Rayonier Inc (RYN) 2002 Q3 法說會逐字稿

Good day, everyone. And welcome to the Rayonier third 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 permission. Your participation on this call constitutes implied consent. Please hang up now if you do not consent to being recorded. I'd like to turn over the call to the Vice President and Chief Financial Officer, Gerald Pollack.

I'd like to welcome everybody to Rayonier's analyst teleconference covering our earnings for the third quarter 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 live web casts 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, which by now I'm sure most of you are familiar with. However, in these presentations, we do include forward-looking statements made pursuant to the safe harbor provisions of the private security litigation reform act. Our 10K and press release lists some of the 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. Third quarter was a strong quarter for us, despite the continuing difficult economic environment. Earnings were well above last year's third quarter, and while they were down sequentially, this was mainly due to the usual seasonal decline in the northwest timber sales volume and the continuing very weak lumber market. A strong contribution from our ongoing lands pit sales program off set some of the lower timber sales program and lumber price impact. Overall, given our mix of businesses, we continued to deliver strong and consistent earnings as well as free cash flow, even in very difficult business conditions.

As you have seen, we have continued to use our strong cash flow to further strengthen our balance sheet and position the company for potential growth opportunities in our two key businesses, Performance Fibers and timber & Land. Our net debt to total capital at quarter end was 48.5%, compared to 54.1% a year ago. I think this clearly demonstrates our commitment and ability to generate cash.

Before I turn it over to Gerry for a review of the financials, let me conclude here by saying that our third quarter and year to date results clearly reflect the strength of this company. The quality and consistency of our earnings demonstrate our relentless focus on maximizing shareholder value. Looking forward to the fourth quarter and beyond, we remain well positioned in our markets, and while economic conditions may remain challenging for some time, we expect to continue delivering on our commitment of unlocking the full value of Rayonier for our shareholders which certainly includes many of our employees. Gerry?

Thanks, Lee. This quarter's highlights presented on chart 2 are fairly straightforward, with the timing of land sale closings which we will discuss coming earlier than anticipated. But overall a fairly strong quarter unto itself. Third quarter earnings per share from continuing operations are 55 cents was down 7 cents per share from an equally strong second quarter and 33 cents per share over the prior year. We will cover the major P&L variances in a moment.

The discontinued operations line in the income statement is not material and relates to the second quarter sale of the New Zealand east coast timber land operations with a favorable impact of one cent per share this quarter as a result of post-closing adjustments. This is also a quarter of continued strong cash flow. EBITDA per share of $2.89 was up sequentially as well as compared to last year, contributing $39 million to free cash flow, allowing for a $40 million reduction in debt while at the same time we increased our invested cash balance by 4 million.

On that note, let me digress for a moment. As we announced last week, our invested cash balance at quarter-end was supplemented by approximately $15 million in line-of-credit borrowings and used to pay off the remaining $78 million of ten-year notes originally issued in 1992. We expect the line-of-credit borrowings to be repaid by year end, with further debt recollection in 2003. Net debt to capital at quarter end, as Lee indicated, was 48.5%, down from the 64% at year end '99.

Let's turn to chart three and cover the P&L variances between second quarter and third-quarter activity. Once again in this analysis we focus on income from continuing operations. As you can see, income from continuing operations in the second quarter was 62 cents per share, with the third quarter's 55 cents representing a 7-cent-per-share decline. In Performance Fibers the analysis reflects a three-cent-per-share decline due to price and mix. Pulp prices actually rose quarter to quarter but product mix within cellulose (ph) specialties and the timing of foreign shipments caused the average recorded prices to decline.

Shipment volume, however, was 6% higher than the second quarter. Timber volume declined in the third quarter as was seasonally expected, impacting the quarter to quarter EPS comparison by 16 cents. Land sales operating income of approximately $19 million was $8 million higher than the second quarter's level, and as I indicated slightly higher than expectations as the timing of closings this time favored the third quarter versus the fourth. Also, lumber prices as Lee indicated continued to drop during the quarter with the third quarter average price approximately 13% below that of the second quarter.

The decline in the New Zealand dollar from its second quarter level to third had a varying and offsetting effect by line item. As it favorably impacted the New Zealand comparative operating income by $2 million while adversely affecting the corporate and other line item by $3.8 million for net $1.8 million unfavorable variance on operating income quarter to quarter. However, the after-tax variance was far less due to differences between the New Zealand and U.S. tax treatments.

Interest expense continued to decline quarter to quarter, primarily as a result of having an average of $40 million less debt in the third quarter. The cumulative effect of these variances caused the seven-cent decline from the second quarter to 55 cents per share earned in the third quarter.

Let's briefly look at the year-over-year comparisons on chart 4, picking out the major movements. Looking at the variances for the third quarter by itself, you can see the analysis starts with a 22 cents per share in last year's third quarter and works toward our 55 cents for this quarter's earnings. Major contributors to the year-over-year improvements were 9.4% in lower manufacturing costs and 10% higher shipment volume in Performance Fibers. Once again, very strong land sales in the quarter, and lower interest expense were offset by adverse lumber pricing. The net result were the 33 cent-per-share increase in income from continuing operations from a year ago bringing us to this year's 55 cents per share level.

Before we move on to Lee and our marketing operations report, I just want to comment on our disclosure in the press release related to pension liabilities. As you are aware, we as most other companies track pension fund performance during the year, and by the summer and fall of 2002, began to update both the year-end funding position and the following year's projections as well as the impact on pension expense. With a decline in stock market values through the summer and ell into the fall, and declining interest rates, we realized that, short of a miraculous recovery in the stock market, or an increase in the interest rates used to discount liabilities from decade-low levels, our unfunded pension obligation would increase considerably. We tested the impact based on September 30 asset and interest rate levels, and if those levels were to remain the same at year end, we will record a fourth quarter charge of 30 to $35 million to shareholders equity and to other comprehensive income for an additional minimum pension liability adjustments.

In addition, in looking at the pension assumptions used in calculating our pension expense, and comparing them to key capital market trends, we anticipate some changes to those assumptions for 2003. The combined effect of the increase in the unfunded positions and changes in assumptions will most likely increase our pension expense next year by only 3 to $4 million pre-tax. However, obviously at this time we don't know what December 31 values will be and have not finalized what those changes to pension assumptions might result in. But for fair disclosure, we felt it best to put this on the table now, so that the materiality or lack of materiality can be judged accordingly. We'll have some enhanced disclosure on this issue in our third quarter 10-Q. With that, let me turn the conference over to Lee for an update on markets and operations.

Thank you, Jerry. Let's now review the performance of our two business, businesses, Performance Fibers and Timber and Land. On pages 6 and 7 you can see pricing and volume data for the Performance Fibers business. You should note that these reflect shipments while exhibit F in the earnings release contain sales data. Any minor variations are due to foreign sales timing.

As you can see at the top of page 6, the average price for Cellulose Specialties is down about 2%, which is due entirely to running some lower-value product in that quarter. On an item-by-item basis, our prices remain unchanged. Our market position in the specialty segment of this business is solid, and demand remains strong. Unlike absorbent materials, the Cellulose specialties businesses is characterized by few players, and high barriers to entry enable us to earn good margins for these higher value added products.

On the absorbent materials side which is primarily fluff pulp, prices remain steady. As noted earlier, earnings from Performance Fibers business were sequentially flat with higher sales volume being off set by slightly lower average prices. Compared to last year, earnings in Performance Fibers improved primarily due to lower manufacturing costs. Looking ahead, we expect flat pricing in Cellulose Specialties and fluff pulp, while there have been some signs of price improvement in fluff pulp, it's just too early to tell.

Looking at page 7, Cellulose Specialties volume should be somewhat mire the fourth quarter. However, overall Performance Fibers operating income is expected to slip in the quarter due in large part to higher chemical and fuel costs. Let me adhere that our position in Cellulose Specialty markets remain very strong and we continue to push for further increases in the volume and to strengthen the mix in this business. We can do that with our commitment to this business, the quality of our products, and ultimately the cost to our customers and their final product.

On page 8, and as noted during our second quarter earnings conference call, you can see the impact of the seasonally lower northwest timber sales volumes as we discussed earlier. Prices there are steady, and we expect fourth quarter sales volume to generally reflect the usual percentage pick up from the third quarter. On a full-year basis we expect volumes to be down slightly from last year.

Moving to Southeast Timber on page 9, third quarter volumes were down slightly with prices essentially unchanged. Looking at the fourth quarter, we should see a modest pickup in volume with the average price holding. New Zealand Timber on page 10, and as you can see on the footnote, this data has been restated to reflect our ongoing operations. For the third quarter, both volume and price were up. Fourth quarter volume should be up from the third, as is typically the case. However, prices may soften a bit from third quarter levels due to the mix.

Let me conclude with some comments on our wood products business, as shown on pages 11 and 12, before I turn it back to Gerry. Looking first at our lumber business on page 11, which consists of three mills here in the southeast, and while volumes were up, pricing environment was extremely difficult, perhaps better described as horrible, which we expect to see continuing in the fourth quarter. Keeping this business in a negative position.

Moving on to our MDF business on page 12, the plant continues to run well above design capacity and should finish with production this year about 5% above last year's level. As you can also see on this chart, our average price continues to trend upward due in large part to optimizing our markets and product mix. In the fourth quarter we should see slightly stronger financial performance here due to additional volume and cost reductions offsetting slightly lower price due to mix. With that, let's go back to Gerry.

Thanks, Lee. Once again, we close the formal part of the presentation with our discussion of earnings-per-share trends. As you can see we have completed three-quarters of 2002 with $1.49 in EPS. The final quarter of 2002, however, is anticipated to be lower than the third quarter, primarily due to fewer land sale closings, as well as, as Lee indicated, higher fuel, chemical, and other manufacturing costs at Performance Fibers.

For the year we will most likely be down from 2001's earnings level, but at the present time, the First Call estimate for 2002 as of October 18 at a $1.84 is considered in the ballpark of expected outcomes. With that let me turn the call back over to the conference operator to take questions from our audience.

Thank you. Our question and answer session is conducted electronically. If you would like to signal for a question, please press the star key followed by the digit 1. Again, that's star-one if you would like to signal for a question. If you are on a speakerphone please be sure that the 'mute' function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal us and we will take as many questions as time permits. Gentlemen, our first question will come from Richard Holohan at Salomon Smith Barney.

Hi. Good afternoon. I had a question on the land sales. The number, the average price per acre that you got there seemed to be somewhat above what you've seen, at least in recent quarters. Is that because of the geographic break down of where it was sold or could you give us some color there?

Richard, Jerry Pollack. Most of the land sales is occurring in the southeast, but it's really a relationship of higher and better use land to regular timber land, and it's just a function of being a higher priced properties in this quarter. I don't know of any other significant issue. I think last quarter we had some New Zealand sales in there, but in this particular case, I think mostly just a mix of higher and bettered use versus regular land .

So, in other words, there were more higher and better use in the total mix of land sales this quarter?

Right, higher prices, right.

Gotcha. Thank you .

Our next question will come from Mark Weintraub at Goldman Sachs.

Thank you. On the pension, you had mentioned under a certain scenario, pension expense might go up three to four million. Can you tell us what your cash contribution this year is and what under that same scenario would happen to the cash contribution?

Yes. Well, the cash contribution this year was really roughly $500,000 or so, planned for 2002. The cash contributions tend to lag quite a bit, so even though we may end up this year with a higher unfunded balance, it shouldn't impact 2003. More likely, 2004. Because it's almost a nine-month lag effect. We haven't decided yet whether we will make the contribution this year as we did last year, but once again, the stock market movement was so severe this year, there's -- there's always the possibility in 2003 to go back up, and to put cash in unnecessarily would not be appropriate. But right now, it should not have a significant impact on cash for 2003 .

If things were flat for next year, is the order of magnitude similar to the pension expense number? Is it three to four million, or can it be quite different?

I'm really not sure what that number is at this point. We looked at the unfunded balances, looked at the pension expense, and we don't have time right now to roll through it. We will probably in the 10-Q put that number in .

Okay. And shifting gears to volumes for timber for next year, in the type of environment that at this juncture -- if we were to assume that it's not a great business, but not horrendous, would you be expecting volumes to be similar to this year, or they're company-specific issues that would cause changes in volume?

You talking about timber, you said -- .

Yes.

I wouldn't describe the timber business as horrible, but anyway, I don't see any reason to have significant differences, you know, in the timber business. New Zealand, northwest, southeast. Obviously after you adjust New Zealand for taking out east coast timberland sale, which we did in our numbers, but I don't see any reason for any significant differences in volume.

Okay, great. Thank you.

Again, that is star-bun if you would like to signal to ask question -- star-one if you would like to signal to ask a question. If you are on a speakerphone be sure your mute button is off to allow your signal to reach our equipment. We now go to Matt Berler at Morgan Stanley .

Lee, Jerry, I think you said that the strength in the third quarter land sales reflected to some extent timing, some of which you expected to close in the fourth quarter. We had an estimate of timber sales initiatives, sales $12 million -- income in the fourth quarter of $12 million. Does that mean we should be taking that down by some kind of 3 to $6 million?

Well, I'm not sure the exact number that was in your models, but, yes, you should probably take your fourth quarter down for the advanced closing in the third quarter. And so the answer is probably yes, and I'm not sure what the correct number should be based on your model. We've always talked about, for the year, having 35 to $40 million. This is still a strong year. There's strong demand for property. We could have closings occur in the fourth quarter that we didn't anticipate might occur in the first quarter. It's very fluid. But probably, apples to apples, with your prior model, with the third quarter up, you should take it down by probably what the unanticipated increase in your model was for the third quarter .

I see. But -- I'm sorry. Go ahead.

No, that's it.

Okay, but you're expecting to go above the high end of that range for the first year?

Probably yes, correct .

Right, unless you're basically going to have no sales -- .

Correct. We'll be at the high end or above the range, very strong demand, and closings take place as fast as financing and permitting can occur .

Okay. And then I thought that you guys made some money in MDF in the second quarter. I could be wrong.

No Mark, we didn't. It's kind of been bumping along but, you know, the business painfully but gradually has been getting better. You know, with the theme in that business for several years here, at least certainly the last two, is it has a strong cash flow.

So if I take your geographic segment earnings for New Zealand of 2 million, subtract out the timber and land component that came from New Zealand of 4.3, I know there's probably some trading involved -- noise there, but does that suggest you lost about two million in MDF? If I did that right?

No, I know that.

In the quarter?

No, I'm not sure what your numbers are, but it's nowhere near that.

You reported a -- you reported a geographic profit in New Zealand of 2 million. And you reported timber -- .

I'm sorry, you said a geographic -- 2 million, correct .

2 million.

Right .

And you reported operating income from New Zealand land and timber of 4.3. So the difference has to be a loss somewhere of 2.3.

Correct. But part of that is the foreign exchange component which I'm not sure is showing up in your numbers. So to some extent it's in consolidation. So I think foreign exchange is a factor in there. That I will have to get back to. But the MDF loss is well under half a million .

Okay, so the rest is FX .

I think it's FX which is in the intercompany elimination line.

Okay. Now, the New Zealand operating profit from timber was a real breakout, I think, on a quarterly basis, and graphically you show why, I guess price and volume.

Correct. Very strong New Zealand forest resources timber performance in the quarter .

And you said price might come down a little bit if volume would stay strong .

I think Matt we may stay low just because of mix, not because of absolute prices, but mix and volume should be up slightly in the fourth quarter. Let me just reiterate, I don't know the numbers, but the MDF loss and operating income loss in MDF is far, far below -- .

Well under half a million .

Yeah, yeah. So I mean it's -- .

I think we just identified the missing piece. FX

All right .

Yeah, the FX impact in the New Zealand numbers was about $2 million.

Yeah, that's it .

Chopped from 49 cents to 46 cents to the U.S. dollar, and that was a big impact in the quarter.

Right. Okay. So, back to New Zealand timber, are you comfortable with us now assuming that the new run rate from an operating profit standpoint is 4 million, which would take us back to -- I mean you've really never done that before.

Take us back to what, I'm sorry, Matt?

I was just saying, I was looking backwards in time and I've never seen you guys report an operating profit number that strong out of New Zealand timber. Is this a new run rate for you, do you think?

At this point it's at least a one-quarter run rate. As Lee indicated, the market conditions down there are pretty favorable, and so a number in the range of three to four million, you know, quarter to quarter would not be inappropriate.

Okay. So the answer is 'yes' then. All right .

The difference, perhaps, that you're seeing in this quarter and almost in entirety is the timber that -- a lot of the timber that we are selling is being bought and sold on the New Zealand market, and rather than into the export market. And what we've retained is considerably richer mix than what we sold in the east coast sale. You're going to see less volume but you're certainly going to see some improved results.

Good. And then just a couple other follow-ups. Southeastern volumes, did you see they would be up in the fourth quarter?

Slightly. Slightly.

Is that -- How do we reconcile that with what's probably going to be significant increase in downtime in the lumber business, I would think, given what's going on with pricing and profits at the sawmills?

You mean erosion in price, is that what you're talking about, Matt?

Yes. Not erosion in price of stumpage, but erosion in margin and prices for the end product .

The end product being -- .

Lumber .

I think as we indicated, and we've given some ballpark guidance for the year which backs up into the quarter, obviously, we don't expect any increased lumber prices from where they are right now, we think they're going to remain flat.

Okay, let me rephrase the question. I'm curious how it is you're going to sell more logs, why the harvest level would go up in the fourth quarter, given how weak the end markets are.

Well, it's deminimus, Matt, the increase and we're not talking about any -- I mean it's just -- you know if you want it's virtually flat for all intents and purposes, but it's deminimus. Obvious what will we have out there is already fixed, they were fixed some six months ago so the issue only is if harvest were to drop. We don't see any indication that people are backing out .

Does that -- at some point do you think that will have to happen, though? How do we resolve this glut of lumber and the excess capacity?

Well, that's a good question. I'm not sure I've been able to answer that either when it's up or down. When lumber markets are far stronger than they are today we didn't see that kind of dramatic pickup in stumpage prices and you don't see it on the downside. So, you know, I don't -- looking at current sales, both our stumpage as well as others, which you're seeing some of those timber land sales go for, we haven't seen a drop yet. There's the expect -- hope strings eternal out there on some of the people that get into this business, and obviously they're speculating.

Fascinating. Okay. I think that does it. Oh, do you have any -- I know the way you auction off the rights to cut timber in the Pacific Northwest in particular it gives you an insight into what people think is going to happen in the coming kind of three, six, nine, 12 months, how have those prices held up in terms of the auction results, the most recent -- .

What we've seen recently were flat, you know. Now, remember, in the northwest, Matt, that that's sold not on as pay-as-cut but it's sold on a lump-sum basis so when we sell it at a point in time that's when the sale is booked, if you will, whereas in the southeast we have a sale and they're on pay as cut, so as we cut it then we book sale. So, you know, when you're looking at third quarter, you're looking at bid prices in the third quarter, essentially.

I see. And the fourth quarter volumes that you're anticipating would reflect prices that -- explain that to me. You're saying that people have already paid for that up front?

Yes. Third quarter was -- well, in the northwest, the paid -- the third quarter was paid for at the day of the bid, essentially. I mean that's basically when it's booked. Obviously it closes a few days later. And what we're seeing and expecting in the fourth quarter is the same kind of selling prices we saw in the third quarter. We don't see any reason for them to drop. And I think I said my comments are -- our forecast is essentially flat on price. And the volume change, on a percentage basis, will be very similar, we're forecasting very similar to the percentage change you saw last year between third and fourth quarter.

Got it. Okay. Thank you very much.

Once again that is star-one if you would like to signal to ask a question, star-one. Gentlemen, we have no other questions. I'll turn it back to you for any closing comments.

Thank you. There's really not much more to add. Activities in the quarter were traditional and reflective of most industry market conditions that have been published. However the continued strong demand for cellulose specialty products as well as for our southeast development opportunities provide both a cushion for any downside as well as opportunities on the upside. With that, let me close the conference and thank everybody for joining us.

Thank you. That does conclude the call. We do appreciate your participation. At this time you may disconnect. Thank you