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After Ray Dillon’s $3M Exit, Deltic Timber Seeks a CEO

8 min read

In the month since Ray C. Dillon retired as CEO of Deltic Timber Corp. — a departure seen as surprising and sudden — he and officers of the El Dorado company have had little to say about the transition.

Interim CEO D. Mark Leland on Tuesday discounted speculation that friction with the board played a part in Dillon’s exit, insisting Dillon had approached the board. “Ray came to us ready to retire, and he felt the company was in good shape,” Leland said. “He knew we had a good bench and that the company was doing well.”

Publicly traded Deltic announced generally solid third-quarter earnings about two weeks after Dillon left on Oct. 10 with a severance package worth about $3 million, and Leland said in a late October conference call that the company planned no leadership changes beyond Dillon’s retirement.

Dillon and Board Chairman Robert C. Nolan did not respond to two weeks’ worth of telephone messages from Arkansas Business, and efforts to reach more than a half-dozen board members also failed.

Leland said a nationwide search for a new CEO is well underway, and he repeated that he has no plans to stay as chief executive beyond his interim role. “The search has been going on for three weeks now, and we’re expecting some excellent candidates. This is a good job with a good company; there aren’t that many public companies seeking CEOs.”

He said the board hopes to land a permanent CEO with “solid operational experience and outstanding leadership skills.”

Leland said he had no indications that Dillon had been in conflict with board member Bert Jones, the former pro football star who was the focus of some talk about board disagreements with Dillon. After several phone calls seeking comment, Jones said through an assistant that he would be out of the office while his wife is recovering from surgery.

Jones, who was the NFL’s most valuable player in 1976 as a golden-armed quarterback for the Baltimore Colts, is owner and president of Mid-States Wood Preservers of Simsboro, Louisiana. He joined Deltic’s board in June 2015 to great acclaim from Nolan. After praising Jones’ years of experience in wood products, the board chairman said the addition of the former LSU All-American would help establish “the strategic direction needed for the company’s future growth.” Nolan also applauded Jones’ team leadership abilities, citing his “years as a successful quarterback in the National Football League.”

Albert Sebastian of Prospect Advisors, an analyst who asked questions during the Deltic conference call on Oct. 27, said he knew Dillon and found “his departure somewhat surprising and somewhat abrupt.”

“There might be a little more there than we know as to why,” said Sebastian, portfolio manager at Prospect in Stamford, Connecticut. “When a CEO abruptly leaves it could be a signal of differences.”

But Leland said he had no inkling of board discord. “I’m relatively new to the board [he joined in June], but I’m not aware of anything like that. “We had a good quarter, and Ray was leaving on a good note. The lumber market is on the rise and the company’s doing very well.”

Dillon, who was 60 at the time of Deltic’s annual proxy statement in March, became the company’s chief in 2003 when he was hired away from Gaylord Container Corp., where he had also been CEO. Dillon earned $1.89 million in total compensation in 2015, according to the proxy statement, down from $1.93 million in 2014. The company’s other named executives also reaped less in 2015 as Deltic failed to reach its income and shareholder return goals. Deltic’s net income in fiscal 2015 was $2.7 million, compared with $19.7 million the year before. Dillon’s best pay year was 2013, when he earned $2.87 million.

Deltic said its fourth-quarter results for 2016 will include a pretax expense of “approximately $3 million related to the recent retirement of Ray C. Dillon.” The one-time expense, it said, includes a cash payment and the financial impact “of vesting the equity grants previously awarded to him.”

Leland praised Dillon in the October earnings call, which was recorded and transcribed by SeekingAlpha.com.

“He leaves the company operating well and in good shape. I was honored when the board asked me to step in as interim CEO to lead the company during this transition. Deltic has a great set of assets and a solid team of employees,” Leland said.

He added that while the CEO search is underway, Deltic will “focus on safe operations and operational excellence to deliver quality products for our customers and continued solid financial performance for our shareholders. We don’t anticipate any additional leadership changes during this transition.”

Leland, 54, joined the Deltic board on June 16. He retired as president of the Midstream Division of El Paso Corp., a large natural gas producer that was acquired by Kinder Morgan in 2012. He also served as chief operating officer of GulfTerra Energy Partners.

Asked to assess the board’s strategic intent in the search for a new CEO, he said in the call that the board wanted “somebody with solid leadership capabilities, a proven track record to build and develop teams and operate in this industry. There is really no change in strategy or emphasis at this stage.”

He said the search would simply focus on finding “the right person for the job.”

Good and Not So Good
Deltic’s third-quarter net income was $1.5 million, or 12 cents per share, up from $100,000 in the same quarter of 2015. The company cited higher average lumber prices, lower operating costs and a solid performance by its manufacturing segment in raising net sales to $53.5 million for the quarter from $50.1 million the year before. Over the first nine months of 2016, Deltic’s net income was up to $6.1 million, or 50 cents a share, compared with $2.8 million, or 22 cents per share, over the same period in 2015.

“The report had its good points, as well as some that weren’t so good,” Sebastian said. “The lumber business did very well, but the sale of lots [in Deltic’s real estate segment] wasn’t so good. They sold lots subsequent to the end of the quarter, and that will be reflected in upcoming reports. So there’s been a pickup in the real estate business, and that bodes well.”

Leland told Arkansas Business that the real estate business was “up and down,” and noted that 45 lots had sold in October after the period covered by the third-quarter report. The real estate segment reported an operating loss of $200,000 in the third quarter, selling 25 residential lots in its Chenal Valley development in west Little Rock.

Sebastian agreed with Leland that the overall outlook is good for Deltic, pointing to several factors. The company is positioned well for an upturn in the housing market, with the potential to sell more lots and to benefit from higher demand for lumber as more houses are built.

Sebastian expects timber prices to rise further if the United States imposes tariffs or quotas on Canadian lumber, a prospect that may be even more likely under a Donald J. Trump administration. “About a third of the lumber consumed in this country comes from Canada. If these quotas or tariffs come about, and they are likely, prices are going to rise.”

Deltic, which owns some 530,000 acres of timberland, has three major business units. The woodlands segment harvests pine and hardwoods for sawtimber and wood pulp, and reaps some revenue from oil and gas lease rentals and royalties, hunting leases and sales of what it calls “non-strategic hardwood bottomland.” The manufacturing segment includes a sawmill in Ola (Yell County) and another in Waldo (Columbia County), along with a medium-density fiberboard plant near El Dorado. Its third segment, real estate, turns former timberland into residential developments. It sells these upscale tracts to “home builders, individual buyers and commercial developments,” the company website says.

“The manufacturing division includes lumber mills that are doing quite well,” Sebastian said. “But the plant making fiberboard is not performing particularly well.” The analyst said the board is focused on improving performance at the plant, but that meeting goals might be an uphill climb. “The plant had operating income of $1.6 million through the first nine months of the year, and I would say they’d like to get to around $8 [million] to $10 million a year in annual operating income from that plant.”

Leland told Arkansas Business that the fiberboard plant is a “big, complicated operation” but said Deltic would get the problems “ironed out.”

A fire at the plant on March 10, 2015, suspended operations for several weeks, but Deltic’s 2015 annual report to the Securities & Exchange Commission said insurance covered the damage and the cost of the business disruption. Deltic did face a $948,000 deductible on the business disruption claim and a $1 million deductible on its property damage claim, the SEC document noted.

Sebastian said Deltic’s operational details also look good for growth. “Deltic has finished up its major capital spending projects, so they’re going to have a significant decline in capital expenditures. That will enable them to generate significantly more free cash flow.”

Sebastian expects this cash-flow improvement to bring an increase in Deltic’s 40-cent dividend to stockholders. “I asked a question in the conference call saying that they may have $15 million to $20 million less in CapEx next year, and that leaves a lot of room to raise the dividend. So I asked what the board thought and if Deltic feels it has to be competitive with other timber companies from a standpoint of yield on the stock.”

Leland’s answer in the call was noncommittal, indicating the board would look “at all of the potential uses of our free cash flow and allocate it to where it will get the most bang for the buck. … I think that if you look at our dividend plus share repurchase dollars this year, it’s probably much more in line with what our peers are paying out in total.”

Sebastian said the real question for Deltic’s future is whether it will remain a diversified company or become a more focused timber company.

“In terms of the person they hire in as CEO, over the long term they have to decide strategically, do they sell off nontimber assets, or do they keep significant assets in manufacturing and real estate? Do they want to keep that course or narrow the focus?” Sebastian said.

Leland said, however, that Deltic has held to its diversified strategy for two decades as a public company and that the path had served it well.

“I don’t foresee any change in overall strategy,” he told Arkansas Business, adding that as interim CEO, he wouldn’t be the person to direct any new long-term course. “That would wait for the new person.”

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