Rayonier Inc (RYN) 2003 Q1 法說會逐字稿

Good day everyone, and welcome to this Rayonier First 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 constitute 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 call over to the SVP and CFO, Mr. Gerald Pollack.

Thank you, and good afternoon. I would like to once again welcome everybody to Rayonier investor's teleconference, this time covering our earnings for the first quarter of 2003. Our earnings statement was released this morning and supplemental material soon thereafter. 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 call.

With me today is Lee W. 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 formal presentation with a discussion of earnings per share trends.

In these presentations, we include forward-looking statements made pursuant to the safe harbour provisions of the Private Securities Litigation Reform Act. A 10K and press release list some of those factors which could change from time to time, causing actual results to differ materially from our statements. Please familiarize yourself with them.

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

Thank you, Gerry. Let me just take a few minutes to comment on the first quarter, and then some general remarks on the year, which we see shaping up to be yet another challenge. Overall, our first quarter results, although somewhat expected, were disappointing. We were down from fourth quarter and first quarter 2002. However, given the difficult economic environment and generally weak markets, our unique portfolio of businesses once again serve us relatively well.

With earnings for the quarter of 22 cents per share it was a difficult period for us, particularly so in performance fibers where a severe shortage of hardwood fiber used entirely in cellulose specialty products at our Jesup Mill forced production delays there, shifts and very significant increases in costs.

In addition, production and costs at our front-end mill were negatively impacted by not only an extensive March maintenance shutdown but also by related poor operating conditions leading up to that closure. In hindsight, that maintenance shutdown should probably have been taken late last year.

As we move into the second quarter, while prices and demand for absorbent materials have improved, we continue to struggle with hardwood fiber availability and meeting the increase in demand for our cellulose specialty products. As we've pointed out before, we have and will continue to shift our product mix further to cellulose specialties, having moved that piece of our business from 53 percent to 62 percent of our mix over the last five years.

Let me add here that due to the announced mid-2003 closure of a major cellulose specialty production facility we have seen a significant increase in demand for that product. While we will begin to feel some impact later this year due to outstanding annual contracts, we will begin to see the real impact on our cellulose specialty business beginning in 2004.

In timber and land, while U.S. timber markets remain generally weak, our land sales program continues to be a strong complement to our harvest operations. This will be even more pronounced in the second quarter with Natchez March sale which closed last week. While the timing of land sales has been and will continue to remain somewhat variable quarter to quarter, on an annual basis our performance should reflect a stable and predictable trend.

Obviously, this segment has not only been a sizeable contributor to our earnings, but also our cash flow. We have diligently used that cash flow from our two key businesses to reduce debt and further strengthen our balance sheet. For the first quarter, we continue to pay down debt, although going forward the pace is likely somewhat in the $500m plus that we've paid down over the last three years.

Our net debt to total capital ratio is now 47 percent, down from its peak of 64 percent at the end of 1999. Let me conclude here by saying that we face another challenging three quarters. However, I think for the year we will once again see the quality and consistency of our financial performance which we see as a hallmark of Rayonier. Our financial health remains strong, while these are tough times. We remain focused on maximizing our cash allocation strategies and to further enhance our shareholder value. Gerry.

Thanks, Lee. I will keep my remarks on the financials for the quarter brief, as the numbers fairly well outline what happened and the press release was fairly detailed in its explanations. I will focus my thoughts on trends from the fourth quarter of 2002 to the first quarter of 2003. Before I begin, let me make a few comments on format. The press release has been conformed to our 10K. We identified three business segments; performance fibers, timber and land, and wood products in accordance with FASV-131. It is not to imply that wood products as a business is any more or less core than it had been previously, but the quantitative guidelines given in the FASV require a more limited third party business to be identified rather than our previously broader wood products and trading grouping. The other operations category now includes the wood products trading and U.S. and New Zealand log trading operations.

Second, we now provide for a more timely investor analysis a condensed balance sheet and cash flow statement, as you can see in exhibit D to the press release. Finally, to provide some additional transparency, we are showing an exhibit E to the press release, timber harvest sales and operating income by region which was not available heretofore when combined timber and land statistics were presented. Land information is available elsewhere, for example in Exhibit C, on a total company basis and therefore presenting harvest data separately should be helpful to you.

With that, let's start on chart 2, where we can see that sales of $266m represented a decline of approximately $20m from the fourth quarter, with cellulose specialty volume declining from the seasonally strong fourth quarter, and lower trading revenues as the primary reasons. Operating income also declined as you will see in more detail in a few minutes, primarily from the reduced cellulose specialty volume and lower timber prices.

Net income of $6m or 22 cents per share was in line with expectations, as the hardwood and energy cost issues were somewhat anticipated. But with the increased severity of those expenses offset by higher than expected land sales. Cash flow, as Lee indicated, remains strong, with cash provided by operating activities from continuing operations of $39m and EBITDA of $65m. Although some of that cash was used for higher working capital, and a $9m contribution to the pension plans, we still were able to reduce debt by $26m to bring gross and net debt down to $628m, or 47 percent debt to cap.

Let's move on to chart 3 and see a more detailed income variance explanation of the fourth quarter to first quarter movement. In this chart 3 we provide the analysis of near-term trends with the fourth quarter net income of 46 cents per share as the baseline. In the performance fiber section, you can see that the impact of both the reduced cellulose specialty volume and higher manufacturing costs contributed to a decline of 15 cents per share from the baseline. Included in this cost variance was approximately $1.2m in higher major maintenance related costs at Fernandina that Lee alluded to.

There is also some reduction occurring in fluff pulp pricing as the year started, contributing another 6 cents per share to the earnings decline. Overall, performance fibers contribution shortfall resulted in a decline of 18 cents per share, quarter to quarter.

Our timber and land segment also saw a decline in income, as a result of reduced timber prices in the U.S. and lower volume in New Zealand. Land sales income was only slightly lower than the fourth quarter level. In wood products, improved lumber prices offset higher MDF manufacturing costs, the latter very heavily influenced by a 7 percent appreciation of the New Zealand dollar since December 31.

Several other factors help offset the operating performance defined in performance fibers and timber and land, including improved trading margins, the absence in comparative terms of the $2.7m increase in disposition reserves in the fourth quarter of 2002, lower corporate A&G expenses, and much lower interest expense.

However, the tax line, although reflective of a lower than typical 22 percent effective annual tax rate, was still $44m worse than the fourth quarter. As the prior quarter benefited from certain foreign related tax benefits, particularly the full favourable tax impact of a 10 percent appreciation in that quarter of the New Zealand dollar. Overall, EPS declined 24 cents from the 46 cent baseline to the 22 cent per share results reported for the first quarter.

Let's briefly review the year-over-year comparisons and then we will turn to Lee for a report on markets and operations. On chart 4 we present year-over-year comparison, with first quarter of 2002 33 cents per share as our baseline. In performance fibers, is the EPS shortfall on a per share basis were very similar to the previous analysis. The cellulose specialities pricing being slightly favourable, absorbent materials for fluff pulp pricing declining, but the volume declines in cellulose specialities and the higher energy and fibre costs having the most significant impact on performance fiber's year over year, 18 cent per share decline.

In timber and land, the most significant shortfall of 7 cents per share was related to southeast average timber pricing which declined approximately 14 percent year over year, and in wood products, where lumber price reduction of 11 percent contributed another 5 cent per share shortfall.

Once again, improved trading margins, lower corporate A&G expenses and lower interest expense helped offset more than half of the other operating variances. Before I finish, let me also disclose two full year's statistics of importance to the model builders out there. Based on today's assumptions, DD&A and non-cash land bases for the year is estimated at $155m to $165m, and capex at $90m to $95m. This is fairly consistent with what we said in January at our year-end conference.

With that, let me turn the conference over to Lee W. Nutter to report on markets and operations. Lee.

Thank you, Gerry. As I review the operations and markets of our business, in each I will make a few comments about the first quarter and give you some sense of how we see the second quarter and the balance of the year.

On pages 6 and 7 of the package, you can see pricing and volume information for performance fibers. You should note that these charts now reflect sales data. You may recall that we used to show shipping data in the past. The difference between the two is obviously foreign sales timing.

As you can see at the top of page 6, sales specialties prices moved up in the first quarter from the fourth, while average fluff prices were down. Because of the hardwood fiber shortage, we were forced to run more fluff in the quarter and sell it into then-weak spot markets, further reducing the average fluff sales price.

Looking at the second quarter today, I think we should see relatively flat pricing in cellulose specialties, and probably a 5 percent increase in fluff pulp prices. Looking ahead to the year, I think there is some upside in cellulose specialties, but in fluff I am just not sure. As we have said before, unlike the commodities side of this business, the cellulose specialities segment is made up of very few players, and apparently one less come mid year. Unlike almost every other pulp, the cellulose speciality business has high barriers to entry.

Over the last few years, we've made good progress, as I mentioned earlier, in shifting our mix to this high value segment. We continue to look for means of moving further in this direction.

As I mentioned earlier, performance fibers earnings were both down sequentially as well as year over year, mostly due to the higher energy costs, the tenacious hardwood supply situation at the Jesup Mill and the extended maintenance shutdown at the Fernandina Mill. In fact, turning to page 7, you can see the impact of these issues on cellulose specialties volumes.

Looking ahead to the second quarter, cellulose specialities volumes as well as overall mix are expected to return to more normalized levels, and operating income should improve due to a stronger mix, higher volumes and some pick up in fluff pulp prices.

On page 8, Northwest timber sales, you can see the usual strong volume start for the year, and you can see prices move down about 9 percent in the fourth quarter. For the second quarter we expect volumes to move back to about the fourth quarter level, and due to a shift in mix and what we anticipate to see as some market weaknesses, we should see stumpage prices that could be down from the first quarter average by 10 to 15 percent.

For the year, as we noted on the last conference call, we expect volumes on year over year basis to be down in the range of about 4 percent. We do expect some price recovery later in the second half of the year, if from nothing other than a somewhat higher mix.

Moving onto southeast timber on page 9, volumes were up but we saw some modest price erosion. For the second quarter, volumes are expected to be down, bringing first half volumes about equal to our first half last year. Volumes for the year should be down slightly, but prices should remain steady at first quarter levels.

New Zealand timber, on page 10, shows the usual slow start-up following the holidays, although prices in the quarter were quite strong mainly due to mix and the impact of foreign exchange. Going forward, as we have seen in the past, volumes in the second quarter and the balance of the year should ramp up and we think average prices for the year could be about 10 percent above the 2002 level.

For the year, as we have noted before, volumes are expected to be down in the range of about 12 percent. Let me now make just a few quick comments on our wood products businesses detailed on pages 11 and 12, before we go back to Gerry. On page 11, you can see the volumes and prices for our lumber business reflecting somewhat lower volumes in the quarter and some price pickup that still remains at very depressed levels. Looking ahead on this very difficult market, our production to a large extent will depend on lumber prices and log costs. We have, and we will continue to take market-driven temporary shutdowns.

Moving on to MDF, page 12, volumes were as usual down slightly with a 1 percent decline in price. The plant continues to run very well and we should see a production increase this year of as much as 15 percent over 2002. In the second quarter, volumes should pick up to the fourth quarter level, with prices relatively unchanged. With that, let's go back to Gerry.

Thanks, Lee. In chart 13, we continue our reflection on 2003 EPS trends, with a focus on the second quarter. This format shows earnings per share, excluding the large Natchez land sale that closed April 14th, in order to more easily understand how a more recurring operations are performing. Obviously, with April's Natchez deal 80 cents per share economic contribution, we will beat both last year's second quarter and this year's first quarter on a reported basis. However, excluding that one transaction, we see comparative results mixed. Although we expect significant improvement in performance fibers results, with higher fluff pulp pricing, increased cellulose specialties volume and somewhat lower cost, we also see first the second quarter decline in both Northwest and Southeast timber volume, as well as some reduced land sales contributions from our regular program, once again, when the Natchez Marsh sale is set aside.

These two major segments results will not be sufficient to match the 62 cents per share of the prior year, but we are too early in the quarter to call whether these segment contributions, excluding the Natchez Marsh sale, will be higher or lower than the first quarter. It is also too early to spend much time on the full year forecast, but based on current market conditions, the first call estimate as of April 18th of $1.97 is within the ballpark of expectations.

With that, let me turn the conference over to the teleconference operator for questions from our audience.

Thank you, Mr. Pollack. (Operator instructions) Sir, our first question comes from Chip Dillon with Smith Barney.

Good afternoon. I noticed in your presentation that you noted, Lee, that your wood prices were down, or timber prices were down in the first quarter. That seems to be kind of counter to what we are hearing elsewhere about wood costs, particularly about hardwood/pulp wood costs in the first quarter. Where, in fact, one company yesterday mentioned that they were back to first quarter 1998 levels, which was a long time ago in a lot of ways.

I just wondered if you could reconcile the two statements?

Chip, I guess in one case what we are talking about in Southeast timber, on page 9 if that is the one you were talking about, obviously it is pine and 90 percent of what we produce is pine and maybe 10 percent is hardwood. We consume probably four to five times as much hardwood in the Jesup Mill as we produce off our own lands, just to give you a comparison.

I think pine prices, certainly in our markets and as you are well aware, it's an option market, so we are out there all the time on an open bid basis. This is what we've seen on pine. Hardwood is, I guess if you can harvest it, it is a spectacular price on a stumpage basis. I am not sure I answered your question --

I understand, because you are really selling into effectively stumpage and into the saw log market, and that was certainly not -- but if you could also, just one more question. I know that about three years ago you changed the way you viewed how to market your timber to where I believe you would sell increasing amounts that might not be mature, but close to maturity and then taking from the proceeds and putting some of those proceeds back into younger stands, and therefore, if you will, accelerating cash flow. If you could just review for us if that is in fact how you are running the business, and is it fair to suggest that as you do that, that you are still running the company on what I would call a sustained yield basis? As the newer properties you buy mature, that they are able to replace the cash flows from the stuff you sold earlier.

Okay, Chip, I will try to remember it all. I mean, one of the things that we are doing, and always and you will see the rotation ages perhaps flex a little bit, we are always trying to maximize, economically maximize the rotation age. As you make different assumptions on what prices are going to be in the future for saw logs or pulp wood, you can change a little bit.

Let me address the issue particularly in the Northwest, where we in fact have reduced our rotation age from about 50 years and we've pulled it down to 45 for economic reasons, and frankly very simple reason on the market today. If you are out selling saw logs to lumber conversion facilities, they are continuing to want a smaller and smaller and more uniform size log.

I am not sure one's definition of mature, I guess in the end it is economically mature and we've certainly never taken the approach of selling something below what we consider to be an economically mature point. Hopefully I answered that part of your question.

I think I've got you. Thank you.

Gerry reminded me, you asked about sustainability. We are never sitting in here trying to fall off a cliff or harvest everything and then forget about the years down the road. You know, if we move our rotation age down from 50 to 45 years over a five year period, obviously that could have an impact out somewhere in the future --

But what you are saying is, you are not actually, if you will, when we look at your cash flow and your dividends you are not actually sort of taking principal, you are basically -- what you are doing is sustainable into perpetuity, I would think.

Certainly. I wouldn't think there would be any question whatsoever on anybody's part out there as to our ability to sustain our dividend, looking at our cash flow.

Okay, thank you.

We will now go to [Steve Sheercover], he is with D.A. Davidson.

Good afternoon. You guys do a great job in providing data. My question is, can you give us any additional guidance on the land sales program? Obviously we know what Natchez can provide. In the remainder of the year, will it be similar to Q1 type levels?

Steve, this is Gerry Pollack. Let me address it like I addressed it in the year end. Natchez is a new yield opportunity and we capitalized on it. It didn't mean that we stopped our regular land sale program. We have people out there in the field responding to a lot of requests and presenting proposals. Our target, without Natchez Marsh was $35m to $40m annually in land sales contributions, both timber land and higher and better use. There is no reason to change from that. In fact, probably this year will be at the upper end of that, if not exceeding it. We will probably see more contribution from the Northwest than we had in the past. So, the regular program is ongoing. Natchez is somewhat on top of that, and that is at least the picture we see this year while we still see a very strong interest in land for many purposes.

Great. A second question. You kind of give us the impression that the repayment of debt is going to slow down going forward, but the way my model is showing, at least in terms of the cash flows, you should at least be generating at least as much as the $26m in net debt repayment in the first quarter. So does that mean that you will be sitting with additional cash on the balance sheet if there is no maturity that you can repay?

Steve, we are talking about economic efficiency in paying down some of the debt that we have. We have instalment notes that we used to purchase the [Murfa] timberland that, because of their structure and the reason we got a very good price on that deal is we were willing to offer to have make-hold provisions so we can't really effectively pay those down. We have tax-exempt debt that primarily relates to manufacturing facilities that in the long term have good interest rates and therefore we are reluctant to paying some of that down, which we probably could.

So right now, by the end of the year, we probably will build some cash and take a look at what the opportunities are in the mid-term for using cash or not using cash. But from an economic standpoint, it doesn't pay for us to go below a certain level. Not because we are not generating the cash, but effectively it is not efficient to do that, at least not right now.

Understood. So you won't be actually retiring it, but you will be sitting there, as we do a net debt calculation --

Correct, correct.

And would that prompt you to perhaps raise the dividend or repurchase shares, or are all of those options available?

It prompts you to look at your capital structure and investment opportunities, and it opens up some other opportunities that may not have been there when we had a billion worth of debt back in 1999 and we brought it back down. So it does present some other opportunities that we haven't seen until this year.

But it won't burn a hole in your pocket, you will remain very disciplined in the position of opportunities?

We always have.

Steve, this is Lee W. Nutter. No, it will not burn a hole in our pocket, let me assure you.

Great. Okay, congratulations. Keep it up.

We do have another question. It is from [Peter Rieschmeyer] with Liehmann Brothers.

thanks, good afternoon. I had a question, perhaps for Lee as it relates to the closure of Naches and what kind of opportunity that presents to you. If it is possible to indicate where you may get some -- what kind of volume pickup you may experience and also importantly what opportunities you think present themselves in terms of mix improvement of your performance fibers business?

Well, Peter, there are a couple of opportunities here. One of them is to move some more of our fluff capacity over into cellulose specialties. That is somewhat limited. We may pick up a percentage point or maybe as much as two there. So that is one piece of it. The other piece of it is to shift the mix within the cellulose specialties business to those that have a higher return. So, while I would rather not even try to quantify for you the impacts of those, there are two sides to it.

We also -- well, yes. We can enrich the mix within the cellulose specialties business, including not just Jesup but at Fernandina as well.

Any quantification as to what kind of volume you may pick up? Substantial volume is being taken off the market.

Well, I think in total we could -- you are going to get a shift of one to two percent up in cellulose specialties, but then what you end up with is mixing around within cellulose specialties where you drop some low value business or more commodity business and move up into the high-end acetates. So you are going to get some shifts there. I would be very reluctant to try right now, Peter, and quantify the number for you. But you can get some idea of the magnitude.

Fair enough. And also, while we are on performance fibers, any update on your R&D development and new products you've been working to promote and develop? I know it is an ongoing effort, but anything you can highlight there?

Well you know us, we tend to under promise and over deliver. We have made some progress. We are continuing to work, particularly on the absorbent material side, or engineered absorbent products. We think we have some advantages in some areas. We've seen some progress. We still need to do some things, particularly on the cost side as always. Everybody wants higher quality at lower costs. So I think there is some promise there, but we still have a ways to go.

Okay, great. Thanks very much.

(Operator Instructions) Gentlemen, we have nothing else at this time, so I will turn it back to you for any closing comments.

Thank you. There is really not much more to add. As I indicated at the beginning of the presentation, the results are pretty straight forward and our press release is fairly detailed and transparent in its explanations. With that, let me close the conference and thank everybody for joining us.

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