Pope Resources Reports Second Quarter Income Of $289,000

Aug 06, 2015, 19:00 ET from Pope Resources

POULSBO, Wash., Aug. 6, 2015 /PRNewswire/ -- Pope Resources (NASDAQ: POPE) reported net income attributable to unitholders of $289,000, or $0.06 per ownership unit, on revenue of $13.9 million for the quarter ended June 30, 2015.  This compares to net income attributable to unitholders of $1.8 million, or $0.41 per ownership unit, on revenue of $18.6 million for the comparable period in 2014.

Net income attributable to unitholders for the six months ended June 30, 2015 totaled $8.1 million, or $1.87 per ownership unit, on revenue of $40.8 million.  For the six months ended June 30, 2014 the Partnership reported net income of $14.1 million, or $3.17 per ownership unit, on revenue of $56.4 million.

Cash provided by operations for the quarter ended June 30, 2015 was $3.1 million, compared to $5.8 million for the second quarter of 2014.  For the six months ended June 30, 2015, cash provided by operations was $12.2 million, compared to $26.0 million in 2014. 

"As expected, soft log markets defined a challenging second quarter for our Fee Timber segment, as weak demand from Asia and typical seasonal supply increases reduced our log price realizations," said Tom Ringo, President and CEO.  "In response, we deferred a portion of our harvest to capture greater value in the future when log markets strengthen. Operationally, our Real Estate segment built on its strong first quarter performance with additional Q2 2015 closings from our Harbor Hill development and conservation sales."

Second quarter highlights

  • Harvest volume was 15 million board feet (MMBF) in Q2 2015 compared to 26 MMBF in Q2 2014, a 42% decrease. Harvest volume for the first six months of 2015 was 40 MMBF compared to 56 MMBF for 2014, a 29% decrease. These harvest volume figures do not include timber deed sales of 0.6 MMBF sold by ORM Timber Fund III (Fund III) in Q1 2015. The harvest volume and log price realization metrics cited below also exclude these timber deed sales.
  • Average realized log price per thousand board feet (MBF) was $562 in Q2 2015 compared to $630 per MBF in Q2 2014, an 11% decrease. For the first six months of 2015, the average realized log price was $591 per MBF compared to $668 per MBF for 2014, a 12% decrease.
  • Fund properties contributed 52% of Q2 2015 harvest volume, compared to 51% in Q2 2014. For the first six months of 2015, Fund properties contributed 50% of harvest volume, compared to 52% for 2014.
  • As a percentage of total harvest, volume sold to export markets in Q2 2015 decreased to 14% from 33% in Q2 2014, with a correspondingly larger increase in the mix of volume sold to domestic markets to 68% in Q2 2015 from 51% in Q2 2014. For the first six months of 2015, the relative percentages of volume sold to export and domestic markets were 17% and 61%, respectively, compared to 38% and 46%, respectively, in 2014. Hardwood and pulpwood log sales make up the balance of total harvest volume.
  • The percentage of total harvest comprised of Douglas-fir sawlogs increased to 52% in Q2 2015 from 42% in Q2 2014, with a corresponding decrease in the whitewood sawlog component to 20% in Q2 2015 from 37% in Q2 2014. For the first six months of 2015, the relative mix of Douglas-fir and whitewood sawlogs was 48% and 23%, respectively, compared to 51% and 29%, respectively, for 2014.
  • During Q2 2015 we closed on the sale of 33 residential lots from our Harbor Hill project in Gig Harbor, Washington, for $3.3 million as well as a 175-acre conservation land sale for $920,000.

Second quarter and year-to-date operating results

Fee Timber: Fee Timber operating income for Q2 2015 was $1.6 million, compared to $5.0 million for Q2 2014.  This decrease in segment operating income was due to the 42% decrease in harvest volume and 11% decrease in log prices, as mentioned above.  Contributing further to the reduction in operating income was a decrease in income generated from commercial thinning activity compared to the prior year.

Fee Timber operating income for the first six months of 2015 was $6.5 million compared to $14.3 million in 2014.  This decrease was due to both a 29% decrease in harvest volume and a 12% decrease in log prices in 2015 compared to 2014.  A decrease in commercial thinning activity also contributed to the lower segment operating income in 2015.

Demand from the export market remained weak due to the strength of the U.S. dollar, as well as competition in Japan from European-sourced products and the continued effects in China of reduced credit availability and high log inventories at its ports. Logs normally destined for the export market were diverted instead to the domestic market, which itself was already well supplied due to the unseasonably warm and dry weather in the Pacific Northwest during the first half of the year. These regional weather conditions afforded timberland owners excellent access to timber not typically available in the first half of the year. A lackluster recovery in the U.S. housing market added further downside price pressure, from the demand side, due to weak lumber pricing, which in turn reduced the price that mills were willing to pay for logs. In response to these market conditions, we decided to defer harvest volume to future periods when log prices improve.

Timberland Management: Our Timberland Management segment generates its revenue by managing three private equity timber funds. ORM Timber Fund I (Fund I) sold its timberland portfolio in 2014, leaving two funds with operations. Fund I is expected to be completely wound-down by the end of 2015.  All three funds are consolidated into the Partnership's financial statements due to the Partnership's control of the Funds. As such, all fees earned by the Timberland Management segment associated with managing the Funds are eliminated from revenue in the Partnership's consolidated financial statements, leaving an operating loss for this segment that consists entirely of operating expenses. Conversely, the fee revenue is an expense to the Fee Timber segment which is also eliminated when the Funds are consolidated into the Partnership's financial statements. As a result of this consolidation for external reporting purposes, we eliminated $767,000 and $840,000 of timber fund management fee revenue for Q2 2015 and Q2 2014, respectively.  The decline in eliminated revenue is due to a decline in harvest volume as we defer volume in response to weak log markets, which results in a decrease in management fees earned. Operating losses incurred by this segment for Q2 2015 and Q2 2014 totaled $785,000 and $510,000, respectively, after eliminating revenue earned from managing the Funds. The increase in operating expense is due to opening a new timberland management office in Oregon to manage the increase in acres owned there and to facilitate future growth.

Similarly, we eliminated $1.6 million and $1.7 million of timber fund management fee revenue for the first six months of 2015 and 2014, respectively.  Operating losses incurred by this segment for 2015 and 2014 totaled $1.5 million and $1.1 million, respectively, after eliminating management fees earned from the Funds.  Consistent with the quarterly fluctuations, eliminated management fee revenue has declined as we defer harvest volume. Additionally, operating expenses have increased as we opened a new timberland management office in Oregon.

Our two remaining operational Funds collectively own 80,000 acres representing $312 million in assets under management.  As of June 30, 2015 Fund III has $50.8 million of its original $180 million capital commitment remaining to invest with the Partnership's portion of this remaining capital commitment representing $2.5 million

Real Estate: Our Real Estate segment posted operating income of $575,000 for Q2 2015 compared to an operating loss of $952,000 for Q2 2014.  The primary drivers of Q2 2015 results were a 175-acre conservation land sale for $920,000 and the sale of 33 residential lots from our Harbor Hill project for $3.3 million, whereas there were no land transactions in Q2 2014.

For the first six months of 2015, the Real Estate segment generated operating income of $5.7 million on the strength of conservation land and easement sales covering 3,861 acres for $6.0 million and three closings totaling 75 residential lots in our Harbor Hill project for $9.0 million.  This compares to 2014 operating income of $6.0 million in 2014, driven primarily by a 535-acre conservation land sale and the sale of 115 residential lots from Harbor Hill.

General & Administrative (G&A): G&A expenses for Q2 2015 and 2014 were $1.2 million and $0.5 million, respectively.  For first six months of 2015 and 2014, G&A expenses were $2.4 million and $1.8 million, respectively.  The 2014 amounts were lower due primarily to reversals of incentive compensation accruals as a result of the second quarter 2014 departure of a former executive. Without these reversals, G&A expense for the second quarter and first six months of 2014 would have been $1.1 million and $2.4 million, respectively, consistent with the 2015 amounts.

Outlook

Log prices for 2015 reached what we expect to be their lowest point in the second quarter. Due to this weaker pricing environment, we have deferred a portion of our harvest and expect total annual log harvest and stumpage sale volume of between 85 and 90 MMBF for 2015. The majority of this deferral is attributable to tree farms owned by the Funds that are located in areas more strongly influenced by the export market. We expect that log markets will remain volatile over the next several quarters, with a gradual strengthening trend overall. This volatility will influence our harvest decisions as the year unfolds.

We expect additional land sales from our Real Estate segment over the remainder of 2015, although the timing of these transactions could be impacted by permitting or other delays.

The financial schedules accompanying this earnings release provide detail on individual segment results and operating statistics.

About Pope Resources

Pope Resources, a publicly traded limited partnership, and its subsidiaries Olympic Resource Management and Olympic Property Group, own or manage 193,000 acres of timberland and development property in Washington, Oregon, and California.  We also manage, co-invest in, and consolidate three private equity timber funds, for which we earn management fees. These funds provide an efficient means of investing our own capital in Pacific Northwest timberland while earning fees from managing the funds for third-party investors. The Partnership and its predecessor companies have owned and managed timberlands and development properties for over 160 years. Additional information on the company can be found at www.poperesources.com. The contents of our website are not incorporated into this release or into our filings with the Securities and Exchange Commission.

Forward Looking Statements

This press release contains a number of projections and statements about our expected financial condition, operating results, business plans and objectives. These statements reflect management's estimates based on current goals and its expectations about future developments. Because these statements describe our goals, objectives, and anticipated performance, they are inherently uncertain, and some or all of these statements may not come to pass. Accordingly, they should not be interpreted as promises of future management actions or financial performance. Our future actions and actual performance will vary from current expectations and under various circumstances the results of these variations may be material and adverse. Among those forward-looking statements contained in this report are statements about management's expectations for future log prices, harvest volumes and markets, and statements about our expectations for future sales in our Real Estate segment.  However, readers should note that all statements other than expressions of historical fact are forward-looking in nature.  Some of the factors that may cause actual operating results and financial condition to fall short of expectations include our ability to accurately estimate the cost of ongoing and changing environmental remediation obligations, and our ability to anticipate and address the political and regulatory climate that affects these obligations; our ability to consummate various pending and anticipated real estate transactions on the terms management expects; our ability to manage our timber funds and their assets in a manner that our investors consider acceptable, and to raise additional capital or establish new funds on terms that are advantageous to the Partnership; conditions in the housing construction and wood-products markets, both domestically and globally, that affect demand for our products; the effects of competition, particularly by larger and better-financed competitors; factors that affect our ability to anticipate and respond adequately to fluctuations in the market prices for our products; fluctuations in foreign currency exchange rates that affect both competition for sales of our products and our customers' demand for them; environmental and land use regulations that limit our ability to harvest timber and develop property, including changes in those regulations; conditions affecting credit markets as they affect the availability of capital and costs of borrowing; labor, equipment and transportation costs that affect our net income; our ability to anticipate and mitigate potential impacts of our operations on adjacent properties; the impacts of natural disasters on our timberlands and on surrounding areas; and our ability to discover and to accurately estimate other liabilities associated with our assets. Other factors are set forth in that part of our Annual Report on Form 10-K entitled "Risk Factors."

Other issues that may have an adverse and material impact on our business, operating results, and financial condition include those risks and uncertainties discussed in our other filings with the Securities and Exchange Commission. Forward-looking statements in this release are made only as of the date shown above, and we cannot undertake to update these statements.

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(all amounts in $000's, except per unit amounts)

Quarter ended June 30,

Six Months Ended  June 30,

2015

2014

2015

2014

Revenue

$

13,904

$

18,583

$

40,812

$

56,362

Cost of sales

(8,815)

(11,377)

(23,312)

(30,301)

Operating expenses

(4,909)

(4,069)

(9,247)

(8,676)

 Operating income

180

3,137

8,253

17,385

Interest expense, net

(777)

(629)

(1,522)

(1,203)

Income (loss) before income taxes

(597)

2,508

6,731

16,182

Income tax expense

(28)

(69)

(368)

(226)

Net income (loss)

(625)

2,439

6,363

15,956

 Net (income) loss attributable to noncontrolling interests

914

(593)

1,735

(1,869)

Net income attributable to Pope Resources' unitholders

$

289

$

1,846

$

8,098

$

14,087

Basic and diluted weighted average units outstanding

4,298

4,391

4,296

4,389

Basic and diluted net income per unit

$

0.06

$

0.41

$

1.87

$

3.17

 

CONDENSED CONSOLIDATING BALANCE SHEETS

(all amounts in $000's)

June 30, 2015

December 31, 2014

Assets:

Pope

ORM

Timber Funds

Consolidating Entries

 Consolidated

Cash and cash equivalents

$

16,532

$

6,591

$

$

23,123

$

24,028

Land held for sale

2,526

2,526

7,160

Other current assets

6,673

696

(967)

6,402

6,292

  Total current assets

25,731

7,287

(967)

32,051

37,480

Timber and roads, net

32,258

193,479

225,737

227,144

Timberlands

14,904

33,368

48,272

47,933

Land held for development

28,879

28,879

26,040

Buildings and equipment, net

5,904

16

5,920

6,039

Investment in ORM Timber Funds

18,330

(18,330)

Other assets

382

145

527

441

    Total assets

$

126,388

$

234,295

$

(19,297)

$

341,386

$

345,077

Liabilities and equity:

Current liabilities

$

4,046

$

2,161

$

(967)

$

5,240

$

5,405

Current portion of long-term debt

5,111

5,111

5,109

Current portion of environmental remediation

12,488

12,488

3,700

  Total current liabilities

21,645

2,161

(967)

22,839

14,214

Long-term debt

27,436

57,380

84,816

84,872

Environmental remediation and other long-term liabilities

8,733

8,733

18,362

  Total liabilities

57,814

59,541

(967)

116,388

117,448

Partners' capital

68,574

174,754

(175,846)

67,482

64,216

Noncontrolling interests

157,516

157,516

163,413

    Total liabilities and equity

$

126,388

$

234,295

$

(19,297)

$

341,386

$

345,077

 

RECONCILIATION BETWEEN NET INCOME (LOSS) AND CASH FLOWS FROM OPERATIONS

(all amounts in $000's)

Quarter ended June 30,

Six months ended June 30,

2015

2014

2015

2014

Net income (loss)

$

(625)

$

2,439

$

6,363

$

15,956

Added back:

  Depletion

1,737

3,014

4,948

6,451

  Equity-based compensation

242

71

580

521

  Excess tax benefit of equity-based compensation

(5)

  Real estate project expenditures

(2,029)

(598)

(4,615)

(2,128)

  Depreciation and amortization

159

181

314

359

  Deferred taxes

24

94

203

94

  Cost of land sold

2,425

697

6,503

7,618

  Gain on disposal of property and equipment

(1)

(1)

  Change in environmental remediation liability

(286)

(203)

(572)

(214)

  Change in other operating accounts

1,423

80

(1,527)

(2,665)

Cash provided by operations

$

3,070

$

5,774

$

12,192

$

25,991

 

SEGMENT INFORMATION

(all amounts in $000's)

Quarter ended June 30,

Six months ended June 30,

2015

2014

2015

2014

Revenue:

Partnership Fee Timber

$

4,771

$

8,723

$

13,561

$

19,867

Funds Fee Timber

4,501

8,772

11,657

19,737

    Total Fee Timber

9,272

17,495

25,218

39,604

Timberland Management

Real Estate

4,632

1,088

15,594

16,758

    Total

$

13,904

$

18,583

$

40,812

$

56,362

Operating income (loss):

Fee Timber

$

1,588

$

5,049

$

6,448

$

14,270

Timberland Management

(785)

(510)

(1,514)

(1,120)

Real Estate

575

(952)

5,707

6,007

General & Administrative

(1,198)

(450)

(2,388)

(1,772)

    Total

$

180

$

3,137

$

8,253

$

17,385

 

SELECTED STATISTICS

Quarter ended June 30,

Six months ended June 30,

2015

2014

2015

2014

Log sale volumes by species (million board feet):

Sawlogs

Douglas-fir

7.8

10.9

19.1

28.9

Whitewood

3.0

9.6

9.0

16.3

Pine

1.1

0.5

1.1

0.5

Cedar

0.5

0.8

1.8

1.5

Hardwood

0.4

0.5

1.9

1.5

Pulpwood - all species

2.3

3.8

6.7

7.3

Total

15.1

26.1

39.6

56.0

Log sale volumes by destination (million board feet):

Export

2.1

8.5

6.8

21.0

Domestic

10.3

13.3

24.2

26.2

Hardwood

0.4

0.5

1.9

1.5

Pulpwood

2.3

3.8

6.7

7.3

Subtotal log sale volumes

15.1

26.1

39.6

56.0

Timber deed sale

0.6

Total

15.1

26.1

40.2

56.0

 

Average price realizations by species (per thousand board feet):

Quarter ended June 30,

Six months ended June 30,

2015

2014

2015

2014

Sawlogs

Douglas-fir

$

608

$

694

$

629

$

738

Whitewood

541

653

550

670

Pine

552,000

525

551

526

Cedar

1,120

1,270

1,398

1,337

Hardwood

532

597

623

598

Pulpwood - all species

322

281

326

275

Overall

562

630

591

668

Average price realizations by destination (per thousand board feet):

Export

$

604

$

722

$

646

$

765

Domestic

608

672

647

704

Hardwood

532

597

623

598

Pulpwood

322

281

326

275

Overall log sales

562

630

591

668

Timber deed sale

389

Owned timber acres

111,000

110,000

111,000

110,000

Acres owned by Funds

80,000

91,000

80,000

91,000

Depletion expense per MBF - Partnership tree farms

$

48

$

48

$

47

$

48

Depletion expense per MBF - Fund tree farms

$

166

$

180

$

192

$

177

Capital and development expenditures ($000's)

$

2,731

$

1,443

$

5,879

$

3,353

 

PERIOD TO PERIOD COMPARISONS

(Amounts in $000's except per unit data)

Q2 2015 vs.

YTD 2015 vs.

Q2 2014

YTD 2014

Net income attributable to Pope Resources' unitholders:

2nd Quarter 2015

$

289

$

8,098

2nd Quarter 2014

1,846

14,087

   Variance

$

(1,557)

$

(5,989)

Detail of earnings variance:

Fee Timber

Log volumes (A)

$

(6,930)

$

(10,955)

Log price realizations (B)

(1,027)

(3,049)

Timber deed sale

19

230

Production costs

3,140

4,416

Depletion

1,357

1,583

Other Fee Timber

(20)

(47)

Timberland Management

(275)

(394)

Real Estate

Land sales

1,644

(4,482)

Conservation easement sales

4,311

Timber depletion on land sale

194

(139)

Other Real Estate

(311)

10

General & Administrative costs

(748)

(616)

Net interest expense

(148)

(319)

Taxes

41

(142)

Noncontrolling interest

1,507

3,604

Total variance

$

(1,557)

$

(5,989)

(A)

Volume variance calculated by extending change in sales volume by the average log sales price for the comparison period.

(B)

Price variance calculated by extending the change in average realized price by current period volume.

 

SOURCE Pope Resources



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