Deltic Timber's (DEL) CEO Ray Dillon on Q1 2016 Results - Earnings Call Transcript

| About: Deltic Timber (DEL)

Deltic Timber Corporation (NYSE:DEL)

Q1 2016 Results Earnings Conference Call

April 26, 2016 11:00 a.m. ET

Executives

Ray Dillon - President and Chief Executive Officer

Kenneth Mann - Vice President and Chief Financial Officer

Analysts

Albert Sebastian - Prospect Advisors

Operator

Good day, ladies and gentlemen and welcome to the First Quarter 2016 Deltic Timber Corporation Conference Call. My name is Genetta and I’ll be your operator for today. At this time, all participants are in a listen-only mode. Later we will be conducting a question-and-answer session. [Operator Instructions]

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

Ray Dillon

Good morning. I would like to welcome you to Deltic Timber Corporation’s first quarter conference call. We appreciate your interest in Deltic. For today's 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 some comments on current operations and the outlook for the second quarter and remainder of 2016 before we open the line for any questions. Ken?

Kenneth Mann

Thank you, Ray. Deltic issued its news release yesterday announcing earnings for the first quarter of 2016. If by chance you don’t have a copy of it yet, you can download one from the Investor Relations section of our company Web site, deltic.com. If by chance you don’t have access to the Internet, you can always call me to request a copy. My direct telephone number is 870-881-6432.

And now, 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 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 2015 Form 10-K on file with the SEC.

Financial results for the first quarter 2016 were net income of $0.4 million or $0.03 a share. These results were a decrease of $1.5 million from the first quarter of 2015, mainly due to weak wood products markets combined with decreased oil and gas related income and increased expenses for the cost of fee timber harvested and interest expense, partially offset by benefits due to a decrease in the company's effective income tax rate.

For the quarter, net sales of $50.6 million or approximately 4.6% more than a year ago. Going through our operating segment in detail. The Woodlands segment reported operating income of $5.3 million in the quarter, $1.2 million decrease from the first quarter of 2015. The decrease largely came from decreased oil and gas royalty income, a decreased pine sawtimber harvest volume combined with an increased cost of the fee timber harvested and decreased income from timberland sales.

For the quarter, the pine sawtimber harvest volume was 205,608 tons compared to 231,534 tons in the first quarter of 2015, while the average sales price received for the sawtimber harvested increased $2 per ton to $28 per ton. The pine pulpwood harvest for the first quarter of 2016 of 160,270 tons increased when compared to 91, 673 tons harvested in the first quarter of 2015. While the average per ton sales price for pine pulpwood was $9 compared to $10 for 2015's first quarter.

Oil and gas lease rental and royalty income for the first quarter of 2016 was $400,000 which is $800,000 less than the same period a year ago due to the impact of reduced revenue from royalty payments received as a result of low natural gas prices and reduced gas production volume for which royalties were paid. During the quarter we did not sell any timberland while we sold 20 acres of bottomland for $1,900 per acre in the first quarter of 2015.

The manufacturing segment reported operating income of $3.3 million in the first quarter of 2016 compared to income of $3.5 million for the first quarter of last year. The lumber sales volume for the first quarter of 2016 of 71.5 million board feet was about 10.2 million board feet more than a year ago. While the average lumber price received decreased $20 per thousand board feet to $338 per thousand. The sales volume of MDF in the first quarter of 2016 was 26 million square feet or 400,000 square feet less than sold in the first quarter of 2015.

The average sales price for the medium density fiber board sold during 2016's first quarter was $547 per thousand square feet which compares to $573 per thousand square feet for the first quarter a year ago. During the first quarter of last year there was a fire at the press in our MDF plant. With the resulting property and business interruption insurance claim we incurred a $1.7 million deductible cost in the prior year period.

The real estate segment reported an operating loss of $600,000 compared to a loss of $800,000 in the first quarter a year ago. In the current year quarter we had sales of six residential lots at an average lot price of $85,200 versus two lots sold for $51,200 per lot in 2015's first quarter. There were no commercial acreage sales in either quarter.

Corporate operating expense in the first quarter of 2016 was $4.7 million, $100,000 more than the first quarter of 2015 due to slightly higher G&A expenses. Interest expense in the first quarter of 2016 was $2.7 million compared to $1.6 million in the first quarter a year ago. The increase was due to borrowings for capital expenditures and share repurchases combined with a higher weighted average interest rate for our debt. Income tax expense for the first quarter of 2016 was $200,000 compared to $1.1 million for the first quarter of last year. The decrease was mainly due to lower pretax income combined with a decreased income tax -- expected income tax rate at the income from our timber harvesting activities is being taxed at a capital gains rate for 2016.

Capital expenditures were $8.7 million for the first quarter of 2016 versus $5.7 million in the first quarter of 2015. Timberland acquisitions were $100,000 in the first quarter of both 2015 and 2016. At March 31, long-term debt was $207.8 million and adjusted working capital was $18 million. And now, I will turn the call over to Ray for his comments.

Ray Dillon

Thank you, Ken. During 2015, there was a modest in the United States, most of this increase was multifamily development which consumes less board feet of lumber per square foot than if these constructed units had been single family homes. The modest benefit of the additional consumption of building product that came from this construction activity was more than offset by an increase in the amount of lumber available to consumers in the United States.

Lumber producers began to ramp up production in anticipation of a stronger recovery in the housing market then actually occurred. In addition, reduced exports of logs and lumber to Asian markets from West Coast producers caused by a slowing Chinese economy and stronger dollar resulted in more of the lumber produced in North America to remain in the United States.

In addition, with the expiration of the Softwood Lumber agreement in October, some of Canada's lumber production that had been going to China was diverted into the United States. As a result, the pricing environment for most wood products including the lumber and medium density fiberboard manufactured by the company weakened throughout the year. While there was a slight increase in lumber consumption during the first quarter of 2016, the markets for wood products remained weak from a historical perspective.

In the quarter, we increased the operating hours in both of our sawmills to balance their production with market demand. As a result the volume of lumber that was sold during the first quarter of 2016 increased 17% from the sales volume in the same period in 2015, while the average lumber sales price received for the lumber we sold of $338 per thousand board feet decreased some 6% when compared to the first quarter of 2015.

For the remainder of 2016, we will continue to adjust operating hours in our sawmills to match lumber production with market demand. In regard to the second quarter and year of 2016, we estimate finished lumber sales volumes to be 65 million to 75 million board feet and 265 million to 285 million board feet respectively.

During the first quarter, the market for MDF also continued to be weak. As a result the volume of MDF that we sold in the first quarter of 2016 decreased 2% when compared to the same quarter of 2015, while the average sales price for the MDF we sold decreased 5% from a year ago. At Del-Tin Fiber, I am proud to report that operating performance is improving and the plant produced positive operating income for the quarter. We focused on increasing the plant's uptime percentage, hourly productivity rate as well as its press and resin efficiencies in order to continue to improve the plant's financial performance.

In regard to the second quarter and year of 2016, MDF volume is forecasted to be 25 million to 35 million square feet and 110 million to 130 million square feet respectively. In the Woodlands segment, harvest of pine sawtimber during the first quarter of 2016 decreased 11% from the first quarter of 2015. The decrease was mainly due to timing and to wet weather conditions in the company's operating area during the first three months of 2016. The price that area lumber producers were willing to pay for the pine stumpage needed to supply their mills continued to increase resulting in the average sales price for pine sawtimber during the quarter increasing 8% compared to a year ago.

During the first quarter of 2016, our woodlands segment also sold and/or harvested 160,270 ton of pine pulpwood. This was 75% more than in the first quarter of last year. The increase for the current quarter was largely due to the timing of sales of pine pulpwood to third parties under timber deed and to the mix of products growing on the specific tracts that we harvested during the quarter. The average sales price received for pine pulpwood during the quarter of $9 per ton was 10% lower than received in the first quarter of 2015. We continue to manage our timberlands on a sustainable yield basis. In regard to the second quarter and year of 2016, we estimate our pine sawtimber harvest to be 200,000 tons to 225,000 tons and 725,000 tons to 765,000 tons respectively.

During the quarter we did not sell any recreational use hardwood bottomland. In the first quarter of 2015 we sold 20 acres of this non-strategic timberland. We continue to evaluate our timberland acreage to identify non-strategic hardwood bottomland for future sale. With the persistent low prices that exist for natural gas, drilling activity in the Fayetteville Shale is non-existent. Only five wells were added during the quarter to Deltic's royalty producing well count. With the low natural gas prices, decreased gas production volumes from maturing previously drilled wells and the decrease in new drilling activity, oil and gas related income decreased some 67% compared to a year ago.

In our real estate segment, we saw an increase in lot sales activity compared to the first quarter of 2015. In addition, the average sales price per lot was 66% higher than in the first quarter of last year due to the sales mix of lots sold. We had the first offering of the new lots that we were developing in 2016 earlier this month. These lots were in our Chenal Valley development and we had a very good response with all 27 lots offered now being under contract and scheduled to close in the third quarter. We are currently developing additional lots to offer for sale in both our Chenal Valley and Wildwood Place developments in order to ensure the right number and mix of lot inventory exists to meet demand.

In regard to the second quarter and year of 2016, we estimate residential lot sales to be 5 to 10 lots and 90 to 120 lots respectively. There were no commercial sales of real estate acreage in the first quarter of 2015 or 2016. We saw increased activity by potential buyers regarding our commercial properties during the first quarter. We were very focused on achieving sales of commercial acreage in 2016, especially near the key commercial intersection of Chenal Parkway and Rahling Road in our Chenal Valley development. However, due to the significant factors involved, it's difficult to predict the timing of future commercial real estate transaction.

For 2016, our financial results were benefitting from the passage of the consolidated appropriations act. This act was enacted for one year and included the capital gains treatment for income from timber harvesting activity for C-corporations under the TREE Act. In the first quarter we repurchased an additional 277,430 shares of Deltic stock as we continued to increase the number of timberland acres owned by our shareholders per outstanding share.

We remain cautious about the prospects for 2016 given the uncertainty and volatility in the economy and the challenging operating environment that exists for our businesses. We will protect our solid balance sheet while working to further reduce cost and improve efficiencies throughout the company. Genetta, we can now open the lines for any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Albert Sebastian with Prospect Advisors. Please proceed.

Albert Sebastian

Ray, on Del-Tin, it seems as though the performance there has improved. Do you expect and is the trajectory of the performance better in the second quarter than it is in the first, do you think?

Ray Dillon

Yes, Al. It's continuing to improve. I am very pleased with the progress being made. It's never fast enough but it's solid progress. It's sustainable and it will continue to improve. We expect a great year at Del-Tin.

Albert Sebastian

Okay. And any further thoughts on the outlook for lumber pricing?

Ray Dillon

Well, I will give you my opinion. It's -- crystal ball is very foggy, right, this minute. With the strength of the dollar and with exports to China being reduced from they had been. We could possibly see a slightly better pricing environment in North America the rest of this year but chances are it's going to be about the same or a little less than last year. But it's strictly dependent upon, quite frankly, operating in the U.S. and exports from Canada to the U.S., Al. So it's a long-winded way of saying, it's probably about the same as last year and it could be up 5% or down 5% just as easy.

Albert Sebastian

Okay. And with regards to timberland transactions, are you continuing to see interest from the [indiscernible] and other institutional buyers concerning interest in purchasing timberlands.

Ray Dillon

I would say primarily the group you described, Al, are looking for large blocks of timberland and so to the degree that those are available, then there is a lot of interest from those entities. Quite frankly, there is not a lot of land on the market in our operating area or in our vicinity in the southeast right now. And I am now aware of a lot coming to market but that could change. There is a lot of interest, there is just not a lot out there.

Operator

And at this time we have no further questions. I would now like to turn the call back over to Mr. Ray Dillon for any closing remarks.

Ray Dillon

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

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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