Potlatch Corporation (PCH)

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Potlatch Corporation (PCH)

Q3 2012 Earnings Call

October 22, 2012 12:00 p.m. ET


Michael Covey - Chairman, President and CEO

Eric Cremers - EVP and CFO


Michael Roxland - Bank of America Merrill Lynch

Gail Glazerman – UBS

Chip Dillon - Vertical Research

Steve Chercover - D. A. Davidson

Joshua Barber - Stifel Nicolaus

Albert Sebastian - Prospect Advisors



Good morning. My name is Stephanie and I will be your conference operator today. At this time, I would like to welcome everyone to the Potlatch third quarter 2012 earnings conference call featuring Eric Cremers, Executive Vice President and Chief Financial Officer; and Michael Covey, Chairman, President, and Chief Executive Officer for Potlatch Corporation. (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 2012 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 in our press release, on the presentation slides, and in our filings with the SEC concerning the risks associated with these forward-looking statements. Also please note that segment information as well as a reconciliation of non-GAAP measures can be found on our website, www.potlatchcorp.com, as part of the webcast 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 review our third quarter results in more detail. Mike?

Michael Covey

Thanks. Good morning. We’re very pleased to announce third quarter results that exceeded our expectations giving us two strong back-to-back quarters in our lumber and plywood business. In our resources business, we again realized higher sawlog prices compared to the previous quarter as well as substantially increased harvest volume caused by normal seasonality.

Our woods products segment continued to build upon what was an exceptionally strong performance in the second quarter and has exceeded our outlook from the beginning of year. Throughout the year, favorable trends in the wood products demand and pricing have prompted to increase production levels at our mills, primarily through increased operating hours in order to take advantage of improved market conditions.

Though our real estate segment results were weaker as compared to prior quarters, we continued to experience a steady level of demand for rural recreational and HBU real estate. In reviewing our consolidated results both our quarterly and year-to-date performance have been much stronger than we originally anticipated.

Given our recent operational gains as well as meaningful turnaround in the housing industry, we maintain a very optimistic outlook over both the near and long-term. In the near term, we expect continued strength in wood products pricing for a variety of reasons. Demand for wood products is higher driven by higher levels of housing starts and improving outlook for both commercial and industrial markets as well as repair and remodel markets.

At the same time there is diminished manufacturing capacity in the industry to meet higher demand as roughly 10 billion board feet or 15% of the industry has been permanently shut down in North America over the past few years. Combined with relatively low inventory levels both at mills and throughout the various distribution channels, industry conditions remain very favorable for further potential pricing gains.

Over the long-term we believe a variety of factors can work in concert to create very favorable market conditions for both our wood products and our resource segments. First, we expect Chinese demand for North American fiber to remain relatively firm, and second, we expect reduced Canadian lumber production due to the mountain pine beetle and the lower allowable cut in the Eastern Canadian provinces. Additionally – and most importantly we expect increased domestic demand for wood products as the U.S. housing market continues to improve.

Though both near and long-term market conditions appear promising, we have not altered our near-term harvest plans. As we have discussed throughout the year, we remain committed to our intentional decision to defer a portion of our timber harvest activities and plan to harvest 3.5 million tons this year which is significantly below sustainable levels. We believe it is most beneficial to our shareholders to exercise patience and preserve our timber value directly on the stock, allowing our trees to continue to grow and further increase in value while awaiting even better market conditions that we believe are in the not-too-distant future.

We’re encouraged by the continued improvements in the wood products industry and have already begun to see higher lumber prices translate into higher sawlog prices, particularly in our northern region. Undoubtedly pronounced continued improvements in the wood products industry, capacity utilization and profitability will ultimately lead to higher sawlog prices and thus higher profits in our resource. Once the sawlog market recovery is clearly evidenced, we will respond by raising our harvest levels which will increase our cash flows considerably from the trough levels that are at today.

I’d now like to turn the call over to Eric to discuss the quarterly results and then we will take questions.

Eric Cremers

Thanks Mike. As shown on page 3 of the slide accompanying this presentation, we reported third quarter 2012 net income of $18.6 million or $0.46 per diluted share. This compares to net income of $25.6 million or $0.63 per diluted share for the third quarter of 2011 and net income of $5.1 million or $0.13 per diluted share for the second quarter this year. As a reminder, in the third quarter of last year we closed on the third and final phase of a large land sale in Northern Idaho which produced revenues of over $9 million in that quarter.

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