Potlatch Corporation (PCH)

PCH 
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Potlatch Corp. (PCH)

Q1 2010 Earnings Call

April 27, 2010 11:00 am ET

Executives

Eric Cremers - VP and CFO

Mike Covey - Chairman, President, and CEO

Analyst

Chip Dillon - Credit Suisse

Mark Weintraub - Buckingham Research

Gail Glazerman – UBS

Mike Roxland - Bank of America/Merrill Lynch

Steve Chercover - D.A. Davidson

Mike Marburg - Ramsey Asset Management

Presentation

Operator

Good morning, my name is Lorrie and I’ll be your conference operator. At this time I’d like to welcome everyone to the Potlatch first quarter 2010 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 first quarter 2010 earnings. Before we begin, let me remind you that this call may contain forward-looking statements with regard to our business and operations, please review the warning statements and our press release on the presentation slides and in our filings with the SEC concerning the risks associated with these forward looking statement.

Also please note that segment information, as well as the reconciliation of non-GAAP measures can be found on our website www.potlatchcorp.com as part of the webacast for this call.

I would now like to turn the call over to Mike Covey, our Chairman, and CEO, who will make some introductory remarks. And then I’ll drill into our first quarter results in a little more detail, Mike.

Mike Covey

Thanks Eric, good morning. By almost every measure our wood products business show dramatic improvement in the first quarter and both our resource and wood products businesses continue strong as we move through April.

Lumber and plywood prices are at the highest level in almost five years. Our manufacturing facilities which consume about 25% of our total harvest volume are running at normal and our customers are also operating on typical two or three shift operating schedules.

The robust activity and wood products manufacturing is quickly translating into higher log prices particularly as minerals try to replenish depleted log inventories to capture market opportunities.

As we expected, our wood products business contributed meaningfully to EBITDA after a long period of breakeven results and losses going back to late 2008.

We expect our second quarter results for wood products to be similar to the first quarter due to the strong demand and continued strengthening in lumber and plywood prices. Clearly the market is reacting to supply disruptions caused by mill closures, log shortages on the heel of winter weather the Chilean earthquake offshore demand and currency related issues to name a few factors.

As we expected would happen the higher lumber prices are working their way into higher into higher log prices. Given the improvement we already begun to see in log prices we are exploring operating at the higher end of our harvest guidance for 2010 which works between 4.0 and 4.4 million tonnes.

Furthermore, if the strength in wood prices continues we may increase the harvest level beyond 4.4 million tonnes, but we won’t make that decision until we get at the further end of the second quarter.

We are experiencing good log demand from our customer in all market areas with log prices for most products currently forecast to be up 10% to 20% over Q1. Moreover, we are not experiencing any logging contractor shortage and see no impediments to increasing harvest levels should we decide to do so.

We will make a final determination on harvest levels in June based on market condition leading into the third quarter, which is typically when we harvest roughly 35% of our annual volume due to favorable operating conditions.

As noted in our earnings release demand for real estate remains stable. For five consecutive quarters we have closed between 30 and 40 transactions mostly in the late state at prices that are attractive relative to the underlying timberland value.

We continue to explore opportunities to sell non-strategic timberland holdings in each of our three operating regions. Interest remains firm in transactions the range and size from $25 to $100 million.

Overall, we are pleased with the trajectory of our business, although we did not expect the lumber and plywood pricing to be as strong as it is today and the near term outlook remains some what uncertain it is clear we are at path to higher housing starts over the next several years which at the end of the day is one of the key factors that drive our business and cash flows.

Our view is that there is a modest risk of lower lumber prices over the next quarter or two, but if that happens we don't believe they will slide all the way back to the levels experienced in the trough of the market in 2009.

For sometime we have stated that higher log prices coupled with increased harvest levels would allow us to sustain and perhaps even increase our dividend overtime. Recent market activity gives us added confidence, that our dividend is sustainable and can be supported by our core businesses.

Let me now turn the remaining time over to Eric to address our first quarter results, followed by questions from analysts and investors on the call.

Read the rest of this transcript for free on seekingalpha.com