Rayonier Inc (RYN) 2011 Q3 法說會逐字稿

Welcome and thank you for joining Rayonier's third-quarter 2011 teleconference call.

At this time, all participants are in a listen-only mode. (Operator Instructions). Today's conference is being recorded. If you have any objections, you may disconnect at this time.

Now I'll 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'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 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 on Page 2 of our presentation material.

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

Thanks Hans. First let me say how pleased I am with the election of Paul Boynton as CEO effective January 1. I'll remain as Chairman until May, when Paul will assume that role in addition to being President and CEO. As many of you know, Paul has successfully lead all three businesses of Rayonier and most recently served as President and as a member of our Board of Directors. Paul has been instrumental in shaping and implementing our strategies. This has been a well-planned transition, and I'm confident the Company will continue the successful execution of our strategies under Paul's leadership.

Turning now to our quarterly results, I'll make a few overall comments before turning it back over to Hans to review our financial results. I'll ask Paul to review the results of each business. When we finish our prepared remarks, we'll invite Lynn Wilson, our Vice President of US Forest Resources, Charlie Margiotta, our Senior Vice President of Real Estate, and Jack Kriesel, our Senior Vice President of Performance Fibers, to join us in responding to your questions.

We continued to deliver strong operating results this quarter with pro forma earnings per share of $0.71 and cash flows that more than support the 11% dividend increase our Board approved in July. At $1.60 per share, our annualized dividend is now 20% higher than a year ago. These results reflect strong execution across all our businesses.

In Forest Resources, we continue to take advantage of attractive pricing for Asian exports, selling 38% of this quarter's harvest in the Pacific Northwest to overseas markets and locking in future volume. At the same time, we increased volumes in the Atlantic region as we completed the salvage of wood damaged by recent fires.

In Performance Fibers, global demand for our unique high purity cellulose specialties products remains strong.

We also made significant progress on key strategic initiatives, which we reviewed in detail during our recent investor day. In September, we announced our agreement to acquire 250,000 acres of southeastern timberland for approximately $330 million. This transaction, which is scheduled to close in November, will generate attractive returns and enhance our overall timberland portfolio. We're also moving forward with our 190,000 ton cellulose specialties expansion project at our Jesup Mill. Our customer meetings are going very well, resulting in commitments for over 70% of this new volume.

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

Thanks Lee.

Let's start on Page 3 with the overall financial highlights. As Lee noted, we had a strong third quarter with sales of $385 million, operating income of $108 million, net income of $105 million or $0.84 per share, and pro forma net income of $89 million or $0.71 per share.

We had one special item in the third quarter which was a $16 million tax benefit from reversing a reserve established back in 2009 relating to the alternative fuel mixture credit. This reversal reflects the successful completion of IRS audit covering 2009.

The first quarter of 2010 included a $12 million gain, or $0.09 per share, from the sale of a portion of our New Zealand joint venture. Both of these items are excluded to arrive at the year-to-date amounts used for the comparisons throughout this call.

On the bottom of Page 3, we provide an outline of cash resources and liquidity. Our year-to-date cash flow was strong with adjusted EBITDA of $380 million and cash available for distribution of $242 million. Note that last year's cash available for distribution of $400 million included receipt of $189 million from the alternative fuel mixture credit.

Our debt level was comparable to year-end while our debt-to-capital ratio declined slightly. We ended the quarter with approximately $362 million in cash, so on a net debt basis, we were at a very manageable $413 million. We also increased our bank revolver from $300 million to $450 million during the third quarter, of which $370 million is undrawn.

Let's now run through the variance analyses. On Page 4, we prepared a sequential quarterly variance analysis. In Forest Resources, operating income declined due to lower volume and higher logging costs in the northern region, and softer pricing in the Atlantic and Gulf regions due to an abundance of fire-damaged salvaged timber. Real estate income improved significantly due primarily to increased sales of nonstrategic property and a $6 million benefit from settling prior year's property tax disputes in Florida.

Moving to Performance Fibers, operating income was $4 million above last quarter, reflecting higher sales volumes. Cellulose specialties pricing declined primarily due to a very strong product mix last quarter. Costs also improved, reflecting lower wood and conversion expenses.

Let's move on now to Page 5 and the year-over-year variances. The third-quarter and year-to-date variances to last year generally have similar drivers. Our Forest Resources results reflect strengthening prices and volumes in the Northwest driven by export demand, offset by higher logging and transportation costs and, on a year-to-date basis, the $3 million fire loss. The year-to-date real estate variance reflects our planned reduction of nonstrategic timberland acres sold, partially offset by higher rural HBU and nonstrategic pricing and the favorable property tax settlement. In Performance Fibers, cellulose specialties prices strengthened, offset somewhat by higher input and transportation costs. Finally, wood products year-to-date results were lower, reflecting weaker lumber prices.

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. Our cash flow is quite strong with CAD of $242 million, well above our dividend requirement.

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

Thanks Hans. Good afternoon. Let's first start and cover Forest Resources.

If you go to Page 8, in our northern region, which is primarily Washington state, strong export demand continued throughout the quarter, primarily from China. Year-to-date, approximately 38% of the Washington volume has been sold into the export market, compared to less than 20% in 2010. As a result of the increased demand, prices for delivered logs rose 13% from second-quarter levels, and were up 30% over the prior-year period. Overall, we expect delivered log pricing for the full year to be approximately 35% above 2010 levels and 2011 volume to be 12% above 2010.

Now, if you turn to Atlantic and Gulf regions on Page 9, pine stumpage prices decreased from the second-quarter levels, as expected, due to the abundance of salvaged wood from the spring and summer fires. However, we expect fourth-quarter prices to return to second-quarter levels.

Harvest volumes in the nine months of 2011 were significantly lower than 2010 when we accelerated sales to take advantage of the tight markets due to weather related supply constraints. For the full year 2011, pine harvest volume and price are projected to be slightly below 2010, primarily as a result of salvage operations related to the fires. Overall, Forest Resources operating income should be substantially above 2010.

Now, turning to Real Estate, Real Estate operating income of $28 million for the third quarter was up substantially from the prior quarter, primarily due to two factors -- first, a sale of a 6300 acre nonstrategic parcel in Washington state at $4000 an acre; and second, the settlement of a long-standing property tax issue in Florida which had a favorable impact of $6 million.

On Page 10, we show rural and development sales volume. Although lumpy quarter-to-quarter, rural land sales have been steady year-over-year. For the full year, we expect approximately 15,000 acres to be sold.

Now, Page 11 details per-acre prices. Third-quarter rural price of $2041 an acre was down from the prior two quarters but above the third quarter of 2010 primarily due to location and property attributes.

Page 12 highlights nonstrategic timberland sales. As noted, the third quarter consisted primarily of Washington state sales, which contained predominately mid-aged pre-merchantable timber. We expect 2011 nonstrategic sales to total between 10,000 and 12,000 acres. Overall, 2011 operating income will be below 2010 due to fewer nonstrategic acres sold.

Now, moving to Performance Fibers, Performance Fibers had another strong operating result quarter. On Page 13, you'll see net selling prices for our two Performance Fibers product lines. Compared to the same quarter in the prior year, cellulose specialty prices increased $208 a ton, or 15%, primarily due to 2011 annual price increase. However, prices decreased $60 a ton or 4% from the previous quarter as second-quarter prices reflected a more favorable mix. Fourth-quarter cellulose specialties sales prices are expected to be comparable to third quarter, resulting in a year-over-year price increase of approximately 14%. Absorbant material prices, which consist principally of fluff pulp, decreased $21 a ton or 2% compared to the same quarter in the prior year and decreased $20 a ton from previous quarter as market conditions softened.

Moving on to Page 14 and looking at volumes, our third-quarter cellulose specialty sales volume increased approximately 13,000 tons compared to the second quarter of 2011 and was comparable to the third quarter of 2010. Year-to-date sales volume was 6000 tons above the prior year reflecting the timing of customer shipments and a production shift from absorbant materials to cellulose specialties production. Year-to-date absorbant materials volumes were approximately 15,000 tons lower than the same period last year, primarily due to this production shift. As a result of the production mix shift to cellular specialties, coupled with commodity chemicals and energy cost increases, we expect total year-over-year cost to increase approximately 6% to 7%.

Our cellulose specialty expansion at our Jesup, Georgia facility is on schedule. Due to the process changes required for this expansion, we've requested regulatory approval for alternative process equipment to meet the requirements of our color consent order. As a result, in the fourth quarter, we expect to have a $5.5 million write-off related to equipment previously acquired which will no longer be utilized.

Overall, we expect another record year of financial results for Performance Fibers. As we look forward into 2012, we anticipate that revenues and earnings will continue to grow due to strong demand driving higher prices for our cellulose specialty products.

With that, let me turn it back over to Hans.

Thanks Paul.

Now I'd like to update some key statistics to assist you in refining your model for Rayonier. So we expect depreciation, depletion, and amortization of $133 million and the non-cash cost base of land sold of about $4 million or approximately $137 million in total. Capital expenditures, excluding strategic investments for timberland acquisitions and the cellulose specialties expansion, are expected to total about $145 million. We expect 2011 spending on the cellulose specialties expansion to range between $45 million and $50 million. Spending on timberland acquisitions should approximate $433 million.

We expect interest expense, net of interest income, of about $49 million.

Finally, our third-quarter tax expense included a $9 million benefit associated with the sale of HBU properties to the TRS. When you factor in this benefit, we expect our full-year effective tax rate to approximate 15%, excluding the $16 million AFMC special item. When you put all of these elements together, the strength of our Performance Fibers and Forest Resources businesses, we anticipate very strong earnings and cash flow.

We are increasing our earnings guidance for the year from $1.90 to $2.07 per share to a range of $2.07 to $2.15 per share, reflecting the favorable Florida property tax settlement, lower effective tax rate, net of the expected fourth-quarter Performance Fibers environmental equipment write-off. Note that this EPS guidance excludes the special item which is the $16 million tax benefit from reversing the AFMC reserves.

We expect adjusted EBITDA to range from $490 million to $510 million, while CAD is still expected in the $285 million to $310 million range.

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

As you've heard, we continue to perform well in 2011 and have raised our guidance. For the remainder of the year, we'll stay focused on operational excellence across all of our businesses, positioning us to finish strongly this year, establishing a firm foundation for continued improvements in earnings in 2012.

Our long-term strategy remains the same. We're committed to growing our dividend funded by strong operational cash flows, building on our track record of increasing the dividend three times in the last four years. We're executing our strategy to expand our timberland portfolio over time with acquisitions expected to approximate 315,000 acres in 2011. We've achieved the land-use changes we were seeking for several development properties and now have 39,000 acres of entitled properties that represent a future source of value when markets recover. In Performance Fibers, our $300 million expansion project and ongoing investments in manufacturing excellence are key elements of our strategy to remain the global leader in high purity cellulose specialties. With our strategy in place, strong operating cash flow, and solid balance sheet, I'm confident the Company will continue to drive superior value creation under Paul's leadership.

With that, I'd like to close the formal part of the presentation and turn the call back to the operator for questions.

(Operator Instructions). Michael Roxland, Bank of America.

Thanks very much. Congratulations on a very good quarter, guys. Just first question I guess just relates to Performance Fibers. Obviously, the sales volume for sale of specialties was down 3.1% year-on-year. Can you just provide a little more color on what happened there and whether maybe it's a timing issue due to something like shipping?

This is Jack. It is all based on timing and schedule of shipments.

So we should see an improvement then in 4Q, so you should be making up that volume?

Yes.

Got you. Jack, how is pricing shaping up thus far for 2012? At this juncture, I would assume you're at the tail end of your process, negotiation process with customers. Would it be fair to say that you should be getting something, at least 8% to 9% increase on the sale of [specialties side] for 2012?

We're still in the negotiating process and like in previous years, we'll give you an accurate update in our next call on that.

Chip Dillon, Vertical Research.

Good afternoon. You looked -- the northern obviously segment is very impressive with the shipments to Asia. Other companies have talked about the demand backing off a little bit. As you look at it, both near-term and especially it'd be interesting to hear what your perspective is, say, beyond the winter months. What do you think 2012 is going to look like there?

I'll let Lynn answer that. I would say, overall, though, as we talked about on our investor day, we've done a lot of work and we feel there's very fundamental long-term demand as far as China is concerned for wood products, both logs as well as lumber from North America. So we feel confident in terms of the demand from China. But Lynn, why don't you talk about what you think is going to occur over the shorter term?

This is Lynn. In the short term, what we see is there's the seasonal ups and downs and the supply on the market will obviously affect the near-term shipments, but we feel very strongly as we move into 2012 that those fundamentals are strong and the five ports and the brokers that we're utilizing in Washington are well positioned to continue on with very similar business in 2012.

Got you. Then shifting gears a little bit to the timberland sales program, the nonstrategic sales, can you give us a view? Has it changed much since we were down there to visit in September of what 2012 might look like? In particular I guess you've seen some pullback in some areas of the economy, and in other areas you haven't seen any. I just didn't know if there's been any change in the appetite for your nonstrategic land sales or for that matter the rural HBU as well as you look at 2012.

As we've said over the course of the last year, nonstrategic land sales for us is a declining category in terms of acreage. We've worked through an awful lot of what we considered nonstrategic, so those acres have gone down. We've not seen any diminished demand for acreage when we put it on the market.

Then the flip side of that, which is the sales of rural timberland continues to be good and steady. We see good demand for our rural timberland. It changes over time from different parts of the country, but it's been a very steady program for us.

This is Paul. I'll just add to that. We recently went in and looked at an opportunity to acquire a property, and there's 15 bidders in on that property. We were not the top bidder and we didn't get the property, but I think it just shows it's a pretty robust market out there.

Got you. Lee, I'm not sure if this is your last call or not, but thanks very much for all the help through the years, both in Atlanta and in Jacksonville, and Paul, good luck.

Thanks Chip, I appreciate that. I've got a lot of confidence in Paul's ability to keep this Company headed in exactly the same direction we've been on for the last number of years.

Steve Chercover, D.A. Davidson. (technical difficulty)

We'll go to the next question. Mark Wilde, Deutsche Bank.

Good afternoon. I'm just curious. It sounded like when we were in Jesup that the response to your -- from your customers for the expansion had been a little better than you'd expected. I just wondered if there had been any incremental news since we were down there a little over a month ago in terms of commitments.

I think we've firmed up commitments. I think that when we -- I think, when you were there, we said almost 70%. I think we now say over 70%. I think we're still in negotiation with a lot of customers. We also have a lot of new customers that we're talking to about volume, but we're still very confident in where we are with demand. It's very good.

Then my question about China -- you've often said to us that sometimes the New Zealand business as a little bit of an early read. Can you give us some sense of what you're seeing between New Zealand and Asia right now?

Yes, just kind of building on what Lynn commented, we did see kind of a little bit of a drop-off in pricing and the supply was abundant coming out of the Northwest US and Canada. And so we saw that and that has happened. We, again, attribute it to seasonality and a little bit of oversupply. We think that we'll see in the coming new year and after the Chinese New Year that will come back again. So we feel, as Lee mentioned, positive in the long term and I think we're just going to see which is fairly typical to China and our short-term push-back.

Okay. Finally, Lee, I would just like to echo Chip Dillon. Over the last 18 years, I've really both enjoyed and appreciated watching you as a manager in both Atlanta and Jacksonville, and I'd also like to acknowledge your years in public service. I think we could use some more of your temperament in Washington DC these days.

You're very kind, Mark. I appreciate that. You remind me about how long I've been in this business. That's why I'm looking forward to retirement.

Good luck.

Joshua Barber, Stifel Nicolaus.

Good afternoon. I was wondering if you could talk a little bit about the fluff pulp market. I know we've seen that pull back somewhat. You had some comments yesterday from one of the major users that they're seeing some demand moderate (multiple speakers)

I didn't hear the last part of that, Josh.

I'm sorry. Can you hear me now? On the fluff pulp side, we had some comments from one of the major users of fluff pulp yesterday talking about some moderation in demand. Have you guys seen that market continue to go soft in the fourth quarter, or has that just been modestly down sort of like we saw in the third quarter?

We have seen that, seen a drop-off globally over the last few months. I think RISI price was up around $1040, and it's dropped down to I think about $1015. Then the spot market is a little softer than the contract price, so the reasons are kind of varied. We think, one, there is some more supply out there in the market, but two, just the total demand for it is off a little bit. Users are not consuming as many of the absorbent materials products as they have in the past.

Okay. You had made just some earlier comments about having some additional -- some of the new additional production capacity committed to. Is that viscose or is that specialty? Can you also clarify if any of the viscose volume that's been committed to is on basically just a spot basis for that year or is that a longer-term contract?

I'm assuming you're talking about when we start up the facility?

That's right.

The majority of the volume that we have committed and contracted for is the high-value sale of specialty. We do have a small amount of volume that is in the commodity viscose, but that is purely for that transition period.

The intent as we start up is we'll bring it up. A portion of that volume is commodity viscose while we trial and qualify that specialty cellulose. That, as Jack said, that's where most of our contract volume is for these commitments. So there's a period of time, and I think we estimate 12 to 18 months for that qualification period as we bring all of that specialty on.

Okay. Turning to the balance sheet, now especially once you close the timberland deal in November, I guess you'll have a lot less capacity left on the line, and you have a convert coming due next year. What are you guys thinking about in terms of the right side of the balance sheet being able finance that at -- the ten-year bond? We really haven't seen a REIT issue since August. What do you think the market is for you guys out there today, and what are your financing plans I guess for the next six months?

It's Hans. I think the market was certainly pretty open for us to go out with a ten-year from the REIT, so likely in the first quarter would be the time that we look seriously at terming out some of the debt related to the timberland acquisition. Indications for us are now somewhere between 5.1% and 5.2% of ten-year money. So that would give you a relevant range, but so we'll look at that.

As far as the longer-term on that convert that's due in a year, we'll kind of evaluate that as we get a little bit closer. My inkling now though would be probably to go to shorter-term as that convert is in the TRS and we expect to have some pretty significant cash flow generated in the TRS once we complete the CSE expansion, but we'll have to get a little closer to that time frame.

Thank you very much. Lee, best of luck.

Thanks a lot Josh.

(Operator Instructions). Mark Weintraub, Buckingham Research.

Thank you. One quick clarification. So the $5.5 million write-off, that is included in the earnings guidance that you gave?

Yes, it is.

Okay. Then I'm sorry, maybe I got distracted. But I know there had been a question on fluff pulp just before, and you had talked about you were expecting prices in chemical cellulose to be relatively flat 4Q vs. 3Q. Did you share with us order of magnitude, what might be happening in the fluff pulp business for 4Q vs. 3Q?

No we didn't. The majority of our fluff pulp business is a contract type pricing. It's related to a RISI price, so we don't see -- we aren't subject as much to the spot market as maybe some others might be, but the general market we see dropping off maybe about $20, $30 a ton into Q4.

So basically you just will tend to follow these indexes. Any significant lag or fairly real-time?

There's a little bit of a lag, correct.

A month or two month type lag?

Correct, yes.

Okay. And then can you share with us your expectations order of magnitude on your shipments next year in the Performance Fibers business, what the breakdown between chemical cellulose and then the absorbent or the fluff products might be?

It will be fairly consistent. It will be a little bit stronger on CS as we continue to strengthen that part of our business, but in fluff terms it's about the same.

In January we'll give you guidance on that along with some pricing guidance as well for the year.

Okay. Thanks very much. Congrats Lee. I'm sure you've enjoyed these last couple of years at Rayonier.

I really have. Thanks a lot.

Steve Chercover, D.A. Davidson.

Thanks, I'm sorry about that technical difficulty. I was wondering if you could give us a sense of the incremental volume and perhaps even the EBITDA that we'll see from the 250,000 acres you're acquiring.

I think we had kind of laid that out on the investor day in the longer-term. I don't think anything has changed from our expectations there. As far as what we're expecting to get next year, I don't think we've really -- we're in the midst of doing our budgets now. I believe longer-term five years out or so, Lynn, we were out about 1.5 million tons, was that about incremental tons?

That's right. Within the five-year period, we'll be moving to 1.5 million tons annually of incremental volume that will be added from the acquisition.

Because those lands are fairly mature presently.

The timber is relatively young.

That's helpful. Then two other quick ones. Is there any more alternative fuel tax credits to be monetized?

We'll see. We're always looking. Really only thing that would be left I think would be the exchange of the AFMC for the cellulosic biofuel credit. That's something that, once we get into 2012, we'll look at that. I don't expect that will be too significant in '12 however.

You'll probably answer this one in January as well, but tax rates 2012 similar to this year or back to that 20% to 22% you used to guide us towards?

I'd have to give you an update in January. We're still internally just going through our budgeting process as we speak, and so I'll have to wait until January to give you that.

Understood, thank you very much.

This is Paul. I just want to follow up on your question about the added harvest volume from the acquisitions. I think Lynn gave guidance, which is good guidance out there, maybe 1.5 million tons in five years or so. I would think in the first three years, because a lot of that, the majority of that property is younger timber, and you'll see [probably] less than half of that amount in the first three years.

So it will ramp. Thanks for that color.

Joshua Barber, Stifel Nicolaus.

Just a quick follow-up. Hans, I believe you said you expect CapEx for the full year of $145 million, and that would be almost $60 million in the fourth quarter, ex-Jesup. Can you just talk about why CapEx would be that much higher in the fourth quarter this year?

It's actually for both of the business units for both PF and on our timber side of the business. The ability to do the replanting on the timer side has skewed a little bit to the fourth quarter weather related, and then just a number of projects at both Fernandina and Jessup have kind of gravitated towards the back end of the year.

Thanks.

I am showing no further questions.

Thanks everybody for participation and please contact Carl Kraus for any follow-up. Thanks.

Thank you. This does conclude today's conference call. You may disconnect at this time. Have a great day.