Rayonier Inc (RYN) 2009 Q3 法說會逐字稿

Welcome and thank you for joining Rayonier's third quarter analyst teleconference call.

At this time, all participants are in a listen-only mode. (Operator Instructions) Today's conference is being recorded.

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 third quarter earnings. Our earnings statements and presentation 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 federal securities laws. Our earnings release, as well as our Form 10K filed with the SEC list some of the factors which may cause actual results to differ materially from the forward-looking statements we may make. They're also referenced to page two of our presentation material.

With that, let's start our teleconference with opening comments from Lee Thomas, Chairman, President, and CEO. Lee?

Thanks, Hans. I will make a few overall comments and then Hans will take you through the financials. After which Tim Brannon, Senior Vice President, Forest Resources; Charlie Margiotta, Senior Vice President and head of our real estate business; and Paul Boynton, Senior Vice President, Performance Fibers and Wood Products will review those business segments.

Overall, we generated solid cash flows in the third quarter. The strength of our Performance Fibers segment and steady interest in our rural properties, continue to help offset the impact of the housing market on our timber business. In Performance Fibers, we saw strong demand for our cellulose specialties products and lower cost. These were partially offset by lower prices compared to the second quarter as we removed the cost driven surcharge imposed last year.

In real estate, we recorded a 7,000 acre conservation sale to the Georgia Department of Natural Resources. Although we remain focused on divesting nonstrategic timberlands, sales will be completed only if they meet our value expectations. In timber, we continue to operate at reduced sawtimber harvesting levels, and are focused on meeting pulpwood demand and cost cutting efforts. Additionally in the third quarter, we continued to strengthen our balance sheet by successfully issuing $173 million of six year 4.5% exchangeable notes. We have a strong balance sheet, ample liquidity, and are well-positioned for growth opportunities that we may see.

Now with that, let me turn it over to Hans for a review of the financials.

Let's start on page three with the overall financial highlights.

As Lee noted, we had a solid third quarter. Sales totaled $301 million while operating income totaled $111 million, and net income was $81 million or $1.01 per share. Note that these results include the benefit of the alternative fuel mixture credit, which increased third quarter operating income by $56 million and net income by $49 million or $0.61 per share. Without this benefit, operating income was $55 million and net income was $32 million or $0.40 per share. These proforma amounts will be used for the comparisons throughout this call.

On the bottom of page three, we provide an outline of cash resources and liquidity. Our year-to-date cash flow remained relatively strong with adjusted EBITDA of $280 million and cash available for distribution of $163 million. Our debt is now $810 million, reflecting the August issuance of 173 million of six year exchangeable notes.

Simultaneously with this issuance, we entered into hedge and warrant transactions, which effectively increased the conversion premium such that no dilution will occur unless our stock price exceeds $60 a share. The bulk of these proceeds will be used to pay off $122 million note maturing at year end. We ended the quarter with approximately $153 million in cash. So on a net debt basis, we finished at [$657 million] (corrected by company after the call). Let's now run through the variance analyses.

On page four we prepare our typical sequential quarterly variance analysis. In timber, operating income increased slightly primarily due to price improvement in both the eastern and western regions. Real estate income decreased $11 million due primarily to fewer non-strategic timberland acres sold, partially offset by an increase in rural acres sold.

Moving to Performance Fibers, you can see a price decline, which was primarily in Cellulose Specialties. As previously discussed, this reflects the removal of a cost based surcharge implemented in September of 2008. Our costs have declined, as indicated here, so the surcharge has been removed. We also had improved volumes as expected as orders rebounded from the prior quarter when customers were reducing inventories.

Let's now move to page five and the year-over-year variances. The third quarter and year-to-date variances to last year generally reflect similar drivers. Our timber results reflect softening prices and the mix of lower sawlog volumes versus pulpwood. We're able to offset some of this negative impact through reduced costs. The real estate results were comparable with some variability due to mix. In Performance Fibers, Cellulose Specialties prices improved as expected but results were still adversely affected by lower Cellulose Specialties volumes, higher production costs and reduced absorbant material prices.

Turn now to page six. 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. Our cash flow remains strong with CAD of $163 million, comparable to last year, and well above our dividend requirement.

Turning now to page seven. We prepared a debt maturity schedule which reflects the $173 million of six year exchangeable notes mentioned earlier. Our $250 million revolving credit facility has $245 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 provides significant liquidity which positions us well to take advantage of future growth opportunities.

With that, let me turn the conference over to Tim Brannon to cover Forest Resources.

Thanks, Hans.

On page nine, you will notice that prices for our western timber increased about 10% in the third quarter off of a second quarter low. In our markets, sources of lower priced timber have been nearly exhausted and supply has tightened modestly. We continue to hold much of our high value sawtimber off of the market as we wait for housing to recover. Year-to-date our volume is down 32% from 2008 and 40% to 50% below the rate we would expect to harvest under more normal housing market conditions.

We estimate that in 2008 and 2009, we have deferred about 215 million board feet of timber or over $65 million at 2007 stumpage prices. In the fourth quarter, we expect prices to remain at the cyclical lows; and therefore, will continue our strategy of withholding volume. 2009 volume is forecast to be about 33% below 2008.

In the east, on page 10 pricing appears to have bottomed. The good news is that during the third quarter, pine sawtimber markets remained stable in the south; while pulpwood demand continued to be strong. Our emphasis on pulpwood harvest, and thinnings continued with pulpwood representing a mix of over 80% of our pine harvest. Our more normal mix would be about 50% pulpwood.

We estimate that for the years 2008 and 2009, we will have preserved as much as 1.3 million tons of pine sawtimber for future harvest when markets recover. At 2007 stumpage prices, this conservatively represents over $30 million of deferred revenue. In the fourth quarter, we will continue to restrict our harvest of sawtimber while overall we expect prices to rise modestly as we head into the winter. 2009 pine harvest is forecast to be about 8% below that of 2008.

With that, let me turn it over to Charlie Margiotta to review our real estate business.

Thanks, Tim.

Since last call we have noticed an element of caution among some timberland buyers; and as a result, we have moderated our outlook for the remainder of the year for nonstrategic timberland sales. Transactions will be completed if we can achieve our value expectation. Otherwise, we will wait until the market sentiment improves.

Page 11 details the rural acres sold. During the third quarter, a 7,000 acre conservation sale was completed with the Georgia Department of Natural Resources. The property is a hardwood flood plain in southeast Georgia, and is another example of our history of working with public and private conservation groups. The balance of the sales were smaller transactions in Florida, Georgia, Alabama, and Texas. We view our rural land sales market as very stable and improving somewhat as the overall economy strengthens.

Page 12 highlights the per acre prices. The third quarter was dominated by the 7,000 acre sale to Georgia DNR at slightly over $1,700 per acre. Page 13 describes the nonstrategic timberland sales. Except for some small sales in the southeast, the third quarter results were driven by 2,300 acre sale in Washington State to the DNR for $2,900 per acre.

The property essentially contained 100% mid-rotation pre-merchantable timber. While we continue to discuss additional nonstrategic sales with potential buyers, the outcome is difficult to predict. However, given the strength of our balance sheet and cash flow generation across the Company, we have the financial flexibility to wait for transactions that meet our return expectations.

With that let me turn it over to Paul.

Thanks, Charlie.

Performance Fibers' results were solid for the third quarter. On page 14, you see net selling prices for our two Performance Fibers product lines. As we mentioned previously, our Cellulose Specialties business typically has fixed annual prices under multi-year contracts. However, in September 2008 we made an exception and asked our customers to support a price surcharge due to rapidly escalating costs.

Now, with these costs returning to more normal levels, we are effectively giving back last year's surcharge that was built into our 2009 price increases. As a result, Cellulose Specialties prices declined $69 a ton or 5% from the previous quarter and will decrease approximately another $24 a ton in the fourth quarter. As we look at the full year, Cellulose Specialties year to year annual price increase should average between 12% and 13%.

Moving to absorbent materials, which consists principally of fluff pulp, prices declined $16 a ton or 3% sequentially and $147 a ton or about 19% below same quarter prior year. We believe third quarter prices are at the bottom of the market as we have recently seen prices turn upward.

As a result, prices should improve approximately 3% in the fourth quarter. For the full year, we project price declines for absorbent materials of roughly 15% compared to 2008. Moving on to page 15 and looking at volumes, you can see our third quarter Cellulose Specialties sales were up significantly compared to prior quarter as demand normalized as customers' destocking efforts were largely completed in the first half of the year.

For the fourth quarter, we expect volume to be 15% to 20% higher resulting in full year Cellulose Specialties sales volumes comparable to slightly below 2008. Absorbent material volume of 68,000 tons increased 4% from prior quarter. We expect total year sales volume of absorbent materials to be about 9% above prior year.

In summary, Performance Fibers third quarter results were strong driven by higher Cellulose Specialties volumes and reduced raw material costs, principally caustic, partially offset by lower selling prices. Due to solid global demand for our Cellulose Specialties products and costs moving towards trend line, we will generate full year operating income well above 2008.

And as we focus on our Cellulose Specialties customer contracts, we are pleased with the significant progress with our key customers regarding the extension of agreements into 2013. While the agreements have not been finalized, we are confident in the stability of the business further into the future through the certainty of volume these contracts provide.

With that let me turn it back over to Hans.

Thanks, Paul.

Through the third quarter, the alternative fuel mixture credit totaled $142 million, of which $56 million was generated in the third quarter. We expect a comparable amount to be generated in the fourth quarter. We're claiming the alternative fuel mixture credit as a refundable income tax credit, which will offset our 2009 TRS income tax liability. So we expect to have no federal cash tax liability of TRS this year.

Through September 30th, we had applied about $12 million against estimated tax payments, and we expect to apply about another $9 million by year end. The excess credit, above our 2009 tax liability, will then be realized as a refund in 2010 after filing our 2009 tax return. Assuming the credit extends through the end of this year, we'd expect our refund to next year to be in the $170 million to $180 million range.

Now, I would like to update some key statistics to assist you in refining your model. This guidance does not include any benefit from the alternative fuel mixture credit.

First, we expect depreciation, depletion, and amortization of $155 million; and the non-cash cost basis of land sold of $8 million or about $163 million in total. This is $5 million above previous guidance driven primarily by higher depletion. Capital expenditures, excluding acquisitions, are expected to total about $90 million. We expect interest expense, net of interest income, of about $51 million versus $48 million in 2008.

Finally, our effective tax rate is expected to approximate 22%, slightly above our prior guidance. 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 and the likely absence of a significant nonstrategic timberland sale in the fourth quarter. We expect EBITDA 10% below 2008, but the CAD should be comparable to last year reflecting reduced capital expenditures and lower cash taxes. Finally, we expect EPS to be about 20% below 2008.

Now let me turn it back to Lee for some closing comments.

With improving market conditions during the third quarter, the U.S. economy is beginning to recover from the worst recession any of us have experienced. In addition, we're seeing stronger global demand for products particularly from China. Also, credit markets continue to improve and we took advantage of these favorable conditions with our successful exchangeable note offering.

As a result, our balance sheet is stronger than ever, and we have excellent liquidity. I feel our businesses are performing as expected with signs of improvement as the economy recovers. In real estate, there's a steady demand for our rural properties and good progress on entitling our development projects. We continue to have interest in nonstrategic timberland; however, we'll remain disciplined and sell only those properties where we realize attractive returns.

In forest resources, we're encouraged by signs that the housing market has troughed; but expect that housing will recover gradually over the next several years; therefore, we'll continue to hold off harvesting our high valued sawtimber until prices improve. In Performance Fibers we're making good progress with our customers working to extend their volume contracts; while at the same time, we continue our focus on improving productivity and driving down cost.

Finally, we'll continue in our efforts to look for timberland acquisitions which meet our strategic and financial criteria. In short, our unique business mix, strong balance sheet, and ample liquidity provide significant operating flexibility and position us well for growth opportunities in the future.

And with that, let me turn it over to the operator and let's see what questions we have.

Okay. Our first questions, Claudia Hueston with JPMorgan. Your line is open.

Hi. Thanks very much. Good afternoon.

Hello, Claudia.

We've heard from a number of companies, both on the timber side and the manufacturing side that weather issues are starting to get more significant in the south. I just wondered if that's affecting you at this point, and how you've thought about that in terms of your fourth quarter outlook?

Well, it will affect us somewhat as far as timber prices are concerned; and, Tim, you may want to just comment on whether we have seen much impact.

Right. In the western--in Texas, Oklahoma, even some in Alabama, we have seen some impact of the rains there.

That's, of course--when that happens in the short-term, that has some impact on our ability to harvest; but by the same token in Georgia, Florida, that area, it has not been nearly as severe; so frankly, we're not anticipating a big impact from the rains. We are looking at holding--continuing to hold our sawtimber off the market, so some of that is a bit self-imposed, but--not a terrific amount of impact from the weather.

Okay. That's helpful.

And then I was just wondering if you could maybe just provide a little bit of color on how you see this BCAP program unfolding and if you have given any thought to how Rayonier might be in a position to benefit from that program?

Claudia, we have taken a look at it. It is still very early in the regulatory process. Know that the regulations are still in the formulation stage. We have taken a look at what was available. We see the potential for benefit both on our Forest Resource and manufacturing side, but that's really all dependent on how those regulations come out. It is just real early in the process to speculate on what it may mean for us at this point.

Okay. Thank you.

Chip Dillon with Credit Suisse. Your line is open.

Yes. Good afternoon.

Hello, Chip.

Just a couple of clarifications.

I think you gave us the absorbent volumes should be up about 9% this year. What about the specialties?

Chip, this is Paul.

We said Specialty should be comparable if not slightly down.

Okay.

And then you mentioned something about getting a contract extended to 2013. I thought you already had some pretty long-term contracts. Could you just refresh our memories?

Sure, Chip. Again, Paul.

We put these contracts in place and most of them were written into the five year timeframe roughly, some longer, some a little bit shorter; but on average five years. Now, after several years, since those have been originated, we're going back out and working with our customers to extend those another couple of years. So essentially from this point forward we're looking at four years or more from this timeframe.

Most of them. A lot went into 2011.

Most of them went into 2011, and now we're looking at them into 2013.

Time does fly. That makes perfect sense.

When you look at the black liquor credits, just one maybe Hans could answer this. On the front of the press release, you mentioned that the net benefits say, for example, $49 million for the three months but then on the footnotes there's sort of a pre-tax benefit of 55.8. What accounts for that $6.8 million difference? Is there some tax impact that goes along with this?

Yes. Although we believe the credit is going to be nontaxable, we are providing about a 10% or so FIN48 tax liability on the credit, so that's the delta that you're seeing there, Chip.

Was that federal or state?

That would be for federal.

Just so there's a chance--obviously this is not definitive, but there is a chance you could end up reversing those tax accruals, right?

Correct.

Okay. Got you.

And then could you just give us a look, one last question on the real estate business. Did you give us a sort of a feel for what you thought you could do in the fourth quarter and actually two of your competitors have said that the appetite for rural land sales has actually stayed quite good despite the recession and that they're even seeing more inquiry; is that your experience as well?

It is. We've continued to have a good steady rural lands program; and as a matter of fact, I think as the economy has continued to improve a little, we have seen that pick up a little.

Got you. Then in terms of the fourth quarter?

On the rural side we really don't see anything different, a good continued steady business. We don't see any reason why it should change.

Okay, but you're not in a position to give us a revenue guesstimate or range that we could assume for the fourth quarter in terms of the overall real estate segment?

Not really, Chip. The real estate business is largely dependent on when properties close; and it is always been pretty lumpy, so we have not done that.

Okay.

And the very last question, on the earnings per share, I know you did--this is your second convert situation that you have done where you have a very high effective strike price. I believe, isn't it fair to say the rules are you really don't take those potential shares into account unless the stock actually gets into that range?

That's right. They'll have to be into the money at that point before you start to have any EPS dilution.

Got you. Thank you very much.

Okay.

Mark Weintraub with Buckingham Research Group. Your line is open.

Thank you.

First, can you give us a sense in terms of pricing for the chemical cellulose as to how those look to be panning out for 2010?

We really haven't given any guidance at this point for 2010. I think that would probably be the next call.

Okay.

Also you had mentioned that you essentially put yourself in a good position to have flexibility to take advantage of opportunities with your balance sheet, etc. Where do you see yourself right now? Given where current markets are, for timberlands, do you view yourself as more of a buyer or seller or how would you respond to that?

Mark, we're continuing to look at properties as they come on the market. We have taken a hard look at some properties. We have not gone forward on buying any of the ones we've looked at. So I guess I would have to say we're still certainly selling more than we're buying, since we really haven't bought in about the last year and a half to two years; but my sense is we may well see more opportunities, particularly as we look over into 2010 to acquire some more properties.

And is that a function that you think there will just be more liquidity or more available; or is it that you think that it will also be at potentially more attractive returns for you?

I think it may be more attractive returns for us.

Okay.

And then lastly, I realize BCAP is in a preliminary stage, etc. Have many of those facility, which you supply wood, are they getting registered?

They are. We see a number of them getting registered, and we see others that are in the midst of the registration process.

And can you give us any sense as to what percentage of your harvest might be covered in the BCAP program?

I don't think we can at this point; can we, Tim?

Not really, Mark. Of course, the problem that we've had is we still just don't know what the new rules are going to be. And we're expecting to see a draft of that, I think it is supposed to come out on Friday or maybe early next week; and then goes for public comment and then it is January, I think, before they finally are going to have them finalized. As a result, it is still just awfully early to know what's going to be--what's going to qualify and what's not in terms of non-material we might supply.

I guess it would be safe to say that most companies are pretty active in the registration process, anticipating that they may be covered. So I think an awful lot of people are going at it from that point of view.

Okay. That's real helpful.

Is sounds like though, by January or sometime early next year that's when there may be more visibility on what this could mean for you or would there be steps beyond what you said that would be necessary before you would have real visibility?

No. I think we'll have good visibility once those rules are final. We're keeping up with the process, our people are very active, both on the timber side and the manufacturing side about what the potential may be. So I think as the rules become more final, we'll clearly know what it means to us. And we're interacting with all of our customers as well, so we know where they stand in the process.

Thank you, Lee.

Yes.

Peter Ruschmeier, Barclays Capital. Your line is open.

Thanks. Good afternoon.

Hi, Pete.

A couple of questions.

I am curious, maybe a question for Paul on the Cellulose Specialties. Are you capacity constrained at all in the business; and curious if you have any plans for debottlenecking going forward?

Pete, we are currently capacity constrained. We've done a real good job, the team has, over the last ten years of debottlenecking the Cellulose Specialty side of our business and allowing for more capacity. But I would say we're probably close to our limit and I think we would have to see some capital go in potentially if we wanted any kind of incremental volume above what we do today.

Okay.

And I guess related question would be, do you have any preliminary CapEx guidance for 2010; and is there anything note worthy for Cellulose Specialty?

Really haven't done that. We'll do that on our next call. We are taking a look at a variety of things as we look at 2010, but I think it is too early for us to give you guidance on that.

Okay.

And, Lee, I guess I would be curious as you look for 2010 potentially to be opportunistic on acquiring timberlands. I am curious if you can help to us better understand a framework with how you think about it? Are there limitations in terms of size of transaction, or debt capacity, are there different metrics that you can help us to better understand as to how you think about what size you might limit yourself to?

Well, I think overall we have always said that we're going to maintain our investment grade rating. So as far as debt capacity is concerned we're not going to do anything that would jeopardize that. We have been investment grade since we were a public company, and intend to continue to be that. We think that's an important part of our value proposition.

So in that regard, that certainly has some limitations. On the other hand, we look at property and we look at where it is located, particularly as it relates to our current property. I will tell you we're probably biased toward the U.S. as opposed to outside the U.S. We have looked outside the U.S. We still feel like within the U.S. we see good returns when we look at potential sales.

We also look from a geographic point of view as to what the markets actually not only are today, but may be in the future. An example would be bioenergy. Which of those markets may develop more strongly and what may that mean to a particular piece of property we're looking at in addition to existing mills that may draw on that property? We always look at what kind of HBU potential there is in the property; and finally, obviously, we always look at the return on the property. So those are the kind of things we look at.

Okay. That's helpful.

And maybe just a last one, a quick one if I could. You've indicated how much timber you've deferred, which is very helpful. I'm curious to the extent you can quantify I would imagine there has also been an adverse mix shift as well, with perhaps more pulpwood, less sawtimber. Is thee anyway to quantify how much you have been impacted by a weaker mix shift on pricing related to what you're selling?

Well, clearly there has been a significant mix shift in what we're selling. I mean, I think last quarter in the east we were at about 80%, 82% pulpwood. Typically we would be at 50%.

Right.

So there is a big mix shift, and the same was true in the west, where we don't sell that much pulpwood, but I think we were at 25% to 30%.

We were at least in the 20%.

Pete, I think to your question that we haven't really quantified the financial impact of that mix shift, we might be able to take a look at that, and get back to you on that.

Okay. It is very helpful. Thanks. I will turn it over.

Steve Chercover from D.A. Davidson. Your line is open.

Thank you.

I think Paul anticipated some of my questions, but I just wanted to clarify. If fluff is going to be 9% higher this year and Specialties will be a wee bit down, overall volumes are going to be higher yet again; is that correct?

That's correct. Overall volumes year to year will be up a couple percent, Steve.

Okay.

And there is uncoated free sheet producer that's converting to fluff over the next year or two. Will the market be able to absorb that, no pun intended?

My guess is yes, the market is growing, it is a 4.7 million -ton market growing 3% or 4% a year. My guess is they will phase that volume into the marketplace, and my guess is over time it will again, no pun intended, absorb it just fine.

Great.

And switching gears a little bit, it looks like there has been some subtle restatements of your 2008 results. Was that associated with New Zealand or can you help me with that?

That's exactly what it was, Steve. It was--when we went to sell it we took New Zealand to disc ops; and when we terminated that selling process this year, we had to bring New Zealand back into continuing ops. And I think the other element was related to the convertible debt where there was a change in the rules, and effectively you had to--we have to now accrue interest expense based on the basis of what a straight debt interest cost would have been; which effectively I think decreased our EPS by about $0.06 a share or so. So those would be the two elements that are impacting '08 versus what you may have seen previously.

That's helpful.

My last question is you told us basically EPS 20% lower, so we should use that $1.87 as the base?

Absolutely. That's right.

Thank you very much.

Okay.

Mike Roxland with Banc of America-Merrill Lynch. Your line is open.

Thanks very much. Good afternoon, guys.

Hey, Mike.

Just a quick question on Performance Fibers. Recently cost bounced off of its lows and want to get more color on you from where you see caustic trending and what the potential impact could be in 4Q?

I think you're right, caustic kind of come back down obviously significantly from the beginning of the year. We see it moving back up in the fourth quarter as offshore supply tightens a little bit and some of the players, some of the producers take some market down time. So we see it going up into the fourth quarter, and I don't know the range of that. If you look out, the industry numbers would say it is in 15% to 30% range as far as increase; but so overall we have that factored into everything that we have already talked to you about.

Got you. What about a little more color on the demand trends from Asia China? I think Lee mentioned earlier on it is holding up pretty well. What are you seeing from China at this point?

On the performance fibers side of the business we certainly see continued strong demand from China. Customers existing as well as some new customers going into that region of the world.

We have seen the same thing in terms of our log exports out of New Zealand. China, over the course of the last year, has really surpassed south Korea to some extent in terms of volume, and I think as they moved maybe to a more diverse supplier from their Russian logs that they have always imported. So we're seeing a good bit more business out of New Zealand into China.

Got you. Just last question, in terms of interest expense, given that you intend to pay off the installment note in December, how should we think about interest expense in 2010?

We should definitely be favorable absent any significant timberland acquisition. But we'll come out in the January call, Mike, and narrow that down for you guys a little better on where we see a full year expense.

Got you. Thanks very much. Good luck in the quarter.

Thanks.

(Operator Instructions)

I am showing no other audio questions at this time.

Okay. Well, thank you very much. We'll look forward to talking to you at the end of next quarter.

This does conclude our conference for today. All parties may disconnect at this time. Thank you.