Potlatchdeltic Corp (PCH) 2013 Q3 法說會逐字稿

Good morning. My name is Melinda and I'll be your conference operator today. At this time, I would like to welcome everyone to the Potlatch third quarter 2013 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer session.

(Operator Instructions)

Thank you. I would now like to turn the call over to Mr. Mike Covey, Chairman and Chief Executive Officer for opening remarks. Sir, you may proceed.

Thank you and good morning.

Welcome to Potlatch's investor teleconference covering our third quarter 2013 earnings. With me this morning in the room are Jerry Richards, Potlatch's new Chief Financial Officer, and Eric Cremers, President and Chief Operating Officer.

Before we begin, I'd like to 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 our reconciliation of non-GAAP measures can be found on our website, potlatchcorp.com as part of the webcast for this call.

We are happy to report another quarter of solid earnings. Resource posted seasonally strong results in spite of the fact that we've pulled harvest forward into the first half of the year to take advantage of strong saw log demand. The pulp wood market however continues to be over supplied in the North and we've not yet seen an improvement in pine saw log prices in the South.

Our wood products mills operated well in the third quarter. While average lumber prices were lower than the second quarter, they are currently higher than they were at the start of the third quarter. We are on track to complete several high return capital projects this year, which will reduce costs and improve recovery and productivity at each of our mills.

Interest in our HBU and rural recreational properties continues to be strong. We closed 53 transactions in the third quarter, which is one of the highest transactions totals, since we converted to a REIT in 2006.

We continue to be encouraged by the long-term fundamentals that drive our performance. Housing starts have improved, although at a bit more of a measured pace than anticipated earlier in the year. End use wood products demand is steady and we anticipate a normal seasonal pattern in the fourth quarter as buyers look to end the year with lean inventories.

Lumber prices have stabilized and it appears they will continue to strengthen well into next year. Ultimately we look to the end of the year with solid results and anticipate operating conditions will continue to improve through 2014. We will provide more thoughts about 2014 on our fourth quarter earnings call.

After several quarters of improved performance, especially in wood products and northern resource, it is clear that we are building cash and believe a return of capital to our shareholders in the form of a higher sustained dividend is important to shareholders. Our Board has taken a cautious approach to raising our dividend and we will meet later this quarter to make a determination. Any updates will be communicated in the form of a press release.

Now I'd like to turn the call over to Jerry Richards who has been on his role as CFO for the last three months. He will provide more detail and then we'll open it up to questions. Jerry?

Thank you, Mike. I'm excited to be at Potlatch and look forward to working with those of you on today's call.

As shown on Page 3 of the slides accompanying this call, our third quarter net income was $22.2 million, or $0.54 per diluted share. This compares to net income of $19.2 million last quarter, or $0.47 per diluted share.

We recorded a pretax charge of $1 million during the third quarter for environmental remediation at one of our properties in Northern Idaho. The after-tax effect environmental remediation charge was $0.02 per diluted share. We recorded a charge of $1.8 million on a pretax basis, or $0.03 per diluted share in the second quarter. We are pleased to report the physical clean up activities at the site were completed during the third quarter.

Now I'd like to review the results of our operating segments for the quarter. Information about the performance of our Resource segment is displayed on Slides 4 through 6. Third quarter income was $25.4 million, compared to $14.5 million in the second quarter. As you know, the third quarter is typically Resources' seasonally strongest quarter. Northern saw log prices were 3% lower than the prior quarter. The modest price decline was a result of the lumber indexed arrangements that currently cover approximately 2/3 of our harvest volume in the region.

Because the contractual agreements were set on a one- to three-month lag, the declines in lumber prices experienced during the second quarter affected our average third quarter saw log prices. Adequate log yard inventories at mills also played a role in the minor price decline.

Harvest volumes increased nearly twofold from the prior quarter, as the third quarter is generally the optimal harvest season in our northern region. Third quarter saw log harvest volumes were slightly under historical third quarter volumes, primarily due to the strategic decision to pull forward a portion of the planned third quarter harvest volume earlier in 2013 to capitalize on attractive saw log prices.

In the northern region we continue to execute a strategy of minimizing pulp wood production due to weak demand. Southern saw log prices rose 9% and harvest volumes increased 30%, compared to the second quarter, due primarily to a higher mix of hardwood saw logs in the third quarter. Adverse weather negatively affected hardwood saw log production in the second quarter. Southern pine saw log and pulp wood prices were flat, quarter-over-quarter, while harvest volumes increased seasonally.

Information about the performance of our Real Estate segment is displayed on Slides 7 through 10. Third quarter revenues for our Real Estate division were $8.9 million for the quarter, compared to $5.8 million in the previous quarter. We sold more HBU property in the third quarter, which sells at a higher price than non-strategic timber land or rural real estate.

Operating income for the third quarter was $6.5 million, compared to $4.1 million last quarter. Overall we are pleased with the continued strength of demand for HBU and rural recreational properties which has supported firm real estate prices throughout the year.

Information about the performance of our wood products segment is displayed on Slides 11 and 12. Operating income for the third quarter was $11.3 million, compared to income of $19.7 million in the prior quarter. Average lumber prices realized in the third quarter were 14% lower than the second quarter. Lumber prices declined in the second quarter after hitting a peak in April, stabilized and increased during the third quarter. Lumber shipments for the third quarter were up 14% over the prior quarter, reflecting resumption of buying after prices bottomed near the end of the second quarter.

Corporate administration costs, excluding net cash interest expense, were $10.8 million, compared to $7.7 million in the second quarter. Second quarter results included favorable non-cash mark-to-market adjustments related to our deferred compensation plans. We also increased our incentive compensation accrual in the third quarter as a result of our strong 2013 performance.

Overall, our financial position remains sound and we have ample liquidity. We ended the quarter with $63 million in cash and short-term investments and almost $250 million of borrowing capacity on a revolving line of credit. We have no debt maturing until the end of 2015. Capital expenditures for the quarter were $6.5 million and we continue to anticipate full-year capital expenditures will be approximately $24 million.

Next, I'd like to discuss our outlook for the final quarter of 2013. In our Resource segment, we expect to harvest approximately 3.7 million tons in 2013. Prices for southern pine of saw logs remain largely unchanged and we do not foresee meaningful price improvement in the near-term. We anticipate that northern region saw log prices will decline slightly in the fourth quarter due to seasonal factors and the lag effect of lumber price changes earlier in the year.

We should see modest improvement in wood products prices during the fourth quarter, consistent with industry forecasts. We anticipate shipment volumes will decline slightly from the high level we've reached in the third quarter, but remain above the first two quarters of the year. We expect fourth quarter wood products earnings to be comparable to the third quarter.

We expect our real estate business will sell between 18,000 and 20,000 acres for the year, consistent with our original 2013 estimate. Pricing should remain steady at an average price per acre of approximately $1,400. Land bases should approximate 15% to 20% of our land sales revenues for the full year.

In closing, we are pleased with our operating results for the first three quarters of 2013 and we anticipate continued solid results in each of our operating segments for the fourth quarter, as industry related economic fundamentals continue to improve.

That concludes our prepared remarks. Melinda, I would now like to open up the call to Q&A.

(Operator Instructions)

Your first question comes from Michael Roxland.

Thanks very much. And Jerry congrats on your new role. The first question I had was, what was the biggest driver behind the lumber pricing improvement we began to witness in 3Q? Was it a matter of inventory tightness, mill downtime, wet weather impacting volume conditions -- is there any way to really qualify what's been driving lumber prices up?

Hi Michael, it's Eric Cremers.

Hi, Eric.

Good morning. So, it's really tough to know, but our gut feeling is that what drove the price decline from the -- between the quarters had to do with inventories out at the dealers. If you recall, early in the year there was a lot of buzz about higher housing starts for the year and a lot of dealers went and procured lumber inventory. And then some bad weather hit and prices started to rollover and then as the prices rolled over, dealers were reluctant to buy more. And that's what drove prices down so low. So we think the bounce up was inventories needed to be replenished to keep up with the higher levels of housing starts that you started to see as you got into kind of the summer and the early fall months.

So really it wasn't inventory replenishment given inventories were driven unsustainably low previously?

Correct.

Okay, got it. And how quickly do you think sawmills can respond to the pricing increase? As pricing came in, did you see any sawmills take downtime? Did it go from three shifts to two shifts? And how quickly can they respond now to pricing that is on an upward trend?

Well, certainly when prices ran up in the spring, the Chinese backed away from the market, that left the Canadians with more volume to put into the US market and that also helped push prices down. Specifically, I can't recall if mills were -- any mills in our area were taking off shifts for the lower pricing that we were seeing, but I would argue that mills are running pretty hard in this environment because there's still good profitability out there. So I'm not sure there's a lot of easy flat capacity that can come back online.

Okay, got you. This last question and I'll turn it over. Southern saw log pricing was better than we had been expecting. Just want to get a sense of what's driving that. In 3Q is that just a matter of seasonality, maybe selling more cedar, or are you beginning to see signs of sawmills adding shifts given increased wood demand? And I remember in the last call you guys mentioned that West Frazer was restarting their McDavid saw mill. But has anything else occurred that has been notable that contributed to the price increase in southern saw logs?

Hi Michael. This is Jerry Richards. I would say that primary driver for our increased realizations was mix, in the third quarter. So we had a higher mix to hardwood saw logs as opposed to pine. And overall pine saw log prices for us were relatively flat.

Got it. Thank you very much. Good luck in the quarter.

Thank you.

Your next question comes from Gail Glazerman.

Hi. Good morning. I guess just maybe just sticking on that last point. Looking out to the fourth quarter do you expect mix to remain about the same, would you expect it to normalize? And just adding to it, was there a mix issue in the West as well -- and the North as well or was that kind of more just the way your contracts laid out, in terms of price performance? Because I would have expected weaker pricing in the North as well.

Yes, so Gail, this is Eric. In the South it was clearly a mix issue in the third quarter and we expect prices to come back down a little bit due to mix in Q4. You'll see less hardwood and more Southern Yellow Pine. So you'll see pricing come down a little bit from where we were in Q3. So in the North, prices did roll over a little bit, but it's consistent with what we're seeing with lumber pricing in the region. So we were not surprised at the change.

If you look, for example, at saw logs from Q2 to Q3, they went from -- this is northern region saw logs -- they from $92 to $89 a ton. And just for comparison purposes, and I'll just use the lumber composite, prices in Q1 to Q2 went from $412 to $379, or drop of roughly 8%. And its because of the lag effect that you have to look back a quarter for lumber prices. So prices did what we thought they were going to do.

Okay, and can you give us any sort of guidance then, given the lag effect, how that would play out in the Fourth Quarter? Can you be more specific, or not really?

Well, I can tell you from Q2 to Q3 the lumber composite has gone from $379 to $354, so that's a $25 drop or roughly 7%. So you could expect a decline of roughly that ballpark.

Okay, that is very helpful. And can you elaborate a little bit more, I guess, on the weather impact that you referred to in the South? And more so what you're seeing in terms of the fourth quarter, is that starting to normalize or is pressure building relative to what you saw in the prior quarter?

Well, we didn't really have a lot of weather impacts, per se, in our operating. There's some parts of the South that did get hit with inclement weather. Particularly on the east side of the Southeastern US, but we didn't have, in particular overwhelmingly bad weather in the quarter.

Okay. And just a couple of last questions. I guess you mentioned the view that customers were going to -- particularly wood products customers -- were going to enter 2014 with lower inventories. Do you think that's a reflection of their view in terms of demand or do you think it's just over-compensating for their position coming into 2013?

It's Mike. I think it's uncertainty. They don't know what's going to happen, jobs reports, government shutdowns, all those things make them extraordinarily cautious. They got a big price run up last year that's probably spooked them a little bit. So I think they are buying just-in-time inventories and not taking any positions. And we don't expect that to change.

Okay. Just in terms of the dividend, I guess you somewhat hinted at this or came up in prior conversations. In the past you've been pretty clear saying you needed a line of sight towards your harvest returning more towards a 4.3 million ton level, but it feels like perhaps that's changed. And if you can just maybe elaborate in terms of what your current thinking is, in terms of supporting a higher dividend potentially?

Well if you think about the major drivers of our financial results, our Real Estate business is getting stronger evidenced by the number of transactions. We're seeing some movement in price. So we feel very good about that. Our northern saw log business has improved dramatically over the last 18 months. Much stronger pricing and strong returns and we don't think that's going to change, especially with our optimism around lumber pricing, which drives our wood products business. And our wood products business over the last 18 to 24 months has improved dramatically and we think it's going to continue to be a really good business. So I think what's changed is, we have a stronger conviction of our Northern Resource, we have a stronger conviction about wood products, and our Real Estate business we feel is very solid. The weakness in all that is Southern pine saw log pricing, which in our operating area we have still not seen it turn. And we certainly like to see that happen going forward and are hopeful that it will. But I think, given the cash build in our balance sheet -- we've paid down $37 million in debt already this year, we continue to build cash. I think the Board looks to the dividend as still another meaningful way to return capital to shareholders. And as I said we'll review that this next month.

And just one last question, on the Southern pine and saw log pricing. Are you willing to hazard a guess on when at this point you think you might start to see it firm up? Or what conditions need to be in place for that?

We're like the government we keep kicking the can down the road. (laughter) Two years ago we thought it would be better this year. Last year we thought it would be better next year. And as you know, in our area some of that depends on what Georgia Pacific eventually does with a facility that's been moth balled as well as what other operators do in the area. But I think with the forward trajectory of housing starts that we think are positive and an improvement in 2014 and 2015, I think we're closer to the time when the market begins to turn.

Okay, thank you very much.

Your next question comes from Chip Dillon.

Yes, good afternoon or good morning. First question is, if you could and you might have mentioned this, but I know the corporate expenses kind of bounced between almost $8 million and $11 million. Where do you think it comes in in the fourth quarter at least directionally?

Yes, Chip, this is Jerry Richards. I would say you're correct, there are some noise. That noise typically is two things, one our mark-to-market related to changes in our stock price on deferred comp. And then number two, we had a charge obviously, related to our environmental remediation. In terms of the ongoing running rate, it's about a little over $9 million per quarter, and that's absent those adjustments that I'm referring to. And then like we said, once we get into 2014, we'll re-measure pension and some other things, so we'll defer any comments on 2014 until our fourth quarter call.

Okay, that's helpful. And then as you look at -- I know you mentioned your harvest plan is 3.7 million tons, and I think that might be -- is that the same as its been all year or did that come down a little bit? And then if you could just I guess, Mike, remind us sort of what the long-term -- well when you get to that sort of elevated state that could last for 10 years -- what is that still looking like? I think it's mid 4 million tons. But if you could just clarify that for us as well. And maybe what next year might look like?

Chip, this is Eric. Good morning. So yes, I think at the start of the year, we were guiding people to a 3.8 million ton harvest level. That was actually a round up from a 3.75 was our internal plan. We've seen relatively -- as we've talked about -- we've seen relatively weak open prices in the Northern region, to the point where it's uneconomical for us to log and haul pulp wood. So we basically brought that harvest volume down roughly 100,000 tons, so if you look at our plan for the year -- really for the fourth quarter -- it's to come in at roughly 3.65 million tons, is what we anticipate at this point. So we're down about 100,000 tons from the start of the year and it's really driven by lower non-margin pulp wooden the North.

Got you, okay.

So, with regard to your question on the long term harvest level, we certainly have the capability to flex to a number that's up in the 4.3 million tons, 4.4 million tons, 4.5 million tons per year. As we've said all along we don't want to increase our harvest volumes until we see better pricing. And as we have indicated, we're not getting any indication of that higher pricing in the South. We're preserving that asset value for our shareholders and we're not under financial pressure today to increase the harvest volume. So it's too early to talk about 2014. We'll address that as we release fourth quarter earnings.

Got you. Thank you.

Your next question comes from Mark Weintraub.

Thank you. Two follow-up questions. First, are you having any ongoing conversations regarding potential wood product facility restarts in Arkansas, where presumably you might be a wood supplier? And then second, it sounded like on the one hand you thought that there's been some inventory rebuilding that's helped lumber pricing, yet on the other hand it seemed that you're suggesting that you think inventory levels are still quite low. Maybe if you could just kind of clarify where your thoughts are.

Yes, so on the second question, we're not talking about big swings in inventory here, Mark. It's very modest. I think inventories were driven really low with the price decline that we saw in the second quarter, and now they've come up a little bit. It's just typical for dealers to end the year with relatively lean inventories. A lot have to pay taxes on the assets they have at the end of the year so they like to run those low inventories. There's also been a fair bit of uncertainty with the debt ceiling debate and tax policy and entitlement reform and all that. So we think there's a general fair bit of concern out there. So in that kind of environment dealers will tend to run relatively low.

So that's that part of the question. I'm sorry, what was the first part of the question?

I'll answer that, Mark. Regarding Arkansas, we have, as you know, from a South Central Arkansas, we have an operating circle of 100 miles or 150 miles with where we can economically sell logs and we're in touch with every customer throughout that base. And both mills that are operating, those that are idle and those that have thoughts of increasing production. As you probably also know, even though our saw log business is very weak in the South and log prices remain low, the wood products manufacturing business in Central Arkansas, where we have a large facility is fantastic. And certainly I think most operators are enjoying really outsized margins in the business today due to low log prices primarily and fairly strong lumber pricing. So there are a number of mills that we're in contact with all the time. None of them have the single magnitude that the Crossett facility that's idle does. So they are chipping away at the edges, if you will.

If I could just follow-up, so you point out that the sawmills are very profitable given where lumber prices are and where saw log prices are -- would you expect that plywood facilities at this juncture would also be quite profitable or less so?

No, I think they are both doing very well.

And any follow-up thoughts as to why we wouldn't be potentially getting some action on potential restarts on the plywood side?

I can't speak to what Georgia Pacific's plans might be, or other plywood operators -- many of those companies also run very large OSB operations. The products are fairly directly substitutable, in terms of making Southern Yellow Pine sheeting or OSB, so I think those companies have to make decisions -- kind of where they are going to put their eggs, in which basket. And hopefully Georgia Pacific does both.

Thank you.

Your next question comes from Paul Quinn.

Yes, thanks very much. Just a question on timberland sales activity. Specifically have you seen anything in Idaho and Arkansas. And then if you could have general comments on the North American market?

Well, its been -- Paul, it's Mike. It's been around 750,000 acres sell this year. The bulk of those were in the Longview-Weyerhaeuser transaction. And aside from that one, most of them have been fairly small -- 50,000 and 70,000 acres here and there. Most of that's been in Alabama, Tennessee, Mississippi, there's been very little on the market in Arkansas. There's some tracks for sale on the West Coast -- small tracks and of course the big uncertainty around what MeadWestvaco is going to do. But the market's been unusually quiet this year and I think the general tone of it has been extraordinarily competitive. Transactions that have closed, we think continue to trade at discount rates that are 5% to 6% with fairly aggressive pricing assumptions, so it remains an extraordinarily competitive business with lots of capital chasing few assets for sale.

You guys have been active in the market, just unsuccessfully to-date?

Correct.

Okay. Just a follow-up question on pulp wood in the North. Just trying to understand this change in pricing. Have you seen facilities in the North close? We're seeing pulp prices themselves sort of strengthen in the back half of the year, so it's not an end product thing. It's probably a facility or a demand side?

Yes, it's really a combination of both, Paul. This is Eric. So it's two things. One is sawmills in the region are running relatively hard, so there's a lot of residual supply coming on to the market and then the second factor is that if you look at it over the last five or six years you've seen probably five pulp mills in the Pacific Northwest go down and they've not come back online. And as a result, demand is relatively weak, so that puts pressure on pulp wood prices.

So given your robust forecast on lumber prices going forward and I guess the expectation that these facilities that are closed are not going to come back, you don't see any change in that forecast going forward? Weak pulp wood demand going forward, right?

Yes, that's correct. We don't envision the supply/demand dynamics changing. So yes. The one thing to remind you of is pulp wood is not a huge business for us in Idaho. It's kind of an ancillary product. It's roughly 10% of our harvest for the year. That's what the potential is, unlike the South where pulp wood is a very profitable business for most people.

Noted, thanks very much. Cheers.

Thanks.

(Operator Instructions)

Your next question comes from Steve Chercover.

Good morning, everyone. I hope I'm not beating this to death. But the pulp wood that you sell, is that primarily in Minnesota or in Idaho? I would have thought it was Minnesota.

There's some of both, but it's principally in Idaho.

Oh, really, interesting. Okay, that helps. And two other quickies. So with your liquidity, are you actively looking for land holdings, and any geographies that you'd be particularly interested in or want to avoid?

Steve, it's Mike. We continue to look at most of the transactions that we think come on the market, at least that are in the size that we can manage. We've looked at a number of transactions in the $50 million to $200 million range and have not been successful this year in our area of focus. We've probably been pretty consistent that we're looking for bolt-on acquisitions in the Central US South -- Mississippi, Louisiana, Arkansas, that part of the world as well as the (inaudible) Northwest. So those have been our two key areas of focus.

Got you. And Mike you mentioned the government shutdown earlier. Has that had any impact on your own log supplies for your manufacturing operations? And alternatively, have you been beneficiary from third parties who are looking for alternate supply?

No, Steve. The amount of timber we purchase from the National Forest system or Bureau of Land Management lands is fairly insignificant with the exception of a couple of our Lake State mills. It's not a factor in Idaho or in the South at all for us. And the shutdown was so short lived that it really had no discernible impact on the market. Had it been longer lasting, perhaps it would have, but it's really a non-event from a timber supply or pricing standpoint.

Got it. Okay thank you so much.

There are no additional questions at this time. I would now like to turn it back over to management for closing remarks.

I'd like to thank -- this is Jerry. I'd like to thank everybody for your interest and participation on the call and we look very much forward to talking to you in the fourth quarter.

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