U.S. Markets close in 4 hrs 36 mins

Edited Transcript of DEL earnings conference call or presentation 4-May-17 3:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Deltic Timber Corp Earnings Call

El Dorado May 11, 2017 (Thomson StreetEvents) -- Edited Transcript of Deltic Timber Corp earnings conference call or presentation Thursday, May 4, 2017 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Anna Torma

* Byrom L. Walker

Deltic Timber Corporation - CFO, Interim VP, Controller and Treasurer

* John D. Enlow

Deltic Timber Corporation - CEO, President and Director

================================================================================

Conference Call Participants

================================================================================

* Albert Sebastian

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Welcome to the Deltic Timber Corporation First Quarter 2017 Conference Call. My name is Paulette, and I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded. I will now turn the call over to Anna Torma. You may begin.

--------------------------------------------------------------------------------

Anna Torma, [2]

--------------------------------------------------------------------------------

Good morning, everyone. I would like to welcome each of you who have joined us by conference call or webcast this morning to discuss Deltic Timber Corporation's first quarter 2017 results. I'm Anna Torma, Strategy and Investor Relations at Deltic. Joining me on the call today is John Enlow, President and CEO; and Byrom Walker, interim Vice President and CFO. This call is being webcast, and copies of the earnings release are available on the Investor Relations section of our website at deltic.com.

Before we begin, I would like to remind you that some of the comments made during the course of this conference call will be considered forward-looking statements. Please review the warning statements in our press release concerning the risks associated with forward-looking statements.

Now let me turn the call over to John Enlow for opening remarks.

--------------------------------------------------------------------------------

John D. Enlow, Deltic Timber Corporation - CEO, President and Director [3]

--------------------------------------------------------------------------------

Thank you, Anna. And thank you all for joining us on the call today. I'm thrilled to be joining you on my first call with Deltic Timber. Early days are always important. They mark a beginning, a fresh approach. During my first handful of weeks at Deltic, my initial focus is seeking to understand the company's issues and opportunities by investing significant time on the ground with each of our businesses, while concurrently, evaluating our competitive position at both the business and company level, to help us get a really cleared out understanding of what best in performance looks like.

Guided by this work, we are seizing the opportunity to reassess our strategic direction and chart a course into the future that is laser-focused on delivering shareholder value and delivering a best-in-class natural resources company; to become known for being the place to work because of the investment in developing our people; a neighbor to have due to our contributions to the local communities; and a company to own by delivering top-tier returns for our shareholders. We will establish the right mix of the synergistic and complementary businesses going forward, but with each business evaluated on its own merits, and value unlocked through a market-based approach.

Additional work still needs to be done before formally laying out our initiatives and goals. I look forward to sharing more with you as we complete our work over the coming months.

Now let's turn to reviewing our first quarter 2017 financial results. Deltic Timber reported a net income of $1.1 million for the first quarter 2017 compared to $0.4 million for the first quarter 2016. Our first quarter results benefited from a solid uptick in lumber pricing, a positive trend driven by steady improvement in lumber demand as well as the implementation of tariffs on Canadian lumber imports.

Fundamentals continue to support the recovery in housing. Solid job and wage growth and low interest rates are driving improved housing demand, and there are early signs millennials may have begun to show interest in homeownership. Builder confidence remains high, and repair and remodeling activity continues to grow.

Near term, sawlog markets in our timber baskets continue to lag behind lumber price recovery due to supply. However, longer-term structural shifts in the fundamentals continue to appear favorable for Southern sawlog markets. The Woodlands segment reported operating income of $5.2 million for the first quarter 2017, $0.1 million below year-ago levels. The pine sawtimber harvest was 2.8% higher than year-ago levels, with steady pricing. Our chip-n-saw harvest increased by over 150% from year-ago levels as the newly completed sawlog line at Ola provided an additional market for chip-n-saw-sized logs for lumber production. The removal of this smaller wood from our forest will help maximize growth rates in our Northern Arkansas timberlands. Average chip-n-saw prices was the same as year-ago levels. Pine pulpwood harvests declined by 38% or approximately 57,000 tons from the first quarter of 2016. The decline was due to the mix of products on the tracks being harvested and the timing of timber deed sales. Pulpwood prices were up $1 a ton.

The Manufacturing segment reported first quarter 2017 operating income of $4 million, up over 21% from the year-ago levels. The increase is primarily attributable over to 10% higher lumber pricing and 1.4% higher volume. In addition, MDF sales in the first quarter 2017 benefited from improved operating performance at our Del-Tin mill, resulting in lower manufacturing costs.

Real estate reported first quarter 2017 operating loss of $0.9 million compared to an operating loss of $0.6 million in the previous year. The slower residential lot activity in the first quarter is a reflection of timing. Demand is favorable, and the bulk of our lot closings should be forthcoming in the second half of the year. We are also encouraged by recent increased interest in commercial acreage in Chenal as rooftop density has increased and economic confidence has improved.

Now I'll turn the call over to Byrom for additional comments on the quarter and the outlook.

--------------------------------------------------------------------------------

Byrom L. Walker, Deltic Timber Corporation - CFO, Interim VP, Controller and Treasurer [4]

--------------------------------------------------------------------------------

Thank you, John. Deltic ended the first quarter with net cash provided by operating activities totaling $1.3 million. Capital expenditures for the first quarter totaled $7.7 million. We anticipate CapEx in 2017 to be approximately $34 million. Nearly $20 million of planned capital expenditures are focused on our Manufacturing segment, including the final phase of log line modernization project at our Ola Mill and at Del-Tin, where we plan to replace the press chains and belts in the third quarter of 2017.

Income tax increased by $1.6 million in the first quarter of 2017 from year-ago levels. The increase in current year income tax rate is primarily due to the expiration of favorable capital gains rates on our timber harvested in 2016, combined with the implementation of new GAAP rules related to the method of accounting for tax effects of share-based compensation. This accounting change increased our effective income tax rate for the quarter by 20%. Interest expense was $1.6 million in the first quarter of 2017, a decline of $1.1 million from a year ago. We benefited from a lower average interest rate due to the retirement of $40 million of Series A series notes into December of last year and due to a patronage refund from one of our lenders, which was accounted for as a reduction in interest expense.

We remain on track for our outlook in the second quarter and to year of 2017. We expect the sawtimber harvest to be relatively in line or modestly above year-ago levels in the second quarter, depending upon weather conditions. Lumber sales volume should be flat to 14% above the second quarter last year as we capture the -- as we capitalize on the favorable lumber markets and the benefits of our small-log line and upgrades at our Ola Mill. Residential lot sales are expected to be between 5 and 10 lot range in the second quarter, below the previous year, with the majority of the anticipated lot offerings waiting to close in the second half of the year, and that supports our full year residential lot sales estimate of 120 to 140 lots.

Now I'll turn the call back over to John for closing remarks.

--------------------------------------------------------------------------------

John D. Enlow, Deltic Timber Corporation - CEO, President and Director [5]

--------------------------------------------------------------------------------

Thank you, Byrom. I'm very optimistic about the opportunities in front of us at Deltic. From my first weeks, it's evident that our people care deeply about the company and are dedicated to its success. We remain committed to disciplined capital allocation, identifying opportunities to reduce operating costs, including corporate overhead, and optimizing our assets. We're working hard at driving shareholder value and delivering a best-in-class company. I look forward to updating you as our strategic assessment unfolds further and lease to a specific direction and courses of action. And I also look forward to meeting many of our shareholders in the coming months as we increase our investor outreach.

Operator, let's open the call for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And we have a question online from Albert Sebastian from Prospect Advisors.

--------------------------------------------------------------------------------

Albert Sebastian, [2]

--------------------------------------------------------------------------------

I have a number of questions. First, with regards to Del-Tin. Can you give us some -- give us an indication of how profitable Del-Tin was in the quarter?

--------------------------------------------------------------------------------

Byrom L. Walker, Deltic Timber Corporation - CFO, Interim VP, Controller and Treasurer [3]

--------------------------------------------------------------------------------

With that, Al, we continue to see improvements at Del-Tin. The uptime increased, so our lower cost per unit decreased on there. So we have favorable results from Del-Tin for the period.

--------------------------------------------------------------------------------

Albert Sebastian, [4]

--------------------------------------------------------------------------------

Okay. So I mean, was it -- can you indicate what the operating income was from Del-Tin for the quarter?

--------------------------------------------------------------------------------

Byrom L. Walker, Deltic Timber Corporation - CFO, Interim VP, Controller and Treasurer [5]

--------------------------------------------------------------------------------

Al, we don't really write down the individual segments to give those pieces out on there, but we have some more detailed information which will be coming out in the 10-Q.

--------------------------------------------------------------------------------

Albert Sebastian, [6]

--------------------------------------------------------------------------------

And do you think the Del-Tin I know, that historically you've had a goal of trying to have Del-Tin earn $12 million a month in terms of operating income, do you think that that's something that you could achieve?

--------------------------------------------------------------------------------

Byrom L. Walker, Deltic Timber Corporation - CFO, Interim VP, Controller and Treasurer [7]

--------------------------------------------------------------------------------

Al, of course, the thing we have to spend on that is when we do our upgrades to Del-Tin, replace the press chains, the belts, we have new stones coming in on then, so once those improvements get in place in the third quarter, then we can see really how the facility can run. But we think we can get improved production from it, which could lead to those -- that direction.

--------------------------------------------------------------------------------

John D. Enlow, Deltic Timber Corporation - CEO, President and Director [8]

--------------------------------------------------------------------------------

This is John. And let me just kind of add to that. As Byrom said, the real key to the path forward on Del-Tin is getting this chain and belt issue behind us, that's impacting both our operating rates as well as our product mix from the thin board production, which is our higher margin product. So we feel comfortable that once we get that taken care of, we should be on the path that we would -- we'd all like to see.

--------------------------------------------------------------------------------

Albert Sebastian, [9]

--------------------------------------------------------------------------------

Okay. I mean, historically, the performance of Del-Tin has not been particularly good. So hopefully, and it's really I think since the inception of the construction of the plant, but hopefully, one of these days, it would get configured accordingly and we'll see some good profit side of that. My second question concerns the -- your lots sold. You only sold one lot in the quarter and you guided for 5 to 10 lots. So you obviously came in quite a bit below expectations. However, I guess, you haven't changed your outlook for the year. You're still looking for, I believe, it's 120 to 140 for lots sold. So can you just talk about that?

--------------------------------------------------------------------------------

Byrom L. Walker, Deltic Timber Corporation - CFO, Interim VP, Controller and Treasurer [10]

--------------------------------------------------------------------------------

That's correct, Al. If you noticed, at the end of last year, we had several different lot offerings and some price points. All that inventory was sold, placed on a contract, and the majority of it sold last year. This is just a matter of timing. We are currently working on developing lots in several different neighborhoods and price points within the Chenal Valley development. We have a new offering in our Wildwood small-lot neighborhood coming out in the next few weeks. And then as we go through the next quarters, we'll have more lots within the mid-level tier. We also have some golf course neighborhoods coming out. And so a lot of it is just the mix, having the mix available to sell, and we're in the process of developing those. But we're really encouraged by where we were last year with the sales of all of our lot offerings. I think, if you remember, the ones we put out, they went into contract very quickly, and the majority of them closed in last year.

--------------------------------------------------------------------------------

John D. Enlow, Deltic Timber Corporation - CEO, President and Director [11]

--------------------------------------------------------------------------------

Yes. So it really is just a mix of function, of the timing, of the work that needs to be done for the development to come forward and go to market. As Byrom said, we've seen really strong demand on the medium- to more modest-size lot size, and that's where we're going to focus. And we're quite confident that we're going to able to hit the range of guidance that we've delivered for the year.

--------------------------------------------------------------------------------

Albert Sebastian, [12]

--------------------------------------------------------------------------------

And with regards to the dividend. The yield in the stock is quite a bit below timber REITs. Now you're not a timber REIT, but you do have similar asset-based timber REITs. You have a different corporate structure. You're a C corp. Do you feel that the stock has to have a competitive yield with the timber REITs?

--------------------------------------------------------------------------------

John D. Enlow, Deltic Timber Corporation - CEO, President and Director [13]

--------------------------------------------------------------------------------

Al, the board looks at the dividend on a regular basis, and we evaluate it in conjunction with all the different ways that we can provide return for the shareholder, whether that's a share repurchase or investing back in our business, and at the end of the day, make the decision that we think is going to benefit the shareholder the most. So that's really what guides our capital allocation decisions, and we feel like that's the right way to approach it. So we don't necessarily think about it just exclusively relative to our peers. It's really what creates the most value with the circumstance at Deltic.

--------------------------------------------------------------------------------

Albert Sebastian, [14]

--------------------------------------------------------------------------------

Okay. And just my last question, do you think the current share price reflects the underlying asset value of the company?

--------------------------------------------------------------------------------

John D. Enlow, Deltic Timber Corporation - CEO, President and Director [15]

--------------------------------------------------------------------------------

So obviously, we have an internal view of our value. We don't necessarily share that publicly. We think it's more appropriate to provide you with the information for you to develop your view.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

And we're showing no further questions. I will now turn the call back to John Enlow for closing comments.

--------------------------------------------------------------------------------

John D. Enlow, Deltic Timber Corporation - CEO, President and Director [17]

--------------------------------------------------------------------------------

Okay. So let me close by thanking everyone for joining us this morning. And I really thank you and appreciate your interest in Deltic Timber. Have a good day.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating, and you may now disconnect.