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

Thomson Reuters StreetEvents

Q2 2017 Deltic Timber Corp Earnings Call

El Dorado Aug 12, 2017 (Thomson StreetEvents) -- Edited Transcript of Deltic Timber Corp earnings conference call or presentation Thursday, August 3, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anna Torma

* Byrom L. Walker

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

* John D. Enlow

Deltic Timber Corporation - CEO, President and Director

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Conference Call Participants

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* Albert Sebastian

* Ketan Mamtora

BMO Capital Markets Equity Research - Analyst

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Presentation

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Operator [1]

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Welcome to the Deltic Timber Corporation Second Quarter 2017 Conference Call. My name is Victoria, and I'll be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

And I will now turn the call over to Anna Torma. Anna, you may begin.

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Anna Torma, [2]

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Thank you, and 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 second quarter 2017 results. I am Anna Torma, Strategy and Investor Relations at Deltic. Joining me on the call today are 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.

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

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Thank you, Anna, and thank you all for joining us on the call today. I'm optimistic about the potential that I see within each of our businesses. During the quarter, we continued to work through various items across our operations, particularly in manufacturing. We are laying a solid foundation to enable us to reach a more full stride going forward.

Second quarter results benefited from higher operating income in Woodlands, combined with lower corporate expenses. Lumber prices increased from a year ago, supported by implementation of countervailing duties on Canadian lumber imports and a strong Canadian dollar. Despite favorable market conditions, our Manufacturing segment was impacted this quarter by scheduled capital improvement downtime that our sawmills and unscheduled maintenance downtime at our MDF facility.

In our real estate business, we've seen increased interest in commercial acreage in Chenal Valley as rooftop density has increased and as economic confidence has improved. Sales velocity in residential lots is also increasing, with strong interest in our Chenal Valley developments.

In addition, Deltic had operating cash flows of $13.5 million in the second quarter, enabling us to repay $6 million on a revolving credit facility.

Now let me give you an update on our strategic review process. We've made significant progress in recent months assessing the potential of the Deltic's assets. Evaluating our competitive position in both the business and company level in order to close the gap to business -- to best-in-class performance. We are now in the process of evaluating a comprehensive range of strategic alternatives to chart a course into the future that is laser-focused on achieving strong operational performance, driving shareholder value and delivering best-in-class returns.

Now let me turn it over to Byrom to review second quarter financial results.

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

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Thanks, John, and I'd like to welcome everybody to the call. Deltic Timber reported net income of $2.7 million for the second quarter 2017 compared to $4.2 million for the second quarter of 2016. The Woodlands segment reported operating income of $5 million in the second quarter 2017, $600,000 above the year-ago levels. Pine sawtimber harvest was modestly lower than a year-ago levels due to heavy spring rains which constrained operating conditions. Sawmill pricing was higher by $1 a ton, but continued favorable demand. Our chip-n-saw harvest increased by over 20% from year-ago levels supported by the new small log line at the Ola Saw Mill. Average chip-n-saw pricing was $1 a ton lower than year-ago levels due to locations of the tracks being harvested. Our pulpwood harvest increased by over 31% or approximately 29,000 tons from the second quarter levels in 2016. This increase is due to the mix of timber on the tracks that we were harvesting. On pulpwood prices we're even the second quarter with 2016 levels with supplies meeting demands in our operating areas.

In addition, we sold 20 acres of HBU timberlands for $15,000 an acre in the second quarter of 2017 compared to 9 acres for $4,400 an acre in the same period last year. Manufacturing segment reported second quarter 2017 operating income of $4 million, down $3 million from year-ago levels. Lumber pricing averaged 5% higher in the second quarter 2016. However, lumber sales volume were 4% lower than a year ago. Scheduled downtime at both of our sawmills adversely impacted both volumes and operating cost in the quarter. The Ola sawmill ran at reduced run rates for 5 weeks as we successfully completed the large log-line modernization project in May. Optimization of the new line was affected -- effected run rates for the remainder of the second quarter. We are pleased with the successful completion of this final phase of the Ola Mill modernization, along with the new small log line and we anticipate Ola Mill to benefit from lower average log cost and improved run rates going forward.

Switching to Del-Tin. MDF sales in the second quarter 2017 were 6% below year-ago levels, despite good demand. Del-Tin's performance was significantly impacted by unscheduled maintenance downtime throughout the quarter resulting in higher manufacturing cost. The higher maintenance at the mill was necessary until we replace the worn press chains and a belt. We began this upgrade a few days ago and look forward to completing the work by the end of August. After replacement and start-up, we anticipate higher up-time and improved mix of higher margin thin board production.

Real Estate reported second quarter 2017 operating income of $1.8 million in line with the previous year. As John mentioned, we've seen increased interest in commercial acreage in Chenal Valley. During the second quarter 2017, we closed the 7.9 acreage track for $392,000 per acre for a senior housing project, compared to a 10.8 acreage track for $152,000 in the second quarter of 2016. We also have numerous opportunities on commercial tracks currently at various deal stages.

The 4 residential lot sales activity in the second quarter is reflection of timing. We had a very successful lot offering of 69 lots in our Wildwood development with one lot closing in the second quarter and the remainder is scheduled to close in the third quarter. We have 75 lots currently under development in 3 neighborhoods in Chenal Valley as well as an additional 29 lots under development in Wildwood.

We remain on track to meet our outlook for the third quarter and 2017. Depending on weather conditions, we expect the sawtimber harvest to be 40% above year-ago levels in the third quarter. Lumber sales volumes could be 7% to 20% higher in the third quarter over the third quarter last year as we expect to capitalize on favorable lumber markets and the benefits of our new small log-line and upgrades of the Ola Mill.

Third quarter MDF sales volumes are forecasted to be lower than a year ago due to the impact of the August maintenance shutdown. Residential lot sales are expected to be 60 to 70 lot range in the third quarter, and we expect the full year residential lot closings to be 130 to 150 lots.

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

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

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Thank you, Byrom. Overall, Deltic is well positioned to have a solid year performance. Real Estate segment results are expected to be much stronger in the second half of this year. In Manufacturing, with continued favorable markets, we anticipate substantial operating improvements by the fourth quarter of this year as numerous capital projects begin to bear fruit and show the true potential of our assets. I'm especially excited about the opportunities to capitalize on significant value in Woodlands as we pivot to a more market-oriented log sales philosophy versus one of internal supply. An approach that should result in higher margins and meaningful upside to our harvest levels. We will remain committed to disciplined capital allocation, identifying opportunities to reduce operating cost, including corporate overhead and optimizing our assets.

We're working hard to drive shareholder value in delivering a best-in-class company. We recognize the importance of communicating our strategic plans with you in a timely fashion, but we're balancing this with our commitment to conduct a thorough review and evaluate a comprehensive range of strategic alternatives. I look forward to sharing more with you in the near term as we complete this work.

Operator, I'd like to open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Ketan Mamtora from BMO.

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Ketan Mamtora, BMO Capital Markets Equity Research - Analyst [2]

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The first question, and I appreciate that you're still in the midst of your strategic review. Do you have, at this point, kind of any timeline on when you will be -- when you might be able to communicate whatever comes out of that strategic review process?

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

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Yes, Ketan, we're anxious to communicate that with people, and obviously, have a clear direction forward and so we can get on with the implementation of that. But as I said, we're balancing with communicating that timely with doing it well. And as we're wanting to finish this as soon as possible and we'll back to you when we have that complete.

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Ketan Mamtora, BMO Capital Markets Equity Research - Analyst [4]

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Okay. Is it -- And again, I'm not trying to put too final line on this, but is it fair to say it will be before the end of this year?

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

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Certainly before the end of the year.

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Ketan Mamtora, BMO Capital Markets Equity Research - Analyst [6]

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Got you. Okay. That's helpful. And then just turning to kind of the timberland business. Can you talk at all the opportunity that you might have to improve harvest at your -- in your wood basket? Can you just talk about what you're seeing in terms of demand and any room that you might have there to increase harvest?

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John D. Enlow, Deltic Timber Corporation - CEO, President and Director [7]

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Yes. Sure, Ketan. And we'll provide more details on this as we rollout our strategic direction and any initiatives associated with that. But I would refer you to our investor deck where we've talked about this. Even at -- with just a preliminary view, when we look at our harvest level has been in the past, roughly in the 2.5 tons per acre range versus the range that you see with industrial managed timberlands of 3.5 to 4.5, we feel comfortable that we'll be somewhere in that range at the midpoint of 4 tons per acre. For us that would be an incremental harvest level of about 800,000 tons per year or about a 60% increase. So hopefully that gives you a preliminary view on the potential, and as I've said, we think we'll land somewhere in that range.

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Ketan Mamtora, BMO Capital Markets Equity Research - Analyst [8]

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Got it. That's helpful. And then coming out of the projects that you're doing in wood products right now, what will be your operating rate at the 2 sawmills?

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John D. Enlow, Deltic Timber Corporation - CEO, President and Director [9]

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Yes, so we -- once we have everything complete, we would expect to be in the industry range of operating rates of -- in terms of percentage up-time in the 90-plus percent. And -- so the projects that we're working on are kind of twofold. One, at the Ola Mill, we completed the work on the small log line at the end of last year the beginning of this year. And in the second quarter, we're kind of through the start-up phase on that. And then, into the second quarter, we also started the associated improvements on the log large-line and have just recently completed that and are in the start-up phase on those. So that's kind of a major project there and then...

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Ketan Mamtora, BMO Capital Markets Equity Research - Analyst [10]

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And how much does that increase your production at the Ola Mill, John?

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Byrom L. Walker, Deltic Timber Corporation - CFO, Interim VP, Controller and Treasurer [11]

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Basically, we've added a whole new line to it. So that moves the type of production when it reaches its capacity to that, we're around to 80% of our Waldo Mill.

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John D. Enlow, Deltic Timber Corporation - CEO, President and Director [12]

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And one of the bigger benefits in terms of, not only increased volume, but we expect our cost and our -- to go down significantly, both through the utilization of a much higher mix of smaller logs and then just efficiencies through the Mill as well.

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Ketan Mamtora, BMO Capital Markets Equity Research - Analyst [13]

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Got it. That's very helpful. And then just one kind of a big picture question on housing. As I look at 2017, it seems like you're off to a pretty strong start. Notwithstanding the June housing number that seemed like Q2 had slowed considerably. From what -- from your vantage point, can you talk about what are you seeing in the marketplace? And are we heading for another kind of expectations pretty strong at the start of the year and a gradual ratcheting down of expectations as we move through the year?

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John D. Enlow, Deltic Timber Corporation - CEO, President and Director [14]

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Yes, I would say, there's certainly variations quarter-to-quarter, but we're on pace to come in pretty consistent with what our view of housing starts for the year would be, which is in the 1.25 range we anticipate over the next few years, we see that building to 1.5 and see that as its long-term average. So again, there'll be variation quarter-to-quarter, but it's pretty much on target with our expectations.

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Operator [15]

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And our next question comes from Albert Sebastian from Prospect Advisors.

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Albert Sebastian, [16]

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Couple of questions. First, can you just break down the operating income in Manufacturing between lumber and MDF?

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Byrom L. Walker, Deltic Timber Corporation - CFO, Interim VP, Controller and Treasurer [17]

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Al, on that, we'll be filing our 8-K -- our 10-K later -- or 10-Q later this afternoon. The information has broken out in more detail in that part of our segment pieces. Our -- and as we mentioned, our MDF facility was impacted by some maintenance issues that we had to do to get us through our August shutdown. So the cost associated with that really drove down the margins that we had hoped to see from the Del-Tin project. Once we get through here in August, we expect Del-Tin to be back in its more normal historic ranges on that.

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Albert Sebastian, [18]

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Okay. And then also on lumber pricing. It was up 5% year-over-year. How does that compare sort of to random length? It seems as though your pricing might have been a little bit weaker than the index? Is that the case? And if so, why?

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John D. Enlow, Deltic Timber Corporation - CEO, President and Director [19]

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Al, I don't have the specific total comparison to random lengths. I know on a trend basis, we're pretty much very close to percentage change that we see in random lengths and trade relatively close to that on a trend basis. So that would be the color of that, that I would have at this point.

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Byrom L. Walker, Deltic Timber Corporation - CFO, Interim VP, Controller and Treasurer [20]

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And I'll add more color to it. Al, in there -- with the weather conditions we had in the Midwest, the MSR volumes which are normally are higher -- grade higher-dollar lumber coming out of our mills. They were little slower getting on track this year than what they have been in the past, and that's also had an impact as our Waldo Mill makes a fairly large percentage of that product.

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Albert Sebastian, [21]

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Okay. (inaudible) and concerns the residential lot. It seems as though the average pricing for your residential lot has been trending down and is lower than the historical average, which I believe has been more closer to $75,000, $80,000 a lot. Can you just talk about what's going on there?

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Byrom L. Walker, Deltic Timber Corporation - CFO, Interim VP, Controller and Treasurer [22]

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Some of that was the timing of the various neighborhoods. It just so happens that right now we have this phase at Wildwood, they're coming on. We have -- the 75 lots we have coming on the second half of the year, they're across all phases from entry-level up into some larger tracks on the golf course. So it's been -- we expect good movement in those once we offer those, and that's going to have some in your $80,000 range on average, starting from just $60,000 point on up in to your $180,000 range. So a lot of it's been the mix and the timing of the mix we've had out there and available from it. But there is a stronger market for the entry-level, those lots into our Chenal Valley community. And so we have focused on the lot development in those areas.

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John D. Enlow, Deltic Timber Corporation - CEO, President and Director [23]

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Yes, and a little bit of that, Al, is, as Byrom said, we're seeing strong interest in those more entry-level modest price lots, but we see the opportunities to substantially increase the velocity at those price points, while continuing to have a mix of the more medium and premium lots as well. So overall, we feel like it's the strategy that's going to maximize cash flow and NPV for us. So it's a balance between the 2.

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Operator [24]

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And I'm showing no further questions at this time.

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John D. Enlow, Deltic Timber Corporation - CEO, President and Director [25]

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Okay. Well, I'd like to close by thanking everybody for joining us this morning, and thank you for your interest in Deltic Timber.

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Operator [26]

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Thank you, ladies and gentlemen. This concludes today's call. Thank you for participating, you may now disconnect.