Rayonier Inc (RYN) 2012 Q2 法說會逐字稿

Welcome, and thank you for joining Rayonier's second-quarter 2012 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.

I would now like to 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 second-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 10-Q's and 10-K's filed with the SEC, lists some of the factors which may cause actual results to differ materially from the forward-looking statements we may make. They're also referenced on page 2 of our presentation material.

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

Hey, thanks, Hans. Good afternoon, everyone. I'd like to make a few overall comments before turning it back over to Hans to review our financial results. Then I'll ask Lynn Wilson, Senior Vice President, US Forest Resources, to comment on our timber results. Following our review of Forest Resources, Charlie Margiotta, Senior Vice President of Real Estate, will discuss our land sales. And Jack Kriesel, Senior Vice President, Performance Fibers, will take us through our cellulose fibers business.

We had another great quarter, and I'm pleased to report earnings per share of $0.54, a 20% increase over the prior-year period, together with solid growth in our year-to-date cash flows. On Monday, we announced a 10% increase in our quarterly dividend from $0.40 to $0.44, effective for third-quarter distribution. This action reflects our strong financial position and continued confidence in our ability to generate increasing cash flows through execution of our strategy.

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

Thanks, Paul. Let's start on page 3 with the overall financial highlights. As Paul noted, the second quarter was very solid, with sales of $372 million, operating income of $99 million, and net income of $69 million or $0.54 per share.

On the bottom of page 3, we provided an outline of capital resources and liquidity. Our year-to-date cash flow was strong, with EBITDA of $249 million, cash available for distribution of $141 million. We ended the quarter with approximately $1 billion of debt and $189 million in cash. So, on a net debt basis, we finished at $829 million. Overall, we feel very comfortable with our current balance sheet and liquidity.

Let's now run through the various analyses. On page 4, we've prepared our typical sequential quarterly variance analysis. In Forest Resources, second-quarter operating income was comparable to the first quarter, as improved pricing in the Gulf States and northern regions offset higher logging and transportation costs in Washington. In real estate, our operating income was comparable.

Moving to Performance Fibers, you can see significant price improvement in sale of specialties, reflecting the full realization of the 2012 price increases and improved product mix. However, our costs increased, led by higher depreciation and maintenance. Our Wood Products business improved by $3 million, which was all price-driven. Our other operations, such as log trading, also improved, primarily due to foreign exchange gains.

Corporate and other expenses were $7 million below last quarter, when results were negatively impacted by the timing of stock-based incentive compensation expense associated with the prior CEO's retirement. We also benefited from a $2 million insurance recovery this quarter.

Let's move now to page 5 and the year-over-year variances. The second-quarter and year-to-date variances compared to last year basically have similar drivers. Our Forest Resources results reflect lower prices and volumes in the Northwest, driven by weaker export demand, partially offset by improved prices and volumes in the Atlantic and Gulf state regions, and the absence of a fire loss accrual recorded in the second quarter of 2011. Also, logging costs were higher in the Northwest this year. Real estate results were comparable for both periods.

In Performance Fibers, cellulose specialty prices strengthened, offsetting lower absorbed materials prices. However, input and labor costs were above last year. Finally, with products results improved, reflecting higher lumber prices.

Turning now to page 6, where we reconcile from cash provided by operating activities, which is a GAAP measure, to our non-GAAP metric of cash available for distribution, CAD. Our year-to-date cash flow was strong with CAD of $141 million, above last year and well above our dividend payout of $98 million to date.

With that, let me turn the conference over to Lynn Wilson.

Thank you, Hans. Good afternoon. Let's start with page 8 and the Northern Region, which is primarily our Washington State operations.

Both price and volume declined in the second quarter compared to the prior-year period, due primarily to softness in Asian export demand. However, prices improved in the second quarter compared to the first quarter, and export volume increased from 16% to 27% of our Washington sales.

The recovery in exports to China has been slower than we expected and are now projecting price improvements in the fourth quarter. We are well-positioned to take advantage of both domestic and export demand, with a planned harvest volume increase of approximately 10% to 20% in 2012. Overall, we expect delivered log prices in 2012 to be somewhat below 2011.

In the Atlantic and Gulf regions on page 9, pine stumpage prices increased slightly from first-quarter levels, as we capitalized on markets with strong demand and weather-impacted supply constraints. Prices were higher than the same period last year, as fire-salvaged wood impacted last year's overall market pricing. Harvest volumes were in line with the prior quarter and second quarter of the prior year.

For the full year, both pine harvest volumes and prices are expected to be approximately 5% higher than 2011. Overall, Forest Resources' operating income should be above 2011, due to increased volume and higher pine prices.

Now, let me turn it over to Charlie Margiotta to cover real estate.

Thanks, Lynn. Real estate results for the second quarter were comparable to the first quarter. While we sold somewhat fewer rural acres, per-acre prices were 20% higher, due to geographic mix. Page 10 details rural and development sales.

Activity slowed somewhat from the first quarter, but was comparable to the second-quarter 2011. There were two sales to note in the second-quarter 2012. First, a 425 acre conservation sale in Washington State at $3,000 per acre; and a 2,500 acre rural recreational sale in Florida, for $2,825 per acre. Page 11 details per-acre prices. The $2,677 rural per-acre price was driven generally by the previously mentioned transaction.

We are pleased with the increased interest in our Florida rural properties. We continue to expect operating income to be below 2011 and weighted to the second-half.

Now let me turn the teleconference over to Jack Kriesel.

Thank you, Charlie. Cellulose Specialties demand and good operating performance continue to drive strong earnings in Performance Fibers. On page 12, you see net selling prices for our two Performance Fibers product lines. Compared to the same quarter in the prior year, Cellulose Specialties prices were up $200 per ton or 12%.

Compared to the first-quarter, Cellulose Specialties prices increased $83 per ton or 5%, as a result of the full realization of the 2012 price increase and improved mix. We continue to expect a year-over-year increase in Cellulose Specialties prices of 12% to 13%.

Absorbent Material prices, which consists principally of fluff pulp, declined $142 per ton or 17% from the same quarter in the prior year, and prices declined $16 a ton or 2% from the previous quarter. We believe fluff prices will continue to soften throughout the year, due to the influence of weak commodity pulp prices, coupled with increased global fluff capacity.

Moving on to page 13 and looking at volumes, our second-quarter Cellulose Specialties sales volumes were comparable to the second-quarter of 2011. Full sales volumes are also expected to be comparable to 2011. Second-quarter 2012 Absorbent Material sales volumes were comparable to the prior period. For the full year, we expect volumes to be approximately 5% below prior year.

Overall, we are expecting another record year for Performance Fibers with Cellulose Specialties price increases more than offsetting cost increases and lower Absorbent Material prices.

Our expansion of Cellulose Specialties capacity at our Jesup Mill continues to progress towards a mid-2013 startup. Construction continues on foundations and steel erection as well as installation of some additional process equipment. Having already obtained commitments for approximately 85% of the new production volume, we continue to make good progress firming up our sales for the balance.

Now let me turn it back over to Hans.

Thanks, Jack. Now I'd like to update some key statistics to assist you in refining your model.

We expect depreciation, depletion and amortization of about $147 million and the non-cash cost basis of land sold of about $6 million, or approximately $153 million in total, consistent with our prior guidance.

Capital expenditures, excluding strategic investments for timberland acquisitions in the Cellulose Specialties expansion, are expected to range between $155 million and $160 million, compared to 2011 spending of $145 million. This increase will primarily occur in Performance Fibers on cost reduction and efficiency projects, and also in silvicultural investments in our newly-acquired property. We expect 2012 spending on the Cellulose Specialties' expansion to range between $200 million and $210 million.

Both our interest and income tax expense guidance has changed as a result of how we must record the exchange of the cellulosic biofuel producer credit for the alternative fuel mixture credit. This quarter included a net benefit of $6 million, which was consistent with our prior expectations. However, under the accounting rules, we cannot net the $3 million interest expense associated with this exchange against the $9 million tax benefit, but instead, must record each element on a gross basis.

So, for the full-year, we expect interest expense net of interest income of about $55 million. This includes the $3 million of interest to the IRS from the exchange, but is net of about $7 million of capitalized interest related to the CSE project. Finally, our effective tax rate guidance now is a range between 23% and 25%. This is down a percentage point due to the gross-up benefit of the exchange.

When you put all these elements together, we again anticipate very strong cash flow. We expect EBITDA and operating income to be about 10% to 12% above 2011. CAD should range between $295 million and $310 million. And finally, we are maintaining full-year EPS guidance as being comparable to 2011.

Now I'll turn it back to Paul for some summary comments.

So, as we enter the second half, we're well-positioned for another strong year. In Forest Resources, we will continue to capitalize on local market opportunities in the Southeast, and are well-positioned to increase harvest volumes in the Northwest as the Asian markets improve. As Lynn mentioned, the timing of the Chinese export recovery represents some uncertainty in the second half. However, we remain confident about the positive mid to long-term benefits of this market.

In Performance Fibers, we anticipate another record year, driven by strong Cellulose Specialties markets. And also, as Jack mentioned, we remain on track to complete our Cellulose Specialties expansion project by mid-2013.

Providing a secure and growing dividend to our shareholders remains a key objective. The dividend increase in the third quarter will be our eighth in the last 10 years. Through the successful execution of our strategy, we have now increased our dividend by nearly 30% over the last three years, and we will continue to invest in timberland and Performance Fibers to drive dividend growth and total shareholder returns.

So, with that, I'd like to close the formal part of our presentation and turn the call back to the Operator for questions. Thank you.

(Operator Instructions) Chip Dillon, Vertical Research Partners.

Looking at the exchange that you talked about -- and maybe this is laid out; I just missed it -- but basically, you had this in both second-quarters only, this year and last year. And so, maybe I just don't recall, but is this -- this is up, I guess, about $0.08 of the earnings that you reported -- I'm sorry; I actually did a stock split. Sorry -- it's probably about $0.05 of the $0.45. Is that the way we should think about it for this year?

It's $0.05 (multiple speakers) --

(multiple speakers) Of the $0.54, excuse me.

That's right, Chip. It's about $0.05 of the $0.54 that we recorded this quarter. And yes, basically, you've got to go through the analysis each year. And so, last year, we updated the analysis in the second quarter. And we do the same thing here. We complete the analysis and came up with this determination.

Got you. But there was nothing in there for this for either the first quarter of this year or last year. It's just been recognized only in the two second-quarters, is that right?

That's where -- last year, we had a little bit more, I think, in the third quarter. But you're right, the bulk of it came through in the second quarter.

Got you. Okay. And then moving on, looking at the project, could you just give us an update on that? And I guess the two questions specifically are, how do you see the $7 million in capitalized interest sort of running off next year? Will you see it go away, I guess, in mid-year?

And then, is everything pretty much on time and -- for start-up in the middle of next year, or I guess it's September, as you had indicated -- or I'm sorry -- second-quarter, as you'd indicated earlier?

So, Hans?

Yes. So, once we complete the project, we'll stop capitalizing interest. And that will just then run through the depreciation expense as part of the overall cost of the project.

But, Jack, maybe you want to handle it as far as the timing of it?

Yes, we're -- as indicated, we're still looking at a mid-2013 as per our plan, and we're well underway this year. So we don't see any issues at this point in time.

Okay. And then the last one is, when you do start that up, I mean, right now, it looks like your depreciation is running somewhere around -- well, the $260 million, I guess. Or actually, I'm sorry, you mentioned $153 million for this year. And I'm assuming that won't change a lot until that starts up. But upon start-up, what do you sort of see the annualized depreciation? And I know I included [bases] in that number. What do you see the annualized -- so let's maybe use the $147 million. What do you see that going to? How much of an impact will the project have?

Well, your incremental, I would say, roughly, would be another $15 million or so a year of depreciation, roughly.

Got you. Okay. (multiple speakers) Thank you.

(multiple speakers) On the full year, yes.

Joshua Barber, Stifel Nicolaus.

We've seen some pretty wet weather so far around the Gulf South, so far, third-quarter to date. Can you talk about some potential impacts, first, on your timber pricing for the third quarter? And also on what impact that might be having on the costs for the Performance Fibers side?

Yes, Josh, let's -- Lynn, take the first part and Jack, the second. Yes.

Josh, we've been very fortunate within the Gulf States and we've seen timber prices go up across the board, anywhere between 5% to 7%, but we expect that to carry through the third quarter because of the extended impacts, particularly from Anna West. And we're looking forward to capturing that price in third quarter.

And from a Performance Fibers standpoint, you know, when you go back and you look at some of the wet periods, like 2003, we learned that we needed to carry significant amounts of inventory to try to correct that or prevent it from running out of fiber. So we're in very good position with our procurement group going into this kind of wet period. And bottom-line, is we didn't see much of an impact -- somewhat of an increase in hardware prices, but nothing too significant.

Great, that's helpful. We've seen a couple of big timber deals in the last few months. Are you guys still involved actively in some of the larger deals? And do you think your cost of capital could be competitive today to where some of those prices seem to be?

Yes, Josh, I'll take a swing at this. And then, Charlie, if you want to add to it. Obviously, we're still out there looking. We reported last time kind of our look to hit ratio. And we tend to look at a lot -- bid on a lot less and then actually execute on a very small number. So, Josh, we're still out there actively, but it's got to make good financial return from us. And we stay very disciplined on that. And so we don't have much to report ourselves so far this year.

Charlie, any comments on where you see transaction rates at or anything?

Only that -- just repeat what you said a bit, that we've done evaluations, we've made some offers, and basically, this year have been outbid. So, it's pretty active out there. We continue to look and there are opportunities. But it's a pretty active market.

Great. Two quick questions for Hans. First, is the $0.05 of the cellulosic biofuel credit, is that included in your guidance as being comparable? Or would that be counted as a special item? And second, what's the total cash spent to date on the Jesup project? Thanks very much.

Sure, Josh. Yes. It is just included in the overall guidance -- the $0.05. And so -- and then the total cash spend through June 30 is about $116 million on the CSE.

Great, thank you very much.

Steve Chercover, D.A. Davidson.

I was interested to hear that you're now up to 85% sold out on the Cellulose Specialties project. Does that include the commodity viscose that you're going to start with?

Yes. That's been fairly consistent. What we've been reporting is, of that 85%, 70% is the high value CS business and roughly 15% is commodity viscose.

And Jack, how quickly do you expect that you'll kind of transition out of the commodity viscose?

When we look at -- you know, in 2013, the second half of the year is going to be primarily commodity viscose. We'll use that timeframe to qualify pulps. 2014, the majority of that production will be high value CS. So we'll phase that in over a one to two-year type period.

Perfect. And then, with respect to land transactions, is it still your preference to do kind of smaller deals or bolt-ons? Or would you even be interested in kind of a very large transaction?

Steve, again, I'll take a shot. We're continuing to remain interested in anything that we think we can provide a good return to our shareholders on. Last year, we transacted on well over $400 million worth of property; 325,000 acres. So -- and one of those I think was one of the largest ones transacted last year. So we'd say that's a sizable. It's not as large as one of the ones that we just have heard recently about, but we keep our eyes open for all sizes. In fact, we think we may be more competitive at the larger sizes.

Sure. And final question on wood products, which is finally worth mentioning, do you think it's sustainable?

I'm sorry, do I think it's what?

Sustainable, you know, where it's actually be making a contribution of (multiple speakers) --?

Well, I'd like to think so, but you never quite know here. But the housing market continues to have a little bit of, I guess, growth in it. And so we look favorable in the first half -- or second half.

And sorry, maybe I'll squeeze one more in. Along the I-95 corridor, do you think you have opportunities to do some transactions that might be more commercial or industrial, the way you've done in the past?

Yes, it's Charlie. We sure hope so. I mean, we believe that the commercial and industrial will lead the improvement and residential development will follow. And we've got several properties entitled and rezoned and ready to go. So, yes, we think so. But it's nothing -- I'd like nothing more than to report a couple really good transactions to you. So we're working on them but it's probably going to take a little time.

Okay. Thank you all for your answers.

Mark Wilde.

Good afternoon and congratulations on a good quarter. Just curious. There's a specialty cellulose producer that's been talked about in the market quite a bit recently. Without asking you to comment on that situation, I'm just curious -- is there room for you within the TRS to significantly expand the business beyond what you're doing at Jesup right now, under the REIT rules?

Yes, let me take the first part of that, and I'll maybe let Hans talk through some of our REIT Rules. But I'm not too sure exactly what mill you're talking about. There may be a Northern European one.

Yes, I -- that is. It is.

Yes, you know, we have looked in, as we have for 15 years or longer, any opportunity out there that we think is a nice fit with our business. And we will continue to do that. I'm not saying that this one is a particular fit or not, but I said we're always open-minded that way, Mark.

With regard to the REIT rules and acquiring an asset like that, Hans?

Sure. In a case like that, if it was all financed from the TRS, there really would be, at least out of the chute, no net increase in the TRS value, per se. But, going beyond that, we've said before we have pretty strict oversight of the compliance with all the REIT rules and the asset tests in particular. And a pretty rigorous process, which includes a quarterly review of the Board going through asset values.

And so, we are currently in full compliance with the test. I will say it's a very technical test. As you know, it doesn't go off of GAAP numbers but off fair values. And there's also a lot of internal structuring opportunities that we've done to give us some additional headroom, if you will, under that. And there's some opportunities that we're looking to do in the future.

So, given all that, we're in compliance with it. However, I'd say that we all recognize that if Performance Fibers growth continues, at some point in the future, we may reach a point where we have potentially a issue. And if that comes to be, we'll look at all available options that are really shareholder-friendly. So just to reiterate, we have a very rigorous process around the test.

Okay. A question now for Lynn. It sounds like the rebounds that you were looking for in China, you mentioned that's now kind of -- looks more like fourth-quarter event. I know a couple of months ago, a lot of people that I talked with in the Northwest were thinking about this as a second-half event. So can you just -- can you update us on what you're seeing on the ground in China right now and how you read that situation?

Certainly. As you said, we've experienced the near-term softness. And we were expecting the second half to rebound, and have now looked out to the fourth quarter. New construction in China South, and to tackle the slowdowns, the People's Bank of China lowered the deposit rates and reduced the interest rates.

So, in the first half of 2012, China's log imports declined. But during the same period, the lumber imports dominated by Canada increased. So there has been, even though there was a decline in port inventories in February, there has been a modest increase in those port inventories again. But we are hoping that with the changes to the deposit rates and the reduced interest rates, that that will spur the new construction, which is what we need.

So, in the long-term, we still have that fundamental 7% to 8% growth expansion of their economy, and expect that that demand will flow through the pipeline. And that we're positioned with where our ownership is, with the port access to be able to move quickly -- and the fact that we have invested in roads over the past two years, so that we can operate in any quarter, and move quickly as soon as the price is at a point where we want to be. And we're also seeing some modest uptick with our domestic customers, so we continue to move our volume both to export and domestic customers.

Okay. And I think, Lynn, in the past, you've said that kind of New Zealand is often a leading indicator for you in terms of kind of Chinese market activity. Is there anything to report on that front right now?

You know, just, again, I think that gives Lynn and the team in the Northwest a good view of what may be coming, because we do have the New Zealand operation. And, Mark, I see that's why we give the confidence. And again, Charlie can add to this. But the market is going to be relatively slow going into the back half of this year. So, I think that's why we're saying it's probably likely going to be fourth-quarter at best before we see a lift, because we see China pretty -- or sorry, New Zealand pretty quiet into China right now.

Okay. And Paul, the dollar has been rallying against a lot of currencies. I wondered if you could just take kind of two steps back and talk with us briefly about how you think the FX affects all of your businesses?

Yes, you know, we primarily -- I mean, we look at the dollar and the currency ratios there, just really on the PF side of our business. And we sell in dollars around the world and we treat all of our customers very consistently.

So, through the years, we see ups and downs, and we always take it into our pricing considerations come to the new year. Obviously, a stronger dollar will have some effect; but at the same time, we've seen a very weak dollar, and our customers have all had the benefit of that over several years now. So, there's nothing really specific I can say it's going to push us in one area or another. It's just the fact that we put into our pricing, particularly in the PF side, come the coming year.

Okay. All right. Sounds good. Thanks and good luck in the second half here.

Michael Roxland, Bank of America Merrill Lynch.

A lot of my questions have been asked, but I just had a quick question, I think, for Lynn on timber pricing. Obviously, we've seen a recovery in lumber pricing, and to some extent, lumber demand. At what point should we expect that improvement to translate into improved timber pricing?

Well, Michael, we've already started to see that both in our Wood Products business, but also we are up this course, we've actually shifted a little bit more to saw logs this quarter. Our shift before was 75% to 25%, and this quarter, we're at about 65% pulpwood to 33% saw logs. So we have started to see, particularly in our Gulf states, where we've been able to move more saw logs. But we've already started to see that modest price uptick and demand, which has been a favorable outcome.

But I guess you've really seen a pretty significant improvement in lumber. So, I mean, do you expect to see further price improvement over the next couple of months? Particularly if lumber remains at these levels?

You know, Mike, we saw, I think, quarter-to-quarter on the Wood Products business, a 16% increase on prices there. And then after, it's kind of dropped off a little bit. It's such a hard one for us to predict and even harder to translate that back to the stump.

So it's hard for us to go out there and say this is what it's going to be. If I had to guess, we're probably more conservative. Maybe it's closer back to first-quarter numbers, but it's certainly somewhere in between, we think, first and second-quarter. And again, as Lynn mentioned, it's helped push a mix shift a bit to the grade market versus pulpwood, and given us a little bit lift on price out of the grade market as well. But it's really hard to say exactly where it's going to net out here, going forward.

Got you. Thanks very much.

(Operator Instructions) Paul Quinn, RBC Capital Markets.

Just a couple questions on Performance Fibers pricing. I just noticed that your fluff realizations were down sort of $16 quarter-over-quarter, where list prices were up $35. What -- is that a lag effect happening? Or what specifically is happening to you, versus -- or maybe list isn't indicative of what's happening in the marketplace, but maybe you could comment.

Yes, if we look back at the first part of the year, we saw a little bit of an increase in fluff prices going into the tail end of the first quarter and the first part of the second quarter. And now what we've realized with the NBSK market dropping off, that discounts have been fairly significant out there off of list, on top of a very significant drop in spot prices, particularly in China. So, the drop-off from quarter-to-quarter here is really just kind of indicative of the drop-off we've seen a little bit in the marketplace.

And Jack, you'd say it's probably the gap between what's reported out their list and ours, again, is just more of timing than anything else.

Yes. We have about a two months' offset and it's based on our contractual commitments.

Okay. And have you noticed any difference in sort of the dynamics around fluff pulp pricing as the Franklin Mill ramps up? Do discounts widen out even more?

Yes, I think it's a combination of the South American Mill and the Franklin Mill coming onstream, that's about another almost 500,000 tons of volume, plus with the NBSK market being so soft, some of the swing players swing more over into fluff. That does provide more supply into that market, so you're going to have somewhat of a drop-off or a higher discount off of the list price.

Okay, then just while we're on the specialty DP pricing, that $83 quarter-over-quarter, is that just a rollover of contracts that didn't reset at the beginning of the year, but they reset this quarter?

No. If you go back again from the end of 2011 into 2012, we had less volume roll over into 2012 that would have been at that 2012 -- or '11 prices. We had an increase going in from Q1 to Q2, as it now totally reflects all of 2012 volume; none of 2011. And a little bit on just standard mix.

And Paul, if you look in our notes there, you'll see the same kind of pattern the year before. It just kind of took a while for everything to balance out there into the quarter, and then, you know, the mix.

Okay, great. Thanks, guys.

Thanks, Paul.

We have no other questions from the phone lines. Speakers, I'll turn it back over to you.

All right. Well, great. This is Hans Vanden Noort. We appreciate you joining us this afternoon, and please contact Carl Kraus with any follow-up questions.

Thank you for participating in today's conference. You may now disconnect at this time and have a wonderful day.