Deltic Timber's CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: Deltic Timber (DEL)

Deltic Timber Corporation (NYSE:DEL)

Q4 2013 Earnings Conference Call

February 27, 2014, 11:00 AM EST




Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2013 Deltic Timber Earnings Conference Call. My name is Regina and I’ll be your operator for today. At this time, all participants on the phone lines are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) Today’s event is being recorded for replay purposes.

I would now like to turn the conference over to your host for today Mr. Ray C. Dillon, President and Chief Executive Officer. Please go ahead Mr. Dillon.

Ray C. Dillon

Good morning. I would like to welcome you to Deltic Timber Corporation’s fourth quarter earnings conference call. I’m 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 comments on current operations and the outlook for the first quarter and year of 2014 before we open the line for any questions. Ken.

Kenneth D. Mann

Thank you, Ray. Yesterday, Deltic issued its news release announcing financial results for the fourth quarter and year of 2013. If you don’t have a copy yet, you can download one from the Investor Relations section of our company website, if perhaps you don’t have access to the internet; call me to request a copy. My direct telephone number is 870-881-6432.

Before we begin our prepared comments, there are a couple of items that I need to cover. First is that information recorded on this call speaks only as of today. Therefore, you are advised that any time-sensitive information may no longer be accurate as of the date of any replay. In addition to this, 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 all identified in Deltic’s 2012 Form 10-K on file with the SEC.

Now from our financial review, I will focus initially on the results of the fourth quarter of 2013 and then I’ll go over the year 2013 as a whole. For the fourth quarter, Deltic reported a net income of $2.3 million $0.18 a share. This was a $1,000 decrease from fourth quarter of 2012 due mainly to a lower pine pulpwood harvest volume combined with the sale of fewer acres of recreational-use hardwood bottomland and this was essentially offset by our margin on increased residential lot sales activity and lower general and administrative expenses.

For the quarter, net sales of $48.4 million or 31.9% higher than a year ago. The Woodlands segment reported 21.7% lower operating income at $3.4 million in the 2013 quarter compared to $4.2 million a year ago. The harvest volume of pine sawtimber was 1.4% higher in the fourth quarter of 2013 when compared to the same quarter last year and that was due to timing.

The actual harvest volume in the fourth quarter of 2013 was 103,263 tons, 14018 tons more than the 101,845 tons harvested in the prior year fourth quarter. The average stumpage price received was the same from both periods at $22 per ton. During 2013’s fourth quarter we harvested 65,634 tons of pine pulpwood at an average price of $8 per ton, compared to 116,441 tons in the prior year fourth quarter also for $8 per ton.

Oil and gas lease royalty and rental income increased by $200,000 to $1.4 million for the current year fourth quarter. We also sold 53 acres of non-strategic recreational-use hardwood bottomland for an average price of $2,900 per acre in the fourth quarter of 2013 while the fourth quarter of 2012 included $988 such acres sold on the average price of $1500 per acres.

The manufacturing segment generated operating income of $5.6 million for the quarter, compared to the income of $5.2 million in the 2012 quarter. For the quarter, the manufacturing segment generated cash flow of approximately $8.4 million. Since Deltic acquired the remaining ownership interest of Del-Tin Fiber back in April. The plants financial results are now consolidated into the results of Deltic’s Manufacturing segment.

For the fourth quarter, the average lumber sales price of $355 per thousand was $29 higher than the corresponding quarter of last year. While our lumber sales volume decreased 3.8 million board feet to 65.4 million board feet in 2013’s fourth quarter. MDF sales volume totaled 22.6 million square feet, a decrease of 6.4 million square feet from a year ago. The average sales price for MDF during the current quarter was $570 per thousand square feet compared to $541 for the same period last year.

Residential lot sales increased from a year-ago, we sold 15 lots in the fourth quarter of 2013 compared to 12 lots a year ago. The average price of $82,300 per lot compares to an average of $70,000 per lot in the last year’s fourth quarter. There were no sales of commercial real estate acreage during the fourth quarter of either 2012 or 2013.

As a result of these factors the real estate segment reported an operating loss of $200,000 in the fourth quarter of 2013, compared to an operating loss $400,000 in the fourth quarter of 2012. Corporate operating expense for the fourth quarter of 2013 of $4.2 million was $300,000 lower in the same period of 2012; this was due to reduced general and administrative expenses.

Deltic recorded income tax expense of $1.2 million in the current period compared to $1.6 million in the fourth quarter of 2012 mainly due to decreased pre-taxed income combined with a benefit of a lower effective tax rate in the fourth quarter of 2013. Now turning to the year 2013 Deltic's net income was $26.2 million, $2.06 a share compared to net income in the 2012 period of $9.2 million $0.73 a share. Net sales increased 41.7% to just under $200 million.

The Woodland segment contributed operating income of $16.8 million, which was $1.6 million lower than in 2012. The volume of pine sawtimber harvested was 605,361 tons a decrease of 1518 tons and the average sales price per ton was unchanged at $22 per ton. We harvested 34,083 tons of pine pulpwood at an average price of $8 per ton during 2013 while we harvested 474,834 tons in 2012 also for $8 per ton. Oil and gas lease rent and royalty income increased from $4.9 million in 2012 to $5.1 million in 2013.

During 2013 we sold 677 acres of non-strategic hardwood bottomland for $1,500 per acre compared to 1,776 acres of timberland sold for $1,600 per acre in 2012. For the Manufacturing segment, operating results were income of $38.5 million compared to income of $18.1 million in 2012, this was the $20.4 million increase, it was largely due to an impact of an increased average lumber sales price of $384 per thousand board feet, some $75 per thousand board feet or 24% higher than last year.

Lumber sales volume was 11.8% board feet less than last year and totaled 261.1 million board feet. The average sales price per MDF increased $55 from $523 per thousand square feet in 2012 to $578 per thousand square feet in 2013. MDF sales volume decreased from 120.1 million square feet in 2012 to 107.7 million square feet in 2013.

Real estate operation is reporting an operating loss of $1.4 million for 2013 compared to an operating loss of $2.1 million a year-ago. We sold 65 residential lots at an average price of $76,000 per lot, compared to $50 lots which averaged $69,600 per lot in 2012. We had no sales of commercial real estate acreage in either 2012 or 2013. Corporate operating expense for 2013 of $18 million was $600,000 higher than in 2012. This increase was primarily due to higher incentive plan expenses as a result of the increased net income results for 2013 versus 2012.

Deltic’s equity in Del-Tin Fiber was $1.1 million for 2013, all of which is from the first quarter prior to the acquisition of Del-Tin and that compares to $1 million for all of 2012. Income tax expense for 2013 of $12.6 million was $7.8 million more than in 2012 mainly due into the increased level of pre-tax income.

Capital expenditures increased $9.6 million to $33.6 million for 2013, compared to $24 million during 2012. This was due to increased expenditures for manufacturing operations, we raised the projects to increase hourly productivity rates and total production volumes in the company’s sawmill operations.

At the end of 2013, the company’s cash balance was $4.4 million and the balance of working capital was $5.5 million. Long-term debt outstanding at December 31 was $90 million. Our long-term debt to capital employee ratio was 25.3% still very low for our industry. With the free cash flows generated by our operations in 2013 we funded our $33.6 million capital program and $5.2 million to acquire the remaining ownership interest of Del-Tin Fiber returned $5.1 million to our shareholders in the form of dividends, repurchased $2.2 million of the company stock and reduce the balance of borrowings under our revolving credit facility by $2 million.

And now I’ll turn the call back over to Ray for his comments.

Ray C. Dillon

Thank you, Ken. During the year of 2013 the U.S. housing marketing continued to benefit from an improving overall economy. the combination of reduced on unemployment and low interest rates approximately $1 million new homes were started during the year, which resulted in increased demand for and price of Southern Pine dimension lumber.

With this improving business environment the operational and financial benefits of Deltic Timbers’ strategy of being a vertically integrated forest and wood products company were very evident, led by our manufacturing segment consisting of our two sawmills and our MDF plan Deltic’s operations established a new record for financial performance in 2013.

Our reported earnings for the fourth quarter of 2013 were only $100,000 lower than those of the prior year fourth quarter. It is important to note that this reduction essentially resulted from a decrease in the number of acres of non-strategic recreational use hardwood bottomland sold by the company versus a year ago.

Since we’ve already sold the majority of this type of acreage that we had previously owned and improved our Timberland portfolio with pine acreage we bought with the resulting sales proceeds we will have fewer sales of this type of acreage essentially offsetting the impact of the decrease of these land sales was increased operating income from our ongoing business operations due to improved lumber and MDF prices increase residential real estate lot sales activity and decreased general and administrative expense.

Increased level of both housing starts and residential repair and remodeling activity has resulted in increased prices for the dimension lumber and MDF produced in the company’s manufacturing facilities compared to a year ago. As such our manufacturing segment generated $400,000 quarter–over-quarter increase in reported operating income, due to an improvement in the sales prices for lumber from a year ago combined with the fact that lumber producers have seen essentially no increase in the price they have had to pay for the log used to manufacture at lumber for the past year.

Operating income from our sawmill operations increased $1.3 million compare to the fourth quarter of last year with the acquisition of remaining ownership of Del-Tin Fiber earlier in 2013 the financial and operating results of this segment now includes those of Del-Tin. For the fourth quarter of 2013, our medium density fiberboard facility lost $700,000. The average lumber sales price of $355 per thousand board feet increased 8.9% when compared to the fourth quarter of 2012. The volume of lumber that we sold for the fourth quarter decreased to almost 5.5% from the same period in 2012 as some formally ideal mills began to compete for the volume of lumber concerned.

In our sawmill operations, we will continue to adjust operating hours to match lumber production with market demand. In regard of the first quarter and year of 2014 we estimate finished lumber sales volume to be 65 million to 75 million board feet and 270 million to 290 million board feet respectively. During the fourth quarter, the average sales price for the MDF we sold increased 5.4% when compared to the same quarter in the prior year.

However, again in the quarter, some of the plant’s customers had sufficient inventory which resulted in reduced purchases. As such, the plant took market related downtime during the fourth quarter as we reduced operating days at the plant to balance production with market demand. In addition, Del-Tin Fiber had a planned outage for schedule maintenance during the month of December. As a result of these factors, the sales volume of MDF for the fourth quarter was 6.4 million square feet or almost 22% lower than that of a year-ago.

We continue to implement the changes that we feel are needed to further improve the plant’s operations. We are intensively focused on improving the critical metrics for both press efficiency sand resin efficiency in the plant. In regard to the first quarter and year of 2014, MDF volume is forecast to be 25 million to 35 million square feet and 110 million to 130 million square feet respectively.

As Ken commented, we increased the capital spending level in our manufacturing facilities in 2013 when compared to 2012. We are investing in projects in our sawmill operations to increase their hourly productivity rates as well as total production capacity, in order to capitalize on future market opportunities. We have also invested in projects to improve the production efficiencies at our MDF facility that I noted earlier.

Our Woodlands operating segment with its mix of timber products, in which our cost basis is very low continue to yield its reliable, financial, operating performance. Harvest level of pine sawtimber during the fourth quarter was only 1.4% higher than a year-ago as we harvested essentially the same volume in 2013than we harvested in 2012. The average sales price receive for the pine sawtimber we harvested during the quarter was the same as we received for the same period year ago, at the improved lumber market has had very little impact on the prices paid for pine sawtimber a lumber manufactures due to the availability of such stumpage.

During the fourth quarter our, Woodlands segment harvested about 65.6000 tons of pine pulpwood a 77% decrease from the volume harvested in the fourth quarter of 2012 due to the mix of products growing on the specific timberland track harvested in the respected period. We continue to harvest our timberland on a sustainable yield basis. This management strategy allows us to maximize growth rates in our forest while also properly maintaining them. In regard to the first quarter and year of 2014 we estimate our pine sawtimber harvest to be 175,000 tons to 185,000 tons and 575,000 to 625,000 tons respectively, depending upon the weather conditions in our operating area during 2014.

We continued to see interest in our remaining recreational-use hardwood bottomland acreage and we sold 53 acres during the fourth quarter. This sales activity compares to 988 acres sold in fourth quarter 2012. The average sales price for the land we sold this quarter was $2,900 per acre versus $1,500 per acre for the land was sold a year ago. We will continue to evaluate our timberland acreage to identify any existing non-strategic hardwood bottomland for future sale. Our strategy in selling this recreational-used land is to use of proceeds from these sales to acquire land that is more desirable for growing pine sawtimber, thereby upgrading our timberland portfolio and adding to our pine timber inventory.

Our Woodlands segment also continues to benefit from oil and gas related revenues. Natural gas prices have improve from a year ago as such the impact of reduced production volume from wells in which Deltic receives a royalty interest when compared to the fourth quarter of 2012 was more than offset by the improved prices received for the gas produced. However, the amount of lease rental income recognized by the company continues to steadily decrease as expected, as a greater amount of the company’s available net mineral acreage becomes held by a production rather than by a lease resulted in increased royalties received.

Drilling activity in the Fayetteville shale continues, during the fourth quarter 2013 Deltic began receiving royalties on an additional 11 wells bringing the number of royalty producing wells to 430. In the lower Smackover Brown Dense formation in South Arkansas and North Louisiana where we had leased about 14,000 net mineral acres. Southwestern Energy continues to be the primary operator that is currently active in the area.

To-date they have drilled eight operated wells in the area, of these six are producing gas wells, two more wells are currently being completed and one new one is being drilled. Deltic is yet to receive royalty income from the mineral acreage leased there, but Southwestern Energy has disclosed that it plans to actively continue its development of the area. While the number of residential lot sales and our real estate developments remains below historical averages, lot sales activity for the current quarter increased to 15 lots sold. This was three more lots than we sold in the fourth quarter of 2012, for the year of 2013 we sold 65 residential lots, 15 more than we did in 2012. The average sale price per lot was $12,300 higher than for the same quarter of last year due to the mix of lots sold.

We’re currently developing new residential lots to ensure the right mix of lot inventory exist to meet lot buyers’ needs. On October the 11the, we offered 25 lots for sale in one of the newer mid-tier priced neighborhoods in Chenal Valley. And December 31, 17 of these lots were under contract and scheduled to close in the first quarter of 2014. Therefore, we estimate residential lot sales in the first quarter to be 15 lots to 20 lots and lot sales for the year of 2014 to be 60 lots to 80 lots. There were no sales of commercial acreage in the fourth quarter of either 2012 or 2013.

We are focused on achieving sales of our commercial acreage, especially near the existing key commercial intersection in our Chenal Valley development. However, due to the many factors involved in commercial real estate development, it’s difficult to predict the timing of future commercial real estate transactions.

In closing, I’m pleased to report the financial and operational results achieved in the fourth quarter and year of 2013 with the financial benefit of this operating performance is combined with Deltic Timber’s rock solid balance sheet and our $340 million revolving credit facility, almost all of which is available to finance acquisition opportunities. Deltic is well positioned to take advantage of future market and growth opportunities to achieve future growing results.

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

Question-and-Answer Session


(Operator Instructions) Your first question today is from the line of Brendan Lynch with Sidoti.

Brendan Lynch – Sidoti & Co. LLC

Good morning Ray, good morning Ken.

Ray C. Dillon

Good morning Ben.

Kenneth D. Mann

Good morning.

Brendan Lynch – Sidoti & Co. LLC

A couple of questions for you, first on the manufacturing segment. Can you quantify the amount of the MDF production decline that was stemming from a market slowdown versus your planned outage in December?

Ray C. Dillon

As far as how much was it attributable to each one, is that what your question is?

Brendan Lynch – Sidoti & Co. LLC

Yes, if you could just give us some color on just at the market slowdown versus your planned closure.

Kenneth D. Mann

I’ll take a shot at that Brendan. Most of it was related to the plant maintenance shutdown, there was a lengthy shutdown with many projects primarily in the heat energy system, but the up would be almost twice as much as the market related down time, but as far as specific number of days I don’t have that at my fingertips. But it was mostly related to the maintenance shutdown.

Brendan Lynch – Sidoti & Co. LLC

Okay, very good and then on your lumber pricing, you said in the past that your lumber pricing generally moves directionally with the Southern Pine lumber Index. The index is up quite a bit in the fourth quarter, but your lumber pricing declined sequentially. Can you just give us a little color on what caused that difference?

Ray C. Dillon

Brendan, you know it’s a – those kind of statements are general statements from the aspect of realizing that within our manufacturing operations, we make a significant mix of various dimension lumber products. So any given period of time they can be a component of the mix of products in our two mills [ph] we also have different mixes between the two where, where in our Northern mill it specifically allow timber based product and the mix where in our Southern mill, El Dorado mill would be a lot of the wide longer dimension lumber. And so like component of the composites is going to take all of those and move directionally if you will and where us it can be, because we are focused on making the wide boards and more of the impact for our price differential with the impact in demand for the wide boards during the period versus the general blended composite index that you are referring to.

Brendan Lynch – Sidoti & Co. LLC

Okay, very good, and then in terms of your manufactured products there was a bit of softening of demand in the quarter. Do you think this was a result of the weather impacted across the country and just perhaps a bit of a slowdown in housing construction or are there other elements that you think may have been contributing to that slowdown in demand.

Kenneth D. Mann

Brendan certainly some of it was what I would call weather related, but as much as anything its somewhat seasonal as many of the distributors in the supply chain could have been reducing inventory for year-end purposes, and so that might have forced them to reduce their orders, but a combination of seasonal factors year-end inventory and somewhat weather attributes combined to call it dampened production during the quarter.

Brendan Lynch – Sidoti & Co. LLC

Okay, great. You discussed a little bit about your capital spending and I was just wondering if you could maybe give some more specifics on the improvements that you’ve made in the mills and to Del-Tin and where you expect your capital spending to be in 2014 and 2015 as you continue to work on those efficiency projects?

Ray C. Dillon

Within the mills that the projects have been for items one for drying capacity, two to our throughput through the Sawmill itself, especially from software type upgrades that optimize the production process. We’ve done some projects within our planer [ph] mills to actually improve and automate some of the grading process that take place within the mill. Those would be the higher level of projects that we’ve done within our two sawmills. At Del-Tin Fiber the two things we’ve spent money or focused on capitalize [ph] for the year was primarily a change adding system that we implemented there to improve their processing as well as work on their heat energy system which generates the heat that’s used in the MDF production process. So those are some of the projects that we’ve focused on during 2013.

Brendan Lynch – Sidoti & Co. LLC

And do you think you will be continuing to invest in the mills throughout 2014 and 2015 at a rate similar to what was experienced in 2013?

Ray C. Dillon

Obviously our capital spending is that every year is dependent – we’ve got projects that are out there on the board, we maintain the capital program and our velocity is that we will – our capital spending will match what our operations generating income and specifically cash flow wise. So the answer to your question is yes, we would envision that that program would be equal to 2013 program given that the business generates the cash flow to support all the projects that we have currently planned, and so we had ability to either to speed those up timing wise or slow those down depending upon how we want to manage our cash, but those are projects we’re looking at doing we have more on the drawing board and so yes, for 2014 approximately the same as 2013.

Brendan Lynch – Sidoti & Co. LLC

Okay great and just a couple of more quick questions here. You have about 35,000 net mineral acres under lease or held back production, are any of the oil and gas companies interested in expanding exploration on Deltic acres, can you perhaps estimate the potential acreage that could eventually be explore or come to produce natural resources in addition to the timber?

Kenneth D. Mann

Brendan the way I’ll try to answer that is, is that in the Fayetteville shale overtime we would expect the mineral acreage that are under lease to eventually be drilled on, but Southwestern Energy recently commented that it could easily be another 20 years to 30 years of drilling activity in that play. So it’s hard for us to predict when we just expect that they potentially will be the best we can estimate.

Brendan Lynch – Sidoti & Co. LLC

Okay, very good, so the net mineral acre doesn’t sound like that will change, but just the amount of drilling activity could increase within the acres that have already been identified?

Kenneth D. Mann

That’s correct

Brendan Lynch – Sidoti & Co. LLC

Okay very good and then just my final question is on the commercial real estate, could you just give us some color on if you have ongoing conversations with interested buyers or are you holding out of better price, we just seen a couple years without any transactions and I understand that’s very lumpy, but if you could just give us some color on the current state of appetite for those commercial acres?

Kenneth D. Mann

Good question Brendan, certainly we would tell you that not only in our central Arkansas area, but quite frankly region wide and maybe even nationally commercial activity have been slow, but we’ve seen a pickup in that activity with people we would call it very interested in moving forward with contracts and earnest money. So I would say drive activity has improved especially in so far this year and we hope to turn that trend around from not having a sale in the last two years to hopefully being able to put one in the bank this year.

Brendan Lynch – Sidoti & Co. LLC

Okay great. Thanks for all the color.

Kenneth D. Mann

Thank you and I appreciate your questions.


And there are no further questions in the queue, so I will turn the conference back to Mr. Ray C. Dillon for any closing remarks he would like to make.

Ray C. Dillon

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


Ladies and gentlemen this concludes today’s presentation. Thank you so much for your participation. You may now disconnect. Have a great day.

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