Rayonier Inc (RYN) 2005 Q1 法說會逐字稿

Please stand by, we are about to begin. Good day, everyone, and welcome to Rayonier’s 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 constitutes applied consent. Please hang up now if you do not consent to being recorded.

At this time, for opening remarks and introduction 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 would like to once again welcome everybody to Rayonier’s investor teleconference, this time covering our earnings of the first quarter of 2005. Our earnings statements were released this morning and supplemental materials distributed soon thereafter.

With us today is Lee Hutter, President and CEO. Lee will open the formal presentation followed by my review of the financial highlights for the quarter. Lee as usual then cover markets and operations and I will close our presentation with discussion of earnings per share trends.

In these presentations we include forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act. Our 10K earnings release lists some of those factors which may cause actual results to differ materially from the forward-looking statements we may make. They also appeared on page two of our supplemental material. Please familiarize yourself with them. With that, let’s start the program with opening comments from Lee Hutter. Lee.

Thank you, Gerry. I’ll make just a few comments now and then after Gerry takes you to the summary of the financials, I’ll come back and discuss markets and operations of our business units. As we expected and continuing to the second quarter, we’re off to a very strong start this year as you can see from our first quarter results. This is particularly true in our northwest timbers, southeast real estate and performance fibers business segments. They’re not only major sources of income but also cash.

As you know that in February we quite comfortably increased the annual dividend 10.7 percent to $2.48 per share, reflecting our confidence and the strength of our business segments. I should also point out here that this does not hamper our flexibility to continue to pursue strategic timberland growth opportunities. Clearly, our high value real estate holdings along the coastal corridor in Florida and Georgia represent an opportunity to add further value beyond simply large land sales, and we’re seriously considering the wide range of obvious opportunities. With that, let me turn it over to Gerry for review of the financials.

Thanks, Lee. Let’s first cover the first quarter highlights on page three. As reported, earnings per share for the first quarter was $0.67, which included $0.19 from settling an open tax issue related to 1996 and 1997. While there are other tax issues we could refer to later, we consider this one particular item sizable enough to highlight it as of special note. Without that favorable benefit, earnings per share would have been $0.48. We will use the $0.48 proforma result as our benchmark for comparative performance reporting.

Sales for the quarter of $286 million resulted in $46 million of operating income and $34 million of reported net income. Once again, the latter includes the aforementioned tax benefit. It should also be noted that the comparison to the first quarter of last year showing a $41 million adverse variance reflects a comparison to last year’s reported number as well, which include a $49.7 million dollar tax benefit in that quarter from releasing deferred taxes not required following our reconversion. The better statistic we believe in order to compare results would be, once again, the $0.48 on a proforma earnings per share basis comparing favorably by $0.22 per share to the fourth quarter and basically flat to first quarter of last year.

In the capital resources and liquidity section we continue to show strong cash flow generated by our core businesses. With cash provided by operating activities of $76 million on a GAAP basis, resulting in $60 million of cash available for distribution, or $1.17 per share. Debt at $660 million shows an increase of $43 million over the year ago balance. As we have indicated at the last few analyst conferences, this results from our taxable REIT’s subsidiary purchasing HB Land, Harban Better Use Land [phonetic] from the parent company REIT resulting in higher gross stead on a consolidated basis, but as we’ve noted before, higher cash balances at the parent company this quarter of $96.2 million. Overall, a very strong first quarter.

Let’s briefly look at the quarter-to-quarter comparisons showing the causal factors related to the movement of pretax income and EPS on chart four. As we go into the next two charts, I just want to mention that we somewhat modified our tax calculation on variances for this quarter to better reflect our reached status. The second footnote on chart four, and eventually the third footnote on page five, identify those changes primarily related to the non-taxability of timber harvest activities.

Looking at the overall income movement from the fourth quarter of 2004 to the first quarter of 2005 on chart four, we can see that EPS increased $0.22 per share from the fourth quarter’s $0.26, the positive variances in practically all business segments. Timber price and volume was particular strong in our northwest region as Lee indicated, and real estate sales, very difficult to predict on a quarterly basis, this time came in favorable to the fourth quarter.

And performance fibers’ strong pricing and lower cost increased their operating income by $7 million; and higher lumber prices continued supporting strong wood products results, while setting some of the business units’ strong performance with $4 million in discreet tax items related to recognizing the unrealized ability of certain foreign tax credits as well as higher accrual for the eventual repatriation of foreign earnings due to the stronger New Zealand dollar. Nevertheless, both forms of earnings of $0.48 was at the upper end of our expectations in January.

Let’s turn to chart five and look at the comparison of first quarter to prior year first quarter. In this case we start with last year’s first quarter of $0.51 per share, excluding last year’s major REIT related benefit, and then compare it to this quarter’s EPS of $0.48, once again, also excluding the tax benefit this year. As I just mentioned, results were at the upper end of our expectations in January but slightly short of last year. Timber activity was slightly favorable to prior year with higher prices in the northwest partially offset by lower prices in the southeast. We will go into more detail on these in our markets and operations report.

Real estate sales were down year-over-year as last year’s first quarter had significantly more acreage and sales revenue with 17,000 acres total sold last year in the first quarter, where as this year only approximately 11,000 acres closed. However, I might note that this year’s per acre price averaged about $2,200 per acre comparing favorably to about $1,950 per acre last year.

Performance fibers results reflected strengthening prices in both sales specialties and absorbent materials product lines. The higher prices were realized as well in our lumber operations. The corporate and other line shows a $5 million positive variance from last year’s first quarter as the first quarter of 2004 include approximately $4.8 million in reconversion expenses.

As you can see from an operating standpoint, our business units improved over the prior year’s quarter, equivalent to $0.05 per share but was slightly more than offset from a higher interest rate environment and the two discreet tax items. Overall, compared to first quarter of 2004, the business units showed comparative strength. For most, we expect will carry over into the second quarter as we will discuss later.

Let me just wrap up with a brief discussion of our cash available distribution on page six. On this chart we reconciled from our adjusted EBITDA which includes the non-cash cost basis of real estate sold, down through to our cash available distribution reflecting cash outlook flows for capital spending, tax and interest expense. With the inclusion of balance sheet changes, it brings us down to a $60 million CAD this year compared to $64 million last year. Slightly higher working capital requirements brought that CAD down, but the overall CAD per share of $1.17 provides a strong start to support our quarterly dividend of $0.62 per share.

With that, let me turn the conference over to Lee to cover markets and operations. Lee.

Let me know cover markets and operations of our various businesses. In discussing these I will briefly review the first quarter and then comment on our second quarter outlook and then how at this time we generally see the balance of the year. Please bear in mind that much can still happen in the second quarter and obviously the balance of the year.

In the northwest on page eight, although more than we had expected, prices in the quarter continue to move up; and while volume is typically the case between fourth and first quarter, also increased. As you might recall the unusual sales volume pattern you see here in the second half of 2003 and the first quarter of 2004 relates to the reconversion of the tax advantage we gained with that volume shift. In this, the second quarter, demand for timber in the northwest remains strong which should translate in to higher prices while volume should be comparable to the last year’s second quarter. For the year and in today’s strong pricing environment, the 2005 average could be as much as 30 percent above that of 2004. On the other hand, when compared to 2004 volume, this year’s volume could be down in the range of about 10 percent.

Moving on to page nine and our southeast pine timber sales, we’re seeing little change. Both price and volume for the quarter were up modestly from fourth quarter but slightly below of first quarter of last year. In the second quarter both price and volume should be up in the range of 5 percent from those of the first quarter. For the year, price should average about that of 2004, the volume should be up about 10 percent from last year’s level. Recognize this chart in my comments relate to our pine sales not hardwood, although hardwood represents only about 10 percent of our total harvest.

In New Zealand on page ten, prices are up sequential and in line with that of first quarter 2004. You’ll also see here the normal volume pattern first quarter to first quarter with price unchanged from that period last year while volume was down this year about 10 percent. Prices in New Zealand for the second quarter should move down a bit from last year’s second quarter due largely to geographic mix, while volume should be up about 10 percent from last year’s second quarter. For the year in New Zealand, we expect a modest increase in volume with little change in average prices.

I may just take a minute here to comment a little further on the real estate side of our business. As we’ve noted in the past, given the nature of the business, there is a quarter-to-quarter, as well as year-to-year, variability. For first quarter as Gerry mentioned, operating income of $15.3 million, while above the $11.7 of fourth quarter, was below the $23.7 of last year’s first quarter. Results for the second quarter are expected to be well below that of second quarter last year. Please recall the second quarter of 2004 included the sale of long-term timber lease which contributed $23 million of the $35 million operating income for that period. For the year, while real estate operating income should be somewhat below the level of 2004, it will still be a very meaningful component of our earnings and our cash flow.

For performance fibers for the quarter, results were up sequentially as well as on a year ago basis due to lower costs and higher prices. On pages 11 and 12 you can see the pricing in volume data. As I noted last quarter and as you see here, prices in cellulose specialties moved up as new contracts went into effect January 1. Here you should see a slight increase of 3 to 4 percent in the second quarter and then on a flat level at that basis for the average of the year. Obviously, fluff prices were flat for the first quarter. For second quarter in fluff we should see a modest price increase.

Volumes on page 12 cellulose specialties has become the pattern were down sequentially but above that of first quarter 2004. Second quarter cellulose specialties’ volume should much look like that of second quarter last year, and the same holds true for absorbent materials. For the year 2005, the volumes for both should be up slightly. Strong demand, higher prices and a favorable mix should translate into another strong year for this performance fibers business.

Looking quickly at lumber on page 13, I think the chart tells a story for price and volume. For the second quarter, we expect to see some softness in price toward the end of the quarter and as we move into the second half of the year. For the quarter and the year, we should see another slight increase in volume as we realize the benefits of capital investments made in 2004 and 2005 that targeted incremental yield and productivity improvements.

On page 14 you see the volume and pricing data for the MBF business, a continuing increase in price and the volume stability in our financials you see the economic results due, certainly in part, to currency exchange rates. For the year, both price and volumes are expected to be up above from the old 2004 level.

Let me conclude here by saying that in the positions we hold with our key assets and with this strong first quarter we’re optimistic as to the year and beyond. With that, let’s now go back to Gerry.

Thanks, Lee. On chart 15 we show our expectations for earnings trends with the focus this time on the second quarter of 2005. As we are indicating, we expect to be down considerably from the second quarter of 2004, which included unusually high level of real estate sales. Excluding the expected negative variance in real estate category year-over-year, our expectations at EPS for other groups would be up. A favorable movement is also reflected in our comparison of the first quarter through the second quarter trend. We were showing that the strong start we had against expectations should continue and increase slightly.

At this time we’re not making any comment on the full year other than as we indicated in our earnings release, we expect on an operating basis to compare favorably to 2004. Before I close the presentation let me add that as I mentioned in our fourth quarter earnings conference in January, the capital gain component of our distribution can vary substantially year-to-year based upon inter-company land sale activity and the dividends paid from the TRS to the parent company. Last year the capital gain component of our distribution was approximately 68 percent with 32 percent being return of capital. This year based on current projections, we anticipate the capital gain percentage to be in the mid-80s with the remainder being return of capital. Do not anticipate the distribution will carry any ordinary income component in the near future. Although higher than prior year, the combined tax rate for individuals is still 15 percent or less and continues to compare very favorably to typical REITS. Optimizing our restructure means bringing cash from the TRS to the parent company, either as dividends or through inter-company real estate activity. So that at times, we do have competing objectives as we attempt to minimize our overall corporate and shareholders tax costs.

With that, let me close the formal part of the presentation and open the conference up to questions from our audience.

(OPERATOR INSTRUCTIONS) Our first question comes from Mark Weintraub with Buckingham Research.

Thank you. Just wanted to clarify, you’re saying you expect a full year to compare favorably and in 2004 it shows on the slide you made $2.10 and in the first quarter on the slide it shows the $0.48 backing up the LKE. If I just do simple math that suggests that the last three quarters $1.62 would make it equivalent and so I assume compare favorably would be suggesting that you expect to make more than $1.62. Am I understanding this right?

I think if your arithmetic is good – it’s always better than mine, I would probably say the answer would be yes.

Okay. Thank you.

Our next question comes from Steve Chercover with D.A. Davison.

Thanks. Good afternoon. A couple of quick questions. First of all, you specifically mentioned that labor costs were down in the specialty cellulose division. Can you quantify that? Is that a sustainable trend?

Steve, I don’t think I said labor costs were down. If I did, I didn’t mean to.

Well, it’s actually in the text.

Oh, in the text of the announcement.

Yeah. So I figured it was worth mentioning.

I’m sorry, I thought you were talking my comments this morning. Well, really what you’re talking about is increased production through the facilities – is really where you’re getting it.

Okay. There was no meaningful headcount reduction or renegotiation of contracts?

No, we didn’t renegotiate contracts – obviously, where as one might expect with many of the capital investments we make, we’re able to reduce some of our labor costs and almost always through attrition in the plants rather than just layoffs. So it’s been a very reasonable, I guess I should say, process as we’ve moved ahead.

Okay. And with respect to holding Florida properties off the market. Is that something we will get more color on in a couple of weeks? Obviously, real estate’s still going to be a material part of your earnings. Is the full year estimate still 85 to 100 million, if I remember correctly?

Let me just make a comment on the strategy on what we’re going to do on the properties down here. Yes, they are – real estate has been and will continue to be very meaningful component of our book earnings and cash flow. And anything we do is moving further down in the value added in the real estate side, we’ll do it gradually and as we consider what our alternatives are and slowly move over it. Yes, we’ve certainly seen a dramatic increase in our properties down here along the coastal corridor, particularly in northeast Florida. As to earnings, let me Gerry make a comment.

Yes, let me cover that. Of course, there’s a lot of opportunities in land sale and I think that’s what Lee’s referring to, but let me take you back to what we started with when we talked about the 2 to 4 percent program a couple of years ago and we said that would add about $35 to 50 million to our existing program, which at that time was 10 to 12. So what we’re saying is we think getting back to that range for planning purposes, multi year planning purposes which would put it at $57 and 62 million on average for planning purposes. Now time has moved on, land’s depreciated. I would probably say for planning purposes, once again, the upper end of that range is probably good, although some years will be above it and some years we might be below it. So that range probably in the 55 to 62 for planning purposes is a good level. And I’m not sure, I think, Steve, you may have translated it back into sales which, once again, depending upon which land was selling will produce different margin levels but I think you may have said $85 to $90 million or $80/90 million for sales level is probably a good number in the short term. I think what we expect to do is more with less acreage over time. But that guidance that we gave you a couple of years ago which translates to about $47 to 62 million of operating income is probably good for planning purposes.

Sometimes inflation’s a good thing. And do you have any other tax issues, you know, like you had in the 96/97 timeframe that might come back and give us another few pennies going forward?

It could go either way, Steve. You know, we’re not overly aggressive in our tax return and filings and we take a very – even a more conservative view when we run up CAP books and this particular case we’re very conservative on a book basis, even though we had some tax planning opportunities that ended up with some dialogue with the IRS. That completes our tax years for 1997. We still have 98, 99 through 2003. We haven’t filed 2004 yet. They can go either way. A lot of times we get the benefit of the cash which we don’t necessarily see through the P&L. So, I don’t think we have any unusual ones that other corporations don’t have, but we also have a risk that we have to end up with a negotiated settlement with the IRS and we’ve noted that in our 10K that we’re always in dialogue with the IRS and even sometimes have notices of proposed disallowances. So it goes either way. This was a major structure we did to – intensifies our environmental management people to minimize the cost of the environmental reserve activity – a very strong program and they’ve done that, but as a result, it took many years to resolve with the IRS and we finally came to agreement. But it could go either way, Steve. Really – nothing that we know that’s material to the financial statement.

Okay. Thanks. I’ll turn the floor over for a moment.

We’ll go next with Frank Binell with Adage Capital.

Yeah, I just want to go back to that comment in the press release about the Florida real estate and holding off the market because you think it’s going to, I guess, significantly increase value over the next few years. I mean, if other people think the same thing, what’s the difference between selling it now and selling then?

Well, I mean, we’re not talking about all our property. There’s some specific properties that we think have attributes that we can get more value out of by holding them off, and sometimes holding it off means putting together a plan that not only addresses the immediate piece that might be of significant value, but also the property that we hold behind it. And what you do on the – let’s just say for example, nearest the road can have a big impact on the property that we hold behind it. So, you really have to look at these piece by piece and instead of just selling the real attractive immediate stuff along the highway or along the freeway, you have to look at what’s behind it, because you can destroy a lot of value if you don’t.

All right. Now along those lines, are you planning on developing anything or are you just trying to time this out or –

No, we – as we say, I think in my statements –we’ve otherwise said, we’ve indicated we’re taking a hard look at perhaps not if we go down that road but more how far we go down that it. We think there’s some opportunities at different levels to do more than we’ve done in just dumping, if you will, land on a wholesale basis.

And one last question along these lines, I mean is there any tax reason, can you do like an incline swab [phonetic] or something so you get a better tax treatment down the road or is this just you think it’s better –

I don’t think on a land basis – you know you have the opportunity certainly in timber, but I don’t think just selling straight land, in this case, is going to do it.

Thanks.

We’ll go next with Matt Berg [phonetic] with Highbridge [phonetic] Capital.

Hi. Just following up on that series of questions. I know that a lead core has begun site preparation at Town Center. I want to know if you could give us a little bit of color on that? I know that it’s near some of your properties and I’ve also seen the transaction values down there have been for about $300,000 an acre. Can we use that, is it comparable or is that totally different land? If you could just kind of help out with what’s going on in Town Center. I know that it was also cited as the fastest growing county in the United States.

Well, we certainly know it’s growing and I’d like to tell you we have hundreds of thousands or at least thousands of acres at $300,000 an acre. I think Town Center you’ve got very different situation than what we have. Anytime you get up to $300,000 an acre, if in fact that’s – I’ll take your word that that’s what it sold for. You know, we have some property I think in time has those kind of potentials, but it’s going to take a lot investment in both capital and time to start to approach anything near those kind of numbers. But you’re right. Florida is growing very rapidly as has the value of these lands we hold along this coastal corridor. And as part of what we said we just need to take a step back and we’re not pulling everything off the market, we’re not making any dramatic changes in neither our earnings or cash flow from it, we just got to take a hard look and see that we’re in fact getting every dollar of value added we can.

Okay. Okay. Is your land – is it in the vicinity of this Town Center development?

Not really.

Okay. Okay, thank you.

And it appears that we have no further questions at this time. I would like to turn the conference back over to our speakers for any additional or closing remarks.

This is Gerry Pollack. No, I think we’ve said it all. We started off the year very well. The operating units are strong and I think we have a lot of potential, as we indicated, over the next few years in land sales and income growth. Other than that, if you have any questions after the conference call [indiscernible] I want to thank everybody for joining us today. Thank you.

This does conclude today’s teleconference. Thank you for your participation. You may now disconnect. 3