Executives
Ray Dillon - President and CEO
Ken Mann - VP and CFO
Analysts
Will Hunter - Neuberger Berman
Robert Holt - Holt Capital Partners
Deltic Timber Corp. (DEL) Q2 2008 Earnings Call July 24, 2008 11:00 AM ET
Operator
Good day, ladies and gentlemen and welcome to the second quarter 2008 deltic timber earnings call. (Operator Instructions).
I would now like to turn the presentation over to your host for today's conference, Mr. Ray Dillon, President and Chief Executive Officer. Please proceed.
Ray Dillon
Good morning. I would like to welcome you to Deltic Timber Corporations second quarter conference call. We appreciate your interest in and support of Deltic.
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 third quarter and remainder 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 second quarter of 2008. If you don't have a copy yet, you can download one from the Investor Relations section of our company website at deltic.com. But if you don't have access to the Internet, you can call me to request a copy, and my direct telephone number is area code 870-881-6432.
Now, 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 2007 Form 10-K, which is on file with the SEC.
For my financial review, I will focus initially on the results for the second quarter of 2008 and then comment on the first half of the year.
For the second quarter, Deltic's net income was $2.5 million, $0.19 a share, about $100,000 lower than the 2007 second quarter of $2.6 million, or $0.20 a share. Net sales were some 6.1% lower at $35.6 million. The Woodlands segment recorded 85% higher operating income at $7.4 million in the 2008 quarter, compared to $4 million a year ago.
Harvested Pine sawtimber was 48% greater in the second quarter of 2008, when compared to the same quarter last year, as a result of the impact of catching up the harvest shortfall from our planned volume that occurred during the first quarter this year, due to wet weather conditions. The actual sawtimber harvest volume level was 143,200 tons, some 46,800 tons more than the 96,400 tons harvested in the prior year second quarter. The average (inaudible) price dropped 10% to $35 per ton, compared to $39 a ton in the 2007 second quarter.
The harvested pine pulpwood was 89,600 tons, some 22,000 tons less than in the second quarter of 2007, while the average sales price for pine sawtimber -- pine pulpwood sold, excuse me, was 15% higher than a year ago at $15 per ton.
During the quarter, we sold about 970 acres of non-strategic recreational use hardwood bottomland. For this acreage, we received just over $2,300 per acre. In the second quarter of last year, timberland sales were 64 acres for about $1,560 per acre.
As expected, residential lot sales continued to be below historic levels, due to the slowdown in housing starts in the Central Arkansas region. We sold seven lots in the second quarter of 2008, compared to 20 lots a year ago, while the average price of $72,100 a lot compares negatively to the average of $87,900 per lot in last year's second quarter, and that's due to sales mix.
As we have communicated before, we have not discounted lot prices due to lower sales activity and have no plans to do so.
There were no sales of commercial real estate for the second quarter of 2008, while financial results for the 2007 period, included sales of 26 acres of commercial multi-family property at an average of $240,600 per acre. Due largely to the unfavorable impact of the lack of commercial acreage sales, the real estate segment lost $300,000 in the second quarter of 2008, a decrease of $5.5 million, when compared to the $5.2 million of income for the same quarter of 2007.
In the Mills segment, operating results were a loss of $600,000, compared to a loss of $700,000 in the 2007 quarter, and that's primarily on improved hourly production rates in our sawmills, combined with a benefit of reduced cost for loss consumed. But these improvements were partially offset by 6% reduction in average lumber sales realizations of $289 per thousand board feet, some $17 lower in the corresponding quarter of last year.
Del-Tin Fiber had another steady quarter, contributing $700,000, compared to $800,000 a year ago. The plant's average sales realizations increased [6%] to $526 per thousand square feet, compared to the second quarter 2007 results, while sales volume dropped about 4% to 29.3 million square feet for the second quarter of 2008. The production volume in the second quarter of this year was essentially equal to that a year ago. The second quarter also benefited from the impact of a lower effective income tax rate, due to the enactment of the TREE Act, which lowered the federal income tax rate on the company's qualified timber sale gains.
Now, turning to the first six months of 2008, Deltic's net income was $2.1 million, $0.17 a share, compared to the 2007 period of $9.2 million, or $0.74 a share. Net sales were down 19% at $63.4 million. Looking at it by segment, the Woodlands segment, contributed $15.8 million, some $1.8 million more than the first six months of 2007, largely on a $2.9 million increased margin from timberland sales, as we have sold some 1,600 more acres at a 44% higher average price per acre.
In addition, 2008 revenues from oil and gas leases have essentially doubled from the first half of 2007 to about $1.5 million. Offsetting these favorable branches were a lower level of Pine sawtimber harvest and a 12% lower average sales price per ton. Volumes harvested were some 323,600 tons, a decrease of 3%, and the price was $36 a ton, a decrease of $5 a ton.
For the Mills segment, operating results were a loss of $5 million, compared to a loss of $2.7 million for the 2007 first half, again mainly on a lower average sales realization of $266 per thousand board feet, some $33 per thousand board feet lower than last year.
Lumber sales volume was 6% greater than the first six months of last year, due to increased hourly productivity rates totaling 132.6 million board feet.
Real estate operations lost $900,000 compared to a contribution of $12.6 million a year ago. We have sold 14 residential lots at an average price of $70,100 a lot, compared to 34 lots, which averaged $93,000 a lot in the 2007 period.
During the first half of 2008, there were no commercial sales, while we did sell 26 acres of commercial real estate at an average price of $240,600 per acre, in the first six months of last year. Well, there is currently significant interest in our commercial property in Chenal Valley. Another real estate transaction having a significant impact on the reported financial results for this segment during last year was the sale of 680 acres of undeveloped real estate for $8.2 million, or $12,000 per acre, while we have had no undeveloped real estate acreage sales thus far in 2008.
Deltic's equity in Del-Tin Fiber was $1.4 million for the first six months of 2008, compared to $1 million in the first half of 2007. Average sales realizations for the 2008 period were $529 a 1,000, compared to $483 a 1,000 in the 2007 first six months. Sales volume was some 7% lower at 59.4 million square feet.
Capital expenditures were $10.7 million for the first six months of 2008, compared to $9.3 million during the first half of 2007. The increase is a result of increased land acquisitions and timber site preparation and planning activities from a year ago. Total long-term debt remains at $70 million, and our cash balance is about $6.9 million. Our long-term debt-to-capital employed ratio is some 24.8%, still one of the lowest in our industry. In short, our balance sheet remains to be very strong.
Now, I'll turn the call over to Ray for his comments.
Ray Dillon
Thank you, Ken. Deltic's reported net income for the second quarter of 2008, was once again largely impacted by the depressed environment that exists for lumber and residential real estate. However, I am pleased that Deltic was able to report positive financial results despite these difficult operating conditions.
In our Mills segment, the weak residential housing market in the United States continue to depress prices for the lumber produced in our sawmill. However, during the months of May and June, lumber prices actually increased some, due to the seasonal spring building increase. While the Mills segment reported a financial loss at $600,000 for the quarter, the segment's financial result actually improved from the second quarter a year ago despite a lower average sales price for lumber sold of some $17 per thousand board feet. In fact, the segment produced positive income for the months of May and June.
This improvement, was due largely to the benefit of improved hourly productivity for both of our sawmills, better control of direct manufacturing costs required to produce lumber, and to reduced raw material log costs as Pine sawtimber stumpage prices in our operating area have decreased as a result of reduced demand from curtailments and shuttering of some area sawmills and plywood mills.
Additionally, we plan to continue to strive for marginal improvements in the operating efficiencies at both mills to further improve their respective cost structures.
Lumber sales volume for the second quarter was 70.2 million board feet, an increase of 10%, when compared to 2007 second quarter. And this increase was accomplished with fewer production hours in the sawmills as a result of the improved hourly productivity that we have achieved.
Deltic's finished lumber sales volume for the third quarter is estimated at 60 to 70 million board feet and 250 million to 260 million board feet for the year of 2008. However, this volume is dependent upon market conditions.
In our Woodlands segment, our efforts continued to sell non-strategic hardwood bottomland for recreational use and use the sales proceeds to acquire additional Pine timberland in a tax efficient manner. Sales of 971 acres of such land in the second quarter for just over $2,300 per acre reflects the appetite for such lands and greatly benefited the second quarter results.
Demand for pine pulpwood by area paper mills continues to be high, and this also benefited the Woodlands segment this quarter as we sold about 89,600 tons of this pulpwood in the second quarter for $15 per ton.
The average sales price represents another $2 per ton increase from the price received, during the same period of last year. In reaction to this high demand for pine pulpwood and resulting higher prices, Deltic will continue to maximize its pine pulpwood harvest in 2008 to capitalize on this opportunity without over spending our pine plantations.
During the second quarter of 2008, we saw sales realizations for pine sawtimber drop $4 per ton from the same quarter a year ago, as depressed lumber market combined with reduced lumber and plywood production levels in our operating area have caused the price of pine sawtimber stumpage to decrease. The historically weak lumber market seen in 2008, has negatively impacted stumpage prices more than during past down cycles. We plan to keep 2008's annual pine sawtimber harvest volume at planned levels of 550,000 to 575,000 tons so the expected harvest volume in the third quarter is 135,000 to 145,000 tons.
With regard to the Fayetteville Shale Play, through June 30, 2008, we've received royalty payments totaling some $564,000 from the production in units where some 21 wells have been drilled. As I've communicated in the past, our ownership percentage in these units varies greatly. For the second quarter of 2008, royalty payments received averaged just over $100,000 per month. And for the financial impact realized, beyond the recognition of the annualized portion of the lease bonus payment already received has begun to more materially impact our reported financial results. But estimation of the future potential impact remains difficult due to the number of variables involved.
In our real estate segment, residential lot sales activity during the second quarter of 2008 continues to reflect the depressed housing market seen throughout the United States. It is apparent, this slowdown will continue for the remainder of 2008 and well into the second half of 2009 or possibly even early 2010, according to industry analysts.
We do anticipate offering only 32 additional lots in one new neighborhood for sale during 2008, to allow demand to catch up with available lot inventory. That new neighborhood is in the middle-priced segments of our lots in our Chenal Valley development. This is the segment that has seen the most resilient sales activity, and our available lot inventory of this product requires replenishing.
I'm pleased to report that we continue to see strong interest in the commercial real estate property that we have available, and we are working with potential buyers regarding sites for various uses. With the condition of the residential real estate and lumber markets predicted to remain depressed for the remainder of 2008, much of our focus for this year will be on attempting to complete the closing of sales of some of this commercial acreage.
Residential lot sales for the second quarter of 2008 decreased, from 20 lots to 7 lots when compared to a year ago. We anticipate that combined lot closings for our three developments for the third quarter and year of 2008, will be between 5 to 10 lots and 45 to 55 lots respectively. We also anticipate that some of the commercial acres being sought after by potential buyers will close in 2008. However, as we have said before, the predictability of this type of sale is very difficult, and their timing tends to be very sporadic.
Another important accomplishment for the second quarter was the continued positive financial performance of Del-Tin Fiber, our 50% owned joint venture to manufacture medium-density fiberboard. We are pleased with the plant's stable operating performance and the overall market for MDF, as it remained relatively strong throughout the second quarter of 2008, as production levels of MDF remained in balance with demand.
MDF producers continue to be able to receive slight price increases to offset some of the impact of higher costs for resin glue and wax, used in the MDF manufacturing process and of higher wood cost fiber, as they have had to compete with paper mills for the limited supply of residual chips.
These factors resulted in equity in the joint venture's financial results for Deltic of $700,000 for the second quarter of 2008, essentially equal to the $800,000 from a year ago, despite the pressure on margins at the plant from the cost increases seen.
One last item to mention is that during the second quarter, Deltic's financial results benefited from a lower effective income tax rate, due to the enactment of the TREE Act that was part of the recently approved Farm Bill. This act, reduced the federal tax rate on qualified timber sales gains. We are continuing to analyze the potential impact of this to act on our future financial results, but we are very pleased with its adoption.
In closing, I would note that the year 2008, remains to be one that presents many challenges given our current business environment. But the year could also present some unique opportunities, and we will continue to be focused on recognizing and capitalizing on any such opportunities as they arise.
[Shanelle], we can now open the lines for any questions.
Questions-and-Answers Session
Operator
(Operator Instructions). And your first question comes from the line of Will Hunter of Neuberger Berman. Please proceed.
Will Hunter - Neuberger Berman
Good morning.
Ray Dillon
Good morning, Will.
Will Hunter - Neuberger Berman
I just have two questions. First one, you guys have historically talked about the relative stability of your sawtimber prices, and prices seem to be down quite a bit this quarter. Could you just talk a little bit about, what's going on there and your outlook for sawtimber prices?
Ray Dillon
What's going on is that, as demand for lumber throughout the Untied States and specifically in the Southern United States has dropped. There's less lumber being sawn from saw logs, so there is a resulting reduction in demand, but there continues to be more available logs on the market, so it's resulted in reduced prices being transacted. And as our logs, we basically price those logs at market levels, and so that's resulted in our logs being priced at a lower level because the market has dropped, and it's due to less demand and still an available log supplier for sawmills in the area.
Will Hunter - Neuberger Berman
Is that supply different this cycle, than it has been in the past?
Ray Dillon
One thing as I mentioned, one thing that is different about this cycle is that in previous cycles, there would have probably been more private landowners taking their available sawtimber off the market, which would have reduced supply, which would have tended to hold those sawtimber prices up more than it has during this cycle.
Will Hunter - Neuberger Berman
And what's different this cycle?
Ray Dillon
Well, the difference is that the private landowners continue to put timber on the market, so the supply of timber continues to be more than available sawmills are sawing, so that's why you see the price pressure.
Will Hunter - Neuberger Berman
Okay. And why is their behavior different this time?
Ray Dillon
I cannot answer that.
Will Hunter - Neuberger Berman
Would you like to take a guess?
Ray Dillon
No.
Will Hunter - Neuberger Berman
Okay. And then the second question is just -- sorry, go ahead?
Ray Dillon
We didn't say anything.
Will Hunter - Neuberger Berman
Okay. The second question is just on your guidance for lot sales? Could you just talk about, why the big incremental jump in the second half of the year?
Ray Dillon
We're offering the new neighborhood in the second -- in the middle-priced tier of lots, and we expect that to be offered in August or September. And traditionally, we would see additional lot sales as a result of a new neighborhood being offered, and that will take place in the second half of the year.
Will Hunter - Neuberger Berman
Okay. Thank you very much.
Ray Dillon
Thank you, Will.
Operator
And your next question comes from the line of Robert Holt of Holt Capital Partners.
Robert Holt - Holt Capital Partners
Good morning, couple of clarification questions. You commented that you had cumulative royalty income or royalty revenue of $654,000. Does that include 2007, or is that a year-to-date number?
Ken Mann
That's cumulative. That would include in 2007, as well.
Robert Holt - Holt Capital Partners
Okay.
Ken Mann
That number is you know where we had something around $100,000, just under that, in 2007, so you can adjust that according to get, how much was in the current year.
Robert Holt - Holt Capital Partners
Yeah all right. Your other income was a $20,000 loss, and I assume that to your $300,000 or so royalty income was in there, and I wondered what the offsets were.
Ken Mann
As far as in the total other income?
Robert Holt - Holt Capital Partners
Yes.
Ken Mann
No, our royalty income does not show up in other income in that line item. Our royalty income shows up in our net sales number, in our Woodlands segment.
Robert Holt - Holt Capital Partners
Okay. Thank you.
Ken Mann
There's not a big offset, no.
Robert Holt - Holt Capital Partners
And I noticed that your average shares outstanding came down a little bit. Did you buy some stock in the quarter, and if so, how many shares and what's the size of your buyback program?
Ken Mann
I would tell you that we have not bought any shares thus far in 2008. This is an average, so it's an average calculation. You can compare it. So, the shares we would've bought last year in the fourth quarter would impact that average. But our program, if you remember, we expanded about $25 million. We had some $7.9 million that were unexpended under our previous program, and of that total, we spent about $1 million in the fourth quarter of last year.
Robert Holt - Holt Capital Partners
And I think you mentioned that you had purchased some timberland in the quarter. I wondered, how many acres and about what the average cost per acre was?
Ray Dillon
I guess what we are in the process of doing is using the proceeds from the hardwood bottomland sales to acquire timberland. I don't have the exact number of acres at hand with me, Robert, but Ken will call you back with that, okay?
Robert Holt - Holt Capital Partners
That would be great. That takes care of me.
Ray Dillon
Thank you.
Operator
There are no further questions.
Ray Dillon
Thank you for your interest in Deltic, and I hope you will join us again next quarter.
Operator
Ladies and gentlemen, that concludes the presentation. Thank you for your participation, you may now disconnect. Have a excellent week.
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