Rayonier Inc (RYN) 2002 Q2 法說會逐字稿

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And welcome to the Rayonier second quarter earnings release conference call. Today's call is being recorded by Rayonier and is copyrighted material. It cannot be recorded or rebroadcast without our express written consent. Your participation on this call constitute implied consents. Please hang up if you do not consent to being recorded.

At this time for opening remarks and introductions, I'd like to turn the call over to the Senior Vice President and Chief Financial Officer, Mr. Gerald Pollack. Please go ahead, sir.

Thank you and good afternoon. I'd like to once again welcome everybody to Rayonier's Analyst Teleconference, this time covering our earnings for the second quarter of 2002.

Earnings statements were released yesterday, and supplemental materials soon thereafter. If you have not received this material, please call Parag Bhansali, our Vice President of Investor Relations, at 904-357-9155 and he will add you to our mailing list.

This conference is being broadcast live over the Internet and is open to all shareholders and interested investors. Instructions on accessing the live Webcast were given in our press release.

With me today, as usual, is Lee Nutter, Chairman, President, and CEO. We will be following our typical routine with Lee opening the formal presentation, followed by my review of the financial highlights for the quarter. Lee will then cover markets and operations, and I will close our presentation with a discussion of earnings per share trends.

In these presentations, we include forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act. Our 10-K and press release list some of those factors which may cause actual results to differ from those projected and which do change from time to time. Please familiarize yourselves with them.

With that, let's start the program with opening comments from Lee Nutter. Lee?

Thank you, Gerry.

As you've seen and we'll cover in a little more detail now, our ongoing results compare favorably with last quarter and, excluding the $59 million very large sale of environmentally-sensitive lands to the Nature Conservancy, we are also up from second quarter last year.

Once again, Rayonier's results show consistency of earnings, consistency in EBITDA and net income, as well as our strong flow of free cash. In what we seem to see in today's world, very good news is the stability of our business. It is straightforward, and very consistently generates positive earnings and cash. I think the numbers speak very clearly for themselves, and rather than my taking time now to highlight the financials, Gerry will do that for us in a moment.

Let me conclude here by saying the numbers in this quarter once again show the strength of this company in every respect from our people, our markets, our customers, and our assets coupled with our ability to perform. As we look forward, and as I will say again, we remain very committed to continue unlocking the unrecognized value in Rayonier for our shareholders. I will review and make specific comments on the fundamentals of our two basic business units - Performance Fibers and Timber and Land - following Gerry's financial overview. Gerry?

Thanks, Lee.

Before I begin, let me just highlight two transactions that affect the analysis of this quarter's results. First, in this year's second quarter, we sold our New Zealand East Coast Timberland Operations and associated assets and recorded the sale in accordance with FAS 144 as Discontinued Operations. Results of operations through the end of May and in prior periods have been reclassified in accordance with that treatment.

Second, as Lee indicated, in last year's second quarter, we had the Pinhook Major Timberland sale for $59 million in sales value and $33 million in operating income. That sale contributed $21 million in net income or 75 cents per share to last year's $1.14 in earnings.

With those transactions noted, let me begin with the financial highlights on chart two.

Comparing this quarter's results basically to the first quarter of 2002, sales of 269 million were flat with that of the prior quarter with lower sales volume occurring in Performance Fibers as a result of a higher level of in-transit shipments. This decline was offset by higher sales at our Lumber and Wood Products Trading businesses.

Operating income at $40 million was 12 million higher than the immediate prior quarter with improvement in almost every business area being noted, as you will see when we get to the next chart.

Net income from continuing operations of 62 cents per share reflected a strong 30-cent improvement over the first quarter. Finally, as previously announced, we had a five cent per share loss from discontinued operations, bringing final net income to 57 cents per share.

If we briefly look at the comparison this quarter to the second quarter of last year, you can see the impact of last year's major timberland sale on the variances. Once again, if these - that transaction was excluded from the comparison, you would basically see positive variances in all three categories. EBITDA per share at $2.74 reflected a 14-cent per share improvement over the first quarter. Free cash flow at $30 million is equivalent to $4.21 per share at - per share annualized, and notwithstanding difficult economic times, our dividends at over a three percent yield plus a free cash flow after dividend yield of over nine percent clearly reflect our strength in generating the hardest asset of all - cash. As a result, we were able to reduce our debt by further $47 million, bringing our net debt to capital ratio to approximately 50 percent.

As some of you will note, we have invested cash and have some cash balances building on the balance sheet. This is in anticipation of paying off approximately $78 million of 10-year bonds that mature this coming October. This is the remaining portion of $110 million in bonds taken out in 1992 when we acquired the New Zealand Timberlands.

Let's turn to chart three - the quarterly comparison of the first quarter to second quarter on a causal factor basis. For these analyses, we will focus on net income from continuing operations, excluding the five cent per share net loss in the second quarter.

I might note, as we indicated in our May 28 press release on the New Zealand East Coast sale, that the full-year impact on 2002 results due to the East Coast sale will be less than the second quarter loss as a result of interest income worth approximately two to three cents per share to be realized during the second half of the year. But in accordance with GAAP, we will report it above the pretax line.

we can once again see the major contributors to the 30 cent per share improvement from the first quarter. Primarily lower costs in Performance Fibers related to wood, chemicals, maintenance, and higher production contributed to a significant reduction in cost per ton from $705 in the first quarter to $679 per ton in the second quarter.

Our ongoing land sale program contributed another $2 million in operating income improvement, and trading activity also, as a result of being able to capitalize on some of the uncertainty surrounding the Canadian tariff situation.

The corporate and other line items contributed three million pretax from gains related to the strengthening of the New Zealand dollar and, unfortunately to some, lower stock price based incentive compensation accruals as a - as a result of the market decline.

As I indicated, basically all product areas, with the exception of the Southeast Timber Group, showed strong quarterly improvement.

Let's just briefly take a look at the comparison of our results in the prior year shown on Chart Four. Taking a look at the second quarter columns primarily, you can see our starting point is a reported net income per share of $1.14, which included the 75 cents from the major Timberland sale, leaving a contribution of 39 cents from other activities.

Using that as a base, second quarter year-over-year improvement was effectively 23 cents per share, but in this case, the puts and takes are slightly mixed. In Performance Fibers, the second quarter of 2002 appears to represent the bottom of the fluff pulp market. Market pulp prices began to turn in the quarter, and fluff pulp prices lagging somewhat, stabilized. However, the second quarter fluff pulp price average still represented a 14 percent decline year-over-year.

Also, last year's second quarter pulp shipments were quite strong, so that in returning to more normal levels, the year-over-year volume impact is negative at six cents per share. Costs, however, have been continually improving, and this quarter's $679 per ton represents a $38 per ton reduction from $717 per ton cost in last year's second quarter.

There were three other major contributors to the improvement year-over-year. First, contributions from our ongoing land sale program contributed 21 cents per share when the 75 cents per share of the Pinwood transaction is factored out.

Second, corporate and other charges showed similar improvement as in the comparison to the first quarter with foreign exchange and lower incentive comp charges contributing favorably.

The third major factor helping the year-over trend analysis is interest expense, which contributed six cents per share to the improvement as a result of over $100 million in debt having been paid down since June of last year. The net improvement is an improvement of 33 cents per share or 23 cents per share over the pro forma reference number I mentioned.

I would just like to update you on two statistical elements that I know you're interested in. First, capital spending for the year should be in the $80 to $90 million range, and , including the of timber sold, should be approximately to $175 to $170 million based on current market expectations. The latter statistic is lower than the guidance we've given you in the past of $185 to $190 million as a result of the reclassification of from the New Zealand East Coast as part of cash from discontinued operations which will be offset at least to this year by working capital cash coming from the collection of installment notes. So on an ongoing basis will be less than our prior projected.

With that, let me turn it over to Lee to cover market conditions. Lee?

Thank you, Gerry.

Looking at pages six and seven, you see at the top of these charts the core of our Performance Fibers business - Cellulose Specialties, and its stability in both price and volume. As you see the data on page seven, let me remind you that these are shipments in the detail behind yesterday's earnings releases in sales. Any variation between these numbers is strictly due to foreign sales timing.

As mentioned earlier, earnings in Performance Fibers are up from first quarter due to cost reductions primarily coming from lower cost for wooden chemicals and higher yields from both, as well as some reduced energy usage. The reduction in operating income from to from last year's second quarter to this is due to the 10 percent drop in average fluff prices you see on page six partly offset by some cost reductions.

Looking ahead in this business at the third quarter, we should see flat pricing in sale of specialties and perhaps a little recovery in fluff pricing from the net sales return you see here. Cellulose Specialties volume should be somewhat higher. As we see things today, overall Performance Fibers operating income will probably be down slightly due to some expected cost increases in chemicals, energy, and possibly in wood.

As you know, the core of our Performance Fibers business is Cellulose Specialties. And as we've said many times, and we will repeat it, we hold large positions in these markets and we'll push to continue increase our volume and share as we move ahead.

Turning to page eight and looking at Northwest Timber Sales, you see from first to second quarter's and last year's second quarter selling prices generally reflect trends in end products markets, though certainly they don't swing to the extent of prices in wood products. As we've mentioned and as you see here in the last two years, we expect to see a reduction in sales from second to third quarter, which is simply just a reflection of our normal sales program.

Southeast Timber on page eight - I'm sorry, page nine, quarter-to-quarter volume and prices are essentially unchanged. In fact, prices remained unchanged for the last four quarters, as you can see. Looking ahead at the third quarter, we should see a pickup in volume and probably some slippage in price due to a change in the quality of timber we will be selling in the quarter rather than any like-for-like price erosion.

In New Zealand, on page 10, as you see in footnote, this data has been restated to reflect the results of our ongoing operations. In other words, what you see here is the volume and price of the sales from approximately the 120,000 acres we continue to hold.

In third quarter in New Zealand, we should see an increase in volume taking sales back up closer to the average for third quarters of the last two years. We should also see in price reflecting the higher quality of timber on the lands we will continue to hold.

Let me conclude now with just a couple of comments on wood products on pages 11 and 12. Looking first at lumber and our mills all located in Georgia, there are obvious - they are obviously, as you can see, producing more at lower cost. You should again see higher volume in the third quarter than you've seen in the prior two years, but what we - with what we see today, it probably won't be enough to offset what we expect in lower lumber prices looking ahead.

On page 12, volume and price is up, the mill is running well, and markets are tight. As we move into the third quarter, we expect - we expect to see a further modest increase in volume and price. Obviously price could move due to shifts in product mix, shifting sales between markets, and general product price increases. We should see some benefit from each of these. On the cost side, we are seeing an increase over there in resin and the cost of fiber due to the strengthening New Zealand dollar.

With that, let's go back to Gerry, and then we'll come back and take questions. Gerry?

Thanks, Lee.

Once again, I'd like to focus on earnings from continuing operations. As you can see on chart 13, the second quarter appears to be the beginning of a trend of favorable year-over-year comparisons from our somewhat more predictable business operations.

As we look forward into the third quarter, as Lee indicated, we typically see declines from our U.S. timber operations due to seasonal and business cycle patterns that emerge. As a result, we expect earnings per share in the third quarter to be less than that in the second quarter, barring any new significant event.

Just how much of a decline is difficult to predict, but if you look back at last year or the last two years, you'll see a decline from $6 to $10 million in the years in operating income from our Timber Resources Group. Whether or not that pattern will hold is uncertain because as you know, many of this year's timber contracts are already signed. But as you recognize revenue in some cases on a pay-as-cut basis whether, our customers decide to cut or not this quarter can't be controlled.

For the year, it is too - still too early. As we have discussed, fluff pulp prices are beginning to turn. The uncertainty of the Canadian tariff situation seems to be abating, and we are in a very low inflationary economy. The depreciation of the U.S. dollar, although significantly the stock market, has benefited us not only on foreign exchange translation, but on our competitive position worldwide, as close to half of our sales are outside the United States.

However, uncertainties in the global economy still persist and the impact of the stock market and consumer spending, although not yet apparent, could very well alter the favorable trends that we are now seeing. Still too early to call, notwithstanding that we are halfway through the year.

With that, let me close the formal part of the presentation and open up the Analyst Teleconference via the operator for questions from our audience.

Thank you. Our question-and-answer session is conducted electronically. If you would like to ask a question, please press the star key followed by the digit one. Again, that's star, one to signal for your questions. We'll pause for a moment to give everyone a chance to signal.

Gentlemen, our first question comes from . He's at Salomon Smith Barney.

Good afternoon and congratulations on a great quarter.

I have two quick questions for you. One was on the land sales. It looks like the - your realization per acre was significantly higher than you've seen in the past, and I was just wondering if it was an isolated sale or if it was spread around or if we could have some color on that.

And the second was just on the tax rate - if guidance of I think 32 percent is still what you guys are looking at for the year. I know that the first two quarters have trended a little bit below that.

, hi - Gerry Pollack. Let me give you some - a little more details on the acres and per acreage price for this quarter versus last quarter.

This quarter is more typical of the price that we tend to have as pretty close to two-thirds was land and about one-third timberland value. In last year's first quarter, we had a significant acreage sale in New Zealand - the sale, which was 14,000 of timberland. So that tends to bring down the average price.

So it really depends on the relationship of land to timberland that'll drive the per acre value. But the per acre value tends to be, as you can tell from the numbers in the second quarter, three times or more higher than timberland values.

And was it - was it - was it concentrated in one geographic area this quarter or was it spread around?

It was mostly in the Southeast.

OK.

And so far, most of the sales have come out of the Southeast.

OK.

On the tax rate, once again, the year-to-date - the year-to-date provision reflects our annual provision, so I don't know that it should be any higher going forward. On a continuing operations basis, I would probably say that that rate should hold at about 30 percent.

OK. OK, terrific.

Yes, the impact may alter that, so in terms of surrogating the taxes, we may need to come back to you a little bit more on that. I think the presentation is probably distorting the ratio a little bit.

OK, terrific. Thank you very much.

Once again, that is star one if you would like to signal for a question. We'll now go to . He's at Goldman Sachs.

Thank you. Lee, I was hoping that maybe you'd update us on your thinking about share repurchase, given the strength in your free cash flow - the fact that you've paid down a lot of debt and clearly the valuation of your stock has gotten better and maybe in this context also remind us what your debt targets are.

Well, let me - maybe come at that backwards a little bit. Obviously, Mark, as we've said, you know, as you recall, we started out above - after the Smurfit acquisition, we were at 63 percent - a little debt to total capital. We're now at 50, and obviously looking at a lower number as we go out of this year as we've indicated several times in public comments, you know, below 50. I'd - rather than being specific as to what the number is, I'd rather stay from, but obviously we'd like to get it down further and we'll continue to push on it. And I think I've indicated that before.

As far as share repurchases, we were in the market a little bit certainly before we got close to month end. Obviously when we hit the window, we had to close it. We - there's a point at which we will go back in, obviously with the volume out there. We might as well let the tide kind of run here a little bit, and when we think time is right and perhaps the volume slows back down, we'll take another look at when we'll go in and how far we'll go in. But obviously with the yield at 3.2 or 3.2 higher with our cash, it certainly becomes a favorable alternative.

And the issue you always face, and we've discussed it, is liquidity - is to how far you want to pull your liquidity down. But it is - it's an interesting, if not anything other than a philosophical discussion. But we certainly are willing to use our cash to support our stock because it's - it - it's a good yield, and I would think it's a great investment. And if we're not willing to put our own cash into it, it's a little hard to sometimes try to convince investors they should.

Great. Thanks. Very helpful.

Next question's going to come from . He's at Morgan Stanley.

Hi. Gerry, I wondered if you could just review something that you probably already said, but in New Zealand, when you look at the segment operating income just looking at Timber and Land sales, you were at breakeven in the quarter, but on a - on a geographic basis, you actually made money - two-and-a-half million dollars. Does that mean that you made - was that the facility or do you also have trading profits in there?

- correct. The - you'd have the trading profits coming from the log sales in New Zealand, which was positive the end of quarter and offset by a slight loss in - so, really the log sales out of New Zealand as opposed to the sales that generated profit and turned it around.

I see. So, is still at around breakeven?

It's been running breakeven to a slight loss - yes.

Slight loss? OK. And you had said you expect volume and price improvement in the third quarter in . Would that be enough to make that profitable, do you think?

Well, , this is Lee Nutter. Yes, we do expect some improvement in price and we do expect some improvement in volume. Obviously the New Zealand dollar has run against us a little bit from second to third quarter. I think we'll probably be slightly under on the operating income side, but obviously an improvement. And we expect the situation to improve as we continue to move across the year.

OK. And on third quarter volumes in the Pacific Northwest, obviously they'll be down for seasonal reasons, but do you think that they will come in at or possibly below third quarter year-ago?

Hang on a second, . Just let me look at where we were. Where is year-ago?

I mean I think second quarter - second quarter, for example, was surprisingly high, at least for us. Did you ...

This year - this year - , this is Gerry.

That's right.

This year was much higher than last year. Last year had a very strong first quarter, but the second quarter came in low. I would probably say that once again, it'll probably be under the third quarter. But as we keep talking, you don't know when the customers are going to cut. But right now, Northwest timber will - is looking like under last year's third quarter.

OK. So you're not encouraging us, then, to increase our full-year harvest expectations for the Northwest?

I don't know what your expectations were.

Well, we were looking for a full ...

don't see any overall change.

We were looking for a lower number in 2002 compared to 2001 for the full year.

That's correct. Yes, they really haven't changed. The quarters have shifted, but the - but the expectations are that this year's volume will be less than prior year based upon current trends.

OK. Oh, yes - and third quarter, did you give any explicit guidance on land sales and profit from land sales?

No. As you know, it's difficult. Land sales close or they don't close. They get delayed. I think our - the only guidance I believe we've ever given is that when you take a look at total land sales, and timberland sales, we tend to talk about $35 to $40 million in operating income for the year. That's still a good number, but which quarter it will fall in and , I don't know.

OK, 35 to 40 for the ...

That's a - that's a range.

Thirty-five to 40. So, that's down from the 52 that you did last year.

Yes. Correct, it is. We did 51.9 and right now 40 to 45 is the guidance we have given, and - I'm sorry, 35 to 40 is the guidance we've given. And, you know, it may - could come in stronger. We just don't know.

So, you say it could come in stronger. Should we then use a range of could be as much as 50 or ...

, you have to use what you want to use.

Well, ...

You can't ...

I know less than you do about your land sales, so ...

Right. And the lawyers - talk to the lawyers who are handling the closings and the financing. That's all I could really say is 35 to 40 is a comfortable range. If you want to be aggressive, you can go higher. You want to be conservative, you can go lower.

OK.

, if I could just add - this is Lee. You know, we always have a number of these things working, and not totally dependent on one or two. And you - it's very hard, as you probably realize, in the real estate business to determine when these things are going to close. So, ...

Sure.

... we're not trying to be evasive here. I just ...

No, no. I understand.

We'd rather do a little - do our best to under-promise a little bit and over-deliver.

Yes, I was trying to get a sense of whether there is a scenario in which you could have land sales for the full year equal to last year, and it sounds as though you think that's not likely. But it's - potentially it's possible, I suppose.

That would be a stretch, but you'd have to hit, you know, hit - 500 or something here to make it happen. It just - and typically, they just don't. There's always some reason or another why something gets held up or hung up and you - that's why you have a lot of them working at one time.

Got it. And so then just looking out over the next couple - three years, you think 35 to 40 million is about right for an annual basis?

That's what we've said in the past, and some years, we'll exceed it and ...

OK.

... some years we could fall short. You just don't know.

OK. And that's total - that's your timberland sales initiative, and it incorporates or encompasses all land sale activities?

and timberland sales.

Great.

Really, more or less, , lump it in just total land sales rather than ...

Good. Good. I just wanted to make sure that that's still how you're looking at it.

Right.

And then I guess in the South, you did about - what - five million of operating profits from stumpage sales in the second quarter.

I thought it'd be a little bit higher than that.

And which is down year-over-year and also down - yes, because what we're doing is we're taking out the land sales from the Southeastern land profits - Southeast profits, if you see what I'm doing.

Yes, and I see - yes. But the six million is a - is a good range for the Southeast stumpage activity. Six - I think was a little over six, actually.

A little over six?

Yes.

And I think you said third quarter volumes and price could be down.

I think volume price will be down somewhat. Due to mix of the timber that's going to be sold, volume should be up a little bit, .

Going back in your comment I think asking about the difference in Southeast timber, as you see on page nine, the harvest level in the second quarter of last year was almost a million-and-a-half tons and the second quarter of this year, we were down closer to a million - one. So there's a 400,000 ton drop there and price is the same, but what you have a - is a major volume variance there.

OK. And then lastly, just to be real clear, Gerry, on the final page of guidance where you were talking about the third quarter range, ...

Right.

... down from the 62 cents that you just reported, ...

Right.

... do you sometimes have arrows? In the past, did you have arrows trying to tie the year-ago quarter to the - to the upcoming quarter?

Yes, we used to have arrows that maybe one day will come back, but as you can - as you can read, with the SEC and the New York Stock Exchange and the Senate and the House, we're just going to be a lot more cautious about what we have - we have to say. And ...

I see.

... we'll just have to live with it for a while until the dust settles.

But are you - are you - just to be clear, are you suggesting that the 22-cent year-ago number is - that you - that the question mark is whether or not you'll be above or below that number?

No, no. The question mark is we don't know what it is. It's going to be down from the 62 cents, and the only significant specific seasonal issue is the U.S. Resources Group declined from second to third quarter, and I indicated that in the last year or two, that decline has been from six million to 10 million in each year ...

Got it. Got it.

... of operating income.

OK. Well, I guess I will ask one last question. Your price came down in the second quarter if I just take shipments ...

Yes.

... divided by - sales divided by shipments?

That's correct. It's basically mix.

Oh, it's basically mix.

Mix. prices haven't really changed.

Oh, OK. So, should that mix rebound in coming quarters or should we use that same average price for the next couple quarters for ?

I think you probably still have a little bit of a mix issue in there that will creep in a little bit as you look in the third quarter probably as we look at the world today, .

OK, but the recent sales price initiatives for fluff - that could begin to show up in the third quarter for you guys?

The - I hate to say we expect so. We hope so. You're beginning to see the fundamentals of it. What you're concerned a little bit - this is not the best time of year going into the middle of the summer to push and hold price increases. So, we're very cautiously optimistic. I think we've got a lot better chance in the fourth quarter than we do the third, although we're trying in the third.

And was the reason why your fluff price was up - was that also mix?

Basically.

Basically mix, .

OK. Very good. Thanks a lot.

Once again, that is star one to signal to ask a question - star, one.

Gentlemen, we have no other questions at this time.

Thank you. There's really not much more to add. Second quarter results were strong compared to those of the first quarter and to the second quarter of last year, as well. Our focus remains on earnings improvement, cost control, and debt reduction.

With that, let me close the conference and thank you for joining us.

Thank you. We do appreciate your participation. At this time, you may disconnect.