Rayonier Inc (RYN) 2008 Q3 法說會逐字稿

Good day, and welcome to the Rayonier third quarter earnings release conference call. Today's call is being recorded by Rayonier and is copyrighted material. It cannot be recorded or rebroadcast without our express permission. Your participation on this call constitutes implied consent. Please hang up now if you do not consent to being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to Senior Vice President, Mr. Hans Vanden Noort. Please go ahead, sir.

Thank you, and good morning. Welcome to Rayonier's investor teleconference covering third-quarter earnings. Our earnings statements and supplemental materials were released this morning and are available on our website at rayonier.com. I would like to remind you that in these presentations, we include forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, and other Federal Securities laws. Our earning release, as well as our Form 10-K filed with the SEC, lists some of the factors which may cause actual results to differ materially from the forward-looking statements we may make. They are also referenced on page 2 of our supplemental material. Please familiarize yourselves with them. Also, this conference is being webcast and can be accessed through our home page. With that, let's start our teleconference with opening comments from Lee Thomas, Chairman, President, and CEO. Lee?

Thanks, Hans. First, I will make a few opening comments. Hans will then take you through the financials, after which Tim Brannon, our Senior Vice President of Forest Resources, Charlie Margiotta, Senior Vice President and Head of our Real Estate business, and Paul Boynton, Senior Vice President for Performance Fibers and Wood Products, will review those business segments. I'd like to first discuss our financial position, especially in light of the unprecedented turmoil in the credit markets. We're well-positioned, with a low level of debt and no near-term debt maturities. We also benefit from the diversity and balance of our three core businesses that continue to generate strong cash flows. This balance was again evident this past quarter, as continued interest in our nonstrategic timberlands, strong demand in cellulose specialty fibers as well as absorbent materials, partially offset ongoing softness in the saw log timber markets.

Now turning to our businesses, in timber, saw log prices remained depressed due to the weak housing market and an oversupply of blow-down timber in the NorthWest. As a result, we continue to limit our saw timber harvest in both the West and the East to preserve our high value of grade timber until markets improve. However, in the East, demand for pulp wood remains very strong, and we continue to adjust our harvest to take advantage of this favorable market. In Real Estate, we continue to shift emphasis from sales of development lands to timberland sales. In particular, demand for our nonstrategic timberlands remained strong. We sold nearly 11,000 acres in the third quarter as part of our strategy to upgrade our overall timberland portfolio. In Performance Fibers, market conditions remained strong for both cellulose specialties and absorbent materials. However, we continued to experience unprecedented increases in our overall costs, particularly around wood, chemical costs, transportation, and energy. As a result, we implemented a cellulose specialty surcharge on September 1.

Overall, as I said earlier, our businesses are performing well in a challenging environment. Now let me turn it over to Hans for review of the financials.

Okay. Let's start on page 3 with our overall financial highlights. Sales totaled $308 million, resulting in operating income of $49 million and net income from continuing operations of $40 million, or $0.50 per share, which was below prior year, but slightly above prior quarter. Note that our comparisons are with our income from continuing operations because net income this quarter includes a $10 million loss from discontinued operations, resulting from our decision to offer our New Zealand business for sale. This loss is primarily due to two tax items which accounting rules require that we recognize ahead of the actual sale. The first is a $5.8 million charge for a valuation reserve for a net operating loss carry-forward that we no longer expect to utilize. The second item is a $4.4 million charge to provide U.S. taxes on unremitted earnings that we previously expected to reinvest in New Zealand and, therefore, did not provide U.S. taxes for, as allowed under GAAP.

Since our intent is to repatriate the sale proceeds to the U.S., this tax election is no longer valid. So we have some one-time charges that are coming through the operations this period. For all subsequent comparisons on the call, we'll use income from continuing operations. On the bottom of page 3, we provide an outline of cash resources and liquidity. Year to date, cash flow remains strong with an adjusted EBITDA of $283 million and cash available for distribution of $159 million. These amounts are below the prior year, primarily due to a $47 million real estate sale to an industrial buyer in the third quarter of 2007. Our debt and debt-to-capital ratio increased slightly from year end, reflecting additional debt proceeds to fund a portion of our $213 million Western timberland acquisition that closed on April 3. We ended the quarter with approximately $55 million in cash; so on a net debt basis, we finished at $739 million.

Moving now to page 4, we've prepared a sequential quarterly variance analysis. Starting with timber, the third quarter is typically a low-harvest quarter, and this year was no exception. Log prices in the Western region were also down, reflecting the oversupply of available timber caused by the blowdown from last winter's storm. On the cost side, we recognized $3 million of increased depletion expense related to the Timberland acquisition from this past April. The cost and merchantable inventory of this acquisition were added to our legacy holdings, which increased the average cost basis of our inventory and, therefore, our depletion rate. Moving to performance fibers, results improved, driven by increased shipments of cellulose specialties and slightly stronger pricing. Finally, our tax expense improved by about $7 million from the second quarter. The primary driver was a settlement with the IRS over a disputed real estate sale, which resulted in almost $4 million reserve reversal. We also had some favorable return to accrual and deferred tax adjustments.

Let's move on now to page 5 to briefly review the year-over-year variances. On page 5, we begin with last year's third-quarter earnings of $0.89 per share. Our timber income was $13 million below last year, mainly due to lower saw log prices, particularly out West, and increased depletion as noted earlier. Next, our Real Estate results were $34 million below third quarter last year, primarily due to the $47 million industrial sale previously referenced, partially offset by increased nonstrategic timberland sales. Performance Fibers results reflect improved prices in both cellulose specialties and absorbent materials. However, costs were unfavorable, driven by higher input costs, somewhat mitigated by lower depreciation expense. Finally, taxes were $9 million below the third quarter last year, reflecting the tax items previously noted. These amounts bring us to the current quarter's result of $0.50 per share. These variance descriptions generally apply to the nine month's data included on the right side of the chart.

Turning now to page 6 to review Cash Available for Distribution. On this page, we've reconciled Cash Provided by Operating Activities, which is a GAAP measure, to our non-GAAP metric of Cash Available for Distribution. Our cash flow remains strong, with year-to-date CAD totaling $159 million; and although below last year's CAD, well above our year-to-date dividends of $118 million. On page 7, we've prepared a debt maturity schedule. Given the current credit crisis, we thought it was timely to revisit this. Note that we have no near-term refinancing needs. Our next major maturity is $122 million of installment notes that's not due until December 31, 2009. Also, please note that we have a $250 million revolving credit facility with $144 million of remaining capacity, which is available at an interest rate of LIBOR plus 40. This facility does not expire until August, 2011.

All in all, we believe our strong balance sheet, conservative credit profile, and strong and consistent cash generation provide liquidity which will position us well to manage through this current turmoil in the credit markets. With that, let me turn the conference over to Tim Brannon to cover Forest Resources.

Thanks, Hans. Although timber markets remain challenging, we have continued to adjust our product and geographic mix to meet market demands. Lumber and plywood prices deteriorated in September and October, causing mills to take curtailments. We anticipate that many sawmills will also take extended holiday closures in November and December. As a result, pulp mills are relying on round wood for fiber since residual sawmill chip supply is tight. We remain focused on leaving high-value saw timber standing and harvesting pulp wood to meet that market demand. In the West, shown on page 9, volume was down sequentially, as well as compared to prior year. While third quarter is normally a lower volume quarter, the ongoing slowdown in housing starts clearly had an impact on our harvest, as we continued to hold saw logs off the market. Pricing was also lower sequentially and compared to prior year, as we were affected first by the falling lumber market and second by the oversupply of logs continuing to come onto the market from the December, 2007 blow down. Both of these factors are expected to remain with us in the fourth quarter.

We are committed to holding back volume of our high-value saw logs, so we expect fourth-quarter volume to be comparable to third quarter 2008 and fourth quarter 2007. Price is expected to decrease by about 15% in the fourth quarter as compared to the prior quarter, as the percentage mix of salvage wood will be higher. The market for pulp wood in the West remains solid, as pulp mills are concerned about the supply of fiber this winter given the number of sawmill curtailment announcements. At present, however, the volume of the blow-down salvage wood is easily meeting the demand for round pulp wood in our coastal market. Currently, the export log market is by and large stable. We view this as good news given the worldwide financial market crisis of late.

Moving to the East on page 10, the poor lumber prices continue to have an unfavorable impact on our grade timber markets. Fortunately, pulpwood markets have remained strong and we have continued to look for opportunities to expand the availability of pulpwood harvest and thinnings. At the same time, we are holding back on the harvest of stands containing a higher percentage of grade timber until the markets improve. Pine volume for third quarter was down sequentially when compared to prior year, but still strong. Year-to-date, harvest is nearly 4% above 2007, which reflected a significant volume of salvage wood from the March, 2007 fires. Price is flat sequentially and slightly up on third quarter 2007. In the fourth quarter, we expect volume to be up 10% to 15% sequentially and 5% to 10% over prior year, as sawmill closures impact chip availability and pulp mills will be forced to rely heavily on round wood for their fiber supply. Grade timber prices will remain under downward pressure. Overall, price in the fourth quarter is expected to be up modestly over third quarter due mainly to increased pulp wood pricing and geographic mix. Overall, our timber margin in the third quarter suffered from low selling prices, increased pulpwood mix, and high depletion, as Hans pointed out earlier. However, cash flow remained solid at $18 million for the quarter and nearly $80 million for the first nine months.

Turning to our New Zealand sale, the process is well underway. Investment bankers and other advisors have been retained by the joint venture. A marketing brief covering the business has been issued, and there has been significant interest expressed. Preliminary offers are expected by mid-December. With that, let me turn it over to Charlie Margiotta to review the Real Estate business.

Thanks, Tim. The real estate market remains unchanged from last quarter, with continued solid interest for timberland, mixed demand for rural properties, and weak demand for development properties. Our geographic diversity provides access to numerous markets and a variety of end uses. Page 11 details the third-quarter HBU sales in acres as well as prior performance. Third-quarter results consisted of a relatively small number of development sales in Florida and Georgia, and over 2,800 acres of rural sales in virtually all of our geographic areas. Demand for rural land is impacted by the general economic conditions and is not particularly price sensitive. Average sales price per acre is shown on page 12. Third-quarter rural sales prices are generally flat, and the average price of approximately $2,600 per acre is a significant premium to underlying timberland values. Note that most rural sales have very merchantable little timber value, as the timber has been harvested or reserved.

Nonstrategic timberland sales results are shown on page 13. The third-quarter sales of nearly 11,000 acres in Alabama were the result of a sealed bid process. I would characterize the results as very competitive. As we indicated in the second-quarter call, we anticipate selling an additional 20,000 to 30,000 acres in the fourth quarter in a similar bid process, taking advantage of what we believe continues to be a competitive and strong timberland market. With that, let me turn it over to Paul to review Performance Fibers.

Thanks, Charlie. Performance Fibers had a solid third quarter, due to strong demand for our unique cellulose specialty products and solid markets for absorbent materials, despite rising raw material costs. On page 14, as customary, you'll see net selling prices for our two Performance Fibers product lines. Looking first at cellulose specialty prices, which represent 65% of our volume, you'll see sequentially improved prices due to the initial implementation of a $95MT price surcharge with cellulose specialty customers, effective September 1 through the balance of the year. The surcharge was necessary action to help mitigate some -- but certainly not all -- of the unprecedented cost increases we continue to experience in raw materials, chemicals, fuels, and transportation. You should expect to see the full surcharge price in effect in our fourth quarter results.

Looking at absorbent material prices -- which consist principally of fluff pulp, as noted here -- global demand, combined with currency valuation and higher raw material costs, have pushed prices upward 2% over prior quarter and 10% above third quarter, 2007. Despite declining global economic conditions and recent drop in commodity pulp prices, we expect our fluff prices in the fourth quarter to be comparable to the third quarter. Moving on to page 15 and looking at volumes, you can see the increased sales of our cellulose specialty products above both the prior quarter and similar quarter a year ago, due to improved operations and timing of customer orders. Year-to-date sales are now above prior year by 2%. Consistent with this improvement and in trend with prior years, we expect fourth quarter volumes to be above third quarter, yielding an annual total cellulose specialty sales volume of roughly 3% above prior year.

Absorbent materials volumes of 67,000 was above prior quarter due to better performing operations and lack of a maintenance shutdown at our Jesup, Georgia, facility, where these products are produced. We expect fourth quarter absorbent materials volumes to be significantly above third quarter, bringing the full-year sales comparable to prior year. With the price and volume improvement in both Performance Fibers' product lines, third quarter operating income results were well above second quarter and comparable to third quarter prior year. Looking ahead to the fourth quarter, we see continued cost increases that will outpace the recently-implemented price surcharge. We anticipate operating income below the current quarter, and slightly below fourth quarter 2007.

In summary, we had a solid financial quarter, driven by: one, exceptional demand for a high-value cellulose specialty fibers where nearly all the volume is under long-term contracts through 2011, and Rayonier is the global market leader; and second, the overall strength of the absorbent materials market. Now let me turn it back over to Hans.

Thanks, Paul. With that, let's turn to page 16 to review earnings trends. Based on current market conditions, we expect fourth quarter earnings to be comparable to third-quarter earning of $0.50 per share, resulting in full-year 2008 earnings below the '07 pro forma EPS of $2.33. Before I close, I'd like to update some key statistics to assist you in refining your model. First for 2008, we expect depreciation, depletion and amortization of $161 million, and the noncash cost basis of land sold of $12 million, or approximately $173 million in total. This would be a net $9 million increase from 2007 and $3 million above previous guidance, driven by increased depletion.

Capital expenditures, excluding acquisitions, are expected to range between $105 million and $110 million, which is $8 to $13 million above 2007, with the increased focus in performance fibers on operational and reliability improvements and environmental projects. We expect interest expense net of interest income to be between $43 million and $45 million. Finally, our year-to-date effective tax rate was 10.4%, which is below our expectation for the full-year rate due to the favorable discreet adjustments noted earlier. The effective rate can vary significantly based on the mix of income between our REIT and TRS businesses and like-kind exchange benefits. With that said, we expect the 2008 effective tax rate to be in the 11% to 13% range. This is below previous guidance, and now it reflects the impact of higher costs in our performance fibers business, thereby reducing the proportion of TRS income to total income.

When you put all these elements together, we continue to anticipate strong cash flow, although CAD will be below last year primarily due to higher capital expenditures and lower EBITDA. Now let me turn it back to Lee for some summary comments.

Thank you, Hans. Let me just conclude by saying that although there is significant turmoil in the credit markets, our businesses are performing well and clearly have the ability to generate cash flow in a very strong fashion. As a result, cash available for distribution in 2008 is anticipated to be well above our dividend requirement. Additionally, our low debt levels and no near term maturities provide significant operating flexibilities. Now with that, I'd like to close the formal part of the presentation and turn the teleconference back to the conference operator for questions from the audience.

(OPERATOR INSTRUCTIONS). And our first question today is from Tyler Old.

Good morning. Just was wondering if you had noticed any change in the demand for rural land in the past few months, particularly given what's been going on in credit markets. I think one of your competitors recently announced some land sales that had been canceled in parts of Florida.

Charlie, you want to respond to that? I think, as you noted in your comments, we've had rural land sales kind of across the country. I don't believe we had any in the last quarter in Florida. But we've had them pretty well across the rest of our property.

Yes, Tyler, it's certainly a mix. But because of our geographic diversity -- for instance, in the last quarter, we had some good sales in Washington state and in the state of Georgia. You know, no doubt that credit is having some impact. But I'd say prices are steady. Demand might be off a little, but you know, it's quite mixed. But I'd say it's relatively steady.

And then just on the timber business, we've been reading a lot about the limited availability of loggers, particularly in the Southeast. Are you experiencing any of this, and are there things that you can do to maybe improve that situation?

You know, Tim, one of the things I think is helpful to loggers now is the fact that diesel prices have begun to go back down. But I know we have seen the impact of higher energy prices on some of the logging crews. But what are you seeing now?

Yes, well, we certainly have, Lee. With the problem of just diesel, not only for the trucks getting the wood to the mills, but also in their operations in the woods, of course. It is coming down. That's going to be favorable to them. But certainly with the grade logs having fallen as far as they have and the demand having slacked off, we have seen some loggers that have basically parked their equipment. And so there is some reduction in that. Certainly right now, we're seeing that we're able to meet all of our demands in terms of supply to the mills and so forth. We're not having any particular problem. I would think that over time as markets do improve, over the next year or so, that could become more of an issue. But we'll just have to have wait and see how that materializes.

Okay, thanks. And then just any early guidance on how we should be thinking about CapEx in 2009?

No. I think as far as 2009 is concerned, we'll be giving all of our guidance in our January call.

Okay. Great. Actually, just one last housekeeping question. The land basis for this quarter, do you have that, handy?

One second here, Tyler. I believe third quarter was about $3 million. That's right.

$3 million.

Great, thanks very much.

All right.

And our second question today is from Mark Weintraub, Buckingham Research.

Thank you. First, have you started the process on the 20,000 to 30,000 acres that you are considering selling in the fourth quarter? And are you noticing any change in the tenor of the market, given developments in financial markets, et cetera?

We have started the process. Charlie, you want to talk about it?

Yes. I need to be a little careful here because we're in the middle of it. Bids were due in the latter part of last week. The bids are in. We are reviewing them. We're quite pleased with the level of activity. And we've seen no fall-off in the competitive nature of that market. So, you know, we have -- certainly those sales aren't closed. But the bidding was completed last week. Half of those properties were in Georgia and half of those properties, approximately, were in Alabama.

Great. And if it does go well, is this program something that you would likely continue into next year, or would you continue to accelerate some timberland sales?

Well, Mark, we have taken a look at that over the course of this year. And our intent is to continue to pursue that strategy of upgrading the portfolio, which is looking across our nonstrategic lands, given the strength of demand in that marketplace. So yes, I would anticipate we would.

And you used the word upgrade. Does that mean that you are also buying -- because you obviously did something in April. Would you expect to be in the market buying land in the year ahead, as well?

Well, you know, this year, we did buy two pieces of property, about 110,000 acres in Washington state and New York. And our strategy long term is to continue to upgrade -- which means not just acreage, but quality, as well. So that's where the sales come from. I think in the kind of overall financial shape of the market, we would be very cautious as far as our buying is concerned. And we have -- we have only bought properties -- even the two we did this year -- that really met our criteria where we were able to negotiate what we felt were good overall acquisitions. And both of them adjoined our current property. But I think it was a compelling case. Clearly, our strategy is to look at acquiring property. We're just going to be very conservative given the financial shape of the markets.

Great. I've got more questions. But, you know, I'll just come back on so as not to take up too much time. I'll come back at the end.

Okay.

And as a reminder, that's star-one to ask a question. We'll pause for a moment to assemble our roster. And we have Mark Weintraub with Buckingham Research.

Okay, I did have follow-up questions for you guys.

Thanks, Mark.

On the Performance Fiber side, obviously there have been some pretty sharp drop-offs in the paper pulp markets in the most recent past. A., are you beginning to see any of that spill into your fluff pulp business? Would you expect it to spill to into your fluff pulp business? Maybe start there, and then some questions on the chemical cellulose part, as well.

Mark, it's Paul. Let me comment on the fourth quarter only, and we'll leave 2009 to January, as Lee indicated and Hans indicated. We don't anticipate seeing much drop-off in the fourth quarter with our pricing. We think it's going to be comparable to third quarter. We certainly expect some downward pressure. But the nature of that, we don't see that will flow through in these three months.

Okay. And then -- I assume -- well, would the lag impact also potentially be true in the chemical cellulose? I think it's -- as I interpreted what you're saying is that fluff pulp, yes, there could be downward pressure, but it takes a while until that would play through. Would you also anticipate that there could be pressure on the chemical cellulose business after a lag, or is that sufficiently differentiated, that they're almost two separate markets?

They're clearly two separate markets. We wouldn't see any connection between the two. And I think you interpreted my comments on fluff pulp pricing with the lag correctly. But our cellulose specialty business is very unique. It's almost kind of a chemical business, if you will. And that's negotiated on annual contracts. And we will -- we are currently in the process of doing that right now.

Can you give us any sense -- obviously, I understand there is going to be sensitivity about being too precise. But given the extreme uncertainty investors have in this environment, can you give any sense of comfort to understanding how those types of negotiations might be going?

Yes. Negotiations are going very well. The market for our product is very tight. The demand is very strong. And we would expect to see our ability to pass on some of our costs that were experienced this year into our pricing into 2009. And I think that's all I can say at this point.

Okay. Appreciate it.

Well, we have no more questions at this time. (OPERATOR INSTRUCTIONS). And our next question is from Tyler Old, J.P. Morgan.

One last follow-up. Just in terms of the slowdown, where do you think we are in terms of the salvage recovery on the West Coast?

You know, I'm going to let Tim respond to that. But I would say we've moved an awful lot of the salvage wood off our property. The issue that we are running into and have run into this year is the fact that there's a lot of additional timber from adjoining properties that are in the marketplace. And we think that's what will play out in the fourth quarter and beyond. And that's what's depressing the market. In other words, we think we've pretty well finished the harvest -- or will in the fourth quarter, anyway -- with most of our salvage wood. But Tim, you got any further color on that?

Lee, that is basically right in terms of what's affecting us. We feel as though we've gotten through most of ours. We've got some more in the fourth quarter. It may bleed over into the first quarter of next year. But there are other ownerships that certainly still have blow down there, and we would expect that to have at last some limited impact on pricing as we go into 2009, sure.

Great. That's very helpful. Thank you.

Okay.

(OPERATOR INSTRUCTIONS). And we'll pause to assemble our roster. And we have no questions at this time.

All right. Well, this is Hans Vanden Noort. Thank you very much for joining us, and please follow up with Carl Kraus with any additional questions. Thank you.

We thank you for your participation on today's call, and have a wonderful day.