Rayonier Inc (RYN) 2010 Q1 法說會逐字稿

Welcome and thank you for joining Rayonier's first quarter 2010 conference call. (Operator Instructions). Today's conference is being recorded. If anyone has any objections, you may disconnect at this time. Now I turn the call over to Mr. Hans Vanden Noort, CFO, sir you may begin.

Good morning. Welcome to Rayonier's investor teleconference covering first quarter earning. Our earning statements and presentation materials were released this morning and are available on our website at www.rayonier.com. I'd like to remind you that in these presentations we include forward-looking statements made pursuant to the Safe Harbor Provisions and SEC/Federal security laws. Our earnings release along with Form 10-K filed with SEC list factors which may cause results to differ materially from forward-looking statements we make, and they are also listed on page 2 of our presentation material. With that, let's start with opening comments from Lee Thomas, Chairman, President and CEO, Lee?

Thanks, Hans. I'll make a few comments before turning it back over to Hans to review our financial results, then ask Paul Boynton, Executive Vice President from Forest Resources and Real Estate to comment on our timber results. Following our timber results we will then ask Charlie Margiotta, our SVP of Real Estate will discuss the results of that segment and Jack Kriesel SVP for Performance Fibers to take us through that business. We were pleased to report pro forma earnings $0.56 in the first quarter. The highest level since the third quarter of 2007 with solid results from each of our three core businesses. Importantly strong operating cash flows drove cash available for distribution to $0.96 a share significantly above our dividend of $0.50. These results reflect action we've taken to create value in an economy beginning to show signs of a broadening recovery. In timber, we accelerated our planned harvest levels to take advantage of prices created by supply demand imbalances. We believe the markets will come back into balance in the next months, but look for prices to moderate above levels of a year ago. While these difficult conditions forced some pulp mills to import fiber or to curtail production, we were able to source the wood we needed to run our performance fibers mills at full capacity. We see increasing strength in our global markets, driving demand for both our cellulose products and absorbent materials. In real estate, we sold nearly 24,000 -acres of non strategic timberland at attractive returns. We are seeing steady interest today and heard reports of TIMO's raising new capital to invest. Our results demonstrate the ongoing benefits of our balanced business mix and disciplined approach to creating value. We are encouraged by these results and expect to exceed our previous guidance which we'll describe in more detail during our call. With that let me turn it over to Hans for a review of the financials.

Let's start on page three of the overall financial highlights. As Lee noted, we had a good first quarter, sales totaled $310 million while operating income totaled $77 million and net income $57 million or $0.71 per share. These results include a gain on sale of a portion of our New Zealand joint-venture which increased first quarter operating income by $12 million or $0.15 per share. Without this benefit operating income was $65 million and net income was $46 million or $0.56 per share. These proforma amounts will be used for these comparisons throughout the call. On the bottom of page three, we provide an outline of financial resources and liquidity. Our Cash Flow was strong with adjustment EBITDA of $110 million and cash available for distribution of $77 million. In March, we borrowed $75 million under a five-year term note so our debt is $762 million, versus $700 million at year end. We ended the quarter with approximately $153 million in cash, so on a net debt basis, we finished at $609 million.

I'll also comment here on a couple of notable events which occurred after quarter end. First Moody's upgraded our debt rating to Baa2-Stable. Second with the receipt of $189 million from the alternative fuel mixture tax credit, our cash balance is over $340 million and net debt down to $420 million, so overall we feel comfortable with our balance sheet. Now I'll run through the variance analysis. On page 4, we prepared a typical sequential quarterly analysis. In timber, operating income increased, driven by price improvement in both the western and eastern regions. Paul will cover the details in his presentation. The negative variance results from lower recreational licenses which are largely recognized in the fourth quarter. In real estate, income increased $13 million due primarily to higher non strategic acres sold. Moving down to performance fibers, you can see price improvement which occurred in both cellulose specialties and fluff, however this improvement was offset by lower cellulose specialty volume due to timing of customer shipments and the scheduled maintenance shutdown. Imput costs were unfavorable due to higher wood and chemical costs.

Cooperate and other expenses were lower than fourth quarter, reflecting better results of trading operations and the insurance settlement. Move now to page 5 in the year-over-year variances. In timber, the $11 million year-over-year improvement was driven by stronger pricing in both regions as well as lower logging and transportation costs. The real estate results in the first quarter improved $3 million, primarily due to non strategic sales. In performance fibers, while operating income increased $4 million overall, cellulose specialties and fluff prices declined. The cellulose specialties decline reflects the removal last year of a cost-based $95/ton surcharge. Our costs have declined as indicated here compared to the first quarter of last year. If we turn to page 6, we reconciled from cash provided by operating activities, which is the GAAP measure to our Non-GAAP metric of cash available for distribution. First quarter cash flow was quite strong with CAD of $76.6 million well above last year and dividend payout of $40 million. With that, let me turn the conference over to Paul Boynton, to cover forest resources.

Thanks, Hans. Overall we are pleased to report operating income of $8.2 million for the first quarter compared to $2.3 million loss for the same period in 2009. On page 8, you will notice that our prices for western timber stumpage increased 15% in the first quarter over fourth quarter and 31% over a year ago. Since a substantial portion of our volume is currently from delivered logs, we have also included the corresponding price trend. In our markets, supply has tightened due to reduced availability of accessible timber and continued strong export demand driven mainly through China. In response, we pulled volume forward into the first quarter. With our coastal Washington timberland locations, which are readily accessible for harvesting, we will continue to capitalize on solid export demand and tight markets by increasing our 2010 volume by approximately 5%-10% above 2009. However, with 2010 prices well below historical levels, we will also continue to defer approximately 30% of our future planned harvest levels to preserve value.

In the east, as shown on page 9, pine prices improved 30% in the first quarter over the prior years' s fourth quarter. This was due to extremely wet weather conditions in the south, combined with strong pulp wood demand and strengthening sawlog markets due to inventory restocking. In response we pulled volume into the first quarter and pre sold the majority of our 2010 stumpage volume at today's higher prices. 2010 pine harvest volumes are forecasted to be somewhat below that of 2009 as thinnings return to more normal levels. Overall operating income should be substantially above 2009. With that, let me turn it over to Charlie Margiotta to review our real estate business.

Thanks, Paul. The real estate business is off to a good start with a solid first quarter. Interest in our land throughout all our operating areas has improved from one year ago, and our expectations are for slow but steady demand side gains. Chart 10 details the rural and development acreage sold. Rural sales were completed in every state where we have ownership. Overall, rural markets were strongest in Alabama and Texas. While rural land sale closings tend to be lumpy, we expect 2010 acres to be above 2009 for this value-added business and weighted to the second half of the year. Chart 11 highlights per acre prices. Rural land prices when you account for geographic mix have been essentially flat for the last four or five quarters.

We have seen some improvement in demand and expect it to translate into better per-acre prices. Non strategic timberland sales are shown on chart 12. First quarter sales were predominantly properties located in Georgia at prices consistent with what we achieved in 2009. We believe there continues to be amble institutional capital available to keep this market competitive. However, we expect to sell somewhat less acres in 2010 as we continue to maintain price discipline. With that, let me turn it over to Jack Kriesel to review our performance fibers business.

Thanks, Charlie. Performance fibers started 2010 with solid first quarter results driven primarily by the strong demand for cellulose specialties and absorbent material products and continued improvement in absorbent material pricing. This is partially offset by higher manufacturing costs during the quarter. On page 13, you see net selling prices for two performance fibers product lines. Cellulose specialty prices increased $60/MT, or 4% from the previous quarter due to 2010 price increases and mix. Compared to the same quarter prior year, quarter one prices were down $29/MT or 2%. However, as Hans stated, this is due to the removal of our cost surcharge late last year. Excluding this surcharge, prices were up $66/MT or 5%. Absorbent material prices, which consist principally of fluff pulp increased from previous quarter $35/MT or 6% as market conditions continue to improve from late last year.

However, prices decreased $42/MT or 6% compared to the same quarter in the prior year. Moving on to page 14 and looking at volumes, our first quarter cellulose specialties sales volume was slightly favorable compared to the same quarter prior year and absorbent material volume of 61,000/MT was slightly unfavorable from the same quarter in the prior year. These volume shifts were largely due to mix optimization to meet demands. During the last teleconference I mentioned the abnormally wet weather could effect fiber costs particularly hardwoods, in the first half of the year. Indeed, we did experience $7 million of higher wood costs in the first quarter compared to the fourth quarter of 2009.

However, manufacturing costs are expected to moderate in the second half of the year. As we look into the second quarter and the balance of the year, we see continued solid demand for our cellulose specialty products. Global demand for fluff pulp continues to be strong and based upon previously announced price increases, we expect absorbent material prices to be significantly higher in the second quarter. In summary, performance fibers is off to a great start with strong market demand and operational performance and we are anticipating a record year of financial results. Now turn it back over to Hans.

Thanks, Jack. Now I'd like to update some of the key statistics to assist you in refining your 2010 model. First of all, we expect depreciation, depletion and amortization of $141 million and the non cash basis of the land sold of $9 million, or approximately $150 million in total. This is $6 million below our prior guidance, that's driven primarily by lower depletion in the real estate sales due to mix. Capital expenditures, excluding acquisitions, are expected to total about $140 million versus $92 million in 2009 and a more normalized run rate of $100-$110 million. This significant increase will primarily occur in performance fibers on cost reduction and efficiency projects as well as a couple of environmental projects.

We expect interest expense, to total about $51 million for the year. Our pension expense for the year should be about $11 million. Also, we expect to contribute a significant amount to our pension plans and potentially up to the $40-$50 million range. Finally, our effective tax rate is expected to range between 16%-18%, below our prior guidance. This decrease reflects our expectations of an increase in the mix of income from our REIT businesses. When you put all of these elements together with the AFMC refund, we expect very strong cash flow despite continuing to defer the harvest of our higher value saw timber. We expect adjusted EBITDA to be above 2009. CAD should be well above 2009, and in the 330-$350 million range reflecting the AFMC refund net of the higher CapEx and pension contributions.

Finally, we expect proforma EPS between $1.80 and $2 per share, excluding the gain on the New Zealand joint-venture transaction. As was the case last year, we expect second quarter EPS to be the lowest quarter of the year due to the planned Jesup shutdown, timing of real estate sales, and shift of timber volume as previously mentioned. Accordingly, we expect second quarter EPS to be comparable to last year's second quarter. I will turn it back over to Lee for comments.

As you've heard, we see clear signs of fundamental strengthening in our markets and are increasing our guidance for the full year. We are optimistic that economic recovery is broadening. The housing market is gradually improving. Although, we believe it remains fragile and will take several years to fully recover. We see tremendous value in our timberlands based on improving near term markets and strong long-term fundamentals. The relatively modest decline of around 15% in timberland prices in the downturn provides evidence that investors have looked through this cyclical downturn, and continue to value timberland for its unique attributes.

Our timberland portfolio is further enhanced by the value we capture through rural conservation and development sales. In addition to our extensive timberland and HBU real estate properties, we remain the global leader in cellulose specialty products. We anticipate continued demand for these products and absorbent materials, contributing to another record year for performance fibers. We are investing in high return projects to assure reliability and cost competitiveness of our mills in meeting customer's exacting needs. Our unique business mix, our conservative balance sheet, and substantial liquidity provide the operating flexibility to manage through any remaining economic challenges, while taking advantage of attractive opportunities for growth. We are actively seeking acquisitions that meet our strategic and financial criteria, while remaining disciplined sellers of non-strategic timberland. We are committed to our strategy of providing attractive dividend through strong operating cash flows and creating long-term value for our shareholders by growing our timberland holdings over time. With that, I'd like to close the formal part of the presentation and turn the call back to the operator for questions from the audience..

(Operator Instructions) One moment, please, for your first question. Your first question from Mike Roxland from Bank of America Merrill Lynch.

Congratulations guys, on a really good quarter. Just a couple of quick questions for you. Any additional color with respect to log decks and how quickly inventories are being rebuilt there.

Our sense is particularly as we hear from our own, look at our own saw mills as well as here from the market place is that they have built up fairly quickly. We feel like most of the inventories are in fairly good shape as far as saw mills are concerned. Particularly in the east. The one thing I would say is we continue to see good demand as far as export off the west coast. And out of New Zealand. But overall, I think we're beginning to see a leveling off as far as pricing is concerned.

Got you. On timberland itself, can you talk about what you are seeing with institutional buyers, specifically you mentioned that you heard chatter they are raising funds, can you provide color on the type money, on the amount of money raised and whether it is being invested.

We heard reports of additional money being invested through TIMOs and, Charlie, you might want to comment on a couple of things that you have heard reported.

Certainly, we heard some specific names and some specific amounts, which are relatively large amounts and we are getting calls from TIMOs expressing interest in buying, which is a shift from 12 months ago. We believe the capital is out there and we believe sort of in a buying mode.

Got you. One quick question on performance fibers Lee or Jack, there seems to be some additional competitors entering the market and challenging Rayonier's leadership. I know you mentioned the Bahia mill but it seems more recently that you have the pulp mills converted into specialty pulp, you have the Chinese investment in Nucel, Port Alice British Columbia mill which is going to focus on specialty assistant, I want to grab your thoughts on those projects and the potential threats they pose to your performance fibers business.

I think a lot of that capacity at least as we see it is probably geared more toward the commodity market more than the acetate market we participate so actively in. Additionally, as we've talked all along in the specialty market, it is a business that really values long-term relationships between customers and suppliers. So at least in this point in time we have not seen an impact as far as those kind of announcements are concerned. But, Jack, do you have anything to add to that?

The only thing I will add is the overall commodity viscose market continues to be strong and we see that continuing this year and ongoing. With that we see these competitors starting at different mills or converting mills, they will continue their focus in that commodity viscose market.

Great. Thanks very much. Good luck in the quarter.

Your next question comes from Steven Chercover of D.A. Davidson. Your line is open.

Thank you, good morning. My first question, your prior guidance was going to be better than $1.50 or did you have something more specific?

We were more specific, Steve, we said up 10-20% from 2009, it would effectively translate from $1.65 to $1.80

Thank you. I wanted to engage how big of a bump this was. With respect to the CapEx you are doing with the specialty cellulose business, can you give us a sense of the kind of returns you are going to get from that, either cost per ton or payback period?

Well, there are really two types of projects. We've got good return projects. I'll let Jack comment on that. We also have some environmental projects and some of those environmental projects are very low returns, but a part of a long-term upgrade that we are doing, particularly at our Jessup mill related to environmental commitments that we've made there. Jack, you want to give specifics?

On the return projects, most of the focus has been in the boiler areas at both facilities. The type of returns we look at in our projects are 20 plus percentage.

Will they have any impact on volume at the end of the day?

Ultimately you see some incremental debottlenecking ,so some gradual increase in production but no significant step changes.

Thank you. Final question from me would be when it comes to buying timber you indicated you're actively looking, what's your size bracket, $100 million transactions? Can you give us a sense?

No, not really. We're in the market and we're looking at, and actively looking at as we have over the last year, of a variety of tracks of land. Some are relatively small, some are larger than that. Frankly there is not a lot of timber on the market, but we're actively looking at timber that could range from 10,000-acres up to timber that could range to 75,000-acres. It's a broad range and we take a look at a number of tracks over time.

Thank you, Lee.

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

Good morning. I just wanted to ask a few questions on performance fibers, if possible. First of all on the cost side, what's going on with caustic soda, these days?

It's back to what I would call historical trends. We've seen a little increase this quarter over last quarter, I think, Jack. Haven't we?

If you look at market pricing, the prices jump from $270 to $360 quarter over quarter, but really in line with historical levels. Certainly not at the levels we saw a year or so back when it was upwards of $1,000 a short ton.

And did you have visibility what it's going to be like in the second half?

The expectation is that it's going to be flat compared to second quarter.

And you talked about things moderating on the fiber side. Are there any other cost elements that would represent a significant change year over year?

I think overall, the big driver has been fiber in Q1 and Q2 and that makes up the majority of the change.

We have seen a little bit of an uptick year over year. Somewhere in the range of $10 or so a ton.

What about in terms of volume on any of the specialties or the plus side. How do you expect those to trend compared to last year?

No real significant change. In terms of volume year over year.

Okay. Do you have good visibility into what specialty prices are going to be this year compare to last year?

Our specialty pulp prices are set on an annual basis. We had roughly a 3% increase in our specialty pulp price at the beginning of the year. Going into 2011, we expect to see significant improvements.

Okay. Very good. And turning to the real estate side, how do you guys expect the volume, the acreage and mix of land sold to compare to last year?

Non strategic acres will be down year over year and rural acres are likely to be up year-over-year.

So balancing those two, would you say it's going to be roughly flat or will one change or dominate over the other?

Net-net, we still have 8 months to go, I think net-net, our acres should be down a bit.

Down 10%.

Yes. Net-net acres.

Okay. And then on the acquisition side, we do have a sense it's going to be any harder to get deals done in light of what you mentioned earlier about TIMOs being increasingly interested in buying as well.

Chris, we haven't seen a lot of timber coming on the market. And so that has been a part of what I consider a challenge. And now I think there is a very good likelihood it's going to be more competitive, at least based on what we are hearing reported of money available to be invested. When you put all that together, it's going to continue to be a challenging market as far as acquisitions are concerned. On the other hand, I think we are well positioned to be a buyer. I think that we're going to be in the market and we're going to be competitive in the market.

Okay. Thanks for your help.

Sure.

Your next question from James Armstrong of Credit Suisse. Your line is open.

Good morning, gentleman. Just a quick question about fluff pricing in the marketplace, remind us again pricing increase announced in the market?

The latest increase that we've seen from May 1st, that's been announced, is roughly about $40 a ton bringing fluff prices up to 1,010, 1,020 depending on the region of the world.

And effective for April?

May 1st.

And given the pricing announcements in the market, what would happen to your realizations and how long does specialty chemical usually lag?

Not specialty chemical, specialty pulp, sorry.

Okay. Specialty pulp really doesn't lag. Its pricing, as Jack indicated, is set on an annual basis. So those price improvements that Jack talked about, I think 3% are effective this year. And we would anticipate that will hold for the year. As far as fluff is concerned, there is often a lag effect there depending on the contract that we've got with each individual customer.

2-3 months.

Right.

Would you expect to see the full implementation by the third quarter?

Correct.

Thank you.

Your next question comes from Peter Ruschmeier, Barclays Capital, your line is open.

Good morning. Just as a follow-up to that previous question considering the lag effect of fluff pulp prices. If the fluff pulp prices fully implemented to the $1010 to $1020 realization level, what does that imply about the realized pulp prices in the third quarter relative to the first quarter?

Roughly a 10-15% change in overall pricing from Q1 to Q2 to Q3. We don't know what Q3 really will be in terms of nominal, but in terms of that lag effect that's what you would see.

15%.

Okay. And if I heard you correctly, Jack, I think you said specialty cellulose, obviously fixed for the year, but I think you said significant improvement for 2011. I'm curious if you could elaborate on that what gives you confidence at this early juncture on that and what would be driving that?

Peter, the confidence you hear from Jack is based on demand level we see in the marketplace today and it looks like it's good sustainable demand. I think that in terms of further guidance and what Jack gave you, we should wait until later in the year.

Okay. That's helpful. And on the non strategic land sales, almost 24,000-acres. Can you help us understand qualitatively how they compare to the quality of what you have on the ground?

Charlie?

We go through a process, we lay out the attributes of non strategic ,which is generally lower than average quality land. Maybe a higher percentage of wetlands, whatever. We go through that. What we sell is clearly less than average, as it relates to our core timberland. Obviously has to be in a sellable package. It's hard to quantify it exactly but clearly below average.

A couple of other criteria we also use is location and whether it's consolidated or fragmented.

Right. What we like to have happen is, what is non strategic to us is very strategic to somebody else and we can achieve a really good price.

And lastly and I'll turn it over, Lee, can you remind us what your dividend policy has been over time, certainly looks like the high class problem of rising CAD and declining debt level and you would have to weigh this against opportunities to grow through acquisition. What has been your policy of dividend versus CAD?

Well, that weighing of utilization of cash, as you indicated, is an important factor that our board takes into account. However, having said that, they view an attractive dividend as an important part of the value proposition for our shareholders. They look at the dividend, and typically they look at it closely as we go through our long range planning process, which we do each year looking at a 5-year outlook. They do that because it's not only cash flows of today but anticipating the future that's an important part of setting that dividend and clearly they'll take a hard look at it this year as they do each year. And typically we do that in the July-October time frame.

Great quarter. Thanks, guys.

Thank you.

(Operator Instructions). One moment, please, for your next question. Your next question from Mark Masters of JPMorgan. Your line is open.

Thank you. First question, I was wondering if you could get more color on the increased export demand in 1Q and what is driving that strength and what percent of your log volumes are in the export market?

Paul, why don't you take that. It's not only in the northwest but what we've seen out of New Zealand as well.

Right. Mark, a couple of different factors there. Mainly the export demand is being driven out of Asia and particularly China, and we see the product mainly into concrete formation type of applications in China. So the Chinese overall domestic activity is driving a lot of that, but also coupled by a decline in the amount of volume available out of Russia. What we've seen and what we estimate is that perhaps 50% level of flow of Russian logs coming into China versus historical level looking back a few years. Those combination of things a strong driver in the Russian and Chinese economy and lack of flow out of Russia is picking up overall demand out of that region not only the northwest and out of Canada, but also other places such as our New Zealand operations.

Okay. That's helpful, thanks. Just in wood products, what is your take on the rally in the wood products pricing recently? Do you think it's largely been supply-driven or pick up in demand that would sustain current prices?

I think it was primarily on the supply side. It had to do with a couple of things. And it had to do with wet weather and availability of log inventory and log decks and how quickly saw mills were able to recover. I also think a number of saw mills as you know had taken downtime, laid off shifts, had closed altogether, and I think they were reluctant to bring significant capacity back on-line because they didn't see this as a sustainable recovery. But I would say we were going into a typical spring building season, so we did see some improvement as far as demand.

We always do see that this part of the year, and I think a number of customers had really depleted inventory and very low on inventory. So as a result, they were pushing to put product back into their stores. One final factor, I'd say is, trucking, particularly in the east, was very tight to move product. And that had some impact just from a supply point of view and the ready availability of supply from customers. If you put all of that together and you had a rapid run-up in pricing for lumber. But frankly, I think that was not based on some strong underlying strength of demand. We are gradually seeing improvement in housing, but still at a very low level, as you know. So our view is lumber pricing has probably plateaued, is softening, we don't really see it strengthening on a sustainable basis until we see that fundamental housing recovery that we keep looking for.

Have you seen your customers? I mean, ramp up capacity given improvement in prices. Are they still running very lean at this point?

As far as customers are concerned, buying lumber, I think they've built their inventories up to a good level now. As far as demand for our timber, we continue to see good demand for our timber, but particularly demand for pulp wood. The pulp market continues to be very strong. So the pulp mills, who had a difficult time getting wood in the winter weather, have continued to put strong demand for pulp wood and rebuilt a lot of their chip inventories. And the sawmills did put additional demand. We saw that particularly, as Paul indicated, out west in addition to export, saw increased demand for saw timber in the west and saw some increases as far as the east is concerned as well. But my sense is a lot of the mills have gotten their log decks back in fairly good shape. I think the pricing on timber clearly moved up well. Still, well below historical highs, but we don't think it is going to drop back to where it was last year.

Okay. That's helpful. And lastly, did you get any benefit from this program BCAP in 1Q and your outlook in 2010 include earnings in that program?

We got little benefit.

We got maybe $300,00 or $400,000.

And we're not planning on any additional benefit in any of our estimates for the year.

Thanks, guys.

At this time, there are no further questions. I will turn the call back to Mr. Vanden Noort for closing comments.

We'd like to thank everyone for their participation and contact Carl Kraus for questions, thanks a lot.

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