any risk, most people are running kind of hand to mouth on building product inventories so that's helped support pricing in lumber and plywood. Plywood was relatively stronger than lumber and that's largely due to the closure of some southern plywood plants throughout the US over the last couple of quarters as well as a large fire in a large producer in Chile that interrupted supply to the United States, so by and large plywood has been stronger but lumber is good and we really expect the situation to hold for a few quarters here. There's certainly a lot of vital capacity in the industry but pricing has held pretty firm.

Have you seen anybody to that point thinking about reopening some of that idled capacity or it's too early for that?

I just can't comment on that. I don't have any knowledge of what other people's plans are.

Okay. Last question on the real estate sales. You had talked about 25,000 acres. Can you give us a little bit more details on what you expect the mix to be, especially given that you had a lot of HBU development sales in the first quarter?

Yes. You know, if you take a look at it we did have a relatively strong HBU sale in the first quarter but we're always working on different deals, Josh, and the Real Estate business can be lumpy, but we still expect to sell that roughly 20,000 to 25,000 acres per year, roughly 30% is going to be non-strategic, roughly 40% will be rural and roughly 30% will be HBU. So that's kind of how we see the mix shaking out over the course of the year.

That's very helpful. Thanks very much, guys.

Michael Roxland, Banc of America, Merrill Lynch.

Thanks very much. On the last call, I believe that you mentioned the 65% of your log volume in Idaho is in various lumber indices and on a one quarter lag and on this call you mentioned that it's about 50% for the overall portfolio. Given the general uptrend in lumber prices beginning late 4Q and continuing through 1Q, how do you reconcile that with the $5 per ton decline you saw in northern sawlog pricing?

Well, you know, you've got to, it's not everything is indexed to the price of lumber. Our Cedar sales for example, which are much higher priced product, that's not indexed to the price of lumber so there are mix issues that are underlying all of that when you sort through it.

So it's more of a -- is it basically the 35% that is not tied to the indices, meaning that the volume is not tied to the indices really drove your pricing lower? Was it strong enough to drive your pricing lower to $5 per ton in 1Q?

That's correct.

Okay, and when do you see rebound in Cedar sales? Is 2Q typically your strongest?

Yes, we will see a rebound in Cedar sales as we move out.

Okay, and then just on real estate quickly, you sold around 3,000 acres for an average price of about $1,850 an acre in 1Q. Was there anything in particular about that land that caused you to sell it for that price? Because when I looked back the last few years, your average HBU price has been around $2,300 an acre so almost $500 an acre more than what you sold this HBU land for in 1Q. What was the reason, what was the logic behind selling this acreage?

That's a good question, Mike. As I mentioned, these real estate sales are lumpy and they're very project specific and there's some discretion as to which bucket we'll put a real estate transaction in, whether it's rural or non-strategic or HBU. The particular transaction that really drove that average down in the first quarter was some timberland that we sold in Minnesota to somebody that was going to convert that land over to an agricultural use so it wasn't, people think of HBU as a new house or new retail development or multi-family projects, something like that. This is not that kind of an HBU sale. This is converting it from timberland growing to agricultural use, so a little bit lower value add application.

But still significantly, in our view, significantly more value than -- as you continue to hold and manage the property as timberland so we felt that this agricultural use was its highest and best use and made sense to sell it.

And was the land originally labeled as HBU or is it something that you switched into the HBU category from non-strategic in the last couple quarters? How did you determine -- how did it wind up in HBU?

Well it wound up in HBU because somebody approached us and asked us if we would be willing to sell the acres and pay us a great price for it.

Got it. All right. Good luck in the quarter.

Thanks.

(Operator Instructions) Mark Weintraub, Buckingham Research.

Thank you. Just clarifying from that last question, want to make sure I heard that right. Did you say that so 65% of your Idaho sawlogs are indexed to lumber and 50% overall? Was that correct?

Yes, that's more or less correct.

Okay, and is that for third party or does that include also internal sales?

It's some of both.

Okay, and would it be a similar percentage though if you just looked at third party? Or does that change quite a bit?

We looked at third party?

I don't think it changes too much.

Yes, I don't think it changed too much, Mark. I haven't thought of it that way before but I don't think it changed too much.

Okay, and when you say indexed, does that mean that if the lumber price goes up by -- and I don't know if you're doing it off the framing or your more regional, et cetera. If it goes up by $10, is it a percentage or can you give us a little bit of a sense just so we can understand the -- how to model the magnitude of change in lumber, how that would relate to the magnitude of change in your sawlog pricing?

It's not on a percentage basis. It's based on a dollar basis, so we use here in Idaho it's Western Wood Products Association puts out a price sheet. I believe it's weekly and so we'll average those up or excuse me, monthly, we'll average those up and then whatever the dollar changes, the contract that we have that directly ties to a change in the log price.

Okay, and is this something particularly on the third party stuff, is this just for this year or how should one think about -- is this a change in the way you expect pricing on a go-forward basis to be or is this just a this year thing?

No, I think it's more than just a this year thing, Mark. It's an agreement that both we and a major customer have agreed to. They like it and we like it. They like it because it more or less locks in margin for their mills. We like it because we participate very quickly. Our view is that prices were going to move up as housing and these other things start to impact markets and we wanted to participate very quickly as opposed to waiting the traditional two or three quarters for prices to improve so both parties are pretty happy with how this thing is structured.

Well, it's with more than just one other party.

Yes. It's more than one but there's one big one.

Okay, and then lastly, you had referenced the plywood closures, et cetera, and of course you'd lost an important customer, at least temporarily. Any update on whether Crossett might at some future point be reopened or is that now a permanent closure and are you proceeding in terms of finding other potential users for the wood sooner rather than later or is that something you want to wait and see the market strengthen before you do that more aggressively?

Yes, I don't have any update on the status of the Crossett facility and Georgia Pacific has not made any statement about it that we're aware of. We're more actively looking to reposition the logs to other customers and continue to have some luck doing that but overall, we continue to have deferred harvest levels there because of the weak market and so the urgency to reposition the logs has not really hit yet and it won't until we see better pricing and then it should be pretty easy to reposition. There's a lot of mills in southwest Arkansas.

Okay, great. Just one last thing. Wasn't 100% sure of what you said. In terms of the Cedar pricing, I know you answered whether there's been any change. I missed that. What did you say?

Oh, I said cedar pricing really tends to pick up in the second quarter and our expectation is that our cedar pricing is going to improve as we move through the year and that should favorably impact northern region sawlog prices.

Okay, thanks very much.

Steve Chercover, D.A. Davidson.

Thanks, good morning everyone. I was also interested in lumber and some of the questions have been asked, but it seems right now that you've gone from expecting 2012 to be a pretty significantly down year to being $15 million to $20 million EBIT number. Is that correct?

Yes, I don't know that we thought this is going to be a down year, Steve. I think we thought 2012 was going to be relatively flat compared to 2011 which was not a great year for wood products for us. And it was an okay year. But with these higher lumber prices that we're seeing, our expectation is for results to be better this year than they were last year and I think in the kind of range you spoke about and it's very realistic.

And considering the hopefully not permanent loss of the GP Mill, would you contemplate restarting your Prescott Mill in Arkansas?

Steve, we sold that mill and its been dismantled and torn down.

Oh, sorry I guess I missed that. And then also in Arkansas, maybe I missed this too. Do you own the mineral rights down there and any opportunities for you down there?

You know, the sub-surface estate is very complex and it varies in counties and all over the place but we have not so far in the counties in south Arkansas, we have not had any mineral or oil or gas exploration successes as of yet.

Great. Thank you.

That does conclude our question and answer session for today. I hand the program back over to management for any further comments or closing remarks.

Thank you very much for your participation this quarter and we'll speak to you at the end of second quarter.

This does conclude today's conference call. You may now disconnect.