Rayonier Inc (RYN) 2009 Q1 法說會逐字稿

Welcome. Thank you for joining Rayonier's first quarter analyst teleconference call. Operator Instructions)

Now I will turn the meeting over to Mr. Hans Vanden Noort, CFO. Sir, you may begin.

Thank you and good afternoon. Welcome to Rayonier's investor teleconference, covering first quarter earnings. Our earnings statements and presentation materials were released this morning and are available on our website at Rayonier.com. I'd like to remind you that in these presentations, we include forward-looking statements made pursuant to the Safe Harbor provisions of Federal Securities laws. Our earnings release, as well as our Form 10-K filed with the SEC with 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 presentation material. With that let's start our teleconference with opening comments from Lee Thomas, Chairman, President and CEO. Lee?

Thank you, Hans. I will make a few overall comments for the first quarter of 2009. Then Hans will take you through the financials, after which Tim Brannon, our SVP Forest Resources, Charlie Margiotta, our SVP and Head of our Real Estate business and Paul Boynton, SVP Performance Fibers and Wood Products, will review those business segments.

Overall, we are pleased with our first quarter results, given the weak economic conditions and the unprecedented drop in housing starts. Softness in our timber business and lower rural HBU sales were balanced by our strong demand in our Performance Fibers products and continued interest in our non-strategic timberlands. Our timber results reflect the impact of the weak housing market on overall pricing, as well as our decision to continue to reduce harvest levels. Our real estate business benefited from non-strategic timberland sales of 19,000 acres which generated $23 million in revenue during the quarter. The lower rural sales are really a matter of timing of sales rather than a lack of interest. In Performance Fibers, results were driven by increased cellulose specialty pricing, which was largely offset by higher caustic cost which I believe appear to have peaked during the quarter.

In summary the strength of our business mix, and the good execution by our people resulted in a good quarter, despite weak economic conditions and the softness in the housing market. We generated good cash flow and remain well positioned to manage through the current recession. With that let me turn it over to Hans for review of the financial.

Thank you, Lee. Let's start on page 3 with our overall financial highlights. As Lee noted we had a good first quarter. Sales totaled $274 million resulting in operating income of $44 million, a net income of $26 million or $0.33 per share. On the bottom of page 3, we provide an outline of cash resources and liquidity. Our first quarter cash flow was relatively strong with adjusted EBITDA of $85 million and cash available for distribution of $54 million.

Our debt and debt-to-capital ratios were comparable to year-end levels. We ended the quarter with approximately $57 million in cash. So, on net debt basis we finished at $692 million.

Note that our current quarter and comparative period results reflect a required accounting change for our Senior Exchangeable Notes, whereby additional interest expense is accrued to represent what interest expense would have been without the conversion feature. This reduced earnings per share by about $0.01 per share in all periods presented. This accounting change also reduced the carrying amount of debt by about $22 million by reclassifying the value of the conversion feature from debt to equity.

Let's now run through the variance analysis. On page 4, we prepared a year-over-year quarterly variance analysis. In Timber, we experienced reduced prices for both pulpwood and sawtimber across the board. Volume in our western region was well below last year reflecting our decision to reduce harvest levels in this environment. Additionally, results in the East reflect a significant increase in the mix of pulpwood versus sawtimber. Real estate income declined $7 million due primarily to the timing of rural HBU sales, which more than offset increased nonstrategic timberland acres sold.

Moving to Performance Fibers. We had a $21 million price improvement reflecting the annual cellulose specialties price increase, less the impact of reduced fluff pricing. However, this benefit was largely offset by increased costs, primarily caustic.

Let's move on now to page 5 and the sequential variance. In general, the sequential Timber results follow the trends noted on the previous chart. Prices softened for all grades in both of our regions. Additionally, results declined due to seasonally lower hunting license and other recreational income, which is largely recognized in the fourth quarter.

In Real Estate, the variance was driven by fewer non-strategic timberland acres sold and lower per acre prices.

Finally, in Performance Fibers, increased cellulose specialty prices and reduced input costs more than offset lower volumes for both cellulose specialties and absorbent materials.

Last quarter's results also included a $4 million mark-to-market charge for hedges.

Turning now to page 6. On this page, we reconcile from Cash Provided by Operating Activities, which is a GAAP measure to our non-GAAP metric of Cash Available for Distribution or CAD. Our cash flow remains strong with CAD of $54 million, about 11% below last year's first quarter, but well above our dividend requirement.

Moving on now to page 7, our debt maturity schedule. Our next major maturity is $122 million installment note due on December 31, 2009. We expect to pay down a portion of this note using operating cash flows and to then refinance the balance using either our existing revolver or a new term note. Our $250 million revolving credit facility has a $145 million of remaining capacity, which is available at an interest rate of LIBOR plus 40 bps. This facility does not expire until August of 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 the continuing turmoil in the credit markets. With that, let me turn the conference over to Tim Brannon to cover Forest Resources.

Thank you, Hans. Timber markets are very weak. Housing starts remain depressed, so sawtimber demand is soft. In addition, the slowdown in the commodity pulp and paper industry, which we began seeing in the fourth quarter is continuing resulting in lower pulp wood requirements. In the West, as shown on page 9, our sawtimber harvest is at historically low levels. We have a limited volume that we are supplying into the export market, which at present is reasonably firm. But, lumber mills in the domestic market have curtailed operations and many mills are operating sporadically, so as a result volume and price are quite soft.

Accordingly we are holding back volume until markets strengthen. Sequentially, volume is down 32% and price is off 7%. In the East, shown on page 10, sawtimber markets are also depressed. Sawmill curtailments and closures have weakened log demand. Fortunately, our thinning program remains robust and we have continued to supply pulpwood and small logs despite the slowdown in the commodity pulp and paper industry.

Our first quarter pine volume was 9% above first quarter 2008 and reflects a significantly higher mix of pulpwood versus sawtimber from 65% to 78%. As you can see stumpage prices remained relatively flat in the East during the last three quarters of 2008, but the higher mix of thinnings in the first quarter of 2009, combined with lower demand and price for sawtimber, resulted in price deterioration of 14% sequentially.

For the balance of 2009, US market weakness is likely to persist. We expect a very modest seasonal uptick in lumber pricing during the year, but we think it will have little to no impact on timber prices.

In the West, we plan to let our high value timber grow and have reduced our harvest to a level 40% to 45% below what we would expect to harvest under more normal market conditions and 35% below 2008. In addition, we are considering further harvest reductions as markets dictate. Prices for the year in the West will be down around 10% year-over-year due to weaker saw log demand, as well as unfavorable species and market mix.

In the East, we currently project that our pine volume will be down modestly year-over-year. However, we will be monitoring the pulpwood market closely and may consider a further volume reduction depending upon price and demand.

Since we will continue to hold sawtimber off the market, thinnings and pulp production will be a higher proportion of our pine volume in 2009 than in 2008. Lower sawtimber prices combined with this mixed shift to lower value pulpwood will result in a stumpage price deterioration of 15% to 20% year-over-year. With regard to the sale of joint venture estate in New Zealand, we are engaged in due diligence with several interested parties.

With that, let me turn it over to Charlie Margiotta to review our Real Estate business.

Thanks, Tim. Our real estate activity continues at a steady pace. Rural markets have shown active interest and timberland markets continue to prove resilient. We continue to make progress on our key strategic development projects with activity predominantly focused on planning and gaining entitlements in Florida and Georgia.

Chart 11 shows the rural and development acres sold by quarter. First quarter sales of nearly 1400 acres were low due to the timing of contract closings. However, based on buyer interest we expect acres sold in 2009 to be in line with 2008. The most active markets are Georgia and Alabama and note that in April, we completed our first rural sale from our recently purchased New York property.

Chart 12 describes development and rural per acre prices. The rural price of nearly $2800 per acre represented sales across a number of states at price levels within the respective markets consistent with the last 12 to 24 months. We see no erosion in per acre prices and in fact, there is some evidence of improving availability of credit for land buyers.

Moving to our non-strategic timberland sales results, as shown in chart 13, we continue to experience serious buyer interest from parties with available capital. Timberland buyers have become more targeted. However, solid demand still exists.

Results of our first quarter non-strategic timberland sales were at per acre prices generally below what was achieved in 2008, due in part to property attributes and to some extent market forces.

The first quarter sales of about 19,000 acres at a price of nearly $1200 per acre, represented predominantly properties located in Alabama. We expect that non-strategic sales acres in 2009 will be at or above prior year, albeit at somewhat lower per acre prices. With that, let me turn it over to Paul to review Performance Fibers.

Thanks, Charlie. Performance Fibers started 2009 with a solid first quarter due principally to strong demand for our unique cellulose specialties products.

On page 14, you see net selling prices for our two Performance Fibers product lines. We increased our Cellulose Specialty prices year-over-year due to both strong demand for these products and significant raw material cost pressure. In line with our guidance, first quarter Cellulose Specialty prices increased 8% sequentially and 17% above the same quarter prior year.

Looking at Absorbent Materials, which consists principally of fluff pulp, prices dropped at anticipated 6% sequentially and 3% below the same quarter prior year.

Moving on to page 15 and looking at volumes, you can see our first quarter Cellulose Specialty sales were comparable to the same quarter prior year.

Fortunately, demand for our unique Cellulose Specialty Fibers has been relatively strong. While we have seen the anticipated softening of demand in smaller segments such as applications for engine filtration, additives for automotive paint coatings and plastics for LCD screens, demand remains stable for the majority of our product end-use applications, such as food, pharmaceuticals and filter tow.

Absorbent material volume of 65,000 metric tons was 16% above the same quarter prior year, due to both strong production and the absence of reliability constraints that challenged us last year. These combined business factors, particularly Cellulose Specialties pricing, generated improvement in the year-over-year and sequential operating income. We anticipate that our second quarter Cellulose Specialties volume will be below this quarter, as certain key customers complete their inventory drawdown efforts, which will affect the timing of orders. For the year, we believe that our Cellulose Specialties volumes will be comparable to the prior year. For the second quarter and full-year, we expect Absorbent Materials sales volume to increase approximately 30% and 14% respectively compared to 2008. We expect prices to decline 15% to 20% year-over-year.

During our last teleconference, I commented that we could see our largest single chemical cost, caustic, increase more than $80 million year-over-year, as a set of very favorable four-year contracts expired at the end of 2008. And, indeed, if we annualized our first quarter caustic spend, it would approximate $80 million.

However, we have become optimistic that caustic prices will ease through the balance of the year, much as other input costs have already done. Our Cellulose Specialties business typically has fixed prices for the year. However last year, we asked our customers to support a price surcharge due to rapidly escalating costs. Now with falling costs, we see the potential opportunity to effectively give back last year's surcharge that was essentially built into the pricing increase for 2009.

As a result, Cellulose Specialties year-to-year annual price increase should average about 13%, slightly below the guidance I gave you last quarter.

In summary we are off to a solid start in both operational performance and financial results. And despite global economic pressures, demand for our Cellulose Specialties products remains solid which should support our business well for 2009. Now let me turn it back to Hans.

Thanks, Paul. Before I update our full-year guidance I would like to provide a status update with respect to the alternative fuel tax credit. Our two Performance Fibers mills were certified by the IRS as alternative fuel mixers in early April. Through the first quarter, we believe that approximately $40 million of tax credits were generated. However, since the certification was not received until April, this amount was not recognized in the first quarter financial statements and will instead be recognized as other operating income in the second quarter. As of today, we believe that the generated credit has increased to approximately $60 million.

We expect to apply the earned tax credits against our 2009 and 2010 TRS income tax liability. So, we expect to have no cash taxes payable at the TRS, this year or next year. Any excess credit above our tax liability will be realized as a refund in 2010 after filing our 2009 tax return. Because this credit has been subject to so much public and political debate, we are not going to speculate on the ultimate benefit to be generated or the credits' prospects to last through 2009 as the law is currently written.

Now I'd like to update some key statistics to assist you in refining your model for Rayonier. As mentioned last quarter, I'll only be talking about full-year statistics and guidance, given the variability in timing around our timber and non-strategic timberland sales and the overall volatility in the financial markets. Further, please note that this guidance does not include any benefit from the alternative fuel credit.

We expect depreciation, depletion and amortization of $156 million and the non-cash cost basis of land sold of $11 million or approximately $167 million in total. This is $16 million below previous guidance, driven primarily by lower depletion due to the reduced harvest levels and a mix change within non-strategic timberland sales.

Capital expenditures, excluding acquisitions, are expected to range between $85 million and $88 million. $10 million below previous guidance as we work to conserve capital.

We expect interest expense, net of interest income of about $50 million versus $49 million in 2008. Both of these amounts reflect the new accounting for convertible debt as previously noted.

Finally, our effective tax rate is expected to range between 18% and 20%, which is above our prior guidance and the 2008 effective rate of 11%. This reflects the increase in the mix of income of our TRS businesses, after the planned volume reductions in timber. When you put all these elements together, we continue to anticipate strong cash flow despite the adverse conditions facing our timber business. We are still comfortable with guidance provided in the last call, of EBITDA of about 10% to 15% below 2008 and EPS 20% to 25% below 2008. However, we expect CAD to improve and to be only slightly below 2008 and well above our current dividend of $2.00 per share.

Let me turn it back to Lee for some summary comments.

Let me conclude here by saying that we believe we will perform well in 2009 in spite of the challenging economic conditions. In Timber, in response to the soft market we anticipate reducing harvest volumes and plan to let our high value timber grow until market conditions improve.

In Real Estate, we anticipate ongoing demand for our non-strategic timberlands, and are encouraged by the interest we are seeing in our rural and conservation markets. Additionally as Charlie noted, we continue to make good progress towards entitling our development properties in Florida and Georgia.

Our Performance Fibers earnings are expected to be comparable to 2008, as increased cellulose specialties prices are offset by declining absorbent material prices and higher caustic costs.

Overall, I believe with our diverse business mix, prudent management of cost, conservative debt levels, we are well positioned to continue to perform well in 2009 and build shareholder value for the long-term. With that I'd like to close the formal part of the presentation, turn the teleconference back to the conference Operator for questions from the audience.

Your first question comes from Peter Ruschmeier of Barclays Capital. Your line is open.

Good afternoon.

Good afternoon.

Couple of questions. I was curious in the specialty pulp area. I understand there were some reversals perhaps, of the surcharges from last year. Has that completely been reversed or is there some potential that could continue even further in future quarters?

Paul, do you want to catch that.

Peter, I think we commented it is our plan as we look at falling costs to go ahead and return some of that surcharge that we had last year, this year. But other than that I don't think I could comment on anything more specifically.

Okay. And the fluff pulp price for the quarter was a little higher than I thought. I'm curious if you can comment on recent trends or maybe where prices today might be relative to the first quarter average?

Yes. I think we still see in the marketplace, you see fluff spot pulp prices at the bottom and I think what you see is some of the contracted volume and prices with that gravitating in that direction. So, we do anticipate through the course of the year some decline in fluff pulp prices.

Okay. I guess also related to the pulp business, correct me if I'm wrong, but the credits that you can apply for and receive are from the pulp business. I'm curious if you can help us on how much wood fluff pulp consumes per ton of output relative to the dissolving? I'm understanding that dissolving is quite a bit more.

I'm sorry, Peter, can you repeat the question?

I'm trying to understand how many tons of green wood do you consume per ton of dissolving pulp relative to green tons consumed per ton of fluff pulp?

In our Cellulose Specialties side of the business, we may use up to 6 green tons per ton of pulp and if you look at fluff pulp, it would be somewhat less than that. 4 to 5.

All right. Very good. Just lastly, maybe shifting to the Timber business I think you mentioned the Western harvest about 40% to 45% below normal levels. I'm curious if you share the same figure for the South?

Peter, it is Tim Brannon. Actually, in the South, we expect to be off modestly from last year. At least at this point. As I mentioned, we are watching the commodity pulp market closely and seeing what may happen there. But at this point, we will be down from last year modestly, but intend -- because of the amount of thinnings we have been able to do about 78% of our harvest of the first quarter in pulpwood, which has been positive for us so we have continued to supply that market.

Tim, but if you broke that down and just looked at the saw timber piece, it would be down substantially.

The saw timber portion of it would be down substantially, right.

We are normally about a 50/50 mix in a normal pricing environment.

We are running more like a 75/25 mix.

Correct.

Very helpful. Good quarter. I will turn it over. Thanks, guys.

Thanks, Peter.

Your next question comes from Christopher Chun Deutsche Bank. Your line is open.

Thanks. Good afternoon, guys.

Hello, Chris.

First of all, I had a couple of questions on the Performance Fibers business. Congratulations on the good performance in there, by the way.

Thank you.

Can you tell us where the caustic costs are now compared to the 1Q average?

As commented, Q1 came in as anticipated and if we annualize Q1 relative to Q1 prior year we would be up in the $80 million mark. Right now, we are certainly sitting below that and we anticipate that to be the case and continuing throughout the course of the year. As far as nailing down that number, I think I'm a little bit reluctant at this time.

Could you give us an order of magnitude, though. If caustic costs remain similar to where they are now will that $80 million number turn into $60 million or $40 million?

I think, Chris, it may be best if you look at overall cash costs and we have commented on this in the past and we thought we would be well into the double digits for the year. Right now as we look at it, we are hopeful to be in the single digits for the balance of the year. But again, it is a little bit premature to pin that down.

One of the things on caustic I think that makes it difficult to say, we were coming off of these contracts that ended, in addition to contracted volume going forward, we are also buying on the spot market, so to some extent it depends on how much and for how long we are able to find product on the spot market.

Right. So before this year you were on contract and now are you all on spot or do you have some contracts?

We actually had some on spot at the end of last year. Most was on contract, but that spot was very, very high. This year we are on both contract, but also more on spot and what we are finding is with imports coming in particularly from Asia, at spot is giving us a benefit.

Okay, that's fair. Can you tell us, let's say per ton of pulp output how much caustic you use?

I don't think that's a number we are going to put out there, Chris. Sorry.

Okay. That's all right. I'm going to keep asking, though.

Fair enough.

And then in terms of pricing. Obviously, we see that the industry prices published on fluff. Is that consistent with what you guys realize on a quarterly basis or is there some lag involved?

Yes, the first quarter pricing for Cellulose Specialties when compared to -- oh, I'm sorry, fluff. Yes, there is a bit of lag to what you see out there in the marketplace and a lot of our contracts are constructed in such a way that you're going to see a couple to three-month type of lag to the market.

Okay. And then switching gears to the Timber side. Tim, I was just wondering if you could tell us what percent of your Northwest sales now are in the export market.

Chris, it is in the, say 7%, maybe as high as 10%. But, let me just be clear. We don't export directly. This is sales that we make to others who then put it over the wharf. So as I say, it is a relatively small amount, but I'd say in this market any glimmer of hope is a good thing. So, we are pleased that at least it is firm. It is not robust, but it is at least firm.

Right. Then are you on a stumpage model out there or delivered logs?

We do both.

How much difference is there in terms of your costs to deliver to, let's say, a port versus a typical lumber producer within the region?

It's not necessarily a large amount, but even having said that, we are by in large we are supplying to folks who may be consolidating wood at a given spot, in some cases we may be delivering to the port, but there is not a great deal of difference between the type of delivery in terms of the costs from the forest to that point.

Okay. And then do you know which countries the logs go into?

Into Asian countries.

Can you be specific whether it is China, Japan or other countries?

Typically the wood that we are selling is going into Korea.

And what species is that?

Hemlock.

Hemlock. Okay. And then finally on the Real Estate side. You mentioned that you are really not seeing evidence of price erosion, but the realizations on the non-strategic side are going to be a bit lower. Can you give us some more color on what the land attributes that are causing that?

Sure, Chris. This is Charlie. What we said was that timberland prices were resilient. We believe we had record high timberland prices in 2007 and particularly in 2008 and we have come off that some, but the change in price, say, from third, fourth quarter of 2008 to 2009 is due some to market, but also some property attributes. We do think the market has come down a bit, but it is certainly off record high prices.

Okay, that's fair. So, it wasn't just on the HBU, the recreational HBU side, that you said that you are not seeing any erosion?

That's correct. On the timberland side we are thinking maybe there has been a 10% move on price, but that's about all we have seen.

Okay. That's fair. Thanks for your help, guys.

Your next question comes from Claudia Hueston, JPMorgan. Your line is open.

Hi. Thanks very much. Just on the Real Estate side, I was hoping maybe you could just provide a little bit of color on the kinds of -- the types of buyers or interested persons who are sort of looking at land right now and looking at your assets?

Sure. Certainly on the timberland side, it is predominantly TIMOs. It is not exclusively. On the Real Estate side it really -- excuse me. On the Rural Land side, as always it is a real mix of adjoining landowners as buyers. We are starting to see some buyers that had gotten out of the market the last six or nine months because of credit slowly moving back in. And we are starting to see a slight pickup in interest from Conservation.

Thanks. That's really helpful. Lee, I don't know if you just wanted to maybe address priorities for cash particularly. You had a good quarter this quarter and now with the fuel credit cash coming through as well, how are you thinking about cash going forward? Thanks.

Claudia, even without the fuel credit, as Hans indicated, we feel like we have got good cash available for distribution this year. Probably just slightly below last year. Obviously, the dividend is a very important part of our cash distribution. Maintaining our facilities as far as capital is concerned. Ensuring that we keep our debt conservative and as Hans mentioned, we have got a note coming due the end of this year and we intend to use some of our available cash to pay down that note, at least partially pay it down, if not totally pay it down. Depending on what kind of cash we have got available. Those are the kind of things we will look at this year in terms of priorities.

Okay. And so I noticed, it didn't sound like acquisitions were on that list at this point, so it is really more sort of a year of just cash generation and debt pay-down?

I think those are the priorities, although I would not rule out acquisitions. I mean, as Charlie indicated we have seen a little reduction in timberland prices from last year. Not a large one, but if we see a good opportunity, we would still take a look at potential acquisition. We are always looking at the same time, we are talking to people about buying our properties.

Okay. Thank you very much.

Your next question comes from Mark Weintraub of Buckingham Research. Your line is open.

Thank you. I just want to make sure I was doing my math right here. On the black liquor credit, it seems that it is running at $20 million a month now. Is that right? So for the eight months yet to come can we just take the $20 million and times it by 8 and get a ballpark type of number?

Mark, we are just really not going to speculate on anything going forward. It is just too much uncertainty about all of that.

Okay. Can you just confirm that that $20 million for the month of April is what was indicated in the Q. Is that correct?

That is correct.

Okay. Great. Then you also said on the call -- I just wanted to make sure I understood it -- that you would -- the way you would use the credits would be as a tax credit? So, it would be essentially -- it would be offsetting taxes you would be paying or would it be a credit that you would then have to pay taxes on? I just wasn't fully clear whether or not the credits the way you were going to handle them would be taxable or not.

Well, Mark, it is Hans. I did say that our intent right now would be to apply it as an offset to taxes that TRS would otherwise have to pay. And so our understanding is that we would apply it to the 2009 payments and 2010 payments until the 2009 tax return was filed. That's what our intent is now given what we know today.

Okay. And then just shifting gears quickly on the New Zealand business, you've just mentioned you were in negotiations with several interested parties. Is there any more color that you can provide? I know it is on the books at about $45 million or so. Is that order of magnitude? And I realize you're not going to want to get specific, but some timberlands sometimes are on the books at magnitudes below what they might be worth. Has that been adjusted to approximate the value or can we not really pay any attention to what it's on the books at and try to assess its value?

I think that latter statement is more accurate, Mark. It is just on an historical basis, so it hasn't been adjusted in any form or fashion to a market per se. Something like that.

Okay, thanks very much.

Sure.

(Operator Instructions) Your next question comes from Steve Chercover. D.A. Davidson. Your line is open.

Thanks. Most of my questions have been already responded to. Do you have any 1031 exchanges you are compelled to try to offset this year?

No, we really don't have anything that we are compelled to offset. As we look at our -- the sales, we always evaluate whether it makes sense to try to match it up or not. But, we really don't have anything compelling it.

Okay. Thank you.

At this time there are no further questions.

All right. Well, I would like to thank everybody for listening in and please contact Carl Kraus if you have any follow-up questions.

Thanks a lot.

This does conclude today's conference. Thank you for attending. You may disconnect at this time.