Potlatchdeltic Corp (PCH) 2014 Q1 法說會逐字稿

Good morning. My name is Jody, and I will be your conference operator today. At this time, I would like to welcome everyone to the Potlatch first-quarter 2014 earnings conference call.

(Operator Instructions)

I would now like to turn the call over to Mr. Jerry Richards, Vice President and Chief Financial Officer, for opening remarks. Sir, you may proceed.

Thank you, Jody, and good morning.

Welcome to Potlatch's investor call and webcast covering our first-quarter 2014 earnings. With me in the room are Mike Covey, Chairman and Chief Executive Officer; and Eric Cremers, President and Chief Operating Officer.

Before we begin, I would like to remind you that this call will contain forward-looking statements. Please review the warning statements in our press release, in the opening of 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 the reconciliation of non-GAAP measures, can be found on our website, www.potlatchcorp.com, as part of the webcast for this call.

I will now turn the call over to Mike to make some introductory remarks, and then I will review our first-quarter results in detail.

Thank you, good morning, everyone. We are pleased to report strong results in each of our business segments in spite of the harsh winter weather. Our resource business posted its highest first-quarter operating income since 2008.

We are encouraged to see northern region's follow-up prices continue to improve based on the fundamentals that are driving strong lumber markets. However, southern log prices in our wood basket remain historically low and likely won't increase until a meaningful level of manufacturing capacity restarts. We expect southern yellow pine sawlog prices to remain subdued this year.

The quarterly performance of our Wood Products division was solid, and earnings increased, compared to the fourth quarter, primarily due to higher average lumber prices. The direct effect of the severe winter weather on our mills was not significant. Production was slightly lower than the fourth quarter, and we finished the quarter with about 2.5 million board feet of extra lumber inventory due to weather-related transportation issues.

Our real estate segment also generated significant first-quarter income. As mentioned on our last earnings call, we closed on the sale of 11,000 acres of rural recreational real estate in northern Idaho in January.

Overall, expectations for our business and the industry remain positive. While extreme winter weather hindered building activity during the first quarter, we believe this setback is temporary.

We continue to believe that housing will continue its recovery and we will exceed 1 million starts in the US this year. Strong spring building season will be necessary to achieve projected housing starts and improved prices for our products.

In summary, we are very pleased with the start of the year and expect 2014 to be another strong year.

Now I would like to turn it back over to Jerry to discuss the quarterly results in greater detail, and then the three of us will take questions. Jerry?

Thank you, Mike.

Beginning with page 3 of the slides accompanying this call, our first-quarter net income was $20.3 million or $0.50 per diluted share. This compared to net income of $13.7 million or $0.34 per diluted share last quarter, and $15.5 million or $0.38 per share in the first quarter last year. EBITDA was $41.7 million for the quarter.

I will now turn to the results of our operating segments for the quarter. Our resource business is covered on pages 4 through 6.

The segment generated operating income of $16.2 million in the first quarter, compared to $18 million in the prior quarter. As Mike mentioned, this is the highest resource earnings have been in the first quarter since 2008. This is also the fourth consecutive quarter that the segment's margin has been at or above 30%.

Sawlog prices in the northern region were up slightly from the prior quarter. Price increases on a dimensional volume basis or board foot basis are muted when converted to dollars per ton because logs are heavier in the winter due to moisture. Customers pay based on dimensional volume in Idaho, not weight.

Northern region sawlog volumes were down 18% on a sequential basis due to seasonality. Pulpwood prices and volumes were higher in the northern region due to a contract that went into effect at the end of 2013. Unlike the South, Idaho pulpwood primarily reflects defective trees and over-mature stands, and our pulpwood sales in Idaho do not generate significant margins.

Southern sawlog prices, shown on page 6, declined 6% during the first quarter as higher value of hardwood sawlogs made up a lower proportion of the mix. This is typical during the wetter winter months.

The southern sawlog harvest was slightly below the level we planned going into the quarter. Southern region pulpwood prices were flat quarter over quarter, and harvest volumes declined seasonally.

The results of our wood products segment are on pages 7 and 8. Operating income for the first quarter was $12.7 million compared to $9 million last quarter.

The first-quarter average lumber sales realization increased 7% quarter over quarter. Quarterly lumber shipments declined 5%, due in part to transportation issues caused by the extreme winter weather.

Our real estate division's results are on page 9. Operating income for the quarter was $8.3 million compared to $4.6 million in the fourth quarter of last year.

As Mike mentioned, in January, we closed on a bulk sale of 11,000 acres of scattered rural recreation parcels in Idaho that were previously harvested. Operating margin declined because the Idaho property had a higher basis relative to mix of real estate than we have sold in the recent quarters.

Corporate administrative costs, which are included on slide 3, were $6.7 million versus $10.2 million last quarter. The decline was primarily related to mark-to-market adjustments in our deferred compensation plans, which are driven by changes in our stock price, reduced incentive compensation expenses, and lower pension expense.

Our income tax provision was $5.5 million for the quarter, up from $1.3 million last quarter. The increase was due to higher earnings generated by our taxable REIT subsidiary.

Our effective tax rate for the quarter was 21% at a consolidated level and 33% at a taxable REIT subsidiary level. While the rate will fluctuate during the year based on the mix of earnings between the REIT and the taxable REIT subsidiary in the given quarter, the full-year rate should approximate the first-quarter rate.

Moving to page 10, our balance sheet remains solid. Cash and short-term investments increased over $18 million in the quarter and were $76 million at the end of the quarter.

Our $250 million revolver remains undrawn, and we have no debt maturing during 2014. We also have significant headroom under our loan covenants.

Capital expenditures totaled $3.6 million for the quarter. We are still planning to spend approximately $28 million on capital projects in 2014.

Now I would like to make a few remarks about our outlook for the rest of 2014. In our resource business, we continue to expect to harvest approximately 3.8 million tons this year. The breakdown between the regions is expected to be largely consistent with last year.

Our harvest level is typically lowest in the second quarter due to spring break up in Idaho. Soft ground makes it impractical to harvest during part of the quarter. We expect our harvest level in Idaho in the second quarter to be approximately two-thirds of the volume harvested in the first quarter.

We anticipate stronger northern sawlog prices in the second quarter based on higher average lumber prices in the first quarter. Approximately two-thirds of our Idaho harvest volume is indexed to lumber prices on a one- to three-month lag.

In the southern region, we anticipate higher prices on harvest volumes for hardwood sawlogs in the second quarter based on high demand for hardwood products. We expect prices for southern yellow pine sawlogs, our predominant product in the region, to remain flat at historically low levels.

We anticipate second-quarter pulpwood prices in both regions to be largely consistent with the first-quarter results. We expect earnings from our wood products segment to increase in the second quarter by an amount that approximates the increase that we experienced sequentially in the first quarter of 2013.

Our customers are telling us that field inventories are low and that they are seeing signs of improvement in the markets. Improved weather conditions should help alleviate transportation issues that hampered shipments during the first quarter. Our second-quarter estimate assumes an increase of approximately 10% in lumber shipments and flat average lumber prices realizations.

In our real estate segment, we expect to close a conservation sale for a little more than $10 million in the second quarter. Total acres sold in the second quarter should approximate the number of acres sold in the first quarter. Our land basis, as a percentage of revenues, will decline in the second quarter as our sales mix shifts.

Consistent with our outlook in last year's earnings call, we anticipate land basis will approximate 25% to 30% of land sales revenue for the year, and we remain on track to sell between 30,000 and 35,000 total acres in 2013. In conclusion, we were pleased with our first-quarter results and continue to foresee strong performance for each of our operating segments for the remainder of the year.

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

(Operator Instructions)

Gail Glazerman from UBS.

Hi, good morning. If I heard you correctly, you mentioned -- and certainly consistent with my views -- sawlog harvests were lower than expected in the south. Could you talk a little bit more about that? And if you're not changing harvest volume, do you expect to make that up within southern sawlogs or across the spectrum in regions in pulpwood?

Yes, Gail, this is Eric. The sawlog volume was a little bit lower than we had planned on, in the south. Some of that was just due to the seasonality, but some of it was due to weather.

We had a really wet Spring in the south. The first three months of the year, they were not only cold, but they were also wet. And that hindered our getting into the woods, to some degree. So, there may be a little volume that will shift out of the first quarter into quarters later in the year.

Okay. And there was a reference in the slides about a new contract, in terms of northern pulpwood. I realize it's not a huge profit generator for you, but can you talk about what changed there and how we should think about that moving forward?

Gail, historically, if you take a look at the Pacific Northwest, it's been oversupplied in terms of sawmill residuals and pulpwood. A lot of pulp mills have closed down in the Pacific Northwest, and that's resulted in, generally speaking, a glut of fiber in the region.

Consequently, selling pulpwood was not a great business for us over the last couple of years. It's gotten to a point where margins were so low that we were not even taking it out of the woods.

While a customer approached us and said: They would like to enter into a contract with us. And we indicated we could only do it -- justify it at higher prices because the haul distance is relatively far compared to what we had been providing them. We were able to reach an agreement with them in the [mid-$40] price range.

That provides us a little bit of margin. I don't know, we might make $1 million a year off of this. But it is not significant, and doesn't really move the needle.

Okay. More strategically, it seems like lumber might be finding some sort of floor right now, but over the prior couple of weeks, it has been relatively weak -- the random lengths -- even as weather has been improving. I am just wondering if you have any perspective on what has been driving that? And maybe also if you could give a little bit of color in terms of what you are seeing in terms of the seasonal pickup that you have referenced -- any anecdotes there?

Yes. Gail, it is Eric again. Yes, prices have been a little bit weak here of late. We still have bad weather throughout the Midwest, even as recently as last week.

If you look at housing starts in the Midwest, they were down 35% in the Midwest year over year. So, we think that weather has had a significant impact on the housing market this year.

We are now at the point where things are starting to turn. In fact, lumber futures were [limit up] from July yesterday. So, we think we are at that turning point.

And certainly what we hear from our customers out in the field is that dealers have been holding off on buying inventory because they remind themselves of what happened last year when prices got bid up early in the year and then fell hard. So, they have been running with relatively light inventories, and now we're going to need to see them step into the market and buy lumber.

So, our view is that that doesn't really start to happen until you get into the back half of this quarter, so it's a little bit early yet. But we think June and the third quarter are going to be relatively strong. That is consistent with RICI's view as well.

Gail, just to add onto that -- this is Mike. I still think you have to take a longer-term view of this housing market and its recovery, which -- the North American lumber industry is producing somewhere in the neighborhood of 54 billion board feet of lumber today.

As demand for housing increases and gets to more normalized levels, which we think will approach 1.5 million starts as we get through the recovery a couple years from now, demand is going to increase an incremental 10 billion board feet over that time period, and support 1.5 million housing starts. We're seeing demand rise this year a couple billion board feet, and a couple billion board feet more next year.

As the demand capacity ratios in the industry rise from the low-80% range today to numbers in the future -- that consistently has supported stronger pricing for lumber. So, we remain very optimistic long term.

Okay. Any signs of customers in Arkansas starting to take action and ramping up production?

There's been a couple positive things -- not directly in our wood basket, but West Fraser just purchased two mills in the north central Arkansas -- north and a little bit west of Little Rock. There is other rumored sawmill starts in the area, although the very large GP plywood plant remains idled.

There is no question, this recovery -- the numbers that I mentioned, the incremental 10 billion board feet of lumber that is going to support the housing recovery in this country, is not going to come from the Pacific Northwest. It's likely not going to come much from Canada. It's got to come from the US south, and eventually Arkansas will play a role in that. And when that happens, we will see higher log prices in our wood basket.

Okay. And just two last modeling questions. In terms of corporate expense, can you give us any thoughts on how we should be thinking about that for the balance of the year? And can you -- in terms of your second-quarter harvest plans -- can you give any sort of perspective on the breakdown between pulpwood and sawlogs by region?

Gail, this is Jerry Richards. I will take the corporate question, and I think Eric will take the harvest breakdown question.

On corporate, our guidance in the past has been: We expect corporate to run about $9 million per quarter. And I would say it's probably in that $8 million to $9 million per quarter. We certainly were -- while we are in the first quarter compared to that run rate.

Again, it's largely due to mark-to-market on the decrease in the stock price, some incentive comp. And then, like I said, pension is running lower this year, but that is baked into the $8 million to $9 million guidance that I am giving.

On the harvest volume question, Gail, I think what you will see is about 670,000 tons for the second quarter. That's what we are currently expecting. Roughly half from the north and half from the south.

If you break it down and you think about the two different regions, the north, with roughly 330,000 tons, roughly 90% of that is sawlog and 10% of that is traditionally pulpwood. And then if you take a look at the south, it will be skewed a little bit more towards pulpwood versus sawlog.

Okay. Thanks very much.

Thank you.

Chip Dillon, Vertical Research.

Yes. Hello. Good morning.

Good morning.

First question is -- just to understand the land sales a little bit. You mentioned the basis would be 25% to 30% for the year. I haven't done the calculation. What was it in the first quarter?

It was approximately 36% in the first quarter, Chip.

So, if the land -- the acres are going to be about the same, I guess that other big sale will happen in the second quarter. I guess we could see a little bit -- and even a small improvement in the real estate EBIT for the second quarter before it drops off?

Yes. That's correct, Chip. We do anticipate a slightly higher EBIT in the second quarter.

Okay. And then, as we go beyond this year, I would guess you all are gearing toward around a 20,000 or so acre per year run rate. In other words, this is a little bit of an elevated year, and then in the future, as far as -- it's going to be about 20,000 acres a year of land sales.

I think at the start of the year, when we gave guidance on how we thought 2014 was going to play out, we spoke about these two transactions being a bit unusual. We are skewing our land sales higher for the year, but our typical run rate is going to be in the 20,000 to 25,000 acres per year.

Got you. Shifting gears a little bit, there has been more barking than biting going on in terms of what we are hearing about land sale activity out there. Not the kind that we were just talking about, but timberland in particular.

What is your feeling? Are you getting more people soliciting you for -- to take a look at properties for sale? Are people knocking on your door to actually try to buy from you? And I'm talking not the HBU, but more just pure timberlands.

Chip, this is Mike. I don't think the character of dollars on the sidelines that are waiting to be invested in timberland has changed dramatically over the last 18 to 24 months. There are a number of TIMOs with dollars to invest. That typically has been focused on the US south.

The big transactions -- the last couple have been done by REITs with Weyerhaeuser and Plum Creek executing large deals. There's still a strong appetite, and whatever property comes on the market in this 50,000-acre range or 25,000 acres, there are a number of bidders, both TIMOs and REITs, and it is very competitive.

I don't think the pipeline has really changed dramatically. There is really not a lot of land for sale. There is a fair amount of dollars chasing it, and as a result, as a benchmark, we have seen southern land prices kind of reset at this $2,000-an-acre range.

Got you. Thank you.

Paul Quinn, RBC Capital Markets.

Thanks very much. Good morning -- or I guess, afternoon, for some.

Just a question on -- you mentioned West Fraser acquisitions down in Arkansas. Has there been any other acquisitions down in that state? And given West Fraser's plan to increase production, is that enough to move the needle to increase prices in harvest levels by Potlatch?

Paul, this is Mike. The West Fraser purchases of the two mills they just recently bought are, transportation-wise, out of the Potlatch wood basket. They're too far north and west.

So, certainly incremental capacity in the states, to the extent West Fraser improves the mills, runs them at higher levels, that is all good. But it does not immediately affect Potlatch.

There have been no other large transactions in the state of Arkansas with investors, other than -- there is certainly a number of people exploring [co-op] mill investments in the state of Arkansas, as well as a couple of idled mills that are rumored to be in the process of sale and restart that have not happened yet. Specifically, the former GP mill in El Dorado, Arkansas, which is in Potlatch's wood basket.

Okay, thanks. And just a question on the Pacific Northwest. Prices have held up pretty strong on the lumber side, as well as the log side. We are starting to hear some expected weakness in export markets. Are you hearing that at all, and do you think that comes back on your pricing levels in Idaho?

Paul, this is Eric. Certainly there is a risk, if export markets weaken, particularly China. If China lessens demand, I suppose the Canadians could redirect some wood to the US. We haven't seen signs of that happening yet. But certainly if that were to happen -- if the Canadians redirected wood here, it wouldn't be healthy for US markets.

Yes, we kind of -- we've held our breath during the [strike] in Vancouver, and expected perhaps that we would see a slug of inventory come from Canada to the US. But for whatever reason, that really hasn't happened. I think it's been held for eventual debt shipments to export markets and other customers. And also, to some degree, a portion of the mountain pine beetle wood that's being produced in Canada really doesn't have a suitable home here in the US in the retail or homebuilding market.

We're also seeing exports so far, in fact, of lumber from Canada to China actually were up something like 7% year to date, which is surprising to me. And I am also hearing issues about log availability up in BC, so there could be some mitigating factors here. We are also close to where the tariff kicks in for the Canadians as well. As you know, we are just a few dollars above where that 5% duty would kick in. So, we are cautiously optimistic.

Okay, thanks very much. Thanks for the color.

Mark Weintraub, Buckingham Research.

Thank you. With your FAD comfortably above your dividend right now, and a fairly upbeat assessment of where you think things are going, can you help us think about how we should think about your dividend on a go-forward basis and/or share repurchase? If that is something that could be a use of cash on a go-forward basis.

Mark, just to level set the numbers, our FAD exceeded distributions by $25 million in 2013, and our FAD was $13 million higher this quarter than the distributions were. So, you're correct; our FAD stream is growing. That's largely been supported by the strength of our northwest resource business, as well as our wood products manufacturing business. And then certainly this large land sale that we executed in Q1, plus the one we plan in Q2 help that figure.

We've said, over time, we will increase the dividend when we believe it can be done on a sustainable basis, and we really look for improvement in our southern log markets to help with that decision. We've been patient. So, that is not to say we have to see improvement in southern sawlog prices, but it would certainly be a catalyst for us to have greater confidence about the dividend going forward.

Regarding other uses of capital, our focus has been on acquisitions. We have not been successful on any large ones recently, although we have been competitive on several.

We increased -- we stepped up the investment in capital expenditures, particularly in our wood products business, to a total of $28 million this year. We have paid down all of the debt that we think made sense to pre-pay. And a share repurchase program is something that our Board has not authorized, but something that certainly we wouldn't rule out.

And just on that last part, what would be the dynamics that would get you to choose to go that direction? Because I think you would agree you're probably selling at a reasonably meaningful discount to -- if you were to try and go out and buy assets. And given where the yield is on the dividend, buying back stock, you're actually reduce the cash out fairly substantially. What would be the other elements that you would want in place before wanting to go forward with thinking seriously about share repurchase?

Well, the comments that you made are -- certainly we agree with all of those statements. We believe we trade at a significant discount to the net asset value today. So, that makes a share repurchase program more attractive; there is no question about that.

I think the other thing is keeping a component of dry powder available for us in the event that an attractive acquisition comes along. So, it is balancing all of those decisions and having $76 million of cash on hand today plus an untapped revolver. It's a matter, I think, for the Board to decide how much do we want to use up some of that dry powder for share repurchase program, if they were supportive of it, versus holding it for an acquisition program.

Thank you.

You're welcome.

Steve Chercover, D.A. Davidson.

Thanks, good morning, everyone. You mentioned the low field inventories, and you also talked about the Canadian strike that fortunately didn't float in the US. With all the railcar shipments, are you afraid that there might be some wood or finished lumber at mills that's still going to go to the market?

Steve, so far what we are seeing and what we're hearing is that that wood is directed to the Canadian markets. You have to remember: A lot of it is lower quality beetle kill wood in the first place. So, its natural home is for the Chinese construction market.

I think, assuming China doesn't implode, and so far we have a GDP data out on the first quarter for China -- it held in there pretty good at 7.4%. It looks to us like that wood is going to eventually find its way over to China, and not be redirected to the US. But certainly it is a concern.

Okay, so, when you talk about the results in wood products being up similar to the performance in Q2 2013, you're saying it is up about $1 million from the Q1 level?

Steve, this is Jerry Richards. Really what we are looking at: If you were to go back to slide 3, we were up about $3.7 million operating earnings. So, that was guidance saying we expect to be somewhere in that same range sequentially Q1 to Q2.

Got it. And then, we discussed opportunities for acquisitions. There was a fairly decent transaction in Arkansas in Q1. Were you competitive there, and you're still interested in growing?

Well, Steve, we certainly look at anything. Frankly, we are looking at virtually everything that is in the southeast right now. That doesn't mean we're pulling the trigger on them, but we are certainly looking at everything in the southeast, especially if it is in Arkansas.

I think what Mike was suggesting is that we are getting closer and closer in terms of being the winning bid, if you will, on those transactions. But we have not been successful here of late.

But being contiguous to your existing land or even your existing states isn't a key criteria?

Well, the closer it is to our operating unit, the more interested we are in the property.

Okay. Many thanks.

(Operator Instructions)

Chip Dillon, Vertical Research.

Yes, hey, I guess more for Mike, but certainly Eric and Jerry should chime in. It would seem to me, based on your comments about the timber or the sawlog pricing you're seeing out there, that if you bought lands at current prices with even distribution of harvest or -- in other words, where it's not mostly you have to wait, but you're cutting right away. That you are getting a better immediate return in the west because the pricing of logs is -- I guess you would view as something closer to acceptable, whereas in the south, they are still below acceptable?

I guess what I'm saying is: If you buy in the south, you're getting a lower price, but you are probably getting a very low near-term return in the hopes that you can recover that, and then some, with prices going up? Is that sort of fair, especially given you mentioned that southern values have perked back up again?

Well, I think investments in southern timberland today, in the markets where we operate anyway, can only be justified on -- the prices that they've been trading for can only be justified on a belief that southern log pricing is, in fact, going to improve. And improve pretty dramatically in the next two to three years.

If you bid on the transactions that we've looked at, current pricing on those transactions with some discount rate that is in what we believe is the competitive range, you are not going to be successful. There is no question that successful buyers in southern timberland were bidding in a recovery.

In the Pacific Northwest, the few transactions that have occurred, in Oregon and Washington, I think you can much more successfully bid current prices and perhaps be successful. But in the south, you have to bid on a speculation that price is going to improve. (multiple speakers) Or use a discount rate that is incredibly low.

I see. Well, maybe some of us would measure success by the fact that you aren't buying land in the south, if those are the conditions. And those that are, are going to have to hold out for even higher prices than you would need to, to move your volume. So, that sounds like you're doing a good job there.

Thank you.

(Operator Instructions)

Collin Mings, Raymond James.

Hey, good morning, guys. Just a quick follow up. Can you just remind me what the softwood/hardwood mix is in the US south, just in context of that shift in pricing in reported prices you guys were talking about?

The mix in terms of sawlogs in the south, is that your question, Collin?

Softwood versus hardwood.

It's roughly, call it, 90% softwood, 10% hardwood.

Okay. And then, you guys talked about, just again in context of that price mix or that price shift, just the mix in the hardwood and seeing materially stronger pricing in the hardwood component. Can you just maybe shed some light on what is driving that or what you think is driving that, recognizing it is a small part of the overall mix?

Yes. We think it is driven by really strong furniture and appearance markets, like flooring for example. Also, railroad ties come from hardwood, and that market is particularly strong. So, it is really those three sectors that are driving it.

Okay. Great. Thanks.

Yes.

(Operator Instructions)

There are no further questions, sir, at this time.

All right. Thank you. And thanks for joining our call today and for your interest in Potlatch.

The investor events in which we will be participating this quarter include the REITWeek conference in New York the first week of June, and Marketing in Toronto, the Midwest, and the East Coast in May and June. I will be back at my desk shortly, and look forward to answering your additional questions. Thanks, Jody.

Thank you, sir. That concludes today's conference call. You may now disconnect.