CatchMark Timber Trust, Inc.
Q1 2015 Earnings Call Transcript

Published: 5 May 2015

[Operator:]

Good day and welcome to the CatchMark Timber Trust Releases First Quarter 2015 Earnings Conference Call. At this time, I would like to turn the conference over to Mr. Brian Davis, Chief Financial Officer. Please go ahead, sir.

[Brian Davis:]

Thank you, Tierra. Good morning and thank you for joining us for a review of CatchMark Timber Trust results for the first quarter 2015. I’m Brian Davis, the Chief Financial Officer of CatchMark. Joining me are President and CEO, Jerry Barag; and Chief Operating Officer, John Rasor. 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 2014 Form 10-K and other reports that we file with SEC. John Raiser and I will join Jerry to answer any of your questions after this presentation. Now I turn it over the call to Jerry Barag.

[Jerry Barag:]

Thanks Brian and good morning everyone. In the next few minutes I would like to review our strong 2015 first quarter results and review the current state of the acquisition market. As we announced yesterday CatchMark registered another outstanding quarter showing substantial year-over-year increases in company revenues and adjusted EBITDA. These robust results reflect directly on our deliberate and successful integration of last year's Timberland acquisition into our operating platform. Although we did not make any major acquisitions during the first quarter we remain very much focused on making additional accretive acquisitions of the highest quality Timberland available this year using our low leverage balance sheet and have remained focused on closing a number of smaller transactions at attractive prices. As we've said before we believe our strategy and the execution of our strategy are working and we remain very much on course for meeting our goals for the year while ensuring long-term potential for sustainable harvest durable earnings and higher dividends. And the Board declared a $0.125 per share dividend for shareholders of record may 29, 2015 which will be payable on June 15th. Now let's compare our performance for the first quarter 2015 against the first quarter 2014. A comparison we're very pleased to highlight because of our significant increases this year primarily due to our 2014 acquisitions. So for the first three months of 2015 the period ending on March 31st, the year-over-year results show revenues increased by 128%, adjusted EBITDA increased by 464%, gross timber sales revenue increased by 62%, total harvest volume increased by 66% and average sawtimber prices increased by 15%. We acquired approximately 7,700 acres of timberlands located in our existing Georgia operating markets for $14.5 million in three separate transactions. We sold $6.2 million in Timberland Holdings in nine separate transactions both sales comprised approximately 3,400 acres. And as you know we paid off a dividend of $0.125 per share on March 16, 2015. To give you more specifics on the gains and revenues and adjusted EBITDA revenues increased to $20.2 million primarily due an increase in timber sales revenue of 5 million and an increase in timber sales revenue of $6.1 million. Gross timber sales revenue increased almost entirely due to harvest from properties acquired since April 2014 and Timberland sales revenue increased due to selling more acres during the first quarter in 2015 than last year's first quarter. As a result of wet weather in the southwest we accelerated sawtimber sales to meet increased fire demand on properties we acquired last year in that region. Average sawtimber prices increased 15% reflecting the positive impact of regional differences in realized market pricing from our 2014 acquisitions. Average pulpwood prices declined 3% year-over-year in our legacy properties in Georgia and Alabama, as a result of exceptionally high prices from last year's abnormally wet weather, which particularly impacted prices to the upside for hardwood pulpwood in our primary mill markets. I should note our pine pulpwood prices remain flat year-over-year. Adjusted EBITDA for the three months ending March 31, 2015 increased by $9 million over the year earlier period to 11 million primarily resulting from a $3.6 million increase in net timber sales and $5.7 million increase in net revenue from Timberland sales. As we noted we acquired approximately 7,700 acres of Timberland during the quarter supplementing holdings in our existing Georgia mill markets. We did not complete any major acquisitions in the first three months of the year simply because we're remaining extremely disciplined in evaluating our pipeline and will wait until we find the right transactions to meet the high quality standards and productivity that we seek. At present and unlike last year the market is somewhat bifurcated between small and large deal sizes especially in the U.S. South where we've been concentrating our activities and seeing the best relative value. We remain confident about announcing new accretive transactions of high quality timberlands during the year and we continue to export joint venture and fund strategies which will augment purchasing power. As discussed previously the company’s refinancing late last year and our low leverage balance sheet put us in an excellent position to make purchases when we see deals that meet our standards and compliment our portfolio needs. We continue to look for superior productivity characteristics from soil attributes and forest genetics which can provide durable harvest revenue and sustain long-term growth. And properties with trees at the right age classes to complement our existing holdings and support sustainable harvest volumes. As well as regional markets with favorable supply demand characteristics that will support above the average price growth. In conclusion we're up to a very good start for the year, our dividend is secure and we're extremely well positioned to make accretive acquisitions. CatchMark is all about assembling the highest quality properties, sustaining porous growth and maximizing timber sales for the long-term, that's what we've been doing successfully and we intend to continue doing that successfully. It’s a formula that's working and should bear further gains as we continue to implement our strategy and execute on our management plan. Thanks as always. And now Brian and John and I will be happy to take your questions.

[Operator:]

Thank you. [Operator Instructions]. And we'll take our first quarter from Collin Mings with Raymond James and Associates.

[Collin Mings:]

I guess just really first can we just talk a little bit more about the demand environment in your wood baskets. I mean given the drop and lumber prices, has that impacted your customers at all? I mean you're talking about some of the pricing increases year-over-year as far as in sawlog. How much of that again is just mix shift versus actual momentum as far as on a apples-to-apples basis.

[John Rasor:]

This is John, I'll take that. Certainly we're very happy with the first quarter results and the ability that we demonstrated to be able to move volume and keep pricing in a pretty good place. So yes there has been some evidence of some mills wind to push back on pricing, we've been able to hold ours on pine sawtimber and chip and saw. So we were quite pleased with where we came out, let me give you a little color here. Our Coastal Southeast Georgia properties still are in the strongest markets across our landscape and that pricing has been very healthy and we haven't had any push back. In our South Central region which is the single biggest region which includes our marked legacy properties, there has been some push back but as it relates to our ability to supply volume on a deliberate basis we've been able to hold our pine sawtimber prices. We have lost a bid pricing in pulpwood as Jerry talked about and I'll give you some context on that and our hardwood pulp wood is down from last year where it was extremely high the previous year during the first quarter. So we expect that to start picking back up as we move through the year as it relates to hardwood pulpwood. But we finished Q4 at 13.54 on pine pulpwood and we're at 13.78 Q1 '15, so we're up slightly, we're up slightly on pine chip and saw and pine sawtimber. As I said we’re down on hardwood pulpwood and up slightly on hardwood sawtimber. So generally we're seeing a fairly stable situation right now and looking forward the things hopefully picking here at the second half.

[Jerry Barag:]

I mean as you know and most everybody knows at this point for the lumber producers first bad weather conditions across the U.S. and other factors, those are rough couple of months. We feel like we've made that through -- made it through the first quarter on scale and even a little bit ahead of where we expected to be, and we're definitely seeing a pickup in demand and activity that's going on into the second quarter. So, we think we have weather at worst unintended.

[John Rasor:]

And Collin I would also add that Q1 '15 we were at a 60-40 mix on pulpwood sawtimber and I think that's generally where we see it staying fairly close plus or minus as we push the rest of the year, which reflects the increased mix of sawtimber on our acquisitions and we've been talking about that throughout last year.

[Jerry Barag:]

Towards the end of the day Collin it's our consistent story, it's where we're located and the market that's we're selling our timber into which have remained much stronger in general than the overall sale.

[Collin Mings:]

I guess for both for Jerry and John to that point; would you still say overall for pine sawtimber this year may be up, just mid single-digit type percentage increases?

[John Rasor:]

I think that's where we see it, yes.

[Jerry Barag:]

Yes that was our projection going into the year and I don't think we've altered from that.

[Collin Mings:]

And I guess another question for both of you guys as it relates to, I mean you talked a little bit about this last quarter but any update on how you're thinking about the Midwest Bancorp, Rock-Tenn merger, I know it's still early days and we talked about on our last call any impact there or any positive or negative read-throughs at this point?

[John Rasor:]

No negative, we quarterly have a meeting with MeadWestvaco as part of our fiber supply agreement to the Mahrt Mill just to stay in touch around matters like this and there was no real update. So we don't really see any change in our business relationship as it relates the Mahrt properties and as that are all under the long-term fibre supply agreement. If anything, we should be in a better position to supply more hardwood pulpwood to their Evadale Texas Mill. They are talking to us about that and as we build out our properties over in that area. We've got some good hardwood tracks we can get onto as soon as the spin river goes down. So I think we see business pretty much as stable going forward with them.

[Collin Mings:]

And then two more from me for now and then I'll turn it over. Just stepping back in, it didn't look like any sort of update to the guidance in the press release last night. Anything we should take away from now, although you completed of about $15 million of acquisitions. Should we kind of just infer for now that you're maintaining guidance or how should we think about the guidance and potential update to that to the remainder of the year.

[Brian Davis:]

Collin this is Brian. Our prior guidance as you note excluded the impact of acquisitions and we're not updating our guidance at this point in time.

[Collin Mings:]

And then one other one as far as just on the land sales during the quarter. It looked like it was a little bit lower on a per acre basis as far as the pricing you got, then the last few quarters. I know the 4Q had some unusual particularly high value land that you sold but anything that we should read in to the per acre pricing at the land sale completed during the quarter?

[Brian Davis:]

Collin as Brian, I'll handle that one as well. Really Collin when we do land sales is typically a less productive properties or we've also harvested the timber of to that. I mean look at our acquisitions we've averaged about 40 tonnes per acre and when we take a look at the types of dispositions we've had with average it having to remain about 20 tonnes per acre. And so what you really see is the removal of timber and the selling of this less productive properties. So I wouldn’t really read into that from the standpoint of the top line land sales number.

[Operator:]

[Operator Instructions]. We will take our next question from Dave Rodgers with Baird.

[Dave Rodgers:]

I am sure I heard the comments about the acquisitions and opportunities in the market but I was wondering if you could dig a little bit deeper into what you are seeing in the acquisition pipeline if you got anything under contract today or anything in the near-term that we can expect you to close?

[Jerry Barag:]

As I noted in my comments, we've kind of got a bifurcated market that's been going on after a very active 2014 from a market perspective, we started to see some offering as it come out at the beginning of this year or although the timing of that has seem to be a little bit odd. What's coming for the market has been either very large transactions and the number of small transactions that either have come into the market that we've sourced directly. And from an opportunity standpoint the smaller transactions have been much better price, much better productivity, much more complementary to our business plan and so we've -- while it takes a lot of effort to do that they are very accretive properties for us and are very consistent with what our plans are here and so we closed 7,700 acres of that, there is some more that is under contract. But again from a significant standpoint those aren’t going be things that really move the dial in any individual deal. There at least three very large 100,000 plus acre transactions that are in the marketplace that we've looked at and evaluated. It's kind of hard to draw any conclusion, they're all part of processes that are underway that are going to take some time. I will tell you for the most part of the kind of landscape of what's out there today is that the sellers of large properties have seem to have pretty lumpy expectations of what properties might or should be trading at, and for right now it appears that the market is staying fairly disciplined around pricing, which we like which we're happy about. And so we'll see how those processes end up. But there is nothing eminent on a large scale basis that’s going on.

[Dave Rodgers:]

And maybe the follow up to the acquisitions that you did in the first quarter, I know typically you've given a little bit more detail in terms of the stocking and expectations for the pulpwood sawtimber mix. I may have missed it either earlier in the call or missed a prior release but did you give any of those details regarding the acquisitions during the first quarter or could you?

[Jerry Barag:]

We didn’t give level of information; you may have the ability to do that obviously anecdotally I will tell you it's very similar most of the other acquisitions that we did during 2014 in terms of stocking and income producing capability. So I will talk to Brian about that and see what we can do.

[Dave Rodgers:]

Brian for you, can you talk about the buying capacity today kind of where the balance sheet stands and where you can think you can deploy out too?

[Brian Davis:]

So cash and available credit under our debt facilities were about $300 million of liquidity. We feel very comfortable deploying 200 million of that plus or minus in being at a target leverage level relative to opportunities we may push at number.

[Dave Rodgers:]

And then last question for you. This is maybe more a comment. Can you talk a little bit about the depletion accounting change in the quarter and any meaningful impact to you guys have accompany from doing that?

[Jerry Barag:]

Depletion in itself is a complex process as used as estimate the constant merchant inventory and with the blessing for auditors this year essentially we've streamlined it. The downsize is streamlining our process is there are updated cost per unit under the new method or more conservative, which really led to what you saw the low over 20% increase in our depletion expense just because the rates have increased based upon the simpler method. Really it's not much more than that other than making sure that we're lining up our costs with a streamline depletion method.

[Brian Davis:]

And we have moved to a depletion method that’s probably more widely adapted in the industry and what's complex to understand.

[Operator:]

And we'll take our next question from Collin Mings with Raymond James and Associates.

[Collin Mings:]

Couple of follow ups here, going back to just Jerry your comments about looking at potential JV partnerships. Can you maybe just provide a little bit more detail on how that’s progressing as you look at potential JV partnerships and remind us maybe how you would maybe look to a structure potential JV deals?

[Jerry Barag:]

Sure we have continued down that that path and we've made quite a bit of progress at this point. There is structuring and labor work that we'll need to go through to actually implement anything. And so we're about to undertake that phase of things but there is basically two different mechanisms and opportunities that we do. One would be strategic partnerships with institutional investors. And we've indentified select subset of institutional investors that philosophically are very complementary to what our management strategy is and as potential deals arise we'll have the opportunity to kind of mix and match amongst those large investors and create joint ventures. The other thing that we've been working on is more of a fun concept and that will be up much smaller in terms of dollars much smaller type vehicle. And it will be for smaller investors and that’s probably all I can at this point.

[Collin Mings:]

And I guess going back to Dave's question just about the acquisition and from your prepared remarks as well. I guess the 7,000 plus acres that you acquired during the quarter. What region or what part of Georgia was that? Was that kind of close full market or was that more in the central part of the state?

[Jerry Barag:]

It was about half and half. So some of that was kind right next to the Oglethorpe acquisition that we did last year and some of it goes down towards Waycross.

[Collin Mings:]

And then just a bigger picture as it relates to the acquisition environment. Why don’t you think this year has done up to the start that last year did both for you guys and for the broader market as far as this deal flow.

[Jerry Barag:]

I'll conjecture here because we're not the sellers but my guess is that people got pretty enthusiastic about the activity and some of the prices that got paid during 2014 for some of the timberland transactions after call it an eight year or high eight is where virtually model up had treated in the marketplace. And so what we've seen is a lot of either pent-up demand from sellers that have been honestly looking to sell properties for quite some time. But it seems to have some directional level at which they want to sell their properties. So I think there is -- the markets have been characterized by those sellers have come out trying to test the boundaries of the market from the pricing standpoint to see if the momentum from 2014 would carry over and lift those prices and there has been a lot of comments not by me but by other people in the industry about the same thing. And it's from a pricing standpoint I think people and being participants has been a little bit of skittish about moving to the next level of pricing quite frankly with the underlying economic activity and market fundamentals it doesn’t necessarily justify pricing move to a higher level.

[Collin Mings:]

So you would say that overall timberland values are kind of apples-to-apples base during the U.S South continues to edge a little bit higher, correct?

[Jerry Barag:]

For these transactions to get completed, my contention my feeling would be that 2014 pricing was more or less at fair pricing for the underlying fundamentals of market conditions. And so unless we're going to see a quantum leap in market conditions or expected future market conditions I don’t know how you justify significantly higher timberland prices.

[Collin Mings:]

Brian just kind of housekeeping question for you as far as -- how should I be thinking about CapEx for the remainder of the year?

[Brian Davis:]

In our 10-K we provided a range of $2 million to $3 million and we remain comfortable with that range based on seasonality in our numbers that occurs with CapEx.

[Collin Mings:]

And then I guess this one of for John and Jerry, just going back to my comments again some of the prepared remarks just talking about the strength of your customers and obviously it's been a relatively weaker pricing environment for lumber than it was a year ago. But how do you think about just to help of your customers in context of capacity expansions adding hours, I mean this is a trend that we been hearing a lot about. But just curious what you're seeing so far this year given some of these headwinds on both those fronts as far as mills want to put more money into their facilities and then they're still adding hours.

[John Rasor:]

Well other than what we've already talked about last year in terms of the [Tulisan] mill by Interfor where they have added some capacity. We haven’t seen anything significant in terms of the other areas that we're in. So I think people are still little bit cautious about want to putting more lumber into the market given the pricing environment you just talked about.

[Jerry Barag:]

Quite frankly Collin there is a lot of enthusiasm about capital investment in the forest product sector. But the stated number of significant projects that have gone on is still pretty muted. So I think if the marketing conditions respond you'll start to see some of these projects that have been specked out start to move forward. But still a little weak and a little early for that.

[John Rasor:]

They're causing mail down in [four days] in the stages of start up. And that’s taken a while to come up. So obviously that’s probably the single biggest one, than anything close to our area.

[Collin Mings:]

We talked about that little bit last quarter. I guess just one last big picture question from me. One of your peers just suggested that given some of weakness on the Asian markets and the tipping point as far as better pricing in the U.S. South might have been pushed out a little bit more. Just your thoughts about that how does what clearly is been a week pricing environment in the Pacific North West tie back to your business and kind of the trends we're seeing in the U.S. South. And do you think that there could be an opportunity to do something that Pacific North West given some of the correction in lot pricing in that region.

[Jerry Barag:]

Let me start and then I'll let John jump, I'll go backwards in terms of what you said. I would hope, I mean we would love to get involved in Pacific Northwest markets but quite frankly at pricing levels that we saw last year, we didn't see necessarily the opportunity to do that at a an ambitious prices. We are going to have to -- we would expect that if the weakness in exports continues which is really been the whole story out there or most of the story out there that we'll start to see a moderation or a pull back of prices out there that might make it more attractive for us to enter the region now. It's more complex than that, because we've got management and operational issues that we have to deal with to move to that region. But, if we can get to attractive pricing we'll figure out the operational issues. John and I actually were just out on our West Coast, a week or so ago and going through what's going on out there operationally and kind of to your point. And the reality is before the pullback the buildup in inventory in China and the pullback of the demand there; they were pretty much operating full out. I mean in terms of the amount of timber that was available and the amount of lumber that was [indiscernible] and getting shipped to China. And so, slight pullback in those numbers is not necessarily a bad thing for those market and it's not necessarily got to mean that there is a lot of timber that's coming from the West Coast that's going to start our timber and lumber, that's going to start coming back eastward in the U.S., we think initially the response is going to be out there. The manufactures are going to pullback production which will mean a little bit less timber consumption out there and it will settle in at the new lower level for a while now. If it gets persistently bad or there is a real drop off in demand, the much more significant in long-term drop off in demand, you might start to see that coming back across the country. But for right now it fears that I think everybody out there is going to take a little bit of breathe there and let some of the air out of the balloon rather than keep producing all the lumber and timber at the rate that they have been.

[John Rasor:]

I don't think I could answer that. Operator [Operator Instructions]. And we have no further questions and I would now like to turn the conference back over to our host Jerry Barag for any additional or closing remarks.

[Jerry Barag:]

Thanks everybody for joining us this morning. We will talk to you in three more months and hopefully and I expect we'll have the same kind of conversation.

[Operator:]

And this concludes today's conference. Thank you for your participation, you may now disconnect.