Deltic Timber Corporation (NYSE:DEL) Q2 2016 Results Earnings Conference Call July 28, 2016 10:00 AM ET
Ray Dillon - President and Chief Executive Officer
Kenneth Mann - Vice President, Treasurer, and Chief Financial Officer
Good morning and welcome to the Second Quarter 2016 Deltic Timber Corporation Conference Call. My name is Brandon and I'll be your operator for today. [Operator Instructions]
I’ll now turn it over to Mr. Ray Dillon, President and Chief Executive Officer. Mr. Dillon, you may begin.
Good morning. I would like to welcome you to Deltic Timber Corporation's second 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 third quarter and remainder of 2016, before we open the line for any questions.
Thank you, Ray. Yesterday, Deltic issued its news release announcing earnings for the second quarter of 2016. If you don't have a copy yet, you can download one from the Investor Relations section of our company website at deltic.com. If by chance you don't have access to the internet, you can 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 conference call will be considered forward-looking statements. These statements 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.
For our financial review, I will focus initially on the results for the second quarter of 2016 and then comment on the first half of the year. For the second quarter, Delta’s net income was $4.2 million or $0.35 a share. This compares to $0.8 million or $0.07 a share for the second quarter of 2015. The company's net sales were 11.1% higher at $56.8 million, mainly as a result of increased sales volume for pine sawtimber, lumber, MDF, and residential lots and of having a commercial real estate acreage sale in the current quarter.
The Woodlands segment reported operating income of $4.4 million, 11.8% lower than in the second quarter of 2015, primarily due to decreased oil and gas related income. Due to timing, the pine sawtimber harvest was higher in the second quarter of 2016 when compared to the same quarter of last year.
The actual sawtimber harvest volume was 203,773 tons, some 14,293 tons more than the 189,480 tons harvested in the prior year second quarter, while the average price of $27 per ton was equal to the average sales price in the 2015 second quarter. The harvest of pine pulpwood during the quarter was 103,128 tons, some 17,331 tons less than in the second quarter of 2015, while the average sales price for the pipe pulpwood sold decrease $1 per ton to $9.
For the quarter, oil and gas lease rental income was about $100,000 and net royalty income was about $200,000. Our total oil and gas related revenues of $300,000, $500,000 less than in the second quarter of 2015.
During the quarter, we sold nine acres of non-strategic timberland. For this acreage, we received an average of $4,400 per acre. In the second quarter of last year, timberland sales were 38 acres for $2,500 per acre.
The manufacturing segment reported operating income of $7 million compared to income of $3.5 million in the 2015 quarter. For the quarter, the manufacturing segment generated cash flow of approximately $10.4 million.
We sold 69.9 million board feet of lumber during the second quarter, 8 million board feet more than we’ve sold in the second quarter of last year. The average lumber sales price was $371 for 1,000 board feet, $24 more than the corresponding quarter of last year.
MDF sales volume totaled 27.7 million square feet, an increase of 7.2 million square feet from a year ago. The average sales price for MDF during the current quarter was $561 per thousand square feet compared to $565 for the same period last year.
Deltic sold 22 lots in the second quarter of 2016 versus 12 lots sold in 2015 second quarter. The average price of $90,100 per lot was higher than the average of $69,500 per lot in the last year second quarter and that’s due to sales mix. There was a sale of a commercial real estate acreage in 2016 second quarter of 10.8 acres for $152,500 per acre, while there were no sales of commercial real estate in the second quarter of 2015.
As a result of the increased residential and commercial real estate sales activity, the real estate segment produced operating income of $1.8 million in the second quarter 2016 compared to an operating loss of $300,000 in the prior year second quarter.
Corporate operating expense was $4.7 million in the second quarter of 2016 compared to $5.1 million for the corresponding quarter of 2015. The decrease was due to reduced general and administrate expense.
Interest expense increased $500,000 to $2.2 million, mainly due to borrowings during the fourth quarter of 2015 and the first quarter of 2016 to fund a portion of the company's capital expenditure program and share repurchases. Income tax expense for the quarter increased $1.5 million to $1.9 million, primarily as a result of increased pretax income, partially offset by the benefit of a lower effective income tax rate due to the gains from timber harvesting activity being taxed at a capital gains rate for the year 2016.
With the bonus depreciation deduction, we will be able to take for 2016 as a result of capital investment we're making in our manufacturing operations, we will benefit from further reductions in income taxes paid for the year. Turing to the first six months of 2016, Deltic had net income of $4.6 million, $0.38 a share compared to net income for the 2015 period of $2.7 million, $0.22 a share.
Net sales of the company increased 14.1% to $107.4 million. The Woodlands segment contributed $9.7 million compared to $11.4 million for the first six months of 2015. The harvest volume for pine sawtimber was 409,381 tons, 11,633 tons less than the prior year period due to timing.
For the first half of 2016, the average sales price for the pine sawtimber harvested of $28 per ton was $1 per ton higher than in the first half of 2015. The fine pulpwood harvest was 263,398 tons, 51,266 tons more than in the first half of 2015, while the average sales price for the pulpwood harvested of $9 per ton was $1 lower than in the first six months of 2015.
For the first six months of 2016, oil and gas revenues totaled $800,000, consisting of approximately $260,000 in lease rental income and about $540,000 in income from net royalty payments. This was a decrease of $1.2 million from a year ago, mainly due to the impact of decreased natural gas prices and decreased gas production volume on royalty income.
During the first six months of 2016, we sold 9 acres of hardwood bottomland for an average sales price of $4,400 per acre. This compared to 58 acres for $2,300 per acre a year ago. The manufacturing segment produced operating income of $10.3 million compared to an income of $7 million for the 2015 first half.
Lumber sales volume of 141.5 million board feet was 18.3 million feet more than the first six months of last year and the average lumber sales price of $354 was $2 more for the first half of 2015. MDF sales volume increased from 47 million square feet in 2015 to 53.7 million square feet in 2016, while the average sales price for MDF decreased $15 from $569 per thousand square feet in 2015 to $554 per thousand square feet in 2016.
Real estate operation reported operating income of $1.2 million compared to an operating loss of $1.1 million a year ago. During the first six months of 2016, Deltic sold 10.8 acres of commercial real estate for $152,500 per acre, while there were no sales of commercial real estate in the first half of 2015. During the first half of 2016, we sold 28 residential lots at an average price $89,000 a lot compared to 14 lots which an average $66,900 a lot in the 2015 period.
Corporate operating expense of $9.4 million was $300,000 less than in the first half of 2015 due to decreased general and administrative expenses. Interest expense of $4.9 million was $1.6 million more than in the first half of 2015, primarily as a result of the borrowings noted earlier.
Capital expenditures were $19 million for the first six months of 2016 compared to $14 million for the first half of 2015, due to increased expenditures in the company's manufacturing and real estate segments. Timberland acquisition expenditures totaled $719,000 in the first half of 2016 compared to $619,000 for the first six months of 2015.
Total debt at June 30 was $240.8 million, while our adjusted working capital balance at June 30 was $10.3 million, including $3.5 million in cash. During the second quarter, we made repayments of previous borrowings in the amount of $7 million.
And now, I'll turn the call over to Ray for his comments.
Thank you, Ken. During the second quarter, the lumber market continued to build on the momentum that we saw at the end of the first quarter of 2016. As a result, we saw an improvement in the lumber market for the first quarter as well as from the second quarter of 2015.
Capitalized on this improvement, we ran additional hours in our sawmills and sold more lumber in the current quarter than we did during the second quarter of last year. For the quarter, our lumber sales volume increased 13%. With this, we maintained our market share while also balancing supply and demand.
This lumber market environment also resulted in improved prices for the lumber we manufacture. As a result, we received a higher average sales price for the lumber that we sold for the lumber that we sold in the second quarter. For the second quarter, the average sales price that we received for the lumber sold increased 7% from the same quarter of 2015.
During the second quarter, we continued to make progress on our capital projects in our sawmills that will increase our driving capacity and hourly productivity rate, while continuing to achieve improvements in other operating efficiencies at both sawmills. At our older mill, we’re also making a capital investment to install a new small logline that will be operational this October. This project will allow us to better utilize small wood from our forest.
We will continue to adjust the operating hours in our sawmills to match lumber production with market demand, while also continuing to focus on improving the cost structure in both of our sawmills. In regard to the third quarter and year of 2016, we estimate finished lumber sales volume to be 60 million to 70 million board feet and 265 million to 285 million board feet, respectively.
At our medium density fiber-board plant, we saw the sales volume of MDF increase 35% from the same quarter year ago. Most of the increase was due to the negative impact on sales volume for the second quarter of 2015 from the plant being shut down for the last 21 days of March and the first 20 days of April of last year to repair damage caused by a fire in the press that occurred on March 10, 2015.
For most of the period the plant was down for repairs, we had adequate product inventory in our warehouse to ship and meet our customers’ critical needs. However, the plant’s production and sales volume for the second quarter of last year were negatively impacted.
The sales price received for the MDF we sold during the second quarter decreased slightly from a year ago. The decrease was due to the mix of the products sold during the respective periods and was less than 1%. Although we are improving, we will continue to focus on increasing the plant’s up-time percentage and hourly productivity as well as its press and resin efficiency for the remainder of 2016.
In regard to the third quarter and year of 2016, the MDF sales volume is forecasted to be 25 million to 35 million square feet and 100 million to 120 million square feet respectively.
In the woodlands segment, the harvest volume of pine sawtimber during the second quarter of 2016 increased 8% from the second quarter of 2015. The increase was due to the timing of harvesting of the company's 2016 planned annual harvest volume as we manage our timberlands on a sustainable yield basis.
The average sales price for the pine sawtimber we harvested during the second quarter of 2016 of $27 per ton was unchanged from the prior year second quarter. During the second quarter of 2016, Deltic also harvested one 103,128 tons of pine pulpwood. This was 14% lower than in the second quarter of last year due to softer markets for pulpwood in our operating area during the quarter.
Average sales price received for the pine pulpwood harvested was $1 per ton lower than we received in the second quarter of 2015. Small-log line being constructed at our Ola Mill will help to create an additional market for some of the small wood that we need to remove from our forest in order to continue to maximize soft timber growth rates in our forest. In regard to the third quarter and year of 2016, we estimate our planned soft timber harvest to be 220,000 to 250,000 tons and 725,000 to 765,000, respectively.
During the current quarter, we sold 9 acres of non-strategic timberland for the average sales price of $4,400 per acre, while in the second quarter of 2015 we sold 38 acres of non-strategic timberland for approximately $2,500 per acre. We'll continue to evaluate our timberland acreage to identify non-strategic land for future sale and use the proceeds from these sales when possible to acquire land that is more desirable for producing pine sawtimber. This activity upgrades our timberland portfolio and adds to our pine sawtimber inventory.
With the persistent low prices that exist for natural gas, drilling activity in the Fayetteville Shale area is essentially non-existent. During the second quarter, Deltic’s royalty-producing well count actually decreased by 1 well as producers began to shut in non-economical wells with the low natural gas prices, decreased gas production volume from previously drilled wells that are reaching the maturity in their lifecycle and with no drilling activity oil and gas related income decreased almost 63% compared to a year ago.
In our real estate segment, we closed on the sale of a 10.8 acre commercial real estate site during the second quarter. Planned use for this acreage is the expansion of a successful senior housing development that exists in our Chenal Valley development. For the site, we received $152,500 per acre. We continue to receive enquiries from other potential buyers regarding our commercial properties, especially those near the key commercial intersection of Chenal Parkway and Rahling Road in our Chenal Valley development.
We're focused on achieving additional sales of commercial acreage in 2016; however, it's difficult to predict the timing of future commercial real estate transactions due to the significant factors involved.
During the second quarter of 2016, we saw an increase in lot sales activity compared to the second quarter of 2015. This increase from 12 lots in the second quarter a year ago to 22 lots in the second quarter of this year was largely the result of the closing the sale of some of the lots put under contract from a lot offering in a neighborhood in our Chenal Valley development in the first quarter of 2016.
For the lots we sold, the average sales price was 30% higher than for the lots sold in the first quarter of last year and that was just primarily due to the mix of lots sold. We're currently developing additional lots to offer for sale in both the Chenal Valley and Wildwood Place developments in order to ensure that we have the right inventory level as well as the right mix of lots to meet market demand. In regard to the third quarter and year of 2016, we estimate residential lot sales to be 20 to 30 lots and 90 to 120 lots, respectively.
While we capitalized on the improvement in wood products markets that occurred in the second quarter, we entered the third quarter with cautious optimism for the remainder of the year. The housing recovery continues to be slow, but steady. The assets of the company are well positioned to take full advantage of all opportunities that exist or that may arise in addition to our strong balance sheet that allows us to have the needed flexibility in our decision-making process as we operate and grow the assets at Deltic Timber, with the purpose of increasing shareholder value for our shareholders.
Brandon, we can now open the line for any questions.
Thank you again for your interest in Deltic and I hope you'll join us again next quarter.
Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.
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