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The St. Joe Company (NYSE:JOE)

Q2 2012 Earnings Call

August 2, 2012 5:00 p.m. ET

Executives

Thomas Hoyer - Chief Financial Officer

Analysts

Buck Horne - Raymond James

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2012 Earnings Conference Call. (Operator instructions) As a reminder, this conference call is being recorded. I would like to now turn the conference over to Mr. Hoyer. Mr. Hoyer, you may begin.

Thomas Hoyer

Thank you. Hello, everyone, and welcome to The St. Joe earnings call for the period ending June 30, 2012. My name is Tom Hoyer, I'm the Chief Financial Officer at St. Joe and I'll be the sole representative from the company conducting the call today.

Some of the information we will discuss in this call is forward looking. This information includes statements that are preceded by or include the words believe, expect, intend, anticipate, will, may, could, or similar expressions. These forward-looking statements may be affected by the risks and certainties in our business and actual results may differ materially from the forward-looking statements.

Everything we say here today is qualified in its entirety by cautionary statements and risk factors set forth in this afternoon's press release and our SEC filings, including our annual report on Form 10-K filed with the SEC on February 27, 2012, which the documents are publicly available.

Our statements are as of today, August 2, 2012, and we have no obligation to update the forward-looking statements that we may make.

Let me take a moment to explain our approach to investor relations. We're reinstituting a quarterly earnings call, which I'll provide brief comments and then I'll have pre-qualified analysts to ask questions. We're running with a lean management team here, so to save time and make it easier to comply with Regulation FD, we're no longer meeting with analysts and investors between the third quarterly earnings announcements.

These quarterly earnings calls, like this one today, will be your main opportunity to ask questions. I will prepare, ten days after the call, to take phone calls to clarify statements made on today's call, but I won't be answering additional questions or adding information to what was said on today's call.

Let's move on to second quarter results. Compared to the second quarter of last year our situation has certainly improved. Revenue was higher in the second quarter this year compared to the second quarter of last and we generated positive cash flow in the second quarter just ended. We are encouraged by the trends that we see developing in our businesses.

Revenue in the second quarter increased to $30.4 million compared to $25.3 million in the second quarter of 2011, which is about a 20% increase. For the six month ended June 30, 2012, the company reported $60.9 million of revenue compared to about $98.7 million for the first six months of last year. If we adjust for a one-time timber deed, it was executed in the first half of last year for the amount of $54.5 million, then I can tell you that on pro forma basis revenue increased for the first half of the year by $44.2 million to $60.9 million.

Several things have contributed to the improvement in revenues in the second quarter. The sale of residential units increased 68% quarter-over-quarter. In the associated revenue grew 50% for the same period. Sales of home sites increased in all of our communitities and sales in primary communities, such Rivertown and Breakfast Point grew at a faster pace than sales in the resort communities, such as WaterColor.

Price points in our primary communities are lower than our price points in our resort communities, which is why the percentage increase in home sites sold is greater than the percentage of revenue growth.

While we're on the topic of real estate sales, let me also note that the sale of real estate and the company's commercial and rural land businesses was relatively unchanged in this quarter compared to the second quarter of last year.

Our forestry business was also contributive to the improvement in the revenue in the second quarter. We harvested 23% more tons of timber in the second quarter of 2012 compared to the second quarter of 2011. We were able to do this for several reasons. First, land that had been previously restricted for residential and commercial development was opened to timber operations. Second, we stepped up investment in basic infrastructure, things like roads and bridges, which gave us better and more consistent access to our timber. Third, we removed restrictions on our harvest operations such the ban on harvesting up to roadsides, which has allowed us to reap more tons per acre. Fourth, we invested new forest management software that allows us to plan with more clarity. All these things made us more efficient and productive, which in turn increased in tons of timber harvest in this quarter.

The contributor to higher revenue in the second quarter is our resorts and clubs business, which includes the WaterColor Inn, vacation rentals, golf clubs and marinas. All those businesses showed improvement compared to the second quarter of last year, but (inaudible) vacation rentals business, in particular, showed strength this year and both were experiencing a strong summer season. Both occupancy and rates have improved compared to the second quarter of last year.

Net income for the second quarter of 2012 was $0.2 million compared to a net loss of $13.3 million for the second quarter of 2011. The revenue increases that I just spoke about were part of the improvement in net income. But the majority of improvements came from lower overhead cost in form of reduced construction costs, lower professional fees, lower pension expense and less rent costs compared to last year's second quarter.

We also put the gain in the second quarter 2012 related to payments received for a Deepwater Horizon claim.

Year to date we've increased cash by $7.5 million, but you can't really extrapolate that into a trend because you still have property taxes and capital expenditures to fund in the second half of the year. We expect to end the year around break even on cash flow, give or take a couple of million dollars, depending on how fast we invest in certain projects.

We ended the quarter with approximately $170 million in cash. We believe that we have a strong balance sheet and a stable business that will give us time to develop the future of the company. Although we've been operating with a sense of urgency, we're not rushing into projects ahead of their time. We're testing assets for different ideas and you know from us when those ideas crystallize into meaningful projects.

You'll find more information in our earnings press release, which was released about an hour ago and in our 10-Q, which will be filed tomorrow.

I'll now turn it over to the operator for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from Buck Horne with Raymond James.

Thomas Hoyer

Hey, Buck

Buck Horne - Raymond James

I think on behalf of all investors to the (inaudible) of the conference calls here. I guess I do have to lead off, I've got a list of questions, but I just want to ask you if there is a reason Park is not going to join us on this conference call and why he thinks it's not really a good idea to address some of the investor's questions?

Thomas Hoyer

Yeah, this was a discussion we had with our Board of Directors and the management team there. As you know, we're running with a pretty lean group here and we decided to reinstitute these calls and we didn't want to engage the whole management team in the preparation and the conduct of these calls.

So, ultimately, we decided it would be my responsibility going forward. It's mostly just a focus thing. We don't have a chief operating officer, we don't have a treasurer, investor relations person. So we're trying to keep our management focused on the things that we're trying to do to assess our projects, assess our assets and build value there.

Buck Horne - Raymond James

Okay. Well, let me ask you a few questions and let me start this fairly broadly then. I think a lot of investors really just understand, well, number one, you've accomplished a very important part your mission already which was to stop the bleeding and I think, obviously, you've identified you're going to strategically invest in a few projects here. But can you give us a sense of the broader goals and visions for St. Joe and it's asset base now and I guess that's two points?

I mean, one, how do you want to articulate to the residents of the region and your commercial partners what St. Joe's identity is going be going forward? And, I guess, to investors, what are you going to tell them or how do you want to articulate to them what you're going to do to maximize the present value of cash flows that these assets represent now.

Thomas Hoyer

Sure. Let me start off by saying that we're still working on articulating what we're going to say to partners and to investors as we go forward here. I can tell you that the core of the strategy is we're going to make the most of the assets that we have here in Florida. We're going to focus on Florida.

We're going to focus residential, commercial. What that means is we're going to look for pockets of activity where we can leverage certain projects. Some places are much more active than others. We're going to try and take advantage of demographic trends. The boomer trends, the multi-family housing trends and see which of our assets we can leverage into those trends.

We have a port which is a very unique asset. It doesn't really fall into simple bucket, but it's a great, tremendous asset. We are talking with some people who are much more expert in port and port operations than we are. We're trying to figure out who would go there, what kind of businesses would be there, what they're willing to pay to be there and we're really just in the beginning stages of that.

And, of course, we have our timber and resorts operations. The timer operations have been a backbone and mainstay in this business for many years and solely for the last few years. In the resorts business, we've actually turned around. It's now a profit generating business for us.

Growth going forward. I expect that growth is going to come through the residential commercial development and to a lesser degree retail and commercial leasing. That's how we're proceeding forward right now. Our vision for the company is still crystallizing for us, but we got a canvas here to work with. So that's the plan going forward right now.

Buck Horne - Raymond James

All right. Let me ask one more, and then I'll jump in the que and let someone else jump in. Just one on Pier Park north, it looks like Glenshire [SP] decided to walk away from from Pier Park. I was wondering if you could comment at all, on why they felt it was best to cut their losses there, and do you thing you'll be able to find a new retail partner at Pier Park pretty soon?

Thomas Hoyer

The understanding with Glenshire is that they pulled out of development all together, and it wasn't just Pier Park; it was all of the developments. They're just going out and [will] purchase assets and run them. That's what they communicated to us. We think that project is a pretty good project, and we are very close to bringing a replacement for Glenshire on there. Actually, on terms that we think may be better all around for us. We're not abandoning that project, we think it's a great project, and we should be probably be making an announcement here in the not too distant future about what we're going to do on that.

Buck Horne - Raymond James

Okay. Thanks, Tom. I'll jump back into que later.

Thomas Hoyer

Okay.

Operator

(Operator Instructions) Okay, and I'm seeing Buck Horne again.

Buck Horne - Raymond James

Tom, it looks like I got you all to myself. I'll just go down my list then.

Thomas Hoyer

Yeah. Please do.

Buck Horne - Raymond James

Sure. Can you give us an update on VentureCrossings, in terms of the airport project? What you're working on right now, and are you finding any interest, in terms of someone wanting to access your through the fence rights, at VentureCrossings? Just what type of potential tenants are you getting the most interest from right now?

Thomas Hoyer

Sure. You know that we signed a lease with ITT, and they're actually going to be occupying that building here, I think within the next couple of months or so. ITT represents the kinds of companies that show interest out there. They're kind of technology, industrial military kinds of companies. We have some moderate interest in the space out there, in the interests that we have out there. That's going to be a slow build for us. The success of that project really depends on the strength of the economy in the southeast. The businesses in the southeast, people wanting to expand into a place like VentureCrossings. We haven't had any interests that I am aware of for through the fence access, but we do know of some opportunities where that might be helpful for us, in attracting tenants here. So, VentureCrossings, I think is off to a good start, but I think it's going to be a little slower growth than people here previously thought it would be.

Buck Horne - Raymond James

Okay. Can we talk a little bit more about Port St. Joe. I know you guys are talking to the experts and trying to get a feel for what you can do. Based on those initial conversations, do you have an idea of what kind of infrastructure investment would need to be made, and ultimately, would you think that port can become, given it's size and location?

Thomas Hoyer

We compared a lot to a port over Louisiana, Port Fourchon, that is I think how you pronounce it. That would be a good proxy for what we think that port might be, but that's just one aspect of it. That's just us thinking about it, that's not the expert telling us that's what it's going to be, so we're still on the discovery phase with that. Because we're still on the discovery phase, I really can't answer your question on how much or what we would install there at the port. What I can tell you is, to whatever extent investment goes into the port, it's not going to be all St. Joe money. We believe that we have access to public sector funds, we think there is private sector funding that would be available for this, and of course the money that we would put in. It's kind of consistent with our approach that we're taking now. We're not going to put a lot of infrastructure money in there, until we have a pretty good idea of who's going to be there and what they're going to pay us to be there.

Buck Horne - Raymond James

Okay. Switching gears on you a little bit. Are you seeing any changes to southwest air service schedule at the airport following the termination of the back/stop agreement? Are they increasing or decreasing frequencies?

Thomas Hoyer

They have actually been, what they did is they had a couple of [inaudible] that were doing very well for them and they've added flights to those. Routes from Houston, for example, they added flights from St. Louis that is actually doing very well. What they're going to take away is a couple of routes that weren't doing so well for them, connections through Orlando. Overall, because the flights that they're taking away carry less passengers than the ones that they're adding, overall they expect their traffic to increase at the airport over the next year.

Buck Horne - Raymond James

Okay. Can I just maybe get your sense, or just take the temperature of the residential housing market in northwest Florida these days. I was up there earlier this Spring, and saw a lot more new construction underway than I had seen in years. I'm just wondering has that kind of continued, in terms of new demand? Are we seeing, just really primarily demand for vacation homes in the region, or are you seeing more primary residences starting to accelerate?

Thomas Hoyer

We're seeing both. The primary is increasing, which is doing well. DR Horton is doing well here. The vacation homes, we're seeing demand there as well, but prices are increasing there as well. The only activity that you saw when you were here is continuing and probably more so than when you were here among our vacation properties right along coast here. So, it's actually pretty nice. It's kind of exciting to be driving up and down the road, seeing all the construction activity going on around here.

Buck Horne - Raymond James

Okay. I think you mentioned that you were going to be cash-flow break even, by this year. What does that imply for CapEx spending this year?

Thomas Hoyer

I think that it will probably be around, hold on just a second. Probably right around about $32 to $33 million in capital expenditures for this year.

Buck Horne - Raymond James

Okay. Would we be looking at a similar number for next year?

Thomas Hoyer

No. I actually think it will be less for next year. We're not finished with our planning, and I'm not going to give you a specific number, I'm not going to give you any guidance, Buck. A lot of the CapEx this year was finishing out some work at a couple of projects that we felt that we should finish out; that if we had been here when they were started they probably wouldn't have started it in the first place. I think that probably next year, we'll see less CapEx next year.

Buck Horne - Raymond James

Okay. I would assume the last reference, or at least in reference to River Town, maybe what's the longer term plan for River Town?

Thomas Hoyer

Right now River Town is actually, the business is picking up there. We did finish the amenities down there, putting in a new entrance, and we think that finishing the new amenities is helping unit sales there. We think finishing the entry will help it even more, the market there seems to be picking up. River Town has a lot of good things going for it actually. It's in a very good school district, it is a little far away from downtown Jacksonville, but it is along the river there. It's a very beautiful site. So, the long-term right now is to basically hold and market, and see what comes out of it.

Buck Horne - Raymond James

Okay. My last one is just on the oil spill claims. I'm just kind of wondering, you got $1 million this quarter. How much more are you guys pursuing, in terms of potential claims, and is there any idea when we can expect some resolution on those claims?

Thomas Hoyer

Sure. You know, we filed the first claims with the Gulf Coast Claims Facility, mostly related to our resorts and clubs business; because that's what that fund was really kind of geared towards. Then we collected about $1.7 against our claims on that. Our claim is still open on that, it's transferred now, over to this multi-district litigation venue, which is basically a court process in Louisiana. In addition to that claim, we are going to file additional claims. We've been working on that here, this summer. We have not finalized a claim, we can't really tell you what it is. Of course, I can't really tell you when we expect it will be resolved. It's kind of open ended for us right now.

Buck Horne - Raymond James

All right, Tom. That's my list, hopefully someone else is back in the que now, but I'll drop off now. Thanks.

Thomas Hoyer

All right. Thanks, Buck.

Operator

(Operator instructions) Okay. I'm showing no further questions.

Thomas Hoyer

All right. Thank you, [Kay]. Thank you, everybody We'll talk again the first week of November when we discuss third quarter results. Have a great day.

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