Bank of America Merrill Lynch Industrials & Materials Conference
September 5, 2012, 1:20 p.m. ET
Paul Boynton – Chairman, President, CEO
As many of you know, Rayonier, the new Timberlands, in addition to owning 2.7 million acres in the U.S. and New Zealand, they also have a real estate segments and a performance fibers business which makes specialty pulp, which is a very specialized application. With that, I will turn it over to Pau.
Thanks, Mike. Good afternoon everyone. Let me just – I’m just going to walk you through Rayonier and our story and help you understand what we’re all about and certainly, we’ll open it up for questions at the end of the forum. Hopefully you have a booklet in front of you to follow along with. I’ll put it up on the screen here as well, but let’s start with just kind of the company portfolio and profile. We are a natural resource business, a global forest products company, 5.5 billion market cap actually over 6 billion market cap to date. It's set around three businesses; Forest Resources, Real Estate, and Performance Fibers and I’ll go into depth on each one of those.
$1.5 billion in revenue, almost half of our sales are to customers outside of the U.S. with some good geographic diversity. Dividends is a very important part of our equation and I’ll show you a little bit from our history, but right now we’re about 3.9% on dividend yield and of course that dividend taxed at a capital gains rate.
We operate within our restructure so a highly efficient structure and we’ve got a great balance sheet. You can see that in our investment grade Baa.
[Inaudible] portfolio. And of what we have in there, of course, is our core Timberland Forest Resources and we look to continue to grow that core Timberland business. We look for further acquisitions out there and I’ll show you a little bit of a track record that we have in that regard.
And of course, with that we say, okay, that’s our core, Timerland is our main Forest Resources engine and we’re constantly using silvicultural practices. We get a great RDT to say, how do you get more productivity out of that engine and we’re constantly redefining that to grow our Timberland [inaudible].
Now, as we mentioned, we have 2.7 million acres and anytime you have 2.7 million acres of Timberland, you’re automatically in the real estate business. So we’ve got a real estate team and they’re looking at our real estate timberland and mapping it out and saying, what is worth more to the company, to our shareholders than just this timber land? They look at that and say what if it had some higher, better use potential. So they identified that and we worked to monetize those parcels out there and capture that value. We also look at parcels out there that may be of non-strategic value and again, we remove those out of the portfolio just as you take our lower-end stock out of the portfolio. And then we also work on titling land, positioning timber land for some future use by the government entitlement process and we work hard to do that and position it for the future.
And then our third business is our Performance Fibers business. We’ve got a very unique business with a world leader of highly purified cellulose fibers and I’ll show you what that means just shortly.
Our strategy there is to maintain that global leadership and we do that with a lot of effort towards our differentiation of our product, very technical, very high value and also we put a lot of investment and time into improving our reliability and driving our cost down. And again, we’ll take you through that. That business has been sold out for about six years now so we have an expansion currently underway, a $300 million-plus expansion in Jesup, Georgia at the site of one of our facilities, which will allow us to continue that leadership going forward.
So let’s start and talk a little bit about Forest Resources. Again ,just in general, Timberland is a very attractive asset class. It’s historically outpaced inflation. We continue to see a strong interest in it. I don’t know if you’re familiar, but recently there’s been an acquisition of forest capital partners, Timberland assets over $2 billion. I don’t know the exact amount, but this demonstrates to use that there’s continued interest in moving into this asset class.
We like it because it’s very flexible, flexible in how you harvest it, how you grow it, different markets, so it’s just a lot of flexibility when we look at our cash flow and our operating income. And unlike most natural resources, it continues to grow even if you decide you’re not going to harvest it at that point in time, you’re not going to monetize it, right, so it grows naturally in the forest, 4 to 6 to 7% a year just by keeping it there and waiting for the right time to move it out to market.
Of course, the Timberland part of the business is what is classified as a REIT, so it’s very tax efficient and you can see the numbers there in terms of sales and EBITDA over $100 million in the last 12 months.
Where are our assets at? We’ve got, again, 2.7 million acres, 2.1 million of that is in the United States. We’re the seventh largest land owner in the U.S. You can see it’s really geographically disbursed, a large concentration in the Southeast, but that’s between the Atlantic regions and the Gulf State regions where we have 1.9 million in total acreage. In the Pacific Northwest, the states of Washington and the Olympic Peninsula, we have 400,000 acres and upstate New York we have 120,00 acres. All those bring us different risk portfolios, they bring us different market in any uses so for example, in the Pacific Northwest we are – all of our properties are within 100 miles of a port, which allows us to export to Asia and to China so if that market goes up we can take advantage of that. It’s a heavily saw timber market out in the Pacific Northwest, 85% is going into the saw timber market whereas in the Southeast, traditionally it’s been a 50/50 between saw, logs and pulp market. So again, it’s that kind of diversity that we’re looking for as we manage the total portfolio.
And noted here, we have 300,000-plus acres in a partnership in New Zealand and we manage all of that for the partnership.
Now, again, our key strategy in our Timberland business is to continue to grow this. This chart here shows us our holdings over time. So the blue bars are our base holdings in that year, the green is what we’ve added and the red bar is what we’ve taken out and sold out, liquidated and monetized either non-strategic or an opportunity to achieve some HBU value.
And you can see through time, we’ve continued to grow this asset base from about 2.1 million acres in 2004 to 2.78 million acres – 2.7 million acres in 2012.
So again, we’re confident after looking and we’re very disciplined in how we acquire and I see that’s demonstrated through these charts here.
Looking at the outlook for Forest Resources, again, obviously going through some tough economic times in certainly housing as that comes back around it’s the main driver, we see a – we certainly see that as an opportunity to [inaudible] from where it has been. But in the near term, we certainly see China and the opportunity there and we guided as we thought in the back half of this year, we started to see a little more robust pricing coming out of China and we’re still waiting to see if that will happen.
In the mid-to-long term though, there’s a lot of great factors here that help support and promote those businesses. Number one, again, is volume, Asian volume and demand coming out as China continues to grow, they continue to have the need for additional softwood logs. They do not have the internal ability to satisfy that so they have to import logs and it’s going to come from New Zealand, it’s going to come from Canada, it’s going to come from the U.S. and it’s going to come from Russia, their traditional supplier. But their traditional supplier of Russia has largely depleted their forestry along the Chinese boarder and they’re having to go further and further into the Russian infrastructure, which is just not there. So we’re seeing that that is kind of steadied and everybody else around that Asia base is now shipping more and more product into China.
Another driver is mix. As we see the housing market come back around, you’re going to see more Southeast sawlog and that’s going to help out our mix business, it’s going to be a higher price volume. And then there’s the housing recovery itself, of course, driving price. The British Columbia mountain pine beetle issue that we see coming around another four or five years and then continue to export demand.
Also in our case, we continue to acquire – and we’ve acquired a lot of younger timber and that’s going to also help fuel our timber sales in the future as that becomes mature and ready for market and [inaudible] 1.4 million tons of additional harvest by 2016.
So a real nice story here, where we have been traditionally to where we think we can go in the future just based on the market dynamics as well as our acquisition base.
Quickly just shifting gears to real estate, again, when you’re a large timberland owner, you’re in the real estate business. Our team basically classifies every single acre that we own into several different buckets. Once again, one is strategic timberland. This is the stuff we want to hold and are going to hold for the long term. There’s property out there that we say this is great for rural use, either recreation or potential conservation opportunities. There’s opportunities out there in terms of development. This is by intersection or interchange or potential golf course. And so again, we put that, we position that in a different bucket yet. And then finally there’s the product out there of timberland that we said, look this is non-strategic. It’s either poor productivity and quality or it’s maybe very remote and hard to operator so therefore it’s worth more to somebody else than it is to Rayonier and we move that out of our portfolio. Again, in the last 12 months, 69 million in revenue and 57 million in EBITDA and sales of 27,000 acres.
If you look at where the property is and we say it’s higher better use, just think of Atlanta, Georgia all the way down to Daytona Beach, Florida. We have 200,000 acres along that I95 corridor where we think at some point will be worth more than just timberland.
The great thing about all [inaudible], we continue to manage it as timberland so we continue to get all the value and cash flows off of that as timberland until it’s ready and it’s the right time to monetize it for real estate.
A couple of things, right now the downturn of the market, we’re still waiting for housing recovery to start driving some additional sales of real estate, is that we’ve positioned and we continue to work on industrial development sites because we see the activity starting to improve there before it starts back to commercial and residential real estate. And we’ve got some prime properties, one south of Savannah, about 17 miles south of the Port of Savannah that’s got I95 on one side and SFX railroad on the other side. Savannah is the fastest growing port in the country, it’s the fourth largest in the country and this property is well positioned for industrial distribution, industrial warehouses, industrial manufacturing.
We have a similar property in Nassau County of Florida off of I10 and I95, not far from the Jacksonville port. Again, this one has two Class 1 railroads going through it so forming a railroad diamond which is very unique and very highly sought after. So both these industrial properties we are now in the process of getting what we call mega site certification. So we’re positioning it for a very quick conversion to an industrial development site. Now again, Rayonier itself is not a developer. We just stop at the street [inaudible] but we position it for real estate play.
And again, they also look at this as we have continued in the downturn even at great demand for our HB role properties in terms of recreation, in terms of conservation, sales and we expect 2012 in these areas to actually be above 2011.
We think that most of our entitled work has already been done and so we are well positioned for the rebound of the U.S. economy so we’re standing by for that to happen.
Let’s switch gears now and let’s talk about Performance Fibers. I already indicated that what we do better than anybody else in the world is we isolate a very pure form of a tree fiber. When you get a pure form of tree fiber, you basically have a natural polymer or if you will, natural plastic but you can think of any application that you can use plastic in, you can use this fiber in. Our customers use it in that way. They put it into a liquid form, they combine it, they form it into another type of product and it’s basically an application like that. We produce this product out of two facilities; one in Jesup, Georgia and one in Fernandina Beach, Florida. We have about 730,000 tons and truly that business is split between two main product lines; one we call Cellulose Specialties and that’s kind of a high-end plastic [inaudible]. And the other is about 1/3 of it is going into Absorbent Materials and that is a fluff pulp or you may think about it as a baby diaper fiber. So it’s the inside of that.
I’ll talk about that because we’re phasing out of that. We started that business 40 years ago in combination with Johnson and Johnson and working on a new baby diaper, a disposable baby diaper and we’ve been a leader in that for a long time but it’s become somewhat fairly commoditized and we’re actually getting out of that and therefore we have a conversion product going on because this is $300 million investment we’re taking into Jesup, Georgia and take that absorbent material line and convert it on over to the cellulose specialties line.
Our Performance Fibers business generates sales over $1 billion in EBITDA, $373 million in the last 12 months. It’s a real nice business for us, a real growing business for us.
I just want to get on the next page. I’m looking at it in context of the market and this is the market pulp if you will and again, what we are is a pulp supplier going into papers and bags and boxes. That would be more of a market commodity down there that you see at the bottom of this pyramid. We operate at the very top end of purity and there’s a pyramid of purity specialties and that’s that specialty area and that goes into products such as ethers and high strength viscose and high value products and again, I’ll show you.
It’s a total market of 61 million tons, we’re really operating in the area of this specialty cellulose segment of 1.5 million tons. And we have approximately 1/3 of that market share, so about 33% market share on the high end which makes us more than double the next leading market provider. So it puts us in a nice position. So where does that cellulous specialties volume go when we make that 500,000 tons, you see it broken down in the pie chart here. The majority of that is going to acetate which acetate, you see on the bottom by picture there, that is things like a polarizing film for everyone CD screen out there on the market. So every laptop, every LCD at home has a polarizing film on it likely made from our product from our customer right here in the U.S. It goes into the high-strength ether. This is going to make products thicker, like ice creams and syrups or it’s an pharmaceutical like Advil and Tylenol. It’s in high strength viscose which is high speed tires, there’s a core that goes around the high-speed tires that is made from our product or a casing for a sausage that you remove before you eat it. So a whole host of products there, you see and we’re the world leader in this area. And just looking at the segments a little bit more in the same stage, you see the kind of breakdown of where the acetate is, for example, the cigarette folders, LCD films and coatings and plastics.
Can you describe some of the trends that you supply globally for the special grade, assuming that tire prices are attracting some new supply, although, I think it is difficult to bring on – can you comment on that?
Yes, it’s a – absolutely. This is an attractive business, and obviously it’s bringing on our own additional supply. There’s been a couple of announcements from some large competitors – Buckeye has announced some incremental capacity coming on, I believe, next year sometime, as well, also Tendash has announced additional capacity coming on – and again, it’s difficult to get into the higher end areas, those are certainly two players that will get in there, and I think Buckeye [inaudible] I think they are in the 40,000 ton range, and – but those are certainly two suppliers that can, and know how to service this business as well, and there are other folks out there kind of on the fringes that would like to get into [inaudible] certainly a lot more difficult – it is a very difficult are to penetrate. And so, you will hear more about that, but again, one of the ways that you can look at this business is will they have the ability to penetrate into the [inaudible] specialty areas, is just look at their investment per ton, and for example, Buckeye’s is like $1,700 a ton investment they are putting in. Right here, ours is very similar, $1,600 a ton, but then you will see the others out there, and they said that they are going to get into the [inaudible] specialty market, but they are out there putting investments at the $6, $700 a ton. So, that sounds – a dollar a ton gap lack in investments is a good indicator to us that they are not putting in the capital that they [inaudible] just couldn’t get there with their investments.
Do you do any hedging for currency exposure?
No, we – we’re selling in dollars worldwide, so, we do not because this business performance [inaudible] is a dollar basis, so we do not do any do any hedging of currency.
What you thought about how you monetize, or how you decide to sell all of your different real estate properties, what’s the trigger point – you know, are you taking a cash flow back from what you expect the [inaudible] September versus what you can sell a property for at current value?
Yes, we – great question – so, how do we think about monetizing our real estate? What we do is we take it back to the land value – so, we know what the value of the trees are on the property, so we subtract that off – so, okay, now we just have bare dirt, and then we take what is a multiple bare dirt as far as we have different hurdles for different properties, and that is how we would look at it, and so they vary from, you know, two time, three times, four times what the dirt might be, and that’s probably what we will monetize it, and then we will make sure we capture the value of the trees on top of that as well. So, that is how we look at it, but we look at it as a bare land value basis.
I’ll take a question, when planning for your [inaudible] expansion, what type of industry supply increase were you expecting on modeling, or anticipating? A lot of concern that I think around [inaudible] here, has been on the, not only the fact that you have Buckeye and [inaudible] potential increase in capacity, but also at the lower end of commodity [inaudible] – a couple of million tons of that coming out the next couple of years – and the concern is, I think, that there’s the potential for that as you really compete with those guys in the next year or two. So, when going through with the [inaudible] expansion, can you just help us get behind your thought process – maybe, any initiative that you can take if the market tries to become [inaudible]?
Yes, like, you – if you think about this business, again, it is sort about six years ago when our customers came to us and asked us, are we planning to grow – have further expansion in [inaudible] specialty, because they could see that we were at a point of being sold out, and they were growing, and they were asking us the question – what are we going to do to support their growth? We took several years to look around the world on how we could potentially expand that business, and we further got the questions from our customers, what are you going to do? We are going, we need your support. So, finally, then last year, when we – before we announced this expansion, we went to all of our customers and said look, we are going to expand, but we need your cooperation, you know, partnership, and that is why today this expansion of 190,000 tons, 85% of that is already committed to in the market place, and it doesn’t even come on for another year from now, and those commitments go on out to 2017. So, Mike, that is how we feel very confident that there was a home for this product out in the market place – you know, we still have 15% of out there that we are still looking for commitments for, but we are going to blend that in as we go forward in time. Certainly, to your point again, there’s a lot of commodity [inaudible] – capacity coming on, but that was kind of my reference earlier as you look at that [inaudible] study, it’s not really capacity that could make a very small product [inaudible], it can operate around a [inaudible], it can operate in low grade [inaudible]. For example, it may be able to go into [inaudible] compound for the European construction market, but we don’t sell product into that market now, that is not very attractive to our shareholders. So, there is going to be that pressure and that tension, but I think you can look clearly over time, and see the pricing of Viscose market – the Viscose price is very up and down, and you see our steady continued price increase very independent of the ups and downs of the Viscose market. But I think very independent type of – but there is some where you can overlap there that will come and put some pressure on it. But we think in the next three years from the [inaudible] capacity out there, and what we project out there as far as the demand from our customer basis in these different areas that we just talked about – there is [inaudible] and high value, they are very closely matched, Mike, so we think it’s going to be paired together very nicely. And you can go onto our website, we’ve got presentation [inaudible].
Paul, we have it in the appendix year on pages 38 and 39, you’ll see the expansion, you can forward on the screen there at DuPont. On page 38, you see the expansion, and that’s the [inaudible] now a 190,000 tons, Buckeye is 42,000, and [inaudible] 30 – that’s 262,000 tons, and then on the next page, Paul, there is [inaudible].
Right, so very closely matching what we know as a planned expansion, and what we see out there as demand, and this is to include the fact that we think the market is currently under surge as far as demand, and supply matching that there. Any questions from the audience, if not I have another [inaudible].
If the demand profile remains positive in [inaudible] especially, what else could you possibly do once you get past those expansions, increase your participation – anything that market, and how does that impact your ability to supply with the [inaudible]?
Okay, I will take the first, and Corey, you can jump in on the second if you want on the [inaudible] job. So, [inaudible] we’ll be on – first of all, we are going to make sure this project that we have in place now, the [inaudible] expansion is well executed, and then this is going to take us several years on out to get all of this product placed into the market place. So, the question of where we go beyond here is not one that will currently work on heavily, Mike, but there is a lot of opportunities out there, whether it is existing capacity that we can convert into it if the market demands it, there are also, again, other potential assets out there that we think that we may run differently than people in the market today. So, there’s a couple opportunities out there, but I think that is well down the path – we’ve got to make sure that the market demand is there before we would go out and commit to anything like that, just some opportunity. And certainly on the [inaudible] side, we can manage that – [inaudible] if you want to comment on it.
Yes, there – I mean, clearly, that we have a robust process today, Mike, that you’re well aware of – you know, to make sure that we’re meeting the retask, and then with respect to our planning process, we are always stress testing to determine how much cushion we have within the re-rules. So, there is a possibility that sometime out there in the future – again, it depends on how fast we are able to grow the timber side of the base, because that gives you more cushion as we grow the asset, and the fair value of the vast increase over time. But it is something that we have to stress test as to make sure that there is enough room in there in order to handle the growth of the CRS businesses.
Mike, I think one thing that is to make that difficult is that the [inaudible] look at those to do the re-test, are gap measures. So, they are internal measures, of course we look at and verify…
They are called tax base.
They are tax based – so, it’s not an easy one to take a look at, and say, hey is there an issue there or not. I think we’ve got – we’re very comfortable in our compliance and we will be for a few years to come.
Sure. Any questions from the audience?
If you helped characterize the usage of your special [inaudible] in a [inaudible] application today, where there is more room in the gaps for what you sell today, going over – say over the next couple of years versus the last two to five years? I don’t know if somebody could make the argument that you’re bumping up again capacity, so to speak, [inaudible] applications like, you know, ETB’s or Power Cord, or you know, just go right down the list – how do you feel directionally, and not…
Let me take a shot at it – it sounds like I answered your question, if I think I understand. If you take a look at the [inaudible] area, and just back on page 20 here, again, we have indicated growth out there as 1.5% to 2% type of range, so, again, on a 700,000 ton market. So, I think your question is, are we pushing up against that capacity with our – demand with our current capacity expansion?
Yes, so here is the question, is that 1.5% to 2% growth a function of those categories and trends in growth need to be how much of what you sell in actually going into those products with higher percentage? Or both?
Yes, I think the market growth is the market growth, again, it’s coming out of all of these different combinations, LCD films, the filtrations for cigarettes, coating and plastics, and that is growing at about 1.5, 2% range. If the question is our capacity – is our new capacity going to feed into each one of these markets, they will feed differently, certainly, Acetate will be a base load for our expansion. We will probably push more of those, see more growth because it is growing faster than to the [inaudible] area were we are relatively underserved, as we are in the areas of the specialty – at the [inaudible]. So, all of those markets are growing out there at that rate that we showed you at the very appendix chart – the very end chart, and we will supply that with our incremental capacity to each one of those areas correspondently. But there will probably diversify our offering a bit out into the market place outside of Acetate and more into some of the other areas because we’ll probably have the greatest concentration today in the Acetate area.
Paul, you may want to mention also, some of the new uses for [inaudible] for example in the highest purity area.
Yes, there is some great applications across the [inaudible] and pharmaceuticals, and food products of [inaudible], we continue to see that area grow – and we are seeing opportunities in there, again, it is to tableting, it’s into time release coatings of pharmaceutical tablets – there is always applications. So, that is growing at that 5% to 10% level, and with that growth, we will be able to supply more into that market as well. So, I can talk to you afterwards if I haven’t hit – I can see a little bit of…
Any other question from the audience? If not I have one remaining question.
At the beginning of the year you were hopeful in terms of improving Chinese demand, following your second quarter call, that sort of got pushed out to 4Q, can you just give us an update as to what you are seeing in perspective of Chinese demand for North American logs, and will it be [inaudible] of the piping situation is like – I don’t know if there is anything like that?
Yes, we said it – I mean, you are absolutely right, we count it as a back half of the year [inaudible] we thought that China would come back around, is their economy, Mike, kind of rolling more robustly, and in the last quarter we said, look, we expected pricing that we’ve seen that in the fourth quarter, and we are still anticipating that, Mike, as the fourth quarter, we will see some lift. However, I will say to date, that we have just seen, you know, pricing relatively flat to prior quarters, we haven’t seen any pick up at this point in time. We still see volume out of our New Zealand operation – continued to hum along very well into China. So, that hasn’t really slowed down, it’s just that the tightness there, we haven’t seen come back enough to see prices up, and again, we are still hopeful that that would occur in the fourth quarter.