Rayonier Inc (RYN) 2002 Q4 法說會逐字稿

Good day, everyone, and welcome to the Rayonier fourth quarter earnings release conference call. Today’s call is being recorded by Rayonier and is copywrited 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.

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

Thank you and good afternoon. I would like to once again welcome everybody to Rayonier’s investor teleconference at this time covering our earnings for the fourth quarter and full year 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, Investor Relations at (904) 357-9155 and he will add you to our mailing list.

As a reminder, 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. Simply go to our website at rayonier.com and link to the conference.

To those of you who are using the exhibits the press release had sent out by business wire, please note that the average number of shares outstanding at the bottom of Exhibit B in their first dissemination came out as pound signs. A revised page was subsequently sent. That exhibit came through correctly, both on First Call and our website posting.

With me today 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 and the year. Lee will then cover markets and operations, and I will close our formal presentation with a discussion of earnings per share trends.

These presentations may include forward-looking statements made pursuant to the Safe Harbor Provisions of the Private Security Litigation Reform Act. Our 10-K and press release lists some of the factors that could cause actual results to differ materially from such statements. Please familiarize yourselves with them.

With that, let’s start the program with opening comments from Lee. Lee.

Thank you, Gerry. Let me just take a minute to comment on the fourth quarter and then on the year, which once again, can best be described as having been a challenge.

Overall, fourth quarter results were solid with earnings well above last year’s fourth quarter. And while they were down sequentially, this was mainly due to a lower level of land sales and the higher chemical and energy costs for our performance fibers that I mentioned in my last comment -- or my comments on third quarter.

The usual seasonal pickup in Northwest timber operations and lower interest costs on debt outstanding offset some of this weakness. Overall, our unique mix of businesses, once again, delivered strong, consistent earnings, as well as free cash flow.

While the commodities segments of our business -- which obviously are small -- continue to face difficult times, the key components of our [technical difficulty] business units -- timber and land and performance fibers -- have done quite well. In timber and land, our program to annually sell 2 to 4 percentage of our acreage to unlock value for shareholders is proceeding quite well.

In 2002, we sold about 2 percent. While in 2001 and 2000 -- I mean, in 2000 -- we averaged slightly under 3 percent. Earnings from these land sales over the last three years included holdings from the almost 1 million acres we acquired in 1999. In fact, about 70 percent of the property we sold over this three-year period has come from those so-called “new acres”. Obviously, the bottom line, buying and selling land has served us well.

While the timing of these sales has, and will remain, somewhat variable over quarter-to-quarter, on an annual basis, they reflect a more stable and predictable trend. Obviously, this segment has not only been a sizeable contributor to our earnings, but reflects a large component of our cash flow.

In performance fibers, we continue to experience strong demand and stable pricing for our market leading sales specialty products, which gives us a steady earnings base. While the commodities side remains weak and generally volatile, over time, we have over the last five years changed the product mix of this business to reflect a greater component of sale of specialties. In 2002, this high value added segment reflected 62 percent of volume. While in 1998, it represented 53 percent. High product quality, long-term client relationship backed by our research and development program, should allow us to continue to increase our market share.

Let me add here that we very recently have seen an increase level of interest in our higher purity grades of cellulose, and if this were to become incremental volume, it would have a positive impact on the relative performance of this cellulose specialties business beginning possibly later this year and continuing into next.

As I will once again point out, we have a strong cash flow from our two strategic businesses and have diligently used that cash to reduce debt and further strengthen our balance sheet. Coming into 2003, this has positioned us well for potential growth in our two key businesses.

Our net debt in this last year was reduced by over 200m and by 500m, or 45 percent since the beginning of 2000. Our net debt-to-capital ratio has come down from a peak of 64 percent in 1999 to 46.9 percent at the end of December.

Let me conclude here by saying we face another challenging year, and particularly, the first quarter. However, I think for the year in total, we will once again see the quality and consistency of our earnings, which we see as the hallmark of Rayonier. I think this has been demonstrated by delivering returns to our shareholders, certainly above most companies in our sector and above the S&P 500, not only in 2002, but also over the last three years.

Looking ahead, we remain well positioned in our businesses, and as always, focused on maximizing shareholder value. Gerry.

Thanks, Lee. Let’s start the financial coverage on chart 2. First, with fourth quarter highlights and then some brief comments on the full year.

For the fourth quarter, there were three items that we consider of special interest. The first relates to a $2.7m pre-tax increase in disposition reserves related to closed pulp facilities in the Northwest, and that is reported in disposition line.

Second, 3.5m pre-tax in additional tax deficiency interest accruals related to tax audits of prior years recorded in interest expense, and approximately $5m in additional net earnings due to the appreciation of the New Zealand dollar during the quarter, and tax benefits that impact the tax provision, but do not necessarily or proportionately affect pre-tax income. As we discuss today’s results, I’ll try to highlight where these items are and the statistics reported. But, on a combined basis, the three items contributed $0.04 per share to our bottom line.

The reasons for the quarterly and full-year variance is the sales and operating income will be covered in the next two charts, so let me know focus on the capital resources that include each section of chart 2.

Cash provided by operating activities of continued operations is a GAAP measure of cash flow and tracks with a 10-K format in a consolidated statement of cash flows. It is also shown in our Exhibit D to the press release.

Focusing on the full year results, cash provided by operating activities of $250m was generated primarily by approximately 55m of income from continuing operations and non-cash items of $184m of which DD&A and the non-cash cost of land comprised $176m. A very strong cash generation year, as we noted.

I might note at this time that along with the GAAP measures of cash provided by operating activities, we do present other non-GAAP measures, which we feel are important and which are reconciled to the nearest comparable GAAP measure on chart 15 of our package and defined on chart 16. Similar presentations and definitions were provided in Exhibit A and Exhibit G of our press release.

[indiscernible] by the year by definition excludes DD&A interest and income tax expense, and also ignores balance sheet changes, is a measure of gross cash flow capability of the company and came in over $300m. The decline from prior year was primarily due to slightly lower income.

Pre-cash flow of $142m, however, represented a $16m increase over prior year, primarily resulting from working capital improvements on top of the income.

As we mentioned, repayment of borrowings of $210m came, not only, from that free cash flow, but also from approximately $71m in cash generated from the sale of our discontinued New Zealand East Coast timber land operations.

With that, gross debt declined from $850m at the beginning of the year to the $640m gross at year-end, and with approximately $14m of short-term cash invested awaiting debt repayment, our net debt, as Lee mentioned, of $627m resulted in a net debt-to-capital ratio of 46.9 percent.

Let’s move on to chart 3 and a more detailed explanation of our sales, operating, and net income.

On chart 3, we provide the analysis of near-term trends from our third quarter earnings of $0.55 per share to fourth quarter earnings of $0.46. As you can see, there was an approximate $0.10 per share decline in performance fibers contribution primarily as a result of higher raw material and chemical costs. This variance was offset to some extent by higher sale of specialties prices due to mix.

In timber and land, as we’ve always mentioned, the timing of land sales, and in particular, during the year cannot be predicted. In this particular case, we did have a strong fourth quarter, but not as strong as our more recent third quarter. Third quarter results included one particularly large land sale for approximately $8m in operating income. This quarter-to-quarter unfavorable variance, along with unfavorable foreign exchange movement in our New Zealand timber balance sheet accounts, more than offset a strong improvement in timber volume in both the Southeast and the Northwest.

At this point, I would like to explain how the improvement of the New Zealand dollar from approximately $0.47 at September 30 to $0.52 at year-end had a significant effect on this quarter’s income statement.

It affected two business segments, our corporate line, as well as our tax provision. The primary results from having U.S. dollar denominated inter-company accounts on the New Zealand statutory books, as well as New Zealand dollar denominated inter-company accounts on our corporate books. In some cases, these accounts offset each other in book consolidation, but create statutory tax benefits or charges disproportionate to the pre-tax line. In this particular quarter, we had approximately $1.4m in pre-tax income on a consolidated basis due to the foreign exchange movement, yet $2.9m in tax benefits.

The gains we realize this quarter effectively offset losses to a previously and slowly incurred over time as the New Zealand dollar declined from one of its long-term highs at $0.68 per U.S. dollar in 1996 to briefly below $0.40 in April of 2001.

Moving on with our analysis of operating segment results, in wood products and trading, you can see that lumber margins were basically flat quarter-to-quarter, with lower lumber prices being offset by improved manufacturing costs. And at our MDF plant in New Zealand, we realized lower costs, as well as some favorable foreign exchange movement.

As we head down this chart’s operating income, we note the increase in the provision of dispositions of $3m on a rounded basis, resulting in operating income $8m below the third quarter level.

Although interest expense on outstanding debt, as we indicated was below prior periods as would be expected, as a result, the recent IRS proposals relating to outstanding tax audit issues increased our tax deficiency interest in the quarter resulting in the overall interest expense line increasing by $3m.

The next line, “other taxes”, relates to our tax benefits and as you can see, an approximate $4m after-tax earnings improvement, primarily relating to the foreign exchange movement we talked about, as well as the realization of some unrecognized tax benefits from dissolving some Canadian legal entities.

Net [net], our earnings declined from $0.55 to $0.46 per share with approximately $0.04 per share coming from the three particular items I noted earlier.

Let’s complete our financial presentation with a brief look at chart 4, our fourth quarter and full-year comparisons for the prior year.

For the fourth quarter, our improvement from last year’s $0.25 per share level came primarily from lower costs in performance fibers and increase tax benefits year-over-year. What is obscured from this analysis is that the interest expense, once again, on a regularly outstanding debt declined by approximately $3m that was offset by that increase tax deficiency interest we talked about.

But, more important, on this page is the full-year comparison and the trends over 12 months that have impacted this year’s results. Clearly, the two dominant impacts were lower fluff pulp, or absorbent material prices, notwithstanding a short-term improvement mid-summer, and improved performance fibers manufacturing costs over the 12-month period.

In timber and land, markets have been soft since late last year and its impact to 2002 can be noted, and the $0.14 per share lower contribution from pricing and $0.28 per share from overall volume.

Year-over-year, once again interest expense, even including the tax deficiency interest, favorably impacted our bottom line by $0.18 per share and the lower effective tax rate this year contributed another $0.17 per share.

This year’s $1.95 in earnings, down only 5 percent from last year’s $2.06 per share, demonstrates our abilities to sustain earnings through adverse market conditions in most segments. Sale of specialties, demand in pricing remain remarkably strong and stable over the year. And commercial and residential real estate development, as well as the need to protect the environmentally sensitive lands, have and are expected to continue to support strong land sales contributions.

Before I conclude, let me highlight that we changed the format in Exhibit E of the earnings release to reflect cash-flow analysis more in conformance with generally accepted accounting principals. In there you will see nine cash items of $184m for the year, of which I indicated $176m was for DD&A and the non-cash cost of land sold. On that chart, you could also see that capital expenditures for the year was $77m.

For 2003, we expect a slight decrease in depletion as timber markets remain weak, while capital expenditures for 2003 will probably move upwards more toward past disclosed capital spending upper limits of $90m to $100m. I’m mentioning this because DD&A and capital expenditure projections, as you can imagine, are two frequently asked questions.

With that, let me turn the conference over to Lee for a discussion of markets and operations. Lee.

Thank you, Gerry. Let me now review the performance in our two core businesses. On pages 6 and 7, you can see pricing and volume information for performance fibers. You should note that these reflect shipments, while Exhibit F in the earnings release, is sales data. As we said before, these variations are due to foreign sales timing.

As you can see at the top of page 6, the average price for sale of specialties moved up in the fourth quarter to where we’ve been for the last several quarters. As we said in our last quarterly call, the third quarter average price reflected producing and selling some lower value product during that quarter.

Our market position in the high-end specialty business remains solid and demand continues to be strong. And as I said earlier, we’ve seen a very recent increase in the level of interest. This issue we could have here in sale of specialties is a difficulty in making rapid changes in product mix. But as you’ve seen and we’ve said before, this high value business is where we’re going.

Unlike the commodity side of this business, the high-value segment is characterized by very few players and high barriers to entry, enabling us to generate good margins. And absorbent materials, which is primarily fluff pulp, prices on the average have remained steady, all be it, at well less than attractive levels.

As noted earlier, earnings in performance fiber were below the third quarter, mainly due to higher raw material and maintenance costs, somewhat offset by higher sales specialty prices.

Compared to fourth quarter 2001, earnings improved at a lower cost and once again, higher sale of specialties volume.

Looking ahead, we expect generally flat pricing in sale of specialties and fluff price in fluff pulp. While there are signs that inventories for market pulp are tightening, it’s still too early to tell when that may be begin to impact fluff pulp prices.

Turning to page 7, as I noted earlier, you can see the progress we are making in changing our mix to our strength sale of specialties. Here you can the shift [technical difficulty] mix in sale of specialties has increased from the 53 to 62 percent that I mentioned earlier.

Looking at first quarter 2003, sale of specialties volume should ease from the fourth quarter. However, we expect volume to be in line with first quarter 2002.

Overall, performance fibers operating income in the first quarter is expected to be lower, mainly due to costs and mix. As some of you probably also know, we and other Southeast pulp and paper mills due to the very wet weather down here, have experienced a significant reduction in hardwood fiber supply and the resulting increase in costs. This impacts our sale of specialties costs and shipments for the quarter, but most likely not volume for the year.

On page 8, Northwest timber sales, you can see the typical fourth quarter pick up from the third. Prices remain steady and we expect first quarter sales to be generally in line with first quarter 2002.

Moving to Southeast timber on page 9, volumes were up, but sales were lower. For the first quarter, volumes are expected to be down sequentially with perhaps a minor erosion in price from fourth quarter levels.

While we see some price slippage on the sales side, I think I should reiterate that while we sell about 5 million tons of timber in the Southeast, we purchase over 6 million tons for our mills. So what we lose on one side, we can gain on the other.

New Zealand Timber, on page 10, as we’ve noted earlier, this data has been restated to reflect our ongoing operations. As expected, volumes were up in the quarter and prices due to mix, ease somewhat from the third quarter level.

Looking to the first quarter of 2003, you should see the typical seasonality with the light start and then volumes ramping up through the year. Prices should remain steady.

Let me conclude with some quick comments on our wood products businesses detailed on pages 11 and 12 before I turn it back over to Gerry.

Looking first at our lumber business on page 11, which consists of three mills here in the Southeast, volumes were reflecting downtime due to markets and the holidays. Obviously, pricing remains very difficult and we see only modest upside in the first quarter.

Moving on to our MDF business on page 12, fourth quarter volumes were up, while [indiscernible] mix prices eased slightly. The plant continues to run above design capacity and we should continue to see volume growth in 2003. In the first quarter, volumes will likely ease a bit from the strong fourth quarter level flat pricing.

With that, let’s go back to Gerry.

Thank you, Lee. On chart 13, we begin our quarterly discussion of earnings per share trends with our outlook for the first quarter. As indicated in our press release, given today’s market conditions, we see a slow start for the year in earnings development, the first quarter expectations well below last year’s first quarter as a result of the timing of both land sales and performance fiber shipments on a calendar basis, continued weak timber markets and unusual conditions, creating higher raw material and energy costs.

Nevertheless, as I said before, we expect our sale specialties and land sale businesses to continue to provide a strong, stable base of earnings and cash flow for the year as a whole.

With that, let me close the formal part of the presentation and turn the conference over to the conference operator for questions from our audience.

Thank you, sir. Today's question-and-answer session will be conducted electronically. (Caller Instructions.)

We'll go first to Richard Holohan with Salomon Smith Barney.

Hi. Good afternoon. I had a question on the performance fibers mix. Going forward, you know, assuming that we see a classic pulp cycle emerge at some point – and I'm thinking on the commodities side here – is this a permanent mix shift, or is this something that you guys are being somewhat opportunistic in terms of the weak pricing on the commodities side? Would you add to production, or could you add to production if the commodities side became more profitable as the cycle goes along?

Richard, this is Leo. I'll try to answer your question. I think the first part of the answer is yes. We have made the move. We will continue to make the move into cellulose specialties. That's the strength of Rayonier's performance fibers business. We've consistently said we'll move away from the commodities side here, particularly fluff pulp. Could we switch back if we chose? Yes, we could switch back into fluff pulp, but the cellulose specialties business isn't something you can jump in and out of, and I think the reason – one of the reasons we've been able to build that position you saw in those charts is because Rayonier has been in it, we've stayed in it, and I think our customers realize that we will stay in it albeit there could be times – we haven't seen it since 1995 – in which the commodity grades fluff pulp, in other words, were more attractive than chemicals – or cellulose specialties.

Gotcha. And specifically on the cellulose specialties side, you've mentioned earlier that you were starting to see some interest that could add to your volumes there by the end of the year. Could you characterize that as – is it one large customer that might be coming in, or is it just general demand that you're seeing in the area?

Well, Richard, we've had inquiries concerning or asking us if we could have available later perhaps in this year and next year volumes above what we've supplied in the past. And, you know, rather than speculate further than that, that's just what we've had in the last several weeks.

Gotcha. Okay. And last question, could you give us an idea of what the geographic breakdown of land sales in the fourth quarter was? Just looking roughly at what appears to be your pricing among the different geographic regions, it looks like it'd be about one-third in the Northwest and two-thirds in the Southeast and nothing coming from New Zealand. Is that about right?

Richard, primarily, I would probably say slightly less than a third in the Northwest, and obviously slightly more than that in the -- two thirds in the Southeast, and nothing material really in New Zealand.

Gotcha. Okay. Thank you very much.

(Caller Instructions.)

We'll go next to Mark Weintraub with Goldman Sachs.

Thank you. First, Lee, you may have mentioned this, but just could you give us a little bit more specifics on harvest volume expectations for 2003 versus '02 by the different regions?

Mark, this is Gerry Pollack. Just to give you an indication, total year harvest in the Northwest will probably be down from this year – once again, marketing conditions being what they are right now – perhaps by 7, 8 percent. In the Southeast, probably something very similar, about 5 percent down. And in New Zealand, the feet timber should be roughly the same, not anything to sneeze at. So it's really about perhaps 7, 8 percent in the Northwest and 5 percent down in the Southeast given today's projections.

Okay. And in curiosity, on the chemical cellulose, would it be fair to assume that changes by customers would reflect more -- how much of their business they're giving to folks as opposed to market growth of the customer? Or might it be market growth of the customer?

I think it's probably more accurately portrayed, Mark, as a shift in sources rather than – I mean the market we're talking about is acetate for cigarette filters.

Um-hmm.

-- and which continues to grow on a worldwide basis somewhere around 1 percent. So you've got a little bit of that in there, and I think you've got somewhat of a shift for sources – for a source.

Okay, great. And, lastly, on the first quarter timberland sales, recognizing they're spotty and difficult to predict, but when you gave us the guidance of well below the prior-year first quarter, what type of number were you assuming for timberland sales in providing that guidance?

Mark, Gerry again. I think the guidance, "well below," was for the company as a whole and not necessarily for the timberland sales in the first quarter. So let me just clarify that issue. We do expect land sales to be down from the fourth quarter and the first quarter last year, but I wouldn't characterize that element as well below because when you look at the quarterly trend last year in land, the first quarter was the lowest quarter anyhow. So, once again, land will be down, but the "well below" was really, to some extent, land, to some extent, performance fibers, and weak timber markets, in general.

Okay. And then, lastly, you typically in the past adjusted timberland sales maybe kind of in the 35- to 40m-range per year. There was one big potential sale that you may be having in '03. But would you care to give us some brackets on the size of timberland sales that you might expect from a profit perspective in 2003?

Well, Mark, what we've said when we did have that press release on the – Florida's south – St. Johns Water Management District sale, I mean if it comes, then it comes in. We're not closing down our HBU business, the [indiscernible] [Better Use][ph] land sales. We've got people out there selling parcels, negotiating with customers, and so that's just not going to be closed down. So beyond that, I really don't have any particular guidance. We'll see interest rates shoot up. We may not have land sales, and if demand continues as is, it should be probably higher than our typical guideline, which was 35 to $40m, because that one land sale if it closes is in the range of $36m of operating income. So you can conclude what you'd like to conclude, but we're not shutting down our land development – our land sales business.

Okay, thank you.

This concludes today's question-and-answer session. At this time, I'd like to turn the conference back over to Mr. Pollack for any additional or closing comments.

Thank you. There's really not much more to add. I want to thank everybody for joining us, and Parag and I will be available for any questions that follow, but please respect our inability to add materially to what we've said given Fair Disclosure requirements. Thank you again for joining us.

This does conclude today's Rayonier Fourth Quarter Earnings Release Conference Call. We thank you for your participation in today's conference. You may disconnect at this time.