Potlatch Corporation (PCH)

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Potlatch Corporation (PCH)

Q3 2009 Earnings Call

October 27, 2009 8:00 am ET

Executives

Eric Cremers - VP and CFO

Michael Covey - Chairman, President and CEO

Analysts

Gail Glazerman - UBS

Mike Roxland - Banc of America/Merrill Lynch

Steve Chercover - D.A. Davidson

Mark Weintraub - Buckingham Research

Mike Marburg – Ramsey Asset Management

Joshua Zaret – Longbow Research

Presentation

Operator

Welcome everyone to the Potlatch third quarter 2009 earnings conference call, featuring Eric Cremers, Vice President of Finance and Chief Financial Officer; and, Michael Covey, Chairman, President, and Chief Executive Officer for Potlatch Corporation. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator instructions) Thank you.

I would now like to turn the call over to Mr. Eric Cremers for opening remarks. Sir, you may proceed.

Eric Cremers

Thank you, and good morning. Welcome to Potlatch’s investor teleconference covering our third quarter 2009 earnings. Before we begin, let me remind you that this call may contain certain forward-looking statements within the meaning of US Securities Laws. These statements include statements about the company’s future business prospects, anticipated performance in upcoming quarters, harvest levels, and future dividends. These statements are not guarantees of future performance, and the company undertakes no duty to update them. Although these statements reflect management’s expectations today, they are subject to a number of business risks and uncertainties. Actual results may differ materially from those expressed or implied in this call.

For a discussion of certain factors that may cause actual results to differ from the results anticipated, please refer to Potlatch’s recent filings with the SEC. Also, please note that segment information as well as a reconciliation of non-GAAP measures, can be found in the supplemental materials on our Web site, www.potlatchcorp.com, as part of the webcast for this call. I would now like to discuss our third quarter results.

Despite a difficult economy in the third quarter we continued to make progress in several areas. First, we closed the previously announced timber deed transaction in the third quarter and used the nearly $49 million of cash proceeds to pay down drawings we had on our revolver. As I will discuss later, our balance sheet continues to strengthen and we have more than ample liquidity.

Second, our wood products division had positive EBITDA in the third quarter overcoming the very challenging conditions facing virtually all wood products manufacturers.

Finally, saw log and pulpwood prices appear to have bottomed and we continue to be optimistic about future log prices as we are forecasting significantly higher housing starts over the next several years.

Now let’s turn to the numbers. As shown on slide three of the slides accompanying this presentation, we reported third quarter 2009 earnings from continuing operations of $46 million or $1.15 per fully diluted share. This compares to earnings from continuing operations of $24.9 million or $0.62 per fully diluted share in the third quarter of last year. As a reminder, our comparative 2008 financial results have Clearwater Paper operations moved to discontinued operations including corporate administrative costs directly associated with Clearwater and interest expense for the debt retained by Clearwater.

I would now like to review our third quarter results broken down by segment. Our resource segment results for the third quarter of 2009 were significantly better than the third quarter of 2008. Operating income in the third quarter totaled $55.4 million compared to $30.7 million in the third quarter of last year. Of course the primary driver behind the positive earnings variance was the timber deed transaction which provided almost $42 million of operating earnings for our resource segment.

Slide four highlights harvest volume and pricing trends for the Northern region. Saw log feet volumes were down 24% comparing Q3 2009 to Q3 2008 as we continued to defer harvest levels to match the lower demand caused by sawmill curtailments. Saw log pricing in the Northern Region was down 29% year-over-year but actually increased 8% sequentially. Pulpwood volumes in the Northern region were down 20% year-over-year and pricing was lower by 10%. Sequentially pulpwood pricing in the Northern Region was up 1% as compared to the second quarter of this year.

Slide five highlights harvest volume and pricing trends in the Southern Region. Saw log feet volumes in the third quarter of 2009 decreased 16% from the third quarter of 2008 but increased nearly 2% sequentially. Saw log pricing in the Southern Region is holding up better than the Northern Region with prices down 7% year-over-year and flat sequentially. Pulpwood volumes in the Southern Region were up 7% year-over-year and up 11% sequentially. Pulpwood pricing in the Southern Region fell 12% year-over-year but was flat sequentially. As Mike will discuss in a moment, we are cautiously optimistic that log prices in both the Northern and Southern regions have reached a bottom.

Next, I would like to review our real estate business. As shown on slide six, our real estate segment closed sales totaling $5.6 million during the third quarter resulting in segment operating earnings of $1.5 million. This is down from $3.2 million in operating earnings in Q3 2008 due to a higher cost basis for land sold in 2009 versus 2008. In total we had 38 real estate transactions in the quarter. Coincidentally, the same as in Q1 and in Q2. Slide seven highlights our real estate sales by product type and as you can see we sold over 2,100 acres of rural recreational real estate in the quarter down from the 2,900 acres we sold in Q2 but consistent with the 2,000 acres we sold in Q1.

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