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Deltic Timber Corp. (NYSE:DEL)

Q4 2008 Earnings Call

February 05, 2009 11:00 AM ET

Executives

Ray C. Dillon - President and Chief Executive Officer

Kenneth D. Mann - Vice President, Treasurer, and Chief Financial Officer

Analysts

Anna E. Torma - Soleil Securities

Robert Holt - Holt Capital Partners

Operator

Good day, ladies and gentlemen. And welcome to the Q4 2008 Deltic Timber Earnings Conference Call. My name is Becky and I will be your coordinator for today. (Operator Instructions).

I would now like to turn the presentation over to your host for today's call Mr. Ray Dillon, President and Chief Executive Officer. Please proceed.

Ray C. Dillon

Good morning. I would like to welcome you to Deltic Timber Corporation's fourth quarter 2008 conference call. I am joined today by Ken Mann, Vice President and Chief Financial Officer. Ken will begin with an opening statement, followed by a review of the financial results released yesterday. And then I will close with some brief comments on current operations, and the outlook for the first quarter of 2009, before we open the line for any questions. Ken?

Kenneth D. Mann

Thank you, Ray. Yesterday Deltic issued it's news release announcing earnings for the fourth quarter and New Year (ph) of 2008. If you don't have a copy yet you can download one from the Investor Relations section of our company website deltic.com.

If you don't have access to the Internet, call me to request a copy, my direct telephone number is 870-881-6432. And now before continuing, I would like to make a statement relating to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Some of the comments made during the course of this conference call will be considered forward-looking statements. These statements will reflect the company's current views in regard to future events and financial performance. However, no assurance can be given that these events will occur or that the projections will be attained.

Certain important risk factors that may cause actual results to differ materially from these forward-looking statements are identified in Deltic's 2007 Form 10-K on file with the SEC.

For my financial review, I will focus initially on the results for the fourth quarter of 2008 and then I will go over the year 2008 as a whole.

For the fourth quarter Deltic's financial results were a loss of $0.2 million, $0.02 a share, a decrease of $1.9 million from the 2007 fourth quarter income of $1.7 million, $0.13 a share.

Free cash flow income for the quarter was actually positive by $900,000 but a tax adjustment recorded during the period resulted in an effective income tax rate for financial reporting purposes of some 129% thus resulting in the reported loss. I want to discuss this in more detail later in my comments.

For the quarter net sales were some 27.3% higher than a year ago at $31.2 million. However, this increase was due largely to downtime at the Waldo Mill in the fourth quarter of last year as we completed fire related affairs there.

The Woodlands segment, reported 17% higher operating income at $6.9 million in the 2008 quarter compared to $5.9 million a year ago. For the quarter, we benefited from the sale of 3,200 acres of non-strategic recreational use hardwood bottomland for an average price of $1,521 per acre. We plan to use the proceeds from these sales to acquire additional pine timberlands.

The quarter also benefited from a 25,400 ton increase in pine pulpwood harvested and $1 per ton increase in the price of seed for the 116,700 ton of pine pulpwood sold. And to $558,000 of additional oil and gas lease rental and royalty income compared to the fourth quarter of last year.

The harvested pine sawtimber was 21% lower in the fourth quarter of 2008 when compared to the same quarter last year. Mainly as a result of the acceleration of harvesting from the company's Waldo region free lands in the fourth quarter of last year due to the start-up of production at our Waldo Mill after repair to the fire damage were completed at the end of October. If you recall we had suspended our harvesting activities during the third quarter of 2007 due to the mill shutdown.

Actual harvest volume level in the fourth quarter of 2008 was 108,800 tons some 29,500 tons lower than the 138,300 tons harvested in the prior year fourth quarter. The average stumpage price dropped 26% to $29 per ton compared to $39 a ton in the 2007 fourth quarter. As a weak lumber market had exerted downward pressure in sawtimber prices.

As expected residential lot sales continue to be lower than desired due to the slowdown in housing starts in the Central Arkansas region consistent with the rest of the U.S. We sold 14 lots in the fourth quarter of 2008 compared to 23 lots a year ago. While the average price of $88,200 per lot compares unfavorably to the average of $90,400 per lot in last year's fourth quarter due to sales mix.

Financial results for the fourth quarter of both 2008 and 2007 include no sales of commercial property. And as a result of these factors, the real estate segment reported a loss of $500,000 in the fourth quarter of 2008, a decrease of $1 million compared to income of $500,000 for the same period of 2007.

In the mill segment, operating results were a loss of $1.6 million compared to income of $500,000 to the 2007 quarter, $2.1 million reduction.

In closing the 2007 quarter results were a again on the involuntary conversion of the Waldo Mill planer machine damaged in the fire totaling $1.9 million, and operating income of $1.2 million on the settlement of related business interruption claims for the month August, September and October.

If we were to exclude the $3.1 million benefit of the income from these insurance claim settlements from 2007 fourth quarter, the financial results for the mill segment in the fourth quarter of 2008 would have actually been an improvement of $1 million. This operating improvement given the additional lumber market that existed for all of 2008 that deteriorated further in the fourth quarter is largely the result of improved operating efficiency at both of our mills especially for the hourly lumber production rate metric and of lower royalty plateaus as pine's stumpage prices have decreased.

Average sales realizations of $264 a thousand, some $5, 2% lower than the corresponding quarter of last year. Lumber sales volume increased 11.2% to 52.5 million board feet in 2008's fourth quarter, due to a combination of the suspension of production at Waldo Mill for most of the month of October 2007 as a result of the fire and to the significant improvement in hourly lumber production rate during 2008.

Del-Tin Fiber had a respectable quarter, contributing $200,000. This compares to $400,000 a year ago. The plant's average sales realization increased 7% compared to the fourth quarter of 2007 results. $534 per thousand square feet while sales volume dropped 15% to 23 on 8 million square feet for the fourth quarter of 2008 due to reduced MDF consumption.

The income tax adjustment that I referred to you earlier was due to adjusting the estimated annual effective income tax rate for the year of 2008 that was used for the first three quarters of the year through the actual effective annual rate that was based on actual pre-tax financial results.

This adjustment was recorded in the fourth quarter as required was primarily the result of realizing lower than estimated benefit for package of the TREE Act which was impacted largely by the level of fourth quarter 2008 taxable income.

Turning to the year 2008, Deltic's net income was $4.4 million, $0.45 a share based compared to the 2007 period of $11.1 million, $0.90 a share. Net sales increase about 1% to $129.5 million.

The Woodlands segment contributed $27.8 million some $3 million higher in 2007. Volume of pine sawtimber harvested is 579,770 tons, an increase of about 4,100 tons. The average sales price per ton is $33, decrease of $7 a ton.

The market for pine pulpwood remain very strong in 2008. We harvested 390,200 tons an attractive average price of $15 per ton. We also sold 5,062 acres of non-strategic hardwood bottomland at $1,752 per acre in 2008 compared to 893 acres of timberland sold for $1,700 per acre in 2007.

Oil and gas lease rental and royalty increased a 119% from the prior year, $3.5 million in 2008.

For the mill segment, operating results were a loss of $4.8 million compared to a loss of $3 million in 2007. Partially due to the impact of a lower average sales price of $277 per thousand board feet from $16 per thousand board feet lower from last year.

Lumber sales volume was 17% higher than last year totaling 254.6 million board feet and the 2007 volume was impacted significantly by the three month production suspension at the Waldo Mill due to the fire.

Real estate operations, a loss of $1.9 million compared to a positive contribution of $13.1 million a year ago. We sold 39 residential lots, an average price of $77,800 a lot compared to 81 lots which averaged $89,500 a lot in 2007.

During 2008, we had no commercial acreage sales while in 2007, we sold almost 26 acres of commercial real estate, an average price of $240,600 a acre.

There continue to be interest in our remaining commercial properties in all valley specially that zone for multi-family housing. However, the current tight credit market has impacted most commercial property developers as Ray will discuss in his comments.

Another real estate transaction having a significant impact for the financial... our reported financial results for this segment in the 2007 period was the sale of 680 acres of undeveloped real estate in Central Arkansas Water to $8.2 million or $12,000 per acre. There were no such undeveloped acreage sales in 2008.

Deltic's equity in Del-Tin Fiber was $2.3 million for 2008 compared to $1.7 million for 2007. The average sales realization for 2008 was $538 a thousand compared to $488 a thousand in 2007. Sales volumes were some 4.7% (ph) lower due to reduced consumption of MDF if set in the fourth quarter of 2008.

Capital expenditures increased to $29.7 million for 2008, compared to $20.6 million during 2007. The increase was primarily a result of timberland acquisitions as we utilized proceeds from the sale of the hardwood bottomland to acquire pine acreage as planned and our real estate acreage acquisitions as we capitalizes on some opportunities that rose in 2008.

At the end of 2008, our cash balance was $2.4 million; our working capital was $4.8 million. Long-term debt outstanding, at December 31st, was $75.8 million, while long-term debt to capital employed ratio was some 26.2% among the lowest in our industry.

With that level of working capital, the cash generated from our businesses to the $269 million available through our existing revolving credit facility if needed Deltic does have liquidity concerns even in the current economic environment.

Now, I will turn the call over to Ray for his comments.

Ray C. Dillon

Thank you, Ken. Deltic's reported financial results for the fourth quarter of 2008 were largely impacted by the financial crisis and the resulting economic contraction that existed during the quarters, the effects of which I will discuss in more depth and the increased effective income tax rate which Ken commented on earlier.

Tightened credit markets that existed as we entered the fourth quarter saw additional deterioration and further depressed the environment that exist for both residential and commercial real estate sales and construction. This impacted Deltic in the form of fewer residential lot sales and our real estate developments, and a lack of commercial real estate acreage sold here in the year.

We also saw a further reduction in the demand for the dimension lumber to be used to construct new homes. This reduced lumber demand directly impacted the sales realizations received for the lumber that we produced. In addition, the drastically reduced lumber consumption level forced many sawmills to either reduce operating hours like temporary downtime or seize production indefinitely. This severely depressed lumber market also resulted in significant downward pressure on pine sawtimber stumpage prices, especially in the operating area of our Waldo Mill.

Business conditions for most of 2008 were more difficult for forest products companies than seen in many years, I would note that Deltic's reported financial results for the year were positive which is very respectable for the economic environment that existed for most of the year.

I would also note that there were some significant positive highlights for the year of 2008. Operating income and cash flows for our core Woodlands segment actually improved from a year ago despite the decrease in pine sawtimber stumpage prices. This segment contributed income of $6.9 million in the fourth quarter and $27.8 million for the year of 2008. This compares to $5.9 million in 2007's fourth quarter and $24.8 million for the year of 2007.

Cash flows totaled $33.8 million in 2008 versus $30.9 million in 2007. 2008, we continue to capitalize on the strong demand for pulpwood that resulted from reduced availability of residual softwood chips from sawmills as they reduced output due to soft lumber market conditions. As such, we harvested 390,200 tons of pine pulpwood and a record average price of $15 per ton obtaining our pine forest and plantations as needed to enhance their sawtimber producing capabilities. This generated some $5.8 million in revenue from pulpwood for the year about $200,000 more than in 2007 on some 69,000 fewer tons sold.

The third noteworthy highlight of 2008 was the sale of about 5,100 acres of non-strategic recreational use hardwood bottomland some $8.9 million on attractive $1,752 per acre. In already harvested, most of the pine sawtimber and higher quality hardwood timber on these lands in previous years and the hardwood flooring market was strong.

These acres were not well suited for growing pine sawtimber, so we liquidated such non-strategic lands and used the sales proceed to invest in acquisitions of pine timberlands to grow our strategic land base.

During 2008, revenues received for oil and gas leasing activities, specially those related to acres leased in the Fayetteville Shale area increased significantly over the amount in the prior year. For 2008 combined income from lease rentals and royalties were about $3.5 million, some $1.9 million more than received in 2007.

We received royalty payments totaling some $1.6 million from the production in units, there are 45 successful wells have been drilled. Our ownership percentage in these various units carries greatly. Therefore, the financial impact realized beyond the recognition of the $2 million of annual lease bonus income on payments already received has began to materially impact our reported financial results.

Estimation of the future potential impact remains difficult due to the number of variables involved particularly in natural gas prices as this drives the level of drilling activity as well as the price we receive for our share of the gas produced.

Our financial results for Deltic's mill segment were negatively impacted by the weak demand for dimension lumber. We remain intensively focused on managing our sawmills for maximum efficiency. These efforts were concentrated on increasing hourly productivity rate and improving operating efficiencies while reducing every element of controllable manufacturing cost. As such, another highlight for the year was that our mill segment was able to produce positive cash flows for the company in 2008 despite the extremely weak lumber market.

And final significant highlight was to continue additional positive financial performance at Del-Tin Fiber. Our 50% owned joint venture to manufacture medium density fiberboard. We're very pleased with the plant's operating and financial performance in this economic environment. Although at a reduced level, the overall market for MDF remained relatively stable for most of 2008 as production levels of MDF remained in balance with demand.

Combination of solid operating performance, and enhanced product mix, and relatively good market conditions for the year was partially offset by the impact of high costs for both the wood fiber and resin glue used in the MDF manufacturing process. These factors resulted in Deltic's equity in the joint venture increasing from $1.7 million for the year of 2007 to $2.3 million for 2008. As Ken reported equity in Del-Tin for the fourth quarter of $200,000 was about one half of the amount reported for the same period in 2007 as we expected softening of the MDF market with the current level of housing starts finally occurred in the fourth quarter.

Otherwise, we remain committed to keeping our pine sawtimber August volume equal to estimated annual timber inventory growth. Accordingly, the pine sawtimber harvest volume in 2008, of 579,770 tons is only slightly higher than the harvest in 2007. Failed realizations for pine sawtimber averaged $33 per ton in 2008 versus $40 per ton for 2007.

We anticipate that the total 2009 pine sawtimber harvest level to come in at 525,575 tons with 140,000 to 150,000 tons harvested in the first quarter. Operating schedules for our sawmills and then resulting log supply needs will impact the timing of harvest from our land more than in previous years.

Primarily as a result of the production downtime at our Waldo sawmill due to a fire in third quarter of 2007 and the related downtime for completion of repairs during the months of August, September and October of last year, our lumber sales volume increased from 47.2 million board feet a year ago to 52.5 million board feet in the fourth quarter of 2008 and from 218.2 million board feet for the year of 2007 to 254.6 million board feet for 2008.

Deltic's finished lumber sales volume is estimated at 45 million to 55 million board feet for the first quarter and 220 million to 260 million board feet for the year of 2009. However, this volume could quickly be adjusted as needed to react to conditions in the lumber market.

In our real estate segment, residential lot sales activity during the fourth quarter and the year of 2008 reflects the significant slowdown in the housing market that has been seen throughout the United States. Residential lot sales for the fourth quarter of 2008 decreased from 23 lots to 14 lots when compared to a year ago.

For the year of 2008, lot sales totaled 39 lots versus 81 lots sold in 2007. We anticipate that combined lot closings for our three developments for the first quarter and the year of 2009 will continue to be very slow and be between zero to five lots and 20 to 30 lots respectively.

Company has adjusted the timing of the development of new lot offerings to allow demand to catch up with available lot inventory and currently plans to offer no new neighborhoods for sale in 2009.

I'm pleased with the reported financial results for the year, given the environment in which we operated. I would also repeat the fact that Deltic actually generated positive pre-tax income in the fourth quarter. Without the unusually high effected income tax rate for the quarter, we would have had a positive net income for the period. A remarkable feat, given the state of the economy.

As with similar equities in our peer group, Deltic share price traded below its intrinsic value in the fourth quarter. We took advantage of this by utilizing some $6.2 million of our open share repurchase program.

We view this activity as the purchase of more of the timberland that we know the best at discounted prices. Deltic's strong balance sheet allowed us to maintain our dividend with the added bonus of repurchasing our shares at attractive prices.

Liquidity is not an issue with our strong balance sheet. Revolving credit facility that we have in place. As we enter 2009 I feel that the operating environment for forest products and real estate companies will be extremely challenging. We're very cautious about the state of the overall economy.

However, I feel we're well positioned to take advantage of any market recovery when it comes. In the mean time these conditions may eventually present asset buying opportunities as we look to grow Deltic's asset base.

Becky, we can now open the lines for any questions.

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of Anna Torma of Soleil Securities. Please proceed.

Anna Torma - Soleil Securities

Good morning, Ray, Ken. Your guidance for sawtimber volumes to be sort of flat to down to 9% year-over-year. Do you expect your pulpwood volumes to be under similar pressure or should we be looking for a different delta there?

Ray Dillon

I would say that they would be a down slightly, would be what we've forecast on.

Anna Torma - Soleil Securities

Okay, great, thanks. And then can you comment on whether your pulpwood or sawtimber log pricing looks to be still holding relatively flat coming into January are you seeing some greater slippage?

Ray Dillon

We are continuing to see slippage in both product categories as you see downtime at the pulp and paper mills and our market areas and also as we continue see the lumber price exert pressure on sawtimber prices.

Anna Torma - Soleil Securities

Okay, great, thanks. And then just one more question if I could do you, are you seeing any pressure on reducing your prices for your lots or are you kind of hold to your strategy of keeping pricing steady and waiting for the market to come back to you here? Thanks.

Ray Dillon

We continue to hold our strategy of holding our price levels for the value that the lots weigh and waiting for the markets to return.

Anna Torma - Soleil Securities

Okay great. Thank you very much.

Ray Dillon

Thank you.

Operator

And your next question comes from the line of Robert Holt of Holt Capital Partners. Please proceed.

Robert Holt - Holt Capital Partners

Good morning.

Ray Dillon

Hi, Rob.

Robert Holt - Holt Capital Partners

Your CapEx in the real estate segment was up some, could you give us more details there and what you expect for '09 versus '08 in terms of real estate CapEx?

Ray Dillon

The CapEx was related to real estate purchases in that segment. And that would be the reason for being up. I guess as far as real estate development we plan no new residential development segments for the year 2009. It's hard to predict depending upon what opportunities may present in sales but I would tell you the best forecast I could give you today is that it would be comparable and it likely would be a little less than what it was in the previous years especially since we have no new developments planned.

Robert Holt - Holt Capital Partners

So would this be developable land contiguous to which you have already got or can you give us some more color there?

Ray Dillon

Yes. It's land located in the areas in which we operate in our present real estate developments.

Robert Holt - Holt Capital Partners

And did you also acquire some additional timberland during the quarter and if so, how many acres and the price per acre?

Ray Dillon

I think we can give you the number of acres today. You have those Ken?

Kenneth Mann

I do. For the quarter we purchased about just under 3,300 acres of timberland during the quarter.

Ray Dillon

And the price per acre now will be disclosed in the 10-K, Rob.

Robert Holt - Holt Capital Partners

Okay. How much stock you have remaining on your buyback program?

Ray Dillon

It's about $19 million. Is what's authorized in our buyback program. Is what's left remaining in our buyback program.

Robert Holt - Holt Capital Partners

And then in the third quarter you had as I recall roughly a $1 million of incremental G&A expenses for acquisitions work that was done and apparently didn't materialize with anything. Where are you in that process at this point? Your G&A seem to come back down. So I think that you didn't spend much money in the quarter?

Ray Dillon

That's correct.

Robert Holt - Holt Capital Partners

Any comment on the valuation that is implied by the bid for Four Star (ph)?

Ray Dillon

No comments.

Robert Holt - Holt Capital Partners

Okay. Thank you.

Ray Dillon

Thank you.

Operator

I am showing here no further questions at this time. At this time I would like to turn the call back over to Mr. Ray Dillon for closing remarks.

Ray Dillon

Thank you for your interest in Deltic Timber and I hope you would join us again next quarter.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.

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