Rayonier Inc (RYN) 2004 Q2 法說會逐字稿

Please stand by. We're about to begin.

Good day, everyone, and welcome to the Rayonier's 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 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 call over to 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 2004. Earnings statements was released yesterday afternoon and supplemental materials soon thereafter. If you have not received this material, please call our Investor Relations Department at 904-357-9177, and we will add you to our fax or email list.

This conference is being broadcast live over the Internet and is open to all shareholders and interested investors. Instructions on accessing the live web cast were given in our Press Release. Simply go to our web site at Rayonier.com and link to the conference.

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

As usual, in these presentations, we include forward-looking statements made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act. Our 10K, Earnings Release and supplemental materials list many of the factors which could cause actual results to differ from those projected and which do change from time to time as our investor communication is updated. Please familiarize yourselves with them.

In our Earnings Release, supplemental materials, and also in the conference, we also use non-GAAP measures, such as cash available for distribution or pro forma earnings per share, giving effect to our December 2003 special earnings and profits dividends. Footnotes explaining definitions and reconciliation of those non-GAAP measures are provided in our materials.

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

Lee?

Thank you, Jerry. Let me make a few overall comments, and we'll go back to you for review of the financials.

For the first half of 2004 and six months as a REIT behind us, I think you're beginning to see the real strength of Rayonier and our assets. As a REIT, we have obviously unlocked very meaningful value for our shareholders, and going forward, we should continue to provide very substantial financial benefits.

As you've seen in our cash flow, it remains strong. Our cash at the end of June was 66 million after having paid 55 million in dividends in the first six months of this year.

As we said in yesterday's announcement, but I think it's worth repeating here today, the Alabama Timberland acquisition, which we expect to close in the third quarter, will be financed entirely from internally generated funds. Second-quarter results were strong generally across the board, and following a good first quarter, our year-to-date operating income of 113 million is clearly one of the better year-to-date performances for this Company.

In Timberland and land, the harvest side delivered solid results. The strength of the Canadian dollar and its corresponding impact on imports kept timber prices steady in the Northwest. Weather conditions in the Southeast are more normal this year, certainly compared to last, and while that's neutral for our Southeast Timber business, it's been a positive for our performance fibers. This is particularly the case in terms of hardwood fiber costs.

Land sales, as you see, were also very strong in the quarter, and secondquarter and year-to-date results, you continue to see the strong demand for our higher and better-used properties. That is particularly true here in Northeast Florida. In the second half, we plan to move more of our higher value real estate down to our Rayland taxable REIT subsidiary to better position that property for sale in future years.

Performance fibers, after recovery in the first quarter from a very difficult 2003, continued in the second quarter to build on that positive momentum. From last year, prices in both cellulose specialties and absorbent materials improved, while costs, again, particularly hardened wood fiber, continued to move down. Operating performances improved as well, with our mills running essentially at 100-percent of capacity in the quarter.

On the demand side, we continued to pick up incremental cellulose specialties volume as a result of very limited market supply. These factors led to a very substantial improvement in this business for the quarter and year-to-date and the corresponding 2003 periods. The ongoing strength in lumbar markets also contributed to our results.

Looking ahead, while the second half of 2004 is not expected to be as strong as the first half, mainly due to quarter-to-quarter variability in land sales and some seasonal factors on the timber harvest side, we expect a gradual, positive impact of the improving economy trends to be of help. I'll get into more detail when I cover the markets and operations in a later section.

Let me conclude here by saying that we're off to a very solid start as a REIT and well positioned in our businesses and markets and looking forward for new opportunities to further increase the value of this Company.

Jerry, you want to go through the financials?

Thanks, Lee.

Let's start on chart three. As we indicated, the second quarter represented another strong recovery from relatively stagnant conditions during 2003, reflecting improvement in all of our product areas. Operating income of $70 million for the quarter representated of a 65-percent increase over that of the first quarter and net income of $44 million was a 69-cent improvement over the first quarter's $26 million, excluding the $50 million net payable impact of two to three tax items related to our REIT conversion.

Earnings per share of 86 cents in the second quarter of 2004 reflects a 35-cent per share improvement over the first quarter and a 21-cent per share improvement over last year, with last year's per share results reflecting the pro forma effect of the special December earnings and profit dividend that I mentioned.

Equally strong, if not better, is our cash flow for the first six months of the year. Cash provided by operating activities, the GAAP measure, was $158 million, $49 million better than the first six months of 2003. Cash available for distribution, the internal management metric by which we and the Board measure ongoing cash flow available for strategic use, was $121 million for the first six months of this year, a $45-million improvement over last year.

As mentioned in our Press Release, $30 million of that cash flow is currently restricted to help fund the pending Alabama Timberland acquisition.

Debt at $616 million is within our target range, and debt to capital on June 30 of 44.1 percent was a 1.7-percentage improvement lower than last year.

Let's now take a look at the business factors that influenced this quarter's net income in comparison to our two usual comparative periods. First, as reflects the comparison of the second quarter to the first quarter of 2004, let's turn to chart four.

In this chart, we typically begin with the 2004 first quarter net income of 51 cents per share, which excludes the two discreet tax items that we reported on earlier having to do with our REIT conversion. If you were not with us in the first quarter, one of the items related to our no longer having to carry deferred taxes of book to tax differences associated with timber harvesting, as the taxes will no longer be due. And the second was an additional tax provision for the eventual repatriation of foreign earnings, given the Company's new strategy to focus new investments primarily in U.S. timberlands. Excluding those two items but including 7 cents per share in wheat conversion costs incurred in the first quarter, our pro forma EPS was 51 cents per share.

Rather than repeat what we will cover in the markets and operations section of our presentation, I just want to highlight three major positive improvements this quarter. First, relating to increased land sales, not only coming from what was called a [kerma] lease sale, which generated $24 million in operating income, but as a result of several other land sales, reflecting a continued strong demand for housing and commercial development in the Southeast. Second, As Lee indicated, performance [indiscernible] operating income improved significantly, with increases in fluff pulp pricing continuing into the quarter, tracking NBSK paper price trends, and more importantly for the segment, income improved from lower operating costs. Third,product price movements in our wood products operations also contributed to strong quarter-to-quarter gains. Overall, EPS improved from the 51-cent for pro forma in the first quarter to 86 cents per share this quarter.

Let's move on to chart five, where we can see and focus primarily on the comparison of the second quarter to the prior year's comparable period.

In this chart, we start out with 65 cents per share pro forma earnings for last year's second quarter and track the positive variances to this year's 86 cents per share. Here, you can clearly see improvements in almost all product areas, coming from strength in timber price and volume, performance fiber sale of specialties and fluff pulp price increases, production volume increases and improvements in lumber pricing.

These positive variances were ostensibly offset by lower landfills of $13 million, but the shortfall was really due to the difference between one large land sale last year called the [Metansa] sale, which contributed $39 million in operating income, seeing significantly more than the still large Cumberland [Reitly] sale this year, which generated $23 million of operating income.

Absent these two transactions, routine land sales, representing the bulk of our more typical ongoing land sale program, would have shown an increase year-over-year. On a year-to-date first half comparison on the right side of the chart, results show an even better comparison of how all the product areas, save for foreign exchange effects of MDF, are significantly improved over prior year.

As we directly indicated in last year's - in last quarter's analyst conference relating to disproportionate first half earnings level to the year as a whole, first half results of $1.37 is now expected to be approximately 70 to 80 percent of full-year earnings, excluding the discrete tax items, a pattern, again, somewhat matching last year's trend.

Before we move into markets and operations, I want to highlight, as we have from time to time, several key features of the financial results that are unique to us this year as a result of having converted to a REIT or are transaction related. We won't spend up time on the subsequent charts, but we will be available to answer questions later in the call.

What is not clearly shown in these variance analyses is the puts and takes of our tax provision that is affecting our results. Let me just briefly cover that with you on chart six.

In this chart, we highlight some of the key features of the typical statutory income tax reconciliation report. We start by showing the theoretical six-month to-date federal tax provision for 2004 of $31.8 million, which is 35 percent of our consolidated pre-tax income of $90.8 million. On the next line, you can clearly see that $60.3 million of qualifying REIT activities produced a $21.1 million tax benefit. However, on the third line, we can also see that since interest and overhead expenses of the REIT do not carry the typical tax deductibility shield, it results in $8.3 million of additional tax that might not typically be due, increasing our effective tax rate.

At this point in the analysis, our effective tax rate would be 20.8 percent at the federal level, and when state and local taxes are included, the all in effective rate would be 22 percent. With the effect of other items, primarily taxes caused by foreign exchange movements, the rate before the discrete items increased to 25.1 percent.

The end result is roughly at the upper end of the guidance previously provided, but should decline significantly subsequent to lifetime benefits being recorded.

On chart seven and Analyzing Cash Flow Results, we'll focus just on the six months or year-to-date results, starting with what can be called a gross cash flow metric adjusted EBITDA, Earnings Before Interest, Taxes, Depreciation, Depletion and Amortization, and a noncash cost basis of land sold. At $202 million for the six months, it represents strong, strong results. We then, for informational purposes, outlined the elements derived at cash available for distribution.

Once again, the latter metric, CAD, is the basis by which we and the Board will evaluate our ability to fund strategic acquisitions, establish appropriate dividends to be distributed or possibly repurchase common shares. CAD for the first six months of this year of $120.5 million after providing $10 million in discretionary pension contributions, represented a $45 million improvement over prior year and funded $55 million in dividends and $30 million in restricted cash to be used for the anticipated third-quarter acquisition and help builds the $66 million in cash on our balance sheet as of June 30.

After the $89 million acquisition is complete and some further discretionary pension contributions made in the second half of the year, we still expect to have invested cash of approximately $15 million going into next year.

In response to some questions, let me add that we have not established any thresholds or constraints on the amount of dividends that we would declare as a percent of cash available for distribution. As we are still working through our first year as a REIT and continue to discover new opportunities for improving earnings, maximizing cash flow and providing for strategic growth. There are no formulas at the present time.

Let me just repeat briefly again how we plan to finance the $89-million Alabama Timberland acquisition with internally generated cash funds. Let's turn to chart eight.

This chart basically summarizes what I've just discussed. Proceeds from the second quarterTimberland lease sale were immediately put into an escrow account along with proceeds from several other sales. This account is now available for acquisitions. The $20 million in this chart represents the after-tax amount of those sales, assuming no lifetime exchange transactions were completed. We then show the lifetime exchange tax benefits to be realized, representing cash flow not simply from deferring tax obligations but permanently eliminating them. As a REIT, to the extent that we can exchange lifetime property for timberland and then do not expect to sell the underlying land base for 10 years, the tax deferral will become permanent and is not run through the tax provision. We can still recognize revenue from selling timber harvest rights during the 10 years on an untaxed basis. The lifetime exchange benefits basically represent permanent capital.

The remaining portion of the $8 million acquisition price, as I indicated, will come from cash effectively sitting already on our balance sheet, and we will still end this year well positioned to choose from several more alternatives that will increase shareholder value.

Let me just note that this first half of the year of operating as a REIT has brought forth many structural, financial and legal opportunities that were anticipated, that are changed in the nature and face of our financial reporting. For transparency purposes, we will continue to highlight those elements. However, we do not want these explanations to detract from the results of our core businesses, the basic reason of our existence. Without operating cash flows, none of the potential opportunities that we capitalize on will be available. As we move on in the year, these structural explanations in the future will probably only be included in the Appendix section.

With that, let me turn the conference over to Lee Nutter for the critical discussions of markets and operations.

Lee?

Thank you, Jerry.

I'll quickly review the markets and operations of our businesses, and at the same time, make a few comments on our outlook for the third quarter, the balance of the year.

Operating income from land sales in the second quarter of 35 million was above our first quarter of 2004; however, below second quarter of 2003. As I said earlier, land sales for the third and fourth quarter are expected to be significantly lower than what we've seen in the first two quarters, reflecting the normal short-term variability in this business. For this year, we expect land sales to be somewhat below 2003, but well above that of 2002.

As we've indicated on numerous occasions, we expect operating income on an annual basis from land sales to be in the range of approximately 45 to $50 million . Looking at the Northwest Timber business on page 10, you can see some of the impact of the sales that were shifted from fourth quarter of last year into first quarter of this year or first half of this year. As we've said, this was done to take advantage of our conversion to a REIT and its very significant tax advantages.

Looking at the next six months, we should see a slight increase in stumpage prices from the last three quarters' average, while volume will reflect the usual seasonal slowdown. Third and fourth quarter volumes should be down approximately 35 percent from the second-quarter level. However, this year with the volume shift from late 2003 into this year of 2004, we expect Northwest volumes to be about 20 to 25 percent above the level of 2003.

On page 11, you can see our Southeast timber volumes were, as expected, below first quarter and essentially flat compared to second quarter of 2003. As you see, prices held at fourth and first-quarter levels and should remain so for the second half of this year.

Volume, with only a small increase from the third to fourth quarter, should, for the next six months, approximate the second half of 2003. For the year, including the impact of the Alabama Timberland acquisition, we now expect pine volume to be flat to slightly up from 2003. The acquisition, once fully absorbed, should add approximately 10 percent to our Southeast pine timber harvest.

On page 12, for our New Zealand operations, you can see the typical volume pickup in the second quarter. The obvious question, I think, as you look at this chart is why our first half 2004 price is shown to be significantly higher than prior periods. The explanation is that until the first quarter of this year, the sales average you see included the internal sale of stuffage which consisted of very poor quality timber. Beginning in 2004, the prices you see reflect only external sales. However, in all cases this year, as well as last, the volume reflects our total New Zealand timber harvest. Here, prices as we look ahead, should hold at about, or perhaps slightly below, the level of second quarter. Volume in the second half will likely step up from third to fourth quarter, and 2004 total volume should be about 5 to 7 percent above what you see in 2003.

Moving on to performance fibers business on page 14, cellulose specialty prices, as expected, remained essentially flat, as they should for the second half. As we said before, this is a specialty product. Much of the volume and price is set in longer-term contracts with annual price adjustments. The stronger pricing combined with much lower hardwood fiber costs improved operating performance and the 5-percent fluff price increase pushed the second-quarter operating income in this business to $18 million.

With year-to-date EBITDA of 64 million, performance fibers remains a strong cash generator for Rayonier. Fluff pulp prices looking ahead, given the commodity nature of this product, are difficult to predict. However, as global economic growth continues, we could see further price improvements in the fourth quarter.

On page 14, you see the pickup in volumes from the first quarter and from last year's second quarter. Our mix remains strong with cellulose specialties representing slightly more than 60 percent of our volume for the quarter and year-to-date. Obviously, cellulose specialties is a much higher percentage of our revenue in this business.

As I indicated earlier, cellulose specialties prices for the second half should remain steady, reflecting the 6 percent year-over-year average price increase. Lower hardwood costs, higher product prices and better productivity should result in substantially higher earnings in 2004 compared to 2003.

Pages 15 and 16 reflect information on our reproducts segment. Lumber prices moved up 14 percent from the first quarter levels, and volume was up 10 percent. Both volumes and prices were also well above second-quarter 2003 levels. While lumber prices have retreated somewhat from their recent highs, we expect third-quarter volumes should hold at approximately current price levels. That said, we continue to expect lumber to perform well in both the third quarter and second half.

On page 16, you can see the key statistics on our MDF business. The volumes were essentially flat to both first quarter and last year's second quarter, while prices moved up from the first quarter and were 10 percent above second quarter 2003. For the third quarter, volumes and prices should continue to increase. On an operating basis, while this business reported a small loss, you should note that the weak U.S. dollar had a large impact on this plant's financial results.

With that, Jerry, you want to go?

Thanks, Lee.

Before I go into the discussion of our earnings per share trends, I do want to highlight one final element of our shareholder value that is somewhat unique when compared to regular [C-Corps] and even other REITS. This has to do with the tax characteristics of our dividend to shareholders, as shown on chart 17.

REIT, as you know, is based on your pass through vehicle. As a result, our shareholders receive 1099s, with the taxable income characteristics of the dividend clearly broken out. For calendar 2004, we estimate that 50 to 60-percent of the dividend will be designated as long-term capital gains, taxed at a maximum 15 cents to individuals; 40 to 50 percent will then be return of capital, with no current taxation as long as the shareholder has tax bases in his holdings. As shown, we do not expect to generate any net ordinary income this year, nor do we expect to in the near future.

As you can imagine, the weighted average combined effective tax rates on the individual U.S. shareholder, excluding other possible limitations imposed by the IRS, will be a tax rate under 10 percent, comparing very favorably to up to 35 percent tax obligations ordinarily incurred by shareholders of more conventional REITS and up to a full 15-percent rate on qualified dividends to shareholders of [C-Corp] shares, an addition, I might add, to the higher effective tax rate that [C-Corp] itself incurs.

We reiterate this theme here at this time, as there seems to be some confusion among existing and potential investors as to the relative tax characteristics of Rayonier's particular dividend vis-à-vis others. The after-tax yield and return to shareholder is the ultimate driver of shareholder value.

Let me now wrap up the formal part of our presentation with our earnings per share trend analysis, with the presentation on chart 18.

The format of this chart is the same as in the first quarter. In the first column we show our actual 2004 earnings per share results and then compare it to last year's results; first, on a pro forma basis, adjusted for the special ENP dividend, and then in the final column, on an as-reported basis.

For this year, we begin with our first-quarter EPS of 51 cents, which, as I mentioned earlier, includes the adverse effect of 7 cents per share in REIT conversion expenses. A strong second quarter EPS of 86 cents per share [inaudible]. We then highlight expectations for the third quarter, typically, a lower EPS generating quarter than others. At this point, we expect earnings for the third quarter to be above both the pro forma and the reported EPS of last year, but down from the very strong 86 cents per share in the second quarter. This reflection excludes approximately 20 to 22 cents per share of like-kind exchange benefits that we anticipate would be realized in the third quarter, when all aspects of the like-kind exchange transactions are certain.

For the full year, we expect our results to approximate the consensus forecast of $2.06 per share, when first like-kind exchange benefits are included, but with the first quarter 7 cents per share reconversion cost deducted, as we report from the estimate.

As you can see, there are a lot of apples and oranges in these earnings expectation comparisons, so I have to leave it to you analysts and investors to ensure that you understand what your numbers represent and how they compare to other guidances that may be out there.

For comparative purposes at this time, looking forward, we will tend to include the reconversion expenses as an expense, reducing first-quarter EPS, but not include like-kind exchange benefits going forward since they are not assured to be repeated every year.

I hope I have not added to the confusion, and I will be happy to answer any questions on the call if there are some.

But with that, let me turn the conference over to our teleconference operator for questions from the floor.

Thank you, gentlemen.

The question-and-answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touchtone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

Once again, please press star one for questions.

We'll go to - I apologize, Mark Weintraub, Buckingham Research.

Great. Thank you. Harry, I just wanted to go over the last thing you had mentioned there on the earnings and - so if I understood you correctly, if you were to take the first half of the year and take out the reconversion costs, that would then total 147, is that correct?

No, we're at 137 with those expenses already deducted, 51 plus 86 is 137 with the conversion expenses deducted. But then First Call is carrying 58 cents for the first quarter, and that's where some of the confusion is arising.

Okay, and then so you're saying basically in the second half of the year you would expect to earn about 50 cents plus the 20 cents from the like-kind exchange?

In the ballpark, yes-22 cents in the like-kind exchange on top of what you just said, yes.

Okay, understood. A small question: There was a reversal of maintenance accrual that got referenced in the Press Release. What was that, and does that mean kind of at the base in the second quarter for the performance fibers is really kind of 1-1/2 million lower, and the first quarter was really 1-1/2 million higher?

No, this has nothing to do with - the first half - yes, the first half would be higher without that reversal. This had to do with a wastewater dredging [recrual] that we were carrying for major maintenance. We've been able to work through other ways of treating the wastewater at less cost, and as a result, that expenditure would not be required. But we did disclose it, as it was a reversal of reserve.

Okay, and has that reserve all been made in the first quarter or that had been -

It built up over time.

I see. Okay. Could you also see how much of the $88.1 million of depreciation, et cetera, was noncash land bases, that's for the first half of the year?

For the first half?

Right.

I would probably say - let's see if I can catch that. Showing up into two bit - about 9 million. I'm just looking at my controller, about 9 million.

And I apologize I'm jumping all over the place, here, but -

Hey, Mark, if we have the answer, we'll give it to you. If not, we'll get back to you.

You said that you don't have any formulas yet for dividends, pay out or the such like. Do you expect to develop them, and if so, approximately by when?

Mark, this is Lee. We're not certainly setting a time when we might do it. I don't think at this stage of the game we are planning to do that. I suppose perhaps somewhere down the line we could do it, but at this time, we have not.

Okay, and then lastly, on cap spending, I believe you have, in the past [indiscernible] about a 90 million full-year rate, and I think through the first half you're only at 36. Are you going to likely be lower than that 90, or is there going to be a lot of back-ended spend?

Well, there tends to be, as usual, Mark, more on the back end than the front end. We've been around the - 90, Mark, is what we've typically said. The last several years we've been under it. This year I think we could end up somewhat over it. But I think it's still a reasonable number with a little bit more upside than down.

Okay, great. Thank you.

Once again, if you'd like to ask a question, please press star one on your touchtone telephone.

And Mr. Pollack, it appears we have no further questions at this time. I'll turn the conference back over to you, sir, for any additional or closing comments.

Well, I want to thank everybody for joining us. I think the transparency of reporting is obvious, and so once again we think it was a strong quarter, strong cash flow, and we look forward to speaking to you again in another 90 days.

Thank you.

Thank you, and this does conclude today's conference. We do appreciate your participation. You may now disconnect.