Pope Resources reports Q3 net loss of US$562,000 versus year-ago profit of US$1.1 and 12.8% drop in net sales to US$7.5M as company cut volumes after front-loading harvest to meet Chinese demand
October 26, 2011
– Pope Resources (NASDAQ:POPE - News) reported a net loss attributable to unitholders of $562,000, or $0.14 per diluted ownership unit, on revenue of $7.5 million for the quarter ended September 30, 2011. This compares to net income attributable to unitholders of $1.1 million, or $0.22 per diluted ownership unit, on revenue of $8.6 million for the comparable period in 2010.
Net income for the nine months ended September 30, 2011 totaled $6.4 million, or $1.42 per diluted ownership unit, on revenue of $39.5 million. Net income for the corresponding period in 2010 totaled $375,000, or $0.07 per diluted ownership unit, on revenue of $22.6 million.
Cash provided by operations for the quarter ended September 30, 2011 was $603,000, compared to $4.2 million for the third quarter of 2010. For the nine months ended September 30, 2011, cash provided by operations was $14.3 million, compared to $5.3 million for year-to-date 2010 results.
“In response to surging demand for Pacific Northwest logs from China, we made a conscious decision earlier this year to front-load our annual harvest volume into the first two quarters of the year to take advantage of the all-season operability of some of our low elevation timberlands,” said David L. Nunes, President and CEO. “Anticipating that log prices might soften as more timber came available from higher elevation lands during the summer months, we ratcheted back our third quarter harvest volume. As a result, we generated less revenue and recorded a net loss for the quarter.”
As our timber fund business has grown, harvests from timber fund properties naturally represent a higher proportion of our overall harvest volume. Through the first nine months of the year, timber fund properties represented 40% of the total harvest volume compared to only 15% in 2010. Our timber fund properties also carry a higher proportion of inventory in whitewood species than is the case with the Partnership’s properties. As such, the overall species mix for the nine-month periods ended September 30 changed from 73% Douglas-fir and 8% whitewoods for 2010 to 58% Douglas-fir and 23% whitewoods for 2011. Typically, a heavier mix of whitewoods would result in lower average log realizations, but the strong log demand from China that was largely indifferent as to species counteracted this expected price-dampening effect.
As anticipated, export and total realized log prices each softened 5% in the third quarter of 2011 relative to the second quarter of 2011, with export log prices falling $31 per MBF and total realized log prices falling $27 per MBF. However, log prices were still up sharply from 2010 levels. For the first nine months of 2011, our average realized log price increased $81 per MBF, or 17%, from $487 per MBF in 2010 to $568 per MBF in 2011. This occurred even in the face of continued softness in domestic demand. Within this total, Douglas-fir sawlog prices increased $85 per MBF, or 16%, from $527 per MBF in 2010 to $612 per MBF in 2011, while whitewood sawlogs increased $103 per MBF, or 23%, from $446 per MBF in 2010 to $549 per MBF in 2011. Across all species, export log prices increased $96 per MBF, or 18%, from $529 per MBF in 2010 to $625 per MBF in 2011. In addition, while there was only a 2%, or $8 per MBF, spread between export and domestic log market pricing in the first nine months of 2010, this export spread increased to 11%, or $64 per MBF, for the first nine months of 2011.
Operating income in the third quarter for Fee Timber decreased 66%, from $2.7 million in 2010 to $910,000 in 2011. This decrease was driven primarily by a 26% decrease in our harvest volume, from 16 MMBF in 2010 to 12 MMBF in 2011, offset in part by a $62 per MBF, or 13%, lift in average realized log price, which increased from $493 per MBF in 2010 to $555 per MBF in 2011. The decline in operating income was also influenced by a higher proportion of harvest from timber fund properties, which were acquired more recently and carry a much higher depletion rate than the Partnership’s properties. The percentage of third quarter harvest from timber fund properties increased from 23% in 2010 to 41% in 2011.
For the first nine months of 2011, Fee Timber operating income was up nearly 42% from the corresponding period in 2010, increasing from $8.0 million in 2010 to $11.4 million in 2011. This improvement was driven by the combined effect of a 45% increase in harvest volumes, from 42 MMBF in 2010 to 61 MMBF in 2011, and the $81 per MBF improvement in average realized log price described above. Again, the higher depletion rate on timber fund properties offset some of what would otherwise have been an even more significant increase in year-to-date operating income, as the percentage of harvest from timber fund properties increased.
Our Timberland Management & Consulting (TM&C) segment generates revenue through the management of private equity timber funds, which are consolidated into the Partnership’s financial statements due to the Partnership’s role as General Partner or Managing Member of the funds. Also, from time to time, this segment will be engaged to manage timberland for unaffiliated third parties. Consolidating these funds into the Partnership’s financial statements results in the elimination of all management fees charged to the funds, with a corresponding decrease in operating expenses in the Fee Timber segment. Thus, TM&C had no revenue for the nine months ended September 30, 2011 after eliminating $1.6 million of revenue earned from managing the funds. This compares to $15,000 of revenue for the same period in 2010 after eliminating $987,000 of fund management fee revenue. The increase in the amount of this revenue eliminated resulted from additional fees earned on the management of $58 million of timberland acquired by ORM Timber Fund II, Inc. at the end of the third quarter of 2010. In total we managed 61,000 acres in two timber funds for the first nine months of 2011 versus 36,000 acres in the prior year’s corresponding period.
Operating losses generated by the TM&C segment for the nine months ended September 30, 2011 and 2010 totaled $1.1 million and $905,000, respectively, after eliminating revenue earned from managing the funds. The increase in operating losses is attributable to added costs related to higher harvest levels from the two funds and higher personnel related expenses associated with fund oversight.
Our Real Estate segment posted operating income of $414,000 for the first nine months of 2011 compared to an operating loss of $2.1 million for the comparable period in 2010. The improvement in performance was primarily due to a 386-acre second quarter 2011 conservation land sale that generated $2.0 million of revenue, or $5,065 per acre. In addition, five varying types of property sales totaling 96 acres closed in 2011, for an aggregate price of $859,000. Finally, environmental remediation costs decreased from $568,000 in 2010 to $346,000 in 2011.
General & Administrative expenses for the first nine months of 2011 decreased 6% to $3.2 million, compared to $3.4 million in the prior year. This decrease in overhead costs was driven primarily by implementation of a new long-term compensation plan in 2010 that required a catch-up accrual last year for trailing-year performance cycles.
We expect our harvest volume for the year to total between 86 and 89 MMBF, with the final total depending on the strength or weakness of log markets as well as weather patterns over the last few months of the year.
The financial schedules attached to 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 178,000 acres of timberland and development property in Washington and Oregon. We also manage, co-invest in, and consolidate two timberland investment funds that we manage for a fee. In addition, we offer our forestry consulting and timberland investment management services to third-party owners and managers of timberland in the U.S. Pacific Northwest. The company and its predecessor companies have owned and managed timberlands and development properties for more than 150 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.