Rayonier, Inc. (NYSE:RYN)
BAML 2011 Industrials Conference
December 6, 2011 01:00 pm ET
Carl Kraus – Senior Vice President of Finance
Helen Rowan – Vice President, Strategic Planning and Communications
Andy Fricke – Manager, Investor Relations
Thanks for joining us. We’re very happy to have Rayonier here with us this afternoon. Representing the company is Carl Kraus, Senior Vice President of Finance. As you know, Carl has been with Rayonier since 2005. We’re also pleased to have Helen Rowan in the audience with us who heads Strategic Development, and Andy Fricke who assists Carl in the IR function. Without any further ado, Carl, please take it away.
Good afternoon, thanks Mike. We’ll start off with a company profile that based on yesterday’s closing price we’re a $5 billion global forest products company with core operations in forest resources, real estate, and performance fibers. Annually we generate revenues of $1.4 billion and about half of our sales are outside the US to 40 different countries around the globe.
At our current dividend rate of $1.60 per annum we’re yielding approximately 4%. We are structured as a highly efficient real estate investment trust and we enjoy high investment-grade ratings from both Moody’s and Standard & Poor’s.
On the next page, looking at our company structure, you can see on the left-hand side of the chart that our timber assets are in the REIT and our performance fibers and certain of our real estate assets are in our taxable REIT subsidiary. And because of the strong financial dynamics of our TRS we’re able to house the majority of our debt in that entity.
On the next slide, looking at the cash contributions from the business units you’ll see a steady and growing EBIDTA contribution over time. However, when we look for example at the reddish bar, you’ll see that the forest resources is generating only about two-thirds of the EBIDTA that it did back in 2006 before the housing collapse. However the top line in our performance fibers segment, we’re experiencing over a doubling of EBIDTA since 2006.
Taking a look on the next slide at the dividend and the cash flow supporting that, we’ve had six dividend increases over the last seven years including an 11% dividend increase in September. The payout ratio this year on a full-year basis will be about 65%.
On the next slide, looking at our credit metrics, we have very conservative leverage and on a GAAP basis our debt to total capitalization is about 35%, 36%. Our debt to EBIDTA ratio is 1.7x and we have a very strong 10.8 interest coverage.
Reviewing our strategy on the next slide with respect to forest resources, the primary use of our strategic capital will be to grow our timberland portfolio over time in a very disciplined manner. We also have a continuous review of our timberland ownership to identify land that has higher and better use, or to identify land which is non-strategic which we will divest. From an operational point of view, our focus is to enhance the yield of every acre through advanced [silvocultral] practices.
Moving to our real estate segment, here we’re focused on monetizing our rural, higher and better–use land through sale of conservation and recreational land. And we’ll show you on a map in a few minutes there where we have land on the I-95 coastal corridor from Savannah down to Daytona, and here, while continuing to keep this land under active timber management we have gone through a land use change or entitlement process to enhance the future value of the property.
And in performance fibers, our focus is to maintain our global leadership in the cellulose specialty space and we do this through continued differentiation and with a focus on purity, consistency and reliability. We also in our Jessup Facility have a major capital improvement underway and we’re focused on an on-time and on-budget completion of that by 2013 – and we’ll get into more details about that project in a few minutes.
Moving on to the little bit deeper dive into the timberland segment, there are various desirable attributes including the fact that timberland assets have appreciated at a faster pace than inflation historically. Also there’s great flexibility with this asset class. If the markets are relatively soft you can defer harvest and continue to have biological growth; so biological growth while waiting for price improvement.
As I mentioned, one of our strategic focuses is to grow our timberland base over time and in 2011 we have completed the acquisition of approximately 300,000 acres of timberland. Looking at the map on the next page and then reviewing where we have our timberland ownership, in the Atlantic region which is Florida and Georgia, we control 1.1 million acres and this is primarily pine plantations. In our Gulf region we have approximately 750,000 acres and again, it’s mostly pine plantations. Moving to the Pacific Northwest, in Washington State we have nearly 400,000 acres of timberland and this is primarily hemlock and Doug Fir and then in Washington State have 128,000 acres, and this is mostly mixed hardwoods. We are also the managing partner and have a 26% equity interest in a New Zealand venture that controls 327,000 acres of [Radiata] pine plantations.
On the next slide, the main point here as I mentioned is that we have grown our timberland portfolio over time and will continue to grow in a disciplined manner; however it will be lumpy through the cycle. For example, in 2011 we will be adding to our timberland assets while in the prior several years we were a net seller. But importantly, if you take a look back to 2004 we had approximately 2.2 million acres under ownership and management and today we have about 2.7 million acres.
With some of the current dynamics in the marketplace, just a comment on what’s going on currently, that year-over-year 2011 will be a much stronger year in the Pacific Northwest driven primarily by strong demand for logs into China. Now, what we have seen is relatively stronger demand in the first part of the year and currently there is a situation where there is a backup in the ports of China, but stepping back and taking a longer view we so continue to believe that there will be strong demand into the future for log exports from the Pacific Northwest and New Zealand into China.
In the Southeastern part of the US we see steady pulpwood demand, but on the saw timber side which is sold into sawmills for the housing business, you still see relative weakness and we continue to defer harvests of our most mature stands. Taking a mid- to longer-term view we remain very bullish on the timber segment and we see future EBIDTA growth from increased volume, improved mix, increased price as the housing recovery and the impact of the Canadian Pine Beetle is manifested back to the stump in the US. And then lastly, as I mentioned, through timberland acquisitions we will be adding volume and EBIDTA over the next several years. By the way, in fact on our website we have the slides from our Investor Day that was held in September that gives a lot more detail and a bridge to our future EBIDTA growth.
Turning now to the real estate segment, first our real estate efforts are focused exclusively on adding value to our timberland base. We are not a real estate developer nor do we intend to invest significant strategic capital into real estate infrastructure. What we do is continuously evaluate every acre of timberland and at any one point in time the majority of our timberland acreage will be dedicated to active timber management. If land is identified as non-strategic the real estate group will divest of those assets. And then in the value-added segments we will identify and sell rural better use land that can be sold to conservation groups or for rural recreation where we can get a nice premium on a per acre basis over underlying timberland values.
Then with respect to land that’s in the development corridor, we’ll show you on the map on the next page, we have identified approximately 200,000 acres of land along the Interstate 95 coastal corridor from Savannah down through Jacksonville and down through the Palm Coast area. So most of our ownership is zoned agricultural which permits the growing and the harvesting of trees but does not permit dense real estate use. While maintaining active timber management for 39,000 acres along this corridor we have successfully changed the land use and have the entitlements that would permit more real estate development as the economy and underlying demand improves. So this is all about enhancing flexibility and positioning ourselves to capture future value as demand improves in this corridor in the future.
Looking at some of the current dynamics in real estate, we see continued demand for rural and recreational property and in 2011 in total we would expect to sell approximately 15,000 acres and that’s been relatively consistent historically. With respect to non-strategic timberlands, we’re at the end of this program with respect to our legacy properties and would expect to sell approximately 10,000 to 12,000 acres in this category this year compared to approximately 50,000 acres per year over the last several years. And with respect to the development corridor, as I mentioned most of the entitlement efforts have been completed but we will continue to position these properties for monetization as the markets improve.
Moving to our last business segment, performance fibers, we have two manufacturing facilities. The larger of the two is in Jessup, Georgia, where the mill has the capacity of generating 580,000 tons of a combination of cellulose specialty and absorbent materials today. And then in our [Fernadina Beach] area, which is a suburb of Jacksonville, we have a one-line mill that generates 160,000 tons of cellulose specialty. In the aggregate today, about 69% of our volume is in our specialties and 31% in absorbent materials. However, we have a significant capital project underway in Jessup where we’re converting our C-line, which today makes about 260,000 tons of fluff pulp and we’ll be converting that to 190,000 tons of specialty, and we’ll get into a little bit more detail in a few slides.
The next page is just a depiction of commodity pulp and we’re not a producer of any of these grades. Looking at the pyramid on the next chart, we’re defining the global pulp market which totals about 54 million metric tons. Most of that volume are in the commodity grades where we’re not a player, but moving up the specialization scale there’s a 5 million ton global fluff market and we’re a relatively small player there today; and we will be exiting that market by mid-2013. Moving up the specialization scale, the next grades are what are called dissolving pulp. The larger of the two segments here is a 3.4 million commodity viscose market. Rayonier is not a player in that space today.
That grade is used primarily to make rayon fabric. And then at the very top of the pyramid is a 1.4 million metric ton cellulose specialty market, and moving to the pie chart on the right side of the page you can see the segments – acetates, ethers and high strength viscose – that make up that specialty market. Now, looking at the upper right-hand portion of the next slide, we’re looking now at Rayonier’s volume where in 2010 we produced 480,000 metric tons of specialties, and 80% of that was in the acetate grades. In the bottom half of the page you see some of the end uses. We sell our grades primarily to specialty chemical companies who then further process and make products like filters for cigarettes or polarizing agents for LCD screens, or thickeners in food products or separators and active ingredients in the pharmaceutical sector.
On the next page we’re now taking a global view of the segments of the specialties market. The largest is acetate with 680,000 metric tons globally and that is dominated by the use of acetate for filter cigarettes, comprising about 82% of that market. That market is growing about 1.5% to 2% globally. Cigarette demand is still increasing. It is declining in the US and Western Europe but continues to grow in China and other emerging economies. Rayonier is by far the global leader in acetate and with approximately 57% market share and the next largest competitor has no more than about 15%. In ethers, that market is growing about 5% to 7%. We’re in the top three there and our focus is in the higher purity grades in the food and pharma segment. And then lastly there’s the high strength viscose and specialty high value. There are two players there and we’re the smaller player.
On the next slide we just briefly try to communicate what makes Rayonier different as the technical leader in the cellulose specialty market. There are several things which differentiate Rayonier. First, we have the ability to make the specialties from both hardwood and softwood. We also in Jessup utilize the craft process and in [Fernadina] have the softwood process. Every ton of specialties is made to customer specification, and so this gives us significantly more flexibility to respond to our customers’ exacting specifications. Further, we have 80 years of knowhow in the pulping process which leads to a higher reliability and purity of all of our grades.
Looking now to the pricing chart, you can see over the cycle that our specialty products have been able to command premium pricing. As I mentioned, most of our cellulose specialty volume is under long-term volume contracts with annual price negotiations and the price increases take effect during Q1, so in each year since 2005 we’ve been able to implement price increases and in 2011 that increase will be approximately 14% over 2010.
Now, explaining a little bit more detail on the next chart, our cellulose specialty expansion project in Jessup, Georgia, is a $300 million project where we’re converting our fluff line to 190,000 tons of specialties. This is a customer-driven project. We have been sold out in our specialty grades over the last several years and so we’re deciding to convert this line offensively to respond to the higher specialty demand and not defensively driven by a desire to exit fluff. But this also strategically allows us to diversify within the other grades within the specialty, so we would expect to have more volume in ethers grades for example. And of course we wouldn’t proceed unless we were projecting significant financial returns, and here we’re projecting 17% to 20% return on investment.
Looking at the next chart and addressing the risk profile of this project, we decided to locate this project in Jessup, Georgia, and what we’re doing is essentially duplicating our B-line where we’re using the same technology and customer-proven quality of the product. We are projecting completion by mid-2013 and until then we will continue to make fluff pulp. And then we have a scheduled annual maintenance in 2013; when we come out of that shutdown we will no longer be making fluff and will be focusing on dissolving pulp.
During the transition period starting in mid-2013 we will have to go through a qualification period with our customers, and during that period a portion of our volume will be in commodity viscose until we feather in to match that with our increasing demand for our specialty products. And importantly, we now have over 70% of this new capacity committed from existing and new customers and we continue to have good discussions with other customers for the remaining volume.
Now, looking at the next slide, just commenting on some of the market dynamics, as I mentioned we continue to see very strong demand in our specialties category. However, we see softening in the fluff markets relatively speaking so that over the last couple quarters we’ve seen a weakening in demand and pricing there. For 2012 most of our specialty volume is already committed and with that strong demand we would expect higher prices for the specialties in 2012.
In conclusion let me just flip to the cash flow charts here again. From our mix of businesses we’ve been able to generate growing cash flow through the business cycle, allowing us to continue to grow the dividend with significant cash flow coverage of the dividend. And then on the last chart here before we open it up to questions, on the left-hand side of the chart you can see that the dividend has grown from $1.25 per share back in 2006 to the current annual rate of $1.60. On the right-hand portion of the chart going back to the start of 2006, we had a total 180% return which is an 11% annual compounded rate.
So with that I’ll open it up to questions. Mike, do you want to kick it off?
Yeah, thanks very much, Carl. The first question to begin, I know that you recently closed on the purchase of 250,000 acres in the Southeast. Can you help us think about what type of EBIDTA contribution those acres will have in 2012?
Yes, as Mike said we just closed on a 250,000-acre acquisition in the Southeast. First I’ll just review. We go through various gating processes in terms of deciding on the go/no-go on any acquisition, so first the timberlands have to be a strategic fit that we have preferred regions. We like the Southeastern part of the United States because of the diversity of end markets. Also the timberlands have to be of acceptable site quality which is all about the productivity of the land, and then finally the investment has to meet our financial criteria. And then Mike, I’m going to dodge your question specifically about the EBIDTA contribution next year but in order for us to move forward we have to see an overall return of 7.5% to 8% on an unlevered basis over our ownership period.
This particular acquisition tended to be relatively young and when we’re looking at acquisitions, our goal over the cycle is to be able to have a sustainable harvest volume so that we’re able to respond to our customer demand on a year-by-year basis. We did give some guidance at our Investor Day, Mike, as you know, and these slides are on our website, where we see by 2015 and 2016 significant EBIDTA growth from our timber segment. To put that in context and included in the slides here today, back in 2006 the US forest resources segment was generating about $150 million worth of EBDITA. For the last twelve months that was about $100 million so we certainly see over the next several years the ability to surpass the $150 million worth of EBIDTA and grow that towards the $200 million level, but that’s going to be more in the 2015-2016 timeframe.
I do believe that we said that as a result of the acquisitions we would be adding about 500,000 tons of volume next year and that by the end of the planning horizon that that would add about 1.5 million tons on a sustainable level.
Thanks, Carl. Any questions from the audience?
Can you talk to the supply increase expectations out there? Fortress Paper and some of the guys like [Sateri] have talked about the fact that they’re trying to penetrate the specialty viscose market so what are you seeing on the competitive side?
Right. Well the first thing I would point out is to differentiate between the cellulose specialties market and the commodity viscose market. There have been many more announced expansion plans in the commodity viscose space, and again, that’s used primarily to make rayon fabric. So Fortress for example is focused primarily on commodity viscose. [Sappy], their expansions are all in the commodity viscose – the Minnesota expansion, the two that they have in South Africa are all focused there. The only two announced and let’s say confirmed cellulose specialty expansions are our 190,000 tons in Jessup and then in the Foley Mill, Buckeye has announced a 42,000 ton expansion.
There’s speculation that a few others who are currently in the specialties may expand but nothing significant is expected until at least 2015 or 2016, and then even within the commodity viscose with the significant reduction in the spot market price for commodity viscose there have been several cancellations or deferrals in that. So for us in the specialty cellulose space, the primary drivers are not highly correlated to what’s going on in the commodity viscose market.
Just a quick follow-up. If you talk to [Sateri] they will tell you that 30% of their capacity can be used for specialty and they intend to sort of penetrate that market. Can you talk to us a little bit on the barriers to entry here and how easy or difficult it is for a new entrant in the market to get into the specialty space?
Sure. [Sateri] with their [Bohea] mill in Brazil already has some market share in the specialties although most of their volume is focused on commodity viscose. So the issue for any producer will be to qualify their grade with the prospective customers, and that can take one to two years to qualify. So what a producer must prove to a new customer is that you can reach the purity, reliability and consistency of product. So again, just as an example, our customers, the specialty cellulose customers are taking our product which is sold in solid form, dissolves with chemicals and is spun through a spinneret with tiny holes that are narrower than a human hair, so there it’s 24/7 continuous process. So they need high reliability and predictability of purity through to make sure that there’s no downtime or minimal downtime in their process.
So in addition to the significant capital investment that one must make and the technical expertise that you need, you have to go through a lengthy qualification period. So [Sateri] is in the space. Certainly if they stay focused they have the ability to probably grow market share in the future so they’re a competitor and we take them very seriously.
In 2011, I think you mentioned you saw 14% year-over-year price increase, and arguably this price increase for specialty was helped by the fact that the viscose market, the lower end also saw a significant increase given where the cotton market went or cotton pricing went. So this being said, as viscose is rolled off but you mentioned that the specialty business is still very strong, what are your expectations for pricing in 2012 off of a 14% year-over-year price increase?
We will comment on the specific percentage increase on our Q4 call at the end of January. What we have said so far, and I think I commented a few minutes ago, is that with respect to our cellulose specialty volume, most of that is already committed; and based on the strong demand we are expecting price increases but we have not yet quantified what that is.
To answer the other part of your questions, were the spot prices of commodity viscose a significant driver of our negotiations with our customers this time last year? I would say no, that there’s not a high correlation between what’s going on in the commodity viscose space to what’s going on in the specialties. So the specialties, it’s our own supply/demand dynamics. The uses are quite different, the suppliers are quite different and so we would say there’s a very low correlation between what’s going on in the commodity viscose space to what’s going on in the specialties.
Hi Carl, thanks for being here and for your presentation.
Hello, George, how are you?
Good. A couple of questions I had for you. Number one, what significance perhaps should we read into the fact that despite the fact that you’re already largest in terms of your landholdings in the Southeast that your acquisitions this year were in fact in the Southeast as opposed to elsewhere, even though more recently the trends have been more favorable on the West Coast because of Asia? And then I have a couple follow-ons.
Good. Well, we’re very bullish on the Southeast. As you know, there’s great diversity of end markets so a very healthy pulp and paper industry in there and further as you know that the Southeast is the global leader in making fluff pulp because of the high absorbency of Southern Yellow Pine. So through the cycles we like the diversity of the end markets. We also like the fact that from a rural higher and better use opportunity, that we have had more success in the Southeast with selling land to conservation groups or for rural recreation, etc. So the combination of good diversified end markets and opportunity to be able to buy wholesale/sell retail with higher and better use properties are a couple of the drivers that lead to us favoring the Southeast. Now, that’s not to the exclusion of growing in the Pacific Northwest or other parts of the US.
Thanks, Carl. One other question that I had and I’ll turn it over, and perhaps it was just the way you phrased it and there was no other reading that we should have into the statement, but you said at the present time you’re not making any commodity viscose today. Should we read anything into that comment that down the road you would perhaps consider commodity viscose?
Well, as I mentioned George from mid-2013 when we come online with the C-mill expansion, during the qualification period and for a period of time until we grow into the increased demand of our specialties customer, we will be for that defined period making commodity viscose. So but it’s a defined period and then by a certain period, certainly by 2015 or 2016 we’ll be 100% focused on the specialties. After the completion of the ramp up, if you will, post-cellulose specialty expansion, our focus will be 100% on the specialty grades.
Carl, just to follow on with what George said, I was under the assumption that the higher cellulose specialties ramp-up would only take you about six to nine months in terms of the qualification period because basically you’re replicating an already present line. So basically your C-line is modeled after your B-line. Given that your customers already know the type of quality and the product they’re getting, the qualification period that you said is normally one to two years probably will take you six to nine months.
That’s for the qualification. The rest of it, Mike, is that with our existing and new customers, they will have a step-up in volume through the commitment period. So it’s not like… So let’s think of it. Out of the 1.4 million ton specialty market we’re seeing 45,000 to 50,000 tons of increased demand per year, so by the time you get out to 2015 and 2016 we see that adding about 300,000 tons of demand which is more than enough to absorb our 190,000 tons and the other announced expansions. And so as you know, over 70% is currently committed. Most of that’s in the specialties but also some of it for this interim period we’re taking commitments for commodity viscose for this period, from the startup to where we’ll be 100% specialties.
Of the 70% that’s already committed, can you just speak to what is actually cellulose specialties versus commodity viscose?
The majority of it is specialties, Mike. I don’t remember the exact number. I think we broke that out on the Investor Day chart but I’ll have to look at that and give you a call on that one.
Any other questions? If not I have one additional question, just in terms of the export opportunities you see from the Pacific Northwest. If domestic timber markets remain weak in 2012 doe s Rayonier really have any more opportunities to export logs? I think you’re already exporting around 25% to 30% of your Pacific Northwest shipments in terms of the export markets. I know that you also are exporting to Asia from your New Zealand operations but if domestically it looks like housing is going to remain lackluster. Do you have any more opportunities to really increase your export tonnage?
The answer is yes. This year, Mike, the amount of volume that’s being sold into the export market is probably more in the 35% to 37% range out of Washington state, and we are taking the necessary steps to position ourselves to capture growth in that market. And what I mean specifically is particularly in Washington state, the longest lead time is putting I your road network to be able to access the timber if the demand is there. So as you know, we have deferred harvests over the last several years so currently we’re about 80% of sustainable harvest levels out in Washington state so we certainly have the capacity to bring on volume in 2012 and future years if and when the demand is there.
Thanks, Carl. Any final questions? If not let’s thank Carl and Rayonier for their participation.
Okay, thanks Mike and George.
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