CatchMark Timber Trust, Inc.
Q2 2017 Earnings Call Transcript

Published: 4 Aug 2017

[Operator:]

Good morning, and welcome to the CatchMark Timber Trust Second Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Brian Davis, Chief Financial Officer. Please go ahead.

[Brian Davis:]

Thank you, Gary. Good morning and thank you for joining us for a review of CatchMark Timber Trust results for second quarter 2017 the three-month period ending June 30. I am Brian Davis, the Chief Financial Officer of CatchMark. Joining me today on the call are President and CEO, Jerry Barag; Chief Operating Officer, John Rasor; and Senior Vice President of Forestry Operations, Todd Reitz. During the course of this call, CatchMark management will make forward-looking statements. These forward-looking statements are based on management's current beliefs and the information currently available. CatchMark's actual results will be affected by certain risks and uncertainties that are beyond its control or ability to predict and could cause our actual results to differ materially from expectations. For more information about the factors that could cause such differences, we refer you to our 2016 annual report on Form 10-K and other reports that we file with the SEC. Today's presentation may also include certain non-GAAP measurements. Reconciliations of these measurements are included in our earnings release, which is posted to our web site and our Form 10-Q filed with SEC on Thursday, August 3. John Rasor, Todd Reitz, and I will join Jerry to answer any of your questions after his presentation. Now, I turn over the call to Jerry Barag.

[Jerry Barag:]

Good morning and thank you Brian, and thanks to all of you on the call for joining us this morning. CatchMark’s enjoyed a very solid second quarter meeting our expectations and we continue on course for comfortably achieving our 2017 earnings guidance. Here are the highlights; from an operation standpoint, we successfully managed through certain first half year market challenges supported by our fiber supply agreements and delivered wood sales model. It’s important to note that the temporary operating conditions which created impairments at our mill customers in the first half of the year have abated and looking forward should not recur in the second half. We are confident that our property locations, which are consistently in the highest demand with markets across, the US south will continue to generate stronger pricing in the market averages. Timberland sales transactions, which have closed or we have under contract give us high certainty in meeting this target for the year as well. We maintain ample liquidity given our cash position and credit lines to make acquisitions that meet our criteria for quality, stability, and durable earnings. And our first institutional joint venture with the Missouri Department of Transportation & Patrol Retirement System or MPERS, which in April acquired approximately 11,000 acres of timberlands in North Georgia for $20 million is executing according to plan. Yesterday, we also declared a $0.135 dividend per share payable on September 15. Our steadfast commitment to maintain a healthy dividend over time remains our overwriting goal in providing shareholders with a sustainable rate of return. Let’s examine more closely our results for the second quarter. To start, significant year-over-year increases were realized as a result of last year’s acquisition and successful integration of properties in South Carolina. For the quarter ended June 30, we generated revenues of $26.8 million, a 68% increase over a year-ago and realized adjusted EBITDA of $14.3 million, 137% increase over second quarter 2016. Timber sales were up 23% year-over-year and a 21% increase in harvest volumes. These very positive results were achieved despite temporary marketplace challenges, which included mill outages and high raw material inventories at mills. We were able to overcome many of these impediments for two primary reasons. First, our Timber supply agreements and second our exceptional organization, which capably produced delivered wood sales for our customers, while maximizing margins for CatchMark. Our determination and discipline for acquiring and owning properties in prime mill markets also served us well last quarter and underscores why this discipline is so important to us. [Indiscernible] supply agreements and our market relationships resulted in realized stumpage prices across the board above South-wide averages. Operations focus remains on further leveraging and expanding these supply agreements and relationships to increase delivery opportunities, protect us from further downside, and provide a spring board for stronger earnings as market conditions improve. Also, our objective is to continue to achieve the highest productivity per acre, compared to other timberland owners through acquisitions, which improved our per acre stocking and enhance overall portfolio yields. In addition, our ongoing commitment to sustainable forest management practices remains integral to delivering global earnings growth for stock holders. Also during the quarter, we sold 4,000 acres of timberlands for $8 million. Added together with the 2,800 acres we sold for $5.5 million during the first quarter, we have nearly attained our full-year 2017 target range for timberland sales of $14 million to $16 million. During the quarter, we closed the important joint venture with MPERS, which has raised our profile significantly with other potential institutional investor partners who seek the diversification characteristics income generating benefits and favorable risk adjusted returns of timberland investments. We continue to pursue other initiatives to expand our institutional foot print, which could lead to broadening of their access to various acquisition opportunities and produce additional fee income. The Dawsonville transaction with MPERS also pushed CatchMark over the 0.5 million acre milestone in timberland interest. As of June 30, we had more than $180 million of borrowing capacity under our credit facilities and in cash on hand. We did not make any share repurchases during the second quarter and as of the quarter’s end we have $19.8 million available in our share repurchase program. We will continue to be opportunistic in making any future repurchases. Looking at acquisitions, for the first half of 2017, the acquisitions marketplace has been characterized by one megadeal and various small transactions. We continue to review different opportunities, mostly in the US south and a ready to transact when underwriting meets our return thresholds and quality standards for sustainability and durable earnings. We remain totally committed to assembling the highest quality timberland assets in our industry. With regard to market outlook it’s been a familiar story with housing starts on an upward trend, but in fits and starts. Recent numbers have been favorable and particular a spike in building permits issued in June. Strong homebuyer demand, as well as increasing repair and remodel work by existing homeowners is fuelled by low mortgage rates, low unemployment, and a steady slow growth economy. We do not see any dramatic changes incurred trends during the remainder of the year, which translates into a flat pricing environment. However, we’re encouraged by the continued investments in manufacturing capacity expansions and restarts across the US south by both domestic and foreign customers. This will certainly lead to a stronger market recovery and stability in the future. And as discussed, we continue to anticipate achieving our pricing above south-wide averages because of the favorable timberland locations, no market advantages, supply agreements, and our delivery model. That was our edge in the second quarter and will continue to be our advantage during the remainder of the year. So in summary, CatchMark had a strong quarter and we’re on track to meet our 2017 earnings guidance. Given the year-to-date performance and a continued flat pricing outlook we feel well positioned for the rest of the year through the execution of our operating strategy and benefits from the quality and location of our timberlands. We have excellent liquidity and will continue to be deliberate and disciplined about capital allocations to promote our growth strategies. We will continue to concentrate on making new acquisitions which stringently fit our criteria and reinforce the market advantages, which were evident in the second quarter. We’re pleased about our joint venture with MPERS, which we expect can set the stage for expanding our institutional relationships, and we remain focused on providing superior and sustainable rate of return to stockholders, and believe that our new growth opportunities, operational execution and capital allocation strategy are building long-term value. Thanks very much for joining us today, and now Brian, John, Todd and I will answer any of your questions.

[Operator:]

[Operator Instructions] The first question comes from Collin Mings with Raymond James. Please go ahead.

[Collin Mings:]

Thanks, good morning guys.

[Jerry Barag:]

Good morning, Collin.

[Brian Davis:]

Good morning, Collin.

[Collin Mings:]

First question from me just, Jerry, in your prepared remarks, you seem to indicate that you might have some additional timberland under contract, can you may be just expand on that? Or was that correct interpretation of what you were saying?

[Jerry Barag:]

We’re working hard on things and we know within your expectations that we will have some acquisitions and I think that’s a fair assumption.

[Collin Mings:]

At this point Jerry is there any additional color you can provide on just order of magnitude or some of the opportunities that may be you’ve tied up under some sort of contract?

[Jerry Barag:]

I can't really comment on the specifics, but it would be very much in keeping and compatible with what we’ve done in the past from allocation standpoint, as well as a qualitative asset standpoint.

[Collin Mings:]

And would it be something likely - as far as a wholly-owned type transaction or transactions or potentially something else on the JV front?

[Jerry Barag:]

More of the former.

[Collin Mings:]

Okay. Thanks. And then, maybe just switching to operations during the quarter, can you guys maybe talk a little bit about the downtick, obviously, in pulpwood pricing. You guys [indiscernible] to get just $1, $13 to $12 it looks like in the supplemental? And then, are you seeing any further deterioration in 3Q or should we expect kind of a reversal on public pricing as you get to the balance of the year?

[John Rasor:]

Sure. Collin it is John. Let me back up and talk for just a moment where we were first and second quarter 2016 last year, it was the high point and our pine pulpwood pricing since inception, it was also the peek in south-wide on timber market south, but we were down, we were $20 a ton, South Carolina trying to get the mills backup that it had gone almost naked with the rain fall that it had come in and swamped place over there last year. And so even though our price is down year-over-year we’re still very comfortably benchmarked well above the south-wide timber market's average. So we feel okay about where we are with regard to our pricing. Now going forward as Jerry said we would expect the second half of the year to be relatively free of the kind of challenges we had to deal with in the first half of the year on the pulp and paper side of business with both unscheduled and scheduled rolling mill outages, so just backed a lot of pine pulpwood up in the system. And hardwood pulpwood in a couple of cases also has come down as Mills cleaned out their wet yard inventories, basically we’re not on market buying at that time that got reflected in the index pricing, some of which is tied to a supply agreements. So, I hope that gives you a feel for what we think we are.

[Collin Mings:]

That’s very helpful color, I appreciate that. Switching gears, just wanted to touch on guidance again Jerry, in the prepared remarks you seem to indicate your affirming kind of the $37 million to $41 million range, but clearly you guys are tracking well ahead of that here through the first half of the year, just - maybe talk a little bit more about some of the offsets you think in the second half of the year that will [indiscernible] in that range as some supposed to something higher, is it real estate sales or harvest volumes or maybe just walk us through that.

[Jerry Barag:]

Yes. So, the big pivot point on that will be the real estate sales, which as I previously said, we’ve about achieved what our budget and our goal was for the entire year through the second quarter. And so that activity is going to abate pretty significantly and just settle down so that the year-end range will stay comfortably with around where we originally anticipated it. From a timber sales standpoint, as John talked about it, there were some mill outages and other unscheduled events that back things up in the first quarter, we made up a lot of ground in the second quarter and for the rest of the year it appears that we’re going to just track according to where the plan was on timber sales. So, it looks pretty comfortably that we will get to within where our guidance is and then if we have unscheduled or unanticipated increases in timber prices or other conditions it might be something better, but right now it feels pretty comfortably in our guidance range.

[Collin Mings:]

Okay, appreciate that. One last one from me and then I’ll jump back in the queue, but Brian just - what are your latest thoughts around swapping some of your floating rate debt, obviously the LIBOR rate that you're floating rate debt is tied to - is moved up notably year-over-year just how are you thinking about that floating rate debt exposure?

[Jerry Barag:]

Well a couple of points around that. At the end of the second quarter total comps of debt was 2.8% net of patronage of which, as you noted, just under 50% of our debt is fixed. Philosophically we’ve swarmed down to a level that we think is going to be a permanent level financing as we have the ability to pay down a floating exposure without prepayment penalties or mark-to-market payments, but we will continue to actually manage our interest exposure as we have in the past, especially should we deploy additional debt capital to finance acquisition will have to increase a portion of our debt which is fixed. Also notable, Collins and so we increased our work portion of fixed rate debt in the first quarter, the longer-term rates have actually come down anywhere between 10 and 15 basis points.

[Collin Mings:]

Alright. Appreciate the color. I’ll jump back in the queue. Thank you.

[Jerry Barag:]

Thanks Collin.

[Operator:]

[Operator Instructions] The next question comes from Dave Rodgers with Baird. Please go ahead

[Dave Rodgers:]

Hi, good morning. Jerry just wanted to start maybe on your comments about mill capacity and can you talk more about what kind of capacity will come online, I guess here over the next year or two, what that kind of means for the CatchMark business if you can kind of quantify any of that and kind of your expectations on the overall impact on CTG.

[Jerry Barag:]

Yes. And I'm going to invite John and Todd to jump in about any of the specifics, but pretty much across the entire geographically where we’re invested, we have seen on the solid wood side of things, the soft timber of saw mills increase capacity through capital investment programs by - on average of about 20% and that is like I said almost across the entire geography where we operate. And so there is still two opportunities one is, they have the opportunity to add more shifts to the existing operations and then the expansion potential increases that even more. And it’s been recently brought on and so we haven't really seen much if any of the impact of those capital investments yet, but we’re very hopeful and we anticipate that we will start to see that. The same is also true, but on a percentage basis to a much lesser extent on the pulpwood side. And the big news that really just got announced at the end of last week was that Nor Board, which has an OSB plant in Huwail, Alabama, which is right in the middle of our largest - concentration of ownership is going to restart their OSB plant there, which will make a significant increase in demand for pulpwood through that region. And so the signs are all there and we’re feeling very good about it. It’s still early days with respect to all of that but these are significant capital investments that have been made and we have no reason to doubt that they’re going to be realized in terms of operating and then demand for timber that goes along with them.

[Dave Rodgers:]

As we think about that kind of unfolding and the occupancy or the capacity they are ramping up, can you talk about what the correlation would be to pricing or what your historical view might be on the correlation to pricing?

[John Rasor:]

Yes, this is John Dave. It’s going to take a while to work through the overhang of harvest that you’ve heard people talk about for quite some time. So, I think our view is pretty much to 2018, we’re calling for relatively flat pricing environment. If we get the steady improvement that Jerry is talking about, I think we’re expecting to see some friction go positive and at least in some of our operating areas.

[Jerry Barag:]

I mean there is really a two step process that is going to have to occur for prices on South timber side to move meaningfully, and the first step is going to be increases in capacity and in demand, which are just going to come from market factors meaning more housing, more housing demand, more export volume, which is actually happening out of the US south. And then in addition to that the additions to the capacity that have been announced will allow the markets to realign themselves so that the US south itself on specific markets in the US south will get a greater market share of the overall North American lumber markets. And part of that is part of the narrative around the softwood lumber agreement with Canada. And so the first part, the first tranche or the first leg of that has to be drawing down the excess inventory that’s in the forest today, which in some markets is a lot closer than in other markets and again we are invested in those markets that we think have the ability to deflect some terms of pricing earlier and faster. Then those are the markets. And then, once that inventory is drawn down then you move into the category of really starting to tighten up the regular supply of timber, which will allow prices to move up in a much more significant manner.

[Dave Rodgers:]

Thanks guys that's helpful and maybe just last question from me. Just in terms of the land sales, clearly stronger first half, curious about just kind of the overall picture, I know the goal is to grow the company and grow profitably, but it seems like we are at a point just kind of in the overall real estate cycle where land prices probably have gained a lot more than overall construction prices, does that make you comfortable or could you get comfortable accelerating land sales to 4%, 5% some big number of the overall total portfolio maybe getting a little smaller in the near-term, but really packing in some pretty good liquidity for growth?

[Jerry Barag:]

Yes, I mean the market for land sales is pretty buoyant right now. It feels pretty good, but you can’t extrapolate it across the entire 5000 acres that we have. So, we have a fairly disciplined program of identifying those tracks that we believe are suitable and are going to come into premiums that we would want to stay in a land sale program. We’re not just going to sell our Timberland for a price to generate earnings that we don't think that’s in the long-term interest or what the company is. This is really about creating additional value through an HBU program for people to pass more for the timberland than its users as a regular timberland. So, there are practical limitations to how much and what we can sell and that’s put into a fairly programmatic systematic program that we administer here and it’s not always that simple to just say let’s go figure out what’s going to be HBU land sale, eligible in two or three years and pull that forward and sell a lot more of it. It does have a lead times associated with it.

[Dave Rodgers:]

Okay, thank you.

[Operator:]

The next question is a follow-up from Collin Mings with Raymond James. Please go ahead.

[Collin Mings:]

Hi thanks. Just following up a little bit on some of the operational conditions right now, John I am just curious what as far as the comments, and Jerry your comments as far as the dispute between the US and Canada, just what’s the latest feedback from your customers on the software lumber negotiations, obviously some rumors out there about making some progress for the potential deal, what are you hearing from your customers and then just along those lines, how would your business be impacted or how you think your business will be impacted by the pending expiration of the pulmonary kind of ailing duties later this month?

[John Rasor:]

From the standpoint of our customers and a lot of them are Canadian producers at this point, I mean inner for West Fraser are all significant customers that we have and I think the answer is implicit that they’re voting their dollars and their capital allocation and I think you saw the West Fraser just announced a significant transaction to buy the Gilman lumber operations in Florida and Georgia. And they continue to make investments in the US south and so from a Canadian perspective they’ve kind of figured out how to hedge their business in a way where regardless of the outcome of the North American lumber agreement they have the ability to provide growth and value to their shareholders through their ownership positions in the US south, as well as in Western Canada. And I think their expectation is that whatever the agreement comes out as that over time there is going to be more and more operations that have moved to the US South and that the US South is going to be a larger share of the entire North American lumber tie. It’s a much different story from the Eastern Canadian producers, which don't have the same ability or the same operations footprint that the Western Canadian manufacturers have and so that’s caused a lot of murkiness about what the motivations of the entire Canadian delegations are because it’s not negotiated between Western Canada and Eastern Canada are very significant big differences between the motivations of the company is on either side of the country. Now, over time again even if the softwood lumber agreement where settled in an active tomorrow, it will take time for the industry to realign itself and for the impact of it percolate through, but at the end of the day and we said it before, even in the most pessimistic scenario of where the software lumber agreement might come out, it should be positive for the US south and in particular for CatchMark's operations.

[Collin Mings:]

Okay. That's a helpful discussion, Jerry; just maybe on the specific question as far as the pending expiration of the pulmonary kind of availing duties do you expect any sort of noise related to your customers in terms of some of that purchasing habits as we go through the rest of this quarter?

[John Rasor:]

Collin this is John. Well there is no question. There is a lot of choppiness right now with the uncertainty that all what Jerry just described is creating and [indiscernible] commanding a premium to southern yellow pine, you are finding some switch in back and forth going on, and if the countervailing duties are allowed to expire without anything to replace it, I would expect that we are going to have even more volatility and what makes sense for customers to switch between southern yellow pine is [indiscernible] you can see a little bit of that going on.

[Collin Mings:]

Okay. And then John, just sticking again with operations here, there have just been some reports as far as some rail disruptions in the US south, has that impacted any of your customers or anything that relates to your business or is there an issue that you have to deal with all your customers that you think about planning harvest volumes for the remainder of the year?

[John Rasor:]

I don't think in a significant way at this point.

[Collin Mings:]

Okay. And then just one more question for me and it goes back to Jerry, your response to Dave's question earlier just as far as can you expand on the comments about the export activity of the US south versus some that has come up on some of the other timber recalls as well, but just curious given [indiscernible] of maybe looking at more supply agreement to kind of securing volume is this something you have looked at trying to focus on some sort of supply agreement with someone exporting, in particularly locked out of the US south?

[Jerry Barag:]

I’m glad you asked that question and it’s going to give me an opportunity to introduce Todd Reitz to all of you. Todd joined us in March from Weyerhaeuser and prior to that 20 plus years at Plum Creek and Todd has got a long history of operations, but he also had a particular focus while he was at Plum Creek on exports, particularly of the US south. So, I think it'd be interesting for you to get his perspective even more so than mine.

[Todd Reitz:]

Sure, thanks Jerry and thanks Collin. We haven't sat down with anybody on the export side of the business to talk about supply agreements directly of course. It’s encouraging to see that growing. It has been a steady improvement coming out last year. So that’s positive for the industry obviously with Timberland always looking for additional outlets and that being a little more stable has been good, good for those customers as we are beginning to see expansion of their operations a little more in land, showing some more stability and their ability to grow, showing additional stability in the China market being that’s where the majority of that is headed. That touches us on the fringes, where we have been able to operate within that arena we have. You know as opportunities come up if we can get closer to those operations, and yes we would definitely approach those and see what the opportunity is going forward.

[Jerry Barag:]

It’s still somewhat limited Collin to how far from the coast your timberlands are located because they seem to continue to procure as close to the ports as they possibly can, but as Todd mentioned it is trending further and further inland and as it takes hold and gets bigger it is our expectation that it will be a much more significant part of a business as well.

[Collin Mings:]

Appreciate the color guys, good luck during the back half of the year.

[Jerry Barag:]

Thank you.

[John Rasor:]

Thank you.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Jerry Barag for any closing remarks.

[Jerry Barag:]

Thanks again everybody for joining us on the call today, and we will get back to work and we will see you in the next quarter.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.