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Deltic Timber Corp. (NYSE:DEL)

Q4 2007 Earnings Call

February 7, 2008 11:00 am ET

Executives

Ray Dillon - President and CEO

Ken Mann - VP and CFO

Analysts

Operator

Good day ladies and gentlemen and welcome to the Fourth Quarter 2007 Deltic Timber Earnings Call. My name is Dan and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operators Instructions)

As a reminder this conference is being recorded for replay purposes. 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 Dillon

Good morning. I would like to welcome you to Deltic Timber Corporation's fourth quarter 2007 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 2008 before we open the line for any questions. Ken?

Ken Mann

Well, thank you, Ray. Deltic issued its news release yesterday announcing earnings for the fourth quarter in fiscal 2007. If you don't have a copy yet, you can download one from the investor relations section of our company website at www.deltic.com. If you don't have access to the internet, call me to request a copy. My direct telephone number is area code 870-881-6432.

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 2006 Form 10-K on file with the SEC.

For my financial review, I will focus initially on the results for the fourth quarter of 2007, then I will go over the year of 2007 as a whole.

For the fourth quarter Deltic's net income was $1.7 million, $0.13 a share, a $3.7 million improvement from the 2006 fourth quarter loss of $2 million, or $0.16 a share. Net sales were some 8.2% lower at $24.5 million. The Woodlands segment reported a 103% higher operating income at $5.9 million in the 2007 quarter compared to $2.9 million a year ago.

For the quarter, we benefited from a 47,300 ton increase in pine sawtimber harvested, a $6 per ton or 25% increase in the price for pine pulpwood sold and the sale of 469 acres of non-strategic hardwood bottomland, for an average sales price of $1,541 per acre. We plan to use the land sales proceeds to acquire additional pine timberland.

Harvest of pine sawtimber was 52% higher in the fourth quarter of 2007, when compared to the same quarter last year. This mainly was a result of the resumption of harvesting from the Company's Waldo region fee lands, due to startup of production at our Waldo Mill after repair of fire damage we completed at the end of October.

If you'll recall, we suspended harvesting activity during the third quarter due to the mill shutdown. Actual harvest volume level was 138,300 tons, some 47,300 tons higher than the 91,000 tons harvested in the prior year fourth quarter. The average stumpage price dropped 5% to $39 per ton, compared to $41 a ton in the 2006 fourth quarter.

As expected, residential lot sales continue to be a lower and desired due to the slow down in housing starts in the Central Arkansas region. We sold 23 lots in the fourth quarter of 2007, compared to 34 lots a year ago, while the average price of $90,400 a lot compares favorably to the average of $85,800 per lot in last year's fourth quarter, and that's due to sales mix.

Financial results for the 2007 period included no sales of commercial property, while there were sales of 2.1 acres of commercial real estate in the fourth quarter of 2006 at an average of $298,700 per acre. Due to this variance in commercial acreage sales, the real estate segment reported an income of $500,000 in the fourth quarter of 2007, a decrease of $500,000 when compared to the $1 million for the same period of 2006.

In the Mills segment, operating results for income of $500,000 compared to a loss of $3.2 million in the 2006 quarter was a $3.7 million improvement. Including the quarter results, we are again on voluntary conversion of the Waldo Mill planer machine damaged in the fire, which totaled $1.9 million, and operating income of $1.2 million from the settlement of related business interruption claims for the month of August, September and October.

Average sales realizations of $269 per thousand were some $18 or 6% lower in the corresponding quarter of last year. Lumber sales volume decreased 4.8% to $ 47.2 million board feet in fourth quarter 2007. This was mainly due to the suspension of production at the Waldo Mill for most of the month of October, as a result of the fire.

Del-Tin Fiber had a respectable quarter, contributing $400,000, this compares to $200,000 a year ago. The plant's average sales realizations increased 6% compared to the fourth quarter 2006 results, to $499 per thousand square feet, while sales volumes dropped 2% to 28.1 million square feet for the fourth quarter of 2007. This was due to reduced operating hours at the plant.

Turning to the year of 2007, Deltic's net income was $11.1 million or $0.86 a share, compared to the 2006 period of $11.3 million or $0.91 a share. Net sales were down 16.2% at $128.3 million. The Woodlands segment contributed $24.8 million, some $2.3 million higher than in 2006. The volume of pine sawtimber harvested was 575,600 tons, a decrease of 4700 tons, and the average sales price per ton was $40, a decrease of $5 a ton.

The market for pine pulpwood was very strong in 2007. We harvested 458,900 tons, an increase of 10% over the year of 2006 at an average price of $13 per ton, a $5 per ton or 62% increase. We also sold 893 acres of nonstrategic hardwood bottomland for $1700 per acre in 2007, compared to 200 acres of timber land sold or $1400 per acre in 2006.

For the Mills segment, operating results were a loss of $3 million, compared to a loss of $5.3 million in 2006. This was largely due to the impact of recovering the insurance proceeds received in the fourth quarter, and partially offset by lower average sales realization of $293 per 1000 board feet, some $31 per 1000 board feet lower than last year.

Lumber sales volume was 17% lower than last year, totaling 218.2 million board feet, and was significantly impacted by the three month production suspension at the Waldo Mill due to the fire, and to a reduction in operating hours at the Ola Mill beginning back in the second half of 2006.

Real estate contributed $13.1 million compared to $13.9 million a year ago. We sold 81 residential lots at an average price of $89,500 a lot, compared to a 116 lots which averaged $103,800 a lot in 2006.

During 2007, we sold almost 26 acres of commercial real estate at an average price of $240,600 per acre, while we sold about 55 acres of commercial sales last year at an average price of $248,400 per acre. We continue to reach significant increase in our remaining commercial properties in Chenal Valley, especially that zone for multifamily housing.

Another real state transaction having a significant impact on the reported financial results for this segment in 2007 was the first quarter sale of 680 acres of undeveloped real estate to Central Arkansas Water for $8.2 million, or $12,000 per acre.

Deltic's equity in Del-Tin Fiber was $1.7 million for 2007, compared to $2.9 for 2006. Average sales of realization for 2007 were $488 a thousand compared to $456 a thousand in 2006 due to improved sales mix and the ability to recover a portion of a significant increase in resin glue costs to fight increases.

Sales volume was some 22% lower, due to reduced production hours for the plant. Capital expenditures are reduced to $20.6 million for 2007, compared to $27.8 million during 2006, as we complete needed projects at our two sawmills and return to a maintenance level of expenditures for this segment.

Long term debt outstanding is at $66.7 million and our long term debt to capital employee ratio is some 23.4%, still one of the lowest in our industry.

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

Ray Dillon

Thank you, Ken. As noted in our release yesterday Deltic's financial results for the fourth quarter 2007 were significantly impacted by the settlement of insurance claims resulting from a fire at the Company's Waldo Mill that occurred during the third quarter.

And as Ken has stated, the quarter also benefited from the resumption of sawtimber harvesting activities in conjunction with the mill startup, following the replacement of its damage planer machine, and from increased sales of non-strategic hardwood bottomland that's used for recreational purposes.

All these factors possibly impacted reported income. A depressed environment continued to exist during the fourth quarter for the lumber manufacturing and real estate segments of the company. This negative affected both the price received for the lumber sold during the period and the number of residential lots sold.

Our business conditions for most of 2007 were very difficult. I do want to note that the reported financial results for the year were respectable, and that there were several significant positive highlights for the year of 2007. The first of these highlights was our ability to maintain relatively stable sales prices for the pine sawtimber that we harvested form our forest.

The end of first quarter of 2007: Our Woodland segment operations, once again, accelerated the timing of plant sales of timber to third parties, to maximize sales realization for this portion of this plant annual harvest. Deltic benefited from this decision as the further deterioration of the lumber market has now resulted in a decrease in stockage prices to about $39 per ton during the fourth quarter.

We remain committed to keeping our pine sawtimber harvest volume equal to estimated annual timber growth each year. As such we have maintained discipline and did not increase our harvest volume and over-cut our forest to meet earnings expectation.

Accordingly the pine sawtimber harvest volume in 2007 of 575,600 ton was essentially equal to that of 2006. Our sales realizations for pine sawtimber averaged $40 per ton in 2007, versus $45 per ton for 2006. We anticipate the total 2008 pine sawtimber harvest level to come in at 570,000 to 585,000 tons, with 170,000 to 180,000 tons harvested in the first quarter.

Operating income and cash flows from our core Woodland segment actually improved from a year ago, despite the decrease in sawtimber stockage prices. This segment contributed to operating income of $5.9 million in the fourth quarter and $24.8 million for the year of 2007. This compares to $2.9 million in the 2006's fourth quarter and $22.5 million for the year of 2006. Cash flows totaled $30.9 million in 2007 versus $25.6 million in 2006. This improvement was largely due to the second highlight for 2007 (inaudible).

We capitalized on the strong demand for pulpwood that resulted from increased demand from fiber by area paper mills due to reduced availability of residual softwood chips from sawmills, as most cut back on production due to market conditions. As such, we harvested a record level of pine pulpwood at record prices, while planning our pine forest and plantation, needed to enhance the sawtimber producing capability.

This generated some $5.6 million in revenue from pulpwood for the year, almost twice the amount realized in 2006. The third noteworthy highlight of 2007 was the sale of 680 acres of undeveloped real estate of Central Arkansas Water. Back in 2003, we disclosed plans to construct a fourth real estate development on former timber land that had scenic views of Lake Maumelle. This development was to consist of 3 to 5 acres estate first-lots for construction of very high-end homes.

After the announcement of these plans, Central Arkansas Water acted, and condemned these lands in 2004, so they would remain undisturbed. After considerable effort by both parties, the condemnation act was settled, with Deltic agreeing to sell the land to CAW for $8.2 million. Condition of the sale was that CAW agreed to keep the land in its natural stay, and CAW determined it no longer needed the land for watershed protection. Deltic would have an option to buy the land back for the same price any time in the next nine years.

Deltic Timber continued to reach significant benefits from its diversification in real estate development and the investment the company has made in its Chenal Valley development in Little Rock Arkansas. This benefit was realized by the sale of two commercial sights totaling almost 26 acres at a pre-tax margin of $5.3 million. Both sides for zone for multifamily development will be used, and the complex constructed on these sites will be very upscale.

One of the projects that will consist of the first condominium construction on the golf courses is in our Chenal Valley development. Both properties were located in the core area of Chenal Valley and will add to the resident base of the development.

We are experiencing the same trend that is happening in the national real estate market. As single family housing stocks have slowed, the number of multi-family units started is increasing, and we have received additional enquiries in the potential multi-family sites in Chenal Valley. While we are experiencing a strong level of interest in our commercial acreage, I remind you that commercial real estate sales are inherently sporadic and unpredictable in nature. So the timing of this type of sale is uncertain.

Total residential lot sales activities during the fourth quarter and the year of 2007 reflects the slowdown in the housing market, and has been seen in the United States. I believe this slowdown will continue to affect our real estate segment for the entire year of 2008 and into 2009.

Residential lot sales for the fourth quarter of 2007 decreased from 34 lots to 23, compared to a year ago. For the year of 2007, lot sales totaled 81 versus 116 lots sold in 2006. However, I feel that selling this number of lots in a year in which the general housing market was in turmoil, combined with the fact that Deltic did not offer any new neighborhoods for sale during 2007, was actually a noteworthy highlight.

We anticipate that combined lot closings for our three developments for the first quarter and year of 2008 will be between 5 to 10 lots, and 60 to 80 lots respectively. The company has adjusted the timing of development of new lot offerings to allow demand to catch up with available lot inventory, and currently plans to offer only one new neighborhood for sale in 2008. That neighborhood will consist of 32 lots in the mid-price tier of lots offered in Chenal Valley.

Primarily as a result of the production downtime at our Waldo Mill, due to the fire and related repairs there, our lumber sales volume decreased from 49.6 million board feet a year ago to 47.2 million board feet in the fourth quarter of 2007, and from 262.7 million board feet for the year of 2006 to 218.2 million board feet for 2007.

Deltic's finished lumber sales volume is estimated at 60 million to 70 million board feet for the first quarter and 270 million to 300 million board feet for the year of 2008. However, this volume could be adjusted as needed to react to market conditions in the lumber market. We will remain intently focused on increasing hourly productivity rates and efficiencies, while reducing every element of controllable manufacturing cost in our sawmills.

As such, another highlight for the year was that our mill segment was able to produce positive cash flows for the company in 2007, despite the extremely weak lumber market. This is especially noteworthy given such a weak lumber market.

A final significant highlight, the continuation of positive financial performance at Del-Tin Fiber, was our 50% owned joint venture to manufacture medium density fiberboard. We are pleased with the plant’s operating performance as efficiencies continue to improve.

The overall market for MDF remained relatively strong throughout 2007 as production levels at MDF remained in balance with demand. The combination of solid operating performance and enhanced product mix, and relatively good market conditions for the year was offset by the impact of higher cost for resin glue used in the MDF manufacturing process, and by increased fiber cost. This was because Del-Tin had to compete with area paper mills for the limited supply of residual pinewood chips.

These factors resulted in Deltic’s equity in the joint venture, decreasing from $2.9 million for the year of 2006 to $1.7 million for 2007. As Ken reported, equity in Del-Tin for the fourth quarter of $400,000 was twice the amount reported for the same period in 2006, as producers were able to pass along some of the increased cost to buyers through price increases.

With regard to Fayetteville Shale, through year-end in 2007, we had received royalty payments totaling some $107,000 from the production in units where fifteen successful wells have been drilled.

Our ownership percentage in these various units varies greatly. For the month of January 2008, royalty payments received were just over $30,000. Therefore, the financial impact realized was beyond the recognition of the annualized portion of the leased owners’ payments already received, and has not materially impacted our reported financial results thus far. And the estimation of the future potential impact remains difficult, due to the number of variables involved. I'm pleased to inform you that Deltic was able to lease drilling rights for an additional 5900 mineral acres in the Eastern area of the current boundary of the Fayetteville Shale play area for some $2.1 million during the fourth quarter.

Over all I'm pleased with the financial results for the quarter and year but I remind you that the operating environment for companies in the forest products industry during 2008 will be extremely challenging. The reality of operating in a cyclical, commodity-based business environment is that the cycle will turn down for periods of time. We are currently in one of those down periods, and most indications are that business conditions will be difficult during 2008 and into 2009. We will manage our operations to be as efficient as possible, given these current market conditions. I believe the company is well- positioned to take advantage of any market recovery when it comes.

In the meantime, these conditions should eventually present some buying opportunities as we look to grow Deltic’s asset base. Dan, we can now open the line for any questions.

Question-and-Answer Session

Operator

(Operator Instructions) At this we have no further questions in queue.

Ray Dillon

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

Operator

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

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